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EXHIBIT 13
INDEX TO FINANCIAL CONTENTS
Management's Discussion and Analysis of
Financial Condition and Results of Operations B 2
Five-Year Review B 24
Consolidated Balance Sheets B 27
Consolidated Statements of Operations B 29
Consolidated Statements of Shareholders' Equity B 30
Consolidated Statements of Cash Flows B 31
Summary of Significant Accounting Policies B 33
Notes to Consolidated Financial Statements B 37
Market Information on Capital Stock B 69
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities was $8,174,000 in 1995. Cash provided
from operating activities totaled $13,622,000 and $32,600,000 in 1994 and 1993,
respectively. The reduction of cash provided by operations in 1995 as compared
to 1994 is mainly attributable to operating losses of $24,359,000 for the first
nine months of 1995 and idling costs for the remainder of 1995 for the Virginia
division. The Company received $23,503,000 from the sale of a coal contract in
1995. For 1994, the Company's withdrawal from the export market and decreased
participation in the brokered coal business provided $19,208,000 of available
cash. This was due to reductions in working capital from December 31, 1993 of
$17,940,000 related to export receivables, $6,000,000 related to domestic
receivables for coal sold on behalf of unaffiliated producers and $3,553,000
related to coal export inventory, all of which was partially offset by an
$8,285,000 reduction in accounts payables related to unaffiliated producers.
Cash provided from investing activities in 1995 and 1994 was $1,868,000 and
$43,886,000, respectively. Cash used in investing activities totaled
$7,223,000 in 1993. The Company received $10,131,000 from the disposition of
various assets, mainly the Hampton Division, and $3,145,000 in note payments in
1995. Offsetting this cash inflow were cash investments relating to equity
commitments for a cogeneration project of $4,611,000, acquisitions of
$2,771,000 and fixed asset additions of $2,923,000. In 1994, the Company
realized net proceeds from the sale of the assets of Critierion and other
assets totaling $78,273,000. Cash used for investment purposes at Westmoreland
Energy, Inc. ("WEI") was $27,928,000 during 1994 of which $23,178,000 was used
for equity funding commitments for independent power operations. The Company
invested $5,892,000 in capital additions in 1994. The Company has now
completed all equity commitments for its current portfolio of cogeneration and
independent power projects. Refer to Note 5 to the Consolidated Financial
Statements for additional information relating to WEI and the independent power
operations.
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Cash used in financing activities in 1995, 1994 and 1993 totaled $13,784,000,
$66,317,000 and $11,864,000, respectively. Cash used in 1995 included
$10,240,000 relating to the repayment of debt and $2,444,000 in preferred stock
dividends. In 1994, cash used in financing activities included the repayment
of the Company's Revolving Credit Loan of $12,000,000, its 10% Senior Unsecured
Notes of $12,825,000, the payment of the Reimbursement Obligation related to
the Dominion Terminal Associated ("DTA") bonds of $26,560,000 and other debt
payments of $3,281,000. The Company also transferred $8,210,000 during 1994 to
a cash deposit account to collateralize the Company's outstanding surety bonds
for its workers' compensation self-insurance programs. The Company paid
preferred stock dividends of $2,444,000 in 1994.
Consolidated cash and cash equivalents at December 31, 1995 totaled $11,711,000
(including $3,213,000 at Westmoreland Resources, Inc. ("WRI")). At December
31, 1994, cash and cash equivalents totaled $15,453,000 (including $2,445,000
at WRI). The Company's cash and cash equivalents are not restricted as to use
or disposition. The cash at WRI, a 60%- owned subsidiary, is available to the
Company only through dividends. In addition, the Company had restricted cash,
which was not classified as cash or cash equivalents, of $17,960,000 and
$9,210,000 at December 31, 1995 and 1994, respectively. The $17,960,000 is
comprised of two items: a $9,960,000 interest-bearing cash deposit account,
which collateralizes the Company's outstanding surety bonds for its workers'
compensation self-insurance programs and $8,000,000 invested in certificates of
deposit which is classified as an Investment in Independent Power Projects at
December 31, 1995. The $8,000,000 in certificates of deposit represents cash
proceeds which were transferred from debt reserve accounts of certain of the
Company's independent power projects and for which bank letters of credit were
substituted. The cash proceeds are restricted as to use and were invested in
certificates of deposit of the bank issuing the letters of credit. The
certificates of deposit collateralize the letters of credit.
Preferred stock dividends at a rate of 8.5% per annum were paid quarterly from
the third quarter of 1992 through the first quarter of 1994. The declaration
and payment of preferred stock dividends was suspended in the second quarter of
1994 in connection with extension agreements entered into with the Company's
principal lenders. Upon the expiration of these
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extension agreements, the Company paid a quarterly dividend on April 1, 1995
and July 1, 1995. Pursuant to Delaware law, the preferred stock dividend was
suspended in the third quarter of 1995 as a result of the recognition of losses
related to the idling of the Virginia division and the resulting shareholders'
deficit. The five quarterly dividends which are in arrears (those dividends
whose payment dates would have been July 1, 1994, October 1, 1994, January 1,
1995, October 1, 1995, and January 1, 1996) amount to $6,109,000 in the
aggregate ($10.63 per preferred share).
There are statutory restrictions limiting the payment of preferred stock
dividends under Delaware law, the state in which the Company is incorporated.
Under Delaware law, the Company is permitted to pay preferred stock dividends
only: (1) out of surplus, surplus being the amount of shareholders' equity in
excess of the par value of the Company's two classes of stock; or (2) in the
event there is no surplus, out of net profits for the fiscal year in which a
preferred stock dividend is declared (and/or out of net profits for the
preceding fiscal year), but only to the extent that shareholders' equity
exceeds the par value of the preferred stock ($575,000). The Company had a
shareholders' deficit at December 31, 1995 of $38,106,000. The Company's Board
of Directors will continue to review the payment of quarterly preferred stock
dividends, as well as the five preferred stock dividends which are in arrears,
in light of the above restrictions and the Company's ongoing business
circumstances.
PLAN OF REORGANIZATION
On November 8, 1994, the Company filed a petition under Chapter 11 of the
Federal Bankruptcy Code seeking the confirmation of a so-called "pre-packaged"
plan of reorganization (the "Plan of Reorganization"). This measure was taken
to obtain protection from the Company's principal lenders pending the closing
of the sale of the assets of Criterion which closing was also facilitated by
the filing. The Federal Bankruptcy Court approved the Company's Plan of
Reorganization on December 16, 1994. As provided in the Plan of
Reorganization, the Company proceeded to complete its sale of the assets of
Criterion on December 22, 1994 and paid in full its maturing debt obligations
at which time it emerged from bankruptcy. Refer to Note 1 for additional
information concerning the Company's Plan of Reorganization.
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LIQUIDITY OUTLOOK
The major factor impacting the Company's liquidity outlook is its significant
"heritage costs". These heritage costs consist primarily of cash payments for
postretirement medical benefits, workers' compensation costs and UMWA pension
benefits. The Company also is obligated for its own pension and pneumoconiosis
benefits; however, both of these future obligations enjoy a funding surplus at
present. The Company has ongoing cash expenditures in excess of $15,000,000
per year for postretirement medical benefits which could continue over the next
approximately 45 years and approximately $6,500,000 per year for workers'
compensation benefits which will decline to zero over the next 20 years. The
Company is required under the national contract with the UMWA to pay amounts
based on hours worked or tons processed to the UMWA Retirement Funds with
respect to unionized employees. Since this is a multiemployer plan, under
ERISA, a contributing company is liable for its share of unfunded vested
liabilities upon termination or withdrawal from the plan. The Company's
liability for complete withdrawal is estimated to be approximately $20,000,000,
however, there has been no determination by the UMWA trustees that the Company
has incurred a partial or complete withdrawal.
The Company's current principal sources of cash flow include cash distributions
from its independent power projects, dividends from WRI and cash from
operations of DTA. Management believes that cash generated from these sources
and cash reserves should be sufficient to pay the Company's heritage costs for
the next 12 to 18 months. The Company hopes to improve its near-term cash
reserve position in a number of ways including using independent contractors
to mine coal at the Virginia Division or by divesting all or part of that
Division, by selling certain other non-strategic assets and by receiving cash
from liquidation of certain assets given as collateral by Adventure Resources.
The Company also plans to seek further cost reductions wherever feasible and
prudent, and attempt to reduce or defer certain postretirement medical,
workers' compensation and related payments. If future operations do not
generate cash as expected or the aforementioned actions are not executed in the
time frame and to the extent management anticipates, the Company could
experience liquidity problems in 1996.
Under a Federal law (the Coal Industry Retiree Health Benefit Act of 1992), the
Company is required to provide postretirement
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medical benefits for UMWA miners by making premium payments into three benefit
plans: (i) the UMWA Combined Benefit Fund (the "Combined Fund"), a
multiemployer plan which benefits miners who retired before January 1, 1976 or
who retired thereafter but whose last employer did not provide benefits
pursuant to an operator-specific Individual Employer Plan ("IEP"), (ii) an IEP
for miners who retired after January 1, 1976 and (iii) the 1992 UMWA Benefits
Plan, a multiemployer plan which benefits (A) miners who were eligible to
retire on February 1, 1993, who did retire on or before September 30, 1994 and
whose former employers are no longer in business, (B) miners receiving benefits
under an IEP whose former employer goes out of business and ceases to maintain
the IEP, and (C) new spouses or new dependents of retirees in the Combined Fund
who would be eligible for coverage thereunder but for the fact that the
Combined Fund closed to new beneficiaries as of July 20, 1992. The premiums
paid by the Company cover its own retirees, its current workforce and its
allocated portion of the pool of retired miners whose previous employers have
gone out of business.
The Company met all of its premium obligations through the end of 1995, but has
not paid a premium to the Combined Fund in 1996. The Company's current annual
premiums to the Combined Fund are approximately $5,000,000. The Company has
made a proposal to the staff of the Combined Fund to address these late
premiums and a portion of its future premiums, and discussions are ongoing.
The Company may modify its proposal based on these discussions, but its
objective is to conserve cash for acquisitions so that it can give the Combined
Fund adequate assurance that the Company will not only be able to make up its
current premiums but be able to pay future obligations as well. The Company
has requested the Combined Fund staff to consider the Company's proposal and
the Company's financial situation and present the proposal to the plan
trustees. Any decision in this matter must be made by the plan trustees, who
could reject any proposal from the Company. The trustees could initiate legal
action to recover overdue premiums. If the Company is required to pay all
premiums on a current basis, it could experience liquidity problems if current
plans as described above do not materialize.
In addition, the Coal Industry Retiree Health Benefit Act of 1992 (the "Act")
authorized the Trustees of the 1992 UMWA Benefit Plan to implement security
provisions pursuant to the Act. In 1995, the Trustees issued security
provisions which give contributors to the Plan several options for satisfying
the Act's security
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requirements, and set the level of security to be provided by the Company at
approximately $22,000,000. The security under any of the options was required
to be provided by January 1, 1996; however, the Company has not yet provided
security as required under the Act. The Company has proposed to the staff of
the 1992 UMWA Benefit Plan using Company assets as collateral for its
obligation. The 1992 UMWA Benefit Plan trustees could initiate legal action to
enforce the Company's security requirements. Although discussions remain
ongoing, management believes the Company will be able to satisfy the security
requirements through a mutually agreeable alternative, however, there can be no
assurance the 1992 UMWA Benefit Plan trustees will accept such an alternative
and will not initiate legal action to enforce its security requirements.
The Company's current sources of cash flow, as described above, will not be
sufficient by themselves to cover operating expenses and the Company's
"heritage costs" on a long-term basis. Management of the Company believes it
can restore the Company to profitability by adopting a strategy of acquiring
income-producing businesses and properties that will generate earnings and cash
flow. Management of the Company has devoted significant time and effort to
this strategy, with one small acquisition being completed in 1995, and the
preliminary identification of additional candidates. The time required to
implement an acquisition strategy is impossible to estimate, and no assurances
can be given that the Company can successfully implement the strategy or
achieve long-term viability.
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RESULTS OF OPERATIONS:
1995 COMPARED TO 1994
1995 1994
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(in thousands)
Coal Operations:
Virginia Division $ (93,900) $ (3,726)
Hampton Division - 4,490
Criterion Coal Company 106 8,094
Pine Branch Mining Inc. (2,196) (1,778)
Westmoreland Resources, Inc. 4,640 2,592
Westmoreland Coal Sales Company
(including DTA) (2,038) 1,895
Net corporate expenses (7,807) (15,230)
West Virginia - Idled Operations (9,176) (8,657)
Cleancoal Terminal Company (337) (3,446)
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Total Coal Operations (110,708) (15,766)
Independent Power Operations 15,148 548
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Operating (loss) $ (95,560) $(15,218)
========= ========
Gains on the sales of assets:
Criterion Coal Company $ - $ 34,142
Hampton 9,088 -
West Virginia - Idled - 6,988
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Total $ 9,088 $ 41,130
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Details of tons sold (in thousands) and average revenue per ton sold for 1995
and 1994 are as follows:
1995 1994
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Virginia Division * 2,164 4,594
Hampton Division - 1,119
Criterion Coal Company - 1,954
Westmoreland Resources, Inc. 4,426 4,364
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Total Westmoreland Operations 6,590 12,031
For Others 473 2,784
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Total tons sold 7,063 14,815
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By Source and Geographic Sector:
Own Operations-Inland 6,590 11,845
Own Operations-Export - 186
For Others-Inland 473 1,934
For Others-Export - 850
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Total 7,063 14,815
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Average revenue per ton sold:
Eastern Operations $ 34.82 $ 32.30
Westmoreland Resources, Inc. 6.33 7.04
* Includes tons:
Sold by Pine Branch Mining Inc. 158 270
Purchased from unaffiliated producers 458 894
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SUMMARY
The Company reported operating losses of $95,560,000 (excluding $9,088,000 of
gains on the sales of assets) and $15,218,000 (excluding $41,130,000 of gains
on the sales of assets) in 1995 and 1994, respectively.
The most significant item affecting results of operations for 1995 was
$66,623,000 of unusual charges relating to the idling of Eastern coal
operations. Refer to Note 4 for details related to the unusual charges.
The most significant items affecting 1994's net income were gains of
$34,142,000 on the sale of the assets of Criterion and $6,988,000 on the sale
of several inactive properties in West Virginia. Refer to Note 3 for details
related to asset sales.
The following sections compare the results of 1995 to 1994.
VIRGINIA DIVISION
Virginia Division incurred operating losses of $93,900,000 in 1995 compared to
operating losses of $3,726,000 in 1994.
