<PAGE>
SOUTHERN OHIO COAL COMPANY
1996 ANNUAL REPORT
Page
CONTENTS
Statements of Income and Statements of Retained Earnings . . . . . . . . . .1
Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . .2
Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3-4
Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . . . 5-12
<PAGE>
<PAGE>
<TABLE>
SOUTHERN OHIO COAL COMPANY
STATEMENTS OF INCOME
(UNAUDITED)
<CAPTION>
Year Ended December 31,
1996 1995 1994
(in thousands)
<S> <C> <C> <C>
OPERATING REVENUES - Sales to Parent Company . . . $218,611 $183,956 $196,477
OPERATING EXPENSES (including depreciation,
depletion and amortization of mining plant
of $16,962,000 in 1996, $13,294,000 in 1995
and $11,595,000 in 1994) . . . . . . . . . . . . 194,037 161,300 170,151
OPERATING INCOME . . . . . . . . . . . . . . . . . 24,574 22,656 26,326
INTEREST CHARGES . . . . . . . . . . . . . . . . . 5,575 6,034 5,684
OPERATING INCOME BEFORE FEDERAL INCOME TAXES . . . 18,999 16,622 20,642
FEDERAL INCOME TAXES ON OPERATIONS . . . . . . . . 10,696 6,515 6,657
NET INCOME FROM OPERATIONS . . . . . . . . . . . . 8,303 10,107 13,985
NONOPERATING INCOME (LOSS) . . . . . . . . . . . . 1,375 261 (3,617)
NET INCOME . . . . . . . . . . . . . . . . . . . . $ 9,678 $ 10,368 $ 10,368
</TABLE>
<PAGE>
<TABLE>
STATEMENTS OF RETAINED EARNINGS
(UNAUDITED)
<CAPTION>
Year Ended December 31,
1996 1995 1994
(in thousands)
<S> <C> <C> <C>
RETAINED EARNINGS JANUARY 1. . . . . . . . . . . $23,199 $33,025 $33,025
NET INCOME . . . . . . . . . . . . . . . . . . . 9,678 10,368 10,368
CASH DIVIDENDS DECLARED. . . . . . . . . . . . . 8,813 20,194 10,368
RETAINED EARNINGS DECEMBER 31. . . . . . . . . . $24,064 $23,199 $33,025
See Notes to Financial Statements.
</TABLE>
<PAGE>
<PAGE>
<TABLE>
SOUTHERN OHIO COAL COMPANY
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
Year Ended December 31,
1996 1995 1994
(in thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net Income . . . . . . . . . . . . . . . . . . . . $ 9,678 $ 10,368 $ 10,368
Adjustments for Noncash Items:
Depreciation, Depletion and Amortization . . . . 16,962 13,294 11,595
Deferred Federal Income Taxes. . . . . . . . . . (4,740) (3,312) (6,174)
Accrued Postretirement Benefits Other
Than Pensions. . . . . . . . . . . . . . . . . 5,647 6,854 6,847
Reclamation Reserve. . . . . . . . . . . . . . . 2,835 - -
Changes in Certain Current Assets
and Liabilities:
Accounts Receivable. . . . . . . . . . . . . . . (17,734) 3,413 (4,178)
Coal, Materials and Supplies . . . . . . . . . . (129) (2,458) 1,043
Accounts Payable . . . . . . . . . . . . . . . . (2,353) (1,896) 4,080
Other (net). . . . . . . . . . . . . . . . . . . . 5,743 283 6,928
Net Cash Flows From Operating Activities . . 15,909 26,546 30,509
INVESTING ACTIVITIES:
Construction Expenditures. . . . . . . . . . . . . (401) (1,078) (1,733)
Proceeds from Sales of Property. . . . . . . . . . 13 892 1,732
Net Cash Flows Used For
Investing Activities . . . . . . . . . . . (388) (186) (1)
FINANCING ACTIVITIES:
Issuance of Long-term Debt . . . . . . . . . . . . - - 45,000
Retirement of Long-term Debt . . . . . . . . . . . (8,319) - (45,000)
Change in Short-term Debt (net). . . . . . . . . . 1,500 - -
Return of Capital Contributions to Parent Company. (20,859) - -
Receipts from (Payments to) Parent Company for
Future Coal Deliveries . . . . . . . . . . . . . - - (2,276)
Dividends Paid . . . . . . . . . . . . . . . . . . (8,813) (20,194) (10,368)
Net Cash Flows Used For
Financing Activities . . . . . . . . . . . (36,491) (20,194) (12,644)
Net Increase (Decrease) in Cash and
Cash Equivalents . . . . . . . . . . . . . . . . . (20,970) 6,166 17,864
Cash and Cash Equivalents January 1. . . . . . . . . 26,535 20,369 2,505
Cash and Cash Equivalents December 31. . . . . . . . $ 5,565 $ 26,535 $ 20,369
See Notes to Financial Statements.
