NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements (unaudited) include the accounts and operations of Westmoreland Resource Partners, LP (the “Partnership”) and its consolidated subsidiaries and have been prepared in accordance with United States Generally Accepted Accounting Principles (“GAAP”) and require the use of management’s estimates. All intercompany transactions and accounts have been eliminated in consolidation. The financial information contained in this Quarterly Report on Form 10-Q (“Quarterly Report”) is unaudited, but reflects all adjustments which, in the opinion of management, are necessary for a fair presentation of the financial information for the periods shown. Such adjustments are of a normal recurring nature. Certain prior-period amounts have been reclassified to conform with the financial statement line items used by Westmoreland Coal Company (“WCC”), the parent of our general partner Westmoreland Resources GP, LLC (the “GP”). The results of operations for the
three
months ended
March 31, 2018
are not necessarily indicative of results to be expected for the year ending
December 31, 2018
.
These unaudited quarterly consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes to the consolidated financial statements included in the Partnership’s Annual Report on Form 10-K for the year ended
December 31, 2017
(“
2017
Form 10-K”). There were no changes to our significant accounting policies from those disclosed in the audited consolidated financial statements and notes to the consolidated financial statements thereto contained in our
2017
Form 10-K, except as described below in the section titled "Recently Issued Accounting Pronouncements."
Going Concern, Liquidity and Management’s Plan
Our Term Loan (as defined in
Note 5. Debt And Lines Of Credit
) matures on December 31, 2018, and accordingly the principal balance of
$314.4 million
is classified as a current liability on our Consolidated Balance Sheet as of
March 31, 2018
. The Partnership does not currently have liquidity or access to additional capital sufficient to pay off this debt by its maturity date. This condition gives rise to substantial doubt as to the Partnership’s ability to continue as a going concern within one year after the date that these financial statements were issued.
Certain affirmative covenants in our 2014 Financing Agreement (as defined in
Note 5. Debt And Lines Of Credit
) provide that an audit opinion on our consolidated financial statements that includes an explanatory paragraph referencing our conclusion that substantial doubt exists as to the Partnership's ability to continue as a going concern constitutes an event of default. The audit report included in our 2017 Form 10-K contained such an explanatory paragraph. On March 1, 2018, we entered into a waiver and amendment number three to the 2014 Financing Agreement (“Waiver”) that waived any such event of default arising from the inclusion of a going concern explanatory paragraph in the audit report included in our 2017 Form 10-K. The Waiver expires on the earlier of May 15, 2018 or the occurrence of any other event of default that has not been waived as part of the Waiver. Accordingly, on expiration of the Waiver, the lenders could accelerate the maturity date of the Term Loan, making it immediately due and payable.
If our lenders accelerate the maturity date of the Term Loan, we do not currently have sufficient liquidity to repay such indebtedness and would need additional sources of capital to do so. We have engaged financial advisors to assess our capital structure. Management and our Board, with the assistance of our advisors, are evaluating options to address the Term Loan maturity date, which may include seeking an amendment or restructuring of our existing debt. We cannot provide any assurances that we will be successful addressing the maturity date, and if we fail to do so, it may be necessary for us to seek a private restructuring or protection from creditors under Chapter 11 of the United States Bankruptcy Code.
The accompanying consolidated financial statements (unaudited) are prepared on a going concern basis and do not include any adjustments that might result from uncertainty about our ability to continue as a going concern.
Recently Adopted Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09,
Revenue from Contracts with Customers (Topic 606)
(“new revenue standard”), which supersedes all previously existing revenue recognition guidance. Under this guidance, an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard allows for initial application to be performed retrospectively to each period presented or as a cumulative effect adjustment as of the date of adoption. During 2016, the FASB clarified the implementation guidance on
WESTMORELAND RESOURCE PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
principal versus agent, identifying performance obligations and licensing, practical expedients, and made technical corrections on various topics.
The Partnership adopted the new revenue standard effective January 1, 2018 using the full retrospective method. The adoption of this standard did not have a material impact to the Partnership's consolidated financial statements.
