NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include accounts of Westmoreland Coal Company (the “Company”), and its subsidiaries and controlled entities including those of Westmoreland Resource Partners, LP (“WMLP”). All intercompany transactions and accounts have been eliminated in consolidation. The consolidated financial statements of the Company have been prepared in accordance with United States Generally Accepted Accounting Principles (“GAAP”) and require the use of management’s estimates. The financial information contained in this Quarterly Report on Form 10-Q (“Quarterly Report”) is unaudited, but reflects all adjustments which in the opinion of management are necessary for a fair presentation of the financial information for the periods shown. Such adjustments are of a normal recurring nature. Certain prior period amounts have been reclassified to conform to current period presentation. The results of operations for the
six months ended June 30, 2017
are not necessarily indicative of results to be expected for the year ending
December 31, 2017
.
These unaudited quarterly consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2016
(“
2016
Form 10-K”).
Recently Issued Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02,
Leases (Topic 842)
which requires companies leasing assets to recognize on their balance sheet a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term on contracts longer than one year. The lessee is permitted to make an accounting policy election to not recognize lease assets and lease liabilities for short-term leases. How leases are recorded on the balance sheet represents a significant change from previous GAAP guidance as described in Accounting Standards Codification (“ASC”) Topic 840,
Leases.
ASU 2016-02 maintains a distinction between finance leases and operating leases similar to the distinction under previous lease guidance for capital leases and operating leases. The impact of leases reported in the Company’s operating results and statement of cash flows are expected to be similar to previous GAAP.
ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, and early adoption is permitted. Adoption of the new lease accounting standard will require the Company to apply the new standard to the earliest period using a modified retrospective approach. The Company is currently in the process of evaluating the impact of the new standard, including the evaluation of the impact, if any, on changes to business processes, systems and controls to support recognition and disclosure under the new guidance, however, at this time is unable to determine the impact this standard will have on the financial statements and related disclosures.
In January 2016, the FASB issued ASU 2016-01,
Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
which updates certain aspects of recognition, measurement, presentation and disclosure of financial instruments. This standard is effective for interim and annual periods beginning after December 15, 2017. We are currently evaluating the effect adopting this guidance will have on our consolidated financial statements and footnote disclosures.
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers
which was issued as a new Topic, ASC Topic 606. The new revenue recognition standard supersedes all existing revenue recognition guidance. Under this ASU, an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2015-14, issued in August 2015, deferred the effective date of ASU 2014-09 to the first quarter of 2018, with early adoption permitted in the first quarter of 2017. The Company intends to adopt the amended guidance as of January 1, 2018.
In March, April, May, and December 2016, the FASB issued the following updates, respectively, to provide supplemental adoption guidance and clarification to ASU 2014-09. These standards must be adopted concurrently upon the adoption of ASU 2014-09. We are currently evaluating the potential effects of adopting the provisions of these updates.
|
|
•
|
ASU 2016-08,
Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net).
|
|
|
•
|
ASU 2016-10,
Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing.
|
|
|
•
|
ASU 2016-12,
Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients.
|
|
|
•
|
ASU 2016-19,
Technical Corrections and Improvements.
|
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
We have established an implementation team to execute a multi-phase plan to adopt the requirements of the new standard. The team is in the process of finalizing its conclusions on how the guidance will be applied to a sample of our coal sales contracts comprising greater than half of our consolidated revenues. The team is also evaluating the expanded disclosures required by the new standard and reviewing our system capabilities, processes, and internal controls over financial reporting to ensure the appropriate information will be available for these disclosures.
Under the new standard, companies may use either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients; or (ii) a modified retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). We will be adopting the standard under the full retrospective approach.
2. ACQUISITION
Acquisition of San Juan
On January 31, 2016, Westmoreland San Juan, LLC (“WSJ”), a variable interest entity of the Company, acquired San Juan Coal Company (“SJCC”), which operates the San Juan mine in Farmington, New Mexico, and San Juan Transportation Company (“SJTC” and such transaction, the “San Juan Acquisition”) for a total cash purchase price of
$121.0 million
. The San Juan mine is the exclusive supplier of coal to the adjacent San Juan Generating Station (“SJGS”) under a coal supply agreement through 2022. The San Juan operations are included in the Company’s Coal - U.S. segment.
WSJ financed the San Juan Acquisition principally with a
$125.0 million
loan from NM Capital Utility Corporation (the “San Juan Loan”), an affiliate of Public Service Company of New Mexico (one of the owners of SJGS).
The San Juan Acquisition has been accounted for under the acquisition method of accounting that requires the total purchase consideration to be allocated to the assets acquired and liabilities assumed based on estimates of fair value. Purchase price accounting was considered final as of
December 31, 2016
. The allocation of the purchase consideration follows (in millions):
|
|
|
|
|
Purchase price:
|
|
Cash paid
|
$
|
121.0
|
|
|
|
Allocation of purchase price:
|
|
Assets:
|
|
Inventories
|
$
|
8.8
|
|
Total current assets
|
8.8
|
|
Land and mineral rights
|
143.9
|
|
Plant and equipment
|
74.6
|
|
Other assets
|
1.3
|
|
Total assets
|
228.6
|
|
Liabilities:
|
|
Trade payables and other accrued liabilities
|
13.4
|
|
Production taxes
|
2.0
|
|
Asset retirement obligations
|
0.7
|
|
Total current liabilities
|
16.1
|
|
Asset retirement obligations, less current portion
|
43.5
|
|
Postretirement medical benefits
|
1.9
|
|
Deferred income taxes
|
46.1
|
|
Total liabilities
|
107.6
|
|
Net fair value
|
$
|
121.0
|
|
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
Unaudited Pro Forma Information
The following unaudited pro forma information has been prepared for illustrative purposes only and assumes the San Juan Acquisition occurred on January 1, 2016. The unaudited pro forma results have been prepared based on estimates and assumptions, which the Company believes are reasonable, however, they are not necessarily indicative of the consolidated results of operations had the acquisitions occurred on the dates indicated above, or of future results of operations.
|
|
|
|
|
|
Six Months Ended June 30, 2016
|
|
(In thousands, except per share data)
|
Revenues
|
|
As reported
|
$
|
713,451
|
|
Pro forma (unaudited)
|
739,726
|
|
|
|
Operating income
|
|
As reported
|
$
|
6,736
|
|
Pro forma (unaudited)
|
7,831
|
|
|
|
Net loss applicable to common shareholders
|
|
As reported
|
$
|
(1,182
|
)
|
Pro forma (unaudited)
|
(757
|
)
|
|
|
Net loss per share applicable to common shareholders (basic and diluted)
|
|
As reported
|
$
|
(0.06
|
)
|
Pro forma (unaudited)
|
(0.04
|
)
|
3. VARIABLE INTEREST ENTITY
As of
June 30, 2017
, the Company consolidated its
100%
owned WSJ subsidiary which qualifies as a variable interest entity (“VIE”) under GAAP. WSJ’s classification as a VIE is due to a third party lender having the potential right to receive WSJ’s residual returns. The Company is the primary beneficiary because it has the power to direct the activities that most significantly impact WSJ’s economic performance. Accordingly, the Company consolidated the operating results, assets and liabilities of WSJ. See
Note 2 - Acquisition
for details surrounding the VIE’s acquisition and
Note 6 - Debt And Lines Of Credit
for the VIE’s debt structure. The following table presents the carrying amounts, after eliminating the effect of intercompany transactions, included in the Consolidated Balance Sheets that are for the use of or are the obligation of WSJ:
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
|
(In thousands)
|
Assets
|
$
|
228,318
|
|
|
$
|
268,910
|
|
Liabilities
|
193,085
|
|
|
243,884
|
|
Net carrying amount
|
$
|
35,233
|
|
|
$
|
25,026
|
|
4. INVENTORIES
Inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
|
(In thousands)
|
Coal stockpiles
|
$
|
35,296
|
|
|
$
|
44,692
|
|
Coal fuel inventories
|
5,827
|
|
|
6,816
|
|
Materials and supplies
|
83,178
|
|
|
77,628
|
|
Reserve for obsolete inventory
|
(3,721
|
)
|
|
(3,621
|
)
|
Total
|
$
|
120,580
|
|
|
$
|
125,515
|
|
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
5. RESTRICTED INVESTMENTS AND BOND COLLATERAL
The Company invests certain bond collateral, reclamation deposits, and other restricted investments in a limited selection of fixed-income investment options and receives the corresponding investment returns. These investments are not available to meet the Company’s general cash needs. These accounts include available-for-sale securities. Available-for-sale securities are reported at fair value with unrealized gains and losses excluded from earnings and reported in
Accumulated other comprehensive loss
.
The Company’s carrying value and estimated fair value of its restricted investments at
June 30, 2017
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Investments and Bond Collateral
|
|
Reclamation Deposits
|
|
Total Restricted Investments
|
|
(In thousands)
|
Cash and cash equivalents
|
$
|
64,362
|
|
|
$
|
4,054
|
|
|
$
|
68,416
|
|
Time deposits
|
2,467
|
|
|
—
|
|
|
2,467
|
|
Available-for-sale
|
79,557
|
|
|
72,077
|
|
|
151,634
|
|
|
$
|
146,386
|
|
|
$
|
76,131
|
|
|
$
|
222,517
|
|
The Company’s carrying value and estimated fair value of its restricted investments at
December 31, 2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Investments and Bond Collateral
|
|
Reclamation Deposits
|
|
Total Restricted Investments
|
|
(In thousands)
|
Cash and cash equivalents
|
$
|
66,860
|
|
|
$
|
2,673
|
|
|
$
|
69,533
|
|
Time deposits
|
2,473
|
|
|
—
|
|
|
2,473
|
|
Available-for-sale
|
75,580
|
|
|
71,689
|
|
|
147,269
|
|
|
$
|
144,913
|
|
|
$
|
74,362
|
|
|
$
|
219,275
|
|
Available-for-Sale Restricted Investments
The cost basis, gross unrealized holding gains and losses, and fair value of available-for-sale securities at
June 30, 2017
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Investments and Bond Collateral
|
|
Reclamation Deposits
|
|
Total Restricted Investments
|
|
(In thousands)
|
Cost basis
|
$
|
79,932
|
|
|
$
|
72,176
|
|
|
$
|
152,108
|
|
Gross unrealized holding gains
|
493
|
|
|
587
|
|
|
1,080
|
|
Gross unrealized holding losses
|
(868
|
)
|
|
(686
|
)
|
|
(1,554
|
)
|
Fair value
|
$
|
79,557
|
|
|
$
|
72,077
|
|
|
$
|
151,634
|
|
The cost basis, gross unrealized holding gains and losses, and fair value of available-for-sale securities at
December 31, 2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Investments and Bond Collateral
|
|
Reclamation Deposits
|
|
Total Restricted Investments
|
|
(In thousands)
|
Cost basis
|
$
|
76,558
|
|
|
$
|
72,381
|
|
|
$
|
148,939
|
|
Gross unrealized holding gains
|
251
|
|
|
453
|
|
|
704
|
|
Gross unrealized holding losses
|
(1,229
|
)
|
|
(1,145
|
)
|
|
(2,374
|
)
|
Fair value
|
$
|
75,580
|
|
|
$
|
71,689
|
|
|
$
|
147,269
|
|
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
6. DEBT AND LINES OF CREDIT
The Company and its subsidiaries are subject to the following debt arrangements:
|
|
|
|
|
|
|
|
|
|
Total Debt Outstanding
|
|
June 30, 2017
|
|
December 31, 2016
|
|
(In thousands)
|
8.75% Notes
|
$
|
350,000
|
|
|
$
|
350,000
|
|
Term Loan
|
322,239
|
|
|
323,883
|
|
San Juan Loan
|
75,820
|
|
|
95,000
|
|
WMLP Term Loan
|
309,594
|
|
|
306,189
|
|
Revolver
|
—
|
|
|
—
|
|
WMLP Revolver
|
—
|
|
|
—
|
|
Capital lease obligations
|
43,156
|
|
|
55,061
|
|
Other debt
|
7,162
|
|
|
16,464
|
|
Total debt
|
1,107,971
|
|
|
1,146,597
|
|
Less debt discount and issuance costs, net
|
(32,409
|
)
|
|
(37,531
|
)
|
Less current installments
|
(54,494
|
)
|
|
(86,272
|
)
|
Long-term debt, less current installments
|
$
|
1,021,068
|
|
|
$
|
1,022,794
|
|
The following table presents remaining aggregate contractual debt maturities of all long-term debt as of
June 30, 2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt Held by WMLP
|
|
All Other Debt
|
|
Total Debt Outstanding
|
2017
|
$
|
2,764
|
|
|
$
|
39,000
|
|
|
$
|
41,764
|
|
2018
|
313,770
|
|
|
18,470
|
|
|
332,240
|
|
2019
|
4,105
|
|
|
15,240
|
|
|
19,345
|
|
2020
|
1,694
|
|
|
338,562
|
|
|
340,256
|
|
2021
|
1,586
|
|
|
21,164
|
|
|
22,750
|
|
Thereafter
|
1,616
|
|
|
350,000
|
|
|
351,616
|
|
Total debt
|
$
|
325,535
|
|
|
$
|
782,436
|
|
|
$
|
1,107,971
|
|
Covenant Compliance
Our lending arrangements contain, among other terms, events of default and various affirmative and negative covenants, financial covenants and cross-default provisions. Our continuing ability to meet our obligations and comply with these financial covenants depends on our ability to generate adequate cash flows and refinance debt obligations as they become due. Should we be unable to comply with any future debt-related covenant, we will be required to seek a waiver of such covenant to avoid an event of default. Covenant waivers and modifications may be expensive to obtain or potentially unavailable.
