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 Royal Energy Resources, Inc., Rhino GP LLC, Rhino Resource Partners LP and its subsidiaries, in total.
References to “Rhino” or “the Partnership” refer to Rhino Resource Partners, LP. References to “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 the historical audited consolidated financial
statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2017 and the section
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in such Annual
Report on Form 10-K.
On
November 7, 2017, we closed an agreement with a third party to transfer 100% of the membership interests and related assets and
liabilities in our Sands Hill Mining entity to the third party in exchange for a future override royalty for any mineral sold,
excluding coal, from Sands Hill Mining after the closing date. Our unaudited consolidated statement of operations and comprehensive
income (loss) have been retrospectively adjusted to reclassify our Sands Hill Mining operation to discontinued operations for
the three and nine months ended September 30, 2017.
Overview
Current
management acquired control of Royal in March 2015, with the goal of using Royal as a vehicle to acquire undervalued natural resource
assets. Royal has raised approximately $8.5 million through the sale of shares of common stock in private placements, $6.4 million
through issuance of notes payable and is currently evaluating a number of possible acquisitions of operating coal mines and non-operating
coal assets. Despite recent distress in the coal industry, industry experts still predict that coal will supply a significant
percentage of the nation’s energy needs for the foreseeable future, and thus overall demand for coal will remain significant.
Also, demand for metallurgical coal has improved and metallurgical coal prices seem likely to stay in a range that will allow
lower cost North American coal mines to produce profitably. Management believes there are a number of attractive acquisition candidates
in the coal industry which can be operated profitably at current prices and under the current regulatory environment.
Overview
after Rhino Acquisition
Through
a series of transactions completed in the first quarter of 2016, the Company acquired a majority ownership and control of Rhino
and 100% ownership of its General Partner.
We
are a diversified coal producing company 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. Our investments
have included joint ventures that provide for the transportation of hydrocarbons and drilling support services in the Utica Shale
region. We have also invested in joint ventures that provide sand for fracking operations to drillers in the Utica Shale region
and other oil and natural gas basins in the United States.
As
of December 31, 2017, we controlled an estimated 252.7 million tons of proven and probable coal reserves, consisting of an estimated
200.1 million tons of steam coal and an estimated 52.6 million tons of metallurgical coal. In addition, as of December 31, 2017,
we controlled an estimated 185.2 million tons of non-reserve coal deposits.
Our
principal business strategy is to safely, efficiently and profitably produce and sell both steam and metallurgical coal from our
diverse asset base. In addition, we continue to seek opportunities 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 and enhance the stability of our cash flow.
For
the three and nine months ended September 30, 2018, we generated revenues of approximately $73.1 million and $182.8 million, respectively,
and we generated net losses of $4.3 million and $15.3 million for the three and nine months ended September 30, 2018. For the
three months ended September 30, 2018, we produced and sold approximately 1.1 million tons of coal, of which approximately 60%
were sold pursuant to supply contracts. For the nine months ended September 30, 2018, we produced and sold approximately 3.3 million
tons of coal, of which approximately 65% were sold pursuant to supply contracts.
Current
Liquidity and Outlook
As
of September 30, 2018, our available liquidity was $6.2 million. We also have a delayed draw term loan commitment in the amount
of $40 million (under which we have drawn approximately $5 million) contingent upon the satisfaction of certain conditions precedent
specified in the Financing Agreement discussed below.
On
December 27, 2017, we entered into a financing agreement (“Financing Agreement”), which provides us with a multi-draw
loan in the 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 an additional $40 million commitment that
is contingent upon the satisfaction of certain conditions precedent specified in the Financing Agreement. We used approximately
$17.3 million of the net proceeds thereof to repay all amounts outstanding and terminate the Amended and Restated Credit Agreement
with PNC Bank, National Association, as Administrative Agent. The Financing Agreement terminates on December 27, 2020. For more
information about our new Financing Agreement, please read “— Liquidity and Capital Resources—Financing Agreement.”
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.
