UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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þ |
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2010
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _______ to _______
Commission File No. 001-11155
WESTMORELAND COAL COMPANY
(Exact name of registrant as specified in its charter)
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Delaware
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23-1128670 |
(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification No.) |
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2 North Cascade Avenue, 2nd Floor |
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Colorado Springs, CO
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80903 |
(Address of principal executive offices)
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(Zip Code) |
Registrants telephone number, including area code:
(719) 442-2600
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class
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Name of Exchange on Which Registered |
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Common Stock, par value $2.50 per share
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NYSE AMEX |
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Depositary Shares, each representing |
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one-quarter of a share of Series A Convertible |
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Exchangeable Preferred Stock |
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Preferred Stock Purchase Rights |
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Securities registered pursuant to Section 12(g) of the Act:
Series A Convertible Exchangeable Preferred Stock, par value $1.00 per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the Registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the Registrant was required to submit and post such files).
Yes o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
(§229.405 of this chapter) is not contained herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act.
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company.) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes o No þ |
The aggregate market value of voting common stock held by non-affiliates as of June 30, 2010 was
$73,234,564.
There were 13,098,351 shares outstanding of the registrants common stock, $2.50 par value per
share (the registrants only class of common stock), as of March 1, 2011.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement to be used by the Company in connection with its 2011 Annual
Meeting of Stockholders scheduled to be held on May 24, 2011 are incorporated by reference into
Part III of this Annual Report on Form 10-K.
WESTMORELAND COAL COMPANY
FORM 10-K
ANNUAL REPORT
TABLE OF CONTENTS
2
Cautionary Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements. Forward-looking
statements can be identified by words such as anticipates, intends, plans, seeks,
believes, estimates, expects and similar references to future periods. Examples of
forward-looking statements include, but are not limited to, the percentage of 2011 coal tons to be
under currently-existing contracts in 2019, the estimated life of permitted reserves at each of our
mines, expected tons of coal to be delivered pursuant to specified contracts and company-wide, the
matters discussed in Managements Discussion and Analysis of Financial Condition and Results of
OperationSignificant Anticipated Variances Between 2010 and 2011 and Related Uncertainties, and
statements concerning future cash flows from operations and liquidity.
Forward-looking statements are based on our current expectations and assumptions regarding our
business, the economy and other future conditions. Because forward-looking statements relate to the
future, they are subject to inherent uncertainties, risks and changes in circumstances that are
difficult to predict. Our actual results may differ materially from those contemplated by the
forward-looking statements. We therefore caution you against relying on any of these
forward-looking statements. They are statements neither of historical fact nor guarantees or
assurances of future performance. Important factors that could cause actual results to differ
materially from those in the forward-looking statements include political, economic, business,
competitive, market, weather and regulatory conditions and the following:
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changes in our postretirement medical benefit and pension obligations and the impact of the
recently enacted healthcare legislation; |
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changes in our black lung obligations, changes in our experience related to black lung
claims, and the impact of the recently enacted healthcare legislation; |
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our potential inability to expand or continue current coal operations due to limitations in
obtaining bonding capacity for new mining permits; |
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our potential inability to maintain compliance with debt covenant and waiver agreement
requirements; |
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the potential inability of our subsidiaries to pay dividends to us due to restrictions in
our debt arrangements, reductions in planned coal deliveries or other business factors; |
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risks associated with the structure of ROVAs contracts with its lenders, coal suppliers
and power purchaser, which could dramatically affect the overall profitability of ROVA; |
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the effect of Environmental Protection Agency inquiries and regulations on the operations
of ROVA; |
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the effect of prolonged maintenance or unplanned outages at our operations or those of our
major power generating customers; |
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future legislation and changes in regulations, governmental policies and taxes, including
those aimed at reducing emissions of elements such as mercury, sulfur dioxides, nitrogen
oxides, particulate matter or greenhouse gases; and |
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other factors are described in Risk Factors herein. |
Any forward-looking statements made by us in this Annual Report on Form 10-K speaks only as of
the date on which they are made. Factors or events that could cause our actual results to differ
may emerge from time-to-time, and it is not possible for us to predict all of them. We undertake no
obligation to publicly update any forward-looking statements, whether as a result of new
information, future developments or otherwise, except as may be required by law.
3
PART I
The words we, our, the Company, or Westmoreland, as used in this report, refer to
Westmoreland Coal Company and its applicable subsidiary or subsidiaries.
ITEM 1BUSINESS.
Overview
Westmoreland Coal Company began mining in Westmoreland County, Pennsylvania in 1854 as a
Pennsylvania corporation. In 1910, we incorporated in Delaware and continued our focus on
underground coal operations in Pennsylvania and the Appalachian Basin. We moved our headquarters
from Philadelphia, Pennsylvania to Colorado Springs, Colorado in 1995 and fully divested ourselves
of all Eastern coal operations.
Today, Westmoreland Coal Company is an energy company employing 1,081 employees whose
operations include five surface coal mines in Montana, North Dakota and Texas, and two coal-fired
power generating units with a total capacity of approximately 230 megawatts in North Carolina. We
sold 25.2 million tons of coal in 2010. Our two principal operating segments are our coal and power
segments. Our two non-operating segments are heritage and corporate. Our heritage segment
primarily includes the costs of benefits we provide to former mining operation employees and our
corporate segment consists primarily of corporate administrative expenses.
We are subject to two major debt arrangements: (1) $125.0 million senior secured notes at
Westmoreland Mining, LLC, or WML, that is collateralized by all assets of WML, Westmoreland Savage
Corporation, or WSC, Western Energy Company, or WECO, and Dakota Westmoreland Corporation, or DWC,
referred to herein as the WML Notes; and (2) $150.0 million senior secured notes (issued February
4, 2011) at the parent level that are largely collateralized by the assets of the parent, the
Absaloka Mine and the ROVA power facility, referred to herein as the Parent Notes. We incorporate
by reference the information about the operating results of each of our segments for the years
ended December 31, 2010, 2009 and 2008 contained in Note 17 Business Segment Information to our
consolidated financial statements. The following chart provides an overview of the operating
subsidiaries that comprise our coal and power segments:
4
Coal Segment
General
Our coal segments focus is on niche coal markets where we take advantage of customer
proximity and rail transportation advantages. Approximately two-thirds of our coal production is
mine mouth, governed by long-term coal contracts with neighboring power plants. The remaining coal
production is sold in the open market where we take advantage of being the closest coal producer to
our open market customers via rail transportation. Currently, two-thirds of our produced coal is
non-compliance sub-bituminous coal from the Northern Powder River Basin, while the remaining third
is lignite. We project that almost 50% of our contracted tons in 2011 will remain under contract
through 2019. Our relationship with the Crow Tribe allows us to, among other things, continue to
monetize certain Indian Coal Tax Credits as described below in Properties.
In 2010, we sold 25.2 million tons of coal compared to 24.3 million in 2009. Our increase in
tons sold resulted from 2009 customer shutdowns at our Rosebud and Beulah Mines, whereas comparable
shutdowns did not occur during 2010.
The following table provides summary information regarding our principal mining operations as
of December 31, 2010:
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Total Cost of |
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Property, |
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Tons Sold |
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Plant and |
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Employees/ |
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Mining |
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Manner of |
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(In thousands) |
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Equipment |
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Labor |
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Operation |
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Prior Operator |
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Transport |
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Machinery |
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2008 |
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2009 |
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2010 |
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($ in millions) |
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Relations(1) |
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Coal Seam |
MONTANA |
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Rosebud |
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Entech, Inc.,
a subsidiary of Montana Power, Purchased 2001
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Conveyor belt
BNSF Rail
Truck |
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4 drag-lines
Load-out facility |
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13,026 |
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10,332 |
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12,231 |
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$ |
140.9 |
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383 employees; 297 represented by
Local 400 of the IUOE |
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Rosebud |
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Absaloka |
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Washington Group International,
Inc. as contract operator, Ended contract in 2007 |
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BNSF Rail
Truck |
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1 drag-line
Load-out facility |
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6,418 |
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5,911 |
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5,467 |
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$ |
135.1 |
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170 employees;
131 represented by Local 400 of the IUOE |
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Rosebud-McKay |
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Savage |
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Knife River Corporation, a subsidiary of MDU Resources Group, Inc., Purchased 2001 |
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Truck |
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1 dragline |
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359 |
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344 |
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353 |
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$ |
4.6 |
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13 employees; 11 represented by Local 400 of the IUOE |
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Pust |
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TEXAS |
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Jewett |
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Entech, Inc., a subsidiary of Montana Power, Purchased 2001 |
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Conveyor belt |
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4 drag-lines |
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6,494 |
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5,080 |
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4,203 |
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$ |
32.1 |
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327 employees |
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Wilcox Group |
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NORTH DAKOTA |
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Beulah |
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Knife River Corporation,
a subsidiary of MDU Resources Group, Inc., Purchased 2001 |
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Conveyor belt
BNSF Rail |
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2 drag-lines
Load-out facility |
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3,046 |
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2,585 |
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2,898 |
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$ |
61.8 |
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149 employees; 118 represented by Local 1101 of the UMWA |
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Schoolhouse
Beulah-Zap |
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TOTALS |
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29,343 |
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24,252 |
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25,152 |
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$ |
374.5 |
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1,042 employees |
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(1) |
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557 employees, or approximately 52% of our total employees, are represented by
collective bargaining agreements. The labor agreement at the Absaloka Mine, which covers 12%
of our workforce, expires during 2011. |
5
Properties
We had an estimated 389.9 million tons of proven and probable coal reserves as of December 31,
2010. Montana, Texas, and North Dakota each use a permitting process approved by the Office of
Surface Mining. Our mines have chosen to permit coal reserves on an incremental basis and given
the current rates of mining and demand, have sufficient permitted coal to meet production for the
periods shown in the table below. We secure all of our final reclamation obligations by bonds as
required by the respective state agencies. We perform contemporaneous reclamation activities at
each mine in the normal course of operations and coal production.
Our mines control coal reserves and deposits through long-term leases. Coal reserves are that
part of a mineral deposit that can be economically and legally extracted at the time of the reserve
determination. Coal deposits do not qualify as reserves until we conduct a final comprehensive
economic evaluation and conclude it is legally and economically feasible to mine the coal. We base
our estimate of the economic recoverability of our reserves upon a comparison of potential reserves
to reserves currently in production in a similar geologic setting to determine an estimated mining
cost. We compare these estimated mining costs to existing market prices for the anticipated
quality of coal. We only include reserves expected to be economically mined in our reserve
estimates.
Our engineers and geologists generally prepare our reserve estimates. We periodically engage
independent mining and geological consultants to review the models and procedures we use in
preparing our internal estimates of coal reserves according to standard classifications of
reliability. Norwest Corporation, a third-party consultant, was retained to provide an estimate of
our reserves as of September 30, 2010. Reserves shown in the table below reflect the
conclusions set forth in Norwests report, updated to reflect internal estimates of the effect of
fourth quarter 2010 activity and other adjustments. Total recoverable reserve estimates change over
time to reflect mining activity, analysis of new engineering and geological data, information
obtained from our ongoing drilling program, changes in reserve holdings and other factors. We
compile data from individual drill holes in a database from which the depth, thickness and the
quality of the coal are determined. We classify reserves as either proven or probable based on the
density result of the drill pattern.
6
The following table provides information about our mines as of December 31, 2010:
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Absaloka Mine |
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Rosebud Mine |
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Jewett Mine |
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Beulah Mine |
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Savage Mine |
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Texas |
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Dakota |
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Westmoreland |
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Western Energy |
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Westmoreland |
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Westmoreland |
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Westmoreland |
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Owned by |
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Resources, Inc. |
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Company |
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Coal Co. |
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Corporation |
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Savage Corporation |
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Rosebud and |
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Leon, Freestone |
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Big Horn County, |
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Treasure Counties, |
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and Limestone |
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Mercer and Oliver |
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Richland County, |
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Location |
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MT |
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MT |
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Counties, TX |
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Counties, ND |
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MT |
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Coal reserves (thousands of tons)(1) |
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Proven |
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66,976 |
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200,333 |
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44,842 |
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45,248 |
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13,117 |
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Probable |
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19,394 |
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Permitted reserves (thousands of tons) |
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61,290 |
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115,642 |
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44,842 |
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21,682 |
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1,023 |
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2010 production (thousands of tons) |
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5,466 |
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12,254 |
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4,171 |
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2,895 |
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352 |
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Estimated life of permitted reserves(2) |
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2020 |
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2019 |
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2022 |
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2015 |
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2013 |
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Lessor |
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Crow Tribe |
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Federal Government |
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Private parties |
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Private parties |
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Federal Government |
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Private parties |
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State of MT |
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State of TX |
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State of ND |
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Private parties |
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Great Northern Properties |
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Federal Government |
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Lease term |
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Through exhaustion |
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Varies |
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Varies |
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Varies |
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Varies |
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Current production capacity (thousands of tons) |
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7,500 |
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13,300 |
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7,000 |
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3,400 |
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400 |
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Coal type |
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Sub-bituminous |
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Sub-bituminous |
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Lignite |
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Lignite |
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Lignite |
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Major customers |
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Xcel Energy |
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Colstrip 1&2 owners |
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NRG Texas Power LLC |
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Otter Tail |
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MDU |
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Western Fuels Assoc. |
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Colstrip 3&4 owners |
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MDU |
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Sidney Sugars |
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Midwest Energy |
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Minnkota |
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Rocky Mountain Power |
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Northwestern Public Service |
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Delivery method |
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Rail / Truck |
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Truck / Rail / Conveyor |
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Conveyor |
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Conveyor / Rail |
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Truck |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approx. heat content (BTU/lb.)(3) |
|
|
8,571 |
|
|
|
8,534 |
|
|
|
6,652 |
|
|
|
7,002 |
|
|
|
6,380 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approx. sulfur content (%)(4) |
|
|
0.66 |
|
|
|
0.64 |
|
|
|
0.78 |
|
|
|
0.76 |
|
|
|
0.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year current complex opened |
|
|
1974 |
|
|
|
1968 |
|
|
|
1985 |
|
|
|
1963 |
|
|
|
1958 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total tons mined since inception (thousands of
tons) |
|
|
172,602 |
|
|
|
431,931 |
|
|
|
183,263 |
|
|
|
102,251 |
|
|
|
14,493 |
|
|
|
|
(1) |
|
The SEC Industry Guide 7 defines reserves as that part of a mineral deposit, which could be
economically and legally extracted or produced at the time of the reserve determination.
Proven and probable coal reserves are defined by SEC Industry Guide 7 as follows: |
|
|
|
Proven (Measured) Reserves Reserves for which (a) quantity is computed from dimensions
revealed in outcrops, trenches, workings or drill holes; grade and/or quality are computed from
the results of detailed sampling and (b) the sites for inspection, sampling and measurement are
spaced so close and the geographic character is so well defined that size, shape, depth and
mineral content of reserves are well-established. |
|
|
|
Probable (Indicated) Reserves Reserves for which quantity and grade and/or quality are
computed from information similar to that used for proven (measured) reserves, but the sites for
inspection, sampling and measurement are farther apart or are otherwise less adequately spaced.
The degree of assurance, although lower than that for proven (measured) reserves, is high enough
to assume continuity between points of observation. |
|
(2) |
|
Approximate year in which permitted reserves would be exhausted, based on current mine plan
and production rates. Our Jewett Mines permit is expected to be renewed in 2011 while the
other permit expires in 2014, but effectively they cover all of the Mines reserves for the
entire life of the mine. The Absaloka Mine permits expire in 2013 and 2014. |
|
(3) |
|
Approximate heat content applies to the coal mined in 2010. |
|
(4) |
|
Approximate sulfur content applies to the tons mined in 2010. |
7
With the exception of the Jewett Mine, where we control some reserves through fee
ownership, we lease all of our coal properties. We are a party to coal leases with the federal
government, state governments, and private parties at our Rosebud, Beulah, Savage and Jewett Mines.
Each of the federal and state government leases continue indefinitely provided there is diligent
development of the property and continued operation of the related mines. Federal statute
generally sets production royalties on federal leases at 12.5% of the gross proceeds of coal mined
and sold for surface mines. At the Beulah and Savage Mines, we have received reductions in the
federal royalty rate due to the quality of the lignite coal mined. Our private leases run for an
average term of twenty years and have options for renewal. We believe that we have satisfied all
lease conditions in order to retain the properties and keep the leases in force.
We are a party to two leases with the Crow Tribe covering 18,406 acres of land at our Absaloka
Mine. In 2008, and in order to take advantage of certain available tax credits for the production
of coal on the leased Crow Tribe land, Westmoreland Resources, Inc., or WRI, entered into a series
of transactions, including the formation of Absaloka Coal, LLC with an unaffiliated investor. In
2010, the tax credit was equal to $2.20 per ton and will increase annually based on an
inflation-adjustment factor. We received a private letter ruling from the IRS providing that the
Indian Coal Tax Credits are available to us. As part of such transaction, WRI subleased its leases
with the Crow Tribe to Absaloka Coal, LLC, granting it the right to mine specified quantities of
coal through September 2013, with WRI as contract miner. We will pay to the Crow Tribe 33% of the
expected payments we will receive from the investor. All of WRIs property has been fully
encumbered by a first lien under the Parent Notes agreement completed in February 2011. The Parent
Notes allow us to enter into a revolving line of credit collateralized, in part, by the accounts
receivable and inventory at WRI. In addition, WML fully encumbered all of its property at our
Rosebud, Beulah and Savage mines pursuant to the WML Notes and revolving line of credit.
Customers
We sell almost all of the coal that we produce (99% in 2010) to plants that generate
electricity. In 2010, we derived approximately 65% of our total revenues from coal sales to four
power plants: Colstrip Units 3&4 (24% of our 2010 revenues), Limestone Generating Station (16%),
Colstrip Units 1&2 (13%) and Sherburne County Station (12%). We sell more than 80% of our tons
under contracts with remaining supply obligation terms of three years or more. We provide
transportation for our mine-mouth customers, but sell coal and lignite on a Free On Board, or FOB,
basis to our other customers. The purchaser of coal normally bears the cost of transportation and
risk of loss from load out to its final destination. Our coal revenues include amounts earned by
our coal sales company from sales of coal produced by mines other than ours. In 2010, 2009, and
2008, such amounts were $0.4 million, $0.8 million, and $1.2 million, respectively.
Rosebud. The Rosebud Mine has two contracts with the adjacent Colstrip Station power
generating facility. Effective January 1, 2010, a new cost-plus agreement commenced with Colstrip
Units 1&2 with a projected term through at least 2019 and expected tons of 3.0 million per year. A
second agreement at Units 3&4 covers approximately 7.0 million tons per year and is set to expire
at the end of 2019. This contract is also cost-plus, but with provisions for specific returns on
capital investment.
Absaloka. The Absaloka Mine operates primarily in the open market and has several three- to
five-year contracts with various parties that totaled roughly 5.5 million tons in 2010 and decline
to zero by the end of 2015. Approximately 80% of all tons sold in 2010 were to the rail-served
Sherburne County Station in Minnesota under multiple contracts.
Savage. The Savage Mine supplies approximately 0.3 million tons per year to the local Lewis &
Clark Station under an agreement that expires at the end of 2012. Prices under this agreement are
based upon certain actual mine costs and certain inflation indices for such items as diesel fuel.
Jewett. The Jewett Mine has a cost-plus agreement with NRG Texas Powers adjacent Limestone
Generating Station, which commenced January 1, 2008, and replaced various prior agreements in place
since 1985. NRG Texas Power is obligated to pay all mine costs of production plus a margin and the
mines capital and reclamation expenditures. The agreement has a term through 2018, which may be
extended by NRG Texas Power for up to an additional ten years or until the mines reserves are
exhausted. NRG has the option to determine volumes to be delivered, which currently average
approximately 4.2 million tons per year, and to terminate the agreement at its discretion.
8
Beulah. The Beulah Mine supplies approximately 2.5 million tons per year to the adjacent
Coyote Station via conveyor belt under an agreement that expires in May 2016. It also supplies
approximately 0.5 million tons per year to the rail-served Heskett Station under an agreement that
expires during 2011. Prices under these agreements are based upon certain actual mine costs and
certain inflation indices for such items as diesel fuel.
Competition
While the coal industry is intensely competitive, we focus on niche coal markets where we take
advantage of long-term coal contracts with neighboring power plants and rail transportation. For
our open market coal sales, we compete with many other suppliers of coal to provide fuel to power
plants. Additionally, coal competes for electrical power generation with other fuels such as
nuclear energy, natural gas, hydropower, petroleum and wind. Costs and other factors such as
safety, environmental and regulatory considerations relating to these alternative fuels affect the
overall demand for coal as a fuel.
We believe that our mines have a competitive advantage based on three factors:
|
|
|
all of our mines are the most economic suppliers to each of their respective
principal customers, a result of a transportation advantage over our competitors in that
market; |
|
|
|
nearly all of the power plants we supply were specifically designed to use our
coal; and |
|
|
|
the plants we supply are among the lowest cost producers of electric power in
their respective regions and are among the cleaner producers of power from solid fossil
fuels. |
As a result of the foregoing, we believe that our current customers are more likely to be
dispatched to produce power and to continue purchasing coal extracted from our mines.
The principal customers of the Rosebud, Jewett, and Beulah Mines are located adjacent to the
mines; the coal for these customers is delivered by conveyor belt instead of more expensive means
such as truck or rail. The customers of the Savage Mine are located approximately 20 to 25 miles
from the mine so that coal can be transported most economically by truck.
The Absaloka Mine faces a different competitive situation. The Absaloka Mine sells its coal
in the rail market to utilities located in the northern tier of the United States that are served
by BNSF. These utilities may purchase coal from us or from other producers. We compete with other
producers on the basis of price and quality, with the purchasers also taking into account the cost
of transporting the coal to their plants. The Absaloka Mine enjoys an approximately 300-mile rail
advantage over its principal competitors from the Southern Powder River Basin in supplying
customers located in the northern tier. Rail rates have increased over the last several years by 50
to 100%, which increases our competitive advantage. We also believe that the next most economic
suppliers to Absalokas northern tier customers could be our other mines.
Material Effects of Regulation
We are subject to extensive regulation with respect to environmental and other matters by
federal, state and local authorities. Federal laws to which we are subject include the Surface
Mining Control and Reclamation Act of 1977, or SMCRA, the Clean Air Act, the Clean Water Act, the
Toxic Substances Control Act, the Endangered Species Act, the Comprehensive Environmental Response,
Compensation and Liability Act, the Emergency Planning and Community Right to Know Act and the
Resource Conservation and Recovery Act. The United States Environmental Protection Agency, or EPA,
and/or other authorized federal or state agencies administer and enforce these laws. Non-compliance
with these laws and regulations could subject us to material administrative, civil or criminal
penalties or other liabilities, including suspension or termination of operations. In addition, we
may be required to make large and unanticipated capital expenditures to comply with applicable
laws. Our reclamation obligations under applicable environmental laws will be substantial. Our coal
sales agreements contain government impositions provisions that allow the pass-through of
compliance costs in some circumstances. The following summarizes certain legal and regulatory
matters that we believe may significantly affect us.
9
Mine Safety and Health. One of our core values is uncompromised safety. We work towards this
core value through: constant training of employees in safe work practices; establishing, following
and improving safety standards; participating in mine rescue performance evaluations and other
company and industry-sponsored mine safety activities and conferences; and recording, reporting and
investigating all accidents, incidents and losses to avoid reoccurrence. A portion of the annual
performance incentives for mine supervisory employees at our mines is tied to their safety
performance.
We received state and industry safety awards during the year, including both the large
and small mine Governors Safety and Health Award from the state of Montana. During 2010, we
continued to maintain reportable and lost time incident rates significantly below national averages
as indicated in the table below.
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
|
Lost Time |
|
|
Reportable |
|
|
|
Rate |
|
|
Rate |
|
WCC Mines |
|
|
0.88 |
|
|
|
1.31 |
|
National Surface Mines |
|
|
1.23 |
|
|
|
1.83 |
|
Following passage of The Mine Improvement and New Emergency Response Act of 2006 (The
Miner Act), the U.S. Mine Safety and Health Administration (MSHA), significantly increased the
enforcement of safety and health standards and imposed safety and health standards on all aspects
of mining operations. There has also been a dramatic increase in the dollar penalties assessed for
citations issued over the past two years. Most of the states in which we operate have inspection
programs for mine safety and health. Collectively, federal and state safety and health regulations
in the coal mining industry are perhaps the most comprehensive and pervasive systems for protection
of employee health and safety affecting any segment of U.S. industry.
Surface Mining Control and Reclamation Act. SMCRA establishes minimum national operational,
reclamation and closure standards for all surface coal mines. SMCRA requires that comprehensive
environmental protection and reclamation standards be met during the course of and following
completion of coal mining activities. Permits for all coal mining operations must be obtained from
the Federal Office of Surface Mining Reclamation and Enforcement, or OSM, or, where state
regulatory agencies have adopted federally approved state programs under SMCRA, the appropriate
state regulatory authority. States that operate federally approved state programs may impose
standards that are more stringent than the requirements of SMCRA and OSMs regulations and, in many
instances, have done so. Permitting under SMCRA has generally become more difficult in recent
years, which adversely affect the cost and availability of coal purchased by ROVA, especially in
light of significant permitting issues affecting the Central Appalachia region. This difficulty in
permitting also affects the availability of coal reserves at our coal mines.
We do not believe there are any matters that pose a material risk to maintaining our existing
mining permits or materially hinder our ability to acquire future mining permits. It is our policy
to comply in all material respects with the requirements of the SMCRA and the state and tribal laws
and regulations governing mine reclamation.
Clean Air Act and Related Regulations. The federal Clean Air Act and similar state laws and
regulations affect coal mining, coal handling and processing and energy production primarily
through permitting and/or emissions control requirements. For example, regulations relating to
fugitive dust and coal combustion emissions could restrict our ability to develop new mines or
require us to modify our operations. The Clean Air Act also extensively regulates the air
emissions of coal fired electric power generating plants such as ROVA and plants operated by our
coal customers. Coal contains impurities, such as sulfur, mercury and other constituents, many of
which are released into the air when coal is burned. The Clean Air Act and similar legislation
regulate these emissions and therefore affect demand for our coal. In particular, our mines do not
produce compliance coal for purposes of the Clean Air Act. Compliance coal is coal containing
1.2 pounds or less of sulfur dioxide per million British thermal unit, or Btu. This restricts our
ability to sell coal to power plants that do not utilize sulfur dioxide emission controls and
otherwise leads to a price discount based, in part, on the market price for sulfur dioxide emission
allowances under the Clean Air Act. Our coal also contains about fifty percent more ash content
than our primary competitors, which can translate into a cost disadvantage where post-combustion
coal ash must be land filled.
10
While new regulations under the Clean Air Act or similar statutes could increase market prices
for sulfur dioxide emission allowances and therefore the price discount applied to our coal, they
could also cause power plants to retrofit sulfur dioxide emission controls, therefore expanding our
market potential. Higher costs for complying with coal ash regulations could also result in a
higher price discount for our open market coal.
We are at particular risk of changes in applicable environmental laws with respect to the
Jewett Mine, whose customer, the NRG Texas Power-Limestone Station, blends our lignite with
compliance coal from Wyoming. Tightened nitrogen oxide and new mercury emission standards could
result in an increased blend of the Wyoming coal to reduce emissions. Further, increased market
prices for sulfur dioxide emissions and increased coal ash costs could also favor an increased
blend of the lower ash Wyoming compliance coal. In such a case, NRG Texas Power has the option to
increase its purchases of other coal, reduce purchases of our coal, or to terminate our contract.
If NRG terminates the contact, sales of lignite would end and the Jewett Mine would commence final
reclamation activities. NRG would pay for all reclamation work plus a margin.
Bonding Requirements. Federal and state laws require mine operators to assure, usually through
the use of surety bonds, payment of certain long-term obligations, including the costs of mine
closure and the costs of reclaiming the mined land. The costs of these bonds have fluctuated in
recent years, and the market terms of surety bonds have generally become more unfavorable to mine
operators. Surety providers are requiring greater percentages of collateral to secure a bond, which
has required us to provide increasing quantities of cash to collateralize bonds to allow us to
continue mining. These changes in the terms of the bonds have been accompanied, at times, by a
decrease in the number of companies willing to issue surety bonds. As of December 31, 2010, we
have posted an aggregate of $230.4 million in surety bonds for reclamation purposes, with
approximately $27.5 million of cash collateral.
Resource
Conservation and Recovery Act. We may generate wastes, including solid wastes and
hazardous wastes that are subject to the federal Resource Conservation and Recovery Act, or
RCRA, and comparable state statutes, although certain mining and mineral beneficiation wastes and
certain wastes derived from the combustion of coal currently are exempt from regulation as
hazardous wastes under RCRA. The EPA has limited the disposal options for certain wastes that are
designated as hazardous wastes under RCRA. Furthermore, it is possible that certain wastes
generated by our operations that currently are exempt from regulation as hazardous wastes may in
the future be designated as hazardous wastes, and therefore be subject to more rigorous and costly
management, disposal and clean-up requirements.
Comprehensive Environmental Response, Compensation, and Liability Act. Under the Comprehensive
Environmental Response, Compensation, and Liability Act, also known as CERCLA or Superfund, and
similar state laws, responsibility for the entire cost of cleanup of a contaminated site, as well
as natural resource damages, can be imposed upon current or former site owners or operators, or
upon any party who released one or more designated hazardous
substances at the site, regardless
of the lawfulness of the original activities that led to the contamination. CERCLA also authorizes
the EPA and, in some cases, third parties to take actions in response to threats to public health
or the environment and to seek to recover from the potentially responsible parties the costs of
such action. In the course of our operations, we may have generated and may generate wastes that
fall within CERCLAs definition of hazardous substances. We may also be an owner or operator of
facilities at which hazardous substances have been released by previous owners or operators. We
may be responsible under CERCLA for all or part of the costs of cleaning up facilities at which
such substances have been released and for natural resource damages. We have not, to our
knowledge, been identified as a potentially responsible party under CERCLA, nor are we aware of any
prior owners or operators of our properties that have been so identified with respect to their
ownership or operation of those properties. We also must comply with reporting requirements under
the Emergency Planning and Community Right-to-Know Act and the Toxic Substances Control Act.
Climate Change Legislation and Regulations. Numerous proposals for federal and state
legislation have been made relating to greenhouse gas, or GHG, emissions (including carbon dioxide)
and such legislation could result in the creation of substantial additional costs in the form of
taxes or required acquisition or trading of emission allowances. Many of the federal and state
climate change legislative proposals use a cap and trade policy structure, in which GHG emissions
from a broad cross-section of the economy would be subject to an overall cap. Under the proposals,
the cap would become more stringent with the passage of time. The proposals establish mechanisms
for GHG sources such as power plants to obtain allowances or permits to emit GHGs during the
course of a year. The sources may use the allowances to cover their own emissions or sell them to
other sources that do not hold enough emissions for their own operations.
11
In addition, the EPA has issued a notice of finding and determination that emissions of carbon
dioxide, methane and other GHGs present an endangerment to human health and the environment, which
allows the EPA to begin regulating emissions of GHGs under existing provisions of the federal Clean
Air Act. The EPA has begun to implement GHG-related reporting and permitting rules.
The impact of GHG-related legislation and regulations, including a cap and trade structure,
on us will depend on a number of factors, including whether GHG sources in multiple sectors of the
economy are regulated, the overall GHG emissions cap level, the degree to which GHG offsets are
allowed, the allocation of emission allowances to specific sources and the indirect impact of
carbon regulation on coal prices. We may not recover the costs related to compliance with
regulatory requirements imposed on us from our customer due to limitations in our agreements.
