-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EYVAFtryG73C5GVk8184NNJuYgY6D1ST/XigiisfSfZh6KQXK3IXf1D0TwZdKBse YXCqYOP6Cg1jPvUdCAZxiw== 0000106455-97-000015.txt : 19971117 0000106455-97-000015.hdr.sgml : 19971117 ACCESSION NUMBER: 0000106455-97-000015 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: WESTMORELAND COAL CO CENTRAL INDEX KEY: 0000106455 STANDARD INDUSTRIAL CLASSIFICATION: BITUMINOUS COAL & LIGNITE MINING [1220] IRS NUMBER: 231128670 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-11155 FILM NUMBER: 97717697 BUSINESS ADDRESS: STREET 1: 2 NORTH CASCADE AVENUE 14TH FLOOR STREET 2: 200 S BROAD ST CITY: COLORADO SPRINGE STATE: CO ZIP: 80903 BUSINESS PHONE: 7194422600 MAIL ADDRESS: STREET 1: 2 N CASCADE AVE STREET 2: # 14THFL CITY: COLORADO SPRINGS STATE: CO ZIP: 80903-1614 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1997 ------------------- OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from __________ to ___________ Commission File Number 0-752 WESTMORELAND COAL COMPANY ------------------------- (Debtor-in-Possession as of December 23, 1996) ---------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 23-1128670 - ---------------------------- ----------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 2 North Cascade Avenue, 14th Floor Colorado Springs, CO 80903 - ------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, area code 719-442-2600 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 --------- --------- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of August 1, 1997: 6,965,328 PART I - FINANCIAL INFORMATION ITEM 1 FINANCIAL STATEMENTS Westmoreland Coal Company and Subsidiaries Debtor-in-Possession Condensed Consolidated Balance Sheets (Unaudited) Sept. 30, 1997 Dec. 31, 1996 (in thousands)
Assets Current assets: Cash and cash equivalents $ 27,581 $ 8,791 Receivables: Trade 3,355 4,667 Other 1,790 2,218 ---------- ---------- 5,145 6,885 Inventories - 688 Other current assets 379 726 ---------- ---------- Total current assets 33,105 17,090 Property, plant and equipment: Land and mineral rights 11,028 11,028 Plant and equipment 98,663 137,873 ---------- ---------- 109,691 148,901 Less accumulated depreciation and depletion 73,731 106,201 ---------- ---------- 35,960 42,700 Investment in independent power operations 52,424 51,386 Investment in Dominion Terminal Associates (DTA) 19,126 19,841 Workers' compensation bond 7,561 9,960 Prepaid pension cost 12,021 11,021 Other assets 1,586 1,973 ---------- ---------- Total Assets $ 161,783 $ 153,971 ========== ==========
See accompanying notes to condensed consolidated financial statements. Westmoreland Coal Company and Subsidiaries Debtor-in-Possession Condensed Consolidated Balance Sheets (Continued) (Unaudited) Sept. 30, 1997 Dec. 31, 1996 (in thousands)
Liabilities and Shareholders' Equity Current liabilities: Current installments of long-term debt $ 65 $ 443 Accounts payable and accrued expenses: Trade 1,565 847 Taxes, other than income taxes 4,327 3,437 Other accrued expenses 4,865 1,588 Reclamation costs 590 590 ---------- ---------- Total current liabilities 11,412 6,905 Liabilities subject to compromise 133,667 136,191 Long-term debt, less current installments 418 881 Accrual for reclamation costs, less current portion 4,615 4,216 Accrual for pneumoconiosis benefits 687 127 Other liabilities 393 261 Minority interest 6,043 5,153 Commitments and contingent liabilities Shareholders' equity: Preferred stock of $1.00 par value Authorized 5,000,000 shares; Issued 575,000 shares 575 575 Common stock of $2.50 par value Authorized 20,000,000 shares; Issued 6,965,328 shares 17,402 17,402 Other paid-in capital 94,641 94,641 Accumulated deficit (108,070) (112,381) ---------- ---------- Total shareholders' equity 4,548 237 ---------- ---------- Total Liabilities and Shareholders' Equity $ 161,783 $ 153,971 ========== ==========
See accompanying notes to condensed consolidated financial statements. Westmoreland Coal Company and Subsidiaries Debtor-in-Possession Consolidated Statements of Income (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, 1997 1996* 1997 1996* (in thousands except per share data)
Revenues: Coal $ 13,903 $ 12,000 $ 37,873 $ 33,817 Independent power - equity in earnings 5,091 3,931 13,341 11,414 --------- --------- --------- --------- 18,994 15,931 51,214 45,231 Cost and expenses: Cost of coal sold 11,845 10,816 33,539 33,718 Depreciation, depletion and amortization 607 480 1,834 1,507 Selling and administrative 1,720 2,997 4,630 7,523 Heritage costs - 3,105 2,197 11,233 Pension benefit - (843) (1,000) (2,547) --------- --------- --------- --------- 14,172 16,555 41,200 51,434 Operating income (loss) 4,822 (624) 10,014 (6,203) Gains (losses) on the sales of assets 99 3,081 (74) 20,262 Interest expense (59) (82) (268) (321) Interest income 403 378 1,054 1,167 Other income 116 387 1,246 1,407 --------- --------- --------- --------- Income from continuing operations before reorganization item, income tax expense (benefit) and minority interest 5,381 3,140 11,972 16,312 Reorganization legal and consulting fees 900 - 2,684 - Income tax expense (benefit) (170) 269 (488) 733 Minority Interest 331 277 890 758 --------- --------- --------- --------- Income from continuing operations 4,320 2,594 8,886 14,821 Discontinued operations: Corona operating loss 395 433 1,056 1,139 Corona impairment and loss on disposal 418 - 3,518 - --------- --------- --------- --------- Loss from discontinued operations 813 433 4,574 1,139 Income before cumulative effect of change in accounting principle 3,507 2,161 4,312 13,682 Cumulative effect of change in accounting principle - - - (14,372) --------- --------- --------- --------- Net income 3,507 2,161 4,312 28,054 Less preferred stock dividends in arrears (1,222) (1,222) (3,666) (3,666) --------- --------- --------- --------- Net income applicable to common shareholders $ 2,285 $ 939 $ 646 $ 24,388 ========= ========= ========= ========= Net income per share applicable to common shareholders: Before loss from discontinued operations and cumulative effect of change in accounting principle $ .44 $ .20 $ .75 $ 1.60 Loss from discontinued operations (.12) (.06) (.66) (.16) Cumulative effect of change in accounting principle - - - 2.07 -------- --------- --------- ---------- $ .32 $ .14 $ .09 $ 3.51 ======== ========= ========= ========== Weighted average number of common shares outstanding 6,965 6,965 6,965 6,965
