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EX-95.1 - EX-95.1 - Foresight Energy LPfelp-ex951_7.htm
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EX-31.2 - EX-31.2 - Foresight Energy LPfelp-ex312_6.htm
EX-31.1 - EX-31.1 - Foresight Energy LPfelp-ex311_10.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended September 30, 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      No  

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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

 

  (do not check if a smaller reporting company)

  

Smaller reporting company

 

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

As of November 4, 2016, the registrant had 66,104,673 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 September 30, 2016 and December 31, 2015

3

Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2016 and 2015

4

Unaudited Condensed Consolidated Statement of Partners’ (Deficit) Capital for the Nine Months Ended September 30, 2016

5

Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 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

37

Item 4.Controls and Procedures

38

PART II

 

OTHER INFORMATION

 

Item 1.Legal Proceedings

38

Item 1A.Risk Factors

38

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

39

Item 3.Defaults Upon Senior Securities

39

Item 4.Mine Safety Disclosures

39

Item 5.Other Information

39

Signatures

40

Item 6.Exhibits

41

 

 

2


PART I – FINANCIAL INFORMATION.

 

Item 1. Financial Statements.

Foresight Energy LP

Unaudited Condensed Consolidated Balance Sheets

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

December 31,

 

 

2016

 

 

2015

 

 

(In Thousands)

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

76,847

 

 

$

17,538

 

Accounts receivable

 

64,622

 

 

 

61,325

 

Due from affiliates

 

10,526

 

 

 

16,615

 

Financing receivables - affiliate

 

2,849

 

 

 

2,689

 

Inventories, net

 

39,942

 

 

 

50,652

 

Prepaid expenses

 

7,883

 

 

 

5,498

 

Prepaid royalties

 

838

 

 

 

5,386

 

Deferred longwall costs

 

14,541

 

 

 

18,476

 

Coal derivative assets

 

11,654

 

 

 

26,596

 

Other current assets

 

3,209

 

 

 

5,565

 

Total current assets

 

232,911

 

 

 

210,340

 

Property, plant, equipment and development, net

 

1,335,999

 

 

 

1,433,193

 

Due from affiliates

 

1,843

 

 

 

2,691

 

Financing receivables - affiliate

 

67,982

 

 

 

70,139

 

Prepaid royalties

 

72,149

 

 

 

70,300

 

Coal derivative assets

 

3,068

 

 

 

22,027

 

Other assets

 

21,871

 

 

 

12,493

 

Total assets

$

1,735,823

 

 

$

1,821,183

 

Liabilities and partners’ (deficit) capital

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Current portion of long-term debt and capital lease obligations

$

68,057

 

 

$

1,434,566

 

Accrued interest

 

6,061

 

 

 

24,574

 

Accounts payable

 

52,071

 

 

 

55,192

 

Accrued expenses and other current liabilities

 

41,126

 

 

 

35,825

 

Due to affiliates

 

10,226

 

 

 

8,536

 

Total current liabilities

 

177,541

 

 

 

1,558,693

 

Long-term debt and capital lease obligations

 

1,345,142

 

 

 

 

Long-term accrued interest

 

4,174

 

 

 

 

Sale-leaseback financing arrangements

 

193,220

 

 

 

193,434

 

Asset retirement obligations

 

45,571

 

 

 

43,277

 

Warrant liability

 

32,593

 

 

 

 

Other long-term liabilities

 

7,613

 

 

 

6,896

 

Total liabilities

 

1,805,854

 

 

 

1,802,300

 

Limited partners' capital (deficit):

 

 

 

 

 

 

 

Common unitholders (66,105 and 65,192 units outstanding as of September 30, 2016 and December 31, 2015, respectively)

 

143,057

 

 

 

186,660

 

Subordinated unitholder (64,955 units outstanding as of September 30, 2016 and December 31, 2015)

 

(213,088

)

 

 

(166,061

)

Total limited partners' (deficit) capital

 

(70,031

)

 

 

20,599

 

Noncontrolling interests

 

 

 

 

(1,716

)

Total partners' (deficit) capital

 

(70,031

)

 

 

18,883

 

Total liabilities and partners' (deficit) capital

$

1,735,823

 

 

$

1,821,183

 

 

See accompanying notes.

