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EX-31 - EXHIBIT 31.2 - Westmoreland Resource Partners, LPex31-2.htm
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EX-10 - EXHIBIT 10.33 - Westmoreland Resource Partners, LPex10-33.htm
EX-32 - EXHIBIT 32.2 - Westmoreland Resource Partners, LPex32-2.htm
EX-31 - EXHIBIT 31.1 - Westmoreland Resource Partners, LPex31-1.htm
EX-32 - EXHIBIT 32.1 - Westmoreland Resource Partners, LPex32-1.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 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 June 30, 2014

 

OR

 

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

 

Commission file number: 001-34815

 

Oxford Resource Partners, LP

(Exact name of registrant as specified in its charter)

 

Delaware

77-0695453

(State or Other Jurisdiction of

(I.R.S. Employer

Incorporation or Organization)

Identification No.)

 

41 South High Street, Suite 3450, Columbus, Ohio 43215

(Address of Principal Executive Offices, Including Zip Code)

 

(614) 643-0337

(Registrant’s Telephone Number, Including Area Code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
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, or a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” and “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer     ☐                                                                                    Accelerated filer                       ☐

 

Non-accelerated filer       ☐  (Do not check if a smaller reporting company) Smaller reporting company     ☒

 

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 August 4, 2014, 10,727,939 common units and 10,280,380 subordinated units were outstanding. The common units trade on the New York Stock Exchange under the ticker symbol “OXF.”


 

 
 

 

 

 

TABLE OF CONTENTS

 
     
 

PART I. FINANCIAL INFORMATION

Page

     

ITEM 1.

Condensed Consolidated Financial Statements (Unaudited)

2

 

Condensed Consolidated Balance Sheets as of June 30, 2014 and December 31, 2013

2

 

Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2014 and 2013

3

 

Condensed Consolidated Statements of Partners’ (Deficit) Capital for the Six Months Ended June 30, 2014 and 2013

4

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2014 and 2013

5

 

Notes to Condensed Consolidated Financial Statements

6

ITEM 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

16

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

29

ITEM 4.

Controls and Procedures

29

 

   
 

PART II. OTHER INFORMATION

 

ITEM 1.

Legal Proceedings

30

ITEM 1A.

Risk Factors

30

ITEM 4.

Mine Safety Disclosures

30

ITEM 6.

Exhibits

30

 

 
i

 

 

PART I. FINANCIAL INFORMATION

 

OXFORD RESOURCE PARTNERS, LP AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(in thousands, except for unit data)

 

   

As of

June 30,

2014

   

As of

December 31,

2013

 
                 

ASSETS

               

CURRENT ASSETS:

               

Cash

  $ 3,533     $ 3,089  

Accounts receivable

    27,704       25,850  

Inventory

    14,345       13,840  

Advance royalties

    2,884       2,604  

Prepaid expenses and other assets

    1,492       1,737  

Total current assets

    49,958       47,120  
                 

PROPERTY, PLANT AND EQUIPMENT, NET

    128,777       144,426  

ADVANCE ROYALTIES, LESS CURRENT PORTION

    7,762       8,800  

INTANGIBLE ASSETS, NET

    1,074       1,188  

OTHER LONG-TERM ASSETS

    20,301       22,821  

Total assets

  $ 207,872     $ 224,355  
                 

LIABILITIES AND PARTNERS' (DEFICIT) CAPITAL

               

CURRENT LIABILITIES:

               

Accounts payable

  $ 22,904     $ 23,932  

Current portion of long-term debt

    8,906       7,901  

Current portion of reclamation and mine closure obligations

    9,086       5,996  

Accrued taxes other than income taxes

    1,198       1,293  

Accrued payroll and related expenses

    1,193       3,389  

Other liabilities

    2,862       3,457  

Total current liabilities

    46,149       45,968  
                 

LONG-TERM DEBT

    154,710       155,375  

RECLAMATION AND MINE CLOSURE OBLIGATIONS

    24,199       25,658  

WARRANTS

    3,129       4,599  

OTHER LONG-TERM LIABILITIES

    3,738       3,753  

Total liabilities

    231,925       235,353  
                 
                 

PARTNERS’ (DEFICIT) CAPITAL:

               

Limited partners (21,008,319 and 20,867,073 units outstanding as of June 30, 2014 and December 31, 2013, respectively)

    (25,414 )     (13,460 )

General partner (423,494 units outstanding as of June 30, 2014 and December 31, 2013)

    (2,766 )     (2,507 )

Total Oxford Resource Partners, LP (deficit) capital

    (28,180 )     (15,967 )

Noncontrolling interest

    4,127       4,969  

Total partners’ (deficit) capital

    (24,053 )     (10,998 )

Total liabilities and partners’ (deficit) capital

  $ 207,872     $ 224,355  

 

See accompanying notes to condensed consolidated financial statements.

 

 
2

 

 

OXFORD RESOURCE PARTNERS, LP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(in thousands, except for unit and per unit data)

 

   

For the Three Months Ended

June 30,

   

For the Six Months Ended

June 30,

 
   

2014

   

2013

   

2014

   

2013

 

REVENUES:

                               

Coal sales

  $ 79,586     $ 85,691     $ 156,356     $ 170,484  

Other revenue

    2,415       2,434       3,649       6,367  

Total revenues

    82,001       88,125       160,005       176,851  

COSTS AND EXPENSES:

                               

Cost of coal sales:

                               

Produced coal

    66,527       66,556       131,734       133,984  

Purchased coal

    768       5,292       1,287       11,893  

Total cost of coal sales (excluding depreciation, depletion and amortization)

    67,295       71,848       133,021       145,877  

Cost of other revenue

    369       370       771       773  

Depreciation, depletion and amortization

    10,072       12,810       21,296       25,743  

Selling, general and administrative expenses

    3,270       5,847       6,926       10,005  

Impairment and restructuring expenses

    -       721       75       862  

Gain on disposal of assets, net

    (763 )     (5,905 )     (559 )     (5,487 )

Total costs and expenses

    80,243       85,691       161,530       177,773  

INCOME (LOSS) FROM OPERATIONS

    1,758       2,434       (1,525 )     (922 )

INTEREST AND OTHER INCOME (EXPENSES):

                               

Interest income

    2       1       3       2  

Interest expense

    (7,003 )     (4,416 )     (13,873 )     (7,338 )

Change in fair value of warrants

    1,885       (2,149 )     1,470       (2,149 )

Total interest and other expenses

    (5,116 )     (6,564 )     (12,400 )     (9,485 )

NET LOSS

    (3,358 )     (4,130 )     (13,925 )     (10,407 )

Net loss (income) attributable to noncontrolling interest

    461       (380 )     842       (650 )

Net loss attributable to Oxford Resource Partners, LP unitholders

    (2,897 )     (4,510 )     (13,083 )     (11,057 )

Net loss allocated to general partner

    (57 )     (89 )     (259 )     (221 )

Net loss allocated to limited partners

  $ (2,840 )   $ (4,421 )   $ (12,824 )   $ (10,836 )
                                 

Net loss per limited partner unit:

                               

Basic

  $ (0.11 )   $ (0.21 )   $ (0.52 )   $ (0.52 )

Diluted

    (0.11 )     (0.21 )     (0.52 )     (0.52 )
                                 

Weighted average number of limited partner units outstanding:

                               

Basic

    24,734,018       21,093,448       24,686,947       20,779,901  

Diluted

    24,734,018       21,093,448       24,686,947       20,779,901  

 

See accompanying notes to condensed consolidated financial statements.

