EXHIBIT 1.1
LUSCAR ENERGY PARTNERSHIP
FOR IMMEDIATE RELEASE
LEP RESULTS FOR THE THIRD QUARTER ENDED SEPTEMBER 30, 2004
TORONTO, ONTARIO, NOVEMBER 2, 2004. Luscar Energy Partnership ("LEP") and Luscar
Coal Ltd. ("LCL") today released the following report on the third quarter ended
September 30, 2004.
THIRD QUARTER HIGHLIGHTS
- $26.0 million net cash after capital expenditures generated by
operating activities
- 1.0 million man-hours worked without a recordable safety incident
- $31.3 million EBITDA(1)
- $20.7 million foreign currency translation gain as Canadian dollar
strengthens
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion and analysis of financial results of LEP and its wholly
owned subsidiary LCL for the quarter ended September 30, 2004 should be read in
conjunction with the consolidated financial statements and related notes
contained in this interim report and our management discussion and analysis and
the annual audited consolidated financial statements and related notes contained
in LEP's Form 20-F filed June 30, 2004, with the United States Securities and
Exchange Commission. The quarterly information provided herein is unaudited. All
amounts are in Canadian dollars unless otherwise stated and sales volumes are in
metric units.
As a result of the transfer of metallurgical assets formerly owned by LEP to the
Fording Canadian Coal Trust ("FCCT") in the first quarter of 2003, and the
acquisition of the thermal coal assets from a subsidiary of Sherritt Coal
Partnership II ("SCPII") in the third quarter of 2003, certain information in
the financial statements for prior periods has been reclassified to conform to
the presentation format adopted for 2004. Results for the metallurgical assets
have been disclosed as discontinued operations. The revised presentation is
representative of our ongoing operations.
REVIEW OF LUSCAR ENERGY PARTNERSHIP RESULTS
LEP's EBITDA(1) during the third quarter was $31.3 million, compared with $25.4
million for the same quarter last year, reflecting the inclusion of $13.2
million of operating margin(1) from the thermal coal assets acquired in October
2003 which was partially offset by a $6.0 million operating loss(1) at the Coal
Valley mine due to a thickener failure at the plant. 2003 third quarter
EBITDA(1) included a $3.0 million distribution from the Fording Canadian Coal
Trust. LEP recorded 2004 third quarter net earnings of $16.2 million compared to
a net loss of $3.4 million during the same quarter last year as the increased
EBITDA(1) and a $21.0 million non-cash, pre-tax foreign currency translation
gain on LCL's USD $275 million 9.75% senior notes were partially offset by
higher depreciation as a result of acquiring the thermal coal assets.
Net earnings for the nine months ended September 30, 2004 were $23.1 million
compared to net earnings of $107.2 million for the same period last year. Net
earnings in 2004 included $41.5 million of operating margin(1) from the thermal
coal assets acquired in October 2003 and a foreign currency translation gain on
LCL's USD $275 million 9.75% senior notes of $7.8 million. Depreciation was
$12.6 million higher than 2003 as a result of acquiring the thermal coal assets.
Net earnings for the nine months ended September 30, 2003 included a number of
one-time items, including a $10.0 million pre-tax severance provision related to
our efforts to enhance our thermal coal business, a $21.4 million gain on the
redemption of a promissory note, a recovery of future income taxes of $55.2
1) Operating margin (loss) and EBITDA do not have any standardized meaning
prescribed by Canadian generally accepted accounting principles and are
therefore unlikely to be comparable with similar measures presented by
other issuers. Operating margin (loss) is defined as revenue less cost of
sales. Operating margin (loss) has been used to measure performance of the
mines. EBITDA is defined as revenue less cost of sales, selling, general
and administrative costs, plus other income. EBITDA has been disclosed in
order to provide an indication of revenue less cash operating expenses.
million, attributable to substantially-enacted federal income tax rate changes
for resource companies and a $63.0 million non-cash, pre-tax foreign currency
translation gain on LCL's USD $275 million 9.75% senior notes.
The following is a summary of LEP's consolidated third quarter financial
results:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
---- ---- ---- ----
(in thousands of Canadian dollars)
Revenue $ 120,484 $ 87,150 $ 369,949 $ 262,123
Cost of sales 85,735 61,281 259,478 190,004
--------- --------- --------- ---------
OPERATING MARGIN (1) 34,749 25,869 110,471 72,119
Selling, general and administrative expenses 4,347 4,078 13,026 21,195
Other income (886) (3,603) (7,684) (28,003)
--------- --------- --------- ---------
EBITDA (1) 31,288 25,394 105,129 78,927
Depreciation and amortization 25,951 22,141 81,378 68,770
Asset retirement obligations accretion 1,764 1,722 5,665 5,167
Interest expense 10,889 10,427 34,565 35,156
Foreign currency translation gain (20,679) (2,361) (7,261) (63,096)
--------- --------- --------- ---------
Earnings (loss) from continuing operations before taxes $ 13,363 $ (6,535) $ (9,218) $ 32,930
--------- --------- --------- ---------
NET EARNINGS (LOSS) $ 16,167 $ (3,444) $ 23,099 $ 107,232
========= ========= ========= =========
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
---- ---- ---- ----
COAL SHIPMENTS (in thousands of tonnes)
Mine-mouth 5,203 4,119 15,498 12,002
Contract mining 3,444 - 10,875 -
Other thermal 579 1,050 2,239 2,988
--------- --------- --------- ---------
9,226 5,169 28,612 14,990
========= ========= ========= =========
An important part of our efficiency and effectiveness initiatives launched in
the spring of 2003 is the ongoing improvement in safety performance. We have
achieved significant improvements in our safety record over the last year. By
way of example, our operations did not incur any safety incidents in the quarter
and we achieved one million man-hours without a safety incident. We have shown
that an excellent safety record can be maintained over the long term. Our
Genesee and Sheerness mines are the current holders of the prestigious John T.
Ryan Trophy awarded by the Canadian Institute of Mining, Metallurgy and
Petroleum for outstanding performance in safety.
We shipped 9.2 million tonnes during the quarter compared with 5.2 million
tonnes in the same quarter last year primarily due to the acquisition of the
thermal coal assets on October 17, 2003. The Highvale and Whitewood mines are
classified as contract mines and the Genesee mine is classified as a mine-mouth
mine.
Shipments from our other thermal coal operations decreased compared to the same
quarter last year due to the thickener failure at the Coal Valley mine,
suspension of operations at the Obed mine and delayed shipments from the
Bienfait mine. The unexpected thickener failure at the Coal Valley mine reduced
shipments by about 0.2 million tonnes in the quarter. The thickener has now been
repaired and we expect our annualized production rate at the mine to be 2.0
million tonnes by the end of 2004. Given the strong outlook for export coal, we
are examining the feasibility of increasing production by up to an additional
2.0 million tonnes at our Coal Valley mine. Engineering, design and economic
evaluation of the planned expansion are expected to result in a decision by
year-end.
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THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
---- ---- ---- ----
(in Canadian dollars per tonne except for capital
expenditures, which are in thousands of Canadian dollars)
Realized prices $ 13.06 $ 16.86 $ 12.93 $ 17.49
Cost of sales 9.29 11.86 9.07 12.68
-------- --------- -------- --------
Operating margin(1) $ 3.77 $ 5.00 $ 3.86 $ 4.81
Capital expenditures from continuing operations $ 3,525 $ 1,274 $ 8,197 $ 12,134
For the third quarter of 2004 and for the year to date, average realized prices
for thermal coal sales were lower than the prior year period due to the
inclusion of lower priced contract mining revenue from the Highvale and
Whitewood mines. This was partially offset by the inclusion of royalty revenue
from the new thermal coal assets in 2004.
For the third quarter and for the year to date, the average cost of sales per
tonne decreased from the prior year period because of the inclusion of
lower-cost contract mining in the sales from the Highvale and Whitewood mines,
which was partially offset by higher repair costs and lower production at the
Coal Valley mine due to the plant outage.
Average operating margin(1) per tonne was lower in 2004 than in 2003 as lower
margin contract mining sales have been included in margins since the acquisition
of the mining contract for the Highvale and Whitewood mines. This was partially
offset by the inclusion of royalty revenue from the acquisition of the thermal
coal assets.
Capital expenditures were $3.5 million during the third quarter compared with
$1.3 million in the same quarter of last year as previously delayed projects
were started and incurred expenditures.
Capital leases for new equipment totaling $2.3 million were entered into during
the quarter as part of the long-term mine support equipment agreement LEP
entered into with Finning (Canada) a division of Finning International Inc. and
Kramer Ltd., which involves the leasing of equipment as part of a plan to reduce
the maintenance costs and increase equipment utilization. These were reported as
additions to capital assets and long-term debt. We also entered into $9.1
million of operating leases for mine support equipment during the quarter.
REVIEW OF INTEREST EXPENSE, OTHER FINANCING COSTS AND TAXES
LEP recorded interest expense of $10.9 million for the third quarter compared to
$10.4 million in 2003. Interest expense for the nine months ended September 30,
2004 was $34.6 million which was $0.6 million lower than the same period last
year as interest expense on the promissory notes was lower as a result of the
retirement of a promissory note during the fourth quarter of 2003 and interest
on the senior notes was lower due to the strengthening Canadian dollar. This was
largely offset by higher interest expense on reclamation securities and lower
interest income earned on investments.
During the third quarter, LEP reported a foreign currency translation gain of
$20.7 million as a result of the strengthening Canadian dollar compared to a
gain of $2.4 million in the third quarter last year. For the nine months ended
September 30, 2004, LEP reported a foreign currency translation gain of $7.3
million compared to $63.1 million for the same period last year. Foreign
currency translation gains and losses are primarily non-cash and primarily
relate to LCL's US$275 million 9.75% senior notes.
During the third quarter, LEP recorded a tax recovery of $2.9 million on
earnings from continuing operations before tax of $13.4 million as compared with
a tax recovery of $3.1 million on a loss from continuing operations before tax
of $6.5 million during the same quarter last year. An income tax recovery of
$30.3 million on a loss from continuing operations before tax of $9.2 million
was recorded for the nine months ended September 30, 2004. We recorded an income
tax recovery of $55.2 million on earnings from continuing operations of $32.9
million during the same period last year as a result of a substantially-enacted
federal income tax rate change for resource companies.
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LIQUIDITY AND CAPITAL RESOURCES
LEP's operating activities generated net cash, including changes in non-cash
working capital, of $29.5 million during the third quarter compared with $26.6
million for the same period last year. LEP generated higher cash from operating
activities due to the acquisition of the thermal coal assets. Cash generated
from non-cash working capital was $15.2 million in the third quarter compared to
$13.6 million in the same period last year. Trade accounts payable decreased to
$31.5 million this quarter from $38.6 million at December 31, 2003 due to the
timing of cash payments. Inventory decreased by $2.3 million to $41.5 million
since December 31, 2003. Reduced production at the Boundary Dam mine during the
first quarter resulted in an inventory drawdown to meet sales requirements.
Accounts receivable decreased by $2.5 million to $59.6 million due to timing of
cash receipts.
Cash distributions of $24.0 million were made to the partners during the third
quarter. There were no distributions made to partners in the same quarter last
year. Cash distributions of $50.0 million were made during the nine months ended
September 30, 2004 as compared with $27.0 million in the same period last year.
Long-term debt was $366.2 million at quarter end, an increase of $0.3 million
since December 31, 2003 due to the introduction of new capital leases related to
the mine support equipment agreement which was partially offset by the impact of
the strengthening Canadian dollar on the US dollar denominated senior notes.
OUTLOOK
We are the largest coal producer in Canada, operating mines that produce most of
Canada's domestic thermal coal. We own eight surface mines, including one mine
in which we have a 50% ownership interest, and we operate two surface mines
under a mining contract with an electric utility. Together, the mines that we
operate produce approximately 38 million tonnes of coal, making us one of the
largest coal producers in North America.
A significant portion of our operating margin(1) from continuing operations is
derived from thermal coal sales to domestic customers, principally under
long-term contracts to mine-mouth power generators in western Canada, and
royalty income derived from coal and potash mining operations in Alberta and
Saskatchewan. The remaining operating margin(1) is derived from export sales,
contract mining at the Highvale and Whitewood mines, sales of coal to Canadian
utilities delivered by rail, and sales of thermal coal and char to industrial
customers.
Coal production is expected to be approximately 38 million tonnes in 2004,
higher than in 2003 and reflecting the full year impact of the coal assets
acquired in October 2003. Epcor's 495 megawatt expansion of its Genesee power
plant appears to be on schedule for a winter 2004-2005 startup. Our Genesee mine
operation will increase annual output by about 1.8 million tonnes at an
estimated capital cost of $6.0 million (our 50% share) which is included in our
2005 capital estimates. Our program to implement world best mining practices,
which is designed to exploit the similarities of each of our mining operations
and enhance overall efficiencies, is expected to result in reduced operating
costs, enhanced productivity and increased profitability and cash flow in 2004
and subsequent years. Given the strong outlook for export coal, we are examining
the feasibility of increasing export thermal production by up to an additional
2.0 million tonnes above Coal Valley mine's expected year-end production rate of
2.0 million tonnes. Engineering, design and economic evaluation of the planned
expansion are expected to result in a decision by year-end. The maturity of our
promissory note in December 2004 will result in an addition to EBITDA(1) of
approximately $38 million in the fourth quarter of 2004. Capital expenditures
are expected to be approximately $20 million in 2004. In addition, equipment
worth approximately $18 million is expected to be acquired through capital
leases. We also expect to obtain approximately $22 million in assets under
operating leases.
