Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1995
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from __________ to ___________
Commission File Number
0-752 .
WESTMORELAND COAL COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 23-1128670
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification
No.)
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
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 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 the number of shares outstanding of each of the issuer's
classes of common stock, as of April 28, 1995: 6,960,966
PART I - FINANCIAL INFORMATION
ITEM 1
FINANCIAL STATEMENTS
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
March 31, 1995 Dec. 31, 1994
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 23,643 $ 15,453
Notes and accounts receivable
Coal sales 11,245 21,333
Notes 3,830 4,946
Other 750 2,367
15,825 28,646
Less allowance for
doubtful accounts 2,457 3,317
13,368 25,329
Inventories
Coal 5,067 3,554
Mine supplies 4,486 5,050
9,553 8,604
Other current assets 975 952
TOTAL CURRENT ASSETS 47,539 50,338
Property, plant and equipment
Land and mineral rights 30,036 30,175
Plant and equipment 254,125 278,400
284,161 308,575
Less accumulated depreciation
and depletion 199,781 218,847
84,380 89,728
Assets of Cleancoal Terminal Co.
held for sale 5,968 6,149
Investment in Independent
Power Projects 43,901 43,046
Investment in DTA 19,972 20,375
Other assets 19,546 20,103
TOTAL ASSETS $ 221,306 $ 229,739
See accompanying notes to condensed consolidated financial
statements.
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
March 31, 1995 Dec. 31, 1994
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current installments of
long-term debt $ 2,526 $ 3,561
Accounts payable and accrued expenses 24,971 30,311
Accrual for workers' compensation 5,450 5,409
Accrual for postretirement
medical costs 8,075 8,075
Preferred dividends payable 1,222 -
Taxes on income 3,968 3,963
Deferred income taxes 500 500
TOTAL CURRENT LIABILITIES 46,712 51,819
Long-term debt 11,884 12,370
Accrual for pneumoconiosis
benefits 14,386 15,004
Accrual for workers' compensation 21,851 21,771
Accrual for postretirement
medical costs 38,296 36,405
Other liabilities 12,116 16,613
Deferred income taxes 14,595 14,732
Minority interest 10,486 10,301
SHAREHOLDERS' EQUITY
Preferred stock of $1.00 par value
Authorized 5,000,000 shares;
Issued 575,000 shares 575 575
Common stock of $2.50 par value
Authorized 20,000,000 shares;
Issued 6,960,966 shares at 3/31/95 17,400
Issued 6,957,084 shares at 12/31/94 17,390
Other paid-in capital 94,643 94,653
Accumulated deficit (61,638) (61,894)
TOTAL SHAREHOLDERS' EQUITY 50,980 50,724
TOTAL LIABILITIES
AND SHAREHOLDERS' EQUITY $ 221,306 $ 229,739
See accompanying notes to condensed consolidated financial statements.
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share data)
(Unaudited)
Three Months Ended
March 31
1995 1994*
Revenues:
Coal $ 40,788 $ 98,160
Independent Power 4,895 1,074
45,683 99,234
Cost and expenses:
Cost of coal sold 44,558 91,267
Cost of sales -Independent Power 378 627
Depreciation, depletion and
amortization 5,039 4,251
Selling and administrative 4,966 6,359
Provision for (reversal of)
doubtful accounts (967) 192
53,974 102,696
Operating loss (8,291) (3,462)
Gains on the sales of assets 9,515 -
Interest expense 342 1,093
Interest income 625 284
Other income 514 247
Income (loss) before income tax expense
(benefit) and minority interest 2,021 (4,024)
Income taxes (benefit):
Current 495 513
Deferred (137) 56
358 569
Minority interest 185 195
Net income (loss) 1,478 (4,788)
Less preferred stock dividends declared 1,222 1,222
Net income (loss) applicable to
common shareholders $ 256 $ (6,010)
Net income (loss) per share applicable
to common shareholders $ .04 $ (.86)
Weighted average number of common
shares outstanding 6,959 6,955
See accompanying Notes to Consolidated Financial Statements.
* Restated to reflect Westmoreland Energy, Inc. as a continuing
operation.
