<PAGE>
S O U T H E R N O H I O
C O A L C O M P A N Y
1994 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. . . . . . . . . . . . . . . . 6-13
<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, 1994 and 1993, and the related statements of income,
retained earnings and cash flows for each of the three years in the period
ended December 31, 1994. 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, 1994 and 1993, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 1994 in conformity
with generally accepted accounting principles.
As discussed in Notes 5 and 6 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."
DELOITTE & TOUCHE LLP
Columbus, Ohio
February 21, 1995
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<TABLE>
SOUTHERN OHIO COAL COMPANY
STATEMENTS OF INCOME
<CAPTION>
Year Ended December 31,
1994 1993 1992
(in thousands)
<S> <C> <C> <C>
OPERATING REVENUES - Sales to Parent Company . . . $196,477 $161,025 $245,500
OPERATING EXPENSES (including depreciation,
depletion and amortization of mining plant
of $11,595,000 in 1994, $11,039,000 in 1993
and $14,568,000 in 1992) . . . . . . . . . . . . 170,151 138,877 218,865
OPERATING INCOME . . . . . . . . . . . . . . . . . 26,326 22,148 26,635
INTEREST CHARGES (including $1,156,000 in 1992
on long-term debt to the Company's Parent) . . . 5,684 6,862 9,398
OPERATING INCOME BEFORE FEDERAL INCOME TAXES . . . 20,642 15,286 17,237
FEDERAL INCOME TAXES ON OPERATIONS . . . . . . . . 6,657 5,750 6,623
NET INCOME FROM OPERATIONS . . . . . . . . . . . . 13,985 9,536 10,614
NONOPERATING INCOME (LOSS) . . . . . . . . . . . . (3,617) 832 1,430
NET INCOME . . . . . . . . . . . . . . . . . . . . $ 10,368 $ 10,368 $ 12,044
</TABLE>
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<TABLE>
STATEMENTS OF RETAINED EARNINGS
<CAPTION>
Year Ended December 31,
1994 1993 1992
(in thousands)
<S> <C> <C> <C>
RETAINED EARNINGS JANUARY 1. . . . . . . . . . . $33,025 $33,025 $34,073
NET INCOME . . . . . . . . . . . . . . . . . . . 10,368 10,368 12,044
CASH DIVIDENDS DECLARED. . . . . . . . . . . . . 10,368 10,368 13,092
RETAINED EARNINGS DECEMBER 31. . . . . . . . . . $33,025 $33,025 $33,025
See Notes to Financial Statements.
</TABLE>
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<TABLE>
SOUTHERN OHIO COAL COMPANY
BALANCE SHEETS
<CAPTION>
December 31,
1994 1993
(in thousands)
ASSETS
<S> <C> <C>
MINING PLANT:
Surface Lands . . . . . . . . . . . . . . . . . . . . . . . . $ 7,403 $ 7,251
Mining Structures and Equipment . . . . . . . . . . . . . . . 267,690 263,608
Coal Interests (net of depletion) . . . . . . . . . . . . . . 4,341 4,395
Mine Development Costs. . . . . . . . . . . . . . . . . . . . 134,149 134,149
Construction Work in Progress . . . . . . . . . . . . . . . . 1,331 2,673
Total Mining Plant. . . . . . . . . . . . . . . . . . 414,914 412,076
Accumulated Depreciation and Amortization . . . . . . . . . . 200,496 185,054
NET MINING PLANT. . . . . . . . . . . . . . . . . . . 214,418 227,022
OTHER PROPERTY AND INVESTMENTS. . . . . . . . . . . . . . . . . 66,272 68,444
CURRENT ASSETS:
Cash and Cash Equivalents . . . . . . . . . . . . . . . . . . 20,369 2,505
Accounts Receivable:
General . . . . . . . . . . . . . . . . . . . . . . . . . . 3,744 3,934
Insurance . . . . . . . . . . . . . . . . . . . . . . . . . 13,079 15,829
Affiliated Companies. . . . . . . . . . . . . . . . . . . . 8,320 1,202
Coal - at average cost. . . . . . . . . . . . . . . . . . . . 121 558
Materials and Supplies - at average cost. . . . . . . . . . . 10,265 10,871
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,336 1,411
TOTAL CURRENT ASSETS. . . . . . . . . . . . . . . . . 57,234 36,310
REGULATORY ASSETS:
Amounts Due From Parent Company For
Future Federal Income Taxes . . . . . . . . . . . . . . . . 58,722 60,487
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,646 -
TOTAL REGULATORY ASSETS . . . . . . . . . . . . . . . 64,368 60,487
DEFERRED CHARGES. . . . . . . . . . . . . . . . . . . . . . . . 4,819 5,293
TOTAL . . . . . . . . . . . . . . . . . . . . . . . $407,111 $397,556
See Notes to Financial Statements.
