SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A No. 2
Amendement No. 2
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______ .
Commission File No. 0-752
WESTMORELAND COAL COMPANY
-------------------------
(Exact name of registrant as specified in its charter)
Delaware 23-1128670
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14th Floor, 2 North Cascade Avenue, Colorado Springs, CO 80903
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (719) 442-2600
Securities registered pursuant to Section 12(b) of the Act:
NAME OF STOCK EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- ------------------- ----------------------
Common Stock, par value $2.50 per share
Depositary Shares, each representing a
one-quarter share of Series A Convertible
Exchangeable Preferred Stock
Preferred Stock Purchase Rights
Securities registered pursuant to Section 12(g) of the Act:
NAME OF STOCK EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- -------------------- ----------------------
Series A Convertible Exchangeable
Preferred Stock, par value $1.00 per share
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, and (2) has been subject to such filing requirements
for the past 90 days.
Yes [X] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
[X]
The aggregate market value of voting stock held by non-affiliates as of February
1, 1999 is estimated to be $62,957,000.
There were 6,965,328 shares outstanding of the registrant's Common Stock, $2.50
Par Value (the registrant's only class of common stock), as of February 1, 1999.
There were 2,300,000 depository shares, each representing one quarter of a share
of the registrant's Series A Convertible Exchangeable Preferred Stock, $1.00 par
value per preferred share, outstanding as of February 1, 1999.
The following documents have been incorporated by reference into the parts of
this Form 10-K (i.e. Part I, Part II, etc.) indicated in parentheses:
Definitive proxy statement to be filed not later than 120 days after the end of
the fiscal year covered by this Form 10-K. (Part III)
WESTMORELAND COAL COMPANY
Form 10-K
annual report
Table of Contents
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Item Page
Part I
1 Business----------------------------------------------------------------1
2 Properties--------------------------------------------------------------8
3 Legal Proceedings-------------------------------------------------------9
4 Submission of Matters to a Vote of Security Holders--------------------11
Part II
5 Market for Registrant's Common Equity and Related Stockholder Matters--13
6 Selected Financial Data------------------------------------------------15
7 Management's Discussion and Analysis of Financial Condition and
Results of Operations--------------------------------------------------16
8 Financial Statements and Supplementary Data----------------------------26
9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure---------------------------------------------------70
Part III
10 Directors and Executive Officers of the Registrant---------------------70
11 Executive Compensation-------------------------------------------------70
12 Security Ownership of Certain Beneficial Owners and Management---------70
13 Certain Relationships and Related Transactions------------------------70
Part IV
14 Exhibits, Financial Statement Schedule, and Reports on Form 8-K--------71
Signatures--------------------------------------------------------------------75
<PAGE>
PART I
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ITEM 1 - BUSINESS
The Company's principal activities are: (i) the production and sale of coal from
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. Refer to Item 8 - Financial Statements and Supplementary Data
for more information regarding the Company's operating segments.
On December 23, 1996, the Company and four of its subsidiaries filed voluntary
petitions for protection under Chapter 11 of the United States Bankruptcy Code
in the United States Bankruptcy Court for the District of Colorado. Upon the
Company's motion, these cases were dismissed on December 23, 1998. These
petitions and the dismissal are described more fully in Item 3 - Legal
Proceedings.
COAL OPERATIONS
Coal Production
Westmoreland Resources, Inc. ("WRI"). WRI is owned 80% by the Company and 20% by
Morrison Knudsen Corporation who also mines the coal on a contract basis. It
operates one large surface mine on approximately 15,000 acres of subbituminous
coal reserves in the Powder River Basin. WRI shipped 6,458,000 tons, 7,051,000
tons, and 4,668,000 tons of coal in 1998, 1997 and 1996, respectively. The
Company received no dividends from WRI in 1998 and 1997 due to Bankruptcy Code
restrictions regarding the payment of dividends. The Company received cash
dividends from WRI of $2,222,000 in 1996. Transportation is arranged and charges
are paid by WRI's customers.
Virginia Division. The Company's remaining Virginia Division operations, all of
which are idled, include a preparation plant and a transloading facility. No
tons were shipped from the Virginia Division during 1998. The Virginia Division
shipped 8,000 tons and 553,000 tons of coal in 1997 and 1996, respectively,
including coal produced by independent contractors and purchased coal. The
Company idled the Virginia Division in 1995, has sold most of its assets, and is
currently marketing the few remaining assets. Asset sales in 1998 resulted in
proceeds, before selling costs, of approximately $511,000. Additional asset
sales could result in further recoveries.
<PAGE>
The following tables show, for each of the past five years, tons sold and
revenues derived from Company and unaffiliated production as well as revenues
from domestic and export activities. Included in Company Produced tonnages below
are amounts purchased from non-Company properties, but processed through
Company-owned facilities. No such tons have been purchased since 1996.
<TABLE>
Coal Sales in Tons (tons in 000's)
- ------------------------------ ---------------------------- ---------------------------- ---------------------------
Year Total Company Produced Sold for Others
- ------------------------------ ---------------------------- ---------------------------- ---------------------------
<CAPTION>
<S> <C> <C> <C>
1998 6,458 6,458 -
1997 7,059 7,059 -
1996 5,221 4,668 553
1995 7,063 6,590 473
1994 14,815 12,031 2,784
- ------------------------------ ---------------------------- ---------------------------- ---------------------------
Coal Revenues ($'s in 000's)
- ------------------------------ ---------------------------- ---------------------------- ---------------------------
Year Total Company Produced Sold for Others
- ------------------------------ ---------------------------- ---------------------------- ---------------------------
1998 44,010 44,010 -
1997 47,182 47,182 -
1996 44,152 32,554 11,598
1995 109,114 92,992 16,122
1994 370,166 286,970 83,196
- ------------------------------ ---------------------------- ---------------------------- ---------------------------
Coal Revenues ($'s in 000's)
- ------------------------------ ---------------------------- ---------------------------- ---------------------------
Year Total Domestic Export
- ------------------------------ ---------------------------- ---------------------------- ---------------------------
1998 44,010 44,010 -
1997 47,182 47,182 -
1996 44,152 44,152 -
1995 109,114 109,114 -
1994 370,166 340,489 29,677
- ------------------------------ ---------------------------- ---------------------------- ---------------------------
</TABLE>
Approximately 98% of the tonnage sold by the Company in 1998 was pursuant to
contracts at WRI calling for deliveries over a period longer than one year
("long-term contracts"). The table below presents the amount of coal tonnage
sold under long-term contracts for the last five years:
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Sales Under Long-Term
Contracts Tons (000s) %
-----------------------------------------------------------
1998 98%
1997 97%
1996 89%
1995 60%
1994 81%
------------------------------- ---------------------------
WRI's customers accounted for all of the Company's 1998 coal revenues and tons
sold.
<PAGE>
The following table presents total sales tonnage under existing long-term
contracts for the next five years from the Company's mining operations (all from
WRI):
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Projected Sales Tonnage Under
Existing Long-Term Contracts (000s)
-------------------------------------------------------------
1999 6,200
2000 3,700
2001 3,700
2002 3,700
2003 3,700
-------------------------------- ----------------------------
In 1998, the three largest customers of the Company accounted for 93% of its
coal revenues. Northern States Power, Otter Tail Power and Western Fuels
Association accounted for 43%, 26% and 24%, respectively, of the Company's coal
revenues. No other customer accounted for as much as 10% of the Company's 1998
coal revenues. The long-term contract with WRI's largest customer, Northern
States Power, expires in 2005 and the long-term contract with Otter Tail Power
expires at the end of 1999. The Company anticipates replacing sales as contracts
expire with new contracts or spot sales.
WRI has also entered into an option agreement whereby it has agreed to sell up
to an additional 200,000,000 tons of coal to Northern States Power. As
compensation for granting the option, WRI receives 1 1/4 cents, payable
quarterly (with applicable price adjustments) for each optioned ton. The option
may be exercised at any time in whole or in part through December 31, 2005. If
exercised, the sales price will be based on the market price at the time the
option is exercised. WRI recorded income totaling $3,171,000, $3,128,000, and
$3,067,000 during 1998, 1997 and 1996, respectively, relative to the option
agreement. No coal has been delivered under the option agreement.
INDEPENDENT POWER OPERATIONS
Westmoreland Energy, Inc. ("WEI") owns and manages interests in independent
power projects. WEI, through various subsidiaries, has interests in eight such
power projects, all of which are currently operational. Each project has a
single power purchaser and steam host. Refer to Note 5 of the Consolidated
Financial Statements for additional information concerning WEI, including
specific project operational statistics.
Independent power projects sell electricity through long term power contracts to
utilities, or in some cases, to large industrial users. There are three types of
independent power projects: cogeneration projects which provide two types of
useful energy (e.g., electricity and steam) sequentially from a single primary
fuel (e.g., coal); small power producers which utilize waste, biomass or other
renewable resources as fuel; and exempt wholesale generators ("EWG") which
provide electrical energy without the requirement to sell thermal energy or use
waste or renewables as fuel sources. WEI has invested in projects that provide
two types of useful energy sequentially from a single primary fuel and in
projects that are exempt wholesale generators. The key elements of an
independent power project are a long-term contract for the sale of electricity,
long-term contracts for the fuel supply, a suitable site, required permits and
project financing. Cogeneration projects require another long-term contract for
the sale of the steam or other thermal energy. The economic benefits of
cogeneration can be substantial because, in addition to generating electricity,
a significant portion of the energy is used to produce steam or high temperature
water (thermal energy) for industrial processes. Electricity is sold to
utilities and in certain situations, to end-users of electrical power, including
large industrial facilities. Thermal energy from the cogeneration plant is sold
to commercial enterprises and other institutions. Large industrial users of
thermal energy include plants in the chemical processing, petroleum refining,
food processing, pharmaceutical, pulp and paper industries.
On June 30, 1998, LG&E - Westmoreland Rensselaer ("LWR"), completed the
restructuring of the Rensselaer Project under the terms of a Master
Restructuring Agreement with Niagara Mohawk. 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, WEI's share of
the remaining consideration was approximately $30 million, which was
subsequently received. The LWR Partnership also entered into a ten year
transition power supply agreement with Niagara Mohawk Power Corporation and
retained ownership of the plant. LWR has recently been negotiating the sale of
the remaining assets of the Rensselaer Project. The prospective purchaser would
acquire the power plant, inventories, environmental permits, and the material
operating contracts. The signing of a definitive purchase agreement could occur
as early as late February, 1999, with closing soon thereafter.
TERMINAL OPERATIONS
Westmoreland Terminal Company, a wholly-owned subsidiary of the Company, owns a
20% interest in Dominion Terminal Associates ("DTA"), the owner of a coal
storage and vessel-loading facility in Newport News, Virginia. DTA's annual
throughput capacity is 22,000,000 tons, with a ground storage capacity of
1,700,000 tons. DTA loaded 11,511,000, 14,075,000, and 16,444,000 tons in 1998,
1997, and 1996, respectively. The Company's portion of these tons was 2,069,000,
2,682,000, and 3,278,000 in 1998, 1997, and 1996, respectively. Prior to 1995,
the terminal was utilized by the Company for most of its coal exporting and
intracoastal business. Presently, the Company leases ground storage space and
vessel-loading capacity and facilities to others and provides related support
services. Refer to Note 6 of the Consolidated Financial Statements for further
information regarding DTA.
GENERAL
Employees and Labor Relations
The Company, including subsidiaries, directly employed 35 people on December 31,
1998, compared with 40 on December 31, 1997. Included in the 1997 figures were 4
employees represented by the United Mine Workers of America ("UMWA"). The
Company had no UMWA employees at December 31, 1998.
The Independent Bituminous Coal Bargaining Alliance ("IBCBA"), an alliance of
four coal companies, including Westmoreland Coal Company, was formed in 1992 to
negotiate wage agreements with the UMWA which became effective on December 16,
1993 (the "1993 Agreement"). The 1993 Agreement expired on August 1, 1998. The
Company is not a party to any subsequent wage agreement with the UMWA. See Note
10 to Consolidated Financial Statements for additional information regarding the
1993 Agreement. Competition
The coal industry is highly competitive and the Company competes (principally on
price and quality of coal) with many other coal producers of all sizes. The
Company's production accounted for less than 1% of coal production in the United
States in 1998. Coal-fired generation was responsible for nearly 60% of all
electricity generated within the United States in 1998.
The Company's steam coal production also competes with other energy sources in
the production of electricity. For example, a significant, but indirect, cause
of lower coal demand in the future in the electric utility sector could be low
natural gas prices which could encourage utilities to meet a substantial portion
of future electricity growth with natural gas-fired capacity additions. Such a
strategy would displace some potential new coal-fired capacity.
The Company's independent power operations face substantial competition from
utilities, unregulated affiliates of utility companies, affiliates of fuel and
equipment suppliers and other independent developers.
Westmoreland Terminal Company is subject to competition from not only domestic
providers of coal transloading services but from international competitors as
well. A significant portion of the coal shipped from DTA is exported to foreign
locations. Coal suppliers from Australia, South Africa, China, Indonesia and a
number of other international suppliers provide similar services.
Mining Safety and Health Legislation
The Company is subject to state and federal legislation including the Federal
Coal Mine Safety and Health Act of 1969 and the 1977 Amendments thereto, which
prescribes mining health and safety standards. In addition to authorizing fines
and other penalties for violations, the Act empowers the Mine Safety and Health
Administration to suspend or halt offending operations.
Energy Regulation
WEI's cogeneration operations are subject to the provisions of various laws and
regulations, including the federal Public Utilities Regulatory Policies Act of
1978 ("PURPA"). PURPA provides qualifying cogeneration facility status ("QF") to
all of WEI's operations except ROVA I which is an Exempt Wholesale Generator
("EWG"). The QF or EWG status allows those facilities to operate with certain
exemptions from substantial federal and state regulation, including regulation
of the rates at which electricity can be sold.
The most significant recent change in energy regulation was the passage of the
National Energy Policy Act of 1992 ("EP Act"). Companies can now apply for
Exempt Wholesale Generator ("EWG") status with the Federal Energy Regulatory
Commission ("FERC"). An EWG project can provide electrical energy without the
requirement to sell thermal energy to a user. The EP Act permits an EWG project
to also be a QF project. An EWG that is not a QF project must have its power
rates approved. An EWG project that is a QF project can receive avoided cost
rates that are not subject to approval by FERC.
At both the national and state level, there is an ongoing debate about removing
regulatory constraints and allowing competition and market forces to determine
the price of electricity. Two separate proposed bills, calling for deregulation
of the traditional utility monopolies, are pending in the U.S. Congress. In
addition, various states, including Virginia and New York, are either studying
or moving toward a deregulated electric generation and distribution market
place. The direction this public debate will take and its ultimate outcome are
at this time undefined. It seems likely, however, that there will be some
deregulation, but the extent of the deregulation and the time at which such
deregulation may become effective, is not yet predictable.
Protection of the Environment
Mining Operations. The Company believes its mining operations are in compliance
with applicable federal, state and local environmental laws and regulations,
including those relating to surface mining and reclamation, and it is the policy
of the Company to operate in compliance with such standards. The Company
maintains compliance primarily through maintenance and monitoring activities.
WRI has an agreement with its mining contractor, Morrison Knudsen Company, Inc.
(which owns 20% of the stock of WRI), which determines the Company's maximum
liability for reclamation costs associated with final mine closure. It calls for
the Company to pay approximately $1,700,000 over a 15 year period which began in
December 1990. All remaining liability is that of customers who are obligated to
pay final reclamation costs under provisions of their respective coal sales
contracts or Morrison Knudsen. In addition, per ton reclamation fees imposed by
the Federal Surface Mining Control and Reclamation Act of 1977 (the "Surface
Mining Act") amounted to approximately $2,241,000, $2,455,000 and $1,707,000 in
1998, 1997 and 1996, respectively. No reclamation fees were paid by the Virginia
Division in 1998 because there was no production. Reclamation fees incurred at
the Virginia Division amounted to $3,000, and $73,000, in 1997 and 1996,
respectively.
The Commonwealth of Virginia, Division of Mined Land Reclamation ("DMLR"), has
sent Westmoreland Coal Company a letter, dated February 12, 1999 stating that
the permit for the Bullitt refuse area and slurry impoundment has expired for
mining purposes and that only reclamation can be performed within the boundaries
of the permit. Further, the DMLR has ordered Westmoreland to begin reclamation
of the site by April 2, 1999, to complete reclamation of the site by December
15, 1999, and to submit completion reports by January 15, 2000. The estimated
cost to comply with this directive has been accrued. The Company continues to
explore the assignment of this property to third parties in connection with
their possible mining and remining operations in this area.
The Company projects that charges for maintenance and monitoring activities to
meet environmental requirements for remaining operations it continues to own
will be minimal in 1999 due to the idle status of the Virginia Division
operations. The reduction in these costs is largely due to the asset
dispositions that have taken place since 1994 pursuant to which the buyers
assumed reclamation and environmental liabilities. Future costs could change
either to reflect the impact of new regulations or because presently
unforeseeable conditions may be imposed on future mining permits.
The Surface Mining Act regulations set forth standards, limitations and
requirements for surface mining operations and for the surface effects of
underground mining operations. Under the regulatory scheme contemplated by the
Surface Mining Act, the Federal Office of Surface Mining ("OSM") issued
regulations which set the minimum standards to which State agencies concerned
with the regulation of coal mining must adhere. States that wish to regulate
such coal mining must present their regulatory plans to OSM for approval. Once a
State plan receives final approval, the State agency has primary regulatory
authority over mining within the State, and OSM acts principally in a
supervisory role. State agencies may impose standards more stringent than those
required by OSM. The two states in which the Company currently has mining
operations, active or idle, Montana and Virginia, have submitted regulatory
plans to OSM, and these plans have received final approval. There would be
potential liability to the Company in the event it, or any of its previous
independent contractors, failed to satisfy the obligations created by the
Surface Mining Act. Failure to comply with the Surface Mining Act could result
in the Company having its existing permits revoked or applications for new
permits or permit modifications blocked.
In the event final reclamation is not performed in accordance with State and
Federal regulations, the Company has $10,600,000 and $5,434,000 of reclamation
bonds in place in Montana and Virginia, respectively, to assure compliance with
all applicable regulations.
In 1990, certain amendments were enacted to the Clean Air Act ("1990
Amendments"). As the first major revisions to the Clean Air Act since 1977, the
1990 Amendments vastly expanded the scope of federal regulations and enforcement
in several significant respects. In particular, the 1990 Amendments required
that the United States Environmental Protection Agency issue new regulations
related to ozone non-attainment, air toxics and acid rain. Phase I of the acid
rain provisions required, among other things, that electric utilities reduce
their sulfur dioxide emissions to less than 2.5 lbs per million Btu by January
1, 1995. Phase II requires an additional reduction in emissions to less than 1.2
lbs per million Btu by January 1, 2000.
The 1990 Amendments allow utilities the freedom to choose the manner in which
they will achieve compliance with the required emission standards, including
switching to lower sulfur coal, scrubbing and using SO2 credit allowances. Other
than possibly Otter Tail Power facilities currently being supplied, the Company
anticipates little or no impact on its operations from the ozone non-attainment
and air toxic provisions of the 1990 Amendments because the vast majority of
WRI's customers use scrubber facilities or blend with other coals that allow for
compliance with all applicable standards.
Independent Power. The environmental laws and regulations applicable to the
projects in which WEI participates primarily involve the discharge of emissions
into the water and air, but can also include wetlands preservation and noise
regulation. These laws and regulations in many cases require a lengthy and
complex process of obtaining licenses, permits and approvals from federal, state
and local agencies. Meeting the requirements of each jurisdiction with authority
over a project can delay or sometimes prevent the completion of a proposed
project, as well as require extensive modifications to existing projects. The
partnership owners of the projects in which WEI has its interests have the
primary responsibility for obtaining the required permits and complying with the
relevant environmental laws.
The Clean Air Act and the 1990 Amendments contain provisions that regulate the
amount of sulfur dioxide and nitrogen oxides that may be emitted by a project.
Most of the projects in which WEI has investments are fueled by low sulfur coal
and are not expected to be significantly affected by the acid rain provisions of
the 1990 Amendments.
Dominion Terminal Associates. DTA is responsible for complying with certain
state and federal environmental laws and regulations, particularly those
affecting air and water quality. DTA has employees on its staff who are
responsible for assuring that it is in compliance with all laws and regulations.
In the event that DTA failed to comply with applicable laws and regulations, the
Company may be responsible for its 20% share of any loss incurred as a result of
non-compliance.
Foreign and Domestic Operations and Export Sales. The Company's assets are, and
for each of the last three years have been, located entirely within the United
States. There have been no export sales during the last three years.
Refer to Note 16 of the Consolidated Financial Statements for additional
information regarding the Company's business segments.
ITEM 2 - PROPERTIES
As of December 31, 1998, the Company owned or leased coal properties located in
Montana and Virginia. As of December 31, 1998, the Company's estimated
demonstrated coal reserves in owned or leased property in Montana were
626,497,000 tons. Coal reserves in owned or leased property in Virginia were
insignificant. Properties located in Montana are leased by WRI from the Crow
Tribe of Indians, which leases run to exhaustion of the coal reserves.
The following table shows the Company's estimated demonstrated coal reserve base
and production in 1998. The term "demonstrated coal reserve base" is as defined
in the "Coal Resource Classification System of the U.S. Geological Survey"
(Circular 891). This represents the sum of the measured and indicated reserve
base and includes assigned and unassigned economic and uneconomic reserves.
<TABLE>
Summary of Demonstrated Coal Reserve Base and Production Tons
as of December 31, 1998
(in thousands except sulfur percentages)
<CAPTION>
--------------------------------- -------------- ------------- ----------------- ------------------------
1998 Percent Assigned (2) Total Demonstrated
Production Sulfur (1) Coal Reserve Base
================================= ============== ============= ================= ========================
<S> <C> <C> <C> <C>
Western Operations Montana Steam 6,458 .63 626,497 626,497
================================= ============== ============= ================= ========================
</TABLE>
(1)Percent Sulfur applies to the 1998 production tonnages.
(2)Assigned tonnages are legally recoverable through existing facilities
based on current mining plans with current technology and the Company's
infrastructure.
Coal reserves in Montana represent recoverable tonnage held under the terms of
the Crow Tribe Lease, as amended in 1982, and other minor leases. These reserves
are located in Big Horn County, Montana and are accessible via Interstate
Highway 90. Transportation is arranged and charges are paid by WRI's customers.
