<PAGE>
CENTRAL OHIO 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 . . . . . . . . 5-10
<PAGE>
<PAGE>
<TABLE>
CENTRAL OHIO COAL COMPANY
STATEMENTS OF INCOME
(UNAUDITED)
<CAPTION>
Year Ended December 31,
1999 1998 1997
(in thousands)
<S> <C> <C> <C>
OPERATING REVENUES . . . . . . . . . . . $ 63,755 $110,219 $ 66,279
OPERATING EXPENSES (including
depreciation, depletion and
amortization of mining plant of
$14,574,000 in 1999, $3,356,000 in
1998 and $3,771,000 in 1997) . . . . . 66,397 113,845 70,546
OPERATING LOSS . . . . . . . . . . . . . (2,642) (3,626) (4,267)
NONOPERATING INCOME. . . . . . . . . . . 3,055 2,843 3,879
INCOME (LOSS) BEFORE INTEREST CHARGES. . 413 (783) (388)
INTEREST CHARGES . . . . . . . . . . . . - 24 -
INCOME (LOSS) BEFORE FEDERAL
INCOME TAXES. . . . . . . . . . . . . . 413 (807) (388)
FEDERAL INCOME TAX EXPENSE (CREDIT). . . 412 (808) (388)
NET INCOME . . . . . . . . . . . . . . . $ 1 $ 1 $ -
</TABLE>
<PAGE>
<TABLE>
STATEMENTS OF RETAINED EARNINGS
(UNAUDITED)
<CAPTION>
Year Ended December 31,
1999 1998 1997
(in thousands)
<S> <C> <C> <C>
RETAINED EARNINGS JANUARY 1. . . . . . . $1 $- $200
NET INCOME . . . . . . . . . . . . . . . 1 1 -
CASH DIVIDENDS DECLARED. . . . . . . . . - - 200
RETAINED EARNINGS DECEMBER 31. . . . . . $2 $1 $ -
See Notes to Financial Statements.
</TABLE>
<PAGE>
<PAGE>
<TABLE>
CENTRAL OHIO COAL COMPANY
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
Year Ended December 31,
1999 1998 1997
(in thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net Income . . . . . . . . . . . . . . $ 1 $ 1 $ -
Adjustments for Noncash Items:
Depreciation, Depletion and
Amortization . . . . . . . . . . . 14,574 3,356 3,771
Deferred Federal Income Taxes. . . . (8,019) (20,989) (2,952)
Changes in Capital Lease Obligations - (7,904) (2,022)
Reclamation Reserve. . . . . . . . . 5,653 8,524 9,177
Mine Closure Costs . . . . . . . . . (13,427) 44,632 -
Provision for Future Rent Payments . - 8,927 (4,192)
Accrued Postretirement Benefits
Other Than Pensions. . . . . . . . 7,263 26,314 2,269
Changes in Certain Current Assets
and Liabilities:
Accounts Receivable. . . . . . . . . 747 5,342 (5,780)
Coal, Materials and Supplies . . . . (1,099) 225 1,559
Accounts Payable . . . . . . . . . . (864) (83) 612
Taxes Accrued. . . . . . . . . . . . (2,581) 3,246 (596)
Payment of Disputed Tax and
Interest Related to COLI . . . . . . (609) (10,211) -
Other (net). . . . . . . . . . . . . . 2,192 (14,497) 5,366
Net Cash Flows From Operating
Activities. . . . . . . . . . . 3,831 46,883 7,212
INVESTING ACTIVITIES:
Lease Buyouts. . . . . . . . . . . . . (9,670) (6,163) -
Construction Expenditures. . . . . . . (82) (2,915) (1,072)
Proceeds from Sales of Property. . . . - 623 1
Net Cash Flows Used For
Investing Activities. . . . . . (9,752) (8,455) (1,071)
FINANCING ACTIVITIES:
Retirement of Long-term Debt . . . . . - (286) (104)
Dividends Paid . . . . . . . . . . . . - - (200)
Net Cash Flows Used For
Financing Activities. . . . . . - (286) (304)
Net Increase (Decrease) in Cash and
Cash Equivalents. . . . . . . . . . . . (5,921) 38,142 5,837
Cash and Cash Equivalents January 1. . . 52,477 14,335 8,498
Cash and Cash Equivalents December 31. . $ 46,556 $ 52,477 $ 14,335
See Notes to Financial Statements.
