<PAGE>
Southern Ohio
Coal Company
1995 Annual Report
<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>
INDEPENDENT AUDITORS' REPORT
To the Shareholder 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, 1995 and 1994, and the related statements of income,
retained earnings and cash flows for each of the three years in the period
ended December 31, 1995. 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, 1995 and 1994, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 1995 in conformity
with generally accepted accounting principles.
/S/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Columbus, Ohio
February 27, 1996
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<TABLE>
SOUTHERN OHIO COAL COMPANY
STATEMENTS OF INCOME
<CAPTION>
Year Ended December 31,
1995 1994 1993
(in thousands)
<S> <C> <C> <C>
OPERATING REVENUES - Sales to Parent Company . . . $183,956 $196,477 $161,025
OPERATING EXPENSES (including depreciation,
depletion and amortization of mining plant
of $13,294,000 in 1995, $11,595,000 in 1994
and $11,039,000 in 1993) . . . . . . . . . . . . 161,300 170,151 138,877
OPERATING INCOME . . . . . . . . . . . . . . . . . 22,656 26,326 22,148
INTEREST CHARGES . . . . . . . . . . . . . . . . . 6,034 5,684 6,862
OPERATING INCOME BEFORE FEDERAL INCOME TAXES . . . 16,622 20,642 15,286
FEDERAL INCOME TAXES ON OPERATIONS . . . . . . . . 6,515 6,657 5,750
NET INCOME FROM OPERATIONS . . . . . . . . . . . . 10,107 13,985 9,536
NONOPERATING INCOME (LOSS) . . . . . . . . . . . . 261 (3,617) 832
NET INCOME . . . . . . . . . . . . . . . . . . . . $ 10,368 $ 10,368 $ 10,368
</TABLE>
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<TABLE>
STATEMENTS OF RETAINED EARNINGS
<CAPTION>
Year Ended December 31,
1995 1994 1993
(in thousands)
<S> <C> <C> <C>
RETAINED EARNINGS JANUARY 1. . . . . . . . . . . $33,025 $33,025 $33,025
NET INCOME . . . . . . . . . . . . . . . . . . . 10,368 10,368 10,368
CASH DIVIDENDS DECLARED. . . . . . . . . . . . . 20,194 10,368 10,368
RETAINED EARNINGS DECEMBER 31. . . . . . . . . . $23,199 $33,025 $33,025
See Notes to Financial Statements.
</TABLE>
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<TABLE>
SOUTHERN OHIO COAL COMPANY
BALANCE SHEETS
<CAPTION>
December 31,
1995 1994
(in thousands)
<S> <C> <C>
ASSETS
MINING PLANT:
Surface Lands . . . . . . . . . . . . . . . . . . . . . . . . $ 7,386 $ 7,403
Mining Structures and Equipment . . . . . . . . . . . . . . . 222,737 234,495
Coal Interests (net of depletion) . . . . . . . . . . . . . . 4,088 4,341
Mine Development Costs. . . . . . . . . . . . . . . . . . . . 134,149 134,149
Construction Work in Progress . . . . . . . . . . . . . . . . 634 1,331
Total Mining Plant. . . . . . . . . . . . . . . . . . 368,994 381,719
Accumulated Depreciation and Amortization . . . . . . . . . . 182,448 180,132
NET MINING PLANT. . . . . . . . . . . . . . . . . . . 186,546 201,587
OTHER PROPERTY AND INVESTMENTS. . . . . . . . . . . . . . . . . 63,790 66,272
CURRENT ASSETS:
Cash and Cash Equivalents . . . . . . . . . . . . . . . . . . 26,535 20,369
Accounts Receivable:
General . . . . . . . . . . . . . . . . . . . . . . . . . . 4,002 3,744
Insurance . . . . . . . . . . . . . . . . . . . . . . . . . 13,079 13,079
Affiliated Companies. . . . . . . . . . . . . . . . . . . . 4,649 8,320
Coal - at average cost. . . . . . . . . . . . . . . . . . . . 2,044 121
Materials and Supplies - at average cost. . . . . . . . . . . 10,800 10,265
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,571 1,336
TOTAL CURRENT ASSETS. . . . . . . . . . . . . . . . . 62,680 57,234
REGULATORY ASSETS . . . . . . . . . . . . . . . . . . . . . . . 69,598 77,496
DEFERRED CHARGES. . . . . . . . . . . . . . . . . . . . . . . . 4,345 4,819
TOTAL . . . . . . . . . . . . . . . . . . . . . . . $386,959 $407,408
See Notes to Financial Statements.
