Form 8-K

WESTMORELAND COAL COMPANY

Date: November 19, 2015

/s/ Jennifer S. Grafton

Jennifer S. Grafton

SVP, Chief Administrative Officer and Secretary

0001193125-15-382038.txt : 20151119 0001193125-15-382038.hdr.sgml : 20151119 20151119151409 ACCESSION NUMBER: 0001193125-15-382038 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20151119 ITEM INFORMATION: Regulation FD Disclosure ITEM INFORMATION: Financial Statements and Exhibits FILED AS OF DATE: 20151119 DATE AS OF CHANGE: 20151119 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WESTMORELAND COAL Co CENTRAL INDEX KEY: 0000106455 STANDARD INDUSTRIAL CLASSIFICATION: BITUMINOUS COAL & LIGNITE SURFACE MINING [1221] IRS NUMBER: 231128670 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-11155 FILM NUMBER: 151243496 BUSINESS ADDRESS: STREET 1: 9540 SOUTH MAROON CIRCLE STREET 2: SUITE 200 CITY: ENGLEWOOD STATE: CO ZIP: 80112 BUSINESS PHONE: 303-922-6463 MAIL ADDRESS: STREET 1: 9540 SOUTH MAROON CIRCLE STREET 2: SUITE 200 CITY: ENGLEWOOD STATE: CO ZIP: 80112 FORMER COMPANY: FORMER CONFORMED NAME: WESTMORELAND COAL CO DATE OF NAME CHANGE: 19920703 8-K 1 d63436d8k.htm FORM 8-K Form 8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d)

of The Securities Exchange Act of 1934

November 19, 2015

Date of Report (Date of earliest event reported)

WESTMORELAND COAL COMPANY

(Exact name of Registrant as specified in its charter)

Delaware

001-11155

23-1128670

(State or other jurisdiction of

incorporation)

(Commission

File Number)

(I.R.S. Employer

Identification No.)

9450 South Maroon Circle, Suite 200, Englewood, CO 80112

(Address of principal executive offices) (Zip code)

(855) 922-6463

(Registrant’s telephone number, including area code)

(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2 below):

¨	Written communication pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

¨	Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

¨	Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

¨	Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 7.01 Regulation FD Disclosure

The following information, including information contained in Exhibits 99.1, 99.2 and 99.3, shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, nor shall such information or exhibits be deemed incorporated by reference in any filing under the Securities Act of 1933, except as shall be expressly set forth by specific reference in such a filing.

San Juan Financial Information

On July 1, 2015, Westmoreland Coal Company (the “Company”) announced that it had entered into an agreement with respect to the acquisition of all of the issued and outstanding capital stock of San Juan Coal Company and San Juan Transportation Corporation (the “San Juan Acquisition”). The parties’ obligation to complete the San Juan Acquisition is conditioned upon a number of conditions set forth in the related purchase agreement, including receipt of all required regulatory approvals. The Company expects to close the San Juan Acquisition on December 31, 2015. There can be no assurance that the San Juan Acquisition will be completed on the anticipated timeframe, or at all, or that any anticipated benefits of the San Juan Acquisition will be realized.

The Company is filing certain historical and pro forma financial information as Exhibits 99.1, 99.2 and 99.3 to this Current Report on Form 8-K, which information is incorporated by reference into this Item 7.01.

The pro forma financial statements and other information furnished herewith contain “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as “anticipates,” “intends,” “plans,” “seeks,” “believes,” “estimates,” “expects” and similar references to future periods. These statements involve known and unknown risks, which may cause the Company’s actual results to differ materially from results expressed or implied by the forward-looking statements. These risks include factors such as the uncertainty of the Company’s ability to complete the San Juan Acquisition, the uncertain nature of the expected benefits from the San Juan Acquisition, the Company’s ability to obtain financing for the San Juan Acquisition, risks associated with the integration of acquired assets, risks associated with the Company’s industry or the economy generally, and other such matters discussed in the “Risk Factors” section of the Company’s filings with the Securities and Exchange Commission. The forward-looking statements in this report speak only as of the date of this report. Although the Company may from time to time voluntarily update its prior forward looking statements, it disclaims any commitment to do so except as required by securities laws.

Non-GAAP Financial Measures

The Company has included certain financial measures in this report, including the exhibits incorporated by reference, that are not calculated in accordance with generally accepted accounting principles in the United States, or GAAP, including EBITDA, Adjusted EBITDA and pro forma Adjusted EBITDA, in each case on a consolidated basis. EBITDA, Adjusted EBITDA and pro forma Adjusted EBITDA are supplemental measures of financial performance that are not required by, or presented in accordance with, GAAP. The Company defines EBITDA and Adjusted EBITDA as net income (loss) before the relevant items set forth in the EBITDA and Adjusted EBITDA reconciliation and pro forma Adjusted EBITDA as net income (loss) as adjusted. EBITDA, Adjusted EBITDA and pro forma Adjusted EBITDA are included in this report because they are key metrics used by management to assess the Company’s operating performance on a stand-alone basis and on a pro forma basis to reflect the San Juan Acquisition.

The Company believes EBITDA, Adjusted EBITDA and pro forma Adjusted EBITDA are useful to an investor in evaluating its operating performance because these measures:

•

are used widely by investors to measure a company’s operating performance without regard to items excluded from the calculation of such terms, which can vary substantially from company to company depending upon accounting methods and book value of assets, capital structure and the method by which assets were acquired, among other factors;

•

help investors to more meaningfully evaluate and compare the results of the Company’s operations from period to period by removing the effect of the Company’s capital structure and asset base from its operating results; and

•

help investors to more meaningfully evaluate the effect of the San Juan Acquisition on the Company’s operations.

None of EBITDA, Adjusted EBITDA and pro forma Adjusted EBITDA is a measure calculated in accordance with GAAP. The items excluded from EBITDA, Adjusted EBITDA and pro forma Adjusted EBITDA are significant in assessing the Company’s operating results. EBITDA, Adjusted EBITDA and pro forma Adjusted EBITDA have limitations as analytical tools, and should not be considered in isolation from, or as a substitute for, analysis of the Company’s results as reported under GAAP. For example, EBITDA, Adjusted EBITDA and pro forma Adjusted EBITDA:

•

do not reflect the Company’s cash expenditures, or future requirements for capital and major maintenance expenditures or contractual commitments;

•

do not reflect income tax expenses or the cash requirements necessary to pay income taxes;

•

do not reflect changes in, or cash requirements for, the Company’s working capital needs; and

•

do not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on certain of the Company’s debt obligations.

In addition, although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA, Adjusted EBITDA and pro forma Adjusted EBITDA do not reflect any cash requirements for such replacements. Other companies in the Company’s industry and in other industries may calculate EBITDA, Adjusted EBITDA and pro forma Adjusted EBITDA differently from the way that the Company does, limiting their usefulness as comparative measures. Because of these limitations, EBITDA, Adjusted EBITDA and pro forma Adjusted EBITDA should not be considered as measures of discretionary cash available to the Company to invest in the growth of its business. The Company compensates for these limitations by relying primarily on its GAAP results and using EBITDA, Adjusted EBITDA and pro forma Adjusted EBITDA only as supplemental data.

San Juan Coal Supply Agreement

Regulation S-X requires that the Company prepare its pro forma presentation with respect to the San Juan Acquisition using historical San Juan financial information. However, it is important to note that, in connection with the closing of the San Juan Acquisition, we are entering into a coal supply agreement (the “New CSA”) that replaces the existing coal supply agreement reflected in the pro forma presentation (the “Historical CSA”). The pricing terms of the New CSA are significantly less favorable to the Company than the pricing terms of the Historical CSA. The Company’s management estimates that the Company’s pro forma Adjusted EBITDA would have been approximately $20.5 million less than it would have been using the pricing terms of the Historical CSA for the twelve months ended September 30, 2015, which estimate also reflects future non-recurring charges that the Company’s management expects to result from the San Juan Acquisition, including potential costs or savings related to the integration of the San Juan Mine and its related operations, such as investments in environmental, health and safety matters, and does not consider potential impact of current market conditions on revenues or expense efficiencies. This estimate has been prepared solely by the Company’s management for illustrative purposes.

Item 9.01 Financial Statements and Exhibits


Exhibit No.		Description

99.1		Audited Financial Statements of San Juan Coal Company and Affiliate for the year ended December 31, 2014

99.2		Unaudited Financial Statements of San Juan Coal Company and Affiliate for the three and nine months ended September 30, 2015

99.3		Unaudited Pro Forma Condensed Combined Financial Information

SIGNATURE

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, hereunto duly authorized.

Exhibit Index


Exhibit No.		Description

99.1		Audited Financial Statements of San Juan Coal Company and Affiliate for the year ended December 31, 2014

99.2		Unaudited Financial Statements of San Juan Coal Company and Affiliate for the three and nine months ended September 30, 2015

99.3		Unaudited Pro Forma Condensed Combined Financial Information

EX-99.1 2 d63436dex991.htm EX-99.1 EX-99.1

Exhibit 99.1

SAN JUAN COAL COMPANY AND AFFILIATE

FINANCIAL REPORT

DECEMBER 31, 2014

C O N T E N T S


	Page
INDEPENDENT AUDITOR’S REPORT		1

COMBINED FINANCIAL STATEMENTS

Combined Balance Sheets		3

Combined Statements of Income		5

Combined Statements of Stockholder’s Equity		6

Combined Statements of Cash Flows		7

Notes to Combined Financial Statements		8

INDEPENDENT AUDITOR’S REPORT

To the Shareholder of

San Juan Coal Company and Affiliate

We have audited the accompanying combined financial statements of San Juan Coal Company and San Juan Transportation Company (collectively, the Company), which comprise the combined balance sheets as of December 31, 2014 and 2013, and the related combined statements of income, changes in stockholder’s equity, and cash flows for the years then ended, and the related notes to the combined financial statements.

Management’s Responsibility for the Combined Financial Statements

Management is responsible for the preparation and fair presentation of these combined financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of combined financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the combined financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the combined financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the combined financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the combined financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the combined financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

San Juan Coal Company and Affiliate

Opinion

In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of San Juan Coal Company and Affiliate as of December 31, 2014 and 2013, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

Emphasis-of-Matter

As described in Note 8 to the combined financial statements, the Company has significant transactions and relationships with affiliated entities.

WEAVER AND TIDWELL, L.L.P.

Houston, Texas

August 28, 2015

COMBINED FINANCIAL STATEMENTS

SAN JUAN COAL COMPANY AND AFFILIATE

COMBINED BALANCE SHEETS

DECEMBER 31, 2014 AND 2013


	2014			2013
ASSETS
CURRENT ASSETS
Accounts receivable	$	42,031,923		$	47,813,678
Related party receivables		46,807,244			172,685,789
Other assets		15,873,000			11,004,000
Inventories		25,896,561			19,402,860
Prepaid expenses and other current assets		3,974,486			3,838,080

Total current assets		134,583,214			254,744,407
PROPERTY, PLANT AND EQUIPMENT		468,364,508			454,647,726
Accumulated depletion, depreciation, and amortization		(347,804,641	)		(326,979,505	)

Property, plant, and equipment, net		120,559,867			127,668,221
OTHER ASSETS
Other assets		120,338,719			140,372,157
Prepaid assets—noncurrent		1,600,000			2,400,000

TOTAL OTHER ASSETS		121,938,719			142,772,157

TOTAL ASSETS	$	377,081,800		$	525,184,785

The Notes to Combined Financial Statements

are an integral part of these statements.


