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Section 1: 10-Q (10-Q)

felp-10q_20170930.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended September 30, 2017

OR

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

For the transition period from          to          

Commission File Number: 001-36503

 

Foresight Energy LP

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

 

80-0778894

(State or other jurisdiction

of incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

211 North Broadway, Suite 2600, Saint Louis, MO

 

63102

(Address of principal executive offices)

 

(Zip code)

Registrant’s telephone number, including area code: (314) 932-6160

 

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

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

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

 

Large accelerated filer

 

Accelerated filer           Non-accelerated filer  

  

Smaller reporting company        

 

 

 

 

 

 

 

 

 (do not check if a smaller reporting company)

  

Emerging growth company  

 

 

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

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

As of November 6, 2017, the registrant had 77,644,489 common units and 64,954,691 subordinated units outstanding.

 

 

 

 


 

 

 

TABLE OF CONTENTS

 

PART I

FINANCIAL INFORMATION

 

Item 1.Financial Statements

 

 

 

 

Unaudited Condensed Consolidated Balance Sheets

3

Unaudited Condensed Consolidated Statements of Operations

4

Unaudited Condensed Consolidated Statement of Partners’ Capital

5

Unaudited Condensed Consolidated Statements of Cash Flows

6

Notes to Unaudited Condensed Consolidated Financial Statements

8

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

25

Item 3.Quantitative and Qualitative Disclosures About Market Risk

36

Item 4.Controls and Procedures

37

PART II

 

OTHER INFORMATION

 

Item 1.Legal Proceedings

37

Item 1A.Risk Factors

37

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

37

Item 3.Defaults Upon Senior Securities

37

Item 4.Mine Safety Disclosures

37

Item 5.Other Information

37

Item 6. Exhibits

38

Signatures

39

 

 

2


PART I – FINANCIAL INFORMATION.

 

Item 1. Financial Statements.

 

Foresight Energy LP

Unaudited Condensed Consolidated Balance Sheets

(In Thousands)

 

(Successor)

 

 

 

(Predecessor)

 

 

September 30,

 

 

 

December 31,

 

 

2017

 

 

 

2016

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

24,899

 

 

 

$

103,690

 

Accounts receivable

 

25,760

 

 

 

 

54,905

 

Due from affiliates

 

13,145

 

 

 

 

16,891

 

Financing receivables - affiliate

 

3,078

 

 

 

 

2,904

 

Inventories, net

 

75,135

 

 

 

 

43,052

 

Prepaid royalties

 

 

 

 

 

3,136

 

Deferred longwall costs

 

5,374

 

 

 

 

13,310

 

Coal derivative assets

 

 

 

 

 

7,650

 

Other prepaid expenses and current assets

 

19,046

 

 

 

 

21,443

 

Contract-based intangibles

 

16,174

 

 

 

 

 

Total current assets

 

182,611

 

 

 

 

266,981

 

Property, plant, equipment and development, net

 

2,436,279

 

 

 

 

1,318,937

 

Due from affiliates

 

947

 

 

 

 

1,843

 

Financing receivables - affiliate

 

64,904

 

 

 

 

67,235

 

Prepaid royalties, net

 

834

 

 

 

 

13,765

 

Other assets

 

16,653

 

 

 

 

20,250

 

Contract-based intangibles

 

4,741

 

 

 

 

 

Total assets

$

2,706,969

 

 

 

$

1,689,011

 

Liabilities and partners’ capital (deficit)

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Current portion of long-term debt and capital lease obligations

$

60,867

 

 

 

$

368,993

 

Current portion of sale-leaseback financing arrangements

 

4,062

 

 

 

 

1,372

 

Accrued interest

 

26,942

 

 

 

 

29,760

 

Accounts payable

 

67,713

 

 

 

 

60,971

 

Accrued expenses and other current liabilities

 

54,447

 

 

 

 

43,592

 

Asset retirement obligations

 

8,167

 

 

 

 

7,273

 

Due to affiliates

 

10,028

 

 

 

 

20,904

 

