10-Q 1 form10-q.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended June 30, 2018

 

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 001-34892

 

RHINO RESOURCE PARTNERS LP
(Exact name of registrant as specified in its charter)

 

Delaware   27-2377517

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

 

424 Lewis Hargett Circle, Suite 250

Lexington, KY

 

40503

(Address of principal executive offices)   (Zip Code)

 

(859) 389-6500

(Registrant’s telephone number, including area code)

 

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

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth 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 [X]
   
Emerging growth company [  ]  

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Securities Act. [  ]

 

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

 

As of August 3, 2018, 13,098,353 common units, 1,145,743 subordinated units and 1,500,000 Series A preferred units were outstanding.

 

 

 

 
 

 

TABLE OF CONTENTS

 

Cautionary Note Regarding Forward-Looking Statements 3
Part I.—Financial Information (Unaudited) 4
ITEM 1. FINANCIAL STATEMENTS 4
Condensed Consolidated Statements of Financial Position as of June 30, 2018 and December 31, 2017 4
Condensed Consolidated Statements of Operations and Comprehensive Income for the Three and Six Months Ended June 30, 2018 and 2017 5
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2018 and 2017 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 24
Item 4. Controls and Procedures 47
PART II—Other Information 48
Item 1. Legal Proceedings 48
Item 1A. Risk Factors 48
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 48
Item 3. Defaults upon Senior Securities 48
Item 4. Mine Safety Disclosure 48
Item 5. Other Information 48
Item 6. Exhibits 49
SIGNATURES 50

 

2
 

 

Cautionary Note Regarding Forward-Looking Statements

 

This Quarterly Report on Form 10-Q contains certain “forward-looking statements.” Statements included in this report that are not historical facts, that address activities, events or developments that we expect or anticipate will or may occur in the future, including things such as statements regarding our future financial position, expectations with respect to our liquidity, capital resources, plans for growth of the business, future capital expenditures, references to future goals or intentions or other such references are forward-looking statements. These statements can be identified by the use of forward-looking terminology, including “may,” “believe,” “expect,” “anticipate,” “estimate,” “continue,” or similar words. These statements are made by us based on our experience and our perception of historical trends, current conditions and expected future developments as well as other considerations we believe are reasonable as and when made. Whether actual results and developments in the future will conform to our expectations is subject to numerous risks and uncertainties, many of which are beyond our control. Therefore, actual outcomes and results could materially differ from what is expressed, implied or forecasted in these statements.

 

Any differences could be caused by a number of factors, including, but not limited to: our ability to maintain adequate cash flow and to obtain financing necessary to fund our capital expenditures, meet working capital needs and maintain and grow our operations; our future levels of indebtedness and compliance with debt covenants; sustained depressed levels of or further decline in coal prices, which depend upon several factors such as the supply of domestic and foreign coal, the demand for domestic and foreign coal, governmental regulations, price and availability of alternative fuels for electricity generation and prevailing economic conditions; our ability to comply with the qualifying income requirement necessary to maintain our status as a partnership for U.S. federal income tax purposes; declines in demand for electricity and coal; current and future environmental laws and regulations, which could materially increase operating costs or limit our ability to produce and sell coal; extensive government regulation of mine operations, especially with respect to mine safety and health, which imposes significant actual and potential costs; difficulties in obtaining and/or renewing permits necessary for operations; a variety of operating risks, such as unfavorable geologic conditions, adverse weather conditions and natural disasters, mining and processing equipment unavailability, failures and unexpected maintenance problems and accidents, including fire and explosions from methane; poor mining conditions resulting from the effects of prior mining; the availability and costs of key supplies and commodities such as steel, diesel fuel and explosives; fluctuations in transportation costs or disruptions in transportation services, which could increase competition or impair our ability to supply coal; a shortage of skilled labor, increased labor costs or work stoppages; our ability to secure or acquire new or replacement high-quality coal reserves that are economically recoverable; material inaccuracies in our estimates of coal reserves and non-reserve coal deposits; existing and future laws and regulations regulating the emission of sulfur dioxide and other compounds, which could affect coal consumers and reduce demand for coal; federal and state laws restricting the emissions of greenhouse gases; our ability to acquire or failure to maintain, obtain or renew surety bonds used to secure obligations to reclaim mined property; our dependence on a few customers and our ability to find and retain customers under favorable supply contracts; changes in consumption patterns by utilities away from the use of coal, such as changes resulting from low natural gas prices; changes in governmental regulation of the electric utility industry; defects in title in properties that we own or losses of any of our leasehold interests; our ability to retain and attract senior management and other key personnel; material inaccuracy of assumptions underlying reclamation and mine closure obligations; and weakness in global economic conditions. Other factors that could cause our actual results to differ from our projected results are described elsewhere in (1) this Form 10-Q, (2) our Annual Report on Form 10-K for the year ended December 31, 2017, (3) our reports and registration statements filed from time to time with the Securities and Exchange Commission and (4) other announcements we make from time to time. In addition, we may be subject to unforeseen risks that may have a materially adverse effect on us. Accordingly, no assurances can be given that the actual events and results will not be materially different from the anticipated results described in the forward-looking statements.

 

The forward-looking statements speak only as of the date made, and, other than as required by law, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 

3
 

 

PART I.—FINANCIAL INFORMATION

 

Item 1. Financial Statements (Unaudited)

 

RHINO RESOURCE PARTNERS LP

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

(in thousands)

 

   June 30, 2018   December 31, 2017 
ASSETS          
CURRENT ASSETS:          
Cash and cash equivalents  $3,114   $8,796 
Restricted cash   3,652    7,116 
Accounts receivable, net of allowance for doubtful accounts ($-0- as of June 30, 2018 and December 31, 2017)   15,333    20,386 
Inventories   15,862    12,860 
Advance royalties, current portion   819    495 
Investment in available for sale securities   3,535    11,165 
Prepaid expenses and other   3,898    2,891 
Total current assets   46,213    63,709 
PROPERTY, PLANT AND EQUIPMENT:          
At cost, including coal properties, mine development and construction costs   448,799    440,843 
Less accumulated depreciation, depletion and amortization   (270,137)   (263,520)
Net property, plant and equipment   178,662    177,323 
Advance royalties, net of current portion   7,935    7,901 
Deposit - Workers’ Compensation Program   5,209    - 
Investment in unconsolidated affiliates   -    130 
Restricted cash   -    5,209 
Other non-current assets   28,981    28,508 
TOTAL  $267,000   $282,780 
LIABILITIES AND EQUITY          
CURRENT LIABILITIES:          
Accounts payable  $14,116   $9,329 
Accrued expenses and other   12,533    11,186 
Accrued preferred distributions   609    6,038 
Current portion of long-term debt   2,320    5,475 
Current portion of asset retirement obligations   498    498 
Total current liabilities   30,076    32,526 
NON-CURRENT LIABILITIES:          
Long-term debt, net of current portion   23,097    28,573 
Asset retirement obligations, net of current portion   18,645    18,164 
Other non-current liabilities   48,212    48,071 
Total non-current liabilities   89,954    94,808 
Total liabilities   120,030    127,334 
COMMITMENTS AND CONTINGENCIES (NOTE 13)          
PARTNERS’ CAPITAL:          
Limited partners   124,024    130,233 
General partner   8,828    8,855 
Preferred partners   15,000    15,000 
Investment in Royal common stock (NOTE 11)   (4,126)   (4,126)
Common unit warrants   1,264    1,264 
Accumulated other comprehensive income   1,980    4,220 
Total partners’ capital   146,970    155,446 
TOTAL  $267,000   $282,780 

 

See notes to unaudited condensed consolidated financial statements.

