Westmoreland Reports First Quarter 2007 Results

Westmoreland Coal Company (AMEX:WLB):

Net income of $8.9 million for first quarter 2007 compared to net income of $5.4 million for first quarter 2006

2007 special items: sale of coal royalty interest ($5.6 million gain), Combined Benefit Fund settlement ($6.4 million benefit) and completion of Absaloka mining contract buyout ($0.8 million expense)

2006 special item: coal bed methane sale ($5.1 million gain)

Four lost-time accidents in the quarter

Westmoreland Coal Company (AMEX:WLB) reported today its first quarter 2007 financial results. Net income applicable to common shareholders was $8.9 million ($0.96 per diluted common share) for the quarter ended March 31, 2007 compared to $5.4 million ($0.60 per diluted common share) for the quarter ended March 31, 2006.

First Quarter 2007 Operating Results

In the first quarter of 2007, $8.4 million of our operating income came from coal operations, and $4.8 million came from independent power operations. This income was partially offset by $0.9 million of expenses (net of the $5.8 million benefit from the Combined Benefit Fund settlement) attributable to our heritage segment and $1.7 million of expenses (net of the $5.6 million gain on sale of a coal royalty interest) of our corporate segment.

Coal Segment

Our coal segment includes the production and sale of coal from our Montana, North Dakota and Texas surface mines. In first quarter 2007, our coal production was up approximately 1%, to 7.5 million tons, compared to first quarter 2006.

Coal segment operating income was $8.4 million in 2007 compared to $9.5 million in 2006.

Coal Segment

Three months ended March 31,

2007 

2006 

Change

Revenues – thousands

$103,080 

$94,634 

9%

Volumes – millions of equivalent coal tons

7.5 

7.4 

1%

Cost of sales – thousands

$83,050 

$73,865 

12%

We sold approximately 0.1 million more tons in the first quarter 2007 compared to the first quarter 2006. This increase was primarily because of more tons sold at our Jewett and Absaloka mines offset by decreases at our Rosebud, Beulah, and Savage mines, which decreases were primarily caused by unscheduled customer power plant outages.

Our coal revenues in the first quarter 2007 increased by approximately $8.4 million from the first quarter 2006. This was due in part to the increase in tons sold, but was primarily driven by increased pricing. We achieved approximately 13% and 10% increases in revenue per ton, respectively, at the Rosebud and Beulah mines resulting from coal contract pass-through adjustments for higher costs. We also renewed an expiring contract at current market prices. We achieved an 8% revenue per ton increase at the Absaloka mine due to market price reopeners. At our Jewett mine, our revenues increased only slightly as the increase in tons sold was partially offset by a 5% price decrease resulting from our current interim price agreement.

Cost of coal sales in the first quarter 2007 increased by approximately $9.2 million from the first quarter 2006. This increase was primarily driven by $4.3 million increase in base reclamation, stripping, and other operating costs at our Rosebud mine. Our Absaloka mine’s cost of sales increased by $3.0 million due to higher tons sold driving increases in royalties, production taxes, and contract mining costs. The remainder of the increase was driven by higher hauling costs, accretion of our reclamation obligations, and higher commodity costs at our Jewett and Beulah mines.

Our coal segment’s depreciation, depletion, and amortization expenses in the first quarter 2007 increased by approximately $0.5 million from the first quarter 2006. This increase resulted from increased depletion expenses from asset retirement cost assets, which increased at the end of 2006 as a result of updated engineering studies.

Power Segment

The power segment includes the ownership of interests in cogeneration and other non-regulated independent power plants, our power operations and maintenance business and business development expenses. Power segment operating income was $4.8 million in the first quarter 2007 compared to $3.6 million in the first quarter 2006. Our energy revenues and costs of sales were $24.7 million and $14.3 million, respectively, during the first quarter 2007.

In connection with the ROVA acquisition, we changed our method of recognizing revenue under ROVA’s long-term power sales agreements effective July 1, 2006. For the first quarter 2007, revenue billed under these agreements totaling $7.3 million was deferred to future periods. We also began consolidation of ROVA’s results of operations effective July 1, 2006. Previously the ROVA results were reported using the equity method. The equity method reported only earnings (calculated net of interest expense, interest income, depreciation, depletion and amortization).

