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EX-32.2 - EX-32.2 - Foresight Energy LPfelp-ex322_174.htm
EX-32.1 - EX-32.1 - Foresight Energy LPfelp-ex321_173.htm
EX-95.1 - EX-95.1 - Foresight Energy LPfelp-ex951_451.htm
EX-10.1 - EX-10.1 - Foresight Energy LPfelp-ex101_166.htm
EX-31.2 - EX-31.2 - Foresight Energy LPfelp-ex312_172.htm
EX-31.1 - EX-31.1 - Foresight Energy LPfelp-ex311_171.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

x

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

For the quarterly period ended March 31, 2016

OR

¨

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

For the transition period from          to          

Commission File Number: 001-36503

 

Foresight Energy LP

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

 

80-0778894

(State or other jurisdiction

of incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

211 North Broadway, Suite 2600, Saint Louis, MO

 

63102

(Address of principal executive offices)

 

(Zip code)

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

 

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

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

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

 

Large accelerated filer

 

¨

  

Accelerated filer

 

x

 

 

 

 

Non-accelerated filer

 

¨  (do not check if a smaller reporting company)

  

Smaller reporting company

 

¨

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

As of May 6, 2016, the registrant had 66,096,093 common units and 64,954,691 subordinated units outstanding.

 

 

 

 


 

TABLE OF CONTENTS

 

PART I

FINANCIAL INFORMATION

 

Item 1.Financial Statements

 

 

 

 

Unaudited Condensed Consolidated Balance Sheets as of March 31, 2016 and December 31, 2015

3

Unaudited Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2016 and 2015

4

Unaudited Condensed Consolidated Statement of Partners’ Capital (Deficit) for the Three Months Ended March 31, 2016

5

Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2016 and 2015

6

Notes to Unaudited Condensed Consolidated Financial Statements

7

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

26

Item 3.Quantitative and Qualitative Disclosures About Market Risk

35

Item 4.Controls and Procedures

35

PART II

 

OTHER INFORMATION

 

Item 1.Legal Proceedings

35

Item 1A.Risk Factors

35

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

36

Item 3.Defaults Upon Senior Securities

36

Item 4.Mine Safety Disclosures

36

Item 5.Other Information

36

Signatures

37

Item 6.Exhibits

38

 

 

2


PART I – FINANCIAL INFORMATION.

 

Item 1. Financial Statements.

Foresight Energy LP

Unaudited Condensed Consolidated Balance Sheets

 

 

 

 

 

 

 

 

 

 

March 31,

 

 

December 31,

 

 

2016

 

 

2015

 

 

(In Thousands)

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

16,220

 

 

$

17,538

 

Accounts receivable

 

44,423

 

 

 

61,325

 

Due from affiliates

 

4,130

 

 

 

16,615

 

Financing receivables - affiliate

 

2,741

 

 

 

2,689

 

Inventories, net

 

65,197

 

 

 

50,652

 

Prepaid expenses

 

6,468

 

 

 

5,498

 

Prepaid royalties

 

4,068

 

 

 

5,386

 

Deferred longwall costs

 

17,628

 

 

 

18,476

 

Coal derivative assets

 

24,195

 

 

 

26,596

 

Other current assets

 

7,981

 

 

 

5,565

 

Total current assets

 

193,051

 

 

 

210,340

 

Property, plant, equipment and development, net

 

1,397,215

 

 

 

1,433,193

 

Due from affiliates

 

1,843

 

 

 

2,691

 

Financing receivables - affiliate

 

69,434

 

 

 

70,139

 

Prepaid royalties

 

70,727

 

 

 

70,300

 

Coal derivative assets

 

16,645

 

 

 

22,027

 

Other assets

 

14,091

 

 

 

12,493

 

Total assets

$

1,763,006

 

 

$

1,821,183

 

Liabilities and partners’ (deficit) capital

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Current portion of long-term debt and capital lease obligations

$

1,404,874

 

 

$

1,434,566

 

Accrued interest

 

37,343

 

 

 

24,574

 

Accounts payable

 

51,953

 

 

 

55,192

 

Accrued expenses and other current liabilities

 

34,433

 

 

 

35,825

 

Due to affiliates

 

8,267

 

 

 

8,536

 

Total current liabilities

 

1,536,870

 

 

 

1,558,693

 

Sale-leaseback financing arrangements

 

193,434

 

 

 

193,434

 

Asset retirement obligations

 

44,041

 

 

 

43,277

 

Other long-term liabilities

 

6,656

 

 

 

6,896

 

Total liabilities

 

1,781,001

 

 

 

1,802,300

 

Limited partners' capital (deficit):

 

 

 

 

 

 

 

Common unitholders (65,193 and 65,192 units outstanding as of March 31, 2016 and December 31, 2015, respectively)

 

170,169

 

 

 

186,660

 

Subordinated unitholders (64,955 units outstanding as of March 31, 2016 and December 31, 2015)

 

(186,469

)

 

 

(166,061

)

Total limited partners' (deficit) capital

 

(16,300

)

 

 

20,599

 

Noncontrolling interests

 

(1,695

)

 

 

(1,716

)

Total partners' (deficit) capital

 

(17,995

)

 

 

18,883

 

Total liabilities and partners' (deficit) capital

$

1,763,006

 

 

$

1,821,183

 

 

See accompanying notes.

 

 

3


 

Foresight Energy LP

Unaudited Condensed Consolidated Statements of Operations

 

 

Three Months Ended

 

 

March 31,

 

 

2016

 

 

2015

 

 

(In Thousands, Except per Unit Data)

 

Revenues

 

 

 

 

 

 

 

Coal sales

$

163,097

 

 

$

238,915

 

Other revenues

 

2,988

 

 

 

 

Total revenues

 

166,085

 

 

 

238,915

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

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

 

89,177

 

 

 

110,588

 

Cost of coal purchased

 

550

 

 

 

106

 

Transportation

 

25,798

 

 

 

47,359

 

Depreciation, depletion and amortization

 

36,417

 

 

 

38,818

 

Accretion on asset retirement obligations

 

844

 

 

 

567

 

Selling, general and administrative

 

5,719

 

 

 

14,466

 

Transition and reorganization costs

 

5,940

 

 

 

 

Loss (gain) on commodity derivative contracts

 

523

 

 

 

(29,067

)

Other operating income, net

 

(88

)

 

 

(13,979

)

Operating income

 

1,205

 

 

 

70,057

 

Other expenses:

 

 

 

 

 

 

 

Interest expense, net

 

32,995

 

 

 

27,341

 

Debt restructuring costs

 

9,710

 

 

 

 

Loss on extinguishment of debt

 

107

 

 

 

 

Net (loss) income

 

(41,607

)

 

 

42,716

 

Less: net income attributable to noncontrolling interests

 

97

 

 

 

410

 

Net (loss) income attributable to controlling interests

 

(41,704

)

 

 

42,306

 

Less: net income attributable to predecessor equity

 

 

 

 

23

 

Net (loss) income attributable to limited partner units

$

(41,704

)

 

$

42,283

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

Common unitholders

$

(20,890

)

 

$

21,158

 

Subordinated unitholders

$

(20,814

)

 

$

21,125

 

 

 

 

 

 

 

 

 

Net (loss) income per limited partner unit - basic and diluted:

 

 

 

 

 

 

 

Common unitholders

$

(0.32

)

 

$

0.33

 

Subordinated unitholders

$

(0.32

)

 

$

0.33

 

 

 

 

 

 

 

 

 

Weighted average limited partner units outstanding - basic and diluted:

 

 

 

 

 

 

 

Common units

 

65,193

 

 

 

64,971

 

Subordinated units

 

64,955

 

 

 

64,871

 

 

 

 

 

 

 

 

 

Distributions declared per limited partner unit

$

 

 

$

0.36

 

 

 

 

 

 

 

 

 

 

See accompanying notes.

