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Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2011
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File No. 001-11155
WESTMORELAND COAL COMPANY
(Exact name of registrant as specified in its charter)
     
Delaware   23-1128670
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
     
2 North Cascade Avenue, 2nd Floor    
Colorado Springs, CO   80903
(Address of principal executive offices)   (Zip Code)
Registrant’s telephone number, including area code: (719) 442-2600
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
             
Large accelerated filer o   Accelerated filer o   Non-accelerated filer þ   Smaller reporting company o
        (Do not check if a smaller reporting company.)    
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of November 1, 2011: 13,781,417 shares of common stock, $2.50 par value.
 
 

 

 


 

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 Exhibit 31.1
 Exhibit 31.2
 Exhibit 32
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT

 

 


Table of Contents

PART I — FINANCIAL INFORMATION
ITEM 1
FINANCIAL STATEMENTS
Westmoreland Coal Company and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
                 
    September 30,     December 31,  
    2011     2010  
    (In thousands)  
Assets
               
Current assets:
               
Cash and cash equivalents
  $ 43,229     $ 5,775  
Receivables:
               
Trade
    46,698       50,578  
Contractual third-party reclamation receivables
    7,427       7,743  
Other
    4,002       4,545  
 
           
 
    58,127       62,866  
 
               
Inventories
    25,841       23,571  
Other current assets
    6,713       5,335  
 
           
Total current assets
    133,910       97,547  
 
           
 
               
Property, plant and equipment:
               
Land and mineral rights
    84,033       83,824  
Capitalized asset retirement cost
    114,856       114,856  
Plant and equipment
    519,233       506,661  
 
           
 
    718,122       705,341  
Less accumulated depreciation, depletion and amortization
    (319,841 )     (288,386 )
 
           
Net property, plant and equipment
    398,281       416,955  
 
               
Advanced coal royalties
    3,138       3,695  
Reclamation deposits
    70,801       72,274  
Restricted investments and bond collateral
    56,933       55,384  
Contractual third-party reclamation receivables, less current portion
    89,656       87,739  
Deferred income taxes
          2,458  
Intangible assets, net of accumulated amortization of $10.3 million and $9.1 million at September 30, 2011 and December 31, 2010, respectively
    5,297       6,555  
Other assets
    10,951       7,699  
 
           
Total Assets
  $ 768,967     $ 750,306  
 
           
See accompanying Notes to Consolidated Financial Statements.

 

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Westmoreland Coal Company and Subsidiaries
Consolidated Balance Sheets (Continued)
(Unaudited)
                 
    September 30,     December 31,  
    2011     2010  
    (In thousands)  
Liabilities and Shareholders’ Deficit
               
Current liabilities:
               
Current installments of long-term debt
  $ 19,796     $ 14,973  
Accounts payable and accrued expenses:
               
Trade
    43,920       46,247  
Production taxes
    27,896       26,317  
Workers’ compensation
    946       954  
Postretirement medical benefits
    13,581       13,581  
SERP
    304       304  
Deferred revenue
    12,014       10,209  
Asset retirement obligations
    16,677       14,514  
Other current liabilities
    4,682       6,241  
 
           
Total current liabilities
    139,816       133,340  
 
           
 
               
Long-term debt, less current installments
    266,664       208,731  
Revolving lines of credit
          18,400  
Workers’ compensation, less current portion
    9,279       9,424  
Excess of pneumoconiosis benefit obligation over trust assets
    3,611       2,246  
Postretirement medical benefits, less current portion
    196,230       197,279  
Pension and SERP obligations, less current portion
    13,026       20,462  
Deferred revenue, less current portion
    68,320       75,395  
Asset retirement obligations, less current portion
    230,010       227,129  
Intangible liabilities, net of accumulated amortization $10.2 million at September 30, 2011 and $9.4 million at December 31, 2010, respectively
    7,899       8,663  
Other liabilities
    8,480       11,592  
 
           
Total liabilities
    943,335       912,661  
 
           
 
               
Shareholders’ deficit:
               
Preferred stock of $1.00 par value
               
Authorized 5,000,000 shares;
Issued and outstanding 159,960 shares at September 30, 2011, and 160,129 shares at December 31, 2010, respectively
    160       160  
Common stock of $2.50 par value
               
Authorized 30,000,000 shares;
Issued and outstanding 13,762,177 shares at September 30, 2011, and 11,160,798 shares at December 31, 2010, respectively
    34,404       27,901  
Other paid-in capital
    125,498       98,466  
Accumulated other comprehensive loss
    (57,195 )     (57,680 )
Accumulated deficit
    (269,990 )     (226,740 )
 
           
Total Westmoreland Coal Company shareholders’ deficit
    (167,123 )     (157,893 )
Noncontrolling interest
    (7,245 )     (4,462 )
 
           
Total deficit
    (174,368 )     (162,355 )
 
           
Total Liabilities and Shareholders’ Deficit
  $ 768,967     $ 750,306  
 
           
See accompanying Notes to Consolidated Financial Statements.

 

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Westmoreland Coal Company and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2011     2010     2011     2010  
    (In thousands, except per share data)  
Revenues
  $ 132,449     $ 124,080     $ 372,353     $ 378,152  
 
                               
Costs, expenses and other:
                               
Cost of sales
    100,164       94,208       288,964       296,366  
Depreciation, depletion and amortization
    11,612       10,964       33,861       33,435  
Selling and administrative
    9,884       8,930       28,224       28,578  
Heritage health benefit expenses
    3,896       4,241       11,115       11,550  
Loss on sales of assets
    91       165       415       256  
Other operating income
    (1,769 )     (2,267 )     (5,236 )     (6,519 )
 
                       
 
    123,878       116,241       357,343       363,666  
 
                       
Operating income
    8,571       7,839       15,010       14,486  
 
                               
Other income (expense):
                               
Interest expense
    (7,650 )     (5,756 )     (22,262 )     (17,245 )
Loss on extinguishment of debt
                (17,030 )      
Interest income
    423       603       1,134       1,380  
Other income (loss)
    147       17       (2,630 )     907  
 
                         
 
    (7,080 )     (5,136 )     (40,788 )     (14,958 )
 
                       
Income (loss) before income taxes
    1,491       2,703       (25,778 )     (472 )
Income tax expense (benefit)from operations
    (84 )     285       (706 )     149  
 
                       
Net income (loss)
    1,575       2,418       (25,072 )     (621 )
Less net loss attributable to noncontrolling interest
    (1,154 )     (435 )     (2,783 )     (1,878 )
 
                       
Net income (loss) attributable to the Parent company
    2,729       2,853       (22,289 )     1,257  
Less preferred stock dividend requirements
    340       340       1,020       1,020  
 
                       
Net income (loss) applicable to common shareholders
  $ 2,389     $ 2,513     $ (23,309 )   $ 237  
 
                       
 
                               
Net income (loss) per share applicable to common shareholders:
                               
Basic
  $ 0.18     $ 0.23     $ (1.79 )   $ 0.02  
Diluted
    0.18       0.23       (1.79 )     0.02  
 
                               
Weighted average number of common shares outstanding:
                               
Basic
    13,384       10,849       12,990       10,676  
Diluted
    13,442       10,911       12,990       10,758  
 
 
Net income (loss) (from above)
  $ 1,575     $ 2,418     $ (25,072 )   $ (621 )
Other comprehensive income (loss):
                               
Amortization of accumulated actuarial gains or losses, pension
    442       332       1,212       996  
Amortization of accumulated actuarial gains or losses, transition obligations and prior service costs, postretirement medical benefits
    (72 )     (68 )     (216 )     (206 )
Tax effect of other comprehensive income gains
    (141 )           (308 )      
Unrealized and realized gains and losses on available-for-sale securities
    (12 )     262       (203 )     (345 )
 
                       
Comprehensive income (loss)
  $ 1,792     $ 2,944     $ (24,587 )   $ (176 )
 
                       
See accompanying Notes to Consolidated Financial Statements.

 

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Westmoreland Coal Company and Subsidiaries
Consolidated Statement of Shareholders’ Deficit
Nine Months Ended September 30, 2011
(Unaudited)
                                                                         
                                            Accumulated                     Total  
                                            Other             Non-     Shareholders’  
    Preferred Stock     Common Stock     Other Paid-     Compre-     Accumulated     controlling     Equity  
    Shares     Amount     Shares     Amount     In Capital     hensive Loss     Deficit     Interest     (Deficit)  
    (In thousands; except shares data)  
 
                                                                       
Balance at December 31, 2010
    160,129     $ 160       11,160,798     $ 27,901     $ 98,466     $ (57,680 )   $ (226,740 )   $ (4,462 )   $ (162,355 )
 
                                                                       
Preferred dividends declared
                                        (20,961 )           (20,961 )
 
                                                                       
Common stock issued as compensation
                190,916       477       3,331                         3,808  
 
                                                                       
Common stock options exercised
                31,200       78       344                         422  
 
                                                                       
Conversion of convertible notes and securities
    (169 )           1,879,098       4,698       20,787                         25,485  
 
                                                                       
Common stock issued to pension plan assets
                450,000       1,125       3,132                         4,257  
 
                                                                       
Issuance of restricted stock
                50,165       125       (562 )                       (437 )
 
                                                                       
Net loss
                                        (22,289 )     (2,783 )     (25,072 )
 
                                                                       
Tax effect of other comprehensive income gains
                                  (308 )                 (308 )
 
                                                                       
Amortization of accumulated actuarial gains or losses, pension
                                  1,212                   1,212  
 
                                                                       
Amortization of accumulated actuarial gains or losses, transition obligations and prior service costs, postretirement medical benefits
                                  (216 )                 (216 )
Unrealized and realized gains and losses on available-for-sale securities
                                  (203 )                 (203 )
 
                                                     
 
                                                                       
Balance at September 30, 2011
    159,960     $ 160       13,762,177     $ 34,404     $ 125,498     $ (57,195 )   $ (269,990 )   $ (7,245 )   $ (174,368 )
 
                                                     
See accompanying Notes to Consolidated Financial Statements.

 

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Westmoreland Coal Company and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
                 
    Nine Months Ended September 30,  
    2011     2010  
    (In thousands)  
Cash flows from operating activities:
               
Net loss
  $ (25,072 )   $ (621 )
Adjustments to reconcile net loss to net cash provided by operating activities:
               
Depreciation, depletion and amortization
    33,861       33,435  
Accretion of asset retirement obligation and receivable
    8,100       8,687  
Amortization of intangible assets and liabilities, net
    494       348  
Non-cash tax benefits
    (308 )      
Share-based compensation
    3,808       3,206  
Loss on sales of assets
    415       256  
Non-cash interest expense
          1,236  
Amortization of deferred financing costs
    1,886       1,691  
Loss on extinguishment of debt
    17,030        
Gain on sales of investment securities
    (150 )     (604 )
Loss (gain) on derivative instruments
    3,079       (132 )
Changes in operating assets and liabilities:
               
Receivables, net
    4,773       (3,916 )
Inventories
    (2,270 )     995  
Excess of pneumoconiosis benefit obligation over trust assets
    1,365       1,190  
Accounts payable and accrued expenses
    1,361       10,715  
Deferred revenue
    (5,270 )     (1,141 )
Accrual for workers’ compensation
    (153 )     (143 )
Asset retirement obligation
    (4,657 )     (4,543 )
Accrual for postretirement medical benefits
    (1,265 )     (2,258 )
Pension and SERP obligations
    (1,967 )     (3,789 )
Other assets and liabilities
    (1,032 )     (7,028 )
 
           
Net cash provided by in operating activities
    34,028       37,584  
 
           
 
               
Cash flows from investing activities:
               
Additions to property, plant and equipment
    (15,103 )     (15,645 )
Change in restricted investments and bond collateral and reclamation deposits
    (3,479 )     (4,118 )
Net proceeds from sales of assets
    87       389  
Proceeds from sale of restricted investments
    3,350       2,307  
Receivable from customer for property and equipment purchases
    (350 )     117  
 
           
Net cash used in investing activities
    (15,495 )     (16,950 )
 
           
 
               
Cash flows from financing activities:
               
Change in book overdrafts
    (635 )     (1,389 )
Borrowings from long-term debt, net of debt discount
    142,500        
Repayments of long-term debt
    (69,186 )     (17,702 )
Borrowings on revolving lines of credit
    87,200       122,100  
Repayments of revolving lines of credit
    (105,600 )     (118,100 )
Debt issuance and other refinancing costs
    (14,819 )      
Preferred dividends paid
    (20,961 )      
Exercise of stock options
    422       8  
 
           
Net cash provided by (used in) financing activities
    18,921       (15,083 )
 
           
 
               
Net increase in cash and cash equivalents
    37,454       5,551  
Cash and cash equivalents, beginning of period
    5,775       10,519  
 
           
Cash and cash equivalents, end of period
  $ 43,229     $ 16,070  
 
           
 
               
Non-cash transactions:
               
Capital leases
  $ 531     $ 866  
See accompanying Notes to Consolidated Financial Statements.

