Even if we are able to resolve the claim of Dominion Virginia Power, the completion of the ROVA transaction is subject to the following conditions specified in our Interest Purchase Agreement with LG&E:
The closing of the ROVA acquisition is also subject to other customary conditions.
Dominion Virginia Power’s alleged right of first refusal is pending in a court proceeding, and there can be no assurance that we will prevail on this issue. In addition, 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.
We are a party to several legal proceedings, which are described more fully in our Annual Report on Form 10-K for the year ended December 31, 2004 under Item 3 – “Legal Proceedings”, and in Note 7 (“Contingencies”) to our Consolidated Financial Statements in this Quarterly Report on Form 10-Q. 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.
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. The parties subsequently agreed to refer the purchase price adjustment issues to an independent accountant who has concluded his review. Our claim for indemnification is now set for trial in October 2005 in the U.S. District Court in Delaware.
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 2004, we employed 943 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.
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.
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 Estimates and Related Matters” herein. 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 $259.8 million at December 31, 2004. We had an accrued liability for postretirement medical and life insurance benefits of $136.0 and $134.2 million at March 31, 2005 and December 31, 2004, respectively, and we expect to accrue an additional $123.8 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.
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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 March 31, 2005, our total indebtedness was approximately $114.5 million, which included Westmoreland Mining’s obligations under its term loan agreement, including the add-on facility described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources.” 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 2011 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. The $35 million add-on facility is scheduled to be paid-down from 2009 through 2011. 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. |
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 March 31, 2005, the ROVA Project had total debt of approximately $194 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.
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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 2004, we paid approximately $2.5 million in premiums for reclamation bonds and posted approximately $3.2 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.
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 2005 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.
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Approximately two-thirds of the coal tonnage that we will sell in 2005 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 regulations recently adopted by the EPA, 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 recently adopted regulations that could increase the costs of operating coal-fired power plants, including the ROVA Project. Congress is considering legislation that would have this same effect. At this time, we are unable to predict the impact of these new regulations on our business. However, we expect that the new regulations may alter the relative competitiveness among coal suppliers and coal types. The new regulations could also disadvantage some or all of our mines, 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.
In March 2005, the EPA issued the Clean Air Interstate Rule (“CAIR”) and Clean Air Mercury Rule (“CAMR”). The CAIR will reduce emissions of sulfur dioxide and nitrogen oxide in 28 eastern States and the District of Columbia. Texas and Minnesota, in which customers of the Jewett and Absaloka mines are located, and North Carolina, where the ROVA Project is located, are subject to the CAIR. The CAIR requires these States to achieve required reductions in emissions from electric generating units, or EGUs, in one of two ways: (1) through participation in an EPA-administered, interstate “cap and trade” system that caps emissions in two stages, or (2) through measures of the State’s choice. Under the cap and trade system, the EPA will allocate emission “allowances” for nitrogen oxide to each State. The 28 States will distribute those allowances to EGUs, which can trade them. To control sulfur dioxide, the EPA will reduce the existing allowance allocations for sulfur dioxide that are currently provided under the acid rain program established pursuant to Title IV of the Clean Air Act Amendments.EGUs may choose among compliance alternatives, including installing pollution control equipment, switching fuels, or buying excess allowances from other EGUs that have reduced their emissions. Aggregate sulfur dioxide emissions are to be reduced from 2003 levels in two stages, a 45% reduction by 2010 and a 57% reduction by 2015. Aggregate nitrogen oxide emissions are also to be reduced from 2003 levels in two stages, a 53% reduction by 2009 and a 61% reduction by 2015.
The CAMR applies to all States. The CAMR establishes a two-stage, nationwide cap on mercury emissions from coal-fired EGUs. Aggregate mercury emissions are to be reduced from 1999 levels in two stages, a 20% reduction by 2010 and a 70% reduction by 2018. The EPA expects that, in the first stage, emissions of mercury will be reduced in conjunction with the reductions of sulfur dioxide and nitrogen oxide under the CAIR. The EPA has assigned each State an emissions “budget” for mercury, and each state must submit a State Plan detailing how it will meet its budget for reducing mercury from coal-fired EGUs. Again, States may participate in an interstate “cap and trade” system or achieve reductions through measures of the State’s choice. The CAMR also establishes mercury emissions limits for new coal-fired EGUs (new EGUs are power plants for which construction, modification, or reconstruction commenced after January 30, 2004).