- - The major contributor to the increased operating loss was the recognition of
charges relating to the idling of the division during the third quarter of
1995. Included in these charges were postretirement medical costs of
$34,300,000, recognition of a potential UMWA pension withdrawal liability of
$20,000,000, writedown of fixed assets of $18,900,000, severance and early
retirement costs of $8,600,000 and other costs totaling approximately
$5,500,000.
- - The Virginia Division recognized a $23,503,000 gain from the sale of a coal
purchase agreement, which was offset against the above mentioned charges.
- - The Virginia Division recognized $12,890,000 of workers' compensation
expense in 1995 compared to $7,574,000 in 1994. In 1994 the Company refined
its methodology for estimating the Company's workers' compensation liabilities
by engaging an independent actuary and as a result accrued an additional
$3,200,000 expense in 1994 related to prior years' claims for the
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Virginia Division. The Company will continue to utilize an actuarial analysis
in the future as it is a more reliable method of estimating this liability.
HAMPTON DIVISION
In January 1995, the Company sold the assets of the Hampton Division. Refer to
Note 3 for details related to the asset sales.
CRITERION COAL COMPANY
The assets of Criterion were sold in the fourth quarter of 1994. Refer to Note
3 for details related to the asset sale.
PINE BRANCH MINING INCORPORATED ("PINE BRANCH")
Pine Branch had operating losses of $2,196,000 and $1,778,000 in 1995 and 1994,
respectively. Operating losses in 1995 are largely attributable to the
recognition of certain liabilities and charges associated with the shutdown of
Pine Branch operations in the third quarter of 1995. Included in the charges
were $1,400,000 for the write-off of fixed assets, $121,000 of medical
benefits, and $900,000 for final reclamation.
WESTMORELAND RESOURCES, INC.
WRI had operating income of $4,640,000 and $2,592,000 in 1995 and 1994,
respectively. The increase in earnings was due to the recognition of
additional income from the settlement of a state tax dispute wherein WRI
received a refund of $1,003,000, including interest and reversed accrued and
unpaid state income tax totaling $1,214,000. Earnings before income taxes and
the tax settlement were comparable to 1994. The Company received cash
dividends from WRI of $1,650,000 and $1,500,000 in 1995 and 1994, respectively.
WESTMORELAND COAL SALES COMPANY ("WCSC")
WCSC had an operating loss of approximately $2,038,000 in 1995 and operating
income of $1,895,000 in 1994. Included in the results for 1995 was $967,000 in
income generated from the reversal of bad debt allowances related to reserved
accounts subsequently collected. Excluding this benefit, the decrease in
1995's operating income was primarily due to the absence of profits from export
business which was discontinued because of
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low margins and high working capital requirements. WCSC continues to reduce
its selling and administrative expenses as a result of the decline in coal
marketing and sales activity.
NET CORPORATE EXPENSES
Net corporate expenses decreased $7,423,000 in 1995 over 1994. This decrease
is a result of expenses relating to the Company's bankruptcy proceedings being
recognized in 1994 and the reduced operating costs as a result of reduced
staffing and relocating the corporate offices in September 1995. Bankruptcy
expenses in 1994 included $1,050,000 related to legal fees, $2,332,000 related
to the settlement of non-Criterion related claims and $1,000,000 accrued for
the buyout of the Philadelphia office lease, which was negotiated as part of
the bankruptcy proceedings. Relocation of the Corporate office has provided
and will continue to provide for significant reductions in the cost of office
space.
WEST VIRGINIA - IDLED OPERATIONS
West Virginia had operating losses of $9,176,000 in 1995 and $8,657,000 in
1994. West Virginia - Idled Operations are made up of costs (principally
postretirement medical and workers' compensation costs) associated with mining
operations in West Virginia which had been closed in prior years.
CLEANCOAL TERMINAL COMPANY
The Company sold the assets of Cleancoal Terminal Company to an indirect
wholly-owned subsidiary of CSX Corporation ("CSX") in September 1995. In
exchange for the assets of Cleancoal and payment of $2,500,000, CSX agreed to
release the Company from an $8,864,000 loan guarantee made on behalf of
Adventure Resources. The Company was also released from related interest
payments to CSX of approximately $840,000 per year. Cleancoal's unprofitable
operations were discontinued in January 1995 and the majority of its employees
were laid off on January 31, 1995. The loss on the sale of the assets of
Cleancoal Terminal Company was recorded in the fourth quarter of 1994.
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INDEPENDENT POWER OPERATIONS
The Company's Independent Power Operations, through its wholly-owned subsidiary
WEI, recorded operating income of $15,148,000 in 1995 and $548,000 in 1994.
WEI has interests in eight projects, of which seven were operational as of
December 31, 1994 and the eighth became operational in the second quarter of
1995. The improvement in operating income is due to three main factors:
- - Increased equity earnings of $4,282,000 primarily from the three projects
which became operational during 1994 and in the second quarter of 1995.
- - The recognition in 1995 of $4,000,000 of deferred development fees received
in prior years in connection with two projects.
- - Decreased expenses of $2,532,000 related to the amortization of an equity
support agreement for three independent power projects. This equity support
agreement expired in October 1995.
WEI owns a 50% partnership interest in Westmoreland-LG&E Partners (the "ROVA
Partnership"). The ROVA Partnership's principal customer contracted to
purchase the electricity generated by ROVA I under a long-term contract. In
the second quarter of 1994, that customer disputed the ROVA Partnership's
interpretation of the provisions of the contract dealing with the payment of
the capacity purchase price when the facility experiences a forced outage day.
A forced outage day is a day when ROVA I is not able to generate a specified
level of electrical output. The ROVA Partnership believes that the customer is
required to pay the ROVA Partnership the full capacity purchase price unless
forced outage days exceed a contractually stated annual number. The customer
asserts that it is not required to do so.
Through December 31, 1995, the customer withheld approximately $8,500,000 of
capacity purchase price payments to the ROVA Partnership because of this
dispute. The customer has withheld an additional $203,000 from the ROVA
Partnership through March 4, 1996. On October 31, 1994, the ROVA Partnership
filed a complaint in the Circuit Court of the City of Richmond, Virginia to
recover these amounts and to confirm that such payments may not be withheld in
the future. On December 12, 1994 the customer filed a motion to dismiss the
complaint and on March 17, 1995 the Court granted this motion. The ROVA
Partnerships filed an amended complaint on April 17, 1995. On April 27, 1995
the
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customer filed another motion to dismiss the complaint. On August 23, 1995,
the Court overruled the customer's motion to dismiss and set a trial date of
March 25, 1996. The customer filed two motions for summary judgement. The
Court denied the customer's first motion for summary judgement on January 30,
1996; however, the customer filed a second summary judgement motion on March 1,
1996. On March 18, 1996, the Court granted the customer's second summary
judgement motion and effectively dismissed the complaint. The ROVA Partnership
is evaluating its options, including possible appeal of the Court's decision
granting summary judgement. The capacity purchase price withheld had been
included in the revenues and earnings of the ROVA Partnership until a reserve
was recorded as of December 31, 1994 for the full amount withheld by the
customer. WEI had recognized its 50% share of the withheld payments in
earnings in the second, third and fourth quarters of 1994. In the fourth
quarter of 1994, WEIGs revenues were reduced by $2,928,000, representing its
50% share of the disputed amount. No earnings were recognized by WEI in 1995
for payments withheld by the customer relating to forced outage days.
Regardless of the outcome, the Company believes ROVA I will continue to operate
profitably and generate positive cash flows.
GAINS ON THE SALES OF ASSETS
The Company realized a gain in 1995 of $9,088,000 on the sale of the assets of
the Hampton Division. The Company realized gains in 1994 of $34,142,000 on the
sale of the assets of Criterion and $6,988,000 on the sale of several inactive
properties in West Virginia. Refer to Note 3 for details related to asset
sales.
OTHER
Coal revenues in 1995 decreased $258,863,000 (70%) from 1994 due principally to
the Company's decision to idle the Eastern Coal operations.
Income tax expense in 1995 and 1994 included the provision for WRI, which is
not consolidated with the Company for Federal income tax purposes, and state
taxes related to the Company's other operations.
Inflation did not have a material impact on the Company's operations in 1995
and 1994.
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WEI PROJECT CONTINGENCIES
SOUTHAMPTON. The Southampton plant, a 70 megawatt coal-fired cogeneration
facility in Franklin, Virginia, supplies process steam to a nearby chemical
manufacturer and bulk electric power under contract to Virginia Electric and
Power Company ("Virginia Power") as a qualifying facility (QF) under the Public
Utility Regulatory Policies Act ("PURPA"). The plant began commercial
operation in 1992. On July 7, 1994, the Federal Energy Regulatory Commission
("FERC") denied the request of LG&E-Westmoreland Southampton ("the
Partnership", in which WEI has a 30% interest) for a waiver of certain QF
requirements and directed the Partnership to show cause as to why it should not
be required to file new cost- based rates for its 1992 electric sales to
Virginia Power.
The Partnership filed a request for rehearing and a motion to consider its
request for rehearing as timely filed, or in the alternative, to treat its
request for rehearing as a motion for reconsideration, in August 1994, one day
out of time. The Partnership is seeking a reversal of FERC's prior order, or,
in the alternative, a clarification of FERC's order stating that, with the
exception of rates, the Partnership remains a QF for 1992 exempt from
regulation as a public utility under the Public Utility Holding Company Act
("PUHCA"), utility laws of Virginia and various portions of the Federal Power
Act.
In late August 1994, Virginia Power filed a motion for leave to respond to the
Partnership's request for rehearing and response to request for rehearing, and
a response to the Partnership's show cause order. In September 1994, the
Partnership filed with FERC its answer to Virginia Power's motion and response.
Also in September 1994, FERC granted itself an extension of time to act on the
Partnership's request for rehearing, tolling the 30-day period in which FERC
was to have acted on the Partnership's rehearing request. The parties have
fully briefed and submitted to FERC their respective motions with respect to
the request for rehearing and are awaiting FERC's decision. As FERC had not
acted on the Partnership's request for rehearing, in December 1995, the
Partnership filed with FERC a motion to request a settlement conference.
Virginia Power subsequently filed a response in which it did not object to the
proposed settlement conference. The parties are awaiting FERC action, but
expect a settlement proceeding to be initiated in the first half of 1996.
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The Company believes that FERC will grant the Partnership the relief that it is
seeking and, accordingly, the ultimate resolution of the matter is not expected
to have a material adverse effect on its consolidated results of operations,
its financial condition or liquidity. However, in light of FERC's July 7, 1994
order, and the arguable lateness of the filing of the request for rehearing one
day out of time, the Company cannot predict what action FERC ultimately will
take. Possible consequences from an adverse decision include refunds, third
party lawsuits, and potential regulatory and other problems under PUHCA,
Virginia utility law and the Federal Power Act, the scope and amount of which
cannot be determined at this time.
ROANOKE VALLEY I. The Company owns a 50% interest in Westmoreland-LG&E
Partners ("WLP"), the sole owner of Roanoke Valley I, a cogeneration facility
selling electric power to Virginia Power and steam energy to Patch Rubber
Company. Under the Power Purchase Agreement ("PPA") between WLP and Virginia
Power, WLP is entitled to receive capacity payments based on availability.
From May 1994 through December 1995, Virginia Power withheld approximately
$8,500,000 of these capacity payments during periods of forced outages. To
date, the Company has not realized any income on its 50% portion of the
capacity payments being withheld by Virginia Power. In October 1994, WLP filed
a complaint against Virginia Power seeking damages of at least $5,700,000,
contending that Virginia Power breached the PPA in withholding such payments.
In June 1995, the Circuit Court of the City of Richmond, Virginia denied
Virginia Power's motion to dismiss WLP's complaint. In November 1995, Virginia
Power filed with the court a motion for summary judgment, and a hearing on the
motion was held in early December 1995. In late January 1996, the court denied
Virginia Power's motion for summary judgment. The customer filed a second
summary judgement motion on March 1, 1996. On March 18, 1996, the Court
granted the customer's second summary judgement motion and effectively
dismissed the complaint. The ROVA partnership is evaluating its options,
including possible appeal of the Court's decision granting summary judgement.
Regardless of the outcome, the Company believes Roanoke Valley I will operate
profitability and generate positive cash flows.
RENSSELAER. The Company has been informed through public filings that Niagara
Mohawk Power Corporation ("NIMO")(which is the purchasing utility for the
Company's Rensselaer cogeneration facility in which the Company has a 50%
interest) believe that, absent significant relief from its power purchase
arrangements with independent power producers (including qualifying
cogenerators), it may be forced either to file voluntary bankruptcy or attempt
to condemn and purchase the
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cogeneration facilities through eminent domain. The Company intends to oppose
any efforts by NIMO to nullify its contract for the Rensselaer project.
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RESULTS OF OPERATIONS:
1994 COMPARED TO 1993
1994 1993*
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(in thousands)
Coal Operations:
Virginia Division $ (3,726) $(24,309)
Hampton Division 4,490 (42,238)
Criterion Coal Company 8,094 10,289
Pine Branch Mining Inc. (1,778) (1,356)
Westmoreland Resources, Inc. 2,592 3,152
Westmoreland Coal Sales Company
(including DTA) 1,895 1,877
Net corporate expenses (15,230) (11,545)
West Virginia - Idled Operations (8,657) (29,779)
Cleancoal Terminal Company (3,446) (126)
--------- --------
Total Coal Operations (15,766) (94,035)
Independent Power Operations 548 (1,195)
--------- --------
Operating (loss) $ (15,218) $(95,230)
========= ========
Gains on the sales of assets:
Criterion Coal Company $ 34,142 $ -
West Virginia - Idled Operations 6,988 -
Independent Power Operations - 2,000
--------- --------
$ 41,130 $ 2,000
========= ========
* Certain amounts have been reclassified to conform to current classifications.
16
17
Details of tons sold (in thousands) and average revenue per ton sold for 1994
and 1993 are as follows:
1994 1993
------- -------
Virginia Division * 4,594 4,913
Hampton Division 1,119 1,561
Criterion Coal Company 1,954 1,853
Westmoreland Resources, Inc. 4,364 3,224
------- -------
Total Westmoreland Operations 12,031 11,551
For Others 2,784 5,136
------- -------
Total tons sold 14,815 16,687
======= =======
By Source and Geographic Sector:
Own Operations-Inland 11,845 11,136
Own Operations-Export 186 415
For Others-Inland 1,934 2,261
For Others-Export 850 2,875
------- -------
Total 14,815 16,687
======= =======
Average revenue per ton sold:
Eastern Operations $ 32.30 $ 32.38
Westmoreland Resources, Inc. 7.04 7.98
------- -------
* Includes tons:
Sold by Pine Branch Mining Inc. 270 215
Purchased from unaffiliated producers 894 755
SUMMARY
The Company incurred operating losses of $15,218,000 (excluding $41,130,000 of
gains on the sales of assets) and $95,230,000 (including unusual charges of
$79,250,000) in 1994 and 1993, respectively.