 

 

3


Foresight Energy LP

Unaudited Condensed Consolidated Statements of Operations

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

(In Thousands, Except per Unit Data)

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Coal sales

$

228,472

 

 

$

251,125

 

 

$

615,662

 

 

$

739,940

 

Other revenues

 

2,353

 

 

 

1,941

 

 

 

7,249

 

 

 

3,263

 

Total revenues

 

230,825

 

 

 

253,066

 

 

 

622,911

 

 

 

743,203

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

110,311

 

 

 

128,195

 

 

 

311,557

 

 

 

360,769

 

Cost of coal purchased

 

183

 

 

 

5,055

 

 

 

733

 

 

 

7,063

 

Transportation

 

33,324

 

 

 

34,377

 

 

 

96,679

 

 

 

127,757

 

Depreciation, depletion and amortization

 

43,637

 

 

 

54,152

 

 

 

125,521

 

 

 

145,701

 

Accretion on asset retirement obligations

 

844

 

 

 

567

 

 

 

2,532

 

 

 

1,700

 

Selling, general and administrative

 

7,340

 

 

 

4,761

 

 

 

18,648

 

 

 

25,285

 

Transition and reorganization costs

 

 

 

 

5,037

 

 

 

6,889

 

 

 

17,288

 

Loss (gain) on commodity derivative contracts

 

5,987

 

 

 

(17,541

)

 

 

17,270

 

 

 

(40,703

)

Other operating expense (income), net

 

(2,215

)

 

 

384

 

 

 

(2,124

)

 

 

(13,872

)

Operating income

 

31,414

 

 

 

38,079

 

 

 

45,206

 

 

 

112,215

 

Other expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

37,939

 

 

 

29,891

 

 

 

105,269

 

 

 

86,591

 

Debt restructuring costs

 

6,072

 

 

 

 

 

 

21,702

 

 

 

 

Change in fair value of warrants

 

(1,452

)

 

 

 

 

 

(1,452

)

 

 

 

Loss on extinguishment of debt

 

13,186

 

 

 

 

 

 

13,294

 

 

 

 

Net (loss) income

 

(24,331

)

 

 

8,188

 

 

 

(93,607

)

 

 

25,624

 

Less: net (loss) income attributable to noncontrolling interests

 

(45

)

 

 

118

 

 

 

169

 

 

 

652

 

Net (loss) income attributable to controlling interests

 

(24,286

)

 

 

8,070

 

 

 

(93,776

)

 

 

24,972

 

Less: net income attributable to predecessor equity

 

 

 

 

 

 

 

 

 

 

23

 

Net (loss) income attributable to limited partner units

$

(24,286

)

 

$

8,070

 

 

$

(93,776

)

 

$

24,949

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common unitholders

$

(12,249

)

 

$

4,041

 

 

$

(47,135

)

 

$

12,486

 

Subordinated unitholders

$

(12,037

)

 

$

4,029

 

 

$

(46,641

)

 

$

12,463

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common unitholders

$

(0.19

)

 

$

0.06

 

 

$

(0.72

)

 

$

0.19

 

Subordinated unitholders

$

(0.19

)

 

$

0.06

 

 

$

(0.72

)

 

$

0.19

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average limited partner units outstanding - basic and diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common units

 

66,098

 

 

 

65,156

 

 

 

65,737

 

 

 

65,067

 

Subordinated units

 

64,955

 

 

 

64,955

 

 

 

64,955

 

 

 

64,927

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distributions declared per limited partner unit

$

 

 

$

0.38

 

 

$

 

 

$

1.11

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes.

 

4


Foresight Energy LP

Unaudited Condensed Consolidated Statement of Partners’ (Deficit) Capital

 

 

Limited Partners

 

 

 

 

 

 

 

 

 

 

Common

 

 

Number of

 

 

Subordinated

 

 

Number of

 

 

Noncontrolling

 

 

Total Partners'

 

 

Unitholders

 

 

Common Units

 

 

Unitholder

 

 

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

 

(47,135

)

 

 

 

 

 

(46,641

)

 

 

 

 

 

169

 

 

 

(93,607

)

Cash distributions

 

 

 

 

 

 

 

 

 

 

 

 

 

(182

)

 

 