</TABLE>
<PAGE>
<PAGE>
<TABLE>
SOUTHERN OHIO COAL COMPANY
BALANCE SHEETS
(UNAUDITED)
<CAPTION>
December 31,
1996 1995
(in thousands)
<S> <C> <C>
ASSETS
MINING PLANT:
Surface Lands . . . . . . . . . . . . . . . . . . . . . . . . $ 7,386 $ 7,386
Mining Structures and Equipment . . . . . . . . . . . . . . . 217,578 222,737
Coal Interests (net of depletion) . . . . . . . . . . . . . . 3,977 4,088
Mine Development Costs. . . . . . . . . . . . . . . . . . . . 134,149 134,149
Construction Work in Progress . . . . . . . . . . . . . . . . 15 634
Total Mining Plant. . . . . . . . . . . . . . . . . . 363,105 368,994
Accumulated Depreciation and Amortization . . . . . . . . . . 193,608 182,448
NET MINING PLANT. . . . . . . . . . . . . . . . . . . 169,497 186,546
OTHER PROPERTY AND INVESTMENTS. . . . . . . . . . . . . . . . . 61,078 63,790
CURRENT ASSETS:
Cash and Cash Equivalents . . . . . . . . . . . . . . . . . . 5,565 26,535
Accounts Receivable:
General . . . . . . . . . . . . . . . . . . . . . . . . . . 4,383 4,002
Insurance . . . . . . . . . . . . . . . . . . . . . . . . . 13,011 13,079
Affiliated Companies. . . . . . . . . . . . . . . . . . . . 22,070 4,649
Coal - at average cost. . . . . . . . . . . . . . . . . . . . 719 2,044
Materials and Supplies - at average cost. . . . . . . . . . . 12,254 10,800
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,583 1,571
TOTAL CURRENT ASSETS. . . . . . . . . . . . . . . . . 59,585 62,680
REGULATORY ASSETS . . . . . . . . . . . . . . . . . . . . . . . 56,182 69,598
DEFERRED CHARGES. . . . . . . . . . . . . . . . . . . . . . . . 4,356 4,345
TOTAL . . . . . . . . . . . . . . . . . . . . . . . $350,698 $386,959
See Notes to Financial Statements.
