EXHIBIT 99
FINANCIAL STATEMENTS
Canyon Fuel Company, LLC
Years Ended December 31, 2002, 2001 and 2000
Canyon Fuel Company, LLC
Financial Statements
Years Ended December 31, 2002, 2001 and 2000
CONTENTS
<Table>
Report of Independent Auditors.......................................... 1
Financial Statements
Statements of Operations................................................ 2
Balance Sheets.......................................................... 3
Statements of Members' Equity........................................... 4
Statements of Cash Flows................................................ 5
Notes to Financial Statements........................................... 6
</Table>
Report of Independent Auditors
The Members of Canyon Fuel Company, LLC
We have audited the accompanying balance sheets of Canyon Fuel Company, LLC (a
Delaware limited liability company) (the Company) as of December 31, 2002 and
2001, and the related statements of operations, members' equity and cash flows
for each of the three years in the period ended December 31, 2002. These
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 auditing standards generally accepted
in the United States. 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 financial statements referred to above present fairly, in
all material respects, the financial position of Canyon Fuel Company, LLC at
December 31, 2002 and 2001, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2002 in conformity
with accounting principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
St. Louis, Missouri
January 22, 2003
1
Canyon Fuel Company, LLC
Statements of Operations
(In Thousands)
<Table>
<Caption>
YEAR ENDED DECEMBER 31
2002 2001 2000
--------- --------- ---------
Revenues:
Coal sales $ 249,885 $ 301,261 $ 258,513
Other revenues 440 648 588
--------- --------- ---------
250,325 301,909 259,101
Costs and expenses:
Cost of coal sales 235,030 241,087 215,785
Amortization of coal supply agreements 4,110 17,113 19,857
Fees to members 10,321 8,950 8,029
Write-down of impaired assets -- 10,134 --
--------- --------- ---------
249,461 277,284 243,671
--------- --------- ---------
Income from operations 864 24,625 15,430
Interest income, net:
Interest expense (1) -- (140)
Interest income 137 1,401 585
--------- --------- ---------
136 1,401 445
--------- --------- ---------
Net income $ 1,000 $ 26,026 $ 15,875
========= ========= =========
</Table>
The accompanying notes are an integral part of the financial statements.
2
Canyon Fuel Company, LLC
Balance Sheets
(In Thousands)
<Table>
<Caption>
DECEMBER 31
2002 2001
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 84 $ 2,615
Trade accounts receivable 23,670 37,116
Other receivables 7,466 8,351
Inventories 27,428 21,530
Other 5,717 3,572
--------- ---------
Total current assets 64,365 73,184
Property, plant and equipment:
Coal lands and mineral rights 277,656 273,916
Plant and equipment 258,334 241,570
Deferred mine development 45,460 36,366
--------- ---------
581,450 551,852
Less accumulated depreciation, depletion and
amortization (256,331) (218,236)
--------- ---------
Property, plant and equipment, net 325,119 333,616
Other assets:
Prepaid royalties 19,168 22,139
Coal supply agreements 2,243 6,353
Other -- 16
--------- ---------
Total other assets 21,411 28,508
--------- ---------
Total assets $ 410,895 $ 435,308
========= =========
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Accounts payable $ 23,578 $ 21,470
Accrued expenses 6,643 8,060
--------- ---------
Total current liabilities 30,221 29,530
Accrued postretirement benefits other than pension 8,237 7,722
Accrued reclamation and mine closure 4,851 4,247
Accrued workers' compensation 5,636 6,352
Other noncurrent liabilities 6,411 5,730
--------- ---------
Total liabilities 55,356 53,581
Members' equity 355,539 381,727
--------- ---------
Total liabilities and members' equity $ 410,895 $ 435,308
========= =========
</Table>
The accompanying notes are an integral part of the financial statements.
