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ITEM 8
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—
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
|
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Index to Consolidated Financial Statements
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Page
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Report of Independent Registered Public Accounting Firm
To the Unitholders and Board of Directors of Westmoreland Resource Partners, LP
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Westmoreland Resource Partners, LP and subsidiaries (the “Partnership”) as of December 31, 2018 and 2017, the related consolidated statements of operations and comprehensive loss, partners’ capital (deficit), and cash flows for each of the two years in the period ended December 31, 2018, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Partnership at December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.
The Partnership's Ability to Continue as a Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Partnership will continue as a going concern. As discussed in Note 1 to the financial statements, the Partnership and its subsidiaries filed voluntary petitions for relief under Chapter 11 of Title 11 of the United States Bankruptcy Code on October 9, 2018, and has stated that substantial doubt exists about the Partnership’s ability to continue as a going concern. Management's evaluation of the events and conditions and management’s plans regarding these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on the Partnership’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Partnership in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Partnership is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Partnership's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Partnership’s auditor since 2015.
Denver, Colorado
March 15, 2019
WESTMORELAND RESOURCE PARTNERS, LP AND SUBSIDIARIES
Consolidated Balance Sheets
(Debtor-In-Possession)
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
December 31, 2017
|
|
(In thousands)
|
Assets
|
|
|
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
$
|
38,798
|
|
|
$
|
36,739
|
|
Receivables
|
25,164
|
|
|
27,409
|
|
Inventories
|
12,021
|
|
|
14,927
|
|
Other current assets
|
5,983
|
|
|
1,891
|
|
Total current assets
|
81,966
|
|
|
80,966
|
|
Property, plant and equipment:
|
|
|
|
Land, mineral rights, property, plant and equipment
|
206,231
|
|
|
358,375
|
|
Less accumulated depreciation, depletion and amortization
|
(93,639
|
)
|
|
(164,711
|
)
|
Net property, plant and equipment
|
112,592
|
|
|
193,664
|
|
Advanced coal royalties
|
4,142
|
|
|
10,143
|
|
Restricted investments
|
35,749
|
|
|
37,239
|
|
Intangible assets, net of accumulated amortization of $7.2 million, impairment of $23.8 million and $6.2 million at December 31, 2018 and 2017, respectively
|
—
|
|
|
24,800
|
|
Deposits and other assets
|
848
|
|
|
592
|
|
Total Assets
|
$
|
235,297
|
|
|
$
|
347,404
|
|
Liabilities and Partners' Capital (Deficit)
|
|
|
|
Current liabilities:
|
|
|
|
Current installments of long-term debt
|
$
|
324
|
|
|
$
|
314,228
|
|
Accounts payable and accrued expenses:
|
|
|
|
Trade
|
21,814
|
|
|
15,565
|
|
Deferred revenue
|
2,924
|
|
|
3,141
|
|
Production taxes
|
5,993
|
|
|
16,670
|
|
Asset retirement obligations
|
16,246
|
|
|
15,187
|
|
Other current liabilities
|
—
|
|
|
2,091
|
|
Total current liabilities
|
47,301
|
|
|
366,882
|
|
Long-term debt, less current installments
|
—
|
|
|
9,605
|
|
Asset retirement obligations, less current portion
|
23,939
|
|
|
30,609
|
|
Other liabilities
|
46
|
|
|
1,942
|
|
Liabilities subject to compromise
|
365,377
|
|
|
—
|
|
Total liabilities
|
436,663
|
|
|
409,038
|
|
Partners' capital (deficit):
|
|
|
|
Limited partners (1,284,840 units outstanding as of December 31, 2018 and 2017, respectively)
|
18,197
|
|
|
25,959
|
|
Series A convertible units (17,050,680 units outstanding as of December 31, 2018 and 2017, respectively)
|
(173,313
|
)
|
|
(69,605
|
)
|
Series B convertible units (4,512,500 units outstanding as of December 31, 2018 and 2017, respectively)
|
(77,201
|
)
|
|
(49,755
|
)
|
General partner units (35,291 units outstanding as of December 31, 2018 and 2017, respectively)
|
31,472
|
|
|
31,687
|
|
Accumulated other comprehensive (loss) income
|
(521
|
)
|
|
80
|
|
Total Westmoreland Resource Partners, LP deficit
|
(201,366
|
)
|
|
(61,634
|
)
|
Total Liabilities and Partners’ Deficit
|
$
|
235,297
|
|
|
$
|
347,404
|
|
See accompanying Notes to Consolidated Financial Statements.
WESTMORELAND RESOURCE PARTNERS, LP AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Loss
(Debtor-In-Possession)
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2018
|
|
2017
|
|
(In thousands, except per unit data)
|
Revenues
|
$
|
271,036
|
|
|
$
|
315,605
|
|
Costs and expenses:
|
|
|
|
Cost of sales (exclusive of depreciation, depletion and amortization, shown separately)
|
233,909
|
|
|
237,516
|
|
Depreciation, depletion and amortization
|
34,060
|
|
|
45,466
|
|
Selling and administrative
|
23,438
|
|
|
17,233
|
|
Gain on sales of assets
|
(666
|
)
|
|
(305
|
)
|
Loss on impairment
|
77,064
|
|
|
5,872
|
|
Total cost and expenses
|
367,805
|
|
|
305,782
|
|
Operating (loss) income
|
(96,769
|
)
|
|
9,823
|
|
Other (expense) income:
|
|
|
|
Interest expense (contractual interest of $48.2 million for the year ended December 31, 2018)
|
(36,283
|
)
|
|
(43,153
|
)
|
Interest income
|
1,084
|
|
|
938
|
|
Other income
|
122
|
|
|
174
|
|
Reorganization items, net
|
(7,781
|
)
|
|
—
|
|
Change in fair value of warrants
|
444
|
|
|
467
|
|
Total other expenses
|
(42,414
|
)
|
|
(41,574
|
)
|
Loss before income taxes
|
(139,183
|
)
|
|
(31,751
|
)
|
Income tax expense
|
—
|
|
|
—
|
|
Net loss
|
(139,183
|
)
|
|
(31,751
|
)
|
Less net loss allocated to general partner
|
(215
|
)
|
|
(50
|
)
|
Net loss allocated to limited partners
|
$
|
(138,968
|
)
|
|
$
|
(31,701
|
)
|
|
|
|
|
Net loss
|
$
|
(139,183
|
)
|
|
$
|
(31,751
|
)
|
Unrealized and realized (loss) gain on available-for-sale securities
|
(601
|
)
|
|
269
|
|
Comprehensive loss attributable to the Partnership
|
$
|
(139,784
|
)
|
|
$
|
(31,482
|
)
|
|
|
|
|
Net loss per limited partner common unit, basic and diluted:
|
$
|
(6.08
|
)
|
|
$
|
(1.34
|
)
|
|
|
|
|
Weighted average number of limited partner common units outstanding, basic and diluted:
|
1,285
|
|
|
1,274
|
|
|
|
|
|
Cash distribution paid per limited partner common unit
|
$
|
—
|
|
|
$
|
0.5154
|
|
Cash distribution paid per general partner unit
|
—
|
|
|
0.5154
|
|
See accompanying Notes to Consolidated Financial Statements.
WESTMORELAND RESOURCE PARTNERS, LP AND SUBSIDIARIES
Consolidated Statements of Partners' Capital (Deficit)
(Debtor-In-Possession)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Limited Partners
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Income (Loss)
|
|
Total
Partners'
Capital (Deficit)
|
|
Common
|
|
Series A Convertible
|
|
Series B Convertible
|
|
Liquidation
|
|
Total
|
|
General Partner
|
|
Net Investment
|
|
|
|
Units
|
|
Capital (Deficit)
|
|
Units
|
|
Capital (Deficit)
|
|
Units
|
|
Capital (Deficit)
|
|
Units
|
|
Capital (Deficit)
|
|
Units
|
|
Capital (Deficit)
|
|
Units
|
|
Capital (Deficit)
|
|
|
|
|
(In thousands, except units data)
|
Balance at December 31, 2016
|
1,221,060
|
|
|
$
|
28,261
|
|
|
15,656,551
|
|
|
$
|
(46,103
|
)
|
|
4,512,500
|
|
|
$
|
(43,360
|
)
|
|
856,698
|
|
|
$
|
—
|
|
|
22,246,809
|
|
|
$
|
(61,202
|
)
|
|
35,291
|
|
|
$
|
33,281
|
|
|
$
|
—
|
|
|
$
|
(189
|
)
|
|
$
|
(28,110
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attributable to partners
|
—
|
|
|
(1,804
|
)
|
|
—
|
|
|
(23,502
|
)
|
|
—
|
|
|
(6,395
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(31,701
|
)
|
|
—
|
|
|
(50
|
)
|
|
—
|
|
|
—
|
|
|
(31,751
|
)
|
Equity-based compensation
|
—
|
|
|
242
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
242
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
242
|
|
Issuance of units to LTIP participants
|
63,780
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
63,780
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
269
|
|
|
269
|
|
Distribution for acquisition of Johnson Run (Note 3)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,526
|
)
|
|
—
|
|
|
—
|
|
|
(1,526
|
)
|
Paid-in-kind Series A convertible unit distribution
|
—
|
|
|
—
|
|
|
1,394,129
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,394,129
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Cash distribution to unitholders
|
—
|
|
|
(740
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(740
|
)
|
|
—
|
|
|
(18
|
)
|
|
—
|
|
|
—
|
|
|
(758
|
)
|
Balance at December 31, 2017
|
1,284,840
|
|
|
25,959
|
|
|
17,050,680
|
|
|
(69,605
|
)
|
|
4,512,500
|
|
|
(49,755
|
)
|
|
856,698
|
|
|
—
|
|
|
23,704,718
|
|
|
(93,401
|
)
|
|
35,291
|
|
|
31,687
|
|
|
—
|
|
|
80
|
|
|
(61,634
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attributable to partners
|
—
|
|
|
(7,814
|
)
|
|
—
|
|
|
(103,708
|
)
|
|
—
|
|
|
(27,446
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(138,968
|
)
|
|
—
|
|
|
(215
|
)
|
|
—
|
|
|
—
|
|
|
(139,183
|
)
|
Equity-based compensation
|
—
|
|
|
52
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
52
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
52
|
|
Issuance of units to LTIP participants
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(601
|
)
|
|
(601
|
)
|
Distribution for acquisition of Johnson Run (Note 3)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Paid-in-kind Series A convertible unit distribution
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Cash distribution to unitholders
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Balance at December 31, 2018
|
1,284,840
|
|
|
$
|
18,197
|
|
|
17,050,680
|
|
|
$
|
(173,313
|
)
|
|
4,512,500
|
|
|
$
|
(77,201
|
)
|
|
856,698
|
|
|
$
|
—
|
|
|
23,704,718
|
|
|
$
|
(232,317
|
)
|
|
35,291
|
|
|
$
|
31,472
|
|
|
$
|
—
|
|
|
$
|
(521
|
)
|
|
$
|
(201,366
|
)
|
See accompanying Notes to Consolidated Financial Statements.