Recent
Developments - Rhino
Financing
Agreement
On
December 27, 2017, we entered into a 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 Lenders agreed to provide us with a multi-draw term loan in the aggregate principal amount of $80 million, subject
to the terms and conditions set forth in the Financing Agreement. The total principal amount is divided into a $40 million commitment,
the conditions for which were satisfied at the execution of the Financing Agreement (the “Effective Date Term Loan Commitment”)
and an additional $40 million commitment that is contingent upon the satisfaction of certain conditions precedent specified in
the Financing Agreement (“Delayed Draw Term Loan Commitment”). Loans made pursuant to the Financing Agreement are
secured by substantially all of our assets. The Financing Agreement terminates on December 27, 2020. For more information about
our new Financing Agreement, please read “— Liquidity and Capital Resources—Financing Agreement.”
On
April 17, 2018, we amended the Financing Agreement to allow for certain activities including a sale leaseback of certain pieces
of equipment, the due date for the lease consents was extended to June 30, 2018 and confirmation of the distribution to holders
of the Series A preferred units of $6.0 million (accrued in our consolidated financial statements at December 31, 2017). Additionally,
the amendments provide that we could sell additional shares of Mammoth Inc. stock and retain 50% of the proceeds with the other
50% used to reduce debt. We reduced the debt by $3.4 million with proceeds from the sale of Mammoth Inc. stock in the second quarter
of 2018.
On
July 27, 2018, we entered into a consent with our Lenders related to the Financing Agreement. The consent included the lenders
agreement to make a $5 million loan from the Delayed Draw Term Loan Commitment, which was repaid in full by October 26, 2018 pursuant
to the terms of the consent. The consent also included a waiver of the requirements relating to the use of proceeds of any sale
of the shares of Mammoth Inc. set forth in the consent to the Financing Agreement, dated as of April 17, 2018 and also waived
any Event of Default that arose or would otherwise arise under the Financing Agreement for failing to comply with the Fixed Charge
Coverage Ratio for the six months ended June 30, 2018.
On
November 8, 2018, we entered into a consent with its Lenders related to the Financing Agreement. The consent includes the lenders
agreement to waive any Event of Default that arose or would otherwise arise under the Financing Agreement for failing to comply
with the Fixed Charge Coverage Ratio for the six months ended September 30, 2018.
Common
Unit Warrants
In
December 2017, Rhino 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 of Rhino common units (“Common Unit Warrants”)
at an exercise price of $1.95 per unit, which was the closing price of the 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 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 Rhino’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.
Letter
of Credit Facility – PNC Bank
On
December 27, 2017, we entered into a master letter of credit facility, security agreement and reimbursement agreement (the “LoC
Facility Agreement”) with PNC Bank, National Association (“PNC”), pursuant to which PNC agreed to provide us
with a facility for the issuance of standby letters of credit used in the ordinary course of our business (the “LoC Facility”).
The LoC Facility Agreement provided that we pay a quarterly fee at a rate equal to 5% per annum calculated based on the daily
average of letters of credit outstanding under the LoC Facility, as well as administrative costs incurred by PNC and a $100,000
closing fee. The LoC Facility Agreement provided that we reimburse PNC for any drawing under a letter of credit by a specified
beneficiary as soon as possible after payment was made. Our obligations under the LoC Facility Agreement were secured by a first
lien security interest on a cash collateral account that was required to contain no less than 105% of the face value of the outstanding
letters of credit. In the event the amount in such cash collateral account was insufficient to satisfy our reimbursement obligations,
the amount outstanding would bear interest at a rate per annum equal to the Base Rate (as that term was defined in the LoC Facility
Agreement) plus 2.0%. We would indemnify PNC for any losses which PNC may have incurred as a result of the issuance of a letter
of credit or PNC’s failure to honor any drawing under a letter of credit, subject in each case to certain exceptions. We
provided cash collateral to our counterparties during the third quarter of 2018 and as of September 30, 2018, the LoC Facility
was terminated. We had no outstanding letters of credit as of September 30, 2018.
