Attached files
file | filename |
---|---|
EXCEL - IDEA: XBRL DOCUMENT - Armstrong Energy, Inc. | Financial_Report.xls |
EX-31.1 - EX-31.1 - Armstrong Energy, Inc. | d806216dex311.htm |
EX-32.2 - EX-32.2 - Armstrong Energy, Inc. | d806216dex322.htm |
EX-31.2 - EX-31.2 - Armstrong Energy, Inc. | d806216dex312.htm |
EX-95.1 - EX-95.1 - Armstrong Energy, Inc. | d806216dex951.htm |
EX-32.1 - EX-32.1 - Armstrong Energy, Inc. | d806216dex321.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2014
or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number: 333-191182
(Exact name of registrant as specified in its charter)
Delaware | 20-8015664 | |
(State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification No.) | |
7733 Forsyth Boulevard, Suite 1625 St. Louis, Missouri |
63105 | |
(Address of principal executive offices) | (Zip code) |
(314) 721 8202
(Registrants 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. x 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). x Yes ¨ 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 x No
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.
As of November 1, 2014, there were 21,944,476 shares of Armstrong Energy, Inc.s Common Stock outstanding.
Table of Contents
Page | ||||||
PART I FINANCIAL INFORMATION | ||||||
Item 1. |
Financial Statements | 1 | ||||
Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations | 21 | ||||
Item 3. |
Quantitative and Qualitative Disclosures about Market Risk | 31 | ||||
Item 4. |
Controls and Procedures | 32 | ||||
PART II OTHER INFORMATION | ||||||
Item 1. |
Legal Proceedings | 33 | ||||
Item 1A. |
Risk Factors | 33 | ||||
Item 4. |
Mine Safety Disclosures | 33 | ||||
Item 5. |
Other Information | 33 | ||||
Item 6. |
Exhibits | 33 | ||||
34 |
Table of Contents
PART I FINANCIAL INFORMATION
Armstrong Energy, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
September 30, 2014 |
December 31, 2013 |
|||||||
(Unaudited) | ||||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 66,704 | $ | 51,632 | ||||
Accounts receivable |
26,803 | 24,654 | ||||||
Inventories |
12,891 | 12,683 | ||||||
Prepaid and other assets |
2,696 | 3,669 | ||||||
Deferred income taxes |
829 | 605 | ||||||
|
|
|
|
|||||
Total current assets |
109,923 | 93,243 | ||||||
Property, plant, equipment, and mine development, net |
413,208 | 424,365 | ||||||
Investments |
3,335 | 3,224 | ||||||
Intangible assets, net |
134 | 144 | ||||||
Other non-current assets |
24,433 | 22,577 | ||||||
|
|
|
|
|||||
Total assets |
$ | 551,033 | $ | 543,553 | ||||
|
|
|
|
|||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 28,777 | $ | 27,972 | ||||
Accrued liabilities and other |
25,681 | 16,234 | ||||||
Current portion of capital lease obligations |
2,580 | 2,497 | ||||||
Current maturities of long-term debt |
4,942 | 4,498 | ||||||
|
|
|
|
|||||
Total current liabilities |
61,980 | 51,201 | ||||||
Long-term debt, less current maturities |
199,810 | 198,186 | ||||||
Long-term obligation to related party |
104,648 | 106,283 | ||||||
Related party payables, net |
20,080 | 7,780 | ||||||
Asset retirement obligations |
18,311 | 17,230 | ||||||
Long-term portion of capital lease obligations |
1,887 | 2,222 | ||||||
Deferred income taxes |
829 | 605 | ||||||
Other non-current liabilities |
3,851 | 3,103 | ||||||
|
|
|
|
|||||
Total liabilities |
411,396 | 386,610 | ||||||
Stockholders equity: |
||||||||
Common stock, $0.01 par value, 70,000,000 shares authorized, 21,944,476 and 21,933,710 shares issued and outstanding as of September 30, 2014 and December 31, 2013, respectively |
219 | 219 | ||||||
Preferred stock, $0.01 par value, 1,000,000 shares authorized, zero shares issued and outstanding as of September 30, 2014 and December 31, 2013, respectively |
| | ||||||
Additional paid-in-capital |
238,651 | 238,799 | ||||||
Accumulated deficit |
(98,597 | ) | (81,361 | ) | ||||
Accumulated other comprehensive loss |
(659 | ) | (737 | ) | ||||
|
|
|
|
|||||
Armstrong Energy, Inc.s equity |
139,614 | 156,920 | ||||||
Non-controlling interest |
23 | 23 | ||||||
|
|
|
|
|||||
Total stockholders equity |
139,637 | 156,943 | ||||||
|
|
|
|
|||||
Total liabilities and stockholders equity |
$ | 551,033 | $ | 543,553 | ||||
|
|
|
|
See accompanying notes to unaudited condensed consolidated financial statements.
1
Table of Contents
Armstrong Energy, Inc. and Subsidiaries
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Revenue |
$ | 108,935 | $ | 108,236 | $ | 336,088 | $ | 310,702 | ||||||||
Costs and Expenses: |
||||||||||||||||
Cost of coal sales, exclusive of items shown separately below |
88,068 | 87,818 | 273,353 | 250,083 | ||||||||||||
Production royalty to related party |
2,049 | 2,485 | 6,313 | 6,502 | ||||||||||||
Depreciation, depletion, and amortization |
13,240 | 10,258 | 33,178 | 28,023 | ||||||||||||
Asset retirement obligation expenses |
560 | 595 | 1,568 | 1,760 | ||||||||||||
General and administrative costs |
4,850 | 5,834 | 14,839 | 17,150 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Operating income |
168 | 1,246 | 6,837 | 7,184 | ||||||||||||
Other income (expense): |
||||||||||||||||
Interest expense, net |
(8,025 | ) | (9,170 | ) | (24,559 | ) | (26,382 | ) | ||||||||
Other, net |
59 | 73 | 486 | 318 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Loss before income taxes |
(7,798 | ) | (7,851 | ) | (17,236 | ) | (18,880 | ) | ||||||||
Income tax provision |
| | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net loss |
(7,798 | ) | (7,851 | ) | (17,236 | ) | (18,880 | ) | ||||||||
Income attributable to non-controlling interests |
| | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net loss attributable to common stockholders |
$ | (7,798 | ) | $ | (7,851 | ) | $ | (17,236 | ) | $ | (18,880 | ) | ||||
|
|
|
|
|
|
|
|
See accompanying notes to unaudited condensed consolidated financial statements.
2
Table of Contents
Armstrong Energy, Inc. and Subsidiaries
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands)
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Net loss |
$ | (7,798 | ) | $ | (7,851 | ) | $ | (17,236 | ) | $ | (18,880 | ) | ||||
Other comprehensive income (loss): |
||||||||||||||||
Postretirement benefit plan |
26 | 25 | 78 | (833 | ) | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Other comprehensive income (loss) |
26 | 25 | 78 | (833 | ) | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Comprehensive loss |
(7,772 | ) | (7,826 | ) | (17,158 | ) | (19,713 | ) | ||||||||
Less: Comprehensive income (loss) attributable to non-controlling interests |
| | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Comprehensive loss attributable to common stockholders |
$ | (7,772 | ) | $ | (7,826 | ) | $ | (17,158 | ) | $ | (19,713 | ) | ||||
|
|
|
|
|
|
|
|
See accompanying notes to unaudited condensed consolidated financial statements.
3
Table of Contents
Armstrong Energy, Inc. and Subsidiaries
UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
Nine Months Ended September 30, 2014
(Amounts in thousands)
Common Stock | Preferred Stock | |||||||||||||||||||||||||||||||||||
Additional | Accumulated Other |
Total | ||||||||||||||||||||||||||||||||||
Number of Shares |
Amount | Number of Shares |
Amount | Paid-in- Capital |
Accumulated Deficit |
Comprehensive Loss |
Non-Controlling Interest |
Stockholders Equity |
||||||||||||||||||||||||||||
Balance at December 31, 2013 |
21,934 | $ | 219 | | $ | | $ | 238,799 | $ | (81,361 | ) | $ | (737 | ) | $ | 23 | $ | 156,943 | ||||||||||||||||||
Net loss |
| | | | | (17,236 | ) | | | (17,236 | ) | |||||||||||||||||||||||||
Stock based compensation |
| | | | (61 | ) | | | | (61 | ) | |||||||||||||||||||||||||
Postretirement benefit plan |
| | | | | | 78 | | 78 | |||||||||||||||||||||||||||
Repurchase of employee stock relinquished for tax withholdings |
(8 | ) | | | | (87 | ) | | | | (87 | ) | ||||||||||||||||||||||||
Shares issued under employee plan |
18 | | | | | | | | | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Balance at September 30, 2014 |
21,944 | $ | 219 | | $ | | $ | 238,651 | $ | (98,597 | ) | $ | (659 | ) | $ | 23 | $ | 139,637 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited condensed consolidated financial statements.
4
Table of Contents
Armstrong Energy, Inc. and Subsidiaries
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Nine Months Ended September 30, |
||||||||
2014 | 2013 | |||||||
Cash Flows from Operating Activities: |
||||||||
Net loss |
$ | (17,236 | ) | $ | (18,880 | ) | ||
Adjustments to reconcile net income to cash provided by operating activities: |
||||||||
Non-cash stock compensation expense |
(61 | ) | 356 | |||||
Income from equity affiliate |
(113 | ) | (24 | ) | ||||
Gain on settlement of asset retirement obligation |
| (90 | ) | |||||
Loss (gain) on disposal of property, plant and equipment |
80 | (16 | ) | |||||
Amortization of original issue discount |
558 | 493 | ||||||
Amortization of debt issuance costs |
909 | 855 | ||||||
Depreciation, depletion and amortization |
33,178 | 28,023 | ||||||
Asset retirement obligation expenses |
1,568 | 1,760 | ||||||
Non-cash activity with related party, net |
10,665 | 8,011 | ||||||
Non-cash interest on long-term obligations |
5,865 | 6,155 | ||||||
Change in operating assets and liabilities: |
||||||||
Increase in accounts receivable |
(2,149 | ) | (3,185 | ) | ||||
Increase in inventories |
(207 | ) | (4,147 | ) | ||||
Decrease in prepaid and other assets |
973 | 1,219 | ||||||
(Increase) decrease in other non-current assets |
(2,263 | ) | 3,399 | |||||
Increase in accounts payable and accrued liabilities |
4,306 | 12,586 | ||||||
Increase in other non-current liabilities |
748 | 1,409 | ||||||
|
|
|
|
|||||
Net cash provided by operating activities: |
36,821 | 37,924 | ||||||
Cash Flows from Investing Activities: |
||||||||
Investment in property, plant, equipment, and mine development |
(14,961 | ) | (30,354 | ) | ||||
Proceeds from disposal of fixed assets |
5 | 255 | ||||||
|
|
|
|
|||||
Net cash used in investing activities |
(14,956 | ) | (30,099 | ) | ||||
Cash Flows from Financing Activities: |
||||||||
Payment on capital lease obligations |
(2,008 | ) | (3,639 | ) | ||||
Payment of long-term debt |
(4,684 | ) | (3,269 | ) | ||||
Proceeds from sale-leaseback |
986 | | ||||||
Payment of financing costs and fees |
(1,000 | ) | (29 | ) | ||||
Repurchase of employee stock relinquished for tax withholdings |
(87 | ) | | |||||
Contributions of non-controlling interest |
| 4 | ||||||
|
|
|
|
|||||
Net cash used in financing activities |
(6,793 | ) | (6,933 | ) | ||||
|
|
|
|
|||||
Net change in cash and cash equivalents |
15,072 | 892 | ||||||
Cash, at the beginning of the period |
51,632 | 60,132 | ||||||
|
|
|
|
|||||
Cash, at the end of the period |
$ | 66,704 | $ | 61,024 | ||||
|
|
|
|
|||||
Nine Months Ended September 30, |
||||||||
2014 | 2013 | |||||||
Supplemental cash flow information: |
||||||||
Non-Cash Transactions: |
||||||||
Assets acquired with long-term debt |
$ | 7,464 | $ | 1,465 | ||||
Non-cash portion of land and reserve sale / financing with related party |
| 4,886 |
See accompanying notes to unaudited condensed consolidated financial statements.
