10-K 1 wlb-12312012x10k.htm FORM 10-K WLB - 12.31.2012 - 10K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 ______________________________________________________________
FORM 10-K
(Mark One)
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2012
OR
 
¨ 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.)
 
 
9540 South Maroon Circle, Suite 200
Englewood, CO
80112
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: (855) 922-6463
Securities registered pursuant to Section 12(b) of the Act:
 ______________________________________________________________­
Title of Each Class
 
Name of Exchange on Which Registered
Common Stock, par value $2.50 per share
 
NASDAQ Global Market
 
 
 
Depositary Shares, each representing
one-quarter of a share of Series A Convertible
Exchangeable Preferred Stock
 
Preferred Stock Purchase Rights
 
 
Securities registered pursuant to Section 12(g) of the Act:
  ______________________________________________________________
Series A Convertible Exchangeable Preferred Stock, par value $1.00 per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨     No  x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨     No   x
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  x    No  ¨



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  x    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this 10-K or any amendment to this Form 10-K.  ¨
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
 
¨
Accelerated filer
 
x
 
 
 
 
 
Non-accelerated filer
 
¨  (Do not check if a smaller reporting company.)
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x
The aggregate market value of voting common stock held by non-affiliates as of June 30, 2012 was $88,786,573.
There were 14,287,900 shares outstanding of the registrant’s common stock, $2.50 par value per share (the registrant’s only class of common stock), as of March 1, 2013.
  ______________________________________________________________

DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement to be filed by the Company in connection with its 2013 Annual Meeting of Stockholders scheduled to be held on May 21, 2013, which will be filed within 120 days after December 31, 2012, are incorporated by reference into Part III of this Annual Report on Form 10-K.



WESTMORELAND COAL COMPANY
FORM 10-K
ANNUAL REPORT
TABLE OF CONTENTS
 
Item
 
Page
 
 
 
 
 
1
1A
1B
2
3
4
 
 
 
 
 
5
6
7
7A
8
9
9A
 
 
 
 
 
10
11
12
13
14
 
 
 
 
 
15

2


Cautionary Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K 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 in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Significant Anticipated Variances Between 2012 and 2013,” our belief that statutory amendments could give rise to increases in black lung liabilities and future funding requirements, that our business interruption insurance will cover our losses at the Absaloka Mine, and the effect on us of the events described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Recent Developments — Business Interruption Claim.”
Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Our actual results may differ materially from those contemplated by the forward-looking statements. We therefore caution you against relying on any of these forward-looking statements. They are statements neither of historical fact nor guarantees or assurances of future performance. Important factors that could cause actual results to differ materially from those in the forward-looking statements include political, economic, business, competitive, market, weather and regulatory conditions and the following: 
risks associated with our estimated postretirement medical benefit and pension obligations, including those we assumed in the Kemmerer acquisition, and the impact of regulatory changes on those obligations;
changes in our black lung obligations, changes in our experience related to black lung claims, and the impact of the Patient Protection and Affordable Care Act;
our potential inability to maintain compliance with debt covenant requirements;
competition with natural gas and other non-coal energy resources, which may be increased as a result of energy policies, regulations and subsidies or other government incentives that encourage or mandate use of alternative energy sources;
coal-fired power plant capacity, including the impact of environmental regulations, energy policies and other factors that may cause utilities to phase out or close existing coal-fired power plants or reduce construction of any new coal-fired power plants;
railroad, export terminal capacity and other transportation performance, costs and availability;
the potential inability of our subsidiaries to pay dividends to us due to restrictions in our debt arrangements, reductions in planned coal deliveries or other business factors;
our potential inability to enter into new coal supply agreements with existing customers due to the unfavorable result of competitive bid processes or the shutdown of a power facility due to new environmental legislation or regulations;
risks associated with the structure of Westmoreland Energy LLC’s and its subsidiaries, collectively referred to herein as ROVA, contracts with its coal suppliers and power purchaser, which could dramatically affect the overall profitability of ROVA;
the effect of Environmental Protection Agency inquiries and regulations on the operations of ROVA and our customer's power facilities;
the effect of prolonged maintenance or unplanned outages at our operations or those of our major power generating customers, including unplanned outages at our customers due to the impact of weather-related variances or catastrophic events;
the potential that insurance proceeds from our business interruption claim relating to the unexpected shutdown of one of the Absaloka mine customers will not be sufficient to cover our losses associated with the business interruption;
future legislation and changes in regulations, governmental policies and taxes, including those aimed at reducing emissions of elements such as mercury, sulfur dioxides, nitrogen oxides, particulate matter or greenhouse gases; and
other factors that are described in “Risk Factors” herein
Unless otherwise specified, the forward-looking statements in this report speak as of the filing date of this report. Factors or events that could cause our actual results to differ may emerge from time-to-time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update any forward-looking statements, whether because of new information, future developments or otherwise, except as may be required by law.

3


PART I
The words “we,” “our,” “the Company,” or “Westmoreland,” as used in this report, refer to Westmoreland Coal Company and its applicable subsidiary or subsidiaries.
 
ITEM 1
- BUSINESS.
Overview
Westmoreland Coal Company began mining in Westmoreland County, Pennsylvania in 1854 as a Pennsylvania corporation. In 1910, we incorporated in Delaware and continued our focus on underground coal operations in Pennsylvania and the Appalachian Basin. We moved our headquarters from Philadelphia, Pennsylvania to Colorado Springs in 1995 and relocated the headquarters to Englewood, Colorado in November 2011.
Today, Westmoreland Coal Company is an energy company employing approximately 1,250 employees whose operations include six surface coal mines in Montana, Wyoming, North Dakota and Texas, and two coal-fired power-generating units in North Carolina. On January 31, 2012, we completed the acquisition of the Kemmerer Mine in Kemmerer, Wyoming, which added approximately 4.4 million tons of coal sales a year. With the addition of Kemmerer, we sold 21.7 million tons of coal in 2012. Our two principal operating segments are our coal and power segments. Our two non-operating segments are our heritage and corporate segments. Our heritage segment primarily includes the costs of benefits we provide to former mining operation employees and our corporate segment consists primarily of corporate administrative expenses.
As of December 31, 2012, we currently have two major debt issuances outstanding: (1) $103.5 million of term debt issued by Westmoreland Mining, LLC, or WML, referred to herein as the WML Notes; and (2) $252.0 million of senior secured notes issued by us at the parent level, referred to herein as the 10.75% Senior Notes. We incorporate by reference the information regarding the revenues, operating income and total assets of each of our segments for the years ended December 31, 2012, 2011 and 2010 contained in Note 16 — Business Segment Information to our consolidated financial statements. The following chart provides an overview of the operating subsidiaries that comprise our coal and power segments and our relationship to each of them:
Coal Segment
General
Our coal segment’s focus is on niche coal markets where we take advantage of customer proximity and strategically located rail transportation. As of December 31, 2012, approximately three-fourths of our coal production was mine mouth, sold under long-term coal contracts to neighboring power plants. The remaining coal production was sold on the open market, where we use our logistical advantages to deliver our coal via truck and rail transportation. Two-thirds of our coal production comes from our sub-bituminous coal reserves located in the Northern Powder River Basin and southwestern Wyoming, as of December 31, 2012. The remaining third of our production is lignite. We project that about 65% of our contracted tons in 2013 will remain under contract through 2018. Our relationship with the Crow Tribe allows us to, among other things, continue to monetize certain Indian Coal Tax Credits as described below in “Properties.”
In 2012, we sold 21.7 million tons of coal compared to 21.8 million in 2011. Our 2012 tons sold were impacted by customer outages at our Absaloka and Beulah Mines and included tons sold by our Kemmerer Mine following our acquisition of the Kemmerer Mine on January 31, 2012.

4


The following table provides summary information regarding our principal mining operations as of December 31, 2012:
 
Mining
Operation
 
Prior 
Operator
 
Manner of
Transport
 
Machinery
 
Tons Sold
(In thousands)
 
Total Cost
of Property,
Plant and
Equipment
($ in millions)
 
Employees/Labor Relations(1)
 
Coal Seam
2010
 
2011
 
2012
 
 
 
MONTANA
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Rosebud
 
Entech, Inc., a subsidiary of Montana Power, Purchased 2001
 
Ÿ  Conveyor
    belt
Ÿ  BNSF Rail 
Ÿ  Truck
 
Ÿ  4 draglines 
Ÿ  Load-out 
    facility
 
12,231

 
8,785

 
8,018

 
$
160.8

 
381 employees;
300 represented
by Local 400 of
the IUOE
 
Ÿ   Rosebud
Absaloka
 
Washington Group
International, Inc.
as contract
operator, Ended
contract in 2007
 
Ÿ  BNSF Rail 
Ÿ  Truck
 
Ÿ  1 dragline 
Ÿ  Load-out
    facility
 
5,467

 
5,557

 
2,714

 
$
141.1

 
99 employees;
74 represented by
Local 400 of the
IUOE
 
Ÿ  Rosebud-McKay
Savage
 
Knife River
Corporation, a
subsidiary of MDU
Resources Group,
Inc., Purchased
2001
 
Ÿ  Truck
 
Ÿ  1 dragline
 
353

 
350

 
298

 
$
6.2

 
13 employees; 11
represented by
Local 400 of the
IUOE
 
Ÿ  Pust
TEXAS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Jewett
 
Entech, Inc., a subsidiary of Montana Power, Purchased 2001
 
Ÿ  Conveyor
    belt
 
Ÿ  4 draglines
 
4,203

 
4,204

 
4,201

 
$
31.9

 
329 employees
 
Ÿ  Wilcox
    Group
NORTH DAKOTA
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beulah
 
Knife River
Corporation, a subsidiary of MDU
Resources Group, Inc., Purchased
2001
 
Ÿ  Conveyor
    belt
Ÿ  BNSF Rail
 
Ÿ  1 dragline
Ÿ  Load-out
    facility
 
2,898

 
2,920

 
2,267

 
$
66.7

 
97 employees;
69 represented
by Local 1101 of
the UMWA
 
Ÿ  Schoolhouse
Ÿ  Beulah-Zap
WYOMING(2)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Kemmerer
 
Chevron Mining Inc., Purchased
2012
 
Ÿ  Conveyor
    belt
Ÿ  Rail
Ÿ  Truck
 
Ÿ  Truck and
    shovel
 
*(2)

 
*(2)

 
4,247

 
$
155.9

 
288 employees;
225 represented
by Local 1307 of
the UMWA
 
Ÿ  Adaville Series
TOTALS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
25,152

 
21,816

 
21,745

 
$
562.6

 
1,250
employees
 
 
 
(1)
As of December 31, 2012, 679 employees, or approximately 54% of our total employees, were represented by collective bargaining agreements. The labor agreements at the Savage Mine, Rosebud Mine and Kemmerer Mine were renegotiated in 2012 and expire in 2016, 2018 and 2019, respectively. The labor agreements at our Beulah and Absaloka Mines expire in 2014 and 2015, respectively.
(2)
We closed on the acquisition of the Kemmerer Mine on January 31, 2012; historical tonnage for 2010 and 2011 is not applicable.

5


Properties
We had an estimated 552.8 million tons of total proven or probable coal reserves as of December 31, 2012. Montana, Wyoming, Texas, and North Dakota each use a permitting process approved by the Office of Surface Mining. Our mines have chosen to permit coal reserves on an incremental basis and given the current rates of mining and demand, have sufficient permitted coal to meet production for the periods shown in the table below. We secure all of our final reclamation obligations by reclamation bonds as required by the respective state agencies. We perform contemporaneous reclamation activities at each mine in the normal course of operations and coal production.
Our mines control coal reserves and deposits through long-term leases. Coal reserves are that part of a mineral deposit that can be economically and legally extracted at the time of the reserve determination. Coal deposits do not qualify as reserves until we conduct a final comprehensive economic evaluation and conclude it is legally and economically feasible to mine the coal. We base our estimate of the economic recoverability of our reserves through a comparison of potential reserves to reserves currently in production in a similar geologic setting to determine an estimated mining cost. We compare these estimated mining costs to existing market prices for the anticipated quality of coal. We only include reserves expected to be economically mined in our reserve estimates.
Our engineers and geologists generally prepare our reserve estimates. We periodically engage independent mining and geological consultants to review the models and procedures we use in preparing our internal estimates of coal reserves according to standard classifications of reliability. Total recoverable reserve estimates change over time to reflect mining activity, analysis of new engineering and geological data, information obtained from our ongoing drilling program, changes in reserve holdings and other factors. We compile data from individual drill holes in a database from which the depth, thickness and the quality of the coal are determined. We classify reserves as either proven or probable based on the density result of the drill pattern.
The following map shows the locations of our mining and power operations:

6


The following table provides information about our mines as of December 31, 2012:
 
Absaloka
Mine
 
Rosebud
Mine
 
Jewett
Mine
 
Beulah
Mine
 
Savage
Mine
 
Kemmerer
Mine
 
Total
Owned by
Westmoreland
Resources, Inc.
 
Western
Energy
Company
 
Texas
Westmoreland
Coal Co.
 
Dakota
Westmoreland
Corporation
 
Westmoreland
Savage
Corporation
 
Westmoreland
Kemmerer,
Inc.
 
 
Location
Big Horn
County, MT
 
Rosebud and
Treasure
Counties, MT
 
Leon, 
Freestone
and Limestone
Counties, TX
 
Mercer and
Oliver
Counties, ND
 
Richland
County, MT
 
Lincoln
County, WY
 
 
Coal reserves
(thousands of tons)(1)
Proven
59,186

 
306,949

 
34,487

 
27,682

 
5,284

 
94,807

 
528,395

Probable

 

 

 
15,516

 

 
8,867

 
24,383

Total proven and probable reserves (thousands of tons)
59,186

 
306,949

 
34,487

 
43,198

 
5,284

 
103,674

 
552,778

Permitted reserves
(thousands of tons)
59,186

 
115,918

 
34,487

 
11,622

 
5,284

 
44,993

 
271,490

2012 production (thousands of tons)
2,738

 
7,995

 
4,228

 
2,314

 
300

 
4,245

 
21,820

Estimated life of permitted
reserves(2)
2022

 
2019

 
2022

 
2014

 
2026

 
2022

 
 
 Lessor
Ÿ  Crow Tribe
Ÿ  Private parties
 
Ÿ  Federal Government
Ÿ  State of MT
Ÿ  Great Northern Properties
 
Ÿ  Private parties
Ÿ  State of TX
 
Ÿ  Private parties
Ÿ  State of ND
Ÿ  Federal Government
 
Ÿ  Federal Government
Ÿ  Private parties 
 
Ÿ  Federal Government
Ÿ  Private parties
 
 
Lease term
Through
exhaustion
 
Varies
 
Varies
 
Varies
 
Varies
 
Varies
 
 
Current production capacity
(thousands of tons)
7,500

 
13,300

 
7,000

 
3,400

 
400

 
5,000

 
 
Coal type
Sub-bituminous
 
Sub-bituminous
 
Lignite
 
Lignite
 
Lignite
 
Sub-bituminous
 
 
Major customers
Ÿ  Xcel Energy
 
Ÿ  Western Fuels Assoc.
 
Ÿ  Midwest Energy
 
Ÿ  Rocky Mountain Power
 
Ÿ  Colstrip 1&2 owners
 
Ÿ  Colstrip 3&4 owners
 
Ÿ  NRG Texas Power LLC
 
Ÿ  Otter Tail
 
Ÿ  MDU
 
Ÿ  Northern Municipal Power Agency
 
Ÿ  Northwestern Energy
 
Ÿ  MDU
 
Ÿ  Sidney Sugars
 
Ÿ  PacifiCorp
 
Ÿ  Various industrial customers
 
 
Delivery method
Rail / Truck
 
Truck / Rail /
Conveyor
 
Conveyor
 
Conveyor / Rail
 
Truck
 
Conveyor/ Rail/
Truck
 
 
Approx. heat content (BTU/lb.)(3)
8,589

 
8,504

 
6,561

 
7,020

 
6,500

 
9,836

 
 
Approx. sulfur content (%)(4)
0.66

 
0.64

 
0.84

 
0.75

 
0.48

 
0.79

 
 
Year current complex opened
1974

 
1968

 
1985

 
1963

 
1958

 
1950(5)

 
 
Total tons mined since inception
(thousands of tons)
180,877

 
448,691

 
191,713

 
107,489

 
15,148

 
174,076 (5)

 


 
(1)
The SEC Industry Guide 7 defines reserves as that part of a mineral deposit, which could be economically and legally extracted or produced at the time of the reserve determination. Proven and probable coal reserves are defined by SEC Industry Guide 7 as follows:
Proven (Measured) Reserves — Reserves for which (a) quantity is computed from dimensions revealed in outcrops, trenches, workings or drill holes; grade and/or quality are computed from the results of detailed sampling and (b) the sites for inspection, sampling and measurement are spaced so close and the geographic character is so well defined that size, shape, depth and mineral content of reserves are well-established.
Probable (Indicated) Reserves — Reserves for which quantity and grade and/or quality are computed from information similar to that used for proven (measured) reserves, but the sites for inspection, sampling and measurement are farther apart or are otherwise less adequately spaced. The degree of assurance, although lower than that for proven (measured) reserves, is high enough to assume continuity between points of observation.
(2)
Approximate year in which permitted reserves would be exhausted, based on current mine plan and production rates. The Jewett Mine’s

7


reserves are covered under two separate mining permits, which must be renewed every five years. The Absaloka Mine permits expire in 2013 and 2014.
(3)
Approximate heat content applies to the coal mined in 2012.
(4)
Approximate sulfur content applies to the tons mined in 2012.
(5)
Elkol Underground Mine opened in 1950 and the Sorenson Surface Operations opened in 1963. Tons mined since inception for Kemmerer are for tons mined from 1950 through 2012.
With the exception of the Jewett and Kemmerer Mine, where we control some reserves through fee ownership, we lease all of our coal properties. We are a party to coal leases with the federal government, state governments, and private parties at our Absaloka, Rosebud, Beulah, Savage and Jewett Mines. Each of the federal and state government leases continue indefinitely provided there is diligent development of the property and continued operation of the related mines. Federal statute generally sets production royalties on federal leases at 12.5% of the gross proceeds of coal mined and sold for surface mines. At the Beulah and Savage Mines, we have received reductions in the federal royalty rate due to the quality of the lignite coal mined. Our private leases run for an average term of twenty years and have options for renewal. We believe that we have satisfied all lease conditions in order to retain the properties and keep the leases in place.
We are a party to two leases with the Crow Tribe covering 18,406 acres of land at our Absaloka Mine. In 2008, and in order to take advantage of certain available tax credits for the production of coal on the leased Crow Tribe land, Westmoreland Resources, Inc., or WRI, entered into a series of transactions, including the formation of Absaloka Coal, LLC with an unaffiliated investor. In 2012, the tax credit was equal to $2.267 per ton. We received a private letter ruling from the IRS providing that the Indian Coal Tax Credits are available to us. As part of such transaction, WRI subleased its leases with the Crow Tribe to Absaloka Coal, LLC, granting it the right to mine specified quantities of coal through September 2013, with WRI as contract miner. We will pay to the Crow Tribe 33% of the expected payments we will receive from the investor. The tax credit expired at the end of 2012, but was extended for one year through December 31, 2013. Should the tax credit expire without being renewed, it would have a negative effect on earnings and cash flows. The 10.75% Senior Notes have fully encumbered all of WRI’s and WKI’s property by a first lien. The 10.75% Senior Notes allow us to enter into a revolving line of credit collateralized, in part, by the accounts receivable and inventory at WRI and WKI. In addition, WML fully encumbered all of its property at our Rosebud, Beulah and Savage mines pursuant to the WML Notes and revolving line of credit.
Customers
We sell most of the coal that we produce (88% in 2012) to plants that generate electricity. In 2012, we derived approximately 66% of our total revenues from coal sales to five power plants: Colstrip Units 3&4 (21%), Naughton Power Station (16%), Limestone Generating Station (14%), Colstrip Units 1&2 (11%) and Sherburne County Station (4%). We sell the majority of our tons under contracts with remaining supply obligation terms of three years or more. We provide coal delivery via conveyor belt to our mine-mouth customers, but sell coal and lignite on a Free On Board, or FOB, basis to our other customers. The purchaser of coal normally bears the cost of transportation and risk of loss from load-out to its final destination. We are impacted by seasonality due to weather patterns and our customer's annual maintenance outages which typically occur during the second quarter.
Rosebud. The Rosebud Mine has two contracts with the adjacent Colstrip Station power generating facility. A new cost-plus agreement with Colstrip Units 1&2 has a projected term through at least 2019 and expected tons of 3.0 million per year. A second agreement at Units 3&4 covers approximately 7.0 million tons per year and is set to expire at the end of 2019. This contract is also cost-plus, but has provisions for specific returns on capital investment.
Absaloka. The Absaloka Mine operates primarily in the open market and has several three- to five-year contracts with various parties that generally supply 5.5 million tons per year, but only supplied 2.7 million tons in 2012 due to outages. Approximately 65% of all tons sold in 2012 were to the rail-served Sherburne County Generating Station in Minnesota under multiple contracts. Prices under these agreements are based upon certain actual mine costs and certain inflation indices for such items as diesel fuel.
Savage. The Savage Mine supplies approximately 0.3 million tons per year to the local Lewis & Clark Power Station. The mine entered into a new agreement with the Lewis & Clark Power Station in December 2012 that expires December 2017. Prices under this agreement are based upon certain actual mine costs and certain inflation indices for such items as diesel fuel.
Jewett. The Jewett Mine has a cost plus agreement with NRG Texas Power’s adjacent Limestone Generating Station. NRG Texas Power is also responsible for the mine’s capital and reclamation expenditures. The agreement has a term through 2018, which may be extended by NRG Texas Power for up to an additional ten years or until the mine’s reserves are exhausted. NRG has the option to determine volumes to be delivered, which average approximately 4.2 million tons per year, and to terminate the agreement at its discretion.

8


Beulah. The Beulah Mine supplies approximately 2.5 million tons per year to the adjacent Coyote Electric Generating Plant via conveyor belt under an agreement that expires in May 2016. It also supplies approximately 0.5 million tons per year via rail to the Heskett Power Station under an agreement that expires in 2016. Prices under these agreements are based upon certain actual mine costs and certain inflation indices for such items as diesel fuel.
Kemmerer. The Kemmerer Mine supplies approximately 2.7 million tons per year to the adjacent Naughton Power Station via conveyor belt under an agreement that expires in December 2021. Kemmerer also supplies approximately 1.7 million tons a year to various industrial customers, with the vast majority being shipped short-haul rail or truck to Trona plants in Green River, Wyoming. Prices under these agreements are based upon certain actual mine costs and certain inflation indices for such items as diesel fuel.
Competition
While the coal industry is intensely competitive, we focus on niche coal markets where we take advantage of long-term coal contracts with neighboring power plants. For our open market coal sales, we compete with many other suppliers of coal to provide fuel to power plants. Additionally, coal producers compete with producers of alternative fuels used for electrical power generation, such as nuclear energy, natural gas, hydropower, petroleum and wind. Costs and other factors such as safety, environmental and regulatory considerations relating to these alternative fuels affect the overall demand for coal as a fuel.
We believe that our mines have a competitive advantage based on three factors: 
all of our mines are the most economic suppliers to each of their respective principal customers, as a result of transportation advantages over our competitors in each of our key markets;
nearly all of the power plants we supply were specifically designed to use our coal; and
the plants we supply are among the lowest cost producers of electric power in their respective regions and are among the cleaner producers of power from solid fossil fuels.
Because of the foregoing, we believe that our current customers are more likely to be dispatched to produce power and to continue purchasing coal extracted from our mines.
The principal customers of the Rosebud, Jewett, Beulah and Kemmerer Mines are located adjacent to the mines; we deliver the coal for these customers by conveyor belt instead of more expensive means such as truck or rail. The customers of the Savage Mine are located approximately 20 to 25 miles from the mine so that we can transport coal economically by truck.
The Absaloka Mine faces a different competitive situation. The Absaloka Mine sells its coal in the rail market to utilities located in the northern tier of the United States served by BNSF. These utilities may purchase coal from us or from other producers. We compete with other producers based on price and quality, with the purchasers also taking into account the cost of transporting the coal to their plants. The Absaloka Mine enjoys an over 300-mile rail advantage over its principal competitors from the Southern Powder River Basin in supplying customers located in the northern tier. Rail rates have increased over the last several years by 50 to 100%, which strengthens our competitive advantage.
Material Effects of Regulation
We are subject to extensive regulation with respect to environmental and other matters by federal, state and local authorities. Federal laws to which we are subject include the Surface Mining Control and Reclamation Act of 1977, or SMCRA, the Clean Air Act, the Clean Water Act, the Toxic Substances Control Act, the Endangered Species Act, the Comprehensive Environmental Response, Compensation and Liability Act, the Emergency Planning and Community Right to Know Act and the Resource Conservation and Recovery Act. The United States Environmental Protection Agency, or EPA, and/or other authorized federal or state agencies administer and enforce these laws. Non-compliance with federal, tribal and state laws and regulations could subject us to material administrative, civil or criminal penalties or other liabilities, including suspension or termination of operations. In addition, we may be required to make large and unanticipated capital expenditures to comply with future laws, regulations or orders as well as future interpretations and more rigorous enforcement of existing laws, regulations or orders. Our reclamation obligations under applicable environmental laws will be substantial. Our coal sales agreements contain government imposition provisions that allow the pass-through of compliance costs in some circumstances.
Uncompromised safety is a core value of Westmoreland Coal Company. We use a grass roots approach, encouraging and promoting employee involvement in safety and accept input from all employees; we feel employee involvement is a pillar of our safety excellence. In 2012, our Rosebud Mine received the Sentinels of Safety award in the large surface coal category.
During 2012, we continued to maintain reportable and lost time incident rates significantly below national averages as indicated in the table below.

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2012

Reportable
Rate
 
Lost Time
Rate
WCC Mines
1.12

 
0.48

National Surface Mines
1.65

 
1.13

Following passage of The Mine Improvement and New Emergency Response Act of 2006 (The Miner Act), amending the Federal Mine Safety and Health Act of 1977 (the "Mine Act"), the U.S. Mine Safety and Health Administration (MSHA) significantly increased the oversight, inspection and enforcement of safety and health standards and imposed safety and health standards on all aspects of mining operations. There has also been a dramatic increase in the dollar penalties assessed by MSHA for citations issued over the past two years. Most of the states in which we operate have inspection programs for mine safety and health. Collectively, federal and state safety and health regulations in the coal mining industry are perhaps the most comprehensive and pervasive systems for protection of employee health and safety affecting any segment of U.S. industry.
Surface Mining Control and Reclamation Act. SMCRA establishes minimum national operational, reclamation and closure standards for all surface coal mines. SMCRA requires that comprehensive environmental protection and reclamation standards be met during the course of and following completion of coal mining activities. Permits for all coal mining operations must be obtained from the Federal Office of Surface Mining Reclamation and Enforcement, or OSM, or, where state regulatory agencies have adopted federally approved state programs under SMCRA, the appropriate state regulatory authority. States that operate federally approved state programs may impose standards that are more stringent than the requirements of SMCRA and OSM’s regulations and, in many instances, have done so. Permitting under SMCRA has generally become more difficult in recent years, which adversely affects the cost and availability of coal purchased by ROVA, especially in light of significant permitting issues affecting the Central Appalachia region. This difficulty in permitting also affects the availability of coal reserves at our coal mines.
It is our policy to comply in all material respects with the requirements of the SMCRA and the state and tribal laws and regulations governing mine reclamation. Environmental stewardship is a core value of Westmoreland. In 2012, our Jewett Mine received the 2012 Railroad Commission of Texas Core Mining Reclamation Award for its innovative techniques in stream channel restoration.
Clean Air Act and Related Regulations. The federal Clean Air Act and comparable state laws that regulate air emissions affect coal mining operations both directly and indirectly. Direct impacts on coal mining and processing operations include Clean Air Act permitting requirements and emission control requirements relating to air pollutants, including particulate matter, which may include controlling fugitive dust. The Clean Air Act indirectly affects coal mining operations by extensively regulating the emissions of particulate matter, sulfur dioxide, nitrogen oxides, mercury and other compounds emitted by coal-fired power plants. In recent years, Congress has considered legislation that would require increased reductions in emissions of sulfur dioxide, nitrogen oxide and mercury. The air emissions programs that may affect our operations, directly or indirectly, include, but are not limited to, the following:
Mercury Air Standards and Greenhouse Gas Emissions
On February 16, 2012, the EPA issued national emission standards under Section 112 of the Clean Air Act setting limits on hazardous air pollutant emissions from coal- and oil-fired electric generating units (“EGUs”). The “Mercury Air Toxics Standards,” or “MATS Rule,” is expected to be one of the most costly rules ever issued by EPA. It has also proven highly controversial, drawing numerous legal challenges in the U.S. Court of Appeals for the D.C. Circuit as well as petitions for administrative reconsideration filed with EPA.
While the MATS Rule will generally require all coal- and oil-fired EGUs to reduce their hazardous air pollutant emissions, it is particularly problematic for any new coal-fired sources. This is because the new-source limits are so low that they cannot be accurately measured and vendors of pollution control equipment have said they cannot provide commercial guarantees that the limits can be achieved. And because such guarantees are a precondition to obtaining financing in the marketplace, the MATS Rule effectively amounts to a ban on the construction of new coal-fired EGUs. In July 2012, however, EPA agreed to reconsider the new source standards in response to requests by industry. In November 2012, EPA published proposed new source standards with revised, less stringent, emission limits.
In April 2012, the EPA proposed new limits on greenhouse gas emissions from new EGUs under Section 111 of the Clean Air Act (“GHG NSPS”). The proposed limits are referred to as “new source performance standards” because they apply only to new or reconstructed sources. The EPA would require all new fossil-fuel-fired EGUs to emit no more than 1,000 pounds of CO2 / megawatt hour on an average annual basis, which is based on the CO2 emissions from natural gas combined cycle facilities. Under the Clean Air Act, new source performance standards like the GHG NSPS have binding effect from the date of proposal. Once NSPS are finalized, EPA must issue guidance to states for the issuance of existing source standards.

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The GHG NSPS combines two very different kinds of sources-gas-fired EGUs and coal-fired EGUs-into one source category and issues a standard that is based solely on the emissions from the natural gas combined cycle units. The GHG NSPS is a major obstacle to the construction and development of any new coal-fired generation capacity because the limits cannot be achieved by a new coal-fired EGU using presently available technology. EPA proposed to exempt certain “transitional sources” if they had already obtained a final air quality permit for their facility prior to publication of the GHG NSPS in the federal register, and if they can commence construction within one year of publication.
Acid Rain. Title IV of the Clean Air Act requires reductions of sulfur dioxide emissions by electric utilities. Affected power plants have sought to reduce sulfur dioxide emissions by switching to lower sulfur fuels, installing pollution control devices, reducing electricity generating levels or purchasing or trading sulfur dioxide emission allowances. We cannot accurately predict the future effect of these Clean Air Act provisions on our operations.
National Ambient Air Quality Standards ("NAAQS") for Criteria Pollutants. The Clean Air Act requires the EPA to set standards, referred to as NAAQS, for six common air pollutants, including nitrogen oxide and sulfur dioxide. Areas that are not in compliance (referred to as non-attainment areas) with these standards must take steps to reduce emissions levels. Meeting these limits may require reductions of nitrogen oxide and sulfur dioxide emissions. Although our operations are not currently located in non-attainment areas, we could be required to incur significant costs to install additional emissions control equipment, or otherwise change our operations and future development if that were to change. On June 22, 2010, the EPA published a final rule that tightens the NAAQS for sulfur dioxide. On February 17, 2012 the EPA published final NAAQS for nitrogen dioxide. On January 15, 2013, EPA published final NAAQS for particulate matter; EPA lowered the annual standard for particles less than 2.5 micrometers in diameter but maintained the NAAQS for particles less than 10 micrometers in diameter. Non-attainment designations were set for sulfur dioxide in February 2013 and were set for nitrogen dioxide in January 2012. State implementation plans are due in the winter of 2014 and the deadline to achieve attainment is the summer of 2017. We do not know whether or to what extent these developments might affect our operations or our customers’ businesses. In 2008, EPA finalized the current 8-hour ozone standard. EPA agreed to reconsider the standard, and in 2010 EPA proposed to further reduce the standard. Under orders from President Obama, this NAAQS was not finalized and review is ongoing. A proposal for a lower standard is expected during 2013.]
Clean Air Interstate Rule and Cross-State Air Pollution Rule. CAIR calls for power plants in 28 states and the District of Columbia to reduce emission levels of sulfur dioxide and nitrogen oxide pursuant to a cap-and-trade program similar to the system now in effect for acid rain. In June 2011, the EPA finalized CSAPR, a replacement rule to CAIR, which requires 28 states in the Midwest and eastern seaboard of the United States to reduce power plant emissions that cross state lines and contribute to ozone and/or fine particle pollution in other states. Under CSAPR, the first phase of the nitrogen oxide and sulfur dioxide emissions reductions would commence in 2012 with further reductions effective in 2014. On December 15, 2011, the EPA finalized a supplemental rulemaking to require Iowa, Michigan, Missouri, Oklahoma and Wisconsin to make summertime reductions to nitrogen oxide emissions under the CSAPR ozone-season control program. However, on December 30, 2011, the U.S. Court of Appeals for the District of Columbia Circuit stayed the implementation of CSAPR pending resolution of judicial challenges to the rules and ordered the EPA to continue enforcing CAIR until the pending legal challenges have been resolved. In August 2012, the US Court of Appeals struck down CSAPR and previous standards are still in place. In January 2013, the court rejected EPA's request for en banc review. On December 15, 2011, the EPA finalized a supplemental rulemaking to require Iowa, Michigan, Missouri, Oklahoma and Wisconsin to make summertime reductions to nitrogen oxide emissions under the CSAPR ozone-season control program.
Regional Haze and New Source Review. The EPA has initiated a regional haze program designed to protect and improve visibility at and around national parks, national wilderness areas and international parks. In addition, the EPA’s new source review program under certain circumstances requires existing coal-fired power plants, when modifications to those plants significantly change emissions, to install the more stringent air emissions control equipment required of new plants. There is pending litigation to force the EPA to list coal mines as a category of air pollution sources that endanger public health or welfare under Section 111 of the Clean Air Act and establish standards to reduce emissions from sources of methane and other emissions related to coal mines.
Effect on Westmoreland Coal Company. Our mines do not produce “compliance coal” for purposes of the Clean Air Act. Compliance coal is coal containing 1.2 pounds or less of sulfur dioxide per million British thermal unit, or Btu. This restricts our ability to sell coal to power plants that do not utilize sulfur dioxide emission controls and otherwise leads to a price discount based, in part, on the market price for sulfur dioxide emission allowances under the Clean Air Act. Our coal also contains about fifty percent more ash content than our primary competitors, which can translate into a cost disadvantage where post-combustion coal ash must be land filled. We are at particular risk of changes in applicable environmental laws with respect to the Jewett Mine, whose customer, the NRG Texas Power-

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Limestone Station, blends our lignite with compliance coal from Wyoming. Tightened nitrogen oxide and new mercury emission standards could result in an increased blend of the Wyoming coal to reduce emissions. Further, increased market prices for sulfur dioxide emissions and increased coal ash costs could also favor an increased blend of the lower ash Wyoming compliance coal. In such a case, NRG Texas Power has the option to increase its purchases of other coal, reduce purchases of our coal, or to terminate our contract. If NRG terminates the contact, sales of lignite would end and the Jewett Mine would commence final reclamation activities. NRG would pay for all reclamation work plus a margin.
Bonding Requirements. Federal and state laws require mine operators to assure, usually through the use of surety bonds, payment of certain long-term obligations, including the costs of mine closure and the costs of reclaiming the mined land. The costs of these bonds have fluctuated in recent years, and the market terms of surety bonds have generally become more favorable to us. Surety providers are requiring smaller percentages of collateral to secure a bond, which will require us to provide less cash to collateralize bonds to allow us to continue mining. These changes in the terms of the bonds have been accompanied, at times, by an increase in the number of companies willing to issue surety bonds. As of December 31, 2012, we have posted an aggregate of $316.5 million in surety bonds for reclamation purposes, with approximately $53.0 million of cash collateral.
Clean Water Act. The Clean Water Act or CWA and corresponding state and local laws and regulations affect coal mining and power generation operations by restricting the discharge of pollutants, including dredged or fill materials, into waters of the U.S. The CWA provisions and associated state and federal regulations are complex and subject to amendments, legal challenges and changes in implementation. Legislation that seeks to clarify the scope of the CWA jurisdiction is under consideration by Congress. Recent court decisions, regulatory actions and proposed legislation have created uncertainty over CWA jurisdiction and permitting requirements that could either increase or decrease the cost and time spent on CWA compliance.
Endangered Species Act. The Federal Endangered Species Act ESA and similar state laws protect species threatened with extinction. Protection of endangered and threatened species may cause us to modify mining plans or develop and implement species-specific protection and enhancement plans to avoid or minimize impacts to endangered species or their habitats. A number of species indigenous to the areas where we operate are protected under the ESA. Based on the species that have been identified and the current application of applicable laws and regulations, we do not believe that there are any species protected under the ESA or state laws that would materially and adversely affect our ability to mine coal from our properties.
Resource Conservation and Recovery Act. We may generate wastes, including “solid” wastes and “hazardous” wastes that are subject to the federal Resource Conservation and Recovery Act, or RCRA, and comparable state statutes, although certain mining and mineral beneficiation wastes and certain wastes derived from the combustion of coal currently are exempt from regulation as hazardous wastes under RCRA. The EPA has limited the disposal options for certain wastes that are designated as hazardous wastes under RCRA. Furthermore, it is possible that certain wastes generated by our operations that currently are exempt from regulation as hazardous wastes may in the future be designated as hazardous wastes, and therefore be subject to more rigorous and costly management, disposal and clean-up requirements.
The EPA determined that coal combustion residues (“CCR”) do not warrant regulation as hazardous wastes under RCRA in May 2000. Most state hazardous waste laws do not regulate CCR as hazardous wastes. The EPA also concluded that beneficial uses of CCR, other than for mine filling, pose no significant risk and no additional national regulations of such beneficial uses are needed. However, the EPA determined that national non-hazardous waste regulations under RCRA are warranted for certain wastes generated from coal combustion, such as coal ash, when the wastes are disposed of in surface impoundments or landfills or used as minefill. There have been several legislative proposals that would require the EPA to further regulate the storage of CCR. Any significant changes in the management of CCR could increase our customers' operating costs and potentially reduce their ability to purchase coal. In addition, in June 2010 the EPA released two competing proposals for the regulation of CCR. One would regulate the CCR as hazardous or special waste and the other would classify the CCR as non-hazardous waste. Under both options, the EPA would establish dam safety requirements to address the structural integrity of surface impoundments to prevent catastrophic releases. The EPA conducted additional information collections in late 2011; however, by the beginning of 2013, the EPA had not finalized CCR rules nor established a timeline for finalization. The EPA did not address in the proposed regulations the use of CCR as minefill, but indicated that it would separately work with the Office of Surface Mining in order to develop effective federal regulations ensuring that such placement is adequately controlled. In April 2012, several environmental organizations filed suit against the EPA to compel the EPA to take action on the proposed rule. If CCR were classified as a special or hazardous waste, regulations may impose restrictions on ash disposal, provide specifications for storage facilities, require groundwater testing and impose restrictions on storage locations, which could increase our and our customers' operating costs and potentially reduce their ability to purchase coal. In addition, contamination caused by the past disposal of CCR, including coal ash, can lead to material liability for our customers under RCRA or other federal or state laws and potentially reduce the demand for coal.

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Comprehensive Environmental Response, Compensation, and Liability Act. Under the Comprehensive Environmental Response, Compensation, and Liability Act, also known as CERCLA or Superfund, and similar state laws, responsibility for the entire cost of cleanup of a contaminated site, as well as natural resource damages, can be imposed upon current or former site owners or operators, or upon any party who released one or more designated “hazardous substances” at the site, regardless of the lawfulness of the original activities that led to the contamination. CERCLA also authorizes the EPA and, in some cases, third parties to take actions in response to threats to public health or the environment and to seek to recover from the potentially responsible parties the costs of such action. In the course of our operations, we may have generated and may generate wastes that fall within CERCLA’s definition of hazardous substances. We may also be an owner or operator of facilities at which hazardous substances have been released by previous owners or operators. We may be responsible under CERCLA for all or part of the costs of cleaning up facilities at which such substances have been released and for natural resource damages. We have not, to our knowledge, been identified as a potentially responsible party under CERCLA, nor are we aware of any prior owners or operators of our properties that have been so identified with respect to their ownership or operation of those properties. We also must comply with reporting requirements under the Emergency Planning and Community Right-to-Know Act and the Toxic Substances Control Act.
Climate Change Legislation and Regulations. Numerous proposals for federal and state legislation have been made relating to greenhouse gas, or GHG, emissions (including carbon dioxide) and such legislation could result in the creation of substantial additional costs in the form of taxes or required acquisition or trading of emission allowances. Many of the federal and state climate change legislative proposals use a “cap and trade” policy structure, in which GHG emissions from a broad cross-section of the economy would be subject to an overall cap. Under the proposals, the cap would become more stringent with the passage of time. The proposals establish mechanisms for GHG sources such as power plants to obtain “allowances” or permits to emit GHGs during the course of a year. The sources may use the allowances to cover their own emissions or sell them to other sources that do not hold enough emissions for their own operations.
In addition, the EPA has issued a notice of finding and determination that emissions of carbon dioxide, methane and other GHGs present an endangerment to human health and the environment, which allows the EPA to begin regulating emissions of GHGs under existing provisions of the federal Clean Air Act. The EPA has begun to implement GHG-related reporting and permitting rules as described above.
The impact of GHG-related legislation and regulations, including a “cap and trade” structure, on us will depend on a number of factors, including whether GHG sources in multiple sectors of the economy are regulated, the overall GHG emissions cap level, the degree to which GHG offsets are allowed, the allocation of emission allowances to specific sources and the indirect impact of carbon regulation on coal prices. We may not recover the costs related to compliance with regulatory requirements imposed on us from our customer due to limitations in our agreements.
Passage of additional state or federal laws or regulations regarding GHG emissions or other actions to limit carbon dioxide emissions could result in fuel switching from coal to other fuel sources by electricity generators and thereby reduce demand for our coal or indirectly the prices we receive in general. In addition, political and regulatory uncertainty over future emissions controls have been cited as major factors in decisions by power companies to postpone new coal-fired power plants. If these or similar measures, such as controls on methane emissions from coal mines, are ultimately imposed by federal or state governments or pursuant to international treaties, our operating costs may be materially and adversely affected. In addition, alternative sources of power, including wind, solar, nuclear and natural gas could become more attractive than coal in order to reduce carbon emissions, which could result in a reduction in the demand for coal and, therefore, our revenues. Similarly, some of our customers, in particular smaller, older power plants, could be at risk of significant reduction in coal burn or closure as a result of imposed carbon costs. The imposition of a carbon tax or similar regulation could, in certain situations, lead to the shutdown of coal-fired power plants, which would materially and adversely affect our coal and power plant revenues.
Power Segment
General
We own two coal-fired power-generating units in Weldon, North Carolina with a total capacity of approximately 230 megawatts, which we refer to collectively as ROVA. We built ROVA, which commenced operations in 1994, as a Public Utility Regulatory Policies Act co-generation facility with long-term power purchase agreements with Dominion Virginia Power. Westmoreland Partners, which owns ROVA, has fully encumbered all property pursuant to the 10.75% Senior Notes. The 10.75% Senior Notes also allow us to enter into a revolving line of credit collateralized, in part, by the accounts receivable and inventory at ROVA.
The following table shows megawatt hours produced and average annual capacity factors achieved at ROVA for the last three years:

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Year
Megawatt
Hours
 
Capacity
Factor
2012
1,477,000

 
80
%
2011
1,607,000

 
87
%
2010
1,620,000

 
88
%
In 2012, ROVA experienced significant unplanned maintenance outages, resulting in reduced megawatt hours and capacity factor.
Coal Supply
ROVA purchases coal under long-term contracts from coal suppliers with identified reserves located in Central Appalachia, with contracts expiring in 2014 and 2015.
Customer
ROVA supplies power to Dominion Virginia Power under long-term contracts, which expire in 2019 and 2020. We can extend, by mutual consent, the contracts with Dominion Virginia Power for five-year terms at mutually agreeable pricing. In 2012, the sale of power to Dominion Virginia Power accounted for approximately 13% of our consolidated revenues. We are impacted by seasonality as due to the impact of weather on customer demand and scheduled maintenance outages typically performed in the spring and fall.
Material Effects of Regulation
For a thorough discussion of the extensive regulation with respect to environmental and other matters by federal, state and local authorities affecting our power segment, see Item 1 under “Coal Segment -Material Effects of Regulation.
With respect to our power segment, ROVA is among the newer and cleaner coal-fired power plants in the United States. Under Title IV of the Clean Air Act, ROVA is exempt from, but may opt-in to receive allocations of sulfur dioxide emission allowances. The plants are among the lowest coal-fired emitters of mercury in the country. We are evaluating whether ROVA could be a net consumer or seller of mercury allowances under new and pending regulations. Currently, ROVA is a consumer of sulfur dioxide allowances and nitrogen oxide credits, and we expect an increase in costs associated with nitrogen oxide allowances at ROVA. With regard to coal ash regulations, ROVA both landfills its combustion waste. Landfills are lined and meet strict North Carolina Department of Solid Waste regulations.
An important factor relating to the impact of GHG-related legislation and regulations on our power segment will be our ability to recover the costs incurred to comply with any regulatory requirements that the government ultimately imposes. We may not recover the costs related to compliance with regulatory requirements imposed on us due to limitations in our power purchase agreements. If we are unable to pass through such costs incurred by ROVA to Dominion Virginia Power or recoup them in another manner such as through allowances, it could have a material adverse effect on our results of operations at ROVA.
Heritage Segment
Our heritage segment costs consist primarily of payments to our retired workers for various types of postretirement medical benefits. Distributions from our operating subsidiaries fund these collective heritage obligations. We modernized how we provide prescription drug benefits to retirees in 2010 and have continued to reduce our heritage health benefit since then. We continue to explore ways to further reduce or eliminate other portions of our benefits costs incurred because of our former operations.
Corporate Segment
The corporate segment consists primarily of costs for our corporate administrative expenses. In addition, the corporate segment contains our captive insurance company.
We have elected to retain some of the risks associated with operating our company through a wholly owned, consolidated insurance subsidiary, Westmoreland Risk Management Inc., or WRMI. WRMI, a Montana corporation, provides our primary layer of property and casualty insurance. We redomesticated WRMI from Bermuda to Montana in 2011, resulting in cost savings and administrative efficiencies. By using this insurance subsidiary, we have reduced the cost of our property and casualty insurance premiums and retained some economic benefits due to our excellent loss record. We reduce our major exposure by insuring for losses in excess of our retained limits with a number of third-party insurance companies.

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We had no export sales and derived no revenues from outside the United States during the five-year period ended December 31, 2012.
Available Information
We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission. You may access and read our filings without charge through the SEC’s website, at www.sec.gov. You may also read and copy any document we file at the SEC’s Public Reference Room located at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the Public Reference Room.
We also make our public reports available through our website, www.westmoreland.com, as soon as practicable after we file or furnish them with the SEC. You may also request copies of the documents, at no cost, by telephone at (303) 992-6463 or by mail at Westmoreland Coal Company, 9540 South Maroon Circle, Suite 200, Englewood, Colorado, 80112. The information on our website is not part of this Annual Report on Form 10-K.

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ITEM 1A
RISK FACTORS.
This report, including Management’s Discussion and Analysis of Financial Condition and Results of Operation, contains forward-looking statements that may be materially affected by numerous risk factors, including those summarized below.
Risks Relating to our Operations
Risks associated with being leveraged.
At December 31, 2012, we had outstanding indebtedness of approximately $371.1 million and a net leverage ratio of 3.00. We may also incur additional indebtedness in the future, including total additional indebtedness of $45.0 million under our revolving credit facility at WML and our revolving credit facility with The Private Bank. Westmoreland’s debt profile could, among other things: 
limit our ability to obtain additional debt financing in the future for working capital, capital expenditures, acquisitions, or other general corporate purposes;
require us to dedicate a substantial portion of our cash flow from operations to service our debt, reducing the availability of cash flow for other purposes;
increase our vulnerability to economic downturns, limit our ability to capitalize on significant business opportunities, and restrict our flexibility to react to changes in market or industry conditions; or
make it more difficult to pay our debts, including payment on our senior secured notes, when the notes mature in 2018.
While we have recently received credit upgrades from both S&P and Moody's, there can be no assurance that rating agencies will not downgrade the credit rating on our senior secured notes in the future. Any such downgrade could impede our ability to refinance existing debt or secure new debt or otherwise increase our future cost of borrowing and could create additional concerns on the part of our customers, partners, investors and employees about our financial condition and results of operations.
If we fail to comply with certain covenants in our various debt arrangements, it could negatively affect our liquidity and ability to finance our operations.
Our lending arrangements contain, among other conditions, events of default and our various affirmative and negative covenants.  We currently anticipate that we will be able to meet our future covenant requirements for the foreseeable future. Should we be unable to meet future debt-related covenants, we will be required to seek a waiver of such covenant to avoid an event of default. Covenant waivers and modifications may be expensive to obtain, or, potentially, unavailable. If we are unable to obtain covenant waivers and our lenders accelerate our debt, we could attempt to refinance or repay the debt with the proceeds from sales of assets. Sales of assets undertaken in response to such immediate needs may be made at potentially unfavorable prices, or asset sales may not be sufficient to refinance or repay the debt, and we may be unable to complete such transactions in a timely manner, on favorable terms, or at all.
We may not generate sufficient cash flow at our operating subsidiaries to meet our debt service costs and pay our heritage and corporate costs.
As a result of increases in our operating income and a decrease in our heritage health benefit costs, we anticipate that our cash from operations and cash on hand will be sufficient to meet our investing, financing, and working capital requirements for the foreseeable future. However, our expectations in this regard are subject to numerous uncertainties, including uncertainties relating to our operating performance, and general market conditions. In addition, our capital needs may be greater than we currently expect if we pursue one or more significant acquisitions.
Our WML subsidiary, which owns the Rosebud, Jewett, Beulah and Savage mines, is subject to a credit facility that limits its ability to dividend funds to us. Accordingly, WML may not be able to pay dividends to us in the amounts and in the time required for us to pay our heritage health costs and corporate overhead expenses. WML made principal payments of $14.0 million in 2012 and is required to make payments of $18.0 to $22.0 million annually from 2013 to 2017. Due to such amortization, WML is required to maintain a debt reserve account to cover such debt service. Ultimately, if WML’s operating cash flows are insufficient to support its operations, amortize its debt and provide dividends to us in the amounts and time required to pay our expenses, we may be required to expend cash on hand or further leverage our operations through the Private Bank revolving credit facility to fund our heritage liabilities and corporate overhead. Should we be required to expend cash on hand to fund such activities, such funds would be unavailable to grow the business through strategic acquisitions or ventures or support the business through reclamation bonding, capital and reserve acquisition.