The most significant item affecting results of operations for 1993 was
$79,250,000 of unusual charges related to the write-off of the carrying value
of certain mining operations and coal reserves along with provisions for the
termination of certain operations and personnel. These charges resulted from
the
17
18
Company's continuing strategic review of its mining operations in light of
projected costs, prices and demand. Refer to Note 4 for details related to the
unusual charges.
The most significant items affecting 1994's net income were gains of
$34,142,000 on the sale of the assets of Criterion and $6,988,000 on the sale
of several inactive properties in West Virginia. Refer to Note 3 for details
related to asset sales.
Coal revenues in 1994 decreased $95,090,000 (20%) from 1993 due principally to
the Company's decision to withdraw from the export market ($70,150,000 decline
in revenues) and the partial shutdown of the Hampton Division in May of 1994
($18,326,000 decline in revenues).
The following sections compare the results of 1994 to 1993.
VIRGINIA DIVISION
Virginia Division incurred operating losses of $3,726,000 in 1994 compared to
operating losses of $24,309,000 in 1993.
- - Included in 1993's results were unusual charges totalling $16,092,000.
Refer to Note 4 for further details.
- - The Virginia Division recognized $7,574,000 of workers' compensation expense
in 1994 compared to $14,725,000 in 1993. The amount recorded in 1993 reflects
a $9,250,000 adjustment based upon management's reassessment of the workers'
compensation liability. In 1994 the Company refined its methodology for
estimating the Company's workers' compensation liabilities by engaging an
independent actuary and as a result accrued an additional $3,200,000 expense
in 1994 related to prior years' claims for the Virginia Division.
- - Due to reduced production from Company mines, the Virginia Division
purchased an additional 139,000 tons from unaffiliated producers during 1994
compared to 1993. This production shortfall added approximately $3,000,000 in
additional costs over the 1993 levels.
18
19
- - Depreciation expense in 1994 decreased $2,553,000 over the 1993 amount due
to the write-down of certain plant and equipment in the fourth quarter of 1993.
HAMPTON DIVISION
Hampton Division recorded operating income of $4,490,000 and operating losses
of $42,238,000 in 1994 and 1993, respectively.
- - Hampton's results improved due to the elimination of losses related to that
portion of the Hampton Division that was closed in the second quarter of 1994.
Reserves for these operating losses and shutdown costs were accrued in the
fourth quarter of 1993. The operating profit in 1994 relates to a large
surface mine which was operated by a contractor on the Hampton property and a
$2,100,000 reversal of a workers' compensation liability recorded in December
1993 in connection with the anticipated Hampton shutdown.
- - The Hampton Division incurred unusual charges in 1993 totalling $43,158,000
related to the planned discontinuation of most of the Hampton Division's
operations in the second quarter of 1994. This action was necessitated by the
loss of an above-market coal supply contract in December 1993. Based on market
conditions and cost structures, it was unlikely that there were operational
scenarios which would have resulted in future positive cash flow had the
Company continued to operate the deep mine, the preparation plant and the
support facilities. The other major above-market coal supply contract
associated with the Hampton Division continued to be supplied by the production
from a contractor-operated surface mine on the property. The components of the
shutdown costs were $8,247,000 for fixed asset writedowns, $25,653,000 related
to the accrual of postretirement medical liabilities, $3,900,000 in termination
costs for approximately 130 employees, $1,800,000 for reclamation and
$3,558,000 for anticipated operating losses and other shutdown reserves.
CRITERION COAL COMPANY
Criterion recorded operating income of $8,094,000 and $10,289,000 in 1994 and
1993, respectively. Criterion's operating income in the second half of 1994
was hampered by a deterioration in geological conditions at certain mines.
19
20
PINE BRANCH MINING INCORPORATED ("PINE BRANCH")
Pine Branch had operating losses of $1,778,000 and $1,356,000 in 1994 and
1993, respectively. Pine Branch experienced unusually severe weather
conditions in the first quarter of 1994 adversely impacting production and
operating costs which led to an operating loss for the first quarter of 1994 of
$1,180,000. Productivity increased during the second half of 1994 as a result
of a new operating plan.
WESTMORELAND RESOURCES, INC.
WRI had operating income of $2,592,000 and $3,152,000 in 1994 and 1993,
respectively. The decrease in earnings was due to lower "take or pay" payments
received in 1994 compared to 1993 from contracts whose terms have since ended
and increased legal costs of $390,000 in 1994 related to a dispute with the
Crow Indian Tribe. Also, the price received from WRI's second largest customer
was reduced as part of the renegotiation of its contract. This deterioration
was partially offset by earnings on higher levels of shipments in 1994. The
Company received cash dividends from WRI of $1,500,000 and $540,000 in 1994 and
1993, respectively.
WESTMORELAND COAL SALES COMPANY ("WCSC")
WCSC had operating income of approximately $1,900,000 in both 1994 and 1993.
Included in the 1994 results was $2,833,000 in income generated from the
reversal of bad debt allowances related to a contract assigned to CONSOL of
Kentucky, Inc. ("CONSOL"). Excluding this benefit, the decrease in 1994's
operating income was primarily due to the absence of profits from sales to the
export market and the related brokering business. WCSC reduced its selling and
administrative expenses by $1,000,000 in 1994.
NET CORPORATE EXPENSES
Net corporate expenses increased $3,685,000 in 1994 over 1993. The increase
was due to $4,382,000 of expenses related to the Company's bankruptcy
proceedings. $1,050,000 of the bankruptcy cost was related to legal fees,
$2,332,000 was related to the settlement of non-Criterion related claims and
$1,000,000 was accrued for the buyout of the Company's building lease in
Philadelphia under a settlement negotiated during the bankruptcy proceedings.
The Company moved to less costly office facilities
20
21
during 1995. The Company also experienced higher legal costs prior to the
bankruptcy proceedings, primarily related to debt restructuring negotiations.
Other corporate expenses were reduced in 1994 as a result of the August 1993
workforce reduction.
WEST VIRGINIA - IDLED OPERATIONS
The Company had operating losses of $8,657,000 in 1994 and $29,779,000
(including $20,000,000 of unusual charges) in 1993. The unusual charges in 1993
represented the write-off of the partially developed Triangle Mine Complex
("Triangle"). Excluding the unusual charges in 1993, West Virginia - Idled
Operations are made up of costs (principally postretirement medical and
workers' compensation costs) associated with mining operations in West Virginia
which had been closed in prior years.
CLEANCOAL TERMINAL COMPANY
The Company announced, during the fourth quarter of 1994, that it had reached
agreement with an indirect wholly-owned subsidiary of CSX Corporation ("CSX")
to release the Company from an $8,864,000 loan guarantee reflected in Long-Term
Debt in the Company's Consolidated Balance Sheet in exchange for the transfer
of the assets of Cleancoal and the payment of $2,500,000 to CSX. The Company
was also released from related interest payments to CSX of approximately
$70,000 per month. The transaction was completed in 1995. The loss of
$1,882,000 related to this transaction was recognized in 1994. The Cleancoal
terminal was shut down in January 1995 and the majority of its employees were
laid off on January 31, 1995.
Cleancoal incurred operating losses in 1994 of $3,446,000, including the
anticipated loss of $1,882,000 on the pending sale of its assets, and $126,000
in 1993. Cleancoal has an annual transloading capacity of 6,000,000 tons. In
a highly competitive market, Cleancoal transloaded 1,304,000 tons and 2,511,000
tons in 1994 and 1993.
21
22
INDEPENDENT POWER OPERATIONS
The Company's Independent Power Operations, through its wholly-owned subsidiary
WEI, recorded operating income of $548,000 in 1994 and incurred operating
losses of $1,195,000 in 1993. WEI has interests in eight projects, of which
seven were operational as of December 31, 1994 and the eighth became
operational in the second quarter of 1995.
WEI owns a 50% partnership interest in Westmoreland-LG&E Partners (the "ROVA
Partnership"). The ROVA Partnership's principal customer contracted to
purchase the electricity generated by ROVA I under a long-term contract. In
the second quarter of 1994, that customer disputed the ROVA Partnership's
interpretation of the provisions of the contract dealing with the payment of
the capacity purchase price when the facility experiences a forced outage day.
A forced outage day is a day when ROVA I is not able to generate a specified
level of electrical output. The ROVA Partnership believes that the customer is
required to pay the ROVA Partnership the full capacity purchase price unless
forced outage days exceed a contractually stated annual number. The customer
asserts that it is not required to do so.
Through December 31, 1994, the customer withheld approximately $5,856,000 of
capacity purchase price payments to the ROVA Partnership because of this
dispute. On October 31, 1994, the ROVA Partnership filed a complaint in the
Circuit Court of the City of Richmond, Virginia to recover these amounts and to
confirm that such payments may not be withheld in the future. The capacity
purchase price withheld had been included in the revenues and earnings of the
ROVA Partnership until a reserve was recorded as of December 31, 1994 for the
full amount withheld by the customer. WEI had recognized its 50% share of the
withheld payments in earnings in the second, third and fourth quarters of 1994.
In the fourth quarter of 1994, WEIGs revenues were reduced by $2,928,000,
representing its 50% share of the disputed amount. No earnings are being
recognized by WEI for payments withheld by the customer relating to forced
outage days.
GAINS ON THE SALES OF ASSETS
The Company realized gains in 1994 of $34,142,000 on the sale of the assets of
Criterion and $6,988,000 on the sale of several inactive properties in West
Virginia. The Company realized a
22
23
$2,000,000 gain in 1993 from the sale of a portion of its interest in the Ft.
Lupton independent power project. Refer to Note 3 for details related to asset
sales.
OTHER
Income tax expense in 1994 and 1993 included the provision for WRI, which is
not consolidated with the Company for Federal income tax purposes, and state
taxes related to the Company's other operations. Also included in 1993 was a
$683,000 benefit related to the settlement of a state income tax dispute.
Inflation did not have a material impact on the Company's operations in 1994 or
1993.
23
24
Westmoreland Coal Company and Subsidiaries
FIVE-YEAR REVIEW
1995 1994 1993* 1992* 1991*
CONSOLIDATED INCOME STATEMENTS
(in thousands)
Revenue -Coal (1) $ 111,303 $370,166 $ 465,256 $ 536,289 $ 567,075
-Independent Power and other 19,605 7,196 4,642 4,679 1,330
- --------------------------------------------------------------------------------------------------------------------------
Total revenues 130,908 377,362 469,898 540,968 568,405
Cost and expenses (2) (159,845) (394,680) (485,878) (574,614) (575,405)
Unusual (charges) credits (3) (66,623) 2,100 (79,250) - -
- --------------------------------------------------------------------------------------------------------------------------
Operating income (loss) (95,560) (15,218) (95,230) (33,646) ( 7,000)
Gains on the sales of assets (4) 9,088 41,130 2,000 - -
Interest expense 1,164 5,425 4,936 4,164 4,416
Interest and other income 4,106 2,540 2,755 1,824 1,887
- --------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations before
income taxes and minority interest (83,530) 23,027 (95,411) (35,986) (9,529)
Income taxes 1,488 2,291 1,487 3,495 2,753
Minority interest (5) 1,368 583 748 1,543 1,120
- --------------------------------------------------------------------------------------------------------------------------
Net income (loss) (86,386) 20,153 (97,646) (41,024) (13,402)
Less preferred stock dividends:
Declared (6) 2,444 1,222 4,888 2,362 -
In arrears (6) 2,444 3,666 - - -
- --------------------------------------------------------------------------------------------------------------------------
Net income (loss)
applicable to common shareholders (91,274) 15,265 (102,534) (43,386) (13,402)
- --------------------------------------------------------------------------------------------------------------------------
COMMON STOCK INFORMATION
(in thousands except per share data)
Net income (loss) applicable to common
shareholders (6) $ (13.11) $ 2.19 $ (14.74) $ (5.68) $ (1.62)
Dividends declared per common share $ - $ - $ - $ .32 $ .32
Weighted average number of common
and common equivalent shares (7) 6,965 6,956 6,954 7,635 8,250
- --------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
(in thousands)
Working capital (deficit) (8) $ (16,111) $ (1,481) $ (6,839) $ 33,650 $ 42,215
Net property, plant and equipment (3) (4) 59,868 89,728 146,450 204,051 193,155
Total assets 167,107 229,739 265,498 324,625 320,724
Total debt (9) 4,593 15,931 44,034 53,191 38,352
Shareholders' equity (deficit) (38,106) 50,724 31,790 134,477 144,279
Additions to property, plant
and equipment 2,923 5,892 8,190 33,729 15,766
* Certain amounts have been reclassified to conform with current
classifications.
24
25
(1) In 1995, 1994, and 1993, the Company significantly reduced the level
of activity related to selling coal in the export market and coal
sourced from unaffiliated producers thus reducing revenues and costs
and expenses. Coal revenues include the revenues of Cleancoal
Terminal Company.
(2) In 1992, the Company established a provision for doubtful accounts
totalling $29,055,000; $20,489,000 was related to loans and a
guarantee obligation on behalf of Adventure, a coal supplier that
filed for bankruptcy, and $7,747,000 was established for potentially
uncollectible trade receivables. In 1994 the Company reversed
$2,833,000 of the trade receivable reserve into income.
(3) In 1995 and 1993, the Company recorded a loss on idling of Eastern
operations and unusual charges, respectively, related to the write-off
of the carrying value of certain mining operations and coal reserves
along with provisions for the termination of certain coal operations
and personnel. Refer to Note 4 to the Consolidated Financial
Statements for further details.
(4) In 1995, the Company recognized a $9,088,000 gain on the sale of the
assets of the Hampton Division. In 1994, the Company recognized a
$34,142,000 gain on the sale of the assets of Criterion to Consol and
a gain of $6,988,000 on the sale of several inactive properties in
West Virginia. Refer to Note 3 to the Consolidated Financial
Statements for further details on the sales of assets.
(5) Reflects the 40% interest in Westmoreland Resources, Inc. not owned by
the Company.
(6) On July 1, 1992, the Company issued 575,000 shares of Preferred Stock
previously authorized. Two quarterly dividends at (8.5% per annum)
were declared in 1992, four quarterly dividends were declared in 1993,
one quarterly dividend was declared in 1994 and two quarterly
dividends were declared in 1995. As of December 31, 1995, there were
five cumulative undeclared quarterly preferred stock dividends in
arrears. Cumulative undeclared preferred dividends are deducted from
net income (loss) in determining net income (loss) applicable to
common shareholders. Refer
25
26
to Note 13 to the Consolidated Financial Statements for further
information on the Company's Capital Stock.
