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EX-95.1 - EXHIBIT 95.1 - WESTMORELAND COAL Coexh95-1_2016q3.htm
EX-32 - EXHIBIT 32 - WESTMORELAND COAL Coexh32_2016q3.htm
EX-31.2 - EXHIBIT 31.2 - WESTMORELAND COAL Coexh31-2_2016q3.htm
EX-31.1 - EXHIBIT 31.1 - WESTMORELAND COAL Coexh31-1_2016q3.htm
EX-10.3 - EXHIBIT 10.3 - WESTMORELAND COAL Coexh10-3_2016q3.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, 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
  ___________________________________________
wlblogoname.jpg
(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 October 28, 2016: 18,570,642 shares of common stock, $0.01 par value.




TABLE OF CONTENTS
 


2


PART I - FINANCIAL INFORMATION
ITEM 1
FINANCIAL STATEMENTS


WESTMORELAND COAL COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
 
September 30,
2016
 
December 31,
2015
 
(In thousands)
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
28,914

 
$
22,936

Receivables:
 
 
 
Trade
140,063

 
134,141

Loan and lease receivables
5,394

 
6,157

Contractual third-party reclamation receivables
12,985

 
8,020

Other
20,018

 
11,598

 
178,460

 
159,916

Inventories
128,685

 
121,858

Other current assets
24,711

 
16,103

Total current assets
360,770

 
320,813

Property, plant and equipment:
 
 
 
Land and mineral rights
600,160

 
476,447

Plant and equipment
879,718

 
790,677

 
1,479,878

 
1,267,124

Less accumulated depreciation, depletion and amortization
642,791

 
554,008

Net property, plant and equipment
837,087

 
713,116

Loan and lease receivables, less current portion
49,389

 
49,313

Advanced coal royalties
17,470

 
19,781

Reclamation deposits
74,043

 
77,364

Restricted investments and bond collateral
144,454

 
140,807

Contractual third-party reclamation receivables, less current portion
155,249

 
86,915

Investment in joint venture
27,815

 
27,374

Intangible assets, net of accumulated amortization of $4.0 million and $15.9 million at September 30, 2016 and December 31, 2015, respectively
27,492

 
29,190

Other assets
25,883

 
11,904

Total Assets
$
1,719,652

 
$
1,476,577

See accompanying Notes to Consolidated Financial Statements.

3


WESTMORELAND COAL COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets (Continued)
(Unaudited)
 
September 30,
2016
 
December 31,
2015
 
(In thousands)
Liabilities and Shareholders’ Deficit
 
 
 
Current liabilities:
 
 
 
Current installments of long-term debt
$
90,736

 
$
38,852

Revolving lines of credit

 
1,970

Accounts payable and accrued expenses:
 
 
 
Trade and other accrued liabilities
121,266

 
109,850

Interest payable
13,611

 
15,527

Production taxes
55,589

 
46,895

Postretirement medical benefits
13,855

 
13,855

SERP
368

 
368

Deferred revenue
23,203

 
10,715

Asset retirement obligations
51,088

 
43,950

Other current liabilities
34,578

 
30,688

Total current liabilities
404,294

 
312,670

Long-term debt, less current installments
1,035,013

 
979,073

Workers’ compensation, less current portion
4,908

 
5,068

Excess of black lung benefit obligation over trust assets
17,865

 
17,220

Postretirement medical benefits, less current portion
286,952

 
285,518

Pension and SERP obligations, less current portion
42,790

 
44,808

Deferred revenue, less current portion
18,740

 
24,613

Asset retirement obligations, less current portion
450,869

 
375,813

Intangible liabilities, net of accumulated amortization of $10.6 million and $9.8 million at September 30, 2016 and December 31, 2015, respectively
2,669

 
3,470

Other liabilities
36,760

 
30,208

Total liabilities
2,300,860

 
2,078,461

Shareholders’ deficit:
 
 
 
Common stock of $0.01 par value
 
 
 
Authorized 30,000,000 shares; issued and outstanding 18,570,642 shares at September 30, 2016 and 18,162,148 shares at December 31, 2015
186

 
182

Other paid-in capital
246,450

 
240,721

Accumulated other comprehensive loss
(150,726
)
 
(171,300
)
Accumulated deficit
(675,523
)
 
(672,219
)
Total Westmoreland Coal Company shareholders’ deficit
(579,613
)
 
(602,616
)
Noncontrolling interest
(1,595
)
 
732

Total deficit
(581,208
)
 
