<PAGE> 1
SCHEDULE 14A
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INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
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[ ] Definitive Proxy Statement
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WESTMORELAND COAL COMPANY
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
THE WESTMORELAND COMMITTEE TO ENHANCE SHARE VALUE
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
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<PAGE> 2
PRELIMINARY APPRAISAL OF
WESTMORELAND COAL COMPANY'S INDEPENDENT POWER PROJECTS
===============================================================================
<TABLE>
<S> <C>
1.0 VALUATION . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.0 OVERVIEW OF MARKET FOR POWER PROJECTS . . . . . . . . . . . . 3
3.0 DISCOUNTED CASH FLOW APPRAISAL . . . . . . . . . . . . . . . 4
3.1 SUMMARY OF PROJECTS . . . . . . . . . . . . . . . . . . . 5
3.2 INITIAL SUPPLEMENTARY DATA ON PROJECTS . . . . . . . . . . 6
3.3 PRO FORMA CASH FLOW FORECASTS . . . . . . . . . . . . . . 8
3.4 VALUATION OF CASH FLOWS . . . . . . . . . . . . . . . . . 9
4.0 COMPARABLE SALES AND PRICING RATIO APPRAISALS . . . . . . . 11
4.1 COMPARABLE SALES . . . . . . . . . . . . . . . . . . . . 12
4.2 $/KW . . . . . . . . . . . . . . . . . . . . . . . . . . 13
4.3 P/EBITDA AND P/PTNCF . . . . . . . . . . . . . . . . . . 14
4.4 P/E . . . . . . . . . . . . . . . . . . . . . . . . . . 15
APPENDIX : ASSUMPTIONS AND LIMITING CONDITIONS . . . . . . . . 16
</TABLE>
Prepared by:
Bodington & Company, Member: NASD, SIPC
50 California Street, Suite #630
San Francisco, CA 94111
April 26, 1999
<PAGE> 3
1.0 VALUATION
===============================================================================
Bodington & Company (B&Co) was retained by the Committee to Enhance Share Value
to appraise the value of the independent power projects owned by Westmoreland
Energy, Inc. (WEI). B&Co has in depth experience with more than 125 power
projects in the U.S. and is active in advising buyers and sellers of projects
like those owned by WEI. This memorandum presents our preliminary data,
analysis, and conclusions. In addition, B&Co will refine and supplement this
memorandum if and as additional evaluations are completed.
Discounted cash flow (DCF) is the most reliable method of valuation, and
several other methods are employed to check, support, and provide additional
perspectives on our results. The valuation methods employed to appraise WEI
are:
- - $/kW, based on WEI's sale of Rensselear, Ft. Drum, and B&Co's data on over
200 other transactions.
- - P/EBITDA, the ratio of stock price to operating income for nine publicly
traded IPP companies.
- - P/E, the ratio of stock price to net income for nine publicly traded IPP
companies.
- - DCF-PTNCF, the present value of forecasted pre-tax net cash flow for WEI.
- - DCF-ATNCF, the present value of forecasted after-tax net cash flow for WEI.
Briefly, our findings are summarized in the chart below.(1) Each method yields
a range of value. The solid point represents the average and the lines on
either side represent reasonable upper and lower bounds based on different
assumptions about the possible ratios, discount rates, and other factors that
affect the value of WEI. The arrow is drawn to B&Co's preliminary opinion
concerning the value of WEI's projects.
[VALUE OF WEI'S INDEPENDENT POWER PROJECTS CHART]
THESE FINDINGS ARE PRELIMINARY AND SUBJECT TO THE ASSUMPTIONS, DISCLOSURES, AND
LIMITING CONDITIONS SET FORTH AT THE END OF THIS MEMORANDUM.
- ----------------------------------
(1) Results in the chart DO NOT include the net proceeds to WEI of the sale of
the Rensselaer power contract to Niagara Mohawk Power. They DO include an
estimate of the after-tax proceeds from the subsequent sale of the project.
2
<PAGE> 4
2.0 OVERVIEW OF MARKET FOR POWER PROJECTS
===============================================================================
B&Co characterizes the current market for power projects as a seller's market.