See accompanying notes to condensed consolidated financial statements. * Certain amounts have been reclassified to conform to the current presentation. Westmoreland Coal Company and Subsidiaries Debtor-in-Possession Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended September 30, 1997 1996* (in thousands)
Cash flows from operating activities: Net income $ 4,312 $ 28,054 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Corona impairment and loss on disposition 3,518 - Cumulative effect of change in accounting for pneumoconiosis benefits - (14,372) Equity in earnings from independent power projects (13,341) (11,414) Cash distributions from independent power projects 12,306 10,545 Depreciation, depletion and amortization 1,834 1,507 (Gains) losses on the sales of assets 74 (20,262) Minority interest in WRI 890 758 Changes in assets and liabilities of discontinued operations 1,043 172 Changes in assets and liabilities, net of non-cash transactions: Accounts receivable, net of allowance for doubtful accounts 275 (2,523) Inventories 25 596 Accounts payable and accrued expenses 6,148 (2,021) Income taxes payable - (3,340) Accrual for workers' compensation (359) (3,802) Accrual for postretirement medical costs 234 4,636 Accrual for pneumoconiosis benefits 560 (2,894) Other liabilities 399 3,986 Other (542) (3,960) --------- ---------- Net cash provided by (used in) operating activities 17,376 (14,334) Cash flows from investing activities: Fixed asset additions (37) (355) Increase in notes receivable - (303) Minority interest in WRI purchase - (4,200) Net proceeds from sales of assets 2,067 14,643 Decrease in cash due to Corona disposition (490) - --------- ---------- Net cash provided by investing activities 1,540 9,785 Cash flows from financing activities: Repayment of long-term debt (126) (1,333) Dividends paid to minority shareholders - (440) --------- ---------- Net cash used in financing activities (126) (1,773) Net increase (decrease) in cash and cash equivalents 18,790 (6,322) Cash and cash equivalents, beginning of period 8,791 11,711 --------- ---------- Cash and cash equivalents, end of period $ 27,581 $ 5,389 ========= ==========
Westmoreland Coal Company and Subsidiaries Debtor-in-Possession Consolidated Statements of Cash Flows (Continued) Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 31 $ 255 Income taxes, net $ - $ 1,140 Supplemental disclosure of non-cash investing and financing activities: In September 1997, the Company completed the sale of the Corona Group Inc. ("Corona"). Corona was sold for $895,000 in notes receivable, the Company retained a 15% interest in Corona, and the purchaser assumed a contingent liability. In September, 1996, the Company completed a non-cash transaction for the transfer of several of its remaining idled Virginia Division mining operations. In exchange for these operations, the purchaser assumed responsibility for certain reclamation obligations amounting to approximately $2.2 million. The entire amount of the obligations assumed was recorded as a gain on the sale of assets. In May, 1996, the Company completed non-cash transactions for the sale of its idled Wentz and Pine Branch Mining operations. The purchasers of those assets assumed reclamation and other liabilities totaling approximately $3.0 million as part of those transactions. The entire amount of the obligations assumed was recorded as a gain on the sale of assets. See accompanying notes to condensed consolidated financial statements. * Certain amounts have been reclassified to conform to the current presentation. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The Notes contained herein should be read in conjunction with the Notes to the Company's Consolidated Financial Statements filed on Form 10-K for the year ended December 31, 1996. The financial information contained in this Form 10-Q is unaudited but reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of the financial information for the periods shown. Such adjustments are of a normal recurring nature. 1. Chapter 11 Reorganization Proceedings On December 23, 1996 ("Petition Date"), Westmoreland Coal Company and four subsidiaries, Westmoreland Resources, Inc., Westmoreland Coal Sales Company, Westmoreland Energy, Inc., and Westmoreland Terminal Company (the "Debtor Corporations"), filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Colorado. The Debtor Corporations are in possession of their respective properties and assets and are operating as debtors in possession pursuant to provisions of the Bankruptcy Code. The condensed consolidated financial statements contained herein have been prepared in accordance with generally accepted accounting principles applicable to a going concern and do not purport to reflect or to provide for all of the possible consequences of the ongoing Chapter 11 reorganization cases. Specifically, the condensed consolidated financial statements do not present the amount which will ultimately be paid to settle liabilities and contingencies which may be allowed in the Chapter 11 reorganization cases or the effect of any changes which may be made in connection with the Debtor Corporations' capitalization or operations resulting from a plan of reorganization. Costs incurred related to the reorganization through September 30, 1997 were approximately $2,684,000 and were immaterial in 1996. The Debtor Corporations have not filed a plan of reorganization as of November 1, 1997. Because of the ongoing nature of the reorganization cases, the outcome of which is not presently determinable, the condensed consolidated financial statements contained herein are subject to material uncertainties and may not be indicative of the results of the Company's