WESTMORELAND RESOURCE PARTNERS, LP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Debtor-In-Possession)
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2018
|
|
2017
|
|
(In thousands)
|
Cash flows from operating activities:
|
|
|
|
Net loss
|
$
|
(139,183
|
)
|
|
$
|
(31,751
|
)
|
Adjustments to reconcile net loss to net cash provided by operating activities:
|
|
|
|
Depreciation, depletion and amortization
|
34,060
|
|
|
45,466
|
|
Accretion of asset retirement obligations
|
7,702
|
|
|
5,370
|
|
Equity-based compensation
|
52
|
|
|
—
|
|
Loss on impairment
|
77,064
|
|
|
5,872
|
|
Non-cash interest expense
|
14,025
|
|
|
9,344
|
|
Non-cash reorganization items
|
5,601
|
|
|
—
|
|
Amortization of deferred financing costs
|
2,118
|
|
|
2,872
|
|
Gain on sale of assets
|
(666
|
)
|
|
(305
|
)
|
Inventory reserve
|
(77
|
)
|
|
—
|
|
Other
|
1,816
|
|
|
1,993
|
|
Changes in operating assets and liabilities:
|
|
|
|
Receivables, net
|
843
|
|
|
10,220
|
|
Inventories
|
2,983
|
|
|
3,211
|
|
Accounts payable and accrued expenses
|
17,652
|
|
|
(1,697
|
)
|
Interest payable
|
(1,083
|
)
|
|
(293
|
)
|
Deferred revenue
|
(217
|
)
|
|
(406
|
)
|
Other assets and liabilities
|
(1,217
|
)
|
|
2,078
|
|
Asset retirement obligations
|
(11,848
|
)
|
|
(12,278
|
)
|
Unbilled revenue
|
1,401
|
|
|
—
|
|
Net cash provided by operating activities
|
11,026
|
|
|
39,696
|
|
Cash flows from investing activities:
|
|
|
|
Additions to property, plant, equipment and other
|
(6,187
|
)
|
|
(8,446
|
)
|
Advance royalties payments
|
(274
|
)
|
|
(1,593
|
)
|
Proceeds from sales of restricted investments
|
10,823
|
|
|
9,658
|
|
Purchases of restricted investments
|
(11,578
|
)
|
|
(11,467
|
)
|
Net proceeds from sales of assets
|
2,452
|
|
|
1,141
|
|
Net cash used in investing activities
|
(4,764
|
)
|
|
(10,707
|
)
|
Cash flows from financing activities:
|
|
|
|
Repayments of long-term debt
|
(5,793
|
)
|
|
(5,886
|
)
|
Cash distributions to unitholders
|
—
|
|
|
(758
|
)
|
Acquisition under common control of Johnson Run
|
—
|
|
|
(1,526
|
)
|
Net cash used in financing activities
|
(5,793
|
)
|
|
(8,170
|
)
|
Net increase in cash and cash equivalents, including restricted cash
|
469
|
|
|
20,819
|
|
Cash and cash equivalents, including restricted cash, beginning of the period
|
44,494
|
|
|
23,675
|
|
Cash and cash equivalents, including restricted cash, end of period
|
$
|
44,963
|
|
|
$
|
44,494
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
Cash paid for interest
|
$
|
25,307
|
|
|
$
|
31,231
|
|
Cash paid for reorganization items, net
|
2,200
|
|
|
—
|
|
Non-cash transactions:
|
|
|
|
Accrued purchases of property and equipment
|
$
|
—
|
|
|
$
|
1,227
|
|
Economic value of Series A convertible unit distributions
|
—
|
|
|
8,425
|
|
|
|
|
|
Cash and cash equivalents, including restricted cash, end of period
|
|
|
|
Cash and cash equivalents
|
$
|
38,798
|
|
|
$
|
36,739
|
|
Restricted cash in
Restricted investments
|
6,165
|
|
|
7,755
|
|
|
$
|
44,963
|
|
|
$
|
44,494
|
|
See accompanying Notes to Consolidated Financial Statements.
WESTMORELAND RESOURCE PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DEBTOR-IN-POSSESSION)
1. DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Westmoreland Resource Partners, LP (“we”, “us”, “ours”, or the “Partnership”) is a Delaware limited partnership, organized in 1985, and successor by acquisition by Westmoreland Coal Company ("WCC", or "WLB") in 2014.
Basis of Presentation and Principles of Consolidation
The consolidated financial statements of the Partnership include the accounts of the Partnership and its controlled subsidiaries and are prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP"). All intercompany accounts and transactions have been eliminated.
Current Bankruptcy Proceedings
Filing Under Chapter 11 of the United States Bankruptcy Code
On October 9, 2018 (the “Petition Date”), WCC, and certain of its subsidiaries, including Westmoreland Resource GP, LLC, the Partnership’s general partner (the "GP"), the Partnership, and our wholly owned subsidiaries (collectively, the “Debtors”), filed voluntary petitions (the “Bankruptcy Petitions”) for relief under Chapter 11 of Title 11 of the United States Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Southern District of Texas (the “Bankruptcy Court”) (case number 18-35672). On the Petition Date, the Debtors filed a motion with the Bankruptcy Court seeking to jointly administer all of the Debtors’ chapter 11 cases (the “Chapter 11 Cases”) under the caption “In re Westmoreland Coal Company, et al.”, and a series of first day motions that sought authorization to continue conducting their businesses in the ordinary course and without interruption. On November 15, 2018, the Bankruptcy Court entered orders approving these motions on a final basis. These motions are designed primarily to minimize the effect of Bankruptcy on the Debtors' operations, suppliers, customers and employees. The Partnership expects ordinary-course operations to continue substantially uninterrupted throughout the duration of the Chapter 11 Cases, and employees should expect no change in their daily responsibilities and to be paid in the ordinary course of business.
The Debtors continue to operate their businesses as "debtors-in-possession" under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. For the duration of the Chapter 11 Cases, the Partnership’s operations and its ability to develop and execute its business plan are subject to risks and uncertainties associated with the Chapter 11 Cases. As a result of these risks and uncertainties, the Partnership’s assets, liabilities, officers and/or directors could be significantly different following the outcome of the Chapter 11 Cases, and the description of its operations, properties and capital plans included in these financial statements may not accurately reflect its operations, properties and capital plans following the Chapter 11 Cases.
The Debtors' Restructuring Processes
The Partnership, the Partnership's general partner and the Partnership's wholly owned subsidiaries form a subset of Debtors (the "WMLP Debtors") that maintain a capital structure that is separate and apart from the funded debt obligation of WLB and its other subsidiaries and affiliates (collectively, the "WCC Debtors"). There is no cross-obligation or cross-guarantee of the funded debt obligations held by either the WCC Debtors or the WMLP Debtors for the benefit of the other respective group of Debtors. As a result of this separate funded indebtedness, the WCC Debtors and WMLP Debtors generally pursued separate restructuring initiatives in order to maximize the recovery of each Debtor group's respective creditor and stakeholder constituents.
On February 5, 2019, the Bankruptcy Court approved the sale of the Oxford assets and mining operations of the WMLP Debtors (the "Oxford Assets") to CCU Coal and Construction LLC.
On February 11, 2019, the sale of the Oxford Assets was consummated with a purchase price for the Oxford Assets of
$0
along with the assumption of both the outstanding asset retirement obligations associate with the Oxford Assets and the
WESTMORELAND RESOURCE PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DEBTOR-IN-POSSESSION)
collateral securing the existing surety obligations of the Oxford assets and mining operations. The sale of Oxford Assets resulted a loss of approximately
$21.0 million
.
On March 2, 2019, the Bankruptcy Court approved the proposed sale of the Kemmerer mine and assets of certain of the WMLP Debtors (the “Kemmerer Assets”) to Western Coal Acquisition Partners, LLC. The sale contemplates a purchase price of
$7.5 million
, a senior secured first lien note in the principal amount of
$112.5 million
, which will be guaranteed by Merida Natural Resources, LLC and Thomas M. Clarke, and a junior secured note in the principal amount of
$95.0 million
to be funded by free cash flows from operation of the Kemmerer mining operations and assets. The Kemmerer mine and its assets constitute the last remaining mining operations of the WMLP Debtors. The sale of the Kemmerer Assets is anticipated to occur on or before April 15, 2019, and thereafter the WMLP Debtors will seek approval from the Bankruptcy Court of their proposed chapter 11 plan of liquidation, which will facilitate (i) a controlled liquidation of the WMLP Debtors’ remaining nominal assets and (ii) the distribution of the proceeds of the Oxford and Kemmerer sales to their creditors and stakeholders.
On March 2, 2019, the Bankruptcy Court approved the going-concern sale of substantially all of the WCC Debtors' assets pursuant to its chapter 11 plan (the "WCC Plan"). Under the terms of the WCC Plan, an entity created by the WCC Debtors’ first lien creditors (the “Purchaser”) will take ownership of the WCC Debtors’ assets, including the mining operations located in Colstrip, Montana; San Juan, New Mexico; Canada; and all other operating mines of the WCC Debtors. The WCC Debtors’ assets will remain in operation under new leadership and will continue operating in the normal course. The WCC Debtors expect to complete the transactions associated with their financial restructuring and emerge from their Chapter 11 Cases by the end of the first quarter 2019.
The Debtors' Intercompany Arrangements and Settlement
Despite the separate nature of the Debtors’ respective indebtedness, there are numerous intercompany relationships between the WCC Debtors and the WMLP Debtors, including: (a) the WCC Debtors providing all personnel and management services necessary for the WMLP Debtors’ operations; (b) WCC being the employer under the United Mine Workers of America collective bargaining agreement with respect to the employees who work at the WMLP Debtors’ Kemmerer assets; and (c) the WCC Debtors providing back-office support, including enterprise-wide insurance coverage, health and benefits coverage, and compensation administration for the employees who work at the WMLP Debtors’ Kemmerer assets, and (d) WMLP and WCC participating in group surety programs that include an indemnification agreement allowing for cross-collateralization of underlying bond pools. The intercompany arrangements outlined above are governed by the GP administrative and operational services agreement, dated as of January 1, 2015 (as amended, restated, modified and supplemented from time to time in accordance with the terms thereof, the “Shared Services Agreement”). Under the Shared Services Agreement, the WCC Debtors (through the GP) provide services and personnel to the Partnership, and are reimbursed for related costs incurred on the Partnership’s behalf. The services provided by the WCC Debtors (through the GP) include, among other things, operating services, engineering services, and general and administrative services, including legal, accounting, treasury, insurance administration and claims processing, risk management, health, safety and environmental, information technology, human resources, credit, payroll, internal audit, taxes, and engineering services. Where costs are specifically incurred on behalf of one of the Partnership’s affiliates, those costs are billed directly to the Partnership, and are allocated to the Partnership in a variety of methods when the cost or service applies equally to all employees.
To provide for an orderly separation of the WCC Debtors’ business from the WMLP Debtors’ business and to secure the support of the Debtors’ respective secured lenders for the WCC Plan, the WCC Debtors, the WMLP Debtors, and their respective secured lenders entered into a settlement (the “Intercompany Settlement”). On March 2, 2019, the Intercompany Settlement was approved by the Bankruptcy Court. Pursuant to the Intercompany Settlement, on the effective date of the WCC Plan, the Shared Services Agreement shall be rejected pursuant to sections 365 and 1123 of the Bankruptcy Code. Simultaneous with such rejection, the WCC Debtors and the Purchaser anticipate entering into new transition services agreements, which will provide for the continued provision of services to the WMLP Debtors as they finalize the consummation of their own Chapter 11 Cases. Furthermore, the Intercompany Settlement memorializes agreements with respect to certain professional fee allocations, certain retiree and labor issues, and the tender for all of the outstanding common units, representing limited partner interests in the Partnership (the “WMLP Tender”) not directly or indirectly held by WCC for a total price, for all such equity interests collectively, not to exceed
$15,000
, and to pay certain fees and expenses associated therewith. The WMLP Tender of
182,448
common units at a price of
$0.01
per common unit commenced on February 13, 2019. WCC completed its tender offer with
182,448
common units being validly tendered and accepted for purchase by WCC at a price of
$0.01
per common unit on March 14, 2019.
WESTMORELAND RESOURCE PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DEBTOR-IN-POSSESSION)
WMLP Committee Settlement
On February 25, 2019, the WMLP Debtors, the WMLP secured lenders, and the Official Committee of Unsecured Creditors have entered into a settlement that contemplates: (i) Payment of claims - the WMLP secured lenders shall consent to the WMLP Debtors' payment, in a manner of up to
$8.6 million
on account of certain administrative and priority claims, including the costs of winding down the WMLP Debtors' estates up to
$2.7 million
; (ii) Release of claims - the Committee will release all claims and causes of action against any WMLP secured party; (iii) WMLP Chapter 11 Plan - The WMLP Debtors shall file and seek confirmation of the WMLP Debtors' Chapter 11 liquidation plan so that such plan can become effective by April 30, 2019, and thereafter promptly wind down the estates; (iv) Intercompany settlement - the Committee will support the Intercompany Settlement and the releases embodied therein.
Debtor-in-Possession
The Debtors are currently operating as debtors-in-possession in accordance with the applicable provisions of the Bankruptcy Code. The Bankruptcy Court has approved motions filed by the Debtors that were designed primarily to mitigate the impact of the Chapter 11 proceedings on the Partnership. As a result, the Partnership is able to conduct normal business activities and pay all associated obligations for the period following its bankruptcy filing in the ordinary course of business. Additionally, the Partnership is authorized to pay and has paid certain pre-petition obligations pursuant to the First Day Motions. During the pendency of the Chapter 11 proceedings, all transactions outside the ordinary course of business require the prior approval of the Bankruptcy Court.
Automatic Stay
Subject to certain specific exceptions under the Bankruptcy Code, the Bankruptcy Petitions automatically stayed most judicial or administrative actions against the Debtors and efforts by creditors to collect on or otherwise exercise rights or remedies with respect to pre-petition claims. Absent an order from the Bankruptcy Court, substantially all of the Debtors’ pre-petition liabilities are subject to settlement under the Bankruptcy Code
.