These reserves were estimated to be 799,803,000 tons as of January 1, 1980,
based principally upon a report by independent consulting geologists, prepared
in February 1980. The reserves consist of two main seams and a stray seam
between the upper and lower main seams. Currently, the upper seam, with
estimated assigned reserves of 226,000,000 tons, is the only seam being mined
due to a quality modification required by a significant customer. Annually,
estimated remaining recoverable reserves are reduced by production in the upper
main seam and by the amount of reserves in the lower and stray seams bypassed
after mining the upper main seam.
WRI owns and operates a dragline and coal crushing and loading facilities at its
mine in Montana.
As of December 31, 1998, the Company owns coal preparation and loading
facilities in Virginia. All of the Company's Virginia operations have been idled
and the Company has no intention of resuming operations there or mining the
remaining reserves.
ITEM 3 - LEGAL 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"). On July 27, 1998, they filed a
joint motion to be dismissed from bankruptcy. By order of the Bankruptcy Court
entered on December 23, 1998, the Chapter 11 Cases were dismissed. No objections
were filed during the ten day stay period that expired on January 4, 1999.
Effective with the dismissal, the Debtor Corporations are no longer subject to
the protections afforded or restrictions imposed by the Bankruptcy Code. Prior
to the dismissal, the Debtor Corporations were in possession of their respective
properties and assets and were operating as debtors in possession pursuant to
provisions of the Bankruptcy Code. Refer to Note 1 to the Consolidated Financial
Statements for additional information concerning the bankruptcy proceedings.
Westmoreland Energy, Inc. 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 within 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 Contract provides for a
stated annual number of allowed forced outage days and requires payment of a
specified liquidated damages penalty if the Partnership exceeds the allowance.
The ROVA Partnership believes that the customer is required to pay the ROVA
Partnership the full capacity purchase price. The customer asserts that it is
not required to pay for the forced outage days.
From May 1994 through December 1998, Virginia Power withheld approximately
$14,800,000 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 contending
that Virginia Power breached the Power Purchase Agreement in withholding such
payments. In December, 1994, Virginia Power filed a motion to dismiss the
complaint and in March, 1995, the court granted this motion. The ROVA
Partnership filed an amended complaint in April, 1995. Virginia Power filed
another motion to dismiss the complaint and in June 1995, the Circuit Court of
the City of Richmond, Virginia denied Virginia Power's motion to dismiss the
complaint. In November 1995, Virginia Power filed with the court a motion for
summary judgment, and a hearing on the motion was held in early December 1995.
In late January 1996, the court denied Virginia Power's motion for summary
judgment. Virginia Power filed a second summary judgment motion on March 1,
1996. On March 18, 1996, the Court granted Virginia Power's second summary
judgment motion and effectively dismissed the complaint. The ROVA Partnership
appealed the Court's decision granting summary judgment to the Virginia Supreme
Court. On June 6, 1997 the Virginia Supreme Court reversed the trial Court's
decision to grant the customer's summary judgment motion and remanded the matter
for trial. The case was tried on October 26, 1998. The trial judge requested the
parties to submit post trial briefs and on December 2, 1998 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 yet indicated whether it will hear the
appeal.
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.
On August 1, 1996, FERC entered its decision in the Southampton case. FERC
determined that the Partnership's request for reconsideration should be treated
as timely filed, but that the Southampton facility was not in complete
compliance with the QF requirements for 1992. FERC ordered Southampton to comply
with Section 205 for the Federal Power Act ("FPA"), and file, for FERC's review,
rates for calendar year 1992 for wholesale power sales to Virginia Power.
Otherwise, the Southampton project remains exempt from regulation under the
Public Utility Holding Company Act ("PUHCA"), utility laws of Virginia and the
other provisions of the FPA. In August 1996, the Partnership filed a motion
seeking clarification of the August 1, 1996 order. The Partnership also filed an
additional request for rehearing. On May 13, 1998 the FERC entered an Order
clarifying its August 1, 1996 decision in the Southampton case. While affirming
the requirement to make a refund to Virginia Power, the FERC ruled that Virginia
Power must compensate Southampton for every hour in which the unit was available
for dispatch, but not actually dispatched. FERC appointed a settlement Judge to
assist the parties in evaluating and negotiating a settlement.
In October 1998, the Southampton Partnership and Virginia Power entered into a
settlement agreement which resolved these QF issues. 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 by $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 has been approved by the FERC.
A limited partner of LG&E-Southampton, L.P. has made a demand on the Southampton
Partnership and the 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 anticipate making a similar demand against the LG&E
entities in the amount of $3,000,000.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
This item is not applicable.
Executive Officers of the Registrant
The following table shows the executive officers of the Company, their ages as
of February 1, 1999, positions held and year of election to their present
offices. No family relationships exist among them. All of the officers are
elected annually by the Board of Directors and serve at the pleasure of the
Board of Directors.
<PAGE>
<TABLE>
- ----------------------------------------- -------- -- -------------------------------------- -----------------------
Name Age Position Held Since
- ----------------------------------------- -------- -- -------------------------------------- -----------------------
<CAPTION>
<S> <C> <C> <C>
(1) Christopher K. Seglem 52 Chairman of the Board 1996
President and 1992
Chief Executive Officer 1993
(2) Theodore E. Worcester 58 Senior Vice President of 1995
Law and Administration,
General Counsel and 1990
Assistant Secretary 1999
(3) R. Page Henley, Jr. 63 Senior Vice President-Acquisitions 1997
and Development, and
Government Affairs and 1992
President, Westmoreland Coal Sales 1995
Company
(4) Robert J. Jaeger 50 Senior Vice President of Finance and 1996
Treasurer
- ----------------------------------------- -------- -- -------------------------------------- -----------------------
</TABLE>
(1) Mr. Seglem was elected President and Chief Operating Officer of the
Company in June 1992, and a Director of the Company in December 1992. In
June 1993, he was elected Chief Executive Officer, at which time he
relinquished the position of Chief Operating Officer. In June 1996, he was
elected Chairman of the Board. He is a member of the bar of Pennsylvania.
(2) Mr. Worcester was elected Senior Vice President in June 1992 while
retaining his position of General Counsel of the Company. In 1995, he was
elected Senior Vice President of Law and Administration and in 1996,
Corporate Secretary, in addition to his General Counsel position. He is a
member of the bar of Colorado. Mr. Worcester relinquished the title of
Corporate Secretary as of January 1, 1999.
(3) Mr. Henley was elected Senior Vice President-Government Affairs in June
1992. In 1993, Mr. Henley was elected Vice President, General Counsel and
Secretary of the Company's WEI subsidiary, and undertook additional
duties, including project development. In 1994, Mr. Henley was elected
Senior Vice President-Development of the Company, and retained his
position as Vice President of the Company's WEI subsidiary. In 1995, Mr.
Henley was elected president of Westmoreland Coal Sales Co. and
relinquished his position in WEI. In 1997, Mr. Henley's duties were
expanded to include acquisitions, and his title was revised accordingly.
He is a member of the bars of West Virginia and Virginia.
(4) Mr. Jaeger held various financial positions at Penn Virginia Corporation
from 1976 and was Vice President and Chief Financial Officer when he left
in March 1995. He joined Westmoreland Energy, Inc. in April 1995 as Vice
President-Finance. He was elected Vice President Finance, Treasurer and
Controller of the Company in September 1995. He was elected Senior Vice
President-Finance, Treasurer and Controller in February 1996 and
relinquished the position of Controller in January 1998. Mr.
Jaeger is a certified public accountant.
<PAGE>
PART II
- --------------------------------------------------------------------------------
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information:
The following table shows the range of closing prices for the Common Stock and
Depositary Shares of the Company. Each Depositary Share represents one quarter
of a share of Preferred Stock. The stock traded on the New York Stock Exchange
until trading was halted on December 23, 1996. Due to the Company's filing for
protection under Chapter 11, the two issues were removed from listing and
registration on the NYSE on April 15, 1997.
Public trading for the Common Stock and the Depositary Shares resumed in
February, 1997, via the Over the Counter Bulletin Board, and quarterly bid
prices are shown below as reported by the National Association of Securities
Dealers Composite Feed or other qualified interdealer medium.
The Company intends to apply for relisting on NASDAQ or one of the national
exchanges in the near future.
<TABLE>
---------------------------------- ----------------------------------------------------------------
Closing Prices
Common Stock Depositary Shares
---------------------------------- -------------------------------- -------------------------------
High Low High Low
---------------------------------- ----------------- -------------- ---------------- --------------
<CAPTION>
<S> <C> <C> <C> <C>
1997
First Quarter 7/8 1/2 5 3/4 2
Second Quarter 15/16 17/32 5 1/2 5
Third Quarter 2 1/8 15/16 6 3/4 5 1/8
Fourth Quarter 2 7/16 1 1/16 7 3/8 4 7/8
1998
First Quarter 2 1 5/16 14 1/4 5 1/8
Second Quarter 1 7/8 7/32 14 1/2 4 11/16
Third Quarter 2 5/8 16/41 14 5/8 4 5/8
Fourth Quarter 4 1/4 1 1/2 17 1/2 10 3/8
---------------------------------- ----------------- -------------- ---------------- --------------
</TABLE>
Over-the-counter market quotations reflect inter-dealer prices, without retail
mark-up, mark-down, or commission and may not necessarily represent actual
transactions.
Approximate Number of Equity Security Holders:
<TABLE>
-------------------------------------------------- --------------------------------------
Number of Record Holders
Title of Class (as of February 1, 1999)
-------------------------------------------------- --------------------------------------
<CAPTION>
<S> <C>
Common Stock ($2.50 par value) 1,723
Depositary Shares, each representing a
one-quarter share of Series A Convertible 60
Exchangeable Preferred Stock
-------------------------------------------------- --------------------------------------
</TABLE>
Dividends:
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, 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 seventeen quarterly dividends which are in arrears
(dividend payment dates July 1, 1994, October 1, 1994, January 1, 1995, October
1, 1995, January 1, 1996, April 1, 1996, July 1, 1996, October 1, 1996, January
1, 1997, April 1, 1997, July 1, 1997, October 1, 1997, January 1, 1998, April 1,
1998, July 1, 1998, October 1, 1998, and January 1, 1999) amount to $20,772,000
in the aggregate ($36.13 per preferred share or $9.03 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 December 31, 1998, of $21,845,000.
As a result of the filing of voluntary petitions for reorganization under
Chapter 11 of the United States Bankruptcy Code, the Company was prohibited from
paying dividends, either common or preferred. The terms of the Master Agreement,
including various financial covenants over the next six years, discussed in Note
1 to the Consolidated Financial Statements, further prohibit the payment of
dividends, either common or preferred, until after June 30, 1999, in any event.
Going forward the Company's Board of Directors will review the payment of
quarterly preferred stock dividends, the preferred stock dividends which are in
arrears, and common stock dividends, in light of the above restrictions and
consideration of the shareholders' best interests.
<PAGE>
ITEM 6 - SELECTED FINANCIAL DATA
<TABLE>
Westmoreland Coal Company and Subsidiaries
Five Year Review
- --------------------------------------------------------------------------------------------------------------------
1998 1997(1) 1996(1) 1995 1994
- ---------------------------------------------- -------------- ------------ ------------ -------------- -------------
<CAPTION>
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations (in thousands except per share data)
Information
- --------------------------------------------------------------------------------------------------------------------
Revenue - Coal $ 44,010 $ 47,182 $ 44,152 $109,114 $ 368,715
- Independent Power and other 64,559 18,650 16,162 15,886 5,443
- ---------------------------------------------- -------------- ------------ ------------ -------------- -------------
Total revenues 108,569 65,832 60,314 125,000 374,158
Cost and expenses 78,250 66,383 80,104 156,732 391,476
Pension expense (benefit) 111 (5,547) (3,601) (2,440) -
Unusual charges (credits) 2,000 (27,214) (11,896) 66,623 (2,100)
Doubtful accounts recoveries (1,028) (1,410) (3,449) (967) -
DTA impairment charge 12,164 - - - -
- ---------------------------------------------- -------------- ------------ ------------ -------------- -------------
Operating income (loss) 17,072 33,620 (844) (94,948) (15,218)
Gains on the sales of assets 475 969 24,238 9,088 41,130
Interest expense (190) (320) (400) (1,164) (5,425)
Minority interest (775) (1,092) (890) (1,368) (583)
Interest and other income 1,999 713 3,491 3,761 2,540
- ---------------------------------------------- -------------- ------------ ------------ -------------- -------------
Income (loss) before reorganization items
and income taxes 18,581 33,890 25,595 (84,631) 22,444
Reorganization legal and consulting fees (9,872) (2,484) - - -
Reorganization interest income (expense) (1,594) 1,552 - - -
Income tax expense (3,787) - (575) (1,488) (2,291)
- ---------------------------------------------- -------------- ------------ ------------ -------------- -------------
Income (loss) from continuing operations 3,328 32,958 25,020 (86,119) 20,153
Discontinued operations:
Operating loss - (1,284) (1,049) (267) -
Impairment and loss on disposal - (3,518) - - -
- ---------------------------------------------- -------------- ------------ ------------ -------------- -------------
Loss from discontinued operations - (4,802) (1,049) (267) -
- ---------------------------------------------- -------------- ------------ ------------ -------------- -------------
Cumulative effect of change in accounting
principle (9,876) - 14,372 - -
- ---------------------------------------------- -------------- ------------ ------------ -------------- -------------
Net income (loss) (6,548) 28,156 38,343 (86,386) 20,153
Less preferred stock dividends:
Declared - - - 2,444 1,222
In arrears 4,888 4,888 4,888 2,444 3,666
============================================== ============== ============ ============ ============== =============
Net income (loss) applicable to
common shareholders $ (11,436) $ 23,268 $ 33,455 $ (91,274) $ 15,265
============================================== ============== ============ ============ ============== =============
Net income (loss) per share applicable to
common shareholders $ (1.64) $ 3.34 $ 4.80 $ (13.11) $ 2.19
Weighted average number of common
and common equivalent shares 6,965 6,965 6,965 6,965 6,965
- ---------------------------------------------- -------------- ------------ ------------ -------------- -------------
Balance Sheet Information
Working capital (deficit) $ 15,054 $ 38,512 $ 10,185 $ (16,458) $ (1,481)
Net property, plant and equipment 36,950 35,687 42,700 59,868 89,728
Total assets 215,606 181,997 153,971 167,107 229,739
Total debt 1,762 458 1,324 4,593 15,931
Liabilities subject to compromise - 132,667 136,191 - -
Shareholders' equity (deficit) 21,845 28,393 237 (38,106) 50,724
- ---------------------------------------------- -------------- ------------ ------------ -------------- -------------
</TABLE>
(1) On December 23, 1996, 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 were in
possession of their respective properties and assets and operated as
debtors in possession pursuant to provisions of the Bankruptcy Code. The
cases were dismissed on December 23, 1998. Refer to Note 1 to the
Consolidated Financial Statements for further information.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's Discussion and Analysis of Financial Condition Years Ended December
31, 1998, 1997 and 1996
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 completion of the
sale of a significant asset; 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. 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,
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.
The key terms of the Master Agreement are summarized as follows:
o The Funds, the UMWA, and the Equity Committee withdrew their objections to
the Company's Motion to Dismiss the Chapter 11 cases and joined in the
entry of stipulated judgments and the execution of a Master Agreement which
preserve the Company as an ongoing enterprise with undiluted ownership
vested in its existing shareholders.
o The Company agreed that it would not file, institute nor support any action
under state or federal bankruptcy liquidation, insolvency or reorganization
statutes for a period of five years.
o The Company agreed to pay in full, with interest, all undisputed creditor
claims and satisfy all other ongoing obligations. Pursuant to this
commitment, the Company paid approximately $5.7 million to holders of
undisputed claims in early January, 1999.
o The Company agreed to pay in full all arrearages, with interest, under the
Coal Industry Retirement Health Benefit Act of 1992 ("Coal Act"). Pursuant
to this commitment, the Company paid approximately $18.1 million to the
UMWA 1992 Benefit Plan ("1992 Plan") and approximately $19.4 million to the
UMWA Combined Fund ("Combined Fund," and together with the 1992 Plan, the
"Funds") in early January, 1999.
o The Company agreed to pay $4 million to the Funds in full satisfaction of
all other asserted claims for damages, liquidated damages, penalties,
charges, fees and costs. The Company made this payment on February 1, 1999.
o The Company agreed to reinstate its Individual Employer Plan for 1992 Plan
retirees.
o The Company agreed to pay its future obligations to the Funds as and when
due.
o The UMWA 1974 Pension Trust ("1974 Plan") had asserted a claim for
withdrawal liability in the amount of approximately $13.8 million against
the Company to which the Company objects. The Company and the 1974 Plan
agreed to resolve this dispute through arbitration, as provided by law.
o As required under the Coal Act, the Company agreed to secure its obligation
to provide retiree health benefits under the 1992 Plan by posting a bond,
letter of credit, or cash collateral in the amount of three years benefits
(or $20.8 million). The Company has 60 days from January 4, 1999 to provide
this security.
o In addition, the Company agreed to secure its obligations to the Funds by
providing the Funds with a Contingent Promissory Note ("Note"). The
original principal amount of the Note is $12 million; the principal amount
of the Note decreases to $6 million in 2002. The Note is payable only in
the event the Company does not meet its Coal Act obligations, fails to meet
certain ongoing financial tests specified in the Note, fails to maintain
the required balance in the escrow account established under an escrow
agreement ("Escrow Agreement"), or fails to comply with certain covenants
set forth in a security agreement ("Security Agreement"). Certain notice
and cure provisions are included in the Note. If no default occurs, the
Note terminates on January 1, 2005. To secure its obligations to the Funds
under the Note, the Company entered into a Security Agreement and an Escrow
Agreement. In the Security Agreement, the Company pledged the annual cash
flow to which it is entitled from the Roanoke Valley I project. Pursuant to
the Escrow Agreement, the Company placed $6 million into an escrow account
on February 1, 1999. In the year 2002, when the amount of the Note is
reduced to $6 million, the amount in the escrow account may be adjusted so
that the amount in escrow will be $8 million minus the amount of
Westmoreland`s cash flow from the Roanoke Valley I project in the preceding
year. In no event will the amount of the required balance in the escrow
account be more than $6 million or less than zero. If the Company is not
required to make payment under the Note, the Security Agreement and the
Escrow Agreement terminate upon the termination of the Note. The Company
executed and delivered the Note, the Security Agreement, and the Escrow
Agreement to the Funds on January 29, 1999.
o The Company agreed not to initiate further litigation to challenge the Coal
Act or seek to initiate legislation to amend or reject the Coal Act.
o The Company agreed to make payments for retiree health benefits as if it
continued to be obligated under the 1993 UMWA Wage Agreement for eligible
retirees and beneficiaries for a period of five years. At the expiration of
such five year period, the Company is free to initiate litigation
contesting its obligation to continue to provide such benefits, and the
Company will continue to provide such benefits after the expiration of the
five year period until it obtains a ruling from a Court of competent
jurisdiction that it is not obligated to provide such benefits.
o Provided that the pending sale of the Company's remaining interest in the
Rensselaer project occurs and subject to the terms of the Master Agreement,
a public tender for 1,052,631 depositary shares will be implemented, each
representing one quarter of a share of the Company's outstanding Series A
Convertible Exchangeable Preferred Stock, at $19 per depositary share.
Assuming 1,052,631 depositary shares are tendered in the offer, the Company
would be required to pay $20 million in consideration for these shares. The
tender shall occur in the first quarter of 1999, or as soon thereafter as
is practicable, following the date of the asset sale.
o Unless the tender offer is initiated in time to be completed by early
April, the Company will hold a meeting of shareholders by March 31, 1999,
at which shareholders may nominate and elect directors and bring other
matters before the shareholders. The Company presently anticipates that the
shareholders' meeting will take place by May 11, 1999.
o The Equity Committee would dissolve on February 3, 1999.
o Except for the payment to preferred shareholders in the tender offer,
the Company may not make any other cash distribution to preferred or common
shareholders for any purpose prior to June 30, 1999.
Refer to Note 1 of the Consolidated Financial Statements for additional
information concerning the bankruptcy.
Liquidity and Capital Resources
Cash provided by operating activities was $55,894,000 and $19,931,000 in 1998
and 1997, respectively. Cash used by operating activities totaled $14,949,000 in
1996. The increase of $35,963,000 in cash provided by operations in 1998
compared to 1997 is mainly a result of the following: proceeds from the
restructuring of the Rensselaer project, termination of the over-funded salaried
pension plan, increased operating revenues at WRI, and increased cash
distributions from independent power projects. The increase in cash provided by
operations in 1997 as compared to 1996 is principally due to decreased payments
relating to heritage costs as a result of the automatic stay associated with the
bankruptcy.
Cash used in investing activities was $2,434,000 in 1998. This is the result of
additions to property, plant and equipment of $2,945,000, offset by proceeds
from sales of Virginia Division assets of $511,000. Cash provided by investing
activities in 1997 and 1996 was $2,093,000 and $14,684,000, respectively. The
reduction in cash provided from investing activities in 1997 as compared to 1996
is primarily a result of a decrease in proceeds from sales of Virginia Division
assets in 1997. In 1997, the Company continued to sell various assets of the
Virginia Division for aggregate net proceeds of $2,757,000. The Company received
$19,689,000 from the sale of various Virginia Division assets in 1996.
Offsetting these cash inflows was a cash outlay of $4,200,000 for the purchase
of an additional interest in WRI in 1996.
Cash used in financing activities in 1998, 1997 and 1996 totaled $51,000,
$151,000, and $2,655,000, respectively. Cash used in 1998, 1997 and 1996
primarily related to the repayment of debt of WRI and dividends paid to minority
shareholders of WRI in 1996.
Consolidated cash and cash equivalents at December 31, 1998 totaled $84,073,000
(including $14,712,000 at WRI.) At December 31, 1997, cash and cash equivalents
totaled $30,664,000 (including $11,378,000 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 $4,140,000 at December 31, 1998 and $6,665,000 at December
31, 1997. The restricted cash represents an interest-bearing cash deposit
account, which collateralizes the Company's outstanding surety bonds for its
workers compensation self-insurance programs. The Company also has $8,000,000 in
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 black lung trust, approximately $10,900,000, that may be available to
pay postretirement health benefits dependent upon future actuarial calculations.
Refer to Note 9 to the Consolidated Financial Statements for additional
information on this item.