(601,884
)
Total Liabilities and Deficit
$
1,719,652

 
$
1,476,577

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,
 
2016
 
2015
 
2016
 
2015
 
(In thousands, except per share data)
Revenues
$
370,683

 
$
349,796

 
$
1,081,651

 
$
1,070,240

Cost, expenses and other:
 
 
 
 
 
 
 
Cost of sales
278,765

 
292,973

 
842,680

 
880,162

Depreciation, depletion and amortization
33,112

 
34,459

 
101,788

 
106,781

Selling and administrative
30,518

 
29,383

 
94,209

 
84,611

Heritage health benefit expenses
3,265

 
2,801

 
9,502

 
8,022

Loss (gain) on sale/disposal of assets
548

 
1,135

 
(1,369
)
 
2,148

Restructuring charges

 

 

 
656

Derivative loss
5,442

 
5,815

 
2,164

 
6,717

Income from equity affiliates
(1,547
)
 
(463
)
 
(4,127
)
 
(4,141
)
Other operating loss (gain)
3,368

 
(1,000
)
 
5,065

 
(1,000
)
 
353,471

 
365,103

 
1,049,912

 
1,083,956

Operating income (loss)
17,212

 
(15,307
)
 
31,739

 
(13,716
)
Other income (expense):
 
 
 
 
 
 
 
Interest expense
(29,494
)
 
(26,831
)
 
(90,673
)
 
(76,870
)
Loss on extinguishment of debt

 
(5,385
)
 

 
(5,385
)
Interest income
1,374

 
1,555

 
5,521

 
6,262

Gain (loss) on foreign exchange
220

 
1,679

 
(1,531
)
 
2,474

Other income
303

 
356

 
435

 
1,082

 
(27,597
)
 
(28,626
)
 
(86,248
)
 
(72,437
)
Loss before income taxes
(10,385
)
 
(43,933
)
 
(54,509
)
 
(86,153
)
Income tax expense (benefit)
(1,625
)
 
4,087

 
(49,660
)
 
13,596

Net loss
(8,760
)
 
(48,020
)

(4,849
)

(99,749
)
Less net income (loss) attributable to noncontrolling interest
(239
)
 
(1,458
)
 
(1,545
)
 
(4,850
)
Net loss applicable to common shareholders
$
(8,521
)
 
$
(46,562
)
 
$
(3,304
)
 
$
(94,899
)
Net loss per share applicable to common shareholders:
 
 
 
 
 
 
 
Basic and diluted
$
(0.46
)
 
$
(2.59
)
 
$
(0.18
)
 
$
(5.32
)
Weighted average number of common shares outstanding:
 
 
 
 
 
 
 
Basic and diluted
18,570

 
17,986

 
18,458

 
17,846

See accompanying Notes to Consolidated Financial Statements.

5


WESTMORELAND COAL COMPANY AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
Net loss
$
(8,760
)
 
$
(48,020
)
 
$
(4,849
)
 
$
(99,749
)
Other comprehensive income (loss)
 
 
 
 
 
 
 
Pension and other postretirement plans:
 
 
 
 
 
 
 
Amortization of accumulated actuarial gains or losses, pension
1,294

 
996

 
3,884

 
3,263

Adjustments to accumulated actuarial losses and transition obligations, pension
813

 
(253
)
 
786

 
(538
)
Amortization of accumulated actuarial gains or losses, transition obligations, and prior service costs, postretirement medical benefit
368

 
327

 
891

 
981

Adjustments of accumulated actuarial losses and transition obligations, postretirement medical benefit

 

 
984

 

Tax effect of other comprehensive income gains and losses
(1,039
)
 
(558
)
 
(2,410
)
 
(908
)
Change in foreign currency translation adjustment
(2,438
)
 
(20,802
)
 
16,184

 
(43,018
)
Unrealized and realized gains and losses on available-for-sale securities
535

 
165

 
255

 
(1,295
)
Other comprehensive income (loss), net of income taxes
(467
)
 
(20,125
)
 
20,574

 
(41,515
)
Comprehensive income (loss)
(9,227
)
 
(68,145
)
 
15,725

 
(141,264
)
Less: Comprehensive income (loss) attributable to noncontrolling interest
(240
)
 
(1,458
)
 
(1,532
)
 
(4,850
)
Comprehensive income (loss) attributable to common shareholders
$
(8,987
)
 
$
(66,687
)
 
$
17,257

 
$
(136,414
)
See accompanying Notes to Consolidated Financial Statements.