Contract-based intangibles

 

27,985

 

 

 

 

 

Total current liabilities

 

260,211

 

 

 

 

532,865

 

Long-term debt and capital lease obligations

 

1,274,343

 

 

 

 

1,022,070

 

Sale-leaseback financing arrangements

 

196,816

 

 

 

 

190,497

 

Asset retirement obligations

 

37,579

 

 

 

 

37,644

 

Warrant liability

 

 

 

 

 

51,169

 

Other long-term liabilities

 

46,247

 

 

 

 

9,359

 

Contract-based intangibles

 

145,822

 

 

 

 

 

Total liabilities

 

1,961,018

 

 

 

 

1,843,604

 

Limited partners' capital (deficit):

 

 

 

 

 

 

 

 

Common unitholders (77,644 and 66,105 units outstanding as of September 30, 2017 and December 31, 2016, respectively)

 

459,349

 

 

 

 

100,628

 

Subordinated unitholder (64,955 units outstanding as of September 30, 2017 and December 31, 2016)

 

286,602

 

 

 

 

(255,221

)

Total partners' capital (deficit)

 

745,951

 

 

 

 

(154,593

)

Total liabilities and partners' capital (deficit)

$

2,706,969

 

 

 

$

1,689,011

 

 

See accompanying notes.

 

3


 

Foresight Energy LP

Unaudited Condensed Consolidated Statements of Operations

(In Thousands, Except per Unit Data)

 

 

(Successor)

 

 

(Predecessor)

 

 

(Successor)

 

 

(Predecessor)

 

 

(Predecessor)

 

 

Three Months Ended

September 30, 2017

 

 

Three Months Ended

September 30, 2016

 

 

Period From

April 1, 2017 through

September 30, 2017

 

 

Period From

January 1, 2017

through

March 31, 2017

 

 

Nine Months Ended

September 30, 2016

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Coal sales

$

229,670

 

 

$

228,472

 

 

$

434,186

 

 

$

227,813

 

 

$

615,662

 

Other revenues

 

2,770

 

 

 

2,353

 

 

 

5,347

 

 

 

2,581

 

 

 

7,249

 

Total revenues

 

232,440

 

 

 

230,825

 

 

 

439,533

 

 

 

230,394

 

 

 

622,911

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of coal produced (excluding depreciation, depletion and amortization)

 

122,839

 

 

 

110,311

 

 

 

228,629

 

 

 

117,762

 

 

 

311,557

 

Cost of coal purchased

 

 

 

 

183

 

 

 

 

 

 

7,973

 

 

 

733

 

Transportation

 

39,414

 

 

 

33,324

 

 

 

67,672

 

 

 

37,726

 

 

 

96,679

 

Depreciation, depletion and amortization

 

53,754

 

 

 

43,637

 

 

 

103,291

 

 

 

39,298

 

 

 

125,521

 

Contract amortization

 

(15,611

)

 

 

 

 

 

(6,878

)

 

 

 

 

 

 

Accretion on asset retirement obligations

 

726

 

 

 

844

 

 

 

1,454

 

 

 

710

 

 

 

2,532

 

Selling, general and administrative

 

7,858

 

 

 

7,340

 

 

 

15,135

 

 

 

6,554

 

 

 

18,648

 

Transition and reorganization costs

 

 

 

 

 

 

 

 

 

 

 

 

 

6,889

 

Loss on commodity derivative contracts

 

1,101

 

 

 

5,987

 

 

 

2,218

 

 

 

1,492

 

 

 

17,270

 

Other operating (income) expense, net

 

(48

)

 

 

(2,215

)

 

 

(13,538

)

 

 

451

 

 

 

(2,124

)

Operating income

 

22,407

 

 

 

31,414

 

 

 

41,550

 

 

 

18,428

 

 

 

45,206

 

Other expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

35,988

 

 

 

37,939

 

 

 

71,408

 

 

 

43,380

 

 

 

105,269

 

Debt restructuring costs

 

 

 

 

6,072

 

 

 

 

 

 

 

 

 

21,702

 