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
the requirements of Delaware law, described below, 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 seventeen quarterly dividends which are in arrears
(those dividends whose payment dates would have been July 1, 1994, October 1,
1994, January 1, 1995, October 1, 1995, January 1, 1996, April 1, 1996, July 1,
1996, October 1, 1996, January 1, 1997, April 1, 1997, July 1, 1997, October 1,
1997, January 1, 1998, April 1, 1998, July 1, 1998, October 1, 1998 and January
1, 1999) amount to $20,772,000 in the aggregate ($36.13 per preferred share or
$9.03 per depositary share).
The use of cash 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
for a period of six years.
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). The Company had shareholders'
equity at December 31, 1998 of $21,845,000.
Going forward the Company's Board of Directors will review the payment of
quarterly preferred stock dividends, the preferred stock dividends which are in
arrears, 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 in
excess of $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.
Should it ultimately be determined that the Company is liable for this or some
lesser amount, the Company would be required to fund the obligation over no more
than nine and one half years.
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. The Company's current annual premiums to the Combined Fund of
approximately $6,000,000 are included in the annual cash expenditures of
$16,000,000 for postretirement medical benefits described above.
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
must secure its obligation to provide retiree health benefits under the 1992
Plan by posting a bond, letter of credit, or cash collateral in the amount of
three years benefits (or $20.8 million). The Company has 60 days from January 4,
1999 to provide this security under terms of the Master Agreement signed on
January 29, 1999.
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 its share of the proceeds of the
sale of the remaining assets of the Rensselaer facility if it is completed.
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. 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.
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.
The Company recently successfully completed testing at one of the independent
power projects. 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.
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 these systems into compliance and
the Company is carefully monitoring those activities.
Compliance at the Company's terminal operations 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 the Company 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 and, if necessary, will participate in those
efforts.
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 December 31,
1998.
The goal is to have all critical Company systems Y2K compliant during the first
half of 1999. This should allow time before December 31, 1999, to validate the
system modifications and complete contingency plans for customers, suppliers and
others who may not be Y2K compliant. While there can be no assurance that all
such modifications and plans will be successful, the Company does not expect
that any disruptions will have a material adverse effect on its overall
financial position, results of operations, or liquidity.
The foregoing constitutes a "forward-looking statement" within the meaning of
Section 27A of the Securities Act of 1933 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.
New Accounting Standards
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133), was issued in June 1998 by the
Financial Accounting Standards Board. SFAS 133 establishes new accounting and
reporting standards for derivative instruments and for hedging activities. This
statement requires an entity to establish at the inception of a hedge, the
method it will use for assessing the effectiveness of the hedging derivative and
the measurement approach for determining the ineffective aspect of the hedge.
Those methods must be consistent with the entity's approach to managing risk.
SFAS 133 is effective for fiscal years beginning after June 15, 1999. The
Company does not expect adoption of SFAS 133 to have a material effect on its
consolidated financial statements.
Results of Operations
1998 Compared to 1997
- --------------------------------------------------------------------------------
Coal Operations. Coal revenues in 1998 were $44,010,000 compared to $47,182,000
in 1997. The change is due to a slight decrease in tons sold in 1998 compared to
1997's record setting level. Prices received were comparable in the two periods.
Independent Power Operations. Equity in earnings of independent power operations
in 1998 was $64,465,000 compared to $17,770,000 in 1997. The increase is mainly
due to increased earnings at WEI's Rensselaer project as a result of the
restructuring of its power purchase contract with Niagara Mohawk.
Dominion Terminal Associates. Equity in earnings from Dominion Terminal
Associates was $94,000 in 1998 compared to $880,000 in 1997. The decrease is due
to a decrease in throughput as a result of a decline in export coal sales from
the U.S. In 1998, as a result of the continuing decline in the export market,
the Company recognized a $12,164,000 impairment charge relating to its
investment in DTA. DTA is dependent upon its customer's coal export business to
maintain an acceptable level of throughput. The coal export business has
recently experienced a significant decline due to intense competitive pressure
from coal suppliers in other nations. At this time the Company does not believe
that those competitive pressures will abate in the near term. The fair value
assigned to DTA was based on a recently completed sale of a similar nearby
terminal.
Selling and administrative expenses were $7,040,000 in 1998 compared to
$5,932,000 in 1997. The increase is due to additional franchise taxes paid to
the State of New York as a result of the Rensselaer project restructuring.
Heritage costs were $31,449,000 in 1998 compared to $16,673,000 in 1997. The
increase is due to $17,230,000 of Combined Fund benefit accruals made as a
result of the bankruptcy dismissal discussed in Notes 1 and 12.
In 1998, the Company recorded an unusual charge of $2,000,000 relating to a term
of the Master Agreement described in Note 1 to the Consolidated Financial
Statements. Under that Agreement, the Company agreed to make payments for
retiree health benefits as if it continued to be obligated under the 1993 UMWA
Wage Agreement for eligible retirees and beneficiaries for a period of five
years. At the expiration of such five year period, the Company is free to
initiate litigation contesting its obligation to continue to provide such
benefits and the Company will continue to provide such benefits after the
expiration of the five year period until it obtains a ruling from a Court of
competent jurisdiction that it is not obligated to provide such benefits.
In 1997, the Company recorded an unusual credit of $27,214,000 which included a
curtailment gain of $14,199,000 associated with the anticipated expiration of
the 1993 Wage Agreement and a benefit of $13,015,000 due to a charge in the
estimated liability for pneumoconiosis benefits.
Gains on the sale of assets were $475,000 for 1998 most of which related to the
sales of various equipment from the idled Virginia Division. Gains on the sales
of assets were $969,000 during 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.
Results of Operations
1997 Compared to 1996
- --------------------------------------------------------------------------------
Coal Operations. Coal revenues for 1997 were $47,182,000 as compared to
$44,152,000 in 1996. This increase is a direct result of an increase of
2,391,000 in tons produced and sold at Westmoreland Resources, Inc. Expenses
associated with coal revenues decreased as a result of the winding down of
operations at the Virginia Division in 1996 and the subsequent reduction of
costs associated with idle properties.
Independent Power Operations. Equity in earnings of independent power projects
in 1997 were $17,770,000 compared to $15,335,000 in 1996. This 16% increase is
attributable to an increase in project earnings primarily as a result of
increased capacity payments, and reductions in operating and maintenance
expenses.
Terminal Operations. The equity in earnings of DTA of $880,000 in 1997 was
comparable to the equity in earnings of $827,000 in 1996.
Selling and administrative costs decreased $4,287,000 or 42% as a result of the
continued wind-down of Virginia Division operations, a further Company wide
reduction in personnel and related expenses, and lower travel, legal and
consulting expenses. All expenses relating to the Company's reorganization under
the Bankruptcy Code are classified separately.
Heritage costs expensed for 1997 of $16,673,000 were comparable to the
$16,686,000 of heritage costs in 1996. The majority of these liabilities were
subject to compromise and were to be determined in the bankruptcy process.
In 1997, the Company recorded an unusual credit of $27,214,000 which included a
curtailment gain of $14,199,000 associated with the anticipated expiration of
the 1993 Wage Agreement and a benefit of $13,015,000 due to a change in the
estimated liability for pneumoconiosis benefits. In 1996, the Company recorded
an unusual credit of $11,896,000, representing an adjustment of $5,896,000 to
the liability for post-retirement medical benefits recorded when the Hampton
Division was sold in 1995, and an adjustment of $6,000,000 related to an updated
actuarial valuation of the UMWA pension withdrawal liability.
In September, 1997, the Company completed the sale of the Corona Group which
provided technical repair and maintenance services to the power generating
industry. The impairment and loss on disposal of $3,518,000 in 1997, and the
operating losses of $1,284,000 in 1997 and $1,049,000 in 1996, have been
reflected as discontinued operations.
<PAGE>
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements
- --------------------------------------------------------------------------------
Consolidated Balance Sheets---------------------------------------------------27
Consolidated Statements of Operations-----------------------------------------29
Consolidated Statements of Shareholders' Equity (Deficit)---------------------31
Consolidated Statements of Cash Flows-----------------------------------------32
Summary of Significant Accounting Policies------------------------------------34
Notes to Consolidated Financial Statements------------------------------------37
<PAGE>
<TABLE>
Westmoreland Coal Company and Subsidiaries
Consolidated Balance Sheets
- --------------------------------------------------------------------------------
December 31, 1998 1997
- --------------------------------------------------------------------------- ------------------ -- ------------------
(in thousands)
<CAPTION>
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 84,073 $ 30,664
Receivables:
Trade 2,566 4,483
Terminated pension plan, net 500 13,040
Other 2,730 1,026
- --------------------------------------------------------------------------- ------------------ -- ------------------
5,796 18,549
Other current assets 691 402
- --------------------------------------------------------------------------- ------------------ -- ------------------
Total current assets 90,560 49,615
- --------------------------------------------------------------------------- ------------------ -- ------------------
Property, plant and equipment:
Land and mineral rights 10,990 11,684
Plant and equipment 94,989 94,265
- --------------------------------------------------------------------------- ------------------ -- ------------------
105,979 105,949
Less accumulated depreciation and depletion 69,029 70,262
- --------------------------------------------------------------------------- ------------------ -- ------------------
36,950 35,687
Investment in independent power projects 62,386 54,152
Investment in Dominion Terminal Associates (DTA) 5,475 18,680
Workers' compensation bond 4,140 6,665
Prepaid pension cost 3,748 3,528
Excess of trust assets over pneumoconiosis benefit obligation 10,891 11,700
Other assets 1,456 1,970
- --------------------------------------------------------------------------- ------------------ -- ------------------
Total Assets $ 215,606 $ 181,997
=========================================================================== ================== == ==================
See accompanying Summary of Significant Accounting Policies and Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
Westmoreland Coal Company and Subsidiaries
Consolidated Balance Sheets (Continued)
- --------------------------------------------------------------------------------
December 31, 1998 1997
- --------------------------------------------------------------------------- ------------------ -- -----------------
(in thousands)
<CAPTION>
<S> <C> <C>
Liabilities and Shareholders' Equity
Current liabilities:
Current installments of long-term debt $ 200 $ 51
Accounts payable and accrued expenses:
Trade 4,213 2,894
Taxes, other than income taxes 3,893 5,208
Workers compensation 3,800 -
Postretirement medical costs 11,066 -
Reorganization expenses 7,900 1,645
Consent judgment payment obligation 39,006 -
Other accrued expenses 3,143 1,205
Reclamation costs 100 100
Income taxes 2,185 -
- --------------------------------------------------------------------------- ------------------ -- -----------------
Total current liabilities 75,506 11,103
- --------------------------------------------------------------------------- ------------------ -- -----------------
Liabilities subject to compromise - 132,667
Long-term debt, less current installments 1,562 407
Accrual for workers compensation 17,338 -
Accrual for postretirement medical costs 73,143 -
1974 UMWA Pension Plan obligations 13,776 -
Accrual for reclamation costs, less current portion 3,046 3,182
Other liabilities 2,370 -
Minority interest 7,020 6,245
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 6,965,328 shares 17,413 17,413
Other paid-in capital 94,630 94,630
Accumulated deficit (90,773) (84,225)
- --------------------------------------------------------------------------- ------------------ -- -----------------
Total shareholders' equity 21,845 28,393
- --------------------------------------------------------------------------- ------------------ -- -----------------
Total Liabilities and Shareholders' Equity $ 215,606 $181,997
=========================================================================== ================== == =================
See accompanying Summary of Significant Accounting Policies and Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
Westmoreland Coal Company and Subsidiaries
Consolidated Statements of Operations
- --------------------------------------------------------------------------------
Years Ended December 31, 1998 1997 1996
- -------------------------------------------------------- ------------------- ------------------ --------------------
(in thousands)
<CAPTION>
<S> <C> <C> <C>
Revenues:
Coal $ 44,010 $ 47,182 $ 44,152
Independent power projects - equity in earnings 64,465 17,770 15,335
Dominion Terminal Associates ("DTA") - equity in
earnings 94 880 827
- -------------------------------------------------------- ------------------- ------------------ --------------------
108,569 65,832 60,314
- -------------------------------------------------------- ------------------- ------------------ --------------------
Cost and expenses:
Cost of sales - coal 37,472 42,063 50,863
Depreciation, depletion and amortization 2,289 1,715 2,336
Selling and administrative 7,040 5,932 10,219
Heritage costs 31,449 16,673 16,686
Pension expense (benefit) (including termination
gain of $1,512,000 in 1997) 111 (5,547) (3,601)
Unusual charges (credits) 2,000 (27,214) (11,896)
Doubtful accounts recoveries (1,028) (1,410) (3,449)
DTA impairment charge 12,164 - -
- -------------------------------------------------------- ------------------- ------------------ --------------------
91,497 32,212 61,158
- -------------------------------------------------------- ------------------- ------------------ --------------------
Operating income (loss) 17,072 33,620 (844)
Other income (expense):
Gains on sales of assets (including $10,700,000
from Penn Virginia Corporation in 1996) 475 969 24,238
Interest expense (190) (320) (400)
Interest income - - 1,455
Minority interest (775) (1,092) (890)
Other income 1,999 713 2,036
- -------------------------------------------------------- ------------------- ------------------ --------------------
1,509 270 26,439
- -------------------------------------------------------- ------------------- ------------------ --------------------
Income from continuing operations before
reorganization items and income taxes 18,581 33,890 25,595
Reorganization items:
Legal and consulting fees (9,872) (2,484) -
Interest expense (5,188) - -
Interest income 3,594 1,552 -
- -------------------------------------------------------- ------------------- ------------------ --------------------
Income before income taxes 7,115 32,958 25,595
Income tax expense 3,787 - 575
- -------------------------------------------------------- ------------------- ------------------ --------------------
Income from continuing operations 3,328 32,958 25,020
Discontinued operations:
Operating loss - (1,284) (1,049)
Impairment and loss on disposal - (3,518) -
- -------------------------------------------------------- ------------------- ------------------ --------------------
Loss from discontinued operations - (4,802) (1,049)
Cumulative effect of changes in accounting principles (9,876) - 14,372
- -------------------------------------------------------- ------------------- ------------------ --------------------
Net income (loss) (6,548) 28,156 38,343
Less preferred stock dividends
in arrears 4,888 4,888 4,888
======================================================== =================== ================== ====================
Net income (loss) applicable to common
shareholders $(11,436) $23,268 $ 33,455
======================================================== =================== ================== ====================
(Continued)
Westmoreland Coal Company and Subsidiaries
Consolidated Statements of Operations (Continued)
- --------------------------------------------------------------------------------
Years Ended December 31, 1998 1997 1996
- -------------------------------------------------------- ------------------- ------------------ --------------------
Income (loss) per share applicable to common shareholders: (in thousands except per share data)
Continuing operations $ (.22) $ 4.03 $ 2.89
Discontinued operations - (0.69) (.15)
Cumulative effect of changes in accounting
principles (1.42) - 2.06
- -------------------------------------------------------- ------------------- ------------------ --------------------
$ (1.64) $ 3.34 $ 4.80
======================================================== =================== ================== ====================
Pro forma amounts assuming the changes in accounting principles are applied
retroactively:
Net income applicable to common
shareholders $(1,560) $ 19,083
Income per share applicable to common
shareholders $ (.22) $ 2.74
======================================================== =================== ================== ====================
Weighted average number of common
shares outstanding - basic and diluted 6,965 6,965 6,965
======================================================== =================== ================== ====================
See accompanying Summary of Significant Accounting Policies and Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
Westmoreland Coal Company and Subsidiaries
Consolidated Statements of Shareholders' Equity (Deficit) Years Ended December 31, 1996, 1997, and 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Class A
Convertible Total
Exchangeable Other Shareholders'
Preferred Common Stock Paid-In Accumulated Equity
Stock Capital Deficit (Deficit)
- ---------------------------------------- --------------- -------------- ----------- --------------- ----------------
(in thousands)
<CAPTION>
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996 $ 575 17,413 94,630 (150,724) (38,106)
Net income - - - 38,343 38,343
- ---------------------------------------- --------------- -------------- ----------- --------------- ----------------
Balance at December 31, 1996 575 17,413 94,630 (112,381) 237
Net income - - - 28,156 28,156
- ---------------------------------------- --------------- -------------- ----------- --------------- ----------------
Balance at December 31, 1997 575 17,413 94,630 (84,225) 28,393
Net loss - - - (6,548) (6,548)
======================================== =============== ============== =========== =============== ================
Balance at December 31, 1998 $ 575 17,413 94,630 (90,773) 21,845
======================================== =============== ============== =========== =============== ================
See accompanying Summary of Significant Accounting Policies and Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
Westmoreland Coal Company and Subsidiaries
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
Years Ended December 31, 1998 1997 1996
------------------------------------------------------------- ----------------- ----------------- -----------------
(in thousands)
<CAPTION>
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (6,548) $ 28,156 $ 38,343
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Equity in earnings of independent power projects (64,465) (17,770) (15,335)
Cash distributions from independent power projects 46,355 14,995 12,971
Equity earnings from Dominion Terminal Associates (94) (880) (827)
Cash generated by Dominion Terminal
Associates facility 2,952 4,865 3,786
Cash contributions to Dominion Terminal
Associates (1,877) (2,883) (3,187)
DTA impairment charge 12,164 - -
Depreciation, depletion and amortization 2,289 1,715 2,336
Gain on termination of pension plan - (1,512) -
Unusual charges (credits) 2,000 (27,214) (11,896)
Gains on sales of assets (475) (969) (24,238)
Cash from pension termination, net 12,540 - -
Distribution from pneumoconiosis trust 2,634 - -
Minority interest 775 1,092 890
Deferred income tax benefit - - (579)
Impairment and loss on disposition of
discontinued operations - 3,518 -
Cumulative effect of change in accounting principle 9,876 - (14,372)
Other (358) 96 2,747
Changes in assets and liabilities:
Receivables, net of allowance for
doubtful accounts 213 1,392 (1,331)
Inventories - 660 252
Prepaid pension cost (220) (4,035) -
Excess of trust assets over pneumoconiosis
benefit obligation (1,825) 1,188 127
Accounts payable and accrued expenses 1,690 880 (9,037)
Income taxes payable 2,185 - (2,905)
Accrual for workers' compensation (678) - (6,285)
Accrual for postretirement medical costs (2,502) - 7,250
Consent judgment payment obligation 39,006 - -
Other liabilities (5,998) 15 (914)
------------------------------------------------------------- ----------------- ----------------- -----------------
Net cash provided by (used in) operating activities
before reorganization items 49,639 3,309 (22,204)
------------------------------------------------------------- ----------------- ----------------- -----------------
Changes in reorganization items:
Trade and other liabilities subject to compromise - 14,977 7,255
Reorganization expenses 6,255 1,645 -
------------------------------------------------------------- ----------------- ----------------- -----------------
Net change in reorganization items 6,255 16,622 7,255
------------------------------------------------------------- ----------------- ----------------- -----------------
Net cash provided by (used in) operating activities 55,894 19,931 (14,949)
------------------------------------------------------------- ----------------- ----------------- -----------------
<PAGE>
Westmoreland Coal Company and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
- --------------------------------------------------------------------------------
Years Ended December 31, 1998 1997 1996
------------------------------------------------------------- ----------------- ----------------- -----------------
(in thousands)
Cash flows from investing activities:
Additions to property, plant and equipment (2,945) (174) (664)
(Increase) decrease in notes receivable - - (141)
Purchase of additional interest in WRI - - (4,200)
Net proceeds from sales of investments and assets 511 2,757 19,689
Cash held by subsidiary disposed of - (490) -
------------------------------------------------------------- ----------------- ----------------- -----------------
Net cash (used in) provided by investing activities (2,434) 2,093 14,684
------------------------------------------------------------- ----------------- ----------------- -----------------
Cash flows from financing activities:
Repayment of long-term debt (51) (151) (1,662)
Dividends paid to minority shareholders of subsidiary - - (993)
------------------------------------------------------------- ----------------- ----------------- -----------------
Net cash used in financing activities (51) (151) (2,655)
------------------------------------------------------------- ----------------- ----------------- -----------------
Net increase (decrease) in cash and cash equivalents 53,409 21,873 (2,920)
Cash and cash equivalents, beginning of year 30,664 8,791 11,711
============================================================= ================= ================= =================
Cash and cash equivalents, end of year $ 84,073 $ 30,664 $ 8,791
============================================================= ================= ================= =================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 27 $ 31 $ 228
Income taxes 120 - 1,140
</TABLE>
In September 1997, the Company completed the sale of the Corona Group Inc.
("Corona"). Corona was sold for $895,000 in notes receivable, the Company
retained a 15% interest in Corona, and the purchaser assumed a contingent
liability.
In September 1996, the Company completed a non-cash transaction for the transfer
of several of its idled Virginia Division mining operations. In exchange for
these operations, the purchaser assumed responsibility for certain reclamation
obligations amounting to approximately $2,200,000. The entire amount of the
obligations assumed was recorded as a gain on the sale of assets.
In May 1996, the Company completed non-cash transactions for the sale of its
idled Wentz and Pine Branch Mining operations. The purchasers of those assets
assumed reclamation and other liabilities totaling approximately $3,000,000 as
part of those transactions.
The entire amount of the obligations assumed was recorded as a gain on the sale
of assets.
See accompanying Summary of Significant Accounting Policies and Notes to
Consolidated Financial Statements.
<PAGE>
Westmoreland Coal Company and Subsidiaries
Summary of Significant Accounting Policies
- --------------------------------------------------------------------------------
Consolidation Policy
The consolidated financial statements of Westmoreland Coal Company (the
"Company") include the accounts of the Company and its majority-owned
subsidiaries, after elimination of intercompany balances and transactions. The
Company uses the equity method of accounting for companies where its ownership
is between 20% and 50% and for partnerships and joint ventures in which less
than a controlling interest is held.
Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets, liabilities, revenues and expenses and the
disclosure of contingent liabilities in order to prepare these financial
statements in conformity with generally accepted accounting principles. Actual
results will likely differ from those estimates.
Cash Equivalents
The Company considers all highly liquid debt instruments purchased with original
maturities of three months or less to be cash equivalents. All such instruments
are carried at cost. Cash equivalents consists of Eurodollar time deposits,
money market funds and bank repurchase agreements.
Property, Plant and Equipment
Property, plant and equipment are carried at cost and include expenditures for
new facilities and those expenditures that substantially increase the productive
lives of existing plant and equipment. Development costs of mines are
capitalized until commercial operations commence. Maintenance and repair costs
are expensed as incurred. Mineral rights and development costs are depleted
based upon estimated recoverable proven and probable reserves. Plant and
equipment are depreciated straight-line over the assets' estimated useful lives,
ranging from 3 to 40 years. The Company assesses the carrying value of its
property, plant and equipment for impairment by comparing estimated undiscounted
cash flows expected to be generated from such assets with their net book value.
