FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from __________ to ___________
Commission File Number
0-752
WESTMORELAND COAL COMPANY
-------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 23-1128670
-------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
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 May 1, 1999: 7,059,663
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1
Financial Statements
<TABLE>
Westmoreland Coal Company and Subsidiaries
Condensed Consolidated Balance Sheets
- ------------------------------------------------------------------------------------------------------
(Unaudited)
March 31, 1999 December 31, 1998
- ------------------------------------------------------------------------------------------------------
(in thousands)
<CAPTION>
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 56,858 $ 84,073
Receivables:
Trade 853 2,566
Terminated pension plan, net 500 500
Other 1,250 2,730
- -----------------------------------------------------------------------------------------------------
2,603 5,796
Other current assets 1,265 691
- -----------------------------------------------------------------------------------------------------
Total current assets 60,726 90,560
- -----------------------------------------------------------------------------------------------------
Property, plant and equipment:
Land and mineral rights 10,990 10,990
Plant and equipment 96,269 94,989
- -----------------------------------------------------------------------------------------------------
107,259 105,979
Less accumulated depreciation and depletion 69,395 69,029
- -----------------------------------------------------------------------------------------------------
37,864 36,950
Investment in independent power projects 45,425 62,386
Investment in Dominion Terminal Associates (DTA) 5,207 5,475
Workers' compensation bond 4,187 4,140
Prepaid pension cost 3,803 3,748
Excess of trust assets over pneumoconiosis benefit
obligation 9,911 10,891
Security deposits 10,148 -
Other assets 1,190 1,456
- -----------------------------------------------------------------------------------------------------
Total Assets $ 178,461 $ 215,606
=====================================================================================================
(Continued)
See accompanying Notes to Condensed Consolidated Financial Statements.
<PAGE>
Westmoreland Coal Company and Subsidiaries
Condensed Consolidated Balance Sheets (Continued)
- ------------------------------------------------------------------------------------------------------
(Unaudited)
March 31, 1999 December 31, 1998
----------------------------------------------------------------------------------------------------
(in thousands)
Liabilities and Shareholders' Equity
Current liabilities:
Current installments of long-term debt $ 216 $ 200
Accounts payable and accrued expenses 7,702 11,249
Workers compensation 3,200 3,800
Postretirement medical costs 11,066 11,066
Reorganization expenses 1,670 7,900
Consent judgment payment obligation - 39,006
Reclamation costs 100 100
Income taxes 75 2,185
----------------------------------------------------------------------------------------------------
Total current liabilities 24,029 75,506
----------------------------------------------------------------------------------------------------
Long-term debt, less current installments 1,313 1,562
Accrual for workers compensation 17,426 17,338
Accrual for postretirement medical costs 76,174 73,143
1974 UMWA Pension Plan obligations 12,726 13,776
Accrual for reclamation costs, less current portion 3,046 3,046
Other liabilities 1,757 2,370
Minority interest 7,246 7,020
Commitments and contingent liabilities
Shareholders' equity
Preferred stock of $1.00 par value
Authorized 5,000,000 shares;
Issued and outstanding 575,000 shares 575 575
Common stock of $2.50 par value
Authorized 20,000,000 shares;
Issued and outstanding 7,059,663 shares 17,649 17,413
Other paid-in capital 94,783 94,630
Accumulated deficit (78,263) (90,773)
----------------------------------------------------------------------------------------------------
Total shareholders' equity 34,744 21,845
----------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 178,461 $ 215,606
====================================================================================================
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
<PAGE>
<TABLE>
Westmoreland Coal Company and Subsidiaries
Consolidated Statements of Income
- ------------------------------------------------------------------------------------------------------
(Unaudited)
Three Months Ended March 31, 1999 1998
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(in thousands except per share data)
<CAPTION>
<S> <C> <C>
Revenues:
Coal $ 8,559 $ 12,252
Independent power - equity in earnings 22,591 4,793
DTA - (share of losses) (321) (83)
- ------------------------------------------------------------------------------------------------------
30,829 16,962
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Costs and expenses:
Cost of sales - coal 7,293 10,347
Depreciation, depletion and amortization 366 455
Selling and administrative 4,675 1,411
Heritage costs 5,595 4,151
Pension benefit (55) (53)
Doubtful account recoveries (8) (113)
- ------------------------------------------------------------------------------------------------------
17,866 16,198
