Securities and Exchange Commission
Office of Public Utility Regulation
Division of Investment Management
450 Fifth Street, N.W.
Washington, D.C. 20549-1004
April 28, 1994
Via EDGAR
Re: Southern Ohio Coal Company
(File No. 70-6152
Cedar Coal Co
CIK 0000215390)
Gentlemen:
As a supplement to our March 30, 1994 EDGAR filing of the
fourth quarter 1993 report, Southern Ohio Coal Company's
1993 Annual Report which includes a statement of
significant accounting policies is filed herewith.
Very truly yours,
G.C. Dean
American Electric Power
Service Corporation
GCD/clm
<PAGE>
[TEXT]
<PAGE>
S O U T H E R N O H I O
C O A L C O M P A N Y
1993 Annual Report
AMERICAN ELECTRIC POWER SYSTEM<PAGE>
<PAGE>
SOUTHERN OHIO COAL COMPANY
Page
CONTENTS
Independent Auditors' Report . . . . . . . . . . . . . . . . . .1
Statements of Income and Statements of Retained Earnings . . . .2
Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . .3-4
Statements of Cash Flows . . . . . . . . . . . . . . . . . . . .5
Notes to Financial Statements. . . . . . . . . . . . . . . . 6-14
<PAGE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareowner and Board of
Directors of Southern Ohio Coal Company:
We have audited the accompanying balance sheets of Southern Ohio Coal Company
as of December 31, 1993 and 1992, and the related statements of income,
retained earnings and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Southern Ohio Coal Company as of December
31, 1993 and 1992, and the results of its operations and its cash flows for
the years then ended in conformity with generally accepted accounting
principles.
As discussed in Notes 1 and 5 in Notes to Financial Statements, effective
January 1, 1993, the Company changed its method of accounting for income taxes
to conform with Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes, " and its method of accounting for
postretirement benefits other than pensions to conform with Statement of
Financial Accounting Standards No. 106 "Employers' Accounting for
Postretirement Benefits Other Than Pensions."
The accompanying statements of income and retained earnings of Southern Ohio
Coal Company for the year ended December 31, 1991 were not audited by us and,
accordingly, we do not express an opinion on them.
DELOITTE & TOUCHE
Columbus, Ohio
February 22, 1994
<PAGE>
<PAGE>
<TABLE>
SOUTHERN OHIO COAL COMPANY
STATEMENTS OF INCOME
<CAPTION>
Year Ended December 31,
1993 1992 1991
(unaudited)
(in thousands)
<S> <C> <C> <C>
OPERATING REVENUES - Sales to Parent Company . . . $161,025 $245,500 $330,298
OPERATING EXPENSES (including depreciation,
depletion and amortization of mining plant
of $11,039,000 in 1993, $14,568,000 in 1992
and $16,531,000 in 1991) . . . . . . . . . . . . 138,877 218,865 300,807
OPERATING INCOME . . . . . . . . . . . . . . . . . 22,148 26,635 29,491
NONOPERATING INCOME. . . . . . . . . . . . . . . . 832 1,430 4,181
INCOME BEFORE INTEREST CHARGES . . . . . . . . . . 22,980 28,065 33,672
INTEREST CHARGES (including $1,156,000
in 1992 and $2,005,000 in 1991 on
long-term debt to the Company's Parent). . . . . 6,862 9,398 11,737
INCOME BEFORE FEDERAL INCOME TAXES . . . . . . . . 16,118 18,667 21,935
FEDERAL INCOME TAXES ON OPERATIONS . . . . . . . . 5,750 6,623 7,994
NET INCOME . . . . . . . . . . . . . . . . . . . . $ 10,368 $ 12,044 $ 13,941
</TABLE>
<TABLE>
STATEMENTS OF RETAINED EARNINGS
<CAPTION>
Year Ended December 31,
1993 1992 1991
(unaudited)
(in thousands)
<S> <C> <C> <C>
RETAINED EARNINGS JANUARY 1. . . . . . . . . . . $33,025 $34,073 $34,132
NET INCOME . . . . . . . . . . . . . . . . . . . 10,368 12,044 13,941
CASH DIVIDENDS DECLARED. . . . . . . . . . . . . 10,368 13,092 14,000
RETAINED EARNINGS DECEMBER 31. . . . . . . . . . $33,025 $33,025 $34,073
See Notes to Financial Statements.
