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| WLB > SEC Filings for WLB > Form 10-K on 13-Mar-2009 | All Recent SEC Filings |
13-Mar-2009
Annual Report
AND RESULTS OF OPERATIONS.
Overview
We are an energy company organized as a Delaware corporation in 1910. We mine coal, which is used to produce electric power, and we own power-generating plants.
We own five mines, which are all located in the United States and supply power plants. Several of these power plants are located adjacent to our mines, and we sell virtually all our coal under multi-year contracts. Due to the generally longer duration and terms of our contracts, we enjoy relatively stable demand compared to competitors who sell more of their production on the spot market and under short-term contracts.
We sold 29.3 million tons of coal in 2008, less than 3% of all the coal produced in the United States. We were the tenth largest coal producer in the United States, ranked by tons of coal mined in 2008.
In addition to our mining operations, we own the Roanoke Valley power plants, or ROVA. ROVA consists of two coal-fired units with a total generating capacity of 230 megawatts. ROVA supplies power pursuant to long-term contracts.
Results of Operations
Items that Affect Comparability of Results For 2008 and each of the prior two years, our results have included restructuring charges and special items that significantly affected net loss. The pretax income (expense) components of restructuring charges and special items were as follows (in thousands): Year Ended December 31, 2008 2007 2006 Interest expense attributable to beneficial conversion feature $ (8,146 ) - - Loss on extinguishment of WML debt (3,834 ) - - Loss on extinguishment of ROVA debt (1,344 ) - - Settlement of coal royalty dispute (2,635 ) - - Gain on sale of interest in Ft. Lupton power project 876 - - Combined benefit fund settlement and interest - 6,389 - Gain on sale of mineral interests - 5,641 5,060 Gain on the sale of power operations and maintenance business - 483 - Absaloka Mine operating contract termination fee - (813 ) - Inventory impairment - (1,128 ) - Restructuring charges (2,009 ) (4,523 ) - Total impact of restructuring charges and special items $ (17,092 ) 6,049 5,060 |
Items recorded in 2008
• We recorded $8.1 million of expense related to the beneficial conversion feature in the convertible notes we issued in March 2008, as the conversion price was lower than the fair market value of our common stock at the time of issuance (see Note 7 for a more detailed discussion).
• We refinanced both our WML and ROVA debt during 2008 and as a result recorded losses of $3.8 million and $1.3 million, respectively, for the extinguishment of debt (see Note 7).
• We recorded $2.6 million in net expense related to two coal royalty claims as we reached an agreement with the U.S. Minerals Management Service and the Montana Department of Revenue to settle two long-standing disputes (see Note 19).
• On July 2, 2008, we received $0.9 million for our royalty interest in the gas-fired Ft. Lupton project and recognized a gain of $0.9 million on the sale (see Note 14).
• In 2007, we initiated a restructuring plan in order to reduce the overall cost structure of the Company. As a result, in 2008 and 2007 we recorded restructuring charges of $2.0 million and $4.5 million, respectively. Most of the restructuring charges related to termination benefits, outplacement costs, and lease costs related to the consolidation of corporate office space (see Note 2).
Items recorded in 2007
• During 2007, we reached a settlement with the Combined Benefit Fund, or CBF, for the reimbursement of $5.8 million, plus interest, in past overpayments to the CBF for retiree medical benefits. We recorded the settlement as a $5.8 million reduction in heritage health benefit expenses and $0.6 million in interest income.
• In 2007, we sold a royalty interest in a Wyoming mine for $12.7 million. The sale of the royalty interest resulted in a gain of approximately $5.6 million.
• In 2007, we sold our power operation and maintenance business to North American Energy Services, or NAES, for $0.8 million. The sale of the power operation and maintenance business resulted in a gain of $0.5 million during 2007.
• In 2007, WRI reached an agreement to settle its contract disputes with Washington Group International, Inc., or WGI, who had been the contract operator and 20% owner of the mine. As part of the settlement agreement, WRI assumed operation of the Absaloka Mine and recorded a contract termination fee of $0.8 million related to the buyout of the WGI operating contract. Later in 2007, we purchased WGI's 20% interest to become the sole owner of WRI.