As of
June 30, 2017
, we are in compliance with the fixed charge ratio under our revolver agreement. Based on current projections, absent management plans, there is substantial doubt as to our ability to comply with this covenant during the next twelve months from this filing. If we were to breach this covenant, we could lose access to the
Revolver
and impact certain customary cross-default provisions in our
$350.0 million
8.75% Notes
and our
$322.2 million
Term Loan
which would become immediately due. Our belief, based on historical patterns, is that it is probable we would be able to alleviate or cure any such
Revolver
covenant default with an amendment or waiver.
8.75% Notes
Pursuant to our senior note indenture, dated as of December 16, 2014, by and among the Company, the guarantors named therein, and U.S. Bank National Association, as trustee and notes collateral agent (the “Indenture”), our senior secured
8.75% Notes
mature on January 1, 2022 and pay interest semiannually on January 1 and July 1 of each year at a fixed 8.75%
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
interest rate (“
8.75% Notes
”). The
8.75% Notes
are a primary obligation of the Company and are guaranteed by Westmoreland Energy LLC, Westmoreland Mining LLC and Westmoreland Resources, Inc. and their respective subsidiaries (other than Absaloka Coal, LLC, Westmoreland Risk Management, Inc. and certain other immaterial subsidiaries), referred to as the “Guarantors.” The
8.75% Notes
are not guaranteed by Westmoreland Canada LLC or any of its subsidiaries, WSJ or any of its subsidiaries, or Westmoreland Resources GP, LLC or WMLP, referred to as the “Non-guarantors.”
Term Loan
Pursuant to our credit agreement, dated as of December 22, 2014, by and among the Company, the lenders from time to time party thereto, and Bank of Montreal, as administrative agent, as amended, our term loan (“
Term Loan
”) matures on December 16, 2020 and accrues interest on a quarterly basis at a variable interest rate which is set at our election at (i) the one-, two-, three- or six-month London Interbank Offered Rate (“LIBOR”) plus 6.50% or (ii) a base rate (determined with reference to the highest of the prime rate, the Federal Funds Rate plus 0.05%, or three-month LIBOR plus 1.00%) plus 5.50%. As of
June 30, 2017
, the interest rate was
7.60%
. The
Term Loan
is a primary obligation of WCC and is guaranteed by the Guarantors.
San Juan Loan
Pursuant to the loan agreement, dated as of February 1, 2016, by and among WSJ and the remaining Westmoreland San Juan Entities as guarantors, and NM Capital Utility Corporation (an affiliate of Public Service Company of New Mexico, part owner of SJGS) as lender, we financed the San Juan Acquisition in part with a senior secured
$125.0 million
term loan (“
San Juan Loan
”). The
San Juan Loan
matures on February 1, 2021 and pays interest and principal on a quarterly basis at an interest rate of (i)
7.25%
(the “Margin Rate”) plus (ii) (A) the LIBOR for a three month period plus (B) a statutory reserve rate, which such Margin Rate increasing incrementally during each year of the
San Juan Loan
term. As of
June 30, 2017
, the cash interest rate is
10.42%
. It is a primary obligation of WSJ, is guaranteed by SJCC, and is secured by substantially all of SJCC’s assets. The
San Juan Loan
has no prepayment penalties. The agreements governing the
San Juan Loan
include representations and warranties and covenants regarding the ownership and operation of SJCC and the properties acquired in the San Juan Acquisition and standard special purpose bankruptcy remote entity covenants designed to preserve the separateness from the Company of each of (i) WSJ, (ii) WSJ’s direct parent company, Westmoreland San Juan Holdings, Inc., (iii) SJCC and (iv) SJTC (collectively, the “Westmoreland San Juan Entities”). Obligations under the
San Juan Loan
are recourse only to the Westmoreland San Juan Entities and their assets. Neither the Company nor its subsidiaries (other than the Westmoreland San Juan Entities) is an obligor under the
San Juan Loan
in any respect. The agreement governing the
San Juan Loan
requires that all revenues of the Westmoreland San Juan Entities, aside from payments on certain leases, are deposited into a cash management collection account swept monthly for operating expenses, capital expenditures, and loan payment and prepayment. The assets and credit of SJCC are not available to satisfy the debts and other obligations of the Company other than those of the Westmoreland San Juan Entities.
WMLP Term Loan
Pursuant to the financing agreement, dated as of December 31, 2014, by and among Oxford Mining Company, LLC, WMLP and each of its subsidiaries, lenders from time to time party thereto, and U.S. Bank National Association, as administrative agent, the term loan of WMLP (“
WMLP Term Loan
”) matures on December 31, 2018 and pays interest on a quarterly basis at a variable rate equal to the 3-month LIBOR rate at each period end (
1.30%
at
June 30, 2017
), or floor of
0.75%
, plus
8.50%
or the reference rate as defined in the financing agreement. As of
June 30, 2017
, the cash interest rate is
9.80%
. The
WMLP Term Loan
is a primary obligation of Oxford Mining Company, LLC, a wholly owned subsidiary of WMLP, is guaranteed by WMLP and its subsidiaries, and is secured by substantially all of WMLP’s and its subsidiaries’ assets.
The
WMLP Term Loan
also provides for Paid-In-Kind Interest (“PIK Interest”) at a variable rate between
1.00%
and
3.00%
based on our consolidated total net leverage ratio as defined in the financing agreement. The rate of PIK Interest is determined on a quarterly basis with the PIK Interest added quarterly to the then-outstanding principal amount of the
WMLP Term Loan
under the financing agreement. PIK Interest under the financing agreement was
$4.6 million
for the
six months ended June 30, 2017
. The outstanding
WMLP Term Loan
amount represents the principal balance of
$288.9 million
, plus PIK Interest of
$20.7 million
.
The
WMLP Term Loan
financing agreement permits cash distributions, in an aggregate amount not to exceed
$15.0 million
, if WMLP does not meet the following requirements (“Restricted Distributions”): (i) consolidated total net leverage ratio of greater than
3.75
or fixed charge coverage ratio of less than
1.00
(as such ratios are defined in the
WMLP Term Loan
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
financing agreement) and (ii) liquidity of greater than
$7.5 million
, after giving effect to such cash distribution and applying its availability under the
WMLP Revolver
, as defined below. As of
June 30, 2017
, WMLP's consolidated total net leverage ratio is in excess of
3.75
, its fixed charge coverage ratio is below
1.00
and WMLP has made
$14.6 million
in Restricted Distributions.
As of
June 30, 2017
, WMLP has distributed
$14.6 million
in cash that counts toward the
$15.0 million
in aggregate Restricted Distribution payments. On July 28, 2017, WMLP announced a quarterly cash distribution for the quarter ended
June 30, 2017
, of
$0.1333
per limited partner common unit, general partner unit and warrant with distribution rights and a distribution of Series A PIK Units in lieu of a cash distribution for holders of Series A Convertible Units (“Second Quarter Distribution”). The Second Quarter Distribution, totaling cash of approximately
$0.2 million
, will be paid on August 14, 2017 to all holders of record as of August 7, 2017. The Second Quarter Distribution will bring the aggregate permitted Restricted Distributions total to
$14.8 million
at that time. If WMLP is unable to either refinance or modify the
WMLP Term Loan
or meet the required ratios noted above, it is only permitted to make
$0.2 million
in additional Restricted Distributions, including any cash distributions to WCC, subsequent to payment of the Second Quarter Distribution.
Revolver
Pursuant to the second amended and restated loan and security agreement, dated as of December 16, 2014, by and among the Company and certain of its subsidiaries, lenders party thereto, and The PrivateBank and Trust Company, as administrative agent (the “
Revolver
”), the Company’s
Revolver
has a total aggregate borrowing capacity of
$60.0 million
between June 15th and August 31st of each year, with an aggregate borrowing capacity of
$50.0 million
outside of these periods subject to borrowing base calculations as defined in the agreement. The availability of the
Revolver
consists of a
$30.0 million
sub-facility (
$35.0 million
with the seasonal increase) available to our U.S. borrowers and a
$20.0 million
sub-facility (
$25.0 million
with the seasonal increase) available to our Canadian borrowers. The
Revolver
may support an equal amount of letters of credit, with outstanding letter of credit balances reducing availability under the
Revolver
. At
June 30, 2017
, availability on the
Revolver
was
$27.0 million
which reflects
$9.9 million
in outstanding letters of credit and
$23.1 million
in borrowing base restrictions. We had
no
borrowings on the
Revolver
. The
Revolver
has a maturity date of
December 31, 2018
.
On May 9, 2017, the Company executed a tenth amendment to our Revolver (“Tenth Amendment”). The Tenth Amendment adjusted the fixed charge coverage ratio calculation by further modifying the treatment of the accelerated repayment of the loan and lease receivable arrangement at our Genesee mine from March 24, 2017, and removing certain testing periods from the U.S. and Canadian fixed charge coverage ratio calculation so long as the Company meets certain liquidity requirements.
WMLP Revolver
Pursuant to the loan and security agreement, dated as of October 23, 2015, by and among WMLP and its subsidiaries, lenders party thereto, and The PrivateBank and Trust Company, as administrative agent (the “
WMLP Revolver
”), the WMLP Revolver permits WMLP to borrow up to the aggregate principal amount of
$15.0 million
subject to borrowing base restrictions as defined in the agreement. The
WMLP Revolver
also allows letters of credit in an aggregate outstanding amount of up to
$10.0 million
, which reduces availability under the
WMLP Revolver
on a dollar-for-dollar basis. At
June 30, 2017
, availability under the
WMLP Revolver
was
$15.0 million
. The
WMLP Revolver
has a maturity date of December 31, 2017.
Capital lease obligations
The Company engages in leasing transactions for equipment utilized in its mining operations. During the
six months ended June 30, 2017
, the Company entered into
$0.5 million
of new capital leases.
7. POSTRETIREMENT MEDICAL BENEFITS AND PENSION
Postretirement Medical Benefits
The Company provides postretirement medical benefits to retired employees and their dependents as mandated by the Coal Industry Retiree Health Benefit Act of 1992 and pursuant to collective bargaining agreements. The Company also provides these benefits to qualified full-time employees pursuant to collective bargaining agreements.
