Attached files
file | filename |
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EX-31.2 - EXHIBIT 31.2 - WESTMORELAND COAL Co | exh31-2_2015q3.htm |
EX-32 - EXHIBIT 32 - WESTMORELAND COAL Co | exh32_2015q3.htm |
EX-2.2 - EXHIBIT 2.2 - WESTMORELAND COAL Co | exh2-2_2015q3.htm |
EX-95.1 - EXHIBIT 95.1 - WESTMORELAND COAL Co | exh95-1_2015q3.htm |
EX-31.1 - EXHIBIT 31.1 - WESTMORELAND COAL Co | exh31-1_2015q3.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 September 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 November 2, 2015: 18,064,956 shares of common stock, $0.01 par value.
TABLE OF CONTENTS
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2
PART I - FINANCIAL INFORMATION
ITEM 1
FINANCIAL STATEMENTS
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
September 30, 2015 | December 31, 2014 | ||||||
(In thousands) | |||||||
Assets | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 29,336 | $ | 14,258 | |||
Receivables: | |||||||
Trade | 146,522 | 143,052 | |||||
Loan and lease receivables | 6,304 | 10,493 | |||||
Contractual third-party reclamation receivables | 19,310 | 12,462 | |||||
Other | 15,081 | 19,923 | |||||
187,217 | 185,930 | ||||||
Inventories | 124,438 | 133,855 | |||||
Deferred income taxes | 14,451 | 13,083 | |||||
Other current assets | 15,795 | 13,645 | |||||
Total current assets | 371,237 | 360,771 | |||||
Property, plant and equipment: | |||||||
Land and mineral rights | 494,950 | 500,226 | |||||
Plant and equipment | 1,012,900 | 956,112 | |||||
1,507,850 | 1,456,338 | ||||||
Less accumulated depreciation, depletion and amortization | 625,940 | 528,676 | |||||
Net property, plant and equipment | 881,910 | 927,662 | |||||
Loan and lease receivables | 51,099 | 73,180 | |||||
Advanced coal royalties | 17,958 | 17,508 | |||||
Reclamation deposits | 77,425 | 77,907 | |||||
Restricted investments and bond collateral | 137,672 | 164,389 | |||||
Contractual third-party reclamation receivables, less current portion | 96,086 | 104,021 | |||||
Investment in joint venture | 28,664 | 33,409 | |||||
Intangible assets, net of accumulated amortization of $16.9 million and $15.3 million at September 30, 2015 and December 31, 2014, respectively | 29,720 | 31,315 | |||||
Other assets | 36,451 | 39,416 | |||||
Total Assets | $ | 1,728,222 | $ | 1,829,578 |
See accompanying Notes to Consolidated Financial Statements.
3
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets (Continued)
(Unaudited)
September 30, 2015 | December 31, 2014 | ||||||
(In thousands) | |||||||
Liabilities and Shareholders’ Deficit | |||||||
Current liabilities: | |||||||
Current installments of long-term debt | $ | 38,879 | $ | 43,136 | |||
Revolving lines of credit | — | 9,576 | |||||
Accounts payable and accrued expenses: | |||||||
Trade and other accrued liabilities | 129,084 | 149,514 | |||||
Interest payable | 7,869 | 2,699 | |||||
Production taxes | 53,437 | 45,747 | |||||
Workers’ compensation | 656 | 671 | |||||
Postretirement medical benefits | 13,263 | 13,263 | |||||
SERP | 368 | 368 | |||||
Deferred revenue | 13,170 | 13,175 | |||||
Asset retirement obligations | 47,462 | 43,289 | |||||
Other current liabilities | 25,895 | 52,459 | |||||
Total current liabilities | 330,083 | 373,897 | |||||
Long-term debt, less current installments | 1,014,075 | 932,075 | |||||
Workers’ compensation, less current portion | 6,081 | 6,315 | |||||
Excess of black lung benefit obligation over trust assets | 11,919 | 11,252 | |||||
Postretirement medical benefits, less current portion | 293,268 | 293,156 | |||||
Pension and SERP obligations, less current portion | 44,256 | 49,779 | |||||
Deferred revenue, less current portion | 27,425 | 35,255 | |||||
Asset retirement obligations, less current portion | 402,145 | 409,456 | |||||
Intangible liabilities, net of accumulated amortization of $14.3 million and $13.5 million at September 30, 2015 and December 31, 2014, respectively | 3,737 | 4,538 | |||||
Deferred income taxes | 47,435 | 34,852 | |||||
Other liabilities | 37,014 | 28,448 | |||||
Total liabilities | 2,217,438 | 2,179,023 | |||||
Shareholders’ deficit: | |||||||
Preferred stock of $1.00 par value | |||||||
Authorized 5,000,000 shares; no issued and outstanding shares at September 30, 2015 and 91,669 shares issued and outstanding at December 31, 2014 | — | 92 | |||||
Common stock of $0.01 par value as of September 30, 2015 and $2.50 par value as of December 31, 2014 | |||||||
Authorized 30,000,000 shares; issued and outstanding 18,021,061 shares at September 30, 2015 and 17,102,777 shares at December 31, 2014 | 180 | 42,756 | |||||
Other paid-in capital | 238,705 | 185,644 | |||||
Accumulated other comprehensive loss | (165,811 | ) | (124,296 | ) | |||
Accumulated deficit | (563,804 | ) | (468,902 | ) | |||
Total Westmoreland Coal Company shareholders’ deficit | (490,730 | ) | (364,706 | ) | |||
Noncontrolling interest | 1,514 | 15,261 | |||||
Total deficit | (489,216 | ) | (349,445 | ) | |||
Total Liabilities and Deficit | $ | 1,728,222 | $ | 1,829,578 |
See accompanying Notes to Consolidated Financial Statements.
