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WLB > SEC Filings for WLB > Form 10-Q on 30-Apr-2013All Recent SEC Filings

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Form 10-Q for WESTMORELAND COAL CO


30-Apr-2013

Quarterly Report


ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Cautionary Note Regarding Forward-Looking Statements This Quarterly Report on Form 10-Q contains "forward-looking statements." Forward-looking statements can be identified by words such as "anticipates," "intends," "plans," "seeks," "believes," "estimates," "expects" and similar references to future periods. Examples of forward-looking statements include, but are not limited to, statements we make about our expectation that our cash from operations, cash on hand and available borrowing capacity will be sufficient to meet our investing, financing, and working capital requirements for the foreseeable future, our anticipated cash spend on heritage health and pension obligations, the timing of when our customer's plant will be back online, and the possibility that we may from time to time use available cash to repurchase our 10.75% Senior Notes on the open market.
Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Our actual results may differ materially from those contemplated by the forward-looking statements. We therefore caution you against relying on any of these forward-looking statements. They are statements neither of historical fact nor guarantees or assurances of future performance. Important factors that could cause actual results to differ materially from those in the forward-looking statements include political, economic, business, competitive, market, weather and regulatory conditions and the following:
risks associated with our estimated postretirement medical benefit and pension obligations, including those we assumed in the Kemmerer acquisition, and the impact of regulatory changes on those obligations;

changes in our black lung obligations, changes in our experience related to black lung claims, and the impact of the Patient Protection and Affordable Care Act;

our potential inability to maintain compliance with debt covenant requirements;

competition with natural gas and other non-coal energy resources, which may be increased as a result of energy policies, regulations and subsidies or other government incentives that encourage or mandate use of alternative energy sources;

coal-fired power plant capacity, including the impact of environmental regulations, energy policies and other factors that may cause utilities to phase out or close existing coal-fired power plants or reduce construction of any new coal-fired power plants;

railroad, export terminal capacity and other transportation performance, costs and availability;

the potential inability of our subsidiaries to pay dividends to us due to restrictions in our debt arrangements, reductions in planned coal deliveries or other business factors;

our potential inability to enter into new coal supply agreements with existing customers due to the unfavorable result of competitive bid processes or the shutdown of a power facility due to new environmental legislation or regulations;

risks associated with the structure of Westmoreland Energy LLC's and its subsidiaries, collectively referred to herein as ROVA, contracts with its coal suppliers and power purchaser, which could dramatically affect the overall profitability of ROVA;

the effect of Environmental Protection Agency inquiries and regulations on the operations of ROVA and our customer's power facilities;

the effect of prolonged maintenance or unplanned outages at our operations or those of our major power generating customers, including unplanned outages at our customers due to the impact of weather-related variances or catastrophic events;

the potential that insurance proceeds from our business interruption claim relating to the unexpected shutdown of one of the Absaloka mine customers will not be sufficient to cover our losses associated with the business interruption;

future legislation and changes in regulations, governmental policies and taxes, including those aimed at reducing emissions of elements such as mercury, sulfur dioxides, nitrogen oxides, particulate matter or greenhouse gases; and

other factors that are described in "Risk Factors" in our 2012 Form 10-K and any subsequent quarterly filing on Form 10-Q

Unless otherwise specified, the forward-looking statements in this report speak as of the filing date of this report. Factors or events that could cause our actual results to differ may emerge from time-to-time, and it is not possible for us to


Table of Contents
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONT.)

predict all of them. We undertake no obligation to publicly update any forward-looking statements, whether because of new information, future developments or otherwise, except as may be required by law. Overview

Westmoreland Coal Company is an energy company whose operations include six surface coal mines in Montana, Wyoming, North Dakota and Texas, and two coal-fired power-generating units in North Carolina. We sold 21.7 million tons of coal in 2012. Our two principal operating segments are our coal and power segments. Our two non-operating segments are our heritage and corporate segments. 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 expenses.

We are a holding company and conduct our operations through subsidiaries. We have significant cash requirements to fund our ongoing heritage health benefit costs and corporate overhead expenses. The principal sources of cash flow to us are distributions from our principal operating subsidiaries.