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
The components of net periodic postretirement medical benefit cost are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(In thousands)
|
Components of net periodic benefit cost:
|
|
|
|
|
|
|
|
Service cost
|
$
|
794
|
|
|
$
|
809
|
|
|
$
|
1,587
|
|
|
$
|
1,744
|
|
Interest cost
|
3,196
|
|
|
3,091
|
|
|
6,393
|
|
|
6,202
|
|
Amortization of deferred items
|
965
|
|
|
323
|
|
|
1,929
|
|
|
523
|
|
Total net periodic benefit cost
|
$
|
4,955
|
|
|
$
|
4,223
|
|
|
$
|
9,909
|
|
|
$
|
8,469
|
|
The following table shows the net periodic postretirement medical benefit costs that relate to current and former mining operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(In thousands)
|
Former mining operations
|
$
|
2,306
|
|
|
$
|
2,135
|
|
|
$
|
4,611
|
|
|
$
|
4,270
|
|
Current operations
|
2,649
|
|
|
2,088
|
|
|
5,298
|
|
|
4,199
|
|
Total net periodic benefit cost
|
$
|
4,955
|
|
|
$
|
4,223
|
|
|
$
|
9,909
|
|
|
$
|
8,469
|
|
The costs for the former mining operations are included in
Heritage health benefit expenses
and costs for current operations are included in
Cost of sales
and
Selling and administrative
expenses.
Pension
The Company provides pension benefits to qualified full-time employees pursuant to collective bargaining agreements. The Company incurred net periodic benefit costs of providing these pension benefits as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(In thousands)
|
Components of net periodic benefit cost:
|
|
|
|
|
|
|
|
Service cost
|
$
|
378
|
|
|
$
|
260
|
|
|
$
|
785
|
|
|
$
|
868
|
|
Interest cost
|
2,630
|
|
|
3,075
|
|
|
5,260
|
|
|
5,362
|
|
Expected return on plan assets
|
(3,648
|
)
|
|
(3,812
|
)
|
|
(7,275
|
)
|
|
(7,043
|
)
|
Settlements
|
269
|
|
|
—
|
|
|
269
|
|
|
—
|
|
Amortization of deferred items
|
583
|
|
|
1,772
|
|
|
1,177
|
|
|
2,345
|
|
Total net periodic pension cost
|
$
|
212
|
|
|
$
|
1,295
|
|
|
$
|
216
|
|
|
$
|
1,532
|
|
These costs are included in
Cost of sales
and
Selling and administrative
expenses. The Company made
$0.2 million
and
$0.4 million
of contributions to its pension plans in the
six months ended June 30, 2017
and
2016
, respectively. The Company expects to make
$1.0 million
of contributions to its pension plans during the remainder of
2017
.
8. DERIVATIVE INSTRUMENTS
Derivative Assets and Liabilities
The Company evaluates all of its financial instruments to determine if such instruments are derivatives, derivatives that qualify for the normal purchase normal sale exception, or contain features that qualify as embedded derivatives. All derivative financial instruments, except for derivatives that qualify for the normal purchase normal sale exception, are recognized on the balance sheet at fair value. Changes in fair value are recognized in earnings if they are not eligible for hedge accounting or in other comprehensive income if they qualify for cash flow hedge accounting.
The Company has power purchase contracts at its Roanoke Valley Power Facility (“ROVA”) to manage exposure to power price fluctuations. These contracts cover the period from April 2014 to March 2019 and contracted power prices range
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
from
$41.05
to
$55.20
per megawatt hour, with a weighted average contract price of
$44.15
over the remaining contract lives. The contracts are not designated as hedging instruments, and accordingly their fair value is recognized on the Consolidated Balance Sheets, with changes in fair value recognized in the Consolidated Statements of Operations. Fair value is based on a comparison of contracted prices to projected future market prices which are Level 2 inputs based on the hierarchy defined below, please see
Note 9 - Fair Value Measurements
.
During the fourth quarter of 2016, the Company entered into a Substitute Energy Purchase Agreement (the “SEP Agreement”) which amends our previous power purchase and operating agreement with our customer. The SEP Agreement, which covers the period from March 1, 2017 to March 31, 2019, enables us to fulfill our obligations under the contract without physically operating the facility. The SEP Agreement calls for fixed payments ranging from
$21.33
to
$24.32
(representing a weighted average price of
$23.84
per megawatt hour) while optional power deliveries are
$15.26
per megawatt hour. The SEP Agreement meets the definition of a derivative and it does not qualify for the normal purchases and normal sales scope exception. This contract is not designated as a hedging instrument, therefore, its fair value is recognized on the Consolidated Balance Sheets and changes in fair value recognized in the Consolidated Statements of Operations. As the underlying power deliveries option is significantly in the money, the fair value of this derivative is based on comparing expected contracted cash inflows per the SEP Agreement to expected future outflows based on projected market prices.
The fair value of outstanding derivative instruments not designated as hedging instruments on the accompanying unaudited Consolidated Balance Sheets was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Instruments
|
|
Balance Sheet Location
|
|
June 30, 2017
|
|
December 31, 2016
|
Contracts to purchase power
|
|
Other current liabilities
|
|
$
|
19,015
|
|
|
$
|
13,382
|
|
Contracts to purchase power
|
|
Other liabilities
|
|
15,994
|
|
|
18,384
|
|
Contract to sell power
|
|
Other current assets
|
|
14,090
|
|
|
10,240
|
|
Contract to sell power
|
|
Other assets
|
|
10,763
|
|
|
9,528
|
|
The effect of derivative instruments not designated as hedging instruments on the accompanying unaudited Consolidated Statements of Operations was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
Derivative Instruments
|
|
Statements of Operations Location
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Contracts to purchase power
|
|
Derivative (gain) loss
|
|
$
|
2,026
|
|
|
$
|
(5,878
|
)
|
|
$
|
3,242
|
|
|
$
|
(3,278
|
)
|
Contract to sell power
|
|
Derivative (gain) loss
|
|
(1,545
|
)
|
|
—
|
|
|
(5,146
|
)
|
|
—
|
|
|
|
|
|
$
|
481
|
|
|
$
|
(5,878
|
)
|
|
$
|
(1,904
|
)
|
|
$
|
(3,278
|
)
|
9. FAIR VALUE MEASUREMENTS
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy, as defined below, gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. For other fair value disclosures, see also
Note 5 - Restricted Investments And Bond Collateral
and
Note 8 - Derivative Instruments
to the consolidated financial statements (unaudited).
|
|
•
|
Level 1, defined as observable inputs such as quoted prices in active markets for identical assets.
|
|
|
•
|
Level 2, defined as observable inputs other than Level 1 prices. These include quoted prices for similar assets or liabilities in an active market, quoted prices for identical assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
|
|
|
•
|
Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
|
The table below sets forth, by level, the Company’s financial assets and liabilities that are accounted for at fair value at
June 30, 2017
:
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in Active Markets
for Identical Assets or Liabilities
|
|
Significant Other Observable Inputs
|
|
Fair Value
|
|
Level 1
|
|
Level 2
|
(In thousands)
|
Assets:
|
|
|
|
|
|
Contract to sell power included in Other current assets and Other assets
|
$
|
24,853
|
|
|
$
|
—
|
|
|
$
|
24,853
|
|
Available-for-sale investments included in Restricted investments and bond collateral
|
79,557
|
|
|
79,557
|
|
|
—
|
|
Available-for-sale investments included in Reclamation deposits
|
72,077
|
|
|
72,077
|
|
|
—
|
|
|
$
|
176,487
|
|
|
$
|
151,634
|
|
|
$
|
24,853
|
|
Liabilities:
|
|
|
|
|
|
Contracts to purchase power included in Other current liabilities and Other liabilities
|
$
|
35,009
|
|
|
$
|
—
|
|
|
$
|
35,009
|
|
Warrants issued by WMLP included in Other liabilities
|
245
|
|
|
245
|
|
|
—
|
|
|
$
|
35,254
|
|
|
$
|
245
|
|
|
$
|
35,009
|
|
Long-term debt fair value estimates are based on observed prices for securities with an active trading market when available (Level 2) and otherwise using discount rate estimates based on interest rates (Level 3). As of
June 30, 2017
, the Company valued the
WMLP Term Loan
and the
San Juan Loan
with Level 3 fair values. The estimated fair values of the Company’s debt with fixed and variable interest rates are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Interest Rate
|
|
Variable Interest Rate
|
|
Carrying Value
|
|
Fair Value
|
|
Carrying Value
|
|
Fair Value
|
|
(In thousands)
|
|
(In thousands)
|
June 30, 2017
|
$
|
389,139
|
|
|
$
|
361,818
|
|
|
$
|
686,423
|
|
|
$
|
628,105
|
|
December 31, 2016
|
409,362
|
|
|
395,274
|
|
|
699,704
|
|
|
658,557
|
|
10. INCOME TAX
For interim income tax reporting the Company estimates its annual effective tax rate and applies this effective tax rate to its year-to-date pre-tax (loss) income. For the
six months ended June 30, 2016
, the effective tax rate differed from the statutory rate primarily as a result of the U.S. and Canadian valuation allowances and the impact of the statutory rate change in Alberta, Canada. For the
six months ended June 30, 2017
, the effective tax rate differed from the statutory rate primarily due to the U.S. and Canadian valuation allowances.
As part of the San Juan Acquisition during the
six months ended June 30, 2016
, the Company acquired
$47.6 million
in deferred tax liabilities. Changes in the acquiring company’s deferred tax assets or liabilities subsequent to a business combination are required to be recorded in income during the quarter in which the transaction occurs. Accordingly, the
$47.6 million
decrease in the Company’s net deferred tax assets resulted in the release of a corresponding
$47.6 million
valuation allowance and recognition of a tax benefit in the
six months ended June 30, 2016
.
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
11. STOCKHOLDERS’ DEFICIT AND ACCUMULATED OTHER COMPREHENSIVE LOSS
Changes in Accumulated Other Comprehensive Loss
The following table reflects the changes in accumulated other comprehensive loss by component:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
Postretirement medical benefits
|
|
Unrealized gains and losses on
available-for-sale securities, net
|
|
Foreign currency translation adjustment
|
|
Tax effect of other comprehensive income gains
|
|
Accumulated other
comprehensive income (loss)
|
|
(In thousands)
|
Balance at December 31, 2016
|
$
|
(26,123
|
)
|
|
$
|
(51,893
|
)
|
|
$
|
(1,674
|
)
|
|
$
|
(61,073
|
)
|
|
$
|
(38,309
|
)
|
|
$
|
(179,072
|
)
|
Other comprehensive income (loss) before reclassifications
|
301
|
|
|
—
|
|
|
902
|
|
|
8,029
|
|
|
(1,819
|
)
|
|
7,413
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
1,177
|
|
|
1,929
|
|
|
294
|
|
|
—
|
|
|
—
|
|
|
3,400
|
|
Balance at June 30, 2017
|
$
|
(24,645
|
)
|
|
$
|
(49,964
|
)
|
|
$
|
(478
|
)
|
|
$
|
(53,044
|
)
|
|
$
|
(40,128
|
)
|
|
$
|
(168,259
|
)
|
The following table reflects the reclassifications out of accumulated other comprehensive loss for the
three and six months ended
June 30, 2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
Details about accumulated other comprehensive loss components
|
Amount reclassified from accumulated other comprehensive loss
|
|
Affected line items in the statements where presented
|
Three Months Ended June 30, 2017
|
|
Six Months Ended June 30, 2017
|
|
Available-for-sale securities
|
|
|
|
|
|
Realized (gains) and losses on available-for-sale securities
|
$
|
166
|
|
|
$
|
294
|
|
|
Other income
|
|
|
|
|
|
|
Amortization of defined benefit pension items
|
|
|
|
|
|
Prior service costs
|
$
|
2
|
|
|
$
|
4
|
|
|
Cost of sales and Selling and administrative
|
Actuarial losses
|
581
|
|
|
1,173
|
|
|
Cost of sales and Selling and administrative
|
Total
|
$
|
583
|
|
|
$
|
1,177
|
|
|
|
Amortization of postretirement medical items
|
|
|
|
|
|
Prior service costs
|
$
|
(159
|
)
|
|
$
|
(318
|
)
|
|
Cost of sales and Selling and administrative
|
Actuarial losses
|
1,124
|
|
|
2,247
|
|
|
Cost of sales and Selling and administrative
|
Total
|
$
|
965
|
|
|
$
|
1,929
|
|
|
|
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
12. SHARE-BASED COMPENSATION
The Company grants employees and non-employee directors restricted stock units. The Company recognized compensation expense from share-based arrangements shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(In thousands)
|
Recognition of value of restricted stock units and cash units over vesting period; and issuance of stock
|
$
|
1,133
|
|
|
$
|
1,230
|
|
|
$
|
2,480
|
|
|
$
|
2,342
|
|
Contributions of stock to the Company’s 401(k) plan
|
—
|
|
|
726
|
|
|
—
|
|
|
2,192
|
|
Total share-based compensation expense
|
$
|
1,133
|
|
|
$
|
1,956
|
|
|
$
|
2,480
|
|
|
$
|
4,534
|
|
2017 Grant
During the
six months ended June 30, 2017
, the Company granted the following stock-based awards under the Amended and Restated 2014 Equity Incentive Plan:
|
|
•
|
713,238
restricted stock units, of which
338,968
vest based on a service condition,
187,135
vest based on a service and market condition, and
187,135
vest based on a service and performance condition.