As part of the thermal asset acquisition, we acquired the mineral rights near
Bow City, Alberta (formerly the Brooks Project), along with engineering and
environmental studies relating to the development of two 500 MW coal fired
electrical power units and the associated mine. We are moving the project
forward towards regulatory approval. The application is scheduled for submission
to the Alberta Regulatory authorities in the spring of 2006. In order to
facilitate the potential submission of an application in 2006, forecast spending
between 2004 and 2006 is expected to be approximately $9.6 million. The field
work is progressing and is expected to be completed in the spring of 2005. This
schedule would see the plant potentially operational by 2010.
Cash flow from operations is expected to be sufficient to meet the existing and
ongoing contractual obligations and commitments of LEP and LCL.
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SUPPLEMENTARY DISCLOSURES
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements requires us to estimate the effect of
various matters that are inherently uncertain as of the date of the interim
financial statements. Each of these required estimates varies in regard to the
level of judgment involved and its potential impact on our reported financial
results. Estimates are deemed critical when a different estimate could have
reasonably been used or where changes in the estimate are reasonably likely to
occur from period to period, and would materially impact our financial
condition, changes in financial condition or results of operations. Our
significant accounting policies are discussed in note 2 of the notes to the
consolidated financial statements and the annual audited consolidated financial
statements. Critical estimates inherent in these accounting policies are
discussed in the following paragraphs.
Capital assets
Capital assets comprise the largest component of our assets and as such the
capitalization of costs, the determination of estimated recoverable amounts and
the amortization of these costs have a significant effect on our financial
statements. Proven and probable reserves are determined based on internal
evaluations by qualified persons. The estimate of these reserves may change
based on additional knowledge gained subsequent to the initial assessment. This
may include results from the reconciliation of actual production data against
the original reserve estimates, or the impact of economic factors such as
changes in the price of coal or the cost of components of production. A change
in the original estimate of reserves would result in a change in the rate of
amortization of the related assets or could result in impairment of the assets
resulting in a write down.
Other assets
Deferred financing costs are expenditures incurred to arrange credit facilities.
These costs are deferred and amortized on a straight-line basis over the period
to maturity of the related debt.
Deferred project development costs include costs that are necessary in the
development of a potential acquisition or construction project. The
appropriateness of the carrying value of these costs is evaluated each reporting
period, and any unrecoverable amounts of capitalized costs for projects no
longer likely to occur are charged to expense in the current period.
Other assets also include investments and other assets which include real estate
properties, prepaid royalties and amounts recoverable from domestic customers in
future years.
Accounts receivable
Eight of our mines derive substantially all of their revenue from single
customers or groups of affiliated customers. The loss of one or more of these
customers could potentially result in the closure of the respective mine, the
loss of the mining contract or, in some cases, the sale of the mine to the
customer.
Management reviews the collectability of accounts receivable on a regular basis
and records an allowance for doubtful accounts if necessary. No allowance for
doubtful accounts has been recorded at the end of the third quarter and no
losses have been experienced. Significant deterioration in the status of any one
of our major customers could materially change this estimate.
Inventories
Coal inventories are valued at the lower of average production cost or net
realizable value. Net realizable value is based on trends in coal prices at the
end of the period.
Mine supplies are recorded at the lower of average cost or replacement cost.
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Asset impairment
We evaluate long-lived assets for impairment when events or changes in
circumstances indicate that the related carrying amounts may not be recoverable.
A long-lived asset is considered to be impaired if the total undiscounted
estimated future cash flows are less than the carrying value of the asset. The
amount of the impairment is determined based on discounted estimated future cash
flows. Future cash flows are determined based on management's estimates of
future results relating to the long-lived assets. These estimates include
various assumptions, which are updated on a regular basis as part of the
internal planning process.
We regularly review our investments to determine whether a permanent decline in
the fair value below the carrying value has occurred. In determining whether a
permanent decline has occurred, management considers a number of factors that
would be indicative of a permanent decline including (i) a prolonged decrease in
the fair value below the carrying value, (ii) severe or continued losses in the
investment and (iii) various other factors such as liquidity which may be
indicative of a decline in value of the investment. The consideration of these
factors requires management to make assumptions and estimates about future
financial results of the investment. These assumptions and estimates are updated
by management on a regular basis.
Asset retirement obligations
We have estimated asset retirement obligations, which we believe will meet
current regulatory requirements. The future obligations are estimated by us
using closure plans and other similar studies which outline the requirements
that will be carried out to meet the obligations. Because the obligations are
dependent on the laws and regulations of Canada and its provinces, the
requirements could change resulting from amendments in the laws and regulations.
Because the estimate of obligations is based on future expectations, a number of
assumptions and judgments are made by management in the determination of these
provisions.
Income taxes
The determination of our ability to utilize tax loss carry forwards to offset
future income taxes payable requires management to exercise judgment and make
certain assumptions about the future performance of LEP. Changes in economic
conditions and other factors could result in revisions to the estimates of the
benefits to be realized or the timing of utilizing the losses.
Post-retirement benefits
The determination of the cost and obligations associated with employee future
benefits requires the use of various assumptions. We must select assumptions
such as the expected return on assets available to fund pension obligations, the
discount rate to measure obligations, the projected age of employees upon
retirement, and the expected rate of future compensation. These assumptions are
re-evaluated each year, and variations between actual results and the results
based on the assumptions for any period will affect reported amounts in future
periods. We retain independent actuarial experts to prepare the calculations and
to advise on the selection of assumptions.
CHANGES IN ACCOUNTING POLICIES AND ESTIMATES
During 2004, we have adopted several new accounting pronouncements from the
Canadian Institute of Chartered Accountants ("CICA"). The highlights of the
impact on the financial statements of the new pronouncements are as follows.
Interim Financial Statements
Effective June 30, 2004, the CICA revised Section 1751, Interim Financial
Statements, which requires disclosure in interim financial statements of benefit
costs as determined by Section 3461, Employee Future Benefits. The new
disclosures are provided in note 10 of the notes to the consolidated financial
statements.
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Asset Retirement Obligations
In March 2003, the CICA issued new accounting rules dealing with asset
retirement obligations, which came into effect for fiscal years beginning on or
after January 1, 2004. This change in accounting policy was applied
retroactively and accordingly, the financial statements of prior periods were
restated. The rules address financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. The standard applies to legal obligations associated
with the retirement of long-lived assets that result from the acquisition,
construction, development, and use of the asset. The rules require that the
estimated fair value of an asset retirement obligation be recognized as a
liability in the period incurred. A corresponding amount is added to the
carrying amount of the associated asset and depreciated over the asset's useful
life. The liability is accreted over time through charges to earnings to reflect
changes in its present value. This differs from the previous practice, which
involved accruing for the estimated reclamation, site restoration, and mine
closure liability through charges to earnings on a unit of production basis over
the expected life of each mine's reserves.
As required by the CICA, this policy was implemented by us on January 1, 2004,
on a retroactive basis. The impact of the adoption of this accounting policy on
prior year amounts is disclosed in note 2 of the notes to the consolidated
financial statements.
Change in Estimated Useful Lives
Concurrent with the implementation of the new accounting rules related to asset
retirement obligations, we undertook a comprehensive review of the estimated
useful lives of capital assets. This review has been finalized and resulted in
depreciation and amortization of capital assets being reduced by $2.6 million in
this quarter and $7.9 million for the first nine months of 2004.
Generally Accepted Accounting Principles
CICA Handbook Section 1100, Generally Accepted Accounting Principles, was issued
in October 2003, and is effective for fiscal years beginning January 1, 2004.
The section establishes standards for financial reporting in accordance with
generally accepted accounting principles ("GAAP") and clarifies the relative
authority of various accounting pronouncements and other sources within GAAP.
There was no impact to the financial statements in adopting this new standard.
General Standards of Financial Statement Presentation
In July 2003, the CICA issued Section 1400, General Standards of Financial
Statement Presentation, which is effective for fiscal years beginning on January
1, 2004. This standard clarifies what constitutes fair presentation in
accordance with GAAP, which involves providing sufficient information in a clear
and understandable manner about certain transactions or events of such size,
nature and incidence that their disclosure is necessary to understand our
financial statements. This standard is reflected in the consolidated financial
statements and there are no material differences as a result of the
implementation.
Revenue Recognition
In December 2003, the CICA issued EIC Abstract 141, Revenue Recognition, which
incorporates the principles and summarizes the guidance in the U.S. Securities
and Exchange Commission Staff Accounting Bulletin 101, Revenue Recognition in
Financial Statements. The abstract also provides interpretative guidance on the
application of CICA Handbook Section 3400, Revenue. The abstract has been
applied prospectively commencing January 1, 2004. The adoption of this abstract
had no impact on the financial statements.
Consolidation of Variable Interest Entities
In June 2003, the CICA issued Accounting Guideline No. 15, Consolidation of
Variable Interest Entities, ("AcG-15"), in order to address the consolidation of
variable interest entities ("VIEs"). VIEs are entities that have insufficient
equity and/or their equity investors lack one or more of the specified essential
characteristics of a controlling financial interest. The guideline provides
specific guidance for determining when an entity is a VIE and when it should be
consolidated. Every enterprise that has a contractual, ownership, or other
financial interest in or with any entity,
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special-purpose or otherwise, must determine whether that interest exposes the
enterprise to expected losses or expected residual gains of the entity in or
with which it has that interest. If the entity is a VIE, the enterprise with the
majority of the expected losses or expected residual returns consolidates the
VIE. In January 2004, the Accounting Standards Board in Canada amended AcG-15 so
that it conformed to FASB Interpretation 46R ("FIN 46R") in the United States.
AcG-15 will apply to any annual or interim financial period beginning on or
after November 1, 2004 for all public enterprises. The expected impact of this
Guideline has been evaluated by Luscar management and no impact on the financial
statements is anticipated.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
The following table presents a summary of our long-term debt and other
commitments including payment due date for each of the next five fiscal years
and thereafter:
LESS THAN 2 TO 3 4 TO 5 MORE THAN
TOTAL 1 YEAR YEARS YEARS 5 YEARS
----- ------ ----- ----- -------
(IN MILLIONS OF CANADIAN DOLLARS)
Long-term debt (excluding capital lease,
pension, and other obligations) $ 658.9 $ 74.1 $ 67.8 $ 67.8 $ 449.2
Obligations under capital leases 21.0 1.1 9.3 7.9 2.7
Electricity and natural gas purchase
commitments 0.7 0.7 - - -
Other leases 18.5 1.0 8.0 7.9 1.6
Pension funding 8.8 1.0 6.0 1.8 -
Asset retirement obligations (undiscounted 156.3 21.0 15.8 21.1 98.4
cash flow)
Pension deficit obligation 3.9 1.2 2.7 - -
------- ------- ------- ------- -------
$ 868.1 $ 100.1 $ 109.6 $ 106.5 $ 551.9
======= ======= ======= ======= =======
Long-term Debt
Long-term debt includes US$275 million of unsecured senior notes issued by LCL
on October 10, 2001, bearing interest at 9.75% per annum, payable on October 15,
2011. A promissory note of $89.3 million bearing interest of 9.625% is payable
on December 30, 2004. Under the terms of the related coal supply agreement, the
excess of the principal amount over the sinking fund is recoverable from a Crown
Corporation and will be included in other income in 2004. The amount due from
the customer on December 30, 2004 is estimated to be $38 million (net of the
related sinking fund).
Payment obligations are not discounted and include related interest.
Obligations under Capital Lease
Obligations under capital leases on specific mining equipment bear interest at
rates ranging from 4.6% to 6.6%. These capital leases mature between 2004 and
2009 and are repayable by blended monthly payments of principal and interest.
Payment obligations are not discounted and include related interest.
Electricity and Natural Gas Purchase Commitments
We have entered into agreements for the purchase of electricity and natural gas
at the Coal Valley and Obed Mountain mines until the end of 2004. The purchase
agreements are for fixed prices as well as for specific quantities. Additional
details are discussed in the Off Balance Sheet Arrangements section.
Other Leases
We have long-term operating leases for office space, vehicles and equipment.
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Pension Funding
Pension funding amounts represent our anticipated contributions to defined
benefit pension plans over the next 5 years. The net expense relating to our
obligations for pensions and post-retirement benefits was $0.3 million for the
third quarter ended September 30, 2004. For the year, the net expense is
expected to be approximately $1.6 million.
Asset Retirement Obligations
Asset retirement obligations payments have not been discounted.