 

 
3

 

  

OXFORD RESOURCE PARTNERS, LP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF PARTNERS' (DEFICIT) CAPITAL

(UNAUDITED)

(in thousands, except for unit data)

 

   

Limited Partners

                          Total  
   

Common

   

Subordinated

   

Total

   

General Partner

    Non-     Partners'  
   

Units

   

Capital

   

Units

   

Deficit

   

Units

   

Capital (Deficit)

   

Units

   

Deficit

    controlling Interest     Capital (Deficit)  
Balance at December 31, 2012     10,470,810     $ 93,930       10,280,380     $ (84,337 )     20,751,190     $ 9,593       423,494     $ (2,010 )   $ 3,744     $ 11,327  

Net (loss) income

    -       (5,482 )     -       (5,354 )     -       (10,836 )     -       (221 )     650       (10,407 )

Equity-based compensation

    -       739       -       -       -       739       -       -       -       739  

Issuance of units to LTIP participants

    66,161       (66 )     -       -       66,161       (66 )     -       -       -       (66 )

Balance at June 30, 2013

    10,536,971     $ 89,121       10,280,380     $ (89,691 )     20,817,351     $ (570 )     423,494     $ (2,231 )   $ 4,394     $ 1,593  
                                                                                 
Balance at December 31, 2013     10,586,693     $ 82,931       10,280,380     $ (96,391 )     20,867,073     $ (13,460 )     423,494     $ (2,507 )   $ 4,969     $ (10,998 )

Net loss

    -       (6,538 )     -       (6,286 )     -       (12,824 )     -       (259 )     (842 )     (13,925 )

Equity-based compensation

    -       921       -       -       -       921       -       -       -       921  

Issuance of units to LTIP participants

    141,246       (51 )     -       -       141,246       (51 )     -       -       -       (51 )

Balance at June 30, 2014

    10,727,939     $ 77,263       10,280,380     $ (102,677 )     21,008,319     $ (25,414 )     423,494     $ (2,766 )   $ 4,127     $ (24,053 )

 

See accompanying notes to condensed consolidated financial statements.

 

 
4

 

 

OXFORD RESOURCE PARTNERS, LP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(in thousands)

 

   

For the Six Months Ended

June 30,

 
   

2014

   

2013

 

CASH FLOWS FROM OPERATING ACTIVITIES:

               

Net loss

  $ (13,925 )   $ (10,407 )

Adjustments to reconcile net loss to net cash from operating activities:

               

Depreciation, depletion and amortization

    21,296       25,743  

Impairment and restructuring expenses

    75       862  

Change in fair value of warrants

    (1,470 )     2,149  

Interest rate swap adjustment to market

    -       (12 )

Non-cash interest expense

    3,786       347  

Amortization and write-off of deferred financing costs

    1,923       2,114  

Non-cash equity-based compensation expense

    921       739  

Non-cash reclamation and mine closure expense

    1,125       1,058  

Amortization of below-market coal sales contracts

    -       (60 )

Gain on disposal of assets, net

    (559 )     (5,487 )

Changes in assets and liabilities:

               

Accounts receivable

    (1,854 )     (7,149 )

Inventory

    (505 )     705  

Advance royalties

    758       (1,981 )

Restricted cash

    (496 )     (6,537 )

Prepaid expenses and other assets

    240       (973 )

Accounts payable

    (1,028 )     (2,002 )

Reclamation and mine closure obligations

    (2,115 )     (4,138 )

Accrued taxes other than income taxes

    (95 )     65  

Accrued payroll and related expenses

    (2,196 )     312  

Other liabilities

    (734 )     (951 )

Net cash from operating activities

    5,147       (5,603 )
                 

CASH FLOWS FROM INVESTING ACTIVITIES:

               

Purchase of property and equipment

    (5,241 )     (5,694 )

Purchase of coal reserves and land

    (5 )     (14 )

Mine development costs

    (618 )     (1,940 )

Proceeds from sale of assets

    3,599       6,249  

Insurance proceeds

    -       14  

Net cash from investing activities

    (2,265 )     (1,385 )
                 

CASH FLOWS FROM FINANCING ACTIVITIES:

               

Proceeds from borrowings

    -       150,000  

Payments on borrowings

    (1,947 )     (45,009 )

Advances on line of credit

    13,500       28,888  

Payments on line of credit

    (15,000 )     (104,000 )

Debt issuance costs

    9       (9,354 )

Collateral for reclamation bonds

    1,000       (11,471 )

Net cash from financing activities

    (2,438 )     9,054  
                 

NET CHANGE IN CASH

    444       2,066  

CASH, beginning of period

    3,089       3,977  

CASH, end of period

  $ 3,533     $ 6,043  

 

See accompanying notes to condensed consolidated financial statements.

 

 
5

 

 

OXFORD RESOURCE PARTNERS, LP AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(in thousands, except for unit and per unit data)

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“US GAAP”) for interim financial information and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by US GAAP for complete financial statements. In our opinion, the condensed consolidated financial statements reflect all adjustments necessary for a fair presentation of the results of operations and financial position for such periods. All such adjustments reflected in the condensed consolidated financial statements are considered to be of a normal recurring nature. The results of operations for any interim period are not necessarily indicative of results for the full year. Accordingly, these condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2013 (the “Annual Report”) and filed with the U.S. Securities and Exchange Commission (the “SEC”).

 

NOTE 1: ORGANIZATION AND PRESENTATION

 

Basis of Presentation and Principles of Consolidation

 

The accompanying unaudited condensed consolidated financial statements include the accounts and operations of the Partnership and its consolidated subsidiaries.

 

Significant Relationships Referenced in Notes to Condensed Consolidated Financial Statements

 

 

“We,” “us,” “our,” or the “Partnership” means the business and operations of Oxford Resource Partners, LP, the parent entity, as well as its consolidated subsidiaries.

 

 

Our “GP” means Oxford Resources GP, LLC, the general partner of Oxford Resource Partners, LP.

 

Organization 

 

We are a low-cost producer of high-value thermal coal and the largest producer of surface-mined coal in Ohio. We market our coal primarily to large electric utilities with coal fired, base-load scrubbed power plants under long-term coal sales contracts. We focus on acquiring thermal coal reserves that we can efficiently mine with our large scale equipment. Our reserves and operations are strategically located to serve our primary market area of Indiana, Kentucky, Michigan, Ohio, Pennsylvania and West Virginia. These coal reserves are mined by our subsidiaries, Oxford Mining Company, LLC (“Oxford Mining”), Oxford Mining Company - Kentucky, LLC and Harrison Resources, LLC (“Harrison Resources”).

 

We are managed by our GP and all executives, officers and employees who provide services to us are employees of our GP. Charles C. Ungurean, the President and Chief Executive Officer of our GP and a member of our GP’s board of directors (“Mr. C. Ungurean”), and Thomas T. Ungurean, a former officer of our GP (“Mr. T. Ungurean”), are the co-owners of one of our limited partners, C&T Coal, Inc. (“C&T”).