5
Table of Contents
Armstrong Energy, Inc. and Subsidiaries
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
1. DESCRIPTION OF BUSINESS AND ENTITY STRUCTURE
Business
The accompanying unaudited condensed consolidated financial statements include the accounts of Armstrong Energy, Inc. and its subsidiaries and controlled entities (collectively, the Company or AE). The Companys primary business is the production of thermal coal from surface and underground mines located in western Kentucky, for sale to utility and industrial markets. Intercompany transactions and accounts have been eliminated in consolidation.
The Companys wholly-owned subsidiary, Elk Creek GP, LLC (ECGP), has an approximate 0.2% ownership interest in Thoroughbred Resources, L.P. (Thoroughbred) (formerly Armstrong Resource Partners, L.P.). The various limited partners of Thoroughbred are related parties to the Company, as Thoroughbred is majority owned by investment funds managed by Yorktown Partners LLC (Yorktown), which has a majority ownership interest in the Company. The Company does not consolidate the financial results of Thoroughbred and accounts for its ownership in Thoroughbred under the equity method.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) for interim financial reporting and U.S. Securities and Exchange Commission (the SEC) regulations. In the opinion of management, all adjustments consisting of normal, recurring accruals considered necessary for a fair presentation have been included. Balance sheet information presented herein as of December 31, 2013 has been derived from the Companys audited consolidated balance sheet at that date. Results of operations for the three and nine months ended September 30, 2014 are not necessarily indicative of results to be expected for the year ending December 31, 2014. These financial statements should be read in conjunction with the audited financial statements and related notes as of and for the year ended December 31, 2013 included in the Companys Annual Report on Form 10-K filed with the SEC.
Reclassifications
Beginning in the first quarter of 2014, Selling and other related expenses in the consolidated statements of operations were reclassified to Cost of coal sales. Selling and other related expenses are primarily comprised of production and severance taxes and royalties, which are incurred as a percentage of coal sales or based on coal volumes. Prior periods have been reclassified to conform to the current presentation, with no impact to the Companys reported net loss. This reclassification increased cost of coal sales as follows:
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Cost of coal sales |
$ | 79,651 | $ | 78,955 | $ | 247,697 | $ | 225,561 | ||||||||
Selling and other related expenses |
8,417 | 8,863 | 25,656 | 24,522 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 88,068 | $ | 87,818 | $ | 273,353 | $ | 250,083 | ||||||||
|
|
|
|
|
|
|
|
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued a comprehensive revenue recognition standard that will supersede nearly all existing revenue recognition guidance under U.S. GAAP. The standard requires revenue to be recognized when promised goods or services are transferred to a customer in an amount that reflects the consideration expected in exchange for those goods or services. The new standard is effective for the Company on January 1, 2017. The standard permits the use of either the full retrospective or modified retrospective transition method and early adoption is not permitted. The Company is currently evaluating the impact of this new pronouncement on its financial statements.
2. INVENTORIES
Inventories consist of the following amounts:
September 30, 2014 |
December 31, 2013 |
|||||||
Materials and supplies |
$ | 10,480 | $ | 9,941 | ||||
Coalraw and saleable |
2,411 | 2,742 | ||||||
|
|
|
|
|||||
Total |
$ | 12,891 | $ | 12,683 | ||||
|
|
|
|
6
Table of Contents
Armstrong Energy, Inc. and Subsidiaries
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. ACCRUED AND OTHER LIABILITIES
Accrued and other liabilities consist of the following amounts:
September 30, 2014 |
December 31, 2013 |
|||||||
Payroll and related benefits |
$ | 10,425 | $ | 8,089 | ||||
Taxes other than income taxes |
5,515 | 3,879 | ||||||
Interest |
6,854 | 995 | ||||||
Royalties |
798 | 1,491 | ||||||
Other |
2,089 | 1,780 | ||||||
|
|
|
|
|||||
Total |
$ | 25,681 | $ | 16,234 | ||||
|
|
|
|
4. OTHER NON-CURRENT ASSETS
Other non-current assets consist of the following amounts:
September 30, 2014 |
December 31, 2013 |
|||||||
Escrows and deposits |
$ | 4,632 | $ | 5,598 | ||||
Restricted surety and cash bonds |
6,541 | 4,509 | ||||||
Advanced royalties |
4,208 | 3,509 | ||||||
Deferred financing costs, net |
9,052 | 8,961 | ||||||
|
|
|
|
|||||
Total |
$ | 24,433 | $ | 22,577 | ||||
|
|
|
|
5. RELATED-PARTY TRANSACTIONS
Merger of Related Parties
On February 1, 2014, Armstrong Resource Partners, L.P. merged with and into Thoroughbred Resources, LLC, with Armstrong Resource Partners, L.P. as the surviving entity (the Merger). Effective with the Merger, Armstrong Resource Partners, L.P. changed its name to Thoroughbred. The Companys wholly-owned subsidiary, ECGP, remained the general partner of the surviving entity, under the terms of the amended and restated limited partnership agreement, which is substantially the same as the limited partnership agreement in effect immediately prior to the Merger. As a result of the Merger, ECGPs equity interest in the combined company was reduced to approximately 0.2%.
In January 2014, the Companys investment in Ram Terminals, LLC (RAM), an entity majority owned by Yorktown, was converted into an equal ownership percentage of Terminal Holdings, LLC, a holding company which is the sole member of both RAM and MG Midstreaming, LLC. Subsequent to the Merger, but also on February 1, 2014, Terminal Holdings, LLC merged with and into a merger subsidiary of Thoroughbred created for the purpose of the transaction, with Terminal Holdings, LLC as the surviving entity. Terminal Holdings, LLC was owned by the Company and Yorktown in the same percentage as their prior interests in RAM, and by virtue of the merger, the Companys equity interest in Terminal Holdings, LLC was converted into an equal number of common units representing limited partnership interests in Thoroughbred. Because of the Companys ownership interest in Thoroughbred through ECGP, the newly converted interest, which equals an additional 0.9%, is accounted for under the equity method.
Sale of Coal Reserves
The Company has executed the sale of an undivided interest in certain land and mineral reserves to Thoroughbred, through a series of transactions beginning in February 2011. Subsequently, the Company entered into lease agreements with Thoroughbred pursuant to which Thoroughbred granted the Company leases to its undivided interests in the mining properties acquired and licenses to mine and sell coal from those properties in exchange for a production royalty. Due to the Companys continuing involvement in the land and mineral reserves transferred, these transactions have been accounted for as financing arrangements. A long-term obligation has been established that is being amortized over the anticipated life of the mineral reserves, at an annual rate of 7% of the estimated gross revenue generated from the sale of the coal originating from the leased mineral reserves. In addition, effective February 2011, the Company and Thoroughbred entered into a Royalty Deferment and Option Agreement, whereby the Company has
7
Table of Contents
Armstrong Energy, Inc. and Subsidiaries
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
been granted an option to defer payment of any royalties earned by Thoroughbred on coal mined from these properties. Compensation for the aforementioned transactions has consisted of a combination of cash payments and the forgiveness of amounts owed by the Company, which primarily consisted of deferred royalties.
On April 1, 2013, the Company sold an additional 2.59% undivided interest in certain land and mineral reserves to Thoroughbred. The percentage interest in the land and mineral reserves sold was based on a fair value determined by a third-party specialist. In exchange for the undivided interest in the land and mineral reserves, Thoroughbred forgave amounts owed by the Company totaling $4,886. This transaction increased Thoroughbreds undivided interest in certain of the Companys land and mineral reserves in Muhlenberg and Ohio Counties to 53.4%. In addition, the transferred mineral reserves were leased back to the Company on terms similar to those applicable to the previous transfers. As the Company will have a continuing involvement in the reserves, the transaction is accounted for as a financing arrangement and an additional long-term obligation to Thoroughbred of $4,886 was recognized in the second quarter of 2013. As a result of the additional asset transfer in April 2013, the effective interest rate on the long-term obligation to related party was adjusted to 10.65%. Based on the mine plan at December 31, 2013, the effective interest rate of the obligation was reduced to 7.0% beginning January 1, 2014.
As of September 30, 2014 and December 31, 2013, the outstanding long-term obligation to related party totaled $104,648 and $106,283, respectively. Interest expense recognized for the three months ended September 30, 2014 and 2013 associated with the long-term obligation to related party was $1,848 and $2,820, respectively and for the nine months ended September 30, 2014 and 2013 was $5,512 and $8,190 respectively.
Lease of Coal Reserves
In February 2011, Thoroughbred entered into a lease and sublease agreement with the Company relating to its Elk Creek reserves and granted the Company a license to mine coal on those properties. The terms of this agreement mirror those of the lease agreements associated with the jointly owned reserves between the Company and Thoroughbred. Total production royalties owed from mining of the Elk Creek reserves, where the Companys Kronos mine resides, for the three months ended September 30, 2014 and 2013 totaled $2,049 and $2,485, respectively, and for the nine months ended September 30, 2014 and 2013 totaled $6,313 and $6,502, respectively.
Short-term Note Receivable
On June 28, 2013, Thoroughbred acquired approximately 175 million tons of fee-owned coal reserves and approximately 23 million tons of leased coal reserves from a third party. The acquired coal reserves are located in Muhlenberg and McLean Counties of Kentucky, contiguous to the Companys reserves. In February 2014, the Company entered into a lease of these reserves from Thoroughbred in exchange for a production royalty.
In connection with Thoroughbreds acquisition of these coal reserves, the Company loaned Thoroughbred $17,500, which was repaid in July 2013. The proceeds of the loan, which was evidenced by a promissory note, were used by Thoroughbred to make a portion of the down payment for the purchase of the coal reserves.
Administrative Services Agreements
Effective as of January 1, 2011, the Company entered into an Administrative Services Agreement with Thoroughbred and its general partner, ECGP, pursuant to which the Company agreed to provide Thoroughbred with general administrative and management services, including, but not limited to, human resources, information technology, financial and accounting services and legal services. As consideration for the use of the Companys employees and services, and for certain shared fixed costs, Thoroughbred paid the Company $253 and $204 for the three months ended September 30, 2014 and 2013, respectively, and $761 and $581 for the nine months ended September 30, 2014 and 2013, respectively. Prior to the Merger, the Company had separate administrative services agreements with Thoroughbred Resources, LLC and RAM. For the three and nine months ended September 30, 2013, the Company was paid $40 and $112, respectively, for the associated services rendered to Thoroughbred Resources, LLC and RAM.
Other
In 2006 and 2007, the Company entered into overriding royalty agreements with a current and a former executive employee to compensate each of them $0.05/ton of coal mined and sold from properties owned by certain subsidiaries of the Company. The agreements remain in effect for the later of 20 years from the date of the agreement or until all salable coal has been extracted from the applicable properties. Both royalty agreements transfer with the property regardless of ownership or lease status. The royalties are payable the month following the sale of coal mined from the specified properties. The Company accounts for these royalty arrangements as expense in the period in which the coal is sold. Associated royalty expense recorded in the three months ended September 30, 2014 and 2013 was $202 and $243, respectively, and $615 and $708 in the nine months ended September 30, 2014 and 2013, respectively.
8
Table of Contents
Armstrong Energy, Inc. and Subsidiaries
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. LONG-TERM DEBT
The Companys total indebtedness consisted of the following:
Type |
September 30, 2014 |
December 31, 2013 |
||||||
11.75% Senior Secured Notes due 2019 |
$ | 194,375 | $ | 193,817 | ||||
Other |
10,377 | 8,867 | ||||||
|
|
|
|
|||||
204,752 | 202,684 | |||||||
Less: current maturities |
4,942 | 4,498 | ||||||
|
|
|
|
|||||
Total long-term debt |
$ | 199,810 | $ | 198,186 | ||||
|
|
|
|
Senior Secured Notes due 2019
On December 21, 2012, the Company completed a $200,000 offering of 11.75% Senior Secured Notes due 2019 (the Notes). The Notes were issued at an original issue discount (OID) of 96.567%. The OID was recorded on the Companys balance sheet as a component of long-term debt, and is being amortized to interest expense over the life of the Notes. As of September 30, 2014 and December 31, 2013, the unamortized OID was $5,625 and $6,183, respectively. Interest on the Notes is due semiannually on June 15 and December 15 of each year, with the first payment being made on June 15, 2013. The Company used $123,698 of the proceeds from this issuance to prepay and terminate its previous Senior Secured Credit Facility, including accrued and unpaid interest. In addition, the Company used the proceeds to pay fees and expenses of $8,358 related to the Notes offering. A loss on extinguishment of debt of $3,953 was recorded in the fourth quarter of 2012 in connection with the write-off of unamortized deferred financing fees related to the previous Senior Secured Credit Facility.