future operations or financial position. No assurance can be given that the Company will be successful in reorganizing its affairs within the Chapter 11 bankruptcy proceedings. For additional information regarding the Chapter 11 reorganization proceedings, see Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations. Liabilities Subject to Compromise The filing of the Chapter 11 cases by the Debtor Corporations (i) automatically stayed actions by creditors and other parties in interest to recover any claim that arose prior to the commencement of the cases, and (ii) served to accelerate, for purposes of allowance, all prepetition liabilities of the Company, whether or not those liabilities were liquidated or contingent as of the Petition Date. In accordance with AICPA Statement of Position 90-7 ("Financial Reporting by Entities in Reorganization under the Bankruptcy Code"), the following table sets forth the liabilities of the Company subject to compromise as of September 30, 1997 and December 31, 1996: Sept. 30, 1997 Dec. 31, 1996 ----------------- ---------------- Trade and other liabilities $ 8,318,000 $ 8,318,000 Long-term debt 1,607,000 1,607,000 1974 UMWA Pension Trust 13,800,000 13,800,000 Workers' compensation 24,581,000 27,339,000 1992 UMWA Benefit Plan 28,115,000 28,115,000 1993 Wage Agreement Plan 44,908,000 44,619,000 Other postretirement benefits 12,338,000 12,393,000 ----------------- ---------------- Total $ 133,667,000 $ 136,191,000 ================= ================ (Note: See below for discussion of Combined Benefit Plan liabilities which are not included in this table.) 1974 UMWA Pension Plan. The Company maintains that for bankruptcy purposes, to the extent any withdrawal liability will be assessed under the Multiemployer Pension Act ("MPPA"), that liability would be in respect of consideration furnished by employees of the Company prior to the Petition Date, and that any such liability was incurred prior to the Petition Date and constitutes a liability subject to compromise. The Company believes that except for a small percentage (i.e., 2% to 3%) of the aggregate withdrawal liability of $13,800,000 estimated by the 1974 Pension Plan as of June 30, 1996, such liability is in respect of consideration furnished by employees of the Company prior to the Petition Date. The withdrawal liability is estimated annually, and is subject to a number of factors. No withdrawal liability has yet been assessed by the 1974 Pension Plan, and the Company maintains that a withdrawal will not occur until the completion of certain reclamation work at the Company's Virginia Division, which is to be performed by UMWA represented employees and will be completed sometime in the first quarter of 1998. No litigation has occurred in the bankruptcy court regarding this matter. Workers' Compensation Benefits. The Company maintains that to the extent workers' compensation benefits pertain to matters and transactions arising prior to the Petition Date, such liabilities constitute liabilities subject to compromise. The Company believes that substantially all of its liability on workers' compensation benefits arose and was incurred prepetition and constitute prepetition claims. No litigation has occurred in the bankruptcy court regarding this matter. 1992 UMWA Benefit Plan. Until shortly before the Petition Date, the Company provided health care benefits under its individual employer plan for beneficiaries (and their dependents) who were age- and service-eligible to receive benefits under the Coal Act as of February 1, 1993, and who retired before October 1, 1994. Prepetition, the Company ceased providing such benefits. The Company maintains that pursuant to applicable law, prior to the Petition Date, the 1992 Plan became obligated to provide health care coverage for such beneficiaries and their dependents. The Company further maintains that, as a result thereof and in accordance with law, all claims of the 1992 Plan arising under the Coal Act were incurred by the Company before the Petition Date and constitute prepetition liabilities subject to compromise. The Company estimates the present value of the Company's liabilities, not including any reduction attributable to implementation of the managed care and cost containment rules required by Section 9712(c)(2) of the Coal Act, the unrecognized net transition obligation and the unrecognized loss totaling $71,963,000, to the 1992 Plan total approximately $28,115,000. The Company believes that for bankruptcy purposes the sum of these amounts, $100,078,000, comprise the present value of the liability subject to compromise. Following the Petition Date, the Trustees of the 1992 Plan commenced an adversary proceeding against the Company requesting that the bankruptcy court: (a) enter a permanent injunction requiring the Company to "reinstate" its individual employer plan for those beneficiaries who were eligible and were receiving benefits under the individual employer plan as of February 1, 1993 and who retired before October 1, 1994, and their dependents; (b) enter a declaratory judgment that the pre-funding premiums and monthly per-beneficiary premiums that arise under the 1992 Plan constitute "taxes" and administrative liabilities of the estate; and (c) enter an injunction requiring all of the Debtor Corporations to pay these pre-funding premiums and monthly per- beneficiary premiums under the 1992 Plan as and when statements are submitted by the Trustees. The Company filed answers and counterclaims in the bankruptcy court vigorously opposing this requested relief. The Trustees of the 1992 Plan filed a motion with the bankruptcy court requesting that the bankruptcy court enter summary judgment in its favor with respect to substantially all of the relief requested in the above-referenced adversary proceeding. The Company filed pleadings in the bankruptcy court opposing this motion. The bankruptcy court held a hearing on May 8, 1997 and took the matter under advisement. On September 5, 1997, the bankruptcy court held that the 1992 Plan's claims related to Westmoreland's