6


WESTMORELAND COAL COMPANY AND SUBSIDIARIES
Consolidated Statements of Deficit
Nine Months Ended September 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

 

 

 

 

 
(795
)
 
(795
)
Common stock issued as compensation
342,353

 
3

 
5,922

 

 

 

 
5,925

Issuance of restricted stock
66,141

 
1

 
(193
)
 

 

 

 
(192
)
Net loss

 

 

 

 
(3,304
)
 
(1,545
)
 
(4,849
)
Other comprehensive income

 

 

 
20,574

 

 
13

 
20,587

Balance at September 30, 2016
18,570,642

 
$
186

 
$
246,450

 
$
(150,726
)
 
$
(675,523
)
 
$
(1,595
)
 
$
(581,208
)
See accompanying Notes to Consolidated Financial Statements.

7


WESTMORELAND COAL COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
 
Nine Months Ended September 30,
 
2016
 
2015
 
(In thousands)
Cash flows from operating activities:
 
 
 
Net loss
$
(4,849
)
 
$
(99,749
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation, depletion and amortization
101,788

 
106,781

Accretion of asset retirement obligation and receivable
21,534

 
21,251

Share-based compensation
5,925

 
5,588

Non-cash interest expense
6,879

 
4,617

Amortization of deferred financing costs
8,324

 
7,849

Loss on derivative instruments
2,164

 
6,717

Loss (gain) on foreign exchange
1,531

 
(2,474
)
Income from equity affiliates
(4,127
)
 
(4,141
)
Distributions from equity affiliates
5,177

 
4,328

Deferred income tax expense (benefit)
(48,490
)
 
14,887

Other
(4,359
)
 
3,968

Changes in operating assets and liabilities:
 
 


Receivables
(238
)
 
(14,327
)
Inventories
9,460

 
494

Accounts payable and accrued expenses
(2,327
)
 
(2,572
)
Interest payable
(3,720
)
 
7,398

Deferred revenue
4,314

 
(8,297
)
Other assets and liabilities
7,375

 
(21,528
)
Asset retirement obligations
(22,120
)
 
(9,908
)
Net cash provided by operating activities
84,241

 
20,882

Cash flows from investing activities:
 
 
 
Additions to property, plant and equipment
(30,619
)
 
(57,971
)
Change in restricted investments
270

 
(7,988
)
Cash received from restricted deposits

 
34,000

Cash payments related to acquisitions and other
(125,315
)
 
(35,887
)
Cash acquired related to acquisition, net

 
2,780

Proceeds from sales of assets
6,176

 
1,691

Receipts from loan and lease receivables
4,852

 
20,192

Payments related to loan and lease receivables
(2,141
)
 
(3,981
)
Other
(587
)
 
(287
)
Net cash used in investing activities
(147,364
)
 
(47,451
)
Cash flows from financing activities:
 
 
 
Borrowings from long-term debt, net of debt discount
122,250

 
199,363

Repayments of long-term debt
(43,876
)
 
(138,185
)
Borrowings on revolving lines of credit
313,900

 
142,823

Repayments on revolving lines of credit
(315,900
)
 
(152,412
)
Debt issuance costs and other refinancing costs
(7,246
)
 
(7,431
)
Other
(798
)
 
90

Net cash provided by financing activities
68,330

 
44,248

Effect of exchange rate changes on cash
771

 
(2,601
)
Net increase in cash and cash equivalents
5,978

 
15,078

Cash and cash equivalents, beginning of period
22,936

 
14,258

Cash and cash equivalents, end of period
$
28,914

 
$
29,336

Supplemental disclosures of cash flow information:
 
 
 
Cash paid for interest
$
79,099

 
$
61,399

Non-cash transactions:
 
 
 
Accrued purchases of property and equipment
$
4,166

 
$
2,718

Capital leases and other financing sources
19,830

 
14,967

 
 
 
 

See accompanying Notes to Consolidated Financial Statements.

