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TABLE OF CONTENTS
INDEX TO FINANCIAL STATEMENTS
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended December 31, 2013 |
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or |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from to |
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Commission file number: 001-34892
Rhino Resource Partners LP
(Exact name of registrant as specified in its charter)
| Delaware (State or other jurisdiction of incorporation or organization) |
27-2377517 (I.R.S. Employer Identification No.) |
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424 Lewis Hargett Circle, Suite 250 Lexington, KY (Address of principal executive offices) |
40503 (Zip Code) |
Registrant's telephone number, including area code: (859) 389-6500
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Name of each exchange on which registered | |
|---|---|---|
| Common Units representing Limited | New York Stock Exchange | |
| Partner Interests |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer o | Accelerated filer ý | Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No ý
As of June 28, 2013, the last business day of the registrant's most recently completed second fiscal quarter, the aggregate market value of the registrant's equity held by non-affiliates of the registrant was approximately $104.3 million based on the closing price of the registrant's common units on the New York Stock Exchange on such date. As of March 7, 2014, the registrant had 16,680,824 common units and 12,397,000 subordinated units outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Documents incorporated by reference in this report are listed in the Exhibit Index of this Form 10-K
i
ash: Inorganic material consisting of iron, alumina, sodium and other incombustible matter that are contained in coal. The composition of the ash can affect the burning characteristics of coal.
assigned reserves: Proven and probable reserves that have the permits and infrastructure necessary for mining.
as received: Represents an analysis of a sample as received at a laboratory.
Bbl: One standard barrel containing 42 United States gallons liquid volume.
BOE: A barrel of oil equivalent and is a standard convention used to express oil and natural gas volumes on a comparable oil equivalent basis. Gas equivalents are determined under the relative energy content method by using the ratio of 6 thousand cubic feet of gas to 1 Bbl of oil or natural gas liquid.
Btu: British thermal unit, or Btu, is the amount of heat required to raise the temperature of one pound of water one degree Fahrenheit.
Central Appalachia: Coal producing area in eastern Kentucky, Virginia and southern West Virginia.
coal seam: Coal deposits occur in layers typically separated by layers of rock. Each layer is called a "seam." A seam can vary in thickness from inches to a hundred feet or more.
coke: A hard, dry carbon substance produced by heating coal to a very high temperature in the absence of air. Coke is used in the manufacture of iron and steel.
fossil fuel: A hydrocarbon such as coal, petroleum or natural gas that may be used as a fuel.
GAAP: Generally accepted accounting principles in the United States.
gross acreage or gross wells: The total acres or wells, as the case may be, in which a working interest is owned.
high-vol metallurgical coal: Metallurgical coal that has a volatility content of 32% or greater of its total weight.
Illinois Basin: Coal producing area in Illinois, Indiana and western Kentucky.
limestone: A rock predominantly composed of the mineral calcite (calcium carbonate (CaCO3)).
lignite: The lowest rank of coal. It is brownish-black with high moisture content commonly above 35% by weight and heating value commonly less than 8,000 Btu.
low-vol metallurgical coal: Metallurgical coal that has a volatility content of 17% to 22% of its total weight.
MBbls: One thousand Bbls.
MBOE: One thousand BOEs.
Mcf: One thousand cubic feet.
mid-vol metallurgical coal: Metallurgical coal that has a volatility content of 23% to 31% of its total weight.
ii
metallurgical coal: The various grades of coal suitable for carbonization to make coke for steel manufacture. Its quality depends on four important criteria: volatility, which affects coke yield; the level of impurities including sulfur and ash, which affects coke quality; composition, which affects coke strength; and basic characteristics, which affect coke oven safety. Metallurgical coal typically has a particularly high Btu but low ash and sulfur content.
Mgal: One thousand United States gallons.
MMCF: One million cubic feet.
net acres or net wells: the sum of the fractional working interests owned in gross acres or gross wells expressed as whole numbers and fractions of whole numbers.
net mineral acre: The product of (i) the percentage of oil and natural gas mineral rights owned in a given tract of land and (ii) the total surface acreage of such tract.
non-reserve coal deposits: Non-reserve coal deposits are coal-bearing bodies that have been sufficiently sampled and analyzed in trenches, outcrops, drilling and underground workings to assume continuity between sample points, and therefore warrant further exploration stage work. However, this coal does not qualify as a commercially viable coal reserve as prescribed by standards of the SEC until a final comprehensive evaluation based on unit cost per ton, recoverability and other material factors concludes legal and economic feasibility. Non-reserve coal deposits may be classified as such by either limited property control or geologic limitations, or both.
Northern Appalachia: Coal producing area in Maryland, Ohio, Pennsylvania and northern West Virginia.
overburden: Layers of earth and rock covering a coal seam. In surface mining operations, overburden is removed prior to coal extraction.
preparation plant: Usually located on a mine site, although one plant may serve several mines. A preparation plant is a facility for crushing, sizing and washing coal to prepare it for use by a particular customer. The washing process separates higher ash coal and may also remove some of the coal's sulfur content.
probable (indicated) coal reserves: Coal reserves for which quantity and grade and/or quality are computed from information similar to that used for proven (measured) reserves, but the sites for inspection, sampling, and measurement are farther apart or are otherwise less adequately spaced. The degree of assurance, although lower than that for proven (measured) reserves, is high enough to assume continuity between points of observation.
productive well: A well that is found to be capable of producing hydrocarbons in sufficient quantities such that proceeds from the sale of the production exceed production expenses and taxes.
proven (measured) coal reserves: Coal reserves for which (a) quantity is computed from dimensions revealed in outcrops, trenches, workings or drill holes; grade and/or quality are computed from the results of detailed sampling and (b) the sites for inspection, sampling and measurement are spaced so closely and the geologic character is so well defined that size, shape, depth and mineral content of reserves are well-established.
proved developed oil and natural gas reserves: Proved oil and natural gas reserves that can be expected to be recovered through existing wells with existing equipment and operating methods or in which the cost of the required equipment is relatively minor compared to the cost of a new well and through installed extraction equipment and infrastructure operational at the time of the reserves estimate if the extraction is by means not involving a well.
iii
proved oil and natural gas reserves: The quantities of oil and natural gas, which, by analysis of geosciences and engineering data, can be estimated with reasonable certainty to be economically producible—from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulations—prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. The project to extract the hydrocarbons must have commenced or the operator must be reasonably certain that it will commence the project within a reasonable time. (i) The area of the reservoir considered as proved includes: (A) The area identified by drilling and limited by fluid contacts, if any, and (B) Adjacent undrilled portions of the reservoir that can, with reasonable certainty, be judged to be continuous with it and to contain economically producible oil or natural gas on the basis of available geoscience and engineering data. (ii) In the absence of data on fluid contacts, proved quantities in a reservoir are limited by the lowest known hydrocarbons as seen in a well penetration unless geoscience, engineering, or performance data and reliable technology establishes a lower contact with reasonable certainty. (iii) Where direct observation from well penetrations has defined a highest known oil elevation and the potential exists for an associated gas cap, proved oil reserves may be assigned in the structurally higher portions of the reservoir only if geoscience, engineering or performance data and reliable technology establish the higher contact with reasonable certainty. (iv) Reserves which can be produced economically through application of improved recovery techniques (including, but not limited to, fluid injection) are included in the proved classification when: (A) Successful testing by a pilot project in an area of the reservoir with properties no more favorable than in the reservoir as a whole, the operation of an installed program in the reservoir or an analogous reservoir, or other evidence using reliable technology establishes the reasonable certainty of the engineering analysis on which the project or program was based; and (B) The project has been approved for development by all necessary parties and entities, including governmental entities. (v) Existing economic conditions include prices and costs at which economic producibility from a reservoir is to be determined. The price shall be the average during the 12-month period prior to the ending date of the period covered by the report, determined as an unweighted arithmetic average of the first-day-of-the-month price for each month within such period, unless prices are defined by contractual arrangements, excluding escalations based upon future conditions.
proved undeveloped oil and natural gas reserves: Proved oil and natural gas reserves that are expected to be recovered from new wells on undrilled acreage or from existing wells where a relatively major expenditure is required for recompletion.
reclamation: The process of restoring land to its prior condition, productive use or other permitted condition following mining activities. The process commonly includes "re-contouring" or reshaping the land to its approximate original contour, restoring topsoil and planting native grass and shrubs. Reclamation operations are typically conducted concurrently with mining operations, but the majority of reclamation costs are incurred once mining operations cease. Reclamation is closely regulated by both state and federal laws.
recompletion: The process of re-entering an existing wellbore that is either producing or not producing and completing new oil and natural gas reservoirs in an attempt to establish or increase existing production.
reserve: That part of a mineral deposit which could be economically and legally extracted or produced at the time of the reserve determination.
steam coal: Coal used by power plants and industrial steam boilers to produce electricity, steam or both. It generally is lower in Btu heat content and higher in volatile matter than metallurgical coal.
iv
sulfur: One of the elements present in varying quantities in coal that contributes to environmental degradation when coal is burned. Sulfur dioxide (SO2) is produced as a gaseous by-product of coal combustion.
surface mine: A mine in which the coal lies near the surface and can be extracted by removing the covering layer of soil overburden. Surface mines are also known as open-pit mines.
tons: A "short" or net ton is equal to 2,000 pounds. A "long" or British ton is 2,240 pounds. A "metric" tonne is approximately 2,205 pounds. The short ton is the unit of measure referred to in this report.
Western Bituminous region: Coal producing area located in western Colorado and eastern Utah.
With respect to information on the working interest in wells, drilling locations and acreage, "net" wells, drilling locations and acres are determined by multiplying "gross" wells, drilling locations and acres by our working interest in such wells, drilling locations or acres. Unless otherwise specified, wells, drilling locations and acreage statistics quoted herein represent gross wells, drilling locations or acres.
v
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This report contains "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 our plans, strategies, prospects and expectations concerning our business, operating results, financial condition and similar matters, are forward-looking statements. These statements can be identified by the use of forward-looking terminology, including "may," "believe," "expect," "anticipate," "estimate," "continue," "plan," "intend," foresee," "should," "would," "could" or similar words, which are generally not historical in nature. These statements are made by us based on our past experience and our perception of historical trends, current conditions and expected future developments as well as other considerations we believe are appropriate under the circumstances. While we believe that these forward-looking statements are reasonable as and when made, there can be no assurance that future developments affecting us will be those that we anticipate. All comments concerning our expectations for future results are based on our forecasts for our existing operations and do not include the potential impact of any unforeseen developments. 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 or our ability to predict. Therefore, actual outcomes and results could materially differ from what is expressed, implied or forecast in these statements. Known material factors that could cause our actual results to differ from those in the forward-looking statements are those described in Item 1A "Risk Factors." The following factors are among those that may cause actual results to differ materially from our forward-looking statements:
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- weakness in global economic conditions;
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- the availability and prices of competing electricity generation fuels;
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- changes in governmental regulation of the mining industry or the electric utility industry;
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- adverse weather conditions and natural disasters;
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- decreases in demand for electricity and changes in demand for and price of coal;
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- poor mining conditions resulting from geological conditions or the effects of prior mining;
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- equipment problems at mining locations;
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- the availability of transportation for coal shipments;
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- the availability and costs of key supplies and commodities such as steel, diesel fuel and explosives;
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- our ability to secure or acquire high-quality coal reserves;
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- our ability to successfully diversify our operations into other non-coal natural resources; and
- •
- our ability to find buyers for coal under favorable supply contracts.
Readers are cautioned not to place undue reliance on forward-looking statements. The forward-looking statements speak only as of the date made, and we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
vi
Unless the context clearly indicates otherwise, references in this report to "Rhino Predecessor," "we," "our," "us" or similar terms when used for periods prior to the completion of the initial public offering of common units of Rhino Resource Partners LP on October 5, 2010 (the "IPO") refer to Rhino Energy LLC and its subsidiaries. When used for periods subsequent to the completion of the IPO, "we,""our,""us," or similar terms refer to Rhino Resource Partners LP and its subsidiaries. References to our "general partner" refer to Rhino GP LLC, the general partner of Rhino Resource Partners LP.
We are a diversified energy limited partnership formed in Delaware that is focused on coal and energy related assets and activities, including energy infrastructure investments. We produce, process and sell high quality coal of various steam and metallurgical grades from multiple coal producing basins in the United States. We market our steam coal primarily to electric utility companies as fuel for their steam powered generators. Customers for our metallurgical coal are primarily steel and coke producers who use our coal to produce coke, which is used as a raw material in the steel manufacturing process. In addition to operating coal properties, we manage and lease coal properties and collect royalties from such management and leasing activities. Our diversified energy portfolio also includes investments in oil and natural gas mineral rights in the Cana Woodford region of western Oklahoma and an investment in the Utica Shale region of eastern Ohio, which we signed a binding letter of intent to sell to a third party for $185 million in February 2014 (details discussed further below). In addition, we have expanded our business to include infrastructure support services, including the formation of a service company to provide drill pad construction for operators in the Utica Shale as well as other joint venture investments to provide for the transportation of hydrocarbons and drilling support services in the Utica Shale region. In December 2012, we also invested in a joint venture that will provide sand for fracking operations to drillers in the Utica Shale region and other oil and natural gas basins in the United States.
In 2011, we and an affiliate of Wexford participated with Gulfport Energy ("Gulfport"), a publicly traded company, to acquire interests in a portfolio of oil and natural gas leases in the Utica Shale. Our initial position in the Utica Shale consisted of a 10.8% net interest in approximately 80,000 gross acres. During the third quarter of 2012, we completed an exchange of our initial 10.8% position for a pro rata interest in 125,000 gross acres under lease by Gulfport and an affiliate of Wexford Capital. Also during the third quarter of 2012, our position was adjusted to a 5% net interest in the 125,000 gross acres, or approximately 6,250 net acres. As of December 31, 2013, our Utica Shale position consisted of our 5% net interest in a total portfolio of approximately 152,300 gross acres, or approximately 7,615 net acres, for a total purchase price of approximately $31.1 million. In addition, per the joint operating agreement among Rhino, Gulfport and an affiliate of Wexford Capital, we funded our proportionate share of drilling costs to Gulfport for wells drilled on our acreage. As of December 31, 2013, we funded approximately $23.3 million of drilling costs. We received approximately $5.6 million of revenue from this investment for the year ended December 31, 2013.
In February 2014, we signed a binding letter of intent to sell our entire Utica Shale joint interest investment to Gulfport for $185 million, subject to customary closing conditions. The expected sale of our investment in the Utica Shale has created substantial value for our unitholders and this investment has been a great success. This transaction will allow us to eliminate substantially all of our debt and will give us significant financial flexibility. The elimination of our debt provides us the capability to opportunistically expand our operations and increase our cash flow through the development of existing coal reserves or the potential acquisition of MLP qualifying assets.
We have a geographically diverse asset base with coal reserves located in Central Appalachia, Northern Appalachia, the Illinois Basin and the Western Bituminous region and oil and natural gas
1
investments in the Cana Woodford region of western Oklahoma. As of December 31, 2013, we controlled an estimated 457.7 million tons of proven and probable coal reserves, consisting of an estimated 438.0 million tons of steam coal and an estimated 19.7 million tons of metallurgical coal. In addition, as of December 31, 2013, we controlled an estimated 277.0 million tons of non-reserve coal deposits. As of December 31, 2013, Rhino Eastern LLC, a joint venture with Patriot Coal Corporation ("Patriot") in which we own a 51% membership interest and for which we serve as manager, controlled an estimated 43.9 million tons of proven and probable coal reserves at the Rhino Eastern mining complex located in Central Appalachia, consisting entirely of premium mid-vol and low-vol metallurgical coal, and an estimated 18.8 million tons of non-reserve coal deposits. Our oil and natural gas investments as of December 31, 2013 also consisted of approximately 1,900 net mineral acres that we own in the Cana Woodford region.
As of December 31, 2013, we operated eight mines, including four underground and four surface mines, located in Kentucky, Ohio, West Virginia and Utah. In addition, the Rhino Eastern joint venture operates one underground mine in West Virginia as of December 31, 2013. We also had one underground mine located in Colorado that was permanently idled at the end of 2013 (see Note 6 of the consolidated financial statements included elsewhere in this annual report for further information). The number of mines that we operate will vary from time to time depending on a number of factors, including the existing demand for and price of coal, depletion of economically recoverable reserves and availability of experienced labor. Excluding results from the Rhino Eastern joint venture, for the year ended December 31, 2013, we produced approximately 3.6 million tons of coal, purchased approximately 0.1 million tons of coal and sold approximately 3.7 million tons of coal. Additionally, the Rhino Eastern joint venture produced and sold approximately 0.2 million tons of premium mid-vol metallurgical coal for the year ended December 31, 2013. Lessees produced approximately 2.8 million tons of coal from our Elk Horn coal leasing properties in eastern Kentucky for the year ended December 31, 2013. We also received royalty revenue from hydrocarbons sold from our Cana Woodford investment for the year ended December 31, 2013. Please see Note 21 of the consolidated financial statements included elsewhere in this annual report for information regarding our reportable business segments.
Our principal business strategy is to safely, efficiently and profitably produce, sell and lease both steam and metallurgical coal from our diverse asset base in order to maintain, and, over time, increase our quarterly cash distributions. In addition, we intend to continue to expand and potentially diversify our operations through strategic acquisitions, including the acquisition of long-term, cash generating natural resource assets. We believe that such assets will allow us to grow our cash available for distribution and enhance our cash flow.
History
Our predecessor was formed in April 2003 by Wexford Capital LP ("Wexford Capital", and together with certain of its affiliates and principals, "Wexford"). Wexford Capital is an SEC registered investment advisor which was formed in 1994 and manages a series of investment funds and has over $4 billion of assets under management. Since the formation of our predecessor, we have significantly grown our coal reserves. Since April 2003, we have completed numerous coal asset acquisitions with a total purchase price of approximately $356.5 million. Through these acquisitions and coal lease transactions, we have substantially increased our proven and probable coal reserves and non-reserve coal deposits. In addition, we have successfully grown our production through internal development projects.
In May 2012, we completed the purchase of certain rights to coal leases and surface property located in Daviess and McLean counties in western Kentucky for a total cost of $3.5 million as of December 31, 2013. These coal leases and property are estimated to contain approximately 32.6 million tons of proven and probable coal reserves that are contiguous to the Green River. The property is fully
2
permitted and we have signed a sales contract with an electric utility anchor customer that ensures this project has an immediate market for its coal. Development of the mine on this property commenced in early 2013 and initial production is scheduled to begin in mid-2014. This property provides us with access to Illinois Basin coal that is adjacent to a navigable waterway, which could be exported to non-U.S. customers in the future. In addition, in June 2011 we completed the acquisition of 100% of the ownership interests in The Elk Horn Coal Company ("Elk Horn") for approximately $119.7 million in cash consideration. Elk Horn is primarily a coal leasing company located in eastern Kentucky that provides us with coal royalty revenues, which we believe helps to diversify our income stream while limiting our direct operational risk.
In addition to our coal acquisitions, in 2011 we began to invest in oil and natural gas mineral rights in the Utica Shale region of eastern Ohio as well as the Cana Woodford region of western Oklahoma. As of December 31, 2013, we had invested a total of approximately $31.1 million for a 5% net interest in a portfolio of oil and natural gas leases in the Utica Shale region along with approximately $23.3 million in drilling costs, which represented our proportionate ownership share in the portfolio. Gulfport, the operator of the portfolio, began drilling and testing wells in the region in 2012 and we received our proportionate share (5%) of revenue from the hydrocarbons produced and sold by the operator on our acreage, which totaled approximately $5.6 million for the year ended December 31, 2013. In February 2014, we signed a binding letter of intent to sell our entire Utica Shale joint interest investment to Gulfport for $185 million, which will provide us significant financial flexibility. In addition, as of December 31, 2013, we have invested approximately $8.1 million for mineral rights in the Cana Woodford region.
We were formed in April 2010 to own and control the coal properties and related assets owned by Rhino Energy LLC. On October 5, 2010, we completed our IPO, in which we sold an aggregate of 3,730,600 common units to the public. Our common units are listed on the New York Stock Exchange under the symbol "RNO". In connection with the IPO, Wexford contributed their membership interests in Rhino Energy LLC to us, and we issued 12,397,000 subordinated units representing limited partner interests in us and 8,666,400 common units to Wexford and issued incentive distribution rights to our general partner. Principals of Wexford Capital, including certain directors of our general partner, own the majority of the membership interests in our general partner.
In addition, on September 13, 2013, we completed a public offering of 1,265,000 common units, representing limited partner interests in us, at a price of $12.30 per common unit. Of the common units issued, 165,000 units were issued in connection with the exercise of the underwriters' option to purchase additional units. On July 18, 2011, we completed a public offering of 2,875,000 common units, representing limited partner interests in us, at a price of $24.50 per common unit. Of the common units issued, 375,000 units were issued in connection with the exercise of the underwriters' option to purchase additional units.
We are managed by the board of directors and executive officers of our general partner. Our operations are conducted through, and our operating assets are owned by, our wholly owned subsidiary, Rhino Energy LLC, and its subsidiaries.
Coal Operations
Mining and Leasing Operations
As of December 31, 2013, we operated four mining complexes located in Central Appalachia (Tug River, Rob Fork, Deane and Rhino Eastern) along with our Elk Horn coal leasing operations in Central Appalachia. In addition, we operated two mining complexes located in Northern Appalachia (Hopedale and Sands Hill). In the Western Bituminous region, we operated one mining complex located in Emery and Carbon Counties, Utah (Castle Valley). We also had one underground mine located in the Western Bituminous region in Colorado (McClane Canyon) that was permanently idled
3
at the end of 2013 (see Note 6 of the consolidated financial statements included elsewhere in this annual report for further information). We are currently developing a new mining complex in the Illinois Basin, our Pennyrile mine, which is expected to begin production in mid-2014, and will consist of one underground mine, a preparation plant and river loadout facility.
We define a mining complex as a central location for processing raw coal and loading coal into railroad cars or trucks for shipment to customers. These mining complexes include eight active preparation plants and/or loadouts (including one owned by our joint venture partner), each of which receive, blend, process and ship coal that is produced from one or more of our active surface and underground mines. All of the preparation plants are modern plants that have both coarse and fine coal cleaning circuits.
4
The following map shows the location of our coal mining and leasing operations as of December 31, 2013 (Note: the McClane Canyon mine in Colorado was permanently idled at December 31, 2013):
5
Our surface mines include area mining and contour mining. These operations use truck and wheel loader equipment fleets along with large production tractors and shovels. Our underground mines utilize the room and pillar mining method. These operations generally consist of one or more single or dual continuous miner sections which are made up of the continuous miner, shuttle cars, roof bolters, feeder and other support equipment. We currently own most of the equipment utilized in our mining operations. We employ preventive maintenance and rebuild programs to ensure that our equipment is modern and well-maintained. The rebuild programs are performed either by an on-site shop or by third-party manufacturers. The mobile equipment utilized at our mining operations is scheduled for replacement on an on-going basis with new, more efficient units according to a predetermined schedule.
The following table summarizes our and the Rhino Eastern joint venture's mining complexes and production by region as of December 31, 2013. The tons produced by the Elk Horn lessees are not included in the table below since we did not directly mine these tons, but rather collected royalty revenues from the lessees.
Region
|
Preparation Plants and Loadouts |
Transportation to Customers(1) |
Number and Type of Active Mines(2) |
Tons Produced for the Year Ended December 31, 2013(3) |
|||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| |
|
|
|
(in million tons) |
|||||||
Central Appalachia |
|||||||||||
Tug River Complex (KY, WV) |
Tug Fork & Jamboree(4) | Truck, Barge, Rail (NS) | 2S | 0.4 | |||||||
Rob Fork Complex (KY) |
Rob Fork | Truck, Barge, Rail (CSX) | 1U, 1S | 0.7 | |||||||
Deane Complex (KY) |
Rapid Loader | Rail (CSX) | 1U | 0.3 | |||||||
Northern Appalachia |
|||||||||||
Hopedale Complex (OH) |
Nelms | Truck, Rail (OHC, WLE) | 1U | 1.1 | |||||||
Sands Hill Complex (OH) |
Sands Hill(5) | Truck, Barge | 1S | 0.2 | |||||||
Illinois Basin |
|||||||||||
Taylorville Field (IL) |
n/a | Rail (NS) | — | — | |||||||
Pennyrile Mine (KY)(6) |
Preparation plant & river loadout | Barge | — | — | |||||||
Western Bituminous |
|||||||||||
Castle Valley Complex (UT) |
Truck loadout | Truck | 1U | 0.9 | |||||||
McClane Canyon Mine (CO)(7) |
n/a | Truck | — | — | |||||||
| | | | | | | | | | | | |
Total |
4U,4S | 3.6 | |||||||||
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Central Appalachia |
|||||||||||
Rhino Eastern Complex (WV)(8) |
Rocklick | Truck, Rail (NS, CSX) | 1U | ||||||||
- (1)
- NS =
Norfolk Southern Railroad; CSX = CSX Railroad; OHC = Ohio Central Railroad; WLE = Wheeling & Lake Erie
Railroad.
- (2)
- Numbers
indicate the number of active mines. U = underground; S = surface. All of our mines as of December 31, 2013 were
company-operated.
- (3)
- Total
production based on actual amounts and not rounded amounts shown in this table.
- (4)
- Jamboree
includes only a loadout facility.
- (5)
- Includes
only a preparation plant.
- (6)
- Construction of a new underground mining operation on this property commenced in early 2013, with production targeted to begin in mid-2014.
6
- (7)
- The
McClane Canyon mine was permanently idled as of December 31, 2013.
- (8)
- Owned by a joint venture in which we have a 51% membership interest and for which we serve as manager. Amounts shown include 100% of the production. The Rocklick preparation plant is owned and operated by our joint venture partner with whom the Rhino Eastern joint venture has a transloading agreement for use of the facility.
Central Appalachia. As of December 31, 2013, we operated four mining complexes located in Central Appalachia consisting of three active underground mines and three surface mines. For the year ended December 31, 2013, the mines at our Tug River, Rob Fork and Deane mining complexes produced an aggregate of approximately 0.8 million tons of steam coal and an estimated 0.6 million tons of metallurgical coal, and the underground mine at the Rhino Eastern mining complex, owned by the Rhino Eastern joint venture in which we have a 51% membership interest and for which we serve as manager, produced approximately 0.2 million tons of metallurgical coal. In addition, for the year ended December 31, 2013, lessees of our Elk Horn properties produced approximately 2.8 million tons of coal.
Tug River Mining Complex. Our Tug River mining complex is located in Kentucky and West Virginia that borders the Tug River. This complex produces coal from two company operated surface mines, which includes one high-wall mining unit. Coal production from these operations is delivered to the Tug Fork preparation plant for processing and then transported by truck to the Jamboree rail loadout for blending and shipping. The Tug Fork plant is a modern, 350 tons per hour preparation plant utilizing heavy media circuitry that is capable of cleaning coarse and fine coal size fractions. The Jamboree loadout is located on the Norfolk Southern Railroad and is a modern unit train, batch weigh loadout. This mining complex produced approximately 0.1 million tons of steam coal and approximately 0.3 million tons of metallurgical coal for the year ended December 31, 2013.
Rob Fork Mining Complex. Our Rob Fork mining complex is located in eastern Kentucky and currently produces coal from one company-operated surface mine and one company-operated underground mine. The Rob Fork mining complex is located on the CSX Railroad and consists of a modern preparation plant utilizing heavy media circuitry that is capable of cleaning coarse and fine coal size fractions and a unit train loadout with batch weighing equipment. The mining complex has significant blending capabilities allowing the blending of raw coals with washed coals to meet a wide variety of customers' needs. The Rob Fork mining complex produced approximately 0.4 million tons of steam coal and 0.3 million tons of metallurgical coal for the year ended December 31, 2013.
Deane Mining Complex. Our Deane mining complex is located in eastern Kentucky and produces steam coal from one company-operated underground mine. The infrastructure consists of a preparation plant utilizing heavy media circuitry capable of cleaning coarse and fine coal size fractions, as well as a unit train loadout facility with batch weighing equipment capable of loading in excess of 10,000 tons into railcars in approximately four hours. The facility has significant blending capabilities allowing the blending of raw coals with washed coals to meet a wide variety of customers' needs. The Deane complex produced approximately 0.3 million tons of steam coal for the year ended December 31, 2013.
Rhino Eastern Mining Complex. The Rhino Eastern mining complex is located in Raleigh and Wyoming Counties, West Virginia. We have a 51% membership interest in, and serve as manager for the joint venture that owns the Rhino Eastern mining complex. Pursuant to the terms of a coal purchase agreement entered into under the joint venture agreement, an affiliate of our joint venture partner, Patriot, controls the amount and terms of sales of the coal produced from the Rhino Eastern mining complex.
The Rhino Eastern mining complex currently produces premium metallurgical coal from one company-operated underground mine. Raw coal is trucked from the mine to a facility owned by our joint venture partner to be sized, washed and shipped by truck or via one of two rail loadouts, located
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on the CSX Railroad and the Norfolk Southern Railroad. The Rhino Eastern mining complex produced approximately 0.2 million tons of premium mid-vol metallurgical coal for the year ended December 31, 2013.
On July 9, 2012, Patriot filed for Chapter 11 bankruptcy protection and Patriot successfully exited bankruptcy in December 2013.
Elk Horn Coal Leasing. Elk Horn is primarily a coal leasing company located in eastern Kentucky that provides us with coal royalty revenues. For the year ended December 31, 2013, Elk Horn lessees produced approximately 2.8 million tons of coal from our Elk Horn properties.
Northern Appalachia. We operate two mining complexes located in Northern Appalachia consisting of one company-operated underground mine and one company-operated surface mine. For the year ended December 31, 2013, these mines produced an aggregate of approximately 1.3 million tons of steam coal.
Hopedale Mining Complex. The Hopedale mining complex includes an underground mine located in Hopedale, Ohio approximately five miles northeast of Cadiz, Ohio. Coal produced from the Hopedale mine is first cleaned at our Nelms preparation plant located on the Ohio Central Railroad and the Wheeling & Lake Erie Railroad in Cadiz, Ohio and then shipped by train or truck to our customers. The infrastructure includes a full-service loadout facility. This underground mining operation produced approximately 1.1 million tons of steam coal for the year ended December 31, 2013.
Sands Hill Mining Complex. We currently operate one surface mine at our Sands Hill mining complex, located near Hamden, Ohio. The infrastructure includes a preparation plant along with a river front barge and dock facility on the Ohio River. The Sands Hill mining complex produced approximately 0.2 million tons of steam coal and approximately 0.5 million tons of limestone aggregate for the year ended December 31, 2013.
Western Bituminous Region. In January 2011, we began production at an underground mine in Emery and Carbon Counties, Utah. We also had one underground mine located in the Western Bituminous region in Colorado (McClane Canyon) that was permanently idled at the end of 2013 (see Note 6 of the consolidated financial statements included elsewhere in this annual report for further information).
Castle Valley Mining Complex. In August 2010, we completed the acquisition of certain mining assets of C.W. Mining Company out of bankruptcy. The assets acquired are located in Emery and Carbon Counties, Utah and include coal reserves and non-reserve coal deposits, underground mining equipment and infrastructure, an overland belt conveyor system, a loading facility and support facilities. We produced approximately 0.9 million tons of steam coal from one underground mine at this complex for the year ended December 31, 2013.
Illinois Basin Mining Complex. In May 2012, we completed the purchase of certain rights to coal leases and surface property located in Daviess and McLean counties in western Kentucky. The coal leases and property are estimated to contain approximately 32.6 million tons of proven and probable coal reserves that are contiguous to the Green River. The property was initially undeveloped, but fully permitted, and provides us with access to Illinois Basin coal that is adjacent to a navigable waterway, which could be exported to non-U.S. customers. In early 2013, we commenced the construction of a new underground mining operation on this property, referred to as our Pennyrile mine, which will include a preparation plant and river loadout facility. Production from this mine is targeted to begin in mid-2014 and initial annual production is scheduled to be approximately 0.8 million tons per year, with the possibility to expand up to 2.0 million tons per year with further development of the mine.
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Other Non-Mining Operations
In addition to our mining operations, we operate several subsidiaries which provide auxiliary services for our coal mining operations. Rhino Trucking provides our Kentucky coal operations with dependable, safe coal hauling to our preparation plants and loadout facilities and our southeastern Ohio coal operations with reliable transportation to our customers where rail is not available. Rhino Services is responsible for mine-related construction, site and roadway maintenance and post-mining reclamation. Through Rhino Services, we plan and monitor each phase of our mining projects as well as the post-mining reclamation efforts. We also perform the majority of our drilling and blasting activities at our company-operated surface mines in-house rather than contracting to a third party. Prior to being sold in August 2012, our Triad Roof Support Systems subsidiary manufactured roof control products used in underground coal mining.
Other Natural Resource Assets
Oil and Gas
In addition to our coal operations, we have invested in oil and natural gas mineral rights and operations that we believe will help to diversify our income stream.
In 2011 we began to invest in oil and natural gas mineral rights and operations in the Utica Shale region of eastern Ohio. As of December 31, 2013, we had invested a total of approximately $31.1 million for a 5% net interest in a portfolio of oil and natural gas leases in the Utica Shale region along with approximately $23.3 million in drilling costs, which represented our proportionate ownership share in the portfolio. Gulfport, the operator of the portfolio, began drilling and testing wells in the region in 2012 and we received our proportionate share (5%) of revenue from the hydrocarbons produced and sold by the operator on our acreage, which totaled approximately $5.6 million for the year ended December 31, 2013. In February 2014, we signed a binding letter of intent to sell our entire Utica Shale joint interest investment to Gulfport for $185 million.
During 2011, we completed the acquisition of certain oil and gas mineral rights in the Cana Woodford region of western Oklahoma for a total purchase price of approximately $8.1 million. We began to receive royalty revenues from these mineral rights in early 2012 and received approximately $115,000 and $77,000 in royalty revenue during 2013 and 2012, respectively.
In December 2012, we made an initial investment of approximately $2.0 million in a new joint venture, Muskie Proppant LLC ("Muskie"), with affiliates of Wexford Capital. Muskie was formed to provide sand for fracking operations to drillers in the Utica Shale region and other oil and natural gas basins in the U.S. We recorded our proportionate share of the operating loss for 2013 and 2012 of approximately $0.5 million and $0.3 million, respectively. During the year ended December 31, 2013, we contributed additional capital based upon our ownership interest to the Muskie joint venture in the amount of $0.5 million. In addition, during the year ended December 31, 2013, we provided a loan based upon our ownership share to Muskie in the amount of $0.2 million that remained outstanding as of December 31, 2013.
In March 2012, we made an initial investment of approximately $0.1 million in a new joint venture, Timber Wolf Terminals LLC ("Timber Wolf"), with affiliates of Wexford Capital. Timber Wolf was formed to construct and operate a condensate river terminal that will provide barge trans-loading services for parties conducting activities in the Utica Shale region of eastern Ohio. The initial investment was our proportionate minority ownership interest to purchase land for the construction site of the condensate river terminal. Timber Wolf had no operating activities during 2013 and 2012.
In addition, during the second quarter of 2012 we formed a services company ("Razorback") to provide drill pad construction services in the Utica Shale for drilling operators. Razorback completed the construction and upgrade of eleven drill pads during the year ended December 31, 2013 in addition
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to the three drill pads completed during 2012. Two impoundments for fracking water were also constructed during 2013 for a total of three completed to date. Additionally, Razorback has constructed several access roads for operators in the Utica Shale region.
In March 2012, we completed a lease agreement with a third party for approximately 1,232 acres that we own in the Utica Shale region in Harrison County, Ohio. The lease agreement is for an initial five year term with an optional three year renewal period and conveys rights to the third party to perform drilling and operating activities for producing oil, natural gas or other hydrocarbons. As part of the lease agreement, the third party agreed to pay us the sum of $6,000 per acre as a lease bonus, of which $0.5 million was paid at the signing of the lease agreement. An additional $6.9 million was paid in the second quarter of 2012 totaling approximately $7.4 million of lease bonus payments for approximately 1,232 acres. In addition, the lease agreement stipulates that the third party shall pay us a 20% royalty based upon the gross proceeds received from the sale of oil and/or natural gas recovered from the leased property.
In April 2013, we completed an agreement with a third party to sell the 20% royalty interest for approximately $10.5 million on the 1,232 acres in the Utica Shale. The sale of the royalty interest resulted in a gain of approximately $10.5 million since we had no cost basis associated with the royalty interest.
In September 2013, we completed an agreement with a third party to sell the oil and natural gas mineral rights for approximately 57 acres we own in the Utica Shale region in Harrison County, Ohio for approximately $0.6 million. The sale of this acreage resulted in a gain of approximately $0.6 million since we had no cost basis associated with this property.
Limestone
Incidental to our coal mining process, we mine limestone from reserves located at our Sands Hill mining complex and sell it as aggregate to various construction companies and road builders that are located in close proximity to the mining complex when market conditions are favorable. We believe that our production of limestone provides us with an additional source of revenues at low incremental capital cost.
Coal Customers
General
Our primary customers for our steam coal are electric utilities, and the metallurgical coal we produce is sold primarily to domestic and international steel producers. Excluding results from the Rhino Eastern joint venture, for the year ended December 31, 2013, approximately 84% of our coal sales tons consisted of steam coal and approximately 16% consisted of metallurgical coal. For the year ended December 31, 2013, 100% of the Rhino Eastern joint venture's coal sales tons consisted of metallurgical coal. For the year ended December 31, 2013, excluding results from the Rhino Eastern joint venture, approximately 73% of our coal sales tons that we produced were sold to electric utilities. The majority of our electric utility customers purchase coal for terms of one to three years, but we also supply coal on a spot basis for some of our customers. Excluding the results from the Rhino Eastern joint venture, for the year ended December 31, 2013, we derived approximately 86.6% of our total coal revenues from sales to our ten largest customers, with affiliates of our top three customers accounting for approximately 45.9% of our coal revenues for that period: NRG Energy, Inc. (fka GenOn Energy, Inc.) (23.4%); American Electric Power (12.7%); and Indiana Harbor (9.8%). Additionally, pursuant to the terms of a coal purchase agreement entered into under the Rhino Eastern joint venture agreement, we sell 100% of Rhino Eastern's production to an affiliate of our joint venture partner, Patriot, which controls the amount and terms of sales of the coal produced from Rhino Eastern. Incidental to our coal mining process, we mine limestone and sell it as aggregate to various
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construction companies and road builders that are located in close proximity to our Sands Hill mining complex.
Coal Supply Contracts
For each of the years ended December 31, 2013 and 2012, approximately 88% of our aggregate coal tons sold were sold through supply contracts. We expect to continue selling a significant portion of our coal under supply contracts. As of December 31, 2013, we had commitments under supply contracts to deliver annually scheduled base quantities as follows:
Year
|
Tons (in thousands) | Number of customers | |||||
|---|---|---|---|---|---|---|---|
2014 |
3,045 | 19 | |||||
2015 |
1,796 | 4 | |||||
2016 |
1,100 | 2 | |||||
2017 |
1,100 | 2 | |||||
Some of the contracts have sales price adjustment provisions, subject to certain limitations and adjustments, based on a variety of factors and indices.
Quality and volumes for the coal are stipulated in coal supply contracts, and in some instances buyers have the option to vary annual or monthly volumes. Most of our coal supply contracts contain provisions requiring us to deliver coal within certain ranges for specific coal characteristics such as heat content, sulfur, ash, hardness and ash fusion temperature. Failure to meet these specifications can result in economic penalties, suspension or cancellation of shipments or termination of the contracts. Some of our contracts specify approved locations from which coal may be sourced. Some of our contracts set out mechanisms for temporary reductions or delays in coal volumes in the event of a force majeure, including events such as strikes, adverse mining conditions, mine closures, or serious transportation problems that affect us or unanticipated plant outages that may affect the buyers.
The terms of our coal supply contracts result from competitive bidding procedures and extensive negotiations with customers. As a result, the terms of these contracts, including price adjustment features, price re-opener terms, coal quality requirements, quantity parameters, permitted sources of supply, future regulatory changes, extension options, force majeure, termination and assignment provisions, vary significantly by customer.
Coal Lease Agreements
With respect to our coal leasing operations, we enter into leases with coal mine operators granting them the right to mine and sell coal from our Elk Horn properties in exchange for a royalty payment. Generally the lease terms provide us with a royalty fee of 6% to 9% of the gross sales price of the coal, with a minimum royalty fee ranging from $1.85 to $4.75 per ton. The terms of such leases vary from five years to the life of the reserves. A minimum royalty is required annually or monthly whether or not the property is mined.
Transportation
We ship coal to our customers by rail, truck or barge. For the year ended December 31, 2013, the majority of our coal sales tonnage was shipped by rail. The majority of our coal is transported to customers by either the CSX Railroad or the Norfolk Southern Railroad in eastern Kentucky and by the Ohio Central Railroad or the Wheeling & Lake Erie Railroad in Ohio. In addition, in southeastern Ohio, we use our own trucking operations to transport coal to our customers where rail is not available. We use third-party trucking to transport coal to our customers in Utah. In addition, coal from certain of our mines is located within economical trucking distance to the Big Sandy River and/or the Ohio River and can be transported by barge. It is customary for customers to pay the transportation costs to their location.
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We believe that we have good relationships with rail carriers and truck companies due, in part, to our modern coal-loading facilities at our loadouts and the working relationships and experience of our transportation and distribution employees.
Suppliers
Principal supplies used in our business include diesel fuel, explosives, maintenance and repair parts and services, roof control and support items, tires, conveyance structures, ventilation supplies and lubricants. We use third-party suppliers for a significant portion of our equipment rebuilds and repairs, drilling services and construction.
We have a centralized sourcing group for major supplier contract negotiation and administration, for the negotiation and purchase of major capital goods and to support the mining and coal preparation plants. We are not dependent on any one supplier in any region. We promote competition between suppliers and seek to develop relationships with those suppliers whose focus is on lowering our costs. We seek suppliers who identify and concentrate on implementing continuous improvement opportunities within their area of expertise.
Competition
The coal industry is highly competitive. There are numerous large and small producers in all coal producing regions of the United States and we compete with many of these producers. Our main competitors include Alliance Resource Partners LP, Alpha Natural Resources, Inc., Arch Coal, Inc., Booth Energy Group, CONSOL Energy Inc., James River Coal Company, Murray Energy Corporation, Foresight Energy LLC, Oxford Resource Partners, LP, Patriot and TECO Energy, Inc.
The most important factors on which we compete are coal price, coal quality and characteristics, transportation costs and the reliability of supply. Demand for coal and the prices that we will be able to obtain for our coal are closely linked to coal consumption patterns of the domestic electric generation industry and international consumers. These coal consumption patterns are influenced by factors beyond our control, including demand for electricity, which is significantly dependent upon economic activity and summer and winter temperatures in the United States, government regulation, technological developments and the location, availability, quality and price of competing sources of fuel such as natural gas, oil and nuclear, and alternative energy sources such as hydroelectric power and wind power.
Regulation and Laws
Our operations are subject to regulation by federal, state and local authorities on matters such as:
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- employee health and safety;
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- mine permits and other licensing requirements;
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- air quality standards;
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- water quality standards;
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- storage, treatment, use and disposal of petroleum products and other hazardous substances;
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- plant and wildlife protection;
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- reclamation and restoration of mining properties after mining is completed;
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- the discharge of materials into the environment, including waterways or wetlands;
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- storage and handling of explosives;
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- •
- wetlands protection;
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- surface subsidence from underground mining;
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- the effects, if any, that mining has on groundwater quality and availability; and
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- legislatively mandated benefits for current and retired coal miners.
In addition, many of our customers are subject to extensive regulation regarding the environmental impacts associated with the combustion or other use of coal, which could affect demand for our coal. The possibility exists that new laws or regulations, or new interpretations of existing laws or regulations, may be adopted that may have a significant impact on our mining operations, oil and natural gas investments, or our customers' ability to use coal.
We are committed to conducting mining operations in compliance with applicable federal, state and local laws and regulations. However, because of extensive and comprehensive regulatory requirements, violations during mining operations occur from time to time. Violations, including violations of any permit or approval, can result in substantial civil and in severe cases, criminal fines and penalties, including revocation or suspension of mining permits. None of the violations to date have had a material impact on our operations or financial condition.
While it is not possible to quantify the costs of compliance with applicable federal and state laws and regulations, those costs have been and are expected to continue to be significant. Nonetheless, capital expenditures for environmental matters have not been material in recent years. We have accrued for the present value of estimated cost of reclamation and mine closings, including the cost of treating mine water discharge when necessary. The accruals for reclamation and mine closing costs are based upon permit requirements and the costs and timing of reclamation and mine closing procedures. Although management believes it has made adequate provisions for all expected reclamation and other costs associated with mine closures, future operating results would be adversely affected if we later determined these accruals to be insufficient. Compliance with these laws and regulations has substantially increased the cost of coal mining for all domestic coal producers. Most of the statutes discussed below apply to exploration and development activities associated with our oil and natural gas investments as well, and therefore we do not present a separate discussion of statutes related to those activities.
Mining Permits and Approvals
Numerous governmental permits or approvals are required for coal mining operations. When we apply for these permits and approvals, we are often required to assess the effect or impact that any proposed production of coal may have upon the environment. The permit application requirements may be costly and time consuming, and may delay or prevent commencement or continuation of mining operations in certain locations. Future laws and regulations may emphasize more heavily the protection of the environment and, as a consequence, our activities may be more closely regulated. Laws and regulations, as well as future interpretations or enforcement of existing laws and regulations, may require substantial increases in equipment and operating costs, or delays, interruptions or terminations of operations, the extent of any of which cannot be predicted. The permitting process for certain mining operations can extend over several years, and can be subject to judicial challenge, including by the public. Some required mining permits are becoming increasingly difficult to obtain in a timely manner, or at all. We may experience difficulty and/or delay in obtaining mining permits in the future.
Regulations provide that a mining permit can be refused or revoked if the permit applicant or permittee owns or controls, directly or indirectly through other entities, mining operations which have outstanding environmental violations. Although, like other coal companies, we have been cited for violations in the ordinary course of business, we have never had a permit suspended or revoked because of any violation, and the penalties assessed for these violations have not been material.
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Before commencing mining on a particular property, we must obtain mining permits and approvals by state regulatory authorities of a reclamation plan for restoring, upon the completion of mining, the mined property to its approximate prior condition, productive use or other permitted condition.
Mine Health and Safety Laws
Stringent safety and health standards have been in effect since the adoption of the Coal Mine Health and Safety Act of 1969. The Federal Mine Safety and Health Act of 1977 (the "Mine Act"), and regulations adopted pursuant thereto, significantly expanded the enforcement of health and safety standards and imposed comprehensive safety and health standards on numerous aspects of mining operations, including training of mine personnel, mining procedures, blasting, the equipment used in mining operations and other matters. The Mine Safety and Health Administration ("MSHA") monitors compliance with these laws and regulations. In addition, the states where we operate also have state programs for mine safety and health regulation and enforcement. Federal and state safety and health regulations affecting the coal industry are complex, rigorous and comprehensive, and have a significant effect on our operating costs.
The Mine Act is a strict liability statute that requires mandatory inspections of surface and underground coal mines and requires the issuance of enforcement action when it is believed that a standard has been violated. A penalty is required to be imposed for each cited violation. Negligence and gravity assessments result in a cumulative enforcement scheme that may result in the issuance of an order requiring the immediate withdrawal of miners from the mine or shutting down a mine or any section of a mine or any piece of mine equipment. The Mine Act contains criminal liability provisions. For example, criminal liability may be imposed for corporate operators who knowingly or willfully authorize, order or carry out violations. The Mine Act also provides that civil and criminal penalties may be assessed against individual agents, officers and directors who knowingly authorize, order or carry out violations.
We have developed a health and safety management system that, among other things, educates our employees about health and safety requirements including those arising under federal and state laws that apply to our mines. In addition, our health and safety management system tracks the performance of each operational facility in meeting the requirements of safety laws and company safety policies. As an example of the resources we allocate to health and safety matters, our safety management system includes a company-wide safety director and local safety directors who oversee safety and compliance at operations on a day-to-day basis. We continually monitor the performance of our safety management system and from time-to-time modify that system to address findings or reflect new requirements or for other reasons. We have even integrated safety matters into our compensation and retention decisions. For instance, our bonus program includes a meaningful evaluation of each eligible employee's role in complying with, fostering and furthering our safety policies.
We evaluate a variety of safety-related metrics to assess the adequacy and performance of our safety management system. For example, we monitor and track performance in areas such as "accidents, reportable accidents, lost time accidents and the lost-time accident frequency rate" and a number of others. Each of these metrics provides insights and perspectives into various aspects of our safety systems and performance at particular locations or mines generally and, among other things, can indicate where improvements are needed or further evaluation is warranted with regard to the system or its implementation. An important part of this evaluation is to assess our performance relative to certain national benchmarks.
Our non-fatal days lost time incidence rate for all operations for the year ended December 31, 2013 was 1.36 as compared to the most recent national average of 2.27, as reported by MSHA, or 40.09% below this national average. Non-fatal days lost incidence rate is an industry standard used to describe occupational injuries that result in loss of one or more days from an employee's scheduled
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work. In addition, for the year ended December 31, 2013 our average MSHA violations per inspection day was 0.41 as compared to the most recent national average of 0.85 violations per inspection day as reported by MSHA, or 51.76% below this national average.
Mining accidents in the last several years in West Virginia, Kentucky and Utah have received national attention and instigated responses at the state and national levels that have resulted in increased scrutiny of current safety practices and procedures at all mining operations, particularly underground mining operations. More stringent mine safety laws and regulations promulgated by these states and the federal government have included increased sanctions for non-compliance. For example, in 2006, the Mine Improvement and New Emergency Response Act of 2006, or MINER Act, was enacted. The MINER Act significantly amended the Mine Act, requiring improvements in mine safety practices, increasing criminal penalties and establishing a maximum civil penalty for non-compliance, and expanding the scope of federal oversight, inspection and enforcement activities. Since passage of the MINER Act, enforcement scrutiny has increased, including more inspection hours at mine sites, increased numbers of inspections and increased issuance of the number and the severity of enforcement actions and related penalties. Other states have proposed or passed similar bills, resolutions or regulations addressing mine safety practices. Moreover, workplace accidents, such as the April 5, 2010, Upper Big Branch Mine incident, have resulted in more inspection hours at mine sites, increased number of inspections and increased issuance of the number and severity of enforcement actions and the passage of new laws and regulations. These trends are likely to continue.
Indeed, in 2013, MSHA began implementing its recently released Pattern of Violation ("POV") regulations under the Mine Act. Under this regulation, MSHA eliminated the ninety (90) day window to take corrective action and engage in mitigation efforts for mine operators who met certain initial POV screening criteria. Additionally, MSHA will make POV determinations based upon enforcement actions as issued, rather than enforcement actions that have been rendered final following the opportunity for administrative or judicial review. After a mine operator has been placed on POV status, MSHA will thereafter issue an order withdrawing miners from the area affected by any enforcement action designated by MSHA as posing a significant and substantial, or S&S, hazard to the health and/or safety of miners. Further, once designated as a POV mine, a mine operator can be removed from POV status only upon: (1) a complete inspection of the entire mine with no S&S enforcement actions issued by MSHA; or (2) no POV-related withdrawal orders being issued by MSHA within ninety (90) days of the mine operator being placed on POV status. Although it remains to be seen how these new regulations will ultimately affect production at our mines, they are consistent with the trend of more stringent enforcement.
From time to time, certain portions of individual mines have been required to suspend or shut down operations temporarily in order to address a compliance requirement or because of an accident. For instance, MSHA issues orders pursuant to Section 103(k) that, among other things, call for operations in the area of the mine at issue to suspend operations until compliance is restored. Likewise, if an accident occurs within a mine, the MSHA requirements call for all operations in that area to be suspended until the circumstance leading to the accident has been resolved. During the fiscal year ended December 31, 2013 (as in earlier years), we received such orders from government agencies and have experienced accidents within our mines requiring the suspension or shutdown of operations in those particular areas until the circumstances leading to the accident have been resolved. While the violations or other circumstances that caused such an accident were being addressed, other areas of the mine could and did remain operational. These circumstances did not require us to suspend operations on a mine-wide level or otherwise entail material financial or operational consequences for us. Any suspension of operations at any one of our locations that may occur in the future may have material financial or operational consequences for us.
It is our practice to contest notices of violations in cases in which we believe we have a good faith defense to the alleged violation or the proposed penalty and/or other legitimate grounds to challenge
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the alleged violation or the proposed penalty. In December 2008 and March 2009, MSHA assessed proposed penalties in excess of $100,000 with regard to three separate notices of violation, all of which relate to our operations at Mine 28. Each of these notices of violation alleged an "unwarrantable failure" under the Mine Act with specific regard to the accumulation of combustible materials. The combustible materials typically underlying such citations are coal, loose coal, and float coal dust. We have contested these violations on grounds that the underlying circumstances did not support the issuance of a notice of violation and/or the gravity of the proposed penalty. These contests are still pending and we cannot predict the outcome of these proceedings or assure you that the fines and penalties will not be assessed in full against us. These alleged violations were abated at the time or immediately after the notices of violation were issued, and we have not been issued any notices of violation from MSHA proposing a penalty in excess of $100,000 since March 2009.
We exercise substantial efforts toward achieving compliance at our mines. In light of the recent citations issued with respect to our mines, we have further increased our focus with regard to health and safety at all of our mines and at Mine 28 and Eagle #1 Mine in particular. These efforts include hiring additional skilled personnel, providing training programs, hosting quarterly safety meetings with MSHA personnel and making capital expenditures in consultation with MSHA aimed at increasing mine safety. We believe that these efforts have contributed, and continue to contribute, positively to safety and compliance at our mines. In Item 4. Mine Safety Disclosure and in Exhibit 95 to this Annual Report on Form 10-K, we provide additional details on how we monitor safety performance and MSHA compliance, as well as provide the mine safety disclosures required pursuant to Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Black Lung Laws
Under the Black Lung Benefits Act of 1977 and the Black Lung Benefits Reform Act of 1977, as amended in 1981, coal mine operators must make payments of black lung benefits to current and former coal miners with black lung disease, some survivors of a miner who dies from this disease, and to fund a trust fund for the payment of benefits and medical expenses to claimants who last worked in the industry prior to January 1, 1970. To help fund these benefits, a tax is levied on production of $1.10 per ton for underground-mined coal and $0.55 per ton for surface-mined coal, but not to exceed 4.4% of the applicable sales price. This excise tax does not apply to coal that is exported outside of the United States. In 2013, we recorded approximately $2.8 million of expense related to this excise tax.
The Patient Protection and Affordable Care Act includes significant changes to the federal black lung program including an automatic survivor benefit paid upon the death of a miner with an awarded black lung claim and establishes a rebuttable presumption with regard to pneumoconiosis among miners with 15 or more years of coal mine employment that are totally disabled by a respiratory condition. These changes could have a material impact on our costs expended in association with the federal black lung program. We may also be liable under state laws for black lung claims that are covered through either insurance policies or state programs.
Workers' Compensation
We are required to compensate employees for work-related injuries under various state workers' compensation laws. The states in which we operate consider changes in workers' compensation laws from time to time. Our costs will vary based on the number of accidents that occur at our mines and other facilities, and our costs of addressing these claims. We are insured under the Ohio State Workers Compensation Program for our operations in Ohio. Our remaining operations, including Central Appalachia and the Western Bituminous region, are insured through Rockwood Casualty Insurance Company.
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Surface Mining Control and Reclamation Act ("SMCRA")
SMCRA establishes operational, reclamation and closure standards for all aspects of surface mining, including the surface effects of underground coal mining. SMCRA requires that comprehensive environmental protection and reclamation standards be met during the course of and upon completion of mining activities. In conjunction with mining the property, we reclaim and restore the mined areas by grading, shaping and preparing the soil for seeding. Upon completion of mining, reclamation generally is completed by seeding with grasses or planting trees for a variety of uses, as specified in the approved reclamation plan. We believe we are in compliance in all material respects with applicable regulations relating to reclamation.
SMCRA and similar state statutes require, among other things, that mined property be restored in accordance with specified standards and approved reclamation plans. The act requires that we restore the surface to approximate the original contours as soon as practicable upon the completion of surface mining operations. The mine operator must submit a bond or otherwise secure the performance of these reclamation obligations. Mine operators can also be responsible for replacing certain water supplies damaged by mining operations and repairing or compensating for damage to certain structures occurring on the surface as a result of mine subsidence, a consequence of long-wall mining and possibly other mining operations. In addition, the Abandoned Mine Lands Program, which is part of SMCRA, imposes a tax on all current mining operations, the proceeds of which are used to restore mines closed prior to SMCRA's adoption in 1977. The maximum tax for the period from October 1, 2012 through September 30, 2021, has been decreased to 28 cents per ton on surface mined coal and 12 cents per ton on underground mined coal. As of December 31, 2013, we had accrued approximately $34.5 million for the estimated costs of reclamation and mine closing, including the cost of treating mine water discharge when necessary. In addition, states from time to time have increased and may continue to increase their fees and taxes to fund reclamation of orphaned mine sites and abandoned mine drainage control on a statewide basis.
After a mine application is submitted, public notice or advertisement of the proposed permit action is required, which is followed by a public comment period. It is not uncommon for a SMCRA mine permit application to take over two years to prepare and review, depending on the size and complexity of the mine, and another two years or even longer for the permit to be issued. The variability in time frame required to prepare the application and issue the permit can be attributed primarily to the various regulatory authorities' discretion in the handling of comments and objections relating to the project received from the general public and other agencies. Also, it is not uncommon for a permit to be delayed as a result of judicial challenges related to the specific permit or another related company's permit.
Federal laws and regulations also provide that a mining permit or modification can be delayed, refused or revoked if owners of specific percentages of ownership interests or controllers (i.e., officers and directors or other entities) of the applicant have, or are affiliated with another entity that has outstanding violations of SMCRA or state or tribal programs authorized by SMCRA. This condition is often referred to as being "permit blocked" under the federal Applicant Violator Systems, or AVS. Thus, non-compliance with SMCRA can provide the bases to deny the issuance of new mining permits or modifications of existing mining permits, although we know of no basis by which we would be (and we are not now) permit-blocked.
In addition, on November 30, 2009, the Office of Surface Mining Reclamation and Enforcement ("OSM") published an advance notice of proposed rulemaking to revise the "stream buffer zone rule," or SBZ Rule, that prohibits mining disturbances within 100 feet of streams if there would be a negative effect on water quality. OSM had previously issued a Stream Buffer Zone rule in December 2008 that would have provided certain exemptions to the requirement for a 100-foot buffer around all waters, including streams, lakes, ponds, and wetlands. The new rule has not yet been proposed or finalized.
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OSM is currently developing an environmental impact statement ("EIS") for use in drafting the anticipated stream protection rule. We are unable to predict the impact, if any, of these actions by the OSM, although the actions potentially could result in additional delays and costs associated with obtaining permits, prohibitions or restrictions relating to mining activities near streams, and additional enforcement actions. In addition, Congress has proposed, and may in the future propose, legislation to restrict the placement of mining material in streams. The requirements of the new stream protection rule or future legislation, when adopted, will likely be stricter than the prior SBZ Rule to further protect streams from the impact of surface mining, and may adversely affect our business and operations.
Surety Bonds
Federal and state laws require a mine operator to secure the performance of its reclamation obligations required under SMCRA through the use of surety bonds or other approved forms of performance security to cover the costs the state would incur if the mine operator were unable to fulfill its obligations. It has become increasingly difficult for mining companies to secure new surety bonds without the posting of partial collateral. In addition, surety bond costs have increased while the market terms of surety bonds have generally become less favorable. It is possible that surety bonds issuers may refuse to renew bonds or may demand additional collateral upon those renewals. Our failure to maintain, or inability to acquire, surety bonds that are required by state and federal laws would have a material adverse effect on our ability to produce coal, which could affect our profitability and cash flow.
As of December 31, 2013, we had approximately $75.2 million in surety bonds outstanding to secure the performance of our reclamation obligations. We may be required to increase these amounts as a result of recent developments in West Virginia and Kentucky. In 2011, West Virginia passed legislation that provides for a minimum incremental bonding rate in lieu of a minimum bond amount that applies regardless of acreage. In addition, the Kentucky Department for Natural Resources and the Office of Surface Mining Reclamation and Enforcement Lexington Field Office executed an Action Plan for Improving the Adequacy of Kentucky Performance Bond Amounts, which provides for, among other things, revised bond computation protocols.
Air Emissions
The federal Clean Air Act, or the CAA, and similar state and local laws and regulations, which regulate emissions into the air, affect coal mining operations both directly and indirectly. The CAA directly impacts our coal mining and processing operations by imposing permitting requirements and, in some cases, requirements to install certain emissions control equipment, on sources that emit various hazardous and non-hazardous air pollutants. The CAA also indirectly affects coal mining operations by extensively regulating the air emissions of coal-fired electric power generating plants and other industrial consumers of coal, including air emissions of sulfur dioxide, nitrogen oxides, particulates, mercury and other compounds. There have been a series of recent federal rulemakings that are focused on emissions from coal-fired electric generating facilities. Installation of additional emissions control technology and additional measures required under laws and regulations related to air emissions will make it more costly to operate coal-fired power plants and possibly other facilities that consume coal and, depending on the requirements of individual state implementation plans, or SIPs, could make coal a less attractive fuel alternative in the planning and building of power plants in the future.
In addition to the greenhouse gas ("GHG") regulations discussed below, air emission control programs that affect our operations, directly or indirectly, include, but are not limited to, the following:
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- The EPA's Acid Rain Program, provided in Title IV of the CAA, regulates emissions of sulfur dioxide from electric generating facilities. Sulfur dioxide is a by-product of coal combustion.
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- The EPA has promulgated rules, referred to as the "NOx SIP Call," that require coal-fired power plants in 22 eastern
states and Washington D.C. to make substantial reductions in nitrogen oxide emissions in an effort to reduce the impacts of ozone transport between states. As a result of the program, many power
plants have been or will be required to install additional emission control measures, such as selective catalytic reduction devices.
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- Additionally, in March 2005, EPA issued the final Clean Air Interstate Rule, or CAIR, which would have reduced nitrogen
oxide and sulfur dioxide emissions in 28 eastern states and Washington, D.C. pursuant to a cap and trade program similar to the system now in effect for acid rain. A December 2008 court decision found
flaws in CAIR, but kept CAIR requirements in place temporarily while directing the EPA to issue a replacement rule.
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- On July 6, 2011, EPA finalized a rule intended to replace CAIR called the Cross-State Air Pollution Rule, or CSAPR,
which requires 28 states in the eastern half of the US to reduce power plant emissions that cross state lines and contribute to ground-level ozone and fine particle pollution in other states. CSAPR
was scheduled to replace CAIR starting January 1, 2012. However, the U.S. Court of Appeals for the D.C. Circuit vacated CSAPR on August 21, 2012, in a 2 to 1 decision, concluding that
the rule was beyond the EPA's statutory authority. The EPA petitioned for en banc review of that decision by the entire U.S. Court of Appeals for the District of Columbia Circuit, but the petition was
denied on January 24, 2013. The U.S. Supreme Court granted certiorari and heard oral arguments in December 2013 over EPA's challenge of the D.C. Circuit Court's vacatur of the CSAPR. While this
litigation delays implementation of CSAPR, it also leaves CAIR in place while the Court considers the merits of the legal challenges to CSAPR. For states to meet their requirements under CSAPR, a
number of coal-fired power plants will likely need to be retired, rather than be retrofitted with the necessary emission control technologies, reducing the demand for steam coal.
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- On February 16, 2012, the EPA formally adopted its "MATS rule," which imposes a new suite of limits on coal- and
oil-fired electric generating unit ("EGU") emissions of mercury, other metals, acid gases, and organic air toxics. On July 20, 2012, the EPA announced that it is reviewing technical information
that is focused on pollution limits under the MATS rule, based on new information provided by industry stakeholders after the rule was finalized. In March 2013, EPA finalized the MATS rule for new
power plants, principally adjusting emissions limits to levels attainable by existing control technologies. Appeals were filed and oral arguments were heard by the District of Columbia Circuit Court
in early December 2013.
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- The EPA also signed revisions to the new source performance standards ("NSPS") for fossil-fuel-fired EGUs. This NSPS
revises the standards that new coal-fired and oil-fired power plants must meet for particulate matter, sulfur dioxide, and nitrogen oxides.
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- In addition, on January 31, 2013, the EPA issued final MACT standards for several classes of boilers and process heaters, including large coal-fired boilers and process heaters (Boiler MACT), which require significant reductions in the emission of particulate matter, carbon monoxide, hydrogen chloride, dioxins and mercury. Like MATS, Boiler MACT imposes stricter limitations on mercury emissions than those vacated in CAMR. Business and environmental
Affected facilities purchase or are otherwise allocated sulfur dioxide emissions allowances, which must be surrendered annually in an amount equal to a facility's sulfur dioxide emissions in that year. Affected facilities may sell or trade excess allowances to other facilities that require additional allowances to offset their sulfur dioxide emissions. In addition to purchasing or trading for additional sulfur dioxide allowances, affected power facilities can satisfy the requirements of the EPA's Acid Rain Program by switching to lower sulfur fuels, installing pollution control devices such as flue gas desulfurization systems, or "scrubbers," or by reducing electricity generating levels.
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- The EPA has adopted new, more stringent national air quality standards, or NAAQS, for ozone, fine particulate matter,
nitrogen dioxide and sulfur dioxide. As a result, some states will be required to amend their existing SIPs to attain and maintain compliance with the new air quality standards. For example, on
June 3, 2010, the EPA issued a final rule setting forth a more stringent primary NAAQS applicable to sulfur dioxide. The rule also modifies the monitoring increment for the sulfur dioxide
standard, establishing a 1-hour standard, and expands the sulfur dioxide monitoring network. Initial non-attainment determinations related to the 2010 sulfur dioxide rule were published in August 2013
with an effective date of October 4, 2013. Determinations on remaining areas of the U.S. have to be made. States with non-attainment areas will have until winter 2014 to submit SIP revisions
which must meet the modified standard by summer 2017. For all other areas, states will be required to submit "maintenance" SIPs. In addition, in January 2013, the EPA published in the Federal Register
the NAAQS for fine particles emitted by a wide variety of sources including power plants, industrial facilities, and gasoline and
diesel engines, tightening the annual PM 2.5 standard to 12 micrograms per cubic meter. The rule became effective in March 2013. In November 2013, EPA proposed revisions to address an earlier remand
of its 1997 PM 2.5 implementation rules and finalization has not occurred as of December 31, 2013. Because coal mining operations and coal-fired electric generating facilities emit particulate
matter and sulfur dioxide, our mining operations and customers could be affected when the standards are implemented by the applicable states.
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- In June 2005, the EPA amended its regional haze program to improve visibility in national parks and wilderness areas. Affected states were required to develop SIPs by December 2007 that, among other things, identifies facilities that will have to reduce emissions and comply with stricter emission limitations. This program may restrict construction of new coal-fired power plants where emissions are projected to reduce visibility in protected areas. In addition, this program may require certain existing coal-fired power plants to install emissions control equipment to reduce haze-causing emissions such as sulfur dioxide, nitrogen oxide, and particulate matter. Demand for our steam coal could be affected when these standards are implemented by the applicable states.
groups have filed legal challenges in federal appeals court and have petitioned EPA to reconsider the rule. EPA has granted petitions for reconsideration for certain issues. However, if Boiler MACT is upheld, EPA estimates the rule will affect 1,700 existing major source facilities with an estimated 14,316 boilers and process heaters. Some owners will make capital expenditures to retrofit boilers and process heaters, while a number of boilers and process heaters will be prematurely retired. The retirements are likely to reduce the demand for coal. The impact of the regulations will depend on the outcome of these legal challenges and cannot be determined at this time.