4
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||
(In thousands, except per share data) | |||||||||||||||
Revenues | $ | 349,796 | $ | 337,830 | $ | 1,070,240 | $ | 805,989 | |||||||
Cost, expenses and other: | |||||||||||||||
Cost of sales | 292,973 | 285,524 | 880,162 | 670,467 | |||||||||||
Depreciation, depletion and amortization | 34,459 | 28,175 | 106,781 | 68,713 | |||||||||||
Selling and administrative | 29,383 | 24,434 | 84,611 | 68,551 | |||||||||||
Heritage health benefit expenses | 2,801 | 3,315 | 8,022 | 10,246 | |||||||||||
Loss on sale/disposal of assets | 1,135 | 119 | 2,148 | 114 | |||||||||||
Restructuring charges | — | 3,265 | 656 | 11,207 | |||||||||||
Derivative loss | 5,815 | 23,691 | 6,717 | 29,621 | |||||||||||
Income from equity affiliates | (463 | ) | (1,261 | ) | (4,141 | ) | (2,060 | ) | |||||||
Other operating loss (income) | (1,000 | ) | — | (1,000 | ) | 151 | |||||||||
365,103 | 367,262 | 1,083,956 | 857,010 | ||||||||||||
Operating loss | (15,307 | ) | (29,432 | ) | (13,716 | ) | (51,021 | ) | |||||||
Other income (expense): | |||||||||||||||
Interest expense | (26,831 | ) | (21,251 | ) | (76,870 | ) | (63,835 | ) | |||||||
Loss on extinguishment of debt | (5,385 | ) | (13 | ) | (5,385 | ) | (12,648 | ) | |||||||
Interest income | 1,555 | 2,468 | 6,262 | 4,351 | |||||||||||
Gain (loss) on foreign exchange | 1,679 | (1,742 | ) | 2,474 | (5,883 | ) | |||||||||
Other income | 356 | 118 | 1,082 | 697 | |||||||||||
(28,626 | ) | (20,420 | ) | (72,437 | ) | (77,318 | ) | ||||||||
Loss before income taxes | (43,933 | ) | (49,852 | ) | (86,153 | ) | (128,339 | ) | |||||||
Income tax expense (benefit) | 4,087 | (718 | ) | 13,596 | 2,979 | ||||||||||
Net loss | (48,020 | ) | (49,134 | ) | (99,749 | ) | (131,318 | ) | |||||||
Less net loss attributable to noncontrolling interest | (1,458 | ) | — | (4,850 | ) | — | |||||||||
Net loss attributable to Westmoreland Coal Company | (46,562 | ) | (49,134 | ) | (94,899 | ) | (131,318 | ) | |||||||
Less preferred stock dividend requirements | — | 195 | — | 664 | |||||||||||
Net loss applicable to common shareholders | $ | (46,562 | ) | $ | (49,329 | ) | $ | (94,899 | ) | $ | (131,982 | ) | |||
Net loss per share applicable to common shareholders: | |||||||||||||||
Basic and diluted | $ | (2.59 | ) | $ | (2.95 | ) | $ | (5.32 | ) | $ | (8.49 | ) | |||
Weighted average number of common shares outstanding: | |||||||||||||||
Basic and diluted | 17,986 | 16,729 | 17,846 | 15,554 |
See accompanying Notes to Consolidated Financial Statements.
5
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
Consolidated Statements of Comprehensive Loss
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||
(In thousands) | |||||||||||||||
Net loss | $ | (48,020 | ) | $ | (49,134 | ) | $ | (99,749 | ) | $ | (131,318 | ) | |||
Other comprehensive income (loss): | |||||||||||||||
Pension and other postretirement plans: | |||||||||||||||
Amortization of accumulated actuarial gains or losses, pension | 996 | 361 | 3,263 | 1,078 | |||||||||||
Adjustments to accumulated actuarial losses and transition obligations, pension | (253 | ) | (371 | ) | (538 | ) | (172 | ) | |||||||
Amortization of accumulated actuarial gains or losses, transition obligations, and prior service costs, postretirement medical benefit | 327 | 3 | 981 | 13 | |||||||||||
Tax effect of other comprehensive income gains | (558 | ) | (487 | ) | (908 | ) | (711 | ) | |||||||
Change in foreign currency translation adjustment | (20,802 | ) | (14,642 | ) | (43,018 | ) | (5,364 | ) | |||||||
Unrealized and realized gains and losses on available-for-sale securities | 165 | 1,231 | (1,295 | ) | 1,231 | ||||||||||
Other comprehensive loss | (20,125 | ) | (13,905 | ) | (41,515 | ) | (3,925 | ) | |||||||
Comprehensive loss attributable to the Parent company | $ | (68,145 | ) | $ | (63,039 | ) | $ | (141,264 | ) | $ | (135,243 | ) |
See accompanying Notes to Consolidated Financial Statements.