Pension Deficit Obligation
The pension deficit obligation relates primarily to obligations under the Line
Creek defined benefit pension plans, which were under funded at the date of
transfer from LCL. Following the completion of an actuarial valuation, the total
obligation was determined to be $5.2 million. This amount is repayable in equal
installments over 5 years and outstanding amounts bear interest at 6.5% per
annum. The first two payments of $1.0 million were paid during the second
quarter after the finalization of the actuarial valuation.
Payment obligations are not discounted and include related interest.
OFF BALANCE SHEET ARRANGEMENTS
Financial Instruments
As at December 31, 2003 and September 30, 2004 there were no outstanding foreign
exchange or commodity options, futures or forward contracts. We have the ability
to address our price-related exposures through the limited use of options,
futures and forward contracts, but generally do not enter into such
arrangements.
As at September 30, 2004, we had the following outstanding fixed price commodity
purchase arrangements representing a total commitment of $0.7 million for the
remainder of 2004:
- natural gas purchase agreement at a fixed price for specified
monthly quantities until the end of 2004 at the Coal Valley mine,
- electricity purchase agreement at a fixed price for specified
megawatts per hour until the end of 2004 for all of Luscar Ltd,
- natural gas purchase agreement at a fixed price for quantities at
the Obed Mountain mine until the end of 2004.
Sales to the export market are transacted in US dollars and therefore are
sensitive to foreign exchange exposure when commitments to deliver coal are
quoted in a foreign currency. Derivative financial instruments are not used to
reduce LEP's exposure to fluctuations in foreign exchange rates.
Guarantees
During 2003, LEP adopted the CICA Accounting Guideline 14, Disclosure of
Guarantees. This policy requires the disclosure of information regarding certain
types of guarantee contracts that require payments contingent on specified types
of future events. All significant guarantee contracts are disclosed within the
notes to the annual consolidated financial statements.
In connection with a borrowing facility, we have provided an indemnity in
respect of transactions related to the extension of credit and environmental
indemnities in respect of our properties to the lender. The indemnities extend
for an unlimited period of time and the maximum potential liability cannot be
determined at this time. No amounts have been accrued with respect to these
indemnities.
- 9 -
As a result of the Manalta Coal acquisition in 1998, Luscar assumed an indemnity
agreement for a subsidiary of Manalta called Chinook Coals that was the grantor
of an indemnity agreement on a land sale to Sarcee Holdings. The agreement
stipulates that Chinook Coals will assume any responsibility or liability for
the mine shaft and mine site that is underneath the land that was sold; as well
as indemnifying Sarcee Holdings for any current or future claims that could
arise - effectively the buyer is fully released from any responsibility
therefore. This agreement is valid and enforceable until 2086.
RELATED PARTY TRANSACTIONS
LEP and Sherritt International Corporation ("Sherritt") are parties to an
administration agreement under which we appointed Sherritt to be our exclusive
manager for a period ending December 31, 2011, unless terminated earlier. The
administration agreement delegates to Sherritt responsibility over our
day-to-day administration, except that such delegation will not reduce or
derogate from the authority of the management committee of LEP. Sherritt must be
specifically authorized by us to enter into any agreements or arrangements
purporting to bind us. We pay Sherritt an administration fee equal to Sherritt's
reasonable direct costs and expenses plus 10%. We may terminate the agreement on
six months notice to Sherritt, or 30 days notice in the event of a default,
breach, misrepresentation or liquidation by Sherritt.
The total value of goods and services expensed under the administration
agreement in the third quarter of 2004 amounted to $0.2 million. Amounts owing
to Sherritt at September 30, 2004 total $0.8 million.
CONTROLS AND PROCEDURES
Each of LEP and LCL has evaluated the effectiveness of the design and operation
of its disclosure controls and procedures for the accurate and timely reporting
of required information about it and its consolidated subsidiaries. Such
evaluations were performed under the supervision of management, including the
chief executive officer and chief financial officer, of each entity. Each of LEP
and LCL has concluded that its respective disclosure controls and procedures
were effective as at September 30, 2004.
FORWARD-LOOKING INFORMATION
This interim report contains certain forward-looking statements such as
statements within the meaning of the Private Securities Litigation Reform Act of
1995 (United States) relating to but not limited to LEP's expectations,
intentions, plans, and beliefs. Forward-looking statements generally can be
identified by the use of statements that include phrases such as "believe",
"expect", "anticipate", "intend", "plan", "likely", "will" or other similar
words or phrases. Similarly, statements that describe our expectations with
respect to production and sales volumes, the commissioning of the Genesee power
plant, our restructuring and rationalization program, operating costs,
productivity, profitability, depreciation and amortization, capital
expenditures, coal markets, demand and pricing, effective tax rates, the Bow
City power project, plans or goals are or may be forward-looking statements.
Actual results may differ materially from results expressed or implied by these
forward-looking statements because of various factors including (i) the risk
factors set forth in our 2003 annual report Form 20-F filed June 30, 2004 with
the Securities and Exchange Commission, (ii) changes in the coal markets,
including with respect to price and demand, (iii) our current cost or
productivity estimates may change or prove incorrect, (iv) our initiation of
opportunity capital projects not included in our current plans, (v) changes in
the amount of cash available for capital asset purchases, and (vi) rating agency
decisions and other future financing developments. The forward-looking
statements included in this interim report are made as of the date of this
report. We caution against placing undue reliance on forward-looking statements,
which necessarily reflect current beliefs and are based on current (and perhaps
evolving) information. We undertake no obligations to revise forward looking
statements to reflect future events, changed circumstances, or changed beliefs.
CORPORATE OVERVIEW
LEP, formed on February 20, 2001 is a 50/50 general partnership between
subsidiaries of Sherritt and the Ontario Teachers' Pension Plan Board. LEP owns
LCL, which in turn owns Luscar Ltd. ("Luscar"). Luscar is Canada's largest
producer of coal and operates ten thermal coal mines in Alberta and
Saskatchewan. The mines we operate produce approximately 38 million tonnes of
coal. Most of the coal produced is sold under long-term coal supply agreements
to adjacent electric power stations in Alberta and Saskatchewan. These stations
generate most of the
- 10 -
electric power in these two provinces. We ship a lesser portion of our coal
production to customers in Ontario and overseas and we also produce char which
is sold to charcoal briquette manufacturers.
Readers may access other information about LEP, including the annual Form 20-F
for the year ended December 31, 2003, and other disclosure documents, reports,
statements or other information that LEP files with the U.S. Securities and
Exchange Commission through EDGAR at www.sec.gov/edgar or at Luscar's web site
at www.luscar.com. Information on our web site is not a part of this interim
report and is not incorporated by reference in this interim report.
For further information contact:
Ernie Lalonde
Luscar Energy Partnership
(416) 934-7655
www.luscar.com
- 11 -
LUSCAR ENERGY PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
AS AT AS AT
SEPTEMBER 30, DECEMBER 31,
2004 2003
---- ----
(in thousands of Canadian dollars) (RESTATED - NOTE 2)
ASSETS
CURRENT
Cash and cash equivalents $ 18,157 $ 21,750
Accounts receivable 59,561 62,087
Income taxes recoverable 1,016 1,096
Inventories 41,545 43,816
Overburden removal costs 3,083 4,199
Prepaid expenses 1,869 2,073
---------- ----------
125,231 135,021
Capital assets [notes 2 & 11] 1,355,714 1,405,306
Other assets 27,680 27,704
---------- ----------
$1,508,625 $1,568,031
========== ==========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT
Credit facility [note 6] $ 12,000 $ 12,000
Trade accounts payable and accrued charges 31,467 38,648
Accrued interest payable 17,687 7,219
Accrued payroll and employee benefits 9,992 10,332
Due to Sherritt International Corporation [note 13] 828 1,236
Income taxes payable 3,033 2,472
Current portions of:
Long-term debt [note 6] 45,574 46,342
Asset retirement obligations [notes 2 & 11] 15,709 17,829
Future income taxes 4,032 1,438
---------- ----------
140,322 137,516
Accrued pension obligations 6,080 4,956
Long-term debt [note 6] 366,213 365,934
Asset retirement obligations [notes 2 & 11] 89,292 90,509
Future income taxes 314,665 349,094
---------- ----------
916,572 948,009
PARTNERS' EQUITY
Partners' equity 592,053 620,022
---------- ----------
$1,508,625 $1,568,031
========== ==========
See accompanying notes
- 12 -
LUSCAR ENERGY PARTNERSHIP
CONSOLIDATED STATEMENTS OF EARNINGS AND PARTNERS' EQUITY
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
---- ---- ---- ----
(in thousands of Canadian dollars) (Restated - Note 2) (Restated - Note 2)
REVENUE [NOTE 5] $ 120,484 $ 87,150 $ 369,949 $ 262,123
EXPENSES AND OTHER INCOME
Cost of sales 85,735 61,281 259,478 190,004
Selling, general and administrative expenses 4,347 4,078 13,026 21,195
Depreciation and amortization 25,951 22,141 81,378 68,770
Asset retirement obligations accretion [note 11] 1,764 1,722 5,665 5,167
Foreign currency translation gain [note 7] (20,679) (2,361) (7,261) (63,096)
Interest expense [note 8] 10,889 10,427 34,565 35,156
Other income [note 9] (886) (3,603) (7,684) (28,003)
--------- -------- --------- ---------
EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE TAXES 13,363 (6,535) (9,218) 32,930
Income tax recovery (2,888) (3,091) (30,348) (55,172)
--------- -------- --------- ---------
NET EARNINGS (LOSS) FROM CONTINUING OPERATIONS 16,251 (3,444) 21,130 88,102
Discontinued operations [note 4] (84) - 1,969 19,130
--------- -------- --------- ---------
NET EARNINGS (LOSS) FOR THE PERIOD 16,167 (3,444) 23,099 107,232
Partners' equity, beginning of period 600,954 566,717 620,022 490,003
Distribution to partners (25,068) - (51,068) (33,962)
--------- -------- --------- ---------
PARTNERS' EQUITY, END OF PERIOD $ 592,053 $ 563,273 $ 592,053 $ 563,273
========= ========= ========= =========
See accompanying notes
- 13 -
LUSCAR ENERGY PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
---- ---- ---- ----
(in thousands of Canadian dollars) (Restated - Note 2) (Restated - Note 2)
OPERATING ACTIVITIES
Net earnings (loss) for the period $ 16,167 $ (3,444) $ 23,099 $ 107,232
Non-cash items:
Depreciation and amortization 25,951 22,141 81,378 69,728
Asset retirement obligations accretion [note 11] 1,764 1,722 5,665 5,167
Future income taxes (3,761) (3,544) (31,835) (49,507)
Foreign currency translation gain [note 7] (20,317) (1,119) (7,293) (61,516)
Loss (gain) on disposal of capital assets [note 9] (675) 1,577 (3,491) (23,393)
Loss (gain) on settlement of ARO [note 9] (294) (843) (1,403) 214
Gain on Fording settlement - - (3,350) -
Pension expense in excess of funding 299 995 1,124 1,126
Other (1,742) (640) (2,788) (3,090)
Asset retirement obligations costs (3,027) (3,876) (13,189) (10,714)
Change in non-cash working capital 15,184 13,643 9,059 44,191
-------- -------- -------- ---------
29,549 26,612 56,976 79,438
-------- -------- -------- ---------
INVESTING ACTIVITIES
Capital asset purchases (3,525) (1,274) (8,197) (12,460)
Proceeds on disposal of capital assets 1,110 41 4,610 1,303
Other investments (1,096) (1,037) (1,096) (1,037)
-------- -------- -------- ---------
(3,511) (2,270) (4,683) (12,194)
-------- -------- -------- ---------
FINANCING ACTIVITIES
Financial instruments - (625) - (1,958)
Repayments of long-term debt [note 6] (1,198) (519) (5,341) (23,248)
Distribution to partners (24,000) - (50,000) (27,000)
-------- -------- -------- ---------
(25,198) (1,144) (55,341) (52,206)
-------- -------- -------- ---------
Change in cash position 840 23,198 (3,048) 15,038
Foreign currency translation loss [note 7] (721) (228) (545) (1,514)
Cash position, beginning of period 6,038 64,267 9,750 73,713
-------- -------- -------- ---------
Cash position, end of period $ 6,157 $ 87,237 $ 6,157 $ 87,237
======== ======== ======== =========
Cash position consists of:
Cash and cash equivalents $ 18,157 $ 87,237 $ 18,157 $ 87,237
Credit facility (12,000) - (12,000) -
-------- -------- -------- ---------
Cash position, end of period $ 6,157 $ 87,237 $ 6,157 $ 87,237
======== ======== ======== =========
Interest paid $ 1,141 $ 110 $ 23,814 $ 26,735
Income taxes paid $ 322 $ 462 $ 1,164 $ 1,389
See accompanying notes
- 14 -
LUSCAR ENERGY PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2004
(Unaudited)
1. BASIS OF PRESENTATION
The quarterly consolidated financial statements presented herein are unaudited.
The statements have been prepared in accordance with Canadian generally accepted
accounting principles ("GAAP") and follow the same accounting policies as the
audited December 31, 2003 annual consolidated financial statements and related
notes contained in the Luscar Energy Partnership ("LEP") and Luscar Coal Ltd.