(7) In July 1, 1992, the Company purchased 1,295,589 of its own shares
from Penn Virginia and in December 1992 retired the shares.
(8) The decrease in working capital from 1994 to 1995 resulted from
charges incurred when the Company idled Virginia operations in the
third quarter of 1995. The increase in working capital from 1993 to
1994 resulted from the Company's sale of the assets of Criterion and
the subsequent repayment of the majority of its debt obligations, then
classified as current liabilities. The decrease in working capital
from 1992 to 1993 resulted from the reclassification of long-term debt
to current, the adoption of SFAS 106 and the accruals for mine closure
costs, all in 1993.
(9) Refer to Note 7 to the Consolidated Financial Statements for
information regarding the Company's debt structure.
26
27
Westmoreland Coal Company and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31, 1995 1994
- --------------------------------------------------------------------------------
(in thousands)
--------------
Assets
Current assets:
Cash and cash equivalents $ 11,711 $ 15,453
Receivables:
Coal sales 3,024 21,333
Notes 2,295 4,946
Other 2,956 2,367
--------- ---------
8,275 28,646
Less allowance for doubtful accounts 2,515 3,317
--------- ---------
5,760 25,329
Inventories:
Coal 645 3,554
Mine supplies 134 5,050
Other 161 -
--------- ---------
940 8,604
Other current assets 921 952
--------- ---------
Total current assets 19,332 50,338
--------- ---------
Property, plant and equipment:
Land and mineral rights 30,029 30,175
Plant and equipment 255,149 278,400
--------- ---------
285,178 308,575
Less accumulated depreciation and depletion 225,310 218,847
--------- ---------
59,868 89,728
Investment in independent power operations 49,069 44,193
Investment in Dominion Terminal Associates (DTA) 19,326 20,375
Assets of Cleancoal Terminal Company held for sale - 6,149
Workers' compensation bond 9,960 9,210
Prepaid pension cost 7,612 8,266
Other assets 1,940 1,480
--------- ---------
Total Assets $ 167,107 $ 229,739
========== =========
See accompanying Summary of Significant Accounting Policies and Notes to
Consolidated Financial Statements.
27
28
December 31, 1995 1994
- -------------------------------------------------------------------------
(in thousands)
--------------
Liabilities and Shareholders' Equity (Deficit)
Current liabilities:
Current installments of long-term debt $ 1,462 $ 3,561
Accounts payable and accrued expenses:
Trade 3,647 9,796
Taxes, other than taxes on income 3,929 6,099
Payroll 451 2,668
Workers' compensation 5,494 5,409
Postretirement medical costs 10,400 8,075
Shutdown accruals - 3,078
Other 7,155 8,670
--------- ---------
32,538 47,356
Income taxes payable 2,905 3,963
Deferred income taxes - 500
--------- ---------
Total current liabilities 35,443 51,819
--------- ---------
Long-term debt 3,131 12,370
Accrual for workers' compensation 28,130 21,771
Accrual for postretirement medical costs 73,373 36,405
Accrual for pneumoconiosis benefits 13,871 15,004
Accrual for reclamation costs 10,311 8,688
Other liabilities 15,558 7,925
Deferred income taxes 14,827 14,732
Minority interest 10,569 10,301
Commitments and contingent liabilities:
Shareholders' equity (deficit):
Preferred stock of $1.00 par value
Authorized 5,000,000 shares;
Issued 575,000 shares 575 575
Common stock of $2.50 par value
Authorized 20,000,000 shares;
Issued 6,965,329 shares at 12/31/95 17,402 -
Issued 6,957,084 shares at 12/31/94 - 17,390
Other paid-in capital 94,641 94,653
Accumulated deficit (150,724) (61,894)
--------- ---------
Total shareholders' equity (deficit) (38,106) 50,724
--------- ---------
Total Liabilities and Shareholders'
Equity (Deficit) $ 167,107 $ 229,739
========= =========
See accompanying Summary of Significant Accounting Policies and Notes to
Consolidated Financial Statements.
28
29
Westmoreland Coal Company and Subsidiaries
Consolidated Statements of Operations
Years Ended December 31, 1995 1994* 1993*
- -----------------------------------------------------------------------------------
(in thousands except per share data)
------------------------------------
Revenues:
Coal $ 111,303 $ 370,166 $ 465,256
Independent power projects -
equity in earnings and fees 16,968 6,362 945
Services 2,637 834 3,697
--------- --------- ---------
130,908 377,362 469,898
--------- --------- ---------
Cost and expenses:
Cost of coal sold 129,353 345,430 433,074
Depreciation, depletion and amortization 14,903 16,800 21,503
Selling and administrative 14,458 32,619 29,006
Services and independent power projects -
related expenses 2,098 2,569 2,552
Doubtful accounts recoveries (967) (2,738) (257)
--------- --------- ---------
159,845 394,680 485,878
Unusual charges (credits) 66,623 (2,100) 79,250
--------- --------- ---------
Operating loss (95,560) (15,218) (95,230)
Other income (expense):
Gains on sales of assets 9,088 41,130 2,000
Interest expense (1,164) (5,425) (4,936)
Interest income 2,600 1,198 783
Other income 1,506 1,342 1,972
--------- --------- ---------
12,030 38,245 (181)
Income (loss) before income taxes and
minority interest (83,530) 23,027 (95,411)
Income taxes 1,488 2,291 1,487
Minority interest 1,368 583 748
--------- --------- ---------
Net income (loss) (86,386) 20,153 (97,646)
Less preferred stock dividends:
Declared 2,444 1,222 4,888
In arrears 2,444 3,666 -
--------- --------- ---------
Net income (loss) applicable to common
shareholders $ (91,274) $ 15,265 $(102,534)
========= ========= =========
Net income (loss) per share applicable to
common shareholders $ (13.11) $ 2.19 $ (14.74)
========= ========= =========
Weighted average number of common
shares outstanding 6,965 6,956 6,954
* Certain amounts have been reclassified to
conform with current classifications.
See accompanying Summary of Significant Accounting Policies and Notes to
Consolidated Financial Statements.
29
30
Westmoreland Coal Company and Subsidiaries
Consolidated Statements of Shareholders' Equity (Deficit)
Years Ended December 31, 1993, 1994 and 1995
Class A
Convertible Retained
Exchangeable Earnings
Preferred Common Paid-In (Accumulated
Stock Stock Capital Deficit) Total
- -----------------------------------------------------------------------------------------------------------
(in thousands)
Balance at January 1, 1993 $ 575 17,386 94,807 21,709 134,477
Net loss - - - (97,646) (97,646)
Cash dividends declared:
Preferred stock (8.5% per annum) - - - (4,888) (4,888)
Other - 3 (156) - (153)
------- ------ ------ -------- -------
Balance at December 31, 1993 575 17,389 94,651 (80,825) 31,790
Net income - - - 20,153 20,153
Cash dividends declared:
Preferred stock - - - (1,222) (1,222)
Other - 1 2 - 3
------- ------ ------ -------- -------
Balance at December 31, 1994 575 17,390 94,653 (61,894) 50,724
Net loss - - - (86,386) (86,386)
Cash dividends declared:
Preferred stock - - - (2,444) (2,444)
Other - 12 (12) - -
------- ------ ------ -------- -------
Balance at December 31, 1995 $ 575 17,402 94,641 (150,724) (38,106)
======== ====== ====== ======== =======
As of December 31, 1995, there were five cumulative undeclared quarterly
preferred stock dividends in arrears.
See accompanying Summary of Significant Accounting Policies
and Notes to Consolidated Financial Statements.
30
31
Westmoreland Coal Company and Subsidiaries
Consolidated Statements
of Cash Flows
Years Ended December 31, 1995 1994* 1993*
- -------------------------------------------------------------------------------------
(in thousands )
Cash flows from operating activities:
Net income (loss) $(86,386) $ 20,153 $ (97,646)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Unusual charges (credits) 90,126 (2,100) 79,250
Gains on sales of assets (9,088) (41,130) (2,000)
Equity earnings from independent power projects (12,968) (6,450) (3,195)
Development fees from independent power projects (4,000) 88 2,250
Cash distributions from independent power
projects - equity earnings 10,370 1,105 395
Depreciation, depletion and amortization 14,903 16,800 21,503
Deferred income tax expense (benefit) (404) 360 (854)
Minority interest in WRIGs income 1,368 583 748
Changes in assets and liabilities, net of
noncash transactions:
Customers' accounts receivable,
net of allowance for doubtful accounts 16,737 28,161 17,199
Other receivables, net of allowance for
doubtful accounts - (103) 361
Inventories 4,389 6,945 5,596
Accounts payable and accrued expenses (26,263) (20,519) (5,788)
Income taxes payable (1,058) 869 737
Accrual for postretirement medical costs 5,008 7,183 18,745
Accrual for workers' compensation (267) 723 10,087
Accrual for pneumoconiosis benefits (1,133) (2,471) (2,047)
Other liabilities (241) 455 (5,265)
Other 7,081 2,970 (7,476)
-------- --------- ---------
Net cash provided by (used in) operating
activities 8,174 13,622 32,600
-------- --------- ---------
Cash flows from investing activities:
Fixed asset additions (2,923) (5,892) (8,190)
Equity funding of independent power projects (4,611) (23,178) -
(Increase) decrease in long-term investments 3,145 (567) (1,286)
Purchase of Subsidiary (2,771) - -
Hampton lease buyout (1,103) - -
Net proceeds from sales of investments and assets 10,131 78,273 2,253
LG&E support fee payment - (4,750) -
-------- --------- ---------
Net cash provided by (used in) investing
activites 1,868 43,886 (7,223)
-------- --------- ---------
31
32
Cash flows from financing activities:
Proceeds from sale/leaseback - - 3,883
Repayment of long-term debt (10,240) (28,106) (9,346)
Cash used to buy DTA bonds - (26,560) -
Cash deposits to support surety bonds - (8,210) (1,000)
Dividends paid to preferred shareholders (2,444) (2,444) (4,888)
Dividends paid and other adjustments relative
to minority shareholders (1,100) (1,000) (360)
Other - 3 (153)
-------- --------- ---------
Net cash (used in) financing
activities (13,784) (66,317) (11,864)
-------- --------- ---------
Net increase (decrease) in cash and cash
equivalents (3,742) (8,809) 13,513
Cash and cash equivalents, beginning of year 15,453 24,262 10,749
-------- --------- ---------
Cash and cash equivalents, end of year $ 11,711 $ 15,453 $ 24,262
======== ========= =========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 1,106 $ 5,489 $ 5,152
Income taxes 1,432 1,115 1,642
Supplemental disclosures of non-cash investing
and financing activities:
Purchase of subsidiary -
Assumption of liabilities 2,042 - -
Release of loan guarantee 8,864 - -
*Certain amounts have been reclassified to conform with current
classifications.
See accompanying Summary of Significant Accounting Policies and Notes to
Consolidated Financial Statements.
32
33
Westmoreland Coal Company and Subsidiaries
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
CONSOLIDATION POLICY
The Consolidated financial statements of Westmoreland Coal Company (the
"Company") include the accounts of the Company and its majority-owned
subsidiaries, after elimination of intercompany balances and transactions. The
Company uses the equity method of accounting for companies where its ownership
is between 20% and 50% and for partnerships and joint ventures in which less
than a controlling interest is held.
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets, liabilities, revenues and expenses and the
disclosure of contingent liabilities in order to prepare these financial
statements in conformity with generally accepted accounting principles. Actual
results will likely differ from those estimates.
CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with
maturities of three months or less to be cash equivalents. All such
instruments are carried at cost. Cash equivalents consists of Eurodollar time
deposits, money market funds and bank repurchase agreements.
INVENTORY VALUATION
Inventories are stated at the lower of average cost or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are carried at cost and include expenditures for
new facilities and those expenditures that substantially increase the
productive lives of existing plant and equipment. Development costs of mines
in the pre-operating stage are capitalized until commercial operations
commence. Maintenance and repair costs are expensed as incurred. Mineral
rights are depleted based upon estimated recoverable reserves. Plant and
equipment are depreciated straight-line over the assets' estimated useful
lives, ranging from 3 to 40 years. The Company assesses the carrying value of
33
34
its property, plant and equipment for impairment by comparing estimated
undiscounted cash flows expected to be generated from such assets with their
net book value. If net book value exceeds estimated cash flows, the asset is
written down to fair value. When an asset is retired or sold, its cost and
related accumulated depreciation and depletion are removed from the accounts.
The difference between unamortized cost and proceeds on disposition is recorded
as a gain or loss. Fully depreciated plant and equipment still in use are not
eliminated from the accounts.
INDEPENDENT POWER DEVELOPMENT
Costs incurred during the development process of independent power projects are
expensed in the period incurred until certain events, including the execution
of certain contracts, which are critical to a project's construction and
operation, have occured. After these events have taken place, all subsequent
costs are capitalized. At the time when non-recourse bank financing has been
obtained, costs previously expensed by the Company, to the extent reimbursed,
are reported as development fee income. All other income generated in
connection with a project's development is deferred until the project achieves
commercial operation, the required equity funding commitment is made, and the
conversion of the loan from a construction loan to a term loan is completed.
WORKERS' COMPENSATION AND PNEUMOCONIOSIS BENEFIT LIABILITIES
The Company is self-insured for workers' compensation claims and federal and
state pneumoconiosis benefits for current and former employees.
The liability for workers' compensation claims is an actuarially determined
estimate of the ultimate losses incurred on such claims based on the Company's
experience, and includes a provision for incurred but not reported losses.
Adjustments to the probable ultimate liability are made continually based on
subsequent developments and experience and are included in operations as
incurred.
The Company accrues for the projected costs of pneumoconiosis benefits, on an
actuarial basis, over the service period of its mining employees. An
independent trust has been established to fund these benefits.
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POST RETIREMENT BENEFITS OTHER THAN PENSIONS
The Company accounts for health care and life insurance benefits provided to
certain retired employees and their dependents by accruing the cost of such
benefits over the service lives of employees. The Company is amortizing its
transition obligation, for past service costs relating to these benefits, over
twenty years. For union employees who retired prior to 1976, the Company
provides similar medical and life insurance benefits by making payments to a
multiemployer union trust fund. The Company expenses such payments when made.
