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EX-3.1 - EXHIBIT 3.1 - WESTMORELAND COAL Coexh3-1_2015q2.htm
EX-32 - EXHIBIT 32 - WESTMORELAND COAL Coexh32_2015q11.htm
EX-31.1 - EXHIBIT 31.1 - WESTMORELAND COAL Coexh31-1_2015q11.htm
EX-10.1 - EXHIBIT 10.1 - WESTMORELAND COAL Coexh10-1_2015q2.htm
EX-95.1 - EXHIBIT 95.1 - WESTMORELAND COAL Coexh95-1_2015q2.htm
EX-31.2 - EXHIBIT 31.2 - WESTMORELAND COAL Coexh31-2_2015q11.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 __________________________________________
FORM 10-Q
 __________________________________________
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2015
or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                 to                 
Commission File No. 001-11155
  ___________________________________________
WESTMORELAND COAL COMPANY
(Exact name of registrant as specified in its charter)
 __________________________________________
Delaware
23-1128670
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
9540 South Maroon Circle, Suite 200
Englewood, CO
80112
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: (855) 922-6463
 __________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
o
 
Accelerated filer
x
Non-accelerated filer
o
(Do not check if a smaller reporting company.)
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
Indicate the number of shares outstanding of each of the issuer's classes of common stock as of July 24, 2015: 17,967,403 shares of common stock, $0.01 par value.




TABLE OF CONTENTS
 


2


PART I - FINANCIAL INFORMATION
ITEM 1
FINANCIAL STATEMENTS


WESTMORELAND COAL COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
 
June 30,
2015
 
December 31,
2014
 
(In thousands)
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
35,876

 
$
14,258

Receivables:
 
 
 
Trade
136,720

 
143,052

Loan and lease receivables
9,258

 
10,493

Contractual third-party reclamation receivables
16,320

 
12,462

Other
14,497

 
19,923

 
176,795

 
185,930

Inventories
138,759

 
133,855

Deferred income taxes
15,181

 
13,083

Other current assets
13,567

 
13,645

Total current assets
380,178

 
360,771

Property, plant and equipment:
 
 
 
Land and mineral rights
504,353

 
500,226

Plant and equipment
1,006,901

 
956,112

 
1,511,254

 
1,456,338

Less accumulated depreciation, depletion and amortization
595,962

 
528,676

Net property, plant and equipment
915,292

 
927,662

Loan and lease receivables
58,627

 
73,180

Advanced coal royalties
18,725

 
17,508

Reclamation deposits
76,952

 
77,907

Restricted investments and bond collateral
128,167

 
164,389

Contractual third-party reclamation receivables, less current portion
99,040

 
104,021

Investment in joint venture
32,465

 
33,409

Intangible assets, net of accumulated amortization of $16.3 million and $15.3 million at June 30, 2015 and December 31, 2014, respectively
30,254

 
31,315

Other assets
37,906

 
39,416

Total Assets
$
1,777,606

 
$
1,829,578

See accompanying Notes to Consolidated Financial Statements.

3


WESTMORELAND COAL COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets (Continued)
(Unaudited)
 
June 30,
2015
 
December 31,
2014
 
(In thousands)
Liabilities and Shareholders’ Deficit
 
 
 
Current liabilities:
 
 
 
Current installments of long-term debt
$
42,566

 
$
43,136

Revolving lines of credit
2,500

 
9,576

Accounts payable and accrued expenses:
 
 
 
Trade and other accrued liabilities
126,864

 
149,514

Interest payable
16,911

 
2,699

Production taxes
46,756

 
45,747

Workers’ compensation
661

 
671

Postretirement medical benefits
13,263

 
13,263

SERP
368

 
368

Deferred revenue
13,176

 
13,175

Asset retirement obligations
49,860

 
43,289

Other current liabilities
27,177

 
52,459

Total current liabilities
340,102

 
373,897

Long-term debt, less current installments
990,768

 
932,075

Workers’ compensation, less current portion
6,148

 
6,315

Excess of black lung benefit obligation over trust assets
11,638

 
11,252

Postretirement medical benefits, less current portion
293,340

 
293,156

Pension and SERP obligations, less current portion
44,925

 
49,779

Deferred revenue, less current portion
30,097

 
35,255

Asset retirement obligations, less current portion
401,403

 
409,456

Intangible liabilities, net of accumulated amortization of $14.0 million and $13.5 million at June 30, 2015 and December 31, 2014, respectively
4,004

 
4,538

Deferred income taxes
45,704

 
34,852

Other liabilities
32,268

 
28,448

Total liabilities
2,200,397

 
2,179,023

Shareholders’ deficit:
 
 
 
Preferred stock of $1.00 par value
 
 
 
Authorized 5,000,000 shares; no issued and outstanding shares at June 30, 2015 and 91,669 shares issued and outstanding at December 31, 2014

 
92

Common stock of $0.01 par value as of June 30, 2015 and $2.50 par value as of December 31, 2014
 
 
 
Authorized 30,000,000 shares; issued and outstanding 17,952,320 shares at June 30, 2015 and 17,102,777 shares at December 31, 2014
180

 
42,756

Other paid-in capital
228,362

 
185,644

Accumulated other comprehensive loss
(145,686
)
 
(124,296
)
Accumulated deficit
(517,242
)
 
(468,902
)
Total Westmoreland Coal Company shareholders’ deficit
(434,386
)
 
(364,706
)
Noncontrolling interest
11,595

 
15,261

Total deficit
(422,791
)
 
(349,445
)
Total Liabilities and Deficit
$
1,777,606

 
$
1,829,578

See accompanying Notes to Consolidated Financial Statements.

4


WESTMORELAND COAL COMPANY AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
 
(In thousands, except per share data)
Revenues
$
348,959

 
$
287,956

 
$
720,444

 
$
468,159

Cost, expenses and other:
 
 
 
 
 
 
 
Cost of sales
285,480

 
248,389

 
587,189

 
387,019

Depreciation, depletion and amortization
34,263

 
24,479

 
72,322

 
40,538

Selling and administrative
28,508

 
28,709

 
55,228

 
42,040

Heritage health benefit expenses
2,162

 
3,388

 
5,221

 
6,932

Loss (gain) on sale/disposal of assets
784

 
(43
)
 
1,013

 
(5
)
Restructuring charges
103

 
7,543

 
656

 
7,941

Derivative loss
6,178

 
5,930

 
902

 
5,930

Income from equity affiliates
(1,653
)
 
(799
)
 
(3,678
)
 
(799
)
Other operating loss

 

 

 
151

 
355,825

 
317,596

 
718,853

 
489,747

Operating income (loss)
(6,866
)
 
(29,640
)
 
1,591

 
(21,588
)
Other income (expense):
 
 
 
 
 
 
 
Interest expense
(25,304
)
 
(21,786
)
 
(50,039
)
 
