Attached files
file | filename |
---|---|
EX-10.5 - EXHIBIT 10.5 - WESTMORELAND COAL Co | exh105_wccdiraward.htm |
EX-95.1 - EXHIBIT 95.1 - WESTMORELAND COAL Co | exh95-1_2016q2.htm |
EX-32 - EXHIBIT 32 - WESTMORELAND COAL Co | exh32_2016q2.htm |
EX-31.2 - EXHIBIT 31.2 - WESTMORELAND COAL Co | exh31-2_2016q2.htm |
EX-31.1 - EXHIBIT 31.1 - WESTMORELAND COAL Co | exh31-1_2016q2.htm |
EX-10.4 - EXHIBIT 10.4 - WESTMORELAND COAL Co | exh104_wcctbaward.htm |
EX-10.3 - EXHIBIT 10.3 - WESTMORELAND COAL Co | exh103_2016wccpbaward.htm |
EX-10.2 - EXHIBIT 10.2 - WESTMORELAND COAL Co | exh102_wcccuaward.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, 2016
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
___________________________________________
(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 29, 2016: 18,569,845 shares of common stock, $0.01 par value.
TABLE OF CONTENTS
PAGE | ||
2
PART I - FINANCIAL INFORMATION
ITEM 1
FINANCIAL STATEMENTS
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
June 30, 2016 | December 31, 2015 | ||||||
(In thousands) | |||||||
Assets | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 35,876 | $ | 22,936 | |||
Receivables: | |||||||
Trade | 142,587 | 134,141 | |||||
Loan and lease receivables | 5,851 | 6,157 | |||||
Contractual third-party reclamation receivables | 12,781 | 8,020 | |||||
Other | 18,937 | 11,598 | |||||
180,156 | 159,916 | ||||||
Inventories | 129,881 | 121,858 | |||||
Other current assets | 19,823 | 16,103 | |||||
Total current assets | 365,736 | 320,813 | |||||
Property, plant and equipment: | |||||||
Land and mineral rights | 597,450 | 476,447 | |||||
Plant and equipment | 875,122 | 790,677 | |||||
1,472,572 | 1,267,124 | ||||||
Less accumulated depreciation, depletion and amortization | 613,745 | 554,008 | |||||
Net property, plant and equipment | 858,827 | 713,116 | |||||
Loan and lease receivables | 50,161 | 49,313 | |||||
Advanced coal royalties | 17,206 | 19,781 | |||||
Reclamation deposits | 73,434 | 77,364 | |||||
Restricted investments and bond collateral | 144,061 | 140,807 | |||||
Contractual third-party reclamation receivables, less current portion | 154,926 | 86,915 | |||||
Investment in joint venture | 28,045 | 27,374 | |||||
Intangible assets, net of accumulated amortization of $3.4 million and $15.9 million at June 30, 2016 and December 31, 2015, respectively | 28,050 | 29,190 | |||||
Other assets | 22,767 | 11,904 | |||||
Total Assets | $ | 1,743,213 | $ | 1,476,577 |
See accompanying Notes to Consolidated Financial Statements.
3
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets (Continued)
(Unaudited)
June 30, 2016 | December 31, 2015 | ||||||
(In thousands) | |||||||
Liabilities and Shareholders’ Deficit | |||||||
Current liabilities: | |||||||
Current installments of long-term debt | $ | 87,754 | $ | 38,852 | |||
Revolving lines of credit | 3,000 | 1,970 | |||||
Accounts payable and accrued expenses: | |||||||
Trade and other accrued liabilities | 134,429 | 109,850 | |||||
Interest payable | 20,386 | 15,527 | |||||
Production taxes | 46,797 | 46,895 | |||||
Postretirement medical benefits | 13,855 | 13,855 | |||||
SERP | 368 | 368 | |||||
Deferred revenue | 19,834 | 10,715 | |||||
Asset retirement obligations | 50,944 | 43,950 | |||||
Other current liabilities | 29,888 | 30,688 | |||||
Total current liabilities | 407,255 | 312,670 | |||||
Long-term debt, less current installments | 1,047,244 | 979,073 | |||||
Workers’ compensation, less current portion | 4,992 | 5,068 | |||||
Excess of black lung benefit obligation over trust assets | 17,594 | 17,220 | |||||
Postretirement medical benefits, less current portion | 286,739 | 285,518 | |||||
Pension and SERP obligations, less current portion | 43,702 | 44,808 | |||||
Deferred revenue, less current portion | 22,441 | 24,613 | |||||
Asset retirement obligations, less current portion | 449,857 | 375,813 | |||||
Intangible liabilities, net of accumulated amortization of $10.3 million and $9.8 million at June 30, 2016 and December 31, 2015, respectively | 2,936 | 3,470 | |||||
Other liabilities | 33,566 | 30,208 | |||||
Total liabilities | 2,316,326 | 2,078,461 | |||||
Shareholders’ deficit: | |||||||
Common stock of $0.01 par value | |||||||
Authorized 30,000,000 shares; issued and outstanding 18,569,845 shares at June 30, 2016 and 18,162,148 shares at December 31, 2015 | 186 | 182 | |||||
Other paid-in capital | 245,050 | 240,721 | |||||
Accumulated other comprehensive loss | (150,259 | ) | (171,300 | ) | |||
Accumulated deficit | (667,002 | ) | (672,219 | ) | |||
Total Westmoreland Coal Company shareholders’ deficit | (572,025 | ) | (602,616 | ) | |||
Noncontrolling interest | (1,088 | ) | 732 | ||||
Total deficit | (573,113 | ) | (601,884 | ) | |||
Total Liabilities and Deficit | $ | 1,743,213 | $ | 1,476,577 |
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, | ||||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||
(In thousands, except per share data) | |||||||||||||||
Revenues | $ | 356,247 | $ | 348,959 | $ | 710,968 | $ | 720,444 | |||||||
Cost, expenses and other: | |||||||||||||||
Cost of sales | 290,113 | 285,480 | 563,915 | 587,189 | |||||||||||
Depreciation, depletion and amortization | 33,663 | 34,263 | 68,676 | 72,322 | |||||||||||
Selling and administrative | 32,019 | 28,508 | 63,691 | 55,228 | |||||||||||
Heritage health benefit expenses | 3,222 | 2,162 | 6,237 | 5,221 | |||||||||||
Loss (gain) on sale/disposal of assets | (2,253 | ) | 784 | (1,917 | ) | 1,013 | |||||||||
Restructuring charges | — | 103 | — | 656 | |||||||||||
Derivative loss (gain) | (5,878 | ) | 6,178 | (3,278 | ) | 902 | |||||||||
Income from equity affiliates | (1,287 | ) | (1,653 | ) | (2,580 | ) | (3,678 | ) | |||||||
Other operating loss | 3,659 | — | 1,697 | — | |||||||||||
353,258 | 355,825 | 696,441 | 718,853 | ||||||||||||
Operating income (loss) | 2,989 | (6,866 | ) | 14,527 | 1,591 | ||||||||||
Other income (expense): | |||||||||||||||
Interest expense | (31,510 | ) | (25,304 | ) | (61,179 | ) | (50,039 | ) | |||||||
Interest income | 2,356 | 2,567 | 4,147 | 4,707 | |||||||||||
Gain (loss) on foreign exchange | (364 | ) | (1,313 | ) | (1,751 | ) | 795 | ||||||||
Other income | 254 | 534 | 132 | 726 | |||||||||||
(29,264 | ) | (23,516 | ) | (58,651 | ) | (43,811 | ) | ||||||||
Loss before income taxes | (26,275 | ) | (30,382 | ) | (44,124 | ) | (42,220 | ) | |||||||
Income tax expense (benefit) | (100 | ) | 7,469 | (48,035 | ) | 9,509 | |||||||||
Net income (loss) | (26,175 | ) | (37,851 | ) | 3,911 | (51,729 | ) | ||||||||
Less net loss attributable to noncontrolling interest | (808 | ) | (1,246 | ) | (1,306 | ) | (3,392 | ) | |||||||
Net income (loss) applicable to common shareholders | $ | (25,367 | ) | $ | (36,605 | ) | $ | 5,217 | $ | (48,337 | ) | ||||
Net income (loss) per share applicable to common shareholders: | |||||||||||||||
Basic and diluted | $ | (1.37 | ) | $ | (2.04 | ) | $ | 0.28 | $ | (2.72 | ) | ||||
Weighted average number of common shares outstanding: | |||||||||||||||
Basic | 18,540 | 17,926 | 18,401 | 17,775 | |||||||||||
Diluted | 18,540 | 17,926 | 18,418 | 17,775 |
See accompanying Notes to Consolidated Financial Statements.
