NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements (unaudited) include the accounts and operations of Westmoreland Resource Partners, LP (the “Partnership”) and its consolidated subsidiaries and have been prepared in accordance with United States Generally Accepted Accounting Principles (“GAAP”) and require the use of management’s estimates. All intercompany transactions and accounts have been eliminated in consolidation. The financial information contained in this Quarterly Report on Form 10-Q (“Quarterly Report”) is unaudited, but reflects all adjustments which, in the opinion of management, are necessary for a fair presentation of the financial information for the periods shown. Such adjustments are of a normal recurring nature. Certain prior-period amounts have been reclassified to conform with the financial statement line items used by Westmoreland Coal Company (“WCC”), the parent of our general partner Westmoreland Resources GP, LLC (the “GP”). The results of operations for the
nine
months ended
September 30, 2018
are not necessarily indicative of results to be expected for the year ending
December 31, 2018
.
These unaudited quarterly consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes to the consolidated financial statements included in the Partnership’s Annual Report on Form 10-K for the year ended
December 31, 2017
(“
2017
Form 10-K”). There were no changes to our significant accounting policies from those disclosed in the audited consolidated financial statements and notes to the consolidated financial statements thereto contained in our
2017
Form 10-K, except as described below in the section titled "Recently Issued Accounting Pronouncements."
Filing Under Chapter 11 of the United States Bankruptcy Code
On October 9, 2018 (the “Petition Date”), WCC, certain of its subsidiaries, including the Partnership, the Partnership's general partner and the Partnership’s wholly owned subsidiaries (collectively, the “Debtors”), filed voluntary petitions (the “Bankruptcy Petitions”) for relief under Chapter 11 of Title 11 of the United States Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Southern District of Texas (the “Bankruptcy Court”) (case number 18-35672). The Debtors have filed a motion with the Bankruptcy Court seeking to jointly administer all of the Debtors’ Chapter 11 cases (the “Chapter 11 Cases”) under the caption "In re Westmoreland Coal Company, et al." The Debtors will continue to operate their businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court.
For the duration of the Chapter 11 Cases, the Partnership’s operations and its ability to develop and execute its business plan are subject to risks and uncertainties associated with the Chapter 11 Cases. As a result of these risks and uncertainties, the Partnership’s assets, liabilities, officers and/or directors could be significantly different following the outcome of the Chapter 11 Cases, and the description of its operations, properties and capital plans included in these financial statements may not accurately reflect its operations, properties and capital plans following the Chapter 11 Cases.
The Debtors have filed a series of first day motions with the Court that seek authorization to continue to conduct their business without interruption, and the Bankruptcy Court has entered orders approving these motions on an interim basis. The Bankruptcy Court hearing to consider approval of these motions on a final basis is currently scheduled for November 13, 2018. These motions are designed primarily to minimize the effect of bankruptcy on the Debtors’ operations, customers and employees. The Partnership expects ordinary-course operations to continue substantially uninterrupted during and after the consummation of the Chapter 11 Cases. Employees should expect no change in their daily responsibilities and to be paid in the ordinary course of business.
The filing of the Chapter 11 Cases described above constitutes an event of default that accelerated the Debtors’ respective obligations under the 2014 Financing Agreement, dated as of December 31, 2014, by and among Oxford Mining Company, LLC and the other borrowers thereto, the Partnership and certain of its subsidiaries as guarantors thereto, and the lenders, collateral agent and administrative agent thereto, as amended (the “2014 Financing Agreement”). The Financing Agreement provides that as a result of the Chapter 11 Cases the principal and interest due thereunder shall be immediately due and payable. Any efforts to enforce such payment obligations under the 2014 Financing Agreement are automatically stayed as a result of the Chapter 11 Cases, and the creditors’ rights of enforcement in respect of the 2014 Financing Agreement are subject to the applicable provisions of the Bankruptcy Code.
Additionally, on the Petition Date, the New York Stock Exchange (the “NYSE”) suspended trading in the common units of the Partnership at the market opening and notified the Partnership that its common units are no longer suitable for listing pursuant to Section 802.01D of the NYSE continued listing standards. As a result of the delisting notice, the Partnership’s common units are currently trading on the OTC Pink Marketplace under the symbol “WMLPQ.”
WESTMORELAND RESOURCE PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
For periods subsequent to filing the Bankruptcy Petitions, the Partnership will apply the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 852,
Reorganizations
, in preparing its consolidated financial statements. ASC 852 requires that the financial statements distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Accordingly, certain revenues, expenses, realized gains and losses and provisions for losses that are realized or incurred in the bankruptcy proceedings will be recorded in a reorganization line item on the consolidated statements of operations. In addition, the pre-petition obligations that may be impacted by the bankruptcy reorganization process will be classified on the consolidated balance sheet as liabilities subject to compromise. These liabilities are reported at the amounts expected to be allowed by the Bankruptcy Court, which may differ from the ultimate settlement amounts.
