2005 Financial Review

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5 – Discontinued Operations

	Years Ended December 31,
(In millions)		2005	2004	2003
Gain (loss) on sale of
BAX Global (costs associated with the sale)	$	(2.8)	-	-
Timber		-	20.7	4.8
Gold		-	(0.9)	-
Natural Gas		-	-	56.2
Coal		-	5.0	-
Results from operations
BAX Global		86.8	49.5	(0.4)
Timber		-	(0.5)	(0.2)
Gold		-	(1.2)	(4.1)
Natural Gas		-	-	11.2
Adjustments to contingent liabilities of former operations
Litigation settlement gain		15.1	-	-
Health Benefit Act liabilities (see note 4)		2.3	3.2	(31.3)
Withdrawal liabilities (see note 4)		6.1	15.4	(17.0)
Reclamation liabilities		(6.2)	(0.1)	(3.2)
Workers’ compensation liabilities		0.4	(4.9)	0.2
Recovery of environmental costs		-	-	5.3
Other		0.1	(3.3)	(2.7)
Income from discontinued operation before income taxes		101.8	82.9	18.8
Income tax (expense) benefit		3.7	(32.9)	(27.3)
Income (loss) from discontinued operations	$	105.5	50.0	(8.5)

 

BAX Global

The Company sold BAX Global, a wholly owned freight transportation subsidiary, on January 31, 2006 for $1.1 billion in cash. The final purchase price and the gain on the sale will change for closing adjustments the Company believes are customary for a transaction of this nature. Net after-tax proceeds are expected to approximate $1.0 billion. The Company has either retained or indemnified the purchaser for some pre-sale liabilities including those for income taxes and for existing litigation as discussed in note 22. The resolution of these matters is expected to take several years.

The Company initially retained ownership of BAX Global’s airline subsidiary, Air Transport International, LLC (“ATI”), pending the receipt of required regulatory approval. Regulatory approval was obtained and ATI was sold on February 28, 2006 for nominal consideration. The Company has concluded that under FIN 46R, “Consolidation of Variable Interest Entities,” ATI should not be included in the consolidated results of the Company after January 31, 2006.

The Company immediately contributed $225 million of the proceeds to the VEBA designated to pay retiree medical obligations of former coal operations, paid down $46 million of short-term debt. On February 28, 2006, the Company gave notice to pay down $58.4 million of long-term debt.

BAX Global’s results of operations, including ATI, have been reported as discontinued operations for all periods presented.

The following tables show selected financial information included in discontinued operations for the three years ended December 31, 2005.

	Years Ended December 31,
(In millions)		2005	2004	2003
BAX Global
Revenues	$	2,899.4	2,440.6	1,999.2
Pretax income (loss)		86.8	49.5	(0.4)

 

In accordance with SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” BAX Global ceased depreciating and amortizing long-lived assets after November 2005, the date BAX Global was classified as held for sale. Had BAX Global not ceased depreciation and amortization, its pretax income in 2005 would have been $4.9 million lower.

Interest expense included in discontinued operations was $2.0 million in 2005, $2.1 million in 2004 and $1.8 million in 2003. Interest expense recorded in discontinued operations includes only interest on third-party borrowings made directly by BAX Global. The Company has not allocated other consolidated interest expense to discontinued operations.

Assets and liabilities for BAX Global and ATI for 2005 have been classified as held for sale. The assets and liabilities that are held for sale comprise the following:

	December 31,
(In millions)		2005
ASSETS
Cash and cash equivalents	$	78.6
Accounts receivable, net		497.9
Prepaid expenses and other current assets		26.5
Property and equipment, net		145.9
Goodwill		165.2
Deferred income taxes and other		62.4
Assets held for sale	$	976.5
LIABILITIES
Short-term borrowings and current maturities of long-term debt	$	7.1
Accounts payable and accrued liabilities		436.4
Long-term debt		1.9
Accrued pension costs and postretirement benefits		23.2
Deferred income taxes and other		22.8
Liabilities held for sale	$	491.4

 

Operating Leases

As of December 31, 2005, BAX Global’s future minimum lease payments under noncancellable operating leases with initial or remaining lease terms in excess of one year are as follows:

(In millions)		Facilities	Other	Total
2006	$	61.4	6.2	67.6
2007		50.7	4.3	55.0
2008		39.0	2.2	41.2
2009		27.8	1.0	28.8
2010		20.0	0.5	20.5
Later years		94.0	0.4	94.4
	$	292.9	14.6	307.5

 

At December 31, 2005 BAX Global had 13 DC-8 aircraft under one-year lease agreements. The lease agreements expire in 2006 with operating lease payments aggregating $10.9 million. These payments are not included in the table above. Net rent expense for BAX Global was $96.2 million in 2005, $84.7 million in 2004 and $75.9 million in 2003, which amounts are included in income from discontinued operations.

