Item 1. Financial Statements.
Notes to Unaudited Condensed Consolidated Financial Statements
1. Organization, Nature of Business and Basis of Presentation
Foresight Energy LLC (“FELLC”), a perpetual-term Delaware limited liability company, was formed in September 2006 for the development, mining, transportation and sale of coal. Prior to June 23, 2014, Foresight Reserves LP (“Foresight Reserves”) owned 99.333% of FELLC and a member of FELLC’s management owned 0.667%. On June 23, 2014, in connection with the initial public offering (“IPO”) of Foresight Energy LP (“FELP”), Foresight Reserves and a member of management contributed their ownership interests in FELLC to FELP for which they were issued common and subordinated units in FELP. Because this transaction was between entities under common control, the contributed assets and liabilities of FELLC were recorded in the combined consolidated financial statements of FELP at FELLC’s historical cost. FELP has been managed by Foresight Energy GP LLC (“FEGP”) subsequent to the IPO.
On April 16, 2015, Murray Energy Corporation and its affiliates (“Murray Energy”) and Foresight Reserves completed a transaction whereby Murray Energy acquired a 34% voting interest in FEGP and all of the outstanding subordinated units of FELP, representing a 50% ownership of the Partnership’s limited partner units outstanding at that time. On March 28, 2017, following the completion of a debt refinancing (the “March 2017 Refinancing Transactions”), Murray Energy exercised its option (the “FEGP Option”) to acquire an additional 46% voting interest in FEGP from Foresight Reserves and a former member of management pursuant to the terms of an option agreement, dated April 16, 2015, among Murray Energy, Foresight Reserves and a former member of management, as amended, thereby increasing Murray Energy’s voting interest in FEGP to 80%. The aggregate exercise price of the FEGP Option was $15 million. Murray Energy’s acquisition of the incremental ownership in FEGP resulted in its obtaining control of FELP.
Per
Accounting Standards Codification (“
ASC”) 805-50-25-4, Murray Energy, as the acquirer of FELP through FEGP, has the option to apply pushdown accounting in the separate financial statements of the acquiree. Murray Energy elected to adopt pushdown accounting in our stand alone financial statements and therefore we have reflected the adjustment of our assets and liabilities to fair value required by pushdown accounting in our consolidated financial statements.
Due to the application of pushdown accounting, our condensed consolidated financial statements and certain footnote disclosures are presented in two distinct periods to indicate the application of two different bases of accounting between the periods presented. The periods prior to the acquisition date are identified as “Predecessor” and the period after the acquisition date is identified as “Successor”. For accounting purposes, management has designated the acquisition date as March 31, 2017 (the “Acquisition Date”), as the operating results and change in financial position for the intervening period was not material.
As used hereafter in this report, the terms “Foresight Energy LP,” “FELP,” the “Partnership,” “we,” “us” or like terms, refer to the consolidated results of Foresight Energy LP and its consolidated subsidiaries and affiliates, unless the context otherwise requires or where otherwise indicated.
The Partnership operates in a single reportable segment and currently owns four underground mining complexes in the Illinois Basin: Williamson Energy, LLC (“Williamson”); Sugar Camp Energy, LLC (“Sugar Camp”); Hillsboro Energy, LLC (“Hillsboro”); and Macoupin Energy, LLC (“Macoupin”). Mining operations at our Hillsboro complex have been idled since March 2015 due to a combustion event. On April 11, 2018, we announced that our Hillsboro operation will be permanently closed (see Note 13). Our mined coal is sold to a diverse customer base, including electric utility and industrial companies primarily in the eastern United States, as well as overseas markets.
The accompanying condensed consolidated financial statements contain all significant adjustments (consisting of normal recurring accruals) that, in the opinion of management, are necessary to present fairly, the Partnership’s condensed consolidated financial position, results of operations and cash flows for all periods presented. In preparing the condensed consolidated financial statements, management used estimates and assumptions that may affect reported amounts and disclosures. To the extent there are material differences between the estimates and actual results, the impact to the Partnership’s financial condition or results of operations could be material. The unaudited condensed consolidated financial statements do not include footnotes and certain financial information as required annually under U.S. generally accepted accounting principles (“U.S. GAAP”) and, therefore, should be read in conjunction with the annual audited consolidated financial statements for the year ended December 31, 2017 included in our Annual Report on Form 10-K filed with the SEC on March 7, 2018. The results of operations for interim periods are not necessarily indicative of results that can be expected for any future period, including the year ending December 31, 2018. Intercompany transactions are eliminated in consolidation.
7
2. New Accounting Standards
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, Revenue from Contracts with Customers (“ASC 606”), that introduces a new five-step revenue recognition model in which an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASC 606 also requires disclosures sufficient to enable users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers, including qualitative and quantitative disclosures about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. We adopted ASC 606 as of January 1, 2018 using the modified retrospective approach; therefore, the comparative information has not been adjusted and continues to be reported under previous revenue recognition guidance. The adoption did not have a material effect on our financial position and results of operations as the timing of revenue recognition related to coal sales remains consistent between ASC 606 and previous revenue recognition guidance. Additionally, there was no cumulative adjustment to partners’ capital as of January 1, 2018. Refer to Note 3 for the additional financial statement disclosures required by ASC 606.
