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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

x

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

For the quarterly period ended June 30, 2014

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: 333-179304

 

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  x*

*The registrant became subject to such requirements on June 18, 2014, and it has filed all reports required since that date.

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  x     No  ¨

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

 

Large accelerated filer

 

¨

  

Accelerated filer

 

¨

 

 

 

 

Non-accelerated filer

 

x  (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  x  

As of August 1, 2014, the registrant had 64,811,395 common units and 64,738,895 subordinated units outstanding.

 

 

 

 


 

TABLE OF CONTENTS

 

PART I

FINANCIAL INFORMATION

 

Item 1.Financial Statements

 

 

 

 

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

3

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

4

Unaudited Condensed Consolidated Statement of Partners’ Capital (Deficit) for the Six Months Ended June 30, 2014

5

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

6

Notes to Unaudited Condensed Consolidated Financial Statements

7

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

20

Item 3.Quantitative and Qualitative Disclosures about Market Risk

29

Item 4.Controls and Procedures

30

PART II

 

OTHER INFORMATION

 

Item 1.Legal Proceedings

30

Item 1A.Risk Factors

30

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

30

Item 3.Defaults Upon Senior Securities

30

Item 4.Mine Safety Disclosures

30

Item 5.Other Information

31

Signatures

32

Item 6.Exhibits

33

 

 

2


PART I – FINANCIAL INFORMATION.

 

Item 1. Financial Statements.

Foresight Energy LP

Condensed Consolidated Balance Sheets

 

 

(Unaudited)

 

 

 

 

 

 

June 30,

 

 

December 31,

 

 

2014

 

 

2013

 

 

(In Thousands)

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

23,606

 

 

$

23,284

 

Accounts receivable

 

65,234

 

 

 

58,987

 

Due from affiliates

 

454

 

 

 

368

 

Inventories

 

91,907

 

 

 

71,290

 

Prepaid expenses

 

5,053

 

 

 

3,028

 

Prepaid royalties

 

8,090

 

 

 

6,330

 

Deferred longwall costs

 

18,775

 

 

 

14,265

 

Coal derivative assets

 

13,360

 

 

 

1,976

 

Other current assets

 

5,072

 

 

 

6,568

 

Total current assets

 

231,551

 

 

 

186,096

 

Property, plant, equipment and development, net

 

1,442,866

 

 

 

1,414,074

 

Prepaid royalties

 

71,409

 

 

 

73,242

 

Coal derivative assets

 

7,936

 

 

 

912

 

Other assets

 

30,093

 

 

 

35,847

 

Total assets

$

1,783,855

 

 

$

1,710,171

 

Liabilities and partners’ capital (deficit)

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Current portion of long-term debt and capital lease obligations

$

34,284

 

 

$

70,034

 

Accrued interest

 

30,007

 

 

 

27,645

 

Accounts payable

 

61,247

 

 

 

50,155

 

Accrued expenses and other current liabilities

 

34,968

 

 

 

37,515

 

Due to affiliates

 

13,378

 

 

 

9,572

 

Total current liabilities

 

173,884

 

 

 

194,921

 

Long-term debt and capital lease obligations

 

1,281,560

 

 

 

1,449,179

 

Sale-leaseback financing arrangements

 

193,434

 

 

 

193,434

 

Asset retirement obligations

 

21,180

 

 

 

20,416

 

Other long-term liabilities

 

4,230

 

 

 

337

 

Total liabilities

 

1,674,288

 

 

 

1,858,287

 

Limited partners' capital (deficit):

 

 

 

 

 

 

 

Common unitholders (62,186 units outstanding as of June 30, 2014)

 

224,505

 

 

 

 

Subordinated unitholders (64,739 units outstanding as of June 30, 2014)

 

(123,764

)

 

 

 

Total limited partners' capital

 

100,741

 

 

 

 

Predecessor members' deficit

 

 

 

 

(157,356

)

Noncontrolling interests

 

8,826

 

 

 

9,240

 

Total partners' capital (deficit)

 

109,567

 

 

 

(148,116

)

Total liabilities and partners' capital (deficit)

$

1,783,855

 

 

$

1,710,171

 

 

 

 

 

 

 

 

 

See accompanying notes.

 

 

 

 

 

 

 

 

 

 

 

3


Foresight Energy LP

Unaudited Condensed Consolidated Statements of Operations

 

 

Three Months Ended

 

 

Six Months Ended

 

 

June 30,

 

 

June 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

 

(In Thousands, Except per Unit Data)

 

Coal sales

$

266,677

 

 

$

215,930

 

 

$

509,400

 

 

$

448,523

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

106,581

 

 

 

78,601

 

 

 

199,529

 

 

 

158,449

 

Cost of coal purchased

 

527

 

 

 

2,163

 

 

 

732

 

 

 

2,163

 

Transportation

 

49,733

 

 

 

46,033

 

 

 

109,169

 

 

 

95,648

 

Depreciation, depletion and amortization

 

40,692

 

 

 

37,228

 

 

 

75,950

 

 

 

74,427

 

Accretion on asset retirement obligations

 

405

 

 

 

382

 

 

 

810

 

 

 

763

 

Selling, general and administrative

 

11,195

 

 

 

9,211

 

 

 

20,233

 

 

 

18,217

 

Gain on coal derivatives

 

(7,028

)

 

 

(228

)

 

 

(22,429

)

 

 

(680

)

Other operating (income) loss, net

 

(1,602

)

 

 

613

 

 

 

(2,287

)

 

 

188

 

Operating income

 

66,174

 

 

 

41,927

 

 

 

127,693

 

 

 

99,348

 

Other expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss on early extinguishment of debt

 

4,979

 

 

 

 

 

 

4,979

 

 

 

 

Interest expense, net

 

30,350

 

 

 

27,760

 

 

 

59,954

 

 

 

55,961

 

Net income

 

30,845

 

 

 

14,167

 

 

 

62,760

 

 

 

43,387

 

Less: net income attributable to noncontrolling interests

 

1,370

 

 

 

131

 

 

 

1,983

 

 

 

206

 

Net income attributable to controlling interests

$

29,475

 

 

$

14,036

 

 

$

60,777

 

 

$

43,181

 

Less: predecessor net income attributable to controlling interests prior to initial public offering

 

33,706

 

 

 

 

 

 

 

65,008

 

 

 

 

 

Net loss subsequent to initial public offering attributable to limited partner units (June 23, 2014 through June 30, 2014)

$

(4,231

)

 

 

 

 

 

$

(4,231

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss subsequent to initial public offering available to limited partner units - basic and diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common units

$

(2,073

)

 

 

 

 

 

$

(2,073

)

 

 

 

 

Subordinated units

$

(2,158

)

 

 

 

 

 

$

(2,158

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss subsequent to initial public offering per limited partner unit - basic and diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common units

$

(0.03

)

 

 

 

 

 