In November 2016, the FASB issued ASU No. 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash
(“new cash flows standard”), which requires all entities that have restricted cash or restricted cash equivalents to explain the changes during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents in the Consolidated Statements of Cash Flows. As a result, amounts generally described as restricted cash and restricted cash equivalents that are included in other financial statement captions of the Consolidated Balance Sheets should be included with cash and cash equivalents when reconciling the beginning of period and end of period total amounts shown on the Consolidated Statements of Cash Flows. The ASU should be adopted using a retrospective transition method to each period presented. The Partnership adopted the new cash flows standard effective January 1, 2018 and applied the ASU retrospectively to the periods presented in the Partnership’s Consolidated Statements of Cash Flows (unaudited). As a result, net cash used in investing activities for the three months ended March 31, 2017 was adjusted to exclude the change in restricted cash as follows:
|
|
|
|
|
|
Three Months Ended March 31, 2017
|
|
(In thousands)
|
Cash used in investing activities, as previously reported
|
$
|
(3,305
|
)
|
Less: Purchases of restricted investments
|
(1,570
|
)
|
Cash used in investing activities, as adjusted
|
$
|
(4,875
|
)
|
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires companies leasing assets to recognize on their balance sheet a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term on contracts longer than one year. The new guidance is effective for fiscal years beginning after December 15, 2018, using a modified retrospective approach, with early adoption permitted. The Partnership has established an implementation team to develop a multi-phase plan to adopt the requirements of the new standard. We will adopt the new guidance in the first quarter of 2019.
2. REVENUE
We produce and sell thermal coal primarily to large electric utility customers with coal-fired power plants, typically under long-term contracts. Our customers are generally in close proximity through mine-mouth power plants and strategically located rail and barge transportation. Lesser amounts of revenue are generated from royalties from oil and gas leases and sales of various mining byproducts.
Under ASC 606, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration we expect to receive in exchange for those goods or services. We measure revenue based on the consideration specified in the contract, and revenue is recognized when the performance obligations in the contract are satisfied. A performance obligation is a promise in a contract to transfer a distinct service to the customer. The transaction price of a contract is allocated to each distinct performance obligation and recognized as revenue when or as the customer receives the benefit of the performance obligation.
For all of our coal sales contracts, performance obligations consist of the delivery of each ton of coal to the customer as our promise is to sell multiple distinct units of a commodity at a point in time. The transaction price principally consists of fixed consideration in the form of a base price per ton of coal with additional variable consideration comprised of adjustments to the base price based on quality measurements. Certain long-term contracts contain additional variable consideration comprised of various index-based adjustments, adjustments based on changes in underlying production costs and reimbursements of various costs such as royalties and taxes.
WESTMORELAND RESOURCE PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
Disaggregated Revenues
The following table presents our revenues for the
three months ended March 31, 2018
disaggregated by type of revenue (in thousands):
|
|
|
|
|
|
Type of Revenue
|
|
|
Coal sales
|
|
$
|
66,709
|
|
Other revenues
|
|
1,098
|
|
Total
|
|
$
|
67,807
|
|
Contract Balances
Contract assets and contract liabilities are the result of timing differences between revenue recognition, billings and cash collections. We recognize contract assets in those instances where billing occurs subsequent to revenue recognition and our right to invoice the customer is conditioned on something other than the passage of time. There were no contract assets included in the Consolidated Balance Sheets (unaudited) as of
March 31, 2018
and December 31, 2017, respectively. We recognize contract liabilities in those instances where billing occurs prior to revenue recognition, which occurs for certain contracts with tiered pricing in which the per ton contract price has exceeded per ton revenue to date, or when we have received consideration prior to satisfaction of performance obligations.
The following table presents the activity in our contract liabilities for the
three months ended March 31, 2018
(in thousands):
|
|
|
|
|
Contract Liabilities
(1)
:
|
|
Balance as of December 31, 2017
|
$
|
3,141
|
|
Additions
|
1,441
|
|
Transfers to
Revenues
|
—
|
|
Balance as of March 31, 2018
|
$
|
4,582
|
|
_________________________
(1) Comprised entirely of current balances of
$4.6 million
and
$3.1 million
reported within
Deferred revenue
in the Consolidated Balance Sheets (unaudited) as of
March 31, 2018
and December 31, 2017, respectively.