 

NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Significant Accounting Policies

 

There were no changes to our significant accounting policies from those disclosed in the audited consolidated financial statements and notes thereto contained in the Annual Report.

 

 
6

 

 

OXFORD RESOURCE PARTNERS, LP AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- (Continued)

(UNAUDITED)

(in thousands, except for unit and per unit data)

 

 NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Liquidity

 

We have incurred net losses in the past few years resulting in an accumulated deficit of $24.1 million at June 30, 2014. We have managed our liquidity for the six months ended June 30, 2014, with $5.1 million of cash flows provided from operations and $2.4 million of cash flows used in financing activities. As of  June 30, 2014, our available liquidity was $10.5 million, which consisted of $3.5 million in cash on hand and $7.0 million of borrowing capacity under our credit facilities. Further, we have an option for an additional $10 million term loan if requested by us and approved by the issuing second lien lender. As the maturity dates approach, we will pursue extending our current financing agreements or refinancing our debt in its entirety. If we are unable to extend or refinance our debt, our ability to continue as a going concern will be impacted.

 

Should we have difficulty meeting our forecasts, this could have an adverse effect on our liquidity position. Management expects to be able to achieve its forecasted results for the year ending December 31, 2014. However, there can be no assurance that our cash flows will be sufficient to allow us to continue as a going concern if we are unable to meet our forecasts.

 

Accounting Pronouncement Effective in the Future

 

In April 2014, the FASB issued ASU 2014-08, Presentation of Financial Statements and Property, Plant and Equipment, which changes the presentation of discontinued operations on the statements of operations and other requirements for reporting discontinued operations. Under the new standard, a disposal of a component or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results when the component meets the criteria to be classified as held for sale or is disposed. The amendments in this update also require additional disclosures about discontinued operations and disposal of an individually significant component of an entity that does not qualify for discontinued operations. The new guidance is effective for interim and annual periods beginning after December 15, 2014. We plan to adopt ASU 2014-08 effective January 1, 2015.

 

In May 2014, the FASB issued ASU 2014-09, Revenue From Contracts With Customers, which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The ASU is based on the principle that an entity should recognize revenue to depict the transfer of 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 ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to fulfill a contract. Entities have the option of using either a full retrospective or a modified retrospective approach for the adoption of the new standard. The new guidance is effective for the interim and annual periods beginning after December 15, 2016; early adoption is not permitted. We are currently assessing the impact that this standard will have on our consolidated financial statements.

 

NOTE 3: IMPAIRMENT AND RESTRUCTURING EXPENSES

 

In March 2012, we received a termination notice from a customer related to a 0.8 million tons per year coal supply contract fulfilled from our Illinois Basin operations. In response, we initially idled some of our Illinois Basin operations, terminated a significant number of employees related to such operations and substituted purchased coal for mined and washed coal on certain sales contracts. Subsequently over time, the remainder of our Illinois Basin operations were idled and the related employees terminated with the result that our Illinois Basin operations were fully idled as of December 31, 2013. During that period, we also sold some of our excess Illinois Basin equipment while redeploying most of the equipment to our Northern Appalachian operations, with such redeployment being completed during the first quarter of 2014. Additionally, we sold our Illinois Basin dock in April 2014. Finally, we are seeking to sell the remaining Illinois Basin equipment, consisting of a large-capacity shovel and several smaller pieces of equipment, and would consider offers to purchase the remaining coal reserves and/or facilities related to our Illinois Basin operations.

 

Impairment Expenses

 

As a result of the restructuring described above, we recorded asset impairment expenses of $12.8 million during 2012. These non-cash expenses related to coal reserves, mine development assets and certain mining equipment. No such expenses were recorded in the three- and six-month periods ended June 30, 2014 and 2013, respectively.

 

 
7

 

 

OXFORD RESOURCE PARTNERS, LP AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- (Continued)

(UNAUDITED)

(in thousands, except for unit and per unit data)

 

NOTE 3: IMPAIRMENT AND RESTRUCTURING EXPENSES (continued)

 

Restructuring Expenses

 

The restructuring related to our Illinois Basin operations were completed March 31, 2014. Accordingly, no restructuring expenses were recorded in the second quarter of 2014, while $0.7 million of restructuring expenses were recorded in the second quarter of 2013. Restructuring expenses of $0.1 and $0.9 million were incurred during the six months ended June 30, 2014 and 2013, respectively. These expenses included termination costs for approximately 35 employees in 2013, professional and legal fees, and transportation costs associated with moving idled equipment to our Northern Appalachian operations. The liabilities related to the restructuring are included in “other liabilities” in our condensed consolidated balance sheet as of December 31, 2013. There is no liability remaining as of June 30, 2014.

 

Restructuring accrual activity, combined with a reconciliation to “impairment and restructuring expenses” as set forth in our condensed consolidated statements of operations, is summarized as follows:

 

   

As of

December 31, 2013

   

For the Six Months Ended

June 30, 2014

   

As of

June 30, 2014

 
   

Liability

   

Expense

   

Payments

   

Liability

 
                                 

Severance and other termination costs

  $ 404     $ (42 )   $ (362 )   $ -  

Equipment relocation costs

    252       117       (369 )     -  

Total cash restructuring expenses

  $ 656     $ 75     $ (731 )   $ -  

 

The following table summarizes the total impairment and restructuring expenses incurred during the six months ended June 30, 2014 and over the course of the restructuring which was completed by March 31, 2014:

 

   

Expenses

         
   

For the Six Months Ended June 30, 2014

   

Incurred Through June 30, 2014

   

Total Expenses

 

Cash:

                       

Severance and other termination costs

  $ (42 )   $ 1,846     $ 1,846  

Professional and legal fees

    -       1,021       1,021  

Equipment relocation costs

    117       1,161       1,161  

Coal lease termination costs

    -       23       23  

Total cash restructuring expenses

    75       4,051       4,051  
                         

Non-cash:

                       

Coal lease termination costs

    -       683       683  

Asset impairment

    -       12,753       12,753  

Total non-cash restructuring expenses

    -       13,436       13,436  

Total impairment and restructuring expenses

  $ 75     $ 17,487     $ 17,487  

 

 

 
8

 

 

 OXFORD RESOURCE PARTNERS, LP AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- (Continued)

(UNAUDITED)

(in thousands, except for unit and per unit data)

 

NOTE 4: INVENTORY

 

Inventory consisted of the following:

 

   

As of

June 30, 2014

   

As of

December 31, 2013

 
                 

Coal

  $ 6,738     $ 5,957  

Fuel

    1,618       1,879  

Spare parts and supplies

    5,989       6,004  

Total

  $ 14,345     $ 13,840  

 

NOTE 5: PROPERTY, PLANT AND EQUIPMENT, NET

 

Property, plant and equipment, net of accumulated depreciation, depletion and amortization, consisted of the following:

 

   

As of

June 30, 2014

   

As of

December 31, 2013

 
                 

Property, plant and equipment, gross

               