In November 2016, the FASB issued ASU 2016-18 which clarified the presentation requirements of restricted cash within the statement of cash flows. Under ASU 2016-18, the changes in restricted cash and restricted cash equivalents during the period should be included in the beginning and ending cash and cash equivalents balance reconciliation on the statement of cash flows. When cash, cash equivalents, restricted cash or restricted cash equivalents are presented in more than one line item within the statement of financial position, an entity shall calculate a total cash amount in a narrative or tabular format that agrees to the amount shown on the statement of cash flows. Details on the nature and amounts of restricted cash should also be disclosed. This standard is effective for fiscal years beginning after December 15, 2017, and is to be applied retrospectively. We adopted this update during the first quarter of 2018 and this new guidance to required adjustments to the presentation of our condensed consolidated statement of cash flows. Refer to Note 4 for the additional financial statement disclosures required by this update.
In February 2016, the FASB updated guidance regarding the accounting for leases. This update requires lessees to recognize a lease liability and a lease asset for all leases, including operating leases, with a term greater than 12 months on its balance sheet. The update also expands the required quantitative and qualitative disclosures surrounding leases. This update is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years, with earlier application permitted. This update will be applied using a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. We are currently evaluating the effect of this update on our consolidated financial statements and related disclosures. We disclosed our future minimum payments on our contractual royalty obligations and operating lease obligations in our Annual Report on Form 10-K filed with the SEC on March 7, 2018 and we will evaluate those contracts as well as other existing arrangements to determine if they qualify for lease accounting under the new standard
3. Revenue from Contracts with Customers
Significant Accounting Policy
Revenue is measured based on consideration specified in a contract with a customer. The Partnership recognizes revenue when it satisfies a performance obligation by transferring control over goods and services to a customer.
Shipping and handling costs (e.g., the application of anti-freezing agents) are accounted for as fulfillment costs. The Partnership includes any fulfillment costs billed to customers in revenue, with the corresponding expenses included in cost of coal produced and transportation.
Nature of Goods and Services
The Partnership’s primary source of revenue is from the sale of coal to domestic and international customers through short-term and long-term coal sales contracts. Coal sales revenue includes the sale to customers of coal produced and, from time to time, the re-sale of coal purchased from third-parties or from one of our affiliates. Performance obligations, consisting of individual tons of coal, are satisfied at a point in time when control is transferred to a customer. For domestic coal sales, this generally occurs when coal is loaded onto railcars at the mine or onto barges at terminals. For coal sales to international markets, this generally occurs when coal is loaded onto an ocean vessel.
The Partnership’s coal sales contracts typically range in length from one to three years, however some agreements have terms of as little as one month. Coal sales contracts generally provide for either a fixed base price or a base price determined by a market index. The base price is subject to quality and weight adjustments. Quality and weight adjustments are recorded as necessary based on coal sales contract specifications as a reduction or increase to coal sales revenue. The coal sales contracts also typically give the customer
8
the option to vary volumes, subject to certain minimums. Coal sales are generally invoiced upon shipment and payment is due from customers within standard industry c
redit timeframes.
Disaggregation of Revenue
The following table disaggregates revenue by domestic and international markets:
|
(Successor)
|
|
|
Three Months Ended
March 31, 2018
|
|
|
(In Thousands)
|
|
Coal sales - Domestic
|
$
|
142,715
|
|
Coal sales - International
|
|
95,672
|
|
Total coal sales
|
$
|
238,387
|
|
Contract Balances
The following table provides information about balances associated with contracts with customers:
|
(Successor)
|
|
|
March 31,
2018
|
|
|
(In Thousands)
|
|
Receivables - Included in 'Accounts receivable'
|
$
|
25,179
|
|
Receivables - Included in 'Due from affiliates - current'
|
|
20,395
|
|
Total contract balances
|
$
|
45,574
|
|
Contract Costs
The Partnership applies the practical expedient in ASC 340-40-25-4, whereby the Partnership recognizes the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that the Partnership would have recognized is one year or less. These costs are included in selling, general and administrative expenses.
Other Revenues
Other revenues consist primarily of a transport lease and overriding royalty agreements with Murray Energy (see Note 9). These arrangements are accounted for under guidance contained in ASC 310
Receivables
, ASC 360
Property, Plant, and Equipment
, and ASC 840
Leases
and therefore are outside the scope of ASC 606.