The Department of Justice, on behalf of the EPA, has filed lawsuits against a number of coal-fired electric generating facilities alleging violations of the new source review provisions of the CAA. The EPA has alleged that certain modifications have been made to these facilities without first obtaining certain permits issued under the new source review program. Several of these lawsuits have settled, but others remain pending. Depending on the ultimate resolution of these cases, demand for our coal could be affected.
On June 16, 2010, several environmental groups petitioned the EPA to list coal mines as a source of air pollution and establish emissions standards under the CAA for several pollutants, including particulate matter, nitrogen oxide gases, volatile organic compounds, and methane. Petitioners further requested that the EPA regulate other emissions from mining operations, including dust and clouds of nitrogen oxides associated with blasting operations. These same groups filed suit against the EPA in November of 2011 in the federal court for the District of Columbia seeking the EPA's listing of coal mines as a New Source Performance Standard category. The EPA has sought to have the case
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dismissed. If the petitioners are successful, emissions of these or other materials associated with our mining operations could become subject to further regulation pursuant to existing laws such as the CAA. In that event, we may be required to install additional emissions control equipment or take other steps to lower emissions associated with our operations, thereby reducing our revenues and adversely affecting our operations.
Carbon Dioxide Emissions
One by-product of burning coal is carbon dioxide, which EPA considers a greenhouse gas ("GHG") and a major source of concern with respect to climate change and global warming.
Future regulation of GHG in the United States could occur pursuant to future U.S. treaty commitments, new domestic legislation that may impose a carbon emissions tax or establish a cap-and-trade program or regulation by the EPA. In its recently released Climate Action Plan, the Obama Administration announced its intent to issue regulations under Section 111(b) and Section 111(d) of the CAA to set NSPS for both new and existing power plants by June 2015. As of December 31, 2013, EPA has not formally published any rules to finalize these requirements. In addition, in October 2013, the U.S. Supreme Court granted certiorari to hear arguments related to a combination of several petitions challenging EPA's approach to CO2 regulation. In addition, passage of any comprehensive federal climate change and energy legislation could impact the demand for coal. Any reduction in the amount of coal consumed by North American electric power generators could reduce the price of coal that we mine and sell, thereby reducing our revenues and materially and adversely affecting our business and results of operations.
Even in the absence of new federal legislation, the EPA has begun to regulate GHG emissions pursuant to the CAA based on the April 2007 United States Supreme Court ruling in Massachusetts, et al. v. EPA that the EPA has authority to regulate carbon dioxide emissions. EPA's GHG regulations consist of seven main rules:
(1) the October 2009 Mandatory Reporting Rule, which requires GHG sources above certain thresholds to monitor and report their emissions;
(2) the December 2009 "Endangerment Finding," determining that air pollution from six GHGs endangers public health and welfare, and that mobile sources cause or contribute to that air pollution;
(3) the May 2010 "Tailpipe Rule," issued jointly with the National Highway Traffic Safety Administration setting GHG emission and fuel economy standards for new light-duty vehicles;
(4) the June 2010 "Final Mandatory Reporting of GHGs Rule," requiring all stationary sources that emit more than 25,000 tons of GHGs per year to collect and report to the EPA data regarding such emissions. This rule affects many of our customers, as well as additional source categories, including all underground mines subject to quarterly methane sampling by MSHA. Underground mines subject to this rule were required to begin monitoring GHG emissions on January 1, 2011 and must begin reporting to the EPA on March 31, 2012.
(5) the April 2010 "Timing Rule," concluding that stationary source regulation under Titles I and V of the CAA (involving Prevention of Significant Deterioration regulations and operating permits, respectively) must regulate GHG emissions beginning when such emissions are subject to controls under the mobile source provisions of the Act;
(6) the June 2010 "Tailoring Rule," temporarily exempting small stationary sources from PSD and Title V requirements through regulations modifying the CAA's emissions thresholds; and
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(7) the December 2010 "SIP Call" rule, finding 13 SIPs inadequate because they did not regulate GHGs from stationary sources, and directing those States to correct the inadequacies or face federalization of their permitting programs.
All of these regulations are subject to legal challenges, but the D.C. Circuit has refused to stay their implementation while the challenges are pending. On June 26, 2012, the U.S. Court of Appeals for the District of Columbia Circuit rejected challenges to the Tailoring Rule and other EPA rules relating to the regulation of GHGs under the CAA. In March 2012, the EPA proposed New Source Performance Standards ("NSPS") for carbon dioxide emissions from new and modified EGUs. The final NSPS, if promulgated along the lines proposed, would pose significant challenges for the construction of new coal-fired power plants and could result in a decrease in U.S. demand for steam coal.
Many states and regions have adopted greenhouse gas initiatives and certain governmental bodies have or are considering the imposition of fees or taxes based on the emission of greenhouse gases by certain facilities, including coal-fired electric generating facilities. For example, in 2005, ten northeastern states entered into the Regional Greenhouse Gas Initiative agreement, or RGGI, calling for implementation of a cap and trade program aimed at reducing carbon dioxide emissions from power plants in the participating states. The members of RGGI have established in statute and/or regulation a carbon dioxide trading program. Auctions for carbon dioxide allowances under the program began in September 2008. Though New Jersey withdrew from RGGI in 2011, since its inception, several additional northeastern states and Canadian provinces have joined as participants or observers.
Following the RGGI model, five Western states launched the Western Regional Climate Action Initiative to identify, evaluate and implement collective and cooperative methods of reducing greenhouse gases in the region to 15% below 2005 levels by 2020. These states were joined by two additional states and four Canadian provinces and became collectively known as the Western Climate Initiative Partners. However, in November 2011, six states withdrew, leaving California and the four Canadian provinces as members. At a January 12, 2012 stakeholder meeting, this group confirmed a commitment and timetable to create the largest carbon market in North America and provide a model to guide future efforts to establish national approaches in both Canada and the U.S. to reduce GHG emissions. It is likely that these regional efforts will continue.
Our customers' coal-fired coal plants have also come under additional scrutiny with respect to GHG emissions. There have been an increasing number of protests and challenges to the permitting of new coal-fired power plants by environmental organizations and state regulators for concerns related to greenhouse gas emissions. For instance, in October 2007, state regulators in Kansas denied an air emissions construction permit for a new coal-fueled power plant based on the plant's projected emissions of carbon dioxide. Other state regulatory authorities have also rejected the construction of new coal-fueled power plants based on the uncertainty surrounding the potential costs associated with GHG emissions from these plants under future laws limiting the emissions of carbon dioxide. In addition, several permits issued to new coal-fired power plants without limits on GHG emissions have been appealed to the EPA's Environmental Appeals Board. In addition, over 30 states have adopted mandatory "renewable portfolio standards," which require electric utilities to obtain a certain percentage of their electric generation portfolio from renewable resources by a certain date. These standards range generally from 10% to 30%, over time periods that generally extend from the present until between 2020 and 2030. Other states may adopt similar requirements, and federal legislation is a possibility in this area. To the extent these requirements affect our current and prospective customers; they may reduce the demand for coal-fired power, and may affect long-term demand for our coal. Finally, a federal appeals court has allowed a lawsuit pursuing federal common law claims to proceed against certain utilities on the basis that they may have created a public nuisance due to their emissions of carbon dioxide, while a second federal appeals court dismissed a similar case on procedural grounds.
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On June 20, 2011, the U.S. Supreme Court ruled unanimously in AEP v. Connecticut that the authority to regulate large stationary sources of GHG emissions granted to the EPA under the CAA displaces federal common law public nuisance claims against those sources.
If mandatory restrictions on carbon dioxide emissions are imposed, the ability to capture and store large volumes of carbon dioxide emissions from coal-fired power plants may be a key mitigation technology to achieve emissions reductions while meeting projected energy demands. A number of recent legislative and regulatory initiatives to encourage the development and use of carbon capture and storage technology have been proposed or enacted. On February 3, 2010, President Obama sent a memorandum to the heads of fourteen Executive Departments and Federal Agencies establishing an Interagency Task Force on Carbon Capture and Storage ("CCS"). The goal was to develop a comprehensive and coordinated Federal strategy to speed the commercial development and deployment of clean coal technologies. On August 12, 2010, the Task Force delivered a series of recommendations on overcoming the barriers to the widespread, cost-effective deployment of CCS within ten years. The report concludes that CCS can play an important role in domestic GHG emissions reductions while preserving the option of using abundant domestic fossil energy resources. However, widespread cost-effective deployment of CCS will occur only if the technology is commercially available at economically competitive prices and supportive national policy frameworks are in place.
Clean Water Act
The Federal Clean Water Act, or the CWA, and similar state and local laws and regulations affect coal mining operations by imposing restrictions on the discharge of pollutants, including dredged or fill material, into waters of the U.S. The CWA establishes in-stream water quality and treatment standards for wastewater discharges that are applied to wastewater dischargers through Section 402 National Pollutant Discharge Elimination System, or NPDES, permits. Regular monitoring, as well as compliance with reporting requirements and performance standards, are preconditions for the issuance and renewal of Section 402 NPDES permits. Individual permits or general permits under Section 404 of the CWA are required to discharge dredged or fill materials into waters of the U.S. including wetlands, streams, and other areas meeting the regulatory definition. Our surface coal mining and preparation plant operations typically require such permits to authorize activities such as the creation of slurry ponds, stream impoundments, and valley fills. The EPA, or a state that has been delegated such authority by the EPA, issues NPDES permits for the discharge of pollutants into navigable waters, while the U.S. Army Corps of Engineers, or the Corps, issues dredge and fill permits under Section 404 of the CWA. Where Section 402 NPDES permitting authority has been delegated to a state, the EPA retains a limited oversight role. The CWA also gives the EPA an oversight role in the Section 404 permitting program, including drafting substantive rules governing permit issuance by the Corps, providing comments on proposed permits, and, in some cases, exercising the authority to delay or pre-empt Corps issuance of a Section 404 permit. The EPA has recently asserted these authorities more forcefully to question, delay, and prevent issuance of some Section 402 and 404 permits for surface coal mining in Appalachia. Currently, significant uncertainty exists regarding the obtaining of permits under the CWA for coal mining operations in Appalachia due to various initiatives launched by the EPA regarding these permits.
For instance, even though the Commonwealth of Kentucky and the State of West Virginia have been delegated the authority to issue NPDES permits for coal mines in those states, the EPA is taking a more active role in its review of NPDES permit applications for coal mining operations in Appalachia. The EPA issued final guidance on July 21, 2011 that encouraged EPA Regions 3, 4 and 5 to object to the issuance of state program NPDES permits where the Region does not believe that the proposed permit satisfies the requirements of the CWA and with regard to state issued general Section 404 permits, support the previously drafted Enhanced Coordination Process ("ECP") among the EPA, the Corps, and the U.S. Department of the Interior for issuing Section 404 permits, whereby
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the EPA undertook a greater level of review of certain Section 404 permits than it had previously undertaken. On October 6, 2011, the District Court for the District of Columbia rejected the ECP on several different legal grounds and later this same court enjoined EPA from any further usage of its final guidance. Any future application of procedures similar to ECP, such as may be enacted following notice and comment rulemaking, would have the potential to delay issuance of permits for surface coal mines, or to change the conditions or restrictions imposed in those permits.
The EPA also has statutory "veto" power under Section 404(c) to effectively revoke a previously issued Section 404 permit if the EPA determines, after notice and an opportunity for a public hearing, that the permit will have an "unacceptable adverse effect." On January 14, 2011, the EPA exercised its Section 404(c) authority to withdraw or restrict the use of a previously issued permit for the Spruce No. 1 Surface Mine in West Virginia, which is one of the largest surface mining operations ever authorized in Appalachia. This action was the first time that such power was exercised with regard to a previously permitted coal mining project. A challenge to the EPA's exercise of this authority was made in the federal District Court in the District of Columbia and on March 23, 2012, the Court ruled that the EPA lacked the statutory authority to invalidate an already issued Section 404 permit retroactively. This decision was appealed and reversed by the D.C. Circuit Court of Appeals in April 2013, finding that EPA has the authority to issue a retroactive veto, but remanding for consideration of whether that decision was arbitrary and capricious. The mining company has also petitioned the U.S. Supreme Court for certiorari to overturn the ruling. Any future use of the EPA's Section 404 "veto" power could create uncertainty with regard to our or our lessees' continued use of their current permits, as well as impose additional time and cost burdens on future operations, potentially adversely affecting our coal royalties revenues.
The Corps is authorized to issue general "nationwide" permits for specific categories of activities that are similar in nature and that are determined to have minimal adverse environmental effects. We may no longer seek general permits under Nationwide Permit 21, or NWP 21, because in February 2012, the Corps reinstated the use of NWP 21, but limited application of NWP 21 authorizations to discharges with impacts not greater than a half-acre of water, including no more than 300 linear feet of streambed, and disallowed the use of NWP 21 for valley fills. If the newly issued NWP 21 cannot be used for any of our proposed surface coal mining projects, we will have to obtain individual permits from the Corps subject to the additional EPA measures discussed below with the uncertainties and delays attendant to that process.
We currently have a number of Section 404 permit applications pending with the Corps. Not all of these permit applications seek approval for valley fills or other obvious "fills"; some relate to other activities, such as mining through streams and the associated post-mining reconstruction efforts. We sought to prepare all pending permit applications consistent with the requirements of the Section 404 program. Our five year plan of mining operations does not rely on the issuance of these pending permit applications. However, the Section 404 permitting requirements are complex, and regulatory scrutiny of these applications, particularly in Appalachia, has increased such that our applications may not be granted or, alternatively, the Corps may require material changes to our proposed operations before it grants permits. While we will continue to pursue the issuance of these permits in the ordinary course of our operations, to the extent that the permitting process creates significant delay or limits our ability to pursue certain reserves beyond our current five year plan, our revenues may be negatively affected.
Total Maximum Daily Load, or TMDL, regulations under the CWA establish a process to calculate the maximum amount of a pollutant that an impaired water body can receive and still meet state water quality standards, and to allocate pollutant loads among the point- and non-point pollutant sources discharging into that water body. Likewise, when water quality in a receiving stream is better than required, states are required to conduct an anti-degradation review before approving discharge permits. The adoption of new TMDLs and load allocations or any changes to anti-degradation policies for streams near our coal mines could limit our ability to obtain NPDES permits, require more costly water treatment, and adversely affect our coal production.
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Hazardous Substances and Wastes
The federal Comprehensive Environmental Response, Compensation and Liability Act, or CERCLA, also known as the "Superfund" law, and analogous state laws, impose liability, without regard to fault or the legality of the original conduct, on certain classes of persons that are considered to have contributed to the release of a "hazardous substance" into the environment. These persons include the owner or operator of the site where the release occurred and companies that disposed or arranged for the disposal of the hazardous substances found at the site. Persons who are or were responsible for releases of hazardous substances under CERCLA may be subject to joint and several liabilities for the costs of cleaning up the hazardous substances that have been released into the environment and for damages to natural resources. Some products used by coal companies in operations generate waste containing hazardous substances. We are not aware of any material liability associated with the release or disposal of hazardous substances from our past or present mine sites.
The federal Resource Conservation and Recovery Act, or RCRA, and corresponding state laws regulating hazardous waste affect coal mining operations by imposing requirements for the generation, transportation, treatment, storage, disposal and cleanup of hazardous wastes. Many mining wastes are excluded from the regulatory definition of hazardous wastes, and coal mining operations covered by SMCRA permits are by statute exempted from RCRA permitting. RCRA also allows the EPA to require corrective action at sites where there is a release of hazardous wastes. In addition, each state has its own laws regarding the proper management and disposal of waste material. While these laws impose ongoing compliance obligations, such costs are not believed to have a material impact on our operations.
On June 21, 2010, EPA released a proposed rule to regulate the disposal of certain coal combustion by-products, or CCB. The proposed rule sets forth two proposed avenues for the regulation of CCB under RCRA. The first option calls for regulation of CCB under Subtitle C as a hazardous waste, which creates a comprehensive program of federally enforceable requirements for waste management and disposal. The second option calls for regulation of CCB under Subtitle D as a solid waste, which gives EPA authority to set performance standards for solid waste management facilities and would be enforced primarily through state agencies and citizen suits. Under both options, the EPA would establish dam safety requirements to address structural integrity of surface impoundments to prevent catastrophic releases. The proposal leaves intact the Bevill exemption for beneficial uses of CCB, except for land application. In April 2012, several environmental organizations filed suit against the EPA to compel the EPA to take action on the proposed rule. However, as of December 31, 2013, EPA has not finalized CCR rules nor established a timeframe for doing so. If CCB were re-classified as hazardous waste, regulations may impose restrictions on ash disposal, provide specifications for storage facilities, require groundwater testing and impose restrictions on storage locations, which could increase our customers' operating costs and potentially reduce their ability to purchase coal. In addition, contamination caused by the past disposal of CCB, including coal ash, can lead to material liability to our customers under RCRA or other federal or state laws and potentially reduce the demand for coal.
It is not possible to determine with certainty the potential permitting requirements or performance standards that may be imposed on the disposal of CCB by future regulations or lawsuits. Any costs associated with new requirements applicable to CCB handling or disposal could increase our customers' operating costs and potentially reduce their ability to purchase coal.
National Environmental Policy Act
Certain of our planned activities and operations include acreage located on federal land and, thus, require governmental approvals that are subject to the requirements of the National Environmental Policy Act ("NEPA"). NEPA requires federal agencies, including the Department of the Interior, to evaluate major agency actions such as issuing an approval that have the potential to significantly impact
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the environment. In the course of such evaluations, an agency will typically prepare an environmental assessment to assess the potential direct, indirect and cumulative impacts of a proposed project. Where the activities in question have significant impacts to the environment, the agency, in this instance, must prepare an environmental impact statement, or EIS. The preparation of an EIS can be time consuming and may result in the imposition of mitigation measures that could affect the amount of coal that we are able to produce from mines on federal lands. Moreover, an EIS is subject to protest, appeal or litigation, which can delay or halt projects. Our proposed Red Cliffs project, which includes acreage on federal land in Colorado, is subject to NEPA. The BLM has published a draft EIS for the Red Cliffs project. Although we do not expect any delays in our development of the Red Cliffs project because of the NEPA review process, the NEPA review may extend the time and/or increase the costs for obtaining the necessary governmental approvals.
Endangered Species Act
The federal Endangered Species Act and counterpart state legislation protect species threatened with possible extinction. Protection of threatened and endangered species may have the effect of prohibiting or delaying us from obtaining mining permits and may include restrictions on timber harvesting, road building and other mining or agricultural activities in areas containing the affected species or their habitats. A number of species indigenous to our properties are protected under the Endangered Species Act. Based on the species that have been identified to date and the current application of applicable laws and regulations, however, we do not believe there are any species protected under the Endangered Species Act that would materially and adversely affect our ability to mine coal from our properties in accordance with current mining plans.
Use of Explosives
We use explosives in connection with our surface mining activities. The Federal Safe Explosives Act, or SEA, applies to all users of explosives. Knowing or willful violations of the SEA may result in fines, imprisonment, or both. In addition, violations of SEA may result in revocation of user permits and seizure or forfeiture of explosive materials.
The storage of explosives is also subject to regulatory requirements. For example, pursuant to a rule issued by the Department of Homeland Security in 2007, facilities in possession of chemicals of interest (including ammonium nitrate at certain threshold levels) are required to complete a screening review in order to help determine whether there is a high level of security risk, such that a security vulnerability assessment and a site security plan will be required. It is possible that our use of explosives in connection with blasting operations may subject us to the Department of Homeland Security's new chemical facility security regulatory program.
The costs of compliance with these requirements should not have a material adverse effect on our business, financial condition or results of operations.
Other Environmental and Mine Safety Laws
We are required to comply with numerous other federal, state and local environmental and mine safety laws and regulations in addition to those previously discussed. These additional laws include, for example, the Safe Drinking Water Act, the Toxic Substance Control Act and the Emergency Planning and Community Right-to-Know Act. The costs of compliance with these requirements is not expected to have a material adverse effect on our business, financial condition or results of operations.
Hydraulic Fracturing
Hydraulic fracturing is an important and common oil and natural gas industry practice that is used to stimulate production of natural gas and/or oil from dense subsurface rock formations. The hydraulic
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fracturing process involves the injection of water, sand, and chemicals under pressure into targeted subsurface formations to fracture the surrounding rock and stimulate production. Gulfport, as the operator on our Utica Shale acreage, and operators on our Cana Woodford acreage routinely use hydraulic fracturing techniques in many of their drilling and completion programs. Hydraulic fracturing typically is regulated by state oil and natural gas commissions, but the EPA has asserted federal regulatory authority pursuant to the federal Safe Drinking Water Act over certain hydraulic fracturing activities involving the use of diesel fuels and published draft permitting guidance in May 2012 addressing the performance of such activities using diesel fuels. In November 2011, the EPA announced its intent to develop and issue regulations under the Toxic Substances Control Act to require companies to disclose information regarding the chemicals used in hydraulic fracturing and the agency currently plans to issue a Notice of Proposed Rulemaking that would seek public input on the design and scope of such disclosure regulations. In addition, Congress has from time to time considered the adoption of legislation to provide for federal regulation of hydraulic fracturing under the Safe Drinking Water Act and to require disclosure of the chemicals used in the hydraulic fracturing process. Some states, including New York, have adopted and other states are considering adopting legal requirements that could impose more stringent permitting, public disclosure or well construction requirements on hydraulic fracturing activities. Local government also may seek to adopt ordinances within their jurisdictions regulating the time, place and manner of drilling activities in general or hydraulic fracturing activities in particular. We believe that Gulfport and operators on our Cana Woodford acreage follow applicable standard industry practices and legal requirements for groundwater protection in their hydraulic fracturing activities. Nevertheless, if new or more stringent federal, state or local legal restrictions relating to the hydraulic fracturing process are adopted in areas where operators conduct fracturing activities on our oil and natural gas acreage, these operators could incur potentially significant added costs to comply with such requirements, experience delays or curtailment in the pursuit of exploration, development, or production activities, and perhaps even be precluded from drilling wells.
In addition, certain governmental reviews have been conducted or are underway that focus on environmental aspects of hydraulic fracturing practices. The White House Council on Environmental Quality is coordinating an administration-wide review of hydraulic fracturing practices. The EPA has commenced a study of the potential environmental effects of hydraulic fracturing on drinking water and groundwater, with a first progress report outlining work currently underway by the agency released on December 21, 2012 and a final report drawing conclusions about the potential impacts of hydraulic fracturing on drinking water resources expected to be available for public comment and peer review by 2014. Moreover, the EPA has announced that it will develop effluent limitations for the treatment and discharge of wastewater resulting from hydraulic fracturing activities by 2014. Other governmental agencies, including the U.S. Department of Energy and the U.S. Department of the Interior, have evaluated or are evaluating various other aspects of hydraulic fracturing. After rescinding its initial May 2012 proposal, BLM re-proposed a rule in May 2013 that would require the disclosure of chemicals used during the fracturing process and addresses drilling plans, water management, and wastewater disposal on federal and Indian lands. These ongoing or proposed studies, depending on their degree of pursuit and any meaningful results obtained, could spur initiatives to further regulate hydraulic fracturing under the federal Safe Drinking Water Act or other regulatory mechanisms.
To our knowledge, there have been no citations, suits, or contamination of potable drinking water arising from hydraulic fracturing operations in any of our oil and natural gas investments. We do not have insurance policies in effect that are intended to provide coverage for losses solely related to hydraulic fracturing operations; however, we believe our pollution liability and excess liability insurance policies would cover third-party claims related to hydraulic fracturing operations and associated legal expenses in accordance with, and subject to, the terms of such policies.
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Employees
To carry out our operations, our general partner and our subsidiaries, excluding our Rhino Eastern joint venture, employed 686 full-time employees as of December 31, 2013. None of the employees are subject to collective bargaining agreements. We believe that we have good relations with these employees and since our inception we have had no history of work stoppages or union organizing campaigns.
Available Information
Our internet address is http://www.rhinolp.com, and we make available free of charge on our website our Annual Reports on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K and Forms 3, 4 and 5 for our Section 16 filers (and amendments and exhibits, such as press releases, to such filings) as soon as reasonably practicable after we electronically file with or furnish such material to the SEC. Also included on our website are our "Code of Business Conduct and Ethics", our "Insider Trading Policy," "Whistleblower Policy" and our "Corporate Governance Guidelines" adopted by the board of directors of our general partner and the charters for the Audit Committee and Compensation Committee. Information on our website or any other website is not incorporated by reference into this report and does not constitute a part of this report.
We file or furnish annual, quarterly and current reports and other documents with the SEC under the Securities Exchange Act of 1934, or the Exchange Act. The public may read and copy any materials that we file with the SEC at the SEC's Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Additionally, the SEC's website, http://www.sec.gov, contains reports, proxy and information statements, and other information regarding issuers, including us, that file electronically with the SEC.
In addition to the factors discussed elsewhere in this report, including the financial statements and related notes, you should consider carefully the risks and uncertainties described below. If any of these risks or uncertainties, as well as other risks and uncertainties that are not currently known to us or that we currently believe are not material, were to occur, our business, financial condition or results of operation could be materially adversely affected and you may lose all or a significant part of your investment.
Risks Inherent in Our Business
We may not have sufficient cash to enable us to pay the minimum quarterly distribution on our common units following establishment of cash reserves and payment of costs and expenses, including reimbursement of expenses to our general partner.
We may not have sufficient cash each quarter to pay the full amount of our minimum quarterly distribution of $0.445 per unit, or $1.78 per unit per year, which will require us to have available cash of approximately $13.2 million per quarter, or $52.8 million per year, based on the number of common and subordinated units outstanding as of December 31, 2013 and the general partner interest. The amount of cash we can distribute on our common and subordinated units principally depends upon the amount of cash we generate from our operations, which will fluctuate from quarter to quarter based on, among other things:
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- the amount of coal we are able to produce from our properties, which could be adversely affected by, among other things,
operating difficulties and unfavorable geologic conditions;
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- the price at which we are able to sell coal, which is affected by the supply of and demand for domestic and foreign coal;
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- the level of our operating costs, including reimbursement of expenses to our general partner and its affiliates. Our
partnership agreement does not set a limit on the amount of expenses for which our general partner and its affiliates may be reimbursed;
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- the proximity to and capacity of transportation facilities;
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- the price and availability of alternative fuels;
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- the impact of future environmental and climate change regulations, including those impacting coal-fired power plants;
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- the level of worldwide energy and steel consumption;
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- prevailing economic and market conditions;
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- difficulties in collecting our receivables because of credit or financial problems of customers;
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- the effects of new or expanded health and safety regulations;
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- domestic and foreign governmental regulation, including changes in governmental regulation of the mining industry, the
electric utility industry or the steel industry;
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- changes in tax laws;
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- weather conditions; and
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- force majeure.
In addition, we have not paid any distributions on our subordinated units for any quarter after the quarter ended March 31, 2012. We may not have sufficient cash available for distributions on our subordinated units in the future. Any further reduction in the amount of cash available for distributions could impact our ability to pay the minimum quarterly distribution on our common units in full. Moreover, we may not be able to increase distributions on our common units if we are unable to pay the full minimum quarterly distribution on our subordinated units.
A decline in coal prices could adversely affect our results of operations and cash available for distribution to our unitholders.
Our results of operations and the value of our coal reserves are significantly dependent upon the prices we receive for our coal as well as our ability to improve productivity and control costs. The prices we receive for coal depend upon factors beyond our control, including:
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- the supply of domestic and foreign coal;
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- the demand for domestic and foreign coal, which is significantly affected by the level of consumption of steam coal by
electric utilities and the level of consumption of metallurgical coal by steel producers;
- •
- the proximity to, and capacity of, transportation facilities;
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- domestic and foreign governmental regulations, particularly those relating to the environment, climate change, health and
safety;
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- the level of domestic and foreign taxes;
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- the price and availability of alternative fuels for electricity generation;
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- weather conditions;
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- terrorist attacks and the global and domestic repercussions from terrorist activities; and
- •
- prevailing economic conditions.
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Any adverse change in these factors could result in weaker demand and lower prices for our products. In addition, the recent global economic downturn, coupled with the global financial and credit market disruptions, has had an impact on the coal industry generally and may continue to do so. The demand for electricity and steel may remain at low levels or further decline if economic conditions remain weak. If these trends continue, we may not be able to sell all of the coal we are capable of producing or sell our coal at prices comparable to recent years. Recent low prices for natural gas, which is a substitute for coal generated power, may also lead to continued decreased coal consumption by electricity-generating utilities. A substantial or extended decline in the prices we receive for our coal supply contracts could materially and adversely affect our results of operations.
In addition, the prices of oil and natural gas may fluctuate widely in response to relatively minor changes in the supply and demand for oil and natural gas, market uncertainty and a variety of additional factors that are beyond our control. A sustained decline in these commodity prices could materially adversely affect the level of return on our oil and natural gas investments in the Cana Woodford region. Significant or extended price declines could also adversely affect the amount of oil and natural gas that our oil and natural gas lessees in the Cana Woodford region can economically produce, which could result in a shortfall in expected cash flows from our investment.
We could be negatively impacted by the competitiveness of the global markets in which we compete and declines in the market demand for coal.
We compete with coal producers in various regions of the United States and overseas for domestic and international sales. The domestic demand for, and prices of, our coal primarily depend on coal consumption patterns of the domestic electric utility industry and the domestic steel industry. Consumption by the domestic electric utility industry is affected by the demand for electricity, environmental and other governmental regulations, technological developments and the price of competing coal and alternative fuel sources, such as natural gas, nuclear, hydroelectric and wind power and other renewable energy sources. Consumption by the domestic steel industry is primarily affected by economic growth and the demand for steel used in construction as well as appliances and automobiles. The competitive environment for coal is impacted by a number of the largest markets in the world, including the United States, China, Japan and India, where demand for both electricity and steel has supported prices for steam and metallurgical coal. The economic stability of these markets has a significant effect on the demand for coal and the level of competition in supplying these markets. The cost of ocean transportation and the value of the U.S. dollar in relation to foreign currencies significantly impact the relative attractiveness of our coal as we compete on price with foreign coal producing sources. During the last several years, the U.S. coal industry has experienced increased consolidation, which has contributed to the industry becoming more competitive. Increased competition by coal producers or producers of alternate fuels could decrease the demand for, or pricing of, or both, for our coal, adversely impacting our results of operations and cash available for distribution.
Portions of our coal reserves possess quality characteristics that enable us to mine, process and market them as either metallurgical coal or high quality steam coal, depending on prevailing market conditions. A decline in the metallurgical market relative to the steam market could cause us to shift coal from the metallurgical market to the steam market, potentially reducing the price we could obtain for this coal and adversely impacting our cash flows, results of operations and cash available for distribution.
Any change in consumption patterns by utilities away from the use of coal, such as resulting from current low natural gas prices, could affect our ability to sell the coal we produce, which could adversely affect our results of operations and cash available for distribution to our unitholders.
Excluding results from the Rhino Eastern joint venture, steam coal accounted for approximately 84% of our coal sales volume for the year ended December 31, 2013. The majority of our sales of
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steam coal during this period were to electric utilities for use primarily as fuel for domestic electricity consumption. The amount of coal consumed by the domestic electric utility industry is affected primarily by the overall demand for electricity, environmental and other governmental regulations, and the price and availability of competing fuels for power plants such as nuclear, natural gas and oil as well as alternative sources of energy. We compete generally with producers of other fuels, such as natural gas and oil. A decline in price for these fuels could cause demand for coal to decrease and adversely affect the price of our coal. For example, low natural gas prices have led, in some instances, to decreased coal consumption by electricity-generating utilities. If alternative energy sources, such as nuclear, hydroelectric, wind or solar, become more cost-competitive on an overall basis, demand for coal could decrease and the price of coal could be materially and adversely affected. Further, legislation requiring, subsidizing or providing tax benefit for the use of alternative energy sources and fuels, or legislation providing financing or incentives to encourage continuing technological advances in this area, could further enable alternative energy sources to become more competitive with coal. A decrease in coal consumption by the domestic electric utility industry could adversely affect the price of coal, which could materially adversely affect our results of operations and cash available for distribution to our unitholders.
Our mining operations are subject to extensive and costly environmental laws and regulations, and such current and future laws and regulations could materially increase our operating costs or limit our ability to produce and sell coal.
The coal mining industry is subject to numerous and extensive federal, state and local environmental laws and regulations, including laws and regulations pertaining to permitting and licensing requirements, air quality standards, plant and wildlife protection, reclamation and restoration of mining properties, the discharge of materials into the environment, the storage, treatment and disposal of wastes, protection of wetlands, surface subsidence from underground mining and the effects that mining has on groundwater quality and availability. The costs, liabilities and requirements associated with these laws and regulations are significant and time-consuming and may delay commencement or continuation of our operations. Moreover, the possibility exists that new laws or regulations (or new judicial interpretations or enforcement policies of existing laws and regulations) could materially affect our mining operations, results of operations and cash available for distribution to our unitholders, either through direct impacts such as those regulating our existing mining operations, or indirect impacts such as those that discourage or limit our customers' use of coal. Although we believe that we are in substantial compliance with existing laws and regulations, we may, in the future, experience violations that would subject us to administrative, civil and criminal penalties and a range of other possible sanctions. The enforcement of laws and regulations governing the coal mining industry has increased substantially. As a result, the consequences for any noncompliance may become more significant in the future.
Our operations use petroleum products, coal processing chemicals and other materials that may be considered "hazardous materials" under applicable environmental laws and have the potential to generate other materials, all of which may affect runoff or drainage water. In the event of environmental contamination or a release of these materials, we could become subject to claims for toxic torts, natural resource damages and other damages and for the investigation and cleanup of soil, surface water, groundwater, and other media, as well as abandoned and closed mines located on property we operate. Such claims may arise out of conditions at sites that we currently own or operate, as well as at sites that we previously owned or operated, or may acquire.
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The government extensively regulates mining operations, especially with respect to mine safety and health, which imposes significant actual and potential costs on us, and future regulation could increase those costs or limit our ability to produce coal.
Coal mining is subject to inherent risks to safety and health. As a result, the coal mining industry is subject to stringent safety and health standards. Fatal mining accidents in the United States in recent years have received national attention and have led to responses at the state and federal levels that have resulted in increased regulatory scrutiny of coal mining operations, particularly underground mining operations. More stringent state and federal mine safety laws and regulations have included increased sanctions for non-compliance. Moreover, future workplace accidents are likely to result in more stringent enforcement and possibly the passage of new laws and regulations.
Within the last few years, the industry has seen enactment of the Federal Mine Improvement and New Emergency Response Act of 2006 (the "MINER Act"), subsequent additional legislation and regulation imposing significant new safety initiatives and the Dodd-Frank Act, which, among other things, imposes new mine safety information reporting requirements. The MINER Act significantly amended the Federal Mine Safety and Health Act of 1977, or the Mine Act, imposing more extensive and stringent compliance standards, increasing criminal penalties and establishing a maximum civil penalty for non-compliance, and expanding the scope of federal oversight, inspection, and enforcement activities. Following the passage of the MINER Act, the U.S. Mine Safety and Health Administration ("MSHA") issued new or more stringent rules and policies on a variety of topics, including:
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- sealing off abandoned areas of underground coal mines;
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- mine safety equipment, training and emergency reporting requirements;
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- substantially increased civil penalties for regulatory violations;
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- training and availability of mine rescue teams;
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- underground "refuge alternatives" capable of sustaining trapped miners in the event of an emergency;
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- flame-resistant conveyor belt, fire prevention and detection, and use of air from the belt entry; and
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- post-accident two-way communications and electronic tracking systems.
Subsequent to passage of the MINER Act, various coal producing states, including West Virginia, Ohio and Kentucky, have enacted legislation addressing issues such as mine safety and accident reporting, increased civil and criminal penalties, and increased inspections and oversight. Other states may pass similar legislation in the future. Additional federal and state legislation that would further increase mine safety regulation, inspection and enforcement, particularly with respect to underground mining operations, has also been considered.
MSHA is also considering a new rule regarding respirable coal mine dust that, if promulgated, would lower the allowable average concentration of respirable dust, allow for single shift sampling to determine noncompliance and establish regulations for the use of Continuous Personal Dust Monitors, among other things. This proposed rule is in the final rule stage and could require significant expenditures in order to comply.
Although we are unable to quantify the full impact, implementing and complying with these new laws and regulations could have an adverse impact on our results of operations and cash available for distribution to our unitholders and could result in harsher sanctions in the event of any violations. Please read "Item 1. Business—Regulation and Laws."
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Penalties, fines or sanctions levied by MSHA could have a material adverse effect on our business, results of operations and cash available for distribution.
Surface and underground mines like ours are continuously inspected by MSHA, which often leads to notices of violation. Recently, MSHA has been conducting more frequent and more comprehensive inspections.
On June 24, 2011, our subsidiary, CAM Mining LLC received notice that on June 23, 2011, MSHA commenced an action in the U.S. District Court of the Eastern District of Kentucky seeking injunctive relief as a result of alleged violations of Sections 103, 104, and 108 of the Mine Act occurring at Mine 28 in connection with an inspection on June 17, 2011 by MSHA inspectors. The complaint alleged that when MSHA inspectors arrived at Mine 28 to inspect the mine with respect to the allegations that employees had been smoking underground, CAM Mining LLC employees gave advance notice of the inspection to miners working underground and that this advance notice hindered, interfered with and delayed the inspection by MSHA. The complaint asserts that the MSHA inspectors did not find any evidence of smoking paraphernalia during the inspection, which was allegedly the result of this advance notice. On June 30, 2011, MSHA obtained a temporary restraining order prohibiting any advance notice of inspections in the future. That became a Permanent Injunction on July 14, 2011. The Permanent Injunction is for three years and will expire on July 14, 2014. On June 17, 2011, MSHA also issued a 104(a) citation in this matter to the Mine for allegedly giving advance notice of the inspection. The citation was assessed at $10,000 and is expected to be settled at $8,000 upon approval by the administrative law judge in 2014.
As a result of these and future inspections and alleged violations and potential violations, we could be subject to material fines, penalties or sanctions. Any of our mines could be subject to a temporary or extended shut down as a result of an alleged MSHA violation. Any such penalties, fines or sanctions could have a material adverse effect on our business, results of operations and cash available for distribution.
We may be unable to obtain and/or renew permits necessary for our operations, which could prevent us from mining certain reserves.
Numerous governmental permits and approvals are required for mining operations, and we can face delays, challenges to, and difficulties in acquiring, maintaining or renewing necessary permits and approvals, including environmental permits. The permitting rules, and the interpretations of these rules, are complex, change frequently, and are often subject to discretionary interpretations by regulators, all of which may make compliance more difficult or impractical, and may possibly preclude the continuance of ongoing mining operations or the development of future mining operations. In addition, the public has certain statutory rights to comment upon and otherwise impact the permitting process, including through court intervention. Over the past few years, the length of time needed to bring a new surface mine into production has increased because of the increased time required to obtain necessary permits. The slowing pace at which permits are issued or renewed for new and existing mines has materially impacted production in Appalachia, but could also affect other regions in the future.
Section 402 National Pollutant Discharge Elimination System permits and Section 404 CWA permits are required to discharge wastewater and discharge dredged or fill material into waters of the United States. Our surface coal mining operations typically require such permits to authorize such activities as the creation of slurry ponds, stream impoundments, and valley fills. Although the CWA gives the EPA a limited oversight role in the Section 404 permitting program, the EPA has recently asserted its authorities more forcefully to question, delay, and prevent issuance of some Section 404 permits for surface coal mining in Appalachia. Currently, significant uncertainty exists regarding the obtaining of permits under the CWA for coal mining operations in Appalachia due to various initiatives launched by the EPA regarding these permits.
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Please read "Part I, Item 1. Business—Regulation and Laws—Clean Water Act" for a discussion of recent litigation and regulatory developments related to the CWA. An inability to obtain the necessary permits to conduct our mining operations or an inability to comply with the requirements of applicable permits would reduce our production and cash flows, which could limit our ability to make distributions to our unitholders.
Our mining operations are subject to operating risks that could adversely affect production levels and operating costs.
Our mining operations are subject to conditions and events beyond our control that could disrupt operations, resulting in decreased production levels and increased costs.
These risks include:
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- unfavorable geologic conditions, such as the thickness of the coal deposits and the amount of rock embedded in or
overlying the coal deposit;
- •
- inability to acquire or maintain necessary permits or mining or surface rights;
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- changes in governmental regulation of the mining industry or the electric utility industry;
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- adverse weather conditions and natural disasters;
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- accidental mine water flooding;
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- labor-related interruptions;
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- transportation delays;
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- mining and processing equipment unavailability and failures and unexpected maintenance problems; and
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- accidents, including fire and explosions from methane.
Any of these conditions may increase the cost of mining and delay or halt production at particular mines for varying lengths of time, which in turn could adversely affect our results of operations and cash available for distribution to our unitholders.
In general, mining accidents present a risk of various potential liabilities depending on the nature of the accident, the location, the proximity of employees or other persons to the accident scene and a range of other factors. Possible liabilities arising from a mining accident include workmen's compensation claims or civil lawsuits for workplace injuries, claims for personal injury or property damage by people living or working nearby and fines and penalties including possible criminal enforcement against us and certain of our employees. In addition, a significant accident that results in a mine shut-down could give rise to liabilities for failure to meet the requirements of coal supply agreements especially if the counterparties dispute our invocation of the force majeure provisions of those agreements. We maintain insurance coverage to mitigate the risks of certain of these liabilities, including business interruption insurance, but those policies are subject to various exclusions and limitations and we cannot assure you that we will receive coverage under those policies for any personal injury, property damage or business interruption claims that may arise out of such an accident. Moreover, certain potential liabilities such as fines and penalties are not insurable risks. Thus, a serious mine accident may result in material liabilities that adversely affect our results of operations and cash available for distribution.
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Fluctuations in transportation costs or disruptions in transportation services could increase competition or impair our ability to supply coal to our customers, which could adversely affect our results of operations and cash available for distribution to our unitholders.
Transportation costs represent a significant portion of the total cost of coal for our customers and, as a result, the cost of transportation is a critical factor in a customer's purchasing decision. Increases in transportation costs could make coal a less competitive energy source or could make our coal production less competitive than coal produced from other sources.
Significant decreases in transportation costs could result in increased competition from coal producers in other regions. For instance, coordination of the many eastern U.S. coal loading facilities, the large number of small shipments, the steeper average grades of the terrain and a more unionized workforce are all issues that combine to make shipments originating in the eastern United States inherently more expensive on a per-mile basis than shipments originating in the western United States. Historically, high coal transportation rates from the western coal producing regions limited the use of western coal in certain eastern markets. The increased competition could have an adverse effect on our results of operations and cash available for distribution to our unitholders.
We depend primarily upon railroads, barges and trucks to deliver coal to our customers. Disruption of any of these services due to weather-related problems, strikes, lockouts, accidents, mechanical difficulties and other events could temporarily impair our ability to supply coal to our customers, which could adversely affect our results of operations and cash available for distribution to our unitholders.
In recent years, the states of Kentucky and West Virginia have increased enforcement of weight limits on coal trucks on their public roads. It is possible that other states may modify their laws to limit truck weight limits. Such legislation and enforcement efforts could result in shipment delays and increased costs. An increase in transportation costs could have an adverse effect on our ability to increase or to maintain production and could adversely affect our results of operations and cash available for distribution.
A shortage of skilled labor in the mining industry could reduce productivity and increase operating costs, which could adversely affect our results of operations and cash available for distribution to our unitholders.
Efficient coal mining using modern techniques and equipment requires skilled laborers. During periods of high demand for coal, the coal industry has experienced a shortage of skilled labor as well as rising labor and benefit costs, due in large part to demographic changes as existing miners retire at a faster rate than new miners are entering the workforce. If a shortage of experienced labor should occur or coal producers are unable to train enough skilled laborers, there could be an adverse impact on labor productivity, an increase in our costs and our ability to expand production may be limited. If coal prices decrease or our labor prices increase, our results of operations and cash available for distribution to our unitholders could be adversely affected.
Unexpected increases in raw material costs, such as steel, diesel fuel and explosives could adversely affect our results of operations.
Our coal mining operations are affected by commodity prices. We use significant amounts of steel, diesel fuel, explosives and other raw materials in our mining operations, and volatility in the prices for these raw materials could have a material adverse effect on our operations. Steel prices and the prices of scrap steel, natural gas and coking coal consumed in the production of iron and steel fluctuate significantly and may change unexpectedly. Additionally, a limited number of suppliers exist for explosives, and any of these suppliers may divert their products to other industries. Shortages in raw materials used in the manufacturing of explosives, which, in some cases, do not have ready substitutes, or the cancellation of supply contracts under which these raw materials are obtained, could increase the
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prices and limit the ability of us or our contractors to obtain these supplies. Future volatility in the price of steel, diesel fuel, explosives or other raw materials will impact our operating expenses and could adversely affect our results of operations and cash available for distribution.
If we are not able to acquire replacement coal reserves that are economically recoverable, our results of operations and cash available for distribution to our unitholders could be adversely affected.
Our results of operations and cash available for distribution to our unitholders depend substantially on obtaining coal reserves that have geological characteristics that enable them to be mined at competitive costs and to meet the coal quality needed by our customers. Because we deplete our reserves as we mine coal, our future success and growth will depend, in part, upon our ability to acquire additional coal reserves that are economically recoverable. If we fail to acquire or develop additional reserves, our existing reserves will eventually be depleted. Replacement reserves may not be available when required or, if available, may not be capable of being mined at costs comparable to those characteristic of the depleting mines. We may not be able to accurately assess the geological characteristics of any reserves that we acquire, which may adversely affect our results of operations and cash available for distribution to our unitholders. Exhaustion of reserves at particular mines with certain valuable coal characteristics also may have an adverse effect on our operating results that is disproportionate to the percentage of overall production represented by such mines. Our ability to obtain other reserves in the future could be limited by restrictions under our existing or future debt agreements, competition from other coal companies for attractive properties, the lack of suitable acquisition candidates or the inability to acquire coal properties on commercially reasonable terms.
Inaccuracies in our estimates of coal reserves and non-reserve coal deposits could result in lower than expected revenues and higher than expected costs.
We base our and the Rhino Eastern joint venture's coal reserve and non-reserve coal deposit estimates on engineering, economic and geological data assembled and analyzed by our staff, which is periodically audited by independent engineering firms. These estimates are also based on the expected cost of production and projected sale prices and assumptions concerning the permitability and advances in mining technology. The estimates of coal reserves and non-reserve coal deposits as to both quantity and quality are periodically updated to reflect the production of coal from the reserves, updated geologic models and mining recovery data, recently acquired coal reserves and estimated costs of production and sales prices. There are numerous factors and assumptions inherent in estimating quantities and qualities of coal reserves and non-reserve coal deposits and costs to mine recoverable reserves, including many factors beyond our control. Estimates of economically recoverable coal reserves necessarily depend upon a number of variable factors and assumptions, all of which may vary considerably from actual results. These factors and assumptions relate to:
- •
- quality of coal;
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- geological and mining conditions and/or effects from prior mining that may not be fully identified by available
exploration data or which may differ from our experience in areas where we currently mine;
- •
- the percentage of coal in the ground ultimately recoverable;
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- the assumed effects of regulation, including the issuance of required permits, taxes, including severance and excise taxes
and royalties, and other payments to governmental agencies;
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- historical production from the area compared with production from other similar producing areas;
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- the timing for the development of reserves; and
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- •
- assumptions concerning equipment and productivity, future coal prices, operating costs, capital expenditures and development and reclamation costs.
For these reasons, estimates of the quantities and qualities of the economically recoverable coal attributable to any particular group of properties, classifications of coal reserves and non-reserve coal deposits based on risk of recovery, estimated cost of production and estimates of net cash flows expected from particular reserves as prepared by different engineers or by the same engineers at different times may vary materially due to changes in the above factors and assumptions. Actual production from identified coal reserve and non-reserve coal deposit areas or properties and revenues and expenditures associated with our and Rhino Eastern's mining operations may vary materially from estimates. Accordingly, these estimates may not reflect our and Rhino Eastern's actual coal reserves or non-reserve coal deposits. Any inaccuracy in our estimates related to our and Rhino Eastern's coal reserves and non-reserve coal deposits could result in lower than expected revenues and higher than expected costs, which could have a material adverse effect on our ability to make cash distributions.
We invest in non-coal natural resource assets, which could result in a material adverse effect on our results of operations and cash available for distribution to our unitholders.
Part of our business strategy is to expand our operations through strategic acquisitions, which includes investing in non-coal natural resources assets. Our executive officers do not have experience investing in or operating non-coal natural resources assets and we may be unable to hire additional management with relevant expertise in operating such assets. Acquisitions of non-coal natural resource assets could expose us to new and additional operating and regulatory risks, including commodity price risk, which could result in a material adverse effect on our results of operations and cash available for distribution to our unitholders.
As of December 31, 2013, we have invested approximately $8.1 million and $31.1 million for mineral rights in the Cana Woodford region of Oklahoma and oil and natural gas leases in the Utica Shale region of eastern Ohio, respectively. In February 2014, we entered into a binding letter of intent to sell our Utica Shale interests for $185 million. The oil and natural gas markets are highly volatile, and we cannot predict future oil and natural gas prices. Prices for oil and natural gas may fluctuate widely in response to relatively minor changes in the supply of and demand for oil and natural gas, market uncertainty and a variety of additional factors that are beyond our control. Such fluctuations could cause us not to realize the full benefits from such investments.
In addition, the natural gas industry could be impacted by the controversy surrounding hydraulic fracturing to extract shale gas. This could include additional regulations imposed on the industry.
We are not the operator of our oil and natural gas properties and therefore are not in a position to control the timing of development efforts, the associated costs or the rate of production of the reserves on such properties.
We are not the operator of the oil and natural gas properties in which we hold interests and may have limited ability to exercise influence over the operations of these and our other non-operated properties or their associated costs. Dependence on the operator and other working interest owners for these projects, and limited ability to influence operations and associated costs, could prevent the realization of targeted returns on capital in drilling or acquisition activities. The success and timing of development and exploration activities on properties operated by others depend upon a number of factors that will be largely outside of our control, including:
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- The timing and amount of capital expenditures;
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- The availability of suitable drilling equipment, production and transportation infrastructure and qualified operating
personnel;
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- The operator's expertise and financial resources;
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- •
- Approval of other participants in drilling wells;
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- Selection of technology; and
- •
- The rate of production of the reserves.
In addition, when we are not the majority owner or operator of a particular oil or natural gas project, if we are not willing or able to fund our capital expenditures relating to such projects when required by the majority owner or operator, our interests in these projects may be reduced or forfeited.
Estimates of oil and natural gas reserves are uncertain and may vary substantially from actual production.
Numerous uncertainties exist in estimating quantities of oil and natural gas proved reserves and future net cash flows therefrom. The estimates of proved reserves and related future net cash flows are based on various assumptions, which may ultimately prove to be inaccurate.
Petroleum engineering is a subjective process of estimating underground accumulations of oil and natural gas that cannot be measured in an exact manner. Estimates of economically recoverable oil and natural gas reserves and of future net cash flows depend upon a number of variable factors and assumptions, including the following:
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- Historical production from the area compared with production from other producing areas;
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- The quality and quantity of available data;
- •
- The interpretation of that data;
- •
- The assumed effects of regulations by governmental agencies;
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- Assumptions concerning future commodity prices; and
- •
- Assumptions concerning future operating costs, severance, ad valorem and excise taxes, development costs, transportation costs and workover and remedial costs.
Because all proved oil and natural gas reserve estimates are to some degree subjective, each of the following items may differ materially from those assumed in estimating proved reserves:
- •
- The quantities of oil and natural gas ultimately recovered;
- •
- The productions costs incurred to recover the oil and natural gas;
- •
- The amount and timing of future development expenditures; and
- •
- Future commodity prices.
Furthermore, different reserve engineers may make different estimates of proved oil and natural gas reserves and cash flows based on the same available data. Actual production, revenues and expenditures will likely be different from estimates, and the differences may be material.
As required by the SEC, the estimated discounted future net cash flows from proved oil and natural gas reserves are based on average prices preceding the date of the estimate and costs as of the date of the estimate, while actual future prices and costs may be materially higher or lower. Actual future net cash flows also will be affected by factors such as:
- •
- The amount and timing of actual production;
- •
- Levels of future capital spending;
- •
- Increases or decreases in the supply of or demand for oil and natural gas; and
- •
- Changes in governmental regulations or taxation.
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PV-10 is a reporting convention that provides a common basis for comparing oil and gas companies subject to the rules and regulations of the SEC. In general, it requires the use of commodity prices that are based upon a 12-month unweighted average, as well as operating and development costs being incurred at the end of the reporting period. Consequently, it may not reflect the prices ordinarily received or that will be received for oil and natural gas production because of seasonal price fluctuations or other varying market conditions, nor may it reflect the actual costs that will be required to produce or develop the oil and natural gas properties. Accordingly, estimates included herein of future net cash flows may be materially different from the future net cash flows that are ultimately received. In addition, the 10% discount factor, which is required by the SEC to be used in calculating discounted future net cash flows for reporting purposes, may not be the most appropriate discount factor based on interest rates in effect from time to time and other risks associated with the properties or the oil and natural gas industry in general. Therefore, the estimates of discounted future net cash flows should not be construed as accurate estimates of the current market value of our Utica Shale proved oil and natural gas reserves.
The amount of estimated maintenance capital expenditures our general partner is required to deduct from operating surplus each quarter could increase in the future, resulting in a decrease in available cash from operating surplus that could be distributed to our unitholders.
Our partnership agreement requires our general partner to deduct from operating surplus each quarter estimated maintenance capital expenditures as opposed to actual maintenance capital expenditures in order to reduce disparities in operating surplus caused by fluctuating maintenance capital expenditures, such as reserve replacement costs or refurbishment or replacement of mine equipment. Our annual estimated maintenance capital expenditures for purposes of calculating operating surplus are $7 to $10 million for 2014. This amount is based on our current estimates of the amounts of expenditures we will be required to make in the future to maintain our long-term operating capacity, which we believe to be reasonable. Our partnership agreement does not cap the amount of maintenance capital expenditures that our general partner may estimate. The amount of our estimated maintenance capital expenditures may be more than our actual maintenance capital expenditures, which will reduce the amount of available cash from operating surplus that we would otherwise have available for distribution to unitholders. The amount of estimated maintenance capital expenditures deducted from operating surplus is subject to review and change by the board of directors of our general partner at least once a year, with any change approved by the conflicts committee. In addition to estimated maintenance capital expenditures, reimbursement of expenses incurred by our general partner and its affiliates will reduce the amount of available cash from operating surplus that we would otherwise have available for distribution to our unitholders. Please read "—Risks Inherent in an Investment in Us—Cost reimbursements due to our general partner and its affiliates for services provided to us or on our behalf will reduce cash available for distribution to our unitholders. The amount and timing of such reimbursements will be determined by our general partner."
Existing and future laws and regulations regulating the emission of sulfur dioxide and other compounds could affect coal consumers and as a result reduce the demand for our coal. A reduction in demand for our coal could adversely affect our results of operations and cash available for distribution to our unitholders.
Federal, state and local laws and regulations extensively regulate the amount of sulfur dioxide, particulate matter, nitrogen oxides, mercury and other compounds emitted into the air from electric power plants and other consumers of our coal. These laws and regulations can require significant emission control expenditures, and various new and proposed laws and regulations may require further emission reductions and associated emission control expenditures. A certain portion of our coal has a medium to high sulfur content, which results in increased sulfur dioxide emissions when combusted and therefore the use of our coal imposes certain additional costs on customers. Accordingly, these laws
39
and regulations may affect demand and prices for our higher sulfur coal. Please read "Part I, Item 1. Business—Regulation and Laws."
Federal and state laws restricting the emissions of greenhouse gases in areas where we conduct our business or sell our coal could adversely affect our operations and demand for our coal.
Recent scientific studies have suggested that emissions of certain gases, commonly referred to as greenhouse gases and including carbon dioxide and methane, may be contributing to warming of the Earth's atmosphere and impacting climate. In response to such studies, the U.S. Congress is considering legislation to reduce emissions of GHG. Many states have already taken legal measures to reduce emissions of GHG, primarily through the development of regional GHG cap-and-trade programs.
In the wake of the Supreme Court's April 2, 2007 decision in Massachusetts, et al. v. EPA, which held that GHG fall under the definition of "air pollutant" in the federal Clean Air Act ("CAA") in December 2009 the EPA issued a final rule declaring that six GHG, including carbon dioxide and methane, "endanger both the public health and the public welfare of current and future generations." The issuance of this "endangerment finding" allows the EPA to begin regulating GHG emissions under existing provisions of the CAA. There are many regulatory approaches currently in effect or being considered to address GHG, including possible future U.S. treaty commitments, new state legislation that may impose a carbon emissions tax or establish a cap-and-trade program and regulation by the EPA.
The permitting of new coal-fired power plants has also been contested by state regulators and environmental organizations for concerns related to GHG emissions from the new plants. In addition, several permits issued to new coal-fired power plants without limits on GHG emissions have been appealed to EPA's Environmental Appeals Board. As state permitting authorities continue to consider GHG control requirements as part of major source permitting Best Available Control Technology ("BACT") requirements, costs associated with new facility permitting and use of coal could increase substantially. A growing concern is the possibility that BACT will be determined to be the use of an alternative fuel to coal.
As a result of these current and proposed laws, regulations and trends, electricity generators may elect to switch to other fuels that generate less GHG emissions, possibly further reducing demand for our coal, which could adversely affect our results of operations and cash available for distribution to our unitholders. Please read "Part I, Item 1. Business—Regulation and Laws—Carbon Dioxide Emissions."
Federal and state laws require bonds to secure our obligations to reclaim mined property. Our inability to acquire or failure to maintain, obtain or renew these surety bonds could have an adverse effect on our ability to produce coal, which could adversely affect our results of operations and cash available for distribution to our unitholders.
We are required under federal and state laws to place and maintain bonds to secure our obligations to repair and return property to its approximate original state after it has been mined (often referred to as "reclamation") and to satisfy other miscellaneous obligations. Federal and state governments could increase bonding requirements in the future. Certain business transactions, such as coal leases and other obligations, may also require bonding. We may have difficulty procuring or maintaining our surety bonds. Our bond issuers may demand higher fees, additional collateral, including supporting letters of credit or posting cash collateral or other terms less favorable to us upon those renewals. The failure to maintain or the inability to acquire sufficient surety bonds, as required
40
by state and federal laws, could subject us to fines and penalties as well as the loss of our mining permits. Such failure could result from a variety of factors, including:
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- the lack of availability, higher expense or unreasonable terms of new surety bonds;
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- the ability of current and future surety bond issuers to increase required collateral; and
- •
- the exercise by third-party surety bond holders of their right to refuse to renew the surety bonds.
We maintain surety bonds with third parties for reclamation expenses and other miscellaneous obligations. It is possible that we may in the future have difficulty maintaining our surety bonds for mine reclamation. Due to adverse economic conditions and the volatility of the financial markets, surety bond providers may be less willing to provide us with surety bonds or maintain existing surety bonds or may demand terms that are less favorable to us than the terms we currently receive. We may have greater difficulty satisfying the liquidity requirements under our existing surety bond contracts. As of December 31, 2013, we had $75.2 million in reclamation surety bonds, secured by $17.2 million in letters of credit outstanding under our credit agreement. Our credit agreement provides for a $300 million working capital revolving credit facility, of which up to $75.0 million may be used for letters of credit. If we do not maintain sufficient borrowing capacity under our revolving credit facility for additional letters of credit, we may be unable to obtain or renew surety bonds required for our mining operations. For more information, please read "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Credit Agreement." If we do not maintain sufficient borrowing capacity or have other resources to satisfy our surety and bonding requirements, our operations and cash available for distribution to our unitholders could be adversely affected.
We depend on a few customers for a significant portion of our revenues. If a substantial portion of our supply contracts terminate or if any of these customers were to significantly reduce their purchases of coal from us, and we are unable to successfully renegotiate or replace these contracts on comparable terms, then our results of operations and cash available for distribution to our unitholders could be adversely affected.
We sell a material portion of our coal under supply contracts. As of December 31, 2013 we had sales commitments for approximately 80% of our estimated coal production (including purchased coal to supplement our production and excluding results from the Rhino Eastern joint venture) for the year ending December 31, 2014. When our current contracts with customers expire, our customers may decide not to extend or enter into new contracts. Of our total future committed tons, under the terms of the supply contracts, we will ship 43% in 2014, 25% in 2015, 16% in 2016, and 16% in 2017. We derived approximately 86.6% of our total revenues from coal sales (excluding results from the joint venture) to our ten largest customers for the year ended December 31, 2013, with affiliates of our top three customers accounting for approximately 45.9% of our coal revenues during that period.
In the absence of long-term contracts, our customers may decide to purchase fewer tons of coal than in the past or on different terms, including different pricing terms. Negotiations to extend existing contracts or enter into new long-term contracts with those and other customers may not be successful, and those customers may not continue to purchase coal from us under long-term coal supply contracts or may significantly reduce their purchases of coal from us. In addition, interruption in the purchases by or operations of our principal customers could significantly affect our results of operations and cash available for distribution. Unscheduled maintenance outages at our customers' power plants and unseasonably moderate weather are examples of conditions that might cause our customers to reduce their purchases. Our mines may have difficulty identifying alternative purchasers of their coal if their existing customers suspend or terminate their purchases. The amount and terms of sales of coal produced from our Rhino Eastern mining complex are controlled by an affiliate of Patriot pursuant to the joint venture agreement. We cannot guarantee that Patriot will be successful in obtaining coal supply contracts at favorable prices, if at all, which could have a material adverse effect on our results
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of operations and cash available for distribution to our unitholders. For additional information relating to these contracts, please read "Part I, Item 1. Business—Customers—Coal Supply Contracts."
Certain provisions in our long-term coal supply contracts may provide limited protection during adverse economic conditions, may result in economic penalties to us or permit the customer to terminate the contract.
Price adjustment, "price re-opener" and other similar provisions in our supply contracts may reduce the protection from short-term coal price volatility traditionally provided by such contracts. Price re-opener provisions typically require the parties to agree on a new price. Failure of the parties to agree on a price under a price re-opener provision can lead to termination of the contract. Any adjustment or renegotiations leading to a significantly lower contract price could adversely affect our results of operations and cash available for distribution to our unitholders.
Coal supply contracts also typically contain force majeure provisions allowing temporary suspension of performance by us or our customers during the duration of specified events beyond the control of the affected party. Most of our coal supply contracts also contain provisions requiring us to deliver coal meeting quality thresholds for certain characteristics such as Btu, sulfur content, ash content, hardness and ash fusion temperature. Failure to meet these specifications could result in economic penalties, including price adjustments, the rejection of deliveries or termination of the contracts. In addition, certain of our coal supply contracts permit the customer to terminate the agreement in the event of changes in regulations affecting our industry that increase the price of coal beyond a specified limit.
Our coal lessees' mining operations and their financial condition and results of operations are subject to some of the same risks and uncertainties that we face as a mine operator.
The mining operations and financial condition and results of operations of our coal lessees are subject to the same risks and uncertainties that we face as a mine operator. If any such risks were to occur, the business, financial condition and results of operations of the lessees could be adversely affected and as a result our coal royalty revenues and cash available for distribution could be adversely affected.
If our coal lessees do not manage their operations well, their production volumes and our royalty revenues could decrease.
We depend on our coal lessees to effectively manage their operations on the leased properties. The lessees make their own business decisions with respect to their operations within the constraints of their leases, including decisions relating to:
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- marketing of the coal mined;
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- mine plans, including the amount to be mined and the method of mining;
- •
- processing and blending coal;
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- expansion plans and capital expenditures;
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- credit risk of their customers;
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- permitting;
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- insurance and surety bonding;
- •
- acquisition of surface rights and other coal estates;
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- employee wages;
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- transportation arrangements;
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- compliance with applicable laws, including environmental laws; and
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- •
- mine closure and reclamation.
A failure on the part of one of the coal lessees to make royalty payments could give us the right to terminate the lease, repossess the property and enforce payment obligations under the lease. If we repossessed any of our properties, we might not be able to find a replacement lessee or enter into a new lease on favorable terms within a reasonable period of time. In addition, the existing lessee could be subject to bankruptcy proceedings that could further delay the execution of a new lease or the assignment of the existing lease to another operator. If we enter into a new lease, the replacement operator might not achieve the same levels of production or sell coal at the same price as the lessee it replaced. In addition, it may be difficult to secure new or replacement lessees for small or isolated coal reserves, since industry trends toward consolidation favor larger-scale, higher-technology mining operations in order to increase productivity.
Coal lessees could satisfy obligations to their customers with coal from properties other than ours, depriving us of the ability to receive amounts in excess of minimum royalty payments.
Coal supply contracts often require operators to satisfy their obligations to their customers with resources mined from specific reserves or may provide the operator flexibility to source the coal from various reserves. Several factors may influence a coal lessee's decision to supply its customers with coal mined from properties we do not own or lease, including the royalty rates under the coal lessee's lease with us, mining conditions, mine operating costs, cost and availability of transportation, and customer specifications. If a coal lessee satisfies its obligations to its customers with coal from properties we do not own or lease, production on our properties will decrease, and we will receive lower royalty revenues.
A coal lessee may incorrectly report royalty revenues, which might not be identified by our lessee audit process or our mine inspection process or, if identified, might be identified in a subsequent period.
We depend on our lessees to correctly report production and royalty revenues on a monthly basis. Our regular lessee audits and mine inspections may not discover any irregularities in these reports or, if we do discover errors, we might not identify them in the reporting period in which they occurred. Any undiscovered reporting errors could result in a loss of royalty revenues and errors identified in subsequent periods could lead to accounting disputes as well as disputes with the coal lessees, or internal control deficiencies.
Defects in title in the coal properties that we own or loss of any leasehold interests could limit our ability to mine these properties or result in significant unanticipated costs.
We conduct a significant part of our mining operations on leased properties. A title defect or the loss of any lease could adversely affect our ability to mine the associated coal reserves. Title to most of our owned and leased properties and the associated mineral rights is not usually verified until we make a commitment to develop a property, which may not occur until after we have obtained necessary permits and completed exploration of the property. In some cases, we rely on title information or representations and warranties provided by our grantors or lessors, as the case may be. Our right to mine some coal reserves would be adversely affected by defects in title or boundaries or if a lease expires. Any challenge to our title or leasehold interest could delay the exploration and development of the property and could ultimately result in the loss of some or all of our interest in the property. Mining operations from time to time may rely on a lease that we are unable to renew on terms at least as favorable, if at all. In such event, we may have to close down or significantly alter the sequence of mining operations or incur additional costs to obtain or renew such leases, which could adversely affect our future coal production. If we mine on property that we do not control, we could incur liability for such mining. Our sponsor, Wexford Capital, will not indemnify us for losses attributable to title defects in the properties that we own or lease.
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Our work force could become unionized in the future, which could adversely affect our production and labor costs and increase the risk of work stoppages.
Currently, none of our employees are represented under collective bargaining agreements. However, all of our work force may not remain union-free in the future. If some or all of our work force were to become unionized, it could adversely affect our productivity and labor costs and increase the risk of work stoppages.
We depend on key personnel for the success of our business.
We depend on the services of our senior management team and other key personnel, including senior management of our general partner. The loss of the services of any member of senior management or key employee could have an adverse effect on our business and reduce our ability to make distributions to our unitholders. We may not be able to locate or employ on acceptable terms qualified replacements for senior management or other key employees if their services were no longer available.