</TABLE>
<PAGE>
<PAGE>
<TABLE>
SOUTHERN OHIO COAL COMPANY
BALANCE SHEETS
<CAPTION>
December 31,
1993 1992
(in thousands)
ASSETS
<S> <C> <C>
MINING PLANT:
Mining Plant in Service . . . . . . . . . . . . . . . . . . . $409,403 $403,126
Construction Work in Progress . . . . . . . . . . . . . . . . 2,673 177
Total Mining Plant. . . . . . . . . . . . . . . . . . 412,076 403,303
Accumulated Depreciation and Amortization . . . . . . . . . . 185,054 166,884
NET MINING PLANT. . . . . . . . . . . . . . . . . . . 227,022 236,419
OTHER PROPERTY AND INVESTMENTS. . . . . . . . . . . . . . . . . 68,444 71,939
CURRENT ASSETS:
Cash and Cash Equivalents . . . . . . . . . . . . . . . . . . 2,505 8,361
Accounts Receivable:
General . . . . . . . . . . . . . . . . . . . . . . . . . . 3,934 4,062
Insurance . . . . . . . . . . . . . . . . . . . . . . . . . 15,829 -
Affiliated Companies. . . . . . . . . . . . . . . . . . . . 1,202 10,814
Coal - at average cost. . . . . . . . . . . . . . . . . . . . 558 404
Materials and Supplies - at average cost. . . . . . . . . . . 10,871 10,284
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,411 1,549
TOTAL CURRENT ASSETS. . . . . . . . . . . . . . . . . 36,310 35,474
REGULATORY ASSETS:
Amounts Due From Customers For
Future Federal Income Taxes . . . . . . . . . . . . . . . . 60,487 -
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,293 2,985
TOTAL REGULATORY ASSETS . . . . . . . . . . . . . . . 65,780 2,985
TOTAL . . . . . . . . . . . . . . . . . . . . . . . $397,556 $346,817
See Notes to Financial Statements.
</TABLE>
<PAGE>
<PAGE>
<TABLE>
SOUTHERN OHIO COAL COMPANY
BALANCE SHEETS
<CAPTION>
December 31,
1993 1992
(in thousands)
CAPITALIZATION AND LIABILITIES
<S> <C> <C>
SHAREOWNER'S EQUITY:
Common Stock - Par Value $1:
Authorized and Outstanding - 5,000 Shares . . . . . . . . . $ 5 $ 5
Paid-in Capital . . . . . . . . . . . . . . . . . . . . . . . 112,689 112,689
Retained Earnings . . . . . . . . . . . . . . . . . . . . . . 33,025 33,025
TOTAL SHAREOWNER'S EQUITY . . . . . . . . . . . . . . 145,719 145,719
LONG-TERM DEBT. . . . . . . . . . . . . . . . . . . . . . . . . 90,000 90,000
OTHER NONCURRENT LIABILITIES:
Obligations Under Capital Leases. . . . . . . . . . . . . . . 27,592 30,742
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,909 12,276
TOTAL OTHER NONCURRENT LIABILITIES. . . . . . . . . . 38,501 43,018
CURRENT LIABILITIES:
Long-term Debt Due Within One Year. . . . . . . . . . . . . . - 15,000
Accounts Payable:
General . . . . . . . . . . . . . . . . . . . . . . . . . . 4,872 2,219
Affiliated Companies. . . . . . . . . . . . . . . . . . . . 2,267 1,965
Taxes Accrued . . . . . . . . . . . . . . . . . . . . . . . . 827 5,208
Accrued Vacation Pay. . . . . . . . . . . . . . . . . . . . . 2,483 2,600
Workers' Compensation Claims. . . . . . . . . . . . . . . . . 7,773 7,259
Obligations Under Capital Leases. . . . . . . . . . . . . . . 11,269 9,001
Accrued Other Postretirement Benefits . . . . . . . . . . . . 7,144 -
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,609 10,960
TOTAL CURRENT LIABILITIES . . . . . . . . . . . . . . 45,244 54,212
DEFERRED FEDERAL INCOME TAXES . . . . . . . . . . . . . . . . . 75,814 13,868
DEFERRED CREDITS. . . . . . . . . . . . . . . . . . . . . . . . 2,278 -
COMMITMENTS AND CONTINGENCIES (Note 2)
TOTAL . . . . . . . . . . . . . . . . . . . . . . . $397,556 $346,817
See Notes to Financial Statements.
