1
EXHIBIT 99.1
BLACK BUTTE COAL COMPANY,
A JOINT VENTURE,
AND R-K LEASING COMPANY
Combined Financial Statements
As of December 31, 1999
and December 26, 1998
2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Venturers and Partners of
Black Butte Coal Company, A Joint Venture,
and R-K Leasing Company:
We have audited the accompanying combined balance sheets of Black Butte Coal
Company, A Joint Venture, and R-K Leasing Company (collectively, the "Company"),
as of December 31, 1999, and December 26, 1998, and the related combined
statements of earnings, joint venture and partnership capital (deficit), and
cash flows for the fiscal years then ended. These combined 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, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Black Butte
Coal Company, A Joint Venture, and R-K Leasing Company, as of December 31, 1999,
and December 26, 1998, and the combined results of their operations and their
cash flows for the fiscal years then ended in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN
Denver, Colorado,
February 2, 2000.
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BLACK BUTTE COAL COMPANY, A JOINT VENTURE
AND R-K LEASING COMPANY
COMBINED STATEMENTS OF EARNINGS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 1999 AND DECEMBER 26, 1998
1999 1998
------------- -------------
COAL SALES $ 241,365,217 $ 274,734,855
OPERATING EXPENSES:
Mining and processing 23,941,519 19,085,136
Coal purchases 60,473,628 62,859,448
Royalties 5,138,406 4,729,666
Management fee 1,381,534 1,261,036
Production taxes and other taxes 6,992,094 6,609,003
------------- -------------
97,927,181 94,544,289
------------- -------------
MARGIN 143,438,036 180,190,566
CONTRACT CANCELLATION PAYMENTS (Note 5) 5,002,828 3,197,805
------------- -------------
Operating income 148,440,864 183,388,371
------------- -------------
OTHER INCOME (EXPENSE):
Interest income 216,112 94,921
Interest expense (351) (17,649)
Gain (loss) on sale of equipment 596,853 (275,655)
Other (215,141) 24,282
------------- -------------
597,473 (174,101)
------------- -------------
Net earnings $ 149,038,337 $ 183,214,270
============= =============
The accompanying notes are an integral part of these combined statements.
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BLACK BUTTE COAL COMPANY, A JOINT VENTURE,
AND R-K LEASING COMPANY
COMBINED BALANCE SHEETS
DECEMBER 31, 1999 AND DECEMBER 26, 1998
ASSETS 1999 1998
------ ------------- -------------
CURRENT ASSETS:
Cash and cash equivalents $ 6,596,715 $ 1,825,005
Accounts receivable:
Trade 13,087,418 20,177,502
Affiliates 14,644 54,989
------------- -------------
Total accounts receivable 13,102,062 20,232,491
Inventories:
Coal 1,851,159 2,633,441
Parts and supplies 154,261 56,770
------------- -------------
Total inventories 2,005,420 2,690,211
Stripping costs applicable to future periods 5,028,867 5,479,142
Other 1,247,519 1,276,174
------------- -------------
Total current assets 27,980,583 31,503,023
------------- -------------
PROPERTY, PLANT AND EQUIPMENT, at cost 167,637,748 171,544,894
Less: Accumulated depreciation and amortization 154,358,311 149,841,934
------------- -------------
Net property, plant and equipment 13,279,437 21,702,960
------------- -------------
DEFERRED DEVELOPMENT COSTS, less accumulated
amortization of $6,522,567 and $6,081,174 439,970 881,363
OTHER ASSETS 1,664,603 2,574,872
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$ 43,364,593 $ 56,662,218
============= =============
LIABILITIES AND JOINT VENTURE AND PARTNERSHIP DEFICIT
CURRENT LIABILITIES:
Accounts payable:
Trade $ 5,990,628 $ 8,397,276
Affiliates 334,588 717,151
------------- -------------
Total accounts payable 6,325,216 9,114,427
Current portion of accrued production taxes 2,748,370 2,436,718
Accrued royalties 339,612 572,549
Current portion of accrued reclamation costs (Note 1) 1,472,000 2,433,622
Other 301,338 339,962
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Total current liabilities 11,186,536 14,897,278
ACCRUED PRODUCTION TAXES 972,818 974,800
ACCRUED RECLAMATION AND OTHER MINING COSTS (Note 1) 55,109,282 52,410,414
OTHER NONCURRENT LIABILITIES 7,192,181 6,063,070
------------- -------------
Total liabilities 74,460,817 74,345,562
------------- -------------
COMMITMENTS AND CONTINGENCIES (Notes 3, 5 and 7)
JOINT VENTURE AND PARTNERSHIP DEFICIT (31,096,224) (17,683,344)
------------- -------------
$ 43,364,593 $ 56,662,218
============= =============
The accompanying notes are an integral part of these combined balance sheets.