("LCL") Form 20-F filed June 30, 2004 with the United States Securities and
Exchange Commission ("SEC"), except as described in note 2, but do not contain
certain disclosures required by GAAP for annual statements. Readers should be
cautioned that interpretation of annual financial results without a full set of
accompanying notes could be misleading. All amounts are in thousands of Canadian
dollars unless otherwise stated.
2. CHANGES IN ACCOUNTING POLICIES AND ESTIMATES
INTERIM FINANCIAL STATEMENTS
Effective June 30, 2004, the Canadian Institute of Chartered Accountants
("CICA") revised Section 1751, Interim Financial Statements, which requires
certain disclosures in interim financial statements of benefit costs as
determined by Section 3461, Employee Future Benefits. These disclosures are
provided in note 10.
ASSET RETIREMENT OBLIGATIONS (SEE NOTE 11)
In March 2003, the CICA issued new accounting rules dealing with asset
retirement obligations, which come into effect for fiscal years beginning on or
after January 1, 2004. This change in accounting policy was applied
retroactively and accordingly, the financial statements of prior periods were
restated. The rules address financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. The standard applies to legal obligations associated
with the retirement of long-lived assets that result from the acquisition,
construction, development, and use of the asset. The rules require that the
estimated fair value of an asset retirement obligation be recognized as a
liability in the period incurred. A corresponding amount is added to the
carrying amount of the associated asset and depreciated over the asset's useful
life. The liability is accreted over time through charges to earnings to reflect
changes in its present value. This differs from the previous practice, which
involved accruing for the estimated reclamation, site restoration, and mine
closure liability through charges to earnings on a unit of production basis over
the expected life of each mine's reserves.
The new accounting policy was implemented on January 1, 2004 on a retroactive
basis with restatement of prior periods. The cumulative effect of the new
accounting standard on the balance sheet at December 31, 2003 was to increase
capital assets by $7,923, decrease future income taxes by $19,359, increase
asset retirement obligations by $67,030, and decrease opening retained earnings
by $39,065. The effect of the change in policy on the statement of earnings for
the three months ended September 30, 2003 was a $530 decrease in net earnings
for the period. For the nine months ended September 30, 2003, the impact was a
$2,993 decrease in net earnings for the period.
CHANGE IN ESTIMATED USEFUL LIVES
Concurrent with the implementation of the new accounting rules related to asset
retirement obligations, LEP undertook a comprehensive review of the estimated
useful lives of capital assets. As a result of this review, the depreciation and
amortization of capital assets was reduced resulting in a reduction of $2,636 in
this quarter and $7,908 for the first nine months of 2004.
- 15 -
LUSCAR ENERGY PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2004
(Unaudited)
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
CICA Handbook Section 1100, Generally Accepted Accounting Principles, was issued
in October 2003, and is effective for fiscal years beginning January 1, 2004.
The section establishes standards for financial reporting in accordance with
GAAP and clarifies the relative authority of various accounting pronouncements
and other sources within GAAP. There was no impact to these financial statements
in adopting this new standard.
GENERAL STANDARDS OF FINANCIAL STATEMENT PRESENTATION
In July 2003, the CICA issued Section 1400, General Standards of Financial
Statement Presentation, which is effective for fiscal years beginning on January
1, 2004. This standard clarifies what constitutes fair presentation in
accordance with GAAP, which involves providing sufficient information in a clear
and understandable manner about certain transactions or events of such size,
nature and incidence that their disclosure is necessary to understand LEP's
financial statements. This standard is reflected in these financial statements
and there are no material differences as a result of the implementation.
REVENUE RECOGNITION
In December 2003, the CICA issued EIC Abstract 141, Revenue Recognition, which
incorporates the principles and summarizes the guidance in the U.S. Securities
and Exchange Commission Staff Accounting Bulletin 101, Revenue Recognition in
Financial Statements. The abstract also provides interpretative guidance on the
application of CICA Handbook Section 3400, Revenue. The abstract has been
applied prospectively commencing January 1, 2004. The adoption of this abstract
had no impact on these financial statements.
CONSOLIDATION OF VARIABLE INTEREST ENTITIES
In June 2003, the CICA issued Accounting Guideline No. 15, Consolidation of
Variable Interest Entities, ("AcG-15"), in order to address the consolidation of
variable interest entities ("VIEs"). VIEs are entities that have insufficient
equity and/or their equity investors lack one or more of the specified essential
characteristics of a controlling financial interest. The guideline provides
specific guidance for determining when an entity is a VIE and when it should be
consolidated. Every enterprise that has a contractual, ownership, or other
financial interest in or with any entity, special-purpose or otherwise, must
determine whether that interest exposes the enterprise to expected losses or
expected residual gains of the entity in or with which it has that interest. If
the entity is a VIE, the enterprise with the majority of the expected losses or
expected residual returns consolidates the VIE. In January 2004, the Accounting
Standards Board in Canada amended AcG-15 so that it conformed to FASB
Interpretation 46R ("FIN 46R") in the United States. AcG-15 will apply to any
annual or interim financial period beginning on or after November 1, 2004 for
all public enterprises. The expected impact of this Guideline has been evaluated
by Luscar management and no impact on the financial statements is anticipated.
3. ACQUISITION
On October 17, 2003 LCL acquired 100% of the shares of Sherritt Coal Acquisition
Inc. ("SCAI"), a wholly owned subsidiary of Sherritt Coal Partnership II
("SCPII"). LEP, LCL, SCAI and SCPII are all owned, as to 50% each, directly or
indirectly, by Sherritt International Corporation ("Sherritt") and Ontario
Teachers' Pension Plan Board ("Teachers'"). The sale was completed for total
consideration of $455,000. The transaction has been recorded in the financial
statements at the net asset carrying amount of $208,838. The difference of
$246,162 between the consideration paid and the carrying value of the assets
received is considered an equity distribution and is charged to equity in the
current year. Subsequent to the purchase of SCAI, Sherritt and Teachers' made a
cash equity contribution to LEP of $298,605, which was used to acquire the
promissory notes due from LCL.
- 16 -
LUSCAR ENERGY PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2004
(Unaudited)
The allocation of the values of assets and liabilities acquired was completed in
the fourth quarter of 2003. A third party independent valuator provided an
opinion that the transaction was fair from a financial point of view to the
holders of LCL's 9.75% senior notes based upon and subject to, amongst other
things, the scope of their review and limitations and assumptions as outlined in
their opinion letter and an indemnity in certain circumstances. The opinion was
one factor among many that the management committee of LEP considered in
contemplation of the transaction.
The assigned fair values of the underlying net assets acquired are summarized as
follows:
(in thousands of Canadian dollars)
ACQUISITION FUNDING AND COST
Cash $ 70,000
Fording Canadian Coal Trust ("FCCT") units 86,395
Promissory notes 298,605
---------
455,000
---------
IDENTIFIABLE NET ASSETS ACQUIRED
Capital assets 228,264
Working capital 2,831
Cash 1,356
Short-term debt (12,000)
Long-term debt (6,043)
Future income taxes (5,570)
---------
208,838
---------
Consideration less net assets acquired 246,162
Equity impact from disposal of FCCT units, net of applicable taxes of $553 2,482
Less equity contribution from partners (298,605)
---------
Net equity contribution $ (49,961)
=========
4. DISCONTINUED OPERATIONS
During the first quarter of 2003, LCL exchanged its metallurgical coal assets
and port facilities for units in the FCCT. LCL received 2,979,000 units of the
trust and affiliates of Sherritt and Teachers' received 221,000 units of the
trust for a total value of $100,801 in exchange for these assets. LCL received
$16,156 related to the estimate of working capital for the metallurgical assets.
A gain of $17,812, net of taxes of $6,346 and selling expenses of $744, was
recorded on the disposal in the first quarter of 2003 at the LEP level.
On June 18, 2004 LEP reached an agreement with Fording Inc., Elk Valley Coal
Partnership, and Consol Energy Inc. (and subsidiaries) settling the majority of
issues that had previously been outstanding related to the transfer of the
metallurgical coal assets to FCCT effective February 28, 2003. Certain elements
of the original sale agreement had not been finalized due to differences in
interpretation between the parties to the transaction. Settled issues include
working capital adjustments, certain payments made under the agreement and
obligations for reclamation activities. As a result of the transferring of the
reclamation liability for the Luscar mine to Elk Valley Coal Partnership, we
were able to reduce our reclamation bonding requirements by $6,467. As a result
of the settlement agreement, LEP recorded a gain of $2,053 net of taxes of $476
in the second quarter of 2004 in discontinued operations. During the third
quarter of 2004 LEP recognized additional expenses related to the settlement of
$84 net of taxes of $45 in discontinued operations.
- 17 -
LUSCAR ENERGY PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2004
(Unaudited)
The results of discontinued operations are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
---- ---- ---- ----
(in thousands of Canadian dollars)
Net income $ - $ - $ - $ 1,318
Gain/(Loss) on settlement agreement (84) - 1,969 -
Gain on sale of assets (see below) - - - 17,812
-------- ------- ------- --------
$ (84) $ - $ 1,969 $ 19,130
======== ======= ======= ========
The carrying values of the assets and liabilities related to the discontinued
operations were as follows:
AS AT
FEBRUARY 28
2003
----
(Restated - Note 2)
Accounts receivable $ 2,653
Inventories 24,594
Overburden removal costs 23,827
Capital assets 48,777
Other assets 1,823
--------
Total assets 101,674
--------
Bank overdraft 1,020
Accounts payable and accrued charges 12,473
Asset retirement obligations 6,892
Capital leases 2,189
Other liabilities 1,267
--------
Total liabilities 23,841
--------
Net assets related to discontinued operations $ 77,833
========
GAIN ON SALE OF ASSETS
Proceeds $100,801
Overburden removal costs (23,827)
Capital assets (48,777)
Other assets (1,823)
Asset retirement obligations 6,892
Capital leases 2,189
Other liabilities 1,267
Liabilities retained by LEP (11,820)
Taxes (6,346)
Selling expenses (744)
--------
Gain on sale of assets $ 17,812
========
- 18 -
LUSCAR ENERGY PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2004
(Unaudited)
Under the terms and conditions of the sale agreement, LEP retained liabilities
relating to severance, unfunded pension plans, and accrued reclamation costs in
total of $11,820. Under the agreement reached on June 18, 2004 LEP transferred
the reclamation liability for the Luscar mine to Elk Valley Coal Partnership.
LEP currently retains liabilities relating to severance and unfunded pension
plans.
Net cash flows relating to the discontinued operations presented on the
statement of cash flows are detailed as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
(in thousands of Canadian dollars) ---- ---- ---- ----
Operating activities $ (84) $ - $ 2,445 $ 21,689
Investing Activities - - - (313)
Financing Activities - - - (21,889)
-------- ------- ------- --------
Cash flows related to discontinued operations $ (84) $ - $ 2,445 $ (513)
======== ======= ======= ========
5. REVENUES
LEP owns and operates surface mines located in western Canada, producing coal
for consumption by domestic and foreign customers. LEP's mining operations are
accounted for as one segment having similar economic and operating
characteristics, customers and operations, and have been aggregated for the
purpose of revenue reporting. Revenue from discontinued operations has been
removed.
Disclosures with respect to export and domestic sales are as follows:
THREE MONTHS ENDED THREE MONTHS ENDED NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2004 SEPTEMBER 30, 2003 SEPTEMBER 30, 2004 SEPTEMBER 30, 2003
------------------ ------------------ ------------------ ------------------
(in thousands of Canadian dollars SALES SALES SALES SALES
except volumes which are in REVENUE TONNES REVENUE TONNES REVENUE TONNES REVENUE TONNES
thousands of tonnes) ------- ------ ------- ------ ------- ------ ------- ------
Export $ 21,051 293 $ 18,635 487 $ 49,594 931 $ 52,517 1,273
Domestic 99,433 8,933 68,515 4,682 320,355 27,681 209,606 13,717
--------- -------- -------- -------- -------- -------- --------- -------
$ 120,484 9,226 $ 87,150 5,169 $369,949 28,612 $ 262,123 14,990
========= ======== ======== ======== ======== ======== ========= =======
Export coal sales are generally denominated in United States dollars.
- 19 -
LUSCAR ENERGY PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2004
(Unaudited)
Revenues are derived from significant customers and in some cases substantially
all production from a particular mine is sold to one customer. The number of
customers, each accounting for more than 10% of revenue for the periods
indicated below, is as follows:
THREE MONTHS ENDED THREE MONTHS ENDED NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2004 SEPTEMBER 30, 2003 SEPTEMBER 30, 2004 SEPTEMBER 30, 2003
------------------- ------------------ ------------------ -------------------
SALES NUMBER OF SALES NUMBER OF SALES NUMBER OF SALES NUMBER OF
REVENUE CUSTOMERS REVENUE CUSTOMERS REVENUE CUSTOMERS REVENUE CUSTOMERS
------- --------- ------- --------- ------- --------- ------- ---------
(in thousands of Canadian dollars)
Major Customers $ 87,398 3 $ 57,022 2 $250,188 3 $ 180,792 2
Credit risks are minimized to the extent that customers include major domestic
utilities and that accounts receivable on export sales are generally insured
under Canadian government export receivables insurance programs or secured by
letters of credit.