 

4
 

 

RHINO RESOURCE PARTNERS LP

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND

COMPREHENSIVE INCOME

(in thousands, except per unit data)

 

   Three Months   Six Months 
   Ended June 30,   Ended June 30, 
   2018   2017   2018   2017 
REVENUES:                    
Coal sales  $54,245   $54,299   $108,517   $105,554 
Freight and handling revenues   -    -    -    - 
Other revenues   678    389    1,206    678 
Total revenues   54,923    54,688    109,723    106,232 
COSTS AND EXPENSES:                    
Cost of operations (exclusive of depreciation, depletion and amortization shown separately below)   49,592    44,951    99,245    88,188 
Freight and handling costs   1,472    -    2,376    594 
Depreciation, depletion and amortization   5,677    5,470    11,104    10,977 
Selling, general and administrative (exclusive of depreciation, depletion and amortization shown separately above)   2,800    2,717    5,496    5,757 
(Gain)/Loss on sale/disposal of assets—net   (3,496)   80    (6,434)   45 
Total costs and expenses   56,045    53,218    111,787    105,561 
(LOSS)/INCOME FROM OPERATIONS   (1,122)   1,470    (2,064)   671 
INTEREST AND OTHER EXPENSE/(INCOME):                    
Interest expense   1,913    965    3,798    2,120 
Interest income and other   -    -    (6)   - 
Equity in net loss/(income) of unconsolidated affiliates   -    (40)   -    (36)
Total interest and other expense   1,913    925    3,792    2,084 
NET( LOSS)/INCOME BEFORE INCOME TAXES FROM CONTINUING OPERATIONS   (3,035)   545    (5,856)   (1,413)
INCOME TAXES   -    -    -    - 
NET (LOSS)/INCOME FROM CONTINUING OPERATIONS   (3,035)   545    (5,856)   (1,413)
DISCONTINUED OPERATIONS (NOTE 3)                    
Loss from discontinued operations   -    (255)   -    (326)
NET (LOSS)/INCOME   (3,035)   290    (5,856)   (1,739)
Other comprehensive (loss)/income:                    
Fair market value adjustment for available-for-sale investment   198    554    4,380    2,021 
Reclass for disposition   (3,977)   -    (6,621)   - 
Total other comprehensive (loss)/income   (3,779)   554    (2,241)   2,021 
COMPREHENSIVE (LOSS)/INCOME  $(6,814)  $844   $(8,097)  $282 
                     
General partner’s interest in net (loss):                    
Net (loss) from continuing operations  $(14)  $(3)  $(27)  $(16)
Net (loss) from discontinued operations   -    (1)   -    (1)
General partner’s interest in net (loss)  $(14)  $(4)  $(27)  $(17)
Common unitholders’ interest in net (loss):                    
Net (loss) from continuing operations  $(3,061)  $(738)  $(5,917)  $(3,533)
Net (loss) from discontinued operations   -    (232)   -    (296)
Common unitholders’ interest in net (loss)  $(3,061)  $(970)  $(5,917)  $(3,829)
Subordinated unitholders’ interest in net (loss):                    
Net (loss) from continuing operations  $(269)  $(70)  $(521)  $(338)
Net (loss) from discontinued operations   -    (23)   -    (28)
Subordinated unitholders’ interest in net (loss)  $(269)  $(93)  $(521)  $(366)
Preferred unitholders’ interest in net income:                    
Net income from continuing operations  $309   $1,357   $609   $2,473 
Net income from discontinued operations   -    -    -    - 
Preferred unitholders’ interest in net income  $309   $1,357   $609   $2,473 
Net (loss)/income per limited partner unit, basic:                    
Common units:                    
Net (loss) per unit from continuing operations  $(0.23)  $(0.06)  $(0.45)  $(0.28)
Net (loss) per unit from discontinued operations   -    (0.02)   -    (0.02)
Net (loss) per common unit, basic  $(0.23)  $(0.08)  $(0.45)  $(0.30)
Subordinated units                    
Net (loss) per unit from continuing operations   (0.23)  $(0.06)  $(0.45)  $(0.28)
Net (loss) per unit from discontinued operations   -    (0.02)   -    (0.02)
Net (loss) per subordinated unit, basic  $(0.23)  $(0.08)  $(0.45)  $(0.30)
Preferred units                    
Net income per unit from continuing operations  $0.21   $0.90   $0.41   $1.65 
Net income per unit from discontinued operations   -    -    -    - 
Net income per preferred unit, basic  $0.21   $0.90   $0.41   $1.65 
Net (loss)/income per limited partner unit, diluted:                    
Common units                    
Net (loss) per unit from continuing operations  $(0.23)  $(0.06)  $(0.45)  $(0.28)
Net (loss) per unit from discontinued operations   -    (0.02)   -    (0.02)
Net (loss) per common unit, diluted  $(0.23)  $(0.08)  $(0.45)  $(0.30)
Subordinated units                    
Net (loss) per unit from continuing operations  $(0.23)  $(0.06)  $(0.45)  $(0.28)
Net (loss) per unit from discontinued operations   -    (0.02)   -    (0.02)
Net (loss) per subordinated unit, diluted  $(0.23)  $(0.08)  $(0.45)  $(0.30)
Preferred units                    
Net income per unit from continuing operations  $0.21   $0.90   $0.41   $1.65 
Net income per unit from discontinued operations   -    -    -    - 
Net income per preferred unit, diluted  $0.21   $0.90   $0.41   $1.65 
                     
Weighted average number of limited partner units outstanding, basic:                    
Common units   13,055    12,964    13,009    12,920 
Subordinated units   1,146    1,236    1,146    1,236 
Preferred units   1,500    1,500    1,500    1,500 
Weighted average number of limited partner units outstanding, diluted:                    
Common units   13,055    12,964    13,009    12,920 
Subordinated units   1,146    1,236    1,146    1,236 
Preferred units   1,500    1,500    1,500    1,500 

 

See notes to unaudited condensed consolidated financial statements.

 

5
 

 

RHINO RESOURCE PARTNERS LP

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

   Six Months Ended June 30, 
   2018   2017 
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net (loss)  $(5,856)  $(1,739)
Adjustments to reconcile net (loss) to net cash provided by operating activities:          
Depreciation, depletion and amortization   11,104    11,307 
Accretion on asset retirement obligations   639    948 
Amortization of advance royalties   378    567 
Amortization of debt issuance costs   815    670 
Amortization of common unit warrants   211    - 
Reduction of deferred revenue   (189)   - 
Equity in net loss/(income) of unconsolidated affiliates   -    (36)
Loss on retirement of advance royalties   108    140 
(Gain) on sale/disposal of assets—net   64    43 
(Gain) on sale of Mammoth shares   (6,498)   - 
Equity based compensation   230    260 
Changes in assets and liabilities:          
Accounts receivable   5,148    (5,932)
Inventories   (3,001)   (2,421)
Advance royalties   (845)   (855)
Prepaid expenses and other assets   (1,480)   (1,359)
Accounts payable   4,163    2,227 
Accrued expenses and other liabilities   1,816    3,497 
Asset retirement obligations   (158)   (34)
Net cash provided by operating activities   6,649    7,283 
CASH FLOWS FROM INVESTING ACTIVITIES:          
Additions to property, plant, and equipment   (16,000)   (10,612)
Proceeds from sales of property, plant, and equipment   4,014    406 
Proceeds from business disposal   -    890 
Proceeds from sale of Mammoth shares   11,887    - 
Net cash used in investing activities   (99)   (9,316)
CASH FLOWS FROM FINANCING ACTIVITIES:          
Borrowings on line of credit   -    64,750 
Repayments on line of credit   -    (62,500)
Repayments on long-term debt   (10,222)   - 
Proceeds from issuance of other debt   1,329    - 
Repayments on other debt   (134)   - 
Deposit for workers’ compensation program   (5,209)   - 
Payments on debt issuance costs   (629)   (227)
Preferred distributions paid   (6,039)   - 
Net cash (used in)/provided by financing activities   (20,904)   2,023 
NET (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH   (14,354)   (10)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH—Beginning of period   21,120    47 
CASH, CASH EQUIVALENTS AND RESTRICTED CASH—End of period  $6,766   $37 
           
Summary Statement of Financial Position:          
Cash and cash equivalents  $3,114   $37 
Restricted cash   3,652    - 
   $6,766   $37 

 

See notes to unaudited condensed consolidated financial statements.