$

(0.03

)

 

 

 

 

Subordinated units

$

(0.03

)

 

 

 

 

 

$

(0.03

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common units outstanding - basic and diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common units

 

64,811

 

 

 

 

 

 

 

64,811

 

 

 

 

 

Subordinated units

 

64,739

 

 

 

 

 

 

 

64,739

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4


Foresight Energy LP

Unaudited Condensed Consolidated Statement of Partners’ Capital (Deficit)

 

 

Limited Partners

 

 

Predecessor

 

 

 

 

 

 

 

 

 

 

Common

 

 

Subordinated

 

 

Members'

 

 

Noncontrolling

 

 

Total Partners'

 

 

Unitholders

 

 

Unitholders

 

 

Deficit

 

 

Interests

 

 

Capital

 

 

(In Thousands)

 

Balance at January 1, 2014

$

 

 

$

 

 

$

(157,356

)

 

$

9,240

 

 

$

(148,116

)

Net income prior to initial public offering

 

 

 

 

 

 

 

65,008

 

 

 

1,781

 

 

 

66,789

 

Non-cash distributions

 

 

 

 

 

 

 

(12,187

)

 

 

 

 

 

(12,187

)

Contribution of net assets to Foresight Energy LP

 

(51,354

)

 

 

(53,524

)

 

 

104,878

 

 

 

 

 

 

 

Issuance of common units, net of offering costs

 

322,670

 

 

 

 

 

 

 

 

 

 

 

 

322,670

 

Cash distributions

 

(46,918

)

 

 

(68,082

)

 

 

(343

)

 

 

(2,397

)

 

 

(117,740

)

Net loss subsequent to initial public offering

 

(2,073

)

 

 

(2,158

)

 

 

 

 

 

202

 

 

 

(4,029

)

Equity-based compensation

 

2,180

 

 

 

 

 

 

 

 

 

 

 

 

2,180

 

Balance at June 30, 2014

$

224,505

 

 

$

(123,764

)

 

$

 

 

$

8,826

 

 

$

109,567

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5


Foresight Energy LP

Unaudited Condensed Consolidated Statements of Cash Flows

 

 

Six Months Ended

 

 

June 30,

 

 

2014

 

 

2013

 

 

(In Thousands)

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net income

$

62,760

 

 

$

43,387

 

Adjustments to reconcile net income to net cash provided by operating

    activities:

 

 

 

 

 

 

 

Depreciation, depletion and amortization

 

75,950

 

 

 

74,427

 

Non-cash equity-based compensation

 

2,180

 

 

 

 

Amortization of debt issuance costs and debt premium/discount

 

3,732

 

 

 

3,707

 

Unrealized gain on coal derivatives

 

(17,710

)

 

 

(228

)

Deferred revenue recognized

 

 

 

 

(10,089

)

Non-cash loss on early extinguishment of debt

 

4,681

 

 

 

 

Other

 

1,961

 

 

 

1,582

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

(6,247

)

 

 

17,398

 

Due from/to affiliates, net

 

3,737

 

 

 

(253

)

Inventories

 

(15,393

)

 

 

(22,987

)

Prepaid expenses and other current assets

 

(5,039

)

 

 

(8,914

)

Prepaid royalties

 

73

 

 

 

(995

)

Coal derivative assets and liabilities

 

(868

)

 

 

306

 

Accounts payable

 

10,938

 

 

 

(3,183

)

Accrued interest

 

2,362

 

 

 

1,590

 

Accrued expenses and other current liabilities

 

826

 

 

 

11,097

 

Deferred revenue

 

 

 

 

23,460

 

Other

 

(470

)

 

 

(1,092

)

Net cash provided by operating activities

 

123,473

 

 

 

129,213

 

Cash flows from investing activities

 

 

 

 

 

 

 

Investment in property, plant, equipment and development

 

(118,398

)

 

 

(77,420

)

Acquisition of an affiliate

 

(3,822

)

 

 

 

Proceeds from sale of equipment

 

40

 

 

 

393

 

Settlement of coal derivatives

 

 

 

 

986

 

Net cash used in investing activities

 

(122,180

)

 

 

(76,041

)

Cash flows from financing activities

 

 

 

 

 

 

 

Net increase in borrowings under revolving credit facility

 

54,000

 

 

 

10,000

 

Proceeds from other long-term debt

 

29,719

 

 

 

 

Payments on other long-term debt and capital lease obligations

 

(289,467

)

 

 

(16,909

)

Distributions paid

 

(117,740

)

 

 

(35,197

)

Proceeds from issuance of common units (net of underwriters' discount)

 

329,875

 

 

 

 

Initial public offering costs paid (other than underwriters' discount)

 

(7,061

)

 

 

 

Debt issuance costs paid

 

(297

)

 

 

 

Net cash used in financing activities

 

(971

)

 

 

(42,106

)

Net increase in cash and cash equivalents

 

322

 

 

 

11,066

 

Cash and cash equivalents, beginning of period

 

23,284

 

 

 

27,888

 

Cash and cash equivalents, end of period

$

23,606

 

 

$

38,954

 

 

 

 

 

 

 

 

 

Supplemental information:

 

 

 

 

 

 

 

Interest paid, net of amounts capitalized

$

53,863

 

 

$

50,656

 

Supplemental disclosures of non-cash financing activities:

 

 

 

 

 

 

 

Non-cash distributions

$

12,187

 

 

$

 

 

 

 

 

 

 

 

 

See accompanying notes.

 

 

 

 

 

 

 

 

6


 

Foresight Energy LP

Notes to Unaudited Condensed Consolidated Financial Statements

 

1. Organization, Nature of Business and Basis of Presentation

As used in this report, the terms “Foresight Energy LP,” “FELP,” the “Partnership,” “we,” “us” or like terms, refer to Foresight Energy LP and our consolidated subsidiaries and affiliates. The information presented in this Quarterly Report on Form 10-Q contains the unaudited combined financial results of Foresight Energy LLC (“FELLC”), our predecessor for accounting purposes (the “Predecessor”), and variable interest entities (“VIEs”) for which FELLC or its subsidiaries are the primary beneficiary, for all periods presented through June 30, 2014. The consolidated financial results for the three and six months ended June 30, 2014 also include the results of operations of the Partnership for the period beginning June 23, 2014, the date of the contribution of the Predecessor’s net assets to the Partnership.

FELLC, a perpetual-term Delaware limited liability company, was formed in September 2006 for the development, mining, transportation and sale of coal mined in the Illinois Basin. Prior to June 23, 2014, Foresight Reserves, LP (“Foresight Reserves”) owned 99.333% of FELLC and the chief executive officer of FELLC (“a member of management”) owned 0.667%. In January 2012, Foresight Energy LP (“FELP”) (formerly named Foresight Energy Limited Partners LP), a Delaware limited partnership, and Foresight Energy GP LLC (“general partner”), a Delaware limited liability company, were formed. FELP was formed to own FELLC and Foresight Energy GP LLC was formed to be the general partner of FELP. Prior to June 23, 2014, FELP had no operating or cash flow activity and no recorded net assets.