Xcel Fire
In November 2011, an explosion and subsequent fire occurred at Unit 3 of Xcel Energy's Sherburne County Generating Station, or Unit 3, which is the largest customer of our Absaloka Mine. Xcel indicated that Unit 3 will be offline for an extended period while Xcel investigates the source of the explosion and the extent of the damage. Sherburne County Generating Station has indicated a start up date of September 2013. Westmoreland Resources, Inc., or WRI, our wholly owned subsidiary that operates the Absaloka Mine, maintains business interruption insurance coverage and submitted a notice of loss to its insurance carriers. Our insurance carriers have accepted liability under the policy for the business interruption claim. We recognize income as business interruption losses are incurred and reimbursement is virtually assured and have recognized $4.8 million of income and received $3.2 million of cash proceeds for the three months ended March 31, 2013. Insurance proceeds are included in Net cash provided by operating activities.
Results of Operations
Three Months Ended March 31, 2013 Compared to Three Months Ended March 31, 2012 Summary
The following table shows the comparative consolidated results and changes between periods:

                                                     Three Months Ended March 31,
                                                                       Increase / (Decrease)
                                         2013           2012             $                %
                                                            (In millions)
Revenues                             $    161.4     $    147.2     $      14.2             9.6  %
Net income (loss) applicable to
common shareholders                        (2.7 )          0.5            (3.2 )        (640.0 )%
Adjusted EBITDA(1)                         25.7           27.3            (1.6 )          (5.9 )%


____________________


(1) Adjusted EBITDA , a non-GAAP measure, is defined and reconciled to net loss at the end of this "Results of Operations" section.

Our first quarter 2013 revenues increased primarily due to the Kemmerer acquisition and increased tonnage due to stronger power demand and favorable weather conditions. These increases were partially offset by an unplanned customer outage at our Beulah Mine and a planned annual maintenance outage at our ROVA power plant, which in 2012 occurred during the second quarter. Our first quarter 2013 net income applicable to common shareholders decreased by $3.2 million. The primary factors, in aggregate, driving this decrease in net income were:


Table of Contents
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONT.)

Three Months Ended March
31, 2013
(In millions)

Decrease in our power segment operating income due to a planned annual maintenance outage $ (3.8 ) Increase in interest expense resulting from the Kemmerer acquisition debt (0.3 ) Increase in our coal segment primarily due to the Kemmerer acquisition, partially offset by the Beulah Mine customer outage 0.5 Increase due to other factors 0.4 Total $ (3.2 )

Coal Segment Operating Results
The following table shows comparative coal revenues, operating income and sales
volume, and percentage changes between periods:
                                                  Three Months Ended March 31,
                                                                  Increase / (Decrease)
                                         2013         2012             $              %
                                              (In thousands, except per ton data)
Revenues                              $ 142,112    $ 126,514    $     15,598       12.3  %
Operating income                         13,472       14,437            (965 )     (6.7 )%
Adjusted EBITDA(1)                       29,906       29,158             748        2.6  %
Tons sold-millions of equivalent tons       6.1          5.5             0.6       10.9  %


____________________


(1) Adjusted EBITDA, a non-GAAP measure, is defined and reconciled to net loss at the end of this "Results of Operations" section.

Our first quarter 2013 coal segment revenues and tons sold increased primarily due to the Kemmerer acquisition and increased tonnage due to stronger power demand and favorable weather conditions. These increases were partially offset by an unplanned customer outage at our Beulah Mine. Our first quarter 2013 coal segment operating income decreased primarily due to increased royalties and timing of maintenance costs at our Kemmerer Mine and the Beulah Mine customer outage.
Power Segment Operating Results
The following table shows comparative power revenues, operating income and production and percentage changes between periods:

                              Three Months Ended March 31,
                                              Increase / (Decrease)
                      2013        2012            $              %
                                     (In thousands)
Revenues           $ 19,336     $ 20,722    $    (1,386 )      (6.7 )%
Operating income     (1,003 )      2,789         (3,792 )    (136.0 )%
Adjusted EBITDA(1)    1,709        5,467         (3,758 )     (68.7 )%
Megawatts hours         340          373            (33 )      (8.8 )%


____________________


(1) Adjusted EBITDA, a non-GAAP measure, is defined and reconciled to net loss at the end of this "Results of Operations" section.

Our first quarter 2013 power segment revenues, operating income and megawatt hours decreased due to a planned annual maintenance outage at our ROVA power plant. In 2012, this planned maintenance outage occurred during the second quarter.


Table of Contents
                   WESTMORELAND COAL COMPANY AND SUBSIDIARIES
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                       AND RESULTS OF OPERATIONS (CONT.)

