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, 1998
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 November 1, 1998: 6,965,328
<PAGE 2>
<TABLE>
PART I - FINANCIAL INFORMATION
ITEM 1
FINANCIAL STATEMENTS
Westmoreland Coal Company and Subsidiaries
Debtor-in-Possession
Condensed Consolidated Balance Sheets
(Unaudited)
Sept. 30, Dec. 31,
1998 1997
- ----------------------------------------------------------------------------
(in thousands)
<CAPTIONS>
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 87,154 $ 30,664
Receivables:
Trade 3,578 4,483
Pension plan termination receivable, net 500 13,040
Other 1,343 1,026
- ----------------------------------------------------------------------------
5,421 18,549
Other current assets 1,040 402
- ----------------------------------------------------------------------------
Total current assets 93,615 49,615
- ----------------------------------------------------------------------------
Property, plant and equipment:
Land and mineral rights 10,990 11,684
Plant and equipment 92,724 94,265
- ----------------------------------------------------------------------------
103,714 105,949
Less accumulated depreciation and depletion 69,128 70,262
- ----------------------------------------------------------------------------
34,586 35,687
Investment in independent power projects 60,945 54,152
Investment in Dominion Terminal Associates (DTA) 18,442 18,680
Workers' compensation bond 4,822 6,665
Prepaid pension cost 3,509 3,528
Excess of trust assets over pneumoconiosis
benefit obligation 11,650 11,700
Other assets 1,962 1,970
- ----------------------------------------------------------------------------
Total Assets $229,531 $181,997
============================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Current installments of long-term debt $ 55 $ 51
Accounts payable and accrued expenses 8,644 9,307
Reorganization expenses 2,389 1,645
Reclamation costs 100 100
- ----------------------------------------------------------------------------
Total current liabilities 11,188 11,103
- ----------------------------------------------------------------------------
Liabilities subject to compromise 140,985 132,667
Long-term debt 356 407
Accrual for reclamation costs 3,046 3,182
Minority interest 6,941 6,245
Shareholders' equity 67,015 28,393
- ----------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $229,531 $181,997
============================================================================
See accompanying notes to condensed consolidated financial statements.
</TABLE>
<PAGE 3>
<TABLE>
Westmoreland Coal Company and Subsidiaries
Debtor-in-Possession
Consolidated Statements of Income
(Unaudited)
Three Months Nine Months
Ended Ended
September 30, September 30,
1998 1997 1998 1997
- ------------------------------------------------------------------------------
(in thousands except per share data)
<CAPTION>
<S> <C> <C> <C> <C>
Revenues:
Coal $ 11,383 $ 12,786 $ 34,526 $ 34,487
Independent power -
equity in earnings 4,129 4,773 59,548 12,938
DTA - equity in earnings (loss) (27) 293 218 876
- ------------------------------------------------------------------------------
15,485 17,852 94,292 48,301
Cost and expenses:
Cost of sales - coal 9,771 11,022 29,265 31,029
Depreciation, depletion and
amortization 618 443 1,855 1,272
Selling and administrative 1,640 1,649 4,678 4,441
Heritage costs 3,975 - 12,079 2,198
Pension benefit (53) - (158) (1,000)
Doubtful account recoveries (725) (289) (953) (1,216)
- ------------------------------------------------------------------------------
15,226 12,825 46,766 36,724
- ------------------------------------------------------------------------------
Operating income 259 5,027 47,526 11,577
Other income (expense):
Gains on sales of assets 204 168 391 235
Interest expense (48) (59) (143) (268)
Minority interest (186) (331) (696) (890)
Other income 486 142 1,942 190
- ------------------------------------------------------------------------------
Income from continuing operations before
reorganization items and income taxes 715 4,947 49,020 10,844
Reorganization legal and
consulting fees (1,321) (971) (2,756) (2,873)
Reorganization interest income 1,102 403 2,430 1,054
- ------------------------------------------------------------------------------
Income from continuing operations 496 4,379 48,694 9,025
Income taxes (197) - (197) -
Discontinued operations - (872) - (4,713)
- ------------------------------------------------------------------------------
Cumulative effect of change in
accounting principle - - (9,876) -
- ------------------------------------------------------------------------------
Net income 299 3,507 38,621 4,312
Less preferred stock dividends
(in arrears) (1,222) (1,222) (3,666) (3,666)
- ------------------------------------------------------------------------------
Net income (loss) applicable to
common shareholders $ (923) $ 2,285 $ 34,955 $ 646
==============================================================================
Net income (loss) per share applicable
to common shareholders:
Income from continuing operations (.13) .46 6.44 .77
Loss from discontinued operations - (.13) - (.68)
Cumulative effect of change in
accounting principle - - (1.42) -
- ------------------------------------------------------------------------------
$ (.13) $ .33 $ 5.02 $ .09
==============================================================================
Weighted average number of
common shares outstanding 6,965 6,965 6,965 6,965
==============================================================================
See accompanying notes to condensed consolidated financial statements.
</TABLE>
<PAGE 4>
<TABLE>
Westmoreland Coal Company and Subsidiaries
Debtor-in-Possession
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended September 30, 1998 1997
- ------------------------------------------------------------------------------
(in thousands)
<CAPTION>
<S> <C> <C>
Cash flows from operating activities:
Net income $ 38,621 $ 4,312
Adjustments to reconcile net income to net
cash provided by operating activities:
Gain on disposition of assets (391) (235)
Equity earnings from independent power projects (59,548) (13,341)
Cash received from independent power projects 42,881 12,306
Equity earnings from DTA (218) (876)
Cash generated by DTA 1,926 3,673
Cash contributions to DTA (1,515) (2,127)
Provision for reclamation, net of costs incurred (136) 399
Depreciation, depletion and amortization 1,855 1,272
Minority interest in WRI's income 696 890
Cumulative effect of change in accounting principle 9,876 -
Impairment and loss on disposition of
discontinued operations - 4,071
Other (303) (316)
Changes in working capital accounts:
Accounts receivable 13,128 275
Other current assets (638) -
Accounts payable and accrued expenses (663) 6,148
- ------------------------------------------------------------------------------
Net cash provided by operating activities before
reorganization items 45,571 16,451
- ------------------------------------------------------------------------------
Changes in reorganization items:
Trade and other liabilities subject to compromise 8,318 435
Liabilities not subject to compromise 744 -
- ------------------------------------------------------------------------------
Net change in reorganization items 9,062 435
- ------------------------------------------------------------------------------
Net cash provided by operating activities 54,633 16,886
- ------------------------------------------------------------------------------
Cash flows from investing activities:
Fixed asset additions (296) (37)
Workers' compensation bond 1,843 -
Net proceeds from sales of assets 357 2,067
- ------------------------------------------------------------------------------
Net cash provided by investing activities 1,904 2,030
- ------------------------------------------------------------------------------
Cash flows used in financing activities:
Repayment of long-term debt (47) (126)
- ------------------------------------------------------------------------------
Net increase in cash and cash equivalents 56,490 18,790
Cash and cash equivalents, beginning of period 30,664 8,791
- ------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 87,154 $ 27,581
==============================================================================
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 27 $ 31
See accompanying notes to condensed consolidated financial statements.