On June 23, 2014, in connection with the initial public offering of 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 consolidated financial statements at FELLC’s historical cost. See Note 3 for information regarding our initial public offering.

The Partnership operates in a single reportable segment and currently operates 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”). Effective June 1, 2014, the second longwall system at our Sugar Camp complex transitioned from the development stage to the production stage and from that date forward is recognized in our results of operations. Mined coal is sold to a diverse customer base, including electric utility and industrial companies in the eastern United States, as well as overseas markets. Intercompany transactions, including those between consolidated VIEs, FELP and its consolidated subsidiaries, are eliminated in consolidation.

The accompanying unaudited 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 consolidated financial position, consolidated results of operations and consolidated cash flows for all periods presented. In preparing the unaudited 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 US generally accepted accounting principles (“US GAAP”) and, therefore, should be read in conjunction with the annual audited consolidated financial statements for the year ended December 31, 2013 included in our prospectus filed with the SEC on June 19, 2014. We have not reported comprehensive income due to the absence of items of other comprehensive income or loss during the periods presented. The results of operations for the three and six months ended June 30, 2014 are not necessarily indicative of results that can be expected for any future period, including the year ending December 31, 2014.

 

2. New Accounting Standards

New Accounting Standards Issued and Not Yet Adopted

In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. ASU 2014-08 changes the requirements for reporting discontinued operations by updating the criteria for determining discontinued operations and modifies the disclosure requirements of both discontinued operations and certain other disposals not defined as discontinued operations. ASU 2014-08 is effective for annual and interim periods beginning after December 15, 2014 and we do not expect it will have a material impact on our consolidated financial statements.

7


In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, to clarify the principles used to recognize revenue. The guidance is effective for annual and interim periods beginning after December 15, 2016. Early adoption is not permitted. We will evaluate the effects, if any, the adoption of this guidance will have on our consolidated financial statements.

 

3. Initial Public Offering

On June 18, 2014, the Partnership’s common units began trading on the New York Stock Exchange (“NYSE”) under the symbol “FELP.” Upon the closing of the initial public offering (“IPO”) on June 23, 2014, the following transactions occurred:

Foresight Reserves and a member of management each contributed their membership interests in FELLC to the Partnership;

The Partnership issued to Foresight Reserves and a member of management, on a pro rata basis, an aggregate of 44,613,895 common units and 64,738,895 subordinated units;

The Partnership issued to our general partner, which is owned 99.333% by Foresight Reserves and 0.667% by a member of management, incentive distribution rights.  The incentive distribution rights entitle the holder to an increasing percentage, up to a maximum of 50%, of the cash the Partnership distributes in excess of $0.3881 per unit per quarter (see Note 4);

The Partnership issued 17,500,000 units to the public at $20.00 per unit; and

The $329.9 million of proceeds received from the sale of common units to the public, net of underwriters’ discount of $20.1 million, were used to repay $210.0 million of principal on the term loan and to pay a $115.0 million distribution to Foresight Reserves and a member of management, on a pro rata basis. As of June 30, 3014, we incurred an additional $7.2 million in other offering costs which were recorded against partners’ capital.

In July 2014, the underwriters’ overallotment option expired, resulting in an additional 2,625,000 units being issued, on a pro rata basis, to Foresight Reserves and a member of management for no additional consideration. After the issuance of these overallotment units in July 2014, the common units held by the public represented 13.5% of the outstanding limited partnership interest.

 

4. Partners’ Capital

Common and Subordinated Units

All subordinated units are currently held by Foresight Reserves and a member of management. The principal difference between our common units and subordinated units is that subordinated unitholders are not entitled to receive a distribution of available cash until the holders of common units have received the minimum quarterly distribution (“MQD”).  The MQD is $0.3375 per unit for such quarter plus any cumulative arrearages of previously unpaid MQDs from previous quarters. Also, subordinated unitholders are not entitled to receive arrearages. The subordination period will end, and the subordinated units will convert to common units, on a one-for-one basis, on the first business day after the Partnership has paid the MQD for each of three consecutive, non-overlapping four-quarter periods ending on or after March 31, 2017 and there are no outstanding arrearages on the common units. Notwithstanding the foregoing, the subordination period will end on the first business day after the Partnership has paid an aggregate amount of at least $2.025 per unit (150.0% of the MQD on an annualized basis) on the outstanding common and subordinated units and the Partnership has paid the related distribution on the incentive distribution rights, for any four-quarter period ending on or after March 31, 2015 and there are no outstanding arrearages on the common units. Our partnership agreement provides that our general partner will make a determination as to whether a distribution will be made, but our partnership agreement does not require us to pay distributions at any time or at any amount. Our partnership agreement authorizes us to issue an unlimited number of additional partnership interests for the consideration and on the terms and conditions determined by our general partner without the approval of the unitholders.

Incentive Distribution Rights

Our general partner owns all of the incentive distribution rights (“IDRs”). IDRs represent the right to receive an increasing percentage of quarterly distributions of available cash from operating surplus after the MQD and the target distribution levels (described below) have been achieved. Our general partner may transfer these rights separately from its general partner interest, subject to restrictions in our partnership agreement. Our general partner, as the IDR holder, will have the right, subsequent to the subordination period and subject to distributions exceeding the MQD by at least 150% for four consecutive quarters, to reset the target distribution levels and receive common units.

8


Allocation of Net Income (Loss)

Our partnership agreement contains provisions for the allocation of net income and loss to the unitholders and the general partner. For purposes of maintaining partner capital accounts, the partnership agreement generally specifies that items of income and loss shall be allocated among the partners in accordance with their respective percentage interest.

Percentage Allocation of Available Cash from Operating Surplus

The following table illustrates the percentage allocation of available cash from operating surplus between the unitholders and our general partner (as the holder of our IDRs) based on the specified target distribution levels. The amounts set forth under the column heading “Marginal Percentage Interest in Distributions” are the percentage interests of the IDR holder and the unitholders of any available cash from operating surplus we distribute up to and including the corresponding amount in the column “Total Quarterly Distribution Per Common Unit”. The percentage interests shown for our unitholders and our general partner for the MQD are also applicable to quarterly distribution amounts that are less than the MQD. The percentage interests set forth below assumes there are no arrearages on common units.

