| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Estimates— The preparation of consolidated financial statements in conformity with generally accepted accounting principles of the United States (“GAAP”) requires the ARLP Partnership’s management to make estimates and assumptions that affect the reported amounts and disclosures in the consolidated financial statements. Actual results could differ from those estimates. Significant estimates and assumptions include:
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Impairment assessments of investments, property, plant and equipment, and goodwill;
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Asset retirement obligations;
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Pension valuation variables;
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Workers’ compensation and pneumoconiosis valuation variables;
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Acquisition related purchase price allocations; and
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Life of mine assumptions.
These significant estimates and assumptions are discussed throughout these notes to the consolidated financial statements.
Principles of Consolidation and Noncontrolling Interests— The consolidated financial statements include our accounts and those of MGP, ARLP, the Intermediate Partnership and the Intermediate Partnership’s operating subsidiaries in the consolidated group, after the elimination of intercompany accounts and transactions. The non-controlling interest on our consolidated balance sheet reflects the outside ownership interest in ARLP as well as Bluegrass Minerals Management, LLC’s (“Bluegrass Minerals”) ownership interest in Cavalier Minerals. See “Basis of Presentation” under Note 1 – Organization and Presentation for information regarding our consolidation of ARLP. See also “Note 12 – Noncontrolling Interests.”
Earnings per Unit— Basic earnings per limited partner unit is computed by dividing net income or loss allocated to limited partner interest by the weighted-average number of common units outstanding during a period. We currently have no dilutive securities. Total net income is allocated to the limited partner interest because the general partner’s interest is non-economic.
Fair Value Measurements — The ARLP Partnership applies fair value measurements to certain assets and liabilities. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. Fair value is based upon assumptions that market participants would use when pricing an asset or liability, including assumptions about risk and risks inherent in valuation techniques and inputs to valuations. Fair value measurements assume that the transaction occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability (the market for which the reporting entity would be able to maximize the amount received or minimize the amount paid). Valuation techniques used in the ARLP Partnership’s fair value measurements are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the ARLP Partnership’s own market assumptions.
The ARLP Partnership uses the following fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels:
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Level 1 – Quoted prices for identical assets and liabilities in active markets that we have the ability to access at the measurement date.
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Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model derived valuations whose inputs are observable or whose significant value drivers are observable.
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Level 3 – Unobservable inputs for the asset or liability including situations where there is little, if any, market activity for the asset or liability.
The fair value hierarchy gives the highest priority to quoted prices in active markets (Level 1) and the lowest priority to unobservable data (Level 3). In some cases, the inputs used to measure fair value might fall into different levels of the fair value hierarchy. The lowest level input that is significant to a fair value measurement determines the applicable level in the fair value hierarchy. Assessing the significance of a particular input to the fair value measurement requires judgment, considering factors specific to the asset or liability. Significant fair value measurements are used in the ARLP Partnership’s significant estimates and are discussed throughout these notes. See Note 8 – Fair Value Measurements for discussion of recurring fair value measurements not otherwise disclosed in these financial statements.
Cash and Cash Equivalents— Cash and cash equivalents include cash on hand and on deposit, including highly liquid investments with maturities of three months or less.
Cash Management — The cash flows from operating activities section of our Consolidated Statements of Cash Flows reflects an adjustment for $10.6 million and $1.7 million representing book overdrafts at December 31, 2015 and 2014, respectively. We had no book overdrafts at December 31, 2013.
Inventories — Coal inventories are stated at the lower of cost or market on a first-in, first-out basis. Supply inventories are stated at an average cost basis, less a reserve for obsolete and surplus items.
Business Combinations— For acquisitions accounted for as a business combination, the ARLP Partnership records the assets acquired, including identified intangible assets and liabilities assumed at their fair value, which in many instances involves estimates based on third party valuations, such as appraisals, or internal valuations based on discounted cash flow analyses or other valuation techniques.
Goodwill — Goodwill represents the excess of cost over the fair value of net assets of acquired businesses. Goodwill is not amortized, but instead is evaluated for impairment periodically. The ARLP Partnership evaluates goodwill for impairment annually on November 30 th , or more often if events or circumstances indicate that goodwill might be impaired. The reporting unit or units used to evaluate and measure goodwill for impairment are determined primarily from the manner in which the business is managed or operated. A reporting unit is an operating segment or a component that is one level below an operating segment. There were no impairments of goodwill during 2015. In future periods it is reasonably possible that a variety of circumstances could result in an impairment of the ARLP Partnership’s goodwill.