(42,584
)
Loss on extinguishment of debt

 
(12,635
)
 

 
(12,635
)
Interest income
2,567

 
1,582

 
4,707

 
1,884

Gain (loss) on foreign exchange
(1,313
)
 
2,649

 
795

 
(4,141
)
Other income
534

 
483

 
726

 
576

 
(23,516
)
 
(29,707
)
 
(43,811
)
 
(56,900
)
Loss before income taxes
(30,382
)
 
(59,347
)
 
(42,220
)
 
(78,488
)
Income tax expense
7,469

 
3,807

 
9,509

 
3,697

Net loss
(37,851
)
 
(63,154
)
 
(51,729
)
 
(82,185
)
Less net loss attributable to noncontrolling interest
(1,246
)
 

 
(3,392
)
 

Net loss attributable to Westmoreland Coal Company
(36,605
)
 
(63,154
)
 
(48,337
)
 
(82,185
)
Less preferred stock dividend requirements

 
209

 

 
470

Net loss applicable to common shareholders
$
(36,605
)
 
$
(63,363
)
 
$
(48,337
)
 
$
(82,655
)
Net loss per share applicable to common shareholders:
 
 
 
 
 
 
 
Basic and diluted
$
(2.04
)
 
$
(4.19
)
 
$
(2.72
)
 
$
(5.52
)
Weighted average number of common shares outstanding
 
 
 
 
 
 
 
Basic and diluted
17,926

 
15,136

 
17,775

 
14,962

See accompanying Notes to Consolidated Financial Statements.

5


WESTMORELAND COAL COMPANY AND SUBSIDIARIES
Consolidated Statements of Comprehensive Loss
(Unaudited)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
Net loss
$
(37,851
)
 
$
(63,154
)
 
$
(51,729
)
 
$
(82,185
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Pension and other postretirement plans:
 
 
 
 
 
 
 
Amortization of accumulated actuarial gains or losses, pension
1,157

 
359

 
2,267

 
717

Adjustments to accumulated actuarial losses and transition obligations, pension
(488
)
 

 
(285
)
 

Amortization of accumulated actuarial gains or losses, transition obligations, and prior service costs, postretirement medical benefit
327

 
5

 
654

 
10

Tax effect of other comprehensive income gains
225

 
64

 
(350
)
 
(224
)
Change in foreign currency translation adjustment
4,924

 
9,477

 
(22,216
)
 
9,477

Unrealized and realized gains and losses on available-for-sale securities
(1,785
)
 

 
(1,460
)
 

Other comprehensive income (loss)
4,360

 
9,905

 
(21,390
)
 
9,980

Comprehensive loss attributable to the Parent company
$
(33,491
)
 
$
(53,249
)
 
$
(73,119
)
 
$
(72,205
)
See accompanying Notes to Consolidated Financial Statements.

6


WESTMORELAND COAL COMPANY AND SUBSIDIARIES
Consolidated Statements of Deficit
Six Months Ended June 30, 2015
(Unaudited)

 
Preferred Stock
 
Common Stock
 
Other
Paid-In
Capital
 
Accumulated
Other
Comprehensive Loss
 
Accumulated
Deficit
 
Non-controlling
Interest
 
Total
Deficit
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
 
(In thousands, except shares data)
Balance at December 31, 2014
91,669

 
$
92

 
17,102,777

 
$
42,756

 
$
185,644

 
$
(124,296
)
 
$
(468,902
)
 
$
15,261

 
$
(349,445
)
Preferred dividends declared

 

 

 

 

 

 
(3
)
 

 
(3
)
WMLP distributions

 

 

 

 

 

 

 
(274
)
 
(274
)
Common stock issued as compensation

 

 
60,422

 
97

 
3,506

 

 

 

 
3,603

Conversion and redemption of convertible notes and securities
(91,669
)
 
(92
)
 
604,557

 
1,511

 
(1,738
)
 

 

 

 
(319
)
Issuance of restricted stock

 

 
184,564

 
406

 
(3,640
)
 

 

 

 
(3,234
)
Change in par value of common stock from $2.50 to $0.01

 

 

 
(44,590
)
 
44,590

 

 

 

 

Net loss

 

 

 

 

 

 
(48,337
)
 
(3,392
)
 
(51,729
)
Other comprehensive loss

 

 

 

 

 
(21,390
)
 

 

 
(21,390
)
Balance at June 30, 2015

 
$

 
17,952,320

 
$
180

 
$
228,362

 
$
(145,686
)
 
$
(517,242
)
 
$
11,595

 
$
(422,791
)
See accompanying Notes to Consolidated Financial Statements.

7


WESTMORELAND COAL COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
 
Six Months Ended June 30,
 
2015
 
2014
 
(In thousands)
Cash flows from operating activities:
 
 
 
Net loss
$
(51,729
)
 
$
(82,185
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation, depletion and amortization
72,322

 
40,538

Accretion of asset retirement obligation and receivable
14,112

 
9,288

Share-based compensation
3,646

 
2,445

Loss (gain) on sale/disposal of assets
1,013

 
(5
)
Non-cash interest expense
2,664

 

Amortization of deferred financing costs
4,997

 
1,209

Loss on extinguishment of debt

 
12,635

Loss on derivatives
902

 
5,930

Loss (gain) on foreign exchange
(795
)
 
4,141

Income from equity affiliates
(3,678
)
 
(799
)
Distributions from equity affiliates
2,289

 
730

Deferred income tax
10,265

 
3,854

Other
(1,470
)
 
89

Changes in operating assets and liabilities:
 
 
 
Receivables
1,283

 
(11,270
)
Inventories
(8,789
)
 
22,770

Accounts payable and accrued expenses
(1,560
)
 
8,538

Deferred revenue
(6,141
)
 
(8,424
)
Accrual for workers’ compensation
(1,269
)
 
(125
)
Asset retirement obligations
(10,914
)
 
(3,362
)
Other assets and liabilities
(15,098
)
 
4,576

Net cash provided by operating activities
12,050

 
10,573

Cash flows from investing activities:
 
 
 
Additions to property, plant and equipment
(38,554
)
 
(17,361
)
Change in restricted investments and bond collateral and reclamation deposits
(10,598
)
 
(30,517
)
Cash released from escrow for acquisition
34,000

 

Cash payments related to acquisitions and other
(35,887
)
 
(322,637
)
Cash acquired related to acquisitions
2,782

 
8,103

Proceeds from the sale of restricted investments
12,396

 
246

Payments related to loan and lease receivables
(2,466
)
 
(1,120
)
Receipts from loan and lease receivables
12,606

 
2,164

Other
1,193

 
131

Net cash used in investing activities
(24,528
)
 
(360,991
)
Cash flows from financing activities:
 
 
 
Change in book overdrafts
2,256

 
1,605

Borrowings from long-term debt, net of debt premium
79,359

 
454,219

Repayments of long-term debt
(33,724
)
 
(97,538
)
Borrowings on revolving lines of credit
35,175

 
10,000

Repayments on revolving lines of credit
(42,251
)
 
(10,000
)
Debt issuance costs and other refinancing costs
(4,252
)
 
(27,053
)
Other
(596
)
 
(277
)
Net cash provided by financing activities
35,967

 
330,956

Effect of foreign exchange rates on cash
(1,871
)
 
(1,038
)
Net increase (decrease) in cash and cash equivalents
21,618

 
(20,500
)
Cash and cash equivalents, beginning of period
14,258

 
61,110

Cash and cash equivalents, end of period
$
35,876

 
$
40,610

Non-cash transactions:
 
 
 
Accrued purchases of property and equipment
$
5,770

 
$
10,456

Capital leases and other financing sources
12,763

 
13,010

See accompanying Notes to Consolidated Financial Statements.