 

 

Total Quarterly Distribution
Per Common Unit

 

 

Marginal Percentage
Interest in Distributions

 

 

 

 

 

Unitholders

 

 

General Partner (IDRs)

 

Minimum quarterly distribution

$0.3375

 

 

 

100.0

%

 

 

 

First target distribution

Above $0.3375 up to $0.3881

 

 

 

100.0

%

 

 

 

Second target distribution

Above $0.3881 up to $0.4219

 

 

 

85.0

%

 

 

15.0

%

Third target distribution

Above $0.4219 up to $0.5063

 

 

 

75.0

%

 

 

25.0

%

Thereafter

Above $0.5063

 

 

 

50.0

%

 

 

50.0

%

Our partnership agreement sets forth the calculation to be used to determine the amount and priority of cash distributions that the common and subordinated unitholders and general partner will receive. On August 5, 2014, we declared a quarterly cash distribution of $0.030 per unit to all unitholders of record on August 15, 2014.  The distribution is equal to the MQD, rounded-up, and prorated for the period from the closing date of the IPO to the end of the second quarter (June 23, 2014 through June 30, 2014) and is payable on August 29, 2014.

Predecessor Members’ Deficit

In May 2014, based upon the terms of the 2013 Reorganization, FELLC distributed to its members approximately 1,900 acres of surface land not needed for current or currently projected future operations and $0.1 million in cash. The carrying value of the distributed land was $12.2 million. Additionally, in connection with the acquisition of Seneca Rebuild LLC on April 1, 2014, a deemed distribution in the amount of $0.3 million was recorded to reflect the excess of the purchase price paid by FELLC over the carrying value of the net assets acquired (see Note 15).

On June 23, 2014, in connection with the IPO, Foresight Reserves and a member of management each contributed their membership interests in FELLC to the Partnership in exchange for common and subordinated units of FELP (see Note 3).  As a result, the members’ deficit balance of $104.9 million at the time of the transfer was allocated, pro rata based on units outstanding, to common and subordinated unitholder capital accounts.

Noncontrolling Interests

Noncontrolling interests and net income attributable to noncontrolling interests result from the consolidation of variable interest entities for which the Partnership has no equity interests (see Note 16).

 

9


5. Long-Term Debt and Capital Lease Obligations

Long-term debt and capital lease obligations consist of the following:

 

 

June 30,

2014

 

 

December 31,

2013

 

 

(In Thousands)

 

2021 Senior Notes

$

596,000

 

 

$

595,795

 

Term Loan

 

235,652

 

 

 

444,602

 

Revolving Credit Facility

 

313,000

 

 

 

259,000

 

Interim longwall financing arrangement

 

 

 

 

31,616

 

5.78% longwall financing arrangement

 

67,230

 

 

 

72,833

 

5.555% longwall financing arrangement

 

67,031

 

 

 

72,187

 

Capital lease obligations

 

36,931

 

 

 

43,180

 

Total long-term debt and capital lease obligations

 

1,315,844

 

 

 

1,519,213

 

Less: current portion

 

(34,284

)

 

 

(70,034

)

Long-term debt and capital lease obligations

$

1,281,560

 

 

$

1,449,179

 

 

Term Loan

In June 2014, we used proceeds from the IPO to repay $210.0 million in principal outstanding under the Term Loan. This prepayment resulted in the write-off of $2.8 million in unamortized debt issuance costs and $1.9 million of unamortized debt discount. The prepayment of principal was applied to prospective scheduled quarterly principal payments as set forth in the Credit Agreement such that no further scheduled payments are due until the Term Loan matures on August 23, 2020.

Revolving Credit Facility

The Revolving Credit Facility has a total borrowing capacity of $500.0 million. At June 30, 2014, we had borrowings of $313.0 million outstanding under the Revolving Credit Facility and $2.6 million outstanding in letters of credit. There was $184.4 million of remaining capacity under the Revolving Credit Facility as of June 30, 2014 and the weighted-average effective interest rate on borrowings as of June 30, 2014 and December 31, 2013 was 3.4% and 3.5%, respectively.

Interim Longwall Financing Arrangement

In November 2013, FELLC entered into an interim longwall financing arrangement and master lease agreement with a lender to finance the installment payments required under a contract with a vendor for the purchase of a set of longwall shields and related parts and equipment. This interim longwall financing arrangement, as amended, allowed for borrowings up to the expected purchase price of $63.2 million. In May 2014, the interim longwall financing arrangement and master lease agreement were terminated with the repayment of the $61.3 million outstanding balance and $0.3 million in lender fees were recorded to loss on early extinguishment of debt for the early termination of the master lease agreement.

 

6. Coal 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 long-term, fixed price coal supply sales agreements and coal derivative contracts.

As of June 30, 2014 and December 31, 2013, we had outstanding coal derivative contracts to fix the selling price on 3.6 million tons and 2.0 million tons, respectively. 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 consolidated balance sheets (see Note 17).

10


A summary of the unrealized and realized gains recorded on coal derivatives for the three and six months ended June 30, 2014 and 2013 is as follows:

 

 

Three Months Ended

 

 

Six Months Ended

 

 

June 30,

2014

 

 

June 30,

2013

 

 

June 30,

2014

 

 

June 30,

2013

 

 

(In Thousands)

 

Unrealized gain on coal derivatives

$

4,800

 

 

$

228

 

 

$

17,710

 

 

$

228

 

Realized gain on coal derivatives

 

2,228

 

 

 

 

 

 

4,719

 

 

 

452

 

Gain on coal derivatives

$

7,028

 

 

$

228

 

 

$

22,429

 

 

$

680

 

 

We received $1.0 million in proceeds during the six months ended June 30, 2013 from the settlement of derivatives that were recorded as an investing activity in the condensed consolidated statement of cash flows because the derivative contracts were settled prior to the underlying sales contracts.

 

7. Equity-Based Compensation

Long-Term Incentive Plan

Upon the closing of the IPO, our general partner adopted a Long-Term Incentive Plan (“LTIP”), pursuant to which employees of the Partnership and directors, officers, and certain employees of our general partner and its affiliates (collectively, the “Participants”) are eligible to receive awards with respect to the Partnership’s common units. The LTIP allows the board of directors of our general partner, at its discretion, to grant unit options, unit appreciation rights, restricted units, phantom units, unit awards, other unit-based awards, distribution equivalent rights, performance awards and substitute awards to Participants. The LTIP is administered by the board of directors of our general partner. Vesting and forfeiture requirements are at the discretion of the board of directors of our general partner at the time of each grant. The LTIP authorized up to 7.0 million common units to be granted by the board of directors.

Upon the closing of the IPO, pre-existing cash-based compensation liability awards, which vest ratably over a three-year period from the award date, will prospectively be settled in FELP units.  As a result, on June 23, 2014, $0.6 million was reclassified from accrued expenses and other current liabilities to partners’ capital in the condensed consolidated balance sheet for the award modification.  No compensation expense was recorded as a result of the modification of these awards.