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These new rules are likely to affect the market for coal for at least three reasons:
| • | | Different types of coal vary in their chemical composition and combustion characteristics. For example, the lignite from our Jewett and Beulah mines is inherently higher in mercury than bituminous and sub-bituminous coal, and sub-bituminous coal from different seams can differ significantly. |
| | | |
| • | | Different EGUs have different levels of emissions control technology. For example, the ROVA Project has “state of the art” emissions control technology that reduces its emissions of sulfur dioxide and nitrogen oxide. |
| | | |
| • | | The CAIR is likely to affect the existing national market for sulfur dioxide emissions allowances, thereby indirectly affecting coal producers and consumers that are not directly subject to the CAIR. |
For all the foregoing reasons, and because it is unclear how States will allocate their emissions budgets, we are unable to predict at this time how these new rules will affect the Company.
The Company’s contracts protect our sales positions, including volumes and prices, to varying degrees. However, we could face disadvantages under the new regulations that could result in our inability to renew some or all of our contracts as they expire or reach scheduled price reopeners or that could result in relatively lower prices upon renewal, thereby reducing our relative revenue, profitability, and/or the value of our coal reserves.
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 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 II 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 II 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 $316.2 million (with a present value of $142.7 million) at March 31, 2005. Of these liabilities, our customers have assumed a gross aggregate of $187.6 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 $56.4 million, in each case at March 31, 2005. We estimate that our gross obligation for final reclamation that is not the contractual responsibility of others was $128.6 million at March 31, 2005, and that the present value of our net obligation for final reclamation that is not the contractual responsibility of others was $56.7 million at March 31, 2005.
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 is scheduled to be out of service for 12 days in April and May 2005. The ROVA Project’s contract with Dominion Virginia Power is structured so that our annual revenues will not be adversely affected by this outage. However, if maintenance uncovers matters beyond those anticipated, the outage could be prolonged beyond the scheduled period, which could reduce the ROVA Project’s profitability and our revenues. In addition, if the maintenance uncovers a matter that must be remedied or repaired, the cost of those repairs may also adversely affect 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 significantly in the last year, and continued escalation of these costs would hurt 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 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 of 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 reduce the Company’s exposure to changes in commodity prices although some of the Company’s contracts are adjusted periodically based upon market prices and some contracts provide for fixed pricing. 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 March 31, 2005.
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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. There were no balances outstanding on these instruments as of March 31, 2005. Westmoreland Mining’s Series D Notes under its term debt agreement have a variable interest rate based on LIBOR. A one percent change in the LIBOR would increase or decrease interest expense by $146,000 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 of March 31, 2005. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, means controls and other procedures of a company that are designed to ensure 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. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of the Company’s disclosure controls and procedures as of March 31, 2005, the Company’s chief executive officer and chief financial officer concluded that, as of such date, the Company’s disclosure controls and procedures were effective at the reasonable assurance level.
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 March 31, 2005 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, 2004, “Item 3 - Legal Proceedings,” the Company has litigation which is still pending. For developments in these proceedings, see Notes 7 and 8 to our Consolidated Financial Statements, which are incorporated by reference herein.
ITEM 3
DEFAULTS UPON SENIOR SECURITIES
See Note 4 “Capital Stock” to our Consolidated Financial Statements, which is incorporated by reference herein.
ITEM 5
OTHER INFORMATION
The description of the Company’s annual incentive compensation for each of the Company’s executive officers and key managers awarded for 2004 is incorporated by reference to Westmoreland’s definitive proxy statement filed in accordance with Regulation 14A on April 18, 2005.