</TABLE>
<PAGE>
<PAGE>
<TABLE>
SOUTHERN OHIO COAL COMPANY
STATEMENTS OF CASH FLOWS
<CAPTION>
Year Ended December 31,
1993 1992 1991
(unaudited)
(in thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net Income . . . . . . . . . . . . . . . . . . . $ 10,368 $ 12,044 $ 13,941
Adjustments for Noncash Items:
Depreciation, Depletion and Amortization . . . 11,039 14,568 16,531
Deferred Federal Income Taxes. . . . . . . . . 1,461 (12,114) (1,569)
Amortization of Deferred Strike Costs. . . . . 185 3,298 3,215
Gain on Sale of Property . . . . . . . . . . . - (12,681) -
Changes in Certain Current Assets
and Liabilities:
Accounts Receivable. . . . . . . . . . . . . . (6,089) (1,659) (445)
Coal, Materials and Supplies . . . . . . . . . (741) 4,566 127
Accounts Payable . . . . . . . . . . . . . . . 2,955 (2,811) (3,254)
Accrued Other Postretirement Benefits. . . . . 7,144 - -
Taxes Accrued. . . . . . . . . . . . . . . . . (4,381) 2,495 100
Other (net). . . . . . . . . . . . . . . . . . . (2,215) (8,005) (1,959)
Net Cash Flows From (Used for)
Operating Activities . . . . . . . . . . 19,726 (299) 26,687
INVESTING ACTIVITIES:
Construction Expenditures. . . . . . . . . . . . (2,553) (158) (3,458)
Buyout of Martinka Leases. . . . . . . . . . . . - (16,400) -
Proceeds from Sale of Martinka
Mining Operations. . . . . . . . . . . . . . . - 62,051 -
Proceeds from Sales of Property. . . . . . . . . 63 129 53
Net Cash Flows From (Used For)
Investing Activities . . . . . . . . . . (2,490) 45,622 (3,405)
FINANCING ACTIVITIES:
Issuance of Long-term Debt . . . . . . . . . . . 25,000 19,900 -
Retirement of Long-term Debt . . . . . . . . . . (40,000) (65,000) -
Receipts from (Payments to) Parent Company for
Future Coal Deliveries . . . . . . . . . . . . 2,276 - (666)
Dividends Paid . . . . . . . . . . . . . . . . . (10,368) (13,092) (14,000)
Net Cash Flows Used For
Financing Activities . . . . . . . . . . (23,092) (58,192) (14,666)
Net Increase (Decrease) in Cash and
Cash Equivalents . . . . . . . . . . . . . . . . (5,856) (12,869) 8,616
Cash and Cash Equivalents January 1. . . . . . . . 8,361 21,230 12,614
Cash and Cash Equivalents December 31. . . . . . . $ 2,505 $ 8,361 $ 21,230
See Notes to Financial Statements.
</TABLE>
<PAGE>
<PAGE>
SOUTHERN OHIO COAL COMPANY
NOTES TO FINANCIAL STATEMENTS
THE INFORMATION RELATED TO THE YEAR ENDED
DECEMBER 31, 1991 IS UNAUDITED.
1. SIGNIFICANT ACCOUNTING POLICIES:
Organization and Regulation. Southern Ohio Coal Company (the Company or
SOCCo), 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's underground mining operations are
conducted in Meigs County in southern Ohio to supply coal to OPCo's Gavin
Plant. All coal is sold to OPCo at prices regulated by the Securities and
Exchange Commission (SEC) under the Public Utility Holding Company Act of 1935
(1935 Act). Prices billed are sufficient to recover expenses and provide for
a return on OPCo's equity investment excluding retained earnings. Former
underground mining operations at the Martinka mine in West Virginia supplied
coal to OPCo's Mitchell Plant. On July 1, 1992, the Martinka operations were
sold to an unaffiliated company as described below. At December 31, 1993,
owned proven coal reserves amounted to 152,822,000 tons in Ohio and 65,003,000
tons in West Virginia.
Basis of Accounting. As a regulated entity, SOCCo's financial statements
reflect actions of regulators that result in the recognition of revenues and
expenses in different time periods than enterprises that are not regulated.
In accordance with Statement of Financial Accounting Standards (SFAS) No. 71
Accounting for the Effects of Certain Types of Regulation (SFAS 71),
regulatory assets and liabilities are recorded to defer expenses or revenues
reflecting such differences.
