FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 August 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)
June 30, December 31,
1998 1997
----------- ------------
(in thousands)
<CAPTION>
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 78,000 $ 30,664
Receivables:
Trade 2,527 4,483
Pension plan termination receivable, net 500 13,040
Other 1,111 1,026
--------- ---------
4,138 18,549
Other current assets 670 402
--------- ---------
Total current assets 82,808 49,615
--------- ---------
Property, plant and equipment:
Land and mineral rights 10,990 11,684
Plant and equipment 92,554 94,265
--------- ---------
103,544 105,949
Less accumulated depreciation and depletion 68,670 70,262
--------- ---------
34,874 35,687
Investment in independent power projects 66,535 54,152
Investment in Dominion Terminal Associates (DTA) 18,663 18,680
Workers' compensation bond 5,237 6,665
Prepaid pension cost 3,633 3,528
Excess of trust assets over
pneumoconiosis benefit obligation 11,650 11,700
Other assets 1,842 1,970
--------- ---------
Total Assets $ 225,242 $ 181,997
========= =========
Liabilities and Shareholders' Equity
Current liabilities:
Current installments of long-term debt $ 55 $ 51
Accounts payable and accrued expenses 8,007 9,307
Reorganization expenses 2,248 1,645
Reclamation costs 100 100
--------- ---------
Total current liabilities 10,410 11,103
--------- ---------
Liabilities subject to compromise 137,920 132,667
Long-term debt 356 407
Accrual for reclamation costs 3,086 3,182
Minority interest 6,755 6,245
Shareholders' equity 66,715 28,393
--------- ---------
Total Liabilities and Shareholders' Equity $ 225,242 $ 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 Six Months
Ended Ended
June 30, June 30,
1998 1997 1998 1997
------ ------ ------ ------
(in thousands except per share data)
<CAPTION>
<S> <C> <C> <C> <C>
Revenues:
Coal $ 10,891 $ 10,412 $ 23,143 $ 21,701
Independent power -
equity in earnings 50,626 4,430 55,419 8,165
DTA - equity in earnings 328 275 245 583
-------- -------- -------- --------
61,845 15,117 78,807 30,449
Cost and expenses:
Cost of sales - coal (9,298) (8,832) (19,494) (20,007)
Depreciation, depletion
and amortization (631) (232) (1,237) (829)
Selling and administrative (1,627) (1,437) (3,038) (2,792)
Heritage costs (3,953) (1,793) (8,104) (2,198)
Pension benefit 52 100 105 1,000
Doubtful account recoveries 115 30 228 927
-------- -------- -------- --------
(15,342) (12,164) (31,540) (23,899)
Operating income 46,503 2,953 47,267 6,550
Other income (expense):
Gains on sales of assets 51 830 187 67
Interest expense (40) (64) (95) (209)
Minority interest (193) (227) (510) (559)
Other income (100) 99 1,456 48
-------- -------- -------- --------
Income from continuing operations
before reorganization items and
income taxes 46,221 3,591 48,305 5,897
Reorganization legal and
consulting fees (776) (1,152) (1,435) (1,902)
Reorganization interest income 691 327 1,328 651
-------- -------- -------- --------
Income from continuing operations 46,136 2,766 48,198 4,646
Discontinued operations - (3,320) - (3,841)
-------- -------- -------- --------
Cumulative effect of change
in accounting principle (9,876) - (9,876) -
-------- -------- -------- --------
Net income (loss) 36,260 (554) 38,322 805
Less preferred stock dividends
(in arrears) (1,222) (1,222) (2,444) (2,444)
-------- -------- -------- --------
Net income (loss) applicable to
common shareholders $ 35,038 $ (1,776) $ 35,878 $ (1,639)
======== ======== ======== ========
Net income (loss) per share
applicable to common
shareholders:
Income from continuing operations $ 6.45 $ 0.22 $ 6.57 $ 0.31
Loss from discontinued operations - (0.48) - (0.55)
Cumulative effect of change in
accounting principle (1.42) - (1.42) -
-------- -------- -------- --------
$ 5.03 (0.26) 5.15 (0.24)
======== ======== ======== ========
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)
