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 June 30, 1997
-------------
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
-------------------------
(Debtor-in-Possession as of December 23, 1996)
---------------------------------------------
(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.)
2 North Cascade Avenue,14th Floor, Colorado Springs, Colorado 80903
- ---------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, area code 719-442-2600
------------
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 August 1, 1997: 6,965,328
<PAGE 2>
PART I - FINANCIAL INFORMATION
ITEM 1
FINANCIAL STATEMENTS
<TABLE>
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
DEBTOR-IN-POSSESSION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
1997 1996
----------- ------------
(in thousands)
<CAPTION>
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 20,178 $ 8,791
Receivables:
Trade 3,939 4,667
Other 1,299 2,218
--------- ---------
5,238 6,885
Inventories 78 688
Other current assets 514 726
--------- ---------
Total current assets 26,008 17,090
--------- ---------
Property, plant and equipment:
Land and mineral rights 11,028 11,028
Plant and equipment 106,218 137,873
--------- ---------
117,246 148,901
Less accumulated depreciation
and depletion 79,702 106,201
--------- ---------
37,544 42,700
Investment in independent power
opertaions 52,848 51,386
Investment in Dominion Terminal 19,298 19,841
Associates (DTA)
Workers' compensation bond 8,273 9,960
Prepaid pension cost 12,021 11,021
Other assets 1,271 1,973
--------- ---------
Total Assets $ 157,263 $ 153,971
========= ==========
</TABLE>
See accompanying notes to condensed consolidated financial
statements.
<PAGE 3>
<TABLE>
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
DEBTOR-IN-POSSESSION
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(Unaudited)
June 30, December 31,
1997 1996
---------- ----------
(in thousands)
<CAPTION>
<S> <C> <C>
Liabilities and Shareholders' Equity
Current liabilities:
Current installments of
long-term debt $ 460 $ 443
Accounts payable and accrued
expenses:
Trade 1,162 847
Taxes, other than income taxes 3,463 3,437
Other accrued expenses 2,988 1,588
Reclamation costs 590 590
--------- ---------
Total current liabilities 8,663 6,905
--------- ---------
Liabilities subject to compromise 134,765 136,191
Long-term debt, less current
installments 836 881
Accrual for reclamation costs, less
current portion 4,217 4,216
Accrual for pneumoconiosis benefits 1,324 127
Other liabilities 704 261
Minority interest 5,712 5,153
Commitments and contingent liabilities
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 6,965,328 shares 17,402 17,402
Other paid-in capital 94,641 94,641
Accumulated deficit (111,576) (112,381)
--------- ---------
Total shareholders' equity 1,042 237
--------- ---------
Total Liabilities and
Shareholders' Equity $ 157,263 $ 153,971
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial
statements.
<PAGE 4>
<TABLE>
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
DEBTOR-IN-POSSESSION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Six Months
Ended Ended
June 30, June 30,
1997 1996* 1997 1996*
---------------------------------------
(in thousands except per share data)
<CAPTION>
<S> <C> <C> <C> <C>
Revenues:
Coal $ 11,512 $ 11,265 $ 23,970 $ 21,817
Services 2,168 1,790 4,095 3,366
Independent power -
equity in earnings 4,515 3,251 8,250 7,483
-------- -------- -------- --------
18,195 16,306 36,315 32,666
Cost and expenses:
Cost of coal sold 10,787 11,515 21,694 22,902
Cost of sales - services 2,305 1,472 4,445 3,570
Depreciation, depletion
and amortization 575 518 1,227 1,027
Selling and
administrative 1,918 3,069 3,713 5,687
Heritage costs 468 4,498 2,197 8,128
Pension benefit (100) (850) (1,000) (1,704)
Corona impairment charge 3,100 - 3,100 -
-------- -------- -------- --------
19,053 20,222 35,376 39,610
Operating income (loss) (858) (3,916) 939 (6,944)
Gains (losses) on the
sales of assets 732 14,740 (173) 17,181
Interest expense (64) (114) (209) (239)
Interest income 327 672 651 1,068
Other income 412 - 1,622 1,400
-------- -------- -------- --------
Income before
reorganization item,
income tax expense
(benefit), minority
interest and cumulative
effect of change in
accounting principle 549 11,382 2,830 12,466
Reorganization legal
and consulting fees 1,034 - 1,784 -
Income tax expense
(benefit) (158) 147 (318) 464
Minority Interest 227 170 559 481
Cumulative effect of
change in accounting
principle - - - (14,372)
-------- -------- -------- --------
Net income (554) 11,065 805 25,893
Less preferred stock
dividends in arrears (1,222) (1,222) (2,444) (2,444)
-------- -------- -------- --------
Net income (loss) applicable
to common shareholders $ (1,776) $ 9,843 $ (1,639) $ 23,449
======== ======== ======== ========
Net income (loss) per share
applicable to
common shareholders:
Before cumulative
effect of change in
accounting principle $ (.26) $ 1.41 $ (.24) $ 1.30
Cumulative effect of
change in accounting
principle - - - $ 2.07
-------- -------- -------- --------
$ (.26) $ 1.41 $ (.24) $ 3.37
======== ======== ======== ========
Weighted average number of
common shares outstanding 6,965 6,965 6,965 6,965
</TABLE>
See accompanying notes to condensed consolidated financial
statements.
