UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________________
FORM 10-Q
__________________________________________
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2014
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 001-11155
___________________________________________
WESTMORELAND COAL COMPANY
(Exact name of registrant as specified in its charter)
__________________________________________
|
| |
Delaware | 23-1128670 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| |
9540 South Maroon Circle, Suite 200 Englewood, CO | 80112 |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (855) 922-6463
__________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
|
| | | | |
Large accelerated filer | o | | Accelerated filer | x |
Non-accelerated filer | o | (Do not check if a smaller reporting company.) | Smaller reporting company | o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
Indicate the number of shares outstanding of each of the issuer's classes of common stock as of July 29, 2014: 16,986,656 shares of common stock, $2.50 par value.
TABLE OF CONTENTS
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ITEM 1 - | | |
ITEM 1 - | | |
ITEM 2 - | | |
ITEM 3 - | | |
ITEM 4 - | | |
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ITEM 1 - | | |
ITEM 1A - | | |
ITEM 2 - | | |
ITEM 4 - | | |
ITEM 6 - | | |
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PART I - FINANCIAL INFORMATION
ITEM 1
FINANCIAL STATEMENTS
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
|
| | | | | | | |
| June 30, 2014 | | December 31, 2013 |
| (In thousands) |
Assets | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 40,610 |
| | $ | 61,110 |
|
Receivables: | | | |
Trade | 129,652 |
| | 66,196 |
|
Loan and lease receivable | 11,682 |
| | — |
|
Contractual third-party reclamation receivables | 7,940 |
| | 8,487 |
|
Other | 3,182 |
| | 5,086 |
|
| 152,456 |
| | 79,769 |
|
Inventories | 153,154 |
| | 39,972 |
|
Deferred income taxes | 6,053 |
| | 5,355 |
|
Restricted investments and bond collateral | — |
| | 5,998 |
|
Other current assets | 12,362 |
| | 12,835 |
|
Total current assets | 364,635 |
| | 205,039 |
|
Property, plant and equipment: | | | |
Land and mineral rights | 439,001 |
| | 278,188 |
|
Plant and equipment | 832,337 |
| | 657,696 |
|
| 1,271,338 |
| | 935,884 |
|
Less accumulated depreciation, depletion and amortization | 485,820 |
| | 445,848 |
|
Net property, plant and equipment | 785,518 |
| | 490,036 |
|
Loan and lease receivable | 85,344 |
| | — |
|
Advanced coal royalties | 7,134 |
| | 7,311 |
|
Reclamation deposits | 75,911 |
| | 74,921 |
|
Restricted investments and bond collateral | 104,511 |
| | 69,235 |
|
Contractual third-party reclamation receivables, less current portion | 93,956 |
| | 88,303 |
|
Investment in joint venture | 33,273 |
| | — |
|
Intangible assets, net of accumulated amortization of $14.9 million and $14.1 million at June 30, 2014 and December 31, 2013, respectively | 677 |
| | 1,520 |
|
Other assets | 32,762 |
| | 10,320 |
|
Total Assets | $ | 1,583,721 |
| | $ | 946,685 |
|
See accompanying Notes to Consolidated Financial Statements.
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets (Continued)
(Unaudited)
|
| | | | | | | |
| June 30, 2014 | | December 31, 2013 |
| (In thousands) |
Liabilities and Shareholders’ Deficit | | | |
Current liabilities: | | | |
Current installments of long-term debt | $ | 42,401 |
| | $ | 44,343 |
|
Accounts payable and accrued expenses: | | | |
Trade and other accrued liabilities | 128,338 |
| | 57,507 |
|
Interest payable | 30,750 |
| | 11,321 |
|
Production taxes | 42,673 |
| | 41,905 |
|
Workers’ compensation | 707 |
| | 717 |
|
Postretirement medical benefits | 13,955 |
| | 13,955 |
|
SERP | 390 |
| | 390 |
|
Deferred revenue | 11,561 |
| | 14,068 |
|
Asset retirement obligations | 31,131 |
| | 23,353 |
|
Other current liabilities | 11,973 |
| | 5,469 |
|
Total current liabilities | 313,879 |
| | 213,028 |
|
Long-term debt, less current installments | 790,643 |
| | 295,494 |
|
Workers’ compensation, less current portion | 6,629 |
| | 6,744 |
|
Excess of black lung benefit obligation over trust assets | 9,841 |
| | 8,675 |
|
Postretirement medical benefits, less current portion | 271,773 |
| | 270,374 |
|
Pension and SERP obligations, less current portion | 22,222 |
| | 24,176 |
|
Deferred revenue, less current portion | 40,676 |
| | 46,567 |
|
Asset retirement obligations, less current portion | 358,253 |
| | 256,511 |
|
Intangible liabilities, net of accumulated amortization of $13.0 million and $12.4 million at June 30, 2014 and December 31, 2013, respectively | 5,072 |
| | 5,606 |
|
Deferred income taxes | 15,514 |
| | 5,355 |
|
Other liabilities | 9,864 |
| | 2,034 |
|
Total liabilities | 1,844,366 |
| | 1,134,564 |
|
Shareholders’ deficit: | | | |
Preferred stock of $1.00 par value | | | |
Authorized 5,000,000 shares; issued and outstanding 95,769 shares at June 30, 2014 and 159,960 at December 31, 2013 | 96 |
| | 160 |
|
Common stock of $2.50 par value | | | |
Authorized 30,000,000 shares; issued and outstanding 15,269,637 shares at June 30, 2014 and 14,592,231 shares at December 31, 2013 | 38,173 |
| | 36,479 |
|
Other paid-in capital | 133,140 |
| | 134,861 |
|
Accumulated other comprehensive loss | (53,615 | ) | | (63,595 | ) |
Accumulated deficit | (378,439 | ) | | (295,784 | ) |
Total shareholders’ deficit | (260,645 | ) | | (187,879 | ) |
Total Liabilities and Shareholders’ Deficit | $ | 1,583,721 |
| | $ | 946,685 |
|
See accompanying Notes to Consolidated Financial Statements.
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2014 | | 2013 | | 2014 | | 2013 |
| (In thousands, except per share data) |
Revenues | $ | 287,956 |
| | $ | 162,499 |
| | $ | 468,159 |
| | $ | 323,947 |
|
Cost, expenses and other: | | | | | | | |
Cost of sales | 248,389 |
| | 130,528 |
| | 387,019 |
| | 260,949 |
|
Depreciation, depletion and amortization | 24,479 |
| | 15,397 |
| | 40,538 |
| | 29,823 |
|
Selling and administrative | 28,709 |
| | 11,969 |
| | 42,040 |
| | 23,855 |
|
Heritage health benefit expenses | 3,388 |
| | 3,109 |
| | 6,932 |
| | 7,060 |
|
Gain on sales of assets | (43 | ) | | (74 | ) | | (5 | ) | | (308 | ) |
Restructuring charges | 7,543 |
| | — |
| | 7,941 |
| | — |
|
Derivative loss | 5,930 |
| | — |
| | 5,930 |
| | — |
|
Income from equity affiliates | (799 | ) | | — |
| | (799 | ) | | — |
|
Other operating loss (income) | — |
| | (10,405 | ) | | 151 |
| | (15,142 | ) |
| 317,596 |
| | 150,524 |
| | 489,747 |
| | 306,237 |
|
Operating income (loss) | (29,640 | ) | | 11,975 |
| | (21,588 | ) | | 17,710 |
|
Other income (expense): | | | | | | | |
Interest expense | (21,786 | ) | | (10,076 | ) | | (42,584 | ) | | (20,236 | ) |
Loss on extinguishment of debt | (12,635 | ) | | (64 | ) | | (12,635 | ) | | (64 | ) |
Interest income | 1,582 |
| | 280 |
| | 1,884 |
| | 577 |
|
Gain (loss) on foreign exchange | 2,649 |
| | — |
| | (4,141 | ) | | — |
|
Other income | 483 |
| | 130 |
| | 576 |
| | 198 |
|
| (29,707 | ) | | (9,730 | ) | | (56,900 | ) | | (19,525 | ) |
Income (loss) before income taxes | (59,347 | ) | | 2,245 |
| | (78,488 | ) | | (1,815 | ) |
Income tax expense | 3,807 |
| | 28 |
| | 3,697 |
| | 55 |
|
Net income (loss) | (63,154 | ) | | 2,217 |
| | (82,185 | ) | | (1,870 | ) |
Less net income attributable to noncontrolling interest | — |
| | 2,499 |
| | — |
| | 797 |
|
Net loss attributable to the Parent company | (63,154 | ) | | (282 | ) | | (82,185 | ) | | (2,667 | ) |
Less preferred stock dividend requirements | 209 |
| | 340 |
| | 470 |
| | 680 |
|
Net loss applicable to common shareholders | $ | (63,363 | ) | | $ | (622 | ) | | $ | (82,655 | ) | | $ | (3,347 | ) |
Net loss per share applicable to common shareholders: | | | | | | | |
Basic and diluted | $ | (4.19 | ) | | $ | (0.04 | ) | | $ | (5.52 | ) | | $ | (0.23 | ) |
Weighted average number of common shares outstanding | | | | | | | |
Basic and diluted | 15,136 |
| | 14,495 |
| | 14,962 |
| | 14,389 |
|
See accompanying Notes to Consolidated Financial Statements.
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2014 | | 2013 | | 2014 | | 2013 |
| (In thousands) |
Net income (loss) | $ | (63,154 | ) | | $ | 2,217 |
| | $ | (82,185 | ) | | $ | (1,870 | ) |
Other comprehensive income (loss): | | | | | | | |
Pension and other postretirement plans: | | | | | | | |
Amortization of accumulated actuarial gains or losses, pension | 359 |
| | 1,004 |
| | 717 |
| | 1,745 |
|
Amortization of accumulated actuarial gains or losses, transition obligations, and prior service costs, postretirement medical benefit | 5 |
| | 1,001 |
| | 10 |
| | 2,002 |
|
Tax effect of other comprehensive income gains | 64 |
| | — |
| | (224 | ) | | — |
|
Change in foreign currency translation adjustment | 9,477 |
| | — |
| | 9,477 |
| | — |
|
Unrealized and realized gains and losses on available-for-sale securities | — |
| | (39 | ) | | — |
| | (39 | ) |
Other comprehensive income | 9,905 |
| | 1,966 |
| | 9,980 |
| | 3,708 |
|
Comprehensive income (loss) attributable to the Parent company | $ | (53,249 | ) | | $ | 4,183 |
| | $ | (72,205 | ) | | $ | 1,838 |
|
See accompanying Notes to Consolidated Financial Statements.
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
Consolidated Statements of Shareholders’ Deficit
Six Months Ended June 30, 2014
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Preferred Stock | | Common Stock | | Other Paid-In Capital | | Accumulated Other Comprehensive Loss | | Accumulated Deficit | | Total Shareholders’ Deficit |
| Shares | | Amount | | Shares | | Amount | | | | |
| (In thousands, except shares data) |
Balance at December 31, 2013 | 159,960 |
| | $ | 160 |
| | 14,592,231 |
| | $ | 36,479 |
| | $ | 134,861 |
| | $ | (63,595 | ) | | $ | (295,784 | ) | | $ | (187,879 | ) |
Preferred dividends declared | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (470 | ) | | (470 | ) |
Common stock issued as compensation | — |
| | — |
| | 9,773 |
| | 24 |
| | 2,421 |
| | — |
| | — |
| | 2,445 |
|
Common stock options exercised | — |
| | — |
| | 9,000 |
| | 23 |
| | 170 |
| | — |
| | — |
| | 193 |
|
SARs exercised | — |
| | — |
| | 8,352 |
| | 21 |
| | (21 | ) | | — |
| | — |
| | — |
|
Conversion of convertible notes and securities | (64,191 | ) | | (64 | ) | | 438,526 |
| | 1,097 |
| | (1,033 | ) | | — |
| | — |
| | — |
|
Issuance of restricted stock | — |
| | — |
| | 211,755 |
| | 529 |
| | (3,258 | ) | | — |
| | — |
| | (2,729 | ) |
Net loss | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (82,185 | ) | | (82,185 | ) |
Other comprehensive income | — |
| | — |
| | — |
| | — |
| | — |
| | 9,980 |
| | — |
| | 9,980 |
|
Balance at June 30, 2014 | 95,769 |
| | $ | 96 |
| | 15,269,637 |
| | $ | 38,173 |
| | $ | 133,140 |
| | $ | (53,615 | ) | | $ | (378,439 | ) | | $ | (260,645 | ) |
See accompanying Notes to Consolidated Financial Statements.
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited) |
| | | | | | | |
| Six Months Ended June 30, |
| 2014 | | 2013 |
| (In thousands) |
Cash flows from operating activities: | | | |
Net loss | $ | (82,185 | ) | | $ | (1,870 | ) |
Adjustments to reconcile net loss to net cash provided by operating activities: | | | |
Depreciation, depletion and amortization | 40,538 |
| | 29,823 |
|
Accretion of asset retirement obligation and receivable | 9,288 |
| | 6,338 |
|
Non-cash tax benefits | (224 | ) | | — |
|
Amortization of intangible assets and liabilities, net | 310 |
| | 326 |
|
Share-based compensation | 2,445 |
| | 3,771 |
|
Gain on sales of assets | (5 | ) | | (308 | ) |
Amortization of deferred financing costs | 1,209 |
| | 1,856 |
|
Loss on extinguishment of debt | 12,635 |
| | 64 |
|
Loss (gain) on sales of investment securities | 3 |
| | (28 | ) |
Loss on derivative | 5,930 |
| | — |
|
Loss on foreign exchange | 4,141 |
| | — |
|
Income from equity affiliates | (799 | ) | | — |
|
Distributions from equity affiliates | 730 |
| | — |
|
Changes in operating assets and liabilities: | | | |
Receivables, net | (11,270 | ) | | 3,687 |
|
Inventories | 22,770 |
| | (1,977 | ) |
Excess of black lung benefit obligation over trust assets | 1,166 |
| | (281 | ) |
Deferred income tax | 3,854 |
| | — |
|
Accounts payable and accrued expenses | 8,538 |
| | 1,701 |
|
Deferred revenue | (8,424 | ) | | (6,214 | ) |
Income tax payable | 528 |
| | (56 | ) |
Accrual for workers’ compensation | (125 | ) | | (284 | ) |
Asset retirement obligations | (3,362 | ) | | (5,424 | ) |
Accrual for postretirement medical benefits | 1,409 |
| | 4,094 |
|
Pension and SERP obligations | (332 | ) | | 1,517 |
|
Other assets and liabilities | 1,805 |
| | (1,811 | ) |
Net cash provided by operating activities | 10,573 |
| | 34,924 |
|
Cash flows from investing activities: | | | |
Additions to property, plant and equipment | (17,361 | ) | | (13,467 | ) |
Change in restricted investments and bond collateral and reclamation deposits | (30,517 | ) | | (8,714 | ) |
Cash payments related to Canadian Acquisition | (322,637 | ) | | — |
|
Cash acquired related to Canadian Acquisition, net | 8,103 |
| | — |
|
Net proceeds from sales of assets | 213 |
| | 577 |
|
Proceeds from the sale of restricted investments | 246 |
| | 6,807 |
|
Increase in loan and lease receivable | (1,120 | ) | | — |
|
Receipts from loan and lease receivable | 2,164 |
| | — |
|
Receivable from customer for property and equipment purchases | — |
| | (308 | ) |
Other | (82 | ) | | — |
|
Net cash used in investing activities | (360,991 | ) | | (15,105 | ) |
Cash flows from financing activities: | | | |
Change in book overdrafts | 1,605 |
| | 1,777 |
|
Borrowings from long-term debt, net of debt premium | 454,219 |
| | — |
|
Repayments of long-term debt | (97,538 | ) | | (16,070 | ) |
Borrowings on revolving lines of credit | 10,000 |
| | 6,000 |
|
Repayments on revolving lines of credit | (10,000 | ) | | (6,000 | ) |
Debt issuance costs and other refinancing costs | (27,053 | ) | | (182 | ) |
|
| | | | | | | |
Preferred dividends paid | (470 | ) | | (680 | ) |
Exercise of stock options | 193 |
| | — |
|
Net cash provided by (used in) financing activities | 330,956 |
| | (15,155 | ) |
Effect of foreign exchange rates on cash | (1,038 | ) | | — |
|
Net increase (decrease) in cash and cash equivalents | (20,500 | ) | | 4,664 |
|
Cash and cash equivalents, beginning of period | 61,110 |
| | 31,610 |
|
Cash and cash equivalents, end of period | $ | 40,610 |
| | $ | 36,274 |
|
See accompanying Notes to Consolidated Financial Statements.
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include accounts of Westmoreland Coal Company, or the Company, or Parent, and its subsidiaries and controlled entities. The Company’s current principal activities are conducted within the United States and Canada. U.S. activities include the production and sale of coal from its mines in Montana, Wyoming, North Dakota and Texas, and the ownership of the Roanoke Valley power plants, or ROVA, in North Carolina. Canadian activities include the production and sale of coal from six surface mines in Alberta and Saskatchewan, selling char to the barbecue briquette industry, and a 50% interest in a joint venture which produces activated carbon for the removal of flue gas. The Company’s activities are primarily conducted through wholly owned subsidiaries. All intercompany transactions and accounts have been eliminated in consolidation.
U.S. Operations – The Company’s Kemmerer Mine is owned by its subsidiary Westmoreland Kemmerer, Inc., or Kemmerer. The Company’s Absaloka Mine is owned by its subsidiary Westmoreland Resources, Inc., or WRI. The Beulah, Jewett, Rosebud, and Savage Mines are owned through the Company’s subsidiary Westmoreland Mining LLC, or WML.
Canadian Operations – Prairie Mines & Royalty ULC, or PMRU, operates five surface coal mines in Alberta and Saskatchewan. PMRU owns and operates the Paintearth, Sheerness, Genesee, Poplar River and Estevan mines. PMRU directly owns a 50% joint venture interest in the Bienfait Activated Carbon Joint Venture, at the Estevan mine, which produces activated carbon for the removal of mercury from flue gas. PMRU also sells char to the barbecue briquette industry. Coal Valley Resources Inc., or CVRI, operates the Coal Valley Mine which is a surface mine located in West Central Alberta where the majority of coal is exported overseas to Asian utility companies and commodity traders. CVRI operated the Obed Mountain surface mine, which ceased production in 2013 and is currently in reclamation.
The consolidated financial statements of the Company have been prepared in accordance with United States generally accepted accounting principles and require use of management’s estimates. The financial information contained in this Form 10-Q is unaudited, but reflects all adjustments, which are, in the opinion of management, necessary for a fair presentation of the financial information for the periods shown. Such adjustments are of a normal recurring nature. The results of operations for the six months ended June 30, 2014 are not necessarily indicative of results to be expected for the year ending December 31, 2014.
These quarterly consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, or the 2013 Form 10-K. The accounting principles followed by the Company are set forth in the Notes to the Company’s consolidated financial statements in its 2013 Form 10-K. Most of the descriptions of the accounting principles and other footnote disclosures previously made have been omitted in this report so long as the interim information presented is not misleading or inconsistent.
Debt Obligations
The Company is subject to one major debt arrangement of $675.5 million in aggregate principal amount of 10.75% senior secured notes at the Parent level that are collateralized by substantially all of the assets of the Company.
Business Interruption Insurance
The Company received business interruption insurance proceeds for the six months ended June 30, 2014 due to an explosion and subsequent fire at a customer’s facility that occurred in November 2011. Operations at that facility resumed during October 2013. The Company recognizes income as business interruption losses are incurred and reimbursement is virtually assured. The Company reports this income in Other operating income and recognized nil and $11.3 million of income for the six months ended June 30, 2014 and 2013, respectively. The Company received $4.6 million of cash proceeds for the six months ended June 30, 2014 related to income recorded in 2013. Insurance proceeds are included in Net cash provided by operating activities. As of June 30, 2014, the Company has collected all cash proceeds related to income recognized.
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
Inventories
Inventories, which include materials and supplies as well as raw coal, are stated at the lower of cost or market. Cost is determined using the average cost method. Coal inventory costs include labor, supplies, equipment, depreciation, depletion, amortization, operating overhead and other related costs.
Derivatives
The Company enters into financial derivatives to manage exposure to fluctuations in foreign currency exchange rates and power prices. The Company does not utilize derivative financial instruments for trading purposes or for speculative purposes.
The Company’s derivative instruments are recorded at fair value with changes in fair value recognized in the Consolidated Statements of Operations at the end of each period in Gain (loss) on foreign exchange or Derivative loss.
Equity-Method Investments
The Company's 50% interest in the Bienfait Activated Carbon Joint Venture is accounted for under the equity method of accounting. Investments in unconsolidated affiliates that the Company has the ability to exercise significant influence over, but not control, are accounted for under the equity method of accounting. Under the equity method of accounting, the Company records its proportionate share of the entity’s net income or loss at each reporting period in Income from equity affiliates on the Consolidated Statements of Operations with a corresponding entry to increase or decrease the carrying value of the investment.
Loan and Lease Receivable
The Company periodically makes loans and finance leases at the Genesee mine in accordance with its operating agreement with its only customer for purposes of funding capital expenditures and working capital requirements. Finance lease and loan receivables are measured at the present value of the future lease payments at the inception of the arrangement. Lease payments received are comprised of a repayment of principal and finance income. Finance income is recognized based on the interest rate implicit in the finance lease. PMRU recognizes finance income over periods between 3 and 27 years, which reflect a constant periodic return on its net investment in the finance lease. Initial direct costs are included in the initial measurement of the finance lease receivable and reduce the amount of income recognized over the lease term.
Income Taxes
The Company’s effective tax rate in the six months ended June 30, 2014, was lower than the effective tax rate in the six months ended June 30, 2013, primarily due to the forecasted 2014 decrease in pre-tax loss and the related income tax expense from the Canadian Acquisition.
For the six months ended June 30, 2014, the Company’s effective tax rate differs from the statutory rate primarily due to the U.S. valuation allowance and foreign operations. For the six months ended June 30, 2013, the Company’s effective tax rate differs from the statutory rate primarily due to the U.S. valuation allowance.
The Company has recorded a $5.8 million liability for unrecognized tax benefits at June 30, 2014 with no liability recorded at December 31, 2013. This liability relates to the utilization of prior losses and is currently under review by taxing authorities. It is reasonably possible that the liability for unrecognized tax benefits will significantly change in the next twelve months upon the taxing authorities concluding the review.
Foreign Currency Translation
The functional currency of the Company’s Canadian operations is the Canadian dollar. The Company’s Canadian operations’ assets and liabilities are translated at period end exchange rates, and revenues and costs are translated using average exchange rates for the period. Foreign currency translation adjustments are reported in Other comprehensive income.
Reclassifications
Certain amounts in prior periods have been reclassified to conform with the presentation of 2014, with no effect on
previously reported net loss, cash flows or shareholders’ deficit. The reclassification affected current assets, current liabilities and noncurrent liabilities on the Consolidated Balance Sheet.
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
Recently Adopted Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers, issued as a new Topic, Accounting Standards Codification (ASC) Topic 606. The new revenue recognition standard provides a five-step analysis of transactions to determine when and how revenue is recognized. The core principle of the guidance is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU is effective beginning in fiscal 2017 and can be adopted by the Company either retrospectively or as a cumulative-effect adjustment as of the date of adoption. The Company is currently evaluating the effect that adopting this new accounting guidance will have on its consolidated results of operations, cash flows and financial position.
2. ACQUISITION
On December 24, 2013, the Company entered into an agreement to acquire Sherritt International Corporation’s Prairie and Mountain coal mining operations, collectively referred to as the Canadian Acquisition. On April 28, 2014, Westmoreland Coal Company consummated the Canadian Acquisition. These operations, referred to as the Canadian operations, include six producing thermal coal mines in the Canadian provinces of Alberta and Saskatchewan, a char production facility, and a 50% interest in an activated carbon plant. The Canadian properties include approximately 649 million tons of total proven or probable coal reserves as of December 31, 2013. The purchase consideration included a $282.8 million initial cash payment made on April 28, 2014, a cash payment for a working capital adjustment of $39.8 million made on June 25, 2014, and assumed liabilities of $330.5 million.
