10-Q 1 ncfi10qs03.txt 10-Q 3RD QTR. 2003 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON DC 20549 FORM 10-Q /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2003 -------------------------------------------------- OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to -------------------------------------------------- NEW CF&I, INC. (Exact name of registrant as specified in its charter) DELAWARE 02-20781 93-1086900 -------------------------------------------------------------------------------- (State or other jurisdiction of (Commission File Number) (IRS Employer incorporation or organization) Identification Number) 1000 S.W. BROADWAY, SUITE 2200, PORTLAND, OREGON 97205 -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (503)223-9228 -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) CF&I STEEL, L.P. (Exact name of registrant as specified in its charter) DELAWARE 02-20779 93-1103440 -------------------------------------------------------------------------------- (State or other jurisdiction of (Commission File Number) (IRS Employer incorporation or organization) Identification Number) 1000 S.W. BROADWAY, SUITE 2200, PORTLAND, OREGON 97205 -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (503)223-9228 -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- ---- Indicate by check mark whether the registrant (1) is an accelerated filer (as defined in Rule 12b-2 of the Act) Yes No X ---- ---- NEW CF&I, INC. CF&I STEEL, L.P. INDEX PART I. FINANCIAL INFORMATION Page Item 1. FINANCIAL STATEMENTS - NEW CF&I, INC. -------------- Consolidated Balance Sheets September 30, 2003 (unaudited) and December 31, 2002... 2 Consolidated Statements of Operations (unaudited) Three and nine months ended September 30, 2003 and 2002............................................... 3 Consolidated Statements of Cash Flows (unaudited) Nine months ended September 30, 2003 and 2002.......... 4 Notes to Consolidated Financial Statements (unaudited)..........................................5-11 FINANCIAL STATEMENTS - CF&I STEEL, L.P. ---------------- Balance Sheets September 30, 2003 (unaudited) and December 31, 2002...12 Statements of Operations (unaudited) Three and nine months ended September 30, 2003 and 2002.............................................. 13 Statements of Cash Flows (unaudited) Nine months ended September 30, 2003 and 2002......... 14 Notes to Financial Statements (unaudited).............15-20 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......21-23 Item 3. Quantitative and Qualitative Disclosures about Market Risk.................................... 23 Item 4. Controls and Procedures..................................23 PART II. OTHER INFORMATION Item 1. Legal Proceedings.......................................24 Item 6. Exhibits and Reports on Form 8-K .......................24 Signatures ....................................................25 Exhibit Index ....................................................26 -1- PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS NEW CF&I, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS EXCEPT FOR PER SHARE AND SHARE AMOUNTS)

-2- NEW CF&I, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS) (UNAUDITED)

-3- NEW CF&I, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)

-4- NEW CF&I, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION --------------------- The consolidated financial statements include the accounts of New CF&I, Inc. and its subsidiaries ("New CF&I"). New CF&I owns a 95.2% interest in CF&I Steel, L.P. ("CF&I"), which is one of New CF&I's principal subsidiaries. Oregon Steel Mills, Inc. ("Oregon Steel") holds an 87% ownership interest in New CF&I. Oregon Steel also owns directly an additional 4.3% interest in CF&I. All significant intercompany balances and transactions have been eliminated. The unaudited financial statements include all adjustments, consisting of normal recurring accruals and other charges as described in Note 4, "Asset Impairments", which in the opinion of management, are necessary for a fair presentation of the interim periods. Results for an interim period are not necessarily indicative of results for a full year. Reference should be made to New CF&I's 2002 Annual Report on Form 10-K for additional disclosures including a summary of significant accounting policies. RECENT ACCOUNTING PRONOUNCEMENTS In August 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 143, "ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS." SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated retirement costs. This statement requires that New CF&I record a liability for the fair value of an asset retirement obligation when New CF&I has a legal obligation to remove the asset. SFAS No. 143 is effective for New CF&I beginning January 1, 2003. The adoption of SFAS No. 143 did not have a material impact on New CF&I's consolidated financial statements. In May 2002, the FASB issued SFAS No. 145, "RECISSION OF FAS NOS. 4, 44, AND 64, AMENDMENT OF FAS 13, AND TECHNICAL CORRECTIONS." Among other things, SFAS No. 145 rescinds various pronouncements regarding early extinguishment of debt and allows extraordinary accounting treatment for early extinguishment only when the provisions of Accounting Principles Board ("APB") Opinion No. 30, "REPORTING THE RESULTS OF OPERATIONS - REPORTING THE EFFECTS OF DISPOSAL OF A SEGMENT OF A BUSINESS, AND EXTRAORDINARY, UNUSUAL AND INFREQUENTLY OCCURRING EVENTS AND TRANSACTIONS" are met. SFAS No. 145 provisions regarding early extinguishment of debt are generally effective for fiscal years beginning after May 15, 2002. In mid-July 2002, Oregon Steel refinanced its credit facility and redeemed its 11% First Mortgage Notes due 2003, resulting in a $1.1 million extraordinary loss, net of taxes, on the early extinguishment of debt. The amount recognized consisted primarily of the write-off of unamortized fees and expenses. The adoption of SFAS No. 145 caused a reclassification of the prior year extraordinary loss to other income (expense) in the third quarter of 2003 in the consolidated financial statements of Oregon Steel. In June 2002, the FASB issued SFAS No. 146, "ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES." SFAS No. 146 addresses the financial accounting and reporting for costs associated with exit or disposal activities and supercedes Emerging Issues Task Force ("EITF") Issue No. 94-3, "LIABILITY RECOGNITION FOR CERTAIN EMPLOYEE TERMINATION BENEFITS AND OTHER COSTS TO EXIT AN ACTIVITY (INCLUDING CERTAIN COSTS INCURRED IN A RESTRUCTURING)." SFAS No. 146 requires recognition of the liability for costs associated with an exit or disposal activity when the liability is incurred. Under EITF No. 94-3, a liability for an exit cost was recognized at the date of New CF&I's commitment to an exit plan. SFAS No. 146 also establishes that the liability should initially be measured and recorded at fair value. This statement is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. New CF&I adopted SFAS No. 146 effective January 1, 2003. New CF&I had accounted for employee termination actions under SFAS No. 112, which required recording when such charges are probable and estimable, and therefore, the adoption of SFAS No. 146 did not have an impact on New CF&I's consolidated financial statements. In November 2002, the FASB issued Interpretation ("FIN") No. 45, "GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS." It clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee, including its ongoing obligation to stand ready to perform over the term of the guarantee in the event that the specified triggering events or conditions occur. The disclosure provisions for FIN No. 45 were effective for the year ending December 31, 2002. New CF&I adopted the recognition provisions of FIN No. 45 effective January 1, 2003 for guarantees issued or modified after December 31, 2002. The adoption of FIN No. 45 did not have a material impact on New CF&I's consolidated financial statements. -5- In January 2003, the FASB issued FIN No. 46, "CONSOLIDATION OF VARIABLE INTEREST ENTITIES." FIN No. 