(182

)

Deemed distribution - acquisition of variable interest entities

 

(922

)

 

 

 

 

 

(907

)

 

 

 

 

 

1,729

 

 

 

(100

)

Capital contribution from Foresight Reserves LP

 

525

 

 

 

 

 

 

521

 

 

 

 

 

 

 

 

 

1,046

 

Equity-based compensation

 

4,711

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,711

 

Issuance of equity-based awards

 

 

 

 

912,284

 

 

 

 

 

 

 

 

 

 

 

 

 

Distribution equivalent rights on LTIP awards

 

28

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

28

 

Net settlement of withholding taxes on issued LTIP awards

 

(810

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(810

)

Balance at September 30, 2016

$

143,057

 

 

 

66,104,673

 

 

$

(213,088

)

 

 

64,954,691

 

 

$

-

 

 

$

(70,031

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes.

 

5


 

Foresight Energy LP

Unaudited Condensed Consolidated Statements of Cash Flows

 

 

Nine Months Ended

 

 

September 30,

 

 

2016

 

 

2015

 

Cash flows from operating activities

(In Thousands)

 

Net (loss) income

$

(93,607

)

 

$

25,624

 

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

 

 

 

 

 

 

 

Depreciation, depletion and amortization

 

125,521

 

 

 

145,701

 

Equity-based compensation

 

4,711

 

 

 

12,897

 

Loss (gain) on commodity derivative contracts

 

17,270

 

 

 

(40,703

)

Settlements of commodity derivative contracts

 

13,112

 

 

 

51,556

 

Settlements of commodity derivative contracts included in investing activities

 

 

 

 

(19,073

)

Transition and reorganization expenses paid by Foresight Reserves (affiliate)

 

2,333

 

 

 

8,031

 

Current period interest expense converted into debt

 

31,484

 

 

 

 

Non-cash debt extinguishment expense

 

11,125

 

 

 

 

Other

 

9,025

 

 

 

6,822

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

(3,297

)

 

 

22,676

 

Due from/to affiliates, net

 

8,627

 

 

 

(25,406

)

Inventories

 

9,737

 

 

 

(3,806

)

Prepaid expenses and other current assets

 

(2,549

)

 

 

2,265

 

Prepaid royalties

 

2,699

 

 

 

(1,820

)

Commodity derivative assets and liabilities

 

2,624

 

 

 

(2,447

)

Accounts payable

 

(3,121

)

 

 

(21,625

)

Accrued interest

 

3,380

 

 

 

(14,451

)

Accrued expenses and other current liabilities

 

5,843

 

 

 

(4,085

)

Other

 

1,422

 

 

 

(2,390

)

Net cash provided by operating activities

 

146,339

 

 

 

139,766

 

Cash flows from investing activities

 

 

 

 

 

 

 

Investment in property, plant, equipment and development

 

(28,031

)

 

 

(69,502

)

Investment in financing arrangements with Murray Energy (affiliate)

 

 

 

 

(75,000

)

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

 

1,997

 

 

 

1,112

 

Settlements of certain coal derivatives

 

 

 

 

19,073

 

Other

 

2,359

 

 

 

 

Net cash used in investing activities

 

(23,675

)

 

 

(124,317

)

Cash flows from financing activities

 

 

 

 

 

 

 

Net change in borrowings under revolving credit facility

 

 

 

 

58,000

 

Net change in borrowings under A/R securitization program

 

(12,200

)

 

 

50,000

 

Proceeds from other long-term debt

 

 

 

 

59,325

 

Payments on other long-term debt and capital lease obligations

 

(33,499

)

 

 

(33,274

)

Payments on short-term debt

 

(653

)

 

 

(2,010

)

Distributions paid

 

(182

)

 

 

(144,748

)

Debt issuance costs paid

 

(15,825

)

 

 

(2,751

)

Other

 

(996

)

 

 

(1,507

)

Net cash used in financing activities

 

(63,355

)

 

 

(16,965

)

Net increase (decrease) in cash and cash equivalents

 

59,309

 

 

 

(1,516

)

Cash and cash equivalents, beginning of period

 

17,538

 

 

 

26,509

 

Cash and cash equivalents, end of period

$

76,847

 

 

$

24,993

 

Supplemental information, including disclosures of non-cash financing activities:

 

 

 

 

 

 

 

Interest paid, net of amounts capitalized

$

63,972

 

 

$

96,050

 

Interest converted into debt

$

49,203

 

 

$

 

Fair value of warrants issued

$

34,045

 

 

$

 

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

$

1,046

 

 

$

10,507

 

Modifications to capital lease obligations

$

663

 

 

$

 

Short-term insurance financing

$

603

 

 

$

2,809

 

 

 

 

 

 

 

 

 

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. FELP has been managed by Foresight Energy GP LLC (“FEGP”) since the IPO.  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.

