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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 . . . . . . . . 4-9
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CONESVILLE COAL PREPARATION COMPANY
STATEMENTS OF INCOME
(UNAUDITED)
<CAPTION>
Year Ended December 31,
1999 1998 1997
(in thousands)
<S> <C> <C> <C>
OPERATING REVENUES -
Services to Parent Company. . . . . . $10,455 $9,481 $9,831
OPERATING EXPENSES (includes
depreciation expense of $270,000 in
1999, $29,000 in 1998 and $27,000
in 1997). . . . . . . . . . . . . . . 10,262 9,394 9,718
OPERATING INCOME . . . . . . . . . . . 193 87 113
NONOPERATING INCOME (LOSS) . . . . . . (6) 41 9
INCOME BEFORE INTEREST CHARGES . . . . 187 128 122
INTEREST CHARGES . . . . . . . . . . . - 6 -
INCOME BEFORE FEDERAL INCOME TAXES . . 187 122 122
FEDERAL INCOME TAXES . . . . . . . . . 117 52 52
NET INCOME . . . . . . . . . . . . . . $ 70 $ 70 $ 70
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<TABLE>
STATEMENTS OF RETAINED EARNINGS
(UNAUDITED)
<CAPTION>
Year Ended December 31,
1999 1998 1997
(in thousands)
<S> <C> <C> <C>
RETAINED EARNINGS JANUARY 1. . . . . . $890 $820 $750
NET INCOME . . . . . . . . . . . . . . 70 70 70
RETAINED EARNINGS DECEMBER 31. . . . . $960 $890 $820
See Notes to Financial Statements.
</TABLE>
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<TABLE>
CONESVILLE COAL PREPARATION COMPANY
BALANCE SHEETS
(UNAUDITED)
<CAPTION>
December 31,
1999 1998
(in thousands)
<S> <C> <C>
ASSETS
PREPARATION PLANT IN SERVICE. . . . . . . . . . . . $2,208 $ 841
Less: Accumulated Depreciation. . . . . . . . . . 669 548
NET PLANT IN SERVICE. . . . . . . . . . . 1,539 293
OTHER PROPERTY AND INVESTMENTS. . . . . . . . . . . 853 810
CURRENT ASSETS:
Cash and Cash Equivalents . . . . . . . . . . . . 11 18
Accounts Receivable:
General . . . . . . . . . . . . . . . . . . . . 10 6
Affiliated Companies. . . . . . . . . . . . . . 723 923
Materials and Supplies - at average cost. . . . . 899 817
Other . . . . . . . . . . . . . . . . . . . . . . 13 11
TOTAL CURRENT ASSETS. . . . . . . . . . . 1,656 1,775
DEFERRED FEDERAL INCOME TAXES . . . . . . . . . . . 713 691
REGULATORY ASSETS . . . . . . . . . . . . . . . . . 323 284
DEFERRED CHARGES. . . . . . . . . . . . . . . . . . 14 1,500
TOTAL . . . . . . . . . . . . . . . . . $5,098 $5,353
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 . . . . . . . . . . . . . . . . 960 890
TOTAL SHAREHOLDER'S EQUITY. . . . . . . . . 1,460 1,390
OTHER NONCURRENT LIABILITIES. . . . . . . . . . . . 2,029 1,376
CURRENT LIABILITIES:
Accounts Payable - General. . . . . . . . . . . . 128 206
Accounts Payable - Affiliated Companies . . . . . 395 295
Accrued Rentals . . . . . . . . . . . . . . . . . - 890
Other . . . . . . . . . . . . . . . . . . . . . . 613 434
TOTAL CURRENT LIABILITIES . . . . . . . . . 1,136 1,825
DEFERRED GAIN ON SALE OF PLANT. . . . . . . . . . . 473 710
REGULATORY LIABILITIES. . . . . . . . . . . . . . . - 52
COMMITMENTS AND CONTINGENCIES (Note 2)
TOTAL . . . . . . . . . . . . . . . . . . $5,098 $5,353
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,
1999 1998 1997
(in thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net Income . . . . . . . . . . . . . $ 70 $ 70 $ 70
Adjustments for Noncash Items:
Depreciation . . . . . . . . . . . 270 29 27
Deferred Federal Income Taxes. . . 22 57 21
Amortization of Deferred
Gain on Sale of Plant . . . . . . (237) (237) (236)
Accrued Other Postretirement
Benefits. . . . . . . . . . . . . 298 200 298
Changes in Certain Current Assets
and Liabilities:
Accounts Receivable. . . . . . . . 196 1,923 158
Materials and Supplies . . . . . . (82) (7) 98
Accounts Payable . . . . . . . . . 22 114 (232)
Payment of Disputed Tax and
Interest Related to COLI. . . . . . (42) (705) -
Other (net). . . . . . . . . . . . . 549 (1,463) (181)
Net Cash Flows From (Used For)
Operating Activities . . . . 1,066 (19) 23
INVESTING ACTIVITIES -
Construction Expenditures . . . . . . (1,073) (5) -
Net Increase (Decrease) in Cash and
Cash Equivalents. . . . . . . . . . . (7) (24) 23
Cash and Cash Equivalents January 1. . 18 42 19
Cash and Cash Equivalents December 31. $ 11 $ 18 $ 42
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.