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. FIN No. 46 also requires disclosures about variable interest entities that a company is not required to consolidate but in which it has a significant variable interest. FIN No. 46 applies immediately to variable interest entities created after January 31, 2003 and to existing variable interest entities in the first interim or annual period ending after December 15, 2003. New CF&I has not created or obtained an interest in any variable interest entities after January 31, 2003. New CF&I is currently evaluating the impact of adoption of FIN No. 46 on its consolidated financial statements. In April 2003, the FASB issued SFAS No. 149, "AMENDMENT OF STATEMENT 133 ON DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES." SFAS No. 149 amends and clarifies the accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES." SFAS No. 149 is generally effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of SFAS No. 149 did not have a material effect on New CF&I's consolidated financial statements. In May 2003, the FASB issued SFAS No. 150, "ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY." SFAS No. 150 requires that certain financial instruments, which under previous guidance were accounted for as equity, must now be accounted for as liabilities. The financial instruments affected include mandatorily redeemable stock, certain financial instruments that require or may require the issuer to buy back some of its shares in exchange for cash or other assets and certain obligations that can be settled with shares of stock. SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003 and must be applied to New CF&I's existing financial instruments effective July 1, 2003, the beginning of the first fiscal period after June 15, 2003. New CF&I adopted SFAS No. 150 on July 1, 2003. The adoption of SFAS No. 150 did not have a material impact on New CF&I's consolidated financial statements. RECLASSIFICATIONS Certain reclassifications have been made in prior periods to conform to the current year presentation. Such reclassifications do not affect results of operations as previously reported. 2. INVENTORIES ----------- Inventories are stated at the lower of manufacturing cost or market value with manufacturing cost determined under the average cost method. The components of inventories are as follows: SEPTEMBER 30, DECEMBER 31, 2003 2002 ------------- ------------ (IN THOUSANDS) Raw materials $ 9,024 $ 5,536 Semi-finished product 5,549 11,325 Finished product 14,375 17,420 Stores and operating supplies 10,661 11,823 ------- ------- Total inventories $39,609 $46,104 ======= ======= 3. CONTINGENCIES ------------- ENVIRONMENTAL MATTERS All material environmental remediation liabilities for non-capital expenditures, which are probable and estimable, are recorded in the financial statements based on current technologies and current environmental standards at the time of evaluation. Adjustments are made when additional information is available that suggests different remediation methods or periods may be required and affect the total cost. The best estimate of the probable cost within a range is recorded; however, if there is no best estimate, the low end of the range is recorded and the range is disclosed. -6- In connection with the acquisition of the steelmaking and finishing facilities located at Pueblo, Colorado ("Pueblo Mill"), CF&I accrued a liability of $36.7 million for environmental remediation related to the prior owner's operations. CF&I believed this amount was the best estimate of costs from a range of $23.1 million to $43.6 million. CF&I's estimate of this liability was based on two remediation investigations conducted by environmental engineering consultants, and included costs for the Resource Conservation and Recovery Act facility investigation, a corrective measures study, remedial action, and operation and maintenance associated with the proposed remedial actions. In October 1995, CF&I and the Colorado Department of Public Health and Environment ("CDPHE") finalized a postclosure permit for hazardous waste units at the Pueblo Mill. As part of the postclosure permit requirements, CF&I must conduct a corrective action program for the 82 solid waste management units at the facility and continue to address projects on a prioritized corrective action schedule which substantially reflects a straight-line rate of expenditure over 30 years. The State of Colorado mandated that the schedule for corrective action could be accelerated if new data indicated a greater threat existed to the environment than was presently believed to exist. At September 30, 2003, the accrued liability was $27.9 million, of which $21.7 million was classified as non-current on the consolidated balance sheet. The CDPHE inspected the Pueblo Mill in 1999 for possible environmental violations, and in the fourth quarter of 1999 issued a Compliance Advisory indicating that air quality regulations had been violated, which was followed by the filing of a judicial enforcement action ("Action") in the second quarter of 2000. In March 2002, CF&I and CDPHE reached a settlement of the Action, which was approved by the court (the "State Consent Decree"). The State Consent Decree provides for CF&I to pay $300,000 in penalties, fund $1.5 million of community projects, and to pay approximately $400,000 for consulting services. CF&I is also required to make certain capital improvements expected to cost approximately $25 million, including converting to the new single New Source Performance Standards Subpart AAa ("NSPS AAa") compliant furnace discussed below. The State Consent Decree provides that the two existing furnaces will be permanently shut down approximately 16 months after the issuance of a Prevention of Significant Deterioration ("PSD") air permit. CF&I applied for the PSD permit in April 2002, and the draft permit was issued for public comment on October 2, 2003. In May 2000, the Environmental Protection Agency ("EPA") issued a final determination that one of the two electric arc furnaces at the Pueblo Mill was subject to federal NSPS AA. This determination was contrary to an earlier "grandfather" determination first made in 1996 by CDPHE. CF&I appealed the EPA determination in the federal Tenth Circuit Court of Appeals, and that appeal is pending. CF&I has negotiated a settlement of this matter with the EPA. Under that agreement and overlapping with the commitments made to the CDPHE described above, CF&I committed to the conversion to the new NSPS AAa compliant furnace (demonstrating full compliance 21 months after permit approval and expected to cost, with all related emission control improvements, approximately $25 million), and to pay approximately $450,000 in penalties and fund certain supplemental environmental projects and undertake additional environmental projects valued at approximately $1.1 million, including the installation of certain pollution control equipment at the Pueblo Mill. The above mentioned expenditures for supplemental environmental projects will be both capital and non-capital expenditures. On April 9, 2003, the EPA filed a proposed Federal Consent Decree, now subject to public comment, which, if approved by the court, will fully resolve all NSPS and PSD issues. At that time CF&I will dismiss its appeal against the EPA. The Court is likely to approve the settlement, but is awaiting a legal memorandum on a narrow issue from the EPA before taking final action. In response to the CDPHE settlement and the resolution of the EPA action, CF&I had expensed $2.8 million in 2002 for possible fines and non-capital related expenditures since the settlement. As of September 30, 2003, the accrued liability was $1.2 million. As noted above, as part of the settlement with the CDPHE and the EPA, CF&I is required to install one new electric arc furnace and the two existing furnaces, with a combined melting and casting capacity of approximately 1.2 million tons through two continuous casters, will be shut down. CF&I has determined that the new single furnace operation will not have the capacity to support a two caster operation, and therefore one caster and the related assets with a book value of $9.2 million was written off in the quarter ended June 30, 2003. See Note 4, "Asset Impairments" for a description of this charge. In December 2001, the State of Colorado issued a Title V air emission permit to CF&I under the Clean Air Act ("CAA") requiring that the furnace subject to the EPA action operate in compliance with NSPS AA standards. This permit was modified in April 2002 to incorporate the longer compliance schedule that is part of the settlement with the CDPHE and the EPA. In September 2002, New CF&I submitted a request for a further extension of certain Title V compliance deadlines, consistent with a joint petition by the State and New CF&I for an extension of the same deadlines in the State Consent Decree. This modification gives CF&I adequate time to convert to a single NSPS AAa compliant furnace. Any decrease in steelmaking production during the furnace conversion period when both furnaces are expected to be shut down will be offset by increasing production prior to the conversion period by building up semi-finished steel inventory and, if necessary, purchasing semi-finished steel ("billets") for conversion into rod products at spot market prices. Pricing and availability of -7- billets is subject to significant volatility. However, New CF&I believes that near term supplies of billets will continue to be available in sufficient quantities at favorable prices. In a related matter, in April 2000, the United Steelworkers of America ("Union") filed suit in U.S. District Court in Denver, Colorado, asserting that New CF&I and