Recent
Developments - Royal
Cedarview
Loan
On
June 12, 2017, we entered into a Secured Promissory Note dated May 31, 2017 with Cedarview Opportunities Master Fund, L.P. (“Cedarview”),
under which we borrowed $2.5 million from Cedarview. The loan bears non-default interest at the rate of 14%, and default interest
at the rate of 17% per annum. We and Cedarview simultaneously entered into a Pledge and Security Agreement dated May 31, 2017,
under which we pledged 5.0 million common units in Rhino as collateral for the loan. The loan is payable through quarterly payments
of interest only until May 31, 2019, when the loan matures, at which time all principal and interest is due and payable. We deposited
$350,000 of the loan proceeds into an escrow account, from which interest payments for the first year will be paid. After the
first year, we are obligated to maintain at least one quarter of interest on the loan in the escrow account at all times. In consideration
for Cedarview’s agreement to make the loan, we transferred 25,000 common units of Rhino to Cedarview as a fee. We intended
to use the proceeds to repay in full all loans made to us by E-Starts Money Co. in the principal amount of $578,593, and the balance
for general corporate overhead, as well as costs associated with potential acquisitions of mineral resource companies, including
legal and engineering due diligence, deposits, and down payments, although to date the Company has not used the proceeds to repay
the loans from E-Starts Money Co. Through September 30, 2018, the funds have been used for general corporate overhead and due
diligence costs for potential acquisitions.
Due
to the Cedarview note coming due in May 2019, we may need to raise capital by selling shares of Royal common stock, selling assets
or transferring shares of pledged Rhino units to satisfy the debt.
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.
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 September 30, 2018, we had commitments under supply contracts to deliver
annually scheduled base quantities of coal as follows:
|
Year
|
|
Tons
(in thousands)
|
|
Number
of customers
|
|
2018 Q4
|
|
1,283
|
|
14
|
|
2019
|
|
2,107
|
|
10
|
|
2020
|
|
1,446
|
|
6
|
Some
of the contracts have sales price adjustment provisions, subject to certain limitations and adjustments, based on a variety of
factors and indices.
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 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 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) 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.
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.
Three
Months Ended September 30, 2018 Compared to Three Months Ended September 30, 2017
Revenues.
The following table presents revenues and coal revenues per ton for the three months ended September 30
,
2018 and
2017:
|
|
|
Three months
|
|
|
Three months
|
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
ended
|
|
|
Increase/(Decrease)
|
|
|
|
|
September
30, 2018
|
|
|
September
30, 2017
|
|
|
$
|
|
|
%*
|
|
|
|
|
(in millions, except
per ton data and %)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Coal revenues
|
|
$
|
71.9
|
|
|
$
|
56.3
|
|
|
$
|
15.6
|
|
|
|
28
|
%
|
|
Other revenues
|
|
|
1.3
|
|
|
|
0.4
|
|
|
|
0.9
|
|
|
|
225
|
%
|
|
Total revenues
|
|
$
|
73.1
|
|
|
$
|
56.7
|
|
|
$
|
16.5
|
|
|
|
25
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tons sold
|
|
|
1,255.2
|
|
|
|
1,044.8
|
|
|
|
201.4
|
|
|
|
19
|
%
|
|
Coal revenues per ton*
|
|
$
|
57.25
|
|
|
$
|
53.86
|
|
|
$
|
3.39
|
|
|
|
6
|
%
|
|
*
|
Percentages
and per ton amounts are calculated based on actual amounts and not the rounded amounts presented in this table.
|
Revenues.
Our coal revenues for the three months ended September 30, 2018 increased approximately $15.6 million. Met and steam coal
tons sold saw increased demand for coal during the 2018 period. This increase was primarily due to the increase in demand for
steam and met coal tons sold from our Central Appalachia operations. Coal revenues per ton was $57.25 for the three months ended
September 30, 2018, an increase of $3.39, or 6%, from $53.86 per ton for the three months ended September 30, 2017. This increase
in coal revenues per ton was primarily the result of higher contracted sales prices in place in 2018 at certain operations compared
to the same period in 2017.
Costs
and Expenses.