|
|
|
•
|
365,444
cash units (“the Cash Units”), which represent the right to cash equal to the closing price of WCC common stock as of the vesting date, of which
157,880
vest based on a service condition,
103,782
vest based on a service and market condition, and
103,782
vest based on a service and performance condition.
|
Restricted Stock Units
Unamortized compensation expense is expected to be recognized over the next
three
years. A summary of outstanding restricted stock units as of
June 30, 2017
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Units
|
|
Weighted Average Grant-Date Fair Value
|
|
Unamortized Compensation Expense (In thousands)
|
Non-vested at December 31, 2016
|
700,500
|
|
|
$
|
15.91
|
|
|
|
Granted
|
713,238
|
|
|
3.94
|
|
|
|
Vested
|
(244,046
|
)
|
|
18.40
|
|
|
|
Forfeited
|
(10,343
|
)
|
|
12.62
|
|
|
|
Non-vested at June 30, 2017
|
1,159,349
|
|
|
$
|
8.76
|
|
|
$
|
6,096
|
|
Cash Units
The compensation expense related to the Cash Units was
$0.2 million
and
$0.1 million
for the
six months ended June 30, 2017
and
2016
, respectively. Because the cash units are settled in cash they are accounted for as a liability award. The accrued liability related to the Cash Units was
$0.1 million
and
$0.3 million
as of
June 30, 2017
and
December 31, 2016
, respectively.
Other Plans
In May 2016, the Company discontinued matching employees’ 401k contributions with common shares and elected instead to match with cash contributions. During 2016, the Company contributed
342,353
common shares to match employees’ contributions to their 401k plans.
342,353
13. EARNINGS PER SHARE
Basic earnings (loss) per share has been computed by dividing the net income (loss) applicable to common shareholders by the weighted average number of shares of common stock outstanding during each period. Net income (loss) applicable to common shareholders includes the adjustment for net income or loss attributable to noncontrolling interest. Diluted earnings (loss) per share is computed by including the dilutive effect of common stock that would be issued assuming conversion or exercise of outstanding stock options and and restricted stock units. No such items were included in the
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
computations of diluted loss per share in the
three and six months ended
June 30, 2017
and in the
three and six months ended
June 30, 2016
because the Company incurred a net loss applicable to common shareholders in these periods and the effect of inclusion would have been anti-dilutive.
The table below shows the number of shares that were excluded from the calculation of diluted loss per share because their inclusion would be anti-dilutive to the calculation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(In thousands)
|
Restricted stock units and stock options
|
1,238
|
|
|
849
|
|
|
1,238
|
|
|
849
|
|
14. SEGMENT INFORMATION
Segment information is based on a management approach which requires segmentation based upon the Company’s internal organization, reporting of revenues and operating income (loss). The Company’s operations are classified into
six
reporting segments: Coal - U.S., Coal - Canada, Coal - WMLP, Power, Heritage, and Corporate. For a detailed description of the Company’s operations segmentation please see our 2016 Form 10-K. Summarized financial information by segment is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Coal - U.S.
(1)
|
|
Coal - Canada
|
|
Coal - WMLP
(2)
|
|
Power
|
|
Heritage
|
|
Corporate
(2)
|
|
Consolidated
|
|
(In thousands)
|
Three Months Ended June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
141,037
|
|
|
$
|
89,349
|
|
|
$
|
81,052
|
|
|
$
|
19,880
|
|
|
$
|
—
|
|
|
$
|
(8,293
|
)
|
|
$
|
323,025
|
|
Depreciation, depletion, and amortization
|
22,644
|
|
|
6,782
|
|
|
10,111
|
|
|
—
|
|
|
—
|
|
|
(40
|
)
|
|
39,497
|
|
Operating income (loss)
|
(6,623
|
)
|
|
(11,735
|
)
|
|
7,588
|
|
|
(383
|
)
|
|
(3,786
|
)
|
|
(6,128
|
)
|
|
(21,067
|
)
|
Total assets
|
571,755
|
|
|
433,889
|
|
|
370,936
|
|
|
64,269
|
|
|
16,699
|
|
|
1,923
|
|
|
1,459,471
|
|
Capital expenditures
|
1,961
|
|
|
1,956
|
|
|
1,977
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,894
|
|
Three Months Ended June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
152,519
|
|
|
$
|
109,328
|
|
|
$
|
80,468
|
|
|
$
|
21,944
|
|
|
$
|
—
|
|
|
$
|
(6,662
|
)
|
|
$
|
357,597
|
|
Depreciation, depletion, and amortization
|
13,741
|
|
|
6,971
|
|
|
14,547
|
|
|
—
|
|
|
—
|
|
|
(36
|
)
|
|
35,223
|
|
Operating income (loss)
|
588
|
|
|
3,590
|
|
|
(4,282
|
)
|
|
6,731
|
|
|
(3,518
|
)
|
|
(3,992
|
)
|
|
(883
|
)
|
Total assets
|
676,709
|
|
|
504,686
|
|
|
397,865
|
|
|
41,819
|
|
|
16,468
|
|
|
(1,520
|
)
|
|
1,636,027
|
|
Capital expenditures
|
4,559
|
|
|
1,139
|
|
|
985
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6,683
|
|
Six Months Ended June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
278,405
|
|
|
$
|
198,364
|
|
|
$
|
155,857
|
|
|
$
|
41,107
|
|
|
$
|
—
|
|
|
$
|
(10,971
|
)
|
|
$
|
662,762
|
|
Depreciation, depletion, and amortization
|
38,643
|
|
|
17,036
|
|
|
20,461
|
|
|
—
|
|
|
—
|
|
|
(76
|
)
|
|
76,064
|
|
Operating income (loss)
|
(2,287
|
)
|
|
(18,839
|
)
|
|
8,870
|
|
|
(1,136
|
)
|
|
(7,456
|
)
|
|
(11,306
|
)
|
|
(32,154
|
)
|
Total assets
|
571,755
|
|
|
433,889
|
|
|
370,936
|
|
|
64,269
|
|
|
16,699
|
|
|
1,923
|
|
|
1,459,471
|
|
Capital expenditures
|
3,856
|
|
|
4,050
|
|
|
5,198
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
13,104
|
|
Six Months Ended June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
308,508
|
|
|
$
|
203,084
|
|
|
$
|
172,949
|
|
|
$
|
43,940
|
|
|
$
|
—
|
|
|
$
|
(15,030
|
)
|
|
$
|
713,451
|
|
Depreciation, depletion, and amortization
|
29,692
|
|
|
12,799
|
|
|
29,812
|
|
|
—
|
|
|
—
|
|
|
(66
|
)
|
|
72,237
|
|
Operating income (loss)
|
8,254
|
|
|
15,693
|
|
|
(3,473
|
)
|
|
931
|
|
|
(6,999
|
)
|
|
(7,670
|
)
|
|
6,736
|
|
Total assets
|
676,709
|
|
|
504,686
|
|
|
397,865
|
|
|
41,819
|
|
|
16,468
|
|
|
(1,520
|
)
|
|
1,636,027
|
|
Capital expenditures
|
7,214
|
|
|
2,488
|
|
|
2,529
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
12,231
|
|
____________________
|
|
(1)
|
T
he San Juan Acquisition was completed on January 31, 2016. For the three and six months ended June 30, 2016, revenues for the Westmoreland San Juan Entities were
$50.0 million
and
$76.7 million
, respectively, and operating income was
$3.5 million
and $
5.0 million
respectively.
|
|
|
(2)
|
The Coal - WMLP segment recorded revenues of
$8.3 million
and
$11.0 million
for intersegment revenues to the Coal - U.S. segment for the
three and six months ended
June 30, 2017
, respectively, and
$6.7 million
and
$15.0 million
for the
three and six months ended
June 30, 2016
, respectively. Eliminations for intersegment revenues and cost of sales are presented within the Corporate segment.
|
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
15. CONTINGENCIES
Litigation
There have been no material changes in our litigation since
December 31, 2016
. For additional information, refer to
Note 20. Commitments and Contingencie
s to the consolidated financial statements of our
2016
Form 10-K.
A loss contingency for the 2013 breach of a water containment pond at our Obed mine in Canada remains probable and reasonably estimable. The previous owner, Sherritt International Corporation, continues to fully indemnify us for the actual cost of the remediation as well as the costs of compliance with any regulatory orders, including any fees, fines, or judgments resulting from the water release. As of
June 30, 2017
, the Company has recorded
$3.9 million
in
Other current liabilities
for the estimated costs of remediation work and a corresponding amount in
Receivables - Other
to reflect the indemnification by the prior owner.
16. SUBSEQUENT EVENTS
On August 2, 2017 we entered into a definitive agreement to sell all of the assets that comprise ROVA for
$5.0 million
in cash. We will retain the related
$2.7 million
reclamation liability. We remain committed to providing a contracted level of energy through 2019 via power purchase contracts.
The Company has evaluated subsequent events in accordance with ASC 855, Subsequent Events, through the filing date of this Quarterly Report, and determined that no events have occurred that have not been disclosed elsewhere in the
Notes to the Consolidated Financial Statements (Unaudited)
that would require adjustments to disclosures in the consolidated financial statements (unaudited).
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
MANAGEMENT
’
S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ITEM 2
—
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report and materials we have filed or will file with the Securities and Exchange Commission (as well as information included in our other written or oral statements) contain or will contain certain statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on our expectations and assumptions at the time they are made and are not guarantees of future performance. Because forward looking statements relate to the future, they involve certain risks, uncertainties and assumptions that are difficult to predict. Actual outcomes and results may differ materially from those expressed in, or implied by, our forward-looking statements. Words such as “expects,” “intends,” “anticipates,” “believes,” “estimates,” “guides,” “provides guidance,” “provides outlook” and other similar expressions or future or conditional verbs such as “may,” “will,” “should,” “would,” “could,” and “might” are intended to identify such forward-looking statements. Readers of this Quarterly Report should not rely solely on the forward-looking statements and should consider all uncertainties and risks discussed in the “Risk Factors” section and throughout the Quarterly Report. The statements are only as of the date they are made, and the Company undertakes no obligation to update any forward-looking statement. Possible events or factors that could cause results or performance to differ materially from those expressed in our forward-looking statements include but are not limited to the following:
|
|
•
|
The effect of legal and administrative proceedings, settlements, investigations and claims, including any related to citations and orders issued by regulatory authorities, and the availability of related insurance coverage;
|
|
|
•
|
Existing and future legislation and regulation affecting both our coal mining operations and our customers’ coal usage, governmental policies and taxes, including those aimed at reducing emissions of elements such as mercury, sulfur dioxides, nitrogen oxides, particulate matter or greenhouse gases;
|
|
|
•
|
The effect of the Environmental Protection Agency’s and Canadian and provincial governments’ inquiries and regulations on the operations of the power plants to which we provide coal;
|
|
|
•
|
Alberta’s Climate Leadership Plan to phase out coal-fired electricity generation by 2030;
|
|
|
•
|
Our substantial level of indebtedness and our ability to adhere to financial covenants related to our borrowing arrangements;
|
|
|
•
|
Changes in our post-retirement medical benefit and pension obligations and the impact of the recently enacted healthcare legislation on our employee health benefit costs;
|
|
|
•
|
Inaccuracies in our estimates of our coal reserves;
|
|
|
•
|
Our potential inability to expand or continue current coal operations due to limitations in obtaining bonding capacity for new mining permits, and/or increases in our mining costs as a result of increased bonding expenses;
|
|
|
•
|
The effect of prolonged maintenance or unplanned outages at our operations or those of our major power generating customers;
|
|
|
•
|
The inability to control costs, recognize favorable tax credits and/or receive adequate train traffic at our open market mine operations;
|
|
|
•
|
The ability or inability of our power hedging arrangements to generate cash.
|
|
|
•
|
Competition within our industry and with producers of competing energy sources;
|
|
|
•
|
Our relationships with, and other conditions affecting, our customers, including how power prices affect our customers’ decision to run their plants;
|
|
|
•
|
Seasonal variations and inclement weather, which may cause fluctuations in our operating results, profitability, cash flow and working capital needs related to our operating segments;
|
|
|
•
|
The availability and costs of key supplies or commodities, such as diesel fuel, steel and explosives;
|
|
|
•
|
Potential title defects or loss of leasehold interests in our properties, which could result in unanticipated costs or an inability to mine the properties;
|
|
|
•
|
Other factors that are described under the heading “Risk Factors” found in our reports filed with the Securities and Exchange Commission, including our Annual Reports on Form 10-K and our Quarterly Reports on Form 10-Q.
|
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
MANAGEMENT
’
S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONT.)