3
Canyon Fuel Company, LLC
Statements of Members' Equity
(In Thousands)
Years Ended December 31, 2002, 2001 and 2000
<Table>
<Caption>
ITOCHU
ARCH WESTERN COAL
RESOURCES, INTERNATIONAL
LLC INC. TOTAL
------------ ------------- ---------
Members' equity, January 1, 2000 $ 289,048 $ 155,640 $ 444,688
Contributions 17,550 9,450 27,000
Distributions (41,448) (22,318) (63,766)
Net income 10,319 5,556 15,875
--------- --------- ---------
Members' equity, December 31, 2000 275,469 148,328 423,797
Comprehensive income:
Net income 16,917 9,109 26,026
Minimum pension liability
adjustment (2,043) (1,100) (3,143)
--------- --------- ---------
Total comprehensive income 14,874 8,009 22,883
Contributions 18,200 9,800 28,000
Distributions (60,419) (32,534) (92,953)
--------- --------- ---------
Members' equity, December 31, 2001 248,124 133,603 381,727
Comprehensive income:
Net income 650 350 1,000
Minimum pension liability
adjustment (551) (296) (847)
--------- --------- ---------
Total comprehensive income 99 54 153
Contributions 23,400 12,600 36,000
Distributions (40,522) (21,819) (62,341)
--------- --------- ---------
Members' equity, December 31, 2002 $ 231,101 $ 124,438 $ 355,539
========= ========= =========
</Table>
The accompanying notes are an integral part of the financial statements.
4
Canyon Fuel Company, LLC
Statements of Cash Flows
(In Thousands)
<Table>
<Caption>
YEAR ENDED DECEMBER 31
2002 2001 2000
--------- --------- ---------
OPERATING ACTIVITIES
Net income $ 1,000 $ 26,026 $ 15,875
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation, depletion and amortization 45,993 66,383 62,005
Prepaid royalties expensed 5,434 5,884 3,424
Net (gain) loss on disposition of assets 148 (12) 25
Write-down of impaired assets -- 10,134 --
Changes in operating assets and
liabilities 9,526 (6,855) (8,160)
Other (2,506) (620) (514)
--------- --------- ---------
Cash provided by operating activities 59,595 100,940 72,655
INVESTING ACTIVITIES
Additions to property, plant and equipment (33,496) (31,593) (28,161)
Proceeds from dispositions of property,
plant and equipment 174 12 148
Additions to prepaid royalties (2,463) (1,805) (7,243)
--------- --------- ---------
Cash used in investing activities (35,785) (33,386) (35,256)
FINANCING ACTIVITIES
Members' contributions 36,000 28,000 27,000
Cash distributions to members (62,341) (92,953) (63,766)
Payment on other noncurrent liabilities -- -- (1,055)
--------- --------- ---------
Cash used in financing activities (26,341) (64,953) (37,821)
--------- --------- ---------
Increase (decrease) in cash and cash
equivalents (2,531) 2,601 (422)
Cash and cash equivalents, beginning of
year 2,615 14 436
--------- --------- ---------
Cash and cash equivalents, end of year $ 84 $ 2,615 $ 14
========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for interest $ 1 $ 10 $ 281
========= ========= =========
</Table>
The accompanying notes are an integral part of the financial statements.
5
Canyon Fuel Company, LLC
Notes to Financial Statements
December 31, 2002
1. THE COMPANY
Canyon Fuel Company, LLC (the Company) is a joint venture between Arch Western
Resources, LLC (Arch Western) (65% ownership) and ITOCHU Coal International Inc.
(ITOCHU) (35% ownership). The owners of the Company are referred to herein as
the "Members." The Company owns an approximate 9% interest in Los Angeles Export
Terminal, Inc. (LAXT).
The Company operates one reportable segment: the production of steam coal from
deep mines in Utah for sale primarily to utility companies in the United States.
Net profits and losses and distributions of the Company's earnings are allocated
to the Members based on their respective ownership percentage.
2. ACCOUNTING POLICIES
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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 and cash equivalents are stated at cost, which approximates fair value.
Cash equivalents consist of highly liquid investments with an original maturity
of three months or less when purchased.