liability to pay for health benefits and the 1992 Plan's claims for pre-funding premiums were prepetition claims, not entitled to administrative priority. The bankruptcy court also held that Westmoreland was not required to reinstate its IEP because doing so would effectively elevate the 1992 Plan's claims above those of other unsecured creditors. The bankruptcy court designated the order on the summary judgment motion as final, thereby allowing an immediate appeal and the 1992 Plan has appealed. The bankruptcy court has set aside December 2, 3 and 4, 1997 for trial of the remaining issues, comprised of the Company's other defenses and counter claims, not resolved by the summary judgment ruling. In an effort to reach an accommodation with the Funds prior to the Petition Date, on or about August 21, 1996, the Company entered into an Interim Agreement and "Pledge Agreement" with the 1992 Plan and the "Combined Benefit Plan" under which, among other things, the Company pledged its interest in certain subsidiaries to secure certain obligations specified therein. In pleadings filed before the bankruptcy court, the Company has maintained that the 1992 Plan does not hold any allowed secured claims against the Company by reason of the Pledge Agreement. The Trustees have disputed the Company's contentions. If the bankruptcy court ultimately determines that the 1992 Plan holds allowed secured claims, then to that extent, such claims would constitute secured liabilities of the Company. In such event, whether or not those secured liabilities would be subject to compromise would depend upon the outcome of the above-described adversary proceeding. 1993 Wage Agreement Plan. The 1993 Wage Agreement between the Company and the UMWA requires the Company to establish and provide health care benefits under an individual employer plan for certain additional retirees. The Company currently provides benefits through its individual employer plan to age and service eligible retirees (and their dependents) who retire prior to the termination or expiration of the current Wage Agreement. The 1993 Benefit Plan is a multiemployer benefit plan providing health care benefits to specified beneficiaries entitled to such benefits under the Wage Agreement, where employers fail to provide such benefits through their individual employer plans. The Company's liabilities under the 1993 Benefit Plan, whether provided under the Company's individual employer plan or by the 1993 Plan, are shown as subject to compromise, by virtue of the provisions of Bankruptcy Code sections 1113 and 1114, which authorize the rejection of collective bargaining agreements and modification of such benefits subject to terms and conditions specified therein, respectively. Financial reporting by the Company historically has assumed that the Company would enter into successor agreements to the 1993 Agreement Between Westmoreland Coal Company and United Mine Workers of America ("1993 Wage Agreement") and would thereby continue to provide retiree health benefits to such beneficiaries. As a result, for financial reporting purposes the Company has estimated the present value of the Company's liabilities, after the effect of the unrecognized net loss of $3,767,000, to the 1993 Plan total approximately $44,908,000. The Company believes that for bankruptcy purposes the sum of these amounts, $48,675,000, comprise the present value of the liability subject to compromise. The Company believes that it is unlikely that the Company will enter into a successor Wage Agreement. Further, the Company maintains that any obligation of the Company to provide benefits under the 1993 Wage Agreement with respect to the 1993 Plan (or the related individual employer plan) extends only through the scheduled expiration of the 1993 Wage Agreement. Negotiations regarding the Company's obligations to the 1993 Plan and other effects of terminating the 1993 Wage Agreement have been commenced with the United Mine Workers of America pursuant to Section 1113 of the Bankruptcy Code. No litigation has been commenced in the Chapter 11 cases regarding the Company's liabilities under the 1993 Plan (or the related individual employer plan). The nature of the Chapter 11 cases is to have all claims against and interests in the Company resolved. In September, 1997 the bankruptcy court set December 1, 1997 as the deadline for shareholders and vendors of the Company to file proofs of claims and interests. Accordingly, the Company's Claims Administrator, on September 30, 1997, sent claim forms to shareholders and vendors. The Company's estimate of liabilities is subject to modification and amendment based upon the Company's review of the proofs of claims timely filed. UMWA Combined Benefit Plan. The UMWA Combined Benefit Plan is a multiemployer plan established for purposes of providing health care benefits under the Coal Act to beneficiaries, and their dependents, who were age- and service-eligible as of July 20, 1992 under the 1950 UMWA Benefit Plan or the 1974 UMWA Benefit Plan. Prior to the Petition Date, the Company ceased making payments to the Combined Benefit Plan. The Company maintains that any liability of the Company to the Combined Benefit Plan arose and was incurred pre-petition and constitutes pre-petition liabilities subject to compromise. On November 3, 1997, the Combined Benefit Plan filed a motion for allowance and ongoing payment of the premiums as administrative claims and to withdraw the reference of this issue from the District Court to the Bankruptcy Court. The Company will vigorously oppose the merits of this claim as well as the efforts of the Combined Benefit Plan to have the matter resolved by the District Court rather than the Bankruptcy Court. The Company estimates the present value of the Company's liabilities to the Combined Benefit Plan total approximately $46,200,000. It is not included in the foregoing table as this is a "pay-as-you-go" obligation and in accordance with generally accepted accounting principles is not subject to recognition on a present value basis. Although the Combined Benefit Plan has not made a claim or commenced litigation regarding any security interest arising under the Pledge Agreement, the Company expects the Combined Benefit Plan may do so. The Company presently intends to maintain that the Combined Benefit Plan does not hold any allowed secured claims under the Pledge Agreement and will dispute any such contention. 