FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from __________ to ___________
Commission File Number
0-752
WESTMORELAND COAL COMPANY
-------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 23-1128670
-------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
2 North Cascade Avenue 14th Floor Colorado Springs, Colorado 80903
- ----------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, area code 719-442-2600
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of May 1, 2000: 7,069,663
<PAGE 2>
PART I - FINANCIAL INFORMATION
Item 1
Financial Statements
<TABLE>
Westmoreland Coal Company and Subsidiaries
Consolidated Balance Sheets
- -------------------------------------------------------------------------------------------------------------
(Unaudited)
March 31, 2000 December 31, 1999
- ------------------------------------------------------------ ------------------------ -----------------------
(in thousands)
<CAPTION>
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 17,670 $ 20,122
Receivables:
Trade 3,168 2,156
Excess of trust assets over pneumoconiosis benefit
obligation - 6,397
Terminated pension plan, net - 500
Other 385 621
- ------------------------------------------------------------ ------------------------ -----------------------
3,553 9,674
Other current assets 1,257 1,180
- ------------------------------------------------------------ ------------------------ -----------------------
Total current assets 22,480 30,976
- ------------------------------------------------------------ ------------------------ -----------------------
Property, plant and equipment:
Land and mineral rights 10,641 10,572
Plant and equipment 65,822 66,231
- ------------------------------------------------------------ ------------------------ -----------------------
76,463 76,803
Less accumulated depreciation and depletion 40,672 40,245
- ------------------------------------------------------------ ------------------------ -----------------------
35,791 36,558
Investment in independent power projects 45,824 45,225
Investment in Dominion Terminal Associates (DTA) 4,604 4,672
Workers' compensation bond 3,720 4,748
Prepaid pension cost 3,934 3,897
Excess of trust assets over pneumoconiosis benefit
obligation 5,502 5,255
Security deposits 15,368 10,148
Other assets 833 818
- ------------------------------------------------------------ ------------------------ -----------------------
Total Assets $ 138,056 $ 142,297
============================================================ ======================== =======================
(Continued)
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE 3>
<TABLE>
Westmoreland Coal Company and Subsidiaries
Consolidated Balance Sheets (Continued)
- -------------------------------------------------------------------------------------------------------------
(Unaudited)
March 31, 2000 December 31, 1999
- ------------------------------------------------------------ ------------------------ -----------------------
(in thousands)
<CAPTION>
<S> <C> <C>
Liabilities and Shareholders' Equity
Current liabilities:
Current installments of long-term debt $ - $ 220
Accounts payable and accrued expenses 6,231 5,942
Workers compensation 3,200 3,200
Postretirement medical costs 10,130 10,130
UMWA 1974 Pension Plan obligation 1,212 1,128
Other accrued expenses 1,269 970
Reorganization expenses 73 400
Reclamation costs 100 100
- ------------------------------------------------------------ ------------------------ -----------------------
Total current liabilities 22,215 22,090
- ------------------------------------------------------------ ------------------------ -----------------------
Long-term debt, less current installments - 1,343
Accrual for workers compensation 14,270 15,072
Accrual for postretirement medical costs 79,105 78,643
1974 UMWA Pension Plan obligations 10,385 10,751
Accrual for reclamation costs, less current portion 2,448 2,537
Other liabilities 1,974 1,930
Minority interest 7,093 6,874
Commitments and contingent liabilities
Shareholders' equity
Preferred stock of $1.00 par value
Authorized 5,000,000 shares;
Issued 208,708 shares at March 31, 2000 209 209
Common stock of $2.50 par value
Authorized 20,000,000 shares;
Issued 7,067,663 shares at March 31, 2000 17,669 17,669
Other paid-in capital 67,315 67,315
Accumulated deficit (84,627) (82,136)
- ------------------------------------------------------------ ------------------------ -----------------------
Total shareholders' equity 566 3,057
- ------------------------------------------------------------ ------------------------ -----------------------
Total Liabilities and Shareholders' Equity $ 138,056 $ 142,297
============================================================ ======================== =======================
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE 4>
<TABLE>
Westmoreland Coal Company and Subsidiaries
Consolidated Statements of Income
- -------------------------------------------------------------------------------------------------------------------------
(Unaudited)
Three Months Ended March 31, 2000 1999
- ---------------------------------------------------------------------- ------------------------- ------------------------
(in thousands except per share data)
<CAPTION>
<S> <C> <C>
Revenues:
Coal $ 9,093 $ 8,559
Independent power - equity in earnings 4,002 22,591
DTA - equity in earnings (share of losses) (430) (321)
- ---------------------------------------------------------------------- ------------------------- ------------------------
12,665 30,829
- ---------------------------------------------------------------------- ------------------------- ------------------------
Costs and expenses:
Cost of sales - coal 7,537 7,293
Depreciation, depletion and amortization 425 366
Selling and administrative 1,601 4,675