Change in fair value of warrants

 

 

 

 

(1,452

)

 

 

 

 

 

(9,278

)

 

 

(1,452

)

Loss on early extinguishment of debt

 

 

 

 

13,186

 

 

 

 

 

 

95,510

 

 

 

13,294

 

Net loss

 

(13,581

)

 

 

(24,331

)

 

 

(29,858

)

 

 

(111,184

)

 

 

(93,607

)

Less: net (loss) income attributable to noncontrolling interests

 

 

 

 

(45

)

 

 

 

 

 

 

 

 

169

 

Net loss attributable to controlling interests

$

(13,581

)

 

$

(24,286

)

 

$

(29,858

)

 

$

(111,184

)

 

$

(93,776

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss available to limited partner units - basic and diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common unitholders

$

(5,097

)

 

$

(12,249

)

 

$

(13,887

)

 

$

(56,259

)

 

$

(47,135

)

Subordinated unitholder

$

(8,484

)

 

$

(12,037

)

 

$

(15,971

)

 

$

(54,925

)

 

$

(46,641

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per limited partner unit - basic and diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common unitholders

$

(0.07

)

 

$

(0.19

)

 

$

(0.18

)

 

$

(0.85

)

 

$

(0.72

)

Subordinated unitholder

$

(0.13

)

 

$

(0.19

)

 

$

(0.25

)

 

$

(0.85

)

 

$

(0.72

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average limited partner units outstanding - basic and diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common units

 

77,510

 

 

 

66,098

 

 

 

76,893

 

 

 

66,533

 

 

 

65,737

 

Subordinated units

 

64,955

 

 

 

64,955

 

 

 

64,955

 

 

 

64,955

 

 

 

64,955

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distributions declared per limited partner unit

$

0.0647

 

 

$

 

 

$

0.0647

 

 

$

 

 

$

 

 

See accompanying notes.

 

4


Foresight Energy LP

Unaudited Condensed Consolidated Statement of Partners’ Capital

(In Thousands, Except per Unit Data)

 

 

Limited Partners

 

 

 

 

 

 

Common

 

 

Number of

 

 

Subordinated

 

 

Number of

 

 

Total Partners'

 

 

Unitholders

 

 

Common Units

 

 

Unitholder

 

 

Subordinated Units

 

 

Capital (Deficit)

 

Predecessor balance at January 1, 2017

$

100,628

 

 

 

66,104,673

 

 

$

(255,221

)

 

 

64,954,691

 

 

$

(154,593

)

Net loss attributable to predecessor

 

(56,259

)

 

 

 

 

 

(54,925

)

 

 

 

 

 

(111,184

)

Issuance of common units to Murray Energy (affiliate)

 

60,586

 

 

 

9,628,108

 

 

 

 

 

 

 

 

 

60,586

 

Reclassification of warrants

 

41,888

 

 

 

 

 

 

 

 

 

 

 

 

41,888

 

Equity-based compensation

 

318

 

 

 

 

 

 

 

 

 

 

 

 

318

 

Issuance of equity-based awards

 

 

 

 

235

 

 

 

 

 

 

 

 

 

 

Predecessor balance at March 31, 2017

 

147,161

 

 

 

75,733,016

 

 

 

(310,146

)

 

 

64,954,691

 

 

 

(162,985

)

Pushdown accounting adjustment

 

449,308

 

 

 

 

 

 

714,170

 

 

 

 

 

 

1,163,478

 

Successor balance at March 31, 2017

 

596,469

 

 

 

75,733,016

 

 

 

404,024

 

 

 

64,954,691

 

 

 

1,000,493

 

Net loss attributable to successor

 

(13,887

)

 

 

 

 

 

(15,971

)

 

 

 

 

 

(29,858

)

Cash distributions

 

(5,026

)

 

 

 

 

 

 

 

 

 

 

 

(5,026

)

Pushdown accounting adjustment

 

(118,285

)

 

 

 

 

 

(101,451

)

 

 

 

 

 

(219,736

)

Conversion of warrants, net

 

