ARMSTRONG ENERGY, INC. - 10-K - Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with Item 6 - "Selected Financial Data"
and our consolidated financial statements and related notes appearing elsewhere
in this Annual Report on Form 10-K. This discussion and analysis contains
forward-looking statements that involve risks and uncertainties. Our actual
results may differ materially from those anticipated in these forward-looking
statements as a result of a variety of risks and uncertainties, including those
described under "Cautionary Statement Concerning Forward-Looking Statements" and
Item 1A - "Risk Factors." We assume no obligation to update any of these
forward-looking statements.
Overview
Armstrong Energy, Inc. (together with its subsidiaries, we or the Company) is a
producer of low chlorine, high sulfur thermal coal from the Illinois Basin, with
both surface and underground mines. We market our coal primarily to proximate
and investment grade electric utility companies as fuel for their steam-powered
generators. Based on 2015 production, we are the fifth largest producer in the
Illinois Basin and the second largest in
Western Kentucky
. We were formed in
2006 to acquire and develop a large coal reserve holding. We commenced
production in the second quarter of 2008 and currently operate six mines,
including three surface and three underground. We control approximately 554
million tons of proven and probable coal reserves. We also own and operate three
coal processing plants, which support our mining operations. From our reserves,
we mine coal from multiple seams that, in combination with our coal processing
facilities, enhance our ability to meet customer requirements for blends of coal
with different characteristics. The locations of our coal reserves and
operations, adjacent to the Green River, together with our river dock coal
handling and rail loadout facilities, allow us to optimize coal blending and
handling, and provide our customers with rail, barge and truck transportation
options.
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We market our coal primarily to large utilities with coal-fired, base-load,
scrubbed power plants under multi-year coal supply agreements. Our multi-year
coal supply agreements usually have specific volume and pricing arrangements for
each year of the agreement. These agreements allow customers to secure a supply
for their future needs and provide us with greater predictability of sales
volume and sales prices. At December 31, 2015, we had multi-year coal supply
agreements with remaining terms ranging from one to four years, and we are
contractually committed to sell 5.6 million tons of coal in 2016.
For each of 2015 and 2014, we produced 8.1 million and 9.3 million tons of coal,
respectively, and, during the same periods, we sold 7.8 million and 9.4 million
tons of coal, respectively. For the year ended December 31, 2015, our revenue
from coal sales was $360.9 million, and we generated an operating loss of $133.6
million, net loss of $162.1 million, and Adjusted EBITDA of $68.5 million. Our
revenue, operating income, net loss and Adjusted EBITDA for the year ended
December 31, 2014 were $441.8 million, $3.5 million, $28.8 million, and $61.8
million, respectively.
Our principal expenses related to the production of coal are labor and benefits,
equipment, materials and supplies (explosives, diesel fuel and electricity),
maintenance, royalties and state and federal severance taxes. Unlike some of our
competitors, we employ a completely non-union workforce. Many of the benefits of
our non-union workforce are related to higher productivity and are not
necessarily reflected in our direct costs. In addition, while we typically do
not pay our customers' transportation costs, they may be substantial and are
often the determining factor in a coal consumer's contracting decision. The
location of our coal reserves and operations, adjacent to the Green and
Ohio
Rivers, together with our river dock coal handling and rail loadout facilities,
allow us to optimize coal blending and handling and provide our customers with
rail, barge and truck transportation options.
Business Developments
On October 28, 2015, Worker Adjustment and Retraining Notification (WARN) Act
notices were delivered to employees of two mining operations, along with the two
preparation plants that directly support those mining operations. The decision
to rationalize production was made in response to persistent weakness in thermal
coal demand, depressed price levels and increased government regulations.
Following an evaluation of cost structures, including wages and benefits, as
well as an assessment of forecasts for customer commitments and anticipated
pricing, effective December 31, 2015, we temporarily idled the Midway surface
mine, reduced operations to one section at the Parkway underground mine, and
reduced the workforce at the related preparation plants. These mines shipped
approximately 2.1 million tons of coal during 2015. We will continue to evaluate
our operations and cost structure, and we will continue to take actions to
respond quickly to changing and challenging market conditions, including a
reduction of general and administrative (G&A) expenses and overhead costs
throughout the Company.
Evaluating the Results of Our Operations
We evaluate the results of our operations based on several key measures:
• our coal production, sales volume and weighted average sales prices;
• our cost of coal sales; and
• our Adjusted EBITDA, a non-GAAP financial measure.
Coal Production, Sales Volume and Sales Prices
We evaluate our operations based on the volume of coal we produce, the volume of
coal we sell and the prices we receive for our coal. Because we sell
substantially all of our coal under multi-year coal supply agreements, our coal
production, sales volume and sales prices are largely dependent upon the terms
of those contracts. The volume of coal we sell is also a function of the
productive capacity of our mines and changes in our inventory levels and those
of our customers.
Our multi-year coal supply agreements typically provide for a fixed price, or a
schedule of fixed prices, over the contract term. In addition, the contracts
typically contain price reopeners that provide for a market-based adjustment to
the initial price after the initial years of those contracts have been
fulfilled. These contracts would terminate if we cannot agree upon a
market-based price with the customer. In addition, many of our multi-year coal
supply agreements have full or partial cost pass through or inflation adjustment
provisions; specifically, costs related to fuel, explosives and new government
impositions are subject to certain pass-through provisions under many of our
multi-year coal supply agreements. Cost pass-through provisions typically
provide for increases in our sales prices in rising operating cost environments
and for decreases in declining operating cost environments. Inflation adjustment
provisions typically provide some protection in rising operating cost
environments. We also
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receive premiums, or pay penalties, based upon the actual quality of the coal we
deliver, which is measured for characteristics such as heat (Btu), sulfur and
moisture content.
We define our coal sales price per ton, or average sales price, as total coal
sales divided by tons sold. We evaluate the price we receive for our coal on an
average sales price per ton basis to evaluate marketing efforts and for market
demand and trend analysis. The following table provides operational data with
respect to our coal production, coal sales volume and average sales prices per
ton for the periods indicated:
Year Ended
December 31,
2015 2014 2013
(In thousands, except per ton amounts)
Tons of Coal Produced 8,074 9,345 9,315
Tons of Coal Sold 7,791 9,419 9,266
Average Sales Price Per Ton $ 46.32 $ 46.91 $
44.82
Cost of Coal Sales
We evaluate our cost of coal sales on a cost per ton basis. Our cost of coal
sales per ton represents our production costs divided by the tons of coal we
sell. Our production costs include labor and associated benefits, fuel,
lubricants, explosives, operating lease expenses, repairs and maintenance,
royalties, selling and related expenses, and all other costs that are directly
related to our mining operations, other than the cost of depreciation, depletion
and amortization (DD&A) expenses. Our production costs also exclude any indirect
expenses, such as G&A expenses.
Our production costs do not take into account the effects of any of the
inflation adjustment or cost pass-through provisions in our multi-year coal
supply agreements, as those provisions result in an adjustment to our coal sales
price.
