UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2020

 

OR

 

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ________ to ________

 

Commission file number 001-34892

 

RHINO RESOURCE PARTNERS LP
(Exact name of registrant as specified in its charter)

 

Delaware   27-2377517

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

 

424 Lewis Hargett Circle, Suite 250

Lexington, KY

  40503
(Address of principal executive offices)   (Zip Code)

 

(859) 389-6500

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [  ] No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). [X] Yes [  ] No

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each Exchange on which registered
n/a   n/a   n/a

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer [  ] Accelerated filer [  ]
   
Non-accelerated filer [  ] (Do not check if a smaller reporting company) Smaller reporting company [X]
   
Emerging growth company [  ]  

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Securities Act. [  ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [  ] Yes [X] No

 

As of May 15, 2020, 13,078,668 common units, 1,143,171 subordinated units and 1,500,000 Series A preferred units were outstanding.

 

 

 

 
 

 

TABLE OF CONTENTS

 

Cautionary Note Regarding Forward-Looking Statements 3
Part I.—Financial Information (Unaudited) 4
ITEM 1. FINANCIAL STATEMENTS 4
Condensed Consolidated Statements of Financial Position as of March 31, 2020 and December 31, 2019 4
Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2020 and 2019 5
Consolidated Statements of Partners’ Capital for the Three Months Ended March 31, 2020 and 2019 6
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2020 and 2019 7
Notes to Condensed Consolidated Financial Statements 8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 26
Item 4. Controls and Procedures 42
PART II—Other Information 43
Item 1. Legal Proceedings 43
Item 1A. Risk Factors 44
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 45
Item 3. Defaults upon Senior Securities 45
Item 4. Mine Safety Disclosure 45
Item 5. Other Information 45
Item 6. Exhibits 45
SIGNATURES 46

 

2

 

 

Cautionary Note Regarding Forward-Looking Statements

 

This Quarterly Report on Form 10-Q contains certain “forward-looking statements.” Statements included in this report that are not historical facts, that address activities, events or developments that we expect or anticipate will or may occur in the future, including things such as statements regarding our future financial position, expectations with respect to our liquidity, capital resources, plans for growth of the business, future capital expenditures, references to future goals or intentions or other such references are forward-looking statements. These statements can be identified by the use of forward-looking terminology, including “may,” “believe,” “expect,” “anticipate,” “estimate,” “continue,” or similar words. These statements are made by us based on our experience and our perception of historical trends, current conditions and expected future developments as well as other considerations we believe are reasonable as and when made. Whether actual results and developments in the future will conform to our expectations is subject to numerous risks and uncertainties, many of which are beyond our control. Therefore, actual outcomes and results could materially differ from what is expressed, implied or forecasted in these statements.

 

Any differences could be caused by a number of factors, including, but not limited to: our ability to maintain adequate cash flow and to obtain financing necessary to fund our capital expenditures, meet working capital needs and maintain and grow our operations; our future levels of indebtedness and compliance with debt covenants; sustained depressed levels of or further decline in coal prices, which depend upon several factors such as the supply of domestic and foreign coal, the demand for domestic and foreign coal, governmental regulations, price and availability of alternative fuels for electricity generation and prevailing economic conditions; our ability to comply with the qualifying income requirement necessary to maintain our status as a partnership for U.S. federal income tax purposes; declines in demand for electricity and coal; current and future environmental laws and regulations, which could materially increase operating costs or limit our ability to produce and sell coal; extensive government regulation of mine operations, especially with respect to mine safety and health, which imposes significant actual and potential costs; difficulties in obtaining and/or renewing permits necessary for operations; a variety of operating risks, such as unfavorable geologic conditions, adverse weather conditions and natural disasters, mining and processing equipment unavailability, failures and unexpected maintenance problems and accidents, including fire and explosions from methane; poor mining conditions resulting from the effects of prior mining; the availability and costs of key supplies and commodities such as steel, diesel fuel and explosives; fluctuations in transportation costs or disruptions in transportation services, which could increase competition or impair our ability to supply coal; a shortage of skilled labor, increased labor costs or work stoppages; our ability to secure or acquire new or replacement high-quality coal reserves that are economically recoverable; material inaccuracies in our estimates of coal reserves and non-reserve coal deposits; existing and future laws and regulations regulating the emission of sulfur dioxide and other compounds, which could affect coal consumers and reduce demand for coal; federal and state laws restricting the emissions of greenhouse gases; our ability to acquire or failure to maintain, obtain or renew surety bonds used to secure obligations to reclaim mined property; our dependence on a few customers and our ability to find and retain customers under favorable supply contracts; changes in consumption patterns by utilities away from the use of coal, such as changes resulting from low natural gas prices; changes in governmental regulation of the electric utility industry; defects in title in properties that we own or losses of any of our leasehold interests; our ability to retain and attract senior management and other key personnel; material inaccuracy of assumptions underlying reclamation and mine closure obligations; weakness in global economic conditions; and our current liquidity constraints, which may require us to sell assets, restructure our debt, or seek protection under Chapter 11 of the U.S. Bankruptcy Code (“Chapter 11”). Other factors that could cause our actual results to differ from our projected results are described elsewhere in (1) this Form 10-Q, (2) our Annual Report on Form 10-K for the year ended December 31, 2019, (3) our reports and registration statements filed from time to time with the Securities and Exchange Commission and (4) other announcements we make from time to time. In addition, we may be subject to unforeseen risks that may have a materially adverse effect on us. Accordingly, no assurances can be given that the actual events and results will not be materially different from the anticipated results described in the forward-looking statements.

 

The forward-looking statements speak only as of the date made, and, other than as required by law, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 

3

 

 

PART I.—FINANCIAL INFORMATION

 

Item 1. Financial Statements (Unaudited)

 

RHINO RESOURCE PARTNERS LP

UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

(In thousands)

 

    March 31,     December 31,  
    2020     2019  
ASSETS                
CURRENT ASSETS:                
Cash and cash equivalents   $ 1,281     $ 112  
Restricted cash     475     $ -  
Accounts receivable     10,703       14,149  
Receivable-other     -       2,800  
Inventories     15,607       15,664  
Advance royalties, current portion     1       3  
Prepaid expenses and other     1,919       2,169  
Total current assets     29,986       34,897  
PROPERTY, PLANT AND EQUIPMENT:                
At cost, including coal properties, mine development and construction costs     361,511       353,809  
Less accumulated depreciation, depletion and amortization     (260,575 )     (251,466 )
Net property, plant and equipment     100,936       102,343  
Operating lease right-of-use assets (net)     10,341       11,145  
Advance royalties, net of current portion     262       119  
Deposits - Workers’ Compensation and Surety Programs     7,943       7,943  
Other non-current assets     31,941       31,590  
Non-current assets held for sale     -       6,510  
TOTAL   $ 181,409     $ 194,547  
LIABILITIES AND EQUITY                
CURRENT LIABILITIES:                
Accounts payable   $ 30,270     $ 28,627  
Accrued expenses and other     11,369       13,207  
Accrued preferred distributions     1,500       1,200  
Current portion of operating lease liabilities     3,195       3,267  
Current portion of long-term debt-net of unamortized debt issuance costs (NOTE 10)     36,781       34,244  
Current portion of asset retirement obligations     420       420  
Current liabilities held for sale     -       4,827  
Total current liabilities     83,535       85,792  
NON-CURRENT LIABILITIES:                
Long-term debt, net     855       1,160  
Asset retirement obligations, net of current portion     20,560       20,171  
Operating lease liabilities, net of current portion     6,741       7,465  
Other non-current liabilities     44,293       44,244  
Total non-current liabilities     72,449       73,040  
Total liabilities     155,984       158,832  
COMMITMENTS AND CONTINGENCIES (NOTE 15)                
PARTNERS’ CAPITAL:                
Limited partners     4,958       15,205  
General partner     8,329       8,372  
Preferred partners     15,000       15,000  
Investment in Royal common stock (NOTE 13)     (4,126 )     (4,126 )
Common unit warrants     1,264       1,264  
Total partners’ capital     25,425       35,715  
TOTAL   $ 181,409     $ 194,547  

 

See notes to unaudited condensed consolidated financial statements.

 

4

 

 

RHINO RESOURCE PARTNERS LP

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per unit data)

 

    Three Months Ended March 31,  
    2020     2019  
REVENUES:                
Coal sales   $ 37,314     $ 44,863  
Other revenues     182       874  
Total revenues     37,496       45,737  
COSTS AND EXPENSES:                
Cost of operations (exclusive of depreciation, depletion and amortization shown separately below)     36,123       40,213  
Freight and handling costs     1,040       1,155  
Depreciation, depletion and amortization     3,949       3,491  

Selling, general and administrative (exclusive of depreciation, depletion and amortization shown separately above)

    4,160       2,722  
(Gain) on sale/disposal of assets, net     63       222  
Total costs and expenses     45,335       47,803  
LOSS FROM OPERATIONS     (7,839 )     (2,066 )
INTEREST AND OTHER (EXPENSE)/INCOME:                
Interest expense and other     (2,072 )     (1,701 )
Total interest and other (expense)     (2,072 )     (1,701 )
NET LOSS BEFORE INCOME TAXES FROM CONTINUING OPERATIONS     (9,911 )     (3,767 )
INCOME TAXES     -       -  
NET LOSS FROM CONTINUING OPERATIONS     (9,911 )     (3,767 )
DISCONTINUED OPERATIONS (NOTE 4)                
Loss from discontinued operations     (79 )     (3,512 )
NET LOSS   $ (9,990 )   $ (7,279 )
                 
General partner’s interest in net (loss):                
Net loss from continuing operations   $ (43 )   $ (17 )
Net loss from discontinued operations     -       (15 )
General partner’s interest in net loss   $ (43 )   $ (32 )
Common unitholders’ interest in net (loss):                
Net loss from continuing operations   $ (9,351 )   $ (3,725 )
Net loss from discontinued operations     (72 )     (3,216 )
Common unitholders’ interest in net loss:   $ (9,423 )   $ (6,941 )
Subordinated unitholders’ interest in net loss:                
Net (loss) from continuing operations   $ (817 )   $ (325 )
Net (loss) from discontinued operations     (7 )     (281 )
Subordinated unitholders’ interest in net loss:   $ (824 )   $ (606 )
Preferred unitholders’ interest in net income:                
Net income from continuing operations   $ 300     $ 300  
Net income from discontinued operations     -       -  
Preferred unitholders’ interest in net income   $ 300     $ 300  
Net (loss)/income per limited partner unit, basic:                
Common units:                
Net loss per unit from continuing operations   $ (0.72 )   $ (0.28 )
Net loss per unit from discontinued operations     -       (0.25 )
Net loss per common unit, basic   $ (0.72 )   $ (0.53 )
Subordinated units                
Net loss per unit from continuing operations   $ (0.72 )   $ (0.28 )
Net loss per unit from discontinued operations     -       (0.25 )
Net loss per subordinated unit, basic   $ (0.72 )   $ (0.53 )
Preferred units                
Net income per unit from continuing operations   $ 0.20     $ 0.20  
Net income per unit from discontinued operations     -       -  
Net income per preferred unit, basic   $ 0.20     $ 0.20  
Net (loss)/income per limited partner unit, diluted:                
Common units                
Net loss per unit from continuing operations   $ (0.72 )   $ (0.28 )
Net loss per unit from discontinued operations     -       (0.25 )
Net loss per common unit, diluted   $ (0.72 )   $ (0.53 )
Subordinated units                
Net loss per unit from continuing operations   $ (0.72 )   $ (0.28 )
Net loss per unit from discontinued operations     -       (0.25 )
Net loss per subordinated unit, diluted   $ (0.72 )   $ (0.53 )
Preferred units                
Net income per unit from continuing operations   $ 0.20     $ 0.20  
Net income per unit from discontinued operations     -       -  
Net income per preferred unit, diluted   $ 0.20     $ 0.20  
                 
Weighted average number of limited partner units outstanding, basic:                
Common units     13,078       13,098  
Subordinated units     1,143       1,144  
Preferred units     1,500       1,500  
Weighted average number of limited partner units outstanding, diluted:                
Common units     13,078       13,098  
Subordinated units     1,143       1,144  
Preferred units     1,500       1,500  

 

See notes to unaudited condensed consolidated financial statements.

 

5

 

 

RHINO RESOURCE PARTNERS LP

UNAUDITED CONSOLIDATED STATEMENTS OF PARTNERS’ CAPITAL

FOR THE THREE MONTHS ENDED MARCH 31, 2020 and 2019

(In thousands)

 

    Limited Partners     General     Preferred           Total  
    Common     Subordinated     Partner     Partner           Partners’  
    Units     Capital     Units     Capital     Capital     Capital     Other     Capital  
                                                 
BALANCE - December 31, 2019     13,078     $ (52,921 )     1,143     $ 68,126     $ 8,372     $ 15,000     $ (2,862 )   $ 35,715  
Net (loss)/income     -       (9,423 )     -       (824 )     (43 )     300       -       (9,990 )
Preferred partner distribution earned     -       -       -       -       -       (300 )     -       (300 )
BALANCE - March 31, 2020     13,078     $ (62,344 )     1,143     $ 67,302     $ 8,329     $ 15,000     $ (2,862 )   $ 25,425  

 

      Limited Partners      General     Preferred           Total  
    Common     Subordinated     Partner     Partner           Partners’  
    Units     Capital     Units     Capital     Capital     Capital     Other     Capital  
BALANCE - December 31, 2018     13,098     $ 39,324       1,144     $ 76,181     $ 8,792     $ 15,000     $ (2,862 )   $ 136,435  
Net (loss)/income     -       (6,941 )     -       (606 )     (32 )     300       -       (7,279 )
Preferred distribution earned     -       -       -       -       -       (300 )     -       (300 )
BALANCE - March 31, 2019     13,098     $ 32,383       1,144     $ 75,575     $ 8,760     $ 15,000     $ (2,862 )   $ 128,856  

 

See notes to unaudited condensed consolidated financial statements.

 

6

 

 

RHINO RESOURCE PARTNERS LP

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

    Three Months Ended March 31,  
    2020     2019  
CASH FLOWS FROM OPERATING ACTIVITIES:                
Net (loss)   $ (9,990 )   $ (7,279 )
Adjustments to reconcile net (loss) to net cash (used in)/provided by operating activities:                
Depreciation, depletion and amortization     3,949       5,549  
Accretion on asset retirement obligations     389       319  
Amortization of advance royalties     3       407  
Amortization of debt issuance costs     755       516  
Amortization of debt discount     35       105  
Loss on retirement of advance royalties     -       112  
Loss on sale/disposal of assets—net     63       655  
(Gain) on sale of Mammoth shares     -       (433 )
Asset impairment adjustment     (343 )     -  
Changes in assets and liabilities:                
Accounts receivable     4,110       (1,855 )
Inventories     56       (4,847 )
Advance royalties     (144 )     (677 )
Prepaid expenses and other assets     196       537  
Accounts payable     (962 )     6,463  
Accrued expenses and other liabilities     (1,090 )     977  
Asset retirement obligations     -       (15 )
Net cash (used in)/provided by operating activities     (2,973 )     534  
CASH FLOWS FROM INVESTING ACTIVITIES:                
Additions to property, plant, and equipment     (1,623 )     (2,001 )
Proceeds from sales of property, plant, and equipment     -       1,401  
Proceeds from pipeline settlement     2,800       -  
Proceeds from sale of Pennyrile assets     3,000       -  
Proceeds from sale of Mammoth shares     -       2,304  
Net cash provided by investing activities     4,177       1,704  
CASH FLOWS FROM FINANCING ACTIVITIES:                
Repayments on long-term debt     (375 )     (375 )
Repayments on other debt     (1,034 )     (522 )
Repayments on finance leases     (1 )     (1 )
Proceeds from financing agreement     3,000       -  
Payments of debt issuance costs     (1,150 )     (101 )
Preferred distributions paid     -       (3,210 )
Net cash provided by/(used in) financing activities     440       (4,209 )
NET (DECREASE) IN CASH, CASH EQUIVALENTS     1,644       (1,971 )
CASH, CASH EQUIVALENTS AND RESTRICTED CASH—Beginning of period     112       6,172  
CASH, CASH EQUIVALENTS AND RESTRICTED CASH—End of period   $ 1,756     $ 4,201  
                 
Summary Statement of Financial Position:                
Cash and cash equivalents   $ 1,281     $ 4,201  
Restricted cash     475       -  
    $ 1,756     $ 4,201  

 

See notes to unaudited condensed consolidated financial statements.

 

7

 

 

RHINO RESOURCE PARTNERS LP

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF MARCH 31, 2020 AND DECEMBER 31, 2019 AND FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019

 

1. BASIS OF PRESENTATION AND ORGANIZATION

 

Basis of Presentation and Principles of Consolidation. The accompanying unaudited interim financial statements include the accounts of Rhino Resource Partners LP and its subsidiaries (the “Partnership”). Intercompany transactions and balances have been eliminated in consolidation.