Coal Supply Agreement. Pursuant to a coal supply agreement with OPCo, the
Company is obligated to deliver the 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.
Mining Plant and Depreciation, Depletion and Amortization. Mining plant is
stated at cost and includes expenditures for mine development. Mine
development includes all costs in excess of amounts realized from coal
produced during the development of commercial mines. 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 average rates used
to accrue AFUDC were 9.50% in 1993, 7.25% in 1992 and 9.75% in 1991. Since
there were no major long-term construction projects, AFUDC was not significant
in 1993, 1992 and 1991.
<PAGE>
<PAGE>
<TABLE>
Mining plant in service (at original cost) at December 31, 1993 and
1992 was comprised of the following:
<CAPTION>
December 31,
1993 1992
(in thousands)
<S> <C> <C>
Surface Lands. . . . . . . . . . . . . . . $ 7,251 $ 7,281
Mining Structures and Equipment. . . . . . 263,608 257,188
Coal Interests (net of depletion). . . . . 4,395 4,508
Mine Development Costs . . . . . . . . . . 134,149 134,149
$409,403 $403,126
</TABLE>
Depreciation, depletion and amortization are provided over the
estimated useful asset lives 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.
Sale of Martinka Operations. On July 1, 1992, the Martinka mining operations
and certain related coal reserves were sold to an unaffiliated company for
approximately $139 million and assumption of certain liabilities. The Company
received $62 million of cash at the time of the sale and will receive $77
million over 13-1/2 years. The sale resulted in a $111,000 after tax loss,
which was included in nonoperating income and billed to OPCo.
Other Property and Investments. Other property and investments includes the
Cove North coal reserves (net book value $27 million at December 31, 1993) in
West Virginia, the net present value of the receivable from the purchaser of
the Martinka operations ($41 million at December 31, 1993 discounted at 8-
1/2%), and other minor items.
Cash and Cash Equivalents. Cash and cash equivalents include temporary cash
investments with original maturities of three months or less.
Inventories. Coal and materials and supplies inventories are stated at cost,
determined on a moving-average basis.
Income Taxes. Effective January 1, 1993, the Company adopted the liability
method of accounting for income taxes as prescribed by SFAS 109, Accounting
for Income Taxes. Under this standard deferred federal 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. In
prior years deferred federal income taxes were provided for differences
between book and taxable income except where flow-through accounting for
certain differences was reflected in billings. Flow-through accounting is a
method whereby federal income tax expense for a particular item is the same
for accounting and coal billing purposes as in the federal income tax return.
As a result of the adoption of SFAS 109, significant additional deferred tax
<PAGE>
liabilities were recorded for items afforded flow-through treatment in
billings. In accordance with SFAS 71 significant corresponding regulatory
assets were also recorded to reflect the future recovery of additional taxes
due when the temporary differences reverse. As a result of this change in
accounting effective January 1, 1993, deferred federal income tax liabilities
increased by $64.3 million and regulatory assets by $59.9 million, and net
income decreased by $4.4 million.
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. Therefore no accruals
for Black Lung liabilities were made in 1993, 1992 or 1991.
The Company is self-insured for workers' compensation. The
estimated present value of workers' compensation claim payments has been
provided based on known events and claims.
Reclamation. 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 sealing the portals at underground mines and
the removal or covering of refuse piles and water settling ponds. Reclamation
costs are recorded as incurred.
Reclassifications. Certain prior-period amounts were reclassified for
comparative purposes.
2. COMMITMENTS AND CONTINGENCIES:
Construction expenditures for the years 1994 through 1996 are
estimated to be $5.8 million and, in connection with the construction program,
commitments have been made.
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) requires significant
reductions in sulfur dioxide and nitrogen oxides emitted from OPCo's
generating plants. In November 1992 the Public Utilities Commission of Ohio
(PUCO) approved OPCo's compliance plan. The PUCO approved plan sets forth
compliance measures for affected generating units, including: the installation
of leased scrubbers at the Gavin Plant to permit OPCo to continue burning Ohio
high-sulfur coal at Gavin. The plan provides for Gavin's coal to be supplied
by the Company's Meigs mine which will operate at reduced capacity and by
replacement coal from new long-term contracts with unaffiliated sources and
spot market purchases.