8


WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include accounts of Westmoreland Coal Company, or the Company, or Parent, and its subsidiaries and controlled entities 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 nine months ended September 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 August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-15 - Statement of Cash Flows (Accounting Standards Codification, or “ASC,” Topic 230): Classification of Certain Cash Receipts and Cash Payments, which requires an entity to elect either the cumulative earnings approach or the nature of the distribution approach when determining the classification of cash inflows from equity method investments on the statement of cash flows. For our Activated Carbon 50/50 joint venture accounted for under the equity method of accounting, we have elected to use the nature of the distribution approach. Under this approach, distributions are reported under operating cash flow unless the facts and circumstances of a specific distribution clearly indicate that it is a return of capital (e.g., a liquidating dividend or distribution of the proceeds from the joint venture’s sale of assets) in which case it is reported as an investing activity. The Company adopted this standard on September 30, 2016.
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 Company adopted this standard on January 1, 2016 and retrospectively applied the guidance to prior periods.
Recently Issued Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, issued as a new Topic, 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 (“SJTC” and such transaction, the “San Juan Acquisition”) for a total cash purchase price of approximately $125.3

9

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

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 principally with a $125.0 million loan from NM Capital Utility Corporation (the “San Juan Loan”), an affiliate of Public Service Company of New Mexico (one of the owners of SJGS).
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
September 30, 2016
Purchase price:
 
Cash paid
$
125.3

 
 
Preliminary allocation of purchase price:
 
Assets:
 
     Inventories - coal and supplies
$
8.8

     Other receivables
10.0

Contractual third-party reclamation receivable
4.6

Total current assets
23.4

     Land and mineral rights
108.3

     Plant and equipment
73.5

Contractual third-party reclamation receivable
66.8

Other assets
10.4

Total assets
282.4

Liabilities:
 
     Trade payables and other accrued liabilities
14.1

Production taxes
2.0

     Other liabilities
9.9

Asset retirement obligations
4.6

Total current liabilities
30.6

     Asset retirement obligations, less current portion
66.8

Postretirement medical
1.9

Deferred income taxes
48.5

     Other liabilities
9.3

Total liabilities
157.1

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

10

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

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.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2016
 
2015
 
(In thousands, except per share data)
Total revenues
 
 
 
 
 
As reported
$
349,796

 
$
1,081,651

 
$
1,070,240

Pro forma
$
423,350

 
$
1,107,926

 
$
1,296,561

 
 
 
 
 
 
Operating income (loss)
 
 
 
 
 
As reported
$
(15,307
)
 
$
31,739

 
$
(13,716
)
Pro forma
$
(5,179
)
 
$
32,834

 
$
17,784

 
 
 
 
 
 
Net loss applicable to common shareholders
 
 
 
 
 
As reported
$
(46,562
)
 
$
(3,304
)
 
$
(94,899
)
Pro forma
$
(39,429
)
 
$
(2,879
)
 
$
(73,542
)
 
 
 
 
 
 
Net loss per share applicable to common shareholders (basic and diluted)
 
 
 
 
 
As reported
$
(2.59
)
 
$
(0.18
)
 
$
(5.32
)
Pro forma
$
(2.19
)
 
$
(0.16
)
 
$
(4.12
)

3. VARIABLE INTEREST ENTITY

As of September 30, 2016, the Company consolidated its 100% owned WSJ subsidiary which is a variable interest entity (“VIE”). WSJ’s classification as a VIE is due to another party having the potential right to receive WSJ’s 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. Accordingly, the Company consolidated the operating results, assets and liabilities of WSJ. See Note 2 - Acquisition and Note 6 - Debt and Lines of Credit.
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):
 
September 30, 2016
Assets
$
311,287

Liabilities
287,485

Net carrying amount
$
23,802


4. INVENTORIES
Inventories consisted of the following:
 
September 30, 2016
 
December 31, 2015
 
(In thousands)
Coal stockpiles
$
42,439

 
$
38,636

Coal fuel inventories
7,103

 
7,194

Materials and supplies
81,998

 
78,784

Reserve for obsolete inventory
(2,855
)
 
(2,756
)
Total
$
128,685

 
$
121,858



11

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

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 corresponding investment returns. 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.
The Company’s carrying value and estimated fair value of its restricted investments at September 30, 2016 were as follows:
 
Restricted Investments and Bond Collateral
 
Reclamation Deposits
 
Total Restricted Investments
 
(In thousands)
Cash and cash equivalents
$
64,307

 
$
2,309

 
$
66,616

Time deposits
2,470

 

 
2,470

Available-for-sale
77,677

 
71,734

 
149,411

 
$
144,454

 
$
74,043

 
$
218,497

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 September 30, 2016 were as follows:
 
Restricted Investments and Bond Collateral
 
Reclamation Deposits
 
Total Restricted Investments
 
(In thousands)
Cost basis
$
78,410

 
$
72,068

 
$
150,478

Gross unrealized holding gains
273

 
551

 
824

Gross unrealized holding losses
(1,006
)
 
(885
)
 
