EXHIBIT 99.1
RAG COLORADO BUSINESS UNIT (A WHOLLY OWNED
BUSINESS UNIT OF RAG AMERICAN COAL COMPANY)
Combined Financial Statements
Years ended December 31, 2003, 2002 and 2001 with Report of Independent
Auditors
RAG Colorado Business Unit
(A Wholly Owned Business Unit of RAG American Coal Company)
Combined Financial Statements
Years ended December 31, 2003, 2002 and 2001
CONTENTS
Report of Independent Auditors............................................ 1
Audited Combined Financial Statements
Combined Balance Sheets....................................................2
Combined Statements of Operations..........................................3
Combined Statements of Stockholders' Equity................................4
Combined Statements of Cash Flows..........................................5
Notes to Combined Financial Statements.....................................6
[ERNST & YOUNG LOGO] - Ernst & Young LLP - Phone: (410) 539-7940
621 East Pratt Street Fax: (410) 783-3832
Baltimore, MD 21202 www.ey.com
Report of Independent Auditors
The Board of Directors and Stockholders
RAG American Coal Company
We have audited the combined balance sheets of the RAG Colorado Business Unit
(as defined in Note 1 to the Combined Financial Statements) as of December 31,
2003 and 2002, and the related combined statements of operations, stockholder's
equity, and cash flows for each of the three years in the period ended December
31, 2003. These financial statements are the responsibility of the Business
Unit's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
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 combined financial position of the RAG Colorado
Business Unit at December 31, 2003 and 2002, and the combined results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2003, in conformity with accounting principles generally accepted
in the United States.
ERNST & YOUNG LLP
February 23, 2004
1
RAG Colorado Business Unit
(A Wholly Owned Business Unit of RAG American Coal Company
as defined in Note 1 to the Combined Financial Statements)
Combined Balance Sheets
DECEMBER 31
2003 2002
----------------------------
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 14 $ 14
Trade accounts receivable (Note 15) 9,934 11,034
Inventories, net (Note 3) 13,597 12,882
Deferred income taxes (Note 9) 623 260
Other current assets (Note 4) 2,763 3,793
--------- ---------
Total current assets 26,931 27,983
Owned surface lands and coal reserves, net (Note 5) 26,094 31,785
Plant and equipment, net (Note 5) 49,151 58,156
Leaseholds in coal reserves, net (Note 5) 89,806 98,757
Other noncurrent assets (Note 6) 909 1,550
--------- ---------
Total assets $ 192,891 $ 218,231
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Trade accounts payable $ 2,498 $ 3,296
Due to Parent (Note 17) 10,979 2,956
Accrued expenses and other current liabilities (Note 7) 10,308 10,791
--------- ---------
Total current liabilities 23,785 17,043
Deferred income taxes (Note 9) 26,835 27,160
Asset retirement obligations (Notes 2 and 16) 6,770 6,275
Other noncurrent liabilities (Note 8) 4,250 3,769
--------- ---------
Total liabilities 61,640 54,247
Commitments and contingencies (Notes 9, 10, 11, 12, 13, 15, and
16) -- --
Stockholder's equity:
Common stock, $2.922 average per share par value. Authorized
11,200 shares; 10,300 shares issued and outstanding (Note 18) 30 30
Additional paid-in capital 152,653 180,567
Accumulated deficit (21,432) (16,613)
--------- ---------
Total stockholder's equity 131,251 163,984
--------- ---------
Total liabilities and stockholder's equity $ 192,891 $ 218,231
========= =========
See accompanying notes.
2
RAG Colorado Business Unit
(A Wholly Owned Business Unit of RAG American Coal Company
as defined in Note 1 to the Combined Financial Statements)
Combined Statements of Operations
YEAR ENDED DECEMBER 31
2003 2002 2001
--------- --------- ---------
(In thousands)
Revenues:
Coal sales $ 146,514 $ 136,468 $ 146,434
Other revenues (Note 14) 329 3,250 862
--------- --------- ---------
146,843 139,718 147,296
Costs and expenses:
Cost of coal sales 104,369 101,595 106,418
Selling, general and administrative
expenses 1,956 1,996 1,842
Depreciation, depletion and
amortization 23,668 21,813 23,755
--------- --------- ---------
129,993 125,404 132,015
--------- --------- ---------
Income from operations 16,850 14,314 15,281
Interest expense (2) -- --
Interest income 47 150 207
Other income, net (Note 14) 19 217 1,877
--------- --------- ---------
Income before income tax expense 16,914 14,681 17,365
Income tax expense 6,438 5,603 6,567
--------- --------- ---------
Income before accounting changes 10,476 9,078 10,798
Cumulative effect of accounting
change, net of taxes (2,087) -- --
--------- --------- ---------
Net income $ 8,389 $ 9,078 $ 10,798
========= ========= =========
See accompanying notes.