8


WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1.    BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include accounts of Westmoreland Coal Company, or the Company, or Parent, and its subsidiaries and controlled entities. The Company’s principal activities are conducted in the United States and Canada. U.S. activities include the production and sale of coal from mines in Montana, Wyoming, North Dakota, Texas, and Ohio and the operation of the Roanoke Valley power plants, or ROVA, in North Carolina. Canadian activities include production and sale of coal from six surface mines in Alberta and Saskatchewan, selling char to the barbecue briquette industry, and a 50% interest in a joint venture which produces activated carbon. The Company’s activities are primarily conducted through wholly owned subsidiaries. See Item 1 - Business of the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 (the “2014 Form 10-K”) for additional information.
All intercompany transactions and accounts have been eliminated in consolidation. The consolidated financial statements of the Company have been prepared in accordance with United States generally accepted accounting principles and require use of management’s estimates. The financial information contained in this Quarterly Report on Form 10-Q (this “Form 10-Q”) is unaudited, but reflects all adjustments, which are, in the opinion of management, necessary for a fair presentation of the financial information for the periods shown. Such adjustments are of a normal recurring nature. Certain prior amounts have been reclassified to conform to current period presentation. The results of operations for the six months ended June 30, 2015 are not necessarily indicative of results to be expected for the year ending December 31, 2015.
These unaudited quarterly consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the 2014 Form 10-K. The accounting principles followed by the Company are set forth in the Notes to the Company’s consolidated financial statements in its 2014 Form 10-K.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers, issued as a new Topic, Accounting Standards Codification (ASC) Topic 606. The new revenue recognition standard provides a five-step analysis of transactions to determine when and how revenue is recognized. The core principle of the guidance is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU is effective beginning in fiscal 2017 and can be adopted by the Company either retrospectively or as a cumulative-effect adjustment as of the date of adoption. The Company is currently evaluating the effect that adopting this new accounting guidance will have on its consolidated results of operations, cash flows and financial position.
In April 2015, the FASB issued ASU 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, which requires that debt issuance costs related to a recognized liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The new guidance should be applied on a retrospective basis. The new guidance is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years, with early adoption permitted. Management projects the impact to the financial statements resulting in balance sheet reclassification for which the Deferred financing costs, net account is recharacterized as a contra-liability reducing the Long-term debt, less current installments balance for each of the respective periods upon adoption.
In April 2015, the FASB issued ASU 2015-05, Internal-Use Software (Subtopic 350-40): Customer's Accounting for Fees Paid in a Cloud Computing Arrangement, provides guidance for determining whether a cloud computing arrangement (also referred to as a hosting arrangement) related to internal-use software has a software license element, and provides guidance on the appropriate accounting treatment. The new guidance should be applied on a retrospective basis. The new guidance is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the effect that adopting this new accounting guidance will have on its consolidated results of operations, cash flows and financial position.

2.    ACQUISITIONS
Acquisition of Buckingham Coal Company, LLC
On January 1, 2015, Westmoreland completed the acquisition of Buckingham Coal Company, LLC, an Ohio-based coal supplier (“Buckingham”), pursuant to an agreement dated January 1, 2015 among WCC Land Holding Company, Inc., an

9

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)

affiliate of the Company, for an initial cash purchase price of $34.0 million, reduced by a working capital adjustment of $1.6 million (the “Buckingham Acquisition”). The Buckingham operations are included in the Company’s Coal - U.S. segment.
The acquisition of Buckingham has been accounted for under the acquisition method of accounting that requires the total purchase consideration to be allocated to the assets acquired and liabilities assumed based on estimates of fair value.
The allocation of the purchase price is preliminary pending the completion of various analyses and the finalization of estimates. During the measurement period (which is not to exceed one year from the acquisition date), additional assets or liabilities may be recognized if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have resulted in the recognition of those assets or liabilities as of that date. The preliminary allocation may be adjusted after obtaining additional information regarding, among other things, asset valuations, liabilities assumed and revisions of previous estimates. These adjustments may be significant and will be accounted for retrospectively.
A summary of the purchase consideration and a preliminary allocation of the purchase consideration follows (in millions):
 
Provisional
as of
June 30,
2015
Purchase Price:
 
Cash paid - Initial payment
$
34.0

Cash received - Working capital adjustment
(1.6
)
Net cash consideration
$
32.4

 
 
Preliminary allocation of purchase price:
 
Assets:
 
     Cash and cash equivalents
$
2.8

     Inventories - materials and supplies
2.0

     Other current assets
0.1

Total current assets
4.9

     Land and mineral rights
13.5

     Plant and equipment
24.7

Total Assets
43.1

Liabilities:
 
     Trade payables and other accrued liabilities
(5.1
)
     Asset retirement obligations
(1.0
)
Total current liabilities
(6.1
)
     Asset retirement obligations, less current portion
(2.8
)
     Other liabilities
(1.8
)
Total Liabilities
(10.7
)
Net fair value
$
32.4


10

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)

Acquisition of General Partner of Westmoreland Resource Partners, LP
On December 31, 2014, the Company completed the acquisition of Westmoreland Resources GP, LLC (the “GP”), the general partner of Westmoreland Resource Partners, LP (“WMLP”), referred to as the “GP Acquisition.” Concurrent with the GP Acquisition, Westmoreland contributed certain royalty-bearing coal reserves to WMLP in return for WMLP common units (the “Contribution” and together with the GP Acquisition, the “WMLP Transactions”).
Westmoreland paid $30.0 million in December 2014 and $3.5 million in January 2015 to acquire the GP; and received 4,512,500 common units of WMLP (on a post-split basis following a 12-to-1 reverse split of WMLP’s common and general partner units) as consideration for the Contribution.
In connection with the closing, WMLP’s name was changed to Westmoreland Resource Partners, LP from Oxford Resource Partners, LP and the name of the GP was changed to Westmoreland Resources GP, LLC from Oxford Resources GP, LLC. The common units of WMLP trade on the NYSE under the symbol “WMLP”.
The acquisition of the GP has been accounted for under the acquisition method of accounting that requires the total purchase consideration to be allocated to the assets acquired and liabilities assumed based on estimates of fair value.
The allocation of the purchase price is preliminary pending the completion of various analyses and the finalization of estimates. During the measurement period (which is not to exceed one year from the acquisition date), additional assets or liabilities may be recognized if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have resulted in the recognition of those assets or liabilities as of that date. The preliminary allocation may be adjusted after obtaining additional information regarding, among other things, asset valuations, liabilities assumed and revisions of previous estimates. These adjustments may be significant and will be accounted for retrospectively.