The following table provides summary information for the dates indicated relating to our cost of coal sales per ton produced:
Year Ended
December 31,
2015 2014 2013
(In thousands, except per ton amounts)
Tons of Coal Sold 7,791 9,419 9,266
Average Sales Price Per Ton $ 46.32 $ 46.91 $ 44.82
Cost of Coal Sales Per Ton $ 36.31 $ 38.46 $ 36.25
Adjusted EBITDA
We define Adjusted EBITDA as net income (loss) before deducting net interest
expense, income taxes, depreciation, depletion and amortization, asset
retirement obligation expenses, non-cash production royalty to related party,
asset impairment and restructuring charges, loss on settlement of interest rate
swap, loss on deferment of equity offering, non-cash stock compensation expense
(income), non-cash employee benefit expense, non-cash charges related to
non-recourse notes, gain on deconsolidation, and (gain) loss on extinguishment
of debt. Although Adjusted EBITDA is not a measure of performance calculated in
accordance with GAAP, it is used as a supplemental financial measure by our
management and by external users of our financial statements such as investors,
commercial banks, research analysts and others, to assess the financial
performance of our assets without regard to financing methods, capital structure
or historical cost basis, the ability of our assets to generate cash sufficient
to pay interest costs and support our indebtedness, our operating performance
and return on investment compared to those of other companies in the coal energy
sector, without regard to financing or capital structures, and the viability of
acquisitions and capital expenditure projects and the overall rates of return on
alternative investment opportunities. Adjusted EBITDA has several limitations
that are discussed under Item 6 - "Selected Financial Data," where we also
include a quantitative reconciliation of Adjusted EBITDA to the most directly
comparable GAAP financial measure, which is net income (loss).
Factors That Affect Our Business
For the past three years, more than 90% of our coal sales were made under
multi-year coal supply agreements. We intend to continue to enter into
multi-year coal supply agreements for a substantial portion of our annual coal
production, using our
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remaining production to take advantage of market opportunities as they present
themselves. We believe our use of multi-year coal supply agreements reduces our
exposure to fluctuations in the spot price for coal and provides us with a
reliable and stable revenue base. Using multi-year coal supply agreements also
allows us to partially mitigate our exposure to rising costs, to the extent
those contracts have full or partial cost pass through provisions or inflation
adjustment provisions. For example, certain of our contracts contain provisions
that adjust the price paid for our coal in the event there is a change in the
price of diesel fuel, a key cost component in our coal production. Certain of
our other contracts contain provisions that permit us to seek additional price
adjustments to account for changes in environmental and other laws and
regulations to which we are subject, to the extent those changes increase the
cost of our production of coal.
Certain of our multi-year coal supply agreements contain option provisions that
give the customer the right to elect to purchase additional tons of coal each
month during the contract term at a fixed price provided for in the contract.
Our multi-year coal supply agreements that provide for these option tons
typically require the customer to provide us with advance notice of an election
to take these option tons. Because the price of these option tons is fixed under
the terms of the contract, we could be obligated to deliver coal to those
customers at a price that is below the market price for coal on the date the
option is exercised. If our customers elect to receive these option tons, we
believe we will have the operating flexibility to meet these requirements
through increased production. Similarly, short-term changes by our customers in
the amount of coal they purchase as a result of these option provisions may
affect our average sales price per ton of coal in any given month or similarly
narrow window.
We believe the other key factors that influence our business are:
• demand for coal;
• demand for electricity;
• economic conditions;
• the quantity and quality of coal available from competitors;
• competition for production of electricity from non-coal sources;
• domestic air emission standards and the ability of coal-fired power
plants to meet these standards using coal produced from the
Illinois
Basin;
• legislative, regulatory and judicial developments, including delays,
challenges to, and difficulties in acquiring, maintaining or renewing
necessary permits or mineral or surface rights; and
• our ability to meet governmental financial security requirements
associated with mining and reclamation activities.
For additional information regarding some of the risks and uncertainties that
affect our business and the industry in which we operate, please see Item 1A -
"Risk Factors."
Recent Trends and Economic Factors Affecting the Coal Industry
Coal consumption and production in
the United States
have been driven in recent
periods by several market dynamics and trends. According to the EIA, total coal
consumption in
the United States
in 2015 decreased by approximately 108 million
tons, or 11.8%, from 2014 levels. The decrease in
U.S.
domestic coal consumption
during 2015 was primarily a function of decreased consumption in the electric
power sector due to lower natural gas prices and an increase in retirements of
coal fired power plants. However, according to the EIA, coal is expected to
remain a major source for electric power generation for the foreseeable future.
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Results of Operations
Summary
The following table presents certain of our historical consolidated financial data for the periods indicated. The following table should be read in conjunction with Item 6 - "Selected Financial Data."
Year Ended December 31,
2015 2014 2013
(In thousands, except per share and per
ton amounts)
Results of Operations Data
Total revenues $ 360,900 $ 441,833 $ 415,282
Costs and expenses:
Costs of coal sales 282,903 362,294 335,904
Production royalties to related party 7,879 8,269 7,811
Depreciation, depletion and
amortization 45,948 46,037 38,219
Asset retirement obligation expenses 3,277 2,099 2,267
Asset impairment and restructuring
charges 138,679 - -
General and administrative expenses 15,813 19,590 21,169
Total costs and expenses 494,499 438,289 405,370
Operating (loss) income (133,599 ) 3,544 9,912
Interest expense, net (34,685 ) (33,134 ) (35,563 )
Other income (expense), net 5,486 758 579
Loss before income taxes (162,798 ) (28,832 ) (25,072 )
Income taxes 657 - -
Net loss (162,141 ) (28,832 ) (25,072 )
Less: income attributable to
non-controlling interest - - -
Net loss attributable to common
stockholders $ (162,141 ) $ (28,832 ) $ (25,072 )
Other Data (1)
Adjusted EBITDA (unaudited) $ 68,483 $ 61,760 $ 58,156
Adjusted EBITDA per ton sold
(unaudited) 8.79 6.56 6.28
(1) Adjusted EBITDA is a non-GAAP financial measure which represents net income
(loss) before deducting net interest expense, income taxes, depreciation,
depletion and amortization, asset retirement obligation expenses, non-cash
production royalty to related party, asset impairment and restructuring
charges, loss on settlement of interest rate swap, loss on deferment of
equity offering, non-cash stock compensation expense (income), non-cash
employee benefit expense, non-cash charges related to non-recourse notes,
gain on deconsolidation, and (gain) loss on extinguishment of debt. For these
purposes, "GAAP" refers to
U.S.
generally accepted accounting principles.
Please see Item 6 - "Selected Financial Data" for a reconciliation of
Adjusted EBITDA to net income (loss).
Year Ended December 31, 2015 Compared to Year Ended December 31, 2014
Overview
We reported revenue of $360.9 million for the year ended December 31, 2015,
compared to $441.8 million for the year ended December 31, 2014. Coal sales
decreased 17.3% to 7.8 million tons in 2015, compared to 9.4 million tons in the
prior year. Our average sales price per ton in the year ended December 31, 2015
totaled $46.32 per ton, as compared to $46.91 per ton for the prior year. Our
net loss and Adjusted EBITDA for 2015 totaled $162.1 million and $68.5 million,
respectively, as compared to net loss and Adjusted EBITDA for 2014 of $28.8
million and $61.8 million, respectively.
Coal Production, Sales Volume, and Sales Price per Ton
Our coal production in 2015 of approximately 8.1 million tons decreased from
production levels in 2014 of 9.3 million tons. For the years ended December 31,
2015 and 2014, we sold 7.8 million tons and 9.4 million tons, respectively. The
decrease in overall production and corresponding decline in sales volumes is
directly related to the deteriorating market demand driven by strict
governmental regulations, increased competition from natural gas, mild weather
in the second half of 2015, and
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oversupply in the domestic coal market. Partially offsetting the production
decreases was the addition of the Survant Underground mine in August 2015, which
produced 0.4 million tons during the year.
Our average sales price per ton decreased to $46.32 for the year ended
December 31, 2015, from $46.91 for 2014. The per ton decrease in 2015 is
primarily due to unfavorable transportation adjustments included as a component
of the price in certain of our long-term coal supply agreements as a result of
declining diesel prices, partially offset by annual price increases on certain
of our multi-year coal supply agreements.