If net book value exceeds estimated cash flows, the asset is written down to
fair value. When an asset is retired or sold, its cost and related accumulated
depreciation and depletion are removed from the accounts. The difference between
unamortized cost and proceeds on disposition is recorded as a gain or loss.
Fully depreciated plant and equipment still in use are not eliminated from the
accounts.
Workers' Compensation and Pneumoconiosis Benefit Liabilities
The Company is self-insured for workers' compensation claims incurred prior to
1996 and federal and state pneumoconiosis benefits for current and former
employees. Workers compensation claims incurred after January 1, 1996 are
covered by a third party insurance provider.
The liability for workers' compensation claims is an actuarially determined
estimate of the ultimate losses incurred on such claims based on the Company's
experience, and includes a provision for incurred but not reported losses.
Adjustments to the probable ultimate liability are made continually based on
subsequent developments and experience and are included in operations as
incurred.
Effective January 1, 1996 and as discussed in Note 9, the Company changed its
method of accounting for pneumoconiosis benefits to recognize actuarial gains
and losses related to the pneumoconiosis benefit obligation, as actuarially
determined, in the period in which they occur. Previously, the Company accrued
for the projected costs of pneumoconiosis benefits, on an actuarial basis, over
the period which benefits were expected to be paid. An independent trust has
been established to pay these benefits.
Post Retirement Benefits Other than Pensions
The Company accounts for health care and life insurance benefits provided to
certain retired employees and their dependents by accruing the cost of such
benefits over the service lives of employees. The Company is amortizing its
transition obligation, for past service costs relating to these benefits, over
twenty years. For UMWA represented union employees who retired prior to 1976,
the Company provides similar medical and life insurance benefits by making
payments to a multiemployer union trust fund. The Company expenses such payments
when made.
Coal Revenues
The Company recognizes coal sales revenue at the time title passes to the
customer. The Company also records as revenue amounts received from coal related
activities, such as proceeds from coal contract buy-outs and coal option
payments. Coal revenues include the sale of mined coal and sales of coal
produced by unaffiliated mining companies where the Company is a sales agent or
broker. The Company recognizes revenue for the coal sold for unaffiliated
companies since the Company assumes the credit risk for the sale, performs other
services such as invoicing, quality control and shipment monitoring, and in most
cases takes title to the coal. The Company had no revenue pertaining to coal
sold for others during 1998 or 1997. Coal revenues pertaining to coal sold for
other companies amounted to $11,598,000 in 1996.
Reclamation
Reclamation costs at WRI are fixed and are being recognized evenly over a 15
year period. Total expected reclamation costs at idled sites were fully accrued
at the time of idling. Estimates at idle sites are periodically reviewed and
adjustments are made in accruals to provide for changes in expected future
costs.
Income Taxes
The Company accounts for deferred income taxes using the asset and liability
method. Deferred tax liabilities and assets are recognized for the expected
future tax consequences of events that have been reflected in the Company's
financial statements based on the difference between the financial statement
carrying amounts and tax bases of assets and liabilities, using enacted tax
rates in effect in the years in which the differences are expected to reverse.
Income (Loss) Per Share Applicable to Common Shareholders
Income (loss) per share applicable to common shareholders has been calculated
based on the weighted average number of common shares outstanding during the
period in accordance with the Statement of Financial Accounting Standards No.
128, issued in February 1997.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year
presentation.
Westmoreland Coal Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
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. Prior to
the dismissal, the Debtor Corporations were in possession of their respective
properties and assets and were operating as debtors in possession pursuant to
provisions of the Bankruptcy Code. During the Chapter 11 Cases, the Debtor
Corporations engaged in litigation with the 1992 UMWA Benefit Plan (the "1992
Plan"), the UMWA Combined Benefit Fund (the "Combined Fund") and the 1974 UMWA
Pension Plan (the "1974 Plan") (sometimes collectively referred to as the
"Funds") as well as the UMWA regarding various matters. With respect to the 1992
Plan and the Combined Fund, the key issues in dispute were (i) whether the
postpetition assessments of the 1992 Plan and the Combined Fund under the Coal
Industry Retirement Health Benefits Act of 1992 (the "Coal Act") are entitled to
administrative priority in the Chapter 11 Cases; (ii) if the 1992 Plan's and the
Combined Fund's claims are not entitled to administrative priority but instead
constitute general unsecured non-priority claims, what is the allowed amount of
those claims for bankruptcy purposes; and (iii) whether the claims and
assessments of the 1992 Plan and the Combined Fund violate the United States
Constitution. The Debtor Corporations and the 1992 Plan also disputed whether
the Company could be compelled to "reinstate" its individual employer plan (the
"IEP") for those beneficiaries who were eligible and were receiving benefits
under the IEP as of February 1, 1993 and who retired before October 1, 1994, and
their dependents. With respect to the 1974 Plan, the key issue was the date of
withdrawal and the Company's liability for its share of unfunded vested
liabilities, if any, upon termination or withdrawal from the plan. With respect
to the UMWA, the key issue was the effect of the expiration of the 1993
Collective Bargaining Agreement on the Company's obligation to provide health
care benefits to the beneficiaries covered by that agreement.
During the Chapter 11 Cases, pursuant to an order entered on September 5, 1997,
the Bankruptcy Court ruled that the 1992 Plan's claims were not entitled to
administrative priority but instead constituted general unsecured non-priority
claims, and that the 1992 Plan could not compel reinstatement of the IEP.
Thereafter, by order dated June 11, 1998, the Bankruptcy Court determined, among
other things, that the 1992 Plan held a prepetition general unsecured claim
against the Debtor Corporations in the amount of $146,103,383.
During the Chapter 11 Cases, both the Debtor Corporations and the Funds filed
plans of reorganization (the "Competing Plans"). Each Competing Plan was
premised upon the treatment of the 1992 Plan's and Combined Fund's claims as
general unsecured non-priority claims. After the Bankruptcy Court issued the
above-noted ruling regarding the amount of the 1992 Plan's general unsecured
claim, the Bankruptcy Court deemed the Debtor Corporations' Competing Plan
withdrawn as unconfirmable absent a change in law or circumstances.
On July 9, 1998, the United States Court of Appeals for the Tenth Circuit
("Tenth Circuit") decided UMWA 1992 Plan v. Rushton (In re Sunnyside), 146 F.3d
1273 (10th Cir. 1998) ("Sunnyside"). In Sunnyside, the Tenth Circuit held that
the premium assessments for the 1992 Plan at issue in that case are taxes
entitled to administrative priority in bankruptcy. Although the Debtor
Corporations previously contended that the facts in Sunnyside were
distinguishable from the facts in the Debtor Corporations' case, the Tenth
Circuit's broad decision appeared to dictate that the postpetition assessments
of the 1992 Plan (and the Combined Fund) are entitled to administrative priority
in the Chapter 11 Cases to the extent allowed. As a result, on July 28, 1998,
the Debtor Corporations filed a motion before the United States District Court
of Colorado (the "District Court"), moving to reverse the Bankruptcy Court's
September 5, 1997 order which held that the claims of the 1992 Plan were general
unsecured prepetition claims. The District Court granted the Debtor
Corporation's motion, thereby reversing the Bankruptcy Court's September 5, 1997
ruling with respect to the priority of the 1992 Plan's assessments but otherwise
vacating and remanding back to the Bankruptcy Court the remaining aspects of the
Bankruptcy Court's rulings involving the 1992 Plan including the determination
that the 1992 Plan's allowed claim was $146,103,383. Thereafter, the Funds
advised the Bankruptcy Court that the Funds had withdrawn their Competing Plan.
On July 28, 1998, the Debtor Corporations filed a motion ("Dismissal Motion")
before the Bankruptcy Court to dismiss these Chapter 11 Cases based upon the
foregoing substantial changes in law, the improvement in their financial
condition and their belief that dismissal would benefit all creditors and
shareholders. As a condition to dismissal, the Debtor Corporations proposed to:
(i) pay in full all undisputed claims, including the assessments of the 1992
Plan and the Combined Fund through the effective date of dismissal ("Dismissal
Date"); (ii) provide such security as is required by section 9712(d)(1)(C) of
the Coal Act; (iii) pay all future premiums assessed by the 1992 Plan and the
Combined Fund on an ongoing basis as and when due; and (iv) not pay dividends to
preferred or common shareholders based on funds on hand or earnings prior to the
Dismissal Date and only to pay dividends in the future if and to the extent that
the Debtor Corporations have current earnings which would permit the payment of
such dividends under applicable Delaware law. Westmoreland Coal also proposed to
continue to maintain its individual employee plan ("IEP") for the benefit of
retirees under the 1993 collective bargaining agreement between Westmoreland
Coal and the UMWA even beyond the expiration of that agreement in August of
1998, unless and until a forum of competent jurisdiction determined that it was
not required to do so. The Dismissal Motion stated that the Debtor Corporations
reserved their right to contest the constitutionality of the Coal Act and/or to
seek to recover any payments made to the 1992 Plan or the Combined Fund in any
appropriate forum. The Equity Committee (see below) and the Funds opposed this
motion.
On June 29, 1998, the Office of the United States Trustee granted certain
shareholders' request to appoint an Official Committee of Equity Security
Holders ("Equity Committee") pursuant to Bankruptcy Code section 1102(a)(1). The
Equity Committee retained its own counsel and financial advisor, subject to the
Company's obligation under the Bankruptcy Code to pay their reasonable and
necessary fees and expenses. 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 was not confirmable. The
Debtor Corporations opposed the Conversion Motion, as did the Funds.
On October 15, 1998 the Company, the Funds, the UMWA, and the 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 was read into the record
during scheduled hearings on the Dismissal Motion and the Conversion Motion, and
following such announcement the hearings were recessed.
On October 30, 1998, the Debtor Corporations, the Funds, and the Equity
Committee filed a joint motion with the Bankruptcy Court, setting forth the
outline of a procedure for dismissal of the Chapter 11 Cases combined with the
entry of "consent judgments" in connection with certain of the pending
litigation. The Bankruptcy Court approved the proposed procedure at a hearing
held before the Bankruptcy Court on November 10, 1998. The procedure called for
the consensual, unconditional dismissal of the chapter 11 cases in conjunction
with certain consent judgments related to contested matters with the Funds and
resolution of all remaining items by contractual settlement agreement among the
parties.
The parties negotiated and documented certain additional agreements, a consent
judgment in the prepetition litigation in the Virginia District Court (imposing
obligations that duplicate the obligations imposed under the above-referenced
consent judgments) and documents to further memorialize the parties' agreement.
These documents and agreements include: the Master Agreement; various pleadings
filed in Micheal Buckner, et. al. v. Westmoreland Coal Co., et al., Civil Action
No. 96-0187-A, in the United States District Court for the Western District of
Virginia, comprised of the Joint Motion to Join the Combined Benefit Fund, the
Joint Motion for Stipulated Final Order, the Memorandum in Support of Joint
Motion for Stipulated Final Order and the Stipulated Final Order; the Contingent
Note, the Escrow Agreement for the Contingent Note; and the Security Agreement
for the Contingent Note. These agreements and documents imposed certain material
obligations on the Debtor Corporations. Thereafter, the Debtor Corporations
filed motions with the Bankruptcy Court requesting approval of the consent
judgments, which motions were granted (and the consent judgments and dismissal
order were entered) on December 23, 1998.
The key terms of the Master Agreement are summarized as follows:
o The Funds, the UMWA, and the Equity Committee withdrew their objections to
the Company's Motion to Dismiss the Chapter 11 cases and joined in the
entry of stipulated judgments and the execution of a Master Agreement which
preserve the Company as an ongoing enterprise with undiluted ownership
vested in its existing shareholders.
o The Company agreed that it would not file, institute nor support any action
under state or federal bankruptcy liquidation, insolvency or reorganization
statutes for a period of five years.
o The Company agreed to pay in full, with interest, all undisputed creditor
claims and satisfy all other ongoing obligations. Pursuant to this
commitment, the Company paid approximately $5.7 million to holders of
undisputed claims in early January, 1999.
o The Company agreed to pay in full all arrearages, with interest, under the
Coal Industry Retirement Health Benefit Act of 1992 ("Coal Act"). Pursuant
to this commitment, the Company paid approximately $18.1 million to the
UMWA 1992 Benefit Plan ("1992 Plan") and approximately $19.4 million to the
UMWA Combined Fund ("Combined Fund," and together with the 1992 Plan, the
"Funds") in early January, 1999.
o The Company agreed to pay $4 million to the Funds in full satisfaction of
all other asserted claims for damages, liquidated damages, penalties,
charges, fees and costs. The Company made this payment on February 1, 1999.
o The Company agreed to reinstate its Individual Employer Plan for 1992 Plan
retirees.
o The Company agreed to pay its future obligations to the Funds as and when
due.
o The UMWA 1974 Pension Trust ("1974 Plan") had asserted a claim for
withdrawal liability in the amount of approximately $13.8 million against
the Company to which the Company objects. The Company and the 1974 Plan
agreed to resolve this dispute through arbitration, as provided by law.
o As required under the Coal Act, the Company agreed to secure its obligation
to provide retiree health benefits under the 1992 Plan by posting a bond,
letter of credit, or cash collateral in the amount of three years benefits
(or $20.8 million). The Company has 60 days from January 4, 1999 to provide
this security.
o In addition, the Company agreed to secure its obligations to the Funds by
providing the Funds with a Contingent Promissory Note ("Note"). The
original principal amount of the Note is $12 million; the principal amount
of the Note decreases to $6 million in 2002. The Note is payable only in
the event the Company does not meet its Coal Act obligations, fails to meet
certain ongoing financial tests specified in the Note, fails to maintain
the required balance in the escrow account established under an escrow
agreement ("Escrow Agreement"), or fails to comply with certain covenants
set forth in a security agreement ("Security Agreement"). Certain notice
and cure provisions are included in the Note. If no default occurs, the
Note terminates on January 1, 2005. To secure its obligations to the Funds
under the Note, the Company entered into a Security Agreement and an Escrow
Agreement. In the Security Agreement, the Company pledged the annual cash
flow to which it is entitled from the Roanoke Valley I project. Pursuant to
the Escrow Agreement, the Company placed $6 million into an escrow account
on February 1, 1999. In the year 2002, when the amount of the Note is
reduced to $6 million, the amount in the escrow account may be adjusted so
that the amount in escrow will be $8 million minus the amount of
Westmoreland`s cash flow from the Roanoke Valley I project in the preceding
year. In no event will the amount of the required balance in the escrow
account be more than $6 million or less than zero. If the Company is not
required to make payment under the Note, the Security Agreement and the
Escrow Agreement terminate upon the termination of the Note. The Company
executed and delivered the Note, the Security Agreement, and the Escrow
Agreement to the Funds on January 29, 1999.
o The Company agreed not to initiate further litigation to challenge the Coal
Act or seek to initiate legislation to amend or reject the Coal Act.
o The Company agreed to make payments for retiree health benefits as if it
continued to be obligated under the 1993 UMWA Wage Agreement for eligible
retirees and beneficiaries for a period of five years. At the expiration of
such five year period, the Company is free to initiate litigation
contesting its obligation to continue to provide such benefits, and the
Company will continue to provide such benefits after the expiration of the
five year period until it obtains a ruling from a Court of competent
jurisdiction that it is not obligated to provide such benefits.
o Provided that the pending sale of the Company's remaining interest in the
Rensselaer project occurs and subject to the terms of the Master Agreement,
a public tender for 1,052,631 depositary shares will be implemented, each
representing one quarter of a share of the Company's outstanding Series A
Convertible Exchangeable Preferred Stock, at $19 per depositary share.
Assuming 1,052,631 depositary shares are tendered in the offer, the Company
would be required to pay $20 million in consideration for these shares. The
tender shall occur in the first quarter of 1999, or as soon thereafter as
is practicable, following the date of the asset sale.
o Unless the tender offer is initiated in time to be completed by early
April, the Company will hold a meeting of shareholders by March 31, 1999,
at which shareholders may nominate and elect directors and bring other
matters before the shareholders. The Company presently anticipates that the
shareholders' meeting will take place by May 11, 1999.
o The Equity Committee would dissolve on February 3, 1999.
o Except for the payment to preferred shareholders in the tender offer,
the Company may not make any other cash distribution to preferred or common
shareholders for any purpose prior to June 30, 1999.
On October 30, 1998, the Debtor Corporations, the Funds, and the Equity
Committee filed a joint motion with the Bankruptcy Court, setting forth the
outline of a procedure for dismissal of the Chapter 11 Cases combined with the
entry of "consent judgments" in connection with certain of the pending
litigation. The Bankruptcy Court approved the proposed procedure at a hearing
held before the Bankruptcy Court on November 10, 1998. Thereafter, the Debtor
Corporations filed motions with the Bankruptcy Court requesting approval of the
consent judgments, which motions were granted (and the consent judgments and
dismissal order were entered) on December 23, 1998.
The consent judgment in respect of the 1992 Plan required the payment of: (i) an
allowed unsecured non-priority claim against the Debtor Corporations in the
amount of $1,097,000, plus interest at the rate established under Internal
Revenue Code ("I.R.C.") ss. 6621 on this claim from December 23, 1996 through
the date of payment, less $200,000 (together with interest thereon) deposited
with the 1992 Plan pursuant to certain prepetition litigation before the United
States District for the Western District of Virginia (the "Virginia District
Court"); and (ii) premiums payable to the 1992 Plan under Section 9712 of the
Coal Act for the time periods beginning on and after December 23, 1996 and
ending on such payment date, in the amount of approximately $16,500,000, plus
interest at the rate established pursuant I.R.C. ss. 6621 from October 15, 1998
through the date of payment. In addition, this consent judgment requires the
Debtor Corporations to post security in the amount of $20,800,000 pursuant to
Section 9712(d)(1)(C) of the Coal Act, within sixty (60) days of the
effectiveness of such judgment. The consent judgment in respect of the Combined
Fund required the payment of: (i) an allowed unsecured non-priority claim
against the Debtor Corporations in the amount of $8,581,000, plus interest at
the rate established under I.R.C.ss. 6621, on this claim from December 23, 1996
through the date of payment; and (ii) all Combined Fund premiums accrued with
respect to the Debtor Corporations for the plan years beginning October 1, 1997
in the amount of $5,581,000, plus interest on such amount pursuant I.R.C. ss.
6621, for the period beginning October 1, 1997 through the date of payment. In
addition, the Debtor Corporations were required to pay one-half the Combined
Fund's October 1, 1998 annual premium assessment of $6,111,000, subject to
certain discount/interest calculations. The total payments by the Company to the
1992 Plan and the Combined Fund made on January 4, 1999 were approximately
$37,500,000. All of these charges were recognized as expenses and accrued on the
balance sheet in 1998, with the exception of the 1992 Plan premiums, which were
previously recognized in accordance with FAS 106.
During 1998, the Company recognized $9,872,000 in legal and consulting fees
related to the bankruptcy, including fees attributable to the activities of the
Equity Committee which, under Federal Bankruptcy Law, must be funded by the
Company. In February, 1999, pursuant to the Master Agreement the Company paid to
the 1992 Plan and the Combined Fund an additional $4 million (which had been
accrued in 1998) in full and final satisfaction of additional claims, including
claims for attorney's fees, that arose prior to that date and paid bonuses
totaling $2,600,000.
Liabilities Subject to Compromise
As discussed above, the Company was a debtor-in-possession from December 23,
1996 through December 23, 1998, at which time the Bankruptcy Court dismissed the
case. The following discussion relating to liabilities subject to compromise
applies only to liabilities at December 31, 1997, while the Company was in
bankruptcy. None of the Company's liabilities at December 31, 1998, are subject
to compromise and have been classified accordingly.
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 were segregated from those that were not in
the accompanying balance sheet. The following table sets forth the liabilities
of the Company that were subject to compromise as of December 31, 1997:
December 31, 1997
- -----------------------------------------------------------------------------
Trade and other liabilities $ 7,035,000
Long-term debt 1,607,000
1974 UMWA Pension Plan 13,800,000
Workers' compensation 24,341,000
1992 UMWA Benefit Plan 40,469,000
1993 Wage Agreement Plan 32,067,000
UMWA Combined Benefit Fund -
Salaried Plan 12,175,000
SERP 1,173,000
- -------------------------------------------------- --------------------------
Total $ 132,667,000
================================================== ==========================
2. Acquisitions
Westmoreland Resources, Inc.
During 1996, the Company increased its ownership in Westmoreland Resources, Inc.
("WRI") from 60% to 80% through the completion of separate transactions with
Morrison Knudsen ("MK") and Penn Virginia Corporation ("Penn Virginia"). As a
result of these transactions, MK is now a 20% minority owner of WRI and will
continue as the contract operator for WRI.
Westmoreland purchased a 4% share of WRI from MK for $1,200,000 cash on
September 30, 1996. Westmoreland also exercised a previously negotiated option
with Penn Virginia Corporation for the purchase of Penn Virginia's 16% share of
WRI for $3,000,000 cash on October 1, 1996, increasing Westmoreland's ownership
to 80%. The transactions were accounted for as purchases and the excess of the
share of the book value of the assets acquired over the cost of the interests
purchased is reflected as a reduction in the carrying value of land and mineral
rights.
3. Dispositions
The Corona Group
On September 9, 1997 the Company completed the sale of the Corona Group which
provides technical repair and maintenance services to the power generating
industry. Revenues for the discontinued operations were $3,814,000, and
$7,800,000 in 1997 and 1996, respectively. The Company recorded a loss on
disposition of $418,000 during the third quarter of 1997. The Company previously
recorded an impairment of $3,100,000 relating to its investment in Corona in the
second quarter of 1997. Consideration received from the sale included secured
promissory notes receivable of $895,000, of which $570,000 was paid in 1997. The
remaining $325,000 is due no later than September 10, 1999. The Company also
retained a 15% interest in the Corona Group.
Virginia Division
In 1998 and 1997, the Company sold various assets of the Virginia Division for
aggregate net proceeds of $511,000 and $2,757,000, respectively, and recorded
gains of $475,000 and $969,000, respectively. The purchasers assumed certain
reclamation liabilities associated with these assets.
During 1996, the Company realized proceeds of $19,689,000 from the sale of
Virginia Division in nine separate transactions. The gain on these transactions
was $24,238,000 which included $5,224,000 in reclamation obligations that were
assumed by the various purchasers.