Also in November 1992 the PUCO issued an order approving OPCo's
stipulation agreement with the PUCO staff and the Ohio Consumer's Counsel.
The agreement provides for, among other things, a three-year predetermined
price of $1.64 per million Btu for coal burned by OPCo from December 1991 to
November 1994 at four of its generating stations, including the Gavin Plant,
and a subsequent 15-year predetermined price of $1.57 1/2 per million Btu for
coal burned at the Gavin Plant, adjusted periodically for inflation. After
<PAGE>
November 2009 the price that OPCo can recover for coal from the Meigs mine
will be limited to the lower of cost or the then-current market price. The
predetermined prices provide OPCo with an opportunity to accelerate recovery
of its PUCO jurisdictional investment in and liabilities of the Meigs mine to
the extent coal costs are below the predetermined prices.
Based on the estimated future cost of coal supplied to the Gavin
Plant, both Meigs and unaffiliated coal, management believes that OPCo should
be able to recover the PUCO jurisdictional portion of the cost of the Meigs
mining operations including eventual mine closure liabilities under the terms
of the stipulation agreement. In the event OPCo does not recover its costs,
the Company would still recover from OPCo all of its costs of mining
operations under the terms of the coal supply agreement.
It may be necessary in the future to shut down the Meigs mining
operations if the predetermined price is not adequate to recover Meigs mining
cost from PUCO jurisdictional fuel clause customers. 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,
reclamation and other shutdown costs. If a shutdown should become necessary,
results of operations are not expected to be affected since shutdown costs
would be recoverable from OPCo under the coal supply agreement.
On July 11, 1993, Meigs 31 mine, one of two underground mines owned
by the Company was inundated with water from an adjoining, sealed and
abandoned mine also owned by the Company. On July 26, 1993, the Ohio
Environmental Protection Agency (Ohio EPA) approved a plan to pump water from
the mine. The Company commenced pumping water from its Meigs 31 mine and
encountered opposition from the Federal Office of Surface Mining Reclamation
and Enforcement (OSM) and United States Environmental Protection Agency
(Federal EPA).
The U.S. District Court for the Southern District of Ohio granted a
motion by the Company for a preliminary injunction against OSM and the Federal
EPA preventing them from exercising jurisdiction to issue orders to cease the
pumping. In an appeal by Federal EPA and OSM the U.S. Court of Appeals for
the Sixth Circuit denied OSM's motion for a stay of the District Court's
preliminary injunction but granted Federal EPA's motion for a stay in part
which allowed Federal EPA to investigate and make findings with respect to
alleged violations of the Clean Water Act and thereafter to exercise its
enforcement authority under the Clean Water Act if a violation was identified.
Federal EPA issued an administrative order requiring a partial cessation of
pumping which was extended until September 8, 1993. On September 8, 1993, the
District Court granted the Company's motion requesting that enforcement of the
Federal EPA order be stayed. On September 23, 1993, the Court of Appeals
ruled that Federal EPA had the right to issue the order, thereby overturning
the District Court's decision. Since September 16, 1993, the Company has
processed all water removed from the mine through its expanded treatment
system and is in compliance with the effluent limitations in its water
discharge permits.
On January 3, 1994 the District Court held that the complaint filed
by the Company should not be dismissed and concluded that sufficient legal and
factual grounds existed for the court to consider the Company's claim that
Federal EPA could not override Ohio EPA's authorization for the Company to
bypass its water treatment system on an emergency basis during pumping
activities. In a separate opinion, the District Court denied Federal EPA's
<PAGE>
request that the District Court defer consideration of the Company's motion
involving a request for a Declaration of Rights with respect to the mine water
release into area streams.
The West Virginia Division of Environmental Protection has proposed
fining the Company $1.8 million for alleged violations resulting from the
release of mine water into the Ohio River.
Pumping has removed most of the water that inundated the mine.
Meigs 31 mine returned to service in February 1994. The cost of returning the
mine to service including the cost of the resolution of the aforementioned
litigation and environmental mitigation will be recovered through insurance or
from OPCo under the terms of 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 SOCCo.