11

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)

A summary of the purchase consideration and a preliminary allocation of the purchase consideration follows (in millions):
 
Provisional
as of
June 30,
2015
Purchase Price:
 
Cash paid at closing
$
30.0

Contingent consideration
3.5

Fair value of outstanding WMLP units (1)
10.8

Total purchase consideration
$
44.3

 
 
Preliminary allocation of purchase price:
 
Assets:
 
     Trade receivables and other
$
22.5

     Inventories - materials and supplies
7.4

     Inventories - coal
6.6

     Other current assets
1.3

Total current assets
37.8

     Land and mineral rights
39.5

     Plant and equipment
134.0

     Advanced coal royalties
9.2

     Restricted investments and bond collateral
10.6

     Intangible assets
31.0

     Other assets
0.2

Total Assets
262.3

Liabilities:
 
     Trade payables and other accrued liabilities
(19.1
)
     Asset retirement obligations
(7.8
)
     Other current liabilities
(4.0
)
Total current liabilities
(30.9
)
     Long-term debt, less current installments
(160.1
)
     Asset retirement obligations, less current portion
(23.9
)
     Warrants
(2.0
)
     Other liabilities
(1.1
)
Total Liabilities
(218.0
)
Net Assets
44.3

Non-controlling Interest
(10.8
)
Invested Equity
$
33.5

(1) Represents the market price of WMLP units outstanding using the December 31, 2014 closing price of $1.00.
No goodwill was recorded in the GP Acquisition and $31.0 million of intangible assets to be amortized over a fifteen-year period were identified. The intangible asset identified in the GP Acquisition is a favorable terminal lease at a dock in Ohio which was fair valued based on more favorable contracted prices in lease agreements than market prices.

12

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)

Canadian Acquisition
On April 28, 2014, Westmoreland Coal Company acquired Prairie Mines & Royalty ULC (“PMRU”) and Coal Valley Resources Inc. (“CVRI”), collectively referred to as the “Canadian Subsidiaries.” The operations of the Canadian Subsidiaries (the “Canadian Operations”) include six producing thermal coal mines in the Canadian provinces of Alberta and Saskatchewan, a char production facility, and a 50% interest in an activated carbon plant. The purchase consideration included a $282.8 million initial cash payment made on April 28, 2014, a cash payment for a working capital adjustment of $39.8 million made on June 25, 2014, and assumed liabilities of $421.3 million.
Acquisition related costs of $31.6 million were expensed for the six months ended June 30, 2014; which included a $13.6 million charge to Cost of sales related to the sale of inventory written up to fair value in the acquisition, $6.9 million of expenses included in Selling and administrative costs, $6.2 million of loss on foreign exchange as described in Note 10, and $4.9 million included in Interest expense related to a bridge facility commitment fee.
The Canadian Acquisition has been accounted for under the acquisition method of accounting that requires the total purchase consideration to be allocated to the assets acquired and liabilities assumed based on estimates of fair value.
The Company finalized the purchase price allocation for the Canadian Acquisition as of December 31, 2014. No goodwill was recorded in the acquisition and $37.0 million of intangible assets were identified in the acquisition.

13

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)

A summary of the purchase consideration and allocation of the purchase consideration follows (in millions):
 
Final
as of
December 31,
2014
Purchase Price:
 
Cash paid - Initial payment
$
282.8

Cash paid - Working capital adjustment
39.8

Total cash consideration
$
322.6

 
 
Allocation of purchase price:
 
Assets:
 
     Cash and cash equivalents
$
26.2

     Receivables
78.1

     Inventories - materials and supplies
52.0

     Inventories - coal
79.8

     Loan and lease receivables
11.2

     Deferred tax assets
8.2

     Other current assets
3.4

Total current assets
258.9

     Land and mineral rights
202.6

     Plant and equipment
114.8

     Loan and lease receivables
79.1

     Contractual third-party reclamation receivables, less current portion
6.8

Investment in joint venture
36.0

Intangible assets
37.0

     Other assets
8.7

Total Assets
743.9

Liabilities:
 
     Current installments of long-term debt
(36.3
)
     Trade payables and other accrued liabilities
(136.1
)
     Asset retirement obligations
(7.8
)
Total current liabilities
(180.2
)
     Long-term debt, less current installments
(86.3
)
     Asset retirement obligations, less current portion
(122.9
)
     Deferred tax liabilities
(31.9
)
Total Liabilities
(421.3
)
Net fair value
$
322.6

The Company became responsible for remediation work for a breach on a containment pond at a currently inactive mine that occurred on October 31, 2013. The prior owner, Sherritt International Corporation, has indemnified Westmoreland against past and future liability stemming from the incident. Accordingly, an indemnification asset of $27.9 million and a corresponding liability was recorded at April 28, 2014.

14

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)

Unaudited Pro Forma Information
The following unaudited pro forma information has been prepared for illustrative purposes only and assumes the acquisitions occurred on January 1, 2013, in the case of the Canadian Acquisition and the WMLP Transactions, and on January 1, 2014, in the case of the Buckingham Acquisition. The unaudited pro forma results have been prepared based on estimates and assumptions, which the Company believes are reasonable, however, they are not necessarily indicative of the consolidated results of operations had the acquisitions occurred on the dates indicated above, or of future results of operations.
(In thousands, except per share data)
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2014
Total Revenues
 
 
 
As reported
$
287,956

 
$
468,159

Pro forma (unaudited)
$
435,933

 
$
901,726

 


 
 
Operating Income
 
 
 
As reported
$
(29,640
)
 
$
(21,588
)
Pro forma (unaudited)
$
(43,648
)
 
$
(7,473
)
 
 
 
 
Net loss applicable to common shareholders
 
 
 
As reported
$
(63,363
)
 
$
(82,655
)
Pro forma (unaudited)
$
(65,836
)
 
$
(64,455
)
 
 
 
 
Net loss per share applicable to common shareholders
 
 
 
As reported
$
(4.19
)
 
$
(5.52
)
Pro forma (unaudited)
$
(4.35
)
 
$
(4.31
)

3.    INVENTORIES
Inventories consisted of the following:
 
June 30, 2015
 
December 31, 2014
 
(In thousands)
Coal stockpiles
$
45,504

 
$
41,795

Coal fuel inventories
9,541

 
6,531

Materials and supplies
86,705

 
88,584

Reserve for obsolete inventory
(2,991
)
 