Executory Contracts
Subject to certain exceptions, under the Bankruptcy Code, the Debtors may assume, assign, or reject certain executory contracts and unexpired leases subject to the approval of the Bankruptcy Court and certain other conditions. Generally, the rejection of an executory contract or unexpired lease is treated as a pre-petition breach of such executory contract or unexpired lease and, subject to certain exceptions, relieves the Debtors from performing their future obligations under such executory contract or unexpired lease but entitles the contract counterparty or lessor to a pre-petition general unsecured claim for damages caused by such deemed breach. Typically, the assumption of an executory contract or unexpired lease requires the Debtors to cure existing monetary defaults under such executory contract or unexpired lease and provide adequate assurance of future performance. Accordingly, any description of an executory contract or unexpired lease with the Debtors in this document, including where applicable a quantification of the Partnership’s obligations under any such executory contract or unexpired lease of the Debtors, is qualified by any overriding rejection rights the Partnership has under the Bankruptcy Code.
Potential Claims
The Debtors have filed with the Bankruptcy Court schedules and statements setting forth, among other things, the assets and liabilities of each of the Debtors, subject to the assumptions filed in connection therewith. These schedules and statements may be subject to further amendment or modification after filing. Certain holders of pre-petition claims that are not governmental units were required to file proofs of claim by the deadline for general claims of December 12, 2018 (the “Bar Date”). The governmental bar date is April 8, 2019.
As of February 22, 2019, the Debtors have received over
1,300
proofs of claim (including
240
proofs of claims related to WMLP), primarily representing general unsecured claims, for an amount of approximately
$2.7 billion
(including
$458 million
related to WMLP). These claims will be reconciled to amounts recorded in Liabilities Subject to Compromise in the Consolidated Balance Sheets. Differences in amounts recorded and claims filed by creditors will be investigated and resolved, including through the filing of objections with the Bankruptcy Court, where appropriate. The Partnership may ask the Bankruptcy Court to disallow claims that the Partnership believes are duplicative, have been later amended or superseded, are without merit, are overstated or should be disallowed for other reasons. In addition, as a result of this process, the Partnership
WESTMORELAND RESOURCE PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DEBTOR-IN-POSSESSION)
may identify additional liabilities that will need to be recorded or reclassified to
Liabilities subject to compromise
. In light of the substantial number of claims filed, and expected to be filed, the claims resolution process may take considerable time to complete and likely will continue after the Debtors emerge from bankruptcy.
Application of Accounting Standards Codification 852, Reorganization
The Partnership has applied the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 852, Reorganizations, in preparing its consolidated financial statements. ASC 852 requires that the financial statements distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Accordingly, certain revenues, expenses, realized gains and losses and provisions for losses that are realized or incurred in the bankruptcy proceedings will be recorded on the Consolidated Statements of Operations and Comprehensive Loss as
Reorganization items, net
. In addition, the pre-petition obligations that may be impacted by the bankruptcy reorganization process will be classified on the Consolidated Balance Sheets as
Liabilities subject to compromise
("LSTC"). These liabilities are reported at the amounts expected to be allowed by the Bankruptcy Court, which may differ from the ultimate settlement amounts.
GAAP requires certain additional reporting for financial statements prepared between the Petition Date and the date that the Partnership emerges from bankruptcy, including:
|
|
•
|
Reclassification of pre-petition liabilities that are unsecured, under-secured or where it cannot be determined that the liabilities are fully secured to a separate line item in the Consolidated Balance Sheets called
Liabilities subject to compromise
; and
|
|
|
•
|
Segregation of
reorganization items
as a separate line in the Consolidated Statements of Operations outside of income from continuing operations.
|
Financial Statement Classification of Liabilities Subject to Compromise
The accompanying Consolidated Balance Sheets as of December 31, 2018, include amounts classified as
Liabilities subject to compromise
, which represent liabilities the Partnership anticipates will be allowed as claims in the Chapter 11 Cases. These amounts represent the Debtors’ current estimate of known or potential obligations to be resolved in connection with the Chapter 11 Cases, and may differ from actual future settlement amounts paid. Differences between liabilities estimated and claims filed, or to be filed, will be investigated and resolved in connection with the claims resolution process. The Partnership will continue to evaluate these liabilities throughout the Chapter 11 process and adjust amounts as necessary. Such adjustments may be material. (See
Note 14. Liabilities Subject To Compromise
).
Reorganization Items, net
The Debtors, have incurred and will continue to incur significant costs associated with the Chapter 11 Cases, primarily legal and professional fees. The amount of these costs, which since the Petition Date are being expensed as incurred, are expected to significantly affect the Partnership’s results of operations. In accordance with applicable guidance, costs associated with the bankruptcy proceedings have been recorded as
Reorganization items, net
within the accompanying Consolidated Statements of Operations and Comprehensive Loss for the year ended December 31, 2018. (See
Note 15. Reorganization Items, Net
).
Going Concern, Liquidity and Management’s Plan
In accordance with the requirements of Accounting Standards Update 2014-15, Presentation of Financial Statements Going Concern (Subtopic 205-40), and Accounting Standards Codification 205-40, the Partnership has the responsibility to evaluate at each reporting period, including interim periods, whether conditions and/or events raise substantial doubt about its ability to meet its future financial obligations. In its evaluation for this report, management considered the Partnership’s current financial condition and liquidity sources, including current funds available, forecasted future cash flows and the Partnership’s conditional and unconditional obligations due for 12 months following the date of issuance of this Annual Report on Form 10-K. The accompanying consolidated financial statements do not include any adjustments related to the recoverability and classification of assets or the amounts and classification of liabilities or any other adjustments that might be necessary should
WESTMORELAND RESOURCE PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DEBTOR-IN-POSSESSION)
the Partnership be unable to continue as a going concern or as a consequence of the Chapter 11 Cases. Based on the Partnership’s substantial level of indebtedness and, as described above, the Partnership’s filing for relief under Chapter 11 of the Bankruptcy Code as well as the uncertainty surrounding such filings, the Partnership determined that there is substantial doubt as to the Partnership’s ability to continue as a going concern for a period of 12 months following the date of issuance of this Form 10-K.
As of December 31, 2018, the Partnership was in default under certain of its debt instruments. The Partnership’s filing of the Chapter 11 Cases described above constitutes an event of default that accelerated the Partnership’s obligation under its Term Loan and 2014 Financing Agreement. Additionally, other events of default, including cross-defaults, are present, including the receipt of a going concern explanatory paragraph from the Partnership’s independent registered public accounting firm on the Partnership’s consolidated financial statements. Under the Bankruptcy Code, the creditors under these debt agreements are stayed from taking any action against the Partnership as a result of an event of default.
As disclosed in our Current Report on Form 8-K filed October 9, 2018, we received a notice of delisting from the New York Stock Exchange (the “NYSE”) that our common units were no longer suitable for listing pursuant to Section 802.01D of the NYSE continued listing standards. The NYSE reached this decision in view of the Partnership's Chapter 11 filing. Under the NYSE listing procedures, the Partnership has a right to a review of this determination by a Committee of the Board of Directors of the NYSE, provided a written request for such review is filed with the Assistant Corporate Secretary of the NYSE within ten business days after receiving the notice of delisting. The Partnership decided not to seek this review. As a result of the delisting notice, the Partnership's common units are currently trading on the over-the-counter Pink Marketplace under the symbol "WMLPQ."
Notwithstanding the aforementioned, the accompanying consolidated financial statements of the Partnership have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from uncertainty related to the ability to continue as a going concern.
Use of Estimates
The preparation of financial statements in conformity with GAAP 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.
Trade Receivables
Trade receivables are recorded at the invoiced amount and do not bear interest. The Partnership evaluates the need for an allowance for doubtful accounts based on a review of collectability.
Inventories
Inventories include materials and supplies, which are carried at historical cost less an obsolescence reserve, when necessary, and coal, which is carried at the lower of cost or net realizable value. Cost of coal is determined using the average cost method and includes labor, supplies, equipment, depreciation, depletion, amortization, operating overhead and other related costs.
Exploration and Mine Development
WESTMORELAND RESOURCE PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DEBTOR-IN-POSSESSION)
Exploration expenditures are charged to
Cost of sales (exclusive of depreciation, depletion and amortization, shown separately)
as incurred, including costs related to drilling and study costs incurred to convert or upgrade mineral resources to reserves.
At existing surface mines, additional pits may be added to increase production capacity. These expansions may require significant capital to purchase or relocate equipment, build or improve existing haul roads and create the initial cut to remove overburden for new pits at existing mines, and ultimately reclaim disturbed lands. 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 Partnership 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.
Land, Mineral Rights, Property, Plant and Equipment
Land, mineral rights, property, plant and equipment are recorded at acquisition cost. Expenditures that extend the useful lives of existing plant and equipment or increase productivity of plant and equipment are capitalized. Maintenance and repair costs that do not extend the useful lives or increase productivity of plant and equipment are expensed as incurred.
Coal reserves, mineral rights and mine development costs are depleted based upon estimated proven and probable reserves. Long-term spare parts inventory begins depreciation when placed in service. Plant and equipment are depreciated on a straight-line basis over the assets’ estimated useful lives as follows:
|
|
|
|
Years
|
Buildings and tipple
|
25 - 39
|
Machinery and equipment
|
1 - 30
|
Vehicles
|
5 - 7
|
Furniture and fixtures
|
3 - 7
|
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. Amortization of capital leases is included in
Depreciation, depletion and amortization
in the Consolidated Statements of Operations and Comprehensive Loss.
Impairment of Long-Lived Assets
The Partnership evaluates its long-lived assets held and used in operations for impairment as events and changes in circumstances indicate that the carrying amount of such assets might not be recoverable. Factors that would indicate potential impairment to be present include, but are not limited to, a sustained history of operating or cash flow losses, an unfavorable change in earnings and cash flow outlook, prolonged adverse industry or economic trends or a significant adverse change in the extent or manner in which a long-lived asset is being used or in its physical condition.
Assets are grouped at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets. Coal mining assets are generally grouped at the mine level.
When indicators of impairment are present, the Partnership evaluates its long-lived assets for recoverability by comparing the estimated undiscounted cash flows expected to be generated by those assets under various assumptions to their carrying amounts. If such undiscounted cash flows indicate that the carrying value of the asset group is not recoverable, impairment losses are measured by comparing the estimated fair value of the asset group to its carrying amount. Fair value is generally determined through the use of an expected present value technique based on the income approach. The estimated future cash flows and underlying assumptions used to assess recoverability and, if necessary, measure the fair value of the Partnership’s long-lived asset groups are derived from those developed in connection with the Partnership’s planning and budgeting process.
WESTMORELAND RESOURCE PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DEBTOR-IN-POSSESSION)
Advanced Coal Royalties
A portion of our reserves are leased. Advanced coal royalties are advance payments made to lessors under terms of lease agreements that are typically recoupable through an offset or credit against royalties payable on future production. We write-off advanced coal royalties when recoverability is no longer probable based on future mining plans.
Restricted Investments
Restricted investments consist of cash and available-for-sale fixed-income investments reported at fair value with unrealized gains and losses excluded from earnings and reported in
Accumulated other comprehensive (loss) income
in the Consolidated Balance Sheets. Funds in the restricted investments accounts are not available to meet the Partnership’s general cash needs.
Deferred Financing Costs
The Partnership capitalizes costs incurred in connection with establishment of credit facilities and issuance of debt securities. These costs are amortized as an adjustment to interest expense over the life of the debt security or term of the credit facility using the effective interest method. The amounts related to debt securities are recorded in the Consolidated Balance Sheets in
Long-term debt, less current installments
as a direct deduction of the carrying amount of the debt security, consistent with debt discounts in the Consolidated Balance Sheets.
Financial Instruments
The Partnership 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) income
in the Consolidated Balance Sheets.
Our financial instruments include fixed price forward contracts for diesel fuel. These contracts meet the normal purchases and sales exclusion and therefore are not accounted for as derivatives. These forward fuel contracts usually have a term of
1 year
or less, and we take physical delivery of all the fuel supplied under these contracts.
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. The 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.
|
|
|
•
|
Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
|
See
Note 4. Loss On Impairment
,
Note 6. Restricted Investments
and
Note 13. Fair Value Measurements
to the consolidated financial statements for further disclosures related to the Partnership’s fair value estimates.
Intangible Assets
Identifiable intangible assets acquired in a business combination are recognized and reported separately from goodwill. These intangible assets are amortized on a straight-line basis over the respective useful life of the asset. See
Note 10. Intangible Assets
to the consolidated financial statements for further details.