 

6
 

 

 

RHINO RESOURCE PARTNERS LP

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF JUNE 30, 2018 AND DECEMBER 31, 2017 AND FOR THE THREE AND SIX MONTHS ENDED

JUNE 30, 2018 AND 2017

 

1. BASIS OF PRESENTATION AND ORGANIZATION

 

Basis of Presentation and Principles of Consolidation. The accompanying unaudited interim financial statements include the accounts of Rhino Resource Partners LP and its subsidiaries (the “Partnership”). Intercompany transactions and balances have been eliminated in consolidation.

 

Cash, Cash Equivalents and Restricted Cash. The Partnership considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. The Partnership early adopted ASU No. 2016-18, Statement of Cash Flows-Restricted Cash as of December 31, 2017 and as such its unaudited condensed consolidated statement of cash flows for all historical periods reflect restricted cash combined with cash and cash equivalents. The Partnership did not have any other material impact from the early adoption of this ASU.

 

Unaudited Interim Financial Information. The accompanying unaudited interim financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information. The condensed consolidated statement of financial position as of June 30, 2018, condensed consolidated statements of operations and comprehensive income for the three and six months ended June 30, 2018 and 2017 and the condensed consolidated statements of cash flows for the six months ended June 30, 2018 and 2017 include all adjustments that the Partnership considers necessary for a fair presentation of the financial position, operating results and cash flows for the periods presented. The condensed consolidated statement of financial position as of December 31, 2017 was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“U.S.”). The Partnership filed its Annual Report on Form 10-K for the year ended December 31, 2017 with the Securities and Exchange Commission (“SEC”), which included all information and notes necessary for such presentation. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the year or any future period. These unaudited interim financial statements should be read in conjunction with the audited financial statements included in the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2017 filed with the SEC.

 

Reclassifications. Certain prior year amounts have been reclassified to discontinued operations on the unaudited condensed consolidated statements of operations and comprehensive income related to the disposal of Sands Hill Mining LLC in 2017. See Note 3, “Discontinued Operations” for further information on the disposal.

 

Organization. Rhino Resource Partners LP is a Delaware limited partnership formed on April 19, 2010 to acquire Rhino Energy LLC (the “Operating Company”). The Operating Company and its wholly owned subsidiaries produce and market coal from surface and underground mines in Kentucky, Ohio, West Virginia and Utah. The majority of sales are made to electric utilities, coal brokers, domestic and non-U.S. steel producers and other coal-related organizations in the United States. In addition, the Partnership has increased its sales focus to U.S. export customers through brokers and direct end-user relationships.

 

Through a series of transactions completed in the first quarter of 2016, Royal Energy Resources, Inc. (“Royal”) acquired a majority ownership and control of the Partnership and 100% ownership of the Partnership’s general partner. The Partnership’s common units trade on the OTCQB Marketplace under the ticker symbol “RHNO.”

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND GENERAL

 

Revenue Recognition. The Partnership adopted ASU 2014-09, Topic 606 on January 1, 2018, using the modified retrospective method. The adoption of Topic 606 has no impact on revenue amounts recorded on the Partnership’s financial statements (See Note 15 for additional discussion). Most of the Partnership’s revenues are generated under coal sales contracts with electric utilities, coal brokers, domestic and non-U.S. steel producers, industrial companies or other coal-related organizations. Revenue is recognized and recorded when shipment or delivery to the customer has occurred, prices are fixed or determinable and the title or risk of loss has passed in accordance with the terms of the sales agreement. Under the typical terms of these agreements, risk of loss transfers to the customers at the mine or port, when the coal is loaded on the rail, barge, truck or other transportation source that delivers coal to its destination. Advance payments received are deferred and recognized in revenue as coal is shipped and title has passed.

 

7
 

 

Freight and handling costs paid directly to third-party carriers and invoiced separately to coal customers are recorded as freight and handling costs and freight and handling revenues, respectively. Freight and handling costs billed to customers as part of the contractual per ton revenue of customer contracts is included in coal sales revenue.

 

Other revenues generally consist of coal royalty revenues, coal handling and processing revenues, rebates and rental income. With respect to other revenues recognized in situations unrelated to the shipment of coal, the Partnership carefully reviews the facts and circumstances of each transaction and does not recognize revenue until the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the seller’s price to the buyer is fixed or determinable and collectability is reasonably assured.

 

Investments in Unconsolidated Affiliates. Investments in other entities are accounted for using the consolidation, equity method or cost basis depending upon the level of ownership, the Partnership’s ability to exercise significant influence over the operating and financial policies of the investee and whether the Partnership is determined to be the primary beneficiary of a variable interest entity. Equity investments are recorded at original cost and adjusted periodically to recognize the Partnership’s proportionate share of the investees’ net income or losses after the date of investment. Any losses from the Partnership’s equity method investments are absorbed by the Partnership based upon its proportionate ownership percentage. If losses are incurred that exceed the Partnership’s investment in the equity method entity, then the Partnership continues to record its proportionate share of losses in excess of its investment. Investments are written down only when there is clear evidence that a decline in value that is other than temporary has occurred.

 

Recently Issued Accounting Standards. In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 requires that lessees recognize all leases (other than leases with a term of twelve months or less) on the balance sheet as lease liabilities, based upon the present value of the lease payments, with corresponding right of use assets. ASU 2016-02 also makes targeted changes to other aspects of current guidance, including identifying a lease and lease classification criteria as well as the lessor accounting model, including guidance on separating components of a contract and consideration in the contract. The amendments in ASU 2016-02 will be effective for the Partnership on January 1, 2019 and will require modified retrospective application as of the beginning of the earliest period presented in the financial statements. Early application is permitted. The Partnership is currently evaluating this guidance and compiling information on its portfolio of leases. The Partnership currently believes this new guidance will not have a material impact on its financial results when adopted, but will require additional assets and liabilities to be recognized for certain agreements where the Partnership has the rights to use assets. The majority of the Partnership’s rights to use assets relate to coal reserves, which are exempt from the requirements of ASU 2016-02.

 

In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805).” ASU 2017-01 clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Partnership has adopted this standard on its unaudited condensed consolidated financial statements, which has no current period impact but may impact future periods in which acquisitions are completed.

 

In July 2017, the FASB issued ASU 2017-11, “Earnings Per Share (Topic 260): Distinguishing Liabilities from Equity (Topic 480), I. Derivatives and Hedging (Topic 815): Accounting for Certain Financial Instruments with Down Round Features and II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception.” Part I of ASU 2017-11 will result in freestanding equity-linked financial instruments, such as warrants, and conversion options in convertible debt or preferred stock to no longer be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. For freestanding equity-classified financial instruments, the amendments require entities that present earnings per share (EPS) in accordance with Topic 260 to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS. The amendments in Part II recharacterize the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in the Codification. The amendments in Part II do not require any transition guidance as the amendments do not have an accounting effect. The amendments in ASU 2017-11 will be effective on January 1, 2020, and the Part I amendments must be applied retrospectively. Early application is permitted. The Partnership early adopted ASU 2017-11, which did not have any material impact.