The following table presents costs and expenses (including the cost of purchased coal) and cost of operations
per ton for the three months ended September 30, 2018 and 2017:
|
|
|
Three months
|
|
|
Three months
|
|
|
|
|
|
|
|
|
|
|
ended
|
|
|
ended
|
|
|
Increase/(Decrease)
|
|
|
|
|
September
30, 2018
|
|
|
September
30, 2017
|
|
|
$
|
|
|
%*
|
|
|
|
|
(in millions, except
per ton data and %)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of operations (exclusive
of depreciation, depletion and amortization shown separately below)
|
|
$
|
60.5
|
|
|
$
|
44.7
|
|
|
$
|
15.8
|
|
|
|
35
|
%
|
|
Freight and handling costs
|
|
|
5.8
|
|
|
|
1.2
|
|
|
|
4.6
|
|
|
|
383
|
%
|
|
Depreciation, depletion and amortization
|
|
|
8.0
|
|
|
|
6.6
|
|
|
|
1.4
|
|
|
|
21
|
%
|
|
Selling, general and administrative
|
|
|
3.1
|
|
|
|
3.1
|
|
|
|
-
|
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tons sold
|
|
|
1,255.2
|
|
|
|
1,044.8
|
|
|
|
210.4
|
|
|
|
20
|
%
|
|
Cost of operations per ton*
|
|
$
|
48.20
|
|
|
$
|
42.38
|
|
|
$
|
5.82
|
|
|
|
14
|
%
|
|
*
|
Percentages and per ton amounts are
calculated based on actual amounts and not the rounded amounts presented in this table.
|
Cost
of Operations.
Total cost of operations was $60.5 million for the three months ended September 30, 2018 as compared to
$44.7 million for the three months ended September 30, 2017. Our cost of operations per ton was $48.20 for the three months ended
September 30, 2018, an increase of $5.82, or 14%, from the three months ended September 30, 2017. The increase in cost of operations
was primarily due to increase in cost of production at our Central Appalachia operations as cost for diesel fuel, contract services
and equipment maintenance increased in the third quarter of 2018.
Freight
and Handling.
Total freight and handling cost increased to $5.8 million for the three months ended September 30, 2018
as compared to $1.2 million for the three months ended September 30, 2017. The increase in freight and handling costs was primarily
the result of rail transportation costs as we executed more export coal sales in the current period that require us to pay for
railroad transportation to the port of export. We also incurred $0.9 million in demurrage charges due to rail transportation constraints
that caused shipments to be delayed to the port of export.
Depreciation,
Depletion and Amortization.
Total DD&A expense for the three months ended September 30, 2018 was $8.0 million as compared
to $6.6 million for the three months ended September 30, 2017. The increase in DD&A relates to an increase in fixed assets.
Selling,
General and Administrative.
SG&A expense for the three months ended September 30, 2018 remained the same at $3.1 million
compared to the three months ended September 30, 2017.
Other
Expense/(Income).
Interest expense for the three months ended September 30, 2018 increased to $2.9 million as compared
to $1.2 million for the three months ended September 30, 2017. This increase was primarily due to the higher outstanding debt
balance and effective interest rate on the new debt.
Net
Loss.
Net loss from continuing operations was $4.3 million for the three months ended September 30, 2018 compared to net
income of $0.6 million for the three months ended September 30, 2017. Our net loss incurred during the three months ended September
30, 2018 compared to 2017 was primarily due to a decrease in contracted prices for tons sold from our Pennyrile mine and elevated
costs at our Central Appalachia operations.
Adjusted
EBITDA
. Adjusted EBITDA from continuing operations for the three months ended September 30, 2018 decreased by $3.5
million to $4.3 million from $7.8 million for the three months ended September 30, 2017. Adjusted EBITDA decreased
period over period primarily due to the decrease in net income results at our Pennyrile mining operation in the Illinois Basin
and at our Central Appalachia operations. Adjusted EBITDA for the three months ended September 30, 2017 was $7.5 million
once the results from discontinued operations were included. We did not incur a gain or loss from discontinued operations for
the three months ended September 30, 2018. Please read “—Reconciliations of Adjusted EBITDA” for reconciliations
of Adjusted EBITDA from continuing operations to net income/(loss) from continuing operations.
Nine
Months Ended September 30, 2018 Compared to Nine Months Ended September 30, 2017
Revenues.