5
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||
(In thousands) | |||||||||||||||
Net income (loss) | $ | (26,175 | ) | $ | (37,851 | ) | $ | 3,911 | $ | (51,729 | ) | ||||
Other comprehensive income (loss) | |||||||||||||||
Pension and other postretirement plans: | |||||||||||||||
Amortization of accumulated actuarial gains or losses, pension | 1,772 | 1,157 | 2,590 | 2,267 | |||||||||||
Adjustments to accumulated actuarial losses and transition obligations, pension | (199 | ) | (488 | ) | (27 | ) | (285 | ) | |||||||
Amortization of accumulated actuarial gains or losses, transition obligations, and prior service costs, postretirement medical benefit | 323 | 327 | 523 | 654 | |||||||||||
Adjustments of accumulated actuarial losses and transition obligations, postretirement medical benefit | 1,672 | — | 984 | — | |||||||||||
Tax effect of other comprehensive income gains and losses | (1,314 | ) | 225 | (1,371 | ) | (350 | ) | ||||||||
Change in foreign currency translation adjustment | (617 | ) | 4,924 | 18,622 | (22,216 | ) | |||||||||
Unrealized and realized gains and losses on available-for-sale securities | 1 | (1,785 | ) | (280 | ) | (1,460 | ) | ||||||||
Other comprehensive income (loss), net of income taxes | 1,638 | 4,360 | 21,041 | (21,390 | ) | ||||||||||
Comprehensive income (loss) | (24,537 | ) | (33,491 | ) | 24,952 | (73,119 | ) | ||||||||
Less: Comprehensive loss attributable to noncontrolling interest | (792 | ) | (1,246 | ) | (1,292 | ) | (3,392 | ) | |||||||
Comprehensive income (loss) attributable to common shareholders | $ | (23,745 | ) | $ | (32,245 | ) | $ | 26,244 | $ | (69,727 | ) |
See accompanying Notes to Consolidated Financial Statements.
6
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
Consolidated Statements of Deficit
Six Months Ended June 30, 2016
(Unaudited)
Common Stock | Other Paid-In Capital | Accumulated Other Comprehensive Loss | Accumulated Deficit | Non-controlling Interest | Total Deficit | |||||||||||||||||||||
Shares | Amount | |||||||||||||||||||||||||
(In thousands, except shares data) | ||||||||||||||||||||||||||
Balance at December 31, 2015 | 18,162,148 | $ | 182 | $ | 240,721 | $ | (171,300 | ) | $ | (672,219 | ) | $ | 732 | $ | (601,884 | ) | ||||||||||
WMLP distributions | — | — | — | — | — | (528 | ) | (528 | ) | |||||||||||||||||
Common stock issued as compensation | 342,353 | 3 | 4,531 | — | — | — | 4,534 | |||||||||||||||||||
Issuance of restricted stock | 65,344 | 1 | (202 | ) | — | — | — | (201 | ) | |||||||||||||||||
Net income (loss) | — | — | — | — | 5,217 | (1,306 | ) | 3,911 | ||||||||||||||||||
Other comprehensive income | — | — | — | 21,041 | — | 14 | 21,055 | |||||||||||||||||||
Balance at June 30, 2016 | 18,569,845 | $ | 186 | $ | 245,050 | $ | (150,259 | ) | $ | (667,002 | ) | $ | (1,088 | ) | $ | (573,113 | ) |
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.