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BLACK BUTTE COAL COMPANY, A JOINT VENTURE
AND R-K LEASING COMPANY
COMBINED STATEMENTS OF JOINT VENTURE AND PARTNERSHIP CAPITAL (DEFICIT)
FOR THE FISCAL YEARS ENDED DECEMBER 31, 1999 AND DECEMBER 26, 1998
Bitter Creek Union Pacific
KCP, Inc. Coal Minerals Total
------------- ------------- ------------- -------------
BALANCE, December 27, 1997 $ (2,005,930) $ (13,545,983) $ 11,528,485 $ (4,023,428)
Capital contributions 9,219,256 8,250,000 969,256 18,438,512
Net earnings (loss) 91,240,923 94,827,288 (2,853,941) 183,214,270
Withdrawals (107,297,812) (106,770,886) (1,244,000) (215,312,698)
------------- ------------- ------------- -------------
BALANCE, December 26, 1998 (8,843,563) (17,239,581) 8,399,800 (17,683,344)
Capital contributions 11,200,000 10,250,000 950,000 22,400,000
Net earnings (loss) 74,157,860 76,336,393 (1,455,916) 149,038,337
Withdrawals (92,423,718) (90,747,499) (1,680,000) (184,851,217)
------------- ------------- ------------- -------------
BALANCE, December 31, 1999 $ (15,909,421) $ (21,400,687) $ 6,213,884 $ (31,096,224)
============= ============= ============= =============
The accompanying notes are an integral part of these combined statements.
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BLACK BUTTE COAL COMPANY, A JOINT VENTURE,
AND R-K LEASING COMPANY
COMBINED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 1999 AND DECEMBER 26, 1998
1999 1998
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 149,038,337 $ 183,214,270
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization 9,406,116 11,427,382
(Gain) loss on sale of equipment (596,853) 275,655
Change in operating assets and liabilities:
Accounts receivable 7,130,429 (4,111,801)
Inventories 684,791 480,415
Stripping costs applicable to future periods 450,275 1,738,615
Other current assets 28,655 236,376
Other assets 910,269 983,158
Accounts payable (2,789,211) 2,406,825
Accrued production taxes 309,670 393,131
Accrued royalties (232,937) 35,303
Accrued reclamation and other mining costs 2,584,246 1,574,518
Other current liabilities (38,625) 45,894
Other noncurrent liabilities 1,129,111 1,422,295
------------- -------------
Net cash provided by operating activities 168,014,273 200,122,036
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,388,846) (2,298,349)
Proceeds from sale of equipment 597,500 34,650
------------- -------------
Net cash used in investing activities (791,346) (2,263,699)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contributions by venture partners 22,400,000 18,438,512
Capital withdrawn by venture partners (184,851,217) (215,312,698)
------------- -------------
Net cash used in financing activities (162,451,217) (196,874,186)
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NET INCREASE IN CASH AND CASH EQUIVALENTS 4,771,710 984,151
CASH AND CASH EQUIVALENTS, beginning of year 1,825,005 840,854
------------- -------------
CASH AND CASH EQUIVALENTS, end of year $ 6,596,715 $ 1,825,005
============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 351 $ 17,649
============= =============
The accompanying notes are an integral part of these combined statements.
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BLACK BUTTE COAL COMPANY, A JOINT VENTURE,
AND R-K LEASING COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The accompanying combined financial statements include the accounts of Black
Butte Coal Company, A Joint Venture, and R-K Leasing Company (collectively the
"Company") which are affiliated through common ownership. Significant
intercompany accounts and transactions have been eliminated.
General
Black Butte Coal Company is a joint venture formed January 1, 1974, by Bitter
Creek Coal Company (a subsidiary of Union Pacific Resources Company) and KCP,
Inc., formerly Kiewit Coal Properties Inc. ("KCP") for the purpose of
developing, mining and selling coal from properties known as the Black Butte
Properties, a surface mine in Sweetwater County, Wyoming. The joint venture
expires on the earliest of (i) January 2004, (ii) when the coal reserves of the
Black Butte Properties have been fully mined, or (iii) when the venturers
mutually agree to terminate the venture. With the exception of a provision
regarding certain new tonnage sold, the joint venture agreement provides for the
venturers to share equally in net profits and net losses unless the capital
contributions of both venturers are not on an equal basis, in which case the
share of net profits shall be in proportion to each venturer's interest in the
total venture capital. Capital contributions and withdrawals shall be made
pursuant to the terms of the joint venture agreement, as amended from time to
time, and generally is based on the working capital needs of the joint venture
as mutually determined by the venturers. During fiscal 1999 and 1998, each
venturer maintained a 50% ownership interest in Black Butte Coal Company.