</TABLE>
<PAGE 5>
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, 1997. 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. Certain prior year amounts have been reclassified to
conform to the current year presentation.
1. NATURE OF OPERATIONS
The Company's principal activities, conducted within the United
States are, (i) the production and sale of coal from a contractor
operated mine in the Powder River Basin in Eastern Montana; (ii)
the ownership of interests in cogeneration and other non-
regulated independent power plants; and (iii) the leasing of
capacity at Dominion Terminal Associates, a coal storage and
vessel loading facility.
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 "Chapter 11 Cases"). 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. During the Chapter 11 Cases,
the Debtor Corporations engaged in litigation with the 1992 UMWA
Benefit Plan (the "1992 Plan"), the UMWA Combined Benefit Fund
(the "Combined Fund") and the 1974 UMWA Pension Plan (the "1974
Plan") (sometimes collectively referred to as the "Funds") as
well as the UMWA regarding various matters. With respect to the
1992 Plan and the Combined Fund, the key issues in dispute were
(i) whether the postpetition assessments of the 1992 Plan and the
Combined Fund under the Coal Industry Retirement Health Benefits
Act of 1992 (the "Coal Act") are entitled to administrative
priority in the Chapter 11 Cases; (ii) if the 1992 Plan's and the
Combined Fund's claims are not entitled to administrative
priority but instead constitute general unsecured non-priority
claims, what is the allowed amount of those claims for bankruptcy
purposes; and (iii) whether the claims and assessments of the
1992 Plan and the Combined Fund violate the United States
Constitution. The Debtor Corporations and the 1992 Plan also
disputed whether the Company could be compelled to "reinstate"
its individual employer plan (the "IEP") for those beneficiaries
who were eligible and were receiving benefits under the IEP as of
February 1, 1993 and who retired before October 1, 1994, and
their dependents. With respect to the UMWA the key issue was the
effect of the expiration of the 1993 Collective Bargaining
Agreement on the Company's obligation to provide health care
benefits to the participants.
During the Chapter 11 Cases, pursuant to an order entered on
September 5, 1997, the Bankruptcy Court ruled that the 1992
Plan's claims were not entitled to administrative priority but
instead constituted general unsecured non-priority claims, and
that the 1992 Plan could not compel reinstatement of the IEP.
Thereafter, by order dated June 11, 1998, the Bankruptcy Court
determined, among other things, that the 1992 Plan held a
prepetition general unsecured claim against the Debtor
Corporations in the amount of $146,103,383.
During the Chapter 11 Cases, both the Debtor Corporations and the
Funds filed plans of reorganization (the "Competing Plans").
Each Competing Plan was premised upon the treatment of the 1992
Plan's and Combined Fund's claims as general unsecured non-
priority claims. After the Bankruptcy Court issued the above-
noted ruling regarding the amount of the 1992 Plan's general
unsecured claim, the Bankruptcy Court deemed the Debtor
Corporations' Competing Plan withdrawn as unconfirmable absent a
change in law or circumstances.
<PAGE 6>
On July 9, 1998, the United States Court of Appeals for the Tenth
Circuit ("Tenth Circuit") decided UMWA 1992 Plan v. Rushton (In
re Sunnyside), 146 F.3d 1273 (10th Cir. 1998) ("Sunnyside"). In
Sunnyside, the Tenth Circuit held that the premium assessments
for the 1992 Plan at issue in that case are taxes entitled to
administrative priority in bankruptcy. Although the Debtor
Corporations previously contended that the facts in Sunnyside
were distinguishable from the facts in the Debtor Corporations'
case, the Tenth Circuit's broad decision appeared to dictate that
the postpetition assessments of the 1992 Plan (and the Combined
Fund) are entitled to administrative priority in the Chapter 11
Cases to the extent allowed. As a result, on July 28, 1998, the
Debtor Corporations filed a motion before the United States
District Court of Colorado (the "District Court"), moving to
reverse the Bankruptcy Court's September 5, 1997 order which held
that the claims of the 1992 Plan were general unsecured
prepetition claims. The District Court granted the Debtor
Corporation's motion, thereby reversing the Bankruptcy Court's
September 5, 1997 ruling with respect to the priority of the 1992
Plan's assessments but otherwise vacating and remanding back to
the Bankruptcy Court the remaining aspects of the Bankruptcy
Court's rulings involving the 1992 Plan. Thereafter, the Funds
advised the Bankruptcy Court that the Funds had withdrawn their
Competing Plan.
On July 28, 1998, the Debtor Corporations filed a motion
("Dismissal Motion") before the Bankruptcy Court to dismiss these
Chapter 11 Cases based upon the foregoing substantial changes in
law, the improvement in their financial condition and their
belief that dismissal will benefit all creditors and
shareholders. As a condition to dismissal, the Debtor
Corporations proposed to: (i) pay in full all undisputed claims,
including the assessments of the 1992 Plan and the Combined Fund
through the effective date of dismissal ("Dismissal Date");
(ii) provide such security as is required by section 9712
(d)(1)(C) of the Coal Act; (iii) pay all future premiums assessed
by the 1992 Plan and the Combined Fund on an ongoing basis as and
when due; and (iv) not pay dividends to preferred or common
shareholders based on funds on hand or earnings prior to the
Dismissal Date and only to pay dividends in the future if and to
the extent that the Debtor Corporations have current earnings
which would permit the payment of such dividends under applicable
Delaware law. Westmoreland Coal also proposed to continue to
maintain its individual employee plan ("IEP") for the benefit of
retirees under the 1993 collective bargaining agreement between
Westmoreland Coal and the UMWA even beyond the expiration of that
agreement in August of 1998, unless and until a forum of
competent jurisdiction determined that it was not required to do
so. The Dismissal Motion stated that the Debtor Corporations
reserved their right to contest the constitutionality of the Coal
Act and/or to seek to recover any payments made to the 1992 Plan
or the Combined Fund in any appropriate forum. The Equity
Committee (see below) and the Funds opposed this motion.