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As a mine mouth operator, we provide coal to a small group of customers. This dependence could adversely affect our revenues if such customers reduce or suspend their coal purchases or if they become unable to pay for our coal.
In 2012, we derived approximately 66% of our total revenues from coal sales to five power plants: Colstrip Units 3&4 (21%), Naughton Power Station (16% ), Limestone Generating Station (14%), Colstrip Units 1&2 (11%) and Sherburne County Station (4%). Interruption in the purchases of coal by our principal customers could significantly affect our revenues. Unscheduled maintenance outages at our customers’ power plants, unseasonably moderate weather, higher-than-anticipated hydro seasons or increases in the production of alternative clean-energy generation such as wind power, or decreases in the price of competing fossil fuels such as natural gas, could cause our customers to reduce their purchases. Five of our six mines are dedicated to supplying customers located adjacent to or near the mines, and these mines may have difficulty identifying alternative purchasers of their coal if their existing customers suspend or terminate their purchases.
In November 2011, the main customer at our Absaloka Mine experienced a fire and subsequent explosion, with no current projection for when the customer’s Unit 3 will come back on line. While we anticipate our business interruption insurance will cover our losses, we lost sales of approximately 3.0 million tons in 2012 and are projecting additional lost sales in 2013. The reduction in the sale of our coal will adversely affect our operating results.
Additionally, certain of our long-term contracts are set to expire in the next several years. Our contracts with the Sherburne County Station are three-year rolling contracts, with one-third of the tonnage expiring on an annual basis.Our contract with Colstrip Units 3&4 expires in December 2019. We have already begun discussions with the 3&4 buyers on the 2019 renewal. Should we be unable to renew any or all of our expiring contracts, the reduction in the sale of our coal would adversely affect our operating results and liquidity and could result in significant impairments to the affected mine should the mine be unable to execute a new long-term coal supply agreement.
Our contract with Coyote Station, located adjacent to our Beulah Mine, expires in May 2016. On May 3, 2012, Coyote Station informed us that they were entering into a mine development agreement with another provider and on October 15, 2012, Coyote Station entered into a coal supply agreement with that provider. As a result, Coyote Station will likely not purchase coal from the Beulah Mine after the expiration of its current contract. For the past several years, the Beulah Mine has averaged 2.5 million tons of coal sold per year to Coyote Station; in addition, it provides approximately 0.5 million tons of coal to the Heskett Station power plant on an annual basis. We are currently considering strategic alternatives for the Beulah Mine, but the loss of Coyote Station as our customer is likely to adversely affect our operating results.
Similarly, interruption in the purchase of power by Dominion could also negatively affect our revenues. In 2012 the sale of power by ROVA to Dominion accounted for approximately 13% of our consolidated revenues. Although ROVA supplies power to Dominion under long-term power purchase agreements, if Dominion is unable or unwilling to pay for the power produced by ROVA in a timely manner, it could have a material adverse effect on our results of operations, financial condition, and liquidity.
Our ability to collect payments from our customers could be impaired if their creditworthiness deteriorates.
Our ability to receive payment for coal sold and delivered depends on the continued creditworthiness of our customers. If we determine that a customer is not creditworthy, we may not be required to deliver coal under the customer's coal sales contract. If this occurs, we may decide to sell the customer's coal on the spot market, which may be at prices lower than the contracted price, or we may be unable to sell the coal at all. Furthermore, the bankruptcy of any of our customers could materially and adversely affect our financial position. In addition, competition with other coal suppliers could cause us to extend credit to customers and on terms that could increase the risk of payment default.
Volatility in the equity markets or interest rate fluctuations could substantially increase our pension funding requirements and negatively impact our financial position.
At December 31, 2012, the projected benefit obligation under our defined benefit pension plans was $172.3 million  and the fair value of plan assets was $121.9 million. The difference between plan obligations and assets, or the funded status of the plans, significantly affects the net periodic benefit cost and ongoing funding requirements of those plans. Among other factors, changes in interest rates, mortality rates, early retirement rates, investment returns and the market value of plan assets can affect the level of plan funding, cause volatility in the net periodic benefit cost and increase our future funding requirements. During fiscal year 2012, we made $0.2 million in contributions to these pension plans and accrued $3.1 million in expense. We expect to make approximately $3.4 million in contributions to our single employer defined benefit pension plans in fiscal 2013. The current economic environment increases the risk that we may be required to make even larger contributions in the future. Additionally, due to covenants in our WML Notes, we are required to maintain our pension plan funding at higher levels than would otherwise be required, increasing funding requirements and the chance that we will be required to make large contributions in the future.

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If our assumptions regarding our future expenses related to employee benefit plans are incorrect, then expenditures for these benefits could be materially higher than we have assumed. In addition, we may have exposure under those plans that extend beyond what our obligations would be with respect to our own employees.
We provide various postretirement medical benefits, black lung and worker’s compensation benefits to current and former employees and their dependents. We calculate the total accumulated benefit obligations according to guidance provided by generally accepted accounting principles in the United States (GAAP). We estimate the present value of our postretirement medical, black lung and worker’s compensation benefit obligations to be $333.8 million, $16.2 million and $9.5 million, respectively, at December 31, 2012. In addition, in connection with the Kemmerer acquisition, we assumed the obligation to provide postretirement health coverage for eligible current union employees of the Kemmerer Mine and black lung claims that may arise in the future with respect to current Kemmerer employees. We have estimated these unfunded obligations based on actuarial assumptions and if our assumptions do not materialize as expected, cash expenditures and costs that we incur could be materially different.
Moreover, regulatory changes could increase our obligations to provide these or additional benefits. We participate in defined benefit multi-employer funds that were established in connection with the Coal Industry Retiree Health Benefit Act of 1992, or Coal Act, which provides for the funding of health and death benefits for certain United Mine Workers of America or UMWA retirees. Our contributions to these funds totaled $2.3 million and $2.6 million for the years ended December 31, 2012 and 2011, respectively. Our contributions to these funds could increase as a result of a shrinking contribution base as a result of the insolvency of other coal companies that currently contribute to these funds, lower than expected returns on fund assets or other funding deficiencies.
We could also have obligations under the Tax Relief and Health Care Act of 2006, or 2006 Act. The 2006 Act authorized up to a maximum of $490 million in federal contributions to pay for certain benefits, including the healthcare costs under certain funds created by the Coal Act for “orphans,” i.e. retirees from companies that subsequently ceased operations, and their dependents. However, if Congress were to amend or repeal the 2006 Act or if the $490 million authorization were insufficient to pay for these healthcare costs, we, along with other contributing employers and certain affiliates, would be responsible for the excess costs.
We also contribute to a multi-employer defined benefit pension plan, the Central Pension Fund of the Operating Engineers, or Central Pension Fund, on behalf of employee groups at our Rosebud, Absaloka and Savage mines that are represented by the International Union of Operating Engineers. The Central Pension Fund is subject to certain funding rules contained in the Pension Protection Act of 2006, or PPA. Under the PPA, if the Central Pension Plan fails to meet certain minimum funding requirements, it would be required to adopt a funding improvement plan or rehabilitation plan. If the Central Pension Fund adopted a funding improvement plan or rehabilitation plan, we could be required to contribute additional amounts to the fund. As of January 31, 2012, its last completed fiscal year, the Central Pension Fund reported that it was underfunded. If we were to partially or completely withdraw from the fund at a time when the Central Pension Fund were underfunded, we would be liable for a proportionate share the fund’s unfunded vested benefits, and this liability could have a material adverse effect on our financial position.
The Patient Protection and Affordable Care Act contains amendments to the Black Lung Benefits Act that could adversely affect our financial condition and results of operations.
In March 2010, the Patient Protection and Affordable Care Act, or PPACA, was enacted. PPACA contains an amendment to the Black Lung Benefits Act, or BLBA, that has the effect of reinstating provisions that were removed from the BLBA in 1981. The amendment provides that, if eligible miners can prove they worked 15 or more years in or around coal mines and have a totally disabling respiratory impairment, there shall be a rebuttable presumption that the miners have pneumoconiosis (black lung) that arose from such mining employment. In addition, the amendment also provides for an automatic survivor benefit to be paid upon the death of a miner with an awarded federal black lung claim without the requirement to prove that the miner’s death was due to black lung disease. Both amendments are retroactive and applicable to claims filed as of January 1, 2005. To date, we have experienced an increase in black lung claims over similar periods and have accepted some of these claims. At a minimum, it takes several months to several years for a claim to be awarded or denied and any liability to be determined. Given the relatively small number of survivors’ claims and the lack of final adjudication of black lung claims, we have very limited experience from which to determine the overall effect, if any, this increase in claims will have on our costs and liability. To date, we have not experienced an increase in cash spend related to such claims. If the number or severity of claims increases, or we are required to accrue or pay additional amounts because the claims prove to be more severe than our current assumptions, our results of operations and liquidity could be immediately impacted.

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Inaccuracies in our estimates of our coal reserves could result in accelerated or increased cash expenditures.
Our future performance depends on, among other things, the accuracy of our estimates of our proven and probable coal reserves. Our reserve estimates are prepared by our engineers and geologists or by third-party engineering firms and are updated periodically. There are numerous factors and assumptions inherent in estimating the quantities and qualities of, and costs to mine, coal reserves, including many factors beyond our control, including the following: 
quality of the coal;
geological and mining conditions, which may not be fully identified by available exploration data or may differ from our experiences in areas where we currently mine;
the percentage of coal ultimately recoverable;
the assumed effects of regulation, including the issuance of required permits, taxes, including severance and excise taxes and royalties, and other payments to governmental agencies;
assumptions concerning the timing for the development of the reserves; and
assumptions concerning equipment and productivity, future coal prices, operating costs, including for critical supplies such as fuel, tires and explosives, capital expenditures and development and reclamation costs.
As a result, estimates of the quantities and qualities of economically recoverable coal attributable to any particular group of properties, classifications of reserves based on risk of recovery, estimated cost of production, and estimates of future net cash flows expected from these properties may vary materially due to changes in the above factors and assumptions. Any inaccuracy in our estimates related to our reserves could result in accelerated reserve acquisitions to replenish supply and increased mining costs due to more difficult conditions.
If the assumptions underlying our reclamation and mine closure obligations are materially inaccurate, we could be required to expend greater amounts than anticipated.
The Surface Mining Control and Reclamation Act of 1977, or SMCRA, establishes operational, reclamation and closure standards for all aspects of surface mining. We calculated the total estimated reclamation and mine-closing liabilities according to the guidance provided by generally accepted accounting principles, or GAAP, and current industry practice. Estimates of our total reclamation and mine-closing liabilities are based upon permit requirements and our engineering expertise related to these requirements. If our estimates are incorrect, we could be required in future periods to spend materially different amounts on reclamation and mine-closing activities than we currently estimate. Likewise, if our customers, some of whom are contractually obligated to pay certain reclamation costs, default on the unfunded portion of their contractual obligations to pay for reclamation, we could be forced to make these expenditures ourselves and the cost of reclamation could exceed any amount we might recover in litigation.
We estimate that our gross reclamation and mine-closing liabilities, which are based upon projected mine lives, current mine plans, permit requirements and our experience, were $263.8 million (on a present value basis) at December 31, 2012. Of these December 31, 2012 liabilities, our customers have assumed $94.4 million by contract. In addition, we held final reclamation deposits, received from customers, of approximately $72.7 million at December 31, 2012 to provide for these obligations. We estimate that our obligation for final reclamation that was not the contractual responsibility of others or covered by offsetting reclamation deposits was $96.7 million at December 31, 2012. We must recover this $96.7 million in the price of coal sold.
Although we update our estimated costs annually, our recorded obligations may prove to be inadequate due to changes in legislation, standards and the emergence of new restoration techniques. Furthermore, the expected timing of expenditures could change significantly due to changes in commodity costs or prices that might curtail the life of an operation. These recorded obligations could prove insufficient compared to the actual cost of reclamation. Any underestimated or unidentified close down, restoration or environmental rehabilitation costs could have an adverse effect on our reputation as well as our asset values, results of operations and liquidity.
If the cost of obtaining new reclamation bonds and renewing existing reclamation bonds increases or if we are unable to obtain additional bonding capacity, our operating results could be negatively affected.
Federal and state laws require that we provide bonds to secure our obligations to reclaim lands used for mining. We must post a bond before we obtain a permit to mine any new area. These bonds are typically renewable on a yearly basis. Bonding companies are requiring that applicants collateralize increasing portions of their obligations to the bonding company. In 2012, we paid approximately $7.2 million in premiums for reclamation bonds and were required to use $25.6 million in cash to collateralize approximately 24% of the face amount of the new bonds obtained in 2012, mostly due to the Kemmerer acquisition. We anticipate that, as we permit additional areas for our mines in 2013, our bonding and collateral requirements

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could increase. Any cash that we provide to collateralize our obligations to our bonding companies is not available to support our other business activities. Our results of operations could be negatively affected if the cost of our reclamation bonding premiums and collateral requirements were to increase. Additionally, if we are unable to obtain additional bonding capacity due to cash flow constraints, we will be unable to begin mining operations in newly permitted areas, which would hamper our ability to efficiently meet our current customer contract deliveries, expand operations, and increase revenues.
Our coal mining operations are subject to external conditions that could disrupt operations and negatively affect our results of operations.
Our coal mining operations are all surface mines. These mines are subject to conditions or events beyond our control that could disrupt operations, affect production, and increase the cost of mining at particular mines for varying lengths of time. These conditions or events include: unplanned equipment failures, geological conditions such as variations in the quality of the coal produced from a particular seam, variations in the thickness of coal seams and variations in the amounts of rock and other natural materials that overlie the coal that we are mining; and weather conditions. For example, in our recent past, we have endured a major blizzard at the Beulah Mine , a trestle fire at the Beulah Mine, and an unanticipated replacement of boom suspension cables on one of our draglines, all of which interrupted deliveries. Major disruptions in operations at any of our mines over a lengthy period could adversely affect the profitability of our mines.
In addition, unplanned outages of draglines and extensions of scheduled outages due to mechanical failures or other problems occur from time-to-time and are an inherent risk of our coal mining business. Unplanned outages typically increase our operation and maintenance expenses and may reduce our revenues because of selling fewer tons of coal. If properly maintained, a dragline can operate for 40 years or longer. The average age of our draglines is 30 years. In addition, at our Kemmerer mine we use shovels instead of draglines. If properly maintained, a shovel can last for 30 years or longer. The average age of our shovels is 15 years. As our draglines/shovels and other major equipment ages, we may experience unscheduled maintenance outages or increased maintenance costs, which would adversely affect our operating results.
Unplanned outages and extensions of scheduled outages due to mechanical failures or other problems occur from time-to-time at our power plant customers and are an inherent risk of our business. Unplanned outages typically increase our operation and maintenance expenses and may reduce our revenues because of selling fewer tons of coal. In November 2011, the Sherburne County station experienced an explosion and fire that has caused an extended outage with no definitive date to recommence operations. As a result, we lost approximately 50% of our coal sales in 2012 at our Absaloka Mine. We are forecasting the loss of additional tonnage in 2013 until the facility recommences operations. While Sherburne County Station initially indicated a start up date of March 2013, they have informed us that the delay will be longer. Significant unanticipated outages at our power plant customers, which result in lost coal sales result in significant adverse affects on our operating results.
Our operations are vulnerable to natural disasters, operating difficulties and infrastructure constraints, not all of which are covered by insurance, which could have an impact on our productivity.
Mining and power operations are vulnerable to natural events, including blizzards, earthquakes, drought, floods, fire, storms and the possible effects of climate change. Operating difficulties such as unexpected geological variations could affect the costs and viability of our operations. Our operations also require reliable roads, rail networks, power sources and power transmission facilities, water supplies and IT systems to access and conduct operations. The availability and cost of infrastructure affects our capital expenditures, operating costs, and planned levels of production and sales. Our insurance does not cover every potential risk associated with our operations. Adequate coverage at reasonable rates is not always obtainable. In addition, our insurance may not fully cover our liability or the consequences of any business interruptions such as equipment failure or labor disputes. The occurrence of a significant event not fully covered by insurance could have an adverse effect on our business, results of operations, financial condition and prospects.
Long-term sales and revenues could be significantly affected by environmental regulations and the effects of the environmental lobby.
A consortium of environmental activists is actively pushing to shut down one-third of the nation's coal plants by 2020. They are taking particular interest in Colstrip Units 1 and 2 and are actively lobbying the EPA to require cost-prohibitive pollution control equipment. In a letter to the EPA, the activists stated that the state's Best Available Retrofit Technology ("BART") analysis for regional haze provides support for a determination that additional controls and/or upgrades to controls to improve regional haze are necessary to achieve BART. Should the EPA determine that additional controls and upgrades are needed at Colstrip Units 1 and 2, it is possible the owners could elect to shutdown the units in lieu of making the large capital expenditures required to comply. If such a decision were made, we could lose coal sales of approximately 3.0 million tons per year starting in approximately 2015. The loss of the sale of this tonnage at our Rosebud Mine could have a material adverse affect on the mine's revenues and profitability.

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Additionally, Rocky Mountain Power, the owner of the Naughton Power Station located adjacent to our Kemmerer Mine, which is our Kemmerer Mine's primary customer, has sought regulatory approval to install pollution control upgrades, including systems to reduce emissions of dust and nitrogen oxides, or NOx. While the state of Wyoming appears to be in favor of the capital investment, environmental groups are contesting the upgrades and are lobbying to have Unit 3 at Naughton switch from coal to natural gas. Further, in recent testimony, Rocky Mountain Power indicated that it is in ongoing discussions that could result in the conversion of Unit 3 from coal to natural gas. Should Unit 3 convert to natural gas, we could lose coal sales at our Kemmerer Mine. However, we do not expect the lowered volumes to have a material effect on our revenues until at least until 2017 due to the annual minimum requirements in the contract through 2016. There are further price protections built into the contract, which are in effect from 2017 to 2021. Despite these price protections, the lost sales at the Kemmerer Mine could have a material adverse affect on the mine's revenues and profitability and our operating results.
In April 2012, the EPA published its proposed new source emission standards for carbon dioxide for electric power plants. The rule would apply to new power plants and to existing plants that make major modifications. There has been no action on this to date although EPA has indicated that it intends to finalize the rules the first half of 2013. If the rule is adopted as proposed, the only new power plants that could meet the proposed emission limits would be coal fired plants with carbon dioxide capture and control, and gas fired plants, which could adversely impact our customers and the demand for coal in the United States as a fuel source.
A defect in title or the loss of a leasehold interest in certain property could limit our ability to mine our coal reserves or result in significant unanticipated costs.
We conduct a significant part of our coal mining operations on properties that we lease. A title defect or the loss of a lease could adversely affect our ability to mine the associated coal reserves. We may not verify title to our leased properties or associated coal reserves until we have committed to developing those properties or coal reserves. We may not commit to develop property or coal reserves until we have obtained necessary permits and completed exploration. As such, the title to property that we intend to lease or coal reserves that we intend to mine may contain defects prohibiting our ability to conduct mining operations. Similarly, our leasehold interests may be subject to superior property rights of other third parties. In order to conduct our mining operations on properties where these defects exist, we may incur unanticipated costs. In addition, some leases require us to produce a minimum quantity of coal and require us to pay minimum production royalties. Our inability to satisfy those requirements may cause the leasehold interest to terminate.
We are dependent on information technology and our systems and infrastructure face certain risks, including cybersecurity risks and data leakage risks.
We are dependent on information technology systems and infrastructure. Any significant breakdown, invasion, destruction or interruption of these systems by employees, others with authorized access to our systems, or unauthorized persons could negatively impact operations. There is also a risk that we could experience a business interruption, theft of information, or reputational damage as a result of a cyber-attack, such as an infiltration of a data center, or data leakage of confidential information either internally or at our third-party providers. While we have invested in the protection of our data and information technology to reduce these risks and periodically test the security of our information systems network, there can be no assurance that our efforts will prevent breakdowns or breaches in our systems that could adversely affect our business.
Should our Indian Coal Tax Credit transaction be audited by the Internal Revenue Service, or IRS, and the tax results contemplated thereby disallowed, the financial benefits of the transaction would be reduced and we may be required to return payments received from a third party investor.
In 2008, WRI entered into a series of transactions with an unaffiliated investor, including the formation of Absaloka Coal LLC, in order to take advantage of certain available tax credits for the production of coal on Indian lands and the sale of that coal. We requested and have received a private letter ruling, or PLR, from the IRS providing that the transaction met certain requirements for the availability of the tax credits under the specific scenario described in the PLR. Even though we have received the PLR, there are certain issues that may be raised by the IRS in a subsequent audit of tax returns of Absaloka Coal LLC. In the event that a subsequent audit results in the disqualification of the tax credits or the disallowance of the allocations of the tax credits, various remedies would minimize the financial benefits of the transaction and we could be required to return to the investor previously received payments. We pay to the Crow Tribe 33% of the expected payments we receive from the investor. The Crow Tribe is only required to reimburse us under very limited circumstances. As a result, in the event that the IRS disallows or disqualifies the tax credits, we would likely be unable to recoup payments already paid to the Crow Tribe.

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Our Absaloka Mine benefits from the Indian Coal Tax Credit, the loss of which would adversely affect the financial condition of the operation.
The Indian Coal Tax Credits are set to expire in December 2013 unless the relevant provisions of the Internal Revenue Code are extended or renewed by the U.S. Congress. While we have been actively seeking an extension or renewal to the tax credits, there can be no assurance that we will be successful in doing so. Further, the provisions regarding any extension or renewal may not be as favorable as those that currently exist. In addition, we cannot assure you that any extension or renewal of the tax credit would be enacted prior to its expiration or, if allowed to expire, that any extension or renewal enacted thereafter would be enacted with retroactive effect. Since 2009, we have experienced $3.0 to $6.0 million of additional benefit per year from the tax credit. Any delay or failure to extend or renew the Indian Coal Tax Credit would adversely affect the financial condition of the WRI operation.
Our future success depends upon our ability to continue acquiring and developing coal reserves that are economically recoverable and to raise the capital necessary to fund our expansion.
Our recoverable reserves decline as we produce coal. We have not yet applied for the permits to use all of the coal deposits under our mineral rights, and the government agencies may not grant those permits in a timely manner or at all. Furthermore, we may not be able to mine all of our coal deposits as efficiently as we do at our current operations. Our future success depends upon conducting successful exploration and development activities and acquiring properties containing economically recoverable coal deposits. Our current strategy includes increasing our coal reserves through acquisitions of other mineral rights, leases, or producing properties and continuing to use our existing properties. Our ability to expand our operations may be dependent on our ability to obtain sufficient working capital, either through cash flows generated from operations, or financing activities, or both. As we mine our coal and deplete our existing reserves, replacement reserves may not be available when required or, if available, we may not be capable of mining the coal at costs comparable to those characteristic of the depleting mines. These factors could have a material adverse affect on our mining operations and costs, and our customers’ ability to use the coal we mine.
Transportation impediments may hinder our current operations or future growth.
Certain segments of our current business, principally our Absaloka Mine, rely on rail transportation for the delivery of our coal product to the customer. Our ability to deliver our product in a timely manner could be adversely affected by the lack of adequate availability of rail capacity, whether because of work stoppages, union work rules, track conditions or otherwise. In 2011, flooding conditions disrupted rail service to the Absaloka Mine, resulting in lost revenue. Furthermore, rail transportation costs represent a significant portion of the total cost of coal for our customers, and the cost of transportation is a key factor in a customer’s purchasing decision. Increases in transportation costs or the lack of sufficient rail capacity or availability could make coal a less competitive source of energy, which could lead to reduced coal sales and/or reduced prices we receive for the coal. Our inability to timely deliver product or fuel switching due to rising transportation costs could have a material adverse effect on our business, financial condition and results of operations.
The unavailability of rail capacity and port capacity could also hinder our future growth as we seek to sell coal into new markets. The current availability of rail cars is limited and at times unavailable because of repairs or improvements, or because of priority transportation agreements with other customers. If transportation is restricted or is unavailable, we may be unable to sell into new markets and, therefore, the lack of rail capacity would hamper our future growth.
Union represented labor creates an increased risk of work stoppages and higher labor costs.
At December 31, 2012, either the International Union of Operating Engineers Local 400 or the UMWA represented approximately 54% of our total workforce. Our unionized workforce is spread out amongst five of our surface mines. As a majority of our workforce is unionized, there may be an increased risk of strikes and other labor disputes, and our ability to alter labor costs is subject to collective bargaining. The collective bargaining agreement relating to the represented workforce at the Absaloka Mine expired in mid-2011. We were successful in negotiating a new agreement without any work stoppages or other disruptions. In 2012, we were successful in entering into agreements with our workforce at Savage, Kemmerer and Rosebud. If our Jewett Mine operations were to become unionized, we could be subject to additional risk of work stoppages, other labor disputes and higher labor costs, which could adversely affect the stability of production and our results of operations. While strikes are generally a force majeure event in long-term coal supply agreements, thereby exempting the mine from its delivery obligations, the loss of revenue for even a short time could have a material adverse effect on our financial results.
Congress has proposed legislation to enact a law allowing workers to choose union representation solely by signing election cards, which would eliminate the use of secret ballots to elect union representation. While the impact is uncertain, if the government enacts this proposal into law, which would make it administratively easier to unionize, it may lead to more coal mines becoming unionized.

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Unscheduled outages at ROVA could affect our revenues or if scheduled maintenance outages last longer than anticipated.
Unplanned outages of and extensions of scheduled outages due to mechanical failures or other problems at our power plants occur from time-to-time and are an inherent risk of our business. For example, ROVA I experienced 54 days of total forced outage do to mechanical failures in 2012. Unplanned outages typically increase our operation and maintenance expenses and may reduce our revenues because of selling fewer megawatt hours. While we maintain insurance, the proceeds of such insurance may not be adequate to cover our lost revenues, increased expenses or liquidated damages payments should we experience equipment breakdown. Any unexpected failure, including failure associated with breakdowns, forced outages or any unanticipated capital expenditures could have an adverse affect on our results of operations and liquidity.
Differences in the termination dates of our coal supply agreements and power purchase agreements could severely affect the profitability of ROVA beginning in 2014.
We entered into a coal supply agreement for our larger plant on June 21, 1993, and a coal supply agreement for our smaller plant on December 1, 1993, which provide for ROVA’s coal needs for a twenty-year period, terminating on May 29, 2014 and June 1, 2015, respectively. We also entered into power sales agreements with Dominion Virginia Power that provide for the sale of power for a twenty-five year term through May 29, 2019, for our larger ROVA plant and June 1, 2020, for the smaller ROVA plant. The coal supply agreements provide for coal at a price per ton that is significantly less than today’s open market price for Central Appalachia coal. Upon the termination of the coal supply agreements beginning in 2014, we will be required to renegotiate our current contract or find a substitute supply of coal at a projected cost per ton far greater than the price we are paying today. However, the power sales agreements do not provide for a price increase related to an increase in the cost per ton of delivered coal and Dominion Virginia Power’s payment for power after 2014 will not escalate with our increased coal costs. Due to the change in the economics of ROVA at such time, it is projected that ROVA will begin incurring losses in 2014 and may be unable to pay its obligations as they become due. While we are actively pursuing various possibilities for the future of the operation, there is no guarantee that we will be able to execute an alternative before our margins related to ROVA are negatively affected.
Permitting issues in Central Appalachia could put ROVA’s coal supply at risk.
ROVA purchases coal under long-term contracts from coal suppliers with identified reserves located in Central Appalachia. While our coal supply has been relatively stable since the inception of the contracts, potential permitting issues pertaining to the reserves identified as our source of coal in our coal contracts could prove problematic in the coming years. Should regulatory/legal action prevent our coal supplier from continuing to mine the reserves identified as our source of coal or to mine other potential sources of coal, we would need to find an alternative source of coal at higher prices. While our coal contracts would cover the cost of substitute coal, we would initially incur the higher costs to secure a coal supply to provide for the continued operations at ROVA. In addition, should issues arise under our coal contracts relating to the cost of cover for substitute coal, the coal suppliers’ guarantee or any other issue, we could be forced to incur significant legal expenses and, potentially, may never recoup our incremental coal or related legal costs. We would need to seek alternative sources of coal, likely at higher prices, if our coal supplier were unable to provide coal due to a strike, an interruption in the availability of transportation services or a similar event.
We face intense competition to attract and retain employees. Further, managing Chief Executive Officer and key executive succession and retention is critical to our success.
We are dependent on retaining existing employees and attracting additional qualified employees to meet current and future needs. We face intense competition for qualified employees, and there can be no assurance that we will be able to attract and retain such employees or that such competition among potential employers will not result in increasing salaries. We rely on employees with unique skill sets to perform our mining operations, including engineers, mechanics and other highly skilled individuals. An inability to retain existing employees or attract additional employees, especially with mining skills and background, could have a material adverse effect on our business, cash flows, financial condition and results of operations.
In October 2012, we announced the transition in April 2013 of the CEO position. The failure to continue to adequately plan for succession of our senior management or the failure to retain key executives would be highly disruptive to our business. While we have succession plans in place, these plans cannot guarantee that we will not face operational risk upon the exit of our Chief Executive Officer or members of our senior management.
Risk Factors Relating to the Coal and Power Industries
The ongoing downturn in the domestic and international financial markets, and the risk of prolonged global recessionary conditions, could adversely affect our financial condition and results of operations.
Because we sell substantially all of our coal to electric utilities, our business and results of operations remain closely

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linked to demand for electricity. The ongoing downturn in the domestic and international financial markets has created economic uncertainty and raised the risk of prolonged global recessionary conditions. Historically, global demand for basic inputs, including electricity production, has decreased during periods of economic downturn. If the recent downturn in the domestic and international financial markets decreases global demand for electricity production, our financial condition and results of operations could be adversely affected.
Competition in the U.S. coal industry may adversely affect our revenues and results of operations.
Many of our competitors in the domestic coal industry are major coal producers who have significantly greater financial resources than we do. The intense competition among coal producers may impact our ability to retain or attract customers and may therefore adversely affect our future revenues and results of operations. Among other things, competitors could develop new mines that compete with our mines or build or obtain access to rail lines that would adversely affect the competitive position of our mines.
Any change in consumption patterns by utilities away from the use of coal could affect our ability to sell the coal we produce or the prices that we receive.
The domestic electric utility industry currently accounts for approximately 90% of domestic coal consumption. The demand for electricity, environmental and other governmental regulations, and the price and availability of competing fuels for power plants such as nuclear, hydro, natural gas and fuel oil as well as alternative sources of energy affects the amount of coal consumed by the domestic electric utility industry. A decrease in coal consumption by the domestic electric utility industry could adversely affect the price of coal, which could negatively impact our results of operations and liquidity. We do not have the right to sell fixed quantities of coal, so revenue can fall even though we have long-term contracts.
Some power plants are fueled by natural gas because of the relatively lower construction costs of such plants compared to coal-fired plants and because natural gas is a cleaner burning fuel. In addition, some states have adopted or are considering legislation that encourages domestic electric utilities to switch from coal-fired power generation plants to natural gas powered plants. Passage of these and other state or federal laws or regulations limiting carbon dioxide emissions could result in fuel switching, from coal to other fuel sources, by purchasers of our coal. Such laws and regulations could also mandate decreases in carbon dioxide emissions from coal-fired power plants, impose taxes on carbon emissions or require certain technology to capture and sequester carbon dioxide from coal-fired power plants. If these or similar measures are ultimately imposed by federal or state governments or pursuant to international treaty, our reserves and operating costs may be materially and adversely affected. Similarly, alternative fuels (non fossil fuels) could become more attractive than coal in order to reduce carbon emissions, which could result in a reduction in the demand for coal and, therefore, our revenues.
Recently, the supply of natural gas has reached record highs and the price of natural gas has remained at depressed levels for sustained periods, making it an attractive competing fuel. A continuing decline in the price of natural gas, or continuing periods of sustained low natural gas prices, could cause demand for coal to decrease, result in fuel switching and decreased coal consumption by electricity-generating utilities and adversely affect the price of our coal. Sustained low natural gas prices may cause utilities to phase-out and/or close existing coal-fired power plants or reduce construction of any new coal-fired power plants, which could have a material adverse effect on demand and prices received for our coal.
Extensive government regulations impose significant costs on our mining operations, and future regulations could increase those costs or limit our ability to produce and sell coal.
The coal mining industry is subject to increasingly strict regulation by federal, state and local authorities with respect to matters such as: 
limitations on land use;
employee health and safety;
mandated benefits for retired coal miners;
mine permitting and licensing requirements;
reclamation and restoration of mining properties after mining is completed;
air quality standards;
discharges to water;
construction and permitting of facilities required for mining operations, including valley fills and other structures constructed in water bodies and wetlands;
protection of human health, plant life and wildlife;

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discharge of materials into the environment;
effects of mining on groundwater quality and availability; and
remediation of contaminated soil, surface and groundwater.
The costs, liabilities and requirements associated with these and other regulations may be costly and time-consuming and may delay commencement or continuation of exploration or production operations. Failure to comply with these regulations may result in the assessment of administrative, civil and criminal penalties, the imposition of cleanup and site restoration costs and liens, the issuance of injunctions to limit or cease operations, the suspension or revocation of permits and other enforcement measures that could have the effect of limiting production from our operations. We may also incur costs and liabilities resulting from claims for damages to property or injury to persons arising from our operations. We must compensate employees for work-related injuries. If we do not make adequate provision for our workers’ compensation liabilities, it could harm our future operating results. If we are pursued for any sanctions, costs and liabilities, our mining operations and, as a result, our results of operations, could be adversely affected.
The possibility exists that new legislation or regulations and orders may be adopted that may materially adversely affect our mining operations, our cost structure or our customers’ ability to use coal. New legislation or administrative regulations (or new judicial interpretations or administrative enforcement of existing laws and regulations), including proposals related to the protection of the environment that would further regulate and tax the coal industry, may also require us or our customers to change operations significantly or incur increased costs. These regulations, if proposed and enacted in the future, could have a material adverse effect on our financial condition and results of operations.
Extensive environmental laws and regulations affect the end-users of coal and could reduce the demand for coal as a fuel source and cause the volume of our sales to decline. These laws and regulations could also impose costs on ROVA that it would be unable to pass through to its customer.
Coal contains impurities, including but not limited to sulfur, mercury, chlorine, carbon and other elements or compounds, many of which are released into the air when coal is burned. The emission of these and other substances is extensively regulated at the federal, state and local level, and these regulations significantly affect our customers’ ability to use the coal we produce and, therefore, the demand for that coal. For example, the purchaser of coal produced from the Jewett Mine blends our lignite with compliance coal from Wyoming. Tightened nitrogen oxide and new mercury emission standards could result in the customer purchasing an increased blend of the Wyoming coal in order to reduce emissions. Further, increased market prices for sulfur dioxide emissions and increased coal ash costs could also favor an increased blend of the lower ash Wyoming compliance coal. In such a case, the customer has the option to increase its purchases of other coal and reduce purchases of our coal or terminate our contract. A termination of the contract or a significant reduction in the amount of our coal that is purchased by the customer could have a material adverse effect on our results of operations and financial condition.
In addition, greenhouse gas, or GHG, emissions have increasingly become the subject of international, national, state and local attention. Coal-fired power plants can generate large amounts of carbon emissions. Accordingly, legislation or regulation intended to limit GHGs will likely affect our coal and power operations. For example, the EPA has issued a notice of finding and determination that emissions of carbon dioxide, methane and other GHGs present an endangerment to human health and the environment, which allows the EPA to begin regulating emissions of GHGs under existing provisions of the federal Clean Air Act. The EPA has begun to implement GHG-related reporting and permitting rules. Similarly, the U.S. Congress has considered, and in the future may consider, “cap and trade” legislation that would establish an economy-wide cap on emissions of GHGs in the United States and would require most sources of GHG emissions to obtain GHG emission “allowances” corresponding to their annual emissions of GHGs. In addition, coal-fired power plants have become subject to challenge, including the opposition to any new coal-fired power plants or capacity expansions of existing plants, by environmental groups seeking to curb the environmental effects of emissions of GHGs. Most recently, President Obama stated in his State of the Union address in February 2013 that he would direct his cabinet to come up with executive actions to address climate change, which many feel means he will direct the EPA to impose GHG standards on existing coal fired power plants.
These developments could have a variety of adverse effects on demand for the coal we produce. For example, state or federal laws or regulations regarding GHGs could result in fuel switching from coal to other fuel sources by electricity generators, or require us, or our customers, to employ expensive technology to capture and sequester carbon dioxide. Political opposition to the development of new coal-fired power plants, or regulatory uncertainty regarding future emissions controls, may result in fewer such plants being built, which would limit our ability to grow in the future.
In addition, political and environmental opposition to capital expenditure for coal-fired facilities could affect the regulatory approval required for the retrofitting of existing power plants. Specifically, the Naughton power facility, which is located adjacent to the Kemmerer Mine, announced in April 2012 that it intends to switch Unit 3 to natural gas from

25


coal. Should the Naughton facility be converted to natural gas, it would have a material adverse effect on our results of operation.
With respect to ROVA, it may be unable to pass costs associated with GHG-related regulation on to its customer, Dominion Virginia Power, under its power purchase agreement even though any imposed carbon tax would be passed through to ROVA from its coal suppliers under the terms of the applicable coal supply agreements. Any legislation or regulation that has the effect of imposing costs on ROVA it is unable to pass through to Dominion Virginia Power would adversely affect our results of operations and liquidity.
Extensive environmental laws, including existing and potential future legislation, treaties and regulatory requirements relating to air emissions, affect our customers and could reduce the demand for coal as a fuel source and cause coal prices and sales of our coal to materially decline.
The operations of our customers are subject to extensive environmental regulation particularly with respect to air emissions. The EPA intends to issue or has issued a number of significant regulations that will impose more stringent requirements relating to air, water and waste controls on electric generating units. These rules include the EPA’s pending new requirements for coal combustion residue (“CCR”) management that may further regulate the handling of wastes from the combustion of coal. In addition, on December 16, 2011, the EPA signed a rule to reduce emissions of toxic air pollutants from power plants. Specifically, these mercury and air toxic standards (“MATS”) for power plants will reduce emissions from new and existing coal- and oil-fired electric utility steam generating units. We continue to evaluate the possible scenarios associated with CCR and MATS and the effects they may have on our business and our results of operations, financial condition or cash flows.
Considerable uncertainty is associated with air emissions initiatives. New regulations are in the process of being developed, and many existing and potential regulatory initiatives are subject to review by federal or state agencies or the courts. Stringent air emissions limitations are either in place or are likely to be imposed in the short to medium term, and these limitations will likely require significant emissions control expenditures for many coal-fired power plants. For example, the owners of Units 3 and 4 at Colstrip, adjacent to our Rosebud Mine, are getting considerable pressure from environmental groups to install Selective Catalytic Reduction (SCR) technology. Should the owners be forced by the EPA to install such SCR technology, the capital requirements could make the continued operation of the two units unsustainable. As a result, Colstrip and other similarly-situated power plants may switch to other fuels that generate fewer of these emissions or may install more effective pollution control equipment that reduces the need for low-sulfur coal. Any switching of fuel sources away from coal, closure of existing coal-fired power plants, or reduced construction of new coal-fired power plants could have a material adverse effect on demand for, and prices received for, our coal. Alternatively, less stringent air emissions limitations, particularly related to sulfur, to the extent enacted, could make low-sulfur coal less attractive, which could also have a material adverse effect on the demand for, and prices received for, our coal.
Risk Factors Relating to our Equity
Provisions of our certificate of incorporation, bylaws, and Delaware law may have anti-takeover effects that could prevent a change of control of our company that stockholders may consider favorable, and the market price of our common stock may be lower as a result.
Provisions in our certificate of incorporation, bylaws and Delaware law could make it more difficult for a third party to acquire us, even if doing so might be beneficial to our stockholders. Provisions of our bylaws impose various procedural and other requirements that could make it more difficult for stockholders to bring about some types of corporate actions such as electing individuals to the board of directors. Our ability to issue preferred stock in the future may influence the willingness of an investor to seek to acquire our company. These provisions could limit the price that some investors might be willing to pay in the future for shares of our common stock and may have the effect of delaying or preventing a change in control. Provisions in the indenture governing the 10.75% Senior Notes regarding certain change of control events could have a similar effect.
Future sales of our common stock by our major stockholder may depress our share price and influence our management policies.
Mr. Jeffrey L. Gendell, directly and indirectly through various entities, currently owns approximately 19% of our common stock. We have granted Mr. Gendell and his various affiliated entities registration rights with respect to our common stock held by them, which we registered on a selling stockholder registration statement in May 2009. Sales of substantial amounts of our common stock in the public market, or the perception that these sales may occur, could cause the market price of our common stock to decline. In addition, if Mr. Gendell or his various affiliated entities were to sell their entire holdings to one person, that person could have significant influence over our management policies.

26


ITEM 1B
UNRESOLVED STAFF COMMENTS.
None
ITEM 2
PROPERTIES.
See “Coal Segment-Properties” and “Power Segment” under Item 1 for information relating to our properties and reserves.
ITEM 3
LEGAL PROCEEDINGS.
We are subject, from time-to-time, to various proceedings, lawsuits, disputes, and claims (“Actions”) arising in the ordinary course of our business. Many of these Actions raise complex factual and legal issues and are subject to uncertainties. We cannot predict with assurance the outcome of Actions brought against us. Accordingly, adverse developments, settlements, or resolutions may occur and may result in a negative impact on income in the quarter of such development, settlement, or resolution. However, we do not believe that the outcome of any current Action would have a material adverse effect on our financial results.
ITEM 4
MINE SAFETY DISCLOSURE.
On July 21, 2010, Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Act. Section 1503(a) of the Act contains reporting requirements regarding mine safety. Mine safety violations and other regulatory matters, as required by Section 1503(a) of the Act and Item 104 of Regulation S-K, are included as Exhibit 95.1 to this report on Form 10-K.

27


PART II
ITEM 5
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market Information
Our common stock is listed and traded on the NASDAQ Global Market under the symbol WLB.
Holders
As of March 5, 2013, based on inquiry there were 1,179 holders of record of our common stock.
The following table shows the range of sales prices for our common stock for the past two years, as reported by the NYSE Amex prior to our voluntary delisting in April 29, 2011, and NASDAQ Global Market since the listing of our common stock on May 2, 2011.
 
 
Sales Prices Common Stock
 
High
 
Low
2011
 
 
 
First Quarter
$
15.14

 
$
11.88

Second Quarter
19.28

 
14.64

Third Quarter
18.37

 
7.65

Fourth Quarter
13.36

 
6.61

2012
 
 
 
First Quarter
$
13.47

 
$
9.78

Second Quarter
11.39

 
6.94

Third Quarter
10.00

 
7.00

Fourth Quarter
10.85

 
7.91

Dividend Policy
Holders of our common stock are entitled to receive such dividends as our Board may declare from time to time from any surplus that we may have. We have not paid dividends on our common stock for some time and we do not anticipate paying any common stock dividends in the foreseeable future. In addition, the Indenture governing the 10.75% Senior Notes restricts our ability to pay dividends on, or make other distributions in respect of, our capital stock unless we are able to meet certain ratio tests or other financial requirements. Should we be permitted to pay dividends pursuant to such Indenture, the payment of such dividends will be dependent upon earnings, financial condition and other factors considered relevant by our Board and will be subject to limitations imposed under Delaware law.
Issuer Purchase of Equity Securities
None.
Stock Performance Graph
This performance graph compares the cumulative total stockholder return on our common stock for the five-year period December 31, 2007 through December 31, 2012 with the cumulative total return over the same period of the NASDAQ Index and a peer group index, which consists of Alliance Resource Partners, L.P., Cloud Peak Energy, Inc., James River Coal Company, Rhino Resource Partners, L.P., and Patriot Coal Corporation. The graph assumes that: 
You invested $100 in Westmoreland Coal common stock and in each index at the closing price on December 31, 2007;
All dividends were reinvested;
Annual reweighting of the peer groups; and
You continued to hold your investment through December 31, 2012.
You are cautioned against drawing any conclusions from the data contained in this graph, as past results are not necessarily indicative of future performance. The indices used are included for comparative purposes only and do not indicate an opinion of management that such indices are necessarily an appropriate measure of the relative performance of our common

28


stock. 
 

At December 31,
Company/Market/Peer Group
2007
 
2008
 
2009
 
2010
 
2011
 
2012
Westmoreland Coal Company
$
100.00

 
$
79.86

 
$
64.11

 
$
85.91

 
$
91.73

 
$
67.20

AMEX Composite Index
$
100.00

 
$
59.58

 
$
80.68

 
$
101.32

 
$
107.67

 
$
114.67

NASDAQ Financial Index
$
100.00

 
$
69.71

 
$
72.99

 
$
83.18

 
$
75.97

 
$
91.19

Peer Group Index
$
100.00

 
$
64.18

 
$
105.89

 
$
151.29

 
$
121.64

 
$
88.03

 

29


ITEM 6
SELECTED FINANCIAL DATA.
Westmoreland Coal Company and Subsidiaries
Five-Year Review
 
Consolidated Statements of Operations Information
2012 (2)
 
2011
 
2010
 
2009
 
2008
 
(In thousands; except per share data)
Revenues
600,437

 
$
501,713

 
$
506,057

 
$
443,368

 
$
509,696

Operating income (loss)
28,872

 
10,626

 
20,521

 
(31,774
)
 
(16,035
)
Loss from continuing operations(1)
(13,662
)
 
(36,875
)
 
(3,170
)
 
(29,162
)
 
(48,567
)
Less net loss attributable to non-controlling interest
(6,436
)
 
(3,775
)
 
(2,645
)
 
(1,817
)
 

Less preferred stock dividend requirements
1,360

 
1,360

 
1,360

 
1,360

 
1,360

Net loss applicable to common shareholders
$
(8,586
)
 
$
(34,460
)
 
$
(1,885
)
 
$
(28,705
)
 
$
(49,927
)
Per common share (basic and diluted):
 
 
 
 
 
 
 
 
 
Loss from continuing operations
$
(0.61
)
 
$
(2.61
)
 
$
(0.17
)
 
$
(2.88
)
 
$
(5.25
)
Net loss applicable to common shareholders
$
(0.61
)
 
$
(2.61
)
 
$
(0.17
)
 
$
(2.88
)
 
$
(5.25
)
Balance Sheet Information (end of period)
 
 
 
 
 
 
 
 
 
Working capital deficit
$
(11,600
)
 
$
(21,669
)
 
$
(35,793
)
 
$
(74,976
)
 
$
(24,152
)
Net property, plant and equipment
512,840

 
396,732

 
416,955

 
456,184

 
443,400

Total assets
936,115

 
759,172

 
750,306

 
772,728

 
812,967

Total debt
360,989

 
282,269

 
242,104

 
254,695

 
269,153

Shareholders’ deficit
(286,231
)
 
(249,858
)
 
(162,355
)
 
(141,799
)
 
(217,598
)
Other Data:
 
 
 
 
 
 
 
 
 
Net cash provided by (used in):
 
 
 
 
 
 
 
 
 
Operating activities
$
57,144

 
$
44,735

 
$
45,353

 
$
29,448

 
$
55,245

Investing activities
(123,534
)
 
(33,639
)
 
(29,180
)
 
(38,597
)
 
(6,588
)
Financing activities
67,217

 
13,912

 
(20,917
)
 
(20,273
)
 
(28,452
)
Capital expenditures
(21,032
)
 
27,594

 
22,814

 
34,546

 
31,320

 
(1)
Includes a loss on extinguishment of debt of $2.0 million and $17.0 million in 2012 and 2011, respectivley. Includes a non-cash tax benefit of $17.1 million and $9.1 million in 2009.

(2)
On January 31, 2012, we acquired the Kemmerer Mine. Our results of operations include Kemmerer’s results of operations from the date of acquisition. Kemmerer's results are reflected in our Coal Segment. In addition, on January 31, 2012, we completed the issuance and sale of $125.0 million aggregate principal amount of 10.75% senior secured notes due 2018 at a price equal to approximately 95.5% of their face value (the "Add-On Notes"). The majority of the proceeds from the sale of the Add-On Notes were used to finance the acquisition of the Kemmerer Mine. See Note 2 to our consolidated financial statements for additional details.
We did not declare cash dividends on common shares for the five years ended December 31, 2012. The financial data presented above should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operation in Part II, Item 7 of this report, which includes a discussion of factors that materially affect the comparability of the information presented, and in conjunction with our consolidated financial statements included in this report.

30


ITEM 7
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis contains forward-looking statements and estimates that involve risks and uncertainties. Actual results could differ materially from these estimates. Factors that could cause or contribute to differences from estimates include those discussed under “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors” contained in Item 1 above.
Overview
Westmoreland Coal Company is an energy company employing approximately 1,250 employees whose operations include six surface coal mines in Montana, Wyoming, North Dakota and Texas, and two coal-fired power-generating units in North Carolina. We sold 21.7 million tons of coal in 2012. Our two principal operating segments are our coal segment and our power segment, in addition to two non-operating segments.
One of the major factors affecting the volume of coal that we sell in any given year is the domestic demand for coal-generated electric power, as well as the specific demand for coal by our customers. Numerous factors affect the domestic demand for electric power and the specific demands of customers including weather patterns, the presence of hydro or wind in our particular energy grids, environmental and legal challenges, political influences, energy policies, international and domestic economic conditions, power plant outages and other factors discussed herein.
We sell almost all of our coal and electricity production under long-term agreements. Our long-term coal contracts typically contain price escalation and adjustment provisions, pursuant to which the price for our coal may be periodically revised in line with cost inflation. The contract may adjust the price in accordance with changes in broad economic indicators such as the consumer price index, commodity-specific indices such as the PPI-light fuel oils index, and/or changes in our actual costs. We refer to these contracts as “cost plus” contracts.
For our contracts that are not cost plus in nature, we have exposure to inflation and price risk for supplies used in the normal course of production such as diesel fuel and explosives. In line with the worldwide mining industry, we have experienced increased operating costs for mining equipment, diesel fuel and other supplies, such as tires. We manage these items through strategic sourcing contracts in normal quantities with our suppliers and may use derivatives from time-to-time.
Kemmerer Mine Acquisition and Add-On Notes
On December 23, 2011, we entered into an agreement with Chevron Mining Inc. to acquire the Kemmerer surface coal mine located in Kemmerer, Wyoming. We closed this acquisition on January 31, 2012. This transaction included approximately 107 million tons of total proven or probable coal reserves as of December 31, 2011. The Kemmerer Mine has an estimated life at current production levels of approximately 22 years. The total consideration paid by us to acquire the Kemmerer Mine included $76.5 million in cash and our assumption of approximately $88.0 million in liabilities, including retiree medical benefits for current union employees, the underfunded portion of the pension and reclamation obligations.
In January 2012, we completed the private placement of $125.0 million of senior secured notes due in 2018 (“Add-On Notes”), which notes were additional notes issued pursuant to the existing Parent Notes indenture (the “Parent Notes”), collectively referred to as the “10.75% Senior Notes”. The net proceeds from the Add-On Notes financed the $76.5 million cash portion of the purchase price for the acquisition of the Kemmerer Mine and the $24.7 million cash bonding obligations for the Kemmerer Mine. The net proceeds also covered the cash transaction costs associated with the Kemmerer acquisition and the Add-On Notes offering of approximately $6.7 million. The remaining net proceeds were partially used to fund the initial operating expenses associated with the Kemmerer Mine. The use of proceeds from the offering of Add-On Notes to finance the acquisition of the Kemmerer Mine is shown in the table below (in millions):
Proceeds received from the Add-On Notes
 
$
125.0

Cash consideration for the Kemmerer acquisition
 
(76.5
)
Reclamation bonding collateral
 
(24.7
)
Transaction fees and expenses
 
(6.7
)
Initial Purchaser's discount
 
(5.6
)
Remaining proceeds
 
$
11.5

Beulah Mine Coal Supply Contract
Our coal supply contract with Coyote Station, located adjacent to our Beulah Mine, expires in May 2016.

31


On May 3, 2012, Coyote Station informed us they are entering into a mine development agreement with another provider and on October 15, 2012, Coyote Station entered into a coal supply agreement with that provider. As a result, Coyote Station will likely not purchase coal from our Beulah Mine after the expiration of our current contract. Based on the uncertainty of securing a new contract, we revised various accounting estimates beginning in the fourth quarter of 2011 to reflect the impact on mining operations of the current contract's expiration in 2016.
For the past several years, the Beulah Mine has averaged 2.5 million tons of coal sold per year to Coyote Station. We are currently considering strategic alternatives for our Beulah Mine, which also provides approximately 0.5 million tons of coal to the Heskett Station power plant on an annual basis.
We will continue to evaluate the effect of this development and potential strategic alternatives on various employment-related liabilities, which could result in revised accounting estimates related to those liabilities in future periods.
Xcel Fire
In November 2011, an explosion and subsequent fire occurred at Unit 3 of Xcel Energy's Sherburne County Generating Station, or Unit 3, which is the largest customer of our Absaloka Mine. Xcel indicated that Unit 3 will be offline for an extended period while Xcel investigates the source of the explosion and the extent of the damage. While Sherburne County Generating Station initially indicated a start up date of March 2013, they have informed us that the delay will be longer. Westmoreland Resources, Inc., or WRI, our wholly owned subsidiary that operates the Absaloka Mine, maintains business interruption insurance coverage and submitted a notice of loss to its insurance carriers. Our insurance carriers have accepted liability under the policy for the business interruption claim. We recognize income as business interruption losses are incurred and reimbursement is virtually assured and have recognized $17.3 million of income and received $15.6 million of cash proceeds for the year ended December 31, 2012. Insurance proceeds are included in Net cash provided by operating activities.
Results of Operations
Items that Affect Comparability of Our Results
For 2012 and each of the prior two years, our results have included items that do not relate directly to ongoing operations. The income (expense) components of these items were as follows:
Year Ended December 31,
2012
 
2011
 
2010
 
(In thousands)
Loss on extinguishment of debt
$
(1,986
)
 
$
(17,030
)
 
$

Fair value adjustment on derivative and related amortization of debt discount

 
(3,215
)
 
(4,840
)
Impact (pre-tax)
$
(1,986
)
 
$
(20,245
)
 
$
(4,840
)
Items recorded in 2012
We recorded $2.0 million of loss on extinguishment of debt related to repurchases of 10.75% Senior Notes with a principal amount of $23.0 million. The loss on the repurchases was measured based on the carrying value of the repurchased portion of the 10.75% Senior Notes, which included a portion of the unamortized debt issue costs and the debt discount on the dates of repurchase.
Items recorded in 2011
We recorded $17.0 million of loss on extinguishment of debt as a result of the Parent Notes offering. 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.
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 2010
We recorded expense of $3.4 million resulting from the mark-to-market accounting of the conversion feature in our convertible notes, primarily due to an increase in our stock price during 2010, with $1.4 million of interest expense of a related debt discount.