Passage of additional state or federal laws or regulations regarding GHG emissions or other
actions to limit carbon dioxide emissions could result in fuel switching from coal to other fuel
sources by electricity generators and thereby reduce demand for our coal or indirectly the prices
we receive in general. In addition, political and regulatory uncertainty over future emissions
controls have been cited as major factors in decisions by power companies to postpone new
coal-fired power plants. If these or similar measures, such as controls on methane emissions from
coal mines, are ultimately imposed by federal or state governments or pursuant to international
treaties, our operating costs may be materially and adversely affected. In addition, alternative
sources of power, including wind, solar, nuclear and natural gas could become more attractive than
coal in order to reduce carbon emissions, which could result in a reduction in the demand for coal
and, therefore, our revenues. Similarly, some of our customers, in particular smaller, older power
plants, could be at risk of significant reduction in coal burn or closure as a result of imposed
carbon costs. The imposition of a carbon tax or similar regulation could, in certain situations,
lead to the shutdown of coal-fired power plants, which would materially and adversely affect our
coal and power plant revenues.
Power Segment
General
We own two coal-fired power-generating units in Weldon, North Carolina with a total capacity
of approximately 230 megawatts, which we refer to collectively as ROVA. ROVA, which commenced
operations in 1994, was built as a Public Utility Regulatory Policies Act co-generation facility
with long-term power purchase agreements with Dominion Virginia Power. While we initially
structured the project as a joint venture where we owned a 50% interest in the partnership that
owned ROVA, we acquired the other 50 percent partnership interest in ROVA in 2006, bringing our
ownership interest in the ROVA project to 100 percent. ROVA was reclassified as an Electric
Wholesale Generator, a Federal Energy Regulatory Commission classification created by the Energy
Policy Act of 1992. Westmoreland Partners has fully encumbered all property pursuant to the Parent
Notes. The Parent Notes also allow us to enter into a revolving line of credit collateralized, in
part, by the accounts receivable and inventory at ROVA.
The following table shows megawatt hours produced and average annual capacity factors achieved
at ROVA for the last three years:
|
|
|
|
|
|
|
|
|
|
|
Megawatt |
|
|
Capacity |
|
Year |
|
Hours |
|
|
Factor |
|
2010 |
|
|
1,620,000 |
|
|
|
88 |
% |
2009 |
|
|
1,486,000 |
|
|
|
81 |
% |
2008 |
|
|
1,641,000 |
|
|
|
89 |
% |
In 2009, ROVA experienced a planned major maintenance outage, which occurs every five
years.
Coal Supply
ROVA purchases coal under long-term contracts from coal suppliers with identified reserves
located in Central Appalachia, with contracts expiring in 2014 and 2015.
12
Customer
ROVA supplies power to Dominion Virginia Power under long-term contracts, which expire in 2019
and 2020. We can extend, by mutual consent, the contracts with Dominion Virginia Power for
five-year terms at mutually agreeable pricing. In 2010, the sale of power to Dominion Virginia
Power accounted for approximately 17% of our consolidated revenues.
Material Effects of Regulation
For a thorough discussion of the extensive regulation with respect to environmental and other
matters by federal, state and local authorities affecting our power segment, see Item 1 under Coal
Segment -Material Effects of Regulation.
With respect to our power segment, ROVA is among the newer and cleaner coal-fired power plants
in the United States. Under Title IV of the Clean Air Act, it is exempted from, but may opt-in to
receive allocations of sulfur dioxide emission allowances. The plants are among the lowest
coal-fired emitters of mercury in the country. We are evaluating whether ROVA could be a net
consumer or seller of mercury allowances under new and pending regulations. Currently, ROVA is a
consumer of sulfur dioxide allowances and nitrogen oxide credits, and we expect an increase in
costs associated with nitrogen oxide allowances at ROVA. With regard to coal ash regulations, ROVA
both remarkets and landfills its combustion waste. Landfills are lined and meet strict North
Carolina Department of Solid Waste regulations.
An important factor relating to the impact of GHG-related legislation and regulations on our
power segment will be our ability to recover the costs incurred to comply with any regulatory
requirements that are ultimately imposed. We may not recover the costs related to compliance with
regulatory requirements imposed on us due to limitations in our power purchase agreements. If we
are unable to pass through such costs incurred by ROVA to Dominion Virginia Power or recoup them in
another manner such as through allowances, it could have a material adverse effect on our results
of operations at ROVA.
Heritage Segment
Our heritage segment costs consist primarily of payments for various types of postretirement
medical benefits. Distributions from our operating subsidiaries fund these collective heritage
obligations.
As we modernized in 2010 how we provide prescription drug benefits to retirees, we
significantly reduced our heritage health benefit expenditures.
We continue to explore ways to further reduce or eliminate other portions of our benefits
costs incurred as a consequence of our former operations.
Corporate Segment
The corporate segment consists primarily of costs for our corporate administrative expenses.
In addition, the corporate segment contains our captive insurance company.
We have elected to retain some of the risks associated with operating our company through a
wholly owned, consolidated insurance subsidiary, Westmoreland Risk Management Ltd., or WRM. WRM, a
Bermuda corporation, provides our primary layer of property and casualty insurance. By using this
insurance subsidiary, we have reduced the cost of our property and casualty insurance premiums and
retained some economic benefits due to our excellent loss record. We reduce our major exposure by
insuring for losses in excess of our retained limits with a number of third-party insurance
companies. In January 2011, the board of directors of the captive voted to redomesticate the
captive to the state of Montana. We are currently in the process of completing such
redomestication.
Except for the assets of WRM, all of our assets are located in the United States. We had no
export sales and derived no revenues from outside the United States during the five-year period
ended December 31, 2010.
13
Available Information
We file annual, quarterly and current reports, proxy statements and other information with the
Securities and Exchange Commission. You may access and read our filings without charge through the
SECs website, at www.sec.gov. You may also read and copy any document we file at the SECs Public
Reference Room located at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. Please call the
SEC at 1-800-SEC-0330 for further information on the Public Reference Room.
We also make our public reports available through our website, www.westmoreland.com, as soon
as practicable after we file or furnish them with the SEC. You may also request copies of the
documents, at no cost, by telephone at (719) 442-2600 or by mail at Westmoreland Coal Company, 2
North Cascade Avenue, 2nd Floor, Colorado Springs, Colorado, 80903. The information on our website
is not part of this Annual Report on Form 10-K.
14
ITEM 1ARISK FACTORS.
This report, including Managements Discussion and Analysis of Financial Condition and Results
of Operation, contains forward-looking statements that may be materially affected by numerous risk
factors, including those summarized below.
Risk Factors Relating to our Operations
Risks associated with being highly leveraged.
Following the issuance of the Parent Notes, we had outstanding indebtedness of approximately
$305 million. We may incur additional indebtedness in the future, including indebtedness under our
existing revolving credit facility at WML and/or enter into a parent-level revolver collateralized
by the accounts receivable and inventory of ROVA and the Absaloka Mine. As a result of our
significant indebtedness, we are highly leveraged. Westmorelands leverage position may, among
other things:
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|
|
limit our ability to obtain additional debt financing in the future for working
capital, capital expenditures, acquisitions, or other general corporate purposes; |
|
|
|
require us to dedicate a substantial portion of our cash flow from operations to
debt service, reducing the availability of cash flow for other purposes; or |
|
|
|
increase our vulnerability to economic downturns, limit our ability to capitalize on
significant business opportunities, and restrict our flexibility to react to changes in
market or industry conditions. |
In addition, there can be no assurance that rating agencies will not downgrade the
credit rating on the Parent Notes, which could impede our ability to refinance existing debt or
secure new debt or otherwise increase our future cost of borrowing and could create additional
concerns on the part of our customers, partners, investors and employees about our financial
condition and results of operations.
We may not generate sufficient cash flow at our operating subsidiaries to pay our operating
expenses, meet our debt service costs and pay our heritage and corporate costs.
As a result of significant increases in our operating profits, a decrease in our heritage
health benefit costs and the receipt of proceeds from the Parent Notes, we anticipate that our cash
from operations, cash on hand and available borrowing capacity through the WML revolver and a
potential parent-level revolver will be sufficient to meet our cash requirements for the
foreseeable future. However, our expectations in this regard are subject to numerous uncertainties,
including uncertainties relating to our operating performance and general market conditions. In
addition, our capital needs may be greater than we currently expect if we were to pursue one or
more significant acquisitions.
Our Westmoreland Mining LLC subsidiary, which owns the Rosebud, Jewett, Beulah and Savage
Mines, is subject to a credit facility that limits the ability of the subsidiary to dividend funds
to us. Accordingly, WML may not be able to pay dividends to us in the amounts and in the time
required for us to pay our heritage health benefit costs and corporate overhead expenses.
Ultimately, if WMLs operating cash flows are insufficient to support their operations and provide
dividends to us in the amounts and time required to pay our expenses, we would be required to
expend cash on hand or further leverage our operations through a parent-level revolver to fund our
heritage liabilities and corporate overheard and, if necessary, support activities at our Absaloka
Mine. Should we be required to expend cash on hand to fund such activities, such funds would be
unavailable to grow the business through strategic acquisitions or ventures or support the business
through reclamation bonding, capital and reserve acquisition.
15
Our debt agreements contain covenant restrictions that may limit our ability to operate our
business.
The agreements governing our Parent Notes and the WML Notes contain covenant restrictions that
limit our ability to operate our business, including restrictions on our ability to:
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incur additional debt or issue guarantees; |
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make certain investments; |
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enter into transactions with our affiliates; |
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redeem capital stock or make other restricted payments; |
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declare or pay dividends or make other distributions to stockholders; and |
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merge or consolidate with any entity. |
Our ability to comply with these covenants is dependent on our future performance, which will
be subject to many factors, some of which are beyond our control, including prevailing economic
conditions. As a result of these covenants, our ability to respond to changes in business and
economic conditions and to obtain additional financing, if needed, may be significantly restricted,
and we may be prevented from engaging in transactions that might otherwise be beneficial to us. In
addition, our failure to comply with these covenants could result in a default under our debt
agreements, which could permit the holders to accelerate our obligation to repay the debt. If any
of our debt is accelerated, we may not have sufficient funds available to repay the accelerated
debt.
Our dependence on a small group of customers could adversely affect our revenues if such customers
reduce or suspend their coal purchases or if they become unable to pay for our coal.
In 2010, approximately 65% of our total revenues were derived from coal sales to four power
plants: Colstrip Units 3&4 (24% of our 2010 revenues), Limestone Generating Station (16%) and
Colstrip Units 1&2 (13%) and Sherburne County Station (12%). Interruption in the purchases of coal
from our operations by our principal customers could significantly affect our revenues.
Unscheduled maintenance outages at our customers power plants, unseasonably moderate weather,
higher-than-anticipated hydro season or increases in the production of alternative clean-energy
generation such as wind power could cause our customers to reduce their purchases. In addition,
new environmental regulations could compel our customer of the Jewett Mine to purchase more
compliance coal, reducing or eliminating our sales to them. Four of our five mines are dedicated
to supplying customers located adjacent to or near the mines, and these mines may have difficulty
identifying alternative purchasers of their coal if their existing customers suspend or terminate
their purchases. The reduction in the sale of our coal would adversely affect our operating
results. In addition, if any of our major customers became unable to pay for contracted amounts of
coal, our results of operation and liquidity would be adversely affected.
Similarly, interruption in the purchase of power by Dominion could also negatively affect our
revenues. In 2010, the sale of power by ROVA to Dominion accounted for approximately 17% of our
consolidated revenues. Although ROVA supplies power to Dominion under long-term power purchase
agreements, if demand for electricity from Dominions customers was materially reduced or if
Dominion was to become insolvent or otherwise unable or unwilling to pay for the power produced by
ROVA in a timely manner, it could have a material adverse effect on our results of operations,
financial condition, and liquidity.
If our assumptions regarding our future expenses related to employee benefit plans are incorrect,
then expenditures for these benefits could be materially higher than we have assumed. In addition,
we may have exposure under those plans that extend beyond what our obligations would be with
respect to our own employees.
We provide various postretirement medical benefits, black lung and workers compensation
benefits to current and former employees and their dependents. We calculate the total accumulated
benefit obligations according to guidance provided by GAAP. We estimate the present value of our
postretirement medical, black lung
and workers compensation benefit obligations to be $210.9 million, $14.1 million and $10.4
million, respectively, at December 31, 2010. We have estimated these unfunded obligations based on
actuarial assumptions described in the notes to our consolidated financial statements. If our
assumptions do not materialize as expected, cash expenditures and costs that we incur could be
materially higher.
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Moreover, regulatory changes could increase our obligations to provide these or additional
benefits. Certain of our subsidiaries participate in defined benefit multi-employer funds
that were established in connection with the Coal Industry Retiree Health Benefit Act of 1992,
or Coal Act, which provides for the funding of health and death benefits for certain UMWA retirees.
Our contributions to these funds totaled $3.1 million for the year ended December 31, 2009 and $3.0
million for the year ended December 31, 2010. Our contributions to these funds could increase as a
result of a shrinking contribution base as a result of the insolvency of other coal
companies that currently contribute to these funds, lower than expected returns on fund assets or
other funding deficiencies.
We could also have obligations under the Tax Relief and Health Care Act of 2006, or 2006 Act.
The 2006 Act authorized up to a maximum of $490 million in federal contributions to pay for certain
benefits, including the healthcare costs under certain funds created by the Coal Act for orphans,
i.e. retirees from companies that subsequently ceased operations, and their dependents. However, if
Congress were to amend or repeal the 2006 Act or if the $490 million authorization were
insufficient to pay for these healthcare costs, we, along with other contributing employers and
certain affiliates, would be responsible for the excess costs.
We also contribute to a multi-employer defined benefit pension plan, the Central Pension Fund
of the Operating Engineers, or Central Pension Fund, on behalf of employee groups at our Rosebud,
Absaloka and Savage mines that are represented by the International Union of Operating Engineers.
The Central Pension Fund is subject to certain funding rules contained in the Pension Protection
Act of 2006, or PPA. Under the PPA, if the Central Pension Plan fails to meet certain minimum
funding requirements, it would be required to adopt a funding improvement plan or rehabilitation
plan. If the Central Pension Fund adopted a funding improvement plan or rehabilitation plan, we
could be required to contribute additional amounts to the fund. As of January 31, 2010, its last
completed fiscal year, the Central Pension Fund reported that it was underfunded. If we were to
partially or completely withdraw from the fund at a time when the Central Pension Fund were
underfunded, we would be liable for a proportionate share the funds unfunded vested benefits, and
this liability could have a material adverse effect on our financial position.
Recent healthcare legislation contains amendments to the Black Lung Benefits Act that could
adversely affect our financial condition and results of operations.
In March 2010, the Patient Protection and Affordable Care Act, or PPACA, was enacted. PPACA
contains an amendment to the Black Lung Benefits Act, or BLBA, that has the effect of reinstating
provisions that were removed from the BLBA in 1981. The amendment provides that eligible miners
can be awarded total disability benefits if they can prove they worked 15 or more years in or
around coal mines and have a totally disabling respiratory impairment. In addition, the amendment
also provides for an automatic survivor benefit to be paid upon the death of a miner with an
awarded federal black lung claim without the requirement to prove that the miners death was due to
black lung disease. Both amendments are retroactive and applicable to claims filed as of January
1, 2005 and have and may continue to result in currently pending claimants being awarded benefits
back to a start date that may be as far back as January 2, 2005. Through the first nine months of
the amendments effectiveness, we have experienced an increase in black lung claims over similar
periods. However, at a minimum, it takes several months to several years for a claim to be awarded
or denied and any liability to be determined. In addition, through the first nine months, we have
accepted several survivors claims. Given the relatively small number of survivors claims and the
lack of final adjudication of black lung claims, we have very limited experience from which to
determine the overall effect, if any, this increase in claims will have on our costs and liability.
In addition, we have incomplete information to determine whether this increase in claims
constitutes a one-time spike in claims, or represents a future trend in black lung claims and
eventual awards. We believe these amendments could give rise to increases in liabilities for
claims from prior periods of time for retroactive costs, an increase in the number of claimants who
are awarded benefits resulting in an increase in future funding requirements and an increase in
administrative fees, including legal expenses, as a result of reviewing and defending an increased
number of benefit claims. In addition, while we periodically perform evaluations of our black lung
liability, using assumptions regarding rates of successful claims, discount factors, benefit
increases and mortality rates, among others, the limited claims experience from the first nine
months of amendment effectiveness is insufficient to determine the potential change in black lung
liability due to the application of these new amendments. If the number or severity of
claims increases, or we are required to accrue or pay additional amounts because the claims
prove to be more severe than our current assumptions, our results of operations and liquidity could
be immediately impacted.
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Inaccuracies in our estimates of our coal reserves could result in decreased profitability from
lower than expected revenues or higher than expected costs.
Our future performance depends on, among other things, the accuracy of our estimates of our
proven and probable coal reserves. Our reserve estimates are prepared by our engineers and
geologists or by third-party engineering firms and are updated periodically. There are numerous
factors and assumptions inherent in estimating the quantities and qualities of, and costs to mine,
coal reserves, including many factors beyond our control, including the following:
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geological and mining conditions, which may not be fully identified by
available exploration data and/or may differ from our experiences in areas where we
currently mine; |
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the percentage of coal ultimately recoverable; |
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the assumed effects of regulation, including the issuance of required permits,
taxes, including severance and excise taxes and royalties, and other payments to
governmental agencies; |
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assumptions concerning the timing for the development of the reserves; and |
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assumptions concerning equipment and productivity, future coal prices,
operating costs, including for critical supplies such as fuel, tires and explosives,
capital expenditures and development and reclamation costs. |
As a result, estimates of the quantities and qualities of economically recoverable coal
attributable to any particular group of properties, classifications of reserves based on risk of
recovery, estimated cost of production, and estimates of future net cash flows expected from these
properties may vary materially due to changes in the above factors and assumptions. Any inaccuracy
in our estimates related to our reserves could result in decreased profitability from lower than
expected revenues and/or higher than expected costs.
If the assumptions underlying our reclamation and mine closure obligations are materially
inaccurate, we could be required to expend greater amounts than anticipated.
The Surface Mining Control and Reclamation Act of 1977, or SMCRA, establishes operational,
reclamation and closure standards for all aspects of surface mining as well as most aspects of deep
mining. We calculated the total estimated reclamation and mine-closing liabilities according to
the guidance provided by Generally Accepted Accounting Principles, or GAAP, and current industry
practice. Estimates of our total reclamation and mine-closing liabilities are based upon permit
requirements and our engineering expertise related to these requirements. If our estimates are
incorrect, we could be required in future periods to spend materially different amounts on
reclamation and mine-closing activities than we currently estimate. Likewise, if our customers,
some of whom are contractually obligated to pay certain reclamation costs, default on the unfunded
portion of their contractual obligations to pay for reclamation, we could be forced to make these
expenditures ourselves and the cost of reclamation could exceed any amount we might recover in
litigation.
We estimate that our gross reclamation and mine-closing liabilities, which are based upon
projected mine lives, current mine plans, permit requirements and our experience, were $241.6
million (on a present value basis) at December 31, 2010. Of these December 31, 2010 liabilities,
our customers have assumed $95.5 million by contract. In addition, we held final reclamation
deposits, received from customers, of approximately $72.3 million at December 31, 2010 to provide
for these obligations. We estimate that our obligation for final reclamation that was not the
contractual responsibility of others or covered by offsetting reclamation deposits was $73.9
million at December 31, 2010. This $73.9 million must be recovered in the price of coal sold.
Responsibility for the final reclamation amounts may change in certain circumstances.
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Although our estimated costs are updated annually, our recorded obligations may prove to be
inadequate due to changes in legislation, standards and the emergence of new restoration
techniques. Furthermore, the expected timing of expenditure could change significantly due to
changes in commodity prices that might curtail the life of an operation. These recorded
obligations could prove insufficient compared to the actual cost of reclamation. Any underestimated
or unidentified close down, restoration and environmental rehabilitation costs could have an
adverse effect on our reputation as well as our asset values, results of operations and liquidity.
If the cost of obtaining new reclamation bonds and renewing existing reclamation bonds continues to
increase or if we are unable to obtain additional bonding capacity, our operating results could be
negatively affected.
Federal and state laws require that we provide bonds to secure our obligations to reclaim
lands used for mining. We must post a bond before we obtain a permit to mine any new area. These
bonds are typically renewable on a yearly basis and have become increasingly expensive. Bonding
companies are requiring that applicants collateralize increasing portions of their obligations to
the bonding company. In 2010, we paid approximately $2.6 million in premiums for reclamation bonds
and were required to use $1.7 million in cash to collateralize 47% of the face amount of the new
bonds obtained in 2010. We anticipate that, as we permit additional areas for our mines in 2011
and 2012, our bonding and collateral requirements will increase significantly. Any capital that we
provide to collateralize our obligations to our bonding companies is not available to support our
other business activities. If the cost of our reclamation bonding premiums and collateral
requirements were to increase, our results of operations could be negatively affected.
Additionally, if we are unable to obtain additional bonding capacity due to cash flow constraints,
we will be unable to begin mining operations in newly permitted areas, which could hamper our
ability to efficiently meet our current customer contract deliveries, expand operations, and
increase revenues.
Our coal mining operations are subject to external conditions that could disrupt operations and
negatively affect our profitability.
Our coal mining operations are all surface mines. These mines are subject to conditions or
events beyond our control that could disrupt operations, affect production, and increase the cost
of mining at particular mines for varying lengths of time. These conditions or events include:
unplanned equipment failures, which could interrupt production and require us to expend significant
sums to repair our equipment, which is integral to the mining of coal; geological conditions such
as variations in the quality of the coal produced from a particular seam, variations in the
thickness of coal seams and variations in the amounts of rock and other natural materials that
overlie the coal that we are mining; and weather conditions. For example, in our recent past, we
have endured: a major blizzard at the Beulah Mine, which interrupted operations; a fire on the
trestle at the Beulah Mine that interrupted rail shipment of our coal; and an unanticipated
replacement of boom suspension cables on one of our draglines that caused a multi-week interruption
of mining. Major disruptions in operations at any of our mines over a lengthy period could
adversely affect the profitability of our mines.
In addition, unplanned outages of draglines and extensions of scheduled outages due to
mechanical failures or other problems occur from time to time and are an inherent risk of our coal
mining business. Unplanned outages typically increase our operation and maintenance expenses and
may reduce our revenues as a result of selling fewer tons of coal. If properly maintained, a
dragline can operate for 40 years or longer. The average age of our draglines is 28 years. The
dragline at our Absaloka Mine was erected in 1980. As our draglines and other major equipment
ages, we may experience unscheduled maintenance outages or increased maintenance costs, which would
adversely affect our operating results.
Our operations are vulnerable to natural disasters, operating difficulties and infrastructure
constraints, not all of which are covered by insurance, which could have an impact on its
productivity.
Mining and power operations are vulnerable to natural events, including blizzards,
earthquakes, drought, floods, fire, storms and the possible effects of climate change. Operating
difficulties such as unexpected geological variations could affect the costs and viability of our
operations. Our operations also require reliable roads, rail networks, power sources and power
transmission facilities, water supplies and IT systems to access and conduct operations. The
availability and cost of infrastructure affects our capital expenditures, operating costs, and
planned levels of production and sales. Our insurance does not cover every potential risk
associated with our operations. Adequate coverage at reasonable rates is not always obtainable.
In addition, our insurance may not fully cover our liability or the consequences of any business
interruptions such as equipment failure or labor dispute. The
occurrence of a significant event not fully covered by insurance could have an adverse effect
on our business, results of operations, financial condition and prospects.
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Health, safety, environment and other regulations, standards and expectations evolve over time and
unforeseen changes could have an adverse effect on our results of operations and liquidity.
We operate in an industry that is subject to numerous health, safety and environmental laws,
regulations and standards as well as community and stakeholder expectations. We are subject to
extensive governmental regulations in all jurisdictions in which we operate. Operations are
subject to general and specific regulations governing mining and processing, land tenure and use,
environmental requirements (including site-specific environmental licenses, permits and statutory
authorizations), workplace health and safety and taxation. Evolving regulatory standards and
expectations can result in increased litigation and/or increased costs, all of which can have an
adverse effect on our results of operations and liquidity.
Should our Indian Coal Tax Credit transaction be audited by the Internal Revenue Service, or IRS,
and the tax results contemplated thereby disallowed, the financial benefits of the transaction
would be reduced and we may be required to return payments received from a third party investor.
In 2008, WRI entered into a series of transactions with an unaffiliated investor, including
the formation of Absaloka Coal, in order to take advantage of certain available tax credits for the
production of coal on Indian lands and the sale of that coal. We requested and have received a
private letter ruling, or PLR, from the IRS providing that certain requirements for the
availability of the tax credits have been met under the specific scenario described in the PLR.
Even though we have received the PLR, there are certain issues that may be raised by the IRS in a
subsequent audit of tax returns of Absaloka Coal. In the event that a subsequent audit results in
the disqualification of the tax credits or the disallowance of the allocations of the tax credits,
various remedies would minimize the financial benefits of the transaction and we could be required
to return to the investor previously received payments. We pay to the Crow Tribe 33% of the
expected payments we receive from the investor. The Crow Tribe is only required to reimburse us
under very limited circumstances. As a result, in the event that the IRS disallows or disqualifies
the tax credits, we would likely be unable to recoup payments already paid to the Crow Tribe.
Furthermore, the transactions described above will expire in 2012 unless renewed. Renewal
would require, among other things, an amendment to the relevant section of the Internal Revenue
Code. While we expect to seek to renew the transactions if the relevant section of the Internal
Revenue Code is amended, there can be no assurance that we will be successful in doing so or that
the relevant section of the Internal Revenue Code will be amended.
Our future success depends upon our ability to continue acquiring and developing coal reserves that
are economically recoverable and to raise the capital necessary to fund our expansion.
Our recoverable reserves will decline as we produce coal. We have not yet applied for the
permits required or developed the mines necessary to use all of the coal deposits under our mineral
rights, and those permits may not be granted in a timely manner or at all. Furthermore, we may not
be able to mine all of our coal deposits as efficiently as we do at our current operations. Our
future success depends upon conducting successful exploration and development activities and
acquiring properties containing economically recoverable coal deposits. Our current strategy
includes increasing our coal reserves through acquisitions of other mineral rights, leases, or
producing properties and continuing to use our existing properties. Our ability to further expand
our operations may be dependent on our ability to obtain sufficient working capital, either through
cash flows generated from operations, or financing activities, or both. As mines become depleted,
replacement reserves may not be available when required or, if available, may not be capable of
being mined at costs comparable to those characteristic of the depleting mines. These factors
could have a material adverse affect on our mining operations and costs, and our customers ability
to use the coal we mine.
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Union represented labor creates an increased risk of work stoppages and higher labor costs.
At December 31, 2010, either the International Union of Operating Engineers Local 400 or the
UMWA represented approximately 52% of our total workforce. Our unionized workforce is spread out
amongst four of our surface mines. As a majority of our workforce is unionized, there may be an
increased risk of strikes and other labor disputes, and our ability to alter labor costs is subject
to collective bargaining. In March 2009, during negotiation over a collective bargaining
agreement, our employees at the Rosebud Mine imposed a sixteen-day work
stoppage. In April 2009, we entered into a new four-year agreement with the union and the
Rosebud Mine resumed full operation. The impact on our operations was minimal as we continued to
make most of our scheduled coal deliveries. If our Jewett Mine operations were to become
unionized, we could be subject to additional risk of work stoppages, other labor disputes and
higher labor costs, which could adversely affect the stability of production and our results of
operations. The collective bargaining agreement relating to the represented workforce at the
Absaloka Mine expires in mid-2011. When the collective bargaining agreement expired in 2008, the
represented workforce at Absaloka imposed a 10-day work stoppage before accepting a new agreement.
It is possible that a work stoppage could occur in connection with these negotiations with the
represented workforce. While strikes are generally a force majeure event in long-term coal supply
agreements, thereby exempting the mine from its delivery obligations, the loss of revenue for even
a short time could have a material adverse effect on our financial results.
Legislation has been proposed to enact a law allowing workers to choose union representation
solely by signing election cards, which would eliminate the use of secret ballots to elect union
representation. While the impact is uncertain, if this proposal is enacted into law, it will be
administratively easier for unions to unionize coal mines and may lead to more coal mines becoming
unionized.
Our revenues could be affected by unscheduled outages or if scheduled maintenance outages last
longer than anticipated.
Unplanned outages of and extensions of scheduled outages due to mechanical failures or other
problems at our mines, our power plants, or the power plants of our customers occur from
time-to-time and are an inherent risk of our business. Unplanned outages typically increase our
operation and maintenance expenses and may reduce our revenues as a result of selling less tons of
coal or fewer megawatt hours. While we maintain insurance, the proceeds of such insurance may not
be adequate to cover our lost revenues, increased expenses or liquidated damages payments should we
experience equipment breakdown. Any unexpected failure, including failure associated with
breakdowns, forced outages or any unanticipated capital expenditures could have an adverse affect
on our results of operations and liquidity.
The profitability of ROVA could be severely affected beginning in 2014 due to differences in the
termination dates of our coal supply agreements and power purchase agreements.
We entered into a ROVA Coal Supply Agreement for our larger plant on June 21, 1993, and a ROVA
Coal Supply Agreement for our smaller plant on December 1, 1993, which provide for ROVAs coal
needs for a twenty-year period, terminating on May 29, 2014 and June 1, 2015, respectively. We
also entered into power sales agreements with Dominion Virginia Power that provide for the sale of
power for a twenty-five year term through May 29, 2019, for our larger ROVA plant and June 1, 2020,
for the smaller ROVA plant. The coal supply agreements provide for coal at a price per ton that is
significantly less than todays open market price for Central Appalachia coal. Upon the
termination of the coal supply agreements beginning in 2014, we will be required to renegotiate our
current contract or find a substitute supply of coal, more than likely at a cost per ton far
greater than the price we are paying today. However, the power sales agreements do not provide for
a price increase related to an increase in the cost per ton of delivered coal and Dominion Virginia
Powers payment for power after 2014 will not escalate with our increased coal costs. Due to the
change in the economics of ROVA at such time, it is projected that ROVA will begin incurring losses
in 2014 and may be unable to pay its obligations as they become due. Should ROVA renegotiate its
future coal supply contracts prior to 2014 in a manner that results in higher coal prices, reduced
margins and an inability to pay obligations could be accelerated.
Permitting issues in Central Appalachia could put ROVAs coal supply at risk.
ROVA purchases coal under long-term contracts from coal suppliers with identified reserves
located in Central Appalachia. While our coal supply has been relatively stable since the
inception of the contracts, potential permitting issues pertaining to the reserves identified as
our source of coal in our coal contracts could prove problematic in the coming years. Should
regulatory/legal action prevent our coal supplier from continuing to mine the reserves identified
as our source of coal or to mine other reserves that could be identified as potential sources of
coal, we could be forced to find an alternative source of coal at higher prices. While the cost of
cover for substitute coal should be covered by our coal contracts, we would be forced to initially
incur the higher costs to secure a coal supply to provide for the continued operations at ROVA. In
addition, should issues arise under our coal contracts relating to the cost of cover for substitute
coal, the coal suppliers guarantee or any other issue, we could be forced to incur significant
legal expenses and, potentially, may never recoup our incremental coal or related legal costs.
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We face intense competition to attract and retain employees. Further, managing Chief Executive
Officer and key executive succession and retention is critical to our
success.