The power segment’s financial performance is presented in the following table:

Power Segment

Three months ended

March 31,

2007 

2006 

 

(in thousands)

50% share of ROVA earnings shown as equity in earnings

$ - 

$ 4,341 

Ft. Lupton equity earnings

136 

117 

 

Total equity earnings

136 

4,458 

 

Energy revenue (1)

24,608 

- 

Costs and expenses:

Cost of sales – energy

(14,308)

- 

Depreciation, depletion, and amortization

(2,423)

(8)

Selling and administrative

(3,219)

(854)

Gain on sales of assets

4 

- 

Power segment revenue less costs and expenses

4,662 

(862)

Independent power segment operating income

4,798 

3,596 

 

Other income (expense):

Interest expense

(3,748)

- 

Interest income

517 

- 

Minority interest

- 

- 

Other income

(3)

126 

Income before income taxes

$ 1,564 

$ 3,722 

(1) The Company recorded $7.3 million in deferred revenue in 2007 related to capacity payments billed at ROVA.

For the first quarter 2007 and 2006, ROVA produced 427,000 and 426,000 MW hours, respectively, and achieved average capacity factors of 94% and 93%, respectively.

During the first quarter 2007, our Westmoreland Utilities subsidiary, which operates and provides maintenance services to four power plants, in Virginia, owned by Dominion Virginia Power, contributed $2.7 million of revenue which is shown as energy revenue and had $2.1 million of costs and expenses which are shown as Cost of sales-energy.

Heritage Segment

Our heritage costs decreased by $6.3 million the first quarter 2007 compared to first quarter 2006. This decrease resulted primarily from a $5.8 million settlement reached with the Combined Benefit Fund which was recorded in the first quarter 2007.

Corporate Segment

Our corporate segment costs decreased by $0.3 million for the first quarter 2007 compared to first quarter 2006. Within this segment, selling and administrative expenses increased by $0.9 million. Gains from the sales of assets were $5.9 million in 2007 compared to $5.0 million in 2006.

Selling and Administrative

Our selling and administrative costs increased from $9.4 million to $13.0 million. $2.4 million of this increase is the result of consolidating ROVA.

Interest

Interest expense was $6.5 million and $2.7 million for the first quarter 2007 and 2006, respectively. The increase resulted from the $2.9 million in interest expense from ROVA’s project development debt following its acquisition and approximately $0.9 million in interest on the ROVA acquisition debt. Interest income increased by $1.3 million in the first quarter 2007 as a result of $0.6 million in interest income received from our settlement with the Combined Benefit Fund, $0.5 million in ROVA interest income, and increased interest income from our restricted cash and bond collateral accounts due to increases in those balances and an increase in interest rates.

Income Tax

Current income tax expense for the first quarter 2007 decreased by $0.1 million from the first quarter 2006. Income tax expense in both periods relates to obligations for state income taxes.

Cash Flow From Operations

Cash provided by operating activities was $19.5 million for the first quarter 2007 compared to $2.8 million for the first quarter 2006. The increase in net income of $3.4 million and increased $5.2 million in non-cash charges to income, which includes depreciation, amortization, stock compensation, gain on sale of assets and minority interest, in the first quarter 2007 increased cash provided by operating activities. There was only $0.1 million of cash distributions from independent power projects for the first quarter 2007 because ROVA distributions received were consolidated after the acquisition in June 2006. Cash provided by operating activities also reflects $7.3 million of revenue deferred under ROVA’s long-term sales agreements. Cash distributions from ROVA of $1.1 million were recorded for the first quarter 2006. Changes in working capital decreased cash provided by operating activities in the first quarter 2007 by $4.3 million compared to a decrease in cash from changes in working capital of $1.6 million in the first quarter 2006.

Safety

Our Beulah, Jewett and Savage mines completed the first quarter with no lost-time accidents and our Rosebud mine had only one. The Absaloka Mine, which was operated under contract by a third party during the quarter, experienced three lost-time accidents.

Other Developments

Absaloka Mining Contract

Westmoreland Resources, Inc. (“WRI”) reached an agreement to settle all contract disputes with Washington Group International, Inc. (“WGI”), and as a result, WRI assumed operation of the Absaloka mine on March 30, 2007. The agreement also includes settlement of other on-going demands by WRI and disputes between its affiliate Westmoreland Coal Sales Company and WGI.

Rosebud Mine Customer Contract

We entered into a new cost-plus agreement to supply coal to Colstrip Units 1&2 through the remaining life of certain permitted coal reserves at the Rosebud mine. Under the new agreement, set to take effect on January 1, 2010, the Rosebud mine will dedicate certain permitted reserves to supply all or almost all of the plant’s solid fuel requirements of approximately three million tons per year through about 2019, and at least half thereafter potentially through the late 2020′s.