The following table presents revenues and coal revenues per ton for the nine months ended September 30
,
2018 and
2017:
|
|
|
Nine months
|
|
|
Nine months
|
|
|
|
|
|
|
|
|
|
|
ended
|
|
|
ended
|
|
|
Increase/(Decrease)
|
|
|
|
|
September
30, 2018
|
|
|
September
30, 2017
|
|
|
$
|
|
|
%*
|
|
|
|
|
(in millions, except
per ton data and %)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Coal revenues
|
|
$
|
180.4
|
|
|
$
|
161.8
|
|
|
$
|
18.6
|
|
|
|
11
|
%
|
|
Other revenues
|
|
|
2.4
|
|
|
|
1.1
|
|
|
|
1.3
|
|
|
|
118
|
%
|
|
Total revenues
|
|
$
|
182.8
|
|
|
$
|
162.9
|
|
|
$
|
19.9
|
|
|
|
12
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tons sold
|
|
|
3,430.6
|
|
|
|
3,017.3
|
|
|
|
413.3
|
|
|
|
14
|
%
|
|
Coal revenues per ton*
|
|
$
|
52.58
|
|
|
$
|
53.63
|
|
|
$
|
(1.05
|
)
|
|
|
(2
|
)%
|
|
*
|
Percentages
and per ton amounts are calculated based on actual amounts and not the rounded amounts presented in this table.
|
Revenues.
Our coal revenues for the nine months ended September 30, 2018 increased by approximately $18.6 million, or 11%, to approximately
$180.4 million from approximately $161.8 million for the nine months ended September 30, 2017. The increase in coal revenues was
primarily due to an increase in met and steam coal tons sold as we saw increased demand for met and steam coal during the period.
Coal revenues per ton was $52.58 for the nine months ended September 30, 2018, a decrease of $1.05, or 2%, from $53.63 per ton
for the nine months ended September 30, 2017. This decrease in coal revenues per ton was primarily the result of lower contracted
sales prices at our Pennyrile operation during 2018 compared to the same period in 2017.
Costs
and Expenses.
The following table presents costs and expenses (including the cost of purchased coal) and cost of operations
per ton for the nine months ended September 30, 2018 and 2017:
|
|
|
Nine
months
|
|
|
Nine
months
|
|
|
|
|
|
|
|
|
|
|
ended
|
|
|
ended
|
|
|
Increase/(Decrease)
|
|
|
|
|
September
30, 2018
|
|
|
September
30, 2017
|
|
|
$
|
|
|
%*
|
|
|
|
|
(in
millions, except per ton data and %)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of operations (exclusive of depreciation, depletion and amortization shown separately below)
|
|
$
|
159.4
|
|
|
$
|
132.6
|
|
|
$
|
26.8
|
|
|
|
20
|
%
|
|
Freight
and handling costs
|
|
|
8.2
|
|
|
|
1.8
|
|
|
|
6.4
|
|
|
|
356
|
%
|
|
Depreciation,
depletion and amortization
|
|
|
23.2
|
|
|
|
34.6
|
|
|
|
(11.4
|
)
|
|
|
(33
|
)%
|
|
Selling,
general and administrative
|
|
|
11.3
|
|
|
|
9.8
|
|
|
|
1.5
|
|
|
|
15
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tons
sold
|
|
|
3,430.6
|
|
|
|
3017.3
|
|
|
|
413.3
|
|
|
|
14
|
%
|
|
Cost
of operations per ton*
|
|
$
|
46.46
|
|
|
$
|
43.95
|
|
|
$
|
2.51
|
|
|
|
6
|
%
|
|
*
|
Percentages
and per ton amounts are calculated based on actual amounts and not the rounded amounts presented in this table.
|
Cost
of Operations.
Total cost of operations was $159.4 million for the nine months ended September 30, 2018 as compared to
$132.6 million for the nine months ended September 30, 2017. Our cost of operations per ton was $46.46 for the nine months ended
September 30, 2018, an increase of $2.51, or 6%, from the nine months ended September 30, 2017. The increase in cost of operations
was primarily due to increased production in response to an increase in demand for met and steam coal. We also experienced an
increase in the cost for diesel fuel, contract services and equipment maintenance in our Central Appalachia segment which resulted
in the cost of operations per ton increasing during the period.
Freight
and Handling.
Total freight and handling cost increased to $8.2 million for the nine months ended September 30, 2018 as
compared to $1.8 million for the nine months ended September 30, 2017. The increase in freight and handling costs was primarily
the result of rail transportation costs as we executed more export coal sales in the current period that require us to pay for
railroad transportation to the port of export.
Depreciation,
Depletion and Amortization.
Total DD&A expense for the nine months ended September 30, 2018 was $23.2 million as compared
to $34.6 million for the nine months ended September 30, 2017. The decrease was due to the fair value purchase adjustments in
the first quarter of 2017 which resulted in $14.3 million of additional depreciation, depletion and amortization expense in that
quarter that related to the prior 2016 reporting period.