The Company and certain wholly-owned subsidiaries of the Company (the Guarantor Subsidiaries) entered into a registration rights agreement (the Registration Rights Agreement) in connection with the issuance and sale of the Notes. Pursuant to the Registration Rights Agreement, the Company and the Guarantor Subsidiaries agreed to file a registration statement with the SEC to register an exchange offer pursuant to which the Company offered to exchange a like aggregate principal amount of senior notes identical in all material respects to the Notes, except for terms relating to transfer restrictions, for any or all of the outstanding Notes. The exchange offer was completed in November 2013.
2012 Credit Facility
Concurrently with the closing of the Notes offering on December 21, 2012, the Company entered into a new asset based revolving credit facility (the 2012 Credit Facility). The 2012 Credit Facility provides for a five-year $50,000 revolving credit facility that will expire on December 21, 2017. Borrowings under the 2012 Credit Facility may not exceed a borrowing base, as defined within the 2012 Credit Facility agreement. In addition, the 2012 Credit Facility includes a $10,000 letter of credit sub-facility and a $5,000 swingline loan sub-facility. As of September 30, 2014 and December 31, 2013, there were no borrowings outstanding under the 2012 Credit Facility, and the Company had $20,358 available for borrowing under the 2012 Credit Facility at September 30, 2014. The Company incurred $1,198 of deferred financing fees related to the 2012 Credit Facility that have been capitalized and are being amortized to interest expense over the life of the 2012 Credit Facility.
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company measures the fair value of assets and liabilities using a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value as follows: Level 1observable inputs such as quoted prices in active markets; Level 2inputs, other than quoted market prices in active markets, which are observable, either directly or indirectly; and Level 3valuations derived from valuation techniques in which one or more significant inputs are unobservable. In addition, the Company may use various valuation techniques including the market approach, using comparable market prices; the income approach, using present value of future income or cash flow; and the cost approach, using the replacement cost of assets.
9
Table of Contents
Armstrong Energy, Inc. and Subsidiaries
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Companys financial instruments consist of cash equivalents, accounts receivable, long-term debt, and other long-term obligations. For cash equivalents, accounts receivable and other long-term obligations, the carrying amounts approximate fair value due to the short maturity and financial nature of the balances. The estimated fair market values of the Companys Notes, which was determined using level 2 inputs, and long-term obligation to related party, which was determined using level 3 inputs, are as follows:
September 30, 2014 | December 31, 2013 | |||||||||||||||
Fair Value |
Carrying Value |
Fair Value |
Carrying Value |
|||||||||||||
11.75% Senior Secured Notes due 2019(1) |
$ | 218,000 | $ | 194,375 | $ | 199,000 | $ | 193,817 | ||||||||
Long-term obligation to related party |
108,955 | 104,648 | 109,930 | 106,283 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 326,955 | $ | 299,023 | $ | 308,930 | $ | 300,100 | ||||||||
|
|
|
|
|
|
|
|
(1) | The carrying value of the Notes is net of the unamortized OID as of September 30, 2014 and December 31, 2013, respectively. |
The fair value of the Notes is based on quoted market prices, while the fair value of the long-term obligation to related party was based on estimated cash flows discounted to their present value.
8. INCOME TAXES
The Company has not recognized certain income tax benefits as it does not believe it is more likely than not it will be able to realize its net deferred tax assets. The Company has therefore established a valuation allowance against its net deferred tax assets as of September 30, 2014 and December 31, 2013. Based on the anticipated reversals of its deferred tax assets and deferred tax liabilities, the Company has concluded a valuation allowance is necessary only for the excess of deferred tax assets over deferred tax liabilities.
9. EMPLOYEE BENEFIT PLANS
Effective January 1, 2013, the Company began providing certain health care benefits, including the reimbursement of a portion of out-of-pocket costs associated with insurance coverage, to qualifying salaried and hourly retirees and their dependents. Plan coverage for reimbursements will be provided to future hourly and salaried retirees in accordance with the plan document. As of the effective date of the plan, the Company recognized a liability totaling $907 associated with the benefits earned by qualified employees prior to January 1, 2013. The Companys funding policy with respect to the plan is to fund the cost of all postretirement benefits as they are paid.
Net periodic postretirement benefit cost included the following components:
Three months ended September 30, |
Nine months ended September 30, |
|||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Service cost for benefits earned |
$ | 259 | $ | 282 | $ | 776 | $ | 846 | ||||||||
Interest cost on accumulated postretirement benefit obligation |
22 | 9 | 65 | 27 | ||||||||||||
Amortization of prior service cost |
26 | 25 | 78 | 74 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net periodic postretirement cost |
$ | 307 | $ | 316 | $ | 919 | $ | 947 | ||||||||
|
|
|
|
|
|
|
|
10
Table of Contents
Armstrong Energy, Inc. and Subsidiaries
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Changes in accumulated other comprehensive income (loss), net of tax, for the nine months ended September 30, 2014 consisted of the following:
Postretirement Benefit Plan |
||||
Balance as of December 31, 2013 |
$ | (737 | ) | |
Other comprehensive loss before reclassifications |
| |||
Amounts reclassified from accumulated other comprehensive income (loss) |
78 | |||
|
|
|||
Net current-period accumulated other comprehensive loss |
(659 | ) | ||
|
|
|||
Balance as of September 30, 2014 |
$ | (659 | ) | |
|
|
The following is a summary of reclassifications out of accumulated other comprehensive income for the three and nine months ended September 30, 2014 and 2013:
Details about Accumulated Other Comprehensive Income (Loss) Components |
Affected Line Item in the Statement Where Net Income (Loss) Is Presented |
Amounts Reclassified from Accumulated Other Comprehensive Income (Loss) For the Three Months Ended September 30, |
||||||||
2014 | 2013 | |||||||||
Amortization of postretirement benefit plan itemsPrior service cost |
(a) | $ | (26 | ) | $ | (25 | ) | |||
|
|
|
|
|||||||
(26 | ) | (25 | ) | |||||||
Income taxes |
| | ||||||||
|
|
|
|
|||||||
Total reclassifications |
$ | (26 | ) | $ | (25 | ) | ||||
|
|
|
|
|||||||
Details about Accumulated Other Comprehensive Income (Loss) Components |
Affected Line Item in the Statement Where Net Income (Loss) Is Presented |
Amounts Reclassified from Accumulated Other Comprehensive Income (Loss) For the Nine Months Ended September 30, |
||||||||
2014 | 2013 | |||||||||
Amortization of postretirement benefit plan itemsPrior service cost |
(a) | $ | (78 | ) | $ | (74 | ) | |||
|
|
|
|
|||||||
(78 | ) | (74 | ) | |||||||
Income taxes |
| | ||||||||
|
|
|
|
|||||||
Total reclassifications |
$ | (78 | ) | $ | (74 | ) | ||||
|
|
|
|
(a) | This component of accumulated other comprehensive income (loss) is included in the computation of net period postretirement cost. See Note 9. |
11. EQUITY AWARDS
The primary stock-based compensation tool used by the Company for its employee base is through awards of restricted stock, which generally cliff vest after two to three years of service. The fair value of restricted stock is equal to the fair market value of the Companys common stock at the date of grant and is amortized to expense ratably over the vesting period, net of forfeitures. During the three months ended June 30, 2014, the Company reversed $211 of previously recognized compensation expense due to a change in the estimated forfeiture rate from 0% to 100% on a non-vested restricted stock grant to a former employee who resigned during the second quarter of 2014.
11
Table of Contents
Armstrong Energy, Inc. and Subsidiaries
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. CLOSURE OF LEWIS CREEK UNDERGROUND MINE
The Companys Lewis Creek underground mine, which produces coal from the West Kentucky #9 seam, has experienced significant operating inefficiencies since July 2013 due to the geological conditions of the portion of the reserve being mined. As a result of the ongoing mining difficulties, a final decision was made in August 2014 not to continue advancing under the current mine plan, but rather to retreat and mine only in the eastern portion of the reserve.
As a result of this change in mine plan, the Company is accelerating the depreciation of the remaining net book value of the capitalized costs associated with the development of the mine due to the diminished useful life of the asset. The asset, which has a net book value of $9,249 at September 30, 2014, will continue to be depreciated using the units of production method over the remaining estimated recoverable reserves. Upon completion of mining the remaining section, which based on current estimates is expected to occur in the first quarter of 2015, the existing portal to the Lewis Creek underground mine will be abandoned and all of the employees and equipment will be relocated to the Companys other mining operations.
13. COMMITMENTS AND CONTINGENCIES
The Company is subject to various market, operational, financial, regulatory, and legislative risks. Numerous federal, state, and local governmental permits and approvals are required for mining operations. Federal and state regulations require regular monitoring of mines and other facilities to document compliance. Monetary penalties of $1,464 and $1,064 related to Mine Safety and Health Administration (MSHA) fines were accrued as of September 30, 2014 and December 31, 2013, respectively.
Periodically, there may be various claims and legal proceedings against the Company arising from the normal course of business. The Company is also involved in litigation matters arising in the ordinary course of business. In the opinion of management, the resolution of these matters will not have a material adverse effect on the Companys consolidated cash flows, results of operations or financial condition.
Coal Sales Contracts
The Company is committed under multi-year supply agreements to sell coal that meets certain quality requirements at specified prices. These contracts typically have specific volume and pricing arrangements for each year of the agreement, which allows customers to secure a supply for their future needs and provides the Company with greater predictability of sales volume and sales prices. Quantities sold under some of these contracts may vary from year to year within certain limits at the option of the customer or the Company. The remaining terms of the Companys coal supply agreements range from one to six years. The Company, via contractual agreements, has commitments for 100% of its anticipated production in 2014 and is committed to sell approximately 8.7 million tons of coal in 2015.
14. SUPPLEMENTAL GUARANTOR/NON-GUARANTOR FINANCIAL INFORMATION
In accordance with the indentures governing the Notes, the Guarantor Subsidiaries have fully and unconditionally guaranteed the Notes, on a joint and several basis. Separate financial statements and other disclosures concerning the Guarantor Subsidiaries are not presented because management believes that such information is not material to the holders of the Notes. The following historical financial statement information is provided for the Guarantor Subsidiaries. The non-guarantor subsidiaries are considered to be minor as the term is defined in Rule 3-10 of Regulation S-X promulgated by the SEC and the financial position, results of operations, and cash flows of the non-guarantor subsidiaries are, therefore, included in the condensed financial data of the Guarantor Subsidiaries.