CF&I had violated the CAA at the Pueblo Mill for a period extending over five years. The Union sought declaratory judgement regarding the applicability of certain emission standards, injunctive relief, civil penalties and attorney's fees. On July 6, 2001, the presiding judge dismissed the suit. The 10th Circuit Court of Appeals on March 3, 2003 reversed the District Court's dismissal of the case and remanded the case for further hearing to the District Court. The Union has amended its complaint in the case raising additional PSD permit issues. While New CF&I does not believe the suit will have a material adverse effect on its results of operations, the result of litigation, such as this, is difficult to predict and an adverse outcome with significant penalties is possible. It is not presently possible to estimate the liability if there is ultimately an adverse determination on remand. LABOR MATTERS The labor contract at CF&I expired on September 30, 1997. After a brief contract extension intended to help facilitate a possible agreement, on October 3, 1997, the Union initiated a strike at CF&I for approximately 1,000 bargaining unit employees. The parties, however, failed to reach final agreement on a new labor contract due to differences on economic issues. As a result of contingency planning, CF&I was able to avoid complete suspension of operations at the Pueblo Mill by utilizing a combination of new hires, striking employees who returned to work, contractors and salaried employees. On December 30, 1997, the Union called off the strike and made an unconditional offer on behalf of its members to return to work. At the time of this offer, because CF&I had permanently replaced the striking employees, only a few vacancies existed at the Pueblo Mill. Since that time, vacancies have occurred and have been filled by formerly striking employees ("Unreinstated Employees"). As of September 30, 2003, approximately 815 Unreinstated Employees have either returned to work or have declined CF&I's offer of equivalent work. At September 30, 2003, approximately 135 Unreinstated Employees remain unreinstated. On February 27, 1998, the Regional Director of the National Labor Relations Board ("NLRB") Denver office issued a complaint against CF&I, alleging violations of several provisions of the National Labor Relations Act ("NLRA"). On August 17, 1998, a hearing on these allegations commenced before an Administrative Law Judge ("Judge"). Testimony and other evidence were presented at various sessions in the latter part of 1998 and early 1999, concluding on February 25, 1999. On May 17, 2000, the Judge rendered a decision which, among other things, found CF&I liable for certain unfair labor practices and ordered as remedy the reinstatement of all 1,000 Unreinstated Employees, effective as of December 30, 1997, with back pay and benefits, plus interest, less interim earnings. Since January 1998, CF&I has been returning Unreinstated Employees to jobs as positions became open. As noted above, there were approximately 135 Unreinstated Employees as of September 30, 2003. On August 2, 2000, CF&I filed an appeal with the NLRB in Washington, D.C. A separate hearing concluded in February 2000, with the judge for that hearing rendering a decision on August 7, 2000, that certain of the Union's actions undertaken since the beginning of the strike did constitute misconduct and violations of certain provisions of the NLRA. The Union has appealed this determination to the NLRB. In both cases, the non-prevailing party in the NLRB's decision will be entitled to appeal to the appropriate U.S. Circuit Court of Appeals. CF&I believes both the facts and the law fully support its position that the strike was economic in nature and that it was not obligated to displace the properly hired replacement employees. New CF&I does not believe that final judicial action on the strike issues is likely for at least two to three years. In the event there is an adverse determination of these issues, Unreinstated Employees could be entitled to back pay, including benefits, plus interest, from the date of the Union's unconditional offer to return to work through the date of their reinstatement or a date deemed appropriate by the NLRB or an appellate court. The number of Unreinstated Employees entitled to back pay may be limited to the number of past and present replacement workers; however, the Union might assert that all Unreinstated Employees should be entitled to back pay. Back pay is generally determined by the quarterly earnings of those working less interim wages earned elsewhere by the Unreinstated Employees. In addition to other considerations, each Unreinstated Employee has a duty to take reasonable steps to mitigate the liability for back pay by seeking employment elsewhere that has comparable working conditions and compensation. Any estimate of the potential liability for back pay will depend significantly on the ability to assess the amount of interim wages earned by these employees since the beginning of the strike, as noted above. Due to the lack of accurate information on interim earnings for both reinstated and Unreinstated Employees and sentiment of the Union towards New CF&I, it is not currently possible to obtain the necessary data to calculate possible back pay. In addition, the NLRB's findings of misconduct by the Union may mitigate any back pay award with respect to any Unreinstated Employees proven to have taken part or participated in acts of misconduct during and after the strike. Thus, it is not presently possible to estimate the liability if there is ultimately an adverse determination against -8- CF&I. An ultimate adverse determination against CF&I on these issues may have a material adverse effect on New CF&I's consolidated financial condition, results of operations, or cash flows. CF&I does not intend to agree to any settlement of this matter that will have a material adverse effect on New CF&I. In connection with the ongoing labor dispute, the Union has undertaken certain activities designed to exert public pressure on CF&I. Although such activities have generated some publicity in news media, CF&I believes that they have had little or no material impact on its operations. PURCHASE COMMITMENTS Effective February 2, 1993, CF&I entered into an agreement, subsequently amended on August 4, 1994, to purchase a base amount of oxygen produced at the Pueblo Mill. This agreement expires January 2013 and specifies that CF&I will pay a base monthly charge that is adjusted annually based upon a percentage change in the Producer Price Index. The monthly base charge at September 30, 2003 for this agreement was $116,000. GUARANTEES AND FINANCING ARRANGEMENTS On July 15, 2002, Oregon Steel issued $305 million of 10% First Mortgage Notes due 2009 ("10% Notes") at a discount of 98.772% and an interest rate of 10%. Interest is payable on January 15 and July 15 of each year. The proceeds of this issuance were used to redeem Oregon Steel's 11% First Mortgage Notes due 2003 (including interest accrued from June 16, 2002 until the redemption date of August 14, 2002), refinance its existing credit agreement, and for working capital and general corporate purposes. New CF&I and CF&I (collectively "Guarantors") guarantee the obligations of Oregon Steel under the 10% Notes, and those guarantees are secured by a lien on substantially all of the property, plant and equipment and certain other assets of the Guarantors, excluding accounts receivable and inventory. In addition, Oregon Steel, New CF&I, CF&I, and Colorado and Wyoming Railway Company ("C&W") are borrowers ("Borrowers") under a $65 million revolving credit facility ("Credit Agreement") that will expire on June 30, 2005 and is collateralized, in part, by certain equity and intercompany interests, accounts receivable and inventory of New CF&I and CF&I. At September 30, 2003, $5.0 million was restricted under the Credit Agreement, $14.3 million was restricted under the outstanding letters of credit, and $45.7 million was available for use. The Credit Agreement contains various restrictive covenants including a minimum consolidated tangible net worth amount, a minimum earnings before interest, taxes, depreciation and amortization ("EBITDA") amount, a minimum fixed charge coverage ratio, a maximum senior debt ratio, limitations on maximum annual capital and environmental expenditures, a borrowing availability limitation relating to inventory, limitations on stockholder dividends and limitations on incurring new or additional debt obligations other than as allowed by the Credit Agreement. On October 24, 2003, the Borrowers determined they were in violation of one of the Credit Agreement covenants, and on November 13, 2003, the Borrowers entered into an agreement with the lenders which waived the violation and amended the minimum consolidated EBITDA, minimum fixed charge coverage ratio, maximum senior debt ratio and minimum