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 September 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, CO 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)
Sept. 30, 1997 Dec. 31, 1996
(in thousands)
<CAPTION>
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 27,581 $ 8,791
Receivables:
Trade 3,355 4,667
Other 1,790 2,218
---------- ----------
5,145 6,885
Inventories - 688
Other current assets 379 726
---------- ----------
Total current assets 33,105 17,090
Property, plant and equipment:
Land and mineral rights 11,028 11,028
Plant and equipment 98,663 137,873
---------- ----------
109,691 148,901
Less accumulated depreciation
and depletion 73,731 106,201
---------- ----------
35,960 42,700
Investment in independent power operations 52,424 51,386
Investment in Dominion Terminal Associates (DTA) 19,126 19,841
Workers' compensation bond 7,561 9,960
Prepaid pension cost 12,021 11,021
Other assets 1,586 1,973
---------- ----------
Total Assets $ 161,783 $ 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)
Sept. 30, 1997 Dec. 31, 1996
(in thousands)
<CAPTION>
<S> <C> <C>
Liabilities and Shareholders' Equity
Current liabilities:
Current installments of long-term debt $ 65 $ 443
Accounts payable and accrued expenses:
Trade 1,565 847
Taxes, other than income taxes 4,327 3,437
Other accrued expenses 4,865 1,588
Reclamation costs 590 590
---------- ----------
Total current liabilities 11,412 6,905
Liabilities subject to compromise 133,667 136,191
Long-term debt, less current installments 418 881
Accrual for reclamation costs,
less current portion 4,615 4,216
Accrual for pneumoconiosis benefits 687 127
Other liabilities 393 261
Minority interest 6,043 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 (108,070) (112,381)
---------- ----------
Total shareholders' equity 4,548 237
---------- ----------
Total Liabilities and Shareholders' Equity $ 161,783 $ 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 Ended Nine Months Ended
September 30, September 30,
1997 1996* 1997 1996*
(in thousands except per share data)
<CAPTION>
<S> <C> <C> <C> <C>
Revenues:
Coal $ 13,903 $ 12,000 $ 37,873 $ 33,817
Independent power - equity in earnings 5,091 3,931 13,341 11,414
--------- --------- --------- ---------
18,994 15,931 51,214 45,231
Cost and expenses:
Cost of coal sold 11,845 10,816 33,539 33,718
Depreciation, depletion and amortization 607 480 1,834 1,507
Selling and administrative 1,720 2,997 4,630 7,523
Heritage costs - 3,105 2,197 11,233
Pension benefit - (843) (1,000) (2,547)
--------- --------- --------- ---------
14,172 16,555 41,200 51,434
Operating income (loss) 4,822 (624) 10,014 (6,203)
Gains (losses) on the sales of assets 99 3,081 (74) 20,262
Interest expense (59) (82) (268) (321)
Interest income 403 378 1,054 1,167
Other income 116 387 1,246 1,407
--------- --------- --------- ---------
Income from continuing operations before
reorganization item, income tax
expense (benefit) and
minority interest 5,381 3,140 11,972 16,312
Reorganization legal and consulting fees 900 - 2,684 -
Income tax expense (benefit) (170) 269 (488) 733
Minority Interest 331 277 890 758
--------- --------- --------- ---------
Income from continuing operations 4,320 2,594 8,886 14,821
Discontinued operations:
Corona operating loss 395 433 1,056 1,139
Corona impairment and loss on disposal 418 - 3,518 -
--------- --------- --------- ---------
Loss from discontinued operations 813 433 4,574 1,139
Income before cumulative effect of
change in accounting principle 3,507 2,161 4,312 13,682
Cumulative effect of change in
accounting principle - - - (14,372)
--------- --------- --------- ---------
Net income 3,507 2,161 4,312 28,054
Less preferred stock dividends in arrears (1,222) (1,222) (3,666) (3,666)
--------- --------- --------- ---------
Net income applicable to common
shareholders $ 2,285 $ 939 $ 646 $ 24,388
========= ========= ========= =========
Net income per share applicable to
common shareholders:
Before loss from discontinued
operations and cumulative effect
of change in accounting principle $ .44 $ .20 $ .75 $ 1.60
Loss from discontinued operations (.12) (.06) (.66) (.16)
Cumulative effect of change in
accounting principle - - - 2.07
-------- --------- --------- ----------
$ .32 $ .14 $ .09 $ 3.51
======== ========= ========= ==========
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 6>
<TABLE>
Westmoreland Coal Company and Subsidiaries
Debtor-in-Possession
