Our net income is sensitive to estimates we make about our ability to use our Federal net operating loss carryforwards, or NOLs.
As of December 31, 2003, we had approximately $180 million of NOLs. These NOLs expire at various dates through 2023. When we have taxable income, we can use our NOLs to shield that income from regular U.S. Federal income tax. Our ability to use our NOLs thus depends on all the factors that determine taxable income, including operational factors, such as new coal sales, and non-operational factors, such as increases in heritage health benefit costs. Under Federal tax law, our ability to use our NOLs would be limited if we had a “change of ownership” within the meaning of the Federal tax code.
Our NOLs are one of our deferred income tax assets. We have reduced our deferred income tax assets by a valuation allowance. The valuation allowance is primarily an estimate of the deferred tax assets that may not be realized in future periods. On a quarterly and annual basis, we estimate how much of our NOLs we will be able to apply against future taxable income and make corresponding adjustments in the valuation allowance.
If we increase our estimated utilization of NOLs, we decrease the valuation allowance and increase our net deferred income tax assets and recognize an income tax benefit in earnings. If we decrease our estimated utilization of NOLs, we increase the valuation allowance and decrease our net deferred income tax assets and increase income tax expense. These changes can materially affect our net income and our assets. In the quarter ended September 30, 2004, for example, we reduced the valuation allowance by $0.9 million in part because we improved the terms of an existing coal supply agreement. We also made other adjustments in our net deferred tax assets. As a result of these estimates and adjustments and changes in temporary differences between book and tax accounting, our net deferred income tax assets increased from $75.8 million at December 31, 2003 to $81.6 million at September 30, 2004, and we recognized income tax benefit from continuing operations of $4.8 million.
When the acquisition of ROVA occurs, we expect to reduce the valuation allowance for Federal net operating losses to zero due to the expected increase in the use of net operating loss carryforwards and the projected increase in future taxable income. This benefit will reduce the basis of the property acquired using purchase accounting.
In early March 2004, Westmoreland Mining arranged to borrow an additional $35 million from its lenders pursuant to what we call the add-on facility. On March 8, Westmoreland Mining borrowed $20.4 million under the facility. It will borrow the remaining $14.6 million in the fourth quarter of 2004. Westmoreland Mining is obligated to pay the principal of this debt in quarterly installments from March 31, 2009 to December 31, 2011. Westmoreland Mining’s term debt increased from $88.5 million at December 31, 2003 to $101.2 million at September 30, 2004.
The add-on facility substantially improves our near term liquidity. In addition, even though the debt service requirements of Westmoreland Mining’s basic term loan agreement restrict our access to some of Westmoreland Mining’s cash, Westmoreland Mining itself provides liquidity.
Cash provided by operating activities was $10.7 million for the nine months ended September 30, 2004, compared with $20.2 million for the nine months ended September 30, 2003. Cash from operations in 2004 compared to 2003 decreased primarily due to the Company receiving lower distributions from the ROVA project because the project’s lenders withheld $8.3 million (of which our share is $4.15 million) as a reserve for the Halifax County, North Carolina tax dispute. We also had reduced sales and higher costs at the Jewett Mine and incurred higher cash costs for post-retirement medical benefits. Among the principal factors increasing our cash costs for post-retirement medical benefits is the challenged retroactive premiums being paid to the Combined Benefit Fund. Working capital was $13.1 million at September 30, 2004 compared to $5.6 million at December 31, 2003. The increase in working capital resulted primarily from the net proceeds from borrowings of long-term debt.
We used $20.5 million of cash in investing activities in the nine months ended September 30, 2004, and $11.6 million in the nine months ended September 30, 2003. Cash used in investing activities in 2004 included $11.7 million of additions to property, plant and equipment, primarily for mine equipment and development projects. Cash used in investing activities in 2004 also included an increase of $9.1 million in restricted accounts, pursuant to our term loan agreement and as collateral for our surety bonds. In 2003, additions to property and equipment using cash totaled $11.2 million. Also during 2003, restricted cash accounts and bond collateral increased $7.1 million. In 2003, net proceeds from sale of assets included $4.5 million cash received from the sale of DTA.
We generated $12.0 million of cash in financing activities in the nine months ended September 30, 2004, including $19.6 million from new borrowings of long-term debt, net of debt issuance costs. We used cash of $6.3 million for the repayment of long-term and revolving debt. Cash used in financing activities in the first nine months of 2003 primarily represented repayment of long-term and revolving debt of $7.9 million. Cash provided by financing activities included long-term debt borrowings of $4.6 million which was used for the purchase of mining equipment and land for mine development.
Consolidated cash and cash equivalents at September 30, 2004 totaled $11.4 million, including $0.1 million at Westmoreland Mining, $5.5 million at Westmoreland Resources, and $2.2 million at Westmoreland Risk Management Ltd., our captive insurance subsidiary. Consolidated cash and cash equivalents at December 31, 2003 totaled $9.3 million, including $4.1 million at Westmoreland Mining, $4.2 million at Westmoreland Resources, and $1.5 million at the captive insurance subsidiary. The cash at Westmoreland Mining is available to us through quarterly distributions, as described below. The cash at Westmoreland Resources is available to us through dividends. In addition, we had restricted cash and bond collateral, which were not classified as cash or cash equivalents, of $32.1 million at September 30, 2004 and $25.0 million at December 31, 2003. The restricted cash at September 30, 2004 included $21.7 million in Westmoreland Mining’s debt service reserve and long-term prepayment accounts. Our reclamation, workers’ compensation and postretirement medical cost obligation bonds were collateralized by interest-bearing cash deposits of $10.3 million, which amount we have classified as a non-current asset. In addition, we have reclamation deposits of $54.8 million, which we received from customers of the Rosebud Mine to pay for reclamation. We also have $12.7 million in interest-bearing debt reserve accounts for the ROVA project. This cash is restricted as to its use and is classified as part of our investment in independent power projects.
In early March 2004, Westmoreland Mining entered into the add-on facility. This facility makes $35 million available to us. The add-on facility permits Westmoreland Mining to undertake certain significant capital projects in the near term without adversely affecting cash available at the parent. Although the terms of the add-on facility permit Westmoreland Mining to distribute this $35 million to Westmoreland Coal Company, the original term loan agreement, which financed our acquisition of the Rosebud, Jewett, Beulah, and Savage Mines, continues to restrict Westmoreland Mining’s ability to make distributions to Westmoreland Coal Company from ongoing operations. Until Westmoreland Mining has fully paid the original acquisition debt, which is scheduled for December 31, 2008, Westmoreland Mining may only pay Westmoreland Coal Company a management fee and distribute to Westmoreland Coal Company 75% of Westmoreland Mining’s surplus cash flow. Westmoreland Mining is depositing the remaining 25% into an account that will fund the $30 million balloon payment due December 31, 2008. At the same time that Westmoreland Mining entered into the add-on facility, it also extended its revolving credit facility to 2007 and reduced the amount of the facility to $12 million. Westmoreland Mining reduced the amount of the revolving facility to better align its capacity to its expected usage and borrowing base. As of September 30, 2004, there is $2.0 million outstanding under this facility.