(1,891
)
Fair value
$
77,677

 
$
71,734

 
$
149,411

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
 
September 30, 2016
 
December 31, 2015
 
(In thousands)
8.75% Notes
$
350,000

 
$
350,000

WCC Term Loan Facility
324,705

 
327,172

San Juan Loan
110,000

 

WMLP Term Loan Facility
304,757

 
299,248

Capital lease obligations
61,579

 
71,168

Revolving Credit Facility

 
1,970

Other
14,930

 
7,251

Total debt
1,165,971


1,056,809

Less debt discount and debt issuance costs
(40,222
)
 
(36,914
)
Less current installments
(90,736
)
 
(40,822
)
Total debt outstanding, less current installments
$
1,035,013

 
$
979,073

The following table presents aggregate contractual debt maturities of all debt: 
 
September 30, 2016
 
(In thousands)
2016
$
29,880

2017
81,178

2018
321,636

2019
19,090

2020
340,332

Thereafter
373,855

Total debt
$
1,165,971

8.75% Notes
The 8.75% senior secured notes mature on January 1, 2022 (“8.75% Notes”) 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 September 30, 2016, we were in compliance with all covenants for the 8.75% Notes.
WCC Term Loan Facility
The term loan matures on December 16, 2020 (“WCC Term Loan Facility”) 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 September 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 September 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. As of September 30, 2016, the cash interest rate is 8.01%. 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., (iii) SJCC and (iv) SJTC (collectively, the “Westmoreland San Juan Entities”). Obligations under the San Juan Loan are recourse only to the Westmoreland San Juan Entities and their assets 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 the Company other than those of the Westmoreland San Juan Entities.
WMLP Term Loan Facility
The term loan of WMLP matures in December 2018 (“WMLP Term Loan Facility”) 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 September 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 September 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 $6.9 million for the nine months ended September 30, 2016. The outstanding term loan amount represents the principal balance of $291.0 million, plus PIK Interest of $13.7 million.
WMLP Revolving Credit Facility
The WMLP revolving line of credit (“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 September 30, 2016, availability under the WMLP revolving credit facility was $15.0 million. The WMLP Revolving Credit Facility has a maturity date of December 31, 2017. We were in compliance with all covenant requirements of the WMLP Revolving Credit Facility as of September 30, 2016.
Capital Lease Obligations
During the nine months ended September 30, 2016, the Company entered into $10.0 million of new capital leases.
WCC Revolving Credit Facility
The Company amended the terms of its revolving line of credit (“WCC Revolving Credit Facility”) on September 30, 2016 and October 12, 2016, respectively. The September 30 amendment clarified the terms “Canadian Fixed Charges” and “US Fixed Charges” to allocate scheduled cash interest payments and to remove the allocation schedule of cash interest payments under the term “Interest Expense.” The October 12 amendment (1) replaced the previous lender, Bank of the West, with a new lender, East West Bank, (2) amended Interest Expense to remove certain dividend payments, (3) revised the term “Required Lenders” to constitute all lenders when only two unaffiliated lenders are party to the revolving credit facility, (4) removed the requirement of the delivery of a social responsibility questionnaire in connection with a Permitted Acquisition, (5) allowed for any Lender to provide the Swing Line Lender one day’s prior written notice prohibiting a US Swing Line Loan or Canadian Swing Line Loan, (6) removed Administrative Agent discretion on application of proceeds from the sale of Collateral, (7)

14

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

adjusted Annual Projections reporting requirements to no longer require delivery of a balance sheet and (8) adjusted the waterfall treatment with respect to Proceeds of Collateral.
Under the WCC 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 WCC 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 September 30, 2016, availability on the WCC Revolving Credit Facility was $36.3 million with an outstanding balance of $13.7 million supporting letters of credit and nothing drawn on the WCC Revolving Credit Facility.  The WCC Revolving Credit Facility has a maturity date of December 31, 2018. We were in compliance with all covenant requirements of the WCC Revolving Credit Facility as of September 30, 2016.
Deferred Financing Costs

Due to the adoption of ASU 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, debt issuance costs related to the Company’s debt liabilities are now reported in the balance sheet as a direct deduction from the face amount of the notes. 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.