If the assumptions underlying our reclamation and mine closure obligations are materially inaccurate, we could be required to expend greater amounts than anticipated.
The Federal Surface Mining Control and Reclamation Act of 1977 and counterpart state laws and regulations establish operational, reclamation and closure standards for all aspects of surface mining as well as most aspects of underground mining. Estimates of our total reclamation and mine closing liabilities are based upon permit requirements and our engineering expertise related to these requirements. The estimate of ultimate reclamation liability is reviewed both periodically by our management and annually by independent third-party engineers. The estimated liability can change significantly if actual costs vary from assumptions or if governmental regulations change significantly. Please read "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates—Asset Retirement Obligations." Wexford will not indemnify us against any reclamation or mine closing liabilities associated with our assets.
Our debt levels may limit our flexibility in obtaining additional financing and in pursuing other business opportunities.
Our level of indebtedness could have important consequences to us, including the following:
- •
- our ability to obtain additional financing, if necessary, for working capital, capital expenditures (including
acquisitions) or other purposes may be impaired or such financing may not be available on favorable terms;
- •
- covenants contained in our existing and future credit and debt arrangements will require us to meet financial tests that
may affect our flexibility in planning for and reacting to changes in our business, including possible acquisition opportunities;
- •
- we will need a portion of our cash flow to make principal and interest payments on our indebtedness, reducing the funds
that would otherwise be available for operations, distributions to unitholders and future business opportunities;
- •
- we may be more vulnerable to competitive pressures or a downturn in our business or the economy generally; and
- •
- our flexibility in responding to changing business and economic conditions may be limited.
Increases in our total indebtedness would increase our total interest expense, which would in turn reduce our forecasted cash available for distribution. As of December 31, 2013 our current portion of long-term debt that will be funded from cash flows from operating activities during 2014 was
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approximately $1.0 million. Our ability to service our indebtedness will depend upon, among other things, our future financial and operating performance, which will be affected by prevailing economic conditions and financial, business, regulatory and other factors, some of which are beyond our control. If our operating results are not sufficient to service our current or future indebtedness, we will be forced to take actions such as reducing distributions, reducing or delaying our business activities, acquisitions, investments and/or capital expenditures, selling assets, restructuring or refinancing our indebtedness, or seeking additional equity capital or bankruptcy protection. We may not be able to effect any of these remedies on satisfactory terms, or at all.
Our credit agreement contains operating and financial restrictions that may restrict our business and financing activities and limit our ability to pay distributions upon the occurrence of certain events.
The operating and financial restrictions and covenants in our credit agreement and any future financing agreements could restrict our ability to finance future operations or capital needs or to engage, expand or pursue our business activities. For example, our credit agreement restricts our ability to:
- •
- incur additional indebtedness or guarantee other indebtedness;
- •
- grant liens;
- •
- make certain loans or investments;
- •
- dispose of assets outside the ordinary course of business, including the issuance and sale of capital stock of our
subsidiaries;
- •
- change the line of business conducted by us or our subsidiaries;
- •
- enter into a merger, consolidation or make acquisitions; or
- •
- make distributions if an event of default occurs.
In addition, our payment of principal and interest on our debt will reduce cash available for distribution on our units. Our credit agreement limits our ability to pay distributions upon the occurrence of the following events, among others, which would apply to us and our subsidiaries:
- •
- failure to pay principal, interest or any other amount when due;
- •
- breach of the representations or warranties in the credit agreement;
- •
- failure to comply with the covenants in the credit agreement;
- •
- cross-default to other indebtedness;
- •
- bankruptcy or insolvency;
- •
- failure to have adequate resources to maintain, and obtain, operating permits as necessary to conduct our operations
substantially as contemplated by the mining plans used in preparing the financial projections; and
- •
- a change of control.
Any subsequent refinancing of our current debt or any new debt could have similar restrictions. Our ability to comply with the covenants and restrictions contained in our credit agreement may be affected by events beyond our control, including prevailing economic, financial and industry conditions. If market or other economic conditions deteriorate, our ability to comply with these covenants may be impaired. If we violate any of the restrictions, covenants, ratios or tests in our credit agreement, a significant portion of our indebtedness may become immediately due and payable, and our lenders' commitment to make further loans to us may terminate. We might not have, or be able to obtain,
45
sufficient funds to make these accelerated payments. In addition, our obligations under our credit agreement will be secured by substantially all of our assets, and if we are unable to repay our indebtedness under our credit agreement, the lenders could seek to foreclose on such assets. For more information, please read "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Credit Agreement."
Risks Inherent in an Investment in Us
Wexford owns and controls our general partner. Our general partner has fiduciary duties to its owners, and the interests of its owners may differ significantly from, or conflict with, the interests of our public common unitholders.
Wexford owns and controls our general partner. Although our general partner has a fiduciary duty to manage us in a manner beneficial to us and our unitholders, the executive officers and directors of our general partner have a fiduciary duty to manage our general partner in a manner beneficial to its owners. Therefore, conflicts of interest may arise between its owners and our general partner, on the one hand, and us and our unitholders, on the other hand. In resolving these conflicts of interest, our general partner may favor its own interests and the interests of its owners over the interests of our common unitholders. These conflicts include the following situations:
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- our general partner is allowed to take into account the interests of parties other than us, such as its owners, in
resolving conflicts of interest, which has the effect of limiting its fiduciary duty to our unitholders;
- •
- neither our partnership agreement nor any other agreement requires Wexford to pursue a business strategy that favors us;
- •
- our partnership agreement limits the liability of and reduces fiduciary duties owed by our general partner and also
restricts the remedies available to unitholders for actions that, without the limitations, might constitute breaches of fiduciary duty;
- •
- except in limited circumstances, our general partner has the power and authority to conduct our business without
unitholder approval;
- •
- our general partner determines the amount and timing of asset purchases and sales, borrowings, issuances of additional
partnership securities and the level of reserves, each of which can affect the amount of cash that is distributed to our unitholders;
- •
- our general partner determines the amount and timing of any capital expenditure and whether a capital expenditure is
classified as a maintenance capital expenditure, which reduces operating surplus, or an expansion capital expenditure, which does not reduce operating surplus;
- •
- our general partner may cause us to borrow funds in order to permit the payment of cash distributions, even if the purpose
or effect of the borrowing is to make a distribution on the subordinated units, to make incentive distributions or to accelerate the expiration of the subordination period;
- •
- our partnership agreement permits us to distribute up to $25.0 million as operating surplus, even if it is
generated from asset sales, non-working capital borrowings or other sources that would otherwise constitute capital surplus. This cash may be used to fund distributions on our subordinated units or
the incentive distribution rights;
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- our general partner determines which costs incurred by it and its affiliates are reimbursable by us;
46
- •
- our partnership agreement does not restrict our general partner from causing us to pay it or its affiliates for any
services rendered to us or entering into additional contractual arrangements with its affiliates on our behalf;
- •
- our general partner intends to limit its liability regarding our contractual and other obligations;
- •
- our general partner may exercise its right to call and purchase common units if it and its affiliates own more than 80% of
the common units;
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- our general partner controls the enforcement of obligations that it and its affiliates owe to us;
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- our general partner decides whether to retain separate counsel, accountants or others to perform services for us; and
- •
- our general partner may elect to cause us to issue common units to it in connection with a resetting of the target distribution levels related to our general partner's incentive distribution rights without the approval of the conflicts committee of the board of directors of our general partner or the unitholders. This election may result in lower distributions to the common unitholders in certain situations.
In addition, Wexford currently holds substantial interests in other companies in the energy and natural resource sectors. We may compete directly with entities in which Wexford has an interest for acquisition opportunities and potentially will compete with these entities for new business or extensions of the existing services provided by us. Please read "—Our sponsor, Wexford Capital, and affiliates of our general partner may compete with us."
Common units held by unitholders who are not eligible citizens will be subject to redemption.
In order to comply with U.S. laws with respect to the ownership of interests in mineral leases on federal lands, we have adopted certain requirements regarding those investors who own our common units. As used in this report, an eligible citizen means a person or entity qualified to hold an interest in mineral leases on federal lands. As of the date hereof, an eligible citizen must be: (1) a citizen of the United States; (2) a corporation organized under the laws of the United States or of any state thereof; or (3) an association of U.S. citizens, such as a partnership or limited liability company, organized under the laws of the United States or of any state thereof, but only if such association does not have any direct or indirect foreign ownership, other than foreign ownership of stock in a parent corporation organized under the laws of the United States or of any state thereof. For the avoidance of doubt, onshore mineral leases or any direct or indirect interest therein may be acquired and held by aliens only through stock ownership, holding or control in a corporation organized under the laws of the United States or of any state thereof. Unitholders who are not persons or entities who meet the requirements to be an eligible citizen run the risk of having their units redeemed by us at the lower of their purchase price cost or the then-current market price. The redemption price will be paid in cash or by delivery of a promissory note, as determined by our general partner.
Our general partner intends to limit its liability regarding our obligations.
Our general partner intends to limit its liability under contractual arrangements so that the counterparties to such arrangements have recourse only against our assets, and not against our general partner or its assets. Our general partner may therefore cause us to incur indebtedness or other obligations that are nonrecourse to our general partner. Our partnership agreement provides that any action taken by our general partner to limit its liability is not a breach of our general partner's fiduciary duties, even if we could have obtained more favorable terms without the limitation on liability. In addition, we are obligated to reimburse or indemnify our general partner to the extent that it incurs obligations on our behalf. Any such reimbursement or indemnification payments would reduce the amount of cash otherwise available for distribution to our unitholders.
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Our partnership agreement requires that we distribute all of our available cash, which could limit our ability to grow and make acquisitions.
We expect that we will distribute all of our available cash to our unitholders and will rely primarily upon external financing sources, including commercial bank borrowings and the issuance of debt and equity securities, to fund our acquisitions and expansion capital expenditures. As a result, to the extent we are unable to finance growth externally; our cash distribution policy will significantly impair our ability to grow.
In addition, because we distribute all of our available cash, our growth may not be as fast as that of businesses that reinvest their available cash to expand ongoing operations. To the extent we issue additional units in connection with any acquisitions or expansion capital expenditures, the payment of distributions on those additional units may increase the risk that we will be unable to maintain or increase our per unit distribution level. There are no limitations in our partnership agreement or our credit agreement on our ability to issue additional units, including units ranking senior to the common units. The incurrence of additional commercial borrowings or other debt to finance our growth strategy would result in increased interest expense, which, in turn, may impact the available cash that we have to distribute to our unitholders.
Our partnership agreement limits our general partner's fiduciary duties to holders of our common and subordinated units.
Our partnership agreement contains provisions that modify and reduce the fiduciary standards to which our general partner would otherwise be held by state fiduciary duty law. For example, our partnership agreement permits our general partner to make a number of decisions in its individual capacity, as opposed to in its capacity as our general partner, or otherwise free of fiduciary duties to us and our unitholders. This entitles our general partner to consider only the interests and factors that it desires and relieves it of any duty or obligation to give any consideration to any interest of, or factors affecting, us, our affiliates or our limited partners. Examples of decisions that our general partner may make in its individual capacity include:
- •
- how to allocate business opportunities among us and its affiliates;
- •
- whether to exercise its limited call right;
- •
- how to exercise its voting rights with respect to the units it owns;
- •
- whether to exercise its registration rights;
- •
- whether to elect to reset target distribution levels; and
- •
- whether or not to consent to any merger or consolidation of the partnership or amendment to the partnership agreement.
By purchasing a common unit, a unitholder is treated as having consented to the provisions in the partnership agreement, including the provisions discussed above.
Our partnership agreement restricts the remedies available to holders of our common and subordinated units for actions taken by our general partner that might otherwise constitute breaches of fiduciary duty.
Our partnership agreement contains provisions that restrict the remedies available to unitholders for actions taken by our general partner that might otherwise constitute breaches of fiduciary duty under state fiduciary duty law. For example, our partnership agreement:
- •
- provides that whenever our general partner makes a determination or takes, or declines to take, any other action in its capacity as our general partner, our general partner is required to make such determination, or take or decline to take such other action, in good faith, and will not be
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- •
- provides that our general partner will not have any liability to us or our unitholders for decisions made in its capacity
as a general partner so long as it acted in good faith, meaning that it believed that the decision was in the best interest of our partnership;
- •
- provides that our general partner and its officers and directors will not be liable for monetary damages to us or our
limited partners resulting from any act or omission unless there has been a final and non-appealable judgment entered by a court of competent jurisdiction determining that our general partner or its
officers and directors, as the case may be, acted in bad faith or engaged in fraud or willful misconduct or, in the case of a criminal matter, acted with knowledge that the conduct was criminal; and
- •
- provides that our general partner will not be in breach of its obligations under the partnership agreement or its
fiduciary duties to us or our limited partners if a transaction with an affiliate or the resolution of a conflict of interest is:
- (1)
- approved
by the conflicts committee of the board of directors of our general partner, although our general partner is not obligated to seek such approval;
- (2)
- approved
by the vote of a majority of the outstanding common units, excluding any common units owned by our general partner and its affiliates;
- (3)
- on
terms no less favorable to us than those generally being provided to or available from unrelated third parties; or
- (4)
- fair and reasonable to us, taking into account the totality of the relationships among the parties involved, including other transactions that may be particularly favorable or advantageous to us.
subject to any other or different standard imposed by our partnership agreement, Delaware law, or any other law, rule or regulation, or at equity;
In connection with a situation involving a transaction with an affiliate or a conflict of interest, any determination by our general partner must be made in good faith. If an affiliate transaction or the resolution of a conflict of interest is not approved by our common unitholders or the conflicts committee and the board of directors of our general partner determines that the resolution or course of action taken with respect to the affiliate transaction or conflict of interest satisfies either of the standards set forth in subclauses (3) and (4) above, then it will be presumed that, in making its decision, the board of directors acted in good faith, and in any proceeding brought by or on behalf of any limited partner or the partnership, the person bringing or prosecuting such proceeding will have the burden of overcoming such presumption.
Our sponsor, Wexford Capital, and affiliates of our general partner may compete with us.
Our partnership agreement provides that our general partner will be restricted from engaging in any business activities other than acting as our general partner and those activities incidental to its ownership interest in us. Affiliates of our general partner, including our sponsor, Wexford Capital, and its investment funds, are not prohibited from engaging in other businesses or activities, including those that might be in direct competition with us. Through its investment funds, Wexford Capital currently holds substantial interests in other companies in the energy and natural resources sectors. Wexford Capital, through its investment funds and managed accounts, makes investments and purchases entities in the coal and oil and natural gas sectors. These investments and acquisitions may include entities or assets that we would have been interested in acquiring. Therefore, Wexford Capital may compete with us for investment opportunities and Wexford may own an interest in entities that compete with us.
Pursuant to the terms of our partnership agreement, the doctrine of corporate opportunity, or any analogous doctrine, does not apply to our general partner or any of its affiliates, including its executive
49
officers, directors and Wexford Capital. Any such person or entity that becomes aware of a potential transaction, agreement, arrangement or other matter that may be an opportunity for us will not have any duty to communicate or offer such opportunity to us. Any such person or entity will not be liable to us or to any limited partner for breach of any fiduciary duty or other duty by reason of the fact that such person or entity pursues or acquires such opportunity for itself, directs such opportunity to another person or entity or does not communicate such opportunity or information to us. This may create actual and potential conflicts of interest between us and affiliates of our general partner and result in less than favorable treatment of us and our unitholders.
Our general partner may elect to cause us to issue common units to it in connection with a resetting of the target distribution levels related to its incentive distribution rights, without the approval of the conflicts committee of its board of directors or the holders of our common units. This could result in lower distributions to holders of our common units.
Our general partner has the right, at any time when there are no subordinated units outstanding and it has received incentive distributions at the highest level to which it is entitled (48.0%) for each of the prior four consecutive fiscal quarters, to reset the initial target distribution levels at higher levels based on our distributions at the time of the exercise of the reset election. Following a reset election by our general partner, the minimum quarterly distribution will be adjusted to equal the reset minimum quarterly distribution and the target distribution levels will be reset to correspondingly higher levels based on percentage increases above the reset minimum quarterly distribution.
If our general partner elects to reset the target distribution levels, it will be entitled to receive a number of common units and will retain its then-current general partner interest. The number of common units to be issued to our general partner will equal the number of common units which would have entitled the holder to an average aggregate quarterly cash distribution in the prior two quarters equal to the average of the distributions to our general partner on the incentive distribution rights in the prior two quarters. We anticipate that our general partner would exercise this reset right in order to facilitate acquisitions or internal growth projects that would not be sufficiently accretive to cash distributions per common unit without such conversion. It is possible, however, that our general partner could exercise this reset election at a time when it is experiencing, or expects to experience, declines in the cash distributions it receives related to its incentive distribution rights and may, therefore, desire to be issued common units rather than retain the right to receive incentive distributions based on the initial target distribution levels. As a result, a reset election may cause our common unitholders to experience a reduction in the amount of cash distributions that our common unitholders would have otherwise received had we not issued new common units to our general partner in connection with resetting the target distribution levels.
Holders of our common units have limited voting rights and are not entitled to elect our general partner or its directors, which could reduce the price at which the common units will trade.
Unlike the holders of common stock in a corporation, unitholders have only limited voting rights on matters affecting our business and, therefore, limited ability to influence management's decisions regarding our business. Unitholders will have no right on an annual or ongoing basis to elect our general partner or its board of directors. The board of directors of our general partner, including the independent directors, is chosen entirely by Wexford, as a result of it owning our general partner, and not by our unitholders. Unlike publicly traded corporations, we do not conduct annual meetings of our unitholders to elect directors or conduct other matters routinely conducted at annual meetings of stockholders of corporations. As a result of these limitations, the price at which the common units will trade could be diminished because of the absence or reduction of a takeover premium in the trading price.
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Even if holders of our common units are dissatisfied, they cannot currently remove our general partner without its consent.
If our unitholders are dissatisfied with the performance of our general partner, they will have limited ability to remove our general partner. Unitholders are currently unable to remove our general partner without its consent because our general partner and its affiliates own sufficient units to be able to prevent its removal. The vote of the holders of at least 662/3% of all outstanding common and subordinated units voting together as a single class is required to remove our general partner. As of March 7, 2014, Wexford owned an aggregate of approximately 61% of our common and subordinated units. Also, if our general partner is removed without cause during the subordination period and no units held by the holders of the subordinated units or their affiliates are voted in favor of that removal, all remaining subordinated units will automatically be converted into common units and any existing arrearages on the common units will be extinguished. Cause is narrowly defined in our partnership agreement to mean that a court of competent jurisdiction has entered a final, non-appealable judgment finding our general partner liable for actual fraud or willful or wanton misconduct in its capacity as our general partner. Cause does not include most cases of charges of poor management of the business.
Our general partner interest or the control of our general partner may be transferred to a third party without unitholder consent.
Our general partner may transfer its general partner interest to a third party in a merger or in a sale of all or substantially all of its assets without the consent of our unitholders. Furthermore, our partnership agreement does not restrict the ability of the members of our general partner to transfer their respective membership interests in our general partner to a third party. The new members of our general partner would then be in a position to replace the board of directors and executive officers of our general partner with their own designees and thereby exert significant control over the decisions taken by the board of directors and executive officers of our general partner. This effectively permits a "change of control" without the vote or consent of the unitholders.
Our general partner has a limited call right that may require unitholders to sell their common units at an undesirable time or price.
If at any time our general partner and its affiliates own more than 80% of the common units, our general partner will have the right, but not the obligation, which it may assign to any of its affiliates or to us, to acquire all, but not less than all, of the common units held by unaffiliated persons at a price equal to the greater of (1) the average of the daily closing price of the common units over the 20 trading days preceding the date three days before notice of exercise of the call right is first mailed and (2) the highest per-unit price paid by our general partner or any of its affiliates for common units during the 90-day period preceding the date such notice is first mailed. As a result, unitholders may be required to sell their common units at an undesirable time or price and may not receive any return or a negative return on their investment. Unitholders may also incur a tax liability upon a sale of their units. Our general partner is not obligated to obtain a fairness opinion regarding the value of the common units to be repurchased by it upon exercise of the limited call right. There is no restriction in our partnership agreement that prevents our general partner from issuing additional common units and exercising its call right. If our general partner exercised its limited call right, the effect would be to take us private and, if the units were subsequently deregistered, we would no longer be subject to the reporting requirements of the Securities Exchange Act of 1934 (the "Exchange Act"). As of March 7, 2014, Wexford owned an aggregate of approximately 44% of our common units and approximately 84% of our subordinated units.
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We may issue additional units without unitholder approval, which would dilute existing unitholder ownership interests.
Our partnership agreement does not limit the number of additional limited partner interests we may issue at any time without the approval of our unitholders. The issuance of additional common units or other equity interests of equal or senior rank will have the following effects:
- •
- our existing unitholders' proportionate ownership interest in us will decrease;
- •
- the amount of cash available for distribution on each unit may decrease;
- •
- because a lower percentage of total outstanding units will be subordinated units, the risk that a shortfall in the payment
of the minimum quarterly distribution will be borne by our common unitholders will increase;
- •
- the ratio of taxable income to distributions may increase;
- •
- the relative voting strength of each previously outstanding unit may be diminished; and
- •
- the market price of the common units may decline.
The market price of our common units could be adversely affected by sales of substantial amounts of our common units in the public or private markets, including sales by Wexford or other large holders.
As of December 31, 2013, we had 16,672,286 common units and 12,397,000 subordinated units outstanding. All of the subordinated units will convert into common units on a one-for-one basis at the end of the subordination period. Pursuant to a registration rights agreement entered into in connection with the closing of our IPO, we filed a resale shelf registration statement pursuant to which we registered the common units held by Wexford, and may be required to register any common units they hold that converted at the end of the subordination period. We may be required to undertake an underwritten offering to facilitate the sale of units held by Wexford or its permitted assignees under the registration rights agreement. In addition, under our partnership agreement, our general partner and its affiliates (including Wexford) have registration rights relating to the offer and sale of any units that they hold, subject to certain limitations. Sales by Wexford or other large holders of a substantial number of our common units in the public markets, or the perception that such sales might occur, could have a material adverse effect on the price of our common units or could impair our ability to obtain capital through an offering of equity securities.
Our partnership agreement restricts the voting rights of unitholders owning 20% or more of our common units.
Our partnership agreement restricts unitholders' voting rights by providing that any units held by a person or group that owns 20% or more of any class of units then outstanding, other than our general partner and its affiliates, their transferees and persons who acquired such units with the prior approval of the board of directors of our general partner, cannot vote on any matter.
Cost reimbursements due to our general partner and its affiliates for services provided to us or on our behalf will reduce cash available for distribution to our unitholders. The amount and timing of such reimbursements will be determined by our general partner.
Prior to making any distribution on the common units, we will reimburse our general partner and its affiliates for all expenses they incur and payments they make on our behalf. Our partnership agreement does not set a limit on the amount of expenses for which our general partner and its affiliates may be reimbursed. These expenses include salary, bonus, incentive compensation and other amounts paid to persons who perform services for us or on our behalf and expenses allocated to our general partner by its affiliates. Our partnership agreement provides that our general partner will
52
determine in good faith the expenses that are allocable to us. The reimbursement of expenses and payment of fees, if any, to our general partner and its affiliates will reduce the amount of available cash to pay cash distributions to our unitholders.
While our partnership agreement requires us to distribute all of our available cash, our partnership agreement, including provisions requiring us to make cash distributions contained therein, may be amended.
While our partnership agreement requires us to distribute all of our available cash, our partnership agreement, including provisions requiring us to make cash distributions contained therein, may be amended. Our partnership agreement generally may not be amended during the subordination period without the approval of our public common unitholders. However, our partnership agreement can be amended with the consent of our general partner and the approval of a majority of the outstanding common units (including common units held by Wexford) after the subordination period has ended. As of March 7, 2014, Wexford owned approximately 44% of the outstanding common units and 84% of our outstanding subordinated units.
Unitholders may have liability to repay distributions and in certain circumstances may be personally liable for our obligations.
Under certain circumstances, unitholders may have to repay amounts wrongfully returned or distributed to them. Under Section 17-607 of the Delaware Revised Uniform Limited Partnership Act, or the Delaware Act, we may not make a distribution to our unitholders if the distribution would cause our liabilities to exceed the fair value of our assets. Delaware law provides that for a period of three years from the date of the impermissible distribution, limited partners who received the distribution and who knew at the time of the distribution that it violated Delaware law will be liable to the limited partnership for the distribution amount. A purchaser of units who becomes a limited partner is liable for the obligations of the transferring limited partner to make contributions to the partnership that are known to the purchaser of units at the time it became a limited partner and for unknown obligations if the liabilities could be determined from the partnership agreement. Liabilities to partners on account of their partnership interests and liabilities that are non-recourse to the partnership are not counted for purposes of determining whether a distribution is permitted.
It may be determined that the right, or the exercise of the right by the limited partners as a group, to (i) remove or replace our general partner, (ii) approve some amendments to our partnership agreement or (iii) take other action under our partnership agreement constitutes "participation in the control" of our business. A limited partner that participates in the control of our business within the meaning of the Delaware Act may be held personally liable for our obligations under the laws of Delaware, to the same extent as our general partner. This liability would extend to persons who transact business with us under the reasonable belief that the limited partner is a general partner. Neither our partnership agreement nor the Delaware Act specifically provides for legal recourse against our general partner if a limited partner were to lose limited liability through any fault of our general partner.
The New York Stock Exchange does not require a publicly traded limited partnership like us to comply with certain of its corporate governance requirements.
Because we are a publicly traded limited partnership, the New York Stock Exchange, or NYSE, does not require us to have a majority of independent directors on our general partner's board of directors or to establish a compensation committee or a nominating and corporate governance committee. Accordingly, unitholders will not have the same protections afforded to certain corporations that are subject to all of the NYSE corporate governance requirements.
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Tax Risks
Our tax treatment depends on our status as a partnership for federal income tax purposes, as well as our not being subject to a material amount of entity-level taxation by individual states. If the IRS were to treat us as a corporation for U.S. federal income tax purposes or we were to become subject to material additional amounts of entity-level taxation for state tax purposes, then our cash available for distribution to our unitholders would be substantially reduced.
The anticipated after-tax economic benefit of an investment in the common units depends largely on our being treated as a partnership for U.S. federal income tax purposes. A publicly traded partnership such as us may be treated as a corporation for federal income tax purposes unless it satisfies a "qualifying income" requirement. Based on our current operations we believe that we satisfy the qualifying income requirement and will be treated as a partnership. Failing to meet the qualifying income requirement or a change in current law could cause us to be treated as a corporation for federal income tax purposes or otherwise subject us to taxation as an entity.
If we were treated as a corporation for U.S. federal income tax purposes, we would pay federal income tax on our taxable income at the corporate tax rate, which is currently a maximum of 35%, and would likely pay state and local income tax at varying rates. Distributions to you would generally be taxed again as corporate distributions, and no income, gains, losses, deductions, or credits would flow through to you. Because a tax would be imposed upon us as a corporation, our cash available for distribution to you would be substantially reduced. Therefore, treatment of us as a corporation would result in a material reduction in the anticipated cash flow and after-tax return to the unitholders, likely causing a substantial reduction in the value of our common units.
Our partnership agreement provides that if a law is enacted or existing law is modified or interpreted in a manner that subjects us to additional amounts of entity level taxation for federal or state tax purposes, the minimum quarterly distribution amount and the target distribution amounts may be adjusted to reflect the impact of that law on us. Changes in current state law may subject us to additional entity level taxation by individual states. Because of widespread state budget deficits and other reasons, several states are evaluating ways to subject partnerships to entity level taxation through the imposition of state income, franchise and other forms of taxation. Imposition of any such taxes may substantially reduce the cash available for distribution to you.
The tax treatment of publicly traded partnerships or an investment in our common units could be subject to potential legislative, judicial or administrative changes or differing interpretations, possibly applied on a retroactive basis.
The present U.S. federal income tax treatment of publicly traded partnerships, including us, or an investment in our common units may be modified by administrative, legislative or judicial changes or differing interpretation at any time. For example, from time to time, members of the U.S. Congress propose and consider substantive changes to the existing federal income tax laws that affect publicly traded partnerships. One such legislative proposal would eliminate the qualifying income exception to the treatment of all publicly traded partnerships as corporations upon which we rely for our treatment as a partnership for U.S. federal income tax purposes. We are unable to predict whether any of these changes or other proposals will be reintroduced or will ultimately be enacted. Any such change could negatively impact the value of an investment in our common units. Any modification to the U.S. federal income tax law may be applied retroactively and could make it more difficult or impossible to meet the exception for certain publicly traded partnerships to be treated as partnerships for U.S. federal income tax purposes.
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If the IRS contests the federal income tax positions we take, the market for our common units may be adversely impacted and the cost of any IRS contest will reduce our cash available for distribution to our unitholders.
We have not requested a ruling from the IRS with respect to our treatment as a partnership for U.S. federal income tax purposes or any other matter affecting us. The IRS may adopt positions that differ from the positions we take. A court may not agree with some or all of the positions we take. Any contest with the IRS may materially and adversely impact the market for our common units and the price at which they trade. Our costs of any contest with the IRS will be borne indirectly by our unitholders and our general partner because the costs will reduce our cash available for distribution.
Unitholders' share of our income will be taxable for U.S. federal income tax purposes even if they do not receive any cash distributions from us.
Because our unitholders will be treated as partners to whom we will allocate taxable income which could be different in amount than the cash we distribute, unitholders will be required to pay U.S. federal income taxes and, in some cases, state and local income taxes on their share of our taxable income, whether or not they receive cash distributions from us. Unitholders may not receive cash distributions from us equal to their share of our taxable income or even equal to the actual tax liability that results from their share of our taxable income.
Tax gain or loss on the disposition of our common units could be more or less than expected.
If you sell your common units, you will recognize a gain or loss for U.S. federal income tax purposes equal to the difference between the amount realized and your tax basis in those common units. Because distributions in excess of your allocable share of our net taxable income result in a decrease in your tax basis in your common units, the amount, if any, of such prior excess distributions with respect to the units you sell will, in effect, become taxable income to you if you sell such units at a price greater than your tax basis in those units, even if the price you receive is less than your original cost. Furthermore, a substantial portion of the amount realized, whether or not representing gain, may be taxed as ordinary income due to potential recapture of depreciation and deductions and certain other items. In addition, because the amount realized includes your share of our liabilities, if you sell your units, you may incur a tax liability in excess of the amount of cash you receive from the sale.
Tax-exempt entities and non-U.S. persons face unique tax issues from owning our common units that may result in adverse tax consequences to them.
Investments in common units by tax-exempt entities, such as employee benefit plans and individual retirement accounts (known as IRAs), and non-U.S. persons raises issues unique to them. For example, virtually all of our income allocated to organizations that are exempt from federal income tax, including IRAs and other retirement plans, will be unrelated business taxable income and will be taxable to them. Distributions to non-U.S. persons will be subject to withholding taxes imposed at the highest effective tax rate applicable to such non-U.S. persons, and each non-U.S. person will be required to file U.S. federal tax returns and pay tax on its share of our taxable income. If you are a tax-exempt entity or a non-U.S. person, you should consult your tax advisor before investing in our common units.
We treat each purchaser of common units as having the same tax benefits without regard to the actual common units purchased. The IRS may challenge this treatment, which could adversely affect the value of the common units.
Because we cannot match transferors and transferees of common units, we have adopted depreciation and amortization positions that may not conform to all aspects of existing Treasury Regulations. A successful IRS challenge to those positions could adversely affect the amount of tax
55
benefits available to you. It also could affect the timing of these tax benefits or the amount of gain from your sale of common units and could have a negative impact on the value of our common units or result in audit adjustments to your tax returns.
We prorate our items of income, gain, loss and deduction between transferors and transferees of our units each month based upon the ownership of our units on the first day of each month, instead of on the basis of the date a particular unit is transferred. The IRS may challenge this treatment, which could change the allocation of items of income, gain, loss and deduction among our unitholders.
We prorate our items of income, gain, loss and deduction between transferors and transferees of our common units each month based upon the ownership of our units on the first day of each month, instead of on the basis of the date a particular common unit is transferred. Nonetheless, we allocate certain deductions for depreciation of capital additions based upon the date the underlying property is placed in service. The use of this proration method may not be permitted under existing Treasury Regulations and although the U.S. Treasury Department issued proposed Treasury Regulations allowing a similar monthly simplifying convention, such regulations are not final and do not specifically authorize the use of the proration method we have adopted. If the IRS were to challenge our proration method or new Treasury Regulations were issued, we may be required to change our allocation of items of income, gain, loss and deduction among our unitholders.
A unitholder whose units are the subject of a securities loan (e.g., a loan to a "short seller" to cover a short sale of units) may be considered to have disposed of those units. If so, the unitholder would no longer be treated for tax purposes as a partner with respect to those units during the period of the loan and could recognize gain or loss from the disposition.
Because there is no tax concept of loaning a partnership interest, a unitholder whose units are the subject of a securities loan may be considered to have disposed of the loaned units. In that case, the unitholder may no longer be treated for tax purposes as a partner in us with respect to those units during the period of the loan and the unitholder may recognize gain or loss from such disposition. Moreover, during the period of the loan, any of our income, gain, loss or deduction with respect to those units may not be reportable by the unitholder and any cash distributions received by the unitholder as to those units could be fully taxable as ordinary income. Unitholders desiring to assure their status as partners and avoid the risk of gain recognition from a loan to a short seller should consult a tax advisor to discuss whether it is advisable to modify any applicable brokerage account agreements to prohibit their brokers from borrowing their units.
We will adopt certain valuation methodologies, for U.S. federal income tax purposes, that may result in a shift of income, gain, loss and deduction between our general partner and the unitholders. The IRS may challenge this treatment, which could adversely affect the value of the common units.
When we issue additional units or engage in certain other transactions, we will determine the fair market value of our assets and allocate any unrealized gain or loss attributable to our assets to the capital accounts of our unitholders and our general partner. Our methodology may be viewed as understating the value of our assets. In that case, there may be a shift of income, gain, loss and deduction between certain unitholders and our general partner, which may be unfavorable to such unitholders. Moreover, under our valuation methods, subsequent purchasers of common units may have a greater portion of their Internal Revenue Code Section 743(b) adjustment allocated to our tangible assets and a lesser portion allocated to our intangible assets. The IRS may challenge our valuation methods, or our allocation of the Section 743(b) adjustment attributable to our tangible and intangible assets, and allocations of taxable income, gain, loss and deduction between our general partner and certain of our unitholders.
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A successful IRS challenge to these methods or allocations could adversely affect the amount of taxable income or loss being allocated to our unitholders. It also could affect the amount of taxable gain from our unitholders' sale of common units and could have a negative impact on the value of the common units or result in audit adjustments to our unitholders' tax returns without the benefit of additional deductions.
The sale or exchange of 50% or more of our capital and profits interests during any twelve-month period will result in the termination of our partnership for federal income tax purposes.
We will be considered to have constructively terminated for U.S. federal income tax purposes if there is a sale or exchange of 50% or more of the total interests in our capital and profits within a twelve-month period. For purposes of determining whether the 50% threshold has been met, multiple sales of the same unit will be counted only once. Our termination would, among other things, result in the closing of our taxable year for all unitholders, which would result in us filing two tax returns (and our unitholders could receive two Schedules K-1) for one calendar year and could result in a deferral of depreciation deductions allowable in computing our taxable income. In the case of a unitholder reporting on a taxable year other than a calendar year, the closing of our taxable year may also result in more than twelve months of our taxable income or loss being includable in the unitholder's taxable income for the year of termination. Our termination currently would not affect our classification as a partnership for federal income tax purposes, but instead, we would be treated as a new partnership for tax purposes. If treated as a new partnership, we must make new tax elections and could be subject to penalties if we are unable to determine that a technical termination occurred. The IRS has announced a relief procedure whereby if a publicly traded partnership that has technically terminated requests and the IRS grants special relief, among other things, the partnership will be required to provide only a single Schedule K-1 to unitholders for the tax years in which the termination occurs.
Certain U.S. federal income tax preferences currently available with respect to coal exploration and development may be eliminated as a result of future legislation.
The Fiscal Year 2014 Budget proposed by the President recommends elimination of certain key U.S. federal income tax preferences relating to coal exploration and development (the "Budget Proposal"). The Budget Proposal would (1) eliminate current deductions and 60-month amortization for exploration and development costs relating to coal and other hard mineral fossil fuels, (2) repeal the percentage depletion allowance with respect to coal properties, (3) repeal capital gains treatment of coal and lignite royalties, and (4) exclude from the definition of domestic production gross receipts all gross receipts derived from the sale, exchange, or other disposition of coal, other hard mineral fossil fuels, or primary products thereof. The passage of any legislation as a result of the Budget Proposal or any other similar changes in U.S. federal income tax laws could eliminate certain tax deductions that are currently available with respect to coal exploration and development, and any such change could increase the taxable income allocable to our unitholders and negatively impact the value of an investment in our units.
Unitholders will likely be subject to state and local taxes and return filing requirements in states where they do not live as a result of investing in our common units.
In addition to U.S. federal income taxes, unitholders will likely be subject to other taxes, including state and local taxes, unincorporated business taxes and estate, inheritance or intangible taxes that are imposed by the various jurisdictions in which we conduct business or control property now or in the future, even if they do not live in any of those jurisdictions. Unitholders will likely be required to file state and local income tax returns and pay state and local income taxes in some or all of these various jurisdictions. Further, unitholders may be subject to penalties for failure to comply with those requirements. We conduct business in a number of states, most of which also impose an income tax on
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corporations and other entities. In addition, many of these states also impose a personal income tax on individuals. As we make acquisitions or expand our business, we may control assets or conduct business in additional states that impose a personal income tax. It is your responsibility to file all U.S. federal, state and local tax returns.
Item 1B. Unresolved Staff Comments
None.
See "Part I, Item 1. Business" for information about our coal operations and other natural resource assets.
Coal Reserves and Non-Reserve Coal Deposits
We base our coal reserve and non-reserve coal deposit estimates on engineering, economic and geological data assembled and analyzed by our staff. These estimates are also based on the expected cost of production and projected sale prices and assumptions concerning the permitability and advances in mining technology. The estimates of coal reserves and non-reserve coal deposits as to both quantity and quality are periodically updated to reflect the production of coal from the reserves, updated geologic models and mining recovery data, coal reserves recently acquired and estimated costs of production and sales prices. Changes in mining methods may increase or decrease the recovery basis for a coal seam as will plant processing efficiency tests. We maintain reserve and non-reserve coal deposit information in secure computerized databases, as well as in hard copy. The ability to update and/or modify the estimates of our coal reserves and non-reserve coal deposits is restricted to a few individuals and the modifications are documented.
Periodically, we retain outside experts to independently verify our coal reserve and our non-reserve coal deposit estimates. The most recent audit by an independent engineering firm of our and Rhino Eastern's coal reserve and non-reserve coal deposit estimates was completed by Cardno MM&A, as of September 30, 2013, and covered a majority of the coal reserves and non-reserve coal deposits that we and Rhino Eastern controlled as of such date. The coal reserve estimates were updated through December 31, 2013 by our internal staff of engineers based upon production data. The coal reserve and non-reserve coal deposit information for our Elk Horn operation was updated by John T. Boyd Company as of December 31, 2013 due to this firm's familiarity with the coal reserves at this location, as John T. Boyd performed the coal reserve audit in connection with our acquisition of Elk Horn in June 2011. We intend to continue to periodically retain outside experts to assist management with the verification of our estimates of our coal reserves and non-reserve coal deposits going forward.
As of December 31, 2013, we controlled an estimated 457.7 million tons of proven and probable coal reserves and an estimated 277.0 million tons of non-reserve coal deposits. As of December 31, 2013, Rhino Eastern controlled an estimated 43.9 million tons of proven and probable coal reserves and an estimated 18.8 million tons of non-reserve coal deposits.
58
Coal Reserves
The following table provides information as of December 31, 2013 on the type, amount and ownership of the coal reserves:
| |
Proven and Probable Coal Reserves(1) | |||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Region
|
Total(3) | Proven | Probable | Assigned | Unassigned | Owned | Leased | Steam(2) | Metallurgical(2) | |||||||||||||||||||
| |
(in million tons) |
|||||||||||||||||||||||||||
Central Appalachia |
||||||||||||||||||||||||||||
Tug River Complex (KY, WV) |
20.5 | 17.4 | 3.1 | 16.2 | 4.3 | 7.5 | 13.0 | 14.8 | 5.7 | |||||||||||||||||||
Rob Fork Complex (KY) |
22.7 | 20.8 | 1.9 | 22.7 | — | 7.4 | 15.3 | 16.9 | 5.8 | |||||||||||||||||||
Deane Complex (KY) |
39.4 | 23.4 | 16.0 | 6.9 | 32.5 | 38.8 | 0.6 | 39.4 | — | |||||||||||||||||||
Rich Mountain Field (WV) |
8.2 | 2.7 | 5.5 | — | 8.2 | 8.2 | — | — | 8.2 | |||||||||||||||||||
Elk Horn (KY) |
113.9 | 78.2 | 35.7 | 54.5 | 59.4 | 111.6 | 2.3 | 113.9 | — | |||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total Central Appalachia |
204.7 | 142.5 | 62.2 | 100.3 | 104.4 | 173.5 | 31.2 | 185.0 | 19.7 | |||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Northern Appalachia |
||||||||||||||||||||||||||||
Hopedale Complex (OH) |
26.5 | 20.8 | 5.7 | 26.5 | — | 10.0 | 16.5 | 26.5 | — | |||||||||||||||||||
Sands Hill Complex (OH) |
11.9 | 10.2 | 1.7 | 11.9 | — | 0.5 | 11.4 | 11.9 | — | |||||||||||||||||||
Leesville Field (OH) |
27.7 | 10.5 | 17.2 | — | 27.7 | 27.7 | — | 27.7 | — | |||||||||||||||||||
Springdale Field (PA) |
13.7 | 8.8 | 4.9 | — | 13.7 | 13.7 | — | 13.7 | — | |||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total Northern Appalachia |
79.8 | 50.3 | 29.5 | 38.4 | 41.4 | 51.9 | 27.9 | 79.8 | — | |||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Illinois Basin |
||||||||||||||||||||||||||||
Taylorville Field (IL) |
111.1 | 38.8 | 72.3 | — | 111.1 | — | 111.1 | 111.1 | — | |||||||||||||||||||
Pennyrile Complex (KY) |
32.6 | 18.5 | 14.1 | — | 32.6 | — | 32.6 | 32.6 | — | |||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total Illinois Basin |
143.7 | 57.3 | 86.4 | — | 143.7 | — | 143.7 | 143.7 | — | |||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Western Bituminous |
||||||||||||||||||||||||||||
Castle Valley Complex (UT) |
23.3 | 15.8 | 7.5 | 23.3 | — | — | 23.3 | 23.3 | — | |||||||||||||||||||
McClane Canyon Mine (CO)(3) |
6.2 | 4.1 | 2.1 | 6.2 | — | 0.1 | 6.1 | 6.2 | — | |||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total Western Bituminous |
29.5 | 19.9 | 9.6 | 29.5 | — | 0.1 | 29.4 | 29.5 | — | |||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total |
457.7 | 270.0 | 187.7 | 168.2 | 289.5 | 225.5 | 232.2 | 438.0 | 19.7 | |||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Percentage of total(4) |
59.0 | % | 41.0 | % | 36.7 | % | 63.3 | % | 49.3 | % | 50.7 | % | 95.7 | % | 4.3 | % | ||||||||||||
Central Appalachia |
||||||||||||||||||||||||||||
Rhino Eastern Complex (WV)(5) |
43.9 | 25.4 | 18.5 | 39.2 | 4.7 | — | 43.9 | — | 43.9 | |||||||||||||||||||
Percentage of total(4) |
57.9 | % | 42.1 | % | 89.3 | % | 10.7 | % | 0.0 | % | 100.0 | % | 0.0 | % | 100.0 | % | ||||||||||||
- (1)
- Represents
recoverable tons.
- (2)
- For
purposes of this table, we have defined metallurgical coal reserves as reserves located in those seams that historically have been of sufficient quality
and characteristics to be able to be used in the steel making process. All other coal reserves are defined as steam coal. However, some of the reserves in the metallurgical category can also be used
as steam coal.
- (3)
- The
McClane Canyon mine was permanently idled as of December 31, 2013.
- (4)
- Percentages
of totals are calculated based on actual amounts and not the rounded amounts presented in this table.
- (5)
- Owned by a joint venture in which we have a 51% membership interest and for which we serve as manager. Amounts shown include 100% of the reserves.
The majority of our leases have an initial term denominated in years but also provide for the term of the lease to continue until exhaustion of the "mineable and merchantable" coal in the lease area so long as the terms of the lease are complied with. Some of our leases have terms denominated in years rather than mine-to-exhaustion provisions, but in all such cases, we believe that the term of years will allow the recoverable reserve to be fully extracted in accordance with our projected mine plan. Consistent with industry practice, we conduct only limited investigations of title to our and Rhino Eastern's coal properties prior to leasing. Title to lands and reserves of the lessors or grantors and the boundaries of our and the joint venture's leased priorities are not completely verified until we prepare to mine those reserves.
59
The following table provides information on particular characteristics of our and Rhino Eastern's coal reserves as of December 31, 2013:
| |
Moist Basis(1) | Proven and Probable Coal Reserves(2) | ||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
|
|
|
|
|
Sulfur Content | ||||||||||||||||||||||
| |
|
|
|
S02/mm Btu |
|
|||||||||||||||||||||||
Region
|
% Ash | % Sulfur | Btu/lb. | Total | <1% | 1 - 1.5% | >1.5% | Unknown | ||||||||||||||||||||
| |
|
|
|
|
(in million tons) |
|||||||||||||||||||||||
Central Appalachia |
||||||||||||||||||||||||||||
Tug River Complex (KY, WV) |
10.34 | % | 1.19 | % | 12,967 | 1.83 | 20.5 | 9.4 | 8.6 | 1.9 | 0.6 | |||||||||||||||||
Rob Fork Complex (KY) |
6.09 | % | 1.17 | % | 13,389 | 1.74 | 22.7 | 13.4 | 5.7 | 2.1 | 1.5 | |||||||||||||||||
Deane Complex (KY) |
5.39 | % | 0.91 | % | 13,442 | 1.35 | 39.4 | 21.0 | 11.5 | 0.9 | 6.0 | |||||||||||||||||
Rich Mountain (WV) |
7.33 | % | 0.60 | % | 13,313 | 0.91 | 8.2 | 8.2 | — | — | — | |||||||||||||||||
Elk Horn (KY) |
11.50 | % | 1.51 | % | 13,100 | 2.31 | 113.9 | 17.5 | 47.8 | 48.6 | — | |||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total Central Appalachia |
9.44 | % | 1.29 | % | 13,193 | 1.95 | 204.7 | 69.5 | 73.6 | 53.5 | 8.1 | |||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Northern Appalachia |
||||||||||||||||||||||||||||
Hopedale Complex (OH) |
6.32 | % | 2.14 | % | 13,045 | 3.28 | 26.5 | — | — | 26.5 | — | |||||||||||||||||
Sands Hill Complex (OH) |
9.66 | % | 3.50 | % | 11,791 | 5.94 | 11.9 | — | — | 11.9 | — | |||||||||||||||||
Leesville Field (OH) |
5.52 | % | 2.31 | % | 12,910 | 3.58 | 27.7 | — | — | 27.7 | — | |||||||||||||||||
Springdale Field (PA) |
7.08 | % | 1.91 | % | 13,337 | 2.87 | 13.7 | — | — | 13.7 | — | |||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total Northern Appalachia |
6.67 | % | 2.36 | % | 12,861 | 3.67 | 79.8 | — | — | 79.8 | — | |||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Illinois Basin |
||||||||||||||||||||||||||||
Taylorville Field (IL) |
7.75 | % | 3.53 | % | 11,057 | 6.38 | 111.1 | — | — | 111.1 | — | |||||||||||||||||
Pennyrile Complex (KY) |
7.79 | % | 2.53 | % | 11,475 | 4.42 | 32.6 | — | — | 32.6 | — | |||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total Illinois Basin |
7.76 | % | 3.30 | % | 11,152 | 5.92 | 143.7 | — | — | 143.7 | — | |||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Western Bituminous |
||||||||||||||||||||||||||||
Castle Valley Complex (UT) |
10.23 | % | 0.72 | % | 12,118 | 1.19 | 23.3 | 23.3 | — | — | — | |||||||||||||||||
McClane Canyon Mine (CO)(3) |
11.19 | % | 0.57 | % | 11,241 | 1.01 | 6.2 | 6.2 | — | — | — | |||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total Western Bituminous |
10.43 | % | 0.69 | % | 11,932 | 1.15 | 29.5 | 29.5 | — | — | — | |||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total |
7.94 | % | 1.89 | % | 11,597 | 3.26 | 457.7 | 99.0 | 73.6 | 277.0 | 8.1 | |||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Percentage of total(4) |
21.6 | % | 16.1 | % | 60.5 | % | 1.8 | % | ||||||||||||||||||||
Central Appalachia |
||||||||||||||||||||||||||||
Rhino Eastern Complex (WV)(5) |
4.32 | % | 0.68 | % | 14,025 | 0.97 | 43.9 | 39.1 | 4.8 | — | — | |||||||||||||||||
- (1)
- Moist
basis represents average dry basis analytical test results which are normalized to a moisture content deemed to be representative of the saleable coal
product, except for Elk Horn, which is reported on a dry basis.
- (2)
- Represents
recoverable tons.
- (3)
- The
McClane Canyon mine was permanently idled as of December 31, 2013.
- (4)
- Totals
and percentages of totals are calculated based on actual amounts and not the rounded amounts presented in this table.
- (5)
- Owned by a joint venture in which we have a 51% membership interest and for which we serve as manager. Amounts shown include 100% of the reserves.
60
Non-Reserve Coal Deposits
The following table provides information on our and Rhino Eastern's non-reserve coal deposits as of December 31, 2013:
| |
Non-Reserve Coal Deposits | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
|
Total Tons | ||||||||
| |
Total Tons | |||||||||
| |
Owned | Leased | ||||||||
| |
(in million tons) |
|||||||||
Region |
||||||||||
Central Appalachia |
181.6 | 170.1 | 11.5 | |||||||
Northern Appalachia |
32.1 | 27.8 | 4.3 | |||||||
Illinois Basin |
33.7 | — | 33.7 | |||||||
Western Bituminous |
29.6 | — | 29.6 | |||||||
| | | | | | | | | | | |
Total |
277.0 | 197.9 | 79.1 | |||||||
| | | | | | | | | | | |
| | | | | | | | | | | |
Percentage of total |
71.44 | % | 28.55 | % | ||||||
Rhino Eastern (Central Appalachia)(1) |
18.8 | — | 18.8 | |||||||
- (1)
- Owned by a joint venture in which we have a 51% membership interest and for which we serve as manager. Amounts shown include 100% of the non-reserve coal deposits.
The Rhino Eastern joint venture leased all of its non-reserve coal deposits from third-party landowners. Consistent with industry practice, we conduct only limited investigations of title to our coal properties prior to leasing. Title to lands and non-reserve coal deposits of the lessors or grantors and the boundaries of our leased priorities are not completely verified until we prepare to mine the coal.
Oil and Natural Gas Reserves
We and an affiliate of Wexford Capital have participated with Gulfport, a publicly traded company, to acquire interests in a portfolio of oil and natural gas leases in the Utica Shale region of eastern Ohio. As of December 31, 2013, our assets in this region consisted of a 5% non-operated working interest in a total of approximately 152,300 acres, or 7,615 net acres. Per a joint operating agreement completed between us, Gulfport (the operator) and an affiliate of Wexford Capital, we began to fund our proportionate share of drilling costs to Gulfport for wells that began to be drilled in 2012 on our acreage. In February 2014, we signed a binding letter of intent to sell our entire Utica Shale joint interest investment to Gulfport for $185 million, subject to customary closing conditions.
Preparation of Estimated Oil and Natural Gas Reserves
Our oil and natural gas reserve estimates at December 31, 2013 were prepared by Ryder Scott Company L.P. ("Ryder Scott") with respect to our assets in the Utica Shale region, based on technical information supplied by Gulfport. Ryder Scott is an independent petroleum engineering firm and a copy of their summary reserve report is included as Exhibit 99.1 to this Annual Report on Form 10-K. Ryder Scott has been providing petroleum consulting services throughout the world for over 75 years. The primary technical person responsible for overseeing the estimate of the reserves presented herein has been employed with Ryder Scott since 1981 and is a Senior Vice President responsible for coordinating and supervising staff and consulting engineers of Ryder Scott in ongoing reservoir evaluation studies worldwide. Before joining Ryder Scott, he served in a number of engineering positions. He graduated with honors from Texas Tech University with a Bachelor of Science degree in Electrical Engineering in 1975 and is a licensed Professional Engineer in the State of Texas. He is also a member of the Society of Petroleum Engineers and the Society of Petroleum Evaluation Engineers. He has fulfilled the work experience and continuing education requirements of the Texas Board of
61
Professional Engineers, and based on his educational background, professional training and more than 30 years of practical experience in the estimation and evaluation of petroleum reserves, he has attained the professional qualifications as a Reserves Estimator and Reserves Auditor as set forth in Article III of the "Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information" promulgated by the Society of Petroleum Engineers.
Gulfport, the operator of our Utica Shale properties, supplied substantially all of the underlying data to Ryder Scott in its preparation of our reserve estimates. Gulfport maintains an internal staff of petroleum engineers and geoscience professionals. Given the relative size and nature of our oil and gas investments in the Utica Shale, management has concluded that at this time it is reasonable and appropriate not to employ our own internal staff of petroleum engineers and geoscience professionals for purposes of our oil and gas investments. While we have no formal committee specifically designated to review the Ryder Scott reserve report and the reserves estimation process, members of senior management reviewed the Ryder Scott reserve report with representatives of Ryder Scott.
The estimation of reserves involves two distinct determinations. The first determination results in the estimation of the quantities of recoverable oil and natural gas and the second determination results in the estimation of the uncertainty associated with those estimated quantities in accordance with SEC definitions. The process of estimating the quantities of recoverable oil and natural gas reserves relies on the use of certain generally accepted analytical procedures. These analytical procedures fall into three broad categories or methods: (1) performance-based methods; (2) volumetric-based methods; and (3) analogy. These methods may be used singularly or in combination by the reserve evaluator in the process of estimating the quantities of reserves. Reserve evaluators must select the method or combination of methods which in their professional judgment is most appropriate given the nature and amount of reliable geoscience and engineering data available at the time of the estimate, the established or anticipated performance characteristics of the reservoir being evaluated and the stage of development or producing maturity of the property. In many cases, the analysis of the available geoscience and engineering data and the subsequent interpretation of this data may indicate a range of possible outcomes in an estimate, irrespective of the method selected by the evaluator. When a range in the quantity of reserves is identified, the evaluator must determine the uncertainty associated with the incremental quantities of the reserves. If the reserve quantities are estimated using the deterministic incremental approach, the uncertainty for each discrete incremental quantity of the reserves is addressed by the reserve category assigned by the evaluator. Therefore, it is the categorization of reserve quantities as proved, probable and/or possible that addresses the inherent uncertainty in the estimated quantities reported. For proved reserves, uncertainty is defined by the SEC as reasonable certainty wherein the "quantities actually recovered are much more likely than not to be achieved." Production information for the Utica Shale is limited. For those of our wells on production, performance methods were used. All of the proved undeveloped reserves included herein were estimated by the analogy method.
We have not provided oil and natural gas reserve estimates pertaining to our Cana Woodford assets in western Oklahoma since we only have a royalty interest in these assets and the information is unavailable. Our share of the oil and natural gas produced from our Cana Woodford assets was immaterial for the year ended December 31, 2013.
62
Estimated Proved Oil and Natural Gas Reserves
The following table sets forth our proportionate interest in our Utica Shale estimated proved oil and natural gas reserves at December 31, 2013 and 2012. Information for 2011 is not presented as exploration and production did not begin until early 2012.
| |
For the year ended December 31, 2013 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Oil/Condensate (Mbbls) |
Natural gas liquids (Mbbls) |
Natural gas (MMcf) |
Total oil and natural gas reserves (MBOE) |
|||||||||
Proved developed |
114 | 230 | 5,942 | 1,334 | |||||||||
Proved undeveloped(1) |
59 | 123 | 2,921 | 669 | |||||||||
| | | | | | | | | | | | | | |
Total estimated proved reserves(2) |
173 | 353 | 8,863 | 2,003 | |||||||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| |
For the year ended December 31, 2012 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Oil/Condensate (Mbbls) |
Natural gas liquids (Mbbls) |
Natural gas (MMcf) |
Total oil and natural gas reserves (MBOE) |
|||||||||
Proved developed |
60 | 4 | 1,532 | 319 | |||||||||
Proved undeveloped(1) |
61 | 7 | 896 | 217 | |||||||||
| | | | | | | | | | | | | | |
Total estimated proved reserves(2) |
121 | 11 | 2,428 | 536 | |||||||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| |
For the year ended December 31, |
||||||
|---|---|---|---|---|---|---|---|
| |
2013 | 2012 | |||||
| |
(in thousands) |
||||||
Total discounted future net income(3) |
$ | 27,161 | $ | 7,833 | |||
| | | | | | | | |
| | | | | | | | |
- (1)
- Proved
undeveloped oil and natural gas reserves will be converted from undeveloped to developed as the applicable wells begin production.
- (2)
- Estimates
of reserves as of December 31, 2013 and 2012 were prepared using an average price equal to the unweighted arithmetic average of hydrocarbon
prices received on the first day of each month within the 12-month periods ended December 31, 2013 and 2012, respectively, in accordance with guidelines of the SEC applicable to reserves
estimates as of year-end. Reserve estimates do not include any value for probable or possible reserves that may exist, nor do they include any value for undeveloped acreage. The reserve estimates
represent our net revenue interest in our properties. Although we believe these estimates are reasonable, actual future production, cash flows, development expenditures, operating expenses and
quantities of recoverable oil and natural gas reserves may vary substantially from these estimates.
- (3)
- Represents present value, discounted at 10% per annum, of estimated future net revenue of our estimated proven oil and natural gas reserves. The estimated future net revenues set forth above were determined by using reserve quantities of proved oil and natural reserves and the periods in which they are expected to be developed and produced based on certain prevailing economic conditions. The estimated future production in our oil and natural reserve reports for the years ended December 31, 2013 and 2012 is priced based on the 12-month unweighted arithmetic average of the first-day-of-the month price for the period January through December of the applicable year, using $96.78 per barrel for oil/condensate, $41.23 per barrel for natural gas liquids and $3.67 per Mcf for natural gas during 2013, and using $94.71 per barrel for oil/condensate, $43.24 per barrel for natural gas liquids and $2.76 per Mcf for natural gas during 2012. In each case, prices are adjusted by lease for transportation fees and regional price differentials.
63
PV-10 is considered a non-GAAP measure. The standardized measure of discounted future net cash flows is the most directly comparable GAAP financial measure. PV-10 is equal to the standardized measure of discounted future net cash flows at the applicable date, before deducting future income taxes, discounted at 10%. However, our PV-10 is equal to our standardized measure of discounted future net cash flows because our standardized measure does not include the impact of future federal income taxes because we are not subject to federal income taxes. We believe that the presentation of PV-10 is relevant and useful to investors because it presents the relative monetary significance of our oil and natural gas properties regardless of tax structure. Further, investors may utilize the measure as a basis for comparison of the relative size and value of our reserves to other companies. We use this measure when assessing the potential return on investment related to our oil and natural gas properties. PV-10, however, is not a substitute for the standardized measure of discounted future net cash flows. Our PV-10 measure and the standardized measure of discounted future net cash flows do not purport to present the fair value of our oil and natural gas reserves.
The foregoing oil and natural reserves are all located within the Utica Shale region within the continental United States. Reserve engineering is a subjective process of estimating volumes of economically recoverable oil and natural gas that cannot be measured in an exact manner. The accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation. As a result, the estimates of different engineers often vary. In addition, the results of drilling, testing and production may justify revisions of such estimates. Accordingly, reserve estimates often differ from the quantities of oil and natural gas that are ultimately recovered. Estimates of economically recoverable oil and natural gas and of future net revenues are based on a number of variables and assumptions, all of which may vary from actual results, including geologic interpretation, prices and future production rates and costs. We have not filed any estimates of total proved oil or natural gas reserves with any federal authority or agency other than the SEC since the beginning of our last fiscal year.
Production, Prices and Production Costs
The following table presents our proportionate portion of production volumes, average prices received and average production costs from our Utica Shale properties for the years ended December 31, 2013 and 2012. Information for 2011 is not presented as exploration and production did not begin until early 2012.
| |
For the year ended December 31, |
||||||
|---|---|---|---|---|---|---|---|
| |
2013 | 2012 | |||||
Production Volumes: |
|||||||
Oil (MBbls) |
24.6 | 2.0 | |||||
Gas (MMcf) |
710.3 | 21.8 | |||||
Natural gas liquids (MGal) |
865.6 | 5.2 | |||||
Oil equivalents (MBOE) |
163.6 | 5.8 | |||||
Average Prices: |
|||||||
Oil (per Bbl) |
$ | 92.53 | $ | 78.08 | |||
Gas (per Mcf) |
$ | 3.19 | $ | 3.82 | |||
Natural gas liquids (per Gal) |
$ | 1.25 | $ | 1.63 | |||
Oil equivalents (per BOE) |
$ | 34.38 | $ | 43.03 | |||
Average Production Costs: |
|||||||
Average production costs (per BOE) |
$ | 7.87 | $ | 7.10 | |||
Average production taxes (per BOE) |
$ | 0.28 | $ | 0.22 | |||
| | | | | | | | |
Total production costs and production taxes (per BOE) |
$ | 8.15 | $ | 7.32 | |||
| | | | | | | | |
| | | | | | | | |
64
Productive Wells and Acreage
The following table presents our total gross productive and non-productive wells, expressed separately for oil and gas, and the total gross and net developed and undeveloped acres as of December 31, 2013. Note that only gross well figures have been disclosed for ease of presentation as we have a 5% interest in the wells and acreage in the Utica Shale properties.
| |
|
|
|
|
Developed acreage |
Non-developed acreage |
|||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Productive oil wells |
Productive gas wells |
Non- productive oil wells |
Non- productive gas wells |
|||||||||||||||||||||
Field
|
Gross | Net | Gross | Net | |||||||||||||||||||||
Utica Shale |
17 | 26 | 9 | 11 | 10,600 | 530 | 141,700 | 7,085 | |||||||||||||||||
Office Facilities
We lease office space at 424 Lewis Hargett Circle, Lexington, Kentucky for our executives and administrative support staff. The lease was set to expire August 2013 and we executed an amendment to this lease to extend the lease term for five additional years to August 2018. In addition, we lease a building primarily for our administrative support staff at 265 Hambley Boulevard, Pikeville, Kentucky, which lease expires June 2015, subject to us having a five-year renewal option.
We may, from time to time, be involved in various legal proceedings and claims arising out of our operations in the normal course of business. While many of these matters involve inherent uncertainty, we do not believe that we are a party to any legal proceedings or claims that will have a material adverse impact on our business, financial condition or results of operations.
Item 4. Mine Safety Disclosures.
Information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K for the year ended December 31, 2013 is included in Exhibit 95.1 to this report.
65
Item 5. Market for Registrant's Common Equity, Related Unitholder Matters and Issuer Purchases of Equity Securities.
Our Limited Partnership Interests
Our common units began trading on the NYSE under the symbol "RNO" on September 30, 2010. On March 7, 2014, the closing market price for our common units was $12.57 per unit. The following table sets forth the range of the daily high and low sales prices and cash distribution per common unit for the periods indicated:
| |
Price Range | |
||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
Cash Distribution(1) |
|||||||||
| |
High | Low | ||||||||
Year ended December 31, 2013 |
||||||||||
Fourth Quarter |
$ | 13.49 | $ | 9.81 | $ | 0.445 | ||||
Third Quarter |
$ | 14.30 | $ | 11.87 | $ | 0.445 | ||||
Second Quarter |
$ | 14.83 | $ | 12.77 | $ | 0.445 | ||||
First Quarter |
$ | 17.04 | $ | 12.82 | $ | 0.445 | ||||
Year ended December 31, 2012 |
||||||||||
Fourth Quarter |
$ | 17.41 | $ | 12.11 | $ | 0.445 | ||||
Third Quarter |
$ | 16.19 | $ | 13.01 | $ | 0.445 | ||||
Second Quarter |
$ | 19.17 | $ | 12.61 | $ | 0.445 | ||||
First Quarter |
$ | 22.26 | $ | 17.91 | $ | 0.480 | ||||
- (1)
- Represents cash distributions attributable to the quarter. Cash distributions declared in respect of a calendar quarter are paid in the following calendar quarter.
As of March 7, 2014, we had outstanding 16,680,824 common units, 12,397,000 subordinated units, a 2% general partner interest and incentive distribution rights, or IDRs. As of March 7, 2014, Rhino Energy Holdings LLC, a Wexford owned entity, owned approximately 36.0% of our outstanding common units and 69.4% of our subordinated units. Our general partner currently owns a 2.0% general partner interest in us and all of our IDRs.
As of March 7, 2014, there were 98 holders of record of our common units. The number of record holders does not include holders of units in "street names" or persons, partnerships, associations, corporations or other entities identified in security position listings maintained by depositories.
Cash Distribution Policy
We will make a minimum quarterly distribution of $0.445 per common unit (or $1.78 per common unit on an annualized basis) to the extent we have sufficient available cash. Available cash is generally defined as cash from operations after establishment by our general partner of cash reserves to provide for the conduct of our business, to comply with applicable law, any of our debt instruments or other agreements or to provide for future distributions to unitholders for any one or more of the next four quarters, and payment of costs and expenses, including reimbursement of expenses to our general partner and its affiliates. These expenses include salary, bonus, incentive compensation and other amounts paid to persons who perform services for us or on our behalf and expenses allocated to our general partner by its affiliates. Our partnership agreement does not set a limit on the amount of cash reserves that our general partner may establish or the amount of expenses for which our general partner and its affiliates may be reimbursed. Available cash may also include, if our general partner so determines, all or any portion of the cash on hand on the date of determination of available cash for the quarter resulting from working capital borrowings made subsequent to the end of such quarter. We
66
may also borrow to fund distributions in quarters when we generate less available cash than necessary to sustain or grow our cash distributions per unit.
There is no guarantee that we will distribute quarterly cash distributions to our unitholders. Our distribution policy is subject to certain restrictions and may be changed at any time. The reasons for such uncertainties in our stated cash distribution policy include the following factors:
- •
- Our cash distribution policy is subject to restrictions on distributions under our credit agreement. Our credit agreement
contains financial tests and covenants that we must satisfy. These financial tests and covenants are described in "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations—Liquidity and Capital Resources—Credit Agreement." Should we be unable to satisfy these restrictions or if we are otherwise in default under our credit
agreement, we would be prohibited from making cash distributions notwithstanding our cash distribution policy.
- •
- Our general partner will have the authority to establish cash reserves for the prudent conduct of our business and for
future cash distributions to our unitholders, and the establishment of or increase in those reserves could result in a reduction in cash distributions from levels we currently anticipate pursuant to
our stated cash distribution policy. Our partnership agreement does not set a limit on the amount of cash reserves that our general partner may establish.
- •
- Prior to making any distribution on the common units, we will reimburse our general partner and its affiliates for all
expenses they incur and payments they make on our behalf. Our partnership agreement provides that our general partner will determine in good faith the expenses that are allocable to us. The
reimbursement of expenses and payment of fees, if any, to our general partner and its affiliates will reduce the amount of available cash to pay cash distributions to our unitholders.
