<PAGE>
SOUTHERN OHIO COAL COMPANY
QUARTERLY REPORT PER REQUIREMENTS
OF HOLDING COMPANY ACT RELEASE NO. 26573
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
CONTENTS
Page
Statements of Income and Retained Earnings 1
Balance Sheets 2-3
Information Concerning Mine Operations and
Capital Improvements 4-5
Calculation of Cost of Capital and
Statement of Cost of Commercial Coal Sold and Shipped 6
Statement of Cost of Operation 7
Analysis of Mining Plant in Service 8
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SOUTHERN OHIO COAL COMPANY
STATEMENT OF INCOME
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
(UNAUDITED)
(in thousands)
OPERATING REVENUES $92,344
COST OF OPERATION 91,515
OPERATING INCOME 829
INTEREST CHARGES 572
OPERATING INCOME BEFORE FEDERAL INCOME TAXES 257
FEDERAL INCOME TAX CREDIT ON OPERATIONS (4,100)
NET INCOME FROM OPERATIONS 4,357
NONOPERATING LOSS (4,357)
NET INCOME $ -
STATEMENT OF RETAINED EARNINGS
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
(UNAUDITED)
(in thousands)
BALANCE AT BEGINNING OF PERIOD $26,446
NET INCOME -
BALANCE AT END OF PERIOD $26,446
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,
2000
(in thousands)
ASSETS
MINING PLANT:
Mining Plant in Service $373,371
Construction Work in Progress 55
Total Mining Plant 373,426
Accumulated Depreciation and Amortization 303,756
NET MINING PLANT 69,670
OTHER PROPERTY AND INVESTMENTS 84,212
CURRENT ASSETS:
Cash and Cash Equivalents 115
Accounts Receivable:
General 6,007
Affiliated Companies 18,223
Advances to Affiliates 126,739
Coal 506
Materials and Supplies 10,486
Other 866
TOTAL CURRENT ASSETS 162,942
DEFERRED INCOME TAXES 65,447
REGULATORY ASSETS 7,213
DEFERRED CHARGES 1,496
TOTAL $390,980
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SOUTHERN OHIO COAL COMPANY
BALANCE SHEET
(UNAUDITED)
September 30,
2000
(in thousands)
CAPITALIZATION AND LIABILITIES
SHAREHOLDER'S EQUITY:
Common Stock - Par Value $1:
Authorized and Outstanding - 5,000 Shares $ 5
Premium on Common Stock 2,562
Other Paid-in Capital 26,320
Retained Earnings 26,446
TOTAL SHAREHOLDER'S EQUITY 55,333
OTHER NONCURRENT LIABILITIES:
Obligations Under Capital Leases 6,749
Accrued Postretirement Benefits Other Than Pensions 50,046
Accrued Reclamation Costs 34,449
Operating Reserves 12,188
TOTAL OTHER NONCURRENT LIABILITIES 103,432
CURRENT LIABILITIES:
Long-term Debt Due Within One Year 45,476
Accounts Payable:
General 3,744
Affiliated Companies 4,387
Taxes Accrued 35,944
Interest Accrued 310
Accrued Vacation Pay 4,502
Workers' Compensation Claims 4,958
Accrued Rent 3,341
Obligations Under Capital Leases 20,672
Other 8,199
TOTAL CURRENT LIABILITIES 131,533
REGULATORY LIABILITIES AND DEFERRED CREDITS 100,682
TOTAL $390,980
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SOUTHERN OHIO COAL COMPANY
INFORMATION CONCERNING MINE OPERATIONS AND CAPITAL IMPROVEMENTS
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
As discussed in Note 3 of the Notes to Financial Statements in the 1999 Annual
Report, the deductibility of certain interest deductions related to AEP's
corporate owned life insurance (COLI) program for taxable years 1991 through
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, 2000 would
increase expenses by approximately $30.8 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 through 1998 to avoid the potential
assessment by the IRS of any additional above market rate interest on the
contested amount. The 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 of all amounts paid plus interest through
litigation.
In order to resolve this issue, the Company filed suit in 1998 against the
United States in the U.S. District Court for the Southern District of Ohio.