Ability to Continue as a Going Concern & Covenant Violations
As of
November 1, 2018
, the Partnership was in default under certain of its debt instruments. The Partnership’s filing of the Chapter 11 Cases described above constitutes an event of default that accelerated the Partnership’s obligations under its Term Loan and 2014 Financing Agreement. Additionally, other events of default, including cross-defaults, are present, including the receipt of a going concern explanatory paragraph from the Partnership’s independent registered public accounting firm on the Partnership’s consolidated financial statements. Under the Bankruptcy Code, the creditors under these debt agreements are stayed from taking any action against the Partnership as a result of an event of default.
The significant risks and uncertainties related to the Partnership’s liquidity and Chapter 11 Cases described above raise substantial doubt about the Partnership’s ability to continue as a going concern. As such, the accompanying consolidated financial statements (unaudited) are prepared on a going concern basis and do not include any adjustments that might result from uncertainty about our ability to continue as a going concern, other than the reclassification of certain long-term debt to current debt and the related debt issuance costs to current liabilities and current assets, respectively. If the Partnership cannot continue as a going concern, adjustments to the carrying values and classification of its assets and liabilities and the reported amounts of income and expenses could be required and could be material.
Recently Adopted Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update ("ASU") 2014-09,
Revenue from Contracts with Customers (Topic 606)
(“new revenue standard”), which supersedes all previously existing revenue recognition guidance. Under this guidance, an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard allows for initial application to be performed retrospectively to each period presented or as a cumulative effect adjustment as of the date of adoption. During 2016, the FASB clarified the implementation guidance on principal versus agent, identifying performance obligations and licensing, practical expedients, and made technical corrections on various topics.
The Partnership adopted the new revenue standard effective January 1, 2018 using the full retrospective method. The adoption of this standard did not have a material impact to the Partnership's consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash
(“new cash flows standard”), which requires all entities that have restricted cash or restricted cash equivalents to explain the changes during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents in the Consolidated Statements of Cash Flows. As a result, amounts generally described as restricted cash and restricted cash equivalents that are included in other financial statement captions of the Consolidated Balance Sheets should be included with cash and cash equivalents when reconciling the beginning of period and end of period total amounts shown on the Consolidated Statements of Cash Flows. The ASU should be adopted using a retrospective transition method to each period presented. The Partnership adopted the new cash flows standard effective January 1, 2018 and applied the ASU retrospectively to the periods presented in the Partnership’s Consolidated Statements of Cash Flows (unaudited). As a result, net cash used in investing activities for the nine months ended September 30, 2017 was adjusted to exclude the change in restricted cash as follows:
|
|
|
|
|
|
Nine Months Ended September 30, 2017
|
|
(In thousands)
|
Cash used in investing activities, as previously reported
|
$
|
(9,844
|
)
|
Less: Purchases of restricted investments
|
(587
|
)
|
Cash used in investing activities, as adjusted
|
$
|
(10,431
|
)
|
WESTMORELAND RESOURCE PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
, which requires companies leasing assets to recognize on their balance sheet a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term on contracts longer than one year. The new guidance is effective for fiscal years beginning after December 15, 2018, using a modified retrospective approach, with early adoption permitted.
In July 2018, the FASB issued ASU 2018-11,
Leases (Topic 842):Targeted Improvements
, which includes two main provisions. The first is an additional optional transition method to adopt the new leasing standard at the adoption date through recognition of a cumulative-effect adjustment to the opening balance of retaining earnings in the period of adoption. The second provides lessors with a practical expedient, by class of underlying asset, to not separate non-lease components from the associated lease component and, instead, to account for those components as a single component, if certain criteria are met.
The Partnership has established an implementation team to execute a multi-phase plan to adopt the requirements of the new standard. The team is in the process of finalizing the quantitative and qualitative analysis in accordance with the plan. The team is also reviewing system capabilities, processes and internal controls over financial reporting to ensure the implementation in the first quarter of 2019.
In August 2018, the FASB issued ASC 2018-13,
Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement
, which eliminates certain disclosure requirements for fair value measurements for all entities, and requires public entities to disclose certain new information while modifying certain disclosure requirements. The new guidance is effective for all entities for fiscal years beginning after December 15, 2019 and for interim periods within those fiscal years, with early adoption permitted. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. We will adopt the new guidance in the first quarter of 2020 and the adoption of this guidance will not have a material impact on the consolidated financial statements.
2. REVENUE
We produce and sell thermal coal primarily to large electric utility customers with coal-fired power plants, typically under long-term contracts. Our customers are generally in close proximity through mine-mouth power plants and strategically located rail and barge transportation. Lesser amounts of revenue are generated from royalties from oil and gas leases and sales of various mining byproducts.
Under ASC 606, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration we expect to receive in exchange for those goods or services. We measure revenue based on the consideration specified in the contract, and revenue is recognized when the performance obligations in the contract are satisfied. A performance obligation is a promise in a contract to transfer a distinct service to the customer. The transaction price of a contract is allocated to each distinct performance obligation and recognized as revenue when or as the customer receives the benefit of the performance obligation.