3
RAG Colorado Business Unit
(A Wholly Owned Business Unit of RAG American Coal Company
as defined in Note 1 to the Combined Financial Statements)
Combined Statements of Stockholders' Equity
TOTAL
SHARES OF ADDITIONAL PAID- ACCUMULATED STOCKHOLDER'S
COMMON STOCK COMMON STOCK IN CAPITAL DEFICIT EQUITY
------------ ------------ ---------------- ----------- -------------
In thousands, except share data)
Balance, January 1, 2001 10,300 $ 30 $ 207,098 $ (797) $ 206,331
Return of capital to Parent -- settlement of intercompany
accounts -- -- (23,377) -- (23,377)
Dividends paid to Parent -- -- -- (18,573) (18,573)
Net income -- -- -- 10,798 10,798
------ --------- --------- --------- ---------
Balance, December 31, 2001 10,300 30 183,721 (8,572) 175,179
Return of capital to Parent -- settlement of intercompany
accounts -- -- (3,154) -- (3,154)
Dividends paid to Parent -- -- -- (17,119) (17,119)
Net income -- -- -- 9,078 9,078
------ --------- --------- --------- ---------
Balance, December 31, 2002 10,300 30 180,567 (16,613) 163,984
Return of capital to Parent -- settlement of intercompany
accounts -- -- (27,914) -- (27,914)
Dividends paid to Parent -- -- -- (13,208) (13,208)
Net income -- -- -- 8,389 8,389
------ --------- --------- --------- ---------
Balance, December 31, 2003 10,300 $ 30 $ 152,653 $ (21,432) $ 131,251
====== ========= ========= ========= =========
See accompanying notes.
4
RAG Colorado Business Unit
(A Wholly Owned Business Unit of RAG American Coal Company
as defined in Note 1 to the Combined Financial Statements)
Combined Statements of Cash Flows
YEAR ENDED DECEMBER 31
2003 2002 2001
-------- -------- --------
(In thousands)
OPERATING ACTIVITIES
Net income $ 8,389 $ 9,078 $ 10,798
Cumulative effect of accounting change, net of
taxes 2,087 -- --
-------- -------- --------
Income before accounting changes 10,476 9,078 10,798
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, depletion and amortization 23,668 21,813 23,755
Gain on sale of assets (140) (49) (1,710)
Deferred income taxes 590 1,910 2,898
Increase in due to parent (33,099) (18,506) (36,944)
Changes in operating assets and liabilities:
Trade accounts receivable 1,100 (37) 3,212
Inventories (715) (3,613) 3,610
Other current assets 1,030 (656) (997)
Noncurrent assets 641 (37) 574
Trade accounts payable (798) 540 734
Accrued expenses and other current
liabilities (481) (1,576) (3,873)
Other noncurrent liabilities 1,211 (1,397) (797)
-------- -------- --------
Net cash provided by operating activities 3,483 7,470 1,260
-------- -------- --------
INVESTING ACTIVITIES
Purchases of plant and equipment (3,623) (7,519) (2,604)
Proceeds from disposition of property, plant
and equipment 140 49 1,345
-------- -------- --------
Net cash used in investing activities (3,483) (7,470) (1,259)
-------- -------- --------
Net Increase in cash and cash equivalents -- -- 1
Cash and cash equivalents at beginning of
period 14 14 13
-------- -------- --------
Cash and cash equivalents at end of period $ 14 $ 14 $ 14
======== ======== ========
See accompanying notes.
5
RAG Colorado Business Unit
(A Wholly Owned Business Unit of RAG American Coal Company
as defined in Note 1 to the Combined Financial Statements)
Notes to Combined Financial Statements
(In thousands)
December 31, 2003
1. BUSINESS AND BASIS OF PRESENTATION
Twentymile Coal Company, RAG Empire Corporation, RAG Shoshone Coal Corporation
and Colorado Yampa Coal Company (combined as RAG Colorado Business Unit) are
wholly owned subsidiaries of RAG American Coal Company (RAG Coal) and were
incorporated in Delaware on February 15, 1983, November 23, 1987, January 18,
1978 and August 23, 1982, respectively. On June 30, 1999, RAG Coal acquired the
stock of Cyprus Amax Coal Company (Cyprus Coal), whose subsidiaries included RAG
Colorado Business Unit, from Cyprus Amax Minerals Company (Cyprus Minerals)
under the terms of a stock purchase and sale agreement dated May 12, 1999 (the
Stock Purchase Agreement). Immediately thereafter, Cyprus Coal was merged into
RAG Coal to form RAG American Coal Company and subsidiaries. RAG American Coal
Company is a wholly owned subsidiary of RAG American Coal Holding, Inc. (RAG
Holding). Collectively, RAG Coal and RAG Holding are referred to as the Parent.
Initial capitalization of RAG Colorado was $238,171 of intercompany equity
resulting from the net of the fair value of assets acquired less the fair value
of liabilities assumed. The acquisition was accounted for using the purchase
method of accounting. Accordingly, the acquisition cost has been allocated to
the assets acquired and liabilities assumed based on their respective fair
values at the date of acquisition.