9
4
. Supplemental Cash Flow Information
The following is supplemental information to the condensed consolidated statement of cash flows (in thousands):
|
(Successor)
|
|
|
(Predecessor)
|
|
|
Three Months Ended
March 31, 2018
|
|
|
Three Months Ended
March 31, 2017
|
|
Supplemental disclosures of non-cash financing activities:
|
|
|
|
|
|
|
|
Reclassification of warrant liability to partners' capital
|
$
|
—
|
|
|
$
|
41,888
|
|
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the condensed consolidated balance sheets to the total of the same such amounts shown in the condensed consolidated statement of cash flows (in thousands):
|
(Successor)
|
|
|
(Successor)
|
|
|
(Successor)
|
|
|
|
(Predecessor)
|
|
|
March 31,
2018
|
|
|
December 31,
2017
|
|
|
March 31,
2017
|
|
|
|
December 31,
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
18,553
|
|
|
$
|
2,179
|
|
|
$
|
4,235
|
|
|
|
$
|
103,690
|
|
Restricted cash - Included in 'Other prepaid expenses and current assets'
|
|
—
|
|
|
|
—
|
|
|
|
10,489
|
|
|
|
|
10,731
|
|
Restricted cash - Included in 'Other assets'
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
2,500
|
|
Total cash, cash equivalents, and restricted cash shown in the statement of cash flows
|
$
|
18,553
|
|
|
$
|
2,179
|
|
|
$
|
14,724
|
|
|
|
$
|
116,921
|
|
Restricted cash included in other prepaid expenses and current assets were amounts that were required to be temporarily held in a restricted cash account for a short duration related to our trade accounts receivable securitization program. The accounts receivable securitization program terminated in December 2017.
Restricted cash included in other assets was cash collateral used to secure a letter of credit for one of our surety bond providers. During the three months ended March 31, 2017, the restriction was released.
5. Accounts Receivable
Accounts receivable consist of the following:
|
(Successor)
|
|
|
|
(Successor)
|
|
|
March 31,
2018
|
|
|
|
December 31,
2017
|
|
|
(In Thousands)
|
|
Trade accounts receivable
|
$
|
25,179
|
|
|
|
$
|
31,225
|
|
Other receivables
|
|
3,432
|
|
|
|
|
3,933
|
|
Total accounts receivable
|
$
|
28,611
|
|
|
|
$
|
35,158
|
|
10
6. Inventories
, Net
Inventories, net consist of the following:
|
(Successor)
|
|
|
|
(Successor)
|
|
|
March 31,
2018
|
|
|
|
December 31,
2017
|
|
|
(In Thousands)
|
|
Parts and supplies
|
$
|
17,366
|
|
|
|
$
|
17,196
|
|
Raw coal
|
|
3,777
|
|
|
|
|
5,577
|
|
Clean coal
|
|
35,414
|
|
|
|
|
17,766
|
|
Total inventories
|
$
|
56,557
|
|
|
|
$
|
40,539
|
|
7. Property, Plant, Equipment and Development, Net
Property, plant, equipment and development, net consist of the following:
|
(Successor)
|
|
|
|
(Successor)
|
|
|
March 31,
2018
|
|
|
|
December 31,
2017
|
|
|
(In Thousands)
|
|
Land, land rights and mineral rights
|
$
|
1,639,980
|
|
|
|
$
|
1,639,980
|
|
Machinery and equipment
|
|
545,570
|
|
|
|
|
580,649
|
|
Machinery and equipment under capital lease
|
|
127,064
|
|
|
|
|
127,064
|
|
Buildings and structures
|
|
221,625
|
|
|
|
|
221,625
|
|
Development costs
|
|
20,450
|
|
|
|
|
16,644
|
|
Other
|
|
3,449
|
|
|
|
|
3,449
|
|
Property, plant, equipment and development
|
|
2,558,138
|
|
|
|
|
2,589,411
|
|
Less: accumulated depreciation, depletion and amortization
|
|
(217,515
|
)
|
|
|
|
(210,806
|
)
|
Property, plant, equipment and development, net
|
$
|
2,340,623
|
|
|
|
$
|
2,378,605
|
|
8. Long-Term Debt and Capital Lease Obligations
Long-term debt and capital lease obligations consist of the following:
|
(Successor)
|
|
|
|
(Successor)
|
|
|
March 31,
2018
|
|
|
|
December 31,
2017
|
|
|
(In Thousands)
|
|
Term Loan due 2022
|
$
|
816,750
|
|
|
|
$
|
818,813
|
|
Second Lien Notes due 2023
|
|
425,000
|
|
|
|
|
425,000
|
|
Revolving Credit Facility ($170.0 million capacity)
|
|
—
|
|
|
|
|
—
|
|
5.78% longwall financing arrangement
|
|
28,012
|
|
|
|
|
28,012
|
|
5.555% longwall financing arrangement
|
|
23,204
|
|
|
|
|
30,937
|
|
Capital lease obligations
|
|
22,566
|
|
|
|
|
25,378
|
|
Subtotal - Total long-term debt and capital lease obligations principal outstanding
|
|
1,315,532
|
|
|
|
|
1,328,140
|
|
Unamortized debt discounts
|
|
(12,953
|
)
|
|
|
|
(13,608
|
)
|
Total long-term debt and capital lease obligations
|
|
1,302,579
|
|
|
|
|
1,314,532
|
|
Less: current portion
|
|
(99,623
|
)
|
|
|
|
(109,532
|
)
|
Non-current portion of long-term debt and capital lease obligations
|
$
|
1,202,956
|
|
|
|
$
|
1,205,000
|
|
Term Loan due 2022
The Term Loan due 2022 bears interest at the borrower’s option of (a) LIBOR (subject to a LIBOR floor of 1.00%) plus 5.75% per annum; or (b) a base rate plus 4.75% per annum. The Term Loan due 2022 also requires us to prepay outstanding borrowings (the
11
“Excess Cash Flow Provisions”), subject to certain exceptions.