For all of our coal sales contracts, performance obligations consist of the delivery of each ton of coal to the customer as our promise is to sell multiple distinct units of a commodity at a point in time. The transaction price principally consists of fixed consideration in the form of a base price per ton of coal with additional variable consideration comprised of adjustments to the base price based on quality measurements. Certain long-term contracts contain additional variable consideration comprised of various index-based adjustments, adjustments based on changes in underlying production costs and reimbursements of various costs such as royalties and taxes.
Disaggregated Revenues
The following table presents our revenues for the three and
nine months ended September 30, 2018
and
2017
disaggregated by type of revenue (in thousands):
WESTMORELAND RESOURCE PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
Type of Revenue
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Coal sales
|
$
|
62,731
|
|
|
$
|
84,888
|
|
|
$
|
189,472
|
|
|
$
|
237,812
|
|
Other revenues
|
54
|
|
|
718
|
|
|
5,415
|
|
|
3,650
|
|
Total
|
$
|
62,785
|
|
|
$
|
85,606
|
|
|
$
|
194,887
|
|
|
$
|
241,462
|
|
Contract Balances
Contract assets and contract liabilities are the result of timing differences between revenue recognition, billings and cash collections. We recognize contract assets in those instances where billing occurs subsequent to revenue recognition and our right to invoice the customer is conditioned on something other than the passage of time. There were no contract assets included in the Consolidated Balance Sheets (unaudited) as of
September 30, 2018
and December 31, 2017, respectively. We recognize contract liabilities in those instances where billing occurs prior to revenue recognition, which occurs for certain contracts with tiered pricing in which the per ton contract price has exceeded per ton revenue to date, or when we have received consideration prior to satisfaction of performance obligations.
The following table presents the activity in our contract liabilities for the
nine months ended September 30, 2018
(in thousands):
|
|
|
|
|
Contract Liabilities
(1)
:
|
|
Balance as of December 31, 2017
|
$
|
3,141
|
|
Additions
|
1,441
|
|
Transfers to
Revenues
|
(3,254
|
)
|
Balance as of September 30, 2018
|
$
|
1,328
|
|
_________________________
(1) Comprised entirely of current balances of
$1.3 million
and
$3.1 million
reported within
Deferred revenue
in the Consolidated Balance Sheets (unaudited) as of
September 30, 2018
and December 31, 2017, respectively.
Remaining Performance Obligations
The following table presents our estimated revenues allocated to remaining performance obligations for contracted revenue that has not yet been recognized, representing our “contractually committed” revenues as of
September 30, 2018
that we will invoice or transfer from contract liabilities and be recognized in future periods (in thousands):
|
|
|
|
|
|
Estimated Revenues
|
Three months ended December 31, 2018
|
$
|
40,963
|
|
2019
|
73,340
|
|
2020
|
69,680
|
|
2021
|
51,727
|
|
2022
|
—
|
|
Thereafter
|
—
|
|
Total
|
$
|
235,710
|
|
Our contractually committed revenue, for purposes of the table above, is limited to the transaction price for long-term coal sales contracts which have minimum tonnage commitments. Our contractually committed revenue amounts generally exclude, based on the following practical expedients that we elected to apply, (i) variable consideration within contracts in which such variable consideration is allocated entirely to wholly unsatisfied performance obligations; and (ii) remaining performance obligations for contracts with an original expected duration of one year or less. Additional revenues are expected to be recognized based on our short-term coal sales contracts, long-term coal sales contracts with no minimum tonnage commitments and long-term coal sales contracts with customer options in addition to minimum tonnage commitments.
WESTMORELAND RESOURCE PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
3. INVENTORIES
Inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
|
(In thousands)
|
Coal stockpiles
|
$
|
3,076
|
|
|
$
|
4,642
|
|
Materials and supplies
|
10,039
|
|
|
10,569
|
|
Reserve for obsolete inventory
|
(284
|
)
|
|
(284
|
)
|
Total
|
$
|
12,831
|
|
|
$
|
14,927
|
|
4. RESTRICTED INVESTMENTS
For all of its restricted investments accounts, the Partnership can select from limited fixed-income investment options for the funds and receive the investment returns on these investments. Funds in the restricted investments accounts are not available to meet the Partnership’s general cash needs. These investments include available-for-sale debt securities, which are reported at fair value with unrealized gains and losses excluded from earnings and reported in
Accumulated other comprehensive (loss) income
in the Consolidated Balance Sheets.
The carrying value and estimated fair value of restricted investments were as follows:
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
|
(In thousands)
|
Cash and cash equivalents
|
$
|
6,745
|
|
|
$
|
7,754
|
|
Available-for-sale debt securities
|
29,207
|
|
|
29,485
|
|
|
$
|
35,952
|
|
|
$
|
37,239
|
|
Available-for-Sale Debt Securities
The cost basis, gross unrealized holding gains and losses and fair value of available-for-sale debt securities were as follows:
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
|
(In thousands)
|
Cost basis
|
$
|
29,406
|
|
|
$
|
29,405
|
|
Gross unrealized holding gains
|
250
|
|
|
409
|
|
Gross unrealized holding losses
|
(449
|
)
|
|
(329
|
)
|
Fair value
|
$
|
29,207
|
|
|
$
|
29,485
|
|
5. LOSS ON IMPAIRMENT
During the second quarter of 2018, the Partnership recorded asset impairment charges to various assets in the amount of
$77.7 million
in
Loss on impairment
in the Consolidated Statements of Operations (unaudited). Indicators of impairment existed as during the second quarter of 2018 AEP Generation Resources Inc. (“AEP”) declined the Partnership’s bid to supply coal to AEP’s Conesville Power Plant Units 5 and 6 for periods subsequent to the expiration of the parties' current contract which expires on December 31, 2018. Coal sales under Oxford’s current coal supply contract to AEP’s Conesville Power Plant Units 5 and 6 represented a substantial portion of the Partnership's revenues generated from the Ohio mines for the year ended December 31, 2017.