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As of September 30, 2004, Westmoreland Coal Company had its entire $14.0 million revolving line of credit available to borrow. Westmoreland Coal Company amended its revolving credit facility effective June 24, 2004 to provide an increase from $10 to $14 million and extend that facility, from January 2005 to June 30, 2006.
On July 28, 2004, we filed a registration statement for a possible rights offering. If the registration statement becomes effective, it would permit holders of our common stock to purchase additional shares of common stock. As stated in the registration statement, the additional equity capital would be used to support our growth and development strategy and for general corporate purposes.
Liquidity Outlook
We described certain liquidity comparisons in this section of the Annual Report on Form 10-K for the year ended December 31, 2003. All of the items described in that report continue to be important to us. Our results for the remainder of 2004 may also be affected by the potential negative impact of increased prospective and retroactive property taxes at the ROVA project. The lender to the project is withholding funds normally available for distribution to us and our partner until the property tax issue is resolved. We also anticipate that the ROVA project and some of the customers of our mines will experience significant scheduled maintenance outage time during the fourth quarter of 2004. We do not expect that these outages will have a material adverse impact on our expected cash flow or liquidity but we anticipate that they will affect our quarterly earnings.
We supply coal to Units 1&2 of the Colstrip Station under a contract that expires December 31, 2009. Under our contract, the price for our coal has two components, a cost component and a profit component, and is periodically redetermined or “reopened.” The final reopener under the contract occurred in July 2001. The parties agreed upon the cost component in December 2003, and arbitrated the profit component. We received the arbitrators’ decision on May 24, 2004. The new profit component, when added to the new cost component, results in a significant price increase under our coal supply agreement for Colstrip Units 1&2. This increased price will remain in effect through expiration of the contract, but is subject to adjustment to reflect changes in some of our costs and in specified indices. Because the new price is effective as of July 30, 2001, we received in July 2004 nearly all of the approximately $11.9 million, net of production taxes and royalties, for coal that we supplied to Colstrip Units 1&2 from July 30, 2001 through May 2004. This payment includes interest of approximately $0.7 million. The remaining unpaid balance of approximately $0.9 million is expected to be received in the fourth quarter.
As discussed in Results of Operations, we continued to incur significantly higher costs for various commodities at the Jewett Mine in the third quarter 2004. The price of the coal to be delivered to the Limestone Electric Generating Station from the Jewett Mine through 2007, agreed to by the parties in the Supplemental Settlement Agreement executed in early 2004, was based upon a much lower assumed rate of commodity cost inflation than has been experienced year-to-date. We are seeking a retroactive price provision adjustment from the customer providing a surcharge for commodity cost increases. We are also evaluating the potential for recovering flood related losses under our insurance coverage and for making production and mine design changes that could reduce the Company’s exposure to such events as excessive rainfall and variable mining conditions. These changes could result in more predictable production volumes which could improve gross margins and return on investment through lower capital and production costs at the Jewett Mine. As a result of the difficulties at the Jewett Mine, we will take no distributions from Westmoreland Mining for the third quarter of 2004. Under Westmoreland Mining’s term loan agreement, Westmoreland Mining is permitted to make quarterly distributions to Westmoreland Coal Company subject to adjustment at year end for audited financial information. If, following the preparation of audited financial statements for Westmoreland Mining for the year ended December 31, 2004, Westmoreland Mining has distributed an amount greater than is permitted under the term loan agreement, either (1) Westmoreland Mining may deduct that amount from future distributions to Westmoreland Coal Company or (2) Westmoreland Coal Company may pay that amount to Westmoreland Mining for deposit into the long term prepayment account.
On August 25, 2004, we signed an Interest Purchase Agreement with a subsidiary of LG&E Energy LLC. We use the term “LG&E” to refer to LG&E Energy LLC and its subsidiaries. Under that agreement, we will acquire LG&E’s 50% interest in the ROVA project in exchange for a cash payment to LG&E at closing of approximately $22 million and the posting of cash or letters of credit with a value of approximately $9.8 million to replace LG&E’s portion of the ROVA project’s debt service reserve accounts. Our subsidiaries will also assume LG&E’s portion of the ROVA project’s debt. LG&E’s share of this debt is approximately $103 million and upon assumption will be an obligation only of our subsidiaries and not of Westmoreland Coal Company. For this reason, we sometimes refer to this debt as non-recourse debt. We intend to pay for the ROVA acquisition with cash on hand, borrowings under Westmoreland Coal Company’s revolving line of credit and debt financing that we are currently arranging.
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Continued growth remains an important part of our strategy. The air permit for our Gascoyne Project in North Dakota was filed in May and a completeness determination was received in July.
The Company previously disclosed in its consolidated financial statements for the year ended December 31, 2003 that it expected to contribute the minimum amount of $1.8 million for pension benefits during 2004. Due to subsequent changes to our pension plans’ actuarial methodologies and assumptions, the minimum contribution amount was increased to $3.4 million. Of that amount, $3.0 million was contributed in the third quarter.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements within the meaning of the rules of the Securities and Exchange Commission.
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RESULTS OF OPERATIONS
Quarter Ended September 30, 2004 Compared to Quarter Ended September 30, 2003.
Coal Operations.In spite of a 2% decrease in tons of coal sold, from nearly 7.5 million tons in the quarter ended September 30, 2003 to 7.3 million tons in the quarter ended September 30, 2004, coal revenues increased slightly. The decrease in tons sold was as a result of lower production at the Jewett Mine related primarily to near record rainfall in the month of June, which continued to impact operations during the third quarter as the mine recovered from the flooding and ground saturation. Costs primarily associated with the recovery and significantly higher costs for various commodities, especially diesel fuel and electricity, further adversely affected gross margins at the Jewett Mine in the third quarter of 2004. Our overall revenue per ton has increased due to higher contract prices, including the increased profit component under the Rosebud Mine’s contract with the Colstrip Units 1 & 2, which was redetermined in the second quarter through an arbitration proceeding.
The following table shows comparative coal revenues, sales volumes, cost of sales and percentage changes between the periods:
| | Quarter Ended | |
| | September 30, | |
| | 2004 | | 2003 | Change |
|
|
|
|
|
|
| | | | | | |
| Revenues – thousands | $ | 78,826 | $ | 78,769 | 0% |
| | | | | | |
| Volumes – millions of equivalent coal tons | | 7.303 | | 7.474 | (2)% |
| | | | | | |
| Cost of sales – thousands | $ | 63,624 | $ | 59,960 | 6% |
The Company’s business is subject to weather and some seasonality. The power-generating plants that we supply typically schedule their regular maintenance for the spring and fall seasons.