6
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
Consolidated Statements of Deficit
Nine Months Ended September 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 | — | — | — | — | — | — | — | (535 | ) | (535 | ) | ||||||||||||||||||||||
Common stock issued as compensation | — | — | 128,480 | 97 | 5,491 | — | — | — | 5,588 | ||||||||||||||||||||||||
Conversion and redemption of convertible notes and securities | (91,669 | ) | (92 | ) | 604,557 | 1,511 | (1,738 | ) | — | — | — | (319 | ) | ||||||||||||||||||||
Issuance of restricted stock | — | — | 185,247 | 406 | (3,644 | ) | — | — | — | (3,238 | ) | ||||||||||||||||||||||
Change in WMLP Ownership Percentage | — | — | — | — | 8,362 | — | — | (8,362 | ) | — | |||||||||||||||||||||||
Change in par value of common stock from $2.50 to $0.01 | — | — | — | (44,590 | ) | 44,590 | — | — | — | — | |||||||||||||||||||||||
Net loss | — | — | — | — | — | — | (94,899 | ) | (4,850 | ) | (99,749 | ) | |||||||||||||||||||||
Other comprehensive loss | — | — | — | — | — | (41,515 | ) | — | — | (41,515 | ) | ||||||||||||||||||||||
Balance at September 30, 2015 | — | $ | — | 18,021,061 | $ | 180 | $ | 238,705 | $ | (165,811 | ) | $ | (563,804 | ) | $ | 1,514 | $ | (489,216 | ) |
See accompanying Notes to Consolidated Financial Statements.
7
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
See accompanying Notes to Consolidated Financial Statements.
Nine Months Ended September 30, | |||||||
2015 | 2014 | ||||||
(In thousands) | |||||||
Cash flows from operating activities: | |||||||
Net loss | $ | (99,749 | ) | $ | (131,318 | ) | |
Adjustments to reconcile net loss to net cash provided by operating activities: | |||||||
Depreciation, depletion and amortization | 106,781 | 68,713 | |||||
Accretion of asset retirement obligation and receivable | 21,251 | 16,257 | |||||
Share-based compensation | 5,588 | 3,456 | |||||
Loss on sale/disposal of assets | 2,148 | 114 | |||||
Non-cash interest expense | 4,617 | — | |||||
Amortization of deferred financing costs | 7,849 | 2,365 | |||||
Loss on extinguishment of debt | 4,445 | 12,648 | |||||
Loss on derivatives | 6,717 | 29,621 | |||||
Loss (gain) on foreign exchange | (2,474 | ) | 5,883 | ||||
Income from equity affiliates | (4,141 | ) | (2,060 | ) | |||
Distributions from equity affiliates | 4,328 | 2,948 | |||||
Deferred income tax | 14,887 | 3,344 | |||||
Other | (2,625 | ) | 524 | ||||
Changes in operating assets and liabilities: | |||||||
Receivables | (14,327 | ) | (24,520 | ) | |||
Inventories | 494 | 55,399 | |||||
Accounts payable and accrued expenses | 4,826 | 6,377 | |||||
Deferred revenue | (8,297 | ) | (9,140 | ) | |||
Accrual for workers’ compensation | (1,240 | ) | (178 | ) | |||
Asset retirement obligations | (9,908 | ) | (5,881 | ) | |||
Other assets and liabilities | (20,288 | ) | 3,659 | ||||
Net cash provided by operating activities | 20,882 | 38,211 | |||||
Cash flows from investing activities: | |||||||
Additions to property, plant and equipment | (57,971 | ) | (35,646 | ) | |||
Change in restricted investments and bond collateral and reclamation deposits | (22,392 | ) | (41,795 | ) | |||
Cash released from escrow for acquisition | 34,000 | — | |||||
Cash payments related to acquisitions and other | (35,887 | ) | (322,637 | ) | |||
Cash acquired related to acquisitions | 2,780 | 8,103 | |||||
Proceeds from the sale of restricted investments | 14,404 | 7,279 | |||||
Payments related to loan and lease receivables | (3,981 | ) | (2,514 | ) | |||
Receipts from loan and lease receivables | 20,192 | 5,057 | |||||
Net proceeds from sales of assets and other | 1,404 | 37,538 | |||||
Net cash used in investing activities | (47,451 | ) | (344,615 | ) | |||
Cash flows from financing activities: | |||||||
Change in book overdrafts | 950 | (317 | ) | ||||
Borrowings from long-term debt, net of debt premium | 199,363 | 454,219 | |||||
Repayments of long-term debt | (138,185 | ) | (110,792 | ) | |||
Borrowings on revolving lines of credit | 142,823 | 15,000 | |||||
Repayments on revolving lines of credit | (152,412 | ) | (15,000 | ) | |||
Debt issuance costs and other refinancing costs | (7,431 | ) | (27,827 | ) | |||
Proceeds from issuance of common shares | — | 56,473 | |||||
Other | (860 | ) | (247 | ) | |||
Net cash provided by financing activities | 44,248 | 371,509 | |||||
Effect of foreign exchange rates on cash | (2,601 | ) | (2,525 | ) | |||
Net increase (decrease) in cash and cash equivalents | 15,078 | 62,580 | |||||
Cash and cash equivalents, beginning of period | 14,258 | 61,110 | |||||
Cash and cash equivalents, end of period | $ | 29,336 | $ | 123,690 | |||
Non-cash transactions: | |||||||
Accrued purchases of property and equipment | $ | 2,718 | $ | 9,555 | |||
Capital leases and other financing sources | 14,967 | 15,484 |
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 nine months ended September 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. ASU 2015-14, issued in August 2015, deferred the effective date of ASU 2014-09 to fiscal years beginning after December 15, 2017. The Company can either adopt these standards 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, which 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.