(3,055
)
Total
$
138,759

 
$
133,855



15

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)

4.    RESTRICTED INVESTMENTS AND BOND COLLATERAL
The Company’s restricted investments and bond collateral consist of the following: 
 
June 30, 2015
 
December 31, 2014
 
(In thousands)
Coal - U.S. Segment:
 
 
 
Reclamation bond collateral:
 
 
 
Kemmerer Mine
$
25,271

 
$
25,282

Absaloka Mine
11,798

 
11,781

Rosebud Mine
3,145

 
3,145

Beulah Mine
1,270

 
1,270

Buckingham acquisition escrow

 
34,000

Coal - Canada Segment:
 
 
 
Reclamation bond collateral - PMRU
18,214

 
18,199

Reclamation bond collateral - CVRI
31,869

 
31,866

Coal - WMLP Segment:
 
 
 
Reclamation bond collateral - WMLP
8,320

 
10,634

Power Segment:
 
 
 
Power contract collateral
12,600

 
12,600

Corporate Segment:
 
 
 
Postretirement medical benefit bonds
8,829

 
8,780

Workers’ compensation bonds
6,851

 
6,832

Total restricted investments and bond collateral
$
128,167

 
$
164,389

The Company invests its restricted investments and bond collateral accounts in a limited selection of fixed-income investment options and receives the investment returns on these investments. Funds in the restricted investments and bond collateral accounts are not available to meet the Company’s general cash needs.
These accounts include available-for-sale securities. Available-for-sale securities are reported at fair value with unrealized gains and losses excluded from earnings and reported in Accumulated other comprehensive loss.
The Company’s carrying value and estimated fair value of its restricted investments and bond collateral at June 30, 2015 were as follows:
 
Carrying Value
 
Fair Value
 
Fair Value Hierarchy
 
(In thousands)
 
 
Cash and cash equivalents
$
92,718

 
$
92,718

 
Level 1
Time deposits
2,455

 
2,455

 
Level 1
Available-for-sale
32,994

 
32,994

 
Level 1
 
$
128,167

 
$
128,167

 
 
Available-for-Sale Restricted Investments and Bond Collateral
The cost basis, gross unrealized holding gains and losses, and fair value of available-for-sale securities at June 30, 2015 were as follows (in thousands):
Cost basis
$
33,814

Gross unrealized holding gains
230

Gross unrealized holding losses
(1,050
)
Fair value
$
32,994


16

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)

Maturities of available-for-sale securities were as follows at June 30, 2015: 
 
Cost Basis
 
Fair Value
 
(In thousands)
Due within one year
$
1,128

 
$
1,068

Due in five years or less
15,135

 
14,832

Due after five years to ten years
4,356

 
4,125

Due in more than ten years
13,195

 
12,969

 
$
33,814

 
$
32,994


5.
RESTRUCTURING CHARGES
In 2013, the Company entered into an agreement with Virginia Electric Power Company, to restructure the remaining 5 years of the ROVA contract. The Company recorded no restructuring charges for ROVA restructuring for the three and six months ended June 30, 2015 and recorded restructuring charges for ROVA restructuring for the three and six months ended June 30, 2014 of $0.1 million and $0.5 million, respectively.
The table below represents the restructuring provision activity related to the ROVA restructuring affecting our Power segment during the six months ended June 30, 2015 (in millions):
Restructure Liability as of
 
 
 
 
 
Restructure Liability as of
December 31, 2014
 
Restructuring Charges
 
Restructuring Payments
 
June 30, 2015
$
0.4

 
$

 
$
0.4

 
$

During 2014, the Company initiated strategic changes related to the Canadian Acquisition and the GP Acquisition. The restructuring actions were completed in 2014 for the Canadian Acquisition and are expected to be completed in 2015 for the GP Acquisition. The Company recorded restructuring charges for one-time employee termination benefits of $0.1 million and $0.7 million for the three and six months ended June 30, 2015, respectively and $8.0 million for the three and six months ended June 30, 2014, and expects that accruals will be paid through 2016.
The table below represents the restructuring provision activity related to the Canadian Acquisition and the GP Acquisition affecting our Coal - Canada, Coal - U.S. and Coal - WMLP segments during the six months ended June 30, 2015 (in millions):
Restructure Liability as of
 
 
 
 
 
Restructure Liability as of
December 31, 2014
 
Restructuring Charges
 
Restructuring Payments
 
June 30, 2015
$
8.8

 
$
0.7

 
$
7.1

 
$
2.4


6.    LINES OF CREDIT AND DEBT
As of June 30, 2015, the Company and its subsidiaries are subject to four major debt arrangements: (1) $350.0 million in aggregate principal amount of 8.75% senior secured notes at the parent level (the “8.75% Notes”); (2) a secured term loan facility at the parent level in the aggregate principal amount of $422.9 million currently outstanding (the “WCC Term Loan Facility”); (3) a revolving credit facility under which the Company may borrow up to $75 million in aggregate principal amount, subject to certain timing restrictions described below (the “Revolving Credit Facility”); and (4) a secured term loan facility at WMLP in the aggregate principal amount of $175.8 million currently outstanding (the “WMLP Term Loan Facility”).
The 8.75% Notes are guaranteed by Westmoreland Energy LLC, Westmoreland Kemmerer, Inc., Westmoreland Mining LLC and Westmoreland Resources, Inc. and their respective subsidiaries (other than Absaloka Coal, LLC, Westmoreland Risk Management, Inc. and certain other immaterial subsidiaries). The 8.75% Notes are not guaranteed by Westmoreland Canada LLC or any of its subsidiaries, nor are they guaranteed by Westmoreland Resources GP, LLC or Westmoreland Resource Partners, LP, referred to as the Non-guarantors. The WCC Term Loan Facility is guaranteed by Westmoreland Energy LLC, Westmoreland Kemmerer, Inc., Westmoreland Mining LLC, Westmoreland Resources, Inc. and certain other direct and indirect subsidiaries of the Company (other than Absaloka Coal, LLC, Westmoreland Risk Management, Inc., Westmoreland Canada, LLC, Westmoreland Resources GP, LLC, Westmoreland Resource Partners, LP and

17

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)

certain other immaterial subsidiaries). Borrowings under the WMLP Term Loan Facility are secured by substantially all of WMLP’s and its subsidiaries’ assets.
The amounts outstanding under the Company’s debt consisted of the following as of the dates indicated: 
 
Total Debt Outstanding
 
June 30, 2015
 
December 31, 2014
 
(In thousands)
8.75% Notes due 2022
$
350,000

 
$
350,000

WCC Term Loan Facility due 2020
422,875

 
350,000

WMLP Term Loan Facility due 2018
175,838

 
175,000

Capital lease obligations
89,862

 
109,351

Revolving line of credit
2,500

 
9,576

Other
8,876

 
4,062

Debt discount
(14,117
)
 