* Certain amounts have been reclassified to conform to the current
presentation.
<PAGE 5>
<TABLE>
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
DEBTOR-IN-POSSESSION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30, 1997 1996
---------- ----------
(in thousands)
<CAPTION>
<S> <C> <C>
Cash flows from operating activities:
Net income $ 805 $ 25,893
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Corona impairment charge 3,100 -
Cumulative effect of change in
accounting for
pneumoconiosis benefits - (14,372)
Equity in earnings from independent
power projects (8,250) (7,483)
Cash distributions from independent
power projects 6,802 6,218
Depreciation, depletion and
amortization 1,227 1,027
(Gains) losses on the sales of assets 173 (17,181)
Minority interest in WRI's income 559 480
Changes in assets and liabilities, net
of non-cash transactions:
Accounts receivable, net of allowance
for doubtful accounts 2,351 (169)
Inventories 610 732
Accounts payable and accrued expenses 2,331 (4,163)
Income taxes payable - (2,943)
Accrual for workers' compensation (253) (2,768)
Accrual for postretirement medical
costs 514 4,490
Accrual for pneumoconiosis benefits 1,197 (2,276)
Other liabilities (136) 4,062
Other (1,323) (1,641)
---------- ----------
Net cash provided by (used in) operating
activities 9,707 (10,094)
---------- ----------
Cash flows from investing activities:
Fixed asset additions (15) (351)
Increase in notes receivable - (308)
Net proceeds from sales of assets 1,733 14,198
---------- ----------
Net cash provided by investing activities 1,718 13,539
---------- ----------
Cash flows from financing activities:
Repayment of long-term debt (38) (1,046)
Dividends paid to minority shareholders - (440)
---------- ----------
Net cash used in financing activities (38) (1,486)
---------- ----------
Net increase in cash and cash equivalents 11,387 1,959
Cash and cash equivalents,
beginning of period 8,791 11,711
---------- ----------
Cash and cash equivalents, end of period $ 20,178 $ 13,670
========== ==========
</TABLE>
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 31 $ 258
See accompanying notes to condensed consolidated financial
statements.
<PAGE 6>
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, 1996. 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. CHAPTER 11 REORGANIZATION PROCEEDINGS
On December 23, 1996 ("Petition Date"), Westmoreland Coal Company and
four subsidiaries, Westmoreland Resources, Inc., Westmoreland Coal
Sales Company, Westmoreland Energy, Inc., and Westmoreland Terminal
Company (the "Debtor Corporations"), filed voluntary petitions for
reorganization under Chapter 11 of the United States Bankruptcy Code
in the United States Bankruptcy Court for the District of Colorado.
The Debtor Corporations are in possession of their respective
properties and assets and are operating as debtors in possession
pursuant to provisions of the Bankruptcy Code. In mid-April, 1997,
the Company presented a settlement proposal to the Funds upon which a
consensual plan of reorganization could be based. While the Company
has subsequently had discussion with and provided extensive backup
information to the Funds' financial advisor, and been assured of a
reply, no response or counter proposal has yet been received. The
parties have agreed not to file any plan without giving 30 days
notice.
The condensed consolidated financial statements contained herein have
been prepared in accordance with generally accepted accounting
principles applicable to a going concern and do not purport to
reflect or to provide for all of the possible consequences of the
ongoing Chapter 11 reorganization cases. Specifically, the condensed
consolidated financial statements do not present the amount which
will ultimately be paid to settle liabilities and contingencies which
may be allowed in the Chapter 11 reorganization cases or the effect
of any changes which may be made in connection with the Debtor
Corporations' capitalization or operations resulting from a plan of
reorganization. Costs incurred related to the reorganization through
June 30, 1997 were approximately $1,784,000 and were immaterial in
1996. The Debtor Corporations have not filed a plan or
reorganization as of August 11, 1997.
