SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): June 6, 1995
Westmoreland Coal Company
(Exact name of registrant as specified in its charter)
Delaware 0-752 23-1128670
(State or other (Commission File (IRS Employer
jurisdiction of Number) Identification
No.)
incorporation)
700 The Bellevue, 200 South Broad Street
Philadelphia, Pennsylvania 19102
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 545-2500
Item 5. Other Events.
On June 6, 1995 Westmoreland held its Annual Shareholders'
Meeting in Philadelphia, Pa. A speech was given by Westmoreland's
President and Chief Executive Officer, Christopher K. Seglem at
that meeting. A copy of the speech was mailed to Shareholders on
June 14, 1995.
Item 7. Exhibits.
1. Cover letter to Shareholders.
2. The above mentioned Speech.
EXHIBIT INDEX
Sequentially
Exhibit Description of Exhibit Numbered
Number Page
1 Cover letter to Shareholders dated . 4
June 14, 1995
2. Speech given by Christopher K. Seglem at 5
Westmoreland's Annual Shareholders' Meeting
on June 6, 1995
SIGNATURE
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.
WESTMORELAND COAL COMPANY
Date: June 14, 1995 By:
Theodore E. Worcester
Senior Vice President and
General Counsel
June 14, 1995
Dear Fellow Shareholder:
We are enclosing a copy of Chris Seglem's speech to the Annual
Meeting of Shareholders of the Company on June 6, 1995 and the overheads
he used (marked "OH" in the speech where they were shown). This material
covers in detail both the accomplishments of 1994 and the challenges still
before us in 1995. We would specifically call your attention to the
description of the Virginia Division situation and what comprises
Westmoreland's "Heritage Costs" and our plans for managing these problem
areas.
While we believe this speech is a full and complete discussion of
Westmoreland's current position and plans for the future, we recognize you
may have questions concerning these matters. If you do please contact us.
As always we appreciate your support.
Sincerely,
Pemberton Hutchinson Christopher K. Seglem
I. INTRODUCTION
I would like to introduce the other members of our Senior Management
Team who are here with us today in alphabetical order:
Frank Boyle
Senior Vice President,
Chief Financial Officer & Treasurer
Greg Daniels,
President - Virginia Division
Page Henley
Senior Vice President - Development
Bob Jaeger
Vice President-Finance
Westmoreland Energy, Inc.
Joe Lee
President
Westmoreland Coal Sales Company
Matt Sakurada
President
Westmoreland Energy, Inc.
Tom Sharpe
Controller
Ron Stucki
Senior Vice President - Operations
Ted Worcester
Senior Vice President & General Counsel
II. GOALS & OBJECTIVES
Our goals and objectives are pretty basic and straightforward.
They are to:
- Cover the operating cash shortfall created by our substantial
heritage costs and losses at the Virginia Division.
- Raise and reinvest capital more effectively to create new
and better sources of operating income.
- Continue to reduce costs wherever possible.
- Pay regularly scheduled dividends and make up the arrearages.
- And ultimately to enhance shareholder value.
III. SUCCESSES/ACCOMPLISHMENTS
Some people continue to count Westmoreland down and out. They are
wrong to do so. While all of us are concerned about the Company, and we still
have much in front of us to complete, we can look to the accomplishments and
the challenges successfully met in 1994 to see what our commitment, discipline,
and hard work can achieve.
In 1994 we:
- Successfully utilized a six week "pre-packaged" Chapter 11
proceeding to protect the Company from creditors by facilitating the assignment
of assets owned by Kentucky Criterion on reasonable terms
- Obtained a cash value of $81 million for the assets of Kentucky
Criterion and closed their sale on a timely basis;
- Paid our principal creditors in full, thereby reducing our debt from
over $70 million at the end of 1993 to just $14 million today;
- Funded the full $23 million equity share available to us in the
Roanoke Valley I and Rensselaer power projects, both of which, along with the
Ft. Lupton project, were brought into commercial operation during the year.
Good management resulted in the equity requirement at ROVA I being
approximately $9 million less than first projected.
ROVA II went into commercial operation last week, on time and
within budget. And with loan conversion at ROVA I and Rensselaer, those
projects are now and forever non-recourse to Westmoreland.
We:
- Terminated our sales agency and financier relationship with
Adventure Resources, reducing annual working capital requirements by $9
million, and receiving $10 million in notes with improved security to repay a
significant portion of the monies previously due us which had been written off;
- And, in a related transaction, agreed to transfer Cleancoal Terminal,
which had not been profitable for a number of years, plus $2.5 million cash to
CSX in return for cancellation of Westmoreland's guarantee of a debt of
Adventure Resources to CSX which totals $8.9 million and is costing
Westmoreland $840,000 per year in interest payments. This deal is expected to
close later this year and will result in our debt being further reduced to about
$5 million.