Former Natural Resource Operations

In February 2005, the Company received additional cash proceeds from the previous sale of its coal business in Virginia; the related pre-tax gain of $5 million was recorded in 2004.

The Company sold a portion of its timber business for $5.4 million in cash in 2003 and recognized a $4.8 million pretax gain. In 2004, the Company received an additional $33.7 million for the remaining portion of its timber business. After deducting the book value of related assets and the payment of $6.2 million in 2004 to purchase equipment formerly leased, the Company recognized a $20.7 million pretax gain in 2004.

In February 2004, the Company sold its gold operations for approximately $1.1 million in cash plus the assumption of liabilities and recognized a $0.9 million loss.

In August 2003, the Company sold its natural gas business and received $81.2 million in cash and recognized a $56.2 million gain.

The following tables show selected financial information included in discontinued operations for the three years ended December 31, 2005.

	Years Ended December 31,
(In millions)		2005	2004	2003
Timber
Revenues	$	-	1.2	21.1
Pretax loss		-	(0.5)	(0.2)
Gold
Revenues	$	-	4.4	23.5
Pretax loss		-	(1.2)	(4.1)
Natural Gas
Revenues	$	-	-	7.3
Pretax income		-	-	11.2

 

Adjustments to Contingent Liabilities of Former Operations

Ongoing expenses related to former operations, including expenses related to Company-sponsored postretirement benefit obligations, Black Lung obligations, pension obligations and expenditures for legal fees and other administrative activities, are classified within continuing operations. Adjustments to contingent assets and liabilities related to former operations, including those related to reclamation matters, worker’s compensation claims, multi-employer pension plan withdrawal liabilities, the Health Benefit Act liabilities and remaining legal contingencies are reported within discontinued operations.

Federal Black Lung Excise Tax

In 1999, the U.S. District Court of the Eastern District of Virginia entered a final judgment in favor of the Company, ruling that the Federal Black Lung Excise Tax (“FBLET”) is unconstitutional as applied to export coal sales. Through December 31, 2004, the Company had received refunds including interest of $27.2 million, including $2.8 million received in 2003. In December 2005, the Company reached a final settlement agreement related to all claims for FBLET refunds and recorded a pretax gain of $15.1 million. The Company has received payments covering this refund during the first quarter of 2006.

Other

The Company recorded $6.2 million in 2005, to reflect an increase in the estimated cost of reclamation at its former coal mines. The estimate of the cost of reclamation may change in the future.

In 2004, the Company recognized $4.9 million of expense to reflect an increase in the expected settlement of coal-related workers’ compensation claims. In 2004, the Company settled legal and other contingencies related to its former coal operations and recognized additional expense of $3.3 million.

In 2003, the Company and a third party reached an agreement that establishes the allocation of costs related to an environmental remediation project, and as a result, the Company recognized a $5.3 million pretax gain. The Company estimates its portion of the remaining clean-up and operational and maintenance costs related to the environmental matter to be $2.7 million.

Income taxes

Discontinued operations includes the tax provision or benefit associated with the Company’s BAX Global and former natural resource businesses, including the resolution of associated contingent tax matters.

The effective tax rate in 2005 was lower than the 35% U.S. statutory tax rate primarily as a result of an income tax benefit of $27.4 million recorded upon the resolution of income tax matters with the Internal Revenue Service related to the former natural resource business. In addition, the Company recognized a $7.0 million net deferred tax benefit as a result of its decision to sell the stock of BAX Global.

The effective tax rate in 2004 was higher than the U.S. statutory tax rate due to state income tax expense. The effective tax rate in 2003 was higher than the U.S. statutory rate due to state deferred tax valuation allowances related to BAX Global and additional accruals made in 2003 for tax contingencies related to the natural resource business.