</TABLE>
<PAGE>
<PAGE>
<TABLE>
SOUTHERN OHIO COAL COMPANY
BALANCE SHEETS
(UNAUDITED)
<CAPTION>
December 31,
1996 1995
(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 . . . . . . . . . . . . . . . . . . . . . . . 91,830 112,689
Retained Earnings . . . . . . . . . . . . . . . . . . . . . . 24,064 23,199
TOTAL SHAREHOLDER'S EQUITY. . . . . . . . . . . . . . 115,899 135,893
LONG-TERM DEBT. . . . . . . . . . . . . . . . . . . . . . . . . 61,681 81,681
OTHER NONCURRENT LIABILITIES:
Obligations Under Capital Leases. . . . . . . . . . . . . . . 23,123 23,111
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,823 38,924
TOTAL OTHER NONCURRENT LIABILITIES. . . . . . . . . . 68,946 62,035
CURRENT LIABILITIES:
Long-term Debt Due Within One Year. . . . . . . . . . . . . . 20,000 8,319
Short-term Debt - Notes Payable to Parent . . . . . . . . . . 1,500 -
Accounts Payable - General . . . . . . . . . . . . . . . . . 5,641 7,800
Accounts Payable - Affiliated Companies . . . . . . . . . . . 1,329 1,523
Interest Accrued. . . . . . . . . . . . . . . . . . . . . . . 2,011 2,065
Accrued Vacation Pay. . . . . . . . . . . . . . . . . . . . . 2,861 2,728
Workers' Compensation Claims. . . . . . . . . . . . . . . . . 13,711 9,360
Obligations Under Capital Leases. . . . . . . . . . . . . . . 9,083 10,816
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,850 3,754
TOTAL CURRENT LIABILITIES . . . . . . . . . . . . . . 59,986 46,365
DEFERRED INCOME TAXES . . . . . . . . . . . . . . . . . . . . . 42,803 59,746
DEFERRED CREDITS. . . . . . . . . . . . . . . . . . . . . . . . 1,383 1,239
CONTINGENCIES (Note 2)
TOTAL . . . . . . . . . . . . . . . . . . . . . . . $350,698 $386,959
See Notes to Financial Statements.
</TABLE>
<PAGE>
<PAGE>
SOUTHERN OHIO COAL COMPANY
NOTES TO FINANCIAL STATEMENTS
(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. 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, 1996, owned proven coal reserves amounted to 128,263,000 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 (deferred expenses) and
regulatory liabilities (deferred income) are recorded to reflect the economic
effects of regulation. Such deferrals are amortized commensurate with their
inclusion in billings to OPCo.
Regulatory assets are comprised of the following:
December 31,
1996 1995
(in thousands)
Regulatory Assets:
Amounts Due From Parent Company For
Future Income Taxes $41,703 $53,905
Raccoon Mine Abandoned Assets 9,803 11,044
Postemployment Benefits 4,676 4,649
Total Regulatory Assets $56,182 $69,598
Use of Estimates. The preparation of these financial statements in
conformity with generally accepted accounting principles requires in certain
instances the use of management's estimates. Actual results could differ
from those estimates.
Coal Supply Agreement. Pursuant to a coal supply agreement with OPCo, the
Company is obligated to deliver substantially all coal it mines to OPCo and
entitled to receive payment for all costs incurred, even under circumstances
in which such coal is not mined and/or delivered due to a natural disaster,
labor unrest or any other forced or voluntary cessation or curtailment of
mining, either temporary or permanent.
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 1996, 1995 and 1994 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 1996 the Company changed the
respective rates to reflect a revised mining plan through 2004. 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, 1996) in West Virginia and the net present value of a receivable
from the sale of the Martinka mining operations in 1992 ($34 million at
December 31, 1996 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, deferred income taxes are recorded with
related regulatory assets and liabilities 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 1996, 1995 or 1994.
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 and billed to OPCo in accordance with the coal
supply agreement.
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,
unaccrued 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 $921,000 in 1996, $818,000 in 1995 and
$928,000 in 1994. As of June 30, 1996, the UMWA actuary estimates that the
Company's share of the UMWA pension plans unfunded vested liabilities was
approximately $14.7 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,
1996, 1995 and 1994 was $377,000, $217,000 and $392,000, 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. The Company's annual contributions totaled
$286,000 in 1996, $278,000 in 1995 and $275,000 in 1994.
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.