In connection with the Canadian Acquisition: (i) proceeds from a private offering of $425.0 million in aggregate principal amount of 10.75% senior secured notes, or the New Notes, were released from escrow and such notes were automatically exchanged for identical notes issued by Westmoreland and Westmoreland Partners, as co-issuers; (ii) Westmoreland increased its revolving line of credit to $60.0 million; and (iii) Westmoreland Mining LLC, or WML; a wholly owned subsidiary of Westmoreland, provided prepayment notices to holders of its 8.02% senior secured notes due 2018, which notes were prepaid at the end of May 2014. Acquisition related costs of $31.6 million have been expensed for the six months ended June 30, 2014; which includes a $13.6 million charge to cost of sales related to the sale of inventory written up to fair value in the acquisition, $6.9 million of expenses included in Selling and administrative costs, $6.2 million of loss on foreign exchange as described in Note 10, and $4.9 million included in Interest expense related to a bridge facility commitment fee.
The Canadian Acquisition has been accounted for under the acquisition method of accounting that requires the total purchase consideration to be allocated to the assets acquired and liabilities assumed based on estimates of fair value.
The allocation of the purchase price is preliminary pending the completion of various analyses and the finalization of estimates. During the measurement period (which is not to exceed one year from the acquisition date), additional assets or liabilities may be recognized if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have resulted in the recognition of those assets or liabilities as of that date. The preliminary allocation may be adjusted after obtaining additional information regarding, among other things, asset valuations, liabilities assumed and revisions of previous estimates. These adjustments may be significant and will be accounted for retrospectively.
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
A summary of the purchase consideration and a preliminary allocation of the purchase consideration follows (in millions):
|
| | | |
Purchase Price: | |
Cash paid - Initial payment | $ | 282.8 |
|
Cash paid - Working capital adjustment | 39.8 |
|
Total cash consideration | $ | 322.6 |
|
| |
Preliminary allocation of purchase price: | |
Assets: | |
Cash and cash equivalents | $ | 26.2 |
|
Trade receivables | 49.9 |
|
Inventories - materials and supplies | 52.0 |
|
Inventories - coal | 79.8 |
|
Leases and loans receivable | 11.2 |
|
Deferred tax assets | 6.7 |
|
Other current assets | 3.4 |
|
Total current assets | 229.2 |
|
Land and mineral rights | 151.3 |
|
Plant and equipment | 171.7 |
|
Leases and loans receivable | 83.8 |
|
Contractual third-party reclamation receivables, less current portion | 6.8 |
|
Other assets | 10.3 |
|
Total Assets | 653.1 |
|
Liabilities: | |
Current installments of long-term debt | (36.3 | ) |
Trade payables and other accrued liabilities | (93.7 | ) |
Asset retirement obligations | (9.7 | ) |
Total current liabilities | (139.7 | ) |
Long-term debt, less current installments | (86.3 | ) |
Asset retirement obligations, less current portion | (92.4 | ) |
Deferred tax liabilities | (12.1 | ) |
Total Liabilities | (330.5 | ) |
Net fair value | $ | 322.6 |
|
The $26.2 million of cash and cash equivalents noted above includes $18.1 million which was used for immediate payment of an assumed liability on the acquisition date, leaving $8.1 million of net cash received upon the acquisition.
The results of operations of the Canadian operations from the acquisition date of April 28, 2014 have been included in the Company's consolidated results of operations for the three and six months ended June 30, 2014. The Canadian operations generated $116.0 million of revenue and $12.7 millionof operating loss since the April 28, 2014 acquisition date.
The following unaudited pro forma information has been prepared for illustrative purposes only and assumes the acquisition occurred on January 1, 2013. The unaudited pro forma results have been prepared based on estimates and assumptions, which the Company believes are reasonable, however, they are not necessarily indicative of the consolidated results of operations had the acquisition occurred on January 1, 2013, or of future results of operations.
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2014 | | 2013 | | 2014 | | 2013 |
Total Revenues | (In thousands, except per share data) |
As reported | $ | 287,956 |
| | $ | 162,499 |
| | $ | 468,159 |
| | $ | 323,947 |
|
Pro forma | $ | 320,761 |
| | $ | 356,962 |
| | $ | 674,378 |
| | $ | 672,735 |
|
|
|
| |
|
| |
|
| |
|
|
Operating Income | | | | | | | |
As reported | $ | (29,640 | ) | | $ | 11,975 |
| | $ | (21,588 | ) | | $ | 17,710 |
|
Pro forma | $ | (50,032 | ) | | $ | 17,081 |
| | $ | (14,433 | ) | | $ | 30,105 |
|
| | | | | | | |
Net loss applicable to common shareholders | | | | | | | |
As reported | $ | (63,363 | ) | | $ | (622 | ) | | $ | (82,655 | ) | | $ | (3,347 | ) |
Pro forma | $ | (89,247 | ) | | $ | (4,167 | ) | | $ | (97,509 | ) | | $ | (9,131 | ) |
| | | | | | | |
Net loss per share applicable to common shareholders | | | | | | | |
As reported | $ | (4.19 | ) | | $ | (0.04 | ) | | $ | (5.52 | ) | | $ | (0.23 | ) |
Pro forma | $ | (5.90 | ) | | $ | (0.29 | ) | | $ | (6.52 | ) | | $ | (0.63 | ) |
3. INVENTORIES
Inventories consisted of the following:
|
| | | | | | | |
| June 30, 2014 | | December 31, 2013 |
| (In thousands) |
Coal stockpiles | $ | 61,663 |
| | $ | 543 |
|
Coal fuel inventories | 5,319 |
| | 6,161 |
|
Materials and supplies | 86,946 |
| | 34,233 |
|
Reserve for obsolete inventory | (774 | ) | | (965 | ) |
Total | $ | 153,154 |
| | $ | 39,972 |
|
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
4. RESTRICTED INVESTMENTS AND BOND COLLATERAL
The Company’s restricted investments and bond collateral consist of the following:
|
| | | | | | | |
| June 30, 2014 | | December 31, 2013 |
| (In thousands) |
Coal - U.S. Segment: | | | |
WML debt reserve account | $ | — |
| | $ | 13,067 |
|
Reclamation bond collateral: | | | |
Kemmerer Mine | 25,077 |
| | 24,966 |
|
Absaloka Mine | 11,696 |
| | 11,653 |
|
Rosebud Mine | 3,145 |
| | 3,145 |
|
Beulah Mine | 1,270 |
| | 1,270 |
|
Coal - Canada Segment: | | | |
PMRU | 16,201 |
| | — |
|
CVRI | 31,867 |
| | — |
|
Power Segment: | | | |
Letter of credit account | — |
| | 5,998 |
|
Corporate Segment: | | | |
Postretirement medical benefit bonds | 8,550 |
| | 8,467 |
|
Workers’ compensation bonds | 6,705 |
| | 6,667 |
|
Total restricted investments and bond collateral | 104,511 |
| | 75,233 |
|
Less current portion | — |
| | (5,998 | ) |
Total restricted investments and bond collateral, less current portion | $ | 104,511 |
| | $ | 69,235 |
|
For all of its restricted investments and bond collateral accounts, the Company can select from limited fixed-income investment options for the funds and receive the investment returns on these investments. Funds in the restricted investments and bond collateral accounts are not available to meet the Company’s general cash needs.
These accounts include held-to-maturity securities. Held-to-maturity securities are recorded at amortized cost, adjusted for the amortization or accretion of premiums or discounts calculated on the effective interest method. Interest income is recognized when earned.
The Company’s carrying value and estimated fair value of its restricted investments and bond collateral at June 30, 2014 are as follows:
|
| | | | | | | |
| Carrying Value | | Fair Value |
| (In thousands) |
Cash and cash equivalents | $ | 67,340 |
| | $ | 67,340 |
|
Time deposits | 2,451 |
| | 2,451 |
|
Held-to-maturity securities | 34,720 |
| | 35,259 |
|
| $ | 104,511 |
| | $ | 105,050 |
|
Held-to-Maturity Restricted Investments and Bond Collateral
The amortized cost, gross unrealized holding gains and fair value of held-to-maturity securities at June 30, 2014 is as follows (in thousands):
|
| | | |
Amortized cost | $ | 34,720 |
|
Gross unrealized holding gains | 628 |
|
Gross unrealized holding losses | (89 | ) |
Fair value | $ | 35,259 |
|
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
Maturities of held-to-maturity securities are as follows at June 30, 2014:
|
| | | | | | | |
| Amortized Cost | | Fair Value |
| (In thousands) |
Due within one year | $ | 1,212 |
| | $ | 1,230 |
|
Due in five years or less | 19,360 |
| | 19,704 |
|
Due after five years to ten years | 8,897 |
| | 9,070 |
|
Due in more than ten years | 5,251 |
| | 5,255 |
|
| $ | 34,720 |
| | $ | 35,259 |
|
The Company does not intend to sell its held-to-maturity securities and it is not more likely than not that the Company will be required to sell the securities before recovery of amortized cost bases, which may be at maturity.
As of February 2014, the Company is no longer required to fund a letter of credit account for its power operations.
In 2013, the Company entered into an agreement with Dominion Virginia Power, a subsidiary of Dominion, to restructure the remaining 5 years of the ROVA contract. The Company recorded a restructuring charge for additional contractual obligations of $0.1 million and $0.5 million for the three and six months ended June 30, 2014, respectively. The Company expects that the $5.1 million of accruals will be paid out by the end of 2014.
The table below represents the restructuring provision activity related to the ROVA restructuring affecting our Power segment during the six months ended June 30, 2014 (in millions):
|
| | | | | | | | | | | | | | |
Beginning Balance | | Restructuring Charges | | Restructuring Payments | | Ending Balance |
$ | 5.1 |
| | $ | 0.5 |
| | $ | 0.5 |
| | $ | 5.1 |
|
During the second quarter of 2014, the Company initiated strategic changes related to the Canadian Acquisition. The restructuring actions are expected to be completed in 2014. The Company recorded a restructuring charge for one-time employee termination benefits of $8.0 million for the three and six months ended June 30, 2014 and expects that accruals will be paid through 2016.
The table below represents the restructuring provision activity related to the Canadian Acquisition affecting our Coal - Canada and Coal - US segments during the six months ended June 30, 2014 (in millions):
|
| | | | | | | | | | | | | | |
Beginning Balance | | Restructuring Charges | | Restructuring Payments | | Ending Balance |
$ | — |
| | $ | 8.0 |
| | $ | 0.4 |
| | $ | 7.6 |
|
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
6. LINES OF CREDIT AND DEBT
The amounts outstanding under the Company’s debt consisted of the following as of the dates indicated:
|
| | | | | | | |
| Total Debt Outstanding |
| June 30, 2014 | | December 31, 2013 |
| (In thousands) |
10.75% Senior Notes due 2018 | $ | 250,485 |
| | $ | 251,500 |
|
Add-On Notes - 10.75% senior notes due 2018 | 425,000 |
| | — |
|
8.02% WML term debt due 2018 | — |
| | 85,500 |
|
Capital lease obligations | 133,240 |
| | 10,153 |
|
Other | 5,286 |
| | 1,209 |
|
Debt premium (discount), net | 19,033 |
| | (8,525 | ) |
Total debt outstanding | 833,044 |
| | 339,837 |
|
Less current installments | (42,401 | ) | | (44,343 | ) |
Total debt outstanding, less current installments | $ | 790,643 |
| | $ | 295,494 |
|
The following table presents aggregate contractual debt maturities of all debt:
|
| | | |
| As of June 30, 2014 |
| (In thousands) |
2014 | $ | 22,270 |
|
2015 | 41,290 |
|
2016 | 39,318 |
|
2017 | 25,776 |
|
2018 | 682,852 |
|
Thereafter | 2,505 |
|
Total | 814,011 |
|
Plus: debt premium (discount), net | 19,033 |
|
Total debt | $ | 833,044 |
|
On February 7, 2014, the Company closed on a private offering of $425.0 million in aggregate principal amount of 10.75% senior notes due 2018 at a price of 106.875% plus accrued interest from February 1, 2014, referred to as the New Notes. Total proceeds of the offering were $454.2 million, which included $29.2 million of debt premium. The net proceeds of the offering of the New Notes were used to finance the $282.8 million initial cash payment for the Canadian Acquisition and cash transaction costs associated with the Canadian Acquisition and offering of the New Notes of approximately $24.0 million. The remaining balance of the proceeds were used to fund the prepayment of the WML Notes and for other general corporate purposes. In connection with the WML prepayment, the WML revolving credit facility was terminated. Upon the prepayment of the WML Notes, WML's assets constitute collateral for the senior notes.
Promptly following the completion of the Canadian Acquisition, the Company exchanged the New Notes for $425 million aggregate principal amount of add-on 10.75% senior secured notes due 2018, referred to as the Add-On Notes, and the Company became party to a registration rights agreement, pursuant to which the Company agreed to register with the Securities and Exchange Commission the exchange of Add-On Notes for registered notes with the same terms as the existing 10.75% Senior Notes due 2018. The Company will pay interest on the Add-On Notes semi-annually on February 1st and August 1st of each year beginning on August 1, 2014.
The Company amended its existing corporate revolving credit agreement to increase the maximum available borrowing amount to $60 million, The revolver may support up to $60 million of letters of credit, which would reduce the balance available under the revolver.
The Company capitalized debt issuance costs of $15.4 million during the six months ended June 30, 2014 related to the new senior notes and the amendment of its revolver.
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
During the six months ended June 30, 2014, the Company paid $1.0 million, excluding accrued interest, to repurchase Senior Notes with a principal amount of $1.0 million. The Company recognized losses of $0.1 million on these repurchases, which were recorded as losses on extinguishment of debt. The losses on the repurchases were measured based on the carrying value of the repurchased portion of the Senior Notes, which included a portion of the unamortized debt issue costs and the debt discount on the dates of repurchase.
Under the indenture governing the 10.75% Senior Notes, the Company is required to offer a portion of our Excess Cash Flow (as defined by the indenture) for each fiscal year to purchase some of these notes at 100% of the principal amount. The Company had $29.5 million of Excess Cash Flow for the year ended December 31, 2013 and offered $22.1 million for repurchase during the second quarter of 2014. As of December 31, 2013, the Company had classified $22.1 million of the outstanding 10.75% Senior Notes to Current installments of long-term debt related to the required Excess Cash Flow offering. The Excess Cash Flow offer expired by June 30, 2014 with $1.0 million of principal being repaid. The remaining $21.1 million was reclassified to Long-term debt, less current installments as of June 30, 2014.
During the six months ended June 30, 2014, the Company entered into $12.9 million of new capital leases at its Kemmerer Mine.
Additional information regarding the Company’s debt is outlined in Note 5 to the Consolidated Financial Statements in the Company's 2013 Annual Report on Form 10-K.
7. POSTRETIREMENT MEDICAL BENEFITS AND PENSION
Postretirement Medical Benefits
The Company provides postretirement medical benefits to retired employees and their dependents as mandated by the Coal Industry Retiree Health Benefit Act of 1992 and pursuant to collective bargaining agreements. The Company also provides these benefits to qualified full-time employees pursuant to collective bargaining agreements.
The components of net periodic postretirement medical benefit cost are as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
2014 | | 2013 | | 2014 | | 2013 |
| (In thousands) | | (In thousands) |
Components of net periodic benefit cost: | | | | | | | |
Service cost | $ | 822 |
| | $ | 1,109 |
| | $ | 1,645 |
| | $ | 2,218 |
|
Interest cost | 3,203 |
| | 3,035 |
| | 6,407 |
| | 6,069 |
|
Amortization of deferred items | 4 |
| | 1,001 |
| | 9 |
| | 2,003 |
|
Total net periodic benefit cost | $ | 4,029 |
| | $ | 5,145 |
| | $ | 8,061 |
| | $ | 10,290 |
|
The following table shows the net periodic postretirement medical benefit costs that relate to current and former mining operations:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2014 | | 2013 | | 2014 | | 2013 |
| (In thousands) | | (In thousands) |
Former mining operations | $ | 2,402 |
| | $ | 3,119 |
| | $ | 4,807 |
| | $ | 6,237 |
|
Current operations | 1,627 |
| | 2,026 |
| | 3,254 |
| | 4,053 |
|
Total net periodic benefit cost | $ | 4,029 |
| | $ | 5,145 |
| | $ | 8,061 |
| | $ | 10,290 |
|
The costs for the former mining operations are included in Heritage health benefit expenses and costs for current operations are included in Cost of sales and Selling and administrative expenses.
Pension
The Company provides pension benefits to qualified full-time employees pursuant to collective bargaining agreements.
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
The Company incurred net periodic benefit costs of providing these pension benefits as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2014 | | 2013 | | 2014 | | 2013 |
| (In thousands) | | (In thousands) |
Components of net periodic benefit cost: | | | | | | | |
Service cost | $ | 500 |
| | $ | 638 |
| | $ | 1,000 |
| | $ | 1,173 |
|
Interest cost | 1,638 |
| | 1,555 |
| | 3,384 |
| | 3,180 |
|
Expected return on plan assets | (2,154 | ) | | (2,325 | ) | | (4,307 | ) | | (4,385 | ) |
Amortization of deferred items | 359 |
| | 1,004 |
| | 719 |
| | 1,745 |
|
Total net periodic pension cost | $ | 343 |
| | $ | 872 |
| | $ | 796 |
| | $ | 1,713 |
|
These costs are included in Cost of sales and Selling and administrative expenses.
The Company contributed $1.1 million of cash contributions to its pension plans in the six months ended June 30, 2014 and expects to make $3.2 million of pension plan contributions during the remainder of 2014.
8. HERITAGE HEALTH BENEFIT EXPENSES
The caption Heritage health benefit expenses used in the consolidated statements of operations refers to costs of benefits the Company provides to its former mining operation employees. The components of these expenses are as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2014 | | 2013 | | 2014 | | 2013 |
| (In thousands) | | (In thousands) |
Health care benefits | $ | 2,376 |
| | $ | 3,089 |
| | $ | 4,650 |
| | $ | 6,266 |
|
Combined benefit fund payments | 512 |
| | 576 |
| | 1,025 |
| | 1,152 |
|
Workers’ compensation benefits | 124 |
| | 117 |
| | 260 |
| | 232 |
|
Black lung benefits | 376 |
| | (673 | ) | | 997 |
| | (590 | ) |
Total | $ | 3,388 |
| | $ | 3,109 |
| | $ | 6,932 |
| | $ | 7,060 |
|
| |
9. | ASSET RETIREMENT OBLIGATIONS, CONTRACTUAL THIRD-PARTY RECLAMATION RECEIVABLE AND RECLAMATION DEPOSITS |
The asset retirement obligation, contractual third-party reclamation receivable, and reclamation deposits for each of the Company’s operating segments at June 30, 2014 are summarized below:
|
| | | | | | | | | | | |
| Asset Retirement Obligation | | Contractual Third-Party Reclamation Receivable | | Reclamation Deposits |
| (In thousands) |
Coal - U.S. | $ | 281,346 |
| | $ | 95,157 |
| | $ | 75,911 |
|
Coal - Canada | 107,111 |
| | 6,739 |
| | — |
|
Power | 927 |
| | — |
| | — |
|
Total | $ | 389,384 |
| | $ | 101,896 |
| | $ | 75,911 |
|
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
Asset Retirement Obligations
Changes in the Company’s asset retirement obligations were as follows:
|
| | | | | | | |
| Six Months Ended June 30, |
| 2014 | | 2013 |
| (In thousands) |
Asset retirement obligations, beginning of year (including current portion) | $ | 279,864 |
| | $ | 263,847 |
|
Accretion | 14,003 |
| | 10,951 |
|
Liabilities settled | (10,250 | ) | | (11,647 | ) |
ARO acquired | 102,075 |
| | — |
|
Changes due to foreign currency translation | 3,692 |
| | — |
|
Asset retirement obligations, end of period | 389,384 |
| | 263,151 |
|
Less current portion | (31,131 | ) | | (24,105 | ) |
Asset retirement obligations, less current portion | $ | 358,253 |
| | $ | 239,046 |
|
Contractual Third-Party Reclamation Receivables
At June 30, 2014, the Company has recognized as an asset of $101.9 million as contractual third-party reclamation receivables, representing the present value of customer obligations to reimburse the Company for future reclamation expenditures at the Company’s Rosebud, Jewett and Absaloka Mines.
Reclamation Deposits
The Company’s reclamation deposits will be used to fund final reclamation activities. The Company’s carrying value and estimated fair value of its reclamation deposits at June 30, 2014 are as follows:
|
| | | | | | | | | |
| Carrying Value | | Fair Value | | Fair Value Hierarchy |
| (In thousands) | | |
Cash and cash equivalents | $ | 44,089 |
| | $ | 44,089 |
| | Level 1 |
Held-to-maturity securities | 31,822 |
| | 32,601 |
| | Level 2 |
| $ | 75,911 |
| | $ | 76,690 |
|
| |
Held-to-Maturity Reclamation Deposits
The amortized cost, gross unrealized holding gains and losses and fair value of held-to-maturity securities at June 30, 2014 are as follows (in thousands):
|
| | | |
Amortized cost | $ | 31,822 |
|
Gross unrealized holding gains | 953 |
|
Gross unrealized holding losses | (174 | ) |
Fair value | $ | 32,601 |
|
Maturities of held-to-maturity securities are as follows at June 30, 2014:
|
| | | | | | | |
| Amortized Cost | | Fair Value |
| (In thousands) |
Within one year | $ | 1,025 |
| | $ | 998 |
|
Due in five years or less | 17,341 |
| | 17,829 |
|
Due after five years to ten years | 7,289 |
| | 7,424 |
|
Due in more than ten years | 6,167 |
| | 6,350 |
|
| $ | 31,822 |
| | $ | 32,601 |
|
The Company does not intend to sell its held-to-maturity securities and it is not more likely than not that the Company will be required to sell the securities before recovery of amortized cost bases, which may be at maturity.
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
10. DERIVATIVE INSTRUMENTS
Derivative Assets and Liabilities
The Company evaluates all of its financial instruments to determine if such instruments are derivatives, derivatives that qualify for the normal purchase normal sale exception, or contain features that qualify as embedded derivatives. All derivative financial instruments, except for derivatives that qualify for the normal purchase normal sale exception, are recognized on the balance sheet at fair value. Changes in fair value are recognized in earnings if they are not eligible for hedge accounting or in other comprehensive income if they qualify for cash flow hedge accounting.
In the first quarter of 2014, the Company entered into two foreign currency exchange forward contracts to purchase Canadian Dollars to manage a portion of its exposure to fluctuating rates of exchange on anticipated Canadian Dollar-denominated Canadian Acquisition cash flows. These two foreign currency contracts had a total notional amount of $348.3 million and were settled in April 2014.
During 2014, the Company entered into contracts to purchase power at its ROVA facility to manage exposure to power price fluctuations. These contracts cover the period from April 2014 to December 2018 and contracted power prices range from $41.05 to $44.09 megawatts per hour. The fair value of these power price derivatives are based on comparing contracted prices to projected future prices.
The fair value of outstanding derivative instruments not designated as hedging instruments on the accompanying Consolidated Balance Sheet was as follows (in thousands):
|
| | | | | | |
Derivative Instruments | | Balance Sheet Location | | June 30, 2014 |
Contracts to purchase power | | Other current liabilities | | $ | 140 |
|
Contracts to purchase power | | Other liabilities | | 5,790 |
|
The effect of derivative instruments not designated as hedging instruments on the accompanying Consolidated Statements of Operations was as follows (in thousands):
|
| | | | | | | | | | |
Derivative Instruments | | Statement of Operations Location | | Three Months Ended June 30, 2014 | | Six Months Ended June 30, 2014 |
Canadian dollar foreign exchange forward contracts | | Gain (loss) on foreign exchange | | $ | 581 |
| | $ | (6,209 | ) |
Contracts to purchase power | | Derivative loss | | (5,930 | ) | | (5,930 | ) |
11. FAIR VALUE MEASUREMENTS
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. See Notes 4, 9 and 10 for additional disclosures related to fair value measurements.
Fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy, as defined below, gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.
| |
• | Level 1, defined as observable inputs such as quoted prices in active markets for identical assets. |
| |
• | Level 2, defined as observable inputs other than Level 1 prices. These include quoted prices for similar assets or liabilities in an active market, quoted prices for identical assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
| |
• | Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. |
Long-term debt fair value estimates are based on observed prices for securities with an active trading market when available (Level 2) and otherwise using discount rate estimates based on interest rates as of June 30, 2014 (Level 3). The estimated fair values of the Company’s debt with fixed interest rates are as follows:
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
|
| | | | | | | |
| Carrying Value | | Fair Value |
| (In thousands) |
December 31, 2013 | $ | 328,473 |
| | $ | 364,329 |
|
June 30, 2014 | $ | 694,515 |
| | $ | 726,146 |
|
The Company uses derivative financial instruments, primarily foreign exchange contracts and forward contracts to purchase power, to reduce its exposure to market risks from changes in foreign exchange rates and changes in prices for power, respectively. The foreign exchange contracts are measured at fair value using quoted forward foreign exchange prices from counterparties corroborated by market-based pricing (Level 2). The contracts to purchase power are measured at fair value using forward pricing curves for power from counterparties corroborated by market-based pricing (Level 2). Additional information related to the Company’s derivative financial instruments is disclosed in Notes 1 and 10 to the consolidated financial statements.