Overview
Westmoreland Coal Company produces and sells thermal coal primarily to investment grade utility customers under long-term, margin-protected contracts. Our focus is primarily on mine locations which allow us to employ dragline surface mining methods and take advantage of close customer proximity through mine-mouth power plants and strategically located rail transportation. Our coal operations include surface coal mines in the United States and Canada, underground coal mines in Ohio and New Mexico, a char production facility, and a 50% interest in an activated carbon plant. We also own the general partner of, and a majority of the equity interests in, WMLP, a publicly-traded coal master limited partnership. Our power operations include two coal-fired power generation units in North Carolina. We classify our business into four operating segments (Coal - U.S., Coal - Canada, Coal - WMLP and Power) and two non-operating segments (Heritage and Corporate). Our Heritage segment primarily includes the costs of benefits we provide to former mining operation employees and our Corporate segment consists primarily of corporate administrative and business development expenses.
We are a holding company and conduct our operations through subsidiaries. We have significant cash requirements to fund our ongoing debt obligations, pension contributions, heritage health benefit costs, and corporate overhead costs. The principal sources of cash flow to us are distributions from our operating subsidiaries.
Recent Trends and Activities
One of the major factors affecting the volume of coal that we sell in any given period is the demand for coal-generated
electric power, as well as the specific demand for coal by our customers. Numerous factors affect the demand for electric power
and the specific demands of customers including weather patterns, the presence of hydro- or wind-generated energy in our
particular energy grids, environmental and legal challenges, political influences, energy policies, international and domestic
economic conditions, power plant outages and other factors discussed herein. More specifically, during the three and six month periods ended June 30, 2017, our financial results were impacted by several trends and activities, which are described below.
|
|
•
|
Weather.
During the first six months of 2017, we experienced unfavorable weather patterns in the markets in which we operate. In particular, the first half of 2017 was generally marked by mild weather, which depressed demand. In addition, during the first quarter, our Kemmerer mine experienced unusually high amounts of precipitation, which increased our mining costs and restricted our ability to supply coal. These factors lowered our coal tons sold and our revenues during the first half of 2017. Some of this decline in revenues, particularly at the Kemmerer mine, was offset in the second quarter by customers seeking to replenish stockpiles, a trend that we believe will continue throughout the year. Weather conditions are inherently unpredictable and could have positive or negative impacts on operating conditions and demand in future periods.
|
|
|
•
|
Coal Pricing.
Our operations in Ohio and at Coal Valley are exposed to changes in the price of coal on the open market. In recent quarters, the price of coal has been volatile and has generally been pressured by reduced demand, political pressures, and the price of competing products, such as natural gas, that are used in energy production. Recent pricing pressure has resulted in depressed revenues, net income and adjusted EBITDA in recent quarters for those facilities affected by open market pricing. Whether pricing and volume softness persist in future periods is dependent upon fluctuations in market demand in the region.
|
|
|
•
|
Cost Reduction Initiatives.
While we always seek to run our business operations as lean and efficiently as possible, since 2016, we have undertaken specific initiatives aimed at centralizing and streamlining certain administrative functions and reducing costs throughout our organization. Cost reduction activities during 2016 resulted in disciplined capital expenditure decisions, lower inventory costs and reduced headcount, among other things. These factors, in turn, have generally lowered operating costs in the 2017 periods as compared to 2016 periods, although we did incur additional costs, including severance-related costs and additional costs resulting from redundancies created during these changes. Cost reduction activities are ongoing.
|
|
|
•
|
Early Repayment of Loan and Lease Receivables.
During the first quarter of 2017, we received $52.5 million from our customer at the Genesee mine, representing an accelerated repayment of all outstanding loan and lease receivables. These loan and lease receivables represented the financed portion of amounts owed to Westmoreland for capital expenditures we had made on behalf of our customer. This payment fully satisfied amounts owed to Westmoreland for loan and lease receivables and Westmoreland is no longer entitled to further payments from these agreements, which generally averaged approximately $3 to $4 million per quarter. We have no further obligation to make capital expenditures at the mine, though we anticipate continuing to provide contract mining services at the Genesee mine through 2030.
|
|
|
•
|
Significant contract renewals and expirations.
In June and December 2016, coal supply agreements at our Beulah and Jewett mines, respectively, terminated, resulting in lower coal tons sold in the subsequent periods. During the quarter ended
June 30, 2017
, our customer at the San Juan mine announced their intent to transition away from coal-generated power in 2022. While their plan still requires official approval, we have adjusted, on a prospective basis, the estimated useful lives of certain property, plant, and equipment at the mine as well as the mine’s mineral reserve depletion rates to reflect the shorter useful lives of these assets. This change in estimate resulted in approximately
$8.3 million
in additional depreciation, depletion, and amortization expense in the second quarter of 2017 compared to the same quarter in 2016, and will continue to result in increased depreciation, depletion, and amortization expense in future periods.
|
|
|
•
|
Coal Valley Operating Challenges.
During the second quarter and first half of 2017, we were mining in a more challenging area at the Coal Valley mine. This was in part because we have been operating Coal Valley anticipating either a sale or shutdown of the mine during 2017, which drove us to minimize the number of mining pits and delay maintenance on our equipment. During the second quarter, in part as a result of delays in the negotiations for the sale of the mine, we made additional investments to extend the life of the mine, which inflated costs for equipment maintenance and development of the pit. This resulted in lower yields, lower revenues, and increased costs during the second quarter and first half of 2017.
|
|
|
•
|
Equipment Outage.
We experienced an unexpected dragline repair at one of our large mines in Canada in the first quarter of 2017, which lowered our production and increased our costs during the first half of 2017.
|
|
|
•
|
Capital Structure Review.
Although we anticipate that our cash from operations, cash on hand and available borrowing capacity will be sufficient to meet our business obligations, we have proactively engaged financial advisors to assess our capital structure. These advisors, together with management and our board of directors, will advise us on options to optimize our overall capital structure and provide greater financial flexibility and liquidity
, particularly in light of upcoming maturities, as described in “Liquidity and Capital Resources.” Costs associated with this process were
$0.9 million
in the second quarter and are estimated to be $7.0 million for the full year 2017.
|
|
|
•
|
Seasonality.
Our financial results are impacted by seasonality caused by weather and customer buying patterns. Customer buying patterns are influenced by many factors, including annual maintenance outages at our customers’ plants, which often occur in the spring, when the demand for power is low. Combined, these factors have historically led to lower adjusted EBITDA for our mine operations in the second quarter and first half of the year.
|
|
|
•
|
ROVA Sale.
Subsequent to the end of the quarter, we entered into a definitive agreement to sell all of the assets that comprise our ROVA for $5 million in cash. After the sale, we will retain the related $2.7 million reclamation liability. We remain committed to providing a contracted level of energy through 2019 via power purchase contracts.
|
Results of Operations
Three Months Ended June 30, 2017
Compared to
Three Months Ended June 30, 2016
Consolidated Results of Operations
The following table shows the comparative consolidated results and changes between periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Increase / (Decrease)
|
|
2017
|
|
2016
|
|
$
|
|
%
|
|
(In thousands, except tons data)
|
Revenues
|
$
|
323,025
|
|
|
$
|
357,597
|
|
|
$
|
(34,572
|
)
|
|
(9.7
|
)%
|
Operating loss
|
(21,067
|
)
|
|
(883
|
)
|
|
(20,184
|
)
|
|
(2,285.8
|
)%
|
Net loss applicable to common shareholders
|
(50,382
|
)
|
|
(28,589
|
)
|
|
(21,793
|
)
|
|
(76.2
|
)%
|
|
|
|
|
|
|
|
|
Tons sold—millions of equivalent tons
|
11.0
|
|
|
12.0
|
|
|
(1.0
|
)
|
|
(8.3
|
)%
|
Adjusted EBITDA
(1)
|
32,566
|
|
|
45,556
|
|
|
(12,990
|
)
|
|
(28.5
|
)%
|
____________________
|
|
(1)
|
Adjusted EBITDA, a non-GAAP measure, is defined and reconciled to net loss at the end of this “Results of Operations” section.
|
Consolidated revenues decreased
$34.6 million
and tons sold declined
8.3%
during the second quarter of 2017 compared with the second quarter of 2016. This decline was driven in part by challenges at our Coal Valley mine as described in "Recent Trends and Activities" above. In addition, revenues were impacted by the Beulah and Jewett contract terminations in
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
MANAGEMENT
’
S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONT.)
2016, the impact on revenue mix from seasonal outages in customer plants, the weather and ongoing demand and pricing softness in Ohio, as described above.
During the second quarter, our operating loss and net loss increased
$20.2 million
and
$21.8 million
, respectively. Offsetting the revenues decline of
$34.6 million
were lower costs resulting from lower tons sold and the impact of cost reduction initiatives, particularly within the Coal - WMLP segment. We also incurred a loss on our derivative of
$0.5 million
in the
three months ended June 30, 2017
compared to a gain of
$5.9 million
for the same period in
2016
.
Consolidated adjusted EBITDA for the second quarter declined
$13.0 million
from the same period in
2016
, driven by the operating loss discussed above, offset by the change in the gain/loss on our derivative, which increased our operating loss but which does not impact adjusted EBITDA. Adjusted EBITDA also included
$2.7 million
in loan and lease receivable collections in the second quarter of 2016, with no such collections in 2017.
Coal - U.S. Segment Operating Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Increase / (Decrease)
|
|
2017
|
|
2016
|
|
$
|
|
%
|
|
(In thousands, except tons data)
|
Revenues
|
$
|
141,037
|
|
|
$
|
152,519
|
|
|
$
|
(11,482
|
)
|
|
(7.5
|
)%
|
Operating (loss) income
|
(6,623
|
)
|
|
588
|
|
|
(7,211
|
)
|
|
*
|
|
Adjusted EBITDA
(1)
|
23,656
|
|
|
20,848
|
|
|
2,808
|
|
|
13.5
|
%
|
Tons sold—millions of equivalent tons
|
4.0
|
|
|
4.7
|
|
|
(0.7
|
)
|
|
(14.9
|
)%
|
____________________
|
|
(1)
|
Adjusted EBITDA, a non-GAAP measure, is defined and reconciled to net loss at the end of this “Results of Operations” section.
|
* Not meaningful
Revenues for the Coal - U.S. segment declined
7.5%
during the second quarter of 2017 compared to the same quarter in 2016 primarily as a result of the expiration of coal supply agreements at the Jewett and Beulah mines. These declines were offset by increased revenues from our San Juan mine.
The segment incurred a
$6.6 million
operating loss in the quarter compared to
$0.6 million
in operating income in the same period in
2016
. The increase in operating loss resulted from
$8.3 million
in additional depreciation, depletion, and amortization expense arising from the change in depreciable lives and depletion rates at our San Juan mine. This increase in expense was offset by the segment-wide impact of the cost reduction initiatives discussed in the “Recent Trends and Activities” section as well as higher operating income at our Jewett mine due to the high margin nature of the reclamation work performed subsequent to the December 31, 2016 termination of the coal supply agreement.