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31, 1995 1994*
(in thousands)
Cash flows from operating activities:
Net income (loss) $ 1,478 $ (4,788)
Adjustments to reconcile net income
(loss) to net cash (used) provided by
operating activities:
Gains on the sales of assets (9,515) -
Equity earnings from independent
power projects (2,735) (984)
Recognition of development fee income (1,750) -
Cash distributions from independent
power projects 1,880 -
Depreciation, depletion and
amortization 5,039 4,251
Increase (decrease) in deferred
income taxes (137) 56
Decrease in accrual for
pneumoconiosis benefits (618) (325)
Minority interest in WRI's income 185 195
Decrease in customers accounts receivable,
net of allowance for
doubtful accounts 9,190 9,366
Decrease in other receivables 1,548 544
Increase in inventories (1,224) (6,654)
Decrease in accounts payable and
accrued expenses (5,777) (3,605)
Increase in income taxes payable 5 512
Increase in accrual for
postretirement medical costs 1,891 1,813
Decrease in long-term accruals (596) (279)
Other 665 662
Net cash (used) provided by operating
activities (471) 764
Cash flows from investing activities:
Fixed assets additions (188) (1,276)
(Increase) decrease in notes receivable 1,405 (874)
Net proceeds from sales of assets 10,068 45
Net cash (used) provided
in investing activities 11,285 (2,105)
* Restated to reflect Westmoreland Energy, Inc. as a continuing
operation.
Cash flows from financing activities:
Hampton lease buyout premium (1,103) -
Repayment of long-term debt (1,521) (2,413)
Cash deposits to support surety bonds - (3,800)
Dividends paid to shareholders - (1,222)
Net cash used in financing activities (2,624) (7,435)
Net increase (decrease) in cash
and cash equivalents 8,190 (8,776)
Cash and cash equivalents,
beginning of period 15,453 24,262
Cash and cash equivalents,
end of period $ 23,643 $ 15,486
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 467 $ 902
Income taxes, net $ 903 $ 6
Supplemental disclosure on non-cash investing activities:
In the first quarter of 1995, $8,000,000 was distributed from
debt reserve accounts of certain of the Company's independent
power projects and were substituted with bank letters of credit.
The cash proceeds are restricted as to use and were invested in
certificates of deposit of the bank issuing the letters of
credit. The certificates of deposit collateralize the letters of
credit and are classified on the Company's Condensed Consolidated
Balance Sheets as an Investment in Independent Power Projects.
See accompanying notes to condensed consolidated financial
statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Notes contained herein should be read in conjunction with the
Notes to the Company's Consolidated Financial Statements filed on
Form 10-K for the year ended December 31, 1994. The financial
information contained in this Form 10-Q is unaudited but reflects
all adjustments which are, in the opinion of management, necessary
for a fair presentation of the financial information for the
periods shown. Such adjustments are of a normal recurring nature.
1. Commitments and Contingencies
Westmoreland Energy, Inc. ("WEI")
WEI, through subsidiaries and 100%-owned partnerships, holds
general and limited equity interests in partnerships which
were formed to develop and own cogeneration and other non-
regulated independent power plants. Equity interests in these
partnerships range from 1.25 percent to 50 percent.
Generally, the lenders to these partnerships have recourse
only against these projects and the income and revenues
therefrom. The project debt agreements contain various
restrictive covenants including restrictions on making cash
distributions to the partners. The partnerships are in
compliance with all of these covenants.
Equity Funding Commitments
WEI has one remaining equity funding commitment estimated to
be $4,600,000 for the Roanoke Valley II Project ("ROVA II")
which is expected to be paid in the second half of 1995. In
the event that after the start-up of this project the
conversion of the project construction loan to a term loan is
delayed beyond December 31, 1995, WEI's required equity
funding commitment could be up to $14,600,000. The conversion
from a construction loan to a term loan is expected to occur
in the fourth quarter of 1995. Additionally, if the total
cost of ROVA II exceeds $91,700,000, WEI's equity funding
commitment would increase by 50% of the amount of such
overrun. ROVA II is scheduled to commence commercial
operation in the second quarter of 1995 with a total expected
cost of less than $91,700,000.
Equity Support Agreement
On April 15, 1993, the Company entered into an equity support
agreement with LG&E Power Inc. ("LG&E") whereby WEI's equity
funding commitments of the Roanoke Valley I Project ("ROVA
I"), the Rensselaer Project and ROVA II were guaranteed by
LG&E. The anticipated $4,600,000 equity funding commitment of
ROVA II is guaranteed by LG&E. As consideration for this
guarantee and those previous guarantees supporting ROVA I and
the Rensselaer Project (both funded by the Company in December
1994), the Company had pledged its interest in all three of
these Projects as security to LG&E. WEI's ownership interest
in the Rensselaer Project, ROVA I and ROVA II will continue to
be pledged to LG&E until the ROVA II equity funding commitment
is satisfied. The Company pays fees of 1.25 percent per annum
on the aggregate amount of the unfunded guarantees and a one-
time fee of $4,750,000, paid in 1994. The $4,750,000 fee is
being amortized through the required equity funding dates of
the respective projects and as of March 31, 1995 the amount
remaining to be amortized is insignificant.