	2014		2013
LIABILITIES AND STOCKHOLDER’S EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities	$	11,424,097	$	16,667,194
Income tax payable		20,020,535		24,117,231
Other provisions		16,430,070		59,702,580
Deferred income		4,907,670		4,907,670
Asset retirement obligations		6,900,000		2,300,000

Total current liabilities		59,682,372		107,694,675
NONCURRENT LIABILITIES
Other provisions		18,267,173		24,405,000
Deferred income		9,815,340		14,723,010
Deferred tax liabilities		19,312,533		12,470,166
Asset retirement obligations		102,073,719		115,967,157

Total noncurrent liabilities		149,468,765		167,565,333
STOCKHOLDER’S EQUITY
Common stock, $10 par value; 25,000 shares authorized, 250 issued and outstanding - San Juan Coal Company		2,500		2,500
Common stock, $10 par value; 25,000 shares authorized, 200 issued and outstanding - San Juan Transportation Company		2,000		2,000
Additional paid-in capital		42,000,000		42,000,000
Retained earnings		125,926,163		207,920,277

TOTAL STOCKHOLDER’S EQUITY		167,930,663		249,924,777

TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY	$	377,081,800	$	525,184,785

SAN JUAN COAL COMPANY AND AFFILIATE

COMBINED STATEMENTS OF INCOME

YEARS ENDED DECEMBER 31, 2014 AND 2013


	2014		2013
REVENUES	$	355,106,507	$	348,583,868
EXPENSES
Operating cost of sales		217,307,232		222,023,050
Taxes other than income		50,805,607		47,837,517
Depletion, depreciation, and amortization		21,547,755		21,304,498
Accretion expense		3,435,000		3,090,000

Total expenses		293,095,594		294,255,065

Income from operations		62,010,913		54,328,803
OTHER INCOME
Other income		3,435,000		3,090,000
Interest expense		117,319		53,874

Total other income		3,552,319		3,143,874

Income before taxes		65,563,232		57,472,677
INCOME TAX EXPENSE		17,557,346		15,218,216

NET INCOME	$	48,005,886	$	42,254,461

The Notes to Combined Financial Statements

are an integral part of these statements.

SAN JUAN COAL COMPANY AND AFFILIATE

COMBINED STATEMENTS OF STOCKHOLDER’S EQUITY

YEARS ENDED DECEMBER 31, 2014 AND 2013


	Common stock -				Common stock -									Total
	San Juan Coal Company				San Juan Transportation Company				Additional		Retained			stockholder’s
	Shares		Amount		Shares		Amount		paid-in capital		earnings			equity
BALANCE, December 31, 2012		250	$	2,500		200	$	2,000	$	42,000,000	$	165,665,816		$	207,670,316
Net income				—				—		—		42,254,461			42,254,461

BALANCE, December 31, 2013		250		2,500		200		2,000		42,000,000		207,920,277			249,924,777
Net income				—				—		—		48,005,886			48,005,886
Dividends paid				—				—		—		(130,000,000	)		(130,000,000	)

BALANCE, December 31, 2014		250	$	2,500		200	$	2,000	$	42,000,000	$	125,926,163		$	167,930,663

The Notes to Combined Financial Statements

are an integral part of these statements.

SAN JUAN COAL COMPANY AND AFFILIATE

COMBINED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2014 AND 2013


	2014			2013
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	48,005,886		$	42,254,461
Adjustment to reconcile net income to net cash provided by operating activities:
Depletion, depreciation, and amortization		21,547,755			21,304,498
Deferred income taxes		6,842,367			25,836
Changes in operating assets and liabilities
Accounts receivable		5,781,755			22,395,096
Related-party receivables		125,878,545			(122,688,880	)
Inventory		(6,493,701	)		(3,706,604	)
Other current assets		(4,869,000	)		1,460,036
Prepaid expenses and other		663,594			2,245,619
Other noncurrent assets		20,033,438			(18,370,208	)
Accounts payable and accrued liabilities		(5,243,097	)		6,514,080
Taxes payable		(4,096,696	)		10,857,873
Deferred income		(4,907,670	)		(4,907,670	)
Other current provisions		(43,272,510	)		37,282,549
Other noncurrent provisions		(6,137,827	)		(13,240,000	)
Asset retirement obligations		(9,293,438	)		31,010,208

Net cash provided by operating activities		144,439,401			12,436,894
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property, plant, and equipment		(14,489,633	)		(12,502,356	)
Proceeds from sale of property, plant, and equipment		50,232			65,462

Net cash used in investing activities		(14,439,401	)		(12,436,894	)
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid		(130,000,000	)		—

Net cash used in financing activities		(130,000,000	)		—

Net change in cash and cash equivalents		—			—
CASH AND CASH EQUIVALENTS, beginning of year		—			—

CASH AND CASH EQUIVALENTS, end of year	$	—		$	—

The Notes to Combined Financial Statements

are an integral part of these statements.

SAN JUAN COAL COMPANY AND AFFILIATE

NOTES TO COMBINED FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Operations

San Juan Coal Company (SJCC) and San Juan Transportation Company (SJTC), collectively, the Company, operate the San Juan Underground Mine (SJM), which is a single long wall operation, for their parent company and sole stockholder, BHP Billiton New Mexico Coal Inc. (“NMC” or the “Parent”). The Company’s ultimate parent is BHP Billiton Limited (BHP Billiton). SJCC supplies coal to the San Juan Generating Station (SJGS) operated by the Public Service Company of New Mexico (PNM).

The summary of significant accounting policies of the Company is presented to assist in understanding the accompanying combined financial statements. The accompanying combined financial statements and notes are representations of management, who is responsible for their integrity and objectivity. The combined financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP).

Basis of Presentation

The combined financial statements and related notes include the accounts of SJCC and SJTC. All significant intercompany accounts and transactions have been eliminated.

Accounting Estimates

The preparation of combined financial statements in conformity with US GAAP requires management to use estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates. Significant estimates include allowance for doubtful accounts, depreciation of property and equipment, asset retirement obligations, deferred tax assets, and liabilities and other provisions.

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.

SAN JUAN COAL COMPANY AND AFFILIATE

NOTES TO COMBINED FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED

Accounts Receivable

Trade receivables are recorded at the invoiced amount and do not bear interest. The Company routinely assesses the recoverability of trade receivables to determine their collectibility and records an allowance for doubtful accounts when, based on the judgment of management, it is probable that a receivable will not be collected and the amount of any allowance may be reasonably estimated. At December 31, 2014 and 2013, the Company does not have a reserve for doubtful accounts as management believes all accounts to be collectible. The Company does not have any off-balance-sheet credit exposure related to its customers.

Inventories

The Company’s inventories consist of two different types of inventory: mined coal and stores/spares. Inventories are stated at the lower of cost or market.

Coal inventory is valued using the weighted average cost to prepare coal to its useful stage less costs reimbursed under the Underground Coal Sales Agreement (UGCSA). Coal is recognized and valued initially when it is brought to the surface as work in process. As the sale of coal occurs simultaneously as it is crushed, no finished goods are reported in the combined balance sheets.

Stores/spares include items such as fuel, roof bolts, spare parts, and other miscellaneous items and are valued using the weighted average price of the inventory items purchased.

Property, Plant, and Equipment

Property, plant, and equipment are stated at historical cost. Mineral rights and related costs are depleted based upon estimated recoverable proven and probable reserves. Assets under construction are not depreciated until such time as they are placed in service. Depreciation on plant and equipment is calculated on a straight-line basis over the estimated useful lives of the assets as follows:


	Useful Life
Buildings		7 - 40 years
Mining plant, machinery, and equipment		4 - 34 years
Vehicles		5 years

SAN JUAN COAL COMPANY AND AFFILIATE

NOTES TO COMBINED FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED

Property, Plant, and Equipment – Continued

Total depletion, depreciation, and amortization for the years ended December 31, 2014 and 2013 was approximately $21.5 million and $21.3 million, respectively. When the Company retires or sells an asset, the Company removes its cost and related accumulated depreciation and amortization from the Company’s combined balance sheets. The Company records the difference between the net book value and proceeds from disposition as a gain or loss on the combined statements of income.

The Company incurs maintenance costs on all of its major equipment. Costs that serve to maintain an asset’s operating capacity at its previously assessed standard of performance, or prevent its useful economic life from declining, are expensed as incurred.

Long-Lived Assets

In accordance with the Financial Accounting Standards Board’s (FASB) Accounting Standards Codification (ASC) Topic 360, Accounting for the Impairment or Disposal of Long-Lived Assets (ASC Topic 360), long-lived assets, such as property, plant and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset to be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by an asset to the carrying value of the asset. If the carrying value of the long-lived asset is not recoverable on an undiscounted cash flow basis, an impairment is recognized for the amount that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values, and third-party independent appraisals, as considered necessary. The Company recorded no impairments of long-lived assets during the years ended December 31, 2014 and 2013.

Asset Retirement Obligations

In accordance with ASC Topic 410, Asset Retirement and Environmental Obligations (ASC Topic 410), the Company recognizes the fair value of a liability for an asset retirement obligation (ARO) in the period in which it is incurred. The Company is required to restore its coal mine sites, either during or at the end of their producing lives, to a condition acceptable to the relevant authorities and consistent with the Company’s environmental policies.

SAN JUAN COAL COMPANY AND AFFILIATE

NOTES TO COMBINED FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED

Asset Retirement Obligations – Continued

The expected cost associated with the retirement of the coal mine sites, discounted to its net present value, is provided when the related environmental disturbance occurs, based on environmental and regulatory requirements. The liability is recognized when the cost can be reasonably estimated and whether the ARO is expected to occur over the life of the operation or at the time of closure of the coal mine sites. The Company’s cost pertaining to final reclamation is fully reimbursable under its customer contracts. Therefore, an asset is maintained, which offsets the liability for ARO. The expected future reimbursements from customers relating to ARO are approximately $109 million and $118 million as of December 31, 2014 and 2013, respectively, and are presented on the combined balance sheets in other current and non-current assets. Expected retirement costs are based on the estimated current cost of detailed plans prepared for the mine site. The Company performs periodic review of its sites for any changes in facts and circumstances that might require changes in the expected cost. When there is a change in the expected costs, the adjustment is recorded against the carrying value of the liability for ARO and the corresponding asset (Note 5). The discounted ARO liability is accreted over time to return to the future fair value at the end of the life of the related site. An offsetting equal amount is recorded to other income to maintain the offsetting reimbursable amount under customer contracts.

Other Provisions

The Company provides for various liabilities and provisions, which arise in the normal course of business. Other current and noncurrent provisions as of December 31, 2014 and 2013 are approximately $35 million and $84 million, respectively, and are primarily related to the insurance proceeds, as discussed in Note 9, and a liability to Cimarron Coal Company (Cimarron). The Cimarron coal liability is a long-term obligation due to the Cimarron and its successors under an installment sales agreement to acquire the La Plata Leases. This liability was the result of a lease buyout of Cimarron and is paid directly by the customer. Accordingly, the Cimarron coal liability is offset by a corresponding asset of the same amount, which is included in other current and noncurrent assets on the combined balance sheets.

Deferred Income

Effective January 1, 2003, the UGCSA replaced a coal sales agreement that previously provided for surface coal mining with new pricing and provisions for underground mining. In consideration for agreeing to terminate the surface supply, and replace it with an underground supply, the Company received a contract termination payment of $73.6 million from SJGS. At December 31, 2014 and 2013, approximately $15 million and $20 million, respectively, of deferred income is reported in the combined balance sheets, which will be amortized to revenue over the remaining life of the renegotiated contract.

SAN JUAN COAL COMPANY AND AFFILIATE

NOTES TO COMBINED FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED

Deferred Income – Continued

Accordingly, approximately $4.9 million was included in revenue in the combined statements of income for each of the years ended December 31, 2014 and 2013.

Revenue Recognition

The Company records revenue from the sales of coal when the product is delivered at a fixed or determinable price per the UGCSA, title has transferred and collectibility is reasonably assured. The Company also recognizes reimbursable costs under the UGCSA as income in the period incurred and billed to PNM.

Income Taxes

The Company is included in the combined tax returns of entities within BHP Billiton. Income taxes due to taxing authorities are allocated by the Parent to the subsidiaries, including SJCC and SJTC, with tax payments made by the Parent and settled through intercompany payable and receivable accounts. Current and deferred taxes are presented as if the Company filed a separate, stand-alone tax return. Taxation on the profit or loss for the year comprises current and deferred tax.

Deferred tax is provided using the asset and liability method, providing for the tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for tax assessment or deduction purposes. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period the rate is enacted. Deferred tax assets are reviewed at each balance sheet date and an allowance provided to the extent that it is no longer probable that the related tax benefit will be realized. Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation jurisdiction and the Company has both the right and the intention to settle its current tax assets and liabilities on a net or simultaneous basis.