Revenue
Our coal sales revenue for the year ended December 31, 2015 decreased by $80.9
million, or 18.3%, to $360.9 million, as compared to $441.8 million for the year
ended December 31, 2014. This decrease is primarily attributable to an
unfavorable volume variance of approximately $76.3 million year-over-year due to
production and delivery issues during the first quarter of 2015 resulting from
the inclement weather experienced in western
Kentucky
and a decline in customer
demand resulting in the delay of shipments during the second half of the year.
In addition, we experienced an unfavorable price variance of approximately $4.6
million driven primarily by unfavorable transportation adjustments.
Cost of Coal Sales
Cost of coal sales decreased 21.9% to $282.9 million in the year ended
December 31, 2015, from $362.3 million in 2014. The decline is primarily
attributable to selling 1.6 million tons less coal during the year ended
December 31, 2015, as compared to 2014. On a per ton basis, our cost of coal
sales decreased during the year ended December 31, 2015, as compared to 2014,
from $38.46 per ton to $36.31 per ton. This decrease in the per ton amounts is
due to favorable repair and maintenance costs experienced at our underground
mines, lower blasting costs incurred by our surface mines, lower fuel costs and
better mining conditions experienced during the year ended December 31, 2015,
partially offset by the impacts of adverse weather conditions that occurred in
the first quarter of 2015.
Production Royalty to Related Party
Production royalty to related party was $7.9 million and $8.3 million,
respectively, for the years ended December 31, 2015 and 2014, respectively. This
amount relates to production royalties earned by our affiliate, Thoroughbred,
from sales originating from our Kronos underground mine (where the mineral
reserves are leased directly from Thoroughbred). Sales volume declines
experienced at our Kronos underground mine during the year ended December 31,
2015, along with slightly lower average prices in the current year, resulted in
the decline in the production royalty earned by Thoroughbred in the year ended
December 31, 2015, as compared to 2014.
Depreciation, Depletion and Amortization
DD&A expense decreased by $0.1 million, or 0.2%, to $45.9 million during the
year ended December 31, 2015, as compared to 2014. The slight decrease is
primarily due to lower depletion expense associated with reduced mine output in
2015 and lower DD&A in the fourth quarter of 2015 from the reduced depreciable
base subsequent to the impairment charge recognized in the third quarter of
2015, mostly offset by the accelerated depreciation of the capitalized mine
development costs associated with the Lewis Creek underground mine resulting
from the closure of the mine in the first quarter of 2015 and the impact of the
revision during the first quarter of 2015 to the useful lives of a portion of
the machinery and equipment associated with certain of our surface mines.
Asset Retirement Obligation Expenses
Asset retirement obligation expenses increased by $1.2 million, or 56.1%, to
$3.3 million during the year ended December 31, 2015, as compared to 2014. The
increase is primarily attributable to changes in asset retirement cost estimates
based on revisions to discount rates, reserve valuations and projected mine
lives.
Asset Impairment and Restructuring Charges
Asset impairment and restructuring charges were $138.7 million for the year
ended December 31, 2015 and consisted of long-lived asset impairments of $137.7
million related to mineral rights and other property, plant, and equipment and
employee termination benefits of $1.0 million. Refer to Note 3, "Asset
Impairment and Restructuring Charges," to our audited consolidated financial
statements, included in Item 8 - "Financial Statements and Supplementary Data,"
of this Annual Report on Form 10-K for further information regarding the nature
and composition of those chargessoud.
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General and Administrative Expenses
G&A expenses were $15.8 million for the year ended December 31, 2015, which was
$3.8 million, or 19.3%, lower than the year ended December 31, 2014. The
decrease in the year ended December 31, 2015, as compared to 2014, is due
primarily to lower labor and benefits expense and non-income related taxes.
Interest Expense, Net
Interest expense, net is derived from the following components:
Year Ended
December 31,
2015 2014
(In thousands)
11.75% Senior Secured Notes due 2019 $ 23,500 $ 23,500 Senior Secured Credit Facility
- -
Long-term obligation to related party 10,049 7,993
Other, net 3,123 2,614
Capitalized interest (1,987 ) (973 )
Total $ 34,685 $ 33,134
Interest expense, net was $34.7 million for the year ended December 31, 2015, as
compared to $33.1 million for the year ended December 31, 2014. The increase is
principally attributable to an increase in the effective interest rate on the
long-term obligation to related party due to revisions in the mine plan at
December 31, 2015 and the increase in the principal balance of the long-term
obligation to related party from the completion of the reserve transfers to
Thoroughbred in October 2014 and May 2015, which increased the principal balance
on the obligation by $6.1 million and $18.2 million, respectively. The
year-over-year increase in interest expense was partially offset by a higher
amount of capitalized interest during the year ended December 31, 2015, as
compared to 2014.
Other, Net
Other, net for the year ended December 31, 2015 and 2014 was $5.5 million and
$0.8 million, respectively. The increase is due to a $4.5 million refund during
the second quarter of 2015 for a portion of
Kentucky
sales and use taxes paid on
the purchase of certain energy and energy producing fuels for the period of 2008
through 2013.
Net Loss
Net loss for the year ended December 31, 2015 was $162.1 million, as compared to
$28.8 million for the same period of 2014. The increase in net loss is largely
due to the asset impairment and restructuring charges of $138.7 million, lower
gross margin of $1.5 million, and higher interest expense of $1.6 million,
partially offset by the refund of certain previously paid
Kentucky
sales and use
taxes during the second quarter of 2015 and lower G&A expenses of $4.5 million
and $3.8 million, respectively.
Adjusted EBITDA
Our Adjusted EBITDA for the year ended December 31, 2015 was $68.5 million, as
compared to $61.8 million for the year ended December 31, 2014. The increase in
Adjusted EBITDA resulted primarily from the $4.5 million
Kentucky
sales and use
tax refund during the second quarter of 2015 and lower G&A costs during the
year, exclusive of stock compensation expense.
Year Ended December 31, 2014 Compared to Year Ended December 31, 2013
Overview
We reported revenue of $441.8 million for the year ended December 31, 2014,
compared to $415.3 million for the year ended December 31, 2013. Coal sales
increased 1.7% to 9.4 million tons in 2014, compared to 9.3 million tons in the
prior year. Our average sales price per ton in the year ended December 31, 2014
totaled $46.91 per ton, as compared to $44.82 per ton for the prior year. Our
net loss and Adjusted EBITDA for 2014 totaled $28.8 million and $61.8 million,
respectively, as compared to net loss and Adjusted EBITDA for 2013 of
$25.1 million and $58.2 million, respectively.
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Coal Production, Sales Volume, and Sales Price per Ton
Our coal production in 2014 remained consistent with that of 2013 at
approximately 9.3 million tons. We completed development of the Lewis Creek
underground mine in mid-2013 and experienced a modest increase in tons produced
year over year. Subsequent to completion, the mine has experienced significant
operating difficulties, which has kept the mine from reaching full capacity and
ultimately led to our abandonment of the mine plan. Production increases also
occurred at the Midway and Equality Boot mines from improved stripping ratios
experienced in 2014. Offsetting the production increases were declines at the
Parkway and Kronos underground mines due to poor geological conditions.
For the years ended December 31, 2014 and 2013, we sold 9.4 million tons and
9.3 million tons, respectively. The increase is due to increased spot sales year
over year.
Our average sales price per ton increased to $46.91 for the year ended
December 31, 2014, from $44.82 for 2013. The per ton increase is due to
favorable customer mix and annual price increases on our multi-year coal supply
agreements.
Revenue
Our coal sales revenue for the year ended December 31, 2014 increased by $26.6
million, or 6.4%, to $441.8 million, as compared to 2013. This increase is
primarily attributable to a favorable price variance of approximately $19.7
million due to a favorable customer mix and higher year-over-year contract
prices. We also experienced a favorable volume variance of approximately $6.9
million due to the sale of 0.2 million additional tons from increased spot sales
in 2014.