 

Upon an evaluation of the effects on the Partnership from the weakness of the metallurgical and steam coal markets, which have been further negatively impacted from the effects of the COVID-19 pandemic, the Partnership determined that it may not have sufficient liquidity to operate its business over the next twelve months from the date of filing this Form 10-Q. Thus, substantial doubt is raised about the Partnership’s ability to continue as a going concern. Our independent registered public accounting firm included an emphasis paragraph with respect to our ability to continue as a going concern in its report on the Partnership’s consolidated financial statements for the year ended December 31, 2019. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount of and classification of liabilities that may result should the Partnership be unable to continue as a going concern. Failure to generate sufficient cash flow from operations could cause us to further curtail our operations and reduce spending and alter our business plan. We may also be required to consider other options, such as selling additional assets or seeking merger opportunities, and depending on the urgency of our liquidity constraints, we may be required to pursue such an option at an inopportune time.

 

The Partnership continues to take measures, including the suspension of cash distributions on its common and subordinated units and cost and productivity improvements, to enhance and preserve our liquidity in order to fund our ongoing operations and necessary capital expenditures to meet our financial commitments and debt service obligations.

 

The Partnership is currently exploring alternatives for other sources of capital for ongoing liquidity needs and transactions to enhance its ability to comply with its financial covenants. As disclosed on the Partnership’s Form 8-K filed with the SEC on March 27, 2020, the Partnership has engaged legal and financial advisors to assist it in evaluating its strategic options. The Partnership is working to improve its operating performance and its cash, liquidity and financial position. This includes pursuing the sale of non-strategic surplus assets, continuing to drive cost improvements across the company, continuing to negotiate alternative payment terms with creditors, and obtaining waivers of going concern and financial covenant violations under our financing agreement, or alternatively, pursuing a court-supervised reorganization under Chapter 11 and related financing needs.

 

Debt Classification — The Partnership evaluated its financing agreement at March 31, 2020 to determine whether the debt liability should be classified as a long-term or current liability on the Partnership’s unaudited condensed consolidated statements of financial position. The Partnership determined that it was in violation of certain debt covenants in the financing agreement as of March 31, 2020 and the lenders were unwilling to grant a waiver to the Partnership for these events of default as of the filing date of this Form 10-Q. The financing agreement contains negative covenants that restrict the Partnership’s ability to, among other things, permit the trailing nine month fixed charge coverage ratio of the Partnership and its subsidiaries to be less than 1.20 to 1.00. The financing agreement also requires the Partnership to receive an annual unqualified audit opinion from its external audit firm that does not include an emphasis paragraph on the Partnership’s ability to continue as a going concern. As of March 31, 2020, Rhino’s fixed charge coverage ratio was less than 1.20 to 1.00 and the Partnership’s annual report on Form 10-K for 2019 included an audit opinion from its external auditors that included an emphasis paragraph regarding the Partnership’s ability to continue as a going concern. Based upon these covenant violations, the Partnership’s debt liability is currently callable by the lenders and is classified as current as of March 31, 2020 and December 31, 2019.

 

Debt issuance costs related to the debt liability are also classified as current. However, since the Partnership is currently in negotiations with its lender, the Partnership has not changed the amortization period of these costs. Included in debt costs are the exit fees described further in Note 10, which absent a waiver, are also callable with the accompanying debt as of March 31, 2020. (Please read Note 10 for additional discussion of the Partnership’s financing agreement).

 

8

 

 

Cash, Cash Equivalents and Restricted Cash. The Partnership considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. Restricted cash is combined with cash and cash equivalents on the unaudited condensed consolidated statement of cash flows.

 

Unaudited Interim Financial Information. The accompanying unaudited interim financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information. The condensed consolidated statement of financial position as of March 31, 2020, condensed consolidated statements of operations for the three months ended March 31, 2020 and 2019, consolidated statements of partners’ capital for the three months ended March 31, 2020 and 2019 and the condensed consolidated statements of cash flows for the three months ended March 31, 2020 and 2019 include all adjustments that the Partnership considers necessary for a fair presentation of the financial position, partners’ capital, operating results and cash flows for the periods presented. The condensed consolidated statement of financial position as of December 31, 2019 was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“U.S.”). The Partnership filed its Annual Report on Form 10-K for the year ended December 31, 2019 with the Securities and Exchange Commission (“SEC”), which included all information and notes necessary for such presentation. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the year or any future period. These unaudited interim financial statements should be read in conjunction with the audited financial statements included in the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC.

 

Organization. Rhino Resource Partners LP is a Delaware limited partnership formed on April 19, 2010 to acquire Rhino Energy LLC (the “Operating Company”). The Operating Company and its wholly owned subsidiaries produce and market coal from surface and underground mines in Kentucky, Ohio, Virginia, West Virginia and Utah. The majority of sales are made to electric utilities, coal brokers, domestic and non-U.S. steel producers and other coal-related organizations in the United States. In addition, the Partnership continues its sales focus to U.S. export customers through brokers and direct end-user relationships.

 

Through a series of transactions completed in the first quarter of 2016, Royal Energy Resources, Inc. (“Royal”) acquired a majority ownership and control of the Partnership and 100% ownership of the Partnership’s general partner. The Partnership’s common units trade on the OTCQB Marketplace under the ticker symbol “RHNO.”

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND GENERAL

 

Revenue Recognition. Most of the Partnership’s revenues are generated under coal sales contracts with electric utilities, coal brokers, domestic and non-U.S. steel producers, industrial companies or other coal-related organizations. Revenue is recognized and recorded when shipment or delivery to the customer has occurred, prices are fixed or determinable, control has passed in accordance with the terms of the sales agreement and collectability is reasonably assured. Under the typical terms of these agreements, control transfers to the customers at the mine or port, when the coal is loaded on the rail, barge, truck or other transportation source that delivers coal to its destination. Advance payments received are deferred and recognized in revenue as coal is shipped and title passes.

 

Freight and handling costs paid directly to third-party carriers and invoiced separately to coal customers are recorded as freight and handling costs and freight and handling revenues, respectively. Freight and handling costs billed to customers as part of the contractual per ton revenue of customer contracts is included in coal sales revenue.

 

Other revenues generally consist of coal royalty revenues, coal handling and processing revenues, rebates and rental income. With respect to other revenues recognized in situations unrelated to the shipment of coal, the Partnership carefully reviews the facts and circumstances of each transaction and does not recognize revenue until the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the seller’s price to the buyer is fixed or determinable and collectability is reasonably assured.

 

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Debt Issuance Costs. Debt issuance costs reflect fees incurred to obtain financing and are amortized (included in interest expense) using the straight-line method over the life of the related debt, which approximates the effective interest method. Debt issuance costs are presented as a direct deduction from long-term debt as of March 31, 2020 and December 31, 2019. The effective interest rate for the three months ended March 31, 2020 was 20.58% and 21.93% for the three months ended March 31, 2019.

 

Recently Issued Accounting Standards. On March 12, 2020, the FASB issued ASU 2020-04, Reference Rate Reform (“ASC 848”): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in ASC 848 provide optional expedients and exceptions for applying generally accepted accounting principles (GAAP) to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in ASC 848 apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022 that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship. The Partnership is currently evaluating this guidance.

 

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. The amendments in ASU 2018-13 revise the disclosure requirements for fair value measurements. These changes are to be applied prospectively for only the most recent interim or annual period present in the year of adoption. The Partnership adopted ASU 2018-13 during the first quarter of 2020. The adoption of ASU 2018-13 did not have a material impact on the Partnership’s unaudited condensed consolidated financial statements.

 

In July 2017, the FASB issued ASU 2017-11, “Earnings Per Share (Topic 260): Distinguishing Liabilities from Equity (Topic 480), I. Derivatives and Hedging (Topic 815): Accounting for Certain Financial Instruments with Down Round Features and II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception.” Part I of ASU 2017-11 will result in freestanding equity-linked financial instruments, such as warrants, and conversion options in convertible debt or preferred stock to no longer be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. For freestanding equity-classified financial instruments, the amendments require entities that present earnings per share (EPS) in accordance with Topic 260 to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS. The amendments in Part II recharacterize the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in the Codification. The amendments in Part II do not require any transition guidance as the amendments do not have an accounting effect. The amendments in ASU 2017-11 were effective on January 1, 2020, and the Part I amendments must be applied retrospectively. Early application is permitted. The Partnership early adopted ASU 2017-11, which did not have any material impact.

 

3. ACQUISITION

 

Blackjewel Assignment Agreement

 

On August 14, 2019, Jewell Valley Mining LLC (“Jewell Valley”), a wholly owned subsidiary of the Partnership, entered into a general assignment and assumption agreement and bill of sale (the “Assignment Agreement”) with Blackjewel L.L.C., Blackjewel Holdings L.L.C., Revelation Energy Holdings, LLC, Revelation Management Corp., Revelation Energy, LLC, Dominion Coal Corporation, Harold Keene Coal Co. LLC, Vansant Coal Corporation, Lone Mountain Processing LLC, Powell Mountain Energy, LLC, and Cumberland River Coal LLC (together, “Blackjewel”) to purchase certain assets from Blackjewel for cash consideration of $850,000 plus an additional royalty of $250,000 that is payable within one year from the date of the purchase, as well as the assumption of associated reclamation obligations. The transaction costs associated with the Assignment Agreement were $103,577. The assets that are subject of the Assignment Agreement consist of three underground mines in Virginia that were actively producing coal prior to Blackjewel’s filing for relief under Chapter 11 of the United States Bankruptcy Code, along with a preparation plant, rail loadout facility, related mineral and surface rights and infrastructure and certain purchase contracts to be assumed at Jewell Valley’s option.

 

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The Partnership resumed mining at two of the three Jewell Valley mines during the fourth quarter of 2019. The operating results for Jewell Valley is reported as part of the Partnership’s Central Appalachia business segment. The Partnership reviewed the appropriate guidance within ASU 2017-01, Business Combinations (Topic 805) and determined that this transaction was an asset purchase.

 

The Assignment Agreement was funded by borrowings from the Partnership’s delayed draw feature of the financing agreement. Please refer to Note 10 for additional details of the financing agreement. The following table summarizes the assets acquired and liabilities assumed as of the acquisition date:

 

    (in thousands)  
Property, plant and equipment   $ 3,853  
Land     378  
Asset retirement obligation     (2,596 )
Net assets acquired   $ 1,635  
Initial cash consideration   $ 850  
Mineral cure payments     431  
Transaction costs     104  
Cash consideration     1,385  
Royalty payable     250  
Total consideration   $ 1,635  

 

4. DISCONTINUED OPERATIONS

 

Pennyrile Asset Purchase Agreement

 

On September 6, 2019, the Partnership and Alliance Coal, LLC (“Buyer”) and Alliance Resource Partners, L.P. (“Buyer Parent”) entered into an Asset Purchase Agreement (the “Pennyrile APA”) pursuant to which the Partnership agreed to sell to the Buyer all of the real property, permits, equipment and inventory and certain other assets associated with its Pennyrile mine complex, as well as the buyer’s assumption of the Pennyrile reclamation obligation, in exchange for approximately $3.7 million, subject to certain adjustments. The final adjustments included the Partnership retaining certain equipment originally included in the assets to be sold to the Buyer, which resulted in a $0.3 million favorable adjustment to the impairment loss originally recorded by the Partnership in the third quarter of 2019 and a decrease in the final purchase price paid by the Buyer. The transaction was completed in March of 2020 and the Partnership received cash consideration of $3.0 million.

 

Coal Supply Asset Purchase Agreement

 

On September 6, 2019, the Partnership, the Buyer and the Buyer Parent entered into an Asset Purchase Agreement for the sale and assignment of certain coal supply agreements associated with the Pennyrile mine complex (the “Coal Supply APA”) in exchange for approximately $7.3 million. The Coal Supply APA included customary representations of the parties thereto and indemnification for losses arising from the breaches of such representations and for liabilities arising during the period in which the relevant parties were not party to the coal supply agreements. The transactions contemplated by the Coal Supply APA closed upon the execution thereof.

 

Discontinued Operations

 

The Pennyrile operating results for the months ended March 31, 2020 and 2019 are recorded as discontinued operations on the Partnership’s unaudited condensed consolidated statements of operations. The current and non-current assets and liabilities previously related to Pennyrile have been reclassified to the appropriate held for sale categories on the Partnership’s unaudited condensed consolidated statement of financial position at December 31, 2019. The footnotes to the consolidated statement of financial position have been adjusted accordingly.

 

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Major assets and liabilities of discontinued operations for Pennyrile Energy LLC as of March 31, 2020 and December 31, 2019 are summarized as follows:

 

    March 31, 2020     December 31, 2019  
    (in thousands)  
Carrying amount of major classes of assets included as part
of discontinued operations: 		               
Cash and cash equivalents   $ -     $ -  
Accounts receivable     -       -  
Accounts receivable-other     -       -  
Inventories     -       -  
Advance royalties     -       -  
Prepaid expenses and other     -       -  
Total current assets of the disposal group classified as held for sale in the statement of financial position   $ -     $ -  
                 
Property and equipment (net)   $ -     $ 6,510  
Advance royalties, net of current portion     -       -  
Other non-current assets     -       -  
Total non-current assets of the disposal group classified as held for sale in the statement of financial position   $ -     $ 6,510  
                 
Carrying amount of major classes of liabilities included as part
of discontinued operations: 		               
Accounts payable   $ -     $ 2,117  
Accrued expenses and other     -       510  
Asset retirement obligations, current portion     -       2,200  
Total current liabilities of the disposal group classified as held for sale in the statement of financial position   $ -     $ 4,827  
                 
Asset retirement obligations, net of current portion   $ -     $ -  
Total non-current liabilities of the disposal group classified as held for sale in the statement of financial position   $ -     $ -  

 

Major components of net loss from discontinued operations for Pennyrile Energy LLC for three months ended March 31, 2020 and 2019 are summarized as follows:

 

    Three Months Ended March 31,  
    2020     2019  
    (in thousands)  
Major line items constituting loss from discontinued operations for the Pennyrile Energy LLC disposal:                
Coal sales   $ -     $ 13,000  
Total revenues     -       13,000  
                 
Cost of operations (exclusive of depreciation, depletion and amortization shown separately below)     422       14,433  
Depreciation, depletion and amortization     -       2,058  
Selling, general and administrative (exclusive of depreciation, depletion and amortization shown separately above)     -       21  
Asset impairment adjustment     (343 )     -  
Total costs, expenses and other     79       16,512  
(Loss) from discontinued operations before income taxes     (79 )     (3,512 )
Income taxes     -       -  
Net (loss) from discontinued operations   $ (79 )   $ (3,512 )

 

Cash Flows. The depreciation, depletion and amortization amounts for Pennyrile for each period presented are listed in the previous table. The Pennyrile capital expenditures for the three months ended March 31, 2019 were $0.3 million. The Partnership recorded a $0.3 million favorable adjustment to asset impairment expense during the first quarter of 2020 as discussed above. Pennyrile did not have any material investing items for any periods presented.

 

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5. PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

Prepaid expenses and other current assets as of March 31, 2020 and December 31, 2019 consisted of the following:

 

    March 31,     December 31,  
    2020     2019  
    (in thousands)  
Other prepaid expenses   $ 851     $ 657  
Prepaid insurance     709       1,163  
Prepaid leases     66       56  
Supply inventory     293       293  
Total   $ 1,919     $ 2,169  

 

Receivable-other

 

On June 28, 2019, the Partnership entered into a settlement agreement with a third party which allowed the third party to maintain certain pipelines pursuant to designated permits at our Central Appalachia operations. The agreement required the third party to pay the Partnership $7.0 million in consideration. The Partnership received $4.2 million on July 3, 2019 and the balance of $2.8 million on January 2, 2020. At December 31, 2019, the $2.8 million receivable was recorded in Receivable –Other on the Partnership’s consolidated statements of financial position. A gain of $6.9 million was recorded on the Partnership’s unaudited condensed consolidated statements of operations during the second quarter of 2019.

 

Investment-securities

 

The Partnership acquired 568,794 shares of Mammoth Energy Services, Inc. (NASDAQ: TUSK) (“Mammoth Inc.”) through a series of transactions in years prior to 2018. As of December 31, 2018, the Partnership owned 104,100 shares of Mammoth Inc., which were recorded at fair market value as a current asset on the Partnership’s unaudited condensed consolidated statements of financial position. During the first quarter of 2019, the Partnership sold its 104,100 shares for net consideration of approximately $2.3 million. A gain of $0.4 million was recorded on the Partnership’s unaudited condensed consolidated statements of operations during the first quarter of 2019.