The Company’s non-recurring fair value measurements include asset retirement obligations (refer to Note 9).
The Company determines the estimated fair value of its asset retirement obligations by calculating the present value of estimated cash flows related to reclamation liabilities using Level 3 inputs. The significant inputs used to calculate such liabilities includes estimates of costs to be incurred, the Company’s credit adjusted discount rate, inflation rates and estimated dates of reclamation. The asset retirement liability is accreted to its present value each period and the capitalized asset retirement cost is depleted using the units-of-production method.
The fair value of assets and liabilities acquired through business combinations is calculated using a discounted-cash flow approach using Level 3 inputs. Cash flow estimates require forecasts and assumptions for many years into the future for a variety of factors.
12. SHAREHOLDERS’ EQUITY AND ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Preferred Stock
The Company has outstanding Series A Convertible Exchangeable Preferred Stock on which cumulative dividends of $2.125 per share are payable quarterly. The Company paid $0.5 million of preferred stock dividends for the six months ended June 30, 2014. During the three months ended June 30, 2014, approximately 25,454 shares of preferred stock were converted into 173,885 shares of common stock. Subsequent to June 30, 2014 and through July 29, 2014, approximately 3,825 shares of preferred stock were converted into 26,133 shares of common stock.
Changes in Accumulated Other Comprehensive Income (Loss)
The following table reflects the changes in accumulated other comprehensive income (loss) by component:
|
| | | | | | | | | | | | | | | | | | | |
| Pension | | Postretirement medical benefits | | Foreign currency translation adjustment | | Tax effect of other comprehensive income gains | | Accumulated other comprehensive loss |
| (In thousands) |
Balance at December 31, 2013 | $ | (12,255 | ) | | $ | (20,292 | ) | | $ | — |
| | $ | (31,048 | ) | | $ | (63,595 | ) |
Other comprehensive income (loss) before reclassifications | — |
| | — |
| | 9,477 |
| | (224 | ) | | 9,253 |
|
Amounts reclassified from accumulated other comprehensive income (loss) | 717 |
| | 10 |
| | — |
| | — |
| | 727 |
|
Balance at June 30, 2014 | $ | (11,538 | ) | | $ | (20,282 | ) | | $ | 9,477 |
| | $ | (31,272 | ) | | $ | (53,615 | ) |
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
The following table reflects the reclassifications out of accumulated other comprehensive loss for the six months ended June 30, 2014 are as follows (in thousands):
|
| | | | | | | | | | |
Details about accumulated other comprehensive loss components | | Amount reclassified from accumulated other comprehensive loss1 | | Affected line item in the statement where net income (loss) is presented |
| Three Months Ended June 30, 2014 | | Six Months Ended June 30, 2014 | |
Amortization of defined benefit pension items | | | | | | |
Actuarial losses | | $ | 359 |
| | $ | 717 |
| | 2 |
Amortization of postretirement medical items | | | | | | |
Prior service costs | | $ | (159 | ) | | $ | (318 | ) | | 3 |
Actuarial losses | | 164 |
| | 328 |
| | 3 |
Total | | $ | 5 |
| | $ | 10 |
| | |
____________________
| |
(1) | Amounts in parentheses indicate debits to income/loss. |
| |
(2) | These accumulated other comprehensive loss components are included in the computation of net periodic pension cost. (See Note 7 - Pension for additional details) |
| |
(3) | These accumulated other comprehensive loss components are included in the computation of net periodic postretirement medical cost. (See Note 7 - Postretirement Medical Benefits for additional details) |
Equity Offering
Subsequent to June 30, 2014, the Company completed a public offering of 1,684,507 shares of common stock at $35.50 per share for gross proceeds of $59.8 million. The Company intends to use the net proceeds of the offering to increase its overall financial flexibility, pursue organic and acquisition growth strategies and for general corporate purposes.
13. SHARE-BASED COMPENSATION
The Company grants employees and non-employee directors restricted stock units from the Amended and Restated 2007 Equity Incentive Stock Plan. The Amended and Restated 2007 Equity Incentive Stock Plan provides that non-employee directors will receive equity awards with a value of $90,000 after each annual meeting.
In June 2014, the Company began contributing Company stock to its 401(k) plan instead of cash.
The Company recognized compensation expense from share-based arrangements shown in the following table:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2014 | | 2013 | | 2014 | | 2013 |
| (In thousands) |
Recognition of fair value of restricted stock units, stock options and SARs over vesting period; and issuance of stock | $ | 1,388 |
| | $ | 597 |
| | $ | 2,116 |
| | $ | 2,260 |
|
Contributions of stock to the Company's 401(k) plan | 329 |
| | 788 |
| | 329 |
| | 1,511 |
|
Total share-based compensation expense | $ | 1,717 |
| | $ | 1,385 |
| | $ | 2,445 |
| | $ | 3,771 |
|
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
Restricted Stock Units
A summary of restricted stock award activity for the six months ended June 30, 2014 is as follows:
|
| | | | | | | | | | | |
| Units | | Weighted Average Grant-Date Fair Value | | Unamortized Compensation Expense (In thousands) | |
Non-vested at December 31, 2013 | 588,727 |
| | $ | 9.37 |
| | | |
Granted | 214,188 |
| | — |
| | | |
Vested | (299,872 | ) | | — |
| | | |
Non-vested at June 30, 2014 | 503,043 |
| | $ | 8.64 |
| | $ | 5,605 |
| (1) |
____________________
| |
(1) | Expected to be recognized over the next three years. |
Stock Options
A summary of stock option activity for the six months ended June 30, 2014 is as follows:
|
| | | | | | | | | | | | | | | | | |
| Stock Options | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Life (In years) | | Aggregate Intrinsic Value (In thousands) | | Unamortized Compensation Expense (In thousands) |
Outstanding at December 31, 2013 | 145,806 |
| | $ | 21.97 |
| | | | | | |
Exercised | (9,000 | ) | | $ | 21.40 |
| | | | | | |
Expired | — |
| | $ | — |
| | | | | | |
Outstanding and exercisable at June 30, 2014 | 136,806 |
| | $ | 22.01 |
| | 3.7 |
| | $ | 1,953 |
| | $ | — |
|
There were no stock options granted during the six months ended June 30, 2014.
SARs
A summary of SARs activity for the six months ended June 30, 2014 is as follows:
|
| | | | | | | | | | | | | | | | |
| SARs | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Life (In years) | | Aggregate Intrinsic Value (In thousands) | | Unamortized Compensation Expense (In thousands) |
Outstanding at December 31, 2013 | 70,734 |
| | $ | 22.60 |
| | | | | | |
Exercised | (36,291 | ) | | $ | 21.30 |
| | | | | | |
Expired | — |
| | $ | — |
| | | | | | |
Outstanding and exercisable at June 30, 2014 | 34,443 |
| | $ | 23.97 |
| | 1.7 | | $ | 424 |
| | $ | — |
|
There were no SARs granted during the six months ended June 30, 2014.
14. EARNINGS PER SHARE
Basic earnings (loss) per share has been computed by dividing the net income (loss) applicable to common shareholders by the weighted average number of shares of common stock outstanding during each period. Net income (loss) applicable to common shareholders includes the adjustment for net income or loss attributable to noncontrolling interest. Diluted earnings (loss) per share is computed by including the dilutive effect of common stock that would be issued assuming conversion or exercise of outstanding convertible notes and securities, stock options, stock appreciation rights, and restricted stock units. No such items were included in the computations of diluted loss per share in the six months ended June 30, 2014
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
and June 30, 2013 because the Company incurred a net loss applicable to common shareholders in these periods and the effect of inclusion would have been anti-dilutive.
The table below shows the number of shares that were excluded from the calculation of diluted loss per share because their inclusion would be anti-dilutive to the calculation:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2014 | | 2013 | | 2014 |
| 2013 |
| (In thousands) |
Convertible securities | $ | 654 |
| | $ | 1,093 |
| | $ | 654 |
| | $ | 1,093 |
|
Restricted stock units, stock options and SARs | 674 |
| | 862 |
| | 674 |
| | 862 |
|
Total shares excluded from diluted shares calculation | $ | 1,328 |
| | $ | 1,955 |
| | $ | 1,328 |
| | $ | 1,955 |
|
15. BUSINESS SEGMENT INFORMATION
Segment information is based on a management approach, which requires segmentation based upon the Company’s internal organization, reporting of revenue, and operating income.
The Company’s operations are classified into five reporting segments: Coal - U.S., Coal - Canada, Power, Heritage and Corporate. The Canadian Acquisition was completed on April 28, 2014 and the segment "Coal - Canada" has not been previously presented. The business segment information for the Company's U.S. coal operations was previously reported in the "Coal" segment in the 2013 Form 10-K since the Company previously only held coal operations in the U.S.
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
Summarized financial information by segment is as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Coal - U.S. | | Coal - Canada(1) | | Power | | Heritage | | Corporate | | Consolidated |
| (In thousands) |
Three Months Ended June 30, 2014 | | | | | | | | | | | |
Revenues | $ | 150,107 |
| | $ | 116,046 |
| | $ | 21,803 |
| | $ | — |
| | $ | — |
| | $ | 287,956 |
|
Restructuring charges | 491 |
| | 6,646 |
| | 101 |
| | — |
| | 305 |
| | 7,543 |
|
Depreciation, depletion, and amortization | 13,283 |
| | 8,671 |
| | 2,486 |
| | — |
| | 39 |
| | 24,479 |
|
Operating income (loss) | (423 | ) | | (12,709 | ) | | (9,473 | ) | | (3,559 | ) | | (3,476 | ) | | (29,640 | ) |
Total assets | 670,375 |
| | 687,185 |
| | 165,763 |
| | 15,664 |
| | 44,734 |
| | 1,583,721 |
|
Capital expenditures | 6,533 |
| | 7,495 |
| | 220 |
| | — |
| | 63 |
| | 14,311 |
|
Three Months Ended June 30, 2013 | | | | | | | | | | | |
Revenues | $ | 139,337 |
| | $ | — |
| | $ | 23,162 |
| | $ | — |
| | $ | — |
| | $ | 162,499 |
|
Depreciation, depletion, and amortization | 12,804 |
| | — |
| | 2,551 |
| | — |
| | 42 |
| | 15,397 |
|
Operating income (loss) | 12,572 |
| | — |
| | 4,837 |
| | (3,530 | ) | | (1,904 | ) | | 11,975 |
|
Total assets | 699,556 |
| | — |
| | 183,855 |
| | 16,305 |
| | 33,887 |
| | 933,603 |
|
Capital expenditures | 7,209 |
| | — |
| | 564 |
| | — |
| | 393 |
| | 8,166 |
|
Six Months Ended June 30, 2014 |
|
| | |
|
|
|
|
|
|
|
Revenues | $ | 308,298 |
| | $ | 116,046 |
| | $ | 43,815 |
| | $ | — |
| | $ | — |
|
| $ | 468,159 |
|
Restructuring charges | 491 |
| | 6,646 |
| | 499 |
| | — |
| | 305 |
| | 7,941 |
|
Depreciation, depletion, and amortization | 26,780 |
| | 8,671 |
| | 5,009 |
| | — |
| | 78 |
|
| 40,538 |
|
Operating income (loss) | 12,275 |
| | (12,709 | ) | | (7,731 | ) | | (7,389 | ) | | (6,034 | ) |
| (21,588 | ) |
Total assets | 670,375 |
| | 687,185 |
| | 165,763 |
| | 15,664 |
| | 44,734 |
|
| 1,583,721 |
|
Capital expenditures | 9,586 |
| | 7,495 |
| | 255 |
| | — |
| | 25 |
|
| 17,361 |
|
Six Months Ended June 30, 2013 |
|
| | |
|
|
|
|
|
|
|
Revenues | $ | 281,449 |
|
| $ | — |
| | $ | 42,498 |
|
| $ | — |
|
| $ | — |
|
| $ | 323,947 |
|
Depreciation, depletion, and amortization | 24,658 |
|
| — |
| | 5,081 |
|
| — |
|
| 84 |
|
| 29,823 |
|
Operating income (loss) | 25,566 |
|
| — |
| | 3,836 |
|
| (7,705 | ) |
| (3,987 | ) |
| 17,710 |
|
Total assets | 699,556 |
|
| — |
| | 183,855 |
|
| 16,305 |
|
| 33,887 |
|
| 933,603 |
|
Capital expenditures | 12,219 |
| | — |
| | 698 |
| | — |
| | 550 |
| | 13,467 |
|
____________________
| |
(1) | The Canadian operations were acquired on April 28, 2014, therefore, information for the three and six months ended June 30, 2014 includes approximately two months of operations and there is no activity for 2013. |
Certain amounts in prior periods have been reclassified to conform with the presentation of 2014. The reclassification affected depreciation, depletion and amortization and operating income (loss) between the Coal U.S. segment and the Corporate segment.
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
A reconciliation of segment income (loss) from operations to loss before income taxes follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2014 | | 2013 | | 2014 | | 2013 |
| (In thousands) |
Income (loss) from operations | $ | (29,640 | ) | | $ | 11,975 |
| | $ | (21,588 | ) | | $ | 17,710 |
|
Loss on extinguishment of debt | (12,635 | ) | | (64 | ) | | (12,635 | ) | | (64 | ) |
Interest expense | (21,786 | ) | | (10,076 | ) | | (42,584 | ) | | (20,236 | ) |
Interest income | 1,582 |
| | 280 |
| | 1,884 |
| | 577 |
|
Gain (loss) on foreign exchange | 2,649 |
| | — |
| | (4,141 | ) | | — |
|
Other income | 483 |
| | 130 |
| | 576 |
| | 198 |
|
Income (loss) before income taxes | $ | (59,347 | ) | | $ | 2,245 |
| | $ | (78,488 | ) | | $ | (1,815 | ) |
16. CONTINGENCIES
The Company is a party to routine claims and lawsuits with respect to various matters. The Company provides for costs related to contingencies when a loss is probable and the amount is reasonably estimable. After conferring with counsel, it is the opinion of management that the ultimate resolution of pending claims will not have a material adverse effect on the consolidated financial condition, results of operations, or liquidity of the Company.
17. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION
Pursuant to the indenture governing the 10.75% Senior Notes, certain 100% owned subsidiaries of the Company have fully and unconditionally guaranteed the notes on a joint and several basis.
As a result of the prepayment of the WML Notes, WML became a Guarantor Subsidiary. The following tables include WML as a Guarantor Subsidiary, including the 2013 information which has been recast.
Guarantees of the Senior Notes will be released under certain circumstances, including:
| |
(1) | in the event of a sale or other disposition of all or substantially all of the assets of such Guarantor Subsidiary, by way of merger, consolidation or otherwise, a sale or other disposition of all of the Equity Interests of such Guarantor Subsidiary then held by the Issuers or any Restricted Subsidiary; provided, that the sale or other disposition does not violate the “Asset Sales” provisions of the Indenture; |
| |
(2) | if such Guarantor Subsidiary is designated as an Unrestricted Subsidiary in accordance with the provisions of the Indenture, upon effectiveness of such designation; |
| |
(3) | upon Legal Defeasance or Covenant Defeasance (as such terms are defined in the indenture) or upon satisfaction and discharge of the Indenture; |
| |
(4) | upon the liquidation or dissolution of such Guarantor Subsidiary, provided no event of default has occurred and is continuing; or |
| |
(5) | at such time as such Guarantor Subsidiary is no longer required to be a Guarantor Subsidiary of the Senior Notes as described in the Indenture, provided no event of default has occurred and is continuing. |
The following tables present unaudited consolidating financial information for (i) the issuer of the notes (Westmoreland Coal Company), (ii) the co-issuer of the notes (Westmoreland Partners), (iii) the guarantors under the notes, and (iv) the entities that are not guarantors under the notes:
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
CONSOLIDATING BALANCE SHEETS
June 30, 2014
(In thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Assets | | Parent/ Issuer | | Co-Issuer | | Guarantor Subsidiaries | | Non- Guarantor Subsidiaries | | Consolidating Adjustments | | Total |
Current assets: | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 13,514 |
| | $ | 415 |
| | $ | 24,440 |
| | $ | 2,241 |
| | $ | — |
| | $ | 40,610 |
|
Receivables: | | | | | | | | | | | | |
Trade | | — |
| | 12,940 |
| | 116,712 |
| | — |
| | — |
| | 129,652 |
|
Loan and lease receivable | | — |
| | — |
| | 11,682 |
| | — |
| | — |
| | 11,682 |
|
Contractual third-party reclamation receivables | | — |
| | — |
| | 7,940 |
| | — |
| | — |
| | 7,940 |
|
Intercompany receivable/payable | | 132,824 |
| | 32,639 |
| | (146,187 | ) | | (19,275 | ) | | (1 | ) | | — |
|
Other | | 673 |
| | 210 |
| | 2,294 |
| | 45 |
| | (40 | ) | | 3,182 |
|
| | 133,497 |
| | 45,789 |
| | (7,559 | ) | | (19,230 | ) | | (41 | ) | | 152,456 |
|
Inventories | | — |
| | 5,319 |
| | 147,834 |
| | 1 |
| | — |
| | 153,154 |
|
Deferred income taxes | | 5,370 |
| | — |
| | 683 |
| | — |
| | — |
| | 6,053 |
|
Other current assets | | 972 |
| | 335 |
| | 11,055 |
| | — |
| | — |
| | 12,362 |
|
Total current assets | | 153,353 |
| | 51,858 |
| | 176,453 |
| | (16,988 | ) | | (41 | ) | | 364,635 |
|
Property, plant and equipment: | | | | | | | | | | | | |
Land and mineral rights | | — |
| | 1,395 |
| | 437,606 |
| | — |
| | — |
| | 439,001 |
|
Plant and equipment | | 4,022 |
| | 221,350 |
| | 606,965 |
| | — |
| | — |
| | 832,337 |
|
| | 4,022 |
| | 222,745 |
| | 1,044,571 |
| | — |
| | — |
| | 1,271,338 |
|
Less accumulated depreciation, depletion and amortization | | 2,863 |
| | 76,662 |
| | 406,295 |
| | — |
| | — |
| | 485,820 |
|
Net property, plant and equipment | | 1,159 |
| | 146,083 |
| | 638,276 |
| | — |
| | — |
| | 785,518 |
|
Loan and lease receivable | | — |
| | — |
| | 85,344 |
| | — |
| | — |
| | 85,344 |
|
Advanced coal royalties | | — |
| | — |
| | 7,134 |
| | — |
| | — |
| | 7,134 |
|
Reclamation deposits | | — |
| | — |
| | 75,911 |
| | — |
| | — |
| | 75,911 |
|
Restricted investments and bond collateral | | 63,322 |
| | — |
| | 41,189 |
| | — |
| | — |
| | 104,511 |
|
Contractual third-party reclamation receivables | | — |
| | — |
| | 93,956 |
| | — |
| | — |
| | 93,956 |
|
Investment in joint venture | | — |
| | — |
| | 33,273 |
| | — |
| | — |
| | 33,273 |
|
Intangible assets | | — |
| | 460 |
| | 217 |
| | — |
| | — |
| | 677 |
|
Investment in subsidiaries | | 480,871 |
| | — |
| | — |
| | 3,770 |
| | (484,641 | ) | | — |
|
Other assets | | 21,825 |
| | — |
| | 10,937 |
| | 3,500 |
| | (3,500 | ) | | 32,762 |
|
Total assets | | $ | 720,530 |
| | $ | 198,401 |
| | $ | 1,162,690 |
| | $ | (9,718 | ) | | $ | (488,182 | ) | | $ | 1,583,721 |
|
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
CONSOLIDATING BALANCE SHEETS
June 30, 2014
(In thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Liabilities and Shareholders’ Deficit | | Parent/ Issuer | | Co-Issuer | | Guarantor Subsidiaries | | Non- Guarantor Subsidiaries | | Consolidating Adjustments | | Total |
Current liabilities | | | | | | | | | | | | |
Current installments of long-term debt | | $ | — |
| | $ | — |
| | $ | 42,401 |
| | $ | — |
| | $ | — |
| | $ | 42,401 |
|
Accounts payable and accrued expenses: | | | | | | | | | | | | |
Trade and other accrued liabilities | | 5,240 |
| | 7,996 |
| | 114,423 |
| | 684 |
| | (5 | ) | | 128,338 |
|
Interest payable | | 30,315 |
| | — |
| | 474 |
| | — |
| | (39 | ) | | 30,750 |
|
Production taxes | | — |
| | 1,081 |
| | 38,936 |
| | 2,657 |
| | (1 | ) | | 42,673 |
|
Workers’ compensation | | 707 |
| | — |
| | — |
| | — |
| | — |
| | 707 |
|
Postretirement medical benefits | | 12,042 |
| | — |
| | 773 |
| | 1,139 |
| | 1 |
| | 13,955 |
|
SERP | | 390 |
| | — |
| | — |
| | — |
| | — |
| | 390 |
|
Deferred revenue | | — |
| | 9,581 |
| | 1,980 |
| | — |
| | — |
| | 11,561 |
|
Asset retirement obligations | | — |
| | — |
| | 31,131 |
| | — |
| | — |
| | 31,131 |
|
Other current liabilities | | 593 |
| | 5,279 |
| | 6,102 |
| | — |
| | (1 | ) | | 11,973 |
|
Total current liabilities | | 49,287 |
| | 23,937 |
| | 236,220 |
| | 4,480 |
| | (45 | ) | | 313,879 |
|
Long-term debt, less current installments | | 698,015 |
| | — |
| | 96,128 |
| | — |
| | (3,500 | ) | | 790,643 |
|
Workers’ compensation, less current portion | | 6,629 |
| | — |
| | — |
| | — |
| | — |
| | 6,629 |
|
Excess of black lung benefit obligation over trust assets | | 9,841 |
| | — |
| | — |
| | — |
| | — |
| | 9,841 |
|
Postretirement medical benefits, less current portion | | 184,902 |
| | — |
| | 68,766 |
| | 18,105 |
| | — |
| | 271,773 |
|
Pension and SERP obligations, less current portion | | 12,776 |
| | 97 |
| | 9,110 |
| | 239 |
| | — |
| | 22,222 |
|
Deferred revenue, less current portion | | — |
| | 35,949 |
| | 4,728 |
| | — |
| | (1 | ) | | 40,676 |
|
Asset retirement obligations, less current portion | | — |
| | 927 |
| | 357,326 |
| | — |
| | — |
| | 358,253 |
|
Intangible liabilities | | — |
| | 5,072 |
| | — |
| | — |
| | — |
| | 5,072 |
|
Deferred income taxes | | 5,370 |
| | — |
| | 10,144 |
| | — |
| | — |
| | 15,514 |
|
Other liabilities | | 707 |
| | 5,790 |
| | 3,167 |
| | 200 |
| | — |
| | 9,864 |
|
Intercompany receivable/payable | | 13,648 |
| | — |
| | (13,849 | ) | | 14,654 |
| | (14,453 | ) | | — |
|