Property, Plant and Equipment — Expenditures which extend the useful lives of existing plant and equipment assets are capitalized. Interest costs associated with major asset additions are capitalized during the construction period. Maintenance and repairs that do not extend the useful life or increase productivity of the asset are charged to operating expense as incurred. Exploration expenditures are charged to operating expense as incurred, including costs related to drilling and study costs incurred to convert or upgrade mineral resources to reserves. Preparation plants and processing facilities are depreciated using the units-of-production method. Other plant and equipment assets are depreciated principally using the straight-line method over the estimated useful lives of the assets, ranging from 1 to 29 years, limited by the remaining estimated life of each mine. Depreciable lives for the mining equipment range from 1 to 22 years. Depreciable lives for buildings, office equipment and improvements range from 2 to 29 years. Gains or losses arising from retirements are included in operating expenses. Depletable lives for mineral rights, assuming current production expectations, range from 1 to 22 years. Depletion of mineral rights is provided on the basis of tonnage mined in relation to estimated recoverable tonnage, which equals estimated proven and probable reserves. Therefore, the ARLP Partnership’s mineral rights are depleted based on only proven and probable reserves derived in accordance with Industry Guide 7. At December 31, 2015 and 2014, land and mineral rights include $30.7 million and $53.2 million, respectively, representing the carrying value of coal reserves attributable to properties where the ARLP Partnership or a third-party to which the ARLP Partnership lease reserves are not currently engaged in mining operations or leasing to third parties, and therefore, the coal reserves are not currently being depleted. The ARLP Partnership believes that the carrying value of these reserves will be recovered.
Mine Development Costs — Mine development costs are capitalized until production, other than production incidental to the mine development process, commences and are amortized on a units of production method based on the estimated proven and probable reserves. Mine development costs represent costs incurred in establishing access to mineral reserves and include costs associated with sinking or driving shafts and underground drifts, permanent excavations, roads and tunnels. The end of the development phase and the beginning of the production phase takes place when construction of the mine for economic extraction is substantially complete. Coal extracted during the development phase is incidental to the mine’s production capacity and is not considered to shift the mine into the production phase. At December 31, 2015 and 2014, capitalized mine development costs were $5.9 million and $7.0 million, respectively, representing the carrying value of development costs attributable to properties where the ARLP Partnership has not reached the production stage of mining operations, and therefore, the mine development costs are not currently being amortized. The ARLP Partnership believes that the carrying value of these development costs will be recovered.
Long-Lived Assets — The ARLP Partnership reviews the carrying value of long-lived assets and certain identifiable intangibles whenever events or changes in circumstances indicate that the carrying amount may not be recoverable based upon estimated undiscounted future cash flows. To the extent the carrying amount is not recoverable based on undiscounted cash flows, the amount of impairment is measured by the difference between the carrying value and the fair value of the asset (See Note 4 – Long-Lived Asset Impairments).
Intangibles —Intangibles subject to amortization include contracts with covenants not to compete, customer contracts acquired from other parties and mining permits. Intangibles other than customer contracts are amortized on a straight-line basis over their useful life. Intangibles for customer contracts are amortized on a per unit basis over the terms of the contracts. Amortization expense attributable to intangibles was $15.1 million, $3.0 million and $3.0 million for the years ending December 31, 2015, 2014 and 2013, respectively. The intangibles are included in Prepaid expenses and other assets , Other long-term assets , Other current liabilities and Other liabilities on our consolidated balance sheets at December 31, 2015 and 2014. Our intangibles at December 31 are summarized as follows:
December 31, 2015
December 31, 2014
Original Cost
Accumulated Amortization
Intangibles, Net
Original Cost
Accumulated Amortization
Intangibles, Net
(in thousands)
Non-compete agreements
$
$
$
$
$
$
Customer contracts and other
Mining permits
Total
$
$
$
$
$
$
Amortization expense attributable to intangible assets is estimated as follows:
Year Ending December 31,
(in thousands)
2016
$
2017
2018
2019
2020
Thereafter
Investments — Investments and ownership interests are accounted for under the equity method of accounting if the ARLP Partnership has the ability to exercise significant influence, but not control, over the entity. Investments accounted for under the equity method are initially recorded at cost, and the difference between the basis of the ARLP Partnership’s investment and the underlying equity in the net assets of the joint venture at the investment date, if any, is amortized over the lives of the related assets that gave rise to the difference. In the event the ARLP Partnership’s ownership entitles it to a disproportionate sharing of income or loss, the ARLP Partnership’s equity in earnings or losses of affiliates is allocated based on the hypothetical liquidation at book value ( “ HLBV ” ) method of accounting.
Under the HLBV method, equity in earnings or losses of affiliates is allocated based on the difference between the ARLP Partnership’s claim on the net assets of the equity method investee at the end and beginning of the period with consideration of certain eliminating entries regarding differences of accounting for various related-party transactions, after taking into account contributions and distributions, if any. The ARLP Partnership’s share of the net assets of the equity method investee is calculated as the amount it would receive if the equity method investee were to liquidate all of its assets at net book value and distribute the resulting cash to creditors, other investors and the ARLP Partnership according to the respective priorities .
The ARLP Partnership’s equity method investments during 2015 included AllDale Minerals, L.P. (“AllDale I”) and AllDale Minerals II, L.P. (“AllDale II”) (collectively “AllDale Minerals”) and White Oak prior to the ARLP Partnership’s acquisition of its remaining equity interests on July 31, 2015. See Note 12 – Equity Investments for further discussion of these equity method investments. In addition, during 2014 the ARLP Partnership’s equity method investments also included MAC prior to the ARLP Partnership’s acquisition of the remaining interest on January 1, 2015. For discussion of both acquisitions, see Note 3 – Acquisitions. The ARLP Partnership reviews its investments and ownership interests accounted for under the equity method of accounting for impairment whenever events or changes in circumstances indicate a loss in the value of the investment may be other than temporary.