4. Unusual CHARGES OR CREDITS
1996
In 1996, the Company recorded an unusual credit of $11,896,000 for the
adjustment of accrued post-retirement medical benefits of $5,896,000 recorded
when the Hampton Division was sold in 1995 and an adjustment of $6,000,000
related to an updated actuarial valuation of the UMWA pension withdrawal
liability. See Notes 10 and 11.
1997
In 1997, the Company recorded an unusual credit of $14,199,000 for a curtailment
gain relating to the 1993 Wage Agreement. See Note 10. In 1997, the Company also
recorded an unusual credit of $13,015,000 due to a change in the estimated
liability for pneumoconiosis benefits. See Note 9.
1998
On January 29, 1999, the Company executed the Master Agreement described in Note
1 to the Consolidated Financial Statements. Under that Agreement, the Company
agreed to make payments for retiree health benefits as if it continued to be
obligated under the 1993 UMWA Wage Agreement for eligible retirees and
beneficiaries for a period of five years. At the expiration of such five year
period, the Company is free to initiate litigation contesting its obligation to
continue to provide such benefits, and the Company will continue to provide such
benefits after the expiration of the five year period until it obtains a ruling
from a Court of competent jurisdiction that it is not obligated to provide such
benefits. The estimated present value of the Company's obligation to provide
these benefits for the five year period is approximately $2,000,000, and was
charged to expense in 1998. The Company currently expects that it will be
necessary to litigate this matter at the conclusion of the five year period. On
the advice of counsel, management believes that the Company should prevail in
any such litigation, although, as in any litigation, there can be no assurance.
Should the UMWA's position be ultimately upheld, the Company would be required
to provide retiree health benefits to such beneficiaries after the expiration of
the five year period. The estimated present value of this contingent liability,
calculated as of December 31, 1998, is approximately $11,600,000.
5. Westmoreland Energy, Inc.
Westmoreland Energy, Inc., ("WEI"), a wholly owned subsidiary of the Company,
holds general and limited partner interests in partnerships which were formed to
develop and own cogeneration and other non-regulated independent power plants.
Equity interests in these partnerships range from 1.25 percent to 50 percent.
WEI has interests in eight operating projects as listed and described in the
Project Summary below. The lenders to these partnerships have recourse only
against these projects and the income and revenues therefrom. The debt
agreements contain various restrictive covenants including restrictions on
making cash distributions to the partners, with which the partnerships are in
compliance. The type of restrictions on making cash distributions to the
partners vary from one project lender to another.
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Project Ft. Drum Altavista Hopewell Southampton Ft. Lupton
-------------------- ----------------- ---------------- ----------------- ---------------- -----------------
Watertown Altavista Hopewell Southampton Ft. Lupton
Location: New York Virginia Virginia Virginia Colorado
-------------------- ----------------- ---------------- ----------------- ---------------- -----------------
Gross Megawatt
Capacity: 55.5 MW 70 MW 70 MW 70 MW 290 MW
-------------------- ----------------- ---------------- ----------------- ---------------- -----------------
WEI Equity
Ownership: 1.25% 30.0% 30.0% 30.0% 4.49%
-------------------- ----------------- ---------------- ----------------- ---------------- -----------------
Electricity Public Service
Purchaser: Niagara Mohawk Virginia Power Virginia Power Virginia Power of Colorado
-------------------- ----------------- ---------------- ----------------- ---------------- -----------------
The Lane Firestone Tire Rocky Mtn.
Steam Host: US Army Company, Inc. & Rubber Co. Hercules, Inc. Produce, Ltd
-------------------- ----------------- ---------------- ----------------- ---------------- -----------------
Fuel Type: Coal Coal Coal Coal Natural Gas
-------------------- ----------------- ---------------- ----------------- ---------------- -----------------
Cyprus Amax Westmoreland United Coal United Coal Thermo Fuels,
Fuel Supplier: Coal Co. Coal Company Company Company Inc.
-------------------- ----------------- ---------------- ----------------- ---------------- -----------------
Commercial
Operations Date: 1989 1992 1992 1992 1994
-------------------- ----------------- ---------------- ----------------- ---------------- -----------------
Roanoke Roanoke
Project Rensselaer Valley I Valley II
-------------------- ---------------- ---------------- ------------------
Rensselaer Weldon Weldon
Location: New York North Carolina North Carolina
-------------------- ---------------- ---------------- ------------------
Gross Megawatt
Capacity: 81 MW 180 MW 50 MW
-------------------- ---------------- ---------------- ------------------
WEI Equity
Ownership: 50.0% 50.0% 50.0%
-------------------- ---------------- ---------------- ------------------
Electricity
Purchaser: Niagara Mohawk Virginia Power Virginia Power
-------------------- ---------------- ---------------- ------------------
Patch Rubber Patch Rubber
Steam Host: BASF Company Company
-------------------- ---------------- ---------------- ------------------
Fuel Type: Natural Gas Coal Coal
-------------------- ---------------- ---------------- ------------------
Western Gas TECO Coal/ TECO Coal/
Fuel Supplier: Marketing, Ltd CONSOL CONSOL
-------------------- --------------- ---------------- ------------------
Commercial
Operations Date: 1994 1994 1995
-------------------- --------------- ---------------- ------------------
</TABLE>
<PAGE>
The following is a summary of aggregated financial information for all
investments owned by WEI and accounted for under the equity method:
<TABLE>
Balance Sheets
December 31, 1998 1997
- ------------------------------------------------------------------------- --------------------- --------------------
(in thousands)
<CAPTION>
<S> <C> <C>
Assets
Current assets $ 127,901 $ 140,510
Property, plant and equipment, net 599,293 670,090
Other assets 50,406 76,238
========================================================================= ===================== ====================
Total assets $ 777,600 $ 886,838
========================================================================= ===================== ====================
Liabilities and equity
Current liabilities 54,526 $ 50,107
Long-term debt and other liabilities 458,787 648,000
Equity 264,287 188,731
========================================================================= ===================== ====================
Total liabilities and equity $ 777,600 $ 886,838
========================================================================= ===================== ====================
WEI's share of equity $ 63,156 $ 53,803
Capitalized start-up costs - 1,012
Other, net (770) (663)
========================================================================= ===================== ====================
WEI's investment in independent power operations $ 62,386 $ 54,152
========================================================================= ===================== ====================
</TABLE>
The Partnerships and the Company adopted Statement of Position No 98-5,
Reporting the Costs of Start-Up Activities as of January 1, 1998. The statement
requires companies to expense the costs of start-up activities as incurred. The
statement also requires certain previously capitalized start-up costs to be
charged to expense at the time of adoption and reported as the cumulative effect
of a change in accounting principle. The cumulative effect on WEI's share of
earnings of the Partnerships and the recognition of its start-up costs was
$9,876,000 and was recorded separately in the Consolidated Statements of
Operations.
The Company's capitalized start-up costs were being amortized straight-line over
the term of the power contract for the related project.
<TABLE>
Income Statements
For years ended December 31, 1998 1997 1996
----------------------------------------------- --------------- ---------------- -----------------
(in thousands)
<CAPTION>
<S> <C> <C> <C>
Revenues $247,015 $270,887 $ 271,237
Operating income 128,302 136,226 137,872
=============================================== =============== ================ =================
Net income $252,191 $ 54,423 $ 55,382
=============================================== =============== ================ =================
WEI equity in earnings $ 64,465 $ 17,770 $ 15,335
Cumulative effect of change in
accounting principle (9,876) - -
----------------------------------------------- --------------- ---------------- -----------------
WEI's share of earnings $ 54,589 $ 17,770 $ 15,335
=============================================== =============== ================ =================
</TABLE>
WEI performs project development and venture and asset management services for
the partnerships and has recognized related revenues of $510,000, $531,000, and
$499,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
Management fees, net of related costs, are recorded as other income when the
service is performed.
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.
On August 1, 1996, FERC entered its decision in the Southampton case. FERC
determined that the Partnership's request for reconsideration should be treated
as timely filed, but that the Southampton facility was not in complete
compliance with the QF requirements for 1992. FERC ordered Southampton to comply
with Section 205 for the Federal Power Act ("FPA"), and file, for FERC's review,
rates for calendar year 1992 for wholesale power sales to Virginia Power.
Otherwise, the Southampton project remains exempt from regulation under the
Public Utility Holding Company Act ("PUHCA"), utility laws of Virginia and the
other provisions of the FPA. In August 1996, the Partnership filed a motion
seeking clarification of the August 1, 1996 order. The Partnership also filed an
additional request for rehearing. On May 13, 1998 the FERC entered an Order
clarifying its August 1, 1996 decision in the Southampton case. While affirming
the requirement to make a refund to Virginia Power, the FERC ruled that Virginia
Power must compensate Southampton for every hour in which the unit was available
for dispatch, but not actually dispatched. FERC appointed a settlement Judge to
assist the parties in evaluating and negotiating a settlement.
In October, 1998, the Southampton Partnership and Virginia Power entered into a
settlement agreement which resolved these issues. 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 has been approved by the FERC.
A limited partner of LG&E-Southampton, L.P. has made a demand on the Southampton
Partnership and the 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 anticipate making a similar demand against the LG&E
entities in the amount of $3,000,000.
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 October, 1998, Virginia Power withheld approximately
$14,800,000 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, 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 Virginia Power's summary judgment motion and remanded the
matter for trial. The case was tried on October 26, 1998. The trial judge
requested the parties to submit post trial briefs and on December 2, 1998
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 June 30, 1998, LG&E - Westmoreland Rensselaer ("LWR"), completed
the restructuring of the Rensselaer Project under the terms of a Master
Restructuring Agreement with Niagara Mohawk. 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, WEI's share of
the remaining consideration was approximately $30 million, which it subsequently
received. The LWR Partnership also entered into a ten year transition power
supply agreement with Niagara Mohawk Power Corporation and retained ownership of
the plant. LWR has recently been negotiating the sale of the remaining assets of
the Rensselaer Project. The prospective purchaser would acquire the power plant,
inventories, environmental permits, and the material operating contracts. The
signing of a definitive purchase agreement could occur as early as late
February, 1999, with closing of the transaction soon thereafter.
6. Dominion Terminal Associates
Westmoreland Terminal Company ("WTC"), a wholly-owned subsidiary of the Company,
has a 20% interest in Dominion Terminal Associates ("DTA"), a partnership formed
for the construction and operation of a coal-storage and vessel-loading facility
in Newport News, Virginia. DTA's annual throughput capacity is 22 million tons,
and its ground storage capacity is 1.7 million tons. Each partner is responsible
for its share of throughput and expenses at the terminal. Total throughput tons
for DTA were 11,511,000, 14,075,000 and 16,440,000 for 1998, 1997 and 1996,
respectively. The Company currently leases the terminal's ground storage space
and vessel-loading facilities to certain unaffiliated parties who are engaged in
the export business and provides related support services.
The following is a summary of financial information for DTA:
<TABLE>
Balance Sheets
December 31, 1998 1997
- ------------------------------------------------------------------------- --------------------- --------------------
(in thousands)
<CAPTION>
<S> <C> <C>
Assets
Current assets $ 4,816 $ 5,705
Non-current assets 86,175 89,484
========================================================================= ===================== ====================
Total assets $ 90,991 $ 95,189
========================================================================= ===================== ====================
Liabilities and partners' deficit
Current liabilities $ 1,967 $ 1,760
Long-term debt and other liabilities 115,660 116,109
Partners' deficit (26,636) (22,680)
========================================================================= ===================== ====================
Total liabilities and partners' deficit $ 90,991 $ 95,189
========================================================================= ===================== ====================
WTC's share of partners' deficit $ (10,586) $ (9,667)
DTA Bonds 26,560 26,560
Goodwill, net of amortization 1,189 1,249
Impairment allowance (12,164) -
Other, net 476 538
- ------------------------------------------------------------------------- --------------------- --------------------
Investment in DTA $ 5,475 $ 18,680
========================================================================= ===================== ====================
</TABLE>
The Company is amortizing the goodwill using the straight-line method over 30
years.
<TABLE>
Income Statements
For the Years ended December 31, 1998 1997 1996
- -------------------------------------------------------- ---------------- --------------------- --------------------
(in thousands)
<CAPTION>
<S> <C> <C> <C>
Contribution from Partners $ 15,393 $ 20,164 $ 21,354
Total expenses 19,349 22,789 24,294
======================================================== ================ ===================== ====================
Excess of expenses over partners' contributions $ (3,956) $ (2,625) $ (2,940)
======================================================== ================ ===================== ====================
Revenues from DTA $ 2,890 $ 4,201 $ 4,640
Company share of DTA costs 2,796 3,321 3,813
- -------------------------------------------------------- ---------------- --------------------- --------------------
Equity in earnings from DTA $ 94 $ 880 $ 827
======================================================== ================ ===================== ====================
</TABLE>
WTC and the Company have a joint and several obligation for interest and
principal obligations with respect to its share of certain DTA bonds
($26,560,000 principal amount at December 31, 1998 and 1997). These obligations
were supported by a letter of credit on which the Company was the ultimate
obligor. In 1994, the Company was in violation of certain covenant requirements
in connection with the DTA letter of credit. As a result, on June 9, 1994 the
DTA letter of credit was drawn. The proceeds of the draw were used to purchase
$26,560,000 (par value) of DTA bonds. The Company repaid the amounts drawn under
the DTA letter of credit on December 22, 1994. The $26,560,000 of DTA bonds are
now owned by WTC and have been accounted for as an increase in the investment in
DTA.
The Company actively markets its 20% share of the terminal's facilities.
Accordingly, the Company's equity in earnings (share of losses) from DTA
represents the revenue received net of the Company's share of the expenses
incurred attributable to the terminal's coal-storage and vessel loading
operations.
The DTA partners have a Throughput and Handling Agreement whereby WTC is
committed to fund its proportionate share of DTA's operating expenses and
capital expenditures. WTC's total cash funding requirements, were $1,877,000,
$2,883,000 and $3,187,000 for 1998, 1997 and 1996, respectively.
In 1998, the Company recognized a $12,164,000 impairment charge relating to its
investment in DTA to reduce its carrying value to its estimated fair value. DTA
is dependent upon its customer's coal export business to maintain an acceptable
level of throughput. The coal export business has recently experienced a
significant decline due to intense competitive pressure from coal suppliers in
other nations. At this time the Company does not believe that those competitive
pressures will abate in the near term. The fair value assigned to DTA was based
on a recently completed sale of a similar nearby terminal.
7. Debt
The Company's debt is summarized as follows:
<TABLE>
December 31, 1998 1997
- ---------------------------------------------------------------------------- ------------------- -------------------
(in thousands)
<CAPTION>
<S> <C> <C>
WRI:
Long term debt subject to compromise $ - $ 1,607
Contracts for deed and mortgage notes payable with interest rates
ranging from 4% to 7%, net of unamortized discount of $169,000
in 1998 and $220,000 in 1997, secured by property plant and
equipment 1,762 458
- ---------------------------------------------------------------------------- ------------------- -------------------
Total debt 1,762 2,065
Less current installments (including $122,000 subject to
compromise in 1997) 200 173
============================================================================ =================== ===================
Long-term debt, less current installments $ 1,562 $ 1,892
============================================================================ =================== ===================
</TABLE>
The secured contracts for deed and mortgage notes payable by WRI are secured by
land and surface rights with a net book value of $1,444,000 at December 31,
1998.
All long term debt subject to compromise at December 31, 1997, was brought
current on January 4, 1999. On that date all arrearages, with interest, were
paid.
Principal payments due on long-term debt, for the next five years and thereafter
are as follows:
Year Ending Amount
- ----------------------------------------------------- -------------------
(in thousands)
December 31, 1999 $ 200
December 31, 2000 220
December 31, 2001 241
December 31, 2002 265
December 31, 2003 291
After December 31, 2003 545
- ----------------------------------------------------- -------------------
8. Workers' Compensation Benefits
The Company was self-insured for workers' compensation benefits prior to and
through December 31, 1995. Beginning in 1996, the Company is covered by third
party insurance for new workers' compensation claims and is no longer
self-insured. Based on updated actuarial and claims data, $469,000 was credited
to earnings in 1998, $753,000 was charged to earnings in 1997 and $1,300,000 was
credited to earnings during 1996. The cash payments for workers' compensation
benefits were $3,540,000, $3,752,000, and $5,010,000 in 1998, 1997 and 1996,
respectively.
The Company was required to obtain surety bonds in connection with its
self-insured workers' compensation plan. The Company's surety bond underwriter
required cash collateral for such bonding. As of December 31, 1998 and 1997,
$4,140,000 and $6,665,000 respectively, was held in the cash collateral account.
In connection with its dismissal from bankruptcy, the Company has been engaged
in settlement discussions with the Commonwealth of Virginia and the State of
West Virginia. Under the settlement with the Commonwealth of Virginia, the
Company will post a new bond in the amount of approximately $8,000,000 and
resume paying benefits directly. The outcome of these discussions with the State
of West Virginia is unknown at this time.
The workers compensation benefits obligation was classified as a liability
subject to compromise in 1997. During the bankruptcy proceedings, workers'
compensation claims were paid out of the surety bond cash collateral account.
9. Pneumoconiosis (Black lung) Benefits
The Company is self-insured for federal and state pneumoconiosis benefits for
current and former employees and has established an independent trust to pay
these benefits.
The following table sets forth the funded status of the Company's obligation:
<TABLE>
December 31, 1998 1997
------------------------------------------------------------------ ------------------- ---------------
(in thousands)
<CAPTION>
<S> <C> <C>
Actuarial present value of benefit obligation:
Expected claims from terminated employees $ 10,726 $ 11,900
Claimants 17,878 17,900
------------------------------------------------------------------ ------------------- ---------------
Total present value of benefit obligation 28,604 29,800
Plan assets at fair value, primarily government-backed
securities 39,495 41,500
------------------------------------------------------------------ ------------------- ---------------
Excess of trust assets over pneumoconiosis benefit
obligation $ 10,891 $ 11,700
================================================================== =================== ===============
</TABLE>
The discount rate used in determining the accumulated pneumoconiosis benefit as
of December 31, 1998 and 1997 was 6.75% and 7.0%, respectively.
As a result of the closing down of the Company's eastern coal operations (as
discussed in Notes 3 and 4) and the termination of all employees eligible for
pneumoconiosis benefits, the Company changed its method of accounting for
pneumoconiosis benefits during the fourth quarter of 1996, and applied such
change retroactively to January 1, 1996. Previously, the Company accrued for the
projected costs of pneumoconiosis benefits, on an actuarial basis, over the
period which benefits were expected to be paid. Under the newly adopted method
of accounting, the Company recognizes all actuarial gains or losses related to
the pneumoconiosis benefit obligation in the period in which they occur. The
cumulative effect of the change at January 1, 1996 was a credit of $14,372,000.
Adoption of this new accounting method decreased net income by $2,562,000 in
1996. Management believes the newly adopted accounting method is preferable
since, with the shutdown of its eastern operations, new obligations for
pneumoconiosis benefits will not be incurred.
In 1997 the Company recorded a benefit of $13,015,000 due to a change in the
estimated liability for pneumoconiosis benefits, which has been recorded as a
component of unusual credits in 1997.
10. Postretirement Medical and Life Insurance Benefits
Single-Employer Plans
The Company and its subsidiaries provide certain health care and life insurance
benefits for retired employees and their dependents. Substantially all of the
Company's current employees may become eligible for these benefits if certain
age and service requirements are met at the time of termination or retirement as
specified in the plan agreement. These benefits are provided through
self-insured programs. The Company adopted SFAS 106 effective January 1, 1993
and elected to amortize its unrecognized, unfunded accumulated postretirement
benefit obligation over a 20-year period.
The Company maintains three plans subject to FAS 106: the Salaried Plan, the
1993 Wage Agreement Plan, and the 1992 Plan. The Salaried Plan provides certain
health and life insurance benefits for salaried retired employees and their
dependents. The 1993 Wage Agreement Plan is the plan that resulted from the 1993
Wage Agreement between the Company and the UMWA. That agreement 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 1992 Plan was
established as a result of the Coal Act. The Company is required to provide
health care benefits for beneficiaries (and their dependents) who were age- and
service-eligible to receive benefits under the Coal Act as of February 1, 1993,
and who retired before October 1, 1994.
Prior to 1997, the calculation of the present value of the Company's obligation
under the 1993 Wage Agreement assumed that the Company would enter into
successor wage agreements to the 1993 Wage Agreement and would thereby continue
to provide retiree health benefits to such beneficiaries. During 1997, the
Company determined that it would not need to enter into a successor wage
agreement. Accordingly, the Company reduced the liability for the 1993 Wage
Agreement and recorded a curtailment gain of $14,199,000 in 1997, which has been
recorded as a component of unusual credits.
The UMWA contests the Company's right to terminate benefits at the expiration of
the collective bargaining agreement and further asserts that former employees
will be entitled to such benefits as they reach age 55. As a condition for not
opposing dismissal of the bankruptcy, the UMWA demanded and pursuant to the
terms of the Master Agreement discussed in Note 1, the Company agreed to
continue to provide benefits to participants of the 1993 Wage Agreement for a
period of five years from the dismissal of the bankruptcy. The estimated present
value of the Company's obligation to provide these benefits for the five year
period was charged to expense in 1998 as an unusual charge. At the expiration of
such five year period, the Company is free to initiate litigation contesting its
obligation to continue to provide such benefits, and the Company will continue
to provide such benefits after the expiration of the five year period until it
obtains a ruling from a Court of competent jurisdiction that it is not obligated
to provide such benefits. The Company currently expects that it will be
necessary to litigate this matter at the conclusion of the five year period. On
the advice of counsel, management believes that the Company should prevail in
any such litigation, although, as in any litigation, there can be no assurance.
Should the UMWA's position be ultimately upheld, the Company would be required
to provide retiree health benefits to such beneficiaries after the expiration of
the five year period. The estimated present value of this contingent liability,
calculated as of December 31, 1998, is approximately $11,600,000.