12
Table of Contents
Armstrong Energy, Inc. and Subsidiaries
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Supplemental Condensed Consolidating Balance Sheets
September 30, 2014 | ||||||||||||||||
Parent / Issuer |
Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||||
ASSETS |
||||||||||||||||
Current assets: |
||||||||||||||||
Cash and cash equivalents |
$ | | $ | 66,704 | $ | | $ | 66,704 | ||||||||
Accounts receivable |
| 26,803 | | 26,803 | ||||||||||||
Inventories |
| 12,891 | | 12,891 | ||||||||||||
Prepaid and other assets |
172 | 2,524 | | 2,696 | ||||||||||||
Deferred income taxes |
829 | | | 829 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total current assets |
1,001 | 108,922 | | 109,923 | ||||||||||||
Property, plant, equipment, and mine development, net |
14,630 | 398,578 | | 413,208 | ||||||||||||
Investments |
| 3,335 | | 3,335 | ||||||||||||
Investments in subsidiaries |
206,486 | | (206,486 | ) | | |||||||||||
Intercompany receivables |
109,734 | (109,734 | ) | | | |||||||||||
Intangible assets, net |
| 134 | | 134 | ||||||||||||
Other non-current assets |
9,268 | 15,165 | | 24,433 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total assets |
$ | 341,119 | $ | 416,400 | $ | (206,486 | ) | $ | 551,033 | |||||||
|
|
|
|
|
|
|
|
|||||||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||||||||||
Current liabilities: |
||||||||||||||||
Accounts payable |
$ | 100 | $ | 28,677 | $ | | $ | 28,777 | ||||||||
Accrued liabilities and other |
9,020 | 16,661 | | 25,681 | ||||||||||||
Current portion of capital lease obligations |
| 2,580 | | 2,580 | ||||||||||||
Current maturities of long-term debt |
| 4,942 | | 4,942 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total current liabilities |
9,120 | 52,860 | | 61,980 | ||||||||||||
Long-term debt, less current maturities |
194,375 | 5,435 | | 199,810 | ||||||||||||
Long-term obligation to related party |
| 104,648 | | 104,648 | ||||||||||||
Related party payables, net |
(2,957 | ) | 23,037 | | 20,080 | |||||||||||
Asset retirement obligations |
| 18,311 | | 18,311 | ||||||||||||
Long-term portion of capital lease obligations |
| 1,887 | | 1,887 | ||||||||||||
Deferred income taxes |
829 | | | 829 | ||||||||||||
Other non-current liabilities |
138 | 3,713 | | 3,851 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total liabilities |
201,505 | 209,891 | | 411,396 | ||||||||||||
Stockholders equity: |
||||||||||||||||
Armstrong Energy, Inc.s equity |
139,614 | 206,486 | (206,486 | ) | 139,614 | |||||||||||
Non-controlling interest |
| 23 | | 23 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total stockholders equity |
139,614 | 206,509 | (206,486 | ) | 139,637 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total liabilities and stockholders equity |
$ | 341,119 | $ | 416,400 | $ | (206,486 | ) | $ | 551,033 | |||||||
|
|
|
|
|
|
|
|
13
Table of Contents
Armstrong Energy, Inc. and Subsidiaries
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2013 | ||||||||||||||||
Parent / Issuer |
Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||||
ASSETS |
||||||||||||||||
Current assets: |
||||||||||||||||
Cash and cash equivalents |
$ | | $ | 51,632 | $ | | $ | 51,632 | ||||||||
Accounts receivable |
| 24,654 | | 24,654 | ||||||||||||
Inventories |
| 12,683 | | 12,683 | ||||||||||||
Prepaid and other assets |
170 | 3,499 | | 3,669 | ||||||||||||
Deferred income taxes |
605 | | | 605 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total current assets |
775 | 92,468 | | 93,243 | ||||||||||||
Property, plant, equipment, and mine development, net |
15,095 | 409,270 | | 424,365 | ||||||||||||
Investments |
| 3,224 | | 3,224 | ||||||||||||
Investments in subsidiaries |
200,865 | | (200,865 | ) | | |||||||||||
Intercompany receivables |
126,410 | (126,410 | ) | | | |||||||||||
Intangible assets, net |
| 144 | | 144 | ||||||||||||
Other non-current assets |
9,697 | 12,880 | | 22,577 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total assets |
$ | 352,842 | $ | 391,576 | $ | (200,865 | ) | $ | 543,553 | |||||||
|
|
|
|
|
|
|
|
|||||||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||||||||||
Current liabilities: |
||||||||||||||||
Accounts payable |
$ | 100 | $ | 27,872 | $ | | $ | 27,972 | ||||||||
Accrued liabilities and other |
3,486 | 12,748 | | 16,234 | ||||||||||||
Current portion of capital lease obligations |
| 2,497 | | 2,497 | ||||||||||||
Current maturities of long-term debt |
| 4,498 | | 4,498 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total current liabilities |
3,586 | 47,615 | | 51,201 | ||||||||||||
Long-term debt, less current maturities |
193,817 | 4,369 | | 198,186 | ||||||||||||
Long-term obligation to related party |
| 106,283 | | 106,283 | ||||||||||||
Related party payables, net |
(2,206 | ) | 9,986 | | 7,780 | |||||||||||
Asset retirement obligations |
| 17,230 | | 17,230 | ||||||||||||
Long-term portion of capital lease obligations |
| 2,222 | | 2,222 | ||||||||||||
Deferred income taxes |
605 | | | 605 | ||||||||||||
Other non-current liabilities |
120 | 2,983 | | 3,103 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total liabilities |
195,922 | 190,688 | | 386,610 | ||||||||||||
Stockholders equity: |
||||||||||||||||
Armstrong Energy, Inc.s equity |
156,920 | 200,865 | (200,865 | ) | 156,920 | |||||||||||
Non-controlling interest |
| 23 | | 23 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total stockholders equity |
156,920 | 200,888 | (200,865 | ) | 156,943 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total liabilities and stockholders equity |
$ | 352,842 | $ | 391,576 | $ | (200,865 | ) | $ | 543,553 | |||||||
|
|
|
|
|
|
|
|
14
Table of Contents
Armstrong Energy, Inc. and Subsidiaries
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Supplemental Condensed Consolidated Statements of Operations
Three Months Ended September 30, 2014 | ||||||||||||||||
Parent / Issuer |
Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||||
Revenue |
$ | | $ | 108,935 | $ | | $ | 108,935 | ||||||||
Costs and Expenses: |
||||||||||||||||
Cost of coal sales, exclusive of items shown separately below |
| 88,068 | | 88,068 | ||||||||||||
Production royalty to related party |
| 2,049 | | 2,049 | ||||||||||||
Depreciation, depletion, and amortization |
474 | 12,766 | | 13,240 | ||||||||||||
Asset retirement obligation expenses |
| 560 | | 560 | ||||||||||||
General and administrative costs |
1,035 | 3,815 | | 4,850 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Operating (loss) income |
(1,509 | ) | 1,677 | | 168 | |||||||||||
Other income (expense): |
||||||||||||||||
Interest expense, net |
(6,087 | ) | (1,938 | ) | | (8,025 | ) | |||||||||
Other, net |
| 59 | | 59 | ||||||||||||
Income from investment in subsidiaries |
(202 | ) | | 202 | | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
(Loss) income before income taxes |
(7,798 | ) | (202 | ) | 202 | (7,798 | ) | |||||||||
Income tax provision |
| | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net (loss) income |
(7,798 | ) | (202 | ) | 202 | (7,798 | ) | |||||||||
Income attributable to non-controlling interests |
| | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net (loss) income attributable to common stockholders |
$ | (7,798 | ) | $ | (202 | ) | $ | 202 | $ | (7,798 | ) | |||||
|
|
|
|
|
|
|
|
|||||||||
Three Months Ended September 30, 2013 | ||||||||||||||||
Parent / Issuer |
Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||||
Revenue |
$ | | $ | 108,236 | $ | | $ | 108,236 | ||||||||
Costs and Expenses: |
||||||||||||||||
Cost of coal sales, exclusive of items shown separately below |
| 87,818 | | 87,818 | ||||||||||||
Production royalty to related party |
| 2,485 | | 2,485 | ||||||||||||
Depreciation, depletion, and amortization |
460 | 9,798 | | 10,258 | ||||||||||||
Asset retirement obligation expenses |
| 595 | | 595 | ||||||||||||
General and administrative costs |
1,343 | 4,491 | | 5,834 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Operating (loss) income |
(1,803 | ) | 3,049 | | 1,246 | |||||||||||
Other income (expense): |
||||||||||||||||
Interest expense, net |
(6,155 | ) | (3,015 | ) | | (9,170 | ) | |||||||||
Other, net |
| 73 | | 73 | ||||||||||||
Income from investment in subsidiaries |
107 | | (107 | ) | | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
(Loss) income before income taxes |
(7,851 | ) | 107 | (107 | ) | (7,851 | ) | |||||||||
Income tax provision |
| | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net (loss) income |
(7,851 | ) | 107 | (107 | ) | (7,851 | ) | |||||||||
Income attributable to non-controlling interests |
| | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net (loss) income attributable to common stockholders |
$ | (7,851 | ) | $ | 107 | $ | (107 | ) | $ | (7,851 | ) | |||||
|
|
|
|
|
|
|
|
15
Table of Contents
Armstrong Energy, Inc. and Subsidiaries
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Supplemental Condensed Consolidated Statements of Operations
Nine Months Ended September 30, 2014 | ||||||||||||||||
Parent / Issuer |
Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||||
Revenue |
$ | | $ | 336,088 | $ | | $ | 336,088 | ||||||||
Costs and Expenses: |
||||||||||||||||
Cost of coal sales, exclusive of items shown separately below |
| 273,353 | | 273,353 | ||||||||||||
Production royalty to related party |
| 6,313 | | 6,313 | ||||||||||||
Depreciation, depletion, and amortization |
1,421 | 31,757 | | 33,178 | ||||||||||||
Asset retirement obligation expenses |
| 1,568 | | 1,568 | ||||||||||||
General and administrative costs |
2,864 | 11,975 | | 14,839 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Operating (loss) income |
(4,285 | ) | 11,122 | | 6,837 | |||||||||||
Other income (expense): |
||||||||||||||||
Interest expense, net |
(18,572 | ) | (5,987 | ) | | (24,559 | ) | |||||||||
Other, net |
| 486 | | 486 | ||||||||||||
Income from investment in subsidiaries |
5,621 | | (5,621 | ) | | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
(Loss) income before income taxes |
(17,236 | ) | 5,621 | (5,621 | ) | (17,236 | ) | |||||||||
Income tax provision |
| | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net (loss) income |
(17,236 | ) | 5,621 | (5,621 | ) | (17,236 | ) | |||||||||
Income attributable to non-controlling interests |
| | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net (loss) income attributable to common stockholders |
$ | (17,236 | ) | $ | 5,621 | $ | (5,621 | ) | $ | (17,236 | ) | |||||
|
|
|
|
|
|
|
|
|||||||||
Nine Months Ended September 30, 2013 | ||||||||||||||||
Parent / Issuer |
Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||||
Revenue |
$ | | $ | 310,702 | $ | | $ | 310,702 | ||||||||
Costs and Expenses: |
||||||||||||||||
Cost of coal sales, exclusive of items shown separately below |
| 250,083 | | 250,083 | ||||||||||||
Production royalty to related party |
| 6,502 | | 6,502 | ||||||||||||
Depreciation, depletion, and amortization |
1,283 | 26,740 | | 28,023 | ||||||||||||
Asset retirement obligation expenses |
| 1,760 | | 1,760 | ||||||||||||
General and administrative costs |
3,800 | 13,350 | | 17,150 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Operating (loss) income |
(5,083 | ) | 12,267 | | 7,184 | |||||||||||
Other income (expense): |
||||||||||||||||
Interest expense, net |
(17,456 | ) | (8,926 | ) | | (26,382 | ) | |||||||||
Other, net |
| 318 | | 318 | ||||||||||||
Income from investment in subsidiaries |
3,659 | | (3,659 | ) | | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
(Loss) income before income taxes |
(18,880 | ) | 3,659 | (3,659 | ) | (18,880 | ) | |||||||||
Income tax provision |
| | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net (loss) income |
(18,880 | ) | 3,659 | (3,659 | ) | (18,880 | ) | |||||||||
Income attributable to non-controlling interests |
| | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net (loss) income attributable to common stockholders |
$ | (18,880 | ) | $ | 3,659 | $ | (3,659 | ) | $ | (18,880 | ) | |||||
|
|
|
|
|
|
|
|
16
Table of Contents
Armstrong Energy, Inc. and Subsidiaries
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Supplemental Condensed Consolidated Statements of Comprehensive Income (Loss)
Three Months Ended September 30, 2014 | ||||||||||||||||
Parent / Issuer |
Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||||
Net loss |
$ | (7,798 | ) | $ | (202 | ) | $ | 202 | $ | (7,798 | ) | |||||
Other comprehensive income: |
||||||||||||||||
Postretirement benefit plan |
| 26 | | 26 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Other comprehensive income |
| 26 | | 26 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Comprehensive (loss) income |
(7,798 | ) | (176 | ) | 202 | (7,772 | ) | |||||||||
Less: Comprehensive income (loss) attributable to non-controlling interests |
| | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Comprehensive (loss) income attributable to common stockholders |
$ | (7,798 | ) | $ | (176 | ) | $ | 202 | $ | (7,772 | ) | |||||
|
|
|
|
|
|
|
|
|||||||||
Three Months Ended September 30, 2013 | ||||||||||||||||
Parent / Issuer |
Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||||
Net (loss) income |
$ | (7,851 | ) | $ | 107 | $ | (107 | ) | $ | (7,851 | ) | |||||
Other comprehensive loss: |
||||||||||||||||
Postretirement benefit plan |
| 25 | | 25 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Other comprehensive loss |
| 25 | | 25 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Comprehensive loss |
(7,851 | ) | 132 | (107 | ) | (7,826 | ) | |||||||||
Less: Comprehensive income (loss) attributable to non-controlling interests |
| | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Comprehensive loss attributable to common stockholders |
$ | (7,851 | ) | $ | 132 | $ | (107 | ) | $ | (7,826 | ) | |||||
|
|
|
|
|
|
|
|
17
Table of Contents
Armstrong Energy, Inc. and Subsidiaries
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Supplemental Condensed Consolidated Statements of Comprehensive Income (Loss)
Nine Months Ended September 30, 2014 | ||||||||||||||||
Parent / Issuer |
Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||||
Net (loss) income |
$ | (17,236 | ) | $ | 5,621 | $ | (5,621 | ) | $ | (17,236 | ) | |||||
Other comprehensive income: |
||||||||||||||||
Postretirement benefit plan |
| 78 | | 78 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Other comprehensive income |
| 78 | | 78 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Comprehensive (loss) income |
(17,236 | ) | 5,699 | (5,621 | ) | (17,158 | ) | |||||||||
Less: Comprehensive income (loss) attributable to non-controlling interests |
| | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Comprehensive (loss) income attributable to common stockholders |
$ | (17,236 | ) | $ | 5,699 | $ | (5,621 | ) | $ | (17,158 | ) | |||||
|
|
|
|
|
|
|
|
|||||||||
Nine Months Ended September 30, 2013 | ||||||||||||||||
Parent / Issuer |
Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||||
Net (loss) income |
$ | (18,880 | ) | $ | 3,659 | $ | (3,659 | ) | $ | (18,880 | ) | |||||
Other comprehensive loss: |
||||||||||||||||
Postretirement benefit plan |
| (833 | ) | | (833 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Other comprehensive loss |
| (833 | ) | | (833 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Comprehensive loss |
(18,880 | ) | 2,826 | (3,659 | ) | (19,713 | ) | |||||||||
Less: Comprehensive income (loss) attributable to non-controlling interests |
| | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Comprehensive loss attributable to common stockholders |
$ | (18,880 | ) | $ | 2,826 | $ | (3,659 | ) | $ | (19,713 | ) | |||||
|
|
|
|
|
|
|
|
18
Table of Contents
Armstrong Energy, Inc. and Subsidiaries
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Supplemental Condensed Consolidating Statements of Cash Flows
Nine Months Ended September 30, 2014 | ||||||||||||
Parent / Issuer |
Guarantor Subsidiaries |
Consolidated | ||||||||||
Cash Flows from Operating Activities: |
||||||||||||
Net cash (used in) provided by operating activities: |
$ | (14,632 | ) | $ | 51,453 | $ | 36,821 | |||||
Cash Flows from Investing Activities: |
||||||||||||
Investment in property, plant, equipment, and mine development |
(955 | ) | (14,006 | ) | (14,961 | ) | ||||||
Proceeds from disposal of fixed assets |
| 5 | 5 | |||||||||
|
|
|
|
|
|
|||||||
Net cash used in investing activities |
(955 | ) | (14,001 | ) | (14,956 | ) | ||||||
Cash Flows from Financing Activities: |
||||||||||||
Payment on capital lease obligations |
| (2,008 | ) | (2,008 | ) | |||||||
Payment of long-term debt |
| (4,684 | ) | (4,684 | ) | |||||||
Proceeds from sale-leaseback |
| 986 | 986 | |||||||||
Payment of financing costs and fees |
(1,000 | ) | | (1,000 | ) | |||||||
Transactions with affiliates, net |
16,674 | (16,674 | ) | | ||||||||
Repurchase of employee stock relinquished for tax withholdings |
(87 | ) | | (87 | ) | |||||||
|
|
|
|
|
|
|||||||
Net cash provided by (used in) financing activities |
15,587 | (22,380 | ) | (6,793 | ) | |||||||
|
|
|
|
|
|
|||||||
Net change in cash and cash equivalents |
| 15,072 | 15,072 | |||||||||
Cash, at the beginning of the period |
| 51,632 | 51,632 | |||||||||
|
|
|
|
|
|
|||||||
Cash, at the end of the period |
$ | | $ | 66,704 | $ | 66,704 | ||||||
|
|
|
|
|
|
|||||||
Nine Months Ended September 30, 2013 | ||||||||||||
Parent / Issuer |
Guarantor Subsidiaries |
Consolidated | ||||||||||
Cash Flows from Operating Activities: |
||||||||||||
Net cash (used in) provided by operating activities: |
$ | (12,980 | ) | $ | 50,904 | $ | 37,924 | |||||
Cash Flows from Investing Activities: |
||||||||||||
Investment in property, plant, equipment, and mine development |
(1,718 | ) | (28,636 | ) | (30,354 | ) | ||||||
Proceeds from disposal of fixed assets |
| 255 | 255 | |||||||||
|
|
|
|
|
|
|||||||
Net cash used in investing activities |
(1,718 | ) | (28,381 | ) | (30,099 | ) | ||||||
Cash Flows from Financing Activities: |
||||||||||||
Payment on capital lease obligations |
| (3,639 | ) | (3,639 | ) | |||||||
Payment of long-term debt |
| (3,269 | ) | (3,269 | ) | |||||||
Payment of financing costs and fees |
(29 | ) | | (29 | ) | |||||||
Contributions of non-controlling interest |
| 4 | 4 | |||||||||
Transactions with affiliates, net |
14,652 | (14,652 | ) | | ||||||||
|
|
|
|
|
|
|||||||
Net cash provided by (used in) financing activities |
14,623 | (21,556 | ) | (6,933 | ) | |||||||
|
|
|
|
|
|
|||||||
Net change in cash and cash equivalents |
(75 | ) | (967 | ) | 892 | |||||||
Cash, at the beginning of the period |
75 | 60,057 | 60,132 | |||||||||
|
|
|
|
|
|
|||||||
Cash, at the end of the period |
$ | | $ | 61,024 | $ | 61,024 | ||||||
|
|
|
|
|
|
19
Table of Contents
15. SUBSEQUENT EVENT
On October 1, 2014, the Company transferred to Thoroughbred a portion of its interest in certain land and mineral reserves the Company controls in Muhlenberg county in exchange for Thoroughbred conveying to the Company a 7.97% undivided interest in the land and mineral reserves previously transferred by the Company to Thoroughbred. This transaction was determined to be a fair and reasonable arms-length transaction by the Conflicts Committee of the Board of Directors of the Company, a committee comprised of only independent directors.
On that same date, the Company sold an additional 3.85% undivided interest in certain leased and owned land and mineral reserves to Thoroughbred in exchange for Thoroughbred forgiving amounts owed by the Company of $8,204, which consisted primarily of deferred production royalties. The newly acquired interests in the mineral reserves were leased and/or subleased by Thoroughbred to the Company in exchange for a production royalty. Similar to previous reserve transfers, this transaction was accounted for as a financing arrangement and an additional long-term obligation to Thoroughbred of $8,204 was recognized in the fourth quarter of 2014.
The percentage interests in the land and mineral reserves transferred in each of the transactions occurring on October 1, 2014 were based on fair values determined by a third-party specialist. At the conclusion of these transactions, Thoroughbreds undivided interest in certain of the Companys leased and owned land and mineral reserves in Muhlenberg and Ohio counties was 49.28%.
20
Table of Contents
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and related notes included in Item 1 of Part I of this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and related notes included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (the SEC) on March 25, 2014.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
Various statements contained in this quarterly report, including those that express a belief, expectation or intention, as well as those that are not statements of historical fact, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). These forward-looking statements may include projections and estimates concerning the timing and success of specific projects and our future production, revenues, income and capital spending. Our forward-looking statements are generally accompanied by words such as estimate, project, predict, believe, expect, anticipate, potential, plan, goal or other words that convey the uncertainty of future events or outcomes. The forward-looking statements in this quarterly report speak only as of the date of this quarterly report; we disclaim any obligation to update these statements unless required by law, and we caution you not to rely on them unduly. We have based these forward-looking statements on our current expectations and assumptions about future events. While our management considers these expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory and other risks, contingencies and uncertainties, most of which are difficult to predict and many of which are beyond our control. These and other important factors may cause our actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements. These risks, contingencies and uncertainties include, but are not limited to, the following:
| market demand for coal and electricity; |
| geologic conditions, weather and other inherent risks of coal mining that are beyond our control; |
| competition within our industry and with producers of competing energy sources; |
| coal users switching to other fuels in order to comply with various environmental standards; |
| excess production and production capacity; |
| our ability to acquire or develop coal reserves in an economically feasible manner; |
| inaccuracies in our estimates of our coal reserves; |
| availability and price of mining and other industrial supplies, including steel-based supplies, diesel fuel, rubber tires and explosives; |
| the continued weakness in global economic conditions or in any industry in which our customers operate, or sustained uncertainty in financial markets, which may cause conditions we cannot predict; |
| railroad, barge, truck and other transportation performance and costs; |
| volatility in the capital and credit markets; |
| availability of skilled employees and other workforce factors; |
| disruptions in the quantities of coal produced at our operations as a consequence of weather or equipment or mine failures; |
| our ability to collect payments from our customers; |
| defects in title or the loss of a leasehold interest; |
| our ability to secure new coal supply arrangements or to renew existing coal supply arrangements; |
| our relationships with, and other conditions affecting, our customers; |
| the deferral of contracted shipments of coal by our customers; |
| our ability to service our outstanding indebtedness; |
| our ability to comply with the restrictions imposed by our revolving credit facility, the indenture governing our notes and other financing arrangements; |
| the availability and cost of surety bonds; |
| our ability to obtain and renew various permits, including permits authorizing the disposition of certain mining waste; |
| existing and future legislation and regulations affecting both our coal mining operations and our customers coal usage, governmental policies and taxes, including those aimed at reducing emissions of elements such as mercury, sulfur dioxide, nitrogen oxides, or toxic gases, such as hydrogen chloride, particulate matter or greenhouse gases; |
| the accuracy of our estimates of reclamation and other mine closure obligations; |
| our customers ability to meet existing or new regulatory requirements and associated costs, including disposal of coal combustion waste material; and |
| efforts to organize our workforce for representation under a collective bargaining agreement. |
21
Table of Contents
When considering these forward-looking statements, you should keep in mind the cautionary statements in this document and in our other SEC filings, including the more detailed discussion of these factors and other factors that could affect our results included in Risk Factors in our Annual Report on Form 10-K filed with the SEC on March 25, 2014.
Overview
Armstrong Energy, Inc. (together with its subsidiaries, we or the Company) is a producer of low chlorine, high sulfur thermal coal from the Illinois Basin, with both surface and underground mines. We market our coal primarily to proximate and investment grade electric utility companies as fuel for their steam-powered generators. Based on 2013 production, we are the fifth largest producer in the Illinois Basin and the second largest in Western Kentucky. We were formed in 2006 to acquire and develop a large coal reserve holding. We commenced production in the second quarter of 2008 and currently operate seven mines, including four surface and three underground, and are seeking permits for three additional mines. We control over 550 million tons of proven and probable coal reserves. Our reserves and operations are located in the Western Kentucky counties of Ohio, Muhlenberg, McLean, Union and Webster. We also own and operate three coal processing plants, which support our mining operations. From our reserves, we mine coal from multiple seams that, in combination with our coal processing facilities, enhance our ability to meet customer requirements for blends of coal with different characteristics. The locations of our coal reserves and operations, adjacent to the Green River, together with our river dock coal handling and rail loadout facilities, allow us to optimize coal blending and handling, and provide our customers with rail, barge and truck transportation options.
We market our coal primarily to large utilities with coal-fired, base-load, scrubbed power plants under multi-year coal supply agreements. Our multi-year coal supply agreements usually have specific volume and pricing arrangements for each year of the agreement. These agreements allow customers to secure a supply for their future needs and provide us with greater predictability of sales volume and sales prices. At September 30, 2014, we had coal supply agreements with eight customers for terms ranging from one to six years. As of September 30, 2014, 100% of our projected coal sales for the remainder of 2014 are committed and priced. We are contractually committed to sell approximately 8.7 million tons of coal in 2015. The average price per committed ton for 2014 is $46.85 and the average price per committed ton for 2015 is $48.18.