Remaining Performance Obligations
The following table presents our estimated revenues allocated to remaining performance obligations for contracted revenue that has not yet been recognized, representing our “contractually committed” revenues as of
March 31, 2018
that we will invoice or transfer from contract liabilities and recognize in future periods (in thousands):
|
|
|
|
|
|
Estimated Revenues
|
Nine months ended December 31, 2018
|
$
|
123,488
|
|
2019
|
73,340
|
|
2020
|
69,680
|
|
2021
|
51,727
|
|
2022
|
—
|
|
Thereafter
|
—
|
|
Total
|
$
|
318,235
|
|
Our contractually committed revenue, for purposes of the table above, is limited to the transaction price for long-term coal sales contracts which have minimum tonnage commitments. Our contractually committed revenue amounts generally exclude, based on the following practical expedients that we elected to apply, (i) variable consideration within contracts in which such variable consideration is allocated entirely to wholly unsatisfied performance obligations; and (ii) remaining performance obligations for contracts with an original expected duration of one year or less. Additional revenues are expected to be recognized
WESTMORELAND RESOURCE PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
based on our short-term coal sales contracts, long-term coal sales contracts with no minimum tonnage commitments and long-term coal sales contracts with customer options in addition to minimum tonnage commitments.
3. INVENTORIES
Inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
|
(In thousands)
|
Coal stockpiles
|
$
|
3,714
|
|
|
$
|
4,642
|
|
Materials and supplies
|
10,552
|
|
|
10,569
|
|
Reserve for obsolete inventory
|
(284
|
)
|
|
(284
|
)
|
Total
|
$
|
13,982
|
|
|
$
|
14,927
|
|
4. RESTRICTED INVESTMENTS
For all of its restricted investments accounts, the Partnership can select from limited fixed-income investment options for the funds and receive the investment returns on these investments. Funds in the restricted investments accounts are not available to meet the Partnership’s general cash needs. These investments include available-for-sale debt securities, which are reported at fair value with unrealized gains and losses excluded from earnings and reported in
Accumulated other comprehensive income
in the Consolidated Balance Sheets.
The carrying value and estimated fair value of restricted investments were as follows:
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
|
(In thousands)
|
Cash and cash equivalents
|
$
|
6,416
|
|
|
$
|
7,754
|
|
Available-for-sale debt securities
|
29,280
|
|
|
29,485
|
|
|
$
|
35,696
|
|
|
$
|
37,239
|
|
Available-for-Sale Debt Securities
The cost basis, gross unrealized holding gains and losses and fair value of available-for-sale debt securities were as follows:
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
|
(In thousands)
|
Cost basis
|
$
|
29,267
|
|
|
$
|
29,405
|
|
Gross unrealized holding gains
|
389
|
|
|
409
|
|
Gross unrealized holding losses
|
(376
|
)
|
|
(329
|
)
|
Fair value
|
$
|
29,280
|
|
|
$
|
29,485
|
|
WESTMORELAND RESOURCE PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
5. DEBT AND LINES OF CREDIT
Debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
|
(In thousands)
|
Term Loan
|
$
|
314,410
|
|
|
$
|
312,734
|
|
Capital lease obligations
|
12,479
|
|
|
13,478
|
|
Other
|
320
|
|
|
375
|
|
Total debt outstanding
|
327,209
|
|
|
326,587
|
|
Less debt issuance costs
|
(2,078
|
)
|
|
(2,754
|
)
|
Less current installments, net of debt issuance costs
|
(316,672
|
)
|
|
(314,228
|
)
|
Total debt outstanding, less current installments
|
$
|
8,459
|
|
|
$
|
9,605
|
|
The following table presents remaining aggregate contractual debt maturities of all long-term debt:
|
|
|
|
|
|
March 31, 2018
|
|
(In thousands)
|
2018
|
$
|
317,605
|
|
2019
|
4,174
|
|
2020
|
1,766
|
|
2021
|
1,664
|
|
2022
|
2,000
|
|
Thereafter
|
—
|
|
Total debt
|
$
|
327,209
|
|
Term Loan
Pursuant to the financing agreement (as amended, the “2014 Financing Agreement”), dated as of December 31, 2014, by and among Oxford Mining Company, LLC, the Partnership and each of its subsidiaries, lenders from time to time party thereto, and U.S. Bank National Association, as administrative agent, we entered into a term loan (“Term Loan”) which matures on December 31, 2018 and pays interest on a quarterly basis at a variable rate equal to the 3-month London Interbank Offered Rate (“LIBOR”) at each period end (
2.30%
as of
March 31, 2018
), subject to a floor of
0.75%
, plus
8.50%
or the reference rate, as defined in the 2014 Financing Agreement. As of
March 31, 2018
, the Term Loan had a cash interest rate of
10.80%
. The Term Loan is a primary obligation of Oxford Mining Company, LLC, a wholly owned subsidiary of the Partnership, is guaranteed by the Partnership and its subsidiaries, and is secured by substantially all of the Partnership’s and its subsidiaries’ assets.