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 September 30,
 
Nine Months Ended September 30,
2016
 
2015
 
2016
 
2015
 
(In thousands)
Components of net periodic benefit cost:
 
 
 
 
 
 
 
Service cost
$
763

 
$
1,054

 
$
2,507

 
$
3,163

Interest cost
3,075

 
2,907

 
9,278

 
8,722

Amortization of deferred items
368

 
327

 
891

 
981

Total net periodic benefit cost
$
4,206

 
$
4,288

 
$
12,676

 
$
12,866

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,
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
Former mining operations
$
2,135

 
$
2,034

 
$
6,405

 
$
6,103

Current operations
2,071

 
2,254

 
6,271

 
6,763

Total net periodic benefit cost
$
4,206

 
$
4,288

 
$
12,676

 
$
12,866

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.

15

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,
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
Components of net periodic benefit cost:
 
 
 
 
 
 
 
Service cost
$
373

 
$
436

 
$
1,242

 
$
1,318

Interest cost
2,564

 
1,831

 
7,926

 
5,780

Expected return on plan assets
(3,349
)
 
(2,435
)
 
(10,390
)
 
(7,744
)
Settlements
247

 
(1,529
)
 
247

 
(1,874
)
Amortization of deferred items
1,294

 
1,059

 
3,884

 
3,301

Total net periodic pension cost
$
1,129

 
$
(638
)
 
$
2,909

 
$
781


These costs are included in Cost of sales and Selling and administrative expenses. The Company made $0.6 million and $3.5 million of contributions to its pension plans in the nine months ended September 30, 2016 and 2015, respectively. The Company expects to make $0.1 million of contributions to its pension plans during the remainder of 2016.
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 $44.00 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
 
September 30, 2016
 
December 31, 2015
Contracts to purchase power
 
Other current liabilities
 
$
15,121

 
$
13,679

Contracts to purchase power
 
Other liabilities
 
24,043

 
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 September 30,
 
Nine Months Ended September 30,
Derivative Instruments
 
Statement of
Operations Location
 
2016
 
2015
 
2016
 
2015
Contracts to purchase power
 
Derivative loss
 
$
(5,442
)
 
$
(5,815
)
 
$
(2,164
)
 
$
(6,717
)

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.

16

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

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 September 30, 2016:
 
 
 
Quoted Prices in Active Markets for Identical Assets or Liabilities
 
Significant Other Observable Inputs
 
Fair Value
 
Level 1
 
Level 2
(In thousands)
Assets:
 
 
 
 
 
Available-for-sale investments included in Restricted investments
$
77,677

 
$
77,677

 
$

Available-for-sale investments included in Reclamation deposits
71,734

 
71,734

 

Total assets
$
149,411

 
$
149,411

 
$

Liabilities:
 
 
 
 
 
Contracts to purchase power included in Other current liabilities and Other liabilities
$
39,164

 
$

 
$
39,164

Warrants issued by WMLP included in Other liabilities
610

 
610

 

Total liabilities
$
39,774

 
$
610

 
$
39,164

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, 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)
September 30, 2016
$
337,368

 
$
276,500

 
$
726,802

 
$
595,591

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 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, 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 San Juan Acquisition.
As part of the San Juan Acquisition, the Company acquired $48.5 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 $48.5 million decrease in the Company’s net deferred tax assets resulted in the release of a corresponding $48.5 million valuation allowance and recognition of a tax benefit in the nine months ended September 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
786

 
984

 
(139
)
 
16,184

 
(2,410
)
 
15,405

Amounts reclassified from accumulated other comprehensive income (loss)
3,884

 
891

 
394

 

 

 
5,169

Balance at September 30, 2016
$
(29,888
)
 
$
(29,211
)
 
$
(1,070
)
 
$
(53,717
)
 
$
(36,840
)
 
$
(150,726
)
The following table reflects the reclassifications out of accumulated other comprehensive loss for the three and nine months ended September 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 September 30, 2016
 
Nine Months Ended September 30, 2016
 
Available-for-sale securities
 
 
 
 
 
Realized gains and losses on available-for-sale securities
$
116

 
$
394

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

 
$
6

 
Cost of sales and Selling and administrative
Actuarial losses
1,292

 
3,878

 
Cost of sales and Selling and administrative
Total
$
1,294

 
$
3,884

 
 
Amortization of postretirement medical items
 
 
 
 
 
Prior service costs
$
(159
)
 
$
(477
)
 
Cost of sales and Selling and administrative
Actuarial losses
527

 
1,368

 
Cost of sales and Selling and administrative
Total
$
368

 
$
891

 
 


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 September 30,
 
Nine Months Ended September 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
$
1,391

 
$
1,100

 
$
3,733

 
$
2,924

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

 
842

 
2,192

 
2,664

Total share-based compensation expense
$
1,391

 
$
1,942

 
$
5,925

 
$
5,588

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 September 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
484,121