consolidated tangible net worth covenants as of October 31, 2003 and for each month through the maturity date of the facility. Included in the Credit Agreement amendment above, the Borrowers' ability to draw letters of credit has been increased from $20 million to $25 million to support issuance of letters of credit and similar contracts. LIQUIDITY New CF&I experienced a net loss for the three and nine months ended September 30, 2003. Contributing to the adverse results was the interest paid by New CF&I to Oregon Steel for its financing. New CF&I has been able to fulfill its needs for working capital and capital expenditures due, in part, to the financing arrangement with Oregon Steel. New CF&I expects that operations will continue for the remainder of 2003, with the realization of assets, and discharge of liabilities in the ordinary course of business. New CF&I believes that its prospective needs for working capital and capital expenditures will be met from cash flows generated by operations and borrowings pursuant to the financing arrangement with Oregon Steel. If operations are not consistent with management's plans, there is no assurance that the amounts from these sources will be sufficient for such purposes. Oregon Steel is not required to provide financing to New CF&I and, although the demand for repayment of the obligation in full is not expected during 2003, Oregon Steel may demand repayment of the loan at any time. If Oregon Steel were to demand repayment of the loan, it is not likely that New CF&I would be able to obtain the external financing necessary to repay the loan or to fund its capital expenditures and other cash needs and, if available, that such financing would be on terms satisfactory to New CF&I. -9- OTHER CONTINGENCIES New CF&I is party to various claims, disputes, legal actions and other proceedings involving contracts, employment and various other matters. In the opinion of management, the outcome of these matters would not have a material adverse effect on the consolidated financial condition of New CF&I. 4. ASSET IMPAIRMENTS ----------------- As noted in Note 3 above, as part of the settlement with the CDPHE and the EPA, CF&I is required to install one new electric arc furnace, and the two existing furnaces with a combined melting and casting capacity of approximately 1.2 million tons through two continuous casters will be shut down. CF&I has determined that the new single furnace operation will not have the capacity to support a two caster operation and therefore CF&I has determined that one caster and other related assets have no future service potential. Accordingly, New CF&I has recorded a pre-tax impairment charge to earnings of $9.2 million in the quarter ended June 30, 2003, including $1.0 million incurred for the reduction in value of related stores items. Because it is believed the caster has no salvage value, the carrying value of the fixed assets was zero after the effect of the impairment charge. 5. INTANGIBLE ASSETS ----------------- The carrying amount of intangible assets and the associated amortization expenses are as follows: AS OF SEPTEMBER 30, 2003 ------------------------------- GROSS CARRYING ACCUMULATED AMOUNT AMORTIZATION --------------- ------------ (IN THOUSANDS) AMORTIZED INTANGIBLE ASSETS --------------------------- Proprietary Technology $1,653 $(781) ====== ===== AGGREGATE AMORTIZATION EXPENSE ------------------------------ For the nine months ended 9/30/03 $ 234 . ESTIMATED AMORTIZATION EXPENSE ------------------------------ For the year ended 12/31/03 $ 261 For the year ended 12/31/04 $ 110 For the year ended 12/31/05 $ 110 For the year ended 12/31/06 $ 110 For the year ended 12/31/07 $ 110 6. INCOME TAXES ------------ The effective income tax expense rate was 121.3% and 12.4% for the three and nine months ended September 30, 2003 respectively, as compared to the tax expense rate of 31.7% and 41.7% in the corresponding periods in 2002. The effective income tax rate for the first nine months of 2003 varied from the combined state and federal statutory rate principally because Oregon Steel established a valuation allowance for certain federal and state net operating loss carry-forwards, state tax credits, and alternative minimum tax credits that was allocated to New CF&I as noted below. Oregon Steel files its income tax return as part of a consolidated group, for which a formal tax allocation agreement exists. As a subsidiary of Oregon Steel, New CF&I is included in the consolidated group and thus does not file a separate tax return. Under the terms of the tax allocation agreement, each subsidiary of Oregon Steel is required to compute its separate tax liability as if it had filed a separate tax return and shall pay such amount to Oregon Steel. Also, each subsidiary will be compensated by Oregon Steel to the extent that tax benefits generated by the subsidiary provide a benefit on a consolidated basis. On this basis, New CF&I computes its standalone tax assets and liabilities, and reflects such balances in its consolidated balance sheets. -10- SFAS No. 109, "ACCOUNTING FOR INCOME TAXES", requires that tax benefits for federal and state net operating loss carry-forwards, state tax credits, and alternative minimum tax credits be recorded as an asset to the extent that management assesses the utilization of such assets to be "more likely than not"; otherwise, a valuation allowance is required to be recorded. During 2003, Oregon Steel has recorded an additional valuation allowance against a portion of its deferred tax assets. New CF&I has been allocated $7.7 million and $10.6 million of this valuation allowance for the three and nine months ended September 30, 2003, respectively, based on its estimated pro rata portion of the overall consolidated valuation allowance. Oregon Steel will continue to evaluate the need for valuation allowances in the future. Changes in estimated future taxable income and other underlying factors may lead to adjustments to the valuation allowances. -11- CF&I STEEL, L.P. BALANCE SHEETS (IN THOUSANDS)

-12- CF&I STEEL, L.P. STATEMENTS OF OPERATIONS (IN THOUSANDS) (UNAUDITED)

-13- CF&I STEEL, L.P. STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)

-14- CF&I STEEL, L.P. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION --------------------- The financial statements include the accounts of CF&I Steel, L.P. ("CF&I"). Oregon Steel Mills, Inc. ("Oregon Steel") owns an 87% interest in New CF&I, Inc. ("New CF&I") which owns a 95.2% interest in CF&I. Oregon Steel also owns directly an additional 4.3% interest in CF&I. In January 1998, CF&I assumed the trade name of Rocky Mountain Steel Mills. The unaudited financial statements include all adjustments, consisting of normal recurring accruals and other charges as described in Note 4, "Asset Impariments", which in the opinion of management, are necessary for a fair presentation of the interim periods. Results for an interim period are not necessarily indicative of results for a full year. Reference should be made to CF&I's 2002 Annual Report on Form 10-K for additional disclosures including a summary of significant accounting policies. RECENT ACCOUNTING PRONOUNCEMENTS In August 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 143, "ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS." SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated retirement costs. This statement requires that CF&I record a liability for the fair value of an asset retirement obligation when CF&I has a legal obligation to remove the asset. SFAS No. 143 is effective for CF&I beginning January 1, 2003. The adoption of SFAS No. 143 did not have a material impact on CF&I's financial statements. In June 2002, the FASB issued SFAS No. 146, "ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES." SFAS No. 146 addresses the financial accounting and reporting for costs associated with exit or disposal activities and supercedes Emerging Issues Task Force ("EITF") Issue No. 94-3, "LIABILITY RECOGNITION FOR CERTAIN EMPLOYEE TERMINATION BENEFITS AND OTHER COSTS TO EXIT AN ACTIVITY (INCLUDING CERTAIN COSTS INCURRED IN A RESTRUCTURING)." SFAS No. 146 requires recognition of the liability for costs associated with an exit or disposal activity when the liability is incurred. Under EITF No. 94-3, a liability for an exit cost was recognized at the date of CF&I's commitment to an exit plan. SFAS No. 146 also establishes that the liability should initially be measured and recorded at fair value. This statement is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. CF&I adopted SFAS No. 146 effective January 1, 2003. CF&I had accounted for employee termination actions under SFAS No. 112, which required recording when such charges are probable and estimable, and therefore, the adoption of SFAS No. 146 did not have an impact on CF&I's financial statements. In November 2002, the FASB issued Interpretation ("FIN") No. 