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended September 30, 1997 1996*
(in thousands)
<CAPTION>
<S>
Cash flows from operating activities: <C> <C>
Net income $ 4,312 $ 28,054
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Corona impairment and loss on disposition 3,518 -
Cumulative effect of change in accounting for
pneumoconiosis benefits - (14,372)
Equity in earnings from independent power projects (13,341) (11,414)
Cash distributions from independent power projects 12,306 10,545
Depreciation, depletion and amortization 1,834 1,507
(Gains) losses on the sales of assets 74 (20,262)
Minority interest in WRI 890 758
Changes in assets and liabilities of discontinued operations 1,043 172
Changes in assets and liabilities, net of non-cash
transactions:
Accounts receivable, net of allowance for doubtful
accounts 275 (2,523)
Inventories 25 596
Accounts payable and accrued expenses 6,148 (2,021)
Income taxes payable - (3,340)
Accrual for workers' compensation (359) (3,802)
Accrual for postretirement medical costs 234 4,636
Accrual for pneumoconiosis benefits 560 (2,894)
Other liabilities 399 3,986
Other (542) (3,960)
--------- ----------
Net cash provided by (used in) operating activities 17,376 (14,334)
Cash flows from investing activities:
Fixed asset additions (37) (355)
Increase in notes receivable - (303)
Minority interest in WRI purchase - (4,200)
Net proceeds from sales of assets 2,067 14,643
Decrease in cash due to Corona disposition (490) -
--------- ----------
Net cash provided by investing activities 1,540 9,785
Cash flows from financing activities:
Repayment of long-term debt (126) (1,333)
Dividends paid to minority shareholders - (440)
--------- ----------
Net cash used in financing activities (126) (1,773)
Net increase (decrease) in cash and cash equivalents 18,790 (6,322)
Cash and cash equivalents, beginning of period 8,791 11,711
--------- ----------
Cash and cash equivalents, end of period $ 27,581 $ 5,389
========= ==========
</TABLE>
<PAGE 7>
Westmoreland Coal Company and Subsidiaries
Debtor-in-Possession
Consolidated Statements of Cash Flows (Continued)
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 31 $ 255
Income taxes, net $ - $ 1,140
Supplemental disclosure of non-cash investing and financing
activities:
In September 1997, the Company completed the sale of the Corona
Group Inc. ("Corona"). Corona was sold for $895,000 in notes
receivable, the Company retained a 15% interest in Corona, and the
purchaser assumed a contingent liability.
In September, 1996, the Company completed a non-cash transaction
for the transfer of several of its remaining idled Virginia
Division mining operations. In exchange for these operations, the
purchaser assumed responsibility for certain reclamation
obligations amounting to approximately $2.2 million. The entire
amount of the obligations assumed was recorded as a gain on the
sale of assets.
In May, 1996, the Company completed non-cash transactions for the
sale of its idled Wentz and Pine Branch Mining operations. The
purchasers of those assets assumed reclamation and other
liabilities totaling approximately $3.0 million as part of those
transactions. The entire amount of the obligations assumed was
recorded as a gain on the sale of assets.
See accompanying notes to condensed consolidated financial
statements.
* Certain amounts have been reclassified to conform to the current
presentation.
<PAGE 8>
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.
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 September 30, 1997 were approximately
$2,684,000 and were immaterial in 1996. The Debtor Corporations
have not filed a plan of reorganization as of November 1, 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.
For additional information regarding the Chapter 11 reorganization
proceedings, see Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations.
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 September 30, 1997 and
December 31, 1996:
<PAGE 9>
Sept. 30, 1997 Dec. 31, 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 24,581,000 27,339,000
1992 UMWA Benefit Plan 28,115,000 28,115,000
1993 Wage Agreement Plan 44,908,000 44,619,000
Other postretirement benefits 12,338,000 12,393,000
----------------- ----------------
Total $ 133,667,000 $ 136,191,000
================= ================
(Note: See below for discussion of Combined
Benefit Plan liabilities which are not included
in this table.)