WESTMORELAND RESOURCE PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DEBTOR-IN-POSSESSION)
Deferred Revenue
Deferred revenues represent funding received in advance of meeting the revenue recognition criteria. Deferred revenues will be recognized as revenue in the periods in which all revenue recognition criteria have been met.
Asset Retirement Obligations
Our asset retirement obligations ("ARO") primarily consists of estimated costs to reclaim surface land and support facilities at our mines and in accordance with federal and state reclamation laws as established by each mining permit.
We estimate 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. We record asset retirement cost associated with the initial recorded liability. Asset retirement cost is amortized based on the units of production method over the estimated proven and probable reserves at the related mine, and the ARO 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. See
Note 11. Asset Retirement Obligations
to the consolidated financial statements.
Income Taxes
As a partnership, we are not a taxable entity for federal or state income tax purposes; the tax effect of our activities passes through to our unitholders. Therefore, no provision or liability for federal or state income taxes is included in the consolidated financial statements. Net income (loss) for financial statement purposes may differ significantly from taxable income (loss) reportable to our unitholders as a result of timing or permanent differences between financial reporting under GAAP and the regulations promulgated by the IRS.
Prior to the Kemmerer Drop, Westmoreland Kemmerer, LLC ("WKL") was subject to income taxes in the United States (including federal and state). Deferred income taxes were 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 (greater than 50%) that a deferred tax asset will not be realized. In determining the need for a valuation allowance at each reporting period, WKL considered projected realization of tax benefits based on expected levels of future taxable income, the duration of statutory carryforward periods, experience with operating loss and tax credit carryforwards not expiring and availability of tax planning strategies.
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.
WKL includes interest and penalties related to income tax matters in
Income tax expense
in the Consolidated Statements of Operations and Comprehensive Loss, however there were no interest and penalties in any years presented.
Revenue Recognition
Revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration we expect to receive in exchange for those goods or services. The Partnership measures revenue based on the consideration specified in the contract, and revenue is recognized when the performance obligations in the contract are satisfied. A performance obligation is a promise in a contract to transfer a distinct service to the customer. The transaction price of a contract is allocated to each distinct performance obligation and recognized as revenue when or as the customer receives the benefit of the performance obligation.
For all of our coal sales contracts, performance obligations consist of the delivery of each ton of coal to the customer as our promise is to sell multiple distinct units of a commodity at a point in time. The transaction price principally consists of
WESTMORELAND RESOURCE PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DEBTOR-IN-POSSESSION)
fixed consideration in the form of a base price per ton of coal with additional variable consideration comprised of adjustments to the base price based on quality measurements. Certain long-term contracts contain additional variable consideration comprised of various index-based adjustments, adjustments based on changes in underlying production costs and reimbursements of various costs such as royalties and taxes.
Equity-Based Compensation
Equity-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
Selling and administrative
in the Consolidated Statements of Operations and Comprehensive Loss. See
Note 17. Unit-Based Compensation
to the consolidated financial statements.
Earnings (Losses) Per Unit
For purposes of our earnings per unit calculation, we apply the two class method. All outstanding limited partner units, Series A Units, Series B Units and general partner units share pro rata in income (loss) allocations and distributions, but only our general partner units have voting rights. Limited partner units are further segregated into common units and liquidation units.
Basic earnings (losses) per limited partner common unit are computed by dividing undistributed earnings and losses after distributions applicable to limited partner common units by the weighted average common units outstanding during the reporting period. Diluted earnings per common unit are computed similar to basic earnings per common unit except that the weighted average units outstanding and net income attributable to limited partner common units are increased to include the dilutive effect of limited partner common units that would be issued assuming conversion of all outstanding warrants and vesting of all outstanding restricted awards. No such items were included in the computation of diluted loss per common unit for the years ended December 31,
2018
and
2017
because we incurred a loss in each of these periods and the effect of inclusion would have been anti-dilutive.
The table below shows the number of units that were excluded from the calculation of diluted loss per common unit because their inclusion would be anti-dilutive to the calculation:
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2018
|
|
2017
|
Long-term incentive plan units
|
—
|
|
|
28,140
|
|
Warrants
|
—
|
|
|
166,557
|
|
All warrants expired without being exercised in June 2018. All long-term incentive plan units were either forfeited or cancelled in 2018. See
Note 17. Unit-Based Compensation
to the consolidated financial statements for additional details.
Reclassifications
Certain amounts in prior periods have been reclassified to conform with current year presentation, with no effect on previously reported net loss, cash flows or partners’ deficit.
Recently Adopted Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update ("ASU") 2014-09,
Revenue from Contracts with Customers (Topic 606)
(“new revenue standard”), which supersedes all previously existing revenue recognition guidance. Under this guidance, an entity should recognize revenue when it transfers 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. The standard allows for initial application to be performed retrospectively to each period presented or as a cumulative effect adjustment as of the date of adoption. During 2016, the FASB clarified the implementation guidance on principal versus agent, identifying performance obligations and licensing, practical expedients, and made technical corrections on various topics.
The Partnership adopted the new revenue standard effective January 1, 2018 using the full retrospective method. The adoption of this standard did not have a material impact to the Partnership's consolidated financial statements.
WESTMORELAND RESOURCE PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DEBTOR-IN-POSSESSION)
In November 2016, the FASB issued ASU 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash
(“new cash flows standard”), which requires all entities that have restricted cash or restricted cash equivalents to explain the changes during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents in the Consolidated Statements of Cash Flows. As a result, amounts generally described as restricted cash and restricted cash equivalents that are included in other financial statement captions of the Consolidated Balance Sheets should be included with cash and cash equivalents when reconciling the beginning of period and end of period total amounts shown in the Consolidated Statements of Cash Flows. The ASU should be adopted using a retrospective transition method to each period presented. The Partnership adopted the new cash flows standard effective January 1, 2018 and applied the ASU retrospectively to the periods presented in the Partnership’s Consolidated Statements of Cash Flows. As a result, net cash used in investing activities for the year ended December 31, 2017 was adjusted to exclude the change in restricted cash as follows:
|
|
|
|
|
|
Year Ended December 31, 2017
|
|
(In thousands)
|
Cash used in investing activities, as previously reported
|
$
|
(9,881
|
)
|
Less: Purchases of restricted investments
|
(826
|
)
|
Cash used in investing activities, as adjusted
|
$
|
(10,707
|
)
|
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
, which requires companies leasing assets to recognize on their balance sheet a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term on contracts longer than one year. The new guidance is effective for fiscal years beginning after December 15, 2018, using a modified retrospective approach, with early adoption permitted.
In July 2018, the FASB issued ASU 2018-11,
Leases (Topic 842):Targeted Improvements
, which includes two main provisions. The first is an additional optional transition method to adopt the new leasing standard at the adoption date through recognition of a cumulative-effect adjustment to the opening balance of retaining earnings in the period of adoption. The second provides lessors with a practical expedient, by class of underlying asset, to not separate non-lease components from the associated lease component and, instead, to account for those components as a single component, if certain criteria are met.
The Partnership has established an implementation team to execute a multi-phase plan to adopt the requirements of the new standard. The team is in the process of finalizing the quantitative and qualitative analysis in accordance with the plan. The team is also reviewing system capabilities, processes and internal controls over financial reporting as of December 31, 2018.
In August 2018, the FASB issued ASU 2018-13,
Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement
, which eliminates certain disclosure requirements for fair value measurements for all entities, and requires public entities to disclose certain new information while modifying certain disclosure requirements. The new guidance is effective for all entities for fiscal years beginning after December 15, 2019 and for interim periods within those fiscal years, with early adoption permitted. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. We will adopt the new guidance in the first quarter of 2020 and the adoption of this guidance will not have a material impact on the consolidated financial statements.
2. REVENUE
We produce and sell thermal coal primarily to large electric utility customers with coal-fired power plants, typically under long-term contracts. Our customers are generally in close proximity through mine-mouth power plants and strategically located rail and barge transportation. Lesser amounts of revenue are generated from royalties from oil and gas leases and sales of various mining byproducts.
WESTMORELAND RESOURCE PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DEBTOR-IN-POSSESSION)
Under ASC 606, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration we expect to receive in exchange for those goods or services. We measure revenue based on the consideration specified in the contract, and revenue is recognized when the performance obligations in the contract are satisfied. A performance obligation is a promise in a contract to transfer a distinct service to the customer. The transaction price of a contract is allocated to each distinct performance obligation and recognized as revenue when or as the customer receives the benefit of the performance obligation.
For all of our coal sales contracts, performance obligations consist of the delivery of each ton of coal to the customer as our promise is to sell multiple distinct units of a commodity at a point in time. The transaction price principally consists of fixed consideration in the form of a base price per ton of coal with additional variable consideration comprised of adjustments to the base price based on quality measurements. Certain long-term contracts contain additional variable consideration comprised of various index-based adjustments, adjustments based on changes in underlying production costs and reimbursements of various costs such as royalties and taxes.
Disaggregated Revenues
The following table presents our revenues for the year ended
December 31, 2018
and
2017
disaggregated by type of revenue:
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2018
|
|
2017
|
Type of Revenue
|
(In thousands)
|
Coal sales
|
$
|
263,569
|
|
|
$
|
311,481
|
|
Other revenues
|
7,467
|
|
|
4,124
|
|
Total
|
$
|
271,036
|
|
|
$
|
315,605
|
|
Contract Balances
Contract assets and contract liabilities are the result of timing differences between revenue recognition, billings and cash collections. We recognize contract assets in those instances where billing occurs subsequent to revenue recognition and our right to invoice the customer is conditioned on something other than the passage of time. There were no contract assets included in the Consolidated Balance Sheets as of
December 31, 2018
and
2017
, respectively. We recognize contract liabilities in those instances where billing occurs prior to revenue recognition, which occurs for certain contracts with tiered pricing in which the per ton contract price has exceeded per ton revenue to date, or when we have received consideration prior to satisfaction of performance obligations.
The following table presents the activity in our contract liabilities for the year ended
December 31, 2018
(in thousands):
|
|
|
|
|
Contract Liabilities
1
:
|
|
Balance as of December 31, 2017
|
$
|
3,141
|
|
Additions
|
2,924
|
|
Transfers to
Revenues
|
(3,141
|
)
|
Balance as of December 31, 2018
|
$
|
2,924
|
|
_________________________
1
Comprised entirely of current balances of $2.9 million and $3.1 million reported within
Deferred revenue
in the Consolidated Balance Sheets as of
December 31, 2018
and 2017, respectively.
Remaining Performance Obligations
WESTMORELAND RESOURCE PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DEBTOR-IN-POSSESSION)
The following table presents our estimated revenues allocated to remaining performance obligations for contracted revenue that has not yet been recognized, representing our “contractually committed” revenues as of
December 31, 2018
that we will invoice or transfer from contract liabilities and be recognized in future periods (in thousands):
|
|
|
|
|
|
Estimated Revenues
|
2019
|
$
|
73,340
|
|
2020
|
69,680
|
|
2021
|
51,727
|
|
2022
|
—
|
|
2023
|
—
|
|
Thereafter
|
—
|
|
Total
|
$
|
194,747
|
|
Our contractually committed revenue, for purposes of the table above, is limited to the transaction price for long-term coal sales contracts which have minimum tonnage commitments. Our contractually committed revenue amounts generally exclude, based on the following practical expedients that we elected to apply, (i) variable consideration within contracts in which such variable consideration is allocated entirely to wholly unsatisfied performance obligations; and (ii) remaining performance obligations for contracts with an original expected duration of one year or less. Additional revenues are expected to be recognized based on our short-term coal sales contracts, long-term coal sales contracts with no minimum tonnage commitments and long-term coal sales contracts with customer options in addition to minimum tonnage commitments.
3. ACQUISITIONS
Acquisition of Johnson Run Coal Reserves
On January 9, 2017, the Partnership acquired surface coal reserves (“Johnson Run”) through conveyance of leases and recoupable advance royalty payments from Buckingham Coal Company, LLC, a wholly owned subsidiary of WCC, for
$1.7 million
, of which
$1.5 million
was deemed a distribution as the transaction was between entities under common control.
4. LOSS ON IMPAIRMENT
Impairment Charges
During 2018, the Partnership recorded asset impairment charges to various assets in the amount of
$77.1 million
in
Loss on impairment
in the Consolidated Statements of Operations and Comprehensive Loss. Indicators of impairment occurred as during the second quarter of 2018 AEP Generation Resources Inc. (“AEP”) declined the Partnership’s bid to supply coal to AEP’s Conesville Power Plant Units 5 and 6 for periods subsequent to the expiration of the parties' current contract which expired on December 31, 2018. Coal sales under Oxford’s current coal supply contract to AEP’s Conesville Power Plant Units 5 and 6 represented a substantial portion of the Partnership's revenues generated from the Ohio mines for the years ended December 31, 2018 and 2017.