 

On June 23, 2014, 0.6 million phantom units were granted to employees under the LTIP, of which 0.1 million units were immediately vested upon the grant date. Also, 3,750 phantom units were granted to the independent director, as defined by the NYSE, on the board of directors of our general partner. Upon the vesting date of phantom units, Participants will receive common units in the Partnership. These phantom units granted under the LTIP include tandem distribution equivalent rights (“DERs”) which provide for the right to accrue quarterly cash distributions in an amount equal to the cash distribution the Partnership makes to unitholders during the vesting period. These awards are subject to service-based vesting conditions and any accrued distributions will be forfeited if the related awards fail to vest according to the relevant service-based vesting conditions. DERs will be settled in cash upon vesting.

The grants to employees under the LTIP plan were measured at their grant date fair value and the compensation expense is recognized ratably over the vesting period. The phantom units granted to the independent director of the board of directors was initially recognized at the grant date fair value and will be remeasured at fair value over the vesting period. Total equity-based compensation cost of $1.5 million was recognized from June 23, 2014 to June 30, 2014 related to the LTIP, of which $1.4 million was for the awards fully vested upon the grant date. As of June 30, 2014, there was $10.9 million in total unrecognized compensation expense related to the non-vested phantom unit awards that are expected to vest which is expected to be recognized over a weighted-average service period of 2.7 years. As of June 30, 2014, the intrinsic value of the non-vested phantom unit awards expected to vest was $11.8 million.

 

8. Earnings per Limited Partner Unit

 

Limited partners’ interest in net income attributable to the Partnership and basic and diluted earnings per unit reflect net income attributable to the Partnership from the June 23, 2014 closing date of the IPO through June 30, 2014. We compute earnings per unit (“EPU”) using the two-class method for master limited partnerships as prescribed in ASC 260, Earnings Per Share. The two-class method requires that securities that meet the definition of a participating security be considered for inclusion in the computation of basic earnings per unit. In addition to the common and subordinated units, we have also identified the general partner interest and IDRs as participating securities. Under the two-class method, earnings per unit is calculated as if all of the earnings for the period were distributed under the terms of the partnership agreement, regardless of whether the general partner has discretion over the amount of distributions to be made in any particular period, whether those earnings would actually be distributed during a particular period from an economic or practical perspective, or whether the general partner has other legal or contractual limitations on its ability to pay distributions that would prevent it from distributing all of the earnings for a particular period.

11


 

The Partnership’s net income is allocated to the limited partners, including the holders of the subordinated units, in accordance with their respective ownership percentages, after giving effect to any special income or expense allocations and incentive distributions paid to the general partner, if any. The partnership agreement contractually limits distributions to available cash as determined by our general partner; therefore, undistributed earnings of the Partnership are not allocated to the IDR holder. Basic earnings per unit is computed by dividing net earnings attributable to unitholders by the weighted average number of units outstanding during each period. However, because our IPO was completed on June 23, 2014, the number of units outstanding from the IPO through June 30, 2014 is utilized for the 2014 periods presented.  Basic common units outstanding includes the 2,625,000 overallotment units offered to the underwriters, which were issued to Foresight Reserves and a member of management in July 2014. Diluted earnings per unit reflects the potential dilution of common equivalent units that could occur if equity participation units are converted into common units.

 

The following table illustrates the Partnership’s calculation of net income per common and subordinated unit for the periods indicated:

 

 

Common Unitholders

 

 

Subordinated Unitholders

 

 

Total

 

 

(In Thousands, Except Per Unit Data)

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

Net loss subsequent to the IPO (June 23, 2014 through

   June 30, 2014) available to limited partner units

$

(2,073

)

 

$

(2,158

)

 

$

(4,231

)

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

Weighted average units to calculate basic EPU(1)

 

64,811

 

 

 

64,739

 

 

 

129,550

 

Less: effect of dilutive securities (2)

 

 

 

 

 

 

 

 

Weighted average units to calculate diluted EPU

 

64,811

 

 

 

64,739

 

 

 

129,550

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net loss per unit

$

(0.03

)

 

$

(0.03

)

 

$

(0.03

)

Diluted net loss per unit

$

(0.03

)

 

$

(0.03

)

 

$

(0.03

)

(1) -

Weighted average units outstanding to calculate basic EPU includes the 2,625,000 overallotment common units issued in July 2014, in addition to the actual number of common units outstanding as of June 30, 2014.

(2) -

Diluted EPU gives effect to all dilutive potential common units outstanding during the period using the treasury stock method. Diluted EPU excludes all dilutive potential units calculated under the treasury stock method if their effect is anti-dilutive. For the three and six months ended June 30, 2014, approximately 0.7 million outstanding phantom units were anti-dilutive therefore excluded from the diluted EPU calculation.

 

9. Accounts Receivable

Accounts receivable consists of the following:

 

 

June 30,

2014

 

 

December 31,

2013

 

 

(In Thousands)

 

Trade accounts receivable

$

59,666

 

 

$

54,084

 

Other receivables

 

5,568

 

 

 

4,903

 

Total accounts receivable

$

65,234

 

 

$

58,987

 

 

10. Inventories

Inventories consist of the following:

 

 

June 30,

2014

 

 

December 31,

2013

 

 

(In Thousands)

 

Parts and supplies inventory

$

32,327

 

 

$

30,155

 

Raw coal

 

6,524

 

 

 

4,250

 

Clean coal

 

53,056

 

 

 

36,885

 

Total inventories

$

91,907

 

 

$

71,290

 

 

12


11. Property, Plant, Equipment and Development, Net

Property, plant, equipment and development, net consist of the following:

 

 

June 30,

2014

 

 

December 31,

2013

 

 

(In Thousands)

 

Land, land rights and mineral rights

$

103,938

 

 

$

114,058

 

Machinery and equipment

 

1,068,913

 

 

 

984,920

 

Machinery and equipment under capital leases

 

70,500

 

 

 

70,500

 

Buildings and structures

 

215,524

 

 

 

218,037

 

Development costs

 

657,790

 

 

 

619,117

 

Other

 

9,862

 

 

 

8,564

 

Property, plant, equipment and development

 

2,126,527

 

 

 

2,015,196

 

Less: accumulated depreciation, depletion and amortization

 

(683,661

)

 

 

(601,122

)

Property, plant, equipment and development, net

$

1,442,866

 

 

$

1,414,074

 

 

12. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consist of the following:

 

 

June 30,

2014

 

 

December 31,

2013

 

 

(In Thousands)

 

Employee compensation, benefits and payroll taxes

$

14,467

 

 

$

17,137

 

Taxes other than income

 

5,733

 

 

 

4,270

 

Royalties (non-affiliate)

 

3,053

 

 

 

2,999

 

Liquidated damages (non-affiliate)

 

5,513

 

 

 

7,448

 

Other

 

6,202

 

 

 

5,661

 

Total accrued expenses and other current liabilities

$

34,968

 

 

$

37,515

 

 