Heritage costs 5,376 5,595
Pension benefit (401) (55)
Doubtful account recoveries - (8)
- ---------------------------------------------------------------------- ------------------------- ------------------------
14,538 17,866
Operating income (loss) (1,873) 12,963
Other income (expense):
Gains on sales of assets - 19
Interest expense (267) (301)
Interest income 547 524
Minority interest (219) (226)
Other expenses (679) (424)
- ---------------------------------------------------------------------- ------------------------- ------------------------
Income (loss) before income taxes (2,491) 12,555
Income taxes - (45)
- ---------------------------------------------------------------------- ------------------------- ------------------------
Net income (loss) (2,491) 12,510
Less preferred stock dividend requirements (444) (1,222)
- ---------------------------------------------------------------------- ------------------------- ------------------------
Net income (loss) applicable to common shareholders $ (2,935) $ 11,288
====================================================================== ========================= ========================
Net income (loss) per share applicable to common shareholders $ (.42) $ 1.62
Weighted average number of common shares outstanding 7,068 6,980
====================================================================== ========================= ========================
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE 5>
<TABLE>
Westmoreland Coal Company and Subsidiaries
Consolidated Statements of Cash Flows
- ----------------------------------------------------------------------------------------------------------------------------
(Unaudited)
Three Months Ended March 31, 2000 1999
- ----------------------------------------------------------------------------------- -------------------- -------------------
(in thousands)
<CAPTION>
<S> <C> <C>
Cash flows provided by operating activities:
Net income (loss) $ (2,491) $ 12,510
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Equity earnings from independent power projects (4,002) (22,591)
Cash received from independent power projects 3,403 39,512
Equity in losses from DTA 430 321
Cash generated by DTA 48 383
Cash contributions to DTA (410) (436)
Depreciation, depletion and amortization 425 366
Stock compensation expense - 271
Gain on disposition of assets - (19)
Minority interest 219 226
Other (92) (268)
Changes in assets and liabilities:
Accounts receivable, net of allowance for doubtful accounts 6,121 3,193
Workers' compensation bond 1,028 (47)
Prepaid pension asset (37) (55)
Excess of trust assets over pneumoconiosis benefit obligation (247) 980
Accounts payable and accrued expenses 588 (3,547)
Income tax payable - (2,110)
Accrual for workers compensation (802) (512)
Accrual for postretirement medical costs 462 3,031
Consent judgment payment obligation - (39,006)
1974 UMWA Pension Plan obligations (282) (1,050)
Other liabilities (45) (561)
---------------------------------------------------------------------------------- -------------------- -------------------
Net cash provided by (used in) operating activities before reorganization items 4,316 (9,409)
---------------------------------------------------------------------------------- -------------------- -------------------
Changes in reorganization items (327) (6,230)
---------------------------------------------------------------------------------- -------------------- -------------------
Net cash provided by (used in) operating activities 3,989 (15,639)
---------------------------------------------------------------------------------- -------------------- -------------------
Cash flows provided by (used in) investing activities:
Fixed asset additions (188) (1,280)
Reimbursement from mine operator 530 -
Long-term deposits (5,220) (10,148)
Net proceeds from sales of assets - 19
---------------------------------------------------------------------------------- -------------------- -------------------
Net cash used in investing activities (4,878) (11,409)
---------------------------------------------------------------------------------- -------------------- -------------------
Cash flows provided by (used in) financing activities:
Repayment of long-term debt (1,563) (233)
Exercise of stock options - 66
---------------------------------------------------------------------------------- -------------------- -------------------
Net cash used in financing activities (1,563) (167)
---------------------------------------------------------------------------------- -------------------- -------------------
Net increase (decrease) in cash and cash equivalents (2,452) (27,215)
Cash and cash equivalents, beginning of period 20,122 84,073
================================================================================== ==================== ===================
Cash and cash equivalents, end of period $ 17,670 $ 56,858
================================================================================== ==================== ===================
Supplemental disclosures of cash flow information: Cash paid during the period
for:
Interest $ 267 $5,195
Taxes $ - $2,110
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE 6>
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Notes contained herein should be read in conjunction with the Notes to the
Company's Consolidated Financial Statements filed on Form 10-K for the year
ended December 31, 1999. The financial information contained in this Form 10-Q
is unaudited but reflects all adjustments which are, in the opinion of
management, necessary for a fair presentation of the financial information for
the periods shown. Such adjustments are of a normal recurring nature. Certain
prior year amounts have been reclassified to conform to the current year
presentation.