 

4


Foresight Energy LP

Unaudited Condensed Consolidated Statement of Partners’ Capital (Deficit)

 

 

Limited Partners

 

 

 

 

 

 

 

 

 

 

Common

 

 

Number of

 

 

Subordinated

 

 

Number of

 

 

Noncontrolling

 

 

Total Partners'

 

 

Unitholders

 

 

Common Units

 

 

Unitholders

 

 

Subordinated Units

 

 

Interests

 

 

Capital (Deficit)

 

 

(In Thousands, Except Unit Data)

 

Balance at January 1, 2016

$

186,660

 

 

 

65,192,389

 

 

$

(166,061

)

 

 

64,954,691

 

 

$

(1,716

)

 

$

18,883

 

Net (loss) income

 

(20,890

)

 

 

 

 

 

(20,814

)

 

 

 

 

 

97

 

 

 

(41,607

)

Cash distributions

 

 

 

 

 

 

 

 

 

 

 

 

 

(76

)

 

 

(76

)

Capital contributions from Foresight Reserves LP

 

407

 

 

 

 

 

 

406

 

 

 

 

 

 

 

 

 

813

 

Equity-based compensation

 

3,992

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,992

 

Issuance of equity-based awards

 

 

 

 

257

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at March 31, 2016

$

170,169

 

 

 

65,192,646

 

 

$

(186,469

)

 

 

64,954,691

 

 

$

(1,695

)

 

$

(17,995

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes.

 

5


Foresight Energy LP

Unaudited Condensed Consolidated Statements of Cash Flows

 

 

Three Months Ended

 

 

March 31,

 

 

2016

 

 

2015

 

 

(In Thousands)

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net (loss) income

$

(41,607

)

 

$

42,716

 

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation, depletion and amortization

 

36,417

 

 

 

38,818

 

Equity-based compensation

 

3,992

 

 

 

8,231

 

Unrealized losses (gains) on commodity derivative contracts

 

389

 

 

 

(22,476

)

Transition and reorganization expenses paid by Foresight Reserves (affiliate)

 

2,000

 

 

 

 

Other

 

3,299

 

 

 

(1,114

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

16,902

 

 

 

447

 

Due from/to affiliates, net

 

13,064

 

 

 

(3,908

)

Inventories

 

(10,237

)

 

 

(30,078

)

Prepaid expenses and other current assets

 

(4,247

)

 

 

(208

)

Prepaid royalties

 

891

 

 

 

(769

)

Coal derivative assets and liabilities

 

6,960

 

 

 

4,714

 

Accounts payable

 

(3,239

)

 

 

(3,501

)

Accrued interest

 

12,769

 

 

 

(10,907

)

Accrued expenses and other current liabilities

 

(695

)

 

 

(5,056

)

Other

 

(2,436

)

 

 

(1,790

)

Net cash provided by operating activities

 

34,222

 

 

 

15,119

 

Cash flows from investing activities

 

 

 

 

 

 

 

Investment in property, plant, equipment and development

 

(5,040

)

 

 

(33,277

)

Return of investment on financing arrangements with Murray Energy (affiliate)

 

653

 

 

 

 

Settlement of certain coal derivatives

 

 

 

 

3,319

 

Proceeds from sale of equipment

 

83

 

 

 

 

Net cash used in investing activities

 

(4,304

)

 

 

(29,958

)

Cash flows from financing activities

 

 

 

 

 

 

 

Net change in borrowings under revolving credit facility

 

 

 

 

30,000

 

Net change in borrowings under A/R securitization program

 

(19,800

)

 

 

47,500

 

Payments on other long-term debt and capital lease obligations

 

(11,097

)

 

 

(10,860

)

Payments on short-term debt

 

(167

)

 

 

 

Distributions paid

 

(76

)

 

 

(46,970

)

Debt issuance costs paid

 

 

 

 

(439

)

Other

 

(96

)

 

 

(111

)

Net cash (used in) provided by financing activities

 

(31,236

)

 

 

19,120

 

Net (decrease) increase in cash and cash equivalents

 

(1,318

)

 

 

4,281

 

Cash and cash equivalents, beginning of period

 

17,538

 

 

 

26,509

 

Cash and cash equivalents, end of period

$

16,220

 

 

$

30,790

 

 

 

 

 

 

 

 

 

Supplemental information:

 

 

 

 

 

 

 

Interest paid, net of amounts capitalized

$

18,551

 

 

$

36,620

 

Supplemental disclosures of non-cash financing activities:

 

 

 

 

 

 

 

Non-cash capital contribution from Foresight Reserves LP (affiliate)

$

813

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes.


6


Foresight Energy LP

Notes to Unaudited Condensed Consolidated Financial Statements

 

1. Organization, Nature of Business and Basis of Presentation

 

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

 

During the first quarter of 2015 (the “Contribution Date”), Foresight Reserves and a member of management contributed (through their incentive distribution rights) their 100% equity interest in Sitran LLC (“Sitran”), Adena Resources LLC (“Adena”), Hillsboro Transport LLC (“Hillsboro Transport”) and Akin Energy LLC (“Akin Energy”) to FELP for no consideration (collectively, the “Contributed Companies”). The aggregate net book value of the Contributed Companies on the Contribution Date was $60.6 million. Because Sitran, Akin Energy and FELP were under common control, FELP’s historical results prior to the Contribution Date have been recast to combine the financial position and results of operations of Sitran and Akin Energy. Hillsboro Transport and Adena were consolidated as variable interest entities (“VIEs”) prior to the Contribution Date (see Note 14); therefore, the contribution did not result in a change in reporting entity. The equity values of Sitran and Akin Energy prior to the Contribution Date are included in predecessor equity in the statement of partners’ capital (deficit), and on the Contribution Date, the net book values of these entities were reclassified from predecessor equity to limited partners’ capital. Similarly, the equity values of Hillsboro Transport and Adena were reclassified from noncontrolling interests to limited partners’ capital on the Contribution Date. The controlling interest net income of the Contributed Companies prior to the Contribution Date and the controlling interest net income of FELLC prior to the IPO are included in net income attributable to predecessor equity in the consolidated statements of operations.

 

On April 16, 2015, Murray Energy Corporation (“Murray Energy”) and Foresight Reserves completed a transaction whereby Murray Energy acquired a 34% noncontrolling economic interest in FEGP and all of the outstanding subordinated units of FELP, representing a 50% ownership percentage of the Partnership’s limited partner units (see Note 13).

 

As used hereafter in this report, the terms “Foresight Energy LP,” “FELP,” the “Partnership,” “we,” “us” or like terms, refer to the combined consolidated results of Foresight Energy LP, the Contributed Companies, and FELLC and its consolidated subsidiaries and affiliates, unless the context otherwise requires or where otherwise indicated. The information presented in this Quarterly Report on Form 10-Q contains, for all periods presented, the combined consolidated financial results of Foresight Energy LP, the Contributed Companies, FELLC, and VIEs for which FELLC or its subsidiaries are the primary beneficiary.

 

The Partnership operates in a single reportable segment and currently has four underground mining complexes in the Illinois Basin: Williamson Energy, LLC (“Williamson”); Sugar Camp Energy, LLC (“Sugar Camp”); Hillsboro Energy, LLC (“Hillsboro”); and Macoupin Energy, LLC (“Macoupin”). Mining operations at our Hillsboro complex have been idled since March 2015 due to a combustion event. In April 2016, we temporarily sealed the entire mine to reduce the oxygen flow paths into the mine. We are uncertain as to when production will resume at this operation. Our mined coal is sold to a diverse customer base, including electric utility and industrial companies primarily in the eastern United States, as well as overseas markets. Intercompany transactions, including those between consolidated VIEs, the Contributed Companies, and FELP and its consolidated subsidiaries, are eliminated in consolidation.