We are dependent on retaining existing employees and attracting additional qualified employees
to meet current and future needs and achieving productivity gains from our investments in
technology. We face intense competition for qualified employees, and there can be no assurance that
we will be able to attract and retain such employees or that such competition among potential
employers will not result in increasing salaries. An inability to retain existing employees or
attract additional employees could have a material adverse effect on our business, cash flows,
financial condition and results of operations.
We would be adversely affected if we fail to adequately plan for succession of our Chief
Executive Officer and senior management or fail to retain key executives. While we have succession
plans in place, these plans do not guarantee that we will not face operational risk upon the exit
of our Chief Executive Officer or members of our senior management.
Risk Factors Relating to the Coal and Power Industries
The recent downturn in the domestic and international financial markets, and the risk of prolonged
global recessionary conditions, could adversely affect our financial condition and results of
operations.
Because we sell substantially all of our coal to electric utilities, our business and results
of operations remain closely linked to demand for electricity. The recent downturn in the domestic
and international financial markets has created economic uncertainty and raised the risk of
prolonged global recessionary conditions. Historically, global demand for basic inputs, including
electricity production, has decreased during periods of economic downturn. If the recent downturn
in the domestic and international financial markets decreases global demand for electricity
production, our financial condition and results of operations could be adversely affected.
Competition in the U.S. coal industry may adversely affect our revenues and results of operations.
Many of our competitors in the domestic coal industry are major coal producers who have
significantly greater financial resources than we do. The intense competition among coal producers
may impact our ability to retain or attract customers and may therefore adversely affect our future
revenues and results of operations. Among other things, competitors could develop new mines that
compete with our mines or build or obtain access to rail lines that would adversely affect the
competitive position of our mines.
Any change in consumption patterns by utilities away from the use of coal could affect our ability
to sell the coal we produce or the prices that we receive.
The domestic electric utility industry currently accounts for approximately 93% of domestic
coal consumption. The amount of coal consumed by the domestic electric utility industry is
affected primarily by the overall demand for electricity, environmental and other governmental
regulations, and the price and availability of competing fuels for power plants such as nuclear,
hydro, natural gas and fuel oil as well as alternative sources of energy. A decrease in coal
consumption by the domestic electric utility industry could adversely affect the price of coal,
which could negatively impact our results of operations and liquidity.
Some power plants are fueled by natural gas because of the relatively cheaper construction
costs of such plants compared to coal-fired plants and because natural gas is a cleaner burning
fuel. In addition, some states have adopted or are considering legislation that encourages
domestic electric utilities to switch coal-fired power generation plants to natural gas powered
plants. Passage of these and other state or federal laws or regulations regarding limiting carbon
dioxide emissions could result in fuel switching, from coal to other fuel sources, by purchasers of
our coal. Such laws and regulations could also mandate decreases in carbon dioxide emissions from
coal-fired power plants, impose taxes on carbon emissions or require certain technology to capture
and sequester carbon dioxide from coal-fired power plants. If these or similar measures are
ultimately imposed by federal or state governments or pursuant to international treaty on the coal
industry, our reserves and operating costs may be materially and adversely affected. Similarly,
alternative fuels (non fossil fuels) could become more attractive than coal in order to reduce
carbon emissions, which could result in a reduction in the demand for coal and, therefore, our
revenues.
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Increased regulation of greenhouse gas emissions could adversely affect our cost of operations.
Our operations are energy intensive and depend heavily on fossil fuels. There is increasing
regulation of greenhouse gas emissions, progressive introduction of carbon emissions trading
mechanisms and tighter emission reduction targets, in numerous jurisdictions in which we operate.
These are likely to raise energy and production costs to a material degree over the next decade.
Regulation of greenhouse gas emissions in our major customers and suppliers jurisdictions could
also have an adverse effect on the demand for our products.
Extensive government regulations impose significant costs on our mining operations, and future
regulations could increase those costs or limit our ability to produce and sell coal.
The coal mining industry is subject to increasingly strict regulation by federal, state and
local authorities with respect to matters such as:
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limitations on land use; |
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employee health and safety; |
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mandated benefits for retired coal miners; |
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mine permitting and licensing requirements; |
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reclamation and restoration of mining properties after mining is
completed; |
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construction and permitting of facilities required for mining operations,
including valley fills and other structures, including those constructed in water
bodies and wetlands; |
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protection of human health, plant life and wildlife; |
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discharge of materials into the environment; and |
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effects of mining on groundwater quality and availability. |
The costs, liabilities and requirements associated with these and other regulations may be
costly and time-consuming and may delay commencement or continuation of exploration or production
operations. Failure to comply with these regulations may result in the assessment of
administrative, civil and criminal penalties, the imposition of cleanup and site restoration costs
and liens, the issuance of injunctions to limit or cease operations, the suspension or revocation
of permits and other enforcement measures that could have the effect of limiting production from
our operations. We may also incur costs and liabilities resulting from claims for damages to
property or injury to persons arising from our operations. We must compensate employees for
work-related injuries. If we do not make adequate provision for our workers compensation
liabilities, it could harm our future operating results. If we are pursued for any sanctions,
costs and liabilities, our mining operations and, as a result, our results of operations could be
adversely affected.
The possibility exists that new legislation and/or regulations and orders may be adopted that
may materially adversely affect our mining operations, our cost structure and/or our customers
ability to use coal. New legislation or administrative regulations (or new judicial
interpretations or administrative enforcement of existing laws and regulations), including
proposals related to the protection of the environment that would further regulate and tax the coal
industry, may also require us or our customers to change operations significantly or incur
increased costs. These regulations, if proposed and enacted in the future, could have a material
adverse effect on our financial condition and results of operations.
23
Extensive environmental laws and regulations affect the end-users of coal and could reduce the
demand for coal as a fuel source and cause the volume of our sales to decline. These laws and
regulations could also impose costs on ROVA that it would be unable to pass through to its
customer.
Coal contains impurities, including but not limited to sulfur, mercury, chlorine, carbon and
other elements or compounds, many of which are released into the air when coal is burned. The
emission of these and other substances is extensively regulated at the federal, state and local
level, and these regulations significantly affect our customers ability to use the coal we produce
and, therefore, the demand for that coal. For example, the purchaser of coal produced from the
Jewett Mine blends our lignite with compliance coal from Wyoming. Tightened nitrogen oxide and new
mercury emission standards could result in the customer purchasing an increased blend of the
Wyoming coal in order to reduce emissions. Further, increased market prices for sulfur dioxide
emissions and increased coal ash costs could also favor an increased blend of the lower ash Wyoming
compliance coal. In such a case, the customer has the option to increase its purchases of other
coal and reduce purchases of our coal or terminate our contract. A termination of the contract or
a significant reduction in the amount of our coal that is purchased by the customer could have a
material adverse effect on our results of operation and financial condition.
In addition, greenhouse gas, or GHG, emissions have increasingly become the subject of a large
amount of international, national, state and local attention. Coal-fired power plants can generate
large amounts of carbon emissions. Accordingly, our coal and power operations will likely be
affected by legislation or regulation intended to limit GHGs. For example, the Environmental
Protection Agency, or EPA, has issued a notice of finding and determination that emissions of
carbon dioxide, methane and other GHGs present an endangerment to human health and the environment,
which allows the EPA to begin regulating emissions of GHGs under existing provisions of the federal
Clean Air Act. The EPA has begun to implement GHG-related reporting and permitting rules.
Similarly, the U.S. Congress is considering cap and trade legislation that would establish an
economy-wide cap on emissions of GHGs in the United States and would require most sources of GHG
emissions to obtain GHG emission allowances corresponding to their annual emissions of GHGs. In
addition, coal-fired power plants have become subject to challenge, including the opposition to any
new coal-fired power plants or capacity expansions of existing plants, by environmental groups
seeking to curb the environmental effects of emissions of GHGs.
These developments could have a variety of adverse effects on demand for the coal we produce.
For example, state or federal laws or regulations regarding GHGs could result in fuel switching
from coal to other fuel sources by electricity generators, or require us, or our customers, to
employ expensive technology to capture and sequester carbon dioxide. Political opposition to the
development of new coal-fired power plants, or regulatory uncertainty regarding future emissions
controls, may result in fewer such plants being built, which would limit our ability to grow in the
future.
With respect to ROVA, it may be unable to pass costs associated with GHG-related regulation on
to Dominion Virginia Power under its power purchase agreement even though any imposed carbon tax
would be passed through to ROVA from its coal suppliers under the terms of the applicable coal
supply agreements. Any legislation or regulation that has the effect of imposing costs on ROVA it
is unable to pass through to Dominion Virginia Power would adversely affect our results of
operations and liquidity.
Risk Factors Relating to our Equity
Provisions of our certificate of incorporation, bylaws, Delaware law and our stockholder rights
plan may have anti-takeover effects that could prevent a change of control of our company that
stockholders may consider favorable, and the market price of our common stock may be lower as a
result.
Provisions in our certificate of incorporation, bylaws and Delaware law could make it more
difficult for a third party to acquire us, even if doing so might be beneficial to our
stockholders. Provisions of our bylaws impose various procedural and other requirements that could
make it more difficult for stockholders to bring about some types of corporate actions such as
electing individuals to the board of directors. In addition, a change of control may be delayed or
deterred as a result of our stockholder rights plan, which was initially adopted by our Board of
Directors in early 1993 and amended and restated in February 2003 and further amended in May 2007
and March 2008. Our ability to issue preferred stock in the future may influence the willingness
of an investor to seek to acquire our company. These provisions could limit the price that some
investors might be willing to pay in the future for shares of our common stock and may have the
effect of delaying or preventing a change in control. Provisions in the indenture governing the
Parent Notes regarding certain change of control events could have a similar effect.
24
Future sales of our common stock by our major stockholder may depress our share price and influence
our management policies.
Mr. Jeffrey L. Gendell, directly and indirectly through various entities, currently owns
approximately 25% of our common stock. We have granted Mr. Gendell and its various affiliated
entities registration rights with respect to our common stock it holds, which we registered on a
selling stockholder registration statement in May 2009. In 2010, Mr. Gendell and the various
affiliated entities sold approximately 10% of their then ownership of our common stock. Sales of
substantial amounts of our common stock in the public market, or the perception that these sales
may occur, could cause the market price of our common stock to decline. In addition, if Mr.
Gendell or his various affiliated entities were to sell their entire holdings to one person, that
person could have significant influence over our management policies.
25
ITEM 1BUNRESOLVED STAFF COMMENTS.
None
ITEM 2PROPERTIES.
See Coal Segment-Properties and Power Segment under Item 1 for information
relating to our properties and reserves.
ITEM 3LEGAL PROCEEDINGS.
We are subject, from time-to-time, to various proceedings, lawsuits, disputes, and claims
(Actions) arising in the ordinary course of our business. Many of these Actions raise complex
factual and legal issues and are subject to uncertainties. We cannot predict with assurance the
outcome of Actions brought against us. Accordingly, adverse developments, settlements, or
resolutions may occur and negatively impact income in the quarter of such development, settlement,
or resolution. However, we do not believe that the outcome of any current Action would have a
material adverse effect on our financial results.
ITEM 4REMOVED AND RESERVED.
ITEM 4BMINE SAFETY DISCLOSURE.
On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Act,
was enacted. Section 1503 of the Act contains reporting requirements regarding mine safety. Mine
safety violations and other regulatory matters, as required by Section 1503 of the Act, are
included as Exhibit 95.1 to this report on Form 10-K.
26
PART II
ITEM 5MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES.
Market Information
Our common stock is listed and traded on the NYSE AMEX under the symbol WLB.
Holders
As of March 1, 2011, there were 1,251 holders of record of our common stock.
The following table shows the range of sales prices for our common stock for the past two
years, as reported by the NYSE Amex.
|
|
|
|
|
|
|
|
|
|
|
Sales Prices |
|
|
|
Common Stock |
|
|
|
High |
|
|
Low |
|
2009 |
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
12.12 |
|
|
$ |
4.61 |
|
Second Quarter |
|
|
10.86 |
|
|
|
6.88 |
|
Third Quarter |
|
|
10.25 |
|
|
|
6.33 |
|
Fourth Quarter |
|
|
9.20 |
|
|
|
6.28 |
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
13.94 |
|
|
$ |
9.06 |
|
Second Quarter |
|
|
14.40 |
|
|
|
8.00 |
|
Third Quarter |
|
|
10.25 |
|
|
|
7.38 |
|
Fourth Quarter |
|
|
12.14 |
|
|
|
9.83 |
|
Dividend Policy
Holders of our common stock are entitled to receive such dividends as our Board may declare
from time to time from any surplus that we may have. We have not paid dividends on our common
stock for some time and we do not anticipate paying any common stock dividends in the foreseeable
future. In addition, the Indenture governing the Parent Notes restricts our ability to pay
dividends on, or make other distributions in respect of, our capital stock unless we are able to
meet certain ratio tests or other financial requirements. Should we be permitted to pay dividends
pursuant to such Indenture, the payment of such dividends will be dependent upon earnings,
financial condition and other factors considered relevant by our Board and will be subject to
limitations imposed under Delaware law.
27
Stock Performance Graph
This performance graph compares the cumulative total stockholder return on our common stock
for the five-year period December 31, 2005 through December 31, 2010 with the cumulative total
return over the same period of the AMEX Market Index and a peer group index, which consists of
Alliance Resource Partners, L.P., Cloud Peak Energy, Inc., James River Coal Company, Massey Energy
Company and Patriot Coal Corporation. The graph assumes that:
|
|
|
You invested $100 in Westmoreland Coal common stock and in each index at
the closing price on December 31, 2005; |
|
|
|
All dividends were reinvested; |
|
|
|
Annual reweighting of the peer groups; and |
|
|
|
You continued to hold your investment through December 31, 2010. |
You are cautioned against drawing any conclusions from the data contained in this graph, as
past results are not necessarily indicative of future performance. The indices used are included
for comparative purposes only and do not indicate an opinion of management that such indices are
necessarily an appropriate measure of the relative performance of our common stock.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ending December 31, |
|
Company/Market/Peer Group |
|
2005 |
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
Westmoreland Coal Company |
|
$ |
100.00 |
|
|
$ |
85.85 |
|
|
$ |
60.70 |
|
|
$ |
48.47 |
|
|
$ |
38.91 |
|
|
$ |
52.14 |
|
NYSE AMEX Composite |
|
$ |
100.00 |
|
|
$ |
119.87 |
|
|
$ |
144.08 |
|
|
$ |
85.85 |
|
|
$ |
116.25 |
|
|
$ |
146.00 |
|
2010 Peer Group Index(1) |
|
$ |
100.00 |
|
|
$ |
66.40 |
|
|
$ |
92.50 |
|
|
$ |
44.01 |
|
|
$ |
99.68 |
|
|
$ |
136.20 |
|
2009 Peer Group Index |
|
$ |
100.00 |
|
|
$ |
67.52 |
|
|
$ |
103.74 |
|
|
$ |
50.38 |
|
|
$ |
117.02 |
|
|
$ |
159.84 |
|
|
|
|
(1) |
|
We revised our peer group to better reflect comparable sized companies in our
industry. |
28
ITEM 6SELECTED FINANCIAL DATA.
Westmoreland Coal Company and Subsidiaries
Five-Year Review
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 (1) |
|
|
|
(In thousands; except per share data) |
|
Consolidated Statements of Operations Information |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
506,057 |
|
|
$ |
443,368 |
|
|
$ |
509,696 |
|
|
$ |
504,217 |
|
|
$ |
444,407 |
|
Operating income (loss) |
|
|
20,521 |
|
|
|
(31,774 |
) |
|
|
(16,035 |
) |
|
|
(5,882 |
) |
|
|
4,617 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations(2) |
|
|
(3,170 |
) |
|
|
(29,162 |
) |
|
|
(48,567 |
) |
|
|
(13,230 |
) |
|
|
(10,860 |
) |
Income from discontinued operations, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,725 |
|
|
|
406 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
(3,170 |
) |
|
|
(29,162 |
) |
|
|
(48,567 |
) |
|
|
(11,505 |
) |
|
|
(10,454 |
) |
Less net income (loss) attributable to non-controlling interest |
|
|
(2,645 |
) |
|
|
(1,817 |
) |
|
|
|
|
|
|
1,194 |
|
|
|
2,244 |
|
Less preferred stock dividend requirements |
|
|
1,360 |
|
|
|
1,360 |
|
|
|
1,360 |
|
|
|
1,360 |
|
|
|
1,585 |
|
Less premium on exchange of preferred stock for common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
791 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss applicable to common shareholders |
|
$ |
(1,885 |
) |
|
$ |
(28,705 |
) |
|
$ |
(49,927 |
) |
|
$ |
(14,059 |
) |
|
$ |
(15,074 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per common share (basic and diluted): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
$ |
(0.17 |
) |
|
$ |
(2.88 |
) |
|
$ |
(5.25 |
) |
|
$ |
(1.72 |
) |
|
$ |
(1.77 |
) |
Net loss applicable to common shareholders |
|
$ |
(0.17 |
) |
|
$ |
(2.88 |
) |
|
$ |
(5.25 |
) |
|
$ |
(1.53 |
) |
|
$ |
(1.72 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Information (end of period) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital deficit |
|
$ |
(35,793 |
) |
|
$ |
(74,976 |
) |
|
$ |
(24,152 |
) |
|
$ |
(94,674 |
) |
|
$ |
(66,773 |
) |
Net property, plant and equipment |
|
|
416,955 |
|
|
|
456,184 |
|
|
|
443,400 |
|
|
|
442,426 |
|
|
|
431,452 |
|
Total assets |
|
|
750,306 |
|
|
|
772,728 |
|
|
|
812,967 |
|
|
|
782,528 |
|
|
|
761,382 |
|
Total debt |
|
|
242,104 |
|
|
|
254,695 |
|
|
|
269,153 |
|
|
|
271,448 |
|
|
|
306,007 |
|
Shareholders deficit (3) |
|
|
(162,355 |
) |
|
|
(141,799 |
) |
|
|
(217,598 |
) |
|
|
(177,257 |
) |
|
|
(180,431 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities |
|
$ |
45,353 |
|
|
$ |
29,448 |
|
|
$ |
55,245 |
|
|
$ |
82,516 |
|
|
$ |
29,434 |
|
Investing activities |
|
|
(29,180 |
) |
|
|
(38,597 |
) |
|
|
(6,588 |
) |
|
|
(43,259 |
) |
|
|
(33,922 |
) |
Financing activities |
|
|
(20,917 |
) |
|
|
(20,273 |
) |
|
|
(28,452 |
) |
|
|
(46,259 |
) |
|
|
20,010 |
|
Capital expenditures |
|
|
22,814 |
|
|
|
34,546 |
|
|
|
31,320 |
|
|
|
30,412 |
|
|
|
20,852 |
|
|
|
|
(1) |
|
Effective June 29, 2006, we acquired a 50% interest in a partnership, which owns the
230-megawatt ROVA power plants from a subsidiary of E.ON U.S. LLC. The acquisition increased
our ownership interest in the partnership to 100%. |
|
(2) |
|
Includes a non-cash tax benefit of $17.1 million and $9.1 million in 2009 and 2007,
respectively. |
|
(3) |
|
Effective December 31, 2006, we recorded an increase in shareholders deficit of $129.8
million to reflect on our balance sheet the underfunded status of our pension and
postretirement medical benefit plans. |
No cash dividends were declared on common shares for the five years ended December 31,
2010.
29
ITEM 7MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
The following discussion and analysis contains forward-looking statements and estimates that
involve risks and uncertainties. Actual results could differ materially from these estimates.
Factors that could cause or contribute to differences from estimates include those discussed under
Cautionary Note Regarding Forward-Looking Statements and Risk Factors contained in Item 1
above.
Overview
Westmoreland Coal Company is an energy company employing 1,081 employees whose operations
include five surface coal mines in Montana, North Dakota and Texas and two coal-fired
power-generating units with a total capacity of approximately 230 megawatts in North Carolina. We
sold 25.2 million tons of coal in 2010. Our two principal operating segments are our coal segment
and our power segment, in addition to two non-operating segments.
We are a holding company and conduct our operations through subsidiaries, which generally have
obtained separate financing. As a holding company, we have significant cash requirements to fund
our ongoing heritage health benefit costs, pension contributions, and corporate overhead expenses.
The principal sources of cash flow to us are distributions from our principal operating
subsidiaries. Following the Parent Notes offering discussed below, we now have cash on hand in
excess of $45 million. The Parent Notes offering permits us to enter into a revolving credit
facility at the Parent.
Recent Developments
In February 2011, we completed a private placement of $150.0 million of senior secured notes
due in 2018. The net proceeds from the offering of the Parent Notes were used to pay all dividend
arrearages on our Series A preferred stock, to repay all outstanding term and revolving line of
credit debt at ROVA and WRI, to retire approximately $2.5 million of the outstanding principal owed
on the senior secured convertible notes (the remaining principal balance of the senior secured
convertible notes was converted to common stock) and for general corporate purposes. We are
required to register the debt issued under the Parent Notes offering with the SEC within 120 days
after the completion of the offering, which was February 4, 2011.
Legislation Enacted
On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and
Consumer Protection Act. The legislation, among other matters, requires mining companies to
provide specific detailed information on health and safety violations on a mine-by-mine basis, and
will require disclosure of payments made to foreign governments and the Federal Government to
further the commercial development of minerals. We have made the required health and safety
violation disclosures in Part I, Item 4B Mine Safety Disclosure. Regulations regarding
government payment disclosures have not yet been adopted.
Healthcare Reform
In March 2010, the Patient Protection and Affordable Care Act, or PPACA was enacted,
potentially impacting our costs to provide healthcare benefits to our active and retired employees
and benefits related to black lung. The PPACA has both short-term and long-term implications on
healthcare benefit plan standards. Implementation of this legislation is planned to occur in
phases, with plan standard changes taking effect beginning in 2010, but to a greater extent with
the 2011 benefit plan year and extending through 2018. Beginning in 2018, the PPACA will impose a
40% excise tax on employers to the extent that the value of their healthcare plan coverage exceeds
certain dollar thresholds. As a result, we have increased our postretirement medical benefit
obligation at December 31, 2010 by $6.9 million with a corresponding increase in Accumulated other
comprehensive loss.
The PPACA reduces the tax benefits available to an employer that receives the Medicare Part D
subsidy beginning in years ending after December 31, 2010. As a result of the PPACA, employers
that receive the Medicare Part D subsidy will recognize the deferred tax effects of the reduced
deductibility of the postretirement prescription drug coverage in the period in which the PPACA was
enacted. Also in March 2010, a companion bill, the Reconciliation Act, was signed into law. The
Reconciliation Act reduces the effect of the PPACA on affected employers by deferring for two years
(until years ending after December 31, 2012) the reduced deductibility of the
postretirement prescription drug coverage. Accounting for income taxes requires that the
effect of adjusting the deferred tax asset for the elimination of this deduction be included in
income from continuing operations. However, entities that have a full valuation allowance for this
deferred tax asset would recognize a related decrease in the valuation allowance. As we have a
full valuation allowance against the related deferred tax asset, this change in tax law regarding
the Medicare Part D subsidy will not have an effect on our income from continuing operations. In
addition, this change in the tax deduction does not affect the pre-tax expense or corresponding
liability for postretirement prescription drug benefits.
30
The PPACA also amended previous legislation related to black lung disease, providing automatic
extension of awarded lifetime benefits to surviving spouses and providing changes to the legal
criteria used to assess and award claims. Since the legislation passed on March 23, 2010, we have
experienced a significant increase in claims filed compared to the corresponding period in prior
years. However, we have not been able to determine what, if any, additional impact may result from
these claims due to lack of claims experience under the new legislation and court rulings
interpreting the new provisions.
We will continue to evaluate the impact of the PPACA in future periods as additional
information, interpretations, guidance and claims experience becomes available.
Results of Operations
Items that Affect Comparability of Our Results
For 2010 and each of the prior two years, our results have included items that do not relate
directly to ongoing operations. The income (expense) components of these items were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
Fair value adjustment on derivative and related amortization
of debt discount |
|
$ |
(4,840 |
) |
|
$ |
5,076 |
|
|
$ |
|
|
Heritage legal claim settlement |
|
|
|
|
|
|
756 |
|
|
|
|
|
Reclamation claim |
|
|
|
|
|
|
(4,825 |
) |
|
|
|
|
Beneficial conversion feature interest expense |
|
|
|
|
|
|
|
|
|
|
(8,146 |
) |
Loss on extinguishment of WML debt |
|
|
|
|
|
|
|
|
|
|
(3,834 |
) |
Loss on extinguishment of ROVA debt |
|
|
|
|
|
|
|
|
|
|
(1,344 |
) |
Settlement of coal royalty dispute |
|
|
|
|
|
|
|
|
|
|
(2,635 |
) |
Gain on sale of interest in Ft. Lupton power project |
|
|
|
|
|
|
|
|
|
|
876 |
|
Restructuring charges |
|
|
|
|
|
|
|
|
|
|
(2,009 |
) |
|
|
|
|
|
|
|
|
|
|
Impact (pre-tax) |
|
$ |
(4,840 |
) |
|
$ |
1,007 |
|
|
$ |
(17,092 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax effect of other comprehensive income gains |
|
$ |
|
|
|
$ |
17,062 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
Items recorded in 2010
|
|
|
We recorded expense of $3.4 million resulting from the mark-to-market
accounting of the conversion feature in our convertible notes, primarily due to an
increase in our stock price during 2010, with $1.4 million of interest expense of a
related debt discount. |
Items recorded in 2009
|
|
|
We recorded an income tax benefit of $17.1 million related to a tax effect of
other comprehensive income gains, primarily related to a decrease in our postretirement
medical obligations. |
|
|
|
We recorded income of $6.1 million resulting from the mark-to-market accounting
of the conversion feature in our convertible notes and a decrease in the value of our
warrant offset with $1.0 million of interest expense of a related debt discount. |
|
|
|
We recorded a gain of $0.8 million related to a settlement of past heritage
claims, as a result of efforts to reduce our heritage costs. |
|
|
|
We recorded $4.8 million in net expense related to the settlement of the
reclamation claim at our Rosebud Mine. This included a $6.5 million reduction in
revenue, offset with a $1.7 million reduction in cost of sales.
|
31
Items recorded in 2008
|
|
|
We recorded $8.1 million of expense related to the beneficial conversion
feature in the convertible notes we issued in March 2008, as the conversion price was
lower than the fair market value of our common stock at the time of issuance. |
|
|
|
We refinanced both our WML and ROVA debt during 2008 and as a result recorded
losses of $3.8 million and $1.3 million, respectively, for the extinguishment of debt. |
|
|
|
We recorded $2.6 million in net expense related to two coal royalty claims as
we reached an agreement with the U.S. Minerals Management Service and the Montana
Department of Revenue to settle two long-standing disputes. This included $12.8
million of cost of sales, offset with $10.2 million of revenue. |
|
|
|
On July 2, 2008, we received $0.9 million for our royalty interest in the
gas-fired Ft. Lupton project and recognized a gain of $0.9 million on the sale. |
|
|
|
In 2007, we initiated a restructuring plan in order to reduce the overall cost
structure of the Company. As a result, in 2008 we recorded restructuring charges of
$2.0 million. Most of the restructuring charges related to termination benefits,
outplacement costs, and lease costs related to the consolidation of corporate office
space. |
2010 Compared to 2009
Summary
Our revenues for 2010 increased to $506.1 million compared with $443.4 million in 2009. This
increase was primarily driven by a $56.9 million increase in our coal segment revenues due to price
increases under existing coal supply agreements and the commencement of new agreements including
the new cost-plus contract with our Rosebud Mines Unit 1&2 buyers. Additionally in 2009, we
experienced customer shutdowns at our Rosebud and Beulah Mines, whereas comparable shutdowns did
not occur during 2010. We refer to these shutdowns as the 2009 customer shutdowns. In addition,
our power segment revenues increased $5.8 million related to an increase in megawatt hours sold as
a result of a planned major maintenance outage, which occurs every five years, and a significant
unplanned outage, both of which occurred in 2009. No comparable outages occurred in 2010.
32
Our net loss applicable to common shareholders for 2010 decreased to $1.9 million compared
with a $28.7 million loss in 2009. Excluding the $4.8 million of expense in 2010 and the $18.1
million of income in 2009 discussed in Items that Affect Comparability of Our Results, our net loss
decreased by $49.7 million during 2010. The primary factors, in aggregate, driving this decrease
in net loss were:
|
|
|
|
|
|
|
2010 |
|
|
|
(In millions) |
|
|
|
|
|
|
Increase in coal segment operating income driven by price increases, new agreements, 2009 customer shutdowns, and strong cost management performance at several mines |
|
$ |
27.6 |
|
|
|
|
|
|
Decrease in heritage segment operating costs primarily due to the agreement we entered into to modernize how we provide prescription drug benefits to retirees |
|
|
16.6 |
|
|
|
|
|
|
Increase in our power segment operating income due to increased megawatt hours sold and decreased maintenance expenses due to planned and unplanned maintenance outages, with no comparable outages occurring in 2010 |
|
|
4.0 |
|
|
|
|
|
|
Increase in the noncontrolling interest adjustment to reduce losses from a partially owned consolidated coal segment subsidiary |
|
|
0.8 |
|
|
|
|
|
|
Gain on sale of securities |
|
|
0.7 |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
49.7 |
|
|
|
|
|
Coal Segment Operating Results
The following table shows comparative coal revenues, operating income and sales volume, and
percentage changes between periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
|
|
|
|
|
|
|
|
Increase / (Decrease) |
|
|
|
2010 |
|
|
2009 |
|
|
$ |
|
|
% |
|
|
|
(In thousands) |
|
Revenues |
|
$ |
418,058 |
|
|
$ |
361,206 |
|
|
$ |
56,852 |
|
|
|
15.7 |
% |
Operating income |
|
|
32,922 |
|
|
|
476 |
|
|
|
32,446 |
|
|
|
6816.4 |
% |
Adjusted EBITDA(1) |
|
|
81,681 |
|
|
|
51,207 |
|
|
|
30,474 |
|
|
|
59.5 |
% |
Tons sold millions of equivalent tons |
|
|
25.2 |
|
|
|
24.3 |
|
|
|
0.9 |
|
|
|
3.7 |
% |
Operating income per ton sold |
|
$ |
1.31 |
|
|
$ |
0.02 |
|
|
$ |
1.29 |
|
|
|
6568.9 |
% |
|
|
|
(1) |
|
Adjusted EBITDA is defined and reconciled to net loss at the end of this Results of
Operations section. |
Our coal segment revenues for 2010 increased to $418.1 million compared with $361.2
million in 2009. This $56.9 million increase occurred primarily from the 0.9 million increase in
tons sold due to the 2009 customer shutdowns, price increases under existing coal supply
agreements, and the start of new agreements including the new cost-plus contract with our Rosebud
Mines Unit 1&2 buyers.
Our coal segment operating income increased to $32.9 million in 2010 compared to $0.5
million in 2009. Excluding the $4.8 million related to the 2009 reclamation claim discussed in
Items that Affect Comparability of Our Results, our coal segment operating income increased by
$27.6 million. This increase was primarily driven by the factors increasing revenue described
above as well as strong cost management performance by several of our mines.
