Westmoreland Reports Second Quarter 2008 Results
Westmoreland Coal Company (AMEX:WLB) reported today its second quarter 2008 financial results.
“In May of 2007, Westmoreland launched numerous restructuring initiatives intended to support our strategic focus on our core competency of coal,” said Keith E. Alessi, Westmoreland’s Executive Chairman. “This led to the divestiture of non-core businesses, the purchase of our partner’s ownership interest in the Absaloka Mine, the signing of a long-term, cost plus contract at our Jewett mine, streamlining of reporting functions and a significant reduction of corporate headcount. We completed the majority of these initiatives by the end of 2007, and then focused our attention on resolving our working capital needs. The refinancing of two of our subsidiaries, as well as the sale of senior secured convertible notes at the parent company level, have resulted in an improvement of working capital of $85.9 million since year end 2007. While this has put the Company on a much stronger financial footing, we will continue to evaluate our long-term capital needs. The fact that we were able to complete these financing transactions in a very difficult credit market speaks to the quality of our coal operation and assets.”
Net loss applicable to common shareholders was $18.3 million ($1.92 per basic and diluted common share) for the quarter ended June 30, 2008, compared to a net loss of $11.3 million ($1.24 per diluted common share) for the quarter ended June 30, 2007. Our results were negatively impacted during second quarter of 2008 by a $3.8 million loss on extinguishment of debt. The second quarter of 2007 was negatively impacted by a $2.3 million restructuring charge. Other major differences between the second quarters of 2008 and 2007 were higher interest charges (net of interest income) in 2008 of $0.9 million associated with our recent financing activities, and a reduction in operating income in the coal operations in 2008 of an estimated $1.7 million caused by a work stoppage at the Absaloka Mine, an unscheduled customer outage and higher fuel, depreciation and depletion costs at our mining operations. Scheduled and unscheduled outages at the ROVA power facility also negatively impacted the second quarter of 2008.
“Four of our five mining complexes met or exceeded operating expectations in the second quarter of 2008. The tonnage shortfall at Absaloka negatively impacted its operating performance but we are poised to make up the lost tonnage over the remainder of 2008,” said D.L. Lobb, Westmoreland’s President and CEO. “We are seeing positive results from our sharpened focus on cost reduction when customers have plant outages, or when demand is impacted by hydro power generation, such as occurred during the second quarter of 2008. We will continue to focus on the safety of our employees, productivity improvements at our mining operations and wise investing of the liquidity we now have at our subsidiaries.”
For the six month period ended June 30, 2008, net loss applicable to common shareholders was $29.7 million ($3.14 per basic and diluted common share), compared to a net loss of $3.9 million ($0.43 per basic and diluted common share) for the first six months of 2007. Net income was negatively impacted during the first six months of 2008 by $8.1 million of interest expense attributable to the beneficial conversion feature of our new convertible notes, $5.2 million in losses on extinguishment of debt resulting from the refinancing of our WML and ROVA subsidiaries, and a $0.6 million restructuring charge. Net income was favorably impacted during the first six months of 2007 by a $5.8 million gain and $0.6 million of interest income from the Combined Benefit Fund settlement, a $5.6 million gain on the sale of a coal royalty interest, offset by a $2.3 million restructuring charge and $0.8 million of expense from the Absaloka mining contract buyout. Our operating income from coal operations decreased $2.1 million in the first six months of 2008 from 2007 as a result of a work stoppage at the Absaloka Mine, unscheduled customer outages and higher fuel, depreciation and depletion costs.
Coal Operations
The following table shows comparative coal revenues, sales volumes and cost of sales for second quarter of 2008 and second quarter of 2007:
Three Months Ended June 30, ——————- Coal Segment 2008 2007 Change —————————– Revenues – thousands $92,471 $101,758 -9% Volumes – millions of equivalent coal tons 6.3 7.0 -10% Cost of sales – thousands $79,598 $84,389 -6%
In the second quarter of 2008, our coal sales decreased approximately 10% compared to the second quarter of 2007, to 6.3 million tons. Our second quarter 2008 coal revenues decreased to $92.5 million, a 9% decrease over the prior year period, attributable to an unscheduled customer outage and the work stoppage at our Absaloka Mine.
Coal operations operating income was $0.4 million in 2008 compared to $2.1 million in 2007, due to the aforementioned decrease in revenue combined with increases in fuel costs, depreciation and depletion over the prior year period.
Power
For second quarters of 2008 and 2007, ROVA produced 375,000 and 399,000 MW hours, respectively, and achieved average capacity factors of 83.3% and 90.7%, respectively.