Recent Developments Relating to Independent Power Projects
Southampton Project
WEI owns a 30% general partnership interest in LG&E-Westmoreland
Southampton ("Southampton Partnership"), which owns the
Southampton Project. The Southampton Project, which was engaged
in start-up and testing operations from September 1991 through
March 1992, failed to meet the Federal Energy Regulatory
Commission ("FERC") operating standards for a qualifying facility
("QF") in 1992. The failure was due to three factors: (i) the
facility was not dispatched by its power customer, Virginia
Electric and Power Company ("Virginia Power"), on a baseload
schedule as anticipated, (ii) the facility was engaged in start-
up and testing operations during a portion of that year, and
(iii) the facility operator mistakenly delivered non-sequential
steam to the host over a significant period of time. On February
23, 1994, the Southampton Partnership filed a request with the
FERC for a waiver of FERC's QF operating standard for 1992.
Virginia Power intervened in the FERC proceeding, opposed the
granting of a waiver, and alleged that its power contract with
the Southampton Partnership had been breached due to the failure
of the facility to maintain QF status in 1992.
On July 7, 1994, the FERC issued an order (1) denying the
application of the Southampton Partnership for a waiver of the
FERC's QF operating standard in 1992 with respect to the
Southampton Project and (2) directing the Southampton Partnership
to show cause why it should not be required to file rate
schedules with the FERC governing its 1992 electricity sales for
resale to Virginia Power. In 1994 the Southampton Project
established a reserve for the anticipated refund obligations
relating to this issue. On August 9, 1994, the Southampton
Partnership filed a request for rehearing of FERC's order or,
alternatively, a motion for reconsideration. If the FERC were to
deny the requested waiver on rehearing and to determine that the
Southampton Partnership had been a "public utility" in 1992, then
the Southampton Partnership's 1992 actions could be subject to
regulation under the Federal Power Act and state laws and
regulations; two other cogeneration projects in which the Company
holds ownership interests could also be subject to such
regulation; the Company and certain of its subsidiaries could
become subject to regulation for 1992 under the Public Utility
Holding Company Act; and defaults might be created under certain
existing agreements. No assurance can be provided as to the
timing of the FERC's decision or the outcome. The Company
believes that a denial by FERC of a waiver for the Southampton
facility would not have a material adverse effect on the
financial condition of the Company.
Rensselaer Project
WEI owns a 50% general partnership interest in LG&E-Westmoreland
Rensselaer (the "Rensselaer Partnership"), which owns the
Rensselaer Project. The Rensselaer Project failed to meet the
FERC's QF operating and efficiency standards in 1993 and did not
meet the QF efficiency standard in 1994 as a result of a single
start-up and testing period that overlapped both years and was
prolonged due to a delay in the construction of necessary gas
pipeline facilities and unexpected equipment problems. On
October 17, 1994, the Rensselaer Partnership filed a request with
the FERC for waivers of the applicable QF standards in 1993 and
1994. On April 26, 1995 the FERC granted the Rensselaer
Project's request for waiver of the applicable QF standards for
1993 and 1994.
ROVA I Project
WEI owns a 50% partnership interest in Westmoreland-LG&E Partners
(the "ROVA Partnership"). The ROVA Partnership's principal
customer contracted to purchase the electricity generated by ROVA
I under a long-term contract. In the second quarter of 1994,
that customer disputed the ROVA Partnership's interpretation of
the provisions of the contract dealing with the payment of the
capacity purchase price when the facility experiences a forced
outage day. A forced outage day is a day when ROVA I is not able
to generate a specified level of electrical output. The ROVA
Partnership believes that the customer is required to pay the
ROVA Partnership the full capacity purchase price unless forced
outage days exceed a contractually stated annual number. The
customer asserts that it is not required to do so.
Through March 31, 1995, the customer withheld approximately
$6,728,000, including $872,000 in the first quarter of 1995, of
capacity purchase price payments to the ROVA Partnership because
of this dispute. On October 31, 1994, the ROVA Partnership filed
a complaint in the Circuit Court of the City of Richmond,
Virginia (the "Court") to recover these amounts and to confirm
that such payments may not be withheld in the future. On
December 12, 1994 the customer filed a motion to dismiss the
complaint and on March 17, 1995 the Court granted this motion.