 

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WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include accounts of Westmoreland Coal Company, or the Company, or Parent, and its subsidiaries and controlled entities. The Company’s current principal activities, all conducted within the United States, are the production and sale of coal from its mines in Montana, North Dakota and Texas, and the ownership of the Roanoke Valley power plants, or ROVA, in North Carolina. The Company’s activities are primarily conducted through wholly owned subsidiaries. All intercompany transactions and accounts have been eliminated in consolidation.
The Company’s Absaloka Mine is owned by its subsidiary Westmoreland Resources, Inc., or WRI. The right to mine coal at the Absaloka Mine has been subleased to an affiliated entity whose operations the Company controls. The Beulah, Jewett, Rosebud, and Savage Mines are owned through the Company’s subsidiary Westmoreland Mining LLC, or WML.
The Company is subject to two major debt arrangements: (1) $125.0 million senior secured notes at WML that are collateralized by all assets of WML, Westmoreland Savage Corporation, or WSC, Western Energy Company, or WECO, and Dakota Westmoreland Corporation, or DWC, and (2) $150.0 million senior secured notes (issued February 4, 2011) at the Parent level that are largely collateralized by the assets of the Parent, WRI and ROVA, referred to herein as the Parent Notes.
These 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, 2010, or the 2010 Form 10-K. The accounting principles followed by the Company are set forth in the Notes to the Company’s consolidated financial statements in its 2010 Form 10-K. Most of the descriptions of the accounting principles and other footnote disclosures previously made have been omitted in this report so long as the interim information presented is not misleading.
The consolidated financial statements of the Company have been prepared in accordance with United States generally accepted accounting principles and require use of management’s estimates. The financial information contained in this Form 10-Q is unaudited, but reflects all adjustments, which are, in the opinion of management, necessary for a fair presentation of the financial information for the periods shown. Such adjustments are of a normal recurring nature. The results of operations for the nine months ended September 30, 2011 are not necessarily indicative of results to be expected for the year ending December 31, 2011.
2. ACCOUNTING POLICIES
Newly Adopted Accounting Pronouncements
In January 2010, accounting guidance was issued regarding fair value measurements and disclosures and improvement in the disclosure about fair value measurements. This guidance requires additional disclosures regarding significant transfers in and out of Levels 1 and 2 of fair value measurements, including a description of the reasons for the transfers. This guidance also requires additional disclosures for the activity in Level 3 fair value measurements, requiring presentation of information about purchases, sales, issuances, and settlements in the reconciliation for fair value measurements. This guidance is effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. See Note 10 for applicable disclosures.
Accounting Pronouncements Not Yet Implemented
In September 2011, accounting guidance was issued which requires that employers provide additional separate disclosures for multiemployer pension plans and multiemployer other postretirement benefit plans. The additional quantitative and qualitative disclosures will provide users with more detailed information about an employer’s involvement in multiemployer pension plans. This standard is effective for annual periods ending after December 15, 2011. The Company has determined that the adoption of this standard will affect the Company’s disclosures but will not have a material effect on the Company’s financial position or results of operations.

 

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WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
In June 2011, accounting guidance was issued which requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This guidance eliminates the option to present the components of other comprehensive income as part of the statement of equity. This standard is effective for periods beginning after December 15, 2011. The Company has determined that the adoption of this standard will affect the Company’s disclosures but will not have a material effect on the Company’s financial position or results of operations.
In May 2011, accounting guidance was issued which generally aligns the principles for fair value measurements and the related disclosure requirements under Generally Accepted Accounting Principles and International Financial Reporting Standards. This guidance requires additional disclosures regarding details about Level 3 fair value measurements, including quantitative information about the significant unobservable inputs used in estimating fair value, a discussion of the sensitivity of the measurement to these inputs and a description of the entity’s valuation processes. Disclosures will also be needed concerning any transfers between Level 1 and 2 of the fair value hierarchy (not just significant transfers as previous guidance required) and the hierarchy classification for items whose fair value is not recorded on the balance sheet but is disclosed in the notes. This standard is effective for periods beginning after December 15, 2011. The Company has determined that the adoption of this standard will affect the Company’s disclosures but will not have a material effect on the Company’s financial position or results of operations.
3. INVENTORIES
Inventories consisted of the following:
                 
    September 30,     December 31,  
    2011     2010  
    (In thousands)  
Coal stockpiles
  $ 792     $ 678  
Coal fuel inventories
    2,025       1,936  
Materials and supplies
    23,599       21,538  
Reserve for obsolete inventory
    (575 )     (581 )
 
           
Total
  $ 25,841     $ 23,571  
 
           
4. RESTRICTED INVESTMENTS AND BOND COLLATERAL
The Company’s restricted investments and bond collateral consists of the following:
                 
    September 30,     December 31,  
    2011     2010  
    (In thousands)  
Coal Segment:
               
Westmoreland Mining — debt reserve account
  $ 10,764     $ 7,514  
Reclamation bond collateral:
               
Absaloka Mine
    13,555       10,956  
Rosebud Mine
    12,264       12,263  
Beulah Mine
    1,270       1,270  
Jewett Mine
          3,001  
 
               
Power Segment:
               
Letter of credit account
    5,978       5,990  
Debt protection account
          905  
Repairs and maintenance account
          1,067  
Ash reserve account
          602  
 
               
Corporate Segment:
               
Postretirement medical benefit bonds
    6,645       5,466  
Workers’ compensation bonds
    6,457       6,350  
 
           
Total restricted investments and bond collateral
  $ 56,933     $ 55,384  
 
           

 

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WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For all of its restricted investments and bond collateral accounts, the Company can select from limited fixed-income investment options for the funds and receive the investment returns on these investments. Funds in the restricted investments and bond collateral accounts are not available to meet the Company’s cash needs.
These accounts include held-to-maturity and available-for-sale securities. Held-to-maturity securities are recorded at amortized cost, adjusted for the amortization or accretion of premiums or discounts calculated on the effective interest method. Interest income is recognized when earned. 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 and bond collateral at September 30, 2011 are as follows:
                 
    Carrying Value     Fair Value  
    (In thousands)  
Cash and cash equivalents
  $ 42,525     $ 42,525  
Time deposits
    7,698       7,698  
Held-to-maturity securities
    4,923       5,297  
Available-for-sale securities
    1,787       1,787  
 
           
 
  $ 56,933     $ 57,307  
 
           
The Company recorded a gain of $0.1 million on the sale of available-for-sale securities held as restricted investments and bond collateral in the nine months ended September 30, 2011.
Following the Parent Notes offering in February 2011 discussed in Note 5, ROVA is no longer required to maintain its debt protection accounts, ash reserve account or the repairs and maintenance account.
Held-to-Maturity and Available-for-Sale Restricted Investments and Bond Collateral
The amortized cost, gross unrealized holding gains and losses and fair value of held-to-maturity securities at September 30, 2011 is as follows (in thousands):
         
Amortized cost
  $ 4,923  
Gross unrealized holding gains
    414  
Gross unrealized holding losses
    (40 )
 
     
Fair value
  $ 5,297  
 
     
Maturities of held-to-maturity securities are as follows at September 30, 2011:
                 
    Amortized Cost     Fair Value  
    (In thousands)  
Within one year
  $ 123     $ 120  
Due in five years or less
    3,067       3,116  
Due after five years to ten years
    792       967  
Due in more than ten years
    941       1,094  
 
           
 
  $ 4,923     $ 5,297  
 
           
The cost basis, gross unrealized holding gains and fair value of available-for-sale securities at September 30, 2011 is as follows (in thousands):
         
Cost basis
  $ 1,566  
Gross unrealized holding gains
    221  
 
     
Fair value
  $ 1,787  
 
     

 

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WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
5. LINES OF CREDIT AND LONG-TERM DEBT
The amounts outstanding under the Company’s lines of credit and long-term debt consist of the following:
                 
    Total Debt Outstanding  
    September 30,     December 31,  
    2011     2010  
    (In thousands)  
Corporate:
               
Senior secured notes
  $ 150,000     $  
Convertible notes
          18,495  
Debt discount
    (7,020 )     (4,823 )
Westmoreland Mining, LLC:
               
Revolving line of credit
          1,500  
Term debt
    120,000       125,000  
Capital lease obligations
    15,163       18,407  
Other term debt
    2,172       2,556  
Westmoreland Resources, Inc.:
               
Revolving line of credit
          16,900  
Term debt
          9,600  
Capital lease obligations
    6,145       7,821  
ROVA:
               
Term debt
          46,220  
Debt premiums
          428  
 
           
Total debt outstanding
    286,460       242,104  
Less current portion
    (19,796 )     (14,973 )
 
           
Total debt outstanding, less current portion
  $ 266,664     $ 227,131  
 
           
The following table presents aggregate contractual debt maturities of all long-term debt and the lines of credit at September 30, 2011 (in thousands):
         
Remainder of 2011
  $ 4,347  
2012
    21,639  
2013
    24,944  
2014
    22,630  
2015
    21,910  
Thereafter
    198,010  
 
     
Total
    293,480  
Less: debt discount
    (7,020 )
 
     
Total debt
  $ 286,460  
 
     
Corporate
On February 4, 2011 through a private placement offering, the Company issued $150.0 million of Parent Notes, which are senior secured notes. The Company’s subsidiary, Westmoreland Partners, was a co-issuer of the notes. The Parent Notes were issued at a 5% discount, mature February 18, 2018, and bear a fixed interest rate of 10.750%, payable semi-annually, in arrears, on February 1 and August 1 of each year which began August 1, 2011. Substantially all of the assets of the Parent, ROVA and WRI constitute collateral for the Parent Notes as to which the holders of these notes have a first priority lien. Under the indenture governing the Parent Notes, the Company is required to offer a portion of its Excess Cash Flow (as defined by the indenture) for each fiscal year to purchase some of these notes at 100% of the principal amount.
As a result of this offering, the Company recorded a $17.0 million loss on extinguishment of debt in the nine months ended September 30, 2011. The loss included a $9.1 million make-whole payment for ROVA’s debt and $7.9 million of non-cash write-offs of unamortized discount on debt and related capitalized debt costs and convertible debt conversion expense.

 

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WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The indenture governing the Parent Notes contains, among other provisions, events of default and various affirmative and negative covenants. As of September 30, 2011, the Company was in compliance with all covenants.
Westmoreland Mining LLC
WML has outstanding $120.0 million in term debt as of September 30, 2011 and is party to a revolving credit facility with a maximum availability of $25.0 million. In the nine months ended September 30, 2011, WML repaid $5.0 million on its term debt and $4.0 million of its capital lease obligations and other term debt. WML entered into capital lease agreements in the amount of $0.4 million during the nine months ended September 30, 2011. The weighted average interest rate for WML’s capital leases and other term debt was 8.01% and 6.18%, respectively, at September 30, 2011.
The available balance on the $25.0 million revolving line of credit at September 30, 2011 was $23.1 million. The revolving line of credit supports a $1.9 million letter of credit, which reduces the available balance. The interest rate on the revolving line of credit was 3.75% at September 30, 2011.
WML’s lending arrangements contain, among other provisions, events of default and various affirmative and negative covenants. As of September 30, 2011, WML was in compliance with all covenants.
Westmoreland Resources, Inc.
In February 2011, proceeds from the Parent Note offering were used to pay off the outstanding balance of WRI’s term debt and revolving line of credit. In addition, WRI’s revolving line of credit was terminated in February 2011.
In the nine months ended September 30, 2011, WRI repaid $1.8 million of its capital lease obligations. WRI entered into capital lease agreements in the amount of $0.1 million during the nine months ended September 30, 2011. The weighted average interest rate for WRI’s capital leases was 6.72% at September 30, 2011.
ROVA
In February 2011, proceeds from the Parent Note offering were used to repay all of ROVA’s outstanding fixed rate term debt. In addition, ROVA’s revolving line of credit was terminated in February 2011.
Convertible Debt
In February 2011, the outstanding balance of the Company’s convertible notes was eliminated, with $2.5 million paid to retire a portion of the convertible notes and the remainder of the notes being converted into 1,877,946 shares of Company common stock at a conversion price of $8.50 per share.
6. PENSION AND POSTRETIREMENT MEDICAL BENEFITS
Pension
The Company provides pension benefits to qualified full-time employees pursuant to collective bargaining agreements. The Company froze its pension plan for non-union employees in 2009.