Six Months Ended June 30, 1998 1997
- ------------------------------------------------------------------------------
(in thousands)
<CAPTION>
<S> <C> <C>
Cash flows from operating activities:
Net income $ 38,322 $ 805
Adjustments to reconcile net income to net
cash provided by operating activities:
(Gain) on disposition of assets (187) (67)
Equity earnings from independent power projects (55,419) (8,250)
Cash received from independent power projects 33,136 6,802
Equity earnings from DTA (245) (583)
Cash generated by DTA 1,298 2,501
Cash contributions to DTA (1,066) (1,687)
Depreciation, depletion and amortization 1,237 829
Minority interest in WRI's income 510 559
Cumulative effect of change in accounting principle 9,876 -
Impairment and loss on disposition of
discontinued operations - 3,582
Changes in working capital accounts:
Accounts receivable 14,411 1,373
Other current assets (268) -
Prepaid pension cost (105) -
Accounts payable and accrued expenses (1,300) 3,287
Workers' compensation bond 1,428 -
Excess of trust assets over pneumoconiosis obligations 50 -
Reclamation costs (96) 180
Other (126) (1,084)
-------- --------
Net cash provided by operating activities
before reorganization items 41,456 8,247
-------- --------
Changes in reorganization items:
Trade and other liabilities subject to compromise 5,253 1,458
Liabilities not subject to compromise 603 -
-------- --------
Net change in reorganization items 5,856 1,458
-------- --------
Net cash provided by operating activities 47,312 9,705
-------- --------
Cash flows from investing activities:
Fixed asset additions (125) (15)
Net proceeds from sales of assets 196 1,733
-------- --------
Net cash provided by investing activities 71 1,718
-------- --------
Cash flows used in financing activities
Repayment of long-term debt (47) (36)
-------- --------
Net increase in cash and cash equivalents 47,336 11,387
Cash and cash equivalents, beginning of period 30,664 8,791
-------- --------
Cash and cash equivalents, end of period $ 78,000 $ 20,178
======== ========
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 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. On April 15, 1998, the
Debtor Corporations submitted an amended joint plan of reorganization
and disclosure statement for Bankruptcy Court review. The original
joint plan of reorganization and disclosure statement had been filed
on February 2, 1998. On April 15, 1998, the 1974 UMWA Pension Plan,
the 1992 UMWA Benefit Plan and the UMWA Combined Fund ("the Funds")
also filed an amended plan of reorganization and disclosure statement.
Their original plan of reorganization and disclosure statement had
been filed on February 2, 1998.
As discussed further below, by order dated June 11, 1998, the
Bankruptcy Court determined among other things that the 1992 UMWA
Benefit Plan holds a pre-petition, unsecured claim against the Debtor
Corporations in the amount of $146,103,383. As a result of this
determination, which rendered the Debtor Corporations' amended joint
plan of reorganization unconfirmable absent a change in circumstances,
the Bankruptcy Court deemed that such plan was withdrawn. Thereafter,
pursuant to an order entered on June 12, 1998, the Bankruptcy Court
determined that the disclosure statement accompanying the Funds'
amended plan of reorganization subject to certain additional
amendments was adequate in accordance with the provisions of
Bankruptcy Code section 1125, and scheduled a hearing on confirmation
of that plan for August 25, 1998. It is unclear, in view of the
developments described below, whether the Funds will proceed to seek
confirmation of their plan of reorganization or that such plan can be
confirmed and the Debtor Corporations believe the Funds' Plan cannot
be confirmed. The Debtor Corporations intend to continue to
vigorously oppose confirmation of the Funds' plan.