1. Nature of Operations
The Company's current principal activities, conducted within the United States,
are: (i) the production and sale of coal in the Powder River Basin in Eastern
Montana; (ii) the development, management and 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.
2. 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"). Pursuant to the request of the
Debtor Corporations, the Chapter 11 Cases were dismissed by order of the
Bankruptcy Court entered on December 23, 1998. Upon dismissal, the Debtor
Corporations were no longer subject to the protections afforded or restrictions
imposed by the Bankruptcy Code.
3. Contingencies
Westmoreland Energy, Inc. ("WEI") - WEI Project Contingencies
Southampton Project - In October, 1998, the Southampton Partnership and Virginia
Power entered into a settlement agreement of their administrative proceeding
before the Federal Energy Regulatory Commission concerning the project's
compliance with Qualifying Facility ("QF") criteria and payments arising out of
plant performance in 1992. The settlement provided for, among other items,
payments by the Southampton Partnership to Virginia Power of $1,000,000 annually
for the years 1999-2001, followed by a reduction in capacity payments from
Virginia Power to the Southampton Partnership of $500,000 for each of the years
2002-2008. Following 2008, Virginia Power may elect to terminate its power
purchases from the Southampton Partnership or continue to be entitled to the
$500,000 annual reduction in capacity payments for the remainder of the power
purchase agreement. The settlement was approved by the FERC.
Resolution of the administrative proceeding confirmed the Southampton
Partnership's QF status after 1992, inapplicability of the Federal Power Act to
both the Southampton project and the upstream partners and owners, including WEI
and Westmoreland, and, assuming continued compliance with loan covenants and
appropriate project financial performance, the ability to distribute earnings to
the project partners.
<PAGE 7>
Following resolution of the administrative proceeding, Fourfold L.P., a limited
partner of LG&E-Southampton L.P. and a subsidiary of Chrysler Capital, 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 have made a similar demand
against the LG&E entities in the amount of $3,300,000. Pursuant to a mediation
effort in 1999, the project participants (general partners, including a
Westmoreland subsidiary, Westpower-Franklin ("Westpower"), and operator) agreed
to compromise and settle Fourfold L.P.'s claim. Westpower, without admitting
liability, contributed $100,000 of a significantly larger settlement to
Fourfold. The mediation which resolved the Fourfold claim did not successfully
resolve the Westpower claims to the Company's satisfaction. Westpower is
evaluating its options and possible legal remedies. The outcome of the dispute
cannot currently be determined and accordingly the Company has not recognized
any revenue related to the dispute.
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 (the
"Power Purchase Agreement"). In the second quarter of 1994, that customer
disputed the ROVA Partnership's interpretation of provisions of the contract
dealing with the payment of the capacity purchase price when the facility
experiences a "forced outage" day. A forced outage day is a day when ROVA I is
not able to generate a specified level of electrical output. The ROVA
Partnership believes that the customer is required to pay the ROVA Partnership
the full capacity purchase price unless forced outage days exceed a
contractually stated allowed annual number. The customer asserts that it is not
required to do so.
From May, 1994, through March, 2000, Virginia Power withheld approximately
$20,876,000 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. The case was tried beginning on October 26, 1998 in the Circuit Court
of the City of Richmond, Virginia. On December 2, 1998, the Court entered
judgment in the ROVA Partnership's favor for the amount of $14,800,000 (the
amount that Virginia Power had withheld at the trial date) 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. Interest continued to accrue on the judgement. The Court
heard oral arguments on January 11, 2000 and on March 3, 2000 at which time the
ROVA partnership's claim was valued at approximately $26,000,000 including
interest (50% of which would ultimately be WEI's share) reversed the trial
Court's decision to exclude certain oral evidence and remanded the matter for
further proceedings. The Circuit Court has now set those proceedings for October
of this year. While the Company cannot predict the outcome of that proceeding,
the Company is confident that the weight of the evidence supports its position.
Rensselaer - On March 15, 1999, LG&E-Westmoreland Rensselaer ("LWR") completed
the sale of the Rensselaer Project to Fulton Cogeneration Associates, L.P.
("Fulton"). LWR received approximately $68,000,000 in cash as consideration for
the sale of the Rensselaer plant and operating contracts. After payment of
expenses and remaining debts, Westmoreland Energy Inc.'s share of the proceeds
was approximately $33,000,000.
Westmoreland Resources, Inc.