Depreciation, depletion and amortization of $4.0 million in the third quarter of 2004 increased from $3.4 million in 2003’s third quarter. The increase is due to continued capital expenditures at the mines for both continued mine development and the replacement of mining equipment.
Independent Power. Our equity in earnings from independent power operations increased to $5.3 million in the third quarter 2004 from $4.5 million in the quarter ended September 30, 2003 due to increased power production and a reduction in operating and maintenance expenses. For the quarters ended September 30, 2004 and 2003, the ROVA project produced 457,000 and 440,000 megawatt hours, respectively, and achieved average capacity factors of 99% and 95%, respectively. Neither period had major scheduled maintenance outages, resulting in high capacity factors for both periods. In the third quarter of 2004, the ROVA project had only two unplanned outage days compared to seven days in 2003’s third quarter. Unit I of the ROVA project successfully completed a major scheduled preventative maintenance outage, including turbine repair and maintenance, which occurred in October. This outage will reduce earnings for the fourth quarter of 2004. Turbine maintenance outages are scheduled at five year intervals.
Costs and Expenses.Selling and administrative expenses were $7.7 million in the quarter ended September 30, 2004 compared to $7.5 million in the quarter ended September 30, 2003. The increase is primarily a result of higher non-cash compensation expense associated with the performance unit and SAR portions of our long-term incentive plans for management. In general, this expense increases as the market price of the Company’s common stock increases. The price of the Company’s stock increased in the third quarter of 2004, as did this non-cash compensation expense. We also had higher pension cost for the Company’s active employees as a result of a decrease in the discount rate used to calculate the present value of that obligation. These increases were nearly offset by lower legal expenses relating to contract disputes and the absence of severance costs in 2004 compared to severance costs for certain operational management in the third quarter of 2003.
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Heritage health benefit costs decreased to $7.2 million in the third quarter of 2004 from $13.1 million in the third quarter 2003. The UMWA Combined Benefit Fund increased premiums in October 2003 using a new methodology that is being challenged by the Company and others. In the third quarter of 2003, the Company accrued $4.7 million for the assessment attributable to periods through September 2003. The remaining decrease is due to the reduction in expected future postretirement medical benefit costs resulting from the Medicare Reform Act.
Interest expense was $2.5 million and $2.6 million for the three months ended September 30, 2004 and 2003, respectively. Interest associated with the larger amount of outstanding debt as a result of the Westmoreland Mining “add-on” facility in the first quarter of 2004 was mostly offset by the lower interest payments due to the pay-down of the acquisition financing obtained during 2001 in connection with the purchase of the Montana Power and Knife River coal operations. Interest income increased in 2004 due to larger balances in our restricted cash and surety bond collateral accounts.
As a result of the acquisitions we completed in the spring of 2001, the Company recognized a $55.6 million deferred income tax asset in April 2001, which assumed that a portion of previously unrecognized net operating loss carryforwards would be utilized because of the projected generation of future taxable income. The deferred tax asset increased to $81.6 million as of September 30, 2004 from $75.8 million at December 31, 2003 because of temporary differences (such as accruals for pension and reclamation expense, which are not deductible for tax purposes until paid) arising during the intervening period and due to a reduction of the deferred income tax valuation allowance discussed above. Deferred tax assets are comprised of both a current and long-term portion. When taxable income is generated, the deferred tax asset relating to the Company’s net operating loss carryforwards is reduced and a deferred tax expense (non-cash) is recognized although no regular Federal income taxes are paid. The income tax benefit for the third quarter of 2004 represents current income tax obligations for State income taxes and for Federal alternative minimum tax, and the utilization of a portion of the Company’s net operating loss carryforwards, net of the impact of changes in deferred tax assets and liabilities. The deferred tax benefit of $1.9 million recognized in the third quarter of 2004 includes a $0.9 million reduction in the valuation allowance resulting from an increase in the amount of Federal net operating loss carryforwards we expect to utilize before their expiration.
Nine Months Ended September 30, 2004 Compared to Nine Months Ended September 30, 2003
Coal Operations. Coal revenues increased to $243.0 million for the nine months ended September 30, 2004 from $219.5 million for the nine months ended September 30, 2003 primarily as a result of the Colstrip Units 1 & 2 arbitration award during the second quarter. This award resulted in the recognition of additional revenue of $16.3 million for coal shipped from July 30, 2001 to May 31, 2004. Production taxes and royalties on those revenues totaled $5.1 million. In addition, the increased contract price contributed to higher revenues through September 30, 2004 and will continue through the expiration of the contract in 2009. Tons sold increased from 20.5 million to 21.4 million. The increase in tons sold in 2004 came from new or extended sales contracts at the Rosebud and Absaloka mines. Costs increased at the Jewett Mine due to unplanned repairs to a primary dragline, a customer outage that extended beyond its planned duration and weather related production interruptions. Costs also increased due to higher prices for certain supplies, especially diesel fuel and electricity, used at our mines. A net increase in gross margin of $4.4 million was realized in 2004 compared to 2003.
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The following table shows comparative coal revenues, sales volumes, cost of sales and percentage changes between the periods:
| | Nine Months Ended | |
| | September 30, | |
| | 2004 | | 2003 | Change |
|
|
|
|
|
|
| | | | | | |
| Revenues – thousands | $ | 242,978 | $ | 219,544 | 11% |
| | | | | | |
| Volumes – millions of equivalent coal tons | | 21.426 | | 20.534 | 4% |
| | | | | | |
| Cost of sales – thousands | $ | 189,942 | $ | 170,927 | 11% |
Independent Power.Equity in earnings from independent power projects decreased to $12.4 million in the first nine months of 2004 from $12.5 million for the nine months ended September 30, 2003. For the nine months ended September 30, 2004 and 2003, the ROVA projects produced 1,310,000 and 1,283,000 megawatt hours, respectively, and achieved capacity factors of 95% in 2004 and 93% in 2003. A $2.0 million charge for retroactive personal property tax assessments in the second quarter of 2004, which is being challenged, reduced equity in earnings to below 2003 levels. The improved operating results in 2004 are due to the scheduled outage at the ROVA I plant lasting fewer days than in 2003.
Costs and Expenses. Selling and administrative expenses were $22.4 million for the nine months ended September 30, 2004 compared to $25.3 million for the nine months ended September 30, 2003. The higher amount in 2003 includes compensation expense for the performance unit portion of long-term incentive awards which was $2.8 million in the first nine months of 2003 compared to $1.7 million in 2004 as well as more than $1 million of severance benefits in 2003. There were higher legal fees in 2003 associated with certain contract disputes including the price arbitration with the owners of Colstrip Units 1 & 2.