• Pursuant to our Jewett Mine's new coal sale agreement with its customer entered into in 2007, we developed a new mine plan. As a result of the new mine plan, we wrote off $1.1 million of inventory associated with equipment which will not be utilized under the new mine plan.
Items recorded in 2006
• In 2006, we sold our interests in two coal bed methane leases in southern Colorado and recognized a $5.1 million gain on the sale.
2008 Compared to 2007
Summary
Our 2008 sales increased to $509.7 million compared with $504.2 million in 2007. This increase was primarily driven by a $4.7 million increase in our power segment revenues related to an increase in megawatt hours sold and favorable price increases. Our 2008 coal segment sales increased by $0.9 million, as a decrease in tons sold and the impact of decreased prices under our new coal sales contract at our Jewett Mine were offset by a 2% overall favorable price increase as well as pass-through revenues recognized upon the settlement of our coal royalty claims.
Our 2008 net loss applicable to common shareholders increased to $49.9 million compared with a net loss in 2007 of $23.2 million. Excluding the $17.1 million of 2008 expenses and the $6.0 million of 2007
income from restructuring and special items (discussed in Items that Affect Comparability of Our Results), our net loss increased by $3.6 million. The primary factors, in aggregate, driving this increase in net loss were:
• A $3.4 million decrease in our coal segment operating income driven by:
• A $3.1 million increase in 2008 depreciation, depletion, and amortization expenses resulting from increased depletion expenses from asset retirement cost assets, which increased at the end of 2007 due to updated engineering studies, and capital expenditures at the mines;
• reduced tonnages sold; and
• increases in fuel and other commodity costs in 2008.
• A $1.7 million increase in power segment operating income resulting primarily from the execution of our restructuring plan and resulting cost savings.
• A $1.1 million increase in our 2008 heritage costs largely driven by a $3.2 million increase in our 2008 workers compensation expenses due to a decrease in the discount rate used and unfavorable claims experience.
• A $1.8 million decrease in our corporate expenses related to the execution of our restructuring plan and our cost control efforts.
• A $0.7 million increase in income tax expense resulting from increases in state income taxes and a provision for a state income tax claim.
• A $1.7 million decrease in income from discontinued power operations and maintenance businesses sold in 2007.
Coal Segment
The following table shows comparative coal revenues, operating income and
production, and percentage changes between periods:
Year Ended December 31,
Increase/
(Decrease)
2008 2007 $ %
(In thousands)
Revenues $ 419,806 $ 418,870 $ 936 0.2 %
Operating income 15,211 18,723 (3,512 ) (18.8 )%
Tons sold - millions of equivalent tons 29.3 30.0 (0.7 ) (2.3 )%
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Our 2008 coal revenues increased to $419.8 million in 2008, compared with $418.9 million in 2007. This increase occurred as a 0.7 million decrease in tons sold during 2008 was offset by a 2% overall increase in pricing due to increases in commodity based indices and contract renewals as well as pass-through revenues recognized upon the settlement of our coal royalty claims.
Our coal segment's operating income decreased to $15.2 million in 2008, down from $18.7 million in 2007. Excluding special items consisting of a $2.6 million charge for the 2008 settlement of a coal royalty dispute, a $0.8 million termination fee paid in 2007 for our Absaloka Mine operating contract, a $1.1 million dollar inventory impairment in 2007, and restructuring charges (all discussed in Items that Affect Comparability of Our Results), our coal segment's operating income decreased by $3.4 million. The decrease in operating income was driven by the following items:
• A $3.1 million increase in 2008 depreciation, depletion, and amortization expenses resulting from increased depletion expenses from asset retirement cost assets, which increased at the end of 2007 due to updated engineering studies, and capital expenditures at the mines;
• reduced tonnages sold; and
• increases in fuel and other commodity costs in 2008.
