<PAGE>
CONESVILLE COAL PREPARATION COMPANY
1996 Annual Report
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
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<TABLE>
CONESVILLE COAL PREPARATION COMPANY
STATEMENTS OF INCOME
(UNAUDITED)
<CAPTION>
Year Ended December 31,
1996 1995 1994
(in thousands)
<S> <C> <C> <C>
OPERATING REVENUES - Services to Parent Company. . . . $8,613 $8,812 $9,093
OPERATING EXPENSES . . . . . . . . . . . . . . . . . . 8,563 8,715 9,008
OPERATING INCOME . . . . . . . . . . . . . . . . . . . 50 97 85
NONOPERATING INCOME (LOSS) . . . . . . . . . . . . . . 7 (1) 11
INCOME BEFORE INTEREST CHARGES . . . . . . . . . . . . 57 96 96
INTEREST CHARGES . . . . . . . . . . . . . . . . . . . 1 - 1
INCOME BEFORE FEDERAL INCOME TAXES . . . . . . . . . . 56 96 95
FEDERAL INCOME TAX EXPENSE (CREDIT). . . . . . . . . . (14) 26 25
NET INCOME . . . . . . . . . . . . . . . . . . . . . . $ 70 $ 70 $ 70
</TABLE>
<TABLE>
STATEMENTS OF RETAINED EARNINGS
(UNAUDITED)
<CAPTION>
Year Ended December 31,
1996 1995 1994
(in thousands)
<S> <C> <C> <C>
RETAINED EARNINGS JANUARY 1. . . . . . . . . . . . . . $680 $610 $540
NET INCOME . . . . . . . . . . . . . . . . . . . . . . 70 70 70
RETAINED EARNINGS DECEMBER 31. . . . . . . . . . . . . $750 $680 $610
See Notes to Financial Statements.
</TABLE>
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<TABLE>
CONESVILLE COAL PREPARATION COMPANY
BALANCE SHEETS
(UNAUDITED)
<CAPTION>
December 31,
1996 1995
(in thousands)
<S> <C> <C>
ASSETS
MINING PLANT IN SERVICE . . . . . . . . . . . . . . . . . . . . . $ 364 $ 451
CURRENT ASSETS:
Cash and Cash Equivalents . . . . . . . . . . . . . . . . . . . 19 18
Accounts Receivable:
General . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 -
Affiliated Companies. . . . . . . . . . . . . . . . . . . . . 3,007 2,601
Materials and Supplies - at average cost. . . . . . . . . . . . 908 880
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 54
TOTAL CURRENT ASSETS. . . . . . . . . . . . . . . . . . 3,989 3,553
DEFERRED FEDERAL INCOME TAXES . . . . . . . . . . . . . . . . . . 683 669
REGULATORY ASSETS . . . . . . . . . . . . . . . . . . . . . . . . 231 280
DEFERRED CHARGES. . . . . . . . . . . . . . . . . . . . . . . . . 28 47
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . $5,295 $5,000
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 . . . . . . . . . . . . . . . . . . . . . . . 750 680
TOTAL SHAREHOLDER'S EQUITY. . . . . . . . . . . . . . 1,250 1,180
OTHER NONCURRENT LIABILITIES. . . . . . . . . . . . . . . . . . . 888 921
CURRENT LIABILITIES:
Accounts Payable - General. . . . . . . . . . . . . . . . . . . 444 208
Accounts Payable - Affiliated Companies . . . . . . . . . . . . 175 134
Accrued Rentals . . . . . . . . . . . . . . . . . . . . . . . . 896 867
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 456 270
TOTAL CURRENT LIABILITIES . . . . . . . . . . . . . . 1,971 1,479
DEFERRED GAIN ON SALE OF PLANT. . . . . . . . . . . . . . . . . . 1,183 1,420
REGULATORY LIABILITIES. . . . . . . . . . . . . . . . . . . . . . 3 -
COMMITMENTS AND CONTINGENCIES (Note 2)
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . $5,295 $5,000
See Notes to Financial Statements.
/TABLE
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<TABLE>
CONESVILLE COAL PREPARATION COMPANY
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
Year Ended December 31,
1996 1995 1994
(in thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net Income . . . . . . . . . . . . . . . . . . . . . $ 70 $ 70 $ 70
Adjustments for Noncash Items:
Depreciation . . . . . . . . . . . . . . . . . . . 27 18 15
Deferred Federal Income Taxes. . . . . . . . . . . 30 44 26
Amortization of Deferred Gain on Sale of Plant . . (237) (237) (236)
Accrued Other Postretirement Benefits. . . . . . . 144 142 230
Changes in Certain Current Assets
and Liabilities:
Accounts Receivable. . . . . . . . . . . . . . . . (409) 8 62
Materials and Supplies . . . . . . . . . . . . . . (28) (26) 46
Accounts Payable . . . . . . . . . . . . . . . . . 277 12 (195)
Other (net). . . . . . . . . . . . . . . . . . . . . 148 (14) 14
Net Cash Flows From Operating Activities . . . 22 17 32
INVESTING ACTIVITIES - Construction Expenditures . . . (21) (39) -
Net Increase (Decrease) in Cash and Cash Equivalents . 1 (22) 32
Cash and Cash Equivalents January 1. . . . . . . . . . 18 40 8
Cash and Cash Equivalents December 31. . . . . . . . . $ 19 $ 18 $ 40
See Notes to Financial Statements.
