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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______ .
Commission File No. 0-752
WESTMORELAND COAL COMPANY
-------------------------
(Exact name of registrant as specified in its charter)
Delaware 23-1128670
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14th Floor, 2 North Cascade Avenue, Colorado Springs, CO 80903
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (719) 442-2600
Securities registered pursuant to Section 12(b) of the Act:
NAME OF STOCK EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- ------------------- ----------------------
Common Stock, par value $2.50 per share
Depositary Shares, each representing a American Stock Exchange
one-quarter of a share of Series A
Convertible Exchangeable Preferred Stock
Preferred Stock Purchase Rights
Securities registered pursuant to Section 12(g) of the Act:
NAME OF STOCK EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- ------------------- ----------------------
Series A Convertible Exchangeable
Preferred Stock, par value $1.00 per share American Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
[ ]
The aggregate market value of voting stock held by non-affiliates as of March 1,
2000 is estimated to be $19,365,000.
There were 7,067,663 shares outstanding of the registrant's Common Stock, $2.50
Par Value (the registrant's only class of common stock), as of March 1, 2000.
There were 834,833 depositary shares, each representing one quarter of a share
of the registrant's Series A Convertible Exchangeable Preferred Stock, $1.00 par
value per preferred share, outstanding as of March 1, 2000.
The definitive proxy statement to be filed not later than 120 days after the end
of the fiscal year covered by this Form 10-K is incorporated by reference into
Part III.
WESTMORELAND COAL COMPANY
Form 10-K
annual report
Table of Contents
- --------------------------------------------------------------------------------
Item Page
- ---- Part I ----
1 Business------------------------------------------------------------------ 1
2 Properties---------------------------------------------------------------- 8
3 Legal Proceedings--------------------------------------------------------- 9
4 Submission of Matters to a Vote of Security Holders----------------------- 12
Part II
5 Market for Registrant's Common Equity and Related Stockholder Matters----- 13
6 Selected Financial Data--------------------------------------------------- 16
7 Management's Discussion and Analysis of Financial Condition and
Results of Operations----------------------------------------------------- 17
8 Financial Statements and Supplementary Data------------------------------- 26
9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure------------------------------------------------------ 65
Part III
10 Directors and Executive Officers of the Registrant------------------------ 65
11 Executive Compensation---------------------------------------------------- 65
12 Security Ownership of Certain Beneficial Owners and Management------------ 65
13 Certain Relationships and Related Transactions---------------------------- 65
Part IV
14 Exhibits, Financial Statement Schedule, and Reports on Form 8-K----------- 66
Signatures------------------------------------------------------------------- 70
PART I
- --------------------------------------------------------------------------------
ITEM 1 - BUSINESS
The Company's principal activities are: (i) the production and sale of coal from
the Powder River Basin in eastern Montana; (ii) the ownership of interests in
cogeneration and other non-regulated independent power plants; and (iii) the
leasing of capacity at Dominion Terminal Associates, a coal storage and vessel
loading facility. Refer to Item 8 - Financial Statements and Supplementary Data
for more information regarding the Company's operating segments.
On December 23, 1996, the Company and four of its subsidiaries filed voluntary
petitions for protection under Chapter 11 of the United States Bankruptcy Code
in the United States Bankruptcy Court for the District of Colorado. Upon the
Company's motion, these cases were dismissed on December 23, 1998. These
petitions and the dismissal are described more fully in Item 3 - Legal
Proceedings.
COAL OPERATIONS
Coal Production
Westmoreland Resources, Inc. ("WRI"). WRI is owned 80% by the Company and 20% by
Morrison Knudsen Corporation, which also mines the coal on a contract basis. WRI
currently operates one large surface mine on approximately 15,000 acres of
subbituminous coal reserves in the Powder River Basin. WRI shipped 5,466,000,
6,458,000, and 7,051,000 tons of coal in 1999, 1998 and 1997, respectively.
Transportation is arranged and charges are paid by WRI's customers. The Company
received cash dividends from WRI of $4,000,000 in 1999. The Company received no
dividends from WRI in 1998 and 1997 due to Bankruptcy Code restrictions
regarding the payment of dividends.
Virginia Division. The Company idled the Virginia Division in 1995 and sold its
remaining Virginia Division assets during 1999. Included in the sale were a
preparation plant and a transloading facility. No tons were shipped from the
Virginia Division during 1999 or 1998. The Virginia Division shipped 8,000 tons
of coal in 1997. Asset sales in 1999 resulted in proceeds, before selling costs,
of approximately $726,000. The Company is negotiating to sell the Virginia
Division's Bullitt refuse area as a site for coal waste disposal. The refuse
area has no recorded value.
The following tables show, for each of the past five years, tons sold and
revenues derived from Company and unaffiliated production. The Company had no
export sales during the five-year period ending December 31, 1999. Included in
Company Produced tonnages below are amounts purchased from non-Company
properties, but processed through Company-owned facilities. No such tons have
been purchased since 1996.
Coal Sales in Tons (tons in 000's)
- -------------------------------------------------------------------------------
Year Total Company Produced Sold for Others
- -------------------------------------------------------------------------------
1999 5,466 5,466 -
1998 6,458 6,458 -
1997 7,059 7,059 -
1996 5,221 4,668 553
1995 7,063 6,590 473
Coal Revenues ($'s in 000's)
- -------------------------------------------------------------------------------
Year Total Company Produced Sold for Others
- -------------------------------------------------------------------------------
1999 38,539 38,539 -
1998 44,010 44,010 -
1997 47,182 47,182 -
1996 44,152 32,554 11,598
1995 109,114 92,992 16,122
All of the tonnage sold by the Company in 1999 was pursuant to contracts at WRI
calling for deliveries over a period longer than one year ("long-term
contracts"). The table below presents the amount of coal tonnage sold under
long-term contracts for the last five years:
------------------------------------------
Sales Under Long-Term
Contracts
------------------------------------------
1999 100%
1998 98%
1997 97%
1996 89%
1995 60%
The following table presents minimum total sales tonnage under existing
long-term contracts for the next five years from the Company's mining operations
(all from WRI). The price for all future tonnage is subject to revision and
adjustments based upon certain indices.
----------------------------------------------
Projected Sales Tonnage Under
Existing Long-Term Contracts (000s)
----------------------------------------------
2000 4,650
2001 4,650
2002 4,650
2003 950
2004 950
----------------------------------------------
In 1999, the three largest customers of the Company accounted for 92% of its
coal revenues. Northern States Power, Otter Tail Power and Western Fuels
Association accounted for 44%, 28% and 20%, respectively, of the Company's coal
revenues. No other customer accounted for as much as 10% of the Company's 1999
coal revenues. The long-term contract with WRI's largest customer, Northern
States Power, expires in 2002 and the long-term contract with Otter Tail Power
expired at the end of 1999. The Company anticipates replacing sales as contracts
expire with new contracts or spot sales.
On July 1, 1999, WRI restructured the terms of its coal sales agreement with
Northern States Power. The new agreement increases tonnage delivered and
eliminates the former option agreement. The new agreement expires on December
31, 2002. WRI anticipates it will negotiate an extension of the new agreement
during late 2000 or early 2001. Prior to the new agreement, WRI had entered into
an option agreement whereby it had agreed to sell up to an additional
200,000,000 tons of coal to Northern States Power. As compensation for granting
the option, WRI received 1 1/4 cents, payable quarterly (with applicable price
adjustments) for each optioned ton. The option was never exercised. WRI recorded
income totaling $1,593,000, $3,171,000, and $3,128,000 during 1999, 1998 and
1997, respectively, relative to the option agreement.
INDEPENDENT POWER OPERATIONS
Westmoreland Energy, Inc. ("WEI") owns and manages interests in independent
power projects. WEI, through various subsidiaries, has interests in seven such
power projects, all of which are currently operational. Each project has a
single power purchaser and steam host. Refer to Note 4 of the Consolidated
Financial Statements for additional information concerning WEI, including
specific project operational statistics.
Independent power projects sell electricity through long-term power contracts to
utilities, or in some cases, to large industrial users. There are three types of
independent power projects: cogeneration projects which provide two types of
useful energy (e.g., electricity and steam) sequentially from a single primary
fuel (e.g., coal); small power producers which utilize waste, biomass or other
renewable resources as fuel; and exempt wholesale generators ("EWG") which
provide electrical energy without the requirement to sell thermal energy or use
waste or renewables as fuel sources. WEI has invested in projects that provide
two types of useful energy sequentially from a single primary fuel and in
projects that are exempt wholesale generators. The key elements of an
independent power project are a long-term contract for the sale of electricity,
long-term contracts for the fuel supply, a suitable site, required permits and
project financing. Cogeneration projects require another long-term contract for
the sale of the steam or other thermal energy. The economic benefits of
cogeneration can be substantial because, in addition to generating electricity,
a significant portion of the energy is used to produce steam or high temperature
water (thermal energy) for industrial processes. Electricity is sold to
utilities and in certain situations, to end-users of electrical power, including
large industrial facilities. Thermal energy from the cogeneration plant is sold
to commercial enterprises and other institutions. Large industrial users of
thermal energy include plants in the chemical processing, petroleum refining,
food processing, pharmaceutical, pulp and paper industries.
On March 15, 1999, LG&E-Westmoreland Rensselaer ("LWR") completed the sale of
the Rensselaer project to Fulton Cogeneration Associates, L.P. ("Fulton"). LWR
received approximately $68,000,000 in cash as consideration for the sale of the
Rensselaer plant and operating contracts. After payment of expenses and
remaining debts, WEI's share of the proceeds was approximately $33,000,000.
TERMINAL OPERATIONS
Westmoreland Terminal Company, a wholly-owned subsidiary of the Company, owns a
20% interest in Dominion Terminal Associates ("DTA"), the owner of a coal
storage and vessel-loading facility in Newport News, Virginia. DTA's annual
throughput capacity is 22,000,000 tons, with a ground storage capacity of
1,700,000 tons. DTA loaded 8,357,000, 11,511,000, and 14,075,000 tons in 1999,
1998, and 1997, respectively. The Company's portion of these tons was 379,000,
2,069,000, and 2,682,000 in 1999, 1998, and 1997, respectively. The Company
leases ground storage space and vessel-loading capacity and facilities to others
and provides related support services. Refer to Note 5 of the Consolidated
Financial Statements for further information regarding DTA.
GENERAL
Employees and Labor Relations
The Company, including subsidiaries, directly employed 29 people on
December 31, 1999, compared with 35 on December 31, 1998. The Company
had no UMWA employees at December 31, 1999.
The Company's last wage agreement with the UMWA became effective on December 16,
1993 (the "1993 Agreement") and expired on August 1, 1998. The Company is not a
party to any subsequent wage agreement with the UMWA. See Note 9 to Consolidated
Financial Statements for additional information regarding the 1993 Agreement.
Competition
The coal industry is highly competitive and the Company competes (principally on
price and quality of coal) with other coal producers of various sizes. The
Company's production accounted for less than 1% of coal production in the United
States in 1999. Coal-fired generation was responsible for nearly 53% of all
electricity generated within the United States in 1999.
The Company's steam coal production also competes with other energy sources in
the production of electricity. For example, a significant, but indirect, cause
of lower coal demand in the future in the electric utility sector could be low
natural gas prices which could encourage utilities to meet a substantial portion
of future electricity growth with natural gas-fired capacity additions. Such a
strategy would displace some potential new coal-fired capacity.
The Company generates electricity which is sold on a wholesale basis under
long-term contracts to utilities under rates established in power purchase
agreements and approved by regulatory agencies. The independent power industry
has grown rapidly over the past twenty years. There are a large number of
suppliers in the wholesale market and a surplus of capacity which has led to
intense competition in this market. The principal sources of competition in this
market include traditional regulated utilities who have underutilized capacity,
unregulated subsidiaries of regulated utilities, energy brokers and traders,
energy service companies in the development and operation or energy-producing
projects and the marketing of electric energy, equipment suppliers and other
non-utility generators like the Company. Competition in this industry is
substantially based on price with competitors discovering lower cost
alternatives for providing electricity. The electric industry is also
characterized by rapid changes in regulations which the Company expects could
continue to increase competition.
Westmoreland Terminal Company is subject to competition from not only domestic
providers of coal transloading services but from international competitors as
well. A significant portion of the coal shipped from DTA is exported to foreign
locations. Coal suppliers from Australia, South Africa, China, Indonesia and a
number of other international suppliers provide similar services.
Mining Safety and Health Legislation
The Company is subject to state and federal legislation including the Federal
Coal Mine Safety and Health Act of 1969 and the 1977 Amendments thereto, which
prescribes mining health and safety standards. In addition to authorizing fines
and other penalties for violations, the Act empowers the Mine Safety and Health
Administration to suspend or halt offending operations.
Energy Regulation
WEI's cogeneration operations are subject to the provisions of various laws and
regulations, including the federal Public Utilities Regulatory Policies Act of
1978 ("PURPA"). PURPA provides qualifying cogeneration facility status ("QF") to
all of WEI's operations except ROVA I which is an Exempt Wholesale Generator
("EWG"). The QF or EWG status allows those facilities to operate with certain
exemptions from substantial federal and state regulation, including regulation
of the rates at which electricity can be sold.
The most significant recent change in energy regulation was the passage of the
National Energy Policy Act of 1992 ("EP Act"). Companies can now apply for
Exempt Wholesale Generator ("EWG") status with the Federal Energy Regulatory
Commission ("FERC"). An EWG project can provide electrical energy without the
requirement to sell thermal energy to a user. The EP Act permits an EWG project
to also be a QF project. An EWG that is not a QF project must have its power
rates approved. An EWG project that is a QF project can receive avoided cost
rates that are not subject to approval by FERC.
At both the national and state level, there is an ongoing debate about removing
regulatory constraints and allowing competition and market forces to determine
the price of electricity. Several states have already passed legislation either
permitting immediate wholesale and/or retail competition or providing a
mechanism for transitioning to a competitive marketplace. The Commonwealth of
Virginia has passed legislation which allows wholesale competition to begin in
2004 and retail competition to begin in 2007. At this time, the promulgation of
state legislation is not expected to have any immediate impact on existing
long-term power purchase agreements. Several proposed bills, calling for
deregulation of the traditional utility monopolies, are pending in the U.S.
Congress. When, or if, some form of national deregulation legislation is enacted
is uncertain.
Protection of the Environment
Mining Operations. The Company believes its mining operations are 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.
WRI has an agreement with its mining contractor, Morrison Knudsen Company, Inc.
(which owns 20% of the stock of WRI), which determines the Company's maximum
liability for reclamation costs associated with final mine closure. It calls for
the Company to pay approximately $1,700,000 over a 15-year period which began in
December 1990. All remaining liability is that of Morrison Knudsen or one
customer who is obligated to pay final reclamation costs under provisions of its
coal sales contract. In addition, per ton reclamation fees imposed by the
Federal Surface Mining Control and Reclamation Act of 1977 (the "Surface Mining
Act") amounted to approximately $1,913,000, $2,241,000, and $2,455,000 in 1999,
1998 and 1997, respectively. No reclamation fees were paid by the Virginia
Division in 1999 and 1998 because there was no production. Reclamation fees
incurred at the Virginia Division amounted to $3,000 in 1997.
Reclamation of the Bullitt refuse area has been deferred pending assignment of
this property to a third party. The estimated cost to comply with Virginia
regulations has been accrued in the event an assignment to a third party is not
consummated. The Company has also submitted information required by regulators
to address a minor water leak in the refuse area.
The Surface Mining Act regulations set forth standards, limitations and
requirements for surface mining operations and for the surface effects of
underground mining operations. Under the regulatory scheme contemplated by the
Surface Mining Act, the Federal Office of Surface Mining ("OSM") issued
regulations which set the minimum standards to which State agencies concerned
with the regulation of coal mining must adhere. States that wish to regulate
such coal mining must present their regulatory plans to OSM for approval. Once a
State plan receives final approval, the State agency has primary regulatory
authority over mining within the State, and OSM acts principally in a
supervisory role. State agencies may impose standards more stringent than those
required by OSM. The two states in which the Company currently has reclamation
obligations, Montana and Virginia, have submitted regulatory plans to OSM, and
these plans have received final approval. There would be potential liability to
the Company in the event it, or any of its previous independent contractors,
failed to satisfy the obligations created by the Surface Mining Act. Failure to
comply with the Surface Mining Act could result in the Company having its
existing permits revoked or applications for new permits or permit modifications
blocked.
The Company has $10,600,000 and $4,067,000 of reclamation bonds in place in
Montana and Virginia, respectively, to assure compliance with all applicable
regulations.
The Company projects that charges for maintenance and monitoring activities to
meet environmental requirements for remaining operations it continues to own
will be minimal in 2000. Future costs could change either to reflect the impact
of new regulations or because presently unforeseeable conditions may be imposed
on future mining permits.
In 1990, certain amendments were enacted to the Clean Air Act ("1990
Amendments"). As the first major revisions to the Clean Air Act since 1977, the
1990 Amendments vastly expanded the scope of federal regulations and enforcement
in several significant respects. In particular, the 1990 Amendments required
that the United States Environmental Protection Agency issue new regulations
related to ozone non-attainment, air toxics and acid rain. Phase I of the acid
rain provisions required, among other things, that electric utilities reduce
their sulfur dioxide emissions to less than 2.5 lbs per million Btu by January
1, 1995. Phase II requires an additional reduction in emissions to less than 1.2
lbs per million Btu by January 1, 2000.
The 1990 Amendments allow utilities the freedom to choose the manner in which
they will achieve compliance with the required emission standards, including
switching to lower sulfur coal, scrubbing, and using SO2 credit allowances. The
Company anticipates little or no impact on its operations from the ozone
non-attainment and air toxic provisions of the 1990 Amendments because WRI's
customers use scrubber facilities or blend with other coals that allow for
compliance with all applicable standards.
Independent Power. The environmental laws and regulations applicable to the
projects in which WEI participates primarily involve the discharge of emissions
into the water and air, but can also include wetlands preservation and noise
regulation. These laws and regulations in many cases require a lengthy and
complex process of obtaining licenses, permits and approvals from federal, state
and local agencies. Meeting the requirements of each jurisdiction with authority
over a project can delay or sometimes prevent the completion of a proposed
project, as well as require extensive modifications to existing projects. The
partnership owners of the projects in which WEI has its interests have the
primary responsibility for obtaining the required permits and complying with the
relevant environmental laws.
On December 17, 1999, EPA issued its final Section 126 rule regarding NOX
reductions of 510,000 tons during each annual ozone season (May 1 - September
30). The additional NOX reductions are to begin in 2003. The rule responds to
petitions filed by several northeastern states under Clean Air Act Section 126
and seeks to control upwind NOX emissions which the petitioning states allege
prevent them from attaining the one hour ambient air quality standard (.15 ppm)
for ozone. The rule 126 approach is an alternative to regional NOX reductions
called for in the challenged EPA NOX SIP Call Rule. One of the most significant
differences between the NOX SIP Call and the Section 126 rule is that under
Section 126, EPA attempts to regulate the individual source directly. This
circumvents state implementation plans. The baseline for 2003-2007 NOX emissions
allocations is the average of the highest date for any two years in the
1995-1998 period. Allocation budgets will be updated in five-year increments and
EPA will inform sources of their allocations three years in advance. Initial
allocations for the three Virginia projects and the ROVA projects beginning in
2003 were published in the December 17 EPA rule.