Heritage health benefit costs decreased to $22.2 million for the nine months ending September 30, 2004 from $28.2 million for the comparable period in 2003. The majority of the decrease is a function of the $4.7 million catch-up premium assessed by the Combined Benefit Fund in 2003 discussed above. There also has been a decrease in actuarially determined costs for postretirement medical plans due to the expected future benefit of the Medicare Prescription Drug Act.
During 2003 there was a gain of $451,000 from sales of non-strategic property rights in Colorado that were acquired as part of the coal operations acquisitions in 2001. There were no material asset sales in 2004.
Interest expense was $7.5 million for the nine-month period ended September 30, 2004 and $7.6 million for the same period of 2003. Interest associated with the larger amount of outstanding debt as a result of the Westmoreland Mining “add-on” facility in the first quarter of 2004 was mostly offset by the lower interest payments due to the pay-down of the acquisition financing obtained during 2001 in connection with the purchase of the Montana Power and Knife River coal operations. Interest income increased in 2004 due to larger balances in our restricted cash and surety bond collateral accounts, and due to $0.7 million in interest relating to the Colstrip Units 1 & 2 arbitration decision.
When taxable income is generated, the deferred tax asset relating to the Company’s net operating loss carryforwards is reduced and a deferred tax expense (non-cash) is recognized although no regular Federal income taxes are paid. Current income tax expense in both 2004 and 2003 relate to obligations for State income taxes and Federal alternative minimum tax. During the first nine months of 2004, the deferred tax benefit of $5.2 million includes a $3.0 million reduction in the valuation allowance resulting from an increase in the amount of Federal net operating loss carryforwards we expect to utilize before their expiration.
Terminal Operations. The Company’s share of operating losses from DTA was $988,000 in the nine months ended September 30, 2003. The Company sold its interest in DTA during 2003 for a gain of $4.5 million.
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RISK FACTORS
In addition to the trends and uncertainties described elsewhere in this report, we are subject to the risk factors set forth below.
Our coal mining operations are inherently subject to conditions that could affect levels of production and production costs at particular mines for varying lengths of time and could reduce our profitability.
Our coal mining operations are all surface mines. These mines are subject to conditions or events beyond our control that could disrupt operations, affect production and increase the cost of mining at particular mines for varying lengths of time and negatively affect our profitability. These conditions or events include:
| • | | unplanned equipment failures, which could interrupt production and require us to expend significant sums to repair our capital equipment, including our draglines, the large machines we use to remove the soil that overlies coal deposits; |
| | | |
| • | | geological conditions, such as variations in the quality or deposition of the coal produced from a particular seam, variations in the thickness of coal seams and variations in the amounts of rock and other natural materials that overlie the coal that we are mining; and |
| | | |
| • | | weather conditions. |
Examples of recent conditions or events of these types include the following:
| • | | In the first quarter of 2004, electrical components on the dragline at our Savage Mine failed. This reduced overburden removal and increased costs at that mine for a period of 10½ days while the dragline was being repaired. |
| | | |
| • | | In the first quarter of 2004, our Beulah Mine experienced sloughage, a condition in which the side of the pit partially collapses and must be stabilized before mining can continue. This limited use of the dragline at that mine for a period of 4 days while the walls of the pit were being stabilized. |
| | | |
| • | | In the second quarter of 2004, our Jewett Mine received approximately 93% more rain than normal, preventing production for much of the month of June and impeding normal production throughout the third quarter. |
Our revenues and profitability could suffer if our customers reduce or suspend their coal purchases.
In 2003, we sold approximately 99% of our coal under long-term contracts and about two-thirds of our coal under contracts that obligate our customers to purchase all or almost all of their coal requirements from us, or which give us the right to supply all of the plant’s coal, lignite or fuel requirements. Two of our contracts, with the owners of Colstrip Units 3&4 and with Texas Genco, L.P. for its Limestone Electric Generating Station, accounted for 34% and 24%, respectively, of our coal revenues in 2003. Interruption in the purchases by or operations of our principal customers could significantly affect our revenues and profitability. Unscheduled maintenance outages at our customers’ power plants and unseasonably moderate weather are examples of conditions that might cause our customers to reduce their purchases. Four of our five mines are dedicated to supplying customers located adjacent to or near the mines, and these mines may have difficulty identifying alternative purchasers of their coal if their existing customers suspend or terminate their purchases.
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Disputes relating to our coal supply agreements could harm our financial results.
From time to time, we may have disputes with customers under our coal supply agreements. These disputes could be associated with claims by our customers that may affect our revenue and profitability. Any dispute that resulted in litigation could cause us to pay significant legal fees, which could also affect our profitability. By way of example, we have entered into a settlement agreement with Texas Genco that addresses contract disputes through 2007, but differences may occur as to the interpretation of various contract provisions after 2007.
We are a party to numerous legal proceedings, some of which, if determined unfavorably to us, could result in significant monetary damages.
We are a party to several legal proceedings, which are described more fully in Note 7 to our Consolidated Financial Statements. Adverse outcomes in some or all of the pending cases could result in substantial damages against us or harm our business.
We currently own a 50% interest in the ROVA project, which is located in Halifax County, North Carolina, and we have agreed to purchase the 50% interest that we do not currently own. Halifax County asserts that the ROVA project owes $8.3 million in back taxes, penalties and interest. If we complete the ROVA acquisition, LG&E has agreed to indemnify the ROVA project for one-half of this amount. If the assessment is upheld, the ROVA project’s future taxes would increase approximately $600,000 per year, compared to 2003 levels.
We acquired the Rosebud and Jewett Mines and other assets from Entech, Inc., a subsidiary of the Montana Power Company, in April 2001. Under our agreement with Entech, the final purchase price is subject to adjustment. In June 2001, Entech proposed adjustments that would increase the purchase price by approximately $9 million. In July 2001, we objected to Entech’s adjustments and proposed our own adjustments, which would result in a substantial decrease in the purchase price. In June 2003, Entech and Touch America Holdings, Inc., the successor to the Montana Power Company, filed bankruptcy petitions. In March 2004, we received notice that Entech and Touch America had commenced an adversary proceeding against us in the bankruptcy court, seeking payment of approximately $9 million. We filed an answer, a motion to dismiss and a claim for indemnification. The bankruptcy court has referred the claims regarding the purchase price adjustment dispute to the courts of the State of New York, and our claim for indemnification is now being heard in the U.S. District Court in Delaware. The purchase price adjustment dispute is being reviewed by an independent accountant, as provided in the Stock Purchase Agreement. At the conclusion of both the purchase price adjustment and breach of representations and warranties litigation, the Entech bankruptcy court will determine whether any judgment obtained by the Company can be offset against any judgment obtained by Entech and the priority of any claim of the Company.