 

8
 

 

3. DISCONTINUED OPERATIONS

 

Sands Hill Mining LLC

Major components of net (loss) from discontinued operations for the three and six months ended

June 30, 2018 and 2017 are summarized as follows:

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2018   2017   2018   2017 
Major line items constituting (loss) from discontinued operations for the Sands Hill Mining disposal:                    
Coal sales  $-   $411   $-   $937 
Limestone sales   -    1,007    -    2,085 
Other revenues   -    429    -    831 
Total revenues   -    1,847    -    3,853 
                     
Cost of operations (exclusive of depreciation, depletion and amortization shown separately below)   -    1,721    -    3,422 
Depreciation, depletion and amortization   -    139    -    330 
Selling, general and administrative (exclusive of depreciation, depletion and amortization shown separately above)   -    14    -    26 
Freight and handling costs        228    -    403 
(Gain) on sale/disposal of assets, net   -    -    -    (2)
Total costs and expenses   -    2,102    -    4,179 
(Loss) from discontinued operations before income taxes for the Sands Hill Mining disposal   -    (255)   -    (326)
Income taxes   -    -    -    - 
Net (loss) from discontinued operations  $-   $(255)  $-   $(326)

 

9
 

 

Cash Flows

 

The depreciation, depletion and amortization amounts for Sands Hill Mining LLC for each period presented are listed in the previous table. The Partnership did not fund any material capital expenditures for Sands Hill Mining LLC for any period presented. Sands Hill Mining LLC did not have any material non-cash operating items or non-cash investing items for any period presented.

 

4. PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

Prepaid expenses and other current assets as of June 30, 2018 and December 31, 2017 consisted of the following:

 

   June 30, 2018   December 31, 2017 
   (in thousands) 
Other prepaid expenses  $1,678   $920 
Prepaid insurance   1,827    1,445 
Prepaid leases   87    92 
Supply inventory   306    434 
Total Prepaid expenses and other  $3,898   $2,891 

 

5. PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment, including coal properties and mine development and construction costs, as of June 30, 2018 and December 31, 2017 are summarized by major classification as follows:

 

   Useful Lives   June 30, 2018   December 31, 2017 
       (in thousands) 
Land       $14,050   $14,687 
Mining and other equipment and related facilities   2 - 20 Years    305,554    298,293 
Mine development costs   1 - 15 Years    60,040    58,566 
Coal properties   1 - 15 Years    64,070    64,070 
Construction work in process        5,085    5,227 
Total        448,799    440,843 
Less accumulated depreciation, depletion and amortization        (270,137)   (263,520)
Net       $178,662   $177,323 

 

Depreciation expense for mining and other equipment and related facilities, depletion expense for coal properties, amortization expense for mine development costs and amortization expense for asset retirement costs for the three and six months ended June 30, 2018 and 2017 were as follows:

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2018   2017   2018   2017 
   (in thousands) 
Depreciation expense-mining and other equipment and related facilities  $4,244   $4,220   $8,331   $8,480 
Depletion expense for coal properties   481    415    953    770 
Amortization expense for mine development costs   821    788    1,570    1,545 
Amortization expense for asset retirement costs   131    47    250    182 
Total depreciation, depletion and amortization  $5,677   $5,470   $11,104   $10,977 

 

10
 

 

On May 17, 2018, the Partnership entered into a sale leaseback agreement with Wintrust Commercial Finance for certain equipment previously owned by the Partnership. The Partnership received approximately $3.7 million of proceeds, of which $1.7 million was used to reduce debt. The lease agreement has a thirty-six month term. The Partnership recorded a loss of $0.2 million on the sale of the equipment which is included on the (Gain)/Loss on sale/disposal of assets-net line in the Partnership’s unaudited condensed consolidated statements of operations and comprehensive income.

 

6. OTHER NON-CURRENT ASSETS

 

Other non-current assets as of June 30, 2018 and December 31, 2017 consisted of the following:

 

   June 30, 2018   December 31, 2017 
   (in thousands) 
Deposits and other  $919   $423 
Due (to)/from Rhino GP   (68)   (61)
Non-current receivable   27,806    27,806 
Deferred expenses   324    340 
Total  $28,981   $28,508 

 

Non-current receivable. The non-current receivable balance of $27.8 million as of June 30, 2018 and December 31, 2017 consisted of the amount due from the Partnership’s workers’ compensation insurance providers for potential claims against the Partnership that are the primary responsibility of the Partnership, which are covered under the Partnership’s insurance policies. The $27.8 million is also included in the Partnership’s accrued workers’ compensation benefits liability balance, which is included in the other non-current liabilities section of the Partnership’s unaudited condensed consolidated statements of financial position. The Partnership presents this amount on a gross asset and liability basis since a right of setoff does not exist per the accounting guidance in ASC Topic 210, Balance Sheet. This presentation has no impact on the Partnership’s results of operations or cash flows.

 

7. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

 

Accrued expenses and other current liabilities as of June 30, 2018 and December 31, 2017 consisted of the following:

 

   June 30, 2018   December 31, 2017 
   (in thousands) 
Payroll, bonus and vacation expense  $2,299   $2,633 
Non income taxes   3,548    2,738 
Royalty expenses   2,222    2,410 
Accrued interest   86    132 
Health claims   680    871 
Workers’ compensation & pneumoconiosis   1,750    1,750 
Deferred revenues   985    - 
Other   963    652 
Total  $12,533   $11,186 

 

11
 

 

8. DEBT

 

Debt as of June 30, 2018 and December 31, 2017 consisted of the following:

 

   June 30, 2018   December 31, 2017 
   (in thousands) 
Note payable -Financing Agreement  $29,778   $40,000 
Note payable-Other   1,195    - 
Net unamortized debt issuance costs   (4,502)   (4,688)
Original Issue Discount   (1,054)   (1,264)
Total   25,417    34,048 
Less current portion   (2,320)   (5,475)
Long-term debt  $23,097   $28,573 

 

Financing Agreement

 

On December 27, 2017, the Operating Company, a wholly-owned subsidiary of the Partnership, certain of the Operating Company’s subsidiaries identified as Borrowers (together with the Operating Company, the “Borrowers”), the Partnership and certain other Operating Company subsidiaries identified as Guarantors (together with the Partnership, the “Guarantors”), entered into a Financing Agreement (the “Financing Agreement”) with Cortland Capital Market Services LLC, as Collateral Agent and Administrative agent, CB Agent Services LLC, as Origination Agent and the parties identified as Lenders therein (the “Lenders”), pursuant to which the Lenders agreed to provide the Borrowers with a multi-draw term loan in the aggregate principal amount of $80 million, subject to the terms and conditions set forth in the Financing Agreement. The total principal amount is divided into a $40 million commitment, the conditions of which were satisfied at the execution of the Financing Agreement (the “Effective Date Term Loan Commitment”) and an additional $40 million commitment that is contingent upon the satisfaction of certain conditions precedent specified in the Financing Agreement (“Delayed Draw Term Loan Commitment”). Loans made pursuant to the Financing Agreement are secured by substantially all of the Borrowers’ and Guarantors’ assets. The Financing Agreement terminates on December 27, 2020.

 

Loans made pursuant to the Financing Agreement are, at the Operating Company’s option, either “Reference Rate Loans” or “LIBOR Rate Loans.” Reference Rate Loans bear interest at the greatest of (a) 4.25% per annum, (b) the Federal Funds Rate plus 0.50% per annum, (c) the LIBOR Rate (calculated on a one-month basis) plus 1.00% per annum or (d) the Prime Rate (as published in the Wall Street Journal) or if no such rate is published, the interest rate published by the Federal Reserve Board as the “bank prime loan” rate or similar rate quoted therein, in each case, plus an applicable margin of 9.00% per annum (or 12.00% per annum if the Operating Company has elected to capitalize an interest payment pursuant to the PIK Option, as described below). LIBOR Rate Loans bear interest at the greater of (x) the LIBOR for such interest period divided by 100% minus the maximum percentage prescribed by the Federal Reserve for determining the reserve requirements in effect with respect to eurocurrency liabilities for any Lender, if any, and (y) 1.00%, in each case, plus 10.00% per annum (or 13.00% per annum if the Borrowers have elected to capitalize an interest payment pursuant to the PIK Option). Interest payments are due on a monthly basis for Reference Rate Loans and one-, two- or three-month periods, at the Operating Company’s option, for LIBOR Rate Loans. If there is no event of default occurring or continuing, the Operating Company may elect to defer payment on interest accruing at 6.00% per annum by capitalizing and adding such interest payment to the principal amount of the applicable term loan (the “PIK Option”).