Westmoreland Resources, Inc. ("WRI") has spent approximately $3,800,000 to
repair the dragline in 1998 and 1999 and another approximately $330,000 have
recently been billed. WRI's mining contractor, Morrison Knudsen ("MK"), has
reimbursed WRI for only $530,000 of these costs. The Company believes, under the
terms of WRI's agreements with Morrison Knudsen, that MK is responsible for all
dragline repairs. WRI has expended these amounts to assure continued,
uninterrupted production at WRI, and has demanded reimbursement from Morrison
Knudsen for the full cost of the repair plus interest. On February 24, 2000, MK
notified WRI that it sought to arbitrate the issue. Believing the issue to not
be subject to arbitration, on March 7, 2000, WRI commenced litigation against
Morrison Knudsen in the United States District Court for the District of Montana
seeking, among other things, payment by Morrison Knudsen of approximately
$3,600,000 of dragline repair costs paid or expected to be paid by WRI, plus
accrued interest. The Company has not recorded in its financial statements any
amounts that may be recovered from Morrison Knudsen.
<PAGE 8>
4. 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 quarterly dividends which are accumulated but unpaid
through April 1, 2000 amount to $9,757,000 in the aggregate ($46.75 per
preferred share or $11.69 per depositary share). Common stock dividends may not
be declared until the preferred stock dividends that are accumulated but unpaid
are made current.
On March 10, 1999, the Company offered to purchase up to 1,052,631 depositary
shares, each representing one quarter of a share of its Series A Convertible
Exchangeable Preferred Stock ("Series A Preferred Stock"). The offer price of
$19 per share was in full satisfaction of claims to accumulated but unpaid
dividends on the depositary shares tendered. On April 7, 1999, the offer expired
and 1,683,903 depositary shares were tendered in response to the offer. Because
the number of shares tendered exceeded the maximum number of shares the Company
had offered to purchase, a proration factor of approximately 62.5% was applied
to all shares tendered. A total of 1,052,631 depositary shares were purchased
for $20,000,000. The balance sheet effect of this transaction was to reduce cash
and shareholders' equity by $20,000,000. Following completion of the tender
offer, the depositary shares purchased in the offer were converted into shares
of Series A Preferred Stock, the shares of Series A Preferred Stock were
retired, and the capital of the Company was reduced by the par value of the
shares of Series A Preferred Stock retired. This reduced the number of shares of
Series A Preferred Stock outstanding from 575,000 to 311,843, accumulated but
unpaid dividends from $21,994,000 to $11,928,000, and the ongoing quarterly
preferred dividend requirement from $1,222,000 to $663,000.
On September 16, 1999, the Company made a second offer to purchase up to an
additional 631,000 depositary shares at $19 per depositary share. The offer
price of $19 per share was in full satisfaction of claims to accumulated but
unpaid dividends on the depositary shares tendered. On October 26, 1999, the
offer expired and 412,536 depositary shares were tendered in response to the
offer. The balance sheet effect of the transaction was to reduce cash and
shareholders' equity by $7,838,000. Following completion of the tender offer,
the depositary shares purchased in the offer were converted to shares of Series
A Preferred Stock, the shares of Series A Preferred Stock were retired, and the
capital of the Company was reduced by the par value of the shares of Series A
Preferred Stock retired. This reduced the number of shares of Series A Preferred
Stock outstanding from 311,843 to 208,709, accumulated but unpaid dividends from
$13,253,000 to $8,870,000 and the ongoing quarterly dividend requirement from
$663,000 to $444,000.
<PAGE 9>
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 (which par value was $208,708 at March 31,
2000). The Company had shareholders' equity at March 31, 2000 of $566,000 and
the par value of all outstanding shares of preferred stock and shares of common
stock aggregated $17,878,000 at March 31, 2000.
5. DISPOSITION
On July 27, 1999, the Company sold all remaining book assets of its idled
Virginia Division. The assets consisted of the Bullitt Preparation Plant and
Transloader Complex. The Company received approximately $650,000 in cash and the
purchaser assumed reclamation liabilities of approximately $600,000. The
transaction resulted in a net gain of approximately $360,000.
6. DEBT
During the first quarter of 2000, WRI retired its remaining long-term debt in
the principal amount of $1,563,000 plus accrued interest.
7. BUSINESS SEGMENT INFORMATION
The Company's current operations have been classified into three segments: coal,
independent power operations and terminal operations. The coal segment includes
the production and sale of coal from the Powder River Basin in eastern Montana.