We may not be able to manage our expanding operations effectively, which could impair our profitability.
At the end of 2000, we owned one mine and employed 31 people. In the spring of 2001, we acquired the Rosebud, Jewett, Beulah and Savage Mines from Entech and Knife River Corporation, and at the end of 2003, we employed 918 people. This growth has placed significant demands on our management as well as our resources and systems. One of the principal challenges associated with our growth has been, and we believe will continue to be, our need to attract and retain highly skilled employees and managers. If we are unable to attract and retain the personnel we need to manage our increasingly large and complex operations, our ability to manage our operations effectively and to pursue our business strategy could be compromised.
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Our growth and development strategy could require significant resources and may not be successful.
We regularly seek opportunities to make additional strategic acquisitions, to expand existing businesses, to develop new operations and to enter related businesses. We may not be able to identify suitable acquisition candidates or development opportunities, or complete any acquisition or project, on terms that are favorable to us. Acquisitions, investments and other growth projects involve risks that could harm our operating results, including difficulties in integrating acquired and new operations, diversions of management resources, debt incurred in financing such activities and unanticipated problems and liabilities. We anticipate that we would finance acquisitions and development activities by using our existing capital resources, borrowing under existing bank credit facilities, issuing equity securities or incurring additional indebtedness. We may not have sufficient available capital resources or access to additional capital to execute potential acquisitions or take advantage of development opportunities.
The ROVA acquisition may not close as anticipated.
While we expect that our acquisition of LG&E’s interest in the ROVA project will close by November 30, 2004, the transaction is subject to the conditions specified in our Interest Purchase Agreement with LG&E, and we may not be able to complete this acquisition.
The transaction is subject to the following conditions specified in the Interest Purchase Agreement:
| • | | Both we and LG&E must have performed and complied with, in all material respects, the obligations and covenants that we and LG&E are required to perform and comply with prior to the closing. |
| | | |
| • | | Our representations and warranties, and the representations and warranties of LG&E, must be true and correct in all material respects on the closing date. |
| | | |
| • | | Since August 25, 2004, there must not have been a material adverse effect on the assets, business, condition, or results of operations of the partnership that owns the ROVA project; the condition, use, or operation of the ROVA project itself; the payments owed to the ROVA project by Dominion Virginia Power under the power purchase agreement; or LG&E’s 50% interest in the ROVA project. |
| • | | We and LG&E must have received all necessary consents to the transaction from all regulatory authorities and third parties, including the consents of the Federal Energy Regulatory Commission, or FERC, and the North Carolina Utilities Commission and the lenders to the ROVA project. |
| | | |
| • | | We must have obtained replacement insurance that satisfies the insurance requirements of the ROVA project’s credit agreement with its lenders. |
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| • | | LG&E and its affiliates must have been released from their obligations under the ROVA project’s existing letters of credit, and the beneficiaries of those letters of credit must not have drawn under them. |
The closing of the ROVA acquisition is also subject to other customary conditions.
Many of the conditions to the closing of the ROVA acquisition are beyond our control, and there can be no assurance that those conditions will be satisfied.
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Our expenditures for postretirement medical and life insurance benefits could be materially higher than we have predicted if our underlying assumptions prove to be incorrect.
We provide various postretirement medical and life insurance benefits to current and former employees and their dependents. We estimate the amounts of these obligations based on assumptions described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies – Postretirement Benefits and Pension Obligations.” We accrue amounts for these obligations, which are unfunded, and we pay as costs are incurred. If our assumptions change, the amount of our obligations could increase, and if our assumptions are inaccurate, we could be required to expend greater amounts than we anticipate. We estimate that our gross obligation for postretirement medical and life insurance benefits was $237.6 million at December 31, 2003. We had an accrued liability for postretirement medical and life insurance benefits of $127.2 million at December 31, 2003, and we will accrue an additional $110.4 million over the next ten years, as permitted by Statement of Financial Accounting Standards No. 106. We regularly revise our estimates, and the amount of our accrued obligations is subject to change.
We have a significant amount of debt, which imposes restrictions on us and may limit our flexibility, and a decline in our operating performance may materially affect our ability to meet our future financial commitments and liquidity needs.
As of September 30, 2004, our total indebtedness was approximately $107.5 million, which included Westmoreland Mining’s obligations under its term loan agreement, including the “add-on” facility. Westmoreland Mining will borrow an additional $14.6 million under the add-on facility in the fourth quarter of 2004, we will assume significant non-recourse debt upon completion of the ROVA acquisition, we may incur additional indebtedness to finance the ROVA acquisition and we may incur additional indebtedness in the future, including indebtedness under our two existing revolving credit facilities.
Westmoreland Mining’s term loan agreement restricts its ability to distribute cash to Westmoreland Coal Company through 2008 and limits the types of transactions that Westmoreland Mining and its subsidiaries can engage in with Westmoreland Coal Company and our other subsidiaries. Westmoreland Mining executed the term loan agreement in 2001 and used the proceeds to finance its acquisition of the Rosebud, Jewett, Beulah and Savage Mines. The final payment on this indebtedness, which we call Westmoreland Mining’s acquisition debt, is in the amount of $30 million and is due on December 31, 2008. After payment of principal and interest, 25% of Westmoreland Mining’s surplus cash flow is dedicated to an account that is expected to fund this final payment. Westmoreland Mining has pledged or mortgaged substantially all of its assets and the assets of the Rosebud, Jewett, Beulah and Savage Mines, and we have pledged all of our member interests in Westmoreland Mining, as security for Westmoreland Mining’s indebtedness. In addition, Westmoreland Mining must comply with financial ratios and other covenants specified in the agreements with its lenders. Failure to comply with these ratios and covenants or to make regular payments of principal and interest could result in an event of default.
A substantial portion of our cash flow must be used to pay principal of and interest on our indebtedness and is not available to fund working capital, capital expenditures or other general corporate uses. In addition, the degree to which we are leveraged could have other important consequences, including:
| • | | increasing our vulnerability to general adverse economic and industry conditions; |
| | | |
| • | | limiting our ability to obtain additional financing to fund future working capital, capital expenditures or other general corporate requirements; and |
| | | |
| • | | limiting our flexibility in planning for, or reacting to, changes in our business and in the industry. |
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If our or Westmoreland Mining’s operating performance declines, or if we or Westmoreland Mining do not have sufficient cash flows and capital resources to meet our debt service obligations, we or Westmoreland Mining may be forced to sell assets, seek additional capital or seek to restructure or refinance our indebtedness. If Westmoreland Mining were to default on its debt service obligations, a note holder may be able to foreclose on assets that are important to our business.