In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330):Simplifying the Measurement of Inventory, which changes the requirement to measure inventory at the lower of cost or market for non last-in, first-out (LIFO) and non retail methods of measuring inventory, to requiring inventory measured at lower of cost or net realizable value. The new guidance is effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years, with early adoption permitted. The Company does not foresee a material effect on its consolidated results of operations, cash flows, and financial position.
9
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
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 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 Buckingham 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 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, and these adjustments may be significant.
A summary of the purchase consideration and a preliminary allocation of the purchase consideration follows (in millions):
Provisional as of September 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 | 2.5 | ||
Other current assets | 0.1 | ||
Total current assets | 5.4 | ||
Land and mineral rights | 13.2 | ||
Plant and equipment | 24.6 | ||
Total Assets | 43.2 | ||
Liabilities: | |||
Trade payables and other accrued liabilities | (5.2 | ) | |
Asset retirement obligations | (1.0 | ) | |
Total current liabilities | (6.2 | ) | |
Asset retirement obligations, less current portion | (2.8 | ) | |
Other liabilities | (1.8 | ) | |
Total Liabilities | (10.8 | ) | |
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 GP 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 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, and these adjustments may be significant.
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 September 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.
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 terminal lease at a dock in Ohio which was fair valued based on contract prices which were favorable to 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 $33.1 million were expensed for the nine months ended September 30, 2014; which included a $14.2 million charge to Cost of sales related to the sale of inventory written up to fair value in the acquisition, $7.8 million of expenses included in Selling and administrative costs, $6.2 million of loss on foreign exchange as described in Note 11, 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 September 30, | Nine Months Ended September 30, | |||||
2014 | 2014 | ||||||
Total Revenues | |||||||
As reported | $ | 337,830 | $ | 805,989 | |||
Pro forma (unaudited) | $ | 465,094 | $ | 1,366,820 | |||
Operating Income | |||||||
As reported | $ | (29,432 | ) | $ | (51,021 | ) | |
Pro forma (unaudited) | $ | (7,339 | ) | $ | (14,678 | ) | |
Net loss applicable to common shareholders | |||||||
As reported | $ | (49,329 | ) | $ | (131,982 | ) | |
Pro forma (unaudited) | $ | (31,034 | ) | $ | (95,373 | ) | |
Net loss per share applicable to common shareholders | |||||||
As reported | $ | (2.95 | ) | $ | (8.49 | ) | |
Pro forma (unaudited) | $ | (1.86 | ) | $ | (6.13 | ) |
3. KEMMERER DROP
On August 1, 2015, we contributed 100% of the outstanding equity interests in Westmoreland Kemmerer, LLC (“Kemmerer”) to WMLP, a controlled and consolidated subsidiary, in exchange for $230 million in aggregate consideration, composed of $115 million of cash and $115 million in newly issued WMLP Series A Convertible Units (the "Series A Units" and such transaction, the “Kemmerer Drop”). In connection with the Kemmerer Drop, all employees of Kemmerer and related employee liabilities, including but not limited to post-retirement pension obligations and post-retirement health benefits, were transferred to us.
The Series A Units are convertible into common units representing limited partner interests of WMLP (“Common Units”), on a one-for-one basis, upon the earlier of (i) the date on which WMLP first makes a regular quarterly cash distribution to holders of Common Units in an amount equal to at least $0.22 per Common Unit, or (ii) a change of control of WMLP. Following the Kemmerer Drop, we hold an approximately 93.8% controlling interest in WMLP (on a fully diluted basis).
The Kemmerer Drop represents a reorganization of entities under common control. Accordingly, the net assets transferred are deemed to have transferred at the $99.6 million carrying value as of the date of transfer. No gain or loss was recognized.
