<PAGE>
Conesville Coal
Preparation Company
1995 Annual Report
<PAGE>
CONESVILLE COAL PREPARATION COMPANY
Page
CONTENTS
Statements of Income and Statements of Retained Earnings . . . 1
Balance Sheets . . . . . . . . . . . . 2
Statements of Cash Flows . . . . . . . . . . 3
Notes to Financial Statements . . . . . . . . . 4-8
<PAGE>
<TABLE>
CONESVILLE COAL PREPARATION COMPANY
STATEMENTS OF INCOME
(UNAUDITED)
<CAPTION>
Year Ended December 31,
1995 1994 1993
(in thousands)
<S> <C> <C> <C>
OPERATING REVENUES - Services to Parent Company. . . . $8,812 $9,093 $9,371
OPERATING EXPENSES . . . . . . . . . . . . . . . . . . 8,715 9,008 9,303
OPERATING INCOME . . . . . . . . . . . . . . . . . . . 97 85 68
NONOPERATING INCOME (LOSS) . . . . . . . . . . . . . . (1) 11 8
INCOME BEFORE INTEREST CHARGES . . . . . . . . . . . . 96 96 76
INTEREST CHARGES . . . . . . . . . . . . . . . . . . . - 1 1
INCOME BEFORE FEDERAL INCOME TAXES . . . . . . . . . . 96 95 75
FEDERAL INCOME TAXES . . . . . . . . . . . . . . . . . 26 25 5
NET INCOME . . . . . . . . . . . . . . . . . . . . . . $ 70 $ 70 $ 70
</TABLE>
<PAGE>
<TABLE>
STATEMENTS OF RETAINED EARNINGS
(UNAUDITED)
<CAPTION>
Year Ended December 31,
1995 1994 1993
(in thousands)
<S> <C> <C> <C>
RETAINED EARNINGS JANUARY 1. . . . . . . . . . . . . . $610 $540 $470
NET INCOME . . . . . . . . . . . . . . . . . . . . . . 70 70 70
RETAINED EARNINGS DECEMBER 31. . . . . . . . . . . . . $680 $610 $540
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
CONESVILLE COAL PREPARATION COMPANY
BALANCE SHEETS
(UNAUDITED)
<CAPTION>
December 31,
1995 1994
(in thousands)
<S> <C> <C>
ASSETS
MINING PLANT IN SERVICE . . . . . . . . . . . . . . . . . . . . . $ 451 $ 531
CURRENT ASSETS:
Cash and Cash Equivalents . . . . . . . . . . . . . . . . . . . 18 40
Accounts Receivable - Affiliated Companies. . . . . . . . . . . 2,601 2,609
Materials and Supplies - at average cost. . . . . . . . . . . . 880 854
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 38
TOTAL CURRENT ASSETS. . . . . . . . . . . . . . . . . . 3,553 3,541
DEFERRED FEDERAL INCOME TAXES . . . . . . . . . . . . . . . . . . 669 670
REGULATORY ASSETS . . . . . . . . . . . . . . . . . . . . . . . . 280 366
DEFERRED CHARGES. . . . . . . . . . . . . . . . . . . . . . . . . 47 24
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . $5,000 $5,132
CAPITALIZATION AND LIABILITIES
SHAREHOLDER'S EQUITY:
Common Stock - Par Value $1,000:
Authorized - 500 Shares
Outstanding - 100 Shares. . . . . . . . . . . . . . . . . . . $ 100 $ 100
Paid-in Capital . . . . . . . . . . . . . . . . . . . . . . . . 400 400
Retained Earnings . . . . . . . . . . . . . . . . . . . . . . . 680 610
TOTAL SHAREHOLDER'S EQUITY. . . . . . . . . . . . . . . 1,180 1,110
OTHER NONCURRENT LIABILITIES. . . . . . . . . . . . . . . . . . . 921 818
CURRENT LIABILITIES:
Accounts Payable - General. . . . . . . . . . . . . . . . . . . 208 199
Accounts Payable - Affiliated Companies . . . . . . . . . . . . 134 131
Accrued Rentals . . . . . . . . . . . . . . . . . . . . . . . . 867 906
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 270 311
TOTAL CURRENT LIABILITIES . . . . . . . . . . . . . . . 1,479 1,547
DEFERRED GAIN ON SALE OF PLANT. . . . . . . . . . . . . . . . . . 1,420 1,657
COMMITMENTS AND CONTINGENCIES (Note 2)
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . $5,000 $5,132
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
CONESVILLE COAL PREPARATION COMPANY
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
Year Ended December 31,
1995 1994 1993
(in thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net Income . . . . . . . . . . . . . . . . . . . . . $ 70 $ 70 $ 70
Adjustments for Noncash Items:
Depreciation . . . . . . . . . . . . . . . . . . . 18 15 15
Deferred Federal Income Taxes. . . . . . . . . . . 44 26 23
Amortization of Deferred Gain on Sale of Plant . . (237) (236) (237)
Accrued Other Postretirement Benefits. . . . . . . 142 230 214
Changes in Certain Current Assets
and Liabilities:
Accounts Receivable. . . . . . . . . . . . . . . . 8 62 (538)
Materials and Supplies . . . . . . . . . . . . . . (26) 46 127
Accounts Payable . . . . . . . . . . . . . . . . . 12 (195) 326