The Partnership performed a recoverability analysis as of June 30, 2018 and determined that the net undiscounted cash flows were less than the carrying values for the Ohio mines' long-lived assets groups. As a result, the Partnership estimated the fair value of the long-lived asset groups using a discounted cash flow analysis using marketplace participant assumptions which constituted Level 3 fair value inputs. The discounted cash flow analysis is dependent on a number of significant management estimates about future performance including sales volumes and prices, which are based on projected revenues based on expected economic conditions, costs to produce, capital spending, working capital changes and the weighted average cost of capital. The estimates of costs to produce include labor, fuel, explosives, supplies and other major components of mining. The Partnership estimated the fair value of certain property, plant and equipment and intangible assets using the market approach. To the extent that the carrying values of the long-lived asset groups exceeded the respective fair values, the Partnership recorded an asset impairment charge, as can be seen by asset type in the table below for the year ended
December 31, 2018
.
WESTMORELAND RESOURCE PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DEBTOR-IN-POSSESSION)
|
|
|
|
|
|
Asset Impairment Charges
|
|
(In thousands)
|
Land, mineral rights, property, plant and equipment, net
|
$
|
50,057
|
|
Advanced coal royalties
1
|
3,194
|
|
Intangible assets, net of accumulated amortization of $7.2 million at June 30, 2018
|
23,767
|
|
Other assets
|
46
|
|
Total
|
$
|
77,064
|
|
_____________________
1
Consists of the current portion of Advanced coal royalties.
For the year ended December 31, 2017, we recorded an impairment charge of $
5.9 million
related to land and mineral rights in Kentucky which were determined to have no further economic value.
5. INVENTORIES
Inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
December 31, 2017
|
|
(In thousands)
|
Coal stockpiles
|
$
|
1,954
|
|
|
$
|
4,642
|
|
Materials and supplies
|
10,273
|
|
|
10,569
|
|
Reserve for obsolete inventory
|
(206
|
)
|
|
(284
|
)
|
Total
|
$
|
12,021
|
|
|
$
|
14,927
|
|
6. RESTRICTED INVESTMENTS
For all of its restricted investments accounts, the Partnership can select from limited fixed-income investment options for the funds and receive the investment returns on these investments. Funds in the restricted investments accounts are not available to meet the Partnership’s general cash needs. These investments include available-for-sale securities, which are reported at fair value with unrealized gains and losses excluded from earnings and reported in
Accumulated other comprehensive (loss) income
in the Consolidated Balance Sheets
.
The carrying value and estimated fair value of restricted investments at
December 31, 2018
were as follows:
|
|
|
|
|
|
|
|
|
|
Carrying Value
|
|
Fair Value
|
|
(In thousands)
|
Cash and cash equivalents
|
$
|
6,165
|
|
|
$
|
6,165
|
|
Available-for-sale securities
|
29,584
|
|
|
29,584
|
|
Total
|
$
|
35,749
|
|
|
$
|
35,749
|
|
The carrying value and estimated fair value of restricted investments at
December 31, 2017
were as follows:
|
|
|
|
|
|
|
|
|
|
Carrying Value
|
|
Fair Value
|
|
(In thousands)
|
Cash and cash equivalents
|
$
|
7,754
|
|
|
$
|
7,754
|
|
Available-for-sale securities
|
29,485
|
|
|
29,485
|
|
Total
|
$
|
37,239
|
|
|
$
|
37,239
|
|
The Partnership recorded realized gains or losses on the sale of available-for-sale securities held as restricted investments for the years ended
December 31, 2018
and
2017
, however these amounts were immaterial to the consolidated financial statements.
WESTMORELAND RESOURCE PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DEBTOR-IN-POSSESSION)
Available-for-Sale Restricted Investments
The cost basis, gross unrealized holding gains and losses and fair value of available-for-sale securities are as follows:
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
December 31, 2017
|
|
(In thousands)
|
Cost basis
|
$
|
30,105
|
|
|
$
|
29,405
|
|
Gross unrealized holding gains
|
141
|
|
|
409
|
|
Gross unrealized holding losses
|
(662
|
)
|
|
(329
|
)
|
Fair value
|
$
|
29,584
|
|
|
$
|
29,485
|
|
Maturities of available-for-sale securities were as follows at
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
Cost Basis
|
|
Fair Value
|
|
(In thousands)
|
Due within one year
|
$
|
1,905
|
|
|
$
|
1,885
|
|
Due after one year to five years
|
9,649
|
|
|
9,459
|
|
Due after five years to ten years
|
6,770
|
|
|
6,714
|
|
Due in more than ten years
|
11,781
|
|
|
11,526
|
|
Total
|
$
|
30,105
|
|
|
$
|
29,584
|
|
7. POSTRETIREMENT MEDICAL BENEFITS
In accordance with the Amended and Restated Contribution Agreement, dated July 31, 2015, between the Partnership and WCC (the "Contribution Agreement"), all employees of WKL are employed by WCC. WCC assumes all liabilities associated with postretirement medical benefits and reflects these liabilities within WCC's consolidated balance sheets. As such, the Consolidated Balance Sheets for WMLP do not reflect any liability amounts for postretirement medical benefits in the years ended
December 31, 2018
and
2017
.
In accordance with the Contribution Agreement, WCC, in compliance with the Services Agreement with our GP and the Partnership Agreement, will allocate expenses incurred for postretirement medical liabilities attributable to the transferred employees on a cash basis through the period ended
December 31, 2018
. Thereafter, WCC shall allocate such expenses in its sole discretion, in compliance with the Services Agreement and the Partnership Agreement.
Postretirement Medical Benefits Plans
WKL provided 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. WKL also provided these benefits to qualified full-time employees pursuant to collective bargaining agreements. These benefits are provided through self-insured programs.
For the years ended
December 31, 2018
and
2017
,
no
net periodic postretirement medical benefit cost was recognized.
Assumptions
For the years ended
December 31, 2018
and
2017
, no assumptions were applicable in determining net periodic postretirement medical benefit cost for the Partnership.
8. PENSION AND OTHER SAVINGS PLANS
In accordance with the Contribution Agreement, all employees of WKL are employed by WCC. WCC assumes all liabilities associated with postretirement pension benefits and reflects these liabilities within WCC's consolidated balance sheets.
WESTMORELAND RESOURCE PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DEBTOR-IN-POSSESSION)
In accordance with the Contribution Agreement, WCC, in compliance with the Services Agreement with our GP and the Partnership Agreement, will allocate expenses incurred for postretirement pension liabilities attributable to the transferred employees on a cash basis through the period ended
December 31, 2018
. Thereafter, WCC shall allocate such expenses in its sole discretion, in compliance with the Services Agreement and the Partnership Agreement.
Defined Benefit Pension Plan
WKL provided 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. WKL’s funding policy is to contribute annually the minimum amount prescribed, as specified by applicable regulations.
For the years ended
December 31, 2018
and
2017
,
no
net periodic pension cost was recognized.
Assumptions
For the years ended
December 31, 2018
and
2017
, no assumptions were applicable in determining net period pension cost for the Partnership.
The Partnership does not support and has never had a pension plan throughout its existence.
Contributions
No
pension plan contributions were made for the years ended
December 31, 2018
or
2017
.
401(k) Savings Plan
Costs recognized related to the matching of employee 401(k) savings plan contributions for the years ended
December 31, 2018
and
2017
were
$1.5
million and
$1.3
million, respectively. These costs are included in the Consolidated Statements of Operations and Comprehensive Loss in
Cost of sales (exclusive of depreciation, depletion and amortization, shown separately)
and
Selling and administrative
.
9. LEASES
We lease certain operating facilities and equipment under noncancelable lease agreements that expire on various dates through
2022
. Generally, the lease terms range from
one
to
four
years. There were no new capital leases entered into during the year ended
December 31, 2018
. The lease contracts were executed prior to the Petition Date, and the Partnership has not made modifications. The following shows the gross value and accumulated depreciation of property, plant and equipment under capital leases related to the leasing of mining equipment as of
December 31, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
December 31, 2017
|
|
(In thousands)
|
Gross value
|
$
|
23,787
|
|
|
$
|
23,883
|
|
Accumulated depreciation
|
15,690
|
|
|
11,908
|
|
Future minimum capital and operating lease payments as of
December 31, 2018
, are as follows:
WESTMORELAND RESOURCE PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DEBTOR-IN-POSSESSION)
|
|
|
|
|
|
|
|
|
|
Capital Leases
|
|
Operating Leases
|
|
(In thousands)
|
2019
|
$
|
4,418
|
|
|
$
|
1,970
|
|
2020
|
2,028
|
|
|
1,233
|
|
2021
|
1,832
|
|
|
1,132
|
|
2022
|
2,040
|
|
|
318
|
|
2023
|
—
|
|
|
—
|
|
Thereafter
|
—
|
|
|
—
|
|
Total minimum lease payments
|
10,318
|
|
|
$
|
4,653
|
|
Less imputed interest
|
(865
|
)
|
|
|
Present value of minimum capital lease payments
|
$
|
9,453
|
|
|
|
Rental expense under operating leases during the years ended
December 31, 2018
and
2017
, totaled
$5.1 million
and
$6.6 million
, respectively.
We have also entered into various coal reserve lease agreements under which advance royalty payments are made. Such payments are capitalized as
Advanced coal royalties
at the time of payment, and are recoupable through an offset or credit against royalties payable on future production.
The Partnership 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
$15.0 million
and
$10.6 million
for the years ended
December 31, 2018
and
2017
, respectively.
10. INTANGIBLE ASSETS
Identifiable intangible assets acquired in a business combination are specifically identified and recognized on a standalone basis. Intangible assets result from more favorable contract prices than market prices in lease agreements as measured during a business combination. As a result of WCC’s acquisition of the GP in December 2014, we determined that the most significant acquired identifiable intangible asset is related to a favorable lease agreement. Our intangible asset is amortized on a straight-line basis over the remaining term of the lease agreement.
The Partnership performed a recoverability analysis as of June 30, 2018. During 2018, the Partnership recorded asset impairment charges to various assets in the amount of
$77.1 million
, including the asset impairment charges of
$23.8 million
to
Intangible Assets
. See
Note 4. Loss On Impairment
for further disclosures related to the impairment charges.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
Estimated Remaining Life (years)
|
|
Cost
|
|
Accumulated Amortization
|
|
Impairment Charges
|
|
Net Carrying Value
|
|
(In thousands, except for years data)
|
Favorable lease agreement
|
11
|
|
$
|
31,000
|
|
|
$
|
7,233
|
|
|
$
|
23,767
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
Estimated Remaining Life (years)
|
|
Cost
|
|
Accumulated Amortization
|
|
Impairment Charges
|
|
Net Carrying Value
|
|
(In thousands, except for years data)
|
Favorable lease agreement
|
12
|
|
$
|
31,000
|
|
|
$
|
6,200
|
|
|
$
|
—
|
|
|
$
|
24,800
|
|
WESTMORELAND RESOURCE PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DEBTOR-IN-POSSESSION)
11. ASSET RETIREMENT OBLIGATIONS
As permittee, the Partnership or its subsidiaries are responsible for the total amount of final reclamation costs for its mines. Our ARO arises from the SMCRA and similar state statutes, which require that mine property be restored in accordance with specified standards and an approved reclamation plan. The required reclamation activities to be performed are outlined in our mining permits. These activities include reclaiming the pit and support acreage, as well as stream mitigation.
As of
December 31, 2018
, our ARO totaled
$40.2 million
, including amounts reported as current liabilities. This balance has been discounted using the credit-adjusted, risk-free interest rate in effect in the year the initial costs or subsequent increases to those costs were recorded. These credit-adjusted, risk-free interest rates range from
6.0%
to
75.0%
and new costs or increases to previously estimated costs were discounted at
75.0%
and
75.0%
as of
December 31, 2018
and
2017
, respectively. While the precise amount of these future costs cannot be determined with certainty, we estimate that, as of
December 31, 2018
, the aggregate undiscounted cost of final ARO was
$93.3 million
. Further, as of
December 31, 2018
, the Partnership had
$111 million
in surety bonds outstanding to secure reclamation obligations. The surety bonds were secured by
$35.7 million
in restricted investments as of
December 31, 2018
.