R-K Leasing Company is a partnership between Union Pacific Minerals and KCP,
formed for the purpose of leasing various types of real and personal property
including buildings, heavy machinery and equipment. All partnership leases are
operating leases with Black Butte Coal Company, A Joint Venture. The partnership
expires March 1, 2014, or upon the complete satisfaction of any long-term
indebtedness incurred by the partnership, or upon termination or expiration of
all equipment or other leases which may be entered into by the partnership,
whichever occurs later. The partnership agreement provides for the partners to
share net earnings in proportion to each partner's interest in total partnership
capital. During fiscal 1999 and 1998, each partner maintained a 50% ownership
interest in R-K Leasing Company.
The Company's coal is sold primarily to electric utilities, which burn coal in
order to generate steam to produce electricity. Approximately 99.5 percent and
92 percent of the Company's coal sales were made under long-term contracts
during fiscal year 1999 and 1998, respectively. The remainder of the Company's
sales are made on the spot market where prices are substantially lower than
those received from the long-term contracts.
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The coal industry is highly competitive. The Company competes not only with
other domestic and foreign coal suppliers, some of whom are larger and have
greater capital resources than the Company, but also with alternative methods of
generating electricity and alternative energy sources. Many of the Company's
competitors are served by two railroads and, due to the competition, often
benefit from lower transportation costs than the Company which is served by a
single railroad. Additionally, many competitors have lower stripping ratios than
the Company, often resulting in lower comparative costs of production.
The Company is also required to comply with various federal, state and local
laws concerning protection of the environment. The Company believes its
compliance with environmental protection and land restoration laws will not
affect its competitive position since its competitors are similarly affected by
such laws.
KCP owns a 50 percent interest in Decker Coal Company ("Decker") which sells
coal to the Company.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid instruments purchased with an original
maturity of three months or less and are carried at cost which approximates
market due to the short maturities.
Inventories
Inventories of coal, parts and supplies are valued at the lower-of-cost or
market. Cost is computed on a currently adjusted average basis.
Stripping Costs Applicable to Future Periods
Costs incurred in the removal of earth to expose coal reserves are deferred and
charged to operations when the coal is mined, according to the average stripping
ratio for the mine. The average stripping ratio is based on the ratio of the
estimated tons of earth to be removed to the estimated recoverable tons of coal.
Depreciation and Amortization
Depreciation and amortization on mining equipment, automobiles and trucks and
furniture, fixtures and equipment is provided on the straight-line method based
on estimated useful lives of 2 to 25 years. Depreciation on railroad trackage,
buildings and improvements, mining facilities and tipple is charged to
operations based on the ratio of tons of coal mined to total tons of coal
committed under sales contracts. When assets are disposed, the cost and related
accumulated depreciation or amortization are removed from the accounts and the
net amount, less any proceeds from disposal, is charged or credited to income.
Deferred Development Costs
Development costs incurred to bring new mineral properties into production have
been capitalized. These costs are charged to operations, by property, based upon
the ratio of tons of coal mined to total tons of coal committed under sales
contracts.
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Reclamation
The Company follows the policy of providing an accrual for reclamation of mined
properties, based on the estimated total cost of restoration of such properties
to meet compliance with laws governing strip mining, by applying per-ton
reclamation rates to coal mined. These reclamation rates are determined using
the remaining estimated reclamation costs and tons of coal committed under sales
contracts. The Company reviews its reclamation cost estimates annually and
revises the reclamation rates on a prospective basis, as necessary.
Income Taxes
Provision for federal and state income taxes has not been made in the combined
financial statements since the liability is that of the venturers and partners
and not that of the joint venture or the partnership.
Coal Sales
Coal sales include routine billing and escalation amounts. Claims for additional
contract compensation are not recorded until the year in which such claims are
allowed.
Fiscal Yearend
During 1999, the Company elected to change from a 52-53 week fiscal year, which
ended on the last Saturday in December, to a calendar year. There were 52 weeks
in fiscal 1998 and 52 weeks and 6 days in fiscal 1999.