- •
- While our partnership agreement requires us to distribute all of our available cash, our partnership agreement, including
provisions requiring us to make cash distributions contained therein, may be amended. Our partnership agreement generally may not be amended during the subordination period without the approval of our
public common unitholders. However, our partnership agreement can be amended with the consent of our general partner and the approval of a majority of the outstanding common units (including common
units held by Wexford) after the subordination period has ended.
- •
- Even if our cash distribution policy is not modified or revoked, the amount of distributions we pay under our cash
distribution policy and the decision to make any distribution is determined by our general partner, taking into consideration the terms of our partnership agreement.
- •
- Under Section 17-607 of the Delaware Act, we may not make a distribution if the distribution would cause our
liabilities to exceed the fair value of our assets.
- •
- We may lack sufficient cash to pay distributions to our unitholders due to cash flow shortfalls attributable to a number
of operational, commercial or other factors as well as increases in our operating or selling, general and administrative expenses, principal and interest payments on our outstanding debt, tax
expenses, working capital requirements and anticipated cash needs.
- •
- If we make distributions out of capital surplus, as opposed to operating surplus, such distributions will result in a
reduction in the minimum quarterly distribution and the target distribution levels. However, we do not anticipate that we will make any distributions from capital surplus.
- •
- Our ability to make distributions to our unitholders depends on the performance of our subsidiaries and their ability to distribute cash to us. The ability of our subsidiaries to make distributions to us may be restricted by, among other things, the provisions of existing and future
67
indebtedness, applicable state partnership and limited liability company laws and other laws and regulations.
Our partnership agreement requires us to distribute all of our available cash each quarter in the following manner:
- •
- first, 98.0% to the holders of common units and 2.0% to our general partner, until each common unit has received the
minimum quarterly distribution of $0.445 plus any arrearages from prior quarters;
- •
- second, 98.0% to the holders of subordinated units and 2.0% to our general partner, until each subordinated unit has
received the minimum quarterly distribution of $0.445; and
- •
- third, 98.0% to all unitholders, pro rata, and 2.0% to our general partner, until each unit has received a distribution of $0.51175.
If cash distributions to our unitholders exceed $0.51175 per unit in any quarter, our unitholders and our general partner will receive distributions according to the following percentage allocations:
| |
Marginal Percentage Interest in Distributions |
||||||
|---|---|---|---|---|---|---|---|
Total Quarterly Distribution Target Amount
|
Unitholders | General Partner |
|||||
Above $0.51175 up to $0.55625 |
85.0 | % | 15.0 | % | |||
Above $0.55625 up to $0.6675 |
75.0 | % | 25.0 | % | |||
Above $0.6675 |
50.0 | % | 50.0 | % | |||
The percentage interest shown of our general partner includes its 2.0% general partner interest. Our general partner is entitled to 2.0% of all distributions that we make prior to our liquidation. Our partnership agreement provides our general partner the right, but not the obligation, to contribute capital to maintain its 2.0% general partner interest in us if we issue additional units in the future. Thus, if our general partner elects not to make such a capital contribution, its interest will be proportionately reduced.
During the subordination period, before we make any quarterly distributions to our subordinated unitholders, our common unitholders are entitled to receive payment of the minimum quarterly distribution plus any arrearages in distributions from prior quarters. The subordination period will end on the first business day after we have earned and paid at least (i) $1.78 (the minimum quarterly distribution on an annualized basis) on each outstanding unit and the corresponding distribution on our general partner's general partner interest for each of three consecutive, non-overlapping four quarter periods ending after September 30, 2013 or (ii) $2.67 (150.0% of the annualized minimum quarterly distribution) on each outstanding unit and the corresponding distributions on our general partner's general partner interest and the incentive distribution rights for the four-quarter period immediately preceding that date. The subordination period also will end upon the removal of our general partner other than for cause if no subordinated units or common units held by the holders of subordinated units or their affiliates are voted in favor of that removal. When the subordination period ends, all subordinated units will convert into common units on a one-for-one basis, and all common units thereafter will no longer be entitled to arrearages.
We have not paid any distributions on our subordinated units for any quarter after the quarter ended March 31, 2012.
We will pay our distributions on or about the 15th day of each of February, May, August and November to holders of record on or about the 1st day of each such month. If the distribution date
68
does not fall on a business day, we will make the distribution on the business day immediately preceding the indicated distribution date.
Item 6. Selected Financial Data.
The following table shows our selected financial and operating data for the periods and as of the dates indicated, which is derived from our consolidated financial statements. On October 5, 2010, we closed our IPO of 3,730,600 common units. In conjunction with the IPO, on September 29, 2010 Wexford became obligated to contribute their membership interests in Rhino Energy LLC to us. For ease of reference, we present the historical results of Rhino Energy LLC as our historical results which also includes the portion of fiscal year 2010 results prior to the IPO that contributed to the total 2010 figures presented below as a total for us. The selected historical consolidated financial data presented as of and for the years ended December 31, 2009 are derived from the audited historical consolidated financial statements of Rhino Energy LLC that are not included in this report. The selected historical consolidated financial data presented as of December 31, 2011 and 2010 are derived from our audited historical consolidated financial statements that are not included in this report. The selected historical consolidated financial data presented as of December 31, 2013 and 2012 and for the years ended December 31, 2013, 2012 and 2011 are derived from our audited historical consolidated financial statements that are included elsewhere in this report.
The following selected consolidated financial data should be read in conjunction with "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Item 8. Financial Statements and Supplementary Data."
The following table presents a non-GAAP financial measure, Adjusted EBITDA, which we use in our business as it is an important supplemental measure of our performance and liquidity. Adjusted EBITDA represents net income before interest expense, income taxes and depreciation, depletion and amortization ("DD&A"), including our proportionate share of DD&A and interest expense for our Rhino Eastern joint venture that is accounted for under the equity method. Adjusted EBITDA also excludes the effect of certain non-cash and/or non-recurring items. This measure is not calculated or presented in accordance with GAAP. We explain this measure under "—Non-GAAP Financial Measure" and reconcile it to its most directly comparable financial measures calculated and presented in accordance with GAAP.
In addition, prior to the issuance of our 2013 financial statements, a determination was made that we had incorrectly calculated and reported our liability and costs for black lung benefits. We had previously accounted for our black lung benefit liability using an event driven approach. It was determined the we should have accounted for our black lung benefit liability using a service cost approach because this approach matches black lung costs over the service lives of the miners who ultimately receive black lung benefits. As a result, the following financial information as of and for the years ended December 31, 2012 and 2011 have been revised from the amounts previously reported to correctly report our liability and costs for black lung benefits. The financial data as of and for the years
69
ending 2010 and 2009 have not been revised since the data to calculate the impact for these periods was not readily available.
| |
For the Year Ended December 31, | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in thousands, except per unit and per ton data)
|
2013 | 2012 | 2011 | 2010 | 2009 | |||||||||||
Statement of Operations Data: |
||||||||||||||||
Total revenues |
$ | 277,891 | $ | 351,991 | $ | 367,221 | $ | 305,647 | $ | 419,790 | ||||||
Costs and Expenses: |
||||||||||||||||
Cost of operations (exclusive of depreciation, depletion and amortization) |
201,042 | 247,783 | 267,603 | 220,756 | 336,335 | |||||||||||
Freight and handling costs |
1,294 | 5,833 | 4,329 | 2,634 | 3,991 | |||||||||||
Depreciation, depletion and amortization |
42,609 | 41,370 | 36,325 | 34,108 | 36,279 | |||||||||||
Selling, general and administrative (exclusive of depreciation, depletion and amortization) |
19,800 | 20,442 | 21,815 | 16,449 | 16,754 | |||||||||||
Asset impairment loss |
1,667 | — | — | 652 | — | |||||||||||
(Gain) loss on sale/acquisition of assets—net |
(10,359 | ) | (4,890 | ) | (3,172 | ) | (10,716 | ) | 1,710 | |||||||
| | | | | | | | | | | | | | | | | |
Total costs and expenses |
256,053 | 310,538 | 326,900 | 263,883 | 395,069 | |||||||||||
| | | | | | | | | | | | | | | | | |
Income from operations |
21,838 | 41,453 | 40,321 | 41,764 | 24,721 | |||||||||||
Interest and other income (expense): |
||||||||||||||||
Interest expense and other |
(7,898 | ) | (7,767 | ) | (6,062 | ) | (5,338 | ) | (6,222 | ) | ||||||
Interest income and other |
207 | 92 | 51 | 24 | 70 | |||||||||||
Equity in net income (loss) of unconsolidated affiliate |
(4,729 | ) | 5,757 | 2,988 | 4,699 | 893 | ||||||||||
| | | | | | | | | | | | | | | | | |
Total interest and other income (expense) |
(12,420 | ) | (1,918 | ) | (3,023 | ) | (615 | ) | (5,259 | ) | ||||||
| | | | | | | | | | | | | | | | | |
Income before income tax |
9,418 | 39,535 | 37,298 | 41,149 | 19,462 | |||||||||||
Income tax |
— | — | — | — | — | |||||||||||
| | | | | | | | | | | | | | | | | |
Net income |
$ | 9,418 | $ | 39,535 | $ | 37,298 | $ | 41,149 | $ | 19,462 | ||||||
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Basic and diluted net income per limited partner common unit(1) |
$ | 0.33 | $ | 1.40 | $ | 1.40 | $ | 0.22 | n/a | |||||||
Distributions paid per limited partner unit |
$ | 1.78 | $ | 1.85 | 1.8108 | n/a | n/a | |||||||||
Weighted average number of limited partner common units outstanding: |
||||||||||||||||
Basic |
15,751 | 15,331 | 13,725 | 12,400 | n/a | |||||||||||
Diluted |
15,760 | 15,335 | 13,744 | 12,413 | n/a | |||||||||||
Balance Sheet Data: |
||||||||||||||||
Cash and cash equivalents |
$ | 423 | $ | 461 | $ | 449 | $ | 76 | $ | 687 | ||||||
Property and equipment, net |
480,487 | 463,960 | 450,116 | 282,577 | 270,680 | |||||||||||
Total assets |
567,767 | 559,876 | 539,203 | 358,645 | 339,984 | |||||||||||
Total liabilities |
271,396 | 260,082 | 237,266 | 111,028 | 201,583 | |||||||||||
Total debt—short term and long term |
171,046 | 163,549 | 143,098 | 36,528 | 122,138 | |||||||||||
Partners' capital/Members' equity |
$ | 296,371 | $ | 299,794 | $ | 301,937 | $ | 247,617 | $ | 138,401 | ||||||
Operating Data(2): |
||||||||||||||||
Tons of coal sold |
3,673 | 4,670 | 4,876 | 4,306 | 6,699 | |||||||||||
Tons of coal produced/purchased |
3,689 | 4,699 | 4,873 | 4,312 | 6,732 | |||||||||||
Coal revenues per ton(3) |
$ | 64.42 | $ | 65.22 | $ | 68.47 | $ | 67.32 | $ | 59.98 | ||||||
Cost of operations per ton(4) |
$ | 54.74 | $ | 53.06 | $ | 54.88 | $ | 51.27 | $ | 50.21 | ||||||
Other Financial Data: |
||||||||||||||||
Net cash provided by operating activities |
$ | 51,730 | $ | 79,744 | $ | 66,916 | $ | 55,001 | $ | 41,495 | ||||||
Net cash used in investing activities |
(43,908 | ) | (58,404 | ) | (188,024 | ) | (37,644 | ) | (27,344 | ) | ||||||
Net cash (used in) provided by financing activities |
(7,860 | ) | (21,328 | ) | 121,481 | (17,968 | ) | (15,401 | ) | |||||||
Adjusted EBITDA |
63,528 | 89,821 | 81,221 | 71,473 | 63,643 | |||||||||||
Capital expenditures(5) |
$ | 54,522 | $ | 61,772 | $ | 211,473 | $ | 41,250 | $ | 29,657 | ||||||
- (1)
- Basic
and diluted earnings per unit for 2010 reflects the period from October 6, 2010 to December 31, 2010, which is the period that net
income was attributable to us as a publicly traded partnership.
- (2)
- In May 2008, we entered into a joint venture with an affiliate of Patriot that acquired the Rhino Eastern mining complex, which commenced production in August 2008. We have a 51% membership interest in, and serve as manager for, the Rhino Eastern joint venture. The operating data do not include data with respect to the Rhino Eastern mining complex. For the years ended December 31, 2013 and 2012, the joint venture produced and sold approximately 0.2 million tons and approximately 0.3 million tons, respectively, of premium mid-vol metallurgical coal
70
- (3)
- Coal
revenues per ton represent total coal revenues derived from the sale of coal from all business segments, divided by total tons of coal sold for all
segments.
- (4)
- Cost
of operations per ton represents the cost of operations (exclusive of depreciation, depletion and amortization) from all business segments divided by
total tons of coal sold for all segments.
- (5)
- The following table presents a reconciliation of total capital expenditures to net cash used for capital expenditures on a historical basis for each of the periods indicated:
| |
For the Year Ended December 31, | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
2013 | 2012 | 2011 | 2010 | 2009 | |||||||||||
| |
(in thousands) |
|||||||||||||||
Reconciliation of total capital expenditures to net cash used for capital expenditures: |
||||||||||||||||
Additions to property, plant and equipment |
$ | 54,522 | $ | 61,772 | $ | 91,856 | $ | 26,248 | $ | 27,836 | ||||||
Acquisitions of coal companies and coal properties |
— | — | 119,617 | 15,002 | — | |||||||||||
Acquisition of roof bolt manufacturing company |
— | — | — | — | 1,821 | |||||||||||
| | | | | | | | | | | | | | | | | |
Total capital expenditures |
$ | 54,522 | $ | 61,772 | $ | 211,473 | $ | 41,250 | $ | 29,657 | ||||||
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Non-GAAP Financial Measure
The following tables present reconciliations of Adjusted EBITDA to the most directly comparable GAAP financial measures for each of the periods indicated. We believe the presentation of Adjusted EBITDA that includes our proportionate share of DD&A and interest expense for our Rhino Eastern joint venture is appropriate since our portion of Rhino Eastern's net income that is recognized as a single line item in our financial statements is affected by these expense items. Since we do not reflect these proportionate expense items of DD&A and interest expense in our consolidated financial statements, we believe that the adjustment for these expense items in the Adjusted EBITDA calculation is more representative of how we review our results and also provides investors with additional information that they can use to evaluate our results. Adjusted EBITDA also excludes the effect of certain non-cash and/or non-recurring items.
71
Adjusted EBITDA should not be considered an alternative to net income, income from operations, cash flows from operating activities or any other measure of financial performance or liquidity presented in accordance with GAAP. Adjusted EBITDA excludes some, but not all, items that affect net income, income from operations and cash flows from operating activities, and these measures may vary among other companies.
| |
For the Year Ended December 31, | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
2013 | 2012 | 2011 | 2010 | 2009 | |||||||||||
| |
(in thousands) |
|||||||||||||||
Reconciliation of Adjusted EBITDA to net income: |
||||||||||||||||
Net income |
$ | 9,418 | $ | 39,535 | $ | 37,298 | $ | 41,149 | $ | 19,462 | ||||||
Plus: |
||||||||||||||||
Depreciation, depletion and amortization |
42,609 | 41,370 | 36,325 | 34,108 | 36,279 | |||||||||||
Interest expense |
7,898 | 7,767 | 6,062 | 5,338 | 6,222 | |||||||||||
Less: |
||||||||||||||||
Income tax benefit |
— | — | — | — | — | |||||||||||
| | | | | | | | | | | | | | | | | |
EBITDA(a) |
$ | 59,925 | $ | 88,672 | $ | 79,685 | $ | 80,595 | $ | 61,964 | ||||||
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Plus: Rhino Eastern DD&A-51% |
994 | 1,070 | 1,509 | 1,630 | 1,460 | |||||||||||
Plus: Rhino Eastern interest expense-51% |
8 | 79 | 27 | 37 | 219 | |||||||||||
Less: Gain from Castle Valley acquisition(b) |
— | — | — | (10,789 | ) | — | ||||||||||
Plus: Non-cash write-off of mining equipment and asset impairment(c) |
2,601 | — | — | — | — | |||||||||||
| | | | | | | | | | | | | | | | | |
Adjusted EBITDA(a) |
$ | 63,528 | $ | 89,821 | $ | 81,221 | $ | 71,473 | $ | 63,643 | ||||||
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Reconciliation of Adjusted EBITDA to net cash provided by operating activities: |
||||||||||||||||
Net cash provided by operating activities |
$ | 51,730 | $ | 79,744 | $ | 66,916 | $ | 55,001 | $ | 41,495 | ||||||
Plus: |
||||||||||||||||
Increase in net operating assets |
— | — | 8,466 | 10,260 | 17,190 | |||||||||||
Decrease in provision for doubtful accounts |
— | — | 19 | — | — | |||||||||||
Gain on sale of assets |
10,359 | 4,878 | 3,172 | — | — | |||||||||||
Gain on acquisition |
— | — | — | 10,789 | — | |||||||||||
Gain on retirement of advance royalties |
— | — | — | — | — | |||||||||||
Amortization of deferred revenue |
1,553 | 929 | 532 | — | — | |||||||||||
Amortization of actuarial gain |
145 | 295 | — | — | — | |||||||||||
Interest expense |
7,898 | 7,767 | 6,062 | 5,338 | 6,222 | |||||||||||
Settlement of litigation |
— | — | — | — | 1,773 | |||||||||||
Equity in net income of unconsolidated affiliates |
— | 5,757 | 2,988 | 4,699 | 893 | |||||||||||
Less: |
||||||||||||||||
Decrease in net operating assets |
599 | 3,330 | — | — | — | |||||||||||
Accretion on interest-free debt |
57 | 222 | 210 | 206 | 200 | |||||||||||
Amortization of advance royalties |
270 | 244 | 1,104 | 865 | 215 | |||||||||||
Amortization of debt issuance costs |
1,295 | 1,075 | 1,043 | 844 | — | |||||||||||
Increase in provision for doubtful accounts |
— | — | — | — | 19 | |||||||||||
Equity-based compensation |
605 | 873 | 727 | 291 | — | |||||||||||
Loss on sale of assets |
— | — | — | 73 | 1,710 | |||||||||||
Loss on asset impairments |
1,667 | — | — | 652 | — | |||||||||||
Loss on retirement of advance royalties |
182 | 100 | 79 | 396 | 712 | |||||||||||
Income tax benefit |
— | — | — | — | — | |||||||||||
Accretion on asset retirement obligations |
2,356 | 1,896 | 1,956 | 2,165 | 2,753 | |||||||||||
Equity in net loss of unconsolidated affiliate |
4,729 | — | — | — | — | |||||||||||
Distributions from unconsolidated affiliate |
— | 2,958 | 3,351 | — | — | |||||||||||
| | | | | | | | | | | | | | | | | |
EBITDA(a) |
$ | 59,925 | $ | 88,672 | $ | 79,685 | $ | 80,595 | $ | 61,964 | ||||||
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Plus: Rhino Eastern DD&A-51% |
994 | 1,070 | 1,509 | 1,630 | 1,460 | |||||||||||
Plus: Rhino Eastern interest expense-51% |
8 | 79 | 27 | 37 | 219 | |||||||||||
Less: Gain from Castle Valley acquisition(b) |
— | — | — | (10,789 | ) | — | ||||||||||
Plus: Non-cash write-off of mining equipment and asset impairment(c) |
2,601 | — | — | — | — | |||||||||||
| | | | | | | | | | | | | | | | | |
Adjusted EBITDA(a) |
$ | 63,528 | $ | 89,821 | $ | 81,221 | $ | 71,473 | $ | 63,643 | ||||||
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
- (a)
- Calculated based on actual amounts and not the rounded amounts presented in this table. Totals may not foot due to rounding.
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- (b)
- During
2010, we acquired certain assets for cash consideration of approximately $15.0 million from the Trustee of the Federal Bankruptcy Court
charged with the sale of the C.W. Mining Company assets, located in Emery and Carbon Counties, Utah (referred to as our Castle Valley mining complex). Because the fair value of the assets acquired
exceeded the purchase price, we recorded a non-cash gain of $10.8 million that is reflected in our 2010 financial results. A gain resulted from this acquisition since the assets were purchased
in a distressed sale out of bankruptcy. Management believes that the isolation and presentation of this specific item to arrive at Adjusted EBITDA is useful because it enhances investors'
understanding of how management assesses the performance of our business. Management believes the adjustment of this item provides investors with additional information that they can utilize in
evaluating our performance. Additionally, management believes the isolation of this item provides investors with enhanced comparability to prior and future periods of our operating results.
- (c)
- During the first quarter of 2013, we incurred a non-cash expense of approximately $0.9 million due to the write-off of a continuous miner that was damaged at one of our underground mines in Central Appalachia. In addition, during the fourth quarter of 2013, we made a strategic decision to permanently close the mining operations at our McClane Canyon mine in Colorado, which resulted in a non-cash impairment charge of approximately $1.7 million. We believe that the isolation and presentation of these specific items to arrive at Adjusted EBITDA is useful because it enhances investors' understanding of how we assess the performance of our business. We believe the adjustment of these items provides investors with additional information that they can utilize in evaluating our performance. Additionally, we believe the isolation of these items provides investors with enhanced comparability to prior and future periods of our operating results.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion of the historical financial condition and results of operations should be read in conjunction with the historical financial statements and accompanying notes included elsewhere in this report. In addition, this discussion includes forward-looking statements that are subject to risks and uncertainties that may result in actual results differing from statements we make. See "Cautionary Note Regarding Forward- Looking Statements." Factors that could cause actual results to differ include those risks and uncertainties discussed in Part I, Item 1A. "Risk Factors."
Prior to the issuance of our 2013 financial statements, a determination was made that we had incorrectly calculated and reported our liability and costs for black lung benefits. We had previously accounted for our black lung benefit liability using an event driven approach under Accounting Standard Codification ("ASC") No. 450, Contingencies. It was determined the we should have accounted for our black lung benefit liability using a service cost approach under ASC 710, Compensation General, because this approach matches black lung costs over the service lives of the miners who ultimately receive black lung benefits. We determined that the effect of this error was not material to our financial statements and disclosures taken as a whole for any period presented. Our financial statements for the years ended December 31, 2012 and 2011 have been revised from the amounts previously reported to correctly report our liability and costs for black lung benefits. The financial statement items impacted include Cost of operations and Equity in net (loss)/income of unconsolidated affiliates in the consolidated statements of operations and comprehensive income and Investments in unconsolidated affiliates, Other non-current assets and Other non-current liabilities in our consolidated statements of financial position. These adjustments had no impact on our consolidated statements of cash flows. The following discussion of our operating results includes revised financial data for the 2012 and 2011 periods.
Overview
We are a diversified energy limited partnership formed in Delaware that is focused on coal and energy related assets and activities, including energy infrastructure investments. We produce, process and sell high quality coal of various steam and metallurgical grades. We market our steam coal primarily to electric utility companies as fuel for their steam powered generators. Customers for our metallurgical coal are primarily steel and coke producers who use our coal to produce coke, which is used as a raw material in the steel manufacturing process. In addition to operating coal properties, we manage and lease coal properties and collect royalties from those management and leasing activities. Our diversified energy portfolio also includes investments in oil and natural gas mineral rights in the Cana Woodford region of western Oklahoma and an investment in the Utica Shale region of eastern Ohio, which we signed a binding letter of intent to sell to a third party for $185 million in February 2014 (details discussed further below). We receive royalty revenue from any hydrocarbons produced
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and sold by operators on our Cana Woodford acreage. In addition, we have expanded our business to include infrastructure support services, including the formation of Razorback, a service company to provide drill pad construction for operators in the Utica Shale, as well as other joint venture investments to provide for the transportation of hydrocarbons and drilling support services in the Utica Shale region. In December 2012, we also invested in a joint venture that will provide sand for fracking operations to drillers in the Utica Shale region and other oil and natural gas basins in the U.S.
We and an affiliate of Wexford participated with Gulfport Energy ("Gulfport"), a publicly traded company, to acquire interests in a portfolio of oil and natural gas leases in the Utica Shale. Our initial position in the Utica Shale consisted of a 10.8% net interest in approximately 80,000 gross acres. During the third quarter of 2012, we completed an exchange of our initial 10.8% position for a pro rata interest in 125,000 gross acres under lease by Gulfport and an affiliate of Wexford Capital. Also during the third quarter of 2012, our position was adjusted to a 5% net interest in the 125,000 gross acres, or approximately 6,250 net acres. As of December 31, 2013, our Utica Shale position consisted of our 5% net interest in a total portfolio of approximately 152,300 gross acres, or approximately 7,615 net acres, for a total purchase price of approximately $31.1 million. In addition, per the joint operating agreement among Rhino, Gulfport and an affiliate of Wexford Capital, we funded our proportionate share of drilling costs to Gulfport for wells drilled on our acreage. As of December 31, 2013, we funded approximately $23.3 million of drilling costs. We received approximately $5.6 million of revenue from this investment for the year ended December 31, 2013.
In February 2014, we signed a binding letter of intent to sell our entire Utica Shale joint interest investment to Gulfport for $185 million, subject to customary closing conditions. The expected sale of our investment in the Utica Shale will allow us to eliminate substantially all of our debt and will give us significant financial flexibility. The elimination of our debt provides us the capability to opportunistically expand our operations and increase our cash flow through the development of existing coal reserves or the potential acquisition of MLP qualifying assets.
We have a geographically diverse asset base with coal reserves located in Central Appalachia, Northern Appalachia, the Illinois Basin and the Western Bituminous region and oil and natural gas investments in the Cana Woodford region in western Oklahoma. As of December 31, 2013, we controlled an estimated 457.7 million tons of proven and probable coal reserves, consisting of an estimated 438.0 million tons of steam coal and an estimated 19.7 million tons of metallurgical coal. In addition, as of December 31, 2013, we controlled an estimated 277.0 million tons of non-reserve coal deposits. As of December 31, 2013, Rhino Eastern LLC, a joint venture in which we have a 51% membership interest and for which we serve as manager, controlled an estimated 43.9 million tons of proven and probable coal reserves at the Rhino Eastern mining complex located in Central Appalachia, consisting entirely of premium mid-vol and low-vol metallurgical coal, and an estimated 18.8 million tons of non-reserve coal deposits. As of December 31, 2013, we operated eight mines, including four underground and four surface mines, located in Kentucky, Ohio, West Virginia and Utah. In addition, our joint venture operated one underground mine in West Virginia. We also had one underground mine located in Colorado that was permanently idled at the end of 2013 (see Note 6 of the consolidated financial statements included elsewhere in this annual report for further information). The number of mines that we operate may vary from time to time depending on a number of factors, including the demand for and price of coal, depletion of economically recoverable reserves and availability of experienced labor. Our oil and natural gas investments as of December 31, 2013 also consisted of approximately 1,900 net mineral acres that we own in the Cana Woodford region..
Our principal business strategy is to safely, efficiently and profitably produce, sell and lease both steam and metallurgical coal from our diverse asset base in order to maintain, and, over time, increase our quarterly cash distributions. In addition, we intend to continue to expand and potentially diversify our operations through strategic acquisitions, including the acquisition of long-term, cash generating
74
natural resource assets, such as our oil and gas investments in the Cana Woodford region. We believe that such assets will allow us to grow our cash available for distribution and enhance our cash flow.
For the year ended December 31, 2013, we generated revenues of approximately $277.9 million and net income of approximately $9.4 million. Excluding results from the Rhino Eastern joint venture, for the year ended December 31, 2013, we produced approximately 3.6 million tons of coal, purchased approximately 0.1 million tons of coal and sold approximately 3.7 million tons of coal, approximately 88% of which were pursuant to supply contracts. Additionally, Rhino Eastern produced and sold approximately 0.2 million tons of premium mid-vol metallurgical coal for the year ended December 31, 2013.
Recent Developments
Follow-on Offering
On September 13, 2013, we completed a public offering of 1,265,000 common units, representing limited partner interests in us, at a price of $12.30 per common unit. Of the common units issued, 165,000 units were issued in connection with the exercise of the underwriters' option to purchase additional units. Net proceeds from the offering were approximately $14.6 million, after deducting underwriting discounts and offering expenses of approximately $1.0 million. We used the net proceeds from this offering, and a related capital contribution by our general partner of approximately $0.3 million, to repay approximately $14.9 million of outstanding indebtedness under our credit facility.
Credit Facility
In April 2013, we entered into an amendment of our amended and restated senior secured credit facility with PNC Bank, N.A., as administrative agent, and a group of lenders, which are parties thereto. The amendment provided for an increase in the maximum allowed investments in coal-related entities outside of our current organization (i.e. joint ventures) under the amended and restated senior secured credit facility from $25 million to $40 million. The amendment also increased the maximum leverage ratio allowed under the amended and restated senior secured credit facility and also altered the pricing grid to include applicable interest rates for borrowings, letter of credit fees and commitment fees on unused borrowings based upon the new maximum leverage ratio. The amendment increased the maximum leverage ratio of the amended and restated senior secured credit facility to 3.75 from April 1, 2013 through March 31, 2015, then steps the maximum leverage ratio down to its previous level of 3.0 after December 31, 2015. All other terms of the amended and restated senior secured credit facility were not affected by the amendment.
Patriot Coal Corporation Bankruptcy
We have a 51% equity interest in the Rhino Eastern joint venture, with Patriot Coal Corporation ("Patriot") owning the remaining membership interest. On July 9, 2012, Patriot filed for Chapter 11 bankruptcy protection and Patriot successfully exited bankruptcy in December 2013.
Acquisition of Coal Property
In May 2012, we completed the purchase of certain rights to coal leases and surface property located in Daviess and McLean counties in western Kentucky for approximately $1.5 million. In addition, we could potentially be required to pay an additional $3.0 million related to this acquisition if certain conditions are met. Of that amount, $2.0 million was initially recorded in in Property, plant and equipment and Accrued expenses related to this acquisition since this additional amount related to the purchase of these assets was probable and estimable. As of December 31, 2013, we have paid the $2.0 million since the conditions requiring payment had been met. The remaining $1.0 million in potential payments has not been recorded because the conditions requiring payment of this amount have not yet occurred.
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The coal leases and property are estimated to contain approximately 32.6 million tons of proven and probable coal reserves that are contiguous to the Green River. The property is fully permitted and provides us with access to Illinois Basin coal that is adjacent to a navigable waterway, which could allow for exports to non-U.S. customers. Initial development of this property has commenced and initial production and sales from our new mine on this property, referred to as the Riveredge mine, is expected to occur in mid-2014.
Oil and Gas Investments
In 2011 we began to invest in oil and natural gas mineral rights in the Utica Shale region of eastern Ohio. As of December 31, 2013, we had invested a total of approximately $31.1 million for a 5% net interest in a portfolio of oil and natural gas leases in the Utica Shale region along with approximately $23.3 million in drilling costs, which represented our proportionate ownership share in the portfolio. Gulfport, the operator of the portfolio, began drilling and testing wells in the region in 2012 and we received our proportionate share (5%) of revenue from the hydrocarbons produced and sold by the operator on our acreage, which totaled approximately $5.6 million for the year ended December 31, 2013. In February 2014, we signed a binding letter of intent to sell our entire Utica Shale joint interest investment to Gulfport for $185 million.
In March 2012, we completed an out-lease agreement with a third party for approximately 1,232 acres we own in the Utica Shale region of Harrison County Ohio. The lease agreement is for an initial five year term with an optional three year renewal period and conveys rights to the lessee to perform drilling and operating activities for producing oil, natural gas or other hydrocarbons. As part of the lease agreement, the third party agreed to pay us the sum of $6,000 per acre as a lease bonus, of which $0.5 million was paid at the signing of the lease agreement. An additional $6.9 million was paid in the second quarter of 2012 totaling approximately $7.4 million of lease bonus payments for approximately 1,232 acres. In addition, the lease agreement stipulates that the third party shall pay us a 20% royalty based upon the gross proceeds received from the sale of oil and/or natural gas recovered from the leased property.
In April 2013, we completed an agreement with a third party to sell the 20% royalty interest for approximately $10.5 million on the 1,232 acres in the Utica Shale. The sale of the royalty interest resulted in a gain of approximately $10.5 million since we had no cost basis associated with the royalty interest.
In September 2013, we completed an agreement with a third party to sell the oil and natural gas mineral rights for approximately 57 acres we own in the Utica Shale region in Harrison County, Ohio for approximately $0.6 million. The sale of this acreage resulted in a gain of approximately $0.6 million since we had no cost basis associated with this property.
We have invested in certain oil and natural gas mineral rights in the Cana Woodford region of western Oklahoma for a total purchase price of approximately $8.1 million. Our investment includes approximately 1,900 net mineral acres that we own in the Cana Woodford region which provide monthly royalty revenue to Rhino.
Other Investments
In December 2012, we made an initial investment of approximately $2.0 million in a new joint venture, Muskie Proppant LLC ("Muskie"), with affiliates of Wexford Capital. Muskie was formed to provide sand for fracking operations to drillers in the Utica Shale region and other oil and natural gas basins in the U.S. We recorded our proportionate portion of the operating loss for the years ended December 31, 2013 and 2012 of approximately $0.5 million and $0.3 million, respectively. During the year ended December 31, 2013, we contributed additional capital based upon our ownership share to the Muskie joint venture in the amount of $0.5 million. In addition, during the year ended December 31, 2013, the Partnership provided a loan based upon its ownership share to Muskie in the amount of $0.2 million that remained outstanding as of December 31, 2013.
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In March 2012, we made an initial investment of approximately $0.1 million in a new joint venture, Timber Wolf Terminals LLC ("Timber Wolf"), with affiliates of Wexford Capital. Timber Wolf was formed to construct and operate a condensate river terminal that will provide barge trans-loading services for parties conducting activities in the Utica Shale region of eastern Ohio. The initial investment was our proportionate minority ownership share to purchase land for the construction site of the condensate river terminal. Timber Wolf had no operating activities during the years ended December 31, 2013 and 2012.
In addition, during the second quarter of 2012 we formed a services company ("Razorback") to provide drill pad construction services in the Utica Shale for drilling operators. Razorback completed the construction and upgrade of eleven drill pads during the year ended December 31, 2013 in addition to the three drill pads completed during 2012. Two impoundments for fracking water were also constructed during 2013 for a total of three completed to date. Additionally, Razorback has constructed several access roads for operators in the Utica Shale region.
Sale of Land Surface Rights
In December 2012, we completed the sale of the surface rights to approximately 134 acres located in Harrison County, Ohio for approximately $1.5 million. We recorded a gain of approximately $1.5 million related to this sale that is included on the (Gain) on sale/disposal of assets—net line of our consolidated statements of operations and comprehensive income.
Sale of Triad Operations
In August 2012, we sold the operations and tangible assets of our roof bolt manufacturing company, Triad, to a third party for $0.5 million of cash consideration. As part of the sale, we retained the rights to certain intellectual property and entered into an exclusive license and option to purchase agreement for this intellectual property with the same third party for potential additional cash consideration. We have not recorded any portion of this additional consideration since this amount is contingent upon the third party determining the viability of the related intellectual property to their specifications, which has since expired. In connection with this sale, we recorded an approximate $0.2 million gain that is recorded on the (Gain) on sale/disposal of assets—net line of our consolidated statements of operations and comprehensive income.
Sale of Mining Assets
In December 2012, we sold certain non-core mining assets located in Pike County, Kentucky to a third party for approximately $0.2 million. The transaction also extinguished certain liabilities related to the assets sold. In relation to the sale of these assets and extinguishment of liabilities, we recorded a gain of approximately $0.9 million, which was higher than the sales amount due to the extinguishment of the liabilities. This gain is included on the (Gain) on sale/disposal of assets—net line of the Partnership's consolidated statements of operations and comprehensive income.
In February 2012, we sold certain non-core mining assets located in Pike County, Kentucky to a third party for approximately $0.6 million. The transaction also extinguished certain liabilities related to the assets sold. In relation to the sale of these assets and extinguishment of liabilities, we recorded a gain of approximately $0.9 million, which was higher than the sales amount due to the extinguishment of the liabilities.
Factors That Impact Our Business
Our results of operations in the near term could be impacted by a number of factors, including (1) adverse weather conditions and natural disasters, (2) poor mining conditions resulting from geological conditions or the effects of prior mining, (3) equipment problems at mining locations, (4) the
77
availability of transportation for coal shipments or (5) the availability and costs of key supplies and commodities such as steel, diesel fuel and explosives.
On a long-term basis, our results of operations could be impacted by, among other factors, (1) changes in governmental regulation, (2) the availability and prices of competing electricity-generation fuels, (3) the world-wide demand for steel, which utilizes metallurgical coal and can affect the demand and prices of metallurgical coal that we produce, (4) our ability to secure or acquire high-quality coal reserves and (5) our ability to find buyers for coal under favorable supply contracts.
We have historically sold a majority of our coal through supply contracts and anticipate that we will continue to do so. As of December 31, 2013, we had commitments under supply contracts to deliver annually scheduled base quantities of coal as follows:
Year
|
Tons (in thousands) |
Number of customers |
|||||
|---|---|---|---|---|---|---|---|
2014 |
3,045 | 19 | |||||
2015 |
1,796 | 4 | |||||
2016 |
1,100 | 2 | |||||
2017 |
1,100 | 2 | |||||
Some of the contracts have sales price adjustment provisions, subject to certain limitations and adjustments, based on a variety of factors and indices.
Results of Operations
Segment Information
We conduct business through five reportable business segments: Central Appalachia, Northern Appalachia, Eastern Met, Rhino Western and Oil and Natural Gas. Additionally, we have an Other category that includes our ancillary businesses. Our Central Appalachia segment consists of three mining complexes: Tug River, Rob Fork and Deane, which, as of December 31, 2013, together included two underground mines, three surface mines and four preparation plants and loadout facilities in eastern Kentucky and southern West Virginia. Additionally, our Central Appalachia segment includes the Elk Horn operations. Our Northern Appalachia segment consists of the Hopedale mining complex, the Sands Hill mining complex, the Leesville field and the Springdale field. The Hopedale mining complex, located in northern Ohio, included one underground mine and one preparation plant and loadout facility as of December 31, 2013. Our Sands Hill mining complex, located in southern Ohio, included two surface mines, a preparation plant and a river terminal as of December 31, 2013. The Eastern Met segment includes our 51% equity interest in the results of operations of the Rhino Eastern joint venture, which owns the Rhino Eastern mining complex, located in West Virginia, and for which we serve as manager. As of December 31, 2013, this complex was comprised of one underground mine and a preparation plant and loadout facility (owned by our joint venture partner). Our Rhino Western segment included our two underground mines in the Western Bituminous region that consisted of our McClane Canyon mine in Colorado that was permanently idled at the end of 2013 and our Castle Valley mining complex in Utah that began production in January 2011. Beginning with our 2013 year-end reporting, we have included a reportable business segment for our oil and natural gas activities. Our Oil and Natural Gas segment includes our Utica Shale and Cana Woodford activities as well as our Razorback drill pad construction operations and our Muskie joint venture to provide sand for fracking operations. Prior to 2013, our oil and natural gas activities were included in our Other category for segment reporting purposes. For periods prior to December 31, 2013, the segment data has been reclassified to separately report our oil and natural gas activities. Our Other category includes our ancillary businesses that consist of our limestone operations and various businesses that provide support services such as reclamation, maintenance and transportation, the cost of which is reflected in our cost of operations.
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During 2012, we changed the method that allocates certain corporate overhead and interest charges to our reportable segments from a method based on production tons to a method based upon the amount invested in fixed assets. We changed the allocation method as a result of additional investments that we made in our non-coal operations. The reportable segment figures in the following discussion and analysis have been re-cast for 2011.
Evaluating Our Results of Operations
Our management uses a variety of financial measurements to analyze our performance, including (1) Adjusted EBITDA, (2) coal revenues per ton and (3) cost of operations per ton.
Adjusted EBITDA. The discussion of our results of operations below includes references to, and analysis of, our segments' Adjusted EBITDA results. Adjusted EBITDA represents net income before deducting interest expense, income taxes and depreciation, depletion and amortization, including our proportionate share of these expense items from our Rhino Eastern LLC joint venture, while also excluding certain non-cash and/or non-recurring items. Adjusted EBITDA is used by management primarily as a measure of our segments' operating performance. Adjusted EBITDA should not be considered an alternative to net income, income from operations, cash flows from operating activities or any other measure of financial performance or liquidity presented in accordance with GAAP. Because not all companies calculate EBITDA identically, our calculation may not be comparable to similarly titled measures of other companies. Please read "—Reconciliation of Adjusted EBITDA to Net Income by Segment" for reconciliations of Adjusted EBITDA to net income by segment for each of the periods indicated.
Coal Revenues Per Ton. Coal revenues per ton represents coal revenues divided by tons of coal sold. Coal revenues per ton are a key indicator of our effectiveness in obtaining favorable prices for our product.
Cost of Operations Per Ton. Cost of operations per ton sold represents the cost of operations (exclusive of DD&A) divided by tons of coal sold. Management uses this measurement as a key indicator of the efficiency of operations.
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Summary
The following table sets forth certain information regarding our revenues, operating expenses, other income and expenses, and operational data for years ended December 31, 2013, 2012 and 2011:
| |
Year Ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
2013 | 2012 | 2011 | |||||||
| |
(in millions) |
|||||||||
Statement of Operations Data: |
||||||||||
Total revenues |
$ | 277.9 | $ | 352.0 | $ | 367.2 | ||||
Costs and expenses: |
||||||||||
Cost of operations (exclusive of DD&A shown separately below) |
201.1 | 247.8 | 267.7 | |||||||
Freight and handling costs |
1.3 | 5.8 | 4.3 | |||||||
Depreciation, depletion and amortization |
42.6 | 41.4 | 36.3 | |||||||
Selling, general and administrative (exclusive of DD&A shown separately above) |
19.8 | 20.5 | 21.8 | |||||||
Asset impairment loss |
1.7 | — | — | |||||||
(Gain) on sale/disposal of assets |
(10.4 | ) | (4.9 | ) | (3.2 | ) | ||||
| | | | | | | | | | | |
Income from operations |
21.8 | 41.4 | 40.3 | |||||||
Interest and other income (expense): |
||||||||||
Interest expense and other |
(7.9 | ) | (7.8 | ) | (6.1 | ) | ||||
Interest income and other |
0.2 | 0.1 | 0.1 | |||||||
Equity in net (loss)/income of unconsolidated affiliates |
(4.7 | ) | 5.8 | 3.0 | ||||||
| | | | | | | | | | | |
Total interest and other income (expense) |
(12.4 | ) | (1.9 | ) | (3.0 | ) | ||||
| | | | | | | | | | | |
Net income |
$ | 9.4 | $ | 39.5 | $ | 37.3 | ||||
| | | | | | | | | | | |
| | | | | | | | | | | |
Other Financial Data |
||||||||||
Adjusted EBITDA |
$ | 63.5 | $ | 89.8 | $ | 81.2 | ||||
| | | | | | | | | | | |
| | | | | | | | | | | |
Year Ended December 31, 2013 Compared to Year Ended December 31, 2012
Summary. For the year ended December 31, 2013, our total revenues decreased to $277.9 million from $352.0 million for the year ended December 31, 2012. We sold 3.7 million tons of coal for the year ended December 31, 2013, which is 1.0 million tons less, or a 21.4% decrease, than the 4.7 million tons of coal sold for the year ended December 31, 2012. This decrease in tons sold was the result of weak demand in the steam coal markets, which resulted in lower coal revenues for 2013 compared to 2012. Coal revenues in 2013 were also negatively impacted by weak met coal prices compared to 2012 levels. We believe the weak demand in the steam coal markets was primarily driven by an over-supply of low priced natural gas that increased stockpiles of coal at electric utilities. We believe utilities are still working to decrease their coal stockpiles, which has extended the weakness in the steam coal markets even though natural gas prices have risen from their previous historic lows. We believe the weak prices in the met coal markets were primarily driven by a decrease in world-wide steel production due to economic weakness in China and Europe.
For the year ended December 31, 2013, our coal inventories decreased by approximately 28,000 tons from the year ended December 31, 2012 as we lowered production levels and sold excess inventory tons.
Net income was $9.4 million for the year ended December 31, 2013 compared to $39.5 million for the year ended December 31, 2012. Adjusted EBITDA decreased to $63.5 million for the year ended December 31, 2013, from $89.8 million for the year ended December 31, 2012. Net income and Adjusted EBITDA decreased year to year as reductions in costs were offset by lower coal revenues. For
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the year ended December 31, 2013, our net income and Adjusted EBITDA was positively impacted by $10.5 million from the sale of our 20% royalty interest on our Utica Shale property, while net income for this period was negatively impacted by approximately $0.9 million due to the non-cash write-off of a continuous miner that was damaged at one of our Central Appalachia underground mines and by approximately $1.7 million due to an asset impairment loss from permanently idling our McClane Canyon mine. For the year ended December 31, 2012, net income and Adjusted EBITDA was positively impacted by the $7.4 million lease bonus payments received for our Utica Shale acreage, which had relatively immaterial costs associated with the transaction. Net income and Adjusted EBITDA were negatively impacted in 2013 due to approximately $4.3 million of net loss from our Rhino Eastern joint venture compared to income of $6.0 million for 2012, each of which represents our proportionate share of income from the Rhino Eastern joint venture in which we have a 51% membership interest and for which we serve as manager.
Tons Sold. The following table presents tons of coal sold by reportable segment for the years ended December 31, 2013 and 2012:
Segment
|
Year Ended December 31, 2013 |
Year Ended December 31, 2012 |
Increase (Decrease) Tons |
%* | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
(in thousands, except %) |
||||||||||||
Central Appalachia |
1,507.7 | 1,756.1 | (248.4 | ) | (14.1 | )% | |||||||
Northern Appalachia |
1,225.0 | 1,875.1 | (650.1 | ) | (34.7 | )% | |||||||
Rhino Western |
940.2 | 1,038.9 | (98.7 | ) | (9.5 | )% | |||||||
| | | | | | | | | | | | | | |
Total*† |
3,672.9 | 4,670.1 | (997.2 | ) | (21.4 | )% | |||||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
- *
- Calculated
percentages and the rounded totals presented are based upon on actual whole ton amounts and not the rounded amounts presented in this table.
- †
- Excludes tons sold by the Rhino Eastern joint venture, which owns the Rhino Eastern mining complex located in West Virginia and for which we serve as manager.
We sold approximately 3.7 million tons of coal in the year ended December 31, 2013 as compared to approximately 4.7 million tons sold for the year ended December 31, 2012. This decrease in tons sold was primarily due to weakness in the steam coal markets, primarily in Northern Appalachia and Central Appalachia. Tons of coal sold in our Central Appalachia segment decreased by approximately 0.3 million, or 14.1%, to approximately 1.5 million tons for the year ended December 31, 2013 from approximately 1.8 million tons for the year ended December 31, 2012. The decrease in total tons sold year-to-year in Central Appalachia was primarily due to weakness in the steam coal markets, partially offset by an increase in met coal tons sold as met coal sales in the spot market increased in 2013 compared to 2012. For our Northern Appalachia segment, tons of coal sold decreased by approximately 0.7 million, or 34.7%, to approximately 1.2 million tons for the year ended December 31, 2013 from approximately 1.9 million tons for the year ended December 31, 2012. The decrease in total tons sold year-to-year was primarily due to lower sales from our Sands Hill complex in Northern Appalachia as market conditions for coal from this operation weakened year-to-year, as well as slightly fewer tons sold at our Hopedale complex. Coal sales from our Rhino Western segment decreased by approximately 0.1 million, or 9.5%, to approximately 0.9 million tons for the year ended December 31, 2013 from approximately 1.0 million tons for the year ended December 31, 2012 as our Castle Valley mine continued to fulfill contracted customer shipments, but had fewer spot sales in 2013 compared to 2012.
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Revenues. The following table presents revenues and coal revenues per ton by reportable segment for the years ended December 31, 2013 and 2012:
Segment
|
Year ended December 31, 2013 |
Year ended December 31, 2012 |
Increase/ (Decrease) $ |
%* | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
(in millions, except per ton data and %) |
||||||||||||
Central Appalachia |
|||||||||||||
Coal revenues |
$ | 126.4 | $ | 161.3 | $ | (34.9 | ) | (21.6 | )% | ||||
Freight and handling revenues |
— | — | — | n/a | |||||||||
Other revenues |
21.0 | 22.1 | (1.1 | ) | (4.9 | )% | |||||||
| | | | | | | | | | | | | | |
Total revenues |
$ | 147.4 | $ | 183.4 | $ | (36.0 | ) | (19.6 | )% | ||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Coal revenues per ton* |
$ | 83.85 | $ | 91.83 | $ | (7.98 | ) | (8.7 | )% | ||||
Northern Appalachia |
|||||||||||||
Coal revenues |
$ | 72.2 | $ | 102.9 | $ | (30.7 | ) | (29.8 | )% | ||||
Freight and handling revenues |
2.2 | 6.3 | (4.1 | ) | (66.1 | )% | |||||||
Other revenues |
6.0 | 12.8 | (6.8 | ) | (52.9 | )% | |||||||
| | | | | | | | | | | | | | |
Total revenues |
$ | 80.4 | $ | 122.0 | $ | (41.6 | ) | (34.1 | )% | ||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Coal revenues per ton* |
$ | 58.95 | $ | 54.87 | $ | 4.08 | 7.4 | % | |||||
Rhino Western |
|||||||||||||
Coal revenues |
$ | 38.0 | $ | 40.4 | $ | (2.4 | ) | (6.1 | )% | ||||
Freight and handling revenues |
— | — | — | n/a | |||||||||
Other revenues |
0.3 | 0.3 | — | 0.3 | % | ||||||||
| | | | | | | | | | | | | | |
Total revenues |
$ | 38.3 | $ | 40.7 | $ | (2.4 | ) | (6.0 | )% | ||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Coal revenues per ton* |
$ | 40.37 | $ | 38.89 | $ | 1.48 | 3.8 | % | |||||
Oil and Natural Gas** |
|||||||||||||
Coal revenues |
n/a | n/a | n/a | n/a | |||||||||
Freight and handling revenues |
n/a | n/a | n/a | n/a | |||||||||
Other revenues |
$ | 10.1 | $ | 1.9 | $ | 8.2 | 431.6 | % | |||||
| | | | | | | | | | | | | | |
Total revenues |
$ | 10.1 | $ | 1.9 | $ | 8.2 | 431.6 | % | |||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Coal revenues per ton* |
n/a | n/a | n/a | n/a | |||||||||
Other** |
|||||||||||||
Coal revenues |
n/a | n/a | n/a | n/a | |||||||||
Freight and handling revenues |
n/a | n/a | n/a | n/a | |||||||||
Other revenues |
$ | 1.7 | $ | 4.0 | $ | (2.3 | ) | (56.6 | )% | ||||
| | | | | | | | | | | | | | |
Total revenues |
$ | 1.7 | $ | 4.0 | $ | (2.3 | ) | (56.6 | )% | ||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Coal revenues per ton* |
n/a | n/a | n/a | n/a | |||||||||
Total |
|||||||||||||
Coal revenues |
$ | 236.6 | $ | 304.6 | $ | (68.0 | ) | (22.3 | )% | ||||
Freight and handling revenues |
2.2 | 6.3 | (4.1 | ) | (66.0 | )% | |||||||
Other revenues |
39.1 | 41.1 | (2.0 | ) | (4.7 | )% | |||||||
| | | | | | | | | | | | | | |
Total revenues |
$ | 277.9 | $ | 352.0 | $ | (74.1 | ) | (21.1 | )% | ||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Coal revenues per ton* |
$ | 64.42 | $ | 65.22 | $ | (0.80 | ) | (1.2 | )% | ||||
- *
- Percentages
and per ton amounts are calculated based on actual amounts and not the rounded amounts presented in this table.
- **
- The Oil and Natural Gas segment does not relate to coal production. The Other category includes results for our ancillary businesses. The activities performed by these ancillary businesses also do not directly relate to coal production. As a result, coal revenues and coal revenues per ton are not presented for the Oil and Natural Gas segment or the Other category.
82
Our total revenues for the year ended December 31, 2013 decreased by $74.1 million, or 21.1%, to $277.9 million from $352.0 million for the year ended December 31, 2012. The decrease in total revenues was primarily due to lower coal revenues from fewer steam coal tons sold and lower met coal prices in Central Appalachia, as well as fewer tons sold from our Sands Hill complex in Northern Appalachia as market conditions for coal from this operation weakened year-to-year. Coal revenues per ton were $64.42 for the year ended December 31, 2013, a decrease of $0.80, or 1.2%, from $65.22 per ton for the year ended December 31, 2012. This decrease in coal revenues per ton was primarily the result of lower prices for met coal sold in Central Appalachia, partially offset by an increase in coal revenues per ton in our Northern Appalachia segment primarily due to fewer lower priced tons being sold from our Sands Hill complex in 2013 compared to 2012.
For our Central Appalachia segment, coal revenues decreased by $34.9 million, or 21.6%, to $126.4 million for the year ended December 31, 2013 from $161.3 million for the year ended December 31, 2012 primarily due to fewer steam coal tons sold and a decrease in the price for met coal tons sold. Coal revenues per ton for our Central Appalachia segment decreased by $7.98, or 8.7%, to $83.85 per ton for the year ended December 31, 2013 as compared to $91.83 for the year ended December 31, 2012, primarily due to lower price for metallurgical coal sold. Other revenues decreased for our Central Appalachia segment primarily due to lower coal royalty revenue from our coal leasing operations as our lessees had lower selling prices for their coal in 2013 compared to 2012.
For our Northern Appalachia segment, coal revenues were $72.2 million for the year ended December 31, 2013, a decrease of $30.7 million, or 29.8%, from $102.9 million for the year ended December 31, 2012. This decrease was primarily due to fewer tons sold from our Sands Hill complex in Northern Appalachia as mentioned earlier and slightly fewer tons sold at our Hopedale complex. Coal revenues per ton for our Northern Appalachia segment increased by $4.08, or 7.4%, to $58.95 per ton for the year ended December 31, 2013 as compared to $54.87 per ton for the year ended December 31, 2012. This increase was primarily due to fewer lower priced tons being sold from our Sands Hill complex as market conditions for coal from this operation weakened year-to-year. Other revenues decreased for our Northern Appalachia segment primarily due to the $7.4 million lease bonus received in 2012 for acreage owned in the Utica Shale region that was not present in the 2013 comparable period.
For our Rhino Western segment, coal revenues decreased by $2.4 million, or 6.1%, to $38.0 million for the year ended December 31, 2013 from $40.4 million for the year ended December 31, 2012 due to slightly fewer tons sold from our Castle Valley mine. Coal revenues per ton for our Rhino Western segment were $40.37 for the year ended December 31, 2013, an increase of $1.48, or 3.8%, from $38.89 for the year ended December 31, 2012. The increase in coal revenues per ton was due to a decrease in lower-priced spot sales from our Castle Valley mine in 2013 when compared to 2012.
In our Oil and Natural Gas segment, total revenues increased by $8.2 million to $10.1 million for the year ended December 31, 2013 from $1.9 million for the year ended December 31, 2012. This increase was primarily due to our portion of revenue from our Utica Shale investment where drilling and operation of wells did not begin until late in 2012 and accelerated throughout 2013.
Other revenues for our Other category decreased by $2.3 million for the year ended December 31, 2013 from the year ended December 31, 2012. The decrease in other revenues was primarily due to the sale of our Triad roof bolt manufacturing operation in September 2012, which generated revenue in 2012 that is not present in the 2013 comparable period.
83
Central Appalachia Overview of Results by Product. Additional information for the Central Appalachia segment detailing the types of coal produced and sold, premium high-vol metallurgical coal and steam coal, is presented below. Note that our Northern Appalachia and Rhino Western segments currently produce and sell only steam coal.
(In thousands, except per ton data and %)
|
Year ended December 31, 2013 |
Year ended December 31, 2012 |
Increase (Decrease) %* |
|||||||
|---|---|---|---|---|---|---|---|---|---|---|
Met coal tons sold |
597.9 | 467.8 | 27.8 | % | ||||||
Steam coal tons sold |
909.8 | 1,288.3 | (29.4 | )% | ||||||
| | | | | | | | | | | |
Total tons sold† |
1,507.7 | 1,756.1 | (14.1 | )% | ||||||
| | | | | | | | | | | |
| | | | | | | | | | | |
Met coal revenue |
$ | 53,721 | $ | 59,511 | (9.7 | )% | ||||
Steam coal revenue |
$ | 72,699 | $ | 101,762 | (28.6 | )% | ||||
| | | | | | | | | | | |
Total coal revenue† |
$ | 126,420 | $ | 161,273 | (21.6 | )% | ||||
| | | | | | | | | | | |
| | | | | | | | | | | |
Met coal revenues per ton |
$ | 89.86 | $ | 127.21 | (29.4 | )% | ||||
Steam coal revenues per ton |
$ | 79.90 | $ | 78.99 | 1.2 | % | ||||
| | | | | | | | | | | |
Total coal revenues per ton† |
$ | 83.85 | $ | 91.83 | (8.7 | )% | ||||
| | | | | | | | | | | |
| | | | | | | | | | | |
Met coal tons produced |
570.5 | 468.3 | 21.8 | % | ||||||
Steam coal tons produced |
958.7 | 1,336.2 | (28.2 | )% | ||||||
| | | | | | | | | | | |
Total tons produced† |
1,529.2 | 1,804.5 | (15.3 | )% | ||||||
| | | | | | | | | | | |
| | | | | | | | | | | |
- *
- Percentages
and per ton amounts are calculated based on actual amounts and not the rounded amounts presented in this table.
- †
- Excludes data for the Rhino Eastern mining complex located in West Virginia for which we serve as manager.
84
Costs and Expenses. The following table presents costs and expenses (including the cost of purchased coal) and cost of operations per ton by reportable segment for the years ended December 31, 2013 and 2012:
Segment
|
Year ended December 31, 2013 |
Year ended December 31, 2012 |
Increase/ (Decrease) $ |
%* | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
(in millions, except per ton data and %) |
||||||||||||
Central Appalachia |
|||||||||||||
Cost of operations (exclusive of depreciation, depletion and amortization shown separately below) |
$ |
100.0 |
$ |
125.8 |
$ |
(25.8 |
) |
(20.5 |
)% |
||||
Freight and handling costs |
0.3 | 0.5 | (0.2 | ) | (44.8 | )% | |||||||
Depreciation, depletion and amortization |
24.2 | 26.3 | (2.1 | ) | (7.8 | )% | |||||||
Selling, general and administrative |
18.5 | 19.0 | (0.5 | ) | (2.5 | )% | |||||||
Cost of operations per ton* |
$ | 66.33 | $ | 71.62 | $ | (5.29 | ) | (7.4 | )% | ||||
Northern Appalachia |
|||||||||||||
Cost of operations (exclusive of depreciation, depletion and amortization shown separately below) |
$ |
52.4 |
$ |
76.0 |
$ |
(23.6 |
) |
(31.0 |
)% |
||||
Freight and handling costs |
1.0 | 5.3 | (4.3 | ) | (80.9 | )% | |||||||
Depreciation, depletion and amortization |
8.1 | 8.3 | (0.2 | ) | (2.5 | )% | |||||||
Selling, general and administrative |
0.3 | 0.3 | — | (17.6 | )% | ||||||||
Cost of operations per ton* |
$ | 42.79 | $ | 40.54 | $ | 2.25 | 5.5 | % | |||||
Rhino Western |
|||||||||||||
Cost of operations (exclusive of depreciation, depletion and amortization shown separately below) |
$ |
30.7 |
$ |
27.5 |
$ |
3.2 |
11.7 |
% |
|||||
Freight and handling costs |
— | — | — | n/a | |||||||||
Depreciation, depletion and amortization |
5.5 | 4.7 | 0.8 | 17.7 | % | ||||||||
Selling, general and administrative |
0.1 | 0.1 | — | (5.4 | )% | ||||||||
Cost of operations per ton* |
$ | 32.62 | $ | 26.42 | $ | 6.20 | 23.5 | % | |||||
Oil and Natural Gas |
|||||||||||||
Cost of operations (exclusive of depreciation, depletion and amortization shown separately below) |
$ |
5.3 |
$ |
1.5 |
$ |
3.8 |
251.3 |
% |
|||||
Freight and handling costs |
— | — | — | n/a | |||||||||
Depreciation, depletion and amortization |
3.1 | 0.1 | 3.0 | n/a | |||||||||
Selling, general and administrative |
0.1 | — | 0.1 | 145.5 | % | ||||||||
Cost of operations per ton** |
n/a | n/a | n/a | n/a | |||||||||
Other |
|||||||||||||
Cost of operations (exclusive of depreciation, depletion and amortization shown separately below) |
$ |
12.7 |
$ |
17.0 |
$ |
(4.3 |
) |
(25.4 |
)% |
||||
Freight and handling costs |
— | — | — | n/a | |||||||||
Depreciation, depletion and amortization |
1.7 | 2.0 | (0.3 | ) | (15.2 | )% | |||||||
Selling, general and administrative |
0.8 | 1.1 | (0.3 | ) | (15.8 | )% | |||||||
Cost of operations per ton** |
n/a | n/a | n/a | n/a | |||||||||
Total |
|||||||||||||
Cost of operations (exclusive of depreciation, depletion and amortization shown separately below) |
$ |
201.1 |
$ |
247.8 |
$ |
(46.7 |
) |
(18.9 |
)% |
||||
Freight and handling costs |
1.3 | 5.8 | (4.5 | ) | (77.8 | )% | |||||||
Depreciation, depletion and amortization |
42.6 | 41.4 | 1.2 | 3.0 | % | ||||||||
Selling, general and administrative |
19.8 | 20.5 | (0.7 | ) | (3.1 | )% | |||||||
Cost of operations per ton* |
$ | 54.74 | $ | 53.06 | $ | 1.68 | 3.2 | % | |||||
- *
- Percentages and per ton amounts are calculated based on actual amounts and not the rounded amounts presented in this table.
85
- **
- Cost of operations for our Oil and Natural Gas segment do not relate to coal production. Cost of operations presented for our Other category includes costs incurred by our ancillary businesses. The activities performed by these ancillary businesses also do not directly relate to coal production. As a result, per ton measurements are not presented for our Oil and Natural Gas segment or our Other category.
Cost of Operations. Total cost of operations was $201.1 million for the year ended December 31, 2013 as compared to $247.8 million for the year ended December 31, 2012. Total cost of operations decreased primarily due to lower production at our Sands Hill complex in Northern Appalachia, which was in response to weak market conditions for coal from this complex, as well as decreased costs from purchased coal in Central Appalachia. Our cost of operations per ton was $54.74 for the year ended December 31, 2013; an increase of $1.68, or 3.2%, from the year ended December 31, 2012. The increase in the cost of operations on a per ton basis was primarily due to the sequence of mining at our Castle Valley mine in our Rhino Western segment where we performed more higher cost advance mining during 2013 compared to more lower cost retreat mining that was performed in 2012.
Our cost of operations for the Central Appalachia segment decreased by $25.8 million, or 20.5%, to $100.0 million for the year ended December 31, 2013 from $125.8 million for the year ended December 31, 2012. Our total cost of operations decreased for Central Appalachia primarily due to decreased costs from purchased coal in 2013 compared to 2012. Our cost of operations per ton decreased to $66.33 per ton for the year ended December 31, 2013 from $71.62 per ton for year ended December 31, 2012. The decrease in cost of operations per ton was primarily due to the fact that we idled a majority of the Central Appalachia operations in June and early July of 2012 in order to reduce higher than normal inventory levels, which resulted in a higher cost per ton figure for the 2012 period when compared to 2013.
In our Northern Appalachia segment, our cost of operations decreased by $23.6 million, or 31.0%, to $52.4 million for the year ended December 31, 2013 from $76.0 million for the year ended December 31, 2012. The decrease in cost of operations was primarily due to lower production at our Sands Hill complex in Northern Appalachia, which was in response to weak market conditions for coal from this complex. Our cost of operations per ton increased to $42.79 for the year ended December 31, 2013 from $40.54 for the year ended December 31, 2012, an increase of $2.25 per ton, or 5.5%. The increase in cost of operations per ton was primarily due to reducing production volumes at Sands Hill.
Cost of operations in our Rhino Western segment increased by $3.2 million, or 11.7%, to $30.7 million for the year ended December 31, 2013 from $27.5 million for the year ended December 31, 2012. Our cost of operations per ton increased to $32.62 for the year ended December 31, 2013 from $26.42 for the year ended December 31, 2012, an increase of $6.20 per ton, or 23.5%. The increases in cost of operations and cost of operations per ton were primarily due to the sequence of mining at our Castle Valley mine. During 2013, the mine was primarily advancing the sections which drove higher cost compared to the lower-cost retreat mining that was performed in 2012.
Cost of operations in our Oil and Natural Gas segment increased by $3.8 million to $5.3 million for the year ended December 31, 2013 from $1.5 million for the year ended December 31, 2012. The increase in cost of operations was primarily due to increased activity in our Razorback drill pad construction business during 2013 compared to 2012, as well as an increase in our proportionate costs for drilling activity on our Utica Shale acreage during 2013 compared to 2012.
Cost of operations in our Other category decreased by $4.3 million to $12.7 million for the year ended December 31, 2013 compared to $17.0 million the year ended December 31, 2012. This decrease was primarily due to the sale of our Triad roof bolt manufacturing operation in September 2012, which incurred cost in 2012 that is not present in the 2013 comparable period.
Freight and Handling. Total freight and handling cost for the year ended December 31, 2013 decreased by $4.5 million, or 77.8%, to $1.3 million from $5.8 million for the year ended December 31,
86
2012. This decrease was primarily due to the decrease in tons of coal sold for 2013 compared to 2012 from our Sands Hill complex, which requires transportation by truck to customers' locations.
Depreciation, Depletion and Amortization. Total DD&A expense for the year ended December 31, 2013 was $42.6 million as compared to $41.4 million for the year ended December 31, 2012.
For the year ended December 31, 2013, our depreciation cost was $31.9 million as compared to $32.7 million for the year ended December 31, 2012. This decrease is primarily due to a decrease in machinery and equipment depreciation from our Central Appalachia operations.
For the year ended December 31, 2013, our depletion cost was $8.0 million as compared to $5.9 million for the year ended December 31, 2012. This increase is primarily attributable to our proportionate share of the Utica Shale oil and gas depletion that was not present in the prior period, partially offset by a decrease in depletion cost from fewer tons produced for the year ended December 31, 2013 compared to 2012 due to weakness in the met and steam coal markets.
For the year ended December 31, 2013, our amortization cost was relatively flat at $2.7 million as compared to $2.8 million for the year ended December 31, 2012.
Selling, General and Administrative. Selling, general and administrative ("SG&A") expense for the year ended December 31, 2013 was $19.8 million as compared to $20.5 million for the year ended December 31, 2012. The decrease in SG&A expense is primarily attributable to a decrease in expenditures for legal fees and other professional fees.
Interest Expense. Interest expense for the year ended December 31, 2013 was $7.9 million as compared to $7.8 million for the year ended December 31, 2012, an increase of $0.1 million, or 1.7%. This increase was the result of an increase in the balance outstanding under our credit facility.
Eastern Met Supplemental Data. Operational and financial data for the Rhino Eastern joint venture in which we have a 51% membership interest and for which we serve as manager (referred to as the "Eastern Met" segment) is presented below. Our consolidated revenue and costs do not include any portion of the revenue or costs of Rhino Eastern since we account for this operation under the equity method. We only record our proportionate share of net income of Rhino Eastern as a single item in our financial statements, but we believe the presentation of these items for Rhino Eastern provides additional insight into how this operation contributes to our overall performance.