Cost of Coal Sales
Cost of coal sales increased 7.9% to $362.3 million in the year ended
December 31, 2014, from $335.9 million in 2013. On a per ton basis, our cost of
coal sales increased during the year ended December 31, 2014, compared to 2013,
from $36.25 per ton to $38.46 per ton. This increase is due to lower
productivity at the Parkway and Kronos underground mines driven by poor
geological conditions and production inefficiencies encountered at the Lewis
Creek underground mine subsequent to the completion of development of the mine,
partially offset by favorable mining conditions at our Midway and Equality Boot
surface mines in 2014.
Production Royalties to Related Party
Production royalties to related party increased $0.5 million, or 5.9%, to $8.3
million for the year ended December 31, 2014, as compared to $7.8 million in
2013. The increase in production royalties earned by Thoroughbred is due to an
increase in sales originating from our Kronos underground mine (where the
mineral reserves are leased directly from Thoroughbred) during 2014, as compared
to 2013.
Depreciation, Depletion and Amortization
DD&A expenses increased by $7.8 million, or 20.5%, during the year ended
December 31, 2014 to $46.0 million, as compared to $38.2 million in 2013. The
increase is primarily due to the accelerated depreciation of the capitalized
mine development costs associated with the Lewis Creek underground mine
resulting from the planned closure of the mine in the first quarter of 2015. In
addition, depletion and amortization expenses were slightly higher as a result
of the higher production in 2014.
Asset Retirement Obligation Expense
Asset retirement obligation expense decreased by $0.2 million, or 7.4%, to $2.1
million in the year ended December 31, 2014, as compared to 2013. The decrease
is primarily attributable to changes in asset retirement cost estimates based on
revisions to discount rates, reserve valuations and projected mine lives.
General and Administrative Expenses
G&A expenses were $19.6 million for the year ended December 31, 2014, which was
$1.6 million, or 7.5%, lower than the year ended December 31, 2013. The decrease
is primarily due to lower expenses for legal and other professional services
($0.9 million), compensation and benefits ($0.2 million), and share-based
compensation ($0.5 million) from the decline in unvested shares and the
forfeiture of certain grants and the reversal of the associated expense during
2014.
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Interest Expense, Net
Interest expense, net is derived from the following components:
Year Ended
December 31,
2014 2013
11.75% Senior Secured Notes due 2019 $ 23,500 $ 23,500 Senior Secured Credit Facility
- -
Long-term obligation to related party 7,993 11,029
Other, net 2,614 2,675
Capitalized interest (973 ) (1,641 )
Total $ 33,134 $ 35,563
Interest expense, net decreased $2.4 million, or 6.8%, to $33.1 million for the
year ended December 31, 2014, as compared to $35.6 million for the year ended
December 31, 2013. The decrease is principally attributable to a decrease in the
effective interest rate on the long-term obligation to related party due to
revisions in the mine plan at December 31, 2013. The decline was partially
offset by the increase in the principal balance of the long-term obligation to
related party from the closing of the reserve transfers to Thoroughbred in April
2013 and October 2014, which increased the principal balance on the obligation
by $4.9 million and $6.1 million, respectively, and a lesser amount of
capitalized interest in the current year due to a decline in capital
expenditures year over year.
Other, Net
Other, net totaled income of $0.8 million for the year ended December 31, 2014,
as compared to income of $0.6 million for the year ended December 31, 2013. The
amount relates primarily to ancillary income from timber, scrap, and crop sales
recognized in each of the respective years.
Net Loss
Net loss for the year ended December 31, 2014 was $28.8 million, as compared to
$25.1 million for 2013. The increase in the loss is largely due to lower
operating income driven from the accelerated depreciation of the capitalized
mine development costs associated with the planned closure of the Lewis Creek
underground mine, partially offset by higher gross margin and reduced G&A
expenses. In addition, the decline in interest expense in 2014 from a lower
effective interest rate favorably affected our overall results.
Adjusted EBITDA
Our Adjusted EBITDA for the year ended December 31, 2014 was $61.8 million, or
$6.56 per ton, as compared to $58.2 million, or $6.28 per ton, for the year
ended December 31, 2013. The increase resulted primarily from higher gross
margin as a result of favorable price and volume variances in 2014, as well as
reduced overall G&A expenses, as compared to 2013.
Liquidity and Capital Resources
Liquidity
Our business is capital intensive and requires substantial capital expenditures
for purchasing, upgrading and maintaining equipment used in mining our reserves,
as well as complying with applicable environmental laws and regulations. Our
principal liquidity requirements are to finance current operations, fund capital
expenditures, including acquisitions from time to time, reclamation obligations,
and to service our debt. Historically, our primary sources of liquidity to meet
these needs have been cash generated by our operations, and to a lesser extent,
borrowings under our credit facilities and contributions from our equity
holders.
The principal indicators of our liquidity are our cash on hand and availability
under our Revolving Credit Facility. As of December 31, 2015, our available
liquidity was $84.3 million, comprised of cash on hand of $67.6 million and
$16.7 million available under our Revolving Credit Facility. We had no
borrowings outstanding under the Revolving Credit Facility as of December 31,
2015 and have not been required to use it as a source of liquidity since its
inception.
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As a result of the weak market conditions and depressed coal prices, we have
undertaken steps to adequately preserve our liquidity and manage operating
costs, including efficiently controlling capital expenditures. During 2015, we
undertook steps to enhance our financial flexibility and reduce cash outflows in
the near term, including a streamlining of our cost structure and anticipated
reductions in production volumes and capital expenditures. We believe that
existing cash balances, cash generated from operations and borrowing capacity
available under our Revolving Credit Facility will be sufficient to meet working
capital requirements, anticipated capital expenditures and debt service
requirements in 2016. If market conditions do not improve, we expect to continue
to experience operating losses, which would adversely affect our liquidity in
the future. As a result, we could be forced to take further action, including
additional restructurings and rationalization of production volumes and capital
expenditures.
In addition to the above, our ability to access the capital markets on
acceptable economic terms in the future will be affected by general economic
conditions, the domestic and global financial markets, our operational and
financial performance, prevailing commodity prices and other macroeconomic
factors outside of our control. Failure to obtain financing or to generate
sufficient cash flow from operations could cause us to significantly reduce our
spending and to alter our business plan. We may also be required to consider
other options, which, depending on the urgency of our liquidity constraints, may
be required to be pursued at an inopportune time.
We manage our exposure to changing commodity prices for our long-term coal
contract portfolio through the use of multi-year coal supply agreements. We
generally enter into fixed price, fixed volume supply contracts with terms
greater than one year with customers with whom we have historically had limited
collection issues. Our ability to satisfy debt service obligations, fund planned
capital expenditures, and make acquisitions will depend upon our future
operating performance, which will be affected by prevailing economic conditions
in the coal industry and financial, business and other factors, some of which
are beyond our control.
Our long-term debt consisted of the following as of the dates indicated:
December 31,
Type 2015 2014
11.75% Senior Secured Notes due 2019 $ 195,419 $ 194,570
Other 23,020 9,319
218,439 203,889
Less: current maturities 8,402 4,929
Total long-term debt $ 210,037 $ 198,960
Senior Secured Notes due 2019
On December 21, 2012, we completed the $200.0 million Notes offering. The Notes
were issued at an original issuance discount (OID) of 96.567%. The OID was
recorded on our balance sheet as a component of long-term debt, and is being
amortized to interest expense over the life of the Notes. As of December 31,
2015 and 2014, the unamortized OID was $4.6 million and $5.4 million,
respectively. We incurred $8.4 million of deferred financing fees related to the
Notes, which have been capitalized and are being amortized over the life of the
Notes.