In addition, the Compensation and Benefits Committee has established a similar set of weighted performance objectives for the 2005 award. The award will be determined based upon the Company’s financial performance during 2005 and awarded in early 2006.
ITEM 6
EXHIBITS
| | | (10.1) | Summary of the Compensation of the Named Executive Officers of Westmoreland Coal Company. |
| | | | |
| | | (10.2) | Summary of the Fees Paid to the Directors of Westmoreland Coal Company |
| | | | |
| | | (10.3) | Annual Bonus Opportunities for Fiscal 2005 for the Named Executive Officers of Westmoreland Coal Company |
| | | | |
| | | (10.4) | The description of the annual incentive compensation paid to the Company's named executive officers for 2004 is incorporated by reference from page 32 of the Company's Definitive Schedule 14A filed April 18, 2005 (SEC File No. 001-11155). |
| | | | |
| | | (31) | Rule 13a-14(a)/15d-14(a) Certifications. |
| | | | |
| | | (32) | Certifications pursuant to 18 U.S.C. Section 1350. |
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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: May 10, 2005 | /s/ David J. Blair |
| David J. Blair |
| Chief Financial Officer |
| (A Duly Authorized Officer) |
| | |
| | /s/ Diane M. Nalty |
| Diane M. Nalty |
| Controller |
| (Principal Accounting Officer) |
| | |
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EXHIBIT INDEX
| 10.1 | Summary of the Compensation of the Named Executive Officers of Westmoreland Coal Company. |
| 10.2 | Summary of the Fees Paid to the Directors of Westmoreland Coal Company |
| 10.3 | Annual Bonus Opportunities for Fiscal 2005 for the Named Executive Officers of Westmoreland Coal Company |
| 10.4 | The description of the annual incentive compensation paid to the Company’s named executive officers for 2004 is incorporated by reference from page 32 of the Company’s Definitive Schedule 14A filed April 18, 2005 (SEC File No. 001-11155). |
| 31 | Rule 13a-14(a)/15d-14(a) Certifications. |
| 32 | Certifications pursuant to 18 U.S.C. Section 1350. |
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Exhibit 10.1
SUMMARY OF THE COMPENSATION OF THE NAMED EXECUTIVE OFFICERS OF
WESTMORELAND COAL COMPANYThis exhibit summarizes the compensation of the named executive officers of Westmoreland Coal Company (the “Company”). The term “named executive officers” is defined in Item 402(a)(3) of Regulation S-K, and in accordance with that item, the identity of the named executive officers is determined as of December 31, 2004. This summary is current as of May 10, 2005, and the salaries set forth below have been in effect since July 1, 2004. None of the named executive officers has an employment agreement with the Company and each serves as an “at will” employee.
Annual Base Salary
| Name | Title | Annual Base Salary |
| Christopher K. Seglem | Chairman of the Board, President and Chief Executive Officer | $ 498,750 |
| Thomas G. Durham | Vice President, Coal Operations | $ 187,852 |
| Todd A. Myers | Vice President, Sales and Marketing | $ 182,882 |
| Ronald H. Beck | Vice President-Finance and Treasurer, Assistant Secretary | $ 159,934 |
Annual Cash Bonus
Each of the named executive officers is eligible to participate in the Company’s annual incentive plan on such terms as may be determined by the Compensation and Benefits Committee of the Company’s Board of Directors (the “Committee”)
Long-Term Incentive Compensation
Each of the named executive officers is eligible to receive long-term incentive compensation on such terms as may be determined by the Committee
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Exhibit 10.2
SUMMARY OF THE FEES PAID TO THE DIRECTORS OF WESTMORELAND COAL COMPANYThis exhibit summarizes the fees paid to the directors of Westmoreland Coal Company (the “Company”) as of May 10, 2005, and the fees set forth below have been in effect since May 22, 2003.
The Company compensates the members of its Board of Directors who are not employees of the Company (“non-employee directors”) by paying them an annual retainer and a fee for each meeting of the Board or committee that they attend and by granting them restricted shares of the Company’s common stock, par value $2.50 per share (“Common Stock”).