Six Months Ended June 30, | |||||||
2016 | 2015 | ||||||
(In thousands) | |||||||
Cash flows from operating activities: | |||||||
Net income (loss) | $ | 3,911 | $ | (51,729 | ) | ||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |||||||
Depreciation, depletion and amortization | 68,676 | 72,322 | |||||
Accretion of asset retirement obligation and receivable | 14,297 | 14,112 | |||||
Share-based compensation | 4,534 | 3,646 | |||||
Non-cash interest expense | 4,554 | 2,664 | |||||
Amortization of deferred financing costs | 6,630 | 4,997 | |||||
Loss (gain) on derivative instruments | (3,278 | ) | 902 | ||||
Loss (gain) on foreign exchange | 1,751 | (795 | ) | ||||
Income from equity affiliates | (2,580 | ) | (3,678 | ) | |||
Deferred income tax expense (benefit) | (47,547 | ) | 10,265 | ||||
Other | (3,696 | ) | 1,832 | ||||
Changes in operating assets and liabilities: | |||||||
Receivables | (2,008 | ) | 1,283 | ||||
Inventories | 6,677 | (8,789 | ) | ||||
Accounts payable and accrued expenses | (8,045 | ) | (1,560 | ) | |||
Deferred revenue | 6,948 | (6,141 | ) | ||||
Other assets and liabilities | 2,995 | (16,367 | ) | ||||
Asset retirement obligations | (16,415 | ) | (10,914 | ) | |||
Net cash provided by operating activities | 37,404 | 12,050 | |||||
Cash flows from investing activities: | |||||||
Additions to property, plant and equipment | (12,231 | ) | (38,554 | ) | |||
Change in restricted investments | 658 | (10,598 | ) | ||||
Cash received from restricted deposits | — | 34,000 | |||||
Cash payments related to acquisitions and other | (125,314 | ) | (35,887 | ) | |||
Cash acquired related to acquisition, net | — | 2,782 | |||||
Net proceeds from sales of assets | 6,706 | 12,396 | |||||
Receipts from loan and lease receivables | 3,268 | 12,606 | |||||
Payments related to loan and lease receivables | (334 | ) | (2,466 | ) | |||
Other | 3,095 | 1,193 | |||||
Net cash used in investing activities | (124,152 | ) | (24,528 | ) | |||
Cash flows from financing activities: | |||||||
Borrowings from long-term debt, net of debt discount | 122,250 | 79,359 | |||||
Repayments of long-term debt | (17,991 | ) | (33,724 | ) | |||
Borrowings on revolving lines of credit | 195,400 | 35,175 | |||||
Repayments on revolving lines of credit | (194,370 | ) | (42,251 | ) | |||
Debt issuance costs and other refinancing costs | (5,709 | ) | (4,252 | ) | |||
Other | (529 | ) | 1,660 | ||||
Net cash provided by financing activities | 99,051 | 35,967 | |||||
Effect of exchange rate changes on cash | 637 | (1,871 | ) | ||||
Net increase in cash and cash equivalents | 12,940 | 21,618 | |||||
Cash and cash equivalents, beginning of period | 22,936 | 14,258 | |||||
Cash and cash equivalents, end of period | $ | 35,876 | $ | 35,876 | |||
Supplemental disclosures of cash flow information: | |||||||
Cash paid for interest | $ | 47,972 | $ | 29,444 | |||
Non-cash transactions: | |||||||
Accrued purchases of property and equipment | $ | 5,762 | $ | 5,770 | |||
Capital leases and other financing sources | 9,334 | 12,763 |
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 including those of Westmoreland Resource Partners LP (“WMLP”). 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 (“GAAP”) and require the use of management’s estimates. The financial information contained in this Quarterly Report on Form 10-Q is unaudited, but reflects all adjustments which in the opinion of management are necessary for a fair presentation of the financial information for the periods shown. Such adjustments are of a normal recurring nature. Certain prior period amounts have been reclassified to conform to current period presentation. The results of operations for the six months ended June 30, 2016 are not necessarily indicative of results to be expected for the year ending December 31, 2016.
These unaudited quarterly consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 (“2015 Form 10-K”).
Recently Adopted Accounting Pronouncements
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 debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The Company adopted this standard on January 1, 2016 and retrospectively applied the guidance to prior periods. The adoption of this standard resulted in the reclassification of $25.8 million of unamortized debt issuance costs from the non-current asset, Other assets, to a reduction of Long-term debt, less current portion on the consolidated balance sheet as of December 31, 2015.
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 February 2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-02”). The amendments in ASU 2016-02 require companies that lease assets to recognize on their balance sheets the assets and liabilities for the rights and obligations generated by contracts longer than one year. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 with early adoption permitted. The guidance is required to be applied by the modified retrospective transition approach. 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. ACQUISITION
Acquisition of San Juan
On January 31, 2016, Westmoreland San Juan, LLC (“WSJ”), a variable interest entity of the Company, acquired San Juan Coal Company (“SJCC”), which operates the San Juan mine in Farmington, New Mexico, and San Juan Transportation Company (together with SJCC, the “San Juan Entities” and such transaction, the “San Juan Acquisition”) for a total cash purchase price of approximately $125.3 million, subject to post-closing adjustments. The San Juan mine is the exclusive supplier of coal to the adjacent San Juan Generating Station (“SJGS”) under a coal supply agreement through 2022. The San Juan operations are included in the Company’s Coal - U.S. segment.
WSJ financed the San Juan Acquisition with available cash on hand and with a $125.0 million loan from NM Capital Utility Corporation, an affiliate of Public Service Company of New Mexico (one of the owners of SJGS).
9
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
The San Juan 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 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. Certain estimates in the San Juan purchase price allocation are classified as Level 3 fair value estimates.
A preliminary allocation of the purchase consideration follows (in millions):
Provisional as of June 30, 2016 | |||
Purchase price: | |||
Cash paid | $ | 125.3 | |
Preliminary allocation of purchase price: | |||
Assets: | |||
Inventories - coal and supplies | $ | 8.8 | |
Other Receivables | 9.5 | ||
Contractual third-party reclamation receivable | 4.6 | ||
Total current assets | 22.9 | ||
Land and mineral rights | 107.1 | ||
Plant and equipment | 73.5 | ||
Contractual third-party reclamation receivable | 66.8 | ||
Other assets | 10.5 | ||
Total assets | 280.8 | ||
Liabilities: | |||
Trade payables and other accrued liabilities | 13.8 | ||
Production taxes | 2.0 | ||
Other liabilities | 9.4 | ||
Asset retirement obligations | 4.6 | ||
Total current liabilities | 29.8 | ||
Asset retirement obligations, less current portion | 66.8 | ||
Postretirement medical | 1.9 | ||
Deferred income taxes | 47.6 | ||
Other liabilities | 9.4 | ||
Total liabilities | 155.5 | ||
Net fair value | $ | 125.3 |
Pro Forma Information
The following pro forma information has been prepared for illustrative purposes only and assumes the San Juan Acquisition occurred on January 1, 2015. 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.
10
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
(In thousands, except per share data) | Three Months Ended June 30, | Six Months Ended June 30, | Six Months Ended June 30, | ||||||||
2015 | 2016 | 2015 | |||||||||
Total revenues | |||||||||||
As reported | $ | 348,959 | $ | 710,968 | $ | 720,444 | |||||
Pro forma | $ | 421,427 | $ | 737,243 | $ | 873,211 | |||||
Operating income (loss) | |||||||||||
As reported | $ | (6,866 | ) | $ | 14,527 | $ | 1,591 | ||||
Pro forma | $ | 4,813 | $ | 15,622 | $ | 22,963 | |||||
Net income (loss) applicable to common shareholders | |||||||||||
As reported | $ | (36,605 | ) | $ | 5,217 | $ | (48,337 | ) | |||
Pro forma | $ | (28,525 | ) | $ | 5,642 | $ | (34,113 | ) | |||
Net income (loss) per share applicable to common shareholders (basic and diluted) | |||||||||||
As reported | $ | (2.04 | ) | $ | 0.28 | $ | (2.72 | ) | |||
Pro forma | $ | (1.59 | ) | $ | 0.31 | $ | (1.92 | ) |
3. VARIABLE INTEREST ENTITY
As of June 30, 2016, the Company consolidated our 100% owned WSJ subsidiary which is a variable interest entity (“VIE”). WSJ is a VIE due to another party potentially having the right to receive WSJ’s expected residual returns. The Company is the primary beneficiary because it has the power to direct the activities that most significantly impact WSJ’s economic performance. See Note 2 - Acquisition and Note 6 - Debt and Lines of Credit. Accordingly, the Company consolidates the operating results, assets and liabilities of WSJ. The following table presents the carrying amounts, after eliminating the effect of intercompany transactions, included in the Consolidated Balance Sheet that are for the use of or are the obligation of WSJ (in thousands):
June 30, 2016 | |||
Assets | $ | 310,290 | |
Liabilities | 296,312 | ||
Net carrying amount | $ | 13,978 |
4. INVENTORIES
Inventories consisted of the following:
June 30, 2016 | December 31, 2015 | ||||||
(In thousands) | |||||||
Coal stockpiles | $ | 40,851 | $ | 38,636 | |||
Coal fuel inventories | 7,913 | 7,194 | |||||
Materials and supplies | 84,077 | 78,784 | |||||
Reserve for obsolete inventory | (2,960 | ) | (2,756 | ) | |||
Total | $ | 129,881 | $ | 121,858 |
5. RESTRICTED INVESTMENTS AND BOND COLLATERAL
The Company invests certain bond collateral, reclamation deposits, and other restricted investments in a limited selection of fixed-income investment options and receives the investment returns on these investments. These investments 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.