Accompanying financial statements include the combined balance sheets of the RAG
Colorado Business Unit (RAG Colorado) as of December 31, 2003 and 2002 and the
related combined statements of operations, stockholder's equity, cash flows for
each of the three years in the period ended December 31, 2003.
RAG Colorado operates one underground longwall mine, Twentymile, located in
Northwest Colorado. RAG Empire is an idled underground longwall operation also
in Northwest Colorado while the other locations, Shoshone and Colorado Yampa,
are closed, mined-out operations located in Southern Wyoming and Northwest
Colorado, respectively. RAG Colorado is engaged in the extraction, cleaning and
selling of coal to electric utilities and industrial users in the United States
and Mexico. Significant interunit balances and transactions are eliminated in
combination.
6
RAG Colorado Business Unit
(A Wholly Owned Business Unit of RAG American Coal Company
as defined in Note 1 to the Combined Financial Statements)
Notes to Combined Financial Statements (continued)
(In thousands)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and in banks.
Cash balances in excess of amounts required for small operational requirements
(petty cash) are administered and maintained by the Parent.
INVENTORIES
Coal inventories are stated at the lower of cost or market with market defined
as the estimated selling price, less estimated preparation and selling costs.
The cost of coal inventories is determined based on average cost of product,
which approximates first-in first-out (FIFO).
Material and supplies inventories are valued at average cost, which approximates
FIFO, less an allowance for obsolete and surplus items.
INTERCOMPANY ACCOUNTS
As more fully discussed in Note 17, the combined financial statements of RAG
Colorado for all periods presented include allocations of corporate expense from
the Parent. In addition, all cash receipts and disbursements are conducted under
the Parent's centralized cash management program and recorded in the
intercompany accounts.
PROPERTY, PLANT, AND EQUIPMENT
Costs for mineral rights and mine development costs incurred to expand capacity
of operating mines or to develop new coal reserves are capitalized and charged
to operations on the units-of-production method. Mobile mining equipment and
most other assets are stated at cost and depreciated on a straight-line basis
over the estimated useful lives ranging from one to 20 years or on a
units-of-production basis. Leasehold improvements are amortized over their
estimated useful lives or the term of the lease, whichever is shorter. Major
repairs and betterments, that significantly extend original useful lives or
improve productivity, are capitalized and depreciated over the period benefited.
Maintenance and repairs are expensed as incurred.
7
RAG Colorado Business Unit
(A Wholly Owned Business Unit of RAG American Coal Company
as defined in Note 1 to the Combined Financial Statements)
Notes to Combined Financial Statements (continued)
(In thousands)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of the asset
to future net cash flows expected to be generated by the asset. If such assets
are considered impaired; the impairment to be recognized is measured as the
amount by which the carrying amount of the assets exceeds the fair value of the
assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.
INCOME TAXES
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carry forwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in operations in the period that includes the enactment
date.
RAG Colorado is included in the consolidated U.S. federal income tax return of
RAG Holding. Income tax expense has been calculated and is shared with RAG
Holding as if RAG Colorado was filing a separate tax return. The business unit
does not have a written tax sharing agreement with its Parent.
ADVANCE MINING ROYALTIES
Rights to leased coal lands are often acquired through royalty payments. Advance
mining royalties are advance payments made to lessors under terms of mineral
lease agreements that are recoverable from future production. These advance
payments are deferred and charged to operations as the coal reserves are mined.
In instances where advance payments are not expected to be recoverable from
future production, no asset is recognized and the scheduled payments are
expenses as incurred. Advance mining royalties deferred are recorded in Other
Current and Noncurrent Assets.
8
RAG Colorado Business Unit
(A Wholly Owned Business Unit of RAG American Coal Company
as defined in Note 1 to the Combined Financial Statements)
Notes to Combined Financial Statements (continued)
(In thousands)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash, accounts receivable, accounts payable and accrued expenses have carrying
values which approximate fair value due to the short maturity or the financial
nature of these instruments. RAG Colorado has no other financial instruments.
REVENUE RECOGNITION
Revenue is recognized on coal sales when title passes to the customer, in
accordance with the terms of the sales agreement, which generally occurs when
the coal is loaded into transport carriers at the mine for shipment to the
customer.
FREIGHT REVENUE AND COSTS
Shipping and handling costs paid to third-party carriers and invoiced to coal
customers are recorded as freight expense, included in cost of sales, and coal
sales, respectively.
INTEREST INCOME
Interest income represents interest received from related parties on certain
receivable balances that are netted in Due to Parent. The remaining components
of the Due to Parent are non-interest bearing.
WORKERS COMPENSATION AND PNEUMOCONIOSIS (BLACK LUNG) BENEFITS
RAG Colorado is self-insured for workers compensation claims in Colorado and a
subscriber to the mandatory state fund in Wyoming. The liability for workers
compensation claims is an actuarially determined estimate of the ultimate losses
incurred on known claims plus a provision for incurred but not reported claims.
This probable ultimate liability is re-determined annually and resultant
adjustments are expensed. These obligations are included in the combined balance
sheets as other current and noncurrent liabilities.