 
7.78

 
 
Vested
(92,719
)
 
26.46

 
 
Forfeited
(2,400
)
 
7.86

 
 
Non-vested at September 30, 2016
743,313

 
$
15.30

 
$
6,767

Stock Options
No stock options were granted, vested, or forfeited during the nine months ended September 30, 2016. A summary of stock options outstanding as of September 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 September 30, 2016
109,306

 
$
22.16

 
1.4

 
$

 
$

SARs
There were no SARs granted during the nine months ended September 30, 2016. A summary of SARs activity for the nine months ended September 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 September 30, 2016

 
$

 
0.0
 
$

 
$


During 2015, the Company contributed 269,567 common shares to match employees’ contributions to their 401k plans. For the nine months ended September 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 and nine months ended September 30, 2016 and 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.
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,
 
2016
 
2015
 
2016

2015
 
(In thousands)
Restricted stock units, stock options and SARs
853

 
490

 
853

 
490


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 nine months ended September 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)(5)
 
(In thousands)
Three Months Ended September 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues
$
168,860

 
$
96,480

 
$
90,320

 
$
21,554

 
$

 
$
(6,531
)
 
$
370,683

Restructuring charges

 

 

 

 

 

 

Depreciation, depletion, and amortization
14,820

 
6,786

 
11,555

 

 

 
(49
)
 
33,112

Operating income (loss)
18,346

 
4,559

 
5,970

 
(4,696
)
 
(3,326
)
 
(3,641
)
 
17,212

Total assets
770,300

 
504,034

 
382,098

 
40,760

 
16,288

 
6,172

 
1,719,652

Capital expenditures
4,824

 
11,313

 
2,251

 

 

 

 
18,388

Three Months Ended September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues
$
132,018

 
$
107,752

 
$
94,785

 
$
22,017

 
$

 
$
(6,776
)
 
$
349,796

Restructuring charges

 

 

 

 

 

 

Depreciation, depletion, and amortization
9,524

 
7,023

 
15,471

 
2,470

 

 
(29
)
 
34,459

Operating income (loss)
482

 
4,009

 
(4,845
)
 
(7,976
)
 
(2,950
)
 
(4,027
)
 
(15,307
)
Total assets
539,497

 
537,465

 
431,338

 
172,182

 
16,152

 
(9,675
)
 
1,686,959

Capital expenditures
7,047

 
7,485

 
4,691

 
198

 

 
(4
)
 
19,417

Nine Months Ended September 30, 2016


 
 
 
 







Revenues
$
475,470

 
$
298,978

 
$
263,269

 
$
65,494

 
$

 
$
(21,560
)

$
1,081,651

Restructuring charges

 

 

 

 

 

 

Depreciation, depletion, and amortization
41,393

 
19,142

 
41,367

 

 

 
(114
)

101,788

Operating income (loss)
33,475

 
21,168

 
2,497

 
(3,766
)
 
(10,325
)
 
(11,310
)

31,739

Total assets
770,300

 
504,034

 
382,098

 
40,760

 
16,288

 
6,172


1,719,652

Capital expenditures
12,038

 
13,801

 
4,780

 

 

 


30,619

Nine Months Ended September 30, 2015


 
 
 
 







Revenues
$
419,505


$
317,157

 
$
300,908

 
$
64,001


$


$
(31,331
)

$
1,070,240

Restructuring charges

 

 
656

 

 

 

 
656

Depreciation, depletion, and amortization
28,199


26,899

 
44,282

 
7,430




(29
)

106,781

Operating income (loss)
8,403


23,397

 
(6,151
)
 
(16,594
)

(8,699
)

(14,072
)

(13,716
)
Total assets
539,497


537,465

 
431,338

 
172,182


16,152


(9,675
)

1,686,959

Capital expenditures
18,908

 
21,413

 
19,918

 
1,305

 

 
(3,573
)
 
57,971

____________________
(1)
The San Juan Acquisition was completed on January 31, 2016. For the three and nine months ended September 30, 2016, revenues for the Westmoreland San Juan Entities were $51.7 million and $128.3 million, respectively, and operating income was $14.0 million and $22.2 million, respectively.
(2)
The Coal - WMLP segment recorded revenues of $6.2 million and $20.5 million for intersegment revenues to the Coal - U.S. segment for the three and nine months ended September 30, 2016, respectively and $5.9 million and $24.6 million for the three and nine months ended September 30, 2015, respectively. Eliminations for intersegment revenues and cost of sales are presented within the Corporate segment.
(3)
Total assets as of September 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 September 30, 2015.
(4)
Deferred tax assets of $14.5 million as of September 30, 2015 were reclassified into liabilities on adoption of ASU 2015-17 - Income Taxes: Balance Sheet Classification of Deferred Taxes.
(5)
Unamortized debt issuance costs of $26.8 million as of September 30, 2015 were reclassified from other non-current assets into long-term debt on adoption of ASU 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.