COAL REVENUES
The Company recognizes coal sales revenue at the time title passes to the
customer. The Company also records as revenue amounts received from coal
related activities, such as proceeds from coal contract buy-outs and coal
option payments. Coal revenues include the sale of mined coal and sales of
coal produced by unaffiliated mining companies where the Company is a sales
agent or broker. The Company recognizes revenue of the coal sold for
unaffiliated companies since the Company assumes the credit risk for the sale,
performs other services such as invoicing, quality control and shipment
monitoring, and in most cases takes title to the coal. Coal revenues
pertaining to coal sold for other companies amounted to $5,959,000,
$83,196,000, $157,788,000 in 1995, 1994, and 1993, respectively.
RECLAMATION
Reclamation costs at active sites are accrued over the expected mine life using
the units of production method based on recoverable reserves and environmental
and regulatory requirements. If a mine shuts down prior to the expected mine
life, the Company accrues the remaining reclamation obligation at the time of
shutdown. Estimates are periodically reviewed and adjustments are made in
accruals to provide for expected future costs.
INCOME TAXES
The Company accounts for deferred income taxes using the asset and liability
method. Deferred tax liabilities and assets are recognized for the expected
future tax consequences of events that have been reflected in the Company's
financial statements based on the difference between the financial statement
carrying amounts and tax bases of assets and liabilities, using enacted tax
rates in effect in the years in which the differences are expected to reverse.
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NET INCOME (LOSS) PER SHARE APPLICABLE TO COMMON SHAREHOLDERS
Declared and undeclared cumulative preferred dividends are deducted from net
income in determining net income (loss) applicable to common shareholders.
Net income (loss) per share applicable to common shareholders is computed by
dividing net income (loss) applicable to common shareholders by the weighted
average number of shares of common stock and common stock equivalents
outstanding during the year. Common stock equivalents are not included in the
calculation when they would have an anti-dilutive effect on income (loss) per
share.
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Westmoreland Coal Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
- --------------------------------------------------------------------------------
1. NATURE OF OPERATIONS
The Company is engaged in the production and sale of coal and owns interests in
cogeneration and other non-regulated independent power plants, principally
within the United States.
The Company incurred a net loss of $86,386,000 and significantly curtailed its
coal mining operations during 1995, and as of December 31, 1995 has a working
capital and shareholders' deficit of $16,111,000 and $38,106,000, respectively.
Management believes, based on its current plans and certain actions taken
subsequent to December 31, 1995, the Company can meet its cash requirements
throughout 1996. In order to improve the Company's liquidity, management may
re-commence mining, on a contract basis, at its Virginia Division, sell certain
assets, and reduce or defer certain postretirement medical, workers'
compensation and related payments due in 1996. If these actions are not
implemented in the time frame and to the extent management contemplates, the
Company could experience liquidity problems during 1996. The Company's long
term viability is ultimately dependent on acquiring or developing additional
profitable operations.
The Company and several of its subsidiaries filed petitions under Chapter 11 of
the Federal Bankruptcy Code on November 8, 1994 seeking the confirmation of a
so-called "prepackaged" plan of reorganization (the "Plan of Reorganization").
The Plan of Reorganization was premised on consummating the sale of certain
assets in order to realize sufficient funds to satisfy $39,250,000 of the
Company's debt obligations which matured on November 8, 1994 and to satisfy
$23,178,000 of equity funding commitments of Westmoreland Energy, Inc.("WEI")
which were due December 30, 1994.
The Company proceeded to complete the sale of certain assets on December 22,
1994 and paid in full its maturing debt obligations of $39,250,000, at which
time it emerged from bankruptcy.
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2. ACQUISITIONS
The Corona Group
On October 31, 1995, WEI, through its newly formed subsidiary,
Westmoreland-Corona, Inc., completed the purchase of The Corona Group Inc.
("Corona"). Corona and its subsidiaries offer technical services and repair
and maintenance services to the power generating industry, including utilities,
cogeneration facilities and independent power producers.
Corona was acquired for $2,771,000 in cash plus the assumption of $2,042,000 in
notes payable and other liabilities, in exchange for 100% of Corona's stock.
The acquisition was accounted for using the purchase method. The transaction
resulted in goodwill of $790,000 which is being amortized straight-line over a
period of fifteen years. The Company's 1995 financial statements include
results of operations from Corona for the period from November 1, 1995 to
December 31, 1995.
3. DISPOSITIONS
Cleancoal Terminal Company
In September 1995, the Company completed the sale of Cleancoal Terminal Company
("Cleancoal"). In exchange for the assets of the unprofitable Cleancoal
operations and a cash payment of $2,500,000, the Company was released from its
$8,864,000 loan guarantee obligation on behalf of Adventure Resources to the
purchaser, as well as the guarantee of related interest payments of
approximately $70,000 per month. In anticipation of the pending sale, the
Company had recognized a loss of $1,882,000 in the fourth quarter of 1994,
closed Cleancoal in January 1995 and laid off the majority of the Cleancoal
employees on January 31, 1995.
Hampton Division
In January 1995, the Company sold the assets of its Hampton Division to an
unrelated party and sold the Hampton Division mineral lease to the lessor for
$9,045,000. The net proceeds to the Company, after the buy out of a related
capital lease, were approximately $7,376,000. The Company recorded a gain on
the disposal of $9,088,000 in 1995, after the reversal of certain liabilities,
including the reclamation and environmental liabilities associated with the
Hampton Division
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which were assumed by the purchasers in the transaction. See Note 4 for
information relating to the shutdown of the Hampton Division.
The revenues, costs and earnings of the Hampton Division for 1994 and 1993 are
summarized below:
1994 1993
----------------------------
(in thousands)
--------------
Revenues $ 33,636 $ 53,874
Costs and expenses 31,246 52,954
Unusual credits (charges) 2,100 (43,158)
----------------------------
Operating income (loss) $ 4,490 $(42,238)
============================
Criterion
In the fourth quarter 1994, the Company sold the assets of its subsidiary
Criterion for cash proceeds of $74,375,000 (net of related cash expenses of
$4,165,000) and realized a gain on the transaction of $34,142,000.
West Virginia - Idled Operations
In the fourth quarter of 1994, the Company sold several inactive properties in
the West Virginia Division for cash proceeds of $3,800,000 and the transfer of
reclamation liabilities related to the purchase, resulting in a gain of
$6,988,000. These properties had not been in operation since the mid-1980's.
4. UNUSUAL CHARGES
Virginia Division
In the third quarter of 1995, the Company incurred $66,600,000 in unusual
charges associated with the cessation of mining activities at the Pine Branch
and the Virginia Division properties. Included in these charges were a
postretirement benefit cost curtailment charge of $34,285,000, a potential UMWA
pension withdrawal liability of $19,800,000, an impairment of fixed assets of
$18,900,000, severance and early retirement costs of $8,600,000 and other costs
totalling approximately $5,500,000. These charges were partially offset by a
$23,500,000 gain realized from the settlement of a coal purchase agreement with
the Virginia Division's major coal customer.
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Idling of the Virginia Division resulted in the termination of 706 employees.
There are 44 employees remaining that are currently involved in maintaining the
properties on a standby status. Of those who were terminated, 600 were UMWA
employees involved in all aspects of mining operations. The remaining 106
employees were salaried and supervisory personnel.
In addition, the Virginia Division recorded $16,092,000 in unusual charges in
1993 related to the closure of the Wentz mine and preparation plant complex, a
write-off of an undeveloped block of reserves, and a write-off related to
certain other assets.
Hampton Division
In 1994, the Company reversed $2,100,000 of the reserves established in 1993
for workers' compensation liabilities based upon the results of an actuarial
analysis.
In 1993, the Company recorded unusual charges of $43,158,000 related to the
anticipated shutdown of the majority of the Hampton Division operations in the
second quarter of 1994. These charges include a write-down of the fixed
assets, an accrual related to the postretirement medical liabilities,
termination costs, a reclamation accrual, and other shutdown reserves. The
Company calculated and recorded these charges in 1993 anticipating termination
of approximately 130 employees. There were 127 employees of the Hampton
Division who were terminated when the shutdown occured in 1994.
West Virginia
In 1993, the Company recorded $20,000,000 in unusual charges for the write-off
of a partially developed property which was subsequently sold in 1994. All
reclamation and environmental liabilities were transferred as part of the sales
transaction.
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Accruals for the above unusual charges as they relate to the Virginia Division,
incurred and included in the balance sheet of the Company as of December 31,
1995 are as follows (in thousands):
Liabilities Idling Liabilities
prior to related Amounts at December
idling charges Paid 31, 1995
- -----------------------------------------------------------------------------------
Post retirement medical benefits $17,050 34,200 (a) (a)
Termination benefits and
other severance costs - 28,400 (5,000) 23,400
Other liabilities arising
from the idling of
operations, including
amounts for remediation
activities 7,209 5,479 (3,000) 9,688
------- ------ ------ ------
24,259 68,079 (8,000) 33,088
======= ====== ======
Current portion of
idling costs (3,600)
-------
Long term portion of
idling costs $29,488
=======
(a) Certain liabilities related to the idling of operations are for post
retirement benefits which are actuarily determined on a company-wide
basis. Accordingly, amounts paid and remaining liabilities for these
items as they relate to the idling of the Virginia Division cannot be
specifically identified.
5. WESTMORELAND ENERGY, INC.
Westmoreland Energy, Inc., ("WEI"), a wholly owned subsidiary of the Company,
holds general and limited partner interests in partnerships which were formed
to develop and own cogeneration and other non-regulated independent power
plants. Equity interests in these partnerships range from 1.25 percent to 50
percent. WEI has interests in eight operating projects as listed and described
in the Project Status Summary below. The lenders to these partnerships have
recourse only against these projects and the income and revenues therefrom.
The debt agreements contain various restrictive covenants including
restrictions on making cash distributions to the partners, with which the
partnerships are in compliance. The type of restrictions on making cash
distributions to the partners vary from one project lender to another.
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PROJECT STATUS SUMMARY
Project Roanoke Roanoke
Ft. Drum Altavista Hopewell Southampton Ft. Lupton Rensselaer Valley I Valley II
- -----------------------------------------------------------------------------------------------------------------------------
Location
Watertown,NY Altavista,VA Hopewell,VA Southampton,VA Ft. Lupton,CO Rensselaer,NY Weldon,NC Weldon,NC
- -----------------------------------------------------------------------------------------------------------------------------
Status
Operational Operational Operational Operational Operational Operational Operational Operational
- -----------------------------------------------------------------------------------------------------------------------------
Gross Megawatt Capacity
55.5 MW 70 MW 70 MW 70 MW 290 MW 81 MW 180 MW 50 MW
- -----------------------------------------------------------------------------------------------------------------------------
WEI Equity Ownership
1.25% 30.0% 30.0% 30.0% 4.49% 50.0% 50.0% 50.0%
- -----------------------------------------------------------------------------------------------------------------------------
Electricity Purchaser
Niagara Virginia Virginia Virignia Public Service Niagara Virginia Virginia
Mohawk Power Power Power of CO. Mohawk Power Power
- -----------------------------------------------------------------------------------------------------------------------------
Steam Host
US Army The Lane Firestone Tire Hercules, Inc. Rocky Mtn BASF Patch Patch
Company, Inc & Rubber Co. Produce, Ltd Rubber, Co. Rubber, Co.
- -----------------------------------------------------------------------------------------------------------------------------
Fuel Type
Coal Coal Coal Coal Natural Gas Natural Gas Coal Coal
- -----------------------------------------------------------------------------------------------------------------------------
Fuel Supplier
Cyprus Amex Westmoreland United Coal United Coal Thermo Western Gas TECO Coal TECO Coal
Coal Co. Coal Co. Company Company Fuels, Inc. Marketing, Ltd CONSOL CONSOL
- -----------------------------------------------------------------------------------------------------------------------------
Commercial Operations Date
1989 1992 1992 1992 1994 1994 1994 1995
- -----------------------------------------------------------------------------------------------------------------------------
The following is a summary of aggregated financial information for all
investments owned by WEI and accounted for under the equity method:
BALANCE SHEET (in thousands)
Dec. 31, 1995 Dec. 31,1994
------------- ------------
ASSETS
Current assets $ 110,763 $ 94,946
Property, plant and equipment, net 714,760 727,597
Other assets 72,422 66,849
--------- ---------
Total assets $ 897,945 $ 889,392
========= =========
LIABILITIES & EQUITY
Current liabilities $ 61,615 $ 35,798
Long-term debt
and other liabilities 702,778 729,451
Equity 133,552 124,143
--------- ---------
Total liabilities & equity $ 897,945 $ 889,392
========= =========
WEI's share of equity $ 40,271 $ 38,981
Restricted cash 8,000 4,065
Acquisition cost in excess of
fair market value of assets
acquired, net of amortization 1,107 1,147
Other, net (309) -
--------- ---------
WEI's investment in
Independent power operations 49,069 44,193
========= =========
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The acquisition cost in excess of fair market value of assets acquired is being
amortized straight-line over the term of the power contract for the related
project.
INCOME STATEMENT (in thousands)
For years ended December 31,
----------------------------
1995 1994 1993
---- ---- ----
Revenues $ 237,693 $ 186,979 $110,199
Operating income 130,192 81,650 48,921
Net income 39,416 25,259 16,624
WEI's share of
equity earnings 12,968 6,670 3,195
------------------------------
WEI performs project development and venture and asset management services for
the partnerships and has recognized related revenues and income of $454,000,
$712,000 and $363,000 for the years ended December 31, 1995, 1994 and 1993,
respectively. These management fees are recorded as revenues when the service
is performed. WEI receives development fees from certain projects.
Recognition of these fees as income is deferred until the related project
achieves commercial operation, the required equity funding commitment is made
and the conversion of the loan from a construction loan to a term loan is
completed. WEI had no deferred fees at the end of 1995 and deferred fees of
$4,000,000 at December 31, 1994. Deferred fees of $4,000,000 were recognized in
1995. No deferred fees were recognized in 1994 or 1993.
Equity Support Agreement
On April 15, 1993, the Company entered into an equity support agreement with
LG&E Power Inc. ("LG&E") whereby WEI's equity funding commitments of the ROVA
I, Rensselaer and ROVA II projects were guaranteed by LG&E. As consideration
for these guarantees, the Company had pledged its interest in all three of
these projects as security to LG&E. WEI's ownership interest in the
Rensselaer, ROVA I and ROVA II projects continued to be pledged to LG&E until
the ROVA II project equity funding commitments was satisfied. That funding
commitment, in the amount of $4,600,000, was made in October 1995, thus ending
the equity support agreement. The Company paid fees of 1.25 percent per annum
on the aggregate amount of the guarantees and a fee of $4,750,000. These fees
were being amortized through the required
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equity funding dates of the respective projects. Such amortization expense was
$425,000 in 1995, $2,957,000 in 1994, and $2,459,000 in 1993.
