<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,
1999 1998 1997
(in thousands)
<S> <C> <C> <C>
OPERATING REVENUES . . . . . . . . . . $122,723 $64,741 $68,555
OPERATING EXPENSES
(including depreciation, depletion
and amortization of mining plant of
$9,944,000 in 1999, $4,594,000 in
1998 and $4,441,000 in 1997) . . . . 124,245 65,959 66,973
OPERATING INCOME (LOSS). . . . . . . . (1,522) (1,218) 1,582
NONOPERATING INCOME. . . . . . . . . . 570 739 223
INCOME (LOSS) BEFORE INTEREST CHARGES. (952) (479) 1,805
INTEREST CHARGES . . . . . . . . . . . 34 2 14
INCOME (LOSS) BEFORE FEDERAL
INCOME TAXES. . . . . . . . . . . . . (986) (481) 1,791
FEDERAL INCOME TAX EXPENSE (CREDIT). . (1,004) (604) 631
NET INCOME . . . . . . . . . . . . . . $ 18 $ 123 $ 1,160
</TABLE>
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<TABLE>
STATEMENTS OF RETAINED EARNINGS
(UNAUDITED)
<CAPTION>
Year Ended December 31,
1999 1998 1997
(in thousands)
<S> <C> <C> <C>
RETAINED EARNINGS JANUARY 1. . . . . . $15 $ 78 $1,268
NET INCOME . . . . . . . . . . . . . . 18 123 1,160
CASH DIVIDENDS DECLARED. . . . . . . . - 186 2,350
RETAINED EARNINGS DECEMBER 31. . . . . $33 $ 15 $ 78
See Notes to Financial Statements.
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<TABLE>
WINDSOR 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 . . . . . . . . . . . . . $ 18 $ 123 $ 1,160
Adjustments for Noncash Items:
Depreciation, Depletion and
Amortization . . . . . . . . . . 9,944 4,594 4,441
Deferred Income Taxes. . . . . . . (24,175) (3,948) (3,526)
Accrued Other Postretirement
Benefits . . . . . . . . . . . . 15,557 1,844 1,134
Accrued Royalty and Rent . . . . . (937) 2,047 1,496
Workers' Compensation. . . . . . . 14,608 (630) 1,343
Mine Closure Costs . . . . . . . . 18,355 - -
Accrued Reclamation Costs. . . . . 3,820 2,821 2,600
Retirement of Mining Equipment . . 8,999 - -
Changes in Certain Current
Assets and Liabilities:
Accounts Receivable. . . . . . . . 241 1,876 460
Coal, Materials and Supplies . . . 541 617 (682)
Accounts Payable . . . . . . . . . 693 506 1,817
Taxes Accrued. . . . . . . . . . . 17,363 473 (206)
Other (net). . . . . . . . . . . . . 3,505 1,212 358
Net Cash Flows From Operating
Activities. . . . . . . . . . 68,532 11,535 10,395
INVESTING ACTIVITIES:
Lease Buyouts. . . . . . . . . . . . (5,457) - -
Construction Expenditures. . . . . . (252) (53) (956)
Proceeds from Sales of Property. . . 39 10 3
Net Cash Flows Used For
Investing Activities. . . . . (5,670) (43) (953)
FINANCING ACTIVITIES:
Capital Contributions Returned
to Parent Co. . . . . . . . . . . . - (8,876) (2,000)
Retirement of Long-term Debt . . . . (7,142) (794) (569)
Dividends Paid . . . . . . . . . . . - (186) (2,350)
Net Cash Flows Used For
Financing Activities. . . . . (7,142) (9,856) (4,919)
Net Increase in Cash and Cash
Equivalents . . . . . . . . . . . . . 55,720 1,636 4,523
Cash and Cash Equivalents January 1. . 10,096 8,460 3,937
Cash and Cash Equivalents December 31. $ 65,816 $10,096 $ 8,460
See Notes to Financial Statements.