The costs of the services are determined 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:
United Mine Workers of America (UMWA) Pension Plans
The Company contributes to UMWA pension funds to provide pension
benefits for UMWA employees meeting eligibility requirements. Benefits are
based on age at retirement and years of service. As of June 30, 1993, the
UMWA actuary estimates that the Company's share of the UMWA pension plans
unfunded vested liabilities was approximately $27 million. In the event the
Company ceases or significantly reduces mining operations or contributions to
the pension plans, a withdrawal obligation may be triggered for all or a
portion of its share of the unfunded vested liability. Employer contributions
are based on the number of hours worked, are expensed when paid and totaled
$772,000 in 1993, $1.3 million in 1992 and $2 million in 1991.
AEP System Pension Plan
The Company participates in the AEP pension plan, a trusteed,
noncontributory defined benefit plan covering all employees meeting
eligibility requirements, except participants in the UMWA pension plans.
Benefits are based on service years and compensation levels. Effective
January 1, 1992 employees may retire without reduction of benefits at age 62
and with reduced benefits as early as age 55. Pension costs are allocated by
first charging each System company with its service cost and then allocating
the remaining pension cost in proportion to its share of the projected benefit
obligation. The funding policy is to make annual trust fund contributions
equal to the net periodic pension cost up to the maximum amount deductible for
federal income taxes, but not less than the minimum contribution required by
law.
<PAGE>
<PAGE>
The Company's share of net pension cost of the AEP pension plan for
the years ended December 31, 1993, 1992 and 1991 was $414,000, $1,104,000 and
$735,000, respectively.
AEP System Savings Plan
An employee savings plan is offered to non-UMWA employees which
allows participants to contribute up to 16% of their salaries into three
investment alternatives, including AEP Co., Inc. common stock. The Company
contributes an amount equal to one-half of the first 6% of the employees'
contribution. The Company's contribution is invested in AEP Co., Inc. common
stock and totaled $258,000 in 1993, $335,000 in 1992 and $463,000 in 1991.
Postretirement Benefits Other Than Pensions
Medical benefits for its UMWA retirees who retired after January 1,
1976 and its active UMWA employees are the liability of the Company. Current
UMWA employees are eligible for medical and life insurance benefits if they
have at least 10 service years and are at least age 55 at retirement. Former
UMWA employees become eligible at age 55 if they have 20 service years. The
cost of health care benefits for UMWA retirees was expensed when paid in 1992
and 1991 and totaled $11.8 million and $11.3 million, respectively.
The AEP System provides certain other benefits for retired
employees. Substantially all non-UMWA employees are eligible for health care
and life insurance benefits if they have a least 10 service years and,
effective January 1, 1992, are age 55 at retirement. Prior to 1993, net costs
of these benefits were also recognized as an expense when paid and totaled
$101,000 and $85,000 in 1992 and 1991, respectively.
SFAS 106, Employers' Accounting for Postretirement Benefits Other
Than Pensions, was adopted in January 1993 for the Company's aggregate
postretirement benefits other than pension (OPEB) liability. SFAS 106
requires the accrual of the present value liability for OPEB costs during the
employee's service years. Prior service costs are being recognized as a
transition obligation over 20 years in accordance with SFAS 106. OPEB costs
are based on actuarially-determined stand alone costs for each System company.
The funding policy is to contribute incremental amounts recovered through coal
billings for non-UMWA employees and cash generated by a corporate owned life
insurance (COLI) program. The annual accrued costs for 1993 required by SFAS
106 for employees and retirees, which includes the recognition of one-
twentieth of the prior service transition obligation, was $10 million.
To reduce the impact of adopting SFAS 106, management took several
measures. In 1990 a Voluntary Employees Beneficiary Association (VEBA) trust
fund for OPEB benefits for all non-UMWA employees was established and a
$260,000 advance contribution was made to the trust fund, the maximum amount
deductible for federal income tax purposes. In 1993, an additional $791,000
contribution was made to the VEBA trust fund from amounts recovered through
coal billings. In addition, to help fund and reduce the future costs of OPEB
benefits, a COLI program was implemented. The insurance policies have a
substantial cash surrender value which is recorded, net of equally substantial
policy loans, as other property and investments.