 

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WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The Company incurred net periodic benefit costs of providing these pension benefits as follows:
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2011     2010     2011     2010  
    (In thousands)  
Components of net periodic benefit cost:
                               
Service cost
  $ 195     $ 147     $ 585     $ 458  
Interest cost
    1,186       1,168       3,554       3,505  
Expected return on plan assets
    (1,343 )     (1,092 )     (3,913 )     (3,277 )
Amortization of deferred items
    442       332       1,212       996  
 
                       
Total net periodic benefit cost
  $ 480     $ 555     $ 1,438     $ 1,682  
 
                       
The Company is required by a WML loan covenant to ensure that by 8.5 months after the end of the plan year, the value of its pension assets are at least 90% of the plan’s year end actuarially determined pension liability.
The Company contributed $3.2 million in cash and $4.2 million in company stock to its pension plans in the nine months ended September 30, 2011 and does not expect to make anymore pension plan contributions during the remainder of 2011.
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.
The Company incurred net periodic benefit costs of providing postretirement medical benefits as follows:
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2011     2010     2011     2010  
    (In thousands)  
Components of net periodic benefit cost:
                               
Service cost
  $ 123     $ 133     $ 369     $ 403  
Interest cost
    2,628       2,625       7,883       7,874  
Amortization of deferred items
    (72 )     (68 )     (216 )     (206 )
 
                       
Total net periodic benefit cost
  $ 2,679     $ 2,690     $ 8,036     $ 8,071  
 
                       
The following table shows the net periodic medical benefit costs that relate to current operations and former mining operations:
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2011     2010     2011     2010  
    (In thousands)  
Former mining operations
  $ 2,316     $ 2,311     $ 6,944     $ 6,935  
Current operations
    363       379       1,092       1,136  
 
                       
Total net periodic benefit cost
  $ 2,679     $ 2,690     $ 8,036     $ 8,071  
 
                       

 

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WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The costs for the former mining operations are included in Heritage health benefit expenses and the costs for current operations are included as operating expenses.
The Company expects to pay approximately $4.3 million for postretirement medical benefits during the remainder of 2011, net of Medicare Part D reimbursements. A total of $9.3 million was paid in the nine months ended September 30, 2011 net of Medicare Part D reimbursements.
7. HERITAGE HEALTH BENEFIT EXPENSES
The caption Heritage health benefit expenses used in the Consolidated Statements of Operations refers to costs of benefits the Company provides to its former mining operation employees. The components of these expenses are as follows:
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2011     2010     2011     2010  
    (In thousands)  
Health care benefits
  $ 2,445     $ 2,932     $ 7,208     $ 7,551  
Combined benefit fund payments
    686       756       2,057       2,268  
Workers’ compensation benefits
    162       175       485       540  
Black lung benefits
    603       378       1,365       1,191  
 
                       
Total
  $ 3,896     $ 4,241     $ 11,115     $ 11,550  
 
                       
8.   ASSET RETIREMENT OBLIGATIONS, CONTRACTUAL THIRD-PARTY RECLAMATION RECEIVABLES, AND RECLAMATION DEPOSITS
The asset retirement obligations, contractual third-party reclamation receivables, and reclamation deposits for each of the Company’s mines and ROVA at September 30, 2011 are summarized below:
                         
            Contractual Third-        
    Asset Retirement     Party Reclamation     Reclamation  
    Obligations     Receivables     Deposits  
    (In thousands)  
Rosebud
  $ 109,266     $ 15,342     $ 70,801  
Jewett
    81,203       81,203        
Absaloka
    33,860       538        
Beulah
    18,756              
Savage
    2,846              
ROVA
    756              
 
                 
Total
  $ 246,687     $ 97,083     $ 70,801  
 
                 

 

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WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Asset Retirement Obligations
Changes in the Company’s asset retirement obligations are as follows:
                 
    Nine Months Ended  
    September 30,  
    2011     2010  
    (In thousands)  
Asset retirement obligations, beginning of period
  $ 241,643     $ 244,615  
Accretion
    15,058       14,830  
Liabilities settled
    (10,014 )     (10,924 )
 
           
Asset retirement obligations, end of period
    246,687       248,521  
Less current portion
    (16,677 )     (16,545 )
 
           
Asset retirement obligations, less current portion
  $ 230,010     $ 231,976  
 
           
The Company’s contract with Coyote Station, located adjacent to our Beulah Mine, expires in May 2016. The Company has been negotiating with the Coyote Station owners in a competitive bid process for another long-term supply contract. Based on the direction of those negotiations, the Company will be changing various accounting estimates due to the uncertainty of entering into a new agreement upon the conclusion of the current contract in 2016. These changes in estimates will take effect in the fourth quarter of 2011 and will result in revised depreciable asset lives, coal reserve lives and asset retirement obligations. The Company expects increases in depreciation, depletion and accretion expense as a result of these changes in estimates. The Company has not yet determined an updated estimate of the asset retirement obligation related to the Beulah Mine, but does not expect the impact of the change to be material to its financial position.
Contractual Third-Party Reclamation Receivables
The Company has recognized an asset of $97.1 million as contractual third-party reclamation receivables, representing the present value of customer obligations to reimburse the Company for reclamation expenditures at the Company’s Rosebud, Jewett and Absaloka Mines.
    Reclamation Deposits
The Company’s reclamation deposits will be used to fund final reclamation activities. The Company’s carrying value and estimated fair value of its reclamation deposits at September 30, 2011 are as follows:
                 
    Carrying Value     Fair Value  
    (In thousands)  
Cash and cash equivalents
  $ 34,845     $ 34,845  
Held-to-maturity securities
    20,636       22,006  
Time deposits
    14,218       14,218  
Available-for-sale securities
    1,102       1,102  
 
           
 
  $ 70,801     $ 72,171  
 
           
The Company recorded a gain of $0.1 million on the sale of available-for-sale securities held as reclamation deposits in the nine months ended September 30, 2011.

 

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WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Held-to-maturity and Available-for-sale Reclamation Deposits
The amortized cost, gross unrealized holding gains and losses and fair value of held-to-maturity securities at September 30, 2011 are as follows (in thousands):
         
Amortized cost
  $ 20,636  
Gross unrealized holding gains
    1,412  
Gross unrealized holding losses
    (42 )
 
     
Fair value
  $ 22,006  
 
     
Maturities of held-to-maturity securities at September 30, 2011 are as follows:
                 
    Amortized Cost     Fair Value  
    (In thousands)  
Due in five years or less
  $ 8,339     $ 8,466  
Due after five years to ten years
    6,236       6,717  
Due in more than ten years
    6,061       6,823  
 
           
 
  $ 20,636     $ 22,006  
 
           
The cost basis, gross unrealized holding gains and fair value of available-for-sale securities at September 30, 2011 are as follows (in thousands):
         
Cost basis
  $ 1,000  
Gross unrealized holding gains
    102  
 
     
Fair value
  $ 1,102  
 
     
9. DERIVATIVE INSTRUMENTS
Derivative 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’s convertible notes were retired on February 4, 2011.
The fair value of outstanding derivative instruments not designated as hedging instruments on the accompanying Consolidated Balance Sheet are as follows:
                     
    Balance Sheet   September 30,     December 31,  
Derivative Instruments   Location   2011     2010  
    (In thousands)  
Convertible debt — conversion feature
  Other liabilities   $     $ 3,588  

 

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WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The effect of derivative instruments not designated as hedging instruments on the accompanying Consolidated Statements of Operations are as follows:
                                     
        Three Months Ended     Nine Months Ended  
    Statement of   September 30,     September 30,  
Derivative Instruments   Operations Location   2011     2010     2011     2010  
        (In thousands)  
Convertible debt — conversion feature
  Other income (loss)   $     $     $ (3,079 )   $ 102  
Warrant
  Other income (loss)                       30  
10. 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. See Notes 4, 8 and 9 for additional disclosures related to fair value measurements.
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.
    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 that are accounted for at fair value:
         
    Fair Value at  
    September 30, 2011  
    Level 1  
    (In thousands)  
Assets:
       
Available-for-sale investments included in Restricted investments and bond collateral
  $ 1,787  
Available-for-sale investments included in Reclamation deposits
    1,102  
 
     
Total assets
  $ 2,889  
 
     
The following table summarizes the change in the fair values of the derivative instrument liabilities categorized as Level 3:
                 
    Three Months Ended     Nine Months Ended  
    September 30, 2011     September 30, 2011  
    (In thousands)  
Beginning balance
  $     $ 3,588  
Change in fair value
          3,079  
Settlements
          (6,667 )
 
           
Ending balance
  $     $  
 
           

 

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WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The Company calculates the fair value of its debt by using discount rate estimates based on interest rates as of September 30, 2011. The estimated fair values of the Company’s debt with fixed interest rates, excluding conversion feature values, are as follows:
                 
    Carrying Value     Fair Value  
    (In thousands)  
December 31, 2010
  $ 185,320     $ 196,483  
September 30, 2011
  $ 262,980     $ 266,680  
11. SHAREHOLDERS’ EQUITY
Preferred Stock
The Company has outstanding Series A Convertible Exchangeable Preferred Stock on which cumulative dividends of $2.125 per share are payable quarterly. In February 2011, the Company paid $19.9 million of dividends that had accumulated as of January 1, 2011. In June 2011, approximately 169 shares of preferred stock were converted into 1,152 shares of common stock.
12. RESTRICTED STOCK UNITS, STOCK OPTIONS, AND STOCK APPRECIATION RIGHTS (SARs)
The Company recognized compensation expense from share-based arrangements shown in the following table:
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2011     2010     2011     2010  
    (In thousands)  
Recognition of fair value of restricted stock units, stock options, and stock appreciation rights over vesting period; and issuance of common stock
  $ 438     $ 208     $ 1,540     $ 792  
Contributions of stock to the Company’s 401(k) plan
    578       669       2,268       2,414  
 
                       
Total share-based compensation expense
  $ 1,016     $ 877     $ 3,808     $ 3,206  
 
                       
Restricted Stock Units
A summary of restricted stock unit activity for the nine months ended September 30, 2011 is as follows:
                         
                    Unamortized  
            Weighted Average     Compensation  
            Grant-Date Fair     Expense  
    Units     Value     (In thousands)  
Non-vested at December 31, 2010
    192,697     $ 8.13          
Granted
    189,721     $ 15.15          
Vested
    (73,203 )     8.13          
Forfeited
    (1,056 )   $ 8.11          
 
                     
Non-vested at September 30, 2011
    308,159     $ 12.45     $ 3,152 (1)
 
                 
     
1   Expected to be recognized over the next three years.
In April 2011, 172,081 restricted stock units were granted, of which 86,052 units will vest ratably over a three-year period. The remaining 86,029 units are performance based, which will vest and pay out at the end of a three-year period if performance goals are met.

 

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WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
    Stock Options
Information with respect to stock option activity for the nine months ended September 30, 2011 is as follows:
                                         
                    Weighted Average             Unamortized  
            Weighted     Remaining     Aggregate     Compensation  
    Stock     Average     Contractual Life     Intrinsic Value     Expense  
    Options     Exercise Price     (in years)     (In thousands)     (In thousands)  
Outstanding at December 31, 2010
    318,590     $ 18.99                          
Exercised
    (31,200 )   $ 13.53             $ 86          
Expired or forfeited
    (66,967 )   $ 16.49                          
 
                                     
Outstanding and exercisable at September 30, 2011
    220,423     $ 20.53       5.3     $     $  
 
                             
Stock Appreciation Rights
Information with respect to stock appreciation rights, or SARs, activity for the nine months ended September 30, 2011 is as follows:
                                         
                    Weighted Average     Aggregate     Unamortized  
            Weighted     Remaining     Intrinsic     Compensation  
            Average     Contractual Life     Value     Expense  
    SARs     Base Price     (in years)     (In thousands)     (In thousands)  
Outstanding at December 31, 2010
    118,934     $ 22.13                          
Expired
    (7,200 )   $ 21.14                          
 
                                     
Outstanding and exercisable at September 30, 2011
    111,734     $ 22.20       3.9     $     $  
 
                             
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 convertible notes and securities, stock options, stock appreciation rights, and restricted stock units. No such items were included in the computation of diluted loss per share in the nine months ended September 30, 2011 because the Company incurred a loss from operations in this period and the effect of inclusion would have been anti-dilutive.
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2011     2010     2011     2010  
    (In thousands)  
Income (loss) for basic earnings per share calculation:
                               
Net income (loss) allocated to common shareholders
  $ 2,389     $ 2,513     $ (23,309 )   $ 237  
 
                       
Weighted average shares outstanding:
                               
Basic weighted average shares outstanding
    13,384       10,849       12,990       10,676  
Effect of restricted stock units, stock options and SARs
    58       62             82  
Effect of convertible notes and securities
                       
 
                       
Diluted weighted average shares outstanding
    13,442       10,911       12,990       10,758  
 
                       

 

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WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The table below shows the number of shares that were excluded from the calculation of diluted income (loss) per share because their inclusion would be anti-dilutive to the calculation:
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2011     2010     2011     2010  
    (In thousands)  
Convertible notes and securities
    1,093       2,943       1,093       2,943  
Restricted stock units, stock options and SARs
    582       649       640       628  
 
                       
Total shares excluded from diluted shares calculation
    1,675       3,592       1,733       3,571  
 
                       
14. BUSINESS SEGMENT INFORMATION
Segment information is based on a management approach, which requires segmentation based upon the Company’s internal organization and reporting of revenue and operating income.
The Company’s operations are classified into four segments: coal, power, heritage and corporate.
Summarized financial information by segment is as follows:
                                         
