August 11, 1995
Dear Fellow Shareholder:
Continuing our policy of trying to provide you directly with timely
information about Westmoreland's progress and status, I would like to update
you on a number of developments since our June 6, 1995 Annual Shareholders
Meeting. By the way, you should have received mailed copies of my
presentation at the Shareholders Meeting. If you or anyone else you know who
is interested have not, please let us know and we will get a copy off
promptly. We hear that some people who hold our stock in street name have
not been receiving our communications, and we want to be sure that all who
are interested do get our letters. The problem, however, is a little like
asking the people in the back row if they can hear you!
Second Quarter Financial Results
We have recently released our second quarter 1995 financial results and filed
Form 10-Q. A copy of the news release which summarizes the second quarter
results is attached, but let me recap certain key items for you here.
Westmoreland's net loss was $10.4 million in the second quarter of 1995
compared to a net loss of $1.7 million in the second quarter of 1994. Net loss
applicable to common shareholders was $11.7 million, compared to a net loss
applicable to common shareholders of $2.9 million in the second quarter of
last year. The difference between net loss and net loss applicable to common
shareholders is the recognition of dividends payable to preferred
shareholders, even if a preferred stock dividend was not declared.
The Company's operating loss was $10.8 million in the second quarter,
compared to an operating loss of $0.6 million in the same period in 1994, and
due primarily to further significant earnings deterioration at the Virginia
Operations. Coal Operations lost $13.6 million in the current period
compared to an operating loss of $0.3 million in the 1994 period. These
losses were offset somewhat by operating income of $2.8 million from
Westmoreland Energy, Inc., our independent power subsidiary, an improvement
of $3.1 million over the second quarter of 1994.
Year to date results and other important information may be found in the
attached second quarter news release.
Coal Operations
Contributing to the $13.3 million of increased losses for the Coal Operations
segment was, of course, the elimination of earnings of Criterion Coal Company
sold in December, 1994 and the Hampton Division sold in January, 1995
($4.1 million of operating income in the second quarter of 1994 from the two
properties). But the elimination of those earnings underscores, as we have
said before, the substantial problem the Virginia Division represents for the
Company and highlights the further earnings deterioration at the Virginia
Division totaling $9.6 million in the second quarter (an operating loss of
$8.4 million in the second quarter of 1995 compared to operating income of
$1.2 million in the second quarter of 1994). This deterioration was related
to higher per ton production costs, reduced sales and increased depreciation
expense. These in turn were driven by worsened mining conditions, the
deferral of certain above market priced shipments, and accelerated
recognition of the depreciating value of the Virginia Division's assets in
light of the expiration of the high priced Duke tonnage in 1996.
As we stated in the Annual Report and then reiterated at the Annual
Meeting, such losses cannot be tolerated, and accordingly, we had been exploring
options with various parties that could allow us to preserve the remaining value
of the Virginia Division's assets. In light of second quarter results, we
announced on June 20, 1995 that we would idle some or all of the Virginia
Division and lay off substantially all of its employees beginning August 23,
1995 while we pursued these other options. A copy of the June 20 news release
announcing these layoffs pursuant to the federal WARN Act is attached.
Sale of Duke Power Coal Supply Agreement
On July 31, 1995 we reached an agreement with Duke Power Company
whereby Duke will buy out the remaining term of the coal supply agreement which
we originally entered into with them on January 1, 1986. Since Duke was the
Virginia Division's sole remaining customer, we promptly idled all operations
at the Division. Pursuant to the WARN Act, all affected employees will be
paid through August 23, 1995, and will receive severance benefits. The
Company expects to defray a significant cash portion of this severance cost
by offering an Early Retirement Incentive Program to non-classified employees.
Most of the cost of the Program will be funded from the non-classified
employee pension plan surplus. Westmoreland will receive approximately $23
million in cash from Duke when the contract sale closes which is now expected
in mid-August.
Remaining Virginia Division Assets
We also identified a number of parties who are interested in other Virginia
Division assets. On July 31, 1995 we announced that we had entered into
negotiations with A.T. Massey Coal Company, Inc., concerning the sale of the
remaining assets of the Virginia Division and Pine Branch Mining Incorporated
("Pine Branch"), a small surface mining subsidiary which provided coal to the
Division. These discussions are ongoing as we write this letter, and it is
our hope that the discussions with A.T. Massey or others will result in a
definitive agreement of sale in the near future.
The benefits to the Company from the sale of the Duke Agreement and the
Virginia Division assets will be the elimination of the operating losses we have
endured from the operations there, the transfer of certain liabilities, and the
generation of additional cash for the Company's cash needs and for
reinvestment. They do not, however, resolve our heritage cost problem.
More on this below.
Recognition of Liabilities
The idling of the Virginia Division in connection with the sale of its assets
will require Westmoreland to recognize, for accounting purposes, certain
liabilities. As previously discussed in the 1994 Form 10-K and Annual Report,
the second quarter 1995 Form 10-Q, and in my discussion with you at the 1995
Annual Shareholders Meeting, the recognition of these liabilities will be
material and may prevent the payment of preferred dividends, possibly as early
as October 1, 1995. However, the total amount of the liabilities to be
recognized and their impact on shareholders' equity cannot be definitively
determined until, among other things, the ongoing negotiations for the sale
of the remaining Virginia Division assets and Pine Branch are completed.
We will continue to keep you advised regarding this issue.