The 2014 Financing Agreement also provides for Paid-In-Kind Interest (“PIK Interest”) at a variable rate between
1.00%
and
3.00%
based on our consolidated total net leverage ratio, as defined in the 2014 Financing Agreement. As of
March 31, 2018
and
December 31, 2017
, the Term Loan had a PIK Interest rate of
3.00%
. The rate of PIK Interest is recalculated on a quarterly basis with the PIK Interest added quarterly to the then-outstanding principal amount of the Term Loan. PIK Interest under the 2014 Financing Agreement was
$2.3 million
for the
three months ended March 31, 2018
and
2017
. The outstanding Term Loan amount as of
March 31, 2018
represents the principal balance of
$286.6 million
, plus PIK Interest of
$27.8 million
.
The 2014 Financing Agreement requires mandatory prepayment of principal with proceeds from the receipt of oil and gas royalties and asset sales. During the
three
months ended
March 31, 2018
, we paid down
$0.6 million
of the Term Loan with such proceeds.
The 2014 Financing Agreement limits cumulative cash distributions to an aggregate amount not to exceed
$15.0 million
(“Restricted Distributions”), if we have: (i) a consolidated total net leverage ratio of greater than
3.75
, or fixed charge coverage ratio of less than
1.00
(as such ratios are defined in the 2014 Financing Agreement), or (ii) liquidity of less than
$7.5 million
, after giving effect to such cash distribution and applying our availability under the Revolver. As of
March 31, 2018
, our consolidated total net leverage ratio is in excess of
3.75
, and we have utilized the full $15.0 million limit on Restricted Distributions.
WESTMORELAND RESOURCE PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
Covenant Compliance
The Partnership does not currently have liquidity or access to additional capital sufficient to pay off the Term Loan by its December 31, 2018 maturity date. This condition gives rise to substantial doubt as to the Partnership’s ability to continue as a going concern within one year after the date that these financial statements were issued. Certain affirmative covenants in our 2014 Financing Agreement provide that an audit opinion on our consolidated financial statements that includes an explanatory paragraph referencing our conclusion that substantial doubt exists as to the Partnership's ability to continue as a going concern constitutes an event of default. The audit report included in our 2017 Form 10-K contained such an explanatory paragraph. On March 1, 2018, we obtained the Waiver that waived any such event of default arising from the inclusion of a going concern explanatory paragraph in the audit report included in our 2017 Form 10-K. The Waiver expires on the earlier of May 15, 2018 or the occurrence of any other event of default that has not been waived as part of the Waiver. Accordingly, on the expiration of the Waiver, the lenders could accelerate the maturity date of the Term Loan, making it immediately due and payable.
For more detail please refer to
Note 1. Basis Of Presentation
"Going Concern, Liquidity and Management’s Plan."
Revolver
On October 23, 2015, the Partnership and its subsidiaries entered into a Loan and Security Agreement (the “Revolver”) with the lenders party thereto and Canadian Imperial Bank of Commerce (formerly known as The PrivateBank and Trust Company). The Revolver expired on its December 31, 2017 maturity date and was not replaced or extended.
Capital Lease Obligations
The Partnership engages in leasing transactions for office equipment and equipment utilized in its mining operations. The Partnership did not enter into any new capital leases during the
three
months ended
March 31, 2018
.
6. DISTRIBUTIONS OF AVAILABLE CASH
Our 2014 Financing Agreement restricts us from making cash distributions in excess of
$15.0 million
in the aggregate when certain ratios and liquidity requirements are not met. As of
March 31, 2018
, one of these ratios was not met, and we do not foresee it being met in the near future. As of
March 31, 2018
, we have made
$15.0 million
in Restricted Distributions and, accordingly, cannot make further distributions unless we either refinance or modify our Term Loan or meet the required ratios noted in
Note 5. Debt And Lines Of Credit
.