The Excess
Cash Flow Provisions are calculated annually and are payable 95 days after year-end. W
e are required to
prepay $5
3
.
8
million of outstanding borrowings under the Excess Cash Flow Provisions
for the annual period ending December 31, 2017. Accordingly, this amount has
been included in the current portion of long-term debt and capital lease obligations on our
condensed consolidated balance sheets
as of March 31, 2018
.
Second Lien Notes due 2023
The Second Lien Notes due 2023 have a maturity date of April 1, 2023 and bear interest at a rate of 11.50% per annum, payable in cash semi-annually on April 1 and October 1.
Revolving Credit Facility
The Revolving Credit Facility has a total borrowing capacity of $170.0 million and bears interest at the borrower’s option of (a) LIBOR (subject to a floor of zero) plus an applicable margin ranging from 5.25% to 5.50% per annum or (b) a base rate plus an applicable margin ranging from 4.25% to 4.50% per annum. We are required to pay a quarterly commitment fee with respect to the unused portions of our Revolving Credit Facility and customary letter of credit fees.
As of March 31, 2018, there were no outstanding borrowings under our Revolving Credit Facility and available borrowing capacity under the Revolving Credit Facility, net of outstanding letters of credit of $9.0 million, was $161.0 million.
9. Related-Party Transactions
Overview
Affiliated entities of FELP principally include: (a) Murray Energy, owner of a 80% interest in our general partner (effective March 28, 2017) and owner of all of the outstanding subordinated limited partner units, (b) Entities owned and controlled by Chris Cline, the former majority owner and former chairman of our general partner and (c) through May 8, 2017, Natural Resource Partners LP (“NRP”) and its affiliates, for which Chris Cline directly and indirectly beneficially owned a 31% and 4% interest in the general and limited partner interests of NRP, respectively. On May 9, 2017, the affiliate owned by Chris Cline sold its holdings in NRP’s general partner. As a result, NRP and its affiliates were not treated as related parties after May 8, 2017. We routinely engage in transactions in the normal course of business with Murray Energy and its subsidiaries, NRP and its subsidiaries and Foresight Reserves and its affiliates. These transactions include, among others, production royalties, transportation services, administrative arrangements, coal handling and storage services, supply agreements, service agreements, land leases and sale-leaseback financing arrangements. We also acquire mining equipment from subsidiaries of Murray Energy.
Murray Investments
In April 2015, Foresight Reserves and Murray Energy executed a purchase and sale agreement whereby Murray Energy paid Foresight Reserves $1.37 billion to acquire a 34% voting interest in FEGP, 77.5% of FELP’s incentive distribution rights (“IDRs”) and nearly 50% of the outstanding limited partner units in FELP, including all of the outstanding subordinated units. On March 27, 2017, Murray Energy contributed $60.6 million in cash (the “Murray Investment”) to us in exchange for 9,628,108 common units of FELP. On March 28, 2017, following completion of the March 2017 Refinancing Transactions, Murray Energy exercised its FEGP Option to acquire an additional 46% voting interest in FEGP from Foresight Reserves and a former member of management pursuant to the terms of an option agreement, dated April 16, 2015, among Murray Energy, Foresight Reserves and a former member of management, as amended, thereby increasing Murray Energy’s voting interest in FEGP to 80%. The aggregate exercise price of the FEGP Option was $15 million. FEGP has continued to govern the Partnership subsequent to this transaction.
Murray Energy was also a holder of
17,556
of FELP’s outstanding warrants. All outstanding warrants held by Murray Energy were exercised in 2017 and Murray Energy held no outstanding warrants as of March 31, 2018.
Following the exercise of the FEGP Option, certain changes to the operating agreement of FEGP went into effect, pursuant to which Murray Energy is entitled to appoint a majority of the board of directors of FEGP (the “Board”). On March 28, 2017, Chris Cline resigned from the Board and from his role as Principal Strategy Advisor. In connection with the departure of Mr. Cline, Robert D. Moore now serves as Chairman of the Board and Mr. Robert Edward Murray became a member of the Board. Mr. Murray currently serves as the Executive Vice President of Marketing and Sales at Murray Energy. All members of the Board, other than Paul Vining, are deemed appointed by Murray Energy and can be removed and replaced by Murray Energy at its sole discretion.
12
Murray Energy Management Services Agreement
In April 2015, a management services agreement (“MSA”) was executed between FEGP and Murray American Coal, Inc. (the ”Manager”), a wholly-owned subsidiary of Murray Energy, pursuant to which the Manager provided certain management and administration services to FELP for a quarterly fee of $3.5 million ($14.0 million on an annual basis), subject to contractual adjustments. To the extent that FELP or FEGP directly incurs costs for any services covered under the MSA, then the Manager’s quarterly fee is reduced accordingly. Also, to the extent that the Manager utilizes outside service providers to perform any of the services under the MSA, then the Manager is responsible for those outside service provider costs. The initial term of the MSA extends through December 31, 2022 and is subject to termination provisions. Upon the exercise of the FEGP Option, FEGP entered into an amended and restated MSA pursuant to which the quarterly fee for the Manager to provide certain management and administration services to FELP was increased to $5.0 million ($20.0 million on an annual basis) and is subject to future contractual escalations and adjustments. After taking into account the contractual escalations and adjustments for direct costs incurred by FELP, the amount of net expense due to the Manager for the three months ended March 31, 2018 and 2017 was $4.0 million and $2.5 million, respectively.