The independent power operations segment includes the development, management
and 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. The
"Corporate" classification noted in the tables represents all costs not
otherwise classified, including corporate office charges, heritage costs, and
all residual costs of the idled Virginia Division. Summarized financial
information by segment for the quarters ended March 31, 2000 and 1999, is as
follows:
<PAGE 10>
<TABLE>
Quarter ended March 31, 2000
Coal Independent Power Terminal
Operations Corporate Total
--------------- ------------------- ---------------- ---------------- ----------------
(in thousands)
<CAPTION>
<S> <C> <C> <C> <C> <C>
Revenues:
Coal revenue $ 9,093 $ - $ - $ - $ 9,093
Equity in earnings (losses) - 4,002 (430) - 3,572
--------------- ------------------- ---------------- ---------------- ----------------
9,093 4,002 (430) - 12,665
Costs and expenses:
Cost of sales - coal 7,537 - - - 7,537
Depreciation, depletion, and
Amortization 388 5 - 32 425
Selling and administrative
expense 152 103 130 1,216 1,601
Heritage costs - - - 5,376 5,376
Pension benefit - - - (401) (401)
--------------- ------------------- ---------------- ---------------- ----------------
Operating income (loss) $ 1,016 $ 3,894 $ (560) $(6,223) $ (1,873)
=============== =================== ================ ================ ================
Capital expenditures $ 182 $ 6 $ - $ - $ 188
=============== =================== ================ ================ ================
Property, plant and equipment (net) $ 35,608 $ 81 $ 8 $ 94 $ 35,791
=============== =================== ================ ================ ================
Information for the Company's reportable segments relates to March 31, 2000
consolidated totals as follows:
Income before income taxes: in thousands
Operating loss $ (1,873)
Gains on sales of assets -
Interest expense (267)
Interest income 547
Minority interest (219)
Other expense (679)
--------------------------
Loss before income taxes $ (2,491)
==========================
</TABLE>
<PAGE 11>
<TABLE>
Quarter ended March 31, 1999
Coal Independent Power Terminal
Operations Corporate Total
--------------- ------------------- ---------------- ---------------- ----------------
(in thousands)
<CAPTION>
<S> <C> <C> <C> <C> <C>
Revenues:
Coal revenue $ 8,559 $ - $ - $ - $ 8,559
Equity in earnings (losses) - 22,591 (321) - 22,270
--------------- ------------------- ---------------- ---------------- ----------------
8,559 22,591 (321) - 30,829
Costs and expenses:
Cost of sales - coal 7,293 - - - 7,293
Depreciation, depletion, and
Amortization 329 8 - 29 366
Selling and administrative
expense 163 898 367 3,247 4,675
Heritage costs - - - 5,595 5,595
Pension benefit - - - (55) (55)
Doubtful account recoveries - - - (8) (8)
--------------- ------------------- ---------------- ---------------- ----------------
Operating income (loss) $ 774 $ 21,685 $ (688) $ (8,808) $ 12,963
=============== =================== ================ ================ ================
Capital expenditures $ 1,280 $ - $ - $ - $ 1,280
=============== =================== ================ ================ ================
Property, plant and equipment (net) $ 37,604 $ 79 $ 8 $ 173 $ 37,864
=============== =================== ================ ================ ================
Information for the Company's reportable segments relates to March 31, 1999
consolidated totals as follows:
Income before income taxes: in thousands
Operating income $ 12,963
Gains on sales of assets 19
Interest expense (301)
Interest income 524
Minority interest (226)
Other expense (424)
-------------------------
Income before income taxes $ 12,555
=========================
</TABLE>
<PAGE 12>
Item 2
- --------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Material Changes in Financial Condition From December 31, 1999 to March 31, 2000
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. Any
statements contained herein that are not statements of historical fact may be
deemed to be forward-looking statements. For example, words such as "may,"
"will," "should," "estimates," "predicts," "potential," "continue," "strategy,"
"believes," "anticipates," "plans," "expects," "intends," and similar
expressions are intended to identify forward-looking statements. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, levels of activity,
performance or achievements of the Company, or industry results, to be
materially different from any future results, levels of activity, performance or
achievements expressed or implied by such forward-looking statements. Such
factors include, among others, the following: general economic and business
conditions; the ability of the Company to implement its business strategy; the
Company's access to financing; the Company's ability to successfully identify
new business opportunities; the Company's ability to achieve anticipated cost
savings and profitability targets; changes in the industry; competition; the
Company's ability to utilize its tax net operating losses; the ability to
reinvest excess cash at an acceptable rate of return; weather conditions; the
availability of transportation; price of alternative fuels; costs of coal
produced by other countries; demand for electricity; the effect of regulatory
and legal proceedings and other factors discussed in Item 1 of the Company's
Form 10-K for the year ended December 31, 1999. 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.
Liquidity and Capital Resources
Cash provided by operating activities was $3,989,000 for the three months ended
March 31, 2000. Cash used by operating activities was $15,639,000 for the three
months ended March 31, 1999. The increase in cash from operations in 2000
compared to 1999 is mainly due to cash distributions from the overfunded
pneumoconiosis trust and workers' compensation bond in 2000 as well as the
payment of pre-petition liabilities and reorganization costs and the payment of
alternative minimum income taxes in 1999.