ASC Topic 740, Income Taxes, (ASC Topic 740) provides the accounting for uncertainties in income taxes by prescribing a minimum recognition threshold that a tax position is required to meet before being recognized in the combined financial statements. ASC Topic 740 requires that the Company recognize in the combined financial statements the financial effects of a tax position, if that position is more likely than not to be sustained upon examination, including resolution of any appeals or litigation processes. Tax positions taken related to the Company’s entity status and those taken in determining its state income tax liability, including deductibility of expenses, have been reviewed, and management is of the opinion that material positions taken upon the Company would more likely than not be sustained upon examination. As of December 31, 2014, the Company’s tax years 2011 through 2014 remain subject to examination.

SAN JUAN COAL COMPANY AND AFFILIATE

NOTES TO COMBINED FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED

Taxes Other Than Income

Taxes other than income consist primarily of severance and production taxes and value taxes paid to the state of New Mexico and the federal government of the United States. The per tonnage taxes are based on the enacted tax rate per tonnage of coal sold and the value taxes are based on coal sales value.

Fair Value of Financial Instruments

The Company’s financial instruments are cash and cash equivalents, accounts receivable, related party receivables/payables, and accounts payable. The carrying values of these instruments approximate fair value due to their short maturity.

Recently Issued Accounting Standards

In May 2014, the FASB issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers, codified as ASC Topic 606. ASC Topic 606 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. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers, which delays the implementation of the provisions of ASU 2014-09 until fiscal periods beginning after December 15, 2018, with early adoption permitted in fiscal periods beginning after December 15, 2016. The new standard can be adopted by the Company either retrospectively or as a cumulative-effect adjustment as of the date of adoption. The Company will evaluate the effect that adopting this new accounting guidance will have on its combined financial statements as the date of adoption approaches.

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The new standard provides guidance around management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s combined financial statements.

SAN JUAN COAL COMPANY AND AFFILIATE

NOTES TO COMBINED FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED

Recently Issued Accounting Standards – Continued

ASC Topic 330, Inventory, currently requires an entity to measure inventory at the lower of cost or market. Market could be replacement cost, net realizable value, or net realizable value less an approximate normal profit margin. In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory, which requires an entity to measure inventory at the lower of cost or net realizable value. Subsequent measurement is unchanged for inventory measured using last-in, first-out (LIFO) or the retail inventory method. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The Company will evaluate the effect that adopting this new accounting guidance will have on its combined financial statements as the date of adoption approaches.

NOTE 2. CONCENTRATIONS

The Company’s financial instruments that are subject to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. At times during the year, the amounts of cash and cash equivalents on deposit may be in excess of insured limits. The Company believes the financial institutions are financially strong and the risk of loss is minimal.

The Company’s primary line of business, coal mining, is driven by a relatively constant demand by utilities companies to provide energy to customers. SJCC’s coal sales are exclusively to the SJGS, and are governed by the UGCSA. SJCC is a party to that agreement with the PNM and Tucson Electric Power (TEP) (collectively, the Utilities). All coal sold under the UGCSA is from the SJM located in New Mexico. The UGCSA dictates the obligations for coal delivery and other performance criteria for the parties, as well as specifies the contractual compensation, which includes but is not limited to the reimbursement of SJCC’s operating costs and a capital investment element. Under the contract, the UGCSA obligates the Utilities to purchase a minimum of 5.6 million tons of coal per year exclusively from SJCC. The agreement obligates SJCC to guarantee supply of coal to SJGS beyond those minimums while maintaining specified reserves. The agreement expires on December 31, 2017. SJGS accounted for 100% of the Company’s sales and trade receivables as of and for the years ended December 31, 2014 and 2013.

Certain groups of employees of NMC that provide services to the Company are members of labor unions and are employed under collective bargaining agreements.

SAN JUAN COAL COMPANY AND AFFILIATE

NOTES TO COMBINED FINANCIAL STATEMENTS

NOTE 3. INVENTORY

Inventory at December 31, 2014 and 2013 consisted of the following:


	2014		2013
Stores and spares	$	12,741,067	$	12,975,353
Mined coal		13,155,494		6,427,507

Total inventory	$	25,896,561	$	19,402,860

NOTE 4. PROPERTY, PLANT, AND EQUIPMENT

Property, plant, and equipment consisted of the following as of December 31, 2014 and 2013 is shown in the following table:


	2014			2013
Land and buildings	$	114,052,930		$	113,010,368
Mining plant, machinery and equipment		238,765,477			216,815,489
Mineral rights		114,329,022			114,329,022
Assets under construction		1,217,079			10,492,847

		468,364,508			454,647,726
Accumulated depletion, depreciation, and amortization		(347,804,641	)		(326,979,505	)

Property, plant, and equipment, net	$	120,559,867		$	127,668,221

SAN JUAN COAL COMPANY AND AFFILIATE

NOTES TO COMBINED FINANCIAL STATEMENTS

NOTE 5. ASSET RETIREMENT OBLIGATIONS

The following table summarizes the Company’s asset retirement obligation transactions recorded in accordance with the provisions of ASC Topic 410 as of December 31, 2014 and 2013:


	2014			2013
Beginning balance at January 1,	$	118,267,157		$	87,256,949
Liabilities settled		(2,148,911	)		(5,062,812	)
Accretion expense		3,435,000			3,090,000
Liabilities incurred and revised		(10,579,527	)		32,983,020

Ending balance		108,973,719			118,267,157
Current portion		(6,900,000	)		(2,300,000	)

Long-term portion	$	102,073,719		$	115,967,157

Accretion expense is offset in the combined statements of income by corresponding amounts of interest income as the ultimate retirement obligations will be reimbursed by PNM under the UGCSA.

SAN JUAN COAL COMPANY AND AFFILIATE

NOTES TO COMBINED FINANCIAL STATEMENTS

NOTE 6. INCOME TAXES

The income tax expense attributable to income from operations consists of the following:


	2014			2013
Current taxes:
Federal	$	7,694,953		$	12,984,040
State		3,020,026			2,208,340
Deferred taxes:
Federal		6,842,367			25,836

Total current taxes	$	17,557,346		$	15,218,216


	2014			2013
Income before income taxes	$	65,563,232		$	57,472,677
Federal income tax rate		35	%		35	%
Tax at federal income tax rate		22,947,131			20,115,437
Increase (decrease) resulting from:
Percentage depletion		(6,900,243	)		(7,761,061	)
State taxes, net of federal income tax benefit		3,020,026			2,208,340
Other		(1,509,568	)		655,500

Total	$	17,557,346		$	15,218,216

Effective rate		27	%		26	%

SAN JUAN COAL COMPANY AND AFFILIATE

NOTES TO COMBINED FINANCIAL STATEMENTS

NOTE 6. INCOME TAXES – CONTINUED

Deferred tax assets and liabilities as of December 31, 2014 and 2013 resulted from the following:


	2014			2013
Deferred tax assets:
Deferred income	$	3,081,278		$	4,108,370
Other		1,033,992			3,739,184

Total deferred tax assets		4,115,270			7,847,554
Deferred tax liabilities:
Depreciation		(23,427,803	)		(20,317,720	)

Total deferred tax liabilities		(23,427,803	)		(20,317,720	)

Net deferred tax liabilities	$	(19,312,533	)	$	(12,470,166	)

NOTE 7. COMMITMENTS AND CONTINGENCIES

Liabilities for loss contingencies, including environmental remediation costs, arising from claims, assessments, litigation, fines, and penalties and other sources, are recorded when it is more likely than not that a liability has been incurred and the amount of the assessment and/or remediation can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred. Recoveries of environmental remediation costs from third parties, which are probable of realization, are separately recorded as assets, and are not offset against the related environmental liability.

Accruals for estimated losses from environmental remediation obligations generally are recognized no later than completion of the remedial feasibility study. Such accruals are adjusted as further information develops or circumstances change. Costs of expected future expenditures for environmental remediation obligations are discounted to their present value.

The Company is subject to legal proceedings, claims, and liabilities that arise in the ordinary course of business. The Company accrues for losses associated with legal claims when such losses are considered probable and the amounts can be reasonably estimated. In addition to amounts accrued for such losses, management believes additional asserted or unasserted claims may possibly result in losses to the Company; however, a range of potential losses could not be determined as of December 31, 2014 or 2013. As such, no accrual has been recorded for these potential losses. In the opinion of management, the disposition of these matters will not have a material adverse effect on the Company’s financial position or results of operations.

SAN JUAN COAL COMPANY AND AFFILIATE

NOTES TO COMBINED FINANCIAL STATEMENTS

NOTE 8. RELATED PARTY TRANSACTIONS

The Company has significant transactions with related parties, including allocations for payroll and employee benefits and management services related to treasury, governance and other operational functions. Related party payables represent noninterest bearing amounts due between the Company and other BHP Billiton entities for normal business activities.

The Company has an interest-bearing arrangement with NMC whereby all excess cash is swept daily into accounts owned and managed by BHP Billiton entities. This arrangement also provides the Company with the ability to borrow up to a maximum aggregate amount of $520 million. Interest is calculated at the 3-month LIBOR rate plus 240 basis points per annum. Interest is capitalized to the loan principal at December 31 and June 30 each year. The Company has no borrowings under this arrangement at December 31, 2014 and 2013. Amounts receivable under the arrangement are $47 million and $173 million at December 31, 2014 and 2013, respectively, and are included in related party receivables in the combined balance sheets. Interest income related to these receivable balances was immaterial for the years ended December 31, 2014 and 2013.

The Company has no employees of record. BHP Billiton group entities, including primarily NMC, provide services to the Company including all mine operational activities as well as management, oversight, support and other functions. The Company is allocated costs related to these services by the corresponding BHP Billiton entities. Employees utilized by the Company participate in a group noncontributory defined benefit pension plan managed by NMC. The Company does not record assets or liabilities related to pension activity at the entity level. The Company records pension expense for allocations from NMC for its share of the plan each year. Salaried employee benefits under this plan were frozen on December 31, 2013 and all salaried employees were transferred to a defined contribution plan. Hourly employee benefits are calculated based on years of service and the monthly pension rate per completed year of service. The hourly plan was closed to new entrants on June 30, 2004 for surface workers and on April 30, 2006 for underground workers; new hires after those dates are part of a defined contribution plan. Full-time employees and retirees utilized by the Company also participate in a defined benefit healthcare plan. As such, the Company recognizes in each period the allocation from NMC as expense, but it does not recognize any employee benefit plan liabilities.

Approximately $66 million and $69 million in expenses related to employee compensation and benefits are reflected in the combined financial statements through charges allocated to the Company during the years ended December 31, 2014 and 2013, respectively. Approximately $24 million and $26 million in expenses related to corporate allocations, which include costs related to the operation of the local office shared with the Parent and other corporate costs, are reflected in the combined financial statements through charges allocated to the Company during the years ended December 31, 2014 and 2013, respectively.

The Company is insured by Stein Insurance Company Limited (Stein), a captive insurance company wholly owned by BHP Billiton. Stein, which is regulated by the Guernsey Financial Services Commission, settled certain insurance claims with the Company as described in Note 9.

SAN JUAN COAL COMPANY AND AFFILIATE

NOTES TO COMBINED FINANCIAL STATEMENTS

NOTE 9. OTHER PROVISIONS

During 2011, the Company experienced a methane ignition event at SJM. Insurance proceeds related to claims for damage, fire suppression, fire containment, recovery, and resumption of operations were settled and received during 2013, totaling $41 million. These proceeds were designated as credits toward charges to PNM billings during 2014. As such, a liability in the amount of $0 and $41 million was included in other current provisions in the combined balance sheets at December 31, 2014 and 2013, respectively.

NOTE 10. SUBSEQUENT EVENTS

The Company evaluated all events and transactions that occurred after December 31, 2014 and through August 28, 2015, the date the combined financial statements were available to be issued. During this period, the Company identified the following material subsequent events:

On July 1, 2015, the Parent entered into a Stock Purchase Agreement with Westmoreland Coal Company (Westmoreland), pursuant to which, upon satisfaction or waiver of the conditions set forth in the agreement, the Parent will sell to Westmoreland the issued and outstanding capital stock of SJCC and SJTC. A number of conditions set forth in the agreement must be met, including receipt of all required regulatory approvals. The agreement may be terminated by mutual consent.