Land

  $ 2,161     $ 3,016  

Coal reserves

    49,579       49,574  

Mine development costs

    61,576       58,077  

Buildings and tipple

    1,824       1,957  

Machinery and equipment

    197,893       202,663  

Vehicles

    4,468       4,522  

Furniture and fixtures

    1,311       1,584  

Railroad sidings

    160       160  

Total property, plant and equipment, gross

    318,972       321,553  

Less: accumulated depreciation, depletion and amortization

    (190,195 )     (177,127 )

Total property, plant and equipment, net

  $ 128,777     $ 144,426  

 

The amounts of depreciation expense related to fixed assets, depletion expense related to coal reserves, amortization expense related to mine development costs and amortization expense related to intangible assets for the respective periods are as follows:

  

   

For the Three Months Ended June 30,

   

For the Six Months Ended June 30,

 
   

2014

   

2013

   

2014

   

2013

 
                                 

Depreciation

  $ 6,835     $ 8,307     $ 14,137     $ 15,524  

Depletion

    1,210       908       2,411       1,698  

Mine development amortization

    1,967       3,532       4,626       8,437  

Intangible asset amortization

    60       63       122       84  
    $ 10,072     $ 12,810     $ 21,296     $ 25,743  

 

 
9

 

 

OXFORD RESOURCE PARTNERS, LP AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- (Continued)

(UNAUDITED)

(in thousands, except for unit and per unit data)

 

 

NOTE 6: RECLAMATION AND MINE CLOSURE OBLIGATIONS

 

As of June 30, 2014, our liability for reclamation and mine closure obligations totaled $33.3 million, including amounts reported as current liabilities. While the amount of these future obligations cannot be determined with certainty, we estimate that, as of June 30, 2014, the aggregate undiscounted obligations for final reclamation and mine closure totaled $40.9 million.

 

The changes in the liability for reclamation and mine closure obligations on a discounted basis for the six months ended June 30, 2014 and the year ended December 31, 2013 are as follows:

 

   

Six Months Ended

   

Year Ended

 
   

June 30, 2014

   

December 31, 2013

 
                 

Balance at beginning of period

  $ 31,654     $ 29,013  

Accretion expense

    1,125       2,293  

Adjustment resulting from additional mines

    2,702       3,671  

Adjustments to the liability from annual recosting and other

    149       5,333  

Payments

    (2,345 )     (8,656 )

Total reclamation and mine closure obligations

    33,285       31,654  

Less current portion

    (9,086 )     (5,996 )

Long-term reclamation and mine closure obligations

  $ 24,199     $ 25,658  

 

NOTE 7: LONG-TERM DEBT

 

Long-term debt as of June 30, 2014 and December 31, 2013 consisted of the following:

 

   

As of

June 30, 2014

   

As of

December 31, 2013

 
                 

First lien debt:

               

Revolver

  $ 18,000     $ 19,500  

Term loan

    68,071       69,321  

Total first lien debt

    86,071       88,821  

Second lien debt:

               

Term loan

    74,813       75,000  

Paid-in-kind interest

    4,580       2,318  

Debt discount, net

    (5,004 )     (6,456 )

Total second lien debt, net of debt discount

    74,389       70,862  

Notes payable

    3,156       3,593  

Total debt

    163,616       163,276  

Less current portion

    (8,906 )     (7,901 )

Long-term debt

  $ 154,710     $ 155,375  

 

In June 2013, we closed on $175 million of credit facilities that replaced our previous term loan and revolving credit facility. These facilities include (i) a first lien credit facility consisting of a $75 million term loan and a $25 million revolver under a financing agreement maturing September 30, 2015, as amended (the “First Lien Financing Agreement”) and (ii) a second lien credit facility consisting of a $75 million term loan (with an option for an additional $10 million term loan if requested by us and approved by the issuing second lien lender) under a financing agreement maturing December 31, 2015, as amended (the “Second Lien Financing Agreement,” and collectively with the First Lien Financing Agreement, the “Financing Agreements”). The Financing Agreements allow for nine-month extensions which we may exercise provided that certain conditions are met.

 

 
10

 

 

OXFORD RESOURCE PARTNERS, LP AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- (Continued)

(UNAUDITED)

(in thousands, except for unit and per unit data)

 

NOTE 7: LONG-TERM DEBT (continued)

 

In conjunction with executing the Financing Agreements, we incurred $9.6 million in debt issuance costs recorded in “other long-term assets.”

 

As of June 30, 2014, we were in compliance with all covenants under the terms of the Financing Agreements.

 

First Lien Credit Facility

 

As of June 30, 2014, we had a term loan of $68.1 million outstanding under the first lien credit facility. We began making and are obligated to make quarterly principal payments of $1.3 million commencing in June 2014, until repayment of the then outstanding balance at maturity. Borrowings on the term loan bear interest at a variable rate per annum equal to, at our option, the London Interbank Offered Rate (“LIBOR”) (floor of 1.5%) plus 6.75% or the Reference Rate (as defined in the First Lien Financing Agreement) (floor of 3.00%) plus 6.25%. As of June 30, 2014, the first lien credit facility term loan had a cash interest rate of 8.25%, consisting of LIBOR of 1.5% plus 6.75%.

 

The first lien credit facility also includes a $25 million revolving credit facility under which $18.0 million was outstanding as of June 30, 2014. As of June 30, 2014, the balance outstanding on the revolving credit facility had a weighted average cash interest rate of 8.25%, consisting of LIBOR of 1.5% plus 6.75%.

 

During the year ended December 31, 2013, we paid down $5.7 million of the first lien term loan with proceeds from the sale of oil and gas rights. The Financing Agreements require mandatory prepayment of principal with proceeds from such events.

 

Second Lien Credit Facility

 

As of June 30, 2014, we had a term loan, net of debt discount, of $74.4 million outstanding under the second lien credit facility. We began making and are obligated to make quarterly principal payments of $0.2 million commencing in June 2014, until repayment of the then outstanding balance at maturity. As of June 30, 2014, the second lien credit facility term loan had a cash interest rate of 11.00%, consisting of LIBOR of 1.25% plus 9.75%.

 

The second lien credit facility also provides for PIK Interest (paid-in-kind interest as defined in the Second Lien Financing Agreement) at the rate of 5.75%. PIK Interest is added quarterly to the then-outstanding principal amount of the term loan as additional principal obligations. For the three months ended June 30, 2014 and 2013, PIK Interest totaled $1.2 million and $0.1 million, respectively. For the six months ended June 30, 2014 and 2013, PIK Interest totaled $2.3 million and $0.1 million, respectively.

 

In conjunction with the Second Lien Financing Agreement, certain lenders and lender affiliates received warrants entitling them to purchase 1,955,666 common units and 1,814,185 subordinated units at $0.01 per unit. The warrants, classified as a liability, were recorded at their fair value of $7.9 million at issuance as a debt discount. The warrants are subsequently marked to fair value with the change in fair value reported in earnings. This discount will be amortized through interest expense over the life of the second lien credit facility using the effective interest method. For the three months ended June 30, 2014 and 2013, amortization of the debt discount totaled $0.8 million and $0.1 million, respectively. For the six months ended June 30, 2014 and 2013, amortization of the debt discount totaled $1.5 million and $0.1 million, respectively.