32


2012 Compared to 2011
Summary
The following table shows the comparative consolidated results and changes between periods:
 
Year Ended December 31,
 

 

 
Increase / (Decrease)
 
2012
 
2011
 
$
 
%
 
(In millions)
Revenues
$
600.4

 
$
501.7

 
$
98.7

 
19.7
%
Net loss applicable to common shareholders
(8.6
)
 
(34.5
)
 
25.9

 
75.1
%
Adjusted EBITDA(1)
105.4

 
73.1

 
32.3

 
44.2
%
 
(1)
Adjusted EBITDA , a non-GAAP measure, is defined and reconciled to net loss at the end of this “Results of Operations” section.
Our revenues for 2012 increased due primarily to the Kemmerer acquisition, which was partially offset by unplanned customer shutdowns at our Beulah and Absaloka Mines, as well as reduced tonnage demand due to increased wind generation and mild weather conditions. Our revenues also decreased due to ROVA having a large planned maintenance outage during the second quarter and increased unplanned outages.
Our net loss applicable to common shareholders for 2012 decreased by $7.6 million, excluding $2.0 million of expense during 2012 and $20.2 million of expense during 2011 discussed in Items that Affect Comparability of Our Results. The primary factors, in aggregate, driving this decrease in net loss were:
 
2012
 
(In millions)
Increase in our coal segment operating income primarily due to the Kemmerer acquisition
$
19.3

Decrease in our heritage segment operating expenses due to favorable claims experience related to our black lung and worker's compensation benefits
5.0

Increased noncontrolling interest losses from a partially owned consolidated subsidiary
2.7

Increase in interest expense resulting from the Add-On Notes
(13.0
)
Decrease in our power segment operating income due to a large planned maintenance outage and increased unplanned outages
(3.9
)
Increase in our corporate segment operating expenses primarily due to one-time executive recruiting and higher long-term compensation expenses
(2.1
)
Decrease due to other factors
(0.4
)
Total
$
7.6

Coal Segment Operating Results
The following table shows comparative coal revenues, operating income and sales volume, and percentage changes between periods: 
 
Year Ended December 31,
 
 
 
 
 
Increase / (Decrease)
 
2012
 
2011
 
$
 
%
 
(In thousands, expect per ton data)
Revenues
$
519,152

 
$
414,928

 
$
104,224

 
25.1
 %
Operating income
48,235

 
27,453

 
20,782

 
75.7
 %
Adjusted EBITDA(1)
110,835

 
76,821

 
34,014

 
44.3
 %
Tons sold—millions of equivalent tons
21.7

 
21.8

 
(0.1
)
 
(0.5
)%
 
(1)
Adjusted EBITDA, a non-GAAP measure, is defined and reconciled to net loss at the end of this “Results of Operations” section.
Our 2012 coal segment revenues and operating income increased primarily due to the Kemmerer acquisition, which was partially offset by unplanned customer shutdowns at our Beulah and Absaloka Mines, as well as reduced tonnage demand due to increased wind generation and mild weather conditions. Business interruption insurance proceeds have reduced most of

33


the Absaloka Mine's decrease in operating income that was due to the fire and have been reported in Other operating income. Overall tons sold decreased primarily due to lower sales at our Absaloka Mine, which was partially offset with tons sold at our Kemmerer Mine.
Power Segment Operating Results
The following table shows comparative power revenues, operating income and production and percentage changes between periods: 
 
Year Ended December 31,
 
 
 
 
 
Increase / (Decrease)
 
2012
 
2011
 
$
 
%
 
(In thousands)
Revenues
$
81,285

 
$
86,785

 
$
(5,500
)
 
(6.3
)%
Operating income
8,244

 
12,119

 
(3,875
)
 
(32.0
)%
Adjusted EBITDA(1)
19,054

 
23,191

 
(4,137
)
 
(17.8
)%
Megawatts hours
1,477

 
1,607

 
(130
)
 
(8.1
)%
 
(1)
Adjusted EBITDA, a non-GAAP measure, is defined and reconciled to net loss at the end of this “Results of Operations” section.
Our 2012 power segment revenues, operating income and megawatt hours decreased due to a large planned maintenance outage during the second quarter and the significant extent of unplanned outages at ROVA.
Heritage Segment Operating Results
The following table shows comparative heritage segment’s operating expenses and percentage change between periods: 
 
Year Ended December 31,
 
 
 
 
 
Increase / (Decrease)
 
2012
 
2011
 
$
 
%
 
(In thousands)
Heritage segment operating expenses
$
14,711

 
$
19,675

 
$
(4,964
)
 
(25.2
)%
Our 2012 heritage segment operating expenses decreased primarily due to favorable claims experience related to our black lung and workers' compensation benefits.
Corporate Segment Operating Results
The following table shows comparative corporate segment’s operating expenses and percentage change between periods: 
 
Year Ended December 31,
 
 
 
 
 
Increase / (Decrease)
 
2012
 
2011
 
$
 
%
 
(In thousands)
Corporate segment operating expenses
$
12,896

 
$
9,271

 
$
3,625

 
39.1
%
Our 2012 corporate segment operating expenses increased partly due to a deductible on a claim paid by our captive insurance entity to our subsidiary related to the business interruption claim at our Absaloka Mine. Additionally, corporate segment operating expenses increased due to one-time executive recruiting and higher long-term compensation expenses.
Nonoperating Results (including interest expense, interest income, other income (loss), income tax expense, and net loss attributable to noncontrolling interest)
Our interest expense for 2012 increased to $42.7 million compared with $29.8 million for 2011 primarily due to the higher overall debt levels resulting from the offering of the Add-On Notes.
Our interest income for 2012 was comparable to 2011.
Our other income (loss) for 2012 was comparable to 2011, excluding the $3.1 million impact of the mark-to-market

34


accounting discussed in Items that Affect Comparability of Our Results.
Our income tax expense for 2012 increased to $0.1 million compared with $0.4 million tax benefit for 2011 due to higher taxable income.
Our loss attributable to noncontrolling interest for 2012 increased to $6.4 million compared with $3.8 million for 2011 related to increased losses from a partially owned consolidated subsidiary.
2011 Compared to 2010
Summary
The following table shows the comparative consolidated results and changes between periods:
 
Year Ended December 31,
 
 
 
 
 
Increase / (Decrease)
 
2011
 
2010
 
$
 
%
 
(In millions)
Revenues
$
501.7

 
$
506.1

 
$
(4.4
)
 
(0.9
)%
Net loss applicable to common shareholders
(34.5
)
 
(1.9
)
 
32.6

 
1,715.8
 %
Adjusted EBITDA(1)
73.1

 
81.6

 
(8.5
)
 
(10.4
)%
 
(1)
Adjusted EBITDA , a non-GAAP measure, is defined and reconciled to net loss at the end of this “Results of Operations” section.
The decrease in revenues was primarily driven by a $3.1 million decrease in our coal segment revenues due to unusually strong hydropower conditions that displaced our customers’ coal-generated power, flooding conditions that disrupted rail service deliveries to a key customer, and to a lesser extent, a fire at a key customer’s plant. In addition, our power segment revenues decreased $1.2 million as a result of a planned maintenance outage.
Our net loss applicable to common shareholders increased by $17.2 million during 2011 (excluding the $20.2 million of expense in 2011 and the $4.8 million of expense in 2010 discussed in Items that Affect Comparability of Our Results). The primary factors, in aggregate, driving this increase in net loss were:
 
2011
 
(In millions)
Increase in interest expense due to the Parent Notes offering
$
(8.0
)
Decrease in our coal segment operating income primarily driven by hydropower and flooding conditions, and a key customer’s fire
(5.5
)
Increase in our heritage segment operating expenses primarily driven by updated cost projections and unfavorable discount rates
(3.7
)
Increase in our corporate segment operating expenses primarily due to office relocation expenses
(1.1
)
Decrease due to other factors
(0.4
)
Increased noncontrolling interest losses from a partially owned consolidated subsidiary
1.1

Increase in our power segment operating income primarily due to decreased maintenance expenses
0.4

Total
$
(17.2
)
Coal Segment Operating Results
The following table shows comparative coal revenues, operating income and sales volume, and percentage changes between periods: 
 
Year Ended December 31,
 
 
 
 
 
Increase / (Decrease)
 
2011
 
2010
 
$
 
%
 
(In thousands, expect per ton data)
Revenues
$
414,928

 
$
418,058

 
$
(3,130
)
 
(0.7
)%
Operating income
27,453

 
32,922

 
(5,469
)
 
(16.6
)%
Adjusted EBITDA(1)
76,821

 
81,681

 
(4,860
)
 
(5.9
)%
Tons sold—millions of equivalent tons
21.8

 
25.2

 
(3.4
)
 
(13.5
)%

35


 
(1)
Adjusted EBITDA, a non-GAAP measure, is defined and reconciled to net loss at the end of this “Results of Operations” section.
Our 2011 coal segment revenues and operating income decreased primarily because of the unusually strong 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 a lesser extent, due to a fire at a key customer’s plant.
Power Segment Operating Results
The following table shows comparative power revenues, operating income and production and percentage changes between periods: 
 
Year Ended December 31,
 
 
 
 
 
Increase / (Decrease)
 
2011
 
2010
 
$
 
%
 
(In thousands)
Revenues
$
86,785

 
$
87,999

 
$
(1,214
)
 
(1.4
)%
Operating income
12,119

 
11,721

 
398

 
3.4
 %
Adjusted EBITDA(1)
23,191

 
22,664

 
527

 
2.3
 %
Megawatts hours
1,607

 
1,620

 
(13
)
 
(0.8
)%
 
(1)
Adjusted EBITDA, a non-GAAP measure, is defined and reconciled to net loss at the end of this “Results of Operations” section.
Our power segment revenues for 2011 decreased primarily due to longer planned maintenance outages.
Our power segment operating income increased because in 2010, we executed a planned major maintenance project that occurs every five years. Maintenance expenses were therefore lower in 2011 and the decrease in maintenance expenses was partially offset by the reduction in revenues discussed above.
Heritage Segment Operating Results
The following table shows comparative heritage segment’s operating expenses and percentage change between periods: 
 
Year Ended December 31,
 

 

 
Increase / (Decrease)
 
2011
 
2010
 
$
 
%
 
(In thousands)
Heritage segment operating expenses
$
19,675

 
$
15,968

 
$
3,707

 
23.2
%
Our heritage segment operating expenses for 2011 increased primarily due to updated cost projections and unfavorable discount rates related to our black lung and workers’ compensation benefits.
Corporate Segment Operating Results
The following table shows comparative corporate segment’s operating expenses and percentage change between periods: 
 
Year Ended December 31,
 
 
 
 
 
Increase / (Decrease)
 
2011
 
2010
 
$
 
%
 
(In thousands)
Corporate segment operating expenses
$
9,271

 
$
8,154

 
$
1,117

 
13.7
%
Our corporate segment operating expenses for 2011 increased primarily due to office relocation expenses.
Nonoperating Results (including interest expense, interest income, other income (loss), income tax benefit, and net loss attributable to noncontrolling interest)
Our interest expense for 2011 increased to $29.8 million compared with $23.0 million for 2010 primarily due to the higher overall debt levels resulting from the Parent Notes offering.

36


Our interest income for 2011 decreased to $1.4 million compared with $1.7 million for 2010 due to lower interest rates.
Our other loss for 2011 was comparable to 2010.
Our income tax benefit for 2011 increased to $0.4 million compared with $0.1 million for 2010 due to lower taxable income.
Our loss attributable to noncontrolling interest for 2011 increased to $3.8 million compared with $2.6 million for 2010 related to increased losses from a partially owned consolidated subsidiary.
Reconciliation of Adjusted EBITDA to Net Loss
The discussion in “Results of Operations” in 2012, 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.
In addition, although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements. Other companies in our industry and in other industries may calculate EBITDA and Adjusted EBITDA differently from the way that we do, limiting their usefulness as comparative measures. Because of these limitations, EBITDA and Adjusted EBITDA should not be considered as measures of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our GAAP results and using EBITDA and Adjusted EBITDA only as supplemental data.
The tables below show how we calculated Adjusted EBITDA, including a breakdown by segment, and reconciles Adjusted EBITDA to net less, the most directly comparable GAAP financial measure.
 

37


 
December 31,
 
2012
 
2011
 
2010
 
(In thousands)
Reconciliation of Adjusted EBITDA to Net loss
 
 
 
 
 
Net loss
$
(13,662
)
 
$
(36,875
)
 
$
(3,170
)
Income tax (benefit) expense from continuing operations
90

 
(426
)
 
(141
)
Other (income) loss
(723
)
 
2,572

 
2,587

Interest income
(1,496
)
 
(1,444
)
 
(1,747
)
Loss on extinguishment of debt
1,986

 
17,030

 

Interest expense
42,677

 
29,769

 
22,992

Depreciation, depletion and amortization
57,145

 
45,594

 
44,690

Accretion of ARO and receivable
12,189

 
10,878

 
11,540

Amortization of intangible assets and liabilities
658

 
657

 
590

EBITDA
98,864

 
67,755

 
77,341

(Gain)/loss on sale of assets
528

 
640

 
226

Share-based compensation
6,040

 
4,721

 
4,049

Adjusted EBITDA
$
105,432

 
$
73,116

 
$
81,616

 
 
December 31,
 
2012
 
2011
 
2010
 
(In thousands)
Adjusted EBITDA by Segment
 
 
 
 
 
Coal
$
110,835

 
$
76,821

 
$
81,681

Power
19,054

 
23,191

 
22,664

Heritage
(14,711
)
 
(19,675
)
 
(15,968
)
Corporate
(9,746
)
 
(7,221
)
 
(6,761
)
Total
$
105,432

 
$
73,116

 
$
81,616

 
December 31,
 
2012
 
2011
 
2010
 
(In thousands)
Adjusted EBITDA
 
 
 
 
 
Guarantor and Issuer
$
57,496

 
$
11,572

 
$
17,904

Non-Guarantor
47,936

 
61,544

 
63,712

Total
$
105,432

 
$
73,116

 
$
81,616

Significant Anticipated Variances between 2012 and 2013 and Related Uncertainties
We expect a number of factors to result in differences in our results of operation, financial condition and liquidity in 2013 relative to 2012, including the following: 
We expect increased coal ton deliveries, revenues, profits and operating cash flows due to one additional month of our Kemmerer Mine operating in 2013 and due to the fact that our 2012 results were adversely impacted by customer shutdowns and reduced tonnage demand due to increased wind generation and mild weather conditions;
We expect increased power revenues and profits due to less unplanned outages;
We expect to make additional capital investments during 2013 in the range of $23.0 million to $28.0 million to improve our mining and power operations and decrease our equipment maintenance costs;
We expect a $4.0 million increase in the scheduled repayments of our WML term debt to $18.0 million;
We expect our interest expense and interest payments will decrease in 2013 due to $23.0 million of 10.75% Senior Notes repayments in 2012;

38


We expect increased cash outlays for our 401(k) match as we expect to begin mid-year of 2013 to fund the match with cash instead of company stock;
We expect our pension and postretirement medical expenses to increase as a result of decreases in discount rates; and;
We expect our pension contributions and postretirement medical payments to increase due to our Kemmerer Mine acquisition and medical inflation.
Liquidity and Capital Resources
We had the following liquidity at December 31, 2012 and 2011: 
 
December 31,
 
2012
 
2011
 
(In millions)
Cash and cash equivalents
$
31.6

 
$
30.8

WML revolving line of credit
23.1

 
23.1

Corporate revolving line of credit
20.0

 

Total
74.7

 
53.9

We anticipate that our cash from operations, cash on hand and available borrowing capacity will be sufficient to meet our investing, financing, and working capital requirements for the foreseeable future.
We are a holding company and conduct our operations through subsidiaries. Our parent holding company has significant cash requirements to fund our debt obligations, ongoing heritage health benefit costs, pension contributions, and corporate overhead expenses. The principal sources of cash flow to the parent company are distributions from our principal operating subsidiaries. The cash at ROVA, Kemmerer, and WRI has no restrictions and is immediately available. The cash at WML is available to us through quarterly distributions. The WML credit agreement requires a debt service account and imposes timing and other restrictions on the ability of WML to distribute funds to us. The cash at WRMI is also available to us through dividends and is subject to maintaining a statutory minimum level of capital, which is two hundred and fifty thousand dollars.
Under the indenture governing the 10.75% Senior Notes, we are required to offer a portion of our Excess Cash Flow (as defined by the indenture) for each fiscal year to purchase some of these notes at 100% of the principal amount. While we did repurchase $23.0 million of 10.75% Senior Notes during 2012, we did not have Excess Cash Flow for the years ended December 31, 2011 or 2012. In addition to the Excess Cash Flow offer, the Company may continue to use available cash to repurchase these notes on the open market, as permitted by the indenture.
Debt Obligations
10.75% Senior Notes
On February 4, 2011, we issued the Parent Notes, which are $150.0 million of 10.75% senior secured notes, and on January 31, 2012, we issued the Add-On Notes, which are $125.0 million of 10.75% senior secured notes. Interest is due at an annual fixed rate of 10.75% and paid in cash semi-annually, in arrears, on February 1 and August 1 of each year. The 10.75% Senior Notes mature February 1, 2018 and contains provisions that affect our sources of liquidity, such as limitations on our ability to enter into new capital leases and other forms of credit.
During the year ended December 31, 2012, we paid $23.1 million, excluding accrued interest, to repurchase 10.75% Senior Notes with a principal amount of $23.0 million. The 10.75% Senior Notes outstanding debt at December 31, 2012 is $252.0 million.
2012 Revolving Credit Agreement
On June 29, 2012, we and certain of our subsidiaries entered into a five-year, $20.0 million revolving line of credit with an expiration date of June 30, 2017. At December 31, 2012, availability on the revolver was $20.0 million with no outstanding balance and no supported letters of credit.
Two interest rate options exist under the revolver. The Base Rate option bears interest at the greater of a Federal Funds Rate plus 0.5% or the Prime Rate, as defined in the loan agreement and is payable monthly. The LIBOR Rate option bears interest at the London Interbank Offering Rate, or LIBOR, rate plus 2.25% and is payable monthly. In addition, a commitment fee of 0.75% of the average unused portion of the available revolver is payable monthly.

39


The loan agreement contains various affirmative, negative and financial covenants. Financial covenants in the agreement include a fixed charge coverage ratio and an EBITDA measure. The fixed charge coverage ratio must meet or exceed a specified minimum. The EBITDA covenant requires a minimum amount of EBITDA to be achieved. We met these covenant requirements as of December 31, 2012.
WML Term Debt and Revolving Credit Agreement
WML has $103.5 million of fixed rate term debt outstanding at December 31, 2012. This term debt matures March 31, 2018, and bears an annual fixed rate of 8.02%, payable quarterly. The principal on the WML notes is scheduled to be paid as follows (in millions): 
2013
$
18.0

2014
18.0

2015
20.0

2016
20.0

2017
22.0

2018
5.5

WML's revolving line of credit has a borrowing limit of $25.0 million and matures in June 2013. The interest rate under the revolving line of credit at December 31, 2012 was 3.75% per annum. At December 31, 2012, WML had no outstanding balance under the revolving line of credit and the revolving line of credit supports a letter of credit of $1.9 million, leaving it with $23.1 million of borrowing availability. WML's revolving line of credit is only available to fund the operations of its respective subsidiaries. We are currently working on renewing this revolving line of credit.
WML's credit agreement contains various affirmative and negative covenants. Operational covenants in the agreements prohibit, among other things, WML from incurring or guaranteeing additional indebtedness, creating liens on its assets, making investments or engaging in asset sales or transactions with affiliates, in each case subject to specified exceptions. Financial covenants in the agreements impose requirements relating to specified debt service coverage and leverage ratios.
On June 28, 2012, we amended Westmoreland Mining, LLC's (“WML”) term debt and revolving line of credit debt agreements as follows:
We must maintain our pension plans at a minimum of 80% funded, as opposed to the prior covenant of 90% funded;
The debt service coverage ratio requirement has been amended so that it may not be less than 1.20 to 1.00 for the quarters ending June 30, 2012 and September 30, 2012, as opposed to the prior covenant of 1.30 to 1.00; and
The leverage ratio requirement has been amended so as not to permit the ratio to exceed 2.25 to 1.00 at March 31, 2013; 2.00 to 1.00 at June 30, 2013 and 1.75 to 1.00 at September 30, 2013. The prior covenant ratio for these periods was 1.50 to 1.00.
The debt service coverage ratio covenant requires that at the end of each quarter WML's ratio of EBITDA less unfinanced capital expenditures to debt service (all defined) for the four quarters then ended meets or exceeds a specified minimum. The coverage ratio as of December 31, 2012 was 1.55 and the specified minimum was 1.30. The leverage ratio covenant requires that WML not permit the ratio of total debt at the end of each quarter to EBITDA (both as defined) for the four quarters then ended to be greater than a specified amount. The leverage ratio as of December 31, 2012 was 1.81, which did not exceed the maximum amount of 2.25. WML met all of its covenant requirements as of December 31, 2012.
Gross and Net Leverage Ratios

These ratios are supplemental measures of financial performance that are not required by, or presented in accordance with, GAAP. We use these ratios to assess our progress in reducing our aggregate debt levels. Refer to the Results of Operations section for the reconciliation of Adjusted EBITDA to net loss.

40


 
December 31,
 
2012
 
2011

(in Millions)
Gross debt
361.0
 
282.3
Less:
 
 
 
Cash and cash equivalents
31.6
 
30.8
WML debt reserve account
13.1
 
11.7

 
 
 
Net debt
316.3
 
239.8
 
 
 
 
Adjusted EBITDA
105.4
 
73.1
 
 
 
 
Gross leverage ratio
3.43
 
3.86
Net leverage ratio
3.00
 
3.28
Heritage Health Costs and Pension Contributions
Our liquidity continues to be affected by our heritage health and pension obligations as follows: 
 
2013 Expected
 
2012 Actual
 
2011 Actual
 
2010 Actual
 
(In millions)
Postretirement medical benefits
$
13.2

 
$
12.0

 
$
12.0

 
$
13.1

CBF premiums
1.9

 
2.3

 
2.6

 
3.0

Workers’ compensation benefits
0.5

 
0.5

 
0.6

 
0.6

Total heritage health payments
15.6

 
14.8

 
15.2

 
16.7

 
 
 
 
 
 
 
 
Pension contributions (1)
3.4

 
0.2

 
7.5

 
10.8

 
(1)
Of the 2010 and 2011 pension contributions, we made $5.0 million and $4.3 million, respectively, through the contribution of company stock.
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: 
 
Years Ended December 31,
 
2012
 
2011
 
(In thousands)
Cash provided by (used in):
 
 
 
Operating activities
$
57,144

 
$
44,735

Investing activities
(123,534
)
 
(33,639
)
Financing activities
67,217

 
13,912

Cash provided by operating activities increased $12.4 million in 2012 compared to 2011, primarily due to the Kemmerer acquisition which was partially offset with the increase in interest payments.
Cash used in investing activities increased $89.9 million in 2012 compared to 2011 due to the Kemmerer acquisition.
Cash provided by financing activities increased $53.3 million for 2012 compared to 2011, as a result of the Add-On Notes.
Our working capital deficit at December 31, 2012 decreased by $10.1 million to $11.6 million compared to a $21.7 million deficit at December 31, 2011 primarily as a result of Kemmerer's inventory, trade receivables, accounts payable and other working capital accounts now being included in our financial statements.

41


Ratio of Earnings to Fixed Charges
The following table sets forth our ratio of earnings to fixed charges for the periods indicated: 

Year Ended December 31,
 
2012
 
2011
 
2010
 
2009
 
2008
 
(In thousands)
Deficiency of earnings to fixed charges
$
13,572

 
$
37,301

 
$
3,311

 
$
46,298

 
$
47,648

For purposes of calculating the ratio of earnings to fixed charges: 
“earnings” consist of loss from continuing operations before income taxes and fixed charges; and
“fixed charges” consist of interest (expensed), amortization of premiums, discounts and deferred financing costs, and an estimate of the interest expense within rental expense.
Contractual Obligations and Commitments
The following table presents information about our contractual obligations and commitments as of December 31, 2012, and the effects we expect such obligations to have on liquidity and cash flow in future periods. Some of the amounts below are estimates. We discuss these obligations and commitments elsewhere in this filing.
 
Payments Due by Period
 
Total
 
2013
 
2014-2015
 
2016-2017
 
After 2017
 
(In thousands)
Long-term debt obligations (principal and interest)
$
530,112

 
53,390

 
104,186

 
101,381

 
271,155

Capital lease obligations (principal and interest)
15,149

 
7,720

 
7,166

 
263

 

Operating lease obligations
16,234

 
6,426

 
8,283

 
1,523

 
2

Purchase obligations(1)
50,008

 
29,500

 
20,508

 

 

Other long-term liabilities(2)
1,492,604

 
41,514

 
84,978

 
129,493

 
1,236,619

Totals
$
2,104,107

 
138,550

 
225,121

 
232,660

 
1,507,776

 
(1)
Our purchase obligations relate to coal supply agreements for our power plants. See Note 15 to our consolidated financial statements for details.
(2)
Represents benefit payments for our postretirement medical benefits, black lung, workers’ compensation, and combined benefit fund plans, as well as contributions for our defined benefit pension plans and final reclamation costs.
Critical Accounting Policies
Postretirement Medical Benefits
We have an obligation to provide postretirement medical benefits to our former employees and their dependents. Detailed information related to this liability is included in Note 6 to our consolidated financial statements.
Our liability for our employees’ postretirement medical benefit costs is recorded on our consolidated balance sheets in amounts equal to the actuarially determined liability, as this obligation is not funded. We use various assumptions including the discount rate and future cost trends, to estimate the cost and obligation for this item. Our discount rate for postretirement medical benefit is determined by utilizing a hypothetical bond portfolio model, which approximates the future cash flows necessary to service our liability. This model is calculated using a yield curve that is developed using the average yield for bonds in the tenth to ninetieth percentiles, which excludes bonds with outlier yields. Our discount rates at December 31, 2012 ranged from 3.60% to 4.15% compared to 4.10% at December 31, 2011. In 2012, our postretirement medical benefit liability increased $75.2 million primarily due to the Kemmerer acquisition and from decreases in discount rates.
We make assumptions related to future trends for medical care costs in the estimates of retiree health care obligations. Our medical trend assumption is developed by annually examining the historical trend of our cost per claim data and projecting forward the participant claims and our current benefit coverage. These projections include the continuation of cost savings we achieved in 2010 from the modernization of how we provide prescription drug benefits to retirees. If our assumptions do not materialize as expected, actual cash expenditures and costs that we incur could differ materially from our current estimates. Moreover, regulatory changes could increase our obligation to satisfy these or additional obligations.
The PPACA could potentially impact these benefits. The PPACA has both short-term and long-term implications on

42


healthcare benefit plan standards. Implementation of this legislation is planned to occur in phases, with plan standard changes taking effect beginning in 2010, but to a greater extend with the 2011 benefit plan year and extending through 2018. We will continue to evaluate the impact of the PPACA in future periods as additional information, interpretations and guidance becomes available.
Below we have provided a sensitivity analysis to demonstrate the significance of the health care cost trend rate assumptions in relation to reported amounts.
 
Postretirement Medical Benefits
Health Care Cost Trend Rate
1% Increase
 
1% Decrease
 
(In thousands)
Effect on service and interest cost components
$
2,992

 
$
(2,340
)
Effect on postretirement medical benefit obligation
$
45,823

 
$
(38,233
)
Asset Retirement Obligations, Final Reclamation Costs and Reserve Estimates
Our asset retirement obligations primarily consist of cost estimates for final reclamation of surface land and support facilities at both surface mines and power plants in accordance with federal and state reclamation laws. Asset retirement obligations are based on projected pit configurations at the end of mining and are determined for each mine using estimates and assumptions including estimates of disturbed acreage as determined from engineering data, estimates of future costs to reclaim the disturbed acreage, the timing of these cash flows, and a credit-adjusted, risk-free rate. As changes in estimates occur such as mine plan revisions, changes in estimated costs, or changes in timing of the final reclamation activities, the obligation and asset are revised to reflect the new estimate after applying the appropriate credit-adjusted, risk-free rate to the changes. If our assumptions do not materialize as expected, actual cash expenditures and costs that we incur could be materially different from currently estimated. Moreover, regulatory changes could increase our obligation to perform final reclamation and mine closing activities.
Certain of our customers have either agreed to reimburse us for final reclamation expenditures as they are incurred or have pre-funded a portion of the expected reclamation costs. See additional information regarding our asset retirement obligations in Note 9 to our consolidated financial statements.
Income Taxes and Deferred Income Taxes
As of December 31, 2012, we had significant deferred tax assets. Our deferred tax assets include federal and state regular net operating losses (NOLs), alternative minimum tax (AMT), credit carryforwards, Indian Coal Tax Credits (ICTC) carryforwards, and net deductible reversing temporary differences related to on-going differences between book and taxable income.
We believe we will be taxed under the AMT system for the foreseeable future due to the significant amount of statutory tax depletion in excess of book depletion expected to be generated by our mining operations. As a result, we have determined that a valuation allowance is required for all of our regular federal net operating loss carryforwards and AMT credit carryforwards since they are only available to offset future regular taxes.
We have recorded a full valuation allowance for all of our state NOLs since we believe they will not be realized.
We have determined that a full valuation allowance is required for all of our ICTC carryforward. The ICTC can generally be used to offset AMT liability. We do not believe we have sufficient positive evidence to substantiate that our deferred tax asset for the ICTC carryforward is realizable at a more-likely-than-not level of assurance. As a result, we will continue to record a full valuation allowance on our ICTC carryforward.
We have determined that since our net deductible temporary differences will not reverse for the foreseeable future, and we are unable to forecast when we will have regular taxable income when they do reverse, a full valuation allowance is required for these deferred tax assets.
The tax effect of pretax income or loss from continuing operations is generally determined by a computation that does not consider the tax effects of items that are not included in continuing operations. The exception to that incremental approach is that all items (for example, items recorded in other comprehensive income, extraordinary items, and discontinued operations) be considered in determining the amount of tax benefit that results from a loss from continuing operations and that shall be allocated to continuing operations.

43


Recent Accounting Pronouncements
The accounting standards adopted in 2012 did not have a material impact on our consolidated financial statements. See Note 1 to our consolidated financial statements for a discussion of recently adopted accounting pronouncements.
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. We utilize surety bonds and letters of credit 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. 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.
We use a combination of surety bonds and letters of credit to secure our financial obligations for reclamation, workers’ compensation, postretirement medical benefit and other obligations as follows as of December 31, 2012:
 
Reclamation
Obligations
 
Workers’
Compensation
Obligations
 
Post
Retirement
Medical Benefit
Obligations
 
Other
 
Total
 
(In thousands)
Surety bonds
$
316,534

 
$
9,996

 
$
9,450

 
$
7,102

 
$
343,082

Letters of credit

 

 

 
8,556

 
8,556

 
$
316,534

 
$
9,996

 
$
9,450

 
$
15,658

 
$
351,638

ITEM 7A
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are exposed to market risk, which includes adverse changes in commodity prices and interest rates.
Commodity Price Risk
We manage our price risk for coal sales, electricity and steam production through the use of long-term agreements, rather than through the use of derivatives. Nearly all of our coal and our electricity production are sold under long-term agreements. These coal contracts typically contain price escalation and adjustment provisions, pursuant to which the price for our coal may be periodically revised. The price may be adjusted in accordance with changes in broad economic indicators such as the consumer price index, commodity-specific indices such as the PPI-light fuel oils index, and/or changes in our actual costs.
For our contracts which are not cost plus, we have exposure to price risk for supplies that are used in the normal course of production such as diesel fuel and explosives. We manage these items through strategic sourcing contracts in normal quantities with our suppliers and may use derivatives from time to time. At December 31, 2012, we had fuel supply contracts outstanding with a minimum purchase requirement of 4.0 million gallons of diesel fuel per year. These contracts qualify for the normal purchase normal sale exception under hedge accounting.
Interest Rate Risk
We are exposed to market risk associated with interest rates due to our existing indebtedness that is indexed to either prime rate or LIBOR. However, based on the balances outstanding as of December 31, 2012, our exposure to interest rate risk is not material as of such date. In the future, if we were to draw on our WML or Corporate revolving line of credit, or if we enter into a new credit facility indexed to a variable interest rate, such as the prime rate or LIBOR, then we would be exposed to market risk associated with interest rates. We have not historically used interest rate hedging instruments to manage our interest rate risk.

44


ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
 

45


Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of Westmoreland Coal Company
We have audited the accompanying consolidated balance sheets of Westmoreland Coal Company and subsidiaries (the “Company”) as of December 31, 2012 and 2011, and the related consolidated statements of operations, comprehensive income (loss), shareholders’ deficit, and cash flows for each of the three years in the period ended December 31, 2012. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Westmoreland Coal Company and subsidiaries at December 31, 2012 and 2011, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2012 in conformity with U.S. generally accepted accounting principles.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Westmoreland Coal Company and subsidiaries’ internal control over financial reporting as of December 31, 2012, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 12, 2013 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Denver, Colorado
March 12, 2013

46


WESTMORELAND COAL COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
 
December 31,
2012
 
December 31,
2011
 
(In thousands)
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
31,610

 
$
30,783

Receivables:
 
 
 
Trade
60,037

 
46,235

Contractual third-party reclamation receivables
10,207

 
11,259

Other
3,220

 
3,493

 
73,464

 
60,987

Inventories
37,734

 
25,696

Other current assets
16,504

 
4,987

Total current assets
159,312

 
122,453

Property, plant and equipment:
 
 
 
Land and mineral rights
261,741

 
198,201

Plant and equipment
635,720

 
527,127

 
897,461

 
725,328

Less accumulated depreciation, depletion and amortization
384,621

 
328,596

Net property, plant and equipment
512,840

 
396,732

Advanced coal royalties
4,316

 
2,552

Reclamation deposits
72,718

 
71,939

Restricted investments and bond collateral
87,209

 
58,305

Contractual third-party reclamation receivables, less current portion
84,158

 
87,674

Intangible assets, net of accumulated amortization of $12.4 million and $10.7 million at December 31, 2012 and December 31, 2011, respectively
3,203

 
4,879

Other assets
12,359

 
14,638

Total Assets
$
936,115

 
$
759,172

See accompanying Notes to Consolidated Financial Statements.

47


WESTMORELAND COAL COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets (Continued)
 
December 31,
2012
 
December 31,
2011
 
(In thousands)
Liabilities and Shareholders’ Deficit
 
 
 
Current liabilities:
 
 
 
Current installments of long-term debt
$
23,791

 
$
20,795

Accounts payable and accrued expenses:
 
 
 
Trade
52,093

 
45,326

Production taxes
33,228

 
25,605

Workers’ compensation
820

 
911

Postretirement medical benefits
14,068

 
13,179

SERP
390

 
391

Deferred revenue
12,822

 
9,852

Asset retirement obligations
22,238

 
19,765

Other current liabilities
11,462

 
8,298

Total current liabilities
170,912

 
144,122

Long-term debt, less current installments
337,198

 
261,474

Workers’ compensation, less current portion
8,710

 
10,715

Excess of black lung benefit obligation over trust assets
8,356

 
6,565

Postretirement medical benefits, less current portion
319,775

 
245,462

Pension and SERP obligations, less current portion
54,250

 
28,991

Deferred revenue, less current portion
56,891

 
65,834

Asset retirement obligations, less current portion
241,609

 
227,713

Intangible liabilities, net of accumulated amortization $11.4 million at December 31, 2012 and $10.4 million at December 31, 2011, respectively
6,625

 
7,644

Other liabilities
18,020

 
10,510

Total liabilities
1,222,346

 
1,009,030

Shareholders’ deficit:
 
 
 
Preferred stock of $1.00 par value
 
 
 
Authorized 5,000,000 shares;
 
 
 
Issued and outstanding 159,960 shares at December 31, 2012 and 2011
160

 
160

Common stock of $2.50 par value
 
 
 
Authorized 30,000,000 shares;
 
 
 
Issued and outstanding 14,201,411 shares at
 
 
 
December 31, 2012 and 13,811,379 shares at
 
 
 
December 31, 2011, respectively
35,502

 
34,527

Other paid-in capital
130,852

 
126,288

Accumulated other comprehensive loss
(148,345
)
 
(121,455
)
Accumulated deficit
(289,727
)
 
(281,141
)
Total Westmoreland Coal Company shareholders’ deficit
(271,558
)
 
(241,621
)
Noncontrolling interest
(14,673
)
 
(8,237
)
Total deficit
(286,231
)
 
(249,858
)
Total Liabilities and Shareholders’ Deficit
$
936,115

 
$
759,172

See accompanying Notes to Consolidated Financial Statements.

48


WESTMORELAND COAL COMPANY AND SUBSIDIARIES
Consolidated Statements of Operations
 
 
Years Ended December 31,
 
2012
 
2011
 
2010
 
(In thousands, except per share data)
Revenues
$
600,437

 
$
501,713

 
$
506,057

Cost, expenses and other:
 
 
 
 
 
Cost of sales
466,521

 
392,787

 
394,827

Depreciation, depletion and amortization
57,145

 
45,594

 
44,690

Selling and administrative
49,908

 
40,276

 
39,481

Heritage health benefit expenses
13,388

 
18,575

 
14,421

Loss on sales of assets
528

 
640

 
226

Other operating income
(15,925
)
 
(6,785
)
 
(8,109
)
 
571,565

 
491,087

 
485,536

Operating income (loss)
28,872

 
10,626

 
20,521

Other income (expense):
 
 
 
 
 
Interest expense
(42,677
)
 
(29,769
)
 
(22,992
)
Loss on extinguishment of debt
(1,986
)
 
(17,030
)
 

Interest income
1,496

 
1,444

 
1,747

Other income (loss)
723

 
(2,572
)
 
(2,587
)
 
(42,444
)
 
(47,927
)
 
(23,832
)
Loss before income taxes
(13,572
)
 
(37,301
)
 
(3,311
)
Income tax expense (benefit)
90

 
(426
)
 
(141
)
Net loss
(13,662
)
 
(36,875
)
 
(3,170
)
Less net loss attributable to noncontrolling interest
(6,436
)
 
(3,775
)
 
(2,645
)
Net loss attributable to the Parent company
(7,226
)
 
(33,100
)
 
(525
)
Less preferred stock dividend requirements
1,360

 
1,360

 
1,360

Net loss applicable to common shareholders
$
(8,586
)
 
$
(34,460
)
 
$
(1,885
)
Net loss per share applicable to common shareholders:
 
 
 
 
 
Basic and diluted
$
(0.61
)
 
$
(2.61
)
 
$
(0.17
)
Weighted average number of common shares outstanding
 
 
 
 
 
Basic and diluted
14,033

 
13,192

 
10,791

See accompanying Notes to Consolidated Financial Statements.

49


W0ESTMORELAND COAL COMPANY AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
 
 
December 31,
 
2012
 
2011
 
2010
 
(In thousands)
Net loss
$
(13,662
)
 
$
(36,875
)
 
$
(3,170
)
Other comprehensive income (loss)
 
 
 
 
 
Pension and other postretirement plans:
 
 
 
 
 
Amortization of accumulated actuarial gains or losses, pension
2,960

 
1,647

 
1,312

Adjustments to accumulated actuarial losses, pension
(9,812
)
 
(15,798
)
 
(3,860
)
Amortization of accumulated actuarial gains or losses, transition obligations, and prior service costs, postretirement medical benefit
2,572

 
(288
)
 
(275
)
Adjustments to accumulated actuarial gains, postretirement medical benefits
(22,342
)
 
(49,136
)
 
(23,195
)
Unrealized and realized gains and losses on available-for-sale securities
(268
)
 
(200
)
 
(439
)
Other comprehensive income (loss)
(26,890
)
 
(63,775
)
 
(26,457
)
Comprehensive income (loss) attributable to Westmoreland Coal Company
$
(40,552
)
 
$
(100,650
)
 
$
(29,627
)
See accompanying Notes to Consolidated Financial Statements.

50


WESTMORELAND COAL COMPANY AND SUBSIDIARIES
Consolidated Statements of Shareholders’ Deficit
Years Ended December 31, 2010, 2011 and 2012
 
 
Preferred Stock
 
Common Stock
 
Other
Paid-In
Capital
 
Accumulated
Other
Comprehensive Loss
 
Accumulated
Deficit
 
Non-controlling
Interest
 
Total
Shareholders’
Equity
(Deficit)
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
 
(In thousands, except shares data)
Balance at December 31, 2009
160,129

 
$
160

 
10,345,927

 
$
25,864

 
$
91,432

 
$
(31,223
)
 
$
(226,215
)
 
$
(1,817
)
 
$
(141,799
)
Common stock issued as compensation

 

 
337,371

 
843

 
3,206

 

 

 

 
4,049

Common stock options exercised

 

 
2,500

 
6

 
2

 

 

 

 
8

Common stock issued to pension plan assets

 

 
475,000

 
1,188

 
3,826

 

 

 

 
5,014

Net loss

 

 

 

 

 

 
(525
)
 
(2,645
)
 
(3,170
)
Other comprehensive loss

 

 

 

 

 
(26,457
)
 

 

 
(26,457
)
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

 

 

 

 

 

 
(21,301
)
 

 
(21,301
)
Common stock issued as compensation

 

 
240,118

 
600

 
4,121

 

 

 

 
4,721

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

 

 

 

 

 

 
(33,100
)
 
(3,775
)
 
(36,875
)
Other comprehensive loss

 

 

 

 

 
(63,775
)
 

 

 
(63,775
)
Balance at December 31, 2011
159,960

 
$
160

 
13,811,379

 
$
34,527

 
$
126,288

 
$
(121,455
)
 
$
(281,141
)
 
$
(8,237
)
 
$
(249,858
)
Preferred dividends declared

 

 

 

 

 

 
(1,360
)
 

 
(1,360
)
Common stock issued as compensation

 

 
323,432

 
808

 
5,232

 

 

 

 
6,040

Issuance of restricted stock

 

 
66,600

 
167

 
(668
)
 

 

 

 
(501
)
Net loss

 

 

 

 

 

 
(7,226
)
 
(6,436
)
 
(13,662
)
Other comprehensive loss

 

 

 

 

 
(26,890
)
 

 

 
(26,890
)
Balance at December 31, 2012
159,960

 
$
160

 
14,201,411

 
$
35,502

 
$
130,852

 
$
(148,345
)
 
$
(289,727
)
 
$
(14,673
)
 
$
(286,231
)
See accompanying Notes to Consolidated Financial Statements.

51


WESTMORELAND COAL COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows
 
 
Years Ended December 31,
 
2012
 
2011
 
2010
 
(In thousands)
Cash flows from operating activities:
 
 
 
 
 
Net loss
$
(13,662
)
 
$
(36,875
)
 
$
(3,170
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
 
 
Depreciation, depletion and amortization
57,145

 
45,594

 
44,690

Accretion of asset retirement obligation and receivable
12,189

 
10,878

 
11,540

Amortization of intangible assets and liabilities, net
658

 
657

 
590

Share-based compensation
6,040

 
4,721

 
4,049

Loss on sales of assets
528

 
640

 
226

Non-cash interest expense

 

 
1,236

Amortization of deferred financing costs
4,358

 
2,515

 
2,304

Loss on extinguishment of debt
1,986

 
17,030

 

Gain on sales of investment securities
(165
)
 
(150
)
 
(604
)
Loss on derivative instruments

 
3,079

 
3,456

Changes in operating assets and liabilities:
 
 
 
 
 
Receivables, net
(12,855
)
 
5,491

 
(4,728
)
Inventories
(2,164
)
 
(2,125
)
 
2,300

Excess of black lung benefit obligation over trust assets
1,791

 
4,319

 
1,460

Accounts payable and accrued expenses
17,399

 
4,128

 
9,041

Deferred revenue
(8,198
)
 
(9,918
)
 
(7,399
)
Accrual for workers’ compensation
(2,096
)
 
1,248

 
(841
)
Asset retirement obligations
(6,943
)
 
(6,510
)
 
(7,783
)
Accrual for postretirement medical benefits
6,191

 
(1,643
)
 
(2,832
)
Pension and SERP obligations
2,802

 
(1,278
)
 
(3,902
)
Other assets and liabilities
(7,860
)
 
2,934

 
(4,280
)
Net cash provided by operating activities
57,144

 
44,735

 
45,353

Cash flows from investing activities:
 
 
 
 
 
Additions to property, plant and equipment
(21,032
)
 
(27,594
)
 
(22,814
)
Change in restricted investments and bond collateral and reclamation deposits
(33,892
)
 
(5,986
)
 
(8,545
)
Cash payments related to acquisitions
(72,522
)
 
(4,000
)
 

Net proceeds from sales of assets
480

 
687

 
712

Proceeds from the sale of restricted investments
4,106

 
3,350

 
2,307

Receivable from customer for property and equipment purchases
(674
)
 
(96
)
 
(840
)
Net cash used in investing activities
(123,534
)
 
(33,639
)
 
(29,180
)
Cash flows from financing activities:
 
 
 
 
 
Change in book overdrafts
(253
)
 
(724
)
 
(595
)
Borrowings from long-term debt, net of debt discount
119,364

 
142,500

 

Repayments of long-term debt
(44,846
)
 
(73,566
)
 
(20,405
)
Borrowings on revolving lines of credit
16,500

 
87,200

 
170,900

Repayments on revolving lines of credit
(16,500
)
 
(105,600
)
 
(168,900
)
Debt issuance costs and other refinancing costs
(5,688
)
 
(15,019
)
 
(1,925
)

52


Preferred dividends paid
(1,360
)
 
(21,301
)
 

Exercise of stock options

 
422

 
8

Net cash provided by (used in) financing activities
67,217

 
13,912

 
(20,917
)
Net increase (decrease) in cash and cash equivalents
827

 
25,008

 
(4,744
)
Cash and cash equivalents, beginning of year
30,783

 
5,775

 
10,519

Cash and cash equivalents, end of year
$
31,610

 
$
30,783

 
$
5,775

Supplemental disclosures of cash flow information:
 
 
 
 
 
Cash paid for interest
$
34,380

 
$
21,199

 
$
19,744

Cash received for income taxes
(73
)
 
(250
)
 
(236
)
Non-cash transactions:
 
 
 
 
 
Accrued purchases of property and equipment
634

 
570

 
628

Capital leases and other financing sources
1,828

 
531

 
3,748

See accompanying Notes to Consolidated Financial Statements.

53


WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Westmoreland Coal Company, or the Company, Westmoreland, WCC, or the Parent, is an energy company. The Company’s current principal activities, all conducted within the United States, are the production and sale of coal from its mines in Montana, Wyoming, North Dakota and Texas; and the ownership of power plants in North Carolina. The Company’s activities are primarily conducted through wholly owned subsidiaries.
The Company's Kemmerer Mine is owned by its subsidiary Westmoreland Kemmerer, Inc., or Kemmerer. The Company’s Absaloka Mine is owned by its wholly owned 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 Rosebud, Jewett, Beulah and Savage Mines are owned through the Company’s wholly owned subsidiary Westmoreland Mining LLC, or WML.
Consolidation Policy
The Consolidated Financial Statements of Westmoreland Coal Company include the accounts of the Company and its controlled subsidiaries. The Company consolidates any variable interest entity, or VIE, for which the Company is considered the primary beneficiary. The Company provides for non-controlling interests in consolidated subsidiaries, in which the Company’s ownership is less than 100 percent. All intercompany accounts and transactions have been eliminated.
A VIE is an entity that is unable to make significant decisions about its activities or does not have the obligation to absorb losses or the right to receive returns generated by its operations. If the entity meets one of these characteristics, then the Company must determine if it is the primary beneficiary of the VIE. The party exposed to the majority of the risks and rewards with the VIE is the primary beneficiary and must consolidate the entity.
The Company has determined for all periods presented, it was the primary beneficiary in Absaloka Coal LLC, a VIE, in which it holds less than a 50% ownership. As a result, the Company has consolidated this entity within the coal segment.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Change in Estimates
The Company's coal supply contract with Coyote Station, located adjacent to its Beulah Mine, expires in May 2016. On May 3, 2012, Coyote Station informed the Company they were entering into a mine development agreement with another provider and on October 15, 2012, Coyote Station entered into a coal supply agreement with that provider. As a result, Coyote Station will likely not purchase coal from the Beulah Mine after the expiration of its current contract. Based on the uncertainty of securing a new contract, the Company revised various accounting estimates beginning in the fourth quarter of 2011 to reflect the impact on mining operations of the current contract's expiration in 2016. For the past several years, the Beulah Mine has averaged 2.4 million tons of coal sold per year to Coyote Station. The Company is currently considering strategic alternatives for its Beulah Mine, which also provides approximately 0.5 million tons of coal to the Heskett Station power plant on an annual basis. The Company will continue to evaluate the effect of this development and potential strategic alternatives on various employment-related liabilities, which could result in revised accounting estimates related to those liabilities in future periods.
Cash and Cash Equivalents
Cash and cash equivalents are stated at cost, which approximate fair value. Cash equivalents consist of highly liquid investments with original maturities of three months or less.
Trade Receivables
Trade receivables are recorded at the invoiced amount and do not bear interest. The Company evaluates the need for an allowance for doubtful accounts based on a review of collectability. The Company has determined that no allowance is necessary for trade receivables as of December 31, 2012 and 2011.

54

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

Inventories
Inventories, which include materials and supplies as well as raw coal, are stated at the lower of cost or market. Cost is determined using the average cost method. Coal inventory costs include labor, supplies, equipment, operating overhead and other related costs.
Exploration and Mine Development
Exploration expenditures are charged to Cost of sales as incurred, including costs related to drilling and study costs incurred to convert or upgrade mineral resources to reserves. 
At existing surface operations, additional pits may be added to increase production capacity in order to meet customer requirements. These expansions may require significant capital to purchase additional equipment, relocate equipment, build or improve existing haul roads and create the initial pre-production box cut to remove overburden for new pits at existing operations. If these pits operate in a separate and distinct area of the mine, the costs associated with initially uncovering coal for production are capitalized and amortized over the life of the developed pit consistent with coal industry practices. Once production has begun, mining costs are then expensed as incurred.
Where new pits are routinely developed as part of a contiguous mining sequence, the Company expenses such costs as incurred. The development of a contiguous pit typically reflects the planned progression of an existing pit, thus maintaining production levels from the same mining area utilizing the same employee group and equipment.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost and includes long-term spare parts inventory. Expenditures that extend the useful lives of existing plant and equipment or increase productivity of the assets are capitalized. Maintenance and repair costs that do not extend the useful life or increase productivity of the asset are expensed as incurred. Coal reserves are recorded at cost, or at fair value originally in the case of acquired businesses.
Coal reserves, mineral rights and mine development costs are depleted based upon estimated recoverable proven and probable reserves. Plant and equipment are depreciated on a straight-line basis over the assets’ estimated useful lives as follows:
 
Years
Buildings and improvements
15 to 30
Machinery and equipment
3 to 36
Long-term spare parts inventory begins depreciation when placed in service.
The Company assesses the carrying value of its property, plant and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by comparing estimated undiscounted cash flows expected to be generated from such assets to their net book value. If net book value exceeds estimated cash flows, the asset is written down to fair value. When an asset is retired or sold, its cost and related accumulated depreciation and depletion are removed from the accounts. The difference between the net book value of the asset and proceeds on disposition is recorded as a gain or loss. Fully depreciated plant and equipment still in use is not eliminated from the accounts.
Reclamation Deposits and Contractual Third-Party Reclamation Receivables
Certain of the Company’s customers have either agreed to reimburse the Company for reclamation expenditures as they are incurred or have pre-funded a portion of the expected reclamation costs. Amounts received from customers and held on deposit are recorded as reclamation deposits. Amounts that are reimbursable by customers are recorded as third-party reclamation receivables when the related reclamation obligation is recorded.
Financial Instruments
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 instruments that contain features that qualify them as embedded derivatives. Except for derivatives that qualify for the normal purchase normal sale exception, all derivative financial instruments are recognized in the balance sheet at fair value. Changes in fair value are recognized in earnings if they are not

55

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

eligible for hedge accounting or Accumulated other comprehensive income (loss) if they qualify for cash flow hedge accounting.
Held-to-maturity financial instruments consist of non-derivative financial assets with fixed or determinable payments and a fixed term, which the Company has the ability and intent to hold until maturity, and, therefore, accounts for them as held-to-maturity 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.
The Company has securities classified as available-for-sale, which are recorded at fair value. The changes in fair values are recorded as unrealized gains (losses) as a component of Accumulated other comprehensive loss in shareholder’s deficit.
The Company reviews its securities routinely for other-than-temporary impairment. The primary factors used to determine if an impairment charge must be recorded because a decline in value of the security is other than temporary include (i) whether the fair value of the investment is significantly below its cost basis, (ii) the financial condition of the issuer of the security, (iii) the length of time that the cost of the security has exceeded its fair value and (iv) the Company’s intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in market value. Other-than-temporary impairments are recorded as a component of Other income (expense).
Fair Value
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 a given measurement date. Valuation techniques used must maximize the use of observable inputs and minimize the use of unobservable inputs.
Fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value and is defined as: 
Level 1, defined as observable inputs such as quoted prices in active markets for identical assets. Level 1 assets include available-for-sale equity securities generally valued based on independent third-party market prices.
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 Company’s non-recurring fair value measurements include asset retirement obligations and the purchase price allocations for the fair value of assets and liabilities acquired through business combinations.

The Company determines the estimated fair value of its asset retirement obligations by calculating the present value of estimated cash flows related to reclamation liabilities using level 3 inputs. The significant inputs used to calculate such liabilities includes estimates of costs to be incurred, the Company’s credit adjusted discount rate, inflation rates and estimated dates of reclamation. The asset retirement liability is accreted to its present value each period and the associated mineral rights are depleted using the units-of-production method.