EX-99.2 3 d63436dex992.htm EX-99.2 EX-99.2

Exhibit 99.2

SAN JUAN COAL COMPANY AND AFFILIATE

FINANCIAL REPORT

SEPTEMBER 30, 2015

LOGO

C O N T E N T S


	Page
INDEPENDENT AUDITOR’S REVIEW REPORT		1

COMBINED FINANCIAL STATEMENTS

Combined Balance Sheets		2

Combined Statements of Income		4

Combined Statements of Stockholder’s Equity		5

Combined Statements of Cash Flows		6

Notes to Combined Financial Statements		7

LOGO

INDEPENDENT AUDITOR’S REVIEW REPORT

To the Shareholder of

San Juan Coal Company and Affiliate

We have reviewed the accompanying combined financial statements of San Juan Coal Company and San Juan Transportation Company (collectively, the Company), which comprise the combined balance sheets as of September 30, 2015 and 2014, the related combined statements of income, and cash flows for the three-month and nine-month periods ended September 30, 2015 and 2014, and the combined statements of changes in stockholder’s equity for the nine-month periods ended September 30, 2015 and 2014.

Management’s Responsibility

Management is responsible for the preparation and fair presentation of the interim combined financial information in accordance with accounting principles generally accepted in the United States of America; this responsibility includes the design, implementation, and maintenance of internal control sufficient to provide a reasonable basis for the preparation and fair presentation of interim combined financial information in accordance with accounting principles generally accepted in the United States of America.

Auditor’s Responsibility

Our responsibility is to conduct our review in accordance with auditing standards generally accepted in the United States of America applicable to reviews of interim financial information. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial information. Accordingly, we do not express such an opinion.

Conclusion

Based on our review, we are not aware of any material modifications that should be made to the accompanying interim combined financial information for it to be in accordance with accounting principles generally accepted in the United States of America.

Emphasis-of-Matter

As described in Note 8 to the combined financial statements, the Company has significant transactions and relationships with affiliated entities.

LOGO

WEAVER AND TIDWELL, L.L.P.

Houston, Texas

October 30, 2015

AN INDEPENDENT MEMBER OF

BAKER TILLY INTERNATIONAL

WEAVER AND TIDWELL, L.L.P.

CERTIFIED PUBLIC ACCOUNTANTS AND ADVISORS

24 GREENWAY PLAZA, SUITE 1800, HOUSTON, TX 77046

P: 713.850.8787 F: 713.850.1673

COMBINED FINANCIAL STATEMENTS

SAN JUAN COAL COMPANY AND AFFILIATE

COMBINED BALANCE SHEETS

(UNAUDITED)


	September 30, 2015			September 30, 2014
ASSETS
CURRENT ASSETS
Accounts receivable	$	6,653,650		$	40,068,755
Related party receivables		118,353,412			38,791,626
Other assets		14,075,000			16,375,400
Inventories		29,321,945			24,409,605
Prepaid expenses and other current assets		5,287,000			2,154,522

Total current assets		173,691,007			121,799,908

PROPERTY, PLANT, AND EQUIPMENT		473,172,400			468,091,345
Accumulated depletion, depreciation, and amortization		(364,246,751	)		(343,331,793	)

Property, plant, and equipment, net		108,925,649			124,759,552

OTHER ASSETS
Other assets		123,396,119			124,762,477
Prepaid assets – noncurrent		1,000,000			1,800,000

Total other assets		124,396,119			126,562,477

TOTAL ASSETS	$	407,012,775		$	373,121,937

The Notes to Combined Financial Statements

are an integral part of these statements.


	September 30, 2015		September 30, 2014
LIABILITIES AND STOCKHOLDER’S EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities	$	9,477,485	$	14,304,369
Income tax payable		21,922,068		16,298,746
Other provisions		18,499,803		17,284,273
Deferred income		4,907,670		4,907,670
Asset retirement obligations		5,100,000		6,900,000

Total current liabilities		59,907,026		59,695,058

NONCURRENT LIABILITIES
Other provisions		14,075,173		22,509,995
Deferred income		6,134,588		11,042,258
Deferred tax liabilities		16,105,372		18,735,137
Asset retirement obligations		109,323,119		102,252,477

Total noncurrent liabilities		145,638,252		154,539,867

STOCKHOLDER’S EQUITY
Common stock, $10 par value; 25,000 shares authorized, 250 issued and outstanding - San Juan Coal Company		2,500		2,500
Common stock, $10 par value; 25,000 shares authorized, 200 issued and outstanding - San Juan Transportation Company		2,000		2,000
Additional paid-in capital		42,000,000		42,000,000
Retained earnings		159,462,997		116,882,512

Total stockholder’s equity		201,467,497		158,887,012

TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY	$	407,012,775	$	373,121,937

See independent auditor’s review report.

SAN JUAN COAL COMPANY AND AFFILIATE

COMBINED STATEMENTS OF INCOME

(UNAUDITED)


	Nine months ended September 30,				Three months ended September 30,
	2015		2014		2015		2014
REVENUES	$	230,001,415	$	268,507,663	$	74,780,640	$	90,472,856

EXPENSES
Operating cost of sales		140,223,776		160,750,693		45,815,143		54,517,082
Taxes other than income		26,534,752		39,291,293		8,540,573		15,350,344
Depletion, depreciation, and amortization		16,442,110		16,352,288		5,280,870		5,457,806
Accretion expense		2,492,250		2,617,500		857,250		817,500

Total expenses		185,692,888		219,011,774		60,493,836		76,142,732

Income from operations		44,308,527		49,495,889		14,286,804		14,330,124

OTHER INCOME
Other income		2,492,250		2,617,500		857,250		817,500
Interest income		114,613		107,014		50,768		13,169

Total other income		2,606,863		2,724,514		908,018		830,669

Income before taxes		46,915,390		52,220,403		15,194,822		15,160,793

INCOME TAX EXPENSE		13,378,556		13,258,168		3,978,888		3,631,397

NET INCOME	$	33,536,834	$	38,962,235	$	11,215,934	$	11,529,396

The Notes to Combined Financial Statements

are an integral part of these statements.

See independent auditor’s review report.

SAN JUAN COAL COMPANY AND AFFILIATE

COMBINED STATEMENTS OF STOCKHOLDER’S EQUITY

(UNAUDITED)


	Common Stock – San Juan Coal Company				Common Stock – San Juan Transportation Company				Additional Paid-In Capital		Retained Earnings			Total Stockholder’s Equity
	Common Stock – San Juan Coal Company				Common Stock – San Juan Transportation Company
	Shares		Amount		Shares		Amount
BALANCE, December 31, 2013		250	$	2,500		200	$	2,000	$	42,000,000	$	207,920,277		$	249,924,777
Net income		—		—		—		—		—		38,962,235			38,962,235
Dividends paid		—		—		—		—		—		(130,000,000	)		(130,000,000	)

BALANCE, September 30, 2014		250	$	2,500		200	$	2,000	$	42,000,000	$	116,882,512		$	158,887,012

BALANCE, December 31, 2014		250	$	2,500		200	$	2,000	$	42,000,000	$	125,926,163		$	167,930,663
Net income		—		—		—		—		—		33,536,834			33,536,834

BALANCE, September 30, 2015		250	$	2,500		200	$	2,000	$	42,000,000	$	159,462,997		$	201,467,497

The Notes to Combined Financial Statements

are an integral part of these statements.

See independent auditor’s review report.

SAN JUAN COAL COMPANY AND AFFILIATE

COMBINED STATEMENTS OF CASH FLOWS

(UNAUDITED)


	Nine months ended September 30,						Three months ended September 30,
	2015			2014			2015			2014
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	33,536,834		$	38,962,235		$	11,215,934		$	11,529,396
Adjustment to reconcile net income to net cash provided by operating activities:
Depletion, depreciation, and amortization		16,442,110			16,352,288			5,280,870			5,457,806
Deferred income taxes		(3,207,161	)		6,264,971			(555,664	)		(366,870	)
Changes in operating assets and liabilities:
Accounts receivable, net of allowance		35,378,273			7,744,923			12,494,380			4,454,873
Related-party receivables		(71,546,168	)		133,894,163			(31,262,963	)		110,466,826
Inventory		(3,425,384	)		(5,006,745	)		(306,974	)		(2,623,780	)
Other current assets		1,798,000			(5,371,400	)		500			(3,400	)
Prepaid expenses and other		(712,514	)		2,283,558			(2,839,575	)		(1,154,522	)
Other noncurrent assets		(3,057,400	)		15,609,680			(123,119	)		(152,477	)
Accounts payable and accrued liabilities		(1,946,612	)		(2,362,825	)		(490,891	)		948,581
Taxes payable		1,901,533			(7,818,485	)		4,534,553			3,998,268
Deferred income		(3,680,752	)		(3,680,752	)		(1,226,917	)		(1,226,917	)
Other current provisions		2,069,733			(42,418,307	)		3,421,083			3,091,471
Other noncurrent provisions		(4,192,000	)		(1,895,005	)		6			(5	)
Asset retirement obligations		5,449,400			(9,114,680	)		123,119			152,477

Net cash provided by operating activities		4,807,892			143,443,619			264,342			134,571,727

CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property, plant, and equipment		(4,807,892	)		(13,443,619	)		(264,342	)		(4,571,727	)

Net cash used in investing activities		(4,807,892	)		(13,443,619	)		(264,342	)		(4,571,727	)

CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid		—			(130,000,000	)		—			(130,000,000	)

Net cash used in financing activities		—			(130,000,000	)		—			(130,000,000	)

Net change in cash and cash equivalents		—			—			—			—
CASH AND CASH EQUIVALENTS, beginning of period		—			—			—			—

CASH AND CASH EQUIVALENTS, end of period	$	—		$	—		$	—		$	—

The Notes to Combined Financial Statements

are an integral part of these statements.

See independent auditor’s review report.

SAN JUAN COAL COMPANY AND AFFILIATE

NOTES TO COMBINED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Operations

San Juan Coal Company (SJCC) and San Juan Transportation Company (SJTC), collectively the Company, operate the San Juan Underground Mine (SJM), which is a single long wall operation, for their parent company and sole stockholder, BHP Billiton New Mexico Coal Inc. (“NMC” or the “Parent”). The Company’s ultimate parent is BHP Billiton Limited (BHP Billiton). SJCC supplies coal to the San Juan Generating Station (SJGS) operated by the Public Service Company of New Mexico (PNM).

Basis of Presentation

The combined financial statements and related notes include the accounts of SJCC and SJTC. All significant intercompany accounts and transactions have been eliminated.

Accounting Estimates

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.

See independent auditor’s review report.

SAN JUAN COAL COMPANY AND AFFILIATE

NOTES TO COMBINED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED

Accounts Receivable

Trade receivables are recorded at the invoiced amount and do not bear interest. The Company routinely assesses the recoverability of trade receivables to determine their collectibility and records an allowance for doubtful accounts when, based on the judgment of management, it is probable that a receivable will not be collected and the amount of any allowance may be reasonably estimated. At September 30, 2015 and 2014, the Company does not have a reserve for doubtful accounts as management believes all accounts to be collectible. The Company does not have any off-balance-sheet credit exposure related to its customers.

Inventories

The Company’s inventories consist of two different types of inventory: mined coal and stores/spares. Inventories are stated at the lower of cost or market.

Stores/spares include items such as fuel, roof bolts, spare parts, and other miscellaneous items and are valued using the weighted average price of the inventory items purchased.

Property, Plant, and Equipment


		Useful Life
Buildings		7 - 40 years
Mining plant, machinery, and equipment		4 - 34 years
Vehicles		5 years

See independent auditor’s review report.

SAN JUAN COAL COMPANY AND AFFILIATE

NOTES TO COMBINED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED

Property, Plant, and Equipment – Continued

Total depletion, depreciation, and amortization for the three and nine months ended September 30, 2015 was approximately $5.3 million and $16.4 million, respectively. For the three and nine months ended September 30, 2014, total depletion, depreciation and amortization was approximately $5.5 million, $16.4 million, respectively. When the Company retires or sells an asset, the Company removes its cost and related accumulated depreciation and amortization from the Company’s combined balance sheets. The Company records the difference between the net book value and proceeds from disposition as a gain or loss on the combined statements of income.