Selling,
General and Administrative.
SG&A expense for the nine months ended September 30, 2018 increased to $11.3 million as
compared to $9.8 million for the nine months ended September 30, 2017. The increase in expense is primarily due to the stock compensation
expense of approximately $1.7 million incurred through a certain severance agreement with a former executive.
Other
Expense/(Income).
Other income for the nine months ended September 30, 2018 included higher interest expense and a $6.5
million gain on sale of investment while other income for the nine months ended September 30, 2017 was higher due to the $171.1
million bargain purchase gain which reflected the Rhino acquisition revaluation. Interest expense for the nine months ended September
30, 2018 increased to $7.0 million as compared to $3.4 million for the nine months ended September 30, 2017. This increase was
primarily due to the higher interest rate on the new Financing Agreement and overall higher outstanding debt balances.
Net
Loss.
Net loss from continuing operations was $15.3 million for the nine months ended September 30, 2018 compared to net
income from continuing operations of $108.0 million for the nine months ended September 30, 2017. The 2017 income results were
substantially impacted by the Rhino valuation adjustments which triggered a $171.1 million bargain purchase gain. The net loss
from continuing operations for the nine months ended September 30, 2018 was partially offset by a gain of $6.5 million on the
sale of shares of Mammoth Inc.
Adjusted
EBITDA
. Adjusted EBITDA from continuing operations for the nine months ended September 30, 2018 decreased by $6.5
million to $12.8 million from $19.3 million for the nine months ended September 30, 2017. Adjusted EBITDA decreased
period over period primarily due to the decrease in net income results at our Pennyrile mining operation in western Kentucky and
at our Central Appalachia operations. Adjusted EBITDA for the nine months ended September 30, 2017 was $18.8 million once
the results from discontinued operations were included. We did not incur a gain or loss from discontinued operations for the nine
months ended September 30, 2018. Please read “—Reconciliations of Adjusted EBITDA” for reconciliations of Adjusted
EBITDA from continuing operations to net income/(loss) from continuing operations.
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:
|
|
|
Three
Months Ended
September 30, 2018
|
|
|
Three
Months Ended
September 30, 2017
|
|
|
Nine
Months ended September 30, 2018
|
|
|
Nine
Months ended
September 30, 2017
|
|
|
Net income (loss) from continuing
operations
|
|
$
|
(4,272
|
)
|
|
$
|
631
|
|
|
$
|
(15,348
|
)
|
|
$
|
108,007
|
|
|
DD&A
|
|
|
7,951
|
|
|
|
6,630
|
|
|
|
23,226
|
|
|
|
34,587
|
|
|
Interest expense
|
|
|
2,937
|
|
|
|
1,168
|
|
|
|
7,015
|
|
|
|
3,402
|
|
|
Income tax provision
(benefit)
|
|
|
(2,613
|
)
|
|
|
(635
|
)
|
|
|
(4,233
|
)
|
|
|
43,925
|
|
|
EBITDA from continuing operations†*
|
|
|
4,003
|
|
|
|
7,794
|
|
|
|
10,660
|
|
|
|
189,921
|
|
|
Plus: Provision for doubtful accounts
|
|
|
294
|
|
|
|
-
|
|
|
|
294
|
|
|
|
-
|
|
|
Bargain purchase gain
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(171,151
|
)
|
|
Stock compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
1,880
|
|
|
|
510
|
|
|
Adjusted EBITDA
from Continuing Operations†*
|
|
$
|
4,297
|
|
|
|
7,794
|
|
|
$
|
12,834
|
|
|
$
|
19,290
|
|
*
Totals may not foot due to rounding.
†
EBITDA is calculated based on actual amounts and not the rounded amounts presented in this table.
Liquidity
and Capital Resources
Liquidity
As
of September 30, 2018, our available liquidity was $6.2 million. We also have a delayed draw term loan commitment in the amount
of $40 million (under which we have drawn approximately $5 million) contingent upon the satisfaction of certain conditions precedent
specified in the Financing Agreement discussed below.