</TABLE>
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<TABLE>
SOUTHERN OHIO COAL COMPANY
BALANCE SHEETS
<CAPTION>
December 31,
1994 1993
(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. . . . . . . . . . . . . . . 26,608 27,592
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,745 18,053
TOTAL OTHER NONCURRENT LIABILITIES. . . . . . . . . . 56,353 45,645
CURRENT LIABILITIES:
Accounts Payable - General . . . . . . . . . . . . . . . . . 8,909 4,872
Accounts Payable - Affiliated Companies . . . . . . . . . . . 2,310 2,267
Taxes Accrued . . . . . . . . . . . . . . . . . . . . . . . . 1,095 827
Interest Accrued. . . . . . . . . . . . . . . . . . . . . . . 2,226 1,943
Accrued Vacation Pay. . . . . . . . . . . . . . . . . . . . . 2,706 2,483
Workers' Compensation Claims. . . . . . . . . . . . . . . . . 10,204 7,773
Obligations Under Capital Leases. . . . . . . . . . . . . . . 11,045 11,269
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,616 6,666
TOTAL CURRENT LIABILITIES . . . . . . . . . . . . . . 46,111 38,100
DEFERRED FEDERAL INCOME TAXES . . . . . . . . . . . . . . . . . 67,875 75,814
DEFERRED CREDITS. . . . . . . . . . . . . . . . . . . . . . . . 1,053 2,278
COMMITMENTS AND CONTINGENCIES (Note 2)
TOTAL . . . . . . . . . . . . . . . . . . . . . . . $407,111 $397,556
See Notes to Financial Statements.
</TABLE>
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<TABLE>
SOUTHERN OHIO COAL COMPANY
STATEMENTS OF CASH FLOWS
<CAPTION>
Year Ended December 31,
1994 1993 1992
(in thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net Income . . . . . . . . . . . . . . . . . . . $ 10,368 $ 10,368 $ 12,044
Adjustments for Noncash Items:
Depreciation, Depletion and Amortization . . . 11,595 11,039 14,568
Deferred Federal Income Taxes. . . . . . . . . (6,174) 1,461 (12,114)
Amortization of Deferred Strike Costs. . . . . - 185 3,298
Gain on Sale of Property . . . . . . . . . . . - - (12,681)
Accrued Postretirement Benefits Other
Than Pensions. . . . . . . . . . . . . . . . 6,847 7,144 -
Changes in Certain Current Assets
and Liabilities:
Accounts Receivable. . . . . . . . . . . . . . (4,178) (6,089) (1,659)
Coal, Materials and Supplies . . . . . . . . . 1,043 (741) 4,566
Accounts Payable . . . . . . . . . . . . . . . 4,080 2,955 (2,811)
Taxes Accrued. . . . . . . . . . . . . . . . . 268 (4,381) 2,495
Other (net). . . . . . . . . . . . . . . . . . . 6,660 (2,215) (8,005)
Net Cash Flows From (Used for)
Operating Activities . . . . . . . . . . 30,509 19,726 (299)
INVESTING ACTIVITIES:
Construction Expenditures. . . . . . . . . . . . (1,733) (2,553) (158)
Buyout of Martinka Leases. . . . . . . . . . . . - - (16,400)
Proceeds from Sale of Martinka
Mining Operations. . . . . . . . . . . . . . . - - 62,051
Proceeds from Sales of Property. . . . . . . . . 1,732 63 129
Net Cash Flows From (Used For)
Investing Activities . . . . . . . . . . (1) (2,490) 45,622
FINANCING ACTIVITIES:
Issuance of Long-term Debt . . . . . . . . . . . 45,000 25,000 19,900
Retirement of Long-term Debt . . . . . . . . . . (45,000) (40,000) (65,000)
Receipts from (Payments to) Parent Company for
Future Coal Deliveries . . . . . . . . . . . . (2,276) 2,276 -
Dividends Paid . . . . . . . . . . . . . . . . . (10,368) (10,368) (13,092)
Net Cash Flows Used For
Financing Activities . . . . . . . . . . (12,644) (23,092) (58,192)
Net Increase (Decrease) in Cash and
Cash Equivalents . . . . . . . . . . . . . . . . 17,864 (5,856) (12,869)
Cash and Cash Equivalents January 1. . . . . . . . 2,505 8,361 21,230
Cash and Cash Equivalents December 31. . . . . . . $ 20,369 $ 2,505 $ 8,361
See Notes to Financial Statements.