Total liabilities | | 981,175 |
| | 71,772 |
| | 771,740 |
| | 37,678 |
| | (17,999 | ) | | 1,844,366 |
|
Shareholders’ deficit | | | | | | | | | | | | |
Preferred stock | | 96 |
| | — |
| | — |
| | — |
| | — |
| | 96 |
|
Common stock | | 38,173 |
| | 5 |
| | 110 |
| | 132 |
| | (247 | ) | | 38,173 |
|
Other paid-in capital | | 133,140 |
| | 52,848 |
| | 441,269 |
| | (124 | ) | | (493,993 | ) | | 133,140 |
|
Accumulated other comprehensive loss | | (53,615 | ) | | (160 | ) | | 16,075 |
| | (3,067 | ) | | (12,848 | ) | | (53,615 | ) |
Accumulated earnings (deficit) | | (378,439 | ) | | 73,936 |
| | (66,504 | ) | | (44,337 | ) | | 36,905 |
| | (378,439 | ) |
Total equity (deficit) | | (260,645 | ) | | 126,629 |
| | 390,950 |
| | (47,396 | ) | | (470,183 | ) | | (260,645 | ) |
Total liabilities and shareholders’ deficit | | $ | 720,530 |
| | $ | 198,401 |
| | $ | 1,162,690 |
| | $ | (9,718 | ) | | $ | (488,182 | ) | | $ | 1,583,721 |
|
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
CONSOLIDATING BALANCE SHEETS
December 31, 2013
(In thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Assets | | Parent/ Issuer | | Co-Issuer | | Guarantor Subsidiaries | | Non- Guarantor Subsidiaries | | Consolidating Adjustments | | Total |
Current assets: | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 25,326 |
| | $ | 3,341 |
| | $ | 27,451 |
| | $ | 4,992 |
| | $ | — |
| | $ | 61,110 |
|
Receivables: | | | | | | | | | | | | |
Trade | | — |
| | 12,934 |
| | 46,985 |
| | 6,277 |
| | — |
| | 66,196 |
|
Contractual third-party reclamation receivables | | — |
| | — |
| | 8,487 |
| | — |
| | — |
| | 8,487 |
|
Intercompany receivable/payable | | (16,273 | ) | | — |
| | 2,761 |
| | (19,353 | ) | | 32,865 |
| | — |
|
Other | | 1,616 |
| | 210 |
| | 3,256 |
| | 28 |
| | (24 | ) | | 5,086 |
|
| | (14,657 | ) | | 13,144 |
| | 61,489 |
| | (13,048 | ) | | 32,841 |
| | 79,769 |
|
Inventories | | — |
| | 6,161 |
| | 33,811 |
| | — |
| | — |
| | 39,972 |
|
Deferred income taxes | | 5,355 |
| | — |
| | 870 |
| | — |
| | (870 | ) | | 5,355 |
|
Restricted investments and bond collateral | | — |
| | 5,998 |
| | — |
| | — |
| | — |
| | 5,998 |
|
Other current assets | | 789 |
| | 143 |
| | 11,069 |
| | 834 |
| | — |
| | 12,835 |
|
Total current assets | | 16,813 |
| | 28,787 |
| | 134,690 |
| | (7,222 | ) | | 31,971 |
| | 205,039 |
|
Property, plant and equipment: | | | | | | | | | | | | |
Land and mineral rights | | — |
| | 1,395 |
| | 276,793 |
| | — |
| | — |
| | 278,188 |
|
Plant and equipment | | 3,973 |
| | 220,872 |
| | 432,851 |
| | — |
| | — |
| | 657,696 |
|
| | 3,973 |
| | 222,267 |
| | 709,644 |
| | — |
| | — |
| | 935,884 |
|
Less accumulated depreciation, depletion and amortization | | 2,707 |
| | 71,653 |
| | 371,488 |
| | — |
| | — |
| | 445,848 |
|
Net property, plant and equipment | | 1,266 |
| | 150,614 |
| | 338,156 |
| | — |
| | — |
| | 490,036 |
|
Advanced coal royalties | | — |
| | — |
| | 7,311 |
| | — |
| | — |
| | 7,311 |
|
Reclamation deposits | | — |
| | — |
| | 74,921 |
| | — |
| | — |
| | 74,921 |
|
Restricted investments and bond collateral | | 15,134 |
| | — |
| | 54,101 |
| | — |
| | — |
| | 69,235 |
|
Contractual third-party reclamation receivables | | — |
| | — |
| | 88,303 |
| | — |
| | — |
| | 88,303 |
|
Intangible assets | | — |
| | 1,283 |
| | 237 |
| | — |
| | — |
| | 1,520 |
|
Investment in subsidiaries | | 280,843 |
| | — |
| | — |
| | 3,770 |
| | (284,613 | ) | | — |
|
Other assets | | 8,636 |
| | — |
| | 1,683 |
| | 2,000 |
| | (1,999 | ) | | 10,320 |
|
Total assets | | $ | 322,692 |
| | $ | 180,684 |
| | $ | 699,402 |
| | $ | (1,452 | ) | | $ | (254,641 | ) | | $ | 946,685 |
|
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
CONSOLIDATING BALANCE SHEETS
December 31, 2013
(In thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Liabilities and Shareholders’ Deficit | | Parent/ Issuer | | Co-Issuer | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Consolidating Adjustments | | Total |
Current liabilities | | | | | | | | | | | | |
Current installments of long-term debt | | $ | 20,392 |
| | $ | — |
| | $ | 23,951 |
| | $ | — |
| | $ | — |
| | $ | 44,343 |
|
Accounts payable and accrued expenses: | | | | | | | | | | | | |
Trade | | 6,840 |
| | 10,119 |
| | 38,061 |
| | 2,487 |
| | — |
| | 57,507 |
|
Interest payable | | 11,302 |
| | — |
| | 40 |
| | — |
| | (21 | ) | | 11,321 |
|
Production taxes | | — |
| | 3 |
| | 36,522 |
| | 5,380 |
| | — |
| | 41,905 |
|
Workers’ compensation | | 717 |
| | — |
| | — |
| | — |
| | — |
| | 717 |
|
Postretirement medical benefits | | 12,042 |
| | — |
| | 774 |
| | 1,139 |
| | — |
| | 13,955 |
|
SERP | | 390 |
| | — |
| | — |
| | — |
| | — |
| | 390 |
|
Deferred revenue | | — |
| | 9,024 |
| | 5,044 |
| | — |
| | — |
| | 14,068 |
|
Asset retirement obligations | | — |
| | — |
| | 23,353 |
| | — |
| | — |
| | 23,353 |
|
Other current liabilities | | — |
| | 5,053 |
| | 417 |
| | — |
| | (1 | ) | | 5,469 |
|
Total current liabilities | | 51,683 |
| | 24,199 |
| | 128,162 |
| | 9,006 |
| | (22 | ) | | 213,028 |
|
Long-term debt, less current installments | | 224,582 |
| | — |
| | 72,912 |
| | — |
| | (2,000 | ) | | 295,494 |
|
Workers’ compensation, less current portion | | 6,744 |
| | — |
| | — |
| | — |
| | — |
| | 6,744 |
|
Excess of black lung benefit obligation over trust assets | | 8,675 |
| | — |
| | — |
| | — |
| | — |
| | 8,675 |
|
Postretirement medical benefits, less current portion | | 185,858 |
| | — |
| | 66,439 |
| | 18,077 |
| | — |
| | 270,374 |
|
Pension and SERP obligations, less current portion | | 13,069 |
| | 99 |
| | 10,765 |
| | 243 |
| | — |
| | 24,176 |
|
Deferred revenue, less current portion | | — |
| | 41,297 |
| | 5,270 |
| | — |
| | — |
| | 46,567 |
|
Asset retirement obligations, less current portion | | — |
| | 892 |
| | 255,619 |
| | — |
| | — |
| | 256,511 |
|
Intangible liabilities | | — |
| | 5,606 |
| | — |
| | — |
| | — |
| | 5,606 |
|
Deferred income taxes | | 5,355 |
| | — |
| | — |
| | — |
| | — |
| | 5,355 |
|
Other liabilities | | 584 |
| | — |
| | 6,687 |
| | 983 |
| | (6,220 | ) | | 2,034 |
|
Intercompany receivable/payable | | 14,021 |
| | — |
| | (7,851 | ) | | 14,654 |
| | (20,824 | ) | | — |
|
Total liabilities | | 510,571 |
| | 72,093 |
| | 538,003 |
| | 42,963 |
| | (29,066 | ) | | 1,134,564 |
|
Shareholders’ deficit | | | | | | | | | | | | |
Preferred stock | | 160 |
| | — |
| | — |
| | — |
| | — |
| | 160 |
|
Common stock | | 36,479 |
| | 5 |
| | 110 |
| | 132 |
| | (247 | ) | | 36,479 |
|
Other paid-in capital | | 134,861 |
| | 52,835 |
| | 157,984 |
| | (124 | ) | | (210,695 | ) | | 134,861 |
|
Accumulated other comprehensive loss | | (63,595 | ) | | (164 | ) | | 6,425 |
| | (3,086 | ) | | (3,175 | ) | | (63,595 | ) |
Accumulated earnings (deficit) | | (295,784 | ) | | 55,915 |
| | (3,120 | ) | | (41,337 | ) | | (11,458 | ) | | (295,784 | ) |
Total equity (deficit) | | (187,879 | ) | | 108,591 |
| | 161,399 |
| | (44,415 | ) | | (225,575 | ) | | (187,879 | ) |
Total liabilities and shareholders’ deficit | | $ | 322,692 |
| | $ | 180,684 |
| | $ | 699,402 |
| | $ | (1,452 | ) | | $ | (254,641 | ) | | $ | 946,685 |
|
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
CONSOLIDATING STATEMENTS OF OPERATIONS
Three Months Ended June 30, 2014
(In thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Parent/ Issuer | | Co-Issuer | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Consolidating Adjustments | | Total |
Revenues | $ | — |
| | $ | 21,803 |
| | $ | 266,153 |
| | $ | — |
| | $ | — |
| | $ | 287,956 |
|
Costs and expenses: | | | | | | | | | | | |
Cost of sales | (247 | ) | | 21,592 |
| | 227,044 |
| | — |
| | — |
| | 248,389 |
|
Depreciation, depletion and amortization | 79 |
| | 2,485 |
| | 21,915 |
| | — |
| | — |
| | 24,479 |
|
Selling and administrative | 12,003 |
| | 1,169 |
| | 15,921 |
| | (384 | ) | | — |
| | 28,709 |
|
Heritage health benefit expenses | 3,178 |
| | — |
| | — |
| | 210 |
| | — |
| | 3,388 |
|
Gain on sales of assets | — |
| | — |
| | (43 | ) | | — |
| | — |
| | (43 | ) |
Restructuring charges | 796 |
| | 101 |
| | 6,646 |
| | — |
| | — |
| | 7,543 |
|
Derivative loss | — |
| | 5,930 |
| | — |
| | — |
| | — |
| | 5,930 |
|
Income from equity affiliates | — |
| | — |
| | (799 | ) | | — |
| | — |
| | (799 | ) |
| 15,809 |
| | 31,277 |
| | 270,684 |
| | (174 | ) | | — |
| | 317,596 |
|
Operating income (loss) | (15,809 | ) | | (9,474 | ) | | (4,531 | ) | | 174 |
| | — |
| | (29,640 | ) |
Other income (expense): | | | | | | | | | | | |
Interest expense | (18,609 | ) | | (74 | ) | | (3,111 | ) | | (1 | ) | | 9 |
| | (21,786 | ) |
Loss on extinguishment of debt | (63 | ) | | — |
| | (12,571 | ) | | (1 | ) | | — |
| | (12,635 | ) |
Interest income | 145 |
| | 4 |
| | 1,433 |
| | — |
| | — |
| | 1,582 |
|
Gain on foreign exchange | 1,557 |
| | — |
| | 1,092 |
| | — |
| | — |
| | 2,649 |
|
Other income | — |
| | — |
| | 483 |
| | — |
| | — |
| | 483 |
|
| (16,970 | ) | | (70 | ) | | (12,674 | ) | | (2 | ) | | 9 |
| | (29,707 | ) |
Income (loss) before income taxes and income of consolidated subsidiaries | (32,779 | ) | | (9,544 | ) | | (17,205 | ) | | 172 |
| | 9 |
| | (59,347 | ) |
Equity in income of subsidiaries | (30,462 | ) | | — |
| | — |
| | — |
| | 30,462 |
| | — |
|
Income (loss) before income taxes | (63,241 | ) | | (9,544 | ) | | (17,205 | ) | | 172 |
| | 30,471 |
| | (59,347 | ) |
Income tax expense (benefit) | (87 | ) | | — |
| | (74 | ) | | 1 |
| | 3,967 |
| | 3,807 |
|
Net income (loss) | (63,154 | ) | | (9,544 | ) | | (17,131 | ) | | 171 |
| | 26,504 |
| | (63,154 | ) |
Less net loss attributable to noncontrolling interest | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Net income (loss) attributable to the Parent company | $ | (63,154 | ) | | $ | (9,544 | ) | | $ | (17,131 | ) | | $ | 171 |
| | $ | 26,504 |
| | $ | (63,154 | ) |
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
CONSOLIDATING STATEMENTS OF OPERATIONS
Three Months Ended June 30, 2013
(In thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Parent/ Issuer | | Co-Issuer | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Consolidating Adjustments | | Total |
Revenues | $ | — |
| | $ | 23,162 |
| | $ | 134,449 |
| | $ | 9,538 |
| | $ | (4,650 | ) | | $ | 162,499 |
|
Costs and expenses: | | | | | | | | | | | |
Cost of sales | (372 | ) | | 14,901 |
| | 113,640 |
| | 7,009 |
| | (4,650 | ) | | 130,528 |
|
Depreciation, depletion and amortization | 94 |
| | 2,551 |
| | 12,753 |
| | — |
| | (1 | ) | | 15,397 |
|
Selling and administrative | 4,259 |
| | 872 |
| | 7,232 |
| | (394 | ) | | — |
| | 11,969 |
|
Heritage health benefit expenses | 2,844 |
| | — |
| | — |
| | 265 |
| | — |
| | 3,109 |
|
Gain on sales of assets | — |
| | — |
| | (74 | ) | | — |
| | — |
| | (74 | ) |
Other operating income | — |
| | — |
| | (10,405 | ) | | — |
| | — |
| | (10,405 | ) |
| 6,825 |
| | 18,324 |
| | 123,146 |
| | 6,880 |
| | (4,651 | ) | | 150,524 |
|
Operating income (loss) | (6,825 | ) | | 4,838 |
| | 11,303 |
| | 2,658 |
| | 1 |
| | 11,975 |
|
Other income (expense): | | | | | | | | | | | |
Interest expense | (7,591 | ) | | (10 | ) | | (2,479 | ) | | (5 | ) | | 9 |
| | (10,076 | ) |
Loss on extinguishment of debt | (64 | ) | | — |
| | — |
| | — |
| | — |
| | (64 | ) |
Interest income | 46 |
| | 5 |
| | 232 |
| | 6 |
| | (9 | ) | | 280 |
|
Other income (loss) | 2 |
| | — |
| | 130 |
| | (2 | ) | | — |
| | 130 |
|
| (7,607 | ) | | (5 | ) | | (2,117 | ) | | (1 | ) | | — |
| | (9,730 | ) |
Income (loss) before income taxes and income of consolidated subsidiaries | (14,432 | ) | | 4,833 |
| | 9,186 |
| | 2,657 |
| | 1 |
| | 2,245 |
|
Equity in income of subsidiaries | 16,648 |
| | — |
| | — |
| | — |
| | (16,648 | ) | | — |
|
Income (loss) before income taxes | 2,216 |
| | 4,833 |
| | 9,186 |
| | 2,657 |
| | (16,647 | ) | | 2,245 |
|
Income tax expense (benefit) | (1 | ) | | — |
| | 1,139 |
| | — |
| | (1,110 | ) | | 28 |
|
Net income (loss) | 2,217 |
| | 4,833 |
| | 8,047 |
| | 2,657 |
| | (15,537 | ) | | 2,217 |
|
Less net loss attributable to noncontrolling interest | 2,499 |
| | — |
| | — |
| | — |
| | — |
| | 2,499 |
|
Net income (loss) attributable to the Parent company | $ | (282 | ) | | $ | 4,833 |
| | $ | 8,047 |
| | $ | 2,657 |
| | $ | (15,537 | ) | | $ | (282 | ) |
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
CONSOLIDATING STATEMENTS OF OPERATIONS
Six Months Ended June 30, 2014
(In thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Parent/ Issuer | | Co-Issuer | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Consolidating Adjustments | | Total |
Revenues | $ | — |
| | $ | 43,815 |
| | $ | 424,351 |
| | $ | (7 | ) | | $ | — |
| | $ | 468,159 |
|
Costs and expenses: | | | | | | | | | | | |
Cost of sales | (471 | ) | | 38,046 |
| | 349,389 |
| | 55 |
| | — |
| | 387,019 |
|
Depreciation, depletion and amortization | 156 |
| | 5,009 |
| | 35,373 |
| | — |
| | — |
| | 40,538 |
|
Selling and administrative | 16,968 |
| | 2,062 |
| | 23,783 |
| | (773 | ) | | — |
| | 42,040 |
|
Heritage health benefit expenses | 6,504 |
| | — |
| | — |
| | 428 |
| | — |
| | 6,932 |
|
Gain on sales of assets | — |
| | — |
| | (5 | ) | | — |
| | — |
| | (5 | ) |
Restructuring charges | 796 |
| | 499 |
| | 6,646 |
| | — |
| | — |
| | 7,941 |
|
Derivative loss | — |
| | 5,930 |
| | — |
| | — |
| | — |
| | 5,930 |
|
Equity in net income of unconsolidated affiliates | — |
| | — |
| | (799 | ) | | — |
| | — |
| | (799 | ) |
Other operating income | — |
| | — |
| | 150 |
| | 1 |
| | — |
| | 151 |
|
| 23,953 |
| | 51,546 |
| | 414,537 |
| | (289 | ) | | — |
| | 489,747 |
|
Operating income (loss) | (23,953 | ) | | (7,731 | ) | | 9,814 |
| | 282 |
| | — |
| | (21,588 | ) |
Other income (expense): | | | | | | | | | | | |
Interest expense | (37,282 | ) | | (118 | ) | | (5,199 | ) | | — |
| | 15 |
| | (42,584 | ) |
Loss on extinguishment of debt | (62 | ) | | — |
| | (12,572 | ) | | (1 | ) | | — |
| | (12,635 | ) |
Interest income | 269 |
| | 7 |
| | 1,608 |
| | 15 |
| | (15 | ) | | 1,884 |
|
Gain (loss) on foreign exchange | (5,233 | ) | | — |
| | 1,092 |
| | — |
| | — |
| | (4,141 | ) |
Other income | — |
| | — |
| | 576 |
| | — |
| | — |
| | 576 |
|
| (42,308 | ) | | (111 | ) | | (14,495 | ) | | 14 |
| | — |
| | (56,900 | ) |
Income (loss) before income taxes and income of consolidated subsidiaries | (66,261 | ) | | (7,842 | ) | | (4,681 | ) | | 296 |
| | — |
| | (78,488 | ) |
Equity in income of subsidiaries | (16,148 | ) | | — |
| | — |
| | — |
| | 16,148 |
| | — |
|
Income (loss) before income taxes | (82,409 | ) | | (7,842 | ) | | (4,681 | ) | | 296 |
| | 16,148 |
| | (78,488 | ) |
Income tax expense (benefit) | (224 | ) | | — |
| | 5,041 |
| | — |
| | (1,120 | ) | | 3,697 |
|
Net income (loss) | (82,185 | ) | | (7,842 | ) | | (9,722 | ) | | 296 |
| | 17,268 |
| | (82,185 | ) |
Less net loss attributable to noncontrolling interest | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Net income (loss) attributable to the Parent company | $ | (82,185 | ) | | $ | (7,842 | ) | | $ | (9,722 | ) | | $ | 296 |
| | $ | 17,268 |
| | $ | (82,185 | ) |
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
CONSOLIDATING STATEMENTS OF OPERATIONS
Six Months Ended June 30, 2013
(In thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Parent/ Issuer | | Co-Issuer | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Consolidating Adjustments | | Total |
Revenues | $ | — |
| | $ | 42,498 |
| | $ | 274,187 |
| | $ | 20,889 |
| | $ | (13,627 | ) | | $ | 323,947 |
|
Costs and expenses: | | | | | | | | | | | |
Cost of sales | (770 | ) | | 31,856 |
| | 223,417 |
| | 20,073 |
| | (13,627 | ) | | 260,949 |
|
Depreciation, depletion and amortization | 187 |
| | 5,082 |
| | 24,554 |
| | — |
| | — |
| | 29,823 |
|
Selling and administrative | 8,207 |
| | 1,726 |
| | 14,680 |
| | (758 | ) | | — |
| | 23,855 |
|
Heritage health benefit expenses | 6,533 |
| | — |
| | — |
| | 527 |
| | — |
| | 7,060 |
|
Gain on sales of assets | — |
| | — |
| | (308 | ) | | — |
| | — |
| | (308 | ) |
Other operating income | — |
| | — |
| | (15,142 | ) | | — |
| | — |
| | (15,142 | ) |
| 14,157 |
| | 38,664 |
| | 247,201 |
| | 19,842 |
| | (13,627 | ) | | 306,237 |
|
Operating income (loss) | (14,157 | ) | | 3,834 |
| | 26,986 |
| | 1,047 |
| | — |
| | 17,710 |
|
Other income (expense): | | | | | | | | | | | |
Interest expense | (15,175 | ) | | (20 | ) | | (5,048 | ) | | (10 | ) | | 17 |
| | (20,236 | ) |
Loss on extinguishment of debt | (64 | ) | | — |
| | — |
| | — |
| | — |
| | (64 | ) |
Interest income | 76 |
| | 15 |
| | 493 |
| | 10 |
| | (17 | ) | | 577 |
|
Other income (loss) | — |
| | — |
| | 200 |
| | (2 | ) | | — |
| | 198 |
|
| (15,163 | ) | | (5 | ) | | (4,355 | ) | | (2 | ) | | — |
| | (19,525 | ) |
Income (loss) before income taxes and income of consolidated subsidiaries | (29,320 | ) | | 3,829 |
| | 22,631 |
| | 1,045 |
| | — |
| | (1,815 | ) |
Equity in income of subsidiaries | 27,450 |
| | — |
| | — |
| | — |
| | (27,450 | ) | | — |
|
Income (loss) before income taxes | (1,870 | ) | | 3,829 |
| | 22,631 |
| | 1,045 |
| | (27,450 | ) | | (1,815 | ) |
Income tax expense (benefit) | — |
| | — |
| | 4,458 |
| | — |
| | (4,403 | ) | | 55 |
|
Net income (loss) | (1,870 | ) | | 3,829 |
| | 18,173 |
| | 1,045 |
| | (23,047 | ) | | (1,870 | ) |
Less net loss attributable to noncontrolling interest | 797 |
| | — |
| | — |
| | — |
| | — |
| | 797 |
|
Net income (loss) attributable to the Parent company | $ | (2,667 | ) | | $ | 3,829 |
| | $ | 18,173 |
| | $ | 1,045 |
| | $ | (23,047 | ) | | $ | (2,667 | ) |
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Three Months Ended June 30, 2014
(In thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Parent/Issuer | | Co-Issuer | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Consolidating Adjustments | | Total |
Net income (loss) | $ | (63,154 | ) | | $ | (9,544 | ) | | $ | (17,131 | ) | | $ | 171 |
| | $ | 26,504 |
| | $ | (63,154 | ) |
Other comprehensive income (loss) | | | | | | | | | | | |
Amortization of accumulated actuarial gains or losses, pension | 359 |
| | 2 |
| | 122 |
| | 6 |
| | (130 | ) | | 359 |
|
Amortization of accumulated actuarial gains or losses, transition obligations, and prior service costs, postretirement medical benefit | 5 |
| | — |
| | (36 | ) | | 5 |
| | 31 |
| | 5 |
|
Tax effect of other comprehensive income gains | 64 |
| | — |
| | — |
| | — |
| | — |
| | 64 |
|
Change in foreign currency translation adjustment | 9,477 |
| | — |
| | 9,477 |
| | — |
| | (9,477 | ) | | 9,477 |
|
Other comprehensive income (loss) | 9,905 |
| | 2 |
| | 9,563 |
| | 11 |
| | (9,576 | ) | | 9,905 |
|
Comprehensive income (loss) attributable to the Parent company | $ | (53,249 | ) | | $ | (9,542 | ) | | $ | (7,568 | ) | | $ | 182 |
| | $ | 16,928 |
| | $ | (53,249 | ) |
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Three Months Ended June 30, 2013
(In thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Parent/Issuer | | Co-Issuer | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Consolidating Adjustments | | Total |
Net income (loss) | $ | 2,217 |
| | $ | 4,833 |
| | $ | 8,047 |
| | $ | 2,657 |
| | $ | (15,537 | ) | | $ | 2,217 |
|
Other comprehensive income (loss) | | | | | | | | | | | |
Amortization of accumulated actuarial gains or losses, pension | 1,004 |
| | 8 |
| | 239 |
| | — |
| | (247 | ) | | 1,004 |
|
Amortization of accumulated actuarial gains or losses, transition obligations, and prior service costs, postretirement medical benefit | 1,001 |
| | — |
| | 214 |
| | — |
| | (214 | ) | | 1,001 |
|
Unrealized and realized gains and losses on available-for-sale securities | (39 | ) | | — |
| | (40 | ) | | — |
| | 40 |
| | (39 | ) |
Other comprehensive income (loss) | 1,966 |
| | 8 |
| | 413 |
| | — |
| | (421 | ) | | 1,966 |
|
Comprehensive income (loss) attributable to the Parent company | $ | 4,183 |
| | $ | 4,841 |
| | $ | 8,460 |
| | $ | 2,657 |
| | $ | (15,958 | ) | | $ | 4,183 |
|
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Six Months Ended June 30, 2014
(In thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Parent/Issuer | | Co-Issuer | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Consolidating Adjustments | | Total |
Net income (loss) | $ | (82,185 | ) | | $ | (7,842 | ) | | $ | (9,722 | ) | | $ | 296 |
| | $ | 17,268 |
| | $ | (82,185 | ) |
Other comprehensive income (loss) | | | | | | | | | | | |
Amortization of accumulated actuarial gains or losses, pension | 717 |
| | 4 |
| | 244 |
| | 11 |
| | (259 | ) | | 717 |
|
Amortization of accumulated actuarial gains or losses, transition obligations, and prior service costs, postretirement medical benefit | 10 |
| | — |
| | (72 | ) | | 10 |
| | 62 |
| | 10 |
|
Tax effect of other comprehensive income gains | (224 | ) | | — |
| | — |
| | — |
| | — |
| | (224 | ) |
Change in foreign currency translation adjustment | 9,477 |
| | — |
| | 9,477 |
| | — |
| | (9,477 | ) | | 9,477 |
|
Other comprehensive income (loss) | 9,980 |
| | 4 |
| | 9,649 |
| | 21 |
| | (9,674 | ) | | 9,980 |
|
Comprehensive income (loss) attributable to the Parent company | $ | (72,205 | ) | | $ | (7,838 | ) | | $ | (73 | ) | | $ | 317 |