Changes in the Partnership’s asset retirement obligations were as follows:
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2018
|
|
2017
|
|
(In thousands)
|
Asset retirement obligations, beginning of year (including current portion)
|
$
|
45,796
|
|
|
$
|
52,177
|
|
Accretion
|
7,702
|
|
|
5,370
|
|
Changes resulting from additional mines
|
51
|
|
|
781
|
|
Changes due to amount and timing of reclamation
|
115
|
|
|
3,382
|
|
Liabilities settled
|
(13,479
|
)
|
|
(15,914
|
)
|
Asset retirement obligations, end of year
|
40,185
|
|
|
45,796
|
|
Less current portion
|
(16,246
|
)
|
|
(15,187
|
)
|
Asset retirement obligations, less current portion
|
$
|
23,939
|
|
|
$
|
30,609
|
|
12. LONG-TERM DEBT
Debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
December 31, 2017
|
|
(In thousands)
|
Term Loan
|
$
|
323,322
|
|
|
$
|
312,734
|
|
Capital lease obligations
|
9,453
|
|
|
13,478
|
|
Other
|
475
|
|
|
375
|
|
Total debt outstanding
|
333,250
|
|
|
326,587
|
|
Less debt issuance costs
|
—
|
|
|
(2,754
|
)
|
Less current installments
|
(324
|
)
|
|
(314,228
|
)
|
Less amounts reclassified to
Liabilities subject to compromise (LSTC)
|
$
|
(332,926
|
)
|
|
$
|
—
|
|
Total debt outstanding, less current installments
|
$
|
—
|
|
|
$
|
9,605
|
|
WESTMORELAND RESOURCE PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DEBTOR-IN-POSSESSION)
The following table presents remaining aggregate contractual debt maturities of all long-term debt:
|
|
|
|
|
|
December 31, 2018
|
|
(In thousands)
|
2019
|
$
|
327,821
|
|
2020
|
1,766
|
|
2021
|
1,664
|
|
2022
|
1,999
|
|
2023
|
—
|
|
Thereafter
|
—
|
|
Total debt
|
$
|
333,250
|
|
In connection with the Partnership’s voluntary petition for reorganization, the
$323 million
outstanding under the Term Loan has been classified to
Liabilities subject to compromise
in the Consolidated Balance Sheets as of
December 31, 2018
. As a result of the Partnership’s Chapter 11 Cases, the Partnership expensed the entire balance of
$636 thousand
of debt issuance costs during the fourth quarter of 2018 to
Reorganization items, net
in the Consolidated Statement of Operations and Comprehensive Loss for the year ended
December 31, 2018
.
For additional information, see
Note 1. Description Of Business, Basis Of Presentation And Summary Of Significant Accounting Policies
to the consolidated financial statements.
Term Loan
Pursuant to the amended 2014 Financing Agreement, dated as of December 31, 2014, by and among Oxford Mining Company, LLC, the Partnership and each of its subsidiaries, lenders from time to time party thereto, and U.S. Bank National Association, as administrative agent, we entered into a term loan (“Term Loan”) which matured on December 31, 2018 and pays interest on a quarterly basis at a variable rate equal to the 3-month London Interbank Offered Rate (“LIBOR”) at each period end (
2.65%
as of
December 31, 2018
), subject to a floor of
0.75%
, plus
8.25%
or the Reference Rate, as defined in the 2014 Financing Agreement. As of
December 31, 2018
, the Term Loan had a cash interest rate of
10.90%
. The Term Loan is a primary obligation of Oxford Mining Company, LLC, a wholly owned subsidiary of the Partnership, is guaranteed by the Partnership and its subsidiaries, and is secured by substantially all of the Partnership’s and its subsidiaries’ assets.
The 2014 Financing Agreement also provides for Paid-In-Kind Interest (“PIK Interest”) at a variable rate between
1.00%
and
3.00%
based on our consolidated total net leverage ratio, as defined in the 2014 Financing Agreement. As of
December 31, 2018
and
2017
, the Term Loan had a PIK Interest rate of
3.00%
. The rate of PIK Interest is recalculated on a quarterly basis with the PIK Interest added quarterly to the then-outstanding principal amount of the Term Loan. PIK Interest under the 2014 Financing Agreement was
$7.4 million
and
$9.3 million
for the years ended
December 31, 2018
and
2017
, respectively. The outstanding Term Loan amount as of
December 31, 2018
represents the principal balance of
$290.5 million
, plus PIK Interest of
$32.8 million
.
The 2014 Financing Agreement requires mandatory prepayment of principal with proceeds from the receipt of oil and gas royalties and asset sales. During the year ended
December 31, 2018
, we paid down
$1.5 million
of the Term Loan with such proceeds, however, no principal prepayments occurred during the year ended
December 31, 2018
.
The 2014 Financing Agreement limits cumulative cash distributions to an aggregate amount not to exceed
$15.0 million
(“Restricted Distributions”), if we have: (i) a consolidated total net leverage ratio of greater than
3.75
, or a fixed charge coverage ratio of less than
1.00
(as such ratios are defined in the 2014 Financing Agreement), or (ii) liquidity of less than
$7.5 million
, after giving effect to such cash distribution and applying our availability under the Revolver. As of
December 31, 2018
, our consolidated total net leverage ratio is in excess of
3.75
, our fixed charge coverage ratio is less than
1.00
and we have utilized the full
$15.0 million
limit on Restricted Distributions.
The filing of the Chapter 11 Cases constitutes an event of default under the 2014 Financing Agreement and the Term Loan that accelerated the Partnership’s obligations thereunder. However, under the Bankruptcy Code, the lenders under the
WESTMORELAND RESOURCE PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DEBTOR-IN-POSSESSION)
Term Loan are stayed from taking any action against the Partnership as a result of the default. See
Note 1. Description Of Business, Basis Of Presentation And Summary Of Significant Accounting Policies
to the consolidated financial statements.
Covenant Compliance
The filing of the Chapter 11 Cases described above constitutes an event of default that accelerated the Debtors’ respective obligations under the 2014 Financing Agreement, dated as of December 31, 2014, by and among Oxford Mining Company, LLC and the other borrowers thereto, the Partnership and certain of its subsidiaries as guarantors thereto, and the lenders, collateral agent and administrative agent thereto, as amended (the “2014 Financing Agreement”). The Financing Agreement provides that as a result of the Chapter 11 Cases the principal and interest due thereunder shall be immediately due and payable. Any efforts to enforce such payment obligations under the 2014 Financing Agreement are automatically stayed as a result of the Chapter 11 Cases, and the creditors’ rights of enforcement in respect of the 2014 Financing Agreement are subject to the applicable provisions of the Bankruptcy Code.
For additional information, see
Note 1. Description Of Business, Basis Of Presentation And Summary Of Significant Accounting Policies
to the consolidated financial statements.
Deferred Financing Costs
Amortization of deferred financing costs included in interest expense was
$2.1 million
and
$2.9 million
for the years ended
December 31, 2018
and
2017
, respectively.
As a result of the Partnership’s Chapter 11 Cases, the Partnership expensed the entire unamortized balance of
$636 thousand
of debt issuance costs during the fourth quarter of 2018 to
Reorganization items, net
in the Consolidated Statement of Operations and Comprehensive Loss for the year ended
December 31, 2018
.
Capital Leases
The Partnership engages in leasing transactions for office equipment and equipment utilized in its mining operations. As of
December 31, 2018
, the capital leases outstanding had a weighted average interest rate of
4.97%
and mature at various dates beginning in 2019 through 2022.
13. FAIR VALUE MEASUREMENTS
The book values of cash and cash equivalents, receivables and accounts payables are considered to be representative of their respective fair values because of the immediate short-term maturity of these financial instruments.
In connection with our refinancing in June 2013, certain of the second lien lenders and lender affiliates received warrants entitling them to purchase common units. The warrants are measured at fair value at each balance sheet date. All outstanding warrants expired without being exercised in June 2018.
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 (Level 3). As of
December 31, 2018
, the Partnership valued the Term Loan using Level 3 fair value inputs. The estimated fair values of the Partnership’s debt with fixed and variable interest rates are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Interest Rate
|
|
Variable Interest Rate
|
|
Carrying Value
|
|
Fair Value
|
|
Carrying Value
|
|
Fair Value
|
|
(In thousands)
|
December 31, 2018
|
$
|
9,928
|
|
|
$
|
9,928
|
|
|
$
|
323,322
|
|
|
$
|
125,459
|
|
December 31, 2017
|
13,853
|
|
|
13,853
|
|
|
309,980
|
|
|
144,536
|
|
WESTMORELAND RESOURCE PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DEBTOR-IN-POSSESSION)
The table below sets forth, by level, the Partnership’s financial assets and liabilities that are accounted for at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
Quoted Prices in Active Markets for Identical Asset or Liability
|
|
Significant Other Observable Inputs
|
|
Significant Unobservable Inputs
|
|
Fair Value
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
(In thousands)
|
Assets:
|
|
|
|
|
|
|
|
Available-for-sale investments, included in
Restricted investments
|
$
|
29,584
|
|
|
$
|
29,584
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
Quoted Prices in Active Markets for Identical Asset or Liability
|
|
Significant Other Observable Inputs
|
|
Significant Unobservable Inputs
|
|
Fair Value
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
(In thousands)
|
Assets:
|
|
|
|
|
|
|
|
Available-for-sale investments, included in
Restricted investments
|
$
|
29,485
|
|
|
$
|
29,485
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
Warrants
|
$
|
445
|
|
|
$
|
—
|
|
|
$
|
445
|
|
|
$
|
—
|
|
14. LIABILITIES SUBJECT TO COMPROMISE
As discussed in
Note 1. Description Of Business, Basis Of Presentation And Summary Of Significant Accounting Policies
, beginning on the Petition Date, the Partnership has been operating as debtor-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with provisions of the Bankruptcy Code. On the Consolidated Balance Sheets, the caption
Liabilities subject to compromise
reflects the expected allowed amount of the prepetition claims that are not fully secured and that have at least a possibility of not being repaid at the full claim amount. Liabilities Subject to Compromise at
December 31, 2018
consisted of the following:
|
|
|
|
|
|
December 31, 2018
|
|
(In thousands)
|
Debt
|
$
|
332,926
|
|
Accounts payable and accrued expenses
|
16,638
|
|
Production taxes
|
11,176
|
|
Interest payable
|
3,459
|
|
Other liabilities
|
1,178
|
|
Total Liabilities Subject to Compromise
|
$
|
365,377
|
|
Subsequent to the Balance Sheet date, as permitted under the Bankruptcy Code, the Partnership might reject certain of its pre-petition contracts and will calculate its estimated liability to the affected unsecured creditors. As a result, additional amounts may be included in liabilities subject to compromise in future periods.
Determination of the value at which liabilities will ultimately be settled cannot be made until the Bankruptcy Court approves the Plan. The Partnership will continue to evaluate the amount and classification of its pre-petition liabilities. Any additional liabilities that are subject to compromise will be recognized accordingly, and the aggregate amount of liabilities subject to compromise may change.
WESTMORELAND RESOURCE PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DEBTOR-IN-POSSESSION)
15. REORGANIZATION ITEMS, NET
Reorganization items incurred as a result of the Chapter 11 Cases are presented separately in the accompanying Consolidated Statements of Operations and Comprehensive Loss for the year ended
December 31, 2018
and were as follows:
|
|
|
|
|
|
Year Ended December 31, 2018
|
|
(In thousands)
|
Professional fees
|
$
|
7,528
|
|
Deferred financing costs
|
636
|
|
Gain on settlement of LSTC
|
(383
|
)
|
Reorganization items, net
|
$
|
7,781
|
|
Professional fees included in
Reorganization items, net
represent professional fees for post-petition expenses incurred since the Petition Date. Deferred financing costs and term loan discount are included in
Reorganization items, net
as the Partnership believes the underlying debt instruments will be impacted by the Chapter 11 Cases.
As of
December 31, 2018
,
$5.3 million
of professional fees were unpaid and accrued in Accounts payable and accrued expenses in the Consolidated Balance Sheets.
Cash paid for reorganization items was
$2.2 million
for the year ended
December 31, 2018
.
16. DISTRIBUTIONS OF AVAILABLE CASH
Currently, the terms of the Interim Cash Collateral Order [Docket No. 95] of the Chapter 11 Cases ("Interim Cash Collateral Order"), in accordance with the approved budget under such order, does not permit cash distributions to our unitholders. Prior to our Petition Date, our 2014 Financing Agreement restricted us from making cash distributions in excess of
$15.0 million
in the aggregate when certain ratios and liquidity requirements are not met. As of
December 31, 2018
, both of these ratios were not met, and we do not foresee them being met in the near future. As of
December 31, 2018
, we had made
$15.0 million
in Restricted Distributions and, accordingly, we would not have been able to make a cash distribution to unitholders had we not filed the Chapter 11 Cases. Additionally, any such future cash distribution would need to comply with the terms of the Interim Cash Collateral Order or any such future cash collateral order governing cash distributions.