13. Sale-Leaseback Financing Arrangements

In 2009, Macoupin sold certain of its coal reserves and rail facilities to WPP, LLC (“WPP”), a subsidiary of Natural Resource Partners, LP (“NRP”), and leased them back. The gross proceeds from this transaction were $143.5 million and were used for capital expenditures. In 2012, Sugar Camp sold certain rail facilities to HOD, LLC (“HOD”), a subsidiary of NRP, and leased them back. The gross proceeds from this transaction were $50.0 million and were used for capital expenditures, to pay down debt and for general corporate purposes. NRP is an affiliated entity to the Partnership (see Note 15). In both transactions, because we had continuing involvement in the assets sold, the transactions were treated as sale-leaseback financing arrangements. In 2013, an agreement was reached between FELLC, Foresight Reserves and HOD that allows for the existing agreement with Sugar Camp to be amended in the future to include coal produced from Sugar Camp’s second longwall on what is expected to be materially consistent terms as the original agreement. Pursuant to such an amendment occurring, the consideration paid by HOD for including coal produced by Sugar Camp’s second longwall will be paid directly to Foresight Reserves. As of June 30, 2014, the outstanding principal balance on the Macoupin and Sugar Camp sale-leaseback financing arrangements was $143.5 million and $50.0 million, respectively.

The implied effective interest rate as of June 30, 2014 on the Macoupin sale-leaseback financing arrangement and the Sugar Camp sale-leaseback financing arrangement was 14.2% and 14.3%, respectively. If there is a material change to the mine plans, the impact of a change in the effective interest rate to the consolidated statements of operations could be significant. Interest expense recorded on the Macoupin sale-leaseback was $4.9 million and $4.8 million for the three months ended June 30, 2014 and 2013, respectively, and $9.6 million and $9.8 million for the six months ended June 30, 2014 and 2013, respectively. Interest expense recorded on the Sugar Camp sale-leaseback was $1.8 million and $1.7 million for the three months ended June 30, 2014 and 2013, respectively, and $3.5 million and $3.4 million for the six months ended June 30, 2014 and 2013, respectively. As of June 30, 2014 and December 31, 2013, interest totaling $10.3 million and $9.1 million, respectively, was accrued in the condensed consolidated balance sheets for the Sugar Camp and Macoupin sale-leaseback financing arrangements.

 

13


14. Asset Retirement Obligations

The change in the carrying amount of asset retirement obligations was as follows for the six months ended:

 

 

June 30,

2014

 

 

(In Thousands)

 

Balance at January 1, 2014 (including current portion)

$

21,225

 

Accretion expense

 

810

 

Expenditures for reclamation activities

 

(46

)

Balance at June 30, 2014 (including current portion)

 

21,989

 

Less: current portion of asset retirement obligations

 

(809

)

Noncurrent portion of asset retirement obligations

$

21,180

 

 

15. Related-Party Transactions

The chairman of our general partner’s board of directors and the controlling member of Foresight Reserves, Chris Cline, directly and indirectly beneficially owns an interest in the general and limited partner interests of NRP. We routinely engage in transactions in the normal course of business with NRP and its subsidiaries and Foresight Reserves and its affiliates. These transactions include production royalties, transportation services, administrative arrangements, coal handling and storage services, supply agreements, service agreements, land leases and sale-leaseback financing arrangements (see Note 13, sale-leaseback financing arrangements are excluded from the tables below). We have also acquired mining equipment from Foresight Reserves and affiliated entities in the past.

On August 1, 2013, FELLC entered into an equipment repair and rebuild agreement with Seneca Rebuild LLC (“Seneca Rebuild”), an affiliated entity owned indirectly by Chris Cline. The agreement called for Seneca Rebuild to be the primary provider of repair and rebuild services for mining machinery and equipment for our mines. Effective April 1, 2014, FELLC reached an agreement to acquire Seneca Rebuild. Because FELLC and Seneca Rebuild were under common control, the assets and liabilities of Seneca Rebuild were recorded by FELLC at carrying value on the acquisition date. Seneca Rebuild’s net assets on the acquisition date principally consisted of $3.4 million in plant, property and equipment and $0.5 million in inventory. The $0.3 million paid over the excess of the carrying value of the net assets of Seneca Rebuild on the acquisition date was recorded as a deemed distribution during the three months ended June 30, 2014. Given the immateriality of this acquisition, the financial statements of Seneca Rebuild are reflected prospectively in the consolidated financial statements of the Partnership.

Limited Partnership Agreement

The Partnership’s general partner manages the Partnership’s operations and activities as specified in the partnership agreement. The general partner of the Partnership is managed by its board of directors. Foresight Reserves has the right to select the directors of the general partner. The members of the board of directors of the general partner are not elected by the unitholders and are not subject to reelection by the unitholders. The officers of the general partner manage the day-to-day affairs of the Partnership’s business. The partnership agreement provides that the Partnership will reimburse its general partner for all direct and indirect expenses incurred or payments made by the general partner on behalf of the Partnership. No amounts were incurred by the general partner or reimbursed under the partnership agreement from the IPO date to June 30, 2014.

The following table presents the affiliate amounts included in our condensed consolidated balance sheets:

 

Affiliated Company

 

Balance Sheet Location

 

June 30,

2014

 

 

December 31,

2013

 

 

 

 

 

(In Thousands)

 

Foresight Reserves and affiliated entities

 

Due from affiliates

 

$

334

 

 

$

368

 

NRP and affiliated entities

 

Due from affiliates

 

 

120

 

 

 

 

Total

 

 

 

$

454

 

 

$

368

 

 

 

 

 

 

 

 

 

 

 

 

Foresight Reserves and affiliated entities

 

Due to affiliates

 

$

8,437

 

 

$

4,521

 

NRP and affiliated entities

 

Due to affiliates

 

 

4,941

 

 

 

5,051

 

Total

 

 

 

$

13,378

 

 

$

9,572

 

 

 

 

 

 

 

 

 

 

 

 

Foresight Reserves and affiliated entities

 

Prepaid royalties

 

$

35,335

 

 

$

37,644

 

NRP and affiliated entities

 

Prepaid royalties

 

 

41,296

 

 

 

39,801

 

Total

 

 

 

$

76,631

 

 

$

77,445

 

14


 

A summary of expenses (income) incurred with affiliated entities is as follows for the three and six months ended June 30:

 

 

Three Months Ended

 

 

Six Months Ended

 

 

June 30,

2014

 

 

June 30,

2013

 

 

June 30,

2014

 

 

June 30,

2013

 

 

(In Thousands)

 

Royalty expense NRP and affiliated entities(1)

$

13,590

 

 

$

11,898

 

 

$

26,024

 

 

$

23,469

 

Royalty expense – Foresight Reserves and affiliated entities(1)

$

2,609

 

 

$

9

 

 

$

3,926

 

 

$

438

 

Loadout services – NRP and affiliated entities(1)

$

2,840

 

 

$

1,988

 

 

$

5,433

 

 

$

4,774

 

Terminal fees – Foresight Reserves and affiliated entities(2)

$

13,554

 

 

$

5,886

 

 

$

26,302

 

 

$

14,022

 

Management and transportation usage fees – Foresight

   Reserves and affiliated entities(3)

$

 

 

$

396

 

 

$

 

 

$

1,506

 

Administrative fee income – Foresight

   Reserves and affiliated entities(4)

$

(60

)

 

$

 

 

$

(135

)

 

$

 

 

Location in the condensed consolidated statements of operations:

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

(2) – Transportation

(3) – Selling, general and administrative

(4) – Other operating (income) loss, net

We also purchased $4.2 million and $7.6 million in mining supplies from an affiliated joint venture under a supply agreement entered into in May 2013 during the three and six months ended June 30, 2014, respectively, and $2.6 million during the three and six months ended June 30, 2013, respectively (see Note 16).