Pursuant to the Partnership’s Fourth Amended and Restated Agreement of Limited Partnership, as amended (the “Partnership Agreement”), we distribute
100%
of our available cash within
45
days after the end of each quarter to unitholders of record and to our GP, subject to the conditions and limitations within the 2014 Financing Agreement. Available cash is determined at the end of each quarter and is generally defined in the Partnership Agreement, as all cash and cash equivalents on hand at the end of each quarter less reserves established by our GP in its reasonable discretion for future cash requirements. These reserves are retained to provide for the conduct of our business, the payment of debt principal and interest, to provide funds for future distributions for any one or more of the next four quarters, and to comply with applicable law or any loan agreement to which the Partnership or any of its subsidiaries are a party. Our available cash may also include, if our GP so determines, all or any portion of the cash on hand on the date of determination of available cash for the quarter resulting from working capital borrowings made subsequent to the end of such quarter.
We made cash distributions as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2018
|
|
2017
|
Limited partner common units
|
$
|
—
|
|
|
$
|
163
|
|
General partner units
|
—
|
|
|
5
|
|
Warrants
|
—
|
|
|
22
|
|
WESTMORELAND RESOURCE PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
7. FAIR VALUE MEASUREMENTS
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Valuation techniques used must maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy, as defined below, gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.
|
|
•
|
Level 1, defined as observable inputs such as quoted prices in active markets for identical assets. Level 1 assets include available-for-sale debt securities generally valued based on independent third-party market prices.
|
|
|
•
|
Level 2, defined as observable inputs other than Level 1 prices. These include quoted prices for similar assets or liabilities in an active market, quoted prices for identical assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
|
|
|
•
|
Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
|
The book values of cash and cash equivalents, receivables and accounts payable reflected in the Consolidated Balance Sheets (unaudited) approximate the fair value of these instruments due to the short duration to their maturities.
See
Note 4. Restricted Investments
for further disclosures related to the Partnership's fair value estimates.
In connection with our refinancing in June 2013, certain of the second lien lenders and lender affiliates received warrants entitling them to purchase common units. The warrants are measured at fair value at each balance sheet date. As of
March 31, 2018
, the fair value of each warrant was
$1.78
, based on the following: spot price of
$1.90
per unit as traded on the New York Stock Exchange, with an exercise price of
$0.12
per unit. The fair value of the warrants are a Level 2 measurement.
Long-term debt fair value estimates are based on observed prices for securities with an active trading market when available (Level 2) and otherwise using discount rate estimates based on interest rates (Level 3). As of
March 31, 2018
, the Partnership valued the Term Loan with Level 3 fair values. The estimated fair values of the Partnership’s debt with fixed and variable interest rates are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Interest Rate
|
|
Variable Interest Rate
|
|
Carrying Value
|
|
Fair Value
|
|
Carrying Value
|
|
Fair Value
|
|
(In thousands)
|
March 31, 2018
|
$
|
12,799
|
|
|
$
|
12,799
|
|
|
$
|
312,332
|
|
|
$
|
113,865
|
|
December 31, 2017
|
13,853
|
|
|
13,853
|
|
|
309,980
|
|
|
144,536
|
|
8. UNIT-BASED COMPENSATION
We grant employees and non-employee directors restricted common units under our Long-Term Incentive Plan (“LTIP”). We recognized compensation expense from unit-based arrangements as shown in the following table:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2018
|
|
2017
|
|
(In thousands)
|
Recognition of fair value of restricted common units over the vesting period
|
$
|
52
|
|
|
$
|
42
|
|
The unvested restricted common unit awards had an initial vesting date of March 2, 2018. However, on March 1, 2018 the grant was modified and the vesting date for all awards was extended to December 15, 2018. As all related compensation expense was recognized as of the modification date and the modification did not result in an increase in fair value of the awards, no additional expense was recognized. A summary of restricted common unit award activity for the
three
months ended
March 31, 2018
is as follows:
WESTMORELAND RESOURCE PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
|
|
|
|
|
|
|
|
|
|
|
|
|
Units
|
|
Weighted Average Grant-Date Fair Value
|
|
Unamortized Compensation Expense
(In thousands)
|
Unvested balance at December 31, 2017
|
82,240
|
|
|
$
|
3.04
|
|
|
|
Granted
|
—
|
|
|
—
|
|
|
|
Vested and issued
|
—
|
|
|
—
|
|
|
|
Unvested balance at March 31, 2018
|
82,240
|
|
|
$
|
3.04
|
|
|
$
|
—
|
|
9. COMMITMENTS AND CONTINGENCIES
Coal Sales Contracts
We are committed under long-term contracts to sell coal that meets certain quality requirements at specified prices. Many of these prices are subject to cost pass-through or cost adjustment provisions that mitigate some risk from rising costs. Quantities sold under some of these contracts may vary from year to year within certain limits at the option of the customer or us. As of
March 31, 2018
, the remaining terms of our long-term contracts range from
one
to
nine
years.