Long-Lived Assets

In accordance with the Financial Accounting Standards Board’s (FASB) Accounting Standards Codification (ASC) Topic 360, Accounting for the Impairment or Disposal of Long-Lived Assets, long-lived assets, such as property, plant and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset to be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by an asset to the carrying value of the asset. If the carrying value of the long-lived asset is not recoverable on an undiscounted cash flow basis, an impairment is recognized for the amount that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values, and third-party independent appraisals, as considered necessary. The Company recorded no impairments of long-lived assets during the three and nine months ended September 30, 2015 and 2014.

Asset Retirement Obligations

See independent auditor’s review report.

SAN JUAN COAL COMPANY AND AFFILIATE

NOTES TO COMBINED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED

Asset Retirement Obligations – Continued

The expected cost associated with the retirement of the coal mine sites, discounted to its net present value, is provided when the related environmental disturbance occurs, based on environmental and regulatory requirements. The liability is recognized when the cost can be reasonably estimated and whether the ARO is expected to occur over the life of the operation or at the time of closure of the coal mine sites. The Company’s cost pertaining to final reclamation is fully reimbursable under its customer contracts. Therefore, an asset is maintained, which offsets the liability for ARO. The expected future reimbursements from customers relating to ARO is approximately $114.4 million and $109.2 million as of September 30, 2015 and 2014, respectively, and is presented on the combined balance sheets in other current and non-current assets. Expected retirement costs are based on the estimated current cost of detailed plans prepared for the mine site. The Company performs periodic review of its sites for any changes in facts and circumstances that might require changes in the expected cost. When there is a change in the expected costs, the adjustment is recorded against the carrying value of the liability for ARO and the corresponding asset (Note 5). The discounted ARO liability is accreted over time to return to the future fair value at the end of the life of the related site. An offsetting equal amount is recorded to other income to maintain the offsetting reimbursable amount under customer contracts.

Other Provisions

The Company provides for various liabilities and provisions, which arise in the normal course of business. Other current and noncurrent provisions as of September 30, 2015 and 2014 are approximately $32.6 million and $39.8 million, respectively, and are primarily related to Cimarron Coal Company (Cimarron). The Cimarron coal liability is a long-term obligation due to Cimarron and its successors under an installment sales agreement to acquire the La Plata Leases. This liability was the result of a lease buyout of Cimarron and is paid directly by the customer. Accordingly, the Cimarron coal liability is offset by a corresponding asset of the same amount, which is included in other current and noncurrent assets on the combined balance sheets.

Deferred Income

Effective January 1, 2003, the UGCSA replaced a coal sales agreement that previously provided for surface coal mining with new pricing and provisions for underground mining. In consideration for agreeing to terminate the surface supply, and replace it with an underground supply, the Company received a contract termination payment of $73.6 million from SJGS. As of September 30, 2015 and 2014, approximately $11.0 million and $15.9 million, respectively, of deferred income is reported in the combined balance sheets, which will be amortized to revenue over the remaining life of the renegotiated contract. Accordingly, approximately $1.2 million and $3.7 million was included in revenue in the combined statements of income during the three and nine months periods, respectively, for each period ended September 30, 2015 and 2014.

See independent auditor’s review report.

SAN JUAN COAL COMPANY AND AFFILIATE

NOTES TO COMBINED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED

Revenue Recognition

Income Taxes

The Company is included in the consolidated tax returns of entities within BHP Billiton. Income taxes due to taxing authorities are allocated by the Parent to the subsidiaries, including SJCC and SJTC, with tax payments made by the Parent and settled through intercompany payable and receivable accounts. Current and deferred taxes are presented as if the Company filed a separate, stand-alone tax return. Taxation on the profit or loss for the period comprises current and deferred tax.

ASC Topic 740, Income Taxes (ASC Topic 740), provides the accounting for uncertainties in income taxes by prescribing a minimum recognition threshold that a tax position is required to meet before being recognized in the combined financial statements. ASC Topic 740 requires that the Company recognize in the combined financial statements the financial effects of a tax position, if that position is more likely than not to be sustained upon examination, including resolution of any appeals or litigation processes. Tax positions taken related to the Company’s entity status and those taken in determining its state income tax liability, including deductibility of expenses, have been reviewed, and management is of the opinion that material positions taken upon the Company would more likely than not be sustained upon examination. As of September 30, 2015, the Company’s tax years 2012 through 2014 remain subject to examination.

See independent auditor’s review report.

SAN JUAN COAL COMPANY AND AFFILIATE

NOTES TO COMBINED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED

Taxes Other Than Income

Fair Value of Financial Instruments

Recently Issued Accounting Standards

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The new standard provides guidance around management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s combined financial statements.

See independent auditor’s review report.

SAN JUAN COAL COMPANY AND AFFILIATE

NOTES TO COMBINED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED

Recently Issued Accounting Standards – Continued

NOTE 2. CONCENTRATIONS

The Company’s primary line of business, coal mining, is driven by a relatively constant demand by utilities companies to provide energy to customers. SJCC’s coal sales are exclusively to the SJGS, and are governed by the UGCSA. SJCC is a party to that agreement with the PNM and Tucson Electric Power (TEP) (collectively, the Utilities). All coal sold under the UGCSA is from the SJM located in New Mexico. The UGCSA dictates the obligations for coal delivery and other performance criteria for the parties, as well as specifies the contractual compensation, which includes but is not limited to the reimbursement of SJCC’s operating costs and a capital investment element. Under the contract, the UGCSA obligates the Utilities to purchase a minimum of 5.6 million tons of coal per year exclusively from SJCC. The agreement obligates SJCC to guarantee supply of coal to SJGS beyond those minimums while maintaining specified reserves. The agreement expires on December 31, 2017. SJGS accounted for 100% of the Company’s sales and trade receivables for the three and nine months ended September 30, 2015 and 2014.

Certain groups of employees of NMC that provide services to the Company are members of labor unions and are employed under collective bargaining agreements.

See independent auditor’s review report.

SAN JUAN COAL COMPANY AND AFFILIATE

NOTES TO COMBINED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 3. INVENTORY

Inventory at September 30, 2015 and 2014 consisted of the following:


	2015		2014
Stores and spares	$	11,893,552	$	13,169,538
Mined coal		17,428,393		11,240,067

Total inventory	$	29,321,945	$	24,409,605

NOTE 4. PROPERTY, PLANT, AND EQUIPMENT

Property, plant, and equipment consisted of the following as of September 30, 2015 and 2014:


	2015			2014
Land and buildings	$	114,752,657		$	113,010,368
Mining plant, machinery and equipment		240,385,187			233,002,969
Mineral rights		114,329,022			114,329,022
Assets under construction		3,705,534			7,748,986

		473,172,400			468,091,345
Accumulated depletion, depreciation, and amortization		(364,246,751	)		(343,331,793	)

Property, plant, and equipment, net	$	108,925,649		$	124,759,552

See independent auditor’s review report.

SAN JUAN COAL COMPANY AND AFFILIATE

NOTES TO COMBINED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 5. ASSET RETIREMENT OBLIGATIONS

The following table summarizes the Company’s asset retirement obligation transactions recorded in accordance with the provisions of ASC Topic 410 as of September 30, 2015 and 2014:


	2015			2014
Beginning balance at January 1,	$	108,973,719		$	118,267,157
Liabilities settled		(2,258,749	)		(10,579,527	)
Accretion expense		2,492,250			2,617,500
Liabilities incurred and revised, net		5,215,899			(1,152,653	)

Ending balance		114,423,119			109,152,477
Current portion		(5,100,000	)		(6,900,000	)

Long-term portion	$	109,323,119		$	102,252,477

Accretion expense is offset in the combined statements of income by corresponding amounts of other income as the ultimate retirement obligations will be reimbursed by PNM under the UGCSA.

See independent auditor’s review report.

SAN JUAN COAL COMPANY AND AFFILIATE

NOTES TO COMBINED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 6. INCOME TAXES

The income tax expense attributable to income from operations consists of the following:


	Nine months ended September 30,						Three months ended September 30,
	2015			2014			2015			2014
Current taxes:
Federal	$	14,163,242		$	5,261,258		$	3,819,774		$	3,360,025
State		2,422,475			1,731,939			714,778			638,242

Deferred taxes:
Federal		(3,207,161	)		6,264,971			(555,664	)		(366,870	)

Total current taxes	$	13,378,556		$	13,258,168		$	3,978,888		$	3,631,397


	Nine months ended September 30,						Three months ended September 30,
	2015			2014			2015			2014
Income before income taxes	$	46,915,390		$	52,220,403		$	15,194,822		$	15,160,793
Federal income tax rate		35	%		35	%		35	%		35	%

Tax at federal income tax rate		16,420,389			18,277,141			5,318,191			5,306,277

Increase (decrease) resulting from:
Percentage depletion		(6,155,401	)		(5,221,085	)		(1,836,994	)		(2,110,641	)
State taxes, net of federal income tax benefit		2,422,475			1,731,940			714,778			638,244
Other		691,093			(1,529,828	)		(217,087	)		(202,483	)

Total	$	13,378,556		$	13,258,168		$	3,978,888		$	3,631,397

Effective rate		29	%		25	%		26	%		24	%

See independent auditor’s review report.

SAN JUAN COAL COMPANY AND AFFILIATE

NOTES TO COMBINED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 6. INCOME TAXES – CONTINUED

Deferred tax assets and liabilities as of September 30, 2015 and 2014 resulted from the following:


	2015			2014
Deferred tax assets:
Deferred income	$	3,864,790		$	5,582,475

Total deferred tax assets		3,864,790			5,582,475

Deferred tax liabilities:
Depreciation		(19,130,720	)		(24,084,604	)
Other		(839,442	)		(233,008	)

Total deferred tax liabilities		(19,970,162	)		(24,317,612	)

Net deferred tax liabilities	$	(16,105,372	)	$	(18,735,137	)

NOTE 7. COMMITMENTS AND CONTINGENCIES

See independent auditor’s review report.

SAN JUAN COAL COMPANY AND AFFILIATE

NOTES TO COMBINED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 7. COMMITMENTS AND CONTINGENCIES – CONTINUED

The Company is subject to legal proceedings, claims, and liabilities that arise in the ordinary course of business. The Company accrues for losses associated with legal claims when such losses are considered probable and the amounts can be reasonably estimated. In addition to amounts accrued for such losses, management believes additional asserted or unasserted claims may possibly result in losses to the Company; however, a range of potential losses could not be determined as of September 30, 2015 and 2014. As such, no accrual has been recorded for these potential losses. In the opinion of management, the disposition of these matters will not have a material adverse effect on the Company’s financial position or results of operations.

NOTE 8. RELATED PARTY TRANSACTIONS

The Company has an interest-bearing arrangement with NMC whereby all excess cash is swept daily into accounts owned and managed by BHP Billiton entities. This arrangement also provides the Company with the ability to borrow up to a maximum aggregate amount of $520 million. Interest is calculated at the 3-month LIBOR rate plus 240 basis points per annum. Interest is capitalized to the loan principal and the Company has no borrowings under this arrangement at September 30, 2015 and 2014. Amounts receivable under the arrangement are $118.4 million and $38.8 million at September 30, 2015 and 2014, respectively, and are included in related party receivables in the combined balance sheets. Interest income related to these receivable balances was immaterial for the three and nine months ended September 30, 2015 and 2014.

See independent auditor’s review report.

SAN JUAN COAL COMPANY AND AFFILIATE

NOTES TO COMBINED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 8. RELATED PARTY TRANSACTIONS – CONTINUED

As such, the Company recognizes in each period the allocation from NMC as expense, but it does not recognize any employee benefit plan liabilities.

Approximately $17.9 million and $51.2 million in expenses related to employee compensation and benefits are reflected in the combined financial statements through charges allocated to the Company during the three and nine months ended September 30, 2015, respectively. These charges amounted to approximately $18.9 million and $47.6 million for the three and nine months ended September 30, 2014, respectively. Approximately $5.3 million and $16.4 million in expenses related to corporate allocations, which include costs related to the operation of the local office shared with the Parent and other corporate costs, are reflected in the combined financial statements through charges allocated to the Company during the three and nine months ended September 30, 2015, respectively. These charges amounted to approximately $5.7 million and $17.9 million for the three and nine months ended September 30, 2014, respectively.

The Company is insured by Stein Insurance Company Limited (Stein), a captive insurance company wholly owned by BHP Billiton. Stein is regulated by the Guernsey Financial Services Commission.