On June 29, 1998, the Office of the United States Trustee granted
certain shareholders' request to appoint an Official Equity
Holders' Committee ("Equity Committee") pursuant to Bankruptcy
Code section 1102(a)(1). The Equity Committee retained its own
counsel and financial advisor. On July 28, 1998, the Equity
Committee filed a motion ("Conversion Motion") before the
Bankruptcy Court to convert the Debtor Corporations' cases to
Chapter 7, contending that pursuant to Sunnyside, liquidation of
the Company would maximize recovery for shareholders since the
Funds' allowable claims would be limited to those accruing during
the bankruptcy and that the Funds' amended plan of reorganization
is not confirmable. The Debtor Corporations opposed the
Conversion Motion, as did the Funds.
On October 15, 1998, the Debtor Corporations announced the terms
of an overall Settlement Agreement with the 1992 Plan, the
Combined Fund, the 1974 Plan, the United Mine Workers of America
("UMWA") and the Equity Committee for the resolution of the
Chapter 11 Cases. The agreement was announced and read into the
record during scheduled hearings on the Dismissal Motion and the
Conversion Motion, and following such announcement the hearings
were recessed.
<PAGE 7>
The key terms of the Settlement Agreement may be generally
summarized as follows:
- All undisputed creditor claims will be paid in full, in
cash, with interest, and the Company will continue to
satisfy its other ongoing obligations.
- All Coal Act arrearages will be paid in full, with
interest.
- The Company will reinstate its Individual Employer Plan
within 60 days of the effective date of a dismissal.
- The Company will pay future 1992 Plan and Combined Fund
payments.
- Obligations to the 1974 Pension Trust will be
determined through arbitration as provided by law.
- The Company will post security to the 1992 Plan as
required under the Coal Act, and in addition, will
provide a $12 million secured contingency note which
will be payable only in the event the Company does not
meet its Coal Act obligations, or fails to meet certain
financial tests.
- The Company will hold a special meeting of shareholders
no later than March 31, 1999. Shareholders will be
invited to submit nominees for the Board of Directors
and proposals for consideration at that meeting. (The
Company has not held a meeting of shareholders while in
bankruptcy).
- Provided that the pending sale of a certain asset
occurs, Westmoreland will make a public tender for no
less than 1 million shares of its outstanding preferred
stock, at a price per share to be determined by the
Equity Committee, for a total consideration of $20
million. The tender shall occur in the first quarter
of 1999, or as soon thereafter as is practicable,
following the date of the asset sale.
- The Company will not initiate litigation to challenge
the Coal Act, and in addition, will not voluntarily
seek the protection of the Bankruptcy Court for a
period of 5 years.
The financial statements do not reflect all of the effects of the
Settlement Agreement. Accordingly, additional costs will be
recorded, the amount of which could range from $25-$30 million
including interest. The total amount of interest will be
dependent on the payment date following dismissal.
On October 30, 1998, the Debtor Corporations, the Funds, and the
Equity Committee filed a joint motion with the Bankruptcy Court,
setting forth the outline of a procedure for dismissal of the
Chapter 11 Cases combined with the entry of "consent judgments"
in connection with certain of the pending litigation. At the
hearing held before the Bankruptcy Court on November 10, 1998,
the Bankruptcy Court approved the proposed procedure. The
parties intend that the Debtor Corporations will file motions
requesting approval of the consent judgments on or around
November 18, 1998. Notices of the filing of these motions will
be mailed to creditors as directed by the Bankruptcy Court, and
depending upon the resolution of any objections filed with the
Bankruptcy court, dismissal of the Chapter 11 Cases should occur
in late December 1998 or early 1999.
The 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
Chapter 11 Cases. Specifically, the consolidated financial
statements do not present the amount which might ultimately be
paid to settle or satisfy liabilities and contingencies which may
be allowed in the Chapter 11 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, conversion or dismissal of the cases. The Company
believes that different assumptions and methodologies other than
generally accepted accounting principles will be used by the
Bankruptcy Court to determine the amount paid to settle
liabilities and contingencies that will be allowed in a Chapter
11 reorganization. Costs incurred related to the reorganization
were $2,756,000 and $2,873,000 for the nine months ended
September 30, 1998 and 1997, respectively.
<PAGE 8>
Because of the ongoing nature of the reorganization cases, the
outcome of which is not presently determinable, the 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 or after
conversion or dismissal of the Chapter 11 Cases.
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") liabilities subject to
compromise are segregated from those that are not in the
accompanying balance sheet. The following table sets forth the
liabilities of the Company that are subject to compromise as of
September 30, 1998 and December 31, 1997:
September 30, December 31,
1998 1997
--------------------------------------------------------------
Trade and other liabilities $ 6,898,000 $ 7,035,000
Long-term debt 1,607,000 1,607,000
1974 UMWA Pension Plan 13,800,000 13,800,000
Workers' compensation 22,348,000 24,341,000
1992 UMWA Benefit Plan 49,734,000 40,469,000
1993 Wage Agreement Plan 33,229,000 32,067,000
UMWA Combined Benefit Fund - -
Salaried Plan 12,034,000 12,175,000
SERP 1,335,000 1,173,000
--------------------------------------------------------------
Total $140,985,000 $132,667,000
==============================================================
The liabilities subject to compromise include obligations to pay
future pension, workers' compensation, health care and other post
retirement benefits ("future benefit obligations"). The
estimates of the present value of these future benefit
obligations are actuarially determined. The actuarial
assumptions underlying these calculations are not subject to
precise estimation. Accordingly, these estimates are subject to
change as new information becomes available.