 

6. PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment, including coal properties and mine development and construction costs, as of March 31, 2020 and December 31, 2019 are summarized by major classification as follows:

 

        March 31,     December 31,  
    Useful Lives   2020     2019  
        (in thousands)  
Land and land improvements       $ 7,223     $ 7,293  
Mining and other equipment and related facilities   2 - 20 Years     260,309       250,912  
Mine development costs   1 - 15 Years     41,262       40,768  
Coal properties   1 - 15 Years     41,464       41,466  
Construction work in process         11,253       13,370  
Total         361,511       353,809  
Less accumulated depreciation, depletion and amortization         (260,575 )     (251,466 )
Net       $ 100,936     $ 102,343  

 

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Depreciation expense for mining and other equipment and related facilities, depletion expense for coal properties, amortization expense for mine development costs and amortization expense for asset retirement costs for the three months ended March 31, 2020 and 2019 was as follows:

 

    March 31,  
    2020     2019  
    (in thousands)  
Depreciation expense-mining and other equipment and related facilities   $ 3,255     $ 2,503  
Depletion expense for coal properties     307       406  
Amortization expense for mine development costs     369       516  
Amortization expense for asset retirement costs     18       66  
Total   $ 3,949     $ 3,491  

 

7. LEASES

 

The Partnership leases various mining, transportation and other equipment under operating and finance leases. The leases have remaining lease terms of 1 year to 8 years, some of which include options to extend the leases for up to 15 years. The Partnership determines if an arrangement is a lease at inception. Some of the leases include both lease and non-lease components which are accounted for as a single lease component as the Partnership has elected the practical expedient to combine these components for all leases. Operating leases are included in operating lease right-of-use (“ROU”) assets, current liabilities and non-current liabilities. Finance leases are included in property, plant and equipment, current liabilities and long-term liabilities.

 

ROU assets represent the Partnership’s right to use an underlying asset for the lease term and lease liabilities represent the Partnership’s obligation to make lease payments related to the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The Partnership utilizes the implicit rate in the lease, if determinable, at the commencement date of the lease to determine the present value of the lease payments. If the implicit rate is not determinable, the Partnership utilizes its incremental borrowing rate at the commencement date of the lease to determine the present value of the lease payments. The Partnership’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Partnership will exercise the option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

 

Supplemental information related to leases was as follows:

 

    Three Months Ended March 31, 2020     Year Ended December 31, 2019  
    (in thousands)        
Operating leases                
Operating lease right-of use assets   $ 10,341     $ 11,145  
                 
Operating lease liabilities-current   $ 3,195     $ 3,267  
Operating lease liabilities-long-term     6,741       7,465  
Total operating lease liabilities   $ 9,936     $ 10,732  
                 
Finance leases                
Property. Plant and Equipment, gross   $ 10     $ 10  
Accumulated depreciation     (6 )     (4 )
Total Property, Plant and Equipment, net   $ 4     $ 6  
                 
Finance lease obligation - current portion   $ 5     $ 4  
Finance lease obligation - noncurrent portion     -       1  
Total finance lease obligation   $ 5     $ 5  

 

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Weighted Average Discount Rates and Lease Terms

 

    March 31, 2020     March 31, 2019  
             
Weighted Average Discount Rate                
Operating leases     7.0 %     7.0 %
Finance leases     7.0 %     7.0 %
                 
Weighted Average Lease Term                
Operating leases     4.79 years       5.4 years  
Finance leases     1.03 years       2.1 years  

 

Supplemental cash flow information related to leases was as follows:

 

    Three Months Ended March 31, 2020     Three Months Ended March 31, 2019  
    (in thousands)  
Cash paid for amounts included in the measurement of lease liabilities:            
Operating cash flows for operating leases   $ 974     $ 977  
Operating cash flows for finance leases   $ -     $ -  
Financing cash flows for finance leases   $ 1     $ 1  
                 
Right-of-use assets obtained in exchange for lease obligations:                
Operating leases   $ -     $ 13,896  
Finance leases   $ -     $ 10  

 

Maturities of lease liabilities are as follows:

 

      Operating leases     Finance leases  
      (in thousands)  
2020 (excluded the three months ended March 31, 2020     $ 3,769     $ 5  
2021       2,635       -  
2022       1,382       -  
2023       906       -  
2024       912          
Thereafter       2,097       -  
Total lease payments       11,701       5  
Less: imputed interest       (1,765 )     -  
Total     $ 9,936     $ 5  

 

The components of lease expense were as follows:

 

    March 31, 2020     March 31, 2019  
    (in thousands)  
             
Operating lease cost   $ 981     $ 983  
                 
Finance lease cost:                
Amortization of right-of-use assets   $ 1     $ 1  
Interest on lease liabilities     -       -  
Total finance lease cost   $ 1     $ 1  

 

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8. OTHER NON-CURRENT ASSETS

 

Other non-current assets as of March 31, 2020 and December 31, 2019 consisted of the following:

 

    March 31,     December 31,  
    2020     2019  
    (in thousands)  
Deposits and other   $ 1,463     $ 1,058  
Due (to) Rhino GP     (147 )     (93 )
Non-current receivable     30,625       30,625  
Total   $ 31,941     $ 31,590  

 

Non-current receivable. The non-current receivable balance of $30.6 million as of March 31, 2020 and December 31, 2019 consisted of the amount due from the Partnership’s workers’ compensation insurance providers for potential claims against the Partnership that are the primary responsibility of the Partnership, which are covered under the Partnership’s insurance policies. The $30.6 million is also included in the Partnership’s accrued workers’ compensation benefits liability balance, which is included in the other non-current liabilities section of the Partnership’s unaudited condensed consolidated statements of financial position. The Partnership presents this amount on a gross asset and liability basis since a right of setoff does not exist per the accounting guidance in ASC Topic 210, Balance Sheet. This presentation has no impact on the Partnership’s results of operations or cash flows.

 

9. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

 

Accrued expenses and other current liabilities as of March 31, 2020 and December 31, 2019 consisted of the following:

 

    March 31,     December 31,  
    2020     2019  
    (in thousands)  
Payroll, bonus and vacation expense   $ 1,117     $ 1,881  
Non-income taxes     2,399       2,067  
Royalty expenses     2,541       2,513  
Accrued interest     98       375  
Health claims     1,091       1,167  
Workers’ compensation & pneumoconiosis     2,500       2,500  
Other     1,623       2,704  
Total   $ 11,369     $ 13,207  

 

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10. DEBT

 

Debt as of March 31, 2020 and December 31, 2019 consisted of the following:

 

    March 31,     December 31,  
    2020     2019  
    (in thousands)  
Note payable -Financing Agreement   $ 44,813     $ 41,398  
Note payable-other debt     2,021       3,054  
Finance lease obligation     5       5  
Net unamortized debt issuance costs     (8,817 )     (8,632 )
Net unamortized original issue discount     (386 )     (421 )
Total     37,636       35,404  
Less current portion     (36,781 )     (34,244 )
Long-term debt   $ 855     $ 1,160  

 

The balance of the financing agreement and related debt issuance costs have been classified as a current liability as of March 31, 2020 and December 31, 2019 (please read Note 1 for further discussion).

 

Other Debt. Other debt consisting of equipment and insurance financing was approximately $2.0 million and $3.1 million as of March 31, 2020 and December 31, 2019, respectively.

 

Financing Agreement

 

On December 27, 2017, the Partnership entered into a Financing Agreement (the “Financing Agreement”) with Cortland Capital Market Services LLC, as Collateral Agent and Administrative agent, CB Agent Services LLC, as Origination Agent and the parties identified as Lenders therein (the “Lenders”), pursuant to which the Lenders agreed to provide the Partnership with a multi-draw term loan in the original aggregate principal amount of $80 million, subject to the terms and conditions set forth in the Financing Agreement. The total principal amount was divided into a $40 million commitment, the conditions of which were satisfied at the execution of the Financing Agreement (the “Effective Date Term Loan Commitment”) and a $40 million additional commitment that was contingent upon the satisfaction of certain conditions precedent specified in the Financing Agreement (“Delayed Draw Term Loan Commitment”). As of March 31, 2020, the Partnership had utilized $18 million of the $40 million additional commitment, which results in $22 million of the additional commitment remaining. The Financing Agreement contains negative covenants that restrict the Partnership’s ability to, among other things: (i) incur liens or additional indebtedness or make investments or restricted payments, (ii) liquidate or merge with another entity, or dispose of assets, (iii) change the nature of their respective businesses; (iv) make capital expenditures in excess, or, with respect to maintenance capital expenditures, lower than, specified amounts, (v) incur restrictions on the payment of dividends, (vi) prepay or modify the terms of other indebtedness, (vii) permit the Collateral Coverage Amount to be less than the outstanding principal amount of the loans outstanding under the Financing Agreement or (viii) permit the trailing nine month Fixed Charge Coverage Ratio of the Partnership and its subsidiaries to be less than 1.20 to 1.00.

 

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The Lenders are entitled to certain fees, including: (i) 1.50% per annum of the unused Delayed Draw Term Loan Commitment for as long as such commitment exists, (ii) for the 12-month period following the execution of the Financing Agreement, a make-whole amount (“Make-Whole Amount”) equal to the interest and unused Delayed Draw Term Loan Commitment fees that would have been payable but for the occurrence of certain events, including among others, bankruptcy proceedings or the termination of the Financing Agreement by the Partnership, and (iii) audit and collateral monitoring fees and origination and exit fees. Commencing December 31, 2018, the principal for each loan made under the Financing Agreement is payable on a quarterly basis in an amount equal to $375,000 per quarter. All remaining unpaid principal and accrued and unpaid interest is due on the loan termination date. The Financing Agreement originally had a termination date of December 27, 2020, which was amended to December 27, 2022. Loans made pursuant to the Financing Agreement are secured by substantially all of the Partnerships’ assets.

 

The Partnership entered into various amendments and consents to the Financing Agreement during 2018 and 2019, which (a) increased the original lender exit fee (“Exit Fee”) of 3.0% to 7.0% as of December 31, 2019. The Exit Fee is applied to the principal amount of the loans made under the Financing Agreement that is payable on the earliest of (i) the final maturity date of the Financing Agreement, (ii) the termination date of the Financing Agreement, (iii) the acceleration of the obligations under the Financing Agreement for any reason, including, without limitation, acceleration in accordance with Section 9.01 of the Financing Agreement, including as a result of the commencement of an insolvency proceeding and (iv) the date of any refinancing of the term loan under the Financing Agreement, (b) modified certain definitions and concepts to account for the Partnership’s 2019 acquisition of properties from Blackjewel, (c) permitted the 2019 disposition of the Pennyrile mining complex, (d) required the Partnership to pay a $1.0 million consent fee related to the Pennyrile sale (paid March 2020), (e) allowed the Partnership to sell certain real property in Western Colorado and adjusted the timing for remittance to the Lender of the proceeds from the sales, (f) provided $15.0 million in additional terms loans under the Delayed Draw Term Loan Commitment feature of the Financing Agreement, (g) revised the definition of the Make-Whole Amount under the Financing Agreement to extend the date of the Make-Whole Amount period to December 31, 2021 and (h) extended the termination date of the Financing Agreement to December 27, 2022.

 

On March 3, 2020, the Partnership entered into a sixth amendment (the “Sixth Amendment”) to the Financing Agreement originally executed on December 27, 2017 with the Lenders. The Sixth Amendment, among other things, provided a consent by the Origination Agent to a $3.0 million term loan under the Delayed Draw Term Loan Commitment feature of the Financing Agreement and increased the Exit Fee payable by the Partnership to the Lenders by 1.0% to a total of 8.0% (payment terms discussed above).

 

The following table presents the loan balances and applicable interest rates for each term loan made under the Financing Agreement as of March 31, 2020:

 

Loan Date   Loan Balance     Interest rate*  
    (in millions)        
12/27/2017   $ 27.2       10.99 %
8/16/2019   $ 5.0       11.20 %
9/16/2019   $ 5.0       10.86 %
3/3/2020   $ 3.0       11.52 %
                 
* Variable interest rate of Libor plus 10.0%  

 

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11. ASSET RETIREMENT OBLIGATIONS

 

The changes in asset retirement obligations for the three months ended March 31, 2020 and the year ended December 31, 2019 are as follows:

 

    March 31,     December 31,  
    2020     2019  
    (in thousands)  
Balance at beginning of period (including current portion)   $ 20,591     $ 17,581  
Accretion expense     389       1,341  
Adjustments to the liability from annual recosting and other     -       (823 )
Jewell Valley LLC acquisition     -       2,596  
Reclassification to held for sale     -       (38 )
Liabilities settled     -       (66 )
Balance at end of period     20,980       20,591  
Less current portion of asset retirement obligation     (420 )     (420 )
Long-term portion of asset retirement obligation   $ 20,560     $ 20,171  

 

12. EMPLOYEE BENEFITS

 

401(k) Plans

 

The Operating Company sponsors a defined contribution savings plans for all employees. Under the defined contribution savings plan, the Operating Company matches voluntary contributions of participants up to a maximum contribution based upon a percentage of a participant’s salary with an additional matching contribution possible at the Partnership’s discretion. The expense under these plans for the three months ended March 31, 2020 and 2019 is included in Cost of operations and Selling, general and administrative expense in the Partnership’s unaudited condensed consolidated statements of operations and was as follows:

 

    Three Months Ended March 31,  
    2020     2019  
    (in thousands)  
401(k) plan expense   $ 391     $ 343  

 

13. PARTNERS’ CAPITAL

 

Common Unit Warrants

 

In December 2017, the Partnership entered into a warrant agreement with certain parties that are also parties to the Financing Agreement discussed above. The warrant agreement included the issuance of a total of 683,888 warrants for common units (“Common Unit Warrants”) of the Partnership at an exercise price of $1.95 per unit, which was the closing price of the Partnership’s common units on the OTC market as of December 27, 2017. The Common Unit Warrants have a five year expiration date. The Common Unit Warrants and the Partnership’s common units after exercise are both transferable, subject to applicable US securities laws. The Common Unit Warrant exercise price is $1.95 per unit, but the price per unit will be reduced by future common unit distributions and other further adjustments in price included in the warrant agreement for transactions that are dilutive to the amount of the Partnership’s common units outstanding. The warrant agreement includes a provision for a cashless exercise where the warrant holders can receive a net number of common units. Per the warrant agreement, the warrants are detached from the Financing Agreement and fully transferable. The Partnership analyzed the Common Unit Warrants in accordance with the applicable accounting literature and concluded the Common Unit Warrants should be classified as equity. The Partnership allocated the $40.0 million proceeds from the Financing Agreement between the Common Unit Warrants and the Financing Agreement based upon their relative fair values. The allocation based upon relative fair values resulted in approximately $1.3 million being recorded for the Common Unit Warrants in the Partner’s Capital equity section and a corresponding reduction in Long-term debt, net on the Partnership’s unaudited condensed consolidated statements of financial position.

 

Series A Preferred Units

 

On December 30, 2016, the general partner entered into the Fourth Amended and Restated Agreement of Limited Partnership of the Partnership (“Amended and Restated Partnership Agreement”) to create, authorize and issue the Series A preferred units.

 

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The Series A preferred units rank senior to all classes or series of equity securities of the Partnership with respect to distribution rights and rights upon liquidation. The holders of the Series A preferred units are entitled to receive annual distributions equal to the greater of (i) 50% of the CAM Mining free cash flow (as defined below) and (ii) an amount equal to the number of outstanding Series A preferred units multiplied by $0.80. “CAM Mining free cash flow” is defined in the Amended and Restated Partnership Agreement as (i) the total revenue of the Partnership’s Central Appalachia business segment, minus (ii) the cost of operations (exclusive of depreciation, depletion and amortization) for the Partnership’s Central Appalachia business segment, minus (iii) an amount equal to $6.50, multiplied by the aggregate number of coal tons sold by the Partnership from its Central Appalachia business segment. If the Partnership fails to pay any or all of the distributions in respect of the Series A preferred units, such deficiency will accrue until paid in full and the Partnership will not be permitted to pay any distributions on its Partnership interests that rank junior to the Series A preferred units, including its common units. The Series A preferred units will be liquidated in accordance with their capital accounts and upon liquidation will be entitled to distributions of property and cash in accordance with the balances of their capital accounts prior to such distributions on equity securities that rank junior to the Series A preferred units.

 

The Series A preferred units vote on an as-converted basis with the common units, and the Partnership is restricted from taking certain actions without the consent of the holders of a majority of the Series A preferred units, including: (i) the issuance of additional Series A preferred units, or securities that rank senior or equal to the Series A preferred units; (ii) the sale or transfer of CAM Mining or a material portion of its assets; (iii) the repurchase of common units, or the issuance of rights or warrants to holders of common units entitling them to purchase common units at less than fair market value; (iv) consummation of a spin off; (v) the incurrence, assumption or guaranty of indebtedness for borrowed money in excess of $50.0 million except indebtedness relating to entities or assets that are acquired by the Partnership or its affiliates that is in existence at the time of such acquisition or (vi) the modification of CAM Mining’s accounting principles or the financial or operational reporting principles of the Partnership’s Central Appalachia business segment, subject to certain exceptions.

 

The Partnership has the option to convert the outstanding Series A preferred units at any time on or after the time at which the amount of aggregate distributions paid in respect of each Series A preferred unit exceeds $10.00 per unit. Each Series A preferred unit will convert into a number of common units equal to the quotient (the “Series A Conversion Ratio”) of (i) the sum of $10.00 and any unpaid distributions in respect of such Series A Preferred Unit divided by (ii) 75% of the volume-weighted average closing price of the common units for the preceding 90 trading days (the “VWAP”); provided however, that the VWAP will be capped at a minimum of $2.00 and a maximum of $10.00. On December 31, 2021, all outstanding Series A preferred units will convert into common units at the then applicable Series A Conversion Ratio.