Reclassifications
Certain prior year amounts have been reclassified to conform with the current
year financial statement presentation.
2. PROPERTY, PLANT AND EQUIPMENT:
A summary of property, plant and equipment cost at December 31, 1999 and
December 26, 1998, is as follows:
1999 1998
------------ ------------
Land $ 484,821 $ 484,821
Railroad spurs 307,310 307,310
Buildings and improvements 12,017,306 12,017,306
Mine facilities 53,144,851 53,144,851
Mine equipment 101,006,748 104,914,327
Automobiles and trucks 536,405 535,972
Furniture, fixtures and office equipment 140,307 140,307
------------ ------------
$167,637,748 $171,544,894
============ ============
3. PENSION PLAN:
The Company has an obligation to make contributions to the Black Butte Coal
Company Pension Plan (the "Plan"), which covers all employees except salaried
and office personnel. The amount of required contributions is determined
actuarially each year. No contributions were required in 1999 or 1998. The
components of the net periodic pension cost (benefit) at December 31, 1999 and
December 26, 1998, were as follows:
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1999 1998
--------- ---------
Service cost $ 20,000 $ 20,000
Interest cost on projected benefit obligation 666,960 635,411
Expected return on plan assets (834,519) (730,329)
Amortization of transition asset and
recognized net actuarial (gain) loss (29,683) (458)
--------- ---------
Net periodic pension benefit $(177,242) $ (75,376)
========= =========
The funded status of the Plan at December 31, 1999 and December 26, 1998, and
the related changes for the fiscal years then ended, were as follows:
1999 1998
------------ ------------
Change in projected benefit obligation
Benefit obligation at beginning of year $ 10,336,891 $ 9,171,585
Service cost 20,000 20,000
Interest cost 666,960 635,411
Actuarial (gain)/loss (1,973,772) 740,929
Benefits paid (261,199) (231,034)
------------ ------------
Benefit obligation at end of year 8,788,880 10,336,891
------------ ------------
Change in plan assets
Fair value of plan assets at beginning of year 10,516,787 9,206,629
Actual return on plan assets 1,187,010 1,541,192
Benefits paid (261,199) (231,034)
------------ ------------
Fair value of plan assets at end of year $ 11,442,598 $ 10,516,787
------------ ------------
Funded status at end of year $ 2,653,718 $ 179,896
Unrecognized transition asset (177,529) (266,294)
Unrecognized net actuarial (gain) loss (811,586) 1,573,759
------------ ------------
Prepaid pension cost $ 1,664,603 $ 1,487,361
============ ============
The projected benefit obligation was determined using an assumed discount rate
of 8.0 percent and 6.5 percent in 1999 and 1998, respectively, and no increases
in compensation were assumed. The expected long-term rate of return on plan
assets was 8 percent in both 1999 and 1998. At December 31, 1999 and December
26, 1998, plan assets were invested in guaranteed insurance contracts and mutual
funds. On December 31, 1992, the Plan and all benefits under the Plan were
frozen and all participants became fully vested. The prepaid pension cost at
December 31, 1999 and December 26, 1998, was included in other assets in the
accompanying combined balance sheets.
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4. SALES:
Coal sales to significant customers and the respective percentage of total coal
sales in fiscal years 1999 and 1998 were as follows:
1999 1998
---------------------------------- -------------------------------------
Amount % Amount %
------ --- ------ ---
Commonwealth Edison Company $ 197,570,749 82% $234,912,238 86%
PacifiCorp $ 25,528,430 11% $ 23,310,370 8%
5. COMMITMENTS:
Mineral Properties
The Company has acquired land, leases, or assignment of leases for approximately
58,427 acres of coal reserves. One agreement provides for royalty and overriding
royalty payments based on the tons of coal mined or sold from the various
properties, including certain minimum tons over the life of the agreements. The
Company has included an accrual of approximately $7 million in other non-current
liabilities for estimated potential additional amounts. These lease agreements
expire or are due for renegotiation from 2000 through 2006.
Sales Contracts
In prior years, the Company and Commonwealth Edison Company ("Commonwealth")
entered into various agreements which stipulated Commonwealth's coal purchase
and payment terms. On December 6, 1999, the Company and Commonwealth signed
amendments stipulating revised semi-monthly payment amounts in lieu of
Commonwealth's remaining purchase commitments. The semi-monthly payment amounts
are equal to the profit margin which would have been earned by the Company had
Commonwealth maintained their original purchase commitments. As a result of
these amendments, Commonwealth paid the Company $997,938 during 1999 for the
profit margin on a portion of December commitments. This amount was included in
contract cancellation payments in the 1999 combined statement of earnings. After
2000, all of Commonwealth's obligations to purchase coal from or make contract
settlement payments to the Company will terminate.