Valuations are high and B&Co has obtained multiple offers for even troubled
projects. High quality projects bring 5 to 10 competitive offers. The reasons
for the current sellers market include:
- - There are many buyers. Publicly owned independent power companies have
aggressive growth plans. Many utilities have sold their own generation and
are reinvesting the proceeds in newer, more efficient power projects. Newer
IPPs, such as WEI's facilities, are 20% to 50% more efficient than older
utility-owned power projects.
- - The supply of IPPs with power contracts is limited. Nearly all new
projects have no power contract and these new projects are exposed to the
risks of deregulating and volatile markets. WEI's projects have power
contracts with either Public Service of Colorado or Virginia Power.
- - Many buyers are public companies involved in early-stage development of
projects that will take several years to place in service. Acquiring
operating projects provides these companies with current earnings to
support their stock prices. All of WEI's projects are profitable and
provide current earnings and cash flow.
- - Utilities are showing interest in buying out power contracts, and the
remaining projects still have value. WEI received net proceeds of over $65
MM for the sale to Niagara Mohawk of its approximately 42 MW net interest
in Rensselaer and Ft. Drum. Virginia Power has bought out power contracts,
and it may be interested in buying out WEI's net interest of 178 MW in Alta
Vista, Hopewell, Rova I and II, and Southampton. Public Service of
Colorado has also bought out contracts, and it may be interested in buying
out WEI's net interest of 13 MW in Ft. Lupton. B&Co. has not contacted
either Virginia Power or Public Service of Colorado.
- - Generation is in demand. Load is growing, and many older facilities are
nearing the ends of their economic lives. New projects are difficult to
permit, develop, and construct. Existing projects, such as those owned by
WEI, are already operating.
3
<PAGE> 5
3.0 DISCOUNTED CASH FLOW APPRAISAL
===============================================================================
This section presents an initial discounted cash flow appraisal of WEI's
independent power projects. Four elements of this analysis are addressed.
- - Summary of Projects
- - Initial supplementary data on each project
- - Cash flow forecasts
- - Present value analysis
4
<PAGE> 6
3.1 Summary of Projects
===============================================================================
SUMMARY OF WEI'S POWER PROJECTS
<TABLE>
<CAPTION>
=========================================================================================================
Net Equity
---------------------
MW % MW Technology / Fuel PPA Utility COD
<S> <C> <C> <C> <C> <C> <C>
Rensselaer 81 50.00 40.50 CCCT NiMo MRA Apr-94
Ft. Drum 55 1.25 0.69 FB Coal & Wood NiMo buy out Jul-94
Alta Vista 70 30.00 21.00 Stoker Coal Virginia Power Feb-92
Hopewell 70 30.00 21.00 Stoker Coal Virginia Power Jun-92
Ft. Lupton 290 4.49 13.02 CCCT PS Colorado Jul-94
Roanoke Valley I 180 50.00 90.00 Pulverized Coal Virginia Power May-94
Roanoke Valley II 50 50.00 25.00 Pulverized Coal Virginia Power ?
Southampton 70 30.00 21.00 Stoker Coal Virginia Power Mar-92
Subtotal 730 191.02
Total 866 232.21
=========================================================================================================
</TABLE>
COD: Commercial Operation Date
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA, $K
=======================================================================
Average 1998 1997 1996
<S> <C> <C> <C>
INCOME STATEMENT
Revenues 64,465 17,770 15,335
Oper. Income 61,805 17,770 13,569
Depr. & Amort. (39) (96) (100)
Interest Expense (70) (113) (91)
Interest Income 1,917 551 438
BALANCE SHEET
Assets 124,617 70,546 53,276
WEI share of book equity 63,156 53,803
DISTRIBUTIONS
Cash 46,400 15,000 13,000
=======================================================================
</TABLE>
5
<PAGE> 7
3.2 Initial Supplementary Data on Projects
===============================================================================
Initial notes concerning the unique circumstances surrounding particular
projects appear below.(2) These notes may be followed by an evaluation of each
project's market, participants, facilities, operations, agreements, and
financial performance as the necessary data become available.
Alta Vista A QF.
LG&E is a 50% owner and may have a right of first refusal.
VP may also have some right of first refusal.
Capacity payments fall from $28.43 to $12.89 /kWmo
beginning March 2007.
Hopewell A QF.