 

During the first quarter of 2019, the Partnership paid $3.2 million to the holders of Series A preferred units for distributions earned for the year ended December 31, 2018. The Partnership accrued approximately $1.2 million for distributions to holders of the Series A preferred units for the year ended December 31, 2019 and approximately $0.3 million for the three months ended March 31, 2020.

 

Investment in Royal Common Stock

 

On September 1, 2017, Royal elected to convert certain obligations to the Partnership totaling $4.1 million to shares of Royal common stock. Royal issued 914,797 shares of its common stock to the Partnership at a conversion price of $4.51 per share. The price per share was equal to the outstanding balance multiplied by seventy-five percent (75%) of the volume-weighted average closing price of Royal’s common stock for the 90 days preceding the date of conversion (“Royal VWAP”), subject to a minimum Royal VWAP of $3.50 and a maximum Royal VWAP of $7.50. The Partnership recorded the $4.1 million conversion as Investment in Royal common stock in the Partners’ Capital section of the Partnership’s unaudited condensed consolidated statements of financial position since Royal does not have significant economic activity apart from its investment in the Partnership.

 

Accumulated Distribution Arrearages

 

Pursuant to the Partnership’s partnership agreement, the Partnership’s common units accrue arrearages every quarter when the distribution level is below the minimum level of $4.45 per unit. Beginning with the quarter ended June 30, 2015 and continuing through the quarter ended March 31, 2020, the Partnership has suspended the cash distribution on its common units. For each of the quarters ended September 30, 2014, December 31, 2014 and March 31, 2015, the Partnership announced cash distributions per common unit at levels lower than the minimum quarterly distribution. The Partnership has not paid any distribution on its subordinated units for any quarter after the quarter ended March 31, 2012. As of March 31, 2020, the Partnership had accumulated arrearages of $965.7 million.

 

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14. EARNINGS PER UNIT (“EPU”)

 

The following table presents a reconciliation of the numerators and denominators of the basic and diluted EPU calculations for the periods ended March 31, 2020 and 2019:

 

Three Months Ended March 31, 2020   General
Partner 		    Common Unitholders     Subordinated Unitholders     Preferred Unitholders  
    (in thousands, except per unit data)          
Numerator:                
Interest in net (loss)/income:                                
Net (loss)/income from continuing operations   $ (43 )   $ (9,351 )   $ (817 )   $ 300  
Net (loss) from discontinued operations     -       (72 )     (7 )     -  
Total interest in net (loss)/income   $ (43 )   $ (9,423 )   $ (824 )   $ 300  
Denominator:                                
Weighted average units used to compute basic EPU     n/a       13,078       1,143       1,500  
Weighted average units used to compute diluted EPU     n/a       13,078       1,143       1,500  
                                 
Net (loss)/income per limited partner unit, basic                                
Net (loss)/income per unit from continuing operations     n/a     $ (0.72 )   $ (0.72 )   $ 0.20  
Net (loss) per unit from discontinued operations     n/a       -       -       -  
Net (loss)/income per common unit, basic     n/a     $ (0.72 )   $ (0.72 )   $ 0.20  
Net (loss)/income per limited partner unit, diluted                                
Net (loss)/income per unit from continuing operations     n/a     $ (0.72 )   $ (0.72 )     0.20  
Net (loss) per unit from discontinued operations     n/a       -       -       -  
Net (loss)/income per common unit, diluted     n/a     $ (0.72 )   $ (0.72 )     0.20  

 

Three Months Ended March 31, 2019   General Partner     Common Unitholders     Subordinated Unitholders     Preferred Unitholders  
  (in thousands, except per unit data)        
Numerator:            
Interest in net (loss)/income:                                
Net (loss)/income from continuing operations   $ (17 )   $ (3,725 )   $ (325 )   $ 300  
Net (loss) from discontinued operations     (15 )     (3,216 )     (281 )     -  
Total interest in net (loss)/income   $ (32 )   $ (6,941 )   $ (606 )     300  
Denominator:                                
Weighted average units used to compute basic EPU     n/a       13,098       1,144       1,500  
Weighted average units used to compute diluted EPU     n/a       13,098       1,144       1,500  
                                 
Net (loss)/income per limited partner unit, basic                                
Net (loss)/income per unit from continuing operations     n/a     $ (0.28 )   $ (0.28 )   $ 0.20  
Net (loss) per unit from discontinued operations     n/a       (0.25 )     (0.25 )     -  
Net (loss)/income per common unit, basic     n/a     $ (0.53 )   $ (0.53 )   $ 0.20  
Net (loss)/income per limited partner unit, diluted                                
Net (loss)/income per unit from continuing operations     n/a     $ (0.28 )   $ (0.28 )   $ 0.20  
Net (loss) per unit from discontinued operations     n/a       (0.25 )     (0.25 )     -  
Net (loss)/income per common unit, diluted     n/a     $ (0.53 )   $ (0.53 )   $ 0.20  

 

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Diluted EPU gives effect to all dilutive potential common units outstanding during the period using the treasury stock method. Diluted EPU excludes all dilutive potential units calculated under the treasury stock method if their effect is anti-dilutive. Since the Partnership incurred net losses for three months ended March 31, 2020 and 2019, all potential dilutive units were excluded from the diluted EPU calculation for these periods because when an entity incurs a net loss in a period, potential dilutive units shall not be included in the computation of diluted EPU since their effect will always be anti-dilutive. There were 683,888 potential dilutive common units related to the Common Unit Warrants as discussed in Note 13 for the three months ended March 31, 2020 and 2019.

 

15. COMMITMENTS AND CONTINGENCIES

 

Coal Sales Contracts and Contingencies—As of March 31, 2020, the Partnership had commitments under sales contracts to deliver annually scheduled base quantities of coal as follows:

 

Year     Tons     Number of customers  
               
  2020 (Q2-Q4)       1,366,138       12  
  2021       400,000       3  
  2022       250,000       2  

 

Some of the contracts have sales price adjustment provisions, subject to certain limitations and adjustments, based on a variety of factors and indices.

 

Purchased Coal Expenses—The Partnership incurs purchased coal expense from time to time related to coal purchase contracts. In addition, the Partnership incurs expense from time to time related to coal purchased on the over-the-counter market (“OTC”). Purchase coal expense from coal purchase contracts or expense from OTC purchases for the three months ended March 31, 2020 and 2019 was as follows:

 

    Three Months Ended March 31,  
    2020     2019  
    (in thousands)  
Purchased coal expense   $ 120     $ -  
OTC expense   $ -     $ -  

 

Leases—The Partnership leases/rents various mining, transportation and other equipment under operating lease or rental agreements. Please read Note 7 for additional discussion of leases. The Partnership also leases coal reserves under agreements that call for royalties to be paid as the coal is mined. Lease/rental and royalty expense for the three months ended March 31, 2020 and 2019 are included in Cost of operations in the Partnership’s unaudited condensed consolidated statements of operations and was as follows:

 

    Three Months Ended March 31,  
    2020     2019  
    (in thousands)  
Lease/rental expense   $ 1,103     $ 1,161  
Royalty expense   $ 2,447     $ 3,035  

 

Guarantees/Indemnifications and Financial Instruments with Off-Balance Sheet Risk— In the normal course of business, the Partnership is a party to certain guarantees and financial instruments with off-balance sheet risk, such as bank letters of credit and performance or surety bonds. No liabilities related to these arrangements are reflected in the unaudited consolidated statements of financial position. The Partnership had no outstanding letters of credit at March 31, 2020. The Partnership had outstanding surety bonds with third parties of $41.3 million as of March 31, 2020 to secure reclamation and other performance commitments, which are secured by $3.0 million in cash collateral on deposit with the Partnership’s surety bond provider. Of the $41.3 million in surety bonds, approximately $0.4 million relates to surety bonds for Deane Mining, LLC, which have not been transferred or replaced by the buyer of Deane Mining LLC as was agreed to by the parties as part of the transaction. The Partnership can provide no assurances that a surety company will underwrite the surety bonds of the purchaser of Deane Mining LLC, nor is the Partnership aware of the actual amount of reclamation at any given time. Further, if there was a claim under these surety bonds prior to the transfer or replacement of such bonds by the buyer of Deane Mining, LLC, the Partnership may be responsible to the surety company for any amounts it pays in respect of such claim. While the buyer is required to indemnify the Partnership for damages, including reclamation liabilities, pursuant to the agreements governing the sales of this entity, the Partnership may not be successful in obtaining any indemnity or any amounts received may be inadequate.

 

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Certain surety bonds for Sands Hill Mining LLC had not been transferred or replaced by the buyer of Sands Hill Mining LLC as was agreed to when the Partnership sold Sands Hill Mining LLC to the buyer in November 2017. On July 9, 2019, the Partnership entered into an agreement with a third party for the replacement of the Partnership’s existing surety bond obligations with respect to Sands Hill Mining LLC. The Partnership agreed to pay the third party $2.0 million to assume the Partnership’s surety bond obligations related to Sands Hill Mining LLC. At the time of closing, the third party delivered to the Partnership confirmation from its surety underwriter evidencing the release and removal of the Partnership, its affiliates and guarantors, from the surety bond obligations and all related obligations under the Partnership’s bonding agreements related to Sands Hill Mining LLC, which includes a release of all applicable collateral for the surety bond obligations. Further, such confirmation from the surety underwriter was specifically provided for their acceptance of the third party as a replacement obligor.

 

16. MAJOR CUSTOMERS

 

The Partnership had sales or receivables from the following major customers that in each period equaled or exceeded 10% of revenues:

 

    March 31, 2020
Receivable
Balance 		    December 31,
2019 Receivable
Balance 		    Three Months
Ended March 31,
2020 Sales 		    Three Months Ended
March 31, 2019
Sales 		 
    (in thousands)  
Javelin Global   $ 2,095     $ 1,007     $ 12,270     $ 12,911  
Haverhill North Coke Co.   $ 2,628     $ 1,335     $ 5,191     $ -  

 

17. REVENUE

 

The majority of the Partnership’s revenues are generated under coal sales contracts. Coal sales accounted for approximately 99.0% of the Partnership’s total revenues for the three months ended March 31, 2020 and 2019. Other revenues generally consist of coal royalty revenues, coal handling and processing revenues, rebates and rental income, which accounted for approximately 1.0% of the Partnership’s total revenues for the three months ended March 31, 2020 and 2019.

 

The majority of the Partnership’s coal sales contracts have a single performance obligation (shipment or delivery of coal according to terms of the sales agreement) and as such, the Partnership is not required to allocate the contract’s transaction price to multiple performance obligations. All of the Partnership’s coal sales revenue is recognized when shipment or delivery to the customer has occurred, the title or risk of loss has passed in accordance with the terms of the coal sales agreement, prices are fixed or determinable and collectability is reasonably assured. With respect to other revenues recognized in situations unrelated to the shipment of coal, the Partnership carefully reviews the facts and circumstances of each transaction and does not recognize revenue until the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the seller’s price to the buyer is fixed or determinable and collectability is reasonably assured.

 

In the tables below, the Partnership has disaggregated its revenue by category for each reportable segment as required by ASC Topic 606.

 

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The following table disaggregates revenue by type for each reportable segment for the three months ended March 31, 2020:

 

    Central Appalachia     Northern Appalachia     Rhino Western     Other     Total Consolidated  
    (in thousands)  
Coal sales                                        
Steam coal   $ 5,405     $ 7,409     $ 8,692     $ -     $ 21,506  
Met coal     15,808       -       -       -       15,808  
Other revenue     54       103       -       25       182  
Total   $ 21,267     $ 7,512     $ 8,692     $ 25     $ 37,496  

 

The following table disaggregates revenue by type for each reportable segment for the three months ended March 31, 2019:

 

    Central Appalachia     Northern Appalachia     Rhino Western     Other     Total Consolidated  
    (in thousands)  
Coal sales                                        
Steam coal   $ 13,389     $ 6,065     $ 8,711     $ -     $ 28,165  
Met coal     16,698       -       -       -       16,698  
Other revenue     320       554       -       -       874  
Total   $ 30,407     $ 6,619     $ 8,711     $ -     $ 45,737  

 

18. FAIR VALUE MEASUREMENTS

 

The Partnership determines the fair value of assets and liabilities based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. The fair values are based on assumptions that market participants would use when pricing an asset or liability, including assumptions about risk and the risks inherent in valuation techniques and the inputs to valuations. The fair value hierarchy is based on whether the inputs to valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Partnership’s assumptions of what market participants would use.

 

The fair value hierarchy includes three levels of inputs that may be used to measure fair value as described below:

 

Level One - Quoted prices for identical instruments in active markets.

 

Level Two - The fair value of the assets and liabilities included in Level 2 are based on standard industry income approach models that use significant observable inputs.

 

Level Three - Unobservable inputs significant to the fair value measurement supported by little or no market activity.

 

In those cases when the inputs used to measure fair value meet the definition of more than one level of the fair value hierarchy, the lowest level input that is significant to the fair value measurement in its totality determines the applicable level in the fair value hierarchy.

 

The book values of cash and cash equivalents, accounts receivable and accounts payable are considered to be representative of their respective fair values because of the immediate short-term maturity of these financial instruments. The fair value of the Partnership’s Financing Agreement was determined based upon a market approach and approximates the carrying value March 31, 2020. The fair value of the Partnership’s Financing Agreement is a Level 2 measurement.

 

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19. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

 

Cash payments for interest were $1.3 million and $1.1 million for the three months ended March 31, 2020 and 2019, respectively.

 

The unaudited condensed consolidated statement of cash flows for the three months ended March 31, 2020 and 2019 excludes approximately $5.9 million and $1.4 million, respectively, of property, plant and equipment additions which are recorded in Accounts payable.

 

20. SEGMENT INFORMATION

 

The Partnership primarily produces and markets coal from surface and underground mines in Kentucky, Virginia, West Virginia, Ohio and Utah. The Partnership sells primarily to electric utilities in the United States as well as coal brokers, domestic and non-U.S. steel producers, industrial companies or other coal-related organizations.

 

As of March 31, 2020, the Partnership had three reportable business segments: Central Appalachia, Northern Appalachia and Rhino Western. Additionally, the Partnership has an Other category that includes its ancillary businesses.

 

The Partnership has not provided disclosure of total expenditures by segment for long-lived assets, as the Partnership does not maintain discrete financial information concerning segment expenditures for long lived assets, and accordingly such information is not provided to the Partnership’s chief operating decision maker. The information provided in the following tables represents the primary measures used to assess segment performance by the Partnership’s chief operating decision maker.

 

Reportable segment results of operations for the three months ended March 31, 2020 are as follows (Note: “DD&A” refers to depreciation, depletion and amortization):

 

    Central Appalachia     Northern Appalachia     Rhino Western     Other     Total Consolidated  
    (in thousands)  
Total revenues   $ 21,267     $ 7,512     $ 8,692     $ 25     $ 37,496  
DD&A     2,401       530       973       45       3,949  
Interest expense     -       -       39       2,033       2,072  
Net (loss)/income   $ (5,647 )   $ (26 )   $ 1,209     $ (5,447 )   $ (9,911 )

 

Reportable segment results of operations for the three months ended March 31, 2019 are as follows:

 

    Central Appalachia     Northern Appalachia     Rhino Western     Other     Total Consolidated  
    (in thousands)  
Total revenues   $ 30,407     $ 6,619     $ 8,711     $ -     $ 45,737  
DD&A     1,901       408       1,094       88       3,491  
Interest expense     -       -       -       1,701       1,701  
Net income/(loss)   $ 1,183     $ (1,123 )   $ (327 )   $ (3,500 )   $ (3,767 )

 

20. SUBSEQUENT EVENTS

 

On April 22, 2020, the Partnership, entered into a promissory note evidencing an unsecured $10.0 million loan under the Paycheck Protection Program (the “PPP Loan”). The Paycheck Protection Program (or “PPP”) was established under the recently congressionally approved Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and is administered by the U.S. Small Business Administration. The PPP Loan to the Partnership is being made through Blue Ridge Bank, N.A. (the “Lender”).

 

The PPP Loan has a two year term and bears interest at a rate of 1.000% per annum. Principal and interest payments are deferred for six (6) months from the date of the PPP Loan and will commence monthly thereafter. Under the terms of the CARES Act, PPP Loan recipients can apply for and be granted forgiveness for all or a portion of loans granted under the PPP. Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds for payroll costs and mortgage interest, rent or utility costs and the maintenance of employee staffing levels and compensation levels. No assurance is provided that the Partnership will obtain forgiveness of the PPP Loan in whole or in part.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Unless the context clearly indicates otherwise, references in this report to “we,” “our,” “us” or similar terms refer to Rhino Resource Partners LP and its subsidiaries. References to “our general partner” refer to Rhino GP LLC, the general partner of Rhino Resource Partners LP.

 

The following discussion of the historical financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto presented in this Quarterly Report on Form 10-Q as well as the audited consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2019 and the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in such Annual Report on Form 10-K.

 

In addition, this discussion includes forward looking statements that are subject to risks and uncertainties that may result in actual results differing from statements we make. Please read the section “Cautionary Note Regarding Forward Looking Statements”. In addition, factors that could cause actual results to differ include those risks and uncertainties discussed in Part I, Item 1A. “Risk Factors” also included in our Annual Report on Form 10-K for the year ended December 31, 2019.