Each non-employee director receives an annual retainer of $30,000, $18,000 of which is paid in cash and the remaining $12,000 of which non-employee directors may elect to receive in cash or in Common Stock. Each non-employee director also receives $1,000 per meeting attended of the Board and of each committee of which he is a member. The Chairman of the Audit Committee receives an additional $750 per meeting, the Chairman of the Compensation and Benefits receives an additional $650 per meeting, and the chairmen of all other committees of the Company’s Board of Directors receive an additional $500 per meeting attended and chaired.
In addition, each non-employee director receives, as an initial grant upon first joining the Board, options to purchase a number of shares of Common Stock equal to $30,000 in value; each non-employee director receives thereafter upon his re-election to the Board a grant of restricted stock equal in value to $30,000.
Directors of the Company who are also employees of the Company do not receive any of the fees described in this summary.
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Exhibit 10.3
ANNUAL BONUS OPPORTUNITIES FOR FISCAL 2005 FOR THE NAMED EXECUTIVE OFFICERS
OF WESTMORELAND COAL COMPANYThis exhibit summarizes the annual bonus potentially payable to the named executive officers of Westmoreland Coal Company (the “Company”) under the Company’s annual incentive plan. The term “named executive officers” is defined in Item 402(a)(3) of Regulation S-K, and in accordance with that item, the identity of the named executive officers is determined as of December 31, 2004. The annual incentive plan takes the form of resolutions adopted by the Compensation and Benefits Committee of the Company’s Board of Directors (the “Committee”) and does not exist separate from those resolutions.
The Committee has established a set of weighted performance objectives for each of the Company’s executive officers and key managers for 2005. The objectives established by the Committee for 2005 relate to safety at the Company’s operations (35% weight) and the Company’s financial performance relative to the budget approved by the Board (30% weight). In addition, the Committee may, in its discretion, award a bonus based upon individual performance, which has a 35% weight. In evaluating whether to award a bonus for individual performance, the Committee is expected to recognize the relative contributions of specific individuals to the accomplishment of strategic objectives, outstanding performance, individuals’ special efforts, and other similar factors.
The Committee has established a target bonus level for each of the Company’s executive officers and key managers. In setting these levels, the Committee was advised by an independent human resources consulting firm. Target bonus levels for the named executive officers range from 40% to 60% of an individual’s base salary, according to the responsibility level of the executive. The maximum bonus that any individual may earn is equal to twice the target bonus level. An individual’s annual bonus award will be equal to (i) the individual’s performance in the measured areas (expressed as a weighted percentage) multiplied by (ii) the applicable percentage of the individual’s base salary, multiplied by (iii) the individual’s base salary.
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Exhibit 31
CERTIFICATIONI, 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| | | | |
| | c) | 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 |
| | | | |
| | d) | 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: May 10, 2005 | /s/ Christopher K. Seglem |
| Name: | Christopher K. Seglem |
| Title: | Chairman of the Board, President and
Chief Executive Officer |
CERTIFICATION
I, David J. Blair, 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| | | | |
| | c) | 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 |
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| | | | |
| | d) | 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. |
| Date: May 10, 2005 | /s/ David J. Blair |
| Name: | David J. Blair |
| Title: | Chief Financial Officer |
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Exhibit 32
STATEMENT PURSUANT TO 18 U.S.C. §1350Pursuant to 18 U.S.C. § 1350, each of the undersigned certifies that this Quarterly Report on Form 10-Q for the period ended March 31, 2005 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: May 10, 2005 | /s/ Christopher K. Seglem |
| Christopher K. Seglem |
| Chief Executive Officer |
| | |
| Dated: May 10, 2005 | /s/ David J. Blair |
| David J. Blair |
| Chief Financial Officer |
A signed original of this written statement required by Section 906 has been provided to Westmoreland Coal Company and will be retained by Westmoreland Coal Company and furnished to the Securities and Exchange Commission or its staff upon request.
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