Preparation Plant and Depreciation
Preparation plant assets are stated at original cost. Depreciation is
provided on a straight-line basis over the estimated useful asset lives.
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Costs of ordinary maintenance, repairs, renewals and minor replacements
of property are expensed while major additions of property, replacements
of property and betterments are capitalized. Preparation plant and the
related accumulated provision for depreciation 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 CSPCo under the coal washing agreement.
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 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 billings and CSPCo's fuel rates, deferred income taxes
are recorded and related regulatory assets and liabilities are
established in accordance with SFAS 71.
2. COMMITMENTS AND CONTINGENCIES
Litigation
The Internal Revenue Service (IRS) agents auditing the AEP System's
consolidated federal income tax returns requested a ruling from their
National Office that certain interest deductions claimed by the Company
relating to AEP's corporate owned life insurance (COLI) program should
not be allowed. As a result of a suit filed in U.S. District Court
(discussed below) this request for ruling was withdrawn by the IRS
agents. Adjustments have been or will be proposed by the IRS
disallowing COLI interest deductions for taxable years 1991-96. A
disallowance of COLI interest deductions through December 31, 1999 would
increase expenses by approximately $767,000 (including interest). The
Company has made no provision for any possible impact from this matter.
The Company made payments of taxes and interest attributable to COLI
interest deductions for taxable years 1991-1998 to avoid the potential
assessment by the IRS of any additional above market rate interest on
the contested amount. These payments to the IRS are included on the
balance sheets in other property and investments pending the resolution
of this matter. The Company is seeking refunds through litigation of
all amounts paid plus interest.
<PAGE>
In order to resolve this issue, the Company filed suit against the
United States (U.S.) in the U.S. District Court for the Southern
District of Ohio in March 1998. In 1999 a U.S. Tax Court judge decided
in the Winn-Dixie Stores v. Commissioner case that a corporate
taxpayer's COLI interest deductions should be disallowed. Notwith-standing the
Tax Court's decision in Winn-Dixie, management has made no
provision for any possible adverse earnings impact from this matter
because it believes, and has been advised by outside counsel, that it
has a meritorious position and will vigorously pursue its lawsuit. In
the event the resolution of this matter is unfavorable, the Company
expects to recover from CSPCo all of its costs under the terms of the
coal washing agreement.
The Company is involved in a number of other legal proceedings and
claims. While management is unable to predict the ultimate outcome of
litigation, it is not expected that the resolution of these matters will
have a material adverse effect on the results of operations, cash flows
or financial condition.
The Company recovers all costs from CSPCo under the SEC approved 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
The Company participates in the United Mine Workers of America (UMWA)
pension plan, a defined contribution plan which covers its UMWA
employees. Contributions totaled $3,000 in 1999, $23,000 in 1998 and
$39,000 in 1997. As of June 30, 1999, the UMWA actuary estimates that
the Company's share of the UMWA pension plans unfunded vested
liabilities was approximately $350,000. 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.
The Company participates in the AEP System qualified pension plan, a
defined benefit plan which covers all employees, except participants in
the UMWA pension plans. Net pension costs for the years ended December
31, 1999, 1998 and 1997 were $2,000, $17,000 and $19,000, respectively.
A defined contribution employee savings plan offered to non-UMWA
employees required that the Company make contributions to the plan
totaling $20,000 in 1999 and $19,000 in both 1998 and 1997.