15
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
4. INVENTORIES
Inventories consisted of the following:
September 30, 2015 | December 31, 2014 | ||||||
(In thousands) | |||||||
Coal stockpiles | $ | 37,313 | $ | 41,795 | |||
Coal fuel inventories | 8,769 | 6,531 | |||||
Materials and supplies | 81,032 | 88,584 | |||||
Reserve for obsolete inventory | (2,676 | ) | (3,055 | ) | |||
Total | $ | 124,438 | $ | 133,855 |
5. RESTRICTED INVESTMENTS AND BOND COLLATERAL
The Company’s restricted investments and bond collateral consist of the following:
September 30, 2015 | December 31, 2014 | ||||||
(In thousands) | |||||||
Coal - U.S. Segment: | |||||||
Reclamation bond collateral: | |||||||
Absaloka Mine | $ | 11,807 | $ | 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 | 18,220 | 18,199 | |||||
Reclamation bond collateral - CVRI | 33,870 | 31,866 | |||||
Coal - WMLP Segment: | |||||||
Reclamation bond collateral - Ohio | 8,255 | 10,634 | |||||
Reclamation bond collateral - Kemmerer Mine | 27,655 | 25,282 | |||||
Power Segment: | |||||||
Power contract collateral | 17,700 | 12,600 | |||||
Corporate Segment: | |||||||
Postretirement medical benefit bonds | 8,891 | 8,780 | |||||
Workers’ compensation bonds | 6,859 | 6,832 | |||||
Total restricted investments and bond collateral | $ | 137,672 | $ | 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 September 30, 2015 were as follows:
Carrying Value | Fair Value | Fair Value Hierarchy | |||||||
(In thousands) | |||||||||
Cash and cash equivalents | $ | 100,363 | $ | 100,363 | Level 1 | ||||
Time deposits | 2,455 | 2,455 | Level 1 | ||||||
Available-for-sale | 34,854 | 34,854 | Level 1 | ||||||
$ | 137,672 | $ | 137,672 |
16
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
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 September 30, 2015 were as follows (in thousands):
Cost basis | $ | 35,475 | |
Gross unrealized holding gains | 206 | ||
Gross unrealized holding losses | (827 | ) | |
Fair value | $ | 34,854 |
Maturities of available-for-sale securities were as follows at September 30, 2015:
Cost Basis | Fair Value | ||||||
(In thousands) | |||||||
Due within one year | $ | 1,258 | $ | 1,189 | |||
Due in five years or less | 15,015 | 14,640 | |||||
Due after five years to ten years | 4,356 | 4,110 | |||||
Due in more than ten years | 14,846 | 14,915 | |||||
$ | 35,475 | $ | 34,854 |
6. RESTRUCTURING CHARGES
In 2013, the Company entered into an agreement with Virginia Electric Power Company, to restructure the remaining five years of the ROVA contract (the "ROVA Restructuring Plan"). Total restructuring charges related to the ROVA Restructuring Plan were $5.5 million and all were recorded to the restructuring expense line item within our consolidated statements of operations as they were incurred. Restructuring expenses related to the ROVA Restructuring Plan impacted our Power Segment and all actions related to this restructuring plan have been completed.
During 2014, the Company initiated strategic changes related to the Canadian Acquisition and the GP Acquisition (collectively, the "Acquisition Restructuring Plans"). Total expected restructuring charges related to the Acquisition Restructuring Plans of $15.2 million have been recorded to the restructuring expense line item within our consolidated statements of operations as they were incurred. Charges related to the Acquisition Restructuring Plans were comprised of one-time employee termination benefits and impacted all segments except for our Power Segment. The restructuring actions were completed in 2014 for the Canadian Acquisition and are expected to be completed in 2015 for the GP Acquisition.
The table below represents the restructuring provision activity related to the restructuring plans:
ROVA Restructuring Plan | Acquisition Restructuring Plans | Total | |||||||||
(In millions) | |||||||||||
Balance, December 31, 2013 | $ | 5.1 | $ | — | $ | 5.1 | |||||
Restructuring Charges | 0.5 | 14.5 | 15.0 | ||||||||
Cash Payments | (5.2 | ) | (5.7 | ) | (10.9 | ) | |||||
Balance, December 31, 2014 | 0.4 | 8.8 | 9.2 | ||||||||
Restructuring Charges | — | 0.7 | 0.7 | ||||||||
Cash Payments | (0.4 | ) | (8.1 | ) | (8.5 | ) | |||||
Balance, September 30, 2015 | $ | — | $ | 1.4 | $ | 1.4 |
17
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
7. LINES OF CREDIT AND DEBT
As of September 30, 2015, the Company and its subsidiaries are subject to the following debt arrangements:
Total Debt Outstanding | |||||||
September 30, 2015 | December 31, 2014 | ||||||
(In thousands) | |||||||
8.75% Notes due 2022 | $ | 350,000 | $ | 350,000 | |||
WCC Term Loan Facility due 2020 | 327,994 | 350,000 | |||||
WMLP Term Loan Facility due 2018 | 297,414 | 175,000 | |||||
Capital lease obligations | 81,077 | 109,351 | |||||
Revolving line of credit | — | 9,576 | |||||
Other | 7,988 | 4,062 | |||||
Debt discount | (11,519 | ) | (13,202 | ) | |||
Total debt outstanding | 1,052,954 | 984,787 | |||||
Less current installments | (38,879 | ) | (52,712 | ) | |||
Total debt outstanding, less current installments | $ | 1,014,075 | $ | 932,075 |
The following table presents aggregate contractual debt maturities of all debt:
As of September 30, 2015 | |||
(In thousands) | |||
2015 | $ | 11,594 | |
2016 | 39,451 | ||
2017 | 31,213 | ||
2018 | 308,458 | ||
2019 | 8,450 | ||
Thereafter | 665,307 | ||
Total | 1,064,473 | ||
Less: debt discount | (11,519 | ) | |
Total debt | $ | 1,052,954 |
8.75% Notes due 2022 (the "8.75% Notes")
The 8.75% Notes were issued by the Parent and are guaranteed by Westmoreland Energy LLC, 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."