We also:
- Completed our withdrawal from the export market due to the high
working capital requirement and low profit margin of that business and
substantially reduced our high cost brokerage business;
- Closed the Charlotte, North Carolina; Banner, Kentucky; and Crab
Orchard, West Virginia field offices and reduced related field and headquarters
staff to reflect elimination of the export business and the reduction in the
brokerage business; and,
- Sold our old Eccles and Triangle mine properties and the Gallagher
lab facility for $3.8 million plus eliminated significant reclamation and
environmental obligations. The Eccles mine last operated in 1986 and
development of the Triangle mine complex had ceased in 1980. The Gallagher
Lab had essentially become a support facility for brokered coal operations.
We:
- Completed negotiations to sell the Hampton Division located in West
Virginia for $9 million and the elimination of significant on-going reclamation
and environmental liabilities. Hampton had been written off in 1993 so the
Company realized a gain of $9.1 million when this deal closed in January of this
year.
In 1994 at Westmoreland Resources we:
- Won a new five year contract with Otter Tail Power for
approximately 1.2 to 2.0 million tons per year;
- Increased production and sales and completed permitting and road
relocation for a new mining area at Sarpy Creek; and
- Renegotiated royalty rates on favorable terms with our lessor the
Crow Indian Tribe.
- When the Otter Tail Power contract is at its expected shipment level,
Westmoreland Resources should produce over 5 million tons of coal per year
Westmoreland also:
- Moved forward with implementation of the new innovative labor
agreement with the United Mineworkers in Virginia and perhaps most
significantly established in both Virginia and West Virginia a managed care
health services network which should result in lower costs for active and
retired employees and their dependents for years to come;
- Analyzed and determined that surpluses existed in Black Lung and
Pension Trusts that could be used without penalty to defray certain health and
restructuring costs.
As a result the Company was recently reimbursed over $1 million in
cash from the Black Lung Fund for previously paid medical expenses for
classified employees. And a portion of an early retirement program which will
facilitate our restructuring and downsizing can be funded from the Pension
Trust, without impairing our ability to pay pension benefits to present and
future retirees.
- Negotiated favorable terms for cancellation of our high priced office
lease in Philadelphia and then selected a new site for corporate headquarters
which will better support development and at the same time save over $700,000
per year on space costs alone; and,
- Most importantly, we were able to declare and pay the first preferred
dividend in 1995 and I am pleased today to announce that the Board of Directors,
at a meeting prior to this Annual Meeting declared a preferred dividend payable
July 1, 1995 to shareholders of record June 20, 1995.
So, an enormous amount has been accomplished since the last Annual
Meeting. We survived. We put a number of serious problems, drags, or
potential threats behind us. We took significant steps forward. We finished
the year with $15 million in cash and very little debt. You should be proud,
as I am, of the team that accomplished all this. I would not count
Westmoreland out.
IV. CHALLENGES
We are poised to move on, but first there is some unfinished work. I
am talking about the Virginia Division here.
With so many and often conflicting interests involved, the path to
unlocking the remaining value of Virginia is a complex one, often
exacerbated by the tendency of various parties to proceed slowly in hope that
less value will need to be shared with Westmoreland as time passes. This is
a tendency we have faced and dealt with before as we have strived to return
Westmoreland to health.
As the core mining property, Virginia has been the key variable for the
Company for many years. Operational problems surfaced in the 80's and the
Division suffered severe losses in the early 90's. Then, after seeing some
initial improvement under new management and a more innovative
approach to labor relations, Virginia's problems re-emerged in the fourth
quarter of 1994. The division subsequently lost a total of $13 million in that
and the next quarter as forecasted improvements in both productivity and
yield failed to materialize.
Further losses are not tolerable. One way or another the value of
Virginia's assets must be put to work generating cash for years to come. The
assets currently of significant value are:
The coal supply agreement with Duke Power which exceeds current
market prices by over $10 per ton until the end of July next year;
The coal reserves which are not tied to currently unprofitable
operations;
And, certain equipment and supplies.
Existing operations will only have value if their costs can be reduced.
Over the past several months we have met with employees, the United
Mineworkers of America, Penn Virginia, Duke Power Company, other
customers, mining contractors and other operators to determine our options,
values, and the best course of action. Bit by bit one party and then another
has brought value and various ways to capture that value to the table. We
are now cautiously optimistic that some reasonable value can be achieved
with Virginia for the near term. We intend to move forward aggressively on
this.
Continuing into the future, the Company's heritage costs pose the
greatest challenge on the downside. Heritage cost is a subject most people
are relatively new to since changes in accounting standards in recent years
have caused them to be accrued on the books of many companies for the first
time. We have tried hard at Westmoreland to fully inform our shareholders
on these obligations and thought further discussion today might be helpful.