</TABLE>
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<TABLE>
SOUTHERN OHIO COAL COMPANY
BALANCE SHEETS
<CAPTION>
December 31,
1995 1994
(in thousands)
<S> <C> <C>
CAPITALIZATION AND LIABILITIES
SHAREHOLDER'S EQUITY:
Common Stock - Par Value $1:
Authorized and Outstanding - 5,000 Shares . . . . . . . . . $ 5 $ 5
Paid-in Capital . . . . . . . . . . . . . . . . . . . . . . . 112,689 112,689
Retained Earnings . . . . . . . . . . . . . . . . . . . . . . 23,199 33,025
TOTAL SHAREHOLDER'S EQUITY. . . . . . . . . . . . . . 135,893 145,719
LONG-TERM DEBT. . . . . . . . . . . . . . . . . . . . . . . . . 81,681 90,000
OTHER NONCURRENT LIABILITIES:
Obligations Under Capital Leases. . . . . . . . . . . . . . . 23,111 26,608
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38,924 33,270
TOTAL OTHER NONCURRENT LIABILITIES. . . . . . . . . . 62,035 59,878
CURRENT LIABILITIES:
Long-term Debt Due Within One Year. . . . . . . . . . . . . . 8,319 -
Accounts Payable - General . . . . . . . . . . . . . . . . . 7,800 8,909
Accounts Payable - Affiliated Companies . . . . . . . . . . . 1,523 2,310
Taxes Accrued . . . . . . . . . . . . . . . . . . . . . . . . 406 1,095
Interest Accrued. . . . . . . . . . . . . . . . . . . . . . . 2,065 2,226
Accrued Vacation Pay. . . . . . . . . . . . . . . . . . . . . 2,728 2,706
Workers' Compensation Claims. . . . . . . . . . . . . . . . . 9,360 10,204
Obligations Under Capital Leases. . . . . . . . . . . . . . . 10,816 11,045
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,348 4,091
TOTAL CURRENT LIABILITIES . . . . . . . . . . . . . . 46,365 42,586
DEFERRED INCOME TAXES . . . . . . . . . . . . . . . . . . . . . 59,746 68,172
DEFERRED CREDITS. . . . . . . . . . . . . . . . . . . . . . . . 1,239 1,053
CONTINGENCIES (Note 2)
TOTAL . . . . . . . . . . . . . . . . . . . . . . . $386,959 $407,408
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
SOUTHERN OHIO COAL COMPANY
STATEMENTS OF CASH FLOWS
<CAPTION>
Year Ended December 31,
1995 1994 1993
(in thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net Income . . . . . . . . . . . . . . . . . . . $ 10,368 $ 10,368 $ 10,368
Adjustments for Noncash Items:
Depreciation, Depletion and Amortization . . . 13,294 11,595 11,039
Deferred Federal Income Taxes. . . . . . . . . (3,312) (6,174) 1,461
Accrued Postretirement Benefits Other
Than Pensions. . . . . . . . . . . . . . . . 6,854 6,847 7,144
Changes in Certain Current Assets
and Liabilities:
Accounts Receivable. . . . . . . . . . . . . . 3,413 (4,178) (6,089)
Coal, Materials and Supplies . . . . . . . . . (2,458) 1,043 (741)
Accounts Payable . . . . . . . . . . . . . . . (1,896) 4,080 2,955
Taxes Accrued. . . . . . . . . . . . . . . . . (689) 268 (4,381)
Other (net). . . . . . . . . . . . . . . . . . . 972 6,660 (2,030)
Net Cash Flows From Operating Activities . 26,546 30,509 19,726
INVESTING ACTIVITIES: Construction Expenditures . (1,078) (1,733) (2,553)
Proceeds from Sales of Property. . . . . . . . . 892 1,732 63
Net Cash Flows Used For
Investing Activities . . . . . . . . . . (186) (1) (2,490)
FINANCING ACTIVITIES:
Issuance of Long-term Debt . . . . . . . . . . . - 45,000 25,000
Retirement of Long-term Debt . . . . . . . . . . - (45,000) (40,000)
Receipts from (Payments to) Parent Company for
Future Coal Deliveries . . . . . . . . . . . . - (2,276) 2,276
Dividends Paid . . . . . . . . . . . . . . . . . (20,194) (10,368) (10,368)
Net Cash Flows Used For
Financing Activities . . . . . . . . . . (20,194) (12,644) (23,092)
Net Increase (Decrease) in Cash and
Cash Equivalents . . . . . . . . . . . . . . . . 6,166 17,864 (5,856)
Cash and Cash Equivalents January 1. . . . . . . . 20,369 2,505 8,361
Cash and Cash Equivalents December 31. . . . . . . $ 26,535 $ 20,369 $ 2,505
See Notes to Financial Statements.