LG&E is a 50% owner and may have a right of first refusal.
VP may also have some right of first refusal.
Capacity payments fall from $28.43 to $12.89 /kWmo
beginning March 2007.
Ft. Drum The PPA was bought out by NiMo, and there is still a
contract to provide hot water to the U.S. Army.
There may be litigation between the project and the
Army concerning the terms of the hot water contract.
Ft. Lupton A QF.
LG&E is a 50% owner and may have a right of first refusal.
WEI is not actually an owner, but has the right to
certain cash flow.
WEI has no management role.
Cash flow is $500 K per year, plus small escalation
Rensselaer A QF.
LG&E is a 50% owner.
Bought out under NiMo's MRA.(3)
Operate with 10 year contract at market rates.
Project sold.
ROVA Roanoke Valley I
An EWG.
Capacity payments fall from $23.24 to $6.00 /kWmo after the
15th year of operation.
Roanoke Valley II
A QF.
Capacity payments fall from 4.9c/kWh to 3.0c/kWh after the
15th year of ops.
Both projects:
The two projects are finance together.
LG&E is a 50% owner and may have a right of first refusal.
VP may have some form of right of first refusal.
- ----------------------------------
(2) The data below are based on WCC's filings with the SEC, information
provided by Mr. Matthew Sakurada, and other sources.
(3) See discussion of comparable sales for more information on the buy out.
6
<PAGE> 8
VP has withheld $14.8 MM concerning a dispute about payments
for forced outages during May 1994 through December 1998.
Virginia Supreme Court found in ROVA's favor on December 2,
1998 and ordered VP to pay the amount due plus interest for a
total of $19.4 MM. WEI's potential share of this amount is
assumed to be 50%, or approximately $9.7 MM. VP has appealed
and posted the necessary bond.
Southampton A QF.
LG&E is a 50% owner and may have a right of first refusal.
VA may also have some right of first refusal.
Capacity payments fall from $28.43 to $12.89 beginning March
2007.
Pursuant to litigation now settled with VP, capacity payments
are also reduced between $1,00 MM and $500 K annually.
Under the settlement with VP, VP may terminate the PPA in
2008.
Litigation between partners in the project will have
uncertain results.
Management
Services WEI performs management services for several projects.
Related revenues were $510, $531, and $499 K for 1998 through
1996.
These revenues, net of expenses are recorded as other income.
NOL Etc. WCC, from various sources, has deferred tax liabilities of
approximately $13 MM and investment tax credit carryforwards
of approximately $2.6 MM. Accordingly, tax liabilities
estimated by B&Co in some cases assuming a 40% tax rate may
overstate actual tax obligations.
7
<PAGE> 9
3.3 Pro Forma Cash Flow Forecasts
===============================================================================
B&Co prepared several Excel models reflecting cash flow forecasts for each of
WEI's operating power projects. The actual cash flow statements will be
included in a final version of this memorandum.
Project Models For each project, a model creates a forecast of:
- Power sales
- Revenues
- Fuel costs
- Non-fuel operating costs
- Indirect operating costs
- EBITDA
- Debt service
- Pre tax net cash flow
- Income taxes
- After tax net cash flow
Consolidated
Model A final model adds the cash flows from each of the
models above. In addition, this model includes net
income from the management services WEI provides to
several of the Projects.
8
<PAGE> 10
3.4 Valuation of Cash Flows
===============================================================================
Forecasts of cash flows were discussed above. Here, the value of those cash
flows is appraised.
[Chart will follow at a later date.]
9
<PAGE> 11
The present value of after-tax net cash flow shown above is between $73 MM and
$80 MM. This range may be low for several reasons, and one of these is that a
buyer may step up its tax basis. The range above is based on WEI's basis, not
the basis of a buyer. A preliminary estimate of the incremental value
associated with a buyer being able to step up its basis is a present value of
approximately $15 MM.
10
<PAGE> 12
4.0 COMPARABLE SALES AND PRICING RATIO APPRAISALS
===============================================================================
Other methods of valuing and checking the value of a power project include
comparable sales such as WEI's interest in he Rensselaer project, and pricing
ratios such as $/kW, P/EBITDA, P/PTNCF, and P/E.