 

 

 

1,770,343

 

 

 

 

 

 

 

 

 

 

Equity-based compensation

 

439

 

 

 

 

 

 

 

 

 

 

 

 

439

 

Issuance of equity-based awards

 

 

 

 

141,130

 

 

 

 

 

 

 

 

 

 

Net settlement of withholding taxes on issued LTIP awards

 

(361

)

 

 

 

 

 

 

 

 

 

 

 

(361

)

Successor balance at September 30, 2017

$

459,349

 

 

 

77,644,489

 

 

$

286,602

 

 

 

64,954,691

 

 

$

745,951

 

 

See accompanying notes.

 

5


Foresight Energy LP

Unaudited Condensed Consolidated Statements of Cash Flows

(In Thousands)

 

(Successor)

 

 

(Predecessor)

 

 

 

 

 

 

Period From

April 1, 2017 through

September 30, 2017

 

 

Period From

January 1, 2017

through

March 31, 2017

 

 

(Predecessor)

Nine Months Ended

September 30, 2016

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

 

 

 

Net loss

$

(29,858

)

 

$

(111,184

)

 

$

(93,607

)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

 

 

 

 

 

 

Depreciation, depletion and amortization

 

103,291

 

 

 

39,298

 

 

 

125,521

 

Amortization of debt discount and deferred issuance costs

 

1,273

 

 

 

6,365

 

 

 

 

Contract amortization

 

(6,878

)

 

 

 

 

 

 

Equity-based compensation

 

439

 

 

 

318

 

 

 

4,711

 

Loss on commodity derivative contracts

 

2,218

 

 

 

1,492

 

 

 

17,270

 

Settlements of commodity derivative contracts

 

320

 

 

 

3,724

 

 

 

13,112

 

Realized gains on coal derivatives included in investing activities

 

 

 

 

(3,520

)

 

 

 

Transition and reorganization expenses paid by Foresight Reserves

 

 

 

 

 

 

 

2,333

 

Current period interest expense converted into debt

 

 

 

 

 

 

 

31,484

 

Change in fair value of warrants

 

 

 

 

(9,278

)

 

 

 

Debt extinguishment expense

 

 

 

 

95,510

 

 

 

11,125

 

Other

 

8,915

 

 

 

1,321

 

 

 

9,025

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

9,450

 

 

 

19,695

 

 

 

(3,297

)

Due from/to affiliates, net

 

6,923

 

 

 

(13,157

)

 

 

8,627

 

Inventories

 

(22,159

)

 

 

(917

)

 

 

9,737

 

Prepaid expenses and other assets

 

(6,331

)

 

 

(2,375

)

 

 

(2,549

)

Prepaid royalties

 

6,240

 

 

 

(241

)

 

 

2,699

 

Commodity derivative assets and liabilities

 

266

 

 

 

(532

)

 

 

2,624

 

Accounts payable

 

(582

)

 

 

7,324

 

 

 

(3,121

)

Accrued interest

 

22,493

 

 

 

(9,803

)

 

 

3,380

 

Accrued expenses and other current liabilities

 

1,188

 

 

 

(3,430

)

 

 

5,843

 

Other

 

1,300

 

 

 

1,782

 

 

 

1,422

 

Net cash provided by operating activities

 

98,508

 

 

 

22,392

 

 

 

146,339

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

 

 

 

Investment in property, plant, equipment and development

 

(36,960

)

 

 

(19,908

)

 

 

(28,031

)

Return of investment on financing arrangements with Murray Energy

 

1,452

 

 

 

705

 

 

 

1,997

 

Settlement of certain coal derivatives

 

 

 

 

3,520

 

 

 

 

Proceeds from sale of property, plant and equipment

 

 

 

 

1,898

 

 

 

 

Other

 

 

 

 

 

 

 

2,359

 

Net cash used in investing activities

 

(35,508

)

 

 

(13,785

)

 

 

(23,675

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

 

 

 

Net change in borrowings under revolving credit facility

 

 

 

 

(352,500

)

 

 

 