Pursuant to the Partnership’s Fourth Amended and Restated Agreement of Limited Partnership, as amended (the “Partnership Agreement”), we distribute
100%
of our available cash within
45
days after the end of each quarter to unitholders of record and to our GP, subject to the conditions and limitations within the 2014 Financing Agreement. Available cash is determined at the end of each quarter and is generally defined in the Partnership Agreement, as all cash and cash equivalents on hand at the end of each quarter less reserves established by our GP in its reasonable discretion for future cash requirements. These reserves are retained to provide for the conduct of our business, the payment of debt principal and interest, to provide funds for future distributions for any one or more of the next four quarters, and to comply with applicable law or any loan agreement to which the Partnership or any of its subsidiaries are a party. Our available cash may also include, if our GP so determines, all or any portion of the cash on hand on the date of determination of available cash for the quarter resulting from working capital borrowings made subsequent to the end of such quarter.
We made cash distributions as follows:
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2018
|
|
2017
|
|
(In thousands)
|
Limited partner common units
|
$
|
—
|
|
|
$
|
654
|
|
General partner units
|
—
|
|
|
18
|
|
Warrants
|
—
|
|
|
86
|
|
WESTMORELAND RESOURCE PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DEBTOR-IN-POSSESSION)
17. UNIT-BASED COMPENSATION
Under our Long-Term Incentive Plan ("LTIP"), we recognize equity-based compensation expense over the vesting period of the units. These units are subject to conditions and restrictions as determined by our Compensation Committee, including continued employment or service.
No
units were granted or vested during the year ended December 31, 2018. For the years ended
December 31, 2018
and
December 31, 2017
, we recognized equity-based compensation expense of
$52 thousand
and
$242
thousand, respectively. These costs are included in
Selling and administrative
in the Consolidated Statements of Operations and Comprehensive Loss. The fair value of LTIP units vested during the year ended
December 31, 2017
was
$328 thousand
. The following table summarizes additional information concerning our unvested LTIP units.
|
|
|
|
|
|
|
|
|
Units
|
|
Weighted Average Grant Date Fair Value
|
Unvested balance at December 31, 2017
|
82,240
|
|
|
$
|
3.04
|
|
Forfeited
|
(16,448
|
)
|
|
3.04
|
|
Cancelled
|
(65,792
|
)
|
|
3.04
|
|
Unvested balance at December 31, 2018
|
—
|
|
|
$
|
—
|
|
The unvested restricted common unit awards had an initial vesting date of March 2, 2018. However, on March 1, 2018, the grant was modified and the vesting date for all awards was extended to December 15, 2018. As all related compensation expense was recognized as of the modification date and the modification did not result in an increase in fair value of the awards, no additional expense was recognized.
Cancellation Option for Restricted Stock Units
Due to the Company’s depressed stock price, the Company offered all holders of unvested restricted stock units an option to cancel their units in order to mitigate potential unfavorable individual tax ramifications. As of
December 31, 2018
, all restricted stock unit holders accepted the cancellation option, resulting in the cancellation of
65,792
restricted stock units.
18. PARTNERS' CAPITAL AND CONVERTIBLE UNITS
Our capital accounts are comprised of approximately
0.15%
beneficial general partner interests and
99.85%
limited partner interests as of
December 31, 2018
. Our limited partners have limited rights of ownership as provided for under our Partnership Agreement and the right to participate in our distributions. Our GP manages our operations and participates in our distributions, including certain incentive distributions pursuant to the incentive distribution rights, which are nonvoting limited partner interests held by our GP. Pursuant to our Partnership Agreement, our GP participates in losses and distributions based on its interest. The GP’s participation in the allocation of losses and distributions is not limited and therefore, such participation can result in a deficit to its capital account. Allocation of losses and distributions, including distributions for previous transactions between entities under common control, has resulted in a deficit to certain limited partners’ capital accounts included in the Consolidated Balance Sheets.
WESTMORELAND RESOURCE PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DEBTOR-IN-POSSESSION)
Series A Convertible Units
In connection with the Kemmerer Drop and the issuance of the Series A Units, the Partnership entered into an amendment (the “Amendment”) to our Partnership Agreement. The Amendment established the terms of the Series A Units and any additional Series A Units that may be issued in kind as a distribution (the “Series A PIK Units”), and provided that each Series A Unit will have the right to share in distributions from us on a pro rata basis with the common units. All or any portion of each distribution payable in respect of the Series A Units (the “Series A Convertible Unit Distribution”) may, at our election, be paid in Series A PIK Units. To the extent any portion of the Series A Convertible Unit Distribution is paid in Series A PIK Units for any quarter, the distribution to the holders of incentive distribution rights shall be reduced by that portion of the distribution that is attributable to the payment of those Series A PIK Units, as further described in the Amendment. The Series A Units and the Series A PIK Units will convert on a
one
-for-one basis, at the earlier of the date on which we first make a regular quarterly cash distribution with respect to any quarter to holders of common units in an amount at least equal to
$0.22
per common unit or upon a change of control. The Series A Units have the same voting rights as if they were outstanding common units and will vote together with the common units as a single class. In addition, the Series A Units are entitled to vote as a separate class on any matters that materially adversely affect the rights or preferences of the Series A Units in relation to other classes of partnership interests or as required by law.
Series B Convertible Units
On October 28, 2016, we issued
4,512,500
Series B Units to WCC in exchange for WCC’s
4,512,500
common units. Upon issuance of the Series B Units in the Exchange, WCC’s common units were canceled. The Series B Units do not share in distributions with the common units and are convertible at the option of the holder on a
one
-for-one basis into common units on the day after the record date for a cash distribution on the common units in which the Partnership is unable to make such a distribution without exceeding its restricted payment basket under the 2014 Financing Agreement (as defined in
Note 12. Long-Term Debt
to the consolidated financial statements). This date occurred on November 15, 2017 and, the holder of the Series B Units has not yet converted these Series B Units into common units. The Series B Units will convert automatically upon a change of control or a dissolution or liquidation of the Partnership. The Series B Units have the same voting rights as if they were outstanding common units and will vote together with the common units as a single class. In addition, the Series B Units are entitled to vote as a separate class on any matters that materially adversely affect the rights or preferences of the Series B Units in relation to other classes of partnership interests or as required by law. Concurrently with the Exchange, we entered into a second amendment to the Partnership Agreement, which established the terms of the Series B Units.
Liquidation Units
The liquidation units have no distribution or voting rights, other than in connection with liquidation. For tax purposes, liquidation units are allocated additional taxable income but no additional taxable loss compared to other unit classes.
Warrants
In June 2013, in connection with a prior credit facility, certain lenders and lender affiliates received warrants entitling them to purchase
166,557
common units at
$0.12
per unit. The warrants participate in distributions whether or not exercised. All outstanding warrants expired without being exercised in June 2018.
Net Income (Loss) Attributable to Limited Partners
Net income (loss) is allocated to the limited partner units, Series A Units, Series B Units and general partner units in accordance with their respective ownership percentages, after giving effect to distributions and declared distributions on Series A Units, warrants and general partner units, including incentive distribution rights. Basic and diluted limited partners’ net income (loss) per limited partner common unit is calculated by dividing limited partners’ interest in net income (loss) by the weighted average number of limited partner common units outstanding during the period. We determined basic and diluted limited partners’ net loss per limited partner common unit as follows (in thousands, except per unit amounts):
WESTMORELAND RESOURCE PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DEBTOR-IN-POSSESSION)
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2018
|
|
2017
|
Net loss attributable to the Partnership
|
$
|
(139,183
|
)
|
|
$
|
(31,751
|
)
|
Less:
|
|
|
|
Paid and declared distributions on Series A convertible units
|
—
|
|
|
6,302
|
|
Series A convertible units share of undistributed loss
|
(103,708
|
)
|
|
(28,568
|
)
|
Series B convertible units share of undistributed loss
|
(27,446
|
)
|
|
(7,791
|
)
|
Paid and declared distributions on general partner units
|
—
|
|
|
14
|
|
General partner units share of undistributed loss
|
(215
|
)
|
|
(61
|
)
|
Paid and declared distributions on warrants
|
—
|
|
|
63
|
|
Net loss available to limited partners
|
$
|
(7,814
|
)
|
|
$
|
(1,710
|
)
|
|
|
|
|
Weighted average number of limited partner common units outstanding used in computation of limited partners' net loss per common unit (basic and diluted)
|
1,285
|
|
|
1,274
|
|
Limited partners' net loss per limited partner common unit (basic and diluted)
|
$
|
(6.08
|
)
|
|
$
|
(1.34
|
)
|
19. WORKERS’ COMPENSATION AND BLACK LUNG
As of
December 31, 2018
and
2017
, we have a liability of
$1.2 million
and
$1.4 million
, respectively, to pay black lung benefits to eligible employees, former employees and their dependents. The liability is recorded in the Consolidated Balance Sheets in
Other liabilities
prior to October 9, 2018 and for the year ended
December 31, 2017
, subsequently it was reclassed to
Liabilities subject to compromise
in the Consolidated Balance Sheets for the year ended
December 31, 2018
. Under the Black Lung Benefits Revenue Act of 1977, as amended in 1981, each coal mine operator must pay federal black lung benefits to claimants who are current and former employees and also make payments to a trust fund for the payment of benefits and medical expenses to claimants who last worked in the coal industry prior to January 1, 1970. The trust fund is funded by an excise tax on production of up to
$1.10
per ton for deep-mined coal and up to
$0.55
per ton for surface-mined coal, with neither amount to exceed
4.4%
of the gross sales price for the coal. For the years ended
December 31, 2018
and
2017
, we recorded
$3.2 million
and
$3.6 million
, respectively, in our cost of sales related to this excise tax.
With regard to workers’ compensation, we are insured through state sponsored programs or an insurance carrier where there is no state sponsored program.
20. INCOME TAX
We are not a taxable entity for federal or state income tax purposes; the tax effect of our activities pass-through to the unitholders. Although publicly traded partnerships as a general rule will be taxed as corporations, we qualify for an exception because at least 90% of our income consists of qualifying income, as defined in Section 7704(c) of the Internal Revenue Code. Net income for financial statement purposes may differ significantly from taxable income reportable to unitholders as a result of differences between the tax basis and financial reporting basis of assets and liabilities, differing depreciation or amortization rates, and the taxable income allocation requirements under our Partnership Agreement. Individual unitholders have different investment bases depending upon the timing and price of acquisition of their partnership units. Furthermore, each unitholder’s tax accounting, which is partially dependent upon the unitholder’s tax position, differs from the accounting followed in the consolidated financial statements. Accordingly, the aggregate difference in the basis of our net assets for financial and tax reporting purposes cannot be readily determined because information regarding each unitholder’s tax attributes in our partnership generally is not available to us.
Prior to the Kemmerer Drop, WKL was subject to income taxes in the United States (including federal and state income taxes). Deferred income taxes were 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 (greater than 50%) that a deferred tax asset will not be realized. In determining the need for a valuation allowance at each reporting period, WKL considered projected realization of tax benefits based on expected levels of future taxable income,
WESTMORELAND RESOURCE PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DEBTOR-IN-POSSESSION)
the duration of statutory carryforward periods, experience with operating loss and tax credit carryforwards not expiring and availability of tax planning strategies.
As of
December 31, 2018
, WKL has not recorded a reserve for uncertain tax positions or penalties and interest. WKL does not anticipate a significant change that would require a reserve to be established for uncertain tax positions in the next 12 months. WKL was party to a federal income tax return and filed a standalone state income tax return, both of which are subject to examination by the IRS and certain state tax authorities. The tax years open to examination include 2014 through July 31, 2015.
21. COMMITMENTS AND CONTINGENCIES
Coal Sales Contracts
We are committed under long-term contracts to sell coal that meets certain quality requirements at specified prices. Many of these prices are subject to cost pass-through or cost adjustment provisions that mitigate some risk from rising costs. Quantities sold under some of these contracts may vary from year to year within certain limits at the option of the customer or us. As of
December 31, 2018
, the remaining terms of our long-term contracts range from
one
to
three
years.
Purchase Commitments
From time to time, we purchase coal from third parties in order to meet quality or delivery requirements under our customer contracts. We buy coal on the spot market, and the cost of that coal is dependent upon the market price and quality of the coal.