Power Segment
The following table shows comparative power revenues, operating income and
production and percentage changes between periods:
Year Ended December 31,
Increase/
(Decrease)
2008 2007 $ %
(In thousands)
Revenues $ 89,640 $ 84,953 $ 4,687 5.5 %
Operating income 16,920 14,150 2,770 19.6 %
Megawatts hours - thousands 1,641 1,590 51 3.2 %
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Our 2008 power segment revenues increased to $89.6 million compared to $85.0 million in 2007. These revenues increased due to an increase in megawatt hours sold as we had a large unexpected shutdown in 2007 and improved operating performance in 2008. Additionally, we had a 5% favorable price increase, which was driven by increases in inflation indices.
Our power segment's operating income was $16.9 million in 2008, compared with $14.1 million in 2007. Excluding the special items consisting of a $0.9 million gain in 2008 on the sale of our royalty interest in Ft. Lupton, a $0.5 million gain on the sale of our power operations and maintenance businesses in 2007, and a $0.7 million restructuring charge in 2007 (all discussed in Items that Affect Comparability of Our Results), our power segment's operating income increased by $1.7 million. This increase was primarily driven by the execution of our restructuring plan we initiated in 2007 and the resulting cost savings.
Heritage
The following table shows comparative detail of the heritage segment's operating
expenses and percentage changes between periods:
Year Ended December 31,
Increase/
(Decrease)
2008 2007 $ %
(In thousands)
Health care benefits $ 25,588 $ 28,252 $ (2,664 ) (9.4 )%
Combined benefit fund payments (credits) 3,470 (2,156 ) (5,626 ) 260.9 %
Workers' compensation benefits 4,417 1,175 3,242 275.9 %
Black lung benefits (credits) (23 ) 318 (341 ) (107.2 )%
Selling and administrative costs 2,045 1,034 1,011 97.8 %
Gain on sale of assets (25 ) - (25 ) -
Heritage segment operating loss $ (35,472 ) $ (28,623 ) $ (6,849 ) 23.9 %
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Our 2008 heritage costs were $35.5 million compared to $28.6 million in 2007. Excluding the $5.8 million combined benefit fund credit we recognized in 2007 (discussed in Items that Affect Comparability of Our Results), our heritage expenses increased by $1.1 million. This increase was primarily driven by a $3.2 million increase in our workers compensation expenses due to a decrease in our discount rate as well as unfavorable claims experience. Favorable health care benefit experience was offset by increased administrative costs primarily due to the resolution of legal claims and consultant costs related to future cost containment efforts.
Corporate
Our corporate segment's operating expenses totaled $12.7 million in 2008 compared to $10.1 million in 2007. Excluding the restructuring charges of $1.8 million and $3.1 million, respectively, in 2008 and 2007,
and the $5.6 million gain on the 2007 sale of mineral rights (discussed in Items that Affect Comparability of Our Results), our corporate segment operating expenses decreased by $1.8 million. This decrease was driven primarily by the execution of our restructuring plan and the resulting cost savings.
Other income (expense), income tax expense, discontinued operations and preferred dividends
Our 2008 other expense increased to $31.6 million compared with $17.4 million of expense in 2007. This increase was predominately driven by special item expenses including $8.1 million of interest on the beneficial conversion feature associated with our convertible debt issued in 2008 and the $3.8 million and $1.3 million losses on the extinguishment of our mining and power debt, respectively, as we refinanced them in 2008 (all discussed in Items that Affect Comparability of Our Results).
Our 2008 income tax expense was $0.9 million compared with $0.2 million in 2007. This increase resulted primarily from increases in state income taxes and a provision for a state income tax claim, which increased our expense.
Income from discontinued operations was $1.7 million in 2007.
2007 Compared to 2006
Summary
Our 2007 sales increased to $504.2 million compared with $444.4 million in 2006. This increase was primarily driven by a $34.4 million increase in our power revenues related to our 2006 acquisition of the remaining ROVA ownership interest, and a $25.4 million increase in our coal revenues due to increased tons and favorable pricing.