Murray Energy Transport Lease and Overriding Royalty Agreements
For the three months ended March 31, 2018 and 2017, we recorded other revenues of $1.6 million and $1.6 million, respectively, under the transport lease (the “Transport Lease”) with American Energy Corporation (“American Energy”), a subsidiary of Murray Energy. The total remaining minimum payments under the Transport Lease were $83.1 million at March 31, 2018, with unearned income equal to $28.1 million. As of March 31, 2018, the outstanding Transport Lease financing receivable was $55.0 million, of which $3.0 million was classified as current in the condensed consolidated balance sheet.
For the three months ended March 31, 2018 and 2017, we recorded other revenues of $0.7 million and $0.8 million, respectively, under the overriding royalty agreement (the “ORRA”) with Murray Energy subsidiaries’ American Energy and Consolidated Land Company. The total remaining minimum payments under the ORRA were $29.6 million at March 31, 2018, with unearned income equal to $18.2 million. As of March 31, 2018, the outstanding ORRA financing receivable was $11.4 million, of which $0.2 million was classified as current in the condensed consolidated balance sheet.
Other Murray Energy Transactions
During the three months ended March 31, 2018 and 2017, we purchased $4.1 million and $2.1 million, respectively, in equipment, supplies and rebuild services from affiliates of Murray Energy. During the three months ended March 31, 2018 and 2017, we provided $0.1 million and $0.1 million, respectively, in equipment, supplies and rebuild services to affiliates of Murray Energy.
From time to time, we purchase and sell coal to Murray Energy and its affiliates to, among other things, meet customer contractual obligations. We also sell coal to Javelin Global Commodities Limited (“Javelin”), an international commodities marketing and trading joint venture owned by Murray Energy, Uniper
, and management of Javelin, as our primary outlet for export sales.
During the three months ended
March 31, 2018 and 2017
, we purchased $1.8 million and $8.0 million, respectively of coal from Murray Energy and its affiliates and we sold $85.1 million and $60.7 million, respectively, of coal to Murray Energy and its affiliates, including Javelin.
During the three months ended March 31, 2018 and 2017, we paid Javelin $1.0 million and $0.5 million, respectively, in transportation costs related to certain export sales.
During the three months ended March 31, 2018 and 2017, we also paid Javelin $1.3 million and $0.7 million, respectively, in sales and marketing expenses.
During the three months ended March 31, 2018 and 2017, we earned less than $0.1 million and $0.2 million, respectively, in other revenues for Murray Energy’s usage of our Sitran terminal.
During the three months ended March 31, 2018, we utilized capacity on a Murray Energy transloading contract with a third party, thereby allowing Murray Energy to reduce its exposure to certain contractual liquidated damage charges. To compensate the Partnership for the reduced contractual liquidated damage charges, Murray Energy reimbursed the Partnership $2.5 million of transportation expenses during the three months ended March 31, 2018.
During the three months ended March 31, 2018, Murray Energy utilized our capacity within our transportation agreement with a third party, thereby allowing us to reduce our exposure to certain contractual liquidated damage charges. To compensate Murray Energy for our reduced contractual liquidated damage charges, we reimbursed Murray Energy $0.2 million of transportation expenses during the three months ended March 31, 2018.
From time to time, we also reimburse Murray Energy for costs paid by them on our behalf, including certain insurance premiums.
13
Reserves Investor Group
The Reserves Investor Group includes Christopher Cline, the Cline Resource and Development Company (“CRDC”), the four trusts established for the benefit of Mr. Cline’s children (the “Cline Trust”), and certain other limited liability companies owned or controlled by individuals with limited partner interests in Foresight Reserves through indirect ownership. Concurrent with and subsequent to the March 2017 Refinancing Transactions, CRDC and the Cline Trust acquired investments in our Term Loan due 2022 and our Second Lien Notes due 2023
on consistent terms as the unaffiliated owners of these notes
.
As of March 31, 2018, CRDC owned $9.9 million and $5.0 million of the outstanding principal on our Term Loan due 2022 and our Second Lien Notes due 2023, respectively.
As of March 31, 2018, the Cline Trust owned $9.9 million and $20.0 million of the outstanding principal on our Term Loan due 2022 and our Second Lien Notes due 2023, respectively. The Cline Trust is also a holder of
17,556
of FELP’s outstanding warrants as of March 31, 2018.
Mineral Reserve Leases
Our mines have a series of mineral reserve leases with Colt, LLC and Ruger, LLC (“Ruger”), subsidiaries of Foresight Reserves. Each of these leases have initial terms of 10 years with six renewal periods of five years each, at the election of the lessees, and generally require the lessees to pay the greater of $3.40 per ton or 8.0% of the gross sales price, as defined in the respective agreements, of such coal. We also have overriding royalty agreements with Ruger pursuant to which we pay royalties equal to 8.0% of the gross selling prices, as defined in the agreements. Each of these mineral reserve leases generally require a minimum annual royalty payment, which is recoupable only against actual production royalties from future tons mined during the period of ten years following the date on which any such royalty is paid.