Adjusted EBITDA increased
$2.8 million
during the second quarter compared with the same quarter in 2016. This increase was driven by the segment wide impact of our cost reduction initiatives as well as the high margin reclamation work performed at our Jewett mine in 2017. Adjusted EBITDA improved despite increased operating losses largely because the increased operating losses were driven by increased depreciation, depletion and amortization expense as described above, which does not impact adjusted EBITDA.
Coal - Canada Segment Operating Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Increase / (Decrease)
|
|
2017
|
|
2016
|
|
$
|
|
%
|
|
(In thousands, except tons data)
|
Revenues
|
$
|
89,349
|
|
|
$
|
109,328
|
|
|
$
|
(19,979
|
)
|
|
(18.3
|
)%
|
Operating (loss) income
|
(11,735
|
)
|
|
3,590
|
|
|
(15,325
|
)
|
|
*
|
|
Adjusted EBITDA
(1)
|
(1,598
|
)
|
|
14,342
|
|
|
(15,940
|
)
|
|
*
|
|
Tons sold—millions of equivalent tons
|
5.2
|
|
|
5.6
|
|
|
(0.4
|
)
|
|
(7.1
|
)%
|
____________________
|
|
(1)
|
Adjusted EBITDA, a non-GAAP measure, is defined and reconciled to net loss at the end of this “Results of Operations” section.
|
* Not meaningful
Revenues for the Coal - Canada segment declined
$20.0 million
compared with the same period in 2016. Coal tons sold during the second quarter of 2017 were
7.1%
lower than in the same period of 2016. This decline was driven by operating challenges at the Coal Valley mine, as described under “Recent Trends and Activities,” which resulted in lower revenues from
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
MANAGEMENT
’
S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONT.)
fewer coal tons sold, offset by pricing improvements. We also experienced a customer plant outage at Poplar River in the second quarter of 2017 that did not occur during the same quarter in 2016 which further lowered coal tons sold. These declines were offset by volume increases at our Estevan mine.
The segment incurred an operating loss of
$11.7 million
compared to operating income of
$3.6 million
in the prior year, which was driven by the revenue decreases described above as well as increased costs related to equipment maintenance and development of the pit at Coal Valley.
Adjusted EBITDA for the second quarter declined
$15.9 million
during the second quarter of 2017 compared to the same period in 2016, driven by greater operating losses as well as
$2.7 million
in customer payments received from loan and lease receivables in 2016 which did not recur in 2017 as a result of the early repayment discussed in “Recent Trends and Activities.”
Coal - WMLP Segment Operating Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Increase / (Decrease)
|
|
2017
|
|
2016
|
|
$
|
|
%
|
|
(In thousands, except tons data)
|
Revenues
|
$
|
81,052
|
|
|
$
|
80,468
|
|
|
$
|
584
|
|
|
0.7
|
%
|
Operating income (loss)
|
7,588
|
|
|
(4,282
|
)
|
|
11,870
|
|
|
*
|
|
Adjusted EBITDA
(1)
|
18,854
|
|
|
16,303
|
|
|
2,551
|
|
|
15.6
|
%
|
Tons sold—millions of equivalent tons
|
1.9
|
|
|
1.7
|
|
|
0.2
|
|
|
11.8
|
%
|
____________________
|
|
(1)
|
Adjusted EBITDA, a non-GAAP measure, is defined and reconciled to net loss at the end of this “Results of Operations” section.
|
* Not meaningful
Revenues for the Coal - WMLP segment increased
0.7%
and coal tons sold increased
11.8%
in the 2017 second quarter compared with the same quarter in 2016. These increases were driven by increased sales volumes from the Kemmerer mine as customers sought to replenish stockpiles after weather-related delays in coal deliveries during the first quarter of 2017. This increase was offset by pressured volumes and pricing in our Ohio market.
Operating income increased to
$7.6 million
in the second quarter of 2017 compared to an operating loss of
$4.3 million
in the second quarter of 2016. This improvement was driven by higher sales, the impact of cost reduction activities, and lower depreciation, depletion and amortization expense resulting from a smaller and aging fleet at our Ohio operations. In addition, during the second quarter of 2016, the Coal - WMLP segment incurred a $4.2 million impairment charge related to the write-down of excess equipment, where no such charge was incurred in the 2017 period.
Adjusted EBITDA increased to
$18.9 million
compared to
$16.3 million
in the three months ended June 30, 2017 and 2016, respectively, driven by increased sales volume and the impact of cost reduction efforts, as discussed previously. The increase in operating income was greater than the increase in adjusted EBITDA because factors such as lower impairment charges and depreciation, depletion, and amortization expense improved operating income but have no impact on adjusted EBITDA.
Power Segment Operating Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Increase / (Decrease)
|
|
2017
|
|
2016
|
|
$
|
|
%
|
|
(In thousands)
|
Revenues
|
$
|
19,880
|
|
|
$
|
21,944
|
|
|
$
|
(2,064
|
)
|
|
(9.4
|
)%
|
Operating (loss) income
|
(383
|
)
|
|
6,731
|
|
|
(7,114
|
)
|
|
*
|
|
Adjusted EBITDA
(1)
|
(141
|
)
|
|
614
|
|
|
(755
|
)
|
|
*
|
|
____________________
|
|
(1)
|
Adjusted EBITDA, a non-GAAP measure, is defined and reconciled to net loss at the end of this “Results of Operations” section.
|
* Not meaningful
Second quarter revenues for the Power segment declined
$2.1 million
in 2017 compared with the same period in 2016 due to the amendment to the pricing terms in our Substitute Energy Purchase Agreement, which became effective on March 1, 2017.
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
MANAGEMENT
’
S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONT.)
During the second quarter of 2017, the Power segment incurred an operating loss of
$0.4 million
, compared with operating income of
$6.7 million
in the second quarter of 2016. The operating income in 2016 was driven by a
$5.9 million
gain on our power derivative contracts, compared to a
$0.5 million
loss in the current period.
Adjusted EBITDA decreased by
$0.8 million
due to lower operating income, offset by the change in the gain/loss on our power derivatives described above which decreased operating income but which did not impact adjusted EBITDA.
Six Months Ended June 30, 2017
Compared to
Six Months Ended June 30, 2016
Consolidated Results of Operations
The following table shows the comparative consolidated results and changes between periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
Increase / (Decrease)
|
|
2017
|
|
2016
|
|
$
|
|
%
|
|
(In thousands, except tons data)
|
Revenues
|
$
|
662,762
|
|
|
$
|
713,451
|
|
|
$
|
(50,689
|
)
|
|
(7.1
|
)%
|
Operating (loss) income
|
(32,154
|
)
|
|
6,736
|
|
|
(38,890
|
)
|
|
*
|
|
Net loss applicable to common shareholders
|
(87,184
|
)
|
|
(1,182
|
)
|
|
(86,002
|
)
|
|
(7,276.0
|
)%
|
|
|
|
|
|
|
|
|
Tons sold—millions of equivalent tons
|
23.3
|
|
|
25.8
|
|
|
(2.5
|
)
|
|
(9.7
|
)%
|
Adjusted EBITDA
(1)
|
120,784
|
|
|
109,206
|
|
|
11,578
|
|
|
10.6
|
%
|
____________________
|
|
(1)
|
Adjusted EBITDA, a non-GAAP measure, is defined and reconciled to net loss at the end of this “Results of Operations” section.
|
* Not meaningful
Consolidated revenues declined
7.1%
during the first half of 2017 compared with the first half of 2016, driven by a decline in tons sold of
9.7%
. The decline in coal tons sold was driven by contract expirations at Jewett and Beulah, ongoing softness in Ohio, lower weather-related demand, and a seasonal outage at a customer plant in Canada. These declines were partially offset by an increase of
34.6%
in coal tons sold from our San Juan mine due largely to an extra month of ownership in 2017 as well as stronger demand.
We incurred an operating loss during the first half of 2017, representing a decline of
$38.9 million
from operating income generated in the first half of 2016. This decline was the result of the
$50.7 million
year-over-year decline in consolidated revenues, partially offset by the corresponding decrease in costs of sales and cost reductions in the Coal - WMLP segment. During the six months ended June 30, 2017, our Canada segment incurred higher costs related to mining in a more challenging area at Coal Valley and the unexpected dragline outage.
Net loss applicable to common shareholders declined
$86.0 million
in the first six months of 2017 compared to the same period in 2016 as a result of
$38.9 million
in increased operating losses year over year. Net loss applicable to common shareholders also reflected a
$48.0 million
income tax benefit for the six months ended June 30, 2016 primarily as a result of the release of valuation allowances on deferred tax assets as part of the San Juan acquisition, a benefit that did not recur in the current year.
Adjusted EBITDA increased
$11.6 million
year over year for the six months ended June 30, 2017 and 2016. Adjusted EBITDA includes the impact of the $52.5 million early repayment of loan and lease receivables discussed in Recent Trends and Activities. Excluding the impact of loan and lease receivable payments in both periods, adjusted EBITDA declined primarily as a result of the larger operating loss in 2017.
Coal - U.S. Segment Operating Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
Increase / (Decrease)
|
|
2017
|
|
2016
|
|
$
|
|
%
|
|
(In thousands, except tons data)
|
Revenues
|
$
|
278,405
|
|
|
$
|
308,508
|
|
|
$
|
(30,103
|
)
|
|
(9.8
|
)%
|
Operating (loss) income
|
(2,287
|
)
|
|
8,254
|
|
|
(10,541
|
)
|
|
*
|
|
Adjusted EBITDA
(1)
|
51,125
|
|
|
51,198
|
|
|
(73
|
)
|
|
(0.1
|
)%
|
Tons sold—millions of equivalent tons
|
8.8
|
|
|
10.7
|
|
|
(1.9
|
)
|
|
(17.8
|
)%
|
____________________
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
MANAGEMENT
’
S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONT.)
|
|
(1)
|
Adjusted EBITDA, a non-GAAP measure, is defined and reconciled to net loss at the end of this “Results of Operations” section.
|
* Not meaningful
Revenues for the Coal - U.S. segment declined
$30.1 million
, or
9.8%
, and coal tons sold declined
17.8%
during the first six months of 2017 compared with the same period in 2016. These declines were driven by contract expirations at Jewett and Beulah. Offsetting these declines was a
34.6%
improvement in coal tons sold from the San Juan mine in the first six months of 2017 compared with the same period in 2016 due to the additional month of ownership in 2017 as well as stronger demand at San Juan throughout 2017.
During the first six months of 2017, operating income declined
$10.5 million
from an operating income of
$8.3 million
in the first six months of 2016 to an operating loss of
$2.3 million
in the first six months of 2017. The decrease in operating income was impacted by the previously described Beulah contract cancellation, offset somewhat by higher operating income at our Jewett mine due to the high margin nature of the reclamation work performed subsequent to the December 31, 2016 termination of the coal supply agreement. In addition, during the second quarter of 2017, we recorded
$8.3 million
in additional depreciation, depletion, and amortization expense as a result of the change in depreciable lives and depletion rates at our San Juan mine as described earlier.
Adjusted EBITDA for the first six months of 2017 was
$51.1 million
compared to
$51.2 million
during the same period in 2016. Despite the higher operating loss in the segment, adjusted EBITDA remained consistent from period to period as the primary driver for the operating loss was increased depreciation, depletion and amortization expense, which does not impact adjusted EBITDA.
Coal - Canada Segment Operating Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
Increase / (Decrease)
|
|
2017
|
|
2016
|
|
$
|
|
%
|
|
(In thousands, except tons data)
|
Revenues
|
$
|
198,364
|
|
|
$
|
203,084
|
|
|
$
|
(4,720
|
)
|
|
(2.3
|
)%
|
Operating (loss) income
|
(18,839
|
)
|
|
15,693
|
|
|
(34,532
|
)
|
|
*
|
|
Adjusted EBITDA
(1)
|
57,637
|
|
|
37,666
|
|
|
19,971
|
|
|
53.0
|
%
|
Tons sold—millions of equivalent tons
|
11.1
|
|
|
11.4
|
|
|
(0.3
|
)
|
|
(2.6
|
)%
|
____________________
|
|
(1)
|
Adjusted EBITDA, a non-GAAP measure, is defined and reconciled to net loss at the end of this “Results of Operations” section.
|
* Not meaningful
Revenues for the Coal - Canada segment declined
2.3%
during the first six months of 2017 compared with the same period in the prior year primarily as a result of a decline in tons sold of
2.6%
. The decline in volume was largely the result of a customer outage during the second quarter of 2017 that did not occur in 2016, offset by improved volumes from our Sheerness mine. Improved pricing and volumes in the first quarter of 2017 offset second quarter declines at Coal Valley.