At July 31, 2004, the ROVA project had total debt of approximately $206 million. The ROVA project’s credit agreement restricts its ability to distribute cash, contains financial ratios and other covenants, and is secured by a pledge of the project and substantially all of the project’s assets. If the ROVA project fails to comply with these ratios and covenants or fails to make regular payments of principal and interest, an event of default could occur. A substantial portion of the ROVA project’s cash flow must be used to pay principal of and interest on its indebtedness and is not available to us. If the ROVA project were to default on its debt service obligations, a creditor may be able to foreclose on assets that are important to our business.
If the cost of obtaining new reclamation bonds and renewing existing reclamation bonds continues to increase, our profitability could be reduced.
Federal and state laws require that we provide bonds to secure our obligations to reclaim lands used for mining. We must post a bond before we obtain a permit to mine any new area. These bonds are typically renewable on a yearly basis and have become increasingly expensive. Bonding companies are requiring that applicants collateralize a portion of their obligations to the bonding company. In 2003, we paid approximately $2.2 million in premiums for reclamation bonds and posted approximately $1.5 million in collateral, in addition to the collateral that we had previously posted, for those bonds. Any capital that we provide to collateralize our obligations to our bonding companies is not available to support our other business activities. If the cost of our reclamation bonds continues to increase, our profitability could be reduced.
Our financial position could be adversely affected if we fail to maintain our Coal Act bonds.
The Coal Act established the 1992 UMWA Benefit Plan, or 1992 Plan. We are required to secure three years of our obligations to that plan by posting a surety bond or a letter of credit or collateralizing our obligations with cash. We presently secure these obligations with two bonds, one in an amount of approximately $21.3 million and one in an amount of approximately $5.0 million. In December 2003, the issuer of our $21.3 million bond indicated a desire to exit the business of bonding Coal Act obligations. In February 2004, this company renewed our Coal Act bond. Although we believe that the issuer of this bond must continue to renew the bond so long as we do not default on our obligations to the 1992 Plan, there can be no assurance that the issuer of this bond will not attempt to cancel the bond. If either of the companies that issue our Coal Act bonds were to cancel or fail to renew our bonds, we may be required to post another bond or secure our obligations with a letter of credit or cash. At this time, we are not aware of any other company that would provide a surety bond to secure obligations under the Coal Act. We do not believe that we could now obtain a letter of credit without collateralizing that letter of credit in full with cash. Any capital that we might provide to collateralize such a letter of credit or secure our obligations under the Coal Act would not be available to support our other business activities.
Our insurance costs may increase, which could increase our expenses and reduce our profitability.
Our insurance costs have increased at each annual renewal on July 1st from 2002 to 2004, and we believe that insurance costs have generally increased throughout the mining industry. We have been able to address a portion of these costs by organizing Westmoreland Risk Management Ltd., our insurance subsidiary, and retaining a portion of the risk associated with our operations. However, Westmoreland Risk Management has limited capacity. Our insurance costs may increase in the future, and any such increase would increase our expenses and thereby reduce our profitability.
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We face competition for sales to new and existing customers, and the loss of sales or a reduction in the prices we receive under new or renewed contracts would lower our revenues and could reduce our profitability.
Approximately one-third of the coal tonnage that we will produce in 2004 will be sold under long-term contracts to power plants that take delivery of our coal from common carrier railroads. All of the Absaloka Mine’s sales are delivered by rail and about 20% of the Rosebud Mine’s and Beulah Mine’s sales are delivered by rail. Contracts covering 90% of those rail tons are scheduled to expire between December 2006 and December 2008. As a general matter, plants that take coal by rail can buy their coal from many different suppliers. We will face significant competition, primarily from mines in the Southern Powder River Basin of Wyoming, to renew our long-term contracts with our rail-served customers, and for contracts with new rail-served customers. Many of our competitors are larger and better capitalized than we are and have coal with a lower sulfur and ash content than our coal. As a result, our competitors may be able to adopt more aggressive pricing policies for their coal supply contracts than we can. If our existing customers fail to renew their existing contracts with us on terms that are at least equivalent to those in effect today, or if we are unable to replace our existing contracts with contracts of equal size and profitability from new customers, our revenues and profitability would be reduced.
Approximately two-thirds of the coal tonnage that we will sell in 2004 will be delivered under long-term contracts to power plants located adjacent to our mines. We will face somewhat less competition to renew these contracts upon their expiration, both because of the transportation advantage we enjoy by being located adjacent to these customers and because most of these customers would be required to invest additional capital to obtain rail access to alternative sources of coal. Our Jewett Mine is an exception because our customer has already built rail unloading and associated facilities that are being used to take coal from the Southern Powder River Basin as permitted under our contract with that customer.
Stricter environmental regulations, including the EPA's proposed rule relating to mercury, could reduce the demand for coal as a fuel source and cause the volume of our sales to decline.
Coal contains impurities, including sulfur, mercury, nitrogen and other elements or compounds, many of which are released into the air when coal is burned. Stricter environmental regulation of emissions from coal-fired electric generating plants could increase the costs of using coal, thereby reducing demand for coal as a fuel source generally, and could make coal a less attractive fuel alternative in the planning and building of utility power plants in the future. The U.S. Environmental Protection Agency, or EPA, has proposed regulations that could increase the costs of operating coal-fired power plants, including the ROVA project. Because different types of coal vary in their chemical composition and combustion characteristics, the proposed regulations could also alter the relative competitiveness among coal suppliers and coal types. Depending on the final forms of these rules, any or all of our mines could be disadvantaged, and notwithstanding our coal supply contracts we could lose all or a portion of our sales volumes and face increased pressure to reduce the price for our coal, thereby reducing our revenues, our profitability and the value of our coal reserves.
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On January 30, 2004, the EPA issued the Proposed National Emission Standards for Hazardous Air Pollutants, or Mercury Rule, which proposes to regulate emissions of mercury by electric generating units, or EGUs. The EPA issued a Supplemental Proposed Rule on March 16, 2004. These proposals contain three alternative methods for regulating emissions of mercury, including two alternatives that would establish standards of performance and cap-and-trade programs, and one alternative that would require EGUs to meet an emissions limit that is based on the installation of controls known as “maximum achievable control technologies,” or MACT. The MACT alternative would limit the amount of mercury that could be emitted from lignite-burning EGUs to 9.2 pounds of mercury for every trillion Btu those units produce, commencing as early as 2007. Mercury emissions from the Limestone Station, which burns lignite produced by our Jewett Mine, are higher than this level, and mercury emissions from the Coyote Station, which burns lignite produced by our Beulah Mine, may be higher than this level. According to the EPA, there are neither precombustion techniques nor proven technologies that are currently commercially available for reducing mercury emissions from lignite-burning EGUs to 9.2 pounds of mercury per trillion Btu produced, and there is also currently no proven technology for accurately measuring the mercury content in emissions. If the EPA were to adopt a version of the Mercury Rule that limits emissions of mercury to 9.2 pounds for every trillion Btu produced from lignite-burning plants, then sales from the Jewett Mine or Beulah Mine could be significantly reduced, and if the EPA were to adopt any version of the Mercury Rule, we could face increased pressure to reduce the price for our lignite to help defray the cost of complying with the regulations. The EPA has announced that it expects to adopt some version of the Mercury Rule by March 15, 2005.