The accompanying condensed consolidated financial statements contain all significant adjustments (consisting of normal recurring accruals) that, in the opinion of management, are necessary to present fairly, the Partnership’s condensed consolidated financial position, results of operations and cash flows for all periods presented. In preparing the condensed consolidated financial statements, management used estimates and assumptions that may affect reported amounts and disclosures. To the extent there are material differences between the estimates and actual results, the impact to the Partnership’s financial condition or results of operations could be material. The unaudited condensed consolidated financial statements do not include footnotes and certain financial information as required annually under U.S. generally accepted accounting principles (“U.S. GAAP”) and, therefore, should be read in conjunction with the annual audited consolidated financial statements for the year ended December 31, 2015 included in our Annual Report on Form 10-K filed with the SEC on March 15, 2016. The results of operations for the three months ended March 31, 2016 are not necessarily indicative of results that can be expected for any future period, including the year ending December 31, 2016.

 

7


2. New Accounting Standards

In February 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-02, Amendments to the Consolidation Analysis. ASU 2015-02 changes the requirements and analysis required when determining the reporting entity’s need to consolidate an entity, including modifying the evaluation of limited partnership variable interest status, the presumption that a general partner should consolidate a limited partnership and the consolidation criterion applied by a reporting entity involved with variable interest entities. We adopted ASU 2015-02 during the first quarter of 2016 and it did not have an impact on our historical consolidation conclusions.

 

In April 2015, the FASB issued ASU 2015-06, Effects on Historical Earnings per Unit of Master Limited Partnership Dropdown Transactions. ASU 2015-06 specifies that for purposes of calculating historical earnings per unit under the two-class method, the earnings of a transferred business before the date of a dropdown transaction should not be allocated to the limited partnership and therefore earnings per unit of the limited partners would not change as a result of the dropdown transaction. We adopted ASU 2015-06 during the first quarter of 2016 and it did not have an effect on our condensed consolidated financial statements or related disclosures.

 

In April 2015, the FASB issued ASU 2015-03, Interest – Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs. ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. We adopted ASU 2015-03 on a retrospective basis during the first quarter of 2016. The adoption of ASU 2015-03 did not affect our results of operations or cash flows, but it required us to reclassify the deferred financing costs associated with certain of our long-term debt. We reclassified approximately $15.9 million of our deferred financing costs as of December 31, 2015 to long-term debt and capital lease obligations in our condensed consolidated financial statements to adhere to ASU 2015-03. The debt issuance costs associated with our revolving credit facility and trade AR securitization program continue to be presented as a current asset on the condensed consolidated balance sheets.

 

In February 2016, the FASB issued ASU 2016-02, Leases, which contains updated guidance regarding the accounting for leases. This update requires lessees to recognize a lease liability and a lease asset for all leases, including operating leases, with a term greater than 12 months on its balance sheet. The update also expands the required quantitative and qualitative disclosures surrounding leases. This update is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years, with earlier application permitted. This update will be applied using a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. We are currently evaluating the effect of this update on our consolidated financial statements.

 

In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation (Topic 718). The pronouncement was issued to simplify the accounting for share-based payment transactions, including income tax consequences, the classification of awards as either equity or liabilities, and the classification on the statement of cash flows. This pronouncement is effective for reporting periods beginning after December 15, 2016. The impact of the adoption of ASU 2016-09 has not yet been determined.

No other new accounting pronouncement issued or effective during the fiscal year which was not previously disclosed in our Annual Report on Form 10-K had, or is expected to have, a material impact on our consolidated financial statements or related disclosures.

 

 

3. Debt Defaults and Liquidity

 

On December 4, 2015, the Delaware Court of Chancery issued a memorandum opinion concluding, among other things, that the purchase and sale agreement between Foresight Reserves and Murray Energy (see Note 13) constituted a “change of control” under the indenture (the “Indenture”) governing our 7.875% Senior Notes due 2021 (the “2021 Senior Notes”) and that an event of default occurred under the Indenture when we failed to offer to purchase the 2021 Senior Notes on or about May 18, 2015.

 

Because of the existence of “change of control” provisions and cross-default or cross-event of default provisions in our other debt agreements, the purchase and sale agreement between Foresight Reserves and Murray Energy also resulted, directly or indirectly, in events of default under FELLC’s credit agreement governing its senior secured credit facilities (the “Credit Agreement”), Foresight Receivables LLC’s receivables securitization program and certain other financing arrangements, including our longwall financing arrangements. The existence of an event of default has prohibited us access to borrowings or other extensions of credit under our revolving credit facility (“Revolving Credit Facility”).

 

On December 18, 2015, we entered into a forbearance agreement (as amended, the “Notes Forbearance Agreement”) with Wilmington Savings Fund Society, FSB, as successor indenture trustee (the “Trustee”), and certain holders of the 2021 Senior Notes, who collectively beneficially own or manage in excess of 75% of the aggregate principal amount of the 2021 Senior Notes. Under the Notes Forbearance Agreement, the noteholders and the Trustee agreed to forbear from exercising certain rights and remedies to which they may be entitled in respect of the 2021 Senior Notes or under the Indenture. The Notes Forbearance Agreement has been extended

8


through May 17, 2016, unless extended by the noteholders in their sole discretion. There can be no assurances that the noteholders party thereto will agree to any extension of the Notes Forbearance Agreement or that if such forbearance agreement is terminated early or otherwise expires or terminates pursuant to its terms, that the requisite noteholders under the Indenture will not pursue any and all remedies available to them under the Indenture or otherwise.

 

On January 27, 2016, we entered into a forbearance agreement in respect of our securitization program (as amended, the “Securitization Forbearance Agreement”), pursuant to which the agent under that facility and the lenders under the securitization program agreed to forbear from exercising certain rights and remedies to which they may be entitled. The Securitization Forbearance Agreement currently remains in effect through July 15, 2016, unless extended by the securitization lenders in their sole discretion. There can be no assurances that the securitization lenders will agree to any extension of the Securitization Forbearance Agreement or that if such forbearance agreement is terminated early or expires, that the securitization lenders will not pursue any and all remedies available to them. Also under the Securitization Forbearance Agreement, the receivables facility was amended to permanently reduce commitments to $50.0 million in total, and we may borrow up to an amount such that the aggregate amount outstanding plus any adjusted LC participation amount at such time does not exceed the least of: (i) $41.0 million, (ii) the borrowing base at such time and (iii) an amount equal to 70% of the outstanding balance of the eligible receivables.

 

We have not entered into forbearance agreements with the lenders under our equipment financing arrangements. Therefore, the lenders under the equipment financing arrangements may exercise any remedies available to them at any time. The remedies available to these lenders include acceleration of the indebtedness owed thereunder and exercising remedies with respect to our collateral securing such indebtedness. There can be no assurances that our creditors will not accelerate the indebtedness under their respective facilities or exercise any rights or remedies to which they are entitled.

 

We have not paid the $23.6 million of accrued interest owed to holders of the 2021 Senior Notes on February 16, 2016, resulting in an additional event of default. We are actively negotiating an out-of-court restructuring with certain holders of the 2021 Senior Notes, who collectively beneficially own or manage in excess of 75% of the aggregate principal amount of the 2021 Senior Notes, and our other creditors. There can be no assurance that these efforts will result in the successful consummation of such restructuring.