 

On September 6, 2019, we entered into an Asset Purchase Agreement with Alliance Coal, LLC (“Buyer”) and Alliance Resource Partners, L.P. (“Buyer Parent”) pursuant to which we agreed to sell to Buyer all of the real property, permits, equipment and inventory and certain other assets associated with the Pennyrile mining complex (“Pennyrile”). The transaction was completed in March 2020. On September 6, 2019, we also entered into an Asset Purchase Agreement with the Buyer and Buyer Parent for the sale and assignment of certain coal supply agreements associated with Pennyrile. The transaction was completed during the third quarter of 2019. Our unaudited condensed consolidated statements of operation have been retrospectively adjusted to reclassify Pennyrile operating results to discontinued operations for the three months ended March 31, 2020 and 2019.

 

COVID-19

 

To date, the current and anticipated economic impact of the COVID-19 pandemic, including the actions of governments and countries here in the United States and around the world designed to decrease the spread of the virus, have caused significant declines in demand for met and steam coal. In response to this reduced demand and to the significant health threats to our employees, on March 20, 2020, we temporarily idled production at several of our mines. We have since restarted production at the majority of our operations. We will continue to monitor conditions to ensure the health and welfare of our employees. The idling of the coal production activities did not affect our ability to fulfill current customer commitments, as loading and shipping crews remained in place to ship coal from existing inventories.

 

If the impact of the COVID-19 pandemic, including the significant decrease in economic activity, continue for an extended period of time or worsen, it could further reduce the demand for met and steam coal, which would have a material adverse effect on our business, financial condition, cash flows and results of operations.

 

In addition, while our business operations have not been significantly restricted by the response to the COVID-19 pandemic from various governmental agencies, which exempt or exclude essential critical infrastructure businesses from various restrictions they impose (other than encouraging remote work where possible), the spread of COVID-19 has caused us to modify our business practices (including requiring remote working where possible, restricting employee travel and congregation of onsite personnel, and increased frequency of cleaning schedules), and we may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers or other stakeholders or the communities in which we operate. Such measures may disrupt our normal operations, and there is no certainty that such measures will be sufficient to mitigate the risks posed by COVID-19 or will not adversely impact our business or results of operations.

 

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Overview

 

Through a series of transactions completed in the first quarter of 2016, Royal Energy Resources, Inc. (“Royal”) acquired a majority ownership and control of us and 100% ownership of our general partner.

 

We are a diversified coal producing limited partnership formed in Delaware that is focused on coal and energy related assets and activities. We produce, process and sell high quality coal of various steam and metallurgical grades. We market our steam coal primarily to electric utility companies as fuel for their steam powered generators. Customers for our metallurgical coal are primarily steel and coke producers who use our coal to produce coke, which is used as a raw material in the steel manufacturing process

 

We have a geographically diverse asset base with coal reserves located in Central Appalachia, Northern Appalachia and the Western Bituminous region. As of December 31, 2019, we controlled an estimated 277.6 million tons of proven and probable coal reserves, consisting of an estimated 171.1 million tons of steam coal and an estimated 106.5 million tons of metallurgical coal. In addition, as of December 31, 2019, we controlled an estimated 190.7 million tons of non-reserve coal deposits.

 

We operate underground and surface mines located in Kentucky, Ohio, Virginia, West Virginia and Utah. The number of mines that we operate may vary from time to time depending on a number of factors, including the demand for and price of coal, depletion of economically recoverable reserves and availability of experienced labor.

 

Our principal business strategy is to safely, efficiently and profitably produce and sell both steam and metallurgical coal from our diverse asset base in order to resume, and, over time, increase our quarterly cash distributions. In addition, we intend to continue to expand and potentially diversify our operations through strategic acquisitions, including the acquisition of long-term, cash generating natural resource assets. We believe that such assets will allow us to grow our cash available for distribution and enhance stability of our cash flow.

 

For the three months ended March 31, 2020, we generated revenues from continuing operations of approximately $37.5 million and a net loss from continuing operations of $9.9 million. For the three months ended March 31, 2020, we produced approximately 0.7 million tons of coal from continuing operations and sold approximately 0.6 million tons of coal from continuing operations, of which approximately 75% were sold pursuant to supply contracts.

 

Current Liquidity and Outlook

 

As of March 31, 2020, our available liquidity was $1.3 million. We also have a delayed draw term loan commitment in the amount of $22 million contingent upon the satisfaction of certain conditions precedent specified in our Financing Agreement discussed below.

 

On December 27, 2017, we entered into a Financing Agreement (the “Financing Agreement”) with Cortland Capital Market Services LLC, as Collateral Agent and Administrative agent, CB Agent Services LLC, as Origination Agent and the parties identified as Lenders therein (the “Lenders”), which provides us with a multi-draw loan in the original aggregate principal amount of $80 million. The total principal amount is divided into a $40 million commitment, the conditions for which were satisfied at the execution of the Financing Agreement and a $40 million additional commitment that was contingent upon the satisfaction of certain conditions precedent specified in the Financing Agreement. As of March 31, 2020, we had utilized $18 million of the $40 million additional commitment, which results in $22 million of the additional commitment remaining. The Financing Agreement initially had a termination date of December 27, 2020, which was amended to December 27, 2022. For more information about our Financing Agreement, please read “— Liquidity and Capital Resources—Financing Agreement.”

 

Beginning in the later part of the third quarter of 2019, we have experienced significantly weaker market demand and have seen prices move lower for the qualities of met and steam coal we produce. This downward price trend has been exacerbated by the recent coronavirus pandemic. In response to this reduced demand and to the significant health threats to our employees, on March 20, 2020, we temporarily idled production at several of our mines. We have since restarted production at the majority of our operations. We will continue to monitor conditions to ensure the health and welfare of our employees. The idling of the coal production activities did not affect our ability to fulfill current customer commitments, as loading and shipping crews remained in place to ship coal from existing inventories.

 

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If we continue to experience weak demand and prices continue to lower for our met and steam coal, we may not be able to continue to give the required representations or meet all of the covenants and restrictions included in our Financing Agreement. If we violate any of the covenants or restrictions in our Financing Agreement, including the fixed-charge coverage ratio, some or all of our indebtedness may become immediately due and payable, and our Lenders may not be willing to make any loans under the additional commitment available under our Financing Agreement. If we are unable to give a required representation or we violate a covenant or restriction, then we will need a waiver from our Lenders under our Financing Agreement, or they may declare an event of default and, after applicable specified cure periods, all amounts outstanding under the Financing Agreement would become immediately due and payable. Although we believe our Lenders are well secured under the terms of our Financing Agreement, there is no assurance that the Lenders would agree to any such waiver. Failure to obtain financing or to generate sufficient cash flow from operations could cause us to further curtail our operations and reduce spending and alter our business plan. We are currently considering alternatives to address our liquidity and balance sheet issues, such as selling additional assets or seeking merger opportunities, and depending on the urgency of our liquidity constraints, we may be required to pursue such an option at an inopportune time.

 

As of March 31, 2020, we were unable to demonstrate that we have sufficient liquidity to operate our business over the next twelve months from the filing date of this Form 10-Q and thus substantial doubt is raised about our ability to continue as a going concern. Our independent registered public accounting firm included an emphasis paragraph with respect to our ability to continue as a going concern in its report on our consolidated financial statements for the year ended December 31, 2019. The presence of the going concern emphasis paragraph in our auditors’ report may have an adverse impact on our relationship with third parties with whom we do business, including our customers, vendors, lenders and employees, making it difficult to raise additional financing to the extent needed to conduct normal operations. As a result, our business, results of operations, financial condition and prospects could be materially adversely affected.

 

We continue to take measures, including the suspension of cash distributions on our common and subordinated units and cost and productivity improvements, to enhance and preserve our liquidity so that we can fund our ongoing operations and necessary capital expenditures and meet our financial commitments and debt service obligations.

 

We are currently exploring alternatives for other sources of capital for ongoing liquidity needs and transactions to enhance its ability to comply with its financial covenants. As disclosed on the Form 8-K filed with the SEC on March 27, 2020, we have engaged legal and financial advisors to assist us in evaluating our strategic options. We are working to improve our operating performance and our cash, liquidity and financial position. This includes pursuing the sale of non-strategic surplus assets, continuing to drive cost improvements across the company, continuing to negotiate alternative payment terms with creditors, and obtaining waivers of going concern and financial covenant violations under our Financing Agreement, or alternatively, pursuing a court-supervised reorganization under Chapter 11 and related financing needs.

 

Recent Developments

 

Financing Agreement

 

On March 2, 2020, we entered into a sixth amendment (the “Sixth Amendment”) to the Financing Agreement. The Sixth Amendment, among other things, provides a consent by the Lenders to a $3.0 million term loan from the delayed draw term loan commitment and increased the exit fee payable by us to the Lenders upon the maturity date (or earlier termination or acceleration date) by 1.0% to a total exit fee of 8.0%. For more information about our Financing Agreement, please read “— Liquidity and Capital Resources—Financing Agreement.”

 

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Pennyrile Mine Complex (“Pennyrile”) Asset Purchase Agreement

 

On September 6, 2019, we entered into an Asset Purchase Agreement (the “Pennyrile APA”) with Alliance Coal, LLC (“Buyer”) and Alliance Resource Partners, L.P. (“Buyer Parent”) pursuant to which we sold to Buyer all of the real property, permits, equipment and inventory and certain other assets associated with Pennyrile in exchange for approximately $3.7 million, subject to certain adjustments. The final adjustments included us retaining certain equipment originally included in the assets to be sold to the Buyer, which resulted in a $0.3 million favorable adjustment to the impairment loss originally recorded by us in the third quarter of 2019 and a decrease in the final purchase price paid by the Buyer. The transaction was completed in March of 2020 and we received cash consideration of $3.0 million.

 

Coal Supply Asset Purchase Agreement

 

On September 6, 2019, we entered into an Asset Purchase Agreement with the Buyer and Buyer Parent for the sale and assignment of certain coal supply agreements associated with Pennyrile (the “Coal Supply APA”) in exchange for approximately $7.3 million. The Coal Supply APA includes customary representations of the parties thereto and indemnification for losses arising from the breaches of such representations and for liabilities arising during the period in which the relevant parties were not party to the coal supply agreements. The transactions contemplated by the Coal Supply APA closed upon the execution thereof.

 

Blackjewel Assignment Agreement

 

On August 14, 2019, our wholly owned subsidiary Jewell Valley Mining LLC, entered into a general assignment and assumption agreement and bill of sale (the “Assignment Agreement”) with Blackjewel L.L.C., Blackjewel Holdings L.L.C., Revelation Energy Holdings, LLC, Revelation Management Corp., Revelation Energy, LLC, Dominion Coal Corporation, Harold Keene Coal Co. LLC, Vansant Coal Corporation, Lone Mountain Processing LLC, Powell Mountain Energy, LLC, and Cumberland River Coal LLC (together, “Blackjewel”) to purchase certain assets from Blackjewel for cash consideration of $850,000 plus an additional royalty of $250,000 that is payable within one year from the date of the purchase, as well as the assumption of associated reclamation obligations. The assets that are subject of the Assignment Agreement consist of three underground mines in Virginia that were actively producing coal prior to Blackjewel’s filing for relief under Chapter 11 of the United States Bankruptcy Code, along with a preparation plant, rail loadout facility, related mineral and surface rights and infrastructure and certain purchase contracts to be assumed at our option. We resumed mining operations at two of the mines in the fourth quarter of 2019.

 

Settlement Agreement

 

On June 28, 2019, we entered into a settlement agreement with a third party which allows the third party to maintain certain pipelines pursuant to designated permits at our Central Appalachia operations. The agreement required the third party to pay us $7.0 million in consideration. We received $4.2 million on July 3, 2019 and the balance of $2.8 million on January 2, 2020. We recorded a gain of $6.9 million during the second quarter of 2019 related to this settlement agreement.

 

Distribution Suspension

 

Pursuant to our limited partnership agreement, our common units accrue arrearages every quarter when the distribution level is below the minimum level of $4.45 per unit. Beginning with the quarter ended June 30, 2015 and continuing through the quarter ended March 31, 2020, we have suspended the cash distribution on our common units. For each of the quarters ended September 30, 2014, December 31, 2014 and March 31, 2015, we announced cash distributions per common unit at levels lower than the minimum quarterly distribution. We have not paid any distribution on our subordinated units for any quarter after the quarter ended March 31, 2012. As of March 31, 2020, we had accumulated arrearages of $965.7 million.

 

Factors That Impact Our Business

 

Our results of operations in the near term could be impacted by a number of factors, including (1) our ability to fund our ongoing operations and necessary capital expenditures, (2) the availability of transportation for coal shipments, (3) poor mining conditions resulting from geological conditions or the effects of prior mining, (4) equipment problems at mining locations, (5) adverse weather conditions and natural disasters or (6) the availability and costs of key supplies and commodities such as steel, diesel fuel and explosives.

 

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On a long-term basis, our results of operations could be impacted by, among other factors, (1) our ability to fund our ongoing operations and necessary capital expenditures, (2) changes in governmental regulation, (3) the availability and prices of competing electricity-generation fuels, (4) the world-wide demand for steel, which utilizes metallurgical coal and can affect the demand and prices of metallurgical coal that we produce, (5) our ability to secure or acquire high-quality coal reserves and (6) our ability to find buyers for coal under favorable supply contracts.

 

We have historically sold a majority of our coal through long-term supply contracts, although we have starting selling a larger percentage of our coal under short-term and spot agreements. As of March 31, 2020, we had commitments under supply contracts to deliver annually scheduled base quantities of coal as follows:

 

Year     Tons     Number of customers  
               
  2020 (Q2-Q4)       1,366,138       12  
  2021       400,000       3  
  2022       250,000       2  

 

Certain of the contracts have sales price adjustment provisions, subject to certain limitations and adjustments, based on a variety of factors and indices.

 

Results of Operations

 

Segment Information

 

As of March 31, 2020, we have three reportable business segments: Central Appalachia, Northern Appalachia and Rhino Western. Additionally, we have an Other category that includes our ancillary businesses. Our Central Appalachia segment consists of three mining complexes: Tug River, Rob Fork and Jewell Valley, which, as of March 31, 2020, together included five underground mines, three surface mines and four preparation plants and loadout facilities in eastern Kentucky, Virginia and southern West Virginia. Our Northern Appalachia segment consists of the Hopedale mining complex and the Leesville field. The Hopedale mining complex, located in northern Ohio, includes one underground mine and one preparation plant and loadout facility as of March 31, 2020. Our Rhino Western segment includes one underground mine in the Western Bituminous region at our Castle Valley mining complex in Utah.

 

Evaluating Our Results of Operations

 

Our management uses a variety of non-GAAP financial measurements to analyze our performance, including (1) Adjusted EBITDA, (2) coal revenues per ton and (3) cost of operations per ton.

 

Adjusted EBITDA. The discussion of our results of operations below includes references to, and analysis of, our segments’ Adjusted EBITDA results. Adjusted EBITDA represents net income before deducting interest expense, income taxes and depreciation, depletion and amortization, while also excluding certain non-cash and/or non-recurring items. Adjusted EBITDA is used by management primarily as a measure of our segments’ operating performance. Adjusted EBITDA should not be considered an alternative to net income, income from operations, cash flows from operating activities or any other measure of financial performance or liquidity presented in accordance with GAAP. Because not all companies calculate Adjusted EBITDA identically, our calculation may not be comparable to similarly titled measures of other companies. Please read “—Reconciliations of Adjusted EBITDA” for reconciliations of Adjusted EBITDA to net income/(loss) by segment for each of the periods indicated.

 

Coal Revenues Per Ton. Coal revenues per ton represents coal revenues divided by tons of coal sold. Coal revenues per ton is a key indicator of our effectiveness in obtaining favorable prices for our product.

 

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Cost of Operations Per Ton. Cost of operations per ton sold represents the cost of operations (exclusive of depreciation, depletion and amortization) divided by tons of coal sold. Management uses this measurement as a key indicator of the efficiency of operations.

 

Summary. (Unless otherwise specified, the following discussion of the results of operations for the three months ended March 31, 2020 and 2019 excludes operating results relating to Pennyrile. The Pennyrile operating results are recorded as discontinued operations in our unaudited condensed consolidated statements of operations.)