2. Discontinued Operations On September 9, 1997 the Company completed the sale of the Corona Group which provides technical repair and maintenance services to the power generating industry. Revenues for the discontinued operations were $3,814,000 for the nine months ending September 30, 1997 and $4,460,000 for the same period in 1996. The Company recorded a loss on disposition of $418,000 during the third quarter of 1997. The Company previously recorded an impairment of $3,100,000 relating to its investment in Corona in the second quarter of 1997. Consideration from the sale included notes receivable of $895,000, of which $595,000 is due by the end of 1997 and the remaining $300,000 due no later than September 10, 1999. The Company retained a 15% interest in Corona, and the purchaser assumed a contingent liability. 3. Contingencies Westmoreland Energy, Inc. ("WEI") - WEI Project Contingencies Southampton Project - WEI owns a 30% general partnership interest in LG&E-Westmoreland Southampton ("Southampton Partnership"), which owns the Southampton Project. The Southampton Project, which was engaged in start-up and testing operations from September 1991 through March 1992, failed to meet Federal Energy Regulatory Commission ("FERC") operating standards for a qualifying facility ("QF") in 1992. The failure was due to three factors: (i) the facility was not dispatched by its power customer, Virginia Electric and Power Company ("Virginia Power"), on a baseload schedule as anticipated, (ii) the facility was engaged in start-up and testing operations during a portion of that year, and (iii) the facility operator mistakenly delivered non-sequential steam to the host over a significant period of time. On February 23, 1994, the Southampton Partnership filed a request with the FERC for a waiver of the FERC's QF operating standard for 1992. Virginia Power intervened in the FERC proceeding, opposed the granting of a waiver, and alleged that its power contract with the Southampton Partnership had been breached due to the failure of the facility to maintain QF status in 1992. On July 7, 1994, the FERC issued an order (1) denying the application of the Southampton Partnership for a waiver of the FERC's QF operating standard in 1992 with respect to the Southampton Project and (2) directing the Southampton Partnership to show cause why it should not be required to file rate schedules with the FERC governing its 1992 electricity sales for resale to Virginia Power. In 1994 the Southampton Project established a reserve for the anticipated refund obligations relating to this issue. On August 9, 1994, the Southampton Partnership filed a request for rehearing of FERC's order or, alternatively, a motion for reconsideration. On August 1, 1996, FERC entered its decision in the Southampton case. FERC determined that the Partnership's request for reconsideration should be treated as timely filed, but that the Southampton facility was not in complete compliance with the QF requirements for 1992. FERC ordered Southampton to comply with Section 205 for the Federal Power Act ("FPA"), and file, for FERC's review, rates for calendar year 1992 for wholesale power sales to Virginia Power. Otherwise, the Southampton project remains exempt from regulation under the Public Utility Holding Company Act ("PUHCA"), utility laws of Virginia and the other provisions of the FPA. In August 1996, the Partnership filed a motion seeking clarification of the August 1, 1996 order. The Partnership also filed an additional request for rehearing. These matters are still pending before the FERC. Ultimate resolution of this matter has not yet been determined. The FERC order does not completely settle what the applicable rate is for 1992. The rate must be determined through negotiations with Virginia Power and further FERC proceedings and may result in refunds to Virginia Power, the ultimate amount of which cannot be determined at this time. ROVA I Project - WEI owns a 50% partnership interest in Westmoreland-LG&E Partners (the "ROVA Partnership"). The ROVA Partnership's principal customer, Virginia Power, contracted to purchase the electricity generated by ROVA I under a long-term contract. In the second quarter of 1994, that customer disputed the ROVA Partnership's interpretation of the provisions of the contract dealing with the payment of the capacity purchase price when the facility experiences a forced outage day. A forced outage day is a day when ROVA I experiences an interruption in the facility's ability to generate electrical output. The ROVA Partnership believes that the customer is required to pay the ROVA Partnership the full capacity purchase price unless forced outage days exceed a contractually stated allowed annual number. The customer asserts that it is not required to do so. From May 1994 through September 30, 1997, Virginia Power withheld approximately $14,163,000 of these capacity payments during periods of forced outages. To date, the Company has not realized any income on its 50% portion of the capacity payments being withheld by Virginia Power. In October 1994, The ROVA Partnerships filed a complaint against Virginia Power seeking damages of at least $5,700,000, contending that Virginia Power breached the Power Purchase Agreement in withholding such payments. In December, 1994, Virginia Power filed a motion to dismiss the complaint and in March, 1995, the court granted this motion. The ROVA Partnerships filed an amended complaint in April, 1995. Virginia Power filed another motion to dismiss the complaint and in June 1995, the Circuit Court of the City of Richmond, Virginia denied Virginia Power's motion to dismiss the ROVA Partnerships' amended complaint. In November 1995, Virginia