(OH #1-6) These costs consist principally of post-retirement medical benefits
and workers compensation benefits.
The nature and determination of the medical and workman's
compensation benefits are set forth in the following overheads.
(OH#7 & 7A) Like most major companies, significant post-retirement
medical costs will be with us for many years. When looked at over such
periods of time without taking into account the time value of money - that is
what a dollar you need to spend in the year 2035 is worth today, the numbers
can seem quite staggering. Of course what is needed to round out the picture
are future streams of cash flow, such as earnings from Westmoreland
Energy, which can seem very large, too, when not discounted for the fact that
they will not be realized until well into the future.
For example, Westmoreland's actuaries today estimate that the
Company currently has significant post retirement obligations reaching 40
years into the future with total projected payments of around $646 million
over that period of time on an undiscounted basis. Likewise, Workers'
Compensation costs, based on claims through November 30, 1994, will be
present at significant levels for 10 years and with payments over that period
of time projected to be approximately $55 million. As you can see from the
overhead, for medical retiree and workers compensation we will be
disbursing $701 million over the next 50 years with annual payments of $18-
20 million a year. It is because such significant future post retirement
medical obligations had only been expensed on a pay-as-you-go basis by most
companies in the past that the financial accounting standards board issued
FAS 106 which requires them to be accrued as they are earned and those
earned heretofore but not expensed to be accrued on a "catch-up" basis.
(OH#8) On a present value basis, that is, when they are discounted for
the time value of money, these obligations today equal $188 million for post
retirement medical benefits and $27 million for Workers' Compensation. Of
these amounts, we have accrued $44 million of the post-retirement medical
benefits, including $26 million booked in 1993 in connection with the
shutdown of the "family" mines at Hampton. If the balance of the net
present value of the medical retiree payments were accrued today, we would
have an additional $144 million to recognize. All $27 million of the net
present value of the projected Workers' Compensation costs are already on
the books.
Let me caution that these numbers are based on actuarial assumptions
and estimates and can change. For example, laying off a person with 20
years experience who is 55 years old would drive the number up because
benefits would begin earlier than the age 62 retirement assumption
incorporated in current projections. Laying off someone who has less than 20
years service would reduce the number since benefits would not have vested.
Re-employment of a vested former employee by another UMWA employer
would reduce the number as that employer would become responsible for the
post-retirement medical benefits. Lower medical cost inflation or better
management of treatment would lower the number. But in virtually any
realistic scenario these obligations are substantial and will use cash and
reduce earnings for many years to come. Companies must match these
obligations either out of existing shareholders equity or future earnings.
Bottom line, the stream of cash flow on into the future must match the
stream out.
To take a simplified snapshot of what this means, consider this
overhead (OH#9) which depicts Major Operating Cash Flows without
earnings from Virginia or any reinvestment in a typical year. It shows a net
shortfall of about $15 million. Without the heritage costs, the Company
would likely have positive operating cash flow and be able to pay preferred
dividends on a sustainable basis even without earnings from Virginia, a
favorable resolution on forced outage at ROVA I or reinvestment. We want to
talk about how to overcome this deficit, but the point to be made here is that
it is these heritage costs that are the problem.
Let me pause here for a moment to comment again on what these
heritage costs could mean for preferred dividends. (OH#10) We begin with
Shareholders Equity, which was $51 million as of March 31, 1995. Under
controlling Delaware law, limitations are placed on dividends under the
following circumstances: What this means is that without offsetting gains or
profits and cash flows, the Company could reach a point where it was not
able to pay dividends. And, as we have earlier reported, the sale, downsizing
or closure of the Virginia operations could accelerate recognition of some or
all of the net present value of the post-retirement benefit costs, triggering
Delaware's limitations.
During this period of significant change, it is very important that
Westmoreland have access to financing and the ability to raise capital. We
recognize that this would be more difficult to do should the Company have a
negative net worth and be unable to pay dividends. It is one reason we are so
intently focused on this issue.
V. HOW TO GET THERE
The Company must add significant profit and cash flow in the near
term. Our target should be an improvement in cash flow of at least $20
million per year. To me this means the major acquisition of existing
profitable operations in the coal and power sectors. There are active
secondary markets for the purchase and sale of projects, operations and
companies in both areas and we should focus there initially. Capital and
imaginative approaches and structure will be critical.
(OH#11) To finance these acquisitions let me share with you some
potential sources of capital we will be pursuing related to current assets:
(OH#12) We must also look to the creative use of our $162 million in
Net Operating Loss Carryforwards. In other words, we need to look for
opportunities where these tax shelters, if you will, could be put to use. We
are beginning to explore structures now that could help us take advantage of
these tax assets.