WESTMORELAND RESOURCE PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
The Partnership performed a recoverability analysis as of June 30, 2018 and determined that the net undiscounted cash flows were less than the carrying values for the Ohio mines' long-lived assets groups. As a result, the Partnership estimated the fair value of the long-lived asset groups using a discounted cash flow analysis using marketplace participant assumptions which constituted Level 3 fair value inputs. The discounted cash flow analysis is dependent on a number of significant management estimates about future performance including sales volumes and prices, which are based on projected revenues based on expected economic conditions, costs to produce, capital spending, working capital changes and the weighted average cost of capital. The estimates of costs to produce include labor, fuel, explosives, supplies and other major components of mining. The Partnership estimated the fair value of certain property, plant and equipment and intangible assets using the market approach. To the extent that the carrying values of the long-lived asset groups exceeded the respective fair values, the Partnership recorded an asset impairment charge, as can be seen by asset type in the table below for the
nine months ended September 30, 2018
.
|
|
|
|
|
|
Asset Impairment Charges
|
|
(In thousands)
|
Land, mineral rights, property, plant and equipment, net
|
$
|
50,717
|
|
Advanced coal royalties
|
3,145
|
|
Intangible assets, net of accumulated amortization of $7.2 million at June 30, 2018
|
23,767
|
|
Other assets
(1)
|
46
|
|
|
$
|
77,675
|
|
_____________________
(1) Consists of the current portion of Advanced coal royalties.
6. DEBT AND LINES OF CREDIT
Debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
|
(In thousands)
|
Term Loan
|
$
|
323,394
|
|
|
$
|
312,734
|
|
Capital lease obligations
|
10,463
|
|
|
13,478
|
|
Other
|
852
|
|
|
375
|
|
Total debt outstanding
|
334,709
|
|
|
326,587
|
|
Less debt issuance costs
|
(695
|
)
|
|
(2,754
|
)
|
Less current installments, net of debt issuance costs
|
(327,622
|
)
|
|
(314,228
|
)
|
Total debt outstanding, less current installments
|
$
|
6,392
|
|
|
$
|
9,605
|
|
The following table presents remaining aggregate contractual debt maturities of all debt:
|
|
|
|
|
|
September 30, 2018
|
|
(In thousands)
|
2018
|
$
|
324,781
|
|
2019
|
4,499
|
|
2020
|
1,766
|
|
2021
|
1,664
|
|
2022
|
1,999
|
|
Thereafter
|
—
|
|
Total debt
|
$
|
334,709
|
|
Covenant Compliance
See
Note 1. Basis Of Presentation
“Ability to Continue as a Going Concern” for matters regarding covenant compliance.
WESTMORELAND RESOURCE PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
Term Loan
Pursuant to the amended 2014 Financing Agreement, dated as of December 31, 2014, by and among Oxford Mining Company, LLC, the Partnership and each of its subsidiaries, lenders from time to time party thereto, and U.S. Bank National Association, as administrative agent, we entered into a term loan (“Term Loan”) which matures on December 31, 2018 and pays interest on a quarterly basis at a variable rate equal to the 3-month London Interbank Offered Rate (“LIBOR”) at each period end (
2.39%
as of
September 30, 2018
), subject to a floor of
0.75%
, plus
8.50%
or the reference rate, as defined in the 2014 Financing Agreement. As of
September 30, 2018
, the Term Loan had a cash interest rate of
10.89%
. The Term Loan is a primary obligation of Oxford Mining Company, LLC, a wholly owned subsidiary of the Partnership, is guaranteed by the Partnership and its subsidiaries, and is secured by substantially all of the Partnership’s and its subsidiaries’ assets.
The 2014 Financing Agreement also provides for Paid-In-Kind Interest (“PIK Interest”) at a variable rate between
1.00%
and
3.00%
based on our consolidated total net leverage ratio, as defined in the 2014 Financing Agreement. As of
September 30, 2018
and
December 31, 2017
, the Term Loan had a PIK Interest rate of
3.00%
. The rate of PIK Interest is recalculated on a quarterly basis with the PIK Interest added quarterly to the then-outstanding principal amount of the Term Loan. PIK Interest under the 2014 Financing Agreement was
$7.4 million
and
$12.2 million
for the three and
nine months ended September 30, 2018
, respectively, and
$2.3 million
and
$7.0 million
for the three and
nine months ended September 30, 2017
, respectively. The outstanding Term Loan amount as of
September 30, 2018
represents the principal balance of
$285.8 million
, plus PIK Interest of
$37.6 million
.