The fair value of assets and liabilities acquired through business combinations is calculated using a discounted-cash flow approach using level 3 inputs. Cash flow estimates require forecasts and assumptions for many years into the future for a variety of factors.
See Notes 2, 4, 7, 9, 10 and 11 for further disclosures related to the Company’s fair value estimates.
Intangible Assets and Liabilities
Identifiable intangible assets or liabilities acquired in a business combination must be recognized and reported separately from goodwill. The Company has determined that its most significant acquired identifiable intangible assets and liabilities are related to sales and purchase agreements. Intangible assets result from more favorable market prices than contracted prices in sales and purchase agreements as measured during a business combination. Intangible liabilities result from less favorable market prices than contracted prices in sales and purchase agreements as measured during a business combination. The majority of these intangible assets and liabilities are amortized on a straight-line basis over the respective period of the sales and purchase agreements, while the remainder are amortized on a unit-of-production basis.

56

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

Amortization of intangible assets recognized in Cost of sales was $1.7 million in 2012, 2011, and in 2010. Amortization of intangible liabilities recognized in Revenues was $1.0 million in 2012, $1.0 million in 2011, and $1.1 million in 2010. 
The estimated aggregate amortization amounts from intangibles assets and liabilities for each of the next five years as of December 31, 2012 are as follows: 
 
Amortization
Expense
(Revenue)
 
(In thousands)
2013
$
657

2014
10

2015
(798
)
2016
(960
)
2017
(960
)
Workers’ Compensation Benefits
The Company is self-insured for workers’ compensation claims incurred prior to 1996. The liabilities for workers’ compensation claims are actuarially determined estimates of the ultimate losses incurred based on the Company’s experience. Adjustments to the probable ultimate liabilities are made annually based on subsequent developments and experience and are included in operations at the time of the revised estimate.
The Company insures its current employees through third-party insurance providers and state arrangements.
Pneumoconiosis (Black Lung) Benefits
The Company is self-insured for federal and state black lung benefits for former employees and has established an independent trust to pay these benefits. The Company accounts for these benefits on the accrual basis. An independent actuary annually calculates the present value of the accumulated black lung obligation. The underfunded status in 2012 and 2011 of the Company’s obligation is included as Excess of black lung benefit obligation over trust assets in the accompanying consolidated balance sheets. Actuarial gains and losses are recognized in the period in which they arise.
The Company insures its current represented employees through arrangements with its unions and its current non-represented employees are insured through third-party insurance providers.
Postretirement Health Care Benefits
The Company accrues the cost to provide the benefits over the employees’ period of active service for postretirement benefits other than pensions. These costs are determined on an actuarial basis. The Company’s consolidated balance sheet reflects the unfunded status of postretirement benefit obligations.
Pension and SERP Plans
The Company accrues the cost to provide the benefits over the employees’ period of active service for the non-contributory defined benefit pension and SERP plans it sponsors. These costs are determined on an actuarial basis. The Company’s consolidated balance sheet reflects the unfunded status of the defined benefit pension and SERP plans.
Deferred Revenue
Deferred revenues represent funding received upon the negotiation of long-term contracts. The deferred revenues for coal will be recognized as deliveries of the reserved coal are made in accordance with the long-term coal contracts. Deferred power revenues are recognized on a pro rata basis, based on the payments estimated to be received over the remaining term of the power sales agreements.
Asset Retirement Obligations
The Company’s asset retirement obligation, or ARO, liabilities primarily consist of estimated costs to reclaim surface land and support facilities at its mines in accordance with federal and state reclamation laws as established by each mining permit.

57

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

The Company estimates its ARO liabilities for final reclamation and mine closure based upon detailed engineering calculations of the amount and timing of the future costs for a third party to perform the required work. These estimates are based on projected pit configurations at the end of mining and are escalated for inflation, and then discounted at a credit-adjusted risk-free rate. The Company records mineral rights associated with the initial recorded liability. Mineral rights are amortized based on the units of production method over the estimated recoverable, proven and probable reserves at the related mine, and the ARO liability is accreted to the projected settlement date. Changes in estimates could occur due to revisions of mine plans, changes in estimated costs, and changes in timing of the performance of reclamation activities.
Income Taxes
Deferred income taxes are provided for temporary differences arising from differences between the financial statement amount and tax basis of assets and liabilities existing at each balance sheet date using enacted tax rates anticipated to be in effect when the related taxes are expected to be paid or recovered. A valuation allowance is established if it is more likely than not that a deferred tax asset will not be realized. In determining the need for a valuation allowance, the Company considers projected realization of tax benefits based on expected levels of future taxable income, available tax planning strategies and its overall deferred tax position.
Accounting guidance prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Under this guidance, a company can recognize the benefit of an income tax position only if it is more likely than not (greater than 50%) that the tax position will be sustained upon tax examination, based solely on the technical merits of the tax position. Guidance is also provided on the derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
The Company includes interest and penalties related to income tax matters in Income tax expense.
The tax effect of pretax income or loss from continuing operations is generally determined by a computation that does not consider the tax effects of items that are not included in continuing operations. The exception to that incremental approach is that all items (for example, items recorded in other comprehensive income, extraordinary items, and discontinued operations) be considered in determining the amount of tax benefit that results from a loss from continuing operations and that shall be allocated to continuing operations.
Deferred Financing Costs
The Company capitalizes costs incurred in connection with borrowings or establishment of credit facilities and issuance of debt securities. These costs are amortized as an adjustment to interest expense over the life of the borrowing or term of the credit facility using the effective interest method. These amounts are recorded in Other assets in the accompanying consolidated balance sheets.
Coal Revenues
The Company recognizes coal sales revenue at the time title passes to the customer in accordance with the terms of the underlying sales agreements and after any contingent performance obligations have been satisfied. Coal sales revenue is recognized based on the pricing contained in the contracts in place at the time that title passes.
Power Revenues
ROVA supplies power under long-term power sales agreements. Under these agreements, ROVA invoices and collects capacity payments based on kilowatt-hours produced if the units are dispatched or for the kilowatt-hours of available capacity if the units are not fully dispatched.
A portion of the capacity payments under the agreements is considered to be an operating lease. The Company is recognizing amounts invoiced under the power sales agreements as revenue on a pro rata basis, based on the weighted average per kilowatt hour capacity payments estimated to be received over the remaining term of the power sales agreements. Under this method of recognizing revenue, $8.3 million and $8.8 million of previously deferred revenue was recognized during 2012 and 2011, respectively.
Other Operating Income (Loss)
Other operating income in the accompanying Consolidated Results of Operations reflects income from sources other than coal or power revenues. Income from the Company’s Indian Coal Tax Credit monetization transaction is recorded as Other operating income. The Company recognizes income as business interruption losses are incurred and reimbursement is virtually assured and has recognized $17.3 million of income, which is included in Other operating income. Insurance proceeds are

58

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

included in Net cash provided by operating activities.
Share-Based Compensation
Share-based compensation expense is generally measured at the grant date and recognized as expense over the vesting period of the entire award. These costs are recorded in Cost of Sales and Selling and administrative expenses in the accompanying consolidated results of operations.
Earnings (Loss) per Share
Basic earnings (loss) per share have 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, stock options, stock appreciation rights, restricted stock and warrants. No such items were included in the computation of diluted loss per share for the years ended 2012, 2011 or 2010 because the Company incurred a loss from operations in each of these periods and the effect of inclusion would have been anti-dilutive.
The table below shows the number of shares that were excluded from the calculation of diluted loss per share because their inclusion would be anti-dilutive to the calculation:
 
Years Ended December 31,
 
2012
 
2011
 
2010
 
(In thousands)
Convertible notes and securities
1,093

 
1,093

 
2,943

Restricted stock units, stock options, and SARs
978

 
634

 
630

Total shares excluded from diluted shares calculation
2,071

 
1,727

 
3,573

Reclassifications
Certain amounts in prior periods have been reclassified to conform with the presentation of 2012, with no effect on previously reported net loss, cash flows or shareholders' deficit. The reclassification affected only noncurrent assets on the balance sheet.
Recently Adopted Accounting Pronouncements
Effective January 1, 2012, the Company adopted an accounting standards update which generally aligns the principles for fair value measurements and the related disclosure requirements under United States 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. The adoption of this standard did not have a material impact on the Company's consolidated financial statements.
Effective January 1, 2012, the Company adopted accounting standards updates with guidance on the presentation of other comprehensive income. These standards require an entity to either present components of net income and other comprehensive income in one continuous statement or in two separate but consecutive statements. Accordingly, the Company has presented net income and other comprehensive income in two consecutive statements.
Effective January 1, 2013, the Company adopted an accounting standards update which requires that companies present either in a single note or parenthetically on the face of the financial statements, the effect of significant amounts reclassified from each component of accumulated other comprehensive income based on its source and the income statement line items affected by the reclassification. If a component is not required to be reclassified to net income in its entirety, companies would instead cross reference to the related footnote for additional information. This accounting standards update is effective for interim and annual reporting periods beginning after December 15, 2012.
Liquidity and Capital Resources
The Parent is a holding company and conducts its operations through subsidiaries. The Parent has significant cash

59

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

requirements to fund debt obligations, ongoing heritage health benefit costs, pension contributions, and corporate overhead expenses. The principal sources of cash flow to the Parent are distributions from principal operating subsidiaries. The cash at ROVA, Kemmerer, and WRI has no restrictions and is immediately available. The cash at WML is available to the Parent 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 the Parent. The cash at WRMI is also available to us through dividends and is subject to maintaining a statutory minimum level of capital, which is two hundred fifty thousand dollars.
The Company anticipates that its cash from operations, cash on hand and available borrowing capacity will be sufficient to meet its investing, financing, and working capital requirements for the foreseeable future.
On June 29, 2012, the Company and certain of its subsidiaries entered into a five-year, $20.0 million revolving line of credit permitted under the indenture governing the 10.75% Senior Notes with an expiration date of June 30, 2017. The revolver may support up to $2.0 million of letters of credit, which would reduce the balance available under the revolver. At December 31, 2012, availability on the revolver was $20.0 million with no outstanding balance and no supported letters of credit. All extensions of credit under the revolver are collateralized by a first priority security interest in and lien upon the inventory and accounts receivable of the Parent, WRI, Kemmerer, and ROVA. Pursuant to the Intercreditor Agreement, the holders of the 10.75% Senior Notes now have a subordinate lien on these assets.
2.
ACQUISITION
On December 23, 2011, the Company, through Westmoreland Kemmerer, Inc., entered into a purchase and sale agreement with Chevron Mining Inc., a Missouri corporation (the “Seller”), pursuant to which the Company agreed to purchase from Seller the Kemmerer surface coal mine, associated processing facilities and other related real and personal property assets located in Kemmerer, Wyoming and assumed certain liabilities related to the mine. The Company did not acquire working capital in the acquisition, other than inventory.
On January 31, 2012, the Company closed on the acquisition of the Kemmerer Mine from the Seller. In addition, on January 31, 2012, the Company completed the issuance and sale of $125.0 million aggregate principal amount of 10.75% senior secured notes due 2018 (the “Add-On Notes”) at a price equal to approximately 95.5% of their face value.
The purchase consideration for the Kemmerer Mine was $164.5 million, which included $76.5 million paid in cash, plus the assumption of approximately $88.0 million of liabilities. The net proceeds of the Add-On Notes financed the $76.5 million cash portion of the purchase consideration, $24.7 million of cash bonding obligations for the Kemmerer Mine and paid cash transaction costs for the Kemmerer acquisition and the Add-On Notes. Acquisition-related costs of $1.6 million have been expensed and are included in Selling and administrative costs. Issuance costs related to the Add-On Notes of $5.1 million have been capitalized. The balance of the net proceeds of the Add-On Notes was used to fund working capital requirements necessary to integrate the Kemmerer operations with the Company's operations.
The Kemmerer acquisition has been accounted for under the acquisition method of accounting that requires the total purchase consideration to be allocated to the assets acquired and liabilities assumed based on estimates of fair value.
During the second quarter of 2012, the Company revised its preliminary allocation of the purchase price for $2.2 million of deferred revenue. Adjustments to preliminary fair values are assumed to have been made as of the acquisition date. As a result, Revenues and Operating income for the first quarter of 2012 would have been higher and Net loss would have been lower by approximately $1.3 million. The results in the consolidated statements of operations for the year ended December 31, 2012 reflect this adjustment in the first quarter of 2012. The remaining $0.9 million of deferred revenue was recognized as revenue in the second quarter of 2012.
The Company has finalized the purchase price allocation for the Kemmerer acquisition. No significant goodwill or other intangible assets were evident in the acquisition.
A summary of the purchase consideration and allocation of the purchase consideration follow (in millions):

60

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

 
Provisional
as of
March 31,
2012
 
Adjustments
 
Final as of
December 31,
2012
Purchase consideration:
 
 
 
 
 
Cash paid
$
76.5

 
$

 
$
76.5

 
 
 
 
 
 
Fair value of liabilities assumed:
 
 
 
 
 
     Postretirement medical cost obligations
49.0

 
0.2

 
49.2

     Asset retirement obligations
15.1

 
4.3

 
19.4

     Pension obligations
11.8

 
3.8

 
15.6

     Deferred revenue

 
2.2

 
2.2

     Accrued liabilities
0.9

 
0.7

 
1.6

Total fair value of liabilities assumed
76.8

 
11.2

 
88.0

 
 
 
 
 
 
Total purchase consideration
$
153.3

 
$
11.2

 
$
164.5

 
 
 
 
 
 
 
 
 
 
 
 
Allocation of purchase consideration:
 
 
 
 
 
 
 
 
 
 
 
     Inventories
$
9.5

 
$
0.1

 
$
9.6

     Land and mineral rights
40.5

 
25.0

 
65.5

     Plant and equipment
103.3

 
(13.9
)
 
89.4

 
 
 
 
 
 
Total
$
153.3

 
$
11.2

 
$
164.5

The Kemmerer Mine has generated $151.6 million of revenue and $27.8 million of operating income since the January 31, 2012 acquisition date, and these amounts are included in the Company's consolidated statement of operations for the year ended December 31, 2012.
The following unaudited pro forma information has been prepared for illustrative purposes only and assumes the acquisition occurred on January 1, 2011. The unaudited pro forma results have been prepared based on estimates and assumptions, which the Company believes are reasonable, however, they are not necessarily indicative of the consolidated results of operations had the acquisition occurred on January 1, 2011, or of future results of operations.
 
Year Ended
 
December 31, 2012
 
December 31, 2011
 
(In thousands)
Total Revenues
 
 
 
As reported
$
600,437

 
$
501,713

Pro forma
$
614,550

 
$
645,595

 
 
 
 
Operating Income
 
 
 
As reported
$
28,872

 
$
10,626

Pro forma
$
31,146

 
$
13,275

 
 
 
 
Net income (loss) applicable to common shareholders
 
 
 
As reported
$
(8,586
)
 
$
(34,460
)
Pro forma
$
(7,524
)
 
$
(46,260
)
 
 
 
 
Net income (loss) per share applicable to common shareholders
 
 
 
As reported
$
(0.61
)
 
$
(2.61
)
Pro forma
$
(0.54
)
 
$
(3.51
)


61

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)


3.
INVENTORIES
Inventories consisted of the following:
 
December 31,
 
2012
 
2011
 
(In thousands)
Coal stockpiles
$
989

 
$
309

Coal fuel inventories
3,048

 
3,755

Materials and supplies
34,954

 
22,508

Reserve for obsolete inventory
(1,257
)
 
(876
)
Total
$
37,734

 
$
25,696


4.
RESTRICTED INVESTMENTS AND BOND COLLATERAL
The Company’s restricted investments and bond collateral consist of the following: 
 
December 31,
2012
 
2011
 
(In thousands)
Coal Segment:
 
 
 
WML debt reserve account
$
13,062

 
$
11,664

Reclamation bond collateral:
 
 
 
Kemmerer Mine
24,702

 

Absaloka Mine
14,507

 
13,593

Rosebud Mine
12,495

 
12,264

Beulah Mine
1,270

 
1,270

Power Segment:
 
 
 
Letter of credit account
5,990

 
5,983

Corporate Segment:
 
 
 
Postretirement medical benefit bonds
8,593

 
7,039

Workers’ compensation bonds
6,590

 
6,492

Total restricted investments and bond collateral
$
87,209

 
$
58,305

The Company’s carrying value and estimated fair value of its restricted investments and bond collateral at December 31, 2012 are as follows:
 
Carrying Value
 
Fair Value
 
(In thousands)
Cash and cash equivalents
$
74,607

 
$
74,607

Time deposits
8,428

 
8,428

Held-to-maturity securities
3,983

 
4,339

Available-for-sale securities
191

 
191

 
$
87,209

 
$
87,565

In 2012, 2011, and 2010, the Company recorded a gain of $0.2 million, $0.1 million, and $0.1 million, respectively, on the sale of available-for-sale securities held as restricted investments and bond collateral.
Coal Segment
Pursuant to the terms of the Note Purchase Agreement dated June 26, 2008, WML must maintain a debt service reserve account. The debt service reserve account is required to contain funds sufficient to pay the principal, interest, and collateral agent’s fees scheduled to be paid in the following six months. The debt service reserve account was fully funded at

62

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

December 31, 2012.
As of December 31, 2012, the Company had reclamation bond collateral in place for its Kemmerer, Absaloka, Rosebud and Beulah Mines. Bond collateral is not required at the Jewett Mine as reclamation bonding is the responsibility of its customer. These government-required bonds assure that coal-mining operations comply with applicable federal and state regulations relating to the performance and completion of final reclamation activities. The amounts deposited in the bond collateral account secure the bonds issued by the bonding company.
Power Segment
Following the Parent Notes offering in February 2011, ROVA is no longer required to maintain its debt protection accounts, ash reserve account or the repairs and maintenance account.
The Company is required to fund a letter of credit account for its power operations.
Corporate Segment
The Company is required to obtain surety bonds in connection with its self-insured workers’ compensation plan and certain health care plans. The Company’s surety bond underwriters require collateral to issue these bonds.
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 are as follows: 
 
December 31,
2012
 
2011
 
(In thousands)
Amortized cost
$
3,983

 
$
4,866

Gross unrealized holding gains
356

 
413

Gross unrealized holding losses

 
(38
)
Fair value
$
4,339

 
$
5,241

Maturities of held-to-maturity securities are as follows at December 31, 2012: 
 
Amortized Cost
 
Fair Value
 
(In thousands)
Due within one year
$
609

 
$
616

Due in five years or less
1,920

 
2,032

Due after five years to ten years
844

 
1,017

Due in more than ten years
610

 
674

 
$
3,983

 
$
4,339

The cost basis, gross unrealized holding gains and fair value of available-for-sale securities are as follows: 
 
December 31,
 
2012
 
2011
 
(In thousands)
Cost basis
$
175

 
$
1,566

Gross unrealized holding gains
16

 
221

Fair value
$
191

 
$
1,787


63

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

5.
LINES OF CREDIT AND LONG-TERM DEBT
The amounts outstanding under the Company’s long-term debt consisted of the following as of the dates indicated: 
 
Total Debt Outstanding
December 31,
 
2012
 
2011
 
(In thousands)
10.75% senior notes due 2018
$
252,000

 
$
150,000

WML term debt due 2018
103,500

 
117,500

Capital lease obligations
13,926

 
19,529

Other
1,654

 
2,071

Debt discount
(10,091
)
 
(6,831
)
Total debt outstanding
360,989

 
282,269

Less current portion
(23,791
)
 
(20,795
)
Total debt outstanding, less current portion
$
337,198

 
$
261,474

The following table presents aggregate contractual debt maturities of all long-term debt: 
 
As of December 31, 2012
 
(In thousands)
2013
$
25,339

2014
23,799

2015
21,751

2016
20,691

2017
22,000

Thereafter
257,500

Total
371,080

Less: debt discount
(10,091
)
Total debt
$
360,989


Revolving Lines of Credit
2012 Revolving Credit Agreement
On June 29, 2012, the Company and certain of its subsidiaries entered into a five-year, $20.0 million revolving line of credit permitted under the indenture governing the 10.75% Senior Notes with an expiration date of June 30, 2017. The revolver may support up to $2.0 million of letters of credit, which would reduce the balance available under the revolver. At December 31, 2012, availability on the revolver was $20.0 million with no outstanding balance and no supported letters of credit. All extensions of credit under the revolver are collateralized by a first priority security interest in and lien upon the inventory and accounts receivable of the Parent, WRI, Kemmerer, and ROVA. Pursuant to the Intercreditor Agreement, the holders of the 10.75% Senior Notes now have a subordinate lien on these assets. The Company has capitalized debt issuance costs of $0.7 million in 2012 related to the revolver.
Two interest rate options exist under this revolver. The Base Rate option bears interest at the greater of the Federal Funds Rate plus 0.5% or the Prime Rate, as defined in the loan agreement and is payable monthly. The LIBOR Rate option bears interest at the London Interbank Offering Rate, or LIBOR, rate plus 2.25% and is payable monthly. In addition, a commitment fee of 0.75% of the average unused portion of the available revolver is payable monthly.
The loan agreement contains various affirmative, negative and financial covenants. Financial covenants in the agreement include a fixed charge coverage ratio and an EBITDA measure. The fixed charge coverage ratio must meet or exceed a specified minimum. The EBITDA covenant requires a minimum amount of EBITDA to be achieved. We met these covenant requirements as of December 31, 2012.

64

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

2001 Revolving Credit Agreement
At December 31, 2012, WML has the 2001 Revolving Credit Agreement with a borrowing limit of $25.0 million and a maturity date of June 26, 2013. WML has two interest rate options to choose from on this revolver. The Base Rate option bears interest at a base rate plus 0.50% and is payable monthly (3.75% per annum at December 31, 2012). The LIBOR Rate option bears interest at the London Interbank Offering Rate, or LIBOR, rate plus 3.0% (3.53% per annum at December 31, 2012). In addition, a commitment fee of 0.50% of the average unused portion of the available revolver is payable quarterly. At December 31, 2012, the revolver had no outstanding balance and supported a $1.9 million letter of credit. The Company had $23.1 million of borrowing availability under this revolver at December 31, 2012.
The revolver is secured by substantially all assets of WML, Westmoreland Savage Corporation, or WSC, Western Energy Company, or WECO, and Dakota Westmoreland Corporation, or DWC; the Company’s membership interest in WML; and the stock of WSC, WECO and DWC. WECO, DWC, and WSC have guaranteed WML’s obligations with respect to the Revolver.
10.75% Senior Notes
On February 4, 2011 through a private placement offering, the Company issued $150.0 million of Parent Notes (the “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 1, 2018, and bear a fixed interest rate of 10.75%, payable semi-annually, in arrears, on February 1 and August 1 of each year, which began August 1, 2011. Proceeds from the Parent Notes were used to retire ROVA's term debt, WRI's term debt and revolving line of credit, and the convertible notes; as well as payment of preferred stock dividend arrearages. As a result of this offering, the Company recorded a $17.0 million loss on extinguishment of debt in the year ended December 31, 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.
On January 31, 2012, the Company completed the private placement of $125.0 million of senior secured notes due in 2018 (the “Add-On Notes”), which notes were additional notes issued pursuant to the existing Parent Notes indenture, collectively referred to as the “10.75% Senior Notes”. The Add-On Notes were issued at a 4.5% original issue discount. On June 22, 2012, the Company commenced an exchange offer for the Add-On Notes for an equal principal amount of notes that have been registered under the Securities Act of 1933, which exchange was completed in July, 2012. At this time, all of the outstanding 10.75% Senior Notes are traded under one CUSIP. In 2011, the Company capitalized $0.2 million of debt issuance costs related to the Add-On Notes offering and has capitalized debt issuance costs of $4.9 million in 2012. The Company funded the Kemmerer Mine acquisition through the net proceeds from the Add-On Notes.
The 10.75% Senior Notes mature February 1, 2018, and bear an annual fixed interest rate of 10.75%, payable semi-annually, in arrears, on February 1 and August 1 of each year. The 10.75% Senior Notes are fully and unconditionally guaranteed by ROVA, Westmoreland Kemmerer, Inc. (“Kemmerer”), WRI and their respective subsidiaries (other than Absaloka Coal, LLC) and by certain other subsidiaries. Substantially all of the assets of the Parent, ROVA, Kemmerer and WRI constitute collateral for the 10.75% Senior Notes as to which the holders of these notes have a lien securing the notes. The lien securing the 10.75% Senior Notes is subordinate to the lien securing our revolving credit agreement. Under the indenture governing the 10.75% Senior 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. During the year ended December 31, 2012, the company paid $23.1 million, excluding accrued interest, to repurchase Senior Notes with a principal amount of $23.0 million. This repurchase reduced Excess Cash Flow, which eliminated the requirement related to Excess Cash Flow for fiscal year 2012. The Company recognized losses of $2.0 million on these repurchases, which were recorded as losses on extinguishment of debt. The losses on the repurchases were measured based on the carrying value of the repurchased portion of the Senior Notes, which included a portion of the unamortized debt issue costs and the debt discount on the dates of repurchase.
The indenture governing the 10.75% Senior Notes contains, among other provisions, events of default and various affirmative and negative covenants. As of December 31, 2012, the Company was in compliance with all covenants for these notes.
WML Term Debt
The term debt bears interest at 8.02% per annum, payable quarterly. The principal payments required for the term debt are as follows: 

65

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

 
(In millions)
2013
$
18.0

2014
18.0

2015
20.0

2016
20.0

2017
22.0

Thereafter
5.5

The term debt is payable in full on March 31, 2018. The term debt is secured by substantially all assets of WML, Westmoreland Savage Corporation, or WSC, Western Energy Company, or WECO, and Dakota Westmoreland Corporation, or DWC; the Company’s membership interest in WML; and the stock of WSC, WECO and DWC. WECO, DWC, and WSC have guaranteed WML’s obligations with respect to the term debt. The credit agreement requires a debt service account and imposes timing and other restrictions on the ability of WML to distribute funds to the Parent.
WML’s credit agreement contains various affirmative and negative covenants. Operational covenants in the agreements prohibit, among other things, WML from incurring or guaranteeing additional indebtedness, creating liens on its assets, making investments or engaging in asset sales or transactions with affiliates, in each case subject to specified exceptions. Financial covenants in the agreements impose requirements relating to specified debt service coverage and leverage ratios. The debt service coverage ratio must meet or exceed a specified minimum. The leverage ratio covenant requires that WML not permit the ratio of total debt at the end of each quarter to EBITDA (both as defined) for the four quarters then ended to be greater than a specified amount. WML met all of its covenant requirements as of December 31, 2012.
Capital Leases
The Company engages in leasing transactions for equipment utilized in its mining operations. At December 31, 2012 and 2011, the capital leases outstanding had a weighted average interest rate of 7.57% and 7.65%, respectively.
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.
Westmoreland Resources, Inc.
In February 2011, proceeds from the Parent Notes 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.
ROVA
In February 2011, proceeds from the Parent Notes 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.
6.
POSTRETIREMENT MEDICAL BENEFITS
The Company provides postretirement medical benefits to retired employees and their dependents, mandated by the Coal Industry Retiree Health 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. These benefits are provided through self-insured programs.
The following table sets forth the actuarial present value of postretirement medical benefit obligations and amounts recognized in the Company’s financial statements: 

66

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

 
December 31,
2012
 
2011
 
(In thousands)
Change in benefit obligations:
 
 
 
Net benefit obligation at beginning of year
$
258,641

 
$
210,860

Liability acquired
49,241

 

Service cost
3,555

 
493

Interest cost
12,363

 
10,510

Plan participant contributions
129

 
200

Actuarial loss
22,342

 
49,135

Gross benefits paid
(13,544
)
 
(13,604
)
Federal subsidy on benefits paid
1,115

 
1,047

Net benefit obligation at end of year
333,842

 
258,641

Change in plan assets:
 
 
 
Employer contributions
13,415

 
13,404

Plan participant contributions
129

 
200

Gross benefits paid
(13,544
)
 
(13,604
)
Fair value of plan assets at end of year

 

Unfunded status at end of year
$
(333,842
)
 
$
(258,641
)
Amounts recognized in the balance sheet consist of:
 
 
 
Current liabilities
$
(14,068
)
 
$
(13,179
)
Noncurrent liabilities
(319,775
)
 
(245,462
)
Accumulated other comprehensive loss
77,528

 
57,758

Net amount recognized
$
(256,315
)
 
$
(200,883
)
Amounts recognized in accumulated other comprehensive loss consists of:
 
 
 
Net actuarial loss
$
83,884

 
$
64,656

Prior service credit
(6,356
)
 
(6,991
)
Transition obligation

 
93

 
$
77,528

 
$
57,758

In 2012, the Company’s postretirement medical benefit liabilities increased $75.2 million primarily due to the Kemmerer acquisition and from decreases in discount rates.
The Company has elected to amortize its transition obligations over a 20-year period. Prior service costs and credits and actuarial gains and losses are amortized over the average life expectancy or average future service of the plan’s participants. The following amounts will be amortized from accumulated other comprehensive loss into net periodic benefit cost in 2013 (in millions): 
Actuarial loss
$
4.6

Prior service credit
0.6

The components of net periodic postretirement medical benefit cost are as follows: 

67

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

 
Years Ended December 31,
2012
 
2011
 
2010
 
(In thousands)
Components of net periodic benefit cost:
 
 
 
 
 
Service cost
$
3,555

 
$
493

 
$
539

Interest cost
12,363

 
10,510

 
10,498

Amortization of:
 
 
 
 
 
Transition obligation
93

 
93

 
93

Prior service credit
(636
)
 
(636
)
 
(636
)
Actuarial loss
3,116

 
255

 
268

Total net periodic benefit cost
$
18,491

 
$
10,715

 
$
10,762

The following table shows the net periodic postretirement medical benefit costs that relate to current and former mining operations: 
 
Years Ended December 31,
 
2012
 
2011
 
2010
 
(In thousands)
Former mining operations
$
11,314

 
$
9,259

 
$
9,225

Current operations
7,177

 
1,456

 
1,537

Total net periodic benefit cost
$
18,491

 
$
10,715

 
$
10,762

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.
Assumptions
The weighted-average assumptions used to determine the benefit obligations as of the end of each year were as follows: 
 
December 31,
 
2012
 
2011
Discount rate
3.60% - 4.15%
 
4.10%
Measurement date
December 31, 2012
 
December 31, 2011
The discount rate is adjusted annually based on an Aa corporate bond index adjusted for the difference in the duration of the bond index and the duration of the benefit obligations. This rate is calculated using a yield curve, which is developed using the average yield for bonds in the tenth to ninetieth percentiles, which excludes bonds with outlier yields.
The weighted-average assumptions used to determine net periodic benefit cost were as follows: 
 
December 31,
 
2012
 
2011
 
2010
Discount rate
4.10%
 
5.15%
 
5.71%
Measurement date
December 31, 2011
 
December 31, 2010
 
December 31, 2009
The following presents information about the assumed health care trend rate: 
 
Year Ended December 31,
 
2012
 
2011
Health care cost trend rate assumed for next year
7.00
%
 
7.25
%
Rate to which the cost trend is assumed to decline (ultimate trend rate)
5.00
%
 
5.00
%
Year that the trend rate reaches the ultimate trend rate
2021

 
2021

The effect of a one percent change on the health care cost trend rate used to calculate periodic postretirement medical benefit costs and the related benefit obligation are summarized in the table below: 

68

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

 
Postretirement Medical Benefits
 
1 % Increase
 
1 % Decrease
 
(In thousands)
Effect on service and interest cost components
$
2,992

 
$
(2,340
)
Effect on postretirement medical benefit obligation
$
45,823

 
$
(38,233
)
Cash Flows
The following benefit payments and Medicare D subsidy (which the Company receives as a benefit partially offsetting its prescription drug costs for retirees and their dependents) are expected by the Company:
 
 
Postretirement
Medical  Benefits
 
Medicare D
Subsidy
 
Net 
Postretirement
Medical Benefits
 
(In thousands)
2013
$
15,254

 
$
(1,185
)
 
$
14,068

2014
15,826

 
(1,234
)
 
14,592

2015
16,537

 
(1,278
)
 
15,259

2016
17,088

 
(1,321
)
 
15,767

2017
17,587

 
(1,372
)
 
16,215

Years 2018 - 2022
95,719

 
(7,561
)
 
88,158

Combined Benefit Fund
Additionally, the Company makes payments to the UMWA Combined Benefit Fund, or CBF, which is a multiemployer health plan neither controlled by nor administered by the Company. The CBF is designed to pay health care benefits to UMWA workers (and dependents) who retired prior to 1976. The Company is required by the Coal Act to make monthly premium payments into the CBF. These payments are based on the number of the Company’s UMWA employees who retired prior to 1976, and the Company’s pro-rata assigned share of UMWA retirees whose companies are no longer in business. Contributions to the CBF have decreased over the past three years due to a declining population. The Company expenses payments to the CBF when they are due. The following payments were made to the CBF (in millions): 
2012
$
2.3

2011
2.6

2010
3.0

Workers’ Compensation Benefits
The Company was self-insured for workers’ compensation benefits prior to January 1, 1996. Since 1996, the Company has purchased third-party insurance for workers’ compensation claims. 
The following table shows the changes in the Company’s workers’ compensation obligation:
 
December 31,
2012
 
2011
(In thousands)
Workers’ compensation , beginning of year (including current portion)
$
11,626

 
$
10,378

Accretion
204

 
348

Claims paid
(475
)
 
(585
)
Actuarial changes
(1,825
)
 
1,485

Workers’ compensation, end of year
9,530

 
11,626

Less current portion
(820
)
 
(911
)
Workers’ compensation, less current portion
$
8,710

 
$
10,715

The discount rates used in determining the workers’ compensation benefit accruals are adjusted annually based on ten-

69

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

year Treasury bond rates. At December 31, 2012 and 2011, the rates were 2.0%.
Black Lung Benefits
The Company is self-insured for federal and state black lung benefits for former employees and has established an independent trust to pay these benefits.
The PPACA amended previous legislation related to black lung disease, providing automatic extension of awarded lifetime benefits to surviving spouses and providing changes to the legal criteria used to assess and award claims. Since the legislation passed in March 2010, the Company has experienced a significant increase in claims filed compared to the corresponding period in prior years. However, the Company has not been able to determine what, if any, additional impact may result from these claims due to lack of claims experience under the new legislation and court rulings interpreting the new provisions. The Company has not noted an increase in cash disbursements resulting from these new claims. The Company will continue to evaluate the impact of the PPACA in future periods as additional information, interpretations, guidance and claims experience becomes available.
The following table sets forth the funded status of the Company’s black lung obligation: 
 
December 31,
2012
 
2011
(In thousands)
Actuarial present value of benefit obligation:
 
 
 
Expected claims from terminated employees
$
1,139

 
$
1,038

Amounts owed to existing claimants
15,061

 
15,404

Total present value of benefit obligation
16,200

 
16,442

Plan assets at fair value, primarily government-backed securities
7,844

 
9,877

Excess of the black lung benefit obligation over trust assets
$
8,356

 
$
6,565

The discount rates used in determining the actuarial present value of the black lung benefit obligation are based on corporate bond yields and are adjusted annually. At December 31, 2012 and 2011, the rates used were 3.25% and 3.90%, respectively. 
Plan Assets
The fair value of the Company’s Black Lung trust assets by asset category is as follows: 
 
Year Ended December 31, 2012
 
 
 
Quoted Prices
in Active
Markets for
Identical Assets
 
Significant
Other
Observable
Inputs
 
Fair Value
 
Level 1
 
Level 2
 
(In thousands)
U.S. treasury securities
$
7,548

 
$

 
$
7,548

Mortgage-backed securities
269

 

 
269

Cash and cash equivalents
27

 
27

 

 
$
7,844

 
$
27

 
$
7,817

 

70

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

 
Year Ended December 31, 2011
 
 
 
Quoted Prices
in Active
Markets for
Identical Assets
 
Significant
Other
Observable
Inputs
 
Fair Value
 
Level 1
 
Level 2
 
(In thousands)
U.S. treasury securities
$
8,885

 
$

 
$
8,885

Mortgage-backed securities
555

 

 
555

Cash and cash equivalents
437

 
437

 

 
$
9,877

 
$
437

 
$
9,440

The Black Lung Level 1 trust assets include cash and cash equivalents.
The Black Lung Level 2 trust assets include U.S. treasury bonds and notes where evaluators gather information from market sources and integrate relative credit information, observed market movements, and sector news into the evaluated pricing applications and models to value these assets. Level 2 trust assets also include mortgage-backed securities which are valued via model using various inputs such as daily cash flow, snapshots of US Treasury market, floating rate indices as a benchmark yield, spread over index, periodic and life caps, next coupon adjustment date, and convertibility of the bond.
7.
PENSION AND OTHER SAVING PLANS
Defined Benefit Pension Plans
The Company provides defined benefit pension plans to qualified full-time employees pursuant to collective bargaining agreements. Benefits are generally based on years of service and the employee’s average annual compensation for the highest five continuous years of employment as specified in the plan agreement. The Company’s funding policy is to contribute annually the minimum amount prescribed, as specified by applicable regulations or loan covenants. The Company may make additional discretionary contributions. In 2009, the Company froze its pension plan for non-represented employees.
Supplemental Executive Retirement Plan
The Company maintains a Supplemental Executive Retirement Plan or SERP for former executives as a result of employment or severance agreements. The SERP is an unfunded non-qualified deferred compensation plan, which provides benefits to certain employees beyond the maximum limits imposed by the Employee Retirement Income Security Act and the Internal Revenue Code. The Company does not expect to add new participants to its SERP plan.
The following table provides a reconciliation of the changes in the benefit obligations of the plans and the fair value of assets of the qualified plans and the amounts recognized in the Company’s financial statements for both the defined benefit pension and SERP plans:

71

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

 
 
Defined Benefit Pension
December 31,
 
SERP
December 31,
 
2012
 
2011
 
2012
 
2011
 
(In thousands)
Change in benefit obligation:
 
 
 
 
 
 
 
Net benefit obligation at beginning of year
$
100,582

 
$
85,447

 
$
4,511

 
$
3,252

Liability acquired
57,307

 

 

 

Service cost
2,139

 
784

 

 

Interest cost
6,330

 
4,568

 
172

 
215

Actuarial loss
13,121

 
14,117

 
(48
)
 
1,438

Benefits paid
(7,190
)
 
(4,334
)
 
(394
)
 
(394
)
Net benefit obligation at end of year
172,289

 
100,582

 
4,241

 
4,511

Change in plan assets:
 
 
 
 
 
 
 
Fair value of plan assets at the beginning of year
75,710

 
67,933

 

 

Assets acquired
41,704

 

 

 

Actual return on plan assets
11,502

 
4,658

 

 

Employer contributions
161

 
7,453

 
394

 
394

Benefits paid
(7,190
)
 
(4,334
)
 
(394
)
 
(394
)
Fair value of plan assets at end of year
121,887

 
75,710

 

 

Funded status at end of year
$
(50,402
)
 
$
(24,872
)
 
$
(4,241
)
 
$
(4,511
)
Amounts recognized in the accompanying balance sheet consist of:
 
 
 
 
 
 
 
Current liability
$

 
$

 
$
(390
)
 
$
(391
)
Noncurrent liability
(50,401
)
 
(24,872
)
 
(3,850
)
 
(4,120
)
Accumulated other comprehensive loss
43,037

 
36,044

 
1,679

 
1,822

Net amount recognized at end of year
$
(7,364
)
 
$
11,172

 
$
(2,561
)
 
$
(2,689
)
Amounts recognized in accumulated other comprehensive loss consist of:
 
 
 
 
 
 
 
Net actuarial loss
$
43,037

 
$
36,044

 
$
1,679

 
$
1,822

 
$
43,037

 
$
36,044

 
$
1,679

 
$
1,822

The accumulated benefit obligation for all plans was $176.5 million and $105.1 million at December 31, 2012 and 2011, respectively. The Company’s pension and SERP liabilities increased $25.3 million in 2012 primarily due to the Kemmerer acquisition and from decreases in discount rates.
Prior service costs and actuarial gains and losses are amortized over the expected future period of service of the plan’s participants. The following amounts will be amortized from accumulated other comprehensive loss into net periodic benefit cost in 2013 (in millions): 
 
Pension
 
SERP
Net actuarial loss
3.3

 
0.1


72

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

The components of net periodic benefit cost are as follows: 
 
Defined Benefit Pension
Years Ended December 31,
 
SERP
Years Ended December 31,
 
2012
 
2011
 
2010
 
2012
 
2011
 
2010
 
(In thousands)
Components of net periodic benefit cost:
 
 
 
 
 
 
 
 
 
 
 
Service cost
$
2,139

 
$
784

 
$
610

 
$

 
$

 
$

Interest cost
6,330

 
4,568

 
4,490

 
172

 
215

 
183

Expected return on plan assets
(8,241
)
 
(5,218
)
 
(4,393
)
 

 

 

Curtailment loss

 

 

 

 

 

Amortization of:
 
 
 
 
 
 
 
 
 
 
 
Prior service cost

 

 

 

 
5

 
10

Actuarial loss
2,867

 
1,578

 
1,282

 
95

 
64

 
20

Total net periodic pension cost
$
3,095

 
$
1,712

 
$
1,989

 
$
267

 
$
284

 
$
213

These costs are included in the accompanying statement of operations in Cost of sales and Selling and administrative expenses.
Assumptions
The weighted-average assumptions used to determine the benefit obligations as of the end of each year were as follows: 
 
Defined Benefit Pension
December 31,
 
SERP
December 31,
 
2012
 
2011
 
2012
 
2011
Discount rate
3.35% - 3.75%
 
4.05% - 4.25%
 
3.75%
 
4.25%
Measurement date
December 31, 2012
 
December 31, 2011
 
December 31, 2012
 
December 31, 2011
The discount rate is adjusted annually based on an Aa corporate bond index adjusted for the difference in the duration of the bond index and the duration of the benefit obligations. This rate is calculated using a yield curve, which is developed using the average yield for bonds in the tenth to ninetieth percentiles, which excludes bonds with outlier yields.
The following table provides the assumptions used to determine net periodic benefit cost: 
 
Defined Benefit Pension
Years Ended December 31,
 
SERP
Years Ended December 31,
 
2012
 
2011
 
2010
 
2012
 
2011
 
2010
Discount rate
4.05% - 4.25%
 
5.15% - 5.40%
 
5.75%-6.00%
 
4.25%
 
5.40%
 
6.00%
Expected return on plan assets
7.40%
 
7.40%
 
7.80%
 
N/A
 
N/A
 
N/A
Rate of compensation increase
N/A
 
N/A
 
N/A
 
N/A
 
N/A
 
N/A
Measurement date
December 31, 2011
 
December 31,
2010
 
December 31,
2009
 
December 31, 2011
 
December 31,
2010
 
December 31,
2009
Plan Assets
The Company’s investment goals are to maximize returns subject to specific risk management policies. The Company sets the expected return on plan assets based on historical trends and forecasts provided by its third-party fund managers. Its risk management policies permit investments in mutual funds, and prohibit direct investments in debt and equity securities and derivative financial instruments. The Company invested in its common stock in 2011 and 2010 in order to meet plan funding requirements. The Company addresses diversification by the use of mutual fund investments whose underlying investments are in fixed income and equity securities, both domestic and international. These mutual funds are readily marketable and can be sold to fund benefit payment obligations as they become payable.

73

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

The weighted-average target asset allocation of the Company’s pension trusts were as follows at December 31, 2012: 
 
Target Allocation
Asset category

Cash and equivalents
0% - 10%
Equity securities funds
20% - 60%
Debt securities funds
40% - 80%
Other
0% - 10%
The fair value of the Company’s pension plan assets by asset category is as follows:
 
Year Ended December 31, 2012
 
 
 
Quoted
Prices in
Active
Markets for
Identical
Assets
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Pooled separate accounts:
 
 
 
 
 
 
 
Large-cap
$
50,589

 
$

 
$
50,589

 
$

International blend
10,294

 

 
10,294

 

Fixed income domestic
42,744

 

 
42,744

 

Stable Value
3,850

 


 
3,850

 


Registered investment companies – growth fund
10,295

 
10,295

 

 

Limited partnerships and limited liability companies
614

 

 

 
614

Westmoreland Coal common stock
3,500

 
3,500

 

 

Cash and cash equivalents
1

 
1

 

 

 
$
121,887

 
$
13,796

 
$
107,477

 
$
614


74

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

`
Year Ended December 31, 2011
 
 
 
Quoted
Prices in
Active
Markets for
Identical
Assets
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Pooled separate accounts:
 
 
 
 
 
 
 
Large-cap
$
21,804

 
$

 
$
21,804

 
$

Mid-cap
4,458

 

 
4,458

 

Small-cap
6,149

 

 
6,149

 

International blend
3,214

 

 
3,214

 

Short-term bond
1,514

 

 
1,514

 

Fixed income domestic
28,502

 

 
28,502

 

Registered investment companies – growth fund
3,347

 
3,347

 

 

Limited partnerships and limited liability companies
1,050

 

 

 
1,050

Westmoreland Coal common stock
5,670

 
5,670

 

 

Cash and cash equivalents
2

 
2

 

 

 
$
75,710

 
$
9,019

 
$
65,641

 
$
1,050

The Company’s Level 1 assets include securities held by registered investment companies and its common stock, which are both typically valued using quoted market prices of an active market. Cash and cash equivalents and short-term investments are predominantly held in money market accounts.
The Company’s Level 2 assets include pooled separate accounts, which are valued based on the quoted market prices of the securities underlying the investments.
The Company’s Level 3 assets include interest in limited partnerships and limited liability companies that invest in privately held companies or privately held real estate assets. These assets are valued by the respective partnership or company manager using market and income approaches. The market approach consists of using comparable market transactions or values. The income approach consists of the net present value of estimated future cash flows, adjusted as appropriate for liquidity, credit, market and other risk factors. The inputs considered in the valuations include original transaction prices, recent transactions in the same or similar instruments, changes in financial ratios or cash flows, discounted cash flow valuations, and general economic and market conditions.
A summary of changes in the fair value of the Plan’s Level 3 assets is shown below: 
 
Limited partnerships and limited
liability companies
 
Year Ended December 31,
 
2012
 
2011
 
(In thousands)
Beginning balance
$
1,050

 
$
1,359

Unrealized (loss) gain
96

 
(78
)
Settlements, net
(532
)
 
(231
)
Ending balance
$
614

 
$
1,050

Contributions
Previously, the Company was required by WML loan covenants 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 each of the plan’s year end actuarially determined pension liability.  On June 28, 2012, the loan covenant was amended to lower the requirement to 80%.
The Company contributed $0.2 million in cash to its retirement plans during 2012, in order to achieve the required

75

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

80% funding status. In 2013, the Company expects to make approximately $3.4 million of pension plan contributions.
Cash Flows
The following benefit payments are expected to be paid from its pension plan assets: 
 
Pension Benefits
 
(In thousands)
2013
$
6,473

2014
7,468

2015
7,859

2016
8,342

2017
9,084

Years 2018 - 2022
49,602

The benefits expected to be paid are based on the same assumptions used to measure the Company’s pension benefit obligation at December 31, 2012 and include estimated future employee service.
Multi-Employer Pension
The Company contributes to the Central Pension Fund, or the Plan, a multiemployer defined benefit pension plan for its WECO, WRI and WSC entities pursuant to collective bargaining agreements. The Plan’s Employer Identification Number is 36-6052390. These employers contribute to the Plan based on a negotiated rate per hour worked per participating employee. For the Plan’s year-end dates of January 31, 2011 and 2012, no single employer contributed more than 5% of total contributions to the Plan. As of the Plan’s year-end date January 31, 2012, it had a healthy or greater than 80% funding status.
The following table shows required information for each employer contributing to the Central Pension Fund:
 
 
WECO
 
WRI
 
WSC
Employer plan number
9313

 
9243

 
4990

Minimum contributions per hour worked
$
5.75

 
$
5.70

 
$2.95 - $3.20

Expiration date of collective bargaining agreements
2/28/2019

 
5/31/2015

 
4/1/2016

Employer contributions (in millions):
 
 
 
 
 
2012
$
3.2

 
$
0.5

 
$
0.1

2011
3.2

 
0.9

 
0.1

2010
3.5

 
0.9

 
0.1

Other Plans
The Company sponsors 401(k) saving plans, which were established to assist eligible employees provide for their future retirement needs. The Company’s expense, representing its contributions of Company stock to the plans, was $2.9 million, $2.7 million and $2.7 million for the years ended December 31, 2012, 2011 and 2010, respectively.