Net change in borrowings under A/R securitization program

 

(10,300

)

 

 

7,000

 

 

 

(12,200

)

Proceeds from other long-term debt

 

 

 

 

1,234,438

 

 

 

 

Payments on debt and capital lease obligations

 

(23,539

)

 

 

(970,721

)

 

 

(34,152

)

Proceeds from issuance of common units to Murray Energy

 

 

 

 

60,586

 

 

 

 

Distributions paid

 

(5,026

)

 

 

 

 

 

(182

)

Debt extinguishment costs

 

 

 

 

(57,645

)

 

 

 

Debt issuance costs paid

 

 

 

 

(27,328

)

 

 

(15,825

)

Other

 

(3,471

)

 

 

(1,892

)

 

 

(996

)

Net cash used in financing activities

 

(42,336

)

 

 

(108,062

)

 

 

(63,355

)

Net increase (decrease) in cash and cash equivalents

 

20,664

 

 

 

(99,455

)

 

 

59,309

 

Cash and cash equivalents, beginning of period

 

4,235

 

 

 

103,690

 

 

 

17,538

 

Cash and cash equivalents, end of period

$

24,899

 

 

$

4,235

 

 

$

76,847

 

 

See accompanying notes.

6


Foresight Energy LP

Unaudited Condensed Consolidated Statements of Cash Flows (CONTINUED)

(In Thousands)

 

(Successor)

 

 

(Predecessor)

 

 

 

 

 

 

Period From

April 1, 2017 through

September 30, 2017

 

 

Period From

January 1, 2017

through

March 31, 2017

 

 

(Predecessor)

Nine Months Ended

September 30, 2016

 

Supplemental disclosures of non-cash financing activities:

 

 

 

 

 

 

 

 

 

 

 

Interest converted into debt

$

 

 

$

 

 

$

49,203

 

Fair value of warrants issued

$

 

 

$

 

 

$

34,045

 

Non-cash capital contribution from Foresight Reserves LP

$

 

 

$

 

 

$

1,046

 

Modifications to capital lease obligations

$

 

 

$

 

 

$

663

 

Short-term insurance financing and vendor financing

$

2,188

 

 

$

 

 

$

603

 

Reclassification of warrant liability to partners' capital

$

 

 

$

41,888

 

 

$

 

 

See accompanying notes.

 

7


Foresight Energy LP

Notes to Unaudited Condensed Consolidated Financial Statements

 

1. Organization, Nature of Business and Basis of Presentation

 

Foresight Energy LLC (“FELLC”), a perpetual-term Delaware limited liability company, was formed in September 2006 for the development, mining, transportation and sale of coal. Prior to June 23, 2014, Foresight Reserves, LP (“Foresight Reserves”) owned 99.333% of FELLC and a member of FELLC’s management owned 0.667%. On June 23, 2014, in connection with the initial public offering (“IPO”) of Foresight Energy LP (“FELP”), Foresight Reserves and a member of management contributed their ownership interests in FELLC to FELP for which they were issued common and subordinated units in FELP. Because this transaction was between entities under common control, the contributed assets and liabilities of FELLC were recorded in the combined consolidated financial statements of FELP at FELLC’s historical cost. FELP has been managed by Foresight Energy GP LLC (“FEGP”) subsequent to the IPO.

 

On April 16, 2015, Murray Energy Corporation and its affiliates (“Murray Energy”) and Foresight Reserves completed a transaction whereby Murray Energy acquired a 34% voting interest in FEGP and all of the outstanding subordinated units of FELP, representing a 50% ownership of the Partnership’s limited partner units outstanding at that time. On March 28, 2017, following the completion of a debt refinancing (see Note 8), Murray Energy exercised its option (the “FEGP Option”) to acquire an additional 46% voting interest in FEGP from Foresight Reserves and Michael J. Beyer (“Beyer”) pursuant to the terms of an option agreement, dated April 16, 2015, among Murray Energy, Foresight Reserves and Beyer, as amended, thereby increasing Murray Energy’s voting interest in FEGP to 80%. The aggregate exercise price of the FEGP Option was $15 million. Murray Energy’s acquisition of the incremental ownership in FEGP resulted in its obtaining control of FELP. Per Accounting Standards Codification (“ASC”) 805-50-25-4, Murray Energy, as the acquirer of FELP through FEGP, has the option to apply pushdown accounting in the separate financial statements of the acquiree. Murray Energy elected to adopt pushdown accounting in our stand alone financial statements and therefore we have reflected the required purchase accounting adjustments in our consolidated financial statements (see Note 3).