9
RAG Colorado Business Unit
(A Wholly Owned Business Unit of RAG American Coal Company
as defined in Note 1 to the Combined Financial Statements)
Notes to Combined Financial Statements (continued)
(In thousands)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
WORKERS COMPENSATION AND PNEUMOCONIOSIS (BLACK LUNG) BENEFITS (CONTINUED)
RAG Colorado is required by federal and state statutes to provide benefits to
employees for awards related to black lung. RAG Colorado is self-insured for
these benefits and funds benefit payments through a Section 501 (c) (21)
tax-exempt trust fund maintained by the Parent for all of its subsidiaries.
Provisions are made for estimated benefits based on annual evaluations prepared
by outside actuaries. RAG Colorado accounts for its participation in the Section
501 (c) (21) trust as a participant in the Parent sponsored benefit plan.
Accordingly, assets and liabilities for the trust are not allocated to the
participants and are not presented in the accompanying combined balance sheets.
RAG Colorado's participation in the trust requires that it fund the net periodic
benefit costs allocated to its employees by the Parent.
PENSION AND OTHER POSTRETIREMENT PLANS
Pensions and postretirement health care and life insurance benefits are provided
to retirees of RAG Colorado through defined benefit plans maintained by the
Parent. RAG Colorado accounts for these plans as a participant in the Parent
sponsored plan; therefore, assets and liabilities are not allocated to the
participants and are not presented in the accompanying combined balance sheets.
RAG Colorado's participation in these Parent sponsored plans requires that they
currently fund the net periodic benefit costs attributable to their employees.
These net periodic benefits costs are calculated annually by outside actuaries
in accordance with the provisions of Statement of Financial Accounting Standard
(SFAS) No. 87, Employers Accounting for Pensions and SFAS No. 106, Employers
Accounting for Postemployment Benefits, respectively.
Long-term disability benefits are accounted for in accordance with SFAS No. 112,
Employers Accounting for Post Employment Benefits, and actuarially determined
obligations for these benefits are included in the combined balance sheets.
10
RAG Colorado Business Unit
(A Wholly Owned Business Unit of RAG American Coal Company
as defined in Note 1 to the Combined Financial Statements)
Notes to Combined Financial Statements (continued)
(In thousands)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of the combined financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the combined financial statements and the reported
amounts of revenues and expenses during the reporting period. The more
significant areas requiring the use of management estimates relate to quantity
and quality of mineral reserves; asset retirement obligations; employee and
retiree benefit liabilities; future cash flows associated with assets; useful
lives for depreciation, depletion, and amortization; and fair value of financial
instruments. Due to the prospective nature of these estimates, actual results
could differ from those estimated.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE FOR ASSET RETIREMENT OBLIGATIONS
Effective January 1, 2003, RAG Colorado initially adopted SFAS No. 143,
Accounting for Asset Retirement Obligations (Statement 143) and accordingly
changed its method of accounting for asset retirement obligations. RAG
Colorado's asset retirement obligations consist principally of costs to reclaim
support acreage and perform other related functions at underground mine
operations. Statement 143 requires the fair value of a liability for an asset
retirement obligation to be recognized in the period in which the legal
obligation associated with the retirement of the tangible long-lived asset is
incurred. When the liability is initially recorded, the offset is capitalized by
increasing the carrying amount of the related long-lived asset. Over time, the
liability is accreted to its present value each period, and the capitalized cost
is depreciated over the useful life of the related asset. To settle the
liability, the obligation is paid, and to the extent there is a difference
between the liability and the amount of cash paid, a gain or loss upon
settlement is incurred. The Company periodically reviews its estimated future
cash flows for its asset retirement obligations.
Under its previous accounting method, the Company accrued the estimated future
costs to reclaim the support acreage and to perform other related functions at
underground mines ratably over the lives of the mines.
11
RAG Colorado Business Unit
(A Wholly Owned Business Unit of RAG American Coal Company
as defined in Note 1 to the Combined Financial Statements)
Notes to Combined Financial Statements (continued)
(In thousands)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CUMULATIVE EFFECT OF ACCOUNTING CHANGE FOR ASSET RETIREMENT OBLIGATIONS
(CONTINUED)
As a result of adoption of Statement 143, the Company recognized an increase in
the total reclamation liability of $415, a decrease in mining properties and
mineral rights, net of accumulated depletion, of $2,951 related to amounts
recorded in previous asset purchase transactions from assumption of
pre-acquisition reclamation liabilities, a decrease in net deferred tax
liability of $1,279 and a cumulative effect of a change in accounting, net of
tax of $2,087.
The following table describes all changes to the Company's reclamation liability
from January 1, 2003, the date of adoption, through December 31, 2003:
2003
--------
Reclamation liability at beginning of period $ 6,960
Cumulative effect on liability from adoption of Statement 143 415
Accretion expense 495
Liability incurred 233
Revisions in estimated cash flows (650)
Payments (510)
-------
Reclamation liability at end of period $ 6,943
=======
On a pro-forma basis, assuming the application of Statement 143 to all periods
presented, the asset retirement obligation at January 1, 2002 and December 31,
2002 would have been $8,151 and $7,375, respectively.