33
Power Segment Operating Results
The following table shows comparative power revenues, operating income and production and
percentage changes between periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
|
|
|
|
|
|
|
|
Increase / (Decrease) |
|
|
|
2010 |
|
|
2009 |
|
|
$ |
|
|
% |
|
|
|
(In thousands) |
|
Revenues |
|
$ |
87,999 |
|
|
$ |
82,162 |
|
|
$ |
5,837 |
|
|
|
7.1 |
% |
Operating income |
|
|
11,721 |
|
|
|
7,672 |
|
|
|
4,049 |
|
|
|
52.8 |
% |
Adjusted EBITDA(1) |
|
|
22,664 |
|
|
|
18,117 |
|
|
|
4,547 |
|
|
|
25.1 |
% |
Megawatts hours |
|
|
1,620 |
|
|
|
1,486 |
|
|
|
134 |
|
|
|
9.0 |
% |
|
|
|
(1) |
|
Adjusted EBITDA is defined and reconciled to net loss at the end of this
Results of Operations section. |
Our power segment revenues for 2010 increased to $88.0 million compared to $82.2 million
in 2009. This $5.8 million increase occurred primarily from an increase in megawatt hours sold as
a result of a planned major maintenance outage, which occurs every five years, and a significant
unplanned outage, both of which occurred in 2009. No comparable outages occurred in 2010.
Our power segment operating income increased to $11.7 million in 2010 compared to $7.7 million
in 2009. This $4.0 million increase was primarily from increased megawatt hours sold and decreased
maintenance expenses as a result of the planned and unplanned maintenance outages discussed above.
Heritage Segment Operating Results
The following table shows comparative detail of the heritage segments expenses and percentage
changes between periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
|
|
|
|
|
|
|
|
Increase / (Decrease) |
|
|
|
2010 |
|
|
2009 |
|
|
$ |
|
|
% |
|
|
|
(In thousands) |
|
Health care benefits |
|
$ |
9,927 |
|
|
$ |
22,490 |
|
|
$ |
(12,563 |
) |
|
|
(55.9 |
)% |
Combined benefit fund payments |
|
|
2,953 |
|
|
|
3,132 |
|
|
|
(179 |
) |
|
|
(5.7 |
)% |
Workers compensation benefits (credits) |
|
|
81 |
|
|
|
(485 |
) |
|
|
566 |
|
|
|
116.7 |
% |
Black lung benefits |
|
|
1,460 |
|
|
|
2,937 |
|
|
|
(1,477 |
) |
|
|
(50.3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total heritage health benefit expenses |
|
|
14,421 |
|
|
|
28,074 |
|
|
|
(13,653 |
) |
|
|
(48.6 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and administrative costs |
|
|
1,547 |
|
|
|
3,696 |
|
|
|
(2,149 |
) |
|
|
(58.1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Heritage segment operating loss |
|
$ |
15,968 |
|
|
$ |
31,770 |
|
|
$ |
(15,802 |
) |
|
|
(49.7 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Our heritage segment operating expenses for 2010 were $16.0 million compared to $31.8
million in 2009. Excluding the heritage legal claim settlement of $0.8 million in 2009 discussed
in Items that Affect Comparability of Our Results, our heritage segment operating expenses
decreased by $16.6 million. This decrease was primarily due to the agreement we entered into to
modernize how we provide prescription drug benefits to our retirees. In addition, while we
continue to work towards further heritage cost reductions, selling and administrative costs
decreased due to reduced cost containment expenses. Finally, we experienced a favorable change in
the valuation of our Black Lung liabilities due to changes in discount rates.
Corporate Segment Operating Results
Our corporate segment operating expenses for 2010 remained consistent with expenses for 2009.
34
Nonoperating Results (including other income (expense), income tax benefit, and net loss
attributable to noncontrolling interest)
Our other expense for 2010 increased to $23.8 million compared with $14.5 million of expense
for 2009. This is primarily due to the $9.9 million impact of the fair value adjustment on
derivatives and related amortization of debt discount discussed in Items that Affect Comparability
of Our Results.
Our income tax benefit was $0.1 million in 2010 compared with $17.1 million in 2009.
Excluding the $17.1 million tax effect of other comprehensive income gains discussed in Items that
Affect Comparability of our Results, our income tax benefit remained consistent with 2009.
Our net loss attributable to noncontrolling interest in 2010 was $2.6 million compared to
$1.8 million in 2009. This increase was due to an increase in the noncontrolling interest
adjustment to reduce losses from a partially owned consolidated coal segment subsidiary.
2009 Compared to 2008
Summary
Our revenues for 2009 decreased to $443.4 million compared with $509.7 million in 2008. This
decrease was primarily driven by a $58.6 million decrease in our coal segment revenues, which
includes approximately $41.9 million as a result of reduced tonnages sold due to the customer
outages and unfavorable current energy market conditions, approximately $6.5 million of revenue
reversed related to a reclamation claim, and approximately $10.2 million of 2008 revenue
recognized related to the settlement of coal royalty claims. In addition, our power segment
revenues decreased $7.7 million related to a decrease in megawatt hours sold.
Our net loss applicable to common shareholders for 2009 decreased to $28.7 million compared
with a $49.9 million loss in 2008. Excluding $18.1 million of income in 2009 and the $17.1 million
of expenses in 2008 discussed in Items that Affect Comparability of Our Results, our net loss
increased by $13.9 million. The primary factors, in aggregate, driving this increase in net loss
were:
|
|
|
|
|
|
|
2009 |
|
|
|
(In millions) |
|
|
|
|
|
|
Decrease in coal segment operating income driven by reduced tonnages sold due to the 2009 customer shutdowns and unfavorable energy market conditions, partially offset with income from Indian Coal Tax Credit monetization transaction, and losses from a partially owned consolidated subsidiary |
|
$ |
(12.7 |
) |
|
|
|
|
|
Decrease in our power segment operating income due to reduced megawatt hours sold, increased maintenance expenses due to a planned major maintenance outage and a significant 2009 unplanned outage |
|
|
(8.3 |
) |
|
|
|
|
|
Decrease in heritage costs due to elimination of postretirement medical benefits for non-represented employees costs in the third quarter of 2009, reduced workers compensation expenses due to changes in interest rates and favorable claims experience, offset by an increase in cost containment efforts and unfavorable changes in the valuation of Black Lung benefits trust assets and liabilities due to changes in interest rates |
|
|
2.9 |
|
|
|
|
|
|
Decrease in corporate expenses due to cost control efforts and a reduction in stock compensation expense |
|
|
2.7 |
|
|
|
|
|
|
Favorable noncontrolling interest adjustment due to losses from a partially owned consolidated subsidiary |
|
|
1.8 |
|
|
|
|
|
|
Decrease in interest income partially offset with a decrease in interest expense due to debt refinancing and an increase in other income |
|
|
(1.3 |
) |
|
|
|
|
|
Decrease in income taxes driven by lower state taxable income due to customer outages |
|
|
1.0 |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(13.9 |
) |
|
|
|
|
35
Coal Segment Operating Results
The following table shows comparative coal revenues, operating income and sales volume, and
percentage changes between periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
|
|
|
|
|
|
|
|
Increase / (Decrease) |
|
|
|
2009 |
|
|
2008 |
|
|
$ |
|
|
% |
|
|
|
(In thousands) |
|
Revenues |
|
$ |
361,206 |
|
|
$ |
419,806 |
|
|
$ |
(58,600 |
) |
|
|
(14.0 |
)% |
Operating income |
|
|
476 |
|
|
|
15,211 |
|
|
|
(14,735 |
) |
|
|
(96.9 |
)% |
Adjusted EBITDA(1) |
|
|
51,207 |
|
|
|
57,743 |
|
|
|
(6,536 |
) |
|
|
(11.3 |
)% |
Tons sold millions of equivalent tons |
|
|
24.3 |
|
|
|
29.3 |
|
|
|
(5.0 |
) |
|
|
(17.1 |
)% |
Operating income per ton sold |
|
$ |
0.02 |
|
|
$ |
0.52 |
|
|
$ |
(0.50 |
) |
|
|
(96.2 |
)% |
|
|
|
(1) |
|
Adjusted EBITDA is defined and reconciled to net loss at the end of this Results of
Operations section. |
Our coal revenues for 2009 decreased to $361.2 million, compared with $419.8 million in
2008. This decrease occurred primarily from a decrease of 5.0 million tons sold as a result of the
customer outages, the reclamation claim recorded in 2009 and settlement of coal royalty claims
recorded in 2008. Additionally, due to unfavorable current economic and energy market conditions,
our Absaloka and Jewett Mines deliveries decreased in 2009.
Our coal segments operating income decreased to $0.5 million in 2009, compared to $15.2
million in 2008. Excluding the $4.8 million related to the anticipated settlement of the
reclamation claim, the $2.6 million coal royalty dispute settlement and $0.2 million of
restructuring charges discussed in Items that Affect Comparability of Our Results, our coal segment
operating income decreased by $12.7 million. Of this decrease, approximately $20.3 million was due
to reduced tonnages sold as a result of the customer outages and unfavorable current economic and
energy market conditions. This decrease was partially offset with approximately $7.6 million of
earnings recognized from our Indian Coal Tax Credit monetization transaction.
Power Segment Operating Results
The following table shows comparative power revenues, operating income and production and
percentage changes between periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
|
|
|
|
|
|
|
|
Increase / (Decrease) |
|
|
|
2009 |
|
|
2008 |
|
|
$ |
|
|
% |
|
|
|
(In thousands) |
|
Revenues |
|
$ |
82,162 |
|
|
$ |
89,890 |
|
|
$ |
(7,728 |
) |
|
|
(8.6 |
)% |
Operating income |
|
|
7,672 |
|
|
|
16,920 |
|
|
|
(9,248 |
) |
|
|
(54.7 |
)% |
Adjusted EBITDA(1) |
|
|
18,117 |
|
|
|
26,493 |
|
|
|
(8,376 |
) |
|
|
(31.5 |
)% |
Megawatts hours |
|
|
1,486 |
|
|
|
1,641 |
|
|
|
(155 |
) |
|
|
(9.4 |
)% |
|
|
|
(1) |
|
Adjusted EBITDA is defined and reconciled to net loss at the end of this
Results of Operations section. |
Our power segment revenues for 2009 decreased to $82.2 million compared to $89.9 million
in 2008. This decrease was primarily driven by decreased megawatt hours sold as a result of a
planned major maintenance outage, which occurs every five years, and a significant unplanned
outage, both of which occurred in the fourth quarter of 2009.
Our power segments operating income decreased to $7.7 million in 2009 compared to $16.9
million in 2008. Excluding the 2008 gain on sale of interest in the Ft. Lupton power project of
$0.9 million discussed in Items that Affect Comparability of Our Results, our power segment
operating income decreased by $8.3 million. This decrease was primarily from reduced megawatt
hours sold and increased maintenance expenses as a result of a planned major maintenance outage,
which occurs every five years, and a significant unplanned outage, both of which occurred in the
fourth quarter of 2009.
36
Heritage Segment Operating Results
The following table shows comparative detail of the heritage segments expenses and percentage
changes between periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
|
|
|
|
|
|
|
|
Increase / (Decrease) |
|
|
|
2009 |
|
|
2008 |
|
|
$ |
|
|
% |
|
|
|
(In thousands) |
|
Health care benefits |
|
$ |
22,490 |
|
|
$ |
25,588 |
|
|
$ |
(3,098 |
) |
|
|
(12.1 |
)% |
Combined benefit fund payments |
|
|
3,132 |
|
|
|
3,470 |
|
|
|
(338 |
) |
|
|
(9.7 |
)% |
Workers compensation benefits (credits) |
|
|
(485 |
) |
|
|
4,417 |
|
|
|
(4,902 |
) |
|
|
(111.0 |
)% |
Black lung benefits (credits) |
|
|
2,937 |
|
|
|
(23 |
) |
|
|
2,960 |
|
|
|
12,869.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total heritage health benefit expenses |
|
|
28,074 |
|
|
|
33,452 |
|
|
|
(5,378 |
) |
|
|
(16.1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and administrative costs |
|
|
3,696 |
|
|
|
2,045 |
|
|
|
1,651 |
|
|
|
80.7 |
% |
Gain on sale of assets |
|
|
|
|
|
|
(25 |
) |
|
|
25 |
|
|
|
(100.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Heritage segment operating loss |
|
$ |
31,770 |
|
|
$ |
35,472 |
|
|
$ |
(3,702 |
) |
|
|
(10.4 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Our heritage expenses for 2009 were $31.8 million compared to $35.5 million in 2008.
Excluding the heritage legal claim settlement of $0.8 million in the second quarter of 2009
discussed in Items that Affect Comparability of Our Results, our heritage segment expenses
decreased by $2.9 million. This decrease was primarily driven by a revaluation due to the
elimination of postretirement medical benefits for our non-represented employees during the third
quarter of 2009 and reduced workers compensation expenses due to changes in interest rates and
favorable claims experience. These decreases were partially offset with an increase in cost
containment
expenditures and unfavorable changes in the valuation of our Black Lung benefits trust assets
and liabilities due to changes in interest rates.
Corporate Segment Operating Results
Our corporate segments operating expenses totaled $8.1 million in 2009 compared to $12.7
million in 2008. Excluding the restructuring charge of $2.0 million in 2008 discussed in Items
that Affect Comparability of Our Results, our corporate segment operating expenses decreased by
$2.7 million. This decrease related to cost control efforts and a reduction in our stock
compensation expense.
Nonoperating Results (including other income (expense), income tax benefit (expense), and
net loss attributable to noncontrolling interest)
Our other expense for 2009 decreased to $14.5 million compared with $31.6 million of expense
in 2008. Excluding the $5.1 million impact of the fair value adjustment on derivative and related
amortization of debt discount, $8.1 million of interest on the beneficial conversion feature
associated with our convertible debt issued in 2008, the $3.8 million loss on the extinguishment of
our WML debt, and the $1.3 million loss on the extinguishment of our power debt discussed in Items
that Affect Comparability of Our Results, our other expense increased $1.3 million. This increase
was driven by a $1.9 million decrease in interest income, which was partially offset with a $0.4
million decrease in interest expense as a result of our debt refinancing and a $0.2 million
increase in other income.
Our 2009 income tax benefit was $17.1 million compared with $0.9 million of expense in 2008.
Excluding the $17.1 million tax effect of other comprehensive income gains discussed in Items that
Affect Comparability of our Results, the remaining $1.0 million decrease resulted primarily from
lower state taxable income primarily driven by the customer outages.
37
Reconciliation of Adjusted EBITDA to Net Loss
The discussion in Results of Operations in 2010, 2009 and 2008 includes references to our
Adjusted EBITDA results. EBITDA and Adjusted EBITDA are supplemental measures of financial
performance that are not required by, or presented in accordance with, GAAP. EBITDA and Adjusted
EBITDA are key metrics used by us to assess our operating performance and we believe that EBITDA
and Adjusted EBITDA are useful to an investor in evaluating our operating performance because these
measures:
|
|
|
are used widely by investors to measure a companys operating performance without
regard to items excluded from the calculation of such terms, which can vary
substantially from company to company depending upon accounting methods and book value
of assets, capital structure and the method by which assets were acquired, among other
factors; and |
|
|
|
help investors to more meaningfully evaluate and compare the results of our
operations from period to period by removing the effect of our capital structure and
asset base from our operating results. |
Neither EBITDA nor Adjusted EBITDA is a measure calculated in accordance with GAAP. The items
excluded from EBITDA and Adjusted EBITDA are significant in assessing our operating results. EBITDA
and Adjusted EBITDA have limitations as analytical tools, and should not be considered in isolation
from, or as a substitute for, analysis of our results as reported under GAAP. For example, EBITDA
and Adjusted EBITDA:
|
|
|
do not reflect our cash expenditures, or future requirements for capital and major
maintenance expenditures or contractual commitments; |
|
|
|
do not reflect income tax expenses or the cash requirements necessary to pay income
taxes; |
|
|
|
do not reflect changes in, or cash requirements for, our working capital needs; and |
|
|
|
do not reflect the significant interest expense, or the cash requirements necessary
to service interest or principal payments, on certain of our debt obligations. |
In addition, although depreciation and amortization are non-cash charges, the assets being
depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted
EBITDA do not reflect any cash requirements for such replacements. Other companies in our industry
and in other industries may calculate EBITDA and Adjusted EBITDA differently from the way that we
do, limiting their usefulness as comparative measures. Because of these limitations, EBITDA and
Adjusted EBITDA should not be considered as measures of discretionary cash available to us to
invest in the growth of our business. We compensate for these limitations by relying primarily on
our GAAP results and using EBITDA and Adjusted EBITDA only as supplemental data.
38
The tables below show how we calculated Adjusted EBITDA and includes a breakdown by segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
Reconciliation of Adjusted EBITDA to Net Loss |
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss |
|
$ |
(3,170 |
) |
|
$ |
(29,162 |
) |
|
$ |
(48,567 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax (benefit) expense from continuing operations |
|
|
(141 |
) |
|
|
(17,136 |
) |
|
|
919 |
|
Other (income) loss |
|
|
2,587 |
|
|
|
(5,991 |
) |
|
|
284 |
|
Interest income |
|
|
(1,747 |
) |
|
|
(3,218 |
) |
|
|
(5,125 |
) |
Loss on extinguishment of debt |
|
|
|
|
|
|
|
|
|
|
5,178 |
|
Interest expense attributable to beneficial conversion feature |
|
|
|
|
|
|
|
|
|
|
8,146 |
|
Interest expense |
|
|
22,992 |
|
|
|
23,733 |
|
|
|
23,130 |
|
Depreciation, depletion and amortization |
|
|
44,690 |
|
|
|
44,254 |
|
|
|
41,387 |
|
Accretion of ARO and receivable |
|
|
11,540 |
|
|
|
9,974 |
|
|
|
9,528 |
|
Amortization of intangible assets and liabilities |
|
|
590 |
|
|
|
279 |
|
|
|
598 |
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
|
77,341 |
|
|
|
22,733 |
|
|
|
35,478 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges |
|
|
|
|
|
|
|
|
|
|
2,009 |
|
Customer reclamation claim |
|
|
|
|
|
|
4,825 |
|
|
|
|
|
(Gain)/loss on sale of assets |
|
|
226 |
|
|
|
191 |
|
|
|
(1,425 |
) |
Share-based compensation |
|
|
4,049 |
|
|
|
2,552 |
|
|
|
2,733 |
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
|
$ |
81,616 |
|
|
$ |
30,301 |
|
|
$ |
38,795 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
Adjusted EBITDA by Segment |
|
|
|
|
|
|
|
|
|
|
|
|
Coal |
|
$ |
81,681 |
|
|
$ |
51,207 |
|
|
$ |
57,743 |
|
Power |
|
|
22,664 |
|
|
|
18,117 |
|
|
|
26,493 |
|
Heritage |
|
|
(15,968 |
) |
|
|
(31,770 |
) |
|
|
(35,497 |
) |
Corporate |
|
|
(6,761 |
) |
|
|
(7,253 |
) |
|
|
(9,944 |
) |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
81,616 |
|
|
$ |
30,301 |
|
|
$ |
38,795 |
|
|
|
|
|
|
|
|
|
|
|
39
Significant Anticipated Variances between 2010 and 2011 and Related Uncertainties
We expect a number of factors to result in differences in our results of operation, financial
condition and liquidity in 2011 relative to 2010:
|
|
|
We expect significantly higher overall levels of cash and liquidity throughout
2011 as a result of the issuance of the Parent Notes, as well as increased coal
operating profits and decreased heritage health benefit expenditures; |
|
|
|
We expect to take a charge to our earnings in 2011 of approximately $20.0
million as a result of the issuance of the Parent Notes and the mark-to-market
accounting of the conversion feature in our convertible notes; |
|
|
|
We expect an increase in the repayments of long-term debt resulting from our
WML Notes as well as from the various debt paid off with the proceeds of the Parent
Notes; |
|
|
|
We expect significantly higher overall levels of debt and interest expense
throughout 2011 as a result of the issuance of the Parent Notes; |
|
|
|
We expect to pay approximately $21.0 million of preferred stock dividends in
2011; |
|
|
|
We expect our overall coal tons delivered to decrease due to the December 31,
2010 expiration of a long-term coal supply contract at our Rosebud Mine. While this
decrease will drive a decrease in overall tonnage sold, we expect the expiration of the
contract to increase our profits and cash flow as our cost per ton sold was
significantly greater than the fixed price per ton we were receiving under the
contract; |
|
|
|
We expect our power operating profit to increase slightly due to the
significant maintenance expenses incurred in 2010 relating to a planned maintenance
shutdown. In addition, the ROVA credit agreements required us to perform certain
maintenance procedures that were not otherwise required. As a result, we expect the
termination of those agreements in connection with the completion of the Parent Notes
offering will result in further reductions in 2011 maintenance expenses; |
|
|
|
We expect an increase in our depreciation, depletion, and amortization expense
in 2011 due to increases in our asset reclamation obligation studies driving increased
depletion expense as well as slightly increased capital spending levels in 2011; |
|
|
|
We expect to make additional capital investments during 2011 in the range of
$40.0 to $50.0 million to improve our mining operations, decrease our equipment
maintenance costs, and increase our coal reserves. We expect these capital investments
to be funded through our mines operating cash flows or, if necessary, WMLs existing
credit facility or capital leases; and |
|
|
|
We expect an increase in our investments in bond collateral in the range of
$9.0 to $12.0 million primarily as a result of securing reclamation bonds for new
mining areas in 2011. |
We believe the net effect of the foregoing factors will result in an increase in cash flows in
2011 relative to 2010. Excluding the expected charge to our earnings in 2011 of approximately
$20.0 million explained above, we expect an overall increase in our results of operations due to
increased coal operating profits. Our outlook for 2011 is based on the information we currently
have available and contains certain assumptions regarding future economic conditions. Differences
in actual economic conditions compared with our assumptions could have a material impact on our
results in 2011 and in subsequent years. Key operational uncertainties relating to our
expectations are described in Risk Factors and Item 1 Coal Segment-Material Effects of
Regulation and Power Segment-Material Effects of Regulation.
40
Liquidity and Capital Resources
Following the February 4, 2011 Parent Notes offering, we now have cash on hand in excess of
$45 million. We also expect increases in coal operating profits and our heritage health benefit
expenditures to continue at their reduced 2010 rates. As a result, we anticipate that our cash
flows from operations, cash on hand and available borrowing capacity will be sufficient to meet our
investing, financing, and working capital requirements for the next several years.
Parent Notes Offering February 4, 2011 and Use of Proceeds
On February 4, 2011, we issued $150.0 million of 10.750% Senior Secured Notes due 2018
together with Westmoreland Partners as co-issuer. Interest is due at an annual fixed rate of
10.750% and will be paid in cash semi-annually, in arrears, on February 1 and August 1 of each year
beginning August 1, 2011. The Parent Notes mature February 1, 2018. They are fully and
unconditionally guaranteed by Westmoreland Energy LLC and WRI and their respective subsidiaries
(other than Absaloka Coal, LLC) and by other subsidiaries. As a result of the Parent Notes
offering, we recorded the current portion of our convertible notes, current portions of WRIs term
and revolving line of credit and ROVAs term debt as non-current liabilities in our consolidated
balance sheet at December 31, 2010.
We received net proceeds from the sale of the Parent Notes in this offering of approximately
$135.2 million after deducting the Initial Purchasers discount or $7.5 million and offering costs
of $7.3 million. We repaid existing outstanding debt as follows: $52.7 million to repay all
outstanding term and revolving line of credit at ROVA, which includes a make-whole payment of $9.1
million; $20.1 million to repay all outstanding term and revolving line of credit at WRI; and $2.5
million to retire certain of our convertible notes. The holder of our convertible notes agreed to
convert the convertible notes not retired into shares of our common stock. In addition, we used
$19.9 million of the net proceeds to pay all dividend arrearages on our preferred stock. We will
use the remaining net proceeds from the offering for general corporate purposes including the
possible acquisition of new reserves. The indenture governing the Parent Notes requires us to
offer to redeem these notes on an annual basis with certain Excess Cash Flow (as defined in the
Indenture), and amounts used for such redemptions will not be available for other purposes.
In connection with the Parent Notes offering, we terminated the WRI and ROVA revolving credit
agreements. The WML Credit Agreements remained in place following the offering. However, following
the Parent Notes offering, we are still able to enter into a revolving credit facility without the
consent of the holders of the notes, subject to certain conditions.
Liquidity Limitations and Requirements
The cash at WML is available to us through quarterly distributions. The WML credit agreement
requires a debt service account and imposes timing and other restrictions on the ability of WML to
distribute funds to us. Cash available from WML is affected beginning in 2011 by payments due in
respect of principal on the WML Notes. Following the February 4, 2011 Parent Notes offering, we
expect that distributions from ROVA and WRI will comprise a significant source of liquidity for us.
The cash at WRM is also available to us through dividends, subject to maintaining a statutory
minimum level of capital, which was $0.1 million at December 31, 2010.
Our liquidity continues to be affected by our heritage health and pension as follows:
|
|
|
|
|
|
|
|
|
|
|
2010 Actual |
|
|
2011 Expected |
|
|
|
(In millions) |
|
Postretirement medical benefits |
|
$ |
14.5 |
|
|
$ |
13.6 |
|
Pension contributions (1) |
|
|
10.8 |
|
|
|
10.2 |
|
CBF premiums |
|
|
3.0 |
|
|
|
2.7 |
|
Workers compensation benefits |
|
|
0.6 |
|
|
|
1.0 |
|
|
|
|
(1) |
|
Of the 2010 pension contribution, $5.0 million was made
through the contribution of Company stock. No stock
contributions are expected in 2011. |
41
WML has $125.0 million of fixed rate term debt outstanding at December 31, 2010.
Principal on the notes is scheduled to be paid as follows: $7.5 million in 2011, $14.0 million in
2012, $18.0 million in 2013, $18.0 million in 2014, $20.0 million in 2015, $20.0 million in 2016,
$22.0 million in 2017 and the remaining $5.5 million in 2018. The revolving credit facility has a
borrowing limit of $25.0 million and matures in June 2013. The interest rate under the revolving
credit facility at December 31, 2010 was 3.75% per annum. At December 31, 2010, WML had an
outstanding balance of $1.5 million under the revolving credit facility and a letter of credit of
$1.9 million supported by the revolving credit facility, leaving it with $21.6 million of unused
borrowings. WMLs revolving line of credit is only available to fund the operations of its
respective subsidiaries.
WMLs credit agreement contains various affirmative and negative covenants. Operational
covenants in the agreements prohibit, among other things, WML from incurring or guaranteeing
additional indebtedness, creating liens on its assets, making investments or engaging in asset
sales or transactions with affiliates, in each case subject to specified exceptions. Financial
covenants in the agreements impose requirements relating to specified debt service coverage and
leverage ratios. The debt service coverage ratio must meet or exceed a specified minimum. The
leverage ratio covenant requires that WML not permit the ratio of total debt at the end of each
quarter to EBITDA (both as defined) for the four quarters then ended to be greater than a specified
amount. WML met all of its covenant requirements as of December 31, 2010 and expects to meet all
covenant requirements for the foreseeable future.
WMLs term debt and revolving credit facility are secured by substantially all of the assets
of WML and its subsidiaries (other than Texas Westmoreland Coal Co., or TWCC), our membership
interests in WML, including certain dividends and other proceeds from such interests, and
substantially all of the stock of WMLs subsidiaries other than TWCC.
Historical Sources and Uses of Cash
The following is a summary of cash provided by or used in each of the indicated types of
activities:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(In thousands) |
|
Cash provided by (used in): |
|
|
|
|
|
|
|
|
Operating activities |
|
$ |
45,353 |
|
|
$ |
29,448 |
|
Investing activities |
|
|
(29,180 |
) |
|
|
(38,597 |
) |
Financing activities |
|
|
(20,917 |
) |
|
|
(20,273 |
) |
Cash provided by operating activities increased $15.9 million in 2010 compared to 2009
primarily as a result of a $26.0 million reduction in net loss in 2010. The increase in operating
cash flows was partially offset by the $17.9 million decrease in cash receipts due to a
contractually scheduled decrease in the payments ROVA collects from its customer.
Cash used in investing activities decreased $9.4 million in 2010 compared to 2009 primarily as
a result of the reduction in our capital spending in 2010. Additions to property, plant and
equipment were $22.8 million in 2010 compared to $34.5 million in 2009.
Cash used in financing activities in 2010 remained consistent with 2009.
Our working capital deficit at December 31, 2010 decreased by $39.2 million to approximately
$35.8 million compared to a $75.0 million deficit at December 31, 2009 primarily as a result of a
decrease in current installments of long-term debt and also a decrease in Other current liabilities
due to the payment of a settlement for reclamation claims.
42
Contractual Obligations and Commitments
The following table presents information about our contractual obligations and commitments as
of December 31, 2010, and the effects such obligations are expected to have on liquidity and cash
flow in future periods. Some of the amounts below are estimates. We discuss these obligations and
commitments elsewhere in this filing.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
|
Total |
|
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
|
2015 |
|
|
After 2015 |
|
|
|
(In thousands) |
|
Long-term debt obligations(1)
(principal and interest) |
|
$ |
279,738 |
|
|
|
51,731 |
|
|
|
40,076 |
|
|
|
61,264 |
|
|
|
38,008 |
|
|
|
35,880 |
|
|
|
52,779 |
|
Capital lease obligations (principal and
interest) |
|
|
30,293 |
|
|
|
8,714 |
|
|
|
8,319 |
|
|
|
7,077 |
|
|
|
4,461 |
|
|
|
1,617 |
|
|
|
105 |
|
Operating lease obligations |
|
|
18,311 |
|
|
|
6,665 |
|
|
|
4,243 |
|
|
|
2,827 |
|
|
|
2,233 |
|
|
|
1,625 |
|
|
|
718 |
|
Purchase obligations(2) |
|
|
105,534 |
|
|
|
28,552 |
|
|
|
28,552 |
|
|
|
28,552 |
|
|
|
17,077 |
|
|
|
2,801 |
|
|
|
|
|
Other long-term liabilities(3) |
|
|
1,096,065 |
|
|
|
44,442 |
|
|
|
41,937 |
|
|
|
42,308 |
|
|
|
54,298 |
|
|
|
42,763 |
|
|
|
870,317 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
1,529,941 |
|
|
|
140,104 |
|
|
|
123,127 |
|
|
|
142,028 |
|
|
|
116,077 |
|
|
|
84,686 |
|
|
|
923,919 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ProForma long-term debt
obligations(4) (principal and
interest) |
|
$ |
435,022 |
|
|
|
26,098 |
|
|
|
39,661 |
|
|
|
43,918 |
|
|
|
40,898 |
|
|
|
41,355 |
|
|
|
243,092 |
|
|
|
|
(1) |
|
On February 4, 2011, we refinanced our convertible notes, WRIs term and revolving line
of credit and ROVAs term debt. See Note 4 to our consolidated financial statements for
details. |
|
(2) |
|
Our purchase obligations relate to coal supply agreements for our power plants. See
Note 15 to our consolidated financial statements for details. |
|
(3) |
|
Represents benefit payments for our postretirement medical benefits, black lung,
workers compensation, and combined benefit fund plans, as well as contributions for our
defined benefit pension plans and final reclamation costs. |
|
(4) |
|
Amounts shown are subsequent to the Parent Notes offering in February 2011. |
Critical Accounting Policies
Postretirement Medical Benefits
We have an obligation to provide postretirement medical benefits to our former employees and
their dependents. Detailed information related to this liability is included in Note 5 to our
consolidated financial statements.
Our liability for our employees postretirement medical benefit costs is recorded on our
consolidated balance sheets in amounts equal to the actuarially determined liability, as this
obligation is not funded. We use various assumptions including the discount rate and future cost
trends, to estimate the cost and obligation for this item. Our discount rate for postretirement
medical benefit is determined by utilizing a hypothetical bond portfolio model, which approximates
the future cash flows necessary to service our liability. This model is calculated using a yield
curve that is developed using the average yield for bonds in the tenth to ninetieth percentiles,
which excludes bonds with outlier yields.