Interest on the Notes is due semiannually on June 15 and December 15 of each
year, with the first payment made on June 15, 2013. We may redeem all or part of
the Notes at any time prior to December 15, 2016, at a redemption price of 100%
of the Notes redeemed plus a "make-whole" premium and accrued and unpaid
interest to the applicable redemption date. We may redeem the Notes, in whole or
in part, at any time during the twelve months commencing on December 15, 2016 at
105.875% of the principal amount redeemed, at any time during the twelve months
commencing December 15, 2017 at 102.938% of the principal amount redeemed, and
at any time after December 15, 2018 at 100.000% of the principal amount
redeemed, in each case plus accrued and unpaid interest to the applicable
redemption date. In addition, at any time prior to December 15, 2015, the Notes
were redeemable with the net cash proceeds received from one or more Equity
Offerings (as defined in the indenture governing the Notes) at a redemption
price equal to 111.75% of the principal amount redeemed plus accrued and unpaid
interest to the applicable redemption date, in an aggregate principal amount for
all such redemptions not to exceed 35% of the original aggregate principal
amount of the Notes.
Upon the occurrence of an event of a Change in Control (as defined in the
indenture governing the Notes), unless we have exercised our right to redeem the
Notes, we will be required to make an offer to purchase the Notes at a
redemption price of 101.000%, plus accrued and unpaid interest to the date of
repurchase.
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Subject to certain customary release provisions, the Notes are fully and
unconditionally guaranteed, jointly and severally, on a senior secured basis, by
us and substantially all of our current and future domestic restricted
subsidiaries (as defined). They are also secured, subject to certain exceptions
and permitted liens, on a first-priority basis by substantially all of our and
the guarantors' assets that do not secure the Revolving Credit Facility (see
below) on a first-priority basis. Subject to certain exceptions and permitted
liens, the Notes will also be secured on a second-priority basis by a lien on
the assets securing our obligations under the Revolving Credit Facility on a
first-priority basis.
The indenture governing the Notes contains restrictive covenants which, among
other things, limit the ability (subject to exceptions) of us and our restricted
subsidiaries (as defined) to (i) incur additional indebtedness or issue
preferred equity; (ii) pay dividends or distributions on or purchase our stock
or our restricted subsidiaries' stock; (iii) make certain investments; (iv) use
assets as security in other transactions; (v) create guarantees of indebtedness
by restricted subsidiaries; (vi) enter into agreements that restrict dividends,
distributions, or other payment by restricted subsidiaries; (vii) sell certain
assets or merge with or into other companies; and (viii) enter into transactions
with affiliates.
Revolving Credit Facility
Concurrently with the closing of the Notes offering on December 21, 2012, we
entered into the Revolving Credit Facility, an asset-based revolving credit
facility. The Revolving Credit Facility provides for a five-year $50.0 million
revolving credit facility that will expire on December 21, 2017. Borrowings
under the Revolving Credit Facility may not exceed a defined borrowing base. In
addition, the Revolving Credit Facility includes a $10.0 million letter of
credit sub-facility and a $5.0 million swingline loan sub-facility. As of
December 31, 2015 and 2014, there were no borrowings outstanding under the
Revolving Credit Facility, and we had $16.7 million and $15.9 million,
respectively, available for borrowing under the facility. We incurred $1.2
million of deferred financing fees related to the Revolving Credit Facility that
have been capitalized and are being amortized to interest expense over the life
of the facility.
Interest and Fees
Borrowings under the Revolving Credit Facility bear interest, at our option, at
a rate based on (i) LIBOR, plus a margin ranging from 3.5% to 4.0%, or (ii) a
base rate, plus a margin ranging from 2.5% to 3.0%. Margins may be increased by
2.0% per annum during the existence of any event of default. We are also
required to pay certain other fees with respect to the Revolving Credit
Facility, including (i) an unused commitment fee ranging from 0.50% to 0.375% in
respect of unutilized commitments, (ii) a fronting fee equal to 0.25% per annum
of the amount of outstanding letters of credit and (iii) customary annual
administration fees.
Collateral and Guarantors
The Revolving Credit Facility is secured by substantially all of our and our
subsidiaries' assets (other than certain excluded assets), with (i) a first
priority lien on the ABL Priority Collateral (as defined) and (ii) a second
priority lien on the Notes Priority Collateral (as defined). The Revolving
Credit Facility is also guaranteed on a full and unconditional basis by the same
subsidiaries that guarantee the Notes.
Restrictive Covenants and Other Matters
The Revolving Credit Facility includes customary covenants that, subject to
certain exceptions, restrict our ability and the ability of our subsidiaries to,
among other things, incur indebtedness (including capital leases), create liens
on assets, make investments, loans, guarantees, advances or acquisitions, pay
dividends and distributions, liquidate, merge or consolidate, divest assets,
engage in certain transactions with affiliates, create joint ventures or
subsidiaries, change the nature of our business, change our fiscal year, issue
stock, amend organizational documents, make capital expenditures and provide
negative pledges on assets. In addition, at any time when (i) undrawn
availability is less than the greater of (a) $10 million or (b) an amount equal
to 20% of the borrowing base or (ii) an event of default has occurred and is
continuing, we will be required to maintain a fixed charge coverage ratio,
calculated as of the end of each calendar month for the 12 months then ended,
greater than 1.0 to 1.0. The fixed charge coverage ratio is defined as the ratio
of consolidated EBITDA to fixed charges, which includes the sum of unfinanced
capital expenditures, scheduled principal payments on indebtedness, cash
interest payments, dividends, and cash taxes.
The Revolving Credit Facility also contains customary affirmative covenants and
events of default. If an event of default occurs, the lenders under the
Revolving Credit Facility will be entitled to take various actions, including
the acceleration of amounts due under the facility and all actions permitted to
be taken by a secured creditor.
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Prepayments and Commitment Reductions
Voluntary prepayments and commitment reductions will be permitted, in whole or
in part, in minimum amounts without premium or penalty, other than customary
breakage costs with respect to LIBOR loans.
Cash Flows
The following table reflects cash flows for the applicable periods:
Year Ended December 31,
2015 2014 2013
(In thousands)
Net cash provided by (used in):
Operating Activities $ 36,243 $ 41,145 $ 32,944
Investing Activities $ (18,925 ) $ (24,437 ) $ (32,581 )
Financing Activities $ (9,219 ) $ (8,822 ) $ (8,863 )
Year Ended December 31, 2015 Compared to Year Ended December 31, 2014
Net cash provided by operating activities was $36.2 million for the year ended
December 31, 2015, a decrease of $4.9 million from net cash provided by
operating activities of $41.1 million for the same period of 2014. Operating
results were negatively impacted during the year due to a decline in gross
margin resulting primarily from lower shipments during this year, as compared to
2014. Substantially offsetting this decline is a reduction in G&A expenses from
lower labor and benefits expense. In addition, operating results were favorably
impacted from the receipt of a
Kentucky
sales and use tax refund totaling
approximately $4.5 million during the second quarter of 2015, which is included
as a component of Other, net in the audited consolidated statement of
operations. Positively impacting cash flows from operations for the year ended
December 31, 2015 was an increase in the net related party liabilities of $16.3
million due to the deferment of amounts owed to our affiliate, Thoroughbred,
including interest and royalties earned on leased reserves. Negatively impacting
operating cash flows was an increase in inventory due to the timing of shipments
and a decrease in accounts payable and accrued and other liabilities due to the
timing of payments. Cash flows from operations for the year ended December 31,
2014 were positively impacted by a decrease in accounts receivable and inventory
resulting from reduced production and shipments during the fourth quarter of
2014, as well as an increase in net related party liabilities of $14.8 million
due to the deferment of amounts owed to Thoroughbred. Negatively impacting
operating cash flows was an increase in other non-current assets during the year
ended December 31, 2014 due to an increase in collateral posted against
outstanding surety bonds, which are used to secure the performance of our
reclamation obligations.