6. LONG-TERM DEBT
AS AT AS AT
SEPTEMBER 30, DECEMBER 31,
2004 2003
---- ----
Senior notes, at issue date $ 429,660 $ 429,660
Cumulative foreign currency translation gain since issue date (82,088) (74,250)
--------- ---------
Senior notes, at balance sheet date 347,572 355,410
9.625% promissory note, due December 30, 2004 89,300 89,300
Less sinking fund (49,066) (46,191)
--------- ---------
40,234 43,109
Capital lease obligations 20,861 8,957
Pension deficit obligation 3,120 4,800
--------- ---------
Long-term debt 411,787 412,276
Current portion of long-term debt (45,574) (46,342)
--------- ---------
$ 366,213 $ 365,934
========= =========
Effective February 4, 2004, LEP and LCL signed a senior credit agreement with a
syndicate of Canadian chartered banks consisting of a revolving 364 day
operating credit facility that permits maximum aggregate borrowings of $115,000,
subject to a borrowing base, which includes accounts receivable, coal
inventories, a $25,000 charge on a dragline, and a general assignment of LCL's
assets. The facility is split into two tranches, the Reclamation Letter of
Credit ("LC") facility and the Working Capital facility. Up to $65,000 of
reclamation letters of credit can be issued under the Reclamation LC facility.
To date $50,609 of letters of credit, providing reclamation security, have been
issued. Under the Working Capital facility, up to $50,000 in advances may be
made, including up to $25,000 in letters of credit. As at September 30, 2004,
$12,000 in cash and $2,450 in letters of credit have been drawn against this
facility. Interest rates payable or advances under the facility are based on
prime lending rates plus interest rate margins ranging from 0.25% to 1.25%
depending on LEP's ratio of debt to operating earnings before interest, taxes,
depreciation and amortization ("EBITDA").
- 20 -
LUSCAR ENERGY PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2004
(Unaudited)
Prior to the replacement of the credit facilities, as indicated above, LEP and
LCL were party to a senior credit agreement with a syndicate of Canadian
chartered banks consisting of a revolving 364 day operating credit facility that
permits maximum aggregate borrowings of $100,000, subject to a borrowing base,
which includes accounts receivable, coal inventories and a $25,000 charge on a
dragline. Up to $75,000 of the credit facility may be used to secure letters of
credit. Interest rates payable or advances under the facility are based on prime
lending rates plus interest rate margins ranging from 0.25% to 1.25% depending
on LEP's ratio of debt to EBITDA. In November 2003, the senior credit agreement
was extended until February 29, 2004 under the same terms and conditions and
replaced February 4, 2004.
Prior to the replacement of the credit facilities, as indicated above, and as a
result of the acquisition of the new thermal coal assets effective October 17,
2003, LEP and LCL assumed SCAI's senior credit agreement with a Canadian
chartered bank, consisting of a 364 day operating credit facility that permits
maximum aggregate borrowings of $15,000, guaranteed by a partner of LEP. In
November 2003, this facility was extended until February 29, 2004 under the same
terms and conditions and replaced February 4, 2004.
Capital leases for new equipment totaling $2,321 were entered in the quarter as
part of the long-term mine support equipment agreement LEP entered into with
Finning (Canada) a division of Finning International Inc. and Kramer Ltd., which
involves the leasing of equipment as part of a plan to reduce the maintenance
costs and increase equipment utilization.
Obligations under capital lease on specific mining equipment bear interest rates
ranging from 4.6% to 6.6%. These capital leases mature between 2004 and 2009 and
are repayable by blended monthly payments of principal and interest.
The pension deficit obligation relates to obligations under the Line Creek
defined benefit pension plan, which was under funded at the date of transfer
from LCL. Following the completion of an actuarial valuation, the total
obligation was determined to be $5,200. This amount is repayable in equal
installments over 5 years and outstanding amounts bear interest at 6.5% per
annum. The first two payments of $1,040 were paid during the second quarter,
after the finalization of the actuarial valuation.
7. FOREIGN CURRENCY TRANSLATION
Foreign currency translation gains and losses consist of the following:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
---- ---- ---- ----
(in thousands of Canadian dollars)
Foreign currency translation (gain) loss on:
Senior notes $(21,038) $ (1,347) $ (7,838) $(63,030)
US dollar cash balances 721 228 545 1,514
Working capital balances (362) (1,242) 32 (1,580)
-------- -------- -------- --------
$(20,679) $ (2,361) $ (7,261) $(63,096)
======== ======== ======== ========
- 21 -
LUSCAR ENERGY PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2004
(Unaudited)
8. INTEREST EXPENSE
Interest expense (income) consists of the following:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
---- ---- ---- ----
(in thousands of Canadian dollars)
Senior notes $ 8,736 $ 9,257 $ 26,726 $ 28,496
Promissory notes net of sinking fund interest income 1,413 1,414 4,241 6,720
Financial instruments - (117) - (434)
Capital leases 233 39 636 139
Reclamation security 485 257 2,599 1,357
Investment income - (498) - (1,515)
Other interest expense 22 75 363 393
-------- -------- -------- --------
$ 10,889 $ 10,427 $ 34,565 $ 35,156
======== ======== ======== ========
9. OTHER INCOME
Other income consists of the following:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
---- ---- ---- ----
(in thousands of Canadian dollars) (Restated - Note 2) (Restated - Note 2)
Boundary Dam promissory note $ - $ - $ - $(21,379)
Recovery of Crown royalties - (401) - (1,180)
Net pension plan expense 276 275 1,101 406
Loss (gain) on disposal of assets (675) 1,577 (3,491) 592
Loss (gain) on settlement of ARO (294) (843) (1,403) 214
Recovery of reclamation services (321) - (947) -
Deferred exploration expense 435 - 1,125 -
Distributions from Fording Canadian Coal Trust - (2,979) - (5,988)
Insurance premium refund - - (2,706) -
Other income (307) (1,232) (1,363) (668)
-------- -------- -------- --------
$ (886) $ (3,603) $ (7,684) $(28,003)
======== ======== ======== ========
Net pension plan expense excludes certain current service and other costs, which
are included in cost of sales.
- 22 -
LUSCAR ENERGY PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2004
(Unaudited)
10. EMPLOYEE FUTURE BENEFITS
LEP sponsors defined benefit and defined contribution pension arrangements
covering substantially all of its employees. The majority of its employees are
members of defined contribution plans; however, unionized employees at two mines
are members of active defined benefit pension plans. LEP has several other
defined benefit pension plans, in which most members have elected to convert
their entitlement to defined contribution plans. LEP uses actuarial reports and
updates prepared by independent actuaries for funding and accounting purposes.
LEP has no other retirement or post-employment benefits.
LEP's pension expense for the third quarter of 2004 was $1,724 and $4,573 year
to date (2003 - $1,120 and $3,469, respectively). Total pension expense includes
current service costs, interest costs, amortization, allowances and other costs;
some of which are included in other income and others which are included in cost
of sales.
11. ASSET RETIREMENT OBLIGATIONS
Our estimates of future asset retirement obligations are based on reclamation
standards that meet regulatory requirements. Elements of uncertainty in
estimating these amounts include potential changes in regulatory requirements,
decommissioning and reclamation alternatives, and amounts to be recovered from
other parties. Future reclamation, site restoration, and mine closure costs are
estimated to be $156,259. LEP technical personnel review these estimates
annually or more frequently as required by regulatory agencies. In connection
with future reclamation, site restoration, and mine closure costs, LEP has
provided financial assurances of $50,609 in the form of letters of credit to
satisfy current regulatory requirements.
The following are reconciliations of the beginning and ending liabilities for
asset retirement obligations for the periods shown.
NINE MONTHS YEAR
ENDED ENDED
SEPTEMBER 30, DECEMBER 31,
2004 2003
---- ----
(in thousands of Canadian dollars) (Restated - Note 2)
Asset retirement obligations, beginning of period $ 108,338 $ 106,645
Additional liabilities incurred 7,778 12,713
Accretion expense 5,665 6,889
Liabilities settled $ (16,780) (17,909)
--------- ---------
Asset retirement obligations, end of period $ 105,001 $ 108,338
Less current portion (15,709) (17,829)
--------- ---------
$ 89,292 $ 90,509
========= =========
Key assumptions on which the carrying amount of the asset retirement obligations
are based are as follows:
(i) Total undiscounted amount of the estimated cash flow -
$156,259
(ii) Expected timing of payment of cash flows is based on the life
of mine plans and will be incurred between the current period
and 2053.
(iii) Asset retirement obligations are recognized when incurred and
recorded as liabilities at fair value assuming a
credit-adjusted risk-free rate of approximately 6 per cent on
average.
- 23 -
LUSCAR ENERGY PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2004
(Unaudited)
12. CONDENSED CONSOLIDATING INFORMATION
The following condensed consolidated information is provided for the period
ending September 30, 2004.
(a) CONDENSED CONSOLIDATING BALANCE SHEET
AS AT SEPTEMBER 30, 2004
-----------------------------------------------------------------------
LUSCAR LUSCAR COAL LUSCAR ENERGY CONSOLIDATING CONSOLIDATED
(unaudited) COAL LTD. INCOME FUND PARTNERSHIP ENTRIES LEP
(in thousands of Canadian dollars) --------- ----------- ----------- ------- ---
ASSETS
CURRENT
Cash and cash equivalents $ 18,214 $ 13 $ (70) $ - $ 18,157
Accounts receivable 59,561 - - - 59,561
Income taxes recoverable 832 - 184 - 1,016
Inventories 41,545 - - - 41,545
Overburden removal costs 3,083 - - - 3,083
Prepaid expenses 1,753 65 51 - 1,869
----------- ----------- ----------- ----------- -----------
124,988 78 165 - 125,231
Investment in related parties - 577,692 458,775 (1,036,467) -
Notes receivable from LCL - - 298,605 (298,605) -
Capital assets 1,379,158 - - (23,444) 1,355,714
Other assets 27,194 486 9,000 (9,000) 27,680
----------- ----------- ----------- ----------- -----------
$ 1,531,340 $ 578,256 $ 766,545 $(1,367,516) $ 1,508,625
=========== =========== =========== =========== ===========
LIABILITIES AND PARTNERS' EQUITY
CURRENT
Credit facility $ 12,000 $ - $ - $ - $ 12,000
Trade accounts payable and accruals 31,289 - 397 (219) 31,467
Accrued interest payable 50,586 - (32,899) - 17,687
Accrued payroll and employee benefits 9,992 - - - 9,992
Income taxes payable 3,033 - - - 3,033
Current portions of
Long-term debt 45,574 - - - 45,574
Accrued reclamation costs 15,709 - - - 15,709
Future income taxes 4,032 - - - 4,032
Due to (from) related parties 44,401 3,877 (47,205) (245) 828
----------- ----------- ----------- ----------- -----------
216,616 3,877 (79,707) (464) 140,322
Accrued pension obligations 10,967 - - (4,887) 6,080
Long-term debt 366,213 - - - 366,213
Promissory notes due to LEP 298,605 - - (298,605) -
Convertible debentures - 96,053 - (96,053) -
Subordinated notes to LCIF 642,969 - - (642,969) -
Accrued reclamation costs 89,292 - - - 89,292
Future income taxes 314,665 - - - 314,665
----------- ----------- ----------- ----------- -----------
1,939,327 99,930 (79,707) (1,042,978) 916,572
Partners' equity (407,987) 478,326 846,252 (324,538) 592,053
----------- ----------- ----------- ----------- -----------
$ 1,531,340 $ 578,256 $ 766,545 $(1,367,516) $ 1,508,625
=========== =========== =========== =========== ===========
- 24 -
LUSCAR ENERGY PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2004
(Unaudited)
12. CONDENSED CONSOLIDATING INFORMATION (CONTINUED)
(b) CONDENSED CONSOLIDATING STATEMENT OF EARNINGS
THREE MONTHS ENDED SEPTEMBER 30, 2004
----------------------------------------------------------------
LUSCAR LUSCAR COAL LUSCAR ENERGY CONSOLIDATING CONSOLIDATED
(unaudited) COAL LTD. INCOME FUND PARTNERSHIP ENTRIES LEP
(in thousands of Canadian dollars) --------- ----------- ----------- ------- ---
REVENUE $ 120,484 $ - $ - $ - $ 120,484
EXPENSES AND OTHER INCOME
Cost of sales 85,735 - - - 85,735
Selling, general and administrative expenses 3,949 - 398 - 4,347
Equity pickup - (6,138) (5,985) 12,123 -
Depreciation and amortization 25,392 153 - 406 25,951
Asset retirement obligations accretion 1,764 - - - 1,764
Foreign currency translation gain (20,679) - - - (20,679)
Intercompany interest expense (income) 10,984 - (10,984) - -
Interest expense (income) 10,891 - (2) - 10,889
Other income (886) - - - (886)
--------- --------- --------- --------- ---------
EARNINGS (LOSS) FROM CONTINUING OPERATIONS
BEFORE TAXES 3,334 5,985 16,573 (12,529) 13,363
Income tax recovery (2,888) - - - (2,888)
--------- --------- --------- --------- ---------
NET EARNINGS (LOSS) FROM CONTINUING OPERATIONS 6,222 5,985 16,573 (12,529) 16,251
Discontinued operations (84) - - - (84)