Liquidity
We noted in the attached second quarter news release that continuing
increased losses at the Virginia Division on top of the ongoing cash costs
related to post-retirement medical and workers' compensation benefits had
created a significant drain on the Company's operating cash. We indicated that
this, coupled with the scheduled funding requirements related to the Roanoke
Valley II independent power project in October and the anticipated near term
sale of Cleancoal Terminal Company, could result in the Company's liquidity
resources becoming inadequate to meet operating requirements through December
31, 1995.
We now expect the sale of the Duke contract, the idling of the Virginia
Division, and the anticipated sale of its remaining assets will resolve this
issue for the near term. However, as I pointed out in detail at the Annual
Meeting, the Company still faces an annual cash shortfall going forward driven
by its substantial heritage costs, i.e., post-retirement medical and workers'
compensation benefits. The projected shortfall has increased from $15-$20
million to $18-$23 million per year as a result of the following two new
developments.
Retiree Health Benefit Plan Security. We have recently been
advised by the Trustees of the 1992 United Mine Workers of America
Benefit Plans that pursuant to The Coal Industry Retiree Health
Benefit Act of 1992 (the "Coal Act"), coal companies will be required to
provide security for future payments to the UMWA Benefit Trust
Fund. The Trustees have set the level of security to be provided by
Westmoreland at approximately $22 million, to be provided by bond,
letter of credit, or cash. The Company has elected to create a cash
escrow security fund by depositing approximately $2.5 million per
year for 9 years, plus an annual finance fee of 2.5% on the remaining
unfunded balance. The first installment, estimated to be
approximately $2.9 million, will be due in January, 1996. While this
additional cash payment is a significant burden on Westmoreland, it
represents the least onerous method available for funding this
requirement.
Increased Workers' Compensation Bond. We have also been
notified by the Commonwealth of Virginia that we will be required to
post an additional $750,000 of surety bonds to continue the existing
self-insurance program for Virginia workers' compensation claims.
These surety bonds must be obtained by September, 1995. This
requirement, like the Benefit Trust Fund security requirement
discussed above, places an additional cash burden on the Company.
Westmoreland Energy
Our independent power subsidiary, Westmoreland Energy Inc. ("WEI")
continues to focus on increasing the value of existing operating projects and
growing through new development opportunities. The existing projects'
management are completing long-term strategic plans aimed at revenue
enhancement and cost reduction. Those plans evaluate and recommend the
marketing, operating and financing solutions that can maximize value during this
time of change from a regulated to a competitive electrical power market.
WEI is also implementing a strategy for both short and long-term growth. Of
highest interest are projects where the synergy of power production can be
blended with that of coal mining. Using its solid fuel expertise, WEI is
developing a waste wood and waste coal facility in Illinois which could begin
construction in the next few years. WEI continues to work on a long-term
mine-mouth merchant plant concept. The low cost of this type of plant makes
it feasible during this time of industry restructuring.
On August 9, 1995 The Roanoke Valley I Partnership received a favorable
decision from the Circuit Court of the City of Richmond, Virginia in the dispute
between the Partnership and Virginia Power over the interpretation of the Forced
Outage Day provisions in the power sales agreement between the parties. The
Court denied Virginia Power's motion to dismiss the Partnership's amended
complaint. This decision reversed an earlier decision in which the Court had
granted a motion to dismiss an earlier complaint filed by the Partnership.
This case will now proceed with pre-trial preparations. We continue to
believe our position is correct and we will keep you advised of developments.
Future Plans
Naturally, we intend to rigorously manage both our retiree medical costs and
our workers' compensation claims to minimize, wherever possible, the cash
demands created by these obligations. We continue to look for new and
innovative ways to do this.
We are also working hard to reduce other costs and improve the performance
of our solid operating assets. Relocation of a downsized corporate headquarters
to less expensive and more strategic offices is one example and is on track for
completion by mid-September.
Most crucial, however, is the rapid acquisition of new sources of significant
income. This presents a formidable challenge to the Company, comprised of
identifying appropriate opportunities and then finding the capital to finance
them, all on a very expedited basis. While this work has begun, it will take
all our resources to achieve once the Virginia Division transactions are closed.
As previously reported, we must take all these steps in the effort to generate
enough cash to meet existing requirements through 1996 and beyond. It is
impossible to assure you at this time that this can be accomplished, but we are
doing everything we can to make it happen.
Two New Directors
In a related development, we were pleased to announce that the Board of
Directors elected Thomas W. Ostrander and James W. Sight to the Board at its
regularly scheduled meeting on July 26, 1995. Messrs. Ostrander and Sight bring
skills particularly relevant to the challenges currently faced by the Company,
as more fully set forth in the attached copy of the news release issued
following their election.
The election of Messrs. Ostrander and Sight is the initial fulfillment of the
plan that we formulated in 1992 and further outlined in the 1994 Annual Report
and the 1995 Proxy Statement. The plan temporarily enlarges the Board from
seven to nine members and provides for a two year transition period (1995-1997)
during which two of our current Directors will reach mandatory retirement age
each year,
and be succeeded by two additional new Directors. By the 1997 Annual
Shareholders Meeting, the Board will once again have a total of seven members.
We continue to value the support you have given us as we work through our
strategy to turn the Company around and secure its future. While we face
additional challenges, we have accomplished significant steps toward our goals.
Your continued support is very important to us, and as always, we encourage you
to contact us to discuss matters of interest to you regarding your Company.
Sincerely,
Christopher K. Seglem