The 2014 Financing Agreement requires mandatory prepayment of principal with proceeds from the receipt of oil and gas royalties and asset sales. During the nine months ended
September 30, 2018
, we paid down
$1.5 million
of the Term Loan with such proceeds, however,
no
principal prepayments occurred during the three months ended
September 30, 2018
.
The 2014 Financing Agreement limits cumulative cash distributions to an aggregate amount not to exceed
$15.0 million
(“Restricted Distributions”), if we have: (i) a consolidated total net leverage ratio of greater than
3.75
, or a fixed charge coverage ratio of less than
1.00
(as such ratios are defined in the 2014 Financing Agreement), or (ii) liquidity of less than
$7.5 million
, after giving effect to such cash distribution and applying our availability under the Revolver. As of
September 30, 2018
, our consolidated total net leverage ratio is in excess of
3.75
, our fixed charge coverage ratio is less than
1.00
and we have utilized the full
$15.0 million
limit on Restricted Distributions.
The filing of the Chapter 11 Cases constitutes an event of default under the 2014 Financing Agreement and the Term Loan that accelerated the Partnership’s obligations thereunder. However, under the Bankruptcy Code, the lenders under the Term Loan are stayed from taking any action against the Partnership as a result of the default. See also
Note 1. Basis Of Presentation
included above.
Revolver
On October 23, 2015, the Partnership and its subsidiaries entered into a Loan and Security Agreement (the “Revolver”) with the lenders party thereto and Canadian Imperial Bank of Commerce (formerly known as The PrivateBank and Trust Company). The Revolver expired on its December 31, 2017 maturity date and management elected not to replace or extend it.
Capital Lease Obligations
The Partnership engages in leasing transactions for office equipment and equipment utilized in its mining operations. The Partnership did not enter into any new capital leases during the
nine
months ended
September 30, 2018
.
7. DISTRIBUTIONS OF AVAILABLE CASH
Currently, the terms of the Interim Cash Collateral Order [Docket No. 95] of the Chapter 11 Cases ("Interim Cash Collateral Order"), in accordance with the approved budget under such order, does not permit cash distributions to our unitholders. Prior to our Petition Date, our 2014 Financing Agreement restricted us from making cash distributions in excess of
$15.0 million
in the aggregate when certain ratios and liquidity requirements are not met. As of
September 30, 2018
, both of these ratios were not met, and we do not foresee them being met in the near future. As of
September 30, 2018
, we had made
$15.0 million
in Restricted Distributions and, accordingly, we would not have been able to make a cash distribution to unitholders had we not filed the Chapter 11 Cases. Additionally, any such future cash distribution would need to comply with the terms of the Interim Cash Collateral Order or any such future cash collateral order governing cash distributions.
WESTMORELAND RESOURCE PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
Pursuant to the Partnership’s Fourth Amended and Restated Agreement of Limited Partnership, as amended (the “Partnership Agreement”), we distribute
100%
of our available cash within
45
days after the end of each quarter to unitholders of record and to our GP, subject to the conditions and limitations within the 2014 Financing Agreement. Available cash is determined at the end of each quarter and is generally defined in the Partnership Agreement, as all cash and cash equivalents on hand at the end of each quarter less reserves established by our GP in its reasonable discretion for future cash requirements. These reserves are retained to provide for the conduct of our business, the payment of debt principal and interest, to provide funds for future distributions for any one or more of the next four quarters, and to comply with applicable law or any loan agreement to which the Partnership or any of its subsidiaries are a party. Our available cash may also include, if our GP so determines, all or any portion of the cash on hand on the date of determination of available cash for the quarter resulting from working capital borrowings made subsequent to the end of such quarter.
We made cash distributions as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Limited partner common units
|
$
|
—
|
|
|
$
|
171
|
|
|
$
|
—
|
|
|
$
|
505
|
|
General partner units
|
—
|
|
|
5
|
|
|
—
|
|
|
15
|
|
Warrants
|
—
|
|
|
22
|
|
|
—
|
|
|
66
|
|
8. FAIR VALUE MEASUREMENTS
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Valuation techniques used must maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy, as defined below, gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.
|
|
•
|
Level 1, defined as observable inputs such as quoted prices in active markets for identical assets. Level 1 assets include available-for-sale debt securities generally valued based on independent third-party market prices.
|
|
|
•
|
Level 2, defined as observable inputs other than Level 1 prices. These include quoted prices for similar assets or liabilities in an active market, quoted prices for identical assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
|
|
|
•
|
Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
|
The book values of cash and cash equivalents, receivables and accounts payable reflected in the Consolidated Balance Sheets (unaudited) approximate the fair value of these instruments due to the short duration to their maturities.
See
Note 4. Restricted Investments
for further disclosures related to the Partnership's fair value estimates.
In connection with our refinancing in June 2013, certain of the second lien lenders and lender affiliates received warrants entitling them to purchase common units. Prior to the expiration of all outstanding warrants in June 2018, the warrants had been measured at fair value at each balance sheet date.