</TABLE>
<PAGE>
<PAGE>
SOUTHERN OHIO COAL COMPANY
NOTES TO FINANCIAL STATEMENTS
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 which
supplied coal to OPCo's Mitchell Plant were sold on July 1, 1992 to an
unaffiliated company as described below. At December 31, 1994, owned proven
coal reserves amounted to 148,512,000 tons in Ohio and 65,003,000 tons in West
Virginia.
Basis of Accounting. As a cost-based rate-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,
regulatory assets and liabilities are recorded and represent deferred expenses
and revenues, respectively, resulting from regulatory actions. Such deferrals
are amortized commensurate with their inclusion in billings to OPCo.
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 9.75% in 1994, 9.50% in 1993 and 7.25% in 1992. Since
there were no major long-term construction projects, AFUDC was not significant
in 1994, 1993 and 1992.
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.
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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, 1994) in
West Virginia, the net present value of the receivable from the purchaser of
the Martinka operations ($39 million at December 31, 1994 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.
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, regulatory assets and liabilities are recorded
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 (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 1994, 1993 or 1992.
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 and billed to OPCo in accordance with the coal
supply agreement.
Reclassifications. Certain prior-period amounts were reclassified for
comparative purposes.
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2. COMMITMENTS AND 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 financial condition.
The Company recovers all of its costs from OPCo under the coal
supply agreement.
3. CONTINUATION OF MINING OPERATIONS:
The Clean Air Act Amendments of 1990 (CAAA) require 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 which includes the installation of
leased scrubbers at the Gavin Plant to permit the continued burning of Ohio
high-sulfur coal. The plan further provides for Gavin's coal to be supplied
by the Company's Meigs mine, long-term contracts with unaffiliated sources and
spot market purchases.
Under settlement agreements applicable to OPCo's PUCO jurisdiction,
OPCo's electric fuel component (EFC) rate is fixed at 1.465 cents per kwh from
June 1995 through November 1998. Thereafter, the cost of coal burned at the
Gavin Plant is subject to a predetermined price of $1.575 per million Btu's
with quarterly escalation adjustments. After 2009 the price that OPCo can
recover for coal from its affiliated Meigs mine will be limited in the PUCO
jurisdiction to the lower of cost or the then-current market price.
It may be necessary in the future to shut down the Meigs mining
operations if for some reason the predetermined price is not adequate to
recover the Meigs mining cost from PUCO jurisdictional fuel clause customers
or if it is no longer economic to continue mining operations. 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.
In the event OPCo is unable to recover the cost of Meigs coal in its
PUCO and other jurisdictions, the Company expects to recover from OPCo all of
its costs of mining operations under the terms of the coal supply agreement.
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.
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 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.
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5. BENEFIT PLANS:
United Mine Workers of America (UMWA) Pension Plans
The Company provides UMWA pension benefits for UMWA employees
meeting eligibility requirements. Benefits are based on age at retirement and
years of service. As of June 30, 1994, the UMWA actuary estimates that the
Company's share of the UMWA pension plans unfunded vested liabilities was
approximately $28 million. In the event the Company ceases or significantly
reduces mining operations or contributions to the UMWA pension plans, a
withdrawal obligation may be triggered for all or a portion of their share of
the unfunded vested liability. Contributions are based on the number of hours
worked, are expensed when paid and totaled $928,000 in 1994, $772,000 in 1993
and $1.3 million in 1992.
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. 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 the Employee Retirement Income Security Act of 1974.
The Company's share of net pension cost of the AEP System pension
plan for the years ended December 31, 1994, 1993 and 1992 was $392,000,
$414,000 and $1,104,000, respectively.
AEP System Savings Plan
An employee savings plan is offered to non-UMWA employees which
allows participants to contribute up to 17% of their salaries into three
investment alternatives, including AEP Co., Inc. common stock. An employer
matching contribution, equaling one-half of the employees' contribution to the
plan up to a maximum of 3% of the employees' base salary, is invested in AEP
Co., Inc. common stock. The employer's annual contributions totaled $275,000
in 1994, $258,000 in 1993 and $335,000 in 1992.