 

16. Variable Interest Entities (VIEs)

The consolidated financial statements include VIEs for which the Partnership or its subsidiary is the primary beneficiary. Among those VIEs consolidated by the Partnership and its subsidiaries are Mach Mining, LLC; M-Class Mining, LLC; MaRyan Mining LLC; Patton Mining LLC; Viking Mining LLC, Coal Field Construction Company LLC; Coal Field Repair Services LLC and LD Labor Company LLC (prior to the 2013 Reorganization date discussed below) (collectively, the “Contractor VIEs”). Coal Field Repair Services LLC provides contract labor for Seneca Rebuild, acquired on April 1, 2014 (see Note 15), under a cost-plus arrangement. Each of the Contractor VIEs holds a contract to provide one or more of the following services to a Partnership subsidiary: contract mining, processing and loading services, or construction and maintenance services. Each of the Contractor VIEs generally receives a nominal per ton fee ($0.01 to $0.02 per ton) above its cost of operations as compensation for services performed. All of these entities were determined not to have sufficient equity at risk and are therefore VIEs. The Partnership was determined to be the primary beneficiary of each of these entities given it controls these entities under a contractual cost-plus arrangement. During the three and six months ended June 30, 2014, in aggregate, the Contractor VIEs earned income of $0.1 million and $0.2 million, respectively, under the contractual arrangements with the Partnership which was recorded as net income attributable to noncontrolling interests in the condensed consolidated statements of operations. During the three and six months ended June 30, 2013, in aggregate, the Contractor VIEs earned income of $0.1 million and $0.2 million, respectively, under the contractual arrangements with the Partnership which was recorded as net income attributable to noncontrolling interests in the condensed consolidated statements of operations.

On August 23, 2013, FELLC effected the 2013 Reorganization pursuant to which certain transportation assets were distributed to its members. Among those assets distributed to its members was Adena Resources LLC (“Adena”), a subsidiary that provides water and other miscellaneous rights to the mines and Hillsboro’s coal loadout facility, including the land on which the facility is situated (collectively, the “Loadout”).

Adena has various water rights contracts that are used to provide water to the Partnership’s mines. Concurrent with the distribution of Adena to FELLC members, we entered into a water resources agreement between the Partnership’s mines and Adena providing for water resources to be available at each of the mines. As compensation for furnishing water to the mines, we pay Adena the actual cost (including capital expenditures) incurred by Adena in furnishing water to the mine plus an annual fee of $10,000. Adena is determined not to have sufficient equity at risk and is therefore a VIE. The Partnership is determined to be the primary beneficiary of Adena given it controls this entity under a contractual cost-plus arrangement. During the three and six months ended June 30, 2014, Adena recorded a loss of $0.1 million and $0.3 million, respectively, which was recorded as net income attributable to noncontrolling interests in the condensed consolidated statements of operations.

15


Subsequent to the 2013 Reorganization date, Foresight Reserves placed the Loadout into a newly created subsidiary, Hillsboro Transport, LLC (“Hillsboro Transport”). A throughput agreement was entered into between Hillsboro and Hillsboro Transport for Hillsboro Transport to operate the Loadout. As compensation for operating and maintaining the Loadout, Hillsboro pays $0.99 per ton for every ton of coal loaded through the Loadout, subject to a minimum quarterly payment of $1.3 million, which began in the first quarter of 2014. Hillsboro Transport was determined not to have sufficient equity at risk as a result of the throughput agreement’s guaranteed minimum quarterly payment and is therefore a VIE. Hillsboro was determined to be the primary beneficiary of this entity as it implicitly controls Hillsboro Transport given the related-party relationship between Hillsboro and Hillsboro Transport and the fact that the sole assets held by Hillsboro Transport are unique to Hillsboro’s operations. During the three and six months ended June 30, 2014, Hillsboro Transport earned $1.4 million and $2.1 million, respectively, in net income under this arrangement, which is presented in net income attributable to noncontrolling interests in the condensed consolidated statements of operations.

The liabilities recognized as a result of consolidating the VIEs do not necessarily represent additional claims on the general assets of the Partnership outside of the VIEs; rather, they represent claims against the specific assets of the consolidated VIEs. Conversely, assets recognized as a result of consolidating these VIEs do not necessarily represent additional assets that could be used to satisfy claims against the Partnership’s general assets. There are no restrictions on the VIE assets that are reported in the Partnership’s general assets. The total consolidated VIE assets and liabilities reflected in the Partnership’s condensed consolidated balance sheets are as follows:

 

 

June 30,

2014

 

 

December 31,

2013

 

 

(In Thousands)

 

Assets:

 

 

 

 

 

 

 

Current assets

$

2,439

 

 

$

4,386

 

Long-term assets

 

1,802

 

 

 

2,141

 

Total assets

$

4,241

 

 

$

6,527

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

Current liabilities

$

8,948

 

 

$

5,310

 

Long-term liabilities

 

164

 

 

 

157

 

Total liabilities

$

9,112

 

 

$

5,467

 

 

In May 2013, an affiliate owned by Chris Cline and a third-party supplier of mining supplies formed a joint venture whose purpose is the manufacture and sale of supplies primarily for use by the Partnership in the conduct of its mining operations. The agreement obligates the Partnership’s coal mines to purchase at least 90% of their aggregate annual requirements for certain mining supplies from the supplier parties, subject to exceptions as set forth in the agreement. The initial term of the amended agreement is five years and expires in April 2018. The supplies sold under this arrangement result in an agreed-upon fixed profit percentage for the joint venture. This joint venture was determined to be a VIE given that the equity holders do not have the obligation to absorb the expected losses or the right to receive the expected residual returns of the joint venture as a result of the Partnership effectively guaranteeing a fixed-profit percentage on the supplies it purchases from the joint venture. We are not the primary beneficiary of this joint venture and, therefore, do not consolidate the joint venture, given that the power over the joint venture is conveyed through the board of directors of the joint venture and no party controls the board of directors.