On
December 27, 2017, we entered into a Financing Agreement, which provides us with a multi-draw loan in the 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 an additional $40 million commitment that is contingent upon the satisfaction
of certain conditions precedent specified in the Financing Agreement. We used approximately $17.3 million of the net proceeds
thereof to repay all amounts outstanding and terminate the Amended and Restated Credit Agreement with PNC Bank. The Financing
Agreement terminates on December 27, 2020. For more information about our new Financing Agreement, please read “—Financing
Agreement” below.
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. We may also be required to consider other options, such as selling
assets or merger opportunities, and depending on the urgency of our liquidity constraints, we may be required to pursue such an
option at an inopportune time.
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.
Cash
Flows
Net
cash provided by operating activities was $6.1 million for the nine months ended September 30, 2018 as compared to $12.0 million
for the nine months ended September 30, 2017. This decrease in cash provided by operating activities was primarily the result
of lower net income as discussed above.
Net
cash used in investing activities was $3.9 million for the nine months ended September 30, 2018 as compared to net cash used in
investing activities of $10.7 million for the nine months ended September 30, 2017. The decrease in cash used in investing activities
was primarily due to the proceeds received from the sale of Mammoth Inc. shares partially offsetting the increase in capital expenditures
for the nine months ended September 30, 2018.
Net
cash used in financing activities was $19.3 million for the nine months ended September 30, 2018, which was primarily attributable
to repayments on our Financing Agreement and payment of the distribution on the Series A preferred units. Net cash provided in
financing activities was $28 thousand for the nine months ended September 30, 2017, which was primarily due to issuance of Cedarview
loan less related party loan payments.
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 nine months ended September 30, 2018 were approximately $11.2 million. These amounts
were primarily used to rebuild, repair or replace older mining equipment. Expansion capital expenditures for the nine months ended
September 30, 2018 were approximately $9.3 million, which were primarily related to the purchase of additional equipment to expand
production at one of our Central Appalachia mines.
Series
A Preferred Units
On
December 30, 2016, Rhino entered into a Series A Preferred Unit Purchase Agreement and its general partner entered into the Fourth
Amended and Restated Agreement of Limited Partnership of the Partnership to create, authorize and issue the Series A preferred
units.
The
Series A preferred units rank senior to all classes or series of Rhino’s equity securities 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) and (ii) an amount equal to the number of outstanding
Series A preferred units multiplied by $0.80. If Rhino 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 Rhino 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.
During
the nine months ended September 30, 2018, we paid $6.0 million in distributions earned for the year ended December 31, 2017 to
holders of Rhino’s Series A preferred units. We also accrued $1.8 million for distributions to holders of the Series A preferred
units for the nine months ended September 30, 2018.
Financing
Agreement
On
December 27, 2017, Rhino entered into a 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 Lenders have agreed to provide us with a multi-draw term loan in the aggregate principal amount of $80 million,
subject to the terms and conditions set forth in the Financing Agreement. The total principal amount is divided into a $40 million
commitment, the conditions for which were satisfied at the execution of the Financing Agreement (the “Effective Date Term
Loan Commitment”) and an additional $40 million commitment that is contingent upon the satisfaction of certain conditions
precedent specified in the Financing Agreement (“Delayed Draw Term Loan Commitment”). Loans made pursuant to the Financing
Agreement will be secured by substantially all of Rhino’s assets. The Financing Agreement terminates on December 27, 2020
and contains provisions that require principal prepayments from the sale or disposition of eligible securities or eligible real
property: payment of annual excess cash flow, as defined, certain insurance proceeds and prohibitions of transactions with affiliates,
including limitations on transactions with Royal.
On
April 17, 2018, we amended our Financing Agreement to allow for certain activities including a sale leaseback of certain pieces
of equipment, the due date for the lease consents was extended to June 30, 2018 and confirmation of the distribution to holders
of the Series A preferred units of $6.0 million (accrued in the consolidated financial statements at December 31, 2017). Additionally,
the amendments provide that we can sell additional shares of Mammoth Inc. stock and retain 50% of the proceeds with the other
50% used to reduce debt.
On
July 27, 2018, we entered into a consent with our Lenders related to the Financing Agreement. The consent included a $5.0 million
loan from the Delayed Draw Term Loan Commitment which was repaid in full on October 26, 2018 pursuant to the terms of the consent.
The consent also waived any Event of Default that has or would otherwise arise under the Financing Agreement for failing to comply
with the Fixed Charge Coverage Ratio for the six month period ending June 30, 2018.