Cash used in investing activities was $4,878,000 for the three months ended
March 31, 2000. Cash used in investing activities for the three months ended
March 31, 1999 was $11,409,000. Cash used in investing activities in 2000
included fixed asset additions of $197,000 (including $191,000 at WRI) offset by
the partial reimbursement from the mine operator of $530,000. Cash used in
investing activities in 1999 included fixed asset additions of $1,280,000 at WRI
offset by proceeds from sales of assets of $19,000. Cash used in investing
activities also included collateral required for long-term security deposits and
bond obligations of $5,219,000 in 2000 and $10,148,000 in 1999.
Cash used in financing activities for the three months ended March 31, 2000 and
1999 totaled $1,563,000 and $167,000, respectively. Cash used in financing
activities in 2000 related to the retirement of debt at WRI. Cash used in 1999
is primarily related to repayment of debt at WRI offset by proceeds from the
exercise of stock options.
<PAGE 13>
Consolidated cash and cash equivalents at March 31, 2000 totaled $17,670,000
(including $14,520,000 at WRI). At December 31, 1999, cash and cash equivalents
totaled $20,122,000 (including $14,314,000 at WRI). Subject to WRI's working
capital requirements, 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 $19,088,000 at
March 31, 2000 and $14,896,000 at December 31, 1999. The restricted cash at
March 31, 2000 represents interest-bearing cash deposit accounts which
collateralize the Company's Contingent Note required by the Master Agreement and
the surety bond for the security required by the 1992 UMWA Benefit Plan of
$6,000,000 and $9,368,000, respectively, as well as $3,720,000 that
collateralizes the outstanding surety bonds for its workers compensation
self-insurance programs. The Company also has $8,000,000 in interest-bearing
debt reserve accounts for certain of the Company's independent power projects.
This cash is restricted as to its use and is classified as part of the
investment in independent power projects. In addition, there is a surplus in the
Company's pneumoconiosis trust of approximately $5,502,000, that may be
available to pay postretirement health benefits dependent upon future actuarial
calculations, as well as $3,934,000 of surplus in the salaried pension plan, a
portion of which may not be available depending upon the form of distribution.
Liquidity Outlook
The major factors impacting the Company's liquidity outlook are its significant
"heritage costs". The heritage costs consist primarily of cash payments for
postretirement medical benefits and workers' compensation costs. The Company
also is obligated for salaried employee 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 the Company believes, in the absence of
possible legislative action, will remain fairly constant over the next four
years and then decline to zero over the next approximately thirty-six 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 nineteen years.
One element of heritage cost is UMWA pensions under the 1974 (Retirement) Plan.
Since this 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 the Company terminated its last UMWA employees in 1998 and withdrew from
the plan. However, the plan claims the Company withdrew at an earlier date and
has asserted a claim of $13,800,000, which the Company is vigorously contesting
through arbitration, as provided under ERISA. In accordance with the
Multiemployer Pension Plan Amendments Act of 1980, the Company has made monthly
principal and interest payments to the plan while it pursues its rights and will
continue to make such monthly payments until arbitration is completed. Included
in the payments made in 2000 is interest of approximately $235,000, which is
reflected as an expense. At the conclusion of arbitration the Company may be
entitled to a refund or it could be required to pay any remaining obligation in
installments through 2008. It is currently anticipated that arbitration will be
concluded by the first quarter of 2001.
Under the Coal Industry Retiree Health Benefits Act ("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 whose last
employers remain in business and maintains an IEP, 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 was 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.
<PAGE 14>
On January 4, 1999, in connection with its dismissal from bankruptcy, the
Company satisfied all of its premium obligations to the Combined Fund from the
date of filing in December, 1996 through the end of 1998 plus interest, and made
prepayments to the Combined Fund for its premiums for the first three quarters
of 1999. Normal monthly payments resumed in October 1999. Beginning on that
date, however, the Company also began receiving credits against its Combined
Fund premiums at a rate of approximately $200,000 per month through April, 2000,
for a total of $1,400,000, as a result of a recalculation of premiums by the
Combined Fund pursuant to an order of the U.S. District Court for the Northern
District of Alabama entered July 20, 1995 in National Coal Association v.
Chater.
The Coal Act authorized the Trustees of the 1992 UMWA Benefit Plan to implement
security provisions for the future payment of benefits pursuant to the Act. The
Trustees set the level of security for each company at an amount equal to three
years' benefits. In Westmoreland's case this obligation was stayed during the
pendency of the bankruptcy. The Company secured its obligation to provide
retiree health benefits under the 1992 Plan by posting a bond in the amount of
$22 million in 1999 which was increased to $23 million in 2000. The Company's
bonding agent required collateral equal to 40% of the bonded amount. The bond is
collateralized by U.S. Government-backed securities in the amount of $9,368,000
at March 31, 2000. The bond amount and the amount to be secured will be reviewed
and adjusted on an annual basis.