Comparable Sales B&Co has maintained a log of 200 power project
transactions since 1990. B&Co reviewed this log for
transactions involving projects similar to those
owned by WEI.
Pricing Ratios Four ratios were employed:
- $/kW of project capacity.
- P/EBITDA, or price divided by operating cash flow.
- P/PTNCF, or price divided by pre-tax cash flow.
- P/E, or price divided by net income.
Data for the valuation ratios are based on:
- B&Co's deal log.
- Data on the following publicly-traded independent
power companies:
AES
Besicorp
CalEnergy
Calpine
Destec
Kenetech
O'Brien
Sithe
Trigen
11
<PAGE> 13
4.1 Comparable Sales
===============================================================================
Few power projects so similar that the value received for one is an accurate
guide to the value of another. Accordingly, even sales are compared on a
pricing ratio basis. A few projects that may be comparable are noted below,
and then pricing ratios are addressed in the next section.
Rensselaer Rensselaer's PPA was sold back to NiMo under NiMo's
Master Restructuring Agreement. Gross proceeds to
the partnership owning the project were $157 MM, and
the net proceeds to WEI before income taxes were
approximately $30 MM.(4) Further, the partnership
retained ownership of the project, has a 10 year
market-based transition power supply contract with
NiMo, and is in the process of selling its assets.
Based on the value received from NiMo:
- 157 / 81 = 1,940 $/kW gross sale proceeds.
- 30 / 40.5 = 740 $/kW net proceeds to WEI.
While Rensselaer is a gas-fired CCCT like Ft. Lupton,
it is not closely comparable to Ft. Lupton in part
because the latter has a different PPA with PS
Colorado. WEI's other projects also have PPAs with
different utilities and are coal fired.
Other B&Co has maintained a deal log since 1990 that is a
device for tracking sales of power projects in the
U.S. For this engagement, B&Co reviewed that log and
found no transactions that have characteristics
comparable to WEI's projects. However, the deal log
data are employed in the pricing ratio analysis
described in the next section.
- ----------------------------------
(4) WCC 1998 10K.
12
<PAGE> 14
4.2 $/kW
===============================================================================
B&Co has maintained a deal log since 1990 and calculates $/kW prices. The
range for the value of a project's equity is zero to over $3000 /kW, and the
average is approximately $600/kW. Data for both QF and utility sales appear
below, because no public data are available on the values of coal-fired QFs. A
low-range coal estimate is made due to the decrease in capacity prices in the
PPAs with VP following the 15th year of operations.
<TABLE>
<CAPTION>
VALUATION BASED ON $/KW, $MM
================================================================================================================
QFs
-----------------------------------------
WEI's B&Co Deal Log Data Utility Coal
-------------------- --------------------------------
Average Rensselaer Besicorp Average 25% Level GPU NYSE&G O&R
<S> <C> <C> <C> <C> <C> <C> <C>
Equity Sales Value, $/kW
Value 1580.0 1069.3 600.0 400.0 955.4 667.1 270.3
Transaction NiMo NiMo Various Various Edison AES Southern
Fuel (s) Gas Gas Various Various Coal Coal Coal
WEI Capacity, MW in ops.
Coal 178.0 178.0 178.0 178.0 178.0 178.0 178.0
CCCT 13.0 13.0 13.0 13.0 13.0 13.0 13.0
Total 191.0 191.0 191.0 191.0 191.0 191.0 191.0
Implied Value, $MM
Average
Coal 103.0 106.8 71.2 170.1 118.8 48.1
CCCT 14.1 20.6 13.9 7.8
TOTAL 117.1
At low-range coal value
Coal 59.7 71.2 48.1
CCCT 14.1 20.6 13.9 7.8
TOTAL 73.8
================================================================================================================
</TABLE>
Other The figures above exclude the $33 MM net proceeds
from the sale of Rensselaer. Assuming a 40% tax
rate, the estimates above should be increased by
approximately $20 MM.
13
<PAGE> 15
4.3 P/EBITDA and P/PTNCF
================================================================================
B&Co evaluated the P/EBITDA ratios for publicly traded IPPs for 1990 through
1998. Ratios under 3.0 and over 10.0 have occurred. While the variance is
large, after adjusting for extraordinary events, the average ratio is in the
range of 5.0 to 6.5. For WEI, cash distributions are the measure of both
EBITDA and PTNCF.