Postretirement Benefits Other Than Pensions
Postretirement medical benefits for the Company's UMWA employees who
have retired or will retire after January 1, 1976 are the liability of the
Company. They are eligible for postretirement health care and life insurance
if they have at least 10 service years and are age 55 at retirement. Non-
active UMWA employees become eligible at age 55 if they have 20 service years.
The cost of health care benefits for this group was expensed when paid in 1992
and totaled $11.8 million.
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The AEP System provides certain other benefits for retired
employees. Substantially all non-UMWA employees are eligible for
postretirement health care and life insurance if they have a least 10 service
years and 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 in
1992.
SFAS 106, Employers' Accounting for Postretirement Benefits Other
Than Pensions, was adopted in January 1993 for the Company's aggregate
liability for postretirement benefits other than pensions (OPEB). SFAS 106
requires the accrual of the present value liability for OPEB costs during the
employee's service years. Costs for the accumulated postretirement benefits
earned and not recognized at adoption are being recognized, in accordance with
SFAS 106, as a transition obligation over 20 years. OPEB costs are determined
by the application of AEP System actuarial assumptions to each company's
employee complement. The Company's annual accrued costs for 1994 and 1993
required by SFAS 106 for employees and retirees, which includes the
recognition of one-twentieth of the prior service transition obligation, was
$9.7 million and $10 million, respectively.
In order to fund OPEB benefits the Company established a Voluntary
Employees Beneficiary Association (VEBA) trust fund and a corporate owned life
insurance (COLI) program. The insurance policies have a substantial cash
surrender value which is recorded, net of equally substantial policy loans, as
other property and investments. The amount contributed to VEBA trust fund is
the difference between the pay-as-you-go OPEB cost and SFAS 106 total OPEB
cost. This contribution is funded by amounts billed to OPCo plus net earnings
from the COLI program. Contributions to the VEBA trust fund were $670,000 in
1994 and $791,000 in 1993.
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. The UMWA health
plans are funded by payments from current and former UMWA wage agreement
signatories, the 1950 UMWA Pension Plan surplus and the Abandoned Mine Land
Reclamation Fund Surplus. Required annual payments to the UMWA health funds
made by the Company were recognized as expense when paid and totaled $253,000
in 1994, $486,000 in 1993 and $5.8 million in 1992.
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. The Company receives cash for the
amount transferred. In 1994 $5.6 million and in 1993 $6 million of Black Lung
surplus was applied in accordance with the Energy Act of which $2.8 million in
1994 and $3.4 million in 1993 was to reimburse the Company for benefits paid
and $2.8 million in 1994 and $2.6 million in 1993 was reallocated from the
Company's surplus Black Lung trust fund to other System member companies. The
Company's share of the excess Black Lung Trust funds at December 31, 1994 and
1993 was $7.9 million and $12.4 million, respectively.
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6. FEDERAL INCOME TAXES:
The details of federal income taxes are as follows:
Year Ended December 31,
1994 1993 1992
(in thousands)
Charged (Credited) to Operations:
Current (net) . . . . . . . . . . . . . . . $12,433 $ 9,439 $ 9,233
Deferred (net). . . . . . . . . . . . . . . (5,776) (3,689) (2,610)
Total . . . . . . . . . . . . . . . . . . 6,657 5,750 6,623
Charged (Credited) to Nonoperating Income:
Current (net) . . . . . . . . . . . . . . . (1,629) 10 19,791
Deferred (net). . . . . . . . . . . . . . . (398) 5,150 (9,504)
Total . . . . . . . . . . . . . . . . . . (2,027) 5,160 10,287
Total Federal Income Taxes. . . . . . . $ 4,630 $10,910 $16,910
Federal income taxes as reported are different than 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 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 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 1988. Returns for the years 1988 through 1990 are
presently being audited by the IRS. In the opinion of management, the final
settlement of open years will not have a material effect on results of
operations.
