EX-99.1 7 dex991.txt FINANCIAL STATEMENTS OF CANYON FUEL COMPANY, LLC FINANCIAL STATEMENTS Canyon Fuel Company, LLC Years ended December 31, 2000, 1999, and 1998 with Report of Independent Auditors Canyon Fuel Company, LLC Financial Statements Years ended December 31, 2000, 1999, and 1998 Contents Report of Independent Auditors............................................. 1 Financial Statements Statements of Operations................................................... 2 Balance Sheets............................................................. 3 Statements of Members' Equity.............................................. 4 Statements of Cash Flows................................................... 5 Notes to Financial Statements.............................................. 6 Report of Independent Auditors To the Members of Canyon Fuel Company, LLC: We have audited the accompanying balance sheets of Canyon Fuel Company, LLC (a Delaware limited liability company) (the Company) as of December 31, 2000 and 1999, and the related statements of operations, members' equity, and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Canyon Fuel Company, LLC at December 31, 2000 and 1999, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP St. Louis, Missouri January 24, 2001 1 Canyon Fuel Company, LLC Statements of Operations (In Thousands)
December 31 2000 1999 1998 --------------- ---------------- --------------- Revenues: Coal sales $ 258,513 $ 240,264 $ 275,303 Other revenues 588 798 905 --------------- ---------------- --------------- 259,101 241,062 276,208 Costs and expenses: Cost of coal sales 215,785 207,052 255,149 Amortization of coal supply agreements 19,857 17,897 19,044 Fees to members 8,029 7,751 5,945 --------------- ---------------- --------------- 243,671 232,700 280,138 --------------- ---------------- --------------- Income (loss) from operations 15,430 8,362 (3,930) Interest, net: Interest expense (140) (230) (205) Interest income 585 634 1,110 --------------- ---------------- --------------- 445 404 905 --------------- ---------------- --------------- Net income (loss) $ 15,875 $ 8,766 $ (3,025) =============== ================ ===============
The accompanying notes are an integral part of the financial statements. 2 Canyon Fuel Company, LLC Balance Sheets (In Thousands)
December 31 2000 1999 ----------------- ------------------ Assets Current assets: Cash and cash equivalents $ 14 $ 436 Trade accounts receivable 36,924 25,829 Other receivables 6,809 7,640 Inventories 20,391 25,430 Other 2,937 1,877 ----------------- ------------------ Total current assets 67,075 61,212 Property, plant and equipment: Coal lands and mineral rights 270,436 266,956 Plant and equipment 230,881 229,280 Deferred mine development 31,959 10,037 ----------------- ------------------ 533,276 506,273 Less accumulated depreciation, depletion and amortization (171,849) (130,686) ----------------- ------------------ Property, plant and equipment, net 361,427 375,587 Other assets: Prepaid royalties 26,218 22,399 Coal supply agreements 23,467 43,324 Other 34 20 ----------------- ------------------ Total other assets 49,719 65,743 ----------------- ------------------ Total assets $ 478,221 $ 502,542 ================= ================== Liabilities and members' equity Current liabilities: Accounts payable $ 25,607 $ 25,334 Accrued expenses 7,528 11,731 ----------------- ------------------ Total current liabilities 33,135 37,065 Accrued postretirement benefits other than pension 8,219 8,219 Accrued reclamation and mine closure 3,649 3,280 Accrued workers' compensation 6,830 6,204 Other noncurrent liabilities 2,591 3,086 ----------------- ------------------ Total liabilities 54,424 57,854 Members' equity 423,797 444,688 ----------------- ------------------ Total liabilities and members' equity $ 478,221 $ 502,542 ================= ==================
The accompanying notes are an integral part of the financial statements. 3 Canyon Fuel Company, LLC Statements of Members' Equity (In Thousands) Years ended December 31, 2000, 1999, and 1998
ARCO Uinta Coal Company Through June 1, 1998, Arch Western Resources, LLC ITOCHU Coal Thereafter International Inc. Total --------------------------- ------------------------ ---------------------- Members' equity, December 31, 1997 $373,060 $200,878 $ 573,938 Contributions 11,785 6,346 18,131 Distributions (18,850) (10,150) (29,000) Net loss (1,966) (1,059) (3,025) --------------------------- ------------------------ ---------------------- Members' equity, December 31, 1998 364,029 196,015 560,044 Distributions (80,679) (43,443) (124,122) Net income 5,698 3,068 8,766 --------------------------- ------------------------ ---------------------- Members' equity, December 31, 1999 289,048 155,640 444,688 Contributions 17,550 9,450 27,000 Distributions (41,448) (22,318) (63,766) Net income 10,319 5,556 15,875 --------------------------- ------------------------ ---------------------- Members' equity, December 31, 2000 $275,469 $148,328 $ 423,797 =========================== ======================== ======================