45, "GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS." It clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee, including its ongoing obligation to stand ready to perform over the term of the guarantee in the event that the specified triggering events or conditions occur. The disclosure provisions for FIN No. 45 were effective for the year ending December 31, 2002. CF&I adopted the recognition provisions of FIN No. 45 effective January 1, 2003 for guarantees issued or modified after December 31, 2002. The adoption of FIN No. 45 did not have a material impact on CF&I's financial statements. In April 2003, the FASB issued SFAS No. 149, "AMENDMENT OF STATEMENT 133 ON DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES." SFAS No. 149 amends and clarifies the accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES." SFAS No. 149 is generally effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of SFAS No. 149 did not have a material effect on CF&I's financial statements. RECLASSIFICATIONS Certain reclassifications have been made in prior periods to conform to the current year presentation. Such reclassifications do not affect results of operations as previously reported. -15- 2. INVENTORIES ----------- Inventories are stated at the lower of manufacturing cost or market value with manufacturing cost determined under the average cost method. The components of inventories are as follows: SEPTEMBER 30, DECEMBER 31, 2003 2002 ------------- ------------ (IN THOUSANDS) Raw materials $ 9,024 $ 5,536 Semi-finished product 5,549 11,325 Finished product 14,375 17,420 Stores and operating supplies 10,375 11,548 ------- ------- Total inventory $39,323 $45,829 ======= ======= 3. CONTINGENCIES ------------- ENVIRONMENTAL MATTERS All material environmental remediation liabilities for non-capital expenditures, which are probable and estimable, are recorded in the financial statements based on current technologies and current environmental standards at the time of evaluation. Adjustments are made when additional information is available that suggests different remediation methods or periods may be required and affect the total cost. The best estimate of the probable cost within a range is recorded; however, if there is no best estimate, the low end of the range is recorded and the range is disclosed. In connection with the acquisition of the steelmaking and finishing facilities located at Pueblo, Colorado ("Pueblo Mill"), CF&I accrued a liability of $36.7 million for environmental remediation related to the prior owner's operations. CF&I believed this amount was the best estimate of costs from a range of $23.1 million to $43.6 million. CF&I's estimate of this liability was based on two remediation investigations conducted by environmental engineering consultants, and included costs for the Resource Conservation and Recovery Act facility investigation, a corrective measures study, remedial action, and operation and maintenance associated with the proposed remedial actions. In October 1995, CF&I and the Colorado Department of Public Health and Environment ("CDPHE") finalized a postclosure permit for hazardous waste units at the Pueblo Mill. As part of the postclosure permit requirements, CF&I must conduct a corrective action program for the 82 solid waste management units at the facility and continue to address projects on a prioritized corrective action schedule which substantially reflects a straight-line rate of expenditure over 30 years. The State of Colorado mandated that the schedule for corrective action could be accelerated if new data indicated a greater threat existed to the environment than was presently believed to exist. At September 30, 2003, the accrued liability was $27.9 million, of which $21.7 million was classified as non-current on the balance sheet. The CDPHE inspected the Pueblo Mill in 1999 for possible environmental violations, and in the fourth quarter of 1999 issued a Compliance Advisory indicating that air quality regulations had been violated, which was followed by the filing of a judicial enforcement action ("Action") in the second quarter of 2000. In March 2002, CF&I and CDPHE reached a settlement of the Action, which was approved by the court (the "State Consent Decree"). The State Consent Decree provides for CF&I to pay $300,000 in penalties, fund $1.5 million of community projects, and to pay approximately $400,000 for consulting services. CF&I is also required to make certain capital improvements expected to cost approximately $25 million, including converting to the new single New Source Performance Standards Subpart AAa ("NSPS AAa") compliant furnace discussed below. The State Consent Decree provides that the two existing furnaces will be permanently shut down approximately 16 months after the issuance of a Prevention of Significant Deterioration ("PSD") air permit. CF&I applied for the PSD permit in April 2002, and the draft permit was issued for public comment on October 2, 2003. In May 2000, the Environmental Protection Agency ("EPA") issued a final determination that one of the two electric arc furnaces at the Pueblo Mill was subject to federal NSPS AA. This determination was contrary to an earlier "grandfather" determination first made in 1996 by CDPHE. CF&I appealed the EPA determination in the federal Tenth Circuit Court of Appeals, and that appeal is pending. CF&I has negotiated a settlement of this matter with the EPA. Under that agreement and overlapping with the commitments made to the CDPHE described below, CF&I committed to the conversion to the new NSPS AAa compliant furnace (demonstrating full compliance 21 months after permit approval and expected to cost, with all related emission control improvements, approximately $25 million), and to pay approximately $450,000 in penalties and fund certain supplemental environmental projects and undertake additional environmental projects valued at approximately $1.1 -16- million, including the installation of certain pollution control equipment at the Pueblo Mill. The above mentioned expenditures for supplemental environmental projects will be both capital and non-capital expenditures. On April 9, 2003, the EPA filed a proposed Federal Consent Decree, now subject to public comment, which, if approved by the court, will fully resolve all NSPS and PSD issues. At that time CF&I will dismiss its appeal against the EPA. The Court is likely to approve the settlement, but is awaiting a legal memorandum on a narrow issue from the EPA before taking final action. In response to the CDPHE settlement and the resolution of the EPA action, CF&I had expensed $2.8 million in 2002 for possible fines and non-capital related expenditures since the settlement. As of September 30, 2003, the accrued liability was $1.2 million. As noted above, as part of the settlement with the CDPHE and the EPA, CF&I is required to install one new electric arc furnace and the two existing furnaces, with a combined melting and casting capacity of approximately 1.2 million tons through two continuous casters, will be shut down. CF&I has determined that the new single furnace operation will not have the capacity to support a two caster operation, and therefore one caster and the related assets with a book value of $9.2 million was written off in the quarter ended June 30, 2003. See Note 4 "Asset Impairments" for a description of this charge. In December 2001, the State of Colorado issued a Title V air emission permit to CF&I under the Clean Air Act ("CAA") requiring that the furnace subject to the EPA action operate in compliance with NSPS AA standards. This permit was modified in April 2002 to incorporate the longer compliance schedule that is part of the settlement with the CDPHE and the EPA. In September 2002, CF&I submitted a request for a further extension of certain Title V compliance deadlines, consistent with a joint petition by the State and CF&I for an extension of the same deadlines in the State Consent Decree. This modification gives CF&I adequate time to convert to a single NSPS AAa compliant furnace. Any decrease in steelmaking production during the furnace conversion period when both furnaces are expected to be shut down will be offset by increasing production prior to the conversion period by building up semi-finished steel inventory and, if necessary, purchasing semi-finished steel ("billets") for conversion into rod products at spot market prices at costs comparable to internally generated billets. Pricing and availability of billets is subject to significant volatility. However, CF&I believes that near term supplies of billets will continue to be available in sufficient quantities at favorable prices. In a related matter, in April 2000, the United Steelworkers of America ("Union") filed suit in U.S. District Court in Denver, Colorado, asserting that CF&I had violated the CAA at the Pueblo Mill for a period extending over five years. The Union sought