 

Also, due to the application of pushdown accounting, our condensed consolidated financial statements and certain footnote disclosures are presented in two distinct periods to indicate the application of two different bases of accounting between the periods presented. The periods prior to the acquisition date are identified as “Predecessor” and the period after the acquisition date is identified as “Successor”. For accounting purposes, management has designated the acquisition date as March 31, 2017 (the “Acquisition Date”), as the operating results and change in financial position for the intervening period was not material.

 

As used hereafter in this report, the terms “Foresight Energy LP,” “FELP,” the “Partnership,” “we,” “us” or like terms, refer to the consolidated results of Foresight Energy LP and its consolidated subsidiaries and affiliates, unless the context otherwise requires or where otherwise indicated.

 

The Partnership operates in a single reportable segment and currently owns four underground mining complexes in the Illinois Basin: Williamson Energy, LLC (“Williamson”); Sugar Camp Energy, LLC (“Sugar Camp”); Hillsboro Energy, LLC (“Hillsboro”); and Macoupin Energy, LLC (“Macoupin”). Mining operations at our Hillsboro complex have been idled since March 2015 due to a combustion event. In April 2016, we temporarily sealed the entire mine to reduce the oxygen flow paths into the mine. In May 2017, we breached the seal and mine rescue teams are currently evaluating and monitoring the mine. We are uncertain as to when production will resume at our Hillsboro operation. Our mined coal is sold to a diverse customer base, including electric utility and industrial companies primarily in the eastern United States, as well as overseas markets.

The accompanying condensed consolidated financial statements contain all significant adjustments (consisting of normal recurring accruals) that, in the opinion of management, are necessary to present fairly, the Partnership’s condensed consolidated financial position, results of operations and cash flows for all periods presented. In preparing the condensed consolidated financial statements, management used estimates and assumptions that may affect reported amounts and disclosures. To the extent there are material differences between the estimates and actual results, the impact to the Partnership’s financial condition or results of operations could be material. The unaudited condensed consolidated financial statements do not include footnotes and certain financial information as required annually under U.S. generally accepted accounting principles (“U.S. GAAP”) and, therefore, should be read in conjunction with the annual audited consolidated financial statements for the year ended December 31, 2016 included in our Annual Report on Form 10-K filed with the SEC on March 1, 2017. The results of operations for interim periods are not necessarily indicative of results that can be expected for any future period, including the year ending December 31, 2017. Intercompany transactions are eliminated in consolidation.

 

8


2. New Accounting Standards

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09, Compensation – Stock Compensation, which was issued to simplify the accounting for share-based payment transactions, including income tax consequences, the classification of awards as equity or liabilities, an option to recognize gross equity-based compensation expense with actual forfeitures recognized as they occur and the classification on the statement of cash flows. This pronouncement is effective for reporting periods beginning after December 15, 2016. We adopted this update during the first quarter of 2017 and it had an immaterial impact on our condensed consolidated financial statements.

In February 2016, the FASB updated guidance regarding the accounting for leases. This update requires lessees to recognize a lease liability and a lease asset for all leases, including operating leases, with a term greater than 12 months on its balance sheet. The update also expands the required quantitative and qualitative disclosures surrounding leases. This update is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years, with earlier application permitted. This update will be applied using a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. We are currently evaluating the effect of this update on our consolidated financial statements.