(13,202
)
Total debt outstanding
1,035,834

 
984,787

Less current installments
(45,066
)
 
(52,712
)
Total debt outstanding, less current installments
$
990,768

 
$
932,075

The following table presents aggregate contractual debt maturities of all debt: 
 
As of June 30, 2015
 
(In thousands)
2015
$
25,074

2016
41,322

2017
32,151

2018
187,299

2019
9,066

Thereafter
755,039

Total
1,049,951

Less: debt discount
(14,117
)
Total debt
$
1,035,834

On January 22, 2015, the Company amended the WCC Term Loan Facility to increase the borrowings by $75.0 million, for an aggregate principal amount of $425.0 million as of that date. The amendments to the WCC Term Loan Facility were made in connection with the Buckingham Acquisition and for working capital. Net proceeds were $71.0 million after a 2.5% discount, 1.5% broker fee, a consent fee of 1.17%, and $0.1 million of additional debt issuance costs.
On June 2, 2015, the Company amended the Revolving Credit Facility to permit Westmoreland and the other U.S. borrowers thereunder to borrow up to an additional $25.0 million between June 15th and August 15th of each year. As a result, the U.S. sub-facility has a maximum available borrowing amount of $55.0 million during these periods, yielding a total aggregate borrowing capacity of $75.0 million when added to the Canadian sub-facility. Outside of these periods, the Revolving Credit Facility has a maximum available borrowing amount of $50.0 million. As of June 30, 2015, the Company had borrowings of $2.5 million under the Revolving Credit Facility and had outstanding letters of credit in the amount of $21.2 million.
During the six months ended June 30, 2015, the Company entered into $12.8 million of new capital leases.


18

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)

7.    POSTRETIREMENT MEDICAL BENEFITS AND PENSION
Postretirement Medical Benefits
The Company provides postretirement medical benefits to retired employees and their dependents as mandated by the Coal Industry Retiree Health Benefit Act of 1992 and pursuant to collective bargaining agreements. The Company also provides these benefits to qualified full-time employees pursuant to collective bargaining agreements.
The components of net periodic postretirement medical benefit cost are as follows: 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
2015
 
2014
 
2015
 
2014
 
(In thousands)
 
(In thousands)
Components of net periodic benefit cost:
 
 
 
 
 
 
 
Service cost
$
1,054

 
$
822

 
$
2,108

 
$
1,645

Interest cost
2,907

 
3,203

 
5,815

 
6,407

Amortization of deferred items
327

 
4

 
654

 
9

Total net periodic benefit cost
$
4,288

 
$
4,029

 
$
8,577

 
$
8,061

The following table shows the net periodic postretirement medical benefit costs that relate to current and former mining operations: 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
 
(In thousands)
Former mining operations
$
2,034

 
$
2,402

 
$
4,068

 
$
4,807

Current operations
2,254

 
1,627

 
4,509

 
3,254

Total net periodic benefit cost
$
4,288

 
$
4,029

 
$
8,577

 
$
8,061

The costs for the former mining operations are included in Heritage health benefit expenses and costs for current operations are included in Cost of sales and Selling and administrative expenses.
Pension
The Company provides pension benefits to qualified full-time employees pursuant to collective bargaining agreements.
The Company incurred net periodic benefit costs of providing these pension benefits as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
 
(In thousands)
Components of net periodic benefit cost:
 
 
 
 
 
 
 
Service cost
$
376

 
$
500

 
$
882

 
$
1,000

Interest cost
1,971

 
1,638

 
3,957

 
3,384

Expected return on plan assets
(2,680
)
 
(2,154
)
 
(5,319
)
 
(4,307
)
Settlements
(347
)
 

 
(347
)
 

Amortization of deferred items
1,140

 
359

 
2,250

 
719

Total net periodic pension cost
$
460

 
$
343

 
$
1,423

 
$
796


These costs are included in Cost of sales and Selling and administrative expenses.

The Company made $3.3 million of contributions to its pension plans in the six months ended June 30, 2015. The Company expects to make $0.5 million of contributions to its pension plans during the remainder of 2015.


19

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)

8.    HERITAGE HEALTH BENEFIT EXPENSES
The caption Heritage health benefit expenses used in the unaudited consolidated statements of operations refers to costs of benefits the Company provides to its former mining operation employees. The components of these expenses are as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
 
(In thousands)
Health care benefits
$
2,049

 
$
2,376

 
$
4,097

 
$
4,650

Combined benefit fund payments
462

 
512

 
925

 
1,025

Workers’ compensation benefits
112

 
124

 
222

 
260

Black lung benefits
(461
)
 
376

 
(23
)
 
997

Total
$
2,162

 
$
3,388

 
$
5,221

 
$
6,932


9.
ASSET RETIREMENT OBLIGATIONS, CONTRACTUAL THIRD-PARTY RECLAMATION RECEIVABLE AND RECLAMATION DEPOSITS
The asset retirement obligation, contractual third-party reclamation receivable, and reclamation deposits for each of the Company’s operating segments at June 30, 2015 are summarized below:
 
Asset
Retirement
Obligation
 
Contractual
Third-Party
Reclamation
Receivable
 
Reclamation
Deposits
 
(In thousands)
Coal - U.S.
$
296,067

 
$
109,223

 
$
76,952

Coal - Canada
121,312

 
6,137

 

Coal - WMLP
32,886

 

 

Power
998

 

 

Total
$
451,263

 
$
115,360

 
$
76,952

Asset Retirement Obligations
Changes in the Company’s asset retirement obligations were as follows: 
 
Six Months Ended June 30,
 
2015
 
2014
 
(In thousands)
Asset retirement obligations, beginning of year (including current portion)
$
452,745

 
$
279,864

Accretion
19,452

 
14,003

Liabilities settled
(17,484
)
 
(10,250
)
Changes due to amount and timing of reclamation
1,769

 

Asset retirement obligations acquired
3,769

 
102,075

Changes due to foreign currency translation
(8,988
)
 
3,692

Asset retirement obligations, end of period
451,263

 
389,384

Less current portion
(49,860
)
 
(31,131
)
Asset retirement obligations, less current portion
$
401,403

 
$
358,253


20

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)

Contractual Third-Party Reclamation Receivables
At June 30, 2015, the Company recognized an asset of $115.4 million as contractual third-party reclamation receivables, representing the present value of customer obligations to reimburse the Company for future reclamation expenditures.
Reclamation Deposits
The Company’s reclamation deposits will be used to fund final reclamation activities. The Company’s carrying value and estimated fair value of its reclamation deposits at June 30, 2015 were as follows: 
 
Carrying Value
 
Fair Value
 
Fair Value Hierarchy
 
(In thousands)
 