Because of the ongoing nature of the reorganization cases, the
outcome of which is not presently determinable, the condensed
consolidated financial statements contained herein are subject to
material uncertainties and may not be indicative of the results of
the Company's future operations or financial position. No assurance
can be given that the Company will be successful in reorganizing its
affairs within the Chapter 11 bankruptcy proceedings.
<PAGE 7>
LIABILITIES SUBJECT TO COMPROMISE
The filing of the Chapter 11 cases by the Debtor Corporations (i)
automatically stayed actions by creditors and other parties in
interest to recover any claim that arose prior to the commencement of
the cases, and (ii) served to accelerate, for purposes of allowance,
all prepetition liabilities of the Company, whether or not those
liabilities were liquidated or contingent as of the Petition Date.
In accordance with AICPA Statement of Position 90-7 ("Financial
Reporting by Entities in Reorganization under the Bankruptcy Code"),
the following table sets forth the liabilities of the Company subject
to compromise as of June 30, 1997 and December 31, 1996:
June 30, December 31,
1997 1996
--------------- ---------------
Trade and other liabilities $ 8,318,000 $ 8,318,000
Long-term debt 1,607,000 1,607,000
1974 UMWA Pension Trust 13,800,000 13,800,000
Workers' compensation 25,399,000 27,339,000
1992 UMWA Benefit Plan 28,115,000 28,115,000
1993 Wage Agreement Plan 44,905,000 44,619,000
Other postretirement benefits 12,621,000 12,393,000
--------------- ---------------
Total $ 134,765,000 $ 136,191,000
=============== ===============
1974 UMWA PENSION TRUST. Although the Company has not formally
withdrawn from this plan in accordance with ERISA procedures, the
Company maintains that for bankruptcy purposes, to the extent any
withdrawal liability under the Multiemployer Pension Act ("MPPA") is
in respect of consideration furnished by employees of the Company
prior to the Petition Date, such liability was incurred prior to the
Petition Date and constitutes a liability subject to compromise, even
if a withdrawal payment is due and payable postpetition. The Company
believes that except for a small percentage (i.e., 2% to 3%) of the
estimated aggregate withdrawal liability of $13,800,000 as of June
30, 1996, such liability is in respect of consideration furnished by
employees of the Company prior to the Petition Date. No litigation
has occurred in the Bankruptcy Court regarding this matter. The
aggregate withdrawal liability is estimated annually.
WORKERS' COMPENSATION BENEFITS. The Company maintains that to the
extent workers' compensation benefits pertain to matters and
transactions arising prior to the Petition Date, such liabilities
constitute liabilities subject to compromise. The Company believes
that substantially all of its liability on workers' compensation
benefits arose and was incurred prepetition and constitute
prepetition claims. No litigation has occurred in the Bankruptcy
Court regarding this matter.
1992 UMWA BENEFIT PLAN. Until shortly before the Petition Date, the
Company provided health care benefits under its individual employer
plan for beneficiaries who were age- and service-eligible to receive
benefits under the Coal Act as of February 1, 1993, and who retired
before October 1, 1994, and their dependents. Prepetition, the
Company ceased providing such benefits. The Company maintains that
pursuant to applicable law, prior to the Petition Date, the 1992 Plan
became obligated to provide health care coverage for such
beneficiaries and their dependents. The Company further maintains
that, as a result thereof and in accordance with law, all claims of
the 1992 Plan arising under the Coal Act were incurred by the Company
before the Petition Date and constitute prepetition liabilities
subject to compromise. The Company estimates the present value of
the Company's liabilities, not including the unrecognized net
transition obligation and the unrecognized loss totaling $71,963,000,
to the 1992 Plan total approximately $28,115,000. The Company
believes that for bankruptcy purposes the sum of these amounts,
$100,078,000, comprise the present value of the liability subject to
compromise.
<PAGE 8>
Following the Petition Date, the Trustees of the 1992 Plan commenced
an adversary proceeding against the Company requesting that the
Bankruptcy Court: (a) enter a permanent injunction requiring the
Company to "reinstate" its individual employer plan for those
beneficiaries who were eligible and were receiving benefits under the
individual employer plan as of February 1, 1993 and who retired
before October 1, 1994, and their dependents; (b) enter a declaratory
judgment that the pre-funding premiums and monthly per-beneficiary
premiums that arise under the 1992 Plan constitute "taxes" and
administrative liabilities of the estate; and (c) enter an injunction
requiring all of the Debtor Corporations to pay these pre-funding
premiums and monthly per-beneficiary premiums under the 1992 Plan as
and when statements are submitted by the Trustees. The Company has
filed answers and counterclaims in the Bankruptcy Court vigorously
opposing this requested relief.