Our power revenues in the second quarter of 2008 decreased to $20.8 million, or a decrease of approximately $0.6 million from the second quarter of 2007. The decrease was driven by the decrease in MW sold which resulted from unplanned outages during the period. Our power operations operating income was $2.8 million in 2008 compared to $3.0 million in 2007.
Heritage Costs
During the second quarter of 2008, our heritage segment’s costs increased by $0.7 million from the second quarter of 2007. Our 2008 black lung heritage costs increased in the second quarter due to increases in black lung claims and less investment income as a result of reduced investments held by the trust.
Corporate
Our corporate selling and administrative expenses increased by $1.1 million in the second quarter 2008 compared to the second quarter of 2007. This increase was primarily due to an increase in professional fees driven by our financial statement restatement and information technology cost increases, offset by reduced costs resulting from the execution of our restructuring plan undertaken last year.
Interest expense and loss on extinguishment of debt
Interest expense was $6.0 million for the second quarter of 2008 compared to $6.3 million in the second quarter of 2007. The decrease resulted from the reduction in our ROVA debt levels following the refinancing of that debt offset by the interest expense recognized for the beneficial conversion feature of the senior secured notes issued by Westmoreland Coal Company. Interest income was $0.9 million in the second quarter of 2008 compared to $2.1 million in the second quarter of 2007. Our interest income decreased because a large portion of our restricted investments were used in the refinancing of our power and mining debt. We also recorded a $3.8 million loss on the extinguishment of debt associated with our mining debt refinancing during the second quarter of 2008.
Cash Flow from Operations
Cash provided by operating activities was $21.2 million for the first six months of 2008 compared to $44.5 million for the first six months of 2007 primarily due to a larger net loss during the period. The first six months of 2007 benefited from a $5.8 million refund of excess trust assets related to our black lung trust and a $10.0 million reserve dedication fee.
Liquidity
In the first six months of 2008 we took three significant steps to improve liquidity:
First, on March 4, 2008, the Company completed the sale of $15.0 million in senior secured convertible notes to an existing stockholder. Secondly, on March 17, 2008, our Westmoreland Partners subsidiary completed a refinancing of the ROVA Power Project debt. The refinancing paid off all outstanding bank borrowings, bond borrowings, and the ROVA acquisition loan, and eliminated the need for the irrevocable letters of credit, which supported the bond borrowings. Finally, on June 26, 2008, our Westmoreland Mining subsidiary completed a refinancing of its term and revolving debt. The refinancing extended the repayment schedule through 2018, with principal payments starting in 2011.
As a result of these steps, working capital improved $85.9 million to $2.9 million at June 30, 2008, compared to a $83.0 million deficit at December 31, 2007.
Safety
Our MSHA reportable incident rate improved 29% in the second quarter of 2008 compared to second quarter of 2007. This improvement was primarily the result of a 67% incident decrease at our Absaloka Mine where Westmoreland safety programs were implemented after we assumed control of the mine operations from a contractor. Year-to-date, Westmoreland mines’ MSHA reportable incident rate has decreased 51% from 2007.
Additional Information
Investors should refer to the attached Consolidated Statements of Operations and Summary Financial Information, and the Company’s Form 10-Q for the period ended June 30, 2008, for additional information.
Westmoreland Coal Company is the oldest independent coal company in the United States and a developer of highly clean and efficient independent power projects. The Company’s coal operations include coal mining in the Powder River Basin in Montana and lignite mining operations in Montana, North Dakota and Texas. Its power operations include ownership of the two-unit ROVA coal-fired power plant in North Carolina. Westmoreland is dedicated to meeting America’s dual goals of low-cost power and a clean environment. For more information visit www.westmoreland.com.