In determining future benefit obligations for purposes of
preparing financial statements in accordance with generally
accepted accounting principles and the related disclosures,
certain assumptions and methodologies must be used with respect
to some actuarial factors. For others, there is a range of
actuarial assumptions that would be considered reasonable. While
the Company believes that the assumptions used in estimating the
present value of these liabilities for future benefits fall
within this acceptable range, there are other reasonable
assumptions which, if used, would reduce those estimates.
<PAGE 9>
The presentation of liabilities subject to compromise set forth
above is required by generally accepted accounting principles.
Under applicable bankruptcy law, and for purposes of the Debtor
Corporations' reorganization proceeding, the liabilities subject
to compromise may differ in amount from the amount set forth
above. The following discussion addresses the Company's
estimates of the liabilities subject to compromise for purposes
of the bankruptcy proceeding and relevant decisions of the
Bankruptcy Court and the Tenth Circuit.
As discussed below, by order dated June 11, 1998, the Bankruptcy
Court determined among other things that the 1992 UMWA Benefit
Plan holds a prepetition, unsecured claim in the amount of
$146,103,383. The Debtor Corporations believe that the
Bankruptcy Court erred in this determination and has appealed the
Bankruptcy Court's order. However, as a result of the Tenth
Circuit's recent decision in Sunnyside, and the District Courts'
decision reversing the Bankruptcy Court's September 5, 1997
priority ruling, the Debtor Corporations believe that (i) the
postpetition assessments of the UMWA 1992 Benefit Plan are
entitled to administrative priority status under Bankruptcy Code
section 503(b)(1)(B) to the extent allowed, (ii) any claims of
the 1992 UMWA Benefit Plan can only be allowed against the Debtor
Corporations as assessed on an annual basis, and (iii) the UMWA
1992 Benefit Plan does not hold claims against the Debtor
Corporations for the present value of future premium assessments.
As a result, the Debtor Corporations believe that any claims of
the UMWA 1992 Benefit Plan for future assessments are not
allowable or enforceable under the Bankruptcy Code. The Debtor
Corporations believe that the same is true with respect to the
claims of the Combined Fund.
Long-Term Debt. The Company maintains that to the extent
unsecured long-term debt pertains to transactions arising prior
to the Petition Date, such liabilities constitute liabilities
subject to compromise. The Company believes that substantially
all of its liability for unsecured long-term debt arose and was
incurred prepetition and constitute prepetition claims. A number
of proofs of claim have been filed in the Chapter 11 case in
connection with this liability.
1974 UMWA Pension Plan. The Company maintains that for
bankruptcy purposes, to the extent any withdrawal liability will
be assessed under the Multiemployer Pension Plan 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 UMWA Pension Plan as of June 30, 1996, and in their
proof of claim, such liability is in respect of consideration
furnished by employees of the Company prior to the Petition Date.
The Company maintains that withdrawal did not occur until the
completion of certain reclamation work at the Company's Virginia
Division, which was performed by UMWA represented employees. It
is now completed and these individuals were laid off in July,
1998. Accordingly, the Company believes that the withdrawal
liability will be determined using an asset valuation date of
June 30, 1998, in accordance with the provisions of MPPA. The
1974 UMWA Pension Plan has not provided the Company with an
updated actuarial estimate of the withdrawal liability calculated
as of June 30, 1998. Accordingly, the amount of the liability
subject to compromise at September 30, 1998 reflects the
actuarial estimate of the withdrawal liability calculated as of
June 30, 1996.
The 1974 UMWA Pension Plan and its Trustees have filed a total of
ten proofs of claim asserting, as against each of the Debtor
Corporations: (i) an administrative priority claim in the amount
of $13,775,912, based upon an assessment of withdrawal liability
under MPPA; and (ii) an administrative priority claim in the
amount of $64,398, which allegedly is subject to the protections
of Bankruptcy Code section 1113. The Debtor Corporations
previously filed objections before the Bankruptcy Court with
respect to each of these claims disputing them in their entirety.
Pursuant to the Settlement Agreement, the parties thereto have
agreed that the claims of the 1974 Plan will be determined
through arbitration as provided by law, pursuant to the terms of
MPPA. Also, on the effective date of the Settlement Agreement,
the Company will pay the 1974 Plan all past monthly MPPA interim
installments that would have come due if the Chapter 11 Cases had
not been pending and the Company had commenced arbitration
concerning the 1974 Plan's withdrawal liability claim. The
Company will continue to make interim payments, as and when due,
and will pursue its rights under the MPPA.
<PAGE 10>
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 for workers'
compensation benefits arose and was incurred prepetition and
constitute prepetition claims.
A number of proofs of claim have been filed in the Chapter 11
Cases in connection with this liability, including: (i) the
state of West Virginia has filed an unsecured priority claim in
the amount of $55,314,265; (ii) the Commonwealth of Virginia has
filed a secured claim in the amount of $7,000,000 and an
unsecured priority claim in the amount of $10,000,000; (iii)
Travelers Casualty & Surety, formerly known as the Aetna Casualty
& Surety Company, member of Travelers Group, has filed a secured
claim in the amount of $7,015,255 and an unsecured non-priority
claim in the amount of $19,720,988; (iv) Safeco Insurance Company
of America has filed an unsecured non-priority claim in the
amount of $11,452,473 and (v) Federal Insurance Company has filed
an unsecured non-priority claim in an unliquidated amount. The
Company currently is evaluating these proofs of claim. The
Company believes that certain of these claims relate to the same
underlying liability and therefore are duplicative, and that
other claims are overstated and should be disallowed, at least in
part. The Funds have filed objections to the claims of the State
of West Virginia and the Commonwealth of Virginia, which
objections have not yet been determined by the Bankruptcy Court.
Pursuant to an agreement announced on the record on October 15,
1998, in conjunction with dismissal of the Chapter 11 Cases, the
Company has agreed to procure an additional bond to cover the
Company's workers' compensation liabilities to the Commonwealth
of Virginia in the amount of $7,500,000 plus the remaining amount
of the bond previously posted by Travelers Casualty & Surety,
formerly known as Aetna Casualty & Surety Company, member of
Travelers Group, in respect of such workers' compensation
liabilities. Following the hearing on October 15, 1998, the
Commonwealth of Virginia made certain demands upon the Company in
connection with the agreement announced on the record. The
Company disagrees with these demands and intends to proceed with
the agreement announced on the record on October 15, 1998.