Our 2007 net loss applicable to common shareholders increased to $23.2 million compared to a net loss applicable to common shareholders in 2006 of $15.1 million. Excluding the $6.0 million and $5.1 million of income, respectively, from restructuring and special items for 2007 and 2006 (discussed in Items that Affect Comparability of Our Results), our net loss applicable to shareholders increased by $9.1 million. The primary factors, in aggregate, driving this increase in net loss applicable to shareholders were:
• a $12.0 million decrease in our coal segment operating profit driven by increases in our coal segment depletion expenses, lease costs, administrative costs, and operating and maintenance costs;
• $2.5 million increase in power segment operating income following the ROVA acquisition;
• $0.7 million increase in our black lung expenses due to the benefit recorded in 2006;
• decrease in income tax expense resulting from a $2.1 million North Carolina state tax assessment recorded in 2006;
• $1.3 million increase in our 2007 income from our discontinued power operations and maintenance business as we owned this business for a longer duration in 2007 than in 2006; and
• $1.4 million charge in 2006 for the exchange of preferred stock for common stock, net of the corresponding decrease in our 2007 preferred stock dividends resulting from the exchange.
Coal Segment
The following table shows comparative coal revenues, operating income and
production and percentage changes between periods:
Year Ended December 31,
Increase/
(Decrease)
2007 2006 $ %
(In thousands)
Revenues $ 418,870 $ 393,482 $ 25,388 6.5 %
Operating income 18,723 33,370 (14,647 ) (43.9 )%
Tons sold - millions of equivalent tons 30.0 29.4 0.6 2.0 %
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Our 2007 coal revenues increased to $418.9 million in 2007, compared with $393.5 million in 2006. This increase was driven by a 0.6 million increase in tons sold during 2007, and a 4% increase in pricing due to favorable contract renewals during the year.
Our coal segment's operating income decreased to $18.7 million in 2007, down from $33.4 million in 2006. Excluding special items consisting of a $1.1 million inventory impairment charge, $0.8 million Absaloka Mine contract termination fee, and a $0.7 million of restructuring charge (discussed in Items that Affect Comparability of Our Results), the coal segment's operating income decreased by $12.0 million. The decrease in operating income was driven by the following items:
• A $4.0 million increase in 2007 depreciation, depletion, and amortization expenses resulting from increased depletion expenses for asset retirement cost assets, which increased at the end of 2006 due to updated engineering studies, and capital expenditures at the mines;
• $2.0 million of costs resulting from an amendment to our Crow Tribe lease agreement;
• $1.3 million increase in administrative costs as a result of increases in legal and professional fees and information technology costs; and
• significant increases in the various mines' operating and maintenance costs.
Power Segment
The following table shows comparative power revenues, operating income and
production and percentage changes between periods:
Year Ended December 31,
Increase/
(Decrease)
2007 2006 $ %
(In thousands)
Revenues $ 84,953 $ 43,244 $ 41,709 96.5 %
Operating income 14,150 11,906 2,244 18.8 %
Megawatt hours - thousands 1,590 1,639 (49 ) (3.0 )%
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Our 2007 power segment revenues increased to $85.0 million compared to $43.2 million in 2006. These revenues increased as a result of the ROVA acquisition and consolidation which was effective July 1, 2006.
Our power segment's operating income was $14.2 million in 2007 compared with $11.9 million in 2006. Excluding the $0.7 million restructuring charge in 2007 and the $0.5 million gain on the sale of our power operations and maintenance business (discussed in Items that Affect Comparability of Our Results), our power segment's operating income increased by $2.5 million. This increase was driven by our ROVA acquisition and the consolidation of a full year of ROVA operations in 2007.
Heritage
The following table shows comparative detail of the heritage segment's operating
expenses and percentage changes between periods:
Year Ended December 31,
Increase/
(Decrease)
2007 2006 $ %
(In thousands)
Health care benefits $ 28,252 $ 28,295 $ (43 ) (0.2 )%
Combined benefit fund payments (credits) (2,156 ) 3,611 (5,767 ) (159.7 )%
Workers' compensation benefits 1,175 1,336 (161 ) (12.1 )%
Black lung benefits (credit) 318 (421 ) 739 175.5 %
Selling and administrative costs 1,034 186 848 455.9 %
Heritage segment operating loss $ (28,623 ) $ (33,007 ) $ (4,384 ) 13.3 %
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Our 2007 heritage costs were $28.6 million compared to $33.0 million in 2006. Our heritage expenses increased by $1.4 million excluding the $5.8 million CBF gain (discussed in Items that Affect Comparability of Our Results). This increase was primarily driven by $0.3 million in black lung expense in 2007 compared to a black lung benefit of $0.4 million recorded in 2006. The benefit in 2006 resulted from favorable actuarial projections, which decreased our obligations. Our heritage selling and administrative expenses also increased as a result of legal fees incurred for claims.