11
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
The Company’s carrying value and estimated fair value of its restricted investments at June 30, 2016 were as follows:
Restricted Investments and Bond Collateral | Reclamation Deposits | Total Restricted Investments | |||||||||
(In thousands) | |||||||||||
Cash and cash equivalents | $ | 64,627 | $ | 1,610 | $ | 66,237 | |||||
Time deposits | 2,462 | — | 2,462 | ||||||||
Available-for-sale | 76,972 | 71,824 | 148,796 | ||||||||
$ | 144,061 | $ | 73,434 | $ | 217,495 |
The Company’s carrying value and estimated fair value of its restricted investments at December 31, 2015 were as follows:
Restricted Investments and Bond Collateral | Reclamation Deposits | Total Restricted Investments | |||||||||
(In thousands) | |||||||||||
Cash and cash equivalents | $ | 102,539 | $ | 45,819 | $ | 148,358 | |||||
Time deposits | 2,455 | — | 2,455 | ||||||||
Available-for-sale | 35,813 | 31,545 | 67,358 | ||||||||
$ | 140,807 | $ | 77,364 | $ | 218,171 |
Available-for-Sale Restricted Investments
The cost basis, gross unrealized holding gains and losses, and fair value of available-for-sale securities at June 30, 2016 were as follows:
Restricted Investments and Bond Collateral | Reclamation Deposits | Total Restricted Investments | |||||||||
(In thousands) | |||||||||||
Cost basis | $ | 77,655 | $ | 72,376 | $ | 150,031 | |||||
Gross unrealized holding gains | 333 | 575 | 908 | ||||||||
Gross unrealized holding losses | (1,016 | ) | (1,127 | ) | (2,143 | ) | |||||
Fair value | $ | 76,972 | $ | 71,824 | $ | 148,796 |
The cost basis, gross unrealized holding gains and losses, and fair value of available-for-sale securities at December 31, 2015 were as follows:
Restricted Investments and Bond Collateral | Reclamation Deposits | Total Restricted Investments | |||||||||
(In thousands) | |||||||||||
Cost basis | $ | 36,715 | $ | 31,977 | $ | 68,692 | |||||
Gross unrealized holding gains | 167 | 521 | 688 | ||||||||
Gross unrealized holding losses | (1,069 | ) | (953 | ) | (2,022 | ) | |||||
Fair value | $ | 35,813 | $ | 31,545 | $ | 67,358 |
12
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
6. DEBT AND LINES OF CREDIT
The Company and its subsidiaries are subject to the following debt arrangements:
Total Debt Outstanding | |||||||
June 30, 2016 | December 31, 2015 | ||||||
(In thousands) | |||||||
8.75% Notes | $ | 350,000 | $ | 350,000 | |||
WCC Term Loan Facility | 325,527 | 327,172 | |||||
San Juan Loan | 125,000 | — | |||||
WMLP Term Loan Facility | 303,301 | 299,248 | |||||
Capital lease obligations | 67,506 | 71,168 | |||||
Revolving Credit Facility | 3,000 | 1,970 | |||||
Other | 6,697 | 7,251 | |||||
Total debt | 1,181,031 | 1,056,809 | |||||
Less debt discount and debt issuance costs | (43,033 | ) | (36,914 | ) | |||
Less current installments | (90,754 | ) | (40,822 | ) | |||
Total debt outstanding, less current installments | $ | 1,047,244 | $ | 979,073 |
The following table presents aggregate contractual debt maturities of all debt:
June 30, 2016 | |||
(In thousands) | |||
2016 | $ | 54,904 | |
2017 | 73,377 | ||
2018 | 319,811 | ||
2019 | 18,861 | ||
2020 | 340,221 | ||
Thereafter | 373,857 | ||
Total debt | $ | 1,181,031 |
8.75% Notes
The senior secured 8.75% Notes mature on January 1, 2022 and pay interest semiannually on January 1 and July 1 of each year at a fixed 8.75% interest rate. The 8.75% Notes are a primary obligation of 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), referred to as the “Guarantors.” The 8.75% Notes are not guaranteed by Westmoreland Canada LLC or any of its subsidiaries, Westmoreland San Juan, LLC or any of its subsidiaries, or Westmoreland Resources GP, LLC or WMLP, referred to as the “Non-guarantors.” As of June 30, 2016, we were in compliance with all covenants for the 8.75% Notes.
WCC Term Loan Facility
The WCC Term Loan Facility matures on December 16, 2020 and pays interest on a quarterly basis at a variable interest rate which is set at our election of (i) one-, two-, three- or six-month London Interbank Offered Rate ("LIBOR") plus 6.50% or (ii) a base rate (determined with reference to the highest of the prime rate, the Federal Funds Rate plus 0.05%, or one-month LIBOR plus 1.00%) plus 5.50%. As of June 30, 2016, the interest rate was 7.50%. The WCC Term Loan Facility is a primary obligation of the Parent and is guaranteed by the Guarantors. As of June 30, 2016, we were in compliance with all covenants of the WCC Term Loan Facility.