The ROVA Partnership filed an amended motion for Judgement with
the Court on April 17, 1995. No earnings are being recognized by
WEI in 1995 for payments withheld by the customer relating to
forced outage days. The Company believes that the ROVA
Partnership's position is correct. However, the Company is
unable to predict the outcome of this proceeding, or the amount,
if any, that the customer may be ordered to pay related to this
matter. Additionally, WEI has been evaluating ways to minimize
the number of forced outage days in the future. Regardless of
the outcome, the Company believes ROVA I will continue to operate
profitably and generate positive cash flows.
Westmoreland Terminal Company
Westmoreland Terminal Company ("WTC"), a wholly-owned subsidiary
of the Company, has a 20% interest in Dominion Terminal
Associates ("DTA"), a partnership formed for the construction and
operation of a coal-storage and vessel-loading facility in
Newport News, Virginia. DTA's annual throughput capacity is 22
million tons, and its ground storage capacity is 1.7 million
tons.
The Company currently utilizes the terminal's facilities for
supplying coal to domestic customers via coastal waterways. The
Company also leases the ground storage space and the vessel-
loading facilities to certain unaffiliated parties.
Historically, the Company utilized the terminal for most of its
coal exporting business. In 1994, the Company disengaged from
the export sales market due to poor margins and the amount of
working capital needed to participate in that market. The
Company has conducted studies to evaluate the future of the
export coal market and believes the export sales market is a
cyclical business that will recover. The Company will continue
to market the use of its share of DTA, aggressively manage
related costs and monitor the performance and value of this
asset.
Although WTC is not currently generating sufficient revenues to
cover its share of DTA's fixed costs, the Company fully expects
to recover its investment in DTA.
The DTA partners have a Throughput and Handling Agreement
whereby WTC is committed to fund its proportionate share of DTA
operating expenses. WTC's total cash funding obligations were
$388,000, including certain rebates related to the total
throughput at the DTA terminal, and $707,000 during the first
three months of 1995 and 1994, respectively. The decrease in the
funding requirement for the first three months of 1995 compared
to the same period of 1994 is largely attributable to the
elimination of interest expense paid on the DTA Bonds during the
first three months of 1994 and the rebates received in the first
quarter of 1995. The Company has offset some of this cash
funding by leasing ground storage space and vessel-loading
facilities to unaffiliated parties. The Company received $298,000
from the leasing activities in the first quarter of 1995. The
Company's throughput tonnage was 318,000 and 379,000 during the
first quarter of 1995 and 1994, respectively.
Cleancoal Terminal Company
The Company has an agreement to sell the assets of Cleancoal
Terminal Company ("Cleancoal") to an indirect wholly-owned
subsidiary of CSX Corporation ("CSX"). In exchange for the
assets of Cleancoal and payment of $2,500,000, CSX has agreed to
release the Company from its $8,864,000 loan guarantee
obligation. The loan guarantee obligation was made to CSX in
1987 in connection with a loan from CSX to affiliates of
Adventure Resources, Inc. The Company will also be released from
related interest payments to CSX for this guarantee of
approximately $840,000 per year when this transaction closes.
Cleancoal's operations were discontinued in January 1995 and the
majority of its employees were laid off on January 31, 1995. The
Company expects to complete the Cleancoal transaction with CSX in
1995.
Other
In addition to the contingencies discussed in this Note, the
Company and its subsidiaries had various claims and suits
pending at March 31, 1995, all in the ordinary course of
business.
2) CAPITAL STOCK
The preferred stock was issued in July 1992. Preferred stock
dividends at a rate of 8.5% per annum have been paid quarterly
for the third quarter of 1992 through the first quarter of 1994.
The declaration and payment of preferred stock dividends was
suspended in the second quarter of 1994 in connection with
extension agreements with the Company's principal lenders. On
February 1, 1995 the Board of Directors declared a first quarter
1995 preferred stock dividend to be paid April 1, 1995 to holders
of record as of March 10, 1995. The three quarterly dividends
which are in arrears at December 31, 1994 (those dividends whose
payment dates would have been July 1, 1994, October 1, 1994 and
January 1, 1995) amount to $3,666,000 in the aggregate ($6.38 per
preferred share). Payment of common stock dividends is not
permitted until the preferred stock dividends that are in arrears
are made current. The Company's Board of Directors will continue
to review the payment of quarterly preferred stock dividends as
well as the three preferred stock dividends which are in arrears,
in light of the Company's ongoing business circumstances.