Power filed with the court a motion for summary judgment, and a hearing on the motion was held in early December 1995. In late January 1996, the court denied Virginia Power's motion for summary judgment. Virginia Power filed a second summary judgment motion on March 1, 1996. On March 18, 1996, the Court granted Virginia Power's second summary judgment motion and effectively dismissed the complaint. The ROVA partnership has appealed the Court's decision granting summary judgment. On June 6, 1997, the Virginia Supreme Court reversed the Richmond Circuit Court's decision granting dismissal of the suit based on Virginia Power's Motion for Summary Judgment. The Supreme Court remanded the matter for trial which has been scheduled for March 2, 1998. Regardless of the outcome, the Company believes Roanoke Valley I will operate profitability and generate positive cash flows. No earnings have been recognized by WEI for payments withheld by Virginia Power relating to forced outage days. Rensselaer - LG&E - Westmoreland Rensselaer (LWR), in which the Company has a 50% interest through an indirect subsidiary, has executed a master restructuring agreement with Niagara Mohawk Power Corporation (NIMO) and 15 other independent power companies (IPPs) effective July 9, 1997. Under this agreement, LWR has an obligation to attempt to restructure the Rensselaer Cogeneration Project. Upon completion of a restructuring and satisfaction of conditions precedent, including all IPPs receiving necessary approvals and NIMO successfully arranging financing, LWR would receive consideration from NIMO. Due to the early stage of the project restructuring at this time, the Company is not able to predict the outcome of this event. Based upon the terms of the agreement and the current status of the restructuring, the Company does not expect the ultimate resolution of this matter to have a material adverse effect on its financial condition, results of operations or cash flows. 4. Capital Stock Preferred stock dividends at a rate of 8.5% per annum were paid quarterly from the third quarter of 1992 through the first quarter of 1994. The declaration and payment of preferred stock dividends was suspended in the second quarter of 1994 in connection with extension agreements of the Company's principal lenders. Upon the expiration of these extension agreements, the Company paid a quarterly dividend on April 1, 1995 and July 1, 1995. Pursuant to the requirements of Delaware law, the preferred stock dividend was suspended in the third quarter of 1995 as a result of recognition of losses and the subsequent shareholders' deficit. The twelve quarterly dividends which are in arrears (dividend payment dates July 1, 1994, October 1, 1994, January 1, 1995, October 1, 1995, January 1, 1996, April 1, 1996, July 1, 1996, October 1, 1996, January 1, 1997, April 1, 1997, July 1, 1997 and October 1, 1997) amount to $14,662,500 in the aggregate ($25.50 per preferred share). Common stock dividends may not be declared until the preferred stock dividends that are in arrears are made current. There are statutory restrictions limiting the payment of preferred stock dividends under Delaware law, the state in which the Company is incorporated. Under Delaware law, the Company is permitted to pay preferred stock dividends only: (1) out of surplus, surplus being the amount of shareholders' equity in excess of the par value of the Company's two classes of stock; or (2) in the event there is no surplus, out of net profits for the fiscal year in which a preferred stock dividend is declared (and/or out of net profits from the preceding fiscal year), but only to the extent that shareholders' equity exceeds the par value of the preferred stock ($575,000). The Company had shareholders' equity at September 30, 1997 of $4,548,000. As a result of the filing of voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code, the Company is prohibited from paying dividends, either common or preferred. ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Material Changes in Financial Condition From December 31, 1996 to September 30, 1997 Bankruptcy Proceeding Westmoreland Coal Company and four subsidiaries, Westmoreland Resources, Inc., Westmoreland Coal Sales Company, Westmoreland Energy, Inc., and Westmoreland Terminal Company ("the Debtor Corporations"), filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code on December 23, 1996. The Debtor Corporations are in possession of their respective properties and assets and are operating as debtors in possession pursuant to provisions of the Bankruptcy Code. Recognizing that it would not be able to meet its retiree benefit obligations to the United Mine Workers of America Pension and Benefit Funds ("the Funds") on a current basis, Westmoreland initiated discussions with the Funds in November 1995. The Company submitted several proposals. After the Funds failed to accept any of Westmoreland's proposals and offered no realistic counter proposals, the Company made the decision to file for protection under Chapter 11 of the United States Bankruptcy Code to protect the Company's value from the demands of the Funds. The Company believes that cash generated from existing operations and the proceeds from the sale of its non-operating assets are not sufficient to meet these Funds' liabilities and that substantial value would be lost if the Company liquidated, including that of its tax loss carryforwards. The Chapter 11 filings raise substantial doubt about the Company's ability to continue as a going concern. However, the condensed consolidated financial statements contained herein have been prepared in accordance with generally accepted accounting principles applicable to a going concern and do not purport to reflect or to provide for all of the consequences of the ongoing Chapter 11 reorganization cases. Specifically, the condensed consolidated financial statements do not present the amount which will ultimately be paid to settle liabilities and contingencies which may be allowed in the Chapter 11 reorganization cases or the effect of any