The accompanying notes are an integral part of the financial statements. 4 Canyon Fuel Company, LLC Statements of Cash Flows (In Thousands)
December 31 2000 1999 1998 --------------- ---------------- --------------- Operating activities Net income (loss) $ 15,875 $ 8,766 $ (3,025) Adjustments to reconcile net income (loss) to cash provided by operating activities: Depreciation, depletion and amortization 62,005 62,074 68,669 Prepaid royalties 3,424 3,344 2,704 Net loss on disposition of assets 25 111 260 Changes in operating assets and liabilities (8,160) 14,489 1,691 Other (514) 878 285 --------------- ---------------- --------------- Cash provided by operating activities 72,655 89,662 70,584 Investing activities Proceeds from coal supply agreements - 11,155 - Additions to property, plant and equipment (28,161) (34,071) (43,499) Proceeds from dispositions of property, plant and equipment 148 - - Additions to prepaid royalties (7,243) (912) - --------------- ---------------- --------------- Cash used in investing activities (35,256) (23,828) (43,499) Financing activities Members' contributions 27,000 - 18,131 Members' cash distributions (63,766) (84,151) (29,000) Payment on other noncurrent liabilities (1,055) (1,493) (1,413) --------------- ---------------- --------------- Cash used in financing activities (37,821) (85,644) (12,282) --------------- ---------------- --------------- (Decrease) increase in cash and cash equivalents (422) (19,810) 14,803 Cash and cash equivalents, beginning of year 436 20,246 5,443 --------------- ---------------- --------------- Cash and cash equivalents, end of year $ 14 $ 436 $ 20,246 =============== ================ =============== Supplemental cash flow information Cash paid during the year for interest $ 281 $ 159 $ 241
The accompanying notes are an integral part of the financial statements. 5 Canyon Fuel Company, LLC Notes to Financial Statements December 31, 2000 1. Formation of the Company Effective December 20, 1996, Canyon Fuel Company, LLC (the Company) was formed as a joint venture between ARCO Uinta Coal Company (ARCO) (65 percent ownership) and ITOCHU Coal International Inc. (35 percent ownership) for the purpose of acquiring certain Utah coal operations and an approximate 9 percent interest in Los Angeles Export Terminal, Inc. (LAXT) from Coastal Coal, Inc. and The Coastal Corporation (collectively, Coastal). Effective June 1, 1998, ARCO's ownership of the Company was acquired by Arch Western Resources, LLC (Arch Western). The owners of the Company are referred to herein as the "Members." The Company operates one reportable segment: the production of steam coal from deep mines in Utah for sale primarily to utility companies in the United States. Net profits and losses are allocated to the Members based on their respective ownership percentage. Distributions of the Company's earnings are also allocated to the Members based on their respective ownership percentage. 2. Accounting Policies Accounting Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents Cash and cash equivalents are stated at cost which approximates fair value. Cash equivalents consist of highly liquid investments with an original maturity of three months or less when purchased. 6 Canyon Fuel Company, LLC Notes to Financial Statements (continued) 2. Accounting Policies (continued) Inventories Inventories consist of the following: December 31 2000 1999 -------------------------------- (In Thousands) Coal $10,963 $14,850 Supplies 9,428 10,580 -------------------------------- $20,391 $25,430 ================================ Coal inventory is valued using the first-in, first-out (FIFO) cost method and is stated at the lower of cost or market. Coal inventory costs include labor, equipment costs, and operating overhead. Supplies are valued using the average cost method and are stated at the lower of cost or market. The Company has recorded a valuation allowance for slow-moving and obsolete supplies inventories of $0.1 million and $0.8 million at December 31, 2000 and 1999, respectively. Coal Acquisition Costs and Prepaid Royalties Coal lease rights obtained through acquisition are capitalized and amortized primarily by the units-of-production method over the estimated recoverable reserves. Amortization occurs as the Company mines on the property. Rights to leased coal lands are often acquired through royalty payments. Where royalty payments represent prepayments recoupable against future production, they are capitalized. As mining occurs on these leases, the prepayment is charged to cost of coal sales. Coal Supply Agreements Acquisition costs related to coal supply agreements are capitalized and amortized on the basis of coal to be shipped over the term of the