(In thousands, except per ton data and %)
|
Year ended December 31, 2013 |
Year ended December 31, 2012 |
Increase (Decrease) %* |
|||||||
|---|---|---|---|---|---|---|---|---|---|---|
Eastern Met 100% Basis |
||||||||||
Coal revenues |
$ | 27,724 | $ | 55,187 | (49.8 | )% | ||||
Total revenues |
$ | 27,853 | $ | 55,221 | (49.6 | )% | ||||
Coal revenues per ton* |
$ | 111.27 | $ | 185.98 | (40.2 | )% | ||||
Cost of operations |
$ | 31,543 | $ | 36,728 | (14.1 | )% | ||||
Cost of operations per ton* |
$ | 126.60 | $ | 123.77 | 2.3 | % | ||||
Depreciation, depletion and amortization |
$ | 1,949 | $ | 2,098 | (7.1 | )% | ||||
Interest expense |
$ | 17 | $ | 155 | (89.3 | )% | ||||
Net income (loss) |
($ | 8,369 | ) | $ | 11,937 | (170.1 | )% | |||
Partnership's portion of net income (loss) |
($ | 4,268 | ) | $ | 6,014 | (171.0 | )% | |||
Tons produced |
205.4 | 337.1 | (39.1 | )% | ||||||
Tons sold |
249.2 | 296.7 | (16.0 | )% | ||||||
- *
- Percentages and per ton amounts are calculated based on actual amounts and not the rounded amounts presented in this table.
87
The decrease in tons produced and sold for the year ended December 31, 2013 compared to 2012 was due to weakness in the met coal market, which resulted in a significant decrease in the market price for the quality of met coal that Rhino Eastern produces. The decrease in tons sold resulted in decreased revenue and net income for the year ended December 31, 2013 compared to the same period in 2012.
Net Income (Loss). The following table presents net income (loss) by reportable segment for the years ended December 31, 2013 and 2012:
Segment
|
Year ended December 31, 2013 |
Year ended December 31, 2012 |
Increase (Decrease) |
|||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
(in millions) |
|||||||||
Central Appalachia |
$ | (7.1 | ) | $ | 3.6 | $ | (10.7 | ) | ||
Northern Appalachia |
26.1 | 29.6 | (3.5 | ) | ||||||
Rhino Western |
(2.4 | ) | 5.7 | (8.1 | ) | |||||
Eastern Met* |
(4.3 | ) | 6.0 | (10.3 | ) | |||||
Oil and Natural Gas |
(0.2 | ) | (0.6 | ) | 0.4 | |||||
Other |
(2.7 | ) | (4.8 | ) | 2.1 | |||||
| | | | | | | | | | | |
Total |
$ | 9.4 | $ | 39.5 | $ | (30.1 | ) | |||
| | | | | | | | | | | |
| | | | | | | | | | | |
- *
- Includes our 51% equity interest in the results of the Rhino Eastern joint venture, which owns the Rhino Eastern mining complex located in West Virginia and for which we serve as manager.
For the year ended December 31, 2013, total net income was $9.4 million compared to $39.5 million for the year ended December 31, 2012 as decreases in costs and expenses were offset by decreases in coal revenues, including lower royalty revenue from our coal leasing business, as well as lower results from our Rhino Eastern joint venture. For the year ended December 31, 2013, our net income was positively impacted by $10.5 million from the sale of our 20% royalty interest on our Utica Shale property. Net income was positively impacted by $7.4 million received as a lease bonus payment in 2012 related to acreage we own in the Utica Shale region of eastern Ohio, which had relatively immaterial costs associated with the transaction.
For our Central Appalachia segment, we generated a net loss of approximately $7.1 million for the year ended December 31, 2013, a decrease of $10.7 million, as compared to the year ended December 31, 2012. The year to year decrease was primarily due to a decrease in tons sold, which decreased revenue, and an approximate $0.9 million charge incurred for the write-off of a continuous miner that was destroyed at one of our underground Central Appalachia mines.
Net income in our Northern Appalachia segment decreased by $3.5 million to $26.1 million for the year ended December 31, 2013, from $29.6 million for the year ended December 31, 2012. Net income in our Northern Appalachia segment was impacted from the $10.5 million received from the sale of our 20% royalty interest on our Utica Shale property in the year ended December 31, 2013 as compared to approximately $7.4 million of lease bonus payments that we received on our Utica Shale property in the year ended December 31, 2012. The increase period to period due to the Utica Shale payments received was partially offset by decreased tons of coal sold from our Sands Hill complex due to weakness in the steam coal market.
Net income in our Rhino Western segment decreased by $8.1 million to a loss of $2.4 million for the year ended December 31, 2013, compared to net income of $5.7 million for the year ended December 31, 2012. This decrease was primarily the result of an increase in cost of operations at our Castle Valley operation due to the sequence of mining discussed earlier, as well as decreased revenue from lower tons sold at Castle Valley due to fewer spot sales. Net income for our Rhino Western
88
segment was also impacted from an asset impairment loss of approximately $1.7 million due to the permanently idling of our McClane Canyon mine at the end of 2013.
Our Eastern Met segment recorded a net loss of $4.3 million for the year ended December 31, 2013, a decrease of $10.3 million from net income of $6.0 million for the year ended December 31, 2012, as weakness in the met coal market caused a decrease in the number of tons sold and lower prices for tons sold.
For our Oil and Natural Gas segment, we generated a net loss of $0.2 million for the year ended December 31, 2013, a benefit of $0.4 million compared to a net loss of $0.6 million for the year ended December 31, 2012, as we experienced positive results from our Utica Shale investment in 2013 compared to 2012.
For the Other category, we had a net loss of $2.7 million for the year ended December 31, 2013, a benefit of $2.1 million as compared to a net loss of $4.8 million for the year ended December 31, 2012. The improvement was primarily due to decreased costs in 2013 compared to 2012 in our ancillary businesses that support our coal operations.
Adjusted EBITDA. The following table presents Adjusted EBITDA by reportable segment for the years ended December 31, 2013 and 2012:
Segment
|
Year ended December 31, 2013 |
Year ended December 31, 2012 |
Increase (Decrease) |
|||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
(in millions) |
|||||||||
Central Appalachia |
$ | 21.9 | $ | 34.3 | $ | (12.4 | ) | |||
Northern Appalachia |
35.0 | 38.7 | (3.7 | ) | ||||||
Rhino Western |
5.4 | 11.1 | (5.7 | ) | ||||||
Eastern Met* |
(3.3 | ) | 7.1 | (10.4 | ) | |||||
Oil and Natural Gas |
3.5 | (0.1 | ) | 3.6 | ||||||
Other |
1.0 | (1.3 | ) | 2.3 | ||||||
| | | | | | | | | | | |
Total Adjusted EBITDA |
$ | 63.5 | $ | 89.8 | $ | (26.3 | ) | |||
| | | | | | | | | | | |
| | | | | | | | | | | |
- *
- Includes our 51% equity interest in the results of the Rhino Eastern joint venture, which owns the Rhino Eastern mining complex located in West Virginia and for which we serve as manager.
Total Adjusted EBITDA for the year ended December 31, 2013 was $63.5 million, a decrease of $26.3 million from $89.8 million for the year ended December 31, 2012. Adjusted EBITDA decreased primarily as a result of a decrease in net income, as described previously. Please read "—Reconciliation of Adjusted EBITDA to Net Income by Segment" for reconciliations of Adjusted EBITDA to net income on a segment basis.
Year Ended December 31, 2012 Compared to Year Ended December 31, 2011
Summary. For the year ended December 31, 2012, our total revenues decreased to $352.0 million from $367.2 million for the year ended December 31, 2011. We sold 4.7 million tons of coal for the year ended December 31, 2012, which is 0.2 million tons less, or a 4.2% decrease, than the 4.9 million tons of coal sold for the year ended December 31, 2011. This decrease in tons sold was the result of weak demand in the met and steam coal markets, which resulted in lower coal revenues for 2012 compared to 2011. We believe the weak demand in the steam coal markets was primarily driven by an unseasonably mild winter along with an over-supply of low priced natural gas, both of which resulted in an increase of coal inventory supplies at electric utilities and fewer tons of steam coal being utilized in
89
electricity generation. We believe the weak demand in the met coal markets was primarily driven by a decrease in world-wide steel production due to economic weakness in China and Europe.
For the year ended December 31, 2012, our coal inventories increased by approximately 29,000 tons from the year ended December 31, 2011 due to weak demand in the steam and met coal markets.
Net income was $39.5 million for the year ended December 31, 2012 compared to $37.3 million for the year ended December 31, 2011. Adjusted EBITDA increased to $89.8 million for the year ended December 31, 2012, from $81.2 million for the year ended December 31, 2011. Net income and Adjusted EBITDA were positively impacted by the $7.4 million lease bonus payments received in 2012 related to our Utica Shale acreage, which had relatively immaterial costs associated with the transaction. Net income and Adjusted EBITDA were also positively impacted in 2012 due to $6.0 million of income from our Rhino Eastern joint venture compared to income of $3.0 million for 2011, each of which represents our proportionate share of income from the Rhino Eastern joint venture in which we have a 51% membership interest and for which we serve as manager.
Tons Sold. The following table presents tons of coal sold by reportable segment for the years ended December 31, 2012 and 2011:
Segment
|
Year Ended December 31, 2012 |
Year Ended December 31, 2011 |
Increase (Decrease) Tons |
%* | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
(in thousands, except %) |
||||||||||||
Central Appalachia |
1,756.1 | 2,308.0 | (551.9 | ) | (23.9 | )% | |||||||
Northern Appalachia |
1,875.1 | 2,061.5 | (186.4 | ) | (9.0 | )% | |||||||
Rhino Western |
1,038.9 | 506.6 | 532.3 | 105.1 | % | ||||||||
| | | | | | | | | | | | | | |
Total*† |
4,670.1 | 4,876.1 | (206.0 | ) | (4.2 | )% | |||||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
- *
- Calculated
percentages and the rounded totals presented are based upon on actual whole ton amounts and not the rounded amounts presented in this table.
- †
- Excludes tons sold by the Rhino Eastern joint venture, which owns the Rhino Eastern mining complex located in West Virginia and for which we serve as manager.
We sold approximately 4.7 million tons of coal in the year ended December 31, 2012 as compared to approximately 4.9 million tons sold for the year ended December 31, 2011. This decrease in tons sold was primarily due to weakness in the met and steam coal markets, primarily in Central Appalachia, partially offset by increased sales at our Castle Valley operation in Utah. Tons of coal sold in our Central Appalachia segment decreased by approximately 0.5 million, or 23.9%, to approximately 1.8 million tons for the year ended December 31, 2012 from approximately 2.3 million tons for the year ended December 31, 2011. The decrease in total tons sold year-to-year in Central Appalachia was primarily due to weakness in the met and steam coal markets. For our Northern Appalachia segment, tons of coal sold decreased by approximately 0.2 million, or 9.0%, to approximately 1.9 million tons for the year ended December 31, 2012 from approximately 2.1 million tons for the year ended December 31, 2011. The decrease in total tons sold year-to-year in Northern Appalachia was primarily due to weakness in the steam coal markets. Coal sales from our Rhino Western segment increased by approximately 0.5 million, or 105.1%, to approximately 1.0 million tons for the year ended December 31, 2012 from approximately 0.5 million tons for the year ended December 31, 2011 as this operation was still being prepared for full operation in 2011 compared to operating at a greater capacity in 2012.
90
Revenues. The following table presents revenues and coal revenues per ton by reportable segment for the years ended December 31, 2012 and 2011:
Segment
|
Year ended December 31, 2012 |
Year ended December 31, 2011 |
Increase/ (Decrease) $ |
%* | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
(in millions, except per ton data and %) |
||||||||||||
Central Appalachia |
|||||||||||||
Coal revenues |
$ | 161.3 | $ | 202.9 | $ | (41.6 | ) | (20.5 | )% | ||||
Freight and handling revenues |
— | — | — | n/a | |||||||||
Other revenues |
22.1 | 16.3 | 5.8 | 35.3 | % | ||||||||
| | | | | | | | | | | | | | |
Total revenues |
$ | 183.4 | $ | 219.2 | $ | (35.8 | ) | (16.4 | )% | ||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Coal revenues per ton* |
$ | 91.83 | $ | 87.92 | $ | 3.91 | 4.4 | % | |||||
Northern Appalachia |
|||||||||||||
Coal revenues |
$ | 102.9 | $ | 109.3 | $ | (6.4 | ) | (5.8 | )% | ||||
Freight and handling revenues |
6.3 | 5.7 | 0.6 | 10.6 | % | ||||||||
Other revenues |
12.8 | 5.0 | 7.8 | 158.4 | % | ||||||||
| | | | | | | | | | | | | | |
Total revenues |
$ | 122.0 | $ | 120.0 | $ | 2.0 | 1.7 | % | |||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Coal revenues per ton* |
$ | 54.87 | $ | 53.00 | $ | 1.87 | 3.5 | % | |||||
Rhino Western |
|||||||||||||
Coal revenues |
$ | 40.4 | $ | 21.7 | $ | 18.7 | 86.4 | % | |||||
Freight and handling revenues |
— | — | — | n/a | |||||||||
Other revenues |
0.3 | — | 0.3 | n/a | |||||||||
| | | | | | | | | | | | | | |
Total revenues |
$ | 40.7 | $ | 21.7 | $ | 19.0 | 87.6 | % | |||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Coal revenues per ton* |
$ | 38.89 | $ | 42.78 | $ | (3.89 | ) | (9.1 | )% | ||||
Oil and Natural Gas** |
|||||||||||||
Coal revenues |
n/a | n/a | n/a | n/a | |||||||||
Freight and handling revenues |
n/a | n/a | n/a | n/a | |||||||||
Other revenues |
$ | 1.9 | $ | 0.3 | $ | 1.6 | 578.1 | % | |||||
| | | | | | | | | | | | | | |
Total revenues |
$ | 1.9 | $ | 0.3 | $ | 1.6 | 578.1 | % | |||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Coal revenues per ton* |
n/a | n/a | n/a | n/a | |||||||||
Other** |
|||||||||||||
Coal revenues |
n/a | n/a | n/a | n/a | |||||||||
Freight and handling revenues |
n/a | n/a | n/a | n/a | |||||||||
Other revenues |
$ | 4.0 | $ | 6.0 | $ | (2.0 | ) | (33.5 | )% | ||||
| | | | | | | | | | | | | | |
Total revenues |
$ | 4.0 | $ | 6.0 | $ | (2.0 | ) | (33.5 | )% | ||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Coal revenues per ton* |
n/a | n/a | n/a | n/a | |||||||||
Total |
|||||||||||||
Coal revenues |
$ | 304.6 | $ | 333.9 | $ | (29.3 | ) | (8.8 | )% | ||||
Freight and handling revenues |
6.3 | 5.7 | 0.6 | 10.6 | % | ||||||||
Other revenues |
41.1 | 27.6 | 13.5 | 48.8 | % | ||||||||
| | | | | | | | | | | | | | |
Total revenues |
$ | 352.0 | $ | 367.2 | $ | (15.2 | ) | (4.1 | )% | ||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Coal revenues per ton* |
$ | 65.22 | $ | 68.47 | $ | (3.25 | ) | (4.8 | )% | ||||
- *
- Percentages
and per ton amounts are calculated based on actual amounts and not the rounded amounts presented in this table.
- **
- The Oil and Natural Gas segment does not relate to coal production. The Other category includes results for our ancillary businesses. The activities performed by these ancillary businesses also do not directly relate to coal production. As a result, coal revenues and coal revenues per ton are not presented for the Oil and Natural Gas segment or the Other category.
91
Our total revenues for the year ended December 31, 2012 decreased by $15.2 million, or 4.1%, to $352.0 million from $367.2 million for the year ended December 31, 2011. The decrease in total revenues was due to lower coal revenues resulting primarily from weakness in the met and steam coal markets, which was partially offset by an increase in other revenues that primarily resulted from the $7.4 million lease bonus received for acreage owned in the Utica Shale region. Our other revenue also increased in 2012 due to a full year of revenue from our coal leasing business compared to only a partial year of revenue from our coal leasing operations in 2011 since we purchased this business in June 2011. Coal revenues per ton were $65.22 for the year ended December 31, 2012, a decrease of $3.25, or 4.8%, from $68.47 per ton for the year ended December 31, 2011. This decrease in coal revenues per ton was primarily the result of a higher proportion of lower priced coal from our Rhino Western operations of our total tons of coal sold.
For our Central Appalachia segment, coal revenues decreased by $41.6 million, or 20.5%, to $161.3 million for the year ended December 31, 2012 from $202.9 million for the year ended December 31, 2011 due to weakness in the met and steam coal markets, which resulted in fewer tons sold. Coal revenues per ton for our Central Appalachia segment increased by $3.91, or 4.4%, to $91.83 per ton for the year ended December 31, 2012 as compared to $87.92 for the year ended December 31, 2011, primarily due to higher contracted prices, primarily related to metallurgical coal sold. Other revenues increased for our Central Appalachia segment primarily due to coal royalty revenue from our coal leasing operations.
For our Northern Appalachia segment, coal revenues were $102.9 million for the year ended December 31, 2012, a decrease of $6.4 million, or 5.8%, from $109.3 million for the year ended December 31, 2011. This decrease was due to weakness in the steam coal market, which resulted in fewer tons sold. Coal revenues per ton for our Northern Appalachia segment increased by $1.87, or 3.5%, to $54.87 per ton for the year ended December 31, 2012 as compared to $53.00 per ton for the year ended December 31, 2011. This increase was primarily due to higher contracted prices for steam coal. Other revenues increased for our Northern Appalachia segment primarily due to the $7.4 million lease bonus received for acreage owned in the Utica Shale region.
For our Rhino Western segment, coal revenues increased by $18.7 million, or 86.4%, to $40.4 million for the year ended December 31, 2012 from $21.7 million for the year ended December 31, 2011 due to an increase in tons sold for coal produced at our Castle Valley mine. Coal revenues per ton for our Rhino Western segment were $38.89 for the year ended December 31, 2012, a decrease of $3.89, or 9.1%, from $42.78 for the year ended December 31, 2011. The decrease in coal revenues per ton was due to lower market prices for coal produced at our Castle Valley mine.
In our Oil and Natural Gas segment, total revenues increased by $1.6 million to $1.9 million for the year ended December 31, 2012 from $0.3 million for the year ended December 31, 2011. This increase was primarily due to revenue from our Razorback drill pad construction company that was formed during the second quarter of 2012.
Other revenues for our Other category decreased by $2.0 million for the year ended December 31, 2012 from the year ended December 31, 2011, which was primarily due to a decrease in revenue from our Triad roof bolt operations that were sold in September 2012.
Central Appalachia Overview of Results by Product. Additional information for the Central Appalachia segment detailing the types of coal produced and sold, premium high-vol metallurgical coal
92
and steam coal, is presented below. Note that our Northern Appalachia and Rhino Western segments currently produce and sell only steam coal.
(In thousands, except per ton data and %)
|
Year ended December 31, 2012 |
Year ended December 31, 2011 |
Increase (Decrease) %* |
|||||||
|---|---|---|---|---|---|---|---|---|---|---|
Met coal tons sold |
467.8 | 654.6 | (28.5 | )% | ||||||
Steam coal tons sold |
1,288.3 | 1,653.4 | (22.1 | )% | ||||||
| | | | | | | | | | | |
Total tons sold† |
1,756.1 | 2,308.0 | (23.9 | )% | ||||||
| | | | | | | | | | | |
| | | | | | | | | | | |
Met coal revenue |
$ | 59,511 | $ | 79,227 | (24.9 | )% | ||||
Steam coal revenue |
$ | 101,762 | $ | 123,706 | (17.7 | )% | ||||
| | | | | | | | | | | |
Total coal revenue† |
$ | 161,273 | $ | 202,933 | (20.5 | )% | ||||
| | | | | | | | | | | |
| | | | | | | | | | | |
Met coal revenues per ton |
$ | 127.21 | $ | 121.04 | 5.1 | % | ||||
Steam coal revenues per ton |
$ | 78.99 | $ | 74.82 | 5.6 | % | ||||
| | | | | | | | | | | |
Total coal revenues per ton† |
$ | 91.83 | $ | 87.92 | 4.4 | % | ||||
| | | | | | | | | | | |
| | | | | | | | | | | |
Met coal tons produced |
468.3 | 660.5 | (29.1 | )% | ||||||
Steam coal tons produced |
1,336.2 | 1,573.5 | (15.1 | )% | ||||||
| | | | | | | | | | | |
Total tons produced† |
1,804.5 | 2,234.0 | (19.2 | )% | ||||||
| | | | | | | | | | | |
| | | | | | | | | | | |
- *
- Percentages
and per ton amounts are calculated based on actual amounts and not the rounded amounts presented in this table.
- †
- Excludes data for the Rhino Eastern mining complex located in West Virginia for which we serve as manager.
93
Costs and Expenses. The following table presents costs and expenses (including the cost of purchased coal) and cost of operations per ton by reportable segment for the years ended December 31, 2012 and 2011:
Segment
|
Year ended December 31, 2012 |
Year ended December 31, 2011 |
Increase/(Decrease) $ |
%* | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
(in millions, except per ton data and %) |
||||||||||||
Central Appalachia |
|||||||||||||
Cost of operations (exclusive of depreciation, depletion and amortization shown separately below) |
$ |
125.8 |
$ |
154.7 |
$ |
(28.9 |
) |
(18.6 |
)% |
||||
Freight and handling costs |
0.5 | — | 0.5 | n/a | |||||||||
Depreciation, depletion and amortization |
26.3 | 22.1 | 4.2 | 18.6 | % | ||||||||
Selling, general and administrative |
19.0 | 20.2 | (1.2 | ) | (6.1 | )% | |||||||
Cost of operations per ton* |
$ | 71.62 | $ | 66.97 | $ | 4.65 | 6.9 | % | |||||
Northern Appalachia |
|||||||||||||
Cost of operations (exclusive of depreciation, depletion and amortization shown separately below) |
$ |
76.0 |
$ |
75.1 |
$ |
0.9 |
1.2 |
% |
|||||
Freight and handling costs |
5.3 | 4.3 | 1.0 | 23.3 | % | ||||||||
Depreciation, depletion and amortization |
8.3 | 8.1 | 0.2 | 2.2 | % | ||||||||
Selling, general and administrative |
0.3 | 0.4 | (0.1 | ) | (13.4 | )% | |||||||
Cost of operations per ton* |
$ | 40.54 | $ | 36.45 | $ | 4.09 | 11.2 | % | |||||
Rhino Western |
|||||||||||||
Cost of operations (exclusive of depreciation, depletion and amortization shown separately below) |
$ |
27.5 |
$ |
17.9 |
$ |
9.6 |
53.0 |
% |
|||||
Freight and handling costs |
— | — | — | n/a | |||||||||
Depreciation, depletion and amortization |
4.7 | 3.1 | 1.6 | 52.2 | % | ||||||||
Selling, general and administrative |
0.1 | 0.1 | — | 2.9 | % | ||||||||
Cost of operations per ton* |
$ | 26.42 | $ | 35.42 | $ | (9.00 | ) | (25.4 | )% | ||||
Oil and Natural Gas |
|||||||||||||
Cost of operations (exclusive of depreciation, depletion and amortization shown separately below) |
$ |
1.5 |
$ |
0.8 |
$ |
0.7 |
93.0 |
% |
|||||
Freight and handling costs |
— | — | — | n/a | |||||||||
Depreciation, depletion and amortization |
0.1 | 0.1 | — | 148.6 | % | ||||||||
Selling, general and administrative |
— | — | — | n/a | |||||||||
Cost of operations per ton** |
n/a | n/a | n/a | n/a | |||||||||
Other |
|||||||||||||
Cost of operations (exclusive of depreciation, depletion and amortization shown separately below) |
$ |
17.0 |
$ |
19.2 |
$ |
(2.2 |
) |
(11.1 |
)% |
||||
Freight and handling costs |
— | — | — | n/a | |||||||||
Depreciation, depletion and amortization |
2.0 | 2.9 | (0.9 | ) | (30.5 | )% | |||||||
Selling, general and administrative |
1.1 | 1.1 | — | (8.5 | )% | ||||||||
Cost of operations per ton** |
n/a | n/a | n/a | n/a | |||||||||
Total |
|||||||||||||
Cost of operations (exclusive of depreciation, depletion and amortization shown separately below) |
$ |
247.8 |
$ |
267.7 |
$ |
(19.9 |
) |
(7.4 |
)% |
||||
Freight and handling costs |
5.8 | 4.3 | 1.5 | 34.8 | % | ||||||||
Depreciation, depletion and amortization |
41.4 | 36.3 | 5.1 | 13.9 | % | ||||||||
Selling, general and administrative |
20.5 | 21.8 | (1.3 | ) | (6.3 | )% | |||||||
Cost of operations per ton* |
$ | 53.06 | $ | 54.88 | $ | (1.82 | ) | (3.3 | )% | ||||
- *
- Percentages and per ton amounts are calculated based on actual amounts and not the rounded amounts presented in this table.
94
- **
- Cost of operations for our Oil and Natural Gas segment do not relate to coal production. Cost of operations presented for our Other category includes costs incurred by our ancillary businesses. The activities performed by these ancillary businesses also do not directly relate to coal production. As a result, per ton measurements are not presented for our Oil and Natural Gas segment or our Other category.
Cost of Operations. Total cost of operations was $247.8 million for the year ended December 31, 2012 as compared to $267.7 million for the year ended December 31, 2011. The decrease in the cost of operations was primarily due to decreased production due to weakness in the met and steam coal markets, including the idling of a majority of our Central Appalachia operations in June 2012. Our cost of operations per ton was $53.06 for the year ended December 31, 2012; a decrease of $1.82, or 3.3%, from the year ended December 31, 2011. The decrease in the cost of operations on a per ton basis was primarily due to a higher mix of lower cost tons from our Castle Valley mine.
Our cost of operations for the Central Appalachia segment decreased by $28.9 million, or 18.6%, to $125.8 million for the year ended December 31, 2012 from $154.7 million for the year ended December 31, 2011. The decrease in total cost of operations was primarily due to decreased production in response to weakness in the met and steam coal markets, including the temporary idling of a majority of our Central Appalachia operations in June 2012. Our cost of operations per ton increased to $71.62 per ton for the year ended December 31, 2012 from $66.97 per ton for year ended December 31, 2011. Cost of operations per ton increased since a portion of our costs are fixed in nature and these fixed costs were spread over a smaller number of tons sold in 2012.
In our Northern Appalachia segment, our cost of operations increased by $0.9 million, or 1.2%, to $76.0 million for the year ended December 31, 2012 from $75.1 million for the year ended December 31, 2011. Our cost of operations per ton increased to $40.54 for the year ended December 31, 2012 from $36.45 for the year ended December 31, 2011, an increase of $4.09 per ton, or 11.2%. The increases in cost of operations and cost of operations per ton were primarily due to geology issues of mining thinner coal seams at our Hopedale mine and an equipment issue that resulted in the need to replace a mining shovel at one of our Sands Hill surface mines in the second quarter of 2012.
Cost of operations in our Rhino Western segment increased by $9.6 million, or 53.0%, to $27.5 million for the year ended December 31, 2012 from $17.9 million for the year ended December 31, 2011. Our cost of operations per ton decreased to $26.42 for the year ended December 31, 2012 from $35.42 for the year ended December 31, 2011, a decrease of $9.00 per ton, or 25.4%. The increase in cost of operations was primarily due to increased production at our Castle Valley mine. Cost of operations per ton decreased primarily due to our Castle Valley mine being at full production in 2012 compared to costs incurred in 2011 associated with preparing our Castle Valley mine to begin production that had a smaller amount of tons sold.
Cost of operations in our Oil and Natural Gas segment increased by $0.7 million to $1.5 million for the year ended December 31, 2012 from $0.8 million for the year ended December 31, 2011. The increase in cost of operations was primarily attributable to our Razorback drill pad construction company that was formed in the second quarter of 2012.
Cost of operations in our Other category decreased by $2.2 million for the year ended December 31, 2012 as compared to the year ended December 31, 2011. This decrease was primarily as a result of the sale of our Triad roof bolt operations in September 2012.
Freight and Handling. Total freight and handling cost for the year ended December 31, 2012 increased by $1.5 million, or 34.8%, to $5.8 million from $4.3 million for the year ended December 31, 2011. This increase was primarily due to an increase in the tons of limestone sold for 2012 as compared to 2011, along with increased coal freight and handling costs in Central Appalachia due to a new customer contract that required coal to be transported by truck to the customer's location.
95
Depreciation, Depletion and Amortization. Total DD&A expense for the year ended December 31, 2012 was $41.4 million as compared to $36.3 million for the year ended December 31, 2011.
For the year ended December 31, 2012, our depreciation cost was $32.7 million as compared to $26.5 million for the year ended December 31, 2011. The increase in depreciation cost in 2012 was primarily due to an increase in machinery and equipment, including a new high-wall miner purchased in Central Appalachia.
For the year ended December 31, 2012, our depletion cost was $5.9 million as compared to $5.1 million for the year ended December 31, 2011. The increase in depletion cost in 2012 is primarily attributable to depletion expense incurred at our coal leasing operations that was not present in the entire 2011 comparable period since our coal leasing business was acquired in June 2011.
For the year ended December 31, 2012, our amortization cost was $2.8 million as compared to $4.7 million for the year ended December 31, 2011. This decrease is primarily attributable to changes in the amortization for both mine development costs and asset retirement costs based on revisions to reserve valuations and useful lives.
Selling, General and Administrative. Selling, general and administrative ("SG&A") expense for the year ended December 31, 2012 was $20.5 million as compared to $21.8 million for the year ended December 31, 2011. The decrease in SG&A expense is primarily attributable to a decrease in expenditures for legal fees and other professional fees.
Interest Expense. Interest expense for the year ended December 31, 2012 was $7.8 million as compared to $6.1 million for the year ended December 31, 2011, an increase of $1.7 million, or 28.1%. This increase was the result of an increase in the balance outstanding under our credit facility.
Eastern Met Supplemental Data. Operational and financial data for the Rhino Eastern joint venture in which we have a 51% membership interest and for which we serve as manager (referred to as the "Eastern Met" segment) is presented below. Our consolidated revenue and costs do not include any portion of the revenue or costs of Rhino Eastern since we account for this operation under the equity method. We only record our proportionate share of net income of Rhino Eastern as a single item in our financial statements, but we believe the presentation of these items for Rhino Eastern provides additional insight into how this operation contributes to our overall performance.
(In thousands, except per ton data and %)
|
Year ended December 31, 2012 |
Year ended December 31, 2011 |
Increase (Decrease) %* |
|||||||
|---|---|---|---|---|---|---|---|---|---|---|
Eastern Met 100% Basis |
||||||||||
Coal revenues |
$ | 55,187 | $ | 49,999 | 10.4 | % | ||||
Total revenues |
$ | 55,221 | $ | 50,073 | 10.3 | % | ||||
Coal revenues per ton* |
$ | 185.98 | $ | 198.97 | (6.5 | )% | ||||
Cost of operations |
$ | 36,728 | $ | 38,412 | (4.4 | )% | ||||
Cost of operations per ton* |
$ | 123.77 | $ | 152.86 | (19.0 | )% | ||||
Depreciation, depletion and amortization |
$ | 2,098 | $ | 2,959 | (29.1 | )% | ||||
Interest expense |
$ | 155 | $ | 52 | 200.5 | % | ||||
Net income (loss) |
$ | 11,937 | $ | 5,715 | 108.9 | % | ||||
Partnership's portion of net income (loss) |
$ | 6,014 | $ | 2,988 | 101.3 | % | ||||
Tons produced |
337.1 | 266.2 | 26.6 | % | ||||||
Tons sold |
296.7 | 251.3 | 18.1 | % | ||||||
- *
- Percentages and per ton amounts are calculated based on actual amounts and not the rounded amounts presented in this table.
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Rhino Eastern's Eagle #2 mine began production in the third quarter of 2011, which was replaced by Rhino Eastern's Eagle #3 mine that began production in the third quarter of 2012 due to adverse conditions in the coal seams at the Eagle #2 mine. The year-to-date operation of the Eagle #2 mine resulted in an increase in tons produced and sold for 2012 compared to 2011. The increase in tons sold resulted in increased revenue and net income for 2012 compared to 2011.
Net Income (Loss). The following table presents net income (loss) by reportable segment for the years ended December 31, 2012 and 2011:
Segment
|
Year ended December 31, 2012 |
Year ended December 31, 2011 |
Increase (Decrease) |
|||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
(in millions) |
|||||||||
Central Appalachia |
$ | 3.6 | $ | 16.5 | $ | (12.9 | ) | |||
Northern Appalachia |
29.6 | 27.4 | 2.2 | |||||||
Rhino Western |
5.7 | (2.6 | ) | 8.3 | ||||||
Eastern Met* |
6.0 | 3.0 | 3.0 | |||||||
Oil and Natural Gas |
(0.6 | ) | (0.5 | ) | (0.1 | ) | ||||
Other |
(4.8 | ) | (6.5 | ) | 1.7 | |||||
| | | | | | | | | | | |
Total |
$ | 39.5 | $ | 37.3 | $ | 2.2 | ||||
| | | | | | | | | | | |
| | | | | | | | | | | |
- *
- Includes our 51% equity interest in the results of the Rhino Eastern joint venture, which owns the Rhino Eastern mining complex located in West Virginia and for which we serve as manager.
For the year ended December 31, 2012, total net income was $39.5 million compared to $37.3 million for the year ended December 31, 2011. Net income was positively impacted by $7.4 million received as a lease bonus payment in 2012 related to acreage we own in the Utica Shale region of eastern Ohio, which had relatively immaterial costs associated with the transaction.
For our Central Appalachia segment, net income decreased to $3.6 million for the year ended December 31, 2012, a decrease of $12.9 million, as compared to the year ended December 31, 2011. This decrease was primarily due to weakness in the steam and met coal markets that resulted in fewer tons sold.
Net income in our Northern Appalachia segment increased by $2.2 million to $29.6 million for the year ended December 31, 2012, from $27.4 million for the year ended December 31, 2011. This increase was primarily the result of the $7.4 million lease bonus payment partially offset by a decrease in tons of coal sold due to weakness in the steam coal markets.
Net income in our Rhino Western segment increased by $8.3 million to income of $5.7 million for the year ended December 31, 2012, compared to a loss of $2.6 million for the year ended December 31, 2011. This increase was primarily the result of more tons sold from the Castle Valley mine.
Our Eastern Met segment recorded net income of $6.0 million for the year ended December 31, 2012, an increase of $3.0 million from $3.0 million recorded for the year ended December 31, 2011.
For our Oil and Natural Gas segment, we experienced a slight increase in net loss for the year ended December 31, 2012 compared to 2011 as our Razorback drill pad construction business that was formed in the second quarter of 2012 provided positive net income, which was offset by the loss generated from our Muskie investment.
For the Other category, we had a net loss of $4.8 million for the year ended December 31, 2012, a benefit of $1.7 million as compared to a net loss of $6.5 million for the year ended December 31, 2011.
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Adjusted EBITDA. The following table presents Adjusted EBITDA by reportable segment for the years ended December 31, 2012 and 2011:
Segment
|
Year ended December 31, 2012 |
Year ended December 31, 2011 |
Increase (Decrease) |
|||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
(in millions) |
|||||||||
Central Appalachia |
$ | 34.3 | $ | 41.6 | $ | (7.3 | ) | |||
Northern Appalachia |
38.7 | 36.3 | 2.4 | |||||||
Rhino Western |
11.1 | 1.0 | 10.1 | |||||||
Eastern Met* |
7.1 | 4.5 | 2.6 | |||||||
Oil and Natural Gas |
(0.1 | ) | (0.4 | ) | 0.3 | |||||
Other |
(1.3 | ) | (1.8 | ) | 0.5 | |||||
| | | | | | | | | | | |
Total Adjusted EBITDA |
$ | 89.8 | $ | 81.2 | $ | 8.6 | ||||
| | | | | | | | | | | |
| | | | | | | | | | | |
- *
- Includes our 51% equity interest in the results of the Rhino Eastern joint venture, which owns the Rhino Eastern mining complex located in West Virginia and for which we serve as manager.
Total Adjusted EBITDA for the year ended December 31, 2012 was $89.8 million, an increase of $8.6 million from $81.2 million for the year ended December 31, 2011, primarily due to an increase in net income, along with higher DD&A and interest expense. Please read "—Reconciliation of Adjusted EBITDA to Net Income by Segment" for reconciliations of Adjusted EBITDA to net income on a segment basis.
Reconciliation of Adjusted EBITDA to Net Income by Segment
The following tables present reconciliations of Adjusted EBITDA to net income on a segment basis for each of the periods indicated. We believe the presentation of Adjusted EBITDA that includes the proportionate share of DD&A and interest expense for our Rhino Eastern joint venture is appropriate since our portion of Rhino Eastern's net income that is recognized as a single line item in our financial statements is affected by these expense items. Since we do not reflect these proportionate expense items of DD&A and interest expense in our consolidated financial statements, we believe that the adjustment for these expense items in the Adjusted EBITDA calculation is more representative of how we review our results and also provides investors with additional information that they can use to evaluate our results. Adjusted EBITDA also excludes the effect of certain non-recurring items.
Year ended December 31, 2013
|
Central Appalachia |
Northern Appalachia |
Rhino Western |
Eastern Met* |
Oil and Natural Gas |
Other | Total | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
(in millions) |
|||||||||||||||||||||
Net income |
$ | (7.1 | ) | $ | 26.1 | $ | (2.4 | ) | $ | (4.3 | ) | $ | (0.2 | ) | $ | (2.7 | ) | $ | 9.4 | |||
Plus: |
||||||||||||||||||||||
DD&A |
24.2 | 8.1 | 5.5 | — | 3.1 | 1.7 | 42.6 | |||||||||||||||
Interest expense |
3.9 | 0.8 | 0.6 | — | 0.6 | 2.0 | 7.9 | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | |
EBITDA†** |
$ | 21.0 | $ | 35.0 | $ | 3.7 | $ | (4.3 | ) | $ | 3.5 | $ | 1.0 | $ | 59.9 | |||||||
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
Plus: Rhino Eastern DD&A-51% |
— | — | — | 1.0 | — | — | 1.0 | |||||||||||||||
Plus: Rhino Eastern interest expense-51% |
— | — | — | — | — | — | — | |||||||||||||||
Plus: Non-cash write-off of mining equipment and asset impairment*** |
0.9 | — | 1.7 | — | — | — | 2.6 | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | |
Adjusted EBITDA† |
$ | 21.9 | $ | 35.0 | $ | 5.4 | $ | (3.3 | ) | $ | 3.5 | $ | 1.0 | $ | 63.5 | |||||||
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
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Year ended December 31, 2012
|
Central Appalachia |
Northern Appalachia |
Rhino Western |
Eastern Met* |
Oil and Natural Gas |
Other | Total | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
(in millions) |
|||||||||||||||||||||
Net income |
$ | 3.6 | $ | 29.6 | $ | 5.7 | $ | 6.0 | $ | (0.6 | ) | $ | (4.8 | ) | $ | 39.5 | ||||||
Plus: |
||||||||||||||||||||||
DD&A |
26.3 | 8.3 | 4.7 | — | 0.1 | 2.0 | 41.4 | |||||||||||||||
Interest expense |
4.4 | 0.8 | 0.7 | — | 0.4 | 1.5 | 7.8 | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | |
EBITDA†** |
$ | 34.3 | $ | 38.7 | $ | 11.1 | $ | 6.0 | $ | (0.1 | ) | $ | (1.3 | ) | $ | 88.7 | ||||||
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
Plus: Rhino Eastern DD&A-51% |
— | — | — | 1.0 | — | — | 1.0 | |||||||||||||||
Plus: Rhino Eastern interest expense-51% |
— | — | — | 0.1 | — | — | 0.1 | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | |
Adjusted EBITDA† |
$ | 34.3 | $ | 38.7 | $ | 11.1 | $ | 7.1 | $ | (0.1 | ) | $ | (1.3 | ) | $ | 89.8 | ||||||
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
Year ended December 31, 2011
|
Central Appalachia |
Northern Appalachia |
Rhino Western |
Eastern Met* |
Oil and Natural Gas |
Other | Total** | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
(in millions) |
|||||||||||||||||||||
Net income |
$ | 16.5 | $ | 27.4 | $ | (2.6 | ) | $ | 3.0 | $ | (0.5 | ) | $ | (6.5 | ) | $ | 37.3 | |||||
Plus: |
||||||||||||||||||||||
DD&A |
22.1 | 8.1 | 3.0 | — | 0.1 | 2.9 | 36.3 | |||||||||||||||
Interest expense |
3.0 | 0.8 | 0.6 | — | — | 1.8 | 6.1 | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | |
EBITDA†** |
$ | 41.6 | $ | 36.3 | $ | 1.0 | $ | 3.0 | $ | (0.4 | ) | $ | (1.8 | ) | $ | 79.7 | ||||||
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
Plus: Rhino Eastern DD&A-51% |
— | — | — | 1.5 | — | — | 1.5 | |||||||||||||||
Plus: Rhino Eastern interest expense-51% |
— | — | — | 0.1 | — | — | 0.1 | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | |
Adjusted EBITDA† ** |
$ | 41.6 | $ | 36.3 | $ | 1.0 | $ | 4.5 | $ | (0.4 | ) | $ | (1.8 | ) | $ | 81.2 | ||||||
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
- *
- Includes
our 51% equity interest in the results of the joint venture, which owns the Rhino Eastern mining complex located in West Virginia and for which we
serve as manager.
- †
- Calculated
based on actual amounts and not the rounded amounts presented in this table.
- **
- Totals
may not foot due to rounding
- ***
- During the first quarter of 2013, we incurred a non-cash expense of approximately $0.9 million due to the write-off of a continuous miner that was damaged at one of our underground mines in Central Appalachia. In addition, during the fourth quarter of 2013, we made a strategic decision to permanently close the mining operations at our McClane Canyon mine in Colorado, which resulted in a non-cash impairment charge of approximately $1.7 million. We believe that the isolation and presentation of these specific items to arrive at Adjusted EBITDA is useful because it enhances investors' understanding of how we assess the performance of our business. We believe the adjustment of these items provides investors with additional information that they can utilize in evaluating our performance. Additionally, we believe the isolation of these items provides investors with enhanced comparability to prior and future periods of our operating results.
Liquidity and Capital Resources
Liquidity
Our business is capital intensive and requires substantial capital expenditures for purchasing, upgrading and maintaining equipment used in developing and mining our reserves, as well as complying with applicable environmental and mine safety laws and regulations. Our principal liquidity
99
requirements are to finance current operations, fund capital expenditures, including acquisitions from time to time, service our debt and make distributions to our unitholders. Our sources of liquidity include cash generated by our operations, borrowings under our credit agreement and further issuances of equity and debt securities.
The principal indicators of our liquidity are our cash on hand and availability under our credit agreement. As of December 31, 2013, our available liquidity was $56.5 million, including cash on hand of $0.4 million and $56.1 million of available borrowing capacity under our credit agreement. The amount available under our credit agreement is based upon a maximum borrowing capacity of 3.75 times a trailing twelve-month EBITDA calculation (as defined in the credit agreement).
Please read "—Capital Expenditures" for a further discussion of the impact on liquidity.
Cash Flows
Year Ended December 31, 2013 Compared to Year Ended December 31, 2012
Net cash provided by operating activities was $51.7 million for the year ended December 31, 2013 as compared to $79.7 million for the year ended December 31, 2012. This decrease in cash provided by operating activities was primarily the result of lower net income, which resulted from decreased tons sold and revenue as well as unfavorable results from our Rhino Eastern joint venture.
Net cash used in investing activities was $43.9 million for the year ended December 31, 2013 as compared to $58.4 million for the year ended December 31, 2012. The decrease in cash used in investing activities was primarily due to the decreased amounts expended for the purchase and construction of mining equipment. For the year ended December 31, 2012, our primary expenditures related to the new preparation plant in our Tug River mining complex, which resulted in increased expenditures when compared to the year ended December 31, 2013. In addition, the $10.5 million received from the sale of our 20% royalty interest on our Utica Shale property in the year ended December 31, 2013 resulted in lower net cash used in investing activities when compared to 2012.
Net cash used in financing activities for the year ended December 31, 2013 was $7.9 million, which was primarily attributable to distributions paid to our unitholders, partially offset by net borrowings under our credit agreement that were primarily used to fund a portion of our capital expenditures. Net cash used in financing activities for the year ended December 31, 2013 also included the net proceeds from our public offering of common units, which resulted in net proceeds after offering expenses of approximately $14.6 million that was used to repay outstanding debt. Net cash used in financing activities for the year ended December 31, 2012 was $21.3 million, which was primarily attributable to distributions paid to our unitholders, partially offset by net borrowings under our credit agreement that were primarily used to fund a portion of our capital expenditures.
Year Ended December 31, 2012 Compared to Year Ended December 31, 2011
Net cash provided by operating activities was $79.7 million for the year ended December 31, 2012 as compared to $66.9 million for the year ended December 31, 2011. This increase in cash provided by operating activities was the result of an increase in net income, primarily due to the $7.4 million of income from the lease bonus payments received on our Utica acreage lease, as well as favorable changes in our working capital accounts year to year.
Net cash used in investing activities was $58.4 million for the year ended December 31, 2012 as compared to $188.0 million for the year ended December 31, 2011. The decrease in cash used in investing activities was primarily due to the acquisition of Elk Horn in 2011 for approximately $119.6 million, net of cash acquired, along with decreased amounts expended for additions to property, plant and equipment in 2012 compared to 2011, primarily due to approximately $28.0 million expended
100
for oil and natural gas mineral rights acquisitions in the Cana Woodford region and the Utica Shale region in 2011.
Net cash used in financing activities for the year ended December 31, 2012 was $21.3 million, which was primarily attributable to distributions paid to our unitholders, partially offset by net borrowings under our credit agreement that were primarily used to fund a portion of our capital expenditures. Net cash provided by financing activities for the year ended December 31, 2011 was $121.5 million, which was primarily attributable to net borrowings under our credit agreement to fund the Elk Horn acquisition that was also partially funded with the net proceeds of approximately $66.9 million from the public offering of common units in July 2011.
Capital Expenditures
Our mining operations require investments to expand, upgrade or enhance existing operations and to meet environmental and safety regulations. Maintenance capital expenditures are those capital expenditures required to maintain our long-term operating capacity. For example, maintenance capital expenditures include expenditures associated with the replacement of equipment and coal reserves, whether through the expansion of an existing mine or the acquisition or development of new reserves, to the extent such expenditures are made to maintain our long-term operating capacity. Expansion capital expenditures are those capital expenditures that we expect will increase our operating capacity over the long term. Examples of expansion capital expenditures include the acquisition of reserves, acquisition of equipment for a new mine or the expansion of an existing mine to the extent such expenditures are expected to expand our long-term operating capacity.
Actual maintenance capital expenditures for the year ended December 31, 2013 were approximately $14.2 million. These amounts were primarily used to rebuild, repair or replace older mining equipment. Expansion capital expenditures for the year ended December 31, 2013 were approximately $40.3 million, which were primarily related to additional investment in our oil and natural gas properties in the Utica Shale region, as well as the initial development of our new Pennyrile mine in western Kentucky. The remaining amount of expansion capital expenditures was primarily spent on our internal development projects. For the year ending December 31, 2014, we have budgeted $7 million to $10 million for maintenance capital expenditures. We expect a decrease in our 2014 expansion capital expenditures since we entered into a binding agreement in February 2014 to sell our entire Utica Shale interests to Gulfport. In the event the Utica Shale sale to Gulfport is not consummated, our 2014 projected expansion capital expenditures would possibly increase if we decided to participate in drilling costs for the Utica Shale acreage.
We believe that we have sufficient liquid assets, cash flows from operations and borrowing capacity under our credit agreement to meet our financial commitments, debt service obligations, contingencies and anticipated capital expenditures for the next twelve months. However, we are subject to business and operational risks that could adversely affect our cash flow. A material decrease in our cash flows would likely produce a corollary adverse effect on our borrowing capacity and our ability to pay distributions to our unitholders. In addition, we have not paid any distributions on our subordinated units for any quarter after the quarter ended March 31, 2012. From time to time, we may issue debt and equity securities.
Credit Agreement
The original maximum availability under our credit facility with PNC Bank, N.A. as administrative agent, was $200.0 million. On June 8, 2011, with the consent of the lenders, we exercised the option to increase the amount available to borrow under the credit agreement by $50.0 million to $250.0 million as part of the Elk Horn acquisition.
101
On July 29, 2011, we executed an amended and restated senior secured credit facility with PNC Bank, N.A., as administrative agent, and a group of participating lenders. The maximum availability under the amended and restated credit facility is $300.0 million, with a one-time option to increase the availability by an amount not to exceed $50.0 million. Of the $300.0 million, $75.0 million is available for letters of credit.
Loans under the credit agreement bear interest at either (i) a base rate equaling the highest of (a) the Federal Funds Open Rate plus 0.50%; (b) the prime rate; or (c) daily LIBOR plus 1.00%, plus an applicable margin in each case or (ii) LIBOR plus an applicable margin, at our option. The applicable margin for the base rate option is 1.50% to 2.50%, and the applicable margin for the LIBOR option is 2.50% to 3.50%, each of which depends on our and our subsidiaries' consolidated leverage ratio ("Consolidated Leverage Ratio"). The credit agreement also contains letter of credit fees equal to an applicable margin of 2.50% to 3.50% depending on the Consolidated Leverage Ratio, multiplied by the aggregate amount available to be drawn on the letters of credit, and a 0.15% fronting fee payable to the administrative agent. In addition, we incur a commitment fee on the unused portion of the credit agreement at a rate of 0.375% to 0.50% per annum, depending on the Consolidated Leverage Ratio. Borrowings on the line of credit are collateralized by all of our unsecured assets.
Our credit agreement requires us to maintain certain minimum financial ratios and contains certain restrictive provisions, including among others, restrictions on making loans, investments and advances, incurring additional indebtedness, guaranteeing indebtedness, creating liens, and selling or assigning units. As of and for the year ended December 31, 2013, we are in compliance with respect to all covenants contained in the credit agreement. The credit agreement expires in July 2016.
On April 19, 2013, we entered into an amendment of the amended and restated senior secured credit facility. The amendment provided for an increase in the maximum allowed investments in coal-related entities outside of our current partnership structure (i.e. joint ventures) under the amended and restated senior secured credit facility from $25 million to $40 million. The amendment also altered the maximum leverage ratio allowed under the amended and restated senior secured credit facility and also altered the pricing grid to include applicable interest rates for borrowings, letter of credit fees and commitment fees on unused borrowings based upon the new maximum leverage ratio. The amendment increases the maximum leverage ratio of the amended and restated senior secured credit facility to 3.75 from April 1, 2013 through March 31, 2015, then steps the maximum leverage ratio down to its previous level of 3.0 after December 31, 2015. All other terms of the amended and restated senior secured credit facility were not affected by the amendment.
At December 31, 2013, we had borrowed $162.0 million at a variable interest rate of LIBOR plus 3.00% (3.17% at December 31, 2013) and an additional $5.0 million at a variable interest rate of the prime rate plus 2.00% (5.25% at December 31, 2013). In addition, we had outstanding letters of credit of approximately $21.5 million at a fixed interest rate of 3.00% at December 31, 2013. Based upon a maximum borrowing capacity of 3.75 times a trailing twelve-month EBITDA calculation (as defined in the credit agreement), we had not used $56.1 million of the borrowing availability at December 31, 2013. During the three month period ended December 31, 2013, we had average borrowings outstanding of approximately $161.1 million under our credit agreement.
Off-Balance Sheet Arrangements
In the normal course of business, we are a party to off-balance sheet arrangements that include guarantees and financial instruments with off-balance sheet risk, such as bank letters of credit and surety bonds. No liabilities related to these arrangements are reflected in our consolidated balance sheet, and 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.
102
Federal and state laws require us to secure certain long-term obligations related to mine closure and reclamation costs. 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 or a bank letter of credit, either of which would require a greater use of our credit agreement. We then use bank letters of credit to secure our surety bonding obligations as a lower cost alternative than securing those bonds with a committed bonding facility pursuant to which we are required to provide bank letters of credit in an amount of up to 25% of the aggregate bond liability. 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.
As of December 31, 2013, we had $21.5 million in letters of credit outstanding, of which $17.2 million served as collateral for approximately $75.2 million in our surety bonds outstanding that secure the performance of our reclamation obligations.
Contractual Obligations
The following table summarizes by period the payments due for our estimated contractual obligations as of December 31, 2013:
| |
Payments Due by Period | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Total | Less than 1 Year |
1 - 3 Years | 4 - 5 Years | More than 5 Years |
|||||||||||
| |
(in thousands) |
|||||||||||||||
Long-term debt obligations (including interest)(1) |
171,046 | $ | 1,024 | $ | 167,475 | $ | 498 | $ | 2,049 | |||||||
Asset retirement obligations |
34,492 | 1,614 | 7,104 | 1,955 | 23,819 | |||||||||||
Operating lease obligations(2) |
5,994 | 1,577 | 3,083 | 1,334 | — | |||||||||||
Ammonia nitrate obligations |
927 | 927 | — | — | — | |||||||||||
Advance royalties(3) |
18,866 | 1,642 | 3,729 | 3,851 | 9,644 | |||||||||||
Retiree medical obligations |
6,867 | 334 | 935 | 1,261 | 4,337 | |||||||||||
| | | | | | | | | | | | | | | | | |
Total |
$ | 238,192 | $ | 7,118 | $ | 182,326 | $ | 8,899 | $ | 39,849 | ||||||
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
- (1)
- Assumes
a current LIBOR of 0.17% plus the applicable margin for all periods.
- (2)
- Some
of our surface mining equipment and a coal handling and loading facility are categorized as operating leases. These leases have maturity dates ranging
from three to five years.
- (3)
- We have obligations on various coal and land leases to prepay certain amounts which are recoupable in future years when mining occurs
Critical Accounting Policies and Estimates
Our financial statements are prepared in accordance with accounting principles that are generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses as well as the disclosure of contingent assets and liabilities. Management evaluates its estimates and judgments on an on-going basis. Management bases its estimates and judgments on historical experience and other factors that are believed to be reasonable under the circumstances. Nevertheless, actual results may differ from the estimates used and judgments made. Note 2 to the audited consolidated financial statements included elsewhere in this report provides a summary of all significant accounting policies and refer to Note 13 for information on our postretirement plan. We believe that of these significant accounting policies, the following may involve a higher degree of judgment or complexity.
103
Investment in Joint Ventures
Investments in joint ventures are accounted for using the consolidation, equity method or cost basis depending upon the level of ownership, our ability to exercise significant influence over the operating and financial policies of the investee and whether we are determined to be the primary beneficiary of a variable interest in an entity. Equity investments are recorded at original cost and adjusted periodically to recognize our proportionate share of the investees' net income or losses after the date of investment. Any losses from our equity method investment are absorbed by us based upon our proportionate ownership percentage. If losses are incurred that exceed our investment in the equity method entity, then we must continue to record our proportionate share of losses in excess of our investment. Investments are written down only when there is clear evidence that a decline in value that is other than temporary has occurred.
In May 2008, we entered into a joint venture, Rhino Eastern, with an affiliate of Patriot to acquire the Rhino Eastern mining complex. To initially capitalize the Rhino Eastern joint venture, we contributed approximately $16.1 million for a 51% ownership interest in the joint venture, and we account for the investment in the joint venture and its results of operations under the equity method. We consider the operations of this entity to comprise a reporting segment ("Eastern Met") and have provided supplemental detail related to this operation in Note 21 to the audited consolidated financial statements that are included elsewhere in this report.
In determining that we were not the primary beneficiary of the variable interest entity for the years ended December 31, 2013, 2012 and 2011, we performed a qualitative and quantitative analysis based on the controlling economic interests of the Rhino Eastern joint venture. This included an analysis of the expected economic contributions of the joint venture. We concluded that we are not the primary beneficiary of the joint venture primarily because of certain contractual arrangements by the joint venture with Patriot and the fact that the Rhino Eastern joint venture is managed by a committee of an equal number of representatives from Patriot and us. Mandatory pro rata additional contributions not to exceed $10 million in the aggregate could be required of the joint venture partners, which we would be obligated to fund based upon our 51% ownership interest.
As of December 31, 2013 and 2012, we have recorded our equity method investment of $19.4 million and $21.4 million, respectively, as a long-term asset. During the year ended December 31, 2013, we made capital contributions to the Rhino Eastern joint venture of approximately $2.3 million based upon our proportionate ownership percentage. As disclosed in Note 19 to the audited consolidated financial statements that are included elsewhere in this report, we provided loans to the Rhino Eastern joint venture during 2012 that totaled approximately $11.9 million, which were fully repaid as of December 31, 2012.
Property, Plant and Equipment
Property, plant, and equipment, including coal properties, oil and natural gas properties, mine development costs and construction costs, are recorded at cost, which includes construction overhead and interest, where applicable. Expenditures for major renewals and betterments are capitalized, while expenditures for maintenance and repairs are expensed as incurred. Mining and other equipment and related facilities are depreciated using the straight-line method based upon the shorter of estimated useful lives of the assets or the estimated life of each mine. Coal properties, as well as oil and natural gas properties, are depleted using the units-of-production method, based on estimated proven and probable reserves. Mine development costs are amortized using the units-of-production method, based on estimated proven and probable reserves. Gains or losses arising from sales or retirements are included in current operations.
On March 30, 2005, the Financial Accounting Standards Board (FASB) ratified the consensus reached by the Emerging Issues Task Force, or EITF, on accounting for stripping costs in the mining
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industry. This accounting guidance applies to stripping costs incurred in the production phase of a mine for the removal of overburden or waste materials for the purpose of obtaining access to coal that will be extracted. Under the guidance, stripping costs incurred during the production phase of the mine are variable production costs that are included in the cost of inventory produced and extracted during the period the stripping costs are incurred. We have recorded stripping costs for all of our surface mines incurred during the production phase as variable production costs that are included in the cost of inventory produced. We define a surface mine as a location where we utilize operating assets necessary to extract coal, with the geographic boundary determined by property control, permit boundaries, and/or economic threshold limits. Multiple pits that share common infrastructure and processing equipment may be located within a single surface mine boundary, which can cover separate coal seams that typically are recovered incrementally as the overburden depth increases. In accordance with the accounting guidance for extractive mining activities, we define a mine in production as one from which saleable minerals have begun to be extracted (produced) from an ore body, regardless of the level of production; however, the production phase does not commence with the removal of de minimis saleable mineral material that occurs in conjunction with the removal of overburden or waste material for the purpose of obtaining access to an ore body. We capitalize only the development cost of the first pit at a mine site that may include multiple pits.
Asset Impairments
We follow the accounting guidance on the impairment or disposal of property, plant and equipment, which requires that projected future cash flows from use and disposition of assets be compared with the carrying amounts of those assets when potential impairment is indicated. 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 must be recorded as the difference between the carrying amount of the assets and their respective fair values. Also, in certain situations, expected mine lives are shortened because of changes to planned operations. When that occurs and it is determined that the mine's underlying costs are not recoverable in the future, reclamation and mine closing obligations are accelerated and the mine closing accrual is increased accordingly. To the extent it is determined that asset carrying values will not be recoverable during a shorter mine life, a provision for such impairment is recognized.
During the fourth quarter of 2013, we made a strategic decision to permanently close the mining operations at our McClane Canyon mine in Colorado. Since the McClane Canyon mine had been idled at the end of 2010, we had been actively marketing the coal from this mine to potential buyers, but had not been able to obtain suitable sales contracts. Due to the unfavorable long-term prospects for the coal market in the Colorado area and to avoid the ongoing costs that were being incurred to actively idle this mine, we made the decision to permanently close this operation at the end of 2013. While a portion of the equipment from this operation was relocated to other operating locations, we incurred an impairment charge of approximately $1.7 million during 2013 related to specific property, plant and equipment at this complex. There were no impairment losses recorded during the years ended December 31, 2012 and 2011.
Asset Retirement Obligations
The accounting guidance for asset retirement obligations addresses asset retirement obligations that result from the acquisition, construction, or normal operation of long-lived assets. This guidance requires companies to recognize asset retirement obligations at fair value when the liability is incurred or acquired. Upon initial recognition of a liability, an amount equal to the liability is capitalized as part
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of the related long-lived asset and allocated to expense over the useful life of the asset. We have recorded the asset retirement costs in Coal properties and Oil and natural gas properties.
We estimate our future cost requirements for reclamation of land where we have conducted surface and underground mining operations, based on our interpretation of the technical standards of regulations enacted by the U.S. Office of Surface Mining, as well as state regulations. These costs relate to reclaiming the pit and support acreage at surface mines and sealing portals at underground mines. Other reclamation costs are related to refuse and slurry ponds, as well as holding and related termination or exit costs.
We expense contemporaneous reclamation which is performed prior to final mine closure. The establishment of the end of mine reclamation and closure liability is based upon permit requirements and requires significant estimates and assumptions, principally associated with regulatory requirements, costs and recoverable coal reserves. Annually, we review our end of mine reclamation and closure liability and make necessary adjustments, including mine plan and permit changes and revisions to cost and production levels to optimize mining and reclamation efficiency. When a mine life is shortened due to a change in the mine plan, mine closing obligations are accelerated, the related accrual is increased and the related asset is reviewed for impairment, accordingly.
The adjustments to the liability from annual recosting reflect changes in expected timing, cash flow, and the discount rate used in the present value calculation of the liability. Each respective year includes a range of discount rates that are dependent upon the timing of the cash flows of the specific obligations. Changes in the asset retirement obligations for the year ended December 31, 2013 were calculated with discount rates that ranged from 2.3% to 5.6%. Changes in the asset retirement obligations for the year ended December 31, 2012 were calculated with discount rates that ranged from 3.2% to 5.3%. Changes in the asset retirement obligations for the year ended December 31, 2011 were calculated with discount rates that ranged from 4.2% to 7.0%. The discount rates changed from previous years due to changes in applicable market indicators that are used to arrive at an appropriate discount rate. Other recosting adjustments to the liability are made annually based on inflationary cost increases or decreases and changes in the expected operating periods of the mines. The related inflation rate utilized in the recosting adjustments was 2.3% for 2013 and 2012, and 2.50% for 2011.
Workers' Compensation and Pneumoconiosis ("black lung") Benefits
Certain of our subsidiaries are liable under federal and state laws to pay workers' compensation and coal workers' black lung benefits to eligible employees, former employees and their dependents. We currently utilize an insurance program and state workers' compensation fund participation to secure our on-going obligations depending on the location of the operation. Premium expense for workers' compensation benefits is recognized in the period in which the related insurance coverage is provided.
Our black lung benefit liability is calculated using the service cost method that considers the calculation of the actuarial present value of the estimated black lung obligation. The actuarial calculations using the service cost method for our black lung benefit liability are based on numerous assumptions including disability incidence, medical costs, mortality, death benefits, dependents and interest rates.
In addition, our liability for traumatic workers' compensation injury claims is the estimated present value of current workers' compensation benefits, based on actuarial estimates. The actuarial estimates for our workers' compensation liability are based on numerous assumptions including claim development patterns, mortality, medical costs and interest rates.
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Revenue Recognition
Most of our revenues are generated under supply contracts with electric utilities, industrial companies or other coal-related organizations, primarily in the eastern United States. 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 supply contract. Under the typical terms of these contracts, 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 are deferred and recognized in revenue as coal is shipped and title has passed.
Coal revenues also result from the sale of brokered coal produced by others. The revenues related to brokered coal sales are included in coal revenues on a gross basis and the corresponding cost of the coal from the supplier is recorded in cost of coal sales in accordance with the revenue recognition accounting guidance on principal agent considerations.
Freight and handling costs paid directly to third-party carriers and invoiced to coal customers are recorded as freight and handling costs and freight and handling revenues, respectively.
Other revenues generally consist of coal royalty revenues, limestone sales, coal handling and processing, rebates and rental income. Coal royalty revenues are recognized on the basis of tons of coal sold by our lessees and the corresponding gross revenues from those sales. The leases are based on (1) minimum monthly or annual payments, (2) a minimum dollar royalty per ton and/or a percentage of the gross sales price, or (3) a combination of both. Coal royalty revenues are recorded from royalty reports submitted by the lessee, which are reconciled and subject to audit by us. Most of our lessees are required to make minimum monthly or annual royalty payments that are recoupable over certain time periods, generally two years. If tonnage royalty revenues do not meet the required minimum amount, the difference is paid as a deficiency. These deficiency payments received are recognized as an unearned revenue liability because they are generally recoupable over certain time periods. When a lessee recoups a deficiency payment through production, the recouped amount is deducted from the unearned revenue liability and added to revenue attributable to the coal royalty revenue in the current period. If a lessee does not recoup a deficiency paid during the allocated time period, the recoupment right lost becomes revenue in the current period and is deducted from the liability.
With respect to other revenues recognized in situations unrelated to the shipment of coal, we carefully review the facts and circumstances of each transaction and do 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 collectibility is reasonably assured. Advance payments received are deferred and recognized in revenue when earned.
Derivative Financial Instruments
We occasionally use diesel fuel forward contracts to manage the risk of fluctuations in the cost of diesel fuel. Our diesel fuel forward contracts qualify for the normal purchase normal sale, or NPNS, exception prescribed by the accounting guidance on derivatives and hedging, based on the terms of the contracts and management's intent and ability to take physical delivery of the diesel fuel.
Income Taxes
We are considered a partnership for income tax purposes. Accordingly, the partners report our taxable income or loss on their individual tax returns.
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Recent Accounting Pronouncements
In February 2013, the FASB issued ASU No. 2013-02, "Comprehensive Income (Topic 220) Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income". This ASU requires preparers to report, in one place, information about reclassifications out of accumulated other comprehensive income ("AOCI"). The ASU also requires companies to report changes in AOCI balances. For significant items reclassified out of AOCI to net income in their entirety in the same reporting period, reporting (either on the face of the statement where net income is presented or in the notes) is required about the effect of the reclassifications on the respective line items in the statement where net income is presented. For items that are not reclassified to net income in their entirety in the same reporting period, a cross reference to other disclosures currently required under US GAAP (e.g., pension amounts that are included in inventory) is required in the notes. The above information must be presented in one place (parenthetically on the face of the financial statements by income statement line item or in a note). Public companies must provide the information required by the ASU (e.g., changes in AOCI balances and reclassifications out of AOCI) in interim and annual periods. For public companies, the ASU is effective for fiscal years and interim periods within those years beginning after 15 December 2012, or the first quarter of 2013 for calendar-year companies. We have included the required disclosures of ASU 2013-02 in this report and this ASU did not have a material effect on us.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the risk of loss arising from adverse changes in market rates and prices. The principal market risks to which we are exposed are commodity price risk and interest rate risk.
Commodity Price Risk
We manage our commodity price risk for coal sales through the use of supply contracts. As of December 31, 2013, we had commitments under supply contracts to deliver annually scheduled base quantities of coal as follows:
Year
|
Tons (in thousands) |
Number of customers |
|||||
|---|---|---|---|---|---|---|---|
2014 |
3,045 | 19 | |||||
2015 |
1,796 | 4 | |||||
2016 |
1,100 | 2 | |||||
2017 |
1,100 | 2 | |||||
Some of the contracts have sales price adjustment provisions, subject to certain limitations and adjustments, based on a variety of factors and indices.
In addition, we manage the commodity price exposure associated with the diesel fuel and explosives used in our mining operations through the use of forward contracts with our suppliers. We are also subject to price volatility for steel products used for roof support in our underground mines, which is managed through negotiations with our suppliers since there is not an active forward contract market for steel products.