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Postretirement medical benefits for the Company's UMWA employees who
have retired or will retire after January 1, 1976 (post 1975 UMWA
retirees) are the liability of the Company. The AEP System provides
certain other benefits for retired employees under an AEP System plan.
The annual accrued costs for these plans were $399,000 in 1999, $278,000
in 1998 and $230,000 in 1997.
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. In June 1998
management decided to cease reimbursing retiree medical costs due to the
reduced levels of available Black Lung surplus and proposed new rules
that could liberalize the current claims process. In 1998 $18,000 and
in 1997 $34,000 of Black Lung surplus was utilized in accordance with
the Energy Act to reimburse the Company for benefits paid. No Black
Lung surpluses were used to reimburse the Company for retiree medical
benefits paid in 1999 and no reallocation from the Company's surplus
Black Lung trust fund to other System member companies was made in 1999.
The Company's share of the Black Lung Trust funds surplus at December
31, 1999, 1998 and 1997 was $54,000, $33,000 and $2,000, respectively.
5. FEDERAL INCOME TAXES
The details of federal income taxes are as follows:
Year Ended December 31,
1999 1998 1997
(in thousands)
Current (net). . . . . . . . . . . . . . . $ 95 $(5) $31
Deferred (net) . . . . . . . . . . . . . . 22 57 21
Total Federal Income Taxes . . . . . . . $117 $52 $52
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.
<PAGE>
The Company has settled with the 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 1996 are presently being audited by
the IRS. With the exception of the deductibility of interest deductions
related to AEP's corporate owned life insurance program, which are
discussed under the heading "Litigation" in Note 2, management is not
aware of any issues from open tax years that upon final resolution are
expected to have a material adverse 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,
1999 1998
(in thousands)
Deferred Tax Assets. . . . . . . . . . . . . . $ 839 $ 833
Deferred Tax Liabilities . . . . . . . . . . . (126) (142)
Net Deferred Tax Asset . . . . . . . . . . . $ 713 $ 691
Deferred Book Gain - Sale/Leaseback of Plant . $166 $249
Amounts Due From Customers
For Future Federal Income Taxes . . . . . . . (31) (46)
Accrued Postretirement Expense . . . . . . . . 500 390
All Other (net) . . . . . . . . . . . . . . . 78 98
Total Net Deferred Tax Asset . . . . . . . . $713 $691
6. SUPPLEMENTARY CASH FLOW INFORMATION
Interest paid in 1998 was $6,000. There were no interest charges paid
in 1999 and 1997. Cash paid for income taxes was $53,000 in 1999,
$70,000 in 1998 and $54,000 in 1997. Noncash acquisitions under capital
leases were $595,000 in 1999, $79,000 in 1998 and $44,000 in 1997.
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,
1999 1998 1997
(in thousands)
Operating Leases . . . . . . . . . . . . $4,335 $3,468 $3,468
Amortization of Capital Leases . . . . . 118 71 57
Interest on Capital Leases . . . . . . . 20 11 12
Total Rental Costs . . . . . . . . . $4,473 $3,550 $3,537
<PAGE>
Properties under capital leases and related obligations recorded on the
balance sheet are as follows:
December 31,
1999 1998
(in thousands)
Property Under Capital Leases. . . . . . . . . . . $796 $502
Accumulated Provision for Amortization . . . . . . 200 348
Net Property under Capital Leases . . . . . . . $596 $154
Capital Lease Obligation:
Noncurrent Liability . . . . . . . . . . . . . . $367 $ 98
Liability Due Within One Year. . . . . . . . . . 229 56
Total Capital Lease Obligations . . . . . . . . $596 $154
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,
1999:
Non-
Cancelable
Capital Operating
Leases Leases
(in thousands)
2000. . . . . . . . . . . . . . . . . . . . . . . . . $259 $3,468
2001. . . . . . . . . . . . . . . . . . . . . . . . . 232 3,468
2002. . . . . . . . . . . . . . . . . . . . . . . . . 138 -
2003. . . . . . . . . . . . . . . . . . . . . . . . . 16 -
2004. . . . . . . . . . . . . . . . . . . . . . . . . 1 -
Total Future Minimum Lease Rentals. . . . . . . . . . 646 $6,936
Less Estimated Interest Element . . . . . . . . . . . 50
Estimated Present Value of Future Minimum
Lease Rentals. . . . . . . . . . . . . . . . . . . . $596