WCC Term Loan Facility due 2020 (the "WCC Term Loan Facility")
The WCC Term Loan Facility is a primary obligation of the Parent and is guaranteed by Westmoreland Energy LLC, 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., certain other immaterial subsidiaries, and the Non-guarantors).
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 "Term Loan Facility Add-on"). The amendments to the WCC Term Loan Facility were made in connection with the Buckingham Acquisition and for working capital purposes. 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.
18
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
In conjunction with the Kemmerer Drop, the Company amended the WCC Term Loan Facility to remove Kemmerer as a guarantor. In addition, $94.1 million of the proceeds received from WMLP related to the Kemmerer Drop were used to pay down the WCC Term Loan Facility.
WMLP Term Loan Facility due 2018 (the "WMLP Term Loan Facility")
The WMLP Term Loan Facility is a primary obligation of Oxford Mining Company, LLC, a wholly owned subsidiary of WMLP, is guaranteed by WMLP and its subsidiaries, and is secured by substantially all of WMLP's and its subsidiaries' assets.
Revolving Line of Credit (the "Revolving Credit Facility")
Pursuant to a June 2, 2015 amendment to the Revolving Credit Facility, Westmoreland has a total aggregate borrowing capacity of $75.0 million between June 15th and August 15th of each year, with an aggregate borrowing capacity of $50.0 million outside of these periods. As of September 30, 2015, the Company had no borrowings under the Revolving Credit Facility and had outstanding letters of credit in the amount of $21.1 million.
During the nine months ended September 30, 2015, the Company entered into $15.0 million of new capital leases.
8. 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 September 30, | Nine Months Ended September 30, | ||||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||
(In thousands) | (In thousands) | ||||||||||||||
Components of net periodic benefit cost: | |||||||||||||||
Service cost | $ | 1,054 | $ | 822 | $ | 3,163 | $ | 2,467 | |||||||
Interest cost | 2,907 | 3,203 | 8,722 | 9,610 | |||||||||||
Amortization of deferred items | 327 | 4 | 981 | 13 | |||||||||||
Total net periodic benefit cost | $ | 4,288 | $ | 4,029 | $ | 12,866 | $ | 12,090 |
The following table shows the net periodic postretirement medical benefit costs that relate to current and former mining operations:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||
(In thousands) | (In thousands) | ||||||||||||||
Former mining operations | $ | 2,034 | $ | 2,402 | $ | 6,103 | $ | 7,210 | |||||||
Current operations | 2,254 | 1,627 | 6,763 | 4,880 | |||||||||||
Total net periodic benefit cost | $ | 4,288 | $ | 4,029 | $ | 12,866 | $ | 12,090 |
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.
19
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
The Company incurred net periodic benefit costs of providing these pension benefits as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||
(In thousands) | (In thousands) | ||||||||||||||
Components of net periodic benefit cost: | |||||||||||||||
Service cost | $ | 436 | $ | 500 | $ | 1,318 | $ | 1,500 | |||||||
Interest cost | 1,831 | 1,747 | 5,780 | 5,240 | |||||||||||
Expected return on plan assets | (2,435 | ) | (2,154 | ) | (7,744 | ) | (6,461 | ) | |||||||
Settlements | (1,529 | ) | — | (1,874 | ) | — | |||||||||
Amortization of deferred items | 1,059 | 359 | 3,301 | 1,078 | |||||||||||
Total net periodic pension cost | $ | (638 | ) | $ | 452 | $ | 781 | $ | 1,357 |
These costs are included in Cost of sales and Selling and administrative expenses.
The Company made $3.5 million of contributions to its pension plans in the nine months ended September 30, 2015. The Company expects to make $0.3 million of contributions to its pension plans during the remainder of 2015.