 

We have engaged financial and legal advisors to advise us regarding potential alternatives to address the issues described above. We cannot provide any assurance that a restructuring will be possible on acceptable terms, if at all. It may be difficult to come to an agreement that is acceptable to all of our creditors. Our failure to reach an agreement on the terms of a restructuring with our creditors or the failure to extend any forbearance agreement in connection with the related negotiations would have a material adverse effect on our liquidity, financial condition and results of operations. During the three months ended March 31, 2016, we incurred legal and financial advisors fees of $9.7 million related to the above issues, which have been recorded as debt restructuring fees in the condensed consolidated statement of operations. We expect financial and legal advisor fees to continue to be substantial until such time as the above issues are remedied, if at all.

 

If an agreement on the terms of an out-of-court restructuring is not reached, it may be necessary for us to file a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in order to implement a restructuring, or our creditors could force us into an involuntary bankruptcy or liquidation. If a plan of reorganization is implemented in a bankruptcy proceeding, it is likely that holders of claims and interests with respect to, or rights to acquire our equity securities, would likely be entitled to little or no recovery, and those claims and interests would likely be canceled for little or no consideration. If that were to occur, we anticipate that all, or substantially all, of the value of all investments in our partnership units would be lost and that our unitholders would lose all or substantially all of their investment. It is also likely that our other stakeholders, including our secured and unsecured creditors, would receive substantially less than the amount of their claims.

 

On April 18, 2016, we entered into a Transaction Support Agreement (as amended, the “Lender TSA”), with certain of the lenders (the “Consenting Lenders”) under the Credit Agreement, pursuant to which the Consenting Lenders have agreed, subject to the terms and conditions within the Lender TSA, to support a proposed global restructuring of the Partnership’s indebtedness (the “Restructuring”), including a proposed amendment and restatement (the “Amendment”) of the Credit Agreement. The proposed Amendment is conditioned upon the successful execution of a series of proposed transactions which are the subject of ongoing negotiations amongst the various stakeholders of the Partnership and its affiliates.

 

9


The negotiations between the Partnership and its affiliates and the creditors, equityholders and other stakeholders of the Partnership concerning the terms of the proposed Restructuring transactions are ongoing and are not finalized. The Partnership is in active negotiations with the holders of the 2021 Senior Notes but has not reached an agreement with them on the terms of the restructuring, including the terms of the Lender TSA. There can be no assurance that the Partnership will reach an agreement with the noteholders by May 17, 2016 nor can there be any assurance that any of the foregoing parties to whom such Restructuring transactions have been proposed will agree to the terms of any such transactions in accordance with the terms described herein, or if at all. The other creditors and stakeholders of the Partnership and its affiliates who are not party to the Lender TSA have not approved nor agreed (either implicitly or explicitly) to the terms of the Restructuring and are not bound to take (or refrain from taking) any actions as a result of the execution of the Lender TSA. See Note 19 for additional discussion.

 

Our primary cash requirements include, but are not limited to, working capital needs, capital expenditures, and debt service costs (interest and principal). Historically, our cash flows from operations and available capacity under our Revolving Credit Facility supported our cash requirements. However, our not having access to borrowings or other extensions of credit under our Revolving Credit Facility is having an adverse effect on our liquidity. Also, the recent losses incurred by the Partnership have had a significant negative impact on our compliance with the financial debt covenants under our Credit Agreement, which are calculated based on the rolling prior four quarters’ financial results. Our Credit Agreement requires that we maintain a consolidated interest coverage ratio of at least 2.00x and a consolidated net senior secured leverage ratio of no greater than 2.75x. As of March 31, 2016, our consolidated interest coverage ratio and consolidated net senior secured leverage ratio were 2.44x and 2.83x, respectively. As such, we are not in compliance with our consolidated net senior secured leverage ratio as of March 31, 2016, which constituted an additional event of default.

 

Based on the facts and circumstances discussed above, we have classified all of our debt as current liabilities in our condensed consolidated balance sheets, which has created substantial working capital deficiencies. The conditions and circumstances above raise substantial doubt about the Partnership’s ability to continue as a going concern. Our auditor’s opinion in connection with our 2015 consolidated financial statements included a “going concern” uncertainty explanatory paragraph, which has resulted or will result in an additional default and/or event of default (and may in the future result in additional defaults and/or events of default) under the terms of the Credit Agreement, the Indenture governing the 2021 Senior Notes, Foresight Receivables LLC’s securitization agreement and the credit agreements governing certain equipment financings of certain of our other subsidiaries, because of requirements in such agreements for the delivery of financial statements without a going concern explanatory paragraph in the auditor opinion and/or cross-default provisions. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount of and classification of liabilities that may result should the Partnership be unable to continue as a going concern.

 

 

4. Transition and Reorganization Costs

 

In connection with Murray Energy acquiring an ownership interest in the Partnership and its general partner, we entered into a management services agreement (“MSA”) with Murray American Coal Inc., an affiliate of Murray Energy, with the intent of optimizing and reorganizing certain corporate administrative functions and generating synergies between the two companies through the elimination of headcount and duplicate selling, general and administrative expenses (see Note 13). The costs are comprised of retention compensation to certain employees during the transition period and termination benefits to employees whose positions were replaced by Murray Energy employees under the MSA. Transition and reorganization costs were $5.9 million for the three months ended March 31, 2016. Included in transition and reorganization costs for the three months ended March 31, 2016 was $2.0 million of retention compensation expense (which was paid by Foresight Reserves during the current and prior periods and therefore was recorded as a capital contribution during the period of Foresight Reserves payment), $3.7 million of equity-based compensation for the accelerated vesting of certain equity awards, and $0.2 million of other one-time charges related to the Murray Energy transaction.

 

 

5. Commodity Derivative Contracts

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

As of March 31, 2016 and December 31, 2015, we had outstanding coal derivative swap contracts to fix the selling price on 1.0 million tons and 1.1 million tons, respectively. Swaps are designed so that the Partnership receives or makes payments based on a differential between fixed and variable prices for coal. The coal derivative contracts are economic hedges to certain future unpriced (indexed) sales commitments and expected sales through 2017. The coal derivative contracts are indexed to the Argus API 2 price index, the benchmark price for coal imported into northwest Europe. The coal derivative contracts are accounted for as freestanding derivatives and any gains or losses resulting from adjusting these contracts to fair value are recorded into earnings. We record the fair value of all positions with a given counterparty on a gross basis in the condensed consolidated balance sheets (see Note 17).

10


We have diesel fuel price exposure in our transportation and production processes and therefore are subject to commodity price risk as a result of changes in the market value of diesel fuel. Beginning in 2015, to limit our exposure to diesel fuel price volatility, we entered into swap agreements with financial institutions which provide a fixed price per unit for the volume of purchases being hedged. As of March 31, 2016 and December 31, 2015, we had swap agreements outstanding for 2016 to hedge the variable cash flows related to 0.8 million and 1.0 million gallons, respectively, of diesel fuel. The diesel fuel derivative contracts are accounted for as freestanding derivatives, and any gains or losses resulting from adjusting these contracts to fair value are recorded into earnings.

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

A summary of the unrealized and realized (losses) gains recorded on commodity derivative contracts for the three months ended March 31, 2016 and 2015 is as follows:

 

 

Three Months Ended

 

 

 

March 31, 2016

 

 

March 31, 2015

 

 

 

(In Thousands)

Unrealized (loss) gain on commodity derivative contracts and prior cumulative unrealized gains realized during the period

$

(5,642

)

 

$

15,782

 

 

Realized gain on commodity derivative contracts

 

5,119

 

 

 

13,285

 

 

(Loss) gain on commodity derivative contracts

$

(523

)

 

$

29,067

 

 

 

We received $3.3 million in proceeds during the three months ended March 31, 2015 from the settlement of derivatives that were reclassified from an operating cash flow activity to an investing activity in the consolidated statement of cash flows because the derivative contracts were settled prior to the expiration of their contractual maturities and prior to the delivery date of the underlying sales contracts.