Operating income 12,963 764
Other income (expense):
Gains on sales of assets 19 136
Interest expense (301) (55)
Interest income 524 -
Minority interest (226) (317)
Other income (expense) (424) 1,556
- ------------------------------------------------------------------------------------------------------
Income from continuing operations before reorganization items and
income taxes 12,555 2,084
Reorganization legal and consulting fees - (659)
Reorganization interest income - 637
Income taxes (45) -
- ------------------------------------------------------------------------------------------------------
Net income 12,510 2,062
Less preferred stock dividends (1,222) (1,222)
- ------------------------------------------------------------------------------------------------------
Net income applicable to common shareholders $ 11,288 $ 840
======================================================================================================
Net income per share applicable to common shareholders $ 1.62 $ .12
Weighted average number of common shares outstanding 6,980 6,965
======================================================================================================
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
<PAGE>
<TABLE>
Westmoreland Coal Company and Subsidiaries
Consolidated Statements of Cash Flows
- ----------------------------------------------------------------------------------------------------------------------------
(Unaudited)
Three Months Ended March 31, 1999 1998
---------------------------------------------------------------------------------- -------------------- -------------------
(in thousands)
<CAPTION>
<S> <C> <C>
Cash flows provided by operating activities:
Net income $ 12,510 $ 2,062
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Equity earnings from independent power projects (22,591) (4,793)
Cash received from independent power projects 39,512 3,886
Equity in losses from DTA 321 83
Cash generated by DTA 383 826
Cash contributions to DTA (436) (541)
Depreciation, depletion and amortization 366 455
Gain on disposition of assets (19) (136)
Pension termination receivable, net - 12,540
Minority interest 226 317
Other (268) (86)
Changes in assets and liabilities:
Accounts receivable, net of allowance for doubtful accounts 3,193 579
Workers' compensation bond (47) 701
Prepaid pension asset (55) (52)
Excess of trust assets over pneumoconiosis benefit obligation 980 50
Security deposits (10,148) -
Accounts payable and accrued expenses (3,547) (1,467)
Income tax payable (2,110) -
Accrual for workers compensation (512) -
Accrual for postretirement medical costs 3,031 -
Accrual for reorganization expenses (6,230) -
Consent judgment payment obligation (39,006) -
Other liabilities (613) -
1974 UMWA Pension Plan obligations (1,050) -
---------------------------------------------------------------------------------- -------------------- -------------------
Net cash provided by (used in) operating activities before reorganization items (26,110) 14,424
---------------------------------------------------------------------------------- -------------------- -------------------
Changes in reorganization items - 3,331
---------------------------------------------------------------------------------- -------------------- -------------------
Net cash provided by (used in) operating activities (26,110) 17,755
---------------------------------------------------------------------------------- -------------------- -------------------
Cash flows provided by (used in) investing activities:
Fixed asset additions (1,280) (75)
Net proceeds from sales of assets 19 161
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Net cash provided by (used in) investing activities (1,261) 86
---------------------------------------------------------------------------------- -------------------- -------------------
Cash flows provided by (used in) financing activities:
Repayment of long-term debt (233) (47)
Issuance of common stock 389 -
---------------------------------------------------------------------------------- -------------------- -------------------
Net cash provided by (used in) financing activities 156 (47)
---------------------------------------------------------------------------------- -------------------- -------------------
Net increase (decrease) in cash and cash equivalents (27,215) 17,794
Cash and cash equivalents, beginning of period 84,073 30,664
================================================================================== ==================== ===================
Cash and cash equivalents, end of period $ 56,858 $ 48,458
================================================================================== ==================== ===================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 5,195 $ 27
Taxes $ 2,110 -
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
<PAGE>
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/A for the year
ended December 31, 1998. 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"). By order of the Bankruptcy Court
entered on December 23, 1998, pursuant to the request of the Debtor
Corporations, the Chapter 11 Cases were dismissed. There were no objections
during the ten day stay period that expired on January 4, 1999. Upon the
dismissal, the Debtor Corporations were and are no longer subject to the
protections afforded or restrictions imposed by the Bankruptcy Code.
