EX-1.1 3 c70817exv1w1.txt INTERIM REPORT FOR THE SECOND QUARTER 2002 EXHIBIT 1.1 LUSCAR ENERGY PARTNERSHIP LUSCAR COAL LTD. INTERIM REPORT FOR THE SECOND QUARTER ENDED JUNE 30, 2002 MANAGEMENT'S DISCUSSION AND ANALYSIS The following discussion and analysis of financial results of Luscar Energy Partnership (LEP) for the six months ended June 30, 2002 should be read in conjunction with our unaudited consolidated financial statements and related notes contained in this interim report and our management discussion and analysis and the audited consolidated financial statements and related notes contained in our Form 20-F filed May 28, 2002 with the United States Securities and Exchange Commission (SEC). Our unaudited consolidated financial statements and related notes contained in this interim report have been prepared in accordance with Canadian generally accepted accounting principles and all amounts are in Canadian dollars unless otherwise stated. Sales volumes are in metric units. SUMMARY OF LEP'S SECOND QUARTER RESULTS LEP recorded net earnings of $15.5 million and operating earnings before depreciation and amortization (EBITDA) of $25.7 million. LEP's operating margin (i.e., revenue less cost of sales) was $28.4 million on revenues of $146.9 million. Year to date, LEP recorded net earnings of $27.2 million, EBITDA of $63.1 million and operating margin of $67.7 million on revenues of $298.6 million. During the second quarter LEP recorded an $18.6 million foreign exchange gain related to the senior notes due to a strengthening of the Canadian dollar against the US dollar. This exchange gain did not impact EBITDA, but increased net earnings for the period. The operating results reflect declining prices in export thermal coal markets and lower volumes except at our contract mining operation. Export metallurgical coal sales were delayed during protracted price negotiations and are expected to increase from their current level in the coming months as customers honor their volume commitments. Mine-mouth domestic sales volumes were down slightly because of the timing of annual maintenance shutdowns. Expected volumes for export thermal coal are dependent upon the outlook for a recovery in that market, while weather conditions will have a bearing on sales volume into Ontario. We are continuing with our program of implementing efficiency initiatives throughout the company and are taking actions to ensure that our export thermal mines remain cash positive until export thermal coal markets improve. A more detailed explanation of these factors is provided in our discussion of LCL's results. LEP is a general partnership formed February 20, 2001 under the laws of Ontario, Canada. LEP acquired control of Luscar Coal Income Fund (LCIF) and its subsidiary, Luscar Coal Ltd (LCL) on May 11, 2001. Since LEP had no operations prior to May 11, 2001, the consolidated statements of earnings and cash flows for the three months and period ended June 30, 2002 include comparative figures only for the period from May 12 to June 30, 2001. To provide a meaningful review of this year's results, this interim report includes financial information for LCL, which provides comparative information for 2001. SUMMARY OF LCL'S SECOND QUARTER RESULTS LCL generated EBITDA of $25.7 million, which was $4.0 million less than the second quarter of last year. On a year to date basis, EBITDA was $62.9 million, a decrease of $2.6 million from the same period last year. In both cases, these comparisons are made before deducting take-over response costs incurred during the second quarter of 2001. For both the quarter and year to date periods, the reduction in EBITDA relates to lower operating margins, which were partly offset by improvements in other income and expenses. Revenue for the quarter was $146.5 million on sales of 8.8 million tonnes, as compared with $159.9 million on sales of 9.1 million tonnes during the same period last year. For the year to date period, revenue was $297.9 million on sales of 18.0 million tonnes compared with $317.8 million on sales of 18.6 million tonnes for the first six months of last year. The decreases in revenue, sales volumes, and operating margins are largely attributable to export operations and to a lesser extent, to domestic operations, which comprise most of our operating margins. The improvements in other income and expenses reflect changes in accruals for reclamation and royalty costs at Gregg River mine, which closed in the fall of 2000. We continue to improve operations at Line Creek, where changes to management, operating procedures and equipment have resulted in a 14% improvement to overburden productivity over the first quarter. We expect increased overburden productivity at Line Creek to result in higher coal release and production for the remainder of the year contributing to the long-term efficiency of the mine. During the second quarter, we reached new collective bargaining agreements with the hourly unions at Coal Valley mine and the Gregg River reclamation site. The contract with the workforce at the Luscar mine expired on June 30, 2002 and negotiations are currently underway. Underlying the results from our domestic operations is the continuing strength of our mine-mouth operations, where we have maintained operating margins at levels comparable to previous quarters. Fluctuations in revenues and costs primarily related to the inclusion of results from our contract mining and other domestic operations. Our mine-mouth operations had lower deliveries than in prior quarters due to the timing of planned annual maintenance shutdowns at the generating stations we supply. Most of the shutdowns at generating stations supplied by our mine-mouth operations occurred during the second quarter compared with the prior year when these maintenance activities were spread over the second and third quarters. We therefore expect these stations will return to higher utilization rates for the remainder of the year, provided demand for electric power generation remains strong in Alberta and Saskatchewan. Reduced sales from mine-mouth operations during the second quarter were offset by higher sales under the Highvale contract, for which operating margins are lower than mine-mouth operations. Sales to Ontario Power Generation (OPG) were lower than in prior periods due to the mild winter and spring conditions. However, we were largely unaffected by the oversupply situation in eastern US markets. The change in the domestic sales mix was the principal reason why our domestic operating margin was $24.2 million compared with $26.2 million for the second quarter last year and on a year to date basis, $54.6 million compared with $56.4 million last year. The increases in our average domestic selling price and in our average domestic cost were primarily attributable to higher costs due to increased stripping ratios at the Highvale contract mine, which are recovered from the customer through higher pricing. Production costs at our mine-mouth operations remained in line with prior periods. Our average domestic selling price was $11.60 per tonne in the second quarter, increased from $11.14 per tonne last year, while the average cost was $8.43 per tonne in the second quarter, up from $7.80 per tonne in the same period last year. Our average domestic operating margin for the quarter declined slightly to $3.17 per tonne from $3.34 per tonne in the same period last year, principally because a higher proportion of the sales were from the lower margin