Recent Developments Relating to Independent Power Projects
Southampton Project WEI owns a 30% general partnership interest in
LG&E-Westmoreland Southampton ("Southampton Partnership"), which owns the
Southampton Project. The Southampton Project, which was engaged in start-up
and testing operations from September 1991 through March 1992, failed to meet
Federal Energy Regulatory Commission ("FERC") operating standards for a
qualifying facility ("QF") in 1992. The failure was due to three factors: (i)
the facility was not dispatched by its power customer, Virginia Electric and
Power Company ("Virginia Power"), on a baseload schedule as anticipated, (ii)
the facility was engaged in start-up and testing operations during a portion of
that year, and (iii) the facility operator mistakenly delivered non-sequential
steam to the host over a significant period of time. On February 23, 1994, the
Southampton Partnership filed a request with the FERC for a waiver of the
FERC's QF operating standard for 1992. Virginia Power intervened in the FERC
proceeding, opposed the granting of a waiver, and alleged that its power
contract with the Southampton Partnership had been breached due to the failure
of the facility to maintain QF status in 1992.
On July 7, 1994, the FERC issued an order (1) denying the application of the
Southampton Partnership for a waiver of the FERC's QF operating standard in
1992 with respect to the Southampton Project and (2) directing the Southampton
Partnership to show cause why it should not be required to file rate schedules
with the FERC governing its 1992 electricity sales for resale to Virginia
Power. In 1994 the Southampton Project established a reserve for the
anticipated refund obligations relating to this issue. On August 9, 1994, the
Southampton Partnership filed a request for rehearing of FERC's order or,
alternatively, a motion for reconsideration. If the FERC were to deny the
requested waiver on rehearing and to determine that the Southampton Partnership
had been a "public utility" in 1992, then the Southampton Partnership's 1992
actions could be subject to regulation under the Federal Power Act and state
laws and regulations; two other cogeneration projects in which the Company
holds ownership interests could also be subject to such regulation; the Company
and certain of its subsidiaries could
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45
become subject to regulation for 1992 under the Public Utility Holding Company
Act; and defaults might be created under certain existing agreements. No
assurance can be provided as to the timing of the FERC's decision or the
outcome. The Company believes that a denial by FERC of a waiver for the
Southampton facility would not have a material adverse effect on the financial
condition, operations or liquidity of the Company.
ROVA I Project - WEI owns a 50% partnership interest in Westmoreland-LG&E
Partners (the "ROVA Partnership"). The ROVA Partnership's principal customer
contracted to purchase the electricity generated by ROVA I under a long-term
contract. In the second quarter of 1994, that customer disputed the ROVA
Partnership's interpretation of the provisions of the contract dealing with the
payment of the capacity purchase price when the facility experiences a forced
outage day. A forced outage day is a day when ROVA I experiences an
interruption in the facility's ability to generate electrical output. The
ROVA Partnership believes that the customer is required to pay the ROVA
Partnership the full capacity purchase price unless forced outage days exceed a
contractually stated allowed annual number. The customer asserts that it is
not required to do so.
Through December 31, 1995, the customer withheld approximately $8,500,000 of
capacity purchase price payments to the ROVA Partnership because of this
dispute. The customer has withheld an additional $203,000 from the ROVA
Partnership through March 4, 1996. On October 31, 1994, the ROVA Partnership
filed a complaint in the Circuit Court of the City of Richmond, Virginia to
recover these amounts and to confirm that such payments may not be withheld in
the future. On December 12, 1994 the customer filed a motion to dismiss the
complaint and on March 17, 1995 the Court granted this motion. The ROVA
Partnership filed an amended complaint on April 17, 1995. On April 27, 1995
the customer filed another motion to dismiss the complaint. On August 23, 1995
the Court denied the customer's motion to dismiss and set a trial date of March
25, 1996. The customer filed two motions for a summary judgement. The court
denied the customer's first motion for summary judgement on January 30, 1996;
however, the customer filed a second summary judgement motion on March 1, 1996.
On March 18, 1996 the Court granted the customer's second summary judgement
motion and effectively dismissed the complaint. The ROVA Partnership is
evaluating its options, including possible appeal of the Court's decision
granting summary judgement. The capacity purchase price withheld had been
included in the revenues and earnings of the ROVA Partnership until a reserve
was recorded as of December 31, 1994 for the full amount withheld by the
customer. WEI
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had recognized its 50% share of the withheld payments in earnings in the
second, third and fourth quarters of 1994. In the fourth quarter of 1994,
WEIGs revenues were reduced by $2,928,000, representing its 50% share of the
disputed amount. No earnings were recognized by WEI in 1995 for payments
withheld by the customer relating to forced outage days.
6. WESTMORELAND TERMINAL COMPANY
Westmoreland Terminal Company ("WTC"), a wholly-owned subsidiary of the
Company, has a 20% interest in Dominion Terminal Associates ("DTA"), a
partnership formed for the construction and operation of a coal-storage and
vessel-loading facility in Newport News, Virginia. DTA's annual throughput
capacity is 22 million tons, and its ground storage capacity is 1.7 million
tons.
The Company currently leases the terminal's ground storage space and
vessel-loading facilities to certain unaffiliated parties. Historically, the
Company utilized the terminal for most of its coal exporting business. In
1994, the Company discontinued export sales.
WTC and the Company have a joint and several obligation for interest and
principal obligations with respect to its share of certain DTA bonds
($26,560,000 principal balance at December 31, 1995 and 1994). These
obligations were supported by a letter of credit on which the Company was the
ultimate obligor.
In 1994, the Company was in violation of certain covenant requirements in
connection with the DTA letter of credit. As a result, on June 9, 1994 the DTA
letter of credit was drawn. The proceeds of the draw were used to purchase
$26,560,000 (par value) of DTA bonds. The Company repaid the amounts drawn
under the DTA letter of credit on December 22, 1994. The $26,560,000 of DTA
bonds are now owned by WTC and have been accounted for as an increase in the
investment in DTA.
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The following is a summary of financial information for DTA:
BALANCE SHEET
December 31, 1995 1994
- ----------------------------------------------------------
(in thousands)
ASSETS
Current assets $ 4,964 $ 5,334
Non-current assets 97,262 101,568
--------------------------------------------------------
Total assets $102,226 $106,902
--------------------------------------------------------
LIABILITIES AND PARTNERS' DEFICIT
Current liabilities $ 3,756 $ 1,580
Long-term debt
and other liabilities 117,177 117,777
Partners' deficit (18,707) (12,455)
--------------------------------------------------------
Total liabilities
& partners' deficit $102,226 $106,902
--------------------------------------------------------
WTC's share
of partners' deficit $( 8,604) $ (7,615)
DTA Bonds 26,560 26,560
Goodwill, net of amortization 1,370 1,430
-------- --------
Investment in DTA 19,326 20,375
======== ========
The Company is amortizing the goodwill using the straight-line method over 30
years.
INCOME STATEMENTS
For the Years ended December 31, 1995 1994 1993
- -------------------------------------------------------------------
(in thousands)
Contribution from Partners $ 17,922 $ 15,946 $ 18,592
Operating expenses 20,035 19,425 19,176
Excess of expenses over
partners' contributions (4,660) (4,208) (1,685)
WTC's share of
net loss $ (989) $ (214) $ (545)
- -------------------------------------------------------------------
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48
The Company actively markets its 20% share of the terminal's facilities.
Accordingly, the Company's share of net income represents the revenue received
and expenses incurred resulting from the utilization of the Company's share of
the terminal's coal-storage and vessel loading operations.
The DTA partners have a Throughput and Handling Agreement whereby WTC is
committed to fund its proportionate share of DTA's operating expenses. WTC's
total cash funding obligations, were $2,282,000, $2,991,000, and $3,129,000 for
1995, 1994 and 1993, respectively.
7. DEBT
The Company's total debt is summarized in the following
tables:
December 31, 1995 1994
- ----------------------------------------------------------------
(in thousands)
Capital lease obligations payable in
installments through 1997 with varying
interest rates ranging from 7% to 14% $ 1,261 $ 4,666
WEI:
Notes Payable (unsecured) - payable to
former Corona Shareholders in two
equal installments due January 1,
1997 and 1998 with interest
at 7.4% 789 -
Bank Note (secured by Corona assets) -
installments due through year 2000 with
a variable interest rate (10.25% at
December 31, 1995) 280 -
WRI:
Contracts for deed and mortgage notes,
payable with specified interest rates
from 4% to 7% net of unamortized
discount (1995-$329 and 1994-$385)
maturing through 2005 2,263 2,401
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Obligation under loan guarantee at an
interest rate of 9.5% - 8,864
- -----------------------------------------------------------------
Total debt 4,593 15,931
Less current installments 1,462 3,561
----------------------------------------------------------------
Long-term portion of debt $ 3,131 $ 12,370
----------------------------------------------------------------
December 31,
1995 1994
-----------------
(in thousands)
Current Maturities:
- -------------------
Capital leases $ 1,239 $ 3,423
WEI debt 72 -
WRI debt 151 138
------- --------
Total current maturities $ 1,462 $ 3,561
======= ========
Principal payments due on long-term debt, including capital leases, for the
next five years and beyond are as follows:
Year Ending Amount
----------------------------------------------------
(in thousands)
-------------
December 31, 1996 $ 1,462
December 31, 1997 614
December 31, 1998 656
December 31, 1999 260
December 31, 2000 260
After December 31, 2000 1,341
---------------------------------------------------
The contracts for deed and mortgage notes payable of WRI are secured by land
and surface rights with an aggregate cost, net of amortization, of
approximately $12,160,000 at December 31,1995.
8. WORKERS' COMPENSATION BENEFITS
The Company was self-insured for workers' compensation benefits through
December 31, 1995. The amounts charged to expense for workers' compensation
were $12,890,000, $5,108,000 and $17,204,000 for 1995, 1994 and 1993,
respectively. The cash payments for workers' compensation were $6,505,000,
$6,266,000 and $6,193,000 in 1995, 1994 and 1993, respectively.
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50
The Company is required to obtain surety bonds in connection with its
self-insured workers' compensation plan. The Company's surety bond underwriter
requires cash collateral for such bonding. As of December 31, 1995, $9,960,000
was deposited in the cash collateral account which is classified in Other
Assets (long-term) in the Company's Consolidated Balance Sheets. Beginning in
1996 the Company is covered by insurance for new workers' compensation claims
and is no longer self-insured.
9. PNEUMOCONIOSIS BENEFITS
The Company is self-insured for Federal and state pneumoconiosis benefits.
Some years ago the Company created a trust with an independent trustee to fund
payment of these benefits and uses an actuarial method of providing for the
cost of projected benefits to current and former employees based on existing
and estimated future claims. The discount rates used for 1995 and 1994 were
7.0% and 7.5%, respectively.
The following table sets forth the plan's status:
December 31, 1995 1994
- ---------------------------------------------------------------------
Actuarial present value of benefit obligation:
Terminated employees $21,100 $ 5,600
Claimants 21,000 17,400
Active employees - 11,600
------- -------
Total present value of benefit obligation 42,100 34,600
Plan assets at fair value 42,601 39,099
------- -------
Plan assets in excess of projected benefit
obligation 501 4,499
Unrecognized net gain (14,372) (19,503)
------- -------
Liabilities recorded by the Company for
pneumoconiosis benefits $13,871 $15,004
======= =======
Based on actuarial data, the Company credited to earnings $1,133,000,
$2,471,000 and $2,047,000, in 1995, 1994 and 1993, respectively, representing
primarily the amortization of the unrecognized net gain.
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10. POSTRETIREMENT MEDICAL AND LIFE INSURANCE BENEFITS
Single-Employer Plans
The Company and its subsidiaries provide certain health care and life insurance
benefits for retired employees and their dependents. Substantially all of the
Company's current employees (unionized and non-unionized) may become eligible
for these benefits if certain age and service requirements are met at the time
of termination or retirement as specified in the plan agreement. These
benefits are provided through self-insured programs.
In 1990, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for Postretirement
Benefits Other than Pensions" ("SFAS 106"). Under this standard the cost of
postretirement benefits other than pensions must be recognized on an accrual
basis as employees perform services rather than the "pay-as-you-go" basis.
The Company adopted SFAS 106 effective January 1, 1993 and elected to amortize
its unrecognized, unfunded accumulated postretirement benefit obligation over a
20-year period. The Company expensed $15,259,000, $16,726,000, and $18,138,000
for SFAS 106 in 1995, 1994 and 1993, respectively. This accounting standard
does not change the cash requirements for funding these benefits. Cash
payments for medical and life insurance benefits were $9,722,000, $7,775,000
and $7,604,000 in 1995, 1994 and 1993, respectively.
During 1995, as a result of the events described in Note 4, the number of
employees and employees accumulating benefits under the plan, has been reduced
significantly. The impact of these events has been accounted for as a plan
curtailment, and accordingly, the Company recognized a loss of $34,285,000
which has been included as a component of unusual charges.
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The following table sets forth the actuarial present value of benefit
obligation and amounts recognized in the Company's financial statements:
December 31,
------------
(in thousands)
1995 1994
---- ----
Accumulated postretirement benefit obligation:
Current retirees and beneficiaries $(162,059) $(91,766)
Fully eligible active plan participants (44) (30,816)
Other active plan participants (375) (8,374)
- ------------------------------------------------------------------------
Total accumulated benefit obligation (162,478) (130,956)
Unrecognized net transition obligation 69,704 93,717
Unrecognized net loss or (gain) 14,937 (775)
- ------------------------------------------------------------------------
Accrued postretirement benefit cost $ (77,837) $(38,014)
========================================================================
The health care cost trend rate assumed ranges from 7.5% in 1996 to 5% by the
year 2001. Increasing the assumed health care cost trend rate by one
percentage point in each year would increase the accumulated postretirement
benefit obligation as of December 31, 1995 by $17,700,000 and the aggregate of
the service and interest cost components of net periodic postretirement benefit
cost for 1995 by $1,200,000.
The discount rate used in determining the accumulated postretirement benefit
was 7.0% and 8.50% at December 31, 1995 and 1994, respectively.
The components of net periodic postretirement benefit cost are as follows:
December 31,
------------
(in thousands)
1995 1994 1993
---- ---- ----
Service cost of benefits earned $ 253 $ 689 $ 1,271
Interest cost on projected
benefit obligation 10,375 10,517 10,555
Net amortization and deferral 4,631 5,520 6,312
- ------------------------------------------------------------------
Net periodic postretirement
benefit cost $15,259 $16,726 $18,138
==================================================================
Multiemployer Plans
The Company makes payments into the UMWA Benefit Trust Funds (the "Funds"),
which are multiemployer health plans neither controlled nor administered by the
Company. These Funds are designed to pay benefits to the Company's UMWA
employees who retired prior to
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1976 and to the Company's pro-rata assigned share of UMWA retirees whose
companies are no longer in business. Prior to February 1993, the amount paid
by the Company was based on hours worked or tons processed (depending on the
source of the coal) in accordance with the National Contract with the UMWA.