3. INVENTORIES
Inventories consisted of the following at December 31:
2003 2002
-------- --------
Coal $ 10,911 $ 10,215
Materials and supplies 3,634 3,471
-------- --------
14,545 13,686
Less materials and supplies reserve for obsolescence 948 804
-------- --------
$ 13,597 $ 12,882
======== ========
12
RAG Colorado Business Unit
(A Wholly Owned Business Unit of RAG American Coal Company
as defined in Note 1 to the Combined Financial Statements)
Notes to Combined Financial Statements (continued)
(In thousands)
4. OTHER CURRENT ASSETS
Other current assets consisted of the following at December 31:
2003 2002
------- -------
Prepaid longwall move $ 1,252 $ 1,960
Prepaid expenses 940 1,563
Miscellaneous receivables 571 270
------- -------
$ 2,763 $ 3,793
======= =======
5. PROPERTY, PLANT, EQUIPMENT AND COAL RESERVES
Property, plant, equipment and coal reserves consisted of the following at
December 31:
2003 2002
-------- --------
OWNED SURFACE LANDS AND COAL RESERVES
Owned surface lands and coal reserves $ 31,453 $ 31,785
Less accumulated depletion 5,359 --
-------- --------
$ 26,094 $ 31,785
======== ========
LEASEHOLDS IN COAL RESERVES
Leaseholds in coal reserves $133,647 $137,279
Less accumulated depletion 43,841 38,522
-------- --------
$ 89,806 $ 98,757
======== ========
PLANT AND EQUIPMENT
Plant and equipment $ 84,717 $ 80,067
Mine development 13,939 14,415
-------- --------
98,656 94,482
Less accumulated depreciation and amortization:
Plant and equipment 46,240 34,432
Mine development 3,265 1,894
-------- --------
49,505 36,326
-------- --------
$ 49,151 $ 58,156
======== ========
13
RAG Colorado Business Unit
(A Wholly Owned Business Unit of RAG American Coal Company
as defined in Note 1 to the Combined Financial Statements)
Notes to Combined Financial Statements (continued)
(In thousands)
5. PROPERTY, PLANT, EQUIPMENT AND COAL RESERVES (CONTINUED)
Leaseholds in coal reserves and coal reserves in owned surface lands
(collectively referred to as coal reserves) are a result of additional costs
being allocated to the underlying purchased assets at the time of acquisition.
These costs are charged to operations on a units-of-production basis over the
life of the coal reserves acquired. These coal reserves are a combination of
leased coal mineral rights and mineral rights held through fee ownership. The
amounts recognized in connection with the purchase price allocation in many
cases would vary if the assets had been recognized at fair value. Amortization
expense related to leaseholds in coal reserves amounted to $6,049, $10,906 and,
$11,095 for the years ended December 31, 2003, 2002 and 2001, respectively.
Amortization expense related to owned surface lands amounted to $5,359 for the
year ended December 31, 2003. No owned surface lands were mined during the years
ended December 31, 2002 and 2001.
6. OTHER NONCURRENT ASSETS
Other noncurrent assets consisted of the following at December 31:
2003 2002
------ -------
Prepaid royalties $ 670 $ 1,105
Prepaid major repairs 239 445
------ -------
$ 909 $ 1,550
====== =======
14
RAG Colorado Business Unit
(A Wholly Owned Business Unit of RAG American Coal Company
as defined in Note 1 to the Combined Financial Statements)
Notes to Combined Financial Statements (continued)
(In thousands)
7. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consisted of the following at
December 31:
2003 2002
-------- --------
Wages and employee benefits $ 3,946 $ 3,480
Royalties 988 634
Freight (14) 270
Utilities 586 552
Taxes other than income taxes 2,717 2,618
Asset retirement obligations 173 685
Long term disability 146 156
Workers compensation 1,200 1,450
Other 566 946
-------- --------
$ 10,308 $ 10,791
======== ========
8. OTHER NONCURRENT LIABILITIES
Other noncurrent liabilities consisted of the following at December 31:
2003 2002
------- -------
Workers compensation $ 3,889 $ 3,345
Long term disability 361 424
------- -------
$ 4,250 $ 3,769
======= =======
15
RAG Colorado Business Unit
(A Wholly Owned Business Unit of RAG American Coal Company
as defined in Note 1 to the Combined Financial Statements)
Notes to Combined Financial Statements (continued)
(In thousands)
9. INCOME TAXES
Income tax expense consisted of the following for the years ended December 31:
2003 2002 2001
------- ------- -------
Current Federal expense $ 5,386 $ 3,260 $ 3,228
Current State expense 462 432 381
------- ------- -------
5,848 3,692 3,609
------- ------- -------
Deferred Federal expense 543 1,740 2,624
Deferred State expense 47 171 274
------- ------- -------
590 1,911 2,898
------- ------- -------
6,438 5,603 6,507
Tax benefit on cumulative effect of
accounting change (1,279) -- --
------- ------- -------
Total income tax expense $ 5,159 $ 5,603 $ 6,507
======= ======= =======
16
RAG Colorado Business Unit
(A Wholly Owned Business Unit of RAG American Coal Company
as defined in Note 1 to the Combined Financial Statements)
Notes to Combined Financial Statements (continued)
(In thousands)
9. INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and liabilities consisted of the following at
December 31:
2003 2002
-------- --------
Deferred tax assets:
Asset retirement obligation $ 3,760 $ 2,645
Coal supply agreements 5,181 5,435
Alternative minimum tax credit carryforward -- 1,082
Accrued payroll and benefits 2,687 2,529
Other 739 391
-------- --------
Total gross deferred tax assets 12,367 12,082
Deferred tax liabilities:
Coal reserves - leased and owned (28,024) (27,301)
Plant and equipment, principally due to capitalization
and depreciation differences (5,418) (6,331)
Mine development (4,010) (3,877)
Major repairs/longwall moves (567) (913)
Other (560) (560)
-------- --------
Total gross deferred tax liabilities (38,579) (38,982)
-------- --------
Net deferred tax liability $(26,212) $(26,900)
======== ========
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. Management believes it is
more likely than not that all of the deferred taxes will be realized.