6
2. ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Inventories consist of the following:
<Table>
<Caption>
DECEMBER 31
2002 2001
------- -------
(In Thousands)
Coal $18,342 $12,537
Supplies, net of allowance 9,086 8,993
------- -------
$27,428 $21,530
======= =======
</Table>
Coal inventory is valued using the first-in, first-out (FIFO) cost method and is
stated at the lower of cost or market. Coal inventory costs include labor,
equipment costs and operating overhead. Supplies are valued using the average
cost method and are stated at the lower of cost or market. The Company has
recorded a valuation allowance for slow-moving and obsolete supplies inventories
of $35 thousand at December 31 for both 2002 and 2001.
COAL ACQUISITION COSTS AND PREPAID ROYALTIES
Coal lease rights obtained through acquisition are capitalized and amortized
primarily by the units-of-production method over the estimated recoverable
reserves. Amortization occurs as the Company mines on the property. Rights to
leased coal lands are often acquired through royalty payments. Where royalty
payments represent prepayments recoupable against future production, they are
capitalized. As mining occurs on these leases, the prepayment is charged to cost
of coal sales.
7
2. ACCOUNTING POLICIES (CONTINUED)
COAL SUPPLY AGREEMENTS
Acquisition costs related to coal supply agreements are capitalized and
amortized on the basis of coal to be shipped over the term of the contract.
Value is allocated to coal supply agreements based on discounted cash flows
attributable to the difference between the above-market contract price and the
then-prevailing market price. Accumulated amortization for sales contracts was
$25.2 million and $91.9 million at December 31, 2002 and 2001, respectively. In
2002, the Company wrote off $70.8 million of sales contract assets and
accumulated amortization related to an expired contract that was fully
amortized.
EXPLORATION COSTS
Costs related to locating coal deposits and determining the economic minability
of such deposits are expensed as incurred.
PROPERTY, PLANT AND EQUIPMENT
Additions to property, plant and equipment are recorded at cost. Maintenance and
repair costs are expensed as incurred. Mine development costs are capitalized
and amortized on the units-of-production method over the estimated recoverable
reserves that are associated with the property being benefited. Proceeds from
the sale of coal mined as a by-product of development activities are not
included in coal sales but are accounted for as a reduction of the amount
capitalized. Depletion of mineral properties is computed on the
units-of-production method over the estimated recoverable coal reserves of the
property being mined. At December 31, 2002, all mineral reserves of the Company
that are capitalized are being amortized on the units-of-production method
through Company operations.
Depreciation and amortization of other property, plant and equipment are
computed by the straight-line method over the expected lives of the assets,
which range from 3 to 19 years. Fully depreciated assets are retained in
property and accumulated depreciation accounts until they are removed from
service. Upon disposal of depreciated assets, residual cost less salvage value
is included in the determination of current income.
8
2. ACCOUNTING POLICIES (CONTINUED)
ASSET IMPAIRMENT
If facts and circumstances suggest that a long-lived asset may be impaired, the
carrying value is reviewed. If this review indicates that the value of the asset
will not be recoverable, as determined based on projected undiscounted cash
flows related to the asset over its remaining life, then the carrying value of
the asset is reduced to its estimated fair value. As described in Note 3, the
Company wrote off the value of its investment in LAXT during 2001.
RECLAMATION AND MINE CLOSING COSTS
The Company charges current reclamation costs to expense as incurred. Final
reclamation costs, including dismantling and restoration, are estimated based
upon current federal and state regulatory requirements and are accrued during
operations using the units-of-production method on the basis of estimated costs
as of the balance sheet date. The effect of changes in estimated costs and
production is recognized on a prospective basis.
The Company is not aware of any events of noncompliance with environmental laws
and regulations. The exact nature of environmental issues and costs, if any,
which the Company may encounter in the future cannot be predicted, primarily
because of the changing character of environmental requirements that may be
enacted by governmental agencies.
As discussed in Note 10, in 2003, the Company will begin accounting for its
final mine closure reclamation liabilities in accordance with FAS 143,
Accounting for Asset Retirement Obligations.