76

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

8.
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:
 
 
Years Ended December 31,
 
2012
 
2011
 
2010
 
(In thousands)
Health care benefits
$
11,367

 
$
9,507

 
$
9,927

Combined benefit fund payments
2,258

 
2,617

 
2,953

Workers’ compensation benefits (credit)
(1,322
)
 
2,132

 
81

Black lung benefits
1,085

 
4,319

 
1,460

Total
$
13,388

 
$
18,575

 
$
14,421

The decrease in heritage health benefit expenses was primarily due to favorable claims experience related to black lung and workers' compensation benefits.
9.
ASSET RETIREMENT OBLIGATIONS, CONTRACTUAL THIRD-PARTY RECLAMATION RECEIVABLE, AND RECLAMATION DEPOSITS
The asset retirement obligation, contractual third-party reclamation receivable, and reclamation deposits for each of the Company’s mines and ROVA at December 31, 2012 are summarized below: 
 
Asset
Retirement
Obligation
 
Contractual
Third-Party
Reclamation
Receivable
 
Reclamation
Deposits
 
(In thousands)
Rosebud
$
117,481

 
$
17,481

 
$
72,718

Jewett
76,501

 
76,501

 

Absaloka
25,813

 
383

 

Beulah
20,669

 

 

Kemmerer
17,768

 

 

Savage
4,786

 

 

ROVA
829

 

 

Total
$
263,847

 
$
94,365

 
$
72,718

Asset Retirement Obligations
Changes in the Company’s asset retirement obligations were as follows: 
 
Years Ended December 31,
 
2012
 
2011
 
(In thousands)
Asset retirement obligations, beginning of year (including current portion)
$
247,478

 
$
241,643

Accretion
21,909

 
20,156

Liabilities settled
(17,342
)
 
(14,646
)
Changes due to amount and timing of reclamation
(7,575
)
 
325

ARO acquired
19,377

 

Asset retirement obligations, end of year
263,847

 
247,478

Less current portion
(22,238
)
 
(19,765
)
Asset retirement obligations, less current portion
$
241,609

 
$
227,713

As permittee, the Company or its subsidiaries are responsible for the total amount of final reclamation costs for its

77

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

mines and ROVA. The financial responsibility for a portion of final reclamation of the mines when they are closed has been transferred by contract to certain customers, while other customers have provided guarantees or funded escrow accounts to cover final reclamation costs. Costs of reclamation of mining pits prior to mine closure are recovered in the price of coal shipped.
As of December 31, 2012, the Company had $316.5 million in surety bonds outstanding to secure reclamation obligations.
Contractual Third-Party Reclamation Receivables
The Company has recognized as an asset $94.4 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 December 31, 2012 are as follows: 
 
Carrying Value
 
Fair Value
 
(In thousands)
Cash and cash equivalents
$
37,558

 
$
37,558

Held-to-maturity securities
19,832

 
21,013

Time deposits
14,289

 
14,289

Available-for-sale securities
1,039

 
1,039

 
$
72,718

 
$
73,899

In 2011 and 2010, the Company recorded a gain of $0.1 million and $0.6 million, respectively on the sale of available-for-sale securities held as reclamation deposits.
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 are as follows: 
 
Years Ended December 31,
 
2012
 
2011
 
(In thousands)
Amortized cost
$
19,832

 
$
19,990

Gross unrealized holding gains
1,190

 
1,401

Gross unrealized holding losses
(9
)
 
(6
)
Fair value
$
21,013

 
$
21,385

Maturities of held-to-maturity securities are as follows at December 31, 2012: 
 
Amortized Cost
 
Fair Value
 
(In thousands)
Within one year
$
1,999

 
$
2,023

Due in five years or less
10,322

 
10,796

Due after five years to ten years
4,105

 
4,400

Due in more than ten years
3,406

 
3,794

 
$
19,832

 
$
21,013


78

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

The cost basis, gross unrealized holding gains and fair value of available-for-sale securities are as follows:
 
December 31,
 
2012
 
2011
 
(In thousands)
Cost basis
$
1,000

 
$
1,000

Gross unrealized holding gains
39

 
104

Fair value
$
1,039

 
$
1,104


79

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

10.
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.
Convertible Debt
As a part of the Parent Notes offering in February 2011, the Company’s convertible notes were retired.
The effect of derivative instruments not designated as hedging instruments on the accompanying consolidated statements of operations was as follows (in thousands): 
 
 
Statement of
Operations Location
 
Income (Expense) Recognized in
Earnings on Derivatives
 
 
Year Ended December 31,
Derivative Instruments
 
2012
 
2011
 
2010
Convertible debt -conversion feature
 
Other income (loss)
 

 
3,079

 
(3,486
)
Warrant
 
Other income (loss)
 

 

 
30

11.
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. The Company is required to disclose the fair value of financial instruments where practicable. The carrying amounts of cash equivalents, accounts receivable and accounts payable reflected on the consolidated balance sheet approximate the fair value of these instruments due to the short duration to their maturities. Long-term debt fair value estimates are based on observed prices for securities with an active trading market when available (Level 2) and otherwise using discount rate estimates based on interest rates as of December 31, 2012 (Level 3).
The estimated fair value of the Company’s debt with fixed interest rates are as follows: 
 
Carrying Value
 
Fair Value
 
(In thousands)
December 31, 2011
$
260,669

 
$
262,535

December 31, 2012
$
345,408

 
$
359,753

The table below sets forth, by level, the Company’s financial assets and liabilities that are accounted for at fair value on a recurring basis:
 
 
Year Ended December 31, 2012
Level 1
 
Level 2
 
Level 3
 
Total
(In thousands)
Assets:
 
 
 
 
 
 
 
Available-for-sale investments included in Restricted investments and bond collateral
$
191

 
$

 
$

 
$
191

Available-for-sale investments included in Reclamation deposits
1,039

 

 

 
1,039

Total assets
$
1,230

 
$

 
$

 
$
1,230

 

80

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

 
Year Ended December 31, 2011
Level 1
 
Level 2
 
Level 3
 
Total
(In thousands)
Assets:
 
 
 
 
 
 
 
Available-for-sale investments included in Restricted investments and bond collateral
$
1,787

 
$

 
$

 
$
1,787

Available-for-sale investments included in Reclamation deposits
1,104

 

 

 
1,104

Total assets
$
2,891

 
$

 
$

 
$
2,891

The following table summarizes the change in the fair values of the derivative instrument liabilities categorized as Level 3: 
 
Year Ended December 31,
 
2012
 
2011
 
(In thousands)
Beginning balance
$

 
$
3,588

Change in fair value

 
3,079

Settlements

 
(6,667
)
Ending balance
$

 
$

12.
RESTRICTED STOCK UNITS, STOCK OPTIONS, AND STOCK APPRECIATION RIGHTS (SARs)
As of December 31, 2012, the Company had restricted stock units, stock options, and stock-settled stock appreciation rights, or SARs, outstanding from three stock incentive plans. Two of these plans were terminated in October 2009. The Company grants employees and non-employee directors restricted stock units from the Amended and Restated 2007 Equity Incentive Stock Plan. The Amended and Restated 2007 Equity Incentive Stock Plan provides that non-employee directors will receive equity awards with a value of $70,000 after each annual meeting.
The maximum number of remaining shares that can be issued under the 2007 Incentive Stock Plan is 164,683.
Compensation cost arising from share-based arrangements is shown in the following table: 
 
Years Ended December 31,
 
2012
 
2011
 
2010
 
(In thousands)
Recognition of fair value of restricted stock units, stock options and SARs over vesting period; and issuance of stock
$
3,088

 
$
1,969

 
$
1,058

Contributions of stock to the Company’s 401(k) plan
2,952

 
2,752

 
2,991

Total share-based compensation expense
$
6,040

 
$
4,721

 
$
4,049

Restricted Stock Units
The Company may issue restricted stock units, which requires no payment from the employee. Restricted stock units typically vest ratably over three years. Upon vesting, the Company can elect to settle the restricted stock units in either cash or the Company’s common stock. Compensation expense is based on the fair value on the grant date and is recorded ratably over the vesting period.
In June 2012, the Company granted 453,336 restricted stock units, of which 226,680 units will vest ratably over a three-year period. The remaining 226,656 units are performance based, which will vest and pay out at the end of a three-year period if performance goals are met. The Company’s management believes it is probable that the target performance condition will be met.
A summary of restricted stock award activity for the year ended December 31, 2012 is as follows: 

81

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

 
Units
 
Weighted Average
Grant-Date Fair
Value
 
Unamortized
Compensation
Expense
(In thousands)
 
Non-vested at December 31, 2011
302,033

 
$
12.46

 
 
 
Granted
506,121

 
$
7.57

 
 
 
Vested
(117,159
)
 
$
11.31

 
 
 
Forfeited
(10,822
)
 
$
12.88

 
 
 
Non-vested at December 31, 2012
680,173

 
$
8.88

 
$
4,101

(1) 
 
(1)
Expected to be recognized over the next three years.
Additional information related to restricted stock units: 
Years Ended December 31:
Weighted
Average
Grant-Date
Fair Value
 
Total
Grant- Date
Fair Value of
Restricted Stock
Units that Vested
(In thousands)
2012
$
7.57

 
$
1,336

2011
$
14.99

 
$
1,757

2010
$
8.31

 
$
421

Stock Options
Stock options generally vest over three years, expire ten years from the date of grant, and have an option price equal to the market value of the stock on the date of grant.
Information with respect to stock option activity for the year ended December 31, 2012, is as follows:
 
Stock Options
 
Weighted
Average
Exercise Price
 
Weighted
Average
Remaining
Contractual
Life
(in years)
 
Aggregate
Intrinsic
Value
(In  thousands)
 
Unamortized
Compensation
Expense
(In thousands)
Outstanding at December 31, 2011
220,423

 
$
20.53

 
 
 
 
 
 
Expired
(27,300
)
 
$
15.92

 
 
 
 
 
 
Outstanding and exercisable at December 31, 2012
193,123

 
$
21.18

 
4.5
 
$

 
$

Additional information related to stock options: 
Years Ended December 31:
Intrinsic Value of
Stock Options
Exercised
 
Total Grant-Date
Fair Value of Stock
Options that Vested
 
(In thousands)
2012
$

 
$

2011
$
86

 
$
538

2010
$
17

 
$
121

There were no stock options granted during 2012, 2011 or 2010.
SARs
SARs generally vest over three years, expire ten years from the date of grant, and have a base price equal to the market value of the stock on the date of grant. Upon vesting, the holders may exercise the SARs and receive a number of shares of common stock having a value equal to the appreciation in the value of the common stock between the grant date and the exercise date.
Information with respect to SARs granted and outstanding for the year ended December 31, 2012 is as follows:

82

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

 
SARs
 
Weighted
Average Base
Price
 
Weighted
Average
Remaining
Contractual
Life
(in years)
 
Aggregate
Intrinsic
Value
(In  thousands)
 
Unamortized
Compensation
Expense
(In thousands)
Outstanding at December 31, 2011
111,734

 
$
22.20

 
 
 
 
 
 
Expired
(6,700
)
 
$
21.49

 
 
 
 
 
 
Outstanding and exercisable at December 31, 2012
105,034

 
$
22.24

 
2.7
 
$

 
$

There were no SARs granted or exercised during 2012, 2011, or 2010.
The total grant-date fair value of SARs that vested was less than $0.1 million in both 2011 and 2010. No SARs vested during 2012.
13.
STOCKHOLDERS’ EQUITY AND ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Preferred and Common Stock
The Company has two classes of capital stock outstanding, common stock, par value $2.50 per share, and Series A Convertible Exchangeable Preferred Stock on which cumulative dividends of $2.125 per share are payable quarterly. Each share of Series A Preferred Stock is represented by four Depositary Shares. Under the terms of the Series A Preferred Stock, the Company can redeem preferred shares at any time for the redemption value of $100.00 plus any accumulated dividends paid in cash. In February 2011, the Company paid $19.9 million of accumulated preferred stock dividends as of January 1, 2011. The Company is permitted to pay preferred stock dividends to the extent there is a surplus, defined by Delaware law. In June 2011, approximately 169 shares of preferred stock were converted into 1,152 shares of common stock. 
Accumulated Other Comprehensive Income (Loss)
The following is a summary of accumulated other comprehensive income (loss):
 
Pension and
Postretirement
Medical Benefits
 
Available for
Sale
Securities
 
Tax Effect of
Other
Comprehensive
Income Gains
 
Accumulated
Other
Comprehensive
Loss
 
(In thousands)
Balance at January 1, 2010
$
(6,031
)
 
$
964

 
$
(26,156
)
 
$
(31,223
)
2010 activity
(26,018
)
 
(439
)
 

 
(26,457
)
Balance at December 31, 2010
(32,049
)
 
525

 
(26,156
)
 
(57,680
)
2011 activity
(63,575
)
 
(200
)
 

 
(63,775
)
Balance at December 31, 2011
(95,624
)
 
325

 
(26,156
)
 
(121,455
)
2012 activity
(26,622
)
 
(268
)
 

 
(26,890
)
Balance at December 31, 2012
$
(122,246
)
 
$
57

 
$
(26,156
)
 
$
(148,345
)
Pension and postretirement medical benefit adjustments relate to changes in the funded status of various benefit plans. The unrealized gains and losses associated with recognizing the Company’s “available-for-sale” securities at fair value are recorded through Accumulated other comprehensive loss.
14.
INCOME TAX
Income tax expense (benefit) attributable to net loss before income taxes consists of: 

83


 
Year Ended December 31,
 
2012
 
2011
 
2010
 
(In thousands)
Current:
 
 
 
 
 
Federal
$
(8
)
 
$
(174
)
 
$
(10
)
State
98

 
168

 
(14
)
 
90

 
(6
)
 
(24
)
Deferred:
 
 
 
 
 
Federal

 

 

State

 
(420
)
 
(117
)
 

 
(420
)
 
(117
)
Income tax benefit
$
90

 
$
(426
)
 
$
(141
)
Income tax benefit attributable to net loss before income taxes differed from the amounts computed by applying the statutory Federal income tax rate of 34% to pre-tax income as a result of the following: 
 
Year Ended December 31,
 
2012
 
2011
 
2010
 
(In thousands)
Computed tax benefit at statutory rate
$
(4,615
)
 
$
(12,683
)
 
$
(1,126
)
Increase (decrease) in tax expense resulting from:
 
 
 
 
 
Tax depletion in excess of basis
(4,782
)
 
(3,820
)
 
(4,019
)
Non-deductible interest expense and convertible debt valuation

 
3,717

 
2,076

Noncontrolling interest
2,188

 
1,283

 
899

State income taxes, net
(3,427
)
 
(4,548
)
 
(1,090
)
Change in valuation allowance for net deferred tax assets
8,571

 
2,923

 
(3,331
)
Medicare Part D subsidy law change

 

 
7,159

Indian Coal Tax Credits
83

 
(122
)
 
(120
)
Federal and state NOL expiration
153

 
11,226

 
19

Other, net
1,919

 
1,598

 
(608
)
Income tax benefit
$
90

 
$
(426
)
 
$
(141
)
The PPACA reduces the tax benefits available to an employer that receives the Medicare Part D subsidy beginning in years ending after December 31, 2010. As a result of the PPACA, employers that receive the Medicare Part D subsidy will recognize the deferred tax effects of the reduced deductibility of the postretirement prescription drug coverage in the period the PPACA was enacted. On March 30, 2010, a companion bill, the Reconciliation Act, was signed into law. The Reconciliation Act reduces the effect of the PPACA on affected employers by deferring for two years (until years ending after December 31, 2012) the reduced deductibility of the postretirement prescription drug coverage. Accounting for income taxes requires that the effect of adjusting the deferred tax asset for the elimination of this deduction be included in income from continuing operations. However, entities that have a full valuation allowance for this deferred tax asset would recognize a related decrease in the valuation allowance. As the Company has a full valuation allowance against its related deferred tax asset, this change in tax law regarding the Medicare Part D subsidy will not have an effect on the Company’s income from continuing operations. In 2010, the effect of this change in tax law was a reduction of $7.2 million of the Company’s deferred tax assets with a corresponding decrease in its valuation allowance. In addition, this change in the tax deduction did not affect the pre-tax expense or corresponding liability for postretirement prescription drug benefits.

84


The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below:
 
December 31,
 
2012
 
2011
 
(In thousands)
Deferred tax assets:
 
 
 
Federal net operating loss carryforwards
$
84,330

 
$
78,103

State net operating loss carryforwards
28,700

 
25,209

Alternative minimum tax credit carryforwards
6,973

 
6,847

Charitable contribution carryforwards
132

 
156

Indian Coal Tax Credit carryforwards
25,591

 
25,675

Accruals for the following:
 
 
 
Workers’ compensation
3,592

 
4,450

Postretirement medical benefit and pension obligations
138,710

 
101,864

Incentive plans
1,995

 
1,565

Asset retirement obligations
77,698

 
70,298

Deferred revenues
22,500

 
26,053

Gain on sale of partnership interest

 
3,165

Other accruals
9,418

 
7,292

Total gross deferred assets
399,639

 
350,677

Less valuation allowance
(293,504
)
 
(274,681
)
Net deferred tax assets
106,135

 
75,996

Deferred tax liabilities:
 
 
 
Property, plant and equipment, differences due to depreciation and amortization
(104,992
)
 
(74,419
)
Change in accounting method

 
(177
)
Other
(1,143
)
 
(1,400
)
Total gross deferred tax liabilities
(106,135
)
 
(75,996
)
Net deferred tax asset
$

 
$

As of December 31, 2012, the Company had significant deferred tax assets. The deferred tax assets include federal and state regular net operating losses (NOLs), alternative minimum tax (AMT), credit carryforwards, Indian Coal Tax Credit (ICTC) carryforwards, charitable contribution carryforwards, and net deductible reversing temporary differences related to on-going differences between book and taxable income.
The Company believes it will be taxed under the AMT system for the foreseeable future due to the significant amount of statutory tax depletion in excess of book depletion expected to be generated by its mining operations. As a result, Westmoreland has determined that a valuation allowance is required for all of its regular federal net operating loss carryforwards and AMT credit carryforwards since they are only available to offset future regular taxes.
The Company has recorded a full valuation allowance for all of its state net operating losses since it believes they will not be realized.
The Company has determined that a full valuation allowance is required for all its ICTC carryforward. The ICTC can generally be used to offset AMT liability. The Company does not believe it has sufficient positive evidence of significant magnitude to substantiate that its deferred tax asset for the ICTC carryforward is realizable at a more-likely-than-not level of assurance. As a result, the Company will continue to record a full valuation allowance on its ICTC carryforward.
The Company has determined that since its net deductible temporary differences will not reverse for the foreseeable future, and it is unable to forecast when it will have regular taxable income when they do reverse, a full valuation allowance is required for these deferred tax assets, other than the deferred tax asset relating to the Company’s uncertain tax positions.
As of December 31, 2012, the Company has available Federal net operating loss carryforwards to reduce future regular

85


taxable income, which expire as follows:
Expiration Date
 
Regular Tax
 
 
(In thousands)
2018
 
28

2019
 
88,429

2020
 
32

2021
 
20

after 2022
 
160,078

Total
 
$
248,587

As of December 31, 2012, the Company has an estimated $25.6 million in ICTC carryforwards available to offset the Company’s regular tax and AMT liabilities. As of December 31, 2012, the Company also has an estimated $637.0 million in State net operating loss carryforwards to reduce future taxable income. A portion of our deferred tax assets include NOL benefits that if realized would result in an increase to Other paid-in capital.
For the year ended December 31, 2012, Westmoreland had no long-term liability related to uncertain tax positions. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: 
 
Year Ended December 31,
 
2012
 
2011
 
(In thousands)
Balance of unrecognized tax benefits at beginning of year
$

 
$
2,879

Additions for tax positions related to current year

 
40

Settlements

 
(2,919
)
Balance of unrecognized tax benefits at end of year
$

 
$

The Company files tax returns in the U.S. federal jurisdiction and in various U.S. state jurisdictions, and is subject to examination by taxing authorities in all of these jurisdictions. From time to time, the Company’s tax returns are reviewed or audited by various U.S. state taxing authorities. The Company believes that adjustments, if any, resulting from these reviews or audits would not be material, individually or in the aggregate, to the Company’s financial position, results of operations or liquidity. It is reasonably possible that the amount of unrecognized tax benefits related to certain of the Company’s tax positions will increase or decrease in the next twelve months as audits or reviews are initiated and settled. At this time, an estimate of the range of a reasonably possible change cannot be made. With few exceptions, the Company is not subject to income tax examinations by U.S. federal or state jurisdictions for fiscal years prior to 2009.

86

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

15.
COMMITMENTS AND CONTINGENCIES
Supply Agreements
Westmoreland Partners, which owns ROVA, has two coal supply agreements with TECO Coal Corporation, or TECO that includes minimum purchase requirements. At the current pricing, Westmoreland Partners is obligated to pay TECO $29.5 million in 2013, $17.6 million for 2014 and $2.9 million for 2015.
Leases
The following shows the gross value and accumulated amortization of property, plant and equipment and mine development assets under capital leases related primarily to the leasing of mining equipment: 
 
2012
 
2011
 
(In thousands)
Gross value
$
34,677

 
$
37,984

Accumulated amortization
15,887

 
15,436

Future minimum capital and operating lease payments as of December 31, 2012, are as follows: 
 
Year Ended December 31, 2012
 
Capital
Leases
 
Operating
Leases
 
(In thousands)
2013
$
7,721

 
$
6,426

2014
5,727

 
5,006

2015
1,438

 
3,278

2016
263

 
1,274

2017

 
249

Thereafter

 
2

Total minimum lease payments
$
15,149

 
$
16,235

Less imputed interest
(1,223
)
 
 
Present value of minimum capital lease payments
$
13,926

 
 
Rental expense under operating leases during the years ended December 31, 2012, 2011 and 2010 totaled $9.5 million, $7.7 million and $6.0 million, respectively.
The Company leases certain of its coal reserves from third parties and pays royalties based on either a per ton rate or as a percentage of revenues received. Royalties charged to expense under all such lease agreements amounted to $40.1 million, $38.8 million and $41.3 million in the years ended December 31, 2012, 2011 and 2010, respectively.
Contingencies
The Company is a party to numerous 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.
16. BUSINESS SEGMENT INFORMATION
Segment information is based on a management approach, which requires segmentation based upon the Company’s internal organization, reporting of revenue, and operating income.
The Company’s operations are classified into four reporting segments: coal, power, heritage and corporate. The coal reporting segment includes the aggregated operations of coal mines located in Wyoming, Montana, North Dakota and Texas. The power segment includes its ROVA operations located in North Carolina. The heritage segment costs primarily include benefits the Company provides to former mining operation employees as well as other administrative costs associated with providing those benefits and cost containment efforts. The corporate segment primarily consists of corporate administrative expenses.

87

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

Summarized financial information by segment is as follows:
 
 
Coal
 
Power
 
Heritage
 
Corporate
 
Consolidated
 
(In thousands)
December 31, 2012
 
 
 
 
 
 
 
 
 
Revenues
$
519,152

 
$
81,285

 
$

 
$

 
$
600,437

Operating income (loss)
48,235

 
8,244

 
(14,711
)
 
(12,896
)
 
28,872

Depreciation, depletion, and amortization
46,639

 
10,085

 

 
421

 
57,145

Total assets
703,315

 
189,599

 
15,508

 
27,693

 
936,115

Capital expenditures
18,804

 
2,070

 

 
158

 
21,032

December 31, 2011
 
 
 
 
 
 
 
 
 
Revenues
$
414,928

 
$
86,785

 
$

 
$

 
$
501,713

Operating income (loss)
27,453

 
12,119

 
(19,675
)
 
(9,271
)
 
10,626

Depreciation, depletion, and amortization
35,112

 
10,176

 

 
306

 
45,594

Total assets
510,507

 
194,730

 
13,769

 
40,166

 
759,172

Capital expenditures
24,678

 
2,119

 

 
797

 
27,594

December 31, 2010
 
 
 
 
 
 
 
 
 
Revenues
$
418,058

 
$
87,999

 
$

 
$

 
$
506,057

Operating income (loss)
32,922

 
11,721

 
(15,968
)
 
(8,154
)
 
20,521

Depreciation, depletion, and amortization
34,168

 
10,131

 

 
391

 
44,690

Total assets
520,722

 
207,643

 
12,283

 
9,658

 
750,306

Capital expenditures
20,056

 
2,207

 

 
551

 
22,814

A reconciliation of segment income (loss) from operations to loss before income taxes follows: 
 
Year Ended
 
2012
 
2011
 
2010
 
(In thousands)
Income (loss) from operations
$
28,872

 
$
10,626

 
$
20,521

Loss on extinguishment of debt
(1,986
)
 
(17,030
)
 

Interest expense
(42,677
)
 
(29,769
)
 
(22,992
)
Interest income
1,496

 
1,444

 
1,747

Other income (loss)
723

 
(2,572
)
 
(2,587
)
Loss before income taxes
$
(13,572
)
 
$
(37,301
)
 
$
(3,311
)
The Company derives its revenues from a few key customers. The customers from which more than 10% of total revenue has been derived and the percentage of total revenue from those customers is summarized as follows: 
 
2012
 
2011
 
2010
 
(In thousands)
Customer A – coal
$
126,982

 
$
120,243

 
$
119,633

Customer B – coal (1)
96,718

 

 

Customer C – coal
81,981

 
81,353

 
80,493

Customer D – power
80,109

 
85,639

 
86,926

Customer E – coal
66,128

 
65,224

 
64,968

Customer F – coal (2)
26,525

 
52,835

 
47,286

Percentage of total revenue
80
%
 
81
%
 
79
%
 
(1)
The revenue from Customer B did not exceed 10% in 2011 or 2010.
(2)
The revenue from Customer F did not exceed 10% in 2012 or 2010.

88

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

17. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data is as follows: 
 
Three Months Ended
 
March 31
 
June 30
 
September 30
 
December 31
 
(In thousands; except per share data)
2012:
 
 
 
 
 
 
 
Revenues
$
147,236

 
$
132,842

 
$
161,332

 
$
159,027

Operating income (loss)
9,086

 
(4,262
)
 
15,451

 
8,597

Net income (loss) applicable to common shareholders
518

 
(12,423
)
 
7,282

 
(3,963
)
Basic income (loss) per common share
$
0.04

 
$
(0.89
)
 
$
0.52

 
$
(0.28
)
2011:
 
 
 
 
 
 
 
Revenues
$
127,764

 
$
112,140

 
$
132,449

 
$
129,360

Operating income (loss)
7,440

 
(1,000
)
 
8,571

 
(4,385
)
Net income (loss) applicable to common shareholders
(17,951
)
 
(7,747
)
 
2,389

 
(11,151
)
Basic income (loss) per common share
$
(1.45
)
 
$
(0.59
)
 
$
0.18

 
$
(0.81
)
During the second quarter of 2012, the Company revised its preliminary allocation of the Kemmerer Mine purchase price for $2.2 million of deferred revenue. Adjustments to preliminary fair values are assumed to have been made as of the acquisition date. As a result, additional revenue of approximately $1.3 million was subsequently recorded in the first quarter of 2012, compared to what was originally reported in the Form 10-Q for the three months ended March 31, 2012. The information above for the three months ended March 31, 2012 reflects this additional revenue.
18. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION
Pursuant to the indenture governing the 10.75% Senior Notes, certain 100% owned subsidiaries of the Company have fully and unconditionally guaranteed the notes on a joint and several basis.

Guarantees of the Senior Notes will be released under certain circumstances, including:

(1)
in the event of a sale or other disposition of all or substantially all of the assets of such Guarantor Subsidiary, by way of merger, consolidation or otherwise, a sale or other disposition of all of the Equity Interests of such Guarantor Subsidiary then held by the Issuers or any Restricted Subsidiary; provided, that the sale or other disposition does not violate the “Asset Sales” provisions of the Indenture;
(2)
if such Guarantor Subsidiary is designated as an Unrestricted Subsidiary in accordance with the provisions of this Indenture, upon effectiveness of such designation;
(3)
upon Legal Defeasance or Covenant Defeasance (as such terms are defined in the indenture) or upon satisfaction and discharge of the Indenture;
(4)
upon the liquidation or dissolution of such Guarantor Subsidiary, provided no event of default has occurred and is continuing; or
(5)
at such time as such Guarantor Subsidiary is no longer required to be a Guarantor Subsidiary of the Senior Notes as described in the Indenture, provided no event of default has occurred and is continuing.
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 that are not guarantors under the notes:
 

89

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

CONSOLIDATING BALANCE SHEETS
December 31, 2012
(In thousands)
 
Assets
 
Parent/
Issuer
 
Co-Issuer
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Total
Current assets:
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
14,836

 
$
4,545

 
$
5,362

 
$
6,867

 
$

 
$
31,610

Receivables:
 
 
 
 
 
 
 
 
 
 
 
 
Trade
 

 
13,018

 
13,428

 
33,591

 

 
60,037

Contractual third-party reclamation receivables
 

 

 
56

 
10,151

 

 
10,207

Intercompany receivable/payable
 
(8,002
)
 

 
5,667

 
(30,641
)
 
32,976

 

Other
 
77

 

 
16,806

 
1,182

 
(14,845
)
 
3,220

 
 
(7,925
)
 
13,018

 
35,957

 
14,283

 
18,131

 
73,464

Inventories
 

 
3,047

 
16,538

 
18,149

 

 
37,734

Other current assets
 
739

 
298

 
5,550

 
9,917

 

 
16,504

Total current assets
 
7,650

 
20,908

 
63,407

 
49,216

 
18,131

 
159,312

Property, plant and equipment:
 
 
 
 
 
 
 
 
 
 
 
 
Land and mineral rights
 

 
1,395

 
91,741

 
168,605

 

 
261,741

Plant and equipment
 
3,198

 
219,857

 
215,751

 
196,914

 

 
635,720

 
 
3,198

 
221,252

 
307,492

 
365,519

 

 
897,461

Less accumulated depreciation, depletion and amortization
 
2,364

 
61,474

 
108,151

 
212,632

 

 
384,621

Net property, plant and equipment
 
834

 
159,778

 
199,341

 
152,887

 

 
512,840

Advanced coal royalties
 

 

 
500

 
3,816

 

 
4,316

Reclamation deposits
 

 

 

 
72,718

 

 
72,718

Restricted investments and bond collateral
 
15,183

 
5,990

 
39,208

 
26,828

 

 
87,209

Contractual third-party reclamation receivables
 

 

 
327

 
83,831

 

 
84,158

Intangible assets
 

 
2,923

 

 
280

 

 
3,203

Investment in subsidiaries
 
248,565

 

 
(792
)
 
3,770

 
(251,543
)
 

Other assets
 
10,267

 

 
635

 
3,457

 
(2,000
)
 
12,359

Total assets
 
$
282,499

 
$
189,599

 
$
302,626

 
$
396,803

 
$
(235,412
)
 
$
936,115


90

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

CONSOLIDATING BALANCE SHEETS
December 31, 2012
(In thousands)
 
Liabilities and Shareholders’ Deficit
 
Parent/
Issuer
 
Co-Issuer
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Total
Current liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Current installments of long-term debt
 
$
(1,548
)
 
$

 
$
1,939

 
$
23,400

 
$

 
$
23,791

Accounts payable and accrued expenses:
 
 
 
 
 
 
 
 
 
 
 
 
Trade
 
4,707

 
4,978

 
15,163

 
42,085

 
(14,840
)
 
52,093

Production taxes
 

 
3

 
10,014

 
23,211

 

 
33,228

Workers’ compensation
 
820

 

 

 

 

 
820

Postretirement medical benefits
 
12,494

 

 
87

 
1,487

 

 
14,068

SERP
 
390

 

 

 

 

 
390

Deferred revenue
 

 
8,788

 
2,997

 
1,037

 

 
12,822

Asset retirement obligations
 

 

 
3,519

 
18,719

 

 
22,238

Other current liabilities
 
11,312

 

 
10

 
144

 
(4
)
 
11,462

Total current liabilities
 
28,175

 
13,769

 
33,729

 
110,083

 
(14,844
)
 
170,912

Long-term debt, less current installments
 
245,456

 

 
2,473

 
91,269

 
(2,000
)
 
337,198

Workers’ compensation, less current portion
 
8,710

 

 

 

 

 
8,710

Excess of black lung benefit obligation over trust assets
 
8,356

 

 

 

 

 
8,356

Postretirement medical benefits, less current portion
 
224,336

 

 
55,981

 
39,458

 

 
319,775

Pension and SERP obligations, less current portion
 
29,265

 
289

 
19,346

 
5,350

 

 
54,250

Deferred revenue, less current portion
 

 
50,239

 

 
6,652

 

 
56,891

Asset retirement obligations, less current portion
 

 
829

 
40,063

 
200,717

 

 
241,609

Intangible liabilities
 

 
6,625

 

 

 

 
6,625

Other liabilities
 
701

 

 
15,677

 
1,642

 

 
18,020

Intercompany receivable/payable
 
23,731

 

 
(7,972
)
 
35,787

 
(51,546
)
 

Total liabilities
 
568,730

 
71,751

 
159,297

 
490,958

 
(68,390
)
 
1,222,346

Shareholders’ deficit
 
 
 
 
 
 
 
 
 
 
 
 
Preferred stock
 
160

 

 

 

 

 
160

Common stock
 
35,502

 
5

 
110

 
132

 
(247
)
 
35,502

Other paid-in capital
 
130,852

 
52,807

 
93,456

 
62,539

 
(208,802
)
 
130,852

Accumulated other comprehensive loss
 
(148,345
)
 
(372
)
 
(4,987
)
 
(24,492
)
 
29,851

 
(148,345
)
Accumulated earnings (deficit)
 
(289,727
)
 
65,408

 
54,750

 
(132,334
)
 
12,176

 
(289,727
)
Total Westmoreland Coal Company shareholders’ deficit
 
(271,558
)
 
117,848

 
143,329

 
(94,155
)
 
(167,022
)
 
(271,558
)
Noncontrolling interest
 
(14,673
)
 

 

 

 

 
(14,673
)
Total equity (deficit)
 
(286,231
)
 
117,848

 
143,329

 
(94,155
)
 
(167,022
)
 
(286,231
)
Total liabilities and shareholders’ deficit
 
$
282,499

 
$
189,599

 
$
302,626

 
$
396,803

 
$
(235,412
)
 
$
936,115


91

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

CONSOLIDATING BALANCE SHEETS
December 31, 2011
(In thousands)
 
Assets
 
Parent/
Issuer
 
Co-Issuer
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Total
Current assets:
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
26,141

 
$
6

 
$
143

 
$
4,493

 
$

 
$
30,783

Receivables:
 
 
 
 
 
 
 
 
 
 
 
 
Trade
 

 
12,651

 
68

 
33,516

 

 
46,235

Contractual third-party reclamation receivables
 

 

 
56

 
11,203

 

 
11,259

Intercompany receivable/payable
 
(20,756
)
 

 
9,657

 
(22,308
)
 
33,407

 

Other
 
224

 
216

 
9,256

 
2,212

 
(8,415
)
 
3,493

 
 
(20,532
)
 
12,867

 
19,037

 
24,623

 
24,992

 
60,987

Inventories
 

 
3,756

 
4,490

 
17,450

 

 
25,696

Other current assets
 
668

 
179

 
1,000

 
3,140

 

 
4,987

Total current assets
 
6,277

 
16,808

 
24,670

 
49,706

 
24,992

 
122,453

Property, plant and equipment:
 
 
 
 
 
 
 
 
 
 
 
 
Land and mineral rights
 

 
1,395

 
29,394

 
167,412

 

 
198,201

Plant and equipment
 
3,249

 
217,846

 
117,836

 
188,196

 

 
527,127

 
 
3,249

 
219,241

 
147,230

 
355,608

 

 
725,328

Less accumulated depreciation, depletion and amortization
 
(2,140
)
 
(51,864
)
 
(88,762
)
 
(185,830
)
 

 
(328,596
)
Net property, plant and equipment
 
1,109

 
167,377

 
58,468

 
169,778

 

 
396,732

Advanced coal royalties
 

 

 

 
2,552

 

 
2,552

Reclamation deposits
 

 

 

 
71,939

 

 
71,939

Restricted investments and bond collateral
 
13,532

 
5,983

 
13,592

 
25,198

 

 
58,305

Contractual third-party reclamation receivables
 

 

 
169

 
87,505

 

 
87,674

Intangible assets
 

 
4,563

 

 
316

 

 
4,879

Investment in subsidiaries
 
161,371

 

 
(792
)
 
3,770

 
(164,349
)
 

Other assets
 
11,085

 

 
1,078

 
2,475

 

 
14,638

Total assets
 
$
193,374

 
$
194,731

 
$
97,185

 
$
413,239

 
$
(139,357
)
 
$
759,172


92

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

CONSOLIDATING BALANCE SHEETS
December 31, 2011
(In thousands)
 
Liabilities and Shareholders’ Deficit
 
Parent/
Issuer
 
Co-Issuer
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Total
Current liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Current installments of long-term debt
 
$
1,125

 
$

 
$
2,409

 
$
19,208

 
$
(1,947
)
 
$
20,795

Accounts payable and accrued expenses:
 
 
 
 
 
 
 
 
 
 
 
 
Trade
 
4,286

 
8,183

 
4,069

 
35,377

 
(6,589
)
 
45,326

Production taxes
 

 
3

 
980

 
24,622

 

 
25,605

Workers’ compensation
 
911

 

 

 

 

 
911

Postretirement medical benefits
 
11,796

 

 

 
1,383

 

 
13,179

SERP
 
391

 

 

 

 

 
391

Deferred revenue
 

 
8,800

 

 
1,052

 

 
9,852

Asset retirement obligations
 

 

 
1,384

 
18,381

 

 
19,765

Other current liabilities
 
6,752

 
259

 
1,276

 
44

 
(33
)
 
8,298

Total current liabilities
 
25,261

 
17,245

 
10,118

 
100,067

 
(8,569
)
 
144,122

Long-term debt, less current installments
 
143,991

 

 
3,152

 
114,331

 

 
261,474

Workers’ compensation, less current portion
 
10,715

 

 

 

 

 
10,715

Excess of black lung benefit obligation over trust assets
 
6,565

 

 

 

 

 
6,565

Postretirement medical benefits, less current portion
 
207,650

 

 

 
37,812

 

 
245,462

Pension and SERP obligations, less current portion
 
25,555

 
245

 

 
3,191

 

 
28,991

Deferred revenue, less current portion
 

 
58,539

 

 
7,295

 

 
65,834

Asset retirement obligations, less current portion
 

 
770

 
23,373

 
203,570

 

 
227,713

Intangible liabilities
 

 
7,644

 

 

 

 
7,644

Other liabilities
 
976

 

 
7,901

 
1,633

 

 
10,510

Intercompany receivable/payable
 
22,519

 

 
(10
)
 
29,202

 
(51,711
)
 

Total liabilities
 
443,232

 
84,443

 
44,534

 
497,101

 
(60,280
)
 
1,009,030

Shareholders’ deficit
 
 
 
 
 
 
 
 
 
 
 
 
Preferred stock
 
160

 

 

 

 

 
160

Common stock
 
34,527

 
5

 
110

 
132

 
(247
)
 
34,527

Other paid-in capital
 
126,288

 
52,775

 
16,373

 
59,893

 
(129,041
)
 
126,288

Accumulated other comprehensive loss
 
(121,455
)
 
(343
)
 
15

 
(23,168
)
 
23,496

 
(121,455
)
Accumulated earnings (deficit)
 
(281,141
)
 
57,851

 
36,153

 
(120,719
)
 
26,715

 
(281,141
)
Total Westmoreland Coal Company shareholders’ deficit
 
(241,621
)
 
110,288

 
52,651

 
(83,862
)
 
(79,077
)
 
(241,621
)
Noncontrolling interest
 
(8,237
)
 

 

 

 

 
(8,237
)
Total equity (deficit)
 
(249,858
)
 
110,288

 
52,651

 
(83,862
)
 
(79,077
)
 
(249,858
)
Total liabilities and shareholders’ deficit
 
$
193,374

 
$
194,731

 
$
97,185

 
$
413,239

 
$
(139,357
)
 
$
759,172


93

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

CONSOLIDATING STATEMENTS OF OPERATIONS
Year Ended December 31, 2012
(In thousands)
 
 
Parent/
Issuer
 
Co-Issuer
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Total
Revenues
$

 
$
81,285

 
$
184,506

 
$
366,105

 
$
(31,459
)
 
$
600,437

Costs and expenses:
 
 
 
 
 
 
 
 
 
 
 
Cost of sales

 
59,299

 
134,683

 
303,998

 
(31,459
)
 
466,521

Depreciation, depletion and amortization
421

 
10,085

 
19,571

 
27,068

 

 
57,145

Selling and administrative
13,748

 
3,657

 
9,993

 
24,037

 
(1,527
)
 
49,908

Heritage health benefit expenses
12,406

 

 

 
982

 

 
13,388

Loss on sales of assets
13

 

 
251

 
264

 

 
528

Other operating income (loss)

 

 
(17,452
)
 

 
1,527

 
(15,925
)
 
26,588

 
73,041

 
147,046

 
356,349

 
(31,459
)
 
571,565

Operating income (loss)
(26,588
)
 
8,244

 
37,460

 
9,756

 

 
28,872

Other income (expense):
 
 
 
 
 
 
 
 
 
 
 
Interest expense
(31,301
)
 
(39
)
 
(378
)
 
(11,039
)
 
80

 
(42,677
)
Loss on extinguishment of debt
(1,986
)
 

 

 

 

 
(1,986
)
Interest income
253

 
15

 
294

 
1,014

 
(80
)
 
1,496

Other income (loss)
190

 

 
395

 
138

 

 
723

 
(32,844
)
 
(24
)
 
311

 
(9,887
)
 

 
(42,444
)
Income (loss) before income taxes and income of consolidated subsidiaries
(59,432
)
 
8,220

 
37,771

 
(131
)
 

 
(13,572
)
Equity in income of subsidiaries
45,762

 

 

 

 
(45,762
)
 

Loss before income taxes
(13,670
)
 
8,220

 
37,771

 
(131
)
 
(45,762
)
 
(13,572
)
Income tax expense (benefit)
(8
)
 
107

 

 
4,410

 
(4,419
)
 
90

Net income (loss)
(13,662
)
 
8,113

 
37,771

 
(4,541
)
 
(41,343
)
 
(13,662
)
Less net loss attributable to noncontrolling interest
(6,436
)
 

 

 

 

 
(6,436
)
Net income (loss) attributable to the Parent company
$
(7,226
)
 
$
8,113

 
$
37,771

 
$
(4,541
)
 
$
(41,343
)
 
$
(7,226
)

94

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

CONSOLIDATING STATEMENTS OF OPERATIONS
Year Ended December 31, 2011
(In thousands)
 
 
Parent/
Issuer
 
Co-Issuer
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Total
Revenues
$

 
$
86,785

 
$
58,544

 
$
411,908

 
$
(55,524
)
 
$
501,713

Costs and expenses:
 
 
 
 
 
 
 
 
 
 
 
Cost of sales

 
60,243

 
49,439

 
338,629

 
(55,524
)
 
392,787

Depreciation, depletion and amortization
306

 
10,175

 
7,936

 
27,177

 

 
45,594

Selling and administrative
10,616

 
4,059

 
4,566

 
21,508

 
(473
)
 
40,276

Heritage health benefit expenses
17,754

 

 

 
821

 

 
18,575

Gain (loss) on sales of assets
3

 
189

 
59

 
389

 

 
640

Other operating income

 

 
(7,258
)
 

 
473

 
(6,785
)
 
28,679

 
74,666

 
54,742

 
388,524

 
(55,524
)
 
491,087

Operating income (loss)
(28,679
)
 
12,119

 
3,802

 
23,384

 

 
10,626

Other income (expense):
 
 
 
 
 
 
 
 
 
 
 
Interest expense
(16,365
)
 
(469
)
 
(657
)
 
(12,370
)
 
92

 
(29,769
)
Loss on extinguishment of debt
(7,873
)
 
(9,073
)
 
(84
)
 

 

 
(17,030
)
Interest income
266

 
14

 
206

 
1,050

 
(92
)
 
1,444

Other income (loss)
(3,014
)
 

 
170

 
272

 

 
(2,572
)
 
(26,986
)
 
(9,528
)
 
(365
)
 
(11,048
)
 

 
(47,927
)
Income (loss) before income taxes and income of consolidated subsidiaries
(55,665
)
 
2,591

 
3,437

 
12,336

 

 
(37,301
)
Equity in income of subsidiaries
18,508

 

 

 

 
(18,508
)
 

Income (loss) before income taxes
(37,157
)
 
2,591

 
3,437

 
12,336

 
(18,508
)
 
(37,301
)
Income tax expense (benefit)
(282
)
 
(2,498
)
 
(26
)
 
7,263

 
(4,883
)
 
(426
)
Net income (loss)
(36,875
)
 
5,089

 
3,463

 
5,073

 
(13,625
)
 
(36,875
)
Less net loss attributable to noncontrolling interest
(3,775
)
 

 

 

 

 
(3,775
)
Net income (loss) attributable to the Parent company
$
(33,100
)
 
$
5,089

 
$
3,463

 
$
5,073

 
$
(13,625
)
 
$
(33,100
)

95

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

CONSOLIDATING STATEMENTS OF OPERATIONS
Year Ended December 31, 2010
(In thousands)
 
 
Parent/
Issuer
 
Co-Issuer
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Total
Revenues
$

 
$
87,999

 
$
52,201

 
$
416,410

 
$
(50,553
)
 
$
506,057

Costs and expenses:
 
 
 
 
 
 
 
 
 
 
 
Cost of sales

 
61,739

 
44,943

 
338,698

 
(50,553
)
 
394,827

Depreciation, depletion and amortization
391

 
10,131

 
7,897

 
26,271

 

 
44,690

Selling and administrative
9,292

 
4,287

 
4,140

 
21,905

 
(143
)
 
39,481

Heritage health benefit expenses
13,732

 

 

 
689

 

 
14,421

Gain (loss) on sales of assets

 
122

 
(5
)
 
109

 

 
226

Other operating income

 

 
(8,109
)
 

 

 
(8,109
)
 
23,415

 
76,279

 
48,866

 
387,672

 
(50,696
)
 
485,536

Operating income (loss)
(23,415
)
 
11,720

 
3,335

 
28,738

 
143

 
20,521

Other income (expense):
 
 
 
 
 
 
 
 
 
 
 
Interest expense
(3,195
)
 
(4,659
)
 
(2,534
)
 
(12,723
)
 
119

 
(22,992
)
Interest income
246

 
36

 
141

 
1,448

 
(124
)
 
1,747

Other income (loss)
(3,389
)
 
30

 
48

 
724

 

 
(2,587
)
 
(6,338
)
 
(4,593
)
 
(2,345
)
 
(10,551
)
 
(5
)
 
(23,832
)
Loss before income taxes and income of consolidated subsidiaries
(29,753
)
 
7,127

 
990

 
18,187

 
138

 
(3,311
)
Equity in income of subsidiaries
26,268

 

 

 

 
(26,268
)
 

Loss before income taxes
(3,485
)
 
7,127

 
990

 
18,187

 
(26,130
)
 
(3,311
)
Income tax expense (benefit)
(315
)
 
368

 
21

 
3,945

 
(4,160
)
 
(141
)
Net income (loss)
(3,170
)
 
6,759

 
969

 
14,242

 
(21,970
)
 
(3,170
)
Less net loss attributable to noncontrolling interest
(2,645
)
 

 

 

 

 
(2,645
)
Net loss attributable to the Parent company
$
(525
)
 
$
6,759

 
$
969

 
$
14,242

 
$
(21,970
)
 
$
(525
)

96

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Year Ended December 31, 2012
(In thousands)

 
Parent/Issuer
 
Co-Issuer
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Total
 
                   

 
                   

 
                   

 
                   

 
                   

  
                   

Net income (loss)
$
(13,662
)
 
$
8,113

 
$
37,771

 
$
(4,541
)
 
$
(41,343
)
 
$
(13,662
)
Other comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
 
Amortization of accumulated actuarial gains or losses, pension
2,171

 
23

 

 
766

 

 
2,960

Adjustments to accumulated actuarial losses and transition obligations, pension
(4,594
)
 
(52
)
 
(3,034
)
 
(2,132
)
 

 
(9,812
)
Amortization of accumulated actuarial gains or losses, transition obligations, and prior service costs, postretirement medical benefit
1,599

 

 

 
973

 

 
2,572

Adjustments to accumulated actuarial gains and transition obligations, postretirement medical benefits
(19,508
)
 

 
(1,969
)
 
(865
)
 

 
(22,342
)
Tax effect of other comprehensive income gains

 

 

 

 

 

Unrealized and realized gains and losses on available-for-sale securities
(204
)
 

 
1

 
(65
)
 

 
(268
)
Other comprehensive income
(20,536
)
 
(29
)
 
(5,002
)
 
(1,323
)
 

 
(26,890
)
Comprehensive income (loss) attributable to Westmoreland Coal Company
$
(34,198
)
 
$
8,084

 
$
32,769

 
$
(5,864
)
 
$
(41,343
)
 
$
(40,552
)




97

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Year Ended December 31, 2011
(In thousands)

 
Parent/Issuer
 
Co-Issuer
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
$
(36,875
)
 
$
5,089

 
$
3,463

 
$
5,073

 
$
(13,625
)
 
$
(36,875
)
Other comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
 
Amortization of accumulated actuarial gains or losses, pension
936

 
9

 

 
702

 

 
1,647

Adjustments to accumulated actuarial losses and transition obligations, pension
(15,204
)
 
(150
)
 

 
(444
)
 

 
(15,798
)
Amortization of accumulated actuarial gains or losses, transition obligations, and prior service costs, postretirement medical benefit
(583
)
 

 

 
295

 

 
(288
)
Adjustments to accumulated actuarial gains and transition obligations, postretirement medical benefits
(39,867
)
 

 

 
(9,269
)
 

 
(49,136
)
Unrealized and realized gains and losses on available-for-sale securities
3

 

 
(103
)
 
(100
)
 

 
(200
)
Other comprehensive income
(54,715
)
 
(141
)
 
(103
)
 
(8,816
)
 

 
(63,775
)
Comprehensive income (loss) attributable to Westmoreland Coal Company
$
(91,590
)
 
$
4,948

 
$
3,360

 
$
(3,743
)
 
$
(13,625
)
 
$
(100,650
)



98

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Year Ended December 31, 2010
(In thousands)

 
Parent/Issuer
 
Co-Issuer
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
$
(3,170
)
 
$
6,759

 
$
969

 
$
14,242

 
$
(21,970
)
 
$
(3,170
)
Other comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
 
Amortization of accumulated actuarial gains or losses, pension
632

 
7

 


 
673

 


 
1,312

Adjustments to accumulated actuarial losses and transition obligations, pension
(2,952
)
 
(45
)
 

 
(863
)
 


 
(3,860
)
Amortization of accumulated actuarial gains or losses, transition obligations, and prior service costs, postretirement medical benefit
(637
)
 


 


 
362

 


 
(275
)
Adjustments to accumulated actuarial gains and transition obligations, postretirement medical benefits
(22,728
)
 


 


 
(467
)
 


 
(23,195
)
Unrealized and realized gains and losses on available-for-sale securities
55

 


 
14

 
(508
)
 


 
(439
)
Other comprehensive income
(25,630
)
 
(38
)
 
14

 
(803
)
 

 
(26,457
)
Comprehensive income (loss) attributable to Westmoreland Coal Company
$
(28,800
)
 
$
6,721

 
$
983

 
$
13,439

 
$
(21,970
)
 
$
(29,627
)


99

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

CONSOLIDATING STATEMENTS OF CASH FLOWS
Year Ended December 31, 2012
(In thousands)
 
Statements of Cash Flows
 
Parent/
Issuer
 
Co-Issuer
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Total
Cash flows from operating activities:
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
 
$
(13,662
)
 
$
8,113

 
$
37,771

 
$
(4,541
)
 
$
(41,343
)
 
$
(13,662
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
 
 
 
 
 
 
 
 
 
Equity in income of subsidiaries
 
45,762

 

 

 

 
(45,762
)
 

Depreciation, depletion, and amortization
 
421

 
10,085

 
19,571

 
27,068

 

 
57,145

Accretion of asset retirement obligation and receivable
 

 
59

 
4,038

 
8,092

 

 
12,189

Amortization of intangible assets and liabilities, net
 

 
622

 

 
36

 

 
658

Share-based compensation
 
2,716

 
44

 
559

 
2,721

 

 
6,040

Loss on sale of assets
 
13

 

 
251

 
264

 

 
528

Amortization of deferred financing costs
 
2,889

 

 
847

 
622

 

 
4,358

Gain on investments
 
(190
)
 

 

 
25

 

 
(165
)
Loss on extinguishment of debt
 
1,986

 

 

 

 

 
1,986

Changes in operating assets and liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Receivables, net
 
147

 
(151
)
 
(20,910
)
 
102

 
7,957

 
(12,855
)
Inventories
 

 
709

 
(2,389
)
 
(484
)
 

 
(2,164
)
Excess of black lung benefit obligation over trust assets
 
1,791

 

 

 

 

 
1,791

Accounts payable and accrued expenses
 
4,981

 
(3,209
)
 
18,396

 
5,453

 
(8,222
)
 
17,399

Deferred revenue
 

 
(8,312
)
 
772

 
(658
)
 

 
(8,198
)
Accrual for workers’ compensation
 
(2,096
)
 

 

 

 

 
(2,096
)
Asset retirement obligations
 

 

 
(1,198
)
 
(5,745
)
 

 
(6,943
)
Accrual for postretirement medical benefits
 
(524
)
 

 
4,858

 
1,857

 

 
6,191

Pension and SERP obligations
 
1,286

 
15

 
709

 
792

 

 
2,802

Other assets and liabilities
 
(243
)
 
(536
)
 
1,047

 
(10,128
)
 
2,000

 
(7,860
)
Net cash provided by (used in) operating activities
 
45,277

 
7,439

 
64,322

 
25,476

 
(85,370
)
 
57,144

Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
 
 
 
Distributions received from subsidiaries
 
31,971

 

 

 

 
(31,971
)
 

Additions to property, plant and equipment
 
(159
)
 
(2,067
)
 
(8,385
)
 
(10,421
)
 

 
(21,032
)
Change in restricted investments and bond collateral and reclamation deposits
 
(3,248
)
 
(7
)
 
(27,504
)
 
(3,133
)
 

 
(33,892
)
Cash payments related to acquisitions and other
 
4,000

 

 
(76,522
)
 

 

 
(72,522
)
Net proceeds from sales of assets
 

 

 
240

 
240

 

 
480


100

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

Proceeds from the sale of investments
 
1,581

 

 
1,889

 
636

 

 
4,106

Receivable from customer for property and equipment purchases
 

 

 

 
(674
)
 

 
(674
)
Net cash provided by (used in) investing activities
 
34,145

 
(2,074
)
 
(110,282
)
 
(13,352
)
 
(31,971
)
 
(123,534
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
 
 
 
Change in book overdrafts
 

 
(259
)
 
6

 

 

 
(253
)
Borrowings from long-term debt
 
119,364

 

 

 

 

 
119,364

Repayments of long-term debt
 
(23,000
)
 

 
(2,494
)
 
(19,352
)
 

 
(44,846
)
Borrowings on revolving lines of credit
 

 

 

 
16,500

 

 
16,500

Repayments on revolving lines of credit
 

 

 

 
(16,500
)
 

 
(16,500
)
Debt issuance costs and other refinancing costs
 
(5,666
)
 

 

 
(22
)
 

 
(5,688
)
Dividends/distributions
 
(1,360
)
 
(1,050
)
 
(19,173
)
 
(11,748
)
 
31,971

 
(1,360
)
Transactions with Parent/affiliates
 
(180,065
)
 
483

 
72,840

 
21,372

 
85,370

 

Net cash provided by (used in) financing activities
 
(90,727
)
 
(826
)
 
51,179

 
(9,750
)
 
117,341

 
67,217

Net increase (decrease) in cash and cash equivalents
 
(11,305
)
 
4,539

 
5,219

 
2,374

 

 
827

Cash and cash equivalents, beginning of year
 
26,141

 
6

 
143

 
4,493

 

 
30,783

Cash and cash equivalents, end of year
 
$
14,836

 
$
4,545

 
$
5,362

 
$
6,867

 
$

 
$
31,610


101

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

CONSOLIDATING STATEMENTS OF CASH FLOWS
Year Ended December 31, 2011
(In thousands)
 
Statements of Cash Flows
 
Parent/
Issuer
 
Co-Issuer
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Total
Cash flows from operating activities:
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
 
$
(36,875
)
 
$
5,089

 
$
3,463

 
$
5,073

 
$
(13,625
)
 
$
(36,875
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
 
 
 
 
 
 
 
 
 
Equity in income of subsidiaries
 
18,508

 

 

 

 
(18,508
)
 

Gain (loss) on derivative instruments
 
3,079

 

 

 

 

 
3,079

Depreciation, depletion, and amortization
 
306

 
10,175

 
7,936

 
27,177

 

 
45,594

Accretion of asset retirement obligation and receivable
 

 
55

 
3,034

 
7,789

 

 
10,878

Amortization of intangible assets and liabilities, net
 

 
621

 

 
36

 

 
657

Share-based compensation
 
1,671

 
32

 
249

 
2,769

 

 
4,721

Loss (gain) on sale of assets
 
3

 
189

 
59

 
389

 

 
640

Amortization of deferred financing costs
 
1,485

 
(21
)
 
383

 
668

 

 
2,515

Gain on investments securities
 

 

 
(75
)
 
(75
)
 

 
(150
)
Loss on extinguishment of debt
 
7,873

 
9,073

 
84

 

 

 
17,030

Changes in operating assets and liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Receivables, net
 
(158
)
 
1,479

 
(4,343
)
 
2,263

 
6,250

 
5,491

Inventories
 

 
(1,820
)
 
134

 
(439
)
 

 
(2,125
)
Excess of black lung benefit obligation over trust assets
 
4,319

 

 

 

 