Surety and Performance Bonds
As of
December 31, 2018
, we had
$111 million
in surety bonds outstanding to secure certain reclamation obligations which were collateralized by cash deposits and restricted investments of
$35.7 million
. Such cash collateral is included in
Restricted investments
in the Consolidated Balance Sheets and
Proceeds from sales of restricted investments
within investing activities in the Consolidated Statements of Cash Flows. Additionally, we had road bonds totaling
$0.8 million
and performance bonds totaling
$1.8 million
outstanding to secure contractual performance. We believe these bonds will expire without any claims or payments thereon and therefore will not have a material adverse effect on our financial position, liquidity or operations.
Legal and Regulatory
Ohio Environmental Protection Agency Challenge
In May of 2016 the Ohio EPA (“OEPA”) notified Oxford Mining Company, LLC (“Oxford”), in writing that the OEPA believed various of the Oxford’s previously remediated mines have failed to meet the performance goals set forth in the approved mitigation plans. The OEPA’s letters allow that Oxford either a) provide evidence that the 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.
By an order entered on February 5, 2019, the Bankruptcy Court approved the sale of the Oxford assets to CCU. The sale of the Oxford assets closed on February 11, 2019. After the Oxford sale had closed, Ohio and OEPA filed an application for the WCC Debtors to pay administrative expenses with respect to approximately fifty Oxford water quality certifications, arguing that these certifications and the underlying obligations had not been transferred to CCU (the “Administrative Claim Request”). The WCC Debtors objected, pointing out, among other things, that CCU had agreed to assume those liabilities under the Oxford purchase agreement. Ohio and OEPA ultimately agreed with the WCC Debtors' analysis. CCU then took the position that it did not assume certain of those liabilities under the Oxford purchase agreement. Accordingly, on March 13, 2019, the WCC Debtors filed a complaint in the Bankruptcy Court for a declaratory judgment that CCU has assumed the liabilities under the Oxford purchase agreement and that nothing is owed under the Administrative Claim Request. A status conference on such litigation is scheduled for March 19, 2019.
WESTMORELAND RESOURCE PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DEBTOR-IN-POSSESSION)
Oxford-Ohio Gathering Pipeline Litigation
In December 2018, Oxford filed litigation against Ohio Gathering (“OG”) pursuant to a mineral sterilization claim based on OG’s installation of a pipeline across Oxford’s mining area. Ultimately the parties advanced the claim to litigation by way of a jury trial in Belmont County, Ohio in January 2019. The jury verdict was in favor of Oxford for approximately
$5.5 million
in Court of Common Pleas, Belmont County, Ohio. OG filed for a new trial in early February, 2019. We responded to the motion and await a hearing on the merits to be held on April 4, 2019.
Other Legal Proceedings
We are involved in various legal proceedings arising in the ordinary course of business and may become involved in additional proceedings from time to time. We accrue for liabilities when it is probable that future losses will be incurred and such losses can be reasonably estimated. Accruals are based on developments to date; management's estimates of the outcomes of these matters; our experience in contesting, litigating and settling similar matters; and any related insurance coverage. While the ultimate outcome of these proceedings cannot be predicted with certainty, management believes that any liabilities that may result from these claims, proceedings and investigations will not have a material effect on the Partnership's liquidity, financial condition, or results of operations.
Filing under Chapter 11 of the United States Bankruptcy Code
On October 9, 2018 (the “Petition Date”), WCC, and certain of its subsidiaries, including Westmoreland Resource GP, LLC, the Partnership’s general partner (the "GP"), the Partnership, and our wholly owned subsidiaries (collectively, the “Debtors”), filed voluntary petitions (the “Bankruptcy Petitions”) for relief under Chapter 11 of Title 11 of the United States Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Southern District of Texas (the “Bankruptcy Court”) (case number 18-35672). On the Petition Date, the Debtors filed a motion with the Bankruptcy Court seeking to jointly administer all of the Debtors’ chapter 11 cases (the “Chapter 11 Cases”) under the caption “In re Westmoreland Coal Company, et al.”, and a series of first day motions that sought authorization to continue conducting their businesses in the ordinary course and without interruption. On November 15, 2018, the Bankruptcy Court entered orders approving these motions on a final basis. These motions are designed primarily to minimize the effect of bankruptcy on the Debtors' operations, suppliers, customers and employees. The Partnership expects ordinary-course operations to continue substantially uninterrupted throughout the duration of the Chapter 11 Cases, and employees should expect no change in their daily responsibilities and to be paid in the ordinary course of business.
The Debtors will continue to operate their businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. For the duration of the Chapter 11 Cases, the Partnership's operations and its ability to develop and execute its business plan are subject to risks and uncertainties associated with the Chapter 11 Cases. As a result of these risks and uncertainties, the Partnership's assets, liabilities, officers and/or directors could be significantly different following the outcome of the Chapter 11 Cases, and the description of its operations, properties and capital plans included in these financial statements may not accurately reflect its operations, properties and capital plans following the Chapter 11 Cases.
Guarantees
Our GP and the Partnership guarantee certain obligations of our subsidiaries. We believe that these guarantees may result in a material liability to the guarantors, and, consequentially, have a material adverse effect on our financial position, liquidity or operations.
22. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
In
2018
and
2017
, we marketed our coal principally to electric utilities, electric cooperatives, municipalities and industrial customers in Wyoming, Kentucky, Ohio, and West Virginia. As of
December 31, 2018
and
2017
, accounts receivable from electric utilities totaled
$17.4 million
and
$16.9 million
, respectively, or
69.0%
and
61.7%
of
Receivables
, respectively, in the Consolidated Balance Sheets. The following table shows the amount of sales to each customer (in each year where applicable, a “Major Customer”) which individually accounted for 10% or more of sales in any of the years ended
December 31, 2018
and
2017
, with a portion of these sales being facilitated by coal brokers.
WESTMORELAND RESOURCE PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DEBTOR-IN-POSSESSION)
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
Years Ended December 31,
|
|
2018
|
|
2017
|
Customer
|
(In millions)
|
PacifiCorp Energy, Inc.
|
$
|
113.6
|
|
|
$
|
108.2
|
|
American Electric Power Company, Inc.
|
36.8
|
|
|
72.9
|
|
East Kentucky Power Cooperative
|
33.6
|
|
|
32.0
|
|
The Major Customers in
2018
and
2017
, in the aggregate, represented
67.9%
and
67.5%
, respectively, of
Revenues
in the applicable year. The Major Customers in each of
2018
and
2017
, in the aggregate, represented
69.0%
and
61.7%
of
Receivables
at
December 31, 2018
and
2017
, respectively.
23. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table reflects the changes in accumulated other comprehensive income (loss) by component:
|
|
|
|
|
|
Accumulated Other Comprehensive Income (Loss)
|
|
(In thousands)
|
Balance at December 31, 2017
|
$
|
80
|
|
Other comprehensive income (loss) before reclassification
|
(717
|
)
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
116
|
|
Balance at December 31, 2018
|
$
|
(521
|
)
|
The following table reflects the reclassifications out of accumulated other comprehensive income (loss) for the years ended
December 31, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount reclassified from accumulated other comprehensive income (loss)
|
Affected line item in the statement where net loss is presented
|
Details about accumulated other comprehensive income (loss) components
|
|
Years Ended December 31,
|
|
2018
|
|
2017
|
|
|
|
(In thousands)
|
|
Realized losses (gains) on available-for-sale securities
|
|
$
|
116
|
|
|
$
|
(47
|
)
|
|
Other income
|
24. RELATED PARTY TRANSACTIONS
The Board of our managing general partner and its Conflicts Committee review our related party transactions that involve a potential conflict of interest between a general partner and WMLP or its subsidiaries or another partner to determine that such transactions reflect market-clearing terms and conditions customary in the coal industry. As a result of these reviews, the Board and the Conflicts Committee approved each of the transactions described below that had such potential conflict of interest as fair and reasonable to us and our limited partners.
Effective January 1, 2015, the Partnership entered into the Services Agreement with the GP. The Services Agreement is terminable by either party upon
120
days’ written notice. The current term of the Services Agreement expires on June 1, 2018, and automatically renews for successive
one
-year periods unless terminated earlier upon 120-days’ notice. On January 31, 2018, we received a letter from WCC providing 120 days’ notice that it was reserving its rights with respect to its continued provision of services to the GP under the Services Agreement, noting that WCC would “continue to pursue value-maximizing transactions for all relevant stakeholders” and noting that WCC would be willing to continue to provide services to the GP and us under certain circumstances. On February 22, 2018, we responded to that letter questioning whether a valid notice of
WESTMORELAND RESOURCE PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DEBTOR-IN-POSSESSION)
termination of the Services Agreement was provided, addressing the continued deployment of the mine-related employees, noting our intention to seek alternative service providers and preserving our options with respect to the ongoing negotiations over WCC’s provisions of services to the GP and us under the Services Agreement. On March 2, 2019, the Intercompany Settlement was approved by the Bankruptcy Court. Simultaneously, the WLB Debtors and the Purchaser anticipate entering into new transaction service agreements, which will provide for the continued provision of services to the WMLP Debtors as they finalize the consummation of their own Chapter 11 Cases. Furthermore, the Intercompany Settlement memorializes agreements with respect to certain professional fee allocations, certain retiree and labor issues, and the tender for all of the outstanding common units, representing limited partner interest in the Partnership not directly or indirectly held by WCC for a total price, for all such equity interests collectively, not to exceed
$15,000
, and to pay certain fees and expenses associated therewith. On March 14, 2019, WCC completed its tender offer with
182,448
common units being validly tendered and accepted for purchase by WCC at a price of
$0.01
per common unit.
Under the terms of the Services Agreement, the GP provides services through its, or an affiliate's, employees and is reimbursed for all related costs incurred on our behalf. Pursuant to the Services Agreement, the Partnership engaged the GP to continue providing services such as general administrative and management, engineering, operations (including mining operations), geological, corporate development, real property, marketing, and other services to the Partnership. Administrative services include without limitation legal, finance and accounting, treasury, insurance administration and claims processing, risk management, health, safety and environmental, information technology, human resources, credit, payroll, internal audit and tax. During the year ended
December 31, 2018
, we paid the GP approximately
$72.8 million
for these services performed under the Services Agreement primarily related to employee costs. Further, under the Services Agreement, the Partnership pays the GP a fixed annual management fee of
$2.2 million
for certain executive and administrative services, and reimburses the GP at cost for other expenses and expenditures. Pursuant to the Services Agreement, the primary reimbursements to our GP were for costs related to payroll. Reimbursable costs under the Services Agreement totaling
$2.5 million
and
$1.3 million
were included in accounts payable as of
December 31, 2018
and
2017
, respectively. In December
2017
, the Partnership prepaid the GP for the
2018
annual management fee of
$2.2 million
, which was included in
Other current assets
in the Consolidated Balance Sheets as of
December 31, 2017
.
On January 9, 2017, the Partnership acquired surface coal reserves ("Johnson Run") through conveyance of leases and recoupable advance royalty payments from Buckingham Coal Company, LLC ("BCC"), a wholly owned subsidiary of WCC, for
$1.7 million
, of which
$1.5 million
was deemed a distribution as the transaction was between entities under common control.
Finally, we sold coal to a subsidiary of WCC, which generated
$6.7 million
and
$19.1 million
in revenues for the years ended
December 31, 2018
and
2017
, respectively. As of
December 31, 2018
and
2017
, accounts receivables related to the aforementioned revenue totaled
$1.5 million
and
$3.8 million
, respectively, and were included in
Receivables
in the Consolidated Balance Sheets.
25. SEGMENT INFORMATION
We operate in
one
business segment. We operate surface coal mines in Ohio and Wyoming, selling high-value thermal coal to utilities, industrial customers, municipalities and other coal-related entities primarily in the Midwest and Wyoming. All of our operations have similar economic characteristics including but not limited to coal quality, geology, coal marketing opportunities, mining and transportation methods and regulatory issues. Our operating and executive management makes its decisions based on consolidated reports. Our Ohio operating subsidiaries share customers and a particular customer may receive coal from any one of such Ohio operating subsidiaries. We also lease or sublease coal reserves to others through our Ohio Operations in exchange for a per ton royalty rate.
26. CONDENSED COMBINED DEBTOR-IN-POSSESSION FINANCIAL INFORMATION
The Partnership and all of its subsidiaries filed for bankruptcy under the Chapter 11 Cases filed on October 9, 2018, and as such the Partnership has no non-debtor entities within its consolidated financial statements.
27. SUBSEQUENT EVENTS
The Partnership has evaluated subsequent events in accordance with ASC 855,
Subsequent Events
, through the filing date of this Annual Report on Form 10-K, and determined that no events have occurred that have not been disclosed elsewhere
WESTMORELAND RESOURCE PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DEBTOR-IN-POSSESSION)
in the notes to the consolidated financial statements that would require adjustments to disclosures in the consolidated financial statements.