 

17. Fair Value of Financial Instruments

The table below sets forth, by level, the Partnership’s net financial assets and liabilities for which fair value is measured on a recurring basis:

 

 

Fair Value at June 30, 2014

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

(In Thousands)

 

Coal derivative contracts

$

21,129

 

 

$

 

 

$

21,129

 

 

$

 

Total

$

21,129

 

 

$

 

 

$

21,129

 

 

$

 

16


 

 

Fair Value at December 31, 2013

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

(In Thousands)

 

Coal derivative contracts

$

2,020

 

 

$

 

 

$

2,020

 

 

$

 

Liability Award

 

(11,700

)

 

 

 

 

 

 

 

 

(11,700

)

Total

$

(9,680

)

 

$

 

 

$

2,020

 

 

$

(11,700

)

 

The Partnership’s coal derivative contracts are valued based on direct broker quotes and corroborated with API 2 market pricing data. The liability award represents a phantom equity award (“Liability Award”) to a retired executive for which the value was determined based on the fair value, as defined in the agreement, of Foresight Reserves as of the employee’s retirement date and was adjusted for distributions made to Foresight Reserves’ members. This Liability Award fully vested in 2010 and was granted principally for services performed to develop the Partnership’s longwall mines. Prior to March 31, 2014, the Liability Award was Level 3 in the fair value hierarchy given Foresight Reserves is a private company; therefore, there was no liquid market to determine the fair value of Foresight Reserves’ equity. The fair value of the Liability Award was determined using a discounted cash flow model and corroborated with recent equity transactions at Foresight Reserves. Effective March 31, 2014, the Liability Award amount was negotiated between the Partnership and the employee to be $12.4 million; therefore, the value of this liability was contracted and therefore no longer a Level 3 liability. As of June 30, 2014, $0.3 million of the remaining unpaid balance is recorded in accrued expenses and other current liabilities for required payments over the next year, and the remaining $4.1 million is recorded in other long-term liabilities, which will be paid out ratably over the next ten years. The note payable to the retired executive bears interest at 3.45%.

The classification and amount of the Partnership’s financial instruments measured at fair value on a recurring basis, which are presented on a gross basis in the condensed consolidated balance sheets as of June 30, 2014 and December 31, 2013, are as follows:

 

 

Fair Value at June 30, 2014

 

 

Current Coal Derivative Assets

 

 

Long-Term –  Coal Derivative Assets

 

 

Accrued Expenses

 

 

Other Long-Term Liabilities

 

 

(In Thousands)

 

Coal derivative contracts

$

13,360

 

 

$

7,936

 

 

$

 

 

$

(167

)

Total

$

13,360

 

 

$

7,936

 

 

$

 

 

$

(167

)

 

 

Fair Value at December 31, 2013

 

 

Current Coal Derivative Assets

 

 

Long-Term –  Coal Derivative Assets

 

 

Accrued Expenses

 

 

Other Long-Term Liabilities

 

 

(In Thousands)

 

Coal derivative contracts

$

1,976

 

 

$

912

 

 

$

(531

)

 

$

(337

)

Liability Award

 

 

 

 

 

 

 

(11,700

)

 

 

 

Total

$

1,976

 

 

$

912

 

 

$

(12,231

)

 

$

(337

)

 

The following is a reconciliation of the beginning and ending balances for assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the six months ended June 30, 2014 and 2013:

 

 

Liability Award

 

 

(In Thousands)

 

Balance at January 1, 2014

$

11,700

 

Recorded fair value losses (gains):

 

 

 

Included in earnings

 

690

 

Purchases, issuances and settlements

 

(12,390

)

Balance at June 30, 2014

$

 

 

 

 

 

Balance at January 1, 2013

$

 

Recorded fair value losses (gains):

 

 

 

Included in earnings

 

(651

)

Capitalized into development costs

 

(217

)

Purchases, issuances and settlements

 

11,240

 

Balance at June 30, 2013

$

10,372

 

17


 

During the six months ended June 30, 2014 and 2013, there were no assets or liabilities that were transferred between Level 1 and Level 2.

Long-Term Debt

The fair value of long-term debt as of June 30, 2014 and December 31, 2013 was $1,329.7 million and $1,509.2 million, respectively. The fair value of long-term debt was determined based on the amount of future cash flows associated with each debt instrument discounted at the Partnership’s current estimated credit-adjusted borrowing rate for similar debt instruments with comparable terms. This is considered a Level 3 fair value measurement.

 

18. Contingencies

In April 2013, the Illinois Environmental Protection Agency (“IEPA”) issued Sugar Camp two violation notices regarding exceedances in effluent discharge from the mine site and improper dilution of high chloride effluent. Sugar Camp believes it is now in compliance with its permit. In March 2014, the IEPA issued Sugar Camp a violation notice regarding non-compliant effluent discharge from the mining operation. Sugar Camp has reclaimed a temporary holding pond that may have contributed to the violation and is currently in compliance with its permit. On July 8, 2014, Sugar Camp entered into a Compliance Commitment Agreement with the IEPA (“July CCA”) identifying a schedule of actions expected to resolve the March 2014 violation.   The IEPA has notified Sugar Camp that the compliance commitment agreements entered into with respect to the two April 2013 violation notices were superseded by the July CCA and are no longer of any force or effect.  Violation of the terms of the July CCA could result in the assessment of fines or penalties or a suspension of mining at the affected operations until a final solution is obtained.

In January 2014, the IEPA issued Sugar Camp a violation notice regarding construction of an underground injection well without issuance of an appropriate permit (“January Notice”). Sugar Camp has ceased all drilling activities at the site and is working with the IEPA to finalize its permit application, which has been in process since May 2013. The IEPA has determined not to enter into a compliance commitment agreement with respect to the January Notice.  However, there can be no assurances that the January Notice will not be referred to the Office of the Attorney General for further processing.  While Sugar Camp believes this referral may result in the assessment of a penalty of an amount yet to be determined, there can be no assurances that an acceptable agreement will be reached. Failure to reach a satisfactory agreement with the Office of the Attorney General with respect to the January Notice could result in the assessment of fines or penalties or a suspension of mining at the affected operations until a final solution is obtained.

Sugar Camp is working with the IEPA to implement a sustainable solution for the future disposal of water at the mine in compliance with its permits. Including actions required under the July CCA, Sugar Camp expects to incur capital expenditures of approximately $20.0 million, $16.4 million of which has been expended through June 30, 2014.

In November 2012, six citizens filed requests for administrative review of Revision No. 1 to Permit No. 399 for the Hillsboro mine. Revision No. 1 allowed for conversion of the currently permitted coal refuse disposal facility from a non-impounding to an impounding structure. Shortly after the filing of Revision No. 1, one citizen withdrew his request. Following a hearing on both Illinois Department of Natural Resources’ (IDNR) and Hillsboro’s motions to dismiss, the hearing officer dismissed the claims of two of the remaining five petitioners and also limited some of the issues remaining for administrative review. In June 2014, two of the remaining three petitioners voluntarily dismissed their request