Litigation
There have been no material changes in our litigation since
December 31, 2017
. For additional information, refer to
Note
18. Commitments and Contingencie
s to the consolidated financial statements of our
2017
Form 10-K.
Guarantees
Our GP and the Partnership guarantee certain obligations of our subsidiaries. We believe that these guarantees may result in a material liability to the guarantors, and, consequentially, have a material adverse effect on our financial position, liquidity or operations.
10. PARTNERS' CAPITAL AND CONVERTIBLE UNITS
Our capital accounts are comprised of approximately
0.15%
beneficial general partner interests and
99.85%
limited partner interests as of
March 31, 2018
. Our limited partners have limited rights of ownership as provided for under our Partnership Agreement and the right to participate in our distributions. Our GP manages our operations and participates in our distributions, including certain incentive distributions pursuant to the incentive distribution rights, which are nonvoting limited partner interests held by our GP. Pursuant to our Partnership Agreement, our GP participates in losses and distributions based on its interest. The GP’s participation in the allocation of losses and distributions is not limited and therefore, such participation can result in a deficit to its capital account. Allocation of losses and distributions, including distributions for previous transactions between entities under common control, has resulted in a deficit to certain limited partners’ capital accounts included in our Consolidated Balance Sheets (unaudited).
Series A Convertible Units
In connection with the Kemmerer Drop (as defined and described in
Note 2. Acquisitions
to the consolidated financial statements for our 2017 Form 10-K) and the issuance of the Series A Convertible Units (the "Series A Units"), the Partnership entered into an amendment (the “Amendment”) to our Partnership Agreement. The Amendment established the terms of the Series A Units and any additional Series A Units that may be issued in kind as a distribution (the “Series A PIK Units”), and provided that each Series A Unit will have the right to share in distributions from us on a pro-rata basis with the common units. All or any portion of each distribution payable in respect of the Series A Units (the “Series A Convertible Unit Distribution”) may, at our election, be paid in Series A PIK Units. To the extent any portion of the Series A Convertible Unit Distribution is paid in Series A PIK Units for any quarter, the distribution to the holders of incentive distribution rights shall be reduced by that portion of the distribution that is attributable to the payment of those Series A PIK Units, as further described in the Amendment. The Series A Units and the Series A PIK Units will convert on a
one
-for-one basis, at the earlier of the date on which we first make a regular quarterly cash distribution with respect to any quarter to holders of common units in an amount at least equal to
$0.22
per common unit or upon a change of control. The Series A Units have the same voting rights as if they were outstanding common units and will vote together with the common units as a single class. In addition, the Series A Units are entitled to vote as a
WESTMORELAND RESOURCE PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
separate class on any matters that materially adversely affect the rights or preferences of the Series A Units in relation to other classes of partnership interests or as required by law.
Series B Convertible Units
On October 28, 2016, we entered into the Exchange in which we issued
4,512,500
Series B Convertible Units (the “Series B Units”) to WCC in exchange for WCC’s
4,512,500
common units. Upon issuance of the Series B Units in the Exchange, WCC’s common units were canceled. The Series B Units do not share in distributions with the common units and are convertible at the option of the holder on a
one
-for-one basis into common units on the day after the record date for a cash distribution on the common units in which the Partnership is unable to make such a distribution without exceeding its restricted payment basket under the 2014 Financing Agreement (as defined in
Note 5. Debt And Lines Of Credit
). This date occurred on November 15, 2017 and the holder of the Series B Units has not yet converted these Series B Units into common units. The Series B Units will convert automatically upon a change of control or a dissolution or liquidation of the Partnership. The Series B Units have the same voting rights as if they were outstanding common units and will vote together with the common units as a single class. In addition, the Series B Units are entitled to vote as a separate class on any matters that materially adversely affect the rights or preferences of the Series B Units in relation to other classes of partnership interests or as required by law. Concurrently with the Exchange, we entered into a second amendment to the Partnership Agreement, which established the terms of the Series B Units.