We make assumptions related to future trends for medical care costs in the estimates of
retiree health care obligations. Our medical trend assumption is developed by annually examining
the historical trend of our cost per claim data and projecting forward the participant claims and
our current benefit coverage. These projections include the continuation of cost savings we
achieved in 2010 from the modernization of how we provide prescription drug benefits to retirees.
If our assumptions do not materialize as expected, actual cash expenditures and costs that we incur
could differ materially from our current estimates. Moreover, regulatory changes could increase
our obligation to satisfy these or additional obligations.
The PPACA could potentially impact these benefits. The PPACA has both short-term and
long-term implications on healthcare benefit plan standards. Implementation of this legislation is
planned to occur in phases, with plan standard changes taking effect beginning in 2010, but to a
greater extend with the 2011 benefit plan year
and extending through 2018. We will continue to evaluate the impact of the PPACA in future
periods as additional information, interpretations and guidance becomes available.
43
Below we have provided a sensitivity analysis to demonstrate the significance of the health
care cost trend rate assumptions in relation to reported amounts.
|
|
|
|
|
|
|
|
|
|
|
Postretirement Medical Benefits |
|
Health Care Cost Trend Rate |
|
1% Increase |
|
|
1% Decrease |
|
|
|
(In thousands) |
|
Effect on service and interest cost components |
|
$ |
1,282 |
|
|
$ |
(1,079 |
) |
Effect on postretirement medical benefit obligation |
|
$ |
22,565 |
|
|
$ |
(19,116 |
) |
Asset Retirement Obligations, Final Reclamation Costs and Reserve Estimates
Our asset retirement obligations primarily consist of cost estimates for final reclamation of
surface land and support facilities at both surface mines and power plants in accordance with
federal and state reclamation laws. Asset retirement obligations are based on projected pit
configurations at the end of mining and are determined for each mine using estimates and
assumptions including estimates of disturbed acreage as determined from engineering data, estimates
of future costs to reclaim the disturbed acreage, the timing of these cash flows, and a
credit-adjusted, risk-free rate. As changes in estimates occur such as mine plan revisions,
changes in estimated costs, or changes in timing of the final reclamation activities, the
obligation and asset are revised to reflect the new estimate after applying the appropriate
credit-adjusted, risk-free rate to the changes. If our assumptions do not materialize as expected,
actual cash expenditures and costs that we incur could be materially different from currently
estimated. Moreover, regulatory changes could increase our obligation to perform final reclamation
and mine closing activities.
Certain of our customers have either agreed to reimburse us for final reclamation expenditures
as they are incurred or have pre-funded a portion of the expected reclamation costs. See
additional information regarding our asset retirement obligations in Note 8 to our consolidated
financial statements.
Income Taxes and Deferred Income Taxes
As of December 31, 2010, we had significant deferred tax assets. Our deferred tax assets
include federal and state regular net operating losses, or NOLs, alternative minimum tax, or AMT,
credit carryforwards, Indian Coal Tax Credits, or ICTC, carryforwards, and net deductible reversing
temporary differences related to on-going differences between book and taxable income.
We believe we will be taxed under the AMT system for the foreseeable future due to the
significant amount of statutory tax depletion in excess of book depletion expected to be generated
by our mining operations. As a result, we have determined that a valuation allowance is required
for all of our regular federal net operating loss carryforwards and AMT credit carryforwards since
they are only available to offset future regular taxes.
We have recorded a full valuation allowance for all but $2.5 million of our state NOLs since
we believe they will not be realized. No valuation allowance is being provided on $2.5 million of
deferred tax assets because we believe that these NOLs will be used to offset our liabilities
relating to our uncertain tax positions.
We have determined that a full valuation allowance is required for all of our ICTC
carryforward. The ICTC can generally be used to offset AMT liability. We do not believe we have
sufficient positive evidence to substantiate that our deferred tax asset for the ICTC carryforward
is realizable at a more-likely-than-not level of assurance. As a result, we will continue to
record a full valuation allowance on our ICTC carryforward; reversing valuation allowance only if
utilized in a future year.
We have determined that since our net deductible temporary differences will not reverse for
the foreseeable future, and we are unable to forecast when we will have regular taxable income when
they do reverse, a full valuation allowance is required for these deferred tax assets, other than
the deferred tax asset relating to our uncertain tax positions.
44
The tax effect of pretax income or loss from continuing operations is generally determined by
a computation that does not consider the tax effects of items that are not included in continuing
operations. The exception to that incremental approach is that all items (for example, items
recorded in other comprehensive income, extraordinary items, and discontinued operations) be
considered in determining the amount of tax benefit that results from a loss from continuing
operations and that shall be allocated to continuing operations.
Recent Accounting Pronouncements
In January 2010, the FASB issued authoritative guidance, which requires additional disclosures
and clarifies certain existing disclosure requirements regarding fair value measurements. This
guidance is effective for interim and annual reporting periods beginning after December 15, 2009.
We adopted this guidance effective January 1, 2010. However, none of the specific additional
disclosures were applicable at December 31, 2010.
On January 1, 2009, we adopted accounting guidance that clarifies how to determine whether
certain instruments or features are indexed to an entitys own stock. This guidance was effective
for financial statements issued for fiscal years beginning after December 15, 2008 and interim
periods within those fiscal years. We recorded a cumulative effect of change in accounting
principles upon adoption of this guidance. See Note 9 to our consolidated financial statements for
additional information.
On January 1, 2009, we adopted accounting guidance that establishes accounting and reporting
standards for (1) noncontrolling interests in partially owned consolidated subsidiaries and (2) the
loss of control of subsidiaries. This guidance requires noncontrolling interests (minority
interests) to be reported as a separate component of equity. The amount of net income or loss
attributable to the noncontrolling interests will be included in consolidated net income or loss on
the face of the income statement. In addition, this guidance requires that a parent recognize a
gain or loss in net income or loss when a subsidiary is deconsolidated. Such gain or loss will be
measured using the fair value of the noncontrolling equity investment on the deconsolidation date.
This guidance also includes expanded disclosure requirements regarding the interests of the parent
and its noncontrolling interest. We recorded $2.6 million and $1.8 million, respectively, of net
loss attributable to noncontrolling interest for the years ended December 31, 2010 and December 31,
2009, which is reflected in our consolidated financial statements.
Off-Balance Sheet Arrangements
In the normal course of business, we are a party to certain off-balance sheet arrangements.
These arrangements include financial instruments with off-balance sheet risk such as bank letters
of credit and performance or surety bonds. Surety bonds and letters of credit are issued by
financial institutions to third parties to assure the performance of our obligations relating to
reclamation, workers compensation obligations, postretirement medical benefit obligations, and
other obligations. These arrangements are not reflected in our consolidated balance sheets, and we
do not expect any material adverse effects on our financial condition, results of operations or
cash flows to result from these off-balance sheet arrangements.
We use a combination of surety bonds and letters of credit to secure our financial obligations
for reclamation, workers compensation, postretirement medical benefit and other obligations as
follows as of December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Post |
|
|
|
|
|
|
|
|
|
|
|
|
|
Workers |
|
|
Retirement |
|
|
|
|
|
|
|
|
|
Reclamation |
|
|
Compensation |
|
|
Medical Benefit |
|
|
|
|
|
|
|
|
|
Obligations |
|
|
Obligations |
|
|
Obligations |
|
|
Other |
|
|
Total |
|
|
|
(In thousands) |
|
Surety bonds |
|
$ |
230,367 |
|
|
$ |
10,303 |
|
|
$ |
9,432 |
|
|
$ |
4,245 |
|
|
$ |
254,347 |
|
Letters of credit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,556 |
|
|
|
8,556 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
230,367 |
|
|
$ |
10,303 |
|
|
$ |
9,432 |
|
|
$ |
12,801 |
|
|
$ |
262,903 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45
ITEM 7AQUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are exposed to market risk, which includes adverse changes in commodity prices and interest
rates.
Commodity Price Risk
We manage our price risk for coal sales, electricity and steam production through the use of
long-term agreements, rather than through the use of derivatives. We estimate that almost 100% of
our coal and our electricity production are sold under long-term agreements. These coal contracts
typically contain price escalation and adjustment provisions, pursuant to which the price for our
coal may be periodically revised. The price may be adjusted in accordance with changes in broad
economic indicators such as the consumer price index, commodity-specific indices such as the
PPI-light fuel oils index, and/or changes in our actual costs.
For our contracts which are not cost plus, we have exposure to price risk for supplies that
are used in the normal course of production such as diesel fuel and explosives. We manage these
items through strategic sourcing contracts in normal quantities with our suppliers and may use
derivatives from time to time. At December 31, 2010, we had fuel supply contracts outstanding with
a minimum purchase requirement of 4.1 million gallons of diesel fuel per year. These contracts
qualify for the normal purchase normal sale exception under hedge accounting.
Interest Rate Risk
Our exposure to changes in interest rates results from our debt obligations shown in the table
below that are indexed to either the prime rate or LIBOR. Based on balances outstanding as of
December 31, 2010, a change of one percentage point in the prime interest rate or LIBOR would
increase or decrease interest expense on an annual basis by the amount shown below (in thousands):
|
|
|
|
|
|
|
Effect of 1% |
|
|
|
increase |
|
|
|
or 1% decrease |
|
Revolving lines of credit(1) |
|
$ |
184 |
|
WRIs term debt(1) |
|
|
96 |
|
|
|
|
(1) |
|
On February 4, 2011, proceeds from the Parent Notes
offering were used to repay WRIs term and revolving line
of credit. See Note 4 to our consolidated financial statements
for details. |
46
ITEM 8FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
|
|
|
|
|
Index to Financial Statements |
|
Page |
|
|
|
|
|
|
|
|
|
48 |
|
|
|
|
|
|
|
|
|
50 |
|
|
|
|
|
|
|
|
|
52 |
|
|
|
|
|
|
|
|
|
53 |
|
|
|
|
|
|
|
|
|
54 |
|
|
|
|
|
|
|
|
|
55 |
|
47
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of Westmoreland Coal Company
We have audited the accompanying consolidated balance sheets of Westmoreland Coal Company and
subsidiaries (the Company) as of December 31, 2010 and 2009, and the related consolidated
statements of operations, shareholders deficit and comprehensive loss, and cash flows for the
years then ended. These financial statements are the responsibility of the Companys management.
Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). 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 financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Westmoreland Coal Company and subsidiaries at
December 31, 2010 and 2009, and the consolidated results of their operations and their cash flows
for the years then ended in conformity with U.S. generally accepted accounting principles.
As discussed in Note 9 to the consolidated financial statements, the Company adopted Emerging
Issues Task Force 07-5, Determining Whether an Instrument (or Embedded Feature) is Indexed to an
Entitys Own Stock (codified in FASB ASC Topic 815,) effective as of January 1, 2009.
We have also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Companys internal control over financial reporting as of
December 31, 2010, based on the criteria established in Internal ControlIntegrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated
March 11, 2011 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Denver, Colorado
March 11, 2011
48
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Westmoreland Coal Company:
We have audited the consolidated statements of operations, shareholders deficit and comprehensive
loss, and cash flows of Westmoreland Coal Company and subsidiaries (the Company) for the year ended
December 31, 2008. In connection with our audit of the aforementioned consolidated financial
statements, we also audited the related consolidated financial statement Schedule I. These
consolidated financial statements, and the financial statement schedule, are the responsibility of
the Companys management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the results of Westmoreland Coal Company and subsidiaries operations and their
cash flows for the year ended December 31, 2008, in conformity with U.S. generally accepted
accounting principles.
The consolidated financial statements have been prepared assuming the Company will continue as a
going concern. During the year ended December 31, 2008, the Company had suffered recurring losses
from operations, had a working capital deficit, and had a net capital deficiency that raised
substantial doubt about the Companys ability to continue as a going concern. The consolidated
financial statements do not include any adjustments that might result from the outcome of this
uncertainty.
Denver, Colorado
March 13, 2009
49
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(In thousands) |
|
Assets |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
5,775 |
|
|
$ |
10,519 |
|
Receivables: |
|
|
|
|
|
|
|
|
Trade |
|
|
50,578 |
|
|
|
46,393 |
|
Contractual third-party reclamation receivables |
|
|
7,743 |
|
|
|
7,257 |
|
Other |
|
|
4,545 |
|
|
|
3,162 |
|
|
|
|
|
|
|
|
|
|
|
62,866 |
|
|
|
56,812 |
|
|
|
|
|
|
|
|
|
|
Inventories |
|
|
23,571 |
|
|
|
25,871 |
|
Other current assets |
|
|
5,335 |
|
|
|
6,047 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
97,547 |
|
|
|
99,249 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment: |
|
|
|
|
|
|
|
|
Land and mineral rights |
|
|
83,824 |
|
|
|
83,694 |
|
Capitalized asset retirement cost |
|
|
114,856 |
|
|
|
134,821 |
|
Plant and equipment |
|
|
506,661 |
|
|
|
486,238 |
|
|
|
|
|
|
|
|
|
|
|
705,341 |
|
|
|
704,753 |
|
Less accumulated depreciation, depletion and amortization |
|
|
(288,386 |
) |
|
|
(248,569 |
) |
|
|
|
|
|
|
|
Net property, plant and equipment |
|
|
416,955 |
|
|
|
456,184 |
|
|
|
|
|
|
|
|
|
|
Advanced coal royalties |
|
|
3,695 |
|
|
|
3,056 |
|
Reclamation deposits |
|
|
72,274 |
|
|
|
73,067 |
|
Restricted investments and bond collateral |
|
|
55,384 |
|
|
|
48,188 |
|
Contractual third-party reclamation receivables, less current portion |
|
|
87,739 |
|
|
|
74,989 |
|
Deferred income taxes |
|
|
2,458 |
|
|
|
2,341 |
|
Intangible assets, net of accumulated amortization of $9.1 million
and $6.8 million at December 31, 2010 and December 31, 2009,
respectively |
|
|
6,555 |
|
|
|
8,781 |
|
Other assets |
|
|
7,699 |
|
|
|
6,873 |
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
750,306 |
|
|
$ |
772,728 |
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
50
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets (Continued)
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(In thousands) |
|
Liabilities and Shareholders Deficit |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Current installments of long-term debt |
|
$ |
14,973 |
|
|
$ |
41,089 |
|
Revolving lines of credit |
|
|
|
|
|
|
16,400 |
|
Accounts payable and accrued expenses: |
|
|
|
|
|
|
|
|
Trade |
|
|
46,247 |
|
|
|
39,264 |
|
Production taxes |
|
|
26,317 |
|
|
|
24,510 |
|
Workers compensation |
|
|
954 |
|
|
|
1,031 |
|
Postretirement medical benefits |
|
|
13,581 |
|
|
|
14,501 |
|
SERP |
|
|
304 |
|
|
|
306 |
|
Deferred revenue |
|
|
10,209 |
|
|
|
8,760 |
|
Asset retirement obligations |
|
|
14,514 |
|
|
|
15,513 |
|
Other current liabilities |
|
|
6,241 |
|
|
|
12,851 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
133,340 |
|
|
|
174,225 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, less current installments |
|
|
208,731 |
|
|
|
197,206 |
|
Revolving lines of credit, less current portion |
|
|
18,400 |
|
|
|
|
|
Workers compensation, less current portion |
|
|
9,424 |
|
|
|
10,188 |
|
Excess of pneumoconiosis benefit obligation over trust assets |
|
|
2,246 |
|
|
|
786 |
|
Postretirement medical benefits, less current portion |
|
|
197,279 |
|
|
|
175,722 |
|
Pension and SERP obligations, less current portion |
|
|
20,462 |
|
|
|
26,827 |
|
Deferred revenue, less current portion |
|
|
75,395 |
|
|
|
84,243 |
|
Asset retirement obligations, less current portion |
|
|
227,129 |
|
|
|
229,102 |
|
Intangible liabilities, net of accumulated amortization $9.4
million at December 31, 2010 and $7.7 million at December
31, 2009, respectively |
|
|
8,663 |
|
|
|
10,300 |
|
Other liabilities |
|
|
11,592 |
|
|
|
5,928 |
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
912,661 |
|
|
|
914,527 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders deficit: |
|
|
|
|
|
|
|
|
Preferred stock of $1.00 par value
Authorized 5,000,000 shares;
Issued and outstanding 160,129 shares at
December 31, 2010, and December 31, 2009 |
|
|
160 |
|
|
|
160 |
|
Common stock of $2.50 par value
Authorized 30,000,000 shares;
Issued and outstanding 11,160,798 shares at
December 31, 2010 and 10,345,927 shares at
December 31, 2009 |
|
|
27,901 |
|
|
|
25,864 |
|
Other paid-in capital |
|
|
98,466 |
|
|
|
91,432 |
|
Accumulated other comprehensive loss |
|
|
(57,680 |
) |
|
|
(31,223 |
) |
Accumulated deficit |
|
|
(226,740 |
) |
|
|
(226,215 |
) |
|
|
|
|
|
|
|
Total Westmoreland Coal Company shareholders deficit |
|
|
(157,893 |
) |
|
|
(139,982 |
) |
Noncontrolling interest |
|
|
(4,462 |
) |
|
|
(1,817 |
) |
|
|
|
|
|
|
|
Total deficit |
|
|
(162,355 |
) |
|
|
(141,799 |
) |
|
|
|
|
|
|
|
Total Liabilities and Shareholders Deficit |
|
$ |
750,306 |
|
|
$ |
772,728 |
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
51
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands, except per share data) |
|
Revenues |
|
$ |
506,057 |
|
|
$ |
443,368 |
|
|
$ |
509,696 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales |
|
|
394,827 |
|
|
|
373,070 |
|
|
|
409,795 |
|
Depreciation, depletion and amortization |
|
|
44,690 |
|
|
|
44,254 |
|
|
|
41,387 |
|
Selling and administrative |
|
|
39,481 |
|
|
|
40,612 |
|
|
|
40,513 |
|
Heritage health benefit expenses |
|
|
14,421 |
|
|
|
28,074 |
|
|
|
33,452 |
|
Restructuring charges |
|
|
|
|
|
|
|
|
|
|
2,009 |
|
Loss (gain) on sales of assets |
|
|
226 |
|
|
|
191 |
|
|
|
(1,425 |
) |
Other operating income |
|
|
(8,109 |
) |
|
|
(11,059 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
485,536 |
|
|
|
475,142 |
|
|
|
525,731 |
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
20,521 |
|
|
|
(31,774 |
) |
|
|
(16,035 |
) |
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(22,992 |
) |
|
|
(23,733 |
) |
|
|
(23,130 |
) |
Interest expense attributable to beneficial conversion feature |
|
|
|
|
|
|
|
|
|
|
(8,146 |
) |
Loss on extinguishment of debt |
|
|
|
|
|
|
|
|
|
|
(5,178 |
) |
Interest income |
|
|
1,747 |
|
|
|
3,218 |
|
|
|
5,125 |
|
Other income (loss) |
|
|
(2,587 |
) |
|
|
5,991 |
|
|
|
(284 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(23,832 |
) |
|
|
(14,524 |
) |
|
|
(31,613 |
) |
|
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
|
(3,311 |
) |
|
|
(46,298 |
) |
|
|
(47,648 |
) |
Income tax (benefit) expense |
|
|
(141 |
) |
|
|
(17,136 |
) |
|
|
919 |
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
(3,170 |
) |
|
|
(29,162 |
) |
|
|
(48,567 |
) |
|
Less net loss attributable to noncontrolling interest |
|
|
(2,645 |
) |
|
|
(1,817 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to the Parent company |
|
|
(525 |
) |
|
|
(27,345 |
) |
|
|
(48,567 |
) |
Less preferred stock dividend requirements |
|
|
1,360 |
|
|
|
1,360 |
|
|
|
1,360 |
|
|
|
|
|
|
|
|
|
|
|
Net loss applicable to common shareholders |
|
$ |
(1,885 |
) |
|
$ |
(28,705 |
) |
|
$ |
(49,927 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share applicable to common shareholders: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted |
|
$ |
(0.17 |
) |
|
$ |
(2.88 |
) |
|
$ |
(5.25 |
) |
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted |
|
|
10,791 |
|
|
|
9,967 |
|
|
|
9,512 |
|
See accompanying Notes to Consolidated Financial Statements.
52
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
Consolidated Statement of Shareholders Deficit and Comprehensive Loss
Years Ended December 31, 2008, 2009 and 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A |
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
Convertible |
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
Non- |
|
|
Shareholders |
|
|
|
Exchangeable |
|
|
Common |
|
|
Other Paid-In |
|
|
Comprehensive |
|
|
Accumulated |
|
|
controlling |
|
|
Equity |
|
|
|
Preferred Stock |
|
|
Stock |
|
|
Capital |
|
|
Loss |
|
|
Deficit |
|
|
Interest |
|
|
(Deficit) |
|
|
|
(In thousands) |
|
Balance at December 31, 2007 (160,129 preferred shares and
9,427,203 common shares outstanding) |
|
$ |
160 |
|
|
$ |
23,567 |
|
|
$ |
85,352 |
|
|
$ |
(125,187 |
) |
|
$ |
(161,149 |
) |
|
$ |
|
|
|
$ |
(177,257 |
) |
Common stock issued as compensation (221,933 shares) |
|
|
|
|
|
|
554 |
|
|
|
2,242 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,796 |
|
Common stock options exercised (40,882 shares) |
|
|
|
|
|
|
102 |
|
|
|
101 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
203 |
|
Warrant repriced in lieu of registration requirement |
|
|
|
|
|
|
|
|
|
|
355 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
355 |
|
Beneficial conversion feature on convertible debt |
|
|
|
|
|
|
|
|
|
|
8,146 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,146 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(48,567 |
) |
|
|
|
|
|
|
(48,567 |
) |
Adjustments to accumulated actuarial losses of pension plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,589 |
) |
|
|
|
|
|
|
|
|
|
|
(17,589 |
) |
Amortization of accumulated actuarial losses of pension plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
351 |
|
|
|
|
|
|
|
|
|
|
|
351 |
|
Adjustments to accumulated actuarial losses, prior service
costs and transition obligations of postretirement medical
benefit plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,533 |
|
|
|
|
|
|
|
|
|
|
|
5,533 |
|
Amortization of accumulated actuarial losses, prior service
costs and transition obligations of postretirement medical
benefit plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,319 |
|
|
|
|
|
|
|
|
|
|
|
8,319 |
|
Unrealized loss on available-for-sale securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(788 |
) |
|
|
|
|
|
|
|
|
|
|
(788 |
) |
Other than temporary impairment of available-for-sale
securities recognized in earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
900 |
|
|
|
|
|
|
|
|
|
|
|
900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(51,841 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008 (160,129 preferred shares and
9,690,018 common shares outstanding) |
|
|
160 |
|
|
|
24,223 |
|
|
|
96,196 |
|
|
|
(128,461 |
) |
|
|
(209,716 |
) |
|
|
|
|
|
|
(217,598 |
) |
Cumulative effect of adoption of ASC 815-40 |
|
|
|
|
|
|
|
|
|
|
(9,847 |
) |
|
|
|
|
|
|
10,846 |
|
|
|
|
|
|
|
999 |
|
Common stock issued as compensation (255,909 shares, less
100,000 shares forfeited) |
|
|
|
|
|
|
391 |
|
|
|
2,180 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,571 |
|
Contributions of Company stock to pension plans assets
(500,000 shares) |
|
|
|
|
|
|
1,250 |
|
|
|
2,903 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,153 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(27,345 |
) |
|
|
(1,817 |
) |
|
|
(29,162 |
) |
Tax effect of other comprehensive income gains |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,062 |
) |
|
|
|
|
|
|
|
|
|
|
(17,062 |
) |
Adjustments to accumulated actuarial losses and transition
obligations, pension |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,459 |
) |
|
|
|
|
|
|
|
|
|
|
(1,459 |
) |
Amortization of accumulated actuarial losses and transition
obligations, pension |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,845 |
|
|
|
|
|
|
|
|
|
|
|
1,845 |
|
Amortization of accumulated actuarial losses and transition
obligations, postretirement medical benefit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,079 |
|
|
|
|
|
|
|
|
|
|
|
7,079 |
|
Effect of pension plan freeze |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,670 |
|
|
|
|
|
|
|
|
|
|
|
10,670 |
|
Effect of postretirement medical benefit plan amendments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95,313 |
|
|
|
|
|
|
|
|
|
|
|
95,313 |
|
Unrealized gain on available-for-sale securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
852 |
|
|
|
|
|
|
|
|
|
|
|
852 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68,076 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009 (160,129 preferred shares and
10,345,927 common shares outstanding) |
|
|
160 |
|
|
|
25,864 |
|
|
|
91,432 |
|
|
|
(31,223 |
) |
|
|
(226,215 |
) |
|
|
(1,817 |
) |
|
|
(141,799 |
) |
Common stock issued as compensation (337,371 shares) |
|
|
|
|
|
|
843 |
|
|
|
3,206 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,049 |
|
Common stock options exercised (2,500 shares) |
|
|
|
|
|
|
6 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8 |
|
Contributions of Company stock to pension plan assets
(475,000 shares) |
|
|
|
|
|
|
1,188 |
|
|
|
3,826 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,014 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(525 |
) |
|
|
(2,645 |
) |
|
|
(3,170 |
) |
Amortization of accumulated actuarial losses and transition
obligations, pension |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,312 |
|
|
|
|
|
|
|
|
|
|
|
1,312 |
|
Adjustments to accumulated actuarial losses and transition
obligations, pension |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,860 |
) |
|
|
|
|
|
|
|
|
|
|
(3,860 |
) |
Amortization of accumulated actuarial gains and transition
obligations, postretirement medical benefits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(275 |
) |
|
|
|
|
|
|
|
|
|
|
(275 |
) |
Adjustments to accumulated actuarial gains and transition
obligations, postretirement medical benefits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23,195 |
) |
|
|
|
|
|
|
|
|
|
|
(23,195 |
) |
Unrealized and realized gains on available-for-sale securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(439 |
) |
|
|
|
|
|
|
|
|
|
|
(439 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(29,627 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010 (160,129 preferred shares and
11,160,798 common shares outstanding) |
|
$ |
160 |
|
|
$ |
27,901 |
|
|
$ |
98,466 |
|
|
$ |
(57,680 |
) |
|
$ |
(226,740 |
) |
|
$ |
(4,462 |
) |
|
$ |
(162,355 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
53
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(3,170 |
) |
|
$ |
(29,162 |
) |
|
$ |
(48,567 |
) |
Adjustments to reconcile net loss to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, depletion and amortization |
|
|
44,690 |
|
|
|
44,254 |
|
|
|
41,387 |
|
Accretion of asset retirement obligation and receivable |
|
|
11,540 |
|
|
|
9,974 |
|
|
|
9,528 |
|
Non-cash tax benefits |
|
|
|
|
|
|
(17,062 |
) |
|
|
|
|
Amortization of intangible assets and liabilities, net |
|
|
590 |
|
|
|
279 |
|
|
|
598 |
|
Restructuring charges |
|
|
|
|
|
|
|
|
|
|
2,009 |
|
Share-based compensation |
|
|
4,049 |
|
|
|
2,552 |
|
|
|
2,733 |
|
Loss (gain) on sales of assets |
|
|
226 |
|
|
|
191 |
|
|
|
(1,425 |
) |
Non-cash interest expense |
|
|
1,236 |
|
|
|
1,470 |
|
|
|
8,934 |
|
Amortization of deferred financing costs |
|
|
2,304 |
|
|
|
1,975 |
|
|
|
839 |
|
Loss on extinguishment of debt |
|
|
|
|
|
|
|
|
|
|
2,292 |
|
Loss (gain) on impairment and sales of investment securities |
|
|
(604 |
) |
|
|
412 |
|
|
|
900 |
|
Loss (gain) on derivative instruments |
|
|
3,456 |
|
|
|
(6,122 |
) |
|
|
|
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Receivables, net |
|
|
(4,728 |
) |
|
|
15,503 |
|
|
|
(6,240 |
) |
Inventories |
|
|
2,300 |
|
|
|
(1,217 |
) |
|
|
4,144 |
|
Excess of pneumoconiosis benefit obligation over trust assets |
|
|
1,460 |
|
|
|
3,025 |
|
|
|
(23 |
) |
Accounts payable and accrued expenses |
|
|
9,041 |
|
|
|
(13,802 |
) |
|
|
2,001 |
|
Deferred revenue |
|
|
(7,399 |
) |
|
|
10,486 |
|
|
|
29,177 |
|
Accrual for workers compensation |
|
|
(841 |
) |
|
|
(1,619 |
) |
|
|
3,316 |
|
Asset retirement obligations |
|
|
(7,783 |
) |
|
|
(2,219 |
) |
|
|
(889 |
) |
Accrual for postretirement medical benefits |
|
|
(2,832 |
) |
|
|
7,762 |
|
|
|
10,021 |
|
Pension and SERP obligations |
|
|
(3,902 |
) |
|
|
3,173 |
|
|
|
(2,116 |
) |
Other assets and liabilities |
|
|
(4,280 |
) |
|
|
(405 |
) |
|
|
(3,374 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
45,353 |
|
|
|
29,448 |
|
|
|
55,245 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property, plant and equipment |
|
|
(22,814 |
) |
|
|
(34,546 |
) |
|
|
(31,320 |
) |
Change in restricted investments and bond collateral and reclamation
deposits |
|
|
(8,545 |
) |
|
|
(4,601 |
) |
|
|
24,319 |
|
Net proceeds from sales of assets |
|
|
712 |
|
|
|
937 |
|
|
|
2,641 |
|
Proceeds from the sale of investments |
|
|
2,307 |
|
|
|
796 |
|
|
|
|
|
Receivable from customer for property and equipment purchases |
|
|
(840 |
) |
|
|
(1,183 |
) |
|
|
(2,228 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(29,180 |
) |
|
|
(38,597 |
) |
|
|
(6,588 |
) |
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Change in book overdrafts |
|
|
(595 |
) |
|
|
596 |
|
|
|
(5,043 |
) |
Borrowings from long-term debt |
|
|
|
|
|
|
8,562 |
|
|
|
205,377 |
|
Repayments of long-term debt |
|
|
(20,405 |
) |
|
|
(35,275 |
) |
|
|
(219,785 |
) |
Borrowings on revolving lines of credit |
|
|
170,900 |
|
|
|
94,116 |
|
|
|
169,600 |
|
Repayments on revolving lines of credit |
|
|
(168,900 |
) |
|
|
(88,016 |
) |
|
|
(173,500 |
) |
Debt issuance costs |
|
|
(1,925 |
) |
|
|
(256 |
) |
|
|
(5,304 |
) |
Exercise of stock options |
|
|
8 |
|
|
|
|
|
|
|
203 |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(20,917 |
) |
|
|
(20,273 |
) |
|
|
(28,452 |
) |
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
(4,744 |
) |
|
|
(29,422 |
) |
|
|
20,205 |
|
Cash and cash equivalents, beginning of year |
|
|
10,519 |
|
|
|
39,941 |
|
|
|
19,736 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year |
|
$ |
5,775 |
|
|
$ |
10,519 |
|
|
$ |
39,941 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
$ |
19,744 |
|
|
$ |
20,418 |
|
|
$ |
22,226 |
|
Income taxes (refunds) |
|
|
(236 |
) |
|
|
2,263 |
|
|
|
2,227 |
|
Non-cash transactions: |
|
|
|
|
|
|
|
|
|
|
|
|
Accrued purchases of property and equipment |
|
|
628 |
|
|
|
949 |
|
|
|
2,715 |
|
Capital leases and other financing sources |
|
|
3,748 |
|
|
|
11,286 |
|
|
|
14,859 |
|
See accompanying Notes to Consolidated Financial Statements.