Our principal expenses related to the production of coal are labor and benefits, equipment, materials and supplies (explosives, diesel fuel and electricity), maintenance, royalties and excise taxes. Unlike some of our competitors, we employ a completely non-union workforce. Many of the benefits of our non-union workforce are related to higher productivity and are not necessarily reflected in our direct costs. In addition, while we typically do not pay our customers transportation costs, they may be substantial and are often the determining factor in a coal consumers contracting decision.
Recent Developments
Lewis Creek Underground Mine
Our Lewis Creek underground mine, which produces coal from the West Kentucky #9 seam, has experienced significant operating inefficiencies since July 2013 due to the geological conditions of the portion of the reserve being mined. As a result of the ongoing mining difficulties, a final decision was made in August 2014 not to continue advancing under the current mine plan, but rather to retreat and mine only in the eastern portion of the reserve.
As a result of this change in mine plan, we are accelerating the depreciation of the remaining net book value of the capitalized costs associated with the development of the mine due to the diminished useful life of the asset. The asset, which has a net book value of approximately $9.2 million at September 30, 2014, will continue to be depreciated using the units of production method over the remaining estimated recoverable reserves. Upon completion of mining the remaining section, which based on current estimates is expected to occur in the first quarter of 2015, the existing portal to the Lewis Creek underground mine will be abandoned and all of the employees and equipment will be relocated to our other mining operations.
Coal Mine Dust Regulations
On Oct. 19, 2010, the U.S. Mine Safety and Health Administration (MSHA) published a proposed rule regulating miners exposure to respirable coal mine dust in all underground and surface coal mines. On April 23, 2014, MSHA issued a final rule with respect to the issue which, among other things, reduces the overall dust standard from 2.0 mg to 1.5 mg per cubic metre of air and cuts in half the standard from 1.0 to 0.5 for certain mine entries and miners with pneumoconiosis. The rule also requires mine operators to install devices to continuously monitor a mines dust levels, and take immediate action when levels are too high. The new rule has a staggered implementation with some of the provisions requiring compliance by August 2014, while certain provisions, including continuous monitoring of coal mine dust concentrations and the overall reduction in the limit of respirable coal mine dust, will not be effective until 2016. We are reviewing the final rule and evaluating its potential effects on our financial condition and results of operations.
22
Table of Contents
Sale of Coal Reserves
On October 1, 2014, we transferred to our affiliate, Thoroughbred Resource Partners, L.P. (Thoroughbred), a portion of our interest in certain land and mineral reserves we control in Muhlenberg county in exchange for Thoroughbred conveying to us a 7.97% undivided interest in the land and mineral reserves previously transferred by us to Thoroughbred. This transaction was determined to be a fair and reasonable arms-length transaction by the Conflicts Committee of the Board of Directors of the Company, a committee comprised of only independent directors.
On that same date, we sold an additional 3.85% undivided interest in certain leased and owned land and mineral reserves to Thoroughbred in exchange for Thoroughbred forgiving amounts owed by us of approximately $8.2 million, which consisted primarily of deferred production royalties. The newly acquired interests in the mineral reserves were leased and/or subleased by Thoroughbred to us in exchange for a production royalty. Similar to previous reserve transfers, this transaction was accounted for as a financing arrangement and an additional long-term obligation to Thoroughbred of approximately $8.2 million was recognized in the fourth quarter of 2014.
The percentage interests in the land and mineral reserves transferred in each of the transactions occurring on October 1, 2014 were based on fair values determined by a third-party specialist. At the conclusion of these transactions, Thoroughbreds undivided interest in certain of our leased and owned land and mineral reserves in Muhlenberg and Ohio counties was 49.28%. See Related Party Transactions and Item 13Certain Relationships and Related Party Transactions, and Director Independence in our Annual Report on Form 10-K filed with the SEC on March 25, 2014 for additional information concerning our leases with related parties.
Results of Operations
Non-GAAP Financial Information
Adjusted EBITDA, as presented in this Quarterly Report on Form 10-Q, is a supplemental measure of our performance that is not required by, or presented in accordance with, U.S. generally accepted accounting (GAAP). It is not a measurement of our financial performance under GAAP and should not be considered as an alternative to net income (loss) or any other performance measures derived in accordance with GAAP or as an alternative to cash flows from operating activities as measures of our liquidity.
We define Adjusted EBITDA as net income (loss) before deducting net interest expense, income taxes, depreciation, depletion and amortization, asset retirement obligation expense, non-cash production royalty for related party, loss on settlement of interest rate swap, loss on deferment of equity offering, gain on settlement of asset retirement obligations, non-cash stock compensation expense, non-cash charges related to non-recourse notes, gain on deconsolidation, and (gain) loss on extinguishment of debt. We caution investors that amounts presented in accordance with our definition of Adjusted EBITDA may not be comparable to similar measures disclosed by other issuers, because not all issuers and analysts calculate Adjusted EBITDA in the same manner. We present Adjusted EBITDA because we consider it an important supplemental measure of our performance and believe it is useful to an investor in evaluating our company. We also include a quantitative reconciliation of Adjusted EBITDA to the most directly comparable GAAP financial performance measure, which is net income (loss), in the sections that follow.
Three Months Ended September 30, 2014 Compared to Three Months Ended September 30, 2013
Summary
Three Months Ended September 30, |
Change | |||||||||||||||
2014 | 2013 | Amount | Percentage | |||||||||||||
(In thousands, except per ton amounts) | ||||||||||||||||
Tons of coal sold |
2,312 | 2,425 | (113 | ) | (4.7 | %) | ||||||||||
Total revenue |
$ | 108,935 | $ | 108,236 | $ | 699 | 0.7 | % | ||||||||
Average sales price per ton |
$ | 47.12 | $ | 44.63 | $ | 2.49 | 5.6 | % | ||||||||
Cost of coal sales2 |
$ | 88,068 | $ | 87,818 | $ | (250 | ) | (2.8 | %) | |||||||
Average cost of sales per ton2 |
$ | 38.09 | $ | 36.21 | $ | (1.88 | ) | (5.2 | %) | |||||||
Net loss |
$ | 7,798 | $ | 7,851 | $ | 53 | 0.7 | % | ||||||||
Adjusted EBITDA1 |
$ | 16,131 | $ | 14,723 | $ | 1,408 | 9.6 | % |
1 | Non-GAAP measure; please see definition above and reconciliation below. |
2 | Includes revenue-based production taxes and royalties; excludes depreciation, depletion, and amortization; asset retirement obligation expenses; and general and administrative costs. |
23
Table of Contents
Revenue
Our coal sales revenue for the three months ended September 30, 2014 increased by $0.7 million, or 0.7%, to $108.9 million, as compared to $108.2 million for the three months ended September 30, 2013. This increase is attributable to a favorable price variance of approximately $5.7 million year-over-year due to favorable customer mix and higher year-over-year contract prices, partially offset by an unfavorable volume variance of 0.1 million tons sold in the current year ($5.0 million) due to transportation issues experienced during the current quarter.
Cost of Coal Sales
Cost of coal sales increased 2.8% to $88.1 million in the three months ended September 30, 2014, from $87.8 million in the same period of 2013. On a per ton basis, our cost of coal sales increased during the three months ended September 30, 2014, compared to the same period of 2013, from $36.21 per ton to $38.09 per ton. This increase is due to lower productivity at the Parkway and Kronos underground mines driven by poor geological conditions and continued production inefficiencies encountered at the Lewis Creek underground mine, partially offset by favorable mining conditions at our Midway surface mine in the current year.
Production Royalty to Related Party
Production royalty to related party decreased $0.5 million to $2.0 million for the three months ended September 30, 2014, as compared to $2.5 million in the same period of 2013. The decrease relates to production royalties earned by our affiliate, Thoroughbred, being lower as a result of a decrease in sales originating from our Kronos mine (where the mineral reserves are leased directly from Thoroughbred) in the current quarter, as compared to the same period of 2013.
Depreciation, Depletion and Amortization
Depreciation, depletion, and amortization (DD&A) expenses increased by $3.0 million, or 29.1%, to $13.2 million during the three months ended September 30, 2014, as compared to the same period of 2013. The increase is primarily due to the accelerated depreciation of the capitalized mine development costs associated with the Lewis Creek underground mine resulting from the planned abandonment of the mine in the first quarter of 2015.
Asset Retirement Obligation Expenses
Asset retirement obligation expenses of $0.6 million for the three months ended September 30, 2014 is comparable to the same period of the prior year.
General and Administrative Costs
General and administrative (G&A) costs were $4.9 million for the three months ended September 30, 2014, which was $1.0 million, or 16.9%, lower than the three months ended September 30, 2013. On a per ton basis for the three months ended September 30, 2014, G&A expenses were $2.10, compared to $2.41 for the three months ended September 30, 2013. The decrease in the three months ended September 30, 2014, as compared to the same period of 2013, is due primarily to lower expenses for professional services ($0.6 million) and lower non-income related taxes ($0.2 million).
Interest Expense, Net
Interest expense, net is derived from the following components:
Three Months Ended September 30, |
||||||||
2014 | 2013 | |||||||
(In thousands) | ||||||||
11.75% Senior Secured Notes due 2019 |
$ | 5,875 | $ | 5,875 | ||||
Senior Secured Credit Facility |
| | ||||||
Long-term obligation to related party |
1,848 | 2,820 | ||||||
Other, net |
302 | 475 | ||||||
|
|
|
|
|||||
Total |
$ | 8,025 | $ | 9,170 | ||||
|
|
|
|
24
Table of Contents
Interest expense, net was $8.0 million for the three months ended September 30, 2014, as compared to $9.2 million for the three months ended September 30, 2013. The decrease is principally attributable to a decrease in the effective interest rate on the long-term obligation to related party due to revisions in the mine plan at December 31, 2013, partially offset by the increase in the principal balance of the long-term obligation to related party from the closing of the reserve transfer to Thoroughbred in April 2013, which increased the principal balance on the obligation by $4.9 million.
Net Loss
Net loss for the three months ended September 30, 2014 was $7.8 million, as compared to $7.9 million for the same period of 2013. The decrease in net loss is largely due to year-over-year decrease in interest expense, partially offset by the decline in operating income, as discussed above.
Adjusted EBITDA
The following table reconciles Adjusted EBITDA to net loss, the most directly comparable GAAP measure:
Three Months Ended September 30, |
||||||||
2014 | 2013 | |||||||
(In thousands) | ||||||||
Net loss |
$ | (7,798 | ) | $ | (7,851 | ) | ||
Income tax provision |
| | ||||||
Depreciation, depletion, and amortization |
13,240 | 10,258 | ||||||
Asset retirement obligation expense s |
560 | 595 | ||||||
Non-cash production royalty to related party |
2,049 | 2,485 | ||||||
Interest expense, net |
8,025 | 9,170 | ||||||
Non-cash stock compensation expense |
55 | 66 | ||||||
|
|
|
|
|||||
Adjusted EBITDA |
$ | 16,131 | $ | 14,723 | ||||
|
|
|
|
Our Adjusted EBITDA for the three months ended September 30, 2014 was $16.1 million, as compared to $14.7 million for the three months ended September 30, 2013. The increase in Adjusted EBITDA resulted primarily from improved gross margin as a result of the favorable price variance in the three months ended September 30, 2014, as compared to the same period of 2013, as well as lower G&A costs, exclusive of stock compensation expense, experienced in the current quarter.
Nine Months Ended September 30, 2014 Compared to Nine Months Ended September 30, 2013
Summary
Nine Months Ended September 30, |
Change | |||||||||||||||
2014 | 2013 | Amount | Percentage | |||||||||||||
(In thousands, except per ton amounts) | ||||||||||||||||
Tons of coal sold |
7,143 | 6,880 | 263 | 3.8 | % | |||||||||||
Total revenue |
$ | 336,088 | $ | 310,702 | $ | 25,386 | 8.2 | % | ||||||||
Average sales price per ton |
$ | 47.05 | $ | 45.16 | $ | 1.89 | 4.2 | % | ||||||||
Cost of coal sales2 |
$ | 273,353 | $ | 250,083 | $ | (23,270 | ) | (9.3 | %) | |||||||
Average cost of sales per ton2 |
$ | 38.27 | $ | 36.35 | $ | (1.92 | ) | (5.3 | %) | |||||||
Net loss |
$ | 17,236 | $ | 18,880 | $ | 1,644 | 8.7 | % | ||||||||
Adjusted EBITDA1 |
$ | 48,321 | $ | 44,053 | $ | 4,268 | 9.7 | % |
1 | Non-GAAP measure; please see definition above and reconciliation below. |
2 | Includes revenue-based production taxes and royalties; excludes depreciation, depletion, and amortization; asset retirement obligation expenses; and general and administrative costs. |
25
Table of Contents
Revenue
Our coal sales revenue for the nine months ended September 30, 2014 increased by $25.4 million, or 8.2%, to $336.1 million, as compared to $310.7 million for the nine months ended September 30, 2013. This increase is attributable to a favorable volume variance of approximately 0.3 million tons sold in the current year ($12.4 million) and a favorable price variance of $13.0 million year-over-year due to favorable customer mix and higher year-over-year contract prices.