The Trustees of the 1992 Plan have filed a motion with the Bankruptcy
Court requesting that the Bankruptcy Court enter summary judgment in
their favor with respect to substantially all of the relief requested
in the above-referenced adversary proceeding. The Company has filed
pleadings in the Bankruptcy Court opposing this motion. The
Bankruptcy Court held a hearing on May 8, 1997 and took the matter
under advisement. The Court has indicated that a ruling on this
matter could be expected in the third quarter. The Court has set
aside December 2, 3 and 4, 1997 for trial of any issues not resolved
by summary judgment.
If the Trustees prevail with respect to the above-described relief,
then substantially all of the Trustees' claims likely would not
constitute a liability subject to compromise, but, instead, the
Company probably would be required to satisfy those liabilities as
postpetition obligations of some or all of the Chapter 11 estates.
Such a determination in favor of the Trustees likely would have a
materially adverse effect on the Company's ability to meet its
obligations and successfully emerge from Chapter 11.
Prior to the Petition Date, on or about August 21, 1996, the Company
entered into a "Pledge Agreement" with the 1992 Plan and the
"Combined Benefit Fund" under which, among other things, the Company
pledged its interest in certain subsidiaries to secure obligations
specified therein to the 1992 Plan and the Combined Benefit Fund. In
pleadings filed before the Bankruptcy Court, the Company has
maintained that the 1992 Plan does not hold any allowed secured
claims against the Company by reason of the Pledge Agreement. The
Trustees have not yet responded to these contentions, but it is
expected that the Trustees will dispute the Company's contentions.
If the Bankruptcy Court ultimately determines that the 1992 Plan
holds allowed secured claims, then to that extent, such claims would
constitute secured liabilities of the Company. In such event,
whether or not those secured liabilities would be subject to
compromise would depend upon the outcome of the above-described
adversary proceeding.
UMWA COMBINED BENEFIT PLAN. The UMWA Combined Benefit Plan is a
multiemployer plan established for purposes of providing health care
benefits under the Coal Act to beneficiaries, and their dependents,
who were age- and service-eligible as of July 20, 1992 under the 1950
UMWA Benefit Plan or the 1974 UMWA Benefit Plan. Prior to the
Petition Date, the Company ceased making payments under the Combined
Benefit Plan. The Company maintains that any liability of the
Company to the Combined Benefit Fund arose and was incurred pre-
petition and constitutes pre-petition liabilities subject to
compromise. It is anticipated that the Combined Benefit Fund will
vigorously oppose this contention. To date, no litigation has been
commenced in the Bankruptcy Court by the Combined Benefit Fund
against the Company and visa versa. The Company estimates the
present value of the Company's liabilities to the Combined Benefit
Fund total approximately $46,200,000. It is not included in the
foregoing table as this is a "pay-as-you-go" liability and in
accordance with generally accepted accounting principles is not
subject to recognition on a present value basis.
<PAGE 9>
Although the Company has not commenced any litigation with the
Combined Benefit Fund regarding the validity of any security interest
of the Combined Benefit Fund arising under the Pledge Agreement, the
Company anticipates it likely will maintain that the Combined Benefit
Fund does not hold any allowed secured claims under the Pledge
Agreement. The Company expects that the Combined Benefit Fund will
dispute any such contention.
1993 WAGE AGREEMENT PLAN. The 1993 Wage Agreement between the
Company and the UMWA requires the Company to establish and provide
benefits under an individual employer plan for certain retirees. The
Company currently provides such benefits through its individual
employer plan. The 1993 Benefit Plan is a multiemployer benefit plan
providing health care benefits to specified beneficiaries entitled to
such benefits under bargaining agreements, where employers fail to
provide such benefits through their individual employer plan, as
required under such agreements. The Company's liabilities under the
1993 Benefit Plan, whether provided under the Company's individual
employer plan or by the 1993 Plan, are shown as subject to
compromise, by virtue of the provisions of Bankruptcy Code sections
1113 and 1114, which authorizes the rejection of collective
bargaining agreements and modification of such benefits subject to
terms and conditions specified therein, respectively.