The Combined Benefit Fund, faced with an impending solvency crisis because
benefit expenses are exceeding premiums from covered companies, sought
additional funding relief from Congress in 1999. Under the sponsorship of
Senators Byrd and Rockefeller of West Virginia, the House and Senate conference
committee approved, as a part of the Interior and Related Agencies
appropriations bill, a transfer of $68,000,000 of accumulated interest in the
Abandoned Mine Land Reclamation Fund to the Combined Fund. This bill was signed
by the President and the funds were transferred. As a part of its report, the
conference committee noted that this was a short-term solution and urged that
the Congressional committees with jurisdiction over the matter work with the
concerned parties to insure the long-term solvency of the Combined Fund. On
January 27, 2000 the Administration announced it will include $346 million in
its current budget proposal for the UMWA Combined Benefit Fund to secure the
long-term solvency of the Fund. There can be no assurance that this proposal
will be enacted into law.
Over the course of the past year, varying versions of a Medicare prescription
drug benefit have also generated a great deal of interest both on Capitol Hill
and in the press around the country. While health care generally remains one of
the most discussed matters of public policy, the specific concern of adequate
resources to meet the pharmaceutical needs of our Medicare eligible population
is of growing importance.
A Medicare prescription drug benefit that includes Medicare eligible
beneficiaries covered by the Coal Act under that law would address one of the
largest and fastest growing costs at a time when funding for coal field retirees
is in serious jeopardy. Westmoreland currently expends over $16 million per year
on retirees' health care costs and over 50% of that expense is for prescription
drugs. There is no assurance at this time what, if any, proposal will be enacted
into law.
<PAGE 15>
The Company is closely monitoring energy deregulation. 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. Several states have already passed legislation either permitting
immediate wholesale and/or retail competition or providing a mechanism for
transitioning to a competitive marketplace. The Commonwealth of Virginia has
passed legislation which allows wholesale competition to begin in 2004 and
retail competition to begin in 2007. At this time, the promulgation of state
legislation is not expected to have any immediate impact on existing long-term
power purchase agreements. Several proposed bills, calling for deregulation of
the traditional utility monopolies, are pending in the U.S. Congress. When, or
if, some form of national deregulation legislation is enacted is uncertain. The
Company is unable to predict the effect of deregulation on WEI.
The Company agreed to secure its obligations to the UMWA Funds under the Master
Agreement for a period of six years by providing 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, or fails to
maintain the required balance of $6 million in an escrow account established in
connection with the Note.
The Company's principal current sources of cash flow from operations include
cash distributions from its independent power projects, dividends from WRI
(which could be reduced in 2000 as a result of the expiration of the Otter Tail
contract but could be increased by any recovery from MK for dragline repairs),
and interest earned on cash reserves.
Potential sources of additional liquidity include the Company's 50% share of any
recovery in the ROVA litigation and reimbursement of amounts paid to the 74
Pension Plan. Other sources of possible additional liquidity include remaining
overfunded amounts from the black lung trust (in February 2000, the Company
obtained a $6,400,000 distribution from this trust), ongoing increased project
earnings from a favorable ROVA decision, the recovery from Morrison Knudsen for
dragline repairs and the effect of any future legislation that causes Medicare
to cover the cost of prescription drug benefits for eligible retirees.
Management believes that available cash should be sufficient to pay the
Company's heritage costs and fund its ongoing operations for the foreseeable
future. The Company intends to strengthen its long-term liquidity and improve
shareholder value by enhancing the performance of existing operations,
monetizing assets where proceeds on sale would exceed the expected return from
continued operation, and acquiring and developing new opportunities in the
energy sector. Each of these strategies should enjoy the benefit of the
Company's substantial tax loss carry forward which offset taxes otherwise
payable on profitable operations. The Company will also continue to seek further
reductions in its costs wherever feasible and prudent. Although management
expects to improve the Company's profitability and cash flows, the time required
to realize such improvements cannot be estimated at this time nor can assurances
be given that the Company can achieve any such improvements.
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 Delaware law, the
preferred stock dividend was suspended in the third quarter of 1995 as a result
of the recognition of losses related to the idling of the Virginia division and
the subsequent shareholders' deficit. Quarterly dividends which are accumulated
but unpaid through April 1, 2000 amount to $9,757,000 in the aggregate ($46.75
per preferred share or $11.69 per depositary share). Common stock dividends may
not be declared until the preferred stock dividends that are accumulated but
unpaid are made current.