| | $ | 7,594 |
| | $ | (72,205 | ) |
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Six Months Ended June 30, 2013
(In thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Parent/Issuer | | Co-Issuer | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Consolidating Adjustments | | Total |
Net income (loss) | $ | (1,870 | ) | | $ | 3,829 |
| | $ | 18,173 |
| | $ | 1,045 |
| | $ | (23,047 | ) | | $ | (1,870 | ) |
Other comprehensive income (loss) | | | | | | | | | | | |
Amortization of accumulated actuarial gains or losses, pension | 1,745 |
| | 14 |
| | 432 |
| | — |
| | (446 | ) | | 1,745 |
|
Amortization of accumulated actuarial gains or losses, transition obligations, and prior service costs, postretirement medical benefit | 2,002 |
| | — |
| | 427 |
| | — |
| | (427 | ) | | 2,002 |
|
Unrealized and realized gains and losses on available-for-sale securities | (39 | ) | | — |
| | (40 | ) | | — |
| | 40 |
| | (39 | ) |
Other comprehensive income (loss) | 3,708 |
| | 14 |
| | 819 |
| | — |
| | (833 | ) | | 3,708 |
|
Comprehensive income (loss) attributable to the Parent company | $ | 1,838 |
| | $ | 3,843 |
| | $ | 18,992 |
| | $ | 1,045 |
| | $ | (23,880 | ) | | $ | 1,838 |
|
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
CONSOLIDATING STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 2014
(In thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Statements of Cash Flows | | Parent/ Issuer | | Co-Issuer | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Consolidating Adjustments | | Total |
Cash flows from operating activities: | | | | | | | | | | | | |
Net income (loss) | | $ | (82,185 | ) | | $ | (7,842 | ) | | $ | (9,722 | ) | | $ | 296 |
| | $ | 17,268 |
| | $ | (82,185 | ) |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | | | | | | | |
Equity in income of subsidiaries | | 16,148 |
| | — |
| | — |
| | — |
| | (16,148 | ) | | — |
|
Depreciation, depletion, and amortization | | 156 |
| | 5,009 |
| | 35,373 |
| | — |
| | — |
| | 40,538 |
|
Accretion of asset retirement obligation and receivable | | — |
| | 34 |
| | 9,254 |
| | — |
| | — |
| | 9,288 |
|
Non-cash tax benefits | | (224 | ) | | — |
| | — |
| | — |
| | — |
| | (224 | ) |
Amortization of intangible assets and liabilities, net | | — |
| | 290 |
| | 20 |
| | — |
| | — |
| | 310 |
|
Share-based compensation | | 1,934 |
| | 14 |
| | 497 |
| | — |
| | — |
| | 2,445 |
|
Gain on sales of assets | | — |
| | — |
| | (5 | ) | | — |
| | — |
| | (5 | ) |
Amortization of deferred financing costs | | 494 |
| | — |
| | 715 |
| | — |
| | — |
| | 1,209 |
|
Loss on extinguishment of debt | | 62 |
| | — |
| | 12,572 |
| | 1 |
| | — |
| | 12,635 |
|
Loss on sales of investment securities | | — |
| | — |
| | 3 |
| | — |
| | — |
| | 3 |
|
Loss on derivative | | — |
| | 5,930 |
| | — |
| | — |
| | — |
| | 5,930 |
|
Loss on foreign exchange | | 5,233 |
| | — |
| | (1,092 | ) | | — |
| | — |
| | 4,141 |
|
Income from equity affiliates | | — |
| | — |
| | (799 | ) | | — |
| | — |
| | (799 | ) |
Distributions from equity affiliates | | — |
| | — |
| | 730 |
| | — |
| | — |
| | 730 |
|
Changes in operating assets and liabilities: | | | | | | | | | | | | |
Receivables, net | | 943 |
| | (6 | ) | | (18,474 | ) | | 4,733 |
| | 1,534 |
| | (11,270 | ) |
Inventories | | — |
| | 842 |
| | 21,929 |
| | (1 | ) | | — |
| | 22,770 |
|
Excess of black lung benefit obligation over trust assets | | 1,166 |
| | — |
| | — |
| | — |
| | — |
| | 1,166 |
|
Deferred income tax | | — |
| | — |
| | 3,854 |
| | — |
| | — |
| | 3,854 |
|
Accounts payable and accrued expenses | | 17,348 |
| | (1,101 | ) | | (3,164 | ) | | (4,526 | ) | | (19 | ) | | 8,538 |
|
Deferred revenue | | — |
| | (4,791 | ) | | (3,633 | ) | | — |
| | — |
| | (8,424 | ) |
Income tax payable | | — |
| | — |
| | 528 |
| | — |
| | — |
| | 528 |
|
Accrual for workers’ compensation | | (125 | ) | | — |
| | — |
| | — |
| | — |
| | (125 | ) |
Asset retirement obligations | | — |
| | — |
| | (3,364 | ) | | 2 |
| | — |
| | (3,362 | ) |
Accrual for postretirement medical benefits | | (885 | ) | | — |
| | 2,256 |
| | 38 |
| | — |
| | 1,409 |
|
Pension and SERP obligations | | 166 |
| | 2 |
| | (507 | ) | | 7 |
| | — |
| | (332 | ) |
Other assets and liabilities | �� | (7,429 | ) | | (273 | ) | | 4,113 |
| | (1,193 | ) | | 6,587 |
| | 1,805 |
|
Distributions received from subsidiaries | | 76,800 |
| | — |
| | — |
| | — |
| | (76,800 | ) | | — |
|
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Net cash provided by (used in) operating activities | | 29,602 |
| | (1,892 | ) | | 51,084 |
| | (643 | ) | | (67,578 | ) | | 10,573 |
|
Cash flows from investing activities: | | | | | | | | | | | | |
Additions to property, plant and equipment | | 16 |
| | (255 | ) | | (17,122 | ) | | — |
| | — |
| | (17,361 | ) |
Change in restricted investments and bond collateral and reclamation deposits | | (48,188 | ) | | 5,998 |
| | 11,673 |
| | — |
| | — |
| | (30,517 | ) |
Cash payments related to Canadian acquisition | | (282,788 | ) | | — |
| | (39,849 | ) | | — |
| | — |
| | (322,637 | ) |
Cash acquired related to Canadian acquisition | | — |
| | — |
| | 8,103 |
| | — |
| | — |
| | 8,103 |
|
Net proceeds from sales of assets | | — |
| | — |
| | 213 |
| | — |
| | — |
| | 213 |
|
Proceeds from the sale of investments | | — |
| | — |
| | 246 |
| | — |
| | — |
| | 246 |
|
Increase in loan and lease receivable | | — |
| | — |
| | (1,120 | ) | | — |
| | — |
| | (1,120 | ) |
Receipts from loan and lease receivable | | — |
| | — |
| | 2,164 |
| | — |
| | — |
| | 2,164 |
|
Receivable from customer for property and equipment purchases | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Other | | — |
| | — |
| | (82 | ) | | — |
| | — |
| | (82 | ) |
Net cash provided by (used in) investing activities | | (330,960 | ) | | 5,743 |
| | (35,774 | ) | | — |
| | — |
| | (360,991 | ) |
Cash flows from financing activities: | | | | | | | | | | | | |
Change in book overdrafts | | — |
| | — |
| | 1,605 |
| | — |
| | — |
| | 1,605 |
|
Borrowings from long-term debt | | 454,219 |
| | — |
| | — |
| | — |
| | — |
| | 454,219 |
|
Repayments of long-term debt | | (1,015 | ) | | — |
| | (96,523 | ) | | — |
| | — |
| | (97,538 | ) |
Borrowings on revolving lines of credit | | — |
| | — |
| | 10,000 |
| | — |
| | — |
| | 10,000 |
|
Repayments on revolving lines of credit | | — |
| | — |
| | (10,000 | ) | | — |
| | — |
| | (10,000 | ) |
Debt issuance costs and other refinancing costs | | (15,407 | ) | | — |
| | (11,646 | ) | | — |
| | — |
| | (27,053 | ) |
Dividends/distributions | | (470 | ) | | (8,500 | ) | | (68,300 | ) | | — |
| | 76,800 |
| | (470 | ) |
Exercise of stock options | | 193 |
| | — |
| | — |
| | — |
| | — |
| | 193 |
|
Transactions with Parent/affiliates | | (147,974 | ) | | 1,723 |
| | 157,581 |
| | (2,108 | ) | | (9,222 | ) | | — |
|
Net cash provided by (used in) financing activities | | 289,546 |
| | (6,777 | ) | | (17,283 | ) | | (2,108 | ) | | 67,578 |
| | 330,956 |
|
Effect of foreign exchange rates on cash | | — |
| | — |
| | (1,038 | ) | | — |
| | — |
| | (1,038 | ) |
Net decrease in cash and cash equivalents | | (11,812 | ) | | (2,926 | ) | | (3,011 | ) | | (2,751 | ) | | — |
| | (20,500 | ) |
Cash and cash equivalents, beginning of period | | 25,326 |
| | 3,341 |
| | 27,451 |
| | 4,992 |
| | — |
| | 61,110 |
|
Cash and cash equivalents, end of period | | $ | 13,514 |
| | $ | 415 |
| | $ | 24,440 |
| | $ | 2,241 |
| | $ | — |
| | $ | 40,610 |
|
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
CONSOLIDATING STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 2013
(In thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Statements of Cash Flows | | Parent/ Issuer | | Co-Issuer | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Consolidating Adjustments | | Total |
Cash flows from operating activities: | | | | | | | | | | | | |
Net income (loss) | | $ | (1,870 | ) | | $ | 3,829 |
| | $ | 18,173 |
| | $ | 1,045 |
| | $ | (23,047 | ) | | $ | (1,870 | ) |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | | | | | | | |
Equity in income of subsidiaries | | (27,450 | ) | | — |
| | — |
| | — |
| | 27,450 |
| | — |
|
Depreciation, depletion, and amortization | | 187 |
| | 5,082 |
| | 24,554 |
| | — |
| | — |
| | 29,823 |
|
Accretion of asset retirement obligation and receivable | | — |
| | 32 |
| | 6,305 |
| | 1 |
| | — |
| | 6,338 |
|
Amortization of intangible assets and liabilities, net | | — |
| | 312 |
| | 19 |
| | (5 | ) | | — |
| | 326 |
|
Share-based compensation | | 1,567 |
| | 23 |
| | 2,181 |
| | — |
| | — |
| | 3,771 |
|
Gain on sales of assets | | — |
| | — |
| | (308 | ) | | — |
| | — |
| | (308 | ) |
Amortization of deferred financing costs | | 1,541 |
| | — |
| | 315 |
| | — |
| | — |
| | 1,856 |
|
Loss on extinguishment of debt | | 64 |
| | — |
| | — |
| | — |
| | — |
| | 64 |
|
Loss on sales of investment securities | | — |
| | — |
| | (28 | ) | | — |
| | — |
| | (28 | ) |
Changes in operating assets and liabilities: | | | | | | | | | | | | |
Receivables, net | | (227 | ) | | (1,995 | ) | | 4,419 |
| | (239 | ) | | 1,729 |
| | 3,687 |
|
Inventories | | — |
| | (1,632 | ) | | (345 | ) | | — |
| | — |
| | (1,977 | ) |
Excess of black lung benefit obligation over trust assets | | (280 | ) | | — |
| | — |
| | (1 | ) | | — |
| | (281 | ) |
Accounts payable and accrued expenses | | (1,957 | ) | | 4,101 |
| | 904 |
| | (1,146 | ) | | (201 | ) | | 1,701 |
|
Deferred revenue | | — |
| | (4,190 | ) | | (2,025 | ) | | 1 |
| | — |
| | (6,214 | ) |
Income tax payable | | — |
| | — |
| | (55 | ) | | (1 | ) | | — |
| | (56 | ) |
Accrual for workers’ compensation | | (284 | ) | | — |
| | — |
| | — |
| | — |
| | (284 | ) |
Asset retirement obligations | | — |
| | — |
| | (5,422 | ) | | (2 | ) | | — |
| | (5,424 | ) |
Accrual for postretirement medical benefits | | (40 | ) | | — |
| | 4,010 |
| | 124 |
| | — |
| | 4,094 |
|
Pension and SERP obligations | | 695 |
| | 9 |
| | 826 |
| | (13 | ) | | — |
| | 1,517 |
|
Other assets and liabilities | | (49 | ) | | 101 |
| | (1,489 | ) | | (374 | ) | | — |
| | (1,811 | ) |
Distributions received from subsidiaries | | 36,600 |
| | — |
| | — |
| | — |
| | (36,600 | ) | | — |
|
Net cash provided by (used in) operating activities | | 8,497 |
| | 5,672 |
| | 52,034 |
| | (610 | ) | | (30,669 | ) | | 34,924 |
|
Cash flows from investing activities: | | | | | | | | | | | | |
Additions to property, plant and equipment | | (575 | ) | | (698 | ) | | (12,189 | ) | | (4 | ) | | (1 | ) | | (13,467 | ) |
Change in restricted investments and bond collateral and reclamation deposits | | (807 | ) | | (5 | ) | | (7,902 | ) | | — |
| | — |
| | (8,714 | ) |
Net proceeds from sales of assets | | — |
| | — |
| | 577 |
| | — |
| | — |
| | 577 |
|
Proceeds from the sale of investments | | — |
| | — |
| | 6,807 |
| | — |
| | — |
| | 6,807 |
|
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Receivable from customer for property and equipment purchases | | — |
| | — |
| | (307 | ) | | (1 | ) | | — |
| | (308 | ) |
Net cash used in investing activities | | (1,382 | ) | | (703 | ) | | (13,014 | ) | | (5 | ) | | (1 | ) | | (15,105 | ) |
Cash flows from financing activities: | | | | | | | | | | | | |
Change in book overdrafts | | — |
| | — |
| | 1,777 |
| | — |
| | — |
| | 1,777 |
|
Repayments of long-term debt | | (500 | ) | | — |
| | (15,561 | ) | | (9 | ) | | — |
| | (16,070 | ) |
Borrowings on revolving lines of credit | | — |
| | — |
| | 6,000 |
| | — |
| | — |
| | 6,000 |
|
Repayments on revolving lines of credit | | — |
| | — |
| | (6,000 | ) | | — |
| | — |
| | (6,000 | ) |
Debt issuance costs and other refinancing costs | | (26 | ) | | — |
| | (156 | ) | | — |
| | — |
| | (182 | ) |
Dividends/distributions | | (680 | ) | | (9,000 | ) | | (27,600 | ) | | — |
| | 36,600 |
| | (680 | ) |
Transactions with Parent/affiliates | | (5,080 | ) | | (38 | ) | | 8,699 |
| | 2,349 |
| | (5,930 | ) | | — |
|
Net cash provided by (used in) financing activities | | (6,286 | ) | | (9,038 | ) | | (32,841 | ) | | 2,340 |
| | 30,670 |
| | (15,155 | ) |
Net increase (decrease) in cash and cash equivalents | | 829 |
| | (4,069 | ) | | 6,179 |
| | 1,725 |
| | — |
| | 4,664 |
|
Cash and cash equivalents, beginning of period | | 14,836 |
| | 4,545 |
| | 10,237 |
| | 1,992 |
| | — |
| | 31,610 |
|
Cash and cash equivalents, end of period | | $ | 15,665 |
| | $ | 476 |
| | $ | 16,416 |
| | $ | 3,717 |
| | $ | — |
| | $ | 36,274 |
|
| |
ITEM 2 | — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains “forward-looking statements.” Forward-looking statements can be identified by words such as “anticipates,” “intends,” “plans,” “seeks,” “believes,” “estimates,” “expects” and similar references to future periods. Examples of forward-looking statements include, but are not limited to, statements we make about our expectation that our cash from operations, cash on hand and available borrowing capacity will be sufficient to meet our investing, financing, and working capital requirements for the foreseeable future, our anticipated cash spend on heritage health and pension obligations, and the possibility that we may from time to time use available cash to repurchase our 10.75% Senior Notes on the open market.
Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Our actual results may differ materially from those contemplated by the forward-looking statements. We therefore caution you against relying on any of these forward-looking statements. They are statements neither of historical fact nor guarantees or assurances of future performance. Important factors that could cause actual results to differ materially from those in the forward-looking statements include political, economic, business, competitive, market, weather and regulatory conditions and the following:
| |
• | changes in our post-retirement medical benefit and pension obligations and the impact of the recently enacted healthcare legislation; |
| |
• | the impact of the recently enacted healthcare legislation and its effect on our employee health benefit costs; |
| |
• | our potential inability to expand or continue current coal operations due to limitations in obtaining bonding capacity for new mining permits, and/or increases in our mining costs as a result of increased bonding expenses; |
| |
• | our substantial level of indebtedness and potential inability to maintain compliance with debt covenant requirements; |
| |
• | the potential inability of our subsidiaries to pay dividends to us due to restrictions in our debt arrangements, reductions in planned coal deliveries or other business factors; |
| |
• | the effect of Environmental Protection Agency inquiries and regulations on the operations of the power plants to which we provide coal; |
| |
• | the effect of prolonged maintenance or unplanned outages at our operations or those of our major power generating customers; |
| |
• | future legislation and changes in regulations, governmental policies and taxes, including those aimed at reducing emissions of elements such as mercury, sulfur dioxides, nitrogen oxides, particulate matter or greenhouse gases; |
| |
• | our expansion into international operations as a result of the Canadian Acquisition which exposes us to risks relating to exchange rates and exchange controls, general economic and political conditions, costs associated with compliance with governmental regulations in multiple jurisdictions, tax-related risks and export or import requirements for, or restrictions related to, our products; |
| |
• | our efforts to effectively integrate the Canadian operations with our existing business and our ability to manage our expanded operations following the acquisition; |
| |
• | our ability to realize growth opportunities and cost synergies as a result of the Canadian Acquisition; and |
| |
• | other factors that are described in “Risk Factors” in our 2013 Form 10-K and any subsequent quarterly filing on Form 10-Q. |
Unless otherwise specified, the forward-looking statements in this report speak as of the filing date of this report. Factors or events that could cause our actual results to differ may emerge from time-to-time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update any forward-looking statements, whether because of new information, future developments or otherwise, except as may be required by law.
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONT.)
Overview
Westmoreland Coal Company is an energy company whose operations include sub-bituminous and lignite coal mining in the Western United States and Canada and power operations in the U.S. The operations in the U.S consist of six surface coal mines in Montana, Wyoming, North Dakota and Texas, and two coal-fired power-generating units in North Carolina. Canadian operations consist of six producing thermal coal mines in the Canadian provinces of Alberta and Saskatchewan, a char production facility, and a 50% interest in an activated carbon plant. We sold 24.9 million tons of coal in 2013 and 17.3 million tons through June 30, 2014. Our three principal operating segments are Coal - U.S., Coal - Canada, and Power. Our two non-operating segments are our heritage and corporate segments. Our heritage segment primarily includes the costs of benefits we provide to former mining operation employees and our corporate segment consists primarily of corporate administrative expenses.
We are a holding company and conduct our operations through subsidiaries. We have significant cash requirements to fund our ongoing heritage health benefit costs and corporate overhead expenses. The principal sources of cash flow to us are distributions from our principal operating subsidiaries.
Equity Offering
Subsequent to June 30, 2014, we completed a public offering of 1,684,507 shares of common stock at $35.50 per share for gross proceeds of $59.8 million. We intend to use the net proceeds from the offering to increase our overall financial flexibility, pursue organic and acquisition growth strategies and for general corporate purposes.
Canadian Acquisition
On April 28, 2014, we completed the acquisition of Sherritt International Corporation’s Prairie and Mountain coal mining operations, which include six producing thermal coal mines in the Canadian provinces of Alberta and Saskatchewan, a char production facility, and a 50% interest in an activated carbon plant; collectively referred to as the Canadian properties. The Canadian properties include approximately 649 million tons of total proven or probable coal reserves as of December 31, 2013. The mines have varying estimated lives between 4 and 41 years at current production levels. The purchase consideration included a $282.8 million initial cash payment made on April 28, 2014, a cash payment for a working capital adjustment of $39.8 million made on June 25, 2014, and assumed liabilities of $330.5 million.
In connection with the acquisition of the Canadian properties: (i) proceeds from the private offering of $425.0 million in aggregate principal amount of 10.75% senior secured notes by Westmoreland Escrow Corporation were released from escrow and such notes were automatically exchanged for identical notes issued by Westmoreland and Westmoreland Partners, as co-issuers; (ii) Westmoreland increased its revolving line of credit to $60 million (which borrowing capacity may be increased to $100 million and can be used for borrowings and letters of credit); and (iii) Westmoreland Mining LLC, or WML, a wholly owned subsidiary of Westmoreland, provided prepayment notices to holders of its 8.02% senior secured notes due 2018, which notes were prepaid at the end of May 2014. In connection with the prepayment, we also terminated the WML revolving credit facility.
ROVA Restructuring
On December 23, 2013, we entered into an agreement with Dominion Virginia Power (“DVP”), a subsidiary of Dominion, to restructure the remaining five years of the ROVA I and ROVA II contracts. Pursuant to the restructured agreement, from January 2014 through March 2019, ROVA will be maintained in operational condition and we anticipate running the plants during high demand energy periods to supply DVP under the contract. During low demand periods, we do not anticipate that the plants will be dispatched and the plants would remain in idle status. We additionally buy power from a power provider at fixed prices, referred to as the fixed-price purchased power. Under the terms of the restructured agreement, we may meet DVP’s power needs with the fixed-price purchased power in the event that doing so becomes more economically attractive than our physically operating the ROVA plants to generate power. Alternatively, we have the option to operate the ROVA plants, sell our produced power to DVP and resell the fixed-price purchased power into the open market. The terms of the fixed-price purchased power are as follows:
|
| | | | | | | |
| April 2014 - December 2014 | | January 2015 - December 2018 |
Price per MWh | $ | 44.09 |
| | $ | 41.05 |
|
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONT.)