At this time, it is too early to determine the impacts of rule 126 on the
Company's independent power projects.
Dominion Terminal Associates. DTA is responsible for complying with certain
state and federal environmental laws and regulations, particularly those
affecting air and water quality. DTA has employees on its staff who are
responsible for assuring that it is in compliance with all laws and regulations.
In the event that DTA failed to comply with applicable laws and regulations, the
Company may be responsible for its 20% share of any loss incurred as a result of
non-compliance.
Foreign and Domestic Operations and Export Sales. The Company's assets are, and
for each of the last three years have been, located entirely within the United
States. There have been no export sales during the last three years.
Refer to Note 15 of the Consolidated Financial Statements for additional
information regarding the Company's business segments.
ITEM 2 - PROPERTIES
As of December 31, 1999, the Company owned or leased coal properties located in
Montana and Virginia. The Company's estimated demonstrated coal reserves in
owned or leased property in Montana were 617,197,000 tons. Coal reserves in
owned or leased property in Virginia were insignificant. Properties located in
Montana are leased by WRI from the Crow Tribe of Indians, which leases run to
exhaustion of the coal reserves.
The following table shows the Company's estimated demonstrated coal reserve base
and production in 1999. The term "demonstrated coal reserve base" is as defined
in the "Coal Resource Classification System of the U.S. Geological Survey"
(Circular 891). This represents the sum of the measured and indicated reserve
base and includes assigned and unassigned economic and uneconomic reserves.
Summary of Demonstrated Coal Reserve Base and Production Tons
as of December 31, 1999
(in thousands except sulfur percentages)
- ---------------------- ---------- ---------- ------------ ------------------
1999 Percent Assigned (2) Total Demonstrated
Production Sulfur (1) Coal Reserve Base
====================== ========== ========== ============ ==================
Western Operations
Montana Steam 5,466 .66 617,197 617,197
====================== ========== ========== ============ ==================
(1) Percent Sulfur applies to the 1999 production tonnages.
(2) Assigned tonnages are legally recoverable through existing facilities based
on current mining plans with current technology and the Company's
infrastructure.
Coal reserves in Montana represent recoverable tonnage held under the terms of
the Crow Tribe Lease, as amended in 1982. These reserves are located in Big Horn
County, Montana. Transportation is arranged and charges are paid by WRI's
customers. These reserves were estimated to be 799,803,000 tons as of January 1,
1980, based principally upon a report by independent consulting geologists,
prepared in February 1980. The reserves consist of two main seams and a stray
seam between the upper and lower main seams. Currently, the upper seam, with
estimated assigned reserves of 221,000,000 tons, is the only seam being mined
due to a quality modification required by a significant customer. Annually,
estimated remaining recoverable reserves are reduced by production in the upper
main seam and by the amount of reserves in the lower and stray seams bypassed
after mining the upper main seam.
WRI owns and operates a dragline and coal crushing and loading facilities at its
mine in Montana.
Refer to Note 4 of Notes to Consolidated Financial Statements for a description
of WEI properties.
All of the Company's Virginia operations have been idled and the Company has no
intention of resuming operations there or mining the few remaining reserves.
ITEM 3 - LEGAL PROCEEDINGS
On December 23, 1996 ("Petition Date"), Westmoreland Coal Company and four
subsidiaries, Westmoreland Resources, Inc., Westmoreland Coal Sales Company,
Westmoreland Energy, Inc., and Westmoreland Terminal Company (the "Debtor
Corporations"), filed voluntary petitions for reorganization under Chapter 11 of
the United States Bankruptcy Code in the United States Bankruptcy Court for the
District of Colorado (the "Chapter 11 Cases"). On July 27, 1998, they filed a
joint motion to be dismissed from bankruptcy. By order of the Bankruptcy Court
entered on December 23, 1998, the Chapter 11 Cases were dismissed. No objections
were filed during the ten day stay period that expired on January 4, 1999.
Effective with the dismissal, the Debtor Corporations are no longer subject to
the protections afforded or restrictions imposed by the Bankruptcy Code. Prior
to the dismissal, the Debtor Corporations were in possession of their respective
properties and assets and were operating as debtors in possession pursuant to
provisions of the Bankruptcy Code. Refer to Note 1 to the Consolidated Financial
Statements for additional information concerning the bankruptcy proceedings.
Westmoreland Energy, Inc. WEI owns a 50% partnership interest in
Westmoreland-LG&E Partners (the "ROVA Partnership"). The ROVA Partnership's
principal customer, Virginia Power, contracted to purchase the electricity
generated by ROVA I, one of two units within the ROVA Partnership, 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, (the "Power
Purchase Agreement") 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 power purchase agreement provides for a stated annual number of allowed
forced outage days and requires payment of a specified liquidated damages
penalty if the ROVA Partnership exceeds the allowance. The ROVA Partnership
believes that the customer is required to pay the ROVA Partnership the full
capacity purchase price. The customer asserts that it is not required to pay the
capacity payments for the forced outage days.
From May 1994 through December 1999, Virginia Power withheld approximately
$19,800,000 of these capacity payments during periods of forced outages. To
date, the Company has not recognized any revenue on its 50% portion of the
capacity payments being withheld by Virginia Power. In October 1994, the ROVA
Partnership filed a complaint against Virginia Power seeking damages contending
that Virginia Power breached the Power Purchase Agreement in withholding such
payments. In December, 1994, Virginia Power filed a motion to dismiss the
complaint and in March, 1995, the Court granted this motion. The ROVA
Partnership filed an amended complaint in April, 1995. Virginia Power filed
another motion to dismiss the complaint and in June 1995, the Circuit Court of
the City of Richmond, Virginia denied Virginia Power's motion to dismiss the
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. Virginia Power filed a second summary judgment motion on March 1,
1996. On March 18, 1996, the Court granted Virginia Power's second summary
judgment motion and effectively dismissed the complaint. The ROVA Partnership
appealed the lower Court's decision to the Virginia Supreme Court. On June 6,
1997, the Virginia Supreme Court reversed the trial Court's decision to grant
the customer's summary judgment motion and remanded the matter for trial. The
case was tried on October 26, 1998. The trial judge requested the parties to
submit post trial briefs and on December 2, 1998, entered judgment in the ROVA
Partnership's favor for the amount of $14,800,000 plus interest for a total of
$19,336,214. On December 21, 1998, Virginia Power posted its appeal bond and on
December 29, 1998 noted its appeal of the Court's decision to the Virginia
Supreme Court. The Court heard oral arguments on January 11, 2000 and on March
3, 2000, the Virginia Supreme Court reversed the Trial Court's decision on an
evidentiary matter and remanded the matter for further proceedings consistent
with the Supreme Court's order.
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. 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.
On August 1, 1996, FERC entered its decision in the Southampton case. FERC
determined that the Southampton Partnership's request for reconsideration should
be treated as timely filed, but that the Southampton facility was not in
complete compliance with the QF requirements for 1992. FERC ordered the
Southampton Project to comply with Section 205 for the Federal Power Act
("FPA"), and file, for FERC's review, rates for calendar year 1992 for wholesale
power sales to Virginia Power. Otherwise, the Southampton Project remains exempt
from regulation under the Public Utility Holding Company Act ("PUHCA"), utility
laws of Virginia and the other provisions of the FPA. In August 1996, the
Southampton Partnership filed a motion seeking clarification of the August 1,
1996 order. The Southampton Partnership also filed an additional request for
rehearing. On May 13, 1998 the FERC entered an Order clarifying its August 1,
1996, decision in the Southampton case. While affirming the requirement to make
a refund to Virginia Power, the FERC ruled that Virginia Power must compensate
the Southampton Project for every hour in which the unit was available for
dispatch, but not actually dispatched. FERC appointed a settlement Judge to
assist the parties in evaluating and negotiating a settlement.
In October 1998, the Southampton Partnership and Virginia Power entered into a
settlement agreement which resolved these QF issues. The settlement provided
for, among other items, payments by the Southampton Partnership to Virginia
Power of $1,000,000 annually for the years 1999-2001, followed by a reduction in
capacity payments from Virginia Power to the Southampton Partnership by $500,000
for the years 2002-2008. Following 2008, Virginia Power may elect to terminate
its power purchases from the Southampton Partnership or continue to receive the
$500,000 annual reduction in capacity payments for the remainder of the power
purchase agreement. The settlement has been approved by the FERC.
Fourfold L.P. ("Fourfold"), a limited partner of LG&E-Southampton, L.P. made a
demand on the Southampton Partnership and the related LG&E and Westmoreland
entities for reimbursement in the amount of $1,979,000 in connection with its
share of the settlement. The project participants (the general partners,
including a Westmoreland subsidiary, Westpower-Franklin ("Westpower"), and the
operator) have agreed to compromise and settle the Fourfold L.P.'s claim.
Westpower's contribution to the total settlement amount was $100,000. The
Westmoreland entities have made a similar demand against the LG&E entities in
the amount of $3,300,000; however, the mediation which resolved the Fourfold
claim did not successfully resolve the Westpower claims. Westpower is evaluating
its options and possible legal remedies. The outcome of the dispute cannot be
determined at December 31, 1999, and the Company has not recognized any revenue
related to the dispute.
Westmoreland Resources, Inc. - WRI has commenced litigation against its mining
contractor, Morrison Knudsen, Inc., in which WRI seeks to require Morrison
Knudsen to pay for significant repairs to WRI's dragline. Refer to Item 7 -
Management's Discussion and Analysis for further information.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
This item is not applicable.
Executive Officers of the Registrant
The following table shows the executive officers of the Company, their ages as
of February 1, 2000, positions held and year of election to their present
offices. No family relationships exist among them. All of the officers are
elected annually by the Board of Directors and serve at the pleasure of the
Board of Directors.
- --------------------------- --- ------------------------------------ ----------
Name Age Position Held Since
- --------------------------- --- ------------------------------------ ----------
(1) Christopher K. Seglem 53 Chairman of the Board 1996
President and 1992
Chief Executive Officer 1993
(2) Theodore E. Worcester 59 Senior Vice President of 1995
Law and Administration,
General Counsel and 1990
Assistant Secretary 1999
(3) R. Page Henley, Jr. 64 Senior Vice President-Acquisitions 1997
and Development, and
Government Affairs and 1992
President, Westmoreland Coal Sales 1995
Company
(4) Robert J. Jaeger 51 Senior Vice President of Finance and 1996
Treasurer
- --------------------------- --- ------------------------------------ ----------
(1) Mr. Seglem was elected President and Chief Operating Officer of the Company
in June 1992, and a Director of the Company in December 1992. In June 1993,
he was elected Chief Executive Officer, at which time he relinquished the
position of Chief Operating Officer. In June 1996, he was elected Chairman
of the Board. He is a member of the bar of Pennsylvania.
(2) Mr. Worcester was elected Senior Vice President in June 1992 while
retaining his position of General Counsel of the Company. In 1995, he was
elected Senior Vice President of Law and Administration and in 1996,
Corporate Secretary, in addition to his General Counsel position. He is a
member of the bar of Colorado. Mr. Worcester relinquished the title of
Corporate Secretary as of January 1, 1999.
(3) Mr. Henley was elected Senior Vice President-Government Affairs in June
1992. In 1993, Mr. Henley was elected Vice President, General Counsel and
Secretary of the Company's WEI subsidiary, and undertook additional duties,
including project development. In 1994, Mr. Henley was elected Senior Vice
President-Development of the Company, and retained his position as Vice
President of the Company's WEI subsidiary. In 1995, Mr. Henley was elected
president of Westmoreland Coal Sales Co. and relinquished his position in
WEI. In 1997, Mr. Henley's duties were expanded to include acquisitions,
and his title was revised accordingly. He is a member of the bars of West
Virginia and Virginia. Mr. Henley has announced his retirement from the
Company effective April 1, 2000.
(4) Mr. Jaeger held various financial positions at Penn Virginia Corporation
from 1976 and was Vice President and Chief Financial Officer when he left
in March 1995. He joined Westmoreland Energy, Inc. in April 1995 as Vice
President-Finance. He was elected Vice President Finance, Treasurer and
Controller of the Company in September 1995. He was elected Senior Vice
President-Finance, Treasurer and Controller in February 1996 and
relinquished the position of Controller in January 1998. Mr. Jaeger is a
certified public accountant.
PART II
- --------------------------------------------------------------------------------
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information:
The following table shows the range of sales prices for the Common Stock and
Depositary Shares of the Company. Each Depositary Share represents one quarter
of a share of Preferred Stock. The stock traded on the New York Stock Exchange
until the Company's filing for protection under Chapter 11.
Public trading for the Common Stock and the Depositary Shares resumed in
February 1997, via the Over the Counter Bulletin Board, and quarterly bid prices
are shown below as reported by the National Association of Securities Dealers
Composite Feed or other qualified interdealer medium. Over-the-counter market
quotations reflect inter-dealer prices, without retail mark-up, mark-down, or
commission and may not necessarily represent actual transactions.
Common Stock and Depositary Shares were listed for trading on the American Stock
Exchange ("AMEX") on April 12, 1999 and sales prices stated after that date were
as reported by the AMEX.
------------------------------------------------------------------
Sales Prices
Common Stock Depositary Shares
----------------------------------------- ------------------------
High Low High Low
----------------------------------------- ------------------------
1998
First Quarter 2 1 5/16 14 1/4 5 1/8
Second Quarter 1 7/8 7/32 14 1/2 4 11/16
Third Quarter 2 5/8 16/41 14 5/8 4 5/8
Fourth Quarter 4 1/4 1 1/2 17 1/2 10 3/8
1999
First Quarter 4 3/4 3 1/2 18 1/2 16 1/4
Second Quarter 4 1/2 2 5/8 20 3/8 16 1/8
Third Quarter 3 3/4 2 3/4 19 1/4 18 1/8
Fourth Quarter 3 7/8 2 11/16 18 5/8 18
----------------------------------------- ------------------------
Approximate Number of Equity Security Holders:
----------------------------------------- ------------------------
Number of Record Holders
Title of Class (as of March 1, 2000)
---------------------------------------- ------------------------
Common Stock ($2.50 par value) 1,700
Depositary Shares, each representing a
one-quarter share of Series A
Convertible Exchangeable Preferred
Stock 37
---------------------------------------- ------------------------
Dividends:
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, described below, 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 twenty-one quarterly dividends which are in arrears
amount to $9,314,000 in the aggregate ($44.63 per preferred share or $11.16 per
depositary share). Common stock dividends may not be declared until the
preferred stock dividends that are in arrears are made current.
On March 10, 1999, the Company offered to purchase up to 1,052,631 depositary
shares, each representing one quarter of a share of its Series A Convertible
Exchangeable Preferred Stock ("Series A Preferred Stock"). The offer price of
$19 per share was in full satisfaction of claims to accumulated but unpaid
dividends on the depositary shares tendered. On April 7, 1999, the offer expired
and 1,683,903 depositary shares were tendered in response to the offer. Because
the number of shares tendered exceeded the maximum number of shares the Company
had offered to purchase, a proration factor of approximately 62.5% was applied
to all shares tendered. A total of 1,052,631 depositary shares were purchased
for $20,000,000. The balance sheet effect of this transaction was to reduce cash
and shareholders' equity by $20,000,000. Following completion of the tender
offer, the depositary shares purchased in the offer were converted into shares
of Series A Preferred Stock, the shares of Series A Preferred Stock were
retired, and the capital of the Company was reduced by the par value of the
shares of Series A Preferred Stock retired. The retirements reduced the number
of shares of Series A Preferred Stock outstanding from 575,000 to 311,843.
Accumulated but unpaid dividends were reduced from $21,994,000 to $11,928,000.
The ongoing quarterly preferred dividend requirement was reduced from $1,222,000
to $663,000.
On September 16, 1999, the Company made a second offer to purchase up to an
additional 631,000 depositary shares at $19 per depositary share. The offer
price of $19 per share was in full satisfaction of claims to accumulated but
unpaid dividends on the depositary shares tendered. On October 26, 1999, the
offer expired and 412,536 depositary shares were tendered in response to the
offer. The balance sheet effect of the transaction was to reduce cash and
shareholders' equity by $7,838,000. Following completion of the tender offer,
the depositary shares purchased in the offer were converted to shares of Series
A Preferred Stock, the shares of Series A Preferred Stock were retired, and the
capital of the Company was reduced by the par value of the shares of Series A
Preferred Stock retired. The retirements reduced the number of shares of Series
A Preferred Stock outstanding from 311,843 to 208,708. Accumulated but unpaid
dividends were reduced from $13,253,000 to $8,870,000 and the ongoing quarterly
dividend requirement was reduced from $663,000 to $444,000.
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 ($208,708). The Company had shareholders'
equity at December 31, 1999, of $3,057,000.
Going forward the Company's Board of Directors will review the payment of
quarterly preferred stock dividends, the preferred stock dividends which are in
arrears, and common stock dividends, in light of the above restrictions and
consideration of the shareholders' best interests.
