Westmoreland Coal Company’s 3Q 2014 cost performance

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Weather impact

Westmoreland Coal Company (WLB) saw its costs go up due to weather-related issues in the last quarter. Saskatchewan, Canada and North Dakota received heavy rains during the quarter, which impacted the company and its customers. Heavy rains led to challenging conditions for mining as well as for logistics. In fact, bad weather is blamed for most of the company’s increased US operational costs, which went up by about $7.3 million. Other coal producers (KOL) such as Alpha Natural Resources, Inc. (ANR) and Arch Coal Inc. (ACI) have also been impacted by a cooler summer in some way or another.

part 4 loss drivers

Contract restricting

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Westmoreland, or WLB, runs two power plants with a total capacity of 230 MW (megawatts). The company entered into a contract with Dominion Resources, Inc. (D) to supply electricity produced by the company’s power plants. WLB procures coal for the plants from Appalachian producers. The below-market price coal-supply contracts with the suppliers were set to expire. Meanwhile, the company’s deal with Dominion involved a fixed-price contract.

To avoid losses from the possibility of an increase in fuel prices for the Power plants, the company restructured its contract with Dominion last December. This allowed WLB to supply electricity to Dominion from outside sources. WLB then entered into hedges to control costs, so that when market coal prices increase, the company gains. And when coal prices decrease, WLB takes a non-cash hit.

Power segment

The company reported adjusted earnings before interest, taxes, depreciation, and amortization, or EBITDA, losses of $175 thousand in the power segment. Meanwhile, WLB reported a positive adjusted EBITDA of $7.8 million due to the revised terms of its contract with Dominion, unfavorable power prices, and lower demand due to cooler summer. With coal prices plummeting, the company took a $24 million non-cash charge on derivative contracts.

Interest expenses on the rise

The company’s debt has more than doubled over the last year, because the company borrowed to fund the acquisition of Sherritt’s Canadian operations. The company reported interest expenses of $21.3 million in 3Q 2014 compared to $9.9 million in 3Q 2013.

What impact did the increased costs have on the company’s profitability? We’ll find out in the next part of this series.

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