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.
Following the Petition Date, the Trustees of the UMWA 1992
Benefit Plan ("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 Coal Act 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 to 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.
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.
<PAGE 11>
By order dated June 11, 1998, the Bankruptcy Court held that the
1992 Plan holds a prepetition, unsecured claim in the amount of
$146,103,383 and overruled the Company's constitutional
challenges to the 1992 Plan's claims. Thereafter, the Company
appealed from the Bankruptcy Court's order asserting that the
Bankruptcy Court erred in its determination. The Company did not
appeal from that portion of the Bankruptcy Court's order
disallowing various "secured claims" filed by the 1992 Plan in
the amount of $20,870,000. Following the Tenth Circuit's
decision in Sunnyside, the Company filed a motion before the
District Court to reverse the Bankruptcy Court's September 5,
1997 order determining that the claims of the 1992 Plan are not
entitled to priority in the Chapter 11 Cases. The District Court
granted this motion and vacated and remanded back to the
Bankruptcy Court the remaining disputes involving the 1992 Plan.
As discussed above, pursuant to the Settlement Agreement, the
Company has resolved the various disputes between the Company and
the 1992 Plan with respect to its claims arising in the Chapter
11 Cases.
The Debtor Corporations estimate the present value of the Debtor
Corporations obligations to the 1992 Plan is approximately
$123,671,000, not including any reduction attributable to
implementation of the managed care and cost containment
provisions required by the Coal Act. The liability recorded at
June, 30, 1998 of $49,734,000, represents the aggregate amount of
the liability, less the unamortized transition obligation of
$59,632,000 and the unrecognized net loss of $14,305,000 at that
date. The Debtor Corporations believe that for bankruptcy
purposes the total amount of $123,671,000 represents the present
value of the liability subject to compromise at September 30,
1998. By order dated June 11, 1998, the Bankruptcy Court
determined among other things that the 1992 Plan holds a
prepetition, unsecured claim in the amount of $146,103,383. The
Debtor Corporations believe that the Bankruptcy Court erred in
this determination which is now moot.
1993 Wage Agreement Plan. The 1993 Wage Agreement between
Westmoreland Coal Company and the UMWA required the Company to
establish and provide health care benefits under an individual
employer plan for age and service eligible employees (and their
dependents) who retired during the term of the 1993 Wage
Agreement. The UMWA 1993 Benefit Plan ("the 1993 Benefit Plan")
is a multiemployer benefit plan providing health care benefits to
specified beneficiaries entitled to such benefits under a UMWA
Wage Agreement where such benefits are not provided by former
employers through individual employer plans. The Company's
liabilities under the 1993 Wage Agreement, whether provided under
the Company's individual employer plan or by the 1993 Benefit
Plan, are shown as subject to compromise, by virtue of the
provisions of Bankruptcy Code section 1113, which authorizes the
rejection of collective bargaining agreements.
The Company estimates that the present value of the Company's
alleged obligations under the 1993 Wage Agreement, if its
liability extends beyond the expiration of the 1993 Wage
Agreement (which the Company denies), determined in accordance
with generally accepted accounting principles, is approximately
$34,580,000, not including any reduction attributable to
implementation of managed care and cost containment efforts. The
liability recorded at September 30, 1998 of $33,229,000,
represents the aggregate amount of such a liability, less the
unrecognized net loss of $1,351,000 at that date. The Company
believes that for bankruptcy purposes the total of these amounts
represents the present value of the liability subject to
compromise at September 30, 1998.
During the Chapter 11 Case, the Company commenced an adversary
proceeding with respect to the Company's liability to provide
benefits under the 1993 Plan. Pursuant to the Settlement
Agreement, the Company has agreed, among other things, that: (i)
for a period of five years from the effective date of the
Settlement Agreement the Company will provide benefits pursuant
to its individual and employer plan established under the 1993
Wage Agreement to its retirees and other beneficiaries entitled
to benefits under the terms of such plan, including all such
retirees and other beneficiaries who first became eligible for
such benefits after August 1, 1998; (ii) the Company will not
initiate any litigation against the UMWA or UMWA retirees
contesting its obligation to provide such benefits for a period
of five years from the effective date; (iii) at the expiration of
such five year period, the company is free to initiate litigation
contesting its obligation to continue to provide such benefits,
and the Company will continue to provide such benefits after the
expiration of the five year period until it obtains a ruling from
a Court of competent jurisdiction that it is not obligated to
provide such benefits; (iv) the UMWA will not use this agreement,
the provision of benefits as provided in such agreement, or
dismissal of the adversary proceeding as any evidence that the
Company acknowledges any obligation to provide benefits, and will
not assert as a defense any statue of limitations, latches,
estoppel, or other equitable defense based on delay or actions
taken pursuant to such agreement, in any litigation initiated
after the five year period; (v) any disputes over the individual
employer plan will be resolved by the Trustees of the UMWA Health
& Retirement Funds as provided in the 1993 Wage Agreement; and
(vi) the above-referenced adversary proceeding will be dismissed
without prejudice.
<PAGE 12>
UMWA Combined Benefit Fund. ("Combined Fund") The Combined Fund
is a multiemployer plan established by the Coal Act for purposes
of providing health care benefits 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 Debtor Corporations ceased
making payments to the Combined Fund. The Debtor Corporations
previously maintained that any liability of the Debtor
Corporations to the Combined Fund arose and was incurred
prepetition and constituted a prepetition liability subject to
compromise. As discussed above, however, as a result of the
Tenth Circuit's decision in Sunnyside and other developments in
the Chapter 11 Cases, the Debtor Corporations no longer contend
that the postpetition assessments of the Combined Benefit Plan
arose and were incurred prepetition. Rather, the Debtor
Corporations have advised the Bankruptcy Court that to the extent
the Combined Fund claims are otherwise allowed and enforceable,
any postpetition assessments of the Combined Fund are entitled to
administrative priority. As discussed above, pursuant to the
Settlement Agreement, the Company has resolved the various
disputes with the Combined Fund regarding its claims arising in
the Chapter 11 Cases.
Proofs of Claims. 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 non-employee/retiree creditors of the Debtor
Corporations to file proofs of claim and interests. Accordingly,
on September 30, 1997, the Company's Claims Administrator sent
claim forms to potential creditors, and other parties in
interest. The Company's estimate of liabilities subject to
compromise is subject to change based upon the Company's review
of the proofs of claim that were timely filed.