17
RAG Colorado Business Unit
(A Wholly Owned Business Unit of RAG American Coal Company
as defined in Note 1 to the Combined Financial Statements)
Notes to Combined Financial Statements (continued)
(In thousands)
9. INCOME TAXES (CONTINUED)
The following is a reconciliation between the amount determined by applying the
federal statutory rate of 35% to income before income taxes and the actual
income tax expense for the years ended December 31:
2003 2002 2001
------- ------- -------
Federal statutory income tax $ 5,920 $ 5,138 $ 6,078
State income taxes, net of U.S. federal
tax benefit 507 441 521
Other increase (decrease) 11 24 (32)
------- ------- -------
$ 6,438 $ 5,603 $ 6,567
======= ======= =======
10. EMPLOYEE BENEFIT PLANS
Substantially all employees of RAG Colorado participate in the Parent sponsored
defined benefit pension and postretirement health care and life insurance plans.
RAG Colorado recorded the following net periodic benefit costs for these plans
in cost of coal sales in the combined statements of operations for the years
ended December 31:
2003 2002 2001
------ ------ ------
Pensions $1,909 $1,072 $ 210
Postretirement health care and life
insurance 978 786 724
------ ------ ------
Total $2,887 $1,858 $ 934
====== ====== ======
These amounts were settled with RAG Coal by crediting the Due to Parent account.
18
RAG Colorado Business Unit
(A Wholly Owned Business Unit of RAG American Coal Company
as defined in Note 1 to the Combined Financial Statements)
Notes to Combined Financial Statements (continued)
(In thousands)
10. EMPLOYEE BENEFIT PLANS (CONTINUED)
In December of 2003, the Medicare Prescription Drug Improvement and
Modernization Act of 2003 (the Act) was enacted in the U.S. The Act introduced a
prescription drug benefit under Medicare as well as a federal subsidy to
sponsors of retiree health benefit plans that provide a benefit that meets
certain criteria. The Parent's other postretirement plans covering retirees
currently provide certain prescription benefits to eligible participants.
Because the Act was only recently passed, the Parent has not evaluated the
impact of the Act's benefits and subsidies on the accumulated benefit obligation
for other postretirement benefits. The Parent has not determined what changes
would be required to the current benefits provided to allow the Parent and its
subsidiaries to qualify for the federal subsidy. Further analysis of the Act and
its impact on the Parent and RAG Colorado will take place in 2004.
RAG Colorado also participates in a number of postemployment plans covering
severance, disability income and continuation of health care and life insurance
for disabled employees. The accumulated postemployment benefit liabilities
consisted of the following as of December 31:
2003 2002
----- -----
Current $ 146 $ 156
Noncurrent 361 424
----- -----
Total $ 507 $ 580
===== =====
These amounts are included in Accrued Expenses and Other Noncurrent Liabilities,
respectively.
11. PNEUMOCONIOSIS (BLACK LUNG) EXPENSE AND TRUST
For the years ended December 31, 2003, 2002 and 2001 RAG Colorado made
provisions for black lung benefits of $26, $0, and $0, respectively, that are
included in cost of coal sales in the combined statements of operations. RAG
Colorado satisfies its financial assurance responsibility for self-insured
Federal Black Lung benefits through participation in the Parent's 501 (c) (21)
Trust. The Parent's 501(c) (21) Trust assets exceeded the Parent's recorded
obligation. The black lung costs allocated to RAG Colorado represent a pro-rata
allocation of the net black lung costs incurred by the Parent. Black lung costs
of RAG Colorado may have been higher if they were not a participant in the
Parent's Trust.