 

The following table sets forth certain information regarding our revenues, operating expenses, other income and expenses, and operational data for the three months ended March 31, 2020 and 2019:

 

    Three Months Ended March 31,     Increase/(Decrease)  
    2020     2019     $     % *  
    (in millions, except per ton data and %)  
Statement of Operations Data:                  
                         
Coal revenues   $ 37.3     $ 44.9     $ (7.6 )     (16.8 )%
Other revenues     0.2       0.8       (0.6 )     (79.2 )%
Total revenues     37.5       45.7       (8.2 )     (18.0 )%
Costs and expenses:                                
Cost of operations (exclusive of DD&A shown separately below)     36.1       40.2       (4.1 )     (10.2 )%
Freight and handling costs     1.0       1.2       (0.2 )     (9.9 )%
Depreciation, depletion and amortization     3.9       3.5       0.4       13.1 %
Selling, general and administrative (exclusive of DD&A shown separately above)     4.2       2.7       1.5       52.9 %
Loss on sale/disposal of assets     0.1       0.2       (0.1 )     (71.8 )%
Loss from operations     (7.8 )     (2.1 )     (5.7 )     279.5 %
Interest expense and other     (2.1 )     (1.7 )     (0.4 )     21.8 %
Interest income and other     -       -       -       n/a  
Total interest and other (income) expense     (2.1 )     (1.7 )     (0.4 )     21.8 %
Net (loss) from continuing operations     (9.9 )     (3.8 )     (6.1 )     163.1 %
Net (loss) from discontinued operations     (0.1 )     (3.5 )     3.4       (97.8 )%
Net (loss)   $ (10.0 )   $ (7.3 )     (2.7 )     37.2 %
                                 
Total tons sold (in thousands except %)     645.8       748.0       (102.2 )     (13.7 )%
Coal revenues per ton   $ 57.78     $ 59.97     $ (2.19 )     (3.7 )%
Cost of operations per ton   $ 55.94     $ 53.76     $ 2.18       4.1 %
                                 
Other Financial Data                                
Adjusted EBITDA from continuing operations   $ (3.9 )   $ 2.1     $ (6.0 )     (284.2 )%
Adjusted EBITDA from discontinued operations   $ (0.4 )   $ (1.5 )   $ 1.1       (71.0 )%
Adjusted EBITDA   $ (4.3 )   $ 0.6     $ (4.9 )     (754.2 )%

 

* Percentages and per ton amounts are calculated based on actual amounts and not the rounded amounts presented in this table.

 

Three Months Ended March 31, 2020 Compared to Three Months Ended March 31, 2019

 

Revenues. Our coal revenues for the three months ended March 31, 2020 decreased by approximately $7.6 million, or 16.8%, to approximately $37.3 million from approximately $44.9 million for the three months ended March 31, 2019. Coal revenues per ton was $57.78 for the three months ended March 31, 2020, a decrease of $2.19 or 3.7%, from $59.97 per ton for the three months ended March 31, 2019. The decrease in coal revenues was primarily the result of fewer tons sold at our Central Appalachia operations due to ongoing weak market demand for our steam and metallurgical coal. The decrease in coal revenues per ton was due to a larger mix of lower price coal sold during the three months ended March 31, 2020 compared to the same period in 2019.

 

Cost of Operations. Total cost of operations decreased by $4.1 million or 10.2% to $36.1 million for the three months ended March 31, 2020 as compared to $40.2 million for the three months ended March 31, 2019. Our cost of operations per ton was $55.94 for the three months ended March 31, 2020, an increase of $2.18, or 4.1%, from the three months ended March 31, 2019. The decrease in total cost of operations was primarily due to fewer tons produced and sold from our Central Appalachia operations during the first quarter of 2020 compared to the same period in 2019. We also temporarily idled production activities at many of our mining operations in response to the coronavirus pandemic during March 2020.

 

Freight and Handling. Total freight and handling cost decreased to $1.0 million for the three months ended March 31, 2020 from approximately $1.2 million for the three months ended March 31, 2019. The decrease in freight and handling costs was primarily the result of fewer export sales that require us to pay railroad transportation to the port of export during the first quarter of 2020.

 

Depreciation, Depletion and Amortization (“DD&A”). Total DD&A expense for the three months ended March 31, 2020 was $3.9 million as compared to $3.5 million for the three months ended March 31, 2019.

 

For the three months ended March 31, 2020, our depreciation expense was $3.2 million and for the three months ended March 31, 2019 it was $2.5 million. The increase in depreciation expense was primarily the result of additional equipment placed in service at our Jewell Valley operation.

 

For the three months ended March 31, 2020 and 2019, our depletion expense was $0.3 million and $0.4 million, respectively. The decrease in the depletion expense was primarily due to the decrease in tons of coal sold during the first quarter of 2020 compared to the same period in 2019.

 

For the three months ended March 31, 2020 and 2019 our amortization expense was $0.4 million and $0.6 million, respectively. The decrease was primarily the result of decreased production during the first quarter of 2020.

 

Selling, General and Administrative. SG&A expense for the three months ended March 31, 2020 increased to $4.2 million as compared to $2.7 million for the three months ended March 31, 2019 as we experienced an increase in corporate legal and outside professional expenses.

 

Interest Expense. Interest expense for the three months ended March 31, 2020 increased to $2.1 million as compared to $1.7 million for the three months ended March 31, 2019. This increase was primarily due to a higher average outstanding debt balance during the three months ended March 31, 2020 compared to the same period in 2019.

 

Net Income/Loss. Net loss was $9.9 million for the three months ended March 31, 2020 compared to net loss of $3.8 million for the three months ended March 31, 2019. The increase in net loss was primarily due to the decrease in coal revenue and an increase in SG&A as discussed above.

 

Adjusted EBITDA. Adjusted EBITDA from continuing operations decreased by $6.0 million for the three months ended March 31, 2020 to $(3.9) million from $2.1 million for the three months ended March 31, 2019. The decrease was primarily due to the increase in net loss for the three months ended March 31, 2020 as discussed above. Including net loss from discontinued operations of approximately $0.1 million, our net loss was $10.0 million and Adjusted EBITDA was $(4.3) million for the three months ended March 31, 2020. Including net loss from discontinued operations of approximately $3.5 million, which related to Pennyrile, our net loss was $7.3 million and Adjusted EBITDA was $0.6 million for the three months ended March 31, 2019. Please read “—Reconciliations of Adjusted EBITDA” for reconciliations of Adjusted EBITDA to net income/(loss) on a segment basis.

 

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Segment Results

 

The following tables set forth certain information regarding our revenues, operating expenses, other income and expenses, and operational data by reportable segment for the three months ended March 31 2020 and 2019:

 

Central Appalachia   Three months ended March 31,     Increase/(Decrease)  
    2020     2019     $     % *  
    (in millions, except per ton data and %)  
                         
Coal revenues   $ 21.2     $ 30.1     $ (8.9 )     (29.5 )%
Freight and handling revenues     -       -       -       n/a  
Other revenues     0.1       0.3       (0.2 )     (83.1 )%
Total revenues     21.3       30.4       (9.1 )     (30.1 )%
Coal revenues per ton   $ 77.86     $ 77.29     $ 0.57       0.7 %
Cost of operations (exclusive of depreciation, depletion and amortization shown separately below)     24.0       26.6       (2.6 )     (9.7 )%
Freight and handling costs     0.3       0.7       (0.4 )     (48.4 )%
Depreciation, depletion and amortization     2.4       1.9       0.5       (26.4 )%
Selling, general and administrative costs     0.1       0.1       -       75.9 %
Cost of operations per ton   $ 88.27     $ 68.37     $ 19.90       29.1 %
Net (loss)/income from continuing operations     (5.6 )     1.2       (6.8 )     (577.4 )%
Adjusted EBITDA from continuing operations     (3.2 )     3.1       (6.3 )     (205.3 )%
Tons sold (in thousands except %)     272.4       389.3       (116.9 )     (30.0 )%

 

* Percentages and per ton amounts are calculated based on actual amounts and not the rounded amounts presented in this table.

 

Tons of coal sold in our Central Appalachia segment decreased by approximately 30.0% for the three months ended March 31, 2020 compared to the three months ended March 31, 2019 primarily due to weakness in the met and steam coal markets, which has resulted in some of our customers pushing out shipments to a future date. We also had some uncontracted tons in Central Appalachia and we were unable to sell the coal on the spot market due to weak market demand.

 

Coal revenues decreased by approximately $8.9 million, or 29.5%, to approximately $21.2 million for the three months ended March 31, 2020 from approximately $30.1 million for the three months ended March 31, 2019. The decrease in coal revenues was due to a decrease in tons sold from our Central Appalachia operations during the first quarter of 2020 compared to 2019. Coal revenues per ton for our Central Appalachia segment increased by $0.57, or 0.7%, to $77.86 per ton for the three months ended March 31, 2020 as compared to $77.29 for the three months ended March 31, 2019. The increase in coal revenues per ton was primarily due to a higher mix of met coal tons sold during the three months ended March 31, 2020 compared to 2019.

 

Cost of operations decreased by $2.6 million, or 9.7%, to $24.0 million for the three months ended March 31, 2020 from $26.6 million for the three months ended March 31, 2019. The decrease in cost of operations was primarily due to fewer tons produced and sold during the third quarter of 2020 compared to the same period in 2019. Our cost of operations per ton of $88.27 for the three months ended March 31, 2020 increased 29.1% compared to $68.37 per ton for the three months ended March 31, 2019. Cost of operations per ton increased as fixed costs were allocated to fewer tons sold from our Central Appalachia operations during the first quarter of 2020.

 

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Total freight and handling cost was $0.3 million for the three months ended March 31, 2020, which was a decrease of $0.4 million from the three months ended March 31, 2019. The decrease in freight and handling costs was primarily the result of fewer export sales during the first quarter of 2020 that require us to pay railroad transportation to the port of export.

 

For our Central Appalachia segment, net loss was approximately $5.6 million for the three months ended March 31, 2020 compared to net income of $1.2 million for the three months ended March 31, 2019. The decrease in net income was primarily the result of the decrease in revenue resulting from fewer sales during the first quarter of 2020 compared to the same period in 2019.

 

Central Appalachia Overview of Results by Product. Additional information for the Central Appalachia segment detailing the types of coal produced and sold, premium high-vol met coal and steam coal for the three months ended March 31, 2020 and 2019, is presented below. Note that our Northern Appalachia and Rhino Western segments currently produce and sell only steam coal.

 

(In thousands, except per ton data and %)   Three months ended March 31, 2020     Three months ended March 31, 2019     Increase
(Decrease)
%* 		 
Met coal tons sold     161.6       149.1       8.4 %
Steam coal tons sold     110.8       240.2       (53.9 )%
Total tons sold     272.4       389.3       (30.0 )%
                         
Met coal revenue   $ 15,808     $ 16,698       (5.3 )%
Steam coal revenue   $ 5,405     $ 13,389       (59.6 )%
Total coal revenue   $ 21,213     $ 30,087       (29.5 )%
                         
Met coal revenues per ton   $ 97.82     $ 111.98       (12.7 )%
Steam coal revenues per ton   $ 48.77     $ 55.75       (12.5 )%
Total coal revenues per ton   $ 77.86     $ 77.29       0.8 %
                         
Met coal tons produced     140.0       122.5       14.3 %
Steam coal tons produced     142.3       308.8       (53.9 )%
Total tons produced     282.3       431.3       (34.5 )%

 

Northern Appalachia   Three months ended March 31,     Increase/(Decrease)  
    2020     2019     $     % *  
    (in millions, except per ton data and %)  
                         
Coal revenues   $ 7.4     $ 6.1     $ 1.3       22.2 %
Freight and handling revenues     -       -       -       n/a  
Other revenues     0.1       0.5       (0.4 )     (81.4 )%
Total revenues     7.5       6.6       0.9       13.5 %
Coal revenues per ton   $ 50.26     $ 50.19     $ 0.07       0.1 %
Cost of operations (exclusive of depreciation, depletion and amortization shown separately below)     6.3       6.8       (0.5 )     (7.8 )%
Freight and handling costs     0.7       0.5       0.2       44.8 %
Depreciation, depletion and amortization     0.5       0.4       0.1       29.9 %
Selling, general and administrative costs     -       -       -       n/a  
Cost of operations per ton   $ 42.77     $ 56.60     $ (13.83 )     (24.4 )%
Net (loss) from continuing operations     -       (1.1 )     1.1       (97.7 )%
Adjusted EBITDA from continuing operations     0.5       (0.7 )     1.2       (170.5 )%
Tons sold (in thousands except %)     147.5       120.8       26.7       22.0 %

 

* Percentages and per ton amounts are calculated based on actual amounts and not the rounded amounts presented in this table.

 

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For our Northern Appalachia segment, tons of coal sold increased by approximately 22.0% for the three months ended March 31, 2020 compared to the three months ended March 31, 2019 as we experienced increased demand for coal from this region.

 

Coal revenues were approximately $7.4 million for the three months ended March 31, 2020, an increase of approximately $1.3 million, or 22.2%, from approximately $6.1 million for the three months ended March 31, 2019. The increase in coal revenues was primarily due to the increase in tons of coal sold from our Hopedale operations during the first quarter of 2020. Coal revenues per ton were relatively flat at $50.26 for the three months ended March 31, 2020 as compared to $50.19 for the three months ended March 31, 2019.

 

Cost of operations decreased by $0.5 million, or 7.8%, to $6.3 million for the three months ended March 31, 2020 from $6.8 million for the three months ended March 31, 2019. Our cost of operations per ton was $42.77 for the three months ended March 31, 2020, a decrease of $13.83, or 24.4%, compared to $56.60 for the three months ended March 31, 2019. Cost of operations per ton decreased primarily as the result of fixed costs being allocated to more tons sold from our Hopedale operation in the first quarter of 2020 compared to the same period in 2019 as well as improved mining conditions in the first quarter of 2020.

 

Net loss in our Northern Appalachia segment was $26,000 for the three months ended March 31, 2020 compared to net loss of $1.1 million for the three months ended March 31, 2019. The decrease in net loss was primarily due to the increase in coal sales revenue during the current period.

 

Rhino Western   Three months ended March 31,     Increase/(Decrease)  
    2020     2019     $     % *  
    (in millions, except per ton data and %)  
                         
Coal revenues   $ 8.7     $ 8.7     $ -       (0.2 )%
Freight and handling revenues     -       -       -       n/a  
Other revenues     -       -       -       n/a  
Total revenues     8.7       8.7       -       (0.2 )%
Coal revenues per ton   $ 38.47     $ 36.61     $ 1.86       5.1 %
Cost of operations (exclusive of depreciation, depletion and amortization shown separately below)     6.5       7.2       (0.7 )     (10.6 )%
Freight and handling costs     -       -       -       n/a  
Depreciation, depletion and amortization     1.0       1.1       (0.1 )     (11.1 )%
Selling, general and administrative costs     -       -       -       n/a  
Cost of operations per ton   $ 28.58     $ 30.35     $ (1.77 )     (5.8 )%
Net income/(loss) from continuing operations     1.2       (0.3 )     1.5       (469.6 )%
Adjusted EBITDA from continuing operations     2.2       1.5       0.7       52.8 %
Tons sold (in thousands except %)     225.9       237.9       (12.0 )     (5.0 )%

 

* Percentages and per ton amounts are calculated based on actual amounts and not the rounded amounts presented in this table.

 

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Tons of coal sold from our Rhino Western segment decreased by approximately 5.0% for the three months ended March 31, 2020 compared to the same period in 2019 primarily due to a decrease in demand for coal from this region.

 

Coal revenues remained flat at approximately $8.7 million for the three months ended March 31, 2020 and 2019. Coal revenues per ton for our Rhino Western segment increased by $1.86 or 5.10% to $38.47 per ton for the three months ended March 31, 2020 as compared to $36.61 per ton for the three months ended March 31, 2019. The increase in coal revenues per ton was primarily due to higher contracted sale prices.

 

Cost of operations decreased by $0.7 million, or 10.6%, to $6.5 million for the three months ended March 31, 2020 from $7.2 million for the three months ended March 31, 2019. Our cost of operations per ton was $28.58 for the three months ended March 31, 2020, a decrease of $1.77, or 5.8%, compared to $30.35 for the three months ended March 31, 2019. Total cost of operations decreased for the three months ended March 31, 2020 compared to the same period in 2019 due to a decrease in operating costs at our Castle Valley mine operation.

 

Net income in our Rhino Western segment was $1.2 million for the three months ended March 31, 2020, compared to a net loss of $0.3 million for the three months ended March 31, 2019. This increase in net income was primarily the result of an increase in our contracted sale prices for tons sold at our Castle Valley operation and lower operating costs during the first quarter of 2020.

 

Other   Three months ended March 31,     Increase/(Decrease)  
    2020     2019     $     % *  
    (in millions, except per ton data and %)  
                         
Coal revenues   $ -     $ -       n/a       n/a  
Freight and handling revenues     -       -       n/a       n/a  
Other revenues     -       -       n/a       n/a  
Total revenues     -       -       -       n/a  
Coal revenues per ton**     n/a       n/a       n/a       n/a  
Cost of operations (exclusive of depreciation, depletion and amortization shown separately below)     (0.7 )     (0.4 )     (0.3 )     (48.1 )%
Freight and handling costs     -       -       -       n/a  
Depreciation, depletion and amortization     -       0.1       (0.1 )     (100.0 )%
Selling, general and administrative costs     4.1       2.6       1.5       54.5 %
Cost of operations per ton**     n/a       n/a       n/a       n/a  
Net (loss) from continuing operations     (5.5 )     (3.6 )     (1.9 )     (55.7 )%
Adjusted EBITDA from continuing operations     (3.4 )     (1.8 )     (1.6 )     97.0 %
Tons sold (in thousands except %)     n/a       n/a       n/a       n/a  

 

* Percentages and per ton amounts are calculated based on actual amounts and not the rounded amounts presented in this table.
   