13
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
San Juan Loan
We financed the San Juan Acquisition in part with the San Juan Loan, a senior secured $125.0 million term loan from NM Capital Utility Corporation, an affiliate of Public Service Company of New Mexico (one of the owners of SJGS). The San Juan Loan matures February 1, 2021 and pays interest and principal on a quarterly basis at an interest rate of (i) 7.25% (the “Margin Rate”) plus (ii) (A) the LIBOR for a three month period plus (B) a statutory reserve rate, which such Margin Rate increases incrementally during each year of the San Juan Loan term. It is a primary obligation of Westmoreland San Juan, LLC, is guaranteed by SJCC, and is secured by substantially all of SJCC’s assets. The San Juan Loan has no prepayment penalties. The agreements governing the San Juan Loan include representations and warranties and covenants regarding the ownership and operation of SJCC and the properties acquired in the San Juan Acquisition and standard special purpose bankruptcy remote entity covenants designed to preserve the separateness from Westmoreland of each of (i) WSJ, (ii) its direct parent company, Westmoreland San Juan Holdings, Inc., and (iii) SJCC (collectively, the “Westmoreland San Juan Entities”). Obligations under the San Juan Loan are recourse only to the Westmoreland San Juan Entities and their assets and neither Westmoreland nor its subsidiaries (other than the Westmoreland San Juan Entities) is an obligor under the San Juan Loan in any respect. The agreement governing the San Juan Loan requires that all revenues of the Westmoreland San Juan Entities, aside from payments on certain leases, are deposited into a cash management collection account swept monthly for operating expenses, capital expenditures, and loan payment and prepayment. The assets and credit of SJCC are not available to satisfy the debts and other obligations of any of the Company other than the Westmoreland San Juan Entities.
WMLP Term Loan Facility
The WMLP Term Loan Facility matures in December 2018 and pays interest on a quarterly basis at a variable rate per annum equal to the LIBOR floor of (0.75%) plus 8.5% or the reference rate as defined in the financing agreement. As of June 30, 2016, the cash interest rate is 9.25%. 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. At June 30, 2016, we were in compliance with all covenants of the WMLP Term Loan Facility.
The WMLP Term Loan Facility also provides for Paid In Kind Interest (“PIK Interest”) at a variable rate per annum between 1.00% and 3.00% based on our consolidated total net leverage ratio as defined in the financing agreement. The rate of PIK Interest is recalculated on a quarterly basis with the PIK Interest added quarterly to the then-outstanding principal amount of the term loan under the financing agreement. PIK Interest under the financing agreement was $4.6 million for the six months ended June 30, 2016. The outstanding term loan amount represents the principal balance of $291.9 million, plus PIK Interest of $11.4 million.
WMLP Revolving Credit Facility
The WMLP Revolving Credit Facility permits WMLP to borrow up to the aggregate principal amount of $15.0 million and also allows letters of credit in an aggregate outstanding amount of up to $10.0 million, which reduces availability under the WMLP revolving credit facility on a dollar-for-dollar basis. At June 30, 2016, availability under the WMLP revolving credit facility was $15.0 million.
Capital Lease Obligations
During the six months ended June 30, 2016, the Company entered into $9.3 million of new capital leases.
Revolving Credit Facility
The Company amended the terms of its revolving credit facility on June 29, 2016. The revolver’s fixed charge coverage ratio (bank adjusted EBITDA to fixed charges for the prior four fiscal quarters) changed to 1.10 from 1.15 for the consolidated U.S. and Canadian calculation commencing with the fiscal quarter ending June 30, 2016. Under the Company’s Revolving Credit Facility the Company has a total aggregate borrowing capacity of $60.0 million between June 15th and August 31st of each year, with an aggregate borrowing capacity of $50.0 million outside of these periods. The availability of the Revolving Credit Facility consists of a $30.0 million sub-facility ($35.0 million with the seasonal increase) available to our U.S. borrowers and a $20.0 million sub-facility ($25.0 million with the seasonal increase) available to our Canadian borrowers. The facility may support an equal amount of letters of credit, with outstanding letter of credit balances reducing availability under the facility. At June 30, 2016, availability on the Revolving Credit Facility was $43.3 million with an outstanding balance of $13.7 million supporting letters of credit and $3.0 million drawn on the Revolving Credit Facility. The Revolving Credit Facility has a maturity date of December 31, 2018. We were in compliance with all covenant requirements of the Revolving Credit Facility as of June 30, 2016.
14
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, | ||||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||
(In thousands) | |||||||||||||||
Components of net periodic benefit cost: | |||||||||||||||
Service cost | $ | 809 | $ | 1,054 | $ | 1,744 | $ | 2,108 | |||||||
Interest cost | 3,091 | 2,907 | 6,202 | 5,815 | |||||||||||
Amortization of deferred items | 323 | 327 | 523 | 654 | |||||||||||
Total net periodic benefit cost | $ | 4,223 | $ | 4,288 | $ | 8,469 | $ | 8,577 |
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, | ||||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||
(In thousands) | |||||||||||||||
Former mining operations | $ | 2,135 | $ | 2,034 | $ | 4,270 | $ | 4,068 | |||||||
Current operations | 2,088 | 2,254 | 4,199 | 4,509 | |||||||||||
Total net periodic benefit cost | $ | 4,223 | $ | 4,288 | $ | 8,469 | $ | 8,577 |
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, | ||||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||
(In thousands) | |||||||||||||||
Components of net periodic benefit cost: | |||||||||||||||
Service cost | $ | 260 | $ | 376 | $ | 868 | $ | 882 | |||||||
Interest cost | 3,075 | 1,971 | 5,362 | 3,957 | |||||||||||
Expected return on plan assets | (3,812 | ) | (2,680 | ) | (7,043 | ) | (5,319 | ) | |||||||
Settlements | — | (347 | ) | — | (347 | ) | |||||||||
Amortization of deferred items | 1,552 | 1,140 | 2,590 | 2,250 | |||||||||||
Total net periodic pension cost | $ | 1,075 | $ | 460 | $ | 1,777 | $ | 1,423 |
These costs are included in Cost of sales and Selling and administrative expenses. The Company made $0.4 million of contributions to its pension plans in the six months ended June 30, 2016. The Company expects to make $0.1 million of contributions to its pension plans during the remainder of 2016.
15
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
8. DERIVATIVE INSTRUMENTS
The Company has power purchase contracts at its Roanoke Valley Power Facility (“ROVA”) 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 $55.20 per megawatt hour, with a weighted average contract price of $43.73 over the remaining contract lives. The contracts are not designated as hedging instruments, and accordingly their fair value is recognized on the Consolidated Balance Sheets, with changes in fair value recognized in the Consolidated Statement of Operations. Fair value is based on a comparison of contracted prices to projected future market prices which are Level 2 inputs based on the hierarchy defined in the fair value footnote.
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, 2016 | December 31, 2015 | |||||||
Contracts to purchase power | Other current liabilities | $ | 11,903 | $ | 13,679 | |||||
Contracts to purchase power | Other liabilities | 21,853 | 23,656 |
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 | 2016 | 2015 | 2016 | 2015 | |||||||||||||
Contracts to purchase power | Derivative gain (loss) | $ | 5,878 | $ | (6,178 | ) | $ | 3,278 | $ | (902 | ) |
9. FAIR VALUE MEASUREMENTS
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The 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. For other fair value disclosures, see also Note 5 - Restricted Investments And Bond Collateral and Note 8 - Derivative Instruments.