Salaried Plan and SERP. The Company maintains that to the extent
salaried retiree and SERP 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 for salaried
retiree and SERP benefits arose and was incurred prepetition and
constitute prepetition claims. A number of proofs of claim have
been filed in the Chapter 11 case in connection with these
liabilities. The salaried plan and SERP were not affected by the
Settlement Agreement discussed above. Those obligations will be
satisfied as incurred.
2. 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.
<PAGE 13>
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.
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. On
May 13, 1998 the FERC entered an Order clarifying its August 1,
1996 decision in the Southampton case. While affirming the
requirement to make a refund to Virginia Power, the FERC ruled
that Virginia Power must compensate Southampton for every hour in
which the unit was available for dispatch, but not actually
dispatched. FERC appointed a settlement Judge to assist the
parties in evaluating and negotiating a settlement.
The Southampton Partnership has reached agreement with Virginia
Power on settlement of the Southampton QF issue. The financial
details of the settlement are as follows:
Part 1: For the years 1999 through 2001, the
Partnership will pay to Virginia Power $1,000,000
per year, payable on March 31st of each year. The
Partnership has the option of paying the entire
$3,000,000, discounted at 6%, or $2,833,393, on
March 31, 1999. The Partnership must exercise this
option by December 31, 1998.
Part 2: For the years 2002 through 2008, the capacity
payment payable by Virginia Power to the
Southampton Partnership will be reduced by
$0.66454/kW-Mo. This reduction will be on a
monthly basis and equates to $500,000 per year.
Part 3: Virginia Power will be given the option to
terminate (prior to its original expiration in
2017) the Power Purchase Agreement ("PPA"). Early
termination would be effective January 1, 2009.
Virginia Power must exercise this option by
December 31, 2007. If Virginia Power does not
elect to terminate the PPA, the Partnership will
pay Virginia Power $500,000 per year until
expiration of the PPA.
While the parties have reached an accord, the settlement must be
approved by the FERC before it becomes final. Ultimate approval
of the settlement is expected, although there can be no assurance
that the settlement will be approved.
<PAGE 14>
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, one of two units
included in the ROVA partnership, under a long-term contract. In
the second quarter of 1994, that customer disputed the ROVA
Partnership's interpretation of the provisions of the contract
dealing with the payment of the capacity purchase price when the
facility experiences a "forced outage" day. A forced outage day
is a day when ROVA I is not able to generate a specified level of
electrical output. The ROVA Partnership believes that the
customer is required to pay the ROVA Partnership the full
capacity purchase price unless forced outage days exceed a
contractually stated allowed annual number. The customer asserts
that it is not required to do so.
From May, 1994, through September, 1998, Virginia Power withheld
approximately $14,500,000 of these capacity payments during
periods of forced outages. To date, the Company has not
recognized any revenue on its 50% portion of the capacity
payments being withheld by Virginia Power. In October 1994, The
ROVA Partnership 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 Partnership 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
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 appealed the Court's decision granting
summary judgment to the Virginia Supreme Court. On June 6, 1997
the Virginia Supreme Court reversed the trial court's decision to
grant the customer's summary judgment motion and remanded the
matter for trial. The case was tried on October 26, 1998 and has
been briefed. A decision from the trial court is expected by
late November. Regardless of the outcome, the Company believes
Roanoke Valley I will operate profitability and generate positive
cash flows.
Rensselaer - On June 30, 1998, LG&E - Westmoreland Rensselaer
("LWR"), completed the restructuring of the Rensselaer Project
under the terms of the Master Restructuring Agreement. LWR
received $157 million in cash as consideration for terminating
its original Power Purchase Agreement. After satisfying project
finance debt obligations and renegotiating project related
contracts for fuel supply and transportation and steam supply,
Westmoreland's share of the remaining consideration was
approximately $30 million, which was subsequently received by
WEI. The LWR Partnership also entered into a ten year transition
power supply agreement with Niagara Mohawk Power Corporation and
retained ownership of the plant.
3. 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 sixteen 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, October 1, 1997, January 1, 1998, April 1,
1998, July 1, 1998 and October 1, 1998) amount to $19,550,000 in
the aggregate ($34.00 per preferred share or $8.31 per depositary
share). Common stock dividends may not be declared until the
preferred stock dividends that are in arrears are made current.
<PAGE 15>
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, 1998 of $67,015,000.
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.
4. ACCOUNTING CHANGE
During the second quarter of 1998, the Company changed its method
of accounting for start up costs associated with several of its
independent power projects owned by WEI. Under the provisions of
AICPA Statement of Position 98-5, the Company is required to
expense these costs as they are incurred. Previously, start up
costs were capitalized and amortized over the life of the
projects. The cumulative effect of the change in the method of
accounting for start-up costs of $9,876,000 has been recorded in
income.
5. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to
the current year presentation.
<PAGE 16>
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Material Changes in Financial Condition From December 31, 1997 to
September 30, 1998
Forward-Looking Disclaimer
This Quarterly Report on Form 10-Q contains "forward-looking
statements" within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of
1934. Among such statements are comments regarding the Company's
projected cash balance, the Company's projected earnings, the
magnitude of future claims on the Company, the Company's ability
to use its NOLs, and the Company's future prospects, condition,
and value. In addition, the terms "anticipate," "believe,"
"estimate," "maintain," "intend," "may," "will," and "expect" and
similar expressions, as they relate to the Debtor Corporations,
are intended to identify forward-looking statements. These
statements are qualified by important factors that could cause
actual results to differ materially from those in the forward-
looking statements, including without limitation the decisions of
the Bankruptcy Court, general economic and competitive
conditions, the completion of the sale of a significant asset and
the ability to reinvest excess cash at an acceptable rate of
return. Additional factors that could cause actual results to
differ materially from those in the forward-looking statements,
or that could contribute to such a difference, are identified in
the Dismissal Motion filed by the Company on July 28, 1998.
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 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.
The 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 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, conversion or dismissal of the cases.
The Company believes that different assumptions and methodologies
other than generally accepted accounting principles will be used
by the Bankruptcy Court to determine the amount paid to settle
liabilities and contingencies that will be allowed in a Chapter
11 reorganization.