<PAGE 6>
On June 25, 1998, the Supreme Court decided Eastern Enterprises v.
Apfel, ____ U.S. _____, 1998 U.S. Lexis 4213 (June 25, 1998)
("Eastern"). In Eastern, the Supreme Court held that a critical
portion of the beneficiary assignment scheme of the Coal Industry
Retiree Health Benefit Act of 1992 ("the Coal Act") was
unconstitutional as applied to the employer in that case. The
employer in Eastern was assigned approximately 1000 beneficiaries
under Section 9706(a)(3) of the Coal Act, by virtue of its status as
the former employer of those retired miners at some time prior to
1978. As a result of these assignments, Eastern became obligated to
pay annual premiums to the UMWA Combined Benefit Fund ("the Combined
Fund") for each of these individuals, pursuant to Section 9704 of the
Coal Act. Eastern sued to protest these assignments, claiming that
the retroactive application of the Coal Act violated the Due Process
and Takings Clauses of the Fifth Amendment. Four justices of the
Supreme Court concluded that application of the Combined Fund
assignment scheme to Eastern was barred by the Takings Clause. A
fifth Justice concurred in the result, concluding that the Coal Act,
as applied to Eastern, was so arbitrary so as to violate the Due
Process Clause. Four justices dissented on a variety of grounds. As
a result of the Court's decision in Eastern, it is unclear whether,
and to what extent, the Coal Act may constitutionally be applied
against the Debtor Corporations in these cases. Among the legal
issues left open by the Court's decision in Eastern are: 1) in light
of the Court's analysis and conclusion, is it constitutionally
permissible under the Due Process and Takings Clauses to impose Coal
Act liability on the four subsidiary Debtor Corporations; and 2) apart
from that, whether the remaining provisions of the Coal Act funding
scheme are constitutionally valid. These issues are expected to be
litigated in the Debtors' Chapter 11 cases, as well as in other Coal
Act cases in other courts. However, if these Chapter 11 cases are
dismissed, these issues may be litigated in another forum. One of the
arguments made by the Company in challenge to the Coal Act is that the
assessments by the Funds are impermissible "direct taxes" in
contravention of Article I, Section 9, clause 4 of the United States
Constitution. This argument is bolstered by the Court's ruling in
Sunnyside.
On July 9, 1998, the United States Court of Appeals for the Tenth
Circuit ("Tenth Circuit") decided United Mine Workers of America 1992
Benefit Plan v. Rushton (In re Sunnyside), Case No. 97-1276
("Sunnyside"). In Sunnyside, the Tenth Circuit held that the premium
assessments of the 1992 UMWA Benefit Plan at issue in that case are
taxes entitled to administrative priority under Bankruptcy Code
section 503(b)(1)(B). Although the Debtor Corporations previously
contended that the facts in Sunnyside are distinguishable, the Tenth
Circuit's broad decision would appear to dictate that the postpetition
assessments of the 1992 UMWA Benefit Plan (and the Combined Fund ) are
entitled to administrative priority in their Chapter 11 cases. As a
result, on July 28, 1998, the Debtor Corporations filed a motion
before the United States District Court of Colorado ("District Court")
moving to reverse the Bankruptcy Court's September 5, 1997 order (as
further described below) which held that the claims of the 1992 UMWA
Benefit Plan were general unsecured prepetition claims. The Debtor
Corporations believe that Combined Fund claims should also be accorded
tax status under the analysis set forth in Sunnyside. While this
affords the Funds' claims administrative priority in bankruptcy, it
prohibits the estimation and acceleration of their future claims. For
this reason, among others, the Debtor Corporations believe that the
Funds' plan of reorganization is not confirmable.