 

6. Accounts Receivable

Accounts receivable consist of the following:

 

 

March 31,

2016

 

 

December 31,

2015

 

 

(In Thousands)

 

Trade accounts receivable

$

38,620

 

 

$

56,013

 

Other receivables

 

5,803

 

 

 

5,312

 

Total accounts receivable

$

44,423

 

 

$

61,325

 

 

 

7. Inventories

Inventories consist of the following:

 

 

March 31,

2016

 

 

December 31,

2015

 

 

(In Thousands)

 

Parts and supplies

$

22,555

 

 

$

24,276

 

Raw coal

 

4,997

 

 

 

1,906

 

Clean coal

 

37,645

 

 

 

24,470

 

Total inventories

$

65,197

 

 

$

50,652

 

 

11


 

8. Property, Plant, Equipment and Development, Net

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

 

 

March 31,

2016

 

 

December 31,

2015

 

 

(In Thousands)

 

Land, land rights and mineral rights

$

99,626

 

 

$

99,676

 

Machinery and equipment

 

1,142,504

 

 

 

1,140,256

 

Machinery and equipment under capital leases

 

126,401

 

 

 

126,401

 

Buildings and structures

 

248,587

 

 

 

248,946

 

Development costs

 

752,641

 

 

 

750,177

 

Other

 

9,370

 

 

 

9,369

 

Property, plant, equipment and development

 

2,379,129

 

 

 

2,374,825

 

Less: accumulated depreciation, depletion and amortization

 

(981,914

)

 

 

(941,632

)

Property, plant, equipment and development, net

$

1,397,215

 

 

$

1,433,193

 

 

9. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consist of the following:

 

 

March 31,

2016

 

 

December 31,

2015

 

 

(In Thousands)

 

Employee compensation, benefits and payroll taxes

$

11,194

 

 

$

12,393

 

Taxes other than income

 

7,284

 

 

 

6,560

 

Liquidated damages (non-affiliate)

 

6,745

 

 

 

6,404

 

Royalties (non-affiliate)

 

2,889

 

 

 

3,707

 

Other

 

6,321

 

 

 

6,761

 

Total accrued expenses and other current liabilities

$

34,433

 

 

$

35,825

 

 

 

10. Long-Term Debt and Capital Lease Obligations

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

 

 

March 31,

2016

 

 

December 31,

2015

 

 

(In Thousands)

 

2021 Senior Notes

$

600,000

 

 

$

600,000

 

Revolving Credit Facility

 

352,500

 

 

 

352,500

 

Term Loan

 

297,750

 

 

 

297,750

 

Trade A/R Securitization

 

21,200

 

 

 

41,000

 

5.78% longwall financing arrangement

 

50,423

 

 

 

50,423

 

5.555% longwall financing arrangement

 

46,406

 

 

 

51,563

 

Capital lease obligations

 

56,770

 

 

 

62,710

 

Subtotal - Total long-term debt and capital lease obligations principal outstanding

 

1,425,049

 

 

 

1,455,946

 

Unamortized deferred financing costs and debt discounts

 

(20,175

)

 

 

(21,380

)

Total long-term debt and capital lease obligations

 

1,404,874

 

 

 

1,434,566

 

Less: current portion

 

(1,404,874

)

 

 

(1,434,566

)

Non-current portion of long-term debt and capital lease obligations

$

 

 

$

 

 

As discussed in Note 3 and further below, we were, and continue to be as of the filing date of these statements, in default under all of our long-term debt and capital lease obligations as of March 31, 2016 and December 31, 2015, and therefore, all outstanding long-term debt and capital lease obligations are reflected as a current liability in the condensed consolidated balance sheets.

 

On December 4, 2015, the Delaware Court of Chancery issued a memorandum opinion concluding, among other things, that the purchase and sale agreement between Foresight Reserves and Murray Energy constituted a “change of control” under the Indenture

12


governing the 2021 Senior Notes and that an event of default occurred under the Indenture when we failed to offer to purchase the 2021 Senior Notes on or about May 18, 2015 (see Note 3). On February 16, 2016, we did not pay the $23.6 million accrued interest owed to the holders of the 2021 Senior Notes on such day (or within the 30-day grace period); therefore an additional event of default exists under the Indenture. We are actively negotiating an out-of-court restructuring with certain holders of the 2021 Senior Notes and our other creditors.

 

Because of the existence of change of control provisions and cross-default provisions in the Credit Agreement, the unfavorable Delaware Court of Chancery opinion and, consequently, the default under the Indenture discussed above also resulted in events of default under the Credit Agreement. As a result, we have not had access to borrowings or other extensions of credit under our Revolving Credit Facility, which is having an adverse effect on our liquidity.

 

The Revolving Credit Facility is subject to customary debt covenants, including a consolidated interest coverage ratio and a consolidated net senior secured leverage ratio. As of March 31, 2016, our consolidated interest coverage ratio and consolidated net senior secured leverage ratio were 2.44x and 2.83x, respectively. Our covenants required a consolidated interest coverage ratio of at least 2.00x and a consolidated net senior secured leverage ratio of no greater than 2.75x as of March 31, 2016. As such, we were not in compliance with our consolidated net senior secured leverage ratio as of March 31, 2016, resulting in an additional event of default.

 

On April 18, 2016, we entered into the Lender TSA with the Consenting Lenders under the Credit Agreement, pursuant to which the Consenting Lenders have agreed, subject to the terms and conditions within the Lender TSA, to support a proposed global restructuring of the Partnership’s indebtedness, including the proposed Amendment of the Credit Agreement. The proposed Amendment is conditioned upon the successful execution of a series of proposed transactions which are the subject of ongoing negotiations amongst the various stakeholders of the Partnership and its affiliates.

 

The negotiations between the Partnership and its affiliates and the creditors, equityholders and other stakeholders of the Partnership concerning the terms of the proposed Restructuring transactions are ongoing and are not finalized. The Partnership is in active negotiations with the holders of the 2021 Senior Notes but has not reached an agreement with them on the terms of the restructuring, including the terms of the Lender TSA. There can be no assurance that the Partnership will reach an agreement with the noteholders by May 17, 2016 nor can there be any assurance that any of the foregoing parties to whom such Restructuring transactions have been proposed will agree to the terms of any such transactions in accordance with the terms described herein, or if at all. The other creditors and stakeholders of the Partnership and its affiliates who are not party to the Lender TSA have not approved nor agreed (either implicitly or explicitly) to the terms of the Restructuring and are not bound to take (or refrain from taking) any actions as a result of the execution of the Lender TSA. See Notes 3 and 19 for additional discussion.

 

In January 2016, we received notice from the administrative agent to the Credit Agreement that borrowings under our Credit Agreement would be subject to the default interest rate, as defined in the Credit Agreement, which has resulted in a 2% increase to our borrowing rates. As of March 31, 2016, the weighted-average interest rate on borrowings under the Revolving Credit Facility was 5.6% and the interest rate on borrowings under the Term Loan was 7.5%. At March 31, 2016, we had $6.5 million outstanding in letters of credit.

 

In January 2016, we entered into a Securitization Forbearance Agreement pursuant to which the agent and the lenders under the Trade A/R Securitization program agreed to forbear from exercising certain rights and remedies to which they may be entitled. The Securitization Forbearance Agreement has been extended through July 15, 2016. There can be no assurances that the securitization lenders will agree to any extension of the Securitization Forbearance Agreement or that if such forbearance agreement is terminated early or expires, that the securitization lenders will not pursue any and all remedies available to them. Also under the Securitization Forbearance Agreement, the Trade A/R Securitization facility was amended to permanently reduce commitments to $50.0 million in total, and we may borrow up to an amount such that the aggregate amount outstanding plus any adjusted LC participation amount at such time does not exceed the least of (i) $41.0 million, (ii) the borrowing base at such time and (iii) an amount equal to 70% of the outstanding balance of the eligible receivables. Any extensions of credit by the lenders during the forbearance period are at the sole and absolute discretion of the lenders. As a result of the permanent reduction in capacity under this facility, we recorded a loss on extinguishment of debt charge of $0.1 million to write-off a portion of the deferred debt issue costs incurred to obtain this facility. As of March 31, 2016, we are paying the default interest rate of 5.5% on outstanding borrowings under this facility.