On February 2, 1998, the Debtor Corporations filed a plan of
reorganization and on April 15, 1998, filed an amended, but
substantially similar, plan of reorganization. On June 11, 1998
the Bankruptcy Court issued a ruling with respect to the allowed
claims of the 1992 UMWA Benefit Plan. The Court allowed a claim
for approximately $146,000,000 for certain liabilities under the
Coal Act related to the Company's Individual Employer Plan. As a
result of the Court ruling, the Company's plan of reorganization
and disclosure statement were deemed withdrawn by the Court
during a disclosure statement adequacy hearing held on June 11,
1998.
<PAGE 17>
On February 2, 1998, the Funds filed a competing plan of
reorganization (the "Funds' Plan"). An amended Funds' Plan was
filed on April 15, 1998. Among other things, the Funds' Plan
provided for the elimination of all preferred and common
shareholder interests for no consideration. The Funds have since
withdrawn their competing plan of reorganization.
On July 28, 1998, the Company and four subsidiaries filed a
motion with the Bankruptcy Court to dismiss their Chapter 11
cases based on substantial changes in law that have resulted from
recent court decisions in other cases and the significant
improvement in the Company's financial condition.
On July 28, 1998 the Official Equity Holders' Committee filed a
motion before the Bankruptcy Court to convert the Debtor
Corporation's Cases to Chapter 7, contending that conversion
would maximize the recovery for shareholders and that the Funds'
amended plan of reorganization is not confirmable. The Debtor
Corporations believe that dismissal of the Chapter 11 cases is
preferable to conversion and should be granted by the Bankruptcy
Court for the benefit of the creditors and to allow for the
preservation and creation of value for the shareholders.
On October 15, 1998 the Company reached a settlement agreement
with the Funds, the United Mine Workers of America ("UMWA") and
the Official Committee of Equity Security Holders ("Equity
Committee") for the resolution of its chapter 11 case. The
agreement, which provides terms for a consensual dismissal, was
announced during scheduled hearings on Westmoreland's Motion to
Dismiss and the Equity Committee's Motion to Convert to Chapter
7, and the hearings were subsequently recessed.
The key terms of the Settlement Agreement may be generally
summarized as follows:
- All undisputed creditor claims will be paid in full, in
cash, with interest, and the Company will continue to
satisfy its other ongoing obligations.
- All Coal Act arrearages will be paid in full, with
interest.
- The Company will reinstate its Individual Employer Plan
within 60 days of the effective date of a dismissal.
- The Company will pay future 1992 Plan and Combined Fund
payments.
- Obligations to the 1974 Pension Trust will be
determined through arbitration as provided by law.
- The Company will post security to the 1992 Plan as
required under the Coal Act, and in addition, will
provide a $12 million secured contingency note which
will be payable only in the event the Company does not
meet its Coal Act obligations, or fails to meet certain
financial tests.
- The Company will hold a special meeting of shareholders
no later than March 31, 1999. Shareholders will be
invited to submit nominees for the Board of Directors
and proposals for consideration at that meeting. (The
Company has not held a meeting of shareholders while in
bankruptcy).
- Provided that the pending sale of a certain asset
occurs, Westmoreland will make a public tender for no
less than 1 million shares of its outstanding preferred
stock, at a price per share to be determined by the
Equity Committee, for a total consideration of $20
million. The tender shall occur in the first quarter
of 1999, or as soon thereafter as is practicable,
following the date of the asset sale.
<PAGE 18>
- The Company will not initiate litigation to challenge
the Coal Act, and in addition, will not voluntarily
seek the protection of the Bankruptcy Court for a
period of 5 years.
The Court gave the parties to the agreement until October 30,
1998 to decide whether to implement the agreement through a
contractual arrangement to be executed upon dismissal or to file
a consensual plan of reorganization. On October 30, 1998, the
Debtor Corporations, the Funds, the UMWA, and the Equity
Committee filed a joint motion with the Bankruptcy Court, setting
forth the outline of a procedure for dismissal of the Chapter 11
Cases combined with the entry of "consent judgments" in
connection with certain of the pending litigation. The parties
intend that the Debtor Corporations will file motions requesting
approval of the consent judgments on or around November 18, 1998.
Notices of the filing of these motions will be mailed to
creditors as directed by the Bankruptcy Court, and depending upon
the resolution of any objections filed with the Bankruptcy court,
dismissal of the Chapter 11 Cases should occur in late December
1998 or early 1999.
Because of the ongoing nature of the reorganization cases, the
outcome of which is not presently determinable, the 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 $54,633,000 and
$16,886,000 for the nine months ended September 30, 1998 and
1997, respectively. The increase in cash provided by operations
in 1998 compared to 1997 is mainly due to cash received from the
Rensselaer restructuring and increased IPP distributions to WEI
and the cash received upon the termination of the overfunded
salaried pension plan. A replacement plan has been established.
Cash provided by investing activities for the nine months ended
September 30, 1998 and 1997 was $1,904,000, and $2,030,000,
respectively. The reduction in cash provided from investing
activities in 1998 as compared to 1997 is a result of a decrease
in proceeds from sales of assets in 1998.
Cash used in financing activities for the nine months ended
September 30, 1998 and 1997 totaled $47,000, and $126,000,
respectively. Cash used in 1998 and 1997 related to the
repayment of long-term debt.
Consolidated cash and cash equivalents at September 30, 1998
totaled $87,154,000. As a result of the Chapter 11 bankruptcy
filings, the Company is not permitted to consolidate the
individual subsidiary cash balances but continues to manage those
balances on their behalf. As of September 30, 1998, the cash
balances at the filed subsidiaries were: Westmoreland Resources,
Inc. ("WRI") - $15,719,000; Westmoreland Coal Sales Company -
$246,000; Westmoreland Terminal Company - $985,000; and
Westmoreland Energy, Inc. - $57,970,000. The cash balance for
Westmoreland Coal Company was $12,234,000 at September 30, 1998.
At December 31, 1997, cash and cash equivalents totaled
$30,664,000 (including $11,378,000 at WRI). 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. Such dividends
may not be paid while WRI's bankruptcy case is pending. In
addition, the Company had restricted cash, which was not
classified as cash or cash equivalents, of $4,822,000 at
September 30, 1998 and $6,665,000 at December 31, 1997. The
amounts represent an interest-bearing cash deposit account which
collateralizes the Company's outstanding surety bonds for its
workers compensation self-insurance programs. The decrease in
restricted cash collateralizing Workers' Compensation surety
bonds reflects amounts drawn in 1998 to pay claims pursuant to an
approved order of the Bankruptcy Court, net of interest earned on
the deposit.