Cost of Coal Sales
Cost of coal sales increased 9.3% to $273.4 million in the nine months ended September 30, 2014, from $250.1 million in the same period of 2013. On a per ton basis, our cost of coal sales increased during the nine months ended September 30, 2014, compared to the same period of 2013, from $36.35 per ton to $38.27 per ton. This increase is due to lower productivity at the Parkway underground mine and Lewis Creek surface mine driven by poor geological conditions and production inefficiencies encountered at the Lewis Creek underground mine subsequent to the completion of the development of the mine, partially offset by favorable mining conditions at our Midway surface mine in the current year.
Production Royalty to Related Party
Production royalty to related party decreased $0.2 million to $6.3 million for the nine months ended September 30, 2014, as compared to $6.5 million in the same period of 2013. The decrease relates to production royalties earned by our affiliate, Thoroughbred, being lower as a result of a decrease in sales originating from our Kronos mine in the current year, as compared to the same period of 2013.
Depreciation, Depletion and Amortization
DD&A expenses increased by $5.2 million, or 18.4%, to $33.2 million during the nine months ended September 30, 2014, as compared to the same period of 2013. The increase is primarily due to the accelerated depreciation of the capitalized mine development costs associated with the Lewis Creek underground mine resulting from the planned abandonment of the mine in the first quarter of 2015. In addition, depletion and amortization expenses were higher as a result of the higher overall production in 2014, as compared to the prior year.
Asset Retirement Obligation Expenses
Asset retirement obligation expenses decreased by $0.2 million to $1.6 million in the nine months ended September 30, 2014, as compared to the same period of 2013. The decrease is primarily attributable to changes in asset retirement cost estimates based on revisions to discount rates, reserve valuations and projected mine lives.
General and Administrative Costs
G&A costs were $14.8 million for the nine months ended September 30, 2014, which was $2.3 million, or 13.5%, lower than the nine months ended September 30, 2013. On a per ton basis for the nine months ended September 30, 2014, G&A expenses were $2.08, as compared to $2.49 for the nine months ended September 30, 2013. The decrease in the nine months ended September 30, 2014, as compared to the same period of 2013 is driven by lower expenses for professional services ($1.0 million), lower non-income related taxes ($0.5 million), and lower share-based compensation ($0.4 million) from the decline in unvested shares and the forfeiture of a grant and the reversal of the associated expense during the second quarter of 2014.
26
Table of Contents
Interest Expense, Net
Interest expense, net is derived from the following components:
Nine Months Ended September 30, |
||||||||
2014 | 2013 | |||||||
(In thousands) | ||||||||
11.75% Senior Secured Notes due 2019 |
$ | 17,625 | $ | 17,625 | ||||
Senior Secured Credit Facility |
| | ||||||
Long-term obligation to related party |
5,512 | 8,190 | ||||||
Other, net |
1,422 | 567 | ||||||
|
|
|
|
|||||
Total |
$ | 24,559 | $ | 26,382 | ||||
|
|
|
|
Interest expense, net was $24.6 million for the nine months ended September 30, 2014, as compared to $26.4 million for the nine months ended September 30, 2013. The decrease is principally attributable to a decrease in the effective interest rate on the long-term obligation to related party due to revisions in the mine plan at December 31, 2013, partially offset by the increase in the principal balance of the long-term obligation to related party from the closing of the reserve transfer to Thoroughbred in April 2013, which increased the principal balance on the obligation by $4.9 million, and a lesser amount of capitalized interest in the current year due to a decline in capital expenditures year over year.
Net Loss
Net loss for the nine months ended September 30, 2014 was $17.2 million, as compared to $18.9 million for the same period of 2013. The decrease in net loss is largely due to the improved gross margin resulting from the favorable volume variance and the reduction in G&A costs and interest expense year-over-year, partially offset by the increase in DD&A expense.
Adjusted EBITDA
The following table reconciles Adjusted EBITDA to net loss, the most directly comparable GAAP measure:
Nine Months Ended September 30, |
||||||||
2014 | 2013 | |||||||
(In thousands) | ||||||||
Net loss |
$ | (17,236 | ) | $ | (18,880 | ) | ||
Income tax provision |
| | ||||||
Depreciation, depletion, and amortization |
33,178 | 28,023 | ||||||
Asset retirement obligation expense s |
1,568 | 1,760 | ||||||
Non-cash production royalty to related party |
6,313 | 6,502 | ||||||
Interest expense, net |
24,559 | 26,382 | ||||||
Non-cash stock compensation expense |
(61 | ) | 356 | |||||
Gain on settlement of asset retirement obligation |
| (90 | ) | |||||
|
|
|
|
|||||
Adjusted EBITDA |
$ | 48,321 | $ | 44,053 | ||||
|
|
|
|
Our Adjusted EBITDA for the nine months ended September 30, 2014 was $48.3 million, as compared to $44.1 million for the nine months ended September 30, 2013. The increase resulted primarily from improved gross margin as a result of selling 0.3 million tons more in the nine months ended September 30, 2014, as compared to the same period of 2013, as well as lower G&A costs, exclusive of stock compensation expense, experienced in the current year.
27
Table of Contents
Liquidity and Capital Resources
Liquidity
Our business is capital intensive and requires substantial capital expenditures for purchasing, upgrading and maintaining equipment used in mining our reserves, as well as complying with applicable environmental laws and regulations. Our principal liquidity requirements are to finance current operations, fund capital expenditures, including acquisitions from time to time, and to service our debt. Our primary sources of liquidity to meet these needs have been cash generated by our operations, borrowings under our credit facility and contributions from our equity holders.
On December 21, 2012, we completed a $200.0 million Notes offering and received proceeds of $193.1 million, as the Notes were issued at an original issue discount of 96.567%. Interest on the Notes is due semiannually on June 15 and December 15 of each year, with the first payment made on June 15, 2013. In connection with the offering, we prepaid and terminated our then existing senior secured credit facility. In addition, we entered into a new asset based revolving credit facility, which provides for revolving borrowings of up to $50.0 million (the 2012 Credit Facility).
We believe our existing cash balances, cash generated from operations and capacity under the 2012 Credit Facility will be sufficient to meet working capital requirements, anticipated capital expenditures and debt service requirements. We manage our exposure to changing commodity prices for our long-term coal contract portfolio through the use of multi-year coal supply agreements. We generally enter into fixed price, fixed volume supply contracts with terms greater than one year with customers with whom we have historically had limited collection issues. Our ability to satisfy debt service obligations, to fund planned capital expenditures, and to make acquisitions, will depend upon our future operating performance, which will be affected by prevailing economic conditions in the coal industry and financial, business and other factors, some of which are beyond our control.
The principal indicators of our liquidity are our cash on hand and availability under the 2012 Credit Facility. As of September 30, 2014, our available liquidity was $87.1 million, comprised of cash on hand of $66.7 million and $20.4 million available under the 2012 Credit Facility.
Cash Flows
The following table reflects cash flows for the applicable periods:
Nine Months Ended September 30, |
||||||||
2014 | 2013 | |||||||
(In thousands) | ||||||||
Net cash provided by (used in): |
||||||||
Operating activities |
$ | 36,821 | $ | 37,924 | ||||
Investing activities |
$ | (14,956 | ) | $ | (30,099 | ) | ||
Financing activities |
$ | (6,793 | ) | $ | (6,933 | ) |
Nine Months Ended September 30, 2014 Compared to nine Months Ended September 30, 2013
Net cash provided by operating activities was $36.8 million for the nine months ended September 30, 2014, a decrease of $1.1 million from net cash provided by operating activities of $37.9 million for the same period of 2013. We experienced a decrease in operating income in the first nine months of 2014 due to the higher production levels and accelerated depreciation of the capitalized mine development costs associated with the Lewis Creek underground mine, which increased DD&A by $5.2 million in the first nine months of 2014, as compared to the same period of 2013. Partially offsetting the increase was an increase in gross margin driven by the increase in sales volume and pricing, as well as the decline in G&A expenses. Positively impacting cash flows from operations for the nine months ended September 30, 2014 was an increase in accounts payable and accrued liabilities of $4.3 million and net related party liabilities of $10.7 million due to the deferment of amounts owed to our affiliate, Thoroughbred, including interest and royalties earned on leased reserves. Negatively impacting operating cash flows was an increase in other non-current assets during the nine months ended September 30, 2014 due to an increase in collateral posted against outstanding surety bonds, which are used to secure the performance of our reclamation obligations, as well as an increase in accounts receivable related to the increase in revenue and the timing of cash receipts. Positively impacting cash flows from operations for the nine months ending September 30, 2013 was an increase in accounts payable and accrued liabilities of $12.6 million and accrued interest of $6.2 million due to the timing of payments and an increase in related party payables due to an increase in royalties earned by Thoroughbred. Negatively impacting operating cash flows was an increase in inventory experienced during the nine months ended September 30, 2013 due to an increase in coal inventory and materials and supplies on hand resulting from the development of the Lewis Creek underground mine, as well as an increase in accounts receivable related to the timing of cash receipts.
28
Table of Contents
Net cash used in investing activities decreased $15.1 million to $15.0 million for the nine months ended September 30, 2014, compared to $30.1 million for the same period of 2013. The current year investment is primarily attributable to capital expenditures associated with maintaining our existing fixed assets, whereas the prior year investment is largely attributable to capital expenditures on equipment and mine development for the completion of the Lewis Creek underground mine.
Net cash used in financing activities was $6.8 million for the nine months ended September 30, 2014, compared to net cash used in financing activities of $6.9 million for the nine months ended September 30, 2013. The current year and prior year activity relates primarily to scheduled capital lease and other long-term debt payments.
Contractual Obligations
Our contractual obligations have not changed materially from the disclosures in our Annual Report on Form 10-K filed with the SEC on March 25, 2014.
Capital Expenditures
Our mining operations require investments to expand, upgrade or enhance existing operations and to comply with environmental regulations. Our anticipated total capital expenditures for 2014 are estimated in a range of $28.0 million to $30.0 million, of which approximately 34% represents machinery, equipment, and land purchases and approximately 66% represents mine development related expenditures. Management anticipates funding 2014 capital requirements with current cash balances and cash flows provided by operations. We will continue to have significant capital requirements over the long-term, which may require us to incur debt or seek additional equity capital. The availability and cost of additional capital will depend upon prevailing market conditions and several other factors over which we have limited control, as well as our financial condition and results of operations.
Mine Development Costs
Mine development costs are capitalized until production commences, other than production incidental to the mine development process, and are amortized on a units-of-production method based on the estimated proven and probable reserves. Mine development costs represent costs incurred in establishing access to mineral reserves and include costs associated with sinking or driving shafts and underground drifts, removing overburden to access reserves in a new pit, permanent excavations, roads and tunnels. The end of the development phase and the beginning of the production phase takes place when construction of the mine for economic extraction is substantially complete. Our estimate of when construction of the mine for economic extraction is substantially complete is based upon a number of assumptions, such as expectations regarding the economic recoverability of reserves, the type of mine under development, and the completion of certain mine requirements, such as ventilation. Coal extracted during the development phase is incidental to the mines production capacity and is not considered to shift the mine into the production phase. We began development of a new underground mine in the second quarter of 2014 at our Parkway mine complex to extract coal from the West Kentucky #8 seam, which is anticipated to be completed in the first half of 2015.