changes which may be made in connection with the Debtor Corporations' capitalization or operations resulting from a plan of reorganization. Westmoreland seeks to structure a consensual plan of reorganization and in mid-April, 1997, the Company presented a settlement proposal to the Funds upon which a consensual plan of reorganization could be based. While the Company subsequently had discussions with and provided extensive backup information to the Funds' financial advisor, and been assured of a prompt reply, no response or counter proposal was received until October 14, 1997. On that date a meeting between representatives of the parties was held in Denver, Colorado during which the Funds made an entirely different settlement offer to the Company. The Funds' proposal comes after nearly two years' effort by Westmoreland and the submission of numerous proposals by the Company over that period. It also follows a September 5, 1997 ruling by the U.S. Bankruptcy Court that denied a motion for summary judgment filed by the 1992 Benefit Plan and held that the 1992 Benefit Plan's claims are general, unsecured pre-petition claims, and not entitled to administrative priority. The Company has rejected this opening proposal from the Funds and must characterize the parties as being far apart at this juncture. However, the Company is evaluating certain aspects of the Funds' proposal and hopes that meaningful negotiations will take place. In accordance with a previous agreement between the parties, Westmoreland gave notice to the Funds on August 28, 1997 of its intent to file a reorganization plan with the U.S. Bankruptcy Court on or after 30 days from that date. The Company subsequently agreed to forbear from filing a plan based on the Funds' assurance that the proposal, which the Company has now received, would be forthcoming promptly. The parties have now further agreed to provide each other with a minimum 14 day notice of their intention to file a reorganization plan. No such notice has been given by either party as of the date of this filing. The Company remains hopeful that settlement discussions will result in a consensual plan being reached with the Funds. No assurances can be given that the Company will be successful in reorganizing its affairs within the Chapter 11 bankruptcy proceedings. Because of the ongoing nature of the reorganization cases, the outcome of which is not presently determinable, the condensed consolidated financial statements contained herein are subject to material uncertainties and may not be indicative of the results of the Company's future operations or financial position. Liquidity and Capital Resources Cash provided by operating activities was $18,496,000 in the first nine months of 1997. Cash used by operating activities was $14,334,000 in the first nine months of 1996. The increase in cash is due to the automatic stay of ongoing payments to the 1992 and Combined Benefit Plans associated with the bankruptcy filing described in Note 1, the non-payment of prepetition claims, further elimination of expenses related to the Company's idled Virginia Division assets, and continued reduction of non-bankruptcy related overhead costs. Cash provided by investing activities was $1,135,000 and $ 9,785,000 in the first nine months of 1997 and 1996, respectively. Included in the first nine months of 1997 were net cash proceeds of $2,067,000 relating to sales of various pieces of equipment from the idled Virginia Division. Included in the first nine months of 1996 were cash proceeds of $10,678,000 and $2,441,000 for the sale of coal reserves to Penn Virginia Corporation and Ark Land Company, respectively. Fixed asset additions were $37,000 and $355,000 in the first nine months of 1997 and 1996, respectively. Cash used in financing activities totaled $841,000 and $1,773,000 in the first nine months of 1997 and 1996, respectively. Repayment of long-term debt amounted to $841,000 and $1,333,000 in the first nine months of 1997 and 1996, respectively. Consolidated cash and cash equivalents at September 30, 1997 totaled $27,581,000. As a result of the Chapter 11 bankruptcy filings, the Company is not allowed to consolidate the individual cash balances for each filed subsidiary. As of September 30, 1997, the cash balances at the filed subsidiaries were: Westmoreland Resources, Inc. - ("WRI") $10,848,000; Westmoreland Coal Sales Company - $150,000; Westmoreland Terminal Company - $1,857,000; and Westmoreland Energy, Inc. - $13,660,000. The cash balance for Westmoreland Coal Company was $1,066,000. As of December 31, 1996, the cash balances at the filed subsidiaries were: Westmoreland Resources, Inc. -$3,095,000; Westmoreland Coal Sales Company - $26,000; Westmoreland Terminal Company - $403,000; and Westmoreland Energy, Inc. - $1,701,000. The cash balance for Westmoreland Coal Company was $3,028,000. The fluctuation in cash balances between December 31, 1996 and September 30, 1997 is attributable to periodic asset sales, distributions at independent power projects and operational cash flow. On October 7, 1997, the bankruptcy court granted the Company's motion to allow the allocation of administrative and overhead expenses incurred by Westmoreland Coal Company among the other debtors. The Company's cash and cash equivalents are not restricted as to use or disposition under the normal course of business, except for the bankruptcy restrictions. The cash at WRI, an 80%-owned subsidiary, is available to the Company only through dividends which are not permissible during the bankruptcy. In addition, the Company had restricted cash, which was not classified as cash or cash equivalents, of $7,561,000 at September 30, 1997 and $9,960,000 at December 31, 1996. The amount represents an interest- bearing cash deposit account, which collateralizes the Company's outstanding surety bonds for its workers' compensation self- insurance programs. Subsequent to the date of the bankruptcy filing described in Note 1, the Company, as a result of the automatic stay imposed by the bankruptcy court, cannot directly pay workers' compensation