NOTE 9. STOCK PURCHASE AGREEMENT

NOTE 10. SUBSEQUENT EVENTS

The Company evaluated all events and transactions that occurred after September 30, 2015 and through October 30, 2015, the date the combined financial statements were available to be issued. During this period, the Company identified no material subsequent events.

See independent auditor’s review report.

EX-99.3 4 d63436dex993.htm EX-99.3 EX-99.3

Exhibit 99.3

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

The unaudited pro forma condensed combined balance sheet and unaudited pro forma condensed combined statements of operations (collectively, “unaudited pro forma condensed combined financial information”) of Westmoreland and its consolidated subsidiaries, including Westmoreland Resource Partners, LP (“WMLP”), gives effect to the following transactions as if they occurred on January 1, 2014 for the pro forma condensed combined statements of operations, and as if they occurred on September 30, 2015 (or before for those transactions that closed prior to September 30, 2015) for the pro forma condensed combined balance sheet:

•

our acquisition of Prairie Mines & Royalty ULC and Coal Valley Resources Inc. (the “Canadian Acquisition”), which closed on April 28, 2014;

•

our acquisition of Westmoreland Resources GP, LLC (the “WMLP GP”) and approximately 79% of the outstanding limited partner interests in WMLP (collectively, the “WMLP Transactions”) and the related refinancing of our and WMLP’s indebtedness in December 2014;

•

the increase in WMLP’s indebtedness in connection with Westmoreland’s contribution of 100% of the equity in Westmoreland Kemmerer, LLC to WMLP (the “Kemmerer Contribution”), and the related payment to Westmoreland of the cash portion of the purchase price for the Kemmerer Contribution and subsequent repayment of indebtedness by Westmoreland;

•

the San Juan Acquisition; and

•

an increase of $125.0 million in principal amount of Westmoreland’s long-term debt.

No pro forma adjustments have been made to reflect Westmoreland’s acquisition of Buckingham Coal Company, LLC (“Buckingham and such acquisition, the “Buckingham Acquisition”), which closed on January 1, 2015, due to the lack of available audited financial statements prior to the acquisition. Buckingham did not materially contribute to our results of operations or statement of financial position for any period presented, and we do not believe its historical results or financial position would have materially impacted our historical results or financial position.

The unaudited pro forma condensed combined financial information is based on the historical financial statements of Westmoreland Coal Company and its subsidiaries, the historical combined consolidated financial statements of the Canadian subsidiaries, the historical financial statements of WMLP and the combined financial statements of San Juan. It is presented for illustrative purposes only and may not be indicative of our financial position or results of operations that would have actually occurred had the Canadian Acquisition, the WMLP Transactions and the San Juan Acquisition been completed at or as of the dates indicated, nor is it indicative of our future operating results or financial position. The data in the unaudited pro forma condensed combined balance sheet as of September 30, 2015 assumes the San Juan Acquisition was completed on that date. The Canadian Subsidiaries and the WMLP GP have been consolidated into Westmoreland as of September 30, 2015. The data in the unaudited pro forma condensed combined statements of operations for the nine months ended September 30, 2015, the year ended December 31, 2014 and the nine months ended September 30, 2014 assumes that each of the Canadian Acquisition, the WMLP Transactions and the San Juan Acquisition was completed as of January 1, 2014. The Westmoreland results of operations for the year ended December 31, 2014 include eight months of consolidated data for the period of time subject to the Canadian Acquisition on April 28, 2014. The Westmoreland results of operations for the nine months ended September 30, 2015 include nine months of consolidated data for the period of time subsequent to the WMLP Transactions (which closed on December 31, 2014).

The unaudited pro forma condensed combined financial information is presented for informational purposes only, is based on certain assumptions that we believe are reasonable and is not intended to represent our financial condition or results of operations had the Canadian Acquisition, WMLP Transactions, San Juan Acquisition or other transactions described above occurred on the dates noted above or to project the results for any future date or period. In particular, the terms of the San Juan Coal Supply Agreement that will become effective upon consummation of the San Juan Acquisition are significantly less favorable to us than the terms of the previous coal supply agreement reflected in San Juan’s historical financial statements. In the opinion of management, all adjustments have been made that are necessary to present fairly the unaudited pro forma condensed combined financial information.

The Canadian Acquisition and the WMLP Transactions have been, and the San Juan Acquisition will be, accounted for as business combinations in accordance with Accounting Standards Codification Topic 805 and the contribution of the reserves at the Kemmerer Mine from Westmoreland to WMLP in connection with the WMLP Transactions was accounted for as a transaction among entities under common control. For purposes of this unaudited pro forma condensed combined financial information, the WMLP Transactions and the San Juan Acquisition purchase prices have been allocated to the tangible assets acquired and liabilities assumed for those assets and liabilities for which Westmoreland has obtained preliminary fair value information. The actual amounts recorded upon finalization of the purchase price allocations may differ materially from the information presented in the accompanying unaudited pro forma condensed combined financial information. Our financial statements issued after the completion of the WMLP Transactions and the San Juan Acquisition will reflect such fair values, which may materially differ from the amounts allocated to such tangible and intangible assets and liabilities in the historical financial statements of the WMLP GP and San Juan, and will determine a new basis in such assets and liabilities that will be reflected in our accounting. As a result, amounts presented in our future consolidated financial statements and footnotes will not be comparable to those of historical periods and with the pro forma financial information.

The combined consolidated financial statements provided to us in respect of the Canadian subsidiaries (which form the basis of the unaudited pro forma condensed combined financial information) were prepared in accordance with International Financial Reporting Standards, or IFRS, and therefore are not directly comparable to our financial statements which are prepared in accordance with generally accepted accounting principles in the United States, or GAAP. IFRS is a set of accounting principles more focused on objectives and principles and less reliant on detailed rules than GAAP. There are significant and material differences in several key areas between GAAP and IFRS which would affect Westmoreland. Additionally, GAAP provides specific guidance in classes of accounting transactions for which equivalent guidance in IFRS does not exist. Adjustments were made to the Canadian subsidiaries’ combined consolidated financial statements from IFRS to GAAP by evaluating and documenting the existing differences between IFRS and GAAP. Adjustments were also made to convert Canadian dollars to U.S. dollars based on historical exchange rates, which may differ from future exchange rates.

The integration of the businesses we acquired in the Canadian Acquisition and the WMLP Transactions, and are acquiring in the San Juan Acquisition, may not achieve the desired results. The unaudited pro forma condensed combined statements of operations do not reflect the cost of any integration activities or benefits from the Canadian Acquisition, the WMLP Transactions, and the San Juan Acquisition and synergies that may be

derived from any integration activities, both of which may have a material effect on the consolidated results of operations in periods following the completion of the Canadian Acquisition, the WMLP Transactions and the San Juan Acquisition. Once the necessary due diligence has been completed, the final purchase prices have been determined and the purchase price adjustments have been completed, actual results may differ materially from the information presented in this unaudited pro forma condensed combined financial information.

Westmoreland Coal Company

Unaudited Pro Forma Condensed Combined Balance Sheet

As of September 30, 2015


	Westmoreland Historical		San Juan Historical		Pro forma adjustments related to financing			Pro forma adjustments related to San Juan Acquisition			Total Westmoreland Combined Pro Forma
	(USD in thousands)
Assets
Current assets:
Cash and cash equivalents	$	29,336	$	—	$	112,500	^a	$	(129,350	)^e	$	12,486
Receivables:
Trade		146,522		6,654		—			—			153,176
Loan and lease receivables		6,304		—		—			—			6,304
Contractual third party reclamation receivables		19,310		—		—			—			19,310
Other (Includes Related Party Receivables)		15,081		118,353		—			(118,353	)^f		15,081

		187,217		125,007		—			(118,353	)		193,871
Inventories		124,438		29,322		—			3,357	^f		157,117
Deferred income taxes		14,451		—		—			—			14,451
Other current assets		15,795		19,362		—			—			35,157

Total current assets		371,237		173,691		112,500			(244,346	)		413,082

Property, plant and equipment:
Land and mineral rights		494,950		115,950		—			396	^f		611,296
Plant and equipment		1,012,900		357,222		—			5,168	^f		1,375,290

		1,507,850		473,172		—			5,564			1,986,587
Less accumulated depreciation, depletion and amortization		625,940		364,247		—			—			990,187

Net property, plant and equipment		881,910		108,926		—			5,564			996,400

Loan and lease receivable		51,099		—		—			—			51,099
Advanced coal royalty		17,958		—		—			—			17,958
Reclamation deposits		77,425		—		—			—			77,425
Restricted investments and bond collateral		137,672		—		—			—			137,672
Contractual third party reclamation receivables		96,086		—		—			—			96,086
Investment in joint venture		28,664		—		—			—			28,664
Intangible assets		29,720		—		—			—			29,720
Deferred tax assets		—		—		—			—			—
Other assets		36,451		124,396		2,500	^b		—			163,347
Goodwill		—		—		—			—			—

Total Assets	$	1,728,222	$	407,013	$	115,000		$	(238,782	)	$	2,011,453

Westmoreland Coal Company

Unaudited Pro Forma Condensed Combined Balance Sheet (continued)

As of September 30, 2015


	Westmoreland Historical			San Juan Historical		Pro forma adjustments related to financing			Pro forma adjustments related to San Juan Acquisition			Total Westmoreland Combined Pro Forma
	(USD in thousands)
Liabilities and Shareholders’ Deficit
Current liabilities:
Current installments of long-term debt	$	38,879		$	—	$	1,250	^c	$	—		$	40,129
Trade and other accrued liabilities		129,084			9,477		—			—			138,561
Interest payable		7,869			—		—			—			7,869
Production taxes		53,437			—		—			—			53,437
Workers’ compensation		656			—		—			—			656
Postretirement medical benefits		13,263			—		—			—			13,263
SERP		368			—		—			—			368
Deferred revenue		13,170			4,908		—			(4,908	)^f		13,170
Income tax payable		—			21,922		—			(21,922	)^f		—
Asset retirement obligation		47,462			5,100		—			—			52,562
Other current liabilities		25,895			18,500		—			—			44,395

Total current liabilities		330,083			59,907		1,250			(26,830	)		364,410
Long-term debt, less current installments		1,014,075			—		113,750	^d		—			1,127,825
Workers’ compensation, less current portion		6,081			—		—			—			6,081
Excess of black lung benefit obligation over trust assets		11,919			—		—			—			11,919
Post-retirement medical benefits, less current portion		293,268			—		—			—			293,268
Pension and SERP benefits, less current portion		44,256			—		—			—			44,256
Deferred revenue, less current portion		27,425			6,135		—			(6,135	)^f		27,425
Asset retirement obligation, less current portion		402,145			109,323		—			—			511,468
Intangible liabilities		3,737			—		—			—			3,737
Deferred income taxes		47,435			16,105		—			—			63,540
Other liabilities		37,014			14,075		—			—			51,089

Total Liabilities		2,217,438			205,546		115,000			(32,965	)		2,505,019

Shareholders’ deficit:
Common Stock		180			5		—			(5	)		180
Other Paid in Capital		238,705			42,000		—			(42,000	)		238,705
Accumulated other comprehensive loss		(165,811	)		—		—			—			(165,811	)
Accumulated earnings (deficit)		(563,804	)		159,462		—			(163,812	)		(568,154	)

Total shareholders’ deficit		(490,730	)		201,467		—			(205,817	)		(495,080	)
Noncontrolling interest		1,514			—		—			—			1,514

Total equity (deficit)		(489,216	)		201,467		—			(205,817	)		(493,566	)

Total Liabilities and Shareholders’ Deficit	$	1,728,222		$	407,013	$	115,000		$	(238,782	)	$	2,011,453

See Notes to Unaudited Pro Forma Condensed Combined Financial Statements

Westmoreland Coal Company

Unaudited Pro Forma Condensed Combined Statement of Operations

Year ended December 31, 2014

(Dollars in thousands)


	PMRL and CVRI Adjusted for the period January 1 through April 27, 2014			Westmoreland Historical			Oxford Resource Partners, LP (Predecessor)			San Juan Historical			Pro forma adjustments related to financing			Pro forma adjustments related to WMLP acquisition			Pro forma adjustments related to Canadian acquisition			Pro forma adjustments related to San Juan acquisition			Total Westmoreland Combined Pro Forma
Revenues	$	206,220		$	1,115,992		$	322,263		$	355,107		$	—		$	—		$	—		$	(4,908	)^o	$	1,994,674