--------- --------- --------- --------- ---------
NET EARNINGS (LOSS) FOR THE PERIOD $ 6,138 $ 5,985 $ 16,573 $ (12,529) $ 16,167
========= ========= ========= ========= =========
NINE MONTHS ENDED SEPTEMBER 30, 2004
----------------------------------------------------------------
LUSCAR LUSCAR COAL LUSCAR ENERGY CONSOLIDATING CONSOLIDATED
(unaudited) COAL LTD. INCOME FUND PARTNERSHIP ENTRIES LEP
(in thousands of Canadian dollars) --------- ----------- ----------- ------- ---
REVENUE $ 369,949 $ - $ - $ - $ 369,949
EXPENSES AND OTHER INCOME
Cost of sales 259,478 - - - 259,478
Selling, general and administrative expenses 11,855 - 1,171 - 13,026
Equity pickup - 7,435 7,895 (15,330) -
Depreciation and amortization 80,271 460 - 647 81,378
Asset retirement obligations accretion 5,665 - - - 5,665
Foreign currency translation gain (7,261) - - - (7,261)
Intercompany interest expense (income) 33,239 - (33,239) - -
Interest expense 34,285 - 280 - 34,565
Other (income) expense (7,831) - - 147 (7,684)
--------- --------- --------- --------- ---------
EARNINGS (LOSS) FROM CONTINUING OPERATIONS
BEFORE TAXES (39,752) (7,895) 23,893 14,536 (9,218)
Income tax recovery (30,348) - - - (30,348)
--------- --------- --------- --------- ---------
NET EARNINGS (LOSS) FROM CONTINUING OPERATIONS (9,404) (7,895) 23,893 14,536 21,130
Discontinued operations 1,969 - - - 1,969
--------- --------- --------- --------- ---------
NET EARNINGS (LOSS) FOR THE PERIOD $ (7,435) $ (7,895) $ 23,893 $ 14,536 $ 23,099
========= ========= ========= ========= =========
- 25 -
LUSCAR ENERGY PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2004
(Unaudited)
12. CONDENSED CONSOLIDATING INFORMATION (CONTINUED)
(c) CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
THREE MONTHS ENDED SEPTEMBER 30, 2004
---------------------------------------------------------------
LUSCAR LUSCAR COAL LUSCAR ENERGY CONSOLIDATING CONSOLIDATED
(unaudited) COAL LTD. INCOME FUND PARTNERSHIP ENTRIES LEP
(in thousands of Canadian dollars) --------- ----------- ----------- ------- ---
OPERATING ACTIVITIES
Net earnings (loss) for the period $ 6,138 $ 5,985 $ 16,573 $ (12,529) $ 16,167
Non-cash items:
Depreciation and amortization 25,392 - - 559 25,951
Asset retirement obligations accretion 1,764 - - - 1,764
Future income taxes (3,761) - - - (3,761)
Foreign currency translation gain (20,317) - - - (20,317)
Equity pickup - (6,138) (5,985) 12,123 -
Gain on disposal of capital assets (675) - - - (675)
Gain on settlement of ARO (294) - - - (294)
Pension expense in excess of funding 299 - - - 299
Other (1,742) - - - (1,742)
Asset retirement obligations costs (3,027) - - - (3,027)
Change in non-cash working capital 28,317 (2,244) (10,736) (153) 15,184
--------- --------- --------- --------- ---------
32,094 (2,397) (148) - 29,549
--------- --------- --------- --------- ---------
INVESTING ACTIVITIES
Capital asset purchases (3,525) - - - (3,525)
Other investments (1,096) - - - (1,096)
Proceeds on disposal of capital assets 1,110 - - - 1,110
--------- --------- --------- --------- ---------
(3,511) - - - (3,511)
--------- --------- --------- --------- ---------
FINANCING ACTIVITIES
Repayments of long-term debt (1,198) - - - (1,198)
Distribution to partners (24,000) - - - (24,000)
--------- --------- --------- --------- ---------
(25,198) - - - (25,198)
--------- --------- --------- --------- ---------
Change in cash position 3,385 (2,397) (148) - 840
Foreign currency translation loss (721) - - - (721)
Cash position, beginning of period 3,550 2,410 78 - 6,038
--------- --------- --------- --------- ---------
Cash position, end of period $ 6,214 $ 13 $ (70) $ - $ 6,157
========= ========= ========= ========= =========
- 26 -
LUSCAR ENERGY PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2004
(Unaudited)
12. CONDENSED CONSOLIDATING INFORMATION (CONTINUED)
(c) CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (CONTINUED)
NINTH MONTHS ENDED SEPTEMBER 30, 2004
----------------------------------------------------------------
LUSCAR LUSCAR COAL LUSCAR ENERGY CONSOLIDATING CONSOLIDATED
(unaudited) COAL LTD. INCOME FUND PARTNERSHIP ENTRIES LEP
(in thousands of Canadian dollars) --------- ----------- ----------- ------- ---
OPERATING ACTIVITIES
Net earnings (loss) for the period $ (7,435) $ (7,895) $ 23,893 $ 14,536 $ 23,099
Non-cash items:
Depreciation and amortization 80,271 - - 1,107 81,378
Asset retirement obligations accretion 5,665 - - - 5,665
Future income taxes (31,835) - - - (31,835)
Foreign currency translation gain (7,293) - - - (7,293)
Equity pickup - 7,435 7,895 (15,330) -
Gain on disposal of capital assets (3,491) - - - (3,491)
Gain on settlement of ARO (1,403) - - - (1,403)
Gain on Fording settlement (3,350) - - - (3,350)
Pension expense in excess of funding 977 - - 147 1,124
Other (2,788) - - - (2,788)
Asset retirement obligations costs (13,189) - - - (13,189)
Change in non-cash working capital 43,489 (2,086) (31,884) (460) 9,059
--------- --------- --------- --------- ---------
59,618 (2,546) (96) - 56,976
--------- --------- --------- --------- ---------
INVESTING ACTIVITIES
Capital asset purchases (8,197) - - - (8,197)
Other investments (1,096) - - - (1,096)
Proceeds on disposal of capital assets 4,610 - - - 4,610
--------- --------- --------- --------- ---------
(4,683) - - - (4,683)
--------- --------- --------- --------- ---------
FINANCING ACTIVITIES
Repayments of long-term debt (5,341) - - - (5,341)
Distribution to partners (50,000) - - - (50,000)
--------- --------- --------- --------- ---------
(55,341) - - - (55,341)
--------- --------- --------- --------- ---------
Change in cash position (406) (2,546) (96) - (3,048)
Foreign currency translation loss (545) - - - (545)
Cash position, beginning of period 7,165 2,559 26 - 9,750
--------- --------- --------- --------- ---------
Cash position, end of period $ 6,214 $ 13 $ (70) $ - $ 6,157
========= ========= ========= ========= =========
13. RELATED PARTY TRANSACTIONS
LEP has undertaken to compensate Sherritt for administration services at
Sherritt's direct cost plus 10 percent and to reimburse both Sherritt and
Teachers' for all third-party costs incurred in connection with LEP. During the
third quarter, LEP incurred $205 for such services and costs which are included
in selling, general and administrative expenses. At September 30, 2004, LEP has
an amount owing to Sherritt of $828 (December 31, 2003 - $1,236).
- 27 -
LUSCAR ENERGY PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2004
(Unaudited)
14. COMMITMENTS AND CONTINGENCIES
LEP is committed to future annual lease payments in respect of its operating
leases for office space, equipment and vehicles. Minimum payments for the next
five years are as follows:
(in thousands of Canadian dollars)
The remainder of 2004 $ 1,054
2005 4,113
2006 3,934
2007 3,934
2008 3,934
Thereafter 1,555
--------
$ 18,524
========
As at September 30, 2004, LEP has the following fixed-price commodity purchase
arrangements outstanding, representing a total commitment of $688 for the
remainder of 2004:
- natural gas purchase agreement at a fixed price for specified
monthly quantities until the end of 2004 at the Coal Valley mine,
- electricity purchase agreement at a fixed price for specified
megawatts per hour until the end of 2004 for all of Luscar Ltd.,
- natural gas purchase agreement at a fixed price for quantities as
required by the mine at the Obed Mountain mine.
15. COMPARATIVE FIGURES
Certain 2003 comparative figures have been reclassified to conform to the
presentation adopted for 2004.
- 28 -
LUSCAR COAL LTD.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
AS AT AS AT
SEPTEMBER 30, DECEMBER 31,
2004 2003
---- ----
(in thousands of Canadian dollars) (Restated - Note 2)
ASSETS
CURRENT
Cash and cash equivalents $ 18,214 $ 19,165
Accounts receivable 59,561 62,087
Income taxes recoverable 832 912
Inventories 41,545 43,816
Overburden removal costs 3,083 4,199
Prepaid expenses 1,753 2,073
----------- -----------
124,988 132,252
Capital assets [notes 2 & 11] 1,379,158 1,428,103
Other assets 27,194 26,758
----------- -----------
$ 1,531,340 $ 1,587,113
=========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT
Credit facility [note 6] $ 12,000 $ 12,000
Trade accounts payable and accrued charges 31,289 38,594
Accrued interest payable 50,586 14,369
Accrued payroll and employee benefits 9,992 10,332
Income taxes payable 3,033 2,472
Current portions of
Long-term debt [note 6] 45,574 46,342
Asset retirement obligations [notes 2 & 11] 15,709 17,829
Future income taxes 4,032 1,438
Due to Luscar Energy Partnership [note 12] 43,328 34,638
Due to Luscar Coal Income Fund [note 12] 245 245
Due to Sherritt International Corporation [note 12] 828 1,236
----------- -----------
216,616 179,495
Accrued pension benefit obligation 10,967 9,991
Long-term debt [note 6] 366,213 365,934
Promissory notes due to LEP 298,605 298,605
Subordinated notes due to LCIF 642,969 642,969
Asset retirement obligations [notes 2 & 11] 89,292 90,509
Future income taxes 314,665 349,094
----------- -----------
1,939,327 1,936,597
----------- -----------
SHAREHOLDERS' DEFICIT
Share capital 14,191 14,191
Deficit (422,178) (363,675)
----------- -----------
(407,987) (349,484)
----------- -----------
$ 1,531,340 $ 1,587,113
=========== ===========
See accompanying notes
- 29 -
LUSCAR COAL LTD.
CONSOLIDATED STATEMENTS OF EARNINGS AND DEFICIT
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
---- ---- ---- ----
(in thousands of Canadian dollars) (Restated - Note 2) (Restated - Note 2)
REVENUE [NOTE 5] $ 120,484 $ 87,150 $ 369,949 $ 262,123
EXPENSES AND OTHER INCOME
Cost of sales 85,735 61,281 259,478 190,004
Selling, general and administrative expenses 3,949 3,331 11,855 20,016
Depreciation and amortization 25,392 21,883 80,271 67,774
Asset retirement obligations accretion [note 11] 1,764 1,722 5,665 5,167
Foreign currency translation gain [note 7] (20,679) (2,361) (7,261) (63,096)
Interest expense [note 8] 21,875 13,328 67,524 43,880
Other income [note 9] (886) (3,602) (7,831) (27,597)
---------- ---------- ---------- ---------
EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE TAXES 3,334 (8,432) (39,752) 25,975
Income tax recovery (2,888) (3,091) (30,348) (55,172)
---------- ---------- ---------- ---------
NET EARNINGS (LOSS) FROM CONTINUING OPERATIONS 6,222 (5,341) (9,404) 81,147
Discontinued operations [note 4] (84) - 1,969 858
---------- ---------- ---------- ---------
NET EARNINGS (LOSS) FOR THE PERIOD 6,138 (5,341) (7,435) 82,005
Deficit, beginning of period (403,248) (110,831) (363,675) (198,177)
Distributions (25,068) - (51,068) -
---------- ---------- ---------- ---------
DEFICIT, END OF PERIOD $ (422,178) $ (116,172) $ (422,178) $(116,172)
========== ========== ========== =========
See accompanying notes
- 30 -
LUSCAR COAL LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
---- ---- ---- ----
(in thousands of Canadian dollars) (Restated - Note 2) (Restated - Note 2)
OPERATING ACTIVITIES
Net earnings (loss) for the period $ 6,138 $ (5,341) $ (7,435) $ 82,005
Non-cash items:
Depreciation and amortization 25,392 21,884 80,271 68,733
Asset retirement obligations accretion 1,764 1,722 5,665 5,167
Future income taxes (3,761) (3,544) (31,835) (49,507)
Foreign currency translation gain [note 7] (20,317) (1,119) (7,293) (61,516)
Loss (gain) on disposal of capital assets [note 9] (675) 1,576 (3,491) (5,121)
Loss (gain) on settlement of ARO [note 9] (294) (843) (1,403) 214
Gain on Fording settlement - - (3,350) -
Pension expense in excess of funding 299 2,153 977 2,284
Other (1,742) (1,305) (2,788) (3,080)
Asset retirement obligations costs (3,027) (3,871) (13,189) (10,709)
Change in non-cash working capital 28,317 7,201 43,489 12,957
------- -------- -------- --------
32,094 18,513 59,618 41,427
------- -------- -------- --------
INVESTING ACTIVITIES
Capital asset purchases (3,525) (1,274) (8,197) (12,460)
Proceeds on disposal of capital assets 1,110 41 4,610 1,303
Other investments (1,096) (1,037) (1,096) (1,037)
------- -------- -------- --------
(3,511) (2,270) (4,683) (12,194)
------- -------- -------- --------
FINANCING ACTIVITIES
Financial instruments (625) (1,958)
Repayments of long-term debt [note 6] (1,198) (519) (5,341) (23,248)
Distribution to partners (24,000) - (50,000) -
------- -------- -------- --------
(25,198) (1,144) (55,341) (25,206)
------- -------- -------- --------
Change in cash position 3,385 15,099 (406) 4,027
Foreign currency translation loss [note 7] (721) (228) (545) (1,514)
Cash position, beginning of period 3,550 (5,464) 7,165 6,894
------- -------- -------- --------
Cash position, end of period $ 6,214 $ 9,407 $ 6,214 $ 9,407
======= ======== ======== ========
Cash position consists of:
Cash and cash equivalents $18,214 $ 9,407 $ 18,214 $ 9,407
Bank indebtedness - - - -
Credit facility (12,000) - (12,000) -
------- -------- -------- --------
Cash position, end of period $ 6,214 $ 9,407 $ 6,214 $ 9,407
======= ======== ======== ========
Interest paid $ 2,400 $ 2,511 $ 37,080 $ 33,939
Income taxes paid $ 322 $ 432 $ 1,164 $ 1,386
See accompanying notes
- 31 -
LUSCAR COAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2004
(Unaudited)
1. BASIS OF PRESENTATION
The quarterly consolidated financial statements presented herein are unaudited.