9. 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 September 30, | Nine Months Ended September 30, | ||||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||
(In thousands) | (In thousands) | ||||||||||||||
Health care benefits | $ | 2,041 | $ | 2,404 | $ | 6,138 | $ | 7,054 | |||||||
Combined benefit fund payments | 462 | 342 | 1,387 | 1,366 | |||||||||||
Workers’ compensation benefits | 102 | 120 | 324 | 380 | |||||||||||
Black lung benefits | 196 | 449 | 173 | 1,446 | |||||||||||
Total | $ | 2,801 | $ | 3,315 | $ | 8,022 | $ | 10,246 |
10. | ASSET RETIREMENT OBLIGATIONS , CONTRACTUAL THIRD-PARTY RECLAMATION RECEIVABLE AND RECLAMATION DEPOSITS |
The asset retirement obligation ("ARO"), contractual third-party reclamation receivable, and reclamation deposits for each of the Company’s operating segments at September 30, 2015 are summarized below:
Asset Retirement Obligation | Contractual Third-Party Reclamation Receivable | Reclamation Deposits | |||||||||
(In thousands) | |||||||||||
Coal - U.S. | $ | 279,864 | $ | 109,758 | $ | 77,425 | |||||
Coal - Canada | 116,061 | 5,638 | — | ||||||||
Coal - WMLP | 52,666 | — | — | ||||||||
Power | 1,016 | — | — | ||||||||
Total | $ | 449,607 | $ | 115,396 | $ | 77,425 |
20
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
Asset Retirement Obligations
Changes in the Company’s asset retirement obligations were as follows:
Nine Months Ended September 30, | |||||||
2015 | 2014 | ||||||
(In thousands) | |||||||
Asset retirement obligations, beginning of year (including current portion) | $ | 452,745 | $ | 279,864 | |||
Accretion | 29,265 | 23,329 | |||||
Liabilities settled | (23,421 | ) | (18,759 | ) | |||
Changes due to amount and timing of reclamation | 4,612 | — | |||||
Asset retirement obligations acquired | 3,769 | 102,075 | |||||
Changes due to foreign currency translation | (17,363 | ) | (1,702 | ) | |||
Asset retirement obligations, end of period | 449,607 | 384,807 | |||||
Less current portion | (47,462 | ) | (29,529 | ) | |||
Asset retirement obligations, less current portion | $ | 402,145 | $ | 355,278 |
Contractual Third-Party Reclamation Receivables
At September 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 September 30, 2015 were as follows:
Carrying Value | Fair Value | Fair Value Hierarchy | |||||||
(In thousands) | |||||||||
Cash and cash equivalents | $ | 46,544 | $ | 46,544 | Level 1 | ||||
Available-for-sale securities | 30,881 | 30,881 | Level 1 | ||||||
$ | 77,425 | $ | 77,425 |
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 September 30, 2015 were as follows (in thousands):
Cost basis | $ | 31,141 | |
Gross unrealized holding gains | 573 | ||
Gross unrealized holding losses | (833 | ) | |
Fair value | $ | 30,881 |
21
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
Maturities of available-for-sale securities were as follows at September 30, 2015:
Cost Basis | Fair Value | ||||||
(In thousands) | |||||||
Within one year | $ | — | $ | — | |||
Due in five years or less | 16,804 | 16,601 | |||||
Due after five years to ten years | 5,424 | 5,262 | |||||
Due in more than ten years | 8,913 | 9,018 | |||||
$ | 31,141 | $ | 30,881 |
11. 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 $41.05 to $56.33 per megawatt hour, with a weighted average contract price of $43.72 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 | September 30, 2015 | December 31, 2014 | |||||||
Contracts to purchase power | Other current liabilities | $ | 10,138 | $ | 8,265 | |||||
Contracts to purchase power | Other liabilities | 30,175 | 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 September 30, | Nine Months Ended September 30, | |||||||||||||||||
Derivative Instruments | Statement of Operations Location | 2015 | 2014 | 2015 | 2014 | |||||||||||||
Canadian dollar foreign exchange forward contracts | Gain (loss) on foreign exchange | $ | — | $ | — | $ | — | $ | (6,209 | ) | ||||||||
Contracts to purchase power | Derivative loss | (5,815 | ) | (23,691 | ) | (6,717 | ) | (29,621 | ) |
12. 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 5, 10 and 11 for additional disclosures related to fair value measurements.
The 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. |
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WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
• | 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 September 30, 2015:
Level 1 | |||
(In thousands) | |||
Assets: | |||
Available-for-sale investments included in Restricted investments and bond collateral | $ | 34,854 | |
Available-for-sale investments included in Reclamation deposits | 30,881 | ||
Total assets | $ | 65,735 |
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 September 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 | |||||||
September 30, 2015 | $ | 345,860 | $ | 305,375 | $ | 320,615 | $ | 264,507 |
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 11 to the unaudited consolidated financial statements.
The Company’s non-recurring fair value measurements include asset retirement obligations (refer to Note 10).
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.
13. 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 nine months ended September 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 nine months ended September 30, 2014, the effective tax rate differed from the statutory rate primarily due to the U.S. valuation allowance and foreign operations.