</TABLE>
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<TABLE>
WINDSOR COAL COMPANY
BALANCE SHEETS
(UNAUDITED)
<CAPTION>
December 31,
1999 1998
(in thousands)
<S> <C> <C>
ASSETS
MINING PLANT:
Surface Lands. . . . . . . . . . . . . . . . . . $ 623 $ 633
Mining Structures and Equipment. . . . . . . . . 35,848 47,537
Coal Interests (net of depletion). . . . . . . . 429 945
Mine Development Costs . . . . . . . . . . . . . 10,041 10,041
Construction Work in Progress. . . . . . . . . . 28 -
Total Mining Plant . . . . . . . . . . . 46,969 59,156
Accumulated Depreciation and Amortization. . . . 40,709 39,514
NET MINING PLANT . . . . . . . . . . . . 6,260 19,642
CURRENT ASSETS:
Cash and Cash Equivalents. . . . . . . . . . . . 65,816 10,096
Accounts Receivable - General. . . . . . . . . . 4,803 4,414
Accounts Receivable - Affiliated Companies . . . 932 1,562
Coal - at average cost . . . . . . . . . . . . . 30 51
Materials and Supplies - at average cost . . . . 3,459 3,979
Other. . . . . . . . . . . . . . . . . . . . . . 345 291
TOTAL CURRENT ASSETS . . . . . . . . . . 75,385 20,393
REGULATORY ASSETS. . . . . . . . . . . . . . . . . 9 918
DEFERRED INCOME TAXES. . . . . . . . . . . . . . . 33,830 9,346
DEFERRED CHARGES . . . . . . . . . . . . . . . . . 565 290
TOTAL. . . . . . . . . . . . . . . . . . $116,049 $50,589
See Notes to Financial Statements.
</TABLE>
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<TABLE>
WINDSOR COAL COMPANY
BALANCE SHEETS
(UNAUDITED)
<CAPTION>
December 31,
1999 1998
(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 . . . . . . . . . . $ - $ -
Retained Earnings. . . . . . . . . . . . . . . . 33 15
TOTAL SHAREOWNER'S EQUITY. . . . . . . . 33 15
LONG-TERM DEBT . . . . . . . . . . . . . . . . . . - 6,572
OTHER NONCURRENT LIABILITIES:
Postretirement Benefits Other Than Pensions. . . 25,693 10,136
Mine Closure Costs . . . . . . . . . . . . . . . 18,355 -
Workers' Compensation. . . . . . . . . . . . . . 15,338 730
Accrued Reclamation Costs. . . . . . . . . . . . 10,583 6,763
Accrued Royalty and Rent . . . . . . . . . . . . 7,004 7,941
Other. . . . . . . . . . . . . . . . . . . . . . 4,994 3,132
TOTAL OTHER NONCURRENT LIABILITIES . . . 81,967 28,702
CURRENT LIABILITIES:
Long-term Debt Due Within One Year . . . . . . . - 570
Accounts Payable - General . . . . . . . . . . . 4,054 1,453
Accounts Payable - Affiliated Companies. . . . . 1,239 3,147
Taxes Accrued. . . . . . . . . . . . . . . . . . 17,795 432
Workers' Compensation. . . . . . . . . . . . . . 2,731 1,998
Accrued Vacation Pay . . . . . . . . . . . . . . 977 1,047
Other. . . . . . . . . . . . . . . . . . . . . . 1,975 2,057
TOTAL CURRENT LIABILITIES. . . . . . . . 28,771 10,704
REGULATORY LIABILITIES:
Amounts Due To Parent Company For
Future Income Tax Benefits. . . . . . . . . . . 4,562 4,253
Other. . . . . . . . . . . . . . . . . . . . . . 716 343
TOTAL REGULATORY LIABILITIES . . . . . . 5,278 4,596
CONTINGENCIES (Note 3)
TOTAL. . . . . . . . . . . . . . . . . . $116,049 $50,589
See Notes to Financial Statements.
</TABLE>
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<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 1999,
1998 and 1997 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 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 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. 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 1999, 1998 or 1997.
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. 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.
The Company announced plans to discontinue mining operations effective
April 30, 2000. Consequently, a provision of $48.4 million for mine
closure costs, postretirement benefits other than pensions and workman's
compensation costs was recorded in July 1999. The provision is
reflected in billings to Ohio Power Company. All shutdown costs are
recoverable from OPCo under the coal supply agreement.
3. 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.
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 $32,000 in 1999, $218,000 in 1998 and
$327,000 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 $3.0 million. The Company's planned
discontinuance of mining operations or the cessation or significant
reduction of contributions to the UMWA pension plans could trigger a
withdrawal obligation for all or a portion of the Company's share of the
unfunded vested liability. The amount of and the need to pay a
withdrawal obligation is subject to actuarial determination.
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, 1999, 1998 and 1997 were $32,000, $103,000 and $95,000,
respectively.