 

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, 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, 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 (the “Hillsboro 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, 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 and nine months ended September 30, 2016 are not necessarily indicative of results that can be expected for any future period, including the year ending December 31, 2016.

 

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

7


 

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 deferred financing costs associated with our revolving credit facility and trade AR securitization program continue to be presented as an 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 2016-09, Compensation – Stock Compensation, which was issued to simplify the accounting for share-based payment transactions, including income tax consequences, the classification of awards as equity or liabilities, an option to recognize gross equity-based compensation expense with actual forfeitures recognized as they occur and the classification on the statement of cash flows. This pronouncement is effective for reporting periods beginning after December 15, 2016. We do not expect the adoption of this update to have a material impact on our consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Payments, which provides guidance on eight specific cash flow issues with the objective of reducing diversity in practice. The guidance is effective for interim and annual periods beginning after December 15, 2017. We early adopted this standard during the current quarter and as a result presented all cash costs for debt prepayment and debt extinguishment as cash outflows from financing activities. The prior period presented had no such costs.

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. Restructuring Transactions

 

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 (the “2015 Delaware Court of Chancery change-of-control litigation”). Because of the existence of “change of control” provisions and cross-default or cross-event of default provisions in our 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 securitization program and certain other financing arrangements, including our longwall financing arrangements. The existence of an event of default prohibited us access to borrowings or other extensions of credit under our revolving credit facility and our failure to pay the semi-annual interest payments of $23.6 million due on February 15, 2016 and August 15, 2016 resulted in additional events of default. These conditions and circumstances above raised prior substantial doubt about the Partnership’s ability to continue as a going concern and therefore our auditor’s issued an audit opinion in connection with our 2015 consolidated financial statements with a “going concern” uncertainty explanatory paragraph.

 

On July 22, 2016, we entered into Amended and Restated Transaction Support Agreements (the “A&R Notes Transaction Support Agreements”) with existing consenting noteholders of the 2021 Senior Notes and certain equityholders of the Partnership, including Christopher Cline, Foresight Reserves LP and certain of its related parties and affiliates and Murray Energy, pursuant to which the parties agreed to modified terms of the restructuring of the Partnership’s indebtedness and certain governance and equity matters relating to the Partnership.

 

On August 30, 2016 (the “Closing Date”), we completed a global restructuring of our indebtedness. The restructuring transactions (the “Restructuring Transactions”), as described herein, alleviated existing defaults and events of default across the Partnership’s capital structure that resulted from the 2015 Delaware Court of Chancery change-of-control litigation related to the purchase and sale agreement between Foresight Reserves and Murray Energy. See Notes 10 and 13 for additional discussion on the debt restructuring and certain governance and other matters impacted by the Restructuring Transactions.

8


 

 

During the three and nine months ended September 30, 2016, we incurred legal and financial advisor fees of $6.1 million and $21.7 million, respectively, related to the above issues, which have been recorded as debt restructuring costs in the condensed consolidated statements of operations.

 

 

4. Transition and Reorganization Costs

 

In April 2015, in connection with Murray Energy acquiring an ownership interest in the Partnership and its general partner, we entered into a Management Services Agreement with Murray American Coal Inc. (the “Manager”), a subsidiary of Murray Energy (the “MSA”), 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 were primarily comprised of retention compensation to certain employees during the transition period and termination benefits to employees whose positions were eliminated as a result of the MSA. Transition and reorganization costs were comprised of the following for the three and nine months ended September 30, 2016 and 2015:

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30, 2016

 

 

September 30, 2015

 

 

September 30, 2016

 

 

September 30, 2015

 

 

(In Thousands)