Postretirement benefits other than pensions (OPEB) are provided for
retired employees under an AEP System plan. Substantially all employees are
eligible for postretirement health care and life insurance if they retire
from active service after reaching age 55 and have at least 10 service years.
OPEB costs are determined by the application of AEP System actuarial
assumptions to each operating company's employee complement. The annual
accrued costs, which includes the recognition of one-twentieth of the prior
service transition obligation, was $9.0 million in 1996, $10.4 million in
1995 and $9.7 million in 1994. The funding policy for AEP's OPEB plan is to
make contributions to an external Voluntary Employees Beneficiary Association
trust fund for all non-UMWA employees equal to the incremental OPEB costs
(i.e., the amount that the total postretirement benefits cost under SFAS 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions,"
exceeds the pay-as-you-go amount). Contributions were $517,000 in 1996,
$686,000 in 1995 and $670,000 in 1994.
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 $157,000
in 1996, $135,000 in 1995 and $253,000 in 1994.
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 utilized in accordance with the Energy Act were $3.9 million in 1996,
$3.8 million in 1995 and $5.6 million in 1994 of which $2.8 million in 1996,
$3.2 million in 1995 and $2.8 million in 1994 was to reimburse the Company
for benefits paid. In addition, the amounts of Black Lung surplus utilized
reflect $1.1 million in 1996, $0.6 million in 1995 and $2.8 million in 1994
reallocated from the Company's surplus Black Lung trust fund to other System
member companies. The Company's share of the Black Lung Trust funds surplus
at December 31, 1996, 1995 and 1994 was $6.3 million, $6.9 million and $7.9
million, respectively.
6. FEDERAL INCOME TAXES:
The details of federal income taxes are as follows:
Year Ended December 31,
1996 1995 1994
(in thousands)
Charged (Credited) to Operations:
Current (net) . .. . . . . . . . . . . . . . . $15,536 $10,108 $12,433
Deferred (net). . . . . . . . . . . . . . . . (4,840) (3,593) (5,776)
Total . . . . . . . . . . . . . . . . . . . 10,696 6,515 6,657
Charged (Credited) to Nonoperating Income:
Current (net) . . . . . . . . . . . . . . . . (593) (1,498) (1,629)
Deferred (net). . . . . . . . . . . . . . . . 100 281 (398)
Total . . . . . . . . . . . . . . . . . . . (493) (1,217) (2,027)
Total Federal Income Taxes. . . . . . . . $10,203 $ 5,298 $ 4,630
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.
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. During the audit the IRS agents
requested a ruling from their National Office that certain interest
deductions relating to corporate owned life insurance (COLI) claimed by the
Company for 1991 through 1993 should not be allowed. The COLI program was
established in 1990 as part of the Company's strategy to fund and reduce the
cost of medical benefits for retired employees. AEP filed a brief with the
IRS National Office refuting the agents' position. Although no adjustments
have been proposed, a
disallowance of the COLI interest deductions through December 31, 1996 would
increase expenses by approximately $24 million (including interest).
Management believes it will ultimately prevail on this issue and will
vigorously contest any adjustments that may be assessed. Accordingly, no
provision for this amount has been recorded. In the event of an unfavorable
resolution of the COLI interest deduction matter, the Company expects to
recover from OPCo all of its costs under the terms of the coal supply
agreement. In the opinion of management, the final settlement of open years
will not have a material effect on results of operations.