On July 28, 1998, the Debtor Corporations also 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 have proposed to: (i) pay in full
all undisputed claims, including the assessments of the 1992 UMWA
Benefit Plan and the UMWA Combined Benefit Plan 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 UMWA Benefit 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
earnings which would permit the payment of such dividends under
applicable Delaware law. Westmoreland Coal will also 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, until and unless a forum of competent
jurisdiction determines that it is not required to do so. The
Dismissal Motion states that the Debtor Corporations have reserved
their right to contest the constitutionality of the Coal Act and/or to
seek to recover any payments made to the 1992 UMWA Benefit Plan or the
Combined Fund in any appropriate forum.
<PAGE 7>
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 has retained counsel and its own
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. Although the Debtor
Corporations agree with the Equity Committee on the latter point, the
Debtor Corporations believe that dismissal of the Chapter 11 cases is
preferable to conversion, is in the best interest of the creditors
and the estate, and should allow for the preservation and creation of
value for shareholders, including utilization of the Company's $224
million net operating tax losses ("NOLs").
The deadline to object to the Dismissal Motion and the Conversion
Motion is August 19, 1998. A hearing on these motions has been
scheduled for August 25, 1998.
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 ongoing Chapter 11
reorganization 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 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 the Chapter 11 reorganization. Costs incurred
related to the reorganization were $1,435,000 and $1,902,000 for the
six months ended June 30, 1998 and 1997, respectively.
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. The Funds' proposed amended plan of
reorganization, would, if confirmed, eliminate all interests of
existing shareholders for no consideration.
<PAGE 8>
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 June
30, 1998 and December 31, 1997:
June 30, December 31,
1998 1997
-----------------------------------------------------------
Trade and other liabilities $ 6,874,000 $ 7,035,000
Long-term debt 1,607,000 1,607,000
1974 UMWA Pension Plan 13,800,000 13,800,000
Workers' compensation 22,813,000 24,341,000
1992 UMWA Benefit Plan 46,646,000 40,469,000
1993 Wage Agreement Plan 32,859,000 32,067,000
UMWA Combined Benefit Fund - -
Salaried Plan 12,040,000 12,175,000
SERP 1,281,000 1,173,000
-----------------------------------------------------------
Total $137,920,000 $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.
The presentation of liabilities subject to compromise set forth above
is required by generally accepted account 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.
Assessing the size of the Debtor Corporations' liabilities under
applicable bankruptcy law and for purposes of the reorganization
proceeding is complicated by the Bankruptcy Court's June 11,1998
decision, which is discussed in more detail below and which the Debtor
Corporations have appealed, and by the Tenth Circuit's decision in the
Sunnyside case, which conflicts with the Bankruptcy Court's June 11,
1998 decision and a prior decision of the Bankruptcy Court. 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.
<PAGE 9>
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, 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), (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 The Bankruptcy
Court's June 11, 1998 order presupposed that the 1992 UMWA Benefit
Plan held general unsecured claims in these cases which could be
estimated and treated in bankruptcy. The Debtor Corporations believe
that after Sunnyside, this premise is no longer valid. Accordingly,
the Debtor Corporations do not believe that the Bankruptcy Court's
June 11, 1998 determination regarding the amount of the 1992 UMWA
Benefit Plan's unsecured claim can serve as the basis for a
confirmable plan of reorganization or other disposition of these
cases.