 

Retention compensation paid by Foresight Reserves and pushed down to FELP

$

 

 

$

2,273

 

 

$

2,333

 

 

$

8,031

 

Equity-based compensation

 

 

 

 

1,252

 

 

 

4,315

 

 

 

3,900

 

Cash retention and termination benefits

 

 

 

 

1,345

 

 

 

 

 

 

4,743

 

Legal and other charges

 

 

 

 

167

 

 

 

241

 

 

 

614

 

Transition and reorganization costs

$

 

 

$

5,037

 

 

$

6,889

 

 

$

17,288

 

 

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 September 30, 2016 and December 31, 2015, we had outstanding coal derivative swap contracts to fix the selling price on 0.7 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 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).

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 September 30, 2016 and December 31, 2015, we had swap agreements outstanding for 2016 to hedge the variable cash flows related to 0.3 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.

9


 

A summary of the settlements of commodity derivative contracts and (loss) gain on commodity derivative contracts for the three and nine months ended September 30, 2016 and 2015 is as follows:

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30, 2016

 

 

September 30, 2015

 

 

September 30, 2016

 

 

September 30, 2015

 

 

(In Thousands)

 

Settlements of commodity derivative contracts

$

3,191

 

 

$

10,925

 

 

$

13,112

 

 

$

51,556

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) gain on commodity derivative contracts

$

(5,987)

 

 

$

17,541

 

 

$

(17,270)

 

 

$

40,703

 

 

We received $19.1 million in proceeds during the nine months ended September 30, 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:

 

 

September 30,

2016

 

 

December 31,

2015

 

 

(In Thousands)

 

Trade accounts receivable

$

52,385

 

 

$

56,013

 

Other receivables

 

12,237

 

 

 

5,312

 

Total accounts receivable

$

64,622

 

 

$

61,325

 

 

 

7. Inventories, Net

Inventories consist of the following:

 

 

September 30,

2016

 

 

December 31,

2015

 

 

(In Thousands)

 

Parts and supplies

$

19,765

 

 

$

24,276

 

Raw coal

 

4,773

 

 

 

1,906

 

Clean coal

 

15,404

 

 

 

24,470

 

Total inventories, net

$

39,942

 

 

$

50,652

 

 

 

8. Property, Plant, Equipment and Development, Net

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

 

 

September 30,

2016

 

 

December 31,

2015

 

 

(In Thousands)

 

Land, land rights and mineral rights

$

100,768

 

 

$

99,676

 

Machinery and equipment

 

1,147,666

 

 

 

1,140,256

 

Machinery and equipment under capital leases

 

127,064

 

 

 

126,401

 

Buildings and structures

 

248,597

 

 

 

248,946

 

Development costs

 

765,082

 

 

 

750,177

 

Other

 

9,249

 

 

 

9,369

 

Property, plant, equipment and development

 

2,398,426

 

 

 

2,374,825

 

Less: accumulated depreciation, depletion and amortization

 

(1,062,427

)

 

 

(941,632

)

Property, plant, equipment and development, net

$

1,335,999

 

 

$

1,433,193

 

10


 

 

9. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consist of the following:

 

 

September 30,

2016

 

 

December 31,

2015

 

 

(In Thousands)

 

Employee compensation, benefits and payroll taxes

$

11,818

 

 

$

12,393

 

Taxes other than income

 

5,719

 

 

 

6,560

 

Liquidated damages

 

10,037

 

 

 

6,404

 

Royalties (non-affiliate)

 

3,043

 

 

 

3,707

 

Other

 

10,509

 

 

 

6,761

 

Total accrued expenses and other current liabilities

$

41,126

 

 

$

35,825

 

 

 

10. Long-Term Debt and Capital Lease Obligations

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

 

 

September 30,

2016

 

 

December 31,

2015

 

 

(In Thousands)

 

2021 Second Lien Notes

$

349,100

 

 

$

 

2017 Exchangeable PIK Notes

 

299,859

 

 

 

 

2021 Senior Notes

 

 

 

 

600,000

 

Revolving Credit Facility

 

352,500

 

 

 

352,500

 

Term Loan

 

297,750

 

 

 

297,750

 

Trade A/R Securitization

 

28,800

 

 

 