The following table sets forth the actuarial present value of postretirement
benefit obligations and amounts recognized in the Company's financial
statements:
<TABLE>
Salaried Plan 1993 Wage Agreement 1992 Plan
--------------------------- --------------------------- ----------------------------
- -------------------------------- ------------- ------------- ------------ -------------- ------------- --------------
December 31, 1998 1997 1998 1997 1998 1997
- -------------------------------- ------------- ------------- ------------ -------------- ------------- --------------
(in thousands)
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Assumptions:
Discount rate 6.75% 7.00% 6.75% 7.00% 6.75% 7.00%
Change in benefit obligation:
Net benefit obligation at
beginning of year 10,505 8,592 33,418 48,386 114,406 100,078
Service cost 57 48 - - - -
Interest cost 701 737 2,461 2,250 7,721 7,893
Plan amendments - - 1 ,865 - - -
Actuarial (gain) loss 148 2,166 1,688 (2,135) 19,997 6,435
Curtailments - - - (14,199) - -
Gross benefits paid (788) (1,038) (725) (884) - -
- -------------------------------- ------------- ------------- ------------ -------------- ------------- --------------
10,623 10,505 38,707 33,418 142,124 114,406
Change in plan assets:
Employer contributions 788 1,038 725 884 - -
Gross benefits paid (788) (1,038) (725) (884) - -
- -------------------------------- ------------- ------------- ------------ -------------- ------------- --------------
Fair value of plan assets at end
of year - - - - - -
Funded status at end of year (10,623) (10,505) (38,707) (33,418) (142,124) (114,406)
Unrecognized net actuarial
(gain) (3,207) (3,526) 3,040 1,351 33,492 14,305
loss
Unrecognized prior service cost - - - - - -
Unrecognized net transition
obligation (asset) 1,732 1,856 - - 55,670 59,632
================================ ============= ============= ============ ============== ============= ==============
Net amount recognized at end of
year (recorded as accrued
benefit cost in the
accompanying (12,098) (12,175) (35,667) (32,067) (52,962) (40,469)
balance sheet)
================================ ============= ============= ============ ============== ============= ==============
</TABLE>
(1) This includes $16,518,000 classified as Consent judgment payment obligations
in the accompanying balance sheet. Refer to Note 12.
<PAGE>
<TABLE>
The components of net periodic postretirement benefit cost are as follows:
Salaried Plan 1993 Wage Agreement 1992 Plan
- ---------------------------- --------------------------- --------------------------- -------------------------------
Year ended
December 31, 1998 1997 1996 1998 1997 1996 1998 1997 1996
- ---------------------------- -------- -------- --------- -------- -------- --------- -------- ---------- -----------
(in thousands)
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assumptions:
Discount rate 6.75% 7.00% 7.50% 6.75% 7.00% 7.50% 6.75% 7.00% 7.50%
Components of net periodic benefit cost:
Service cost $ 56 $ 48 $ 66 $ - $ - $ - $ - $ - $ -
Interest cost 701 737 614 2,461 2,250 3,469 7,721 7,893 7,103
Amortization of:
Transition obligation 124 124 124 - - - 3,976 3,976 3,976
Prior service cost - - - 1,865 - - - - -
Actuarial (gain) loss (170) (196) (266) - - 109 812 485 199
============================ ======== ======== ========= ======== ========= ======== ======== ========== ===========
Total net periodic benefit
cost $ 711 $ 713 $ 538 $ 4,326 $ 2,250 $ 3,578 $12,509 $ 12,354 $11,278
============================ ======== ======== ========= ======== ========= ======== ======== ========== ===========
Sensitivity of retiree welfare results:
Effect of a one percentage
point increase in assumed
health care cost trend
- - on total service and
interest cost components 44 - - 444 - - 903 - -
- - on postretirement
benefit obligation 428 - - 6,875 - - 13,190 - -
Effect of a one percentage
point decrease in assumed
health care cost trend
- - on total service and
interest cost components (44) - - (444) - - (903) - -
- - on postretirement
benefit obligation (428) - - (6,875) - - (13,190) - -
</TABLE>
Postretirement benefits include medical benefits for retirees and their spouses
(and Medicare Part B reimbursement for certain retirees) and retiree life
insurance.
The health care cost trend assumed on covered charges were 6.0%, 6.5%, and 7.0%
for 1998, 1997 and 1996, respectively decreasing to an ultimate trend of 5.0% in
2001 and beyond.
Cash payments for medical and life insurance benefits were $1,452,000,
$1,823,000, and $8,929,000 in 1998, 1997 and 1996, respectively.
All postretirement benefit obligations were liabilities subject to compromise on
December 31, 1997.
Multiemployer Plan
Until December, 1996, and before the commencement of the Chapter 11 cases for
the Debtor Corporations, the Company made payments to the Combined Benefit Plan,
which is a multiemployer health plan neither controlled nor administered by the
Company. The Combined Benefit Plan is designed to pay benefits to UMWA workers
(and dependents) who retired prior to 1976. Prior to February 1993, the amount
paid by the Company was based on hours worked or tons processed (depending on
the source of the coal) in accordance with the national contract with the UMWA.
Beginning February 1993 the Company was required by the Coal Act to make monthly
premium payments into the Combined Benefit Plan. These payments were based on
the number of beneficiaries assigned to the Company, the Company's UMWA
employees who retired prior to 1976 and the Company's pro-rata assigned share of
UMWA retirees whose companies are no longer in business. The net present value
of the Company's future cash payments is estimated to be $36,200,000. The
Company expenses payments to the Combined Benefit Plan when they are made.
As a result of the bankruptcy, no payments were made during 1998 or 1997.
Payments of $2,805,000 were made in 1996. In January, 1999, in accordance with
the Master Agreement, the Company made payments totaling $19,408,000 to the
Combined Benefit Plan. This payment included $15,715,000 for delinquent
premiums, $2,178,000 for interest on those premiums and $1,515,000 for premiums
due for the first three months of 1999, discounted at 6%. The delinquent
premiums and interest were recognized as expense in 1998. The Company will
resume monthly payments to the Combined Benefit Plan beginning in April, 1999.
All of the postretirement medical and life insurance benefit obligations
discussed above were classified as liabilities subject to compromise in 1997.
11. Retirement Plans
Defined Benefit Pension Plans
During 1997, the Company elected to terminate its over-funded non-contributory
defined benefit pension plan. Pension income for 1997 included a gain on
termination of approximately $1,512,000. Upon termination of the plan, the
excess fund assets reverted to the Company. The reversion to the Company was
approximately $13,040,000, net of excise taxes payable of $3,135,000. The
Company received $12,540,000 of the funds and paid the excise taxes in February,
1998. The remaining $500,000 is being held in escrow to pay any final
termination costs related to the plan.
Simultaneously with the termination of this plan, the Company adopted a new plan
that provides for essentially the same benefits as the old plan for current
employees. For the purpose of the benefit calculation under the new plan,
credited service under the old plan is combined with credited service under the
new plan and a benefit amount is calculated. The amount of the accrued benefit
under the old plan, calculated as of the old plan termination date, is
subtracted to arrive at the benefit amount payable under the new plan.
Benefits are based on years of service and the employee's average annual
compensation for the highest five continuous years of employment as specified in
the plan agreement. The Company's funding policy is to contribute annually the
minimum amount prescribed, as specified by applicable regulations. Prior service
costs and actuarial gains are amortized over plan participants' expected future
period of service using the straight-line method.
Supplemental Executive Retirement Plan
Effective January 1, 1992 the Company adopted the Westmoreland Coal Company
Supplemental Executive Retirement Plan ("SERP"). The SERP is an unfunded
non-qualified deferred compensation plan which provides benefits to certain
employees that are not eligible under the Company's defined benefit pension plan
beyond the maximum limits imposed by the Employee Retirement Income Security Act
("ERISA") and the Internal Revenue Code.
The following table provides a reconciliation of the changes in the plans'
benefit obligations and fair value of assets for the periods ending December 31,
1998 and 1997 and the amounts recognized in the Company's financial statements
for both the defined benefit pension and SERP Plans:
<TABLE>
Qualified Pension Benefits SERP Benefits
-------------------------------------------- ----------------- ----------------- ---------------- ----------------
December 31, 1998 1997 1998 1997
-------------------------------------------- ----------------- ----------------- ---------------- ----------------
(in thousands)
<CAPTION>
<S> <C> <C> <C> <C>
Assumptions:
Discount rate 6.75% 7.00% 6.75% 7.00%
Expected return on plan assets 9.00% 9.00% 9.00% 9.00%
Rate of compensation increase 5.00% 5.00% 5.00% 5.00%
Change in benefit obligation:
Net benefit obligation at beginning of year 1,429 54,632 1,349 1,266
Service cost 183 185 56 59
Interest cost 89 3,959 86 86
Actuarial gain (271) - (98) (62)
Settlements - 8,159 1 - -
Gross benefits paid (12) (65,506)2 - -
-------------------------------------------- ----------------- ----------------- ---------------- ----------------
Net benefit obligation at end of year 1,418 1,429 1,393 1,349
Change in plan assets:
Fair value of plan assets at beginning of
year 5,225 84,177 - -
Actual return on plan assets 273 5,220 - -
Gross benefits paid (11) (84,172)3 - -
-------------------------------------------- ----------------- ----------------- ---------------- ----------------
Fair value of plan assets at end of year 5,487 5,225 - -
Funded status at end of year 4,069 3,796 (1,393) (1,349)
Unrecognized net actuarial gain (507) (490) (563) (517)
Unrecognized prior service cost 222 264 577 693
Unrecognized net transition asset (36) (42) - -
-------------------------------------------- ----------------- ----------------- ---------------- ----------------
Net amount recognized at end of year 3,748 3,528 (1,379) (1,173)
Amounts recognized in the accompanying balance sheet consist of:
Prepaid benefit cost 3,748 3,528 - -
Accrued benefit cost (included in
other liabilities) - - (1,379) (1,173)
============================================ ================= ================= ================ ================
Net amount recognized at end of year 3,748 3,528 (1,379) (1,173)
============================================ ================= ================= ================ ================
</TABLE>
1 Represents additional PBO created in order to purchase annuities and pay lump
sums ($62,789,000 - $54,630,000). 2 Represents purchase of annuities, payment of
lump sums, and regular monthly payments. 3 Represents purchase of annuities,
payment of lump sums, regular monthly payments, related expenses, and reversion
to Company The components of net periodic pension cost (benefit) are as follows:
<PAGE>
<TABLE>
Qualified Pension Benefits SERP Benefits
- ---------------------------------- ------------- ------------- ------------- ------------ ------------- -------------
Year ended December 31, 1998 1997 1996 1998 1997 1996
- ---------------------------------- ------------- ------------- ------------- ------------ ------------- -------------
(in thousands)
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Assumptions:
Discount rate 6.75% 7.00% 7.50% 6.75% 7.00% 7.50%
Expected return on plan assets 9.00% 9.00% 9.00% 9.00% 9.00% 9.00%
Rate of compensation increase 5.00% 5.00% 5.00% 5.00% 5.00% 5.00%
Components of net periodic
benefit cost
Service cost $ 183 $ 185 $ 267 $ 56 $ 59 $ 59
Interest cost 88 3,958 4,103 86 86 79
Expected return on assets (491) (7,393) (7,370) - - -
Amortization of:
Transition asset (6) (284) (285) - - -
Prior service cost 42 42 42 116 116 116
Actuarial gain (36) (543) (358) (52) (45) (43)
================================== ============= ============= ============= ============ ============= =============
Total net periodic pension cost
(benefit) $ (220) $(4,035) $(3,601) $ 206 $ 216 $ 211
================================== ============= ============= ============= ============ ============= =============
</TABLE>
The SERP obligation was a liability subject to compromise at December 31, 1997.
The bankruptcy dismissal had no effect on SERP benefits.
1974 UMWA Pension Plan
The Company was required under the 1993 Wage Agreement to pay amounts based on
hours worked or tons processed (depending on the source of the coal) in the form
of contributions to the 1974 UMWA Pension Plan with respect to UMWA represented
employees. The 1974 UMWA Pension Plan is neither controlled nor administered by
the Company.
Under the Multiemployer Pension Plan Act ("MPPA"), a company contributing to a
multiemployer plan is liable for its share of unfunded vested liabilities upon
withdrawal from the plan. In connection with the cessation of mining operations
described in Note 4, the Company recorded an estimate of the liability the
Company would incur upon withdrawal from the 1974 UMWA Pension plan. The
actuarial estimate of this obligation decreased by $6,000,000 in 1996, which was
reflected as an unusual credit to earnings in 1996. 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, the date of the asset
valuation the Company believes should be used to determine the actual withdrawal
liability, in accordance with the provisions of MPPA. The Company is contesting
this withdrawal liability through arbitration. In accordance with MPAA, the
Company must amortize this withdrawal liability, with interest, during the
arbitration process by making payments of approximately $172,500 per month.
These payments are recoverable to the extent the final assessed amount is less
than the amounts paid.
12. Consent JUDGMENT and other dismissal obligations
On January 4, 1999, pursuant to the consent judgments described in Note 1, the
Company paid the Combined Benefit Fund and the 1992 Benefit Plan $17,230,000 and
$16,518,000, respectively, plus interest of $5,258,000 for a total of
$39,006,000. Included in the amount paid to the Combined Benefit Fund was a
prepayment of approximately $1,515,000 for the first quarter of 1999. The Master
Agreement also required certain other payments to general pre-petition
creditors, the reimbursement of bankruptcy related costs incurred by the Funds
and an annual installment to the 1974 UMWA Pension. These amounts were
$5,686,000 (including interest), $4,000,000, and $1,606,000 (including
interest), respectively. The total amount paid on January 4, 1999, for all
obligations was $50,288,000. Of this amount $26,306,000 was charged to expense
in 1998. Other than the consent judgment obligations, all remaining dismissal
related liabilities are classified at December 31, 1998, as accounts payable and
accrued liabilities.
13. Income Taxes (Benefit)
As discussed in Note 2, on October 1, 1996, the Company increased its ownership
in WRI to 80%, the threshold for including WRI in the Company's consolidated
income tax return. WRI filed a separate tax return for the nine months ended
September 30, 1996 and the Company was not able to offset the Company's net
operating loss carryforwards against WRI's taxable income for that period.
Income tax expense attributable to income (loss) before income taxes consists
of:
1998 1997 1996
- -------------------------------------- -------------- ----------- ------------
(in thousands)
Federal:
Current $ 3,687 $ - $1,150
Deferred - - (579)
- -------------------------------------- -------------- ----------- ------------
$ 3,687 - 571
State:
Current 100 - 4
Deferred - - -
- -------------------------------------- -------------- ----------- ------------
- - 4
- -------------------------------------- -------------- ----------- ------------
Income tax expense $ 3,787 $ - $ 575
====================================== ============== =========== ============
Income tax expense attributable to income (loss) before income taxes differed
from the amounts computed by applying the statutory Federal income tax rate of
34% to pretax income (loss) from continuing operations as a result of the
following:
<TABLE>
1998 1997 1996
- ---------------------------------------------------------------------- ------------- --------------- ---------------
(in thousands)
<CAPTION>
<S> <C> <C> <C>
Computed tax expense (benefit) at statutory rate $ ( 939) $ 9,573 $ 13,232
Increase (decrease) in tax expense resulting from:
Percentage depletion (807) (402) (206)
State income taxes, net - - -
Change in valuation
allowance for net deferred tax assets 5,676 ( 8,657) (12,255)
Other (143) (514) (196)
====================================================================== ============= =============== ===============
Income tax expense (benefit) $ 3,787 $ - $ 575
====================================================================== ============= =============== ===============
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1998 and
1997 are presented below:
<TABLE>
1998 1997
- ------------------------------------------------------------------------------------ -------------- ----------------
Deferred tax assets: (in thousands)
<CAPTION>
<S> <C> <C>
Net operating loss carryforwards $ 38,750 $ 76,484
Alternative minimum tax credit carryforwards 3,702 -
Investment tax credit carryforwards 2,594 4,500
Capital loss carryforwards 1,933 -
DTA impairment 4,136 -
Independent power projects transactions recorded for tax purposes 18,316 -
Deferred income 117 117
Accruals for the following:
Workers' compensation 7,186 8,028
Postretirement benefit obligation 40,011 28,979
Pneumoconiosis benefits 5,273 4,926
Reorganization expenses 1,776 -
Reclamation costs 1,506 1,436
Other accruals (642) (2,346)
- ------------------------------------------------------------------------------------ -------------- ----------------
Total gross deferred assets 124,658 122,124
Less valuation allowance (111,638) (105,962)
- ------------------------------------------------------------------------------------ -------------- ----------------
Net deferred tax assets $ 13,020 $ 16,162
- ------------------------------------------------------------------------------------ -------------- ----------------
Deferred tax liabilities:
Plant and equipment, differences due to depreciation and amortization $(12,807) $ (13,983)
Prepaid pension cost - (1,966)
Advanced royalties, capitalized for financial purposes (110) (110)
Unamortized discount on long-term debt for financial purposes (103) (103)
- ------------------------------------------------------------------------------------ -------------- ----------------
Total gross deferred tax liabilities (13,020) (16,162)
- ------------------------------------------------------------------------------------ -------------- ----------------
Net deferred tax liability $ - $ -
==================================================================================== ============== ================
</TABLE>
The Company and subsidiaries have available net operating loss carryforwards to
reduce future taxable income and investment tax credit carryforwards to offset
future taxes payable. Following are the expiration date and amounts of the net
operating loss carryforwards for both regular and alternative minimum tax
purposes:
-------------------- -------------- --------------
Expiration Date Regular Tax Minimum Tax
-------------------- -------------- --------------
(in thousands)
2007 7,409 -
2008 13,014 -
2009 4,754 -
2010 51,986 -
fter 2011 36,807
-------------------- -------------- --------------
Total $113,970 $ -
==================== ============== ==============
The Company has investment tax credit carryforwards of $2,594,000 which expire
by the year 2000.
14. 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 seventeen quarterly dividends which are in arrears
(dividend payment dates July 1, 1994, October 1, 1994, January 1, 1995, October
1, 1995, January 1, 1996, April 1, 1996, July 1, 1996, October 1, 1996, January
1, 1997, April 1, 1997, July 1, 1997, October 1, 1997, January 1, 1998, April 1,
1998, July 1, 1998, October 1, 1998, and January 1, 1999) amount to $20,772,000
in the aggregate ($36.13 per preferred share or $9.03 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 December 31, 1998, of $21,845,000.
As a result of the filing of voluntary petitions for reorganization under
Chapter 11 of the United States Bankruptcy Code, the Company was prohibited from
paying dividends, either common or preferred. The terms of the Master Agreement,
including various financial covenants over the next six years, discussed in Note
1 to the Consolidated Financial Statements, further prohibit the payment of
dividends, either common or preferred, until after June 30, 1999, in any event.
15. Incentive Stock Option and Stock Appreciation Rights Plans
As of December 31, 1998, the Company had options and restricted stock
outstanding from three Incentive Stock Option ("ISOs") and Stock Appreciation
Rights ("SARs") Plans for employees.
The 1982 and 1985 Plans provide for the granting of ISOs and SARs and the 1995
Plan provides for the granting of ISOs and restricted stock. The 1985 and 1995
Plans also provide for the grant of non-qualified options, if so designated, and
contains the terms specified for non-qualified options. A SAR gives the holder
the right to receive, without payment to the Company, its "value" in cash. The
"value" of an SAR for this purpose would be the excess, if any, of the fair
market value of one share of common stock of the Company on the date the right
is exercised over the exercise price of the SAR. Restricted stock is an award
payable in shares of common stock subject to forfeiture under certain
conditions. ISOs granted under the 1982, 1985 and 1995 Plans may not have an
option price that is less than the fair market value of the stock on the date of
grant. ISOs and SARs under the 1982 and 1985 Plans may not be exercised until
two years from the date of grant as to 50% of the total number granted and as to
the remaining 50% not until three years from the date of grant; the right to
exercise ISOs and SARs terminates after eight years from the date of grant. The
maximum number of shares of the Company's common stock and SARs that could be
issued or granted under the Plans is as follows:
<TABLE>
1982 Plan 1985 Plan 1995 Plan
------------------------------------------ --------------------- ----------------- ----------------
<CAPTION>
<S> <C> <C> <C>
Shares of common stock 200,000 400,000 350,000
Stock appreciation rights 470,000 940,000 N/A
------------------------------------------ --------------------- ----------------- ----------------
</TABLE>
The 1982 Plan expired on January 4, 1992, and the 1985 Plan expired on January
7, 1995. Therefore, no further ISOs or SARs may now be granted from either of
those plans. Information for 1998, 1997 and 1996 with respect to the Plans is as
follows:
<TABLE>
Weighted
Stock Stock Average
Issue Price Restricted Option Appreciation Exercise
Range Stock Shares Rights Price
- ------------------------------------------ ---------------- ------------- ----------- --------------- --------------
<CAPTION>
<S> <C> <C> <C> <C> <C>
Outstanding at December 31, 1995 $ 2.63-18.50 5,000 545,899 2,766 $ 6.89
Expired or forfeited in 1996 $ 2.63-18.50 - (56,342) - $ 6.93
- ------------------------------------------ ---------------- ------------- ----------- --------------- --------------
Outstanding at December 31, 1996 $ 2.63-18.50 5,000 489,557 2,766 $ 6.88
Expired or forfeited in 1997 $ 2.63-14.50 - (140,471) (2,766) $ 6.10
========================================== ================ ============= =========== =============== ==============
Outstanding at December 31, 1997 and 1998 $ 2.63-18.50 5,000 349,086 - $ 7.20
========================================== ================ ============= =========== =============== ==============
</TABLE>
On January 26, 1999, 40,000 shares of restricted stock and 65,000 shares of
stock options were granted to a group of employees, including one officer. The
options were granted at an exercise price of $4.00 per share and are exercisable
upon grant.
The 1991 Non-Qualified Stock Option Plan for Non-Employee Directors provides for
the granting on September 1 of each year of options to purchase 1,500 shares of
the Company's common stock. The maximum number of shares of the Company's common
stock that may be issued pursuant to options granted under the plan is 200,000
shares and the options expire ten years after the date of grant. Options granted
pursuant to this plan vest after the completion of one year of board service
following the date of grant. Grants under this plan were suspended in 1996 and
at December 31, 1996, 1997 and 1998, there were options outstanding exercisable
for 18,000 shares of common stock at a weighted average exercise price per share
of $8.76.