 
Cash and cash equivalents
$
43,725

 
$
43,725

 
Level 1
Available-for-sale securities
33,227

 
33,227

 
Level 1
 
$
76,952

 
$
76,952


 
These accounts include available-for-sale securities. Available-for-sale securities are reported at fair value with unrealized gains and losses excluded from earnings and reported in Accumulated other comprehensive loss.
Available-for-Sale Reclamation Deposits
The cost basis, gross unrealized holding gains and losses, and fair value of available-for-sale securities at June 30, 2015 were as follows (in thousands):
Cost basis
$
33,454

Gross unrealized holding gains
617

Gross unrealized holding losses
(844
)
Fair value
$
33,227


Maturities of available-for-sale securities were as follows at June 30, 2015:
 
Cost Basis
 
Fair Value
 
(In thousands)
Within one year
$

 
$

Due in five years or less
18,393

 
18,425

Due after five years to ten years
6,118

 
5,839

Due in more than ten years
8,943

 
8,963

 
$
33,454

 
$
33,227


10.    DERIVATIVE 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 contain features that qualify as embedded derivatives. All derivative financial instruments, except for derivatives that qualify for the normal purchase normal sale exception, are recognized on the balance sheet at fair value. Changes in fair value are recognized in earnings if they are not eligible for hedge accounting or in other comprehensive income if they qualify for cash flow hedge accounting.
In the first quarter of 2014, the Company entered into two foreign currency exchange forward contracts to purchase Canadian Dollars to manage a portion of its exposure to fluctuating rates of exchange on anticipated Canadian Dollar-denominated Canadian Acquisition cash flows. These two foreign currency contracts had a total notional amount of $348.3 million and were settled in April 2014.
During 2014, the Company entered into contracts to purchase power at its ROVA facility to manage exposure to power price fluctuations. These contracts cover the period from April 2014 to March 2019 and contracted power prices range from

21

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)

$41.05 to $56.33 per megawatt hour, with a weighted average contract price of $43.54 over the remaining contract lives. The fair value of these power price derivatives are based on comparing contracted prices to projected future prices.
The fair value of outstanding derivative instruments not designated as hedging instruments on the accompanying unaudited Consolidated Balance Sheets was as follows (in thousands): 
Derivative Instruments
 
Balance Sheet Location
 
June 30, 2015
 
December 31, 2014
Contracts to purchase power
 
Other current liabilities
 
$
7,921

 
$
8,265

Contracts to purchase power
 
Other liabilities
 
26,469

 
21,103

The effect of derivative instruments not designated as hedging instruments on the accompanying unaudited Consolidated Statements of Operations was as follows (in thousands): 
 
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
Derivative Instruments
 
Statement of
Operations Location
 
2015
 
2014
 
2015
 
2014
Canadian dollar foreign exchange forward contracts
 
Gain (loss) on foreign exchange
 
$

 
$
581

 
$

 
$
(6,209
)
Contracts to purchase power
 
Derivative loss
 
(6,178
)
 
(5,930
)
 
(902
)
 
(5,930
)

11.    FAIR VALUE MEASUREMENTS
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. See Notes 4, 9 and 10 for additional disclosures related to fair value measurements.
Fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy, as defined below, gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.
Level 1, defined as observable inputs such as quoted prices in active markets for identical assets.
Level 2, defined as observable inputs other than Level 1 prices. These include quoted prices for similar assets or liabilities in an active market, quoted prices for identical assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
The table below sets forth, by level, the Company’s financial assets that are accounted for at fair value at June 30, 2015:
 
Level 1
(In thousands)
Assets:
 
Available-for-sale investments included in Restricted investments and bond collateral
$
32,994

Available-for-sale investments included in Reclamation deposits
33,227

Total assets
$
66,221


22

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)

Long-term debt fair value estimates are based on observed prices for securities with an active trading market when available (Level 2) and otherwise using discount rate estimates based on interest rates (Level 3). As of June 30, 2015, the Company had no long-term debt with Level 3 fair values. The estimated fair values of the Company’s debt with fixed and variable interest rates are as follows:
 
Fixed Interest Rate
 
Variable Interest Rate
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
 
(In thousands)
 
(In thousands)
December 31, 2014
$
345,498

 
$
348,250

 
$
341,300

 
$
344,750

June 30, 2015
$
345,736

 
$
329,000

 
$
413,022

 
$
412,303

The Company uses derivative financial instruments, primarily foreign exchange contracts and forward contracts to purchase power, to reduce its exposure to market risks from changes in foreign exchange rates and changes in prices for power, respectively. The foreign exchange contracts are measured at fair value using quoted forward foreign exchange prices from counterparties corroborated by market-based pricing (Level 2). The contracts to purchase power are measured at fair value using forward pricing curves for power from counterparties corroborated by market-based pricing (Level 2). Additional information related to the Company’s derivative financial instruments is disclosed in Note 10 to the unaudited consolidated financial statements.
The Company’s non-recurring fair value measurements include asset retirement obligations (refer to Note 9).
The Company determines the estimated fair value of its asset retirement obligations by calculating the present value of estimated cash flows related to reclamation liabilities using Level 3 inputs. The significant inputs used to calculate such liabilities includes estimates of costs to be incurred, the Company’s credit adjusted discount rate, inflation rates and estimated dates of reclamation. The asset retirement liability is accreted to its present value each period and the capitalized asset retirement cost is depleted using the units-of-production method.
The fair value of assets and liabilities acquired through business combinations is calculated using a discounted-cash flow approach using Level 3 inputs. Cash flow estimates require forecasts and assumptions for many years into the future for a variety of factors.

12.     INCOME TAXES

For interim income tax reporting the Company estimates its annual effective tax rate and applies this effective tax rate to its year to date pre-tax (loss) income.  For the six months ended June 30, 2015 the effective tax rate differed from the statutory rate primarily as a result of the U.S. and Canadian valuation allowances and the impact of the statutory rate change in Alberta, Canada. For the six months ended June 30, 2014, the effective tax rate differed from the statutory rate primarily due to the U.S. valuation allowance and foreign operations.

13.    SHAREHOLDERS’ DEFICIT AND ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Preferred Stock
The Company paid less than $0.1 million of preferred stock dividends for the six months ended June 30, 2015. During the first quarter of 2015, all of the Company’s outstanding shares of preferred stock were converted or redeemed, consisting of 88,494 shares of preferred stock being converted into 604,557 shares of common stock and 3,175 shares of preferred stock being redeemed under a mandatory redemption for $0.3 million. At June 30, 2015, there were no outstanding preferred stock shares.