Current financial reporting by the Company assumes that the Company
would enter into a successor agreement to the 1993 Agreement Between
Westmoreland Coal Company and United Mine Workers of America ("1993
Wage Agreement") prior to expiration of that agreement and would
thereby continue to provide retiree health benefits to such
beneficiaries. As a result, for financial reporting purposes the
Company estimates the present value of the Company's liabilities,
after the effect of the unrecognized net loss of $3,767,000, to the
1993 Plan total approximately $44,905,000. The Company believes that
for bankruptcy purposes the sum of these amounts, $48,561,000,
comprise the present value of the liability subject to compromise.
The Company believes that it is unlikely that the Company will enter
into a successor agreement. Further, the Company maintains that any
obligation of the Company to provide benefits under the 1993 Wage
Agreement with respect to the 1993 Plan (or the related individual
employer plan) extends only through the scheduled expiration of the
1993 Wage Agreement. Negotiations regarding the Company's
obligations to the 1993 Plan and other effects of terminating the
1993 Wage Agreement have been commenced with the United Mine Workers
of America. No litigation has been commenced in the Chapter 11 cases
regarding the Company's liabilities under the 1993 Plan (or the
related individual employer plan).
The nature of the Chapter 11 cases is to have all claims against and
interests in the Company resolved. Accordingly, the Company
anticipates that during the Chapter 11 cases the Bankruptcy Court
will establish a deadline on the filing of proofs of claim and
interest. No such deadline has yet been established, and,
accordingly, the Company's estimate of liabilities is subject to
modification and amendment based upon the Company's review of the
proofs of claims to be filed in response to such deadline.
<PAGE 10>
2. CORONA IMPAIRMENT CHARGE
The Company recorded an impairment charge of $3,100,000 relating to
the Company's investment in Corona in the second quarter of 1997.
Included in the charge is approximately $702,000 of goodwill, $66,000
of capitalized acquisition costs, and $2,332,000 reduction in the
value of property and equipment.
Corona, a subsidiary of Westmoreland Energy, Inc., was acquired in
1995 and has not performed in accordance with the Company's
expectations. As a result of discussions with potential purchasers,
the Company has entered into a letter of intent with a strategic
buyer engaged in the acquisition and roll up of business related to
Corona's main business. If the transaction, which would be subject
to due diligence, board approval and Bankruptcy Court approval,
is concluded, the Company would expect to receive at least $1.9
million in consideration. No assurances can be given that the
Company will complete this transaction as proposed.
3. CONTINGENCIES
WESTMORELAND ENERGY, INC. ("WEI") - WEI PROJECT CONTINGENCIES
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 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 the 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.
<PAGE 11>
On August 1, 1996, FERC entered its decision in the Southampton case.
FERC determined that the Partnership's request for reconsideration
should be treated as timely filed, but that the Southampton facility
was not in complete compliance with the QF requirements for 1992.
FERC ordered Southampton to comply with Section 205 for the Federal
Power Act ("FPA"), and file, for FERC's review, rates for calendar
year 1992 for wholesale power sales to Virginia Power. Otherwise,
the Southampton project remains exempt from regulation under the
Public Utility Holding Company Act ("PUHCA"), utility laws of
Virginia and the other provisions of the FPA. In August 1996, the
Partnership filed a motion seeking clarification of the August 1,
1996 order. The Partnership also filed an additional request for
rehearing. These matters are still pending before the FERC.
Ultimate resolution of this matter has not yet been determined. The
FERC order does not completely settle what the applicable rate is for
1992. The rate must be determined through negotiations with Virginia
Power and further FERC proceedings and may result in refunds to
Virginia Power, the ultimate amount of which cannot be determined at
this time.
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 experiences an interruption in
the facility's ability to generate 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 allowed annual number. The
customer asserts that it is not required to do so.
From May 1994 through June 30, 1997, Virginia Power withheld
approximately $13,755,000 of these capacity payments during periods
of forced outages. To date, the Company has not realized any income
on its 50% portion of the capacity payments being withheld by
Virginia Power. In October 1994, The ROVA Partnerships filed a
complaint against Virginia Power seeking damages of at least
$5,700,000, contending that Virginia Power breached the Power
Purchase Agreement in withholding such payments. In December, 1994,
Virginia Power filed a motion to dismiss the complaint and in March,
1995, the court granted this motion. The ROVA Partnerships filed an
amended complaint in April, 1995. Virginia Power filed another
motion to dismiss the complaint and in June 1995, the Circuit Court
of the City of Richmond, Virginia denied Virginia Power's motion to
dismiss the ROVA Partnerships' amended complaint. In November 1995,
Virginia Power filed with the court a motion for summary judgment,
and a hearing on the motion was held in early December 1995. In late
January 1996, the court denied Virginia Power's motion for summary
judgment. Virginia Power filed a second summary judgment motion on
March 1, 1996. On March 18, 1996, the Court granted Virginia Power's
second summary judgment motion and effectively dismissed the
complaint. The ROVA partnership has appealed the Court's decision
granting summary judgment. On June 6, 1997, the Virginia Supreme
Court reversed the Richmond Circuit Court's decision granting
dismissal of the suit based on Virginia Power's Motion for Summary
Judgment. The Supreme Court remanded the matter for trial. Efforts
are being made to schedule the case for trial. Regardless of the
outcome, the Company believes Roanoke Valley I will operate
profitability and generate positive cash flows. No earnings have been
recognized by WEI for payments withheld by the customer relating to
forced outage days.