 

Commencing December 31, 2018, the principal for each loan made under the Financing Agreement will be payable on a quarterly basis in an amount equal to $375,000 per quarter, with all remaining unpaid principal and accrued and unpaid interest due on December 27, 2020. In addition, the Borrowers must make certain prepayments over the term of any loans outstanding, including: (i) the payment of 25% of Excess Cash Flow (as that term is defined in the Financing Agreement) of the Partnership and its subsidiaries for each fiscal year, commencing with respect to the year ending December 31, 2019, (ii) subject to certain exceptions, the payment of 100% of the net cash proceeds from the dispositions of certain assets, the incurrence of certain indebtedness or receipts of cash outside of the ordinary course of business, and (iii) the payment of the excess of the outstanding principal amount of term loans outstanding over the amount of the Collateral Coverage Amount (as that term is defined in the Financing Agreement). In addition, the Lenders are entitled to (i) certain fees, including 1.50% per annum of the unused Delayed Draw Term Loan Commitment for as long as such commitment exists, (ii) for the 12-month period following the execution of the Financing Agreement, a make-whole amount equal to the interest and unused Delayed Draw Term Loan Commitment fees that would have been payable but for the occurrence of certain events, including among others, bankruptcy proceedings or the termination of the Financing Agreement by the Operating Company, and (iii) audit and collateral monitoring fees and origination and exit fees.

 

12
 

 

The Financing Agreement requires the Borrowers and Guarantor to comply with several affirmative covenants at any time loans are outstanding, including, among others: (i) the requirement to deliver monthly, quarterly and annual financial statements, (ii) the requirement to periodically deliver certificates indicating, among other things, (a) compliance with terms of the Financing Agreement and ancillary loan documents, (b) inventory, accounts payable, sales and production numbers, (c) the calculation of the Collateral Coverage Amount (as that term is defined in the Financing Agreement), (d) projections for the Partnership and its subsidiaries and (e) coal reserve amounts; (iii) the requirement to notify the Administrative Agent of certain events, including events of default under the Financing Agreement, dispositions, entry into material contracts, (iv) the requirement to maintain insurance, obtain permits, and comply with environmental and reclamation laws (v) the requirement to sell up to $5.0 million of shares in Mammoth Energy Services Inc. and use the net proceeds therefrom to prepay outstanding term loans, which was completed during the first half of 2018 and (vi) establish and maintain cash management services and establish a cash management account and deliver a control agreement with respect to such account to the Collateral Agent. The Financing Agreement also contains negative covenants that restrict the Borrowers and Guarantors ability to, among other things: (i) incur liens or additional indebtedness or make investments or restricted payments, (ii) liquidate or merge with another entity, or dispose of assets, (iii) change the nature of their respective businesses; (iv) make capital expenditures in excess, or, with respect to maintenance capital expenditures, lower than, specified amounts, (v) incur restrictions on the payment of dividends, (vi) prepay or modify the terms of other indebtedness, (vii) permit the Collateral Coverage Amount to be less than the outstanding principal amount of the loans outstanding under the Financing Agreement or (viii) permit the trailing six month Fixed Charge Coverage Ratio of the Partnership and its subsidiaries to be less than 1.20 to 1.00 commencing with the six-month period ending June 30, 2018. See Note 19 for information relating to the lenders’ waiver of the Fixed Charge Coverage Ratio for the six-month period ending June 30, 2018.

 

The Financing Agreement contains customary events of default, following which the Collateral Agent may, at the request of lenders, terminate or reduce all commitments and accelerate the maturity of all outstanding loans to become due and payable immediately together with accrued and unpaid interest thereon and exercise any such other rights as specified under the Financing Agreement and ancillary loan documents. The Partnership entered into a warrant agreement with certain parties that are also parties to the Financing Agreement discussed above. (See Note 11 for further discussion)

 

On April 17, 2018, Rhino amended its Financing Agreement to allow for certain activities including a sale leaseback of certain pieces of equipment, the extension of the due date for lease consents required under the Financing Agreement to June 30, 2018 and the distribution to holders of the Series A preferred units of $6.0 million (accrued in the consolidated financial statements at December 31, 2017). Additionally, the amendments provided that the Partnership could sell additional shares of Mammoth Energy Services Inc. stock and retain 50% of the proceeds with the other 50% used to reduce debt. The Partnership reduced its outstanding debt by $3.4 million with proceeds from the sale of Mammoth Energy Services Inc. stock in the second quarter of 2018.

 

At June 30, 2018, the Partnership had $29.8 million of borrowings outstanding at a variable interest rate of Libor plus 10.00% (11.97%).

 

Letter of Credit Facility-PNC Bank

 

On December 27, 2017, the Partnership entered into a master letter of credit facility, security agreement and reimbursement agreement (the “LoC Facility Agreement”) with PNC Bank, National Association (“PNC”), pursuant to which PNC agreed to provide the Partnership with a facility for the issuance of standby letters of credit used in the ordinary course of its business (the “LoC Facility”). The LoC Facility Agreement provides that the Partnership pay a quarterly fee at a rate equal to 5% per annum calculated based on the daily average of letters of credit outstanding under the LoC Facility, as well as administrative costs incurred by PNC and a $100,000 closing fee. The LoC Facility Agreement provides that the Partnership reimburse PNC for any drawing under a letter of credit by a specified beneficiary as soon as possible after payment is made. The Partnership’s obligations under the LoC Facility Agreement are secured by a first lien security interest on a cash collateral account that is required to contain no less than 105% of the face value of the outstanding letters of credit. In the event the amount in such cash collateral account is insufficient to satisfy the Partnership’s reimbursement obligations, the amount outstanding bears interest at a rate per annum equal to the Base Rate (as that term is defined in the LoC Facility Agreement) plus 2.0%. The Partnership will indemnify PNC for any losses which PNC may incur as a result of the issuance of a letter of credit or PNC’s failure to honor any drawing under a letter of credit, subject in each case to certain exceptions. The LoC Facility Agreement expires on December 31, 2018.

 

13
 

 

The Partnership had outstanding letters of credit of approximately $3.0 million at a fixed interest rate of 5.00% at June 30, 2018.

 

9. ASSET RETIREMENT OBLIGATIONS

 

The changes in asset retirement obligations for the six months ended June 30, 2018 and the year ended December 31, 2017 are as follows:

 

   Six months ended   Year ended 
   June 30, 2018   December 31, 2017 
   (in thousands) 
Balance at beginning of period (including current portion)  $18,662   $19,108 
Accretion expense   639    1,493 
Adjustment resulting from disposal of property   -    (223)
Adjustments to the liability from annual recosting and other   -    (1,656)
Liabilities settled   (158)   (60)
Balance at end of period   19,143    18,662 
Less current portion of asset retirement obligation   (498)   (498)
Long-term portion of asset retirement obligation  $18,645   $18,164 

 

10. EMPLOYEE BENEFITS

 

401(k) Plans

 

The Operating Company sponsors a defined contribution savings plans for all employees. Under the defined contribution savings plan, the Operating Company matches voluntary contributions of participants up to a maximum contribution based upon a percentage of a participant’s salary with an additional matching contribution possible at the Partnership’s discretion. The expense under these plans for the three and six months ended June 30, 2018 and 2017 is included in Cost of operations and Selling, general and administrative expense in the Partnership’s unaudited condensed consolidated statements of operations and comprehensive income and was as follows:

 

   Three months ended June 30,   Six months ended June 30, 
   2018   2017   2018   2017 
   (in thousands) 
401(k) plan expense  $393   $336   $829   $693 

 