Net cash used in investing activities decreased $5.5 million to $18.9 million
for the year ended December 31, 2015, compared to $24.4 million for 2014. The
current year investment is primarily attributable to capital expenditures for
equipment and mine development associated with the opening of the Survant
underground mine at our Parkway complex, whereas the prior year investment is
attributable to capital expenditures to maintain our existing fixed assets and
initial spending on the development of the Survant underground mine.
Net cash used in financing activities was $9.2 million for the year ended
December 31, 2015, as compared to net cash used in financing activities of $8.8
million for the year ended December 31, 2014. The current year and prior year
activity relates primarily to scheduled capital lease and other long-term debt
payments.
Year Ended December 31, 2014 Compared to Year Ended December 31, 2013
Net cash provided by operating activities was $41.1 million for the year ended
December 31, 2014, an increase of $8.2 million from net cash provided by
operating activities of $32.9 million for 2013. We experienced a decrease in
operating income in 2014 largely driven by the increase in DD&A expense from the
accelerated depreciation of the capitalized mine development costs associated
with the planned closure of the Lewis Creek underground mine, which increased
DD&A expense by $6.3 million in 2014, as compared to 2013. Partially offsetting
the increase in DD&A expense was an increase in gross margin driven by the
increase in sales volume and pricing, as well as the decline in G&A and interest
expense. Positively impacting cash flows from operations for the year ended
December 31, 2014 was a decrease in accounts receivable and inventory resulting
from reduced production and shipments during the fourth quarter of 2014, as well
as an increase in net related party liabilities of $14.8 million due to the
deferment of amounts owed to our affiliate, Thoroughbred, including interest and
royalties earned on leased reserves. Negatively impacting operating cash flows
was an increase in other non-current assets during 2014 due to an increase in
collateral posted against outstanding surety bonds, which are used to secure the
performance
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of our reclamation obligations. Positively impacting cash flows from operations
for the year ended December 31, 2013 was an increase in accounts payable and
accrued liabilities of $3.3 million and an increase in amounts due to related
party resulting primarily from an increase in royalties earned by Thoroughbred.
Negatively impacting operating cash flows was an increase in inventory
experienced during 2013 due to an increase in coal inventory and materials and
supplies on hand resulting from the development of the Lewis Creek underground
mine.
Net cash used in investing activities decreased $8.2 million to $24.4 million
for the year ended December 31, 2014, compared to $32.6 million for 2013. The
2014 investment was largely attributable to capital expenditures associated with
maintaining our existing fixed assets and for the development of the Survant
underground mine at our Parkway mine complex, whereas the 2013 investment
relates primarily to capital expenditures for the completion of the Lewis Creek
underground mine.
Net cash used in financing activities was $8.8 million for the year ended
December 31, 2014, as compared to net cash used in financing activities of
$8.9 million for the year ended December 31, 2013. The 2014 and 2013 activity
relates primarily to scheduled capital lease and other long-term debt payments.
Contractual Obligations
We have various commitments primarily related to long-term debt, including
capital leases and operating lease commitments related to equipment. We expect
to fund these commitments with cash on hand, cash generated from operations and
borrowings under our Revolving Credit Facility. The following table provides
details regarding our contractual cash obligations as of December 31, 2015:
Payments Due by Period
Less Than More Than
Total One Year 1-3 Years 3-5 Years Five Years
(In thousands)
Long-term debt obligations
(principal and interest) $ 318,945 $ 32,906 $ 59,876 $ 226,163 $ -
Long-term obligation to
related party(1) 485,589 6,878 12,894 11,989 453,828
Operating lease obligations 10,464 5,595 4,774 95 -
Capitalized lease
obligations (principal and
interest) 2,601 2,033 568 - -
Purchase obligations 303 303 - - -
Total $ 817,902 $ 47,715 $ 78,112 $ 238,247 $ 453,828
(1) Long-term obligation to related party is an obligation associated with a
financing arrangement with Thoroughbred. Payments due are estimated based on
current mine plans and estimated sales prices of the coal and will be revised
as mine plans change. For 2016, we are deferring the payment of any
production royalty amounts due to Thoroughbred. In consideration for granting
the option to defer these payments, we granted to Thoroughbred the option to
acquire an additional undivided interest in certain of our coal reserves in
Muhlenberg
and
Ohio
Counties by engaging in a financing arrangement, under
which we would satisfy payment of any deferred fees by selling part of our
interest in the aforementioned coal reserves at fair market value for such
reserves determined at the time of the exercise of such options.
Capital Expenditures
Our mining operations require investments to expand, upgrade or enhance existing
operations and to comply with environmental and safety regulations. Our
anticipated total capital expenditures for 2016 are estimated to be within a
range of $8.0 million to $12.0 million. Management anticipates funding 2016
capital requirements with current cash balances and cash flows provided by
operations. We will continue to have significant capital requirements over the
long-term, which may require us to incur debt or seek additional equity capital.
The availability and cost of additional capital will depend upon our financial
condition and results of operations, as well as prevailing market conditions and
several other factors over which we have limited control.
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Mine Development Costs
Mine development costs are capitalized until production commences, other than
production incidental to the mine development process, and are amortized on a
units-of-production method based on the estimated proven and probable reserves.
Mine development costs represent costs incurred in establishing access to
mineral reserves and include costs associated with sinking or driving shafts and
underground drifts, permanent excavations, roads and tunnels. The end of the
development phase and the beginning of the production phase takes place when
construction of the mine for economic extraction is substantially complete. Our
estimate of when construction of the mine for economic extraction is
substantially complete is based upon a number of assumptions, such as
expectations regarding the economic recoverability of reserves, the type of mine
under development, and the completion of certain mine requirements, such as
ventilation. Coal extracted during the development phase is incidental to the
mine's production capacity and is not considered to shift the mine into the
production phase.
During the third quarter of 2015, we completed development of the Survant
underground mine at our Parkway complex to extract coal from the
West Kentucky
#8 seam. Annual production capacity at the mine is eventually expected to be
expanded to approximately 2.4 million tons. Capitalized development costs for
the new mine totaled approximately $25.2 million.
Off-Balance Sheet Arrangements
In the normal course of business, we are a party to certain off-balance sheet
arrangements, which are not reflected in our consolidated balance sheets. These
arrangements include guarantees and financial instruments with off-balance sheet
risk, such as surety bonds and performance bonds. In our past, no claims have
been made against these financial instruments. We do not expect any material
adverse effects on our financial condition, results of operations or cash flows
to result from these off-balance sheet arrangements.
Federal and state laws require us to secure certain long-term obligations such
as mine closure and reclamation costs and other obligations. We typically secure
these obligations by using surety bonds, an off-balance sheet instrument. The
use of surety bonds is less expensive for us than the alternative of posting a
100% cash bond. To the extent that surety bonds become unavailable, we would
seek to secure our reclamation obligations with letters of credit, cash deposits
or other suitable forms of collateral. We also post performance bonds to secure
our performance of various contractual obligations.
As of December 31, 2015, we had approximately $32.5 million in surety bonds
outstanding to secure the performance of our reclamation obligations, which were
supported by approximately $6.1 million of cash posted as collateral.