declaratory judgement regarding the applicability of certain emission standards, injunctive relief, civil penalties and attorney's fees. On July 6, 2001, the presiding judge dismissed the suit. The 10th Circuit Court of Appeals on March 3, 2003 reversed the District Court's dismissal of the case and remanded the case for further hearing to the District Court. The Union has amended its complaint in the case raising additional PSD permit issues. While CF&I does not believe the suit will have a material adverse effect on its results of operations, the result of litigation, such as this, is difficult to predict and an adverse outcome with significant penalties is possible. It is not presently possible to estimate the liability if there is ultimately an adverse determination on remand. LABOR MATTERS The labor contract at CF&I expired on September 30, 1997. After a brief contract extension intended to help facilitate a possible agreement, on October 3, 1997, the Union initiated a strike at CF&I for approximately 1,000 bargaining unit employees. The parties, however, failed to reach final agreement on a new labor contract due to differences on economic issues. As a result of contingency planning, CF&I was able to avoid complete suspension of operations at the Pueblo Mill by utilizing a combination of new hires, striking employees who returned to work, contractors and salaried employees. On December 30, 1997, the Union called off the strike and made an unconditional offer on behalf of its members to return to work. At the time of this offer, because CF&I had permanently replaced the striking employees, only a few vacancies existed at the Pueblo Mill. Since that time, vacancies have occurred and have been filled by formerly striking employees ("Unreinstated Employees"). As of September 30, 2003, approximately 815 Unreinstated Employees have either returned to work or have declined CF&I's offer of equivalent work. At September 30, 2003, approximately 135 Unreinstated Employees remain unreinstated. On February 27, 1998, the Regional Director of the National Labor Relations Board ("NLRB") Denver office issued a complaint against CF&I, alleging violations of several provisions of the National Labor Relations Act ("NLRA"). On August 17, 1998, a hearing on these allegations commenced before an Administrative Law Judge ("Judge"). Testimony and other evidence were presented at various sessions in the latter part of 1998 and early 1999, concluding on February 25, 1999. On May 17, 2000, the Judge rendered a decision which, among other things, found CF&I liable for certain unfair labor -17- practices and ordered as remedy the reinstatement of all 1,000 Unreinstated Employees, effective as of December 30, 1997, with back pay and benefits, plus interest, less interim earnings. Since January 1998, CF&I has been returning Unreinstated Employees to jobs as positions became open. As noted above, there were approximately 135 Unreinstated Employees as of September 30, 2003. On August 2, 2000, CF&I filed an appeal with the NLRB in Washington, D.C. A separate hearing concluded in February 2000, with the judge for that hearing rendering a decision on August 7, 2000, that certain of the Union's actions undertaken since the beginning of the strike did constitute misconduct and violations of certain provisions of the NLRA. The Union has appealed this determination to the NLRB. In both cases, the non-prevailing party in the NLRB's decision will be entitled to appeal to the appropriate U.S. Circuit Court of Appeals. CF&I believes both the facts and the law fully support its position that the strike was economic in nature and that it was not obligated to displace the properly hired replacement employees. CF&I does not believe that final judicial action on the strike issues is likely for at least two to three years. In the event there is an adverse determination of these issues, Unreinstated Employees could be entitled to back pay, including benefits, plus interest, from the date of the Union's unconditional offer to return to work through the date of their reinstatement or a date deemed appropriate by the NLRB or an appellate court. The number of Unreinstated Employees entitled to back pay may be limited to the number of past and present replacement workers; however, the Union might assert that all Unreinstated Employees should be entitled to back pay. Back pay is generally determined by the quarterly earnings of those working less interim wages earned elsewhere by the Unreinstated Employees. In addition to other considerations, each Unreinstated Employee has a duty to take reasonable steps to mitigate the liability for back pay by seeking employment elsewhere that has comparable working conditions and compensation. Any estimate of the potential liability for back pay will depend significantly on the ability to assess the amount of interim wages earned by these employees since the beginning of the strike, as noted above. Due to the lack of accurate information on interim earnings for both reinstated and Unreinstated Employees and sentiment of the Union towards CF&I, it is not currently possible to obtain the necessary data to calculate possible back pay. In addition, the NLRB's findings of misconduct by the Union may mitigate any back pay award with respect to any Unreinstated Employees proven to have taken part or participated in acts of misconduct during and after the strike. Thus, it is not presently possible to estimate the liability if there is ultimately an adverse determination against CF&I. An ultimate adverse determination against CF&I on these issues may have a material adverse effect on CF&I's financial condition, results of operations, or cash flows. CF&I does not intend to agree to any settlement of this matter that will have a material adverse effect on CF&I. In connection with the ongoing labor dispute, the Union has undertaken certain activities designed to exert public pressure on CF&I. Although such activities have generated some publicity in news media, CF&I believes that they have had little or no material impact on its operations. PURCHASE COMMITMENTS Effective February 2, 1993, CF&I entered into an agreement, subsequently amended on August 4, 1994, to purchase a base amount of oxygen produced at the Pueblo Mill. This agreement expires January 2013 and specifies that CF&I will pay a base monthly charge that is adjusted annually based upon a percentage change in the Producer Price Index. The monthly base charge at September 30, 2003 for this agreement was $116,000. GUARANTEES AND FINANCING ARRANGEMENTS On July 15, 2002, Oregon Steel issued $305 million of 10% First Mortgage Notes due 2009 ("10% Notes") at a discount of 98.772% and an interest rate of 10%. Interest is payable on January 15 and July 15 of each year. The proceeds of this issuance were used to redeem Oregon Steel's 11% First Mortgage Notes due 2003 (including interest accrued from June 16, 2002 until the redemption date of August 14, 2002), refinance its existing credit agreement, and for working capital and general corporate purposes. New CF&I and CF&I (collectively "Guarantors") guarantee the obligations of Oregon Steel under the 10% Notes, and those guarantees are secured by a lien on substantially all of the property, plant and equipment and certain other assets of the Guarantors, excluding accounts receivable and inventory. In addition, Oregon Steel, New CF&I, CF&I, and Colorado and Wyoming Railway Company ("C&W") are borrowers ("Borrowers") under a $65 million revolving credit facility ("Credit Agreement") that will expire on June 30, 2005 and is collateralized, in part, by certain equity and intercompany interests, accounts receivable and inventory of New CF&I and CF&I. At September 30, 2003, $5.0 million was restricted under the Credit Agreement, $14.3 million was restricted under the outstanding letters of credit, and $45.7 million was available for use. The Credit Agreement contains various restrictive covenants including a minimum consolidated tangible net worth amount, a minimum earnings before interest, taxes, depreciation and amortization ("EBITDA") amount, a minimum fixed charge coverage ratio, a maximum senior debt ratio, limitations on maximum annual capital and environmental expenditures, a borrowing availability limitation relating to inventory, limitations on stockholder dividends and limitations on incurring new or additional debt obligations other than as allowed by the Credit Agreement. -18- On October 24, 2003, the Borrowers determined they were in violation of one of the Credit Agreement covenants, and on November 13, 2003, the Borrowers entered into an agreement with the lenders which waived the violation and amended the minimum consolidated EBITDA, minimum fixed charge coverage ratio, maximum senior debt ratio and minimum consolidated tangible net worth covenants as of October 31, 2003 and for each month through the maturity date of the facility. Included