In 1996, the shareholders approved a stock option plan for directors. As
described in the Proxy Statement for the 1996 Annual Meeting of Shareholders,
the plan provides for the grant of non-qualified stock options to directors on
an annual basis beginning on the date of the 1996 Annual Meeting with options
for 20,000 shares to be granted to each director on that date or after a
director is first elected or appointed, and options for 10,000 shares to be
granted to each director after each annual meeting thereafter. The maximum
number of shares of the Company's common stock that may be issued or granted
under the plan is 350,000 and the options expire not later than ten years after
the date of grant. Options granted pursuant to this plan vest 25% per year over
a four year period, so that 25% vest after the first year, another 25% after the
second year, another 25% after the third year and the final 25% after the fourth
year. Options granted during a director's period of active service continue to
vest pursuant to this schedule if a director leaves the board due to reaching
retirement age. In the event of a change of control of the Company, any option
that was not previously exercisable and vested will become fully exercisable and
vested.
As it has already done with all other creditors and shareholders, it is the
Company's intention to restore the directors as nearly as possible to the
position they would have enjoyed now that the bankruptcy has been successfully
ended. However, none of the awards made will be exercisable prior to the
forthcoming meeting of shareholders.
The Company applies APB Opinion 25 and related Interpretations in accounting for
its plans. Accordingly, no compensation cost has been recognized for its stock
option plans. Had compensation cost for the Company's three stock-based
compensation plans been determined on the fair value at the grant dates for
awards under those plans consistent with the FASB Statement 123, the Company's
net income (loss) and income (loss) per share would have been reduced to the pro
forma amounts indicated below:
<TABLE>
1998 1997 1996
----------------------------------------- ------------------- ------------------ -------------------
(in thousands, except per share data)
<CAPTION>
<S> <C> <C> <C>
Net Income (loss):
As reported $(11,436) $ 23,268 $ 33,455
Pro forma $(11,600) $ 23,104 $ 33,273
Basic and diluted income (loss) per share:
As reported $ (1.64) $ 3.34 $ 4.80
Pro forma $ (1.67) $ 3.32 $ 4.78
----------------------------------------- ------------------- ------------------ -------------------
</TABLE>
The fair value of each option grant was estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for options granted in 1995: no dividend yield; expected
volatility of 124%; risk-free interest rate of 5.59%; and expected life of 8
years. There were no options granted in 1996, 1997 or 1998
16. 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.
It also includes coal mining operations in the eastern United States which were
idled in the third quarter of 1995. 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 1998, 1997 and 1996 is as
follows:
<TABLE>
Independent Terminal Discontinued
Coal Power Operation Corporate Operations Total
- ------------------------------- ------------- --------------- -------------- ----------- --------------- ------------
1998
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Revenues $44,010 $ 64,465 $ 94 $ - $ - $108,569
Earnings of equity
investees 64,465 94 64,559
- - -
Operating income (loss) 1,918 61,805 (985) (45,666) - 17,072
Depreciation, depletion and
amortization 1,472 39 648 130 - 2,289
DTA impairment charge - - 12,164 - - 12,164
Interest expense 270 70 9 5,029 - 5,378
Interest income 674 1,917 87 916 - 3,594
Investment in equity
investees - 62,386 5,475 - - 67,861
Total assets 61,555 124,617 7,040 22,394 - 215,606
Capital expenditures 2,935 8 - 2 - 2,945
1997
Revenues 47,182 17,770 880 - - 65,832
Earnings of equity
investees - 17,770 880 - - 18,650
Operating income (loss) 2,593 15,126 (615) 16,516 - 33,620
Depreciation, depletion and
amortization 1,499 96 60 60 139 1,854
Interest expense 180 113 - 27 - 320
Interest income 381 551 68 552 - 1,552
Investment in equity
investees - 54,152 18,680 - - 72,832
Total assets 53,420 70,546 20,683 37,348 - 181,997
Capital expenditures 151 8 - 15 - 174
1996
Revenues 44,152 15,335 827 - - 60,314
Earnings of equity
investees - 15,335 827 - - 16,162
Operating income (loss) (1,305) 13,569 (611) (12,497) - (844)
Depreciation, depletion and
amortization 1,687 100 73 129 347 2,336
Interest expense 196 91 - 113 - 400
Interest income 168 438 61 788 - 1,455
Investment in equity
investees - 51,386 19,841 - - 71,227
Total assets 46,495 53,276 20,636 25,786 7,778 153,971
Capital expenditures 338 28 - 85 213 664
- ------------------------------- ------------- --------------- -------------- ----------- --------------- ------------
</TABLE>
<TABLE>
Reconciliation of operating income to income from continuing operations before
income taxes:
Independent Terminal
Coal Power Operation Corporate Total
- ------------------------------------ --- ----------- ----------------- ------------ -------------- -------------
1998
<CAPTION>
<S> <C> <C> <C> <C> <C>
Operating income $ 1,918 $ 61,805 $ (985) $ (45,666) $ 17,072
Gains on sale of assets - - - 475 475
Interest expense (270) (70) (9) (5,029) (5,378)
Interest income 674 1,917 87 916 3,594
Minority interest (775) - - - (775)
Other income 35 - - 1,964 1,999
Reorganization costs - - - (9,872) (9,872)
=========== ================= ============ ============== =============
Income from continuing
operations before income taxes $ 1,582 $ 63,652 $ (907) $ (57,212) $ 7,115
=========== ================= ============ ============== =============
1997
Operating income $ 2,593 $ 15,126 $ (615) $ 16,516 $ 33,620
Gains on sale of assets - - - 969 969
Interest expense (180) (113) - (27) (320)
Interest income 381 551 68 552 1,552
Minority interest (1,092) - - - (1,092)
Other income 128 - - 585 713
Reorganization costs - - - (2,484) (2,484)
=========== ================= ============ ============== =============
Income from continuing
operations before income taxes $ 1,830 $ 15,564 $ (547) $ 16,111 $ 32,958
=========== ================= ============ ============== =============
1996
Operating income $ (1,305) $ 13,569 $ (611) $ (12,497) $ (844)
Gains on sale of assets - - - 24,238 24,238
Interest expense (196) (91) - (113) (400)
Interest income 168 438 61 788 1,455
Minority interest (890) - - - (890)
Other income 51 14 - 1,971 2,036
Reorganization costs - - - - -
=========== ================= ============ ============== =============
Income from continuing
operations before income taxes $ (2,172) $ 13,930 $ (550) $ 14,387 $ 25,595
=========== ================= ============ ============== =============
</TABLE>
17. Commitments and Contingencies
Protection of the Environment
The Company believes its mining operations are in compliance with applicable
federal, state and local environmental laws and regulations, including those
relating to surface mining and reclamation, and it is the policy of the Company
to operate in compliance with such standards. The Company maintains compliance
primarily through maintenance and monitoring activities. WRI has an agreement
with its mining contractor, Morrison Knudsen Company, Inc. (which owns 20% of
the stock of WRI), which determined the Company's maximum liability for
reclamation costs associated with final mine closure. It calls for the Company
to pay approximately $1,700,000 over a 15 year period which began in December
1990. All remaining liability is that of customers who are obligated to pay
final reclamation costs under provisions of their respective coal sales
contracts or Morrison Knudsen. In addition, per ton reclamation fees imposed by
the Federal Surface Mining Control and Reclamation Act of 1977 (the "Surface
Mining Act") amounted to approximately $2,241,000, $2,455,000 and $1,707,000 in
1998, 1997 and 1996, respectively. The Company estimates the total cost for the
reclamation of its remaining Virginia Division properties is $2,736,000, all of
which has been accrued as of December 31, 1998. No assurance can be given that
the amount accrued accurately reflects the actual cost of reclamation activities
that may be required. Costs incurred to perform reclamation in 1998, 1997, and
1996 amounted to $153,000, $257,000, and $148,000 respectively.
In the event final reclamation is not performed in accordance with state and
federal regulations, the Company has $10,600,000 and $5,434,000 of reclamation
bonds in place in Montana and Virginia, respectively, to assure compliance with
all applicable regulations.
Adventure Resources, Inc.
The Company has both secured and unsecured claims against Adventure Resources,
Inc. ("Adventure") in the United States Bankruptcy Court for the Southern
District of West Virginia. The secured claims approximate $3,776,000 and are
collateralized by first and subordinated liens on certain assets of Adventure.
Cash payments of $1,028,000 were received during 1998 and the Company is seeking
to recover remaining amounts. As of December 31, 1998, all remaining claims
against Adventure have been fully reserved due to the uncertainty of collection.
Lease Obligations
The Company leases coal lands from third-parties. Under the terms of these
agreements, the Company is subject to minimum annual royalties aggregating
$198,000 plus real estate taxes, until the reserves are exhausted.
WRI has an agreement to lease coal reserves from the Crow Tribe of Indians which
is in effect until exhaustion of the underlying reserves. This lease requires
annual rentals, recoupable minimum royalty and production royalty payments. The
royalty rate varies from 6% of the F.O.B. mine price to a 12.5% rate net of all
production-based taxes.
Royalties and rentals charged to expense under all lease agreements, including
those in effect for WRI, amounted to $3,591,000, $3,742,000, and 3,438,000 in
1998, 1997 and 1996, respectively.
The Company has operating lease commitments expiring at various dates, primarily
for real property and equipment. Minimum rental obligations existing under these
leases at December 31, 1998 are as follows:
---------------------------------------
(in thousands)
1999 $ 344
2000 251
2001 129
2002 12
----------------------- ---------------
Long-Term Sales Commitments
The following table presents total sales tonnage the Company expects to ship
under existing long-term contracts for the next five years from the Company's
mining operations (all from WRI):
-------------------------------------------------------------
Projected Sales Tonnage Under
Existing Long-Term Contracts (000s)
-------------------------------------------------------------
1999 6,200
2000 3,700
2001 3,700
2002 3,700
2003 3,700
-------------------------------- ----------------------------
WRI has also entered into an option agreement with Northern States Power whereby
it has agreed to sell up to an additional 200,000,000 tons of coal. As
compensation for granting the option, WRI receives 1 1/4 cents, payable
quarterly (with applicable price adjustments) for each optioned ton. The option
may be exercised at any time in whole or in part through December 31, 2005. If
exercised, the sales price will be based on the market price at the time the
option is exercised. WRI recorded income totaling $3,171,000, $3,128,000, and
$3,067,000 during 1998, 1997 and 1996, respectively, relative to the option
agreement. No coal has been delivered under the option agreement.
18. Transactions with Affiliated Companies
The Company leases coal lands from Penn Virginia Coal Company whose parent
company, Penn Virginia Corporation ("Penn Virginia") held a 10.85% voting
interest in the Company at December 31, 1996. In January, 1997 Penn Virginia
reduced its ownership interest in the Company to an insignificant level and is
no longer considered an affiliate. The Company paid no royalties to Penn
Virginia for coal sold during 1998 or 1997. Amounts paid to Penn Virginia for
royalties on coal was $1,301,000 for the year ended December 31, 1996. In 1996
and 1995 the Company sold certain mineral leases back to Penn Virginia. Refer to
Note 3 to the Consolidated Financial Statements for additional information
regarding the sale of these leases.
Westmoreland Resources, Inc., a 80% owned subsidiary, has a coal mining contract
with Morrison Knudsen Company, Inc., one of its stockholders. Mining costs
incurred under the contract were $22,654,000, $24,295,000, and $16,552,000 in
1998, 1997 and 1996, respectively.
<PAGE>
19. Quarterly Financial Data (Unaudited)
Summarized quarterly financial data for 1998 and 1997 are as follows:
<TABLE>
Three Months Ended
March 31 June 30 Sept. 30 Dec. 31
- ---------------------------------------------- ----------------- ----------------- ---------------- ----------------
(in thousands except per share data)
1998
<CAPTION>
<S> <C> <C> <C> <C>
Revenues $ 16,962 $ 61,845 $ 15,485 $ 14,277
Costs and expenses (16,198) (15,342) (15,226) (44,731)
- ---------------------------------------------- ----------------- ----------------- ---------------- ----------------
Operating income 764 46,503 259 (30,454)
Gain (loss) on sale of assets 136 51 204 84
Income from continuing operations
before reorganization items and
income taxes 2,084 46,221 715 (30,439)
Reorganization items:
Legal and consulting fees (659) (776) (1,321) (7,116)
Interest expense - - - (5,188)
Interest income 637 691 1,102 1,164
Income from continuing operations
before income taxes 2,062 46,136 496 (41,579)
Income tax expense - - (197) (3,590)
Cumulative effect of change in
accounting principle - (9,876) - -
Net income (loss) 2,062 36,260 299 (45,169)
Less preferred stock dividends
in arrears (1,222) (1,222) (1,222) (1,222)
============================================== ================= ================= ================ ================
Income (loss) applicable to common
shareholders $ 840 $ 35,038 $ (923) $(46,391)
============================================== ================= ================= ================ ================
Income (loss) per share applicable to common shareholders:
Continuing operations $ .12 $ 6.45 $ (.13) $ (6.66)
Cumulative effect of change in
accounting principle - (1.42) - -
- ---------------------------------------------- ----------------- ----------------- ---------------- ----------------
$ .12 $ 5.03 $ (.13) $ (6.66)
============================================== ================= ================= ================ ================
Number of common and common
equivalent shares outstanding
(weighted average) 6,965 6,965 6,965 6,965
============================================== ================= ================= ================ ================
</TABLE>
<PAGE>
<TABLE>
Three Months Ended
March 31 June 30 Sept. 30 Dec. 31
- ---------------------------------------------- ----------------- ----------------- ---------------- ----------------
(in thousands except per share data)
1997
<CAPTION>
<S> <C> <C> <C> <C>
Revenues $ 16,534 $ 16,688 $ 18,994 $ 13,616
Costs and expenses (14,216) (14,226) (14,172) 10,402
- ---------------------------------------------- ----------------- ----------------- ---------------- ----------------
Operating income 2,318 2,462 4,822 24,018
Gain (loss) on sale of assets (905) 732 99 1,043
Income from continuing operations
before reorganization items and
income taxes 2,478 3,542 4,978 22,892
Reorganization items:
Legal and consulting fees (750) (1,034) (900) 200
Interest income 324 327 403 498
Income from continuing operations
before income taxes 1,880 2,766 4,320 23,992
Loss from discontinued operations (521) (3,320) (813) (148)
Net income (loss) 1,359 (554) 3,507 23,844
Less preferred stock dividends
in arrears (1,222) (1,222) (1,222) (1,222)
============================================== ================= ================= ================ ================
Income (loss) applicable to common
shareholders $ 137 $ (1,776) $ 2,285 $ 22,622
============================================== ================= ================= ================ ================
Income (loss) per share applicable to common shareholders:
Continuing operations .09 .22 .45 3.27
Discontinued operations (.07) (.48) (.12) (.02)
- ---------------------------------------------- ----------------- ----------------- ---------------- ----------------
$ .02 $ (.26) $ .33 $ 3.25
============================================== ================= ================= ================ ================
Number of common and common
equivalent shares outstanding
(weighted average) 6,965 6,965 6,965 6,965
============================================== ================= ================= ================ ================
</TABLE>
<PAGE>
Independent Auditor's Report
The Board of Directors and Shareholders
Westmoreland Coal Company:
We have audited the accompanying consolidated balance sheets of Westmoreland
Coal Company and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of operations, shareholders' equity (deficit) and cash
flows for each of the years in the three-year period ended December 31, 1998.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Westmoreland Coal
Company and subsidiaries at December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
As discussed in Notes 1 and 9 to the consolidated financial statements, the
Company changed its method of accounting for start-up costs in 1998 and its
method of accounting for pneumoconiosis benefits in 1996.
KPMG LLP
Denver, Colorado
February 18, 1999
<PAGE>
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
This item is not applicable.
PART III
- --------------------------------------------------------------------------------
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11 - EXECUTIVE COMPENSATION
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For Items 10-13, inclusive, except for information concerning executive officers
of Westmoreland included as an unnumbered item in Part I above, reference is
hereby made to Westmoreland's definitive proxy statement to be filed in
accordance with Regulation 14A pursuant to Section 14(a) of the Securities
Exchange Act of 1934, which is incorporated herein by reference thereto.
<PAGE>
PART IV
- --------------------------------------------------------------------------------
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
a) 1. The financial statements filed herewith are the Consolidated
Balance Sheets of the Company and subsidiaries as of December 31, 1998
and December 31, 1997, and the related Consolidated Statements of
Operations, Shareholders' Equity (Deficit) and Cash Flows for each of
the years in the three-year period ended December 31, 1998 together
with the Summary of Significant Accounting Policies and Notes, which
are contained on pages __ through __ inclusive.
2. The following financial statement schedule is filed herewith:
Schedule II - Valuation Accounts
3. The following exhibits are filed herewith as required by Item 601
of Regulation S-K:
(2) Plan of acquisition, reorganization, arrangement, liquidation or
succession
(a) Westmoreland's Plan of Reorganization was confirmed by an order of
the United States Bankruptcy Court for the District of Delaware on
December 16, 1994, and upon complying with the conditions of the
order, Westmoreland emerged from bankruptcy on December 22, 1994. A
copy of the confirmed Plan of Reorganization was filed as an Exhibit
to Westmoreland's Report on Form 8-K filed December 30, 1994, which is
incorporated herein by reference thereto.
(3) (a) Articles of Incorporation: Restated Certificate of Incorporation,
filed with the Office of the Secretary of State of Delaware on
February 21, 1995 and filed as Exhibit 3(a) to Westmoreland's 10-K for
1994 which Exhibit is incorporated herein by reference.
(b) Bylaws, as amended on January 26, 1999, and filed as Exhibit
(3)(b).
(4) Instruments defining the rights of security holders
(a) Certificate of Designation of Series A Convertible Exchangeable
Preferred Stock of the Company defining the rights of holders of such
stock, filed July 8, 1992 as an amendment to the Company's Certificate
of Incorporation, and filed as Exhibit 3(a) to Westmoreland's Form
10-K for 1992, which Exhibit is incorporated herein by reference.
(b) Form of Indenture between Westmoreland and Fidelity Bank, National
Association, as Trustee relating to the Exchange Debentures. Reference
is hereby made to Exhibit 4.1 to Form S-2 Registration 33-47872 filed
May 13, 1992, and Amendments 1 through 4 thereto, which Exhibit is
incorporated herein by reference.
(c) Form of Exchange Debenture. Reference is hereby made to Exhibit
4.2 to Form S-2 Registration 33-47872 filed May 13, 1992, and
Amendments 1 through 4 thereto, which Exhibit is incorporated herein
by reference.
(d) Form of Deposit Agreement among Westmoreland, First Chicago Trust
Company of New York, as Depository and the holders from time to time
of the Depository Receipts. Reference is hereby made to Exhibit 4.3 to
Form S-2 Registration 33-47872 filed May 13, 1992, and Amendments 1
through 4 thereto, which Exhibit is incorporated herein by reference.
(e) Form of Certificate of Designation for the Series A Convertible
Exchangeable Preferred Stock. Reference is hereby made to Exhibit 4.4
to Form S-2 Registration 33-47872 filed May 13, 1992, and Amendments 1
through 4 thereto, which Exhibit is incorporated herein by reference.
(f) Specimen certificate representing the common stock of
Westmoreland, filed as Exhibit 4(c) to Westmoreland's Registration
Statement on Form S-2, Registration No. 33-1950, filed December 4,
1985, is hereby incorporated by reference.
(g) Specimen certificate representing the Preferred Stock. Reference
is hereby made to Exhibit 4.6 to Form S-2 Registration 33-47872 filed
May 13, 1992, and Amendments 1 through 4 thereto, which Exhibit is
incorporated herein by reference.
(h) Form of Depository Receipt. Reference is hereby made to Exhibit
4.7 to Form S-2 Registration 33-47872 filed May 13, 1992, and
Amendments 1 through 4 thereto, which Exhibit is incorporated herein
by reference.
(i) Rights Agreement, dated as of January 28, 1993, between
Westmoreland Coal Company and the First Chicago Trust Company of New
York. Reference is hereby made to Exhibit 4 to Westmoreland's Form 8-K
filed February 1, 1993, which Exhibit is incorporated herein by
reference.
(j) In accordance with paragraph (b)(4)(iii) of Item 601 of Regulation
S-K, Westmoreland hereby agrees to furnish to the Commission, upon
request, copies of all other long-term debt instruments.
(10) Material Contracts
(a) On January 5, 1982, the Board of Directors of Westmoreland adopted
a Management by Objectives Plan ("MBO Plan") for senior management. A
description of this MBO Plan is set forth on page 9 of Westmoreland's
definitive proxy statement dated March 31, 1982, which description is
incorporated herein by reference thereto.
(b) Westmoreland Coal Company 1982 Incentive Stock Option and Stock
Appreciation Rights Plan--Reference is hereby made to Exhibit 10(b) to
Westmoreland's Annual Report on Form 10-K for 1981 (SEC File #0-752),
which Exhibit 10(b) is incorporated herein by reference thereto.
(c) Westmoreland Coal Company 1985 Incentive Stock Option and Stock
Appreciation Rights Plan--Reference is hereby made to Exhibits 10(d)
to Westmoreland's Annual Report on Form 10-K for 1984 (SEC File
#0-752), which Exhibit 10(d) is incorporated herein by reference
thereto.
(d) In 1990, the Board of Directors established an Executive Severance
Policy for certain executive officers, which provides a severance
award in the event of termination of employment. Reference is hereby
made to Exhibit 10(h) to Westmoreland's Annual Report on Form 10-K for
1990 (SEC File #0-752), which Exhibit 10(h) is incorporated herein by
reference thereto.
(e) Westmoreland Coal Company 1991 Non-Qualified Stock Option Plan for
Non-Employee Directors - Reference is hereby made to Exhibit 10(i) to
Westmoreland's Annual Report on Form 10-K for 1990 (SEC File #0-752),
which Exhibit 10(i) is incorporated herein by reference thereto.
(f) Effective January 1, 1992, the Board of Directors established a
Supplemental Executive Retirement Plan ("SERP") for certain executive
officers and other key individuals, to supplement Westmoreland's
Retirement Plan by not being limited to certain Internal Revenue Code
limitations. A description of this SERP is set forth on page 11 of
Westmoreland's definitive proxy statement dated June 9, 1992, which
description is incorporated herein by reference thereto.
(g) Amended Coal Lease Agreement between Westmoreland Resources, Inc.
and Crow Tribe of Indians, dated November 26, 1974, as further amended
in 1982, filed as Exhibit (10)(a) to Westmoreland's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1992, is incorporated by
reference thereto.
(h) Effective February 1, 1995, the Board of Directors established a
Long-Term Incentive Stock Plan for officers and other salaried
employees of Westmoreland and its subsidiaries, subject to shareholder
approval. A description of this Plan is set forth in Westmoreland's
definitive proxy to be dated on or before April 28, 1995, which
description is incorporated herein by reference thereto.