ACCRUED WORKERS' COMPENSATION COSTS
The Company is liable under the federal Mine Safety and Health Act of 1977, as
amended, to provide for pneumoconiosis (black lung) benefits to eligible
employees, former employees and dependents with respect to claims filed by such
persons on or after July 1, 1973. The Company is also liable under state
statutes for black lung benefits. The Company currently provides for federal and
state claims principally through a self-insurance program. Charges are being
made to operations as determined by independent actuaries, at the present value
of the actuarially computed present and future liabilities for such benefits
over the employees' applicable years of service. In addition, the Company is
liable for traumatic injuries which are accrued as injuries are incurred.
9
2. ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
Coal sales revenues include sales to customers of coal produced at Company
operations (except for coal that is produced as the by-product of development
activities) and coal purchased from other companies. The Company recognizes
revenue from coal sales at the time title passes to the customer. Transportation
costs that are billed by the Company and reimbursed to the transportation
provider are included in coal sales and cost of coal sales. Revenues from
sources other than coal sales, including gains and losses from dispositions of
long-term assets, are included in other revenues and are recognized as performed
or otherwise earned.
INCOME TAXES
The financial statements do not include a provision for income taxes, as the
Company is treated as a partnership for income tax purposes and does not incur
federal or state income taxes. Instead, its earnings and losses are included in
the Members' separate income tax returns.
COMPREHENSIVE INCOME
The Company reports comprehensive income in its statements of members' equity.
Comprehensive income represents changes in Members' equity from non-owner
sources. For the years ended December 31, 2002 and 2001, minimum pension
liability adjustments were the only item of other comprehensive income.
<Table>
<Caption>
YEAR ENDED DECEMBER 31
2002 2001
-------- --------
(In Thousands)
Net income (as reported) $ 1,000 $ 26,026
Minimum pension liability adjustment (847) (3,143)
-------- --------
Total comprehensive income $ 153 $ 22,883
======== ========
</Table>
10
2. ACCOUNTING POLICIES (CONTINUED)
DERIVATIVE INSTRUMENTS
Statement of Financial Accounting Standards (FAS) 133, Accounting for Derivative
Instruments and Hedging Activity, was effective on January 1, 2001. FAS 133
requires all derivative financial instruments to be reported on the balance
sheet at fair value. Changes in fair value are recognized either in earnings or
equity, depending on the nature of the underlying exposure being hedged and how
effective the derivative is at offsetting price movements in the underlying
exposure. As required, the Company adopted FAS 133 on January 1, 2001. The
Company did not have any financial instruments which qualified as derivatives
under FAS 133, and therefore, there was no impact to the Company as a result of
the adoption of FAS 133.
3. NON-RECURRING INCOME AND EXPENSES
During 2002, the Company was notified by the Bureau of Land Management that it
would receive a royalty rate reduction for certain tons mined at its Skyline
mine. The rate reduction applies to certain tons mined from September 1, 2001
through September 1, 2006. The retroactive portion of the refund totaled $1.7
million and has been recognized in 2002 as a reduction in cost of coal sales in
the statement of operations.
The Company owns an approximate 9% interest in LAXT which the Company has
included in property, plant and equipment. LAXT began operations in 1997 and has
experienced operating losses and negative cash flows since its inception,
principally due to weak demand for U.S. coal exports to the Pacific Rim
countries. During 2001, due to continuing weakness in the export coal market,
LAXT's financial condition was not going to allow it to make its Minimum Annual
Guarantee Rental Payment owed to the Port of Los Angeles, and several
significant owners of LAXT indicated an unwillingness to provide additional
funding to LAXT. The Company believed these events represented indicators of
impairment under the provisions of FAS 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. Based on this,
the Company determined that assets with a carrying value of $10.1 million did
not have any future value to the Company and therefore were written off. In
addition, the Company had a $2.3 million note receivable from LAXT which it no
longer expected to realize and wrote off during 2001.