 

13


11. Sale-Leaseback Financing Arrangements – Affiliate

In 2009, Macoupin sold certain of its coal reserves and rail facilities to WPP, LLC (“WPP”), a subsidiary of Natural Resource Partners, LP (“NRP”), and leased them back. The gross proceeds from this transaction were $143.5 million. In 2012, Sugar Camp sold certain rail facilities to HOD, LLC (“HOD”), a subsidiary of NRP, and leased them back. The gross proceeds from this transaction were $50.0 million. NRP is an affiliated entity to the Partnership (see Note 13). In both transactions, because we had continuing involvement in the assets sold, the transactions were treated as sale-leaseback financing arrangements. Macoupin is currently in dispute with WPP in regards to the application of the recoupment provision of its lease (see Note 18).

As of March 31, 2016, the outstanding principal balance on the Macoupin and Sugar Camp sale-leaseback financing arrangements were $143.5 million and $50.0 million, respectively.

The implied effective interest rate as of March 31, 2016 on the Macoupin sale-leaseback financing arrangement and the Sugar Camp sale-leaseback financing arrangement was 13.9% and 13.2%, respectively. If there is a material change to the mine plans, the impact of a change in the effective interest rate to the condensed consolidated statement of operations could be significant. Interest expense recorded on the Macoupin sale-leaseback was $4.4 million and $5.1 million for the three months ended March 31, 2016 and 2015, respectively. Interest expense recorded on the Sugar Camp sale-leaseback was $1.4 million and $1.5 million for the three months ended March 31, 2016 and 2015, respectively. As of March 31, 2016 and December 31, 2015, interest totaling $4.6 million and $2.1 million, respectively, was accrued in the condensed consolidated balance sheets for the Macoupin and Sugar Camp sale-leaseback financing arrangements.

 

12. Asset Retirement Obligations

The change in the carrying amount of our asset retirement obligations was as follows for the three months ended March 31, 2016:

 

 

March 31, 2016

 

 

(In Thousands)

 

Balance at January 1, 2016 (including current portion)

$

43,295

 

Accretion expense

 

844

 

Expenditures for reclamation activities

 

(80

)

Balance at March 31, 2016 (including current portion)

 

44,059

 

Less: current portion of asset retirement obligations

 

(18

)

Noncurrent portion of asset retirement obligations

$

44,041

 

 

 

13. Related-Party Transactions

 

The chairman of our general partner’s board of directors and the controlling member of Foresight Reserves, Chris Cline, directly and indirectly beneficially owns a 31% and 4% interest in the general and limited partner interests of NRP, respectively. Additionally, Donald R. Holcomb, who served as a director on NRP’s board through April 2016, is the member for the Cline Trust Company LLC, which owns 20.3 million of the Partnership’s common units. We routinely engage in transactions in the normal course of business with NRP and its subsidiaries and Foresight Reserves and its affiliates. These transactions include production royalties, transportation services, administrative arrangements, coal handling and storage services, supply agreements, service agreements, land leases and sale-leaseback financing arrangements (see Note 11, sale-leaseback financing arrangements are excluded from the discussion and tables below). We also acquire, from time to time, mining equipment from Foresight Reserves and affiliated entities. Also, in connection with the reorganization of the Partnership pursuant to the execution of the MSA, Foresight Reserves paid retention bonuses to certain Partnership employees which were recorded as capital contributions during the period of payment (see Note 4).

 

On April 16, 2015, Foresight Reserves and Murray Energy executed a purchase and sale agreement whereby Murray Energy paid Foresight Reserves $1.37 billion to acquire a 34% voting interest in FEGP, 77.5% of FELP’s incentive distribution rights (“IDR”) and nearly 50% of the outstanding limited partner units in FELP, including all of the outstanding subordinated units. FEGP will continue to govern the Partnership subsequent to this transaction. As part of the transaction, Murray Energy obtained an option, subject to certain conditions described below, to purchase an additional 46% of the voting interests in FEGP for $25 million during a five-year period. Murray Energy’s ability to exercise the option is conditioned upon (i) the exercise of the call option with respect to Colt LLC, a wholly-owned subsidiary of Foresight Reserves and (ii) the refinancing of the FELP notes and FELP’s existing credit facilities on terms reasonably acceptable to Foresight Reserves, or any other transaction (whether by amendment, waiver or a consent solicitation) that would have the effect of eliminating the “change of control” provisions of the FELP notes and FELP’s existing credit facilities with respect to the exercise of the option.

 

14


Murray Management Services Agreement

 

On April 16, 2015, a MSA was executed between FEGP and Murray American Coal, Inc. (the ”Manager”), a wholly-owned subsidiary of Murray Energy, pursuant to which the Manager will provide certain management and administration services to FELP for a quarterly fee of $3.5 million ($14.0 million on an annual basis), subject to contractual adjustments. To the extent that FELP or FEGP directly incurs costs for any services covered under the MSA, then the Manager’s quarterly fee is reduced accordingly. Also, to the extent that the Manager utilizes outside service providers to perform any of the services under the MSA, then the Manager is responsible for those outside service provider costs. The initial term of the MSA extends through December 31, 2022 and is subject to termination provisions. After taking into account the contractual adjustments for direct costs incurred by FELP, the amount of net expense due to the Manager for the three months ended March 31, 2016 was $2.1 million.

 

Murray Energy Transport Lease and Overriding Royalty Agreements

 

On April 16, 2015, American Century Transport LLC (“American Transport”), a newly created subsidiary of the Partnership, entered into a purchase and sale agreement (the “PSA”) with American Energy Corporation (“American Energy”), a subsidiary of Murray Energy, pursuant to which American Energy sold to American Transport certain mining and transportation assets for $63.0 million. Concurrent with the PSA, American Transport entered into a lease agreement (the “Transport Lease”) with American Energy pursuant to which (i) American Transport will lease to American Energy a tract of real property, two coal preparation plants and related coal handling facilities at the Transport Mine situated in Belmont and Monroe Counties, Ohio and (ii) American Transport will receive from American Energy a fee ranging from $1.15 to $1.75 for every ton of coal mined, processed and/or transported using such assets, subject to a quarterly recoupable minimum fee of $1.7 million. The Transport Lease is being accounted for as a direct financing lease. The total remaining minimum payments under the Transport Lease was $97.0 million at March 31, 2016, with unearned income equal to $36.6 million. The unearned income will be reflected as other revenue over the term of the lease using the effective interest method. Any amounts in excess of the contractual minimums will be recorded as other revenue when earned. As of March 31, 2016, the outstanding Transport Lease financing receivable was $60.4 million, of which $2.6 million was classified as current in the condensed consolidated balance sheet.