Results of Operations
Items that Affect Comparability of Our Results
For 2014, our results included items that affect comparability of our results. The expense components of these items were as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2014 | | 2013 | | 2014 | | 2013 |
| (In thousands) |
Acquisition and transition costs | $ | (20,175 | ) | | $ | — |
| | $ | (20,463 | ) | | $ | — |
|
Loss on debt extinguishment | (12,635 | ) | | (64 | ) | | (12,635 | ) | | (64 | ) |
Restructuring charges | (7,543 | ) | | — |
| | (7,941 | ) | | — |
|
Derivative losses | (5,930 | ) | | — |
| | (5,930 | ) | | — |
|
Incremental interest incurred before close of transaction | (5,047 | ) | | — |
| | (11,191 | ) | | — |
|
Foreign exchange gain (loss) | 2,649 |
| | — |
| | (4,141 | ) | | — |
|
Canadian Acquisition bridge facility commitment fee | — |
| | — |
| | (4,875 | ) | | — |
|
Impact (pre-tax) | $ | (48,681 | ) | | $ | (64 | ) | | $ | (67,176 | ) | | $ | (64 | ) |
Items recorded in 2014
| |
• | We recorded $20.2 million and $20.5 million of acquisition and transition costs for the three and six months ended June 30, 2014, respectively, as a result of our Canadian Acquisition, which includes the impact on cost of sales related to the sale of inventory written up to fair value in the acquisition. |
| |
• | We recorded $12.6 million of loss on extinguishment of debt for the three and six months ended June 30, 2014 related to the payoff of the WML term debt. This loss included an $11.6 million make-whole payment with the remaining loss due to the write-off of unamortized debt issuance costs. |
| |
• | We recorded $7.5 million and $7.9 million of restructuring charges for the three and six months ended June 30, 2014, respectively, related to a restructuring plan in order to reduce our overall cost structure. Most of the restructuring charges related to our Canadian operations and included termination benefits and outplacement costs. |
| |
• | We recorded $5.9 million of derivative losses for the three and six months ended June 30, 2014 related to ROVA's purchased power contract. |
| |
• | We recorded $5.0 million and $11.2 million of incremental interest expense for the three and six months ended June 30, 2014, respectively, related to the new $425 million senior notes. This incremental interest represents interest expense from the February 7, 2014 closing date of the new senior notes to the April 28, 2014 closing date of the Canadian Acquisition. |
| |
• | We recorded a $2.6 million gain on foreign exchange for the three months ended June 30, 2014 and a $4.1 million loss on foreign exchange for the six months ended June 30, 2014. The majority of this gain and loss relates to two foreign currency exchange forward contracts to purchase Canadian Dollars in order to hedge a portion of our exposure to fluctuating rates of exchange on Canadian Dollar-denominated Canadian Acquisition cash flows. |
| |
• | We recorded $4.9 million of interest expense for the six months ended June 30, 2014 related to the Canadian Acquisition bridge facility. Upon closing of the $425 million private offering, our bridge facility commitment expired unexercised and as a result; the related commitment fee of $4.9 million was expensed and is included in Interest expense. |
Items recorded in 2013
| |
• | We recorded $0.1 million of loss on extinguishment of debt related to repurchases of 10.75% Senior Notes with a principal amount of $0.5 million. The loss on the repurchases was measured based on the carrying value of the repurchased portion of the 10.75% Senior Notes, which included a portion of the unamortized debt issuance costs and the debt discount on the dates of repurchase. |
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONT.)
Three Months Ended June 30, 2014 Compared to Three Months Ended June 30, 2013
Summary
The following table shows the comparative consolidated results and changes between periods:
|
| | | | | | | | | | | | | | |
| Three Months Ended June 30, |
| | | | | Increase / (Decrease) |
| 2014 | | 2013 | | $ | | % |
| (In millions) |
Revenues | $ | 288.0 |
| | $ | 162.5 |
| | $ | 125.5 |
| | 77.2 | % |
Net loss applicable to common shareholders | (63.4 | ) | | (0.6 | ) | | (62.8 | ) | | 10,466.7 | % |
Adjusted EBITDA(1) | 39.6 |
| | 32.0 |
| | 7.6 |
| | 23.8 | % |
____________________
| |
(1) | Adjusted EBITDA , a non-GAAP measure, is defined and reconciled to net loss at the end of this “Results of Operations” section. |
Our second quarter 2014 revenues increased primarily due to the Canadian Acquisition and new customer sales.
Our second quarter 2014 net loss applicable to common shareholders increased by $14.1 million, excluding $48.7 million of expense during 2014 discussed in Items that Affect Comparability of Our Results. The primary factors, in aggregate, driving this increase in net loss were:
|
| | | |
| Three Months Ended June 30, 2014 |
| (In millions) |
Decrease in our power segment operating income due to the restructured ROVA contract and planned outage timing | $ | (8.3 | ) |
Increase in interest expense due to increased debt levels | (5.0 | ) |
Decrease in our coal - U.S. segment primarily due to weather impacts, as well as rail service issues at our Absaloka Mine | (3.3 | ) |
Decrease due to other factors | (0.5 | ) |
Increase in our Coal - Canada segment due to the Canadian Acquisition | 3.0 |
|
Total | $ | (14.1 | ) |
Coal - U.S. Segment Operating Results
The following table shows comparative coal revenues, operating income (loss), adjusted EBITDA, sales volume, and percentage changes between periods:
|
| | | | | | | | | | | | | | |
| Three Months Ended June 30, |
| | | | | Increase / (Decrease) |
| 2014 | | 2013 | | $ | | % |
| (In thousands, except per ton data) |
Revenues | $ | 150,107 |
| | $ | 139,337 |
| | $ | 10,770 |
| | 7.7 | % |
Operating income (loss) | (423 | ) | | 12,572 |
| | (12,995 | ) | | (103.4 | )% |
Adjusted EBITDA(1) | 24,039 |
| | 29,369 |
| | (5,330 | ) | | (18.1 | )% |
Tons sold—millions of equivalent tons | 6.4 |
| | 5.7 |
| | 0.7 |
| | 12.3 | % |
____________________
| |
(1) | Adjusted EBITDA, a non-GAAP measure, is defined and reconciled to net loss at the end of this “Results of Operations” section. |
Our second quarter 2014 U.S. coal segment revenues and tons sold increased primarily due to new customer sales at our Absaloka Mine. Operating income was negatively impacted by weather impacts, rail service issues at our Absaloka Mine, acquisition costs, and increased maintenance expenses.
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONT.)
Coal - Canada Segment Operating Results
The following table shows comparative coal revenues, operating loss, adjusted EBITDA, and sales volume between periods:
|
| | | | | | | |
| Three Months Ended June 30, |
| 2014 | | 2013 |
| (In thousands, except per ton data) |
Revenues | $ | 116,046 |
| | $ | — |
|
Operating loss | (12,709 | ) | | — |
|
Adjusted EBITDA(1) | 21,988 |
| | — |
|
Tons sold—millions of equivalent tons | 4.1 |
| | — |
|
____________________
| |
(1) | Adjusted EBITDA, a non-GAAP measure, is defined and reconciled to net loss at the end of this “Results of Operations” section. |
The above table represents results from the Canadian Acquisition date of April 28, 2014 to June 30, 2014. Operating income was negatively impacted by $13.6 million of cost of sales related to the sale of inventory written up to fair value in the acquisition and $6.6 million of restructuring charges.
Power Segment Operating Results
The following table shows comparative power revenues, operating income (loss), adjusted EBITDA, and percentage changes between periods:
|
| | | | | | | | | | | | | | |
| Three Months Ended June 30, |
| | | | | Increase / (Decrease) |
| 2014 | | 2013 | | $ | | % |
| (In thousands) |
Revenues | $ | 21,803 |
| | $ | 23,162 |
| | $ | (1,359 | ) | | (5.9 | )% |
Operating income (loss) | (9,473 | ) | | 4,837 |
| | (14,310 | ) | | (295.8 | )% |
Adjusted EBITDA(1) | (789 | ) | | 7,572 |
| | (8,361 | ) | | (110.4 | )% |
____________________
| |
(1) | Adjusted EBITDA, a non-GAAP measure, is defined and reconciled to net loss at the end of this “Results of Operations” section. |
Our second quarter 2014 power segment revenues and operating income decreased due to the restructured ROVA contract and planned outage timing. Operating income was also negatively impacted by $5.9 million of derivative losses on ROVA's purchased power contracts.
Heritage Segment Operating Results
The following table shows comparative heritage segment’s operating expenses and percentage change between periods:
|
| | | | | | | | | | | | | | |
| Three Months Ended June 30, |
| | | | | Increase / (Decrease) |
| 2014 | | 2013 | | $ | | % |
| (In thousands) |
Heritage segment operating expenses | $ | 3,559 |
| | $ | 3,530 |
| | $ | 29 |
| | 0.8 | % |
Our second quarter 2014 heritage segment operating expenses were comparable with the second quarter of 2013.
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONT.)
Corporate Segment Operating Results
The following table shows comparative corporate segment’s operating expenses and percentage change between periods:
|
| | | | | | | | | | | | | | |
| Three Months Ended June 30, |
| | | | | Increase / (Decrease) |
| 2014 | | 2013 | | $ | | % |
| (In thousands) |
Corporate segment operating expenses | $ | 3,476 |
| | $ | 1,904 |
| | $ | 1,572 |
| | 82.6 | % |
Our second quarter 2014 corporate segment operating expenses increased due to higher compensation expenses.
Nonoperating Results (including interest expense, interest income, other income, income tax expense, and net income attributable to noncontrolling interest)
Our interest expense for the three months ended June 30, 2014 increased by $6.7 million compared to the three months ended June 30, 2013 primarily due to higher debt levels, excluding $5.0 million of expenses discussed in Items that Affect Comparability of Our Results.
Our interest income, other income and income tax expense for the three months ended June 30, 2014 increased due to the Canadian Acquisition when compared to the three months ended June 30, 2013.
Our net income attributable to noncontrolling interest for the three months ended June 30, 2014 was nil compared with $2.5 million for the three months ended June 30, 2013 related to the elimination of the noncontrolling interest effective January 1, 2014.
Six Months Ended June 30, 2014 Compared to Six Months Ended June 30, 2013
Summary
The following table shows the comparative consolidated results and changes between periods:
|
| | | | | | | | | | | | | | |
| Six Months Ended June 30, |
| | | | | Increase / (Decrease) |
| 2014 | | 2013 | | $ | | % |
| (In millions) |
Revenues | $ | 468.2 |
| | $ | 323.9 |
| | $ | 144.3 |
| | 44.6 | % |
Net loss applicable to common shareholders | (82.7 | ) | | (3.3 | ) | | (79.4 | ) | | 2,406.1 | % |
Adjusted EBITDA(1) | 68.7 |
| | 57.7 |
| | 11.0 |
| | 19.1 | % |
____________________
| |
(1) | Adjusted EBITDA , a non-GAAP measure, is defined and reconciled to net loss at the end of this “Results of Operations” section. |
Our revenues for the six months ended June 30, 2014 increased primarily due to the Canadian Acquisition, new customer sales, and fewer customer outages.
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONT.)
Our net loss applicable to common shareholders for the six months ended June 30, 2014 increased by $12.2 million, excluding $67.2 million of expense during 2014 discussed in Items that Affect Comparability of Our Results. The primary factors, in aggregate, driving this increase in net loss were:
|
| | | |
| June 30, 2014 |
| (In millions) |
Decrease in our power segment operating income due to the restructured ROVA contract | $ | (5.1 | ) |
Decrease in our coal - U.S. segment primarily due to weather impacts, as well as rail service issues at our Absaloka Mine | (5.1 | ) |
Increase in interest expense due to increased debt levels | (4.6 | ) |
Decrease due to other factors | (0.4 | ) |
Increase in our Coal - Canada segment due to the Canadian Acquisition | 3.0 |
|
Total | $ | (12.2 | ) |
Coal - U.S. Segment Operating Results
The following table shows comparative coal revenues, operating income, adjusted EBITDA, sales volume, and percentage changes between periods:
|
| | | | | | | | | | | | | | |
| Six Months Ended June 30, |
| | | | | Increase / (Decrease) |
| 2014 | | 2013 | | $ | | % |
| (In thousands, except per ton data) |
Revenues | $ | 308,298 |
| | $ | 281,449 |
| | $ | 26,849 |
| | 9.5 | % |
Operating income | 12,275 |
| | 25,566 |
| | (13,291 | ) | | (52.0 | )% |
Adjusted EBITDA(1) | 54,332 |
| | 58,936 |
| | (4,604 | ) | | (7.8 | )% |
Tons sold—millions of equivalent tons | 13.2 |
| | 11.8 |
| | 1.4 |
| | 11.9 | % |
____________________
| |
(1) | Adjusted EBITDA, a non-GAAP measure, is defined and reconciled to net loss at the end of this “Results of Operations” section. |
Our coal segment revenues and tons sold for the six months ended June 30, 2014 increased primarily due to new customer sales at our Absaloka Mine and fewer customer outages affecting our Absaloka and Beulah Mines. Operating income was negatively impacted by weather impacts, rail service issues at our Absaloka Mine, acquisition costs, and increased maintenance expenses.
Coal - Canada Segment Operating Results
The following table shows comparative coal revenues, operating loss, adjusted EBITDA, and sales volume between periods:
|
| | | | | | | |
| Six Months Ended June 30, |
| | | |
| 2014 | | 2013 |
| (In thousands, except per ton data) |
Revenues | $ | 116,046 |
| | $ | — |
|
Operating income | (12,709 | ) | | — |
|
Adjusted EBITDA(1) | 21,988 |
| | — |
|
Tons sold—millions of equivalent tons | 4.1 |
| | — |
|
____________________
| |
(1) | Adjusted EBITDA, a non-GAAP measure, is defined and reconciled to net loss at the end of this “Results of Operations” section. |
The above table represents results from the Canadian Acquisition date of April 28, 2014 to June 30, 2014. Operating income was negatively impacted by $13.6 million of cost of sales related to the sale of inventory written up to fair value in the acquisition and $6.6 million of restructuring charges.
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONT.)
Power Segment Operating Results
The following table shows comparative power revenues, operating income, adjusted EBITDA, and percentage changes between periods:
|
| | | | | | | | | | | | | | |
| Six Months Ended June 30, |
| | | | | Increase / (Decrease) |
| 2014 | | 2013 | | $ | | % |
| (In thousands) |
Revenues | $ | 43,815 |
| | $ | 42,498 |
| | $ | 1,317 |
| | 3.1 | % |
Operating income (loss) | (7,731 | ) | | 3,836 |
| | (11,567 | ) | | (301.5 | )% |
Adjusted EBITDA(1) | 4,043 |
| | 9,281 |
| | (5,238 | ) | | (56.4 | )% |
____________________
| |
(1) | Adjusted EBITDA, a non-GAAP measure, is defined and reconciled to net loss at the end of this “Results of Operations” section. |
Our power segment operating income decreased to a loss for the six months ended June 30, 2014 due to the restructured ROVA contract. Operating income was also negatively impacted by $5.9 million of derivative losses on ROVA's purchased power contracts.
Heritage Segment Operating Results
The following table shows comparative heritage segment’s operating expenses and percentage change between periods:
|
| | | | | | | | | | | | | | |
| Six Months Ended June 30, |
| | | | | Increase / (Decrease) |
| 2014 | | 2013 | | $ | | % |
| (In thousands) |
Heritage segment operating expenses | $ | 7,389 |
| | $ | 7,705 |
| | $ | (316 | ) | | (4.1 | )% |
Our heritage segment operating expenses for the six months ended June 30, 2014 were comparable with the six months ended June 30, 2013.
Corporate Segment Operating Results
The following table shows comparative corporate segment’s operating expenses and percentage change between periods:
|
| | | | | | | | | | | | | | |
| Six Months Ended June 30, |
| | | | | Increase / (Decrease) |
| 2014 | | 2013 | | $ | | % |
| (In thousands) |
Corporate segment operating expenses | $ | 6,034 |
| | $ | 3,987 |
| | $ | 2,047 |
| | 51.3 | % |
Our corporate segment operating expenses for the six months ended June 30, 2014 increased due to higher compensation expenses.
Nonoperating Results (including interest expense, interest income, other income, income tax expense, and net income attributable to noncontrolling interest)
Our interest expense for the six months ended June 30, 2014 increased by $6.3 million compared to the six months ended June 30, 2013 primarily due to higher debt levels, excluding $16.1 million of expenses discussed in Items that Affect Comparability of Our Results.
Our interest income, other income and income tax expense for the six months ended June 30, 2014 increased due to the Canadian Acquisition when compared to the six months ended June 30, 2013.
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONT.)
Our net income attributable to noncontrolling interest for the six months ended June 30, 2014 was nil compared with $0.8 million for the six months ended June 30, 2013 related to the elimination of the noncontrolling interest effective January 1, 2014.
Reconciliation of Adjusted EBITDA to Net Income (Loss)
The discussion in “Results of Operations” includes references to our Adjusted EBITDA results. EBITDA is defined as earnings before interest expense, interest income, income taxes, depreciation, depletion, amortization and accretion expense. EBITDA and Adjusted EBITDA are supplemental measures of financial performance that are not required by, or presented in accordance with, GAAP. EBITDA and Adjusted EBITDA are key metrics used by us to assess our operating performance and we believe that EBITDA and Adjusted EBITDA are useful to an investor in evaluating our operating performance because these measures:
| |
• | are used widely by investors to measure a company’s operating performance without regard to items excluded from the calculation of such terms, which can vary substantially from company to company depending upon accounting methods and book value of assets, capital structure and the method by which assets were acquired, among other factors; and |
| |
• | help investors to more meaningfully evaluate and compare the results of our operations from period to period by removing the effect of our capital structure and asset base from our operating results. |
Neither EBITDA nor Adjusted EBITDA is a measure calculated in accordance with GAAP. The items excluded from EBITDA and Adjusted EBITDA are significant in assessing our operating results. EBITDA and Adjusted EBITDA have limitations as analytical tools, and should not be considered in isolation from, or as a substitute for, analysis of our results as reported under GAAP. For example, EBITDA and Adjusted EBITDA:
| |
• | do not reflect our cash expenditures, or future requirements for capital and major maintenance expenditures or contractual commitments; |
| |
• | do not reflect income tax expenses or the cash requirements necessary to pay income taxes; |
| |
• | do not reflect changes in, or cash requirements for, our working capital needs; and |
| |
• | do not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on certain of our debt obligations. |
In addition, although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements. Other companies in our industry and in other industries may calculate EBITDA and Adjusted EBITDA differently from the way that we do, limiting their usefulness as comparative measures. Because of these limitations, EBITDA and Adjusted EBITDA should not be considered as measures of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our GAAP results and using EBITDA and Adjusted EBITDA only as supplemental data.
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONT.)
The tables below show how we calculated Adjusted EBITDA, including a breakdown by segment, and reconciles Adjusted EBITDA to net income (loss), the most directly comparable GAAP financial measure.
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2014 | | 2013 | | 2014 | | 2013 |
| (In thousands) |
Reconciliation of Adjusted EBITDA to Net income (loss) | | | | | | | |
Net income (loss) | $ | (63,154 | ) | | $ | 2,217 |
| | $ | (82,185 | ) | | $ | (1,870 | ) |
| | | | | | | |
Income tax expense | 3,807 |
| | 28 |
| | 3,697 |
| | 55 |
|
Interest income | (1,582 | ) | | (280 | ) | | (1,884 | ) | | (577 | ) |
Interest expense | 21,786 |
| | 10,076 |
| | 42,584 |
| | 20,236 |
|
Depreciation, depletion and amortization | 24,479 |
| | 15,397 |
| | 40,538 |
| | 29,823 |
|
Accretion of ARO and receivable | 5,809 |
| | 3,156 |
| | 9,288 |
| | 6,338 |
|
Amortization of intangible assets and liabilities | 157 |
| | 165 |
| | 310 |
| | 326 |
|
EBITDA | (8,698 | ) | | 30,759 |
| | 12,348 |
| | 54,331 |
|
| | | | | | | |
Restructuring charges | 7,543 |
| | — |
| | 7,941 |
| | — |
|
(Gain) loss on foreign exchange | (2,649 | ) | | — |
| | 4,141 |
| | — |
|
Loss on extinguishment of debt | 12,635 |
| | 64 |
| | 12,635 |
| | 64 |
|
Acquisition related costs (1) | 20,175 |
| | — |
| | 20,463 |
| | — |
|
Customer payments received under loan and lease receivables | 3,285 |
| | — |
| | 3,285 |
| | — |
|
Derivative loss | 5,930 |
| | — |
| | 5,930 |
| | — |
|
Gain on sale of assets and other adjustments | (385 | ) | | (204 | ) | | (440 | ) | | (506 | ) |
Share-based compensation | 1,718 |
| | 1,385 |
| | 2,445 |
| | 3,771 |
|
Adjusted EBITDA | $ | 39,554 |
| | $ | 32,004 |
| | $ | 68,748 |
| | $ | 57,660 |
|
____________________
| |
(1) | Includes acquisition and transition costs included in Selling and administrative on the Consolidated Statements of Operations and the impact of cost of sales related to the sale of inventory written up to fair value in the Canadian Acquisition. |
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2014 | | 2013 | | 2014 | | 2013 |
| (In thousands) |
Adjusted EBITDA by Segment | | | | | | | |
Coal - U.S. | $ | 24,039 |
| | $ | 29,369 |
| | $ | 54,332 |
| | $ | 58,936 |
|
Coal - Canada | 21,988 |
| | — |
| | 21,988 |
| | — |
|
Power | (789 | ) | | 7,572 |
| | 4,043 |
| | 9,281 |
|
Heritage | (3,559 | ) | | (3,530 | ) | | (7,389 | ) | | (7,705 | ) |
Corporate | (2,125 | ) | | (1,409 | ) | | (4,226 | ) | | (2,852 | ) |
Total | $ | 39,554 |
| | $ | 32,002 |
| | $ | 68,748 |
| | $ | 57,660 |
|
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONT.)
Liquidity and Capital Resources
We had the following liquidity at June 30, 2014 and December 31, 2013:
|
| | | | | | | |
| June 30, | | December 31, |
| 2014 | | 2013 |
| (In millions) |
Cash and cash equivalents | $ | 40.6 |
| | $ | 61.1 |
|
WML revolving line of credit | — |
| | 23.1 |
|
Corporate revolving line of credit | 35.0 |
| | 20.0 |
|
Total | $ | 75.6 |
| | $ | 104.2 |
|
We anticipate that our cash from operations, cash on hand and available borrowing capacity will be sufficient to meet our investing, financing, and working capital requirements for the foreseeable future.
We are a holding company and conduct our operations through subsidiaries. Our parent holding company has significant cash requirements to fund our debt obligations, ongoing heritage health benefit costs, pension contributions, and corporate overhead expenses. The principal sources of cash flow to the parent company are distributions from our principal operating subsidiaries. The cash at substantially all of our subsidiaries has no restrictions and is immediately available. The cash at our captive insurance entity is available to us through dividends and is subject to maintaining a statutory minimum level of capital, which is two hundred and fifty thousand dollars.
Under the indenture governing the 10.75% Senior Notes, we are required to offer a portion of our Excess Cash Flow (as defined by the indenture) for each fiscal year to purchase some of these notes at 100% of the principal amount. In addition to any Excess Cash Flow redemption required under the indenture, the Company may continue to use available cash to repurchase these notes on the open market, as permitted by the indenture.
In June, 2014 we started to contribute Company stock to our 401(k) plan instead of cash. Annual requirements for this funding approximates three million dollars.
Debt Obligations
10.75% Senior Notes
The 10.75% Senior Notes (including the Add-On Notes) were outstanding in the principal amount of $675.5 million at June 30, 2014. Interest is due at an annual fixed rate of 10.75% and paid in cash semi-annually, in arrears, on February 1 and August 1 of each year. The 10.75% Senior Notes mature February 1, 2018 and contain provisions that affect our sources of liquidity, such as limitations on our ability to enter into new capital leases and other forms of credit. The notes are fully and unconditionally guaranteed by substantially all of our subsidiaries.
Add-On Notes - 10.75% Senior Notes
On February 7, 2014, we closed on a private offering of $425.0 million in aggregate principal amount of 10.75% senior secured notes due 2018 at a price of 106.875% plus accrued interest from February 1, 2014, referred to as the New Notes. Total proceeds of the offering were $454.2 million, which included $29.2 million of debt premium. The net proceeds of the offering of the New Notes were used to finance the $282.8 million initial cash payment for the Canadian Acquisition and cash transaction costs associated with the Canadian Acquisition and offering of the New Notes of approximately $24.0 million. The remaining balance of the proceeds were used to fund the prepayment of the WML Notes and for other general corporate purposes. In connection with the prepayment, we also terminated the WML revolving credit facility.