Other (net). . . . . . . . . . . . . . . . . . . . . (14) 14 4
Net Cash Flows From Operating Activities . . . 17 32 4
INVESTING ACTIVITIES - Construction Expenditures . . . (39) - -
Net Increase (Decrease) in Cash and Cash Equivalents . (22) 32 4
Cash and Cash Equivalents January 1. . . . . . . . . . 40 8 4
Cash and Cash Equivalents December 31. . . . . . . . . $ 18 $ 40 $ 8
See Notes to Financial Statements.
</TABLE>
<PAGE>
CONESVILLE COAL PREPARATION COMPANY
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES:
Organization and Regulation. Conesville Coal Preparation Company (the
Company or CCPC), is a wholly-owned subsidiary of Columbus Southern Power
Company (CSPCo), which is a subsidiary of American Electric Power Company,
Inc. (AEP Co., Inc.), a public utility holding company. The Company provides
coal washing services to CSPCo's Conesville generating plant. Coal washing
prices are regulated by the Securities and Exchange Commission (SEC) under
the Public Utility Holding Company Act of 1935 (1935 Act). Prices billed in
connection with coal washing services are sufficient to recover expenses and
provide for a return on CSPCo's equity investment excluding retained
earnings.
Basis of Accounting. As a cost-based rate-regulated entity, CCPC's financial
statements reflect the actions of regulators that may 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 CSPCo.
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 Washing Agreement. Pursuant to a coal washing agreement with CSPCo, the
Company is obligated to provide coal washing services to CSPCo and entitled
to receive payment for all costs incurred, even under circumstances when such
services are not performed due to a natural disaster, labor unrest or any
other forced or voluntary cessation of operations, either temporary or
permanent.
Mining Plant. Mining plant is stated at original cost and consists primarily
of assets under capital leases net of accumulated amortization.
Cash and Cash Equivalents. Cash and cash equivalents include temporary cash
investments with original maturities of three months or less.
Inventories. Materials and supplies inventories are stated at cost,
determined on a moving-average basis.
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 billings
and CSPCo's fuel rates, regulatory assets and liabilities are recorded in
accordance with SFAS 71.
Reclassifications. Certain prior-period amounts were reclassified for
comparative purposes.
2. COMMITMENTS AND CONTINGENCIES:
Construction expenditures for the years 1996 through 1998 are
estimated to be $208,000 and, in connection with the construction program,
commitments have been made.
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 costs from CSPCo under the coal washing
agreement.
3. OTHER RELATED-PARTY TRANSACTIONS:
American Electric Power Service Corporation (AEPSC) provides certain
managerial and professional services to AEP System companies including CCPC.
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 regulations of
the SEC under the 1935 Act.
4. 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 $32,000 in 1995 and $31,000 in both 1994
and 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
$515,000. In the event the Company ceases or significantly reduces
operations or contributions to the UMWA pensions 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
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 $16,000, $25,000 and
$23,000, 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 $15,000 in 1995 and $14,000 in both
1994 and 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 or older when
employment terminates. 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 $244,000, $291,000 and $260,000, 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, in deferred charges. 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 CSPCo plus net earnings from the
COLI program. Contributions to the VEBA trust fund were $32,000 in 1995,
1994 and 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 from which cash reimbursements are received. In 1995 $21,000, in
1994 $11,000 and in 1993 $33,000 of Black Lung surplus was applied in
accordance with the Energy Act to reimburse the Company for benefits paid.