2. Contingencies
Westmoreland Energy, Inc. ("WEI") - WEI Project Contingencies
Southampton Project - In October, 1998, the Southampton Partnership and Virginia
Power Company entered into a settlement agreement of their administrative
proceeding before the Federal Energy Regulatory Commission concerning the
project's compliance with Qualifying Facility ("QF") criteria and payments
arising out of plant performance in 1992. The settlement provided for, among
other items, payments by the Southampton Partnership to Virginia Power of
$1,000,000 annually for the years 1999-2001, followed by a reduction in capacity
payments from Virginia Power to the Southampton Partnership of $500,000 for the
years 2002-2008. Following 2008, Virginia Power may elect to terminate its power
purchases from the Southampton Partnership or continue to receive the $500,000
annual reduction in capacity payments for the remainder of the power purchase
agreement. The settlement was approved by the FERC.
Resolution of the FERC QF issue provides the Southampton Partnership an answer
about QF status in 1992, regulatory certainty regarding application of the
Federal Power Act to both the Southampton project and the upstream partners and
owners, including WEI and Westmoreland, and assuming continued compliance with
loan covenants and appropriate project financial performance, the ability to
distribute earnings to the project partners.
A limited partner of LG&E-Southampton, L.P. has made a demand on the Southampton
Partnership and related LG&E and Westmoreland entities for reimbursement in the
amount of $1,979,000 in connection with its share of the settlement. The
Westmoreland entities have made a similar demand against the LG&E entities.
<PAGE>
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 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 March, 1999, Virginia Power withheld approximately
$15,200,000 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 commenced litigation against Virginia Power seeking damages,
contending that Virginia Power breached the Power Purchase Agreement in
withholding such payments. The case was tried beginning on October 26, 1998 in
the Circuit Court of the City of Richmond, Virginia. On December 2, 1998, the
Court entered judgment in the ROVA Partnership's favor for the amount of
$14,800,000 plus interest for a total of $19,336,214. On December 21, 1998,
Virginia Power posted its appeal bond and on December 29, 1998, noted its appeal
of the Court's decision to the Virginia Supreme Court. The Court has not
indicated whether it will hear the appeal. Due to the uncertainty of the appeal,
the financial statements do not reflect any portion of this judgment.
Rensselaer - On March 15, 1999, LG&E-Westmoreland Rensselaer ("LWR") completed
the sale of the Rensselaer Project to Fulton Cogeneration Associates, L.P.
("Fulton"). LWR received approximately $68,000,000 in cash as consideration for
the sale of the Rensselaer plant and operating contracts. After payment of
expenses and remaining debts, Westmoreland Energy Inc.'s share of the proceeds
was approximately $33,000,000.
Other
In accordance with a Master Agreement entered into among the Company, the UMWA
Health and Benefit Funds, the Official Committee of Equity Security Holders, and
the United Mine Workers of America ("UMWA"), pursuant to which the parties
supported Westmoreland's dismissal from bankruptcy, the Company agreed to pay
"the reasonable and necessary professional fees and expenses of the Equity
Committee professionals, Andrews and Kurth, L.L.P. and Putnam Hayes and
Bartlett, for services rendered in connection with the Chapter 11 cases". The
Company paid a large portion of those fees but has disputed and not paid
remaining amounts which total approximately $488,000.
On April 7, 1999, Andrews & Kurth, L.L.P. and Putnam Hayes and Bartlett filed
suit in District court in the State of Colorado seeking payment of the amounts
allegedly owed. The Company believes the charges were not reasonable and
necessary in accordance with the Bankruptcy Code and the Master Agreement and
will vigorously contest the case. The likely outcome of the dispute is unknown
at this time. The Company accrued the entire amount demanded on its records at
December 31, 1998.