<TABLE>
<CAPTION>
VALUATION BASED ON P/EBITDA, $MM
================================================================================
Average 1998 1997 1996
<S> <C> <C> <C>
EBITDA, 1998 10K Report
Cash Distributions 46.4
Adjustment for Rensselaer (30.0)
Net 16.4 15.0 13.0
Implied Value
@ 5.0 X 82.0 75.0 64.9
@ 6.5 X 106.6 97.4 84.3
Average, all data 73.9
Implied Value, plus VA Order Allowance
@ 5.0 X 90.0 83.0 72.9
@ 6.5 X 117.1 108.0 94.8
Average, all data 91.4 avg, plus 9.5 due under VA Order
================================================================================
</TABLE>
Other The figures above exclude the $33 MM net proceeds
from the sale of Rensselaer. Assuming a 40% tax
rate, the estimates above should be increased by
approximately $20 MM.
14
<PAGE> 16
4.4 P/E
===============================================================================
Like the P/EBITDA ratio above, B&Co evaluated the P/E ratios for publicly
traded IPPs for 1990 through 1998. Ratios under 10.0 and over 30.0 have
occurred. Like the other two ratios, the variance is large. After adjusting
for extraordinary events, the average ratio is in the range of 16 to 20.
Further, the lower end of the range for companies, such as WEI, with
potentially flat earnings is approximately 10.
WCC's 10K reports income from WEI on an equity in earnings basis, and its
book-basis income tax rate is approximately 53%.(5) Further, results for 1998
are skewed by the income associated with the Rensselaer buy out and little
information on the tax treatment of this payment.
<TABLE>
<CAPTION>
VALUATION BASED ON ESTIMATE OF P/E, $MM
=======================================================================
Average 1998 1997 1996
<S> <C> <C> <C>
Net Income, 1998 10K Report
Operating Income 61.5 17.7 15.3
Assume 50% tax - (8.9) (7.7)
Net Income - 8.9 7.7
Implied Value
@ 16.0 X 132.0 141.6 122.4
@ 10.0 X 82.5 88.5 76.5
=======================================================================
</TABLE>
Other The figures above exclude the $33 MM net proceeds
from the sale of Rensselaer. Assuming a 40% tax
rate, the estimates above should be increased by
approximately $20 MM.
- ----------------------------------
(5) Income before taxes of 7115 and taxes of 3787 for 1998.
15
<PAGE> 17
APPENDIX : ASSUMPTIONS AND LIMITING CONDITIONS
===============================================================================
The best measure of value is the price at which a facility actually sells in an
all-cash transaction following a thorough due diligence technical, financial,
and legal review. Such a review is beyond the scope of this evaluation.
Accordingly, this evaluation is based on several assumptions and subject to
several limiting conditions.
- - Information pertaining to this evaluation was subjected to tests of
reasonableness and is believed to be accurate. However, B&Co expressly
disclaims liability for all representations and omissions.
- - No site visits were conducted. Without further evaluation, the absence of
technical problems and compliance with all regulatory authorizations cannot
be assured.
- - B&Co has had no access to recent or current confidential WEI data on the
Projects. A final opinion of value would be based on review of documents
and information to which B&Co has not had access.
- - This evaluation intends no opinion on matters which require legal or other
special expertise, investigation, or knowledge beyond that employed.
- - No title investigation has been conducted. This evaluation assumes all
title(s) and rights are free and clear and marketable.
- - Markets and values change. B&Co assumes no responsibility for changes in
market conditions or the ability of the owner to locate a purchaser at the
estimated value of the project.
- - B&Co has no financial interest in the project evaluated, and the fee for
this engagement is not contingent on the findings of this evaluation.
- - This evaluation was conducted by Mr. Bodington, and his professional
qualifications and related experience are available upon request. In sum,
he has 18 years experience in the independent power industry, has been
involved in over 100 power projects with a combined value exceeding $6
billion, and is a Registered General Securities Principal and member of the
National Association of Securities Dealers (NASD). Mr. Bodington was
assisted by Ms. Stella Perone. Ms. Perone has 15 years experience in the
business and finance aspects of the electric power industry.
16