 
4,319

Accounts payable and accrued expenses
 
5,849

 
(1,063
)
 
378

 
3,103

 
(4,139
)
 
4,128

Deferred revenue
 

 
(8,774
)
 
(349
)
 
(795
)
 

 
(9,918
)
Accrual for workers’ compensation
 
1,248

 

 

 

 

 
1,248

Asset retirement obligations
 

 

 
(875
)
 
(5,635
)
 

 
(6,510
)
Accrual for postretirement medical benefits
 
(2,878
)
 

 

 
1,235

 

 
(1,643
)
Pension and SERP obligations
 
(4,320
)
 
(50
)
 

 
3,092

 

 
(1,278
)
Other assets and liabilities
 
444

 
(529
)
 
3,839

 
(392
)
 
(428
)
 
2,934

Net cash provided by (used in) operating activities
 
554

 
14,456

 
13,917

 
46,258

 
(30,450
)
 
44,735

Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
 
 
 
Distributions received from subsidiaries
 
23,400

 

 

 

 
(23,400
)
 

Additions to property, plant and equipment
 
(797
)
 
(2,119
)
 
(2,569
)
 
(22,109
)
 

 
(27,594
)
Change in restricted investments and bond collateral and reclamation deposits
 
(1,714
)
 
2,581

 
(3,738
)
 
(3,115
)
 

 
(5,986
)
Cash payments related to acquisitions and other
 
(4,000
)
 

 

 

 

 
(4,000
)
Net proceeds from sales of assets
 

 

 
250

 
437

 

 
687


102

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

Proceeds from the sale of investments
 

 

 
1,075

 
2,275

 

 
3,350

Receivable from customer for property and equipment purchases
 

 

 

 
(96
)
 

 
(96
)
Net cash provided by (used in) investing activities
 
16,889

 
462

 
(4,982
)
 
(22,608
)
 
(23,400
)
 
(33,639
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
 
 
 
Change in book overdrafts
 
(146
)
 
259

 
(694
)
 
(143
)
 

 
(724
)
Borrowings from long-term debt
 
142,500

 

 

 

 

 
142,500

Repayments of long-term debt
 
(2,532
)
 
(46,220
)
 
(11,982
)
 
(12,832
)
 

 
(73,566
)
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 costs and other refinancing costs
 
(6,042
)
 
(9,077
)
 
100

 

 

 
(15,019
)
Exercise of stock options
 
422

 

 

 

 

 
422

Dividends/distributions
 
(21,301
)
 
(10,700
)
 

 
(12,700
)
 
23,400

 
(21,301
)
Transactions with Parent/affiliates
 
(104,474
)
 
49,946

 
20,684

 
3,394

 
30,450

 

Net cash provided by (used in) financing activities
 
8,427

 
(15,792
)
 
(8,792
)
 
(23,781
)
 
53,850

 
13,912

Net increase (decrease) in cash and cash equivalents
 
25,870

 
(874
)
 
143

 
(131
)
 

 
25,008

Cash and cash equivalents, beginning of year
 
271

 
880

 

 
4,624

 

 
5,775

Cash and cash equivalents, end of year
 
$
26,141

 
$
6

 
$
143

 
$
4,493

 
$

 
$
30,783


103

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

CONSOLIDATING STATEMENTS OF CASH FLOWS
Year Ended December 31, 2010
(In thousands)
 
Statements of Cash Flows
 
Parent/
Issuer
 
Co-Issuer
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Total
Cash flows from operating activities:
 
 
 
 
 
 
 
 
 
 
 
 
Net loss
 
$
(3,170
)
 
$
6,759

 
$
969

 
$
14,242

 
$
(21,970
)
 
$
(3,170
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
 
 
 
 
 
 
 
 
 
Equity in income of subsidiaries
 
(26,268
)
 

 

 

 
26,268

 

Gain on derivative instruments
 
3,486

 
(30
)
 

 

 

 
3,456

Depreciation, depletion, and amortization
 
391

 
10,131

 
7,897

 
26,271

 

 
44,690

Accretion of asset retirement obligation and receivable
 

 
51

 
3,007

 
8,482

 

 
11,540

Amortization of intangible assets and liabilities, net
 

 
621

 

 
(31
)
 

 
590

Share-based compensation
 
4,049

 

 

 

 

 
4,049

Loss (gain) on sale of assets
 

 
122

 
(5
)
 
109

 

 
226

Amortization of deferred financing costs
 
1,489

 
(308
)
 
450

 
673

 

 
2,304

Non-cash interest expense
 
1,236

 

 

 

 

 
1,236

Gain (loss) on investments securities
 
(97
)
 

 

 
(507
)
 

 
(604
)
Changes in operating assets and liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Receivables, net
 
358

 
(609
)
 
(2,266
)
 
(3,367
)
 
1,156

 
(4,728
)
Inventories
 

 
635

 
(208
)
 
1,873

 

 
2,300

Excess of black lung benefit obligation over trust assets
 
1,460

 

 

 

 

 
1,460

Accounts payable and accrued expenses
 
2,333

 
884

 
(863
)
 
8,189

 
(1,502
)
 
9,041

Deferred revenue
 

 
(6,010
)
 
(375
)
 
(1,014
)
 

 
(7,399
)
Accrual for workers’ compensation
 
(841
)
 

 

 

 

 
(841
)
Asset retirement obligations
 

 

 
(1,769
)
 
(6,014
)
 

 
(7,783
)
Accrual for postretirement medical benefits
 
(2,813
)
 

 

 
(19
)
 

 
(2,832
)
Pension and SERP obligations
 
(6,828
)
 

 
93

 
2,833

 

 
(3,902
)
Other assets and liabilities
 
(923
)
 
(211
)
 
898

 
(3,986
)
 
(58
)
 
(4,280
)
Net cash provided by (used in) operating activities
 
(26,138
)
 
12,035

 
7,828

 
47,734

 
3,894

 
45,353

Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
 
 
 
Distributions received from subsidiaries
 
31,300

 

 

 

 
(31,300
)
 

Additions to property, plant and equipment
 
(550
)
 
(2,207
)
 
(4,275
)
 
(15,782
)
 

 
(22,814
)
Change in restricted investments and bond collateral and reclamation deposits
 
(1,714
)
 
142

 
(1,716
)
 
(5,257
)
 

 
(8,545
)
Net proceeds from sales of assets
 

 
1

 
66

 
645

 

 
712

Proceeds from the sale of investments
 
156

 

 

 
2,151

 

 
2,307

Receivable from customer for property and equipment purchases
 

 

 

 
(840
)
 

 
(840
)

104

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

Net cash provided by (used in) investing activities
 
29,192

 
(2,064
)
 
(5,925
)
 
(19,083
)
 
(31,300
)
 
(29,180
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
 
 
 
Change in book overdrafts
 
(111
)
 

 
57

 
(541
)
 

 
(595
)
Repayments of long-term debt
 

 
(9,355
)
 
(4,440
)
 
(6,610
)
 

 
(20,405
)
Borrowings on revolving lines of credit
 

 
7,300

 
91,500

 
72,100

 

 
170,900

Repayments on revolving lines of credit
 

 
(7,300
)
 
(91,000
)
 
(70,600
)
 

 
(168,900
)
Debt issuance costs
 
(1,718
)
 

 
(207
)
 

 

 
(1,925
)
Exercise of stock options
 
8

 

 

 

 

 
8

Dividends/distributions
 

 

 

 
(31,300
)
 
31,300

 

Transactions with Parent/affiliates
 
(1,717
)
 
126

 
2,187

 
3,298

 
(3,894
)
 

Net cash provided by (used in) financing activities
 
(3,538
)
 
(9,229
)
 
(1,903
)
 
(33,653
)
 
27,406

 
(20,917
)
Net increase (decrease) in cash and cash equivalents
 
(484
)
 
742

 

 
(5,002
)
 

 
(4,744
)
Cash and cash equivalents, beginning of year
 
755

 
138

 

 
9,626

 

 
10,519

Cash and cash equivalents, end of year
 
$
271

 
$
880

 
$

 
$
4,624

 
$

 
$
5,775



105


ITEM 9
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A
CONTROLS AND PROCEDURES.
(a)
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Internal control over financial reporting refers to a process designed by, or under the supervision of, our principal executive and principal financial officers or persons performing similar functions, and effected by the board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and includes those policies and procedures that:
 
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and our directors; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on our financial statements.
Management evaluated the effectiveness of our internal control over financial reporting as of December 31, 2012, using the framework set forth in the report of the Treadway Commission’s Committee of Sponsoring Organizations, or COSO, Internal Control — Integrated Framework. Based upon management’s evaluation, the Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO, concluded that our internal control over financial reporting was effective as of December 31, 2012.
Our independent registered public accounting firm, Ernst & Young LLP, has issued an attestation report on our internal control over financial reporting as of December 31, 2012.
(b)
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
(c)
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of Westmoreland Coal Company
We have audited Westmoreland Coal Company and subsidiaries’ internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Westmoreland Coal Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions

106


and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Westmoreland Coal Company and subsidiaries’ maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012 based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Westmoreland Coal Company and subsidiaries’ as of December 31, 2012 and 2011, and the related consolidated statements of operations, comprehensive income (loss), shareholders’ deficit, and cash flows for each of the three years in the period ended December 31, 2012, our report dated March 12, 2013 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Denver, Colorado
March 12, 2013
(d)
Evaluation of Disclosure Controls and Procedures
As of December 31, 2012, management conducted an evaluation, under the supervision and with the participation of our CEO and CFO, of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined in Rule 13a-15(e) and 15d-15(e) of the Exchange Act. Based upon that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as December 31, 2012 in ensuring that information required to be disclosed was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and to provide reasonable assurance that information required to be disclosed by us in such reports is accumulated and communicated to management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

107


PART III
ITEM 10
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The information required by Item 10 will be included under the headings Directors, Executive Officer, Corporate Governance and Section 16(a) Beneficial Ownership Reporting Compliance in our definitive proxy statement for our Annual Meeting of Stockholders to be held May 21, 2013, and such required information is incorporated herein by reference.
ITEM 11
EXECUTIVE COMPENSATION.
The information required by Item 11 will be included under the headings Corporate Governance, Director Compensation for 2012, Compensation Discussion and Analysis and Executive Compensation for 2012 in our definitive proxy statement for our Annual Meeting of Stockholders to be held May 21, 2013, and such required information is incorporated herein by reference.
ITEM 12
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The information required by Item 12 will be included under the headings Beneficial Ownership of Securities and Equity Compensation Plan Information in our definitive proxy statement for our Annual Meeting of Stockholders to be held May 21, 2013, and such required information is incorporated herein by reference.
ITEM 13
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
The information required by Item 13 will be included under the headings Certain Transactions and Corporate Governance in our definitive proxy statement for our Annual Meeting of Stockholders to be held May 21, 2013, and such required information is incorporated herein by reference.
ITEM 14
PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The information required by Item 14 will be included under the heading Auditors in our definitive proxy statement for our Annual Meeting of Stockholders to be held May 21, 2013, and such required information is incorporated herein by reference.

108


PART IV
ITEM 15EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
1. The following consolidated financial statements for Westmoreland Coal Company are filed herewith in Item 8:
 
 
 
 
 
 
 
 
 
 
 
2. The following financial statement schedules for Westmoreland Resources, Inc. and subsidiary, Westmoreland Energy LLC and subsidiaries, Westmoreland Kemmerer, Inc. and Kemmerer Mine are filed herewith:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

109


SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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:
March 12, 2013
/s/ Keith E. Alessi
 
 
Name: Keith E. Alessi
 
 
Title:   Chief Executive Officer
            (A Duly Authorized Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
 
Signature
 
Title
 
Date
 
 
 
 
 
/s/ Keith E. Alessi
 
Chief Executive Officer,
 
March 12, 2013
Keith E. Alessi
 
(Principal Executive Officer), and Director
 
 
 
 
 
 
 
/s/ Kevin A. Paprzycki
 
Chief Financial Officer and Treasurer
 
March 12, 2013
Kevin A. Paprzycki
 
(Principal Financial Officer)
 
 
 
 
 
 
 
/s/ Russell H. Werner
 
Controller (Principal Accounting Officer)
 
March 12, 2013
Russell H. Werner
 
 
 
 
 
 
 
 
 
/s/ Michael R. D’Appolonia
 
Director
 
March 12, 2013
Michael R. D’Appolonia
 
 
 
 
 
 
 
 
 
/s/ Michael G. Hutchinson
 
Director
 
March 12, 2013
Michael G. Hutchinson
 
 
 
 
 
 
 
 
 
/s/ Robert P. King
 
Director
 
March 12, 2013
Robert P. King
 
 
 
 
 
 
 
 
 
/s/ Richard M. Klingaman
 
Director
 
March 12, 2013
Richard M. Klingaman
 
 
 
 
 
 
 
 
 
/s/ Jan B. Packwood
 
Director
 
March 12, 2013
Jan B. Packwood
 
 
 
 
 
 
 
 
 
/s/ Robert C. Scharp
 
Director
 
March 12, 2013
Robert C. Scharp
 
 
 
 

110


WESTMORELAND RESOURCES, INC. AND SUBSIDIARY
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of
Westmoreland Resources, Inc.
We have audited the accompanying consolidated balance sheets of Westmoreland Resources, Inc. and subsidiary (the Company) (a wholly owned subsidiary of Westmoreland Coal Company) as of December 31, 2012 and 2011 and the related consolidated statements of operations, comprehensive income (loss), shareholder’s equity and cash flows for each of the three years in the period ended December 31, 2012. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Westmoreland Resources, Inc. and subsidiary as of December 31, 2012 and 2011, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2012 in conformity with U.S. generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Denver, Colorado
March 12, 2013

111


WESTMORELAND RESOURCES, INC. AND SUBSIDIARY
(A Wholly Owned Subsidiary of Westmoreland Coal Company)
Consolidated Balance Sheets
December 31, 2012 and 2011
(In thousands)
 
2012
 
2011
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,076

 
$
224

Accounts receivable
 
 
 
Trade
3,599

 
5,314

Other
1,743

 
2,667

 
5,342

 
7,981

Inventories
4,901

 
4,490

Other current assets
4,464

 
1,055

Total current assets
15,783

 
13,750

Property, plant and equipment, at cost:
 
 
 
Land and mineral rights
27,494

 
28,894

Plant and equipment
123,343

 
117,797

 
150,837

 
146,691

Less accumulated depreciation, depletion and amortization
94,799

 
88,745

Net property, plant and equipment
56,038

 
57,946

Restricted investments and bond collateral
14,506

 
13,592

Contractual third-party reclamation receivables
327

 
169

Receivable from related parties

 
355

Other assets
635

 
1,078

Total assets
$
87,289

 
$
86,890

Liabilities and Shareholder’s Equity
 
 
 
Current liabilities:
 
 
 
Current installments of long-term debt
$
1,939

 
$
2,409

Accounts payable
4,671

 
5,653

Payable to related parties
1,161

 

Accrued expenses
5,185

 
7,682

Asset retirement obligations
1,412

 
1,384

Other current liabilities

 
1,275

Total current liabilities
14,368

 
18,403

Long-term debt, less current installments
2,473

 
3,153

Asset retirement obligations, less current portion
24,401

 
23,373

Payable to related party
1,870

 
8,480

Other liabilities
15,677

 
7,901

Total liabilities
58,789

 
61,310

Shareholder’s equity:
 
 
 
Common stock of $1 par value. Authorized 40,000 shares; issued and outstanding 10,000 shares at December 31, 2012 and 2011
10

 
10

Additional paid-in capital
15,970

 
15,797

Accumulated other comprehensive income
16

 
15

Retained earnings
27,177

 
17,995

Total Westmoreland Resources Inc. shareholder’s equity
43,173

 
33,817

Noncontrolling interest
(14,673
)
 
(8,237
)
Total shareholder’s equity
28,500

 
25,580

Total liabilities and shareholder’s equity
$
87,289

 
$
86,890

See accompanying Notes to Consolidated Financial Statements.

112


WESTMORELAND RESOURCES, INC. AND SUBSIDIARY
(A Wholly Owned Subsidiary of Westmoreland Coal Company)
Consolidated Statements of Operations
Years Ended December 31, 2012, 2011 and 2010
(In thousands, except per share data)
 
 
2012
 
2011
 
2010
Revenues
$
39,041

 
$
79,831

 
$
74,997

Costs and expenses:
 
 
 
 
 
Cost of sales
43,727

 
76,714

 
71,614

Depreciation, depletion, and amortization
6,283

 
7,925

 
7,886

Selling and administrative
3,780

 
3,656

 
3,437

Loss on sale of assets
9

 
59

 
19

Other operating income
(17,452
)
 
(7,258
)
 
(8,109
)
 
36,347

 
81,096

 
74,847

Operating income (loss)
2,694

 
(1,265
)
 
150

Other income (expense):
 
 
 
 
 
Interest expense
(382
)
 
(668
)
 
(2,534
)
Loss on extinguishment of debt

 
(84
)
 

Interest income
226

 
146

 
21

Other
208

 
170

 
48

 
52

 
(436
)
 
(2,465
)
Income (loss) before income taxes
2,746

 
(1,701
)
 
(2,315
)
Income tax expense (benefit)

 
(16
)
 
21

Net income (loss)
2,746

 
(1,685
)
 
(2,336
)
Less: net loss attributable to noncontrolling interests
(6,436
)
 
(3,775
)
 
(2,645
)
Net income attributable to Parent company
$
9,182

 
$
2,090

 
$
309

Net income per share applicable to Parent company
$
918.20

 
$
209.00

 
$
30.90

Weighted average number of common shares outstanding
10

 
10

 
10

See accompanying Notes to Consolidated Financial Statements.

113


WESTMORELAND RESOURCES, INC. AND SUBSIDIARY
(A Wholly Owned Subsidiary of Westmoreland Coal Company)
Consolidated Statements of Comprehensive Income (Loss)
Years Ended December 31, 2012, 2011 and 2010
(In thousands)
 
 
2012
 
2011
 
2010
Net income (loss)
$
2,746

 
$
(1,685
)
 
$
(2,336
)
Other comprehensive income (loss):
 
 
 
 
 
Unrealized and realized gains and losses on available-for-sale securities
1

 
(105
)
 
14

Comprehensive income (loss) attributable to Westmoreland Resources Inc.
$
2,747

 
$
(1,790
)
 
$
(2,322
)
See accompanying Notes to Consolidated Financial Statements.

114


WESTMORELAND RESOURCES, INC. AND SUBSIDIARY
(A Wholly Owned Subsidiary of Westmoreland Coal Company)
Consolidated Statements of Shareholder’s Equity
Years Ended December 31, 2010, 2011 and 2012
(In thousands)
 
 
Common
stock
 
Additional
paid-in
capital
 
Advances
from
(to)
Parent
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Retained
Earnings
 
Noncontrolling
Interest
 
Total
Shareholder’s
Equity
Balance at December 31, 2009
$
10

 
$
15,412

 
$
(16,171
)
 
$
106

 
$
15,596

 
$
(1,817
)
 
$
13,136

Contribution of Westmoreland Coal Company common stock to pension plan on the Company’s behalf

 
93

 

 

 

 

 
93

Adjustment for utilization of tax losses of Westmoreland Coal Company

 
21

 

 

 

 

 
21

Advances from (to) Parent

 

 
2,784

 

 

 

 
2,784

Unrealized gain on available-for-sale securities

 

 

 
14

 

 

 
14

Net loss

 

 

 

 
309

 
(2,645
)
 
(2,336
)
Balance at December 31, 2010
$
10

 
$
15,526

 
$
(13,387
)
 
$
120

 
$
15,905

 
$
(4,462
)
 
$
13,712

Westmoreland Coal Company common stock issued as compensation

 
183

 

 

 

 

 
183

Contribution of Westmoreland Coal Company common stock to pension plan on the Company’s behalf

 
104

 

 

 

 

 
104

Adjustment for utilization of tax losses of Westmoreland Coal Company

 
(16
)
 

 

 

 

 
(16
)
Advances from (to) Parent

 

 
13,387

 

 

 

 
13,387

Unrealized gain on available-for-sale securities

 

 

 
(105
)
 

 

 
(105
)
Net loss

 

 

 

 
2,090

 
(3,775
)
 
(1,685
)
Balance at December 31, 2011
$
10

 
$
15,797

 
$

 
$
15

 
$
17,995

 
$
(8,237
)
 
$
25,580

Westmoreland Coal Company common stock issued as compensation

 
173

 

 

 

 

 
173

Unrealized loss on available-for-sale securities

 

 

 
1

 

 

 
1

Net income

 

 

 

 
9,182

 
(6,436
)
 
2,746

Balance at December 31, 2012
$
10

 
$
15,970

 
$

 
$
16

 
$
27,177

 
$
(14,673
)
 
$
28,500

See accompanying Notes to Consolidated Financial Statements.

115


WESTMORELAND RESOURCES, INC. AND SUBSIDIARY
(A Wholly Owned Subsidiary of Westmoreland Coal Company)
Consolidated Statements of Cash Flows
Years Ended December 31, 2012, 2011 and 2010
(In thousands)
 
2012
 
2011
 
2010
Cash flows from operating activities:
 
 
 
 
 
Net income (loss)
$
2,746

 
$
(1,685
)
 
$
(2,336
)
Adjustments to reconcile net income (loss) to net cash from operating activities:
 
 
 
 
 
Depreciation, depletion and amortization
6,283

 
7,925

 
7,886

Accretion of asset retirement obligation and receivable
2,368

 
3,034

 
3,007

Share-based compensation
173

 
183

 

Postretirement medical benefit costs allocated by Parent, net of payments
1

 
1

 
1

Pension contributions, net of pension costs allocated by Parent
39

 
(119
)
 
(175
)
Loss on sale of assets
9

 
59

 
19

Loss on extinguishment of debt

 
84

 

Amortization of deferred financing costs
443

 
412

 
450

Amortization of intangible assets and liabilities, net

 

 
(67
)
Utilization of tax losses of Westmoreland Coal Company

 
(16
)
 
21

Change in:
 
 
 
 
 
Accounts receivable
2,639

 
(1,834
)
 
(1,007
)
Inventories
(411
)
 
(170
)
 
(534
)
Accounts payable
(3,695
)
 
1,117

 
687

Payable to related parties
1,771

 
400

 
(1,219
)
Asset retirement obligation
(62
)
 
(954
)
 
(1,814
)
Other assets and liabilities
3,092

 
3,368

 
1,941

Net cash provided by operating activities
15,396

 
11,805

 
6,860

Cash flows from investing activities:
 
 
 
 
 
Additions to property, plant and equipment
(4,518
)
 
(2,069
)
 
(4,240
)
Increase in restricted investments and bond collateral
(913
)
 
(2,741
)
 
(1,716
)
Proceeds from sales of assets

 
250

 
41

Net cash used in investing activities
(5,431
)
 
(4,560
)
 
(5,915
)
Cash flows from financing activities:
 
 
 
 
 
Increase in book overdrafts

 
(695
)
 
77

Repayments of long-term debt
(2,503
)
 
(11,976
)
 
(4,440
)
Borrowings on revolving line of credit

 
12,200

 
91,500

Repayments on revolving line of credit

 
(29,100
)
 
(91,000
)
Deferred financing costs

 
100

 
(206
)
Change in payable to related party
(6,610
)
 
8,480

 

Advances from (to) Parent

 
13,387

 
2,784

Net cash used in financing activities
(9,113
)
 
(7,604
)
 
(1,285
)
Net increase (decrease) in cash and cash equivalents
852

 
(359
)
 
(340
)
Cash and cash equivalents, beginning of year
224

 
583

 
923

Cash and cash equivalents, end of year
$
1,076

 
$
224

 
$
583

Supplemental disclosures of cash flow information:
 
 
 
 
 
Cash paid for interest
$
374

 
$
543

 
$
2,238

Noncash transactions:
 
 
 
 
 
Accrued purchases of property and equipment
$
342

 
$
126

 
$
51

Capital leases
1,353

 
117

 


116


See accompanying Notes to Consolidated Financial Statements

117


WESTMORELAND RESOURCES, INC. AND SUBSIDIARY
(A Wholly Owned Subsidiary of Westmoreland Coal Company)
Notes to Consolidated Financial Statements (Continued)
1.
Summary of Significant Accounting Policies
Nature of Operations
Westmoreland Resources, Inc., or WRI, or the Company, a wholly owned subsidiary of Westmoreland Coal Company, or WCC, or the Parent, owns a surface coal mining operation located in eastern Montana. Coal produced from the Absaloka Mine is sold to electric utilities based in the north central region of the United States. Westmoreland Coal Company owns and operates the Company. All coal reserves are owned by the Crow Tribe of Indians and the mineral rights to the coal reserves are leased by the Company on a long-term basis.
In various transactions in October 2008, the Company formed a limited liability company, Absaloka Coal LLC, which it owns jointly with a newly formed subsidiary, WRI Partners, Inc., to mine and sell coal from the Absaloka Mine. Absaloka Coal LLC subleases the mineral rights from the Company entitling Absaloka Coal LLC to mine up to 40.0 million tons of coal at the Absaloka Mine through September, 2013. WRI also assigned to Absaloka Coal LLC all of its contracts to sell coal to third parties. The Company sold a 99% interest in Absaloka Coal LLC to a third party but continues to consolidate Absaloka Coal LLC as the Company has effective control over its operations.
The Company’s financial statements reflect substantially all of its costs of doing business. Common expenses incurred by the Parent on behalf of the Company are charged to the Company based on proportional cost allocations. The Company believes the allocations used are reasonable; however, these financial statements may not necessarily be representative of a stand-alone company.
WCC Liquidity
The Company anticipates that its cash from operations, cash on hand and available WCC borrowing capacity will be sufficient to meet its investing, financing, and working capital requirements for the foreseeable future.
On June 29, 2012, WCC and certain of its subsidiaries entered into a five-year, $20.0 million revolving line of credit carved out by the indenture governing the 10.75% Senior Notes with an expiration date of June 30, 2017. The revolver may support up to $2.0 million of letters of credit, which would reduce the balance available under the revolver. At December 31, 2012, availability on the revolver was $20.0 million with no outstanding balance and no supported letters of credit. All extensions of credit under the revolver are collateralized by a first priority security interest in and lien upon the inventory and accounts receivable of the Parent, WRI, Westmoreland Kemmerer, Inc., and Westmoreland Energy, LLC. Pursuant to the Intercreditor Agreement, the holders of the 10.75% Senior Notes now have a second lien position on these assets.
Recent Developments
In November 2011, an explosion and subsequent fire occurred at Unit 3 of Xcel Energy's Sherburne County Generating Station, or Unit 3, which is the Company's largest customer. Xcel indicated that Unit 3 will be offline for an extended period while Xcel investigates the source of the explosion and the extent of the damage. While Sherburne County Generating Station initially indicated a start up date of March 2013, it has informed the Company that the delay will be longer. The Company maintains business interruption insurance coverage and submitted a notice of loss to its insurance carriers. The insurance carriers have accepted liability under the policy for the business interruption claim. The Company recognizes income as business interruption losses are incurred and reimbursement is virtually assured and has recognized $17.3 million of income, which is included in Other operating income, and received $15.6 million of cash proceeds for the year ended December 31, 2012. The Company expects to continue to receive proceeds during 2013.
Consolidation Policy
The Company consolidates any variable interest entity, or VIE, for which the Company is considered the primary beneficiary. The Company provides for noncontrolling interests in consolidated subsidiaries, which the Company’s ownership is less than 100 percent. All intercompany accounts and transactions have been eliminated.

A VIE is an entity that is unable to make significant decisions about its activities or does not have the obligation to absorb losses or the right to receive returns generated by its operations. If the entity meets one of these characteristics, then the Company must determine if it is the primary beneficiary of the VIE. The party exposed to the majority of the risks and rewards with the VIE is the primary beneficiary and must consolidate the entity.

The Company has determined that at December 31, 2012, 2011 and 2010 it was the primary beneficiary in Absaloka

118

WESTMORELAND RESOURCES, INC. AND SUBSIDIARY
(A Wholly Owned Subsidiary of Westmoreland Coal Company)
Notes to Consolidated Financial Statements (Continued)

Coal LLC, a VIE, in which it holds less than a 50% ownership. As a result, the Company has consolidated this entity within its operations.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents are stated at cost, which approximate fair value. Cash equivalents consist of highly liquid investments with original maturities of three months or less.
Accounts Receivable
Accounts receivable are recorded at the invoiced amount and do not bear interest. The Company evaluates the need for an allowance for doubtful accounts based on a review of collectability. The Company has determined that no allowance is necessary for accounts receivable as of December 31, 2012 and 2011.
Inventories
Inventories, which include materials and supplies as well as raw coal, are stated at the lower of cost or market. Cost is determined using the average cost method. Coal inventory costs include labor, supplies, equipment, operating overhead and other related costs.
Exploration and Mine Development
Exploration expenditures are charged to Cost of sales as incurred, including costs related to drilling and study costs incurred to convert or upgrade mineral resources to reserves. 
At existing surface operations, additional pits may be added to increase production capacity in order to meet customer requirements. These expansions may require significant capital to purchase additional equipment, relocate equipment, build or improve existing haul roads and create the initial pre-production box cut to remove overburden for new pits at existing operations. If these pits operate in a separate and distinct area of the mine, the costs associated with initially uncovering coal for production are capitalized and amortized over the life of the developed pit consistent with coal industry practices. Once production has begun, mining costs are then expensed as incurred.
Where new pits are routinely developed as part of a contiguous mining sequence, the Company expenses such costs as incurred. The development of a contiguous pit typically reflects the planned progression of an existing pit, thus maintaining production levels from the same mining area utilizing the same employee group and equipment.
Property, Plant, and Equipment
Property, plant and equipment are recorded at cost. Expenditures that extend the useful lives of existing plant and equipment or increase productivity of the assets are capitalized. Maintenance and repair costs that do not extend the useful life or increase productivity of the asset are expensed as incurred. Coal reserves are recorded at cost, or at fair value in the case of acquired businesses.
Coal reserves, mineral rights and mine development costs are depleted based upon estimated recoverable proven and probable reserves. Plant and equipment are depreciated on a straight-line basis over the assets’ estimated useful lives as follows: 
 
Years
Buildings and improvements
15 to 30
Machinery and equipment
3 to 30
The Company assesses the carrying value of its property, plant and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by comparing estimated undiscounted cash flows expected to be generated from such assets to their net book value. If net book

119

WESTMORELAND RESOURCES, INC. AND SUBSIDIARY
(A Wholly Owned Subsidiary of Westmoreland Coal Company)
Notes to Consolidated Financial Statements (Continued)

value exceeds estimated cash flows, the asset is written down to fair value. When an asset is retired or sold, its cost and related accumulated depreciation and depletion are removed from the accounts. The difference between the net book value of the asset and proceeds on disposition is recorded as a gain or loss. Fully depreciated plant and equipment still in use is not eliminated from the accounts.
Restricted Investments and Bond Collateral
The Company has requirements to maintain restricted cash and investments for bonding requirements. Amounts held are recorded as Restricted investments and bond collateral. Funds in the restricted investment and bond collateral accounts are not available to meet the Company’s operating cash needs.
Contractual Third-Party Reclamation Receivables
Certain of the Company’s customers have agreed to reimburse the Company for reclamation expenditures as they are incurred. Amounts that are reimbursable by customers are recorded as Contractual third-party reclamation receivables when the related reclamation obligation is recorded.
Fair Value
The Company is required to disclose the fair value of financial instruments. The carrying amounts of cash equivalents, accounts receivable and accounts payable reflected on the balance sheet approximates the fair value of these instruments due to the short duration to maturities. The fair value of the Company’s Level 1 available-for-sale equity securities is generally based on independent third-party market prices.
The Company’s non-recurring fair value measurements include asset retirement obligations. The Company determines the estimated fair value of its asset retirement obligations by calculating the present value of estimated cash flows related to reclamation liabilities using level 3 inputs. The significant inputs used to calculate such liabilities includes estimates of costs to be incurred, the Company’s credit adjusted discount rate, inflation rates and estimated dates of reclamation. The asset retirement liability is accreted to its present value each period.
Financial Instruments
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 instruments, which contain features that qualify them as embedded derivatives. Except for derivatives that qualify for the normal purchase normal sale exception, all financial instruments are recognized in the balance sheet at fair value. Changes in fair value are recognized in earnings if they are not eligible for hedge accounting or Accumulated other comprehensive income (loss) if they qualify for cash flow hedge accounting.
Held-to-maturity financial instruments consist of non-derivative financial assets with fixed or determinable payments and a fixed term, which the Company has the ability and intent to hold until maturity, and, therefore, accounts for them as held-to-maturity 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.
The Company has securities classified as available-for-sale, which are recorded at fair value. The changes in fair values are recorded as unrealized gains (losses) as a component of Accumulated other comprehensive loss in shareholder’s equity.
The Company reviews its securities routinely for other-than-temporary impairment. The primary factors used to determine if an impairment charge must be recorded because a decline in value of the security is other than temporary include (i) whether the fair value of the investment is significantly below its cost basis, (ii) the financial condition of the issuer of the security, (iii) the length of time that the cost of the security has exceeded its fair value and (iv) the Company’s intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in market value. Other-than-temporary impairments are recorded as a component of Other income (expense).
Intangible Assets and Liabilities
Identifiable intangible assets or liabilities acquired in a business combination must be recognized and reported separately from goodwill. Intangible assets result from more favorable market prices than contracted prices in sales and purchase agreements as measured during a business combination. Intangible liabilities result from less favorable market prices than contracted prices in sales and purchase agreements as measured during a business combination. The majority of these

120

WESTMORELAND RESOURCES, INC. AND SUBSIDIARY
(A Wholly Owned Subsidiary of Westmoreland Coal Company)
Notes to Consolidated Financial Statements (Continued)

intangible assets and liabilities are amortized on a straight-line basis over the respective period of the sales and purchase agreements, while the remainder are amortized on a unit-of-production basis. Amortization of intangible assets and liabilities recognized as an increase in Revenues was $0.1 million in 2010. The Company did not have intangible assets or liabilities as of December 31, 2012 and 2011.
Postretirement Medical Benefits and Pension Plans
The Company, through a plan sponsored by WCC, provides certain medical benefits for retired employees and their dependents. Effective September 1, 2009, WCC eliminated these benefits for non-represented employees and retirees. These benefits are provided through an unfunded self-insured program.
WCC requires the costs of postretirement medical benefits other than pensions to be accrued over the employees’ period of active service. These costs are determined on an actuarial basis and are allocated by the Parent to the Company based on its share of the plan participants. These costs are recorded in Cost of sales with a corresponding decrease in Payable to related party. The Parent’s consolidated balance sheets reflect the unfunded status of these postretirement medical benefit obligations.
The Company also participates in the Parent’s noncontributory defined benefit pension plan, which was frozen effective July 1, 2009. The costs to provide the benefits are accrued over the employees’ period of active service and are determined on an actuarial basis. The Company records an allocation of net periodic retirement benefit costs from the Parent in Cost of sales with a corresponding decrease in Payable to related party. The Parent’s consolidated balance sheets reflect the unfunded status of these defined benefit pension plan obligations.
Income Taxes
The Company files consolidated federal and state tax returns with its Parent. As the Company itself is not a taxable entity, the Parent’s tax expense for its income tax return group included on the Parent’s consolidated income tax return is allocated among the members of that group. This allocation is calculated as if each member were a separate taxpayer. This allocation is reflected by the Company in Income tax expense (benefit) with the offset in Additional paid-in capital. There is no formal tax sharing agreement with the Parent.
The Company accounts for deferred income taxes using the asset and liability method. Deferred tax liabilities and assets are recognized for the expected future tax consequences of events that have been reflected in the Company’s financial statements based on the difference between the financial statement carrying amounts and tax bases of assets and liabilities, as well as net operating loss and tax credit carryforwards, using enacted tax rates in effect in the years in which the differences are expected to reverse. The Company establishes a valuation allowance against its net deferred tax assets to the extent the Company believes that it is more likely than not that it will not realize the net deferred tax assets.
Accounting guidance prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Under this guidance, a company can recognize the benefit of an income tax position only if it is more likely than not (greater than 50%) that the tax position will be sustained upon tax examination, based solely on the technical merits of the tax position. This standard also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
Asset Retirement Obligations
The Company’s asset retirement obligation, or ARO, liabilities primarily consist of estimated costs related to reclaiming surface land and support facilities at its mines in accordance with federal and state reclamation laws as established by each mining permit.
The Company estimates its ARO liabilities for final reclamation and mine closure based upon detailed engineering calculations of the amount and timing of the estimated future costs for a third party to perform the required work. Cost estimates are escalated for inflation, and then discounted at the credit-adjusted risk-free rate. The Company records mineral rights associated with the initial recorded liability. Mineral rights are amortized based on the units-of-production method over the estimated recoverable, proven and probable reserves at the related mine, and the ARO liability is accreted to the projected settlement date. Changes in estimates could occur due to revisions of mine plans, changes in estimated costs, and changes in the timing of the performance of reclamation activities.
Coal Revenues
The Company recognizes coal sales revenue at the time title passes to the customer in accordance with the terms of the

121

WESTMORELAND RESOURCES, INC. AND SUBSIDIARY
(A Wholly Owned Subsidiary of Westmoreland Coal Company)
Notes to Consolidated Financial Statements (Continued)

underlying sales agreements and after any contingent performance obligations have been satisfied. Coal sales revenue is recognized based on the pricing contained in the coal contracts in place at the time that title passes and any retroactive pricing adjustments to those contracts are recognized as revised agreements are reached with the customers and any performance obligations included in the agreements are satisfied.
Other Operating Income
Other operating income in the accompanying Consolidated Statements of Operations reflects income from sources other than coal revenues. Income from the Company’s Indian Coal Tax Credit monetization transaction is recorded as Other operating income.
Share-Based Compensation
Share-based compensation expense is generally measured at the grant date and recognized as expense over the vesting period of the entire award. This expense relates to WCC common stock attributable to the Company's employees. These costs are recorded in Cost of sales and Selling and administrative expenses.
Earnings (Loss) per Share
Basic earnings (loss) per share have 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.
Reclassifications
Certain amounts in prior periods have been reclassified to conform with the presentation of 2012, with no effect on previously reported net income (loss), cash flows or shareholder's equity. The reclassification affected only noncurrent assets on the balance sheet.
Accounting Pronouncements Adopted
Effective January 1, 2012, the Company adopted an accounting standards update 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. The adoption of this standard did not have a material impact on the Company's consolidated financial statements.
Effective January 1, 2012, the Company adopted accounting standards updates with guidance on the presentation of other comprehensive income. These standards require an entity to either present components of net income and other comprehensive income in one continuous statement or in two separate but consecutive statements. Accordingly, the Company has presented net income and other comprehensive income in two consecutive statements.
Effective January 1, 2013, the Company adopted an accounting standards update which requires that companies present either in a single note or parenthetically on the face of the financial statements, the effect of significant amounts reclassified from each component of accumulated other comprehensive income based on its source and the income statement line items affected by the reclassification. If a component is not required to be reclassified to net income in its entirety, companies would instead cross reference to the related footnote for additional information. This accounting standards update is effective for interim and annual reporting periods beginning after December 15, 2012.
2.
Indian Coal Production Tax Credits (ICTC’s)
In August 2005, the Energy Policy Act of 2005 was enacted. Among other provisions, it contains a tax credit for the production of coal owned by Indian tribes. The tax credit is equal to $2.267 per ton in 2012 and increases annually based on an inflation–adjustment factor. The credit may be used against regular corporate income tax for all years and against alternative minimum taxes for the initial four-year period after the placed in service date of the facility. The Absaloka Mine produces coal that qualifies for this credit. The ICTC's are set to expire in December 2013 unless the relevant provisions of the Internal Revenue Code are extended or renewed by the U.S. Congress.

122

WESTMORELAND RESOURCES, INC. AND SUBSIDIARY
(A Wholly Owned Subsidiary of Westmoreland Coal Company)
Notes to Consolidated Financial Statements (Continued)

In July 2008, the Company finalized an agreement with the Crow Tribe covering the treatment of the tax credit in determining royalties payable to the Tribe under its lease agreement with the Tribe.
On October 16, 2008, the Company entered into a series of transactions with a financial institution, or Investor, designed to enable the Company to take advantage of ICTC’s generated by its mining operations.
In these transactions, the Company formed a limited liability company, Absaloka Coal LLC, which it owned jointly with a newly formed subsidiary, WRI Partners, Inc., to mine and sell coal from the Absaloka Mine. Absaloka Coal LLC then entered into a sublease from the Company for the coal leases with the Crow Tribe, entitling Absaloka Coal LLC to mine up to 40.0 million tons of coal at the Absaloka Mine through 2012. WRI also assigned to Absaloka Coal LLC all of its contracts to sell coal to third parties.
On October 16, 2008, the Company sold its interest in Absaloka Coal LLC to the Investor for consideration consisting of an initial payment of $4.0 million, $34.0 million of fixed principal and interest payments, and contingent payments based on 90% of the credits allocated to the Investor in excess of the fixed payments. Based on current forecasts of the Absaloka Mine’s coal sales, the total consideration to be paid by the Investor to the Company is projected to be approximately $49.0 million through December 31, 2013. The Company expects to share approximately $14.8 million of this consideration with the Crow Tribe as royalties.
The Investor will be entitled to 99% of Absaloka Coal LLC’s earnings and related distributions until it has received a 10% return on its initial $4.0 million cash investment, after which it will be entitled to 5% of earnings and distributions.
On October 3, 2008, the Company requested a private letter ruling, or PLR, request with the IRS concerning various issues relating to the validity of the ICTC’s. In March 2009, the Company received a PLR confirming the availability of the ICTC’s under the specific scenario described whereby WRI subleased the right to mine a fixed amount of coal from the Company’s Absaloka Mine to the LLC. The Company recognizes the fixed and contingent payments from the Investor as they are received as income in its consolidated financial statements.
As part of the purchase agreement, the Company has an option to purchase the Investor’s entire membership interest after October 16, 2013, and Investor is entitled to withdraw at any time from Absaloka Coal LLC. In these events, or on dissolution of the LLC, the Company would be required to pay the Investor the appraised value of its capital account balance.
The Company is the sole manager of Absaloka Coal LLC and has entered into a contract mining agreement with Absaloka Coal LLC under which it receives an amount equal to all of its mining costs plus a fee per ton of coal mined. Westmoreland Coal Sales Company acts as the exclusive sales agent on behalf of Absaloka Coal LLC under a sales agency agreement and receives a fee for its services based on the tons of coal sold.
3.
Inventories
Inventory consisted of the following at December 31, 2012 and 2011 (in thousands): 
 
2012
 
2011
Coal
$
248

 
$
88

Materials and supplies
4,792

 
4,451

Reserve for obsolete inventory
(139
)
 
(49
)
Total
$
4,901

 
$
4,490

4.
Restricted Investments and Bond Collateral
The Company’s restricted investments and bond collateral consisted of the following (in thousands): 
 
December 31,
 
2012
 
2011
Reclamation bond collateral
$
14,506

 
$
13,592

The Company’s carrying value and estimated fair value of its restricted investments and bond collateral at December 31, 2012 are as follows (in thousands): 

123

WESTMORELAND RESOURCES, INC. AND SUBSIDIARY
(A Wholly Owned Subsidiary of Westmoreland Coal Company)
Notes to Consolidated Financial Statements (Continued)

 
Carrying Value
 
Fair Value
Cash and cash equivalents
$
9,454

 
$
9,454

Held-to-maturity securities
2,424

 
2,552

Time deposits
2,437

 
2,437

Available-for-sale securities
191

 
191

 
$
14,506

 
$
14,634

Funds in the restricted investment and bond collateral accounts are not available to meet the Company’s operating cash needs. For all of its restricted investments and bond collateral accounts, the Company can select from several investment options for the funds and receives the investment returns on these investments.
As of December 31, 2012, the Company had reclamation bond collateral in place for its active Absaloka Mine. These government-required bonds assure that coal-mining operations comply with applicable federal and state regulations relating to the performance and completion of final reclamation activities. The amounts deposited in the bond collateral account secure the bonds issued by the bonding company.
a)
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 December 31, 2012 and 2011 are as follows (in thousands): 
 
2012
 
2011
Amortized cost
$
2,424

 
$
3,380

Gross unrealized holding gains
128

 
152

Gross unrealized holding losses

 
(38
)
Fair value
$
2,552

 
$
3,494

Maturities of held-to-maturity securities are as follows at December 31, 2012 (in thousands): 
 
Amortized Cost
 
Fair Value
Due within one year
$
609

 
$
616

Due in five years or less
1,205

 
1,261

Due in more than ten years
610

 
675

 
2,424

 
2,552

The cost basis, gross unrealized holding gains and fair value of available-for-sale securities at December 31, 2012 and 2011 are as follows (in thousands): 
 
2012
 
2011
Cost basis
$
175

 
$
175

Gross unrealized holding gains
16

 
15

Fair value
$
191

 
$
190

5.
Capital Leases
The amount outstanding at December 31, 2012 and 2011 under the Company’s capital leases consisted of the following (in thousands): 
 
Total Debt Outstanding
 
2012
 
2011
Capital lease obligations
$
4,412

 
$
5,562

Total debt outstanding
4,412

 
5,562

Less current portion
(1,939
)
 
(2,409
)
Total debt outstanding, less current portion
$
2,473

 
$
3,153


124

WESTMORELAND RESOURCES, INC. AND SUBSIDIARY
(A Wholly Owned Subsidiary of Westmoreland Coal Company)
Notes to Consolidated Financial Statements (Continued)

The following table presents aggregate contractual debt maturities of all long-term debt at December 31, 2012 (in thousands):
 
As of December 31, 2012
2013
$
1,939

2014
1,957

2015
360

2016
156

2017

Thereafter

 
$
4,412

WRI leases equipment utilized in its operations at the Absaloka Mine. The weighted average interest rate for these capital leases outstanding at December 31, 2012 and 2011 was 6.61% and 6.74%, respectively.
6.
Postretirement Medical Benefits
The Company participates in a postretirement medical benefit plan sponsored by the Parent. The plan provided medical benefits for retired employees and their dependents. Effective September 1, 2009, WCC eliminated these benefits for non-represented employees and retirees.
The Company records an allocation of the net periodic postretirement medical benefit cost from the Parent as a component of Cost of sales with a corresponding decrease in Payable to related party. In 2012 and 2011, the Company did not make medical benefit payments for its retirees who participate in the Parent’s postretirement medical benefit plan. The Company recorded postretirement medical benefit costs of less than $0.1 million in both 2012 and 2011. The benefit obligation attributable to the plan participants that are employees or retirees of the Company was less than $0.1 million at December 31, 2012 and 2011.
7.
Pension Plan
The Company participates in a noncontributory defined benefit pension plan sponsored by the Parent, which was frozen effective July 1, 2009. This plan covered nearly all of the Company’s full-time employees. Benefits are generally based on years of service, the employee’s average annual compensation for the highest five continuous years of employment as specified in the plan agreement and social security integration levels.
The Company records an allocation of the net periodic pension benefit cost from the Parent as Cost of sales with a corresponding decrease in Payable to related party. The Company allocated less than $0.1 million in net periodic pension benefit cost in both 2012 and 2011. In 2011, the Company contributed $0.1 million for its allocated share of contributions to the pension plan sponsored by the Parent. The Company did not make any contributions in 2012. The accumulated pension benefit obligation attributable to the plan participants that are employees or retirees of the Company was $2.4 million and $2.2 million at December 31, 2012 and December 31, 2011, respectively. This obligation is funded with $1.7 million and $1.6 million of plan assets held by the Parent at December 31, 2012 and 2011, respectively, resulting in a $0.7 million and $0.6 million unfunded liability recorded on the Parent’s consolidated balance sheet at December 31, 2012 and 2011, respectively.
The Company does not expect to contribute to WCC’s pension plan during 2013.
a)
Multi-Employer Pension
The Company contributes to the Central Pension Fund, or the Plan, a multiemployer defined benefit pension plan pursuant to collective bargaining agreements. The Plan’s Employer Identification Number is 36-6052390. The Company contributes to the Plan based on a negotiated rate per hour worked per participating employee. For the Plan’s year-end dates of January 31, 2012 and 2011, no single employer contributed more than 5% of total contributions to the Plan. As of the Plan’s year-end date January 31, 2012, it had a healthy or greater than 80% funding status.
The following table shows the required disclosures for the Central Pension Fund: 

125

WESTMORELAND RESOURCES, INC. AND SUBSIDIARY
(A Wholly Owned Subsidiary of Westmoreland Coal Company)
Notes to Consolidated Financial Statements (Continued)

 
WRI
Employer plan number
9243

Minimum contributions per hour worked
$
5.70

Expiration date of collective bargaining agreements
5/31/2015

Employer contributions (in millions):
 
2012
$
0.5

2011
0.9

2010
0.9

8.
Asset Retirement Obligations and Contractual Third Party Reclamation Receivables
a)
Asset Retirement Obligations
Changes in the Company’s asset retirement obligations during the year ended December 31, 2012 and 2011 were (in thousands): 
 
2012
 
2011
Asset retirement obligations – beginning of year
$
24,757

 
$
32,338

Accretion
2,394

 
3,091

Liabilities settled
(73
)
 
(978
)
Changes due to amount and timing of reclamation
(1,265
)
 
(9,694
)
Asset retirement obligations – end of year
25,813

 
24,757

Less current portion
(1,412
)
 
(1,384
)
Asset retirement obligations – less current portion
$
24,401

 
$
23,373

As permittee, the Company is responsible for the total amount. The financial responsibility for a portion of final reclamation of the mine when it is closed has been transferred by contract to one of the Company’s customers.
b)
Contractual Third-Party Reclamation Receivables
The Company has recognized an asset of $0.4 million and $0.2 million at December 31, 2012 and 2011, respectively as a contractual third-party reclamation receivable, representing the present value of the obligation of one of its customers to reimburse the Company for a portion of the asset retirement costs.
9.
Fair Value
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. The Company is required to disclose the fair value of financial instruments where practicable. The carrying amounts of cash equivalents, accounts receivable and accounts payable reflected on the Consolidated Balance Sheet approximate the fair value of these instruments due to the short duration to their maturities. See Note 4 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 1 assets include available-for-sale equity securities generally valued based on independent third-party market prices.
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. The Company had no Level 2 inputs at December 31, 2012 and 2011.
Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. The Company had no Level 3 inputs at December 31, 2012 and 2011.
The table below sets forth, by level, the Company’s financial assets that are accounted for at fair value (in thousands):

126

WESTMORELAND RESOURCES, INC. AND SUBSIDIARY
(A Wholly Owned Subsidiary of Westmoreland Coal Company)
Notes to Consolidated Financial Statements (Continued)

 
 
Fair Value at December 31, 2012
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
Available-for-sale investments included in Restricted investments and bond collateral
$
191

 
$

 
$

 
 
Fair Value at December 31, 2011
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
Available-for-sale investments included in Restricted investments and bond collateral
$
190

 
$

 
$

10.
Income Taxes
Income tax expense attributable to net income before income taxes consists of (in thousands): 
 
2012
 
2011
 
2010
Current:
 
 
 
 
 
State
$

 
$
(16
)
 
$
21

Income tax expense (benefit)
$

 
$
(16
)
 
$
21

Income tax expense (benefit) attributable to net income before income taxes differed from the amounts computed by applying the statutory federal income tax rate of 34% to pre-tax income as a result of the following (in thousands): 
 
2012
 
2011
 
2010
Computed tax expense (benefit) at statutory rate
$
933

 
$
(578
)
 
$
(787
)
Increase in income tax expense (benefit) resulting from:
 
 
 
 
 
Noncontrolling interest
2,188

 
1,283

 
899

State income taxes, net of federal tax benefit

 

 
10

State income taxes, return to provision adjustment

 
(10
)
 
5

Prior year permanent items tax adjustments

 
1

 
41

Change in valuation allowance for net deferred tax assets
(3,008
)
 
(745
)
 
(167
)
Domestic production activities deduction
(160
)
 

 

Other, net
47

 
33

 
20

Actual income tax expense (benefit)
$

 
$
(16
)
 
$
21


127

WESTMORELAND RESOURCES, INC. AND SUBSIDIARY
(A Wholly Owned Subsidiary of Westmoreland Coal Company)
Notes to Consolidated Financial Statements (Continued)

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below (in thousands): 
 
2012
 
2011
Deferred tax assets:
 
 
 
Indian coal tax credit carryforward
$
15,956

 
$
15,990

Accruals for following:
 
 
 
Asset retirement obligations
7,505

 
6,647

NOL carryforward
1,391

 
3,206

Other accruals
316

 
234

Pension and postretirement medical obligation
269

 
225

AMT credit carryforward
96

 

Gain on sale of partnership interest

 
2,992

Total gross deferred tax assets
25,533

 
29,294

Less valuation allowance
(14,296
)
 
(17,461
)
Net deferred tax asset
11,237

 
11,833

Deferred tax liabilities:
 
 
 
Property, plant and equipment, due to differences in basis and depreciation, depletion and amortization
(11,237
)
 
(11,826
)
Change in accounting method

 
(7
)
Total gross deferred tax liabilities
(11,237
)
 
(11,833
)
Net deferred taxes
$

 
$

As of December 31, 2012, the Company has available federal net operating loss carryforwards to reduce future regular taxable income, which expires as follows (in thousands): 
Expiration Date
Regular Tax
2030
$
2,263

2031
1,368

Total
$
3,631

As of December 31, 2012, the Company also has an estimated $3.5 million in state net operating loss carryforwards to reduce future taxable income.
11.
Commitments and contingencies
a)
Leases
The gross value of property, plant, equipment and mine development assets under capital leases was $5.3 million and $4.7 million as of December 31, 2012 and December 31, 2011, respectively, related primarily to the leasing of mining equipment. The accumulated amortization for these items was $1.6 million and $1.5 million at December 31, 2012 and December 31, 2011, respectively.
Future minimum capital and operating lease payments as of December 31, 2012, are as follows (in thousands): 

128

WESTMORELAND RESOURCES, INC. AND SUBSIDIARY
(A Wholly Owned Subsidiary of Westmoreland Coal Company)
Notes to Consolidated Financial Statements (Continued)

 
Year Ended December 31, 2012
 
Capital Leases
 
Operating Leases
2013
$
2,164

 
$
569

2014
2,039

 

2015
379

 

2016
159

 

2017

 

Thereafter

 

Total minimum lease payments
$
4,741

 
$
569

Less imputed interest
(329
)
 
 
Present value of minimum capital lease payments
$
4,412

 
 
Rental expense under operating leases during the year ending December 31, 2012, 2011 and 2010 totaled $1.2 million, $1.2 million and $1.0 million, respectively.
The Company leases certain of its coal reserves from third parties and pays royalties based on either a per ton rate or as a percentage of revenues received. Royalties charged to expense under all such lease agreements amounted to $5.0 million, $10.1 million and $9.2 million in 2012, 2011 and 2010, respectively.
The company is subject to litigation in the ordinary course of business. No material litigation exists.
12.
Coal Sales and Major Customers
The customers from which more than 10% of total revenue has been derived and the percentage of total revenue from those customers is summarized as follows (in thousands): 
 
2012
 
2011
 
2010
Customer A
$
26,525

 
$
52,835

 
$
45,211

Customer B (1)

 
16,911

 
15,171

Customer C (2)

 
3,150

 
7,491

 
$
26,525

 
$
72,896

 
$
67,873

Percentage of total revenue
68
%
 
91
%
 
91
%
 
(1)
The revenue from Customer B did not exceed 10% in 2012
(2)
The revenue from Customer C did not exceed 10% in 2012 or 2011
13.
Related Party Transactions
The Company engages in certain transactions with its Parent and other subsidiaries of the Parent.
During 2012, Westmoreland Risk Management, Inc., or WRMI, a wholly owned subsidiary of WCC, reimbursed the Company $1.5 million related to the explosion and subsequent fire as described in Note 1. In 2011, WRMI reimbursed the Company $0.5 million This reimbursement is included in Other operating income.
During 2010, Western Energy Company, or WECO, a wholly owned subsidiary of WML, sold 0.2 million tons of coal to the Company for approximately $2.1 million. WECO did not sell any coal to the Company during 2012 or 2011.
The Company was allocated audit and tax fees and information technology costs incurred by its Parent. In 2012, 2011 and 2010, these fees were $0.4 million, $0.3 million and $0.4 million, respectively, and are included in Selling and administrative expenses.
Payable to related party primarily represent the Company’s obligations for long-term loans from the Parent and accruals for postretirement medical benefit costs and pension costs allocated by the Parent, net of payments.