Liquidation Units
The liquidation units have no distribution or voting rights, other than in connection with liquidation. For tax purposes, liquidation units are allocated additional taxable income but no additional taxable loss compared to other unit classes.
Warrants
In June 2013, in connection with a prior credit facility, certain lenders and lender affiliates received warrants entitling them to purchase
166,557
common units at
$0.12
per unit. The warrants participate in distributions whether or not exercised.
Net Income (Loss) Attributable to Limited Partner Common Units
Net income (loss) is allocated to the limited partner units, Series A Units, Series B Units and general partner units in accordance with their respective ownership percentages, after giving effect to distributions and declared distributions on Series A Units, warrants and general partner units, including incentive distribution rights. Basic and diluted limited partners’ net income (loss) per limited partner common unit is calculated by dividing limited partners’ interest in net income (loss) by the weighted average number of limited partner common units outstanding during the period. We determined basic and diluted limited partners’ net loss per limited partner common unit as follows (in thousands, except per unit amounts):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2018
|
|
2017
|
Net loss attributable to the Partnership
|
$
|
(12,878
|
)
|
|
$
|
(8,815
|
)
|
Less:
|
|
|
|
Paid and declared distributions on Series A convertible units
|
—
|
|
|
2,162
|
|
Series A convertible units share of undistributed loss
|
(9,599
|
)
|
|
(8,222
|
)
|
Series B convertible units share of undistributed loss
|
(2,539
|
)
|
|
(2,301
|
)
|
Paid and declared distributions on general partner units
|
—
|
|
|
5
|
|
General partner units share of undistributed loss
|
(18
|
)
|
|
(18
|
)
|
Paid and declared distributions on warrants
|
—
|
|
|
22
|
|
Undistributed net loss attributable to limited partners
|
$
|
(722
|
)
|
|
$
|
(463
|
)
|
|
|
|
|
Weighted average number of limited partner common units outstanding used in computation of limited partners' net loss per common unit (basic and diluted)
|
1,285
|
|
|
1,242
|
|
Net loss per limited partner common unit, basic and diluted
|
$
|
(0.56
|
)
|
|
$
|
(0.37
|
)
|
WESTMORELAND RESOURCE PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
11. ACCUMULATED OTHER COMPREHENSIVE INCOME
The following table reflects the changes in accumulated other comprehensive income by component:
|
|
|
|
|
|
Accumulated Other Comprehensive Income
|
|
(In thousands)
|
Balance at December 31, 2017
|
$
|
80
|
|
Other comprehensive loss before reclassification
|
(158
|
)
|
Amounts reclassified from accumulated other comprehensive income
|
91
|
|
Balance at March 31, 2018
|
$
|
13
|
|
The following table reflects the reclassifications out of accumulated other comprehensive income for the
three
months ended
March 31, 2018
:
|
|
|
|
|
|
|
|
Details About Accumulated Other Comprehensive Income Components
|
|
Amount Reclassified From Accumulated Other Comprehensive Income
|
|
Affected Line Item in the Statement Where Net Loss is Presented
|
|
|
(In thousands)
|
|
Realized gains on available-for-sale debt securities
|
|
$
|
91
|
|
|
Other income
|
12. RELATED PARTY TRANSACTIONS
The Board of the GP and its Conflicts Committee review our related party transactions that involve a potential conflict of interest between a general partner and WMLP or its subsidiaries or another partner to determine that such transactions reflect market-clearing terms and conditions customary in the coal industry. As a result of these reviews, the Board and the Conflicts Committee approved each of the transactions described below that had such potential conflict of interest as fair and reasonable to us and our limited partners.