claims. However, during the first quarter of 1997, with permission granted by the bankruptcy court, the Company made arrangements to pay workers compensation claims from the cash deposit account. The arrangement is likely to remain in place until the bankruptcy proceeding is resolved or the cash deposit account is depleted. In addition to the deposit described above, at December 31, 1996, the Company had $8,000,000 invested in certificates of deposit which were classified within Investment in independent power projects. The certificates of deposit represented cash proceeds which were transferred from debt reserve accounts of certain of the Company's independent power projects and for which bank letters of credit were substituted. During the first quarter of 1997, the letters of credit were called and the certificates of deposit were used to repay the letters of credit obligations. The $8,000,000 was returned to the debt reserve accounts and continue to be classified within Investment in independent power projects. RESULTS OF OPERATIONS Quarter Ended September 30, 1997 Compared to Quarter Ended September 30, 1996. Revenues for the quarter ending September 30, 1997 were $18,994,000 compared to $15,931,000 for the quarter ending September 30, 1996. The increase is due to a higher volume of tons sold at WRI, and increased earnings from independent power projects. Costs and expenses for the quarter ending September 30, 1997 were $14,172,000 compared to $16,555,000 for the quarter ending September 30, 1996. The majority of the decline is due to a substantial reduction in the accrual for heritage costs. As a result of the bankruptcy filing as previously described in Note 1, the Company is no longer accruing costs associated with the 1992 Plan. In addition, the Company continues to reduce costs associated with overhead expenses and with its idled Virginia Division. Gains on the sales of assets were $99,000 during the quarter ending September 30, 1997, which relates primarily to sales of various assets from the Company's idled Virginia Division. In May, 1996 the Company relinquished to Penn Virginia Corporation certain coal reserves for a cash payment of $10,678,000. In addition, the Company obtained an 18 month option to purchase Penn Virginia's 16% interest in Westmoreland Resources for $3,000,000 which the Company exercised in the third quarter of 1996. The Company also sold its idled Wentz Complex to Stonega Mining and Processing and its idled Pine Branch Mining Inc. to Roaring Fork Mining Company in non-cash transactions. Each purchaser assumed specific reclamation and other liabilities. Nine Months Ended September 30, 1997 Compared to Nine Months Ended September 30, 1996. Revenues for the nine months ending September 30, 1997 were $51,214,000 compared to $45,231,000 for the nine months ending September 30, 1996. The increase is due to a higher volume of tons sold at WRI and increased earnings from independent power projects. Costs and expenses for the nine months ending September 30, 1997 were $41,200,000 compared to $51,434,000 for the nine months ending September 30, 1996. The majority of the decline is due to a substantial reduction in the accrual for heritage costs. As a result of the bankruptcy filing as previously described in Note 1, the Company is no longer accruing costs associated with the 1992 Plan. In addition, the Company continues to reduce costs associated with overhead expenses and with its idled Virginia Division. Losses on the sales of assets were $74,000 during the nine months ending September 30, 1997, of which a loss of $1,609,000 related to the removal and final sale of a longwall mining machine at the idled Virginia Division. Cash proceeds of $3,200,000 were received from the sale of the longwall mining machine but were offset by $2,000,000 of costs to remove the machine, $1,500,000 of remaining book value, and $1,300,000 relating to the buy-out of the lease on the machine. Proceeds of $2,200,000 were received from the sale of various equipment from the idled Virginia Division, $1,500,000 of which was recorded as a gain. Gains on the sales of assets were $20,262,000 for the nine months ending September 30, 1996. In January, 1996, the Company sold to Ark Land Company certain coal reserves held under lease from Ark. Cash proceeds from the transaction was $2,441,000, all of which was recorded as a gain during the first quarter. In May, 1996 the Company relinquished to Penn Virginia Corporation certain coal reserves for a cash payment of $10,678,000. In addition, the Company obtained an 18 month option to purchase Penn Virginia's 16% interest in Westmoreland Resources for $3,000,000, which the Company exercised in the third quarter of 1996. The Company also sold its idled Wentz Complex to Stonega Mining and Processing and its idled Pine Branch Mining Inc. to Roaring Fork Mining Company in non-cash transactions. Each purchaser assumed specific reclamation and other liabilities. PART II - OTHER INFORMATION ITEM 1 LEGAL PROCEEDINGS - ------------------------------------------------------------------ See Note 1 "Chapter 11 Reorganization Proceedings" of Notes to Condensed Consolidated Financial Statements, which is incorporated by reference herein. ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K - ------------------------------------------------------------------- a) Exhibit 27 - Financial Data Schedule b) Reports on Form 8-K - There were no reports on Form 8-K filed for the three months ended September 30, 1997. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. WESTMORELAND COAL COMPANY Date: 11/13/97 /s/ Robert J. Jaeger ----------------------------- Robert J. Jaeger Senior Vice President - Finance, Treasurer and Controller /s/ Larry W. Mikkola ----------------------------- Larry W. Mikkola Assistant Controller EX-27 2
5 1,000 9-MOS DEC-31-1997 SEP-30-1997 27,581 0 5,145 0 25 33,130 109,691 73,731 161,783 11,412 0 0 575 17,402 (14,066) 161,783 51,214 51,214 33,539 41,200 (2,226) 0 268 4,800 (488) 4,312 0 0 0 4,312 0 0
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