Beginning February 1993 the Company is required by the Coal Industry Retiree
Health Benefit Act of 1992 to make monthly premium payments into the Funds.
These payments are based on the number of beneficiaries assigned to the
Company. The net present value of the Company's future cash payments is
estimated to be $53,918,000. The amounts of the cash payments into the Funds
were $5,368,000, $6,072,000 and $3,827,000 in 1995, 1994 and 1993,
respectively. Included in the 1995 amount were cash payments of $570,000 that
were charged against an accrual established in 1993 for the Hampton Division
shutdown. Excluding the Hampton shutdown accrual the amounts expensed by the
Company amounted to $4,798,000, $4,327,000, and $4,937,000 in 1995, 1994 and
1993, respectively. Refer to Note 4 for further information regarding the
Hampton shutdown.
In addition, employees terminated due to layoffs may be eligible for health
care, life insurance and certain other benefits for a period of up to 24
months. The Company charges against earnings an estimate of all these future
costs associated with such employees in the month of layoff.
11. RETIREMENT PLANS
The Company and its subsidiaries have a non-contributory defined benefit
pension plan covering non-union employees. Benefits are based on years of
service and the employee's average annual compensation for the highest five
continuous years of employment as specified in the plan agreement. The
Company's funding policy is to contribute annually the minimum amount
prescribed, as specified by applicable regulations. Prior service costs and
actuarial gains are amortized over plan participants' expected future service
using the straight-line method. The transition asset is amortized over twenty
years with seventeen years remaining. Pension income amounted to $2,439,000,
$1,862,000, and $1,682,000 in 1995, 1994 and 1993, respectively.
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The following table sets forth the funded status of the Company's plan and the
amounts recognized in the Company's financial statements:
December 31, 1995 1994
- ---------------------------------------------------------------------
(in thousands)
--------------
Actuarial present value of benefit obligations:
Total vested and accumulated benefit
obligations $ (59,282) $ (47,254)
- ---------------------------------------------------------------------
Projected benefit obligation (60,325) (53,416)
Plan assets at fair value, primarily listed
stocks and fixed income investments 83,917 76,316
- ---------------------------------------------------------------------
Plan assets in excess of projected benefit
obligation 23,592 22,900
Unrecognized transition asset (2,477) (3,120)
Unrecognized prior service cost 351 2,806
Unrecognized net gain (13,854) (14,320)
- ---------------------------------------------------------------------
Prepaid pension cost included
in Other assets $ 7,612 $ 8,266
=====================================================================
The components of net periodic pension
income for years ended December 31 1995 1994 1993
- ------------------------------------------------------------------------
(in thousands)
--------------
Service cost for benefits earned during
the period $ 516 $ 1,057 $ 1,051
Interest cost on projected benefit
obligation 4,307 4,488 4,609
Actual return on plan assets (18,286) 1,084 (8,064)
Net amortization and deferral 11,023 (8,491) 722
- ------------------------------------------------------------------------
Net periodic pension income $ (2,440) $ (1,862) $ (1,682)
=========================================================================
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Projected benefits have been discounted using a rate of 7.0% and 7.25% at
December 31, 1995 and 1994, respectively. The rate of increase in future
compensation levels for the plan were 5.0% and 5.5% at December 31, 1995 and
1994, respectively. The expected long-term rate of return on assets was 9.0%
for 1995 and 1994.
During 1995, as a result of the events described in Note 4, the number of
employees, and employees accumulating benefits under the plan, has been
significantly reduced. The impact of these events has been accounted for as a
plan curtailment.
Effective January 1, 1992 the Company adopted the Westmoreland Coal Company
Supplemental Executive Retirement Plan ("SERP"). The SERP is an unfunded
non-qualified deferred compensation plan which provides benefits to certain
employees that are not eligible under the Company's defined benefit pension
plan due to maximum limits imposed by the Employee Retirement Income Security
Act ("ERISA") and the Internal Revenue Code. SERP expense amounted to
$225,000, $232,000, and $199,000 in 1995, 1994, and 1993 respectively.
The following table sets forth the plan's funded status and amounts recognized
in the Company's financial statements.
December 31, 1995 1994
- ----------------------------------------------------------------------
(in thousands)
--------------
Actuarial present value of benefit obligations:
Accumulated benefit obligations, including vested
benefits of $632 and $570 in 1995 and 1994,
respectively $ (999) $ (765)
- ----------------------------------------------------------------------
Projected benefit obligation (1,421) (1,042)
Unrecognized prior service cost 926 975
Unrecognized net gain (284) (531)
Additional minimum liability (220) (167)
- ----------------------------------------------------------------------
Accrued pension cost included in Other
liabilities $ (999) $ (765)
======================================================================
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The components of net periodic SERP costs
for year ended December 31, 1995 1994 1993
- ---------------------------------------------------------------
(in thousands)
--------------
Service cost for benefits earned
during the period $ 54 $ 61 $ 28
Interest cost on projected
benefit obligation 94 83 87
Net amortization and deferral 77 88 84
- ---------------------------------------------------------------
Net periodic SERP cost $ 225 $ 232 $ 199
===============================================================
Projected benefits have been discounted using a rate of 7.0% and 8.5% at
December 31, 1995 and 1994, respectively. The rate of increase in future
compensation levels for the plan was 5.0% for 1995 and 1994.
The Company is required under the national contract with the United Mine
Workers' of America (the "UMWA") to pay amounts based on hours worked or tons
processed (depending on the source of the coal) to the UMWA Retirement Funds
with respect to unionized employees. These multiemployer pension plans are not
controlled or administered by the Company. The amounts charged to expense,
including payments made by the Company on behalf of certain contract miners,
were $19,800,000, $1,021,000 and $1,190,000 for the years ended December 31,
1995, 1994 and 1993, respectively. The amount charged in 1995 to expense
includes the estimated liability the Company would incur upon withdrawal from
the plan. Under ERISA, as amended by the Multiemployer Pension Plan Amendment
Act of 1980, a company contributing to a multiemployer plan is liable for its
share of unfunded vested liabilities upon termination or withdrawal from the
plan. There has been no determination by the UMWA trustees that the Company
has incurred a partial or complete withdrawal.
The Board of Directors approved the establishment of a voluntary Early
Retirement Incentive Program (the "Program") during the first quarter of 1995.
The program was implemented in 1995 during the third quarter and is
substantially completed. Senior Management and employees of WEI are not
eligible to participate in this program. Participating employees who receive
benefits under the Program are not eligible for benefits under the severance
policies of the Company or its subsidiaries. Under ERISA, pension assets are
only available to plan participants. The Company recorded a charge of
$9,069,000 for benefits paid to employees participating in the program in 1995.
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57
12. INCOME TAXES (BENEFIT)
The Company's ownership percentage in WRI is below the 80% threshold required
for including WRI in the Company's consolidated income tax return.
Accordingly, WRI must file stand-alone tax returns and the Company is not able
to offset WRI's income with the Company's net operating loss carryforwards.
Income tax expense attributable to income (loss) before income taxes and
minority interest consists of:
1995 1994 1993
-------------------------------------------------------
(in thousands)
--------------
Federal:
Current $ 1,863 $ 1,177 $ 1,421
Deferred (334) 296 (703)
-------------------------------------------------------
1,529 1,473 718
State:
Current 29 754 920
Deferred (70) 64 (151)
-------------------------------------------------------
(41) 818 769
-------------------------------------------------------
Income taxes $ 1,488 $ 2,291 $ 1,487
=======================================================
Income tax expense attributable to income (loss) before income taxes and
minority interest differed from the amounts computed by applying the statutory
Federal income tax rate of 34% to pretax income (loss) from continuing
operations before minority interest as a result of the following:
1995 1994 1993
--------------------------------
(in thousands)
--------------
Computed tax expense (benefit)
at statutory rate $(28,400) $ 7,829 $(32,891)
Increase (decrease) in tax
expense resulting from:
Percentage depletion (131) (340) (1,128)
State income taxes, net (70) 540 543
Minimum tax - 500 600
Net operating loss
carryforward utilized
for book purposes including
change in valuation
allowance 30,004 (6,587) 34,881
Other 85 349 (518)
---------------------------------------------------------------
Income taxes $ 1,488 $ 2,291 $ 1,487
===================================================================
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58
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1995
and 1994 are presented below:
DEFERRED TAX ASSETS: 1995 1994
(in thousands)
Net operating loss carryforwards $ 59,043 $ 55,243
Investment tax credit carryforwards 4,500 4,500
Operating leases capitalized for books - 1,555
Accounts receivable, due to allowance
for doubtful accounts 7,822 7,309
Deferred income 18 1,360
Plant and equipment, differences due to
depreciation and amortization 9,064 8,608
Accruals for the following:
Workers' Compensation 9,151 9,283
Postretirement benefit obligation 26,398 12,846
Pneumoconiosis 4,716 5,203
Reclamation 3,506 3,069
Other 3,024 5,126
--------------------------------------------------------------
Total gross deferred assets 127,242 114,102
Less valuation allowance (124,910) (111,603)
----------------------------------------------------------------
Net deferred tax assets $ 2,332 $ 2,499
================================================================
DEFERRED TAX LIABILITIES:
Plant and equipment, differences due to
depreciation and amortization $(14,376) $(14,750)
Prepaid Pension (2,547) (2,724)
Advanced royalties, capitalized for
financial purposes (109) (109)
Unamortized discount on long-term debt for
financial purposes (127) (148)
----------------------------------------------------------------
Total gross deferred tax liabilities (17,159) (17,731)
================================================================
Net deferred tax liability $(14,827) $(15,232)
================================================================
The Company and subsidiaries, excluding WRI which is not included in the
consolidated federal income tax return of the Company, have available tax basis
net operating loss carryforwards to reduce future taxable income and investment
tax credit carryforwards to offset future taxes payable. The following table
illustrates the expiration date and amounts of the net operating loss
carryforwards for both regular and minimum taxes:
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59
(in thousands)
Expiration Date Regular Tax Minimum Tax
- ---------------- ----------- -----------
1996 $ 24,121 $ -
1997 2,982 -
1998 1,735 -
1999 8,316 -
after 1999 136,503 36,545
--------- ----------
Total $ 173,657 $ 36,545
========= ==========
The Company also has investment tax credit carryforwards of $4,500,000 which
expire over the period from 1997 through 2000.
13. CAPITAL STOCK
The authorized capital stock of the Company consists of 20,000,000 shares of
Common Stock and 4,800,000 shares of Series A, Convertible, Exchangeable
Preferred Stock and 200,000 shares of Series B Junior Participating Preferred
Stock.
As of December 31, 1995, the Company had outstanding 6,965,328 shares of Common
Stock and 575,000 shares of Series A Convertible Exchangeable Preferred Stock.
The Common Stock and the Preferred Stock constitute all of the Company's voting
securities.
In July 1992, the Company sold 2,300,000 Depository Shares, each representing
one quarter of a share of Series A Convertible Exchangeable Preferred Stock
(the "Preferred Stock") for a total public offering price of $57,500,000. Net
proceeds to the Company were $54,528,000. As a result, 575,000 shares of
Preferred Stock are outstanding. The Preferred Stock has a liquidation
preference equivalent to $25 per depository share and dividends accumulate on
the Preferred Stock at 8.5% per annum, equivalent to $2.125 per year per
depository share. There are no mandatory sinking fund requirements on the
Preferred Stock.
The Preferred Stock is convertible at the option of the holder at any time,
unless previously redeemed, into shares of Common Stock of the Company at a
rate equivalent to 1.708 shares of Common Stock for each Depository Share. The
Preferred Stock and the Depository Shares representing such stock are not
redeemable prior to July 1, 1996. The Preferred Stock is redeemable thereafter
at the option of the Company, in whole or in part, from time to time, initially
at an amount equivalent to $26.28 per Depository Share, if redeemed during the
twelve month period
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60
beginning July 1, 1996, and thereafter at prices declining annually to an
amount equivalent to $25 per Depository Share on and after July 1, 2002, plus,
in each case, an amount equal to the sum of all accrued and unpaid dividends.
The Preferred Stock may be exchanged at the option of the Company, as a whole
only, on any dividend payment date commencing July 1, 1996, for 8.5%
Convertible Subordinated Exchange Debentures due July 1, 2012 (the "Exchange
Debenture") in a principal amount equal to $100 per share of Preferred Stock.
The Exchange Debenture, if issued, will be convertible at the option of the
holder at any time, unless previously redeemed, into shares of Common Stock at
the then applicable conversion rate for the Preferred Stock.
Penn Virginia's voting interest in the Company was 18.95% at December 31, 1995,
and 1994 and 18.96% at December 31, 1993.
On January 28, 1993 the Company adopted a Shareholder Rights Plan (the "Plan")
and declared a distribution under the Plan of one Preferred Stock Purchase
Right ("Right") for each outstanding share of the Company's Common Stock. In
the event that any person or group acquires a 20% or greater position in the
Company, each holder of a Right (other than the acquiring person or group) will
be entitled to purchase one one-hundredth of one share of Westmoreland Series B
Junior Participating Preferred Stock at a per share purchase price of $30, or,
in lieu of the Preferred Stock, the number of shares of the Company's Common
Stock having a market value at that time of $60. If the Company is acquired in
a merger or other business combination transaction, each holder of a Right
(other than the acquiring person or group) will be entitled to purchase a
number of shares of the acquiring company's common stock having a market value
at that time of $60.
The Company can redeem the Rights at a redemption price of $.01 per Right at
any time until the tenth business day (subject to extension) after a public
announcement that a 20% position has been acquired.
The Board of Directors has the flexibility to lower the 20% threshold to not
less than 10% prior to the time any person or group acquires a 20% position in
the Company. The Rights expire on February 11, 2003.
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61
Preferred stock dividends at a rate of 8.5% per annum were paid quarterly from
the third quarter of 1992 through the first quarter of 1994. The declaration
and payment of preferred stock dividends was suspended in the second quarter of
1994 in connection with extension agreements of the Company's principal
lenders. Upon the expiration of these extension agreements, the Company paid a
quarterly dividend on April 1, 1995 and July 1, 1995. Pursuant to the
requirements of Delaware law, the preferred stock dividend was suspended in the
third quarter of 1995 as a result of recognition of losses and the subsequent
shareholders' deficit. The five quarterly dividends which are in arrears
(dividend payment dates July 1, 1994, October 1, 1994, January 1, 1995,
October 1, 1995, and January 1, 1996) amount to $6,109,000 in the aggregate
($10.63 per preferred share). Common stock dividends may not be declared until
the preferred stock dividends that are in arrears are made current.