• | 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 and liabilities that are accounted for at fair value at June 30, 2016:
16
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
Fair | Quoted Prices in Active Markets for Identical Assets or Liabilities | Significant Other Observable Inputs | |||||||||
Value | Level 1 | Level 2 | |||||||||
(In thousands) | |||||||||||
Assets: | |||||||||||
Available-for-sale investments included in Restricted investments | $ | 76,972 | $ | 76,972 | $ | — | |||||
Available-for-sale investments included in Reclamation deposits | 71,824 | 71,824 | — | ||||||||
Total assets | $ | 148,796 | $ | 148,796 | $ | — | |||||
Liabilities: | |||||||||||
Contracts to purchase power included in Other current liabilities and Other liabilities | $ | 33,756 | $ | — | $ | 33,756 | |||||
Warrants issued by WMLP included in Other liabilities | 555 | 555 | — | ||||||||
Total liabilities | $ | 34,311 | $ | 555 | $ | 33,756 |
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, 2016, the Company valued the WMLP Term Loan Facility and the San Juan Loan 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) | ||||||||||||||
June 30, 2016 | $ | 336,898 | $ | 260,750 | $ | 733,594 | $ | 587,323 | |||||||
December 31, 2015 | $ | 336,000 | $ | 213,500 | $ | 612,727 | $ | 397,601 |
10. INCOME TAX
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, 2016, the effective tax rate differed from the statutory rate primarily due to the U.S. and Canadian valuation allowances, and for the recognition of changes in the Company’s net deferred tax assets due to the acquisition of SJCC.
As part of the San Juan acquisition, the Company acquired $47.6 million in deferred tax liabilities. Changes in the acquiring company’s deferred tax assets or liabilities subsequent to a business combination are required to be recorded in income during the quarter in which the transaction occurs. Accordingly, the $47.6 million decrease in the Company’s net deferred tax assets resulted in the release of a corresponding $47.6 million valuation allowance and recognition of a tax benefit in the six months ended June 30, 2016.
17
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
11. STOCKHOLDERS’ DEFICIT AND ACCUMULATED OTHER COMPREHENSIVE LOSS
Changes in Accumulated Other Comprehensive Loss
The following table reflects the changes in accumulated other comprehensive 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, 2015 | $ | (34,558 | ) | $ | (31,086 | ) | $ | (1,325 | ) | $ | (69,901 | ) | $ | (34,430 | ) | $ | (171,300 | ) | |||||
Other comprehensive income (loss) before reclassifications | (27 | ) | 984 | (556 | ) | 18,622 | (1,371 | ) | 17,652 | ||||||||||||||
Amounts reclassified from accumulated other comprehensive income (loss) | 2,590 | 523 | 276 | — | — | 3,389 | |||||||||||||||||
Balance at June 30, 2016 | $ | (31,995 | ) | $ | (29,579 | ) | $ | (1,605 | ) | $ | (51,279 | ) | $ | (35,801 | ) | $ | (150,259 | ) |
The following table reflects the reclassifications out of accumulated other comprehensive loss for the three and six months ended June 30, 2016 (in thousands):
Details about accumulated other comprehensive loss components | Amount reclassified from accumulated other comprehensive loss | Affected line item in the statement where net income (loss) is presented | |||||||
Three Months Ended June 30, 2016 | Six Months Ended June 30, 2016 | ||||||||
Available-for-sale securities | |||||||||
Realized gains and losses on available-for-sale securities | $ | 189 | $ | 276 | Other income (loss) | ||||
Amortization of defined benefit pension items | |||||||||
Prior service costs | $ | 2 | $ | 4 | Cost of sales and Selling and administrative | ||||
Actuarial losses | 1,550 | 2,586 | Cost of sales and Selling and administrative | ||||||
Total | $ | 1,552 | $ | 2,590 | |||||
Amortization of postretirement medical items | |||||||||
Prior service costs | $ | (159 | ) | $ | (318 | ) | Cost of sales and Selling and administrative | ||
Actuarial losses | 482 | 841 | Cost of sales and Selling and administrative | ||||||
Total | $ | 323 | $ | 523 |
18
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
12. SHARE-BASED COMPENSATION
The Company grants employees and non-employee directors restricted stock units. The Company recognized compensation expense from share-based arrangements shown in the following table:
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||
(In thousands) | |||||||||||||||
Recognition of fair value of restricted stock units, stock options and SARs over vesting period; and issuance of stock | $ | 1,230 | $ | 1,161 | $ | 2,342 | $ | 1,824 | |||||||
Contributions of stock to the Company’s 401(k) plan | 726 | 963 | 2,192 | 1,822 | |||||||||||
Total share-based compensation expense | $ | 1,956 | $ | 2,124 | $ | 4,534 | $ | 3,646 |
Restricted Stock Units
Unamortized compensation expense is expected to be recognized over the next three years. A summary of outstanding restricted stock units as of June 30, 2016 is as follows:
Units | Weighted Average Grant-Date Fair Value | Unamortized Compensation Expense (In thousands) | ||||||||
Non-vested at December 31, 2015 | 354,311 | $ | 28.44 | |||||||
Granted | 477,192 | 9.15 | ||||||||
Vested | (91,455 | ) | 27.07 | |||||||
Forfeited | — | — | ||||||||
Non-vested at June 30, 2016 | 740,048 | $ | 15.36 | $ | 8,057 |
Stock Options
No stock options were granted, vested, or forfeited during the the six months ended June 30, 2016. A summary of stock options outstanding as of June 30, 2016 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 June 30, 2016 | 109,306 | $ | 22.16 | 1.7 | $ | — | $ | — |
SARs
There were no SARs granted during the six months ended June 30, 2016. A summary of SARs activity for the six months ended June 30, 2016 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, 2015 | 16,943 | $ | 25.44 | |||||||||||||
Expired | (16,943 | ) | 25.44 | |||||||||||||
Outstanding at June 30, 2016 | — | $ | — | 0.0 | $ | — | $ | — |
During 2015, the Company contributed 269,567 common shares to match employees’ contributions to their 401k plans. For the six months ended June 30, 2016, the Company contributed 342,353 common shares. In May 2016, the Company discontinued matching employees’ contributions with common shares and elected instead to match with cash contributions.
19
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
13. 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 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 months ended June 30, 2016 and in the three and six months ended June 30, 2015 because the Company incurred a net loss applicable to common shareholders in those periods and the effect of inclusion would have been anti-dilutive.