The Company is reviewing its options with respect to its Virginia
Division, which include the possible future sale, downsizing or
shutdown of all or a portion the Virginia Division, at which time
the Company may be required to recognize, for accounting
purposes, a significant portion of its postretirement medical
liabilities. The total amount of the postretirement medical
liabilities which would be expensed at the time the Virginia
Division shutdown or sale occurs is not known at this time,
however the impact of this non-cash expense on shareholders'
equity could be substantial enough to affect the Company's
ability to pay preferred stock dividends. There are statutory
restrictions limiting the payment of preferred stock dividends
under Delaware law, the state in which the Company is
incorporated. Under Delaware law, the Company is permitted to
pay dividends only: (1) out of surplus, that being the amount of
shareholders' equity in excess of the par value of the Company's
two classes of stock; or (2) in the event there is no surplus,
out of net profits for the fiscal year in which a dividend is
declared (and/or out of net profits from the preceding fiscal
year), but only to the extent that shareholders' equity exceeds
the par value of preferred stock ($575,000). The combined par
value of the Company's preferred and common stocks is
$17,975,000. The Company's shareholders' equity at March 31,
1995 was $50,980,000.
_____________________________________________________________
The foregoing financial information is unaudited but reflects all
adjustments which are, in the opinion of management, necessary
for a fair presentation of the financial information for the
periods shown. Such adjustments are of a normal recurring
nature.
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
MATERIAL CHANGES IN FINANCIAL CONDITION
FROM DECEMBER 31, 1994 TO MARCH 31,1995
Liquidity
In January of 1995 the Company sold the assets of its Hampton
Division located in Boone and Logan Counties, West Virginia to
Burco Resources Corporation and Wind River Resources Corporation
and sold its Hampton Division mineral lease to the lessor, Penn
Virginia Resources Corporation ("Penn Virginia"), for $9,045,000
in cash. The Company wrote off a substantial portion of the
Hampton Division's assets in 1993. The net proceeds to the
Company were approximately $7,376,000 after payments related to a
capital lease. The elimination of this capital lease resulted in
a further reduction of the Company's long-term debt. The gain on
the sale was $9,090,000 after the reversal of certain
liabilities. The purchasers assumed the reclamation and
environmental liabilities associated with the Hampton Division
as part of the sales transaction.
Cash used by operating activities in the first quarter of 1995
was $471,000 compared to cash provided by operating activities
in the first quarter of 1994 of $764,000. Unexpectedly
continuing increased operating losses from the Virginia Division
significantly impacted the cash flow from operating activities
in the first quarter of 1995. The absence of a positive
operating cash flow from Criterion Coal Company which was sold
in December 1994, was partially offset by $1,880,000 of cash
distributions from independent power projects in the first
quarter of 1995.
Cash provided by investing activities in the first quarter of
1995 was $11,285,000, including proceeds of $9,045,000 from the
sale of the assets of the Company's Hampton Division and
$925,000 from the sale of Virginia Division's Dump Train. WEI
collected $1,232,000 of its subordinated loans receivable from
project partnerships in the first quarter of 1995. Cash used by
investing activities in the first quarter of 1994 amounted to
$2,105,000. Fixed asset additions were $188,000 and $1,276,000
in the first quarter of 1995 and 1994, respectively.
Cash used in financing activities totalled $2,624,000 and
$7,435,000 in the first quarter of 1995 and 1994, respectively.
Repayment of long-term debt amounted to $1,521,000 (including
$566,000 related to the Hampton capital lease) and $2,413,000 in
the first quarter of 1995 and 1994, respectively. Also included
in the
first quarter of 1995 was a payment of $1,103,000 for the buyout
premium for leased assets of the Hampton Division. In the first
quarter of 1994 the Company transferred $3,800,000 to a cash
deposit account to collateralize the Company's outstanding
surety bonds for its workers' compensation self-insurance
programs. The Company paid preferred stock dividends of
$1,222,000 in the first quarter of 1994.
The Company's liquidity position at March 31, 1995 improved
compared to December 31, 1994. The Company's current ratio was
1.02 at March 31, 1995 compared to .97 at December 31, 1994.
The Company's total debt to capitalization ratio (total debt
divided by the sum of total debt, minority interest and
shareholders' equity) was 19% at March 31, 1995 compared to 21%
at December 31, 1994. Debt balances at March 31, 1995 were
$14,410,000 compared to $15,931,000 at December 31, 1994.