Costs and expenses:
Cost of sales		164,172			899,930			260,275			271,548			—			—			2,942	^l		—			1,598,867
Depreciation, depletion, and amortization		29,106			100,778			39,315			21,548			—			7,045	ⁱ		(22,797	)^m		1,079	^p		176,074
Selling and administrative		5,730			100,528			20,510			—			—			—			—			—			126,768
Heritage health benefits		—			13,388			—			—			—			—			—			—			13,388
Loss (gain) on sales of assets		(56	)		1,232			(218	)		—			—			—			—			—			958
Restructuring charges		3,143			14,989			75			—			—			—			—			—			18,207
Derivative loss		—			31,100			—			—			—			—			—			—			31,100
Income from equity affiliates		(1,288	)		(3,159	)		—			—			—			—			—			—			(4,447	)
Other operating income		18,142			181			—			—			—			—			—			—			18,323

		218,949			1,158,967			319,957			293,096			—			7,045			(19,855	)		1,079			1,979,238

		(12,729	)		(42,975	)		2,306			62,011			—			(7,045	)		19,855			(5,987	)		15,436

Other income (expense):
Interest expense		(7,974	)		(84,234	)		(27,787	)		—			466	^g		5,551	^j		—			—			(113,978	)
Loss on extinguishment of debt		—			(49,154	)		500			—			47,455	^h		1,622	^j		—			—			423
Interest income		2,817			6,400			4			117			—			—			—			—			9,338
Loss on foreign exchange		—			(4,016	)		—			—			—			—			—			—			(4,016	)
Other income		—			1,031			822			3,435			—			—			—			—			5,288

		(5,157	)		(129,973	)		(26,461	)		3,552			47,921			7,173			—			—			(102,945	)

Income (loss) before income taxes		(17,886	)		(172,948	)		(24,155	)		65,563			47,921			127			19,855			(5,987	)		(87,510	)
Income tax expense (benefit)		(1,155	)		232			—			17,557			—			—			5,008	ⁿ		—			21,642

Net income (loss)		(16,731	)		(173,180	)		(24,155	)		48,006			47,921			127			14,847			(5,987	)		(109,152	)
Less: net loss attributable to noncontrolling interests		—			(921	)		(1,270	)		—			—			(100	)^k		—			—			(2,291	)

Net income (loss) attributable to Parent company		(16,731	)		(172,259	)		(22,885	)		48,006			47,921			227			14,847			(5,987	)		(106,861	)
Less: preferred stock dividend requirements		—			859			—			—			—			—			—			—			859

Net income (loss) per share applicable to Common shareholders	$	(16,731	)	$	(173,118	)	$	(22,885	)	$	48,006		$	47,921		$	227		$	14,847		$	(5,987	)	$	(107,720	)

EBITDA RECONCILIATION
Net income (loss)	$	(16,731	)	$	(173,180	)	$	(24,155	)	$	48,006		$	47,921		$	127		$	14,847		$	(5,987	)	$	(109,152	)
Income tax expense (benefit)		(1,155	)		232			—			17,557			—			—			5,008			—			21,642
Interest income		(2,817	)		(6,400	)		(4	)		(117	)		—			—			—			—			(9,338	)
Interest expense		7,974			84,234			27,787			—			(466	)		(5,551	)		—			—			113,978
Depreciation, depletion and amortization		29,106			100,778			39,315			21,548			—			7,045			(22,797	)		1,079			176,074
Accretion of ARO and receivable		1,900			21,604			2,337			—			—			—			2,942			—			28,783
Amortization of intangible assets and liabilities		—			138			—			—			—			—			—			—			138

EBITDA		18,277			27,406			45,280			86,994			47,455			1,622			—			(4,908	)		222,126
Restructuring expenses		3,143			14,989			75			—			—			—			—			—			18,207
Loss on foreign exchange		—			4,016			—			—			—			—			—			—			4,016
Loss on extinguishment of debt		—			49,154			(500	)		—			(47,455	)		(1,622	)		—			—			(423	)
Acquisition related costs		—			26,785			—			—			—			—			—			—			26,785
Customer payments received treated as lease receivables under GAAP		6,495			12,388			—			—			—			—			—			—			18,883
Derivative loss		—			31,100			—			—			—			—			—			—			31,100
(Gain)/loss on sale of assets and other adjustments		20,035			3,431			(13,118	)		—			—			—			—			—			10,348
Share-based compensation		(394	)		6,082			4,559			—			—			—			—			—			10,247

Adjusted EBITDA	$	47,556		$	175,351		$	36,296		$	86,994		$	—		$	—		$	—		$	(4,908	)	$	341,289

Westmoreland Coal Company

Unaudited Pro Forma Condensed Combined Statement of Operations

Nine Months Ended September 30, 2014

(Dollars in thousands)


	PMRL and CVRI Adjusted for the period January 1 through April 27, 2014			Westmoreland Historical			Oxford Resource Partners, LP (Predecessor)			San Juan Historical			Pro forma adjustments related to financing			Pro forma adjustments related to WMLP acquisition			Pro forma adjustments related to Canadian acquisition			Pro forma adjustments related to San Juan acquisition			Total Westmoreland Combined Pro Forma
Revenues	$	206,220		$	805,989		$	254,512		$	268,508		$	—		$	—		$	—		$	(3,681	)^o	$	1,531,548

Costs and expenses:
Cost of sales		164,172			670,467			199,226			202,659			—			—			2,942	^l		—			1,239,466
Depreciation, depletion, and amortization		29,106			68,713			30,532			16,352			—			5,284	ⁱ		(22,797	)^m		809	^p		128,000
Selling and administrative		5,730			68,551			10,530			—			—			—			—			—			84,811
Heritage health benefits		—			10,246			—			—			—			—			—			—			10,246
Loss (gain) on sales of assets		(56	)		114			(559	)		—			—			—			—			—			(501	)
Restructuring charges		3,143			11,207			75			—			—			—			—			—			14,425
Derivative loss		—			29,621						—			—			—			—			—			29,621
Income from equity affiliates		(1,288	)		(2,060	)		—			—			—			—			—			—			(3,348	)
Other operating income		18,142			151			—			—			—			—			—			—			18,293

		218,949			857,010			239,804			219,012			—			5,284			(19,855	)		809			1,521,013

		(12,729	)		(51,021	)		14,708			49,496			—			(5,284	)		19,855			(4,490	)		10,535

Other income (expense):
Interest expense		(7,974	)		(63,835	)		(20,899	)		—			796	^g		4,163	^j		—			—			(87,749	)
Loss on extinguishment of debt		—			(12,648	)		—			—			12,571	^h		—			—			—			(77	)
Interest income		2,817			4,351			4			107			—			—			—			—			7,279
Loss on foreign exchange		—			(5,883	)		—			—			—			—			—			—			(5,883	)
Other income		—			697			1,621			2,618			—			—			—			—			4,936

		(5,157	)		(77,318	)		(19,274	)		2,725			13,367			4,163			—			—			(81,494	)

Income (loss) before income taxes		(17,886	)		(128,339	)		(4,566	)		52,220			13,367			(1,121	)		19,855			(4,490	)		(70,960	)
Income tax expense (benefit)		(1,155	)		2,979			—			13,258			—			—			5,008	ⁿ		—			20,090

Net income (loss)		(16,731	)		(131,318	)		(4,566	)		38,962			13,367			(1,121	)		14,847			(4,490	)		(91,050	)
Less: net loss attributable to noncontrolling interests		—			—			(1,270	)		—			—			946	^k		—			—			(324	)

Net income (loss) attributable to Parent company		(16,731	)		(131,318	)		(3,296	)		38,962			13,367			(2,067	)		14,847			(4,490	)		(90,726	)
Less: preferred stock dividend requirements		—			664			—			—			—			—			—			—			664

Net income (loss) per share applicable to Common shareholders	$	(16,731	)	$	(131,982	)	$	(3,296	)	$	38,962		$	13,367		$	(2,067	)	$	14,847		$	(4,490	)	$	(91,390	)

EBITDA RECONCILIATION
Net income (loss)	$	(16,731	)	$	(131,318	)	$	(4,566	)	$	38,962		$	13,367		$	(1,121	)	$	14,847		$	(4,490	)	$	(91,050	)
Income tax expense (benefit)		(1,155	)		2,979			—			13,258			—			—			5,008			—			20,090
Interest income		(2,817	)		(4,351	)		(4	)		(107	)		—			—			—			—			(7,279	)
Interest expense		7,974			63,835			20,899			—			(796	)		(4,163	)		—			—			87,749
Depreciation, depletion and amortization		29,106			68,713			30,532			16,352			—			5,284			(22,797	)		809			128,000
Accretion of ARO and receivable		1,900			16,257			1,725			—			—			—			2,942			—			22,824
Amortization of intangible assets and liabilities		—			385			—			—			—			—			—			—			385

EBITDA		18,277			16,500			48,586			68,466			12,571			—			—			(3,681	)		160,719
Restructuring expenses		3,143			11,207			75			—			—			—			—			—			14,425
Loss on foreign exchange		—			5,883			—			—			—			—			—			—			5,883
Loss on extinguishment of debt		—			12,648			—			—			(12,571	)		—			—			—			77
Acquisition related costs		—			22,079			—			—			—			—			—			—			22,079
Customer payments received treated as lease receivables under GAAP		6,495			7,830			—			—			—			—			—			—			14,325
Derivative loss		—			29,621			—			—			—			—			—			—			29,621
(Gain)/loss on sale of assets and other adjustments		20,035			1,232			(976	)		—			—			—			—			—			20,291
Share-based compensation		(394	)		3,456			1,383			—			—			—			—			—			4,445

Adjusted EBITDA	$	47,556		$	110,456		$	49,068		$	68,466		$	—		$	—		$	—		$	(3,681	)	$	271,865

Westmoreland Coal Company

Unaudited Pro Forma Condensed Combined Statement of Operations

Nine months ended September 30, 2015


	Westmoreland Historical			San Juan Historical			Pro forma adjustments related to financing			Pro forma adjustments related to San Juan Acquisition			Total Westmoreland Combined Pro Forma
Revenues	$	1,070,240		$	230,002		$	—		$	(3,681	)^o	$	1,296,561

Costs and expenses:
Cost of sales		880,162			169,251			—			—			1,049,413
Depreciation, depletion, and amortization		106,781			16,442			—			809	^p		124,032
Selling and administrative		84,611			—			—			—			84,611
Heritage health benefits		8,022			—			—			—			8,022
Loss (gain) on sales of assets		2,148			—			—			—			2,148
Restructuring charges		656			—			—			—			656
Derivative loss		6,717			—			—			—			6,717
Income from equity affiliates		(4,141	)		—			—			—			(4,141	)
Other operating income		(1,000	)		—			—			—			(1,000	)

		1,083,956			185,693			—			809			1,270,458

		(13,716	)		44,309			—			(4,490	)		26,103

Other income (expense):
Interest expense		(76,870	)		—			(10,594	)^g		—			(87,464	)
Loss on extinguishment of debt		(5,385	)		—			5,385	^h		—			—
Interest income		6,262			115			—			—			6,377
Loss on foreign exchange		2,474			—			—			—			2,474
Other income		1,082			2,492			—			—			3,574

		(72,437	)		2,607			(5,209	)		—			(75,039	)

Income (loss) before income taxes		(86,153	)		46,916			(5,209	)		(4,490	)		(48,936	)
Income tax expense (benefit)		13,596			13,379			—			—			26,975

Net income (loss)		(99,749	)		33,537			(5,209	)		(4,490	)		(75,911	)
Less: net loss attributable to noncontrolling interests		(4,850	)		—			—			—			(4,850	)

Net income (loss) attributable to Parent company		(94,899	)		33,537			(5,209	)		(4,490	)		(71,061	)
Less: preferred stock dividend requirements		—			—			—			—			—

Net income (loss) per share applicable to Common shareholders	$	(94,899	)	$	33,537		$	(5,209	)	$	(4,490	)	$	(71,061	)