1974 UMWA Pension Plan. The Company maintains that for bankruptcy
purposes, to the extent any withdrawal liability will be assessed
under the Multiemployer Pension Act ("MPPA"), that liability would
be in respect of consideration furnished by employees of the
Company prior to the Petition Date, and that any such liability was
incurred prior to the Petition Date and constitutes a liability
subject to compromise. The Company believes that except for a
small percentage (i.e., 2% to 3%) of the aggregate
withdrawal liability of $13,800,000 estimated by the 1974 Pension
Plan as of June 30, 1996, such liability is in respect of
consideration furnished by employees of the Company prior to the
Petition Date. The withdrawal liability is estimated annually, and
is subject to a number of factors. No withdrawal liability has yet
been assessed by the 1974 Pension Plan, and the Company maintains
that a withdrawal will not occur until the completion of certain
reclamation work at the Company's Virginia Division, which is to be
performed by UMWA represented employees and will be completed
sometime in the first quarter of 1998. No litigation has occurred
in the bankruptcy court regarding this matter.
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 (and their dependents) 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.
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 any reduction attributable to
implementation of the managed care and cost containment rules
required by Section 9712(c)(2) of the Coal Act, 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 10>
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 filed answers and
counterclaims in the bankruptcy court vigorously opposing this
requested relief.
The Trustees of the 1992 Plan filed a motion with the bankruptcy
court requesting that the bankruptcy court enter summary judgment
in its favor with respect to substantially all of the relief
requested in the above-referenced adversary proceeding. The
Company 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. On September 5, 1997, the
bankruptcy court held that the 1992 Plan's claims related to
Westmoreland's liability to pay for health benefits and the 1992
Plan's claims for pre-funding premiums were prepetition claims, not
entitled to administrative priority. The bankruptcy court also
held that Westmoreland was not required to reinstate its IEP
because doing so would effectively elevate the 1992 Plan's claims
above those of other unsecured creditors.
The bankruptcy court designated the order on the summary judgment
motion as final, thereby allowing an immediate appeal and the 1992
Plan has appealed. The bankruptcy court has set aside December 2,
3 and 4, 1997 for trial of the remaining issues, comprised of the
Company's other defenses and counter claims, not resolved by the
summary judgment ruling.
In an effort to reach an accommodation with the Funds prior to the
Petition Date, on or about August 21, 1996, the Company entered
into an Interim Agreement and "Pledge Agreement" with the 1992 Plan
and the "Combined Benefit Plan" under which, among other things,
the Company pledged its interest in certain subsidiaries to secure
certain obligations specified therein. 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 disputed 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.
1993 Wage Agreement Plan. The 1993 Wage Agreement between the
Company and the UMWA requires the Company to establish and provide
health care benefits under an individual employer plan for certain
additional retirees. The Company currently provides benefits
through its individual employer plan to age and service eligible
retirees (and their dependents) who retire prior to the
termination or expiration of the current Wage Agreement. The 1993
Benefit Plan is a multiemployer benefit plan providing health care
benefits to specified beneficiaries entitled to such benefits under
the Wage Agreement, where employers fail to provide such benefits
through their individual employer plans. 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 authorize the rejection of collective
bargaining agreements and modification of such benefits subject to
terms and conditions specified therein, respectively.
<PAGE 11>
Financial reporting by the Company historically has assumed that
the Company would enter into successor agreements to the 1993
Agreement Between Westmoreland Coal Company and United Mine Workers
of America ("1993 Wage Agreement") and would thereby continue to
provide retiree health benefits to such beneficiaries. As a result,
for financial reporting purposes the Company has estimated 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 $44,908,000. The Company believes that for
bankruptcy purposes the sum of these amounts, $48,675,000, 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 Wage 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 pursuant to Section 1113 of the
Bankruptcy Code. 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. In September, 1997 the
bankruptcy court set December 1, 1997 as the deadline for
shareholders and vendors of the Company to file proofs of claims
and interests. Accordingly, the Company's Claims Administrator, on
September 30, 1997, sent claim forms to shareholders and vendors.