</TABLE>
<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. 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.
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. At
December 31, 1995, owned proven coal reserves amounted to 133,967,000 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 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 and liabilities are recorded
to reflect the economic effects of regulation. Such deferrals are amortized
commensurate with their inclusion in billings to OPCo.
Regulatory assets are comprised of the following:
December 31,
1995 1994
(in thousands)
Regulatory Assets:
Amounts Due From Parent Company For
Future Income Taxes $53,905 $59,018
Raccoon Mine Abandoned Assets 11,044 12,831
Postemployment Benefits 4,649 5,647
Total Regulatory Assets $69,598 $77,496
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 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 to develop the mine 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 1995, 1994 and 1993 were not significant.
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. In 1995 the Company changed the
respective rates to reflect a revised mining plan through 2009. This change
in estimate had no impact on net income.
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.
Other Property and Investments. Other property and investments consists
primarily of the Cove North coal reserves (net book value $27 million at
December 31, 1995) in West Virginia and the net present value of a receivable
from the sale of a mining operation in 1992 ($36 million at December 31, 1995
discounted at 8-1/2%).
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 the 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. No
accruals for Black Lung liabilities were made in 1995, 1994 or 1993.
The Company is self-insured for workers' compensation. The
estimated present value of workers' compensation claims is 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.
2. 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 or 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. OPCo s plan to comply with the CAAA 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 Public Utilities
Commission of Ohio (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 economical 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 of a shutdown, the
Company expects to recover from OPCo all of its costs 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 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:
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. Contributions are based on the number of hours worked,
are expensed when paid and totaled $818,000 in 1995, $928,000 in 1994 and
$772,000 in 1993. As of June 30, 1995, the UMWA actuary estimates that the
Company's share of the UMWA pension plans unfunded vested liabilities was
approximately $20.5 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 its
share of the unfunded vested liability.
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
required contribution in accordance with 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, 1995, 1994 and 1993 was $217,000,
$392,000 and $414,000, 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 various
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 and totaled $278,000 in 1995, $275,000 in 1994 and
$258,000 in 1993.
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 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 at least 10
service years and are age 55 or older when employment terminates.
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 during the employee s service years of the present value
liability for OPEB costs. 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 OPEB costs for
1995, 1994 and 1993 for employees and retirees required by SFAS 106, which
includes the recognition of one-twentieth of the prior service transition
obligation, were $10.4 million, $9.7 million and $10 million, respectively.
As a result of SFAS 106, a Voluntary Employees Beneficiary
Association (VEBA) trust fund for OPEB benefits for all non-UMWA employees
was established and a corporate owned life insurance (COLI) program was
implemented to lower the net OPEB costs. The insurance policies have a
substantial cash surrender value which is recorded, net of equally
substantial policy loans, in other property and investments. Legislation was
passed by Congress which would have significantly reduced the tax benefits of
a COLI program for the future. The legislation containing this provision was
vetoed by the President. At this time it is uncertain if legislation
repealing certain tax benefits from COLI programs will be enacted. If
enacted this legislation would negatively impact the effectiveness of the
COLI program as a funding and cost reduction mechanism. The amount
contributed to the VEBA trust fund is the difference between the pay-as-you-
go OPEB cost and SFAS 106 total OPEB cost. This contribution was funded by
amounts billed to OPCo plus net earnings from the COLI program.
Contributions to the VEBA trust fund were $686,000 in 1995, $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 $135,000
in 1995, $253,000 in 1994 and $486,000 in 1993.
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. The amounts of Black Lung surplus applied in accordance
with the Energy Act were $3.8 million in 1995, $5.6 million in 1994 and $6
million in 1993 of which $3.2 million in 1995, $2.8 million in 1994 and $3.4
million in 1993 was to reimburse the Company for benefits paid. In addition,
the amounts of Black Lung surplus applied reflect $0.6 million in 1995, $2.8
million in 1994 and $2.6 million in 1993 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, 1995,
1994 and 1993 was $6.9 million, $7.9 million and $12.4 million, respectively.
<PAGE>
6. FEDERAL INCOME TAXES:
The details of federal income taxes are as follows:
Year Ended December 31,
1995 1994 1993
(in thousands)
Charged (Credited) to Operations:
Current (net) . . . . . . . . . . . . . . . . .$10,108 $12,433 $ 9,439
Deferred (net). . . . . . . . . . . . . . . . . (3,593) (5,776) (3,689)
Total . . . . . . . . . . . . . . . . . . . . 6,515 6,657 5,750
Charged (Credited) to Nonoperating Income:
Current (net) . . . . . . . . . . . . . . . . . (1,498) (1,629) 10
Deferred (net). . . . . . . . . . . . . . . . . 281 (398) 5,150
Total . . . . . . . . . . . . . . . . . . . . (1,217) (2,027) 5,160
Total Federal Income Taxes. . . . . . . . .$ 5,298 $ 4,630 $10,910
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 1991. Returns for the years 1991 through 1993 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.