in the Credit Agreement amendment above, the Borrowers' ability to draw letters of credit has been increased from $20 million to $25 million to support issuance of letters of credit and similar contracts. LIQUIDITY CF&I experienced a net loss for the three and nine months ended September 30, 2003. Contributing to the adverse results was the interest paid by CF&I to Oregon Steel for its financing. CF&I has been able to fulfill its needs for working capital and capital expenditures due, in part, to the financing arrangement with Oregon Steel. CF&I expects that operations will continue for the remainder of 2003, with the realization of assets, and discharge of liabilities in the ordinary course of business. CF&I believes that its prospective needs for working capital and capital expenditures will be met from cash flows generated by operations and borrowings pursuant to the financing arrangement with Oregon Steel. If operations are not consistent with management's plans, there is no assurance that the amounts from these sources will be sufficient for such purposes. Oregon Steel is not required to provide financing to CF&I and, although the demand for repayment of the obligation in full is not expected during 2003, Oregon Steel may demand repayment of the loan at any time. If Oregon Steel were to demand repayment of the loan, it is not likely that CF&I would be able to obtain the external financing necessary to repay the loan or to fund its capital expenditures and other cash needs and, if available, that such financing would be on terms satisfactory to CF&I. OTHER CONTINGENCIES CF&I is party to various other claims, disputes, legal actions and other proceedings involving contracts, employment and various other matters. In the opinion of management, the outcome of these matters would not have a material adverse effect on the financial condition of CF&I. 4. ASSET IMPAIRMENTS ----------------- As noted in Note 3 above, as part of the settlement with the CDPHE and the EPA, CF&I is required to install one new electric arc furnace, and the two existing furnaces, with a combined melting and casting capacity of approximately 1.2 million tons through two continuous casters, will be shut down. CF&I has determined that the new single furnace operation will not have the capacity to support a two caster operation and therefore CF&I has determined that one caster and other related assets have no future service potential. Accordingly, CF&I has recorded an impairment charge to earnings of $9.2 million in the quarter ended June 30, 2003, including $1.0 million incurred for the reduction in value of related stores items. Because it is believed the caster has no salvage value, the carrying value of the fixed assets was zero after the effect of the impairment charge. -19- 5. INTANGIBLE ASSETS ----------------- The carrying amount of intangible assets and the associated amortization expenses are as follows: AS OF SEPTEMBER 30, 2003 ----------------------------------- GROSS CARRYING ACCUMULATED AMOUNT AMORTIZATION -------------- ------------ (IN THOUSANDS) AMORTIZED INTANGIBLE ASSETS --------------------------- Proprietary Technology $1,653 $(781) ====== ===== AGGREGATE AMORTIZATION EXPENSE ------------------------------ For the nine months ended 9/30/03 $ 234 . ESTIMATED AMORTIZATION EXPENSE ------------------------------ For the year ended 12/31/03 $ 261 For the year ended 12/31/04 $ 110 For the year ended 12/31/05 $ 110 For the year ended 12/31/06 $ 110 For the year ended 12/31/07 $ 110 -20- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL ------- The following information contains forward-looking statements, which are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Statements made in this report that are not statements of historical fact are forward-looking statements. Forward-looking statements made in this report can be identified by forward-looking words such as, but not limited to, "expect," "anticipate," "believe," "intend," "plan," "seek," "estimate," "continue," "may," "will," "would," "could," and similar expressions. These forward-looking statements are subject to risks and uncertainties and actual results could differ materially from those projected. These risks and uncertainties include, but are not limited to, general business and economic conditions; competitive products and pricing, as well as fluctuations in demand; the supply of imported steel and subsidies provided by foreign governments to support steel companies domiciled in their countries; changes in U.S. or foreign trade policies affecting steel imports or exports; potential equipment malfunction; work stoppages; plant construction and repair delays; reduction in electricity supplies and the related increased costs and possible interruptions of supply; changes in the availability and costs of raw materials and supplies used by New CF&I; costs of environmental compliance and the impact of governmental regulations; risks related to the outcome of the pending Union lawsuit, and failure of New CF&I to predict the impact of lost revenues associated with interruption of New CF&I's, its customers' or suppliers' operations. RESULTS OF OPERATIONS --------------------- The following table sets forth tonnage sold, sales and average selling price per ton:

SALES. New CF&I's consolidated sales increased $4.0 million, or 4.8%, to $86.8 million, and increased $13.9 million, or 5.5%, to $264.8 million for the three and nine months ended September 30, 2003, respectively, over the same periods in 2002. For the three and nine months ended September 30, 2003, the Company shipped 217,100 tons and 674,000 tons of rail, rod and bar and seamless pipe products at an average selling price of $382 and $376 per ton, compared to 208,400 tons and 640,400 tons of product at an average selling price of $381 and $375 per ton for the same periods in 2002. The increase in sales for the three and nine months ended September 30, 2003 is a result of higher shipments of rod and bar and seamless pipe products, offset by a decrease in rail products shipped. Due to adverse market conditions, seamless pipe mill operations have been suspended from November 2001 to April 2002, mid-August 2002 to mid- September 2002, and is in the process of temporarily suspending operations at the end of November 2003 until market conditions improve. The seamless pipe mill has a net book value of $3.3 million. GROSS PROFITS. New CF&I's gross profit was $4.5 million and $15.7 million for the three and nine months ended September 30, 2003, respectively, or 5.2% and 5.9% of total sales, compared to $14.5 million and $42.7 million, or 17.5% and 17.0% of total sales, for the same periods in 2002. The decrease of $10.0 million and $27.0 million, respectively, was primarily attributed to higher raw material and energy costs, partially offset by an increase in the average sales price of rod and bar. SELLING, GENERAL & ADMINISTRATIVE. New CF&I's selling, general and administrative expenses ("SG&A") of $4.0 million and $13.2 million for the three and nine months ended September 30, 2003, respectively, decreased by 29.3% and -21- 23.0%, from $5.7 million and $17.1 million for the same periods in 2002. The decrease in 2003 is attributed primarily to a decrease in both legal fees paid and bad debt expense. INTEREST EXPENSE. Total interest expense of $6.0 million and $17.9 million for the three and nine months ended September 30, 2003 decreased by 0.1% and 7.2%, from $6.0 million and $19.3 million, respectively, for the same periods of 2002. Lower interest expense was due to a decrease in the borrowing rate for the nine months ending September 30, 2003. INCOME TAX EXPENSE. The effective income tax expense rate was 121.3% and 12.4% for the three and nine months ended September 30, 2003, respectively, as compared to the tax expense rate of 31.7% and 41.7% in the corresponding periods in 2002. The effective income tax rate for the first nine months of 2003 varied from the combined state and federal statutory rate principally because New CF&I established a valuation allowance for certain federal and state net operating loss carry-forwards, state tax credits, and alternative minimum tax credits. See Note 6, "Income Taxes" for a discussion of the valuation allowance. LIQUIDITY AND CAPITAL RESOURCES ------------------------------- Cash flow provided by operations for the nine months ended September 30, 2003 was $9.0 million compared to $24.2 million in the corresponding period of 2002. The items primarily affecting the $15.2 million decrease in cash flows were operating losses, before consideration of non-cash transactions, and changes in working capital requirements including: 1) a decrease of $6.5 million in net accounts receivable in the first nine months of 2003 versus a decrease of $9.0 million in the same period of 2002; 2) a decrease in inventories in the first nine months of 2003 of $5.6 million versus a decrease of $2.6 million