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The following tables show the elements of the net deferred tax
liability and the significant temporary differences that gave rise to it:
December 31,
1994 1993
(in thousands)
Deferred Tax Assets . . . . . . . . . . $ 17,853 $ 16,471
Deferred Tax Liabilities. . . . . . . . (85,728) (92,285)
Net Deferred Tax Liabilities. . . . . $(67,875) $(75,814)
Property Related Temporary Differences. $(58,507) $(61,595)
Amounts Due From Parent Company
For Future Federal Income Taxes . . . (20,553) (21,170)
Self Insurance Reserves . . . . . . . . 6,846 6,953
Prepaid Royalties . . . . . . . . . . . (4,443) (4,443)
Postretirement Benefits . . . . . . . . 5,535 2,435
All Other (net) . . . . . . . . . . . . 3,247 2,006
Total Net Deferred Tax Liabilities. . $(67,875) $(75,814)
7. SUPPLEMENTARY CASH FLOW INFORMATION:
Year Ended December 31,
1994 1993 1992
(in thousands)
Cash was paid for:
Interest . . . . . . . . . . . . . . $ 5,401 $ 6,679 $10,200
Income Taxes . . . . . . . . . . . . 11,830 14,273 27,763
Noncash acquisitions under capital
leases were. . . . . . . . . . . . . . 13,660 9,091 3,312
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:
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.
Lease rentals are primarily charged to operating expenses. The
components of rental cost are as follows:
Year Ended December 31,
1994 1993 1992
(in thousands)
Operating Leases . . . . . . . . . . . . . $ 1,577 $ 3,541 $ 8,065
Amortization of Capital Leases . . . . . . 11,994 9,678 9,093
Interest on Capital Leases . . . . . . . . 2,974 3,064 3,622
Total Rental Cost. . . . . . . . . . . $16,545 $16,283 $20,780
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Properties under capital leases and related obligations recorded on
the Balance Sheets are as follows:
December 31,
1994 1993
(in thousands)
Mining Plant . . . . . . . . . . . . . . . . $78,625 $70,220
Accumulated Provision for Amortization. . . . 40,972 31,359
Net Properties under Capital Leases . . . $37,653 $38,861
Obligations under Capital Leases:
Noncurrent Liability. . . . . . . . . . . . $26,608 $27,592
Liability Due Within One Year . . . . . . . 11,045 11,269
Total Capital Lease Obligations . . . . . $37,653 $38,861
Properties under operating leases and related obligations are not
included in the Balance Sheets.
Future minimum lease rentals consisted of the following at December
31, 1994:
Non-
Cancelable
Capital Operating
Leases Leases
(in thousands)
1995. . . . . . . . . . . . . . . . . . . . . . $13,528 $ 2,178
1996. . . . . . . . . . . . . . . . . . . . . . 10,316 2,215
1997. . . . . . . . . . . . . . . . . . . . . . 7,134 1,718
1998. . . . . . . . . . . . . . . . . . . . . . 4,069 1,410
1999. . . . . . . . . . . . . . . . . . . . . . 2,284 1,197
Later Years . . . . . . . . . . . . . . . . . . 3,492 2,900
Total Future Minimum Lease Rentals. . . . . . . 40,823 $11,618
Less Estimated Interest Element . . . . . . . . 3,170
Estimated Present Value of Future
Minimum Lease Rentals . . . . . . . . . . . . $37,653
9. LONG-TERM DEBT:
Long-term debt outstanding was as follows:
December 31,
1994 1993
(in thousands)
Notes Payable to Banks:
8.00% due January 1994 . . . . . . . . . . . . . $ - $20,000
8.01% due January 1994 . . . . . . . . . . . . . - 25,000
7.19% due January 1997 . . . . . . . . . . . . . 20,000 20,000
5.79% due January 1996 . . . . . . . . . . . . . 8,319 8,319
6.85% due January 1998 . . . . . . . . . . . . . 16,681 16,681
Variable rate due January 1999 . . . . . . . . . 15,000 -
6.20% due January 2001 . . . . . . . . . . . . . 30,000 -
Total. . . . . . . . . . . . . . . . . . $90,000 $90,000
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The interest rate on the variable rate note is based on LIBOR (5.66%
at December 31, 1994) and adjusted every six months. At January 30, 1995 the
rate was adjusted to 7.10%. The notes payable to banks are guaranteed by
OPCo.
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. At December 31, 1994 and 1993 the fair value of long-term debt
was $87 million and $90 million, respectively, based on quoted market prices
for the same or similar issues and the current interest rates offered for debt
of the same remaining maturities. The carrying amount for long-term debt was
$90 million at December 31, 1994 and 1993.