ITEM 6 - SELECTED FINANCIAL DATA
Westmoreland Coal Company and Subsidiaries
Five Year Review
- --------------------------------------------------------------------------------------------------------------------
1999 1998(1) 1997(1) 1996(1) 1995
- ---------------------------------------------- -------------- ------------- ------------ ------------ --------------
Consolidated Statement of Operations (in thousands except per share date)
Information
Revenue - Coal $ 38,539 $ 44,010 $ 47,182 $ 44,152 $ 109,114
- Independent Power and other 33,028 64,559 18,650 16,162 15,886
- ---------------------------------------------- -------------- ------------- ------------ ------------ --------------
Total revenues 71,567 108,569 65,832 60,314 125,000
Cost and expenses 63,605 78,250 66,383 80,104 156,732
Pension expense (benefit) (149) 111 (5,547) (3,601) (2,440)
Unusual charges (credits) - 2,000 (27,214) (11,896) 66,623
Doubtful accounts recoveries (174) (1,028) (1,410) (3,449) (967)
DTA impairment charge - 12,164 - - -
- ---------------------------------------------- -------------- ------------- ------------ ------------ --------------
Operating income (loss) 8,285 17,072 33,620 (844) (94,948)
Gains on the sales of assets 433 475 969 24,238 9,088
Interest expense (1,135) (190) (320) (400) (1,164)
Minority interest (854) (775) (1,092) (890) (1,368)
Interest and other income 1,826 1,999 713 3,491 3,761
- ---------------------------------------------- -------------- ------------- ------------ ------------ --------------
Income (loss) before reorganization items
and income taxes 8,555 18,581 33,890 25,595 (84,631)
Reorganization legal and consulting fees - (9,872) (2,484) - -
Reorganization interest income (expense) - (1,594) 1,552 - -
Income tax benefit (expense) 82 (3,787) - (575) (1,488)
- ---------------------------------------------- -------------- ------------- ------------ ------------ --------------
Income (loss) from continuing operations 8,637 3,328 32,958 25,020 (86,119)
Discontinued operations:
Operating loss - - (1,284) (1,049) (267)
Impairment and loss on disposal - - (3,518) - -
- ---------------------------------------------- -------------- ------------- ------------ ------------ --------------
Loss from discontinued operations - - (4,802) (1,049) (267)
- ---------------------------------------------- -------------- ------------- ------------ ------------ --------------
Cumulative effect of changes in accounting
principles - (9,876) - 14,372 -
- ---------------------------------------------- -------------- ------------- ------------ ------------ --------------
Net income (loss) 8,637 (6,548) 28,156 38,343 (86,386)
Less preferred stock dividend requirements 2,992 4,888 4,888 4,888 4,888
- ---------------------------------------------- -------------- ------------- ------------ ------------ --------------
Net income (loss) applicable to
common shareholders $ 5,645 $(11,436) $ 23,268 $ 33,455 $(91,274)
============================================== ============== ============= ============ ============ ==============
Net income (loss) per share applicable to
common shareholders $ .80 $ (1.64) $ 3.34 $ 4.80 $ (13.11)
Weighted average number of common
and common equivalent shares 7,040 6,965 6,965 6,965 6,965
============================================== ============== ============= ============ ============ ==============
Balance Sheet Information
Working capital (deficit) $ 10,014 $ 15,054 $ 38,512 $ 10,185 $(16,458)
Net property, plant and equipment 36,558 36,950 35,687 42,700 59,868
Total assets 142,297 215,606 181,997 153,971 167,107
Total debt 1,563 1,762 458 1,324 4,593
Liabilities subject to compromise - - 132,667 136,191 -
Shareholders' equity (deficit) 3,057 21,845 28,393 237 (38,106)
- ---------------------------------------------- -------------- ------------- ------------ ------------ --------------
(1) On December 23, 1996, Westmoreland Coal Company and four subsidiaries,
Westmoreland Resources, Inc., Westmoreland Coal Sales Company, Westmoreland
Energy, Inc., and Westmoreland Terminal Company (the "Debtor
Corporations"), filed voluntary petitions for reorganization under Chapter
11 of the United States Bankruptcy Code in the United States Bankruptcy
Court for the District of Colorado. The Debtor Corporations were in
possession of their respective properties and assets and operated as
debtors in possession pursuant to provisions of the Bankruptcy Code. The
cases were dismissed on December 23, 1998. Refer to Note 1 to the
Consolidated Financial Statements for further information.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's Discussion and Analysis of Financial Condition
Years Ended December 31, 1999, 1998 and 1997
Forward-Looking Disclaimer
Certain statements in this report which are not historical facts or information
are "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
including, but not limited to, the information set forth in Management's
Discussion and Analysis of Financial Condition and Results of Operations. Any
statements contained herein that are not statements of historical fact may be
deemed to be forward-looking statements. For example, words such as "may,"
"will," "should," "estimates," "predicts," "potential," "continue," "strategy,"
"believes," "anticipates," "plans," "expects," "intends," and similar
expressions are intended to identify forward-looking statements. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, levels of activity,
performance or achievements of the Company, or industry results, to be
materially different from any future results, levels of activity, performance or
achievements expressed or implied by such forward-looking statements. Such
factors include, among others, the following: general economic and business
conditions; the ability of the Company to implement its business strategy; the
Company's access to financing; the Company's ability to successfully identify
new business opportunities; the Company's ability to achieve anticipated cost
savings and profitability targets; changes in the industry; competition; the
Company's ability to utilize its tax net operating losses; the ability to
reinvest excess cash at an acceptable rate of return; weather conditions; the
availability of transportation; price of alternative fuels; costs of coal
produced by other countries; demand for electricity; the effect of regulatory
and legal proceedings and other factors discussed in Item 1 of the Company's
Form 10-K. As a result of the foregoing and other factors, no assurance can be
given as to the future results and achievement of the Company. Neither the
Company nor any other person assumes responsibility for the accuracy and
completeness of these statements.
Bankruptcy Proceeding
Westmoreland Coal Company and four subsidiaries, Westmoreland Resources, Inc.,
Westmoreland Coal Sales Company, Westmoreland Energy, Inc., and Westmoreland
Terminal Company ("the Debtor Corporations"), filed voluntary petitions for
protection under Chapter 11 of the Bankruptcy Code on December 23, 1996. On
December 23, 1998, the Bankruptcy Court granted the Debtors' Motion to Dismiss
the cases. The automatic stay period pursuant to the Federal Rules of Bankruptcy
Procedure expired on January 4, 1999.
Continued financial improvement of the Debtors during the bankruptcy provided
the basis for dismissal and settlement with the UMWA Health and Benefit Funds,
the Company's principal creditors. On October 15, 1998, the Company, the Funds,
the United Mine Workers of America ("UMWA") and the Official Committee of Equity
Security Holders ("Equity Committee") reached agreement on terms of a
settlement, which provided for, among other things, the resolution of the
Chapter 11 cases. The agreement, which facilitated a consensual dismissal of the
bankruptcy cases, was announced during scheduled hearings on Westmoreland's
Motion to Dismiss and the Equity Committee's Motion to Convert to Chapter 7, and
the hearings were subsequently recessed. The agreement was subsequently
documented in certain consent judgments and in a Master Agreement among the
Company, the Funds, the UMWA, and the Equity Committee. The Debtor Corporations
filed motions requesting approval of the consent judgments on November 18, 1998.
There were no allowable objections and dismissal of the Chapter 11 cases
occurred on December 23, 1998. The Master Agreement was executed on January 29,
1999.
Liquidity and Capital Resources
Cash used in operating activities was $23,489,000 in 1999. Cash provided by
operating activities was $55,894,000 and $19,931,000 in 1998 and 1997,
respectively. The decrease in cash provided by operations in 1999 compared to
1998 is mainly a result of cash received from the Rensselaer restructuring at
WEI and the termination of the salaried pension plan in 1998, as well as the
payment of pre-petition liabilities, and reorganization costs in 1999. The
increase in cash provided by operations in 1998 compared to 1997 is mainly a
result of the following: proceeds from the restructuring of the Rensselaer
project, termination of the over-funded salaried pension plan, increased
operating revenues at WRI, and increased cash distributions from independent
power projects.
Cash used in investing activities was $11,491,000 and $2,434,000 in 1999 and
1998, respectively, representing primarily security deposits required as
collateral in 1999 as well as additions to property, plant and equipment at WRI
in 1998. Cash provided by investing activities in 1997 was $2,093,000 including
the sale of various assets of the Virginia Division for aggregate net proceeds
of $2,757,000.
Cash used in financing activities in 1999, 1998 and 1997 totaled $28,971,000,
$51,000, and $151,000, respectively. Cash used in 1999 was primarily for the
purchase of preferred stock and the payments of dividends to minority
shareholders of WRI. Cash used in 1998 and 1997 primarily related to the
repayment of debt of WRI.
Consolidated cash and cash equivalents at December 31, 1999 totaled $20,122,000
(including $12,159,000 at WRI.) At December 31, 1998, cash and cash equivalents
totaled $84,073,000 (including $14,712,000 at WRI). The cash at WRI, an
80%-owned subsidiary, is available to the Company through dividends. In
addition, the Company had restricted cash, which was not classified as cash or
cash equivalents, of $14,896,000 at December 31, 1999 and $4,140,000 at December
31, 1998. The restricted cash at December 31, 1999 represents interest-bearing
cash deposit accounts which collateralize the Company's Contingent Note
($6,000,000) required by the Master Agreement and the surety bond for the
security required by the 1992 UMWA Benefit Plan ($4,148,000), as well as
$4,748,000 that collateralizes the outstanding surety bonds for its workers
compensation self-insurance programs. The restricted cash at December 31, 1998
represents collateral for the outstanding surety bonds for its workers
compensation self-insurance programs. The Company also has $8,000,000 in debt
reserve accounts for certain of the Company's independent power projects. This
cash is restricted as to its use and is classified as part of the investment in
independent power projects. In addition, there is a surplus in the Company's
black lung trust at December 31, 1999. The Company received $6,400,000 of the
surplus in February 2000. The surplus received is available to pay
postretirement health benefits. Refer to Note 8 to the Consolidated Financial
Statements for additional information on this item.
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 extension agreements, the
Company paid a quarterly dividend on April 1, 1995 and July 1, 1995. Pursuant to
the requirements of Delaware law, described below, 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 twenty-one quarterly dividends which are in arrears
amount to $9,314,000 in the aggregate ($44.63 per preferred share or $11.16 per
depositary share).
On March 10, 1999, the Company offered to purchase up to 1,052,631 depositary
shares, each representing one quarter of a share of its Series A Convertible
Exchangeable Preferred Stock ("Series A Preferred Stock"). The offer price of
$19 per share was in full satisfaction of claims to accumulated but unpaid
dividends on the depositary shares tendered. On April 7, 1999, the offer expired
and 1,683,903 depositary shares were tendered in response to the offer. Because
the number of shares tendered exceeded the maximum number of shares the Company
had offered to purchase, a proration factor of approximately 62.5% was applied
to all shares tendered. A total of 1,052,631 depositary shares were purchased
for $20,000,000. The balance sheet effect of this transaction was to reduce cash
and shareholders' equity by $20,000,000. Following completion of the tender
offer, the depositary shares purchased in the offer were converted into shares
of Series A Preferred Stock, the shares of Series A Preferred Stock were
retired, and the capital of the Company was reduced by the par value of the
shares of Series A Preferred Stock retired. The retirements reduced the number
of shares of Series A Preferred Stock outstanding from 575,000 to 311,843.
Accumulated but unpaid dividends were reduced from $21,994,000 to $11,928,000,
and the ongoing quarterly preferred dividend requirement was reduced from
$1,222,000 to $663,000.
On September 16, 1999, the Company made a second offer to purchase up to an
additional 631,000 depositary shares at $19 per depositary share. The offer
price of $19 per share was in full satisfaction of claims to accumulated but
unpaid dividends on the depositary shares tendered. On October 26, 1999, the
offer expired and 412,536 depositary shares were tendered in response to the
offer. The balance sheet effect of the transaction was to reduce cash and
shareholders' equity by $7,838,000. Following completion of the tender offer,
the depositary shares purchased in the offer were converted to shares of Series
A Preferred Stock, the shares of Series A Preferred Stock were retired, and the
capital of the Company was reduced by the par value of the shares of Series A
Preferred Stock retired. The retirements reduced the number of shares of Series
A Preferred Stock outstanding from 311,843 to 208,708. Accumulated but unpaid
dividends were reduced from $13,253,000 to $8,870,000 and the ongoing quarterly
dividend requirement was reduced from $663,000 to $444,000.
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 ($208,708). The Company had shareholders'
equity at December 31, 1999 of $3,057,000.
Going forward the Company's Board of Directors will review the payment of
quarterly preferred stock dividends, the preferred stock dividends which are in
arrears, and common stock dividends, in light of the above restrictions and
consideration of the shareholders' best interests.
Liquidity Outlook
The major factors impacting the Company's liquidity outlook are its significant
"heritage costs" and its ongoing and future business needs. The heritage costs
consist primarily of cash payments for postretirement medical benefits and
workers' compensation costs. The Company also is obligated for salaried employee
pension and pneumoconiosis benefits; however, both of these future obligations
have a funding surplus at present. The Company has ongoing cash expenditures in
excess of $16,000,000 per year for postretirement medical benefits which the
Company believes will remain fairly constant over the next four years and then
decline to zero over the next approximately thirty-six years. In addition, the
Company has cash expenditures of approximately $3,000,000 per year for workers'
compensation benefits which will steadily decline to zero over the next
approximately nineteen years.
Since the UMWA pension plan 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 believes the plan was fully funded at
the time of the Company's withdrawal in 1998. However, the plan has asserted a
claim of $13,800,000, which the Company vigorously contests. The Company is
contesting this amount through arbitration, as provided under ERISA. In
accordance with the Multiemployer Pension Plan Amendments Act of 1980, the
Company has made monthly principal and interest payments to the plan while it
pursues its rights and will continue to make such monthly payments until
arbitration is completed. Included in the payments made in 1999 was interest of
approximately $958,000. Depending upon the results of arbitration, the Company
may be entitled to a refund or it could be required to pay any remaining
obligation through 2008.
Under the Coal Act, the Company is required to provide postretirement 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 Benefit 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 and its allocated portion of the pool of retired
miners whose previous employers have gone out of business.
The Company, on January 4, 1999, as a result of its improved financial position
and dismissal from bankruptcy, satisfied all of its premium obligations to the
Combined Fund through the end of 1998, and made prepayments to the Combined Fund
for its premiums for the first three quarters of 1999. Normal monthly payments
resumed on October 25, 1999. Beginning on that date, the Company began receiving
credits against its Combined Fund premiums at a rate of approximately $200,000
per month through April, 2000, for a total of $1,400,000. This credit is the
result of a recalculation of premiums by the Combined Fund pursuant to an order
of the U.S. District Court for the Northern District of Alabama entered July 20,
1995 in National Coal Association v. Chater.
The Combined Benefit Fund is faced with an impending solvency crisis because
benefit expenses are exceeding premiums, and had sought relief from Congress in
1999. Under the sponsorship of Senators Byrd and Rockefeller of West Virginia,
the House and Senate conference committee approved, as a part of the Interior
and Related Agencies appropriations bill, a further transfer of $68,000,000 of
accumulated interest in the Abandoned Mine Land Reclamation Fund to the Combined
Fund. This bill was signed by the President and the funds were transferred. As a
part of its report, the conference committee noted that this was a short-term
solution and urged that the Congressional committees with jurisdiction over the
matter work with the concerned parties to insure the long-term solvency of the
Combined Fund. In addition, on January 27, 2000 the Clinton-Gore Administration
announced it will include $346 million in its current budget proposal to be
given to the UMWA Combined Benefit Fund to secure the long-term solvency of the
Fund. There is no assurance that this proposal will be enacted into law.
In addition, the Coal Act authorized the Trustees of the 1992 UMWA Benefit Plan
to implement security provisions for three years' benefits pursuant to the Act.
In 1995, the Trustees set the level of security to be provided by the Company.
In 1999, the Company secured its obligation to provide retiree health benefits
under the 1992 Plan by posting a bond in the amount of three years benefits (or
$22 million). The bond is collateralized by U.S. Government-backed securities in
the amount of $4,148,000 at December 31, 1999. The bond amount and the amount to
be secured will be reviewed and adjusted on an annual basis.
The Company is closely monitoring energy deregulation. At both the national and
state level, there is an ongoing debate about removing regulatory constraints
and allowing competition and market forces to determine the price of
electricity. Several states have already passed legislation either permitting
immediate wholesale and/or retail competition or providing a mechanism for
transitioning to a competitive marketplace. The Commonwealth of Virginia has
passed legislation which allows wholesale competition to begin in 2004 and
retail competition to begin in 2007. At this time, the promulgation of state
legislation is not expected to have any immediate impact on existing long-term
power purchase agreements. Several proposed bills, calling for deregulation of
the traditional utility monopolies, are pending in the U.S. Congress. When, or
if, some form of national deregulation legislation is enacted is uncertain. The
Company is unable to predict the effect of deregulation on WEI.
The Company is subject to certain financial ratio tests under the terms of the
Master Agreement. The Company agreed to secure its obligations under the Master
Agreement by providing a Contingent Promissory Note ("Note"). The Master
Agreement and Note were filed as Exhibits 99.2 and 99.3 to the Company's Form
8-K filed on February 5, 1999. The original principal amount of the Note is $12
million; the principal amount of the Note decreases to $6 million in 2002. The
Note is payable only in the event the Company does not meet its Coal Act
obligations, fails to meet certain ongoing financial tests specified in the
Note, fails to maintain the required balance in the escrow account established
under an escrow agreement or fails to comply with certain covenants set forth in
a security agreement.
The Company's principal current sources of cash flow from operations include
cash distributions from its independent power projects, dividends from WRI
(which will be reduced in 2000 as a result of the expiration of the Otter Tail
contract), and interest earned on cash reserves. In February 2000, the Company
obtained a $6,400,000 distribution from its overfunded black lung trust.
Potential sources of additional liquidity include the Company's 50% share of any
recovery in the ROVA litigation, reimbursement of amounts paid to the 74 Pension
Plan after the Company's withdrawal from the plan and the recovery of disputed
amounts, if any, from Morrison Knudsen for dragline repairs. Other sources of
possible additional liquidity include remaining overfunded amounts from the
black lung trust, ongoing increased project earnings from a favorable ROVA
decision, and cash flow from investment in new operations. Further, the effect
of any future legislation that causes Medicare to cover the cost of prescription
drug benefits for eligible retirees could reduce the Company's very substantial
retiree benefit costs. Management believes that available cash should be
sufficient to pay the Company's heritage costs and fund its ongoing operations
and other capital requirements for the foreseeable future.
Capital expenditures in 1998 and 1999 included approximately $3,800,000 to
repair the dragline at WRI. In addition, approximately $300,000 of unbilled
dragline repairs are expected to be paid soon. The Company believes, under the
terms of WRI's agreements with Morrison Knudsen, that Morrison Knudsen is
responsible for all dragline repairs. WRI has expended these amounts to assure
continued, uninterrupted production at WRI, and has demanded reimbursement from
Morrison Knudsen for the full cost of the repair. Morrison Knudsen has
reimbursed WRI approximately $530,000 of these costs. On March 7, 2000, WRI
commenced litigation against Morrison Knudsen in the United States District
Court for the District of Montana seeking, among other things, payment by
Morrison Knudsen of approximately $3.6 million of dragline repair costs paid or
expected to be paid by WRI, plus accrued interest. The Company has not recorded
any amounts that may be recoverable from Morrison Knudsen in its financial
statements.
The Company hopes to further improve its long-term liquidity in a number of
ways, including the development of additional cash flow from existing and new
business operations, and monetizing assets where proceeds on sale would exceed
the expected return from continued operation. The Company also plans to seek
further cost reductions wherever feasible and prudent, and attempt to reduce
certain postretirement medical, workers' compensation and related payments.
Although management expects to improve the Company's profitability, the time
required to realize such increases cannot be estimated at this time nor can
assurances be given that the Company can achieve any such improvements.
Year 2000
All of the Company's systems and related software are Y2K compliant. On January
1, 2000, and thereafter, the Company has experienced no interruptions due to Y2K
failures or problems. The Company's total cost of complying with Y2K issues was
less than $60,000.
Results of Operations
1999 Compared to 1998
- --------------------------------------------------------------------------------
Coal Operations. Coal revenues in 1999 were $38,539,000 compared to $44,010,000
in 1998. The reduction in revenues is due to a decrease in tons sold in 1999
compared to 1998 that resulted from an eight week scheduled maintenance outage
at a major customer's facility as well as mild weather. Prices received were
comparable in the two periods.