New legislation or regulations in the United States aimed at limiting emissions of greenhouse gases could increase the cost of using coal or restrict the use of coal, which could reduce demand for our coal, cause our profitability to suffer and reduce the value of our assets.
A variety of international and domestic environmental initiatives are currently aimed at reducing emissions of greenhouse gases, such as carbon dioxide, which is emitted when coal is burned. If these initiatives were to be successful, the cost to our customers of using coal could increase, or the use of coal could be restricted. This could cause the demand for our coal to decrease or the price we receive for our coal to fall, and the demand for coal generally might diminish. Restrictions on the use of coal or increases in the cost of burning coal could cause us to lose sales and revenues, cause our profitability to decline or reduce the value of our coal reserves.
Demand for our coal could also be reduced by environmental regulations at the state level.
Environmental regulations by the states in which our mines are located, or in which the generating plants they supply operate, may negatively affect demand for coal in general or for our coal in particular. For example, Texas has passed regulations requiring all fossil fuel-fired generating facilities in the state to reduce nitrogen oxide emissions beginning in May 2003. In January 2004, we entered into a supplemental settlement agreement with Texas Genco pursuant to which the Limestone Station must purchase a specified volume of lignite from the Jewett Mine. In order to burn this lignite without violating the Texas nitrogen oxide regulations, the Limestone Station is blending our lignite with coal, produced by others in the Southern Powder River Basin, and using emissions credits. Considerations involving the Texas nitrogen oxide regulations might affect the demand for lignite from the Jewett Mine in the period after 2007, which is the last year covered by the supplemental settlement agreement. Texas Genco might claim that it is less expensive for the Limestone Station to comply with the Texas nitrogen oxide regulations by switching to a blend that contains relatively more coal from the Southern Powder River Basin and relatively less of our lignite. Other states are evaluating various legislative and regulatory strategies for improving air quality and reducing emissions from electric generating units. Passage of other state-specific environmental laws could reduce the demand for our coal.
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We have significant reclamation and mine closure obligations. If the assumptions underlying our accruals are materially inaccurate, or if we are required to honor reclamation obligations that have been assumed by our customers or contractors, we could be required to expend greater amounts than we currently anticipate, which could affect our profitability in future periods.
We are responsible under federal and state regulations for the ultimate reclamation of the mines we operate. In some cases, our customers and contractors have assumed these liabilities by contract and have posted bonds or have funded escrows to secure their obligations. We estimate our future liabilities for reclamation and other mine-closing costs from time to time based on a variety of assumptions. If our assumptions are incorrect, we could be required in future periods to spend more on reclamation and mine-closing activities than we currently estimate, which could harm our profitability. Likewise, if our customers or contractors default on the unfunded portion of their contractual obligations to pay for reclamation, we could be forced to make these expenditures ourselves and the cost of reclamation could exceed any amount we might recover in litigation, which would also increase our costs and reduce our profitability.
We estimate that our gross reclamation and mine-closing liabilities, which are based upon permit requirements and our experience, were $307 million (with a present value of $123 million) at December 31, 2003. Of these liabilities, our customers have assumed a gross aggregate of $184 million and have secured a portion of these obligations by posting bonds in the amount of $50 million and funding reclamation escrow accounts that currently hold approximately $54 million, in each case at December 31, 2003. We estimate that our gross obligation for final reclamation that is not the contractual responsibility of others was $123 million at December 31, 2003, and that the present value of our net obligation for final reclamation that is not the contractual responsibility of others was $45.2 million at December 31, 2003.
Our profitability could be affected by unscheduled outages at the power plants we supply or own or if the scheduled maintenance outages at the power plants we supply or own last longer than anticipated.
Scheduled and unscheduled outages at the power plants that we supply could reduce our coal sales and revenues, because any such plant would not use coal while it was undergoing maintenance. We cannot anticipate if or when unscheduled outages may occur.
Our profitability could be affected by unscheduled outages at the ROVA project or if scheduled outages at the ROVA project last longer than we anticipate. For example, the ROVA I unit was out of service for 30 days for scheduled major maintenance in the fourth quarter of 2004. The ROVA project’s contract with Dominion Virginia Power is structured so that our revenues will not be adversely affected by a 30-day outage for major maintenance at ROVA I this year. However, if that maintenance had uncovered matters beyond those anticipated, an outage prolonged beyond the 30-day period, would have reduced the ROVA project’s profitability and our revenues. In addition, if the maintenance uncovered a matter that must be remedied or repaired, the cost of those repairs would also adversely have affected the ROVA project’s profitability.
Increases in the cost of the fuel, electricity and materials we use to operate our mines could affect our profitability.
Under several of our existing coal supply agreements, our mines bear the cost of the diesel fuel, lubricants and other petroleum products, electricity, and other materials and supplies necessary to operate their draglines and other mobile equipment. The prices of many of these commodities have increased in the last year and increased significantly during the third quarter and into the fourth quarter of 2004. This escalation of costs decreases our profitability.
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If we experience unanticipated increases in the capital expenditures we expect to make over the next several years, our profitability could suffer.
Over the next several years, we anticipate making significant capital expenditures, principally at the Rosebud and Jewett Mines, in order to add to and refurbish our machinery and equipment and prepare new areas for mining. We also expect to begin implementing a new enterprise resource planning system in late 2004, with full deployment scheduled for 2005. The costs of any of these expenditures could exceed our expectations, which could reduce our profitability and divert our capital resources from other uses.
Our ability to operate effectively and achieve our strategic goals could be impaired if we lose key personnel.
Our future success is substantially dependent upon the continued service of our key senior management personnel, particularly Christopher K. Seglem, our Chairman of the Board, President and Chief Executive Officer. We do not have key-person life insurance policies on Mr. Seglem or any other employees. The loss of the services any of our executive officers or other key employees could make it more difficult for us to pursue our business goals.
Provisions of our certificate of incorporation, bylaws and Delaware law, and our stockholder rights plan, may have anti-takeover effects that could prevent a change of control of our company that you may consider favorable, and the market price of our common stock may be lower as a result.