</TABLE>
<PAGE>
<PAGE>
<TABLE>
CENTRAL OHIO COAL COMPANY
BALANCE SHEETS
(UNAUDITED)
<CAPTION>
December 31,
1999 1998
(in thousands)
<S> <C> <C>
ASSETS
MINING PLANT:
Surface Lands . . . . . . . . . . . . . . . . . $ 324 $ 324
Mining Structures and Equipment . . . . . . . . 47,800 38,048
Coal Interests (net of depletion) . . . . . . . - 1,378
Other . . . . . . . . . . . . . . . . . . . . . 2,292 2,292
Total Mining Plant. . . . . . . . . . . 50,416 42,042
Accumulated Depreciation and Amortization . . . 49,778 36,584
NET MINING PLANT. . . . . . . . . . . . 638 5,458
OTHER PROPERTY AND INVESTMENT:
Payment of Disputed Tax and Interest
Related to COLI. . . . . . . . . . . . . . . . 10,820 10,211
Other . . . . . . . . . . . . . . . . . . . . . 1,432 1,456
OTHER PROPERTY AND INVESTMENTS . . . . 12,252 11,667
CURRENT ASSETS:
Cash and Cash Equivalents . . . . . . . . . . . 46,556 52,477
Accounts Receivable:
General . . . . . . . . . . . . . . . . . . . 1,014 277
Affiliated Companies. . . . . . . . . . . . . 2,634 4,118
Coal - at average cost. . . . . . . . . . . . . 1,532 140
Materials and Supplies - at average cost. . . . 6,374 6,667
Other . . . . . . . . . . . . . . . . . . . . . 93 148
TOTAL CURRENT ASSETS. . . . . . . . . . 58,203 63,827
DEFERRED INCOME TAXES . . . . . . . . . . . . . . 55,713 45,394
REGULATORY ASSETS . . . . . . . . . . . . . . . . - 142
DEFERRED CHARGES. . . . . . . . . . . . . . . . . 506 998
TOTAL . . . . . . . . . . . . . . . . $127,312 $127,486
See Notes to Financial Statements.
</TABLE>
<PAGE>
<PAGE>
<TABLE>
CENTRAL OHIO COAL COMPANY
BALANCE SHEETS
(UNAUDITED)
<CAPTION>
December 31,
1999 1998
(in thousands)
<S> <C> <C>
CAPITALIZATION AND LIABILITIES
SHAREHOLDER'S EQUITY:
Common Stock - Par Value $0.10:
Authorized - 100,000 Shares
Outstanding - 69,000 Shares . . . . . . . . . . $ 7 $ 7
Retained Earnings . . . . . . . . . . . . . . . . 2 1
TOTAL SHAREHOLDER'S EQUITY. . . . . . . . 9 8
OTHER NONCURRENT LIABILITIES:
Accrued Postretirement Benefits Other
Than Pensions. . . . . . . . . . . . . . . . . . 48,118 40,855
Accrued Reclamation Costs . . . . . . . . . . . . 39,113 35,741
Mine Closure Costs. . . . . . . . . . . . . . . . 14,225 27,652
Other . . . . . . . . . . . . . . . . . . . . . . 10,884 9,435
TOTAL OTHER NONCURRENT LIABILITIES. . . . 112,340 113,683
CURRENT LIABILITIES:
Accounts Payable:
General . . . . . . . . . . . . . . . . . . . . 1,602 2,367
Affiliated Companies. . . . . . . . . . . . . . 310 409
Taxes Accrued . . . . . . . . . . . . . . . . . . 665 3,246
Accrued Reclamation Costs . . . . . . . . . . . . 6,962 4,681
Accrued Vacation Pay. . . . . . . . . . . . . . . 479 607
Workers' Compensation Claims. . . . . . . . . . . 529 619
Other . . . . . . . . . . . . . . . . . . . . . . 1,767 549
TOTAL CURRENT LIABILITIES . . . . . . . . . 12,314 12,478
DEFERRED GAIN ON SALE AND LEASEBACK OF PLANT. . . . - 1,317
REGULATORY LIABILITIES. . . . . . . . . . . . . . . 2,649 -
CONTINGENCIES (Note 2)
TOTAL . . . . . . . . . . . . . . . . . . $127,312 $127,486
See Notes to Financial Statements.