 

 
11

 

 

OXFORD RESOURCE PARTNERS, LP AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- (Continued)

(UNAUDITED)

(in thousands, except for unit and per unit data)

 

NOTE 8: FAIR VALUE OF FINANCIAL INSTRUMENTS

 

The book values of cash, restricted cash, accounts receivable and accounts payable are considered to be representative of their respective fair values because of the immediate short-term maturity of these financial instruments. The fair value of the Partnership’s first and second lien credit facilities and warrants were determined based upon a market approach and approximates the carrying value at June 30, 2014.

 

The warrants are fair valued at each balance sheet date using the Black-Scholes model. As of June 30, 2014, the fair value of each warrant was $0.83, based on the following assumptions: spot price of $0.84 per unit, exercise price of $0.01 per unit, term of 4.00 years, volatility of 79% and a five-year treasury rate of 1.62%.

 

The fair value of the Partnership’s first and second lien credit facilities and warrants are a Level 2 measurement.

 

NOTE 9: LONG-TERM INCENTIVE PLAN

 

Under our Long-Term Incentive Plan (our “LTIP”), we recognize equity-based compensation expense over the vesting period of the units. These units are subject to conditions and restrictions as determined by our Compensation Committee, including continued employment or service. Historically, these units generally vested in equal annual increments over four years with accelerated vesting of the first increment in certain cases. Beginning in 2012, some of the units granted to executive officers vest based on specified performance criteria.

 

We are authorized to distribute up to 2,806,075 units under the LTIP. As of June 30, 2014, 433,757 units remained available for issuance in the future assuming that all grants issued and currently outstanding are settled with common units, without reduction for tax withholding, and no future forfeitures occur.

 

For the three months ended June 30, 2014 and 2013, we recognized equity-based compensation expense of $465 and $416, respectively. For the six months ended June 30, 2014 and 2013, we recognized equity-based compensation expense of $921 and $739, respectively. These amounts are included in selling, general and administrative expenses and cost of coal sales. As of June 30, 2014 and December 31, 2013, $2,936 and $2,150, respectively, of cost remained unamortized. We expect to recognize these costs using the straight-line method over a remaining weighted average period of 1.3 years as of June 30, 2014.

 

The following table summarizes additional information concerning our unvested LTIP units:

 

   

Units

   

Weighted Average Grant Date Fair Value

 
                 

Unvested balance at December 31, 2013

    559,184     $ 6.79  

Granted

    1,420,132       1.22  

Issued

    (141,246 )     4.92  

Surrendered

    (39,888 )     9.69  
                 

Unvested balance at June 30, 2014

    1,798,182       2.47  

 

The value of LTIP units vested during the three months ended June 30, 2014 and 2013 was $37 in each year. The value of LTIP units vested during the six months ended June 30, 2014 and 2013 was $1,043 and $888, respectively.

 

 
12

 

 

OXFORD RESOURCE PARTNERS, LP AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- (Continued)

(UNAUDITED)

(in thousands, except for unit and per unit data)

 

NOTE 10: EARNINGS (LOSSES) PER UNIT

 

The computation of basic and diluted earnings (losses) per unit under the two class method for limited partner units and general partner units is presented as follows:

  

   

For the Three Months Ended

June 30,

   

For the Six Months Ended

June 30,

 
   

2014

   

2013

   

2014

   

2013

 
                                 

Limited partner units

                                               

Average units outstanding:

                               

Basic

    24,734,018       21,093,448       24,686,947       20,779,901  

Effect of equity-based compensation

 

N/A

   

N/A

   

N/A

   

N/A

 

Diluted

    24,734,018       21,093,448       24,686,947       20,779,901  
                                 

Net loss allocated to limited partners

                               

Basic

  $ (2,848 )   $ (4,421 )   $ (12,862 )   $ (10,836 )

Diluted

    (2,848 )     (4,421 )     (12,862 )     (10,836 )
                                 

Net loss per limited partner unit

                               

Basic

  $ (0.11 )   $ (0.21 )   $ (0.52 )   $ (0.52 )

Diluted

    (0.11 )     (0.21 )     (0.52 )     (0.52 )
                                 

General partner units

                                               

Average units outstanding:

                               

Basic

    423,730       423,512       423,730       423,494  

Diluted

    423,730       423,512       423,730       423,494  
                                 

Net loss allocated to general partner

                               

Basic

  $ (49 )   $ (89 )   $ (221 )   $ (221 )

Diluted

    (49 )     (89 )     (221 )     (221 )
                                 

Net loss per general partner unit

                               

Basic

  $ (0.11 )   $ (0.21 )   $ (0.52 )   $ (0.52 )

Diluted

    (0.11 )     (0.21 )     (0.52 )     (0.52 )

 

Under the Partnership’s partnership agreement, arrearage amounts resulting from suspension of the common units distribution accumulate, while those related to the subordinated units do not. In the future, if and as distributions are made for any quarter, the first priority is to pay the then minimum quarterly distribution to common unitholders (including the holders of common unit warrants). Any additional distribution amounts paid at that time are then paid to common unitholders (including the holders of common unit warrants) until their previously unpaid accumulated arrearage amounts have been paid in full. As of June 30, 2014, the total arrearage amount was $36.9 million. Distributions are prohibited by our credit facilities as long as we have outstanding borrowings thereunder.

 

NOTE 11: 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 June 30, 2014, the remaining terms of our long-term contracts ranged from one to two years.

 

Purchase Commitments

 

From time to time, we purchase coal from third parties in order to meet quality or delivery requirements under our customer contracts. We buy coal on the spot market, and the cost of that coal is dependent upon the market price and quality of the coal. We previously had a long-term purchase contract for 0.4 million tons of coal per year with a separate supplier who had asserted that the contract had terminated by its terms. We entered into a settlement agreement with the supplier in February 2013 under which the parties agreed to terminate the contract with the supplier making a one-time payment of $2.1 million to us, which payment was recorded in “other revenue”.

 

 
13

 

 

OXFORD RESOURCE PARTNER, LP AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- (Continued)

(UNAUDITED)

(in thousands, except for unit and per unit data)

 

NOTE 11: COMMITMENTS AND CONTINGENCIES (continued)

 

Transportation

 

We depend upon barge, rail and truck transportation systems to deliver coal to our customers. We have a long-term rail transportation contract that has been amended and extended through March 31, 2015.

 

401(k) Plan

 

The GP did not make a commitment to fund an employer contribution to our 401(k) plan for the year ended December 31, 2013, and consequently no such contribution has been or will be made. As of June 30, 2014, the GP had not made such a commitment for the year ended December 31, 2014 either.

 

Surety and Performance Bonds

 

As of June 30, 2014, we had $34.1 million in surety bonds outstanding to secure certain reclamation obligations which were collateralized by cash deposits of $8.6 million. Such collateral is included in “other long-term assets.” Additionally, we had road bonds totaling $0.7 million and performance bonds totaling $3.1 million outstanding to secure contractual performance. We believe these bonds will expire without any claims or payments thereon and therefore will not have a material adverse effect on our financial position, liquidity or operations.

 

Legal

 

From time to time, we are involved in various legal proceedings arising in the ordinary course of business. We accrue for such liabilities when it is probable that future costs (including legal fees and expenses) will be incurred and such costs can be reasonably estimated. Accruals are based on developments to date; management’s estimates of the outcomes of these matters; our experience in contesting, litigating and settling similar matters; and any related insurance coverage. While the ultimate outcome of these proceedings cannot be predicted with certainty, we have accrued $870 to resolve various claims as of June 30, 2014, of which $650 was accrued during the three and six months ended June 30, 2014.