Long-term debt fair value estimates are based on observed prices for securities with an active trading market when available (Level 2) and otherwise using discount rate estimates based on interest rates (Level 3). As of
September 30, 2018
, the Partnership valued the Term Loan with Level 3 fair values. The estimated fair values of the Partnership’s debt with fixed and variable interest rates are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Interest Rate
|
|
Variable Interest Rate
|
|
Carrying Value
|
|
Fair Value
|
|
Carrying Value
|
|
Fair Value
|
|
(In thousands)
|
September 30, 2018
|
$
|
11,316
|
|
|
$
|
11,316
|
|
|
$
|
322,698
|
|
|
$
|
89,808
|
|
December 31, 2017
|
13,853
|
|
|
13,853
|
|
|
309,980
|
|
|
144,536
|
|
WESTMORELAND RESOURCE PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
9. UNIT-BASED COMPENSATION
Historically, we have granted employees and non-employee directors restricted common units under our Long-Term Incentive Plan (“LTIP”). However, we do not anticipate granting any units during the year ended December 31, 2018. We recognized compensation expense from unit-based arrangements as shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
(In thousands)
|
Recognition of fair value of restricted common units over the vesting period
|
$
|
—
|
|
|
$
|
83
|
|
|
$
|
52
|
|
|
$
|
164
|
|
The unvested restricted common unit awards had an initial vesting date of March 2, 2018. However, on March 1, 2018 the grant was modified and the vesting date for all awards was extended to December 15, 2018. As all related compensation expense was recognized as of the modification date and the modification did not result in an increase in fair value of the awards, no additional expense was recognized. A summary of restricted common unit award activity for the
nine
months ended
September 30, 2018
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Units
|
|
Weighted Average Grant-Date Fair Value
|
|
Unamortized Compensation Expense
(In thousands)
|
Unvested balance at December 31, 2017
|
82,240
|
|
|
$
|
3.04
|
|
|
|
Forfeited
|
(16,448
|
)
|
|
3.04
|
|
|
|
Unvested balance at September 30, 2018
|
65,792
|
|
|
$
|
3.04
|
|
|
$
|
—
|
|
10. COMMITMENTS AND CONTINGENCIES
Coal Sales Contracts
We are committed under long-term contracts to sell coal that meets certain quality requirements at specified prices. Many of these prices are subject to cost pass-through or cost adjustment provisions that mitigate some risk from rising costs. Quantities sold under some of these contracts may vary from year to year within certain limits at the option of the customer or us. As of
September 30, 2018
, the remaining terms of our long-term contracts range from
one
to
eight
years.
Litigation
There have been no material changes in our litigation since
December 31, 2017
. For additional information, refer to
Note
18. Commitments and Contingencie
s to the consolidated financial statements of our
2017
Form 10-K.
Guarantees
Our GP and the Partnership guarantee certain obligations of our subsidiaries. We believe that these guarantees may result in a material liability to the guarantors, and, consequentially, have a material adverse effect on our financial position, liquidity or operations.
11. PARTNERS' CAPITAL AND CONVERTIBLE UNITS
Our capital accounts are comprised of approximately
0.15%
beneficial general partner interests and
99.85%
limited partner interests as of
September 30, 2018
. Our limited partners have limited rights of ownership as provided for under our Partnership Agreement and the right to participate in our distributions. Our GP manages our operations and participates in our distributions, including certain incentive distributions pursuant to the incentive distribution rights, which are nonvoting limited partner interests held by our GP. Pursuant to our Partnership Agreement, our GP participates in losses and distributions based on its interest. The GP’s participation in the allocation of losses and distributions is not limited and therefore, such participation can result in a deficit to its capital account. Allocation of losses and distributions, including distributions for previous transactions between entities under common control, has resulted in a deficit to certain limited partners’ capital accounts included in our Consolidated Balance Sheets (unaudited).
WESTMORELAND RESOURCE PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
Series A Convertible Units
In connection with the Kemmerer Drop (as defined and described in
Note 2. Acquisitions
to the consolidated financial statements for our 2017 Form 10-K) and the issuance of the Series A Convertible Units (the "Series A Units"), the Partnership entered into an amendment (the “Amendment”) to our Partnership Agreement. The Amendment established the terms of the Series A Units and any additional Series A Units that may be issued in kind as a distribution (the “Series A PIK Units”), and provided that each Series A Unit will have the right to share in distributions from us on a pro-rata basis with the common units. All or any portion of each distribution payable in respect of the Series A Units (the “Series A Convertible Unit Distribution”) may, at our election, be paid in Series A PIK Units. To the extent any portion of the Series A Convertible Unit Distribution is paid in Series A PIK Units for any quarter, the distribution to the holders of incentive distribution rights shall be reduced by that portion of the distribution that is attributable to the payment of those Series A PIK Units, as further described in the Amendment. The Series A Units and the Series A PIK Units will convert on a
one
-for-one basis, at the earlier of the date on which we first make a regular quarterly cash distribution with respect to any quarter to holders of common units in an amount at least equal to
$0.22
per common unit or upon a change of control. The Series A Units have the same voting rights as if they were outstanding common units and will vote together with the common units as a single class. In addition, the Series A Units are entitled to vote as a separate class on any matters that materially adversely affect the rights or preferences of the Series A Units in relation to other classes of partnership interests or as required by law.