19
RAG Colorado Business Unit
(A Wholly Owned Business Unit of RAG American Coal Company
as defined in Note 1 to the Combined Financial Statements)
Notes to Combined Financial Statements (continued)
(In thousands)
12. WORKERS COMPENSATION BENEFITS
Workers compensation expense for the years ended December 31, 2003, 2002 and
2001 was $1,575, $957, and $1,426, respectively, and is included in cost of coal
sales in the combined statements of operations. RAG Colorado satisfies its
self-insured workers compensation financial assurance responsibility to the
State of Colorado through a surety bond in the amount of $4,674, which is fully
collateralized by a letter of credit issued by RAG Coal International AG, the
Parent company of RAG Holding.
13. LEASE AND MINERAL ROYALTY OBLIGATIONS
RAG Colorado leases mineral interests from the State of Colorado, the U.S.
Government and other various lessors. Some of the mineral leases require annual
minimum royalty payments, whereas others require payments at the time of
production or shipment. A substantial amount of the coal mined by RAG Colorado
is produced from reserves leased from the owner of the coal. Annual minimum
royalties are expensed when paid if they are not recoverable against future
production of shipments. All of the mineral leases are subject to cancellation
by RAG Colorado.
Rentals and mineral royalties charged to cost of coal sales during the years
ended December 31 were as follows:
2003 2002 2001
------- ------- -------
Rental expense $ 168 $ 225 $ 198
Mineral royalties 5,929 7,591 9,478
Payment of certain mineral royalties are secured by surety bonds issued in favor
of the U.S. Department Interior in the amount of $482 at December 31, 2003.
20
RAG Colorado Business Unit
(A Wholly Owned Business Unit of RAG American Coal Company
as defined in Note 1 to the Combined Financial Statements)
Notes to Combined Financial Statements (continued)
(In thousands)
14. OTHER REVENUES AND OTHER INCOME
Other revenues and other income consisted of the following for the years ended
December 31:
2003 2002 2001
------ ------ ------
OTHER REVENUES
Coal contract buyout $ -- $3,250 $ 862
Easement proceeds 329 -- --
------ ------ ------
Total other revenues $ 329 $3,250 $ 862
====== ====== ======
OTHER INCOME, NET
Gains on disposition of assets $ 140 $ 49 $1,708
Loss on settlement of asset retirement
obligations (233) -- --
Other 112 168 169
------ ------ ------
Total other income $ 19 $ 217 $1,877
====== ====== ======
15. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
The Company markets its coal to electric utilities in the United States and
Mexico. Credit is extended based on an evaluation of the customer's financial
condition and collateral is generally not required. Receivables consist of
amounts billed and currently due from customers. The Company has an allowance
for doubtful accounts to reduce its receivables to their net realizable value.
Management estimates the allowance for doubtful accounts based on various
factors including aging of receivables and historical collection experience.
Credit losses are provided for in the combined 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. RAG Colorado's deliveries
under the coal sales contract with Commission Federale de Electricidad, a
Mexican utility, are backed with a performance bond in the amount of $6,704. RAG
Colorado's performance under its coal supply agreement with Public Service
Company of Colorado, a subsidiary of Xcel Energy, are guaranteed by the
Company's Parent. The prices for some multi-year coal
21
RAG Colorado Business Unit
(A Wholly Owned Business Unit of RAG American Coal Company
as defined in Note 1 to the Combined Financial Statements)
Notes to Combined Financial Statements (continued)
(In thousands)
15. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS (CONTINUED)
contracts are adjusted based on economic indices or the contract may include
year-to-year specified price changes. Quantities sold under some contracts may
vary from year to year within certain limits at the option of the customer.
The table below lists the Company's significant concentrations for the years
ended December 31:
2003 2002 2001
------- ------- --------
Trade accounts receivable from
electric utilities $ 7,778 $ 7,714 $ 8,258
Coal sales exported to Mexico $23,513 $23,198 $ 9,356
Five largest customers versus total
coal sales 66% 75% 66%
Customers comprising more than 10%
of total coal sales:
Xcel Energy 22% 24% 19%
Commission Federale de
Electricidad 16% 17% 18%
Tennessee Valley Authority 14% 9% 2%
Mississippi Power 6% 15% 12%
16. CONTINGENCIES AND COMMITMENTS
ASSET RETIREMENT OBLIGATIONS (FORMERLY RECLAMATION AND MINE CLOSURE)
The table below lists at December 31, 2003 and 2002 , the Company's accruals for
asset retirement obligations (formerly reclamation and mine closure ) along with
the amount of surety bonds securing these regulatory obligations. The Company's
total estimate of future cash outflows for asset retirement obligation of
approximately $11,172 at December 31, 2003 is being accounted for in accordance
with Statement 143.
2003 2002
------- -------
Asset retirement obligations $ 6,943 $ 6,431
Amount of surety bonds securing the obligations $16,776 $16,740
22
RAG Colorado Business Unit
(A Wholly Owned Business Unit of RAG American Coal Company
as defined in Note 1 to the Combined Financial Statements)
Notes to Combined Financial Statements (continued)
(In thousands)
16. CONTINGENCIES AND COMMITMENTS (CONTINUED)
ASSET RETIREMENT OBLIGATIONS (FORMERLY RECLAMATION AND MINE CLOSURE) (CONTINUED)
These surety bonds, along with other reclamation surety bonds of subsidiaries of
the Parent, are partially collateralized by letters of credit issued by RAG Coal
International, AG.