<PAGE 16>
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 (which par value was $208,708 at March 31,
2000). The Company had shareholders' equity at March 31, 2000 of $566,000 and
the par value of all outstanding depositary shares and shares of common stock
aggregated $17,878,000 at March 31, 2000.
Going forward the Company's Board of Directors will consider quarterly preferred
stock dividends, preferred stock dividends which are in arrears, and common
stock dividends, in light of the above restrictions and opportunities to
increase profitability and liquidity.
Results of Operations
- --------------------------------------------------------------------------------
Quarter Ended March 31, 2000 Compared to Quarter Ended March 31, 1999.
Revenues for the quarter ending March 31, 2000 were $12,665,000 compared to
$30,829,000 for the quarter ending March 31, 1999. The decrease is due to lower
equity in earnings from the independent power projects due to a gain on the sale
of the Rensselaer facility of approximately $17,000,000 early in 1999 and
decreased earnings from terminal operations in 2000 due to a further decline in
the export market.
Costs and expenses for the quarter ending March 31, 2000 were $14,538,000
compared to $17,866,000 for the quarter ending March 31, 1999. Sales volumes at
WRI have increased slightly, increasing costs and expenses accordingly. The
decrease in selling and administrative expenses is related to $2,600,000 of
bonuses paid to employees during the first quarter of 1999.
There were no gains on the sales of assets during the quarter ending March 31,
2000, compared to $19,000 for the quarter ending March 31, 1999. The gains
relate primarily to sales of various assets from the Company's idled Virginia
Division.
Interest expense was $267,000 and $301,000 for the three months ended March 31,
2000 and 1999, respectively. The decrease is due to a reduction in the interest
portion on installment payments being made monthly to the 1974 UMWA Pension Plan
pending resolution of the Company's arbitration proceeding with the Plan.
Interest income was $547,000 for the quarter ending March 31, 2000, compared to
$524,000 for the quarter ending March 31, 1999. The increase is due to interest
received on the long-term deposits, offset by the effect of a reduction in
invested cash balances.
<PAGE 17>
Item 3
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
- --------------------------------------------------------------------------------
The Company is exposed to market risk, including the effects of changes in
commodity prices and interest rates as discussed below.
Commodity Price Risk
The Company produces and sells coal to third parties from its coal mine in
Montana and produces and sells electricity and steam to third parties from its
independent power projects located in the eastern United States. Currently, all
of the Company's coal production and all of its electricity and steam production
is sold through long-term contracts with customers. These long-term contracts
serve to minimize the Company's exposure to changes in commodity prices. The
Company generally has not entered into derivative contracts to manage its
exposure to changes in commodity prices, and is not a party to any such
contracts at March 31, 2000.
Interest Rate Risk
The Company finances a portion of its operations with long-term debt. The
Company's long-term debt at December 31, 1999 was repaid during the three months
ended March 31, 2000.
<PAGE 18>
PART II - OTHER INFORMATION
ITEM 1
LEGAL PROCEEDINGS
- --------------------------------------------------------------------------------
See Note 2 "Chapter 11 Reorganization Proceedings" and Note 3 "Contingencies" of
Notes to Consolidated Financial Statements, which are incorporated by reference
herein.
ITEM 3
DEFAULTS UPON SENIOR SECURITIES
- --------------------------------------------------------------------------------
See Note 4 "Capital Stock" of Notes to Consolidated Financial Statements, which
is incorporated by reference herein.
Item 6
Exhibits and Reports on Form 8-K
- --------------------------------------------------------------------------------
a) Exhibit 27 - Financial Data Schedule
On March 6, 2000, the Company filed a report on Form 8-K announcing
that in an appeal by Virginia Power of an earlier trial court decision
in favor of Westmoreland regarding payments withheld by Virginia Power,
the Virginia Supreme Court has reversed that ruling insofar as the
trial court limited its inquiry to the intent of the parties at the
time the original contract was entered into in 1989, and remanded the
case to trial court for further proceedings.
On March 17, 2000, the Company filed a report on Form 8-K announcing
net income from continuing operations of $8.6 million for the full year
ended December 31, 1999 compared with net income from continuing
operations of $3.3 million for 1998.
On March 22, 2000, the Company filed a report on Form 8-K announcing a
correction to the calculation of earnings per share for the year ended
December 31, 1999.
<PAGE 19>
Signatures
- --------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WESTMORELAND COAL COMPANY
Date: May 15, 2000 /s/ Robert J. Jaeger
------------------------------
Robert J. Jaeger
Senior Vice President - Finance and
Treasurer
/s/ Laurel B. Placido
------------------------------
Laurel B. Placido
Controller
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