Related-Party Transactions
For information regarding our related-party transaction, see Note 13,
"Related-Party Transactions," to our audited consolidated financial statements,
included in Item 8 - "Financial Statements and Supplementary Data" of this
Annual Report of Form 10-K.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with GAAP. In
connection with the preparation of our consolidated financial statements, we are
required to make assumptions and estimates about future events, and apply
judgments that affect the reported amounts of assets, liabilities, revenue,
expenses and the related disclosures. We base our assumptions, estimates and
judgments on historical experience, current trends and other factors that
management believes to be relevant at the time our consolidated financial
statements are prepared. On a regular basis, we review the accounting policies,
assumptions, estimates and judgments to ensure that our consolidated financial
statements are presented fairly and in accordance with GAAP. However, because
future events and their effects cannot be determined with certainty, actual
results could differ from our assumptions and estimates, and such differences
could be material.
Our significant accounting policies are discussed in Note 2, "Summary of
Significant Accounting Policies," to our audited consolidated financial
statements, included in Item 8 - "Financial Statements and Supplementary Data,"
of this Annual Report on Form 10-K. We believe the following accounting
estimates are the most critical to aid in fully understanding and evaluating our
reported financial results, and they require our most difficult, subjective or
complex judgments, resulting from the need to make estimates about the effect of
matters that are inherently uncertain.
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Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Expenditures that extend the
useful lives of existing plant and equipment are capitalized. Maintenance and
repairs that do not extend the useful life or increase productivity are charged
to operating expense as incurred. Plant and equipment are depreciated
principally on the straight-line method over the estimated useful lives of the
assets.
There are numerous uncertainties inherent in estimating quantities of reserves,
including many factors beyond our control. Our reserve estimates are based on
engineering, economic and geological data assembled by our staff of geologists
and engineers. Estimates of coal reserves necessarily depend upon a number of
variables and assumptions, any one of which may vary considerably from actual
results. These factors and assumptions relate to geological and mining
conditions, which may not be fully identified by available exploration data
and/or differ from our experiences in areas where we currently mine; the
percentage of coal in the ground ultimately recoverable; historical production
from the area compared with production from other producing areas; the assumed
effects of regulation and taxes by governmental agencies; and assumptions
concerning future coal prices, operating costs, capital expenditures, severance
and excise taxes and development and reclamation costs.
For these reasons, estimates of the recoverable quantities of coal attributable
to any particular group of properties, classifications of reserves based on risk
of recovery and estimates of future net cash flows expected from these
properties as prepared by different engineers, or by the same engineers at
different times, may vary substantially. Actual production, revenue and
expenditures with respect to our reserves will likely vary from estimates, and
these variations may be material. Certain account classifications within our
financial statements such as depreciation, depletion, and amortization and
certain liability calculations such as asset retirement obligations may depend
upon estimates of coal reserve quantities and values. Accordingly, when actual
coal reserve quantities and values vary significantly from estimates, certain
accounting estimates and amounts within our consolidated financial statements
may be materially affected. Coal reserve values are reviewed annually, at a
minimum, for consideration in our consolidated financial statements.
Impairment of Long-Lived Assets
We evaluate our long-lived assets used in operations for impairment as events
and changes in circumstances indicate that the carrying amount of such assets
might not be recoverable. Factors that would indicate potential impairment to be
present include, but are not limited to, a sustained history of operating or
cash flow losses, an unfavorable change in earnings and cash flow outlook,
prolonged adverse industry or economic trends and a significant adverse change
in the extent or manner in which a long-lived asset is being used or in its
physical condition.
If there is an indication the carrying amount of an asset may not be recovered,
the asset is evaluated by management where changes to significant assumptions
are reviewed. Individual assets are grouped for impairment review purposes
based on the lowest level for which there is identifiable cash flows that are
largely independent of the cash flows of other groups of assets. When the sum of
projected undiscounted cash flows is less than the carrying amount, impairment
losses are recognized. In determining such impairment losses, we must determine
the fair value for the assets in question in accordance with the applicable fair
value accounting guidance. Once the fair value is determined, the appropriate
impairment loss is recorded based on the difference between the carrying amount
of the assets and their respective fair values.
Due to the prolonged weakness in the
U.S.
coal markets, in the third quarter of
2015, we performed a comprehensive review of our current mining operations as
well as potential future development projects to ascertain any potential
impairment losses. We recorded an asset impairment charge of $137.7 million for
the year ended December 31, 2015. Refer to Note 3, "Asset Impairment and
Restructuring Charges," to our audited consolidated financial statements,
included in Item 8 - "Financial Statements and Supplementary Data," of this
Annual Report on Form 10-K. No impairment charges were recorded in 2014 and
2013.
Asset Retirement Obligation
Our asset retirement obligations primarily consist of spending estimates for
surface land reclamation and support facilities at both surface and underground
mines in accordance with applicable reclamation laws in the
U.S.
, as defined by
each mining permit. Asset retirement obligations are determined for each mine
using various estimates and assumptions, including, among other items, estimates
of disturbed acreage as determined from engineering data, estimates of future
costs to reclaim the disturbed acreage and the timing of these cash flows,
discounted using a credit-adjusted, risk-free rate. As changes in estimates
occur (such as mine plan revisions, changes in estimated costs, or changes in
timing of the reclamation activities), the obligation and asset are revised to
reflect the new estimate after applying the appropriate credit-adjusted,
risk-free rate. If our assumptions do not materialize as expected, actual cash
expenditures and costs that we incur could be materially different than
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currently estimated. Any difference between the recorded amount of the liability
and the actual cost of reclamation will be recognized as a gain or loss when the
obligation is settled. We expect our actual cost to reclaim our properties will
be less than the expected cash flows used to determine the asset retirement
obligation. However, regulatory changes could increase our obligation to perform
reclamation and mine closing activities. Asset retirement obligation expense for
the years ended December 31, 2015, 2014, and 2013 was $3.3 million, $2.1
million, and $2.3 million, respectively. At December 31, 2015 and 2014, our
balance sheets reflected asset retirement obligation liabilities of $14.1
million and $17.7 million, respectively, including amounts classified as a
current liability. See Note 16 to our audited consolidated financial statements
for additional details regarding our asset retirement obligations, included in
Item 8 - "Financial Statements and Supplementary Data," of this Annual Report on
Form 10-K.
Income Taxes
We account for income taxes in accordance with accounting guidance which
requires deferred tax assets and liabilities be recognized using enacted tax
rates for the effect of temporary differences between the book and tax bases of
recorded assets and liabilities. The guidance also requires that deferred tax
assets be reduced by a valuation allowance if it is "more likely than not" that
some portion or the entire deferred tax asset will not be realized. In our
evaluation of the need for a valuation allowance, we take into account various
factors, including the expected level of future taxable income and available tax
planning strategies. If actual results differ from the assumptions made in our
evaluation, we may record a change in valuation allowance through income tax
expense in the period such determination is made. We believe that the judgments
and estimates are reasonable; however, actual results could differ. See Note 17
to our audited consolidated financial statements for additional details
regarding our accounting for income taxes, included in Item 8 - "Financial
Statements and Supplementary Data," of this Annual Report on Form 10-K.
Based on our cumulative loss position and after evaluating other available
evidence, including the scheduled reversals of our deferred tax assets and
deferred tax liabilities, we have concluded a valuation allowance is necessary
for the excess of deferred tax assets over deferred tax liabilities.
We anticipate that until we re-establish a pattern of continuing profitability,
we will not recognize any material income tax expense or benefit in our
statement of operations for future periods, as pretax profits or losses
generally will generate tax effects that will be offset by decreases or
increases in the valuation allowance with no net effect on the statement of
operations. If a pattern of continuing profitability is re-established and we
conclude that it is more likely than not that deferred income tax assets are
realizable, we will reverse any remaining valuation allowance which will result
in the recognition of an income tax benefit in the period that it occurs.