contract. Value is allocated to coal supply agreements based on discounted cash flows attributable to the difference between the above market contract price and the then-prevailing market price. Accumulated amortization for sales contracts was $74.8 million and $54.9 million at December 31, 2000 and 1999, respectively. In January 1999, the Company settled a coal supply agreement dispute with Intermountain Power Agency (IPA) and Coastal. In return for termination of certain indemnification rights and settlement of outstanding 7 Canyon Fuel Company, LLC Notes to Financial Statements (continued) 2. Accounting Policies (continued) Coal Supply Agreements (continued) receivables, the Company received cash of approximately $11.2 million and a note receivable of $43.7 million (collectively, the settlement). In 1999, the Company distributed the cash received and to be received from the settlement to its Members. In addition, the Company has agreed to supply IPA with 2.2 million tons of coal annually through 2010 (with a mutual option to extend this supply agreement through 2015). The Company has adjusted the carrying value of the coal supply agreements with IPA in the accompanying balance sheet at December 31, 1999 to reflect this settlement. Exploration Costs Costs related to locating coal deposits and determining the economic minability of such deposits are expensed as incurred. Property, Plant and Equipment Additions to property, plant and equipment are recorded at cost. Maintenance and repair costs are expensed as incurred. Mine development costs are capitalized and amortized on the units-of-production method over the estimated recoverable reserves that are associated with the property being benefited. Depletion of mineral properties is computed on the units-of-production method over the estimated recoverable coal reserves of the property being mined. At December 31, 2000, all mineral reserves of the Company that are capitalized are being amortized on the units-of-production method through Company operations. Depreciation and amortization of other property, plant and equipment are computed by the straight-line method over the expected lives of the assets, which range from 3 to 16 years. Fully depreciated assets are retained in property and accumulated depreciation accounts until they are removed from service. Upon disposal of depreciated assets, residual cost less salvage value is included in the determination of current income. 8 Canyon Fuel Company, LLC Notes to Financial Statements (continued) 2. Accounting Policies (continued) Asset Impairment If facts and circumstances suggest that a long-lived asset may be impaired, the carrying value is reviewed. If this review indicates that the value of the asset will not be recoverable, as determined based on projected undiscounted cash flows related to the asset over its remaining life, then the carrying value of the asset is reduced to its estimated fair value. Reclamation and Mine Closing Costs The Company charges current reclamation costs to expense as incurred. Final reclamation costs, including dismantling and restoration, are estimated based upon current federal and state regulatory requirements and are accrued during operations using the units-of-production method on the basis of estimated costs as of the balance sheet date. The effect of changes in estimated costs and production is recognized on a prospective basis. The Company is not aware of any events of noncompliance with environmental laws and regulations. The exact nature of environmental issues and costs, if any, which the Company may encounter in the future cannot be predicted, primarily because of the changing character of environmental requirements that may be enacted by governmental agencies. Accrued Workers' Compensation Costs The Company is liable under the federal Mine Safety and Health Act of 1977, as amended, to provide for pneumoconiosis (black lung) benefits to eligible employees, former employees and dependents with respect to claims filed by such persons on or after July 1, 1973. The Company is also liable under state statutes for black lung benefits. The Company currently provides for federal and state claims principally through a self-insurance program. Charges are being made to operations as determined by independent actuaries, at the present value of the actuarially computed present and future liabilities for such benefits over the employees' applicable years of service. In addition, the Company is liable for traumatic injuries which are accrued as injuries are incurred. 9 Canyon Fuel Company, LLC Notes to Financial Statements (continued) 2. Accounting Policies (continued) Revenue Recognition Coal sales revenues include sales to customers of coal produced at Company operations and purchased from other companies. The Company recognizes revenue from coal sales at the time title passes to the customer. Revenues from sources other than coal sales, including gains and losses from dispositions of long-term assets, are included in other revenues and are recognized as performed or otherwise earned. Income Taxes The financial statements do not include a provision for income taxes, as the Company is treated as a partnership for income tax purposes and does not incur federal or state income taxes. Instead, its earnings and losses are included in the Members' separate income tax returns. 3. Accrued Expenses Accrued expenses consist of the following:
December 31 2000 1999 ------------------------------------------ (In Thousands) Accrued payroll and related benefits $3,590 $ 4,261 Accrued pension 624 3,546 Accrued postretirement benefits other than pension 81 - Accrued taxes other than income taxes 968 543 Accrued workers' compensation 549 798 Other accrued expenses 1,716 2,583 ------------------------------------------ $7,528 $11,731 ==========================================
4. Employee Benefit Plans Defined Benefit Pension and Other Postretirement Benefit Plans Essentially all of the Company's employees are covered by a defined benefit pension plan sponsored by the Company. The benefits are based on years of service and the employee's compensation, primarily during the last five years of service. The funding policy for the pension plan is to make annual contributions as required by applicable regulations. 10 Canyon Fuel Company, LLC Notes to Financial Statements (continued) 4. Employee Benefit Plans (continued) Defined Benefit Pension and Other Postretirement Benefit Plans (continued) The Company also provides certain postretirement medical and life insurance benefits to substantially all employees who retire with the Company. The Company has the right to modify the plans at any time. The Company's current policy is to fund the cost of postretirement medical and life insurance benefits as they are paid. Summaries of the changes in the benefit obligation and plan assets (primarily listed stocks and debt securities) and of the funded status of the plans follow:
Other Postretirement Pension Benefits Benefits 2000 1999 2000 1999 ----------------------------------------------------------- (In Thousands) Change in benefit obligation Benefit obligation at January 1 $ 6,638 $ 5,435 $ 9,358 $ 9,493 Service cost 1,760 1,760 271 415 Interest cost 591 338 542 619 Benefits paid (864) (94) (81) (13) Plan amendments - (482) (2,888) - Other - primarily actuarial (gain) loss 2,129 (319) (1,417) (1,156) ----------------------------------------------------------- Benefit obligation at December 31 $ 10,254 $ 6,638 $ 5,785 $ 9,358 =========================================================== Change in plan assets Value of plan assets at January 1 $ 3,247 $ 1,305 $ - $ - Actual return on plan assets (211) 532 - - Employer contributions 5,016 1,504 81 13 Benefits paid (864) (94) (81) (13) ----------------------------------------------------------- Value of plan assets at December 31 $ 7,188 $ 3,247 $ - $ - =========================================================== Funded status of the plans Accumulated obligations less plan assets $ 3,066 $ 3,391 $ 5,785 $ 9,358 Unrecognized actuarial gain (loss) (2,844) (287) 1,162 (81) Unrecognized prior service cost 402 442 1,353 (1,058) ----------------------------------------------------------- Net liability recognized $ 624 $ 3,546 $ 8,300 $ 8,219 =========================================================== Balance sheet liabilities Current portion of the liability $ 624 $ 3,546 $ 81 $ - Long-term portion of the liability - - 8,219 8,219 ----------------------------------------------------------- Total accrued benefit liabilities $ 624 $ 3,546 $ 8,300 $ 8,219 ===========================================================
11 Canyon Fuel Company, LLC Notes to Financial Statements (continued) 4. Employee Benefit Plans (continued) Defined Benefit Pension and Other Postretirement Benefit Plans (continued) Demographic and assumption changes under the defined benefit pension plan resulted in a $2.1 million loss and a $0.3 million gain in 2000 and 1999, respectively. The decrease in the funded status in the year 2000 resulted from decreased earnings on plan assets during the year. Demographic and assumption changes in other postretirement benefits resulted in the $1.4 million and $1.2 million gain in 2000 and 1999, respectively. The $2.9 million reduction in the postretirement benefit obligation in 2000 associated with plan amendments resulted from a July 2000 amendment changing some of the cost-sharing provisions of the plan for salaried and nonunion hourly participants and an October 2000 plan amendment changing eligibility requirements to ten years of service after reaching the age of 45 for salaried and nonunion hourly participants. The latter plan change triggered a curtailment that resulted in the recognition of $0.4 million in previously unrecognized prior service gains.