A hypothetical increase of $0.10 per gallon for diesel fuel would have reduced net income by $0.4 million for the year ended December 31, 2013. A hypothetical increase of 10% in steel prices would have reduced net income by $1.1 million for the year ended December 31, 2013. A hypothetical increase of 10% in explosives prices would have reduced net income by $0.3 million for the year ended December 31, 2013.
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Interest Rate Risk
We have exposure to changes in interest rates on our indebtedness associated with our credit agreement. A hypothetical increase or decrease in interest rates by 1% would have changed our interest expense by $1.7 million for the year ended December 31, 2013.
Item 8. Financial Statements and Supplementary Data.
The Report of Independent Registered Public Accounting Firm, Consolidated Financial Statements and supplementary financial data required for this Item are set forth on pages F-1 through F-45 of this report and are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
- (a)
- Disclosure Controls and Procedures.
Our principal executive officer (CEO) and principal financial officer (CFO) undertook an evaluation of our disclosure controls and procedures as of the end of the period covered by this report. The CEO and CFO have concluded that our controls and procedures were effective as of December 31, 2013 at the reasonable assurance level. For purposes of this section, the term "disclosure controls and procedures" means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
- (b)
- 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 CEO and CFO, and effected by our general partner's 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 generally accepted accounting principles. 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 CEO and CFO, 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 (1992 Framework). Based on our evaluation under this framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2013. The effectiveness of our internal control over financial reporting as of December 31, 2013 has been audited by Ernst & Young LLP, the independent registered public accounting firm that audited the financial statements included in this annual report, as stated in their attestation report appearing on page 111.
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- (c)
- Changes in Internal Control Over Financial Reporting.
There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during our last fiscal quarter that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors of
The Managing General Partner
And the Partners of
Rhino Resource Partners LP
Lexington, Kentucky
We have audited Rhino Resource Partners LP and subsidiaries' internal control over financial reporting as of December 31, 2013, based on criteria established in the Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) (the COSO criteria). Rhino Resource Partners LP and subsidiaries' management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its 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.
In our opinion, Rhino Resource Partners LP and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statement of financial position of Rhino Resource Partners LP and subsidiaries as of December 31, 2013, and the related consolidated statements of operations and comprehensive income, partners' capital and cash flows for the year then ended and our report dated March 14, 2014 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Louisville, Kentucky
March 14, 2014
None.
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Item 10. Directors, Executive Officers and Corporate Governance.
Management of Rhino Resource Partners LP
We are managed and operated by the board of directors and executive officers of our general partner, Rhino GP LLC. Employees of our general partner devote substantially all of their time and effort to our business. As a result of owning our general partner, Wexford has the right to appoint all members of the board of directors of our general partner, including the independent directors. Our unitholders are not entitled to elect our general partner or its directors or otherwise directly participate in our management or operation. Our general partner owes certain fiduciary duties to our unitholders as well as a fiduciary duty to its owners. Our general partner will be liable, as general partner, for all of our debts (to the extent not paid from our assets), except for indebtedness or other obligations that are made specifically nonrecourse to it. Our general partner, therefore, may cause us to incur indebtedness or other obligations that are nonrecourse.
Our general partner has nine directors, three of whom, Messrs. Plaumann, Lambert and Tompkins are independent as defined under the independence standards established by the NYSE and the Exchange Act. The NYSE does not require a publicly traded limited partnership, like us, to have a majority of independent directors on the board of directors of our general partner or to establish a compensation committee or a nominating/corporate governance committee. We are, however, required to have an audit committee of at least three members, and all of its members are required to be independent as defined by the NYSE and the Exchange Act.
When evaluating a candidate's suitability for a position on the board, Wexford assesses whether such candidate possesses the integrity, judgment, knowledge, experience, skill and expertise that are likely to enhance the board's ability to manage and direct our affairs and business, including, when applicable, to enhance the ability of committees of the board to fulfill their duties.
Executive Officers and Directors
The following table shows information for the executive officers and directors of our general partner as of December 31, 2013:
Name
|
Age (as of 12/31/2013) |
Position With Our General Partner | |||
|---|---|---|---|---|---|
David G. Zatezalo |
58 | Chairman of the Board of Directors | |||
Christopher I. Walton |
55 | President and Chief Executive Officer | |||
Richard A. Boone |
59 | Senior Vice President and Chief Financial Officer | |||
Reford C. Hunt |
40 | Vice President of Technical Services | |||
Whitney C. Kegley |
38 | Vice President, Secretary and General Counsel | |||
Brian T. Aug |
42 | Vice President of Sales | |||
Mark D. Zand* |
60 | Director | |||
Jay L. Maymudes* |
52 | Director | |||
Arthur H. Amron* |
57 | Director | |||
Kenneth A. Rubin* |
59 | Director | |||
Joseph M. Jacobs* |
60 | Director | |||
Mark L. Plaumann** |
58 | Director | |||
Douglas Lambert** |
56 | Director | |||
James F. Tompkins** |
65 | Director | |||
- *
- Principal
of Wexford Capital.
- **
- Independent director.
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David G. Zatezalo. Mr. Zatezalo has served as the Chairman of our general partner's board of directors since October 2013. From May 2010 to August 2013, he served as President of our general partner and as Chief Executive Officer of our general partner from May 2010 to October 2013. Mr. Zatezalo has also served as a director of our general partner since July 2010 and also serves as a member of our general partner's compensation committee. He served as President and Chief Executive Officer of Rhino Energy LLC from September 2009 to October 2013. From March 2007 to September 2009, Mr. Zatezalo served as Chief Operating Officer of Rhino Energy LLC. Prior to March 2007, Mr. Zatezalo served as President of our subsidiary Hopedale Mining LLC. Prior to joining Rhino Energy LLC, Mr. Zatezalo served as President of AEP's various Appalachian Mining Operations and as General Manager of Windsor Coal Company from 1998 to May 2004. He previously served as General Manager of the Cliff Collieries and Manager of Underground Development in the Bowen Basin of Queensland for BHP Australia Coal. Additionally, Mr. Zatezalo has served as Chairman of the Ohio Coal Association and is currently Vice Chairman of the Kentucky Coal Association. In total, Mr. Zatezalo has approximately 40 years of experience in the coal industry. Mr. Zatezalo was selected to be a director of our general partner due to his extensive background and familiarity with the coal industry and his leadership position as President and Chief Executive Officer.
Christopher I. Walton. Mr. Walton has served as Chief Executive Officer of our general partner since October 2013 and as President of our general partner since August 2013. From April 2012 to August 2013, Mr. Walton served as Senior Vice President and Chief Operating Officer of our general partner. He previously served as the General Manager of our Sands Hill Mining LLC and Clinton Stone LLC operations in Hamden, Ohio beginning from December 2009 to April 2012. From December 2007 to December 2009, Mr. Walton served as Engineer/Operations Manager of the Partnership's Sands Hill LLC operation. In total, Mr. Walton has approximately 33 years of experience in the coal industry.
Richard A. Boone. Mr. Boone has served as Senior Vice President and Chief Financial Officer of our general partner since May 2010 and as Senior Vice President and Chief Financial Officer of Rhino Energy LLC since February 2005. Prior to joining Rhino Energy LLC, he served as Vice President and Corporate Controller of PinnOak Resources, LLC, a coal producer serving the steel making industry, since 2003. Prior to joining PinnOak Resources, LLC, he served as Vice President, Treasurer and Corporate Controller of Horizon Natural Resources Company, a producer of steam and metallurgical coal, since 1998. In total, Mr. Boone has approximately 33 years of experience in the coal industry.
Reford C. Hunt. Mr. Hunt has served as our general partner's Vice President of Technical Services since May 2010. Since April 2005 Mr. Hunt has served in various capacities with Rhino Energy LLC and its subsidiaries, including as Chief Engineer and Director of Operations. Mr. Hunt currently serves as Vice President of Technical Services of Rhino Energy LLC, a position he has held since August 2008, as Vice President of Rhino Energy WV LLC and McClane Canyon Mining LLC since September 2009 and as Vice President of Castle Valley Mining LLC since August 2010. Prior to joining Rhino Energy LLC, Mr. Hunt was employed by Sidney Coal Company, a subsidiary of Massey Energy Company, from 1997 to 2005. During his time at Sidney Coal Company as a Mining Engineer, he oversaw planning, engineering, and construction for various mining and preparation operations. In total, Mr. Hunt has approximately 17 years of experience in the coal industry.
Whitney C. Kegley. Ms. Kegley has served as our general partner's Vice President, Secretary and General Counsel since July 2012. Prior to joining our general partner, and beginning in April 2012, Ms. Kegley served as a partner with the law firm of Dinsmore & Shohl, LLP in their Lexington, KY office. Ms. Kegley concentrated her practice on mergers and acquisitions and general corporate law with an emphasis on mineral and energy law. From March 2009 to April 2012, Ms. Kegley was a member in the Lexington, KY office of McBrayer, McGinnis, Leslie & Kirkland, PLLC, where she concentrated on mergers and acquisitions and general corporate law with an emphasis on mineral and
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energy law. From August 1999 to March 2009, Ms. Kegley was employed by the law firm of Frost Brown Todd LLC where she held various positions.
Brian T. Aug. Mr. Aug has served as our general partner's Vice President of Sales since August 2013. From April 2011 to August 2013, Mr. Aug served as Director of Sales and Marketing for Rhino Energy LLC . Prior to joining Rhino Energy LLC, he was Vice President of Marketing and Trading Analysis for Greenstar Global Energy, a US based corporation focused on the selling of US coals into India. From 1994 until 2010 he worked for Duke Energy Ohio, a Midwest utility with coal and natural gas power generation. The last 10 years of his career at Duke Energy Ohio was spent as Director of Fuels.
Mark D. Zand. Mr. Zand served as the Chairman of our general partner's board of directors from January 2010 to October 2013. Mr. Zand remains as a director of our general partner's board of directors and also serves as a member of our general partner's compensation committee. He is a partner of Wexford Capital. Mr. Zand joined Wexford Capital in 1996 and became a partner in 2001. He is involved in fixed income and distressed securities research and trading, and in public and private equity investing. Mr. Zand has been actively involved with Wexford Capital's coal investments since its inception. Mr. Zand was selected to serve as a director due to his in-depth knowledge of our business, including our strategies, operations, finances and markets, as well as his significant knowledge of the coal industry. Since our inception, Mr. Zand has been an integral part of our growth and expansion and we believe he will continue to provide valuable guidance to the board of directors of our general partner. In addition, he has served on the boards and creditors' committees of a number of private companies.
Joseph M. Jacobs. Mr. Jacobs has served as a director of our general partner since July 2010. Mr. Jacobs is the President of Wexford Capital, which he co-founded in 1994. From 1982 to 1994, Mr. Jacobs was employed by Bear Stearns & Co., Inc., where he attained the position of Senior Managing Director. From 1979 to 1982, he was employed as a commercial lending officer at Citibank, N.A. Mr. Jacobs served as a director for ICx Technologies, Inc. until August 2010, Republic Airways Holding Company until June 2008 and Azul S.A. until January 2010, and has served on the boards and creditors' committees of a number of public and private companies in which Wexford Capital has held investments. Mr. Jacobs holds an M.B.A. from Harvard Business School and a B.S. in Economics from the Wharton School of the University of Pennsylvania. Mr. Jacobs was selected to serve as a director due to his significant service on the boards of other public and private companies, which provides a thorough understanding of board roles and responsibilities and widespread knowledge of various industries, businesses, operations, opportunities and risks. Mr. Jacobs' current position as President of Wexford Capital also provides a comprehensive knowledge of management strategy and policy.
Jay L. Maymudes. Mr. Maymudes has served as a director of our general partner since January 2010 and serves as a member of our general partner's compensation committee. Mr. Maymudes joined Seven Harbour Global, LP on February 1, 2014 and currently serves as its Chief Financial Officer. Mr. Maymudes was formerly a partner at Wexford Capital from 1997 through December 31, 2013 and he also served as Wexford Capital's Chief Financial Officer. Mr. Maymudes is a Certified Public Accountant and was selected to serve as a director due to his credentials and qualifications in the area of public and financial accounting. Mr. Maymudes has particular skills in corporate finance, corporate governance, compliance, disclosure and compensation matters and has extensive experience in capital market transactions, which we believe provides valuable expertise and insight to the board of directors of our general partner. In addition, Mr. Maymudes has sat on the boards of a number of public and private companies.
Arthur H. Amron. Mr. Amron has served as a director of our general partner since January 2010. He joined Wexford Capital as General Counsel in 1994 and became a partner in 1999. Mr. Amron is responsible for legal and securities compliance and actively participates in various private equity
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transactions, particularly in the bankruptcy and restructuring areas. Mr. Amron was selected to serve as a director due to his experience with us, his background as a corporate and transactional lawyer and his familiarity with mergers and acquisitions transactions, public offerings, financings, and other capital markets and financial transactions, which we believe provides valuable expertise and insight to the board of directors of our general partner. In his capacity as Wexford Capital's General Counsel, Mr. Amron has been involved with us since our formation and is familiar with many of the transactions we have undertaken. In addition, Mr. Amron has served on the boards of other public and private companies in which Wexford Capital has invested.
Kenneth A. Rubin. Mr. Rubin has served as a director of our general partner since January 2010. He joined Wexford Capital in 1996 and became a partner in 2001 and serves as the portfolio manager of the Wexford Global Strategies Fund. Mr. Rubin focuses on investment grade and government fixed income investments. Mr. Rubin was selected to serve as a director due to his long-term experience in the capital and investment markets. Mr. Rubin brings to the board of directors of our general partner an understanding of our business, history and organization. Mr. Rubin has been on the boards of public and private companies.
Mark L. Plaumann. Mr. Plaumann has served as a director of our general partner, as the chair of our general partner's audit committee and as a member of our general partner's conflicts committee since October 2010. He is currently a Managing Member of Greyhawke Capital Advisors LLC, or Greyhawke, which he co-founded in 1998. Prior to founding Greyhawke, Mr. Plaumann was a Senior Vice President of Wexford Capital. Mr. Plaumann was formerly a Managing Director of Alvarez & Marsal, Inc. and the President of American Healthcare Management, Inc. He also earned the position of Senior Manager at Ernst & Young LLP. Mr. Plaumann holds an M.B.A. and a B.A. in Business from the University of Central Florida. Mr. Plaumann served as a director and audit committee chairman for ICx Technologies, Inc. until October 2010 and served as audit committee chairman of Republic Airways Holdings, Inc. until February 2014. Mr. Plaumann currently serves as a director and audit committee member of Republic Airways Holdings, Inc., and serves as director and audit committee chairman of Diamondback Energy, Inc., as well as a director of one private company. Mr. Plaumann was selected to serve as a director of our general partner due to his significant financial and audit expertise. Mr. Plaumann's service on the boards of other public companies, including previous experience as chairman of audit committees, gives him a clear understanding of his role and responsibilities on our general partner's board of directors.
Douglas Lambert. Mr. Lambert has served as a director of our general partner and as a member of our general partner's audit committee and conflicts committee since October 2010. He is presently a Managing Director with Alvarez & Marsal Inc., a position he has held since November 2006, and had previously served as Chief Executive Officer of Legacy Asset Management Company, a wholly-owned subsidiary of Lehman Brothers Holdings, Inc.. Mr. Lambert has been a director of Republic Airways Holdings, Inc., an airline holding company, since 2001. From 1994 to 2003, Mr. Lambert was a Senior Vice President of Wexford Capital. From 1983 to 1994, Mr. Lambert held various financial positions with Integrated Resources, Inc.'s Equipment Leasing Group, including Treasurer and Chief Financial Officer. Mr. Lambert is a member of the American Institute of Certified Public Accountants and the New York State Society of Certified Public Accountants. Mr. Lambert was chosen to serve as a director due to his strong and diverse financial and operational background in a variety of different businesses and industries.
James F. Tompkins. Mr. Tompkins has served as a director of our general partner and as a member of our general partner's audit committee and conflicts committee since October 2010. He is currently the President of JFT Consultants, LLC, a firm that provides consulting services to the coal and associated industries and which Mr. Tompkins founded in 1997. Prior to founding JFT Consultants, Mr. Tompkins served as a Vice President of the Southern Ohio Coal Company. Mr. Tompkins also
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worked in the mining industry in West Virginia, Nova Scotia, and Manitoba. Mr. Tompkins earned a Bachelor of Mining Engineering degree from Dalhousie University (DalTech) in 1971 and an M.A. in Interpersonal Communication from Ohio University in 1997. He is a member of the Ohio Chapter of the Society of Mining Engineers and a member of the Mining Society of Nova Scotia. Mr. Tompkins has served on several non-profit boards in southern Ohio. Mr. Tompkins was selected to serve as a director of our general partner due to his extensive operational and engineering expertise in the coal industry, as well as his financial experience.
Director Independence
The board of directors of our general partners has determined that each of Messrs. Plaumann, Lambert and Tompkins are independent as defined under the independence standards established by the NYSE and the Exchange Act. Because we are a limited partnership, we are exempt under the rules of the NYSE from the requirement to have a majority of independent directors, as well as a compensation and nominating or corporate governance committee. In evaluating director independence with respect to Mr. Plaumann and Mr. Lambert, the board of directors of our general partner considered the various relationships each of them has with Wexford Capital and its affiliates. Certain affiliated investment funds of Wexford Capital were the majority owners of ICx Technologies, Inc. until October 2010. As described above, Mr. Plaumann served as an independent director and audit committee chairman of ICx Technologies, Inc. until October 2010. In addition, as described below, both Mr. Plaumann and Mr. Lambert were former employees of Wexford Capital and continue to hold small interests in Wexford Capital private equity funds in connection with investments that were made at the time each of them was employed by Wexford Capital. Certain of these funds hold an interest in Rhino Energy Holdings LLC, which as of March 7, 2014, beneficially owns an aggregate 50% of our outstanding units. Mr. Plaumann's and Mr. Lambert's indirect beneficial interest in Rhino Energy Holdings LLC through these funds is immaterial. The board of directors of our general partner considered these relationships in light of the attributes it believes need to be possessed by independent-minded directors, including personal financial substance and a lack of economic dependence on us. The board of directors of our general partner concluded that each of Mr. Plaumann's and Mr. Lambert's relationships, rather than interfering with their ability to be independent from management, are consistent with the business and financial substance that make them qualified, independent directors.
Meetings; Committees of the Board of Directors
The board of directors of our general partner held quarterly meetings during the year ended December 31, 2013. All of the directors attended each meeting. The board of directors of our general partner has an audit committee, a conflicts committee and, although not required by the NYSE, a compensation committee.
Audit Committee
The audit committee of our general partner has been established in accordance with Section 3(a)(58)(A) of the Exchange Act, and consists of Messrs. Plaumann, Lambert and Tompkins, all of whom are independent. The board of directors of our general partner has determined Mr. Plaumann is an "audit committee financial expert" within the meaning of the SEC rules. Our audit committee operates pursuant to a written charter, an electronic copy of which is available on our website at http://www.rhinolp.com. This committee oversees, reviews, acts on and reports to our board of directors of our general partner on various auditing and accounting matters, including: the selection of our independent accountants, the scope of our annual audits, fees to be paid to the independent accountants, the performance of our independent accountants and our accounting practices. In addition, the audit committee oversees our compliance programs relating to legal and regulatory requirements.
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Compensation Committee
The compensation committee of our general partner consists of Messrs. Zatezalo, Zand and Maymudes, and operates pursuant to a written charter. This committee establishes salaries, incentives and other forms of compensation for officers and other employees. The compensation committee also administers our incentive compensation and benefit plans. Because we are exempt under the rules of the NYSE from the requirement to have a compensation committee, our compensation committee is not required to consist of independent directors.
Conflicts Committee
Messrs. Plaumann, Lambert and Tompkins serve on the conflicts committee to review specific matters that the board believes may involve conflicts of interest and determine to submit to the conflicts committee for review. The conflicts committee will determine if the resolution of the conflict of interest is fair and reasonable to us. The members of the conflicts committee may not be directors, officers or employees of our general partner or any person controlling our general partner, including Wexford Capital, and must meet the independence standards established by the NYSE and the Exchange Act to serve on an audit committee of a board of directors, along with other requirements in our partnership agreement. Any matters approved by the conflicts committee will be conclusively deemed to be fair and reasonable to us, approved by all of our partners and not a breach by our general partner of any duties it may owe us or our unitholders.
Executive Sessions of Non-Management Directors; Procedure for Contacting the Board of Directors
The board of directors of our general partner has held regular executive sessions in which the three independent directors meet without any members of management present. The purpose of these executive sessions is to promote open and candid discussion among the independent directors. The rules of the NYSE require that one of the independent directors must preside over each executive session, and the role of presiding director is rotated among each of the independent directors.
A means for interested parties to contact the Board of Directors (including the independent directors as a group) directly has been established in the general partner's Corporate Governance Guidelines, published on our website at www.rhinolp.com. Information may be submitted confidentially and anonymously, although we may be obligated by law to disclose the information or identity of the person providing the information in connection with government or private legal actions and in certain other circumstances.
Code of Ethics
We have adopted a Code of Business Conduct and Ethics that applies to all of our officers, directors and employees. An electronic copy of the code is available on our website at http://www.rhinolp.com. For a discussion on what other corporate governance materials are posted on our website, see Part I, Item 1. "Business—Available Information." We intend to disclose any amendments to, or waivers from, our Code of Business Conduct and Ethics that apply to our principal executive officer, principal financial officer, and principal accounting officer or controller on our website promptly following the date of any such amendment or waiver.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires directors, executive officer and persons who beneficially own more than 10% of a registered class of our equity securities to file with the SEC initial reports of ownership and reports or changes in ownership of such equity securities. Such persons are also required to furnish us with copies of all Section 16(a) forms that they file. Based upon a review of the copies of the forms furnished to us and written representations from certain reporting persons, we
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believe that, during the year ended December 31, 2013, none of our executive officers, directors or beneficial owners of more than 10% of any class of registered equity security failed to file on a timely basis any such report.
Item 11. Executive Compensation
Compensation Discussion and Analysis
Introduction
Our general partner has the sole responsibility for conducting our business and for managing our operations, and its board of directors and officers make decisions on our behalf. The compensation committee of the board of directors of our general partner determines the compensation of the directors and officers of our general partner, including its named executive officers. The compensation payable to the officers of our general partner is paid by our general partner and reimbursed by us on a dollar-for-dollar basis.
In 2013, the named executive officers of our general partner were:
- •
- David G. Zatezalo—Chairman of the board of directors, former President and Chief Executive Officer;
- •
- Christopher I. Walton—President and Chief Executive Officer, former Senior Vice President and Chief Operating
Officer;
- •
- Richard A. Boone—Senior Vice President and Chief Financial Officer;
- •
- Reford C. Hunt—Vice President of Technical Services; and
- •
- Whitney C. Kegley—Vice President, Secretary and General Counsel.
With respect to the compensation disclosures in this Compensation Discussion and Analysis and the tables that follow, these individuals are referred to as the "named executive officers."
Compensation Philosophy and Objectives
We employ a compensation philosophy that emphasizes pay for performance and reflects what the current market dictates. The executive compensation program applicable to the named executive officers is designed to provide a total compensation package that allows us to attract, retain and motivate the executives necessary to manage our business. Our general philosophy and program is guided by several key principles:
- •
- designing competitive total compensation programs to enhance our ability to attract and retain knowledgeable and
experienced senior management level employees;
- •
- motivating employees to deliver outstanding financial performance and meet or exceed general and specific business,
operational, and individual objectives; and
- •
- setting compensation and incentive levels relevant to the market in which the employee provides service.
Our executive compensation program is also designed to ensure that a portion of the total compensation made available to the named executive officers is determined by increases in equity value, thereby assuring an alignment of interests between our senior management level employees and our unitholders.
By accomplishing these objectives, we hope to optimize long-term unitholder value.
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Compensation Setting Process
Our general partner's compensation committee seeks to provide a total compensation package designed to drive performance and reward contributions in support of our business strategies and to attract, motivate and retain high quality talent with the skills and competencies that we require. In the future, the compensation committee may examine the compensation practices of our peer companies and may also review compensation data from the coal industry generally to the extent the competition for executive talent is broader than a group of selected peer companies. To date, the compensation committee has not made any decisions regarding possible benchmarking. In addition, the compensation committee may review and, in certain cases, participate in, various relevant compensation surveys and consult with compensation consultants with respect to determining compensation for the named executive officers. We anticipate that our general partner's compensation committee may consider relevant surveys in determining appropriate pay levels in the future. We expect that our general partner's Chairman of the board of directors, Mr. Zatezalo, will provide periodic recommendations to the compensation committee regarding the compensation of the other named executive officers. The compensation committee reviews the compensation structure for the named executive officers of our general partner on an annual basis. During 2013, the compensation committee modified the compensation for certain of our named executive officers, as described under "—Elements of Compensation—Employment Agreements" below.
Elements of Compensation
The principal elements of compensation for our named executive officers are:
- •
- base salary;
- •
- bonus awards;
- •
- long-term equity based incentive awards; and
- •
- nondiscriminatory welfare and retirement benefits.
We believe that a material amount of executive compensation should be tied to our performance, and that a significant portion of the total prospective compensation of each named executive officer should be tied to measurable financial and operational objectives. These objectives may include absolute performance or performance relative to a peer group. During periods when performance meets or exceeds established objectives, the named executive officers should be paid at or above targeted levels, respectively. When our performance does not meet key objectives, incentive award payments, if any, should be less than such targeted levels.
The compensation committee seeks to balance awards based on short-term annual results with awards intended to compensate our executives based on our long-term viability and success. Consequently, we made long-term equity-based awards to each of our named executive officers in connection with the completion of the IPO and intend to grant additional awards of phantom units from time to time, as determined in the discretion of the compensation committee. In the first quarter of 2013 and during the first quarter of 2014, we granted additional phantom unit awards to Messrs. Boone, Walton, and Hunt and Ms. Kegley to provide long-term incentives to further align the interests of these named executive officers with those of our unitholders. Our general partner believes that awards under its long-term incentive plan (the "LTIP") further incentivize the named executive officers to perform their duties in a way that will enhance our long-term success. The compensation committee elected not to grant any phantom unit awards to Mr. Zatezalo during the first quarter of 2013, although he received a restricted unit award in October 2013 under the LTIP in connection with his appointment as Chairman of our general partner's board of directors.
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Our general partner's compensation committee determines the mix of compensation, comprised of both among short-term and long-term compensation and cash and non-cash compensation, included in the compensation packages for each of the named executive officers. We believe that the mix of base salary, bonus awards, awards under the LTIP and the other benefits that are available to our named executive officers effectively accomplish our overall compensation objectives. We believe the elements of compensation provided create competitive compensation opportunities to align and drive employee performance in support of our business strategies and to attract, motivate and retain high quality talent with the skills and competencies required by us.
Employment Agreements
We have entered into employment agreements with each of the named executive officers. Our employment agreements typically provide for a three year term, which may be terminated earlier in accordance with the terms of the applicable agreement or extended by mutual agreement of the parties. The terms of these employment agreements are described in greater detail below in the section entitled "—Narrative Discussion of Summary Compensation Table and Grants of Plan-Based Awards Table—Employment Agreements."
Effective October 20, 2013, we entered into an amended and restated employment agreement with Mr. Zatezalo. The amendment and restatement of Mr. Zatezalo's employment agreement was concurrent with his resignation as Chief Executive Officer and included the appointment of Mr. Zatezalo as Chairman of the board of directors of the general partner and is effective for an initial two year term commencing from the effective date of the amendment and automatically renews on an annual basis for an additional 12-month period unless either party provides notice of non-renewal. The new agreement includes an annual base salary of $135,000 per year during his first year of employment based upon an expectation that Mr. Zatezalo will spend approximately 25% of normal business hours providing services to us. His annual salary may be adjusted after the first year based on Mr. Zatezalo's time requirements of providing services to us. Mr. Zatezalo also became entitled to receive a one-time cash bonus of $112,000, which was paid in January 2014. Mr. Zatezalo is entitled to participate in the employee benefit arrangements offered to similarly situated employees and is also eligible to participate in the board of directors annual equity compensation plan beginning in the fourth quarter of 2013. The agreement also provides for us to provide Mr. Zatezalo with use of an automobile suitable for his duties.
In October 2013, we also entered into an amended and restated employment agreement with Mr. Walton in connection with his appointment as President and Chief Executive Officer. The term of the amended and restated employment agreement with Mr. Walton extends until December 31, 2016 (unless earlier terminated as provided in the agreement or by the mutual agreement of the parties) and increases his annual base salary to $440,000 per year, which increases to $460,000 for calendar year 2015 and $480,000 for calendar year 2016. Mr. Walton's new agreement also includes an annual discretionary bonus of up to 150% of his base salary, which was prorated for calendar year 2013 based on the time spent in his new role as President and Chief Executive Officer. The agreement also provides for us to continue to provide Mr. Walton with use of an automobile suitable for his duties.
The severance benefits provided under the employment agreements with the named executive officers are described below in the section titled "—Potential Payments Upon Termination or Change in Control—Employment Agreements." The employment agreements also contain certain confidentiality, noncompetition, and other restrictive covenants, which are also described in the section titled "—Potential Payments Upon Termination or Change in Control—Employment Agreements."
Base Salary. The named executive officers' base salaries are established based on various factors, including the amounts we considered necessary to attract and retain the highest quality executives, the responsibilities of the named executive officers and the historic compensation of our executives. Our
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compensation committee reviews the base salaries of our named executive officers on an annual basis and may adjust base salaries consistent with the employment agreements. As part of its review, the compensation committee may review the compensation of executives in similar positions with similar responsibility in any peer companies identified by the compensation committee or in companies in the coal industry with which we generally compete for executives. While our compensation committee will consider all of the foregoing factors in determining the appropriate amount of base salary for each named executive officer, ultimately the minimum base salary for each individual officer was established through negotiations with the individual. In accordance with their employment agreements, Mr. Zatezalo's base salary increased to $540,000 effective for fiscal year 2013 and was adjusted to $135,000 in October 2013 upon his resignation as Chief Executive Officer. Mr. Walton's base salary increased to $440,000 per year in October 2013 upon his appointment as President and Chief Executive Officer. Mr. Boone's base salary increased to $315,000 effective May 31, 2013 and Mr. Hunt's base salary increased to $245,000 effective September 1, 2013. Ms. Kegley's base salary did not change during 2013.
Bonus Awards. We generally provide discretionary annual bonuses to each of our named executive officers. We review annual cash bonus awards for the named executive officers and other executives annually to determine award payments for the last completed fiscal year, as well as to establish award opportunities for the current fiscal year. Approximately one-half of each named executive officer's bonus for 2013 was determined based upon achievement of certain entity-wide safety measures and coal production goals. The other one-half of each named executive officer's annual bonus amount was purely discretionary based upon a review of the named executive officer's individual performance. The total amount of the annual 2013 bonuses was reviewed and approved by the compensation committee.
Consistent with our historical practice, we have retained a maximum bonus threshold of 40% for most of our named executive officers. Our employment agreements with each of the named executive officers provide that the annual bonus actually awarded to a named executive officer for a given fiscal year may be up to 40% of his annual salary (up to 150% of annual base salary in the case of Mr. Walton and up to 75% of annual base salary in the case of Mr. Boone). In order to incentivize Mr. Walton to improve our performance, we have structured a large portion of his cash compensation to be a discretionary, performance-based bonus of up to 150% of his annual base salary.
The following table sets forth the annual rate of base salary payable for fiscal 2013 and potential bonus amounts for the named executive officers pursuant to their employment agreements:
Name and Principal Position
|
Base Salary(1) |
Bonus(1) | |||
|---|---|---|---|---|---|
David G. Zatezalo |
$ | 540,000 | 0% to 150% of base salary | ||
Chairman |
|||||
Christopher I. Walton |
$ | 440,000 | 0% to 150% of base salary | ||
President and Chief Executive Officer |
|||||
Richard A. Boone |
$ | 315,000 | 0% to 75% of base salary | ||
Senior Vice President and Chief Financial Officer |
|||||
Reford C. Hunt |
$ | 245,000 | 0% to 40% of base salary | ||
Vice President of Technical Services |
|||||
Whitney C. Kegley |
$ | 190,000 | 0% to 40% of base salary | ||
Vice President, Secretary and General Counsel |
|||||
- (1)
- Mr. Zatezalo's base salary and bonus were adjusted per the terms of his new employment agreement in October 2013 upon his resignation as Chief Executive Officer and appointment as Chairman of the board of directors.
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Severance and Change in Control Benefits. The employment agreements with the named executive officers provide such individuals with certain severance benefits upon an involuntary termination, including, in some cases, upon a termination due to death. We believe it is appropriate to provide these severance benefits in recognition of the fact that it may be difficult for the named executive officers to find comparable employment within a short period of time if they are involuntarily terminated. The severance and benefits provided under the employment agreements are described in greater detail below. Please read "—Potential Payments Upon Termination or Change in Control—Employment Agreements."
Long-Term Incentive Compensation
The board of directors of our general partner has adopted the LTIP for our employees, consultants and directors and those of our affiliates who perform services for us. Each of the named executive officers is eligible to participate in the LTIP. The LTIP provides for the grant of restricted units, unit options, unit appreciation rights, phantom units, unit payments, other equity-based awards and performance awards.
In connection with our IPO, the named executive officers each received a grant of phantom units under the LTIP in the following amounts: Mr. Zatezalo (73,171 phantom units), Mr. Boone (24,390 phantom units), Mr. Walton (1,220 phantom units) and Mr. Hunt (1,220 phantom units). Ms. Kegley was not employed with us at the time of our IPO. The approximate dollar values of these phantom unit awards were determined as follows: (1) Mr. Zatezalo's award is equal to approximately three times his base salary at the time of the award; (ii) Mr. Boone's award was targeted at approximately two times his base salary at the time of the award; and (iii) awards to Messrs. Walton and Hunt were not tied to their salary levels, but were consistent with the awards granted to other officers in connection with the offering. These multiples of base salary were established at the discretion of our President and Chief Executive Officer at that time and Wexford Capital and through negotiations with our executive officers.
The phantom units vest in equal one-sixth increments over a 36-month period, subject to earlier vesting upon a change of control or the executive's termination due to death or disability. Please read "—Potential Payments Upon Termination or Change in Control—LTIP Phantom Unit Awards." Distributions of dividend equivalent rights, or DERs, credited with respect to unvested phantom units are paid upon vesting of the associated phantom units (and are forfeited at the same time the associated phantom units are forfeited). The final vesting of phantom units granted at the IPO date occurred in October 2013.
In the first quarters of 2012, 2013 and 2014, the compensation committee approved discretionary grants of phantom unit awards under the LTIP to certain named executive officers. These discretionary awards of phantom units were based upon a maximum value of one-half of the executive's annual pre-tax cash bonus award and the phantom units vest in equal one-third installments over a 36-month period from the respective grant date. These discretionary annual awards provide a long-term incentive to our executives to further align the interests of the named executive officers with those of our unitholders.
With respect to future equity compensation awards, we intend to continue to primarily utilize phantom units with associated DERs to provide long-term incentives to our named executive officers. DERs enable the recipients of phantom unit awards to receive cash distributions on our phantom units to the same extent generally as unitholders receive cash distributions on our common units. These awards are intended to align the interests of key employees (including the named executive officers) with those of our unitholders.
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401(k) Plan
Rhino Energy LLC and certain of its subsidiaries are participating employers in the Rhino Energy LLC 401(k) Plan (the "Rhino 401(k) Plan") and Rhino Energy LLC's subsidiary Hopedale Mining LLC sponsors its own plan (the "Hopedale 401(k) Plan" and, collectively with the Rhino 401(k) Plan, the "401(k) Plans"). The companies use the 401(k) Plans to assist their eligible employees in saving for retirement on a tax-deferred basis. The 401(k) Plans permit all eligible employees, including the named executive officers, to make voluntary pre-tax contributions to the applicable plan, subject to applicable tax limitations. The companies make safe harbor matching contributions to the 401(k) Plans for those eligible employees who meet certain conditions and subject to certain limitations under federal law. Under the Rhino 401(k) Plan, eligible employees receive matching contributions equal to 100% of their pre-tax contributions not exceeding 3% of their eligible compensation, plus 50% of their pre-tax contributions in excess of 3% but not in excess of 5% of their eligible compensation. Under the Hopedale 401(k) Plan, eligible employees receive matching contributions equal to 100% of their pre-tax contributions, but not as to pre-tax contributions exceeding 6% of their eligible compensation. In addition, discretionary employer non-elective contributions may be made under the 401(k) Plans. Employee and employer contributions are subject to annual dollar limitations, which are periodically adjusted for changes in the cost of living. Each 401(k) Plan is intended to be tax-qualified under Section 401(a) of the Internal Revenue Code so that contributions to the plan, and income earned on such contributions, are not taxable to employees until withdrawn from the plan, and so that contributions, if any, will be deductible when made.
Other Benefits
The employment agreements for each of the named executive officers provide, in general, that the named executive officer is eligible to participate in our employee benefit plans provided to salaried employees generally. Additional benefits and perquisites for the named executive officers may include payment of premiums for supplemental life insurance, long-term disability insurance and automobile fringe benefits. In 2013, the only perquisite provided to the named executive officers was the use of a company owned automobile.
Tax Deductibility of Compensation
With respect to the deduction limitations under Section 162(m) of the Internal Revenue Code, we are a limited partnership and do not meet the definition of a "corporation" under Section 162(m). Hence, we are not subject to the deduction limitations imposed by Section 162(m).
Compensation Committee Report
The compensation committee of our general partner has reviewed and discussed this Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management and, based on such review and discussion, the compensation committee recommended to the board of directors of our general partner that this Compensation Discussion and Analysis be included in this Form 10-K for the fiscal year ended December 31, 2013.
Members of the compensation committee:
David
Zatezalo
Jay Maymudes
Mark Zand
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Summary Compensation Table
The following table sets forth the cash and other compensation earned by each of our named executive officers for the years ended December 31, 2013, 2012 and 2011.
Name and Principal Position
|
Year | Salary ($) |
Bonus ($)(1) |
Unit Awards ($)(2) |
All Other Compensation ($)(3) |
Total ($) |
|||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
David G. Zatezalo |
2013 | $ | 469,442 | $ | — | $ | 25,006 | $ | 23,445 | $ | 517,893 | ||||||||
Chairman of the Board of Directors |
2012 | 519,615 | 377,500 | — | 15,277 | 912,392 | |||||||||||||
and former President and Chief |
2011 | 499,616 | 357,200 | — | 21,264 | 878,080 | |||||||||||||
Executive Officer |
|||||||||||||||||||
Christopher I. Walton |
2013 |
332,597 |
150,000 |
40,000 |
10,842 |
533,439 |
|||||||||||||
President and Chief Executive |
2012 | 255,578 | 63,500 | 21,994 | 11,942 | 353,014 | |||||||||||||
Officer |
2011 | 133,750 | 44,000 | — | 9,911 | 187,661 | |||||||||||||
Richard A. Boone |
2013 |
306,232 |
90,000 |
57,998 |
12,509 |
466,739 |
|||||||||||||
Senior Vice President and Chief |
2012 | 286,308 | 117,100 | 55,998 | 12,356 | 471,762 | |||||||||||||
Financial Officer |
2011 | 264,231 | 116,300 | — | 12,639 | 393,170 | |||||||||||||
Reford C. Hunt |
2013 |
238,078 |
35,000 |
28,002 |
13,992 |
315,072 |
|||||||||||||
Vice President of Technical |
2012 | 228,076 | 51,600 | 26,003 | 13,119 | 318,798 | |||||||||||||
Services |
2011 | 190,769 | 55,800 | — | 12,147 | 258,716 | |||||||||||||
Whitney C. Kegley |
2013 |
190,000 |
32,000 |
29,997 |
10,200 |
262,197 |
|||||||||||||
Vice President, Secretary and |
2012 | 84,039 | 17,800 | — | 840 | 102,679 | |||||||||||||
General Counsel |
2011 | — | — | — | — | — | |||||||||||||
- (1)
- The
bonus amount reflects the annual cash bonus awarded to each named executive per the terms of their employment agreements.
- (2)
- The
amounts reported in the "Unit Awards" column reflect the aggregate grant date fair value of phantom unit awards and restricted unit awards granted under
the LTIP, computed in accordance with FASB ASC Topic 718. See Note 2 to our consolidated financial statements for additional detail regarding assumptions underlying the value of these equity
awards.
- (3)
- Amounts reflect, as applicable with respect to the named executive officers and as provided in the supplemental table below, the use of a company provided automobile and employer contributions to the Rhino 401(k) Plan and the Hopedale 401(k) Plan. The value of automobile use is calculated as the monthly lease payment paid by us on behalf of the executive multiplied by the monthly percentage of personal use of the automobile by the executive.
Name
|
Automobile Use | Employer Contribution to Rhino 401(k) Plan |
Employer Contribution to the Hopedale 401(k) Plan |
|||||||
|---|---|---|---|---|---|---|---|---|---|---|
David G. Zatezalo |
$ | 495 | $ | — | $ | 22,950 | ||||
Christopher I. Walton |
642 | 10,200 | — | |||||||
Richard A. Boone |
2,309 | 10,200 | — | |||||||
Reford C. Hunt |
3,792 | 10,200 | — | |||||||
Whitney C. Kegley |
— | 10,200 | — | |||||||
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Grants of Plan-Based Awards
Certain named executive officers received discretionary annual awards of phantom units that were granted on March 1, 2013. The dollar amounts of the awards granted were calculated based upon a percentage of the annual pre-tax cash bonus awards the employees received in connection with their fiscal year 2012 performance. The following table sets forth information concerning equity awards for the named executive officers that were granted during the year ended December 31, 2013.
Name
|
Number of Units Granted (#) |
Value of Units Granted ($)(1) |
|||||
|---|---|---|---|---|---|---|---|
David G. Zatezalo |
2,033 | $ | 25,006 | ||||
Christopher I. Walton |
2,847 | $ | 40,000 | ||||
Richard A. Boone |
4,128 | $ | 57,998 | ||||
Reford C. Hunt |
1,993 | $ | 28,002 | ||||
Whitney C. Kegley |
2,135 | $ | 29,997 | ||||
- (1)
- The
amounts reported reflect the aggregate grant date fair value of phantom unit awards granted under the LTIP, computed in accordance with FASB ASC Topic
718. See Note 2 to our consolidated financial statements for additional detail regarding assumptions underlying the value of these equity awards.
- (2)
- The units granted to Mr. Zatezalo are the restricted units he received in connection with his appointment as Chairman of the board of directors in the fourth quarter of 2013.
Narrative Discussion of Summary Compensation Table and Grants of Plan-Based Awards Table
Employment Agreements
During 2013, we had employment agreements in effect with each of the named executive officers. The employment agreements with Messrs. Zatezalo, Walton, Boone and Hunt and Ms. Kegley set forth the annual base salary payable to each named executive officer. During 2013, Messrs. Zatezalo's, Walton's, Boone's and Hunt's employment agreements provided for automatic base salary increases and Ms. Kegley's employment agreement may be reviewed each year for a possible salary increase. The named executive officers were each entitled in 2013 under their respective employment agreements to receive an annual discretionary bonus of up to 40% of their annual base salary (150% of base salary in the case of Mr. Zatezalo and Mr. Walton and 75% of base salary in the case of Mr. Boone). The named executive officers are also entitled to participate in our employee benefit programs, to the extent eligible. Pursuant to their respective employment agreements, we provide Messrs. Zatezalo, Walton, Boone and Hunt with automobiles suitable for their duties and responsibilities to us.
We entered into an amended and restated employment agreement with Mr. Zatezalo, effective January 1, 2010. We have also entered into amended and restated employment agreements with Mr. Walton, effective April 2, 2012, Mr. Boone, effective May 31, 2011, and Mr. Hunt, effective September 13, 2011. As described previously, we entered into an amendment of the amended and restated employment agreement with Mr. Zatezalo, effective October 20, 2013, which included the appointment of Mr. Zatezalo as Chairman of the board of directors of the general partner. Also, as described previously, we entered into an amended and restated employment agreement with Mr. Walton, effective October 21, 2013, which included his appointment to the position of President and Chief Executive Officer. The amended and restated employment agreements are substantially similar to the agreements previously in effect, except as previously described in the section of our Compensation Discussion and Analysis titled "—Elements of Compensation—Employment Agreements." The severance and change in control benefits provided by the employment agreements
125
with the named executive officers are described below in the section titled "—Potential Payments Upon Termination or Change in Control—Employment Agreements."
Phantom Unit Awards
On September 30, 2010, the compensation committee approved a grant of phantom units under the LTIP to each of the named executive officers in connection with our IPO. All phantom units vested in equal one-sixth increments over a 36-month period (i.e., approximately 16.6% vested at each six month anniversary of the date of grant, so that the phantom units were 100% vested on October 5, 2013), provided the named executive officer remained an employee continuously from the date of grant through the applicable vesting date.
Certain named executives received discretionary awards of phantom units in 2013 and 2012 in respect of fiscal 2012 and 2011 performance, respectively. These phantom unit awards vest in equal annual installments over a 36-month period (i.e., approximately 33.3% vest at each annual anniversary of the date of grant, so that the phantom units will be 100% vested in early 2016 and 2015, respectively), provided the named executive officer remains an employee continuously from the date of grant through the applicable vesting date. The phantom units will become fully vested upon a change in control or if the named executive officer's employment is terminated due to disability or death. In addition, if the named executive officer's employment is terminated by us without cause or by the executive for good reason, the vesting of those phantom units scheduled to vest in the 12 month period following such termination will be accelerated to the officer's termination date. While a named executive officer holds unvested phantom units, he is entitled to receive DER credits that will be paid in cash upon vesting of the associated phantom units (and will be forfeited at the same time the associated phantom units are forfeited).
Outstanding Equity Awards at Fiscal Year End
The following table sets forth information concerning outstanding equity awards held by each of our named executive officers as of December 31, 2013.
| |
Unit Awards | ||||||
|---|---|---|---|---|---|---|---|
Name
|
Number of Units That Have Not Vested (#)(1) |
Market Value of Units That Have Not Vested ($)(2) |
|||||
David G. Zatezalo |
1,525 | $ | 17,355 | ||||
Christopher I. Walton |
3,644 | $ | 41,469 | ||||
Richard A. Boone |
6,158 | $ | 70,078 | ||||
Reford C. Hunt |
2,936 | $ | 33,412 | ||||
Whitney C. Kegley |
2,135 | $ | 24,296 | ||||
- (1)
- The vesting schedule applicable to these outstanding phantom units is described above under "Narrative Discussion of Summary Compensation Table and Grants of Plan-Based Awards Table." Approximately one-third of the phantom units granted in 2013 vested on March 1, 2014 and the remaining units vest in equal installments on March 1, 2015 and March 1, 2016, provided that the named executive officer remains continuously employed through each such date. Approximately one-third of the phantom units granted in 2012 vested on March 1, 2013 and another one-third vested on March 1, 2014. The remaining units vest on March 1, 2015, provided that the named executive officer remains continuously employed through such date.
126
- (2)
- This column represents the closing price of our common units on December 31, 2013 (the last trading day in 2013), which is $11.38, multiplied by the number of phantom units outstanding.
Option Exercises and Units Vested
The following table sets forth information concerning equity awards for the named executive officers that vested during the year ended December 31, 2013.
| |
Unit Awards | ||||||
|---|---|---|---|---|---|---|---|
Name
|
Number of Units Acquired Upon Vesting (#) |
Value of Units Realized Upon Vesting ($)(1) |
|||||
David G. Zatezalo |
24,390 | $ | 317,314 | ||||
Christopher I. Walton |
805 | $ | 10,888 | ||||
Richard A. Boone |
9,145 | $ | 120,032 | ||||
Reford C. Hunt |
877 | $ | 11,900 | ||||
Whitney C. Kegley |
— | $ | — | ||||
- (1)
- This column represents the closing price of our common units on the last trading day preceding the applicable vesting date, multiplied by the number of phantom units vesting (calculated before withholding for any applicable taxes).
Pension Benefits
Currently, we do not, and we do not intend to, provide pension benefits to our employees including the named executive officers. Our general partner may change this policy in the future.
Nonqualified Deferred Compensation Table
Currently, we do not, and we do not intend to, sponsor or adopt a nonqualified deferred compensation plan. Our general partner may change this policy in the future.
Potential Payments Upon Termination or Change in Control
We have employment agreements with each of the named executive officers that contain provisions regarding payments to be made to such individuals upon an involuntary termination of their employment by us, other than for cause. The employment agreements are described in greater detail below and in the section above titled "—Compensation Discussion and Analysis—Elements of Compensation—Employment Agreements."
Employment Agreements
Under the employment agreements with Messrs. Zatezalo, Walton, Boone and Hunt and the employment agreement with Ms. Kegley, if the employment of the executive is terminated by us for "cause," by the executive voluntarily without "good reason," (or, with respect to Ms. Kegley, voluntarily for any reason or no reason whatsoever) or due to the executive's "disability," then the executive, as applicable, will be entitled to receive his earned but unpaid base salary, payment with respect to accrued but unpaid vacation days, all benefits accrued and vested under any of our benefit plans, and reimbursement for any properly incurred business expenses (collectively, the "accrued obligations"). In addition to the foregoing, in the event the employment of Mr. Zatezalo, Mr. Walton or Mr. Boone is terminated by us without "cause" or by the executive for "good reason," the executive shall receive a lump sum cash payment equal to twelve months' worth of his base salary (unless, in the case of Mr. Zatezalo, his employment terminates during the initial two-year term, in which case he will be
127
entitled to receive a lump sum cash payment equal to his base salary for the lesser of (i) the remainder of the initial term or (ii) 12 months), in each case, subject to the executive's timely execution and delivery (and nonrevocation) of a release agreement for our benefit. Mr. Walton is also entitled to continue family health insurance, at the same premium cost as was in effect on the date of termination, until the earlier of twelve months or the date he becomes covered under a new employer's plan. In the event of the death of Mr. Zatezalo, Mr. Walton or Mr. Boone, their estate will be entitled to receive the accrued obligations and a pro-rated annual discretionary bonus. Messrs. Zatezalo, Walton and Boone are subject to certain confidentiality, non-compete and non-solicitation provisions contained in their respective employment agreements. The confidentiality covenants are perpetual, while the non-compete and non-solicitation covenants apply during the term of the employment agreement and for one year following the executive's termination for any reason (two years following the executive's termination for any reason in the case of the non-solicitation covenant for Messrs. Zatezalo and Boone and 18 months for Mr. Walton).
For purposes of the agreements with Messrs. Zatezalo, Walton and Boone, the terms listed below have been defined as follows:
- •
- "cause" means (a) failure of the executive to perform substantially his duties (other than a failure due to a
"disability") within ten days after written notice from us, (b) executive's conviction of, or plea of guilty or no contest to a misdemeanor involving dishonesty or any felony,
(c) executive engaging in any illegal conduct, gross misconduct, or other material breach of the employment agreement that is materially and demonstratively injurious to us or
(d) executive engaging in any act of dishonesty or fraud involving us or any of our affiliates.
- •
- "disability" means the inability of executive to perform his normal duties as a result of a physical or mental injury or
ailment for any consecutive 45 day period or for 90 days (whether or not consecutive) during any 365 day period.
- •
- "good reason" means, without the executive's express written consent, (a) the assignment to the executive of duties inconsistent in any material respect with those of the executive's position (including status, office, title, and reporting requirements), or any other diminution in any material respect in such position, authority, duties or responsibilities, (b) a reduction in base salary, (c) a reduction in the executive's welfare, qualified retirement plan or paid time off benefits, other than a reduction as a result of a general change in any such plan or (d) any purported termination of the executive's employment under the employment agreement other than for "cause," death or "disability". The executive must give notice of the event alleged to constitute "good reason" within six months of its occurrence and we have 30 days upon receipt of the notice to cure the alleged "good reason" event.
Under the employment agreements with Mr. Hunt and Ms. Kegley, if their employment is terminated by us without "cause" (or if Mr. Hunt resigns for "good reason"), Mr. Hunt is entitled to receive a lump sum payment equal to twelve months' worth of his base salary and continued family health insurance, at the same premium cost as was in effect on the date of termination, until the earlier of twelve months or the date he becomes covered under a new employer's plan while Ms. Kegley is entitled to receive a lump sum payment equal to six months' worth of her base salary and continued family health insurance, at the same premium cost as was in effect on the date of termination, until the earlier of six months or the date she becomes covered under a new employer's plan. Mr. Hunt and Ms. Kegley are subject to certain confidentiality, non-compete and non-solicitation provisions contained in their employment agreements. The confidentiality covenants are perpetual, while the non-compete covenants apply during the terms of the employment agreements and for one year following termination of employment (except that the non-compete covenant applies for only six months following Ms. Kegley's termination by us with or without "cause"). The non-solicitation period runs until the end of the six month period following the end of the applicable non-compete period.
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For purposes of the agreements with Mr. Hunt and Ms. Kegley, "cause" means (1) the commission by executive of an act of dishonesty or fraud against us, (2) a breach of the executive's obligations under the employment agreement and failure to cure such breach within five days after written notice from us, (3) executive is indicted for or convicted of a crime involving moral turpitude or (4) executive materially fails or neglects to diligently perform his duties and "disability" (and, with respect to Mr. Hunt, "good reason") has the same meaning described above with respect to the employment agreements with Messrs. Zatezalo, Walton and Boone.
LTIP Phantom Unit Awards
Messrs. Walton, Boone, and Hunt and Ms. Kegley hold outstanding awards of phantom units under the LTIP as previously described in the section above titled "—Compensation Discussion and Analysis—Long-Term Incentive Compensation." The vesting of the phantom units will accelerate in full upon a "change of control" or the named executive officer's termination due to death or "disability." In addition, upon a termination of the executive by us without cause or by the executive for a good reason, the vesting of those phantom units scheduled to vest in the 12-month period following such termination will be accelerated to such termination date. For this purpose, "good reason" has the meaning set forth above and "cause" has the meaning set forth in the respective employment agreement of the named executive officer, except that with respect to Mr. Hunt and Ms. Kegley, "cause" has the meaning set forth in the employment agreements of Messrs. Walton and Boone. A "change of control" will be deemed to have occurred if: (i) any person or group, other than Wexford Capital, our general partner or an affiliate of either, becomes the owner of more than 50% of the voting power of the voting securities of either us or our general partner; or (ii) upon the sale or other disposition by either us or our general partner of all or substantially all of its assets, whether in a single or series of related transactions, to one or more parties (other than Wexford Capital, our general partner or an affiliate of either). A "disability" is any illness or injury for which the named executive officer will be entitled to benefits under the long-term disability plan of our general partner.
Quantification of Payments
The table below discloses the amount of compensation and/or benefits due to Messrs. Zatezalo, Walton, Boone and Hunt and Ms. Kegley in the event of their termination of employment under certain specified circumstances and/or upon the occurrence of a change in control. The amounts disclosed assume (i) such termination or change in control was effective on December 31, 2013, taking into account the arrangements described above and the salary and bonus rates in effect for the named executive officers for fiscal 2013, and (ii) that the price per common unit was $11.38, which was the closing price of our common units on December 31, 2013 (the last trading day in 2013). The table excludes amounts accrued through fiscal 2013 year-end that would be paid in the normal course of continued employment, such as accrued but unpaid salary, and benefits generally available to all our salaried employees. The amounts below constitute estimates of the amounts that would be paid to the named executive officers upon their respective terminations and/or upon a change in control under such arrangements. The actual amounts to be paid out are dependent on various factors, which may or
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may not exist at the time a named executive officer is actually terminated or a change in control actually occurs. Therefore, such amounts should be considered "forward-looking statements".
Name
|
Change in Control |
Termination without Cause |
Disability or Death |
Resignation with Good Reason |
|||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
David Zatezalo |
|||||||||||||
Cash Payment |
$ | — | $ | 135,000 | $ | — | $ | 135,000 | |||||
Accelerated Equity Vesting |
$ | 17,355 | $ | 17,355 | $ | 17,355 | $ | 17,355 | |||||
| | | | | | | | | | | | | | |
Total |
$ | 17,355 | $ | 152,355 | $ | 17,355 | $ | 152,355 | |||||
Christopher Walton |
|||||||||||||
Cash Payment |
$ | — | $ | 440,000 | $ | 660,000 | $ | 440,000 | |||||
Accelerated Equity Vesting |
$ | 41,469 | $ | 15,340 | $ | 41,469 | $ | 15,340 | |||||
| | | | | | | | | | | | | | |
Total |
$ | 41,469 | $ | 455,340 | $ | 701,469 | $ | 455,340 | |||||
Richard Boone |
|||||||||||||
Cash Payment |
$ | — | $ | 315,000 | $ | 236,250 | $ | 315,000 | |||||
Accelerated Equity Vesting |
$ | 70,078 | $ | 27,210 | $ | 70,078 | $ | 27,210 | |||||
| | | | | | | | | | | | | | |
Total |
$ | 70,078 | $ | 342,210 | $ | 306,328 | $ | 342,210 | |||||
Reford Hunt |
|||||||||||||
Cash Payment |
$ | — | $ | 245,000 | $ | — | $ | 245,000 | |||||
Accelerated Equity Vesting |
$ | 33,412 | $ | 12,916 | $ | 33,412 | $ | 12,916 | |||||
| | | | | | | | | | | | | | |
Total |
$ | 33,412 | $ | 257,916 | $ | 33,412 | $ | 257,916 | |||||
Whitney Kegley |
|||||||||||||
Cash Payment |
$ | — | $ | 95,000 | $ | — | $ | — | |||||
Accelerated Equity Vesting |
$ | 24,296 | $ | 8,103 | $ | 24,296 | $ | 8,103 | |||||
| | | | | | | | | | | | | | |
Total |
$ | 24,296 | $ | 103,103 | $ | 24,296 | $ | 8,103 | |||||
- (1)
- The accelerated vesting of phantom units is based upon the closing price of our common units on December 31, 2013 (the last trading day in 2013), which is $11.38, multiplied by the number of phantom units that would vest upon the occurrence of the event indicated.
Director Compensation
We provide compensation to the directors (including the directors who are principals of Wexford Capital) of the board of directors of our general partner, including a $20,000 annual base director fee and a grant of that number of common units having a grant date value of approximately $25,000 (based on the preceding 10-day average price per unit), 25% of which vest on the grant date and 75% of which are restricted units that vest one-third on the first day of each of the first three calendar quarters that begin following the grant date (with vesting to be accelerated upon the director's death or disability, if a non-Wexford director, and for all of the directors, on a change of control (as defined in the LTIP)). Distributions made on a restricted unit are held by our general partner (without interest) and vest or are forfeited when the restricted unit vests or is forfeited, as applicable. In addition, the chairs of the audit committee and conflicts committee receive a $15,000 fee, the chair of any other committee (including the compensation committee) receives a $10,000 fee, audit committee and conflicts committee members receive a $10,000 fee and the other committee members receive a $5,000 fee, for their service in such roles each year. Each non-employee director is reimbursed for out-of-pocket expenses in connection with attending meetings of the board of directors or committees, and each director is fully indemnified by us for actions associated with being a director to the extent permitted under Delaware law. Wexford Capital does not receive compensation from us for conducting our business or managing our operations.
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The following table provides information concerning the compensation of our directors for the fiscal year ended December 31, 2013. The restricted unit award granted to Mr. Zatezalo in connection with his appointment as Chairman of the board of directors of our general partner is disclosed in the Summary Compensation Table above.
Name
|
Fees Earned or Paid in Cash ($)(1) |
Unit Awards ($)(2) |
All Other Compensation ($) |
Total ($) |
|||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Mark D. Zand(3) |
$ | 30,000 | $ | 25,006 | $ | — | $ | 55,006 | |||||
Arthur H. Amron(3) |
$ | 20,000 | $ | 25,006 | $ | — | $ | 45,006 | |||||
Joseph M. Jacobs(3) |
$ | 20,000 | $ | 25,006 | $ | — | $ | 45,006 | |||||
Douglas Lambert(4) |
$ | 40,000 | $ | 25,006 | $ | — | $ | 65,006 | |||||
Jay L. Maymudes(3) |
$ | 25,000 | $ | 25,006 | $ | — | $ | 50,006 | |||||
Mark L. Plaumann(4) |
$ | 50,000 | $ | 25,006 | $ | — | $ | 75,006 | |||||
Kenneth A. Rubin(3) |
$ | 20,000 | $ | 25,006 | $ | — | $ | 45,006 | |||||
James F. Tompkins |
$ | 40,000 | $ | 25,006 | $ | — | $ | 65,006 | |||||
- (1)
- Includes
annual base director fee, committee membership fees, and committee chair fees for each non-employee director as more fully explained in the
preceding paragraphs.
- (2)
- The
amounts reported in the "Unit Awards" column reflect the aggregate grant date fair value of the awards granted under the LTIP in fiscal 2012, computed
in accordance with FASB ASC Topic 718. See Note 2 to our consolidated financial statements for fiscal 2013 for additional detail regarding assumptions underlying the value of these equity
awards. As of December 31, 2013, each director held 1,525 outstanding restricted units.
- (3)
- Director
compensation is paid or granted, as applicable, to these individuals in their capacities as agents for Wexford Capital. Restricted units granted to
these individuals under the LTIP are treated for all purposes as grants to Wexford Capital or its assignee, as Wexford Capital may direct or provide, and not to the individual serving as a member of
the board on behalf of Wexford Capital or its assignee.
- (4)
- Messrs. Lambert and Plaumann have agreed or are obligated to transfer all or a portion of the compensation payable to them for their service on the board of directors of our general partner. Accordingly, as directed by Messrs. Lambert and Plaumann, the restricted units granted in respect of their service in fiscal 2013 were issued to entities in which they hold equity interests rather than to Messrs. Lambert and Plaumann individually.
Compensation Practices as They Related to Risk Management
We believe our compensation programs do not encourage excessive and unnecessary risk taking by executive officers (or other employees). Short-term annual incentives are generally paid pursuant to discretionary bonuses, which enable the compensation committee of our general partner to assess the actual behavior of our employees as it relates to risk taking in awarding bonus amounts. Additionally, our annual discretionary bonuses are capped at certain percentages of our executive officers' salaries, as described earlier, which reduce the risk of actions being taken that increase short-term profit at the expense of long-term value creation. Further, our use of equity based long-term compensation serves our compensation program's goal of aligning the interests of executives and unitholders, thereby reducing the incentives to unnecessary risk taking. Our grants of equity-based awards have historically included three-year vesting periods, which encourage our executive officers (and other employees) to focus on sustained growth over the long-term, rather than taking short-term risks.
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Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Unitholder Matters.
The following table sets forth the beneficial ownership of common units and subordinated units as of March 7, 2014 of Rhino Resource Partners LP for:
- •
- beneficial owners of more than 5% of our common units;
- •
- each director, director nominee and named executive officer; and
- •
- all of our directors and executive officers as a group.
The following table does not include any phantom unit awards granted under the long-term incentive plan. Please see "Part III, Item 11. Executive Compensation—Compensation Discussion and Analysis—Elements of Compensation—Long-Term Incentive Compensation."
Name of Beneficial Owner
|
Common Units Beneficially Owned |
Percentage of Common Units Beneficially Owned |
Subordinated Units Beneficially Owned |
Percentage of Subordinated Units Beneficially Owned |
Percentage of Common and Subordinated Units Beneficially Owned |
|||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Rhino Energy Holdings LLC(1)(3)(4) |
6,010,265 | 36.0 | % | 8,597,487 | 69.4 | % | 50.2 | % | ||||||||
Charles E. Davidson(1)(2)(3)(4)(5) |
7,126,545 | 42.7 | % | 10,151,520 | 81.9 | % | 59.4 | % | ||||||||
Joseph M. Jacobs(1)(2)(3)(4) |
6,780,767 | 40.7 | % | 9,656,894 | 77.9 | % | 56.5 | % | ||||||||
Wexford Capital LP(1)(2)(3)(4) |
6,639,801 | 39.8 | % | 9,455,252 | 76.3 | % | 55.4 | % | ||||||||
Wexford GP LLC(1)(2)(3)(4) |
6,639,801 | 39.8 | % | 9,455,252 | 76.3 | % | 55.4 | % | ||||||||
Mark D. Zand |
14,493 | * | 20,729 | — | * | |||||||||||
David G. Zatezalo |
57,541 | * | — | — | * | |||||||||||
Richard A. Boone |
22,064 | * | — | — | * | |||||||||||
Christopher I. Walton |
2,247 | * | — | — | * | |||||||||||
Reford C. Hunt |
1,272 | * | — | — | * | |||||||||||
Whitney C. Kegley |
451 | * | — | — | * | |||||||||||
Jay L. Maymudes |
14,613 | * | 20,903 | * | * | |||||||||||
Arthur H. Amron |
12,199 | * | 17,447 | * | * | |||||||||||
Kenneth A. Rubin |
8,914 | * | 12,754 | * | * | |||||||||||
Mark L. Plaumann(6) |
6,458 | * | 682 | * | * | |||||||||||
Douglas Lambert(6) |
5,981 | * | — | — | * | |||||||||||
James F. Tompkins(6) |
5,981 | * | — | — | * | |||||||||||
All executive officers and directors as a group (13 persons) |
6,932,981 | 41.6 | % | 9,729,409 | 78.5 | % | 57.3 | % | ||||||||
- *
- Represents
less than 1% of the total.
- (1)
- 6,010,265 common units and 8,597,487 of the subordinated units shown as beneficially owned by each of Charles E. Davidson, Joseph M. Jacobs, Wexford GP LLC and Wexford Capital, reflect common units and subordinated units owned of record by Rhino Energy Holdings LLC ("REH"). Wexford Capital serves as manager for REH and as such may be deemed to share beneficial ownership of the units beneficially owned by REH, but disclaims such beneficial ownership to the extent such beneficial ownership exceeds its pecuniary interests. Wexford GP LLC ("Wexford GP"), as the general partner of Wexford Capital, may be deemed to share beneficial ownership of the units beneficially owned by REH, but disclaims such beneficial ownership to the extent such beneficial ownership exceeds its pecuniary interests. Messrs. Davidson and Jacobs, as the controlling persons of Wexford GP, may be deemed to share beneficial ownership of any units beneficially owned by REH for which Wexford Capital serves as manager, but disclaim such
132
beneficial ownership to the extent such beneficial ownership exceeds their respective pecuniary interests.
- (2)
- 599,631
common units and 857,765 of the subordinated units shown as beneficially owned by each of Charles E. Davidson, Joseph M. Jacobs,
Wexford GP LLC and Wexford Capital, reflect common units and subordinated units owned of record by Rhino Resource Holdings LLC ("RRH"). Wexford Capital serves as manager for RRH
and as such may be deemed to share beneficial ownership of the units beneficially owned by RRH, but disclaims such beneficial ownership to the extent such beneficial ownership exceeds its pecuniary
interest. Wexford GP, as the general partner of Wexford, may be deemed to share beneficial ownership of the units beneficially owned by RRH, but disclaims such beneficial ownership to the
extent such beneficial ownership exceeds its pecuniary interest. Messrs. Davidson and Jacobs, as the controlling persons of Wexford GP, may be deemed to share beneficial ownership of any
units beneficially owned by RRH for which Wexford serves as manager, but disclaim such beneficial ownership to the extent such beneficial ownership exceeds its pecuniary interest.