Independent Power Operations. Equity in earnings of independent power operations
in 1999 was $34,492,000 compared to $64,465,000 in 1998. The decrease is mainly
due to decreased earnings at WEI's Rensselaer project as a result of the
restructuring of its power purchase contract with Niagara Mohawk in 1998 and the
subsequent sale of the project in early 1999.
Dominion Terminal Associates. Equity in losses from Dominion Terminal Associates
was $1,464,000 in 1999 compared to equity in earnings of $94,000 in 1998. The
decrease is due to a decrease in throughput as a result of a continued decline
in export coal sales from the U.S. In 1998, as a result of the decline in the
export market, the Company recognized a $12,164,000 impairment charge relating
to its investment in DTA. DTA is dependent upon its customers' coal export
business to maintain an acceptable level of throughput. The coal export business
has experienced a significant decline due to intense competitive pressure from
coal suppliers in other nations. At this time the Company does not believe that
those competitive pressures will abate in the near term. The fair value assigned
to DTA was based on a 1998 sale of a similar nearby terminal.
Selling and administrative expenses were $9,660,000 in 1999 compared to
$7,040,000 in 1998. The increase primarily relates to 1999 bonus payments of
approximately $2,600,000 and related employment taxes. Employee bonuses had not
been paid for the years 1996, 1997 or 1998 while the Company restructured under
protection of Chapter 11.
Heritage costs were $18,737,000 in 1999 compared to $31,449,000 in 1998. The
majority of the difference relates to accruals made in 1998 for Combined Benefit
Fund charges for 1996 and 1997 which were stayed during the bankruptcy
proceedings. They were paid in January 1999 upon the Company's dismissal from
bankruptcy.
In 1998, the Company recorded an unusual charge of $2,000,000 relating to the
Master Agreement described in Note 1 to the Consolidated Financial Statements.
Under that Agreement, the Company agreed to make payments for retiree health
benefits as if it continued to be obligated under the 1993 UMWA Wage Agreement
for eligible retirees and beneficiaries for a period of five years. At the
expiration of such five year period, the Company is free to initiate litigation
contesting its obligation to continue to provide such benefits and the Company
will continue to provide such benefits after the expiration of the five year
period until it obtains a ruling from a Court of competent jurisdiction that it
is not obligated to provide such benefits.
Gains on the sale of assets were $433,000 and $475,000 for 1999 and 1998,
respectively, most of which related to the sales of various equipment from the
idled Virginia Division.
Results of Operations
1998 Compared to 1997
- --------------------------------------------------------------------------------
Coal Operations. Coal revenues in 1998 were $44,010,000 compared to $47,182,000
in 1997. The change is due to a slight decrease in tons sold in 1998 compared to
1997's record setting level. Prices received were comparable in the two periods.
Independent Power Operations. Equity in earnings of independent power operations
in 1998 was $64,465,000 compared to $17,770,000 in 1997. The increase is mainly
due to increased earnings at WEI's Rensselaer project as a result of the
restructuring of its power purchase contract with Niagara Mohawk.
Dominion Terminal Associates. Equity in earnings from Dominion Terminal
Associates was $94,000 in 1998 compared to $880,000 in 1997. The decrease is due
to a decrease in throughput as a result of a decline in export coal sales from
the U.S. In 1998, as a result of the continuing decline in the export market,
the Company recognized a $12,164,000 impairment charge relating to its
investment in DTA. DTA is dependent upon its customers' coal export business to
maintain an acceptable level of throughput. The coal export business has
recently experienced a significant decline due to intense competitive pressure
from coal suppliers in other nations. At this time the Company does not believe
that those competitive pressures will abate in the near term. The fair value
assigned to DTA was based on a recently completed sale of a similar nearby
terminal.
Selling and administrative expenses were $7,040,000 in 1998 compared to
$5,932,000 in 1997. The increase is due to additional franchise taxes paid to
the State of New York as a result of the Rensselaer project restructuring.
Heritage costs were $31,449,000 in 1998 compared to $16,673,000 in 1997. The
increase is due to $17,230,000 of Combined Fund benefit accruals made as a
result of the bankruptcy dismissal discussed in Notes 1 and 12 to the
Consolidated Financial Statements.
In 1998, the Company recorded an unusual charge of $2,000,000 relating to the
Master Agreement described in Note 1 to the Consolidated Financial Statements.
Under that Agreement, the Company agreed to make payments for retiree health
benefits as if it continued to be obligated under the 1993 UMWA Wage Agreement
for eligible retirees and beneficiaries for a period of five years. At the
expiration of such five year period, the Company is free to initiate litigation
contesting its obligation to continue to provide such benefits and the Company
will continue to provide such benefits after the expiration of the five year
period until it obtains a ruling from a Court of competent jurisdiction that it
is not obligated to provide such benefits.
In 1997, the Company recorded an unusual credit of $27,214,000 which included a
curtailment gain of $14,199,000 associated with the anticipated expiration of
the 1993 Wage Agreement and a benefit of $13,015,000 due to a change in the
estimated liability for pneumoconiosis benefits.
Gains on the sale of assets were $475,000 for 1998 most of which related to the
sales of various equipment from the idled Virginia Division. Gains on the sales
of assets were $969,000 during 1997, net of a loss of $1,609,000 related to the
removal and final sale of a longwall mining machine at the idled Virginia
Division. Cash proceeds of $3,200,000 were received from the sale of the
longwall mining machine but were offset by $2,000,000 of costs to remove the
machine, $1,500,000 of remaining book value, and $1,300,000 relating to the
buy-out of the lease on the machine. Proceeds of $1,400,000 were received from
the sale of various equipment from the idled Virginia Division in 1997, all of
which was recorded as a gain.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk, including the effects of changes in
commodity prices and interest rates as discussed below.
Commodity Price Risk
The Company produces and sells coal to third parties from its coal mine in
Montana and produces and sells electricity and steam to third parties from its
independent power projects located in the eastern United States. Currently, all
of the Company's coal production and all of its electricity and steam production
is sold through long-term contracts with customers. These long-term contracts
serve to minimize the Company's exposure to changes in commodity prices. The
Company generally has not entered into derivative contracts to manage its
exposure to changes in commodity prices, and is not a party to any such
contracts at December 31, 1999.
Interest Rate Risk
The Company finances a portion of its operations with long-term debt. Since the
interest rate on the long-term debt is fixed, the Company is not currently
exposed to changes in interest rates. The Company's long-term debt at December
31, 1999 amounts to $1,563,000, and is payable with interest at rates ranging
from 4% to 6%, in installments of $220,000 in 2000, $241,000 in 2001, $265,000
in 2002, $291,000 in 2003, $288,000 in 2004, and $258,000 in 2005.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements
- --------------------------------------------------------------------------------
Consolidated Balance Sheets-------------------------------------------------- 27
Consolidated Statements of Operations---------------------------------------- 29
Consolidated Statements of Shareholders' Equity ----------------------------- 31
Consolidated Statements of Cash Flows---------------------------------------- 32
Summary of Significant Accounting Policies----------------------------------- 34
Notes to Consolidated Financial Statements----------------------------------- 37
Westmoreland Coal Company and Subsidiaries
Consolidated Balance Sheets
December 31, 1999 1998
- --------------------------------------------------------------------------------------------------------------------
(in thousands)
Assets
Current assets:
Cash and cash equivalents $ 20,122 $ 84,073
Receivables:
Trade 2,156 2,566
Excess of trust assets over pneumoconiosis benefit obligation 6,397 -
Terminated pension plan, net 500 500
Other 621 2,730
- --------------------------------------------------------------------------------------------------------------------
9,674 5,796
Other current assets 1,180 691
- --------------------------------------------------------------------------------------------------------------------
Total current assets 30,976 90,560
- --------------------------------------------------------------------------------------------------------------------
Property, plant and equipment:
Land and mineral rights 10,572 10,990
Plant and equipment 66,231 94,989
- --------------------------------------------------------------------------------------------------------------------
76,803 105,979
Less accumulated depreciation and depletion 40,245 69,029
- --------------------------------------------------------------------------------------------------------------------
36,558 36,950
Investment in independent power projects 45,225 62,386
Investment in Dominion Terminal Associates (DTA) 4,672 5,475
Workers' compensation bond 4,748 4,140
Prepaid pension cost 3,897 3,748
Excess of trust assets over pneumoconiosis benefit obligation 5,255 10,891
Security deposits 10,148 -
Other assets 818 1,456
- --------------------------------------------------------------------------------------------------------------------
Total Assets $142,297 $215,606
====================================================================================================================
See accompanying Summary of Significant Accounting Policies and Notes to Consolidated Financial Statements.
(Continued)
Westmoreland Coal Company and Subsidiaries
Consolidated Balance Sheets (Continued)
December 31, 1999 1998
- --------------------------------------------------------------------------------------------------------------------
(in thousands)
Liabilities and Shareholders' Equity
Current liabilities:
Current installments of long-term debt $ 220 $ 200
Accounts payable and accrued expenses:
Trade 2,010 4,213
Taxes, other than income taxes 3,932 3,893
Workers compensation 3,200 3,800
Postretirement medical costs 10,130 11,066
Reorganization expenses 400 7,900
Consent judgment payment obligation - 39,006
Other accrued expenses 970 3,143
Reclamation costs 100 100
Income taxes - 2,185
- --------------------------------------------------------------------------------------------------------------------
Total current liabilities 20,962 75,506
- --------------------------------------------------------------------------------------------------------------------
Long-term debt, less current installments 1,343 1,562
Accrual for workers compensation 15,072 17,338
Accrual for postretirement medical costs 78,643 73,143
1974 UMWA Pension Plan obligations 11,879 13,776
Accrual for reclamation costs, less current portion 2,537 3,046
Other liabilities 1,930 2,370
Minority interest 6,874 7,020
Commitments and contingent liabilities
Shareholders' equity
Preferred stock of $1.00 par value
Authorized 5,000,000 shares;
Issued and outstanding 208,708 shares in 1999 and 209 575
575,000 shares in 1998
Common stock of $2.50 par value
Authorized 20,000,000 shares;
Issued and outstanding 7,067,663 shares in 1999 and 17,669 17,413
6,965,328 shares in 1998
Other paid-in capital 67,315 94,630
Accumulated deficit (82,136) (90,773)
- --------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 3,057 21,845
- --------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $142,297 $215,606
====================================================================================================================
See accompanying Summary of Significant Accounting Policies and Notes to Consolidated Financial Statements.
Westmoreland Coal Company and Subsidiaries
Consolidated Statements of Operations
Years Ended December 31, 1999 1998 1997
- -------------------------------------------------------- ------------------- ------------------ --------------------
(in thousands)
Revenues:
Coal $ 38,539 $ 44,010 $ 47,182
Independent power projects - equity in earnings 34,492 64,465 17,770
Dominion Terminal Associates ("DTA") - equity in
earnings (losses) (1,464) 94 880
- -------------------------------------------------------- ------------------- ------------------ --------------------
71,567 108,569 65,832
- -------------------------------------------------------- ------------------- ------------------ --------------------
Cost and expenses:
Cost of sales - coal 33,637 37,472 42,063
Depreciation, depletion and amortization 1,571 2,289 1,715
Selling and administrative 9,660 7,040 5,932
Heritage costs 18,737 31,449 16,673
Pension expense (benefit) (including termination
gain of $1,512,000 in 1997) (149) 111 (5,547)
Unusual charges (credits) - 2,000 (27,214)
Doubtful accounts recoveries (174) (1,028) (1,410)
DTA impairment charge - 12,164 -
- -------------------------------------------------------- ------------------- ------------------ --------------------
63,282 91,497 32,212
- -------------------------------------------------------- ------------------- ------------------ --------------------
Operating income 8,285 17,072 33,620
Other income (expense):
Gains on sales of assets 433 475 969
Interest expense (1,135) (190) (320)
Interest income 2,052 - -
Minority interest (854) (775) (1,092)
Other income (expense) (226) 1,999 713
- -------------------------------------------------------- ------------------- ------------------ --------------------
270 1,509 270
- -------------------------------------------------------- ------------------- ------------------ --------------------
Income from continuing operations before
reorganization items and income taxes 8,555 18,581 33,890
Reorganization items:
Legal and consulting fees - (9,872) (2,484)
Interest expense - (5,188) -
Interest income - 3,594 1,552
- -------------------------------------------------------- ------------------- ------------------ --------------------
Income before income taxes 8,555 7,115 32,958
Income tax (expense) benefit 82 (3,787) -
- -------------------------------------------------------- ------------------- ------------------ --------------------
Income from continuing operations 8,637 3,328 32,958
Discontinued operations:
Operating loss - - (1,284)
Impairment and loss on disposal - - (3,518)
- -------------------------------------------------------- ------------------- ------------------ --------------------
Loss from discontinued operations - - (4,802)
Cumulative effect of change in accounting principle - (9,876) -
- -------------------------------------------------------- ------------------- ------------------ --------------------
Net income (loss) 8,637 (6,548) 28,156
Less preferred stock dividend requirements 2,992 4,888 4,888
- -------------------------------------------------------- ------------------- ------------------ --------------------
Net income (loss) applicable to common shareholders $ 5,645 $ (11,436) $ 23,268
======================================================== =================== ================== ====================
(Continued)
Westmoreland Coal Company and Subsidiaries
Consolidated Statements of Operations (Continued)
Years Ended December 31, 1999 1998 1997
- -------------------------------------------------------- ------------------- ------------------ --------------------
Income (loss) per share applicable to (in thousands except per share data)
common shareholders:
Continuing operations $ .80 $ (.22) $ 4.03
Discontinued operations - - (0.69)
Cumulative effect of changes in accounting principles - (1.42) -
- -------------------------------------------------------- ------------------- ------------------ --------------------
$ .80 $ (1.64) $ 3.34
======================================================== =================== ================== ====================
Pro forma amounts assuming the changes in accounting
principles are applied retroactively:
Net loss applicable to common shareholders $ - $ (1,560) $ -
Loss per share applicable to common shareholders $ - $ (.22) $ -
======================================================== =================== ================== ====================
Weighted average number of common
shares outstanding - basic and diluted 7,040 6,965 6,965
See accompanying Summary of Significant Accounting Policies and Notes to Consolidated Financial Statements.
Westmoreland Coal Company and Subsidiaries
Consolidated Statements of Shareholders' Equity
Years Ended December 31, 1997, 1998, and 1999
Class A
Convertible
Exchangeable Other Total
Preferred Common Stock Paid-In Accumulated Shareholders'
Stock Capital Deficit Equity
- ---------------------------------------- --------------- -------------- ----------- --------------- ----------------
(in thousands)
Balance at January 1, 1997 $ 575 17,413 94,630 (112,381) 237
Net income - - - 28,156 28,156
- ---------------------------------------- --------------- -------------- ----------- --------------- ----------------
Balance at December 31, 1997 575 17,413 94,630 (84,225) 28,393
Net loss - - - (6,548) (6,548)
- ---------------------------------------- --------------- -------------- ----------- --------------- ----------------
Balance at December 31, 1998 575 17,413 94,630 (90,773) 21,845
Stock issued as compensation - 193 104 - 297
Common Stock options exercised - 63 53 - 116
Preferred stock repurchased and retired (366) - (27,472) - (27,838)
Net income - - - 8,637 8,637
======================================== =============== ============== =========== =============== ================
Balance at December 31, 1999 $ 209 17,669 67,315 (82,136) 3,057
======================================== =============== ============== =========== =============== ================
See accompanying Summary of Significant Accounting Policies and Notes to Consolidated Financial Statements.
Westmoreland Coal Company and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 1999 1998 1997
- ------------------------------------------------------------- ----------------- ----------------- -----------------
(in thousands)
Cash flows from operating activities:
Net income (loss) $ 8,637 $ (6,548) $ 28,156
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Equity in earnings of independent power projects (34,492) (64,465) (17,770)
Cash distributions from independent power projects 51,653 46,355 14,995
Equity in losses (earnings) from Dominion Terminal
Associates 1,464 (94) (880)
Cash generated by Dominion Terminal Associates facility 942 2,952 4,865
Cash contributions to Dominion Terminal Associates (1,603) (1,877) (2,883)
Depreciation, depletion and amortization 1,571 2,289 1,715
Stock compensation expense 297 - -
Gain on termination of pension plan - - (1,512)
Unusual charges (credits) - 2,000 (27,214)
DTA impairment charge - 12,164 -
Gains on sales of assets (433) (475) (969)
Cash from pension termination, net - 12,540 -
Distribution from pneumoconiosis trust - 2,634 -
Minority interest 854 775 1,092
Impairment and loss on disposition of discontinued operations - - 3,518
Cumulative effect of change in accounting principle - 9,876 -
Other 147 (358) 96
Changes in assets and liabilities:
Receivables, net of allowance for doubtful accounts 2,519 213 1,392
Inventories - - 660
Prepaid pension cost (149) (220) (4,035)
Excess of trust assets over pneumoconiosis
benefit obligation (761) (1,825) 1,188
Accounts payable and accrued expenses (4,337) 1,690 880
Income taxes payable (2,185) 2,185 -
Accrual for workers' compensation (3,474) (678) -
Accrual for postretirement medical costs 4,564 (2,502) -
1974 UMWA Pension Plan (1,897) - -
Consent judgment payment obligation (39,006) 39,006 -
Other liabilities (300) (5,998) 15
- ------------------------------------------------------------- ----------------- ----------------- -----------------
Net cash provided by (used in) operating activities
before reorganization items (15,989) 49,639 3,309
- ------------------------------------------------------------- ----------------- ----------------- -----------------
Changes in reorganization items:
Trade and other liabilities subject to compromise - - 14,977
Reorganization expenses (7,500) 6,255 1,645
- ------------------------------------------------------------- ----------------- ----------------- -----------------
Net change in reorganization items (7,500) 6,255 16,622
- ------------------------------------------------------------- ----------------- ----------------- -----------------
Net cash provided by (used in) operating activities (23,489) 55,894 19,931
- ------------------------------------------------------------- ----------------- ----------------- -----------------
(Continued)
Westmoreland Coal Company and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
Years Ended December 31, 1999 1998 1997
- ------------------------------------------------------------- ----------------- ----------------- -----------------
(in thousands)
Cash flows from investing activities:
Additions to property, plant and equipment (2,069) (2,945) (174)
Net proceeds from sales of investments and assets 726 511 2,757
Security deposits (10,148) - -
Cash held by subsidiary disposed of - - (490)
- ------------------------------------------------------------- ----------------- ----------------- -----------------
Net cash (used in) provided by investing activities (11,491) (2,434) 2,093
- ------------------------------------------------------------- ----------------- ----------------- -----------------
Cash flows from financing activities:
Repayment of long-term debt (199) (51) (151)
Dividends paid to minority shareholders of subsidiary (1,000) - -
Exercise of stock options 66 - -
Repurchase of preferred stock (27,838) - -
- ------------------------------------------------------------- ----------------- ----------------- -----------------
Net cash used in financing activities (28,971) (51) (151)
- ------------------------------------------------------------- ----------------- ----------------- -----------------
Net increase (decrease) in cash and cash equivalents (63,951) 53,409 21,873
Cash and cash equivalents, beginning of year 84,073 30,664 8,791
============================================================= ================= ================= =================
Cash and cash equivalents, end of year $ 20,122 $ 84,073 $ 30,664
============================================================= ================= ================= =================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 6,076 $ 27 $ 31
Income taxes 1,606 120 -
In January 1999, the Company issued 45,000 shares of restricted stock valued at
$297,000 to several employees as compensation.