On
November 8, 2018, we entered into a consent with our Lenders related to the Financing Agreement. The consent includes the lenders
agreement to waive any Event of Default that arose or would otherwise arise under the Financing Agreement for failing to comply
with the Fixed Charge Coverage Ratio for the six months ended September 30, 2018.
At
September 30, 2018, $29.8 million was outstanding under the financing agreement at a variable interest rate of Libor plus 10.00%
(12.25% September 30, 2018) and $5.0 million of borrowings outstanding at a fixed interest rate of 12.34%.
Letter
of Credit Facility-PNC Bank
On
December 27, 2017, we entered into a master letter of credit facility, security agreement and reimbursement agreement (the “LoC
Facility Agreement”) with PNC Bank, National Association (“PNC”), pursuant to which PNC agreed to provide us
with a facility for the issuance of standby letters of credit used in the ordinary course of our business (the “LoC Facility”).
The LoC Facility Agreement provided that we pay a quarterly fee at a rate equal to 5% per annum calculated based on the daily
average of letters of credit outstanding under the LoC Facility, as well as administrative costs incurred by PNC and a $100,000
closing fee. The LoC Facility Agreement provided that we reimburse PNC for any drawing under a letter of credit by a specified
beneficiary as soon as possible after payment was made. Our obligations under the LoC Facility Agreement were secured by a first
lien security interest on a cash collateral account that is required to contain no less than 105% of the face value of the outstanding
letters of credit. In the event the amount in such cash collateral account was insufficient to satisfy our reimbursement obligations,
the amount outstanding would bear interest at a rate per annum equal to the Base Rate (as that term was defined in the LoC Facility
Agreement) plus 2.0%. We would indemnify PNC for any losses which PNC may incur as a result of the issuance of a letter of credit
or PNC’s failure to honor any drawing under a letter of credit, subject in each case to certain exceptions. We provided
cash collateral to our counterparties during the third quarter of 2018 and as of September 30, 2018, the LoC Facility was terminated.
We had no outstanding letters of credit at September 30, 2018.
Distribution
Suspension
Pursuant
to the Partnership agreement, Rhino’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 September
30, 2018, 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, Rhino announced cash distributions per common unit at levels lower than the minimum quarterly distribution.
Rhino has not paid any distribution on its subordinated units for any quarter after the quarter ended March 31, 2012. As of September
30, 2018, we had accumulated arrearages of $614.5 million.
Off-Balance
Sheet Arrangements
In
the normal course of business, we are a party to certain off-balance sheet arrangements. These arrangements 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 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, either of which would require a greater use of
our financing agreement. We then use bank letters of credit to secure our surety bonding obligations as a lower cost alternative
than securing those bonds with a committed bonding facility pursuant to which we are required to provide bank letters of credit
as a percentage of our aggregate bond liability. 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
discussed above, we had no letters of credit outstanding as of September 30, 2018.
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, 2017. The Company adopted ASU 2014-09, Topic
606 on January 1, 2018, using the modified retrospective method. The adoption of Topic 606 has no impact on coal sales amounts
recorded in our financial statements. There have been no other significant changes in these policies and estimates as of September
30, 2018.
Income
Taxes- Contingency
We
have failed to file certain federal and state tax returns timely. Additionally, we have failed to timely file the applicable IRS
form to change our tax year end from August 31 to December 31. We completed all the required SEC filings to change our reporting
year end date from August 31 to December 31. Our income tax estimates are predicated on a December 31 year end. If the IRS does
not provide us relief for the non-timely filing of the tax year end change, it is possible our income tax expense, deferred tax
liability and income tax obligations as presented in the accompanying condensed consolidated financial statements are materially
misstated.
We
are currently updating all of our tax filings which may identify new facts that could materially change our net financial position
and operating results. We have applied to the Internal Revenue Service for a tax year filing change to December and request that
it be approved due in part to the Partnership’s December year end. Since we have a controlling interest in the Partnership
since March 2016, we believe this will help support approving our change in tax year retroactive to 2015; however, there are no
guarantees that this relief will be provided. The ultimate resolution of these tax uncertainties could materially impact our accompanying
condensed consolidated financial statements.
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, which is incorporated herein by reference. There are no known future impacts
or material changes or trends of new accounting guidance beyond the disclosures provided in Note 2.