The Company's consolidated cash and cash equivalents at March
31, 1995 totalled $23,643,000 (including $3,432,000 at WRI). At
December 31, 1994, cash and cash equivalents totalled
$15,453,000 (including $2,445,000 at WRI). None of the
Company's cash and cash equivalents was or is restricted as to
use or disposition. The cash at WRI, a 60% owned subsidiary, is
available to the Company only through dividends. In addition,
the Company had restricted cash, which was not classified as
cash and cash equivalents on the Company's Condensed
Consolidated Balance Sheets, of $17,210,000 at March 31, 1995
compared to $9,210,000 at December 31, 1994. The $17,210,000 is
comprised of two items: a $9,210,000 interest-bearing cash
deposit account, which collateralizes the Company's outstanding
surety bonds for its workers' compensation self-insurance
programs and is classified on the Company's Condensed
Consolidated Balance Sheets as long-term in Other assets at
March 31, 1995 and at December 31, 1994; and $8,000,000
invested in certificates of deposit at March 31, 1995 which is
classified on the Company's Condensed Consolidated Balance
Sheets as an Investment in Independent Power Projects (also a
long-term asset). The $8,000,000 in certificates of deposit
represents cash proceeds which were transferred from debt
reserve accounts of certain of the Company's independent power
projects and were substituted with bank letters of credit. The
cash proceeds are restricted as to use and were invested in
certificates of deposit of the bank issuing the letters of
credit. The certificates of deposit collateralize the letters
of credit.
Liquidity Outlook
The Company continues its strategic review of operations as
part of its plan to reduce costs, improve cash flow, eliminate
non-strategic or underperforming assets and reposition the
Company so that it can try to achieve meaningful and
sustainable profitability.
The Company is continuing its efforts to improve the
competitiveness and profitability of its Virginia Division
through cost control, productivity improvement and closure of
non-essential high cost operations, but unexpectedly
continuing increased operating losses over the past two
quarters are troubling. Poor mining conditions at the
Pierrepont mine is a major factor and should improve later in
1995 when the longwall moves to a new area of the mine.
However the Virginia Division also has or will lose the
benefit of two coal supply contracts having sales prices
substantially above the current market price for similar types
of coal. The Georgia Power Company coal supply contract, with
shipments of 942,000 tons in all of 1994, and 275,000 tons in
the first quarter of 1995, (185,000 tons in the first quarter
of 1994), terminated in April 1995. The above market price of
the Duke Power Company coal supply contract, with shipments of
2,792,000 tons in all of 1994, and 478,000 tons in the first
quarter of 1995 (688,000 tons in the first quarter of 1994),
will expire in July 1996; however, the contract may be
extendable through December 31, 2000 provided the parties can
reach an agreement by the end of August 1995 for the sales
price of coal to be shipped after July 1996. It is likely
that the new sales price would be at current market prices.
In 1994, shipments to these two customers accounted for
approximately 83% of the Virginia Division's sales tons. In
the first quarter of 1995 these shipments accounted for
approximately 90% (82% in the first quarter of 1994) of the
Virginia Division's sales tons. In 1994, the Company's
Virginia Division experienced an operating loss of $3,726,000,
including approximately $18,000,000 of non-cash expenses for
depreciation and postretirement medical costs. The Virginia
Division will not be able to operate profitably or generate
positive cash flow from operations after July 1996, even after
excluding the ongoing fixed cash costs of idled operations
unless market prices for eastern coals increase significantly
and/or the Company is able to substantially reduce the cost
per ton of the coal produced. The projected cash flows from
the Virginia Division, including anticipated cash shutdown
costs but excluding postretirement medical costs, exceed the
carrying value of the assets at March 31, 1995. Therefore,
the Virginia Division's assets are not deemed to be impaired
at this time.
The Company is reviewing its options, which include the
possible future sale, downsizing or shutdown of all or a
portion of the Virginia Division, at which time the Company
may be required to recognize, for accounting purposes, a
significant portion of its postretirement medical liabilities.
The total amount of the postretirement medical liabilities
which would be expensed at the time of the Virginia Division's
shutdown, downsizing or sale occurs is not known at this time,
however the impact of this non-cash expense on shareholders'
equity could be substantial enough to affect the Company's
ability to pay preferred stock dividends.
The other major factor hampering the Company's long-term
liquidity outlook is its significant "heritage costs." These
heritage costs consist primarily of cash payments for
postretirement medical benefits and for workers' compensation.
The Company has ongoing cash expenditures in excess of
$12,000,000 per year for postretirement medical benefits and
over $6,000,000 per year for workers' compensation benefits.
More than $10,000,000 per year of those costs are attributable
to idled operations of the Virginia Division.
The Company expects to fund its near-term heritage costs out
of current cash balances, regular cash distributions from the
Company's independent power projects and WRI, improved cash
flow from the Virginia Division, and continued divestment or
improvement of underperforming assets and cost reductions. In
January 1995 the Company sold its Hampton Division and has an
agreement to sell the assets of its subsidiary Cleancoal.
Refer to the Cleancoal Terminal Company section of Note 1 for
further details regarding the sale of Cleancoal. The Company
will attempt to address its long-term liquidity requirements
through investments in profitable acquisitions as well as the
cash sources indicated above. Refer to the ROVA I section of
Note 1 for a discussion of a potential reduction in future
cash distributions to the Company from the ROVA I project.