A defined contribution employee savings plan offered to non-UMWA
employees required that the Company make contributions to the plan
totaling $89,000 in 1999, $86,000 in 1998 and $81,000 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 $16.4 million in 1999,
$2.6 million in 1998 and $1.8 million in 1997.
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 $279,000 in 1999, $271,000 in
1998 and $345,000 in 1997.
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 and $502,000 in 1997. In addition, the amounts of Black Lung
surplus utilized include $175,000 in 1998 and $37,000 in 1997
reallocated from the surplus Black Lung trust fund of other System
member companies 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 $1,660,000, $1,766,000 and $1,000,
respectively.
<PAGE>
6. FEDERAL INCOME TAXES
The details of federal income taxes are as follows:
Year Ended December 31,
1999 1998 1997
(in thousands)
Current (net) . . . . . . . . . . . . . . $ 23,171 $ 3,344 $ 4,157
Deferred (net) . . . . . . . . . . . . . . (24,175) (3,948) (3,526)
Total Federal Income Taxes . . . . . . . . $ (1,004) $ (604) $ 631
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.
<PAGE>
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 . . . . . . . . . . . . . . $34,858 $14,380
Deferred Tax Liabilities. . . . . . . . . . . . (1,028) (5,034)
Net Deferred Tax Assets . . . . . . . . . . . $33,830 $ 9,346
Property Related Temporary Differences. . . . . $ 969 $(3,569)
Amounts Due To Parent Company
For Future Federal Income Taxes . . . . . . . 767 1,027
Self-Insurance Reserves . . . . . . . . . . . . 801 994
Provision for Shutdown Costs. . . . . . . . . . 16,930 -
Accrued Postretirement Expenses . . . . . . . . 4,526 3,643
Accrued Leased Asset Book Rent Expense. . . . . - 1,012
Accrued Book Royalty Expense. . . . . . . . . . 2,452 1,807
Accrued Mine Reclamation Costs. . . . . . . . . 4,301 2,355
Deferred State Income Taxes . . . . . . . . . . 2,362 1,309
All Other (net) . . . . . . . . . . . . . . . . 722 768
Total Net Deferred Tax Assets . . . . . . . . $33,830 $ 9,346
7. SUPPLEMENTARY CASH FLOW INFORMATION
Year Ended December 31,
1999 1998 1997
(in thousands)
Cash was paid for:
Interest . . . . . . . . . . . . . . . $ 34 $ 5 $ 14
Income Taxes . . . . . . . . . . . . . 7,260 3,685 5,669
Noncash acquisitions under capital
leases were . . . . . . . . . . . . . . 13 383 1,685
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,
1999 1998 1997
(in thousands)
Operating Leases . . . . . . . . . . . . . $ 6 $ 4 $ 906
Amortization of Capital Leases . . . . . . 1,552 1,243 976
Interest on Capital Leases . . . . . . . . 41 151 154
Total Rental Costs. . . . . . . . . $1,599 $1,398 $2,036
<PAGE>
Properties under capital leases and related obligations recorded on the
Balance Sheets are as follows:
December 31,
1999 1998
(in thousands)
Mining Plant Under Capital Leases. . . . . . . . $ - $5,917
Accumulated Amortization. . . . . . . . . . . . - 4,278
Net Property under Capital Leases . . . . . $ - $1,639
Capital Lease Obligations:
Noncurrent Liability . . . . . . . . . . . . $ - $ 710
Liability Due Within One Year. . . . . . . . - 929
Total Capital Lease Obligations. . . . . $ - $1,639
Properties under operating leases and related obligations are not
included in the Balance Sheets.
9. RETURN OF CAPITAL
In 1998 and 1997 the Company returned to its parent $8.9 million and $2
million, respectively, out of capital surplus.
10. LONG-TERM DEBT
Long-term debt was outstanding as follows:
December 31,
1999 1998
(in thousands)
Finance Obligations. . . . . . . . . . . . . . . . . $ - $7,142
Less Portion Due Within One Year . . . . . . . . . . - 570
Total. . . . . . . . . . . . . . . . . . . . . . $ - $6,572
In March 1999 the Company bought out all its leases for $8.5 million.
After taking into account amounts previously provided for the lease
buyouts, the Company recorded $5.5 million as a mining plant asset.
Certain of the leases terminated were the result of sale/lease
transactions not accounted for as a sale and a leaseback but rather
subject to special lease accounting treatment in accordance with SFAS
No. 98 whereby the leases were accounted for under the financing method.
As a result of the lease buyout, finance obligations totaling $7.1
million were redeemed.