in 2002; and 3) a $1.4 million increase in operating liabilities in the first nine months of 2003 versus a $6.6 million decrease in the first nine months of 2002. For the nine months ended September 30, 2003, New CF&I expended approximately $9.9 million, excluding capitalized interest, on capital projects. Borrowing requirements for capital expenditures and other cash needs, both short-term and long-term are provided through a loan from Oregon Steel. As of September 30, 2003, $227.5 million of aggregate principal amount of the loan was outstanding, all of which was classified as long-term. The loan includes interest on the daily amount outstanding at the rate of 10.65%. The principal is due on demand or, if no demand is made, due December 31, 2004. Interest on the principal amount of the loan is payable monthly. Because the loan from Oregon Steel is due on demand, the applicable interest rate is effectively subject to renegotiation at any time, and there is no assurance the interest rate will not be materially increased in the future. New CF&I has been able to fulfill its needs for working capital and capital expenditures, due in part to the financing arrangement with Oregon Steel. New CF&I expects that operations will continue for the remainder of 2003, with the realization of assets, and discharge of liabilities in the ordinary course of business. New CF&I believes that its prospective needs for working capital and capital expenditures will be met from cash flows generated by operations and borrowings pursuant to the financing arrangement with Oregon Steel. If operations are not consistent with management's plans, there is no assurance that the amounts from these sources will be sufficient for such purposes. Oregon Steel is not required to provide financing to New CF&I and, although the demand for repayment of the obligation in full is not expected during 2003, Oregon Steel may demand repayment of the loan at any time. If Oregon Steel were to demand repayment of the loan, it is not likely that New CF&I would be able to obtain the external financing necessary to repay the loan or to fund its capital expenditures and other cash needs, and if available, that such financing would be on terms as favorable to New CF&I as that provided by Oregon Steel. The failure of either New CF&I or Oregon Steel to maintain their current financing arrangements would likely have a material adverse impact on New CF&I and CF&I. Oregon Steel has $305 million principal amount of 10% First Mortgage Notes due 2009 ("10% Notes") payable to outside parties. New CF&I and CF&I (the "Guarantors") have guaranteed the obligations of Oregon Steel under the 10% Notes, and those guarantees are secured by a lien on substantially all of the Guarantors' property, plant and equipment and certain other assets, excluding accounts receivable and inventory. In addition, Oregon Steel, New CF&I, CF&I, and Colorado and Wyoming Railway Company ("C&W") are borrowers ("Borrowers") under a $65 million revolving credit facility ("Credit Agreement") that will expire on June 30, 2005 and is collateralized, in part, by certain equity and intercompany interests, accounts receivable and inventory of New CF&I and CF&I. At September 30, 2003, $5.0 million was restricted under the Credit Agreement, $14.3 million was restricted under the outstanding letters of credit, and $45.7 million was available for use. The Credit Agreement contains various restrictive covenants including a minimum consolidated tangible net worth amount, a minimum earnings before interest, taxes, -22- depreciation and amortization ("EBITDA") amount, a minimum fixed charge coverage ratio, a maximum senior debt ratio, limitations on maximum annual capital and environmental expenditures, a borrowing availability limitation relating to inventory, limitations on stockholder dividends and limitations on incurring new or additional debt obligations other than as allowed by the Credit Agreement. On October 24, 2003, the Borrowers determined they were in violation of one of the Credit Agreement covenants, and on November 13, 2003, the Borrowers entered into an agreement with the lenders which waived the violation and amended the minimum consolidated EBITDA, minimum fixed charge coverage ratio, maximum senior debt ratio and minimum consolidated tangible net worth covenants as of October 31, 2003 and for each month through the maturity date of the facility. Included in the Credit Agreement amendment above, the Borrowers' ability to draw letters of credit has been increased from $20 million to $25 million to support issuance of letters of credit and similar contracts. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK No material changes. ITEM 4. CONTROLS AND PROCEDURES In accordance with the Securities Exchange Act of 1934 Rules 13a-15 and 15d-15, New CF&I's and CF&I's management, under the supervision of the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of New CF&I's and CF&I's disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of New CF&I's and CF&I's disclosure controls and procedures were effective. There has been no change in New CF&I's and CF&I's internal controls over financial reporting that occurred during New CF&I's and CF&I's last fiscal quarter that has materially affected, or is reasonably likely to materially affect, New CF&I's and CF&I's internal control over financial reporting. -23- PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS See Part I, Item 1, "Notes to Consolidated Financial Statements - Note 3, Contingencies," for discussion of (a) the lawsuit initiated by the Union alleging violations of the CAA, (b) the environmental issues at CF&I, and (c) the status of the labor matters at CF&I. New CF&I is party to various other claims, disputes, legal actions and other proceedings involving contracts, employment and various other matters. In the opinion of management, the outcome of these matters should not have a material adverse effect on the consolidated financial condition of New CF&I. New CF&I maintains insurance against various risks, including certain types of tort liability arising from the sale of its products. New CF&I does not maintain insurance against liability arising out of waste disposal, or on-site remediation of environmental contamination because of the high cost of such insurance coverage. There is no assurance that the insurance coverage currently carried by New CF&I will be available in the future at reasonable rates, if at all. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.1 Employment Agreement dated August 1, 2003, between Oregon Steel Mills, Inc. and James E. Declusin 10.2 Separation Agreement and General Release dated September 16, 2003, between Oregon Steel Mills, Inc. and its subsidiaries and Joe E. Corvin 10.3 Amendment No. 3 to Credit Agreement dated as of September 26, 2003 10.4 Amendment No. 4 to Credit Agreement dated as of November 13, 2003 31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer 31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer 32.1 Section 1350 Certification of Chief Executive Officer 32.2 Section 1350 Certification of Chief Financial Officer (b) Reports on Form 8-K On July 10, 2003, New CF&I and CF&I filed a report on Form 8-K announcing a change in registrant's independent accountant. New CF&I and CF&I dismissed PricewaterhouseCoopers LLP and engaged KPMG LLP as their independent accountant. On July 29, 2003, New CF&I and CF&I filed a report on Form 8-K in relation to a press release announcing the resignation of Joe Corvin as President and Chief Executive Officer of Oregon Steel Mills, Inc. On August 1, 2003, New CF&I and CF&I filed a report on Form 8-K in relation to a press release announcing the appointment of Jim Declusin as President and Chief Executive Officer of Oregon Steel Mills, Inc. -24- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NEW CF&I, INC. Date: November 14, 2003 /s/ Jeff S. Stewart -------------------------------- Jeff S. Stewart Corporate Controller CF&I STEEL, L.P. BY: NEW CF&I, INC. GENERAL PARTNER Date: November 14, 2003 /s/ Jeff S. Stewart -------------------------------- Jeff S. Stewart Corporate Controller New CF&I, Inc. -25- NEW CF&I, INC. EXHIBIT INDEX LIST OF EXHIBITS FILED WITH FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 2003 10.1 Employment Agreement dated August 1, 2003, between Oregon Steel Mills, Inc. and James E. Declusin 10.2 Separation Agreement and General Release dated September 16, 2003, between Oregon Steel Mills, Inc. and its subsidiaries and Joe E. Corvin 10.3 Amendment No. 3 to Credit Agreement dated as of September 26, 2003 10.4 Amendment No. 4 to Credit Agreement dated as of November 13, 2003 31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer 31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer 32.1 Section 1350 Certification of Chief Executive Officer 32.2 Section 1350 Certification of Chief Financial Officer -26-

NEW CF&I INC 10-Q