In September 1997, the Company completed the sale of the Corona Group Inc.
("Corona"). Corona was sold for $895,000 in notes receivable, the Company
retained a 15% interest in Corona, and the purchaser assumed a contingent
liability.
See accompanying Summary of Significant Accounting Policies and Notes to
Consolidated Financial Statements.
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 original
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.
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. Maintenance and repair costs are expensed
as incurred. Mineral rights and development costs are depleted based upon
estimated recoverable proven and probable 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 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.
Workers' Compensation and Pneumoconiosis Benefit Liabilities
The Company is self-insured for workers' compensation claims incurred prior to
1996 and federal and state pneumoconiosis benefits for current and former
employees. Workers compensation claims incurred after January 1, 1996 are
covered by a third party insurance provider.
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.
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 UMWA represented 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.
Reclamation
Reclamation costs at WRI are fixed and are being recognized evenly over a
15-year period. Total expected reclamation costs at idled sites were fully
accrued at the time of idling. Estimates at idle sites are periodically reviewed
and adjustments are made in accruals to provide for changes in 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.
Earning Per Share
Basic earnings per share is computed by dividing net income (loss) available to
common shareholders by the weighted average number of common shares outstanding
during the period. Diluted earnings per share is determined on the assumption
that outstanding stock options have been converted using the average price for
the period. For purposes of computing earnings per share in a loss year, common
stock equivalents have been excluded from the computation of weighted average
common shares outstanding because their effect is antidilutive. For the year
ended December 31, 1999, the assumed conversion of stock options resulted in the
inclusion of an additional 126,859 weighted average common shares in the diluted
earnings per share calculation, and a $.01 decrease in earnings per share.
Preferred stock convertable into 1,425,895 shares of common stock in 1999 and
3,928,400 shares of common stock in 1998 and 1997 were not included in the
computation of diluted loss per share because the effect of the assumed
conversion would have an antidilutive effect.
Options to purchase approximately 259,500, 194,500, and 212,086 shares of common
stock at $4.00 to $20.00 per share were outstanding at December 31, 1999, 1998,
and 1997, respectively, but were not included in the computation of diluted
earnings per share because the options' exercise prices were greater than the
average market price of the common shares.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year
presentation.
Westmoreland Coal Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
1. Nature of Operations
The Company's principal activities, conducted within the United States are: (i)
the production and sale of coal from a contractor operated mine in the Powder
River Basin in Eastern Montana; (ii) the ownership of interests in cogeneration
and other non-regulated independent power plants; and (iii) the leasing of
capacity at Dominion Terminal Associates, a coal storage and vessel loading
facility.
Bankruptcy Proceeding
Westmoreland Coal Company and four subsidiaries, Westmoreland Resources, Inc.,
Westmoreland Coal Sales Company, Westmoreland Energy, Inc., and Westmoreland
Terminal Company ("the Debtor Corporations"), filed voluntary petitions for
protection under Chapter 11 of the Bankruptcy Code on December 23, 1996. On
December 23, 1998, the Bankruptcy Court granted the Debtors' Motion to Dismiss
the cases. The automatic stay period pursuant to the Federal Rules of Bankruptcy
Procedure expired on January 4, 1999.
Continued financial improvement of the Debtors during the bankruptcy provided
the basis for dismissal and settlement with the UMWA Health and Benefit Funds
("Funds"), the Company's principal creditors. On October 15, 1998, the Company,
the Funds, the United Mine Workers of America ("UMWA") and the Official
Committee of Equity Security Holders ("Equity Committee") reached agreement on
the terms of a settlement, which provided for, among other things, the
resolution of the Chapter 11 cases. The agreement, which facilitated a
consensual dismissal of the bankruptcy cases, was announced during scheduled
hearings on Westmoreland's Motion to Dismiss and the Equity Committee's Motion
to Convert to Chapter 7, and the hearings were subsequently recessed. The
agreement was subsequently documented in certain consent judgments and in a
Master Agreement among the Company, the Funds, the UMWA, and the Equity
Committee. The Debtor Corporations filed motions requesting approval of the
consent judgments on November 18, 1998. There were no allowable objections and
dismissal of the Chapter 11 Cases occurred on December 23, 1998. The Master
Agreement was executed on January 29, 1999.
2. Dispositions
On July 27, 1999, the Company sold all remaining assets of its idled Virginia
Division. The assets consisted of the Bullitt Preparation Plant and Transloader
Complex. The Company received approximately $650,000 in cash and the purchaser
assumed reclamation liabilities of approximately $600,000. The transaction
resulted in a net gain of approximately $360,000. The Company is negotiating to
sell the Virginia Division refuse site. The site has no recorded asset value,
however, liabilities for related reclamation have been accrued.
In 1998 and 1997, the Company sold various assets of the Virginia Division for
aggregate net proceeds of $511,000 and $2,757,000, respectively, and recorded
gains of $475,000 and $969,000, respectively. The purchasers assumed certain
reclamation liabilities associated with these assets.
3. Unusual CHARGES OR CREDITS
1997
In 1997, the Company recorded an unusual credit of $14,199,000 for a curtailment
gain relating to the 1993 Wage Agreement. In 1997, the Company also recorded an
unusual credit of $13,015,000 due to a change in the estimated liability for
pneumoconiosis benefits.
1998
On January 29, 1999, the Company executed the Master Agreement described in Note
1 to the Consolidated Financial Statements. Under that Agreement, the Company
agreed to make payments for retiree health benefits as if it continued to be
obligated under the 1993 UMWA Wage Agreement for eligible retirees and
beneficiaries for a period of five years. At the expiration of such five year
period, the Company is free to initiate litigation contesting its obligation to
continue to provide such benefits, and the Company will continue to provide such
benefits after the expiration of the five year period until it obtains a ruling
from a Court of competent jurisdiction that it is not obligated to provide such
benefits. The estimated present value of the Company's obligation to provide
these benefits for the five year period is approximately $2,000,000, and was
charged to expense in 1998. The Company currently expects that it will be
necessary to litigate this matter at the conclusion of the five-year period. On
the advice of counsel, management believes that the Company should prevail in
any such litigation, although, as in any litigation, there can be no assurance.
Should the UMWA's position be ultimately upheld, the Company would be required
to provide retiree health benefits to such beneficiaries after the expiration of
the five year period. The estimated present value of this contingent liability,
calculated as of December 31, 1999, is approximately $11,000,000.
4. 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 seven operating projects as listed and described in the
Project 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.
Project Ft. Drum Altavista Hopewell Southampton Ft. Lupton
-------------------- ----------------- ---------------- ----------------- ---------------- -----------------
Watertown Altavista Hopewell Southampton Ft. Lupton
Location: New York Virginia Virginia Virginia Colorado
-------------------- ----------------- ---------------- ----------------- ---------------- -----------------
Gross Megawatt
Capacity: 55.5 MW 70 MW 70 MW 70 MW 290 MW
-------------------- ----------------- ---------------- ----------------- ---------------- -----------------
WEI Equity
Ownership: 1.25% 30.0% 30.0% 30.0% 4.49%
-------------------- ----------------- ---------------- ----------------- ---------------- -----------------
Electricity Public Service
Purchaser: Niagara Mohawk Virginia Power Virginia Power Virginia Power of Colorado
-------------------- ----------------- ---------------- ----------------- ---------------- -----------------
The Lane Firestone Tire Rocky Mtn.
Steam Host: US Army Company, Inc. & Rubber Co. Hercules, Inc. Produce, Ltd
-------------------- ----------------- ---------------- ----------------- ---------------- -----------------
Fuel Type: Coal Coal Coal Coal Natural Gas
-------------------- ----------------- ---------------- ----------------- ---------------- -----------------
Cyprus Amax Westmoreland United Coal United Coal Thermo Fuels,
Fuel Supplier: Coal Co. Coal Company Company Company Inc.
-------------------- ----------------- ---------------- ----------------- ---------------- -----------------
Commercial
Operations Date: 1989 1992 1992 1992 1994
-------------------- ----------------- ---------------- ----------------- ---------------- -----------------
Roanoke Roanoke
Project Valley I Valley II
-------------------- ---------------- ------------------
Weldon Weldon
Location: North Carolina North Carolina
-------------------- ---------------- ------------------
Gross Megawatt
Capacity: 180 MW 50 MW
-------------------- ---------------- ------------------
WEI Equity
Ownership: 50.0% 50.0%
-------------------- ---------------- ------------------
Electricity
Purchaser: Virginia Power Virginia Power
-------------------- ---------------- ------------------
Patch Rubber Patch Rubber
Steam Host: Company Company
-------------------- ---------------- ------------------
Fuel Type: Coal Coal
-------------------- ---------------- ------------------
TECO Coal/ TECO Coal/
Fuel Supplier: CONSOL CONSOL
-------------------- --------------- ------------------
Commercial
Operations Date: 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 Sheets
December 31, 1999 1998
- ------------------------------------------------------------------------- --------------------- --------------------
(in thousands)
Assets
Current assets $ 160,814 $ 129,829
Property, plant and equipment, net 504,328 599,293
Other assets 36,060 48,478
- ------------------------------------------------------------------------- --------------------- --------------------
Total assets $ 701,202 $ 777,600
========================================================================= ===================== ====================
Liabilities and equity
Current liabilities $ 56,869 $ 52,526
Long-term debt and other liabilities 425,960 460,787
Equity 218,373 264,287
- ------------------------------------------------------------------------- --------------------- --------------------
Total liabilities and equity $ 701,202 $ 777,600
========================================================================= ===================== ====================
WEI's share of equity $ 45,901 $ 63,156
Other, net (676) (770)
- ------------------------------------------------------------------------- --------------------- --------------------
WEI's investment in independent power operations $ 45,225 $ 62,386
========================================================================= ===================== ====================
The Partnerships and the Company adopted Statement of Position No 98-5,
Reporting the Costs of Start-Up Activities as of January 1, 1998. The statement
requires companies to expense the costs of start-up activities as incurred. The
statement also requires certain previously capitalized start-up costs to be
charged to expense at the time of adoption and reported as the cumulative effect
of a change in accounting principle. The cumulative effect on WEI's share of
earnings of the Partnerships was $9,876,000 and was recorded separately in the
Consolidated Statements of Operations in 1998.
The Company's capitalized start-up costs were being amortized straight-line over
the term of the power contract for the related project.
Income Statements
For years ended December 31, 1999 1998 1997
- ---------------------------------- --------------- ---------------- -----------------
(in thousands)
Revenues $203,082 $247,015 $270,887
Operating income 111,234 128,302 136,226
Net income $ 67,035 $252,191 $ 54,423
================================== =============== ================ =================
WEI equity in earnings $ 34,492 $ 64,465 $ 17,770
Cumulative effect of change in
accounting principle - (9,876) -
- ---------------------------------- --------------- ---------------- -----------------
WEI's share of earnings $ 34,492 $ 54,589 $ 17,770
================================== =============== ================ =================
WEI performs project development and venture and asset management services for
the partnerships and has recognized related revenues of $365,000, $510,000, and
$531,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
Management fees, net of related costs, are recorded as other income when the
service is performed.
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. 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.
On August 1, 1996, FERC entered its decision in the Southampton case. FERC
determined that the Southampton Partnership's request for reconsideration should
be treated as timely filed, but that the Southampton Project was not in complete
compliance with the QF requirements for 1992. FERC ordered the Southampton
Project to comply with Section 205 for the Federal Power Act ("FPA"), and file,
for FERC's review, rates for calendar year 1992 for wholesale power sales to
Virginia Power. Otherwise, the Southampton Project remains exempt from
regulation under the Public Utility Holding Company Act ("PUHCA"), utility laws
of Virginia and the other provisions of the FPA. In August 1996, the Southampton
Partnership filed a motion seeking clarification of the August 1, 1996 order.
The Southampton Partnership also filed an additional request for rehearing. On
May 13, 1998 the FERC entered an Order clarifying its August 1, 1996 decision in
the Southampton case. While affirming the requirement to make a refund to
Virginia Power, the FERC ruled that Virginia Power must compensate the
Southampton Partnership for every hour in which the unit was available for
dispatch, but not actually dispatched. FERC appointed a settlement Judge to
assist the parties in evaluating and negotiating a settlement.
In October, 1998, the Southampton Partnership and Virginia Power entered into a
settlement agreement which resolved these issues. The settlement provided for,
among other items, payments by the Southampton Partnership to Virginia Power of
$1,000,000 annually for the years 1999-2001, followed by a reduction in capacity
payments from Virginia Power to the Southampton Partnership of $500,000 for the
years 2002-2008. Following 2008, Virginia Power may elect to terminate its power
purchases from the Southampton Partnership or continue to receive the $500,000
annual reduction in capacity payments for the remainder of the power purchase
agreement. The settlement has been approved by the FERC.
Fourfold L.P., a limited partner of LG&E-Southampton, L.P. made a demand on the
Southampton Partnership and the related LG&E and Westmoreland entities for
reimbursement in the amount of $1,979,000 in connection with its share of the
settlement. The project participants (general partners, including a Westmoreland
subsidiary, Westpower-Franklin ("Westpower"), and operator) have agreed to
compromise and settle the Fourfold L.P.'s claim. Westpower's contribution to the
total settlement amount was $100,000. The Westmoreland entities have made a
similar demand against the LG&E entities in the amount of $3,300,000, however,
the mediation which resolved the Fourfold claim did not successfully resolve the
Westpower claims. Westpower is evaluating its options and possible legal
remedies. The outcome of the dispute cannot be determined at December 31, 1999
but the Company has not recognized any revenue related to the dispute.
ROVA I Project - WEI owns a 50% partnership interest in Westmoreland-LG&E
Partners (the "ROVA Partnership"). The ROVA Partnership's principal customer,
Virginia Power contracted to purchase the electricity generated by ROVA I, one
of two units included in the ROVA partnership, under a long-term contract. In
the second quarter of 1994, that customer disputed the ROVA Partnership's
interpretation of the provisions of the Power Purchase Agreement 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 allowed
annual number. The customer asserts that it is not required to do so.
From May, 1994, through December, 1999, Virginia Power withheld approximately
$19,800,000 of these capacity payments during periods of forced outages. To
date, the Company has not recognized any revenue on its 50% portion of the
capacity payments being withheld by Virginia Power. In October 1994, the ROVA
Partnership filed a complaint against Virginia Power seeking damages, contending
that Virginia Power breached the Power Purchase Agreement in withholding such
payments. In December, 1994, Virginia Power filed a motion to dismiss the
complaint and in March, 1995, the Court granted this motion. The ROVA
Partnership filed an amended complaint in April, 1995. Virginia Power filed
another motion to dismiss the complaint and in June 1995, the Circuit Court of
the City of Richmond, Virginia denied Virginia Power's motion to dismiss the
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. Virginia Power filed a second summary judgment motion on March 1,
1996. On March 18, 1996, the Court granted Virginia Power's second summary
judgment motion and effectively dismissed the complaint. The ROVA Partnership
appealed the Court's decision granting summary judgment to the Virginia Supreme
Court. On June 6, 1997 the Virginia Supreme Court reversed the trial Court's
decision to grant Virginia Power's summary judgment motion and remanded the
matter for trial. The case was tried on October 26, 1998. The trial judge
requested the parties to submit post trial briefs and on December 2, 1998
entered judgment in the ROVA Partnership's favor for the amount of $14,800,000
plus interest for a total of $19,336,214. On December 21, 1998, Virginia Power
posted its appeal bond and on December 29, 1998, noted its appeal of the Court's
decision to the Virginia Supreme Court. The Court heard oral arguments on
January 11, 2000 and on March 3, 2000 the Virginia Supreme Court reversed the
trial Court's decision on an evidentiary matter and remanded the matter for
further proceedings consistent with the Supreme Court's order.
Rensselaer - On March 15, 1999, LG&E-Westmoreland Rensselaer ("LWR") completed
the sale of the Rensselaer Project to Fulton Cogeneration Associates, L.P.
("Fulton"). LWR received approximately $68,000,000 in cash as consideration for
the sale of the Rensselaer plant and operating contracts. After payment of
expenses and remaining debts, Westmoreland Energy Inc.'s share of the proceeds
was approximately $33,000,000.
5. Dominion Terminal Associates
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. Each partner is responsible
for its share of throughput and expenses at the terminal. Total throughput tons
for DTA were 8,357,000, 11,511,000, and 14,075,000 for 1999, 1998 and 1997,
respectively. The Company currently leases the terminal's ground storage space
and vessel-loading facilities to certain unaffiliated parties who are engaged in
the export business and provides related support services.
The following is a summary of financial information for DTA:
Balance Sheets
December 31, 1999 1998
- ---------------------------------------------- --------------------- --------------------
(in thousands)
Assets
Current assets $ 4,379 $ 4,816
Non-current assets 83,757 86,175
- ---------------------------------------------- --------------------- --------------------
Total assets $ 88,136 $ 90,991
============================================== ===================== ====================
Liabilities and partners' deficit
Current liabilities $ 1,540 $ 1,967
Long-term debt and other liabilities 115,319 115,660
Partners' deficit (28,723) (26,636)
- ---------------------------------------------- --------------------- --------------------
Total liabilities and partners' deficit $ 88,136 $ 90,991
============================================== ===================== ====================
WTC's share of partners' deficit $(10,964) $ (10,586)
DTA Bonds 26,560 26,560
Other, net 1,240 1,665
Impairment allowance (12,164) (12,164)
- ---------------------------------------------- --------------------- --------------------
Investment in DTA $ 4,672 $ 5,475
============================================== ===================== ====================
Income Statements
For the Years ended December 31, 1999 1998 1997
- -------------------------------------------------------- ---------------- --------------------- --------------------
(in thousands)
Contribution from Partners $ 12,902 $ 15,393 $ 20,164
Total expenses 14,989 19,349 22,789
- -------------------------------------------------------- ---------------- --------------------- --------------------
Excess of expenses over partners' contributions $ (2,087) $ (3,956) $ (2,625)
======================================================== ================ ===================== ====================
Revenues from DTA $ 518 $ 2,890 $ 4,201
Company share of DTA costs 1,982 2,796 3,321
- -------------------------------------------------------- ---------------- --------------------- --------------------
Equity in earnings (losses) from DTA $ (1,464) $ 94 $ 880
======================================================== ================ ===================== ====================
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 amount at December 31, 1999 and 1998). 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.
