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EXHIBIT 99.2
BLACK BUTTE COAL COMPANY,
A JOINT VENTURE,
AND R-K LEASING COMPANY
Combined Financial Statements
As of December 27, 1997
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BLACK BUTTE COAL COMPANY, A JOINT VENTURE,
AND R-K LEASING COMPANY
COMBINED STATEMENT OF EARNINGS
FOR THE FISCAL YEAR ENDED DECEMBER 27, 1997
1997
------------
COAL SALES $178,746,106
OPERATING EXPENSES:
Mining and processing 17,278,100
Coal purchases 44,840,861
Royalties 4,043,837
Management fee 1,053,563
Production taxes and other taxes 5,249,360
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72,465,721
------------
MARGIN 106,280,385
CONTRACT CANCELLATION PAYMENTS 6,152,650
------------
Operating income 112,433,035
------------
OTHER INCOME (EXPENSE):
Interest income 116,254
Interest expense --
Gain on sale of equipment 685,998
Other 377,231
------------
1,179,483
------------
Net earnings $113,612,518
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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 SHEET
DECEMBER 27, 1997
ASSETS 1997
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CURRENT ASSETS:
Cash and cash equivalents $ 840,854
Accounts receivable:
Trade 16,091,779
Affiliates 28,911
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Total accounts receivable 16,120,690
Inventories:
Coal 3,031,151
Parts and supplies 139,475
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Total inventories 3,170,626
Stripping costs applicable to future periods 7,217,757
Other 179,171
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Total current assets 27,529,098
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PROPERTY, PLANT AND EQUIPMENT, at cost 181,961,729
Less: Accumulated depreciation and amortization 150,422,806
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Net property, plant and equipment 31,538,923
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DEFERRED DEVELOPMENT COSTS, less accumulated
amortization of $5,527,798 1,432,739
OTHER ASSETS 4,891,409
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$ 65,392,169
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LIABILITIES AND JOINT VENTURE AND PARTNERSHIP DEFICIT
CURRENT LIABILITIES:
Accounts payable:
Trade $ 10,267,367
Affiliates 1,081,010
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Total accounts payable 11,348,377
Current portion of accrued production taxes 2,233,400
Accrued royalties 537,246
Current portion of accrued reclamation costs 2,657,068
Other 294,069
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Total current liabilities 17,070,160
ACCRUED PRODUCTION TAXES 784,987
ACCRUED RECLAMATION AND OTHER MINING COSTS 51,560,450
OTHER NONCURRENT LIABILITIES --
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Total liabilities 69,415,597
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COMMITMENTS AND CONTINGENCIES
JOINT VENTURE AND PARTNERSHIP DEFICIT (4,023,428)
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$ 65,392,169
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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 YEAR ENDED DECEMBER 27, 1997
Bitter Creek Union Pacific
KCP, Inc. Coal Minerals Total
------------- ------------- ------------- -------------
BALANCE, December 28, 1996 $ 7,876,978 $ (6,557,291) $ 14,383,837 $ 15,703,524
Capital contributions 6,128,000 5,750,000 378,000 12,256,000
Net earnings (loss) 56,380,154 58,860,716 (1,628,352) 113,612,518
Withdrawals (72,391,062) (71,599,408) (1,605,000) (145,595,470)
------------- ------------- ------------- -------------
BALANCE, December 27, 1997 (2,005,930) (13,545,983) 11,528,485 (4,023,428)
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 STATEMENT OF CASH FLOWS
FOR THE FISCAL YEAR ENDED DECEMBER 27, 1997
1997
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 113,612,518
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization 7,314,101
(Gain) on sale of equipment (685,998)
Change in operating assets and liabilities:
Accounts receivable 9,641,166
Inventories 1,051,933
Stripping costs applicable to future periods 1,293,044
Other current assets 158,996
Other assets 734,216
Accounts payable 262,477
Accrued production taxes (394,314)
Accrued royalties (113,590)
Accrued reclamation and other mining costs 999,488
Other liabilities (724,830)
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Net cash provided by operating activities 133,149,207
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (615,781)
Proceeds from sale of equipment 720,402
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Net cash used in investing activities 104,621
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CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contributions by venture partners 12,256,000
Capital withdrawn by venture partners (145,595,470)
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Net cash used in financing activities (133,339,470)
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NET DECREASE IN CASH AND CASH EQUIVALENTS (85,642)
CASH AND CASH EQUIVALENTS, beginning of year 926,496
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CASH AND CASH EQUIVALENTS, end of year $ 840,854
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ --
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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 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 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.