UMWA health plans pay the 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
<PAGE>
or is no longer in business. The Energy Policy Act of 1992 secured lifetime
medical benefits for these retirees; reimposed funding obligations upon
companies who previously withdrew from the UMWA plans; eliminated the
withdrawal liability; eliminated the per-hour worked contribution feature for
the 1950 and 1974 UMWA Benefit Plans; assigned beneficiaries to their former
employees; and assigned to signatories on a pro rata basis those beneficiaries
who could not otherwise be assigned. In February 1993, the 1950 and 1974 UMWA
Benefit Plans were merged into the UMWA Combined Benefit Fund and a 1992
Benefit Plan was added. The Combined Fund is financed by payments from
current and former UMWA wage agreement signatories, the 1950 UMWA Pension Plan
surplus and the Abandoned Mine Land Reclamation Fund Surplus. Costs of the
1992 Benefit Plan are paid by signatories to 1988 and prior years' UMWA
contracts. Required annual payments to the UMWA health funds made by the
Company were recognized as expense when paid and totaled $486,000 in 1993,
$5.8 million in 1992 and $7.9 million in 1991.
The 1993 National Bituminous Coal Wage Agreement provides for
establishment of the UMWA 1993 Benefit Plan for future orphaned retirees not
covered by the Energy Act. The 1993 Benefit Plan will be funded by signatory
operators with a per-hour-worked contribution during the duration of the
Agreement. Health benefits under this Plan are provided only for the duration
of the Agreement. In 1993 contributions under the agreement were not
significant.
The Energy Act also permits recovery, within established limits, of
excess funding in the Black Lung Trust funds of the AEP System equal to the
expense of certain benefits other than pensions for those covered by the UMWA
Combined Benefit Fund. Reimbursement limitations apply to the System's excess
funding, therefore funds recovered are transferred between the funds surplus
and deficit member companies. In 1993, $6 million of Black Lung surplus was
applied in accordance with the Energy Act, $3.4 million of which was to
reimburse the Company for benefits paid in 1992 and the first nine months of
1993, and $2.6 million which was transferred from amounts recovered by other
System companies. The Company's Black Lung Trust had excess funds at December
31, 1993 and 1992 of $12.4 million and $18.4 million, respectively, and these
funds may be applied to reimburse the Company for benefits provided in the
future.
<PAGE>
<PAGE>
6. FEDERAL INCOME TAXES:
<TABLE>
The details of federal income taxes are as follows:
<CAPTION>
Year Ended December 31,
1993 1992 1991
(in thousands)
<S> <C> <C> <C>
Charged (Credited) to Operations:
Current (net) . . . . . . . . . . . . . . . . $ 9,439 $ 9,233 $ 9,561
Deferred (net). . . . . . . . . . . . . . . . (3,689) (2,610) (1,567)
Total . . . . . . . . . . . . . . . . . . . 5,750 6,623 7,994
Charged (Credited) to Nonoperating Income:
Current (net) . . . . . . . . . . . . . . . . 10 19,791 -
Deferred (net). . . . . . . . . . . . . . . . 5,150 (9,504) -
Total . . . . . . . . . . . . . . . . . . . 5,160 10,287 -
Total Federal Income Taxes. . . . . . . . $10,910 $16,910 $ 7,994
</TABLE>
Federal income taxes as reported are different than 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 corporate
owned life insurance, self insurance reserves, mine development costs and
certain depreciation differences. In addition, during 1993 federal income tax
expense increased by $4.4 million due to the adoption of SFAS 109.
The net deferred tax liability of $75.8 million at December 31, 1993
includes deferred tax assets of $16.5 million and deferred tax liabilities of
$92.3 million. The significant temporary differences giving rise to the net
deferred tax liabilities are:
<TABLE>
<CAPTION>
Deferred Tax Asset
(Liability)
(in thousands)
<S> <C>
Property Related Temporary Differences. . . . . $(61,595)
Amounts Due From Customers
For Future Federal Income Taxes . . . . . . . (21,170)
Self Insurance Reserves . . . . . . . . . . . . 6,953
Prepaid Royalties . . . . . . . . . . . . . . . (4,443)
All Other (net) . . . . . . . . . . . . . . . . 4,441
Total Net Deferred Tax Liability. . . . . . . $(75,814)
/TABLE
<PAGE>
<PAGE>
7. SUPPLEMENTARY CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
Year Ended December 31,
1993 1992 1991
(in thousands)
<S> <C> <C> <C>
Cash was paid for:
Interest . . . . . . . . . . . . . . . . . . $ 6,679 $10,200 $11,737
Income Taxes . . . . . . . . . . . . . . . . $14,273 $27,763 $11,183
Noncash acquisitions under capital leases were . $ 9,091 $ 3,312 $38,654
</TABLE>
A receivable of $44.6 million was recorded in 1992 in other property
and investments for the net present value of the payments to be received from
the buyer of the Martinka operations.