The Company actively markets its 20% share of the terminal's facilities.
Accordingly, the Company's equity in earnings (losses) from DTA represents the
revenue received net of the Company's share of the expenses incurred
attributable to 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 and
capital expenditures. WTC's total cash funding requirements, were $1,603,000,
$1,877,000, and $2,883,000 for 1999, 1998 and 1997, respectively.
In 1998, the Company recognized a $12,164,000 impairment charge relating to its
investment in DTA to reduce its carrying value to its estimated fair value. DTA
is dependent upon its customer's coal export business to maintain an acceptable
level of throughput. The coal export business has recently experienced a
significant decline due to intense competitive pressure from coal suppliers in
other nations. At this time the Company does not believe that those competitive
pressures will abate in the near term. The fair value assigned to DTA was based
on a 1998 sale of a similar nearby terminal.
6. Debt
The Company's debt is summarized as follows:
December 31, 1999 1998
- ---------------------------------------------------------------------------- ------------------- -------------------
(in thousands)
WRI:
Contracts for deed and mortgage notes payable with interest rates
ranging from 4% to 6%, net of unamortized discount of $124,000
in 1999 and $169,000 in 1998, secured by property plant and
equipment $ 1,563 $ 1,762
- ---------------------------------------------------------------------------- ------------------- -------------------
Total debt 1,563 1,762
Less current installments 220 200
- ---------------------------------------------------------------------------- ------------------- -------------------
Long-term debt, less current installments $ 1,343 $ 1,562
============================================================================ =================== ===================
The secured contracts for deed and mortgage notes payable by WRI are secured by
land and surface rights.
Principal payments due on long-term debt, for the next five years and thereafter
are as follows:
Year Ending Amount
- ----------------------------------------------------- -------------------
(in thousands)
December 31, 2000 $ 220
December 31, 2001 241
December 31, 2002 265
December 31, 2003 291
December 31, 2004 288
After December 31, 2004 258
- ----------------------------------------------------- -------------------
7. Workers' Compensation Benefits
The Company was self-insured for workers' compensation benefits prior to and
through December 31, 1995. Beginning in 1996, the Company is covered by third
party insurance for new workers' compensation claims and is no longer
self-insured. Based on updated actuarial and claims data, $1,239,000 was charged
to earnings in 1999, $469,000 was credited to earnings in 1998 and $753,000 was
charged to earnings during 1997. The cash payments for workers' compensation
benefits were $3,354,000, $3,540,000, and $3,752,000 in 1999, 1998 and 1997,
respectively.
The Company was required to obtain surety bonds in connection with its
self-insured workers' compensation plan. The Company's surety bond underwriters
required collateral for such bonding. As of December 31, 1999 and 1998,
$4,748,000 and $4,140,000 respectively, was held in the collateral accounts.
8. Pneumoconiosis (Black lung) Benefits
The Company is self-insured for federal and state pneumoconiosis benefits for
current and former employees and has established an independent trust to pay
these benefits.
The following table sets forth the funded status of the Company's obligation:
December 31, 1999 1998
---------------------------------------------------------- ------------------- ---------------
(in thousands)
Actuarial present value of benefit obligation:
Expected claims from terminated employees $ 8,329 $ 10,726
Claimants 15,909 17,878
---------------------------------------------------------- ------------------- ---------------
Total present value of benefit obligation 24,238 28,604
Plan assets at fair value, primarily government-backed
securities 35,890 39,495
---------------------------------------------------------- ------------------- ---------------
Excess of trust assets over pneumoconiosis benefit
obligation $ 11,652 $ 10,891
========================================================== =================== ===============
The discount rates used in determining the accumulated pneumoconiosis benefit as
of December 31, 1999 and 1998 were 7.75% and 6.75%, respectively.
In February 2000, the Company received $6,397,000 of the surplus from the trust.
In 1997 the Company recorded a benefit of $13,015,000 due to a change in the
estimated liability for pneumoconiosis benefits, which has been recorded as a
component of unusual credits in 1997.
9. 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 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. 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 maintains three plans subject to FAS 106: the Salaried Plan, the
1993 Wage Agreement Plan, and the 1992 Plan. The Salaried Plan provides certain
health and life insurance benefits for salaried retired employees and their
dependents. The 1993 Wage Agreement Plan is the plan that resulted from the 1993
Wage Agreement between the Company and the UMWA. That agreement required the
Company to establish and provide health care benefits under an individual
employer plan for age- and service-eligible employees (and their dependents) who
retired during the term of the 1993 Wage Agreement. The 1992 Plan was
established as a result of the Coal Act. The Company is required to provide
health care benefits for beneficiaries (and their dependents) who were age- and
service-eligible to receive benefits under the Coal Act as of February 1, 1993,
and who retired before October 1, 1994.
Prior to 1997, the calculation of the present value of the Company's obligation
under the 1993 Wage Agreement assumed that the Company would enter into
successor wage agreements to the 1993 Wage Agreement and would thereby continue
to provide retiree health benefits to such beneficiaries. During 1997, the
Company determined that it would not need to enter into a successor wage
agreement. Accordingly, the Company reduced the liability for the 1993 Wage
Agreement and recorded a curtailment gain of $14,199,000 in 1997, which has been
recorded as a component of unusual credits.
The UMWA contests the Company's right to terminate benefits at the expiration of
the collective bargaining agreement and further asserts that former employees
will be entitled to such benefits as they reach age 55. As a condition for not
opposing dismissal of the bankruptcy, the UMWA demanded and pursuant to the
terms of the Master Agreement discussed in Note 1, the Company agreed to
continue to provide benefits to participants of the 1993 Wage Agreement for a
period of five years from the dismissal of the bankruptcy. The estimated present
value of the Company's obligation to provide these benefits for the five-year
period was charged to expense in 1998 as an unusual charge. At the expiration of
such five year period, the Company is free to initiate litigation contesting its
obligation to continue to provide such benefits, and the Company will continue
to provide such benefits after the expiration of the five year period until it
obtains a ruling from a Court of competent jurisdiction that it is not obligated
to provide such benefits. The Company currently expects that it will be
necessary to litigate this matter at the conclusion of the five-year period. On
the advice of counsel, management believes that the Company should prevail in
any such litigation, although, as in any litigation, there can be no assurance.
Should the UMWA's position be ultimately upheld, the Company would be required
to provide retiree health benefits to such beneficiaries after the expiration of
the five year period. The estimated present value of this contingent liability,
calculated as of December 31, 1999, is approximately $11,000,000.
The following table sets forth the actuarial present value of postretirement
benefit obligations and amounts recognized in the Company's financial
statements:
Salaried Plan 1993 Wage Agreement 1992 Plan
--------------------------- --------------------------- ----------------------------
- -------------------------------- ------------- ------------- ------------ -------------- ------------- --------------
December 31, 1999 1998 1999 1998 1999 1998
- -------------------------------- ------------- ------------- ------------ -------------- ------------- --------------
(in thousands)
Assumptions:
Discount rate 7.75% 6.75% 7.75% 6.75% 7.75% 6.75%
Change in benefit obligation:
Net benefit obligation at
beginning of year $ 10,623 $ 10,505 $ 38,707 $ 33,418 $ 142,124 $ 114,406
Service cost 62 57 - - - -
Interest cost 601 701 2,310 2,461 8,423 7,721
Plan participant contributions 79 - - - - -
Plan amendments - - - 1,865 - -
Actuarial (gain) loss (2,543) 148 (8,032) 1,688 (8,745) 19,997
Settlements - - - - (18,580) -
Gross benefits paid (868) (788) (1,165) (725) (7,177) -
- -------------------------------- ------------- ------------- ------------ -------------- ------------- --------------
7,954 10,623 31,820 38,707 116,045 142,124
Change in plan assets:
Employer contributions 789 788 1,165 725 7,177 -
Plan participant contributions 79 - - - - -
Gross benefits paid (868) (788) (1,165) (725) (7,177) -
- -------------------------------- ------------- ------------- ------------ -------------- ------------- --------------
Fair value of plan assets at end
of year - - - - - -
Funded status at end of year (7,954) (10,623) (31,820) (38,707) (116,045) (142,124)
Unrecognized net actuarial
(gain) loss (5,487) (3,207) (4,992) 3,040 24,223 33,492
Unrecognized net transition
obligation 1,608 1,732 - - 51,694 55,670
================================ ============= ============= ============ ============== ============= ==============
Net amount recognized at end of
year (recorded as accrued
benefit cost in the
accompanying balance sheet) $(11,833) $(12,098) $(36,812) $(35,667) $ (40,128) $ (52,962)(1)
================================ ============= ============= ============ ============== ============= ==============
(1) This includes $16,518,000 classified as Consent judgment payment obligations
in the accompanying balance sheet. Refer to Note 11.
The components of net periodic postretirement benefit cost are as follows:
Salaried Plan 1993 Wage Agreement 1992 Plan
- ---------------------------- --------------------------- --------------------------- -------------------------------
Year ended
December 31, 1999 1998 1997 1999 1998 1997 1999 1998 1997
- ---------------------------- -------- -------- --------- -------- -------- --------- -------- ---------- -----------
(in thousands)
Assumptions:
Discount rate 7.75% 6.75% 7.00% 7.75% 6.75% 7.00% 7.75% 6.75% 7.00%
Components of net periodic benefit cost:
Service cost $ 62 $ 56 $ 48 $ - $ - $ - $ - $ - $ -
Interest cost 601 701 737 2,310 2,461 2,250 8,423 7,721 7,893
Amortization of:
Transition obligation 124 124 124 - - - 3,976 3,976 3,976
Prior service cost - - - - 1,865 - - - -
Actuarial (gain) loss (263) (170) (196) - - - 524 812 485
- ---------------------------- -------- -------- --------- -------- -------- --------- -------- ---------- -----------
Total net periodic benefit
cost $ 524 $ 711 $ 713 $2,310 $4,326 $2,250 $12,923 $12,509 $12,354
============================ ======== ======== ========= ======== ========= ======== ======== ========== ===========
Sensitivity of retiree welfare results:
Effect of a one percentage
point increase in assumed
health care cost trend
- - on total service and
interest cost components $ 52 $ 44 $ 348 $ 444 $ 1,183 $ 903
- - on postretirement
benefit 446 428 4,638 6,875 15,738 13,190
obligation
Effect of a one percentage
point decrease in assumed
health care cost trend
- - on total service and
interest cost components (48) (44) (301) (444) (1,037) (903)
- - on postretirement
benefit obligation (422) (428) (4,046) (6,875) (13,858) (13,190)
Postretirement benefits include medical benefits for retirees and their spouses
(and Medicare Part B reimbursement for certain retirees) and retiree life
insurance.
The health care cost trend assumed on covered charges were 6.0%, 6.0%, and 6.5%
for 1999, 1998 and 1997, respectively, decreasing to an ultimate trend of 5.0%
in 2001 and beyond.
Cash payments for medical and life insurance benefits were $28,597,000,
$1,452,000, and $1,823,000 in 1999, 1998 and 1997, respectively. The 1999
payments include normal benefit payments as well as settlements paid upon the
Company's dismissal from bankruptcy.
Multiemployer Plan
Until December 1996, and before the commencement of the Chapter 11 cases for the
Debtor Corporations, the Company made payments to the Combined Benefit Plan,
which is a multiemployer health plan neither controlled nor administered by the
Company. The Combined Benefit Plan is designed to pay benefits to UMWA workers
(and dependents) who retired prior to 1976. 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 was required by the Coal Act to make monthly
premium payments into the Combined Benefit Plan. These payments were based on
the number of beneficiaries assigned to the Company, the Company's UMWA
employees who retired prior to 1976 and the Company's pro-rata assigned share of
UMWA retirees whose companies are no longer in business. The net present value
of the Company's future cash payments is estimated to be $34,881,000. The
Company expenses payments to the Combined Benefit Plan when they are made.
In January 1999, in accordance with the Master Agreement, the Company made
payments totaling $19,408,000 to the Combined Benefit Plan. This payment
included $15,715,000 for delinquent premiums, $2,178,000 for interest on those
premiums and $1,515,000 for premiums due for the first three months of 1999,
discounted at 6%. The Company prepaid the second and third quarter 1999 premiums
at the beginning of each quarter and resumed monthly payments to the Combined
Benefit Plan in October 1999. The premiums and interest paid in January 1999
were recognized as expense in 1998. As a result of the bankruptcy, no payments
were made during 1998 or 1997.
10. Retirement Plans
Defined Benefit Pension Plans
During 1997, the Company elected to terminate its over-funded non-contributory
defined benefit pension plan. Pension income for 1997 included a gain on
termination of approximately $1,512,000. Upon termination of the plan, the
excess fund assets reverted to the Company. The reversion to the Company was
approximately $13,040,000, net of excise taxes payable of $3,135,000. The
Company received $12,540,000 of the funds and paid the excise taxes in February
1998. The remaining amount being held in escrow to pay final termination costs
related to the plan was received in February 2000.
Simultaneously with the termination of this plan, the Company adopted a new plan
that provides for essentially the same benefits as the prior plan for current
employees. For the purpose of the benefit calculation under the new plan,
credited service under the prior plan is combined with credited service under
the new plan and a benefit amount is calculated. The amount of the accrued
benefit under the prior plan, calculated as of the prior plan termination date,
is subtracted to arrive at the benefit amount payable under the new plan.
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
period of service using the straight-line method.
Supplemental Executive Retirement Plan
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
beyond the maximum limits imposed by the Employee Retirement Income Security Act
("ERISA") and the Internal Revenue Code.
The following table provides a reconciliation of the changes in the plans'
benefit obligations and fair value of assets for the periods ending December 31,
1999 and 1998 and the amounts recognized in the Company's financial statements
for both the defined benefit pension and SERP Plans:
Qualified Pension Benefits SERP Benefits
-------------------------------------------- ----------------- ----------------- ---------------- ----------------
December 31, 1999 1998 1999 1998
-------------------------------------------- ----------------- ----------------- ---------------- ----------------
(in thousands)
Assumptions:
Discount rate 7.75% 6.75% 7.75% 6.75%
Expected return on plan assets 9.00% 9.00% 9.00% 9.00%
Rate of compensation increase 5.00% 5.00% 5.00% 5.00%
Change in benefit obligation:
Net benefit obligation at beginning of year $ 1,418 $ 1,429 $ 1,393 $ 1,349
Service cost 205 183 66 56
Interest cost 105 89 100 86
Actuarial gain (333) (271) (125) (98)
Gross benefits paid (17) (12) (134) -
-------------------------------------------- ----------------- ----------------- ---------------- ----------------
Net benefit obligation at end of year 1,378 1,418 1,300 1,393
Change in plan assets:
Fair value of plan assets at beginning of
year 5,487 5,225 - -
Actual return on plan assets (1) 273 - -
Employer Contributions - - 134 -
Gross benefits paid (17) (11) (134) -
-------------------------------------------- ----------------- ----------------- ---------------- ----------------
Fair value of plan assets at end of year 5,469 5,487 - -
Funded status at end of year 4,090 4,069 (1,300) (1,393)
Unrecognized net actuarial gain (344) (507) (642) (563)
Unrecognized prior service cost 180 222 461 577
Unrecognized net transition asset (29) (36) - -
-------------------------------------------- ----------------- ----------------- ---------------- ----------------
Net amount recognized at end of year 3,897 3,748 (1,481) (1,379)
Amounts recognized in the accompanying balance sheet consist of:
Prepaid benefit cost 3,897 3,748 - -
Accrued benefit cost (included in
other liabilities) - - (1,481) (1,379)
-------------------------------------------- ----------------- ----------------- ---------------- ----------------
Net amount recognized at end of year $ 3,897 $ 3,748 $(1,481) $(1,379)
============================================ ================= ================= ================ ================
The components of net periodic pension cost (benefit) are as follows:
Qualified Pension Benefits SERP Benefits
- ---------------------------------- ------------- ------------- ------------- ------------ ------------- -------------
Year ended December 31, 1999 1998 1997 1999 1998 1997
- ---------------------------------- ------------- ------------- ------------- ------------ ------------- -------------
(in thousands)
Assumptions:
Discount rate 7.75% 6.75% 7.00% 7.75% 6.75% 7.00%
Expected return on plan assets 9.00% 9.00% 9.00% 9.00% 9.00% 9.00%
Rate of compensation increase 5.00% 5.00% 5.00% 5.00% 5.00% 5.00%
Components of net periodic
benefit cost
Service cost $ 204 $ 183 $ 185 $ 66 $ 56 $ 59
Interest cost 105 88 3,958 99 86 86
Expected return on assets (493) (491) (7,393) - - -
Amortization of:
Transition asset (6) (6) (284) - - -
Prior service cost 42 42 42 116 116 116
Actuarial gain (1) (36) (543) (45) (52) (45)
- ---------------------------------- ------------- ------------- ------------- ------------ ------------- -------------
Total net periodic pension cost
(benefit) $ (149) $ (220) $(4,035) $ 236 $ 206 $ 216
================================== ============= ============= ============= ============ ============= =============
1974 UMWA Pension Plan
The Company was required under the 1993 Wage Agreement to pay amounts based on
hours worked or tons processed (depending on the source of the coal) in the form
of contributions to the 1974 UMWA Pension Plan with respect to UMWA represented
employees. The 1974 UMWA Pension Plan is neither controlled nor administered by
the Company.
Under the Multiemployer Pension Plan Act ("MPPA"), a company contributing to a
multiemployer plan is liable for its share of unfunded vested liabilities upon
withdrawal from the plan. In connection with the cessation of mining operations,
the Company recorded an estimate of the liability the Company would incur upon
withdrawal from the 1974 UMWA Pension plan. The actuarial estimate of this
obligation was estimated at $13,800,000 in 1996. The 1974 UMWA Pension Plan has
not provided the Company with an updated actuarial estimate of the withdrawal
liability calculated as of June 30, 1998, the date of the asset valuation the
Company believes should be used to determine the actual withdrawal liability, in
accordance with the provisions of MPPA. The Company believes the liability at
June 30, 1998 would be substantially less than $13,800,000 and is contesting the
withdrawal liability through arbitration. In accordance with MPAA, the Company
must amortize this withdrawal liability, with interest, during the arbitration
process by making payments of approximately $172,500 per month. These payments
have been made and will be recoverable to the extent the final assessed amount
is less than the amounts paid.
11. Consent JUDGMENT and other dismissal obligations
On January 4, 1999, pursuant to the consent judgments described in Note 1, the
Company paid the Combined Benefit Fund and the 1992 Benefit Plan $17,230,000 and
$16,518,000, respectively, plus interest of $5,258,000 for a total of
$39,006,000. Included in the amount paid to the Combined Benefit Fund was a
prepayment of approximately $1,515,000 for the first quarter of 1999. The Master
Agreement also required certain other payments to general pre-petition
creditors, the reimbursement of bankruptcy related costs incurred by the Funds
and an annual installment to the 1974 UMWA Pension Plan. These amounts were
$5,686,000 (including interest), $4,000,000, and $1,606,000 (including
interest), respectively. The total amount paid on January 4, 1999, for all
obligations was $50,288,000. Of this amount $26,306,000 was charged to expense
in 1998. Other than the consent judgment obligations, all remaining dismissal
related liabilities are classified at December 31, 1998, as accounts payable and
accrued liabilities.