The Company's estimate of liabilities is subject to modification
and amendment based upon the Company's review of the proofs of
claims timely filed.
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 to
the Combined Benefit Plan. The Company maintains that any
liability of the Company to the Combined Benefit Plan arose and was
incurred pre-petition and constitutes pre-petition liabilities
subject to compromise. On November 3, 1997, the Combined Benefit
Plan filed a motion for allowance and ongoing payment of the
premiums as administrative claims and to withdraw the reference of
this issue from the District Court to the Bankruptcy Court. The
Company will vigorously oppose the merits of this claim as well as
the efforts of the Combined Benefit Plan to have the matter
resolved by the District Court rather than the Bankruptcy Court.
The Company estimates the present value of the Company's
liabilities to the Combined Benefit Plan total approximately
$46,200,000. It is not included in the foregoing table as this is
a "pay-as-you-go" obligation and in accordance with generally
accepted accounting principles is not subject to recognition on a
present value basis.
<PAGE 12>
Although the Combined Benefit Plan has not made a claim or
commenced litigation regarding any security interest arising under
the Pledge Agreement, the Company expects the Combined Benefit Plan
may do so. The Company presently intends to maintain that the
Combined Benefit Plan does not hold any allowed secured claims
under the Pledge Agreement and will dispute any such contention.
2. Discontinued Operations
On September 9, 1997 the Company completed the sale of the Corona
Group which provides technical repair and maintenance services to
the power generating industry. Revenues for the discontinued
operations were $3,814,000 for the nine months ending September 30,
1997 and $4,460,000 for the same period in 1996. The Company
recorded a loss on disposition of $418,000 during the third quarter
of 1997. The Company previously recorded an impairment of
$3,100,000 relating to its investment in Corona in the second
quarter of 1997. Consideration from the sale included notes
receivable of $895,000, of which $595,000 is due by the end of 1997
and the remaining $300,000 due no later than September 10, 1999.
The Company retained a 15% interest in Corona, and the purchaser
assumed a contingent liability.
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 13>
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, Virginia Power, 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 September 30, 1997, Virginia Power withheld
approximately $14,163,000 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 which has been scheduled for March 2, 1998.
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
Virginia Power relating to forced outage days.
<PAGE 14>
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 financial condition, results of
operations or cash flows.
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 twelve
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, July 1, 1997 and October 1, 1997)
amount to $14,662,500 in the aggregate ($25.50 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 September 30,
1997 of $4,548,000.
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 15>
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Material Changes in Financial Condition From December 31, 1996 to
September 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 Funds' 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.
Westmoreland seeks to structure a consensual plan of reorganization
and 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 subsequently had discussions with and
provided extensive backup information to the Funds' financial
advisor, and been assured of a prompt reply, no response or counter
proposal was received until October 14, 1997. On that date a
meeting between representatives of the parties was held in Denver,
Colorado during which the Funds made an entirely different
settlement offer to the Company. The Funds' proposal comes after
nearly two years' effort by Westmoreland and the submission of
numerous proposals by the Company over that period. It also
follows a September 5, 1997 ruling by the U.S. Bankruptcy Court
that denied a motion for summary judgment filed by the 1992 Benefit
Plan and held that the 1992 Benefit Plan's claims are general,
unsecured pre-petition claims, and not entitled to administrative
priority. The Company has rejected this opening proposal from the
Funds and must characterize the parties as being far apart at this
juncture. However, the Company is evaluating certain aspects of
the Funds' proposal and hopes that meaningful negotiations will
take place.
<PAGE 16>
In accordance with a previous agreement between the parties,
Westmoreland gave notice to the Funds on August 28, 1997 of its
intent to file a reorganization plan with the U.S. Bankruptcy Court
on or after 30 days from that date. The Company subsequently
agreed to forbear from filing a plan based on the Funds' assurance
that the proposal, which the Company has now received, would be
forthcoming promptly. The parties have now further agreed to
provide each other with a minimum 14 day notice of their intention
to file a reorganization plan. No such notice has been given by
either party as of the date of this filing. The Company remains
hopeful that settlement discussions will result in a consensual
plan being reached with the Funds. 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.