Effective January 1, 2015, the Partnership and the GP, which is a wholly owned subsidiary of WCC, entered into an administrative and operational services agreement (the “Services Agreement”). The Services Agreement is terminable by either party upon
120
days’ written notice. The current term of the Services Agreement expires on June 1, 2018, and automatically renews for successive
one
-year periods unless terminated earlier upon 120-days’ written notice. On January 31, 2018, we received a letter from WCC providing 120 days’ written notice that it was reserving its rights with respect to its continued provision of services to the GP under the Services Agreement, noting that WCC would “continue to pursue value-maximizing transactions for all relevant stakeholders” and noting that WCC would be willing to continue to provide services to the GP and us under certain circumstances. On February 22, 2018, we responded to that letter questioning whether a valid notice of termination of the Services Agreement was provided, addressing the continued deployment of the mine-related employees, noting our intention to seek alternative service providers and preserving our options with respect to the ongoing negotiations over WCC’s provisions of services to the GP and us under the Services Agreement. The parties remain in constructive discussions with respect to WCC’s continued provision of administrative and operational services to us, but, if an agreement with respect to the continued provision of such services cannot be reached with WCC by June 1, 2018, we could have a legal dispute with WCC regarding whether the January 31, 2018 reservation of rights letter constituted a valid termination notice under the Services Agreement.
Under the terms of the Services Agreement, the GP provides services through its, or an affiliate's, employees and is reimbursed for all related costs incurred on our behalf. Pursuant to the Services Agreement, the Partnership engaged the GP to continue providing services such as general administrative and management, engineering, operations (including mining operations), geological, corporate development, real property, marketing, and other services to the Partnership. Administrative services include without limitation legal, finance and accounting, treasury, insurance administration and claims processing, risk management, health, safety and environmental, information technology, human resources, credit, payroll, internal audit and tax. During the
three months ended March 31, 2018
, we paid the GP approximately
$18.5 million
for these services performed under the Services Agreement primarily related to employee costs. Further, under the Services Agreement, the Partnership pays the GP a fixed annual management fee of
$2.2 million
for certain executive and administrative services, and reimburses the GP at cost for other expenses and expenditures. This fixed annual management fee has not been prepaid and is expensed as incurred. Expense related to this annual management fee, included in
Selling and administrative
in the Consolidated Statements of Operations (unaudited), for the
three months ended March 31, 2018
and
2017
was
$0.5 million
. Pursuant to the Services Agreement, the
WESTMORELAND RESOURCE PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
primary reimbursements to our GP were for costs related to payroll. Reimbursable costs under the Services Agreement totaling
$0.9 million
and
$1.3 million
were included in accounts payable as of
March 31, 2018
and
December 31, 2017
, respectively.
On January 9, 2017, the Partnership acquired surface coal reserves (“Johnson Run”) through conveyance of leases and recoupable advance royalty payments from Buckingham Coal Company, LLC, ("BCC") a wholly owned subsidiary of WCC, for
$1.7 million
, of which
$1.5 million
was deemed a distribution as the transaction was between entities under common control.
During the three months ended
March 31, 2017
, we sold coal to a subsidiary of WCC, which generated
$3.8 million
in revenues.
No
such coal sales occurred during the three months ended
March 31, 2018
. Further, as of
December 31, 2017
, accounts receivable related to the coal sales to the subsidiary of WCC totaled
$3.8 million
and were included in
Receivables
in the Consolidated Balance Sheet (unaudited) for that period.
No
accounts receivable related to these revenues was outstanding as of
March 31, 2018
.
13. SEGMENT INFORMATION
We operate in
one
business segment. We operate surface coal mines in Ohio and Wyoming, selling thermal coal to utilities, industrial customers, municipalities and other coal-related entities primarily in the Midwest and Wyoming. All of our operations have similar economic characteristics including but not limited to coal quality, geology, coal marketing opportunities, mining and transportation methods and regulatory issues. Our operating and executive management makes its decisions based on consolidated reports. Our Ohio operating subsidiaries share customers and a particular customer may receive coal from any one of such Ohio operating subsidiaries. We also lease or sublease coal reserves to others through our Ohio operations in exchange for a per ton royalty rate.
14. SUBSEQUENT EVENTS
The Partnership has evaluated subsequent events in accordance with ASC 855,
Subsequent Events
, through the filing date of this Quarterly Report, and determined that no events have occurred that have not been disclosed elsewhere in the notes to the consolidated financial statements (unaudited) that would require adjustments to disclosures in the consolidated financial statements (unaudited).