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 June 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. Prior to its ruling on the claims of the UMWA 1992
Benefit Plan, the Bankruptcy Court had scheduled a hearing to consider
the Company's objections. In view of that ruling, but prior to the
Sunnyside and Eastern rulings, the Debtor Corporations entered into a
stipulation with the 1974 UMWA Pension Plan which was approved by the
Bankruptcy Court providing that (i) the Debtor Corporations withdrew
without prejudice their objections, provided that if the Debtor
Corporations refiled objections to these claims, the Debtor
Corporations would provide the 1974 UMWA Pension Plan at least three
(3) business days' notice in writing, (ii) pending resolution of the
appeal from the June 11, 1998 order of the Bankruptcy Court
determining the amount of the claims of the 1992 UMWA Benefit Plan,
the Debtor Corporations waived the right to oppose confirmation of the
Funds' plan of reorganization or to seek a continuance of the hearing
on confirmation of such plan based upon the fact that the amount of
these claims had not yet been determined, (iii) during such pendency,
and solely for the purpose of the hearing on confirmation of the
Funds' amended plan of reorganization (and for no other purpose) the
Debtor Corporations waived the right to prosecute any objection to the
Funds' plan of reorganization based upon the contention that these
claims might be reduced to less than $13,800,000, (iv) the Debtor
Corporations reserved the right to oppose confirmation of the Funds'
amended plan of reorganization and/or to seek a continuance of the
confirmation hearing or a stay pending appeal of any confirmation
order on any ground not expressly waived, and (v) certain other terms
and conditions as more particularly set forth in such stipulation.
<PAGE 10>
In the event the Dismissal Motion is granted, and the claims at issue
are not resolved prior thereto, the Debtor Corporations intend to
litigate the issues presented by the above-referenced proof of claims
in arbitration proceedings, pursuant to the terms of MPPA. In the
event that any withdrawal liability assessment is finally determined
by a court or other tribunal, MPPA provides for that assessment to be
paid according to the payout schedule described in 29 U.S.C. Section 1399.
The Debtors Corporations estimate that, pursuant to this provision,
payout of any withdrawal liability assessment would be amortized over
approximately 9 years.
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 case 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.
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 Industry Retiree
Health Benefits Act ("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 prior to the
Petition Date, the 1992 Plan became obligated to provide health care
coverage for such beneficiaries and their dependents. 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.
<PAGE 11>
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 appealed. Thereafter, on June 1, 2 and 3, 1998, a trial was held
before the Bankruptcy Court on the remaining issues, comprised of the
Company's other defenses and counterclaims, not resolved by the
summary judgment ruling. The Company moved to dismiss without
prejudice certain counterclaims previously asserted by the Company in
the adversary proceeding alleging that the 1992 Plan received a
prepetition preference and alleging that the terms of the prepetition
Pledge Agreement were ambiguous. This motion was granted. In
addition, the Company augmented the counterclaims to assert that if
the 1992 Plan was correct in contending that the 1992 Plan premiums
should be deemed "taxes," then those provisions of the Coal Act
mandating the payment of such premiums constituted an unconstitutional
direct tax that is not apportioned among the states, in violation of
the Direct Tax Clause of Article I of the United States Constitution.
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. The District
Court denied the Company's request to expedite this appeal, which is
still pending. For the reasons discussed below, the Company does not
believe that the Bankruptcy Court's June 11, 1998 determination
regarding the amount of the 1992 UMWA Benefit Plan's unsecured claim
can serve as the basis for a confirmable plan of reorganization or
other disposition of these Chapter 11 cases, in view of the Tenth
Circuit's decision in Sunnyside.
The Company previously maintained that all claims of the 1992 Plan
arising under the Coal Act were incurred by the Company before the
Petition Date and constituted prepetition liabilities subject to
compromise. As a result of the Tenth Circuit's decision in Sunnyside,
the Company now believes that (i) the postpetition assessments of the
1992 Plan are entitled to administrative priority status under
Bankruptcy Code section 503(b)(1)(B), (ii) any claims of the 1992 Plan
can only be allowed against the Debtor Corporations when they are
assessed on an annual basis, and (iii) the 1992 Plan does not hold
general unsecured claims against the Company for the present value of
future premium assessments. As a result, the Debtor Corporations
believe that any claims of the 1992 Plan for future assessments are
not allowable or enforceable. On July 28, 1998, the Company filed a
motion before the District Court moving to reverse the Bankruptcy
Court's September 5, 1997 order determining that the claims of the
1992 UMWA Benefit Plan are not entitled to priority in these Chapter
11 cases.