The trial began on October 30, 2000. In 1999 a U.S. Tax Court judge decided
in the Winn-Dixie Stores v. Commissioner case that a corporate taxpayer's
COLI interest deduction should be disallowed. In October 2000, a judge for the
U.S. District Court for Delaware reached a similar decision in Internal
Revenue Service vs. C.M. Holdings, Inc. Notwithstanding the Tax Court's and
U.S. District Court's decisions, 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 terms of the coal supply agreement.
MINE CLOSURE
The Meigs mine is scheduled to close on February 28, 2001 and the Company
is accruing mine shutdown costs at a current monthly rate of $8.2 million.
Through September 30, 2000, the Company has accrued $113.3 million of shutdown
costs estimated to total $145.8 million. The Company expects to recover from
OPCo all of its shutdown costs under the terms of the coal supply agreement.
MONEY POOL
On June 15, 2000, the Company became a participant in the American Electric
Power (AEP) System Money Pool (Money Pool). The Money Pool is a mechanism
structured to meet the short-term cash requirements of the participants with
AEP Company, Inc. acting as the primary borrower on behalf of the Money Pool.
The Company's affiliates that are U.S. domestic electric utility operating
companies and coal-mining companies are the primary participants in the
Money Pool.
The operation of the Money Pool is designed to match on a daily basis the
available cash and borrowing requirements of the participants. Participants
with excess cash loan funds to the Money Pool reducing the amount of external
funds AEP Company, Inc. needs to borrow to meet the short-term cash
requirements of other participants with advances from the Money Pool.
AEP Company, Inc. borrows the funds needed on a daily basis to meet the net
cash requirements of the Money Pool participants. A weighted average daily
interest rate which is calculated based on the outstanding short-term debt
borrowings made by AEP Company, Inc. is applied to each Money Pool
participant's daily outstanding investment or debt position to determine
interest income or interest expense. Interest income is included in
nonoperating income, and interest expense is included in interest charges.
As a result of becoming a Money Pool participant, the Company retired its
short-term debt. At September 30, 2000 the Company was a net investor in the
Money Pool and reports its investment in the Money Pool as Advances to
Affiliates on the Balance Sheet.
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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, 2000
(in thousands, except as noted)
<CAPTION>
July through
September
2000
<S> <C>
I. Calculation of Cost-of-Capital Compensation:
A. Equity Investment at Beginning of Period:
Common Stock $ 5
Premium on Common Stock 2,562
Other Paid-in Capital 26,320
28,887
B. Rate of Return Allowable per HCAR No. 26573, 10.27% per annum, 2.5675% per quarter .025675
C. Earnings Allowable on Equity Investment
1. Current Quarter $ 742
2. Year-to-Date $ 2,237
D. Net Income per Statement of Income (a) $ -
Add: Interest Charges 572
Less: Nonoperating Loss (4,357)
E. Applied Cost-of-Capital Billing Adder:
1. Current Quarter $ 4,929
2. Year-to-Date $ 11,197
II. Coal Billing Calculation - Meigs Division:
A. Total Operating Expenses (b) $ 87,415
B. Add: Cost-of-Capital Billing Adder as Applied per E. 1. of Section I 4,929
C. Cost Applicable to Current Quarter Coal Billings to Ohio Power $ 92,344
D. Coal Sold and Shipped in Current Quarter to Ohio Power (in tons) 1,150,166
E. Average Price per Ton to Ohio Power (in dollars) (C/D) $ 80.29
(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, 2000
(in thousands)
Direct Labor-UMW* $ 1,651
Indirect Labor-UMW* 5,434
Benefits-UMW* 7,099
Salaries and Benefits-Nonunion 4,167
Operating Supplies 3,147
Repair Parts and Materials 5,201
Electricity and Other Utilities 1,608
Outside Services-Maintenance, Haulage and Reclamation 5,046
Taxes Other Than Federal Income Taxes** 4,176
Rental of Equipment 8,363
Depreciation, Depletion and Amortization 4,287
Mining Cost Normalization*** 34,982
Other Production Costs 5,969
Subtotal 91,130
Transfers of Production Costs (to)/from Coal Inventory 385
Total $91,515
* 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, 2000
Net
Gross Accumulated Carrying
Cost Provisions Amount
(in thousands)
Description
Surface Lands $ 7,578 $ - $ 7,578
Mining Structures and Equipment 230,641 188,937 41,704
Coal Interests (net of depletion) 1,003 - 1,003
Mine Development Costs 134,149 114,819 19,330
Total Mining Plant
in Service $373,371 $303,756 $69,615
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