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11. PARTNERS’ CAPITAL

 

Common Unit Warrants

 

In December 2017, the Partnership entered into a warrant agreement with certain parties that are also parties to the Financing Agreement discussed above. The warrant agreement included the issuance of a total of 683,888 warrants for common units (“Common Unit Warrants”) of the Partnership at an exercise price of $1.95 per unit, which was the closing price of the Partnership’s common units on the OTC market as of December 27, 2017. The Common Unit Warrants have a five year expiration date. The Common Unit Warrants and the Partnership’s common units after exercise are both transferable, subject to applicable US securities laws. The Common Unit Warrant exercise price is $1.95 per unit, but the price per unit will be reduced by future common unit distributions and other further adjustments in price included in the warrant agreement for transactions that are dilutive to the amount of the Partnership’s common units outstanding. The warrant agreement includes a provision for a cashless exercise where the warrant holders can receive a net number of common units. Per the warrant agreement, the warrants are detached from the Financing Agreement and fully transferable. The Partnership analyzed the Common Unit Warrants in accordance with the applicable accounting literature and concluded the Common Unit Warrants should be classified as equity. The Partnership allocated the $40.0 million proceeds from the Financing Agreement between the Common Unit Warrants and the Financing Agreement based upon their relative fair values. The allocation based upon relative fair values resulted in approximately $1.3 million being recorded for the Common Unit Warrants in the Partner’s Capital equity section and a corresponding reduction in Long-term debt, net on the Partnership’s consolidated statements of financial position.

 

Series A Preferred Units

 

On December 30, 2016, the general partner entered into the Fourth Amended and Restated Agreement of Limited Partnership of the Partnership (“Amended and Restated Partnership Agreement”) to create, authorize and issue the Series A preferred units.

 

The Series A preferred units rank senior to all classes or series of equity securities of the Partnership with respect to distribution rights and rights upon liquidation. The holders of the Series A preferred units are entitled to receive annual distributions equal to the greater of (i) 50% of the CAM Mining free cash flow (as defined below) and (ii) an amount equal to the number of outstanding Series A preferred units multiplied by $0.80. “CAM Mining free cash flow” is defined in the Amended and Restated Partnership Agreement as (i) the total revenue of the Partnership’s Central Appalachia business segment, minus (ii) the cost of operations (exclusive of depreciation, depletion and amortization) for the Partnership’s Central Appalachia business segment, minus (iii) an amount equal to $6.50, multiplied by the aggregate number of coal tons sold by the Partnership from its Central Appalachia business segment. If the Partnership fails to pay any or all of the distributions in respect of the Series A preferred units, such deficiency will accrue until paid in full and the Partnership will not be permitted to pay any distributions on its Partnership interests that rank junior to the Series A preferred units, including its common units. The Series A preferred units will be liquidated in accordance with their capital accounts and upon liquidation will be entitled to distributions of property and cash in accordance with the balances of their capital accounts prior to such distributions on equity securities that rank junior to the Series A preferred units.

 

The Series A preferred units vote on an as-converted basis with the common units, and the Partnership is restricted from taking certain actions without the consent of the holders of a majority of the Series A preferred units, including: (i) the issuance of additional Series A preferred units, or securities that rank senior or equal to the Series A preferred units; (ii) the sale or transfer of CAM Mining or a material portion of its assets; (iii) the repurchase of common units, or the issuance of rights or warrants to holders of common units entitling them to purchase common units at less than fair market value; (iv) consummation of a spin off; (v) the incurrence, assumption or guaranty of indebtedness for borrowed money in excess of $50.0 million except indebtedness relating to entities or assets that are acquired by the Partnership or its affiliates that is in existence at the time of such acquisition or (vi) the modification of CAM Mining’s accounting principles or the financial or operational reporting principles of the Partnership’s Central Appalachia business segment, subject to certain exceptions.

 

The Partnership has the option to convert the outstanding Series A preferred units at any time on or after the time at which the amount of aggregate distributions paid in respect of each Series A preferred unit exceeds $10.00 per unit. Each Series A preferred unit will convert into a number of common units equal to the quotient (the “Series A Conversion Ratio”) of (i) the sum of $10.00 and any unpaid distributions in respect of such Series A Preferred Unit divided by (ii) 75% of the volume-weighted average closing price of the common units for the preceding 90 trading days (the “VWAP”); provided however, that the VWAP will be capped at a minimum of $2.00 and a maximum of $10.00. On December 31, 2021, all outstanding Series A preferred units will convert into common units at the then applicable Series A Conversion Ratio.

 

15
 

 

During the first quarter of 2018, the Partnership paid $6.0 million in distributions earned for the year ended December 31, 2017 to holders of the Series A preferred units. The Partnership has accrued $0.6 million for distributions to holders of the Series A preferred units for the six months ended June 30, 2018.

 

Investment in Royal Common Stock

 

On September 1, 2017, Royal elected to convert certain obligations to the Partnership totaling $4.1 million to shares of Royal common stock. Royal issued 914,797 shares of its common stock to the Partnership at a conversion price of $4.51 per share. The price per share was equal to the outstanding balance multiplied by seventy-five percent (75%) of the volume-weighted average closing price of Royal’s common stock for the 90 days preceding the date of conversion (“Royal VWAP”), subject to a minimum Royal VWAP of $3.50 and a maximum Royal VWAP of $7.50. The Partnership recorded the $4.1 million conversion as Investment in Royal common stock in the Partners’ Capital section of the Partnership’s unaudited condensed consolidated statements of financial position since Royal does not have significant economic activity apart from its investment in the Partnership.

 

Other Comprehensive Income

 

On April 12, 2018 the Partnership sold 232,347 shares of Mammoth Energy Services, Inc. (NASDAQ: TUSK) (“Mammoth Inc.”) for net cash consideration of $7.1 million. The Partnership used $3.4 million of the proceeds to reduce its debt balance. The Partnership recorded a gain on the sale of approximately $3.6 million and reduced Other Comprehensive income by $4.0 million as a result of the disposition. On January 19, 2018 the Partnership sold 232,347 shares of Mammoth Inc. for net cash consideration of $4.8 million. The proceeds were used to reduce the Partnership’s debt balance. The Partnership recorded a gain on the sale of $2.9 million and reduced Other Comprehensive income by $2.6 million as a result of the disposition. As of June 30, 2018 and December 31, 2017, the Partnership recorded fair market value adjustments of $4.4 million and $2.6 million, respectively, for its available-for-sale investment in Mammoth Inc. based on the market value of the shares at June 30, 2018 and December 31, 2017, respectively, which was recorded in Other Comprehensive Income. As of June 30, 2018 and December 31, 2017, the Partnership recorded its investment in Mammoth Inc. as a current asset, which was classified as available-for-sale. The Partnership has included its investment in Mammoth Inc. in its Other category for segment reporting purposes. As of June 30, 2018, the Partnership owned 104,100 shares of Mammoth Inc.

 

Accumulated Distribution Arrearages

 

Pursuant to the Partnership’s partnership agreement, the Partnership’s common units accrue arrearages every quarter when the distribution level is below the minimum level of $4.45 per unit. Beginning with the quarter ended June 30, 2015 and continuing through the quarter ended June 30, 2018, the Partnership has suspended the cash distribution on its common units. For each of the quarters ended September 30, 2014, December 31, 2014 and March 31, 2015, the Partnership announced cash distributions per common unit at levels lower than the minimum quarterly distribution. The Partnership has not paid any distribution on its subordinated units for any quarter after the quarter ended March 31, 2012. As of June 30, 2018, the Partnership had accumulated arrearages of $556.0 million.