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||
(In thousands) | |||||||||||||||
Income (loss) for basic earning per share calculation: | |||||||||||||||
Net income (loss) allocated to common shareholders | $ | (25,367 | ) | $ | (36,605 | ) | $ | 5,217 | $ | (48,337 | ) | ||||
Weighted average shares outstanding: | |||||||||||||||
Basic weighted average shares outstanding | 18,540 | 17,926 | 18,401 | 17,775 | |||||||||||
Effect of restricted stock units | — | — | 17 | — | |||||||||||
Diluted weighted average shares outstanding | 18,540 | 17,926 | 18,418 | 17,775 |
The table below shows the number of shares that were excluded from the calculation of diluted income (loss) per share because their inclusion would be anti-dilutive to the calculation:
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||
(In thousands) | |||||||||||
Restricted stock units, stock options and SARs | 849 | 492 | 832 | 492 |
14. 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. On August 1, 2015, the Company contributed 100% of the outstanding equity interests in Westmoreland Kemmerer, LLC (“Kemmerer”) to WMLP (the “Kemmerer Drop”), and, accordingly, to enable comparability, all segment disclosures have been adjusted to remove financial information for Kemmerer from the Coal - U.S. segment and present it in the Coal - WMLP segment for each of the three and six months ended ended June 30, 2016 and 2015.
20
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 | Coal - WMLP(2) | Power(3) | Heritage | Corporate(2) | Consolidated(4) | |||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||||||
Three Months Ended June 30, 2016 | |||||||||||||||||||||||||||
Revenues | $ | 151,433 | $ | 109,064 | $ | 80,468 | $ | 21,944 | $ | — | $ | (6,662 | ) | $ | 356,247 | ||||||||||||
Restructuring charges | — | — | — | — | — | — | — | ||||||||||||||||||||
Depreciation, depletion, and amortization | 12,435 | 6,717 | 14,547 | — | — | (36 | ) | 33,663 | |||||||||||||||||||
Operating income (loss) | 3,850 | 4,200 | (4,282 | ) | 6,731 | (3,518 | ) | (3,992 | ) | 2,989 | |||||||||||||||||
Total assets | 950,021 | 504,537 | 397,865 | 41,819 | 16,468 | (167,497 | ) | 1,743,213 | |||||||||||||||||||
Capital expenditures | 4,559 | 1,139 | 985 | — | — | — | 6,683 | ||||||||||||||||||||
Three Months Ended June 30, 2015 | |||||||||||||||||||||||||||
Revenues | $ | 132,620 | $ | 106,162 | $ | 97,033 | $ | 21,334 | $ | — | $ | (8,190 | ) | $ | 348,959 | ||||||||||||
Restructuring charges | — | — | 103 | — | — | — | 103 | ||||||||||||||||||||
Depreciation, depletion, and amortization | 9,297 | 8,611 | 13,921 | 2,476 | — | (42 | ) | 34,263 | |||||||||||||||||||
Operating income (loss) | 801 | 9,524 | (936 | ) | (9,035 | ) | (2,400 | ) | (4,820 | ) | (6,866 | ) | |||||||||||||||
Total assets | 561,007 | 582,412 | 441,840 | 170,126 | 16,241 | (9,201 | ) | 1,762,425 | |||||||||||||||||||
Capital expenditures | 6,771 | 9,879 | 8,348 | 528 | — | 1 | 25,527 | ||||||||||||||||||||
Six Months Ended June 30, 2016 | |||||||||||||||||||||||||||
Revenues | $ | 306,611 | $ | 202,498 | $ | 172,949 | $ | 43,940 | $ | — | $ | (15,030 | ) | $ | 710,968 | ||||||||||||
Restructuring charges | — | — | — | — | — | — | — | ||||||||||||||||||||
Depreciation, depletion, and amortization | 26,573 | 12,356 | 29,812 | — | — | (65 | ) | 68,676 | |||||||||||||||||||
Operating income (loss) | 15,129 | 16,609 | (3,473 | ) | 931 | (6,999 | ) | (7,670 | ) | 14,527 | |||||||||||||||||
Total assets | 950,021 | 504,537 | 397,865 | 41,819 | 16,468 | (167,497 | ) | 1,743,213 | |||||||||||||||||||
Capital expenditures | 7,214 | 2,488 | 2,529 | — | — | — | 12,231 | ||||||||||||||||||||
Six Months Ended June 30, 2015 | |||||||||||||||||||||||||||
Revenues | $ | 287,487 | $ | 209,405 | $ | 206,123 | $ | 41,984 | $ | — | $ | (24,555 | ) | $ | 720,444 | ||||||||||||
Restructuring charges | — | — | 656 | — | — | — | 656 | ||||||||||||||||||||
Depreciation, depletion, and amortization | 18,674 | 19,876 | 28,810 | 4,962 | — | — | 72,322 | ||||||||||||||||||||
Operating income (loss) | 7,919 | 19,388 | (1,306 | ) | (8,618 | ) | (5,749 | ) | (10,043 | ) | 1,591 | ||||||||||||||||
Total assets | 561,007 | 582,412 | 441,840 | 170,126 | 16,241 | (9,201 | ) | 1,762,425 | |||||||||||||||||||
Capital expenditures | 15,427 | 13,928 | 11,661 | 1,107 | — | (3,569 | ) | 38,554 |
____________________
(1) | The San Juan Acquisition was completed on January 31, 2016. For the three and six months ended June 30, 2016, revenues for the San Juan Entities were $50.0 million and $76.6 million, respectively, and operating income was $5.1 million and $8.2 million, respectively. |
(2) | The Coal - WMLP segment recorded revenues of $6.4 million and $14.3 million for intersegment revenues to the Coal - U.S. segment for the three and six months ended June 30, 2016, respectively and $6.6 million and $21.1 million for the three and six months ended June 30, 2015, respectively. Eliminations for intersegment revenues and cost of sales are presented within the Corporate segment. |
(3) | Total assets as of June 30, 2016 reflect a $133.1 million asset impairment in the Power segment that was recorded during the fourth quarter of 2015. No such impairment had been recorded as of June 30, 2015. |
(4) | Deferred tax assets of $15.2 million as of June 30, 2015 were reclassified into liabilities on adoption of ASU 2015-17 - Income Taxes: Balance Sheet Classification of Deferred Taxes. |
21
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
15. CONTINGENCIES
The Company is a party to or receives notification of routine claims, lawsuits and regulatory proceedings with respect to various matters. The Company provides for costs related to contingencies when a loss is probable and the amount is reasonably estimable. After conferring with counsel, it is the opinion of management that the ultimate resolution of pending claims will not have a material adverse effect on the consolidated financial condition, results of operations, or liquidity of the Company.
22
ITEM 2 | — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains “forward-looking statements.” Forward-looking statements can be identified by words such as “anticipates,” “intends,” “plans,” “seeks,” “believes,” “estimates,” “expects” and similar references to future periods. Examples of forward-looking statements include, but are not limited to, statements we make about recent acquisitions and their anticipated effects on us, and our expectation that our cash from operations, cash on hand and available borrowing capacity will be sufficient to meet our investing, financing, and working capital requirements for the foreseeable future.
Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Our actual results may differ materially from those contemplated by the forward-looking statements. We therefore caution you against relying on any of these forward-looking statements. They are statements neither of historical fact nor guarantees or assurances of future performance. Important factors that could cause actual results to differ materially from those in the forward-looking statements include political, economic, business, competitive, market, weather and regulatory conditions and the following:
• | The effect of legal and administrative proceedings, settlements, investigations and claims, including any related to citations and orders issued by regulatory authorities, and the availability of related insurance coverage; |
• | Existing and future legislation and regulation affecting both our coal mining operations and our customers’ coal usage, governmental policies and taxes, including those aimed at reducing emissions of elements such as mercury, sulfur dioxides, nitrogen oxides, particulate matter or greenhouse gases; |
• | The effect of the Environmental Protection Agency’s and Canadian and provincial governments’ inquiries and regulations on the operations of the power plants to which we provide coal; |
• | Our ability to manage the San Juan Entities following the San Juan Acquisition; |
• | Our substantial level of indebtedness and our ability to adhere to financial covenants related to our borrowing arrangements; |
• | Changes in our post-retirement medical benefit and pension obligations and the impact of the recently enacted healthcare legislation on our employee health benefit costs; |
• | Inaccuracies in our estimates of our coal reserves; |
• | Our potential inability to expand or continue current coal operations due to limitations in obtaining bonding capacity for new mining permits, and/or increases in our mining costs as a result of increased bonding expenses; |
• | The effect of prolonged maintenance or unplanned outages at our operations or those of our major power generating customers; |
• | The inability to control costs, recognize favorable tax credits and/or receive adequate train traffic at our open market mine operations; |
• | Our ability to realize growth opportunities and cost synergies as a result of the acquisition of our Canadian mines; |
• | The ability or inability of our hedging arrangement with respect to our ROVA facility to generate cash flow due to the fully hedged position through March 2019; |
• | Competition within our industry and with producers of competing energy sources; |
• | Our relationships with, and other conditions affecting, our customers; |
• | The availability and costs of key supplies or commodities, such as diesel fuel, steel and explosives; |
• | Potential title defects or loss of leasehold interests in our properties, which could result in unanticipated costs or an inability to mine the properties; and |
• | Other factors that are described under the heading “Risk Factors” found in our reports filed with the Securities and Exchange Commission, including our 2015 Form 10-K. |
Unless otherwise specified, the forward-looking statements in this report speak as of the filing date of this report. Factors or events that could cause our actual results to differ may emerge from time-to-time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update any forward-looking statements, whether because of new information, future developments or otherwise, except as may be required by law.
23
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONT.)
Overview
Westmoreland Coal Company is the oldest independent coal company in the United States. Our coal operations include surface coal mines in the United States and Canada, underground coal mines in Ohio and New Mexico, a char production facility, and a 50% interest in an activated carbon plant. We also own the general partner of, and a majority of the equity interests in, WMLP, a publicly-traded coal master limited partnership. Our power operations include two coal-fired power generation units in North Carolina. We classify our business into four operating segments (Coal - U.S., Coal - Canada, Coal - WMLP and Power) and two non-operating segments (Heritage and Corporate). Our Heritage segment primarily includes the costs of benefits we provide to former mining operation employees and our Corporate segment consists primarily of corporate administrative and business development expenses.
We are a holding company and conduct our operations through subsidiaries. We have significant cash requirements to fund our ongoing debt obligations, pension contributions, heritage health benefit costs, and corporate overhead costs. The principal sources of cash flow to us are distributions from our operating subsidiaries.
San Juan Acquisition and related financing
On January 31, 2016, WSJ, a special purpose subsidiary of Westmoreland, acquired SJCC, which operates the San Juan mine in Farmington, New Mexico, and San Juan Transportation Company for a total cash purchase price of approximately $125.3 million, subject to post-closing adjustments. The San Juan mine is the exclusive supplier of coal to the adjacent SJGS under a coal supply agreement through 2022. For details of the financing structure, see Note 6 - Debt and Lines of Credit.
Results of Operations
Three Months Ended June 30, 2016 Compared to Three Months Ended June 30, 2015
Consolidated Results of Operations
The following table shows the comparative consolidated results and changes between periods:
Three Months Ended June 30, | ||||||||||||||
Increase / (Decrease) | ||||||||||||||
2016 | 2015 | $ | % | |||||||||||
(In thousands) | ||||||||||||||
Revenues | $ | 356,247 | $ | 348,959 | $ | 7,288 | 2.1 | % | ||||||
Net loss applicable to common shareholders | (25,367 | ) | (36,605 | ) | 11,238 | 30.7 | % | |||||||
Adjusted EBITDA(1) | 43,558 | 55,281 | (11,723 | ) | (21.2 | )% |
____________________
(1) | Adjusted EBITDA, a non-GAAP measure, is defined and reconciled to net income (loss) at the end of this “Results of Operations” section. |
Revenue growth was driven by our January 31, 2016 San Juan acquisition, offset by softer demand at other mines. Net income increased as a result of $9.9 million in operating income growth and a $7.6 million decrease in income tax expense, offset by a $6.2 million increase in interest expense due to higher debt levels. Adjusted EBITDA decreased as a result of an $8.7 million decrease in receipts from loan and lease receivables as well as demand softness at certain of our Canadian and U.S. mines. This was offset by the addition of $9.4 million in Adjusted EBITDA by our San Juan acquisition.
24
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONT.)
Coal - U.S. Segment Operating Results
As a result of the Kemmerer Drop, results for all periods presented reflect Kemmerer as part of the Coal - WMLP segment and not part of the Coal - U.S. segment:
Three Months Ended June 30, | ||||||||||||||
Increase / (Decrease) | ||||||||||||||
2016 | 2015 | $ | % | |||||||||||
(In thousands, except ton data) | ||||||||||||||
Revenues | $ | 151,433 | $ | 132,620 | $ | 18,813 | 14.2 | % | ||||||
Operating income | 3,850 | 801 | 3,049 | 380.6 | % | |||||||||
Adjusted EBITDA(1) | 19,761 | 14,186 | 5,575 | 39.3 | % | |||||||||
Tons sold—millions of equivalent tons | 4.7 | 5.3 | (0.6 | ) | (11.3 | )% |
____________________
(1) | Adjusted EBITDA, a non-GAAP measure, is defined and reconciled to Net income (loss) at the end of this “Results of Operations” section. |
Our San Juan acquisition added $50.0 million in revenue. This growth was offset by decreases arising from the expiration of certain contracts, which had been expected. Certain mines experienced a decrease due to softer demand. Further, cost reduction initiatives at cost plus mines led to a corresponding decrease in revenue. Our San Juan acquisition added $5.1 million in operating income and $9.4 million in Adjusted EBITDA. Adjusted EBITDA also benefited from the absence of a prior year customer shut-down, offset slightly by the aforementioned revenue pressures.
Coal - Canada Segment Operating Results
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