<PAGE 12>
The Debtor Corporations estimate the present value of the Debtor
Corporations obligations to the 1992 Plan is approximately
$120,583,000, 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
$46,646,000, 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
$120,583,000 represents the present value of the liability subject to
compromise at June 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, and has appealed the Bankruptcy Court's order.
However, the Debtor Corporations believe that as a result of the Tenth
Circuit's decision in Sunnyside, the 1992 Plan can only assert claims
premiums actually assessed on an annual basis and that the balance of
the 1992 Plan's claims must be disallowed. The Bankruptcy Court's
June 11, 1998 order presupposed that the 1992 UMWA Benefit Plan held
general unsecured claims in these bankruptcy cases which could be
estimated and treated in bankruptcy. The Debtor Corporations believe
that after Sunnyside, this premise is no longer valid. Moreover, the
Debtor Corporations believe that, as a result of the Supreme Court's
decision in Eastern and the real possibility of further amendments to
the Coal Act in the near term, the actual amount of the Debtor
Corporations future liabilities to the 1992 Plan may be for less than
the amount determined by the Bankruptcy Court and that the claims of
the Combined Fund may be substantially reduced as well. Accordingly,
the Debtor Corporations do not believe that the Bankruptcy Court's
June 11, 1998 determination regarding the amount of the 1992 Plan's
unsecured claim can serve as the basis for a confirmable plan of
reorganization or other disposition of these Chapter 11 cases.
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 maintains that any obligation of the Company
to provide benefits under the 1993 Wage Agreement pursuant to its
individual employer plan or to make contributions to the 1993 Plan
extended only through the scheduled expiration of the 1993 Wage
Agreement. As discussed below, the Company previously filed an
adversary proceeding before the Bankruptcy Court, requesting, among
other things, a determination that the Company's position is correct.
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 $34,210,000, not including any reduction
attributable to implementation of managed care and cost containment
efforts. The liability recorded at June 30, 1998 of $32,859,000,
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
June 30, 1998.
<PAGE 13>
The UMWA has filed a proof of claim against the Debtor Corporations,
asserting an unsecured non-priority claim in the amount of
$62,189,106. The proof of claim allegedly seeks to recover the
estimated costs of providing medical benefits for life of former
Westmoreland employees and their dependents who retired during the
term of the 1993 Wage Agreement and for those who were laid off and
reach age 55 following expiration of the 1993 Wage Agreement. The
Company believes this claim covers only the period of time following
expiration of the 1993 Wage Agreement on August 1, 1998. The Debtor
Corporations have filed objections to this proof of claim on the
ground that none of the Debtor Corporations has liability under the
1993 Wage Agreement after August 1, 1998. In addition, the Debtor
Corporations asserted counterclaims against the UMWA and the 1993
Benefit Plan. In their counterclaims, the Debtor Corporations seek a
declaration (i) that Westmoreland's obligations to provide medical
benefits for certain of its recent retirees and to make contributions
to the 1993 Benefit Plan were established by and expire with the 1993
Wage Agreement (ii) that Westmoreland's subsidiaries are not liable
for any obligations created by the 1993 Wage Agreement; and (iii) that
the 1993 Benefit Plan was established to provide medical benefits to
retirees who no longer receive benefits from their former employer,
and is therefore the proper entity required to provide medical
benefits to Westmoreland's recent retirees after expiration of the
1993 Wage Agreement. The 1993 Benefit Plan sought and received an
order dismissing the counterclaims against it. The counterclaim
against the UMWA remains. The Bankruptcy Court denied the Debtor
Corporations' motion for summary judgment on this counterclaim which
may now be tried before another judge in the Bankruptcy Court.
On July 28, 1998, the Bankruptcy Court presiding over this matter
decided to take no further action on this matter, pending resolution
of the Dismissal Motion, the Conversion Motion, and the Funds' pending
plan of reorganization.