    Coal     Power     Heritage     Corporate     Consolidated  
    (In thousands)  
Three Months Ended September 30, 2011
                                       
Revenues
  $ 108,823     $ 23,626     $     $     $ 132,449  
Depreciation, depletion, and amortization
    8,966       2,570             76       11,612  
Operating income (loss)
    9,679       4,694       (4,076 )     (1,726 )     8,571  
Total assets
    514,169       200,280       13,356       41,162       768,967  
Capital expenditures
    2,354       482             297       3,133  
Three Months Ended September 30, 2010
                                       
Revenues
  $ 100,482     $ 23,598     $     $     $ 124,080  
Depreciation, depletion, and amortization
    8,334       2,529             101       10,964  
Operating income (loss)
    8,869       5,059       (4,729 )     (1,360 )     7,839  
Total assets
    530,751       213,665       11,769       8,815       765,000  
Capital expenditures
    6,155       219             (272 )     6,102  
Nine Months Ended September 30, 2011
                                       
Revenues
  $ 303,734     $ 68,619     $     $     $ 372,353  
Depreciation, depletion, and amortization
    25,971       7,666             224       33,861  
Operating income (loss)
    20,576       11,764       (12,062 )     (5,268 )     15,010  
Total assets
    514,169       200,280       13,356       41,162       768,967  
Capital expenditures
    13,541       1,178             384       15,103  
Nine Months Ended September 30, 2010
                                       
Revenues
  $ 310,490     $ 67,662     $     $     $ 378,152  
Depreciation, depletion, and amortization
    25,565       7,588             282       33,435  
Operating income (loss)
    21,944       10,536       (12,745 )     (5,249 )     14,486  
Total assets
    530,751       213,665       11,769       8,815       765,000  
Capital expenditures
    13,752       1,349             544       15,645  

 

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WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
A reconciliation of segment operating income to income (loss) before income taxes follows:
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2011     2010     2011     2010  
    (In thousands)  
Income from operations
  $ 8,571     $ 7,839     $ 15,010     $ 14,486  
Interest expense
    (7,650 )     (5,756 )     (22,262 )     (17,245 )
Loss on extinguishment of debt
                (17,030 )      
Interest income
    423       603       1,134       1,380  
Other income (loss)
    147       17       (2,630 )     907  
 
                       
Income (loss) before income taxes
  $ 1,491     $ 2,703     $ (25,778 )   $ (472 )
 
                       
15. CONTINGENCIES
The Company is a party to claims and lawsuits with respect to various matters. The Company provides for costs related to contingencies when a loss is probable and the amount is reasonably estimable. After conferring with counsel, it is the opinion of management that the ultimate resolution of pending claims will not have a material adverse effect on the consolidated financial condition, results of operations or liquidity of the Company.

 

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WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
16. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION
Pursuant to the indenture governing the Parent Notes, certain wholly owned subsidiaries of the Company have fully and unconditionally guaranteed the notes on a joint and several basis. The following tables present unaudited consolidating financial information for (i) the issuer of the notes (Westmoreland Coal Company), (ii) the co-issuer of the notes (Westmoreland Partners), (iii) the guarantors under the notes, and (iv) the entities which are not guarantors under the notes:
CONSOLIDATING BALANCE SHEETS
September 30, 2011
(In thousands)
                                                 
                            Non-              
    Parent/             Guarantor     Guarantor     Consolidating        
Assets   Issuer     Co-Issuer     Subsidiaries     Subsidiaries     Adjustments     Total  
Current assets:
                                               
Cash and cash equivalents
  $ 32,026     $ 3,285     $ 3     $ 7,915     $     $ 43,229  
Receivables:
                                               
Trade
          14,350       347       32,001             46,698  
Contractual third-party reclamation receivables
                112       7,315             7,427  
Intercompany receivable/payable
    (19,955 )           9,647       (23,161 )     33,469        
Other
    265       24       10,749       2,934       (9,970 )     4,002  
 
                                   
 
    (19,690 )     14,374       20,855       19,089       23,499       58,127  
 
                                               
Inventories
          2,025       4,517       19,299             25,841  
Other current assets
    786       720       784       4,973       (550 )     6,713  
 
                                   
Total current assets
    13,122       20,404       26,159       51,276       22,949       133,910  
 
                                   
Property, plant and equipment:
                                               
Land and mineral rights
          1,156       17,806       65,071             84,033  
Capitalized asset retirement cost
          239       20,463       94,154             114,856  
Plant and equipment
    2,993       217,083       118,701       180,456             519,233  
 
                                   
 
    2,993       218,478       156,970       339,681             718,122  
 
                                               
Less accumulated depreciation, depletion and amortization
    (2,209 )     (49,554 )     (88,244 )     (179,834 )           (319,841 )
 
                                   
Net property, plant and equipment
    784       168,924       68,726       159,847             398,281  
Advanced coal royalties
                548       2,590             3,138  
Reclamation deposits
                      70,801             70,801  
Restricted investments and bond collateral
    13,102       5,978       13,555       24,298             56,933  
Contractual third-party reclamation receivables, less current portion
                425       89,231             89,656  
Intangible assets
          4,972             325             5,297  
Investment in subsidiaries
    167,707             (717 )     3,770       (170,760 )      
Other assets
    7,076             1,236       2,639             10,951  
 
                                   
Total assets
  $ 201,791     $ 200,278     $ 109,932     $ 404,777     $ (147,811 )   $ 768,967  
 
                                   

 

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WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
CONSOLIDATING BALANCE SHEETS
September 30, 2011
(In thousands)
                                                 
                            Non-              
    Parent/             Guarantor     Guarantor     Consolidating        
Liabilities and Shareholders’ Deficit   Issuer     Co-Issuer     Subsidiaries     Subsidiaries     Adjustments     Total  
Current liabilities
                                               
Current installments of long-term debt
  $ 1,621     $     $ 2,394     $ 18,201     $ (2,420 )   $ 19,796  
Accounts payable and accrued expenses:
                                               
Trade
    2,116       8,966       3,640       36,889       (7,691 )     43,920  
Production taxes
          1       1,401       26,494             27,896  
Workers’ compensation
    946                               946  
Postretirement medical benefits
    12,198                   1,383             13,581  
SERP
    304                               304  
Deferred revenue
          8,594       1,025       2,945       (550 )     12,014  
Asset retirement obligations
                2,810       13,867             16,677  
Other current liabilities
    2,765             1,844       86       (13 )     4,682  
 
                                   
Total current liabilities
    19,950       17,561       13,114       99,865       (10,674 )     139,816  
 
                                   
Long-term debt, less current installments
    143,779             3,750       119,135             266,664  
Workers’ compensation, less current portion
    9,279                               9,279  
Excess of pneumoconiosis benefit obligation over trust assets
    3,611                               3,611  
Postretirement medical benefits, less current portion
    167,959                   28,271             196,230  
Pension and SERP obligations, less current portion
    10,875       95             2,056             13,026  
Deferred revenue, less current portion
          60,633             7,687             68,320  
Asset retirement obligations, less current portion
          756       31,050       198,204             230,010  
Intangible liabilities
          7,899                         7,899  
Other liabilities
    451             6,674       1,355             8,480  
Intercompany receivable/payable
    20,255             2,258       26,542       (49,055 )      
 
                                   
Total liabilities
    376,159       86,944       56,846       483,115       (59,729 )     943,335  
 
                                   
 
                                               
Shareholders’ deficit:
                                               
Preferred stock
    160                               160  
Common stock
    34,404       5       110       132       (247 )     34,404  
Other paid-in capital
    125,498       52,742       17,215       56,034       (125,991 )     125,498  
Accumulated other comprehensive loss
    (57,195 )     (196 )     14       (13,103 )     13,285       (57,195 )
Accumulated earnings (deficit)
    (269,990 )     60,783       35,747       (121,401 )     24,871       (269,990 )
 
                                   
Total Westmoreland Coal Company shareholders’ deficit
    (167,123 )     113,334       53,086       (78,338 )     (88,082 )     (167,123 )
Noncontrolling interest
    (7,245 )                             (7,245 )
 
                                   
Total equity (deficit)
    (174,368 )     113,334       53,086       (78,338 )     (88,082 )     (174,368 )
 
                                   
Total liabilities and shareholders’ deficit
  $ 201,791     $ 200,278     $ 109,932     $ 404,777     $ (147,811 )   $ 768,967  
 
                                   

 

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WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
CONSOLIDATING BALANCE SHEETS
December 31, 2010
(In thousands)
                                                 
                            Non-              
    Parent/             Guarantor     Guarantor     Consolidating        
Assets   Issuer     Co-Issuer     Subsidiaries     Subsidiaries     Adjustments     Total  
Current assets:
                                               
Cash and cash equivalents
  $ 271     $ 880     $     $ 4,624     $     $ 5,775  
Receivables:
                                               
Trade
          14,148       65       36,365             50,578  
Contractual third-party reclamation receivables
                135       7,608             7,743  
Intercompany receivable/payable
                10,193       (21,544 )     11,351        
Other
    66       198       4,917       1,530       (2,166 )     4,545  
 
                                   
 
    66       14,346       15,310       23,959       9,185       62,866  
 
                                               
Inventories
          1,935       4,624       17,012             23,571  
Other current assets
    796       224       469       3,944       (98 )     5,335  
 
                                   
Total current assets
    1,133       17,385       20,403       49,539       9,087       97,547  
 
                                   
Property, plant and equipment:
                                               
Land and mineral rights
          1,156       17,806       64,862             83,824  
Capitalized asset retirement cost
          239       20,463       94,154             114,856  
Plant and equipment
    2,611       215,851       117,360       170,839             506,661  
 
                                   
 
    2,611       217,246       155,629       329,855             705,341  
 
                                               
Less accumulated depreciation, depletion and amortization
    (1,987 )     (42,156 )     (82,239 )     (162,004 )           (288,386 )
 
                                   
Net property, plant and equipment
    624       175,090       73,390       167,851             416,955  
Advanced coal royalties
                998       2,697             3,695  
Reclamation deposits
                      72,274             72,274  
Restricted investments and bond collateral
    11,816       8,563       10,956       24,049             55,384  
Contractual third-party reclamation receivables
                390       87,349             87,739  
Deferred income taxes
                            2,458       2,458  
Intangible assets
          6,203             352             6,555  
Investment in subsidiaries
    115,612             (717 )     3,770       (118,665 )      
Other assets
    2,060       401       1,683       3,555             7,699  
 
                                   
Total assets
  $ 131,245     $ 207,642     $ 107,103     $ 411,436     $ (107,120 )   $ 750,306  
 
                                   

 

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WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
CONSOLIDATING BALANCE SHEETS
December 31, 2010
(In thousands)
                                                 
                            Non-              
    Parent/             Guarantor     Guarantor     Consolidating        
Liabilities and Shareholders’ Deficit   Issuer     Co-Issuer     Subsidiaries     Subsidiaries     Adjustments     Total  
Current liabilities
                                               
Current installments of long-term debt
  $     $     $ 2,255     $ 12,718     $     $ 14,973  
Accounts payable and accrued expenses:
                                               
Trade
    5,187       8,549       3,283       31,709       (2,481 )     46,247  
Production taxes
          2       1,084       25,231             26,317  
Workers’ compensation
    954                               954  
Postretirement medical benefits
    12,198                   1,383             13,581  
SERP
    304                               304  
Deferred revenue
          8,805       349       1,055             10,209  
Asset retirement obligations
                3,371       11,143             14,514  
Other current liabilities
    249       782       3,138       2,164       (92 )     6,241  
 
                                   
Total current liabilities
    18,892       18,138       13,480       85,403       (2,573 )     133,340  
 
                                   
Long-term debt, less current installments
    13,671       46,648       15,166       133,246             208,731  
Revolving lines of credit
                16,900       1,500             18,400  
Workers’ compensation, less current portion
    9,424                               9,424  
Excess of pneumoconiosis benefit obligation over trust assets
    2,246                               2,246  
Postretirement medical benefits, less current portion
    169,677                   27,602             197,279  
Pension and SERP obligations, less current portion
    16,105       154             4,203             20,462  
Deferred revenue, less current portion
          67,308             8,087             75,395  
Asset retirement obligations, less current portion
          715       28,967       197,447             227,129  
Intangible liabilities
          8,663                         8,663  
Other liabilities
    4,153             3,149       1,409       2,881       11,592  
Intercompany receivable/payable
    59,432             (19,590 )     26,424       (66,266 )      
 
                                   
Total liabilities
    293,600       141,626       58,072       485,321       (65,958 )     912,661  
 
                                   
 