** The Other category includes results for our ancillary businesses. The activities performed by these ancillary businesses do not directly relate to coal production. As a result, coal revenues and coal revenues per ton are not presented for the Other category. Cost of operations presented for our Other category includes costs incurred by our ancillary businesses. As a result, cost per ton measurements are not presented for this category.

 

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For the Other category, we had net loss of $5.5 million for the three months ended March 31, 2020 as compared to net loss of $3.6 million for the three months ended March 31, 2019. The increase in net loss was primarily the result of an increase to selling, general and administrative costs during the first quarter of 2020 compared to the same period in 2019.

 

Reconciliations of Adjusted EBITDA

 

The following tables present reconciliations of Adjusted EBITDA to the most directly comparable GAAP financial measures for each of the periods indicated:

 

    Central     Northern     Rhino     Illinois              
Three months ended March 31, 2020   Appalachia     Appalachia     Western     Basin     Other     Total  
    (in millions)  
Net (loss)/income from continuing operations   $ (5.6 )   $ -     $ 1.2     $ -     $ (5.5 )   $ (9.9 )
Plus:                                                
DD&A     2.4       0.5       1.0       -       -       3.9  
Interest expense     -       -       -       -       2.1       2.1  
EBITDA from continuing operations†   $ (3.2 )   $ 0.5     $ 2.2     $ -     $ (3.4 )   $ (3.9 )
Adjusted EBITDA from continuing operations     (3.2 )     0.5       2.2       -       (3.4 )     (3.9 )
Plus: Adjusted EBITDA from discontinued operations     -       -       -       (0.4 )     -       (0.4 )
Adjusted EBITDA   $ (3.2 )   $ 0.5     $ 2.2     $ (0.4 )   $ (3.4 )   $ (4.3 )

 

    Central     Northern     Rhino     Illinois              
Three months ended March 31, 2019   Appalachia     Appalachia     Western     Basin     Other     Total  
    (in millions)  
Net income/(loss) from continuing operations   $ 1.2     $ (1.1 )   $ (0.3 )   $ -     $ (3.6 )   $ (3.8 )
Plus:                                             -  
DD&A     1.9       0.4       1.1       -       0.1       3.5  
Interest expense     -       -       -       -       1.7       1.7  
EBITDA from continuing operations†   $ 3.1     $ (0.7 )   $ 0.8     $ -     $ (1.8 )   $ 1.4  
Plus: Loss from sale of non-core asset (1)     -       -       0.7       -       -       0.7  
Adjusted EBITDA from continuing operations†   $ 3.1     $ (0.7 )   $ 1.5     $ -     $ (1.8 )   $ 2.1  
Plus: Adjusted EBITDA from discontinued operations     -       -       -       (1.5 )     -       (1.5 )
Adjusted EBITDA   $ 3.1     $ (0.7 )   $ 1.5     $ (1.5 )   $ (1.8 )   $ 0.6  

 

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    For the Three Months Ended March 31,  
    2020     2019  
    (in millions)  
Net cash (used in)/provided by operating activities   $ (3.0 )   $ 0.5  
Plus:                
Interest expense     2.1       1.7  
Adjustment on impairment of assets (1)     0.3       -  
Less:                
Decrease in net operating assets     2.1       0.7  
Amortization of advance royalties     0.1       0.4  
Amortization of debt discount     -       0.1  
Amortization of debt issuance costs     0.8       0.5  
Loss on sale of assets     -       0.2  
Loss on retirement of advance royalties     -       0.1  
Accretion on asset retirement obligations     0.4       0.3  
EBITDA†     (4.0 )     (0.1 )
Plus: Loss from sale of non-core assets (2)     -       0.7  
Less: Adjustment on impairment of assets (1)     (0.3 )     -  
Adjusted EBITDA     (4.3 )     0.6  
Less: Adjusted EBITDA from discontinued operations     (0.4 )     (1.5 )
Adjusted EBITDA from continuing operations   $ (3.9 )   $ 2.1  

 

  (1)

During the three months ended March 31, 2020, we finalized the Pennyrile APA. The final adjustments included us retaining certain equipment originally included in the assets to be sold to the Buyer, which resulted in a $0.3 million favorable adjustment to the impairment loss originally recorded by us in the third quarter of 2019.

   
  (2) During the three months ended March 31, 2019, we sold parcels of land owned in western Colorado for proceeds less than our carrying value of the land that resulted in losses of approximately $0.7. This land is a non-core asset that we chose to monetize despite the loss incurred. We believe that the isolation and presentation of this specific item to arrive at Adjusted EBITDA is useful because it enhances investors’ understanding of how we assess the performance of our business. We believe the adjustment of this item provides investors with additional information that they can utilize in evaluating our performance. Additionally, we believe the isolation of this item provides investors with enhanced comparability to prior and future periods of our operating results.

 

† Calculated based on actual amounts and not the rounded amounts presented in this table.

 

Liquidity and Capital Resources

 

Liquidity

 

As of March 31, 2020, our available liquidity was $1.3 million. We also have a delayed draw term loan commitment in the amount of $22 million contingent upon the satisfaction of certain conditions precedent specified in the Financing Agreement.

 

On December 27, 2017, we entered into a Financing Agreement, which provides us with a multi-draw term loan in the original aggregate principal amount of $80 million, subject to the terms and conditions set forth in the Financing Agreement. The total principal amount was divided into a $40 million commitment, the conditions of which were satisfied at the execution of the Financing Agreement (the “Effective Date Term Loan Commitment”) and a $40 million additional commitment that was contingent upon the satisfaction of certain conditions precedent specified in the Financing Agreement (“Delayed Draw Term Loan Commitment”). As of March 31, 2020, we had utilized $18 million of the $40 million additional commitment, which results in $22 million of the additional commitment remaining. The Financing Agreement initially had a termination date of December 27, 2020, which was amended to December 27, 2022. Please read below for more information about our Financing Agreement.

 

Our business is capital intensive and requires substantial capital expenditures for purchasing, upgrading and maintaining equipment used in developing and mining our reserves, as well as complying with applicable environmental and mine safety laws and regulations. Our principal liquidity requirements are to finance current operations, fund capital expenditures, including acquisitions from time to time, and service our debt. Historically, our sources of liquidity included cash generated by our operations, cash available on our balance sheet and issuances of equity securities. Our ability to access the capital markets on economic terms in the future will be affected by general economic conditions, the domestic and global financial markets, our operational and financial performance, the value and performance of our equity securities, prevailing commodity prices and other macroeconomic factors outside of our control. Failure to maintain financing or to generate sufficient cash flow from operations could cause us to significantly reduce our spending and to alter our short- or long-term business plan.

 

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Beginning in the later part of the third quarter of 2019, we have experienced significantly weaker market demand and have seen prices move lower for the qualities of met and steam coal we produce. This downward price trend has been exacerbated by the recent coronavirus pandemic. In response to this reduced demand and to the significant health threats to our employees, on March 20, 2020, we temporarily idled production at several of our mines. We have since restarted production at the majority of our operations. We will continue to monitor conditions to ensure the health and welfare of our employees. The idling of the coal production activities did not affect our ability to fulfill current customer commitments, as loading and shipping crews remained in place to ship coal from existing inventories.

 

If we continue to experience weak demand and prices continue to lower for our met and steam coal, we may not be able to continue to give the required representations or meet all of the covenants and restrictions included in our Financing Agreement. If we violate any of the covenants or restrictions in our Financing Agreement, including the fixed-charge coverage ratio, some or all of our indebtedness may become immediately due and payable, and our Lenders may not be willing to make any loans under the additional commitment available under our Financing Agreement. If we are unable to give a required representation or we violate a covenant or restriction, then we will need a waiver from our Lenders under our Financing Agreement, or they may declare an event of default and, after applicable specified cure periods, all amounts outstanding under the Financing Agreement would become immediately due and payable. Although we believe our Lenders are well secured under the terms of our Financing Agreement, there is no assurance that the Lenders would agree to any such waiver. Failure to obtain financing or to generate sufficient cash flow from operations could cause us to further curtail our operations and reduce spending and alter our business plan. We are currently considering alternatives to address our liquidity and balance sheet issues, such as selling additional assets or seeking merger opportunities, and depending on the urgency of our liquidity constraints, we may be required to pursue such an option at an inopportune time.

 

As of March 31, 2020, we were unable to demonstrate that we have sufficient liquidity to operate our business over the next twelve months from the date of filing this Form 10-Q and thus substantial doubt is raised about our ability to continue as a going concern. Our independent registered public accounting firm included an emphasis paragraph with respect to our ability to continue as a going concern in its report on our consolidated financial statements for the year ended December 31, 2019. The presence of the going concern emphasis paragraph in our auditors’ report may have an adverse impact on our relationship with third parties with whom we do business, including our customers, vendors, lenders and employees, making it difficult to raise additional financing to the extent needed to conduct normal operations. As a result, our business, results of operations, financial condition and prospects could be materially adversely affected.

 

We evaluated our Financing Agreement at March 31, 2020 to determine whether the debt liability should be classified as a long-term or current liability on our unaudited condensed consolidated statements of financial position. We determined that we were in violation of certain debt covenants in the Financing Agreement as of March 31, 2020 and the Lenders were unwilling to grant a waiver to us for these events of default as of the filing date of this Form 10-Q. The Financing Agreement contains negative covenants that restrict our ability to, among other things, permit the trailing nine month fixed charge coverage ratio of us and our subsidiaries to be less than 1.20 to 1.00. The Financing Agreement also requires us to receive an annual unqualified audit opinion from our external audit firm that does not include an emphasis paragraph on our ability to continue as a going concern. As of March 31, 2020, our fixed charge coverage ratio was less than 1.20 to 1.00 and our annual report on Form 10-K for 2019 includes an audit opinion from our external auditors that includes an emphasis paragraph regarding our ability to continue as a going concern. Based upon these covenant violations, our debt liability is currently callable by the Lenders and the debt liability is classified as current.

 

Debt issuance costs related to the debt liability have also been classified as current. However, since we are currently in negotiations with our Lenders, we have not changed the amortization period of these costs. Included in debt costs are the exit fees described below, which absent a waiver, are also callable with the accompanying debt as of March 31, 2020.

 

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We continue to take measures, including the suspension of cash distributions on our common and subordinated units and taking steps to improve productivity and control costs, to enhance and preserve our liquidity so that we can fund our ongoing operations and necessary capital expenditures and meet our financial commitments and debt service obligations.

 

Cash Flows

 

Net cash used in operating activities was $3.0 million for the three months ended March 31, 2020 as compared to net cash provided by operating activities of $0.5 million for the three months ended March 31, 2019. This decrease in cash provided by operating activities was the result of a higher net loss during the three months ended March 31, 2020.

 

Net cash provided by investing activities was $4.2 million for the three months ended March 31, 2020 as compared to net cash provided by investing activities of $1.7 million for the three months ended March 31, 2019. The increase in cash provided by investing activities was primarily due to an increase in proceeds from the sale of assets during the three months ended March 31, 2020 compared to the same period in 2019.

 

Net cash provided by financing activities was $0.4 million for the three months ended March 31, 2020 and net cash used in financing activities was $4.2 million for the three months ended March 31, 2019. Net cash provided by financing activities for the three months ended March 31, 2020 was primarily attributable to proceeds from our Financing Agreement. Net cash used in financing activities for the three months ended March 31, 2019 was primarily attributable to repayments on our Financing Agreement and by the payment of the distribution on the Series A preferred units.

 

Capital Expenditures

 

Our mining operations require investments to expand, upgrade or enhance existing operations and to meet environmental and safety regulations. Maintenance capital expenditures are those capital expenditures required to maintain our long-term operating capacity. For example, maintenance capital expenditures include expenditures associated with the replacement of equipment and coal reserves, whether through the expansion of an existing mine or the acquisition or development of new reserves, to the extent such expenditures are made to maintain our long-term operating capacity. Expansion capital expenditures are those capital expenditures that we expect will increase our operating capacity over the long term. Examples of expansion capital expenditures include the acquisition of reserves, acquisition of equipment for a new mine or the expansion of an existing mine to the extent such expenditures are expected to expand our long-term operating capacity.

 

Actual maintenance capital expenditures for the three months ended March 31, 2020 were approximately $0.9 million. This amount was primarily used to rebuild, repair or replace older mining equipment. Expansion capital expenditures for the three months ended March 31, 2020 were approximately $0.7 million, which were primarily related to development costs at our Blackjewel mine.

 

Series A Preferred Unit Purchase Agreement

 

On December 30, 2016, we entered into a Series A Preferred Unit Purchase Agreement (“Preferred Unit Agreement”) with Weston Energy LLC (“Weston”) and Royal. Under the Preferred Unit Agreement, Weston and Royal agreed to purchase 1,300,000 and 200,000, respectively, of Series A preferred units representing limited partner interests in us at a price of $10.00 per Series A preferred unit. The Series A preferred units have the preferences, rights and obligations set forth in our Fourth Amended and Restated Agreement of Limited Partnership, which is described below. In exchange for the Series A preferred units, Weston and Royal paid cash of $11.0 million and $2.0 million, respectively, to us and Weston assigned to us a $2.0 million note receivable from Royal originally dated September 30, 2016. Through a series of transactions, Weston now owns all of the Series A preferred units.

 

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Fourth Amended and Restated Partnership Agreement of Limited Partnership

 

On December 30, 2016, our general partner entered into the Fourth Amended and Restated Agreement of Limited Partnership of the Partnership (“Amended and Restated Partnership Agreement”) to create, authorize and issue the Series A preferred units.

 

The holders of the Series A preferred units are entitled to receive annual distributions equal to the greater of (i) 50% of the CAM Mining free cash flow (as defined below) and (ii) an amount equal to the number of outstanding Series A preferred units multiplied by $0.80. “CAM Mining free cash flow” is defined in our partnership agreement as (i) the total revenue of our Central Appalachia business segment, minus (ii) the cost of operations (exclusive of depreciation, depletion and amortization) for our Central Appalachia business segment, minus (iii) an amount equal to $6.50, multiplied by the aggregate number of met coal and steam coal tons sold by us from our Central Appalachia business segment. If we fail to pay any or all of the distributions in respect of the Series A preferred units, such deficiency will accrue until paid in full and we will not be permitted to pay any distributions on our partnership interests that rank junior to the Series A preferred units, including our common units.

 

We will have the option to convert the outstanding Series A preferred units at any time on or after the time at which the amount of aggregate distributions paid in respect of each Series A preferred unit exceeds $10.00 per unit. Each Series A preferred unit will convert into a number of common units equal to the quotient (the “Series A Conversion Ratio”) of (i) the sum of $10.00 and any unpaid distributions in respect of such Series A Preferred Unit divided by (ii) 75% of the volume-weighted average closing price of the common units for the preceding 90 trading days (the “VWAP”); provided however, that the VWAP will be capped at a minimum of $2.00 and a maximum of $10.00. On December 31, 2021, all outstanding Series A preferred units will convert into common units at the then applicable Series A Conversion Ratio.

 

During the first quarter of 2019, we paid $3.2 million to the holders of Series A preferred units for distributions earned for the year ended December 31, 2018. We have accrued $1.2 million for distributions to holders of the Series A preferred units for the year ended December 31, 2019 and $0.3 million for the three months ended March 31, 2020.

 

Financing Agreement

 

On December 27, 2017, we entered into a Financing Agreement, which provides us with a multi-draw term loan in the original aggregate principal amount of $80 million, subject to the terms and conditions set forth in the Financing Agreement. The total principal amount was divided into a $40 million commitment, the conditions of which were satisfied at the execution of the Financing Agreement and a $40 million additional commitment that was contingent upon the satisfaction of certain conditions precedent specified in the Financing Agreement. As of March 31, 2020, we had utilized $18 million of the $40 million additional commitment, which results in $22 million of the additional commitment remaining. The Financing Agreement contains negative covenants that restrict our ability to, among other things: (i) incur liens or additional indebtedness or make investments or restricted payments, (ii) liquidate or merge with another entity, or dispose of assets, (iii) change the nature of their respective businesses; (iv) make capital expenditures in excess, or, with respect to maintenance capital expenditures, lower than, specified amounts, (v) incur restrictions on the payment of dividends, (vi) prepay or modify the terms of other indebtedness, (vii) permit the Collateral Coverage Amount to be less than the outstanding principal amount of the loans outstanding under the Financing Agreement or (viii) permit the trailing nine month Fixed Charge Coverage Ratio of the Partnership and its subsidiaries to be less than 1.20 to 1.00.

 

The Lenders are entitled to certain fees, including: (i) 1.50% per annum of the unused Delayed Draw Term Loan Commitment for as long as such commitment exists, (ii) for the 12-month period following the execution of the Financing Agreement, a make-whole amount (“Make-Whole Amount”) equal to the interest and unused Delayed Draw Term Loan Commitment fees that would have been payable but for the occurrence of certain events, including among others, bankruptcy proceedings or the termination of the Financing Agreement by the Partnership, and (iii) audit and collateral monitoring fees and origination and exit fees. Commencing December 31, 2018, the principal for each loan made under the Financing Agreement is payable on a quarterly basis in an amount equal to $375,000 per quarter. All remaining unpaid principal and accrued and unpaid interest is due on the loan termination date. The Financing Agreement originally had a termination date of December 27, 2020, which was amended to December 27, 2022. Loans made pursuant to the Financing Agreement are secured by substantially all of our assets.