54
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Westmoreland Coal Company, or the Company, Westmoreland, WCC, or the Parent, is an energy
company. The Companys current principal activities, all conducted within the United States, are
the production and sale of coal from its mines in Montana, North Dakota and Texas; and the
ownership of power plants in North Carolina. The Companys activities are primarily conducted
through wholly owned subsidiaries.
The Companys Absaloka Mine is owned by its wholly owned subsidiary Westmoreland Resources,
Inc., or WRI. The right to mine coal at the Absaloka Mine has been subleased to an affiliated
entity whose operations the Company controls. The Rosebud, Jewett, Beulah and Savage Mines are
owned through the Companys wholly owned subsidiary Westmoreland Mining LLC, or WML.
Liquidity
Following the February 4, 2011 Parent Notes offering described below, the Company has cash on
hand in excess of $45 million. The Company also expects increases in coal operating profits and
the Companys heritage health benefit expenditures to continue at their reduced 2010 rates. As a
result, the Company anticipates that its cash flows from operations, cash on hand and available
borrowing capacity will be sufficient to meet its investing, financing, and working capital
requirements for the next several years.
On February 4, 2011 through a private placement offering, the Company issued $150.0 million of
Senior Secured Notes due in 2018 together with Westmoreland Partners as co-issuer. The Parent
Notes mature February 18, 2018 and they bear a fixed interest rate of 10.750%, payable
semi-annually, in arrears, on February 1 and August 1 of each year beginning August 1, 2011.
Substantially all of the assets of ROVA and WRI constitute collateral for the Parent Notes as to
which the holders of these notes have a first priority lien. Under the indenture governing the
Parent Notes, the Company is required to offer a portion of its Excess Cash Flow (as defined by the
Indenture) for each fiscal year to purchase some of these notes at 100% of the principal amount.
The Company received approximately $135.2 million in proceeds from the Parent Notes offering
after deducting the Initial Purchasers discount of $7.5 million and offering costs of $7.3
million. The proceeds were used to pay the outstanding balance on WRI and ROVAs term and
revolving lines of credit. The credit facilities at both WRI and ROVA were terminated in February
2011, as result of the Parent Notes offering. The Company is still able to enter into a revolving
credit facility without the consent of the holders of the notes, subject to certain conditions.
The outstanding balance for the convertible notes was also eliminated with $2.5 million being paid
to retire a portion of the corporate convertible notes with the remainder of the notes being
converted into 1,877,946 shares of Westmoreland common stock at a conversion price of $8.50 per
share. In February 2011, the Company used $19.9 million of the proceeds to pay all dividend
arrearages on its preferred stock.
As a result of the Parent Notes offering, the Company recorded the current portion of its
convertible notes, current portions of WRIs term and revolving line of credit and ROVAs term debt
as non-current liabilities in its consolidated balance sheet at December 31, 2010. The Company
will also record a loss on extinguishment of debt in the first quarter of 201l because of the
offering.
The Companys liquidity continues to be affected by its heritage health, pension, capital
expenditures and bond collateral obligations. The cash at WML is available to the Company through
quarterly distributions. The WML credit agreement requires a debt service account and imposes
timing and other restrictions on the ability of WML to distribute funds to WCC. Cash available from
WML is affected beginning in 2011 by payments due in respect of principal on the WML term debt.
Following the February 4, 2011 note offering described above, the Company expects that
distributions from ROVA and WRI will comprise a significant source of liquidity. The cash at WRM
is also available to the Company through dividends.
55
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Consolidation Policy
The Consolidated Financial Statements of Westmoreland Coal Company include the accounts of the
Company and its controlled subsidiaries. The Company consolidates any variable interest entity, or
VIE, for which the Company is considered the primary beneficiary. The Company provides for
non-controlling interests in consolidated subsidiaries, in which the Companys ownership is less
than 100 percent. All intercompany accounts and transactions have been eliminated.
A VIE is an entity that is unable to make significant decisions about its activities or does
not have the obligation to absorb losses or the right to receive returns generated by its
operations. If the entity meets one of these characteristics, then the Company must determine if it
is the primary beneficiary of the VIE. The party exposed to the majority of the risks and rewards
with the VIE is the primary beneficiary and must consolidate the entity.
The Company has determined that at December 31, 2010, it was the primary beneficiary in
Absaloka Coal LLC, a VIE, in which it holds less than a 50% ownership. As a result, the Company
has consolidated this entity within the coal segment.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosures of contingent assets and liabilities at the date of the
financial statements and reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents are stated at cost, which approximate fair value. Cash equivalents
consist of highly liquid investments with original maturities of three months or less.
Trade Receivables
Trade receivables are recorded at the invoiced amount and do not bear interest. The Company
evaluates the need for an allowance for doubtful accounts based on a review of collectability. The
Company has determined that no allowance is necessary for trade receivables as of December 31, 2010
and 2009.
Inventories
Inventories, which include materials and supplies as well as raw coal, are stated at the lower
of cost or market. Cost is determined using the average cost method. Coal inventory costs include
labor, supplies, equipment, operating overhead and other related costs.
Restricted Investments and Bond Collateral
The Company has requirements to maintain restricted cash and investments for bonding and debt
requirements. Amounts held are recorded as Restricted Investments and Bond Collateral. Funds in
the restricted investment and bond collateral accounts are not available to meet the Companys
operating cash needs.
Mine Development
At existing surface operations, additional pits may be added to increase production capacity
in order to meet customer requirements. These expansions may require significant capital to
purchase additional equipment, relocate equipment, expand the workforce, build or improve existing
haul roads and create the initial pre-production box cut to remove overburden for new pits at
existing operations. If these pits operate in a separate and distinct area of the mine, the costs
associated with initially uncovering coal for production are capitalized and amortized over the
life of the developed pit consistent with coal industry practices. Once production has begun,
mining costs are then expensed as incurred.
56
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Where new pits are routinely developed as part of a contiguous mining sequence, the Company
expenses such costs as incurred. The development of a contiguous pit typically reflects the planned
progression of an existing pit, thus maintaining production levels from the same mining area
utilizing the same employee group and equipment.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost and includes long-term spare parts
inventory. Expenditures that extend the useful lives of existing plant and equipment or increase
productivity of the assets are capitalized. Maintenance and repair costs that do not extend the
useful life or increase productivity of the asset are expensed as incurred. Coal reserves are
recorded at cost, or at fair value in the case of acquired businesses.
Coal reserves, mineral rights and mine development costs are depleted based upon estimated
recoverable proven and probable reserves. Plant and equipment are depreciated on a straight-line
basis over the assets estimated useful lives as follows:
|
|
|
|
|
Years |
Buildings and improvements |
|
15 to 30 |
Machinery and equipment |
|
3 to 36 |
Long-term spare parts inventory begins depreciation when placed in service.
The Company assesses the carrying value of its property, plant and equipment for impairment
whenever events or changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability is measured by comparing estimated undiscounted cash flows expected
to be generated from such assets to 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 the net book value of the asset and proceeds on disposition is recorded as a gain or loss.
Fully depreciated plant and equipment still in use is not eliminated from the accounts.
Reclamation Deposits and Contractual Third-Party Reclamation Receivables
Certain of the Companys customers have either agreed to reimburse the Company for reclamation
expenditures as they are incurred or have pre-funded a portion of the expected reclamation costs.
Amounts received from customers and held on deposit are recorded as reclamation deposits. Amounts
that are reimbursable by customers are recorded as third-party reclamation receivables when the
related reclamation obligation is recorded.
Financial Instruments
The Company evaluates all of its financial instruments to determine if such instruments are
derivatives, derivatives that qualify for the normal purchase normal sale exception or instruments
which contain features that qualify them as embedded derivatives. Except for derivatives that
qualify for the normal purchase normal sale exception, all financial instruments are recognized in
the balance sheet at fair value. Changes in fair value are recognized in earnings if they are not
eligible for hedge accounting or Accumulated other comprehensive income (loss) if they qualify for
cash flow hedge accounting.
Held-to-maturity financial instruments consist of non-derivative financial assets with fixed
or determinable payments and a fixed term, which the Company has the ability and intent to hold
until maturity, and, therefore, accounts for them as held-to-maturity securities. Held-to-maturity
securities are recorded at amortized cost, adjusted for the amortization or accretion of premiums
or discounts calculated on the effective interest method. Interest income is recognized when
earned.
The Company has securities classified as available-for-sale, which are recorded at fair value.
The changes in fair values are recorded as unrealized gains (losses) as a component of Accumulated
other comprehensive loss in shareholders deficit.
57
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
The Company reviews its securities routinely for other-than-temporary impairment. The primary
factors used to determine if an impairment charge must be recorded because a decline in value of
the security is other than temporary include (i) whether the fair value of the investment is
significantly below its cost basis, (ii) the financial condition of the issuer of the security,
(iii) the length of time that the cost of the security has exceeded its fair value and (iv) the
Companys intent and ability to retain the investment for a period of time sufficient to allow for
any anticipated recovery in market value. Other-than-temporary impairments are recorded as a
component of Other income (expense).
Intangible Assets and Liabilities
Identifiable intangible assets or liabilities acquired in a business combination must be
recognized and reported separately from goodwill. The Company has determined that its most
significant acquired identifiable intangible assets and liabilities are related to sales and
purchase agreements. Intangible assets result from more favorable market prices than contracted
prices in sales and purchase agreements as measured during a business combination. Intangible
liabilities result from less favorable market prices than contracted prices in sales and purchase
agreements as measured during a business combination. The majority of these intangible assets and
liabilities are amortized on a straight-line basis over the respective period of the sales and
purchase agreements, while the remainder are amortized on a unit-of-production basis.
Amortization of intangible assets recognized in Cost of sales was $1.7 million in 2010, $1.7
million in 2009, and $1.7 million in 2008. Amortization of intangible liabilities recognized in
Revenues was $1.1 million in 2010, $1.4 million in 2009, and $1.1 million in 2008.
The estimated aggregate amortization amounts from intangibles assets and liabilities for each
of the next five years as of December 31, 2010 are as follows:
|
|
|
|
|
|
|
Amortization |
|
|
|
Expense (Revenue) |
|
|
|
(In thousands) |
|
2011 |
|
$ |
657 |
|
2012 |
|
|
657 |
|
2013 |
|
|
657 |
|
2014 |
|
|
10 |
|
2015 |
|
|
(798 |
) |
Workers Compensation Benefits
The Company is self-insured for workers compensation claims incurred prior to 1996. The
liabilities for workers compensation claims are actuarially determined estimates of the ultimate
losses incurred based on the Companys experience. Adjustments to the probable ultimate
liabilities are made annually based on subsequent developments and experience and are included in
operations at the time of the revised estimate.
The Company insures its current employees through third-party insurance providers and state
arrangements.
Black Lung Benefits
The Company is self-insured for federal and state pneumoconiosis (black lung) benefits for
former employees and has established an independent trust to pay these benefits. The Company
accounts for these benefits on the accrual basis. An independent actuary annually calculates the
present value of the accumulated black lung obligation. The underfunded status in 2010 of the
Companys obligation is included as Excess of pneumoconiosis benefit obligation over trust assets
in the accompanying Consolidated Balance Sheets. Actuarial gains and losses are recognized in the
period in which they arise.
58
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
The Company insures its current represented employees through arrangements with its unions and
its current non-represented employees are insured through third-party insurance providers.
Postretirement Health Care Benefits
The Company accrues the cost to provide the benefits over the employees period of active
service for postretirement benefits other than pensions. These costs are determined on an
actuarial basis. The Companys consolidated balance sheet reflects the unfunded status of
postretirement benefit obligations.
Pension and SERP Plans
The Company accrues the cost to provide the benefits over the employees period of active
service for the non-contributory defined benefit pension and SERP plans it sponsors. These costs
are determined on an actuarial basis. The Companys consolidated balance sheet reflects the
unfunded status of the defined benefit pension and SERP plans.
Deferred Revenue
Deferred revenues represent funding received upon the negotiation of long-term contracts. The
deferred revenues for coal will be recognized as deliveries of the reserved coal are made in
accordance with the long-term coal contracts. Deferred power revenues are recognized on a pro rata
basis, based on the payments estimated to be received over the remaining term of the power sales
agreements.
Asset Retirement Obligations
The Companys asset retirement obligation, or ARO, liabilities primarily consist of estimated
costs to reclaim surface land and support facilities at its mines in accordance with federal and
state reclamation laws as established by each mining permit.
The Company estimates its ARO liabilities for final reclamation and mine closure based upon
detailed engineering calculations of the amount and timing of the future costs for a third party to
perform the required work. These estimates are based on projected pit configurations at the end of
mining and are escalated for inflation, and then discounted at a credit-adjusted risk-free rate.
The Company records an ARO asset associated with the initial recorded liability. The ARO asset is
amortized based on the units of production method over the estimated recoverable, proven and
probable reserves at the related mine, and the ARO liability is accreted to the projected
settlement date. Changes in estimates could occur due to revisions of mine plans, changes in
estimated costs, and changes in timing of the performance of reclamation activities.
Income Taxes
Deferred income taxes are provided for temporary differences arising from differences between
the financial statement amount and tax basis of assets and liabilities existing at each balance
sheet date using enacted tax rates anticipated to be in effect when the related taxes are expected
to be paid or recovered. A valuation allowance is established if it is more likely than not that a
deferred tax asset will not be realized. In determining the need for a valuation allowance, the
Company considers projected realization of tax benefits based on expected levels of future taxable
income, available tax planning strategies and its overall deferred tax position.
Accounting guidance prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or expected to be taken in
a tax return. Under this guidance, a company can recognize the benefit of an income tax position
only if it is more likely than not (greater than 50%) that the tax position will be sustained upon
tax examination, based solely on the technical merits of the tax position. Guidance is also
provided on the derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition.
The Company includes interest and penalties related to income tax matters in Income tax
expense.
59
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
The tax effect of pretax income or loss from continuing operations is generally determined by
a computation that does not consider the tax effects of items that are not included in continuing
operations. The exception to that incremental approach is that all items (for example, items
recorded in other comprehensive income, extraordinary items, and discontinued operations) be
considered in determining the amount of tax benefit that results from a loss from continuing
operations and that shall be allocated to continuing operations.
Deferred Financing Costs
The Company capitalizes costs incurred in connection with borrowings or establishment of
credit facilities and issuance of debt securities. These costs are amortized as an adjustment to
interest expense over the life of the borrowing or term of the credit facility using the effective
interest method. These amounts are recorded in Other assets in the accompanying Consolidated
Balance Sheets.
Coal Revenues
The Company recognizes coal sales revenue at the time title passes to the customer in
accordance with the terms of the underlying sales agreements and after any contingent performance
obligations have been satisfied. Coal sales revenue is recognized based on the pricing contained
in the contracts in place at the time that title passes. Retroactive pricing adjustments to those
contracts are recognized as revised agreements are reached with the customers and any performance
obligations included in the revised agreements are satisfied.
Power Revenues
ROVA supplies power under long-term power sales agreements. Under these agreements, ROVA
invoices and collects capacity payments based on kilowatt-hours produced if the units are
dispatched or for the kilowatt-hours of available capacity if the units are not fully dispatched.
A portion of the capacity payments under the agreements is considered to be an operating
lease. The Company is recognizing amounts invoiced under the power sales agreements as revenue on
a pro rata basis, based on the weighted average per kilowatt hour capacity payments estimated to be
received over the remaining term of the power sales agreements. Under this method of recognizing
revenue, $6.0 million of prior deferred revenue was recognized during 2010 while $11.2 million of
amounts invoiced during 2009, were deferred from recognition. The Company began to recognize prior
deferred revenue during 2010 at its smaller ROVA plant, and during 2009 at its larger ROVA plant.
Other Operating Income (Loss)
Other operating income in the accompanying Consolidated Results of Operations reflects income
from sources other than coal or power revenues. Income from the Companys Indian Coal Tax Credit
monetization transaction is recorded as Other operating income.
Exploration and Drilling Costs
Exploration expenditures are charged to Cost of sales as incurred, including costs related to
drilling and study costs incurred to convert or upgrade mineral resources to reserves.
Share-Based Compensation
Share-based compensation expense is generally measured at the grant date and recognized as
expense over the vesting period of the entire award.
Earnings (Loss) per Share
Basic earnings (loss) per share have been computed by dividing the net income (loss)
applicable to common shareholders by the weighted average number of shares of common stock
outstanding during each period. Net income (loss) applicable to common shareholders includes the
adjustment for net income or loss attributable to noncontrolling interest. Diluted earnings (loss)
per share is computed by including the dilutive effect of common
stock that would be issued assuming conversion or exercise of outstanding convertible notes,
stock options, stock appreciation rights, restricted stock and warrants. No such items were
included in the computation of diluted loss per share for the years ended 2010, 2009 or 2008
because the Company incurred a loss from operations in each of these periods and the effect of
inclusion would have been anti-dilutive.
60
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
The table below shows the number of shares that were excluded from the calculation of diluted
loss per share because their inclusion would be anti-dilutive to the calculation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
Convertible notes and securities |
|
|
2,943 |
|
|
|
2,820 |
|
|
|
2,673 |
|
Restricted stock units, stock options, SARs, and warrant shares |
|
|
630 |
|
|
|
779 |
|
|
|
870 |
|
|
|
|
|
|
|
|
|
|
|
Total shares excluded from diluted shares calculation |
|
|
3,573 |
|
|
|
3,599 |
|
|
|
3,543 |
|
|
|
|
|
|
|
|
|
|
|
Accounting Pronouncements Adopted
In January 2010, the FASB issued authoritative guidance, which requires additional disclosures
and clarifies certain existing disclosure requirements regarding fair value measurements. This
guidance is effective for interim and annual reporting periods beginning after December 15, 2009.
The Company adopted this guidance effective January 1, 2010. However, none of the specific
additional disclosures were applicable at December 31, 2010.
On January 1, 2009, the Company adopted accounting guidance that clarifies how to determine
whether certain instruments or features are indexed to an entitys own stock. This guidance was
effective for financial statements issued for fiscal years beginning after December 15, 2008 and
interim periods within those fiscal years. The Company recorded a cumulative effect of change in
accounting principles upon adoption of this guidance. See Note 9 for additional information.
On January 1, 2009, the Company adopted accounting guidance that establishes accounting and
reporting standards for (1) noncontrolling interests in partially owned consolidated subsidiaries
and (2) the loss of control of subsidiaries. This guidance requires noncontrolling interests
(minority interests) to be reported as a separate component of equity. The amount of net income or
loss attributable to the noncontrolling interests will be included in consolidated net income or
loss on the face of the income statement. In addition, this guidance requires that a parent
recognize a gain or loss in net income or loss when a subsidiary is deconsolidated. Such gain or
loss will be measured using the fair value of the noncontrolling equity investment on the
deconsolidation date. This guidance also includes expanded disclosure requirements regarding the
interests of the parent and its noncontrolling interest. The Company recorded $2.6 million and
$1.8 million, respectively, of net loss attributable to noncontrolling interest for the years ended
December 31, 2010 and December 31, 2009, which is reflected in the Companys consolidated financial
statements.
2. INVENTORIES
Inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(In thousands) |
|
Coal |
|
$ |
678 |
|
|
$ |
1,158 |
|
Materials and supplies |
|
|
23,474 |
|
|
|
25,713 |
|
Reserve for obsolete inventory |
|
|
(581 |
) |
|
|
(1,000 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
23,571 |
|
|
$ |
25,871 |
|
|
|
|
|
|
|
|
61
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
3. RESTRICTED INVESTMENTS AND BOND COLLATERAL
The Companys restricted investments and bond collateral consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(In thousands) |
|
Coal Segment: |
|
|
|
|
|
|
|
|
Westmoreland Mining debt reserve account |
|
$ |
7,514 |
|
|
$ |
5,064 |
|
Reclamation bond collateral: |
|
|
|
|
|
|
|
|
Rosebud Mine |
|
|
12,263 |
|
|
|
12,462 |
|
Absaloka Mine |
|
|
10,956 |
|
|
|
9,228 |
|
Jewett Mine |
|
|
3,001 |
|
|
|
1,502 |
|
Beulah Mine |
|
|
1,270 |
|
|
|
1,270 |
|
|
|
|
|
|
|
|
|
|
Power Segment: |
|
|
|
|
|
|
|
|
Letter of credit account |
|
|
5,990 |
|
|
|
6,037 |
|
Debt protection account |
|
|
905 |
|
|
|
2,067 |
|
Repairs and maintenance account |
|
|
1,067 |
|
|
|
|
|
Ash reserve account |
|
|
602 |
|
|
|
600 |
|
|
|
|
|
|
|
|
|
|
Corporate Segment: |
|
|
|
|
|
|
|
|
Workers compensation bonds |
|
|
6,350 |
|
|
|
6,118 |
|
Postretirement medical benefit bonds |
|
|
5,466 |
|
|
|
3,840 |
|
|
|
|
|
|
|
|
Total restricted investments and bond collateral |
|
$ |
55,384 |
|
|
$ |
48,188 |
|
|
|
|
|
|
|
|
For all of its restricted investments and bond collateral accounts, the Company can
select investment options for the funds and receives the investment returns on these investments.
Funds in the restricted investment and bond collateral accounts are not available to meet the
Companys cash needs. These restricted investments include holds held-to-maturity and
available-for-sale securities.
The Companys carrying value and estimated fair value of its restricted investments and bond
collateral at December 31, 2010 are as follows:
|
|
|
|
|
|
|
|
|
|
|
Carrying Value |
|
|
Fair Value |
|
|
|
(In thousands) |
|
Cash and cash equivalents |
|
$ |
39,557 |
|
|
$ |
39,557 |
|
Time deposits |
|
|
10,266 |
|
|
|
10,266 |
|
Held-to-maturity securities |
|
|
2,672 |
|
|
|
3,012 |
|
Available-for-sale securities |
|
|
2,889 |
|
|
|
2,889 |
|
|
|
|
|
|
|
|
|
|
$ |
55,384 |
|
|
$ |
55,724 |
|
|
|
|
|
|
|
|
In 2010, the Company recorded a gain of $0.1 million on the sale of available-for-sale
securities held as restricted investments and bond collateral. In 2009, an impairment of $0.2
million was recorded as a result of other-than-temporary declines in the value of marketable
securities included in restricted investments and bond collateral.
Coal Segment
Pursuant to the terms of the Note Purchase Agreement dated June 26, 2008, WML must maintain a
debt service reserve account. The debt service reserve account is required to contain funds
sufficient to pay the principal, interest, and collateral agents fees scheduled to be paid in the
following six months. The debt service reserve account was fully funded at December 31, 2010.
As of December 31, 2010, the Company had reclamation bond collateral in place for its
Absaloka, Rosebud, Jewett and Beulah Mines. These government-required bonds assure that
coal-mining operations comply with applicable federal and state regulations relating to the
performance and completion of final reclamation activities. The amounts deposited in the bond
collateral account secure the bonds issued by the bonding company.
62
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Power Segment
Pursuant to the terms of its loan agreement with Prudential, ROVA was required to maintain
either three or six months debt service reserves in its debt protection accounts, which was based
on the calculation of its current debt service coverage ratio. Following the Parent Notes offering
in February 2011, this is no longer required.
The loan agreement required ROVA to fund an ash reserve account to $0.6 million. The ash
reserve account was fully funded at December 31, 2010.
The loan agreement also required ROVA to fund a repairs and maintenance account up to a
maximum amount of $2.6 million. The funds for the repairs and maintenance account were required to
be deposited every three months based on a formula contained in the agreement.
Following the Parent Notes offering in February 2011, the debt protection, ash reserve, and
repairs and maintenance accounts are no longer required and will be available for current operating
needs.
Corporate Segment
The Company is required to obtain surety bonds in connection with its self-insured workers
compensation plan and certain health care plans. The Companys surety bond underwriters require
collateral to issue these bonds.
Held-to-Maturity and Available-for-Sale Restricted Investments and Bond Collateral
The amortized cost, gross unrealized holding gains and losses and fair value of
held-to-maturity securities are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(In thousands) |
|
Amortized cost |
|
$ |
2,672 |
|
|
$ |
3,479 |
|
Gross unrealized holding gains |
|
|
340 |
|
|
|
113 |
|
Gross unrealized holding losses |
|
|
|
|
|
|
(2 |
) |
|
|
|
|
|
|
|
Fair value |
|
$ |
3,012 |
|
|
$ |
3,590 |
|
|
|
|
|
|
|
|
Maturities of held-to-maturity securities are as follows at December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
Amortized Cost |
|
|
Fair Value |
|
|
|
(In thousands) |
|
Due in five years or less |
|
$ |
652 |
|
|
$ |
730 |
|
Due after five years to ten years |
|
|
762 |
|
|
|
859 |
|
Due in more than ten years |
|
|
1,258 |
|
|
|
1,423 |
|
|
|
|
|
|
|
|
|
|
$ |
2,672 |
|
|
$ |
3,012 |
|
|
|
|
|
|
|
|
The cost basis, gross unrealized holding gains and losses and fair value of
available-for-sale securities are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(In thousands) |
|
Cost basis |
|
$ |
2,566 |
|
|
$ |
2,625 |
|
Gross unrealized holding gains |
|
|
323 |
|
|
|
281 |
|
Gross unrealized holding losses |
|
|
|
|
|
|
(27 |
) |
|
|
|
|
|
|
|
Fair value |
|
$ |
2,889 |
|
|
$ |
2,879 |
|
|
|
|
|
|
|
|
63
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
4. LINES OF CREDIT AND LONG-TERM DEBT
The amounts outstanding under the Companys lines of credit and long-term debt consisted of
the following as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
Total Debt Outstanding |
|
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(In thousands) |
|
Westmoreland Mining, LLC: |
|
|
|
|
|
|
|
|
Revolving line of credit |
|
$ |
1,500 |
|
|
$ |
|
|
Term debt |
|
|
125,000 |
|
|
|
125,000 |
|
Capital lease obligations |
|
|
18,407 |
|
|
|
22,360 |
|
Other term debt |
|
|
2,556 |
|
|
|
1,463 |
|
Westmoreland Resources, Inc.: |
|
|
|
|
|
|
|
|
Revolving line of credit |
|
|
16,900 |
|
|
|
16,400 |
|
Term debt |
|
|
9,600 |
|
|
|
12,000 |
|
Capital lease obligations |
|
|
7,821 |
|
|
|
9,864 |
|
ROVA: |
|
|
|
|
|
|
|
|
Term debt |
|
|
46,220 |
|
|
|
55,575 |
|
Debt premiums |
|
|
428 |
|
|
|
880 |
|
Corporate: |
|
|
|
|
|
|
|
|
Convertible notes |
|
|
18,495 |
|
|
|
17,258 |
|
Debt discount |
|
|
(4,823 |
) |
|
|
(6,105 |
) |
|
|
|
|
|
|
|
Total debt outstanding |
|
|
242,104 |
|
|
|
254,695 |
|
Less current portion |
|
|
(14,973 |
) |
|
|
(57,489 |
) |
|
|
|
|
|
|
|
Total debt outstanding, less current portion |
|
$ |
227,131 |
|
|
$ |
197,206 |
|
|
|
|
|
|
|
|
The following table presents aggregate contractual debt maturities of all long-term debt
and the lines of credit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subsequent |
|
|
|
As of |
|
|
to Parent |
|
|
|
December 31, |
|
|
Notes |
|
|
|
2010 |
|
|
Offering |
|
|
|
(In thousands) |
|
2011 |
|
$ |
42,298 |
|
|
$ |
14,973 |
|
2012 |
|
|
32,732 |
|
|
|
21,512 |
|
2013 |
|
|
56,855 |
|
|
|
26,315 |
|
2014 |
|
|
34,435 |
|
|
|
22,565 |
|
2015 |
|
|
32,170 |
|
|
|
21,910 |
|
Thereafter |
|
|
48,009 |
|
|
|
198,009 |
|
|
|
|
|
|
|
|
Total |
|
|
246,499 |
|
|
|
305,284 |
|
Less: debt discount |
|
|
(4,395 |
) |
|
|
(7,500 |
) |
|
|
|
|
|
|
|
Total debt |
|
$ |
242,104 |
|
|
$ |
297,784 |
|
|
|
|
|
|
|
|
Westmoreland Mining LLC
WML has $125.0 million of fixed rate term debt outstanding at December 31, 2010. The term
debt bears interest at 8.02% per annum, payable quarterly. The principal payments required for the
term debt are $7.5 million in 2011, $14.0 million in 2012, $18.0 million in 2013, $18.0 million in
2014, $20.0 million in 2015, and $47.5 million thereafter. The term debt is payable in full on
March 31, 2018.
64
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
At December 31, 2010, WML has the 2001 Revolving Credit Agreement, or the Revolver, with a
borrowing limit of $25.0 million and a maturity date of June 26, 2013. WML has two interest rate
options to choose from on the Revolver. The Base Rate option bears interest at a base rate plus 0.50% and is
payable monthly (3.75% per annum at December 31, 2010). The LIBOR Rate option bears interest at
the London Interbank Offering Rate, or LIBOR, rate plus 3.0% (3.30% per annum at December 31,
2010). In addition, a commitment fee of 0.50% of the average unused portion of the available
Revolver is payable quarterly. At December 31, 2010, the Revolver had an outstanding balance of
$1.5 million and also supported a $1.9 million letter of credit. The Company had $21.6 million of
unused borrowings under the Revolver.
The term debt and Revolver are secured by substantially all assets of WML, Westmoreland Savage
Corporation, or WSC, Western Energy Company, or WECO, and Dakota Westmoreland Corporation, or DWC;
the Companys membership interest in WML; and the stock of WSC, WECO and DWC. WECO, DWC, and WSC
have guaranteed WMLs obligations with respect to the term debt and the Revolver. The credit
agreement requires a debt service account and imposes timing and other restrictions on the ability
of WML to distribute funds to the Parent.
WMLs lending arrangements contain, among other conditions, events of default and various
affirmative and negative covenants. As of December 31, 2010, WML was in compliance with all
covenants. The Company expects to meet all WML covenant requirements in 2011.
WML engages in leasing transactions for equipment utilized in its mining operations. At
December 31, 2010 and 2009, the capital leases outstanding had a weighted average interest rate of
7.96% and 7.74%, respectively. WML also had other term debt outstanding at December 31, 2010 and
2009, with weighted average interest rate of 6.14% for both years.
Westmoreland Resources, Inc.
In December 2010, WRIs Business Loan Agreement was amended and the $20.0 million revolving
line of credit was extended through December 18, 2011. The interest rate for the term debt and the
revolver were payable at the prime rate. The term debt and the revolver were both subject to a per
annum 8.0% and 7.0% floor, respectively. As described in Note 1, the outstanding balance of the
term debt and the revolving line of credit were repaid and the revolving line of credit was
terminated in February 2011.
At December 31, 2010, the Company had $3.1 million of unused borrowings under the revolver.
The revolver did not have commitment fees for the unused portion of the available revolving loan.
The two debt instruments were collateralized by a first lien in WRIs inventory, chattel
paper, accounts and notes receivable, and equipment. WCC was the guarantor of the debt under the
Agreement and its guaranty was secured by a pledge of WCCs interest in WRI.