11
3. NON-RECURRING INCOME AND EXPENSES (CONTINUED)
During 2001, the Company received notification that contested property tax
valuations from 1998 and 1999 were settled in the Company's favor. The Company
recognized $4.5 million of income in 2001, which is the amount refunded by the
state of Utah to the Company. In addition, the Internal Revenue Service issued a
notice during 2000 outlining the procedures for obtaining tax refunds on certain
excise taxes paid by the industry on export sales tonnage. The notice is a
result of a 1998 Federal District Court decision that found such taxes to be
unconstitutional. As a result of processing these claims during 2001, the
Company recorded $2.2 million of income related to these excise tax recoveries.
4. ACCRUED EXPENSES
Accrued expenses included in current liabilities consist of the following:
<Table>
<Caption>
DECEMBER 31
2002 2001
------ ------
(In Thousands)
Payroll and related benefits $1,486 $2,188
Pension 866 2,118
Postretirement benefits other than pension 147 359
Taxes other than income taxes 988 1,104
Workers' compensation 551 411
Other accrued expenses 2,605 1,880
------ ------
$6,643 $8,060
====== ======
</Table>
12
5. EMPLOYEE BENEFIT PLANS
DEFINED BENEFIT PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
Essentially all of the Company's employees are covered by a defined benefit
pension plan sponsored by the Company. The benefits are based on years of
service and the employee's compensation, primarily during the last five years of
service. The funding policy for the pension plan is to make annual contributions
as required by applicable regulations.
The Company also provides certain postretirement medical and life insurance
benefits to substantially all employees who retire with the Company. The Company
has the right to modify the plans at any time. The Company's current policy is
to fund the cost of postretirement medical and life insurance benefits as they
are paid.
13
5. EMPLOYEE BENEFIT PLANS (CONTINUED)
Summaries of the changes in the benefit obligation and plan assets (primarily
listed stocks and debt securities) and of the funded status of the plans follow:
<Table>
<Caption>
OTHER POSTRETIREMENT
PENSION BENEFITS BENEFITS
--------------------- ---------------------
2002 2001 2002 2001
-------- -------- -------- --------
(In Thousands)
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at January 1 $ 14,070 $ 10,254 $ 5,479 $ 5,785
Service cost 2,170 1,951 471 316
Interest cost 1,005 810 415 393
Benefits paid (425) (226) (146) (380)
Plan amendments -- 11 -- --
Other - primarily actuarial (gain) loss (350) 1,270 575 (635)
-------- -------- -------- --------
Benefit obligation at December 31 $ 16,470 $ 14,070 $ 6,794 $ 5,479
======== ======== ======== ========
CHANGE IN PLAN ASSETS
Value of plan assets at January 1 $ 7,868 $ 7,188 $ -- $ --
Actual return on plan assets (loss) (995) (342) -- --
Employer contributions 4,200 1,248 146 380
Benefits paid (425) (226) (146) (380)
-------- -------- -------- --------
Value of plan assets at December 31 $ 10,648 $ 7,868 $ -- $ --
======== ======== ======== ========
FUNDED STATUS OF THE PLANS
Accumulated obligations less plan assets $ 5,822 $ 6,202 $ 6,794 $ 5,479
Unrecognized actuarial gain (loss) (5,267) (4,434) 615 1,438
Unrecognized prior service cost 311 350 975 1,164
-------- -------- -------- --------
Net liability recognized $ 866 $ 2,118 $ 8,384 $ 8,081
======== ======== ======== ========
BALANCE SHEET LIABILITIES
Minimum pension liability adjustment $ (3,990) $ (3,143) $ -- $ --
Accrued benefit liabilities 4,856 5,261 8,384 8,081
-------- -------- -------- --------
Net liability recognized 866 2,118 8,384 8,081
Less current portion 866 2,118 147 359
-------- -------- -------- --------
Long-term liability $ -- $ -- $ 8,237 $ 7,722
======== ======== ======== ========
</Table>
14
5. EMPLOYEE BENEFIT PLANS (CONTINUED)
Demographic and assumption changes under the defined benefit pension plan
resulted in a $350,000 gain in 2002 and a $1,270,000 loss in 2001. The decrease
in the funded status of pension benefits in the year 2002 resulted from
decreased earnings on plan assets during the year. FAS 87, Employers' Accounting
for Pensions, contains a minimum liability provision that requires, in some
situations, that an employer recognize an "additional minimum liability" in the
balance sheet without a corresponding charge to earnings. To the extent an
additional minimum liability is required, a corresponding reduction in equity
may also be recognized. Demographic and assumption changes in other
postretirement benefits resulted in the $575,000 loss in 2002 and $635,000 gain
in 2001.