<PAGE>
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 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 the requirements of
Delaware law, described below, 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 eighteen quarterly dividends which are accumulated
but unpaid (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, October 1, 1998, January 1, 1999, and April
1, 1999) amount to $21,994,000 in the aggregate ($38.25 per preferred share or
$9.56 per depositary share). Common stock dividends may not be declared until
the preferred stock dividends that are accumulated but unpaid are made current.
On March 10, 1999, the Company offered to purchase up to 1,052,631 depositary
shares, each representing one quarter of a share of its Series A Convertible
Exchangeable Preferred Stock. The offer price of $19 per share is in full
satisfaction of claims to accumulated but unpaid dividends on the depositary
shares tendered. On April 7, 1999, the offer expired and 1,683,903 depositary
shares were tendered in response to the offer. Because the number of shares
tendered exceeded the maximum number of shares offered, a proration factor of
approximately 62.5% was applied to all shares tendered. A total of 1,052,631
depositary shares were purchased for $20,000,000. The balance sheet effect of
this transaction will be to reduce cash and shareholders' equity by $20,000,000.
At the same time, total preferred shares outstanding will be reduced from
575,000 shares to 311,842, accumulated but unpaid dividends to $11,928,000, and
the ongoing quarterly preferred dividend will be reduced from $1,222,000 to
$663,000.
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 at March 31, 1999). The Company
had shareholders' equity at March 31, 1999 of $34,744,000 and the par value of
all outstanding depositary shares and shares of common stock aggregated
$18,224,000 at March 31, 1999.
The Company is also subject to certain financial ratio tests under the terms of
the Master Agreement, compliance with which is secured by a $12 million
contingency note, and is prohibited in any event from payment of dividends,
either common or preferred, until after June 30, 1999.
4. BUSINESS SEGMENT INFORMATION
The Company's operations have been classified into three segments: coal,
independent power operations and terminal operations. The coal segment includes
the production and sale of coal from the Powder River Basin in eastern Montana.
The independent power operations includes the ownership of interests in
cogeneration and other non-regulated independent power plants. The terminal
operation segment consists of the leasing of capacity at Dominion Terminal
Associates, a coal storage and vessel loading facility. Summarized financial
information by segment for the quarters ending March 31, 1999 and 1998 is as
follows:
<PAGE>
<TABLE>
--------------------------------------- -------------- ----------------- ---------------- --------------- ----------------
Independent Power Terminal
Coal Operations Operations Corporate Total
--------------------------------------- -------------- ----------------- ---------------- --------------- ----------------
(in thousands)
March 31, 1999
<CAPTION>
<S> <C> <C> <C> <C> <C>
Revenues $ 8,559 $ 22,591 $ (321) $ - $ 30,829
Operating income (loss) 1,011 21,751 (724) (9,075) 12,963
Total assets 52,570 81,226 6,396 38,269 178,461
Reconciliation of operating income to income from continuing operations before
income taxes:
Operating income (loss) 1,011 21,751 (724) (9,075) 12,963
Gains on sale of assets - - - 19 19
Interest expense (36) - - (265) (301)
Interest income 134 237 3 150 524
Minority interest (226) - - - (226)
Other income (expense) (7) (485) 28 40 (424)
======================================= ============== ================= ================ =============== ================
Income (loss) from continuing
operations before income taxes $ 876 $ 21,503 $ (693) $ (9,131) $12,555
======================================= ============== ================= ================ =============== ================
March 31, 1998
Revenues $ 12,252 $ 4,793 $ (83) $ - $16,962
Operating income (loss) 1,281 4,300 (504) (4,313) 764
Total assets 52,123 75,281 20,374 38,420 186,198
Reconciliation of operating income to income from continuing operations before
income taxes:
Operating income (loss) 1,281 4,300 (504) (4,313) 764
Gains on sale of assets - - - 136 136
Interest expense (41) (7) - (7) (55)
Interest income 150 239 5 243 637
Minority interest (317) - - - (317)
Other income (expense) 6 (57) 24 1,583 1,556
Reorganization costs (61) (53) (48) (497) (659)
======================================= ============== ================= ================ =============== ================
Income (loss) from continuing
operations before income taxes $ 1,018 $ 4,422 $ (523) $ (2,855) $ 2,062
======================================= ============== ================= ================ =============== ================
</TABLE>
<PAGE>
Item 2
