20. COMMITMENTS AND CONTINGENCIES

Leases and other Commitments

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 as of December 31:



	2016		2015
	(In thousands)
Gross value	$	74,335	$	65,293
Accumulated amortization	32,335		25,878

Future minimum capital and operating lease payments as of December 31, 2016, are as follows:



	Capital Leases			Operating Leases
	(In thousands)
2017	$	35,345		$	9,574
2018	10,467			7,784
2019	6,666			5,763
2020	3,237			1,350
2021	1,772			1,312
Thereafter	1,644			5,100
Total minimum lease payments	59,131			$	30,883
Less imputed interest	(4,070		)
Present value of minimum capital lease payments	$	55,061

Rental expense under operating leases during the years ended December 31, 2016, 2015 and 2014 totaled $18.2 million, $25.2 million and $16.6 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 $99.2 million, $96.7 million and $61.8 million in the years ended December 31, 2016, 2015 and 2014, respectively.

At December 31, 2016, the Company had fuel supply contracts outstanding with a minimum purchase requirement of 9.4 million gallons of diesel fuel for 2017. These contracts qualify for the normal purchase normal sale exception under hedge accounting.

Litigation

Indemnified Canadian Governmental Charges - Obed Mine Containment Pond Breach

On October 31, 2013, at a time when the mine was still owned by Sherritt International Corporation (“Sherritt”), a breach of an on-site water containment pond occurred at the Obed Mountain mine near Hinton, Alberta. The water release consisted of approximately 670,000 cubic meters of processed water containing water mixed with naturally occurring materials, mainly clay, mud, shale and coal fines. The release resulted in investigations by various regulatory authorities. The government of Alberta issued an environmental order in relation to the release on November 19, 2013 against Sherritt and Westmoreland’s Canadian subsidiary, and filed charges under provincial legislation on October 16, 2015. The federal government of Canada filed charges under federal legislation on January 13, 2016.

We are in the process of defending/resolving the provincial and federal charges. Pursuant to a Cooperation Agreement entered into between Sherritt and Westmoreland on April 28, 2014, Sherritt will fully indemnify us for the actual cost of remediation and work required to comply with all regulatory orders. In addition, pursuant to the Arrangement Agreement, Sherritt will fully indemnify us, with no deductibles or minimums, for any and all fees, fines or judgments resulting from the water release. Because of our contractual indemnifications, we do not believe the results of the Obed mine charges will have a material adverse impact on our consolidated financial statements.

A loss contingency for this matter is probable and reasonably estimable. However, due to the full contractual indemnification, the probability of the Company having a net material liability arising out of these matters is remote. As of December 31, 2016, the Company has recorded $5.8 million in Other current liabilities for the estimated costs of remediation work and a corresponding amount in current receivables Other to reflect the indemnification by the prior owner.

Indemnified Canadian Governmental Charges - Coal Valley Mine Water Exceedances

On April 21, 2016, the government of Canada filed charges against Sherritt and Westmoreland’s Canadian subsidiary under federal legislation related to allegations from 2011-2013 of depositing deleterious substances in water frequented by fish at the Coal Valley mine near Edson, Alberta. The allegations concern the use of a certain flocculent at holdings ponds. During those times the mine was still owned by Sherritt.

We are in the process of defending/resolving these federal charges. Pursuant to the Cooperation Agreement and the Arrangement Agreement between Sherritt and Westmoreland, Sherritt will fully indemnify us for the actual cost of remediation and work required to comply with all regulatory orders and fully indemnify us, with no deductibles or minimums, for any and all fees, fines or judgments resulting from this matter. Because of our contractual indemnifications, we do not believe the results of these Coal Valley mine charges will have a material adverse impact on our consolidated financial statements.

WildEarth Guardians Regulatory Challenge to OSM’s Approval Process for Mine Plans

SJCC is subject to certain litigation related to its operations, including an Action filed by WildEarth Guardians (“WEG”) on February 27, 2013, in the United States District Court for the District of Colorado seeking review of the Office of Surface Mining (“OSM”) decisions and decisions of the Assistant Secretary of the Interior approving mine plans or mine plan amendments concerning seven separate coal mines in Colorado, Montana, New Mexico, and Wyoming. Among the decisions being challenged is the January 2008 approval of the mining plan modification for the San Juan mine. WEG alleges that in approving the plans or plan amendments, OSM engaged in a “pattern and practice of failing to comply with” the requirements of the National Environmental Policy Act (“NEPA”) by failing “to ensure that the public was appropriately involved in the adoption of” the mine plans and by failing to “take a hard look at a number of potentially significant environmental impacts.” On February 7, 2014, the case was transferred to the U.S. District Court for the District of New Mexico. On August 31, 2016 Judge Robert Junell issued a decision that 1) granted OSM’s motion for a voluntary remand back to the agency to conduct the required NEPA process as it relates to WEG’s claimed deficiencies and 2) mandated that OSM and SJCC conduct an Environmental Impact Statement (“EIS”) to address the alleged deficiencies of the original NEPA process within a three year time frame at which time automatic vacatur of the mining permit would occur absent a showing of good cause by the parties.

OSM has selected a contractor to perform the required services in support of the EIS in early December 2016. Currently, all affected parties have commenced finalization of contractual requirements to effectuate and manage the EIS process.

Pursuant to the judicial decision SJCC is free to continue operating under the existing permit during the three-year time frame that the EIS is being conducted.

Ohio Environmental Protection Agency Challenge

In May of 2016 the Ohio EPA (“OEPA”) notified Oxford Mining Company, LLC (“Oxford”), in writing that OEPA believed various of the Oxford’s previously remediated mines have failed to meet the performance goals set forth in the approved mitigation plans. OEPA’s letters allow that Oxford either a) provide evidence that OEPA’s listed mitigation deficiencies are actually meeting the performance standards, b) request an extension of up to two years to complete the outstanding mitigation obligations, or c) pursue off-site mitigation credit such as purchasing mitigation credits from third parties. None of the written correspondence specified monetary damages or cost estimates to complete the alleged mitigation deficiencies.

Discussions are ongoing with OEPA to determine an appropriate resolution. There is currently an open dialogue whereby comparative evaluations are being discussed. Presently, our position is that our exposure is inconsequential based on internally conducted technical and legal evaluations.

Other Legal Proceedings

We are party to other legal proceedings arising in the ordinary course of business and may become involved in additional proceedings from time to time. We believe that there are no other legal proceedings pending that are likely to have a material adverse effect on our consolidated financial condition, results of operations or cash flows. Nevertheless, we cannot predict the impact of future developments affecting our claims and lawsuits, and any resolution of a claim or lawsuit or an accrual within a particular fiscal period may materially and adversely impact our results of operations for that period. In addition to claims and lawsuits against us, our operations, permits, and other industry regulatory processes and approvals, including those applicable to the utilities and transportation industries, may also continue to be subject to legal challenges that could materially and adversely impact our mining operations, results and liquidity. These regulatory challenges may seek to vacate prior regulatory decisions and authorizations that are legally required for some or all of our current or planned mining activities. If we are required to reduce or modify our mining activities as a result of these challenges, the impact could have a material adverse effect on our shipments, financial results and liquidity, and could result in claims from third parties if we are unable to meet our commitments under pre-existing commercial agreements as a result of any such required reductions or modifications to our mining activities.