 

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We entered into various amendments and consents to the Financing Agreement during 2018 and 2019, which (a) increased the original lender exit fee (“Exit Fee”) of 3.0% to 7.0% as of December 31, 2019. The Exit Fee is applied to the principal amount of the loans made under the Financing Agreement that is payable on the earliest of (i) the final maturity date of the Financing Agreement, (ii) the termination date of the Financing Agreement, (iii) the acceleration of the obligations under the Financing Agreement for any reason, including, without limitation, acceleration in accordance with Section 9.01 of the Financing Agreement, including as a result of the commencement of an insolvency proceeding and (iv) the date of any refinancing of the term loan under the Financing Agreement, (b) modified certain definitions and concepts to account for our 2019 acquisition of properties from Blackjewel, (c) permitted the 2019 disposition of the Pennyrile mining complex, (d) required us to pay a $1.0 million consent fee related to the Pennyrile sale (paid March 2020), (e) allowed us to sell certain real property in Western Colorado and adjusted the timing for remittance to the Lender of the sale proceeds, (f) provided $15.0 million in additional terms loans under the Delayed Draw Term Loan Commitment feature of the Financing Agreement, (g) revised the definition of the Make-Whole Amount under the Financing Agreement to extend the date of the Make-Whole Amount period to December 31, 2021 and (h) extended the termination date of the Financing Agreement to December 27, 2022.

 

On March 3, 2020, we entered into the Sixth Amendment to the Financing Agreement, which among other things, provided us with a $3.0 million term loan under the Delayed Draw Term Loan Commitment feature of the Financing Agreement and increased the Exit Fee payable to the Lenders upon the maturity date (or earlier termination or acceleration date) by 1.0% to a total of 8.0%.

 

The following table presents the loan balances and applicable interest rates for each term loan made under the Financing Agreement as of March 31, 2020:

 

Loan Date   Loan Balance     Interest rate*  
      (in millions)          
12/27/2017   $ 27.2       10.99 %
8/16/2019   $ 5.0       11.20 %
9/16/2019   $ 5.0       10.86 %
3/3/2020   $ 3.0       11.52 %
                 
* Variable interest rate of Libor plus 10.0%  

 

Off-Balance Sheet Arrangements

 

In the normal course of business, we are a party to off-balance sheet arrangements that include guarantees and financial instruments with off-balance sheet risk, such as bank letters of credit and surety bonds. No liabilities related to these arrangements are reflected in our unaudited condensed consolidated balance sheet, and we do not expect any material adverse effects on our financial condition, results of operations or cash flows to result from these off-balance sheet arrangements.

 

Federal and state laws require us to secure certain long-term obligations related to mine closure and reclamation costs. We typically secure these obligations by using surety bonds, an off-balance sheet instrument. The use of surety bonds is less expensive for us than the alternative of posting a 100% cash bond or a bank letter of credit. We then provide cash collateral to secure our surety bonding obligations in an amount up to a certain percentage of the aggregate bond liability that we negotiate with the surety companies. To the extent that surety bonds become unavailable, we would seek to secure our reclamation obligations with letters of credit, cash deposits or other suitable forms of collateral.

 

As of March 31, 2020, we had $7.9 million in cash collateral held by third-parties of which $3.0 million serves as collateral for approximately $41.3 million in surety bonds outstanding that secure the performance of our reclamation obligations. The other $4.9 million serves as collateral for our self-insured workers’ compensation program. Of the $41.3 million in surety bonds, approximately $0.4 million relates to surety bonds for Deane Mining, LLC, which have not been transferred or replaced by the buyer of Deane Mining LLC as was agreed to by the parties as part of the transaction. We can provide no assurances that a surety company will underwrite the surety bonds of the purchaser of Deane Mining LLC, nor are we aware of the actual amount of reclamation at any given time. Further, if there was a claim under these surety bonds prior to the transfer or replacement of such bonds by the buyer of Deane Mining, LLC, we may be responsible to the surety company for any amounts it pays in respect of such claim. While the buyer is required to indemnify us for damages, including reclamation liabilities, pursuant to the agreements governing the sales of this entity, we may not be successful in obtaining any indemnity or any amounts received may be inadequate.

 

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Certain surety bonds for Sands Hill Mining LLC had not been transferred or replaced by the buyer of Sands Hill Mining LLC as was agreed to when we sold Sands Hill Mining LLC to the buyer in November 2017. On July 9, 2019, we entered into an agreement with a third party for the replacement of our existing surety bond obligations with respect to Sands Hill Mining LLC. We agreed to pay the third party $2.0 million to assume our surety bond obligations related to Sands Hill Mining LLC. At the time of closing, the third party delivered to us confirmation from its surety underwriter evidencing the release and removal of us, our affiliates and guarantors, from the surety bond obligations and all related obligations under our bonding agreements related to Sands Hill Mining LLC, which includes a release of all applicable collateral for the surety bond obligations. Further, such confirmation from the surety underwriter was specifically provided for their acceptance of the third party as a replacement obligor.

 

We had no letters of credit outstanding as of March 31, 2020.

 

Critical Accounting Policies and Estimates

 

Our financial statements are prepared in accordance with accounting principles that are generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses as well as the disclosure of contingent assets and liabilities. Management evaluates its estimates and judgments on an on-going basis. Management bases its estimates and judgments on historical experience and other factors that are believed to be reasonable under the circumstances. Nevertheless, actual results may differ from the estimates used and judgments made.

 

The accounting policies and estimates that we have adopted and followed in the preparation of our consolidated financial statements are fully described in our Annual Report on Form 10-K for the year ended December 31, 2019. We adopted ASU 2016-02- Leases (Topic 842) and all related clarification standards on January 1, 2019 using the transition method to apply the standard prospectively. The standard had a material impact on our unaudited condensed consolidated statements of financial position, but did not have an impact on our unaudited condensed consolidated statements of operations. Please refer to Note 7 of the notes to the unaudited condensed consolidated financial statements for further discussion of the standard and the related disclosures. There have been no other significant changes in these policies and estimates as of March 31, 2020

 

Recent Accounting Pronouncements

 

Refer to Part-I— Item 1. Financial Statements, Note 2 of the notes to the unaudited condensed consolidated financial statements for a discussion of recent accounting pronouncements. There are no known future impacts or material changes or trends of new accounting guidance beyond the disclosures provided in Note 2.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures. As required by Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), we have evaluated, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Form 10-Q. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed by us in reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Based upon the evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective as of March 31, 2020 at the reasonable assurance level.

 

Changes in Internal Control over Financial Reporting. There was no change in our internal control over financial reporting that occurred during the quarter ended March 31, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II—Other Information

 

Item 1. Legal Proceedings.

 

We may, from time to time, be involved in various legal proceedings and claims arising out of our operations in the normal course of business. While many of these matters involve inherent uncertainty, we do not believe that we are a party to any legal proceedings or claims that will have a material adverse impact on our business, financial condition or results of operations.

 

Yorktown and Weston Litigation

 

On May 3, 2019, we (the “Plaintiffs”) filed a complaint in the Court of Chancery in the State of Delaware against Rhino Resource Partners Holdings LLC (“Holdings”), Weston Energy LLC (“Weston”), Yorktown Partners LLC and certain Yorktown funds (collectively, the “Yorktown entities”), as well as Mr. Ronald Phillips, Mr. Bryan H. Lawrence and Mr. Bryan R. Lawrence (the “Yorktown Litigation”).

 

The complaint alleges that Holdings violated certain representations and negative covenants under an option agreement, dated December 30, 2016 among Holdings, the Plaintiffs, and Weston (the “Option Agreement”), as a result of Holdings’ entry into a Restructuring Support Agreement with Armstrong Energy, Inc. (“Armstrong”), its creditors and certain other parties, which agreement was entered into in advance of Armstrong’s filing for bankruptcy relief under Chapter 11 of the United States Code in November 2017. The complaint further alleges that (i) Mr. Phillips violated fiduciary and contractual duties owed to the Plaintiffs and solicited, accepted and agreed to accept certain benefits from Holdings, Weston, the Yorktown entities and Messrs. Lawrence and Lawrence without the Plaintiff’s knowledge or consent and during a period in which Mr. Phillips was the President of Royal and a director on the Partnership’s board and (ii) Holdings, Weston, the Yorktown entities and Messrs. Lawrence and Lawrence aided and abetted Mr. Phillips’ breaches of his fiduciary duties, tortuously interfered with the observance of Mr. Phillips’ duties under the respective organizational agreements and conferred, offered to confer and agreed to confer benefits on Mr. Phillips without the Plaintiff’s knowledge or consent.

 

The Plaintiffs are seeking (i) the rescission of the Option Agreement, (ii) the return of all consideration thereunder, including 5,000,000 of our common units representing limited partner interests (iii) the cancellation of the Series A Preferred Purchase Agreement, dated December 30, 2016, among the Plaintiffs and Weston (the “Series A Preferred Purchase Agreement”), (iv) the invalidation of the Series A preferred units representing limited partner interests in us issued to Weston pursuant to the Series A Preferred Purchase Agreement and (v) unspecified monetary damages arising from Mr. Phillips’ breaches of fiduciary duties and the other defendants’ aiding and abetting of such breaches.

 

The Yorktown entities filed an answer to the lawsuit on May 31, 2019, followed by a Motion for Judgment on the Pleadings and Motion to Dismiss. A hearing was scheduled to be held on the Motion for Judgment on the Pleadings on April 7, 2020. Due to the COVID-19 pandemic situation, the hearing was postponed and will be scheduled for a later date that has yet to be determined.

 

On November 7, 2019, Weston filed a claim in the Court of Chancery of the State of Delaware against us. Weston holds 1,500,000 Series a preferred units representing limited partner interests in us (“Series a Preferred Units”). The claims allege that we breached certain representations, covenants and rights contained in our Fourth Amended and Restated Limited Partnership Agreement and the purchase agreement relating to the sale of the Series A Preferred Units to Weston, as a result of us (i) effecting the previously reported $7 million settlement with a third party in June 2019, which allowed the third party to maintain certain pipelines pursuant to designated permits at our Central Appalachia operations, without Weston’s consent, and (ii) refusing to distribute what Weston, as a holder of Series A Preferred Units, claims is its pro rata share of such settlement. We believe these claims are without merit and intend to vigorously defend against them.

 

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Item 1A. Risk Factors.

 

In addition to the other information set forth in this Report, you should carefully consider the risks under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019, which risks could materially affect our business, financial condition or future results. Except as stated below, there has been no material change in our risk factors from those described in the Annual Report on Form 10-K for the year ended December 31, 2019. These risks are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or results of operations.

 

Our results of operations will be negatively impacted by the coronavirus pandemic.

 

To date, the current and anticipated economic impact of the COVID-19 pandemic, including the actions of governments and countries here in the United States and around the world designed to decrease the spread of the virus, have caused significant declines in demand for met and steam coal. In response to this reduced demand and to the significant health threats to our employees, on March 20, 2020, we temporarily idled production at several of our mines. We will continue to monitor conditions to ensure the health and welfare of our employees. We do not expect the idling of the coal production activities will affect our ability to fulfill current customer commitments, as loading and shipping crews will remain in place to ship coal from existing inventories.

 

If the impact of the COVID-19 pandemic, including the significant decrease in economic activity, continue for an extended period of time or worsen, it could further reduce the demand for met and steam coal, which would have a material adverse effect on our business, financial condition, cash flows and results of operations.

 

In addition, while our business operations have not been significantly restricted by the response to the COVID-19 pandemic from various governmental agencies, which exempt or exclude essential critical infrastructure businesses from various restrictions they impose (other than encouraging remote work where possible), the spread of COVID-19 has caused us to modify our business practices (including requiring remote working where possible, restricting employee travel and congregation of onsite personnel, and increased frequency of cleaning schedules), and we may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers or other stakeholders or the communities in which we operate. Such measures may disrupt our normal operations, and there is no certainty that such measures will be sufficient to mitigate the risks posed by COVID-19 or will not adversely impact our business or results of operations.

 

As a result of prolonged adverse conditions in the coal industry and our business, we are currently evaluating several strategic options to enhance our ability to generate liquidity and service our debt, as well as meet our financial covenants under the Financing Agreement on an ongoing basis. To the extent these options are not successful, we may pursue a court-supervised reorganization under Chapter 11.

 

The Partnership is currently exploring alternatives for other sources of capital for ongoing liquidity needs and transactions to enhance its ability to comply with its financial covenants, and is working to improve its operating performance and its cash, liquidity and financial position. This includes pursuing the sale of non-strategic surplus assets, continuing to drive cost improvements across the company, continuing to negotiate alternative payment terms with creditors, and obtaining waivers of going concern and financial covenant violations under our Financing Agreement. To the extent that these options are not successful or adequate to address our liquidity needs or our ability to meet our Financing Agreement covenants on an ongoing basis, we may pursue a court-supervised reorganization under Chapter 11.

 

A bankruptcy proceeding could have a material adverse effect on our business, financial condition, results of operations and liquidity. It is impossible for us to predict with certainty the amount of time needed to complete a potential Chapter 11 proceeding. For as long as a Chapter 11 proceeding were to continue, our senior management would be required to spend a significant amount of time and effort dealing with the reorganization as well as focusing on our business operations. A Chapter 11 proceeding may involve significant additional professional fees and expenses and create additional liquidity needs for our business. A bankruptcy proceeding also could make it more difficult to retain management and other key personnel necessary to the success of our business. In addition, while we are in a bankruptcy proceeding, our customers and suppliers may lose confidence in our ability to reorganize our business successfully and could seek to establish other commercial relationships, particularly if the process is prolonged.

 

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

None.

 

Item 3. Defaults upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosure.

 

Information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K for the three months ended March 31, 2020 is included as Exhibit 95.1 to this report.

 

Item 5. Other Information.

 

None.

 

Item 6. Exhibits.

 

Exhibit Number   Description
     
3.1   Certificate of Limited Partnership of Rhino Resource Partners LP, incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S-1 (File No. 333-166550) filed on May 5, 2010
     
3.2   Fourth Amended and Restated Agreement of Limited Partnership of Rhino Resource Partners LP, dated as of December 30, 2016, incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K (File No. 001-34892) filed on January 6, 2017
     
3.3   Amendment No. 1 to the Fourth Amended and Restated Agreement of Limited Partnership of Rhino Resource Partners LP, dated January 25, 2018, incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K (File No. 001-34892) filed on January 25, 2018
     
4.1   Registration Rights Agreement, dated as of March 21, 2016, by and between Rhino Resource Partners LP and Royal Energy Resources, Inc., incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K (File No. 001-34892) filed on March 23, 2016
     
4.2*   Form of Common Unit Warrant.
     
10.1   Sixth Amendment to Financing Agreement dated as of March 2, 2020, by and among Rhino Resource Partners LP, as Parent, Rhino Energy LLC and each subsidiary of Rhino Energy listed as a borrower on the signature pages thereto, as Borrowers, Parent and each subsidiary of Parent listed as a guarantor on the signature pages thereto, as Guarantors, the lenders from time to time party thereto, as Lenders, Cortland Capital Market Services LLC, as Collateral Agent and Administrative Agent and CB Agent Services LLC, as Origination Agent, incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K (File No. 001-34892) filed on March 6, 2020.
     
10.2   Promissory Note dated April 22, 2020, by and between Rhino Energy LLC and Blue Ridge Bank, NA, incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K (File No. 001-34892) filed on April 28, 2020.
     
31.1*   Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 7241)
     
31.2*   Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 7241)
     
32.1*   Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)
     
32.2*   Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)
     
95.1*   Mine Health and Safety Disclosure pursuant to §1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act for the three months ended March 31, 2019
     
101.INS*   XBRL Instance Document
     
101.SCH*   XBRL Taxonomy Extension Schema Document
     
101.CAL*   XBRL Taxonomy Extension Calculation Linkbase Document
     
101.DEF*   XBRL Taxonomy Definition Linkbase Document
     
101.LAB*   XBRL Taxonomy Extension Label Linkbase Document
     
101.PRE*   XBRL Taxonomy Extension Presentation Linkbase Document

 

The exhibits marked with the asterisk symbol (*) are filed or furnished (in the case of Exhibits 32.1 and 32.2) with this Form 10-Q.

 

** Schedules and similar attachments have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The Partnership will provide a copy of any omitted schedule or similar attachments to the Securities and Exchange Commission upon request.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  RHINO RESOURCE PARTNERS LP
     
  By: Rhino GP LLC, its General Partner
     
Date: May 22, 2020 By: /s/ Richard A. Boone
    Richard A. Boone
    President, Chief Executive Officer and Director
    (Principal Executive Officer)
     
Date: May 22, 2020 By: /s/ W. Scott Morris
    W. Scott Morris
    Senior Vice President and Chief Financial Officer
    (Principal Financial Officer)

 

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