RESULTS OF OPERATIONS:
QUARTER ENDED MARCH 31,1995 COMPARED
TO QUARTER ENDED MARCH 31,1994
Three Months Ended
March 31,
1995 1994*
(in thousands)
Coal Operations:
Virginia Division $ (7,530) $ (495)
Pine Branch Mining Incorporated (194) (1,180)
Westmoreland Resources, Inc. 699 784
Westmoreland Coal Sales Company 521 627
Net corporate expenses (3,332) (2,258)
West Virginia - Idled Operations (2,551) (2,275)
Hampton Division - (30)
Criterion Coal Company - 2,344
Cleancoal Terminal Company (104) (430)
Total Coal Operations (12,491) (2,913)
Independent Power Operations:
Westmoreland Energy, Inc. 2,450 (549)
WEI - recognition of deferred income 1,750 -
Total Independent Power Operations 4,200 (549)
Operating loss $ (8,291) $
(3,462)
Gains on the sales of assets $ 9,515 $ -
* Certain amounts have been reclassed to agree with current
classifications.
Details of tons sold (in thousands) and average revenue per ton
sold were as follows:
Three Months
Ended
March 31,
1995
1994
By Source and Geographic Sector:
Tons Sold:
Own Operations - Inland 1,869
2,800
Own Operations - Export -
49
For Others - Inland 76
430
For Others - Export -
447
Total Tons Sold 1,945
3,726
By Segment:
Virginia Division* 863 1,072
Westmoreland Resources, Inc. 1,006 995
Hampton Division - 306
Criterion Coal Company - 476
Total Westmoreland Operations 1,869 2,849
For Others 76 877
Total Tons Sold 1,945 3,726
Average revenue per ton sold:
Eastern Operations $ 35.77 $ 33.31
Westmoreland Resources, Inc. 7.15 7.24
Weighted Average 20.97 26.34
*Includes tons:
Sold by Pine Branch Mining Incorporated 70 35
Purchased from unaffiliated producers 251 152
Total
COAL OPERATIONS
Coal operations reported operating losses of $12,491,000 and
$2,913,000 for the first quarter of 1995 and 1994,
respectively. The deterioration is primarily attributable to
a unexpectedly continuing increased operating loss from the
Company's Virginia Division and the absence of $2,344,000 in
operating profits from Criterion Coal Company, which was sold
in December 1994.
Those business units reporting significant changes in results
of operations are discussed below.
Virginia Division - $7,035,000 worse
The Virginia Division had operating losses of $7,530,000 and
$495,000 in the first quarter of 1995 and 1994, respectively.
The unexpectedly continuing increased operating loss at the
Virginia Division is largely attributable to a production
shortfall of 219,000 tons from Company mines in the first
quarter of 1995 compared to the first quarter of 1994. This
production loss necessitated the purchase of an additional
99,000 tons of coal in the first quarter of 1995 which
increased costs by approximately $2,200,000. A portion of the
decline in production when comparing the two quarters is
attributable to the completion of the Company's lowest cost
mine, the Holton longwall mine. This mine produced 220,000
tons in the first quarter of 1994 but ceased operations in the
fourth quarter of 1994 as it finished mining the last reserves
available to it. The Company expected other Company mines to
make up the lost Holton production, however, difficult mining
conditions have prevented this. Poor mining conditions at the
Pierrepont mine have been experienced but productivity is
expected to improve later in the year when the longwall moves
to a new area of the mine. Also, contributing to the
increased operating losses at the Virginia Division in the
first quarter of 1995 compared to the first quarter of 1994
was a $1,600,000 increase in depreciation expense. The first
quarter of 1995 includes $2,100,000 of additional depreciation
expense related to a reduction in the estimated useful life of
plant and equipment so that these assets reflect their
estimated salvage value by July 31, 1996. The tons sold from
the Virginia Division also decreased by 230,000 tons in the
first quarter of 1995 compared to the first quarter of 1994
due to an agreement with its largest customer to defer
shipments to later periods. Shipments to this customer were
478,000 tons and 688,000 tons in the first quarter of 1995 and
1994, respectively.
Pine Branch Mining Incorporated ("Pine Branch") - $986,000
better
Pine Branch is a mountain top surface operation which had
operating losses of $194,000 and $1,180,000 in the first
quarter of 1995 and 1994, respectively. Unusually severe
weather conditions in the first quarter of 1994 adversely
impacted production and operating costs. The first quarter
is always the most difficult for Pine Branch due to weather
conditions at the mountain top and the shorter work days. The
continued operation of Pine Branch is directly related to the
Virginia Division.