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.
16. SUBSEQUENT EVENTS

Eighth Amendment to Second Amended and Restated Loan and Security Agreement

On October 12, 2016, the Company executed an amendment to its revolving credit facility. The terms of the amendment are described above in Note 6 - Debt and Lines of Credit.

WMLP Series B Convertible Unit Exchange

On October 28, 2016, the Company exchanged its 4,512,500 common units representing limited partner interests in WMLP (“Common Units”) for 4,512,500 Series B Convertible Units representing limited partner interests in WMLP (the “Series B Units”). The Series B Units do not share in distributions with the Common Units and are convertible on a one-for-one basis into Common Units on the day after the record date for a cash distribution on the Common Units in which WMLP is unable to make such a distribution without exceeding its restricted payment basket under the WMLP Term Loan Facility and the WMLP Revolving Credit Facility. The Series B Units will also convert automatically upon a change of control or a dissolution or liquidation of WMLP. The Series B Units have the same voting rights as if they were outstanding Common Units and will vote together with the Common Units as a single class. In addition, the Series B Units are entitled to vote as a separate class on any matters that materially adversely affect the rights or preferences of the Series B Units in relation to other classes of partnership interests or as required by law.


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
MANAGEMENTS 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 the Company, acquired SJCC, which operates the San Juan mine in Farmington, New Mexico, and SJTC 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 September 30, 2016 Compared to Three Months Ended September 30, 2015
Consolidated Results of Operations
The following table shows the comparative consolidated results and changes between periods:
 
Three Months Ended September 30,
 
 
 
 
 
Increase / (Decrease)
 
2016
 
2015
 
$
 
%
 
(In thousands)
Revenues
$
370,683

 
$
349,796

 
$
20,887

 
6.0
%
Net loss applicable to common shareholders
(8,521
)
 
(46,562
)
 
38,041

 
81.7
%
Adjusted EBITDA(1)
71,201

 
47,966

 
23,235

 
48.4
%
____________________
(1)
Adjusted EBITDA, a non-GAAP measure, is defined and reconciled to net loss at the end of this “Results of Operations” section.
Consolidated revenue increased due to $51.7 million in revenue generated by our January 2016 San Juan acquisition, offset by softness at other locations. Our net loss improved by $38.0 million as a result of $32.5 million in improved operating income. Consolidated Adjusted EBITDA increased as a result of strong operating results in our Coal-US and Coal-WMLP offset slightly by lower loan and lease receivable payments in our Coal-Canada segment.

24

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
MANAGEMENTS 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 September 30,
 
 
 
 
 
Increase / (Decrease)
 
2016
 
2015
 
$
 
%
 
(In thousands, except ton data)
Revenues
$
168,860

 
$
132,018

 
$
36,842

 
27.9
%
Operating income
18,346

 
482

 
17,864

 
3,706.2
%
Adjusted EBITDA(1)
36,701

 
14,758

 
21,943

 
148.7
%
Tons sold—millions of equivalent tons
6.9


6.0

 
0.9

 
15.0
%
____________________
(1)
Adjusted EBITDA, a non-GAAP measure, is defined and reconciled to net loss at the end of this “Results of Operations” section.
Revenue increased as a result of $51.7 million in revenue generated by our San Juan acquisition. This increase was offset by decreases from the expected expiration of certain contracts as well as cost reduction initiatives at cost plus mines leading to corresponding decreases in revenue. Operating income grew primarily as a result of $14.0 million contributed by our San Juan acquisition. The increase in Adjusted EBITDA was driven by $18.5 million contributed by our San Juan acquisition as well as strong demand arising from favorable weather. Weather conditions are inherently unpredictable and could have positive or negative impacts on demand in future periods.
Coal - Canada Segment Operating Results
 
Three Months Ended September 30,
 
 
 
Increase / (Decrease)
 
2016
 
2015
 
$
 
%
 
(In thousands, except ton data)
Revenues
$
96,480

 
$
107,752

 
$
(11,272
)
 
(10.5
)%
Operating income
4,559

 
4,009