Limited Partnership Agreement
The general partner manages the Partnership’s operations and activities as specified in the partnership agreement. The general partner of the Partnership is managed by its board of directors. Murray Energy and Foresight Reserves have the right to appoint the directors of the general partner. The members of the board of directors of the general partner are not elected by the unitholders and are not subject to reelection by the unitholders. The officers of the general partner manage the day-to-day affairs of the Partnership’s business. The partnership agreement provides that the Partnership will reimburse its general partner for all direct and indirect expenses incurred or payments made by the general partner on behalf of the Partnership.
14
The following table summarizes certain affiliate amounts included in our condensed consolidated balance sheets:
|
|
|
|
(Successor)
|
|
|
|
(Successor)
|
|
Affiliated Company
|
|
Balance Sheet Location
|
|
March 31,
2018
|
|
|
|
December 31,
2017
|
|
|
|
|
|
(In Thousands)
|
|
Murray Energy and affiliated entities
(1)
|
|
Due from affiliates - current
|
|
$
|
26,315
|
|
|
|
$
|
37,685
|
|
Total
|
|
|
|
$
|
26,315
|
|
|
|
$
|
37,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Murray Energy and affiliated entities
|
|
Financing receivables - affiliate - current
|
|
$
|
3,200
|
|
|
|
$
|
3,138
|
|
Total
|
|
|
|
$
|
3,200
|
|
|
|
$
|
3,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Murray Energy and affiliated entities
|
|
Due from affiliates - noncurrent
|
|
$
|
—
|
|
|
|
$
|
947
|
|
Total
|
|
|
|
$
|
—
|
|
|
|
$
|
947
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Murray Energy and affiliated entities
|
|
Financing receivables - affiliate - noncurrent
|
|
$
|
63,257
|
|
|
|
$
|
64,097
|
|
Total
|
|
|
|
$
|
63,257
|
|
|
|
$
|
64,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foresight Reserves and affiliated entities
|
|
Prepaid royalties - current and noncurrent
|
|
$
|
1,579
|
|
|
|
$
|
4,000
|
|
Total
|
|
|
|
$
|
1,579
|
|
|
|
$
|
4,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Murray Energy and affiliated entities
(1)
|
|
Due to affiliates - current
|
|
$
|
11,384
|
|
|
|
$
|
11,591
|
|
Foresight Reserves and affiliated entities
|
|
Due to affiliates - current
|
|
|
1,015
|
|
|
|
|
1,733
|
|
Total
|
|
|
|
$
|
12,399
|
|
|
|
$
|
13,324
|
|
(1) – Includes amounts due to/from Javelin, a joint venture partially owned by Murray Energy.
A summary of certain expenditures and expenses (revenues) incurred with affiliated entities is as follows for the three months ended March 31, 2018 and 2017 (in thousands):
|
(Successor)
|
|
|
(Predecessor)
|
|
|
Three Months Ended
March 31, 2018
|
|
|
Three Months Ended
March 31, 2017
|
|
Coal sales – Murray Energy and affiliated entities (including Javelin)
(1)
|
$
|
(85,082
|
)
|
|
$
|
(60,749
|
)
|
Overriding royalty and lease revenues – Murray Energy and affiliated entities
(2)
|
$
|
(2,296
|
)
|
|
$
|
(2,355
|
)
|
Terminal revenues - Murray Energy and affiliated entities
(2)
|
$
|
(44
|
)
|
|
$
|
(226
|
)
|
Royalty expense – NRP and affiliated entities
(3)
— through April 30, 2017
|
n/a
|
|
|
$
|
3,669
|
|
Royalty expense – Foresight Reserves and affiliated entities
(3)
|
$
|
5,387
|
|
|
$
|
1,521
|
|
Loadout services – NRP and affiliated entities
(3)
— through April 30, 2017
|
n/a
|
|
|
$
|
2,134
|
|
Transportation services - Murray Energy and affiliated entities (including Javelin)
(4)
|
$
|
978
|
|
|
$
|
525
|
|
Purchased goods and services – Murray Energy and affiliated entities
(5)
|
$
|
4,118
|
|
|
$
|
2,061
|
|
Purchased coal - Murray Energy and affiliated entities
(6)
|
$
|
1,751
|
|
|
$
|
7,973
|
|
Land leases - Foresight Reserves and affiliated entities
(3), (4)
|
$
|
60
|
|
|
$
|
57
|
|
Sales and marketing expenses - Murray Energy and affiliated entities (including Javelin)
(7)
|
$
|
1,266
|
|
|
$
|
692
|
|
Management services, net – Murray Energy and affiliated entities
(7)
|
$
|
3,983
|
|
|
$
|
2,547
|
|
Sales-leaseback interest expense - NRP and affiliated entities
(8)
— through April 30, 2017
|
n/a
|
|
|
$
|
6,244
|
|
Principal location in the condensed consolidated financial statements:
(1) – Coal sales
(2) – Other revenues
(3) – Cost of coal produced (excluding depreciation, depletion and amortization)
15
(4) – Transportation
(5) – Cost of coal produced (excluding depreciation, depletion and amortization) and property, plant and equipment and development, net, as applicable
(6) – Cost of coal purchased
(7) – Selling, general and administrative
(8) – Interest expense, net
Transactions with NRP and affiliated entities are only included in the table above through April 30, 2017 as a result of NRP no longer being an affiliate subsequent to Chris Cline’s affiliate selling its interest in NRP’s general partner on May 9, 2017.