EBITDA RECONCILIATION
Net income (loss)	$	(99,749	)	$	33,537		$	(5,209	)	$	(4,490	)	$	(75,911	)
Income tax expense (benefit)		13,596			13,379			—			—			26,975
Interest income		(6,262	)		(115	)		—			—			(6,377	)
Interest expense		76,870			—			10,549			—			87,464
Depreciation, depletion and amortization		106,781			16,442			—			809			124,032
Accretion of ARO and receivable		21,250			—			—			—			21,250
Amortization of intangible assets and liabilities		(756	)		—			—			—			(756	)

EBITDA		111,730			63,243			5,385			(3,681	)		176,678
Restructuring expenses		656			—			—			—			656
Loss on foreign exchange		(2,474	)		—			—			—			(2,474	)
Loss on extinguishment of debt		5,385			—			(5,385	)		—			—
Acquisition related costs		4,470			—			—			—			4,470
Customer payments received treated as lease receivables under GAAP		24,252			—			—			—			24,252
Derivative loss		6,717			—			—			—			6,717
Loss on sale of assets and other adjustments		2,951			—			—			—			2,951
Share-based compensation		5,588			—			—			—			5,588

Adjusted EBITDA	$	159,275		$	63,243		$	—		$	(3,681	)	$	218,837

Westmoreland Coal Company and Subsidiaries

Notes to Unaudited Pro Forma Condensed Combined Financial Information

Note 1. Basis of Presentation

The unaudited pro forma condensed combined financial information presented is based on the historical financial statements of Westmoreland Coal Company and its subsidiaries, the historical combined consolidated financial statements of the Canadian subsidiaries, the historical consolidated financial statements of WMLP, and the financial statements of San Juan. The unaudited pro forma condensed combined financial information has been prepared to reflect the WMLP Transactions, the San Juan Acquisition and an increase of $125.0 million in principal amount of Westmoreland’s long-term debt, and includes the impact of the Canadian Acquisition and the increase in WLMP’s indebtedness in connection with the Kemmerer Contribution, and the related payment to Westmoreland of the cash portion of the purchase price for the Kemmerer Contribution and subsequent repayment of indebtedness by Westmoreland. It is presented for illustrative purposes only and may not be indicative of the combined company’s financial position or results of operations that would have actually occurred had the Canadian Acquisition, the WMLP Transactions, the San Juan Acquisition or the Kemmerer Contribution been completed at or as of the dates indicated, nor is it indicative of our future operating results or financial position. The data in the unaudited pro forma condensed combined balance sheet as of September 30, 2015 assumes the San Juan Acquisition was completed on that date. The Canadian Subsidiaries and WMLP have been consolidated into Westmoreland as of this balance sheet date. The data in the unaudited pro forma condensed combined statements of operations for the nine months ended September 30, 2015, the year ended December 31, 2014 and the nine months ended September 30, 2014 assumes that each of the Canadian Acquisition, the WMLP Transactions, the San Juan Acquisition and the increase in WMLP’s indebtedness in connection with the Kemmerer Contribution, and the related payment to Westmoreland of the cash portion of the purchase price for the Kemmerer Contribution and subsequent repayment of indebtedness by Westmoreland was completed as of January 1, 2014. The Westmoreland results of operations for the nine months ended September 30, 2015 include nine months of consolidated data for the period of time subsequent to the WMLP Transactions (which closed on December 31, 2014).

Pro forma adjustments reflected in the unaudited pro forma condensed combined balance sheet are based on items that are directly attributable to the proposed San Juan Acquisition and factually supportable. Pro forma adjustments reflected in the unaudited pro forma condensed combined statements of operations are based on items directly attributable to the Canadian Acquisition, the WMLP Transactions, the San Juan Acquisition and the increase in WMLP’s indebtedness in connection with the Kemmerer Contribution, and the related payment to Westmoreland of the cash portion of the purchase price for the Kemmerer Contribution and subsequent repayment of indebtedness by Westmoreland, factually supportable and expected to have a continuing impact on Westmoreland.

The combined consolidated financial statements provided to us in respect of the Canadian subsidiaries (which form the basis of the unaudited pro forma combined financial information regarding the Canadian subsidiaries presented herein) were prepared in accordance with IFRS, and therefore are not directly comparable to our financial statements which are prepared in accordance with GAAP. IFRS is a set of accounting principles

more focused on objectives and principles and less reliant on detailed rules than GAAP. There are significant and material differences in several key areas between GAAP and IFRS which would affect Westmoreland. Additionally, GAAP provides specific guidance in classes of accounting transactions for which equivalent guidance in IFRS does not exist. Adjustments were made to the Canadian subsidiaries’ financial statements from IFRS to GAAP by evaluating and documenting the existing differences between IFRS and GAAP. Adjustments were also made to convert Canadian dollars to U.S. dollars based on historical exchange rates, which may differ from future exchange rates.

At this time, Westmoreland has not completed a detailed valuation analysis to determine the fair values of WMLP’s and San Juan’s assets and liabilities and accordingly, the unaudited pro forma condensed combined financial statements include preliminary allocations of the purchase prices based on assumptions and estimates which, while considered reasonable under the circumstances, are subject to changes, which may be material. Additionally, Westmoreland has not completed the due diligence necessary to identify items that could significantly impact the purchase price allocations or the assumptions and adjustments made in preparation of this unaudited pro forma condensed combined financial information.

Upon completion of detailed valuation analyses, there may be additional increases or decreases to the recorded book values of WMLP’s and San Juan’s assets and liabilities, including, but not limited to, mineral reserves, property and equipment, asset retirement obligations, capital lease obligations, coal supply agreements and other intangible assets that will give rise to future amounts of depletion, depreciation and amortization expenses or credits, or interest expense, that are not reflected in the unaudited pro forma condensed combined financial information. Accordingly, once the necessary due diligence is completed, the final purchase prices are determined and the purchase price allocations are completed, actual results may differ materially from the information presented in this unaudited pro forma condensed combined financial information. Additionally, the unaudited pro forma condensed combined statements of operations do not reflect the cost of any integration activities or benefits from the Canadian Acquisition, the WMLP Transactions and the San Juan Acquisition and synergies that may be derived from any integration activities, all of which may have a material impact on the consolidated results of operations in periods following the completion of the Canadian Acquisition, the WMLP Transactions and the San Juan Acquisition.

Certain amounts in the Canadian subsidiaries’, the WMLP GP’s and San Juan’s historical financial statements have been reclassified to conform to Westmoreland’s financial statement presentation.

Pursuant to the Second Amendment to the Credit Agreement, on January 22, 2015, Bank of Montreal made an additional incremental term loan of $75.0 million to Westmoreland under the Term Loan, making the aggregate principal amount of the loans available thereunder $425.0 million. Additionally, in August 2015, in conjunction with the Kemmerer Contribution, Westmoreland amended the Term Loan to remove Kemmerer as a guarantor and repaid $94.1 million of outstanding principal. As of September 30, 2015, the outstanding principal balance of the Term Loan was $328.0 million.

Note 2 – Unaudited Pro Forma Condensed Combined Balance Sheet Adjustments and Assumptions

Pro forma adjustments related to financing

a)	Reflects the following pro forma adjustments to financing:


Cash inflows:
Issuance of long-term debt of Westmoreland Coal Company, net of discount	$	115,000
Cash outflows:
Estimated debt issuance costs		(2,500	)

Net cash inflows	$	112,500

b)	Reflects debt issuance costs reported as a deferred financing asset.

c)	Reflects the current portion of the issuance of long-term debt of Westmoreland Coal Company.

d)	Reflects the issuance of the long-term debt, net of the $10.0 million 8.0% discount.

Pro Forma Adjustments Related to San Juan Acquisition

e)	Reflects the following pro forma adjustments for the San Juan Acquisition:


Estimated Acquisition cash outflows:
Cash paid at closing	$	(125,000	)
Estimated acquisition related costs		(4,350	)

Net cash outflows	$	(129,350	)

The pro forma adjustments primarily reflect the San Juan Acquisition under the acquisition method of accounting, under which tangible and identifiable intangible assets acquired and liabilities assumed are recorded at their estimated fair values as of the acquisition date. The estimated fair values of assets acquired and liabilities assumed are based on preliminary management estimates and are subject to final valuation adjustments which may cause the amounts ultimately recorded to be different from those shown on the unaudited pro forma condensed combined balance sheet. Additional specific adjustments are further described below.

The following table presents a preliminary allocation of the major classes of assets acquired and liabilities assumed at September 30, 2015:


	Preliminary Purchase Price Allocation
Assets acquired:
Accounts receivable	$	6,654
Inventories		32,679
Other current assets		19,362
Net property, plant and equipment		114,490
Other long-term assets		124,396

Total assets		297,581

Liabilities assumed:
Current liabilities:
Trade payables and other accrued liabilities		9,477
Current portion of asset retirement obligations		5,100
Other liabilities		18,500
Noncurrent liabilities:
Asset retirement obligations		109,323
Other liabilities		14,075
Deferred income taxes		16,105

Total liabilities		172,581

Net assets	$	125,000

Note 3 – Unaudited Pro Forma Condensed Combined Statements of Operations Adjustments and Assumptions

Pro forma adjustments related to financing

For all periods presented, reflects an assumed interest expense of an additional $125.0 million in principal amount of Westmoreland’s long-term debt at a 12.0% interest rate and an 8.0% discount. A 0.125% change in the interest rate or a 0.125% change in the discount rate would result in a change in interest expense of $0.2 million. An increase in the discount rate would increase our use of cash.

For the nine months ended September 30, 2014 and the year ended December 31, 2014, reflects adjustments related to interest expense on the Term Loan and Westmoreland’s 8.75% Senior Secured Notes due 2022 (the “Existing Notes”) that closed on December 16, 2014. Also reflects for the nine months ended September 30, 2014 and the year ended December 31, 2014, the elimination of the interest expense recorded during those periods for the term debt issued by Westmoreland Mining, LLC (“WML”), which was redeemed in connection with the Canadian Acquisition and for Westmoreland’s 10.75% senior secured notes due 2018, which were redeemed on December 16, 2014.

For the nine months ended September 30, 2015, reflects adjustments related to interest expense for the additional delayed draw term loan by WMLP in August 2015 in connection with the Kemmerer Contribution and the $94.1 million principal payment on the Term Loan made on August 5, 2015 in connection with the Kemmerer Contribution.

Represents the elimination of loss on extinguishment of debt related to the WML notes expensed in the nine months ended September 30, 2014 and the year ended December 31, 2014. Also includes the elimination of loss on extinguishment of debt related to the 10.75% senior secured notes expensed in the year ended December 31, 2014. Further, for the nine months ended September 30, 2015, it includes the elimination of the loss on extinguishment of debt related to the $94.1 million principal payment on the Term Loan made on August 5, 2015 in connection with the Kemmerer Contribution.

Pro Forma Adjustments Related to WMLP Transactions

i)	Represents additional depletion associated with reflecting the acquired mineral reserves in the WMLP Transactions at estimated fair value. The adjustments assume estimated useful lives of eight years for mineral reserves.

Reflects adjustments related to the interest expense for the WMLP credit facility which closed on December 31, 2014. Also includes amortization of debt issuance costs and amortization of debt discount. Reflects the elimination of the interest expense recorded during the periods presented for WMLP’s previously existing long-term debt retired on December 31, 2014.

k)	Represents the portion of WMLP’s historical income from continuing operations that is attributable to noncontrolling interests in WMLP.

Pro Forma Adjustments Related to Canadian Acquisition

l)	Reflects the adjustment to the accretion expense of the asset retirement obligations as a result of adjustments to record these items at fair value.

m)	Reflects the adjustment to depreciation, depletion and amortization expense of the land and mineral rights and plant and equipment as a result of adjustments to record these items at fair value.

Reflects the income tax effect of the pro forma adjustments based on a 34% statutory rate for Westmoreland Coal Company and an estimated Canadian statutory rate of 26% for PMRL and CVRI. Adjustments have been made under the assumption that Westmoreland Coal Company and CVRI have full valuation allowances recorded against their net deferred tax assets.

Pro Forma Adjustments Related to San Juan Acquisition

o)	Reflects the adjustment to revenue as a result of adjustments to record deferred revenue balances at fair value.

p)	Reflects the adjustment to depreciation, depletion and amortization expense of the land and mineral rights and plant and equipment as a result of adjustments to record these items at fair value.

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