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 is the later event. The partnership agreement provides for the
partners to share net earnings in proportion to each partner's interest in total
partnership capital.
The Company's coal is sold primarily to electric utilities, which burn coal in
order to generate steam to produce electricity. Approximately 89% of the
Company's coal sales were made under long-term contracts during fiscal year
1997. 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.
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.
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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% 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 generally consist of highly liquid instruments purchased with a
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 in order to expose coal reserves are
charged to operations when related coal is delivered.
Depreciation and Amortization
Depreciation on railroad spurs, buildings and improvements, mine facilities and
equipment is charged to operations based upon the ratio of tons of coal
delivered to total tons of coal estimated to be delivered through 2004.
Depreciation of other assets is provided on the straight-line method based upon
estimated useful lives of 2 to 10 years. In the case of disposals, the assets
and related accumulated depreciation and amortization are removed from the
accounts and the net amount, less proceeds from disposal, is charged or credited
to income.
Unrecovered 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 ration of tons of coal delivered to total tons of coal estimated to be
delivered through 2004.
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
in compliance with laws governing strip mining. It is at least reasonably
possible that the estimated cost of restoration will be revised in the
near-term.
Income Taxes
Provision for federal and state income taxes has not been made in the financial
statements since the liability is that of the venturers and partners and not
that of the joint venture and 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.
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Fiscal Year-end
The Company is on a 52-53 week fiscal year which ends on the last Saturday in
December. There were 52 weeks in 1997.
2. PROPERTY, PLANT AND EQUIPMENT:
A summary of property, plant and equipment cost at December 27, 1997 is as
follows:
1997
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Land $ 484,821
Railroad spurs 307,310
Buildings and improvements 12,967,458
Mine facilities 62,150,661
Mine equipment 105,316,879
Automobiles and trucks 504,566
Furniture, fixtures and office equipment 230,034
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$181,961,729
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3. PENSION PLAN:
The Company has an obligation to make contributions to the Black Butte Coal
Company Pension 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 1997. The net periodic pension cost
(benefit) at December 27, 1997 was as follows:
1997
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Service cost $ 20,000
Interest cost on projected benefit obligation 596,810
Actual return on plan assets (1,132,684)
Net amortization and deferral 466,338
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Net periodic pension benefit $ (49,536)
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The funded status of the Plan at December 27, 1997 was as follows:
1997
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Change in projected benefit obligation
Plan assets, at fair value $ 9,206,629
Projected benefit obligation 9,171,585
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Plan assets in excess of projected benefit obligation 35,044
Unrecognized net loss 1,732,000
Unrecognized transition asset (355,059)
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Prepaid pension costs $ 1,411,985
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The projected benefit obligation was determined using an assumed discount rate
of 7% in 1997, no increases in compensation were assumed. The expected long-term
rate of return on plan assets was 8% in 1997. At December 27, 1997, plan assets
were invested in guaranteed insurance contracts and mutual funds. On
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December 31, 1992, the Plan and all benefits under the Plan were frozen and all
participants became fully vested.
4. SALES:
Sales to significant customers were as follows:
1997
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Commonwealth Edison Company $145,814,000
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PacifiCorp $ 19,847,000
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Idaho Power $ 7,277,000
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Sierra Pacific $ 291,000
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Solvay Minerals Inc. $ 5,506,000
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5. COMMITMENTS:
Mineral Properties
The Company has acquired land, leases, or assignment of leases for approximately
58,427 acres of coal reserves. The various agreements provide for royalty and
overriding royalty payments based on the tons of coal mined or sold from the
various properties. These lease agreements expire or are due for renegotiation
from 1998 through 2006.