In July 2015, the FASB issued ASU 2015-11, Inventory: Simplifying the Measurement of Inventory, which simplifies the measurement of inventories valued under most methods. Under this new guidance, inventories valued under these methods would be valued at the lower of cost and net realizable value, with net realizable value defined as the estimated selling price less reasonable costs to sell the inventory. We adopted this update during the first quarter of 2017 and it did not have a material impact on our condensed consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, that introduces a new five-step revenue recognition model in which an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU also requires disclosures sufficient to enable users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers, including qualitative and quantitative disclosures about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. We will adopt ASU 2014-09 as of January 1, 2018 using the modified retrospective approach. While we have not yet fully completed our review of the impact of the new standard, we do not currently anticipate a material impact on our revenue recognition practices. We are in the process of reviewing the various terms and clauses within our coal sales contracts and are continuing to evaluate the disclosure requirements under this standard as well as additional changes, modifications or interpretations which may impact our current conclusions. While the primary source of revenue is from the sale of coal, we continue to evaluate other revenue streams to assess the impact, if any, related to the adoption of the new standard.

 

 

3. Pushdown Accounting

 

Pursuant to the acquisition by Murray Energy of the controlling interest in FEGP, management, with the assistance of a third-party valuation firm, has preliminarily estimated the fair value of FELP’s assets and liabilities as of the Acquisition Date. Given that the valuation being performed by the third-party valuation firm is not yet complete, the value of certain assets and liabilities are preliminary in nature and will be adjusted as additional analysis is performed and as additional information is obtained about the facts and circumstances that existed at the acquisition date. As a result, material adjustments to this allocation may occur as the valuation and the related pushdown accounting is finalized (such finalization to be completed within one year of the Acquisition Date, per the terms of ASC 805-50-25-4). Adjustments to the fair value of FELP’s asset and liabilities as of the Acquisition Date will be recorded during the period in which the adjustment is determined, including the effect on earnings of any amounts we would have recorded in previous periods if the accounting had been completed at the Acquisition Date (i.e. the historical reported financial statements will not be retrospectively adjusted). During the three months ended September 30, 2017, changes to the estimated fair value of FELP’s assets and liabilities, specifically increases in the estimated fair value of inventories, decreases in the estimated fair value of favorable contract-based intangibles, and decreases the estimated fair value of mineral rights, land and land rights, resulted in an increase of $4.3 million in cost of coal produced (excluding depreciation, depletion, and amortization), a decrease of $16.4 million in contract amortization, and a decrease of $1.2 million in depreciation, depletion, and amortization that would have been recognized in the three months ended June 30, 2017, if the adjustments to provisional amounts had been recognized as of the Acquisition Date.

 

The preliminary fair value of our mineral rights, which are controlled through private coal leases, were established utilizing discounted cash flow (“DCF”) models. The DCF models were based on assumptions market participants would use in the pricing of these assets as well as projections of revenues and expenditures that would be incurred to mine or maintain these coal reserves through the life of mine. Our DCF models assume that the combustion event at our Hillsboro mine will subside and that production will resume at this mine.  The tax-effected discount rates utilized in the DCF models ranged from 11.5% to 15.5% and the future cash flows were based on our forecast models, which included a variety of estimates and assumptions, such as pricing and demand for coal and expected

9


future capital expenditures. Coal pricing was based principally on third-party forward pricing curves, adjusted for the quality and expected sales point of our coal.

 

The preliminary fair value of plant and equipment was established with the assistance of a third-party valuation firm utilizing both market and cost approaches. The market approach was used to estimate the value of assets where detailed product specification data and maintenance history for the asset was available and an active market was identified for comparable property. The cost approach was utilized where there were limitations in the secondary equipment market. Under the cost approach, an estimate of the replacement cost of the asset was made adjusting for depreciation due to physical deterioration and also contemplated functional and economic obsolescence, where appropriate. Useful lives were assigned to all assets based on remaining future economic benefit of each asset.

 

The carrying values of certain of FELP's assets and liabilities in this preliminary estimate were assumed to approximate their fair values.