The following tables show the elements of the net deferred tax
liability and the significant temporary differences giving rise to such
deferrals: December 31,
1996 1995
(in thousands)
Deferred Tax Assets. . . . . . . . . . . . . . $ 23,029 $ 20,432
Deferred Tax Liabilities . . . . . . . . . . . (65,832) (80,178)
Net Deferred Tax Liabilities . . . . . . . . . $(42,803) $(59,746)
Property Related Temporary Differences. . . . $(46,409) $(51,296)
Amounts Due From Parent Company
For Future Federal Income Taxes . . . . . . . (14,521) (19,255)
Self Insurance Reserves . . . . . . . . . . . 7,404 6,513
Prepaid Royalties . . . . . . . . . . . . . . - (4,443)
Postretirement Benefits . . . . . . . . . . . 10,004 7,742
All Other (net) . . . . . . . . . . . . . . . 719 993
Total Net Deferred Tax Liabilities. . . . . . $(42,803) $(59,746)
7. SUPPLEMENTARY CASH FLOW INFORMATION:
Year Ended December 31,
1996 1995 1994
(in thousands)
Cash was paid for:
Interest . . . . . . . . . . . . . $ 5,629 $6,196 $ 5,401
Income Taxes . . . . . . . . . . . 16,380 9,494 11,830
Noncash acquisitions under capital
leases were . . . . . . . . . . . . . 9,163 8,642 13,660
8. LEASES:
Leases of property, plant and equipment are for periods of 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 for both operating and capital leases are generally
charged to operating expenses. The components of rental cost are as follows:
Year Ended December 31,
1996 1995 1994
(in thousands)
Operating Leases . . . . . . . . . . . . . . $ 2,054 $ 1,597 $ 1,577
Amortization of Capital Leases . . . . . . . 8,925 10,419 11,994
Interest on Capital Leases . . . . . . . . . 2,099 2,624 2,974
Total Rental Costs . . . . . . . . . . . $13,078 $14,640 $16,545
Properties under capital leases and related obligations recorded on
the Balance Sheets are as follows:
December 31,
1996 1995
(in thousands)
Mining Plant . . . . . . . . . . . . . . . $65,295 $71,072
Accumulated Provision for Amortization. . . 33,089 37,145
Net Property under Capital Leases . . . $32,206 $33,927
Capital Lease Obligations:
Noncurrent Liability. . . . . . . . . . . $23,123 $23,111
Liability Due Within One Year . . . . . . 9,083 10,816
Total Capital Lease Obligations . . . . $32,206 $33,927
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, 1996:
Non-
Cancelable
Capital Operating
Leases Leases
(in thousands)
1996. . . . . . . . . . . . . . . . . . . . . . . $10,630 $ 1,718
1997. . . . . . . . . . . . . . . . . . . . . . . 7,541 1,410
1998. . . . . . . . . . . . . . . . . . . . . . . 4,933 1,197
1999. . . . . . . . . . . . . . . . . . . . . . . 3,465 733
2000. . . . . . . . . . . . . . . . . . . . . . . 2,435 538
Later Years . . . . . . . . . . . . . . . . . . . 3,364 1,629
Total Future Minimum Lease Rentals. . . . . . . . 32,368 $ 7,225
Less Estimated Interest Element . . . . . . . . . 162
Estimated Present Value of Future
Minimum Lease Rentals . . $32,206
9. RETURN OF CAPITAL:
In September 1996, the Company was granted permission by the SEC to
return to its parent up to $68,000,000 out of capital surplus through
December 31, 1998. On October 1, 1996 the Company returned $20,859,000 to
its parent.
<PAGE>
10. LONG-TERM DEBT:
Long-term debt outstanding was as follows:
December 31,
1996 1995
(in thousands)
Notes Payable:
7.19% due January 1997 . . . . . . . . . . . $20,000 $20,000
5.79% due January 1996 . . . . . . . . . . . - 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
81,681 90,000
Less: Portion Due Within One Year. . . . . . 20,000 8,319
Total. . . . . . . . . . . . . . . . $61,681 $81,681
The interest rate on the variable rate note is based on LIBOR (5.88%
at December 31, 1996) and adjusted every six months. At January 31, 1997 the
rate was adjusted to 6.04%. The notes payable are guaranteed by OPCo.
11. 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, 1996 and 1995 the fair value of long-term debt
was $82 million and $92 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 $82 million and $90 million at December 31, 1996 and 1995,
respectively.