The statements have been prepared in accordance with Canadian generally accepted
accounting principles ("GAAP") and follow the same accounting policies as the
audited December 31, 2003 annual consolidated financial statements and related
notes contained in the Luscar Energy Partnership ("LEP") and Luscar Coal Ltd.
("LCL") Form 20-F filed June 30, 2004 with the United States Securities and
Exchange Commission ("SEC"), except as described in note 2, but do not contain
certain disclosures required by GAAP for annual statements. Readers should be
cautioned that interpretation of annual financial results without a full set of
accompanying notes could be misleading. All amounts are in thousands of Canadian
dollars unless otherwise stated.
2. CHANGES IN ACCOUNTING POLICIES AND ESTIMATES
INTERIM FINANCIAL STATEMENTS
Effective June 30, 2004, the Canadian Institute of Chartered Accountants
("CICA") revised Section 1751, Interim Financial Statements, which requires
certain disclosures in interim financial statements of benefit costs as
determined by Section 3461, Employee Future Benefits. These disclosures are
provided in note 10.
ASSET RETIREMENT OBLIGATIONS (SEE NOTE 11)
In March 2003, the CICA issued new accounting rules dealing with asset
retirement obligations, which come into effect for fiscal years beginning on or
after January 1, 2004. This change in accounting policy was applied
retroactively and accordingly, the financial statements of prior periods were
restated. The rules address financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. The standard applies to legal obligations associated
with the retirement of long-lived assets that result from the acquisition,
construction, development, and use of the asset. The rules require that the
estimated fair value of an asset retirement obligation be recognized as a
liability in the period incurred. A corresponding amount is added to the
carrying amount of the associated asset and depreciated over the asset's useful
life. The liability is accreted over time through charges to earnings to reflect
changes in its present value. This differs from the previous practice, which
involved accruing for the estimated reclamation, site restoration, and mine
closure liability through charges to earnings on a unit of production basis over
the expected life of each mine's reserves.
The new accounting policy was implemented on January 1, 2004 on a retroactive
basis with restatement of prior periods. The cumulative effect of the new
accounting standard on the balance sheet at December 31, 2003 was to increase
capital assets by $7,923, decrease future income taxes by $19,359, increase
asset retirement obligations by $67,030, and decrease opening retained earnings
by $39,065. The effect of the change in policy on the statement of earnings for
the three months ended September 30, 2003 was a $530 decrease in net earnings
for the period. For the nine months ended September 30, 2003, the impact was a
$2,993 decrease in net earnings for the period.
CHANGE IN ESTIMATED USEFUL LIVES
Concurrent with the implementation of the new accounting rules related to asset
retirement obligations, LCL undertook a comprehensive review of the estimated
useful lives of capital assets. As a result of this review, the depreciation and
amortization of capital assets was reduced resulting in a reduction of $2,636 in
this quarter and $7,908 for the first nine months of 2004.
- 32 -
LUSCAR COAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2004
(Unaudited)
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
CICA Handbook Section 1100, Generally Accepted Accounting Principles, was issued
in October 2003, and is effective for fiscal years beginning January 1, 2004.
The section establishes standards for financial reporting in accordance with
GAAP and clarifies the relative authority of various accounting pronouncements
and other sources within GAAP. There was no impact to these financial statements
in adopting this new standard.
GENERAL STANDARDS OF FINANCIAL STATEMENT PRESENTATION
In July 2003, the CICA issued Section 1400, General Standards of Financial
Statement Presentation, which is effective for fiscal years beginning on January
1, 2004. This standard clarifies what constitutes fair presentation in
accordance with GAAP, which involves providing sufficient information in a clear
and understandable manner about certain transactions or events of such size,
nature and incidence that their disclosure is necessary to understand LCL's
financial statements. This standard is reflected in these financial statements
and there are no material differences as a result of the implementation.
REVENUE RECOGNITION
In December 2003, the CICA issued EIC Abstract 141, Revenue Recognition, which
incorporates the principles and summarizes the guidance in the U.S. Securities
and Exchange Commission Staff Accounting Bulletin 101, Revenue Recognition in
Financial Statements. The abstract also provides interpretative guidance on the
application of CICA Handbook Section 3400, Revenue. The abstract has been
applied prospectively commencing January 1, 2004. The adoption of this abstract
had no impact on these financial statements.
CONSOLIDATION OF VARIABLE INTEREST ENTITIES
In June 2003, the CICA issued Accounting Guideline No. 15, Consolidation of
Variable Interest Entities, ("AcG-15"), in order to address the consolidation of
variable interest entities ("VIEs"). VIEs are entities that have insufficient
equity and/or their equity investors lack one or more of the specified essential
characteristics of a controlling financial interest. The guideline provides
specific guidance for determining when an entity is a VIE and when it should be
consolidated. Every enterprise that has a contractual, ownership, or other
financial interest in or with any entity, special-purpose or otherwise, must
determine whether that interest exposes the enterprise to expected losses or
expected residual gains of the entity in or with which it has that interest. If
the entity is a VIE, the enterprise with the majority of the expected losses or
expected residual returns consolidates the VIE. In January 2004, the Accounting
Standards Board in Canada amended AcG-15 so that it conformed to FASB
Interpretation 46R ("FIN 46R") in the United States. AcG-15 will apply to any
annual or interim financial period beginning on or after November 1, 2004 for
all public enterprises. The expected impact of this Guideline has been evaluated
by Luscar management and no impact on the financial statements is anticipated.
3. ACQUISITION
On October 17, 2003 LCL acquired 100% of the shares of Sherritt Coal Acquisition
Inc. ("SCAI"), a wholly owned subsidiary of Sherritt Coal Partnership II
("SCPII"). LEP, LCL, SCAI and SCPII are all owned, as to 50% each, directly or
indirectly, by Sherritt International Corporation ("Sherritt") and Ontario
Teachers' Pension Plan Board ("Teachers'"). The sale was completed for total
consideration of $455,000. The transaction has been recorded in the financial
statements at the net asset carrying amount of $208,838. The difference of
$246,162 between the consideration paid and the carrying value of the assets
received is considered an equity distribution and is charged to equity in the
current year. Subsequent to the purchase of SCAI, Sherritt and Teachers' made a
cash equity contribution to LEP of $298,605, which was used to acquire the
promissory notes due from LCL.
- 33 -
LUSCAR COAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2004
(Unaudited)
The allocation of the values of assets and liabilities acquired was completed in
the fourth quarter of 2003. A third party independent valuator provided an
opinion that the transaction was fair from a financial point of view to the
holders of LCL's 9.75% senior notes based upon and subject to, amongst other
things, the scope of their review and limitations and assumptions as outlined in
their opinion letter and an indemnity in certain circumstances. The opinion was
one factor among many that the management committee of LEP considered in
contemplation of the transaction.
The assigned fair values of the underlying net assets acquired are summarized as
follows:
ACQUISITION FUNDING AND COST
(in thousands of Canadian dollars)
Cash $ 70,000
Fording Canadian Coal Trust ("FCCT") units 86,395
Promissory notes 298,605
---------
455,000
---------
IDENTIFIABLE NET ASSETS ACQUIRED
Capital assets 228,264
Working capital 2,831
Cash 1,356
Short-term debt (12,000)
Long-term debt (6,043)
Future income taxes (5,570)
---------
208,838
---------
Consideration less net assets acquired 246,162
Equity impact from disposal of FCCT units, net of applicable taxes of $553 2,482
---------
Net assets acquired in excess of liabilities assumed $ 248,644
=========
4. DISCONTINUED OPERATIONS
During the first quarter of 2003, LCL exchanged its metallurgical coal assets
and port facilities for units in the FCCT. LCL received 2,979,000 units of the
trust and affiliates of Sherritt and Teachers' received 221,000 units of the
trust for a total value of $100,801 in exchange for these assets. LCL received
$16,156 related to the estimate of working capital for the metallurgical assets.
A loss of $460, net of taxes of $6,346 and selling expenses of $744, was
recorded on the disposal in the first quarter of 2003.
On June 18, 2004 LCL reached an agreement with Fording Inc., Elk Valley Coal
Partnership, and Consol Energy Inc. (and subsidiaries) settling the majority of
issues that had previously been outstanding related to the transfer of the
metallurgical coal assets to FCCT effective February 28, 2003. Certain elements
of the original sale agreement had not been finalized due to differences in
interpretation between the parties to the transaction. Settled issues include
working capital adjustments, certain payments made under the agreement and
obligations for reclamation activities. As a result of the transferring of the
reclamation liability for the Luscar mine to Elk Valley Coal Partnership, we
were able to reduce our reclamation bonding requirements by $6,467. As a result
of the settlement agreement, LCL recorded a gain of $2,053 net of taxes of $476
in the second quarter of 2004 in discontinued operations. During the third
quarter of 2004 LCL recognized additional expenses related to the settlement of
$84 net of taxes of $45 in discontinued operations.
- 34 -
LUSCAR COAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2004
(Unaudited)
The results of discontinued operations are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
---- ---- ---- ----
(in thousands of Canadian dollars) (Restated - Note 2)
Net income $ - $ - $ - $ 1,318
Gain/ (Loss) on settlement agreement (84) - 1,969 -
Loss on sale of assets (see below) - - - (460)
------- ------- ------- -------
$ (84) $ - $ 1,969 $ 858
======= ======= ======= =======
The carrying values of the assets and liabilities related to the discontinued
operations were as follows:
AS AT
FEBRUARY 28
2003
----
(Restated - Note 2)
Accounts receivable $ 2,653
Inventories 24,594
Overburden removal costs 23,827
Capital assets 66,731
Other assets 1,823
---------
Total assets 119,628
---------
Bank overdraft 1,020
Accounts payable and accrued charges 12,473
Asset retirement obligations 6,892
Capital leases 2,189
Other liabilities 1,267
---------
Total liabilities 23,841
---------
Net assets related to discontinued operations $ 95,787
=========
LOSS ON SALE OF ASSETS
Proceeds $ 100,801
Overburden removal costs (23,827)
Capital assets (66,731)
Other assets (1,823)
Asset retirement obligations 6,892
Capital leases 2,189
Other liabilities 1,267
Liabilities retained by LCL (12,138)
Taxes (6,346)
Selling expenses (744)
---------
Loss on sale of assets $ (460)
=========
- 35 -
LUSCAR COAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2004
(Unaudited)
Under the terms and conditions of the sale agreement, LCL retained liabilities
relating to severance, unfunded pension plans, and accrued reclamation costs in
total of $12,138. Under the agreement reached on June 18, 2004 LCL transferred
the reclamation liability for the Luscar mine to Elk Valley Coal Partnership.
LCL currently retains liabilities relating to severance and unfunded pension
plans.
Net cash flows relating to the discontinued operations presented on the
statement of cash flows are detailed as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
---- ---- ---- ----
(Restated - Note 2)
(in thousands of Canadian dollars)
Operating activities $ (84) $ - $ 2,445 $ 21,689
Investing Activities - - - (313)
Financing Activities - - - (21,889)
-------- ------- -------- --------
Cash flows related to discontinued operations $ (84) $ - $ 2,445 $ (513)
======== ======= ======== ========
5. REVENUES
LCL owns and operates surface mines located in western Canada, producing coal
for consumption by domestic and foreign customers LCL's mining operations are
accounted for as one segment having similar economic and operating
characteristics, customers and operations, and have been aggregated for the
purpose of revenue reporting. Revenue from discontinued operations has been
removed.