<Table>
<Caption>
OTHER POSTRETIREMENT
PENSION BENEFITS BENEFITS
--------------------- ----------------------
2002 2001 2002 2001
-------- -------- --------- --------
Weighted average assumptions as of
December 31:
Discount rate 7.00% 7.50% 7.00% 7.50%
Rate of compensation increase 4.25% 4.50% N/A N/A
Expected return on plan assets 9.00% 9.00% N/A N/A
Health care cost trend on covered
charges N/A N/A 7.50-5.00% 5.00%
</Table>
The following table details the components of pension and other postretirement
benefit costs:
<Table>
<Caption>
PENSION BENEFITS OTHER POSTRETIREMENT BENEFITS
------------------------------- -------------------------------
2002 2001 2000 2002 2001 2000
------- ------- ------- ------- ------- -------
(In Thousands)
Service cost $ 2,170 $ 1,951 $ 1,760 $ 471 $ 316 $ 271
Interest cost 1,005 810 591 415 393 542
Expected return on plan
assets (899) (660) (648) -- -- --
Other amortization and
deferral 672 642 391 (437) (548) (208)
Curtailments -- -- -- -- -- (443)
------- ------- ------- ------- ------- -------
$ 2,948 $ 2,743 $ 2,094 $ 449 $ 161 $ 162
======= ======= ======= ======= ======= =======
</Table>
15
5. EMPLOYEE BENEFIT PLANS (CONTINUED)
The health care cost trend rate assumption has a significant effect on the
amounts reported. However, as the employer contribution cap was reached, the
impact of health care cost trend rate changes is not material.
OTHER PLANS
The Company sponsors a 401(k) savings plan which was established to assist
eligible employees in providing for their future retirement needs. The savings
plan matches a certain percentage of employee contributions. The Company's
contribution to the savings plan was $1.6 million in 2002 and $1.4 million in
2001.
6. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
The Company places its cash equivalents in investment-grade short-term
investments and limits the amount of credit exposure to any one commercial
issuer.
The Company markets its coal principally to electric utilities in the United
States. Generally, credit is extended based on an evaluation of the customer's
financial condition, and collateral is not generally required. Credit losses are
provided for in the financial statements and historically have been minimal.
The Company is committed under long-term contracts to supply coal that meets
certain quality requirements at specified prices. These prices are generally
adjusted based on indices. Quantities sold under some of these contracts may
vary from year to year within certain limits at the option of the customer.
Intermountain Power Agency accounted for approximately 29%, 36% and 44% of coal
sales in 2002, 2001 and 2000, respectively. This same customer accounted for 20%
and 31% of accounts receivable at December 31, 2002 and 2001, respectively.
Sierra Pacific accounted for approximately 24%, 20% and 17% of coal sales in
2002, 2001 and 2000, respectively. Pacificorp accounted for approximately 15%
and 8% of coal sales in 2002 and 2001, respectively. Approximately 7%, 13% and
14% of coal sales in 2002, 2001 and 2000, respectively, were export sales to
Japanese customers.
16
7. RELATED PARTY TRANSACTIONS
As described in Note 1, 65% of the Company is owned by Arch Western. Arch
Western acts as the Company's managing Member. The Company pays administration
and production fees to Arch Western for managing the Company's operations. In
addition, the Company pays certain additional management fees to ITOCHU, its 35%
owner. These fees to Members were $10.3 million, $8.9 million and $8.0 million
in 2002, 2001 and 2000, respectively. The Company has a payable balance to its
Members of $6.4 million and $2.8 million at December 31, 2002 and 2001,
respectively.