Management's Discussion and Analysis of Financial Condition
and Results of Operations
- --------------------------------------------------------------------------------
Material Changes in Financial Condition From December 31, 1998 to March 31, 1999
Forward-Looking Disclaimer
Certain statements in this report which are not historical facts or information
are "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,
including, but not limited to, the information set forth in Management's
Discussion and Analysis of Financial Condition and Results of Operations. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, levels of activity,
performance or achievements of the Company, or industry results, to be
materially different from any future results, levels of activity, performance or
achievements expressed or implied by such forward-looking statements. Such
factors include, among others, the following: general economic and business
conditions; the ability of the Company to implement its business strategy; the
Company's access to financing; the Company's ability to successfully identify
new business opportunities; the Company's ability to achieve anticipated cost
savings and profitability targets; changes in the industry; competition; the
Company's ability to utilize its tax net operating losses; the ability to
reinvest excess cash at an acceptable rate of return; weather conditions; the
availability of transportation; price of alternative fuels; costs of coal
produced by other countries; the effect of regulatory and legal proceedings and
other factors discussed in Item 1 of the Company's Form 10-K/A. As a result of
the foregoing and other factors, no assurance can be given as to the future
results and achievement of the Company. Neither the Company nor any other person
assumes responsibility for the accuracy and completeness of these statements.
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
protection under Chapter 11 of the Bankruptcy Code on December 23, 1996. On
December 23, 1998, the Bankruptcy Court granted the Debtors' Motion to Dismiss
the cases. The automatic stay period pursuant to the Federal Rules of Bankruptcy
Procedure expired on January 4, 1999.
Continued financial improvement of the Debtors during the bankruptcy provided
the basis for dismissal and settlement with the UMWA Health and Benefit Funds
("Funds"), the Company's principal creditors. On October 15, 1998, the Company,
the Funds, the United Mine Workers of America ("UMWA") and the Official
Committee of Equity Security Holders ("Equity Committee") reached agreement on a
settlement term sheet, which contained the principal terms of an agreement among
them and provided for, among other things, the resolution of the Chapter 11
cases. The agreement, which facilitated a consensual dismissal of the bankruptcy
cases, 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 agreement was subsequently documented
in certain stipulated judgments and in a Master Agreement among the Company, the
Funds, the UMWA, and the Equity Committee. 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 Debtor Corporations
filed motions requesting approval of the consent judgments on or around November
18, 1998. Notices of the filing of these motions were mailed to creditors as
directed by the Bankruptcy Court. There were no allowable objections and
dismissal of the Chapter 11 Cases occurred on December 23, 1998. The Master
Agreement was executed on January 29, 1999.
<PAGE>
Liquidity and Capital Resources
Cash used in operating activities was $26,110,000 for the three months ended
March 31, 1999. Cash provided by operating activities was $17,755,000 for the
same period in 1998. The decrease in the three months ending March 31, 1999
compared to the same period in 1998 is a result of approximately, $52,000,000 of
payments related to the bankruptcy dismissal that occurred on January 4, 1999 as
well as approximately $10,000,000 of security deposits required under the Master
Agreement. Offsetting the large dismissal payment and security deposits was the
receipt of approximately $33,000,000 relating to the sale of the Rensselaer
project. During the quarter ended March 31, 1998, the Company received
approximately $12,500,000 from the termination of its overfunded salaried
pension plan.
Cash used in investing activities was $1,261,000 for the three months ended
March 31, 1999. This is the result of additions to property, plant and equipment
of $1,280,000, offset by proceeds from sales of Virginia Division assets of
$19,000. Cash provided by investing activities for the three months ending March
31, 1998 was $86,000, all of which was received from the sale of idled Virginia
Division assets.
Cash provided by financing activities was $156,000 for the three months ending
March 31, 1999. Cash used in financing activities for the same period in 1998
totaled $47,000. Cash provided in 1999 is primarily related to the issuances of
stock and the exercise of stock options offset by repayment of debt at WRI.