<PAGE 12>
RENSSELAER - LG&E - Westmoreland Rensselaer (LWR), in which the
Company has a 50% interest through an indirect subsidiary, has
executed a master restructuring agreement with Niagara Mohawk Power
Corporation (NIMO) and 15 other independent power companies (IPPs)
effective July 9, 1997. Under this agreement, LWR has an obligation
to attempt to restructure the Rensselaer Cogeneration Project. Upon
completion of a restructuring and satisfaction of conditions
precedent, including all IPPs receiving necessary approvals and NIMO
successfully arranging financing, LWR would receive consideration
from NIMO. Due to the early stage of the project restructuring at
this time, the Company is not able to predict the outcome of this
event. Based upon the terms of the agreement and the current status
of the restructuring, the Company does not expect the ultimate
resolution of this matter to have a material adverse effect on its
results of operations or financial condition.
4. CAPITAL STOCK
Preferred stock dividends at a rate of 8.5% per annum were paid
quarterly from 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 of the Company's principal lenders. Upon the expiration
of these extension agreements, the Company paid a quarterly dividend
on April 1, 1995 and July 1, 1995. Pursuant to the requirements of
Delaware law, the preferred stock dividend was suspended in the third
quarter of 1995 as a result of recognition of losses and the
subsequent shareholders' deficit. The eleven quarterly dividends
which are in arrears (dividend payment dates July 1, 1994, October
1, 1994, January 1, 1995, October 1, 1995, January 1, 1996, April 1,
1996, July 1, 1996, October 1, 1996, January 1, 1997, April 1, 1997
and July 1, 1997) amount to $13,440,625 in the aggregate ($23.39 per
preferred share). Common stock dividends may not be declared until
the preferred stock dividends that are in arrears are made current.
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
preferred stock dividends only: (1) out of surplus, surplus 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 preferred
stock 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 the preferred stock ($575,000). The
Company had shareholders' equity at June 30, 1997 of $1,042,000.
As a result of the filing of voluntary petitions for reorganization
under Chapter 11 of the United States Bankruptcy Code, the Company is
prohibited from paying dividends, either common or preferred.
<PAGE 13>
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
MATERIAL CHANGES IN FINANCIAL CONDITION FROM DECEMBER 31, 1996 TO
JUNE 30, 1997
BANKRUPTCY PROCEEDING
Westmoreland Coal Company and four subsidiaries, Westmoreland
Resources, Inc., Westmoreland Coal Sales Company, Westmoreland
Energy, Inc., and Westmoreland Terminal Company ("the Debtor
Corporations"), filed voluntary petitions for reorganization under
Chapter 11 of the United States Bankruptcy Code on December 23, 1996.
The Debtor Corporations are in possession of their respective
properties and assets and are operating as debtors in possession
pursuant to provisions of the Bankruptcy Code.
Recognizing that it would not be able to meet its retiree benefit
obligations to the United Mine Workers of America Pension and Benefit
Funds ("the Funds") on a current basis, Westmoreland initiated
discussions with the Funds in November 1995. The Company submitted
several proposals. After the Funds failed to accept any of
Westmoreland's proposals and offered no realistic counter proposals,
the Company made the decision to file for protection under Chapter 11
of the United States Bankruptcy Code to protect the Company's value
from the demands of the Funds.
The Company believes that cash generated from existing operations and
the proceeds from the sale of its non-operating assets are not
sufficient to meet these Fund liabilities and that substantial value
would be lost if the Company liquidated, including that of its tax
loss carryforwards.