Promptly following the completion of the Canadian Acquisition, we exchanged the New Notes for $425.0 million aggregate principal amount of add-on 10.75% senior secured notes due 2018, referred to as the Add-On Notes, and we became party to a registration rights agreement, pursuant to which we agreed to register with the Securities and Exchange Commission the exchange of Add-On Notes for registered notes with the same terms as the existing 10.75% Senior Notes due 2018. We will pay interest on the Add-On Notes semi-annually on February 1st and August 1st of each year beginning on August 1, 2014.
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONT.)
2012 Revolving Credit Agreement
Our 2012 Revolving Credit Agreement has a borrowing limit of $60.0 million and an expiration date of June 30, 2017. The revolver may support up to $60.0 million of letters of credit, which would reduce the balance available under the revolver. At June 30, 2014, availability on the revolver was $35.0 million with no outstanding balance and $25.0 million of supported letters of credit.
Two interest rate options exist under the revolver. The Base Rate option bears interest at the greater of a Federal Funds Rate plus 0.5% or the Prime Rate, as defined in the loan agreement and is payable monthly. The LIBOR Rate option bears interest at the London Interbank Offering Rate, or LIBOR, rate plus 2.25% and is payable monthly. In addition, a commitment fee of 0.75% of the average unused portion of the available revolver is payable monthly.
The loan agreement contains various affirmative, negative and financial covenants. Financial covenants in the agreement include a fixed charge coverage ratio. The fixed charge coverage ratio must meet or exceed a specified minimum. We met these covenant requirements as of June 30, 2014. All extensions of credit under the revolver are collateralized by a first priority security interest in and lien upon the inventory and accounts receivable of the Parent and substantially all of its subsidiaries.
Capital Leases
During the six months ended June 30, 2014, we entered into $12.9 million of new capital leases at our Kemmerer Mine. In addition, we assumed $122.6 million of capital lease obligations in the Canadian Acquisition.
Asset Retirement Obligations
We assumed $102.1 million of asset retirement obligations in the Canadian Acquisition.
Heritage Health Costs and Pension Contributions
Our liquidity continues to be affected by payments of our heritage health and pension obligations as follows:
|
| | | | | | | | | | | |
| Six Months Ended June 30, | | 2014 Remaining Expected Amounts |
| 2014 | | 2013 | |
| (In millions) |
Postretirement medical benefits | $ | 5.6 |
| | $ | 6.0 |
| | $ | 8.2 |
|
Combined Benefit Fund premiums | 1.0 |
| | 1.2 |
| | 1.0 |
|
Workers’ compensation benefits | 0.2 |
| | 0.4 |
| | 0.4 |
|
Total heritage health payments | $ | 6.8 |
| | $ | 7.6 |
| | $ | 9.6 |
|
| | | | | |
Pension contributions | $ | 1.1 |
| | $ | — |
| | $ | 3.2 |
|
Historical Sources and Uses of Cash
The following is a summary of cash provided by or used in each of the indicated types of activities:
|
| | | | | | | |
| Six Months Ended June 30, |
| 2014 | | 2013 |
| (In thousands) |
Cash provided by (used in): | | | |
Operating activities | $ | 10,573 |
| | $ | 34,924 |
|
Investing activities | (360,991 | ) | | (15,105 | ) |
Financing activities | 330,956 |
| | (15,155 | ) |
Cash provided by operating activities decreased $24.4 million for the six months ended June 30, 2014 compared to the six months ended June 30, 2013 primarily due to increased interest from higher debt levels, Canadian Acquisition costs, unfavorable impacts of weather, and the restructured ROVA contract.
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONT.)
Cash used in investing activities increased $345.9 million for the six months ended June 30, 2014 compared to the six months ended June 30, 2013 primarily due to the $322.6 million cash consideration for the Canadian Acquisition, which includes $39.8 million for a working capital adjustment. Capital expenditures were $17.4 million and $13.5 million for the six months ended June 30, 2014 and 2013, respectively.
Cash provided by financing activities increased $346.1 million for the six months ended June 30, 2014 compared to the six months ended June 30, 2013 primarily due to the Canadian Acquisition debt. Debt repayments were $97.5 million and $16.1 million for the six months ended June 30, 2014 and 2013, respectively.
We had a working capital surplus of $50.8 million at June 30, 2014 compared with a working capital deficit of $8.0 million at December 31, 2013 primarily due to the increase in inventories related to the Canadian Acquisition.
Equity Offering
Subsequent to June 30, 2014, we completed a public offering on July 16, 2014, of 1,684,507 shares of common stock at $35.50 per share for gross proceeds of $59.8 million. We intend to use the net proceeds from the offering to increase our overall financial flexibility, pursue organic and acquisition growth strategies and for general corporate purposes.
Critical Accounting Policies and Estimates
Please refer to the corresponding section in Part II, Item 7 of our 2013 Form 10-K and the footnote disclosures included in Part I, Item I of this report for a discussion of our accounting policies and estimates.
Recent Accounting Pronouncements
See Note 1 of Notes to Consolidated Financial Statements included in “Part I — Item 1 — Financial Statements.”
Off-Balance Sheet Arrangements
In the normal course of business, we are a party to certain off-balance sheet arrangements. These arrangements include financial instruments with off-balance sheet risk such as bank letters of credit and performance or surety bonds. We utilize surety bonds and letters of credit issued by financial institutions to third parties to assure the performance of our obligations relating to reclamation, workers’ compensation obligations, postretirement medical benefit obligations, and other obligations. These arrangements are not reflected in our consolidated balance sheets, and we do not expect any material adverse effects on our financial condition, results of operations or cash flows to result from these off-balance sheet arrangements.
During the six months ended June 30, 2014 we added approximately CAD $143.8 million of surety bonds related to the reclamation obligations for our mines in Canada. We also added approximately $12 million of letters of credit to secure our additional financial obligations related to our Canadian operations.
Our off-balance sheet arrangements are discussed in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2013 Form 10-K.
| |
ITEM 3 | — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
Other than the changes below, there have been no material changes in our market risk during the six months ended June 30, 2014. For additional information, refer to the “Quantitative and Qualitative Disclosures about Market Risk” in Item 7A of our 2013 Form 10-K.
Commodity Risks
We are exposed to commodity price risk on sales of power at our ROVA facility. We have entered into derivative contracts to purchase power in the future at fixed prices. Such derivative contracts are structured to manage our exposure to changing power prices and not for trading.
Foreign Currency Exchange Rates
We are exposed to the effects of changes in exchange rates primarily from the Canadian dollar at our Canadian operations. To address the risks arising from adverse changes in foreign currency exchange rates from our planned cash flows in the Canadian Acquisition we entered into various derivative contracts. All decisions on derivative contracts are authorized and executed pursuant to our policies and procedures, which do not allow the use of financial instruments for trading purposes. There were no foreign currency derivative contracts outstanding as of June 30, 2014.
A description of our accounting policies for derivative financial instruments is included in Notes 1 and 10 to the consolidated financial statements.
| |
ITEM 4 | — CONTROLS AND PROCEDURES. |
As required by Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, management has evaluated, with the participation of our chief executive officer and chief financial officer, the effectiveness of our disclosure controls and procedures as of June 30, 2014. Disclosure controls and procedures are designed to provide reasonable assurance that material information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the Securities and Exchange Commission.
Disclosure controls and procedures also include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in our reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding our required disclosure. Based on that evaluation, our management, including our chief executive officer and chief financial officer, concluded that the disclosure controls and procedures were effective as of such date.
On April 28, 2014, we closed on the Canadian Acquisition. As a result of the acquisition, we are in the process of reviewing the internal controls of the Canadian operations and, if necessary, will make appropriate changes as we incorporate our controls and procedures into the acquired operations. Except for the acquisition, there have been no changes in internal control over financial reporting that occurred during the six months ended June 30, 2014, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II
OTHER INFORMATION
| |
ITEM 1 | — LEGAL PROCEEDINGS. |
We are subject, from time-to-time, to various proceedings, lawsuits, disputes, and claims (“Actions”) arising in the ordinary course of our business. Many of these Actions raise complex factual and legal issues and are subject to uncertainties. We cannot predict with assurance the outcome of Actions brought against us. Accordingly, adverse developments, settlements, or resolutions may occur and may result in a negative impact on income in the quarter of such development, settlement, or resolution. However, we do not believe that the outcome of any current Action would have a material adverse effect on our financial results.
We have disclosed under the heading “Risk Factors” in our 2013 Form 10-K, the risk factors that we believe materially affect our business, financial condition or results of operations. Except as provided below, there have been no material changes from the risk factors previously disclosed. You should carefully consider the risk factors set forth in the 2013 Form 10-K and the other information set forth elsewhere in this Quarterly Report on Form 10-Q. You should be aware that these risk factors and other information may not describe every risk facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and or operating results.
We may not realize the anticipated benefits of the Canadian Acquisition, including potential synergies, due to challenges associated with integrating the Canadian subsidiaries or other factors.
The long-term success of the Canadian Acquisition on our company will depend in part on the success of our management in efficiently integrating the operations, technologies and personnel of the Canadian subsidiaries. Our management’s inability to meet the challenges involved in successfully integrating the Canadian subsidiaries or to otherwise realize the anticipated benefits of the transaction could harm our results of operations.
The challenges involved in the integration of the Canadian subsidiaries include:
| |
• | integrating the operations, processes, people and technologies relating to the Canadian subsidiaries; |
| |
• | coordinating and integrating regulatory, benefits, operations and development functions; |
| |
• | demonstrating to customers that the Canadian Acquisition will not result in adverse changes in coal quality, delivery schedules and other relevant deliverables; |
| |
• | managing and overcoming the unique characteristics of the Canadian subsidiaries, such as the specific mining conditions at each of the acquired mines; |
| |
• | retaining the personnel of the Canadian subsidiaries and integrating the business cultures, operations, systems and clients of the Canadian subsidiaries with our own; |
| |
• | consolidating corporate and administrative infrastructures and eliminating duplicative operations and administrative functions; and |
| |
• | identifying the potential unknown liabilities associated with the Canadian subsidiaries and other Canadian assets. |
In addition, the overall integration of the Canadian subsidiaries will require substantial attention from our management, particularly in light of the geographically dispersed operations of the acquired mines relative to our other mines and operations and the unique characteristics of the Canadian assets. If our senior management team is required to devote considerable amounts of time to the integration process, it will decrease the time they will have to manage our business, develop new strategies and grow our business. If our senior management is not able to manage the integration process effectively, or if any significant business activities are interrupted as a result of the integration process, our business could suffer.
Furthermore, the anticipated benefits and synergies of the Canadian Acquisition are based on assumptions and current expectations, with limited actual experience, and assume that we will successfully integrate and reallocate resources without unanticipated costs and that our efforts will not have unforeseen or unintended consequences. In addition, our ability to realize the benefits and synergies of the Canadian Acquisition could be adversely impacted to the extent that relationships with existing or potential customers, suppliers or the workforce of the Canadian subsidiaries is adversely affected as a consequence of the Canadian Acquisition, as a result of further weakening of global economic conditions, or by practical or legal constraints on our ability to successfully integrate the operations of the Canadian assets.
We cannot assure you that we will successfully or cost-effectively integrate the Canadian assets into our operations in a timely manner, or at all, and we may not realize the anticipated benefits of the acquisition, including potential synergies or growth opportunities, to the extent or in the time frame anticipated. The failure to do so could have a material adverse effect on our financial condition, results of operations and business.
Risks associated with being highly leveraged.
At June 30, 2014, we had outstanding indebtedness of approximately $833.0 million, which includes the $425.0 million aggregate principal amount of 10.75% Senior Secured Notes due 2018 and the capital leases we assumed in the Canadian Acquisition. We may also incur additional indebtedness in the future, including additional indebtedness under our revolving credit facility. Our leverage position may, among other things:
| |
• | limit our ability to obtain additional debt financing in the future for working capital, capital expenditures, acquisitions, or other general corporate purposes; |
| |
• | require us to dedicate a substantial portion of our cash flow from operations to service our debt, reducing the availability of cash flow for other purposes; |
| |
• | increase our vulnerability to economic downturns, limit our ability to capitalize on significant business opportunities, and restrict our flexibility to react to changes in market or industry conditions; or |
| |
• | make it more difficult to pay our debts, including payment on the notes, which will mature in 2018. |
On January 23, 2014, Moody’s Investor Service, or Moody’s, concluded its review of our ratings which was initiated on December 26, 2013, following the announcement of the Canadian Acquisition, and confirmed our existing credit ratings. However, we cannot assure you that rating agencies will not downgrade the credit rating on the notes in the future. Any such downgrade, or any perceived decrease in our creditworthiness, could impede our ability to refinance existing debt or secure new debt or otherwise increase our future cost of borrowing and could create additional concerns on the part of our customers, partners, investors and employees about our financial condition and results of operations.
As a mine mouth operator, we provide coal to a small group of customers. This dependence could adversely affect our revenues if such customers reduce or suspend their coal purchases or if they become unable to pay for our coal.
In 2013, we derived approximately 67% of our total revenues from coal sales to five power plants: Colstrip Units 3&4 (17%), Naughton Power Station (17%), Limestone Generating Station (13%), Colstrip Units 1 & 2 (13%) and Coyote Station (7%). Similarly, for full-year 2013, the Canadian subsidiaries sold approximately 25% of their total aggregate coal production to two customers, SaskPower (13%) and Capital Power (12%). Interruption in the purchases of coal by our principal customers could significantly affect our revenues.
Unscheduled maintenance outages or other outages at our customers’ power plants, unseasonably moderate weather, higher-than-anticipated hydro seasons or increases in the production of alternative clean-energy generation such as wind power, or decreases in the price of competing fossil fuels such as natural gas, could cause our customers to reduce their purchases. 11 of our 12 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.
Additionally, certain of our long-term contracts are set to expire in the next several years. Our contracts with the Sherburne County Station are three-year rolling contracts, with one-third of the tonnage expiring on an annual basis. Our contract with Coyote Station, located adjacent to our Beulah Mine, and averaging approximately 2.5 million tons of coal sold per year, expires in May 2016 and is not expected to be renewed. Our contract with Colstrip Units 3 & 4 expires in December 2019. Should we be unable to successfully renew any or all of these expiring contracts, the reduction in the sale of our coal would adversely affect our operating results and liquidity and could result in significant impairments to the affected mine should the mine be unable to execute a new long-term coal supply agreement. The long term agreements we acquired or subsequently negotiated in connection with the Canadian Acquisition have long-remaining terms with the exception of the contract applicable to Poplar River Mine, which is set to expire in 2015. Coal supply agreements also typically contain force majeure provisions allowing temporary suspension of performance by us or the customer during the duration of specified events beyond the control of the affected party. Additionally, many of our coal supply agreements contain provisions allowing customers to suspend acceptance of coal shipments if coal delivered does not meet certain quality thresholds.
Similarly, interruption in the purchase of power by Dominion North Carolina Power, or Dominion, could also negatively affect our revenues. During the year ended December 31, 2013, the sale of power by our Roanoke Valley Energy Facility, or ROVA, to Dominion accounted for approximately 13% of our consolidated revenues. Although ROVA supplies power to Dominion under long-term power purchase agreements, if Dominion is unable or unwilling to pay for the power produced by ROVA in a timely manner, it could have a material adverse effect on our results of operations, financial condition, and liquidity.
If the assumptions underlying our reclamation and mine closure obligations are materially inaccurate, we could be required to expend greater amounts than anticipated.
We are subject to stringent reclamation and closure standards for our mining operations. We calculated the total estimated reclamation and mine-closing liabilities according to the guidance provided by GAAP and current industry practice. Estimates of our total reclamation and mine-closing liabilities are based upon permit requirements and our engineering expertise related to these requirements. If our estimates are incorrect, we could be required in future periods to spend materially different amounts on reclamation and mine-closing activities than we currently estimate. Likewise, if our customers, some of whom are contractually obligated to pay certain reclamation costs, 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.
We estimate that our gross reclamation and mine-closing liabilities, which are based upon projected mine lives, current mine plans, permit requirements and our experience, were $389.4 million (on a present value basis) at June 30, 2014. Of these June 30, 2014 liabilities, our customers have assumed $101.9 million by contract. In addition, we held final reclamation deposits, received from customers, of approximately $75.9 million at June 30, 2014 to provide for these obligations. We estimate that our obligation for final reclamation that was not the contractual responsibility of others or covered by offsetting reclamation deposits was $211.6 million at June 30, 2014. We must recover this $211.6 million from revenues generated by coal sales.
Although we update our estimated costs annually, our recorded obligations may prove to be inadequate due to changes in legislation or standards and the emergence of new restoration techniques. Furthermore, the expected timing of expenditures could change significantly due to changes in commodity costs or prices that might curtail the life of an operation. These recorded obligations could prove insufficient compared to the actual cost of reclamation. Any underestimated or unidentified close down, restoration or environmental rehabilitation costs could have an adverse effect on our reputation as well as our asset values, results of operations and liquidity.
If the cost of obtaining new reclamation bonds and renewing existing reclamation bonds increases or if we are unable to obtain additional bonding capacity, our operating results could be negatively affected.
We are required to 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. Bonding companies are requiring that applicants collateralize increasing portions of their obligations to the bonding company. In 2013, we paid approximately $6.4 million in premiums for reclamation bonds. We anticipate that, as we permit additional areas for our mines, our bonding and collateral requirements could increase. Any cash that we provide to collateralize our obligations to our bonding companies is not available to support our other business activities. Our results of operations could be negatively affected if the cost of our reclamation bonding premiums and collateral requirements were to increase. Additionally, if we are unable to obtain additional bonding capacity due to cash flow constraints, we will be unable to begin mining operations in newly permitted areas, which would hamper our ability to efficiently meet our current customer contract deliveries, expand operations, and increase revenues. We used approximately $48.1 million to collateralize new bonds in connection with the Canadian Acquisition.
Our coal mining operations are subject to external conditions that could disrupt operations and negatively affect our results of operations.
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. These conditions or events include: unplanned equipment failures; geological, hydrological or other conditions such as variations in the quality 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; weather conditions; and competition and/or conflicts with other natural gas resource extraction activities and production within our operating areas. For example, in our recent past, we have endured poor rail performance at the Absaloka Mine, a major blizzard at the Beulah Mine, a trestle fire at the Beulah Mine, and an unanticipated replacement of boom suspension cables on one of our draglines, all of which interrupted deliveries. Major disruptions in operations at any of our mines over a lengthy period could adversely affect the profitability of our mines.
In addition, unplanned outages of draglines and extensions of scheduled outages due to mechanical failures or other problems occur from time-to-time and are an inherent risk of our coal mining business. Unplanned outages typically increase our operation and maintenance expenses and may reduce our revenues because of selling fewer tons of coal. As of June 30, 2014, five of our 30 owned or operated draglines were not in use due to either equipment servicing or because the dragline was scheduled to be down based on the operational needs of our mines. If properly maintained, a dragline can operate for 40 years
or longer. As of December 31, 2013, the average age of Westmoreland’s dragline fleet (including the Canadian subsidiaries) was 33 years. In addition, at our Kemmerer Mine we use shovels instead of draglines. If properly maintained, a shovel can last for 30 years or longer. As of December 31, 2013, the average age of our shovels was 16 years. As our draglines, shovels and other major equipment ages, we may experience unscheduled maintenance outages or increased maintenance costs, which would adversely affect our operating results.
Unplanned outages and extensions of scheduled outages due to mechanical failures or other problems occur from time-to-time at our power plant customers and are an inherent risk of our business. Unplanned outages typically increase our operation and maintenance expenses and may reduce our revenues because of selling fewer tons of coal. For example, in November 2011, the Sherburne County station experienced an explosion and fire that caused an extended outage. As a result, we lost approximately 50% of our coal sales in 2012 and 2013 at our Absaloka Mine. While Sherburne County station initially indicated a start-up date of March 2013, it did not ultimately resume operations until October 2013, resulting in additional lost coal sales during 2013. We maintain business interruption insurance coverage to lessen the impact of events such as this, and have received a total of approximately $33.6 million of cash proceeds in insurance compensation for lost sales to the Sherburne County station. While we believe our insurance did not fully compensate us for the impact of lost sales, we believe the shortfall was not material. However, business interruption insurance may not always provide adequate compensation for lost coal sales, and significant unanticipated outages at our power plant customers which result in lost coal sales could result in significant adverse effects on our operating results.
Long-term sales and revenues could be significantly affected by environmental regulations and the effects of the environmental lobby.
A consortium of environmental activists is actively pushing to shut down one-third of the nation’s coal plants by 2020. They are taking particular interest in Colstrip Units 1 and 2 and are actively lobbying the U.S. Environmental Protection Agency, or EPA, to require cost-prohibitive pollution control equipment. In litigation filed in 2012, the activists stated that the EPA’s Best Available Retrofit Technology (“BART”) analysis for regional haze provides support for a determination that additional controls or upgrades to controls to improve regional haze are necessary to achieve BART. A decision in the case is pending. In 2013, environmental groups also filed a citizen suit complaint in Montana district court asserting that the owners and operators of Colstrip are in violation of Clean Air Act requirements. Trial in the case is set for late in 2014. If environmental groups are successful, Colstrip would be required to undergo new permitting and comply with more stringent emission limits applicable to a number of pollutants. If additional emissions controls and upgrades are required at Colstrip Units 1 and 2, it is possible the owners could elect to shut down the units in lieu of making the large capital expenditures required to comply. If such a decision were made, we could lose coal sales of approximately 3.0 million tons per year starting in approximately 2015. The loss of the sale of this tonnage at our Rosebud Mine could have a material adverse effect on the mine’s revenues and profitability.
Additionally, Rocky Mountain Power, the owner of the Naughton Power Station located adjacent to our Kemmerer Mine, which is our Kemmerer Mine’s primary customer, has sought regulatory approval to convert Unit 3 at Naughton to 100% natural gas fueling. When complete, the conversion of Unit 3 to natural gas will result in the loss of coal sales at our Kemmerer Mine. However, Rocky Mountain Power recently announced the conversion of Naughton Unit 3 will not occur until 2018. In addition, price protections built into the contract that are in effect from 2017 to 2021 will partially offset the effects of lowered volume following the conversion of Unit 3. Despite these price protections, the lost sales at the Kemmerer Mine could have a material adverse effect on the mine’s revenues and profitability and on our operating results.
In September 2013, the EPA reproposed new source performance standards for greenhouse gases (“GHG”) that would require new fossil-fuel fired power plants to install carbon capture and sequestration systems. The EPA stated that it intends to finalize the rule by January of 2015. The EPA also is developing GHG standards for existing and modified power plants, initial draft proposals of which the EPA released on June 2, 2014. The proposed rule sets the standard for existing sources as state-specific carbon emission rates that, if finalized, would be phased in between 2020 and 2030. The proposed rule would give states the discretion to use a variety of approaches-including cap-and-trade programs-to meet the standard. The EPA estimates that the proposed existing source rule would reduce CO2 emissions from the power sector by 30 percent by 2030, with a focus on emissions from coal-fired generation. The EPA plans to finalize the rule by June 2015, with state plans due by June 2016, with one- to two-year extensions available. It is difficult to predict at this time the effect these proposed rules would have on our revenues and profitability.
Following the Canadian Acquisition, we are also affected by Canadian GHG emissions regulations. On September 12, 2012, the federal government of Canada released final regulations for reducing GHG emissions from coal-fired electricity generation: “Reduction of Carbon Dioxide Emissions from Coal-Fired Generation of Electricity” (the “Canadian CO2 Regulations”). The Canadian CO2 Regulations will require certain Canadian coal-fired electricity generating plants, effective July 1, 2015, to achieve an average annual emissions intensity performance standard of 420 tons of CO2 per gigawatt hour. The impact of the Canadian CO2 Regulations on existing plants will vary by province and specific location. PMRL’s long-term
sales could be reduced unless certain existing plants that it supplies or new plants built to replace such existing plants are equipped with carbon capture and sequestration or other technology that achieves the prescribed performance standard, the impact of the Canadian CO2 Regulations is altered by equivalency agreements, or the Canadian CO2 Regulations are changed to lower the performance standard.
In addition, various Canadian provincial governments and other regional initiatives are moving ahead with GHG reduction and other initiatives designed to address climate change. As it is unclear at this time what shape additional regulation in Canada will ultimately take, it is not yet possible to reliably estimate the extent to which such regulations will impact the operations we acquired in the Canadian Acquisition. However, our Canadian operations involve large facilities, so the setting of emissions targets (whether in the manner described above or otherwise) may well affect some or all of our Canadian customers, and may in turn have a material adverse effect on our business, results of operations and financial performance. In addition to directly emitting GHGs, the operations we acquired in the Canadian Acquisition require large quantities of power. Future taxes on or regulation of power producers or an increase in cost of the fuels used in power production (including coal, oil and gas or other products) may also add to our operating costs.