WRIs Business Loan Agreement required it to comply with numerous covenants and minimum
financial ratio requirements primarily related to debt coverage, tangible net worth, capital
expenditures, and its operations. Primarily as a result of unfavorable market conditions driving
decreases in tonnages sold, WRI was not in compliance with a net worth requirement contained in its
Business Loan Agreement at April 30, 2010. As a result of this non-compliance, the interest rates
on WRIs term debt and revolving line of credit were increased 1% (to 8% and 7%, respectively at
December 31, 2010). As of December 31, 2010, WRI was in compliance with all covenants, with the
exception of the net worth requirement.
WRI leases equipment utilized in its operations at the Absaloka Mine. The weighted average
interest rate for these capital leases outstanding at December 31, 2010 and 2009 was 6.65% and
7.60%, respectively.
ROVA
At December 31, 2010, ROVAs outstanding fixed rate term debt had interest rates varying from
6.0% to 11.42%. The weighted average interest rate on the fixed rate term debt at December 31, 2010
and 2009 was 9.93% and 10.0%, respectively. As described in Note 1, the outstanding balance of the
fixed rate term debt was repaid in February 2011.
ROVA had a $6.0 million revolving loan with interest payable quarterly at the three-month
LIBOR rate plus 1.375% (1.68% per annum at December 31, 2010). In addition, a commitment fee of
1.375% of the unused portion of the available revolving loan was payable quarterly. At December
31, 2010, the Company had $6.0 million of unused borrowings under the revolver. ROVAs revolving
line of credit was terminated as part of the Parent Notes offering described in Note 1.
65
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
The term debt as well as the revolving loan were secured by a pledge of the quarterly cash
distributions from ROVA. ROVA was required to comply with certain loan covenants related to
interest and fixed charge coverage. As of December 31, 2010, ROVA was in compliance with such
covenants.
Convertible Debt
On March 4, 2008, the Company completed the sale of $15.0 million in senior secured
convertible notes to an existing shareholder pursuant to a Note Purchase Agreement. The notes had
an interest rate of 10.0% per annum. Interest on the notes was payable monthly in cash or in kind
by increasing the principal amount of each note at the Companys option. The number of shares of
common stock into which the notes could be converted increased in the circumstances specified in
the Note Purchase Agreement, including the Companys payment of interest on the notes in kind and
the issuance of additional securities at a price less than the conversion price of the notes then
in effect. The Company paid interest in kind through the issuance of $1.2 million of additional
notes during 2010. This resulted in an additional 123,644 shares of common stock being issuable on
conversion of the convertible notes at a conversion price of $10.00 per share, bringing the total
to 1,849,453 shares at December 31, 2010. As described in Note 1, the convertible notes were
retired in February 2011.
The convertible notes were secured by a second lien on the assets of WRI.
The note purchase agreement contained affirmative and negative covenants. WRIs
non-compliance with the net worth requirement in its Business Loan Agreement triggered a cross
default in the Companys convertible notes. On August 2, 2010, the Company obtained a waiver from
its lenders regarding this cross default. In consideration of this waiver, the interest rate on
the convertible notes increased 1% on July 1, 2010 to 10%. As of December 31, 2010, the Company
was in compliance with all covenants, with the exception of the cross default that had been waived.
5. POSTRETIREMENT MEDICAL BENEFITS
The Company provides postretirement medical benefits to retired employees and their
dependents, mandated by the Coal Industry Retiree Health Act of 1992 and pursuant to collective
bargaining agreements. The Company also provides these benefits to qualified full-time employees
pursuant to collective bargaining agreements. These benefits are provided through self-insured
programs.
In 2009, plan amendments, which modernized how the Company provides prescription drug benefits
to retirees, favorable claims experience, favorable interest rates, and reductions in
administrative fees resulted in a $95.3 million reduction in the Companys postretirement medical
obligation with a corresponding decrease in Accumulated other comprehensive loss.
In March 2010, the Patient Protection and Affordable Care Act, or PPACA was enacted,
potentially impacting the Companys costs to provide healthcare benefits to its retired employees.
The PPACA has both short-term and long-term implications on healthcare benefit plan standards.
Implementation of this legislation is planned to occur in phases, with plan standard changes taking
effect beginning in 2010, but to a greater extent with the 2011 benefit plan year and extending
through 2018. Beginning in 2018, the PPACA will impose a 40% excise tax on employers to the extent
that the value of their healthcare plan coverage exceeds certain dollar thresholds. As a result,
the Company has increased its postretirement medical benefit obligation at December 31, 2010 by
$6.9 million with a corresponding increase in Accumulated other comprehensive loss. The Company
will continue to evaluate the impact of the PPACA in future periods as additional information,
interpretations and guidance becomes available.
In addition to the $6.9 million increase in the Companys postretirement medical obligation at
December 31, 2010 due to the PPACA, an additional increase of $16.3 million occurred as a result of
changes in discount rates and claims experience. As a result, the Company had a corresponding increase in Accumulated
other comprehensive loss.
66
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
The following table sets forth the actuarial present value of postretirement medical benefit
obligations and amounts recognized in the Companys financial statements:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(In thousands) |
|
Change in benefit obligations: |
|
|
|
|
|
|
|
|
Net benefit obligation at beginning of year |
|
$ |
190,223 |
|
|
$ |
284,851 |
|
Service cost |
|
|
539 |
|
|
|
735 |
|
Interest cost |
|
|
10,498 |
|
|
|
16,233 |
|
Plan participant contributions |
|
|
153 |
|
|
|
140 |
|
Actuarial (gain) loss |
|
|
23,195 |
|
|
|
(60,155 |
) |
Gross benefits paid |
|
|
(14,797 |
) |
|
|
(17,816 |
) |
Federal subsidy on benefits paid |
|
|
1,049 |
|
|
|
1,315 |
|
Plan amendments |
|
|
|
|
|
|
(35,080 |
) |
|
|
|
|
|
|
|
Net benefit obligation at end of year |
|
|
210,860 |
|
|
|
190,223 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets: |
|
|
|
|
|
|
|
|
Employer contributions |
|
|
14,644 |
|
|
|
17,676 |
|
Plan participant contributions |
|
|
153 |
|
|
|
140 |
|
Gross benefits paid |
|
|
(14,797 |
) |
|
|
(17,816 |
) |
|
|
|
|
|
|
|
Fair value of plan assets at end of year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unfunded status at end of year |
|
$ |
(210,860 |
) |
|
$ |
(190,223 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the balance sheet consist of: |
|
|
|
|
|
|
|
|
Current liabilities |
|
$ |
(13,581 |
) |
|
$ |
(14,501 |
) |
Noncurrent liabilities |
|
|
(197,279 |
) |
|
|
(175,722 |
) |
Accumulated other comprehensive loss (gain) |
|
|
8,336 |
|
|
|
(15,134 |
) |
|
|
|
|
|
|
|
Net amount recognized |
|
$ |
(202,524 |
) |
|
$ |
(205,357 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in accumulated other
comprehensive loss consists of: |
|
|
|
|
|
|
|
|
Net actuarial loss (gain) |
|
$ |
15,777 |
|
|
$ |
(7,151 |
) |
Prior service credit |
|
|
(7,627 |
) |
|
|
(8,262 |
) |
Transition obligation |
|
|
186 |
|
|
|
279 |
|
|
|
|
|
|
|
|
|
|
$ |
8,336 |
|
|
$ |
(15,134 |
) |
|
|
|
|
|
|
|
The Company has elected to amortize its unrecognized, unfunded accumulated postretirement
medical benefit obligation over a 20-year period. Transition obligations, prior service costs and
credits, and actuarial gains and losses are amortized over the average life expectancy of the
plans participants. The transition obligation, actuarial loss and prior service credit that will
be amortized from accumulated other comprehensive loss into net periodic pension cost in 2011 are
less than $0.1 million, $0.3 million, and $0.6 million, respectively.
67
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
The components of net periodic postretirement medical benefit cost are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
Components of net periodic benefit
cost: |
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
539 |
|
|
$ |
735 |
|
|
$ |
677 |
|
Interest cost |
|
|
10,498 |
|
|
|
16,233 |
|
|
|
17,107 |
|
Amortization of: |
|
|
|
|
|
|
|
|
|
|
|
|
Transition obligation |
|
|
93 |
|
|
|
3,381 |
|
|
|
3,613 |
|
Prior service cost (credit) |
|
|
(636 |
) |
|
|
924 |
|
|
|
1,325 |
|
Actuarial loss |
|
|
268 |
|
|
|
2,774 |
|
|
|
3,381 |
|
|
|
|
|
|
|
|
|
|
|
Total net periodic benefit cost |
|
$ |
10,762 |
|
|
$ |
24,047 |
|
|
$ |
26,103 |
|
|
|
|
|
|
|
|
|
|
|
The following table shows the net periodic postretirement medical benefit costs that
relate to current and former mining operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
Former mining operations |
|
$ |
9,225 |
|
|
$ |
22,186 |
|
|
$ |
24,553 |
|
Current operations |
|
|
1,537 |
|
|
|
1,861 |
|
|
|
1,550 |
|
|
|
|
|
|
|
|
|
|
|
Total net periodic benefit cost |
|
$ |
10,762 |
|
|
$ |
24,047 |
|
|
$ |
26,103 |
|
|
|
|
|
|
|
|
|
|
|
The costs for the former mining operations are included in Heritage health benefit
expenses and the costs for current operations are included as operating expenses.
Assumptions
The weighted-average assumptions used to determine the benefit obligations as of the end of
each year were as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
Discount rate |
|
|
5.15 |
% |
|
|
5.71 |
% |
Measurement date |
|
|
December 31, 2010 |
|
|
|
December 31, 2009 |
|
The discount rate is adjusted annually based on an Aa corporate bond index adjusted for
the difference in the duration of the bond index and the duration of the benefit obligations. This
rate is calculated using a yield curve, which is developed using the average yield for bonds in the
tenth to ninetieth percentiles, which excludes bonds with outlier yields.
The weighted-average assumptions used to determine net periodic benefit cost were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Discount rate |
|
|
5.71 |
% |
|
|
5.45% - 6.05 |
% |
|
|
6.10 |
% |
Measurement date |
|
|
December 31, 2009 |
|
|
|
December 31, 2008 |
|
|
|
December 31, 2007 |
|
68
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
The following presents information about the assumed health care trend rate:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
Health care cost trend rate assumed for next year |
|
|
7.50 |
% |
|
|
8.00 |
% |
Rate to which the cost trend is assumed to decline
(ultimate trend rate) |
|
|
5.00 |
% |
|
|
5.00 |
% |
Year that the trend rate reaches the ultimate trend rate |
|
|
2016 |
|
|
|
2016 |
|
The effect of a one percent change on the health care cost trend rate used to calculate
periodic postretirement medical benefit costs and the related benefit obligation are summarized in
the table below:
|
|
|
|
|
|
|
|
|
|
|
Postretirement Medical Benefits |
|
|
|
1% Increase |
|
|
1% Decrease |
|
|
|
(In thousands) |
|
Effect on service and interest cost components |
|
$ |
1,282 |
|
|
$ |
(1,079 |
) |
Effect on postretirement medical benefit
obligation |
|
$ |
22,565 |
|
|
$ |
(19,116 |
) |
Cash Flows
The following benefit payments and Medicare D subsidy (which the Company receives as a benefit
partially offsetting its prescription drug costs for retirees and their dependents) are expected by
the Company:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement |
|
|
Medicare D |
|
|
Net Postretirement |
|
|
|
Medical Benefits |
|
|
Subsidy |
|
|
Medical Benefits |
|
|
|
(In thousands) |
|
2011 |
|
$ |
14,734 |
|
|
$ |
(1,153 |
) |
|
$ |
13,581 |
|
2012 |
|
|
15,088 |
|
|
|
(1,215 |
) |
|
|
13,873 |
|
2013 |
|
|
15,428 |
|
|
|
(1,270 |
) |
|
|
14,158 |
|
2014 |
|
|
15,617 |
|
|
|
(1,318 |
) |
|
|
14,299 |
|
2015 |
|
|
15,903 |
|
|
|
(1,350 |
) |
|
|
14,553 |
|
Years 2016 - 2020 |
|
|
78,962 |
|
|
|
(7,201 |
) |
|
|
71,761 |
|
Combined Benefit Fund
Additionally, the Company makes payments to the UMWA Combined Benefit Fund, or CBF, which is a
multiemployer health plan neither controlled by nor administered by the Company. The CBF is
designed to pay health care benefits to UMWA workers (and dependents) who retired prior to 1976.
The Company is required by the Coal Act to make monthly premium payments into the CBF. These
payments are based on the number of the Companys UMWA employees who retired prior to 1976, and the
Companys pro-rata assigned share of UMWA retirees whose companies are no longer in business. The
Company expenses payments to the CBF when they are due. Payments in 2010, 2009 and 2008 were $3.0
million, $3.1 million and $3.5 million, respectively.
Workers Compensation Benefits
The Company was self-insured for workers compensation benefits prior to January 1, 1996.
Since 1996, the Company has purchased third-party insurance for workers compensation claims.
69
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
The following table shows the changes in the Companys workers compensation obligation:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(In thousands) |
|
Workers compensation, beginning of year
(including current portion) |
|
$ |
11,219 |
|
|
$ |
12,838 |
|
Accretion |
|
|
429 |
|
|
|
300 |
|
Claims paid |
|
|
(633 |
) |
|
|
(806 |
) |
Actuarial changes |
|
|
(637 |
) |
|
|
(1,113 |
) |
|
|
|
|
|
|
|
Workers compensation, end of year |
|
|
10,378 |
|
|
|
11,219 |
|
Less current portion |
|
|
(954 |
) |
|
|
(1,031 |
) |
|
|
|
|
|
|
|
Workers compensation, less current portion |
|
$ |
9,424 |
|
|
$ |
10,188 |
|
|
|
|
|
|
|
|
The discount rates used in determining the workers compensation benefit accruals are
adjusted annually based on ten-year Treasury bond rates. At December 31, 2010 and 2009, the rates
were 3.60% and 4.10%, respectively.
Pneumoconiosis (Black Lung) Benefits
The Company is self-insured for federal and state pneumoconiosis benefits for former employees
and has established an independent trust to pay these benefits.
The PPACA amended previous legislation related to black lung disease, providing automatic
extension of awarded lifetime benefits to surviving spouses and providing changes to the legal
criteria used to assess and award claims. Since the legislation passed in March 2010, the Company
has experienced a significant increase in claims filed compared to the corresponding period in
prior years. However, the Company has not been able to determine what, if any, additional impact
may result from these claims due to lack of claims experience under the new legislation and court
rulings interpreting the new provisions. The Company will continue to evaluate the impact of the
PPACA in future periods as additional information, interpretations, guidance and claims experience
becomes available.
The following table sets forth the funded status of the Companys black lung obligation:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(In thousands) |
|
Actuarial present value of benefit obligation: |
|
|
|
|
|
|
|
|
Expected claims from terminated employees |
|
$ |
949 |
|
|
$ |
937 |
|
Amounts owed to existing claimants |
|
|
13,108 |
|
|
|
13,723 |
|
|
|
|
|
|
|
|
Total present value of benefit obligation |
|
|
14,057 |
|
|
|
14,660 |
|
Plan assets at fair value, primarily government-backed securities |
|
|
11,811 |
|
|
|
13,874 |
|
|
|
|
|
|
|
|
Excess of the pneumoconiosis benefit obligation over trust assets |
|
$ |
(2,246 |
) |
|
$ |
(786 |
) |
|
|
|
|
|
|
|
The underfunded status of the Companys 2010 and 2009 obligation is included as Excess of
pneumoconiosis benefit obligation over trust assets in the accompanying Consolidated Balance
Sheets.
The discount rates used in determining the actuarial present value of the pneumoconiosis
benefit obligation are based on corporate bond yields and are adjusted annually. At December 31,
2010 and 2009, the rates used were 4.60% and 5.20%, respectively.
70
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Plan Assets
The fair value of the Companys Black Lung trust assets by asset category is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2010 |
|
|
|
|
|
|
|
Quoted Prices |
|
|
Significant |
|
|
|
|
|
|
|
in Active |
|
|
Other |
|
|
|
|
|
|
|
Markets for |
|
|
Observable |
|
|
|
|
|
|
|
Identical Assets |
|
|
Inputs |
|
|
|
Fair Value |
|
|
Level 1 |
|
|
Level 2 |
|
|
|
(In thousands) |
|
U.S. treasury securities |
|
$ |
10,416 |
|
|
$ |
|
|
|
$ |
10,416 |
|
Mortgage-backed securities |
|
|
682 |
|
|
|
|
|
|
|
682 |
|
Cash and cash equivalents |
|
|
713 |
|
|
|
713 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
11,811 |
|
|
$ |
713 |
|
|
$ |
11,098 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2009 |
|
|
|
|
|
|
|
Quoted Prices |
|
|
Significant |
|
|
|
|
|
|
|
in Active |
|
|
Other |
|
|
|
|
|
|
|
Markets for |
|
|
Observable |
|
|
|
|
|
|
|
Identical Assets |
|
|
Inputs |
|
|
|
Fair Value |
|
|
Level 1 |
|
|
Level 2 |
|
|
|
(In thousands) |
|
U.S. treasury securities |
|
$ |
12,860 |
|
|
$ |
|
|
|
$ |
12,860 |
|
Mortgage-backed securities |
|
|
839 |
|
|
|
|
|
|
|
839 |
|
Cash and cash equivalents |
|
|
175 |
|
|
|
175 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
13,874 |
|
|
$ |
175 |
|
|
$ |
13,699 |
|
|
|
|
|
|
|
|
|
|
|
The Black Lung Level 1 trust assets include cash and cash equivalents.
The Black Lung Level 2 trust assets include U.S. treasury bonds and notes where evaluators
gather information from market sources and integrate relative credit information, observed market
movements, and sector news into the evaluated pricing applications and models to value these
assets. Level 2 trust assets also include mortgage-backed securities which are valued via model
using various inputs such as daily cash flow, snapshots of US Treasury market, floating rate
indices as a benchmark yield, spread over index, periodic and life caps, next coupon adjustment
date, and convertibility of the bond.
6. PENSION AND OTHER SAVING PLANS
Defined Benefit Pension Plans
The Company provides defined benefit pension plans to qualified full-time employees pursuant
to collective bargaining agreements. Benefits are generally based on years of service and the
employees average annual compensation for the highest five continuous years of employment as
specified in the plan agreement. The Companys funding policy is to contribute annually the
minimum amount prescribed, as specified by applicable regulations or loan covenants.
Effective July 1, 2009, the Company froze its pension plan for non-represented employees and,
as a result, future benefits will no longer accrue under this plan. The Company recorded a $10.7
million decrease in its pension liability with a corresponding decrease in Accumulated other
comprehensive loss.
71
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Supplemental Executive Retirement Plan
The Company maintains a Supplemental Executive Retirement Plan or SERP for former executives
as a result of employment or severance agreements. The SERP is an unfunded non-qualified deferred
compensation plan, which provides benefits to certain employees beyond the maximum limits imposed
by the Employee Retirement Income Security Act and the Internal Revenue Code. The Company does not
expect to add new participants to its SERP plan.
The following table provides a reconciliation of the changes in the benefit obligations of the
plans and the fair value of assets of the qualified plans and the amounts recognized in the
Companys financial statements for both the defined benefit pension and SERP plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined Benefit Pension |
|
|
SERP |
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
(In thousands) |
|
Change in benefit obligation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net benefit obligation at beginning of year |
|
$ |
76,084 |
|
|
$ |
76,672 |
|
|
$ |
3,200 |
|
|
$ |
3,279 |
|
Service cost |
|
|
610 |
|
|
|
1,577 |
|
|
|
|
|
|
|
|
|
Interest cost |
|
|
4,490 |
|
|
|
4,650 |
|
|
|
183 |
|
|
|
191 |
|
Actuarial loss |
|
|
7,025 |
|
|
|
3,171 |
|
|
|
175 |
|
|
|
36 |
|
Benefits paid |
|
|
(2,762 |
) |
|
|
(1,610 |
) |
|
|
(306 |
) |
|
|
(306 |
) |
Plan amendments |
|
|
|
|
|
|
204 |
|
|
|
|
|
|
|
|
|
Curtailments |
|
|
|
|
|
|
(8,580 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net benefit obligation at end of year |
|
|
85,447 |
|
|
|
76,084 |
|
|
|
3,252 |
|
|
|
3,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at the beginning
of year |
|
|
52,152 |
|
|
|
40,783 |
|
|
|
|
|
|
|
|
|
Actual return on plan assets |
|
|
7,732 |
|
|
|
7,196 |
|
|
|
|
|
|
|
|
|
Employer contributions |
|
|
10,811 |
|
|
|
5,782 |
|
|
|
306 |
|
|
|
306 |
|
Benefits paid |
|
|
(2,762 |
) |
|
|
(1,610 |
) |
|
|
(306 |
) |
|
|
(306 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year |
|
|
67,933 |
|
|
|
52,151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status at end of year |
|
$ |
(17,514 |
) |
|
$ |
(23,933 |
) |
|
$ |
(3,252 |
) |
|
$ |
(3,200 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the accompanying
balance sheet consist of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liability |
|
$ |
|
|
|
$ |
|
|
|
$ |
(304 |
) |
|
$ |
(306 |
) |
Noncurrent liability |
|
|
(17,514 |
) |
|
|
(23,933 |
) |
|
|
(2,948 |
) |
|
|
(2,894 |
) |
Accumulated other comprehensive loss |
|
|
22,946 |
|
|
|
20,542 |
|
|
|
770 |
|
|
|
625 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized at end of year |
|
$ |
5,432 |
|
|
$ |
(3,391 |
) |
|
$ |
(2,482 |
) |
|
$ |
(2,575 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in accumulated other
comprehensive loss consist of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss |
|
$ |
22,946 |
|
|
$ |
20,542 |
|
|
$ |
765 |
|
|
$ |
610 |
|
Prior service costs |
|
|
|
|
|
|
|
|
|
|
5 |
|
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
22,946 |
|
|
$ |
20,542 |
|
|
$ |
770 |
|
|
$ |
625 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accumulated benefit obligation for all plans was $88.7 million and $79.3 million at
December 31, 2010 and 2009, respectively. There is no difference between the accumulated benefit
obligation and the benefit obligation in 2010 or 2009 due to the pension plan freeze mentioned
above.
72
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Prior service costs and actuarial gains and losses are amortized over the expected future
period of service of the plans participants using the corridor method. The net actuarial loss and
prior service costs that will be amortized from accumulated other comprehensive loss into net
periodic benefit cost in 2011 is $1.5 million and less than $0.1 million, respectively.
The components of net periodic benefit cost are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined Benefit Pension |
|
|
SERP |
|
|
|
Years Ended December 31, |
|
|
Years Ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of net periodic
benefit cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
610 |
|
|
$ |
1,577 |
|
|
$ |
2,597 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Interest cost |
|
|
4,490 |
|
|
|
4,650 |
|
|
|
4,390 |
|
|
|
183 |
|
|
|
191 |
|
|
|
198 |
|
Expected return on plan assets |
|
|
(4,393 |
) |
|
|
(3,359 |
) |
|
|
(4,416 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Curtailment loss |
|
|
|
|
|
|
204 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10 |
|
|
|
10 |
|
|
|
10 |
|
Actuarial loss |
|
|
1,282 |
|
|
|
1,817 |
|
|
|
340 |
|
|
|
20 |
|
|
|
18 |
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net periodic pension cost |
|
$ |
1,989 |
|
|
$ |
4,889 |
|
|
$ |
2,911 |
|
|
$ |
213 |
|
|
$ |
219 |
|
|
$ |
219 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
These costs are included in the accompanying statement of operations in Cost of sales and
Selling and administrative expenses.
Assumptions
The weighted-average assumptions used to determine the benefit obligations as of the end of
each year were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined Benefit Pension |
|
|
SERP |
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Discount rate |
|
5.15% - 5.40% |
|
|
5.96% |
|
|
5.40% |
|
|
6.00% |
|
Rate of compensation increase |
|
N/A |
|
|
N/A |
|
|
N/A |
|
|
N/A |
|
Measurement date |
|
December 31, 2010 |
|
|
December 31, 2009 |
|
|
December 31, 2010 |
|
|
December 31, 2009 |
|
The discount rate is adjusted annually based on an Aa corporate bond index adjusted for
the difference in the duration of the bond index and the duration of the benefit obligations. This
rate is calculated using a yield curve, which is developed using the average yield for bonds in the
tenth to ninetieth percentiles, which excludes bonds with outlier yields.
The following table provides the assumptions used to determine net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined Benefit Pension |
|
|
SERP |
|
|
|
Years Ended December 31, |
|
|
Years Ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Discount rate |
|
5.75%-6.00% |
|
|
6.10% |
|
|
6.20%-6.30% |
|
|
6.00% |
|
|
6.10% |
|
|
6.30% |
|
Expected return on
plan assets |
|
7.80% |
|
|
7.96% |
|
|
8.50% |
|
|
N/A |
|
|
N/A |
|
|
N/A |
|
Rate of
compensation
increase |
|
N/A |
|
|
4.00%-7.50% |
|
|
4.00%-7.50% |
|
|
N/A |
|
|
4.00%-7.50% |
|
|
4.00%-7.50% |
|
Measurement date |
|
December 31, 2009 |
|
|
December 31, 2008 |
|
|
December 31, 2007 |
|
|
December 31, 2009 |
|
|
December 31, 2008 |
|
|
December 31, 2007 |
|
73
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Plan Assets
The Companys investment goals are to maximize returns subject to specific risk management
policies. The Company sets the expected return on plan assets based on historical trends and
forecasts provided by its third-party fund managers. Its risk management policies permit
investments in mutual funds, and prohibit direct investments in debt and equity securities and
derivative financial instruments. The Company invested in its common stock in 2010 in order to
meet plan funding requirements. The Company addresses diversification by the use of mutual fund
investments whose underlying investments are in fixed income and equity securities, both domestic
and international. These mutual funds are readily marketable and can be sold to fund benefit
payment obligations as they become payable.
The weighted-average target asset allocation of the Companys pension trusts were as follows
at December 31, 2010:
|
|
|
|
|
|
|
Target
Allocation |
|
Asset category |
|
|
|
|
Cash and equivalents |
|
|
0% - 10 |
% |
Equity securities funds |
|
|
40% - 70 |
% |
Debt securities funds |
|
|
30% - 60 |
% |
Other |
|
|
0% - 10 |
% |
Total |
|
|
|
|
The fair value of the Companys pension plan assets by asset category is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2010 |
|
|
|
|
|
|
|
Quoted |
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices in |
|
|
|
|
|
|
|
|
|
|
|
|
|
Active |
|
|
Significant |
|
|
|
|
|
|
|
|
|
|
Markets for |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
|
Identical |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
|
|
|
Assets |
|
|
Inputs |
|
|
Inputs |
|
|
|
Fair Value |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities funds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. |
|
$ |
29,233 |
|
|
$ |
29,233 |
|
|
$ |
|
|
|
$ |
|
|
International |
|
|
6,659 |
|
|
|
6,659 |
|
|
|
|
|
|
|
|
|
Debt securities funds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. bonds |
|
|
22,736 |
|
|
|
|
|
|
|
22,736 |
|
|
|
|
|
Short-term securities |
|
|
1,313 |
|
|
|
1,313 |
|
|
|
|
|
|
|
|
|
Limited partnerships and
limited liability companies |
|
|
1,359 |
|
|
|
|
|
|
|
|
|
|
|
1,359 |
|
Westmoreland Coal common stock |
|
|
6,045 |
|
|
|
6,045 |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
588 |
|
|
|
588 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
67,933 |
|
|
$ |
43,838 |
|
|
$ |
22,736 |
|
|
$ |
1,359 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2009 |
|
|
|
|
|
|
|
Quoted |
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices in |
|
|
|
|
|
|
|
|
|
|
|
|
|
Active |
|
|
Significant |
|
|
|
|
|
|
|
|
|
|
Markets for |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
|
Identical |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
|
|
|
Assets |
|
|
Inputs |
|
|
Inputs |
|
|
|
Fair Value |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
|
(In thousands) |
|
Equity securities funds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. |
|
$ |
24,850 |
|
|
$ |
24,850 |
|
|
$ |
|
|
|
$ |
|
|
International |
|
|
2,467 |
|
|
|
2,467 |
|
|
|
|
|
|
|
|
|
Debt securities funds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. bonds |
|
|
15,065 |
|
|
|
|
|
|
|
15,065 |
|
|
|
|
|
Short-term securities |
|
|
967 |
|
|
|
967 |
|
|
|
|
|
|
|
|
|
Limited partnerships and
limited liability companies |
|
|
1,697 |
|
|
|
|
|
|
|
|
|
|
|
1,697 |
|
Westmoreland Coal common stock |
|
|
3,240 |
|
|
|
3,240 |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
3,865 |
|
|
|
3,865 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
52,151 |
|
|
$ |
35,389 |
|
|
$ |
15,065 |
|
|
$ |
1,697 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys Level 1 assets include domestic and foreign equity securities funds and its
common stock, which is typically valued using quoted market prices of a national exchange. Cash and
cash equivalents and short-term investments are predominantly held in money market accounts.
The Companys Level 2 assets include U.S. bond funds, which contain primarily domestic
fixed-income securities that are valued using inputs such as benchmark yields, reported trades,
broker/dealer quotes and issuer spreads.
The Companys Level 3 assets include interest in limited partnerships and limited liability
companies that invest in privately held companies or privately held real estate assets. Due to the
private nature of the partnership investments, pricing inputs are not readily observable. Assets
valuations are developed by the general partners that manage the partnerships. These valuations
are based on property appraisals, application of public market multiples to private company cash
flows, utilization of market transactions that provide valuation information for comparable
companies and other methods.
A summary of changes in the fair value of the Plans Level 3 assets is shown below:
|
|
|
|
|
|
|
|
|
|
|
Limited partnerships and limited |
|
|
|
liability companies |
|
|
|
Year Ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(In thousands) |
|
Beginning balance |
|
$ |
1,697 |
|
|
$ |
5,866 |
|
Realized loss |
|
|
|
|
|
|
(283 |
) |
Unrealized (loss) gain |
|
|
197 |
|
|
|
(234 |
) |
Settlements |
|
|
(535 |
) |
|
|
(3,652 |
) |
|
|
|
|
|
|
|
Ending balance |
|
$ |
1,359 |
|
|
$ |
1,697 |
|
|
|
|
|
|
|
|
75
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Contributions
The Company is required by loan covenants to ensure that by 8.5 months after the end of the
plan year, the value of its pension assets are at least 90% of each of the plans year end
actuarially determined pension liability.
The Company contributed $5.8 million in cash and $5.0 million in company stock to its
retirement plans during 2010, in order to achieve the required 90% funding status. In 2011, the
Company expects to make approximately $10.2 million of pension plan contributions in cash. The
increase in expected contributions primarily resulted from the recent decline in the value of the
Companys pension investments.
Cash Flows
The following benefit payments are expected to be paid from its pension plan assets:
|
|
|
|
|
|
|
Pension Benefits |
|
|
|
(In thousands) |
|
2011 |
|
$ |
2,674 |
|
2012 |
|
|
3,049 |
|
2013 |
|
|
3,476 |
|
2014 |
|
|
3,899 |
|
2015 |
|
|
4,277 |
|
Years 2016 - 2020 |
|
|
27,412 |
|
The benefits expected to be paid are based on the same assumptions used to measure the
Companys pension benefit obligation at December 31, 2010 and include estimated future employee
service.