8. LEASES:
<TABLE>
Leases of property, plant and equipment are for periods up to 30
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.
<CAPTION>
Lease rentals are primarily charged to operating expenses. The
components of rentals are as follows:
Year Ended December 31,
1993 1992 1991
(in thousands)
<S> <C> <C> <C>
Operating Leases . . . . . . . . . . . . . . . $ 3,541 $ 8,065 $ 9,514
Amortization of Capital Leases . . . . . . . . 9,678 9,093 14,175
Interest on Capital Leases . . . . . . . . . . 3,064 3,622 4,409
Total Rental Payments. . . . . . . . . . . $16,283 $20,780 $28,098
<CAPTION>
Properties under capital leases and related obligations recorded on
the Balance Sheet are as follows:
December 31,
1993 1992
(in thousands)
<S> <C> <C>
Mining Plant . . . . . . . . . . . . . . . . . . . $70,220 $63,670
Accumulated Provision for Amortization. . . . . . . 31,359 23,927
Net Properties under Capital Leases . . . . . . $38,861 $39,743
Obligations under Capital Leases. . . . . . . . . . $38,861 $39,743
Less Portion Due Within One Year. . . . . . . . . . 11,269 9,001
Noncurrent Liability. . . . . . . . . . . . . . . . $27,592 $30,742
Properties under operating leases and related obligations are not
included in the Balance Sheet.
</TABLE>
<PAGE>
<PAGE>
<TABLE>
Future minimum lease payments consisted of the following at December
31, 1993:
<CAPTION>
Non-
Cancelable
Capital Operating
Leases Leases
(in thousands)
<S> <C> <C>
1994. . . . . . . . . . . . . . . . . . . . . . . . $13,871 $ 2,064
1995. . . . . . . . . . . . . . . . . . . . . . . . 11,297 1,918
1996. . . . . . . . . . . . . . . . . . . . . . . . 8,312 1,956
1997. . . . . . . . . . . . . . . . . . . . . . . . 5,363 1,436
1998. . . . . . . . . . . . . . . . . . . . . . . . 2,559 1,093
Later Years . . . . . . . . . . . . . . . . . . . . 3,230 3,585
Total Future Minimum Lease Payments . . . . . . . . 44,632 $12,052
Less Estimated Interest Element . . . . . . . . . . 5,771
Estimated Present Value of Future
Minimum Lease Payments. . . . . . . . . . . . . . $38,861
</TABLE>
9. LONG-TERM DEBT:
Long-term debt outstanding was as follows:
<TABLE>
<CAPTION>
December 31,
1993 1992
(in thousands)
<S> <C> <C>
Notes Payable to Banks:
7.68% due January 1993 . . . . . . . . . . . . . . . $ - $ 40,000
8.00% due January 1994 . . . . . . . . . . . . . . . 20,000 20,000
8.01% due January 1994 . . . . . . . . . . . . . . . 25,000 25,000
7.19% due January 1997 . . . . . . . . . . . . . . . 20,000 20,000
5.79% due January 1996 . . . . . . . . . . . . . . . 8,319 -
6.85% due January 1998 . . . . . . . . . . . . . . . 16,681 -
90,000 105,000
Less Portion Due Within One Year . . . . . . . . . . . - 15,000
Total. . . . . . . . . . . . . . . . . . . . $90,000 $ 90,000
</TABLE>
The notes payable to banks are guaranteed by OPCo.
In January 1994, $20,000,000 of the 8.00% and $25,000,000 of the
8.01% notes payable were refinanced. The replacement debt consists of three
notes totaling $30 million with 6.20% fixed interest rates due January 2001
and one $15 million note due January 1999 with a variable interest rate,
initially 3.725% through July 1994. As a result, the $45,000,000 is
classified as long-term on the balance sheet.
<PAGE>
<PAGE>
10. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amounts of cash and cash equivalents, accounts
receivable, short-term debt and accounts payable approximate fair value
because of the short-term maturity of these instruments. The carrying amount
of the receivable from the purchaser of the Martinka operations approximates
fair value based on current interest rates of investments with similar
maturities. Fair values for long-term debt approximate carrying value and are
based on quoted market prices for the same or similar issues and the current
interest rates offered for instruments of the same remaining maturities.