 

Guarantees

 

Our GP and the Partnership guarantee certain obligations of our subsidiaries. We believe that these guarantees will expire without any liability to the guarantors, and therefore will not have a material adverse effect on our financial position, liquidity or operations.

 

NOTE 12: RELATED PARTY TRANSACTIONS

 

In connection with our formation in August 2007, the Partnership and Oxford Mining entered into an administrative and operational services agreement (the “Services Agreement”) with our GP. The Services Agreement is terminable by either party upon thirty days’ written notice. Under the terms of the Services Agreement, our GP provides services through its employees to us and is reimbursed for all related costs incurred on our behalf. Our GP provides us with services such as general administrative and management, human resources, legal, information technology, finance and accounting, corporate development, real property, marketing, engineering, operations (including mining operations), geological, risk management and insurance services. Pursuant to the Services Agreement, the primary reimbursements to our GP were for costs related to payroll. Reimbursable costs under the Services Agreement totaling $1,560 and $624 were included in accounts payable as of June 30, 2014 and December 31, 2013, respectively.

 

We sell clay and small quantities of coal to Tunnell Hill Reclamation, LLC (“Tunnell Hill”), a company that is indirectly owned by Mr. C. Ungurean, Mr. T. Ungurean, and affiliates of AIM Oxford. Sales to Tunnell Hill were $274 and de minimis for the three months ended June 30, 2014 and 2013, respectively, and $422 and de minimis for the six months ended June 30, 2014 and 2013, respectively. Accounts receivable from Tunnell Hill were $302 at June 30, 2014 and $83 at December 31, 2013.

 

 
14

 

 

OXFORD RESOURCE PARTNERS, LP AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- (Continued)

(UNAUDITED)

(in thousands, except for unit and per unit data)

 

NOTE 13: SUPPLEMENTAL CASH FLOW INFORMATION

 

Supplemental cash flow information:

 

   

For the Six Months Ended June 30,

 
   

2014

   

2013

 

Cash paid for:

               

Interest

  $ 8,243     $ 5,156  

Non-cash activities:

               

Reclamation and mine closure costs capitalized in mine development

    2,880       9,554  

Market value of common units vested in LTIP

    217       255  

 

NOTE 14: SEGMENT INFORMATION

 

We operate in one business segment. We operate surface coal mines in Northern Appalachia and, through December 2013, in the Illinois Basin. We sell high-value thermal coal to utilities, industrial customers, municipalities and other coal-related entities primarily in the eastern United States. Our operating and executive management reviews and bases its decisions upon consolidated reports. Our operating subsidiaries extract coal utilizing surface-mining techniques and prepare it for sale to their customers. Such operating subsidiaries share customers and a particular customer may receive coal from any one of such operating subsidiaries.

 

NOTE 15: SUBSEQUENT EVENT

 

In March 2012, a customer of our Illinois Basin operations terminated a coal supply agreement under which we were to supply 800,000 tons of coal per year for the next four years through the end of 2015. We initiated and aggressively pursued litigation to recover damages from the wrongful termination. In July 2014, we entered into a settlement agreement with the customer under which the customer agreed to pay us $19.5 million to compensate us for lost profits on coal sales to the customer due to the termination. We believe this settlement amount substantially compensates us for the damages we incurred due to the wrongful termination. Pursuant to our Financing Agreements, we will out of these settlement proceeds make a prepayment of principal on our first lien debt totaling between $12.5 and $17.5 million. The approximately $2.0 to $7.0 million in remaining settlement proceeds will be retained by the Partnership and enhances our liquidity.

 

 
15

 

 

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

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q (this “Quarterly Report”) and the audited consolidated financial statements and notes thereto and management’s discussion and analysis of financial condition and results of operations for the year ended December 31, 2013 included in our Annual Report on Form 10-K (our “Annual Report”) and filed with the United States Securities and Exchange Commission (the “SEC”). This discussion contains forward-looking statements that reflect management’s current views with respect to future events and financial performance. Our actual results may differ materially from those anticipated in these forward-looking statements or as a result of certain factors such as those set forth below under “Cautionary Statement About Forward-Looking Statements.”

 

CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS

 

Statements in this Quarterly Report that are not historical facts are forward-looking statements within the “safe harbor” provision of the Private Securities Litigation Reform Act of 1995 and may involve a number of risks and uncertainties. We have used the words “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” and similar terms and phrases, including references to assumptions, in this Quarterly Report to identify forward-looking statements. These forward-looking statements are made based on expectations and beliefs concerning future events affecting us and are subject to various risks, uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control, that could cause our actual results to differ materially from those matters expressed in or implied by these forward-looking statements. The following factors are among those that may cause actual results to differ materially from our forward-looking statements:

 

 

market demand for coal and energy, including changes in consumption patterns by utilities away from the use of coal;

 

 

availability of qualified workers;

 

 

future economic or capital market conditions;

 

 

weather conditions or catastrophic weather-related damage;

 

 

our production capabilities;

 

 

consummation of financing, acquisition or disposition transactions and the effect thereof on our business;

 

 

our plans and objectives for future operations, including expansion or consolidation;

 

 

our relationships with, and other conditions affecting, our customers;

 

 

availability and costs of credit and surety bonds;

 

 

our liquidity, including our ability to adhere to financial covenants related to our borrowing arrangements;

 

 

availability and costs of key supplies or commodities, such as diesel fuel, steel, explosives and tires;

 

 

availability and costs of capital equipment;

 

 

prices of fuels which compete with or impact coal usage, such as oil and natural gas;

 

 

timing of reductions or increases in customer coal inventories;

 

 

long-term coal supply arrangements;

 

 
16

 

 

 

reductions and/or deferrals of purchases by major customers;

 

 

coal mining operations, including risks relating to third-party suppliers and carriers operating at our mines or complexes;

 

 

unexpected maintenance and equipment failure;

 

 

environmental, safety and other laws and regulations, including those directly affecting our coal mining and production, and those affecting our customers' coal usage;

 

 

ability to obtain and maintain all necessary governmental permits and authorizations;

 

 

competition among coal and other energy producers in the United States and internationally;

 

 

railroad, barge, trucking and other transportation availability, performance and costs;

 

 

employee benefits costs and labor relations issues;

 

 

replacement of our reserves;

 

 

our assumptions concerning economically recoverable coal reserve estimates;

 

 

title defects or loss of leasehold interests in our properties, which could result in unanticipated costs or inability to mine these properties;

 

 

future legislation and changes in regulations or governmental policies or changes in interpretations or enforcement thereof, including with respect to safety enhancements and environmental initiatives relating to global warming and climate change;

 

 

our ability to pay our quarterly distributions (when permitted) which substantially depends upon our future operating performance (which may be affected by prevailing economic conditions in the coal industry), debt covenants, and financial, business and other factors, some of which are beyond our control;

 

 

limitations in the cash distributions we receive from our majority-owned subsidiary, Harrison Resources, LLC ("Harrison Resources"), and the ability of Harrison Resources to acquire additional reserves on economical terms from CONSOL Energy, Inc. (“CONSOL”) in the future;

 

 

adequacy and sufficiency of our internal controls; and

 

 

legal and administrative proceedings, settlements, investigations and claims, including those related to citations and orders issued by regulatory authorities, and the availability of related insurance coverage.