Combined Benefit Fund Settlement

During the first quarter of 2007, the Company reached a settlement with the UMWA Combined Benefit Fund (“CBF”) for the reimbursement of $5.8 million, plus interest, in past overpayments to the CBF for retiree medical benefits. The Company received $2.9 million of the reimbursement and $0.6 million in interest during the first quarter, and received the remaining $2.9 million reimbursement plus interest of approximately $0.1 million during the second quarter of 2007. The Company recorded the settlement as a $5.8 million reduction in heritage health benefit expenses and $0.6 million in interest income, and recorded a receivable for the $2.9 million plus related accrued interest through March 31, 2007.

Sale of Coal Royalty Rights

The Company sold its coal royalty interest in Wyoming for $12.7 million, which resulted in a gain of approximately $5.6 million during the first quarter of 2007.

Liquidity

On May 2, 2007, the Company entered into a Standby Purchase Agreement with an investor that would backstop a rights offering of common stock by the Company to its shareholders and purchase additional shares of common stock. The Company expects to seek gross proceeds of at least $85 million before expenses. Proceeds from the rights offering will be used to fund capital expenditures that are expected to improve the Company’s coal sales margins, fund future growth initiatives and provide working capital, as well as for general corporate purposes. As part of the transaction, the Company intends to use a portion of the proceeds from the rights offering to retire its outstanding Series A Convertible Exchangeable Preferred Stock, each share of which is represented by four depositary shares. The Company is evaluating options to achieve this objective.

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 March 31, 2007 for additional information.

About Westmoreland

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 current power operations include ownership and operation of the two-unit ROVA coal-fired power plant in North Carolina, an interest in a natural gas-fired power plant in Colorado, and the operation of four power plants in Virginia. Westmoreland is implementing a growth strategy dedicated to meeting America’s dual goals of low-cost power and a clean environment through the acquisition and development of complementary, niche opportunities in coal, power and other segments of the energy sector. For more information visit www.westmoreland.com.

Safe Harbor Statement

Throughout this news 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 Company’s ability to raise additional equity capital through a rights offering; the material weakness in the Company’s internal controls over financial reporting identified in our 2006 Form 10-K, 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 manage growth and significantly expanded operations; the ability of the Company to implement its growth and development strategy; 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 or ability to refinance its bridge loan; 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 2006 Form 10-K and our Form 10-Q for the quarter ended March 31, 2007; the Company’s ability to raise additional capital, as discussed under Liquidity and Capital Resources; and the other factors discussed in Note 18 of the Form 10-Q for the quarter ended March 31, 2007. 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

 

Three months ended March 31,

2007 

2006 

(unaudited)

(in thousands, except per share data)

Revenues:

Coal

$ 103,080 

$ 94,634 

Energy

24,608 

- 

Independent power projects – equity in earnings

136 

4,458 

127,824 

99,092 

Cost and expenses:

Cost of sales — coal

83,050 

73,865 

Cost of sales — energy

14,308 

- 

Depreciation, depletion and amortization

8,885 

5,920 

Selling and administrative

12,980 

9,426 

Heritage health benefit expenses

465 

7,024 

Gain on sales of assets

(5,866)

(5,016)

113,822 

91,219 

Operating income

14,002 

7,873 

 

Other income (expense):

Interest expense

(6,545)

(2,654)

Interest income

2,403 

1,133 

Minority interest

(588)

(483)

Other income

124 

197 

(4,606)

(1,807)

Income before income taxes

9,396 

6,066 

Income tax expense

182 

277 

Net income

9,214 

5,789 

Less preferred stock dividend requirements

340 

436 

Net income applicable to common shareholders

$ 8,874 

$ 5,353 

 

Net income per share applicable to common shareholders:

Basic

$ 0.98 

$ 0.63 

Diluted

$ 0.96 

$ 0.60 

 

Weighted average number of common shares outstanding:

Basic

9,039 

8,430 

Diluted

9,286 

8,928 

Westmoreland Coal Company and Subsidiaries

Summary Financial Information

 

(Unaudited)

(in thousands)

 

Quarter Ended

March 31

2007 

2006 

Cash Flow

Net cash provided by operating activities

$ 19,503 

$ 2,836 

Net cash provided by investing activities

$ 6,424 

$ 381 

Net cash provided by (used in) financing activities

$ (26,916)

$ (4,495)

Production and Sales

Coal – tons (million)

7.5 

7.4 

(Unaudited)

(in thousands)

 

March 31, 2007

December 31, 2006

 

Balance Sheet Data

Total assets

$ 759,337 

$ 761,382 

Total debt

$ 281,480 

$ 306,007 

Shareholders’ deficit

$ (113,975)

$ (126,185)

Common shares outstanding

9,057 

9,014