Provisions in our certificate of incorporation and bylaws and Delaware law could make it more difficult for a third party to acquire us, even if doing so might be beneficial to our stockholders. Provisions of our bylaws impose various procedural and other requirements that could make it more difficult for stockholders to effect some types of corporate actions. In addition, a change of control of our Company may be delayed or deterred as a result of our stockholder rights plan, which was initially adopted by our Board of Directors in early 1993 and amended and restated in February 2003. Our ability to issue preferred stock in the future may influence the willingness of an investor to seek to acquire our company. These provisions could limit the price that some investors might be willing to pay in the future for shares of our common stock and may have the effect of delaying or preventing a change in control of Westmoreland.
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, through its subsidiaries Westmoreland Resources, Inc. and Westmoreland Mining LLC, produces and sells coal to third parties from coal mining operations in Montana, Texas and North Dakota, and through its subsidiary, Westmoreland Energy, LLC, produces and sells electricity and steam to third parties from its independent power projects located in North Carolina and Colorado. Nearly all of the Company’s coal production and all of its electricity and steam production are sold through long-term contracts with customers. These long-term contracts serve to minimize the Company’s exposure to changes in commodity prices although some of the Company’s contracts are adjusted periodically based upon market prices. The Company has not entered into derivative contracts to manage its exposure to changes in commodity prices, and was not a party to any such contracts at September 30, 2004.
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Interest Rate Risk
The Company and its subsidiaries are subject to interest rate risk on its debt obligations. Long-term debt obligations have fixed interest rates, and the Company’s revolving lines of credit have a variable rate of interest indexed to either the prime rate or LIBOR. Based on the balances outstanding as of September 30, 2004, a one percent change in the prime interest rate or LIBOR would increase or decrease interest expense by $20,000 on an annual basis. The Company’s heritage health benefit costs are also impacted by interest rate changes because its pension, pneumoconiosis and post-retirement medical benefit obligations are recorded on a discounted basis.
ITEM 4
CONTROLS AND PROCEDURES
The Company’s management, with the participation of the Company’s chief executive officer and chief financial officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of September 30, 2004. Based on this evaluation, the Company’s chief executive officer and chief financial officer concluded that, as of September 30, 2004, the Company’s disclosure controls and procedures were (1) designed to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to the Company’s chief executive officer and chief financial officer by others within those entities, particularly during the period in which this report was being prepared, and (2) effective, in that they provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
No change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended September 30, 2004 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II - OTHER INFORMATION
ITEM 1
LEGAL PROCEEDINGS
As described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003, “Item 3 - Legal Proceedings,” the Company has litigation which is still pending. For developments in these proceedings, see Note 7 to our Consolidated Financial Statements, which is incorporated by reference herein.
ITEM 2
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On August 9, 2002, the Board of Directors authorized the repurchase of up to 83,483 depositary shares on the open market or in privately negotiated transactions with institutional and accredited investors between August 9, 2002 and the end of 2004. The timing and amount of depositary shares repurchased will be determined by the Company’s management based on its evaluation of the Company’s capital resources, the price of the depositary shares offered to the Company and other factors. The Company will convert any acquired depositary shares into shares of Series A Convertible Exchangeable Preferred Stock and retire the preferred shares. The Company will fund the repurchase program from working capital. Since the commencement of the depositary share purchase program, the Company has purchased a total of 14,500 depositary shares for an aggregate consideration of $457,000. The Company has not purchased any depositary shares since the second quarter of 2003.
ITEM 3
DEFAULTS UPON SENIOR SECURITIES
See Note 4 “Capital Stock” to our Consolidated Financial Statements, which is incorporated by reference herein.
ITEM 6
EXHIBITS
| | | (10.1)* | Interest Purchase Agreement By and Between LG&E Roanoke Valley L.P., as Seller, and Westmoreland-Roanoke Valley L.P. as Buyer, dated as of August 25, 2004 to acquire LG&E's 50% partnership interest in the ROVA power project located in Weldon, North Carolina. |
| | | | |
| | | (31) | Rule 13a-14(a)/15d-14(a) Certifications. |
| | | | |
| | | (32) | Certifications pursuant to 18 U.S.C. Section 1350. |
| | | | |
| | | * | Confidential treatment has been requested as to certain portions, which portions have been omitted and filed separately with the Securities and Exchange Commmission. |
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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: November 9, 2004 | /s/ Ronald H. Beck |
| Ronald H. Beck |
| Vice President - Finance and |
| Treasurer |
| (A Duly Authorized Officer) |
| | |
| | /s/ Thomas S. Barta |
| Thomas S. Barta |
| Controller |
| (Principal Accounting Officer) |
| | |
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EXHIBIT INDEX
| 10.1* | Interest Purchase Agreement By and Between LG&E Roanoke Valley L.P., as Seller, and Westmoreland-Roanoke Valley L.P. as Buyer, dated as of August 25, 2004 to acquire LG&E's 50% partnership interest in the ROVA power project located in Weldon, North Carolina. |
| 31 | Rule 13a-14(a)/15d-14(a) Certifications. |
| 32 | Certifications pursuant to 18 U.S.C. Section 1350. |
| * | Confidential treatment has been requested as to certain portions, which portions have been omitted and filed separately with the Securities and Exchange Commmission. |
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Exhibit 31
CERTIFICATION
I, Christopher K. Seglem, certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q of Westmoreland Coal Company; |
| | | |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| | | |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| | | |
| 4. | The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: |
| | | |
| | a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| | | | |
| | b) | Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| | | | |
| | c) | Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
| | | |
| 5. | The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): |
| | a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
| | | | |
| | | b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
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| Date: November 9, 2004 | /s/ Christopher K. Seglem |
| Name: | Christopher K. Seglem |
| Title: | Chairman of the Board, President and
Chief Executive Officer |
CERTIFICATION
I, Ronald H. Beck, certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q of Westmoreland Coal Company; |
| | | |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| | | |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| | | |
| 4. | The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: |
| | | |
| | a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| | | | |
| | b) | Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| | | | |
| | c) | Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
| 5. | The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): |
| | a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
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| | | b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
| Date: November 9, 2004 | /s/ Ronald H. Beck |
| Name: | Ronald H. Beck |
| Title: | Vice President-Finance and Treasurer
Acting Chief Financial Officer |
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Exhibit 32
STATEMENT PURSUANT TO 18 U.S.C.§ 1350
Pursuant to 18 U.S.C. § 1350, each of the undersigned certifies that this Quarterly Report on Form 10-Q for the period ended September 30, 2004 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in this report fairly presents, in all material respects, the financial condition and results of operations of Westmoreland Coal Company.
| Dated: November 9, 2004 | /s/ Christopher K. Seglem |
| Christopher K. Seglem |
| Chief Executive Officer |
| | |
| Dated: November 9, 2004 | /s/ Ronald H. Beck |
| Ronald H. Beck |
| Acting Chief Financial Officer |
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