 

16
 

 

12. EARNINGS PER UNIT (“EPU”)

 

The following table presents a reconciliation of the numerators and denominators of the basic and diluted EPU calculations for the periods ended June 30, 2018 and 2017:

 

Three months ended June 30, 2018  General Partner   Common Unitholders   Subordinated Unitholders   Preferred Unitholders 
  (in thousands, except per unit data)     
Numerator:                    
Interest in net (loss)/income:                    
Net (loss)/income from continuing operations  $(14)  $(3,061)  $(269)  $309 
Net(loss)/income from discontinued operations   -    -    -    - 
Total interest in net (loss)/income  $(14)  $(3,061)  $(269)  $309 
Denominator:                    
Weighted average units used to compute basic EPU   n/a     13,055    1,146    1,500 
Weighted average units used to compute diluted EPU   n/a     13,055    1,146    1,500 
                     
Net (loss)/income per limited partner unit, basic                    
Net (loss)/income per unit from continuing operations   n/a    $(0.23)  $(0.23)  $0.21 
Net(loss/income) per unit from discontinued operations   n/a     -    -    - 
Net (loss)/income per common unit, basic   n/a    $(0.23)  $(0.23)  $0.21 
Net (loss)/income per limited partner unit, diluted                    
Net (loss)/income per unit from continuing operations   n/a    $(0.23)  $(0.23)   0.21 
Net (loss)/income per unit from discontinued operations   n/a     -    -    - 
Net (loss)/income per common unit, diluted   n/a    $(0.23)  $(0.23)   0.21 

 

Three months ended June 30, 2017  General Partner   Common Unitholders   Subordinated Unitholders   Preferred Unitholders 
  (in thousands, except per unit data)     
Numerator:                    
Interest in net (loss)/income:                    
Net (loss)/income from continuing operations  $(3)  $(738)  $(70)  $1,357 
Net (loss) from discontinued operations   (1)   (232)   (23)   - 
Total interest in net (loss)/income  $(4)  $(970)  $(93)   1,357 
Denominator:                    
Weighted average units used to compute basic EPU    n/a     12,964    1,236    1,500 
Weighted average units used to compute diluted EPU    n/a     12,964    1,236    1,500 
                     
Net (loss)/income per limited partner unit, basic                    
Net (loss)/income per unit from continuing operations    n/a    $(0.06)  $(0.06)  $0.90 
Net (loss) per unit from discontinued operations    n/a     (0.02)   (0.02)   - 
Net (loss)/income per common unit, basic    n/a    $(0.08)  $(0.08)  $0.90 
Net (loss)/income per limited partner unit, diluted                    
Net (loss)/income per unit from continuing operations    n/a    $(0.06)  $(0.06)  $0.90 
Net (loss) per unit from discontinued operations    n/a     (0.02)   (0.02)   - 
Net (loss)/income per common unit, diluted    n/a    $(0.08)  $(0.08)  $0.90 

 

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Six months ended June 30, 2018  General Partner   Common Unitholders   Subordinated Unitholders   Preferred Unitholders 
  (in thousands, except per unit data)     
Numerator:                    
Interest in net (loss)/income:                    
Net (loss)/income from continuing operations  $(27)  $(5,917)  $(521)  $609 
Net (loss)/income from discontinued operations   -    -    -    - 
Total interest in net (loss)/income  $(27)  $(5,917)  $(521)  $609 
Denominator:                    
Weighted average units used to compute basic EPU   n/a     13,009    1,146    1,500 
Weighted average units used to compute diluted EPU    n/a     13,009    1,146    1,500 
                     
Net (loss)/income per limited partner unit, basic                    
Net (loss)/income per unit from continuing operations    n/a    $(0.45)  $(0.45)  $0.41 
Net (loss)/income per unit from discontinued operations    n/a     -    -    - 
Net (loss)/income per common unit, basic    n/a    $(0.45)  $(0.45)  $0.41 
Net (loss)/income per limited partner unit, diluted                    
Net (loss)/income per unit from continuing operations    n/a    $(0.45)  $(0.45)   0.41 
Net (loss)/income per unit from discontinued operations    n/a     -    -    - 
Net (loss)/income per common unit, diluted    n/a    $(0.45)  $(0.45)   0.41 

 

Six months ended June 30, 2017  General Partner   Common Unitholders   Subordinated Unitholders   Preferred Unitholders 
  (in thousands, except per unit data)     
Numerator:                    
Interest in net (loss/income):                    
Net (loss)/income from continuing operations  $(16)  $(3,533)  $(338)   2,473 
Net (loss) from discontinued operations   (1)   (296)   (28)   - 
Total interest in net (loss)/income  $(17)  $(3,829)  $(366)   2,473 
Denominator:                    
Weighted average units used to compute basic EPU    n/a     12,920    1,236    1,500 
Weighted average units used to compute diluted EPU    n/a     12,920    1,236    1,500 
                     
Net (loss)/income per limited partner unit, basic                    
Net (loss)/income per unit from continuing operations    n/a    $(0.28)  $(0.28)  $1.65 
Net (loss) per unit from discontinued operations    n/a     (0.02)   (0.02)   - 
Net (loss)/income per common unit, basic    n/a    $(0.30)  $(0.30)  $1.65 
Net (loss)/income per limited partner unit, diluted                    
Net (loss)/income per unit from continuing operations    n/a    $(0.28)  $(0.28)  $1.65 
Net (loss) per unit from discontinued operations    n/a     (0.02)   (0.02)   - 
Net (loss)/income per common unit, diluted    n/a    $(0.30)  $(0.30)  $1.65 

 

Diluted EPU gives effect to all dilutive potential common units outstanding during the period using the treasury stock method. Diluted EPU excludes all dilutive potential units calculated under the treasury stock method if their effect is anti-dilutive. Since the Partnership incurred a total net loss for three and six months ended June 30, 2018 and the six months ended June 30, 2017, all potential dilutive units were excluded from the diluted EPU calculation for these periods because when an entity incurs a net loss in a period, potential dilutive units shall not be included in the computation of diluted EPU since their effect will always be anti-dilutive. The Partnership incurred total net income for the three months ended June 30, 2017 but did not have any potential dilutive units outstanding during the period. There were 683,888 potential dilutive common units related to the Common Unit Warrants as discussed in Note 11 for the six months ended June 30, 2018.

 

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13. COMMITMENTS AND CONTINGENCIES

 

Coal Sales Contracts and Contingencies—As of June 30, 2018, the Partnership had commitments under sales contracts to deliver annually scheduled base quantities of coal as follows:

 

Year   Tons (in thousands)   Number of customers 
 2018 Q3-Q4    2,475    18 
 2019    2,020    8 
 2020    1,146    5 

 

Some of the contracts have sales price adjustment provisions, subject to certain limitations and adjustments, based on a variety of factors and indices.

 

Purchased Coal Expenses—The Partnership incurs purchased coal expense from time to time related to coal purchase contracts. In addition, the Partnership incurs expense from time to time related to coal purchased on the over-the-counter market (“OTC”). The Partnership incurred no purchase coal expense from coal purchase contracts or expense from OTC purchases for the three and six months ended June 30, 2018 and 2017.

 

Leases—The Partnership leases various mining, transportation and other equipment under operating leases. The Partnership also leases coal reserves under agreements that call for royalties to be paid as the coal is mined. Lease and royalty expense for the three and six months ended June 30, 2018 and 2017 are included in Cost of operations in the Partnership’s unaudited condensed consolidated statements of operations and comprehensive income and was as follows:

 

   Three months ended June 30,   Six months ended June 30, 
   2018   2017   2018   2017 
   (in thousands) 
Lease expense  $976   $968   $1,406   $2,472 
Royalty expense  $3,467   $3,924   $7,111   $7,286 

 

14. MAJOR CUSTOMERS

 

The Partnership had sales or receivables from the following major customers that in each period equaled or exceeded 10% of revenues:

 

   June 30   December 31   Six months   Six months 
   2018   2017   ended   ended 
   Receivable   Receivable   June 30   June 30 
   Balance   Balance   2018 Sales   2017 Sales 
   (in thousands) 
Javelin Global  $3,727   $2,470   $16,554   $- 
Dominion Energy   1,958    1,232    14,013    11,123 
Integrity Coal   -    2,238    11,364    12,268 
Big Rivers Electric Corporation   932    -    10,817    13,234 
LG&E   234    1,483    6,559    21,162 

 

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15. REVENUE

 

The Partnership adopted ASC Topic 606 on January 1, 2018, using the modified retrospective method. The adoption of Topic 606 has no impact on revenue amounts recorded on the Partnership’s financial statements. The new disclosures required by ASC Topic 606, as applicable, are presented below. The majority of the Partnership’s revenues are generated under coal sales contracts. Coal sales accounted for approximately 99.0% of the Partnership’s total revenues for the three and six months ended June 30, 2018 and 2017. Other revenues generally consist of coal royalty revenues, coal handling and processing revenues, rebates and rental income, which accounted for approximately 1.0% of the Partnership’s total revenues for the three and six months ended June 30, 2018 and 2017.