<PAGE>
The following tables show the elements of the net deferred tax
liability and the significant temporary differences that gave rise to it:
December 31,
1995 1994
(in thousands)
Deferred Tax Assets . . . . . . . . . . . . . $ 20,432 $ 17,853
Deferred Tax Liabilities. . . . . . . . . . . (80,178) (86,025)
Net Deferred Tax Liabilities. . . . . . . . $(59,746) $(68,172)
Property Related Temporary Differences. . . . $(51,296) $(58,507)
Amounts Due From Parent Company
For Future Federal Income Taxes . . . . . . . (19,255) (20,553)
Self Insurance Reserves . . . . . . . . . . . . 6,513 6,846
Prepaid Royalties . . . . . . . . . . . . . . . (4,443) (4,443)
Postretirement Benefits . . . . . . . . . . . . 7,742 5,535
All Other (net) . . . . . . . . . . . . . . . . 993 2,950
Total Net Deferred Tax Liabilities. . . . . .$(59,746) $(68,172)
7. SUPPLEMENTARY CASH FLOW INFORMATION:
Year Ended December 31,
1995 1994 1993
(in thousands)
Cash was paid for:
Interest . . . . . . . . . . . . . . . . . . $ 6,196 $ 5,401 $ 6,679
Income Taxes . . . . . . . . . . . . . . . . 9,494 11,830 14,273
Noncash acquisitions under capital leases were . 8,642 13,660 9,091
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.
<PAGE>
Lease rentals are generally charged to operating expenses. The
components of rental cost are as follows:
Year Ended December 31,
1995 1994 1993
(in thousands)
Operating Leases . . . . . . . . . . . . . . . . $ 1,597 $ 1,577 $ 3,541
Amortization of Capital Leases . . . . . . . . . 10,419 11,994 9,678
Interest on Capital Leases . . . . . . . . . . . 2,624 2,974 3,064
Total Rental Costs . . . . . . . . . . . . . $14,640 $16,545 $16,283
Properties under capital leases and related obligations recorded on
the Balance Sheets are as follows:
December 31,
1995 1994
(in thousands)
Mining Plant . . . . . . . . . . . . . . . . . . . .$71,072 $78,625
Accumulated Provision for Amortization. . . . . . . . 37,145 40,972
Net Property under Capital Leases . . . . . . . .$33,927 $37,653
Capital Lease Obligations:
Noncurrent Liability. . . . . . . . . . . . . . . .$23,111 $26,608
Liability Due Within One Year . . . . . . . . . . . 10,816 11,045
Total Capital Lease Obligations . . . . . . . . .$33,927 $37,653
Properties under operating leases and related obligations are not
included in the Balance Sheets.
<PAGE>
Future minimum lease rentals consisted of the following at December
31, 1995:
Non-
Cancelable
Capital Operating
Leases Leases
(in thousands)
1996. . . . . . . . . . . . . . . . . . . . . . . . . . $12,407 $ 2,215
1997. . . . . . . . . . . . . . . . . . . . . . . . . . 9,057 1,718
1998. . . . . . . . . . . . . . . . . . . . . . . . . . 5,601 1,410
1999. . . . . . . . . . . . . . . . . . . . . . . . . . 3,347 1,197
2000. . . . . . . . . . . . . . . . . . . . . . . . . . 2,342 733
Later Years . . . . . . . . . . . . . . . . . . . . . . 3,173 2,168
Total Future Minimum Lease Rentals. . . . . . . . . . . 35,927 $ 9,441
Less Estimated Interest Element . . . . . . . . . . . . 2,000
Estimated Present Value of Future Minimum Lease Rentals $33,927
9. LONG-TERM DEBT:
Long-term debt outstanding was as follows:
December 31,
1995 1994
(in thousands)
Notes Payable to Banks:
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 15,000
6.20% due January 2001 . . . . . . . . . . . . . . . . . 30,000 30,000
90,000 90,000
Less: Portion Due Within One Year. . . . . . . . . . . . 8,319 -
Total. . . . . . . . . . . . . . . . . . . . . .$81,681 $90,000
The interest rate on the variable rate note is based on LIBOR
(6.2875% at December 31, 1995) and adjusted every six months. At January 31,
1996 the rate was adjusted to 5.75%. 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, 1995 and 1994 the fair value of long-term debt
was $92 million and $87 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, 1995 and 1994.