129

WESTMORELAND RESOURCES, INC. AND SUBSIDIARY
(A Wholly Owned Subsidiary of Westmoreland Coal Company)
Notes to Consolidated Financial Statements (Continued)

14.
Quarterly Financial Data (unaudited)
Summarized quarterly financial data is as follows: 
 
Three Months Ended
 
March 31
 
June 30
 
September 30
 
December 31
 
(In thousands; except per share data)
2012:
 
 
 
 
 
 
 
Revenues
$
9,355

 
$
7,880

 
$
9,452

 
$
12,354

Operating income (loss)
484

 
1,601

 
(739
)
 
1,348

Net income (loss) applicable to Parent company
980

 
1,914

 
991

 
5,297

Basic income (loss) per common share
$
98.00

 
$
191.40

 
$
99.10

 
$
529.70

2011:
 
 
 
 
 
 
 
Revenues
$
19,817

 
$
18,489

 
$
22,291

 
$
19,234

Operating income (loss)
566

 
(709
)
 
566

 
(1,688
)
Net income (loss) applicable to Parent company
837

 
(112
)
 
1,031

 
334

Basic income (loss) per common share
$
83.70

 
$
(11.20
)
 
$
103.10

 
$
33.40


130


WESTMORELAND ENERGY LLC AND SUBSIDIARIES
Report of Independent Registered Public Accounting Firm
The Board of Directors of
Westmoreland Energy LLC
We have audited the accompanying consolidated balance sheets of Westmoreland Energy LLC and subsidiaries (the Company) (a wholly owned subsidiary of Westmoreland Coal Company) as of December 31, 2012 and 2011 and the related consolidated statements of operations, comprehensive income (loss), member’s equity and cash flows for each of the three years in the period ended December 31, 2012. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Westmoreland Energy LLC and subsidiaries at December 31, 2012 and 2011, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2012 in conformity with U.S. generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Denver, Colorado
March 12, 2013

131


WESTMORELAND ENERGY LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Westmoreland Coal Company)
Consolidated Balance Sheets
December 31, 2012 and 2011
 
 
2012
 
2011
 
(In thousands)
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
4,545

 
$
6

Accounts receivable
13,018

 
12,867

Inventories
3,047

 
3,756

Other current assets
298

 
179

Total current assets
20,908

 
16,808

Property, plant, and equipment:
 
 
 
Land
1,156

 
1,156

Capitalized asset retirement cost
239

 
239

Plant, equipment, and other
219,857

 
217,846

 
221,252

 
219,241

Less accumulated depreciation and amortization
61,474

 
51,864

 
159,778

 
167,377

Restricted investments
5,990

 
5,983

Intangible assets, net of accumulated amortization of $10.7 million at December 31, 2012 and $9.0 million at December 31, 2011
2,923

 
4,563

Total assets
$
189,599

 
$
194,731

Liabilities and Member’s Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
4,979

 
8,183

Book overdrafts

 
259

Accrued expenses
3

 
3

Deferred revenue
8,788

 
8,800

Total current liabilities
13,770

 
17,245

Deferred revenue, less current portion
50,239

 
58,539

Pension
289

 
245

Asset retirement obligation
829

 
770

Intangible liabilities, net of accumulated amortization of $6.6 million at December 31, 2012 and $5.6 million at December 31, 2011
6,625

 
7,644

Total liabilities
71,752

 
84,443

Member’s equity:
 
 
 
Contributed capital
52,810

 
52,780

Accumulated other comprehensive income
(372
)
 
(343
)
Retained earnings
65,409

 
57,851

Total member’s equity
117,847

 
110,288

Total liabilities and member’s equity
$
189,599

 
$
194,731

See accompanying Notes to Consolidated Financial Statements.

132


WESTMORELAND ENERGY LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Westmoreland Coal Company)
Consolidated Statements of Operations
Years Ended December 31, 2012, 2011 and 2010
 
 
2012
 
2011
 
2010
 
(In thousands)
Revenues
$
81,285

 
$
86,785

 
$
87,999

Costs and expenses:
 
 
 
 
 
Cost of sales
59,299

 
60,243

 
61,739

Depreciation
10,085

 
10,175

 
10,131

Selling and administrative
3,657

 
4,059

 
4,287

Loss on sale of assets

 
189

 
122

 
73,041

 
74,666

 
76,279

Operating income
8,244

 
12,119

 
11,720

Other income (expense):
 
 
 
 
 
Interest expense
(39
)
 
(469
)
 
(4,659
)
Loss on extinguishment of debt

 
(9,073
)
 

Interest income
15

 
14

 
36

Other income
—    

 

 
30

 
(24
)
 
(9,528
)
 
(4,593
)
Income before income taxes
8,220

 
2,591

 
7,127

Income tax expense (benefit)
107

 
(2,498
)
 
368

Net income
$
8,113

 
$
5,089

 
$
6,759

See accompanying Notes to Consolidated Financial Statements.

133


WESTMORELAND ENERGY LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Westmoreland Coal Company)
Consolidated Statements of Comprehensive Income (Loss)
December 31, 2012, 2011 and 2010
 
 
2012
 
2011
 
2010
 
(In thousands)
Net income
$
8,113

 
$
5,089

 
$
6,759

Other comprehensive income (loss):
 
 
 
 
 
Amortization and adjustment of accumulated actuarial gains or losses, pension
(29
)
 
(140
)
 
(39
)
Comprehensive income attributable to Westmoreland Energy LLC
$
8,084

 
$
4,949

 
$
6,720

See accompanying Notes to Consolidated Financial Statements.

134


WESTMORELAND ENERGY LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Westmoreland Coal Company)
Consolidated Statements of Member’s Equity
Years Ended December 31, 2010, 2011 and 2012
 
 
Contributed
Capital
 
Accumulated
Other
Comprehensive
Loss
 
Retained
Earnings
 
Total
Member’s
Equity
 
(In thousands)
Balance at December 31, 2009
$
6

 
$
(164
)
 
$
59,299

 
$
59,141

Transactions with Parent/affiliates

 

 
126

 
126

Contributions of Westmoreland Coal Company common stock to pension plan on the Company’s behalf
29

 

 

 
29

Amortization and adjustment of accumulated actuarial loss of pension plans

 
(39
)
 

 
(39
)
Net loss

 

 
6,759

 
6,759

Balance at December 31, 2010
$
35

 
$
(203
)
 
$
66,184

 
$
66,016

Distributions

 

 
(10,700
)
 
(10,700
)
Transactions with Parent/affiliates
52,670

 

 
(2,722
)
 
49,948

Westmoreland Coal Company common stock issued as compensation
32

 

 

 
32

Contributions of Westmoreland Coal Company common stock to pension plan on the Company’s behalf
43

 

 

 
 
Amortization and adjustment of accumulated actuarial loss of pension plans

 
(140
)
 

 
 
Net income

 

 
5,089

 
5,089

Balance at December 31, 2011
$
52,780

 
$
(343
)
 
$
57,851

 
$
110,288

Distributions

 

 
(1,050
)
 
(1,050
)
Transactions with Parent/affiliates
(14
)
 

 
495

 
481

Westmoreland Coal Company common stock issued as compensation
44

 

 

 
44

Amortization and adjustment of accumulated actuarial loss of pension plans

 
(29
)
 

 
(29
)
Net income

 

 
8,113

 
8,113

Balance at December 31, 2012
$
52,810

 
$
(372
)
 
$
65,409

 
$
117,847

See accompanying Notes to Consolidated Financial Statements

135


WESTMORELAND ENERGY LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Westmoreland Coal Company)
Consolidated Statements of Cash Flows
Years Ended December 31, 2012, 2011 and 2010
 
 
2012
 
2011
 
2010
 
(In thousands)
Cash flows from operating activities:
 
 
 
 
 
Net income
$
8,113

 
$
5,089

 
$
6,759

Adjustments to reconcile net income to net cash from operating activities:
 
 
 
 
 
Depreciation
10,085

 
10,175

 
10,131

Accretion of asset retirement obligation
59

 
55

 
51

Share-based compensation
44

 
32

 

Loss on the sale of assets

 
189

 
122

Amortization of deferred financing costs

 
(21
)
 
(308
)
Amortization of intangible assets and liabilities, net
621

 
621

 
621

Loss on extinguishment of debt

 
9,073

 

Gain on derivative

 

 
(30
)
Change in:
 
 
 
 
 
Accounts receivable
(151
)
 
1,479

 
(609
)
Inventories
709

 
(1,820
)
 
635

Accounts payable and accrued expenses
(3,201
)
 
(1,063
)
 
884

Deferred revenues
(8,312
)
 
(8,774
)
 
(6,010
)
Other assets and liabilities
(523
)
 
(579
)
 
(211
)
Net cash provided by operating activities
7,444

 
14,456

 
12,035

Cash flows from investing activities:
 
 
 
 
 
Purchases of property, plant and equipment
(2,070
)
 
(2,119
)
 
(2,207
)
Change in restricted investments
(7
)
 
2,581

 
142

Proceeds from sale of assets

 

 
1

Net cash provided by (used in) investing activities
(2,077
)
 
462

 
(2,064
)
Cash flows from financing activities:
 
 
 
 
 
Change in book overdrafts
(259
)
 
259

 

Repayments of long-term debt

 
(46,220
)
 
(9,355
)
Borrowings on revolving lines of credit

 
1,500

 
7,300

Repayments on revolving lines of credit

 
(1,500
)
 
(7,300
)
Deferred financing costs and other refinancing costs

 
(9,077
)
 

Transactions with Parent/affiliates
481

 
49,946

 
126

Distributions
(1,050
)
 
(10,700
)
 

Net cash used in financing activities
(828
)
 
(15,792
)
 
(9,229
)
Net increase (decrease) in cash and cash equivalents
4,539

 
(874
)
 
742

Cash and cash equivalents, beginning of year
6

 
880

 
138

Cash and cash equivalents, end of year
$
4,545

 
$
6

 
$
880

Supplemental disclosure of cash flow information:
 
 
 
 
 
Cash paid during the year for:
 
 
 
 
 
Interest
$
39

 
$
1,179

 
$
5,159

Income taxes (refunds)
$

 
$
(74
)
 
$
10

Noncash transactions:
 
 
 
 
 
Accrued purchases of property and equipment
$

 
$
3

 
$
86

See accompanying Notes to Consolidated Financial Statements

136


WESTMORELAND ENERGY LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Westmoreland Coal Company)
Notes to Consolidated Financial Statements
1.
Summary of Significant Accounting Policies
Nature of Operations
Westmoreland Energy LLC, or WELLC, or the Company, a wholly owned subsidiary of Westmoreland Coal Company, or WCC, or the Parent, is a special purpose Delaware Limited Liability Company formed on December 4, 2000. Through its subsidiaries, the Company owns and operates two cogeneration facilities also known as Roanoke Valley Power Facility, or ROVA, located in Weldon, North Carolina. The first facility, ROVA I, is a 180 MW facility and the second facility, ROVA II, is a 50 MW facility adjacent to ROVA I. ROVA I and ROVA II operate as exempt wholesale generators as determined by the Federal Energy Regulatory Commission, or FERC. ROVA I commenced commercial operation on May 29, 1994. ROVA II commenced commercial operation on June 1, 1995. The Parent provides management and administrative support to WELLC and its subsidiaries, including legal, environmental, sales, and accounting services.
The Company’s financial statements reflect substantially all of its costs of doing business. Common expenses incurred by the Parent on behalf of the Company are charged to the Company based on proportional cost allocations. The Company believes the allocations used are reasonable; however, these financial statements may not necessarily be representative of a stand-alone company.
WCC’s Liquidity
The Company anticipates that its cash from operations, cash on hand and available WCC borrowing capacity will be sufficient to meet its investing, financing, and working capital requirements for the foreseeable future.
On June 29, 2012, WCC and certain of its subsidiaries entered into a five-year, $20.0 million revolving line of credit carved out by the indenture governing the 10.75% Senior Notes with an expiration date of June 30, 2017. The revolver may support up to $2.0 million of letters of credit, which would reduce the balance available under the revolver. At December 31, 2012, availability on the revolver was $20.0 million with no outstanding balance and no supported letters of credit. All extensions of credit under the revolver are collateralized by a first priority security interest in and lien upon the inventory and accounts receivable of the Parent, Westmoreland Resources, Inc., Westmoreland Kemmerer, Inc., and WELLC. Pursuant to the Intercreditor Agreement, the holders of the 10.75% Senior Notes now have a second lien position on these assets.
Consolidation Policy
The consolidated financial statements of WELLC include the accounts of the Company and its wholly owned subsidiaries, after elimination of intercompany balances and transactions.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents are stated at cost, which approximate fair value. Cash equivalents consist of highly liquid investments with original maturities of three months or less.
Accounts Receivable
Accounts receivable are recorded at the invoiced amount and do not bear interest. The Company evaluates the need for an allowance for doubtful accounts based on a review of collectability. The Company has determined that no allowance is necessary for accounts receivable as of December 31, 2012 and 2011.

137


WESTMORELAND ENERGY LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Westmoreland Coal Company)
Notes to Consolidated Financial Statements (Continued)

Inventories
Inventories, which consist primarily of coal, are stated at the lower of cost or market. Cost is determined using the average cost method.
Restricted Investments
The Company has requirements to maintain restricted cash and investments for letter of credit requirements. Funds in the restricted investment accounts are not available to meet the Company’s operating cash needs. For all of its restricted investments, the Company can select from several investment options for the funds and receives the investment returns on these investments.
Property, Plant, and Equipment
Property, plant and equipment are carried at cost and include expenditures for new facilities, those expenditures that substantially increase the productive lives of existing plant and equipment and long-term spare parts inventory. Maintenance and repair costs that do not extend the useful life or increase the productivity of the asset are expensed as incurred. Plant and equipment are depreciated on a straight-line basis over the assets’ estimated useful lives as follows: 
 
Years
Buildings and improvements
15 to 30
Machinery and equipment
3 to 36
Ash monofills are amortized on a cost per ton basis multiplied by tons sent to each monofill. The ash monofills were built as disposal sites for the ash generated during operations. Long-term spare parts inventory begins depreciation when placed in service.
The Company assesses the carrying value of its property, plant and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by comparing estimated undiscounted cash flows expected to be generated from such assets to their net book value. If net book value exceeds estimated cash flows, the asset is written down to fair value.
When an asset is retired or sold, its cost and related accumulated depreciation and depletion are removed from the accounts. The difference between the net book value of the asset and proceeds on disposition is recorded as a gain or loss. Fully depreciated plant and equipment still in use is not eliminated from the accounts.
Intangible Assets and Liabilities
Identifiable intangible assets or liabilities acquired in a business combination must be recognized and reported separately from goodwill. The Company has determined that its acquired identifiable intangible assets and liabilities are related to sales and purchase agreements. Intangible assets result from more favorable market prices than contracted prices in sales and purchase agreements as measured during a business combination. Intangible liabilities result from less favorable market prices than contracted prices in sales and purchase agreements as measured during a business combination. These intangible assets and liabilities are amortized on a straight-line basis over the respective period of the sales and purchase agreements.
Amortization of intangible assets recognized in Cost of sales was $1.6 million in 2012, 2011 and 2010. Amortization of intangible assets and liabilities recognized in Revenues was $1.0 million in 2012, 2011 and 2010.
The estimated aggregate amortization amounts from intangibles assets and liabilities for each of the next five years as of December 31, 2012 are as follows: 

138


WESTMORELAND ENERGY LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Westmoreland Coal Company)
Notes to Consolidated Financial Statements (Continued)

 
Amortization
Expense (Revenue)
 
(In thousands)
2013
$
621

2014
(26
)
2015
(834
)
2016
(996
)
2017
(996
)
Fair Value
The Company is required to disclose the fair value of financial instruments. The carrying amounts of cash equivalents, accounts receivable and accounts payable reflected on the balance sheet approximates the fair value of these instruments due to the short duration to maturities.
The Company’s non-recurring fair value measurements include asset retirement obligations. The Company determines the estimated fair value of its asset retirement obligations by calculating the present value of estimated cash flows related to reclamation liabilities using level 3 inputs. The significant inputs used to calculate such liabilities includes estimates of costs to be incurred, the Company’s credit adjusted discount rate, inflation rates and estimated dates of reclamation.
Financial Instruments
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 instruments, which contain features that qualify them as embedded derivatives. Except for derivatives that qualify for the normal purchase normal sale exception, all financial instruments are recognized in the balance sheet at fair value. Changes in fair value are recognized in earnings if they are not eligible for hedge accounting or Accumulated other comprehensive income (loss) if they qualify for cash flow hedge accounting.
Pension Plan
The Company participates in the Parent’s noncontributory defined benefit pension plan, which was frozen effective July 1, 2009. The costs to provide the benefits are accrued over the employees’ period of active service and are determined on an actuarial basis. The liability recorded for this obligation was $0.3 million and $0.2 million at December 31, 2012 and 2011, respectively.
Deferred Revenue
Deferred revenue is recognized as a portion of the capacity payments under the power sales agreements is considered to be an operating lease. The deferred power revenues are recognized as power is delivered on a pro rata basis, based on the payments estimated to be received and recognized over the remaining term of the power sales agreements.
Asset Retirement Obligation
The Company’s asset retirement obligation (ARO) liabilities primarily consist of estimated costs related to reclaiming land at its facilities in accordance with federal and state reclamation laws.
The Company estimates its ARO liabilities based upon detailed engineering calculations of the amount and timing of the future costs for a third party to perform the required work. Cost estimates are escalated for inflation, and then discounted at the credit-adjusted risk-free rate. The Company records a capitalized asset retirement cost associated with the initial recorded liability. The capitalized asset retirement cost is amortized on a straight-line basis and the ARO liability is accreted to the projected settlement date. Changes in estimates could occur due to revisions of plant operating plans, changes in estimated costs, and changes in timing of the performance of reclamation activities.
Changes in the Company’s asset retirement obligations for the years ended December 31, 2012 and 2011 were as follows: 

139


WESTMORELAND ENERGY LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Westmoreland Coal Company)
Notes to Consolidated Financial Statements (Continued)

 
2012
 
2011
 
(In thousands)
Asset retirement obligation - beginning of period
$
770

 
$
715

Accretion
59

 
55

Asset retirement obligation - end of period
$
829

 
$
770

Income Taxes
The Company is a limited liability company, or LLC, which is treated as a disregarded entity for U.S. Federal and State income tax purposes and as a result is included in the determination of taxable income or loss of WCC. In preparing these separate financial statements, income taxes have been provided like any other tax-paying enterprise based upon the requirement that single-member LLCs are subsidiaries of the member for financial reporting purposes, and income taxes generally are allocated under ASC paragraphs 740-10-30-27 and 30-28.
The Company files consolidated federal and state tax returns with its Parent. As the Company itself is not a taxable entity, the Parent’s tax expense for its income tax return group included on the Parent’s consolidated income tax return is allocated among the members of that group. This allocation is calculated as if each member were a separate taxpayer. This allocation is reflected by the Company in Income tax expense (benefit) with a corresponding amount in Member’s equity. There is no formal tax sharing agreement with the Parent.
The Company accounts for deferred income taxes using the asset and liability method. Deferred tax liabilities and assets are recognized for the expected future tax consequences of events that have been reflected in the Company’s consolidated financial statements based on the difference between the financial statement carrying amounts and tax bases of assets and liabilities, as well as net operating loss and tax credit carryforwards, using enacted tax rates in effect in the years in which the differences are expected to reverse. The Company establishes a valuation allowance against its net deferred tax assets to the extent the Company believes that it is more likely than not that it will not realize the net deferred tax assets.
Accounting guidance prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Under this guidance, a company can recognize the benefit of an income tax position only if it is more likely than not (greater than 50%) that the tax position will be sustained upon tax examination, based solely on the technical merits of the tax position. This accounting standard also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
Power Revenues
ROVA supplies power under long-term power sales agreements. Under these agreements, ROVA invoices and collects capacity payments based on kilowatt-hours produced if the units are dispatched or for the kilowatt-hours of available capacity if the units are not fully dispatched.
A portion of the capacity payments under the agreements is considered to be an operating lease. The Company is recognizing amounts invoiced under the power sales agreements as revenue on a pro rata basis, based on the weighted average per kilowatt hour capacity payments estimated to be received over the remaining term of the power sales agreements. Under this method of recognizing revenue, $8.3 million and $8.8 million of previously deferred revenue was recognized during 2012 and 2011, respectively.
Share-Based Compensation
Share-based compensation expense is generally measured at the grant date and recognized as expense over the vesting period of the entire award. This expense relates to WCC common stock attributable to the Company's employees. These costs are recorded in Selling and administrative expenses in the accompanying consolidated statements of operations.
Accounting Pronouncements Adopted
Effective January 1, 2012, the Company adopted an accounting standards update which generally aligns the principles for fair value measurements and the related disclosure requirements under United States 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

140


WESTMORELAND ENERGY LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Westmoreland Coal Company)
Notes to Consolidated Financial Statements (Continued)

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. The adoption of this standard did not have a material impact on the Company's consolidated financial statements.
Effective January 1, 2012, the Company adopted accounting standards updates with guidance on the presentation of other comprehensive income. These standards require an entity to either present components of net income and other comprehensive income in one continuous statement or in two separate but consecutive statements. Accordingly, the Company has presented net income and other comprehensive income in two consecutive statements.
Effective January 1, 2013, the Company adopted an accounting standards update which requires that companies present either in a single note or parenthetically on the face of the financial statements, the effect of significant amounts reclassified from each component of accumulated other comprehensive income based on its source and the income statement line items affected by the reclassification. If a component is not required to be reclassified to net income in its entirety, companies would instead cross reference to the related footnote for additional information. This accounting standards update is effective for interim and annual reporting periods beginning after December 15, 2012.
2.
Restricted Investments
 
The Company’s restricted investments consist of the following at December 31, 2012 and 2011:
 
2012
 
2011
 
(In thousands)
Letter of credit
$
5,990

 
$
5,983

Total restricted investments
$
5,990

 
$
5,983

All restricted investments at December 31, 2012, consisted of cash and cash equivalents.
All underlying financial instruments included in the restricted investment accounts have Level I inputs available regarding fair value measurements. Level I inputs are quoted prices in active markets for identical financial instruments that the Company has the ability to access at the fair value measurement date.
The Company is required to fund a letter of credit account for its power operations.
3.
Derivative Instruments
Warrant
The Company’s warrant expired August 20, 2010 and therefore had no value at December 31, 2012 or 2011. The effect of derivative instruments not designated as hedging instruments on the accompanying Consolidated Statements of Operations was as follows (in thousands): 
 
 
 
Income Recognized in
Earnings on Derivatives
 
Statement of
Operations Location
 
Year Ended December 31,
Derivative Instruments
 
2012
 
2011
 
2010
Warrant
Other income
 
$

 
$

 
$
30

4.
Income Taxes
Income tax expense (benefit) consists of: 

141


WESTMORELAND ENERGY LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Westmoreland Coal Company)
Notes to Consolidated Financial Statements (Continued)

 
Year Ended December 31,
 
2012
 
2011
 
2010
 
(In thousands)
Current:
 
 
 
 
 
Federal
$
107

 
$
(2,492
)
 
$
296

State

 
(6
)
 
72

Income tax expense (benefit)
$
107

 
$
(2,498
)
 
$
368

Income tax expense attributable to net income before income taxes differed from the amounts computed by applying the statutory federal income tax rate of 34% to pre-tax income as a result of the following: 
 
Year Ended December 31,
 
2012
 
2011
 
2010
 
(In thousands)
Computed tax expense (benefit) at statutory rate
$
2,795

 
$
907

 
$
2,495

Increase (decrease) in income tax expense resulting from:
 
 
 
 
 
State tax, net of federal benefit

 
(4
)
 
47

Prior year permanent items tax return true-up
(5
)
 
(29
)
 
(34
)
Adjustments to deferred tax assets attributable to prior years

 

 
38

Change in valuation allowance for net deferred tax assets
(2,664
)
 
(911
)
 
(2,170
)
2009 federal refund from NOL carryback
(8
)
 
(2,464
)
 

Other, net
(11
)
 
3

 
(8
)
Income tax expense (benefit)
$
107

 
$
(2,498
)
 
$
368

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below: 
 
December 31,
 
2012
 
2011
 
(In thousands)
Deferred tax assets:
 
 
 
Accruals for the following:
 
 
 
Pension and postretirement medical benefit obligation
$
111

 
$
97

Deferred revenue
22,757

 
26,589

Reclamation
266

 
249

MBO bonus
202

 
266

NOLs
306

 
316

Other accruals
70

 
55

Total gross deferred tax assets:
23,712

 
27,572

Less valuation allowance
(5,133
)
 
(8,341
)
Net deferred tax assets
18,579

 
19,231

Deferred tax liabilities:
 
 
 
Other
(1,156
)
 
(1,429
)
Property, plant, and equipment, principally due to differences in depreciation, depletion, and amortization
(17,423
)
 
(17,802
)
Total gross deferred tax liabilities:
(18,579
)
 
(19,231
)
Net deferred tax asset
$

 
$

As of December 31, 2012, the Company also has an estimated $6.7 million in State net operating loss carryforwards to reduce future taxable income.

142


WESTMORELAND ENERGY LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Westmoreland Coal Company)
Notes to Consolidated Financial Statements (Continued)

5.
Commitments and contingencies
Coal Supply Agreement
Westmoreland Partners, which owns ROVA, has two coal supply agreements with contracts expiring in 2014 and 2015. If Westmoreland Partners continues to purchase coal under these contracts at the current volume and pricing, then Westmoreland Partners would be obligated to pay $29.5 million in 2013, $17.6 million for 2014 and $2.9 million for 2015.
The coal supply agreements provide for coal at a price per ton that is significantly less than today’s open market price for Central Appalachia coal. Upon the termination of the coal supply agreements beginning in 2014, the Company will be required to renegotiate its current contract or find a substitute supply of coal at a projected cost per ton far greater than the price it is paying today.
The company is subject to litigation in the ordinary course of business. No material litigation exists.
6.
Power Sales and Major Customers
Substantially all of the Company’s power sales during the years ended December 31, 2012, 2011 and 2010 were made to one customer. ROVA supplies power to Dominion Virginia Power under long-term contracts, which expire in 2019 and 2020. The Company can extend, by mutual consent, the contracts with Dominion Virginia Power for five-year terms at mutually agreeable pricing.
7.
Related-Party Transactions
The Company incurred various costs which were paid to WCC relating to accounting services and are included in Selling and administrative expenses. Fees paid totaled $0.2 million in 2012, $0.3 million in 2011 and 2010.
In addition, WCC allocated $0.2 million in 2012, 2011 and 2010, of audit and tax fees to the Company, which are included in Selling and administrative expenses.
8.
Quarterly Financial Data (unaudited)
Summarized quarterly financial data is as follows: 
 
Three Months Ended
 
March 31
 
June 30
 
September 30
 
December 31
 
(In thousands)
2012:
 
 
 
 
 
 
 
Revenues
$
20,722

 
$
15,882

 
$
22,534

 
$
22,147

Operating income
2,790

 
(1,748
)
 
4,023

 
3,179

Net income (loss)
2,783

 
(1,756
)
 
4,016

 
3,070

2011:
 
 
 
 
 
 
 
Revenues
$
23,628

 
$
21,364

 
$
23,626

 
$
18,167

Operating income
2,553

 
2,450

 
4,694

 
2,422

Net income (loss)
(4,875
)
 
2,451

 
4,665

 
2,848


143


WESTMORELAND KEMMERER, INC.

144


Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholder of
Westmoreland Kemmerer, Inc.
We have audited the accompanying balance sheet of Westmoreland Kemmerer, Inc. (the Company) (a wholly owned subsidiary of Westmoreland Coal Company) as of December 31, 2012 and the related statements of operations, comprehensive income, shareholder’s equity and cash flows for the eleven months ended December 31, 2012. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Westmoreland Kemmerer, Inc. as of December 31, 2012, and the results of its operations and its cash flows for the eleven months ended December 31, 2012, in conformity with U.S. generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Denver, Colorado
March 12, 2013



145


WESTMORELAND KEMMERER, INC
(A Wholly Owned Subsidiary of Westmoreland Coal Company)
Balance Sheet
 
 
December 31, 2012
 
(in thousands)
Assets
 
Current assets:
 
Cash and cash equivalents
$
5,018

Accounts receivable
 
Trade
13,415

Other
278

 
13,693

Inventories
11,637

Deferred income taxes
905

Other current assets
1,086

Total current assets
32,339

Property, plant and equipment, at cost:
 
Land and mineral rights
63,442

Plant and equipment
92,408

 
155,850

Less accumulated depreciation, depletion and amortization
13,352

Net property, plant and equipment
142,498

Restricted investments and bond collateral
24,702

Deferred income taxes
774

Total assets
$
200,313

Liabilities and Shareholder’s Equity
 
Current liabilities:
 
Accounts payable
11,653

Deferred Revenue
2,997

Income taxes
1,679

Payable to related party
1,053

Accrued expenses
9,200

Postretirement medical benefits
87

Asset retirement obligations
2,107

Total current liabilities
28,776

Postretirement medical costs, less current portion
55,981

Pension obligations, less current portion
19,346

Asset retirement obligations, less current portion
15,661

Total liabilities
119,764

Shareholder’s equity:
 
Common stock of $.01 par value. Authorized, issued and outstanding 100 shares at December 31, 2012

Additional paid-in capital
76,777

Accumulated other comprehensive loss
(5,003
)
Retained earnings
8,775

Total Westmoreland Kemmerer Inc. shareholder’s equity
80,549

Total liabilities and shareholder’s equity
$
200,313

See accompanying Notes to Financial Statements.

146



WESTMORELAND KEMMERER, INC
(A Wholly Owned Subsidiary of Westmoreland Coal Company)
Statement of Operations
 
 
Eleven Months
Ended
December 31,
2012
 
(In thousands)
Revenues
$
151,606

Costs and expenses:
 
Cost of sales
104,971

Depreciation, depletion, and amortization
13,287

Selling and administrative
5,351

Loss on sale of assets
242

 
123,851

Operating income
27,755

Other income:
 
Interest income
4

Other
189

 
193

Income before income taxes
27,948

Income tax expense
8,916

Net income
$
19,032

See accompanying Notes to Financial Statements.


147


WESTMORELAND KEMMERER, INC
(A Wholly Owned Subsidiary of Westmoreland Coal Company)
Statement of Comprehensive Income
 
 
Eleven Months
Ended
December 31,
2012
 
(In thousands)
Net income
$
19,032

Other comprehensive income (loss):
 
Adjustments to accumulated actuarial losses and transition obligations, pension
(3,034
)
Adjustments to accumulated actuarial gains and transition obligations, postretirement medical benefits
(1,969
)
Comprehensive income attributable to Westmoreland Kemmerer Inc.
$
14,029

See accompanying Notes to Financial Statements.



148


WESTMORELAND KEMMERER, INC
(A Wholly Owned Subsidiary of Westmoreland Coal Company)
Statement of Shareholder’s Equity
Eleven months ended December 31, 2012
(In thousands)
 
 
Additional
paid-in
capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Retained
Earnings
 
Total
Shareholder’s
Equity
 
(In thousands)
Balance at January 31, 2012
$
76,523

 
$

 
$

 
$
76,523

Westmoreland Coal Company common stock issued as compensation
254

 

 

 
254

Transactions with Parent/affiliates

 

 
8,916

 
8,916

Distributions

 

 
(19,173
)
 
(19,173
)
Other comprehensive loss

 
(5,003
)
 

 
(5,003
)
Net income

 

 
19,032

 
19,032

Balance at December 31, 2012
$
76,777

 
$
(5,003
)
 
$
8,775

 
$
80,549

See accompanying Notes to Financial Statements.



149



WESTMORELAND KEMMERER, INC
(A Wholly Owned Subsidiary of Westmoreland Coal Company)
Statement of Cash Flows
 
 
Eleven Months
Ended
December 31,
2012
 
(In thousands)
Cash flows from operating activities:
 
Net income
$
19,032

Adjustments to reconcile net income (loss) to net cash from operating activities:
 
Depreciation, depletion and amortization
13,287

Accretion of asset retirement obligation and receivable
1,670

Share-based compensation
254

Loss on sale of assets
242

Change in:

Accounts receivable
(13,693
)
Inventories
(1,978
)
Accounts payable
19,334

Payable to related parties
1,053

Deferred revenues
772

Asset retirement obligation
(1,136
)
Accrual for postretirement medical benefits
4,858

Pension and SERP obligations
709

Other assets and liabilities
(1,086
)
Net cash provided by operating activities
43,318

Cash flows from investing activities:
 
Additions to property, plant and equipment
(3,562
)
Increase in restricted investments and bond collateral
(24,702
)
Proceeds from sales of assets
221

Net cash used in investing activities
(28,043
)
Cash flows from financing activities:
 
Transactions with Parent/affiliates
8,916

Distributions
(19,173
)
Net cash used in financing activities
(10,257
)
Net increase in cash and cash equivalents
5,018

Cash and cash equivalents, beginning of year

Cash and cash equivalents, end of year
$
5,018

Supplemental disclosures of cash flow information:
 
Cash paid for interest
$

Noncash transactions:
 
Accrued purchases of property and equipment
$

Capital leases

See accompanying Notes to Financial Statements

150

WESTMORELAND KEMMERER, INC
(A Wholly Owned Subsidiary of Westmoreland Coal Company)
Notes to Consolidated Financial Statements


1.
Summary of Significant Accounting Policies
Nature of Operations
Westmoreland Kemmerer, Inc., or WKI, or the Company, a wholly owned subsidiary of Westmoreland Coal Company, or WCC, or the Parent, owns a surface coal mining operation located in southwestern Wyoming. On January 31, 2012, WCC closed on the acquisition of the Kemmerer Mine. See footnote 2 for additional information on the acquisition. Coal produced from the Kemmerer Mine is sold to electric utilities and various industrial customers based in the north central region of the United States. Westmoreland Coal Company owns and operates the Company. All coal reserves are owned by the Company.
The Company’s financial statements reflect substantially all of its costs of doing business. Common expenses incurred by the Parent on behalf of the Company are charged to the Company based on proportional cost allocations. The Company believes the allocations used are reasonable; however, these financial statements may not necessarily be representative of a stand-alone company.
WCC Liquidity
The Company anticipates that its cash from operations, cash on hand and available WCC borrowing capacity will be sufficient to meet its investing, financing, and working capital requirements for the foreseeable future.
On June 29, 2012, WCC and certain of its subsidiaries entered into a five-year, $20.0 million revolving line of credit carved out by the indenture governing the 10.75% Senior Notes with an expiration date of June 30, 2017. The revolver may support up to $2.0 million of letters of credit, which would reduce the balance available under the revolver. At December 31, 2012, availability on the revolver was $20.0 million with no outstanding balance and no supported letters of credit. All extensions of credit under the revolver are collateralized by a first priority security interest in and lien upon the inventory and accounts receivable of the Parent, Westmoreland Resources, Inc., WKI, and Westmoreland Energy, LLC. Pursuant to the Intercreditor Agreement, the holders of the 10.75% Senior Notes now have a second lien position on these assets.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents are stated at cost, which approximate fair value. Cash equivalents consist of highly liquid investments with original maturities of three months or less.
Accounts Receivable
Accounts receivable are recorded at the invoiced amount and do not bear interest. The Company evaluates the need for an allowance for doubtful accounts based on a review of collectability. The Company has determined that no allowance is necessary for accounts receivable as of December 31, 2012.
Inventories
Inventories, which include materials and supplies as well as raw coal, are stated at the lower of cost or market. Cost is determined using the average cost method. Coal inventory costs include labor, supplies, equipment, operating overhead and other related costs.
Exploration and Mine Development
Exploration expenditures are charged to Cost of sales as incurred, including costs related to drilling and study costs incurred to convert or upgrade mineral resources to reserves. 
At existing surface operations, additional pits may be added to increase production capacity in order to meet customer requirements. These expansions may require significant capital to purchase additional equipment, relocate equipment, build or improve existing haul roads and create the initial pre-production box cut to remove overburden for new pits at existing

151

WESTMORELAND KEMMERER, INC
(A Wholly Owned Subsidiary of Westmoreland Coal Company)
Notes to Consolidated Financial Statements (Continued)

operations. If these pits operate in a separate and distinct area of the mine, the costs associated with initially uncovering coal for production are capitalized and amortized over the life of the developed pit consistent with coal industry practices. Once production has begun, mining costs are then expensed as incurred.
Where new pits are routinely developed as part of a contiguous mining sequence, the Company expenses such costs as incurred. The development of a contiguous pit typically reflects the planned progression of an existing pit, thus maintaining production levels from the same mining area utilizing the same employee group and equipment.
Property, Plant, and Equipment
Property, plant and equipment are recorded at cost. Expenditures that extend the useful lives of existing plant and equipment or increase productivity of the assets are capitalized. Maintenance and repair costs that do not extend the useful life or increase productivity of the asset are expensed as incurred. Coal reserves are recorded at cost, or at fair value in the case of acquired businesses.
Coal reserves, mineral rights and mine development costs are depleted based upon estimated recoverable proven and probable reserves. Plant and equipment are depreciated on a straight-line basis over the assets’ estimated useful lives as follows: 
 
Years
Buildings and improvements
15 to 30
Machinery and equipment
3 to 30
The Company assesses the carrying value of its property, plant and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by comparing estimated undiscounted cash flows expected to be generated from such assets to their net book value. If net book value exceeds estimated cash flows, the asset is written down to fair value. When an asset is retired or sold, its cost and related accumulated depreciation and depletion are removed from the accounts. The difference between the net book value of the asset and proceeds on disposition is recorded as a gain or loss. Fully depreciated plant and equipment still in use is not eliminated from the accounts.
Restricted Investments and Bond Collateral
The Company has requirements to maintain restricted cash and investments for bonding requirements. Amounts held are recorded as Restricted investments and bond collateral. Funds in the restricted investment and bond collateral accounts are not available to meet the Company’s operating cash needs.
Fair Value
The Company is required to disclose the fair value of financial instruments. The carrying amounts of cash equivalents, accounts receivable and accounts payable reflected on the balance sheet approximates the fair value of these instruments due to the short duration to maturities.
Fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value and is defined as: 
Level 1, defined as observable inputs such as quoted prices in active markets for identical assets. Level 1 assets include available-for-sale equity securities generally valued based on independent third-party market prices.
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 Company’s non-recurring fair value measurements include asset retirement obligations. The Company determines the estimated fair value of its asset retirement obligations by calculating the present value of estimated cash flows related to reclamation liabilities using level 3 inputs. The significant inputs used to calculate such liabilities includes estimates of costs to be incurred, the Company’s credit adjusted discount rate, inflation rates and estimated dates of reclamation. The asset retirement liability is accreted to its present value each period.

152

WESTMORELAND KEMMERER, INC
(A Wholly Owned Subsidiary of Westmoreland Coal Company)
Notes to Consolidated Financial Statements (Continued)

Financial Instruments
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 instruments, which contain features that qualify them as embedded derivatives. Except for derivatives that qualify for the normal purchase normal sale exception, all financial instruments are recognized in the balance sheet at fair value. Changes in fair value are recognized in earnings if they are not eligible for hedge accounting or Accumulated other comprehensive income (loss) if they qualify for cash flow hedge accounting.
Postretirement Health Care Benefits
The Company accrues the cost to provide the benefits over the employees’ period of active service for postretirement benefits other than pensions. These costs are determined on an actuarial basis. The Company’s balance sheet reflects the unfunded status of postretirement benefit obligations.
Pension Plan
The Company accrues the cost to provide the benefits over the employees’ period of active service for the non-contributory defined benefit pension plan it sponsors. These costs are determined on an actuarial basis. The Company’s balance sheet reflects the unfunded status of the defined benefit pension plan.
Deferred Revenue
Deferred revenues represent a multi-tiered pricing structure on a certain coal sales contract.
Income Taxes
The Company files consolidated federal and state tax returns with its Parent. As the Company itself is not a taxable entity, the Parent’s tax expense for its income tax return group included on the Parent’s consolidated income tax return is allocated among the members of that group. This allocation is calculated as if each member were a separate taxpayer. This allocation is reflected by the Company in Income tax expense (benefit) with the offset in Shareholder's equity. There is no formal tax sharing agreement with the Parent.
The Company accounts for deferred income taxes using the asset and liability method. Deferred tax liabilities and assets are recognized for the expected future tax consequences of events that have been reflected in the Company’s financial statements based on the difference between the financial statement carrying amounts and tax bases of assets and liabilities, as well as net operating loss and tax credit carryforwards, using enacted tax rates in effect in the years in which the differences are expected to reverse. The Company establishes a valuation allowance against its net deferred tax assets to the extent the Company believes that it is more likely than not that it will not realize the net deferred tax assets.
Accounting guidance prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Under this guidance, a company can recognize the benefit of an income tax position only if it is more likely than not (greater than 50%) that the tax position will be sustained upon tax examination, based solely on the technical merits of the tax position. This standard also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
Asset Retirement Obligations
The Company’s asset retirement obligation, or ARO, liabilities primarily consist of estimated costs related to reclaiming surface land and support facilities at its mines in accordance with federal and state reclamation laws as established by each mining permit.
The Company estimates its ARO liabilities for final reclamation and mine closure based upon detailed engineering calculations of the amount and timing of the estimated future costs for a third party to perform the required work. Cost estimates are escalated for inflation, and then discounted at the credit-adjusted risk-free rate. The Company records mineral rights associated with the initial recorded liability. Mineral rights are amortized based on the units-of-production method over the estimated recoverable, proven and probable reserves at the related mine, and the ARO liability is accreted to the projected settlement date. Changes in estimates could occur due to revisions of mine plans, changes in estimated costs, and changes in the timing of the performance of reclamation activities.

153

WESTMORELAND KEMMERER, INC
(A Wholly Owned Subsidiary of Westmoreland Coal Company)
Notes to Consolidated Financial Statements (Continued)

Coal Revenues
The Company recognizes coal sales revenue at the time title passes to the customer in accordance with the terms of the underlying sales agreements and after any contingent performance obligations have been satisfied. Coal sales revenue is recognized based on the pricing contained in the coal contracts in place at the time that title passes and any retroactive pricing adjustments to those contracts are recognized as revised agreements are reached with the customers and any performance obligations included in the agreements are satisfied.
Share-Based Compensation
Share-based compensation expense is generally measured at the grant date and recognized as expense over the vesting period of the entire award. This expense relates to WCC common stock attributable to the Company's employees. These costs are recorded in Cost of sales and Selling and administrative expenses.
Accounting Pronouncements Adopted
Effective January 1, 2012, the Company adopted an accounting standards update which generally aligns the principles for fair value measurements and the related disclosure requirements under United States 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. The adoption of this standard did not have a material impact on the Company's consolidated financial statements.
Effective January 1, 2013, the Company adopted an accounting standards update which requires that companies present either in a single note or parenthetically on the face of the financial statements, the effect of significant amounts reclassified from each component of accumulated other comprehensive income based on its source and the income statement line items affected by the reclassification. If a component is not required to be reclassified to net income in its entirety, companies would instead cross reference to the related footnote for additional information. This accounting standards update is effective for interim and annual reporting periods beginning after December 15, 2012.

2. Acquisition
On December 23, 2011, WCC, through Westmoreland Kemmerer, Inc., entered into a purchase and sale agreement with Chevron Mining Inc., a Missouri corporation (the “Seller”), pursuant to which WCC agreed to purchase from Seller the Kemmerer surface coal mine, associated processing facilities and other related real and personal property assets located in Kemmerer, Wyoming and assumed certain liabilities related to the mine. WCC did not acquire working capital in the acquisition, other than inventory.
On January 31, 2012, WCC closed on the acquisition of the Kemmerer Mine from the Seller. In addition, on January 31, 2012, WCC completed the issuance and sale of $125.0 million aggregate principal amount of 10.75% senior secured notes due 2018 (the “Add-On Notes”) at a price equal to approximately 95.5% of their face value.
The purchase consideration for the Kemmerer Mine was $164.5 million, which included $76.5 million paid in cash, plus the assumption of approximately $88.0 million of liabilities. The net proceeds of the Add-On Notes financed the $76.5 million cash portion of the purchase consideration, $24.7 million of cash bonding obligations for the Kemmerer Mine and paid cash transaction costs for the Kemmerer acquisition and the Add-On Notes. The balance of the net proceeds of the Add-On Notes was used to fund working capital requirements necessary to integrate the Kemmerer operations with WCC's operations.
The Kemmerer acquisition has been accounted for under the acquisition method of accounting that requires the total purchase consideration to be allocated to the assets acquired and liabilities assumed based on estimates of fair value.
WCC has finalized the purchase price allocation for the Kemmerer acquisition. No significant goodwill or other intangible assets were evident in the acquisition.
A summary of the purchase consideration and allocation of the purchase consideration follow (in millions):

154

WESTMORELAND KEMMERER, INC
(A Wholly Owned Subsidiary of Westmoreland Coal Company)
Notes to Consolidated Financial Statements (Continued)

 
 
Final as of
December 31,
2012
Purchase consideration:
 
 
Cash paid
 
$
76.5

 
 
 
Fair value of liabilities assumed:
 
 
     Postretirement medical cost obligations
 
49.2

     Asset retirement obligations
 
19.4

     Pension obligations
 
15.6

     Deferred revenue
 
2.2

     Accrued liabilities
 
1.6

Total fair value of liabilities assumed
 
88.0

 
 
 
Total purchase consideration
 
$
164.5

 
 
 
 
 
 
Allocation of purchase consideration:
 
 
 
 
 
     Inventories
 
$
9.6

     Land and mineral rights
 
65.5

     Plant and equipment
 
89.4

 
 
 
Total
 
$
164.5



3.
Inventories
Inventory consisted of the following at December 31, 2012 (in thousands): 
 
2012
Coal
$
202

Materials and supplies
11,688

Inventories - other
73

Reserve for obsolete inventory
(326
)
Total
$
11,637



4.
Restricted Investments and Bond Collateral
The Company’s restricted investments and bond collateral consisted of the following (in thousands): 
 
December 31,
 
2012
Reclamation bond collateral
$
24,702

The Company’s carrying value and estimated fair value of its restricted investments and bond collateral at December 31, 2012 are as follows (in thousands): 
 
Carrying Value
 
Fair Value
Cash and cash equivalents
$
24,702

 
$
24,702





155

WESTMORELAND KEMMERER, INC
(A Wholly Owned Subsidiary of Westmoreland Coal Company)
Notes to Consolidated Financial Statements (Continued)

5.
Postretirement Medical Benefits
The Company provides postretirement medical benefits pursuant to collective bargaining agreements. These benefits are provided through self-insured programs.
The following table sets forth the actuarial present value of postretirement medical benefit obligations and amounts recognized in the Company’s financial statements: 

Eleven Months
Ended
December 31,
2012
 
(In thousands)
Change in benefit obligations:

Net benefit obligation at January 31, 2012
$
49,241

Service cost
2,834

Interest cost
2,029

Actuarial loss
1,969

Gross benefits paid
(5
)
Net benefit obligation at end of year
56,068

Change in plan assets:

Employer contributions
5

Gross benefits paid
(5
)
Fair value of plan assets at end of year

Unfunded status at end of year
$
(56,068
)
Amounts recognized in the balance sheet consist of:

Current liabilities
$
(87
)
Noncurrent liabilities
(55,981
)
Accumulated other comprehensive loss
1,969

Net amount recognized
$
(54,099
)
Amounts recognized in accumulated other comprehensive loss consists of:

Net actuarial loss
$
1,969


$
1,969

Actuarial gains and losses are amortized over the average future service of the plan’s participants. The following amounts will be amortized from accumulated other comprehensive loss into net periodic benefit cost in 2013 (in millions): 
Actuarial loss
$

The components of net periodic postretirement medical benefit cost are as follows: 
 
Eleven Months
Ended
December 31,
2012
 
(In thousands)
Components of net periodic benefit cost:
 
Service cost
$
2,834

Interest cost
2,029

Total net periodic benefit cost
$
4,863

These costs are included in the accompanying statement of operations in Cost of sales and Selling and administrative expenses.

156

WESTMORELAND KEMMERER, INC
(A Wholly Owned Subsidiary of Westmoreland Coal Company)
Notes to Consolidated Financial Statements (Continued)

Assumptions
The weighted-average assumptions used to determine the benefit obligations as of the end of each year were as follows: 
 
December 31,
2012
Discount rate
4.15%
Measurement date
December 31, 2012
The discount rate is adjusted annually based on an Aa corporate bond index adjusted for the difference in the duration of the bond index and the duration of the benefit obligations. This rate is calculated using a yield curve, which is developed using the average yield for bonds in the tenth to ninetieth percentiles, which excludes bonds with outlier yields.
The weighted-average assumptions used to determine net periodic benefit cost were as follows: 
 
Eleven Months
Ended
December 31,
2012
Discount rate
4.50%
Measurement date
January 31, 2012
The following presents information about the assumed health care trend rate: 
 
December 31,
2012
Health care cost trend rate assumed for next year
7.00
%
Rate to which the cost trend is assumed to decline (ultimate trend rate)
5.00
%
Year that the trend rate reaches the ultimate trend rate
2021

The effect of a one percent change on the health care cost trend rate used to calculate periodic postretirement medical benefit costs and the related benefit obligation are summarized in the table below: 
 
Postretirement Medical Benefits
 
1 % Increase
 
1 % Decrease
 
(In thousands)
Effect on service and interest cost components
$
1,544

 
$
(1,110
)
Effect on postretirement medical benefit obligation
$
12,942

 
$
(9,797
)
Cash Flows
The following benefit payments and Medicare D subsidy (which the Company receives as a benefit partially offsetting its prescription drug costs for retirees and their dependents) are expected by the Company:
 
 
Postretirement
Medical  Benefits
 
Medicare D
Subsidy
 
Net 
Postretirement
Medical Benefits
 
(In thousands)
2013
$
87

 
$

 
$
87

2014
290

 
(1
)
 
289

2015
553

 
(2
)
 
551

2016
788

 
(5
)
 
783

2017
1,057

 
(16
)
 
1,041

Years 2018 - 2022
10,177

 
(355
)
 
9,822




157

WESTMORELAND KEMMERER, INC
(A Wholly Owned Subsidiary of Westmoreland Coal Company)
Notes to Consolidated Financial Statements (Continued)

6.
Pension
Defined Benefit Pension Plans
The Company provides a defined benefit pension plan to qualified full-time employees pursuant to a collective bargaining agreement. Benefits are generally based on years of service and a specific dollar amount per year of service as specified in the plan agreement. The Company’s funding policy is to contribute annually the minimum amount prescribed, as specified by applicable regulations.
 