<PAGE 19>
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 entered into with 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 Delaware law, the
preferred stock dividend was suspended in the third quarter of
1995 as a result of the recognition of losses related to the
idling of the Virginia division and the resulting shareholders'
deficit. The sixteen quarterly dividends which are in arrears
(those dividends whose payment dates would have been 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, October 1, 1997, January 1,
1998, April 1, 1998 July 1, 1998 and October 1, 1998) amount to
$19,550,000 in the aggregate ($34.00 per preferred share or $8.31
per depositary share).
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 for 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 1998 of $67,015,000.
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.
On October 9, 1998, WRI submitted to the Bankruptcy Court a
motion for authority to expend funds for mining equipment. WRI
and its mining contractor, Morrison-Knudsen ("M-K") have
determined that a major component of the dragline commonly known
as "the tub" has developed stress cracks and is at risk of total
failure. The preliminary estimated cost to repair the tub could
be up to $4,800,000. The replacement will take place once
fabrication of the tub is completed in the first quarter of 1999.
Because M-K is unwilling to pay for replacement of the tub, WRI
had no alternative but to seek authority to accomplish the
replacement using its own funds, while reserving all rights it
has to require M-K to pay for the replacement. It is not
expected that the repair will have a significant negative impact
on WRI's results of operations.
Year 2000
The Year 2000 ("Y2K") problem concerns the inability of
information and technology-based operating systems to properly
recognize and process date-sensitive information beyond December
31, 1999. This could result in systems failures and
miscalculations which could cause business disruptions.
Equipment that uses a date, such as computers and operating
control systems, maybe affected. This includes equipment used by
our customers and suppliers, as well as the Company's independent
power projects.
Many of the Company's systems and related software are already
Y2K compliant. The Company is actively reviewing all hardware and
software associated with its computers, personal computers and
client/servers, telecommunications and embedded systems found in
equipment throughout its operations. This program consists of
identifying and inventorying all software applications and
systems, making required modifications, and testing. There are
similar ongoing compliance programs at the Company's independent
power projects.
<PAGE 20>
Based on information currently available, it is estimated that
the costs to modify systems to achieve Y2K compliance will not
exceed $125,000, none of which has been incurred through
September 30, 1998.
The Company is also gathering information about the Y2K readiness
of its independent power projects and of its customers and
suppliers. Since it cannot be stated with certainty whether the
Company's operations will be materially adversely affected by
their compliance problems, the Company is developing contingency
plans in order to minimize the negative impacts on the Company if
they are not Y2K ready.
The goal is to have all critical Company systems Y2K compliant
during the first half of 1999. This should allow time before
December 31, 1999, to validate the system modifications and
complete contingency plans for customers, suppliers and others
who may not be Y2K compliant. While there can be no assurance
that all such modifications and plans will be successful, the
Company does not expect that any disruptions will have a material
adverse effect on its overall financial position, results of
operations, or liquidity.
The foregoing constitutes a "forward-looking statement" within
the meaning of Section 27A of the Securities Act of 1933. It is
based on management's current expectations, estimates and
projections, which could ultimately prove to be inaccurate.
Factors which could affect the Company's ability to be Y2K
compliant by the end of 1999 include the failure of customers,
suppliers, governmental entities and others to achieve compliance
and the inaccuracy of certifications received from them.
RESULTS OF OPERATIONS
- -----------------------------------------------------------------
Quarter Ended September 30, 1998 Compared to Quarter Ended
September 30, 1997.
Revenues for the quarter ending September 30, 1998 were
$15,485,000 compared to $17,852,000 for the quarter ending
September 30, 1997. The decrease is due to decreased earnings at
DTA as a result of a downturn in export steam coal sales and a
slight decrease in sales volume at WRI.
Costs and expenses for the quarter ending September 30, 1998 were
$15,226,000 compared to $12,825,000 for the quarter ending
September 30, 1997. The majority of the increase is due to an
increase in the accrual for costs associated with the 1992 Plan.
The Company also revised its reserve estimates at WRI resulting
in a decrease in the depletable reserve base and an increase in
depletion expense.
Gains on the sales of assets were $204,000 during the quarter
ending September 30, 1998, compared to $168,000 for the quarter
ending September 30, 1997. The gains relate primarily to sales
of various assets from the Company's idled Virginia Division.
Nine Months Ended September 30, 1998 Compared to Nine Months
Ended September 30, 1997.
Revenues for the nine months ending September 30, 1998 were
$94,292,000 compared to $48,301,000 for the nine months ending
September 30, 1997. The increase is mainly due to increased
earnings at WEI's Renssalaer project as a result of the
restructuring of its power purchase contract with Niagara Mohawk.
Costs and expenses for the nine months ending September 30, 1998
were $46,766,000 compared to $36,724,000 for the nine months
ending September 30, 1997. The majority of the increase is due
to an increase in the accrual for costs associated with the 1992
Plan. The Company also revised its reserve estimates at WRI
resulting in a decrease in the depletable reserve base and an
increase in depletion expense.
<PAGE 21>
Gains on the sale of assets was $391,000 for the nine months
ended September 30, 1998 most of which related to the sales of
various equipment from the idled Virginia Division. Gains on the
sales of assets were $235,000 during the nine months ending
September 30, 1997, which was net of 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 in 1997, all of which was recorded as a gain.
<PAGE 22>
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) On July 28, 1998 the Company filed a report on Form 8-K
announcing that it had filed a motion with the U.S.
Bankruptcy Court to dismiss its chapter 11 cases.
c) On October 15, 1998 the Company filed a report on Form 8-K
announcing that it had reached a settlement with the Benefit
Funds, the United Mine Workers of America, and the Equity
Committee for the resolution of its chapter 11 cases.
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: 11/16/98 /s/ Robert J. Jaeger
----------------------------------
Robert J. Jaeger
Senior Vice President -
Finance and Treasurer
/s/ Larry W. Mikkola
----------------------------------
Larry W. Mikkola
Controller
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