Our Absaloka Mine benefited from Indian Coal Production Tax Credits, or ICTC, the permanent loss of which will adversely affect the financial condition of the operation.
The ICTC, which our Absaloka Mine historically benefited from, expired in December 2013 and has not been extended or renewed. There is no assurance that a renewal, if any is enacted, would be enacted with retroactive effect. The provisions regarding any future renewal may not be as favorable as those that previously existed. Additionally, the investment in Absaloka Coal LLC by our partner did not continue after December 31, 2013. We expect to seek a new partner in the event of a future renewal, but our results of operations will continue to be negatively affected during the interim period and for any period for which the ICTC is not renewed with retroactive effect. From 2009 through 2013, we experienced a yearly average of $3.1 million of income and $6.1 million of cash receipts from Absaloka Coal LLC’s participation in ICTC transactions.
Union represented labor creates an increased risk of work stoppages and higher labor costs.
Approximately 70% of our total U.S. workforce is represented by two labor unions, the International Union of Operating Engineers and the UMWA. Our unionized workforce is spread out amongst the majority of our surface mines. As a majority of our workforce is unionized, there may be an increased risk of strikes and other labor disputes, and our ability to alter labor costs is subject to collective bargaining. The collective bargaining agreement relating to the represented workforce at the Absaloka Mine expired in mid-2011. We were successful in negotiating a new agreement without any work stoppages or other disruptions. In 2012, we were successful in entering into agreements with our workforce at Savage, Kemmerer and Rosebud. If our Jewett Mine operations were to become unionized, we could be subject to additional risk of work stoppages, other labor disputes and higher labor costs, which could adversely affect the stability of production and our results of operations. While strikes are generally a force majeure event in long-term coal supply agreements, thereby exempting the mine from its delivery obligations, the loss of revenue for even a short time could have a material adverse effect on our financial results.
Congress has proposed legislation to enact a law allowing workers to choose union representation solely by signing election cards, which would eliminate the use of secret ballots to elect union representation. While the impact is uncertain, if the government enacts this proposal into law, which would make it administratively easier to unionize, it may lead to more coal mines becoming unionized.
Approximately 65% of our total Canadian workforce is represented by a labor union. There are labor agreements in place with one or more unions at each of the producing mines we acquired in the Canadian Acquisition, other than the Genesee Mine. Our collective bargaining agreement related to the Estevan Mine will expire on June 30, 2015. If we are not successful in negotiating new labor agreements as they expire with any of the Canadian workforce unions or otherwise maintaining strong partnerships with them, it could result in labor disputes, work stoppages or higher labor costs, any of which could have an adverse effect on our business and results of operations.
Following the Canadian Acquisition, we are subject to foreign exchange risk as a result of exposures to changes in currency exchange rates between the U.S. and Canada.
Following the Canadian Acquisition, we face increased exposure to exchange rate fluctuations between the Canadian dollar and U.S. dollar. We realize a large portion of our revenues from sales made from the Canadian assets in Canadian dollars, and many of the expenses incurred by the Canadian assets are recognized in Canadian dollars. The exchange rate of the Canadian dollar to the U.S. dollar has been at or near historic highs in recent years. In the event that the Canadian dollar weakens in comparison to the U.S. dollar, earnings generated from Canadian operations will translate into reduced earnings in our consolidated statements of operations reported in U.S. dollars. In addition, our Canadian subsidiaries also record certain
accounts receivable and accounts payable, which are denominated in Canadian dollars. Foreign currency transactional gains and losses are realized upon settlement of these assets and obligations.
Following the Canadian Acquisition, fluctuations in the U.S. dollar relative to the Canadian dollar may make it more difficult to perform period-to-period comparisons of our reported results of operations. For purposes of accounting, the assets and liabilities of our Canadian operations will be translated using period-end exchange rates, and the revenues and expenses of our Canadian operations will be translated using average exchange rates during each period. Translation gains and losses are reported in accumulated other comprehensive loss as a component of stockholders’ equity.
Changes in the export and import markets for coal products could affect the demand for our coal, our pricing and our profitability.
Although our mines and the majority of our customers are located in North America, we compete in a worldwide market for coal and coal products. The pricing and demand for our products is affected by a number of global economic factors that are beyond our control and difficult to predict. These factors include:
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• | currency exchange rates; |
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• | growth of economic development; |
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• | price of alternative sources of electricity or steel; |
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• | worldwide demand for coal and other sources of energy; and |
Any decrease in the aggregate amount of coal exported from the United States and Canada, or any increase in the aggregate amount of coal imported into the United States and Canada, could have a material adverse impact on the demand for our coal, our pricing and our profitability. Ongoing uncertainty in European economies and slowing economies in China, India and Brazil have reduced and may continue to reduce near-term pricing and demand for coal exported from the United States and Canada. The operations we acquired in the Canadian Acquisition include a mine in western Canada that primarily supplies premium thermal coal to the Asian export market. Ownership of this mine will increase our exposure to price fluctuations in the international coal market, and a substantial downturn in demand in the Asian market could have a material adverse effect on our financial condition and results of operations.
Extensive government regulations impose significant costs on our mining operations, and future regulations could increase those costs or limit our ability to produce and sell coal.
The coal mining industry is subject to increasingly strict regulation by federal, state and local authorities with respect to matters such as:
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• | limitations on land use; |
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• | employee health and safety; |
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• | mandated benefits for retired coal miners; |
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• | mine permitting and licensing requirements; |
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• | reclamation and restoration of mining properties after mining is completed; |
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• | construction and permitting of facilities required for mining operations, including valley fills and other structures constructed in water bodies and wetlands; |
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• | protection of human health, plant life and wildlife; |
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• | management of the materials generated by mining operations and discharge of these materials into the environment; |
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• | effects of mining on groundwater quality and availability; and |
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• | remediation of contaminated soil, surface and groundwater. |
We are required to prepare and present to governmental authorities data concerning the potential effects of any proposed exploration or production of coal on the environment and the public has statutory rights to submit objections to requested permits and approvals. The costs, liabilities and requirements associated with these and other regulations may be costly and time-consuming and may delay commencement or continuation of exploration or production operations. Failure to comply with these regulations may result in the assessment of administrative, civil and criminal penalties, the imposition of
cleanup and site restoration costs and liens, the issuance of injunctions to limit or cease operations, the suspension or revocation of permits and other enforcement measures that could have the effect of limiting production from our operations. We may also incur costs and liabilities resulting from claims for damages to property or injury to persons arising from our operations. We must compensate employees for work-related injuries. If we do not make adequate provision for our workers’ compensation liabilities, it could harm our future operating results. If we are pursued for any sanctions, costs and liabilities, our mining operations and, as a result, our results of operations, could be adversely affected.
New legislation or regulations and orders may be adopted that may materially adversely affect our mining operations, our cost structure or our customers’ ability to use coal. New legislation or administrative regulations (or new judicial interpretations or administrative enforcement of existing laws and regulations), including proposals related to the protection of the environment that would further regulate and tax the coal industry, may also require us or our customers to change operations significantly or incur increased costs. These regulations, if proposed and enacted in the future, could have a material adverse effect on our financial condition and results of operations.
Concerns regarding climate change are, in many of the jurisdictions in which we operate, leading to increasing interest in, and in some cases enactment of, laws and regulations governing greenhouse gas emissions, which affect the end-users of coal and could reduce the demand for coal as a fuel source and cause the volume of our sales or the prices we receive to decline. These laws and regulations also have imposed, and will continue to impose, costs directly on us.
GHG emissions have increasingly become the subject of international, national, state, provincial and local attention. Coal-fired power plants can generate large amounts of carbon and other GHG emissions. Accordingly, legislation or regulation intended to limit GHGs will likely indirectly affect our coal operations by limiting our customers’ demand for our products or reducing the prices we can obtain, and also may directly affect our own power operations. In the United States, the EPA has issued a notice of finding and determination that emissions of carbon dioxide, methane, nitrous oxide and other GHGs present an endangerment to human health and the environment, which allows the EPA to begin regulating emissions of GHGs under existing provisions of the federal Clean Air Act. The EPA implemented GHG-related reporting and permitting rules. Portions of the EPA’s GHG permitting rules, which were the subject of litigation by some industry groups and states, were recently struck down in part by the U.S. Supreme Court, but the EPA’s authority to impose GHG permitting requirements on a majority of large emissions sources, including coal-fired electric utilities, remain in place. President Obama in June 2013 announced a Climate Action Plan, which included a Presidential Memorandum directing the EPA to issue standards for GHG emissions from existing, modified and reconstructed fossil-fuel fired power plants. The EPA issued a revised proposal with standards for new fossil fuel-fired plants, including coal-fired plants, in September 2013, which the EPA plans to finalize by January 2015. The EPA also has released its “Clean Power Plan” in June 2014, which includes proposed standards for existing and modified sources. Under the Clean Power Plan as currently proposed, the EPA would set standards for existing sources as stringent state-specific carbon emission rates that, if finalized, would be phased in between 2020 and 2030. The proposed rule would give states the discretion to use a variety of approaches-including cap-and-trade programs-to meet the standard. The EPA estimates that the proposed existing source rule would reduce CO2 emissions from the power sector by 30 percent by 2030, with a focus on emissions from coal-fired generation. The EPA plans to finalize the rule by June 2015, with state plans due by June 2016, with one- to two-year extensions available. The U.S. Congress has considered, and in the future may again consider, legislation governing GHG emission, including “cap and trade” legislation that would establish a cap on emissions of GHGs covering much of the economy in the United States and would require most sources of GHG emissions to obtain GHG emission “allowances” corresponding to their annual emissions of GHGs. In addition, coal-fired power plants, including new coal-fired power plants or capacity expansions of existing plants, have become subject to opposition by environmental groups seeking to curb the environmental effects of GHG emissions. It is difficult to predict at this time the effect these proposed rules would have on our revenues and profitability.
In Canada, in September 2012 the federal government released final regulations for reducing GHG emissions from coal-fired electricity generation through the Canadian CO2 Regulations. The Canadian CO2 Regulations will require certain Canadian coal-fired electricity generating units, effective July 1, 2015, to achieve an average annual emissions intensity performance standard of 420 tons of CO2 per gigawatt hour. According to Sherritt International Corporation’s public filings, this performance standard represents approximately one-half of the annual average CO2 emissions intensity of the customer generating assets currently served by the Prairie operations. The performance standard will apply to new units commissioned after July 1, 2015 and to units that are considered to have reached the end of their useful life, generally between 45 and 50 years from the unit’s commissioning date. New and end-of-life units that incorporate technology for carbon capture and sequestration may apply for a temporary exemption from the performance standard that would remain in effect until 2025, provided that certain implementation milestones are met. Provincial equivalency agreements, under which the Canadian CO2 Regulations would stand down, are being negotiated or discussed with the provinces of Alberta and Saskatchewan. The Prairie coal production in the long-term could be reduced unless certain existing units or new units of the customers served by the Prairie operations are equipped with carbon capture and storage or other technology that achieves the prescribed performance standard, the impact of the Regulations is altered by equivalency agreements, or the Canadian CO2 Regulations are changed to
lower the performance standard. The impact of the Canadian CO2 Regulations on existing units will vary by location and province.
In addition, various Canadian provincial governments and other regional initiatives are moving ahead with GHG reduction and other initiatives designed to address climate change. For example, under the Climate Change and Emissions Management Act (the “CCEM”), the Province of Alberta enacted the “Specified Gas Emitters Regulation.” As of January 1, 2008, this enactment requires certain existing facilities with direct emissions of 100,000 tons or more of certain specified gases to ensure that the net emissions intensity for a year for an established facility must not exceed 88% of the baseline emissions intensity for the facility. For the 2011 compliance period, CVRI’s Coal Valley operations exceeded the 100,000 ton emissions threshold established under the Specified Gas Emitters Regulation, and Coal Valley was required to contribute to the Climate Change and Emissions Management Fund. According to Sherritt International Corporation’s public filings, for the 2012 compliance period, the preliminary calculations indicate Coal Valley will be required to purchase fund credits. It is anticipated that for the next several years, emissions intensity at Coal Valley will increase as the distance between the coal being mined and the processing plant increases. The Government of Alberta has also introduced a complementary Specified Gas Reporting Regulation, which came into force on October 20, 2004. This legislation requires all industrial emitters emitting 50,000 tons or more of CO2 to report their annual GHG emissions in accordance with the specified Gas Reporting Standard published by the Government of Alberta. In Saskatchewan, Bill 126, The Management and Reduction of Greenhouse Gases Act, was passed in 2010 but is not yet proclaimed in force. The legislation provides a framework for the control of GHG emissions by regulated emitters and will be proclaimed once accompanying draft regulations are finalized.
As it is unclear at this time what shape additional regulation in Canada will ultimately take, it is not yet possible to estimate the extent to which such regulations will impact the operations we acquired in the Canadian Acquisition. However, those operations involve large facilities, so the setting of emissions targets (whether in the manner described above or otherwise) may well affect them and may have a material adverse effect on our business, results of operations and financial performance. These developments in both Canada and the United States could have a variety of adverse effects on demand for the coal we produce. For example, laws or regulations regarding GHGs could result in fuel switching from coal to other fuel sources by electricity generators, or require us, or our customers, to employ expensive technology to capture and sequester carbon dioxide. Political and environmental opposition to capital expenditure for coal-fired facilities could affect the regulatory approval required for the retrofitting of existing power plants. For example, the Naughton power facility, which is located adjacent to the Kemmerer Mine, announced in April 2012 that it is seeking regulatory approval to switch Unit 3 to natural gas from coal. The conversion of Naughton Unit 3 to natural gas would result in significant reduction in coal sales from our Kemmerer Mine, and could have a material adverse effect on our results of operations. However, Rocky Mountain Power, the owner of the Naughton facility, recently announced that the conversion will not take place until at least 2018. Political opposition to the development of new coal-fired power plants, or regulatory uncertainty regarding future emissions controls, may result in fewer such plants being built, which would limit our ability to grow in the future.
In addition to directly emitting GHGs, the operations we acquired in the Canadian Acquisition require large quantities of power. Future taxes on or regulation of power producers or the production of coal, oil and gas or other products may also add to our operating costs. And many of the developments in the U.S. discussed above that may affect our customers and demand for our coal could also affect us directly through adverse impacts on ROVA.
Depending on how they evolve, such developments, individually or in the aggregate, may have a material adverse effect on our business, results of operations and financial performance.
Extensive environmental laws, including existing and potential future legislation, treaties and regulatory requirements relating to air emissions other than GHGs, affect our customers and could reduce the demand for coal as a fuel source and cause coal prices and sales of our coal to materially decline, and could impose additional costs on ROVA.
Our customers, as well as ROVA, are subject to extensive environmental regulations particularly with respect to air emissions other than GHG. Coal contains impurities, including but not limited to sulfur, mercury, chlorine and other elements or compounds, many of which are released into the air when coal is burned. The emission of these and other substances is extensively regulated at the federal, state, provincial and local level, and these regulations significantly affect our customers’ ability to use the coal we produce and, therefore, the demand for that coal. For example, the purchaser of coal produced from the Jewett Mine blends our lignite with compliance coal from Wyoming. Tightened nitrogen oxide and new mercury emission standards could result in the customer purchasing an increased blend of the Wyoming coal in order to reduce emissions. Further, increased market prices for sulfur dioxide emissions allowances and increased coal ash management costs could also favor an increased blend of the lower ash Wyoming compliance coal. In such a case, the customer has the option to increase its purchases of other coal and reduce purchases of our coal or terminate our contract. A termination of the contract or a significant reduction in the amount of our coal that is purchased by the customer could have a material adverse effect on our results of operations and financial condition.
The EPA intends to issue or has issued a number of significant regulations that will impose more stringent requirements relating to air, water and waste controls on electric generating units. These rules include the EPA’s pending new requirements for coal combustion residue (“CCR”) management that may further regulate the handling of wastes from the combustion of coal. In addition, in February 2012, the EPA signed a rule to reduce emissions of mercury and toxic air pollutants from new and existing coal- and oil-fired electric utility steam generating units, often referred to as the MATS Rule. This rule was upheld by the Federal Court of Appeals for the D.C. Circuit in April 2014. In April 2014, the U.S. Supreme Court upheld the EPA’s Cross-State Air Pollution Rule (“CSAPR”), which would require stringent reductions in emissions of nitrogen oxides and sulfur dioxide from power plants in much of the Eastern United States, including Texas and North Carolina. The EPA has filed a motion to have the D.C. Circuit lift its stay on the CSAPR. In May 2014, the EPA Administrator signed a final rule that establishes requirements for cooling water intake structures for the withdrawal of cooling water by electric generating plants; the rule is anticipated to affect over 500 power plants.
Considerable uncertainty is associated with air emissions initiatives. New regulations are in the process of being developed, and many existing and potential regulatory initiatives are subject to review by federal or state agencies or the courts. Stringent air emissions limitations are either in place or are likely to be imposed in the short to medium term, and these limitations will likely require significant emissions control expenditures for many coal-fired power plants. For example, the owners of Units 3 and 4 at Colstrip, adjacent to our Rosebud Mine, are getting considerable pressure from environmental groups to install Selective Catalytic Reduction (“SCR”) technology. Should the owners be forced by the EPA to install such technology, the capital requirements could make the continued operation of the two units unsustainable. As a result, Colstrip and other similarly-situated power plants may switch to other fuels that generate fewer of these emissions or may install more effective pollution control equipment that reduces the need for low-sulfur coal. Any switching of fuel sources away from coal, closure of existing coal-fired power plants, or reduced construction of new coal-fired power plants could have a material adverse effect on demand for, and prices received for, our coal. Alternatively, less stringent air emissions limitations, particularly related to sulfur, to the extent enacted, could make low-sulfur coal less attractive, which could also have a material adverse effect on the demand for, and prices received for, our coal.
The regulation of air emissions in Canada may also reduce the demand for the products of the operations we acquired in the Canadian Acquisition. Specifically, the Alberta Environmental Protection and Enhancement Act (“EPEA”) and the Canadian Environmental Protection Act, 1999 (“CEPA, 1999”) and the provision for the reporting of pollutants via the National Pollutant Release Inventory (“NPRI”), could also have a significant effect on the customers of our Canadian mines, which in turn could, over time, significantly reduce the demand for the coal produced from those mines.
The customers of our Canadian mines must comply with a variety of environmental laws that regulate and restrict air emissions, including the EPEA and its regulations, and the CEPA, 1999. Because many of these customers’ activities generate air emissions from various sources, compliance with these laws requires our customers in Canada to make investments in pollution control equipment and to report to the relevant government authorities if any emissions limits are exceeded or are made in contravention of the applicable regulatory requirements.
These laws restrict the amount of pollutants that our Canadian customer’s facilities can emit or discharge into the environment. The NPRI, for example, is created under authority of the CEPA, 1999 and is a Canada-wide, legislated, and publicly accessible inventory of specific substances that are released into the air, water, and land. The purpose of the NPRI was to provide comprehensive national data on releases of specified substances, and assists with, identifying priorities for action, encouraging voluntary action to reduce releases, tracking the progress of reductions in releases, improving public awareness and understanding of substances released into the environment, and supporting targeted initiatives for regulating the release of substances.
Regulatory authorities can enforce these and other environmental laws through administrative orders to control, prevent or stop a certain activity; administrative penalties for violating certain environmental laws; and judicial proceedings. If environmental regulatory burdens continue to increase for our Canadian customers, as a result of policy changes or increased regulatory reform relating to the substances reported, it could potentially affect customer operations and future demand for coal.
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ITEM 2 | — UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. |
The Company's purchases of its common stock during the three months ended June 30, 2014 were as follows:
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Period | Total Number of Shares Purchased (1) | | Average Price Paid per Share |
April 1, 2014 | 80,740 |
| | $ | 31.38 |
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June 12, 2014 | 5,698 |
| | $ | 34.37 |
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June 30, 2014 | 1,679 |
| | $ | 36.28 |
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____________________
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(1) | Shares purchased as indicated in this table represent the withholding of a portion of restricted shares to cover taxes on vested restricted and unrestricted shares. |
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ITEM 4 | — MINE SAFETY DISCLOSURE. |
On July 21, 2010, Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Act. Section 1503(a) of the Act contains reporting requirements regarding mine safety. Mine safety violations and other regulatory matters, as required by Section 1503(a) of the Act and Item 104 of Regulation S-K, are included as Exhibit 95.1 to this report on Form 10-Q.
See Exhibit Index at the end of this report.
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.
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| | WESTMORELAND COAL COMPANY |
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Date: | July 31, 2014 | /s/ Kevin A. Paprzycki |
| | Kevin A. Paprzycki |
| | Chief Financial Officer and Treasurer (Principal Financial Officer and A Duly Authorized Officer) |
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Date: | July 31, 2014 | /s/ Russell H. Werner |
| | Russell H. Werner |
| | Controller (Principal Accounting Officer and A Duly Authorized Officer) |
EXHIBIT INDEX
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| | Incorporated by Reference | | |
Exhibit Number | Exhibit Description | Form | File Number | Exhibit | Filing Date | Filed Herewith | Submitted Herewith |
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1.1 | Underwriting Agreement dated July 10, 2014 among Westmoreland Coal Company, BMO Capital Markets Corp. and Deutsche Bank Securities Inc., as representatives of the several underwriters | 8-K | 001-11155 | 1.1 | 7/16/2014 | | |
10.1 | Form of 2014 Time Vested Restricted Stock Unit Agreement for Directors | | | | | X | |
10.2 | Form of Time Vested Restricted Stock Unit Agreement for 2014 Awards | | | | | X | |
10.3 | Form of Performance Vested Restricted Stock Unit Agreement for 2014 Awards | | | | | X | |
10.4 | Amending Agreement, dated as of April 27, 2014, by and among Westmoreland, Sherritt, Altius Minerals Corporation and the other parties thereto | 8-K | 001-11155 | 10.1 | 5/2/2014 | | |
10.5 | Third Supplemental Indenture, dated as of April 28, 2014, by and among Westmoreland, Westmoreland Partners, Wells Fargo Bank, National Association, as trustee, Wells Fargo Bank, National Association, as note collateral agent, and the guarantors party thereto | 8-K | 001-11155 | 10.2 | 5/2/2014 | | |
10.6 | Fourth Supplemental Indenture, dated as of April 28, 2014, by and among Westmoreland, Westmoreland Partners, Wells Fargo Bank, National Association, as trustee, Wells Fargo Bank, National Association, as note collateral agent, and the new guarantors party thereto | 8-K | 001-11155 | 10.3 | 5/2/2014 | | |
10.7 | Registration Rights Agreement, dated as of April 28, 2014, by and among Westmoreland, Westmoreland Partners, the guarantors party thereto, and BMO Capital Markets Corp. and Deutsche Bank Securities Inc. | 8-K | 001-11155 | 10.4 | 5/2/2014 | | |
10.8 | Amended and Restated Loan and Security Agreement, dated as of April 28, 2014, by and among Westmoreland, certain of its subsidiaries, The PrivateBank and Trust Company, as Administrative Agent, and the lenders party thereto | 8-K | 001-11155 | 10.5 | 5/2/2014 | | |
10.9 | Amended and Restated Intercreditor Agreement, dated as of April 28, 2014, by and among Wells Fargo Bank, National Association, as note collateral agent, The PrivateBank and Trust Company, as administrative agent, acknowledged and agreed to by Westmoreland and certain of its subsidiaries | 8-K | 001-11155 | 10.6 | 5/2/2014 | | |
31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) | | | | | X | |
31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) | | | | | X | |
32 | Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 | | | | | X | |
95.1 | Mine Safety Disclosure | | | | | X | |
101.INS | XBRL Instance Document | | | | | X | |
101.SCH | XBRL Taxonomy Extension Schema Document | | | | | X | |
101.CAL | XBRL Taxonomy Calculation Linkbase Document | | | | | X | |
101.LAB | XBRL Taxonomy Label Linkbase Document | | | | | X | |
101.PRE | XBRL Taxonomy Presentation Linkbase Document | | | | | X | |
101.DEF | XBRL Taxonomy Definition Document | | | | | X | |
Attached as Exhibit 101 to this report are documents formatted in XBRL (Extensible Business Reporting Language). The financial information contained in the XBRL-related document is "unaudited" or "unreviewed."