Other Postretirement Pension Benefits Benefits ----------------------------------------------------------- 2000 1999 2000 1999 ----------------------------------------------------------- Weighted average assumptions as of December 31 Discount rate 7.75% 7.50% 7.75% 7.50% Rate of compensation increase 4.75% 5.25% N/A N/A Expected return on plan assets 9.00% 9.00% N/A N/A Health care cost trend on covered charges N/A N/A 5.00% 5.00%
The following table details the components of pension and other postretirement benefit costs:
Other Postretirement Pension Benefits Benefits ------------------------------------------------------------------------- 2000 1999 1998 2000 1999 1998 ------------------------------------------------------------------------- (In Thousands) Service cost $1,760 $1,760 $1,674 $ 271 $ 415 $ 463 Interest cost 591 338 353 542 619 612 Expected return on plan assets (648) (166) (42) - - - Other amortization and deferral 391 153 194 (208) 296 383 Curtailments - - - (443) - - ------------------------------------------------------------------------- $2,094 $2,085 $2,179 $ 162 $1,330 $1,458 =========================================================================
12 Canyon Fuel Company, LLC Notes to Financial Statements (continued) 4. Employee Benefit Plans (continued) Defined Benefit Pension and Other Postretirement Benefit Plans (continued) The health care cost trend rate assumption has a significant effect on the amounts reported. However, as the employer contribution cap is expected to be reached in 2001, the impact of health care cost trend rate changes is not material. Other Plans The Company sponsors a savings plan which was established to assist eligible employees in providing for their future retirement needs. The savings plan matches a certain percentage of employee contributions. The Company's contribution to the savings plan was $1.3 million in both 2000 and 1999. 5. Concentration of Credit Risk and Major Customers The Company places its cash equivalents in investment-grade short-term investments and limits the amount of credit exposure to any one commercial issuer. The Company markets its coal principally to electric utilities in the United States. Generally, credit is extended based on an evaluation of the customer's financial condition, and collateral is not generally required. Credit losses are provided for in the financial statements and historically have been minimal. The Company is committed under long-term contracts to supply coal that meets certain quality requirements at specified prices. These prices are generally adjusted based on indices. Quantities sold under some of these contracts may vary from year to year within certain limits at the option of the customer. IPA accounted for approximately 44 percent, 34 percent and 29 percent of coal sales in 2000, 1999 and 1998, respectively. This same customer accounted for 53 percent and 39 percent of accounts receivable at December 31, 2000 and 1999, respectively. Sierra Pacific accounted for approximately 12 percent, 11 percent and 11 percent of coal sales in 2000, 1999 and 1998, respectively. Approximately 8 percent, 6 percent and 8 percent of coal sales in 2000, 1999 and 1998, respectively, were export sales to Japanese customers. 6. Related Party Transactions As described in Note 1, 65 percent of the Company was owned by ARCO and subsequent to June 1, 1998 is owned by Arch Western. ARCO, and now Arch Western, acts as the Company's managing Member. The Company pays administration and production fees to 13 Canyon Fuel Company, LLC Notes to Financial Statements (continued) 6. Related Party Transactions (continued) ARCO and now Arch Western for managing the Company's operations. These fees were $8.0 million, $7.8 million and $5.9 million in 2000, 1999 and 1998, respectively. The Company has a payable balance to Arch Western of $3.8 million and $6.4 million at December 31, 2000 and 1999, respectively. 