                                               
Shareholders’ deficit
                                               
Preferred stock
    160                               160  
Common stock
    27,901       5       110       132       (247 )     27,901  
Other paid-in capital
    98,466       30       16,036       53,264       (69,330 )     98,466  
Accumulated other comprehensive income
    (57,680 )     (203 )     120       (14,353 )     14,436       (57,680 )
Accumulated earnings (deficit)
    (226,740 )     66,184       32,765       (112,928 )     13,979       (226,740 )
 
                                   
Total Westmoreland Coal Company shareholders’ deficit
    (157,893 )     66,016       49,031       (73,885 )     (41,162 )     (157,893 )
Noncontrolling interest
    (4,462 )                             (4,462 )
 
                                   
Total equity (deficit)
    (162,355 )     66,016       49,031       (73,885 )     (41,162 )     (162,355 )
 
                                   
Total liabilities and shareholders’ deficit
  $ 131,245     $ 207,642     $ 107,103     $ 411,436     $ (107,120 )   $ 750,306  
 
                                   

 

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WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
CONSOLIDATING STATEMENTS OF OPERATIONS
Three Months Ended September 30, 2011
(In thousands)
                                                 
                            Non-              
    Parent/             Guarantor     Guarantor     Consolidating        
    Issuer     Co-Issuer     Subsidiaries     Subsidiaries     Adjustments     Total  
Revenues
  $     $ 23,626     $ 16,323     $ 108,109     $ (15,609 )   $ 132,449  
 
                                               
Costs, expenses and other:
                                               
Cost of sales
          15,055       12,748       87,970       (15,609 )     100,164  
Depreciation, depletion and amortization
    76       2,570       2,050       6,916             11,612  
Selling and administrative
    2,091       1,308       1,134       5,351             9,884  
Heritage health benefit expenses
    3,688                   208             3,896  
Loss on sales of assets
                      91             91  
Other operating income
                (1,769 )                 (1,769 )
 
                                   
 
    5,855       18,933       14,163       100,536       (15,609 )     123,878  
 
                                   
Operating income (loss)
    (5,855 )     4,693       2,160       7,573             8,571  
Other income (expense):
                                               
Interest expense
    (4,471 )     (29 )     (115 )     (3,066 )     31       (7,650 )
Interest income
    71             49       334       (31 )     423  
Other income
    34             26       87             147  
 
                                   
 
    (4,366 )     (29 )     (40 )     (2,645 )           (7,080 )
 
                                   
Income (loss) before income taxes and income of consolidated subsidiaries
    (10,221 )     4,664       2,120       4,928             1,491  
Equity in income of subsidiaries
    11,437                         (11,437 )      
 
                                   
Income (loss) before income taxes
    1,216       4,664       2,120       4,928       (11,437 )     1,491  
Income tax expense (benefit) from operations
    (358 )           620       1,897       (2,243 )     (84 )
 
                                   
Net income (loss)
    1,574       4,664       1,500       3,031       (9,194 )     1,575  
Less net loss attributable to noncontrolling interest
    (1,154 )                             (1,154 )
 
                                   
Net income (loss) attributable to the Parent company
  $ 2,728     $ 4,664     $ 1,500     $ 3,031     $ (9,194 )   $ 2,729  
 
                                   

 

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Table of Contents

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
CONSOLIDATING STATEMENTS OF OPERATIONS
Three Months Ended September 30, 2010
(In thousands)
                                                 
                            Non-              
    Parent/             Guarantor     Guarantor     Consolidating        
    Issuer     Co-Issuer     Subsidiaries     Subsidiaries     Adjustments     Total  
Revenues
  $     $ 23,598     $ 13,217     $ 100,134     $ (12,869 )   $ 124,080  
 
                                               
Costs, expenses and other:
                                               
Cost of sales
          15,135       11,095       80,847       (12,869 )     94,208  
Depreciation, depletion and amortization
    101       2,529       1,985       6,349             10,964  
Selling and administrative
    1,796       875       980       5,279             8,930  
Heritage health benefit expenses
    4,063                   178             4,241  
Loss on sales of assets
                28       137             165  
Other operating income
                (2,267 )                 (2,267 )
 
                                   
 
    5,960       18,539       11,821       92,790       (12,869 )     116,241  
 
                                   
Operating income (loss)
    (5,960 )     5,059       1,396       7,344             7,839  
Other income (expense):
                                               
Interest expense
    (833 )     (1,143 )     (646 )     (3,144 )     10       (5,756 )
Interest income
    91       7       66       449       (10 )     603  
Other income (loss)
                22       (5 )           17  
 
                                   
 
    (742 )     (1,136 )     (558 )     (2,700 )           (5,136 )
 
                                   
Income (loss) before income taxes and income of consolidated subsidiaries
    (6,702 )     3,923       838       4,644             2,703  
Equity in income of subsidiaries
    (8,810 )                       8,810        
 
                                   
Income (loss) before income taxes
    2,108       3,923       838       4,644       (8,810 )     2,703  
Income tax expense (benefit) from operations
    (310 )     32       803       1,391       (1,631 )     285  
 
                                   
Net income (loss)
    2,418       3,891       35       3,253       (7,179 )     2,418  
Less net loss attributable to noncontrolling interest
    (435 )                             (435 )
 
                                   
Net income (loss) attributable to the Parent company
  $ 2,853     $ 3,891     $ 35     $ 3,253     $ (7,179 )   $ 2,853  
 
                                   

 

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Table of Contents

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
CONSOLIDATING STATEMENTS OF OPERATIONS
Nine Months Ended September 30, 2011
(In thousands)
                                                 
                            Non-              
    Parent/             Guarantor     Guarantor     Consolidating        
    Issuer     Co-Issuer     Subsidiaries     Subsidiaries     Adjustments     Total  
Revenues
  $     $ 68,619     $ 44,186     $ 301,650     $ (42,102 )   $ 372,353  
 
                                               
Costs, expenses and other:
                                               
Cost of sales
          45,959       35,703       249,405       (42,103 )     288,964  
Depreciation, depletion and amortization
    224       7,666       6,049       19,922             33,861  
Selling and administrative
    6,735       3,040       3,275       15,174             28,224  
Heritage health benefit expenses
    10,496                   619             11,115  
Loss on sales of assets
          189       24       202             415  
Other operating income
                (5,236 )                 (5,236 )
 
                                   
 
    17,455       56,854       39,815       285,322       (42,103 )     357,343  
 
                                   
Operating income (loss)
    (17,455 )     11,765       4,371       16,328       1       15,010  
Other expense:
                                               
Interest expense
    (11,929 )     (460 )     (553 )     (9,380 )     60       (22,262 )
Loss on extinguishment of debt
    (7,873 )     (9,073 )     (84 )                 (17,030 )
Interest income
    195       10       152       837       (60 )     1,134  
Other income (loss)
    (3,013 )           159       224             (2,630 )
 
                                   
 
    (22,620 )     (9,523 )     (326 )     (8,319 )           (40,788 )
 
                                   
Income (loss) from operations before income taxes and income of consolidated subsidiaries
    (40,075 )     2,242       4,045       8,009       1       (25,778 )
Equity in income of subsidiaries
    14,483                         (14,483 )      
 
                                   
Income (loss) before income taxes
    (25,592 )     2,242       4,045       8,009       (14,482 )     (25,778 )
Income tax expense (benefit) from operations
    (520 )           1,065       3,618       (4,869 )     (706 )
 
                                   
Net income (loss)
    (25,072 )     2,242       2,980       4,391       (9,613 )     (25,072 )
Less net loss attributable to noncontrolling interest
    (2,783 )                             (2,783 )
 
                                   
Net income (loss) attributable to the Parent company
  $ (22,289 )   $ 2,242     $ 2,980     $ 4,391     $ (9,613 )   $ (22,289 )
 
                                   

 

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Table of Contents

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
CONSOLIDATING STATEMENTS OF OPERATIONS
Nine Months Ended September 30, 2010
(In thousands)
                                                 
                            Non-              
    Parent/             Guarantor     Guarantor     Consolidating        
    Issuer     Co-Issuer     Subsidiaries     Subsidiaries     Adjustments     Total  
Revenues
  $     $ 67,662     $ 40,240     $ 309,418     $ (39,168 )   $ 378,152  
 
                                               
Costs, expenses and other:
                                               
Cost of sales
          46,316       34,000       255,218       (39,168 )     296,366  
Depreciation, depletion and amortization
    282       7,588       5,933       19,632             33,435  
Selling and administrative
    6,455       3,222       3,206       15,695             28,578  
Heritage health benefit expenses
    11,084                   466             11,550  
Loss (gain) on sales of assets
          (1 )     28       229             256  
Other operating income
                (6,519 )                 (6,519 )
 
                                   
 
    17,821       57,125       36,648       291,240       (39,168 )     363,666  
 
                                   
Operating income (loss)
    (17,821 )     10,537       3,592       18,178             14,486  
Other income (expense):
                                               
Interest expense
    (2,316 )     (3,548 )     (1,926 )     (9,564 )     109       (17,245 )
Interest income
    193       30       83       1,187       (113 )     1,380  
Other income
    199       29       29       650             907  
 
                                   
 
    (1,924 )     (3,489 )     (1,814 )     (7,727 )     (4 )     (14,958 )
 
                                   
Income (loss) before income taxes and income of consolidated subsidiaries
    (19,745 )     7,048       1,778       10,451       (4 )     (472 )
Equity in income of subsidiaries
    (18,814 )                       18,814        
 
                                   
Income (loss) before income taxes
    (931 )     7,048       1,778       10,451       (18,818 )     (472 )
Income tax expense (benefit) from operations
    (310 )     97       549       4,652       (4,839 )     149  
 
                                   
Net income (loss)
    (621 )     6,951       1,229       5,799       (13,979 )     (621 )
Less net loss attributable to noncontrolling interest
    (1,878 )                             (1,878 )
 
                                   
Net income (loss) attributable to the Parent company
  $ 1,257     $ 6,951     $ 1,229     $ 5,799     $ (13,979 )   $ 1,257  
 
                                   

 

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WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
CONSOLIDATING STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2011
(In thousands)
                                                 
    Parent/             Guarantor     Non-Guarantor     Consolidating        
Statements of Cash Flows   Issuer     Co-Issuer     Subsidiaries     Subsidiaries     Adjustments     Total  
Cash flows from operating activities:
                                               
Net income (loss)
  $ (25,072 )   $ 2,242     $ 2,980     $ 4,391     $ (9,613 )   $ (25,072 )
 
                                               
Adjustments to reconcile net income (loss) to net cash provided by operation activities:
                                               
Equity in income of subsidiaries
    14,484                         (14,484 )      
Loss on derivative instruments
    3,079                               3,079  
Non-cash tax benefits
    (308 )                             (308 )
Depreciation, depletion, and amortization
    224       7,666       6,049       19,922             33,861  
Accretion of asset retirement obligation and receivable
          41       2,275       5,784             8,100  
Amortization of intangible assets and liabilities, net
          467             27             494  
Share-based compensation
    3,808                               3,808  
Loss on sale of assets
          189       24       202             415  
Loss on extinguishment of debt
    7,873       9,073       84                   17,030  
Amortization of deferred financing costs
    1,107       (21 )     297       503             1,886  
Gain on the sale of investments
                (75 )     (75 )           (150 )
Changes in operating assets and liabilities:
                                               
Receivables, net
    (199 )     (28 )     (6,115 )     3,310       7,805       4,773  
Inventories
          (89 )     107       (2,288 )           (2,270 )
Excess of pneumoconiosis benefit obligation over trust assets
    1,365                               1,365  
Accounts payable and accrued expenses
    (371 )     (385 )     498       6,842       (5,223 )     1,361  
Deferred revenue
          (6,886 )     676       1,490       (550 )     (5,270 )
Accrual for workers’ compensation
    (153 )                             (153 )
Asset retirement obligations
                (766 )     (3,891 )           (4,657 )
Accrual for postretirement medical benefits
    (2,156 )                 891             (1,265 )
Pension and SERP obligations
    (4,742 )     (52 )           2,827             (1,967 )
Other assets and liabilities
    (145 )     (992 )     2,915       (2,494 )     (316 )     (1,032 )
 
                                   
Net cash provided by (used in) operating activities
    (1,206 )     11,225       8,949       37,441       (22,381 )     34,028  
 
                                   
Cash flows from investing activities:
                                               
Distributions received by subsidiaries
    20,200                         (20,200 )      
Additions to property, plant and equipment
    (383 )     (1,179 )     (1,341 )     (12,200 )           (15,103 )
Change in restricted investments and bond collateral and reclamation deposits
    (1,283 )     2,585       (3,705 )     (1,076 )           (3,479 )
Net proceeds from sales of assets
                      87             87  
Proceeds from sale of restricted investments
                1,075       2,275             3,350  
Receivable from customer for property and equipment purchases
                      (350 )           (350 )
 
                                   
Net cash provided by (used in) investing activities
    18,534       1,406       (3,971 )     (11,264 )     (20,200 )     (15,495 )
 
                                   
Cash flows from financing activities:
                                               