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WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
14. SHAREHOLDERS’ DEFICIT AND ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Noncontrolling Interest
Following the WMLP Transactions, WMLP is a consolidated subsidiary and we recorded a noncontrolling interest totaling $15.3 million, which represents the equity attributable to the noncontrolling unitholders, who owned approximately 21% of the outstanding Common Unitsof WMLP at December 31, 2014. The Kemmerer Drop resulted in our acquisition of an additional 15% interest in WMLP (on a fully diluted basis) with a corresponding decrease in noncontrolling interest ownership. Accordingly, we recorded a decrease to noncontrolling interest of $8.4 million during the three months ended September 30, 2015. Activity in the noncontrolling interest is summarized as follows:
(in millions) | |||
Beginning Balance as of December 31, 2014 | $ | 15,261 | |
Change in Parent's ownership | (8,362 | ) | |
Net loss allocated to noncontrolling interest | (4,850 | ) | |
Distributions to noncontrolling interest | (535 | ) | |
Ending Balance as of September 30, 2015 | $ | 1,514 |
Preferred Stock
The Company paid less than $0.1 million of preferred stock dividends for the nine months ended September 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 September 30, 2015, there were no outstanding shares of preferred stock.
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 | (576 | ) | — | (1,438 | ) | (43,018 | ) | (908 | ) | (45,940 | ) | ||||||||||||
Amounts reclassified from accumulated other comprehensive income (loss) | 3,301 | 981 | 143 | — | — | 4,425 | |||||||||||||||||
Balance at September 30, 2015 | $ | (33,340 | ) | $ | (38,735 | ) | $ | (882 | ) | $ | (60,898 | ) | $ | (31,956 | ) | $ | (165,811 | ) |
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WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
The following table reflects the reclassifications out of accumulated other comprehensive loss for the three and nine months ended months ended September 30, 2015 (in thousands):
Details about accumulated other comprehensive loss components | Amount reclassified from accumulated other comprehensive loss(1) | Affected line item in the statement where net loss is presented | ||||||||
Three Months Ended September 30, 2015 | Nine Months Ended September 30, 2015 | |||||||||
Available-for sale securities | ||||||||||
Realized gains and losses on available-for sale securities | $ | 19 | $ | 143 | Other income (loss) | |||||
Amortization of defined benefit pension items | ||||||||||
Prior service costs | $ | 2 | $ | 6 | ||||||
Actuarial losses | 1,032 | 3,295 | (2) | |||||||
Total | $ | 1,034 | $ | 3,301 | ||||||
Amortization of postretirement medical items | ||||||||||
Prior service costs | $ | (159 | ) | $ | (477 | ) | (3) | |||
Actuarial losses | 486 | 1,458 | (3) | |||||||
Total | $ | 327 | $ | 981 |
____________________
(1) | Amounts in parentheses indicate amounts recognized as income. Amounts with no parenthesis were recognized as expenses or losses. |
(2) | These accumulated other comprehensive loss components are included in the computation of net periodic pension cost. (See Note 8 - Pension for additional details) |
(3) | These accumulated other comprehensive loss components are included in the computation of net periodic postretirement medical cost. (See Note 8 - Postretirement Medical Benefits for additional details) |
15. 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.
The Company recognized compensation expense from share-based arrangements shown in the following table:
Three Months Ended September 30, | Nine Months Ended September 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 | $ | 1,100 | $ | 334 | $ | 2,924 | $ | 2,450 | |||||||
Contributions of stock to the Company’s 401(k) plan | 842 | 677 | 2,664 | 1,006 | |||||||||||
Total share-based compensation expense | $ | 1,942 | $ | 1,011 | $ | 5,588 | $ | 3,456 |
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WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
Restricted Stock Units
A summary of restricted stock award activity for the nine months ended September 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 September 30, 2015 | 364,148 | $ | 28.57 | $ | 8,053 | (1) |
____________________
(1) | Expected to be recognized over the next three years. |
Stock Options
A summary of stock option activity for the nine months ended September 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 | (1,500 | ) | 21.40 | |||||||||||||
Outstanding and exercisable at September 30, 2015 | 109,306 | $ | 22.16 | 2.4 | $ | — | $ | — |
There were no stock options granted during the nine months ended September 30, 2015.
SARs
A summary of SARs activity for the nine months ended September 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 September 30, 2015 | 16,943 | $ | 25.44 | 0.6 | $ | — | $ | — |
There were no SARs granted during the nine months ended September 30, 2015.
16. 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 nine months ended
26
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
September 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 September 30, | Nine Months Ended September 30, | ||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||
(In thousands) | |||||||||||
Convertible securities | — | 626 | — | 626 | |||||||
Restricted stock units, stock options and SARs | 490 | 568 | 490 | 568 | |||||||
Total shares excluded from diluted shares calculation | 490 | 1,194 | 490 | 1,194 |
17. 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. During the third quarter of 2015, we completed the Kemmerer Drop into WMLP. Accordingly, to enable comparability, all segment disclosures have been restated to remove Kemmerer from the Coal-US segment and place it in the Coal - WMLP segment.
27
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
Summarized financial information by segment is as follows:
Coal - U.S.(1) | Coal - Canada(2) | Coal - WMLP(3)(4) | Power | Heritage | Corporate and Eliminations | Consolidated | |||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||||||
Three Months Ended September 30, 2015 |