Liquidity and Capital Resources
Cash provided by operating activities was $18,496,000 in the first
nine months of 1997. Cash used by operating activities was
$14,334,000 in the first nine months of 1996. The increase in cash
is due to the automatic stay of ongoing payments to the 1992 and
Combined Benefit Plans associated with the bankruptcy filing
described in Note 1, the non-payment of prepetition claims, further
elimination of expenses related to the Company's idled Virginia
Division assets, and continued reduction of non-bankruptcy related
overhead costs.
Cash provided by investing activities was $1,135,000 and $
9,785,000 in the first nine months of 1997 and 1996, respectively.
Included in the first nine months of 1997 were net cash proceeds of
$2,067,000 relating to sales of various pieces of equipment from
the idled Virginia Division. Included in the first nine 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 $37,000 and $355,000 in
the first nine months of 1997 and 1996, respectively.
Cash used in financing activities totaled $841,000 and $1,773,000
in the first nine months of 1997 and 1996, respectively. Repayment
of long-term debt amounted to $841,000 and $1,333,000 in the first
nine months of 1997 and 1996, respectively.
Consolidated cash and cash equivalents at September 30, 1997
totaled $27,581,000. 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 September 30, 1997,
the cash balances at the filed subsidiaries were: Westmoreland
Resources, Inc. - ("WRI") $10,848,000; Westmoreland Coal Sales
Company - $150,000; Westmoreland Terminal Company - $1,857,000; and
Westmoreland Energy, Inc. - $13,660,000. The cash balance for
Westmoreland Coal Company was $1,066,000. 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 September 30, 1997 is attributable to
periodic asset sales, distributions at independent power projects
and operational cash flow. On October 7, 1997, the bankruptcy
court granted the Company's motion to allow the allocation of
administrative and overhead expenses incurred by Westmoreland Coal
Company among the other debtors.
<PAGE 17>
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
which are not permissible during the bankruptcy. In addition, the
Company had restricted cash, which was not classified as cash or
cash equivalents, of $7,561,000 at September 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.
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 within 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 within Investment in independent power projects.
RESULTS OF OPERATIONS
Quarter Ended September 30, 1997 Compared to Quarter Ended
September 30, 1996.
Revenues for the quarter ending September 30, 1997 were $18,994,000
compared to $15,931,000 for the quarter ending September 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 September 30, 1997 were
$14,172,000 compared to $16,555,000 for the quarter ending
September 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.
<PAGE 18>
Gains on the sales of assets were $99,000 during the quarter ending
September 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.
Nine Months Ended September 30, 1997 Compared to Nine Months Ended
September 30, 1996.
Revenues for the nine months ending September 30, 1997 were
$51,214,000 compared to $45,231,000 for the nine months ending
September 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 nine months ending September 30, 1997
were $41,200,000 compared to $51,434,000 for the nine months ending
September 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 $74,000 during the nine months
ending September 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 $2,200,000 were received from the sale of
various equipment from the idled Virginia Division, $1,500,000 of
which was recorded as a gain. Gains on the sales of assets were
$20,262,000 for the nine months ending September 30, 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 19>
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 September 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: 11/13/97 /s/ Robert J. Jaeger
-----------------------------
Robert J. Jaeger
Senior Vice President - Finance,
Treasurer and Controller
/s/ Larry W. Mikkola
-----------------------------
Larry W. Mikkola
Assistant Controller
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 27,581
<SECURITIES> 0
<RECEIVABLES> 5,145
<ALLOWANCES> 0
<INVENTORY> 25
<CURRENT-ASSETS> 33,130
<PP&E> 109,691
<DEPRECIATION> 73,731
<TOTAL-ASSETS> 161,783
<CURRENT-LIABILITIES> 11,412
<BONDS> 0
0
575
<COMMON> 17,402
<OTHER-SE> (14,066)
<TOTAL-LIABILITY-AND-EQUITY> 161,783
<SALES> 51,214
<TOTAL-REVENUES> 51,214
<CGS> 33,539
<TOTAL-COSTS> 41,200
<OTHER-EXPENSES> (2,226)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 268
<INCOME-PRETAX> 4,800
<INCOME-TAX> (488)
<INCOME-CONTINUING> 4,312
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,312
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