Of course, we will explore opportunities for new sources of capital as
well, such as project financeable opportunities and investment partners.
We are also focused in the near term on doing everything possible to
gain back the $2-3 million per year in cash flow we believe is rightfully ours
at ROVA I and to reduce the annual cash costs for medical and workers'
compensation benefits. A mere 10% improvement there would cut the deficit
by $1.5 million a year.
Our mid to long term strategy for growth in power and coal is driven
by certain other considerations.
We have been successful and are well positioned in the Eastern
independent power market. We will continue to look for opportunities there
out of our Charlottesville, Virginia based office. But we intend to increase
our coverage in the midwest and west. RCG/Hagler Bailly in a September
1994 study of the trends for future potential of the independent power
market found that the two largest areas of growth potential in the United
States between 1995 and 2004 were the states west of the Mississippi at
14,320 MW and the southeastern states at 9,870 MW.
The western states are expected to have 28% of the projected new
independent generating capacity during that period while the southeastern
states will have 19% of the new independent generating capacity.
The next largest area is the east north central region (Michigan,
Minnnesota, Illinois, Indiana and Ohio) which projects the addition of 5,785
MW between 1995 and 2004 or 11% of the projected independent power
market. This region also has experienced the greatest shift to western coal
supply than any other area of the country to date.
From a thematic point of view, our development effort will focus on
Industrial Power and Solid Fuel projects.
On the coal side our efforts will focus on western opportunities for the
following reasons.
To begin with, our most promising existing coal operation is
Westmoreland Resources, Inc., located in the Montana portion of the Powder
River Basin.
RDI, a consultant to Westmoreland, in an initial study in 1994 and in
subsequent discussions with Westmoreland analyzed all producing regions of
the United States and concluded that the western United States offered
Westmoreland at the present time, the best potential for successful
acquisition. This was premised on the following factors:
Growth/Demand - The Northern Powder River Basin is projected to see
demand grow by 30% between 1995 and 2000. The Southern Powder River
Basin expects 29% growth in the same period. The Raton, Green River,
Hanna and Uinta Basins appear to have growth rates around 10% for this
period. The only eastern area expected to show demand growth is central
Appalachia, but opportunities there are limited, as I will discuss in a
moment. Both northern Appalachia and Illinois Basin are expected to
decline during this period by 1% and 29% respectively. Southern Appalachia
demand will decline by 6% between 1995 and 2000.
Cost/Quality - Western coal, in general, is lower cost and high quality.
These will be driving factors in our acquisition and development of
properties.
Logistics - The most advantageous transportation situations in the
domestic coal industry are to be found in the western U.S. Cost reduction
and innovative approaches such as haul back based rates are helping expand
the markets in which western coal can compete.
Niche Markets - We ill also be looking for niche markets. The greatest
opportunities in existing mine mouth power plant opportunities are in the
western northern and southern lignite properties. While non lignite
opportunities exist in all areas, there are a large number in the western
states.
Industry Consolidation - The northern and central Appalachian coal
fields are increasingly being dominated by a few large companies.
Opportunities for significant, high quality acquisitions are extremely limited.
The western coal fields offer more diversity of ownership and thus more
opportunity to "buy in". Properties also tend to be more substantial and
attractive. Thus, we think the west deserves our principal attention at this
juncture for new properties.
In both the power and coal sectors we will also look for opportunities to
use our people and their expertise, to grow in less capital-intensive ways. We
will look for opportunities to manage coal and related facility operations, for
example. We will try to expand on providing development and support
services in the energy field. As part of our own medical cost containment
efforts we will investigate the potential for providing similar services for
others.
We are taking every step we can to focus our future efforts on growth.
The Colorado Springs office, while much less expensive, will be dedicated to
the primary mission of senior management: the identification of
opportunities for growth, the raising of capital, and the completion of deals.
The future composition of our Board likewise will reflect this
emphasis.
VI. CONCLUSION
Change, progress and success can be forged in adversity. We have that
challenge and that opportunity at Westmoreland.
It takes skill, heart, and hard work. We have a core and are building
on it. I am terribly proud of how the Board, management, employees and key
outside advisers performed in 1994. They have demonstrated enormous
tenacity and commitment. Outside parties who would tarry in hopes of
profiting from our faint heartedness or our demise cannot be encouraged by
what they have seen.
We are fewer and much busier than just three years ago and I rely on
many people's ingenuity, initiative, and commitment to do what needs to be
done, when it needs to be done. It can be a very stressful situation for them.
And I know in the circumstances they sometimes fail to get the recognition
they deserve. So let me take this opportunity to say from the bottom of my
heart, that it has been a great effort and I thank you.
We accomplished just about everything we said we would a year ago.
Challenges remain. To you, our shareholders, know that we will continue to
give you our best effort.
Thank you. And now may I answer any questions.