The Chapter 11 filings raise substantial doubt about the Company's
ability to continue as a going concern. However, the condensed
consolidated financial statements contained herein have been prepared
in accordance with generally accepted accounting principles
applicable to a going concern and do not purport to reflect or to
provide for all of the consequences of the ongoing Chapter 11
reorganization cases. Specifically, the condensed consolidated
financial statements do not present the amount which will ultimately
be paid to settle liabilities and contingencies which may be allowed
in the Chapter 11 reorganization cases or the effect of any changes
which may be made in connection with the Debtor Corporations'
capitalization or operations resulting from a plan of reorganization.
In mid-April, 1997, the Company presented a settlement proposal to
the Funds upon which a consensual plan of reorganization could be
based. While the Company has subsequently had discussion with and
provided extensive backup information to the Funds' financial
advisor, and been assured of a reply, no response or counter proposal
has yet been received. The parties have agreed not to file any plan
without giving 30 days notice. No assurances can be given that the
Company will be successful in reorganizing its affairs within the
Chapter 11 bankruptcy proceedings.
Because of the ongoing nature of the reorganization cases, the
outcome of which is not presently determinable, the condensed
consolidated financial statements contained herein are subject to
material uncertainties and may not be indicative of the results of
the Company's future operations or financial position.
<PAGE 14>
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities was $9,707,000 in the first six
months of 1997. Cash used by operating activities was $10,094,000 in
the first six months of 1996. The increase in cash is due to the non-
payment of prepetition claims which resulted from the automatic stay
associated with the bankruptcy filing described in Note 1. The
Company also continues to reduce costs associated with overhead
expenses and with its idled Virginia Division assets.
Cash provided by investing activities was $1,718,000 and $13,539,000
in the first six months of 1997 and 1996, respectively. Included in
the first six months of 1997 were cash proceeds of $1,733,000
relating to sales of various pieces of equipment from the idled
Virginia Division. Included in the first six months of 1996 were
cash proceeds of $10,678,000 and $2,441,000 for the sale of coal
reserves to Penn Virginia Corporation and Ark Land Company,
respectively. Fixed asset additions were $15,000 and $351,000 in the
first six months of 1997 and 1996 respectively.
Cash used in financing activities totaled $38,000 and $1,486,000 in
the first six months of 1997 and 1996, respectively. Repayment of
long-term debt amounted to $38,000 and $1,046,000 in the first six
months of 1997 and 1996, respectively.
Consolidated cash and cash equivalents at June 30, 1997 totaled
$20,178,000. As a result of the Chapter 11 bankruptcy filings, the
Company is not allowed to consolidate the individual cash balances
for each filed subsidiary. As of June 30, 1997, the cash balances at
the filed subsidiaries were: Westmoreland Resources, Inc. - ("WRI")
$7,573,000; Westmoreland Coal Sales Company - $237,000; Westmoreland
Terminal Company - $1,440,000; and Westmoreland Energy, Inc. -
$7,962,000. The cash balance for Westmoreland Coal Company was
$2,252,000. As of December 31, 1996, the cash balances at the filed
subsidiaries were: Westmoreland Resources, Inc. -$3,095,000;
Westmoreland Coal Sales Company - $26,000; Westmoreland Terminal
Company - $403,000; and Westmoreland Energy, Inc. - $1,701,000. The
cash balance for Westmoreland Coal Company was $3,028,000. The
fluctuation in cash balances between December 31, 1996 and June 30,
1997 is attributable to periodic asset sales, distributions at
independent power projects and operational cash flow.
The Company's cash and cash equivalents are not restricted as to use
or disposition under the normal course of business, except for the
bankruptcy restrictions. The cash at WRI, an 80%-owned subsidiary,
is available to the Company only through dividends. In addition, the
Company had restricted cash, which was not classified as cash or cash
equivalents, of $8,273,000 at June 30, 1997 and $9,960,000 at
December 31, 1996. The amount represents an interest-bearing cash
deposit account, which collateralizes the Company's outstanding
surety bonds for its workers' compensation self-insurance programs.
Subsequent to the date of the bankruptcy filing described in Note 1,
the Company, as a result of the automatic stay imposed by the
Bankruptcy Court, cannot directly pay workers' compensation claims.
However, during the first quarter of 1997, with permission granted by
the Bankruptcy Court, the Company made arrangements to pay workers
compensation claims from the cash deposit account. The arrangement
is likely to remain in place until the bankruptcy proceeding is
resolved or the cash deposit account is depleted.
<PAGE 15>
In addition to the deposit described above, at December 31, 1996, the
Company had $8,000,000 invested in certificates of deposit which were
classified as an Investment in independent power projects. The
certificates of deposit represented cash proceeds which were
transferred from debt reserve accounts of certain of the Company's
independent power projects and for which bank letters of credit were
substituted. During the first quarter of 1997, the letters of
credit were called and the certificates of deposit were used to repay
the letters of credit obligations. The $8,000,000 was returned to
the debt reserve accounts and continue to be classified as an
Investment in independent power projects.