- (3)
- The
compensation we pay our non-executive directors includes an annual grant of common units having a grant date value of approximately $25,000, which are
subject to the terms and conditions set forth in our LTIP. See "Item 11. Executive Compensation—Director Compensation." The annual grant on October 4, 2013 included a total
of 10,165 common units granted to five Wexford Capital affiliated directors of our general partner on behalf of Wexford Capital. These units vest as follows: 2,540 units vested on the grant date,
2,540 units vested on January 1, 2014, 2,540 units will vest on April 1, 2014 and 2,545 units will vest on July 1, 2014. The units are reflected in the table above as beneficially
owned by Wexford Capital, Wexford GP, as general partner of Wexford Capital, and Messrs. Davidson and Jacobs, as the controlling persons of Wexford GP. Wexford Capital,
Wexford GP and Messrs. Davidson and Jacobs each disclaim beneficial ownership of these units to the extent such beneficial ownership exceeds their respective pecuniary interests.
- (4)
- The
address for this person or entity is 411 West Putnam Avenue, Greenwich, Connecticut 06830.
- (5)
- Includes
486,744 common and 696,268 subordinated units held by CD Holding Company, LLC, for which Mr. Davidson is the sole managing member,
and the common and subordinated units owned of record by Mr. Davidson's Roth IRA.
- (6)
- Each of these three non-executive directors received an annual grant of 2,033 units on October 4, 2013 pursuant to the LTIP. These units vest as follows: 25% of the units vested upon the grant, 25% vested on January 1, 2014, and the remaining 50% vest ratably on April 1, 2014 and July 1, 2014.
Equity Compensation Plan Information
Plan Category
|
Number of units to be issued upon exercise/vesting of outstanding options, warrants and rights as of December 31, 2013 |
Weighted-average exercise price of outstanding options, warrants and rights |
Number of units remaining available for future issuance under equity compensation plans as of December 31, 2013 (excluding units reflected in column (a)) |
|||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
(a) |
(b) |
(c) |
|||||||
Equity compensation plans not approved by unitholders(1): |
||||||||||
Long-Term Incentive Plan |
41,002 | n/a | (2) | 2,289,869 | ||||||
- (1)
- Adopted
by the board of directors of our general partner in connection with our IPO.
- (2)
- To date, only phantom and restricted and unrestricted units have been granted under the Long-Term Incentive Plan.
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For more information relating to our Long-Term Incentive Plan and the unit awards granted thereunder, please see Note 14 of the consolidated financial statements included elsewhere in this annual report.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
As of March 7, 2014, Wexford owned 7,317,730 common units and 10,424,995 subordinated units representing approximately 61.0% of our units, owns and controls our general partner, and has appointed all of the directors of our general partner, which maintains its 2.0% general partner interest as well as the incentive distribution rights representing a limited partner interest in us.
Principals of Wexford Capital, including Mark D. Zand, Joseph M. Jacobs, Jay L. Maymudes, Arthur H. Amron and Kenneth A. Rubin, own membership interests in our general partner.
The terms of the transactions and agreements disclosed in this section were determined by and among affiliated entities and, consequently, are not the result of arm's length negotiations. Such terms are not necessarily at least as favorable to the parties to these transactions and agreements as the terms which could have been obtained from unaffiliated third parties.
Distributions and Payments to Our General Partner and Its Affiliates
In connection with the closing of our IPO, the following occurred:
- •
- Wexford contributed all of their membership interests in Rhino Energy LLC to us;
- •
- we issued to Rhino Energy Holdings LLC an aggregate of 8,666,400 common units and 12,397,000 subordinated units and
reimbursed Rhino Energy Holdings LLC for approximately $9.3 million of capital expenditures it incurred with respect to the assets contributed to us;
- •
- our general partner made a capital contribution of approximately $10.4 million and maintained its 2.0% general
partner interest in us; and
- •
- we issued our general partner the incentive distribution rights, which entitle the holder to increase percentages, up to a maximum of 48.0%, of the cash we distribute in excess of $0.51175 per unit per quarter.
During 2013, Wexford received distributions of approximately $1.0 million on the 2.0% general partner interest and approximately $13.0 million on its common units. No distributions were paid on subordinated units during 2013.
On February 14, 2014, Wexford received a distribution for the fourth quarter of 2013 of approximately $0.3 million on the 2.0% general partner interest and approximately $3.3 million on its common units. No distribution was paid on the subordinated units.
From time to time, employees from Wexford perform legal, consulting, and advisory services for us and we incur expenses related to these services. Please see Note 19 of our consolidated financial statements included elsewhere in this annual report for the amounts paid to Wexford for these services during the years ended December 31, 2013, 2012 and 2011.
Agreements with Affiliates
Registration Rights Agreement
Under our partnership agreement, as amended and restated, we have agreed to register for resale under the Securities Act and applicable state securities laws any common units, subordinated units or other limited partner interests proposed to be sold by our general partner or any of its affiliates or their assignees if an exemption from the registration requirements is not otherwise available. These
134
registration rights continue for two years following any withdrawal or removal of our general partner. We are obligated to pay all expenses incidental to the registration, excluding underwriting discounts.
In addition, in connection with our IPO, on October 5, 2010 we entered into a registration rights agreement with Rhino Energy Holdings LLC. Pursuant to the registration rights agreement, we will be required to file a registration statement to register the common units and subordinated units issued to Rhino Energy Holdings LLC and the common units issuable upon the conversion of the subordinated units upon request of Rhino Energy Holdings LLC. In addition, the registration rights agreement gives Rhino Energy Holdings LLC piggyback registration rights under certain circumstances. The registration rights agreement also includes provisions dealing with holdback agreements, indemnification and contribution and allocation of expenses. These registration rights are transferable to affiliates of Rhino Energy Holdings LLC and, in certain circumstances, to third parties.
Transactions with Affiliates
Utica Shale
We and an affiliate of Wexford Capital have participated with Gulfport, a publicly traded company, to acquire interests in a portfolio of oil and natural gas leases in the Utica Shale. During the year ended December 31, 2011, we completed the acquisitions of interests in a portfolio of leases in the Utica Shale region of eastern Ohio for a total purchase price of approximately $19.9 million.
Our initial position in the Utica Shale consisted of a 10.8% net interest in approximately 80,000 gross acres. During the third quarter of 2012, we completed an exchange of our initial 10.8% position for a pro rata interest in 125,000 gross acres under lease by Gulfport and an affiliate of Wexford Capital. Also during the third quarter of 2012, our position was adjusted to a 5% net interest in the 125,000 gross acres, or approximately 6,250 net acres. As of December 31, 2013, our Utica Shale position consisted of our 5% net interest in a total portfolio of approximately 152,300 gross acres, or approximately 7,615 net acres. In addition, per the joint operating agreement completed between us, Gulfport and an affiliate of Wexford Capital, we have funded our proportionate share of drilling costs to Gulfport for wells being drilled on our acreage. During the year ended December 31, 2013, we funded approximately $23.3 million of drilling costs that are included in Oil and natural gas properties in our consolidated statements of financial position as of December 31, 2013. We recognized approximately $5.6 million and $0.2 million, respectively, of revenue on our Utica Shale investment during the years ended December 31, 2013 and 2012. In February 2014, we signed a binding letter of intent to sell our entire Utica Shale joint interest investment to Gulfport for $185 million, which is subject to customary closing conditions.
Muskie Proppants LLC
In December 2012, we made an initial investment of approximately $2.0 million in a new joint venture, Muskie Proppants LLC ("Muskie"), with affiliates of Wexford Capital. Muskie was formed to provide sand for fracking operations to drillers in the Utica Shale region and other oil and natural gas basins in the U.S. During the year ended December 31, 2013, we made capital contributions to Muskie of approximately $0.5 million based upon our proportionate ownership percentage. In addition, during the year ended December 31, 2013, we provided a loan based upon our ownership share to Muskie in the amount of $0.2 million that remained outstanding as of December 31, 2013.We recorded our proportionate portion of operating losses for 2013 and 2012, approximately $0.5 million and $0.3 million, respectively, for Muskie.
Timber Wolf Terminals LLC
In March 2012, we made an initial investment of approximately $0.1 million in a new joint venture, Timber Wolf Terminals LLC ("Timber Wolf"), with affiliates of Wexford Capital. Timber Wolf was
135
formed to construct and operate a condensate river terminal that will provide barge trans-loading services for parties conducting activities in the Utica Shale region of eastern Ohio. The initial investment was our proportionate minority ownership share to purchase land for the construction site of the condensate river terminal. Timber Wolf had no operating activities during 2013 and 2012.
Policies Relating to Conflicts of Interest
Conflicts of interest exist and may arise in the future as a result of the relationships between our general partner and its affiliates, including Wexford Capital, on the one hand, and our partnership and our limited partners, on the other hand. The directors and officers of our general partner have fiduciary duties to manage our general partner in a manner beneficial to its owners. At the same time, our general partner has a contractual duty to manage our partnership in a manner beneficial to us and our unitholders.
Whenever a conflict arises between our general partner or its affiliates, on the one hand, and us and our limited partners, on the other hand, our general partner will resolve that conflict. Our partnership agreement contains provisions that replace default fiduciary duties under applicable Delaware law with contractual corporate governance standards. Our partnership agreement also delimits the remedies available to our unitholders for actions taken by our general partner that, without those limitations, might constitute breaches of its default fiduciary duty under applicable Delaware law.
Our general partner will not be in breach of its obligations under our partnership agreement or its duties or obligations to us or our unitholders if the resolution of the conflict is:
- •
- approved by the conflicts committee of our general partner, although our general partner is not obligated to seek such
approval;
- •
- approved by the vote of a majority of the outstanding common units, excluding any common units owned by our general
partner or any of its affiliates;
- •
- on terms no less favorable to us than those generally being provided to or available from unrelated third parties; or
- •
- fair and reasonable to us, taking into account the totality of the relationships among the parties involved, including other transactions that may be particularly favorable or advantageous to us.
Our general partner may, but is not required to, seek the approval of such resolution from the conflicts committee of its board of directors. In connection with a situation involving a conflict of interest, any determination by our general partner involving the resolution of the conflict of interest must be made in good faith, provided that, if our general partner does not seek approval from the conflicts committee and its board of directors determines that the resolution or course of action taken with respect to the conflict of interest satisfies either of the standards set forth in the third and fourth bullet points above, then it will be presumed that, in making its decision, the board of directors acted in good faith, and in any proceeding brought by or on behalf of any limited partner or the partnership, the person bringing or prosecuting such proceeding will have the burden of overcoming such presumption. Unless the resolution of a conflict is specifically provided for in our partnership agreement, our general partner or the conflicts committee may consider any factors that it determines in good faith to be appropriate when resolving a conflict. When our partnership agreement provides that someone act in good faith, it requires that person to reasonably believe he is acting in the best interests of the partnership.
136
Director Independence
See "Part III, Item 10. Directors, Executive Officers and Corporate Governance" for information regarding the directors of our general partner and the independence requirements applicable to the board of directors of our general partner and its committees.
Item 14. Principal Accounting Fees and Services.
The firm of Ernst & Young LLP is our independent registered public accounting firm for the 2013 year. The firm of Deloitte & Touche LLP was our independent registered public accounting firm for the 2012 year. Fees paid to Ernst & Young LLP and Deloitte & Touche LLP during the last two fiscal years were as follows.:
| |
2013 | 2012 | |||||
|---|---|---|---|---|---|---|---|
| |
(in thousands) |
||||||
Ernst & Young LLP |
|||||||
Audit fees(1) |
$ | 724 | $ | — | |||
Audit related fees |
2 | — | |||||
Tax fees(2) |
8 | 20 | |||||
| | | | | | | | |
Total |
$ | 734 | $ | 20 | |||
| | | | | | | | |
| | | | | | | | |
Deloitte & Touche LLP |
|||||||
Audit fees(1) |
$ | 72 | $ | 945 | |||
Tax fees(2) |
— | — | |||||
| | | | | | | | |
Total |
$ | 72 | $ | 945 | |||
| | | | | | | | |
| | | | | | | | |
- (1)
- Expenditures
classified as "Audit fees" above include those related to both Ernst & Young LLP's and Deloitte and Touche LLP's audit of
our consolidated financial statements and work performed in connection with our follow-on offering in 2013.
- (2)
- "Tax fees" are related to general tax advisory services.
Our audit committee has adopted an audit committee charter, which is available on our website, which requires the audit committee to pre-approve all audit and non-audit services to be provided by our independent registered public accounting firm. The audit committee does not delegate its pre-approval responsibilities to management or to an individual member of the audit committee. All fees reported above were pre-approved by the audit committee as required.
Item 15. Exhibits, Financial Statement Schedules.
- (a)
- (1) Financial Statements
See "Index to the Consolidated Financial Statements" set forth on Page F-1.
- (2)
- Financial Statement Schedules
All schedules are omitted because they are not applicable or the required information is presented in the financial statements or notes thereto.
137
- (3)
- Exhibits
| Exhibit Number |
Description | ||
|---|---|---|---|
| 3.1 | Certificate of Limited Partnership of Rhino Resource Partners LP, incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S-1 (File No. 333-166550) filed on May 5, 2010 | ||
| 3.2 | Second Amended and Restated Agreement of Limited Partnership of Rhino Resource Partners LP, dated as of October 26, 2010, incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K (File No. 001-34892) filed on November 1, 2010 | ||
| 4.1 | Registration Rights Agreement, dated as of October 5, 2010, by and between Rhino Resource Partners LP and Rhino Energy Holdings LLC, incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K (File No. 001-34892) filed on October 8, 2010 | ||
| 10.1 | † | Rhino Long-Term Incentive Plan incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K (File No. 001-34892) filed on October 1, 2010 | |
| 10.2 | † | Form of Long-Term Incentive Plan Grant Agreement—Phantom Units with DERs, incorporated by reference to Exhibit 10.12 of Amendment No. 3 to the Registration Statement on Form S-1 (File No. 333-166550) filed on July 23, 2010 | |
| 10.3 | † | Form of Long-Term Incentive Plan Grant Agreement—Unit Awards and Restricted Units (Directors who are not Principals of Wexford), incorporated by reference to Exhibit 10.22 of Amendment No. 3 to the Registration Statement on Form S-1 (File No. 333-166550) filed on July 23, 2010 | |
| 10.4 | † | Form of Long-Term Incentive Plan Grant Agreement—Unit Awards and Restricted Units (Directors who are Principals of Wexford), incorporated by reference to Exhibit 10.23 of Amendment No. 3 to the Registration Statement on Form S-1 (File No. 333-166550) filed on July 23, 2010 | |
| 10.5 | †* | Amended and Restated Employment Agreement of David G. Zatezalo effective as of October 20, 2013. | |
| 10.6 | † | Amended and Restated Employment Agreement of Richard A. Boone dated May 31, 2011, incorporated by reference to Exhibit 10.17 of the Registration Statement on Form S-1 (File No. 333-175138), filed on June 24, 2011 | |
| 10.7 | † | Amended and Restated Employment Agreement of R. Chad Hunt dated September 8, 2011, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K (File No. 001-34892) filed on September 13, 2011 | |
| 10.8 | †* | Amended and Restated Employment Agreement of Christopher I. Walton effective as of October 20, 2013 | |
| 10.9 | †* | Amended and Restated Employment Agreement of Whitney C. Kegley effective as of July 16, 2012 | |
138
| Exhibit Number |
Description | ||
|---|---|---|---|
| 10.10 | Amended and Restated Credit Agreement, dated July 29, 2011 by and among Rhino Energy LLC, PNC Bank, National Association, as Administrative Agent, PNC Capital Markets and Union Bank, N.A., as Joint Lead Arrangers and Joint Bookrunners, Union Bank N.A., as Syndication agent, Raymond James Bank, FSB, Wells Fargo Bank, national Association and the Huntington National Bank, as Co-Documentation Agents and the guarantors and lenders party thereto, incorporated by reference to Exhibit 10.1 of the Current report on Form 8-K (File No. 001-34892), filed on August 4, 2011 | ||
| 10.11 | First Amendment to Amended and Restated Credit Agreement, dated April 18, 2013 by and among Rhino Energy LLC, PNC Bank, National Association, as Administrative Agent, PNC Capital Markets and Union Bank, N.A., as Joint Lead Arrangers and Joint Bookrunners, Union Bank, N.A., as Syndication Agent, Raymond James Bank, FSB, Wells Fargo Bank, National Association and the Huntington National Bank, as Co-Documentation Agents and the guarantors and lenders party thereto, incorporated by reference to Exhibit 10.1 of the Current report on Form 8-K (File No. 001-34892), filed on April 19, 2013 | ||
| 21.1 | * | List of Subsidiaries of Rhino Resource Partners LP | |
| 23.1 | * | Consent of Ernst & Young LLP | |
| 23.2 | * | Consent of Deloitte & Touche LLP | |
| 23.3 | * | Consent of Cardno MM&A | |
| 23.4 | * | Consent of John T. Boyd Company | |
| 23.5 | * | Consent of Ryder Scott Company, LP | |
| 31.1 | * | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 7241) | |
| 31.2 | * | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 7241) | |
| 32.1 | * | Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350) | |
| 32.2 | * | Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350) | |
| 95.1 | * | Mine Health and Safety Disclosure pursuant to §1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act for the year ended December 31, 2012 and the three months ended December 31, 2012 | |
| 99.1 | * | Report of Ryder Scott Company, LP | |
| 101.INS | § | XBRL Instance Document | |
| 101.SCH | § | XBRL Taxonomy Extension Schema Document | |
| 101.CAL | § | XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF | § | XBRL Taxonomy Definition Linkbase Document | |
| 101.LAB | § | XBRL Taxonomy Extension Label Linkbase Document | |
139
| Exhibit Number |
Description | ||
|---|---|---|---|
| 101.PRE | § | XBRL Taxonomy Extension Presentation Linkbase Document | |
- *
- Filed
or furnished herewith, as applicable.
- †
- Management
contract or compensatory plan or arrangement required to be filed as an exhibit to this 10-K pursuant to Item 15(b).
- §
- Furnished with this Form 10-K. In accordance with Rule 406T of Regulation S-T, the information in these exhibits shall not be deemed to be "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing.
140
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| RHINO RESOURCE PARTNERS LP | ||||
By: |
Rhino GP LLC, its general partner |
|||
By: |
/s/ CHRISTOPHER I. WALTON Christopher I. Walton President and Chief Executive Officer |
|||
Date: March 14, 2014
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
|
Title
|
Date
|
|||
|---|---|---|---|---|---|
| /s/ CHRISTOPHER I. WALTON Christopher I. Walton |
President and Chief Executive Officer (Principal Executive Officer) | March 14, 2014 | |||
/s/ RICHARD A. BOONE Richard A. Boone |
Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) |
March 14, 2014 |
|||
/s/ DAVID G. ZATEZALO David G. Zatezalo |
Director |
March 14, 2014 |
|||
/s/ MARK D. ZAND Mark D. Zand |
Director |
March 14, 2014 |
|||
/s/ ARTHUR H. AMRON Arthur H. Amron |
Director |
March 14, 2014 |
|||
/s/ JAY L. MAYMUDES Jay L. Maymudes |
Director |
March 14, 2014 |
141
Signature
|
Title
|
Date
|
|||
|---|---|---|---|---|---|
| /s/ KENNETH A. RUBIN Kenneth A. Rubin |
Director | March 14, 2014 | |||
/s/ JOSEPH M. JACOBS Joseph M. Jacobs |
Director |
March 14, 2014 |
|||
/s/ MARK L. PLAUMANN Mark L. Plaumann |
Director |
March 14, 2014 |
|||
/s/ DOUGLAS LAMBERT Douglas Lambert |
Director |
March 14, 2014 |
|||
/s/ JAMES F. TOMPKINS James F. Tompkins |
Director |
March 14, 2014 |
142
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors of
the Managing General Partner
and the Partners of
Rhino Resource Partners LP
Lexington, Kentucky
We have audited the accompanying consolidated statement of financial position of Rhino Resource Partners LP and subsidiaries as of December 31, 2013, and the related consolidated statements of operations and comprehensive income, partners' capital and cash flows for the year then ended. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Rhino Resource Partners LP and subsidiaries as of December 31, 2013, and the consolidated results of their operations and their cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Rhino Resource Partners LP's internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) and our report dated March 14, 2014 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG, LLP
Louisville,
Kentucky
March 14, 2014
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors of
the Managing General Partner
and the Partners of
Rhino Resource Partners LP
Lexington, Kentucky
We have audited the accompanying consolidated statement of financial position of Rhino Resource Partners LP and subsidiaries (the "Partnership") as of December 31, 2012, and the related consolidated statements of operations and comprehensive income, partners' capital, and cash flows for each of the two years in the period ended December 31, 2012. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on the financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Rhino Resource Partners LP and subsidiaries as of December 31, 2012, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2012, in conformity with accounting principles generally accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
Cincinnati,
Ohio March 8, 2013
(March 14, 2014 as to the accounting for black lung obligations in Note 12 and changes in segment reporting in Note 21)
F-3
RHINO RESOURCE PARTNERS LP
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(In thousands)
| |
As of December 31, | ||||||
|---|---|---|---|---|---|---|---|
| |
2013 | 2012 | |||||
ASSETS |
|||||||
CURRENT ASSETS: |
|||||||
Cash and cash equivalents |
$ | 423 | $ | 461 | |||
Accounts receivable, net of allowance for doubtful accounts ($0 as of December 31, 2013 and 2012) |
25,915 | 33,560 | |||||
Inventories |
18,580 | 18,743 | |||||
Advance royalties, current portion |
179 | 187 | |||||
Prepaid expenses and other |
4,572 | 4,323 | |||||
| | | | | | | | |
Total current assets |
49,669 | 57,274 | |||||
| | | | | | | | |
PROPERTY, PLANT AND EQUIPMENT: |
|||||||
At cost, including coal properties, mine development and construction costs |
733,284 | 683,669 | |||||
Less accumulated depreciation, depletion and amortization |
(252,797 | ) | (219,709 | ) | |||
| | | | | | | | |
Net property, plant and equipment |
480,487 | 463,960 | |||||
| | | | | | | | |
Advance royalties, net of current portion |
5,580 | 4,506 | |||||
Investment in unconsolidated affiliates |
21,243 | 23,224 | |||||
Intangible assets, net |
1,148 | 1,228 | |||||
Other non-current assets |
9,640 | 9,684 | |||||
| | | | | | | | |
TOTAL |
$ | 567,767 | $ | 559,876 | |||
| | | | | | | | |
| | | | | | | | |
LIABILITIES AND EQUITY |
|||||||
CURRENT LIABILITIES: |
|||||||
Accounts payable |
$ | 22,951 | $ | 18,030 | |||
Accrued expenses and other |
20,567 | 22,178 | |||||
Current portion of long-term debt |
1,024 | 2,350 | |||||
Current portion of asset retirement obligations |
1,614 | 2,255 | |||||
Current portion of postretirement benefits |
334 | 227 | |||||
| | | | | | | | |
Total current liabilities |
46,490 | 45,040 | |||||
| | | | | | | | |
NON-CURRENT LIABILITIES: |
|||||||
Long-term debt, net of current portion |
170,022 | 161,199 | |||||
Asset retirement obligations, net of current portion |
32,878 | 30,748 | |||||
Other non-current liabilities |
16,220 | 16,575 | |||||
Postretirement benefits, net of current portion |
5,786 | 6,520 | |||||
| | | | | | | | |
Total non-current liabilities |
224,906 | 215,042 | |||||
| | | | | | | | |
Total liabilities |
271,396 | 260,082 | |||||
| | | | | | | | |
COMMITMENTS AND CONTINGENCIES (NOTE 15) |
|||||||
PARTNERS' CAPITAL: |
|||||||
Limited partners |
283,339 | 287,060 | |||||
General partner |
10,801 | 11,303 | |||||
Accumulated other comprehensive income |
2,231 | 1,431 | |||||
| | | | | | | | |
Total partners' capital |
296,371 | 299,794 | |||||
| | | | | | | | |
TOTAL |
$ | 567,767 | $ | 559,876 | |||
| | | | | | | | |
| | | | | | | | |
See notes to consolidated financial statements.
F-4
RHINO RESOURCE PARTNERS LP
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(In thousands, except per unit data)
| |
Year Ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
2013 | 2012 | 2011 | |||||||
REVENUES: |
||||||||||
Coal sales |
$ | 236,601 | $ | 304,568 | $ | 333,876 | ||||
Freight and handling revenues |
2,159 | 6,357 | 5,750 | |||||||
Other revenues |
39,131 | 41,066 | 27,595 | |||||||
| | | | | | | | | | | |
Total revenues |
277,891 | 351,991 | 367,221 | |||||||
COSTS AND EXPENSES: |
||||||||||
Cost of operations (exclusive of depreciation, depletion and amortization shown separately below) |
201,042 | 247,783 | 267,603 | |||||||
Freight and handling costs |
1,294 | 5,833 | 4,329 | |||||||
Depreciation, depletion and amortization |
42,609 | 41,370 | 36,325 | |||||||
Selling, general and administrative (exclusive of depreciation, depletion and amortization shown separately above) |
19,800 | 20,442 | 21,815 | |||||||
Asset impairment loss |
1,667 | — | — | |||||||
(Gain) on sale/disposal of assets, net |
(10,359 | ) | (4,890 | ) | (3,172 | ) | ||||
| | | | | | | | | | | |
Total costs and expenses |
256,053 | 310,538 | 326,900 | |||||||
| | | | | | | | | | | |
INCOME FROM OPERATIONS |
21,838 | 41,453 | 40,321 | |||||||
| | | | | | | | | | | |
INTEREST AND OTHER INCOME (EXPENSE): |
||||||||||
Interest expense and other |
(7,898 | ) | (7,767 | ) | (6,062 | ) | ||||
Interest income and other |
207 | 92 | 51 | |||||||
Equity in net (loss)/income of unconsolidated affiliates |
(4,729 | ) | 5,757 | 2,988 | ||||||
| | | | | | | | | | | |
Total interest and other (expense) |
(12,420 | ) | (1,918 | ) | (3,023 | ) | ||||
| | | | | | | | | | | |
INCOME BEFORE INCOME TAXES |
9,418 | 39,535 | 37,298 | |||||||
INCOME TAXES |
— | — | — | |||||||
| | | | | | | | | | | |
NET INCOME |
9,418 | 39,535 | 37,298 | |||||||
| | | | | | | | | | | |
Other comprehensive income— |
||||||||||
Change in actuarial gain under ASC Topic 815 |
800 | (917 | ) | 1,723 | ||||||
| | | | | | | | | | | |
COMPREHENSIVE INCOME |
$ | 10,218 | $ | 38,618 | $ | 39,021 | ||||
| | | | | | | | | | | |
| | | | | | | | | | | |
General partner's interest in net income |
$ | 188 | $ | 790 | $ | 746 | ||||
Common unitholders' interest in net income |
$ | 5,217 | $ | 21,422 | $ | 19,205 | ||||
Subordinated unitholders' interest in net income |
$ | 4,013 | $ | 17,323 | $ | 17,347 | ||||
Net income per limited partner unit, basic: |
||||||||||
Common units |
$ | 0.33 | $ | 1.40 | $ | 1.40 | ||||
Subordinated units |
$ | 0.32 | $ | 1.40 | $ | 1.40 | ||||
Net income per limited partner unit, diluted: |
||||||||||
Common units |
$ | 0.33 | $ | 1.40 | $ | 1.40 | ||||
Subordinated units |
$ | 0.32 | $ | 1.40 | $ | 1.40 | ||||
Distributions paid per limited partner unit(1) |
$ | 1.78 | $ | 1.85 | $ | 1.8108 | ||||
Weighted average number of limited partner units outstanding, basic: |
||||||||||
Common units |
15,751 | 15,331 | 13,725 | |||||||
Subordinated units |
12,397 | 12,397 | 12,397 | |||||||
Weighted average number of limited partner units outstanding, diluted: |
||||||||||
Common units |
15,760 | 15,335 | 13,744 | |||||||
Subordinated units |
12,397 | 12,397 | 12,397 | |||||||
- (1)
- No distributions were paid on the subordinated units during 2013 or for the three months ended June 30, 2012, September 30, 2012 and December 31, 2012.
See notes to consolidated financial statements.
F-5
RHINO RESOURCE PARTNERS LP
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
(In
thousands)
| |
Limited Partner | |
|
|
||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Common | Subordinated | |
Accumulated Other Comprehensive Income/(Loss) |
|
|||||||||||||||||
| |
General Partner Capital |
Total Partners' Capital |
||||||||||||||||||||
| |
Units | Capital | Units | Capital | ||||||||||||||||||
BALANCE—December 31, 2010 |
12,400 | $ | 133,968 | 12,397 | $ | 98,313 | $ | 10,323 | $ | 625 | $ | 243,229 | ||||||||||
Net income |
— | 19,205 | — | 17,347 | 746 | — | 37,298 | |||||||||||||||
Distributions to unitholders and general partner |
— | (25,215 | ) | — | (22,449 | ) | (972 | ) | — | (48,636 | ) | |||||||||||
General partners' contributions |
— | — | — | — | 1,450 | — | 1,450 | |||||||||||||||
Offering of common units |
2,875 | 66,916 | — | — | — | — | 66,916 | |||||||||||||||
Offering costs |
— | (560 | ) | — | (9 | ) | — | — | (569 | ) | ||||||||||||
Equity-based compensation |
— | (241 | ) | — | — | — | — | (241 | ) | |||||||||||||
Issuance of units under LTIP |
36 | 767 | — | — | — | — | 767 | |||||||||||||||
Change in actuarial gain under ASC Topic 815 |
— | — | — | — | — | 1,723 | 1,723 | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | |
BALANCE—December 31, 2011 |
15,311 | $ | 194,840 | 12,397 | $ | 93,202 | $ | 11,547 | $ | 2,348 | $ | 301,937 | ||||||||||
| | | | | | | | | | | | | | | | | | | | | | | |
Net income |
— | 21,422 | — | 17,323 | 790 | — | 39,535 | |||||||||||||||
Distributions to unitholders and general partner |
— | (28,470 | ) | — | (11,901 | ) | (1,047 | ) | — | (41,418 | ) | |||||||||||
General partners' contributions |
— | — | — | — | 13 | — | 13 | |||||||||||||||
Offering costs |
— | (7 | ) | — | — | — | — | (7 | ) | |||||||||||||
Issuance of units under LTIP |
39 | 651 | — | — | — | — | 651 | |||||||||||||||
Change in actuarial gain under ASC Topic 815 |
— | — | — | — | — | (917 | ) | (917 | ) | |||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | |
BALANCE—December 31, 2012 |
15,350 | $ | 188,436 | 12,397 | $ | 98,624 | $ | 11,303 | $ | 1,431 | $ | 299,794 | ||||||||||
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
Net income |
— | 5,217 | — | 4,013 | 188 | — | 9,418 | |||||||||||||||
Distributions to unitholders and general partner |
— | (28,119 | ) | — | — | (1,020 | ) | — | (29,139 | ) | ||||||||||||
General partners' contributions |
— | — | — | — | 330 | — | 330 | |||||||||||||||
Offering of common units |
1,265 | 14,788 | — | — | — | — | 14,788 | |||||||||||||||
Offering costs |
— | (214 | ) | — | — | — | — | (214 | ) | |||||||||||||
Issuance of units under LTIP |
45 | 594 | — | — | — | — | 594 | |||||||||||||||
Change in actuarial gain under ASC Topic 815 |
— | — | — | — | — | 800 | 800 | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | |
BALANCE—December 31, 2013 |
16,660 | $ | 180,702 | 12,397 | $ | 102,637 | $ | 10,801 | $ | 2,231 | $ | 296,371 | ||||||||||
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
See notes to consolidated financial statements.
F-6
RHINO RESOURCE PARTNERS LP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| |
Year Ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
2013 | 2012 | 2011 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||||
Net income |
$ | 9,418 | $ | 39,535 | $ | 37,298 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||||
Depreciation, depletion and amortization |
42,609 | 41,370 | 36,325 | |||||||
Accretion on asset retirement obligations |
2,356 | 1,896 | 1,956 | |||||||
Accretion on interest-free debt |
57 | 222 | 210 | |||||||
Amortization of deferred revenue |
(1,553 | ) | (929 | ) | (532 | ) | ||||
Amortization of advance royalties |
270 | 244 | 1,104 | |||||||
Amortization of debt issuance costs |
1,295 | 1,075 | 1,043 | |||||||
Amortization of actuarial gain |
(145 | ) | (295 | ) | — | |||||
Provision for doubtful accounts |
— | — | (19 | ) | ||||||
Equity in net loss/(income) of unconsolidated affiliates |
4,729 | (5,757 | ) | (2,988 | ) | |||||
Distributions from unconsolidated affiliate |
— | 2,958 | 3,351 | |||||||
Loss on retirement of advance royalties |
182 | 100 | 79 | |||||||
(Gain) on sale/disposal of assets—net |
(10,359 | ) | (4,878 | ) | (3,172 | ) | ||||
Loss on impairment of assets |
1,667 | — | — | |||||||
Equity-based compensation |
605 | 873 | 727 | |||||||
Changes in assets and liabilities: |
||||||||||
Accounts receivable |
7,441 | 6,465 | (7,253 | ) | ||||||
Inventories |
163 | (3,114 | ) | 6 | ||||||
Advance royalties |
(1,517 | ) | (1,687 | ) | (905 | ) | ||||
Prepaid expenses and other assets |
(1,395 | ) | 1,341 | (115 | ) | |||||
Accounts payable |
(2,036 | ) | (5,540 | ) | 4,435 | |||||
Accrued expenses and other liabilities |
(135 | ) | 6,497 | (643 | ) | |||||
Asset retirement obligations |
(2,240 | ) | (1,108 | ) | (4,722 | ) | ||||
Postretirement benefits |
318 | 476 | 731 | |||||||
| | | | | | | | | | | |
Net cash provided by operating activities |
51,730 | 79,744 | 66,916 | |||||||
| | | | | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||||
Additions to property, plant, and equipment |
(54,522 | ) | (61,772 | ) | (91,856 | ) | ||||
Proceeds from sales/recoveries of property, plant, and equipment |
12,489 | 5,479 | 3,415 | |||||||
Proceeds from sale of coal properties and related assets and liabilities |
— | — | 20,000 | |||||||
Principal payments received on notes receivable |
— | 11,945 | 5,780 | |||||||
Cash paid from issuance of notes receivable |
(205 | ) | (11,945 | ) | (5,780 | ) | ||||
Changes in restricted cash |
1,079 | 3 | 34 | |||||||
Investment in unconsolidated affiliates |
(2,749 | ) | (2,114 | ) | — | |||||
Acquisitions of coal companies and other properties |
— | — | (119,617 | ) | ||||||
| | | | | | | | | | | |
Net cash used in investing activities |
(43,908 | ) | (58,404 | ) | (188,024 | ) | ||||
| | | | | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||||
Borrowings on line of credit |
185,300 | 212,300 | 338,200 | |||||||
Repayments on line of credit |
(175,510 | ) | (192,050 | ) | (229,670 | ) | ||||
Proceeds from issuance of long-term debt |
— | 2,973 | 1,379 | |||||||
Repayments on long-term debt |
(2,350 | ) | (2,994 | ) | (3,550 | ) | ||||
Payments on debt issuance costs |
(980 | ) | — | (3,758 | ) | |||||
Proceeds from issuance of common units, net of underwriting costs |
14,788 | — | 66,916 | |||||||
Payment of offering costs |
(214 | ) | (7 | ) | (569 | ) | ||||
Net settlement of withholding taxes on employee unit awards vesting |
(85 | ) | (145 | ) | (281 | ) | ||||
General partner's contributions |
330 | 13 | 1,450 | |||||||
Distributions to unitholders |
(29,139 | ) | (41,418 | ) | (48,636 | ) | ||||
| | | | | | | | | | | |
Net cash (used in) provided by financing activities |
(7,860 | ) | (21,328 | ) | 121,481 | |||||
| | | | | | | | | | | |
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
(38 | ) | 12 | 373 | ||||||
CASH AND CASH EQUIVALENTS—Beginning of period |
461 | 449 | 76 | |||||||
| | | | | | | | | | | |
CASH AND CASH EQUIVALENTS—End of period |
$ | 423 | $ | 461 | $ | 449 | ||||
| | | | | | | | | | | |
| | | | | | | | | | | |
See notes to consolidated financial statements.
F-7
RHINO RESOURCE PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
1. ORGANIZATION AND BASIS OF PRESENTATION
Organization—Rhino Resource Partners LP and subsidiaries (the "Partnership") is a Delaware limited partnership formed on April 19, 2010 to acquire Rhino Energy LLC (the "Predecessor" or the "Operating Company"). The Partnership had no operations during the period from April 19, 2010 (date of inception) to October 5, 2010 (the consummation of the initial public offering ("IPO") date of the Partnership). 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 Partnership also had one underground mine located in Colorado that was permanently idled at the end of 2013 (see Note 6 for further discussion). The majority of the Partnership's sales are made to electric utilities and other coal-related organizations in the United States. In addition to operating coal properties, the Partnership manages and leases coal properties and collects royalties from such management and leasing activities. In addition to the Partnership's coal operations, the Partnership has invested in oil and natural gas mineral rights and operations that began to generate revenues in early 2012.
Initial Public Offering
On October 5, 2010, Rhino Resource Partners LP completed its IPO of 3,244,000 common units, representing limited partner interests in the Partnership, at a price of $20.50 per common unit. Net proceeds from the offering were approximately $58.3 million, after deducting underwriting discounts and offering expenses of $8.2 million. The Partnership used the net proceeds from this offering, and a related capital contribution by Rhino GP LLC, the Partnership's general partner (the "General Partner") of approximately $10.4 million, to repay approximately $69.4 million of outstanding indebtedness under the Operating Company's credit facility. These net proceeds do not include $9.3 million that was used to reimburse affiliates of the Partnership's sponsor, Wexford Capital LP ("Wexford Capital"), for capital expenditures incurred with respect to the assets contributed to the Partnership in connection with the offering. In connection with the closing of the IPO, the owners of the Operating Company contributed their membership interests in the Operating Company to the Partnership, and the Partnership issued 12,397,000 subordinated units representing limited partner interests in the Partnership and 9,153,000 common units to Rhino Energy Holdings LLC, an affiliate of Wexford Capital, and issued incentive distribution rights to the General Partner. Upon the closing of the IPO, and as required by the Operating Company's credit agreement by and among the Operating Company, as borrower, and its subsidiaries as guarantors, and PNC Bank, National Association, as agent, and the other lenders thereto (as amended from time to time, the "Credit Agreement"), the Partnership pledged 100% of the membership interests in the Operating Company to the agent on behalf of itself and the other lenders to secure the Operating Company's obligations under the Credit Agreement.
Follow-on Offerings
On July 18, 2011, the Partnership completed a public offering of 2,875,000 common units, representing limited partner interests in the Partnership, at a price of $24.50 per common unit. Of the common units issued, 375,000 units were issued in connection with the exercise of the underwriters' option to purchase additional units. Net proceeds from the offering were approximately $66.4 million, after deducting underwriting discounts and offering expenses of approximately $4.1 million. The Partnership used the net proceeds from this offering, and a related capital contribution by the General
F-8
RHINO RESOURCE PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
1. ORGANIZATION AND BASIS OF PRESENTATION (Continued)
Partner of approximately $1.4 million, to repay approximately $67.8 million of outstanding indebtedness under the Partnership's credit facility.
On September 13, 2013, the Partnership completed a public offering of 1,265,000 common units, representing limited partner interests in the Partnership, at a price of $12.30 per common unit. Of the common units issued, 165,000 units were issued in connection with the exercise of the underwriter's option to purchase additional units. Net proceeds from the offering were approximately $14.6 million, after deducting underwriting discounts and offering expenses of approximately $1.0 million. The Partnership used the net proceeds from this offering, and a related capital contribution by the General Partner of approximately $0.3 million, to repay approximately $14.9 million of outstanding indebtedness under the Partnership's credit facility.
Basis of Presentation and Principles of Consolidation—The accompanying consolidated financial statements include the accounts of Rhino Resource Partners LP and its subsidiaries. Intercompany transactions and balances have been eliminated in consolidation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND GENERAL
Company Environment and Risk Factors. The Partnership, in the course of its business activities, is exposed to a number of risks including: fluctuating market conditions of coal, truck and rail transportation, fuel costs, changing government regulations, unexpected maintenance and equipment failure, employee benefits cost control, changes in estimates of proven and probable coal reserves, as well as the ability of the Partnership to maintain adequate financing, necessary mining permits and control of sufficient recoverable coal properties. In addition, adverse weather and geological conditions may increase mining costs, sometimes substantially.
Concentrations of Credit Risk. See Note 17 for discussion of major customers. The Partnership does not require collateral or other security on accounts receivable. The credit risk is controlled through credit approvals and monitoring procedures.
Cash and Cash Equivalents. The Partnership considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents.
Inventories. Inventories are stated at the lower of cost, based on a three month rolling average, or market. Inventories primarily consist of coal contained in stockpiles.
Advance Royalties. The Partnership is required, under certain royalty lease agreements, to make minimum royalty payments whether or not mining activity is being performed on the leased property. These minimum payments may be recoupable once mining begins on the leased property. The Partnership capitalizes the recoupable minimum royalty payments and amortizes the deferred costs once mining activities begin on the units-of-production method or expenses the deferred costs when the Partnership has ceased mining or has made a decision not to mine on such property.
Note Receivable. At various times during 2012, the Partnership loaned to Rhino Eastern LLC ("Rhino Eastern"), a joint venture with an affiliate of Patriot Coal Corporation ("Patriot"), approximately $11.9 million that was recorded as notes receivable, which bear interest at a fixed rate of
F-9
RHINO RESOURCE PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND GENERAL (Continued)
10%. The notes were fully repaid as of December 31, 2012. The Partnership did not provide any loans to Rhino Eastern during 2013.
During 2013, the Partnership provided a loan based upon its ownership share to Muskie Proppant LLC ("Muskie") in the amount of $0.2 million that remained outstanding as of December 31, 2013. Muskie is a joint venture established in 2012 with affiliates of Wexford Capital, which was formed to provide sand for fracking operations to drillers in the Utica Shale region and other oil and natural gas basins in the United States. The note bears interest at a rate equal to the lesser of (a) the prime interest rate plus 2.5% per annum, or (b) the maximum rate of interest permitted by applicable law.
Property, Plant and Equipment. Property, plant, and equipment, including coal properties, oil and natural gas properties, mine development costs and construction costs, are recorded at cost, which includes construction overhead and interest, where applicable. Expenditures for major renewals and betterments are capitalized, while expenditures for maintenance and repairs are expensed as incurred. Mining and other equipment and related facilities are depreciated using the straight-line method based upon the shorter of estimated useful lives of the assets or the estimated life of each mine. Coal properties, as well as oil and natural gas properties, are depleted using the units-of-production method, based on estimated proven and probable reserves. Mine development costs are amortized using the units-of-production method, based on estimated proven and probable reserves. The Partnership assumes zero salvage values for its property, plant and equipment when depreciation and amortization are calculated. Gains or losses arising from sales or retirements are included in current operations.
Stripping costs incurred in the production phase of a mine for the removal of overburden or waste materials for the purpose of obtaining access to coal that will be extracted are variable production costs that are included in the cost of inventory produced and extracted during the period the stripping costs are incurred. The Partnership defines a surface mine as a location where the Partnership utilizes operating assets necessary to extract coal, with the geographic boundary determined by property control, permit boundaries, and/or economic threshold limits. Multiple pits that share common infrastructure and processing equipment may be located within a single surface mine boundary, which can cover separate coal seams that typically are recovered incrementally as the overburden depth increases. In accordance with the accounting guidance for extractive mining activities, the Partnership defines a mine in production as one from which saleable minerals have begun to be extracted (produced) from an ore body, regardless of the level of production; however, the production phase does not commence with the removal of de minimis saleable mineral material that occurs in conjunction with the removal of overburden or waste material for the purpose of obtaining access to an ore body. The Partnership capitalizes only the development cost of the first pit at a mine site that may include multiple pits.
For the Partnership's oil and natural gas investments, the Partnership uses the full cost method of accounting for oil and natural gas operations. Accordingly, all costs, including nonproductive costs and certain general and administrative costs directly associated with acquisition, exploration and development of oil and natural gas properties, are capitalized. Under the full cost method of accounting, the Partnership is required to perform a ceiling test each quarter. The test determines a limit, or cost center ceiling, on the book value of the oil and natural gas properties. Net capitalized costs are limited to the lower of unamortized cost or the cost center ceiling. The cost center ceiling is defined as the sum of (a) estimated future net revenues, discounted at 10% per annum, from proved
F-10
RHINO RESOURCE PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND GENERAL (Continued)
reserves, based on the 12-month unweighted average of the first-day-of-the-month price during the applicable year, excluding the estimated abandonment costs for properties with asset retirement obligations recorded on the balance sheet, (b) the cost of properties not being amortized, if any, and (c) the lower of cost or market value of unproved properties included in the cost being amortized. If the net book value exceeds the ceiling, an impairment or noncash writedown is required. Such capitalized costs, including the estimated future development costs and site remediation costs of proved undeveloped properties are depleted by an equivalent units-of-production method, converting gas to barrels at the ratio of six Mcf of natural gas to one barrel of oil. No gain or loss is recognized upon the disposal of oil and natural gas properties, unless such dispositions significantly alter the relationship between capitalized costs and proven oil and natural gas reserves. Oil and natural gas properties not subject to amortization are detailed in Note 5. These costs are reviewed quarterly by the Partnership for impairment. If impairment has occurred, the portion of cost in excess of the current value is transferred to the cost of oil and natural gas properties subject to amortization. Factors considered by the Partnership in its impairment assessment include drilling results by the operators on the Partnership's oil and natural gas properties, the terms of oil and natural gas leases not held by production, and available funds for exploration and development.
Asset Impairments for Coal Properties, Mine Development Costs and Other Coal Mining Equipment and Related Facilities. The Partnership follows the accounting guidance on the impairment or disposal of property, plant and equipment for its coal mining assets, which requires that projected future cash flows from use and disposition of assets be compared with the carrying amounts of those assets when potential impairment is indicated. When the sum of projected undiscounted cash flows is less than the carrying amount, impairment losses are recognized. In determining such impairment losses, the Partnership must determine the fair value for the coal mining assets in question in accordance with the applicable fair value accounting guidance. Once the fair value is determined, the appropriate impairment loss must be recorded as the difference between the carrying amount of the coal mining assets and their respective fair values. Also, in certain situations, expected mine lives are shortened because of changes to planned operations or changes in coal reserve estimates. When that occurs and it is determined that the mine's underlying costs are not recoverable in the future, reclamation and mine closing obligations are accelerated and the mine closing accrual is increased accordingly. To the extent it is determined that coal asset carrying values will not be recoverable during a shorter mine life, a provision for such impairment is recognized. During 2013, the Partnership recorded an impairment loss of $1.7 million related to its McClane Canyon mining complex in Colorado. See Note 6 for more information on this impairment loss. There were no impairment losses recorded during the years ended December 31, 2012 and 2011.
Debt Issuance Costs. Debt issuance costs reflect fees incurred to obtain financing and are amortized (included in interest expense) using the effective interest method over the life of the related debt. Debt issuance costs are included in other non-current assets.
Asset Retirement Obligations. The accounting guidance for asset retirement obligations addresses asset retirement obligations that result from the acquisition, construction or normal operation of long-lived assets. This guidance requires companies to recognize asset retirement obligations at fair value when the liability is incurred or acquired. Upon initial recognition of a liability, an amount equal to the liability is capitalized as part of the related long-lived asset and allocated to expense over the
F-11
RHINO RESOURCE PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND GENERAL (Continued)
useful life of the asset. The Partnership has recorded the asset retirement costs for its mining operations in coal properties. In addition, the Partnership has recorded asset retirement costs for its proportionate share of its oil and natural gas investments, which are included in oil and natural gas properties.
The Partnership estimates its future cost requirements for reclamation of land where it has conducted surface and underground mining operations, based on its interpretation of the technical standards of regulations enacted by the U.S. Office of Surface Mining, as well as state regulations. These costs relate to reclaiming the pit and support acreage at surface mines and sealing portals at underground mines. Other reclamation costs are related to refuse and slurry ponds, as well as holding and related termination/exit costs.
The Partnership expenses contemporaneous reclamation which is performed prior to final mine closure. The establishment of the end of mine reclamation and closure liability is based upon permit requirements and requires significant estimates and assumptions, principally associated with regulatory requirements, costs and recoverable coal reserves. Annually, the Partnership reviews its end of mine reclamation and closure liability and makes necessary adjustments, including mine plan and permit changes and revisions to cost and production levels to optimize mining and reclamation efficiency. When a mine life is shortened due to a change in the mine plan, mine closing obligations are accelerated, the related accrual is increased and the related asset is reviewed for impairment, accordingly.
The adjustments to the liability from annual recosting reflect changes in expected timing, cash flow and the discount rate used in the present value calculation of the liability. Each respective year includes a range of discount rates that are dependent upon the timing of the cash flows of the specific obligations. Changes in the Partnership's asset retirement obligations for the year ended December 31, 2013 were calculated with discount rates that ranged from 2.3% to 5.6%. Changes in the asset retirement obligations for the year ended December 31, 2012 were calculated with discount rates that ranged from 3.2% to 5.3%. Changes in the asset retirement obligations for the year ended December 31, 2011 were calculated with discount rates that ranged from 4.2% to 7.0%. The discount rates changed in each respective year due to changes in applicable market indicators that are used to arrive at an appropriate discount rate. Other recosting adjustments to the liability are made annually based on inflationary cost increases or decreases and changes in the expected operating periods of the mines. The related inflation rate utilized in the recosting adjustments was 2.3% for 2013 and 2012, and 2.5% for 2011.
Workers' Compensation Benefits. Certain of the Partnership's subsidiaries are liable under federal and state laws to pay workers' compensation and coal workers' pneumoconiosis ("black lung") benefits to eligible employees, former employees and their dependents. The Partnership currently utilizes an insurance program and state workers' compensation fund participation to secure its on-going obligations depending on the location of the operation. Premium expense for workers' compensation benefits is recognized in the period in which the related insurance coverage is provided.
The Partnership's black lung benefit liability is calculated using the service cost method that considers the calculation of the actuarial present value of the estimated black lung obligation. The actuarial calculations using the service cost method for the Partnership's black lung benefit liability are
F-12
RHINO RESOURCE PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND GENERAL (Continued)
based on numerous assumptions including disability incidence, medical costs, mortality, death benefits, dependents and interest rates.
In addition, the Partnership's liability for traumatic workers' compensation injury claims is the estimated present value of current workers' compensation benefits, based on actuarial estimates. The actuarial estimates for the Partnership's workers' compensation liability are based on numerous assumptions including claim development patterns, mortality, medical costs and interest rates.
See Note 12 for more information on the Partnership's workers' compensation and black lung liabilities and expense.
Revenue Recognition. Most of the Partnership's revenues are generated under long-term coal sales contracts with electric utilities, industrial companies or other coal-related organizations, primarily in the eastern United States. 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.
Coal sales revenues also result from the sale of brokered coal produced by others. The revenues related to brokered coal sales are included in coal sales revenues on a gross basis and the corresponding cost of the coal from the supplier is recorded in cost of coal sales in accordance with the revenue recognition accounting guidance on principal agent considerations.
Freight and handling costs paid directly to third-party carriers and invoiced to coal customers are recorded as freight and handling costs and freight and handling revenues, respectively.
Other revenues generally consist of coal royalty revenues, limestone sales, coal handling and processing, oil and natural gas revenues, rebates and rental income. Coal royalty revenues are recognized on the basis of tons of coal sold by the Partnership's lessees and the corresponding gross revenues from those sales. The leases are based on (1) minimum monthly or annual payments, (2) a minimum dollar royalty per ton and/or a percentage of the gross sales price, or (3) a combination of both. Coal royalty revenues are recorded from royalty reports submitted by the lessee, which are reconciled and subject to audit by the Partnership. Most of the Partnership's lessees are required to make minimum monthly or annual royalty payments that are recoupable over certain time periods, generally two years. If tonnage royalty revenues do not meet the required minimum amount, the difference is paid as a deficiency. These deficiency payments received are recognized as an unearned revenue liability because they are generally recoupable over certain time periods. When a lessee recoups a deficiency payment through production, the recouped amount is deducted from the unearned revenue liability and added to revenue attributable to the coal royalty revenue in the current period. If a lessee does not recoup a deficiency paid during the allocated time period, the recoupment right lost becomes revenue in the current period and is deducted from the liability.
With respect to other revenues recognized in situations unrelated to the shipment of coal or coal royalties, 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,
F-13
RHINO RESOURCE PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND GENERAL (Continued)
delivery has occurred or services have been rendered, the seller's price to the buyer is fixed or determinable and collectibility is reasonably assured. Advance payments received are deferred and recognized in revenue when earned.
Equity-Based Compensation. The Partnership applies the provisions of ASC Topic 718 to account for any unit awards granted to employees or directors. This guidance requires that all share-based payments to employees or directors, including grants of stock options, be recognized in the financial statements based on their fair value. The General Partner has currently granted restricted units and phantom units to directors and certain employees of the General Partner and Partnership that contain only a service condition. The fair value of each restricted unit and phantom unit award was calculated using the closing price of the Partnership's common units on the date of grant.
With the vesting of the first portion of the employees' awards in early April 2011, the Compensation Committee of the board of directors of the General Partner elected to pay some of the awards in cash or a combination of cash and common units. This election was a change in policy from December 31, 2010 since management had previously planned to settle all employee awards with units upon vesting as per the grant agreements. This policy change resulted in a modification of all employee awards from equity to liability classification as of March 31, 2011 and all new awards granted thereafter. Thus, the employee awards are required to be marked-to-market each reporting period until they are vested. Restricted unit awards granted to directors of the General Partner are considered nonemployee equity-based awards since the directors are not elected by unitholders. Thus, these director awards are also required to be marked-to-market each reporting period until they are vested. Expense related to unit awards is recorded in the selling, general and administrative line of the Partnership's consolidated statements of operations and comprehensive income.
Derivative Financial Instruments. On occasion, the Partnership uses diesel fuel forward contracts to manage the risk of fluctuations in the cost of diesel fuel. The Partnership's diesel fuel forward contracts qualify for the normal purchase normal sale ("NPNS") exception prescribed by the accounting guidance on derivatives and hedging, based on management's intent and ability to take physical delivery of the diesel fuel. The Partnership did not have any diesel fuel forward contracts as of December 31, 2013.
Investment in Joint Ventures. Investments in joint ventures 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 investment 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 must continue 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.
In May 2008, the Operating Company entered into a joint venture, Rhino Eastern, with an affiliate of Patriot to acquire the Eagle mining complex. To initially capitalize the Rhino Eastern joint venture, the Operating Company contributed approximately $16.1 million for a 51% ownership interest in the
F-14
RHINO RESOURCE PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND GENERAL (Continued)
joint venture and accounts for the investment in Rhino Eastern and its results of operations under the equity method. The Partnership considers the operations of this entity to comprise a reporting segment ("Eastern Met") and has provided additional detail related to this operation in Note 21, "Segment Information."
In determining that the Partnership was not the primary beneficiary of the variable interest entity for the years ended December 31, 2013, 2012 and 2011, the Partnership performed a qualitative and quantitative analysis based on the controlling economic interests of the Rhino Eastern joint venture. This included an analysis of the expected economic contributions of the joint venture. The Partnership concluded that it is not the primary beneficiary of Rhino Eastern primarily because of certain contractual arrangements by the joint venture with Patriot and the fact that the Rhino Eastern joint venture is managed by a committee of an equal number of representatives from Patriot and us. Mandatory pro rata additional contributions not to exceed $10 million in the aggregate could be required of the joint venture partners which the Partnership would be obligated to fund based upon its 51% ownership interest.
As of December 31, 2013 and 2012, the Partnership has recorded its equity method investment of $19.4 million and $21.4 million, respectively, in the Rhino Eastern joint venture as a long-term asset. During 2013, the Partnership contributed additional capital based upon its ownership share to the Rhino Eastern joint venture in the amount of $2.3 million. The Partnership did not contribute any additional capital during 2012. As disclosed in Note 19 "Related Party and Affiliate Transactions", during 2012 and 2011, the Partnership provided loans to Rhino Eastern totaling approximately $11.9 million and $5.8 million, respectively, which were fully repaid as of December 31, 2012 and 2011.
On July 9, 2012, Patriot filed for Chapter 11 bankruptcy protection. Patriot successfully exited bankruptcy in December 2013 and normal operations have continued at the Rhino Eastern joint venture.
In March 2012, the Partnership made an initial investment of approximately $0.1 million in a new joint venture, Timber Wolf Terminals LLC ("Timber Wolf"), with affiliates of Wexford. Timber Wolf was formed to construct and operate a condensate river terminal that will provide barge trans-loading services for parties conducting activities in the Utica Shale region of eastern Ohio. The initial investment was the Partnership's proportionate minority ownership share to purchase land for the construction site of the condensate river terminal. Timber Wolf had no operating activities during the years ended December 31, 2013 and 2012 and the Partnership will initially include any operating activities of Timber Wolf in its Other category for segment reporting purposes.
In December 2012, the Partnership made an initial investment of approximately $2.0 million in a new joint venture, Muskie Proppant LLC, with affiliates of Wexford Capital. Muskie was formed to provide sand for fracking operations to drillers in the Utica Shale region and other oil and natural gas basins in the U.S. During 2013, the Partnership contributed additional capital based upon its ownership share to the Muskie joint venture in the amount of $0.5 million. As disclosed in Note 19 "Related Party and Affiliate Transactions", during 2013 the Partnership provided a loan to Muskie totaling approximately $0.2 million which remained outstanding as of December 31, 2013. In addition, the Partnership recorded its proportionate portion of operating losses for 2013 and 2012, approximately $0.5 million and $0.3 million, respectively, for Muskie. As of December 31, 2013 and 2012, the
F-15
RHINO RESOURCE PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND GENERAL (Continued)
Partnership has recorded its equity method investment of $1.8 million and $1.7 million, respectively, in the Muskie joint venture as a long-term asset. The Partnership initially included Muskie in its Other category for segment reporting purposes, but Muskie is included in the Partnership's Oil and Natural Gas segment beginning with December 31, 2013 reporting. See Note 21 for information on the Partnership's reportable segments.
Income Taxes. The Partnership is considered a partnership for income tax purposes. Accordingly, the partners report the Partnership's taxable income or loss on their individual tax returns.
Loss Contingencies. In accordance with the guidance on accounting for contingencies, the Partnership records loss contingencies at such time that an unfavorable outcome becomes probable and the amount can be reasonably estimated. When the reasonable estimate is a range, the recorded loss is the best estimate within the range. If no amount in the range is a better estimate than any other amount, the minimum amount of the range is recorded. The Partnership discloses information concerning loss contingencies for which an unfavorable outcome is probable. See Note 15, "Commitments and Contingencies," for a discussion of such matters.
Management's Use of Estimates. The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Recently Issued Accounting Standards. In February 2013, the FASB issued ASU No. 2013-02, "Comprehensive Income (Topic 220) Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income". This ASU requires preparers to report, in one place, information about reclassifications out of accumulated other comprehensive income ("AOCI"). The ASU also requires companies to report changes in AOCI balances. For significant items reclassified out of AOCI to net income in their entirety in the same reporting period, reporting (either on the face of the statement where net income is presented or in the notes) is required about the effect of the reclassifications on the respective line items in the statement where net income is presented. For items that are not reclassified to net income in their entirety in the same reporting period, a cross reference to other disclosures currently required under U.S. GAAP (e.g., pension amounts that are included in inventory) is required in the notes. The above information must be presented in one place (parenthetically on the face of the financial statements by income statement line item or in a note). Public companies must provide the information required by the ASU (e.g., changes in AOCI balances and reclassifications out of AOCI) in interim and annual periods. For public companies, the ASU is effective for fiscal years and interim periods within those years beginning after 15 December 2012, or the first quarter of 2013 for calendar-year companies. The Partnership has included the required disclosures of ASU 2013-02 in this Report on Form 10-K and this ASU did not have a material effect on the Partnership.
F-16
RHINO RESOURCE PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
3. SUBSEQUENT EVENTS
On January 21, 2014, the Partnership announced a cash distribution of $0.445 per common unit, or $1.78 per unit on an annualized basis. This distribution was paid on February 14, 2014 to all common unitholders of record as of the close of business on January 31, 2014. No distributions were paid on the subordinated units.
In January 2014, the Partnership received approximately $8.4 million of net proceeds from the sale by Blackhawk Midstream LLC ("Blackhawk") of its equity interest in two entities, Ohio Gathering Company, LLC and Ohio Condensate Company, LLC, to Summit Midstream Partners, LLC. As part of the joint operating agreement for the Utica Shale investment completed between the Partnership, Gulfport Energy ("Gulfport") and an affiliate of Wexford Capital (discussed further in Note 4), the Partnership had the right to approximately 5% of the proceeds of the sale by Blackhawk. The Partnership has not completed its accounting analysis for the net proceeds received in this transaction.
In February 2014, the Partnership signed a binding letter of intent with Gulfport to sell its entire Utica Shale interests for approximately $185 million. The transaction is expected to close by the end of March 2014 subject to customary closing conditions. The Partnership has not completed its accounting analysis for the net proceeds received in this transaction.
4. BUSINESS COMBINATIONS AND OTHER ACQUISITIONS
Acquisition of The Elk Horn Coal Company, LLC
In June 2011, the Partnership completed the acquisition of 100% of the ownership interests in The Elk Horn Coal Company, LLC ("Elk Horn") for approximately $119.7 million in cash consideration, or approximately $119.6 million net of cash acquired (referred to as the "Elk Horn Acquisition"). Elk Horn is primarily a coal leasing company that owns or controls coal reserves and non-reserve coal deposits and surface acreage in eastern Kentucky. The Elk Horn Acquisition was initially funded with borrowings under the Partnership's credit facility. The Partnership completed a public offering of common units in July 2011 that provided proceeds the Partnership used to repay existing indebtedness on its credit facility that was incurred from the Elk Horn acquisition. The following table summarizes the assets acquired and liabilities assumed as of the acquisition date:
| |
(in thousands) | |||
|---|---|---|---|---|
Cash |
$ | 58 | ||
Accounts receivable |
2,619 | |||
Prepaid expenses and other |
94 | |||
Property, plant and equipment |
7,466 | |||
Mine development costs |
3,000 | |||
Coal properties |
111,647 | |||
Intangible assets |
654 | |||
Other non-current assets |
1,112 | |||
Accounts payable |
(79 | ) | ||
Deferred revenues |
(2,499 | ) | ||
Accrued expenses and other |
(1,691 | ) | ||
Asset retirement obligations |
(2,707 | ) | ||
| | | | | |
Net assets acquired |
$ | 119,674 | ||
| | | | | |
| | | | | |
Total consideration |
$ | 119,674 | ||
| | | | | |
| | | | | |
F-17
RHINO RESOURCE PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
4. BUSINESS COMBINATIONS AND OTHER ACQUISITIONS (Continued)
Although the responsibility of valuation remains with the Partnership's management, the determination of the fair values of the various assets and liabilities acquired were based in part upon studies conducted by third-party professionals with experience in the appropriate subject matter. The studies related to the value of the property, plant and equipment, coal properties, intangible assets acquired and asset retirement obligations. The table above reflects the allocation of the purchase price to the fair value of the assets acquired and liabilities assumed in the Elk Horn Acquisition, which resulted in no recognition of goodwill or gain on the acquisition. The Partnership's consolidated statements of operations and comprehensive income do not include revenue, costs or net income from Elk Horn prior to June 10, 2011, the effective date of the acquisition. The post-acquisition revenue of Elk Horn that is included in the Partnership's results was approximately $13.0 million for the year ended December 31, 2011. The post-acquisition net income of Elk Horn that is included in the Partnership's results was approximately $7.7 million for the year ended December 31, 2011.
The following table presents selected unaudited pro forma financial information for the year ended December 31, 2011. The pro forma information was prepared using Elk Horn's historical financial data and also reflects adjustments based upon assumptions by the Partnership's management to give effect for certain pro forma items that are directly attributable to the acquisition. These pro forma adjustment items include increased depletion expense related to the step-up in basis for the mineral assets acquired and increased interest expense from borrowings incurred to fund the acquisition. The pro forma adjustments for interest expense and earnings per unit reflect the net amount of the additional borrowings incurred by the Partnership in June 2011 to initially fund the acquisition that were partially offset by proceeds from common units issued in a public offering completed in July 2011. Supplemental pro forma revenue, net earnings and earnings per unit disclosures are as follows.
| |
Year ended December 31, 2011 |
|||
|---|---|---|---|---|
| |
(in thousands) |
|||
Revenues: |
||||
As reported |
$ | 367,221 | ||
Pro forma adjustments |
9,477 | |||
| | | | | |
Pro forma revenues |
$ | 376,698 | ||
Net Income: |
||||
As reported |
$ | 38,071 | ||
Pro forma adjustments |
3,129 | |||
| | | | | |
Pro forma net income |
$ | 41,200 | ||
Net income per limited partner unit, diluted: |
||||
As reported |
$ | 1.43 | ||
Pro forma adjustments |
$ | 0.03 | ||
| | | | | |
Pro forma net income per limited partner unit |
$ | 1.46 | ||
Acquisition of Oil and Gas Mineral Rights
Beginning in 2011, the Partnership and an affiliate of Wexford Capital participated with Gulfport, a publicly traded company, to acquire interests in a portfolio of oil and natural gas leases in the Utica
F-18
RHINO RESOURCE PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
4. BUSINESS COMBINATIONS AND OTHER ACQUISITIONS (Continued)
Shale. During the year ended December 31, 2011, the Partnership completed the acquisitions of interests in a portfolio of leases in the Utica Shale region of eastern Ohio, which consisted of a 10.8% net interest in approximately 80,000 gross acres. During the third quarter of 2012, the Partnership completed an exchange of its initial 10.8% position for a pro rata interest in 125,000 gross acres under lease by Gulfport and an affiliate of Wexford Capital. The non-cash transaction was an exchange of the Partnership's operating interest for the operating interest owned by another party in order to diversify the Partnership's risk in its oil and natural gas investment. Thus, the Partnership determined that the non-cash exchange of the Partnership's ownership interest in the Utica acreage did not result in any gain or loss. Also during the third quarter of 2012, the Partnership's position was adjusted to a 5% net interest in the 125,000 gross acres, or approximately 6,250 net acres. As of December 31, 2013, the Partnership had invested approximately $31.1 million for its pro rata interest in the Utica Shale portfolio of oil and natural gas leases, which consisted of a 5% interest in a total of approximately 152,300 gross acres, or 7,615 net acres. In addition, per the joint operating agreement completed between the Partnership, Gulfport and an affiliate of Wexford Capital, the Partnership has funded its proportionate share of drilling costs to Gulfport for wells being drilled on the Partnership's acreage. For the years ended December 31, 2013 and 2012, the Partnership has funded approximately $23.3 million and $5.3 million, respectively, of drilling costs that are included in Oil and natural gas properties in the Partnership's consolidated statements of financial position. For the year ended December 31, 2013, the Partnership recorded revenue from its Utica Shale investment of approximately $5.6 million in Other revenue and approximately $2.6 million of depletion expense in the Partnership's consolidated statements of operations and comprehensive income. The Partnership recognized an immaterial amount of revenue and depletion expense from its Utica Shale investment for the year ended December 31, 2012. As described in Note 3, in February 2014, the Partnership signed a binding letter of intent to sell its entire Utica Shale joint interest investment to Gulfport for $185 million, subject to customary closing conditions.