Heritage Segment Operating Results
The following table shows comparative heritage segment's operating expenses and
percentage change between periods:
                                                      Three Months Ended March 31,
                                                                           Increase / (Decrease)
                                           2013              2012             $               %
                                                             (In thousands)
Heritage segment operating expenses  $     4,175         $    4,010     $        165           4.1 %

Our first quarter 2013 heritage segment operating expenses are comparable to the first quarter of 2012.
Corporate Segment Operating Results
The following table shows comparative corporate segment's operating expenses and percentage change between periods:

Three Months Ended March 31,
Increase / (Decrease)
2013 2012 $ %
(In thousands)

Corporate segment operating expenses $ 2,560 $ 4,131 $ (1,571 ) (38.0 )%

Our first quarter 2013 corporate segment operating expenses decreased primarily due to a deductible on a claim paid by our captive insurance entity to our subsidiary related to the business interruption claim at our Absaloka Mine during the first quarter of 2012, however this expense was offset by proceeds recorded in the coal segment and thus had no impact on a consolidated basis. Nonoperating Results (including interest expense, interest income, other income
(loss), income tax expense, and net loss attributable to noncontrolling interest) Our interest expense for the first quarter of 2013 increased to $10.2 million compared with $9.9 million for the first quarter of 2012 primarily due to the higher overall debt levels resulting from the Kemmerer acquisition debt. Our interest income, other income (loss), and income tax expense for the first quarter of 2013 is comparable to the first quarter of 2012. Our loss attributable to noncontrolling interest for the first quarter of 2013 increased to $1.7 million compared with $1.1 million for the first quarter of 2012 related to increased losses from a partially owned consolidated subsidiary. Reconciliation of Adjusted EBITDA to Net Loss The discussion in "Results of Operations" includes references to our Adjusted EBITDA results. 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 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; 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.

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:


Table of Contents
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONT.)

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 Adjusted EBITDA, including a breakdown by segment, and reconciles Adjusted EBITDA to net loss, the most directly comparable GAAP financial measure. Concerning the presentation of data for the Year Ended December 31, 2012 in the table below, please refer to our Annual Report on 2012 Form 10-K for additional information regarding our financial results. The Twelve Months Ended March 31, 2013 column is calculated from the prior three columns.

                                                                            Year Ended        Twelve Months
                                       Three Months Ended March 31,        December 31,      Ended March 31,
                                          2013               2012              2012               2013
                                                                 (In thousands)
Reconciliation of Adjusted EBITDA
to Net loss
Net loss                            $      (4,087 )     $        (222 )   $     (13,662 )   $       (17,527 )

Income tax expense from continuing
operations                                     28                   7                90                 111
Other income                                  (70 )              (177 )            (723 )              (616 )
Interest income                              (297 )              (406 )          (1,496 )            (1,387 )
Loss on extinguishment of debt                  -                   -             1,986               1,986
Interest expense                           10,160               9,883            42,677              42,954
Depreciation, depletion and
amortization                               14,426              13,289            57,145              58,282
Accretion of ARO and receivable             3,180               2,853            12,189              12,516
Amortization of intangible assets
and liabilities                               164                 162               658                 660
EBITDA                                     23,504              25,389            98,864              96,979

(Gain)/loss on sale of assets                (234 )                38               528                 256
Share-based compensation                    2,386               1,902             6,040               6,524
Adjusted EBITDA                     $      25,656       $      27,329     $     105,432     $       103,759


Table of Contents
                   WESTMORELAND COAL COMPANY AND SUBSIDIARIES
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                       AND RESULTS OF OPERATIONS (CONT.)

                              Three Months Ended March 31,
                                 2013               2012
                                     (In thousands)
Adjusted EBITDA by Segment
Coal                       $      29,906       $      29,158
Power                              1,709               5,467
Heritage                          (4,175 )            (4,010 )
Corporate                         (1,784 )            (3,286 )
Total                      $      25,656       $      27,329



                           Three Months Ended March 31,
                                 2013                  2012
                                  (In thousands)
Adjusted EBITDA
Guarantor and Issuer $         9,744                 $ 14,301
Non-Guarantor                 15,912                   13,028
Total                $        25,656                 $ 27,329