</TABLE>
<PAGE>
<PAGE>
CENTRAL OHIO COAL COMPANY
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
Discontinued Mining Operations
Central Ohio Coal Company (the Company or COCCo), 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. Until October 1999 the Company conducted surface
mining operations in southeastern Ohio to supply coal to OPCo's
Muskingum River Plant. The Clean Air Act Amendments of 1990 (CAAA)
requires significant reductions in sulfur dioxide and nitrogen oxides
emitted from OPCo's generating plants. Muskingum River Plant Unit 5 has
been switched to low sulfur coal, as part of the AEP System's least-cost
compliance plan. The plan also includes fuel switching to lower sulfur
coal at other AEP System generating units, including Muskingum River
Plant Units 1 through 4, to comply with Phase II of the CAAA in the year
2000. As a result in October 1999 the Company discontinued mining
operations, except for incidental coal mining available during the final
reclamation process.
Basis of Accounting
As a cost-based rate-regulated entity, COCCo'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 1999,
1998 and 1996 were not significant.
Depreciation, depletion and amortization are provided over the estimated
useful asset lives or the estimated life of the mine, whichever is
shorter, and are calculated using the straight-line method for mining
structures and equipment and the units-of-production method for coal
rights 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 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 the 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 and related regulatory assets and liabilities are
established 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, as amended, to pay certain black lung benefits to eligible
present and former employees. An irrevocable 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 1999, 1998 or 1997.
The Company is self-insured for workers' compensation. The estimated
present value of workers' compensation claims is provided for based on
known events and claims.
<PAGE>
Reclamation
Accruals are made for estimated costs of direct reclamation as a result
of the surface mining of coal. The accrual is for the estimated amount
necessary to restore the land and water resources affected by the mining
operations to their post mining land uses, as approved by the Ohio
Department of Natural Resources.
The Surface Mining and Reclamation Act of 1977 established minimum
standards for the final closure of mines after their coal reserves are
exhausted. This would include reclaiming the support acreage at surface
mines and the removal or covering of refuse piles and water settling
ponds. Reclamation costs associated with support operations at the
Company's surface mines are recorded and billed to OPCo in accordance
with the coal supply agreement.
2. CONTINGENCIES
Litigation
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 claimed by the Company
relating to AEP's corporate owned life insurance (COLI) program should
not be allowed. As a result of a suit filed in U.S. District Court
(discussed below) this request for ruling was withdrawn by the IRS
agents. Adjustments have been or will be proposed by the IRS
disallowing COLI interest deductions for taxable years 1991-96. A
disallowance of COLI interest deductions through December 31, 1999 would
increase expenses by approximately $10.8 million (including interest).
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 sheets 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 (U.S.) in the U.S. District Court for the Southern
District of Ohio in March 1998. In 1999 a U.S. Tax Court judge decided
in the Winn-Dixie Stores v. Commissioner case that a corporate
taxpayer's COLI interest deductions should be disallowed. Notwith-standing the
Tax Court's decision in Winn-Dixie, management has made no
provision for any possible adverse earnings impact from this matter
because it 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.
<PAGE>
The Company is involved in a number of other legal proceedings and
claims. While management is unable to predict the ultimate 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. OTHER RELATED-PARTY TRANSACTIONS
American Electric Power Service Corporation (AEPSC) provides certain
managerial and professional services to AEP System companies including
COCCo. 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 regulations of the SEC under the 1935 Act.