 

Also, on April 16, 2015, American Century Minerals LLC (“Minerals”), a newly created subsidiary of the Partnership, entered into an overriding royalty agreement (“ORRA”) with Murray Energy subsidiaries’ American Energy and Consolidated Land Company (collectively, “AEC”), pursuant to which AEC granted to Minerals an overriding royalty interest ranging from $0.30 to $0.50 for each ton of coal mined, removed and sold from certain coal reserves situated near the Century Mine in Belmont and Monroe Counties, Ohio for $12.0 million. The ORRA is subject to a minimum recoupable quarterly fee of $0.5 million. This overriding royalty was accounted for as a financing arrangement. The payments the Partnership receives with respect to the ORRA will be reflected partially as a return of the initial investment (reduction in the affiliate financing receivable) and partially as other revenue over the life of the agreement using the effective interest method. Any amounts in excess of the contractual minimums will be recorded as other revenue when earned. The total remaining minimum payments under the ORRA was $33.6 million at March 31, 2016, with unearned income equal to $21.8 million. As of March 31, 2016, the outstanding ORRA financing receivable was $11.8 million, of which $0.2 million was classified as current in the condensed consolidated balance sheet.

 

Other Murray Transactions

 

During the three months ended March 31, 2016, we purchased $0.4 million in equipment, supplies and rebuild services from affiliates of Murray Energy. During the three months ended March 31, 2016, our affiliate, Coalfield Construction, provided $0.3 million in equipment, supplies and rebuild services to affiliates of Murray Energy.

 

During the three months ended March 31, 2016, we purchased $0.6 million in coal from Murray Energy and its affiliates to meet quality specifications under certain customer contracts.

 

During the three months ended March 31, 2016, Murray Energy transported coal under our transportation agreement with a third-party rail company resulting in usage fees owed to the third-party rail company of $3.6 million. These usage fees were billed to Murray Energy, resulting in no impact to our condensed consolidated statement of operations. The usage of the railway line with this third-party rail company by Murray Energy counts toward the minimum annual throughput volume requirement with the third-party rail company, thereby reducing the Partnership’s exposure to contractual liquidated damage charges.

 

During the three months ended March 31, 2016, we earned $0.5 million in other revenues for Murray Energy’s usage of our Sitran terminal.

 

2021 Senior Notes

 

On August 23, 2013, Cline Resource and Development Company (“CRDC”) acquired $16.5 million of outstanding principal amount of our 2021 Senior Notes (the “Original Purchase”). During September and October 2013, CRDC sold the Original Purchase primarily

15


to affiliates, including $8.0 million to Chris Cline, $4.0 million to an entity controlled by John F. Dickinson, a director of our general partner’s board of directors until December 31, 2015, and $3.2 million to Michael Beyer, the former chief executive officer of the Partnership. Additional amounts were acquired independently in 2015 by Chris Cline and The Cline Trust Company LLC, as discussed below.

 

As of March 31, 2016 and December 31, 2015, Chris Cline owned $44.5 million of the outstanding principal on our 2021 Senior Notes. Chris Cline acquired $8.0 million in principal of the Original Purchase and, during the year ended December 31, 2015, acquired an additional $36.5 million in principal from third parties in open market transactions. During the three months ended March 31, 2016 and 2015, $0 and $0.6 million, respectively, of interest on the 2021 Senior Notes was paid to Chris Cline. As of March 31, 2016 and December 31, 2015, $2.2 million and $1.3 million, respectively, of interest on the 2021 Senior Notes was accrued to the benefit of Chris Cline.

 

As of March 31, 2016 and December 31, 2015, The Cline Trust Company LLC owned $10.0 million in principal of our 2021 Senior Notes, all of which was acquired during the year ended December 31, 2015. No interest has been paid to The Cline Trust Company LLC. As of March 31, 2016 and December 31, 2015, $0.5 million and $0.3 million of interest on the 2021 Senior Notes was accrued to the benefit of The Cline Trust Company LLC.

 

The entity controlled by Mr. Dickinson, who resigned as a director of our general partner’s board of directors on December 31, 2015, owned $4.0 million of the outstanding principal on our 2021 Senior Notes as of December 31, 2015, all of which was acquired from the Original Purchase. During the three months ended March 31, 2015, $0.3 million of interest on the 2021 Senior Notes was paid to Mr. Dickinson. As of December 31, 2015, $0.1 million of interest on the 2021 Senor Notes was accrued to the benefit of the entity controlled by Mr. Dickinson.

Also, Michael Beyer, who resigned in May 2015, acquired $3.2 million in principal from the Original Purchase. Mr. Beyer disposed of his 2021 Senior Notes in September of 2015. Mr. Beyer was no longer an affiliate of the Partnership subsequent to his termination date. For the three months ended March 31, 2015, $0.3 million in interest was paid to Mr. Beyer.

Mineral Reserve Leases

Our mines have a series of mineral reserve leases with Colt, LLC (“Colt”) and Ruger, LLC (“Ruger”), subsidiaries of Foresight Reserves. Each of these leases have initial terms of 10 years with six renewal periods of five years each, at the election of the lessees, and generally require the lessees to pay the greater of $3.40 per ton or 8.0% of the gross sales price, as defined in the respective agreements, of such coal. We also have overriding royalty agreements with Ruger pursuant to which we pay royalties equal to 8.0% of the gross selling price, as defined in the agreements. Each of these mineral reserve leases generally requires a minimum annual royalty payment, which is recoupable only against actual production royalties from future tons mined during the period of 10 years following the date on which any such royalty is paid.

We also lease mineral reserves under lease agreements with subsidiaries of NRP, including WPP, HOD, and Independence Energy, LLC (“Independence”). The initial terms of these agreements vary, however, and each carries an option by the lessee to extend the leases until all merchantable and mineable coal has been mined and removed. Royalty payments under these arrangements are generally determined based on the greater of a minimum per ton amount (ranging from $2.50 per ton to $5.40 per ton) or a percentage of the gross sales price (generally 8.0% - 9.0%), as defined in the respective agreements. We are also subject under certain of these mineral reserve agreements to overriding royalties and/or wheelage fees. Our mineral reserve leases with NRP subsidiaries generally also require minimum quarterly or annual royalties which are generally recoupable on future tons mined and sold during the preceding five-year period from the excess tonnage royalty payments on a first paid, first recouped basis.

In July 2015, we provided notice to WPP declaring a force majeure event at our Hillsboro mine due to elevated carbon monoxide levels as a result of a mine fire, which has required the stoppage of mining operations since March 2015. As a result of the force majeure event, we have not made $23.6 million in minimum deficiency payments to WPP in accordance with the force majeure provisions of the royalty agreement. WPP is asserting that the stoppage of mining operations as a result of the mine fire does not constitute an event of force majeure under the royalty agreement (see Note 18).

As of March 31, 2016 and December 31, 2015, we have established a $43.2 million and $46.3 million reserve, respectively, against contractual prepaid royalties between Hillsboro and WPP given that the recoupment of certain prior minimum royalty payments was improbable given the remaining recoupment period available and forecasted demand for Hillsboro coal based on current and forecasted near-term market conditions. During the three months ended March 31, 2016, the recoupment period of $3.1 million in prepaid royalties between Hillsboro and WPP expired, resulting in the write-off of the prepaid royalty and the corresponding reserve. We continually evaluate our ability to recoup prepaid royalty balances which includes, among other things, assessing mine production plans, sales commitments, current and forecasted future coal market conditions, and remaining years available for recoupment.

16


Convent Marine Terminal Amendment

In August 2011, an affiliated company owned by Foresight Reserves acquired the IC RailMarine Terminal in Convent, Louisiana. This terminal, commonly referred to as the Convent Marine Terminal (“CMT”), is owned by Raven Energy LLC (“Raven”), an entity once controlled and beneficially owned by Christopher Cline. The terminal is designed to ship and receive commodities via rail, river barge and ocean vessel. We have a materials handling and storage agreement for throughput at the terminal under which we pay fees based on the tonnages of coal we move through the terminal, subject to minimum annual take-or-pay volume commitments. Effective May 1, 2015, the Partnership amended its materials handling and storage agreement with Raven to reduce the minimum annual throughput volume at CMT to 5.0 million tons and to extend the duration of the contract by one year to 2022. In August 2015, The Cline Group sold Raven to an entity under which it does not have significant influence; therefore the business activities with Raven are no longer considered affiliate transactions subsequent to the sale date.