 

The preliminary net purchase accounting adjustments to record the assets and liabilities of FELP to fair value as of the Acquisition Date resulted in a $944 million net increase to net assets, and was comprised of the following preliminary adjustments from carrying value as of the Acquisition Date (in thousands):

 

Working capital and certain other long-term asset accounts (1)

$

(29,995

)

Mineral rights, land and land rights (2)

 

1,474,693

 

Plant, equipment and development (2)

 

(261,739

)

Contract-based intangibles, net

 

(159,769

)

Deferred debt issuance costs

 

(33,879

)

Sales-leaseback financing arrangements

 

(9,267

)

Long-term liabilities (1)

 

(36,302

)

Pushdown accounting adjustment

$

943,742

 

 

(1) – Accrued expenses and other current liabilities and other long-term liabilities include liabilities of $16.9 million and $38.9 million, respectively, for certain royalty and transportation executory contracts under which we have contractual future minimum required payments but we do not expect to receive any future economic benefits.

(2) – The development costs of the mine were reduced to zero as part of the fair value adjustment and the corresponding value of mineral rights assets were increased to reflect the future cash flows that the developed mines are expected to generate. As a result, the value of the plant, equipment and development asset category decreased significantly and the value of the mineral rights category increased significantly.

 

The following table presents each major class of intangible assets preliminarily identified as of the Acquisition Date (in thousands):

 

Unfavorable sales contracts, net

$

(9,214

)

Unfavorable royalty agreements

 

(150,555

)

Total contract-based intangibles, net

$

(159,769

)

 

The fair values of unfavorable sales contracts, net and unfavorable royalty agreements were determined using a DCF model based on the difference between estimated market rates and actual contract rates for each of the respective contracts. The favorable and unfavorable sales contract assets and liabilities will be amortized into contract amortization in the consolidated statement of operations on a per ton basis as the coal is sold throughout the term of each individual sales contract.  The unfavorable royalty agreement liabilities will be amortized into contract amortization in the consolidated statement of operations over a weighted average period of 17.2 years.

 

4. Commodity Derivative Contracts

 

The Partnership has commodity price risk for its coal sales as a result of changes in the market value of its coal. To minimize this risk, we enter into fixed price coal supply sales agreements and coal derivative swap contracts.

As of September 30, 2017 and December 31, 2016, we had outstanding coal derivative swap contracts to fix the selling price on 0.1 million tons and 0.5 million tons, respectively. Swaps are designed so that the Partnership receives or makes payments based on a differential between fixed and variable prices for coal. The coal derivative contracts are economic hedges to certain future unpriced (indexed) sales commitments through 2017. The coal derivative contracts are indexed to the Argus API 2 price index, the benchmark price for coal imported into northwest Europe. The coal derivative contracts are accounted for as freestanding derivatives and any gains or losses resulting from adjusting these contracts to fair value are recorded into earnings. We record the fair value of all positions with a given counterparty on a gross basis in the condensed consolidated balance sheets (see Note 11).

10


We have master netting agreements with all of our counterparties that allow for the settlement of contracts in an asset position with contracts in a liability position in the event of default. We manage counterparty risk through the utilization of investment grade commercial banks, diversification of counterparties and our counterparty netting arrangements.

 

We received $3.5 million in proceeds during the predecessor period from January 1, 2017 to March 31, 2017 from the settlement of derivatives that were reclassified from an operating cash flow activity to an investing activity in the condensed consolidated statement of cash flows because the derivative contracts were settled prior to the expiration of their contractual maturities and prior to the delivery date of the underlying sales contracts.

 

 

5. Accounts Receivable

 

Accounts receivable consist of the following:

 

 

(Successor)

 

 

 

(Predecessor)

 

 

September 30,

2017

 

 

 

December 31,

2016

 

 

(In Thousands)

 

 

 

(In Thousands)

 

Trade accounts receivable

$

22,857

 

 

 

$

42,862

 

Other receivables

 

2,903

 

 

 

 

12,043

 

Total accounts receivable

$

25,760

 

 

 

$

54,905

 

 

 

 

 

6. Inventories

Inventories consist of the following:

 

 

 

(Successor)

 

 

 

(Predecessor)