Westmoreland Coal Sales Co. ("WCSC") - $106,000 worse
WCSC had operating income of $521,000 and $627,000 in the
first quarter of 1995 and 1994, respectively. Included in
the first quarter of 1995 results was $967,000 in income
generated from the reversal of bad debt allowances related to
reserved accounts receivable subsequently collected.
Excluding this benefit, the decrease in 1995's operating
income was primarily due to the absence of profits from sales
to the export market and the related brokering business.
WCSC reduced its selling and administrative expenses by
$324,000 in the first quarter of 1995 compared to the same
period of 1994.
Net Corporate Expenses - $1,074,000 worse
Net corporate expenses were $3,332,000 and $2,258,000 in the
first quarter of 1995 and 1994, respectively. Expenses in 1995
increased due to a $1,411,000 non-cash charge for an early
retirement program related to the restructuring and downsizing
of the Corporate office. The early retirement will be funded
principally out of Westmoreland's Pension Plan surplus.
Excluding the $1,411,000 charge in the first quarter of 1995,
the reduction in net corporate expenses for the first quarter
of 1995 compared to the same period of 1994 is due to decreased
staffing and lower legal expenses.
Independent Power Operations - $4,749,000 better
The Company's Independent Power Operations, through its wholly-
owned subsidiary, WEI, recorded operating income of $4,200,000 in
the first quarter of 1995 compared to an operating loss of
$549,000 in the first quarter of 1994. The improvement is due to
two factors: equity earnings of $2,194,000 from the ROVA I,
Rensselaer and Ft. Lupton Projects which became operational in
the second quarter of 1994; and $1,750,000 of deferred
development fees received in prior years in connection with the
ROVA I and Rensselaer Projects were recognized as income in the
first quarter of 1995.
Gains on the sales of assets
In January of 1995 the Company sold the assets of its Hampton
Division located in Boone and Logan Counties, West Virginia to
Burco Resources Corporation and Wind River Resources
Corporation and sold its Hampton Division mineral lease to the
lessor, Penn
Virginia Resources Corporation, for $9,045,000 in cash. The
net proceeds to the Company were approximately $7,376,000
after payments related to a capital lease. The elimination of
this capital lease resulted in a further reduction of the
Company's long-term debt. The Company wrote off a substantial
portion of the Hampton Division's assets in 1993. The gain on
the sale was $9,090,000 after the reversal of certain
liabilities. The purchasers assumed the reclamation and
environmental liabilities associated with the Hampton Division
as part of the sales transaction. In February 1995, the
Company sold the Virginia Division's Dump Train for cash of
$945,000 and the related gain on the sale was $425,000.
OTHER
Corporate Headquarters Relocation
As part of its continuing effort to reduce ongoing costs, the
Company has terminated its high priced office lease in
Philadelphia and will relocate its corporate headquarters to
Colorado Springs, Colorado at the end of the third quarter of
1995. Annual corporate office space costs alone should be
reduced by more than $700,000 per year compared to
Philadelphia. Also as part of the cost reduction effort, the
corporate staff will continue to be downsized, with the major
part of the cost defrayed by implementation of an early
retirement program funded out of the Company's Pension Plan
surplus. Only a small leadership group will be relocated to
the new headquarters. In a related matter, Francis J. Boyle,
Senior Vice President, Chief Financial Officer and Treasurer
has informed the Company that he has elected not to relocate.
New Accounting Standard
In 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 121,
"Accounting for the Impairment of Long-Lived Assets." This
new statement, requires that impairment of a long-lived asset
be recognized if the sum of the expected futures net cash
flows is less than the carrying value of the asset. The
impairment loss meeting the recognition criteria is to be
measured as the amount by which the carrying amount of the
asset exceeds the fair value of the asset. Although
management has not fully evaluated the impact of adoption, the
impact is not expected to be material since management already
utilizes the recognition and measurement criteria required by
this new standard.
Inflation did not have a material impact on the Company's
operations in 1995.
PART II - OTHER INFORMATION
ITEM 6
EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibit 28 - Financial Data Schedule.
b) Reports on Form 8-K:
Report filed March 22, 1995, announcing that the
Company's
1994 earnings were reduced by $2,928,000 due to a reserve
established by the partnership owning one of the
Company's
independent power projects, including the press release
of
same date.
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.
WESTMORELAND COAL COMPANY
Date: May 15, 1995
Francis J. Boyle
Senior Vice President,
Chief Financial Officer
and Treasurer
Thomas C. Sharpe
Controller