Book overdrafts
    (140 )           (352 )     (143 )           (635 )
Borrowings of long-term debt, net of debt discount
    142,500                               142,500  
Repayments of long-term debt
    (2,532 )     (46,220 )     (11,396 )     (9,038 )           (69,186 )
Borrowings on revolving lines of credit
          1,500       12,200       73,500             87,200  
Repayments on revolving lines of credit
          (1,500 )     (29,100 )     (75,000 )           (105,600 )
Debt issuance and other refinancing costs
    (5,842 )     (9,077 )     100                   (14,819 )
Exercise of stock options
    422                               422  
Distributions / dividends
    (20,961 )     (7,500 )           (12,700 )     20,200       (20,961 )
Transactions with Parent/affiliates
    (99,020 )     52,571       23,573       495       22,381        
 
                                   
Net cash provided by (used in) financing activities
    14,427       (10,226 )     (4,975 )     (22,886 )     42,581       18,921  
 
                                   
Net increase in cash and cash equivalents
    31,755       2,405       3       3,291             37,454  
Cash and cash equivalents, beginning of year
    271       880             4,624             5,775  
 
                                   
Cash and cash equivalents, end of year
  $ 32,026     $ 3,285     $ 3     $ 7,915     $       43,229  
 
                                   

 

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WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
CONSOLIDATING STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2010
(In thousands)
                                                 
                            Non-              
    Parent/             Guarantor     Guarantor     Consolidating        
Statements of Cash Flows   Issuer     Co-Issuer     Subsidiaries     Subsidiaries     Adjustments     Total  
Cash flows from operating activities:
                                               
Net income (loss)
  $ (621 )   $ 6,951     $ 1,229     $ 5,799     $ (13,979 )   $ (621 )
Adjustments to reconcile net income (loss) to net cash provided by operation activities:
                                               
Equity in income of subsidiaries
    (18,815 )                       18,815        
Depreciation, depletion, and amortization
    (102 )     (30 )                       (132 )
Accretion of asset retirement obligation and receivable
    1,236                               1,236  
Amortization of intangible assets and liabilities, net
    282       7,588       5,933       19,632             33,435  
Share-based compensation
          38       2,255       6,394             8,687  
Loss (gain) on sale of assets
          465             (117 )           348  
Non-cash interest expense
    3,206                               3,206  
Amortization of deferred financing costs
          (1 )     28       229             256  
Loss (gain) on the sales of investment securities
    1,075       (241 )     356       501             1,691  
Gain on derivative
    (97 )                 (507 )           (604 )
Changes in operating assets and liabilities:
                                               
Receivables, net
    (99 )     40       (3,536 )     (2,704 )     2,383       (3,916 )
Inventories
          (173 )     (209 )     1,377             995  
Excess of pneumoconiosis benefit obligation over trust assets
    1,190                               1,190  
Accounts payable and accrued expenses
    (114 )     1,216       (332 )     12,406       (2,461 )     10,715  
Deferred revenue
          (3,954 )     (177 )     2,990             (1,141 )
Accrual for workers’ compensation
    (143 )                             (143 )
Asset retirement obligations
                (566 )     (3,977 )           (4,543 )
Accrual for postretirement medical benefits
    (2,450 )     (57 )           249             (2,258 )
Pension and SERP obligations
    (3,298 )                 (491 )           (3,789 )
Other assets and liabilities
    (898 )     (581 )     (105 )     (5,495 )     51       (7,028 )
 
                                   
Net cash provided by (used in) operating activities
    (19,648 )     11,261       4,876       36,286       4,809       37,584  
 
                                   
Cash flows from investing activities:
                                               
Distributions received by subsidiaries
    25,400                         (25,400 )      
Additions to property, plant and equipment
    (544 )     (1,349 )     (3,732 )     (10,020 )           (15,645 )
Change in restricted investments and bond collateral and reclamation deposits
    (1,287 )     (168 )     (1,673 )     (990 )           (4,118 )
Net proceeds from sales of assets
          1       7       381             389  
Proceeds from the sale of restricted investments
    156                   2,151             2,307  
Receivable from customer for property and equipment purchases
                      117             117  
 
                                   
Net cash provided by (used in) investing activities
    23,725       (1,516 )     (5,398 )     (8,361 )     (25,400 )     (16,950 )
 
                                   
Cash flows from financing activities:
                                               
Book overdrafts
    (67 )           (638 )     (684 )           (1,389 )
Repayments of long-term debt
          (9,355 )     (3,377 )     (4,970 )           (17,702 )
Borrowings on revolving lines of credit
          7,300       68,300       46,500             122,100  
Repayments on revolving lines of credit
          (3,800 )     (67,800 )     (46,500 )           (118,100 )
Exercise of stock options
    8                               8  
Dividends/distributions
                      (25,400 )     25,400        
Transactions with Parent/affiliates
    (4,569 )     (246 )     4,096       5,528       (4,809 )      
 
                                   
Net cash provided by (used in) financing activities
    (4,628 )     (6,101 )     581       (25,526 )     20,591       (15,083 )
 
                                   
Net increase (decrease) in cash and cash equivalents
    (551 )     3,644       59       2,399             5,551  
Cash and cash equivalents, beginning of year
    755       138             9,626             10,519  
 
                                   
Cash and cash equivalents, end of year
  $ 204     $ 3,782     $ 59     $ 12,025     $       16,070  
 
                                   

 

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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 flows from operations, cash on hand and available borrowing capacity will be sufficient to meet our investing, financing, and working capital requirements for the next twelve months and for the next several years, our intended use of the net proceeds remaining from the Parent Notes offering is for general corporate purposes including the possible acquisition of new reserves, our expectation that distributions from ROVA and WRI will comprise a significant source of liquidity for us and that we expect an increase in depreciation, depletion and accretion expense as a result of the changes in estimates of the life of the Beulah Mine.
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 caution you therefore against relying on any of these forward-looking statements. They are neither statements 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:
  changes in our postretirement medical benefit and pension obligations and the impact of recently enacted healthcare legislation;
  changes in our black lung obligations, changes in our experience related to black lung claims, and the impact of recently enacted healthcare legislation;
  our potential inability to expand or continue current coal operations due to limitations in obtaining bonding capacity for new mining permits;
  our potential inability to maintain compliance with debt covenant requirements;
  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 ROVA’s contracts with its lenders, coal suppliers and power purchaser, which could dramatically affect the overall profitability of ROVA;
  the effect of Environmental Protection Agency, or EPA, inquiries and regulations on the operations of ROVA;
  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;
  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
  the other factors that are described in “Risk Factors” under Part I, Item 1A of the 2010 Form 10-K and in subsequent Quarterly Reports on Form 10-Q, including this Quarterly Report.
Any forward-looking statement made by us in this Quarterly Report on Form 10-Q speaks only as of the date on which it was made. 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 predict all of them. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future developments or otherwise, except as may be required by law.

 

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WESTMORELAND COAL COMPANY AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONT.)
Overview
Westmoreland Coal Company is an energy company whose operations include five surface coal mines in Montana, North Dakota and Texas and two coal-fired power-generating units with a total capacity of 230 megawatts in North Carolina. We sold 25.2 million tons of coal in 2010. Our two principal operating segments consist of our coal and power segments. We also have two non-operating segments.
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. As a result of the Parent Notes offering, discussed below, we have $43.2 million cash on hand at September 30, 2011. Following the Parent Notes offering, we are able to enter into a parent-level revolving credit facility without the consent of the holders of the notes, subject to certain conditions.
Recent Developments
Our contract with Coyote Station, located adjacent to our Beulah Mine, expires in May 2016. We have been negotiating with the Coyote Station owners in a competitive bid process for another long-term supply contract. Based on the direction of those negotiations, we will be changing various accounting estimates due to the uncertainty of entering into a new agreement upon the conclusion of the current contract in 2016. These changes in estimates will take effect in the fourth quarter of 2011 and will result in revised depreciable asset lives, coal reserve lives and asset retirement obligations. We expect increases in depreciation, depletion and accretion expense as a result of these changes in estimates. We have not yet determined an updated estimate of the asset retirement obligation related to the Beulah Mine, but do not expect the impact of the change to be material to our financial position.
In February 2011, we completed a private placement of $150.0 million of senior secured notes due in 2018, referred to herein as the Parent Notes. The net proceeds from the offering of the Parent Notes were used to pay all dividend arrearages on our Series A preferred stock; to repay all outstanding term and revolving line of credit debt at our Roanoke Valley power plants, or ROVA, and Westmoreland Resources, Inc., or WRI; to retire approximately $2.5 million of the outstanding principal owed on our senior secured convertible notes (the remaining principal balance of the senior secured convertible notes was converted to common stock); and for general corporate purposes. On September 1, 2011, we closed the exchange offer pursuant to which we exchanged all of the outstanding Parent Notes for new notes registered under the Securities Act of 1933.
Results of Operations
Items that Affect Comparability of Our Results
For the three and nine months ended September 30, 2011 and 2010, our results have included items that do not relate directly to ongoing operations. The expense components of these items were as follows:
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2011     2010     2011     2010  
    (In thousands)  
Loss on extinguishment of debt
  $     $     $ (17,030 )   $  
Fair value adjustment on derivatives and related amortization of debt discount
          (358 )     (3,215 )     (870 )
 
                       
Impact (pre-tax)
  $     $ (358 )   $ (20,245 )   $ (870 )
 
                       

 

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WESTMORELAND COAL COMPANY AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONT.)
Items recorded in the nine months ended September 30, 2011
    In the nine months ended September 30, 2011 and as a result of the Parent Notes offering, we recorded $17.0 million of loss on extinguishment of debt. The loss included a $9.1 million make-whole payment for ROVA’s debt and $7.9 million of non-cash write-offs of unamortized discount on debt and related capitalized debt costs and convertible debt conversion expense.
    In the nine months ended September 30, 2011 upon the Parent Notes offering and subsequent retirement of our convertible debt, we recorded an expense of $3.1 million resulting from the mark-to-market accounting for the conversion feature in the notes with $0.1 million of interest expense of a related debt discount.
Items recorded in the three and nine months ended September 30, 2010
    In the three months ended September 30, 2010, we recorded $0.4 million of interest expense of a related debt discount.
    In the nine months ended September 30, 2010, we recorded income of $0.1 million resulting from the mark-to-market accounting of the conversion feature in our convertible notes with $1.0 million of interest expense of a related debt discount.
Quarter Ended September 30, 2011 Compared to Quarter Ended September 30, 2010
Summary
Our third quarter 2011 revenues increased to $132.4 million compared with $124.1 million in the third quarter of 2010. This increase was primarily driven by an increase in our coal segment revenues due to increased sales at our Absaloka, Beulah, and Jewett Mines. Favorable pricing also contributed to the increased revenues. Our third quarter 2011 power segment revenues were comparable with our third quarter 2010 power segment revenues.
Our third quarter 2011 net income applicable to common shareholders decreased to $2.4 million compared with $2.5 million in the third quarter of 2010. Excluding $0.4 million of third quarter 2010 expense discussed in Items that Affect Comparability of Our Results, our net income decreased by $0.5 million. The primary factors, in aggregate, driving this decrease in net income were:
         
    Three Months  
    Ended  
    September 30, 2011  
    (In millions)  
Increase in interest expense primarily due to the Parent Notes offering
  $ (2.3 )
Increase in our coal segment operating income primarily from favorable pricing
    0.8  
Increase in the noncontrolling interest adjustment to reduce losses from a partially owned consolidated coal segment subsidiary
    0.7  
Increase due to other factors
    0.3  
 
     
 
  $ (0.5 )
 
     

 

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WESTMORELAND COAL COMPANY AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONT.)
Coal Segment Operating Results
The following table shows comparative coal revenues, operating income and sales volume and percentage changes between periods:
                                 
    Three Months Ended September 30,  
                    Increase / (Decrease)  
    2011     2010     $     %  
Revenues (in thousands)
  $ 108,823     $ 100,482     $ 8,341       8.3 %
Operating income (in thousands)
    9,679       8,869       810       9.1 %
Adjusted EBITDA (in thousands)1
    22,070       20,839       1,231       5.9 %
Tons sold — millions of equivalent tons
    6.0       6.5       (0.5 )     (7.7 )%
Operating income per ton sold
  $ 1.61     $ 1.36     $ 0.25       18.2 %
     
1)   Adjusted EBITDA is defined and reconciled to net income (loss) at the end of this “Results of Operations” section.
Our third quarter 2011 coal segment revenues increased to $108.8 million compared with $100.5 million in the third quarter of 2010. This $8.3 million increase was primarily due to increased sales at our Absaloka, Beulah, and Jewett Mines. Favorable pricing also contributed to the increased revenues. Overall tons sold decreased during the quarter due to lower sales at our Rosebud Mine as a result of favorable hydropower conditions, which displaced our customers’ coal generated power; however, revenues were largely unaffected due to favorable pricing.
Our coal segment operating income was $9.7 million in the third quarter of 2011 compared to $8.9 million in the third quarter of 2010. This $0.8 million increase was primarily driven by favorable pricing.
Power Segment Operating Results
The following table shows comparative power revenues, operating income, production and percentage changes between periods:
                                 
    Three Months Ended September 30,  
                    Increase / (Decrease)  
    2011     2010     $     %  
    (In thousands)  
Revenues
  $ 23,626     $ 23,598     $ 28       0.1 %
Operating income
    4,694       5,059       (365 )     (7.2 )%
Adjusted EBITDA1
    7,441       7,761       (320 )     (4.1 )%
Megawatts hours
    445       439       6       1.4 %
     
1)   Adjusted EBITDA is defined and reconciled to net income (loss) at the end of this “Results of Operations” section.
Our third quarter 2011 power segment revenues were comparable with our third quarter 2010 power segment revenues.
Our power segment operating income decreased to $4.7 million in the third quarter of 2011 compared to $5.1 million in the third quarter of 2010. This $0.4 million decrease was primarily from increased property tax expenses.

