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r <br />Memorandum Re: Kerr Historical Overview <br />November 28, 1994 <br />Page 4 <br />By early 1981, Kerr was poised to implement an eight-year <br />mine plan that anticipated producing 750,000 tons of coal per <br />year. The base contract with Union Electric, together with <br />smaller contracts and spot market sales, supported that level of <br />production. Issuance of the federal lease and acquisition of the <br />non-federal leasehold on the northern end of the mine provided the <br />reserve base to meet the sales opportunities. <br />Federal lease C-22777 carried a royalty burden of 12.51. In <br />anticipation oP the royalty, Kerr attempted in negotiation of the <br />1979 contract extension with Union Electric to allow a pass- <br />through of the royalty burden and any cost increase resulting from <br />any regulatory mandates that might come with the new permits for <br />the extension of the mine. <br />Shortly after issuance of the federal lease C-22777 in 1980, <br />Kerr began initial work in the Pit 1 area and in April of 1981, <br />3,200 tons of coal were mined from Pit 1. In January of 1981, <br />Kerr representatives met with union Electric representatives to <br />discuss the details of the pass-through mechanism. At this <br />meeting, Union Electric advised Kerr that it would not accept the <br />pass-through of the federal royalty and associated costs since <br />they had not expected the magnitude of increase to be so <br />significant. Ensuing discussions resulted in termination of the <br />contract extension as of April of 1981. Mining in Pit 1 was <br />suspended and 80 employees were terminated. <br />Kerr immediately began seeking alternative markets and <br />arranged for several test burns of coal during 1981 and 1982. <br />Unfortunately, replacement business could not be found. In <br />December of 1981, Kerr filed for royalty relief on federal lease <br />C-22777. The royalty request was denied in early 1982. <br />Coal sales dropped from 725,000 tons in 1980 to 287,000 in <br />1981 and to 108,000 tons in 1982. All remaining hourly employees <br />were terminated in mid-1982, and the mine was operated with <br />salaried employees. The sales hit 35,000 in 1983, but rebounded <br />slightly in 1984 at 113,000. <br />Despite the setback in sales occasioned by the loss oP the <br />Union Electric contract, Kerr remained optimistic that Clean Air <br />Act requirements would eventually create significant demand for <br />the low sulphur coal. In 1986, Kerr secured a contract with <br />Colorado Public Service and produced and sold 180,000 tons. The <br />State of Colorado permit was renewed in 1986 in the context of <br />increased business. <br />