Series B Convertible Units
On October 28, 2016, we issued
4,512,500
Series B Convertible Units (the “Series B Units”) to WCC in exchange for WCC’s
4,512,500
common units (the "Exchange"). Upon issuance of the Series B Units in the Exchange, WCC’s common units were canceled. The Series B Units do not share in distributions with the common units and are convertible at the option of the holder on a
one
-for-one basis into common units on the day after the record date for a cash distribution on the common units in which the Partnership is unable to make such a distribution without exceeding its restricted payment basket under the 2014 Financing Agreement (as defined in
Note 6. Debt And Lines Of Credit
). This date occurred on November 15, 2017 and the holder of the Series B Units has not yet converted these Series B Units into common units. The Series B Units will convert automatically upon a change of control or a dissolution or liquidation of the Partnership. The Series B Units have the same voting rights as if they were outstanding common units and will vote together with the common units as a single class. In addition, the Series B Units are entitled to vote as a separate class on any matters that materially adversely affect the rights or preferences of the Series B Units in relation to other classes of partnership interests or as required by law. Concurrently with the Exchange, we entered into a second amendment to the Partnership Agreement, which established the terms of the Series B Units.
Liquidation Units
The liquidation units have no distribution or voting rights, other than in connection with liquidation. For tax purposes, liquidation units are allocated additional taxable income but no additional taxable loss compared to other unit classes.
Warrants
In June 2013, in connection with a prior credit facility, certain lenders and lender affiliates received warrants entitling them to purchase 166,557 common units at
$0.12
per unit. The warrants participated in distributions whether or not exercised. All outstanding warrants expired without being exercised in June 2018.
Net Income (Loss) Attributable to Limited Partner Common Units
Net income (loss) is allocated to the limited partner units, Series A Units, Series B Units and general partner units in accordance with their respective ownership percentages, after giving effect to distributions and declared distributions on Series A Units, warrants and general partner units, including incentive distribution rights. Basic and diluted limited partners’ net income (loss) per limited partner common unit is calculated by dividing limited partners’ interest in net income (loss) by the weighted average number of limited partner common units outstanding during the period. We determined basic and diluted limited partners’ net loss per limited partner common unit as follows (in thousands, except per unit amounts):
WESTMORELAND RESOURCE PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Net loss attributable to the Partnership
|
$
|
(17,308
|
)
|
|
$
|
(1,360
|
)
|
|
$
|
(123,945
|
)
|
|
$
|
(12,528
|
)
|
Less:
|
|
|
|
|
|
|
|
Paid and declared distributions on Series A convertible units
|
—
|
|
|
1,940
|
|
|
—
|
|
|
6,302
|
|
Series A convertible units share of undistributed loss
|
(12,897
|
)
|
|
(2,573
|
)
|
|
(92,360
|
)
|
|
(14,311
|
)
|
Series B convertible units share of undistributed loss
|
(3,413
|
)
|
|
(695
|
)
|
|
(24,442
|
)
|
|
(3,947
|
)
|
Paid and declared distributions on general partner units
|
—
|
|
|
4
|
|
|
—
|
|
|
14
|
|
General partner units share of undistributed loss
|
(27
|
)
|
|
(6
|
)
|
|
(185
|
)
|
|
(31
|
)
|
Paid and declared distributions on warrants
|
—
|
|
|
19
|
|
|
—
|
|
|
63
|
|
Undistributed net loss attributable to limited partners
|
$
|
(971
|
)
|
|
$
|
(49
|
)
|
|
$
|
(6,958
|
)
|
|
$
|
(618
|
)
|
|
|
|
|
|
|
|
|
Weighted average number of limited partner common units outstanding used in computation of limited partners' net loss per common unit (basic and diluted)
|
1,285
|
|
|
1,285
|
|
|
1,285
|
|
|
1,271
|
|
Net loss per limited partner common unit, basic and diluted
|
$
|
(0.76
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(5.42
|
)
|
|
$
|
(0.49
|
)
|
12. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table reflects the changes in accumulated other comprehensive income (loss) by component:
|
|
|
|
|
|
Accumulated Other Comprehensive Income (Loss)
|
|
(In thousands)
|
Balance at December 31, 2017
|
$
|
80
|
|
Other comprehensive loss before reclassification
|
(385
|
)
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
106
|
|
Balance at September 30, 2018
|
$
|
(199
|
)
|
The following table reflects the reclassifications out of accumulated other comprehensive income (loss) for the
three and nine
months ended
September 30, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount Reclassified From Accumulated Other Comprehensive Income (Loss)
|
|
|
Details About Accumulated Other Comprehensive Income (Loss) Components
|
|
Three Months Ended September 30, 2018
|
|
Nine Months Ended September 30, 2018
|
|
Affected Line Item in the Statement Where Net Loss is Presented
|
|
|
(In thousands)
|
|
Realized (gain) loss on available-for-sale debt securities
|
|
$
|
(1
|
)
|
|
$
|
106
|
|
|
Other income (loss)
|
13. RELATED PARTY TRANSACTIONS
The Board of the GP and its Conflicts Committee review our related party transactions that involve a potential conflict of interest between a general partner and WMLP or its subsidiaries or another partner to determine that such transactions reflect market-clearing terms and conditions customary in the coal industry. As a result of these reviews, the Board and the Conflicts Committee approved each of the transactions described below that had such potential conflict of interest as fair and reasonable to us and our limited partners.