41,000

 

5.78% longwall financing arrangement

 

44,820

 

 

 

50,423

 

5.555% longwall financing arrangement

 

41,250

 

 

 

51,563

 

Capital lease obligations

 

45,964

 

 

 

62,710

 

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

 

1,460,043

 

 

 

1,455,946

 

Unamortized deferred financing costs and debt discounts

 

(46,844

)

 

 

(21,380

)

Total long-term debt and capital lease obligations

 

1,413,199

 

 

 

1,434,566

 

Less: current portion

 

(68,057

)

 

 

(1,434,566

)

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

$

1,345,142

 

 

$

 

On August 30, 2016, we completed a global restructuring of our indebtedness. The Restructuring Transactions described below alleviated certain defaults and events of default across the Partnership’s capital structure that resulted from the 2015 Delaware Court of Chancery change-of-control litigation related to the purchase and sale agreement between Foresight Reserves and Murray Energy. As a result of the Restructuring Transactions and the resolution of the 2015 Delaware Court of Chancery change-of-control litigation, certain of our outstanding long-term debt and capital lease obligations are no longer reflected as a current liability in the condensed consolidated balance sheets and we are no longer subject to default interest rates.

Also, as a result of the Restructuring Transactions, a loss on the early extinguishment of debt of $13.2 million was recognized during the three months ended September 30, 2016 for the write-off of $11.0 million of unamortized debt discount and debt issuance costs associated with the extinguishment of our 7.875% Senior Notes due 2021 and the reduction in borrowing capacity under our Revolving Credit Facility and due to the incurrence of $2.2 million in costs related to the modification of our debt which were expensed in accordance with the authoritative accounting literature on debt modifications. Lender and third-party professional fees totaling $13.5 million were deferred and will be amortized over the remaining lives of the respective debt instruments.

Exchange of 2021 Senior Notes for New Notes and Warrants

On the Closing Date, the Partnership exchanged $599.8 million in aggregate principal amount of our 2021 Senior Notes and the accrued and unpaid interest thereon for the following consideration:

 

 

 

(i) $349.1 million in aggregate principal of Senior Secured Second Lien PIK Notes due 2021 (the “Second Lien Notes”);

11


 

  

 

(ii) $299.9 million in aggregate principal of Senior Secured Second Lien Exchangeable PIK Notes due 2017 (the

Exchangeable PIK Notes,” and, together with the Second Lien Notes, the “New Notes”); and

  

 

(iii) 516,825 warrants (the “Warrants”) to acquire newly issued common units of FELP (the “Common Units”) equal to 4.5% of the total limited partner units of FELP outstanding on the date of a Note Redemption (as defined below) (after giving effect to the full exercise thereof and the Note Redemption).

On the Closing Date, we also redeemed the remaining $175,000 in aggregate principal amount of 2021 Senior Notes that were not exchanged. Upon such redemption, the obligations under the 2021 Senior Notes were satisfied and discharged.

The Warrants were determined to meet the criteria of a detachable freestanding derivative liability instrument and the calculated fair value of the Warrants on the Closing Date was $34.0 million. See Note 17 for additional discussion on the fair value of the Warrants. A liability for the fair value of the Warrants was recorded in our condensed consolidated balance sheet as of the Closing Date and the offset was recognized as a debt discount to the New Notes.  The discount was allocated pro rata between the Second Lien Notes and the Exchangeable PIK Notes in proportion to the relative fair value of each instrument held by a person other than the Reserves Group (see Note 13) on the Closing Date (only the unaffiliated holders of the New Notes received the Warrants on the Closing Date). The $25.0 million discount allocated to the Second Lien Notes and the $9.0 million discount allocated to the Exchangeable PIK Notes will be amortized using the effective interest method over their respective maturities.

Terms of the New Notes

The Second Lien Notes were issued pursuant to an indenture and have a maturity date of August 15, 2021. The Second Lien Notes bear interest at a rate of: (i) 9.0% per annum until August 15, 2018 and 10.0% per annum thereafter, in each case, payable in cash on each interest payment date; and (ii) 1.0% per annum payable in kind. Interest will be payable semi-annually on February 15th and August 15th, commencing on February 15, 2017. The Issuers may redeem the Second Lien Notes in whole or in part subject to the redemption premiums and provisions in the indenture.  