 

You should keep in mind that any forward-looking statements made by us in this Quarterly Report or elsewhere speak only as of the date on which the statements were made. New risks and uncertainties arise from time to time, and it is impossible for us to predict these events or how they may affect us or anticipated results. We have no duty to, and do not intend to, update or revise the forward-looking statements in this Quarterly Report after the date of this Quarterly Report, except as may be required by law. In light of these risks and uncertainties, you should keep in mind that any forward-looking statement made in this Quarterly Report might not occur. When considering these forward-looking statements, you should keep in mind the cautionary statements in this Quarterly Report and in our other SEC filings, including the more detailed discussion of these factors, as well as other factors that could affect our results, contained in the “Risks Relating to Our Business” section of Item 1A of our Annual Report.

 

 
17

 

 

Overview

 

We are a low-cost producer and marketer of high-value thermal coal (“coal”) to United States (“U.S.”) utilities and industrial users, and we are the largest producer of surface mined coal in Ohio. We market our coal primarily to large electric utilities with coal-fired, base-load scrubbed power plants under long-term coal sales contracts. We focus on acquiring coal reserves that we can efficiently mine with our large-scale equipment. Our reserves and operations are strategically located to serve our primary market area of Indiana, Kentucky, Michigan, Ohio, Pennsylvania and West Virginia.

 

We operate in a single business segment and have three operating subsidiaries, Oxford Mining Company, LLC ("Oxford Mining"), Oxford Mining Company-Kentucky, LLC and Harrison Resources. All of our operating subsidiaries participate primarily in the business of utilizing surface mining techniques to mine domestic coal and prepare it for sale to our customers. All three subsidiaries share common customers, assets and employees.

 

We currently have 12 active surface mines and we manage these mines as six mining complexes. Our coal reserves and operations are strategically located near our customers with the flexibility to ship by barge, truck or rail. During the three and six months ended June 30, 2014, we produced and sold 1.5 and 3.0 million tons, respectively, of coal.

 

As previously disclosed in our periodic filings with the SEC, in the first quarter of 2012 we received a termination notice from a customer related to a 0.8 million tons per year coal supply contract fulfilled from our Illinois Basin operations. In response, we initially idled some of our Illinois Basin operations, terminated a significant number of employees related to such operations and substituted purchased coal for mined and washed coal on certain sales contracts. Subsequently, over time, the remainder of our Illinois Basin operations were idled and the related employees terminated with the result that our Illinois Basin operations were fully idled as of December 31, 2013. During that period, we also sold some of our excess Illinois Basin equipment while redeploying most of the equipment to our Northern Appalachian operations, with such redeployment being completed during the first quarter of 2014. Additionally, we sold our Illinois Basin dock in April 2014. And finally, we are seeking to sell the remaining Illinois Basin equipment, consisting of a large-capacity shovel and several smaller pieces of equipment, and would consider offers to purchase the remaining coal reserves and/or facilities related to our Illinois Basin operations.

 

In July 2014, we concluded litigation, with a former customer who wrongfully terminated its Coal supply agreement with us, by entering into a settlement agreement under which the former customer agreed to pay us $19.5 million to compensate us for lost profits on coal sales to the former customer due to the termination. We believe this settlement amount substantially compensates us for the damages we incurred due to the wrongful termination. Pursuant to our Financing Agreements, we will out of these settlement proceeds make a prepayment of principal on our first lien debt of between $12.5 and $17.5 million. The approximately $2.0 to $7.0 million in remaining settlement proceeds will be retained by us and will further enhance our liquidity.

 

Evaluating Our Results of Operations

 

We evaluate our results of operations based on several key measures, which include:

 

 

our coal production, sales volume and sales prices, which drive our coal sales revenue;

 

 

our cost of coal sales, including cost of purchased coal;

 

 

our net (loss) income; and

 

 

our Adjusted EBITDA, a non-GAAP financial measure.

 

 
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Coal Production, Sales Volume and Sales Prices

 

We evaluate our operations based on the volume of coal we produce, the volume of coal we sell, and the prices we receive for our coal. The volume of coal we sell is also a function of the productive capacity of our mining complexes, the amount of coal we purchase, and market demand. We sell substantially all of our coal under long-term coal sales contracts, and thus sales prices are dependent upon the terms of those contracts.

 

Our long-term coal sales contracts typically provide for fixed prices, or a schedule of prices that are either fixed or contain market-based adjustments, over the contract term. In addition, many of our long-term coal sales contracts have full or partial cost pass through or cost adjustment provisions. Cost pass through provisions increase or decrease the coal sales price for all or a specified percentage of changes in the costs for items such as fuel and inflation. Cost adjustment provisions adjust the initial contract price over the term of the contract either by a specific percentage or a percentage determined by reference to various cost-related indices, including cost-related indices for fuel and the cost-of-living generally.

 

We evaluate the price we receive for our coal on a per ton basis. Our coal sales revenue per ton represents our coal sales revenue divided by total tons of coal sold. The following table provides operational data including data with respect to our tons of coal produced, purchased and sold, as well as our coal sales revenue, cash cost of coal sales and cash margin on a per ton basis, for the periods indicated:

  

   

Three Months Ended

         

Six Months Ended

     
   

June 30,

           

June 30,

         
   

2014

   

2013

    % Change    

2014

   

2013

    % Change  
   

(tons in thousands, unaudited)

 
                                                 

Produced tons

    1,492       1,566       (4.7 %)     2,913       3,102       (6.1 %)

Purchased tons

    24       108       (77.8 %)     42       245       (82.9 %)

Tons of coal sold

    1,516       1,674       (9.4 %)     2,955       3,347       (11.7 %)
                                                 

Tons sold under long-term contracts

    96.6 %     96.7 %  

n/a

      96.7 %     95.0 %  

n/a

 
                                                 

Coal sales revenue per ton

  $ 52.49     $ 51.21       2.5 %   $ 52.91     $ 50.94       3.9 %

Amortization of below-market coal sales contracts per ton

    -       -       0.0 %     -       (0.02 )     (100.0 %)

Cash coal sales revenue per ton

    52.49       51.21       2.5 %     52.91       50.92       3.9 %

Cash cost of coal sales per ton

    (44.38 )     (42.93 )     3.4 %     (45.02 )     (43.59 )     3.3 %

Cash margin per ton

  $ 8.11     $ 8.28       (2.1 %)   $ 7.89     $ 7.33       7.6 %

 

Cost of Coal Sales

 

We evaluate, on a cost per ton sold basis, our cost of coal sales which excludes non-cash costs such as depreciation, depletion and amortization (“DD&A”), gain or loss on asset disposals, impairment and restructuring expenses, and indirect costs such as selling, general and administrative expenses. Our cost of coal sales per ton represents our cost of coal sales divided by the tons of coal sold. Our cost of coal sales includes costs for labor, fuel, oil, explosives, royalties, equipment lease expense, repairs and maintenance, and other costs directly related to our mining operations.