During the first six months of 2017, the segment incurred an operating loss of
$18.8 million
compared to operating income of
$15.7 million
in the same period of 2016, a
$34.5 million
decline year over year. The decline was driven by the above described revenue pressures as well as higher costs related to mining in more challenging areas at Coal Valley. In addition, we incurred additional expenses due to unexpected dragline maintenance in the first quarter of 2017 that did not occur in the prior year.
Adjusted EBITDA for the Coal - Canada segment increased during the first six months of 2017 due to the the impact of the $52.5 million early payment of loan and lease receivables, offset by the change in operating income discussed previously.
Coal - WMLP Segment Operating Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
Increase / (Decrease)
|
|
2017
|
|
2016
|
|
$
|
|
%
|
|
(In thousands, except tons data)
|
Revenues
|
$
|
155,857
|
|
|
$
|
172,949
|
|
|
$
|
(17,092
|
)
|
|
(9.9
|
)%
|
Operating income (loss)
|
8,870
|
|
|
(3,473
|
)
|
|
12,343
|
|
|
*
|
|
Adjusted EBITDA
(1)
|
31,723
|
|
|
35,583
|
|
|
(3,860
|
)
|
|
(10.8
|
)%
|
Tons sold—millions of equivalent tons
|
3.6
|
|
|
3.7
|
|
|
(0.1
|
)
|
|
(2.7
|
)%
|
____________________
|
|
(1)
|
Adjusted EBITDA, a non-GAAP measure, is defined and reconciled to net loss at the end of this “Results of Operations” section.
|
* Not meaningful
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
MANAGEMENT
’
S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONT.)
Coal - WMLP segment revenues declined
9.9%
and coal tons sold declined
2.7%
during the
six months ended June 30, 2017
compared with the same period in 2016. This decline was driven by ongoing price and volume pressures in our Ohio market.
Operating income for the segment increased
$12.3 million
in the first half of 2017 compared with the first half of 2016. This increase was driven by cost savings measures and lower depreciation expenses resulting from a smaller and aging fleet at our Ohio operations. In addition, during the first six months of 2016, the Coal - WMLP segment incurred a $4.7 million impairment charge related to the write-down of excess equipment, where no such charge was incurred in the 2017 period.
Adjusted EBITDA for the Coal - WMLP segment declined
$3.9 million
in the first half of 2017 compared to the same period in 2016 largely as a result of the decline in coal deliveries, partially offset by the impact of cost reduction efforts. The decreases in depreciation expense from the prior year as well as the absence of the prior year impairment charge that lead to increased operating income did not have any impact on adjusted EBITDA.
Power Segment Operating Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
Increase / (Decrease)
|
|
2017
|
|
2016
|
|
$
|
|
%
|
|
(In thousands)
|
Revenues
|
$
|
41,107
|
|
|
$
|
43,940
|
|
|
$
|
(2,833
|
)
|
|
(6.4
|
)%
|
Operating (loss) income
|
(1,136
|
)
|
|
931
|
|
|
(2,067
|
)
|
|
*
|
|
Adjusted EBITDA
(1)
|
(3,514
|
)
|
|
(2,734
|
)
|
|
(780
|
)
|
|
(28.5
|
)%
|
____________________
|
|
(1)
|
Adjusted EBITDA, a non-GAAP measure, is defined and reconciled to net loss at the end of this “Results of Operations” section.
|
* Not meaningful
Power segment revenues for the six months ended June 30, 2017 declined $2.8 million compared with the same period in 2016 due to the amendment to the pricing terms in our Substitute Energy Purchase Agreement, which became effective on March 1, 2017.
For the six months ended June 30, 2017, the Power segment incurred an operating loss of
$1.1 million
, compared with operating income of
$0.9 million
for the six months ended June 30, 2016. The operating income in 2016 was driven by a
$3.3 million
gain on our power derivative contracts, compared to a gain of only
$1.9 million
in the current period. The remaining decrease in operating income arose as a result of the revenues decrease described above.
Adjusted EBITDA decreased by
$0.8 million
due to lower operating income, offset by the change in the gain/loss on our power derivatives described above, which decrease operating income but which do not impact adjusted EBITDA.
Non-GAAP Financial Measures
Reconciliation of Net (Loss) Income to Adjusted EBITDA
EBITDA is defined as earnings before interest expense, interest income, income taxes, depreciation, depletion, amortization and accretion expense. Adjusted EBITDA is defined as EBITDA before certain charges to income such as restructuring, impairment, debt extinguishment, foreign exchange and derivative losses and/or gains which are not considered part of earnings from operations for comparison purposes to other companies’ normalized income. EBITDA and adjusted EBITDA are supplemental measures of financial performance that are not required by, or presented in accordance with GAAP. EBITDA and adjusted EBITDA are key metrics used by us to assess our operating performance and as a basis for strategic planning and forecasting and we believe that EBITDA and adjusted EBITDA are useful to an investor in evaluating our 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;
• are used by rating agencies, lenders and other parties to evaluate our creditworthiness; and
• help investors to more meaningfully evaluate and compare the results of our operations from period to period by removing the effect of our capital structure and asset base from our operating results.
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
MANAGEMENT
’
S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONT.)
Neither EBITDA nor adjusted EBITDA is a measure calculated in accordance with GAAP. The items excluded from EBITDA and adjusted EBITDA are significant in assessing our operating results. EBITDA and adjusted EBITDA have limitations as analytical tools, and should not be considered in isolation from, or as a substitute for, analysis of our results as reported under GAAP. For example, EBITDA and adjusted EBITDA:
• do not reflect our 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, our 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 our 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 and adjusted EBITDA do not reflect any cash requirements for such replacements. Other companies in our industry and in other industries may calculate EBITDA and adjusted EBITDA differently from the way that we do, limiting their usefulness as comparative measures. Because of these limitations, EBITDA and adjusted EBITDA should not be considered as measures of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our GAAP results and using EBITDA and adjusted EBITDA only as supplemental data.
The tables below show how we calculated EBITDA and adjusted EBITDA, including a breakdown by segment, and reconcile adjusted EBITDA to net loss, the most directly comparable GAAP financial measure.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(In thousands)
|
Reconciliation of Net (Loss) Income to Adjusted EBITDA
|
|
|
|
|
|
|
|
Net loss
|
$
|
(50,520
|
)
|
|
$
|
(29,397
|
)
|
|
$
|
(87,821
|
)
|
|
$
|
(2,488
|
)
|
|
|
|
|
|
|
|
|
Income tax benefit
|
(501
|
)
|
|
(100
|
)
|
|
(965
|
)
|
|
(48,035
|
)
|
Interest income
|
(1,038
|
)
|
|
(2,356
|
)
|
|
(1,931
|
)
|
|
(4,147
|
)
|
Interest expense
|
30,109
|
|
|
30,860
|
|
|
59,371
|
|
|
59,787
|
|
Depreciation, depletion and amortization
|
39,497
|
|
|
35,223
|
|
|
76,064
|
|
|
72,237
|
|
Accretion of asset retirement obligation
|
11,142
|
|
|
10,332
|
|
|
22,437
|
|
|
19,950
|
|
Amortization of intangible assets and liabilities
|
(267
|
)
|
|
(260
|
)
|
|
(534
|
)
|
|
(427
|
)
|
EBITDA
|
28,422
|
|
|
44,302
|
|
|
66,621
|
|
|
96,877
|
|
|
|
|
|
|
|
|
|
Advisory fees
(1)
|
925
|
|
|
—
|
|
|
925
|
|
|
—
|
|
Loss on foreign exchange
|
1,185
|
|
|
364
|
|
|
1,652
|
|
|
1,751
|
|
Acquisition-related costs
|
—
|
|
|
133
|
|
|
—
|
|
|
568
|
|
Customer payments received under loan and lease receivables
(2)
|
—
|
|
|
2,727
|
|
|
50,489
|
|
|
5,387
|
|
Derivative loss (gain)
|
481
|
|
|
(5,878
|
)
|
|
(1,904
|
)
|
|
(3,278
|
)
|
Loss on sale/disposal of assets and other adjustments
|
420
|
|
|
1,954
|
|
|
521
|
|
|
3,367
|
|
Share-based compensation
|
1,133
|
|
|
1,954
|
|
|
2,480
|
|
|
4,534
|
|
Adjusted EBITDA
|
$
|
32,566
|
|
|
$
|
45,556
|
|
|
$
|
120,784
|
|
|
$
|
109,206
|
|
____________________
|
|
(1)
|
Amount represents fees paid to financial and legal advisers related to the assessment of Westmoreland’s capital structure. These advisers, together with Westmoreland's management and board of directors, are developing and evaluating options to optimize Westmoreland’s overall capital structure.
|
|
|
(2)
|
Represents a return of and on capital. These amounts are not included in operating income or operating cash flows as the capital outlays are treated as loan and lease receivables, but are included within adjusted EBITDA so that the cash received by the Company is treated consistently with all other contracts within the Company that do not result in loan and lease receivable accounting. During the first quarter of 2017, the Company received $52.5 million from its customer at the Genesee mine, representing an accelerated repayment of all outstanding loan and lease receivables. We will continue to provide contract mining services at the Genesee mine. We have no further
|
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
MANAGEMENT
’
S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONT.)
obligation to make any capital expenditures. All future capital expenditures at the Genesee mine will be funded by the customer pursuant to the Company’s contractual arrangement with the customer. Accordingly, there will be no additional payments from the customer at the Genesee mine in the form of loan and lease repayments, however, the Company will continue to manage the Genesee mine and earn a management fee pursuant the contract mining arrangement.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(In thousands)
|
Adjusted EBITDA by Segment
|
|
|
|
|
|
|
|
Coal - U.S.
|
$
|
23,656
|
|
|
$
|
20,848
|
|
|
$
|
51,125
|
|
|
$
|
51,198
|
|
Coal - Canada
|
(1,598
|
)
|
|
14,342
|
|
|
57,637
|
|
|
37,666
|
|
Coal - WMLP
|
18,854
|
|
|
16,303
|
|
|
31,723
|
|
|
35,583
|
|
Power
|
(141
|
)
|
|
614
|
|
|
(3,514
|
)
|
|
(2,734
|
)
|
Heritage
|
(3,786
|
)
|
|
(3,518
|
)
|
|
(7,456
|
)
|
|
(6,999
|
)
|
Corporate
|
(4,419
|
)
|
|
(3,033
|
)
|
|
(8,731
|
)
|
|
(5,508
|
)
|
Total
|
$
|
32,566
|
|
|
$
|
45,556
|
|
|
$
|
120,784
|
|
|
$
|
109,206
|
|
Liquidity and Capital Resources
Liquidity
We had the following liquidity at
June 30, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
|
(In millions)
|
Cash and cash equivalents
|
$
|
57.6
|
|
|
$
|
60.1
|
|
Availability under Revolver
|
27.0
|
|
|
36.3
|
|
Availability under WMLP Revolver
|
15.0
|
|
|
15.0
|
|
Total
|
$
|
99.6
|
|
|
$
|
111.4
|
|
As of
June 30, 2017
, we are in compliance with the fixed charge ratio under our revolver agreement. Based on current projections, absent management plans, there is substantial doubt as to our ability to comply with this covenant during the next twelve months from this filing. If we were to breach this covenant, we could lose access to the
Revolver
and impact certain customary cross-default provisions in our
$350.0 million
8.75% Notes
and our
$322.2 million
Term Loan
which would become immediately due. Our belief, based on historical patterns, is that it is probable we would be able to alleviate or cure any such
Revolver
covenant default with an amendment or waiver.