 

The majority of the Partnership’s coal sales contracts have a single performance obligation (shipment or delivery of coal according to terms of the sales agreement) and as such, the Partnership is not required to allocate the contract’s transaction price to multiple performance obligations. All of the Partnership’s coal sales revenue is recognized when shipment or delivery to the customer has occurred, prices are fixed or determinable and the title or risk of loss has passed in accordance with the terms of the coal sales agreement. With respect to other revenues recognized in situations unrelated to the shipment of coal, the Partnership carefully reviews the facts and circumstances of each transaction and does not recognize revenue until the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the seller’s price to the buyer is fixed or determinable and collectability is reasonably assured.

 

In the tables below, the Partnership has disaggregated its revenue by category for each reportable segment as required by ASC Topic 606.

 

The following table disaggregates revenue by type for each reportable segment for the three months ended June 30, 2018:

 

   Central Appalachia   Northern Appalachia   Rhino Western   Illinois Basin   Other   Total Consolidated 
   (in thousands) 
Coal sales                              
Steam coal  $13,200   $3,904   $8,656   $13,608   $-   $39,368 
Met coal   14,877    -    -    -    -    14,877 
Other revenue   56    517    -    -    105    678 
Total  $28,133   $4,421   $8,656   $13,608   $105   $54,923 

 

The following table disaggregates revenue by type for each reportable segment for the three months ended June 30, 2017:

 

   Central Appalachia   Northern Appalachia   Rhino Western   Illinois Basin   Other   Total Consolidated 
   (in thousands) 
Coal sales                              
Steam coal  $10,380   $2,325   $8,760   $17,604   $-   $39,070 
Met coal   15,229    -    -    -    -    15,229 
Other revenue   65    317    3    -    4    389 
Total  $25,674   $2,642   $8,763   $17,604   $4   $54,688 

 

The following table disaggregates revenue by type for each reportable segment for the six months ended June 30, 2018:

 

   Central Appalachia   Northern Appalachia   Rhino Western   Illinois Basin   Other   Total Consolidated 
   (in thousands) 
Coal sales                              
Steam coal  $24,861   $7,592   $16,716   $25,219   $-   $74,388 
Met coal   34,129    -    -    -    -    34,129 
Other revenue   118    974    9    -    105    1,206 
Total  $59,108   $8,566   $16,725   $25,219   $105   $109,723 

 

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The following table disaggregates revenue by type for each reportable segment for the six months ended June 30, 2017:

 

   Central Appalachia   Northern Appalachia   Rhino Western   Illinois Basin   Other   Total Consolidated 
   (in thousands) 
Coal sales                              
Steam coal  $17,055   $6,184   $16,058   $34,412   $-   $73,708 
Met coal   31,846    -    -    -    -    31,846 
Other revenue   88    578    3    -    9    678 
Total  $48,989   $6,762   $16,061   $34,412   $9   $106,232 

 

16. FAIR VALUE MEASUREMENTS

 

The Partnership determines the fair value of assets and liabilities based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. The fair values are based on assumptions that market participants would use when pricing an asset or liability, including assumptions about risk and the risks inherent in valuation techniques and the inputs to valuations. The fair value hierarchy is based on whether the inputs to valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Partnership’s assumptions of what market participants would use.

 

The fair value hierarchy includes three levels of inputs that may be used to measure fair value as described below:

 

Level One - Quoted prices for identical instruments in active markets.

 

Level Two - The fair value of the assets and liabilities included in Level 2 are based on standard industry income approach models that use significant observable inputs.

 

Level Three - Unobservable inputs significant to the fair value measurement supported by little or no market activity.

 

In those cases when the inputs used to measure fair value meet the definition of more than one level of the fair value hierarchy, the lowest level input that is significant to the fair value measurement in its totality determines the applicable level in the fair value hierarchy.

 

The book values of cash and cash equivalents, accounts receivable and accounts payable are considered to be representative of their respective fair values because of the immediate short-term maturity of these financial instruments. The fair value of the Partnership’s Financing Agreement was determined based upon a market approach and approximates the carrying value at June 30, 2018. The fair value of the Partnership’s Financing Agreement is a Level 2 measurement.

 

As of June 30, 2018 and December 31, 2017, the Partnership had a recurring fair value measurement relating to its investment in Mammoth Inc. As discussed in Note 11, the Partnership owned 104,100 shares of Mammoth Inc. as of June 30, 2018. The Partnership’s shares of Mammoth Inc. are classified as an available-for-sale investment on the Partnership’s unaudited condensed consolidated statements of financial position. Based on the availability of a quoted price, the recurring fair value measurement of the Mammoth Inc. shares is a Level 1 measurement.

 

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17. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

 

Cash payments for interest were $2.8 million and $1.4 million for the six months ended June 30, 2018 and 2017, respectively.

 

The unaudited condensed consolidated statement of cash flows for the six months ended June 30, 2018 and 2017 excludes approximately $1.6 million and $1.1 million, respectively, of property, plant and equipment additions which are recorded in Accounts payable.

 

18. SEGMENT INFORMATION

 

The Partnership primarily produces and markets coal from surface and underground mines in Kentucky, West Virginia, Ohio and Utah. The Partnership sells primarily to electric utilities in the United States.

 

As of June 30, 2018, the Partnership has four reportable business segments: Central Appalachia, Northern Appalachia, Rhino Western and Illinois Basin. Additionally, the Partnership has an Other category that includes its ancillary businesses.

 

The Partnership’s Other category as reclassified is comprised of the Partnership’s ancillary businesses. Held for sale assets are included in the applicable segment for reporting purposes. The Partnership has not provided disclosure of total expenditures by segment for long-lived assets, as the Partnership does not maintain discrete financial information concerning segment expenditures for long lived assets, and accordingly such information is not provided to the Partnership’s chief operating decision maker. The information provided in the following tables represents the primary measures used to assess segment performance by the Partnership’s chief operating decision maker.

 

Reportable segment results of operations for the three months ended June 30, 2018 are as follows (Note: “DD&A” refers to depreciation, depletion and amortization):

 

   Central   Northern   Rhino   Illinois       Total 
   Appalachia   Appalachia   Western   Basin   Other   Consolidated 
   (in thousands) 
Total revenues  $28,133   $4,422   $8,656   $13,608   $104   $54,923 
DD&A   2,263    300    1,041    1,979    94    5,677 
Interest expense   -    -    -    -    1,913    1,913 
Net income (loss) from continuing operations  $997   $(1,477)  $(63)  $(1,880)  $(612)  $(3,035)

 

Reportable segment results of operations for the three months ended June 30, 2017 are as follows:

 

   Central   Northern   Rhino   Illinois       Total 
   Appalachia   Appalachia   Western   Basin   Other   Consolidated 
   (in thousands) 
Total revenues  $25,675   $2,642   $8,763   $17,604   $4   $54,688 
DD&A   1,949    279    1,200    1,949    93    5,470 
Interest expense   -