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, 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. However, the Debtor Corporations have raised
constitutional challenges to the Combined Fund claims. The Debtor
Corporations have requested that absent dismissal of these Chapter 11
cases, the Bankruptcy Court rule on those constitutional challenges.
Alternatively, if these Chapter 11 cases are dismissed, the Debtor
Corporations expect to assert the constitutional challenges in another
appropriate forum. The Bankruptcy Court has not yet ruled on the
Debtor Corporations request.
<PAGE 14>
The Combined Fund previously filed two proofs of claim asserting
liability against all of the Debtor Corporations based upon alleged
"tax assessments" and liabilities arising under the Coal Act: (i) an
unsecured non-priority claims in the amount of $63,554,715 plus
unliquidated "secured and priority" claims; and (ii) an unsecured non-
priority claim in the amount of $8,583,175 plus unliquidated "secured
and priority" claims. The Debtor Corporations filed objections to
these claims. Thereafter, pursuant to a stipulation entered into
between the Combined Benefit Fund and the Debtor Corporations and
approved by the Bankruptcy Court, the Debtor Corporations withdrew
those objections without prejudice. Based upon the Tenth Circuit's
decision in Sunnyside, however, the Debtor Corporations do not believe
that the Combined Benefit Fund holds any allowed unsecured claims
based upon the present value of future premium assessments.
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.
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.
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 15>
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.
The ultimate resolution of this matter cannot yet be determined. The
FERC Order does not completely settle this matter. A Settlement Judge
has been appointed by FERC to assist the parties in evaluating and
negotiating any potential refund to Virginia Power. The parties
continue to discuss the matter and meet with the Settlement Judge. If
the parties are unable to negotiate an acceptable refund, further FERC
proceedings will be necessary. The ultimate amount of any refund
cannot be determined at this time. The Partnership continues to
evaluate its options.
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 June 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 is set to be tried on October 26,
1998. Regardless of the outcome, the Company believes Roanoke Valley
I will operate profitability and generate positive cash flows.
<PAGE 16>
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 fifteen 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, and
July 1, 1998) amount to $18,328,000 in the aggregate ($31.88 per
preferred share or $7.97 per depositary share). Common stock
dividends may not be declared until the preferred stock dividends that
are in arrears are made current.
There are statutory restrictions limiting the payment of preferred
stock dividends under Delaware law, the state in which the Company is
incorporated. Under Delaware law, the Company is permitted to pay
preferred stock dividends only: (1) out of surplus, surplus being the
amount of shareholders' equity in excess of the par value of the
Company's two classes of stock; or (2) in the event there is no
surplus, out of net profits for the fiscal year in which a preferred
stock dividend is declared (and/or out of net profits from the
preceding fiscal year), but only to the extent that shareholders'
equity exceeds the par value of the preferred stock ($575,000). The
Company had shareholders' equity at June 30, 1998 of $66,715,000.
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 assets of $9,876,000 has been recorded in income.
<PAGE 17>
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Material Changes in Financial Condition From
December 31, 1997 to June 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 the Chapter 11 reorganization.
<PAGE 18>
Westmoreland has sought 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 was 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 presented an entirely
different settlement approach to the Company. The Funds' proposal
came after nearly two years' effort by Westmoreland and the submission
of numerous proposals by the Company over that period. The Company
rejected this opening proposal from the Funds, but attempted to use
certain features of that proposal as a basis for further discussions
with financial advisors to the Funds. These discussions continued
until December 7, 1997 when, at a meeting between representatives of
Westmoreland and representatives of the Funds, Westmoreland was
advised that the financial advisors to the Funds had no authority to
negotiate and that their statements did not reflect the views of
counsel or the trustees of the Funds, who had not even been briefed on
these discussions. The Funds' counsel demanded that any further
negotiations be between counsel and solely pursuant to the exchange of
formal written proposals. On January 7, 1998, Westmoreland made a
further and written proposal to the Funds and two weeks later counsel
to the Funds informed the Company that the proposal was unacceptable,
declining to provide any explanation or analysis or whether any
elements of the proposal might form the basis for further discussion.