Long-Term Obligation to Related Party
We have entered into certain transactions with our affiliate, Thoroughbred,
whereby we have sold an undivided interest in certain of our land and mineral
reserves and subsequently entered into a lease agreement to mine the acquired
mineral reserves in exchange for a production royalty. Due to our continuing
involvement in the land and mineral reserves transferred, these transactions
have been accounted for as financing arrangements and a long-term obligation has
been established that is being amortized at an annual rate of 7% of the
estimated gross revenue generated from the sale of the coal originating from the
leased mineral reserves. The effective interest rate of the obligation is based
on various estimates in future pricing and production quantities within our mine
plans and is adjusted prospectively, as significant changes in our mine plans
occur. As of December 31, 2015, the effective interest on the long-term
obligation to related party was 5.0%. See Note 13 to our audited consolidated
financial statements for additional details regarding our related party
obligations, included in Item 8 - "Financial Statements and Supplementary Data,"
of this Annual Report on Form 10-K.
Newly Adopted Accounting Standards and Accounting Standards Not Yet Implemented
We are an "emerging growth company," as defined in Section 2(a)(19) of the
Securities Act, as modified by the JOBS Act. Section 107 of the JOBS Act also
provides that an "emerging growth company" can take advantage of the extended
transition period provided in Section 7(a)(2)(B) of the Securities Act for
complying with new or revised accounting standards, and delay compliance with
new or revised accounting standards until those standards are applicable to
private companies. However, we have chosen to opt out of any extended transition
period, and, as a result, we will comply with new or revised accounting
standards on the relevant dates on which adoption of such standards is required
for non-emerging growth companies. Section 107 of the JOBS Act provides that our
decision to opt out of the extended transition period for complying with new or
revised accounting standards is irrevocable.
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In February 2016, the Financial Accounting Standards Board (FASB) issued updated
guidance regarding the accounting for leases. This update requires lessees to
recognize a lease liability and a lease asset for all leases, including
operating leases, with a term greater than 12 months on its balance sheet. The
update also expands the required quantitative and qualitative disclosures
surrounding leases. This update is effective for fiscal years beginning after
December 15, 2018 and interim periods within those fiscal years, with earlier
application permitted. This update will be applied using a modified
retrospective transition approach for leases existing at, or entered into after,
the beginning of the earliest comparative period presented in the financial
statements. We are currently evaluating the effect of this update on our
consolidated financial statements.
In November 2015, the FASB issued guidance that eliminates the requirement to
present deferred tax liabilities and assets as current and noncurrent in a
classified balance sheet. Instead, entities will be required to classify all
deferred tax assets and liabilities as noncurrent. The new guidance is effective
for financial statements issued for annual periods beginning after December 15,
2016, and interim periods within those annual periods, with early adoption
permitted. We adopted this standard as of December 31, 2015. While the adoption
of this guidance impacted our balance sheet disclosure, it did not affect our
results of operations or cash flows.
In April 2015, the FASB issued guidance requiring an entity to present debt
issuance costs on the balance sheet as a direct deduction from the related debt
liability as opposed to an asset. Amortization of the costs will continue to be
reported as interest expense. The update is effective for annual reporting
periods (including interim reporting periods within those periods) beginning
after December 15, 2015. Early adoption is permitted for financial statements
that have not been previously issued, and the new guidance would be applied
retrospectively to all prior periods presented. The adoption of this standard
update is not expected to have a material impact on our consolidated financial
statements.
In August 2014, the FASB issued guidance on management's responsibility in
evaluating, at each annual and interim reporting period, whether there is
substantial doubt about an entity's ability to continue as a going concern and
to provide related footnote disclosures. The new guidance is effective for the
annual period ending after December 15, 2016, and for annual periods and interim
periods thereafter with early adoption permitted.
In May 2014, the FASB issued a comprehensive revenue recognition standard that
will supersede nearly all existing revenue recognition guidance under
U.S.
GAAP.
The standard requires revenue to be recognized when promised goods or services
are transferred to a customer in an amount that reflects the consideration
expected in exchange for those goods or services. The standard permits the use
of either the full retrospective or modified retrospective transition method.
This guidance is effective for annual and interim reporting periods beginning
after December 15, 2017, with early adoption permitted to the original effective
date of December 15, 2016. We are currently evaluating the impact of this new
pronouncement on our financial statements.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We defined market risk as the risk of economic loss as a consequence of the
adverse movement of market rates and prices. We believe our principal market
risks are commodity price risk and credit risk.
Commodity Price Risk
We sell most of the coal we produce under multi-year coal supply agreements.
Historically, we have principally managed the commodity price risks from our
coal sales by entering into multi-year coal supply agreements of varying terms
and durations, rather than through the use of derivative instruments.
Some of the products used in our mining activities, such as diesel fuel,
explosives and steel products for roof support used in our underground mining,
are subject to price volatility. Through our suppliers, we utilize forward
purchases to manage a portion of our exposure related to diesel fuel volatility.
A hypothetical increase of $0.10 per gallon for diesel fuel would have
negatively impacted our results of operations by $0.7 million for the year ended
December 31, 2015. A hypothetical increase of 10% in steel prices would have
negatively impacted our results of operations by $1.7 million for the year ended
December 31, 2015. A hypothetical increase of 10% in explosives prices would
have negatively impacted our results of operations by $1.2 million for the year
ended December 31, 2015.
Credit Risk
Most of our coal sales are made to electric utilities. Therefore, our credit
risk is primarily with domestic electric power generators. Our policy is to
independently evaluate each customer's creditworthiness prior to entering into a
transaction with the customer and to constantly monitor outstanding accounts
receivable against established credit limits. When deemed
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appropriate, we will take steps to reduce credit exposure to customers that do
not meet our credit standards or whose credit has deteriorated. Credit losses
are provided for in the financial statements and have historically been minimal.
Seasonality
Our business has historically experienced some variability in its results due to
the effect of seasons. Demand for coal-fired power can increase due to unusually
hot or cold weather as power consumers use more air conditioning or heating.
Conversely, mild weather can result in softer demand for our coal. Adverse
weather conditions, such as floods or blizzards, can affect our ability to mine
and ship our coal and our customers' ability to take delivery of coal.
Item 8. Financial Statements and Supplementary Data
The report of independent registered public accounting firm and the consolidated
financial statements required by this Item are set forth on pages F-1 through
F-34 of this report and are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountant on Accounting and Financial
Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our disclosure controls and procedures are designed to provide reasonable
assurance that information required to be disclosed in the reports that we file
or submit under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the rules and forms of the SEC, and that
such information is accumulated and communicated to management, including our
Chief Executive Officer and Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure. Our management, including our
Chief Executive Officer and Chief Financial Officer, reviewed and evaluated the
effectiveness of our disclosure controls and procedures as of December 31, 2015.
Based upon such review and evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures were
effective as of the date of such evaluation to provide reasonable assurance that
information required to be disclosed by the Company in the reports that it files
or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified by the SEC's rules and forms and that
such information is accumulated and communicated to the Company's management,
including the Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure.
Management's Report on Internal Control over Financial Reporting.
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act
Rule 13a-15(f). Internal control over financial reporting is a process designed
under the supervision of our Chief Executive Officer and Chief Financial
Officer, and effected by our board of directors, management and other personnel
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of our consolidated financial statements for external
purposes in accordance with GAAP. Because of inherent limitations, internal
control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate. Under the supervision and with the participation of our management,
including the Chief Executive Officer and Chief Financial Officer, we conducted
an evaluation of the effectiveness of our internal control over financial
reporting based upon the framework in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(2013 Framework). Based on our evaluation under this framework, our management
concluded that our internal control over financial reporting was effective as of
December 31, 2015.
Changes in Internal Control over Financial Reporting
During the fourth quarter of 2015, there has been no change in the Company's
internal control over financial reporting that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
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