7. Commitments and Contingencies The Company has entered into various noncancelable royalty lease agreements and federal lease bonus payments under which future minimum payments are due. On May 24, 1999, the Company was the successful bidder in a federal auction of certain mining rights in the 7,172-acre Pines tract in Sevier and Emory Counties in Utah. The Company's lease bonus bid amounted to $16.9 million for the tract, of which $3.4 million was paid on May 24, 1999 and an additional $3.4 million was paid in 2000. The tract contains approximately 60 million tons of demonstrated coal reserves and is contiguous with the Company's Sufco mine. Geological surveys indicate that there are sufficient reserves relative to these properties to permit recovery of the Company's investment. Minimum payments due in future years under lease agreements (including the Pines tract lease) are $3.4 million in 2001, $3.4 million in 2002 and $3.4 million in 2003. The Company was in litigation with the Skyline Partners, lessors of the coal reserves which comprise the Company's Skyline Mine. The coal leases required the Company to make annual advance minimum royalty payments which are fully recoupable against a production royalty that is to be paid by the Company on each ton of coal mined and sold from the leaseholds. In 1997, the Company filed suit against Skyline Partners in Utah State Court alleging that the Company was not required to make the final minimum advance royalty payment. On February 24, 2000, the Company and Skyline Partners reached an agreement to settle the litigation. The settlement includes a $7.2 million recoupable payment by the Company to Skyline Partners which was recorded as a prepaid royalty in 2000 and a grant of an overriding royalty interest to Skyline Partners covering land adjacent to the Skyline Mine reserves. The Company is also the subject of or party to a number of other pending or threatened legal actions. On the basis of management's best assessment of the likely outcome of these actions, expenses or judgments arising from any of these suits are not expected to have a material adverse effect on the Company's operations, financial position or cash flows. 14 Canyon Fuel Company, LLC Notes to Financial Statements (continued) 7. Commitments and Contingencies (continued) Included in property, plant and equipment of the Company is an approximate 9 percent investment in LAXT (recorded at cost) amounting to $10.8 million and $11.5 million as of December 31, 2000 and 1999, respectively. LAXT began operations in 1997 and has been experiencing operating losses and negative cash flow since its inception, principally due to weak demand for U.S. coal exports to the Pacific Rim countries. The ability of LAXT to continue as a going concern is dependent on its improving operating results and obtaining additional financing, if necessary. If these issues are not satisfactorily resolved in a timely manner, there can be no assurance that the Company's investment in LAXT will be recoverable. In January 2001, LAXT owed the Port of Los Angeles a Minimum Annual Guarantee Rental Payment (MAG) of $5.5 million, for which it did not have sufficient funding to make the payment. Currently, LAXT has proposed a plan that would raise additional funding from its Members, reduce certain operating expenses, improve operating performance and explore additional sources of revenue. The plan appears to have support of the Members. The Company believes this plan will be successful and the MAG payment will be made and future operations of LAXT will be profitable in such a manner to allow recovery of the LAXT investment. 8. Cash Flow The changes in operating assets and liabilities as shown in the statements of cash flows are comprised of the following:
2000 1999 1998 ---------------------------------------------------- (In Thousands) Decrease (increase) in operating assets: Receivables $(10,264) $ 9,500 $(11,023) Inventories 5,039 (1,588) 8,552 Increase (decrease) in operating liabilities: Accounts payable and accrued expenses (3,930) 5,606 25 Accrued postretirement benefits other than pension - 1,317 1,463 Accrued reclamation and mine closure 369 487 406 Accrued workers' compensation 626 (833) 2,268 ---------------------------------------------------- $ (8,160) $14,489 $ 1,691 ====================================================
9. Accounting Development In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and 15 Canyon Fuel Company, LLC Notes to Financial Statements (continued) Hedging Activities, which is required to be adopted in years beginning after June 15, 2000. SFAS No. 133 permits early adoption as of the beginning of any fiscal quarter after its issuance. SFAS No. 133 will require the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will either be offset against the change in fair value of the hedged assets or liabilities through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. SFAS No. 133 will not have a material impact on the earnings and financial position of the Company.