12. Income Taxes (Benefit)
Income tax expense (benefit) attributable to income (loss) before income taxes
consists of:
1999 1998 1997
- -------------------------------------- -------------- ----------- ------------
(in thousands)
Federal:
Current $ - $ 3,687 $ -
Deferred - - -
- -------------------------------------- -------------- ----------- ------------
- $ 3,687 -
State:
Current (82) 100 -
Deferred - - -
- -------------------------------------- -------------- ----------- ------------
Income tax expense (benefit) $ (82) $ 3,787 $ -
====================================== ============== =========== ============
Income tax expense (benefit) attributable to income (loss) before income taxes
differed from the amounts computed by applying the statutory Federal income tax
rate of 34% to pretax income (loss) from continuing operations as a result of
the following:
1999 1998 1997
- ---------------------------------------------------- ------------- --------------- ---------------
(in thousands)
Computed tax expense (benefit) at statutory rate $ 2,909 $ (939) $ 9,573
Increase (decrease) in tax expense resulting from:
Percentage depletion (417) (807) (402)
Change in valuation
allowance for net deferred tax assets (2,951) 5,676 (8,657)
Other 377 (143) (514)
==================================================== ============= =============== ===============
Income tax expense (benefit) $ (82) $ 3,787 $ -
==================================================== ============= =============== ===============
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1999 and
1998 are presented below:
1999 1998
- ------------------------------------------------ -------------- ----------------
Deferred tax assets: (in thousands)
Net operating loss carryforwards $ 69,149 $ 38,750
Alternative minimum tax credit carryforwards 3,148 3,702
Investment tax credit carryforwards - 2,594
Capital loss carryforwards - 1,933
DTA impairment 4,136 4,136
Independent power projects 2,705 18,316
Deferred income 117 117
Accruals for the following:
Workers' compensation 6,212 7,186
Postretirement benefit obligation 34,222 46,577
Reclamation costs 897 1,070
Other accruals 440 1,134
- ------------------------------------------------ -------------- ----------------
Total gross deferred assets 121,026 125,515
Less valuation allowance (104,567) (107,518)
- ------------------------------------------------ -------------- ----------------
Net deferred tax assets $ 16,459 $ 17,997
================================================ ============== ================
Deferred tax liabilities:
Plant and equipment, differences due to
depreciation and amortization $(13,189) $(12,807)
Prepaid pension cost (1,325) (1,274)
Excess of trust assets over pneumoconiosis
benefit obligation (1,787) (3,703)
Advanced royalties, capitalized for
financial purposes (110) (110)
Unamortized discount on long-term debt for
financial purposes (48) (103)
- ------------------------------------------------ -------------- ----------------
Total gross deferred tax liabilities (16,459) (17,997)
- ------------------------------------------------ -------------- ----------------
Net deferred tax liability $ - $ -
================================================ ============== ================
The Company and subsidiaries have available net operating loss carryforwards to
reduce future taxable income which expire as follows:
-------------------- --------------
Expiration Date Regular Tax
-------------------- --------------
(in thousands)
2007 $ 7,937
2008 13,014
2009 4,879
2010 52,081
after 2011 123,798
-------------------- --------------
Total $201,709
==================== ==============
The Company has alternative minimum tax credit carryforwards of $3,148,000 which
are available indefinitely to offset future taxes payable.
13. Capital Stock
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 with 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, described below, 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 twenty-one quarterly dividends which are in arrears
amount to $9,314,000 in the aggregate ($44.63 per preferred share or $11.16 per
depositary share). Common stock dividends may not be declared until the
preferred stock dividends that are in arrears are made current.
On March 10, 1999, the Company offered to purchase up to 1,052,631 depositary
shares, each representing one quarter of a share of its Series A Convertible
Exchangeable Preferred Stock ("Series A Preferred Stock"). The offer price of
$19 per share was in full satisfaction of claims to accumulated but unpaid
dividends on the depositary shares tendered. On April 7, 1999, the offer expired
and 1,683,903 depositary shares were tendered in response to the offer. Because
the number of shares tendered exceeded the maximum number of shares the Company
had offered to purchase, a proration factor of approximately 62.5% was applied
to all shares tendered. A total of 1,052,631 depositary shares were purchased
for $20,000,000. The balance sheet effect of this transaction was to reduce cash
and shareholders' equity by $20,000,000. Following completion of the tender
offer, the depositary shares purchased in the offer were converted into shares
of Series A Preferred Stock, the shares of Series A Preferred Stock were
retired, and the capital of the Company was reduced by the par value of the
shares of Series A Preferred Stock retired. The retirements reduced the number
of shares of Series A Preferred Stock outstanding from 575,000 to 311,843.
Accumulated but unpaid dividends were reduced from $21,994,000 to $11,928,000,
and the ongoing quarterly preferred dividend requirement was reduced from
$1,222,000 to $663,000.
On September 16, 1999, the Company made a second offer to purchase up to an
additional 631,000 depositary shares at $19 per depositary share. The offer
price of $19 per share was in full satisfaction of claims to accumulated but
unpaid dividends on the depositary shares tendered. On October 26, 1999, the
offer expired and 412,536 depositary shares were tendered in response to the
offer. The balance sheet effect of the transaction was to reduce cash and
shareholders' equity by $7,838,000. Following completion of the tender offer,
the depositary shares purchased in the offer were converted to shares of Series
A Preferred Stock, the shares of Series A Preferred Stock were retired, and the
capital of the Company was reduced by the par value of the shares of Series A
Preferred Stock retired. The retirements reduced the number of shares of Series
A Preferred Stock outstanding from 311,843 to 208,708. Accumulated but unpaid
dividends were reduced from $13,253,000 to $8,870,000 and the ongoing quarterly
dividend requirement was reduced from $663,000 to $444,000.
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 ($208,708). The Company had shareholders'
equity at December 31, 1999, of $3,057,000.
14. Incentive Stock Option and Stock Appreciation Rights Plans
As of December 31, 1999, the Company had options and restricted stock
outstanding from three Incentive Stock Option ("ISOs") and Stock Appreciation
Rights ("SARs") Plans for employees and two Incentive Stock Option Plans for
directors.
The 1982 and 1985 employee Plans provide for the granting of ISOs and SARs and
the 1995 employee 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 SAR for this purpose would 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 1982, 1985 and 1995 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 two years from the date of grant as to 50% of the total number granted and
as to the remaining 50% not until three years from the date of grant; the right
to exercise ISOs and SARs terminates after eight years from the date of grant.
The maximum number of shares of the Company's common stock and SARs that could
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 N/A
- ---------------------------- ---------------- --------------- ----------------
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 of
those plans.
In January 1999, 40,000 shares of restricted stock and options to purchase
65,000 shares were granted to a group of employees, including one officer. The
options were granted at an exercise price of $4.00 per share and are exercisable
upon grant.
The 1991 Non-Qualified Stock Option Plan for Non-Employee Directors provides for
the granting on September 1 of each year of options to purchase 1,500 shares of
the Company's common stock. The maximum number of shares of the Company's common
stock that may be issued pursuant to options granted under the plan is 200,000
shares and the options expire ten years after the date of grant. Options granted
pursuant to this plan vest after the completion of one year of board service
following the date of grant. Grants under this plan were suspended in 1996 and
at December 31, 1997 and 1998, there were options outstanding exercisable for
shares of common stock at a weighted average exercise price per share of $8.76.
In December, 1999, 25,500 shares of stock options were granted to non-employee
directors at an exercise price of $3.00 per share. At December 31, 1999, there
were options outstanding exercisable for 43,500 shares of common stock at a
weighted average exercise price per share of $5.38.
In 1996, the shareholders approved a stock option plan for directors. The plan
provides for the grant of non-qualified stock options to directors on an annual
basis beginning on the date of the 1996 Annual Meeting with options for 20,000
shares to be granted to each director on that date or after a director is first
elected or appointed, and options for 10,000 shares to be granted to each
director after each annual meeting thereafter. The maximum number of shares of
the Company's common stock that may be issued or granted under the plan is
350,000 and the options expire not later than ten years after the date of grant.
Options granted pursuant to this plan vest 25% per year over a four-year period.
Options granted during a director's period of active service continue to vest
pursuant to this schedule if a director leaves the board due to reaching
retirement age. In the event of a change of control of the Company, any option
that was not previously exercisable and vested will become fully exercisable and
vested. In December, 1999, options to purchase 350,000 shares of stock options
were granted to directors at an exercise price of $3.00 per share and all of
those options granted were outstanding at December 31, 1999.
Information for 1999, 1998 and 1997 with respect to both the employee and
director Plans is as follows:
Weighted
Stock Stock Average
Issue Price Restricted Option Appreciation Exercise
Range Stock Shares Rights Price
- ------------------------------------------ ---------------- ------------- ----------- --------------- --------------
Outstanding at December 31, 1996 $2.63-20.00 5,000 507,557 2,766 $ 6.95
Expired or forfeited in 1997 2.63-14.50 - (140,471) (2,766) 6.10
- ------------------------------------------ ---------------- ------------- ----------- --------------- --------------
Outstanding at December 31, 1997 2.63-20.00 5,000 367,086 - 7.28
Expired or forfeited in 1998 18.50 - (17,586) - 18.50
- ------------------------------------------ ---------------- ------------- ----------- --------------- --------------
Outstanding at December 31, 1998 2.63-20.00 5,000 349,500 - 6.72
Granted in 1999 3.00-4.00 40,000 467,500 - 3.11
Exercised in 1999 2.63-4.00 (45,000) (25,000) - 3.41
- ------------------------------------------ ---------------- ------------- ----------- --------------- --------------
Outstanding at December 31, 1999 2.63-20.00 - 792,000 - 4.76
========================================== ================ ============= =========== =============== ==============
The Company applies APB Opinion 25 and related Interpretations in accounting for
its plans. Accordingly, no compensation cost has been recognized for its stock
option plans. Had compensation cost for the Company's three stock-based
compensation plans been determined based on the fair value at the grant dates
for awards under those plans consistent with the FASB Statement 123, the
Company's net income (loss) and income (loss) per share would have been reduced
to the pro forma amounts indicated below:
1999 1998 1997
- ---------------------------- ------------------- --------------------- ------------------
(in thousands, except per share data)
Net Income (loss):
As reported $ 5,645 $(11,436) $ 23,268
Pro forma $ 5,227 $(11,600) $ 23,104
Basic and diluted income
(loss) per share:
As reported $ .80 $ (1.64) $ 3.34
Pro forma $ .74 $ (1.67) $ 3.32
- ---------------------------- ------------------- --------------------- ------------------
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted average assumptions used for options granted in 1999. There
were no options granted in 1997 or 1998.
Options Granted in 1999 Dividend Yield Volatility Risk-Free Rate Expected Life
- ------------------------------- ------------------ --------------- ------------------ -----------------
1991 Plan None 175% 5.99 - 6.11% 10 years
1995 Plan None 174% 4.76% 8 years
1996 Plan None 175% 6.11% 10 years
15. Business Segment Information
The Company's operations have been classified into three segments: coal,
independent power operations and terminal operations. The coal segment includes
the production and sale of coal from the Powder River Basin in eastern Montana.
It also includes coal mining operations in the eastern United States which were
idled in the third quarter of 1995. The independent power operations includes
the ownership of interests in cogeneration and other non-regulated independent
power plants. The terminal operation segment consists of the leasing of capacity
at Dominion Terminal Associates, a coal storage and vessel loading facility.
Summarized financial information by segment for 1999, 1998 and 1997 is as
follows:
Year ended December 31, 1999
Coal Independent Terminal
Power Operations Corporate Total
--------------- ---------------- ------------- --------------- ---------------
(in thousands)
Revenues:
Coal revenue $38,539 $ - $ - $ - $38,539
Equity in earnings (losses) - 34,492 (1,464) - 33,028
--------------- ---------------- ------------- --------------- ---------------
38,539 34,492 (1,464) - 71,567
Costs and expenses:
Cost of sales - coal 33,637 - - - 33,637
Depreciation, depletion, and
amortization 1,425 29 - 117 1,571
Selling and administrative
expense 770 1,020 732 7,138 9,660
Heritage costs - - - 18,737 18,737
Pension benefit - - - (149) (149)
Doubtful account recoveries - - - (174) (174)
--------------- ---------------- ------------- --------------- ---------------
Operating income (loss) $ 2,707 $33,443 $(2,196) $(25,669) $ 8,285
=============== ================ ============= =============== ===============
Capital expenditures $ 1,999 $ 29 $ - $ 41 $ 2,069
=============== ================ ============= =============== ===============
Property, plant and equipment (net) $36,343 $ 81 $ 8 $ 126 $36,558
=============== ================ ============= =============== ===============
Information for the Company's reportable segments relates to 1999 consolidated
totals as follows:
Income before income taxes: In Thousands
-----------------
Operating income $ 8,285
Gains on sales of assets 433
Interest expense (1,135)
Interest income 2,052
Minority interest (854)
Other income (expense) (226)
-----------------
Income before income taxes $ 8,555
=================
Year ended December 31, 1998
Coal Independent Terminal
Power Operations Corporate Total
--------------- ---------------- ------------- --------------- ---------------
(In Thousands)
Revenues:
Coal revenue $ 44,010 $ - $ - $ - $ 44,010
Equity in earnings (losses) - 64,465 94 - 64,559
--------------- ---------------- ------------- --------------- ---------------
44,010 64,465 94 - 108,569
Costs and expenses:
Cost of sales - coal 37,472 - - - 37,472
Depreciation, depletion, and
amortization 1,472 39 648 130 2,289
Selling and administrative
expense 1,297 1,162 753 3,828 7,040
Heritage costs - - - 31,449 31,449
Pension expense - - - 111 111
Unusual charges - - - 2,000 2,000
Doubtful account recoveries - - - (1,028) (1,028)
DTA impairment charge - - - 12,164 12,164
--------------- ---------------- ------------- --------------- ---------------
Operating income (loss) $ 3,769 $ 63,264 $(1,307) $(48,654) $ 17,072
=============== ================ ============= =============== ===============
Capital expenditures $ 2,935 $ 8 $ - $ 2 $ 2,945
=============== ================ ============= =============== ===============
Property, plant and equipment (net) $ 35,768 $ 88 $ 8 $ 1,086 $ 36,950
=============== ================ ============= =============== ===============
Information for the Company's reportable segments relates to 1998 consolidated
totals as follows:
Income before income taxes: In Thousands
-----------------
Operating income $ 17,072
Gains on sales of assets 475
Interest expense (190)
Minority interest (775)
Other income (expense) 1,999
Reorganization items (11,466)
-----------------
Income before income taxes $ 7,115
=================
Year ended December 31, 1997
Coal Independent Terminal
Power Operations Corporate Total
---------------- ---------------- --------------- --------------- ---------------
(In Thousands)
Revenues:
Coal revenue $ 47,182 $ - $ - $ - $ 47,182
Equity in earnings (losses) - 17,770 880 - 18,650
---------------- ---------------- --------------- --------------- ---------------
47,182 17,770 880 - 65,832
Costs and expenses:
Cost of sales - coal 42,063 - - - 42,063
Depreciation, depletion, and
amortization 1,499 96 - 120 1,715
Selling and administrative
expense 198 783 562 4,389 5,932
Heritage costs - - - 16,673 16,673
Pension benefit - - - (5,547) (5,547)
Unusual credits - - - (27,214) (27,214)
Doubtful account recoveries - - - (1,410) (1,410)
---------------- ---------------- --------------- --------------- ---------------
Operating income $ 3,422 $ 16,891 $ 318 $ 12,989 $ 33,620
================ ================ =============== =============== ===============
Capital expenditures $ 151 $ 8 $ - $ 15 $ 174
================ ================ =============== =============== ===============
Property, plant and equipment (net) $ 34,307 $ 125 $ 8 $ 1,247 $ 35,687
================ ================ =============== =============== ===============
Information for the Company's reportable segments relates to 1997 consolidated
totals as follows:
Income before income taxes: In Thousands
-----------------
Operating income $ 33,620
Gains on sales of assets 969
Interest expense (320)
Minority interest (1,092)
Other income (expense) 713
Reorganization items (932)
-----------------
Income before income taxes $ 32,958
=================
16. Commitments and Contingencies
Protection of the Environment
The Company believes its mining operations are 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. WRI has an agreement
with its mining contractor, Morrison Knudsen Company, Inc. (which owns 20% of
the stock of WRI), which determined the Company's maximum liability for
reclamation costs associated with final mine closure. It calls for the Company
to pay approximately $1,700,000 over a 15-year period which began in December
1990. All remaining liability is that of Morrison Knudsen or customers, who are
obligated to pay final reclamation costs under provisions of their respective
coal sales contracts. In addition, per ton reclamation fees imposed by the
Federal Surface Mining Control and Reclamation Act of 1977 (the "Surface Mining
Act") amounted to approximately $1,913,000, $2,241,000, and $2,455,000 in 1999,
1998 and 1997, respectively. The Company estimates the total cost for the
reclamation of its remaining Virginia Division properties is approximately
$1,811,000, all of which has been accrued as of December 31, 1999. No assurance
can be given that the amount accrued accurately reflects the actual cost of
reclamation activities that may be required. Costs incurred to perform
reclamation in 1999, 1998, and 1997 amounted to $144,000, $153,000, and
$257,000, respectively.
In the event final reclamation is not performed in accordance with state and
federal regulations, the Company has $10,600,000 and $4,067,000 of reclamation
bonds in place in Montana and Virginia, respectively, to assure compliance with
all applicable regulations.
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 $3,602,000 and are
collateralized by first and subordinated liens on certain assets of Adventure.
Cash payments of $174,000 were received during 1999 and the Company is seeking
to recover the remaining amounts. As of December 31, 1999, all remaining claims
against Adventure have been fully reserved due to the uncertainty of collection.
Lease Obligations
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 $3,115,000, $3,591,000, and $3,742,000 in
1999, 1998 and 1997, 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, 1999 are as follows:
---------------------------------------
(in thousands)
2000 $ 295
2001 305
2002 195
2003 191
----------------------- ---------------
Long-Term Sales Commitments
The following table presents total sales tonnage the Company expects to ship
under existing long-term contracts for the next five years from the Company's
mining operations (all from WRI):
-------------------------------------------------------------
Projected Sales Tonnage Under
Existing Long-Term Contracts (000s)
-------------------------------------------------------------
2000 4,650
2001 4,650
2002 4,650
2003 950
2004 950
-------------------------------- ----------------------------
On July 1, 1999, WRI restructured the terms of its coal sales agreement with
Northern States Power. The new agreement increases tonnage delivered and
eliminates the former option agreement. The new agreement expires on December
31, 2002. Prior to the new agreement, WRI had entered into an option agreement
whereby it had agreed to sell up to an additional 200,000,000 tons of coal to
Northern States Power. As compensation for granting the option, WRI received 1
1/4 cents, payable quarterly (with applicable price adjustments) for each
optioned ton. The option was never exercised. WRI recorded income totaling
$1,593,000, $3,171,000, and $3,128,000 during 1999, 1998 and 1997, respectively,
relative to the option agreement.