Disclosures with respect to export and domestic sales are as follows:
THREE MONTHS ENDED THREE MONTHS ENDED NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2004 SEPTEMBER 30, 2003 SEPTEMBER 30, 2004 SEPTEMBER 30, 2003
------------------ ------------------ ------------------ ------------------
(in thousands of Canadian dollars SALES SALES SALES SALES
except volumes which are in REVENUE TONNES REVENUE TONNES REVENUE TONNES REVENUE TONNES
thousands of tonnes) ------- ------ ------- ------ ------- ------ ------- ------
Export $ 21,051 293 $ 18,635 487 $ 49,594 931 $ 52,517 1,273
Domestic 99,433 8,933 68,515 4,682 320,355 27,681 209,606 13,717
-------- ------- -------- ------ -------- ------- -------- ------
$120,484 9,226 $ 87,150 5,169 $369,949 28,612 $262,123 14,990
======== ======= ======== ====== ======== ======= ======== ======
Export coal sales are generally denominated in United States dollars.
- 36 -
LUSCAR COAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2004
(Unaudited)
Revenues are derived from significant customers and in some cases substantially
all production from a particular mine is sold to one customer. The number of
customers, each accounting for more than 10% of revenue is as follows:
THREE MONTHS ENDED THREE MONTHS ENDED NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2004 SEPTEMBER 30, 2003 SEPTEMBER 30, 2004 SEPTEMBER 30, 2003
------------------ ------------------ ------------------ ------------------
SALES NUMBER OF SALES NUMBER OF SALES NUMBER OF SALES NUMBER OF
REVENUE CUSTOMERS REVENUE CUSTOMERS REVENUE CUSTOMERS REVENUE CUSTOMERS
(in thousands of Canadian dollars)
Major Customers $ 87,398 3 $ 57,022 2 $ 250,188 3 $ 180,792 2
Credit risks are minimized to the extent that customers include major domestic
utilities and accounts receivable on export sales are generally insured under
Canadian government export receivables insurance programs or secured by letters
of credit.
6. LONG-TERM DEBT
AS AT AS AT
SEPTEMBER 30, DECEMBER 31,
2004 2003
---- ----
Senior notes, at issue date $ 429,660 $ 429,660
Cumulative foreign currency translation gain since issue date (82,088) (74,250)
--------- ---------
Senior notes, at balance sheet date 347,572 355,410
9.625% promissory note, due December 30, 2004 89,300 89,300
Less sinking fund (49,066) (46,191)
--------- ---------
40,234 43,109
Capital lease obligations 20,861 8,957
Pension deficit obligation 3,120 4,800
--------- ---------
Long-term debt 411,787 412,276
Current portion of long-term debt (45,574) (46,342)
--------- ---------
$ 366,213 $ 365,934
========= =========
Effective February 4, 2004, LEP and LCL signed a senior credit agreement with a
syndicate of Canadian chartered banks consisting of a revolving 364 day
operating credit facility that permits maximum aggregate borrowings of $115,000,
subject to a borrowing base, which includes accounts receivable, coal
inventories, a $25,000 charge on a dragline, and a general assignment of LCL's
assets. The facility is split into two tranches, the Reclamation Letter of
Credit ("LC") facility and the Working Capital facility. Up to $65,000 of
reclamation letters of credit can be issued under the Reclamation LC facility.
To date $50,609 of letters of credit, providing reclamation security, have been
issued. Under the Working Capital facility, up to $50,000 in advances may be
made, including up to $25,000 in letters of credit. As of September 30, 2004,
$12,000 in cash and $2,450 in letters of credit have been drawn against this
facility. Interest rates payable or advances under the facility are based on
prime lending rates plus interest rate margins ranging from 0.25% to 1.25%
depending on LEP's ratio of debt to operating earnings before interest, taxes,
depreciation and amortization ("EBITDA").
- 37 -
LUSCAR COAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2004
(Unaudited)
Prior to the replacement of the credit facilities, as indicated above, LEP and
LCL were party to a senior credit agreement with a syndicate of Canadian
chartered banks consisting of a revolving 364 day operating credit facility that
permits maximum aggregate borrowings of $100,000, subject to a borrowing base,
which includes accounts receivable, coal inventories and a $25,000 charge on a
dragline. Up to $75,000 of the credit facility may be used to secure letters of
credit. Interest rates payable or advances under the facility are based on prime
lending rates plus interest rate margins ranging from 0.25% to 1.25% depending
on LEP's ratio of debt to EBITDA. In November 2003, the senior credit agreement
was extended until February 29, 2004 under the same terms and conditions and
replaced February 4, 2004.
Prior to the replacement of the credit facilities, as indicated above, and as a
result of the acquisition of the new thermal coal assets effective October 17,
2003, LEP and LCL assumed Sherritt Coal Acquisition Inc.'s senior credit
agreement with a Canadian chartered bank, consisting of a 364 day operating
credit facility that permits maximum aggregate borrowings of $15,000, guaranteed
by a partner of LEP. In November 2003, this facility was extended until February
29, 2004 under the same terms and conditions and replaced February 4, 2004.
Capital leases for new equipment totaling $2,321 were entered in the quarter as
part of the long-term mine support equipment agreement LCL entered into with
Finning (Canada), a division of Finning Internation Inc. and Kramer Ltd., which
involves the leasing of equipment as part of a plan to reduce the maintenance
costs and increase equipment utilization.
Obligations under capital lease on specific mining equipment bear interest rates
ranging from 4.6% to 6.6%. These capital leases mature between 2004 and 2009 and
are repayable by blended monthly payments of principal and interest.
The pension deficit obligation relates to obligations under the Line Creek
defined benefit pension plan, which was under funded at the date of transfer
from LCL. Following the completion of an actuarial valuation, the total
obligation was determined to be $5,200. This amount is repayable in equal
installments over 5 years and outstanding amounts bear interest at 6.5% per
annum. The first two payments of $1,040 were paid during the second quarter,
after the finalization of the actuarial valuation.
7. FOREIGN CURRENCY TRANSLATION
Foreign currency translation gains and losses consist of the following:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
---- ---- ---- ----
(in thousands of Canadian dollars)
Foreign currency translation (gain) loss on:
Senior notes $(21,038) $ (1,347) $ (7,838) $(63,030)
US dollar cash balances 721 228 545 1,514
Working capital balances (362) (1,242) 32 (1,580)
-------- -------- -------- --------
$(20,679) $ (2,361) $ (7,261) $(63,096)
======== ======== ======== ========
- 38 -
LUSCAR COAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2004
(Unaudited)
8. INTEREST EXPENSE
Interest expense (income) consists of the following:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
---- ---- ---- ----
(in thousands of Canadian dollars)
Senior notes $ 8,736 $ 9,257 $ 26,726 $ 28,496
Promissory notes net of sinking fund interest income 1,413 1,414 4,241 6,720
Financial instruments - (117) - (434)
Capital leases 233 39 636 139
Reclamation security 485 257 2,599 1,357
Other interest expense 24 76 83 398
-------- -------- -------- --------
10,891 10,926 34,285 36,676
LEP promissory notes 8,584 - 26,035 -
Subordinated notes 2,400 2,402 7,204 7,204
-------- -------- -------- --------
$ 21,875 $ 13,328 $ 67,524 $ 43,880
======== ======== ======== ========
9. OTHER INCOME
Other income consists of the following:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
---- ---- ---- ----
(Restated - Note 2) (Restated - Note 2)
(in thousands of Canadian dollars)
Boundary Dam promissory note $ - $ - $ - $(21,379)
Recovery of Crown royalties - (401) - (1,180)
Net pension plan expense 276 275 954 406
Loss (gain) on disposal of assets (675) 1,577 (3,491) 592
Loss (gain) on settlement of ARO (294) (843) (1,403) 214
Distributions from Fording Canadian Coal Trust - (2,979) - (5,988)
Recovery of reclamation services (321) - (947) -
Deferred exploration expense 435 - 1,125 -
Insurance premium refund - - (2,706) -
Other income (307) (1,231) (1,363) (262)
-------- -------- -------- --------
$ (886) $ (3,602) $ (7,831) $(27,597)
======== ======== ======== ========
Net pension plan expense excludes certain current service and other costs, which
are included in cost of sales.
- 39 -
LUSCAR COAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2004
(Unaudited)
10. EMPLOYEE FUTURE BENEFITS
LCL sponsors defined benefit and defined contribution pension arrangements
covering substantially all of its employees. The majority of its employees are
members of defined contribution plans; however, unionized employees at two mines
are members of active defined benefit pension plans. LEP has several other
defined benefit pension plans, in which most members have elected to convert
their entitlement to defined contribution plans. LEP uses actuarial reports and
updates prepared by independent actuaries for funding and accounting purposes.
LEP has no other retirement or post-employment benefits.
LCL's pension expense for the third quarter of 2004 was $1,724 and $4,426 year
to date (2003 - $1,120 and $3,469, respectively). Total pension expense includes
current service costs, interest costs, amortization, allowances and other costs;
some of which are included in other income and others which are included in cost
of sales.
11. ASSET RETIREMENT OBLIGATIONS
Our estimates of future asset retirement obligations are based on reclamation
standards that meet regulatory requirements. Elements of uncertainty in
estimating these amounts include potential changes in regulatory requirements,
decommissioning and reclamation alternatives, and amounts to be recovered from
other parties. Future reclamation, site restoration, and mine closure costs are
estimated to be $156,259. LCL technical personnel review these estimates
annually or more frequently as required by regulatory agencies. In connection
with future reclamation, site restoration, and mine closure costs, LCL has
provided financial assurances of $50,609 in the form of letters of credit to
satisfy current regulatory requirements.
The following are reconciliations of the beginning and ending liabilities for
asset retirement obligations for the periods shown.
NINE MONTHS YEAR
ENDED ENDED
SEPTEMBER 30, DECEMBER 31,
2004 2003
---- ----
(Restated - Note 2)
(in thousands of Canadian dollars)
Asset retirement obligations, beginning of period $ 108,338 $ 106,645
Additional liabilities incurred 7,778 12,713
Accretion expense 5,665 6,889
Liabilities settled $ (16,780) (17,909)
--------- ---------
Asset retirement obligations, end of period $ 105,001 $ 108,338
Less current portion (15,709) (17,829)
--------- ---------
$ 89,292 $ 90,509
========= =========
Key assumptions on which the carrying amount of the asset retirement obligations
are based are as follows:
(i) Total undiscounted amount of the estimated cash flow - $156,259
(ii) Expected timing of payment of cash flows is based on the life of
mine plans and will be incurred between the current period and 2053.
(iii) Asset retirement obligations are recognized when incurred and
recorded as liabilities at fair value assuming a credit-adjusted
risk-free rate of approximately 6 per cent on average.
- 40 -
LUSCAR COAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2004
(Unaudited)
12. RELATED PARTY TRANSACTIONS
AS AT AS AT
SEPTEMBER 30, DECEMBER 31,
2004 2003
---- ----
(Restated - Note 2)
Due to LEP $ 43,328 $ 34,638
Due to Luscar Coal Income Fund (LCIF) 245 245
Due to Sherritt International Corporation 828 1,236
-------- --------
$ 44,401 $ 36,119
======== ========
Periodically, LCL makes advances to or receives advances from related parties,
including LEP and LCIF. Except as noted such advances are repayable upon demand
and do not bear interest. On a continuing basis, LCL advances its surplus cash
to LEP. As at September 30, 2004, LCL had a net receivable of $26,672 (December
31, 2003 - $35,362) less the $70,000 payable for the SCAI acquisition described
in Note 4 for a total amount due to LEP of $43,328 (December 31, 2003 -
$34,638). At September 30, 2004, LCL had an amount owing to Sherritt of $828
(December 31, 2003 - $1,236) for administration services and other expenses.
13. COMMITMENTS AND CONTINGENCIES
LCL is committed to future annual lease payments in respect of its operating
leases for office space, equipment and vehicles. Minimum payments for the next
five years are as follows:
(in thousands of Canadian dollars)
The remainder of 2004 $ 1,054
2005 4,113
2006 3,934
2007 3,934
2008 3,934
Thereafter 1,555
---------
$ 18,524
=========
As at September 30, 2004, LCL has the following fixed-price commodity purchase
arrangements outstanding, representing a total commitment of $688 for the
remainder of 2004:
- natural gas purchase agreement at a fixed price for specified
monthly quantities until the end of 2004 at the Coal Valley mine,
- electricity purchase agreement at a fixed price for specified
megawatts per hour until the end of 2004 for all of Luscar Ltd.,
- natural gas purchase agreement at a fixed price for quantities as
required by the mine at the Obed Mountain mine.
14. COMPARATIVE FIGURES
Certain 2003 comparative figures have been reclassified to conform to the
presentation adopted for 2004.
- 41 -