In March 2012, the Partnership completed a lease agreement with a third party for approximately 1,232 acres that the Partnership previously owned in the Utica Shale region in Harrison County, Ohio. The lease agreement is for an initial five year term with an optional three year renewal period and conveys rights to the third party to perform drilling and operating activities for producing oil, natural gas or other hydrocarbons. As part of the lease agreement, the third party agreed to pay the Partnership the sum of $6,000 per acre as a lease bonus, of which $0.5 million was paid at the signing of the lease agreement. An additional $6.9 million was paid in the second quarter of 2012 totaling approximately $7.4 million of lease bonus payments for the approximately 1,232 acres. In addition, the lease agreement stipulates that the third party shall pay the Partnership a 20% royalty based upon the gross proceeds received from the sale of oil and/or natural gas recovered from the leased property.
The Partnership analyzed the lease agreement and determined that the lease bonus payments represented a conveyance of these oil and natural gas rights, and should be recognized as a component of the Partnership's consolidated statements of operations. This determination was based upon the fact that that the lease agreement did not require the Partnership to perform any future obligations to perform or participate in drilling activities and the lease agreement did not result in any pooling of assets that would be used to perform any future drilling activities. In addition, the entire amount of the lease bonus was recognized as Other revenues since the Partnership's business activities have historically included the leasing of mineral resources, including coal leasing, which have been recorded
F-19
RHINO RESOURCE PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
4. BUSINESS COMBINATIONS AND OTHER ACQUISITIONS (Continued)
as Other revenues. For the year ended December 31, 2012, the Partnership recorded $7.4 million related to the initial lease bonus payments within Other revenues in the Partnership's Northern Appalachia segment.
In April 2013, the Partnership closed on an agreement with a third party to sell the 20% royalty interest on its owned 1,232 acres in the Utica Shale for approximately $10.5 million. The sale of the royalty interest resulted in a gain of approximately $10.5 million since the Partnership had no cost basis associated with the royalty interest. This gain is included on the (Gain) on sale/disposal of assets—net line of the Partnership's consolidated statements of operations and comprehensive income.
In September 2013, the Partnership closed on an agreement with a third party to sell the oil and natural gas mineral rights for approximately 57 acres the Partnership owns in the Utica Shale region in Harrison County, Ohio for approximately $0.6 million. The sale of this acreage resulted in a gain of approximately $0.6 million since the Partnership had no cost basis associated with this property. This gain is included on the (Gain) on sale/disposal of assets—net line of the Partnership's consolidated statements of operations and comprehensive income.
During the year ended December 31, 2011, the Partnership completed the acquisition of certain oil and natural gas mineral rights in the Cana Woodford region of western Oklahoma for a total purchase price of approximately $8.1 million. The Partnership recorded an immaterial amount of royalty revenue from its Cana Woodford investment during the years ended December 31, 2013 and 2012.
Acquisition of Coal Property
In May 2012, the Partnership completed the purchase of certain rights to coal leases and surface property located in Daviess and McLean counties in western Kentucky for approximately $1.5 million. In addition, the Partnership could potentially be required to pay an additional $3.0 million related to this acquisition if certain conditions are met. Of that amount, $2.0 million was initially recorded in Property, plant and equipment and Accrued expenses related to this acquisition since this additional amount related to the purchase of these assets was probable and estimable. The remaining $1.0 million in potential payments has not been recorded because the conditions requiring payment of this amount have not yet occurred.
During the third quarter of 2012, the Partnership paid $1.6 million of the $2.0 million that was accrued related to the acquisition since the conditions requiring payment had been met. The remaining balance of $0.4 million was paid in the fourth quarter of 2013 since the conditions requiring payment had been met.
The coal leases and property are estimated to contain approximately 32.6 million tons of proven and probable coal reserves as of December 31, 2013 that are contiguous to the Green River. The property was initially undeveloped, but fully permitted, and provides the Partnership with access to Illinois Basin coal that is adjacent to a navigable waterway, which could be exported to non-U.S. customers. The Partnership has commenced the construction of a new underground mining operation on this property with production targeted to begin in mid-2014.
In August 2011, the Partnership purchased non-reserve coal deposits at its Sands Hill operation for approximately $2.5 million, which is estimated to include approximately 2.5 million tons of non-reserve coal deposits.
F-20
RHINO RESOURCE PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
4. BUSINESS COMBINATIONS AND OTHER ACQUISITIONS (Continued)
In June 2011, the Partnership acquired approximately 32,600 acres and associated surface rights in Randolph and Upshur Counties, West Virginia for approximately $7.5 million. These development stage properties are unpermitted and contain no infrastructure. The property is estimated to contain approximately 8.2 million tons of proven and probable underground metallurgical coal reserves as of December 31, 2013.
5. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets as of December 31, 2013 and 2012 consisted of the following:
| |
December 31, | ||||||
|---|---|---|---|---|---|---|---|
| |
2013 | 2012 | |||||
| |
(in thousands) |
||||||
Other prepaid expenses |
$ | 951 | $ | 767 | |||
Prepaid insurance |
1,958 | 1,895 | |||||
Prepaid leases |
122 | 121 | |||||
Supply inventory |
1,221 | 1,219 | |||||
Deposits |
320 | 321 | |||||
| | | | | | | | |
Total |
$ | 4,572 | $ | 4,323 | |||
| | | | | | | | |
| | | | | | | | |
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, including coal properties and mine development and construction costs, as of December 31, 2013 and 2012 are summarized by major classification as follows:
| |
|
December 31, | |||||||
|---|---|---|---|---|---|---|---|---|---|
| |
Useful Lives | 2013 | 2012 | ||||||
| |
|
(in thousands) |
|||||||
Land and land improvements |
$ | 35,078 | $ | 34,978 | |||||
Mining and other equipment and related facilities |
2 - 20 Years | 304,504 | 297,615 | ||||||
Mine development costs |
1 - 15 Years | 73,344 | 67,045 | ||||||
Coal properties |
1 - 15 Years | 238,975 | 240,368 | ||||||
Oil and natural gas properties |
62,623 | 37,720 | |||||||
Construction work in process |
18,760 | 5,943 | |||||||
| | | | | | | | | | |
Total |
733,284 | 683,669 | |||||||
Less accumulated depreciation, depletion and amortization |
(252,797 | ) | (219,709 | ) | |||||
| | | | | | | | | | |
Net |
$ | 480,487 | $ | 463,960 | |||||
| | | | | | | | | | |
| | | | | | | | | | |
F-21
RHINO RESOURCE PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
6. PROPERTY, PLANT AND EQUIPMENT (Continued)
The Partnership's proportionate share of oil and natural gas properties not subject to amortization as of December 31, 2013 and 2012 are summarized as follows:
| |
December 31, | ||||||
|---|---|---|---|---|---|---|---|
| |
2013 | 2012 | |||||
| |
(in thousands) |
||||||
Acquisition costs |
$ | 30,430 | $ | 32,175 | |||
Exploration costs |
— | — | |||||
Development costs |
— | — | |||||
| | | | | | | | |
Total |
$ | 30,430 | $ | 32,175 | |||
| | | | | | | | |
| | | | | | | | |
Depreciation expense for mining and other equipment and related facilities, depletion expense for coal and oil and natural gas properties, amortization expense for mine development costs, amortization expense for intangible assets and amortization expense for asset retirement costs for the years ended December 31, 2013, 2012 and 2011 was as follows:
| |
Year Ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
2013 | 2012 | 2011 | |||||||
| |
(in thousands) |
|||||||||
Depreciation expense-mining and other equipment and related facilities |
$ | 31,886 | $ | 32,685 | $ | 26,467 | ||||
Depletion expense for coal properties |
5,387 | 5,784 | 5,140 | |||||||
Depletion expense for oil and natural gas properties |
2,653 | 96 | — | |||||||
Amortization expense for mine development costs |
2,520 | 2,180 | 3,322 | |||||||
Amortization expense for intangible assets |
80 | 80 | 65 | |||||||
Amortization expense for asset retirement costs |
83 | 545 | 1,331 | |||||||
| | | | | | | | | | | |
Total |
$ | 42,609 | $ | 41,370 | $ | 36,325 | ||||
| | | | | | | | | | | |
| | | | | | | | | | | |
Sale of Land Surface Rights
In December 2012, the Partnership completed the sale of the surface rights to approximately 134 acres located in Harrison County, Ohio for approximately $1.5 million. The Partnership recorded a gain of approximately $1.5 million related to this sale that is included on the (Gain) loss on sale/acquisition of assets, net line of the Partnership's consolidated statements of operations and comprehensive income.
Sale of Triad Operations
In August 2012, the Partnership sold the operations and tangible assets of its roof bolt manufacturing company, Triad Roof Support Systems, LLC ("Triad"), to a third party for $0.5 million of cash consideration. As part of the sale, the Partnership retained the rights to certain intellectual property and entered into an exclusive license and option to purchase agreement for this intellectual property with the same third party for potential additional cash consideration. The Partnership has not recorded any portion of this additional consideration since this amount is contingent upon the third party determining the viability of the related intellectual property to their specifications. In connection with the purchase of Triad in 2009, the Partnership had recorded approximately $0.2 million of
F-22
RHINO RESOURCE PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
6. PROPERTY, PLANT AND EQUIPMENT (Continued)
goodwill. Since the Partnership disposed of the entire operations and fixed assets of the Triad reporting unit, the goodwill was included in the carrying amount of the Triad reporting unit to determine the $0.2 million gain that was recorded on the sale of this reporting unit. This gain is included on the (Gain) on sale/disposal of assets, net line of the Partnership's consolidated statements of operations and comprehensive income.
Sale of Mining Assets
In December 2012, the Partnership sold certain non-core mining assets located in Pike County, Kentucky to a third party for approximately $0.2 million. The transaction also extinguished certain liabilities related to the assets sold. In relation to the sale of these assets and extinguishment of liabilities, the Partnership recorded a gain of approximately $0.9 million, which was higher than the sales amount due to the extinguishment of the liabilities. This gain is included on the (Gain) on sale/disposal of assets, net line of the Partnership's consolidated statements of operations and comprehensive income.
In February 2012, the Partnership sold certain non-core mining assets located in Pike County, Kentucky to a third party for approximately $0.6 million. The transaction also extinguished certain liabilities related to the assets sold. In relation to the sale of these assets and extinguishment of liabilities, the Partnership recorded a gain of approximately $0.9 million, which was higher than the sales amount due to the extinguishment of the liabilities. This gain is included on the (Gain) on sale/disposal of assets, net line of the Partnership's consolidated statements of operations and comprehensive income.
In August 2011, the Partnership closed on an agreement to sell and assign certain non-core mining assets and related liabilities located in the Phelps, Kentucky area of the Partnership's Tug River mining complex for $20 million. The mining assets included leasehold interests and permits to surface and mineral interests that included steam coal reserves and non-reserve coal deposits. Additionally, the sales agreement includes the potential for additional payments of approximately $8.75 million dependent upon the future issuance of certain permits and the commencement of mining activities by the purchaser. These contingent payments are being accounted for as gain contingencies and will be recognized in the future when and if the contingencies are resolved. The transaction also transfers certain liabilities related to the assets sold. In relation to the sale of these assets and transfer of liabilities, the Partnership recorded a gain of approximately $2.4 million, which is included on the (Gain) on sale/disposal of assets, net line of the Partnership's consolidated statements of operations and comprehensive income.
Long-Lived Asset Impairment
During the fourth quarter of 2013, the Partnership's management made a strategic decision to permanently close the mining operations at its McClane Canyon complex in Colorado. Since the McClane Canyon complex had been idled at the end of 2010, the Partnership had been actively marketing the coal from this complex to potential buyers, but had not been able to obtain suitable sales contracts. Due to the unfavorable long-term prospects for the coal market in the Colorado area and to avoid the ongoing costs that were being incurred to temporarily idle this complex, the Partnership's management made the decision to permanently close this operation at the end of 2013. While a portion
F-23
RHINO RESOURCE PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
6. PROPERTY, PLANT AND EQUIPMENT (Continued)
of the equipment from this operation was relocated to other operating locations, the Partnership incurred an impairment charge of approximately $1.7 million during 2013 related to specific property, plant and equipment, which is included on the Asset impairment loss line of the Partnership's consolidated statements of operations and comprehensive income.
7. GOODWILL AND INTANGIBLE ASSETS
ASC Topic 350 addresses financial accounting and reporting for goodwill and other intangible assets subsequent to their acquisition. Under the provisions of ASC Topic 350, goodwill and other intangible assets with indefinite useful lives are not amortized but instead tested for impairment at least annually.
As discussed in Note 6, the Partnership's goodwill balance was reduced to zero as a result of the disposal of the Partnership's Triad operations that were sold during the third quarter of 2012.
Intangible assets of the Partnership as of December 31, 2013 consisted of the following:
Intangible Asset
|
Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount |
|||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
(in thousands) |
|||||||||
Patent |
$ | 728 | $ | 207 | $ | 521 | ||||
Developed Technology |
78 | 22 | 56 | |||||||
Trade Name |
184 | 23 | 161 | |||||||
Customer List |
470 | 60 | 410 | |||||||
| | | | | | | | | | | |
Total |
$ | 1,460 | $ | 312 | $ | 1,148 | ||||
| | | | | | | | | | | |
| | | | | | | | | | | |
Intangible assets of the Partnership as of December 31, 2012 consisted of the following:
Intangible Asset
|
Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount |
|||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
(in thousands) |
|||||||||
Patent |
$ | 728 | $ | 164 | $ | 564 | ||||
Developed Technology |
78 | 18 | 60 | |||||||
Trade Name |
184 | 14 | 170 | |||||||
Customer List |
470 | 36 | 434 | |||||||
| | | | | | | | | | | |
Total |
$ | 1,460 | $ | 232 | $ | 1,228 | ||||
| | | | | | | | | | | |
| | | | | | | | | | | |
The Partnership considers the patent and developed technology intangible assets to have a useful life of seventeen years.
In connection with the Elk Horn Acquisition, the Partnership recognized an intangible asset for the trade name valued at $184,000 and a customer list intangible asset valued at $470,000 during 2011. The trade name and customer list intangible assets recognized in the Elk Horn Acquisition do not have any residual value and do not have any renewal or extension terms. The Partnership considers the trade name and customer list intangible assets to have a useful life of twenty years. All of the intangible assets are amortized over their useful life on a straight line basis. Amortization expense for the years ended December 31, 2013, 2012 and 2011 is included in the depreciation, depletion and amortization table included in Note 6.
F-24
RHINO RESOURCE PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
7. GOODWILL AND INTANGIBLE ASSETS (Continued)
The future total amortization expense for each of the five succeeding years related to intangible assets that are currently recorded in the consolidated statement of financial position is estimated to be as follows at December 31, 2013:
| |
Patent | Developed Technology |
Trade Name | Customer List |
Total | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
(in thousands) |
|||||||||||||||
2014 |
$ | 43 | $ | 5 | $ | 9 | $ | 23 | $ | 80 | ||||||
2015 |
43 | 5 | 9 | 23 | 80 | |||||||||||
2016 |
43 | 5 | 9 | 23 | 80 | |||||||||||
2017 |
43 | 5 | 9 | 23 | 80 | |||||||||||
2018 |
43 | 5 | 9 | 23 | 80 | |||||||||||
8. OTHER NON-CURRENT ASSETS
Other non-current assets as of December 31, 2013 and 2012 consisted of the following:
| |
December 31, | ||||||
|---|---|---|---|---|---|---|---|
| |
2013 | 2012 | |||||
| |
(in thousands) |
||||||
Deposits and other |
$ | 1,223 | $ | 1,988 | |||
Debt issuance costs—net |
3,535 | 3,851 | |||||
Non-current receivable |
4,327 | 3,829 | |||||
Note receivable |
206 | — | |||||
Deferred expenses |
349 | 16 | |||||
| | | | | | | | |
Total |
$ | 9,640 | $ | 9,684 | |||
| | | | | | | | |
| | | | | | | | |
Debt issuance costs were $9.0 million and $8.0 million as of December 31, 2013 and 2012, respectively. Accumulated amortization of debt issuance costs were $5.5 million and $4.2 million as of December 31, 2013 and 2012, respectively. As of December 31, 2013 and 2012, the non-current receivable balance of $4.3 million and $3.8 million, respectively, consisted of the amount due from the Partnership's workers' compensation insurance providers for potential claims that are the primary responsibility of the Partnership, but are covered under the Partnership's insurance policies. See Note 12 for a discussion of the $4.3 million and $3.8 million that is also recorded in the Partnership's other non-current workers' compensation liabilities.
F-25
RHINO RESOURCE PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
9. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities as of December 31, 2013 and 2012 consisted of the following:
| |
December 31, | ||||||
|---|---|---|---|---|---|---|---|
| |
2013 | 2012 | |||||
| |
(in thousands) |
||||||
Payroll, bonus and vacation expense |
$ | 3,573 | $ | 4,086 | |||
Non-income taxes |
2,750 | 3,318 | |||||
Royalty expenses |
2,001 | 2,536 | |||||
Accrued interest |
760 | 671 | |||||
Health claims |
1,036 | 1,479 | |||||
Workers' compensation & pneumoconiosis |
1,190 | 1,784 | |||||
Deferred revenues |
3,592 | 2,788 | |||||
Accrued insured litigation claims |
2,579 | 2,783 | |||||
Other |
3,086 | 2,733 | |||||
| | | | | | | | |
Total |
$ | 20,567 | $ | 22,178 | |||
| | | | | | | | |
| | | | | | | | |
The $2.6 million and $2.8 million accrued for insured litigation claims as of December 31, 2013 and 2012, respectively, consists of probable and estimable litigation claims that are the primary obligation of the Partnership. This amount is also due from the Partnership's insurance providers and is included in Accounts receivable, net of allowance for doubtful accounts on the Partnership's consolidated statements of financial position. The Partnership presents this amount on a gross asset and liability basis as a right of setoff does not exist per the accounting guidance in ASC Topic 210. This presentation has no impact on the Partnership's results of operations or cash flows.
10. DEBT
Debt as of December 31, 2013 and 2012 consisted of the following:
| |
December 31, | ||||||
|---|---|---|---|---|---|---|---|
| |
2013 | 2012 | |||||
| |
(in thousands) |
||||||
Senior secured credit facility with PNC Bank, N.A. |
$ | 167,040 | $ | 157,250 | |||
Note payable to H&L Construction Co., Inc. |
800 | 1,560 | |||||
Other notes payable |
3,206 | 4,739 | |||||
| | | | | | | | |
Total |
171,046 | 163,549 | |||||
Less current portion |
(1,024 | ) | (2,350 | ) | |||
| | | | | | | | |
Long-term debt |
$ | 170,022 | $ | 161,199 | |||
| | | | | | | | |
| | | | | | | | |
Senior Secured Credit Facility with PNC Bank, N.A.—The original maximum availability under the credit facility by and among the Operating Company, the guarantors (including the Partnership) and lenders which are parties thereto, and PNC Bank, N.A. as administrative agent was $200.0 million. On June 8, 2011, with the consent of the lenders, the Operating Company exercised the option to increase the amount available to borrow under the credit agreement by $50.0 million to $250.0 million as part of
F-26
RHINO RESOURCE PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
10. DEBT (Continued)
the Elk Horn Acquisition discussed earlier. As part of exercising this option to increase the available amount under the credit agreement, the Operating Company paid a fee of $1.0 million to the lenders, which was recorded in Debt issuance costs in Other non-current assets on the Partnership's consolidated statements of financial position and in Cash flows from financing activities in the Partnership's consolidated statements of cash flows.
On July 29, 2011, the Operating Company and the Partnership, as a guarantor, executed an amended and restated senior secured credit facility with PNC Bank, N.A., as administrative agent, and a group of lenders, which are parties thereto. The maximum availability under the amended and restated credit facility is $300.0 million, with a one-time option to increase the availability by an amount not to exceed $50.0 million. Of the $300.0 million, $75.0 million is available for letters of credit. Borrowings under the facility bear interest, which varies depending upon the levels of certain financial ratios. As part of the agreement, the Operating Company is required to pay a commitment fee on the unused portion of the borrowing availability that also varies depending upon the levels of certain financial ratios. Borrowings on the amended and restated senior secured credit facility are collateralized by all the unsecured assets of the Partnership. The amended and restated senior secured credit facility requires the Partnership to maintain certain minimum financial ratios and contains certain restrictive provisions, including among others, restrictions on making loans, investments and advances, incurring additional indebtedness, guaranteeing indebtedness, creating liens, and selling or assigning stock. The Partnership was in compliance with all covenants contained in the amended and restated senior secured credit facility as of and for the period ended December 31, 2013. The amended and restated senior secured credit facility expires in July 2016.
As part of executing the amended and restated senior secured credit facility, the Operating Company paid a fee of approximately $2.8 million to the lenders, which was recorded in Debt issuance costs in Other non-current assets on the Partnership's consolidated statements of financial position and in Cash flows from financing activities in the Partnership's consolidated statements of cash flows. The Partnership evaluated the accounting guidance in ASC Topic 470, Debt, De-recognition, Line-of-Credit or Revolving-Debt Arrangements, and determined that the balance of the previous deferred financing costs met the requirements to be included with the fees paid for the amended and restated credit facility, with the combined balance of financing costs being deferred and amortized over the five year term of the amended and restated credit facility.
In April 2013, the Partnership entered into an amendment of its amended and restated senior secured credit facility with PNC Bank, N.A., as administrative agent, and a group of lenders, which are parties thereto. The amendment provided for an increase in the maximum allowed investments in coal-related entities outside of the Partnership (i.e. joint ventures) under the amended and restated senior secured credit facility from $25 million to $40 million. The amendment also altered the maximum leverage ratio allowed under the amended and restated senior secured credit facility and also altered the pricing grid to include applicable interest rates for borrowings, letter of credit fees and commitment fees on unused borrowings based upon the new maximum leverage ratio. The amendment increases the maximum leverage ratio of the amended and restated senior secured credit facility to 3.75 from April 1, 2013 through March 31, 2015, then steps the maximum leverage ratio down to its previous level of 3.0 after December 31, 2015. All other terms of the amended and restated senior secured credit facility were not affected by the amendment. As part of executing the amendment to the
F-27
RHINO RESOURCE PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
10. DEBT (Continued)
amended and restated senior secured credit facility, the Operating Company paid a fee of approximately $1.0 million to the lenders in April 2013, which was recorded in Debt issuance costs in Other non-current assets on the Partnership's consolidated statements of financial position and in Cash flows from financing activities in the Partnership's consolidated statements of cash flows.
At December 31, 2013, the Operating Company had borrowed $162.0 million at a variable interest rate of LIBOR plus 3.00% (3.17% at December 31, 2013) and an additional $5.0 million at a variable interest rate of PRIME plus 2.00% (5.25% at December 31, 2013). In addition, the Operating Company had outstanding letters of credit of $21.5 million at a fixed interest rate of 3.00% at December 31, 2013. Based upon a maximum borrowing capacity of 3.75 times a trailing twelve-month EBITDA calculation (as defined in the credit agreement), the Operating Company had not used $56.1 million of the borrowing availability at December 31, 2013.
For the year ending December 31, 2013, the Partnership capitalized interest costs of approximately $0.1 million, which was related to the construction of its Pennyrile mine in western Kentucky. The Partnership did not capitalize any interest costs during the years ended December 31, 2012 and 2011.
Note payable to H&L Construction Co., Inc.—The note payable to H&L Construction Co., Inc. was originally a non-interest bearing note and the Partnership has recorded a discount for imputed interest at a rate of 5.0% on this note that is being amortized over the life of the note using the effective interest method. The note payable matures in January 2015. The note is secured by mineral rights purchased by the Partnership from H&L Construction Co., Inc. with a carrying amount of $11.1 million and $11.3 million at December 31, 2013 and 2012, respectively.
Principal payments on long-term debt due subsequent to December 31, 2013 are as follows:
| |
in thousands | |||
|---|---|---|---|---|
2014 |
$ | 1,049 | ||
2015 |
210 | |||
2016 |
167,265 | |||
2017 |
240 | |||
2018 |
257 | |||
Thereafter |
2,050 | |||
| | | | | |
Total principal payments |
171,071 | |||
Less imputed interest on interest free notes payable |
(25 | ) | ||
| | | | | |
Total debt |
$ | 171,046 | ||
| | | | | |
| | | | | |
F-28
RHINO RESOURCE PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
11. ASSET RETIREMENT OBLIGATIONS
The changes in asset retirement obligations for the years ended December 31, 2013, 2012 and 2011 are as follows:
| |
Year Ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
2013 | 2012 | 2011 | |||||||
| |
(in thousands) |
|||||||||
Balance at beginning of period (including current portion) |
$ | 33,003 | $ | 34,113 | $ | 35,691 | ||||
Accretion expense |
2,356 | 1,896 | 1,956 | |||||||
Adjustment resulting from addition of property |
— | 72 | 2,707 | |||||||
Adjustment resulting from disposal of property |
— | (968 | ) | (3,588 | ) | |||||
Adjustments to the liability from annual recosting and other |
61 | (201 | ) | (617 | ) | |||||
Liabilities settled |
(928 | ) | (1,909 | ) | (2,036 | ) | ||||
| | | | | | | | | | | |
Balance at end of period |
34,492 | 33,003 | 34,113 | |||||||
Less current portion of asset retirement obligation |
(1,614 | ) | (2,255 | ) | (3,192 | ) | ||||
| | | | | | | | | | | |
Long-term portion of asset retirement obligation |
$ | 32,878 | $ | 30,748 | $ | 30,921 | ||||
| | | | | | | | | | | |
| | | | | | | | | | | |
12. WORKERS' COMPENSATION AND BLACK LUNG
Certain of the Partnership's subsidiaries are liable under federal and state laws to pay workers' compensation and coal workers' black lung benefits to eligible employees, former employees and their dependents. The Partnership currently utilizes an insurance program and state workers' compensation fund participation to secure its on-going obligations depending on the location of the operation. Premium expense for workers' compensation benefits is recognized in the period in which the related insurance coverage is provided.
Commencing with the December 31, 2013 reporting period, the Partnership's black lung benefit liability is calculated using the service cost method that considers the calculation of the actuarial present value of the estimated black lung obligation. The Partnership had previously accounted for its black lung benefit liability using an event driven approach under ASC 450, Contingencies. It was determined the Partnership should have accounted for its black lung benefit liability using a service cost approach under ASC 710, Compensation-General, because this approach matches black lung costs over the service lives of the miners who ultimately receive black lung benefits. All prior period information for black lung expense and benefit liability presented in the consolidated financial statements and in this Note has been revised using the service cost method. As of December 31, 2010, this correction resulted in a decrease in partners' capital of $5.8 million from amounts previously reported. The correction also resulted in a decrease in net income of approximately $0.7 million and approximately $0.8 million for 2012 and 2011, respectively, from amounts previously reported.
The Partnership's actuarial calculations using the service cost method for its black lung benefit liability are based on numerous assumptions including disability incidence, medical costs, mortality, death benefits, dependents and interest rates. The Partnership's liability for traumatic workers' compensation injury claims is the estimated present value of current workers' compensation benefits,
F-29
RHINO RESOURCE PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
12. WORKERS' COMPENSATION AND BLACK LUNG (Continued)
based on actuarial estimates. The Partnership's actuarial estimates for its workers' compensation liability are based on numerous assumptions including claim development patterns, mortality, medical costs and interest rates. The discount rate used to calculate the estimated present value of future obligations for black lung was 5.0% and 4.0%, respectively, for December 31, 2013 and 2012 and for workers' compensation was 2.0% at December 31, 2013 and 2012.
The black lung and workers' compensation expenses for the years ended December 31, 2013, 2012 and 2011 are as follows:
| |
Year Ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
2013 | 2012 | 2011 | |||||||
| |
(in thousands) |
|||||||||
Black lung benefits: |
||||||||||
Service cost |
$ | 736 | $ | 1,215 | $ | 156 | ||||
Interest cost |
469 | 466 | 110 | |||||||
Actuarial (gain)/loss |
(1,584 | ) | 693 | 1,231 | ||||||
| | | | | | | | | | | |
Total black lung |
(379 | ) | 2,374 | 1,497 | ||||||
Workers' compensation expense |
2,743 | 1,018 | 4,049 | |||||||
| | | | | | | | | | | |
Total expense |
$ | 2,364 | $ | 3,392 | $ | 5,546 | ||||
| | | | | | | | | | | |
| | | | | | | | | | | |
The changes in the black lung benefit liability for the years ended December 31, 2013 and 2012 are as follows:
| |
Year Ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
2013 | 2012 | 2011 | |||||||
| |
(in thousands) |
|||||||||
Benefit obligations at beginning of year |
$ | 8,513 | $ | 6,392 | $ | 5,055 | ||||
Service cost |
736 | 1,215 | 156 | |||||||
Interest cost |
469 | 466 | 110 | |||||||
Actuarial (gain)/loss |
(1,584 | ) | 693 | 1,231 | ||||||
Benefits and expenses paid |
(883 | ) | (253 | ) | (160 | ) | ||||
| | | | | | | | | | | |
Benefit obligations at end of year |
$ | 7,251 | $ | 8,513 | $ | 6,392 | ||||
| | | | | | | | | | | |
| | | | | | | | | | | |
F-30
RHINO RESOURCE PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
12. WORKERS' COMPENSATION AND BLACK LUNG (Continued)
The classification of the amounts recognized for the Partnership's workers' compensation and black lung benefits liability as of December 31, 2013 and 2012 are as follows:
| |
December 31, | ||||||
|---|---|---|---|---|---|---|---|
| |
2013 | 2012 | |||||
| |
(in thousands) |
||||||
Black lung claims |
$ | 7,251 | $ | 8,513 | |||
Workers' compensation claims |
10,159 | 9,846 | |||||
| | | | | | | | |
Total obligations |
$ | 17,410 | $ | 18,359 | |||
Less current portion |
(1,190 | ) | (1,784 | ) | |||
| | | | | | | | |
Non-current obligations |
$ | 16,220 | $ | 16,575 | |||
| | | | | | | | |
| | | | | | | | |
The balance for workers' compensation claims as of December 31, 2013 and 2012 consisted of $4.3 million and $3.8 million, respectively, that is the primary obligation of the Partnership, but this amount is also due from the Partnership's insurance providers, which is included in Note 8 as non-current receivables, based on the Partnership's workers' compensation insurance coverage. 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. This presentation has no impact on the Partnership's results of operations or cash flows.
13. EMPLOYEE BENEFITS
Postretirement Plan—In conjunction with the acquisition of the coal operations of American Electric Power on April 16, 2004, the Operating Company acquired a postretirement benefit plan providing healthcare to eligible employees at its Hopedale operations. The Partnership has no other postretirement plans.
Summaries of the changes in benefit obligations and funded status of the plan as of the measurement dates of December 31, 2013, 2012 and 2011 are as follows:
| |
Year Ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
2013 | 2012 | 2011 | |||||||
| |
(in thousands) |
|||||||||
Benefit obligation at beginning of period |
$ | 6,747 | $ | 5,649 | $ | 6,641 | ||||
Changes in benefit obligations: |
||||||||||
Service costs |
385 | 378 | 491 | |||||||
Interest cost |
186 | 231 | 312 | |||||||
Benefits paid |
(253 | ) | (133 | ) | (72 | ) | ||||
Actuarial (gain)/loss |
(945 | ) | 622 | (1,723 | ) | |||||
| | | | | | | | | | | |
Benefit obligation at end of period |
$ | 6,120 | $ | 6,747 | $ | 5,649 | ||||
| | | | | | | | | | | |
| | | | | | | | | | | |
Fair value of plan assets at end of period |
$ | — | $ | — | $ | — | ||||
Funded status |
$ | (6,120 | ) | $ | (6,747 | ) | $ | (5,649 | ) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
F-31
RHINO RESOURCE PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
13. EMPLOYEE BENEFITS (Continued)
The classification of net amounts recognized for postretirement benefits as of December 31, 2013 and 2012 are as follows:
| |
December 31, | ||||||
|---|---|---|---|---|---|---|---|
| |
2013 | 2012 | |||||
| |
(in thousands) |
||||||
Current liability—postretirement benefits |
$ | (334 | ) | $ | (227 | ) | |
Non-current liability—postretirement benefits |
(5,786 | ) | (6,520 | ) | |||
| | | | | | | | |
Net amount recognized |
$ | (6,120 | ) | $ | (6,747 | ) | |
| | | | | | | | |
| | | | | | | | |
The amounts recognized in accumulated other comprehensive income for the years ended December 31, 2013, 2012 and 2011 are as follows:
| |
Year Ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
2013 | 2012 | 2011 | |||||||
| |
(in thousands) |
|||||||||
Balance at beginning of year |
$ | 1,431 | $ | 2,348 | $ | 625 | ||||
Actuarial gain (loss) |
945 | (622 | ) | 1,723 | ||||||
Amortization of net actuarial gain |
(145 | ) | (295 | ) | — | |||||
| | | | | | | | | | | |
Net actuarial gain |
$ | 2,231 | $ | 1,431 | $ | 2,348 | ||||
| | | | | | | | | | | |
| | | | | | | | | | | |
The amounts reclassified from accumulated other comprehensive income to Cost of operations in the Partnership's consolidated statements of operations for the years ended December 31, 2013 and 2012 was $0.1 million and $0.3 million, respectively. No amounts were reclassified from accumulated other comprehensive income for the year ended December 31, 2011.
| |
December 31, | ||||||
|---|---|---|---|---|---|---|---|
| |
2013 | 2012 | |||||
Weighted Average assumptions used to determine benefit obligations: |
|||||||
Discount rate |
3.96 | % | 2.80 | % | |||
Expected return on plan assets |
n/a | n/a | |||||
| |
Year Ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
2013 | 2012 | 2011 | |||||||
Weighted Average assumptions used to determine periodic benefit cost: |
||||||||||
Discount rate |
2.80 | % | 4.15 | % | 4.75 | % | ||||
Expected return on plan assets |
n/a | n/a | n/a | |||||||
Rate of compensation increase |
n/a | n/a | n/a | |||||||
F-32
RHINO RESOURCE PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
13. EMPLOYEE BENEFITS (Continued)
The components of net periodic benefit cost for the years ended December 31, 2013, 2012 and 2011 are as follows:
| |
Year Ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
2013 | 2012 | 2011 | |||||||
| |
(in thousands) |
|||||||||
Service costs |
$ | 385 | $ | 378 | $ | 491 | ||||
Interest cost |
186 | 231 | 312 | |||||||
Amortization of (gain) |
(145 | ) | (295 | ) | — | |||||
| | | | | | | | | | | |
Benefit cost |
$ | 426 | $ | 314 | $ | 803 | ||||
| | | | | | | | | | | |
| | | | | | | | | | | |
Amounts expected to be amortized from accumulated other comprehensive income into net periodic benefit cost during the year ending December 31, 2014, are as follows:
| |
(in thousands) | |||
|---|---|---|---|---|
Net actuarial gain |
$ | 367 | ||
Expected future benefit payments are as follows:
Period
|
(in thousands) | |||
|---|---|---|---|---|
2014 |
$ | 334 | ||
2015 |
397 | |||
2016 |
538 | |||
2017 |
602 | |||
2018 |
659 | |||
2019 - 2023 |
$ | 4,337 | ||
For benefit obligation measurement purposes, a 7.30% annual rate of increase in the per capita cost of covered health care benefits was assumed, gradually decreasing to 4.50% in 2027 and remaining level thereafter.
Net periodic benefit cost is determined using the assumptions as of the beginning of the year, and the funded status is determined using the assumptions as of the end of the year. Effective June 1, 2007, employees hired by the Partnership are not eligible for benefits under the plan.
The expense and liability estimates can fluctuate by significant amounts based upon the assumptions used by the Partnership. As of December 31, 2013, a one-percentage-point change in assumed health care cost trend rates would have the following effects:
| |
One-Percentage Point Increase |
One-Percentage Point Decrease |
|||||
|---|---|---|---|---|---|---|---|
| |
(in thousands) |
||||||
Effect on total service and interest cost components |
$ | 58 | $ | (52 | ) | ||
Effect on postretirement benefit obligation |
$ | 467 | $ | (433 | ) | ||
F-33
RHINO RESOURCE PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
13. EMPLOYEE BENEFITS (Continued)
401(k) Plans—The Partnership and certain subsidiaries sponsor defined contribution savings plans for all employees. Under one defined contribution savings plan, the Partnership 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 years ended December 31, 2013, 2012 and 2011 was as follows:
| |
Year Ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
2013 | 2012 | 2011 | |||||||
| |
(in thousands) |
|||||||||
401(k) plan expense |
$ | 2,243 | $ | 2,322 | $ | 2,245 | ||||
14. EQUITY-BASED COMPENSATION
In October 2010, the General Partner established the Rhino Long-Term Incentive Plan (the "Plan" or "LTIP"). The Plan is intended to promote the interests of the Partnership by providing to employees, consultants and directors of the General Partner, the Partnership or affiliates of either incentive compensation awards to encourage superior performance. The LTIP provides for grants of restricted units, unit options, unit appreciation rights, phantom units, unit awards, and other unit-based awards. The aggregate number of units initially reserved for issuance under the LTIP is 2,479,400.
As of December 31, 2013, the General Partner granted phantom units to certain employees and restricted units and unit awards to its directors. A portion of these grants were made in connection with the IPO completed during October 2010, as well as annual restricted unit awards to directors and phantom unit awards granted in the first quarters of 2013 and 2012 to certain employees in connection with the prior fiscal year's performance. The phantom units granted in the first quarters of 2013 and 2012 vest in equal annual installments over a three year period from the date of grant. The remaining terms and conditions of these phantom unit awards are similar to the phantom units awarded in
F-34
RHINO RESOURCE PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
14. EQUITY-BASED COMPENSATION (Continued)
connection with the Partnership's IPO. A summary of non-vested LTIP awards as of and for the years ended December 31, 2013, 2012 and 2011 is as follows:
| |
Common Units |
Weighted Average Grant Date Fair Value (per unit) |
|||||
|---|---|---|---|---|---|---|---|
| |
(in thousands) |
||||||
Non-vested awards at December 31, 2010 |
135 | $ | 20.50 | ||||
Granted |
10 | $ | 19.90 | ||||
Vested |
(52 | ) | $ | 20.47 | |||
Forfeited |
(1 | ) | $ | 20.50 | |||
| | | | | | | | |
Non-vested awards at December 31, 2011 |
92 | $ | 20.45 | ||||
Granted |
32 | $ | 17.40 | ||||
Vested |
(49 | ) | $ | 20.12 | |||
Forfeited |
(8 | ) | $ | 20.28 | |||
| | | | | | | | |
Non-vested awards at December 31, 2012 |
67 | $ | 19.23 | ||||
| | | | | | | | |
Granted |
49 | $ | 13.50 | ||||
Vested |
(58 | ) | $ | 18.88 | |||
Forfeited |
(3 | ) | $ | 16.62 | |||
| | | | | | | | |
Non-vested awards at December 31, 2013 |
55 | $ | 14.63 | ||||
| | | | | | | | |
| | | | | | | | |
With the vesting of the first portion of the employees' awards in early April 2011, the Compensation Committee of the board of directors of the General Partner elected to pay some of the awards in cash or a combination of cash and common units. This election was a change in policy since management had previously planned to settle all employee awards with units upon vesting as per the grant agreements. This policy change resulted in a modification of all employee awards from equity to liability classification as of March 31, 2011 and all new awards granted thereafter. The Partnership incurred incremental compensation expense for the year ended December 31, 2011 of approximately $0.1 million due to the modification of these awards. The equity balance of approximately $0.2 million accrued as of December 31, 2010 for the non-vested awards was also reclassified from the Limited partners' capital account to Accrued expenses and other in the current liability portion in the consolidated statement of financial position as of December 31, 2011. For the years ended December 31, 2013 and 2012, the Partnership did not record any incremental compensation expense due to the modification of the employees' IPO awards since the market price of the Partnership's common units was below the IPO grant price. The final tranche of the IPO awards vested in October 2013.
For the years ended December 31, 2013, 2012 and 2011, the Partnership recorded expense of approximately $0.7 million, approximately $0.9 million and approximately $1.1 million, respectively, for the LTIP awards. All of the non-vested LTIP awards granted during 2013, 2012 and 2011 included, with respect to the phantom unit awards, distribution equivalent rights (or DERs) or unit distribution rights, with respect to restricted unit awards, each of which are rights to accrue quarterly cash distributions in an amount equal to the cash distribution the Partnership makes to unitholders during the vesting
F-35
RHINO RESOURCE PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
14. EQUITY-BASED COMPENSATION (Continued)
period. However, any accrued distributions will be forfeited if the related awards fail to vest according to the relevant vesting conditions of the award.
For the year ended December 31, 2013, the total fair value of the awards that vested was $0.8 million. As of December 31, 2013, the total unrecognized compensation expense related to the non-vested LTIP awards that are expected to vest was $0.5 million. The expense is expected to be recognized over a weighted-average period of 1.6 years. As of December 31, 2013, the intrinsic value of the non-vested LTIP awards was $0.6 million.
During the first quarter of 2014, certain employees received grants of phantom units with tandem DERs under the LTIP program. These awards were granted in connection with fiscal year 2013 performance and vest in equal annual installments over a three-year period from the date of grant. The total value of the awards granted was approximately $0.4 million and the expense related to these awards will be recognized ratably over the three-year vesting period, plus any mark-to-market adjustments.
15. COMMITMENTS AND CONTINGENCIES
Coal Sales Contracts and Contingencies—As of December 31, 2013, the Partnership had commitments under sales contracts to deliver annually scheduled base quantities of coal as follows:
Year
|
Tons (in thousands) |
Number of customers |
|||||
|---|---|---|---|---|---|---|---|
2014 |
3,045 | 19 | |||||
2015 |
1,796 | 4 | |||||
2016 |
1,100 | 2 | |||||
2017 |
1,100 | 2 | |||||
Some of the contracts have sales price adjustment provisions, subject to certain limitations and adjustments, based on a variety of factors and indices.
Purchase Commitments—As of December 31, 2013, the Partnership had a commitment to purchase 2,000 tons of ammonia nitrate at fixed prices from March 2014 through December 2014 for approximately $0.9 million.
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"). Purchase coal expense from coal purchase contracts and expense from OTC purchases for the years ended December 31, 2013, 2012 and 2011 was as follows:
| |
Year Ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
2013 | 2012 | 2011 | |||||||
| |
(in thousands) |
|||||||||
Purchased coal expense |
$ | 3,730 | $ | 25,637 | $ | 14,283 | ||||
OTC expense |
$ | 1,271 | $ | — | $ | 14 | ||||
F-36
RHINO RESOURCE PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
15. COMMITMENTS AND CONTINGENCIES (Continued)
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 years ended December 31, 2013, 2012 and 2011 was as follows:
| |
Year Ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
2013 | 2012 | 2011 | |||||||
| |
(in thousands) |
|||||||||
Lease expense |
$ | 3,161 | $ | 2,860 | $ | 2,630 | ||||
Royalty expense |
$ | 11,442 | $ | 14,474 | $ | 16,175 | ||||
Approximate future minimum lease and royalty payments (not including advance royalties already paid and recorded as assets in the accompanying statements of financial position) are as follows:
Years Ended December 31,
|
Royalties | Leases | |||||
|---|---|---|---|---|---|---|---|
| |
(in thousands) |
||||||
2014 |
$ | 1,642 | $ | 1,577 | |||
2015 |
1,865 | 1,538 | |||||
2016 |
1,864 | 1,545 | |||||
2017 |
1,922 | 1,141 | |||||
2018 |
1,929 | 193 | |||||
Thereafter |
9,644 | — | |||||
| | | | | | | | |
Total minimum royalty and lease payments |
$ | 18,866 | $ | 5,994 | |||
| | | | | | | | |
| | | | | | | | |
Environmental Matters—Based upon current knowledge, the Partnership believes that it is in compliance with environmental laws and regulations as currently promulgated. However, the exact nature of environmental control problems, if any, which the Partnership may encounter in the future cannot be predicted, primarily because of the increasing number, complexity and changing character of environmental requirements that may be enacted by federal and state authorities.
Legal Matters—The Partnership is involved in various legal proceedings arising in the ordinary course of business due to claims from various third parties, as well as potential citations and fines from the Mine Safety and Health Administration, potential claims from land or lease owners and potential property damage claims from third parties. The Partnership is not party to any other pending litigation that is probable to have a material adverse effect on the financial condition, results of operations or cash flows of the Partnership. Management of the Partnership is also not aware of any significant legal, regulatory or governmental proceedings against or contemplated to be brought against the Partnership.
Guarantees/Indemnifications and Financial Instruments with Off-Balance Sheet Risk—In the normal course of business, the Partnership is a party to certain guarantees and financial instruments with off-balance sheet risk, such as bank letters of credit and performance or surety bonds. No liabilities related to these arrangements are reflected in the consolidated statements of financial position. The amount of bank letters of credit outstanding with PNC Bank, N.A., as the letter of credit issuer under the Partnership's credit facility, was $21.5 million as of December 31, 2013. The bank letters of credit outstanding reduce the borrowing capacity under the credit facility. In addition, the Partnership has
F-37
RHINO RESOURCE PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
15. COMMITMENTS AND CONTINGENCIES (Continued)
outstanding surety bonds with third parties of $75.2 million as of December 31, 2013 to secure reclamation and other performance commitments.
The credit facility is fully and unconditionally, jointly and severally guaranteed by the Partnership and substantially all of its wholly owned subsidiaries. Borrowings under the credit facility are collateralized by the unsecured assets of the Partnership and substantially all of its wholly owned subsidiaries. See Note 10 for a more complete discussion of the Partnership's debt obligations.
Joint Venture—Pursuant to the Rhino Eastern joint venture agreement with Patriot, the Partnership is required to contribute additional capital to assist in funding the development and operations of the Rhino Eastern joint venture. During the year ended December 31, 2013, the Partnership made capital contributions to the Rhino Eastern joint venture of approximately $2.3 million based upon its proportionate ownership percentage. The Partnership may be required to contribute additional capital or make loans to Rhino Eastern commensurate with its ownership percentage in subsequent periods.
The Partnership may contribute additional capital to the Timber Wolf joint venture that was formed in the first quarter of 2012. The Partnership did not make any capital contributions to the Timber Wolf joint venture during the year ended December 31, 2013.
The Partnership is required to contribute additional capital to the Muskie Proppant joint venture that was formed in the fourth quarter of 2012. During the year ended December 31, 2013, the Partnership made capital contributions to the Muskie Proppant joint venture of approximately $0.5 million based upon its proportionate ownership percentage. In addition, during the year ended December 31, 2013, the Partnership provided a loan based upon its ownership share to Muskie in the amount of $0.2 million that remained outstanding as of December 31, 2013. The Partnership may be required to contribute additional capital or make loans to Muskie commensurate with its ownership percentage in subsequent periods.
16. 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 December 31, 2013, 2012 and 2011:
Year ended December 31, 2013
|
General Partner |
Common Unitholders |
Subordinated Unitholders |
|||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
(in thousands, except per unit data) |
|||||||||
Numerator: |
||||||||||
Interest in net income |
$ | 188 | $ | 5,217 | $ | 4,013 | ||||
Denominator: |
||||||||||
Weighted average units used to compute basic EPU |
n/a | 15,751 | 12,397 | |||||||
Effect of dilutive securities—LTIP awards |
n/a | 9 | — | |||||||
| | | | | | | | | | | |
Weighted average units used to compute diluted EPU |
n/a | 15,760 | 12,397 | |||||||
Net income per limited partner unit, basic |
n/a | $ | 0.33 | $ | 0.32 | |||||
Net income per limited partner unit, diluted |
n/a | $ | 0.33 | $ | 0.32 | |||||
F-38
RHINO RESOURCE PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
16. EARNINGS PER UNIT ("EPU") (Continued)
Year ended December 31, 2012
|
General Partner |
Common Unitholders |
Subordinated Unitholders |
|||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
(in thousands, except per unit data) |
|||||||||
Numerator: |
||||||||||
Interest in net income |
$ | 790 | $ | 21,422 | $ | 17,323 | ||||
Denominator: |
||||||||||
Weighted average units used to compute basic EPU |
n/a | 15,331 | 12,397 | |||||||
Effect of dilutive securities—LTIP awards |
n/a | 4 | — | |||||||
| | | | | | | | | | | |
Weighted average units used to compute diluted EPU |
n/a | 15,335 | 12,397 | |||||||
Net income per limited partner unit, basic |
n/a | $ | 1.40 | $ | 1.40 | |||||
Net income per limited partner unit, diluted |
n/a | $ | 1.40 | $ | 1.40 | |||||
Year ended December 31, 2011
|
General Partner |
Common Unitholders |
Subordinated Unitholders |
|||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
(in thousands, except per unit data) |
|||||||||
Numerator: |
||||||||||
Interest in net income |
$ | 746 | $ | 19,205 | $ | 17,347 | ||||
Denominator: |
||||||||||
Weighted average units used to compute basic EPU |
n/a | 13,725 | 12,397 | |||||||
Effect of dilutive securities—LTIP awards |
n/a | 19 | — | |||||||
| | | | | | | | | | | |
Weighted average units used to compute diluted EPU |
n/a | 13,744 | 12,397 | |||||||
Net income per limited partner unit, basic |
n/a | $ | 1.40 | $ | 1.40 | |||||
Net income per limited partner unit, diluted |
n/a | $ | 1.40 | $ | 1.40 | |||||
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. For the year ended December 31, 2013, approximately 12,000 LTIP granted phantom units were anti-dilutive. There were no anti-dilutive units for the years ended December 31, 2012 and 2011.
17. MAJOR CUSTOMERS
The Partnership had revenues or receivables from the following major customers that in each period equaled or exceeded 10% of revenues or receivables (Note: customers with "n/a" had revenue or receivables below the 10% threshold in any period where this is indicated):
| |
December 31, 2013 Receivable Balance |
Year Ended December 31, 2013 Sales |
December 31, 2012 Receivable Balance |
Year Ended December 31, 2012 Sales |
December 31, 2011 Receivable Balance |
Year Ended December 31, 2011 Sales |
|||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
(in thousands) |
||||||||||||||||||
NRG Energy Inc. (fka GenOn Energy, Inc.) |
$ | 3,046 | $ | 55,246 | $ | 3,158 | $ | 53,661 | $ | 3,254 | $ | 56,000 | |||||||
American Electric Power Company, Inc. |
1,434 | 30,070 | 3,450 | 36,308 | 3,556 | 43,840 | |||||||||||||
Indiana Harbor Coke Company, L.P. |
n/a | n/a | 6,597 | 40,133 | 4,259 | 39,767 | |||||||||||||
Blackstone Resources, Inc. |
n/a | n/a | n/a | n/a | 3,553 | 23,104 | |||||||||||||
PPL Corporation |
n/a | n/a | 2,760 | 37,364 | 3,038 | 46,672 | |||||||||||||
F-39
RHINO RESOURCE PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
18. FAIR VALUE OF FINANCIAL INSTRUMENTS
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 senior secured credit facility was determined based upon a market approach and approximates the carrying value at December 31, 2013. The fair value of the Partnership's senior secured credit facility is a Level 2 measurement.
19. RELATED PARTY AND AFFILIATE TRANSACTIONS
Related Party
|
Description | 2013 | 2012 | 2011 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
|
(in thousands) |
||||||||||
Wexford Capital LP |
Expenses for legal, consulting, and advisory services | $ | 149 | $ | 213 | $ | 263 | |||||
Wexford Capital LP |
Distributions paid | 14,034 | 27,704 | 38,602 | ||||||||
Wexford Capital LP |
Partner's contribution | 330 | 13 | 1,450 | ||||||||
Rhino Eastern LLC |
Equity in net (loss)/income of unconsolidated affiliate | (4,268 | ) | 6,014 | 2,988 | |||||||
Rhino Eastern LLC |
Distributions from unconsolidated affiliate | — | 2,958 | 3,351 | ||||||||
Rhino Eastern LLC |
Expenses for legal, health claims, workers' compensation and other expenses | 4,666 | 6,175 | 4,662 | ||||||||
Rhino Eastern LLC |
Receivable for legal, health claims and workers' compensation and other expenses | 999 | 559 | 1,974 | ||||||||
Rhino Eastern LLC |
Investment in unconsolidated affiliate | 19,369 | 21,367 | 18,311 | ||||||||
Timber Wolf Terminals LLC |
Investment in unconsolidated affiliate | 114 | 114 | — | ||||||||
Muskie Proppants LLC |
Investment in unconsolidated affiliate | 1,761 | 1,743 | — | ||||||||
Muskie Proppants LLC |
Equity in net (loss) of unconsolidated affiliate | (461 | ) | (257 | ) | — | ||||||
Muskie Proppants LLC |
Note receivable from unconsolidated affiliate | 206 | — | — | ||||||||
From time to time, employees from Wexford Capital perform legal, consulting, and advisory services to the Partnership. The Partnership incurred expenses of $0.1 million for the year ended December 31, 2013, $0.2 million for the year ended December 31, 2012 and $0.3 million for the year ended December 31, 2011 for legal, consulting, and advisory services performed by Wexford Capital.
During 2012, the Partnership provided loans to Rhino Eastern, a joint venture between the Partnership and Patriot, totaling approximately $11.9 million that were fully repaid as of December 31, 2012. During 2011, the Partnership provided loans based upon its ownership share to Rhino Eastern totaling approximately $5.8 million that were fully repaid as of December 31, 2011. The Partnership did not provide any loans to Rhino Eastern during 2013.
F-40
RHINO RESOURCE PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
19. RELATED PARTY AND AFFILIATE TRANSACTIONS (Continued)
From time to time, the Partnership has allocated and paid expenses on behalf of the Rhino Eastern joint venture. During the years ended December 31, 2013, 2012 and 2011, the Partnership paid expenses for legal, health claims and workers' compensation of $4.7 million, $6.2 million and $4.7 million, respectively, on behalf of Rhino Eastern that were subsequently billed and paid by Rhino Eastern to the Partnership.
20. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for interest were $6.4 million, $6.5 million and $4.3 million for the years ended December 31, 2013, 2012 and 2011, respectively.
The consolidated statement of cash flows for the year ended December 31, 2013 is exclusive of approximately $10.5 million of property, plant and equipment additions which are recorded in Accounts payable. The consolidated statements of cash flows for the year ended December 31, 2013 also excludes approximately $0.6 million related to the value of LTIP units that were issued to certain employees and directors of the General Partner.
The consolidated statement of cash flows for the year ended December 31, 2012 is exclusive of approximately $3.6 million of property, plant and equipment additions which are recorded in Accounts payable and $0.4 million related to the amount accrued for the acquisition of the western Kentucky assets discussed in Note 4, which is included in Accrued expenses and other. The consolidated statements of cash flows for the year ended December 31, 2012 also excludes approximately $0.7 million related to the value of LTIP units that were issued to certain employees and directors of the General Partner.
The consolidated statement of cash flows for the year ended December 31, 2011 is exclusive of approximately $3.2 million of property, plant and equipment additions which are recorded in accounts payable, approximately $5.2 million of property, plant and equipment additions which are included in accrued expenses and other liabilities and approximately $0.8 million related to the value of LTIP units that were issued to certain employees and directors of the General Partner.
21. 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. In addition, with the Elk Horn Acquisition mentioned earlier, the Partnership also leases coal reserves to third parties in exchange for royalty revenues. For the year ended December 31, 2013, the Partnership has five reportable business segments: Central Appalachia (comprised of both surface and underground mines located in Eastern Kentucky and Southern West Virginia, along with the Elk Horn operations), Northern Appalachia (comprised of both surface and underground mines located in Ohio), Rhino Western (comprised of an underground mine in Utah), Eastern Met (comprised solely of the Rhino Eastern joint venture with Patriot) and Oil and Natural Gas. Beginning with 2013 year-end reporting, the Partnership has included a reportable business segment for its oil and natural gas activities since the total assets for these operations have met the quantitative threshold for separate segment reporting. The Oil and Natural Gas segment includes the Partnership's Utica Shale and Cana Woodford activities as well as its Razorback drill pad construction operations and its Muskie joint
F-41
RHINO RESOURCE PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
21. SEGMENT INFORMATION (Continued)
venture to provide sand for fracking operations. Prior to 2013, the Partnership's oil and natural gas activities were included in its Other category for segment reporting purposes. For periods prior to December 31, 2013, the segment data has been reclassified to separately report the Partnership's oil and natural gas activities. Additionally, the Partnership has an Other category that is comprised of the Partnership's ancillary businesses. 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 total segment expenditures for long lived assets, and accordingly such information is not provided to the Partnership's chief operating decision maker.
The Partnership has historically accounted for the Rhino Eastern joint venture (formed in the year ended December 31, 2008) under the equity method. Under the equity method of accounting, the Partnership has historically only presented limited information (net income). The Partnership considers this operation to comprise a separate operating segment and has presented additional operating detail (with corresponding eliminations and adjustments to reflect its percentage of ownership) below. Since this equity method investment met the significance test of ten percent of net income or loss in 2012 and 2013, the Partnership has presented additional summarized financial information for this equity method investment below.
During 2012, the Partnership changed the method to allocate certain corporate overhead and interest charges to its reportable segments from a method based on production tons to a method based upon the amount invested in fixed assets. The Partnership changed the allocation method as a result of additional investments that the Partnership has made in its non-coal operations. Reportable segment figures presented below have been re-cast for 2011 for comparability purposes.
Reportable segment results of operations and financial position for the year ended December 31, 2013 are as follows (Note: "DD&A" refers to depreciation, depletion and amortization):
| |
|
|
|
Eastern Met | |
|
|
|||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Central Appalachia |
Northern Appalachia |
Rhino Western |
Complete Basis |
Equity Method Eliminations |
Equity Method Presentation |
Oil and Natural Gas |
Other | Total Consolidated |
|||||||||||||||||||
| |
(in thousands) |
|||||||||||||||||||||||||||
Total assets |
$ | 293,675 | $ | 54,906 | $ | 66,463 | $ | 44,791 | $ | (44,791 | ) | $ | — | $ | 68,906 | $ | 83,817 | $ | 567,767 | |||||||||
Total revenues |
147,430 | 80,401 | 38,249 | 27,853 | (27,853 | ) | — | 10,074 | 1,737 | 277,891 | ||||||||||||||||||
DD&A |
24,170 | 8,127 | 5,476 | 1,949 | (1,949 | ) | — | 3,099 | 1,737 | 42,609 | ||||||||||||||||||
Interest expense |
3,927 | 771 | 665 | 17 | (17 | ) | — | 593 | 1,942 | 7,898 | ||||||||||||||||||
Net Income (loss) |
$ | (7,132 | ) | $ | 26,089 | $ | (2,378 | ) | $ | (8,369 | ) | $ | 4,101 | $ | (4,268 | ) | $ | (220 | ) | $ | (2,673 | ) | $ | 9,418 | ||||
F-42
RHINO RESOURCE PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
21. SEGMENT INFORMATION (Continued)
Reportable segment results of operations and financial position for the year ended December 31, 2012 are as follows:
| |
|
|
|
Eastern Met | |
|
|
|||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Central Appalachia |
Northern Appalachia |
Rhino Western |
Complete Basis |
Equity Method Eliminations |
Equity Method Presentation |
Oil and Natural Gas |
Other | Total Consolidated |
|||||||||||||||||||
| |
(in thousands) |
|||||||||||||||||||||||||||
Total assets |
$ | 325,418 | $ | 57,429 | $ | 70,822 | $ | 52,682 | $ | (52,682 | ) | $ | — | $ | 38,509 | $ | 67,698 | $ | 559,876 | |||||||||
Total revenues |
183,374 | 122,024 | 40,696 | 55,221 | (55,221 | ) | — | 1,895 | 4,002 | 351,991 | ||||||||||||||||||
DD&A |
26,220 | 8,339 | 4,653 | 2,098 | (2,098 | ) | — | 109 | 2,049 | 41,370 | ||||||||||||||||||
Interest expense |
4,385 | 811 | 717 | 155 | (155 | ) | — | 398 | 1,456 | 7,767 | ||||||||||||||||||
Net Income (loss) |
$ | 3,668 | $ | 29,565 | $ | 5,691 | $ | 11,937 | $ | (5,923 | ) | $ | 6,014 | $ | (637 | ) | $ | (4,766 | ) | $ | 39,535 | |||||||
Reportable segment results of operations and financial position for the year ended December 31, 2011 are as follows:
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Eastern Met | |
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|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
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Central Appalachia |
Northern Appalachia |
Rhino Western |
Complete Basis |
Equity Method Eliminations |
Equity Method Presentation |
Oil and Natural Gas |
Other | Total Consolidated |
|||||||||||||||||||
| |
(in thousands) |
|||||||||||||||||||||||||||
Total assets |
$ | 325,746 | $ | 57,137 | $ | 72,986 | $ | 45,219 | $ | (45,219 | ) | $ | — | $ | 28,783 | $ | 54,551 | $ | 539,203 | |||||||||
Total revenues |
219,274 | 119,966 | 21,688 | 50,073 | (50,073 | ) | — | 279 | 6,014 | 367,221 | ||||||||||||||||||
DD&A |
22,115 | 8,160 | 3,057 | 2,959 | (2,959 | ) | — | 44 | 2,949 | 36,325 | ||||||||||||||||||
Interest expense |
3,074 | 687 | 547 | 52 | (52 | ) | — | — | 1,754 | 6,062 | ||||||||||||||||||
Net Income (loss) |
$ | 16,497 | $ | 27,404 | $ | (2,596 | ) | $ | 5,715 | $ | (2,727 | ) | $ | 2,988 | $ | (467 | ) | $ | (6,528 | ) | $ | 37,298 | ||||||
Additional summarized financial information for the equity method investment as of and for the periods ended December 31, 2013, 2012 and 2011 is as follows:
| |
2013 | 2012 | 2011 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
(in thousands) |
|||||||||
Current assets |
$ | 5,608 | $ | 12,788 | $ | 7,880 | ||||
Noncurrent assets |
39,183 | 39,805 | 37,339 | |||||||
Current liabilities |
2,020 | 6,290 | 4,361 | |||||||
Noncurrent liabilities |
4,794 | 4,496 | 5,098 | |||||||
Total costs and expenses |
36,206 | 43,140 | 44,307 | |||||||
(Loss)/income from operations |
(8,353 | ) | 12,081 | 5,766 | ||||||
Additional information on the Partnership's revenue by product category for the periods ended December 31, 2013, 2012 and 2011 is as follows:
| |
2013 | 2012 | 2011 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
(in thousands) |
|||||||||
Met coal revenue |
$ | 53,721 | $ | 59,511 | $ | 79,227 | ||||
Steam coal revenue |
182,880 | 245,057 | 254,649 | |||||||
Other revenue |
41,290 | 47,423 | 33,345 | |||||||
| | | | | | | | | | | |
Total revenue |
$ | 277,891 | $ | 351,991 | $ | 367,221 | ||||
| | | | | | | | | | | |
| | | | | | | | | | | |
F-43
RHINO RESOURCE PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
22. SUPPLEMENTAL INFORMATION ON OIL AND GAS EXPLORATION AND PRODUCTION ACTIVITIES
The following is revenue and cost information relating to the Partnership's proportionate share of oil and natural gas operations located entirely in the Utica Shale region of the United States:
Capitalized Costs Related to Oil and Gas Producing Activities
| |
December 31, | ||||||
|---|---|---|---|---|---|---|---|
| |
2013 | 2012 | |||||
| |
(in thousands) |
||||||
Proven properties |
$ | 25,335 | $ | 6,183 | |||
Unproven properties |
30,810 | 24,083 | |||||
| | | | | | | | |
Total |
56,145 | 30,266 | |||||
Less accumulated depreciation, depletion and amortization |
(2,703 | ) | (96 | ) | |||
| | | | | | | | |
Net |
$ | 53,442 | $ | 30,170 | |||
| | | | | | | | |
| | | | | | | | |
Costs Incurred in Oil and Gas Property Acquisition and Development Activities
| |
Year Ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
2013 | 2012 | 2011 | |||||||
| |
(in thousands) |
|||||||||
Acquisition |
$ | 7,857 | $ | 5,073 | $ | 19,874 | ||||
Development of proved undeveloped properties |
18,022 | 5,319 | — | |||||||
Exploratory |
— | — | — | |||||||
| | | | | | | | | | | |
Total |
$ | 25,879 | $ | 10,392 | $ | 19,874 | ||||
| | | | | | | | | | | |
| | | | | | | | | | | |
Results of Operations for Producing Activities
The following schedule sets forth the Partnership's proportionate share revenues and expenses related to the production and sale of oil and natural gas.
| |
Year Ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
2013 | 2012 | 2011 | |||||||
| |
(in thousands, except per BOE amounts) |
|||||||||
Revenues |
$ | 5,626 | $ | 248 | $ | — | ||||
Production costs |
(1,288 | ) | (63 | ) | — | |||||
Depletion |
(2,607 | ) | (96 | ) | — | |||||
| | | | | | | | | | | |
Results of operations from producing activities |
$ | 1,731 | $ | 89 | $ | — | ||||
| | | | | | | | | | | |
| | | | | | | | | | | |
Depletion per barrel of oil equivalent (BOE) |
$ | 15.91 | $ | 16.73 | $ | — | ||||
| | | | | | | | | | | |
| | | | | | | | | | | |
F-44
RHINO RESOURCE PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
23. QUARTERLY FINANCIAL DATA (UNAUDITED)
(in thousands, except per unit data)
|
First Quarter |
Second Quarter |
Third Quarter |
Fourth Quarter |
|||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2013: |
|||||||||||||
Revenues |
$ | 74,744 | $ | 66,828 | $ | 71,088 | $ | 65,231 | |||||
Income from operations |
3,049 | 9,898 | 5,798 | 3,092 | |||||||||
Net (loss)/ income |
$ | (177 | ) | $ | 5,897 | $ | 2,877 | $ | 820 | ||||
Basic and diluted net (loss)/income per limited partner unit: |
|||||||||||||
Common units |
$ | (0.01 | ) | $ | 0.21 | $ | 0.10 | $ | 0.03 | ||||
Subordinated units |
$ | (0.01 | ) | $ | 0.21 | $ | 0.10 | $ | 0.03 | ||||
Weighted average number of limited partner units outstanding, basic: |
|||||||||||||
Common units |
15,354 | 15,371 | 15,609 | 16,659 | |||||||||
Subordinated units |
12,397 | 12,397 | 12,397 | 12,397 | |||||||||
Weighted average number of limited partner units outstanding, diluted: |
|||||||||||||
Common units |
15,354 | 15,379 | 15,621 | 16,672 | |||||||||
Subordinated units |
12,397 | 12,397 | 12,397 | 12,397 | |||||||||
(in thousands, except per unit data)
|
First Quarter |
Second Quarter |
Third Quarter |
Fourth Quarter(1) |
|||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2012: |
|||||||||||||
Revenues |
$ | 81,882 | $ | 89,998 | $ | 93,575 | $ | 86,536 | |||||
Income from operations |
8,688 | 12,599 | 9,151 | 11,016 | |||||||||
Net income |
$ | 8,974 | $ | 12,996 | $ | 8,876 | $ | 8,690 | |||||
Basic and diluted net income per limited partner unit: |
|||||||||||||
Common units |
$ | 0.32 | $ | 0.46 | $ | 0.31 | $ | 0.31 | |||||
Subordinated units |
$ | 0.32 | $ | 0.46 | $ | 0.31 | $ | 0.31 | |||||
Weighted average number of limited partner units outstanding, basic: |
|||||||||||||
Common units |
15,313 | 15,329 | 15,332 | 15,348 | |||||||||
Subordinated units |
12,397 | 12,397 | 12,397 | 12,397 | |||||||||
Weighted average number of limited partner units outstanding, diluted: |
|||||||||||||
Common units |
15,327 | 15,331 | 15,333 | 15,349 | |||||||||
Subordinated units |
12,397 | 12,397 | 12,397 | 12,397 | |||||||||
- (1)
- Fourth quarter 2012 data was revised from the amounts previously reported to correctly report the Partnership's liability and costs for black lung benefits (see note 12 for further details).
F-45