Availability under the Revolver and WMLP Revolver is subject to their respective borrowing base calculations as defined in the underlying debts agreement for each. At
June 30, 2017
, availability on the
Revolver
was
$27.0 million
which reflects
$9.9 million
in outstanding letters of credit and
$23.1 million
in borrowing base restrictions. We had
no
borrowings on the
Revolver
. We anticipate that our cash from operations, cash on hand and available borrowing capacity will be sufficient to meet our investing, financing, and working capital requirements for the foreseeable future.
We conduct our operations through subsidiaries. We have significant cash requirements to fund our debt obligations, ongoing heritage health benefit costs, pension contributions, and corporate overhead expenses. The principal sources of cash flow to the WCC are distributions from our operating subsidiaries. The cash at all of our subsidiaries is immediately available, except Westmoreland Risk Management, Inc. (“WRMI”), the Westmoreland San Juan Entities, and WMLP. The cash at our captive insurance entity, WRMI, is available to us through dividends and is subject to maintaining a statutory minimum level of capital, which is $0.25 million. The cash at the Westmoreland San Juan Entities is governed as described in
Note 6 - Debt And Lines Of Credit
to the consolidated financial statements (unaudited).
Although we anticipate that our cash from operations, cash on hand and available borrowing capacity will be sufficient to meet our business obligations, we have proactively engaged financial advisors to assess our capital structure. These advisors, together with management and our board of directors, will advise us on options to optimize our overall capital structure and provide greater financial flexibility and liquidity
, particularly in light of the December 2017 maturity of
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
MANAGEMENT
’
S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONT.)
the WMLP Revolver, the December 2018 maturity of the WMLP Term Loan, and 2018 interest rate and other changes associated with the San Juan Loan.
Debt Obligations
See
Note 6 - Debt And Lines Of Credit
to the consolidated financial statements (unaudited) for a description of our different debt facilities.
Restricted Group and Unrestricted Group Results
Under each of the Indenture, the
Term Loan
and the
Revolver
, the following entities are designated as unrestricted subsidiaries: the Westmoreland San Juan Entities, Westmoreland Resources GP, LLC, WMLP and all of WMLP’s subsidiaries (collectively, the “Unrestricted Group”). Each of our other subsidiaries are restricted by the the Indenture, the
Term Loan
and the
Revolver
(the “Restricted Group”). Within the Restricted Group, pursuant to the Indenture and the Term Loan, each of Absaloka Coal, LLC, WRMI, Westmoreland Canada LLC, the Canadian subsidiaries and our Netherlands subsidiary, are considered non-guarantors (collectively, the “Non-Guarantor Restricted Subsidiaries”), and accordingly, our remaining subsidiaries that are in neither the Unrestricted Group, nor are Non-Guarantor Restricted Subsidiaries, are both restricted subsidiaries and guarantors under the Indenture and Term Loan (the “Guarantor Restricted Subsidiaries”). For financial statements pertaining to the Guarantor Restricted Subsidiaries only, see
Schedule I
to this Quarterly Report.
The Indenture requires summary information for the Restricted Group and Unrestricted Group provided as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Group
|
|
Unrestricted Group
|
|
Total
|
|
(In thousands)
|
Balance sheet as of June 30, 2017:
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
21,318
|
|
|
$
|
36,302
|
|
|
$
|
57,620
|
|
Total current assets
|
225,208
|
|
|
120,253
|
|
|
345,461
|
|
Total assets
|
860,217
|
|
|
599,254
|
|
|
1,459,471
|
|
Total current liabilities
|
240,283
|
|
|
102,927
|
|
|
343,210
|
|
Total debt
|
681,012
|
|
|
394,550
|
|
|
1,075,562
|
|
Total liabilities
|
1,621,104
|
|
|
604,877
|
|
|
2,225,981
|
|
|
|
|
|
|
|
Statement of operations for the six months ended June 30, 2017:
|
|
|
|
|
|
Revenues
|
$
|
407,258
|
|
|
$
|
255,504
|
|
|
$
|
662,762
|
|
Operating costs and expenses
|
451,748
|
|
|
243,168
|
|
|
694,916
|
|
Operating income (loss)
|
(44,490
|
)
|
|
12,336
|
|
|
(32,154
|
)
|
Other income and expenses
|
(29,843
|
)
|
|
(26,789
|
)
|
|
(56,632
|
)
|
Loss before income taxes
|
(74,333
|
)
|
|
(14,453
|
)
|
|
(88,786
|
)
|
Income tax benefit
|
(965
|
)
|
|
—
|
|
|
(965
|
)
|
Net loss
|
(73,368
|
)
|
|
(14,453
|
)
|
|
(87,821
|
)
|
Less net loss attributable to noncontrolling interest
|
(637
|
)
|
|
—
|
|
|
(637
|
)
|
Net loss attributable to the Company
|
$
|
(72,731
|
)
|
|
$
|
(14,453
|
)
|
|
$
|
(87,184
|
)
|
For the
six months ended June 30, 2017
, adjusted EBITDA associated with the Restricted Group and Unrestricted Group was
$59.5 million
and
$61.2 million
, respectively.
Non-guarantor Restricted Subsidiaries Results
The Indenture requires summary information for Absaloka Coal, LLC, WRMI, Westmoreland Canada LLC, the Canadian Subsidiaries and our Netherlands subsidiary (collectively, the “Non-Guarantor Restricted Subsidiaries”) which is
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
MANAGEMENT
’
S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONT.)
provided as follows (in thousands):
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
Percent of Consolidated Total
|
Total assets
|
$
|
653,055
|
|
|
44.7
|
%
|
Total debt
|
20,185
|
|
|
1.9
|
%
|
Total liabilities
|
219,742
|
|
|
9.9
|
%
|
|
|
|
|
|
Six Months Ended June 30, 2017
|
|
Percent of Consolidated Total
|
Revenues
|
$
|
315,832
|
|
|
47.7
|
%
|
Adjusted EBITDA
|
57,648
|
|
|
47.7
|
%
|
Our non-guarantor Canadian Subsidiaries had availability of up to
$15.2 million
under the Canadian tranche of the Revolver as of
June 30, 2017
.
Historical Sources and Uses of Cash
The following table summarizes net cash provided by (used in) operating activities, investing activities and financing activities for the
six months ended June 30, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
Cash provided by (used in):
|
(In thousands)
|
Operating activities
|
$
|
10,154
|
|
|
$
|
41,899
|
|
Investing activities
|
31,609
|
|
|
(127,785
|
)
|
Financing activities
|
(44,688
|
)
|
|
99,051
|
|
For the first six months of 2017, our operating activities provided
$10.2 million
in cash, down from
$41.9 million
in the prior year primarily as a result of lower operating income, described further in "Results of Operations." Investing activities brought in
$31.6 million
in cash due to the $52.5 million cash receipt from our customer at our Genesee mine to pay off the loan and lease receivable in its entirety. This compares to a use of cash of
$127.8 million
primarily comprised of $125 million in use of cash to acquire our San Juan mine. Financing activities consumed
$44.7 million
in cash as we continued to pay down debt. This compares to
$99.1 million
provided by financing activities in the prior year, primarily comprised of $122 million in borrowings to acquire our San Juan mine.
Asset Retirement Obligations and Related Assets Available to Fund Obligations
The asset retirement obligations and related reclamation deposits and reclamation bond collateral for each of the Company’s operating segments at
June 30, 2017
are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Retirement Obligations
|
|
Reclamation Deposits
|
|
Restricted Investments and Bond Collateral
|
|
(In thousands)
|
Coal - U.S.
|
$
|
314,472
|
|
|
$
|
76,131
|
|
|
$
|
16,814
|
|
Coal - Canada
|
128,095
|
|
|
—
|
|
|
52,624
|
|
Coal - WMLP
|
48,226
|
|
|
—
|
|
|
38,415
|
|
Power
|
1,157
|
|
|
—
|
|
|
—
|
|
Other restricted investments:
|
|
|
|
|
|
Power derivative collateral (ROVA)
|
—
|
|
|
—
|
|
|
22,200
|
|
Other
|
—
|
|
|
—
|
|
|
16,333
|
|
Total
|
$
|
491,950
|
|
|
$
|
76,131
|
|
|
$
|
146,386
|
|
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
MANAGEMENT
’
S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONT.)
Other restricted investments include various investments not associated with reclamation obligations. Reclamation spend, net of customer receipts for reclamation, was
$14.0 million
for the
six months ended June 30, 2017
. As of
June 30, 2017
, we estimate approximately $173.8 million will be reimbursed to us by our customers for performance of final reclamation.
Critical Accounting Policies and Estimates
Please refer to the corresponding section in
Part II - Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations
of our
2016
Form 10-K for a discussion of our accounting policies and estimates.
Recent Accounting Pronouncements
See
Note 1 - Basis Of Presentation
to the consolidated financial statements (unaudited).
Off-Balance Sheet Arrangements
In the normal course of business, we are a party to certain off-balance sheet arrangements. These arrangements include financial instruments with off-balance sheet risk such as bank letters of credit and performance or surety bonds. We utilize surety bonds and letters of credit issued by financial institutions to third parties to assure the performance of our obligations relating to reclamation, workers’ compensation obligations, postretirement medical benefit obligations, and other obligations. These arrangements are not reflected in our consolidated balance sheets, and we do not expect any material adverse effects on our financial condition, results of operations or cash flows to result from these off-balance sheet arrangements.
There have been no material changes to our off-balance sheet arrangements since December 31, 2016. Our off-balance sheet arrangements are discussed in
Part II - Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations
of our
2016
Form 10-K.
|
|
ITEM 3
|
—
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
There have been no material changes in our market risk since
December 31, 2016
. For additional information, refer to
Part II - Item 7A - Quantitative and Qualitative Disclosures about Market Risk
in our
2016
Form 10-K.
|
|
ITEM 4
|
—
CONTROLS AND PROCEDURES
|
As previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016, we identified a material weakness related to accounting policy review for asset retirement obligations. The controls over the review of accounting policies were ineffective as they did not identify an inappropriate accounting policy for the treatment of asset retirement obligations that were subject to reimbursements by customers. The Company has assigned personnel with the appropriate level of asset retirement obligation and technical accounting experience to review the accounting for asset retirement obligations in accordance with GAAP.
We are in the process of remediating this material weakness by executing upon the above actions. The actions that we are taking are subject to ongoing senior management review, as well as Audit Committee oversight. Although we plan to complete this remediation process as quickly as possible, we cannot at this time estimate how long it will take and our initiatives may not prove to be successful in remediating this material weakness. Management believes the foregoing efforts will effectively remediate the material weakness. As we continue to evaluate and work to improve our internal control over financial reporting, management may execute additional measures to address potential control deficiencies or modify the remediation plan described above. Management will continue to review and make necessary changes to the overall design of our internal controls.
As required by Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), management has evaluated, with the participation of our chief executive officer and chief financial officer, the effectiveness of our disclosure controls and procedures as of
June 30, 2017
. Disclosure controls and procedures are designed to provide reasonable assurance that material information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the Securities and Exchange Commission. Disclosure controls and procedures also include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in our reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our chief executive officer and chief financial
officer, as appropriate to allow timely decisions regarding our required disclosure. Based on that evaluation, which includes the material weakness identified at December 31, 2016 discussed above, our management, including our chief executive officer and chief financial officer, concluded that the disclosure controls and procedures were not effective as of
June 30, 2017
.
Changes in Internal Control over Financial Reporting
Beginning January 1, 2017, the Company integrated our enterprise resource planning (“ERP”) system to a single instance of our ERP system across all locations and segments which will improve the timeliness and quality of information (including financial information) to all appropriate levels of Company personnel. The integration was not in response to any identified deficiency or material weakness in the Company’s internal control over financial reporting. The integration of the ERP system will likely affect the processes included in our internal controls over financial reporting and will require testing for operating effectiveness.
Also beginning January 1, 2017 and in connection with the integration discussed immediately above, the Company initiated the centralization of controls from our corporate offices in Edmonton, Canada and Coshocton, Ohio resulting in a centralized control environment. The centralization was not in response to any identified deficiency or material weakness in the Company’s internal controls over financial reporting. The centralization will be completed throughout 2017 and will affect the processes that constitute our internal controls over financial reporting. The centralized control framework will require testing for operating effectiveness.