The Funds stated that further discussions were not likely to be
fruitful and that the Funds intended to file their own plan of
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.
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 provides for
the elimination of all preferred and common shareholder interests for
no consideration. The Bankruptcy Court has set August 25, 1998 for
confirmation hearings. The Company intends to vigorously oppose the
Funds' Plan and contends that the Funds' Plan is unconfirmable.
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.
A hearing on the above described motions has been set for August 25,
1998.
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.
<PAGE 19>
Liquidity and Capital Resources
Cash provided by operating activities was $47,312,000 and $9,705,000
for the six months ended June 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 at WEI
and the termination of the salaried pension plan.
Cash provided by investing activities for the six months ended June
30, 1998 and 1997 was $76,000, and $1,718,000, 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 six months ended June 30,
1998 and 1997 totaled $47,000, and $36,000, respectively. Cash used
in 1998 and 1997 related to the repayment of long-term debt.
Consolidated cash and cash equivalents at June 30, 1998 totaled
$78,000,000. 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 June 30, 1998, the cash balances at the filed subsidiaries were:
Westmoreland Resources, Inc. ("WRI") - $15,225,000; Westmoreland Coal
Sales Company - $359,000; Westmoreland Terminal Company - $1,298,000;
and Westmoreland Energy, Inc. - $48,365,000. The cash balance for
Westmoreland Coal Company was $12,753,000 at June 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
$5,238,000 at June 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.
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 fifteen 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 and July
1, 1998) amount to $18,328,000 in the aggregate ($31.88 per preferred
share or $7.97 per depositary share).
<PAGE 20>
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 June 30, 1998 of $66,715,000.
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.
RESULTS OF OPERATIONS
Quarter Ended June 30, 1998 Compared to Quarter Ended June 30, 1997.
Revenues for the quarter ending June 30, 1998 were $61,845,000
compared to $15,117,000 for the quarter ending June 30, 1997. The
increase is due to increased earnings at WEI's Rensselaer project as a
result of the restructuring of its power purchase contract with
Niagara Mohawk, increased sales volumes at WRI and increased earnings
from other independent power projects.
Costs and expenses for the quarter ending June 30, 1998 were
$15,342,000 compared to $12,164,000 for the quarter ending June 30,
1997. The majority of the increase is due to an increase in the
accrual for costs associated with the 1992 Plan. In addition, sales
volumes at WRI have increased slightly, increasing costs and expenses
accordingly. 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 $51,000 during the quarter ending
June 30, 1998, compared to $830,000 for the quarter ending June 30,
1997. The gains relate primarily to sales of various assets from the
Company's idled Virginia Division.
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30,
1997.
Revenues for the six months ending June 30, 1998 were $78,807,000
compared to $30,449,000 for the six months ending June 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 and increased sales volumes at WRI.
Costs and expenses for the six months ending June 30, 1998 were
$31,540,000 compared to $23,899,000 for the six months ending June 30,
1997. The majority of the increase is due to an increase in the
accrual for costs associated with the 1992 Plan. In addition, sales
volumes at WRI have increased slightly, increasing costs and expenses
accordingly. 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 sale of assets was $187,000 for the six months ended June
30, 1998 most of which related to the sales of various equipment from
the idled Virginia Division. Gains on the sales of assets were
$67,000 during the six months ending June 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 21>
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 - On April 15, 1998, the Company filed a
report on Form 8-K where it announced its 1997 results and that
it had filed an amended plan of reorganization and disclosure
statement related to its Chapter 11 proceedings with the
Bankruptcy Court.
On July 29, 1998, the Company filed a report on Form 8-K
announcing that it had filed a Motion to Dismiss the Chapter 11
cases with the Bankruptcy Court.
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: 08/13/98 /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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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
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575
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