Liquidity and Capital Resources
We had the following liquidity at March 31, 2013 and December 31, 2012:
                                    March 31,      December 31,
                                       2013            2012
                                           (In millions)
Cash and cash equivalents          $      40.9    $         31.6
WML revolving line of credit              23.1              23.1
Corporate revolving line of credit        20.0              20.0
Total                                     84.0              74.7

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 are a holding company and conduct our operations through subsidiaries. Our parent holding company has 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 parent company are distributions from our principal operating subsidiaries. The cash at ROVA, Kemmerer, and WRI has no restrictions and is immediately available. The cash at WML is available to us through quarterly distributions. The WML credit agreement requires a debt service account and imposes timing and other restrictions on the ability of WML to distribute funds to us. The cash at WRMI is also available to us through dividends and is subject to maintaining a statutory minimum level of capital, which is two hundred and fifty thousand dollars.
Under the indenture governing the 10.75% Senior Notes, we are required to offer a portion of our Excess Cash Flow (as defined by the indenture) for each fiscal year to purchase some of these notes at 100% of the principal amount. While we did repurchase $23.0 million of 10.75% Senior Notes during 2012, we did not have Excess Cash Flow for the year ended December 31, 2012. In addition to any Excess Cash Flow redemption required under the indenture, the Company may continue to use available cash to repurchase these notes on the open market, as permitted by the indenture.


Table of Contents
WESTMORELAND COAL COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONT.)

Debt Obligations
10.75% Senior Notes
The 10.75% Senior Notes were outstanding in the principal amount of $252 million at March 31, 2013. Interest is due at an annual fixed rate of 10.75% and paid in cash semi-annually, in arrears, on February 1 and August 1 of each year. The 10.75% Senior Notes mature February 1, 2018 and contain provisions that affect our sources of liquidity, such as limitations on our ability to enter into new capital leases and other forms of credit. The notes are fully and unconditionally guaranteed by ROVA, Kemmerer, WRI and their respective subsidiaries (other than Absaloka Coal, LLC) and by certain other subsidiaries. 2012 Revolving Credit Agreement
Our 2012 Revolving Credit Agreement has a borrowing limit of $20.0 million and an expiration date of June 30, 2017. At March 31, 2013, availability on the revolver was $20.0 million with no outstanding balance and no supported letters of credit.
Two interest rate options exist under the revolver. The Base Rate option bears interest at the greater of a Federal Funds Rate plus 0.5% or the Prime Rate, as defined in the loan agreement and is payable monthly. The LIBOR Rate option bears interest at the London Interbank Offering Rate, or LIBOR, rate plus 2.25% and is payable monthly. In addition, a commitment fee of 0.75% of the average unused portion of the available revolver is payable monthly. The loan agreement contains various affirmative, negative and financial covenants. Financial covenants in the agreement include a fixed charge coverage ratio and an EBITDA measure. The fixed charge coverage ratio must meet or exceed a specified minimum. The EBITDA covenant requires a minimum amount of EBITDA to be achieved. We met these covenant requirements as of March 31, 2013. All extensions of credit under the revolver are collateralized by a first priority security interest in and lien upon the inventory and accounts receivable of the Parent, WRI, Kemmerer and ROVA.
WML Term Debt and Revolving Credit Agreement WML had $99.0 million of fixed rate term debt outstanding at March 31, 2013. This term debt matures March 31, 2018, and bears an annual fixed rate of 8.02%, payable quarterly. The principal on the WML notes is scheduled to be paid as follows (in millions):

2013 remaining $ 13.5
2014             18.0
2015             20.0
2016             20.0
2017             22.0
2018              5.5

In March 2013, we amended the WML Revolving Credit Agreement by extending the maturity date from June 26, 2013 to December 31, 2017. WML's revolving line of credit has a borrowing limit of $25.0. The interest rate under the revolving line of credit at March 31, 2013 was 3.75% per annum. At March 31, 2013, WML had no outstanding balance under the revolving line of credit and the revolving line of credit supports a letter of credit of $1.9 million, leaving it with $23.1 million of borrowing availability. WML's revolving line of credit is only available to fund the operations of its respective subsidiaries. WML's credit agreement contains various affirmative and negative covenants. Operational covenants in the agreements prohibit, among other things, WML from incurring or guaranteeing additional indebtedness, creating liens on its assets, making investments or engaging in asset sales or transactions with affiliates, in each case subject to specified exceptions. Financial covenants in the agreements impose requirements relating to specified debt service coverage and leverage ratios.
The debt service coverage ratio covenant requires that at the end of each . . .

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