Consolidated cash and cash equivalents at March 31, 1999 totaled $56,858,000
(including $13,891,000 at WRI.) At December 31, 1998, cash and cash equivalents
totaled $84,073,000 (including $14,712,000 at WRI). The cash at WRI, an
80%-owned subsidiary, is available to the Company only through dividends. In
addition, the Company had restricted cash, which was not classified as cash or
cash equivalents, of $14,335,000 at March 31, 1999 and $4,140,000 at December
31, 1998. The restricted cash represents interest-bearing cash deposit accounts
which collateralize the Company's Contingent Note ($6,000,000) required by the
Master Agreement and the surety bond for the security required by the 1992 UMWA
Benefit Plan ($4,148,000), as well as $4,187,000 that collateralizes the
outstanding surety bonds for its workers compensation self-insurance programs.
The Company also has $8,000,000 in interest-bearing debt reserve accounts for
certain of the Company's independent power projects. This cash is restricted as
to its use and is classified as part of the investment in independent power
projects. In addition, there is a surplus in the Company's pneumoconiosis trust
of approximately $9,911,000, that may be available to pay postretirement health
benefits dependent upon future actuarial calculations.
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 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 the requirements of
Delaware law, described below, 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 eighteen quarterly dividends which are accumulated
but unpaid (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, October 1, 1998, January 1, 1999, and April
1, 1999) amount to $21,994,000 in the aggregate ($38.25 per preferred share or
$9.56 per depositary share). Common stock dividends may not be declared until
the preferred stock dividends that are accumulated but unpaid are made current.
<PAGE>
On March 10, 1999, the Company offered to purchase up to 1,052,631 depositary
shares, each representing one quarter of a share of its Series A Convertible
Exchangeable Preferred Stock. The offer price of $19 per share is in full
satisfaction of claims to accumulated but unpaid dividends on the depositary
shares tendered. On April 7, 1999, the offer expired and 1,683,903 depositary
shares were tendered in response to the offer. Because the number of shares
tendered exceeded the maximum number of shares offered, a proration factor of
approximately 62.5% was applied to all shares tendered. A total of 1,052,631
depositary shares were purchased for $20,000,000. The balance sheet effect of
this transaction will be to reduce cash and shareholders' equity by $20,000,000.
At the same time, total preferred shares outstanding will be reduced from
575,000 shares to 311,842, accumulated but unpaid dividends to $11,928,000, and
the ongoing quarterly preferred dividend will be reduced from $1,222,000 to
$663,000.
The use of cash to pay dividends or redeem equity securities is restricted under
the Master Agreement. Except for the $20,000,000 tender offer referred to above,
the Company may not redeem any equity security for cash or make any cash
distributions to preferred or common shareholders for any purpose prior to June
30, 1999. Thereafter, covenant limitations included in the Master Agreement
regarding liquidity, operating cash flow and debt coverage could restrict the
amount of cash available for dividends through 2005.
There are also 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 at March 31, 1999). The Company
had shareholders' equity at March 31, 1999 of $34,744,000 and the par value of
all outstanding depositary shares and shares of common stock aggregated
$18,224,000 at March 31, 1999.
Going forward the Company's Board of Directors will review the payment of
quarterly preferred stock dividends, the preferred stock dividends which are
accumulated but unpaid, and common stock dividends, in light of the above
restrictions and consideration of the shareholders' best interests.
Liquidity Outlook
The major factors impacting the Company's liquidity outlook are its significant
"heritage costs" and its ongoing and future business needs. These heritage costs
consist primarily of cash payments for postretirement medical benefits, workers'
compensation costs and UMWA pension benefits. The Company also is obligated for
pension and pneumoconiosis benefits; however, both of these future obligations
have a funding surplus at present. The Company has ongoing cash expenditures of
approximately $16,000,000 per year for postretirement medical benefits which
will remain fairly constant over the next five years and then decline to zero
over the next approximately thirty-seven years. In addition, the Company has
cash expenditures of approximately $3,000,000 per year for workers' compensation
benefits which will steadily decline to zero over the next approximately twenty
years. Since the UMWA pension plan is a multiemployer plan under ERISA, a
contributing company is liable for its share of unfunded vested liabilities upon
termination or withdrawal from the plan. The Company believes the plan was fully
funded at the time of the Company's withdrawal in 1998. However, the plan has
asserted a claim of $13,800,000, which the Company vigorously contests. The
Company is contesting this amount through arbitration, as provided under ERISA.