contract mining operation. Lower revenues from Bienfait to OPG were also a factor in the lower margins. Our export operating margin was $3.8 million on sales of 1.1 million tonnes compared to $7.9 million on sales of 1.4 million tonnes for the second quarter last year. Year to date, our export operating margin was $12.4 million on sales of 2.2 million tonnes compared with $16.4 million on sales of 2.7 million tonnes for the same period last year. There are two reasons for these results. Firstly, lower sales volumes during protracted negotiations with export coal customers affected results for the quarter and year to date. Contracts and prices for export metallurgical coal have been largely settled and we expect that our customers will take delivery of their sales commitments over the remaining nine months of the coal contract year. According to trade publications, the price for Canadian hard coking coal sold to Japanese steel mills in the contract year beginning April 1, 2002 has increased by approximately US$4.00 per tonne from last year. Price increases for sales from our Line Creek mine are comparable to those for other Canadian producers while average prices for sales from our Luscar mine were made with pricing incentives due to the pending closure of the mine. Secondly, contracts and prices for export thermal coal are not fully settled at this time. While we are seeking alternate markets, export thermal coal sales have been lower and for the remainder of the year could be lower than anticipated due to oversupply in the market, which has resulted in intense competition for sales amongst world suppliers and significant price decline. Trade publications indicate that initial settlements for Australian thermal coal in Japan were in the US$28 to US$29 per tonne range compared to US$34.50 per tonne last year. Recently, Australian thermal coal pricing has softened further with spot market prices of approximately US$22 per tonne. Luscar's thermal coal exports are being impacted by these developments. Weaker export thermal prices and an increase in the proportion of export thermal coal sales reduced average export operating margins to $3.43 per tonne from $6.01 per tonne in the second quarter last year and $8.14 per tonne in the first quarter of this year. During the quarter, export sales included a higher proportion of thermal coal sales and an increased proportion of sales to spot market customers during pricing negotiations under our contracts with Asian customers. Coupled with weaker export thermal prices these factors caused our average export price to drop to $51.33 per tonne from $53.77 last year and $58.29 in the first quarter. On a year to date basis, contract price increases for metallurgical coal and weakening of the Canadian dollar were sufficient to increase our average export price to $54.66 per tonne from $53.77 per tonne last year. Average export costs are similar to last year, but down from the average cost in the first quarter due to the increased proportion of export thermal coal, which has lower costs than metallurgical coal. Interest on the subordinated notes, which eliminates on consolidation with LEP, was $11.1 million for the quarter compared with $13.1 million in the same period last year. Other interest, which includes interest on the senior notes, was $17.0 million in the second quarter compared with $11.3 million in the same period last year and $11.8 million in the first quarter. The increase in interest from the prior year relates to the increase in long-term debt from $421 million at June 30, 2001 to $496 million at June 30, 2002, due to the issue of the senior notes. The increase from the first quarter this year primarily relates to changes in the market value of our $100 million interest rate swap and a foreign exchange loss on our net US dollar denominated current assets, due to a strengthening in the Canadian dollar against the US dollar in the second quarter. LIQUIDITY AND CAPITAL RESOURCES At June 30, 2002, LEP held cash and cash equivalents, including short-term deposits, of $73.0 million. Net cash provided by LEP's operating activities, before changes in non-cash working capital, was $4.1 million for the three months ended June 30, 2002. Cash used for non-cash working capital was $3.2 million during the second quarter of 2002. This was mainly impacted by a $15.2 million decrease in interest payable resulting from interest payments on the senior notes and promissory notes, which were made in the quarter, offset by a $13.0 million reduction in accounts receivable from our customers. Capital asset purchases by LCL amounted to $10.9 million for the quarter unchanged from the same period last year. Purchases were primarily for replacement equipment at existing minesites and included expenditures related to the scheduled replacement of the dragline tub at Poplar River mine and additional equipment to support our reclamation activities at Boundary Dam mine. Capital spending for 2002 is expected to be approximately $50 million. 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 the Company'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 coal markets, demand and pricing, capital spending, production levels at Luscar mine, productivity levels at Line Creek and our objectives, 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 annual report Form 20-F filed May 28, 2002 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) we may engage in opportunity capital projects not included in our current plans, and (v) changes in the amount of cash available for capital asset purchases. The forward-looking statements included in this interim report are made only as of July 24, 2002. LUSCAR ENERGY PARTNERSHIP CONSOLIDATED BALANCE SHEETS AS AT AS AT JUNE 30 DECEMBER 31 2002 2001 ---------- ----------- (in thousands of Canadian dollars) (Unaudited) (Audited) ASSETS CURRENT Cash and cash equivalents ................ $ 73,024 $ 60,331 Accounts receivable ...................... 66,088 92,384 Income taxes recoverable ................. 7,682 6,484 Inventories .............................. 81,992 70,337 Overburden removal costs ................. 31,351 28,225 Prepaid expenses ......................... 3,551 4,766 ---------- ---------- 263,688 262,527 Capital assets ............................... 1,296,602 1,319,971 Other assets ................................. 30,428 30,033 ---------- ---------- $1,590,718 $1,612,531 ========== ========== LIABILITIES AND PARTNERS' EQUITY CURRENT Trade accounts payable and accrued charges 46,456 40,596 Accrued interest payable ................. 8,778 9,970 Accrued payroll and employee benefits .... 7,607 12,671 Income taxes payable ..................... 1,125 1,105 Current portion of financial instruments . 3,055 4,324 Current portion of long-term debt [note 4] 3,132 2,980 Accrued reclamation costs ................ 21,002 21,002 Future income taxes ...................... 2,800 2,800 ---------- ---------- 93,955 95,448 Long-term debt [note 4] ...................... 493,246 517,632 Financial instruments ........................ 1,138 2,823 Accrued reclamation costs .................... 27,922 30,843 Future income taxes .......................... 450,248 468,822 ---------- ---------- 1,066,509 1,115,568 ---------- ---------- PARTNERS' EQUITY Partners' equity ......................... 524,209 496,963 ---------- ---------- $1,590,718 $1,612,531 ========== ========== See accompanying notes LUSCAR ENERGY PARTNERSHIP CONSOLIDATED STATEMENT OF EARNINGS AND PARTNERS' EQUITY