23

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)

Changes in Accumulated Other Comprehensive Income (Loss)
The following table reflects the changes in accumulated other comprehensive income (loss) by component:
 
Pension
 
Postretirement
medical benefits
 
Unrealized gains and losses on available-for-sale
securities, net
 
Foreign currency translation adjustment
 
Tax effect of
other
comprehensive
income gains
 
Accumulated
other
comprehensive
income (loss)
 
(In thousands)
Balance at December 31, 2014
$
(36,065
)
 
$
(39,716
)
 
$
413

 
$
(17,880
)
 
$
(31,048
)
 
$
(124,296
)
Other comprehensive income (loss) before reclassifications
(285
)
 

 
(1,584
)
 
(22,216
)
 
(350
)
 
(24,435
)
Amounts reclassified from accumulated other comprehensive income (loss)
2,267

 
654

 
124

 

 

 
3,045

Balance at June 30, 2015
$
(34,083
)
 
$
(39,062
)
 
$
(1,047
)
 
$
(40,096
)
 
$
(31,398
)
 
$
(145,686
)
The following table reflects the reclassifications out of accumulated other comprehensive loss for the three and six months ended months ended June 30, 2015 (in thousands):
Details about accumulated other comprehensive loss components
 
Amount reclassified from accumulated other
comprehensive loss1
 
Affected line item
in the statement
where net loss is presented
 
Three Months Ended June 30, 2015
 
Six Months Ended June 30, 2015
 
Available-for sale securities
 
 
 
 
 
 
Realized gains and losses on available-for sale securities
 
$
110

 
$
124

 
Other income (loss)
 
 
 
 
 
 
 
Amortization of defined benefit pension items
 
 
 
 
 
 
Prior service costs
 
$
2

 
$
4

 
 
Actuarial losses
 
1,155

 
2,263

 
2 
Total
 
$
1,157

 
$
2,267

 
 
Amortization of postretirement medical items
 
 
 
 
 
 
Prior service costs
 
$
(159
)
 
$
(318
)
 
3 
Actuarial losses
 
486

 
972

 
3 
Total
 
$
327

 
$
654

 
 
____________________
(1)
Amounts in parentheses indicate debits to income/loss.
(2)
These accumulated other comprehensive loss components are included in the computation of net periodic pension cost. (See Note 7 - Pension for additional details)
(3)
These accumulated other comprehensive loss components are included in the computation of net periodic postretirement medical cost. (See Note 7 - Postretirement Medical Benefits for additional details)

14.     SHARE-BASED COMPENSATION
The Company grants employees and non-employee directors restricted stock units. Non-employee directors receive equity awards with a value of $90,000 after each annual meeting.

24

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)

The Company recognized compensation expense from share-based arrangements shown in the following table:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
Recognition of fair value of restricted stock units, stock options and SARs over vesting period; and issuance of stock
$
1,161

 
$
1,388

 
$
1,824

 
$
2,116

Contributions of stock to the Company’s 401(k) plan
963

 
329

 
1,822

 
329

Total share-based compensation expense
$
2,124

 
$
1,717

 
$
3,646

 
$
2,445

Restricted Stock Units
A summary of restricted stock award activity for the six months ended June 30, 2015 is as follows: 
 
Units
 
Weighted
Average
Grant-Date
Fair Value
 
Unamortized
Compensation
Expense
(In thousands)
 
Non-vested at December 31, 2014
409,362

 
$
13.87

 
 
 
Granted
262,555

 
28.26

 
 
 
Vested
(247,528
)
 
10.53

 
 
 
Forfeited
(60,241
)
 
10.57

 
 
 
Non-vested at June 30, 2015
364,148

 
$
28.57

 
$
8,750

(1) 
____________________
(1)
Expected to be recognized over the next three years.
Stock Options
A summary of stock option activity for the six months ended June 30, 2015 is as follows:
 
Stock Options
 
Weighted
Average
Exercise Price
 
Weighted
Average
Remaining
Contractual
Life
(In years)
 
Aggregate Intrinsic
Value
(In thousands)
 
Unamortized
Compensation
Expense
(In thousands)
Outstanding at December 31, 2014
110,806

 
$
22.15

 
 
 
 
 
 
Exercised

 

 
 
 
 
 
 
Expired

 

 
 
 
 
 
 
Outstanding and exercisable at June 30, 2015
110,806

 
$
22.15

 
2.7
 
$

 
$

There were no stock options granted during the six months ended June 30, 2015.
SARs
A summary of SARs activity for the six months ended June 30, 2015 is as follows:
 
SARs
 
Weighted
Average Exercise Price
 
Weighted
Average
Remaining
Contractual
Life
(In years)
 
Aggregate Intrinsic
Value
(In thousands)
 
Unamortized
Compensation
Expense
(In thousands)
Outstanding at December 31, 2014
16,943

 
$
25.44

 
 
 
 
 
 
Exercised

 

 
 
 
 
 
 
Expired

 

 
 
 
 
 
 
Outstanding and exercisable at June 30, 2015
16,943

 
$
25.44

 
0.9
 
$

 
$


25

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)

There were no SARs granted during the six months ended June 30, 2015.

15.    EARNINGS PER SHARE
Basic earnings (loss) per share has been computed by dividing the net income (loss) applicable to common shareholders by the weighted average number of shares of common stock outstanding during each period. Net income (loss) applicable to common shareholders includes the adjustment for net income or loss attributable to noncontrolling interest. Diluted earnings (loss) per share is computed by including the dilutive effect of common stock that would be issued assuming conversion or exercise of outstanding convertible notes and securities, stock options, stock appreciation rights, and restricted stock units. No such items were included in the computations of diluted loss per share in the three and six months ended June 30, 2015 and 2014 because the Company incurred a net loss applicable to common shareholders in these periods and the effect of inclusion would have been anti-dilutive.
The table below shows the number of shares that were excluded from the calculation of diluted loss per share because their inclusion would be anti-dilutive to the calculation:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015

2014
 
(In thousands)
Convertible securities

 
654

 

 
654

Restricted stock units, stock options and SARs
492

 
674

 
492

 
674

Total shares excluded from diluted shares calculation
492

 
1,328

 
492

 
1,328



26

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)

16.    BUSINESS SEGMENT INFORMATION
Segment information is based on a management approach, which requires segmentation based upon the Company’s internal organization, reporting of revenue, and operating income. The Company’s operations are classified into six reporting segments: Coal - U.S., Coal - Canada, Coal - WMLP, Power, Heritage, and Corporate and Eliminations.
Summarized financial information by segment is as follows:
 
Coal -
U.S.(1)
 
Coal - Canada(2)
 
Coal - WMLP(3)
 
Power
 
Heritage
 
Corporate and Eliminations(4)
 
Consolidated
 
(In thousands)
Three Months Ended June 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues
$
170,138

 
$
106,162

 
$
59,515

 
$
21,334

 
$

 
$
(8,190
)
 
$
348,959

Restructuring charges

 

 
103

 

 

 

 
103

Depreciation, depletion, and amortization
13,655

 
8,611

 
9,563

 
2,476

 

 
(42
)
 
34,263

Operating income (loss)
404

 
9,524

 
(539
)
 
(9,035
)
 
(2,400
)
 
(4,820
)
 
(6,866
)
Total assets
712,824