Forward-Looking Statements
Throughout this press release, the Company makes statements which are not historical facts or information and that may be deemed “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements include, but are not limited to, the information set forth in Management’s Discussion and Analysis of Financial Condition and Results of Operations. For example, words such as “may,”"will,”"should,”"estimates,”"predicts,”"potential,”"continue,”"strategy,”"believes,”"anticipates,”"plans,”"expects,”"intends,” and similar expressions are intended to identify forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause the actual results, levels of activity, performance or achievements, or industry results, to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: general economic and business conditions; the material weaknesses in the Company’s internal controls over financial reporting identified in the Annual Report on Form 10-K for the year ended December 31, 2007, or our 2007 Form 10-K, and the associated ineffectiveness of the Company’s disclosure controls; health care cost trends; the cost and capacity of the surety bond market; the Company’s ability to pay the preferred stock dividends that are accumulated but unpaid; the Company’s ability to retain key senior management; the Company’s access to financing; the Company’s ability to maintain compliance with debt covenant requirements or obtain waivers from its lenders in cases of non-compliance; the Company’s ability to achieve anticipated cost savings and profitability targets; the Company’s ability to successfully identify new business opportunities; the Company’s ability to negotiate profitable coal contracts, price reopeners and extensions; the Company’s ability to predict or anticipate commodity price changes; the Company’s ability to maintain satisfactory labor relations; changes in the industry; competition; the Company’s ability to utilize its deferred income tax assets; the ability to reinvest cash, including cash that has been deposited in reclamation accounts, at an acceptable rate of return; weather conditions; the availability of transportation; price of alternative fuels; costs of coal produced by other countries; the demand for electricity; the performance of ROVA and the structure of ROVA’s contracts with its lenders and Dominion Virginia Power; the effect of regulatory and legal proceedings; environmental issues, including the cost of compliance with existing and future environmental requirements; the risk factors set forth in our 2007 Form 10-K and our Form 10-Q for the quarter ended June 30, 2008; and the other factors discussed in Note 18 to our Form 10-Q for the period ended June 30, 2008. As a result of the foregoing and other factors, no assurance can be given as to the future results and achievement of the Company’s goals. The Company disclaims any duty to update these statements, even if subsequent events cause its views to change.
Westmoreland Coal Company and Subsidiaries Consolidated Statements of Operations (Unaudited) Three Months Ended Six Months Ended June 30, June 30, 2008 2007 2008 2007 ————————————— (In thousands, except per share data) Revenues: Coal $92,471 $101,758 $200,813 $204,838 Energy 20,835 21,447 44,001 43,306 Independent power projects – equity in earnings 117 47 202 183 ——— ——— ——— ——— 113,423 123,252 245,016 248,327 ——— ——— ——— ——— Cost and expenses: Cost of sales – coal 79,598 84,389 167,104 167,439 Cost of sales – energy 14,586 14,563 28,739 27,377 Depreciation, depletion and amortization 9,663 9,617 19,910 18,499 Selling and administrative 10,981 11,683 20,797 23,634 Restructuring charges – 2,278 628 2,278 Heritage health benefit expenses 8,243 8,028 15,208 10,204 Loss (gain) on sales of assets (621) 29 (622) (5,834) ——— ——— ——— ——— 122,450 130,587 251,764 243,597 ——— ——— ——— ——— Operating income (loss) (9,027) (7,335) (6,748) 4,730 Other income (expense): Interest expense (5,670) (6,273) (11,556) (12,818) Interest expense attributable to beneficial conversion feature (377) – (8,108) – Loss on extinguishment of debt (3,834) – (5,178) – Interest income 941 2,090 2,553 4,493 Minority interest – (142) – (730) Other income 135 23 216 147 ——— ——— ——— ——— (8,805) (4,302) (22,073) (8,908) ——— ——— ——— ——— Loss from continuing operations before income taxes (17,832) (11,637) (28,821) (4,178) Income tax expense (benefit) from continuing operations 109 (89) 243 93 ——— ——— ——— ——— Loss from continuing operations (17,941) (11,548) (29,064) (4,271) Income from discontinued operations – 608 – 1,036 ——— ——— ——— ——— Net loss (17,941) (10,940) (29,064) (3,235) Less preferred stock dividend requirements 340 340 680 680 ——— ——— ——— ——— Net loss applicable to common shareholders $(18,281) $(11,280) $(29,744) $(3,915) ========= ========= ========= ========= Loss per share from continuing operations: Basic $(1.92) $(1.31) $(3.14) $(0.55) Diluted $(1.92) $(1.31) $(3.14) $(0.55) Income per share from discontinued operations: Basic $- $0.07 $- $0.12 Diluted $- $0.07 $- $0.12 Net loss per share applicable to common shareholders: Basic $(1.92) $(1.24) $(3.14) $(0.43) Diluted $(1.92) $(1.24) $(3.14) $(0.43) Weighted average number of common shares outstanding: Basic 9,498 9,092 9,471 9,066 Diluted 9,568 9,341 9,563 9,310
Westmoreland Coal Company and Subsidiaries Summary Financial Information (In thousands) Six Months Ended June 30, ————————- 2008 2007 ————————- Cash Flow (Unaudited) Net cash provided by operating activities $21,210 $44,540 Net cash provided by (used in) investing activities $25,856 $(3,606) Net cash provided by (used in) financing activities $2,229 $(27,832) (In thousands) June 30, December 31, 2008 2007 ————————- Balance Sheet Data (Unaudited) Total assets $795,737 $782,528 Total debt $287,910 $271,448 Working capital (deficit) $2,944 $(82,967) Shareholders’ deficit $(192,332) $(177,257) Common shares outstanding 9,517 9,427