In addition to the cancellation of the Commonwealth purchase commitments
discussed above, during fiscal 1999 and 1998, the Company received $4,004,890
and $3,197,805, respectively, in consideration for the cancellation by another
customer of ten and eight months, respectively, of purchase commitments under a
sales contract.
The Company also has other sales commitments, including those with Sierra
Pacific, Solvay Minerals Inc., Idaho Power and PacifiCorp, that provide for the
delivery of approximately 18.2 million tons through 2005. On January 1, 1999,
the Company signed a seven-year agreement with Idaho Power and PacifiCorp to
provide for the delivery of up to 2.75 million tons per year through 2005, which
is included in the aforementioned sales commitments.
The sales contracts provide that the per ton sales price of coal will be
adjusted on a current basis for changes in indices and certain cost items.
Certain escalation costs are billed at the close of each contract year. In the
event that these customers do not fulfill the contractual responsibilities, the
Company would pursue the available legal remedies.
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In the opinion of management, the Company has sufficient coal reserves to cover
the above sales commitments. Sales to these customers account for substantially
all of the Company's revenue.
As the current sales agreements expire, a higher proportion of the Company's
sales will occur on the spot market where prices are substantially lower than
those in the aforementioned agreements.
6. TRANSACTIONS WITH RELATED PARTIES:
Management Fee
Under the terms of the joint venture agreement, a management fee is to be paid
to KCP for its costs of managing the Company. These fees were $1,381,534 and
$1,261,036 in fiscal 1999 and 1998, respectively. The management fee is three
percent of gross coal sales on mined coal and three percent of the margin on
coal purchased from an affiliate. Accrued management fees to KCP as of December
31, 1999 and December 26, 1998, were $88,418 and $111,274, respectively and are
included in accounts payable - affiliates in the accompanying combined balance
sheets.
Royalties
In connection with certain leases of mineral properties described in Note 5,
royalties of $2,286,237 and $2,062,138 in 1999 and 1998, respectively, were
earned by affiliates of the venturers and included in royalties expense in the
accompanying combined statements of earnings. Accrued royalties to affiliates of
the venturers as of December 31, 1999 and December 26, 1998 were $114,350 and
$242,118, respectively.
Purchased Coal
The Company purchased coal of approximately $26.2 million in 1999 and $20.2
million in 1998 from Decker Coal Company, which is partially owned by KCP.
Other
Other amounts due to affiliates of the Company for working capital and related
items and included in accounts payable - affiliates in the accompanying December
31, 1999 and December 26, 1998 combined balance sheets were $246,170 and
$605,877, respectively.
7. OTHER MATTERS:
The Minerals Management Service, an agency of the United States Interior
Department ("MMS") and the Montana Department of Revenue ("MDOR") have conducted
audits and issued assessments to a KCP affiliate (the "Supplier") for additional
royalties and production taxes, respectively, in connection with coal produced
and sold under contract to the Company prior to 1993. The MMS and MDOR claim
that the contracts were not at arm's length, and the Supplier appealed such
assessments. The Supplier has previously appealed to the Director of the MMS,
and intends to pursue additional appeals in the event of any adverse decisions
from the Director of the MMS, if and when that occurs. During 1998, a Montana
state district court ruled in favor of the MDOR. However, the Supplier appealed
that decision to the Montana Supreme Court, where the case is pending. At
December 31, 1999, the estimated additional royalties and production taxes
assessed by the MMS and MDOR that would affect the Company, including interest,
are approximately $13.4 million and $30.3 million, respectively. In the event of
any adverse outcome, the Supplier will obtain reimbursement from the Company
pursuant to certain indemnifications in the coal contract with such Supplier.
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The Company has not reflected any estimated liability related to any of these
assessments in its combined balance sheets or statements of earnings. Any
estimated liabilities related to these assessments are recorded in the
respective financial statements of the venture partners.
The Company is also involved in various lawsuits, claims, regulatory, and
environmental proceedings incidental to its business.
The Company previously insured for Black Lung disease with a captive insurance
company. This captive insurance company was liquidated in 1996. The Company is
now self-insured and has established an accrued liability of approximately
$658,000 for estimated claims for Black Lung as of December 31, 1999 and
December 26, 1998.