WESTMORELAND RESOURCE PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
Effective January 1, 2015, the Partnership and the GP, which is a wholly owned subsidiary of WCC, entered into an administrative and operational services agreement (the “Services Agreement”). The Services Agreement is terminable by either party upon
120
days’ written notice. The current term of the Services Agreement expires on June 1, 2019, and automatically renews for successive
one
-year periods unless terminated earlier upon 120-days’ written notice. On January 31, 2018, we received a letter from WCC providing 120 days’ written notice that it was reserving its rights with respect to its continued provision of services to the GP under the Services Agreement, noting that WCC would “continue to pursue value-maximizing transactions for all relevant stakeholders” and noting that WCC would be willing to continue to provide services to the GP and us under certain circumstances. On February 22, 2018, we responded to that letter questioning whether a valid notice of termination of the Services Agreement was provided, addressing the continued deployment of the mine-related employees, noting our intention to seek alternative service providers and preserving our options with respect to the ongoing negotiations over WCC’s provisions of services to the GP and us under the Services Agreement. As of the date of this filing, WCC continues to provide certain administrative and operational services to us as part of the Services Agreement.
Under the terms of the Services Agreement, the GP provides services through its, or an affiliate's, employees and is reimbursed for all related costs incurred on our behalf. Pursuant to the Services Agreement, the Partnership engaged the GP to continue providing services such as general administrative and management, engineering, operations (including mining operations), geological, corporate development, real property, marketing and other services to the Partnership. Administrative services include without limitation legal, finance and accounting, treasury, insurance administration and claims processing, risk management, health, safety and environmental, information technology, human resources, credit, payroll, internal audit and tax. During the three and
nine months ended September 30, 2018
, respectively, we paid the GP approximately
$19.6 million
and
$54.3 million
, respectively, for these services performed under the Services Agreement primarily related to employee costs. Further, under the Services Agreement, the Partnership pays the GP a fixed annual management fee of
$2.2 million
for certain executive and administrative services, and reimburses the GP at cost for other expenses and expenditures. This fixed annual management fee has not been prepaid and is currently being expensed as incurred. Expense related to this annual management fee, included in
Selling and administrative
in the Consolidated Statements of Operations (unaudited), was
$0.5 million
and
$1.6 million
for the three and
nine months ended September 30, 2018
and
2017
, respectively. Pursuant to the Services Agreement, the primary reimbursements to our GP were for costs related to payroll. Reimbursable costs under the Services Agreement totaling
$1.0 million
and
$1.3 million
were included in accounts payable as of
September 30, 2018
and
December 31, 2017
, respectively.
On January 9, 2017, the Partnership acquired surface coal reserves (“Johnson Run”) through conveyance of leases and recoupable advance royalty payments from Buckingham Coal Company, LLC, ("BCC") a wholly owned subsidiary of WCC, for
$1.7 million
, of which
$1.5 million
was deemed a distribution as the transaction was between entities under common control.
Finally, we sold coal to a subsidiary of WCC, which generated
$2.6 million
and
$2.6 million
in revenues during the three and
nine months ended September 30, 2018
, respectively, and
$3.2 million
and
$15.3 million
in revenues for the three and
nine months ended September 30, 2017
, respectively. Further, as of
September 30, 2018
and
December 31, 2017
, accounts receivable related to the coal sales to the subsidiary of WCC totaled
$1.4 million
and
$3.8 million
, respectively, and were included in
Receivables
in the Consolidated Balance Sheet (unaudited).
14. SEGMENT INFORMATION
We operate in
one
business segment. We operate surface coal mines in Ohio and Wyoming, selling thermal coal to utilities, industrial customers, municipalities and other coal-related entities primarily in the Midwest and Wyoming. All of our operations have similar economic characteristics including but not limited to coal quality, geology, coal marketing opportunities, mining and transportation methods and regulatory issues. Our operating and executive management makes its decisions based on consolidated reports. Our Ohio operating subsidiaries share customers and a particular customer may receive coal from any one of such Ohio operating subsidiaries. We also lease or sublease coal reserves to others through our Ohio Operations in exchange for a per ton royalty rate.
15. SUBSEQUENT EVENTS
For information regarding the Partnership's filing under Chapter 11 of the United States Bankruptcy Code, see
Note 1. Basis Of Presentation
.
The Partnership has evaluated subsequent events in accordance with ASC 855,
Subsequent Events
, through the filing date of this Quarterly Report, and determined that no other events have occurred that have not been disclosed elsewhere in the notes to the consolidated financial statements (unaudited) that would require adjustments to disclosures in the consolidated financial statements (unaudited).