LEGAL PROCEEDINGS
The Company is involved in various claims and other legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's combined financial position, results of operations or liquidity.
17. RELATED PARTY TRANSACTIONS
All significant cash receipts and disbursements of RAG Colorado are transacted
by the Parent under its centralized cash management system. In addition, RAG
Colorado contributes to the Parent's sponsored benefit plans and pays the
current portion of its income tax provision to the Parent. Such activity is
initially recorded through Due to/from Parent accounts. Quarterly, the balance
in this account is settled between RAG Colorado and the Parent. In the case of a
net amount due from Parent, RAG Colorado records a return of capital. In the
case of a net amount due to Parent, RAG Colorado records a capital contribution
from the Parent.
Non-cash intercompany equity transactions consisted of the following for years
ended December 31:
2003 2002 2001
------- ------- -------
Return of Capital to Parent $27,914 $ 3,154 $23,377
Dividends to Parent $13,208 $17,119 $18,573
23
RAG Colorado Business Unit
(A Wholly Owned Business Unit of RAG American Coal Company
as defined in Note 1 to the Combined Financial Statements)
Notes to Combined Financial Statements (continued)
(In thousands)
17. RELATED PARTY TRANSACTIONS (CONTINUED)
Certain sales and administrative services are performed on a shared services
basis by the Parent and are charged to RAG Colorado and other subsidiaries on an
allocated basis. These charges encompass sales and marketing, property and
liability insurance, information technology, employee benefit plan
administration, human resource administration, cash management, real estate
administration, legal services, corporate secretarial services, environmental
management, safety, purchasing and certain accounting services. Allocation
methods used by the Parent to charge its subsidiaries for these shared services
include relative production and sales volumes, relative insurable values,
relative employee counts, and relative amount of staff time spent. The amounts
charged for shared services are not necessarily representative of amounts that
RAG Colorado might spend to obtain such services on a stand-alone basis. The
amounts charged and their classification in the Combined Statements of
Operations for the years ended December 31 are:
2003 2002 2001
------- ------- -------
Cost of coal sales $ 2,052 $ 1,713 $ 1,166
Selling, general and administrative $ 1,956 $ 1,996 $ 1,842
When the Parent acquired the stock of Cyprus Amax Coal on June 30, 1999, it
funded a portion of the purchase price through term loans from three
international banks. As part of the documentation for this transaction, the
Parent executed a Pledge Agreement granting the banks a security interest in the
shares of specified subsidiaries of the Parent. The subsidiaries comprising RAG
Colorado are among these specified subsidiaries. Interest expense related to
this debt has historically not been allocated by the Parent to its subsidiaries
and is not included in the accompanying Combined Statements of Operations.
24
RAG Colorado Business Unit
(A Wholly Owned Business Unit of RAG American Coal Company
as defined in Note 1 to the Combined Financial Statements)
Notes to Combined Financial Statements (continued)
(In thousands)
17. RELATED PARTY TRANSACTIONS (CONTINUED)
The Company purchases mining equipment for its underground mines, along with
related repair parts and services, from DBT America, Inc., which is a wholly
owned subsidiary of the Parent. Such purchases are made on a competitive basis
and management believes the transactions were concluded on similar terms to
those prevailing among unaffiliated parties. During the years ended December 31,
2003, 2002 and 2001, purchases from DBT America, Inc. totaled $5,181, $2,817 and
$3,702, respectively. At December 31, 2003 and 2002 the Company owed DBT $287
and $32, respectively, which amounts are included in accounts payable. At
December 31, 2003 and 2002 DBT America, Inc. owed the Company $2 and $10,
respectively, which amounts are included in Other Current Assets.
RAG Colorado's workers compensation surety bond is backed by a letter of credit
issued under credit facilities of RAG Coal International AG.
18. COMMON STOCK
Common stock presented in the combined balance sheet represents the aggregate
common stock of the corporations that are combined to form RAG Colorado. The
individual components of each corporation's common stock is as follows (in whole
numbers):
TWENTYMILE RAG EMPIRE RAG SHOSHONE COLORADO YAMPA
COAL COMPANY CORPORATION COAL CORPORATION COAL COMPANY
------------ ----------- ---------------- --------------
COMMON STOCK:
Authorized shares 100 1,000 10,000 100
Outstanding shares 100 100 10,000 100
Par value per share $ 100.00 $ 1.00 $ 1.00 $ 100.00
Total Common Stock $10,000.00 $100.00 $10,000.00 $ 10,000.00
19. PENDING SALE OF RAG COLORADO
In December of 2003, RAG Coal International AG entered into a non-binding letter
of intent with Peabody Energy to sell the operations of RAG Colorado. The
completion of this transaction is subject to due diligence and negotiation of a
definitive purchase agreement.
25