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WLB > SEC Filings for WLB > Form 10-Q on 26-Jul-2013All Recent SEC Filings

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Form 10-Q for WESTMORELAND COAL CO


26-Jul-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 and 11.8 million tons through June 30, 2013. 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. Indian Coal Production Tax Credits (ICTC) amendment and extension On May 30, 2013, we extended our ICTC monetization transaction two and a half months to December 31, 2013 to coincide with the IRS's extension of the ICTC. We also agreed with our partner in the transaction to adjust the mining fee WRI receives as compensation for mining to better reflect current market conditions. As a result of the change in the mining fee, we recorded an increase of $3.7 million in Other operating income for each of the three and six month periods ended June 30, 2013 with a corresponding increase in Net income attributable to noncontrolling interest. There was no impact on Net loss applicable to common shareholders.
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 would be offline for an extended period. Sherburne County Generating Station has indicated a start up date of September 2013. WRI, our wholly owned subsidiary that operates the Absaloka Mine, maintains business interruption insurance coverage and has recognized $6.5 million and $11.3 million of income for the three and six months ended June 30, 2013, respectively; and $5.5 million and $8.6 million of income for the three and six months ended June 30, 2012, respectively. We received $4.2 million and $7.4 million of cash proceeds for the three and six months ended June 30, 2013, respectively. Insurance proceeds are included in Net cash provided by operating activities.

Results of Operations
Three Months Ended June 30, 2013 Compared to Three Months Ended June 30, 2012
Summary
The following table shows the comparative consolidated results and changes
between periods:
                                                        Three Months Ended June 30,
                                                                          Increase / (Decrease)
                                         2013           2012                $                  %
                                                               (In millions)
Revenues                             $    162.5     $    132.8     $      29.7                 22.4  %
Net income (loss) applicable to
common shareholders                        (0.6 )        (12.4 )          11.8                (95.2 )%
Adjusted EBITDA(1)                         32.0           14.6            17.4                119.2  %


____________________


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

Our second quarter 2013 revenues increased primarily due to stronger power demand, favorable weather conditions, the timing of ROVA's planned maintenance, and planned 2012 mine customer outages.


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

Our second quarter 2013 net loss applicable to common shareholders decreased by $11.8 million. The primary factors, in aggregate, driving this decrease in net loss were:

Three Months Ended
June 30, 2013
(In millions)

Increase in our power segment operating income due to timing of a planned maintenance outage and fewer unplanned outages. $ 6.6 Increase in our coal segment primarily due to stronger power demand,
favorable weather conditions, and planned 2012 mine customer
outages.                                                                            4.0
Decrease in interest expense due to lower debt levels.                              1.0
Increase due to other factors                                                       0.2
Total                                                                $             11.8

Coal Segment Operating Results
The following table shows comparative coal revenues, operating income, adjusted
EBITDA and sales volume, and percentage changes between periods:
                                                        Three Months Ended June 30,
                                                                          Increase / (Decrease)
                                          2013           2012                $                  %
                                                    (In thousands, except per ton data)
Revenues                              $  139,337     $  116,960     $     22,377                19.1 %
Operating income                          13,076          5,018            8,058               160.6 %
Adjusted EBITDA(1)                        29,667         20,337            9,330                45.9 %
Tons sold-millions of equivalent tons        5.7            3.9              1.8                46.2 %


____________________


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

Our second quarter 2013 coal segment revenues, operating income and tons sold increased primarily due to stronger power demand, favorable weather conditions, and planned 2012 mine customer outages. In addition, operating income increased due to the ICTC amendment.
Power Segment Operating Results
The following table shows comparative power revenues, operating income, adjusted EBITDA and production and percentage changes between periods:

                                 Three Months Ended June 30,
                                                 Increase / (Decrease)
                     2013         2012                $                %
                                        (In thousands)
Revenues           $ 23,162    $ 15,882     $      7,280             45.8 %
Operating income      4,838      (1,749 )          6,587            376.6 %
Adjusted EBITDA(1)    7,573         959            6,614            689.7 %
Megawatts hours         421         287              134             46.7 %


____________________


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

Our second quarter 2013 power segment revenues, operating income and megawatt hours increased due to 2012 outage timing at our ROVA power plant and fewer unplanned outages.


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 June 30,
Increase / (Decrease)
2013 2012 $ %
(In thousands)

Heritage segment operating expenses $ 3,530 $ 4,527 $ (997 ) (22.0 )%

Our second quarter 2013 heritage segment operating expenses decreased primarily due to favorable interest rates.
Corporate Segment Operating Results
The following table shows comparative corporate segment's operating expenses and percentage change between periods:

Three Months Ended June 30,
Increase / (Decrease)
2013 2012 $ %
(In thousands)

Corporate segment operating expenses $ 2,409 $ 3,004 $ (595 ) (19.8 )%

Our second quarter 2013 corporate segment operating expenses decreased primarily due to one-time
recruiting and compensation expenses related to a new executive position occurring during the second quarter of 2012.
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 second quarter of 2013 decreased to $10.1 million compared with $11.0 million for the second quarter of 2012 primarily due to lower debt levels. Our interest income and other income (loss) for the second quarter of 2013 is comparable to the second quarter of 2012. Our income tax expense for the second quarter of 2013 increased to less than $0.1 million compared with $0.9 million of benefit for the second quarter of 2012 due to higher taxable income on improved results. Our income attributable to noncontrolling interest for the second quarter of 2013 increased to $2.5 million compared with a loss of $1.6 million for the second quarter of 2012 related to decreased losses from a partially owned consolidated subsidiary due to the ICTC amendment.
Six Months Ended June 30, 2013 Compared to Six Months Ended June 30, 2012 Summary
The following table shows the comparative consolidated results and changes between periods:

                                                         Six Months Ended June 30,
                                                                          Increase / (Decrease)
                                         2013           2012                $                  %
                                                               (In millions)
Revenues                             $    323.9     $    280.1     $      43.8                 15.6  %
Net income (loss) applicable to
common shareholders                        (3.3 )        (11.9 )           8.6                (72.3 )%
Adjusted EBITDA(1)                         57.7           41.9            15.8                 37.7  %


____________________


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


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

Our revenues for the first six months of 2013 increased primarily due to stronger power demand, favorable weather conditions and the Kemmerer acquisition. In addition, our ROVA power plant had fewer unplanned outages. Our net loss applicable to common shareholders for the first six months of 2013 decreased by $8.6 million. The primary factors, in aggregate, driving this decrease in net loss were:

Six Months Ended June
30, 2013
(In millions)

Increase in our coal segment primarily due to stronger power demand,
favorable weather conditions, and the Kemmerer acquisition.          $             5.2
Increase in our power segment operating income due to fewer
unplanned outages.                                                                 2.8
Decrease in interest expense due to lower debt levels.                             0.7
Decrease due to other factors                                                     (0.1 )
Total                                                                $             8.6

Coal Segment Operating Results
The following table shows comparative coal revenues, operating income, adjusted
EBITDA and sales volume, and percentage changes between periods:
                                                          Six Months Ended June 30,
                                                                           Increase / (Decrease)
                                          2013           2012                 $                   %
                                                     (In thousands, except per ton data)
Revenues                              $  281,449     $  243,474     $      37,975                 15.6 %
Operating income                          26,547         19,454             7,093                 36.5 %
Adjusted EBITDA(1)                        59,573         49,496            10,077                 20.4 %
Tons sold-millions of equivalent tons       11.8            9.5               2.3                 24.2 %


____________________


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

Our coal segment revenues, operating and tons sold increased for the first six months of 2013 primarily due to stronger power demand, favorable weather conditions, and the Kemmerer acquisition. In addition, operating income increased due to the ICTC amendment.
Power Segment Operating Results
The following table shows comparative power revenues, operating income, adjusted EBITDA and production and percentage changes between periods:

                                  Six Months Ended June 30,
                                                Increase / (Decrease)
                     2013        2012                $                %
                                       (In thousands)
Revenues           $ 42,498    $ 36,604    $      5,894             16.1 %
Operating income      3,837       1,042           2,795            268.2 %
Adjusted EBITDA(1)    9,282       6,426           2,856             44.4 %
Megawatts hours         761         660             101             15.3 %


____________________


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

Our power segment revenues, operating income and megawatt hours increased for the first six months of 2013 due to fewer unplanned outages at our ROVA power plant.


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:

Six Months Ended June 30,
Increase / (Decrease)
2013 2012 $ %
(In thousands)

Heritage segment operating expenses $ 7,705 $ 8,537 $ (832 ) (9.7 )%

Our heritage segment operating expenses decreased for the first six months of 2013 primarily due to favorable interest rates. Corporate Segment Operating Results
The following table shows comparative corporate segment's operating expenses and percentage change between periods:

Six Months Ended June 30,
Increase / (Decrease)
2013 2012 $ %
(In thousands)

Corporate segment operating expenses $ 4,968 $ 7,135 $ (2,167 ) (30.4 )%

Our corporate segment operating expenses for the first six months of 2013 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. In addition, expenses decreased due to one-time recruiting and compensation expenses related to a new executive position occurring during the first six months of 2012.
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 six months of 2013 decreased to $20.2 million compared with $20.9 million for the first six months of 2012 primarily due to lower overall debt levels. Our interest income and other income (loss) for the first six months of 2013 is comparable to the first six months of 2012. Our income tax expense for the first six months of 2013 increased to $0.1 million compared with $0.9 million of benefit for the first six months of 2012 due to higher taxable income on improved results. Our income attributable to noncontrolling interest for the first six months of 2013 increased to $0.8 million compared with a loss of $2.6 million for the first six months of 2012 related to decreased losses from a partially owned consolidated subsidiary due to the ICTC amendment. 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.


Table of Contents
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 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 2012 Form 10-K for additional information regarding our financial results. The Twelve Months Ended June 30, 2013 column is calculated from the prior three columns.

                                                                                                Year Ended       Twelve Months
                          Three Months Ended June 30,          Six Months Ended June 30,       December 31,      Ended June 30,
                           2013                2012              2013              2012            2012               2013
                                                                    (In thousands)
Reconciliation of
Adjusted EBITDA to
Net loss
Net income (loss)     $      2,217       $      (13,646 )   $     (1,870 )     $  (13,868 )   $     (13,662 )   $       (1,664 )

Income tax expense
(benefit)                       28                 (921 )             55             (914 )              90              1,059
Other income                  (130 )               (237 )           (198 )           (414 )            (723 )             (507 )
Interest income               (280 )               (490 )           (577 )           (895 )          (1,496 )           (1,178 )
Loss on
extinguishment of
. . .
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