See accompanying notes LUSCAR ENERGY PARTNERSHIP CONSOLIDATED STATEMENT OF CASH FLOWS

See accompanying notes LUSCAR ENERGY PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS PERIOD ENDED JUNE 30, 2002 (Unaudited) 1. BASIS OF PRESENTATION These consolidated financial statements should be read in conjunction with the audited consolidated financial statements as at December 31, 2001, contained in the Luscar Coal Ltd. (LCL) Form 20-F filed May 28, 2002 with the United States Securities and Exchange Commission (SEC). These consolidated financial statements are prepared in accordance with Canadian generally accepted accounting principles and follow the same accounting policies as disclosed in those financial statements, but do not contain all disclosures required by generally accounting principles for annual statements. Since Luscar Energy Partnership (LEP) had no operations prior to May 12, 2001, the consolidated statements of earnings and cash flows for the three months ended June 30, 2002 only include comparative figures for the period from May 12 to June 30, 2001. All amounts are in thousands of Canadian dollars unless otherwise stated. 2. SEGMENT INFORMATION LEP owns and operates surface mines located in western Canada, producing coal for consumption by domestic and foreign customers. LEP's mining operations have similar economic and operating characteristics, customers and products have been aggregated for the purpose of segment reporting. Disclosures with respect to products and geographic areas are as follows:

Export coal sales are generally denominated in United States dollars. LUSCAR ENERGY PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS PERIOD ENDED JUNE 30, 2002 (Unaudited) 2. SEGMENT INFORMATION (CONTINUED) Sales within the domestic and export markets are as follows:

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 by type of coal, is as follows:

Credit risks are minimized to the extent that customers include major domestic utilities and accounts receivable on export sales are generally insured under government export development programs or secured by letters of credit. LUSCAR ENERGY PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS PERIOD ENDED JUNE 30, 2002 (Unaudited) 3. SUPPLEMENTARY OPERATING INFORMATION

4. LONG-TERM DEBT

LUSCAR ENERGY PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS PERIOD ENDED JUNE 30, 2002 (Unaudited) 5. CONDENSED CONSOLIDATING INFORMATION The following condensed consolidated information is provided for the period ending June 30, 2002. (A) CONDENSED CONSOLIDATING BALANCE SHEET

LUSCAR ENERGY PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS PERIOD ENDED JUNE 30, 2002 (Unaudited) 5. CONDENSED CONSOLIDATING INFORMATION (CONTINUED) (B) CONDENSED CONSOLIDATING STATEMENT OF EARNINGS

LUSCAR ENERGY PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS PERIOD ENDED JUNE 30, 2002 (Unaudited) 5. CONDENSED CONSOLIDATING INFORMATION (CONTINUED) (C) CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

LUSCAR COAL LTD CONSOLIDATED BALANCE SHEETS

See accompanying notes LUSCAR COAL LTD CONSOLIDATED STATEMENTS OF EARNINGS AND DEFICIT

See accompanying notes LUSCAR COAL LTD CONSOLIDATED STATEMENTS OF CASH FLOWS

See accompanying notes LUSCAR COAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS PERIOD ENDED JUNE 30, 2002 (Unaudited) 1. BASIS OF PRESENTATION These consolidated financial statements should be read in conjunction with the audited consolidated financial statements as at December 31, 2001, contained in the Luscar Coal Ltd. (LCL) Form 20-F filed May 28, 2002 with the United States Securities and Exchange Commission (SEC). These consolidated financial statements are prepared in accordance with Canadian generally accepted accounting principles and follow the same accounting policies as disclosed in those financial statements, but do not contain all disclosures required by generally accounting principles for annual statements. All amounts are in thousands of Canadian dollars unless otherwise stated. 2. SEGMENT INFORMATION LCL owns and operates surface mines located in western Canada, producing coal for consumption by domestic and foreign customers. LCL's mining operations have similar economic and operating characteristics, customers and products have been aggregated for the purpose of segment reporting. Disclosures with respect to products and geographic areas are as follows:

Export coal sales are generally denominated in United States dollars. LUSCAR COAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS PERIOD ENDED JUNE 30, 2002 (Unaudited) 2. SEGMENT INFORMATION (CONTINUED) Sales within the domestic and export markets are as follows:

Credit risks are minimized to the extent that customers include major domestic utilities and accounts receivable on export sales are generally insured under government export development programs or secured by letters of credit. LUSCAR COAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS PERIOD ENDED JUNE 30, 2002 (Unaudited) 3. SUPPLEMENTARY OPERATING INFORMATION

4. LONG-TERM DEBT

LUSCAR COAL LTD 6-K