 

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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 detail of the heritage segment’s operating expenses and percentage changes between periods:
                                 
    Three Months Ended September 30,  
                    Increase / (Decrease)  
    2011     2010     $     %  
    (In thousands)  
Health care benefits
  $ 2,445     $ 2,932     $ (487 )     (16.6 )%
Combined benefit fund payments
    686       756       (70 )     (9.3 )%
Workers’ compensation benefits
    162       175       (13 )     (7.4 )%
Black lung benefits
    603       378       225       59.5 %
 
                       
Total heritage health benefit expenses
    3,896       4,241       (345 )     (8.1 )%
Selling and administrative costs
    180       488       (308 )     (63.1 )%
 
                       
Heritage segment operating loss
  $ 4,076     $ 4,729     $ (653 )     (13.8 )%
 
                       
Our third quarter 2011 heritage operating expenses of $4.1 million are comparable to the operating expenses of $4.7 million for the third quarter of 2010.
Corporate Segment Operating Results
Our corporate segment operating expenses for the third quarter of 2011 of $1.7 million are comparable to $1.4 million in the third quarter of 2010.
Nonoperating Results (including interest expense, other income, income tax expense (benefit), and noncontrolling interest)
Our interest expense for the third quarter of 2011 increased to $7.7 million compared with $5.8 million for the third quarter of 2010. This increase was primarily due to the higher overall debt levels resulting from the Parent Notes offering.
Our other income for the third quarter of 2011 of $0.1 million was comparable to the third quarter of 2010.
Our income tax benefit for the third quarter of 2011 was $0.1 million compared with an income tax expense of $0.3 million for the third quarter of 2010. This change was due to lower taxable income.
Our noncontrolling interest for the third quarter of 2011 increased to $1.2 million compared with $0.4 million for the third quarter of 2010. This was due to an increase in the noncontrolling interest adjustment to reduce losses from a partially owned consolidated coal segment subsidiary.
Nine Months Ended September 30, 2011 Compared to Nine Months Ended September 30, 2010
Summary
Our revenues for the first nine months of 2011 decreased to $372.4 million compared with $378.2 million in the first nine months of 2010. This decrease was primarily driven by a decrease in our coal segment revenues due to favorable hydropower conditions, which displaced our customers’ coal-generated power. Record high levels of snow in the Pacific Northwest displaced power primarily at our Rosebud Mine. Coal revenues also decreased due to flooding conditions which disrupted rail service to our Absaloka Mine and to the expiration of an unprofitable coal contract at our Rosebud Mine. The above decreases in our coal segment revenues were partially offset with an increase in our power segment revenues of $1.0 million related to an increase in megawatt hours sold as a result of shorter planned outages.

 

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WESTMORELAND COAL COMPANY AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONT.)
Our net loss applicable to common shareholders for the first nine months of 2011 increased to $23.3 million compared with $0.2 million income in the first nine months of 2010. Excluding the $20.2 million of expenses in the first nine months of 2011 and the $0.9 million of expenses in the first nine months of 2010 discussed in Items that Affect Comparability of Our Results, our net loss increased by $4.2 million. The primary factors, in aggregate, driving this increase in net loss were:
         
    Nine Months Ended  
    September 30, 2011  
    (In millions)  
Increase in interest expense primarily due to the Parent Notes offering
  $ (5.9 )
Decrease in our coal segment operating income primarily driven by hydropower and flooding conditions, partially offset with the expiration of an unprofitable coal contract at our Rosebud Mine
    (1.4 )
Increase in our power segment operating income primarily from an increase in megawatt hours sold as a result of shorter planned outages, and decreased maintenance costs
    1.2  
Increase in the noncontrolling interest adjustment to reduce losses from a partially owned consolidated coal segment subsidiary
    0.9  
Decrease in income tax expense due to lower taxable income
    0.9  
Increase due to other factors
    0.1  
 
     
 
       
 
  $ (4.2 )
 
     
Coal Segment Operating Results
The following table shows comparative coal revenues, operating income and sales volume, and percentage changes between periods:
                                 
    Nine Months Ended September 30,  
                    Increase / (Decrease)  
    2011     2010     $     %  
Revenues (in thousands)
  $ 303,734     $ 310,490     $ (6,756 )     (2.2 )%
Operating income (in thousands)
    20,576       21,944       (1,368 )     (6.2 )%
Adjusted EBITDA (in thousands)1
    57,262       58,753       (1,491 )     (2.5 )%
Tons sold — millions of equivalent tons
    16.0       18.8       (2.8 )     (14.9 )%
Operating income per ton sold
  $ 1.29     $ 1.17     $ 0.12       10.2 %
     
1)   Adjusted EBITDA is defined and reconciled to net income (loss) at the end of this “Results of Operations” section.
Our coal segment revenues for the first nine months of 2011 decreased to $303.7 million compared with $310.5 million in the first nine months of 2010. This $6.8 million decrease was primarily due to favorable hydropower conditions, which displaced our customers’ coal-generated power. Coal revenues also decreased due to flooding conditions which disrupted rail service to our Absaloka Mine and to the expiration of an unprofitable coal contract at our Rosebud Mine.
Our coal segment’s operating income decreased to $20.6 million in the first nine months of 2011 compared to $21.9 million in the first nine months of 2010. This decrease was primarily driven by the same factors that decreased our coal segment revenues described above.

 

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WESTMORELAND COAL COMPANY AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONT.)
Power Segment Operating Results
The following table shows comparative power revenues, operating income and production and percentage changes between periods:
                                 
    Nine Months Ended September 30,  
                    Increase / (Decrease)  
    2011     2010     $     %  
    (In thousands)  
Revenues
  $ 68,619     $ 67,662     $ 957       1.4 %
Operating income
    11,764       10,536       1,228       11.7 %
Adjusted EBITDA1
    20,152       18,644       1,508       8.1 %
Megawatts hours
    1,282       1,242       40       3.2 %
     
1)   Adjusted EBITDA is defined and reconciled to net income (loss) at the end of this “Results of Operations” section.
Our power segment revenues for the first nine months of 2011 increased to $68.6 million compared to $67.7 million in the first nine months of 2010. This increase related primarily to an increase in megawatt hours sold as a result of shorter planned outages.
Our power segment’s operating income increased to $11.8 million in the first nine months of 2011 compared to $10.5 million in the first nine months of 2010. This increase resulted primarily from an increase in megawatt hours sold as a result of shorter planned outages, and decreased maintenance costs.
Heritage Segment Operating Results
The following table shows comparative detail of the heritage segment’s operating expenses and percentage changes between periods:
                                 
    Nine Months Ended September 30,  
                    Increase / (Decrease)  
    2011     2010     $     %  
    (In thousands)  
Health care benefits
  $ 7,208     $ 7,551     $ (343 )     (4.5 )%
Combined benefit fund payments
    2,057       2,268       (211 )     (9.3 )%
Workers’ compensation benefits
    485       540       (55 )     (10.2 )%
Black lung benefits
    1,365       1,191       174       14.6 %
 
                       
Total heritage health benefit expenses
    11,115       11,550       (435 )     (3.8 )%
 
                               
Selling and administrative costs
    947       1,195       (248 )     (20.8 )%
 
                       
Heritage segment operating loss
  $ 12,062     $ 12,745     $ (683 )     (5.4 )%
 
                       
Our heritage operating expenses for the first nine months of 2011 are comparable to the operating expenses for the first nine months of 2010.
Corporate Segment Operating Results
Our corporate segment’s operating expenses for the first nine months of 2011 of $5.3 million are comparable to $5.2 million in the first nine months of 2010.

 

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WESTMORELAND COAL COMPANY AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONT.)
Nonoperating Results (including interest expense, other income (loss), income tax expense (benefit), and noncontrolling interest)
Our interest expense for the first nine months of 2011 increased to $22.3 million compared with $17.2 million for the first nine months of 2010. This increase was primarily due to the higher overall debt levels resulting from the Parent Notes offering.
Our other loss for the first nine months of 2011 increased to $2.6 million compared with $0.9 million of income for the first nine months of 2010. Excluding the $3.2 million impact of the fair value adjustment on derivatives discussed in Items that Affect Comparability of Our Results, our other expense increased $0.3 million primarily due to gains on sales of securities during the first nine months of 2010.
Our income tax benefit for the first nine months of 2011 increased to $0.7 million compared with $0.1 million of expense for the first nine months of 2010. This increase was due to lower taxable income.
Our noncontrolling interest for the first nine months of 2011 increased to $2.8 million compared with $1.9 million for the first nine months of 2010. This was due to an increase in the noncontrolling interest adjustment to reduce losses from a partially owned consolidated coal segment subsidiary.
Reconciliation of Adjusted EBITDA to Net Income (Loss)
The discussion in “Results of Operations” in 2011 and 2010 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:
    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.

 

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WESTMORELAND COAL COMPANY AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONT.)
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 calculate EBITDA and Adjusted EBITDA, including a breakdown by segment for Adjusted EBITDA.
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2011     2010     2011     2010  
    (In thousands)  
Reconciliation of Adjusted EBITDA to net income (loss)
                               
Net income (loss)
  $ 1,575     $ 2,418     $ (25,072 )   $ (621 )
 
                               
Income tax expense (benefit) from continuing operations
    (84 )     285       (705 )     149  
Other loss (income)
    (147 )     (17 )     2,630       (908 )
Interest income
    (423 )     (603 )     (1,134 )     (1,380 )
Loss on extinguishment of debt
                17,030        
Interest expense
    7,650       5,756       22,262       17,246  
Depreciation, depletion and amortization
    11,612       10,964       33,861       33,435  
Accretion of ARO and receivable
    2,700       2,847       8,100       8,687  
Amortization of intangible assets and liabilities
    167       112       494       348  
 
                       
EBITDA
    23,050       21,762       57,466       56,956  
 
                               
Loss on sale of assets
    91       165       415       256  
Share-based compensation
    1,016       877       3,808       3,206  
 
                       
Adjusted EBITDA
  $ 24,157     $ 22,804     $ 61,689     $ 60,418  
 
                       
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2011     2010     2011     2010  
    (In thousands)  
Adjusted EBITDA by Segment
                               
Coal
  $ 22,070     $ 20,839     $ 57,262     $ 58,753  
Power
    7,441       7,761       20,152       18,644  
Heritage
    (4,076 )     (4,729 )     (12,062 )     (12,745 )
Corporate
    (1,278 )     (1,067 )     (3,663 )     (4,234 )
 
                       
Total
  $ 24,157     $ 22,804     $ 61,689     $ 60,418  
 
                       

 

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WESTMORELAND COAL COMPANY AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONT.)
Liquidity and Capital Resources
At September 30, 2011, we had $43.2 million of cash and cash equivalents and $23.1 million of available borrowing capacity under our Westmoreland Mining LLC, or WML, revolving line of credit. We anticipate that our cash flows from operations, cash on hand and available borrowing capacity will be sufficient to meet our investing, financing, and working capital requirements for the next twelve months and for the next several years.
Parent Notes Offering and Use of Proceeds
On February 4, 2011, we issued the Parent Notes, which are $150.0 million of 10.750% senior secured notes. Our subsidiary, Westmoreland Partners, was a co-issuer of the notes. Interest is due at an annual fixed rate of 10.750% and will be paid in cash semi-annually, in arrears, on February 1 and August 1 of each year which began August 1, 2011. The Parent Notes mature February 1, 2018. They are fully and unconditionally guaranteed by Westmoreland Energy LLC and WRI and their respective subsidiaries (other than Absaloka Coal, LLC) and by certain other subsidiaries.
The following table outlines the use of the proceeds from the Parent Notes offering (in millions):
         
Proceeds received from the Parent Notes offering
  $ 150.0  
Repayment of ROVA debt — outstanding term loan and revolving line of credit
    (43.6 )
Repayment of WRI debt — outstanding term loan and revolving line of credit
    (20.1 )
Payment of preferred stock dividend arrearages
    (19.9 )
ROVA make-whole payment
    (9.1 )
Initial Purchaser’s discount
    (7.5 )
Offering costs
    (7.5 )
Payment to retire certain of our convertible notes
    (2.5 )
 
     
Remaining proceeds
  $ 39.8  
 
     
The holder of our convertible notes agreed to convert the convertible notes not retired into shares of our common stock. We will use the remaining net proceeds from the offering for general corporate purposes including the possible acquisition of new reserves. The indenture governing the Parent Notes requires us to offer to redeem the notes on an annual basis with certain Excess Cash Flow (as defined in the indenture), and amounts used for such redemptions will not be available for other purposes.
In connection with the Parent Notes offering, we terminated the WRI and ROVA revolving credit agreements. The WML Credit Agreements remained in place following the offering. Following the Parent Notes offering, we are able to enter into a parent-level revolving credit facility without the consent of the holders of the notes, subject to certain conditions.
Liquidity Limitations and Requirements
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. Cash available from WML is affected by the principal payments due on the WML notes. Following the February 4, 2011 Parent Notes offering, we expect that distributions from ROVA and WRI will comprise a significant source of liquidity for us. The cash at our insurance subsidiary is also available to us through dividends, subject to maintaining a statutory minimum level of capital, which is two hundred and fifty thousand.