</TABLE>
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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 (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 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, deferred income taxes are recorded with related
regulatory assets and liabilities in accordance with SFAS 71.
2. COMMITMENTS AND CONTINGENCIES:
Construction expenditures for the years 1997 through 1999 are
estimated to be $223,000 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 both 1996 and 1995 and $31,000
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
$445,000. In the event the Company ceases or significantly reduces
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
$22,000, $16,000 and $25,000, 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 $19,000 in 1996, $15,000 in 1995 and
$14,000 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 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.
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 $244,000 in both 1996 and 1995 and
$291,000 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 $29,000 in 1996 and
$32,000 in both 1995 and 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 from which cash reimbursements are received. In 1996 $36,000, in
1995 $21,000 and in 1994 $11,000 of Black Lung surplus was utilized in
accordance with the Energy Act to reimburse the Company for benefits paid.
The Company's share of the Black Lung Trust funds surplus at December 31,
1996, 1995 and 1994 was $13,000, $5,000 and $10,000, respectively.
5. FEDERAL INCOME TAXES:
The details of federal income taxes are as follows:
Year Ended December 31,
1996 1995 1994
(in thousands)
Current (net). . . . . . . . . . . . . $(44) $(18) $(1)
Deferred (net) . . . . . . . . . . . . 30 44 26
Total Federal Income Taxes . . . . . $(14) $ 26 $25
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 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.
The following tables show the elements of the net deferred tax asset
and the significant temporary differences giving rise to such deferrals:
December 31,
1996 1995
(in thousands)
Deferred Tax Assets . . . . . . . . . . . . . . . . . . $ 799 $ 799
Deferred Tax Liabilities. . . . . . . . . . . . . . . . (116) (130)
Net Deferred Tax Asset. . . . . . . . . . . . . . . . $ 683 $ 669
Deferred Book Gain - Sale/Leaseback of Plant. . . . . . $ 414 $ 497
Amounts Due From Customers
For Future Federal Income Taxes . . . . . . . . . . . (77) (92)
Accrued Postretirement Expense. . . . . . . . . . . . . 267 205
All Other (net) . . . . . . . . . . . . . . . . . . . . 79 59
Total Net Deferred Tax Asset. . . . . . . . . . . . . $ 683 $ 669
6. SUPPLEMENTARY CASH FLOW INFORMATION:
Cash paid (received) for income taxes was $(32,000) in 1996, $5,000
in 1995 and $46,000 in 1994. Noncash acquisitions under capital leases were
$23,000 in 1996, $41,000 in 1995 and $47,000 in 1994.
7. LEASES:
Leases of property, plant and equipment are for periods of 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 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 . . . . . . . . . . . . $3,470 $3,479 $3,468
Amortization of Capital Leases . . . . . 96 136 149
Interest on Capital Leases . . . . . . . 18 26 37
Total Rental Costs . . . . . . . . . $3,584 $3,641 $3,654
Properties under capital leases and related obligations recorded on
the balance sheet are as follows:
December 31,
1996 1995
(in thousands)
Mining Plant. . . . . . . . . . . . . . . . . . . . $704 $1,091
Accumulated Provision for Amortization. . . . . . . 530 837
Net Property under Capital Leases . . . . . . . $174 $ 254
Capital Lease Obligation:
Noncurrent Liability. . . . . . . . . . . . . . . $108 $156
Liability Due Within One Year . . . . . . . . . . 66 98
Total Capital Lease Obligations . . . . . . . . $174 $254
Capital lease obligations are included in other noncurrent liabilities
and other current liabilities on the balance sheets.
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.
Future minimum lease rentals consisted of the following at December 31,
1996:
Noncancelable
Capital Operating
Leases Leases
(in thousands)
1997. . . . . . . . . . . . . . . . . . . . . . . $ 76 $ 3,486
1998. . . . . . . . . . . . . . . . . . . . . . . 56 3,468
1999. . . . . . . . . . . . . . . . . . . . . . . 28 3,468
2000. . . . . . . . . . . . . . . . . . . . . . . 13 3,468
2001. . . . . . . . . . . . . . . . . . . . . . . 8 3,468
Later Years . . . . . . . . . . . . . . . . . . . 14 -
Total Future Minimum Lease Rentals. . . . . . . . 195 $17,340
Less Estimated Interest Element . . . . . . . . . 21
Estimated Present Value of Future
Minimum Lease Rentals . . . . . . . . . . . . . $174