There are statutory restrictions limiting the payment of preferred stock
dividends under Delaware law, the state in which the Company is incorporated.
Under Delaware law, the Company is permitted to pay preferred stock dividends
only: (1) out of surplus, surplus being the amount of shareholders' equity in
excess of the par value of the Company's two classes of stock; or (2) in the
event there is no surplus, out of net profits for the fiscal year in which a
preferred stock dividend is declared (and/or out of net profits from the
preceding fiscal year), but only to the extent that shareholders' equity
exceeds the par value of the preferred stock ($575,000). The Company had a
shareholders' deficit at December 31, 1995 of $38,106,000.
14. INCENTIVE STOCK OPTION AND
STOCK APPRECIATION RIGHTS PLANS
As of December 31, 1995, the Company had options, stock appreciation rights and
restricted stock outstanding from three Incentive Stock Option and Stock
Appreciation Rights Plans.
The plans provide for three types of incentive awards: incentive stock options
("ISOs"), stock appreciation rights ("SARs") and restricted stock. The 1982
and 1985 Plans provide for the granting of ISOs and SARs and the 1995 Plan
provides for the granting of ISOs and restricted stock. The 1985 and 1995
Plans also provide for the grant of non- qualified options, if so designated,
and contains the terms specified for non-qualified options. A SAR gives the
holder the right to receive, without payment to the Company, its "value" in
cash. The "value" of an
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SAR for this purpose will be the excess, if any, of the fair market value of
one share of common stock of the Company on the date the right is exercised
over the exercise price of the SAR. Restricted stock is an award payable in
shares of common stock subject to forfeiture under certain conditions. ISOs
granted under the Plans may not have an option price that is less than the fair
market value of the stock on the date of grant. ISOs and SARs under the 1982
and 1985 Plans may not be exercised until 2 years from the date of grant as to
50% of the total number granted and as to the remaining 50% not until 3 years
from the date of grant; the right to exercise ISOs and SARs terminates after 8
years from the date of grant. Under the 1995 Plan one-fourth of the ISOs
granted vest in each of the next four years. The maximum number of shares of
the Company's common stock and SARs that may be issued or granted under the
Plans is as follows:
1982 Plan 1985 Plan 1995 Plan
- -----------------------------------------------------------------
Shares of common stock 200,000 400,000 350,000
Stock appreciation rights 470,000 940,000 -
- -----------------------------------------------------------------
The 1982 Plan expired on January 4, 1992, and the 1985 Plan expired on January
7, 1995. Therefore, no further ISOs or SARs may now be granted from either
plan. Information for 1995, 1994 and 1993 with respect to the Plans is as
follows:
Stock
Issue Restricted Option Appreciation
Price Range Stock Shares Rights
- -----------------------------------------------------------------------
Outstanding at
December 31, 1992 12.63- 18.50 - 427,549 28,570
Granted on
June 2, 1993 8.75 - 40,000 -
Granted on
December 8, 1993 5.75 - 65,000 -
Ceased to be
exercisable in 1993 14.28- 18.50 - (101,696) (10,125)
- --------------------------------------------------------------------
Outstanding at
December 31, 1993 5.75- 18.50 - 430,853 18,445
Granted on
December 19, 1994 6.50 - 107,458 -
Ceased to be
exercisable in 1994 5.75- 18.50 - (126,456) (3,176)
- --------------------------------------------------------------------
Outstanding at
December 31, 1994 5.75- 18.50 - 411,855 15,269
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Granted on
December 5, 1995 2.63 5,000 255,000 -
Ceased to be exercisable
in 1995 5.75 -18.50 - (120,956) (12,503)
- --------------------------------------------------------------------
Outstanding as of
December 31, 1995 2.63 -18.50 5,000 545,899 2,766
====================================================================
Over the periods in which the SARs become exercisable, the Company accrues as
expense the amount by which the market price exceeds the various grant prices
of the SARs outstanding. This is adjusted in subsequent reporting periods for
increases or decreases in the market price of the stock. In 1995, 1994 and
1993 no accrual was recorded.
15. COMMITMENTS AND CONTINGENCIES
Protection of the Environment
The Company believes its mining operations are substantially in compliance with
applicable federal, state and local environmental laws and regulations,
including those relating to surface mining and reclamation, and it is the
policy of the Company to operate in compliance with such standards. The
Company maintains compliance primarily through maintenance and monitoring
activities. In 1995 the Company accrued approximately $3,400,000 against
earnings in order to comply with environmental regulations applicable to its
mining operations. The entire charge related to idling of the Company's
Virginia Division and Pine Branch operations. The Company estimates its total
liabilities for reclamation are $10,311,000, all of which have been accrued as
of December 31, 1995. Actual cash paid to perform reclamation in 1995 amounted
to $210,000. In 1994 the Company charged $1,245,000 to earnings which did not
include a $3,135,000 credit to earnings resulting from a reversal of
reclamation accruals in connection with the sales of inactive properties in
West Virginia and the assets of Criterion in Kentucky. In addition,
reclamation fees imposed by the Federal Surface Mining Control and Reclamation
Act of 1977 (the "Surface Mining Act") amounted to approximately $1,755,000,
$2,414,000 and $2,077,000 in 1995, 1994 and 1993, respectively.
In the event final reclamation is not performed in accordance with state and
federal regulations, the Company has $12,000,000 and $18,000,000 of reclamation
bonds in place in Montana and Virginia, respectively, that assures compliance
with all applicable regulations.
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64
Adventure Resources, Inc.
The Company has both secured and unsecured claims against Adventure Resources,
Inc. ("Adventure") in the United States Bankruptcy Court for the Southern
District of West Virginia. The secured claims approximate $10,000,000 and are
collateralized by first and subordinated liens on certain assets of Adventure.
No payments have been received on these claims to date, however, asset sales
are pending and the Company is moving to foreclose on certain assets. As of
December 31, 1995, all claims against Adventure have been fully reserved due to
the uncertainty of collecting all or a portion of the amounts.
Lease Obligations
The Company and its subsidiaries lease coal lands from an affiliated Company
and other third-parties. Under the terms of these agreements, the Company is
subject to minimum annual royalties aggregating $606,000 plus real estate
taxes, until the leases expire in 1998.
WRI has an agreement to lease coal reserves from the Crow Tribe of Indians
which is in effect until exhaustion of the underlying reserves. This lease
requires annual rentals, recoupable minimum royalty and production royalty
payments. The royalty rate varies from 6% of the F.O.B. mine price to a 12.5%
rate net of all production-based taxes.
Royalties and rentals charged to expense under all lease agreements, including
those in effect for WRI, amounted to $5,844,000, $17,262,000 and $17,761,000 in
1995, 1994 and 1993, respectively.
The Company has operating lease commitments expiring at various dates,
primarily for real property and equipment. Minimum rental obligations existing
under these leases at December 31, 1995 are as follows:
(in thousands)
--------------
1996 $1,732
1997 988
1998 526
1999 355
2000 274
After 2001 149
64
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16. TRANSACTIONS WITH AFFILIATED COMPANIES
The Company leases coal lands from Penn Virginia Resources Corporation whose
parent company, Penn Virginia Corporation ("Penn Virginia") holds an 18.95%
voting interest in the Company at December 31, 1995. Amounts paid to Penn
Virginia for royalties on coal were $5,325,000, $11,019,000 and $11,699,000 for
the years ended December 31, 1995, 1994 and 1993, respectively. In 1995 the
Company sold certain mineral leases back to Penn Virginia. Refer to Note 3 to
the Consolidated Financial Statements for additional information regarding the
sale of assets.
Westmoreland Resources, Inc., a 60% owned subsidiary, has a coal mining
contract with Morrison Knudsen Company, Inc., one of its stockholders. Mining
costs incurred under the contract were $15,719,000, $15,390,000 and $12,131,000
in 1995, 1994 and 1993, respectively.
17. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for 1995 and 1994 are as
follows:
Three Months Ended
------------------
March 31 June 30 Sep. 30 Dec. 31
---------------------------------------
(in thousands except per share data)
--------------------------------------
1995
Revenues $ 45,683 $ 43,254 $ 23,780 $ 18,191
Costs and expenses 53,974 54,092 36,388 15,391
Gain on sale of assets (1) 9,088 - - -
Unusual (charges)credits (4) - - (70,538) 3,915
Net income (loss) 1,478 (10,443) (82,987) 5,566
Less preferred stock
dividends:
Declared (2) 1,222 1,222 - -
In arrears (2) - - 1,222 1,222
Net income (loss) applicable
to common shareholders 256 (10,443) (84,209) 3,122
Net income (loss) per share
applicable to common
shareholders .04 (1.50) (12.10) .45
Number of common and common
equivalent shares outstanding
(weighted average) 6,959 6,961 6,961 6,965
65
66
- ----------------------------------------------------------------------
1994
Revenues $ 99,234 $108,762 $ 96,752 $ 72,614
Costs and expenses 102,696 109,361 95,838 86,785
Gain on sale of assets (1) - - - 41,130
Unusual (charges) credits (4) - - - 2,100
Net income (loss) (4,788) (1,710) (703) 27,354
Less preferred stock
dividends:
Declared (2) 1,222 - - -
In arrears (2) (3) - 1,222 1,222 1,222
Net income (loss) applicable
to common shareholders (3) (6,010) (2,932) (1,925) 26,132
Net income (loss) per share
applicable to common
shareholders (3) (.86) (.42) (.28) 3.75
Number of common and common
equivalent shares outstanding
(weighted-average) (3) 6,955 6,955 6,956 6,956
(1) Refer to Note 3 to the Consolidated Financial Statements for information
on the sale of assets.
(2) Refer to Consolidated Statements of Shareholders' Equity and Note 13 to
the Consolidated Financial Statements.
(3) These amounts have been adjusted from the amounts reported in the
Company's Form 10-Q filed for the second and third quarters of 1994 to
reflect the cumulative undeclared preferred stock dividends.
(4) Refer to Note 4 to the Consolidated Financial Statements for information
related to the unusual charges.
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18. SUPPLEMENTARY COAL STATISTICS (UNAUDITED)
Information with respect to the Company's coal reserves is as follows:
1995 1994 1993 1992 1991
- --------------------------------------------------------------------------------
Demonstrated coal reserve
base at year-end
(thousands of tons) 680,602 701,047 815,169 966,843 1,081,872
Production tonnage
(thousands of tons) 7,784 10,923 10,463 10,405 10,121
Average price per
ton sold $15.68 $23.24 $25.58 $25.25 $23.87
- --------------------------------------------------------------------------------
The Company makes yearly evaluations of its reserves and periodically modifies
the amount of reserves reported. The reserve evaluations are based on new
information developed by bore-hole drilling, examination of outcrops,
acquisitions, dispositions, production, changes in mining methods, abandonments
and other information. Substantially all of the estimated coal reserves are
leased from others.
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INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Shareholders
Westmoreland Coal Company:
We have audited the accompanying consolidated balance sheets of Westmoreland
Coal Company and subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of operations, shareholders' equity (deficit) and cash
flows for each of the years in the three-year period ended December 31, 1995.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Westmoreland Coal
Company and subsidiaries at December 31, 1995 and 1994, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1995, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Denver, Colorado
March 25, 1996
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MARKET INFORMATION ON CAPITAL STOCK
Price Range:
The following table shows the range of prices for the Common Stock and
Preferred Stock of the Company on the New York Stock Exchange for the calendar
quarters indicated:
Closing Prices
Common Stock Preferred Stock
- -----------------------------------------------------------------------
High Low High Low
- -----------------------------------------------------------------------
1994
First Quarter 5 3/4 4 1/2 20 1/2 15 1/2
Second Quarter 5 1/8 4 1/2 16 1/4 13 7/8
Third Quarter 6 1/4 4 1/2 18 1/2 15 1/4
Fourth Quarter 7 4 1/4 17 3/4 14 1/4
1995
First Quarter 6 5/8 4 1/2 18 1/4 14 1/2
Second Quarter 5 1/4 4 3/8 14 5/8 12
Third Quarter 4 1/2 2 3/4 13 1/4 9 1/8
Fourth Quarter 3 5/8 2 1/2 10 1/8 6
- -----------------------------------------------------------------------
Approximate Number of Equity Security Holders
Number of Record Holders
Title of Class (as of February 28, 1996)
- -----------------------------------------------------------
Common Stock 1,979
($2.50 par value)
Preferred Stock 122
($1.00 par value)
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Dividends:
After obtaining a waiver to its 1977 Loan Agreement, the Company declared and
paid an $.08 dividend on Common Stock in each of the four quarters of 1992. On
January 26, 1993 the Company announced that the regular quarterly dividend of
$.08 per share of common stock payable for the first quarter of 1993 would be
suspended and has not been resumed. Common stock dividend payments may not be
declared until the preferred stock dividends that are in arrears are made
current.
Preferred stock dividends at a rate of 8.5% per annum were paid quarterly from
the third quarter of 1992 through the first quarter of 1994. The declaration
and payment of preferred stock dividends was suspended in the second quarter of
1994 in connection with extension agreements of the Company's principal
lenders. Upon the expiration of these extension agreements, the Company paid a
quarterly dividend on April 1, 1995 and July 1, 1995. The preferred stock
dividend was suspended in the third quarter of 1995 as a result of recognition
of losses and the subsequent shareholders' deficit. Common stock dividend
payments were not permitted under covenants contained by the Company's loan
agreements from January 1993 through December 22, 1994. Further payment of
common stock dividends is not permitted until the preferred stock dividends
that are in arrears are made current. The five quarterly dividends which are
in arrears (those dividends whose payment dates would have been July 1, 1994,
October 1, 1994, January 1, 1995, October 1, 1995, and January 1, 1996) amount
to $6,109,000 in the aggregate ($10.63 per preferred share).
There are statutory restrictions limiting the payment of preferred stock
dividends under Delaware law, the state in which the Company is incorporated.
Under Delaware law, the Company is permitted to pay preferred stock dividends
only: (1) out of surplus, surplus being the amount of shareholders' equity in
excess of the par value of the Company's two classes of stock; or (2) in the
event there is no surplus, out of net profits for the fiscal year in which a
preferred stock dividend is delcared (and/or out of net profits from the
preceding fiscal year), but only to the extent that shareholders' equity
exceeds the par value of the preferred stock ($575,000). The Company had a
shareholders' deficit at December 31, 1995 of $38,106,000.
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