4. 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 $24,000 in 1999, $189,000 in 1998 and
$278,000 in 1997. As of June 30, 1999, the UMWA actuary estimates that
the Company's share of the UMWA pension plans unfunded vested
liabilities was approximately $2.8 million.
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 credits for the years ended
December 31, 1999 and 1998 were $180,000 and $39,000, respectively.
There was no pension cost for the AEP System plan in 1997.
A defined contribution employee savings plan offered to non-UMWA
employees required that the Company make contributions to the plan
totaling $87,000 in 1999, $87,000 in 1998 and $84,000 in 1997.
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 $9.7 million in 1999,
$28.5 million in 1998 and $4.4 million in 1997. The accrued cost in
1998 includes $24.1 million in curtailment charges recognized in
anticipation of the October 31, 1999 shutdown of the Muskingum Mine by
the Company.
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 $154,000 in 1999, $143,000 in
1998 and $94,000 in 1997.
<PAGE>
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 to reimburse the
Company for benefits paid were $0.7 million in 1998 and $1.1 million in
1997. In 1998 $385,000 and in 1997 $514,000 of Black Lung surplus was
utilized to reallocate from the Company's surplus Black Lung trust fund
to other System member companies. No Black Lung surpluses were used to
reimburse the Company for retiree medical benefits paid in 1999 and no
reallocation from the Company's surplus Black Lung trust fund to other
System member companies was made in 1999. The Company's share of the
Black Lung Trust funds surplus at December 31, 1999, 1998 and 1997 was
$1.7 million, $1.6 million and $1.1 million, respectively.
5. FEDERAL INCOME TAXES
The details of Federal income taxes are as follows:
Year Ended December 31,
1999 1998 1997
(in thousands)
Current (net) . . . . . . . . . . . . . . . $ 8,431 $20,181 $ 2,564
Deferred (net). . . . . . . . . . . . . . . (8,019) (20,989) (2,952)
Total Federal Income Taxes. . . . . . . . . $ 412 $ (808) $ (388)
Federal income taxes as reported are different from pre-tax book income
multiplied by the statutory tax rate predominantly due to permanent
differences for corporate owned life insurance and the practice of flow-through
accounting for book/tax differences associated with certain
depreciation differences.
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.
<PAGE>
The Company has settled with the 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 being audited by
the IRS. With the exception of the deductibility of interest deductions
related to AEP's corporate owned life insurance program, which are
discussed under the heading "Litigation" in Note 2, management is not
aware of any issues from open tax years that upon final resolution are
expected to have a material adverse effect on results of operations.
The following tables show the elements of the net deferred tax asset and
the significant temporary differences giving rise to such deferrals:
December 31,
1999 1998
(in thousands)
Deferred Tax Assets . . . . . . . . . . . . . . $55,713 $45,394
Property Related Temporary Differences. . . . . $11,388 $ 3,309
Amounts Due From Parent Company
For Future Federal Income Taxes . . . . . . . 878 29
Accrued Mine Reclamation Expense. . . . . . . . 18,413 14,834
Provision for Shutdown Costs. . . . . . . . . . 5,306 15,621
Deferred State Income Taxes . . . . . . . . . . - 126
Deferred Book Gain - Sale/Leaseback of Plant. . - 461
Accrued Postretirement Expense. . . . . . . . . 16,980 5,933
Accrued Leased Asset Book Rent Expense. . . . . - 4,366
All Other (net) . . . . . . . . . . . . . . . . 2,748 715
Total Deferred Tax Assets . . . . . . . . $55,713 $45,394
6. SUPPLEMENTARY CASH FLOW INFORMATION
Year Ended December 31,
1999 1998 1997
(in thousands)
Cash was paid for:
Interest. . . . . . . . . . . . . . . . $ - $ 24 $ -
Income Taxes. . . . . . . . . . . . . . 10,823 16,605 3,818
Noncash acquisitions under capital
leases . . . . . . . . . . . . . . . . - - 256