8. COMMITMENTS AND CONTINGENCIES
In October 2002, the Company entered into a long-term operating lease for
longwall equipment to be used at its Dugout mine. The lease contains options
that would allow the Company to purchase the longwall at amounts approximating
fair market value. Assuming the Company does not exercise these options, the
lease will terminate on October 1, 2009. Rental expense was $1.5 million in
2002, and $0.6 million in 2001 and 2000, respectively.
The Company has entered into various noncancelable royalty lease agreements and
federal lease bonus payments under which future minimum payments are due. In May
2001, the Company was the successful bidder in a state auction of certain mining
rights in the 2,560-acre Dugout tract in Carbon County, Utah. The Company's
lease bid amounted to $1.0 million for the tract, of which $100 thousand was
paid in each of the years 2002 and 2001, respectively. The Company will make
payments of $100 thousand in each of the years 2003 and 2004 and $120 thousand
in each of the years 2005 through 2009. The tract contains approximately 6
million tons of demonstrated coal reserves and is contiguous to the Company's
Dugout mine. In May 1999, the Company was the successful bidder in a federal
auction of certain mining rights in the 7,172-acre Pines tract in Sevier and
Emory Counties in Utah. The Company's lease bonus bid amounted to $16.9 million
for the tract, of which $3.4 million was paid on May 24, 1999 and an additional
$3.4 million was paid in each of the years 2002, 2001 and 2000, respectively.
The tract contains approximately 48 million tons of demonstrated coal reserves
and is contiguous with the Company's Sufco mine. Geological surveys indicate
that there are sufficient reserves relative to these properties to permit
recovery of the Company's investment. Minimum payments due in future years under
lease agreements (including the Dugout and Pines tract leases) are $6.8 million
in 2003, $3.4 million in 2004, $3.0 million in 2005, $2.9 million in 2006, $3.1
million in 2007 and $9.2 million thereafter.
17
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company was in litigation with Skyline Partners, lessors of the coal
reserves which comprise the Company's Skyline mine. The coal leases required the
Company to make annual advance minimum royalty payments which are fully
recoupable against a production royalty that is to be paid by the Company on
each ton of coal mined and sold from the leaseholds. In 1997, the Company filed
suit against Skyline Partners in Utah State Court alleging that the Company was
not required to make the final minimum advance royalty payment. On February 24,
2000, the Company and Skyline Partners reached an agreement to settle the
litigation. The settlement includes a $7.2 million recoupable payment by the
Company to Skyline Partners which was recorded as a prepaid royalty in 2000 and
a grant of an overriding royalty interest to Skyline Partners covering land
adjacent to the Skyline mine reserves.
The Company is also the subject of or party to a number of other pending or
threatened legal actions. On the basis of management's best assessment of the
likely outcome of these actions, expenses or judgments arising from any of these
suits are not expected to have a material adverse effect on the Company's
operations, financial position or cash flows.
9. CASH FLOW
The changes in operating assets and liabilities as shown in the statements of
cash flows are comprised of the following:
<Table>
<Caption>
2002 2001 2000
-------- -------- --------
(In Thousands)
Decrease (increase) in operating assets:
Receivables $ 14,330 $ (1,734) $(10,264)
Inventories (5,898) (1,139) 5,039
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses 691 (3,605) (3,930)
Accrued postretirement benefits other than
pension 515 (497) --
Accrued reclamation and mine closure 604 598 369
Accrued workers' compensation (716) (478) 626
-------- -------- --------
$ 9,526 $ (6,855) $ (8,160)
======== ======== ========
</Table>
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10. ACCOUNTING DEVELOPMENT
Effective January 1, 2003, the Company adopted FAS 143. FAS 143 requires legal
obligations associated with the retirement of long-lived assets to be recognized
at their fair value at the time the obligations are incurred. Upon initial
recognition of a liability, that cost should be capitalized as part of the
related long-lived asset and allocated to expense over the useful life of the
asset. Application of the new rules will result in a cumulative effect of
adoption that will decrease net income and members' equity by approximately $1
million to $4 million.
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