Multi-Employer Pension
The Company contributes to a multiemployer defined benefit pension plan pursuant to collective
bargaining agreements. The contributions are based on hours worked and totaled $4.5 million, $4.3
million and $4.6 million for the years ended December 31, 2010, 2009 and 2008, respectively.
Other Plans
The Company sponsors 401(k) saving plans, which were established to assist eligible employees
provide for their future retirement needs. The Companys expense, representing its contributions
of Company stock to the plans, was $2.7 million, $2.4 million and $1.5 million for the years ended
December 31, 2010, 2009 and 2008, respectively.
7. |
|
HERITAGE HEALTH BENEFIT EXPENSES |
The caption Heritage health benefit expenses used in the Consolidated Statements of Operations
refers to costs of benefits the Company provides to its former mining operation employees. The
components of these expenses are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
Health care benefits |
|
$ |
9,927 |
|
|
$ |
22,490 |
|
|
$ |
25,588 |
|
Combined benefit fund payments |
|
|
2,953 |
|
|
|
3,132 |
|
|
|
3,470 |
|
Workers compensation benefits
(credit) |
|
|
81 |
|
|
|
(485 |
) |
|
|
4,417 |
|
Black lung benefits (credit) |
|
|
1,460 |
|
|
|
2,937 |
|
|
|
(23 |
) |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
14,421 |
|
|
$ |
28,074 |
|
|
$ |
33,452 |
|
|
|
|
|
|
|
|
|
|
|
The decrease in heritage health benefit expenses was primarily due to an agreement the
Company entered into to modernize how it provides prescription drug benefits to retirees.
76
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
8. |
|
ASSET RETIREMENT OBLIGATIONS, CONTRACTUAL THIRD-PARTY RECLAMATION RECEIVABLE, AND
RECLAMATION DEPOSITS |
The asset retirement obligation, contractual third-party reclamation receivable, and
reclamation deposits for each of the Companys mines and ROVA at December 31, 2010 are summarized
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual |
|
|
|
|
|
|
Asset |
|
|
Third-Party |
|
|
|
|
|
|
Retirement |
|
|
Reclamation |
|
|
Reclamation |
|
|
|
Obligation |
|
|
Receivable |
|
|
Deposits |
|
|
|
(In thousands) |
|
Rosebud |
|
$ |
106,990 |
|
|
$ |
14,622 |
|
|
$ |
72,274 |
|
Jewett |
|
|
80,335 |
|
|
|
80,335 |
|
|
|
|
|
Absaloka |
|
|
32,338 |
|
|
|
525 |
|
|
|
|
|
Beulah |
|
|
18,588 |
|
|
|
|
|
|
|
|
|
Savage |
|
|
2,676 |
|
|
|
|
|
|
|
|
|
ROVA |
|
|
716 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
241,643 |
|
|
$ |
95,482 |
|
|
$ |
72,274 |
|
|
|
|
|
|
|
|
|
|
|
Asset Retirement Obligations
Changes in the Companys asset retirement obligations were as follows:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(In thousands) |
|
Asset retirement obligations, beginning of year
(including current portion) |
|
$ |
244,615 |
|
|
$ |
222,708 |
|
Accretion |
|
|
19,773 |
|
|
|
17,436 |
|
Liabilities settled |
|
|
(15,351 |
) |
|
|
(9,434 |
) |
Changes due to amount and timing of reclamation |
|
|
(7,394 |
) |
|
|
13,905 |
|
|
|
|
|
|
|
|
Asset retirement obligations, end of year |
|
|
241,643 |
|
|
|
244,615 |
|
Less current portion |
|
|
(14,514 |
) |
|
|
(15,513 |
) |
|
|
|
|
|
|
|
Asset retirement obligations, less current portion |
|
$ |
227,129 |
|
|
$ |
229,102 |
|
|
|
|
|
|
|
|
As permittee, the Company or its subsidiaries are responsible for the total amount of
final reclamation costs for its mines and ROVA. The financial responsibility for a portion of
final reclamation of the mines when they are closed has been transferred by contract to certain
customers, while other customers have provided guarantees or funded escrow accounts to cover final
reclamation costs. Costs of reclamation of mining pits prior to mine closure are recovered in the
price of coal shipped.
As of December 31, 2010, the Company had $230.4 million in surety bonds outstanding to secure
reclamation obligations.
Contractual Third-Party Reclamation Receivables
The Company has recognized as an asset $95.5 million as contractual third-party reclamation
receivables, representing the present value of customer obligations to reimburse the Company for
reclamation expenditures at the Companys Rosebud, Jewett and Absaloka Mines.
During 2010, the Company increased its Contractual third-party reclamation receivables by $9.0
million due to a customer reclamation settlement. A corresponding decrease was recorded to
Capitalized asset retirement cost.
77
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Reclamation Deposits
The Companys reclamation deposits will be used to fund final reclamation activities. The
Companys carrying value and estimated fair value of its reclamation deposits at December 31, 2010,
are as follows:
|
|
|
|
|
|
|
|
|
|
|
Carrying Value |
|
|
Fair Value |
|
|
|
(In thousands) |
|
Cash and cash equivalents |
|
$ |
38,534 |
|
|
$ |
38,534 |
|
Held-to-maturity securities |
|
|
15,633 |
|
|
|
17,044 |
|
Time deposits |
|
|
15,903 |
|
|
|
15,903 |
|
Available-for-sale securities |
|
|
2,204 |
|
|
|
2,204 |
|
|
|
|
|
|
|
|
|
|
$ |
72,274 |
|
|
$ |
73,685 |
|
|
|
|
|
|
|
|
In 2010, the Company recorded a $0.6 million gain on the sale of available-for-sale
securities held as reclamation deposits. In 2009, an impairment of $0.3 million was recorded as a
result of other-than-temporary declines in the value of marketable securities included in
reclamation deposits.
Held-to-Maturity and Available-for-Sale Reclamation Deposits
The amortized cost, gross unrealized holding gains and losses and fair value of
held-to-maturity securities are as follows:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(In thousands) |
|
Amortized cost |
|
$ |
15,633 |
|
|
$ |
21,099 |
|
Gross unrealized holding gains |
|
|
1,453 |
|
|
|
1,418 |
|
Gross unrealized holding losses |
|
|
(42 |
) |
|
|
(9 |
) |
|
|
|
|
|
|
|
Fair value |
|
$ |
17,044 |
|
|
$ |
22,508 |
|
|
|
|
|
|
|
|
Maturities of held-to-maturity securities are as follows at December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
Amortized Cost |
|
|
Fair Value |
|
|
|
(In thousands) |
|
Due in five years or less |
|
$ |
3,350 |
|
|
$ |
3,732 |
|
Due after five years to ten years |
|
|
4,207 |
|
|
|
4,335 |
|
Due in more than ten years |
|
|
8,076 |
|
|
|
8,977 |
|
|
|
|
|
|
|
|
|
|
$ |
15,633 |
|
|
$ |
17,044 |
|
|
|
|
|
|
|
|
The cost basis, gross unrealized holding gains and fair value of available-for-sale
securities are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(In thousands) |
|
Cost basis |
|
$ |
2,000 |
|
|
$ |
2,402 |
|
Gross unrealized holding gains |
|
|
204 |
|
|
|
712 |
|
|
|
|
|
|
|
|
Fair value |
|
$ |
2,204 |
|
|
$ |
3,114 |
|
|
|
|
|
|
|
|
78
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
9. |
|
DERIVATIVE INSTRUMENTS |
Adoption of ASC 815-40
On January 1, 2009, the Company adopted ASC 815-40, Determining Whether an Instrument (or
Embedded Feature) is Indexed to an Entitys Own Stock. As part of the adoption of ASC 815-40, the
Company determined that its convertible debt instrument is not indexed to its stock, and therefore
the value of the conversion feature was separated from the debt and reclassified as a liability. A
corresponding debt discount was established which will be amortized over the life of the
convertible notes. Prior to adopting ASC 815-40, the Company followed ASC 470-20, Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion
Ratios. ASC 470-20 required the Company to record interest expense and corresponding
paid-in-capital related to the beneficial conversion feature in its convertible debt and was
superseded by ASC 815-40. In addition to the Companys convertible debt, ASC 815-40 also applies
to a warrant the Company issued and, therefore, the value of the warrant has been recorded as a
liability. As a part of the Parent Notes offering in February 2011, the convertible notes were
retired.
The Company recorded the following cumulative effect of change in accounting principle
pursuant to its adoption of ASC 815-40:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt |
|
|
Derivative |
|
|
Other Paid- |
|
|
Accumulated |
|
|
|
Discount |
|
|
Liability |
|
|
In-Capital |
|
|
Deficit |
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Record January 1, 2009, debt discount and derivative instrument liability related
to convertible debt |
|
$ |
7,734 |
|
|
$ |
5,605 |
|
|
$ |
|
|
|
$ |
(2,129 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Record January 1, 2009, derivative instrument liability related to warrant |
|
|
|
|
|
|
477 |
|
|
|
|
|
|
|
477 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Record amortization of debt discount from March 4, 2008, through December 31, 2008 |
|
|
(653 |
) |
|
|
|
|
|
|
|
|
|
|
653 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Record the reversal of the beneficial conversion feature expensed in 2008 under
ASC 470-20 |
|
|
|
|
|
|
|
|
|
|
(8,147 |
) |
|
|
(8,147 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Record the reversal of prior accounting related to the warrant |
|
|
|
|
|
|
|
|
|
|
(1,700 |
) |
|
|
(1,700 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
7,081 |
|
|
$ |
6,082 |
|
|
$ |
(9,847 |
) |
|
$ |
(10,846 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible Debt
A Binomial Lattice model was used to obtain the fair value of the conversion feature in the
Companys convertible debt instrument. The conversion feature of the convertible debt instruments
had no value at December 31, 2009 and the following assumptions were used at December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
Stock Price |
|
|
Bond Yield |
|
|
|
$ |
11.94 |
|
|
|
5.16 |
% |
Warrant
The Companys warrant expired August 20, 2010 and therefore had no value at December 31, 2010.
The following assumptions were used for the warrant at December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in |
|
Dividend |
|
|
|
|
|
|
Risk Free |
|
|
Expected Life |
|
Warrant |
|
Yield |
|
|
Volatility |
|
|
Rate |
|
|
(in years) |
|
173,228 |
|
None |
|
|
65 |
% |
|
|
0.20 |
% |
|
|
1.0 |
|
79
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
The fair value of outstanding derivative instruments not designated as hedging
instruments on the accompanying Consolidated Balance Sheet were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
Derivative Instruments |
|
Balance Sheet Location |
|
|
2010 |
|
|
2009 |
|
Convertible debt
-conversion feature |
|
Other liabilities |
|
$ |
3,588 |
|
|
$ |
|
|
Warrant |
|
Other liabilities |
|
|
|
|
|
|
30 |
|
The effect of derivative instruments not designated as hedging instruments on the
accompanying Consolidated Statements of Operations was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Expense) Recognized in |
|
|
|
|
|
|
|
Earnings on Derivatives |
|
|
|
Statement of |
|
|
Year Ended December 31, |
|
Derivative Instruments |
|
Operations Location |
|
|
2010 |
|
|
2009 |
|
Convertible debt
-conversion feature |
|
Other income (loss) |
|
$ |
(3,486 |
) |
|
$ |
5,674 |
|
Warrant |
|
Other income (loss) |
|
|
30 |
|
|
|
448 |
|
10. |
|
FAIR VALUE MEASUREMENTS |
Fair value is the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date. The
Company is required to disclose the fair value of financial instruments where practicable. The
carrying amounts of cash equivalents, accounts receivable and accounts payable reflected on the
Consolidated Balance Sheet approximate the fair value of these instruments due to the short
duration to their maturities. The Company calculates the fair value of its long-term debt by using
discount rate estimates based on interest rates as of December 31, 2010. See Notes 3, 8 and 9 for
additional disclosures related to fair value measurements on restricted cash and bond collateral,
reclamation deposits and embedded derivatives, respectively.
The estimated fair value of the Companys debt with fixed interest rates, excluding conversion
feature values are as follows:
|
|
|
|
|
|
|
|
|
|
|
Carrying Value |
|
|
Fair Value |
|
|
|
(In thousands) |
|
December 31, 2009 |
|
$ |
192,608 |
|
|
$ |
201,352 |
|
December 31, 2010 |
|
$ |
185,320 |
|
|
$ |
196,483 |
|
Fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair
value. The hierarchy, as defined below, gives the highest priority to unadjusted quoted prices in
active markets for identical assets or liabilities and the lowest priority to unobservable inputs.
|
|
|
Level 1, defined as observable inputs such as quoted prices in active markets for
identical assets. Level 1 assets include available-for-sale equity securities
generally valued based on independent third-party market prices. |
|
|
|
Level 2, defined as observable inputs other than Level 1 prices. These include
quoted prices for similar assets or liabilities in an active market, quoted prices for
identical assets and liabilities in markets that are not active, or other inputs that
are observable or can be corroborated by observable market data for substantially the
full term of the assets or liabilities. The Company had no Level 2 inputs at December
31, 2010. |
|
|
|
Level 3, defined as unobservable inputs in which little or no market data exists,
therefore requiring an entity to develop its own assumptions. The Companys
convertible notes conversion feature and warrant were classified as Level 3. These
items were valued using the Binomial Lattice model and the Black-Scholes model,
respectively. |
80
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
The table below sets forth, by level, the Companys financial assets and liabilities that
are accounted for at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2010 |
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale investments
included in Restricted investments
and bond collateral |
|
$ |
2,889 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
2,889 |
|
Available-for-sale investments
included in Reclamation deposits |
|
|
2,204 |
|
|
|
|
|
|
|
|
|
|
|
2,204 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
5,093 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
5,093 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible debt conversion feature |
|
$ |
|
|
|
$ |
|
|
|
$ |
3,588 |
|
|
$ |
3,588 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
$ |
|
|
|
$ |
|
|
|
$ |
3,588 |
|
|
$ |
3,588 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2009 |
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
investments included in
Restricted investments
and bond collateral |
|
$ |
2,879 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
2,879 |
|
Available-for-sale
investments included in
Reclamation deposits |
|
|
3,114 |
|
|
|
|
|
|
|
|
|
|
|
3,114 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
5,993 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
5,993 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant |
|
$ |
|
|
|
$ |
|
|
|
$ |
30 |
|
|
$ |
30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
$ |
|
|
|
$ |
|
|
|
$ |
30 |
|
|
$ |
30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the change in the fair values of the derivative instrument
liabilities categorized as Level 3:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(In thousands) |
|
Beginning balance |
|
$ |
30 |
|
|
$ |
|
|
January 1, 2010, beginning balance
adjustment pursuant to adoption of ASC
815-40 |
|
|
|
|
|
|
6,082 |
|
Additional debt discount |
|
|
102 |
|
|
|
70 |
|
Change in fair value |
|
|
3,456 |
|
|
|
(6,122 |
) |
|
|
|
|
|
|
|
Ending balance |
|
$ |
3,588 |
|
|
$ |
30 |
|
|
|
|
|
|
|
|
81
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
11. STOCKHOLDERS EQUITY
Preferred and Common Stock
The Company has two classes of capital stock outstanding, common stock, par value $2.50 per
share, and Series A Convertible Exchangeable Preferred Stock on which cumulative dividends of
$2.125 per share are payable quarterly. Each share of Series A Preferred Stock is represented by
four Depositary Shares. Under the terms of the Series A Preferred Stock, the Company can redeem
preferred shares at any time for the redemption value of $100.00 plus accumulated dividends paid in
cash.
The amount of dividends accumulated through and including January 1, 2011 and the redemption
value of preferred shares are shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Extended Total |
|
|
|
Shares |
|
|
Per Share |
|
|
(in thousands) |
|
Dividends accumulated(1) |
|
|
160,129 |
|
|
$ |
124.53 |
|
|
$ |
19,940 |
|
Redemption value |
|
|
160,129 |
|
|
$ |
100.00 |
|
|
|
16,013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
$ |
35,953 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
In February 2011, the Company paid the $19.9 million of
accumulated dividends
as of January 1, 2011. |
The Company is permitted to pay preferred stock dividends to the extent that there is a
surplus, as defined by Delaware law.
Restricted Net Assets
WCC has obligations to pay pension and postretirement medical benefits, to fund corporate
expenditures, and to pay interest on the Parent Notes. However, WCC conducts no operations, has no
source of revenue and is fully dependent on distributions from its subsidiaries to pay its costs.
At December 31, 2010, the loan agreements of WML and ROVA required debt service accounts and
imposed timing and other restrictions on the ability of WML and ROVA to distribute funds to WCC.
At December 31, 2010, the subsidiaries of the Parent had approximately $108.1 million of net
assets that were not available to be transferred to the Parent in the form of dividends, loans, or
advances due to restrictions contained in the credit facilities of these subsidiaries. Subsequent
to the Parent Notes offering, the Company will no longer have restricted net assets.
12. |
|
RESTRICTED STOCK, STOCK OPTIONS, AND STOCK APPRECIATION RIGHTS |
As of December 31, 2010, the Company had restricted stock, stock options, and stock-settled
stock appreciation rights, or SARs, outstanding from five stock incentive plans. Four of these
plans were terminated in October 2009. Employees are now granted restricted stock units from the
2007 Incentive Stock Plan. The 2007 Incentive Stock Plan also provides that non-employee directors
will receive equity awards with a value of $50,000 after each annual meeting.
The maximum number of remaining shares that can be issued under the 2007 Incentive Stock Plan
is 288,261.
82
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Compensation cost arising from share-based arrangements is shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
Recognition of fair value of restricted stock, stock options
and SARs over vesting period |
|
$ |
1,058 |
|
|
$ |
702 |
|
|
$ |
1,227 |
|
Contributions of stock to the Companys 401(k) plan |
|
|
2,991 |
|
|
|
1,869 |
|
|
|
1,569 |
|
Compensation credit for performance units plan (1) |
|
|
|
|
|
|
(19 |
) |
|
|
(63 |
) |
|
|
|
|
|
|
|
|
|
|
Total share-based compensation expense (2) |
|
$ |
4,049 |
|
|
$ |
2,552 |
|
|
$ |
2,733 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The Companys only active performance unit plan expired June 30, 2009. |
|
(2) |
|
These costs are recorded in Cost of sales and Selling and administrative expenses in
the accompanying statement of operations. |
The Company used the Black-Scholes option pricing model to determine the fair value of
options and SARs on the date of grant. The Company utilized U.S. Treasury yields as of the grant
date for its risk-free interest rate assumption and expected volatilities were based on historical
stock price movement and other factors. The Company utilized historical data to develop its
dividend yield and expected option life assumptions. The following assumptions were used for the
year ended December 31, 2008; no options or SARs were granted in 2010 or 2009:
|
|
|
|
|
|
|
December 31, 2008 |
|
Assumptions (weighted average): |
|
|
|
|
Risk-free interest rate |
|
|
3.62 |
% |
Expected dividend yield |
|
None |
Expected volatility |
|
|
50 |
% |
Expected life (in years) |
|
|
7.0 |
|
Restricted Stock
The Company may issue restricted stock, which requires no payment from the employee.
Restricted stock typically vests ratably over three years. Upon vesting, restricted stock will be
redeemed and paid to employees with either cash or the Companys common stock. Compensation
expense is based on the fair value on the grant date and is recorded ratably over the vesting
period.
A summary of restricted stock award activity for the year ended December 31, 2010, is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized |
|
|
|
|
|
|
|
Weighted Average |
|
|
Compensation |
|
|
|
Common |
|
|
Grant-Date Fair |
|
|
Expense |
|
|
|
Shares |
|
|
Value |
|
|
(In thousands) |
|
Non-vested at December 31, 2009 |
|
|
96,558 |
|
|
$ |
8.36 |
|
|
|
|
|
Granted |
|
|
157,833 |
|
|
$ |
8.31 |
|
|
|
|
|
Vested |
|
|
(47,656 |
) |
|
$ |
9.21 |
|
|
|
|
|
Forfeited |
|
|
(14,038 |
) |
|
$ |
8.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested at December 31, 2010 |
|
|
192,697 |
|
|
$ |
8.13 |
|
|
$ |
1,265 |
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Expected to be recognized over the next three years. |
Weighted average grant-date fair value was $8.31, $8.24 and $15.99 for 2010, 2009 and
2008, respectively.
The total grant-date fair value of restricted stock that vested was $0.4 million in 2010 and
$0.2 million in both 2009 and 2008.
83
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Stock Options
Stock options generally vest over three years, expire ten years from the date of grant, and
have an option price equal to the market value of the stock on the date of grant.
Information with respect to stock option activity for the year ended December 31, 2010, is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
|
|
|
|
Unamortized |
|
|
|
|
|
|
|
Weighted |
|
|
Contractual |
|
|
Aggregate |
|
|
Compensation |
|
|
|
|
|
|
|
Average |
|
|
Life |
|
|
Intrinsic |
|
|
Expense |
|
|
|
Stock Options |
|
|
Exercise Price |
|
|
(in years) |
|
|
Value |
|
|
(In thousands) |
|
Outstanding at December 31, 2009 |
|
|
354,224 |
|
|
$ |
18.73 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(2,500 |
) |
|
$ |
3.38 |
|
|
|
|
|
|
$ |
16,588 |
|
|
|
|
|
Expired |
|
|
(28,466 |
) |
|
$ |
17.40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(4,668 |
) |
|
$ |
21.40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2010 |
|
|
318,590 |
|
|
$ |
18.99 |
|
|
|
4.4 |
|
|
$ |
16,938 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2010 |
|
|
273,834 |
|
|
$ |
18.60 |
|
|
|
3.9 |
|
|
$ |
16,938 |
|
|
$ |
259 |
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Expected to be recognized over the next year. |
The weighted average grant-date fair value per stock option granted in 2008 was $11.84.
No stock options were granted in 2010 or 2009.
The intrinsic value of stock options exercised was less than $0.1 million in 2010 and $0.5
million in 2008. No stock options were exercised in 2009.
The total grant-date fair value of stock options that vested was $0.1 million in both 2010 and
2009 and less than $0.1 million in 2008.
SARs
SARs generally vest over three years, expire ten years from the date of grant, and have a base
price equal to the market value of the stock on the date of grant. Upon vesting, the holders may
exercise the SARs and receive a number of shares of common stock having a value equal to the
appreciation in the value of the common stock between the grant date and the exercise date.
Information with respect to SARs granted and outstanding for the year ended December 31, 2010
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
|
|
|
|
Unamortized |
|
|
|
|
|
|
|
Weighted |
|
|
Contractual |
|
|
Aggregate |
|
|
Compensation |
|
|
|
|
|
|
|
Average Base |
|
|
Life |
|
|
Intrinsic |
|
|
Expense |
|
|
|
SARs |
|
|
Price |
|
|
(in years) |
|
|
Value |
|
|
(In thousands) |
|
Outstanding at December 31, 2009 |
|
|
155,334 |
|
|
$ |
21.91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired |
|
|
(36,400 |
) |
|
$ |
21.18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2010 |
|
|
118,934 |
|
|
$ |
22.13 |
|
|
|
4.6 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2010 |
|
|
118,934 |
|
|
$ |
22.13 |
|
|
|
4.6 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No SARs were granted during 2010, 2009, or 2008.
The intrinsic value of SARs exercised was less than $0.1 million in 2008. No SARs were
exercised in 2010 or 2009.
84
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
The total grant-date fair value of SARs that vested was less than $0.1 million in both 2010
and 2009 and $0.3 million in 2008.
13. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following is a summary of accumulated other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax Effect of |
|
|
Accumulated |
|
|
|
Pension and |
|
|
Available for |
|
|
Other |
|
|
Other |
|
|
|
Postretirement |
|
|
Sale |
|
|
Comprehensive |
|
|
Comprehensive |
|
|
|
Medical Benefits |
|
|
Securities |
|
|
Income Gains |
|
|
Loss |
|
|
|
(In thousands) |
|
Balance at January 1, 2008 |
|
$ |
(116,093 |
) |
|
$ |
|
|
|
$ |
(9,094 |
) |
|
$ |
(125,187 |
) |
2008 activity |
|
|
(3,386 |
) |
|
|
112 |
|
|
|
|
|
|
|
(3,274 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008 |
|
|
(119,479 |
) |
|
|
112 |
|
|
|
(9,094 |
) |
|
|
(128,461 |
) |
Postretirement medical
benefit plan amendments and
pension plan freeze
adjustments |
|
|
105,983 |
|
|
|
|
|
|
|
|
|
|
|
105,983 |
|
2009 activity |
|
|
7,465 |
|
|
|
852 |
|
|
|
(17,062 |
) |
|
|
(8,745 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009 |
|
|
(6,031 |
) |
|
|
964 |
|
|
|
(26,156 |
) |
|
|
(31,223 |
) |
2010 activity |
|
|
(26,018 |
) |
|
|
(439 |
) |
|
|
|
|
|
|
(26,457 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010 |
|
$ |
(32,049 |
) |
|
$ |
525 |
|
|
$ |
(26,156 |
) |
|
$ |
(57,680 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension and postretirement medical benefit adjustments relate to changes in the funded
status of various benefit plans, as discussed in Notes 5 and 6. The unrealized gains and losses
associated with recognizing the Companys available-for-sale securities at fair value are
recorded through Accumulated other comprehensive loss. See Note 14 regarding the tax effect of
other comprehensive income gains.
14. INCOME TAX
Income tax expense (benefit) attributable to net loss before income taxes consists of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
(10 |
) |
|
$ |
(323 |
) |
|
$ |
|
|
State |
|
|
(14 |
) |
|
|
1,168 |
|
|
|
919 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24 |
) |
|
|
845 |
|
|
|
919 |
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
|
|
|
|
(15,977 |
) |
|
|
|
|
State |
|
|
(117 |
) |
|
|
(2,004 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(117 |
) |
|
|
(17,981 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) |
|
$ |
(141 |
) |
|
$ |
(17,136 |
) |
|
$ |
919 |
|
|
|
|
|
|
|
|
|
|
|
85
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Income tax expense (benefit) attributable to net loss before income taxes differed from
the amounts computed by applying the statutory Federal income tax rate of 34% to pre-tax income as
a result of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
Computed tax benefit at statutory rate |
|
$ |
(1,126 |
) |
|
$ |
(15,619 |
) |
|
$ |
(16,200 |
) |
Increase (decrease) in tax expense resulting from: |
|
|
|
|
|
|
|
|
|
|
|
|
Tax depletion in excess of basis |
|
|
(4,019 |
) |
|
|
(713 |
) |
|
|
(2,643 |
) |
Non-deductible interest expense and
convertible debt valuation |
|
|
2,076 |
|
|
|
(1,074 |
) |
|
|
3,156 |
|
Noncontrolling interest |
|
|
899 |
|
|
|
618 |
|
|
|
|
|
State income taxes, net |
|
|
(1,090 |
) |
|
|
(2,467 |
) |
|
|
(3,214 |
) |
Change in valuation allowance for net deferred
tax assets |
|
|
(3,312 |
) |
|
|
2,902 |
|
|
|
24,628 |
|
Medicare Part D subsidy law change |
|
|
7,159 |
|
|
|
|
|
|
|
|
|
Indian Coal Tax Credits |
|
|
(120 |
) |
|
|
(96 |
) |
|
|
(5,893 |
) |
Other, net |
|
|
(608 |
) |
|
|
(687 |
) |
|
|
1,085 |
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) |
|
$ |
(141 |
) |
|
$ |
(17,136 |
) |
|
$ |
919 |
|
|
|
|
|
|
|
|
|
|
|
The PPACA reduces the tax benefits available to an employer that receives the Medicare
Part D subsidy beginning in years ending after December 31, 2010. As a result of the PPACA,
employers that receive the Medicare Part D subsidy will recognize the deferred tax effects of the
reduced deductibility of the postretirement prescription drug coverage in the period the PPACA was
enacted. On March 30, 2010, a companion bill, the Reconciliation Act, was signed into law. The
Reconciliation Act reduces the effect of the PPACA on affected employers by deferring for two years
(until years ending after December 31, 2012) the reduced deductibility of the postretirement
prescription drug coverage. Accounting for income taxes requires that the effect of adjusting the
deferred tax asset for the elimination of this deduction be included in income from continuing
operations. However, entities that have a full valuation allowance for this deferred tax asset
would recognize a related decrease in the valuation allowance. As the Company has a full valuation
allowance against its related deferred tax asset, this change in tax law regarding the Medicare
Part D subsidy will not have an effect on the Companys income from continuing operations. The
effect of this change in tax law is a reduction of $7.2 million of the Companys deferred tax
assets with a corresponding decrease in its valuation allowance. In addition, this change in the
tax deduction does not affect the pre-tax expense or corresponding liability for postretirement
prescription drug benefits.
For the year ended December 31, 2009, the Company recorded a tax benefit of $17.1 million due
to a non-cash income tax benefit related to gains recorded within other comprehensive income during
2009. Generally accepted accounting principles, or GAAP, require all items be considered,
including items recorded in other comprehensive income, in determining the amount of tax benefit
that results from a loss from continuing operations that should be allocated to continuing
operations. In accordance with GAAP, the Company recorded a tax benefit on its loss from continuing
operations, which was exactly offset by income tax expense on other comprehensive income as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss From |
|
|
Other |
|
|
Total |
|
|
|
Continuing |
|
|
Comprehensive |
|
|
Comprehensive |
|
|
|
Operations |
|
|
Income |
|
|
Income |
|
|
|
(In thousands) |
|
Pre-allocation |
|
$ |
(46,224 |
) |
|
$ |
114,300 |
|
|
$ |
68,076 |
|
Tax allocation |
|
|
17,062 |
|
|
$ |
(17,062 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As presented |
|
$ |
(29,162 |
) |
|
$ |
97,238 |
|
|
$ |
68,076 |
|
|
|
|
|
|
|
|
|
|
|
As the income tax expense on other comprehensive income is equal to the income tax
benefit recognized in continuing operations, the Companys total comprehensive income is unchanged.
In addition, the Companys net deferred tax position at December 31, 2009 was not impacted by this
tax allocation.
86
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
The tax effects of temporary differences that give rise to significant portions of the
deferred tax assets and deferred tax liabilities are presented below:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(In thousands) |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Federal net operating loss carryforwards |
|
$ |
74,061 |
|
|
$ |
67,133 |
|
State net operating loss carryforwards |
|
|
24,627 |
|
|
|
14,983 |
|
Alternative minimum tax credit carryforwards |
|
|
7,009 |
|
|
|
5,683 |
|
Charitable contribution carryforwards |
|
|
169 |
|
|
|
179 |
|
Indian Coal Tax Credit carryforwards |
|
|
25,552 |
|
|
|
26,654 |
|
Accruals for the following: |
|
|
|
|
|
|
|
|
Workers compensation |
|
|
4,013 |
|
|
|
4,338 |
|
Postretirement medical benefit and pension
obligations |
|
|
80,116 |
|
|
|
81,764 |
|
Incentive plans |
|
|
1,843 |
|
|
|
900 |
|
Asset retirement obligations |
|
|
68,561 |
|
|
|
66,839 |
|
Deferred revenues |
|
|
29,430 |
|
|
|
31,757 |
|
Gain on sale of partnership interest |
|
|
6,402 |
|
|
|
8,061 |
|
Other accruals |
|
|
5,618 |
|
|
|
7,147 |
|
|
|
|
|
|
|
|
Total gross deferred assets |
|
|
327,401 |
|
|
|
315,438 |
|
Less valuation allowance |
|
|
(247,086 |
) |
|
|
(232,575 |
) |
|
|
|
|
|
|
|
Net deferred tax assets |
|
|
80,315 |
|
|
|
82,863 |
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|