 

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WESTMORELAND COAL COMPANY AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONT.)
Our liquidity continues to be affected by payments on our heritage health and pension obligations as follows:
                 
            2011 Remaining  
    Year-to-date     Expected  
    2011 Actual     Amounts  
    (In millions)  
Postretirement medical benefits
  $ 9.3     $ 4.3  
Pension contributions(1)
    7.4        
CBF premiums
    2.1       0.6  
Workers’ compensation benefits
    0.4       0.6  
     
(1)   Of the 2011 pension contribution, $4.2 million was made through the contribution of Company stock.
In addition to the Parent Notes mentioned above, WML has $120.0 million of fixed rate term debt outstanding at September 30, 2011. Principal on the notes is scheduled to be paid as follows (in millions):
         
Remainder of 2011
  $ 2.5  
2012
    14.0  
2013
    18.0  
2014
    18.0  
2015
    20.0  
2016
    20.0  
2017
    22.0  
2018
    5.5  
The revolving credit facility has a borrowing limit of $25.0 million and matures in June 2013. At September 30, 2011, WML had no outstanding balance under the revolving credit facility and the revolving credit facility supported 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 subsidiaries.
Historical Sources and Uses of Cash
The following is a summary of cash provided by or used in each of the indicated types of activities:
                 
    Nine Months Ended  
    September 30,  
    2011     2010  
    (In thousands)  
Cash provided by (used in):
               
Operating activities
  $ 34,028     $ 37,584  
Investing activities
    (15,495 )     (16,950 )
Financing activities
    18,921       (15,083 )
Cash Flow from Operations
Cash provided by operating activities decreased by $3.6 million in the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010, primarily due to the increase in interest payments in 2011 related to the Parent Notes.

 

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WESTMORELAND COAL COMPANY AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONT.)
Cash used in investing activities decreased $1.5 million in the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010. Proceeds from the sale of investments increased by $1.0 million in 2011 compared to 2010. Additions to property, plant and equipment were $15.1 million for the nine months ended September 30, 2011 compared to $15.6 million for the same period in 2010.
Cash provided by financing activities increased by $34.0 million for the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010, primarily as a result of the Parent Notes offering.
Our working capital deficit at September 30, 2011 decreased by $29.9 million to $5.9 million compared to a $35.8 million deficit at December 31, 2010 primarily as a result of a $37.5 million increase in cash and cash equivalents mostly due to the Parent Notes offering.
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. Surety bonds and letters of credit are 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. Liabilities related to 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 were no material changes to our off-balance sheet arrangements during the nine months ended September 30, 2011. Our off-balance sheet arrangements are discussed in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2010 Form 10-K.
Newly Adopted Accounting Pronouncements
See Note 2 of Notes to Consolidated Financial Statements included in “Part I — Item 1 — Financial Statements” for a description of recently issued and adopted accounting pronouncements, including the expected dates of adoption and estimated effects on our consolidated financial statements.

 

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Item 3

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Other than the changes noted below, there have been no material changes in our market risk during the nine months ended September 30, 2011. For additional information, refer to the “Quantitative and Qualitative Disclosures about Market Risk” in Item 7A of our 2010 Form 10-K for the fiscal year ended December 31, 2010.
Interest Rate Risk
Our exposure to changes in interest rates results from our debt obligations shown in the table below that are indexed to either the prime rate or LIBOR. Based on balances outstanding as of September 30, 2011, a change of one percentage point in the prime interest rate or LIBOR would increase or decrease interest expense on an annual basis by the amount shown below:
         
    Effect of 1%  
    increase  
    or 1% decrease  
    (In thousands)  
 
       
WML revolving line of credit
  $  
ITEM 4

CONTROLS AND PROCEDURES
As required by Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, 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 September 30, 2011. 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, our management, including our chief executive officer and chief financial officer, concluded that the disclosure controls and procedures were effective as of such date.
Additionally, there have been no changes in internal control over financial reporting that occurred during our fiscal quarter ended September 30, 2011, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II

OTHER INFORMATION
ITEM 1

LEGAL PROCEEDINGS
Please refer to the information contained in Note 15 to the Consolidated Financial Statements in this Quarterly Report on Form 10-Q and in Part I, Item 3 — Legal Proceedings of our 2010 Form 10-K, which is responsive to this Item 1 and is incorporated herein by reference. There have been no material developments with respect to our legal proceedings previously disclosed in our 2010 Form 10-K.
ITEM 1A

RISK FACTORS
We have disclosed under the heading “Risk Factors” in our 2010 Form 10-K and subsequent Quarterly Reports on Form 10-Q, the risk factors that we believe materially affect our business, financial condition or results of operations. Except as provided below, there have been no material changes from the risk factors previously disclosed. You should carefully consider the risk factors set forth in the 2010 Form 10-K, subsequent Quarterly Reports on Form 10-Q, and the other information set forth elsewhere in this Quarterly Report on Form 10-Q. You should be aware that these risk factors and other information may not describe every risk facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and or operating results.
The Cross-State Air Pollution Rules, if commenced on January 1, 2012, could adversely affect cost of operations at our Roanoke Valley Energy Facility.
The Environmental Protection Agency promulgated the Cross-State Air Pollution Rule, or CSAPR, which sets strict new limits on the emission of nitrogen oxides, or NOx, and sulfur dioxide, or SO2, for each of the 28 states covered by CSAPR. To date, there are more than 30 lawsuits asking the U.S. Court of Appeals for the District of Columbia Circuit to block CSAPR, while a number of states and other third parties have filed motions as interveners asking the court to uphold the EPA’s rules set to begin on January 1, 2012.
Should these numerous lawsuits and motions be resolved in favor of the EPA and CSAPR become effective on January 1st, it will have a dramatic impact on the cost of operations at our Roanoke Valley Energy facility. While the cost of credits in the open market is unknown at this time, NOx and SO2 credits, which are required to run the facility, could increase in cost over 2011 by as much as 1000% under CSAPR. As it is unlikely we would be able to pass through these additional costs to Dominion Virginia Power, such an increase would adversely affect our results of operations and profitability.

 

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PART II

OTHER INFORMATION (CONT.)
ITEM 2

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On September 13, 2011, the Company made contributions totaling 425,000 shares of the Company’s common stock (the “Shares”) to one of the Company’s employee pension plans to satisfy certain funding obligations. The Shares were valued at 425,000 shares at $8.96 or $3.8 million in the aggregate. The Shares were contributed to the plan in lieu of cash contributions in a private placement transaction made in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended. The Company will not receive any proceeds from the contribution.
The Company’s purchases of its common stock during the nine months ended September 30, 2011 were as follows:
                 
    Total Number of     Average Price Paid  
Period   Shares Purchased (1)     per Share  
July 1, 2011
    23,038     $ 17.98  
     
(1)   Shares purchased indicated in this table represent the withholding of a portion of restricted shares to cover taxes on vested restricted shares.
ITEM 5

OTHER INFORMATION
Section 1503. Reporting Requirements Regarding Coal or Other Mine Safety.
On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Act, was enacted. Section 1503 of the Act contains new reporting requirements regarding coal or other mine safety. Westmoreland Coal Company is committed to providing a safe workplace for all of our employees. Recently, two of our mines received the Montana Governor’s Award for Health and Safety, one in the Large Mining category and one in the Small Mining category. In addition, our Beulah Mine received the Lignite Energy Council’s Safety Excellence Award for the lowest accident incident rate in the lignite industry for 2010 and the Rocky Mountain Coal Mining Institute Surface Mine Safety Award for the surface mine with the lowest reportable rate of incidents in the eight-member state region in 2010. Our other mines had excellent safety records in 2010, which continued through the third quarter of 2011. We continue to engage proactively with federal and state agencies in support of measures that can improve the safety and well-being of our employees.
The operation of our mines is subject to regulation by the federal Mine Safety and Health Administration, or MSHA, under the Federal Mine Safety and Health Act of 1977, or the Mine Act. MSHA inspects our mines on a regular basis and issues various citations and orders when it believes a violation has occurred under the Mine Act. Below, we have included information regarding certain mining safety and health citations and orders that MSHA has issued with respect to our coal mining operations. In evaluating this information, consideration should be given to factors such as: (i) the number of citations and orders will vary depending on the size of the coal mine, (ii) the number of citations and orders issued will vary from inspector-to-inspector and mine-to-mine, and (iii) citations and orders can be contested and appealed, and in that process, may be reduced in severity and amount, and are sometimes dismissed.

 

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PART II

OTHER INFORMATION (CONT.)
The table below includes references to specific sections of the Mine Act. We are providing the information in the table by mine as that is how we manage and operate our business.
                                                                 
    (A)     (B)     (C)     (D)     (E)     (F)     (G)     (H)  
                                            Proposed             Pending  
    Section     Section     Section     Section     Section     Assessments             Legal  
Mine Name/ID   104 S&S     104(b)     104(d)     110(b)(2)     107(a)     ($)     Fatalities     Action  
Rosebud Mine & Crusher Conveyor / 24-01747
    8                               I            
Absaloka Mine / 24-00910
    6                               I            
Savage Mine / 24-00106
    3                               I            
Jewett Mine / 41-03164
    1                               I            
Beulah Mine / 32-00043
    1                               I            
     
(A)   The total number of violations of mandatory health or safety standards that could significantly and substantially contribute to the cause and effect of a coal or other mine safety or health hazard under section 104 of the Mine Safety and Health Act of 1977 (30 U.S.C. 814) for which the operator received a citation from the Mine Safety and Health Administration.
 
(B)   The total number of orders issued under section 104(b) of such Act (30 U.S.C. 814(b)).
 
(C)   The total number of citations and orders for unwarrantable failure of the mine operator to comply with mandatory health or safety standards under section 104(d) of such Act (30 U.S.C. 814(d)).
 
(D)   The total number of flagrant violations under section 110(b)(2) of such Act (30 U.S.C. 820(b)(2)).
 
(E)   The total number of imminent danger orders issued under section 107(a) of such Act (30 U.S.C. 817(a)).
 
(F)   The total dollar value of proposed assessments from the Mine Safety and Health Administration under such Act (30 U.S.C. 801 et seq.).
 
(G)   The total number of mining-related fatalities.
 
(H)   Any pending legal action before the Federal Mine Safety and Health Review Commission involving such coal or other mine.
 
(I)   Not assessed as of 9/30/2011.

 

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PART II

OTHER INFORMATION (CONT.)
ITEM 6

EXHIBITS
See Exhibit Index at page 50 of this report.

 

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
         
  WESTMORELAND COAL COMPANY
 
 
Date: November 8, 2011  /s/ Kevin A. Paprzycki    
  Kevin A. Paprzycki   
  Chief Financial Officer and Treasurer
(A Duly Authorized Officer) 
 
     
Date: November 8, 2011  /s/ Russell H. Werner    
  Russell H. Werner   
  Controller and Principal Accounting Officer
(A Duly Authorized Officer) 
 

 

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EXHIBIT INDEX
                                 
            Incorporated by Reference        
Exhibit           File       Filing   Filed   Submitted
Number   Exhibit Description   Form   Number   Exhibit   Date   Herewith   Herewith
       
 
                       
  31.1    
Certification of Chief Executive Officer pursuant to Rule 13a-14(a)
                  X    
       
 
                       
  31.2    
Certification of Chief Financial Officer pursuant to Rule 13a-14(a)
                  X    
       
 
                       
  32    
Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350
                  X    
       
 
                       
  101    
Interactive Data File (Form 10-Q for the quarterly period ended September 30, 2011 furnished in XBRL). Users of this data are advised in accordance with Rule 406T of Regulation S-T promulgated by the Securities and Exchange Commission that this Interactive Data File is deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections. The financial information contained in the XBRL-related documents is “unaudited” and “unreviewed.”
                      X

 

50