Eleven Months
Ended
December 31,
2012
 
(In thousands)
Change in benefit obligation:
 
Net benefit obligation at January 31, 2012
$
57,307

Service cost
1,348

Interest cost
2,107

Actuarial loss
3,844

Benefits paid
(2,141
)
Net benefit obligation at end of year
62,465

Change in plan assets:
 
Fair value of plan assets at the beginning of year
41,704

Actual return on plan assets
3,556

Benefits paid
(2,141
)
Fair value of plan assets at end of year
43,119

Funded status at end of year
$
(19,346
)
Amounts recognized in the accompanying balance sheet consist of:
 
Current liability
$

Noncurrent liability
(19,346
)
Accumulated other comprehensive loss
3,034

Net amount recognized at end of year
$
(16,312
)
Amounts recognized in accumulated other comprehensive loss consist of:
 
Net actuarial loss
$
3,034

The accumulated benefit obligation for all plans was $62.5 million at December 31, 2012.
The components of net periodic benefit cost are as follows: 
 
Eleven Months
Ended
December 31,
2012
 
(In thousands)
Components of net periodic benefit cost:
 
Service cost
$
1,348

Interest cost
2,107

Expected return on plan assets
(2,746
)
Total net periodic pension cost
$
709

These costs are included in the accompanying statement of operations in Cost of sales and Selling and administrative expenses.

158

WESTMORELAND KEMMERER, INC
(A Wholly Owned Subsidiary of Westmoreland Coal Company)
Notes to Consolidated Financial Statements (Continued)

Assumptions
The weighted-average assumptions used to determine the benefit obligations as of the end of each year were as follows: 
 
Eleven Months
Ended
December 31,
2012
Discount rate
3.65%
Measurement date
December 31, 2012
The discount rate is adjusted annually based on an Aa corporate bond index adjusted for the difference in the duration of the bond index and the duration of the benefit obligations. This rate is calculated using a yield curve, which is developed using the average yield for bonds in the tenth to ninetieth percentiles, which excludes bonds with outlier yields.
The following table provides the assumptions used to determine net periodic benefit cost: 
 
Eleven Months
Ended
December 31,
2012
Discount rate
4.10%
Expected return on plan assets
7.40%
Rate of compensation increase
N/A
Measurement date
January 31, 2012
Plan Assets
The Company’s investment goals are to maximize returns subject to specific risk management policies. The Company sets the expected return on plan assets based on historical trends and forecasts provided by its third-party fund managers. Its risk management policies permit investments in mutual funds, and prohibit direct investments in debt and equity securities and derivative financial instruments. The Company addresses diversification by the use of mutual fund investments whose underlying investments are in fixed income and equity securities, both domestic and international. These mutual funds are readily marketable and can be sold to fund benefit payment obligations as they become payable.
The weighted-average target asset allocation of the Company’s pension trusts were as follows at December 31, 2012: 
 
Target Allocation
Asset category

Cash and equivalents
0% - 10%
Equity securities funds
20% - 60%
Debt securities funds
40% - 80%
Other
0% - 10%
The fair value of the Company’s pension plan assets by asset category is as follows:

159

WESTMORELAND KEMMERER, INC
(A Wholly Owned Subsidiary of Westmoreland Coal Company)
Notes to Consolidated Financial Statements (Continued)

 
December 31, 2012
 
 
 
Quoted
Prices in
Active
Markets for
Identical
Assets
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Pooled separate accounts:
 
 
 
 
 
 
 
Large-cap
$
19,027

 
$

 
$
19,027

 
$

International blend
7,324

 

 
7,324

 

Fixed income domestic
14,643

 

 
14,643

 

Stable Value
2,125

 


 
2,125

 


 
$
43,119

 
$

 
$
43,119

 
$

The Company did not have any Level 1 or Level 3 assets.
The Company’s Level 2 assets include pooled separate accounts, which are valued based on the quoted market prices of the securities underlying the investments.
Contributions
The Company did not make any contributions to its retirement plan during 2012. In 2013, the Company does not expect to make any pension plan contributions.
Cash Flows
The following benefit payments are expected to be paid from its pension plan assets: 
 
Pension Benefits
 
(In thousands)
2013
$
2,633

2014
2,889

2015
3,105

2016
3,285

2017
3,500

Years 2018 - 2022
18,481

The benefits expected to be paid are based on the same assumptions used to measure the Company’s pension benefit obligation at December 31, 2012 and include estimated future employee service.



160

WESTMORELAND KEMMERER, INC
(A Wholly Owned Subsidiary of Westmoreland Coal Company)
Notes to Consolidated Financial Statements (Continued)

7. Asset Retirement Obligations
Changes in the Company’s asset retirement obligations for the eleven months ended December 31, 2012:
 
Eleven Months
Ended
December 31,
2012
Asset retirement obligations at January 31, 2012
$
19,377

Accretion
1,670

Liabilities settled
(1,270
)
Changes due to amount and timing of reclamation
(2,009
)
Asset retirement obligations – end of year
17,768

Less current portion
(2,107
)
Asset retirement obligations – less current portion
$
15,661

As permittee, the Company is responsible for the total amount.
8.
Income Taxes
Income tax expense attributable to net income before income taxes consists of (in thousands): 
 
December 31,
2012
Current:
 
Federal
$
8,916

Income tax expense
$
8,916

Income tax expense (benefit) attributable to net income before income taxes differed from the amounts computed by applying the statutory federal income tax rate of 35% to pre-tax income as a result of the following (in thousands): 
 
December 31, 2012
Computed tax expense at statutory rate
$
9,782

Increase in income tax expense resulting from:

Domestic production activities deduction
(875
)
Other, net
9

Actual income tax expense
$
8,916

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below: 

161

WESTMORELAND KEMMERER, INC
(A Wholly Owned Subsidiary of Westmoreland Coal Company)
Notes to Consolidated Financial Statements (Continued)

 
December 31,
 
2012
 
(In thousands)
Deferred tax assets:
 
Accruals for the following:
 
Pension and postretirement medical benefit obligation
$
26,395

Asset retirement obligations
6,922

Accrued vacation
649

Other accrued liabilities
348

Total gross deferred tax assets
34,314

 
 
Deferred tax liabilities:
 
Property, plant, and equipment, principally due to differences in depreciation, depletion, and amortization
(32,635
)
Total gross deferred tax liabilities
(32,635
)
Net deferred tax asset
$
1,679

 
 
Deferred tax asset - current
$
905

Deferred tax asset - noncurrent
774

Net deferred tax asset
$
1,679


9.
Commitments and contingencies
a)
Leases
Future minimum operating lease payments as of December 31, 2012, are as follows (in thousands): 
 
December 31,
2012
2013
$
751

2014
524

2015
4

2016
2

2017
2

Thereafter
2

Total minimum lease payments
$
1,285

Rental expense under operating leases during the eleven months ending December 31, 2012 totaled $0.6 million.
The Company leases certain of its coal reserves from third parties and pays royalties based on either a per ton rate or as a percentage of revenues received. Royalties charged to expense under all such lease agreements amounted to $6.6 million, in the eleven months ending December 31, 2012.
The company is subject to litigation in the ordinary course of business. No material litigation exists.
10.
Coal Sales and Major Customers
The customers from which more than 10% of total revenue has been derived and the percentage of total revenue from those customers is summarized as follows (in thousands): 

162

WESTMORELAND KEMMERER, INC
(A Wholly Owned Subsidiary of Westmoreland Coal Company)
Notes to Consolidated Financial Statements (Continued)

 
Eleven months ended December 31, 2012
Customer A
$
96,718

Customer B 
19,617

Customer C
18,253

 
$
134,588

Percentage of total revenue
89
%

11.
Related Party Transactions
The Company was allocated audit and tax fees and information technology costs incurred by its Parent. In 2012 these fees were $0.3 million and are included in Selling and administrative expenses.
12.
Quarterly Financial Data (unaudited)
Summarized quarterly financial data is as follows: 
 
Two Months ended
 
Three Months Ended
 
March 31
 
June 30
 
September 30
 
December 31
 
(In thousands)
Eleven months ended December 31, 2012:
 
 
 
 
 
 
 
Revenues
$
30,733

 
$
38,177

 
$
44,339

 
$
38,357

Operating income
8,266

 
5,521

 
10,915

 
3,053

Net income (loss)
8,281

 
5,529

 
11,036

 
(5,811
)



163


KEMMERER MINE


Westmoreland Coal Company (the “Company”) completed its acquisition of Chevron Mining Inc.'s (the Seller) Kemmerer surface coal mine on January 31, 2012.

The required audited financial statements of Kemmerer Mine (predecessor to Westmoreland Kemmerer, Inc.) as of December 31, 2011 and for the month ended January 31, 2012 and the years ended December 31, 2011 and 2010 are following. In accordance with the letter, dated January 31, 2013, from the staff of the Division of Corporation Finance of the Securities and Exchange Commission to the Company, these financial statements present a Statement of Assets to be Acquired and Liabilities to be Assumed and Statements of Revenues and Direct Operating Expenses and Statements of Cash Flows. The full S-X Rule 3-16 financial statements and other financial information are not available and not presented due to the following reasons:

Because the Kemmerer Mine is not a stand-alone entity, separate, audited financial statements of the Kemmerer Mine have never been prepared and the Seller has not maintained the distinct and separate accounts necessary to present the full financial statements of the Kemmerer Mine. In addition, certain available financial information for the Kemmerer Mine is kept on separate accounting systems and at separate physical locations. It would be extremely costly and impractical to obtain complete financial statements in accordance with generally accepted accounting principles because separate financial statements were never historically required nor were such statements ever prepared. The preparation of such statements would involve many subjective assumptions, unreasonable effort and expense.

A determination of the portion of historical general and administrative expenses or other indirect expenses that were attributable to the Kemmerer Mine is not practicable due to the Seller not maintaining the distinct and separate records necessary to present such expenses.

In evaluating the Kemmerer Mine, the Company did not rely on any audited or unaudited financial statements relating to the Kemmerer Mine. In valuing the transaction, the Company relied on individual analysis of the specific assets it was going to purchase and the liabilities it was going to assume. In addition, the Company relied on an income statement that did not contain costs that were incurred on behalf of the Kemmerer Mine at the Seller's level. The cost information provided by the Seller to the Company was summary level data containing direct operating and capital expenses. The Company's management did not believe the historical earnings or operations of the Kemmerer Mine to be necessary or relevant to its decision to acquire the Kemmerer Mine.

The Company's financial analysis of the Kemmerer Mine was based on internally generated forward-looking projections of the Kemmerer Mine earnings potential given the reserve potential of the Kemmerer Mine; the Company's projection of the future pricing and revenue, operating, general and administrative and capital costs; information regarding the competitive environment; and the Company's extensive knowledge and experience in the coal industry.

The omission of the full financial statements and other financial information would not have a material impact on a reader's understanding of the Kemmerer Mine's financial results and condition and related trends.

In addition, there have not been any material changes in the historical results of operations, liquidity, cash flows and financial resources related to the operations acquired since the date of acquisition.


164


KEMMERER MINE
(Predecessor to Westmoreland Kemmerer, Inc.)

Financial Statements

As of December 31, 2011 and
for the Month Ended January 31, 2012 and the
Years Ended December 31, 2011 and 2010

Together with Independent Auditors' Report



165



INDEPENDENT AUDITORS' REPORT

To the Board of Directors of
Westmoreland Coal Company

We have audited the accompanying financial statements of the Kemmerer Mine (the Mine), predecessor to Westmoreland Kemmerer, Inc., which comprise the Statement of Assets to be Acquired and Liabilities to be Assumed as of December 31, 2011, and the Statements of Revenues and Direct Operating Expenses and Statements of Cash Flows for the month ended January 31, 2012 and the years ended December 31, 2011 and 2010, and the related notes to the financial statements.

The accompanying financial statements were prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission (for inclusion in Westmoreland Coal Company's Form 10-K) and are not intended to be a complete financial presentation of the Mine.

Management's Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of the financial statements that are free from material misstatement, whether due to error or fraud.

Auditors' Responsibility
Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors' judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the assets to be acquired and liabilities to be assumed of the Kemmerer Mine, predecessor to Westmoreland Kemmerer, Inc., as of December 31, 2011, and its revenues and direct operating expenses and its cash flows for the month ended January 31, 2012 and the years ended December 31, 2011 and 2010, in accordance with accounting principles generally accepted in the United States of America.

/s/ Tanner LLC
Salt Lake City, Utah
March 12, 2013


166


KEMMERER MINE
(Predecessor to Westmoreland Kemmerer, Inc.)
Statement of Assets to be Acquired and Liabilities to be Assumed

As of December 31, 2011



Assets to be Acquired
 
Inventories, net
$
10,018,000

Property and equipment, net
145,011,000

 
 
Total assets to be acquired
155,029,000

 
 
Liabilities to be Assumed
 
Accrued liabilities
835,000

Postretirement benefit obligation
55,670,000

Asset retirement obligation
22,045,000

Pension obligation
11,306,000

Pneumoconiosis benefit obligation
2,421,000

 
 
Total liabilities to be assumed
92,277,000

 
 
Commitment and contingencies
 
 
 
Net assets to be acquired
$
62,752,000






 
 
See accompanying notes to financial statements.
167




KEMMERER MINE
(Predecessor to Westmoreland Kemmerer, Inc.)
Statements of Revenues and Direct Operating Expenses



 
For the
 
For the
 
For the
 
Month Ended
 
Year Ended
 
Year Ended
 
January 31,
 
December 31,
December 31,
 
2012
 
2011
 
2010
 
 
 
 
 
 
Net Revenues
 
 
 
 
 
Product sales
$
14,753,000

 
$
144,112,000

 
$
144,261,000

 
 
 
 
 
 
Direct Operating Expenses
 
 
 
 
 
Cost of sales
12,275,000

 
127,262,000

 
113,299,000

Depreciation, depletion, amortization and accretion
1,303,000

 
15,484,000

 
14,055,000

 
 
 
 
 
 
Total direct operating expenses
13,578,000

 
142,746,000

 
127,354,000

 
 
 
 
 
 
Excess of revenues over direct operating expenses
$
1,175,000

 
$
1,366,000

 
$
16,907,000



 
 
See accompanying notes to financial statements.
168






KEMMERER MINE
(Predecessor to Westmoreland Kemmerer, Inc.)
Statements of Cash Flows

 
For the
 
For the
 
For the
 
Month Ended
 
Year Ended
 
Year Ended
 
January 31,
 
December 31,
 
December 31,
 
2012
 
2011
 
2010
 
 
 
 
 
 
Cash flows from operating activities:
 
 
 
 
 
Excess of revenues over direct operating expenses
$
1,175,000

 
$
1,366,000

 
$
16,907,000

Adjustments to reconcile excess of
 revenues over direct operating expenses to
 net cash provided by operating activities:
 
 
 
 
 
Depreciation, depletion, amortization and accretion
1,303,000

 
15,484,000

 
14,055,000

(Gain) loss on disposal of property and equipment
(14,000
)
 
5,871,000

 
1,683,000

Decrease (increase) in:
 
 
 
 
 
Accounts receivable
1,229,000

 
(3,104,000
)
 
(2,030,000
)
Inventories
424,000

 
(1,496,000
)
 
(2,805,000
)
Increase (decrease) in:
 
 
 
 
 
Accounts payable
342,000

 
1,145,000

 
1,146,000

Accrued liabilities
96,000

 
(35,000
)
 
(58,000
)
Pneumoconiosis benefit obligation

 
127,000

 
126,000

Postretirement benefit obligation
337,000

 
12,984,000

 
8,509,000

Pension obligation
(1,375,000
)
 
5,110,000

 
(1,795,000
)
Asset retirement obligation

 
(12,423,000
)
 
955,000

 
 
 
 
 
 
Net cash provided by operating activities
3,517,000

 
25,029,000

 
36,693,000

 
 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
 
Purchase of property and equipment
(88,000
)
 
(15,883,000
)
 
(8,716,000
)
Proceeds from sale of property and equipment
15,000

 
5,000

 
118,000

 
 
 
 
 
 
Net cash used in investing activities
(73,000
)
 
(15,878,000
)
 
(8,598,000
)
 
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
 
Change in due to / due from CMI
(3,444,000
)
 
(9,151,000
)
 
(28,095,000
)
 
 
 
 
 
 
Net change in cash

 

 

 
 
 
 
 
 
Cash at beginning of year

 

 

 
 
 
 
 
 
Cash at end of year
$

 
$

 
$





 
 
See accompanying notes to financial statements.
169



KEMMERER MINE
(Predecessor to Westmoreland Kemmerer, Inc.)
Notes to Financial Statements





1. Description of
Organization
 
Nature of Operations
The Kemmerer Mine (the Mine), located in Lincoln County, Wyoming, was an operation of Chevron Mining, Inc. (CMI). CMI is a wholly owned subsidiary of Chevron Corporation (the Parent). The Mine produces high-quality sub-bituminous coal for sale to the adjacent Naughton power station, as well as various industrial customers located in the proximate geographic region.
 
 
 
 
 
On January 31, 2012, Westmoreland Coal Company, through a wholly owned subsidiary, Westmoreland Kemmerer, Inc., or WKI, completed a Purchase and Sale Agreement, pursuant to which it agreed to purchase from CMI the Mine, including associated processing and shipping facilities and other related real and personal property assets located in the Hams Forks Region of southwestern Wyoming near the town of Kemmerer, Wyoming.


2. Summary
of Significant
Accounting
Policies
 
Basis of Presentation
The accompanying financial statements are presented on the accrual basis of accounting and reflect the assets to be acquired, liabilities to be assumed, revenues and direct operating expenses of the Mine. During the periods presented, the Mine was not accounted for as a separate division by CMI and therefore, certain costs recorded at CMI, such as corporate and shared service expenses, interest, corporate income taxes, litigation expenses, and other indirect expenses, were not allocated to the Mine. Furthermore, all cash receipts and payments were made by CMI. Therefore, while the statements of cash flows present the sources and uses of cash, the cash flows were actually through CMI.
 
 
 
 
 
The Statement of Assets to be Acquired and Liabilities to be Assumed and the Statements of Revenues and Direct Operating Expenses are presented in lieu of the financial statements required under Rule 3-16 of the Securities and Exchange Commission Regulation S-X. The results presented in these financial statements may not be representative of future operations.
 
 
 
 
 
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (US GAAP) requires management to make estimates and assumptions that affect reported amounts and disclosures. Accordingly, actual results could differ from those estimates.

170

KEMMERER MINE
(Predecessor to Westmoreland Kemmerer, Inc.)
Notes to Financial Statements
Continued



2. Summary
of Significant
Accounting
Policies Continued
 
Inventories
Inventories, which include materials and supplies used for mining coal as well as raw coal, are stated at the lower of cost or market. Cost is determined using the average cost method. Coal inventory costs include labor, supplies, equipment, operating overhead and other related costs. Management periodically reviews inventories for excess supply, obsolescence, and valuations above estimated realizable amounts, and provides a reserve to reduce inventories to their net realizable values.
 
 
 
 
 
Property and Equipment
Mineral rights are recorded at cost less accumulated depletion. Mineral rights are depleted based upon estimated recoverable proven and probable reserves. Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation, amortization and depletion are calculated using the straight-line method over the estimated economic useful lives of the assets, and the units of production method, as follows:
Plant and equipment
3-12 years
Mining equipment
4-10 years
Tip-load equipment
5-10 years
 
 
Management estimates the economic useful lives of property and equipment based on the expected number of years the assets will be used. Management revisits these assumptions annually and adjusts the economic useful lives if warranted.

Expenditures that materially increase values or capacities or extend useful lives of property and equipment are capitalized. Routine maintenance, repairs, and renewal costs are expensed as incurred. Upon sale or other retirement of depreciable property, the cost and accumulated depreciation and amortization are removed from the related accounts and any gain or loss is reflected in the statements of revenues and direct operating expenses.
 
 
 
 
 
Impairment of Long-Lived Assets
Long-lived assets are reviewed for impairment when events or changes in circumstances indicate the book value of an asset may not be fully recoverable. When this occurs, the Mine reviews the value assigned to long-lived assets by analyzing the anticipated, undiscounted cash flows they generate. When the expected future undiscounted cash flows from these assets do not exceed their carrying balances, the Mine determines the estimated fair value of such assets. Impairment is recognized to the extent the carrying amount of these assets exceeds their estimated fair value.

171

KEMMERER MINE
(Predecessor to Westmoreland Kemmerer, Inc.)
Notes to Financial Statements
Continued



2. Summary
of Significant
Accounting
Policies Continued
 
Postretirement Benefit Obligation
The Mine accrues the cost to provide other postretirement employee benefits (OPEB), as well as life insurance, other than pension benefits, over the employees' period of active service. These costs are determined on an actuarial basis. The plan is unfunded, and the Mine and retirees share the costs. Certain life insurance benefits are paid by the Mine. Under the accounting standards for postretirement benefits, the Mine recognized the underfunded status as a liability on the Statement of Assets to be Acquired and Liabilities to be Assumed.
 
 
 
 
 
Asset Retirement Obligation
The Mine's asset retirement obligation (ARO) primarily consists of estimated costs to reclaim surface land and support facilities in accordance with the federal and state reclamation laws as established by each mining permit.
 
 
 
 
 
The Mine estimates its ARO for final reclamation and mine closure based upon detailed engineering calculations of the amount and timing of the future costs for a third party to perform the required work. These estimates are based on projected pit configurations at the end of mining and are escalated for inflation, and then discounted at a credit-adjusted risk-free rate. The Mine records an ARO asset associated with the initial recorded liability. The ARO asset is amortized based on the units-of-production method over the estimated recoverable, proven and probable reserves at the Mine, and the ARO liability is accreted to the projected settlement date. Changes in estimates occur due to revisions of Mine plans, changes in estimated costs, and changes in timing of the performance of reclamation activities, and are reflected in the period of change.
 
 
 
 
 
Pension Obligation
The Mine accrues the cost to provide the benefits over the employees' period of active service for the non-contributory defined benefit pension plan it sponsors. These costs are determined on an actuarial basis. The Mine's Statement of Assets to be Acquired and Liabilities to be Assumed reflects the unfunded status of the defined benefit pension plan.
 
 
 
 
 
Pneumoconiosis benefit obligation
The Mine is self-insured for federal and state pneumoconiosis (black lung) benefits for employees. The Mine accounts for these benefits on the accrual basis. Actuarial gains and losses are recognized in the period in which they arise. 

172

KEMMERER MINE
(Predecessor to Westmoreland Kemmerer, Inc.)
Notes to Financial Statements
Continued



2. Summary
of Significant
Accounting
Policies Continued
 
Coal Revenues
The Mine recognizes coal sales revenue at the time title passes to the customer in accordance with the terms of the underlying sales agreements. Coal sales revenue is recognized based on the pricing contained in the contracts in place at the time that title passes.
 
 
 
 
 
Cost of Sales
Cost of sales consists primarily of product and product-related costs.
 
 
 
 
 
Income Taxes
Under the provisions of the Internal Revenue Code and applicable state laws, the Mine is taxed as part of a corporate consolidated income tax return, and as a result, is not directly subject to income taxes. Therefore, no provision for income tax expense or related assets or liabilities has been included in the accompanying financial statements. The Mine is unaware of any uncertain tax positions that qualify for either recognition or disclosure in the financial statements.
 
 
 
 
 
Subsequent Events
Management has evaluated events and transactions for potential recognition or disclosure subsequent to January 31, 2012 and through March 12, 2013, which is the date the financial statements were available to be issued.


3. Inventories
 
Inventories consisted of the following as of December 31, 2011:
Materials and supplies
 
$
10,448,000

Coal
 
812,000

 
 
11,260,000

Less reserve for obsolete inventories
 
(1,242,000
)
 
 
$
10,018,000



4. Property and
Equipment
 
Property and equipment consisted of the following as of December 31, 2011:
Land and mineral rights
 
$
227,761,000

Mining equipment
 
119,553,000

Tip-load equipment
 
50,098,000

Plant and equipment
 
18,482,000

Asset retirement obligation
 
7,795,000

 
 
423,689,000

Less accumulated depreciation and depletion
 
(278,678,000
)
 
 
$
145,011,000


173

KEMMERER MINE
(Predecessor to Westmoreland Kemmerer, Inc.)
Notes to Financial Statements
Continued



4. Property and
Equipment
Continued
 
Depreciation and depletion expense on property and equipment was $1,157,000, $13,757,000 and $12,449,000 for the month ended January 31, 2012 and the years ended December 31, 2011 and 2010, respectively.


5. Postretirement
Benefit
Obligation
 
The Mine provides postretirement medical benefits, as well as life insurance, to current employees and their dependents upon retirement, as mandated by the Coal Industry Retiree Health Act of 1992 and pursuant to collective bargaining agreements. These benefits are provided through self-insured programs.
 
 
 
 
The following table sets forth the actuarial present value of postretirement medical benefit obligations and amounts recognized in the Mine's financial statements as of and for the year ended December 31, 2011:
Change in benefit obligations:
 
 
Net obligation at beginning of year
 
$
42,686,000

Service cost
 
1,676,000

Interest cost
 
2,241,000

Actuarial loss
 
9,067,000

Net obligation at end of year
 
$
55,670,000

 
 
The actuarial loss was primarily a result of decreases in discount rates and updated cost projections.

174

KEMMERER MINE
(Predecessor to Westmoreland Kemmerer, Inc.)
Notes to Financial Statements
Continued



5. Postretirement
Benefit
Obligation
Continued
 
The components of net periodic postretirement medical benefit cost were as follows for the month ended January 31, 2012 and the years ended December 31, 2011 and 2010.
 
 
2012
 
2011
 
2010
Components of net periodic benefit
 cost:
 
 
 
 
 
 
   Service cost
 
$
140,000

 
$
1,676,000

 
$
928,000

   Interest cost
 
197,000

 
2,241,000

 
1,965,000

   Amortization of actuarial loss
 
144,000

 
819,000

 
1,819,000

Total net periodic benefit cost
 
$
481,000

 
$
4,736,000

 
$
4,712,000

 
 
Assumptions
The weighted-average discount rate used to determine the benefit obligations was 4.25% as of December 31, 2011. The discount rate assumption used to determine the postretirement benefit plan obligation and expense reflect the prevailing rates available on high-quality, fixed-income debt instruments. This rate was based on a cash flow analysis that matched estimated future benefit payments to the Citigroup Pension Discount Yield Curve as of December 31, 2011.
 
 
 
 
 
The weighted-average assumptions used to determine the net periodic benefit cost were as follows for the month ended January 31, 2012 and the years ended December 31, 2011 and 2010:
 
2012
 
2011
 
2010
Discount rate
5.25
%
 
5.25
%
 
5.75
%
Measurement date
January 1, 2012

 
January 1, 2011

 
January 1, 2010

 
 
The following presents information about the assumed health care trend rate as of December 31, 2011:
Health care cost trend rate assumed for next
  fiscal year
6.5% - 8.00%
Average assumed rate to which the cost trend is
  to decline (ultimate trend rate)
5.00%
Year that the rate reaches the ultimate trend rate
2023

175

KEMMERER MINE
(Predecessor to Westmoreland Kemmerer, Inc.)
Notes to Financial Statements
Continued



5. Postretirement
Benefit
Obligation
Continued
 
The effect of a one percentage change on the health care cost trend rate used to calculate periodic postretirement medical benefit costs and the related benefit obligation as of December 31, 2011 are summarized in the table below:
 
 
1%
Increase
 
1%
Decrease
Effect on service and interest cost
components
 
$
1,109,000

 
$
(816,000
)
Effect on postretirement medical benefit
obligation
 
8,573,000

 
(6,966,000
)
 
 
Cash Flows
The following benefit payments were expected by the Mine subsequent to December 31, 2011:
Years Ending December 31:
 
 
2012
 
$
101,000

2013
 
373,000

2014
 
701,000

2015
 
1,077,000

2016
 
1,386,000

2017 - 2021
 
11,165,000

 
 
$
14,803,000



6. Asset
Retirement
Obligation
 
Changes in the Mine's asset retirement obligation were as follows for the month ended January 31, 2012 and the years ended December 31, 2011 and 2010:
 
 
2012
 
2011
 
2010
Asset retirement obligation at beginning of period
 
$
22,045,000

 
$
32,857,000

 
$
30,409,000

Accretion
 
141,000

 
1,611,000

 
1,493,000

Changes due to amount and timing of reclamation
 

 
(12,423,000
)
 
955,000

Asset retirement obligation at end of period
 
$
22,186,000

 
$
22,045,000

 
$
32,857,000





176

KEMMERER MINE
(Predecessor to Westmoreland Kemmerer, Inc.)
Notes to Financial Statements
Continued

7. Pension
Obligation
 
The Mine provides a defined benefit pension plan to qualified full-time employees pursuant to a collective bargaining agreement. CMI prefunds the defined benefit plan as required by local regulations or in certain situations where prefunding provides economic advantages. In the United States, all qualified plans are subject to the Employee Retirement Income Security Act (ERISA) minimum funding standard.
 
 
 
 
 
The following table provides a reconciliation of the changes in the plan's benefit obligation and the fair value of the plan's assets, and the amounts recognized in the Mine's financial statements for the plan as of and for the year ended December 31, 2011:
Change in benefit obligations:
 
 
Net obligation at beginning of year
 
$
45,054,000

Service cost
 
1,167,000

Interest cost
 
2,417,000

Actuarial loss
 
5,035,000

Benefits paid
 
(2,176,000
)
Net obligation at end of year
 
51,497,000

 
 
 
Change in plan assets:
 
 
Fair value of plan assets at beginning of year
 
38,858,000

Actual return on plan assets
 
(491,000
)
Employer contributions
 
4,000,000

Benefits paid
 
(2,176,000
)
Fair value of plan assets at end of year
 
40,191,000

Unfunded status at end of year
 
$
(11,306,000
)
 
 
 
Amounts recognized in the Statements of Assets to be acquired and Liabilities to be Assumed consist of:
 
 
Noncurrent liability
 
$
11,306,000

Net amount recognized at end of year
 
$
11,306,000

 
 
 
Amounts recognized in accumulated other
  comprehensive loss consist of:
 
 
Net actuarial loss
 
$
19,898,000

Prior service costs
 
608,000

Total
 
$
20,506,000


177

KEMMERER MINE
(Predecessor to Westmoreland Kemmerer, Inc.)
Notes to Financial Statements
Continued



7. Pension
Obligation
Continued
 
The following tables set forth information summarizing the changes in other comprehensive loss for the year ended December 31, 2011:
Total other comprehensive loss at beginning of year
 
$
12,960,000

Adjustment to actuarial return on plan assets
 
3,415,000

Actuarial loss
 
5,035,000

Amortization of recognized actuarial losses
 
(764,000
)
Amortization of prior period service costs
 
(140,000
)
Total other comprehensive loss at end of year
 
$
20,506,000

 
 
The accumulated benefit obligation for the plan was $51,497,000 as of December 31, 2011.
 
 
 
 
 
Prior service costs and credits and actuarial gains and losses are amortized over the expected future years of service of the plan's participants using the corridor method. The following amounts were expected to be amortized from accumulated other comprehensive loss into net periodic pension cost for the year ended December 31, 2012:
Prior period cost
 
$
140,000

Net loss
 
1,468,000

Total
 
$
1,608,000

 
 
The components of net periodic benefit cost were as follows for the month ended January 31, 2012 and the years ended December 31, 2011 and 2010:
 
 
2012
 
2011
 
2010
Service cost
 
$
97,000

 
$
1,167,000

 
$
1,113,000

Interest cost
 
193,000

 
2,417,000

 
2,432,000

Return on plan assets
 
(244,000
)
 
(2,925,000
)
 
(2,545,000
)
Amortization of:
 
 
 
 
 
 
  Prior service cost
 
12,000

 
140,000

 
383,000

  Actuarial loss
 
106,000

 
764,000

 
764,000

Total benefit cost
 
$
164,000

 
$
1,563,000

 
$
2,147,000

 
 
These costs are included in the accompanying Statements of Revenues and Direct Operating Expenses.

178

KEMMERER MINE
(Predecessor to Westmoreland Kemmerer, Inc.)
Notes to Financial Statements
Continued



7. Pension
Obligation
Continued
 
Assumptions
The weighted-average discount rate used to determine the benefit obligations was 4.50% as of January 31, 2012 and December 31, 2011. The discount rate is adjusted annually based on an A corporate bond index adjusted for the difference in the duration of the bond index and the duration of the benefit obligations. This rate is calculated using a yield curve, which is developed using the average yield for bonds in the tenth to nineteenth percentiles, which excludes bonds with outlier yields.
 
 
 
 
 
The weighted-average assumptions used to determine the benefit cost were as follows for the month ended January 31, 2012 and the years ended December 31, 2011 and 2010:
 
2012
 
2011
 
2010
Discount rate
5.5
%
 
5.5
%
 
6
%
Expected long-term
 rate of return
7.75
%
 
7.75
%
 
7.75
%
Measurement date
December 31, 2011
 
December 31, 2011
 
December 31, 2010
 
 
Plan Assets
The pension plan's investments were combined with the investments of Chevron Master Pension Trust (Master Trust) to maximize administrative efficiencies of CMI. The Master Trust also included the investment assets of other retirement plans sponsored by CMI. Investment income, investment management fees and other direct expenses relating to the Master Trust were allocated to the individual plans based upon the average daily balances. The Plan's interest in the Master Trust was 0.46% as of December 31, 2011.
 
 
 
 
 
The primary investment objectives of the pension plan are to achieve the highest rate of total return within prudent levels of risk and liquidity, to diversify and mitigate potential downside risk associated with the investments, and to provide adequate liquidity for benefit payments and portfolio management.

The Master Trust has an Investment Committee that regularly meets during the year to review the asset holdings and their returns. To assess the plan's investment performance, long-term asset allocation policy benchmarks have been established.

179

KEMMERER MINE
(Predecessor to Westmoreland Kemmerer, Inc.)
Notes to Financial Statements
Continued



7. Pension
Obligation
Continued
 
Plan Assets - Continued
For the Master Trust, the Chevron Board of Directors has established the following approved asset allocation ranges: Equities 40-70 percent, Fixed Income and Cash 20-65 percent, Real Estate 0-15 percent, and Other 0-5 percent. To mitigate concentration and other risks, assets are invested across multiple asset classes with active investment managers and passive index funds. CMI does not prefund the OPEB obligations.
 
 
 
 
 
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly hypothetical transaction between market participants at a given measurement date. Valuation techniques used must maximize the use of observable inputs and minimize the use of unobservable inputs.

Fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value and is defined as:
 
 
 
 
 
Level 1, defined as observable inputs such as quoted prices in active markets for identical assets. Level 1 assets include available-for-sale equity securities generally valued based on independent third-party market prices.

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.

180

KEMMERER MINE
(Predecessor to Westmoreland Kemmerer, Inc.)
Notes to Financial Statements
Continued



7. Pension
Obligation
Continued
 
Plan Assets - Continued
The following table summarizes the assets or liabilities carried by the Master Trust at fair values by fair value hierarchy level, as described above, as of December 31, 2011 (in billions):

 
 
Level 1
 
Level 2
 
Level 3
 
Total
Equities:
 
 
 
 
 
 
 
 
   U.S.
 
$
1,470

 
$

 
$

 
$
1,470

   International
 
1,203

 

 

 
1,203

   Collective trusts/mutual
    funds
 
14

 
2,619

 

 
2,633

Fixed Income:
 
 
 
 
 
 
 
 
   Government
 
146

 
476

 

 
622

   Corporate
 

 
338

 

 
338

   Mortgage-back securities
 

 
107

 

 
107

   Other asset backed
 

 
61

 

 
61

   Collective trusts/mutual
    funds
 

 
1,046

 

 
1,046

U.S. Real Estate
 

 

 
843

 
843

Cash and cash
  equivalents
 
404

 

 

 
404

Other
 
(79
)
 
8

 
54

 
(17
)
                          Total
 
$
3,158

 
$
4,655

 
$
897

 
$
8,710

 
 
U.S. equities include investments in Chevron's common stock in the amount of $35 billion as of December 31, 2011.
 
 
 
 
 
Collective trusts/mutual funds for U.S. plans are entirely index funds. For these index funds, the Level 2 designation is partially based on the restriction that advance notifications of redemptions, typically two business days, is required.
 
 
 
 
 
The year-end valuations of the U.S. real estate assets are based on internal appraisals by the real estate managers, which are updates of third-party appraisals that occur at least once a year for each property in the portfolio.
 
 
 
 
 
The other assets class includes net payables for securities not yet settled (level 1); dividends and interest and tax-related receivables (level 2); and insurance contracts and investments in private-equity limited partnerships (level 3).

181

KEMMERER MINE
(Predecessor to Westmoreland Kemmerer, Inc.)
Notes to Financial Statements
Continued



7. Pension
Obligation
Continued
 
Plan Assets - Continued
The following tables set forth information summarizing the changes in fair value of the Plan's Level 3 assets for the year ended December 31, 2011 (in billions):
Balance at beginning of year
 
$
649

Actual return on plan assets:
 
 
     Assets held at the reporting date
 
102

     Assets sold during the period
 
(1
)
Purchases, sales, and settlements
 
147

Balance at end of year
 
$
897

 
 
Cash Flows
The following benefit payments were expected to be paid from the pension plan assets subsequent to December 31, 2011:

Years Ending December 31:
 
2012
 
$
2,339,000

2013
 
2,395,000

2014
 
2,632,000

2015
 
2,820,000

2016
 
2,980,000

2017 - 2021
 
17,170,000

 
 
$
30,336,000

 
 
The benefits expected to be paid are based on the same assumptions used to measure the pension benefit obligation as of December 31, 2011 and include estimated future employee service.




182

KEMMERER MINE
(Predecessor to Westmoreland Kemmerer, Inc.)
Notes to Financial Statements
Continued

8. Pneumoconiosis
Benefit
Obligation
 
The PPACA amended previous legislation related to black lung disease, providing automatic extension of awarded lifetime benefits to surviving spouses and providing changes to the legal criteria used to assess and award claims. The Mine has not determined what, if any, additional impact may result from these claims due to lack of claims experience under the new legislation and court rulings interpreting the new provisions. The Mine will continue to evaluate the impact of the PPACA in future periods as additional information, interpretations, guidance and claims experience becomes available.
 
 
 
 
 
The Mine's black lung obligation was $2,421,000 as of December 31, 2011.
 
 
 
 

The discount rate used in determining the actuarial present value of the pneumoconiosis benefit obligation was 6% as of December 31, 2011.


9. Commitments
Contingencies,
and
Concentrations
 
Litigation
The Mine is involved in legal proceedings from time-to-time arising in the normal course of business.  The legal proceedings associated with the Kemmerer Mine are handled by CMI and any matters that are subject to legal settlements will be paid by CMI.
 
 
 
 
 
Concentrations
Customers accounting for 10% or more of revenues were as follows for the month ended January 31, 2012 and the years ended December 31, 2011 and 2010:
 
2012
 
2011
 
2010
Customer A
57
%
 
67
%
 
69
%
Customer B
13
%
 
12
%
 
*

Customer C
12
%
 
*

 
*

 
 
*The customer accounted for less than 10% for the period indicated.
 
 
 
 
 
Production Commitment
In July 2010, the Mine entered into a production commitment with Customer A. Under the agreement, the Mine is obligated to sell between 2.4 million tons and 2.85 million tons of coal to Customer A per year. The agreement expires in December 2021. The base price is $35.662 per ton up to 2.4 million tons and $20.00 per ton between 2.4 million and 2.85 million tons and is subject to quarterly adjustments.

183

KEMMERER MINE
(Predecessor to Westmoreland Kemmerer, Inc.)
Notes to Financial Statements
Continued


9. Commitments
Contingencies, and
Concentrations
Continued
 
Production Commitment - Continued
In addition, the Mine has entered into production commitments with approximately 11 other customers in which they are obligated to sell in aggregate between 1,907,000 and 4,161,000 tons of coal with a base price between $15.70 and $54.40 per ton per year. The production commitments were entered into beginning in 2004 and expire as late as 2020.
 
 
 
 
 
Purchase Commitment
The Mine has a purchase commitment to buy a specific number of tires per year through 2014. The estimated annual amount of the purchase commitment is $3.5 million and may vary depending on the actual cost of the tires at the time of purchase.
 
 
 
 
 
Leases
The Mine leases certain of its coal reserves from third parties and pays royalties based on either a per ton rate or as a percentage of revenues received. Royalties charged to expense under all such lease agreements amounted to approximately $.4 million, $4.0 million, and $6.8 million for the month ended January 31, 2012 and the years ended December 31, 2011 and 2010, respectively.


10. Related Party
Transactions
 
The Mine purchased fuel from its Parent in the amounts of $1,088,000, $16,263,000, and $12,569,000 during the month ended January 31, 2012 and the years ended December 31, 2011 and 2010, respectively.
 
 
 
 
 
The Mine purchased lube services from a related party in the amounts $865,000 and $764,000 during the years ended December 31, 2011 and 2010, respectively.
 
 
 
 
 
The Mine periodically transferred assets to and from other mines. The Mine received assets from another mine in the amounts of $892,000 and $1,757,000 during the years ended December 31, 2011 and 2010, respectively.




184


EXHIBIT INDEX 
 
 
 
 
Incorporated by Reference
 
 
Exhibit
Number
 
Exhibit Description
 
Form
 
File
Number
 
Exhibit
 
Filing Date
 
Filed
Herewith
 
 
 
 
 
 
 
 
 
 
 
 
 
Other debt instruments are omitted in accordance with Item 601(b)(4)(iii)(A) of Regulation S-K. Copies of such agreements will be furnished to the Securities and Exchange Commission upon request. Exhibits with asterisks indicate management contracts or compensatory plans or arrangements.
3.1
 
Restated Certificate of Incorporation
 
S-1
 
333-117709
 
3.1
 
7/28/2004
 
 
3.2
 
Certificate of Correction to the Restated Certificate of Incorporation
 
8-K
 
001-11155
 
3.1
 
10/21/2004
 
 
3.3
 
Certificate of Amendment to the Restated Certificate of Incorporation
 
8-K
 
001-11155
 
3.1
 
9/7/2007
 
 
3.4
 
Certificate of Amendment to the Restated Certificate of Incorporation
 
8-K
 
001-11155
 
3.2
 
9/7/2007
 
 
3.5
 
Amended and Restated Bylaws
 
8-K
 
001-11155
 
3.1
 
1/11/2013
 
 
4.1
 
Certificate of Designation of Series A Convertible Exchangeable Preferred Stock
 
10-K
 
001-11155
 
3(a)
 
3/15/1993
 
 
4.2
 
Common Stock certificate
 
S-2
 
33-1950
 
4(c)
 
12/4/1985
 
 
4.3
 
Preferred Stock certificate
 
S-2
 
33-47872
 
4.6
 
5/13/1992
 
 
4.4
 
Indenture, dated as of 2/04/2011, by and between Westmoreland Coal Company, Westmoreland Partners and Wells Fargo Bank, NA, as trustee and note collateral agent.
 
8-K
 
001-11155
 
4.1
 
2/10/2011
 
 
4.5
 
Form of 10.75% Senior Notes due 2018 (included as Exhibit A in Exhibit 4.4).
 
8-K
 
001-11155
 
4.2
 
2/10/2011
 
 
4.6
 
Registration Rights Agreement, dated 2/04/2011, among Westmoreland Coal Company and Westmoreland Partners and Gleacher & Company Securities, Inc., as initial purchaser
 
8-K
 
001-11155
 
4.3
 
2/10/2011
 
 
4.7
 
Pledge and Security Agreement dated as of 2/04/ 2011, by Westmoreland Coal Company and Westmoreland Partners in favor of Wells Fargo Bank, NA, as note collateral agent
 
8-K
 
001-11155
 
4.4
 
2/10/2011
 
 
4.8
 
Supplemental Indenture, dated as of January 31, 2012, by and among Westmoreland Coal Company, Westmoreland Partners and Wells Fargo Bank, National Association, as trustee and not collateral agent.
 
8-K
 
001-11155
 
4.1
 
1/31/2012
 
 
4.9
 
Form of 10.75% Senior Notes due 2018 (included as Exhibit A in Exhibit 4.9).
 
8-K
 
001-11155
 
4.1
 
1/31/2012
 
 
4.10
 
Registration Rights Agreement, dated January 31, 2012, by and among Westmoreland Coal Company, Westmoreland Partners and Gleacher & Company Securities, Inc., as initial purchaser.
 
8-K
 
001-11155
 
4.3
 
1/31/2012
 
 
4.11
 
Amendment No. 1 to the Pledge and Security Agreement dated January 26, 2012
 
8-K
 
001-11155
 
4.4
 
1/31/2012
 
 
10.1*
 
Amended and Restated 2007 Equity Incentive Plan for Employees and Non-Employee Directors
 
 
 
 
 
 
 
 
 
X
10.2*
 
Form of ISO Agreement
 
10-Q
 
001-11155
 
10.1
 
5/9/2008
 
 
10.3*
 
Form of NQSO Agreement for directors
 
10-Q
 
001-11155
 
10.2
 
5/9/2008
 
 
10.4*
 
Form of NQSO Agreement for persons other than directors
 
10-Q
 
001-11155
 
10.3
 
5/9/2008
 
 
10.5*
 
Form of Restricted Stock Unit Agreement for directors
 
10-K
 
001-11155
 
10.5
 
3/13/2012
 
 

185


 
 
 
 
Incorporated by Reference
 
 
Exhibit
Number
 
Exhibit Description
 
Form
 
File
Number
 
Exhibit
 
Filing Date
 
Filed
Herewith
10.6*
 
Form of Restricted Stock Unit Agreement for 2010, 2011 and 2012 awards
 
10-Q
 
001-11155
 
10.2
 
8/9/2010
 
 
10.7*
 
Form of Performance-Based Restricted Stock Unit Agreement for 2011 and 2012 awards
 
10-Q
 
001-11155
 
10.1
 
5/9/2011
 
 
10.8*
 
Form of Restricted Stock Unit Agreement for 2013 Awards
 
 
 
 
 
 
 
 
 
X
10.9*
 
Form of Performance-Based Restricted Stock Unit Agreement for 2013 Awards
 
 
 
 
 
 
 
 
 
X
10.10*
 
Form of Cash Time-Based Award for 2013
 
 
 
 
 
 
 
 
 
X
10.11*
 
Form of Cash Performance-Based Award for 2013
 
 
 
 
 
 
 
 
 
X
10.12*
 
Severance Policy
 
10-Q
 
001-11155
 
10.9
 
8/5/2011
 
 
10.13*
 
Annual Incentive Plan/ Long-Term Incentive Plan Policy
 
 
 
 
 
 
 
 
 
X
10.14*
 
Executive Transition Agreement effective April 5, 2013
 
10-Q
 
001-11155
 
10.1
 
11/8/2012
 
 
10.15
 
Amended Coal Mining Lease between Westmoreland Resources, Inc. (WRI) and Crow Tribe dated 11/26/1974, as amended in 1982
 
10-Q
 
0-752
 
10(a)
 
5/15/1992
 
 
10.16
 
Amendment to Amended Coal Mining Lease between the Crow Tribe and WRI dated 12/02/1994
 
10-K
 
001-11155
 
10.2
 
3/13/2009
 
 
10.17
 
Exploration and Option to Lease Agreement between the Crow Tribe and WRI dated 2/13/2004
 
10-K/A
 
001-11155
 
10.2
 
5/8/2009
 
 
10.18
 
Crow Tribal Lands Coal Lease between the Crow Tribe and WRI dated 2/13/2004
 
10-K/A
 
001-11155
 
10.5
 
5/8/2009
 
 
10.19
 
Master Agreement dated 1/04/1999, between WCC and the UMWA
 
8-K
 
001-11155
 
99.2
 
2/4/1999
 
 
10.20
 
Third Amendment and Restatement of the Power Purchase and Operating Agreement between Westmoreland-LG&E Partners and Virginia Electric and Power Company for ROVA I
 
10-Q
 
001-11155
 
10.2
 
11/6/2006
 
 
10.21
 
Second Amendment and Restatement of the Power Purchase and Operating Agreement between Westmoreland-LG&E Partners and Virginia Electric and Power Company for ROVA II
 
10-Q
 
001-11155
 
10.3
 
11/6/2006
 
 
10.22
 
Senior Secured Convertible Note Purchase Agreement dated 3/04/2008 among WCC and Tontine
 
8-K
 
001-11155
 
10.1
 
3/6/2008
 
 
10.23
 
Amendment to Senior Secured Convertible Note Purchase Agreement dated 1/05/2011
 
8-K
 
001-11155
 
99.1
 
1/14/2011
 
 
10.24
 
Registration Rights Agreement dated 3/04/2008, among WCC and Tontine
 
8-K
 
001-11155
 
10.2
 
3/6/2008
 
 
10.25
 
Note Purchase Agreement dated 6/26/2008 among Westmoreland Mining LLC (WML) and institutional investors
 
8-K
 
001-11155
 
10.1
 
6/26/2008
 
 
10.26
 
Amendment No. 1 to Note Purchase Agreement dated as of June 28, 2012 among WML and institutional investors
 
8-K
 
001-11155
 
10.2
 
7/3/2012
 
 
10.27
 
Continuing Agreement of Guaranty and Suretyship dated 6/26/2008 from various WML subsidiaries
 
8-K
 
001-11155
 
10.2
 
6/26/2008
 
 

186


 
 
 
 
Incorporated by Reference
 
 
Exhibit
Number
 
Exhibit Description
 
Form
 
File
Number
 
Exhibit
 
Filing Date
 
Filed
Herewith
10.28
 
Security Agreement dated 6/26/2008 among WML and U.S. Bank NA
 
8-K
 
001-11155
 
10.3
 
6/26/2008
 
 
10.29
 
Pledge Agreement dated 6/26/2008 among WCC, WML and U.S. Bank NA, for the benefit of the noteholders
 
8-K
 
001-11155
 
10.4
 
6/26/2008
 
 
10.30
 
Amended and Restated Credit Agreement dated 6/26/2008 among WML and PNC Bank, NA
 
8-K
 
001-11155
 
10.5
 
6/26/2008
 
 
10.31
 
First Amendment to Amended and Restated Credit Agreement datd as of June 28, 2012 among WML and PNC Bank, NA
 
8-K
 
001-11155
 
10.3
 
7/3/2012
 
 
10.32
 
Amended and Restated Continuing Agreement of Guaranty dated 6/26/2008 from various WML subsidiaries in favor of PNC Bank, NA
 
8-K
 
001-11155
 
10.6
 
6/26/2008
 
 
10.33
 
Amended and Restated Security Agreement dated 6/26/2008 among WML and U.S. Bank NA
 
8-K
 
001-11155
 
10.7
 
6/26/2008
 
 
10.34
 
Amended and Restated Pledge Agreement dated 6/26/2008 among WCC, WML and U.S. Bank NA
 
8-K
 
001-11155
 
10.8
 
6/26/2008
 
 
10.35
 
Membership Interest Purchase Agreement among WRI, WRI Partners, Inc., Absaloka Coal, LLC and Feedstock Investments IV, LLC dated 10/16/2008
 
8-K
 
001-11155
 
10.1
 
10/21/2008
 
 
10.36
 
Form of Fixed Payment Note
 
8-K
 
001-11155
 
10.3
 
10/21/2008
 
 
10.37
 
Form of Contingent Payment Note
 
8-K
 
001-11155
 
10.4
 
10/21/2008
 
 
10.38
 
Purchase and Sale Agreement dated December 23, 2011 for Kemmerer Coal Mine Assets
 
8-K
 
001-11155
 
99.1
 
1/17/2012
 
 
10.39
 
Amendment to Purchase and Sale Agreement dated January 25, 2012 for Kemmerer Coal Mine Assets
 
8-K
 
001-11155
 
99.1
 
1/31/2012
 
 
10.40
 
Loan and Security Agreement dated June 29, 2012 among The PrivateBank and Trust Company, WCC and various subsidiaries
 
8-K
 
001-11155
 
10.1
 
7/3/2012
 
 
12.1
 
Statement Regarding Computation of Ratios
 
 
 
 
 
 
 
 
 
X
21.1
 
Subsidiaries of WCC
 
 
 
 
 
 
 
 
 
X
23.1
 
Consent of Ernst & Young LLP
 
 
 
 
 
 
 
 
 
X
23.2
 
Consent of Tanner LLC
 
 
 
 
 
 
 
 
 
X
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
95.1
 
Mine Safety Disclosure
 
 
 
 
 
 
 
 
 
X

187


 
 
 
 
Incorporated by Reference
 
 
Exhibit
Number
 
Exhibit Description
 
Form
 
File
Number
 
Exhibit
 
Filing Date
 
Filed
Herewith
101

 
Interactive Data File (Form 10-K for the year ended December 31, 2012 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


188