The Exchangeable PIK Notes were issued pursuant to an indenture and have a maturity date of October 3, 2017 (the “Exchangeable PIK Notes Maturity Date”). The Exchangeable PIK Notes bear interest payable in kind at a rate of 15.0% per annum, payable on March 1, 2017 and October 3, 2017.

We may redeem, repurchase, refinance, defease or otherwise retire (any of the foregoing, a “redemption”) all of the Exchangeable PIK Notes on or prior to October 2, 2017 for cash at 100% of the principal amount thereof plus accrued interest (any such redemption, an “Exchangeable PIK Note Retirement”). In addition to the Exchangeable PIK Note Retirement, Murray Energy, an affiliate of Murray Energy or a group of persons which includes Murray Energy or any of its affiliates (collectively, the “Murray Group”) shall have the right to purchase all (but not less than all) of the Exchangeable PIK Notes on or prior to October 2, 2017 for cash at a price equal to 100% of the principal amount of the Exchangeable PIK Notes plus accrued interest (a “Murray Purchase,” and together with an Exchangeable PIK Note Retirement and any repayment of the Exchangeable PIK Notes in full in cash that occurs on the Exchangeable PIK Notes Maturity Date, a “Note Redemption”). Upon a Murray Purchase, the Murray Group will receive FELP units equal to the principal and interest settlement amount divided by the lesser of: (a) a number equal to one divided by 92.5% of the last thirty days weighted-average trading price or (b) 1.12007 common units per $1.00 principal amount of Exchangeable PIK Notes. The Issuer and Murray Energy may each purchase less than all of the Exchangeable PIK Notes, so long as the combination results in redemption of all of the Exchangeable PIK Notes. The Exchangeable PIK Note Retirement may be funded with the proceeds from an investment by the Murray Group or any member thereof in FELP, from general working capital or from any other source permitted by the Exchangeable PIK Notes Indenture (and subject to compliance with the Partnership’s other debt agreements). If the Exchangeable PIK Notes have not been redeemed or purchased for cash at 100% of the principal amount thereof plus accrued interest by the Exchangeable PIK Note Maturity Date, then all outstanding Exchangeable PIK Notes (including accrued interest) shall be exchanged for common units representing 75% of FELP’s outstanding limited partner units on the Exchangeable PIK Notes Maturity Date, subject to adjustment on account of certain anti-dilution protections.

The obligations under the New Notes are unconditionally guaranteed on a senior secured basis by each of FELP’s wholly owned domestic subsidiaries that guarantee the Senior Secured Credit Facilities (other than Foresight Energy Finance Corporation) and on a senior unsecured basis by FELP and are or will be secured by second-priority perfected liens on substantially all of our and the subsidiary guarantors’ existing and future assets, subject to certain exceptions.

Senior Secured Credit Facilities

On the Closing Date, FELLC entered into an amendment to its senior secured credit facilities (as amended, the “Senior Secured Credit Facilities”), pursuant to which outstanding defaults under its existing credit agreement were waived and the credit agreement was amended and restated as set forth in the third amended and restated credit agreement (the “Amended Credit Agreement”). Pursuant to the Amended Credit Agreement, $297.8 million in term loans remain outstanding and mature in August 2020 (the “Term Loan”) and the commitments under our $550.0 million revolving credit facility (the “Revolving Credit Facility”), which terminates in August 2018, was reduced to $475.0 million. In addition, the commitments under our Revolving Credit Facility will be further reduced to

12


 

$450.0 million on December 31, 2016. The Amended Credit Agreement also adds an anti-hoarding provision under our Revolving Credit Facility which prohibits new borrowings if the aggregate amount of our unrestricted cash and cash equivalents (taking into account certain pending applications of cash) exceeds $35.0 million both before and after giving effect to such borrowings when taking into account the intended use of such loan proceeds for bona fide purposes within 60 days. Mandatory term loan prepayments are required to be made based on an excess cash flow calculation, as defined by the Amended Credit Agreement, for the second half of fiscal year 2016 and full fiscal year 2017, sales of assets, certain proceeds from insurance recoveries and condemnation awards and certain incurrence of indebtedness, subject, in each case, to customary exceptions and thresholds. As of September 30, 2016, we had $352.5 million in borrowings outstanding under the Revolving Credit Facility and $6.5 million in letters of credit.