In accordance with the Multiemployer Pension Plan Amendments Act of 1980, the
Company has made monthly principal and interest payments to the plan while it
pursues its rights and will continue to make such monthly payments until
arbitration is completed. Depending upon the results of arbitration, the Company
may be entitled to a refund or it could pay any remaining obligation over no
more than nine and one half years.
<PAGE>
Under the Coal Act, the Company is required to provide postretirement medical
benefits for UMWA miners by making premium payments into three benefit plans:
(i) the UMWA Combined Benefit Fund (the "Combined Fund"), a multiemployer plan
which benefits miners who retired before January 1, 1976 or who retired
thereafter but whose last employer did not provide benefits pursuant to an
operator-specific Individual Employer Plan ("IEP"), (ii) an IEP for miners who
retired after January 1, 1976 and (iii) the 1992 UMWA Benefit Plan, a
multiemployer plan which benefits (A) miners who were eligible to retire on
February 1, 1993, who did retire on or before September 30, 1994 and whose
former employers are no longer in business, (B) miners receiving benefits under
an IEP whose former employer goes out of business and ceases to maintain the
IEP, and (C) new spouses or new dependents of retirees in the Combined Fund who
would be eligible for coverage thereunder but for the fact that the Combined
Fund closed to new beneficiaries as of July 20, 1992. The premiums paid by the
Company cover its own retirees and its allocated portion of the pool of retired
miners whose previous employers have gone out of business.
The Company, as a result of its improved financial position and subsequent
dismissal from bankruptcy, satisfied all of its premium obligations to the
Combined Fund through the end of 1998, and made a prepayment to the Combined
Fund for its premiums for the first quarter of 1999. The payment was made on
January 4, 1999.
In addition, the Coal Act authorized the Trustees of the 1992 UMWA Benefit Plan
to implement security provisions pursuant to the Act. In 1995, the Trustees
issued security provisions which give contributors to the Plan several options
for satisfying the Coal Act's security requirements, and set the level of
security to be provided by the Company at approximately $21,000,000. The Company
secured its obligation to provide retiree health benefits under the 1992 Plan by
posting a bond in the amount of three years benefits (or $20.8 million). The
amount to be secured and the bond amount will be reviewed and adjusted on an
annual basis.
The Company's current principal sources of cash flow include cash distributions
from its independent power projects, dividends from WRI, cash from operations of
DTA and interest earned on its cash reserves. In addition, the Company will
receive its share of the judgment in the ROVA litigation if VEPCO's appeal to
the Virginia Supreme Court is unsuccessful and will review a possible
distribution from the overfunded pneumoconiosis trust. Management believes that
cash generated from these sources and cash reserves should be sufficient to pay
the Company's heritage costs and fund its ongoing operations and other capital
requirements for the foreseeable future.
Capital commitments include a requirement to spend up to a total of $4,800,000
to repair the dragline at WRI. Approximately $2,000,000 was expended in 1998
with the remainder to be expended in 1999. The Company has undertaken to spend
these amounts in order to assure continued, uninterrupted production at WRI, but
the Company believes the obligation to repair the dragline is solely
Morrison-Knudsen's and, therefore, is in discussion with them on this and a
variety of matters, including enforcement of the Company's right to require
Morrison-Knudsen to pay for the repair.
The Company hopes to further improve its long-term liquidity in a number of
ways, including the development of additional cash flow from existing and new
business operations, selling the remaining Virginia Division assets and
monetizing assets where proceeds on sale would exceed the expected return from
continued operation. The Company also plans to seek further cost reductions
wherever feasible and prudent, and attempt to reduce certain postretirement
medical, workers' compensation and related payments. The Company is also
monitoring certain legislative developments, such as the proposed inclusion of
prescription drug costs under Medicare coverage, which could significantly
reduce the Company's retiree health care expenses. Although management expects
to improve the Company's profitability, the time required to realize such
increases cannot be estimated at this time nor can assurances be given that the
Company can achieve any such improvements.