(i) Master Agreement, dated as of January 4, 1999 between Westmoreland
Coal Company, Westmoreland Resources, Inc., Westmoreland Energy, Inc.,
Westmoreland Terminal Company, and Westmoreland Coal Sales Company,
the UMWA 1992 Benefit Plan and its Trustees, the UMWA Combined Benefit
Fund and its Trustees, the UMWA 1974 Pension Trust and its Trustees,
the United Mine Workers of America, and the Official Committee of
Equity Security Holders in the chapter 11 case of Westmoreland Coal
and its official members filed as Exhibit No. 99.2 to Westmoreland's
Form 8-K filed on February 5, 1999, which is incorporated herein by
reference thereto.
(j) Contingent Promissory Note between Westmoreland Coal Company,
Westmoreland Resources, Inc., Westmoreland Energy, Inc., Westmoreland
Coal Sales Company, and Westmoreland Terminal Company and the UMWA
Combined Benefit Fund and the UMWA 1992 Benefit Plan filed as Exhibit
No. 99.3 to Westmoreland's Form 8-K filed on February 5, 1999, which
is incorporated herein by reference thereto.
(21) Subsidiaries of the Registrant
(23) Consent of Independent Certified Public Accountants
(27) Financial Data Schedule
(99) WEI Project Chart
b) Reports on Form 8-K.
(1) On October 15, 1998, the Company filed a report on Form 8-K under Item
5 - Other Events, announcing that it had reached a settlement with the
Benefit Funds, the UMWA, and the Equity Committee for the resolution
of its Chapter 11 cases.
(2) On December 24, 1998, the Company filed a report on Form 8-K under
Item 5 - Other Events, announcing that its Chapter 11 cases were
dismissed by the Bankruptcy Court, subject to a 10 day stay period.
(3) On February 4, 1999, the Company filed a report on Form 8-K under Item
5 - Other Events, announcing that it had executed the Master
Agreement.
<PAGE>
SIGNATURES
- --------------------------------------------------------------------------------
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
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: February 18, 1999 By: /s/ Robert J. Jaeger
----------------------------------
Robert J. Jaeger
Senior Vice President of
Finance and Treasurer
(Principal Financial Officer)
Date: February 18, 1999 By: /s/ Larry W. Mikkola
----------------------------------
Larry W. Mikkola
Controller
(Principal Accounting Officer)
<TABLE>
Signature Title Date
- ---------------------------------------- ---- ----------------------------------------- --- ------------------------
<CAPTION>
<S> <C> <C>
Principal Executive Officer:
Chairman of the Board, President, and
Chief Executive Officer
/s/ Christopher K. Seglem February 18, 1999
- ---------------------------------------- ----------------------------------------- ------------------------
Christopher K. Seglem
Directors:
/s/ Pemberton Hutchinson Director February 18, 1999
- ---------------------------------------- ----------------------------------------- ------------------------
Pemberton Hutchinson
/s/ William R. Klaus Director February 18, 1999
- ---------------------------------------- ----------------------------------------- ------------------------
William R. Klaus
/s/ Robert E. Killen Director February 18, 1999
- ---------------------------------------- ----------------------------------------- ------------------------
Robert E. Killen
/s/ Edwin E. Tuttle Director February 18, 1999
- ---------------------------------------- ----------------------------------------- ------------------------
Edwin E. Tuttle
/s/ Thomas W. Ostrander Director February 18, 1999
- ---------------------------------------- ----------------------------------------- ------------------------
Thomas W. Ostrander
/s/ James W. Sight Director February 18, 1999
- ---------------------------------------- ----------------------------------------- ------------------------
James W. Sight
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
The Board of Directors and Shareholders
Westmoreland Coal Company:
Under date of February 18, 1999, we reported on the consolidated balance sheets
of Westmoreland Coal Company and subsidiaries as of December 31, 1998 and 1997,
and the related statements of operations, shareholders' equity (deficit), and
cash flows for each of the years in the three-year period ended December 31,
1998, which report appears in the December 31, 1998, Annual Report on Form 10-K
of Westmoreland Coal Company. In connection with our audits of the
aforementioned consolidated financial statements, we also audited the related
financial statement schedule II. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement schedule based on our audits.
In our opinion, such financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
KPMG LLP
Denver, Colorado
February 18, 1999
<PAGE>
<TABLE>
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
Valuation Accounts
Years ended December 31, 1998, 1997, and 1996
- --------------------------------------------------------------------------------------------------------------------
Balance at Deductions Other Balance at
beginning of credited to additions end of year
year earnings (deductions) (B)
- -------------------------------------------- --------------- --------------- ---------------- --- ------------- ----
<CAPTION>
<S> <C> <C> <C> <C>
Year ended December 31, 1998:
Allowance for doubtful accounts $ 4,804 (1,028) - $ 3,776 (A)
============================================ =============== =============== ================ === ============= ====
Year ended December 31, 1997:
Allowance for doubtful accounts $ 5,864 (1,410) 350 $ 4,804 (A)
============================================ =============== =============== ================ === ============= ====
Year ended December 31, 1996:
Allowance for doubtful accounts $ 10,313 (3,449) (1,000) $ 5,864 (A)
============================================ =============== =============== ================ === ============= ====
</TABLE>
Amounts above include current and non-current valuation accounts.
(A) Includes reserves of $3,776,000, $4,804,000 and $5,864,000 as of December
31, 1998, 1997 and 1996 respectively, reported as a reduction of Other
Assets in the Company's Consolidated Balance Sheets.
(B) Deductions represent the reserves associated with assets sold to third
parties. Additions represent a provision for accrued interest.
<PAGE>
WESTMORELAND COAL COMPANY
(DELAWARE CORPORATION)
BYLAWS
ARTICLE I
SHAREHOLDERS
SECTION 1. Meetings
(a) Annual Meeting. Unless otherwise fixed by the Board of
Directors, the annual meeting of shareholders for the
election of Directors and for other business shall be
held on the first Tuesday of May in each year, or, if
that day is a legal holiday, on the next following
business day.
(b) Special Meetings. Special meetings of the shareholders
may be called at any time by the chief executive
officer, or a majority of the Board of Directors, or
the holders of at least one-fifth of the shares of
stock of the Company outstanding and entitled to vote.
(c) Place. Meetings of the shareholders shall be held in
Colorado Springs, Colorado (where the company will
maintain an office at which it may keep its books to
the extent permitted by law) or such other location as
may be fixed by the Board of Directors in the notice of
meeting.
SECTION 2. Notice
Written notice of the time and place of all meetings of
shareholders and of the purpose of each special meeting of
shareholders shall be given to each shareholder entitled to
vote thereat at least ten days before the date of the meeting,
unless a greater period of notice is required by law in a
particular case.
SECTION 3. Voting
(a) Voting Rights. Except as otherwise provided herein, or
in the Certificate of Incorporation, or by law, every
shareholder shall have the right at every shareholders'
meeting to one vote for every share standing in his
name on the books of the Company which is entitled to
vote at such meeting. Every shareholder may vote either
in person or by proxy.
<PAGE>
(b) Number of Directors. The number of directors shall be
six, provided, however, that upon the occurrence of a
Director Event and the resignation of any director with
whom a Director Service Agreement exists, the number of
directors shall be reduced accordingly (not including
directors that are elected or are to be elected by the
vote of a separate class or series of the Company's
capital stock). A "Director Event" shall mean the
following events: (1) an announcement by the Company
that it will exchange its 8 and 1/2% Convertible
Subordinated Exchange Debentures due July 1, 2012 for
the Company's outstanding Series A Convertible
Exchangeable Preferred Stock (the "Preferred Stock");
(2) a reduction in the aggregate liquidation preference
of outstanding Preferred Stock to an amount of less
than $5,000,000, whether by reason or redemption,
exchange, purchase, conversion or otherwise; or (3) if
the Company shall have failed to declare and pay or set
apart for payment in full the dividends accumulated on
the outstanding shares of Preferred Stock for any six
quarterly dividend payment periods, whether or not
consecutive.
SECTION 4. Quorum and Required Vote
The presence, in person or by proxy, of the holders of a
majority of the outstanding shares of stock of the Company
entitled to vote at a meeting shall constitute a quorum. If a
quorum is not present no business shall be transacted except
to adjourn to a future time. Except as may otherwise be
provided in these Bylaws, in the Certificate of Incorporation
or by law, directors shall be elected by the affirmative votes
of a plurality of the votes of the shares present in person or
by proxy at the meeting, and in all other matters, the
affirmative vote of a majority of the shares present in person
or by proxy at the meeting shall be the act of the
shareholders.
ARTICLE II
DIRECTORS
SECTION 1. Term of Office
Each director elected at an annual meeting of the shareholders
shall hold office until his successor is elected and has
qualified or until his earlier resignation or proper removal.
SECTION 2. Powers
The business of the Company shall be managed by the Board of
Directors which shall have all powers conferred by law and
these bylaws. The Board of Directors shall elect, remove and
suspend officers, determine their duties and compensations,
and require security in such amounts as it may deem proper.
SECTION 3. Meetings
(a) Regular Meetings. Regular meetings shall be held at
such times as the Board shall designate by
resolution. Notice of the regular meetings need not
be given.
(b) Special Meetings. Special meetings of the Board may
be called at any time by the chief executive officer
and shall be called by him upon the written request
of one-third of the directors. Written notice of the
time, place and the general nature of the business to
be transacted at each special meeting shall be given
to each director at least three days before such
meeting.
(c) Place. Meetings of the Board of Directors shall be
held at such place in or out of Delaware as the Board
may designate or as may be designated in the notice
calling the meeting.
SECTION 4. Quorum
A majority of all the directors in office (but not less than
one-third of the number fixed by these bylaws) shall
constitute a quorum for the transaction of business at any
meeting. The vote of the majority of the directors present at
any meeting at which a quorum is present shall be the act of
the Board of Directors.
SECTION 5. Vacancies
Vacancies in the Board of Directors shall be filled by vote of
a majority of the remaining members of the Board though less
than a quorum. Such election shall be for the balance of the
unexpected term or until a successor is duly elected by the
shareholders and has qualified.
ARTICLE III
EXECUTIVE COMMITTEE
The Board of Directors by resolution of a majority of the number of directors
fixed by these bylaws may designate three or more directors to constitute an
executive committee, which, to the extent provided in such resolution, shall
have and may exercise all the authority of the Board of Directors except to
amend the Company's bylaws. If an executive committee is so designated, it will
elect one of its members to be its chairman.
<PAGE>
ARTICLE IV
OFFICERS
SECTION 1. Election
At its first meeting after each annual meeting of the
shareholders, the Board of Directors shall elect a President,
Treasurer, and Secretary, and such other officers as it deems
advisable. Any two or more offices may be held by the same
person except for the offices of President and Secretary.
SECTION 2. Chairman and President
(a) If the Board in its discretion determines that there
shall be a Chairman, he may be the chief executive
officer of the Company and shall preside at all
meetings of the Board and of the shareholders. In
such event the President shall be the chief operating
officer, responsible to the Chairman, with such
duties as the Board of Directors or the Chairman
shall from time to time prescribe, and he shall
exercise the powers and perform the duties of the
Chairman during the Chairman's absence or inability
to act.
(b) When the office of Chairman is not filled, or when
the Chairman is not the chief executive officer, the
President shall be the chief executive officer.
(c) In the event the President shall be the chief
executive officer, the Board may designate an
Executive Vice President or Senior Vice President as
chief operating officer. In the absence of such
designation, the President shall also be the chief
operating officer.
(d) Except as the Board of Directors may otherwise
prescribe by resolution, the chief executive officer
shall have general supervision over the business and
operations of the Company and may perform any act and
execute any instrument for the conduct of such
business and operations.
SECTION 3. Other Officers
The duties of the other officers shall be those usually
related to their offices, except as otherwise prescribed by
resolution of the Board of Directors.
SECTION 4. General
(a) In the absence of the Chairman and President, any
officer designated by the Board shall exercise the
powers and perform the duties of the chief executive
officer or the chief operating officer or both.
<PAGE>
(b) Except as otherwise determined by resolution of the
Board of Directors, the Vice Chairman, President or
any Executive Vice President or Senior Vice President
may execute any instrument for the conduct of the
Company's business and operations.
SECTION 5. Agents
The chief executive officer or any officer or employee
authorized by him may appoint, remove or suspend agents or
employees of the Company and may determine their duties and
compensation.
ARTICLE V
INDEMNIFICATION
SECTION 1. Right to Indemnification
The corporation shall indemnify any person who was or is a
party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, either civil,
criminal, administrative or investigative, by reason of the
fact that he is or was a director, officer or supervisor or
manager of the corporation or a constituent corporation
absorbed in a consolidation or merger, or while a director,
officer or supervisor or manager of the corporation is or was
serving at the request of the corporation or a constituent
corporation absorbed in a consolidation or merger, as a
director, officer or supervisor or manager of another
corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action,
suit or proceeding, whether or not the indemnified liability
arises or arose from any threatened, pending or completed
action by or in the right of the corporation to the extent
that such person is not otherwise indemnified and to the
extent such indemnification is not prohibited by applicable
law.
SECTION 2. Advance of Expenses
Expenses incurred by a director, officer or supervisor or
manager of the corporation in defending a civil or criminal
action, suit or proceeding, shall be paid by the corporation
in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of
the director, officer or supervisor or manager to repay such
amount if it shall ultimately be determined that he is not
entitled to be indemnified by the corporation.
SECTION 3. Procedure for Determining Permissibility
The procedure for determining the permissibility of
indemnification under the standards contained in this Article
V (including the advance of expenses) shall be that set forth
in Section 145(d) of the Delaware General Corporation Law,
provided that, if there has been a change in control of the
corporation between the time of the action or failure to act
giving rise to the claim for indemnification and such claim,
and at the option of the person seeking indemnification, the
permissibility of indemnification shall be determined by
independent legal counsel selected jointly by the corporation
and the person seeking indemnification. The reasonable
expenses of any director, officer or supervisor or manager in
prosecuting a successful claim for indemnification, and the
fees and expenses of any special legal counsel engaged to
determine permissibility of indemnification, shall be borne by
the corporation.
SECTION 4. Contractual Obligation
The obligations of the corporation to indemnify a director,
officer or supervisor or manager under this Article V,
including the duty to advance expenses, shall be considered a
contract between the corporation and such director, officer or
supervisor or manager and no modification or repeal of any
provision of this Article V shall affect, to the detriment of
the director, officer or supervisor or manager, such
obligations of the corporation in connection with a claim
based on any act or failure to act occurring before such
modification or repeal.
SECTION 5. Indemnification Not Exclusive: Inuring of Benefit
The indemnification and advance of expenses provided by this
Article V shall not be deemed exclusive of any other right to
which one indemnified may be entitled, both as to action in
his official capacity and as to action in another capacity
while holding such office, and shall inure to the benefit of
the heirs, executors and administrators of any such person.
SECTION 6. Insurance and Other Indemnification
The Board of Directors shall have the power to (i) authorize
the corporation to purchase and maintain, at the corporation's
expense, insurance on behalf of the corporation and on behalf
of others to the extent that power to do so has not been
prohibited by applicable law, and (ii) give other
indemnification to the extent permitted by law.
ARTICLE VI
CERTIFICATES OF STOCK
SECTION 1. Share Certificates
Every shareholder of record shall be entitled to a share
certificate representing the shares held by him. Every share
certificate may bear the corporate seal and the signature of
the Chairman or President or a Vice President, and Secretary
or Assistant Secretary, or the Treasurer or an Assistant
Treasurer of the Company, or may bear a facsimile corporation
seal, a facsimile signature of the Chairman or President, the
signature of the Secretary or any Assistant Secretary, or
Treasurer or an Assistant Treasurer of the Company and the
signature of a transfer clerk.
SECTION 2. Transfers
Shares of stock of the Company shall be transferable on the
books of the Company only by the registered holder or by duly
authorized attorney. A transfer shall be made only upon
surrender of the share certificate. The Board of Directors may
fix a record date to determine the voting and other rights of
shareholders to the extent permitted by law.
ARTICLE VII
AMENDMENTS
These bylaws may be changed at any regular or special meeting of the Board of
Directors by the vote of a majority of all the directors in office or at any
annual or special meeting of shareholders by the vote of the holders of a
majority of the outstanding stock entitled to vote. Notice of any such meeting
of the Board of Directors or of shareholders shall set forth the proposed change
or a summary thereof.
ARTICLE VIII
PROHIBITION OF BANKRUPTCY FILING
Westmoreland Coal Company shall not, nor shall it take any action to enable its
subsidiary companies Westmoreland Resources, Inc., Westmoreland Energy, Inc.,
Westmoreland Terminal Company or Westmoreland Coal Sales Company, Inc., to, file
a voluntary petition under Title 11 of the US Code or Institute an action under
any other state or federal liquidation, insolvency, or reorganization statute
for five years after January 4, 1999.
<PAGE>
EXHIBIT 21
Subsidiaries of the Registrant for the year ended December 31, 1998:
Subsidiary Name State of Incorporation
- ------------------------------------------------- ------------------------------
Kentucky Criterion Coal Company Delaware
Pine Branch Mining Co. Delaware
WEI - Fort Lupton, Inc. Delaware
WEI - Rensselaer, Inc. Delaware
WEI - Roanoke Valley, Inc. Delaware
Westmoreland Coal Sales Company Delaware
Westmoreland Energy, Inc. Delaware
Westmoreland Resources, Inc. Delaware
Westmoreland Terminal Company Delaware
Westmoreland - Altavista, Inc. Delaware
Westmoreland - Corona, Inc. Delaware
Westmoreland - Fort Drum, Inc. Delaware
Westmoreland - Franklin, Inc. Delaware
Westmoreland - Hopewell, Inc. Delaware
Westmoreland Technical Service, Inc. Delaware
Cleancoal Terminal Co. Delaware
Criterion Coal Co. Delaware
Deane Processing Co. Delaware
Eastern Coal and Coke Co. Pennsylvania
- ------------------------------------------------- ------------------------------
<PAGE>
EXHIBIT 23
Consent of Independent Certified Public Accountants
The Board of Directors
Westmoreland Coal Company:
We consent to incorporation by reference in the registration statements (Nos.
2-90847 and No. 33-33620) on Form S-8 of Westmoreland Coal Company of our
reports dated February 18, 1999, relating to the consolidated balance sheets of
Westmoreland Coal Company and subsidiaries as of December 31, 1998 and 1997, and
the related consolidated statements of operations, shareholders' equity
(deficit) and cash flows for each of the years in the three-year period ended
December 31, 1998, and the related schedule, which reports appear in the
December 31, 1998, annual report on Form 10-K of Westmoreland Coal Company.
Our report on the financial statements refers to a change in the method of
accounting for start-up costs in 1998 and a change in the method of accounting
for pneumoconiosis benefits in 1996.
KPMG LLP
Denver, Colorado
February 18, 1999
- -----------------------------------------------------
<PAGE>
EXHIBIT 99
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Project Ft. Drum Altavista Hopewell Southampton Ft. Lupton
-------------------- ----------------- ---------------- ----------------- ---------------- -----------------
Watertown Altavista Hopewell Southampton Ft. Lupton
Location: New York Virginia Virginia Virginia Colorado
-------------------- ----------------- ---------------- ----------------- ---------------- -----------------
Gross Megawatt
Capacity: 55.5 MW 70 MW 70 MW 70 MW 290 MW
-------------------- ----------------- ---------------- ----------------- ---------------- -----------------
WEI Equity
Ownership: 1.25% 30.0% 30.0% 30.0% 4.49%
-------------------- ----------------- ---------------- ----------------- ---------------- -----------------
Electricity Public Service
Purchaser: Niagara Mohawk Virginia Power Virginia Power Virginia Power of Colorado
-------------------- ----------------- ---------------- ----------------- ---------------- -----------------
The Lane Firestone Tire Rocky Mtn.
Steam Host: US Army Company, Inc. & Rubber Co. Hercules, Inc. Produce, Ltd
-------------------- ----------------- ---------------- ----------------- ---------------- -----------------
Fuel Type: Coal Coal Coal Coal Natural Gas
-------------------- ----------------- ---------------- ----------------- ---------------- -----------------
Cyprus Amax Westmoreland United Coal United Coal Thermo Fuels,
Fuel Supplier: Coal Co. Coal Company Company Company Inc.
-------------------- ----------------- ---------------- ----------------- ---------------- -----------------
Commercial
Operations Date: 1989 1992 1992 1992 1994
-------------------- ----------------- ---------------- ----------------- ---------------- -----------------
Roanoke Roanoke
Project Rensselaer Valley I Valley II
-------------------- ---------------- ---------------- ------------------
Rensselaer Weldon Weldon
Location: New York North Carolina North Carolina
-------------------- ---------------- ---------------- ------------------
Gross Megawatt
Capacity: 81 MW 180 MW 50 MW
-------------------- ---------------- ---------------- ------------------
WEI Equity
Ownership: 50.0% 50.0% 50.0%
-------------------- ---------------- ---------------- ------------------
Electricity
Purchaser: Niagara Mohawk Virginia Power Virginia Power
-------------------- ---------------- ---------------- ------------------
Patch Rubber Patch Rubber
Steam Host: BASF Company Company
-------------------- ---------------- ---------------- ------------------
Fuel Type: Natural Gas Coal Coal
-------------------- ---------------- ---------------- ------------------
Western Gas TECO Coal/ TECO Coal/
Fuel Supplier: Marketing, Ltd CONSOL CONSOL
-------------------- --------------- ---------------- ------------------
Commercial
Operations Date: 1994 1994 1995
-------------------- --------------- ---------------- ------------------
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000106455
<NAME> WESTMORELAND COAL COMPANY
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 84,073
<SECURITIES> 0
<RECEIVABLES> 5,796
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 90,560
<PP&E> 105,979
<DEPRECIATION> 69,029
<TOTAL-ASSETS> 215,606
<CURRENT-LIABILITIES> 75,506
<BONDS> 0
0
575
<COMMON> 17,413
<OTHER-SE> 3,857
<TOTAL-LIABILITY-AND-EQUITY> 215,606
<SALES> 108,569
<TOTAL-REVENUES> 108,569
<CGS> 37,472
<TOTAL-COSTS> 91,497
<OTHER-EXPENSES> (1,699)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 190
<INCOME-PRETAX> 7,115
<INCOME-TAX> (3,787)
<INCOME-CONTINUING> 3,328
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,548)
<EPS-PRIMARY> (1.64)
<EPS-DILUTED> (1.64)
</TABLE>