Limited Partnership Agreement

The Partnership’s general partner manages the Partnership’s operations and activities as specified in the partnership agreement. The general partner of the Partnership is managed by its board of directors. Foresight Reserves and Murray Energy have the right to select the directors of the general partner. The members of the board of directors of the general partner are not elected by the unitholders and are not subject to reelection by the unitholders. The officers of the general partner manage the day-to-day affairs of the Partnership’s business. The partnership agreement provides that the Partnership will reimburse its general partner for all direct and indirect expenses incurred or payments made by the general partner on behalf of the Partnership.

 

The following table summarizes certain affiliate amounts included in our condensed consolidated balance sheets:

 

Affiliated Company

 

Balance Sheet Location

 

March 31,

2016

 

 

December 31,

2015

 

 

 

 

 

(In Thousands)

 

Foresight Reserves and affiliated entities

 

Due from affiliates - current

 

$

123

 

 

$

145

 

Murray Energy and affiliated entities

 

Due from affiliates - current

 

 

3,923

 

 

 

16,316

 

NRP and affiliated entities

 

Due from affiliates - current

 

 

84

 

 

 

154

 

Total

 

 

 

$

4,130

 

 

$

16,615

 

 

 

 

 

 

 

 

 

 

 

 

Murray Energy and affiliated entities

 

Financing receivables - affiliate - current

 

$

2,741

 

 

$

2,689

 

Total

 

 

 

$

2,741

 

 

$

2,689

 

 

 

 

 

 

 

 

 

 

 

 

Murray Energy and affiliated entities

 

Due from affiliates - noncurrent

 

$

1,843

 

 

$

2,691

 

Total

 

 

 

$

1,843

 

 

$

2,691

 

 

 

 

 

 

 

 

 

 

 

 

Murray Energy and affiliated entities

 

Financing receivables - affiliate - noncurrent

 

$

69,434

 

 

$

70,139

 

Total

 

 

 

$

69,434

 

 

$

70,139

 

 

 

 

 

 

 

 

 

 

 

 

Foresight Reserves and affiliated entities

 

Prepaid royalties - current and noncurrent

 

$

67,832

 

 

$

69,555

 

NRP and affiliated entities

 

Prepaid royalties - current and noncurrent

 

 

404

 

 

 

 

Total

 

 

 

$

68,236

 

 

$

69,555

 

 

 

 

 

 

 

 

 

 

 

 

Foresight Reserves and affiliated entities

 

Due to affiliates - current

 

$

2,595

 

 

$

1,054

 

Murray Energy and affiliated entities

 

Due to affiliates - current

 

 

3,880

 

 

 

5,020

 

NRP and affiliated entities

 

Due to affiliates - current

 

 

1,792

 

 

 

2,462

 

Total

 

 

 

$

8,267

 

 

$

8,536

 

 

17


A summary of certain expenses (income) incurred with affiliated entities is as follows for the three months ended March 31, 2016 and 2015:

 

Three Months Ended

 

 

 

March 31, 2016

 

 

March 31, 2015

 

 

 

(In Thousands)

Coal sales – Murray Energy and affiliated entities (1)

$

30

 

 

$

 

 

Overriding royalty and lease revenues – Murray Energy and affiliated entities (2)

$

(2,470

)

 

$

 

 

Terminal revenues - Murray Energy and affiliated entities (2)

$

(518

)

 

$

 

 

Royalty expense NRP and affiliated entities (3)

$

2,843

 

 

$

9,006

 

 

Royalty expense – Foresight Reserves and affiliated entities (3)

$

3,447

 

 

$

2,630

 

 

Loadout services – NRP and affiliated entities (3)

$

1,723

 

 

$

2,325

 

 

Purchased goods and services – Murray Energy and affiliated entities (4)

$

392

 

 

$

 

 

Purchased coal - Murray Energy and affiliated entities (5)

$

550

 

 

$

 

 

Terminal fees – Foresight Reserves and affiliated entities (6)

$

 

 

$

9,264

 

 

Management services  – Murray Energy and affiliated entities (7)

$

2,078

 

 

$

 

 

Administrative fee income – Foresight Reserves and affiliated entities (8)

$

 

 

$

(47

)

 

 

Principal location in the condensed consolidated financial statements:

(1) – Coal sales

(2) – Other revenues

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

(4) – Cost of coal produced (excluding depreciation, depletion and amortization) and property, plant and equipment, as applicable

(5) – Cost of coal purchased

(6) – Transportation

(7) – Selling, general and administrative

(8) – Other operating income, net

 

We also purchased $2.1 million and $4.3 million in mining supplies from an affiliated joint venture under a supply agreement during the three months ended March 31, 2016 and 2015, respectively (see Note 14).

 

14. Variable Interest Entities (VIEs)

Our financial statements include VIEs for which the Partnership or one of its subsidiaries is the primary beneficiary. Among those VIEs consolidated by the Partnership and its subsidiaries are Mach Mining, LLC; M-Class Mining, LLC; MaRyan Mining LLC; Patton Mining LLC; Viking Mining LLC; Coal Field Construction Company LLC; Coal Field Repair Services LLC; and LD Labor Company LLC (collectively, the “Contractor VIEs”). Each of the Contractor VIEs holds a contract to provide one or more of the following services to a Partnership subsidiary: contract mining, processing and loading services, or construction and maintenance services. Each of the Contractor VIEs generally receives a nominal per ton fee ($0.01 to $0.02 per ton) above its cost of operations as compensation for services performed. All of these entities were determined not to have sufficient equity at risk and are therefore VIEs. The Partnership was determined to be the primary beneficiary of each of these entities given it controls these entities under a contractual cost-plus arrangement. During each of the three months ended March 31, 2016 and 2015, in aggregate, the Contractor VIEs earned income of $0.1 million under the contractual arrangements with the Partnership which was recorded as net income attributable to noncontrolling interests in the condensed consolidated statements of operations.

In January 2016, we contributed $2.5 million to a new entity, Foresight Surety LLC (“Foresight Surety”), whose purpose was to obtain and maintain a letter of credit for the benefit of one of our surety bond providers. We hold all of the economic units of Foresight Surety and a professional service provider with which we have had a long-standing relationship holds all of the voting rights in Foresight Surety. Foresight Surety is a VIE given that the holder of all of the economic rights has no ability to exercise power over it. We were determined to be the primary beneficiary of Foresight Surety, and therefore consolidate Foresight Surety, as the professional service provider with all of the voting rights was determined to be acting as our de facto agent and therefore we would aggregate voting power. In February 2016, Foresight Surety obtained a $2.5 million letter of credit with a lender for the benefit of one of our surety bond providers. The letter of credit is secured by the $2.5 million of cash we contributed to Foresight Surety.

On August 23, 2013, FELLC effected a reorganization pursuant to which certain transportation assets were distributed to its members (the “2013 Reorganization”). Among the assets distributed were Adena and Hillsboro Transport. Subsequent to the 2013 Reorganization, both of these entities were identified as VIEs and continued to be consolidated by FELLC. During the first quarter of 2015, Adena and Hillsboro Transport were contributed to the Partnership by Foresight Reserves and a member of management and are therefore no longer consolidated as VIEs (see Note 1).

18


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

 

 

March 31,

2016

 

 

December 31,

2015

 

 

(In Thousands)

 

Assets:

 

 

 

 

 

 

 

Current assets (1)

$

3,743

 

 

$

4,933

 

Long-term assets

 

2,500

 

 

 

 

Total assets (1)

$

6,243

 

 

$

4,933

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

Current liabilities

$

13,798

 

 

$

12,835