 

At times, we purchase coal from third parties to fulfill a portion of our obligations under our long-term coal sales contracts and, in certain cases, to meet customer coal quality specifications. These costs are included in the cost of purchased coal amount within cost of coal sales.

 

Adjusted EBITDA

 

Adjusted EBITDA is a non-GAAP financial measure used by management to gauge operating performance. We define Adjusted EBITDA as net income or loss before deducting interest, income taxes, depreciation, depletion, amortization, change in fair value of warrants, impairment and restructuring expenses, gain or loss on disposal of assets, amortization of below-market coal sales contracts, non-cash equity-based compensation expense, non-cash reclamation and mine closure expense, and certain non-recurring revenues and costs. Although Adjusted EBITDA is not a measure of financial performance calculated in accordance with GAAP, we believe it is useful to management and others, such as investors and lenders, in evaluating our financial performance without regard to our financing methods, capital structure or income taxes; our ability to generate cash sufficient to pay interest and principal on our indebtedness, make distributions and fund capital expenditures; and our compliance with certain credit facility financial covenants. Because not all companies calculate Adjusted EBITDA the same way, our calculation may not be comparable to similarly titled measures of other companies.

 

 
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For a reconciliation of Net Loss to Adjusted EBITDA for the three and six months ended June 30, 2014 and 2013, see “— Results of Operations - Summary.”

 

Long-term Coal Supply Contracts

 

As is customary in the coal industry, we enter into long-term supply contracts (one year or longer in duration) with substantially all of our customers. These contracts allow customers to secure a supply for their future needs and provide us with greater predictability of sales volumes and prices. For the six months ended June 30, 2014, approximately 96.7% of our coal tons sold were sold under long-term supply contracts. We sell the remainder of our coal through short-term contracts and on the spot market.

 

The terms of our coal supply contracts result from competitive bidding and extensive negotiations with each customer. Consequently, the terms can vary significantly by contract, and can cover such matters as price adjustment features, price reopener terms, coal quality requirements, quantity adjustment mechanisms, permitted sources of supply, future regulatory changes, extension options, force majeure provisions and termination and assignment provisions. Some long-term contracts provide for a pre-determined adjustment to the stipulated base price at specified times or periodic intervals to account for changes due to inflation or deflation in prevailing market prices.

 

Also, most contracts contain provisions to adjust the base price due to new statutes, ordinances or regulations that influence our costs of production. In addition, some of our contracts contain provisions that allow for the recovery of costs impacted by modifications or changes in the interpretations or application of government statutes.

 

Price reopener provisions are present in several of our long-term contracts. These price reopener provisions may automatically set a new price based on prevailing market price or, in some instances, require the parties to agree on a new price, sometimes within a specified range. In a limited number of contracts, failure of the parties to agree on a price under a price reopener provision can lead to contract termination.

 

As of June 30, 2014, 98.1% of our projected coal sales tons for the balance of 2014 were committed and priced. As of June 30, 2014, we had commitments under supply contracts to deliver 4.1 million, 2.1 million and 2.1 million tons of coal to customers in 2015, 2016 and 2017, respectively. Of these amounts, in 2015 and 2016, 3.4 million and 1.7 million tons, respectively, are dependent upon reaching agreement on pricing during reopener periods. In 2017, all 2.1 million tons are dependent upon reaching agreement on pricing during reopener periods.

 

Factors That Impact Our Business

 

Our results of operations in the near term could be impacted by a number of factors, including (1) adverse weather conditions and natural disasters, (2) poor mining conditions resulting from geological conditions or the effects of prior mining, (3) equipment problems, (4) the availability of transportation for coal shipments and (5) 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) changes in governmental regulation, (2) the availability and prices of competing electricity-generation fuels, (3) our ability to secure or acquire high-quality coal reserves and (4) our ability to find buyers for coal under favorable supply contracts.

 

 
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Results of Operations

 

Summary

 

The following table presents historical condensed consolidated financial data for the three and six months ended June 30, 2014 and 2013:

 

SELECTED FINANCIAL AND OPERATING DATA

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2014

   

2013

   

2014

   

2013

 
   

(in thousands, unaudited)

 

STATEMENT OF OPERATIONS DATA:

                               

REVENUES:

                               

Coal sales

  $ 79,586     $ 85,691     $ 156,356     $ 170,484  

Other revenue

    2,415       2,434       3,649       6,367  

Total revenues

    82,001       88,125       160,005       176,851  

COSTS AND EXPENSES:

                               

Cost of coal sales:

                               

Produced coal

    66,527       66,556       131,734       133,984  

Purchased coal

    768       5,292       1,287       11,893  

Total cost of coal sales (excluding depreciation, depletion and amortization)

    67,295       71,848       133,021       145,877  

Cost of other revenue

    369       370       771       773  

Depreciation, depletion and amortization

    10,072       12,810       21,296       25,743  

Selling, general and administrative expenses

    3,270       5,847       6,926       10,005  

Impairment and restructuring expenses

    -       721       75       862  

Gain on disposal of assets, net

    (763 )     (5,905 )     (559 )     (5,487 )

Total costs and expenses

    80,243       85,691       161,530       177,773  

INCOME (LOSS) FROM OPERATIONS

    1,758       2,434       (1,525 )     (922 )

INTEREST AND OTHER INCOME (EXPENSES):

                               

Interest income

    2       1       3       2  

Interest expense

    (7,003 )     (4,416 )     (13,873 )     (7,338 )

Change in fair value of warrants

    1,885       (2,149 )     1,470       (2,149 )

Total interest and other expenses

    (5,116 )     (6,564 )     (12,400 )     (9,485 )

NET LOSS

    (3,358 )     (4,130 )     (13,925 )     (10,407 )

Net loss (income) attributable to noncontrolling interest

    461       (380 )     842       (650 )

Net loss attributable to Oxford Resource Partners, LP unitholders

  $ (2,897 )   $ (4,510 )   $ (13,083 )   $ (11,057 )

 

 
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The following table presents a reconciliation of net loss to Adjusted EBITDA for the three and six months ended June 30, 2014 and 2013:

 

RECONCILIATION OF NET LOSS TO ADJUSTED EBITDA

 

   

Three Months Ended
June 30,

   

Six Months Ended
June 30,

 
   

2014

   

2013

   

2014

   

2013

 
   

(in thousands, unaudited)

 

Net loss

  $ (3,358 )   $ (4,130 )   $ (13,925 )   $ (10,407 )

Adjustments:

                               

Interest expense, net of interest income

    7,001       4,415       13,870       7,336  

Depreciation, depletion and amortization

    10,072       12,810       21,296       25,743  

Change in fair value of warrants

    (1,885 )     2,149       (1,470 )     2,149  

Impairment and restructuring expenses

    -       721       75       862  

Gain on disposal of assets, net

    (763 )     (5,905 )     (559 )     (5,487 )

Amortization of below-market coal sales contracts

    -       (8 )     -       (60 )

Non-cash equity-based compensation expense

    465       416       921       739  

Non-cash reclamation and mine closure expense

    560       550       1,125       1,058  

Non-recurring costs:

                               

Debt refinancing expenses

    -       2,849       -       3,059  

Other