Sales Contracts
The Company and Commonwealth Edison Company ("Commonwealth") have entered into
various agreements which stipulated delivery and payment terms for the sale of
coal. The agreements, as amended effective January 1, 1993, provide for the
delivery of 40 million tons during the period 1998 through 2004, with annual
shipments ranging from 4 million to 10.4 million tons. This quantity included 12
million tons of coal reserves previously sold to Commonwealth.
To satisfy the delivery obligations for 1998-2004 under the renegotiated
Commonwealth agreements, the Company has agreed to buy coal from three mines,
two of which are unaffiliated mines located in the Powder River Basin area of
Wyoming and one which is an affiliate of KCP. These contracts call for the
Powder River Basin Mines to deliver 24 million tons of coal from 1998 to 2000
with annual amounts ranging from 6.5 to 10.4 million tons and for the affiliate
mine to deliver 2 million tons in 1998 and 1.8 million tons in 2000. The Company
expects to fulfill its obligations to deliver 12 million tons of coal during
2002 to 2004 by purchasing that coal from an alternate source mine, but no
agreement has yet been signed.
The Company also has other sales commitments, including those with Sierra
Pacific, Solvay Minerals Inc., Idaho Power and PacificCorp, that provide for the
delivery of approximately 5.8 million tons through 2005.
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.
In the opinion of management, the Company has sufficient coal reserves to cover
the above sales
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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. This fee was $1,053,563 in 1997.
The management fee is 3% of gross coal sales on mined coal and 3% of the margin
on coal purchased from an affiliate. Accrued management fees to KCP as of
December 27, 1997 were $185,981.
Royalties
In connection with certain leases described in Note 5(a), royalties of
$1,237,104 in 1997, were earned by affiliates of the venturers. Accrued
royalties to affiliates of the venturers as of December 27, 1997 were $129,135.
Engineering Service Fee:
Kiewit Mining Group, Inc. provides various engineering services to the Company.
The service fee for 1997 was $353,875.
Purchased Coal
The Company purchased coal of approximately $19.1 million from Decker in 1997.
7. OTHER MATTERS:
The Minerals Management Service has conducted an audit and issued an assessment
to a Decker which claims that there has been an underpayment of royalties for
coal sold by Decker to the Company . Pursuant to the contract between Decker and
the Company, the Company would reimburse Decker for these royalties. The
potential liability for royalties and interest approximate $11.8 million.
Additionally, the State of Montana Department of Revenue has issued assessments
to Decker which claim additional production taxes for coal sold by Decker to the
Company. Pursuant to the contract between Decker and the Company, the Company
would reimburse Decker for these production taxes. The potential liability for
production taxes and interest approximates $26. Million. Decker is vigorously
contesting these assessments.
The Company is also involved in various lawsuits, claims, regulatory, and
environmental proceedings incidental to its business
Management believes that nay resulting liability from the above matters should
not materially affect the Company's financial position, but could, however, have
a material effect on future results of operations and future cash flows.
In 1997, the Company issued letters of credit to a lessor amounting to
$1,115,000.
The Company previously insured for Black Lung disease with a captive insurance
company. This captive insurance company was liquidated in 1996, whereupon the
Company received a refund of premiums paid, plus interest totaling $8,202,126.
The Company is now self-insured and has set up a reserve of $657,862 for
estimated claims for Black Lung. It is at least reasonably possible that this
claims estimate will be revised in
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the near-term. The difference between the refund received and the reserve
established has been reflected as "Insurance costs refunded, net" in the
Statement of Earnings.
The Company established a reserve for certain non-mobile assets that are not
considered salable. As of December 27, 1997 the reserve was $3,136,000, which is
included in noncurrent accrued reclamation and other mining costs.
In 1997 the Company received $6,152,650 in consideration for the cancellation by
a customer of one year of purchase commitments under a sales contract.