<PAGE>
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, may
be affected. This includes equipment used by our customers and suppliers, as
well as the Company's independent power projects.
Some 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 replacements, modifications, and testing.
One of the independent power projects recently completed Y2K testing. The
project operated normally with only minor errors in the reporting process.
Similar test methods will be used at the remaining projects with a scheduled
completion date of September 30, 1999, for testing at all facilities. A number
of critical systems and components at all of the projects have been replaced or
will be replaced or modified with scheduled completion dates near mid-year,
1999.
Computer systems at WRI's coal operations have been or will be replaced or
appropriately modified by mid-1999. WRI's mining contractor and rail supplier
have embarked on aggressive campaigns to bring their systems into compliance and
the Company is carefully monitoring those activities.
Compliance at Dominion Terminal Associates ("DTA") has been nearly completed
through replacement of non-compliant systems. Efforts to upgrade the few
remaining systems will be completed by mid-1999. The terminal is dependent on
efficient and timely rail service and DTA is closely monitoring the compliance
efforts of the terminal's rail service providers.
The nature of the Company's operations make substantive contingency plans
extremely difficult. No reasonable alternatives exist for the inability of the
railroads to provide timely service to WRI and the DTA terminal. As previously
mentioned, the Company is closely following the compliance efforts of the
railroads and other major suppliers.
Based on information currently available, it is estimated that the costs to
replace and modify Company systems to achieve Y2K compliance will not exceed
$125,000, of which approximately $5,000 has been incurred through March 31,
1999.
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.
<PAGE>
The foregoing constitutes a "forward-looking statement" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. 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 March 31, 1999 Compared to Quarter Ended March 31, 1998.
Revenues for the quarter ending March 31, 1999 were $30,829,000 compared to
$16,962,000 for the quarter ending March 31, 1998. The increase is due to the
recognition of a gain of approximately $17,000,000 from the sale of the
Rensselaer project, offset by lower coal sales at WRI due to scheduled
maintenance at a large customer's plant. Equity in losses at DTA were higher in
the first quarter of 1999 compared to the first quarter of 1998 because of a
decrease in throughput volumes.
Costs and expenses for the quarter ending March 31, 1999 were $17,866,000
compared to $16,198,000 for the quarter ending March 31, 1998. The increase is
due to a decline in the overfunded pneumoconiosis trust of approximately
$980,000 as a result of bond market changes, $2,600,000 of bonuses paid to
employees, and approximately $700,000 of Workers Compensation expense and bond
procurement fees, offset by reduced coal contract mining costs of $3,030,000 due
to the decrease in sales volume at WRI mentioned above.
Gains of $19,000 and $136,000 on the sales of assets during the first quarter of
1999 and 1998 resulted from the sale of various pieces of equipment from the
Company's idled Virginia Division.
Interest income for the quarters ending March 31, 1999 and March 31, 1998 was
$524,000 and $637,000, respectively. The decline is due to the reduction in cash
as a result of the payment of all bankruptcy related pre-petition liabilities on
January 4, 1999.
Other expense for the quarter ending March 31, 1999, relates primarily to
miscellaneous asset management costs of $548,000 at WEI, net of management fee
income of $109,000 from the independent power projects. Other income for the
quarter ending March 31, 1998 included a $711,000 gain relating to the buyout of
a royalty agreement and the recognition of a $854,000 gain relating to the
resolution of a tax escrow account established in conjunction with a previous
sale of property.
<PAGE>
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 3
DEFAULTS UPON SENIOR SECURITIES
- --------------------------------------------------------------------------------
See Note 3 "Capital Stock" 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 February 4, 1999, the Company filed a report on Form 8-K announcing that
it had successfully emerged from bankruptcy.
c) On March 24, 1999, the Company filed a report on Form 8-K announcing that
it had completed the sale of all of its remaining interest in its
cogeneration project in Rensselaer, New York.
Signatures
- --------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WESTMORELAND COAL COMPANY
Date: May 17, 1999 /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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