We also purchased $3.0 million in mining supplies from an affiliated joint venture under a supply agreement during the three months ended March 31, 2017. This joint venture was no longer an affiliate subsequent to March 31, 2017, due to The Cline Group disposing of its interest in the joint venture.
10. Earnings per Limited Partner Unit
We compute earnings per unit (“EPU”) using the two-class method for master limited partnerships as prescribed in ASC 260,
Earnings Per Share
. The two-class method requires that securities that meet the definition of a participating security be considered for inclusion in the computation of basic EPU. In addition to the common and subordinated units, we have also identified the general partner interest and our incentive distribution rights (“IDR”) as participating securities. Under the two-class method, EPU is calculated as if all of the earnings for the period were distributed under the terms of the partnership agreement, regardless of whether the general partner has discretion over the amount of distributions to be made in any particular period, whether those earnings would actually be distributed during a particular period from an economic or practical perspective, or whether the general partner has other legal or contractual limitations on its ability to pay distributions that would prevent it from distributing all of the earnings for a particular period.
The Partnership’s net loss is allocated to the limited partners, including the holders of the subordinated units, in accordance with the partnership agreement on their respective ownership percentages, after giving effect to any special income or expense allocations and incentive distributions paid to the general partner, if any. The holders of our IDRs have the right to receive increasing percentages of quarterly distributions from operating surplus after certain distribution levels defined in the partnership agreement have been achieved. The general partner has no obligation to make distributions; therefore, undistributed earnings of the Partnership are not allocated to the IDRs. Basic EPU is computed by dividing net earnings attributable to unitholders by the weighted-average number of units outstanding during each period. Diluted EPU reflects the potential dilution of common equivalent units that could occur if equity participation units are converted into common units.
The following table illustrates the Partnership’s calculation of net loss per common and subordinated unit for the three month periods indicated:
|
|
(Successor)
|
|
|
(Predecessor)
|
|
|
|
Three Months Ended March 31,
|
|
|
Three Months Ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
Common Units
|
|
|
Subordinated Units
|
|
|
Total
|
|
|
Common Units
|
|
|
Subordinated Units
|
|
|
Total
|
|
|
|
(In Thousands, Except Per Unit Data)
|
|
|
(In Thousands, Except Per Unit Data)
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to limited partner units
|
|
$
|
(9,789
|
)
|
|
$
|
(11,780
|
)
|
|
$
|
(21,569
|
)
|
|
$
|
(56,259
|
)
|
|
$
|
(54,925
|
)
|
|
$
|
(111,184
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average units to calculate basic EPU
|
|
|
78,846
|
|
|
|
64,955
|
|
|
|
143,801
|
|
|
|
66,533
|
|
|
|
64,955
|
|
|
|
131,488
|
|
Less: effect of dilutive securities
(1)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Weighted-average units to calculate diluted EPU
|
|
|
78,846
|
|
|
|
64,955
|
|
|
|
143,801
|
|
|
|
66,533
|
|
|
|
64,955
|
|
|
|
131,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net loss per unit
|
|
$
|
(0.12
|
)
|
|
$
|
(0.18
|
)
|
|
$
|
(0.15
|
)
|
|
$
|
(0.85
|
)
|
|
$
|
(0.85
|
)
|
|
$
|
(0.85
|
)
|
Diluted net loss per unit
|
|
$
|
(0.12
|
)
|
|
$
|
(0.18
|
)
|
|
$
|
(0.15
|
)
|
|
$
|
(0.85
|
)
|
|
$
|
(0.85
|
)
|
|
$
|
(0.85
|
)
|
16
|
(1) -
|
Diluted EPU gives effect to all dilutive potential common units outstanding during the period usi
ng the treasury stock method. Diluted EPU excludes all dilutive potential units calculated under the treasury stock method if their effect is anti-dilutive. For the three months ended March 31, 2018 and 2017, approximately
0.3
million and 0.
4
million phant
om units, respectively, were anti-dilutive, and therefore excluded from the diluted EPU calculation. Diluted EPU also is not impacted during the current period by the
142,530
Warrants outstanding as of March 31, 2018, which are convertible into common units at an exchange rate of approximately
13.4
common units of FELP at an exercise price of $
0.8531
per common unit, in each case subject to adjustment (see Note 11).
|
|
11. Fair Value of Financial Instruments
Warrants
In August 2016, FELP issued 516,825 warrants (the “Warrants”) to the unaffiliated owners of previously outstanding debt to purchase an amount of common units. Upon their issuance, the Warrants were recorded as a liability at fair value and remeasured to fair value at each balance sheet date. The resulting non-cash gain or loss on remeasurements was recorded as a non-operating loss in our consolidated statements of operations.