Off-Balance Sheet Arrangements
In the normal course of business, we are a party to certain off-balance sheet arrangements. These arrangements include guarantees and financial instruments with off-balance sheet risk, such as surety bonds and performance bonds. No liabilities related to these arrangements are reflected in our consolidated balance sheet, and we do not expect any material adverse effects on our financial condition, results of operations or cash flows to result from these off-balance sheet arrangements.
Federal and state laws require us to secure certain long-term obligations such as mine closure and reclamation costs and other obligations. We typically secure these obligations by using surety bonds, an off-balance sheet instrument. The use of surety bonds is less expensive for us than the alternative of posting a 100% cash bond. To the extent that surety bonds become unavailable, we would seek to secure our reclamation obligations with letters of credit, cash deposits or other suitable forms of collateral. We also post performance bonds to secure our performance of various contractual obligations.
As of September 30, 2014, we had approximately $35.6 million in surety bonds outstanding to secure the performance of our reclamation obligations, which were supported by approximately $6.0 million of cash posted as collateral.
Related Party Transactions
Merger of Related Parties
On February 1, 2014, Armstrong Resource Partners, L.P. merged with and into Thoroughbred Resources, LLC, with Armstrong Resource Partners, L.P. as the surviving entity (the Merger). Effective with the Merger, Armstrong Resource Partners, L.P. changed its name to Thoroughbred. Our wholly-owned subsidiary, Elk Creek GP, LLC (ECGP), remained the general partner of the surviving entity, under the terms of the amended and restated limited partnership agreement, which is substantially the same as the limited partnership agreement in effect immediately prior to the Merger. As a result of the Merger, ECGPs equity interest in the combined company was reduced to approximately 0.2%.
29
Table of Contents
In January 2014, our investment in Ram Terminals, LLC (RAM), an entity majority owned by Yorktown, was converted into an equal ownership percentage of Terminal Holdings, LLC, a holding company which is the sole member of both RAM and MG Midstreaming, LLC. Subsequent to the Merger, but also on February 1, 2014, Terminal Holdings, LLC merged with and into a merger subsidiary of Thoroughbred created for the purpose of the transaction, with Terminal Holdings, LLC as the surviving entity. Terminal Holdings, LLC was owned by us and Yorktown in the same percentage as their prior interests in RAM, and by virtue of the merger, our equity interest was converted into an equal number of common units representing limited partnership interests in Thoroughbred. Because of our ownership interest in Thoroughbred through ECGP, the newly converted interest, which equals 0.9%, is accounted for under the equity method.
Sale of Coal Reserves
We have executed the sale of an undivided interest in certain land and mineral reserves to Thoroughbred, through a series of transactions beginning in February 2011. Subsequently, we entered into lease agreements with Thoroughbred pursuant to which Thoroughbred granted us leases to its undivided interests in the mining properties acquired and licenses to mine and sell coal from those properties in exchange for a production royalty. Due to our continuing involvement in the land and mineral reserves transferred, these transactions have been accounted for as financing arrangements. A long-term obligation has been established that is being amortized over the anticipated life of the mineral reserves, at an annual rate of 7% of the estimated gross revenue generated from the sale of the coal originating from the leased mineral reserves. In addition, effective February 2011, we and Thoroughbred entered into a Royalty Deferment and Option Agreement, whereby we have been granted an option to defer payment of any royalties earned by Thoroughbred on coal mined from these properties. Compensation for the aforementioned transactions has consisted of a combination of cash payments and the forgiveness of amounts owed by us, which primarily consisted of deferred royalties.
On April 1, 2013, we sold an additional 2.59% undivided interest in certain land and mineral reserves to Thoroughbred. The percentage interest in the land and mineral reserves sold was based on a fair value determined by a third-party specialist. In exchange for the undivided interest in the land and mineral reserves, Thoroughbred forgave amounts owed by us totaling $4.9 million. This transaction increased Thoroughbreds undivided interest in certain of our land and mineral reserves in Muhlenberg and Ohio Counties to 53.4%. In addition, the transferred mineral reserves were leased back to us on terms similar to those applicable to the previous transfers. As we will have a continuing involvement in the reserves, the transaction is accounted for as a financing arrangement and an additional long-term obligation to Thoroughbred of $4.9 million was recognized in the second quarter of 2013. As a result of the additional asset transfer in April 2013, the effective interest rate on the long-term obligation to related party was adjusted to 10.65%. Based on the mine plan as of December 31, 2013, the effective interest rate of the obligation was reduced to 7.0% beginning January 1, 2014.
As of September 30, 2014 and December 31, 2013, the outstanding long-term obligation to related party totaled $104.6 million and $106.3 million, respectively. Interest expense recognized for the three months ended September 30, 2014 and 2013 associated with the long-term obligation to related party was $1.8 million and $2.8 million, respectively, and $5.5 million and $8.2 million for the nine months ended September 30, 2014 and 2013, respectively.
Lease of Coal Reserves
In February 2011, Thoroughbred entered into a lease and sublease agreement with us relating to its Elk Creek reserves and granted us a license to mine coal on those properties. The terms of this agreement mirror those of the lease agreements associated with the jointly owned reserves between us and Thoroughbred. Total production royalties owed from mining of the Elk Creek reserves, where our Kronos mine resides, for the three months ended September 30, 2014 and 2013 totaled $2.0 million and $2.5 million, respectively, and for the nine months ended September 30, 2014 and 2013 totaled $6.3 million and $6.5 million, respectively.
Short-term Note Receivable
On June 28, 2013, Thoroughbred acquired approximately 175 million tons of fee-owned coal reserves and approximately 23 million tons of leased coal reserves from a third party. The acquired coal reserves are located in Muhlenberg and McLean Counties of Kentucky, contiguous to our reserves. In February 2014, we entered into a lease of these reserves from Thoroughbred in exchange for a production royalty.
In connection with Thoroughbreds acquisition of these coal reserves, we loaned Thoroughbred $17.5 million, which was repaid in July 2013. The proceeds of the loan, which was evidenced by a promissory note, were used by Thoroughbred to make a portion of the down payment for the purchase of the coal reserves.
30
Table of Contents
Administrative Services Agreements
Effective as of January 1, 2011, we entered into an Administrative Services Agreement with Thoroughbred and its general partner, ECGP, pursuant to which we agreed to provide Thoroughbred with general administrative and management services, including, but not limited to, human resources, information technology, financial and accounting services and legal services. As consideration for the use of our employees and services, and for certain shared fixed costs, Thoroughbred paid us $0.3 million and $0.2 million for the three months ended September 30, 2014 and 2013, respectively and $0.8 million and $0.6 million for the nine months ended September 30, 2014 and 2013, respectively. Prior to the Merger, we had separate administrative services agreements with Thoroughbred Resources, LLC and RAM. For the three and nine months ended September 30, 2013, we were paid an immaterial amount and $0.1 million, respectively, for the associated services rendered to Thoroughbred Resources, LLC and RAM.
Other
In 2006 and 2007, we entered into overriding royalty agreements with a current and a former executive employee to compensate each of them $0.05/ton of coal mined and sold from properties owned by certain of our subsidiaries. The agreements remain in effect for the later of 20 years from the date of the agreement or until all salable coal has been extracted from the applicable properties. Both royalty agreements transfer with the property regardless of ownership or lease status. The royalties are payable the month following the sale of coal mined from the specified properties. We account for these royalty arrangements as expense in the period in which the coal is sold. Associated royalty expense recorded in the three months ended September 30, 2014 and 2013 was $0.2 million and $0.2 million, respectively, and $0.6 million and $0.7 million in the nine months ended September 30, 2014 and 2013, respectively.
Please read Item 13Certain Relationships and Related Party Transactions, and Director Independence in our Annual Report on Form 10-K filed with the SEC on March 25, 2014 for additional information concerning related party transactions.
Critical Accounting Policies and Estimates
Our preparation of financial statements in conformity with GAAP requires that we make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We base our judgments, estimates and assumptions on historical information and other known factors that we deem relevant. Estimates are inherently subjective as significant management judgment is required regarding the assumptions utilized to calculate accounting estimates.
The most significant areas requiring the use of management estimates and assumptions relate to units-of-production amortization calculations, asset retirement obligations, useful lives for depreciation of fixed assets, and the accounting for the long-term obligation to related party. For a full discussion of our accounting estimates and assumptions that we have identified as critical in the preparation of our condensed consolidated financial statements, refer to our Annual Report on Form 10-K filed with the SEC on March 25, 2014.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued a comprehensive revenue recognition standard that will supersede nearly all existing revenue recognition guidance under GAAP. The standard requires revenue to be recognized when promised goods or services are transferred to a customer in an amount that reflects the consideration expected in exchange for those goods or services. The new standard is effective for us on January 1, 2017. The standard permits the use of either the full retrospective or modified retrospective transition method and early adoption is not permitted. We are currently evaluating the impact of this new pronouncement on our financial statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We define market risk as the risk of economic loss as a consequence of the adverse movement of market rates and prices. We believe our principal market risks are commodity price risk and credit risk.
Commodity Price Risk
We sell most of the coal we produce under multi-year coal supply agreements. Historically, we have principally managed the commodity price risks from our coal sales by entering into multi-year coal supply agreements of varying terms and durations, rather than through the use of derivative instruments.
Some of the products used in our mining activities, such as diesel fuel, explosives and steel products for roof support used in our underground mining, are subject to price volatility. Through our suppliers, we utilize forward purchases to manage a portion of our exposure related to diesel fuel volatility. A hypothetical increase of $0.10 per gallon for diesel fuel would have increased net loss by $0.2 million and $0.7 million for the three and nine months ended September 30, 2014, respectively. A hypothetical increase of 10% in steel prices would have increased net loss by $0.4 million and $1.6 million for the three and nine months ended September 30, 2014, respectively. A hypothetical increase of 10% in explosives prices would have increased net loss by $0.4 million and $1.4 million for the three and nine months ended September 30, 2014, respectively.
31
Table of Contents
Credit Risk
Most of our coal sales are made to electric utilities. Therefore, our credit risk is primarily with domestic electric power generators. Our policy is to independently evaluate each customers creditworthiness prior to entering into a transaction with the customer and to constantly monitor outstanding accounts receivable against established credit limits. When deemed appropriate, we will take steps to reduce credit exposure to customers that do not meet our credit standards or whose credit has deteriorated. Credit losses are provided for in the financial statements and have historically been minimal.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Our management, including our Chief Executive Officer and Chief Financial Officer, reviewed and evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2014. Based upon such review and evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the date of such evaluation to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SECs rules and forms and that such information is accumulated and communicated to the Companys management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
During the third quarter of 2014, there has been no change in the Companys internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.
32
Table of Contents
We are involved from time to time in various lawsuits and claims arising in the ordinary course of business. Although the outcomes of these lawsuits and claims are uncertain, we do not believe any of them will have a material adverse effect on our business, financial condition or results of operations.
There have been no material changes in our risk factors from those disclosed in our Annual Report on Form 10-K filed with the SEC on March 25, 2014.
Item 4. Mine Safety Disclosures
Information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K (17 CFR 229.104) is included in Exhibit 95.1 to this Quarterly Report on Form 10-Q.
(a) None.
(b) There have been no material changes to the procedures by which security holders may recommend nominees to the Companys Board of Directors during the fiscal quarter ended September 30, 2014.
Incorporated by Reference |
Filed or | |||||||||||
Exhibit |
Description |
Form |
File Number |
Exhibit |
Filing |
|||||||
31.1 | Certification of principal executive officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended. | X | ||||||||||
31.2 | Certification of principal financial officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended. | X | ||||||||||
32.1# | Certification of principal executive officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | X | ||||||||||
32.2# | Certification of principal executive officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | X | ||||||||||
95.1 | Federal Mine Safety and Health Act Information. | X | ||||||||||
101.INS | XBRL Instance Document | X | ||||||||||
101.SCH | XBRL Taxonomy Extension Scheme Document | X | ||||||||||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | X | ||||||||||
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | X | ||||||||||
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | X | ||||||||||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | X |
# | This certification is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the Exchange Act), or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act. |
33
Table of Contents
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ARMSTRONG ENERGY, INC. | ||||||
Date: November 13, 2014 | By: | /s/ J. Richard Gist | ||||
J. Richard Gist | ||||||
Senior Vice President and Chief Financial Officer | ||||||
(On behalf of the registrant and as Principal Financial Officer) |
34