Under the Amended Credit Agreement, borrowings under our Revolving Credit Facility bear interest at a rate equal to, at our option: (i) LIBOR (subject to a LIBOR floor of 0%) plus an applicable margin ranging from 3.50% to 4.50%; or (ii) a base rate plus an applicable margin ranging from 2.50% to 3.50%; in each case, determined in accordance with our consolidated net leverage ratio. Our Term Loans bear interest of a rate equal to, at our option: (i) LIBOR (subject to a LIBOR floor of 1.00%) plus 5.50%; or (ii) a base rate plus 4.50%. We are also required to pay a commitment fee of 0.50% to the lenders under the Revolving Credit Facility in respect of unutilized commitments thereunder and pay a fronting fee equal to 0.125% per annum of the amount available to be drawn under letters of credit. As of September 30, 2016, the weighted-average interest rate on Revolving Credit Facility and term loan borrowings was 5.0% and 6.5%, respectively.

The obligations under the Senior Secured Credit Facilities are unconditionally guaranteed on a senior unsecured basis by FELP and on a senior secured basis by our direct and indirect domestic subsidiaries and are or will be secured by first-priority perfected liens on substantially all of our and the subsidiary guarantors’ existing and future assets, subject to certain exceptions.

The Senior Secured Credit Facilities require that we comply on a quarterly basis with certain financial covenants, including a minimum consolidated interest coverage ratio of 2.00:1.00 and a maximum senior secured net leverage ratio ranging from 3.50:1.00 for the fiscal quarter ending September 30, 2016 to 2.75:1.00 for the fiscal quarter ending March 31, 2021 and thereafter. Our Senior Secured Credit Facilities prohibit certain restricted payments, including discretionary dividends, until the later to occur of: (i) June 30, 2018 and (ii) the date on which our obligations under our revolving credit facility have been paid in full, after which restricted payments can be made of up to $25.0 million per year, subject to certain adjustments and exceptions.

Amendments and Waivers Relating to Equipment Financing Arrangements

On the Closing Date, we entered into an amendment to the 5.78% longwall financing credit agreement under which the lenders waived the existing defaults and the maturity date was accelerated by one year by increasing the last three semi-annual amortization payments. The new maturity date of the 5.78% longwall financing arrangement is June 2019.  In addition, the senior secured leverage ratio financial maintenance covenant was amended to be consistent with the Amended Credit Agreement.

On the Closing Date, we entered into an amendment to the 5.555% longwall financing credit agreement  under which the lenders waived the existing defaults and the maturity date was accelerated by one year by increasing the last four semi-annual amortization payments. The new maturity date of the 5.555% longwall financing arrangement is September 2019.  In addition, the senior secured leverage ratio financial maintenance covenant was amended to be consistent with the Amended Credit Agreement.

In connection with the restructuring, we also executed waivers to cure outstanding defaults under the master lease agreements to our capital lease obligations. These waivers, among other things, ratified the existing terms of each applicable equipment financing agreement, provided the lessor with a waiver fee equal to one hundred basis points of the outstanding amount due under the agreement, increased the interest rate by one percent per annum, and, with respect to certain arrangements, released the lessor from any claims that such parties may have against the lessor with respect to the lease. The modification to the capital leases resulted in a $0.7 million increase to our capital lease obligations and the corresponding right-to-use assets.

A/R Securitization Agreement

 

In August 2016, we entered into an amended and restated receivables financing agreement pursuant to which commitments under the facility were reduced to $50.0 million. We recorded a loss on extinguishment of debt charge of $0.1 million during the first quarter of 2016 to write-off a portion of the deferred debt issue costs for the reduction in commitments as part of the forbearance agreement.

 

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Maturity Table

 

The following table summarizes the contractual principal maturities of long-term debt (excluding unamortized debt discounts and debt issuance costs) and capital lease obligations as of September 30, 2016 (in one-year increments from September 30, 2016):

 

Long-Term Debt

 

 

Capital Lease Obligations

 

 

(In Thousands)

 

October 1, 2016 to September 30, 2017

$

50,317

 

 

$