RESULTS OF OPERATIONS
QUARTER ENDED JUNE 30, 1997 COMPARED TO QUARTER ENDED JUNE 30, 1996.
Revenues for the quarter ending June 30, 1997 were $18,195,000
compared to $16,306,000 for the quarter ending June 30, 1996. The
increase is due to a higher volume of tons sold at WRI, and increased
earnings from independent power projects.
Costs and expenses for the quarter ending June 30, 1997 were
$15,953,000 compared to $20,222,000 for the quarter ending June 30,
1996. The majority of the decline is due to a substantial reduction
in the accrual for heritage costs. As a result of the bankruptcy
filing as previously described in Note 1, the Company is no longer
accruing costs associated with the 1992 Plan. In addition, the
Company continues to reduce costs associated with overhead expenses
and with its idled Virginia Division.
Gains on the sales of assets were $732,000 during the quarter ending
June 30, 1997, which relates primarily to sales of various assets
from the Company's idled Virginia Division. In May, 1996 the Company
relinquished to Penn Virginia Corporation certain coal reserves for a
cash payment of $10,678,000. In addition, the Company obtained an 18
month option to purchase Penn Virginia's 16% interest in Westmoreland
Resources for $3,000,000 which the Company exercised in the third
quarter of 1996. The Company also sold its idled Wentz Complex to
Stonega Mining and Processing and its idled Pine Branch Mining Inc.
to Roaring Fork Mining Company in non-cash transactions. Each
purchaser assumed specific reclamation and other liabilities.
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30,
1996.
Revenues for the six months ending June 30, 1997 were $36,315,000
compared to $32,666,000 for the six months ending June 30, 1996. The
increase is due to a higher volume of tons sold at WRI and increased
earnings from independent power projects.
<PAGE 16>
Costs and expenses for the six months ending June 30, 1997 were
$32,276,000 compared to $39,610,000 for the six months ending June
30, 1996. The majority of the decline is due to a substantial
reduction in the accrual for heritage costs. As a result of the
bankruptcy filing as previously described in Note 1, the Company is
no longer accruing costs associated with the 1992 Plan. In addition,
the Company continues to reduce costs associated with overhead
expenses and with its idled Virginia Division.
Losses on the sales of assets were $173,000 during the six months
ending June 30, 1997, of which a loss of $1,609,000 related to the
removal and final sale of a longwall mining machine at the idled
Virginia Division. Cash proceeds of $3,200,000 were received from
the sale of the longwall mining machine but were offset by $2,000,000
of costs to remove the machine, $1,500,000 of remaining book value,
and $1,300,000 relating to the buy-out of the lease on the machine.
Proceeds of $1,400,000 were received from the sale of various
equipment from the idled Virginia Division, all of which was recorded
as a gain. Gains on the sales of assets were $17,181,000 for the six
months ending March 31, 1996. In January, 1996, the Company sold to
Ark Land Company certain coal reserves held under lease from Ark.
Cash proceeds from the transaction was $2,441,000, all of which was
recorded as a gain during the first quarter. In May, 1996 the
Company relinquished to Penn Virginia Corporation certain coal
reserves for a cash payment of $10,678,000. In addition, the Company
obtained an 18 month option to purchase Penn Virginia's 16% interest
in Westmoreland Resources for $3,000,000, which the Company exercised
in the third quarter of 1996. The Company also sold its idled Wentz
Complex to Stonega Mining and Processing and its idled Pine Branch
Mining Inc. to Roaring Fork Mining Company in non-cash transactions.
Each purchaser assumed specific reclamation and other liabilities.
<PAGE 17>
PART II - OTHER INFORMATION
ITEM 1
LEGAL PROCEEDINGS
See Note 1 "Chapter 11 Reorganization Proceedings" of Notes to
Condensed Consolidated Financial Statements, which is incorporated by
reference herein.
ITEM 6
EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibit 27 - Financial Data Schedule
b) Reports on Form 8-K - There were no reports on Form 8-K filed
for the three months ended June 30, 1997.
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: August 12, 1997 /s/ Robert J. Jaeger
--------------------
Robert J. Jaeger
Senior Vice President -
Finance,
Treasurer and Controller
/s/ Larry W. Mikkola
--------------------
Larry W. Mikkola
Assistant Controller
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