As a result of a series of transactions related to the March 2017 Refinancing Transactions, the establishment of a fixed exchange rate for the conversion of the Warrants to a number of common units resulted in the warrant liability being reclassified to partners’ capital, and therefore, were not remeasured at fair value subsequent to the March 2017 Refinancing Transactions. As of March 31, 2018, there are 142,530 Warrants outstanding and exercisable into 13.4 common units of FELP at an exercise price of $0.8531 per common unit.
Long-Term Debt
The fair value of long-term debt as of March 31, 2018 and December 31, 2017 was $1,205.1 million and $1,178.1 million, respectively. The fair value of long-term debt was calculated based on (i) quoted prices in markets that are not active and (ii) the amount of future cash flows associated with each debt instrument discounted at the Partnership’s current estimated credit-adjusted borrowing rate for similar debt instruments with comparable terms. These are considered Level 2 and Level 3 fair value measurements, respectively.
12. Contingencies
In January 2016, WPP LLC (“WPP”), a subsidiary of NRP, a sent a demand letter to Macoupin claiming it had misapplied the royalty recoupment provision involving a coal mining lease and a rail infrastructure lease, resulting in underpayments of $3.3 million. In April 2016, WPP and HOD LLC (“HOD”), a subsidiary of NRP filed a complaint in the Circuit Court of Macoupin County, Illinois. As of December 31, 2017, WPP claims it is owed $9.5 million. We do not believe that the royalty recoupment provision was misapplied and have continued to apply the recoupment provision consistently with prior periods. While we believe that the language of the agreements and the parties’ course of performance thereunder support Macoupin’s position, should we not prevail, we would be responsible for paying WPP for any recoupment taken that is found to contravene the contractual language. Macoupin has filed a motion to dismiss the Complaint, which is pending.
In July 2015, we provided notice to WPP declaring a force majeure event at our Hillsboro mine due to a combustion event. As a result of the force majeure event, as of March 31, 2018, we have not made $83.5 million in minimum deficiency payments to WPP in accordance with the force majeure provisions of the royalty agreement. On November 24, 2015, WPP filed a Complaint in the Circuit Court of Montgomery County, Illinois, against Hillsboro, and WPP has subsequently amended its Complaint. On October 6, 2017, the Circuit Court dismissed many of the claims in the Third Amended Complaint against Hillsboro and the Partnership and other of its subsidiaries. However, WPP was afforded a chance to replead some claims, and WPP’s claim for breach of the royalty agreement will proceed. While we believe this is a force majeure event, as contemplated by the royalty agreement, and that the alleged claims are without merit, should we not prevail, we would be responsible for funding any minimum deficiency payment amounts during the shutdown period to WPP and potentially additional fees and interest of 1% per month. A bench trial to resolve the dispute over Hillsboro’s declaration of force majeure is currently set for October 22, 2018.
On April 11, 2018, Hillsboro filed appropriate pleadings to seek a declaratory judgment from the Circuit Court of Montgomery County, Illinois, that the royalty agreement has terminated by its own terms. Under the royalty agreement, Hillsboro leased certain mineral rights from WPP for a term of 20 years (with the option to renew for additional five-year terms, with a maximum of six terms) or until the date on which all merchantable and mineable coal under the royalty agreement has been mined and removed. Hillsboro maintains that all merchantable and mineable coal under the royalty agreement was mined and removed as of March 26, 2015, the date on which the last coal was mined and removed under the terms of the royalty agreement. If the Court agrees that the royalty agreement is terminated, no payments are owed by Hillsboro under the royalty agreement after the date of termination. Hillsboro’s declaratory judgment action is subject to litigation, the outcome of which remains uncertain.
We are also party to various other litigation matters, in most cases involving ordinary and routine claims incidental to our business.
17
We cannot reasonably estimate the ultimate legal and financial liability with respect to all pending litigation matters. However, we believe, based on our examination of such matters, that the ultimate liability will not have a material adverse effect on o
ur consolidated financial position, results of operations or cash flows.
Insurance Recoveries
We are currently in discussions with our insurance provider in regards to further potential recoveries under our policy related to the combustion event at our Hillsboro operation. From the date of the combustion event through December 31, 2017, we have recognized $46.9 million of insurance recoveries related to the recovery of mitigation costs and business interruption insurance proceeds. We continue to pursue additional remedies under our insurance policies; however, there can be no assurances that we will receive any further insurance recoveries related to this incident.
Performance Bonds
We had outstanding surety bonds with third parties of $85.8 million as of March 31, 2018 to secure reclamation and other performance commitments, which are partially secured by $4.5 million of our outstanding letters of credit.
13. Subsequent Event
On April 11, 2018, we announced that our Hillsboro operation will
be permanently closed and certain long-lived assets, including mineral reserves, buildings and structures, machinery and equipment, and other related assets are not expected to generate future positive cash flows. As such, we expect to record an aggregate impairment charge between $134 million and $172 million in the second quarter of 2018. The impairment charge represents the estimated net book value of the certain long-lived assets and other related assets as of March 31, 2018.
On May
8
, 2018, we announced a cash distribution of $
0.0565
per unit payable to common unitholders. The distribution is payable on May
31
, 2018, for common unitholders of record on May
21
, 2018.
18