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SOUTHERN OHIO COAL COMPANY
QUARTERLY REPORT PER REQUIREMENTS
OF HOLDING COMPANY ACT RELEASE NO. 26573
FOR THE QUARTER ENDED JUNE 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 JUNE 30, 2000
(UNAUDITED)
(in thousands)
OPERATING REVENUES $76,855
COST OF OPERATION 70,115
OPERATING INCOME 6,740
INTEREST CHARGES 493
OPERATING INCOME BEFORE FEDERAL INCOME TAXES 6,247
FEDERAL INCOME TAXES ON OPERATIONS 547
NET INCOME FROM OPERATIONS 5,700
NONOPERATING LOSS (2,454)
NET INCOME $ 3,246
STATEMENT OF RETAINED EARNINGS
FOR THE QUARTER ENDED JUNE 30, 2000
(UNAUDITED)
(in thousands)
BALANCE AT BEGINNING OF PERIOD $23,200
NET INCOME 3,246
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)
June 30,
2000
(in thousands)
ASSETS
MINING PLANT:
Mining Plant in Service $385,493
Construction Work in Progress 835
Total Mining Plant 386,328
Accumulated Depreciation and Amortization 303,220
NET MINING PLANT 83,108
OTHER PROPERTY AND INVESTMENTS 85,776
CURRENT ASSETS:
Cash and Cash Equivalents 33
Accounts Receivable:
General 5,278
Affiliated Companies 14,826
Advances to Affiliates 76,217
Coal 891
Materials and Supplies 10,535
Other 311
TOTAL CURRENT ASSETS 108,091
REGULATORY ASSETS 14,821
DEFERRED INCOME TAXES 50,832
DEFERRED CHARGES 3,117
TOTAL $345,745
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SOUTHERN OHIO COAL COMPANY
BALANCE SHEET
(UNAUDITED)
June 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
LONG-TERM DEBT:
Notes Payable 30,000
Finance Obligations 6,360
TOTAL LONG-TERM DEBT 36,360
OTHER NONCURRENT LIABILITIES:
Obligations Under Capital Leases 11,397
Accrued Postretirement Benefits Other Than Pensions 48,246
Accrued Reclamation Costs 32,596
Operating Reserves 11,313
TOTAL OTHER NONCURRENT LIABILITIES 103,552
CURRENT LIABILITIES:
Long-term Debt Due Within One Year 12,085
Accounts Payable:
General 8,167
Affiliated Companies 3,618
Taxes Accrued 19,028
Interest Accrued 797
Accrued Vacation Pay 4,207
Workers' Compensation Claims 6,850
Obligations Under Capital Leases 20,806
Other 7,067
TOTAL CURRENT LIABILITIES 82,625
REGULATORY LIABILITIES & DEFERRED CREDITS 67,875
TOTAL $345,745
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SOUTHERN OHIO COAL COMPANY
INFORMATION CONCERNING MINE OPERATIONS AND CAPITAL IMPROVEMENTS
FOR THE QUARTER ENDED JUNE 30, 2000
TAXES
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 1991-1996 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 June 30, 2000 would increase
expenses by approximately $30.8 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 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. In 1999 a US Tax Court judge
decided in the Winn-Dixie Stores v. Commissioner case that a
corporate taxpayer's COLI interest deductions should be disallowed.
Notwithstanding the Tax Court's decision in Winn-Dixie, management
has made no provision for any possible adverse earnings impact from
the 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.
MINE CLOSURE
The Meigs mine is scheduled to close on December 31, 2001 and
currently the Company is accruing mine shutdown costs at a current
monthly rate of $8.2 million. Through June 30, 2000, the Company
has accrued $88.7 million of shutdown costs. The liability for
closing the mine is estimated to be $145.8 million, including
reclamation costs. The Company expects to recover from OPCo all of
its shutdown costs under the terms of the coal supply agreement.
BLACK LUNG
In April 2000, the Company recorded an $8.4 million provision
for black lung expense. The amount was based on an actuarial
valuation prepared as of January 1, 2000 which projected the amount
of current black lung liabilities in excess of available trust
funds.
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 June 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 JUNE 30, 2000
(in thousands, except as noted)
<CAPTION> April through
June
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 $ 1,495
D. Net Income per Statement of Income (a) $ 3,246
Add: Interest Charges 493
Less: Nonoperating Income (2,454)
E. Applied Cost-of-Capital Billing Adder:
1. Current Quarter $ 6,193
2. Year-to-Date $ 6,268
II. Coal Billing Calculation - Meigs Division:
A. Total Operating Expenses (b) $ 70,662
B. Add: Cost-of-Capital Billing Adder as Applied per E. 1. of Section I 6,193
C. Cost Applicable to Current Quarter Coal Billings to Ohio Power $ 76,855
D. Coal Sold and Shipped in Current Quarter to Ohio Power (in tons) 1,055,012
E. Average Price per Ton to Ohio Power (in dollars) (C/D) $72.85
(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
Iincome.
</TABLE>
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SOUTHERN OHIO COAL COMPANY
STATEMENT OF COST OF OPERATION
FOR THE QUARTER ENDED JUNE 30, 2000
(in thousands)
Direct Labor-UMW* $ 1,756
Indirect Labor-UMW* 5,616
Benefits-UMW* 13,743
Salaries and Benefits-Nonunion 6,042
Operating Supplies 3,089
Repair Parts and Materials 5,326
Electricity and Other Utilities 1,685
Outside Services-Maintenance, Haulage and Reclamation 3,446
Taxes Other Than Federal Income Taxes** 3,894
Rental of Equipment 8,377
Depreciation, Depletion and Amortization 2,365
Mining Cost Normalization*** 22,038
Other Production Costs (7,012)
Subtotal 70,365
Transfers of Production Costs (to)/from Coal Inventory (250)
Total $70,115
* 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 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
June 30, 2000
Net
Gross Accumulated Carrying
Cost Provisions Amount
(in thousands)
Description
Surface Lands $ 7,578 $ - $ 7,578
Mining Structures and Equipment 242,791 191,714 51,077
Coal Interests (net of depletion) 975 - 975
Mine Development Costs 134,149 111,506 22,643
Total Mining Plant in Service $385,493 $303,220 $82,273