The Company's share of the excess Black Lung Trust funds at December 31,
1995, 1994 and 1993 was $5,000, $10,000 and $13,000, respectively.
<PAGE>
5. FEDERAL INCOME TAXES:
The details of federal income taxes are as follows:
Year Ended December 31,
1995 1994 1993
(in thousands)
Current (net). . . . . . . . . . .$(18) $(1) $(18)
Deferred (net) . . . . . . . . . . 44 26 23
Total Federal Income Taxes . . $ 26 $25 $ 5
Federal income taxes as reported are different from pre-tax book income
multiplied by the statutory tax rate predominantly due to non-taxable effects of
corporate owned life insurance and the reversal of deferred taxes recorded in
prior years at tax rates different than the current statutory tax rate.
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 . . . . . . . . . . . . . . $ 799 $ 810
Deferred Tax Liabilities. . . . . . . . . . . . (130) (140)
Net Deferred Tax Asset. . . . . . . . . . . . $ 669 $ 670
Deferred Book Gain - Sale/Leaseback of Plant. . $ 497 $ 580
Amounts Due From Customers
For Future Federal Income Taxes . . . . . . . (92) (107)
All Other (net) . . . . . . . . . . . . . . . . 264 197
Total Net Deferred Tax Asset. . . . . . . . . $ 669 $ 670
6. SUPPLEMENTARY CASH FLOW INFORMATION:
Cash paid (received) for income taxes was $5,000 in 1995, $46,000 in
1994 and $(26,000) in 1993. Noncash acquisitions under capital leases were
$41,000 in 1995, $47,000 in 1994 and $82,000 in 1993.
<PAGE>
7. LEASES:
Leases of property, plant and equipment are for periods up to 15 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 coal washing operations continue.
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 . . . . . . . . . . . . . . . . $3,479 $3,468 $3,468
Amortization of Capital Leases . . . . . . . . . 136 149 171
Interest on Capital Leases . . . . . . . . . . . 26 37 49
Total Rental Costs . . . . . . . . . . . . . $3,641 $3,654 $3,688
Properties under capital leases and related obligations recorded on the
balance sheet are as follows:
December 31,
1995 1994
(in thousands)
Mining Plant. . . . . . . . . . . . . . . . . . . . . . $1,091 $1,183
Accumulated Provision for Amortization. . . . . . . . . 837 827
Net Property under Capital Leases . . . . . . . . . $ 254 $ 356
Capital Lease Obligation:
Noncurrent Liability. . . . . . . . . . . . . . . . . $156 $220
Liability Due Within One Year . . . . . . . . . . . . 98 136
Total Capital Lease Obligations . . . . . . . . . . $254 $356
Capital lease obligations are included in other noncurrent liabilities and
other current liabilities.
Properties under operating leases and related obligations are not included
in the balance sheet.
The Company sold its preparation plant and began a 15-year leaseback in
1986. The gain on the sale/leaseback is being amortized (approximately $19,700
a month) over the life of the lease and is recorded as a reduction to operating
expenses.
<PAGE>
Future minimum lease rentals consisted of the following at December 31,
1995:
Non-
Cancelable
Capital Operating
Leases Leases
(in thousands)
1996. . . . . . . . . . . . . . . . . . . . . . . . . . $111 $ 3,468
1997. . . . . . . . . . . . . . . . . . . . . . . . . . 67 3,468
1998. . . . . . . . . . . . . . . . . . . . . . . . . . 50 3,468
1999. . . . . . . . . . . . . . . . . . . . . . . . . . 26 3,468
2000. . . . . . . . . . . . . . . . . . . . . . . . . . 11 3,468
Later Years . . . . . . . . . . . . . . . . . . . . . . 22 3,468
Total Future Minimum Lease Rentals. . . . . . . . . . . 287 $20,808
Less Estimated Interest Element . . . . . . . . . . . . 33
Estimated Present Value of Future Minimum Lease Rentals $254