Corporate
Our 2007 corporate segment's operating loss was $10.1 million in 2007 compared to $7.7 million in 2006. Excluding the restructuring charge of $3.1 million, and the gains on the sale of mineral rights (discussed in Items that Affect Comparability of Our Results), corporate segment operating loss changed by less than $0.1 million.
Other income (expense), income tax expense, discontinued operations, and preferred dividends
Our 2007 other expense increased to $17.4 million compared with $15.3 million of expense in 2006. This increase resulted from the acquisition of ROVA and the recording of a full year of ROVA interest expense in 2007 and was partially offset by a decrease in interest expense from our mining debt due to reduced debt levels in 2007.
Our 2007 income tax expense was $0.2 million compared with $2.4 million in 2006. This decrease resulted primarily from a $2.1 million North Carolina state tax assessment recorded in 2006.
Our 2007 income from discontinued operations was $1.7 million compared with $0.4 million in 2006. This increase related to the $0.5 million gain on the sale of our power operations and maintenance business in 2007, as well as the fact that we owned this business for a longer period of time in 2007 than in 2006.
In 2007, our preferred stock dividend requirements were $1.4 million compared with $1.6 million in 2006. This decrease resulted from a 2006 reduction in the number of preferred shares outstanding as a result of the exchange of our common stock for preferred stock in 2006. We also recorded a $0.8 million premium on the exchange in 2006.
Significant Anticipated Variances between 2008 and 2009
Our outlook for 2009 is based on information presently available and contains certain assumptions regarding future economic conditions. Differences in actual economic conditions compared with our assumptions could have a material impact on our 2009 results.
Special items and restructuring charges in 2008 are discussed in Items that Affect Comparability of Results. We do not expect these items to reoccur in 2009, and in addition, we project the following significant variances will occur in 2009. In the aggregate, we expect these events will allow us to improve upon both our operating results and our cash flows in 2009:
• We expect our overall tons delivered to decrease from 2008 sales tonnages due to anticipated reductions in customer demand and overall economic conditions. We expect this decrease in tons sold to be offset with cost savings generated by productivity and efficiency improvements;
• We expect a decrease in our power segment revenues and increased maintenance expenses resulting from a planned maintenance shutdown at one of our ROVA plants that is required every five years;
• In May 2009, the fixed capacity payment that we receive for each megawatt-hour of electricity that ROVA produces will step down to a lower rate which continues through the end of the power sales agreement in 2019. This decrease will result in a reduction in cash receipts, but will have no impact on our revenues as we begin recognition of previously deferred revenues;
• We expect our Indian Coal Production Tax Credit transactions to generate approximately $7.0 to $8.0 million of additional earnings and cash flows upon the approval of the private letter ruling by the Investor and one of our lenders;
• We expect an increase in our depreciation expense as a result of increased capital investments made during 2008 at our mining operations. We expect to make additional capital investments during 2009 in the range of $40.0 to $50.0 million to improve our mining operations and increase productivity. We expect these capital investments to be funded through our mine's operating cash flows or, if necessary, the mine's existing credit facilities;
• We expect a decrease in corporate professional fees as we incurred significant expenses in 2008 related to our financial statement restatement;
• We expect a reduction in our repayments of long-term debt resulting from the refinancing in 2008 of our coal and power debt. We are not required to make principal payments on our WML debt until 2011;
• We expect an increase in our restricted investments and bond collateral as we enter new mining areas during 2009 and expect to use approximately $5.0 to $10.0 million in cash collateral to secure our reclamation bonds; and
• We expect to have an increase in our required pension plan contributions resulting from the decline in the value of our pension investments and our . . .
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