17. Transactions with Affiliated Companies
Westmoreland Resources, Inc., a 80% owned subsidiary, has a coal mining contract
with Morrison Knudsen Company, Inc., one of its stockholders. Mining costs
incurred under the contract were $19,445,000, $22,654,000, and $24,295,000 in
1999, 1998 and 1997, respectively.
18. Quarterly Financial Data (Unaudited)
Summarized quarterly financial data for 1999 and 1998 are as follows:
Three Months Ended
March 31 June 30 Sept. 30 Dec. 31
- ---------------------------------------------- ----------------- ----------------- ---------------- ----------------
(in thousands except per share data)
1999
Revenues $ 30,829 $ 12,394 $ 14,292 $ 14,052
Costs and expenses (17,866) (16,894) (18,240) (10,282)
- ---------------------------------------------- ----------------- ----------------- ---------------- ----------------
Operating income (loss) 12,963 (4,500) (3,948) 3,770
Gain (loss) on sale of assets 19 50 364 -
Income from continuing operations
before income taxes 12,555 (4,208) (3,234) 3,442
Income tax (expense) benefit (45) - 99 28
Net income (loss) 12,510 (4,208) (3,135) 3,470
Less preferred stock dividend requirements (1,222) (663) (663) (444)
- ---------------------------------------------- ----------------- ----------------- ---------------- ----------------
Income (loss) applicable to common
shareholders $ 11,288 $ (4,871) $ (3,798) $ 3,026
============================================== ================= ================= ================ ================
Income (loss) per share applicable to
common shareholders $ 1.62 $ (.69) $ (.54) $ .43
============================================== ================= ================= ================ ================
Number of common and common
equivalent shares outstanding
(weighted average) 6,980 7,020 7,033 7,040
============================================== ================= ================= ================ ================
Three Months Ended
March 31 June 30 Sept. 30 Dec. 31
- ---------------------------------------------- ----------------- ----------------- ---------------- ----------------
(in thousands except per share data)
1998
Revenues $ 16,962 $ 61,845 $ 15,485 $ 14,277
Costs and expenses (16,198) (15,342) (15,226) (44,731)
- ---------------------------------------------- ----------------- ----------------- ---------------- ----------------
Operating income (loss) 764 46,503 259 (30,454)
Gain (loss) on sale of assets 136 51 204 84
Income from continuing operations
before reorganization items and income taxes 2,084 46,221 715 (30,439)
Reorganization items:
Legal and consulting fees (659) (776) (1,321) (7,116)
Interest expense - - - (5,188)
Interest income 637 691 1,102 1,164
Income from continuing operations before income taxes 2,062 46,136 496 (41,579)
Income tax expense - - (197) (3,590)
Cumulative effect of change in
accounting principle - (9,876) - -
Net income (loss) 2,062 36,260 299 (45,169)
Less preferred stock dividend
requirements (1,222) (1,222) (1,222) (1,222)
- ---------------------------------------------- ----------------- ----------------- ---------------- ----------------
Income (loss) applicable to common
shareholders $ 840 $ 35,038 $ (923) $(46,391)
============================================== ================= ================= ================ ================
Income (loss) per share applicable to
common shareholders:
Continuing operations $ .12 $ 6.45 $ (.13) $ (6.66)
Cumulative effect of change in
accounting principle - (1.42) - -
- ---------------------------------------------- ----------------- ----------------- ---------------- ----------------
$ .12 $ 5.03 $ (.13) $ (6.66)
============================================== ================= ================= ================ ================
Number of common and common
equivalent shares outstanding
(weighted average) 6,965 6,965 6,965 6,965
============================================== ================= ================= ================ ================
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, 1999 and 1998, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1999. 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, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1999, in conformity with generally accepted accounting
principles.
As discussed in Note 4 to the consolidated financial statements, the Company
changed its method of accounting for start-up costs in 1998.
KPMG LLP
Denver, Colorado
March 3, 2000
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
This item is not applicable.
PART III
- --------------------------------------------------------------------------------
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11 - EXECUTIVE COMPENSATION
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For Items 10-13, inclusive, except for information concerning executive officers
of Westmoreland included as an unnumbered item in Part I above, reference is
hereby made to Westmoreland's definitive proxy statement to be filed in
accordance with Regulation 14A pursuant to Section 14(a) of the Securities
Exchange Act of 1934, which is incorporated herein by reference thereto.
PART IV
- --------------------------------------------------------------------------------
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
a) 1. The financial statements filed herewith are the Consolidated Balance
Sheets of the Company and subsidiaries as of December 31, 1999 and December
31, 1998, 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, 1999 together with the Summary of
Significant Accounting Policies and Notes, which are contained on pages 26
through 61 inclusive.
2. The following financial statement schedule is filed herewith: Schedule
II - Valuation Accounts
3. The following exhibits are filed herewith as required by Item 601 of
Regulation S-K:
(2) Plan of acquisition, reorganization, arrangement, liquidation or
succession
(a) Westmoreland's Plan of Reorganization was confirmed by an order
of the United States Bankruptcy Court for the District of
Delaware on December 16, 1994, and upon complying with the
conditions of the order, Westmoreland emerged from bankruptcy on
December 22, 1994. A copy of the confirmed Plan of Reorganization
was filed as an Exhibit to Westmoreland's Report on Form 8-K
filed December 30, 1994, which is incorporated herein by
reference thereto.
(3) (a) Articles of Incorporation: Restated Certificate of
Incorporation, filed with the Office of the Secretary of State of
Delaware on February 21, 1995 and filed as Exhibit 3(a) to
Westmoreland's 10-K for 1994 which Exhibit is incorporated herein
by reference.
(b) Bylaws, as amended on June 18, 1999, and filed as Exhibit (3)(b)
to Westmoreland's Report on Form 8-K filed June 21, 1999, which
exhibit is incorporated herein by reference.
(4) Instruments defining the rights of security holders
(a) Certificate of Designation of Series A Convertible Exchangeable
Preferred Stock of the Company defining the rights of holders of
such stock, filed July 8, 1992 as an amendment to the Company's
Certificate of Incorporation, and filed as Exhibit 3(a) to
Westmoreland's Form 10-K for 1992, which Exhibit is incorporated
herein by reference.
(b) Form of Indenture between Westmoreland and Fidelity Bank,
National Association, as Trustee relating to the Exchange
Debentures. Reference is hereby made to Exhibit 4.1 to Form S-2
Registration No. 33-47872 filed May 13, 1992, and Amendments 1
through 4 thereto, which Exhibit is incorporated herein by
reference.
(c) Form of Exchange Debenture. Reference is hereby made to Exhibit
4.2 to Form S-2 Registration No. 33-47872 filed May 13, 1992, and
Amendments 1 through 4 thereto, which Exhibit is incorporated
herein by reference.
(d) Form of Deposit Agreement among Westmoreland, First Chicago Trust
Company of New York, as Depository and the holders from time to
time of the Depository Receipts. Reference is hereby made to
Exhibit 4.3 to Form S-2 Registration No. 33-47872 filed May 13,
1992, and Amendments 1 through 4 thereto, which Exhibit is
incorporated herein by reference.
(e) Form of Certificate of Designation for the Series A Convertible
Exchangeable Preferred Stock. Reference is hereby made to Exhibit
4.4 to Form S-2 Registration No. 33-47872 filed May 13, 1992, and
Amendments 1 through 4 thereto, which Exhibit is incorporated
herein by reference.
(f) Specimen certificate representing the common stock of
Westmoreland, filed as Exhibit 4(c) to Westmoreland's
Registration Statement on Form S-2, Registration No. 33-1950,
filed December 4, 1985, is hereby incorporated by reference.
(g) Specimen certificate representing the Preferred Stock. Reference
is hereby made to Exhibit 4.6 to Form S-2 Registration No.
33-47872 filed May 13, 1992, and Amendments 1 through 4 thereto,
which Exhibit is incorporated herein by reference.
(h) Form of Depository Receipt. Reference is hereby made to Exhibit
4.7 to Form S-2 Registration No. 33-47872 filed May 13, 1992, and
Amendments 1 through 4 thereto, which Exhibit is incorporated
herein by reference.
(i) Rights Agreement, dated as of January 28, 1993, between
Westmoreland Coal Company and the First Chicago Trust Company of
New York. Reference is hereby made to Exhibit 4 to Westmoreland's
Form 8-K filed February 1, 1993, which Exhibit is incorporated
herein by reference.
(j) In accordance with paragraph (b)(4)(iii) of Item 601 of
Regulation S-K, Westmoreland hereby agrees to furnish to the
Commission, upon request, copies of all other long-term debt
instruments.
(10) Material Contracts
(a) On January 5, 1982, the Board of Directors of Westmoreland
adopted a Management by Objectives Plan ("MBO Plan") for senior
management. A description of this MBO Plan is set forth on page 9
of Westmoreland's definitive proxy statement dated March 31,
1982, which description is incorporated herein by reference
thereto.
(b) Westmoreland Coal Company 1982 Incentive Stock Option and Stock
Appreciation Rights Plan--Reference is hereby made to Exhibit
10(b) to Westmoreland's Annual Report on Form 10-K for 1981 (SEC
File #0-752), which Exhibit 10(b) is incorporated herein by
reference thereto.
(c) Westmoreland Coal Company 1985 Incentive Stock Option and Stock
Appreciation Rights Plan--Reference is hereby made to Exhibits
10(d) to Westmoreland's Annual Report on Form 10-K for 1984 (SEC
File #0-752), which Exhibit 10(d) is incorporated herein by
reference thereto.
(d) In 1990, the Board of Directors established an Executive
Severance Policy for certain executive officers, which provides a
severance award in the event of termination of employment.
Reference is hereby made to Exhibit 10(h) to Westmoreland's
Annual Report on Form 10-K for 1990 (SEC File #0-752), which
Exhibit 10(h) is incorporated herein by reference thereto.
(e) Westmoreland Coal Company 1991 Non-Qualified Stock Option Plan
for Non-Employee Directors Reference is hereby made to Exhibit
10(i) to Westmoreland's Annual Report on Form 10-K for 1990 (SEC
File #0-752), which Exhibit 10(i) is incorporated herein by
reference thereto.
(f) Effective January 1, 1992, the Board of Directors established a
Supplemental Executive Retirement Plan ("SERP") for certain
executive officers and other key individuals, to supplement
Westmoreland's Retirement Plan by not being limited to certain
Internal Revenue Code limitations. A description of this SERP is
set forth on page 11 of Westmoreland's definitive proxy statement
dated June 9, 1992, which description is incorporated herein by
reference thereto.
(g) Amended Coal Lease Agreement between Westmoreland Resources, Inc.
and Crow Tribe of Indians, dated November 26, 1974, as further
amended in 1982, filed as Exhibit (10)(a) to Westmoreland's
Quarterly Report on Form 10-Q for the quarter ended March 31,
1992, is incorporated by reference thereto.
(h) Effective February 1, 1995, the Board of Directors established a
Long-Term Incentive Stock Plan for officers and other salaried
employees of Westmoreland and its subsidiaries, subject to
shareholder approval. A description of this Plan is set forth in
Westmoreland's definitive proxy to be dated on or before April
28, 1995, which description is incorporated herein by reference
thereto.
(i) Master Agreement, dated as of January 4, 1999 between
Westmoreland Coal Company, Westmoreland Resources, Inc.,
Westmoreland Energy, Inc., Westmoreland Terminal Company, and
Westmoreland Coal Sales Company, the UMWA 1992 Benefit Plan and
its Trustees, the UMWA Combined Benefit Fund and its Trustees,
the UMWA 1974 Pension Trust and its Trustees, the United Mine
Workers of America, and the Official Committee of Equity Security
Holders in the chapter 11 case of Westmoreland Coal and its
official members filed as Exhibit No. 99.2 to Westmoreland's Form
8-K filed on February 5, 1999, which is incorporated herein by
reference thereto.
(j) Contingent Promissory Note between Westmoreland Coal Company,
Westmoreland Resources, Inc., Westmoreland Energy, Inc.,
Westmoreland Coal Sales Company, and Westmoreland Terminal
Company and the UMWA Combined Benefit Fund and the UMWA 1992
Benefit Plan filed as Exhibit No. 99.3 to Westmoreland's Form 8-K
filed on February 5, 1999, which is incorporated herein by
reference thereto.
(k) On December 10, 1999, the Board of Directors adopted the 1996
Directors' Stock Incentive Plan, which was approved by
shareholders on June 12, 1996. A description of this Plan is set
forth in Westmoreland's definitive proxy statement dated April
26, 1996, which description is incorporated herein by reference
thereto.
(21) Subsidiaries of the Registrant
(23) Consent of Independent Certified Public Accountants
(27) Financial Data Schedule
b) Reports on Form 8-K.
(1) On October 27, 1999, the Company filed a report on Form 8-K announcing
the results of its tender offer to purchase up to 631,000 shares of
its depositary shares.
(2) On November 15, 1999, the Company filed a report on Form 8-K
announcing third quarter 1999 financial results.
(3) On March 3, 2000, the Company filed a report on Form 8-K announcing
that the Virginia Supreme Court had reversed the prior ROVA ruling and
remanded the case to trial court for further proceedings.
(4) On March 17, 2000, the Company filed a report on Form 8-K announcing
results of operations for the year ended December 31, 1999.
(5) On March 22, 2000, the Company filed a report on Form 8-K announcing a
correction to the calculation of earnings per share in the press
release attached to the Form 8-K filed on March 17, 2000.
SIGNATURES
- --------------------------------------------------------------------------------
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
WESTMORELAND COAL COMPANY
Date: March 23, 2000 By: /s/ Robert J. Jaeger
-------------------------
Robert J. Jaeger
Senior Vice President of
Finance and Treasurer
(Principal Financial Officer)
Date: March 23, 2000 By: /s/ Larry W. Mikkola
-------------------------
Larry W. Mikkola
Controller
(Principal Accounting Officer)
Signature Title Date
- ------------------------------ ---------------------------- -----------------
Principal Executive Officer:
Chairman of the Board,
President, and
/s/ Christopher K. Seglem Chief Executive Officer March 23, 2000
- ------------------------------ ---------------------------- -----------------
Christopher K. Seglem
Directors:
/s/ Pemberton Hutchinson Director March 23, 2000
- ------------------------------ ---------------------------- -----------------
Pemberton Hutchinson
/s/ William R. Klaus Director March 23, 2000
- ------------------------------ ---------------------------- -----------------
William R. Klaus
/s/ Robert E. Killen Director March 23, 2000
- ------------------------------ ---------------------------- -----------------
Robert E. Killen
/s/ Edwin E. Tuttle Director March 23, 2000
- ------------------------------ ---------------------------- -----------------
Edwin E. Tuttle
/s/ Thomas W. Ostrander Director March 23, 2000
- ------------------------------ ---------------------------- -----------------
Thomas W. Ostrander
/s/ James W. Sight Director March 23, 2000
- ------------------------------ ---------------------------- -----------------
James W. Sight
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
The Board of Directors and Shareholders
Westmoreland Coal Company:
Under date of March 3, 2000, we reported on the consolidated balance sheets of
Westmoreland Coal Company and subsidiaries as of December 31, 1999 and 1998, and
the related statements of operations, shareholders' equity (deficit), and cash
flows for each of the years in the three-year period ended December 31, 1999,
which report appears in the December 31, 1999, Annual Report on Form 10-K of
Westmoreland Coal Company. In connection with our audits of the aforementioned
consolidated financial statements, we also audited the related financial
statement schedule II. This financial statement schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits.
In our opinion, such financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
KPMG LLP
Denver, Colorado
March 3, 2000
Schedule II
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
Valuation Accounts
Years ended December 31, 1999, 1998, and 1997
- --------------------------------------------------------------------------------------------------------------------
Balance at Deductions
beginning of credited to Other Balance at
year earnings Additions (B) end of year
- -------------------------------------------- --------------- --------------- -------------------- ------------------
Year ended December 31, 1999:
Allowance for doubtful accounts $ 3,776 (174) - $ 3,602 (A)
============================================ =============== =============== ==================== ==================
Year ended December 31, 1998:
Allowance for doubtful accounts $ 4,804 (1,028) - $ 3,776 (A)
============================================ =============== =============== ==================== ==================
Year ended December 31, 1997:
Allowance for doubtful accounts $ 5,864 (1,410) 350 $ 4,804 (A)
============================================ =============== =============== ==================== ==================
Amounts above include current and non-current valuation accounts.
(A) Includes reserves of $3,602,000, $3,776,000 and $4,804,000 as of December
31, 1999, 1998 and 1997 respectively, reported as a reduction of Other
Assets in the Company's Consolidated Balance Sheets.
(B) Additions represent a provision for accrued interest.
EXHIBIT 21
Subsidiaries of the Registrant for the year ended December 31, 1999:
Subsidiary Name State of Incorporation
--------------------------------------------- -------------------------------
Kentucky Criterion Coal Company Delaware
Pine Branch Mining Co. Delaware
WEI - Fort Lupton, Inc. Delaware
WEI - Rensselaer, Inc. Delaware
WEI - Roanoke Valley, Inc. Delaware
Westmoreland Coal Sales Company Delaware
Westmoreland Energy, Inc. Delaware
Westmoreland Resources, Inc. Delaware
Westmoreland Terminal Company Delaware
Westmoreland - Altavista, Inc. Delaware
Westmoreland - Corona, Inc. Delaware
Westmoreland - Fort Drum, Inc. Delaware
Westmoreland - Franklin, Inc. Delaware
Westmoreland - Hopewell, Inc. Delaware
Westmoreland Technical Services, Inc. Delaware
Cleancoal Terminal Co. Delaware
Criterion Coal Co. Delaware
Deane Processing Co. Delaware
Eastern Coal and Coke Co. Pennsylvania
--------------------------------------------- -------------------------------
EXHIBIT 23
Consent of Independent Certified Public Accountants
The Board of Directors
Westmoreland Coal Company:
We consent to incorporation by reference in the registration statements (No.
2-90847 and No. 33-33620) on Form S-8 of Westmoreland Coal Company of our
reports dated March 3, 2000, relating to the consolidated balance sheets of
Westmoreland Coal Company and subsidiaries as of December 31, 1999 and 1998, 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, 1999, and the related schedule, which reports appear in the
December 31, 1999, annual report on Form 10-K of Westmoreland Coal Company.
Our report on the financial statements refers to a change in the method of
accounting for start-up costs in 1998.
KPMG LLP
Denver, Colorado
March 3, 2000