Advance Royalties, net — Rights to coal mineral leases are often acquired and/or maintained through advance royalty payments. Where royalty payments represent prepayments recoupable against future production, they are recorded as an asset, with amounts expected to be recouped within one year classified as a current asset. As mining occurs on these leases, the royalty prepayments are charged to operating expenses. The ARLP Partnership assesses the recoverability of royalty prepayments based on estimated future production. The ARLP Partnership has recorded a $3.8 million and $1.3 million allowance against these prepayments as of December 31, 2015 and 2014, respectively. Royalty prepayments estimated to be nonrecoverable are expensed. The ARLP Partnership’s Advance royalties, net at December 31 are summarized as follows:
2015
2014
(in thousands)
Advance royalties, affiliates (see Note 19 – Related-Party Transactions)
$
$
Advance royalties, third-parties
Total advance royalties, net
$
$
Asset Retirement Obligations — The ARLP Partnership records a liability for the estimated cost of future mine asset retirement and closing procedures on a present value basis when incurred or acquired and a corresponding amount is capitalized by increasing the carrying amount of the related long lived asset. Those costs relate to permanently sealing portals at underground mines and to reclaiming the final pits and support acreage at surface mines. Examples of these types of costs, common to both types of mining, include, but are not limited to, removing or covering refuse piles and settling ponds, water treatment obligations, and dismantling preparation plants, other facilities and roadway infrastructure. Accounting for asset retirement obligations also requires depreciation of the capitalized asset retirement cost and accretion of the asset retirement obligation over time. The depreciation is generally determined on a units-of-production basis and accretion is generally recognized over the life of the producing assets. As changes in estimates occur (such as mine plan revisions, changes in estimated costs or changes in timing of the performance of reclamation activities), the revisions to the obligation and asset are recognized at the appropriate credit-adjusted, risk-free interest rate . See Note 17 – Asset Retirement Obligations for more information.
Pension Benefits— The funded status of the ARLP Partnership’s pension benefit plan is recognized separately in its consolidated balance sheets as either an asset or liability. The funded status is the difference between the fair value of plan assets and the plan’s benefit obligation. Pension obligations and net periodic benefit costs are actuarially determined and impacted by various assumptions and estimates including expected return on assets, discount rates, mortality assumptions, employee turnover rates and retirement dates. The ARLP Partnership evaluates its assumptions periodically and make adjustments to these assumptions and the recorded liability as necessary. (See Note 14 – Employee Benefit Plans.)
The discount rate is determined for the ARLP Partnership’s pension benefit plan based on an approach specific to its plan. The year-end discount rate is determined considering a yield curve comprised of high-quality corporate bonds and the timing of the expected benefit cash flows.
The expected long-term rate of return on plan assets is determined based on a broad equity and bond indices, the investment goals and objectives, the target investment allocation and on the 20-year average annual total return for each asset class.
Unrecognized actuarial gains and losses and unrecognized prior service costs and credits are deferred and recorded in accumulated other comprehensive income (“AOCI”) until amortized as a component of net periodic benefit cost. Unrecognized actuarial gains and losses in excess of 10% of the greater of the benefit obligation or the market-related value of plan assets are amortized over the participants’ average remaining future years of service.
Workers’ Compensation and Pneumoconiosis (Black Lung) Benefits — The ARLP Partnership is generally self-insured for workers’ compensation benefits, including black lung benefits. The ARLP Partnership accrues a workers’ compensation liability for the estimated present value of workers’ compensation and black lung benefits based on its actuarially determined calculations (See Note 18 – Accrued Workers’ Compensation and Pneumoconiosis Benefits).
Revenue Recognition —Revenues from coal sales are recognized when title passes to the customer as the coal is shipped. Some coal supply agreements provide for price adjustments based on variations in quality characteristics of the coal shipped. In certain cases, a customer’s analysis of the coal quality is binding and the results of the analysis are received on a delayed basis. In these cases, the ARLP Partnership estimates the amount of the quality adjustment and adjust the estimate to actual when the information is provided by the customer. Historically, such adjustments have not been material. Non-coal sales revenues primarily consist of transloading fees, mine safety services and products, royalties and throughput fees earned from White Oak prior to July 31, 2015 as disclosed in Note 3 – Acquisitions, other coal contract fees and other handling and service fees. Transportation revenues are recognized in connection with the ARLP Partnership incurring the corresponding costs of transporting coal to customers through third-party carriers for which it is directly reimbursed through customer billings.
Common Unit-Based Compensation — The fair value of restricted common unit grants under the ARLP Long-Term Incentive Plan ( “ARLP LTIP”), Supplemental Executive Retirement Plan (“SERP”), the AGP Amended and Restated Directors Annual Retainer and Deferred Compensation Plan (“AGP Deferred Compensation Plan”), and the MGP Amended and Restated Deferred Compensation Plan for Directors (“Deferred Compensation Plan”) are determined on the grant date of the award and recognized as compensation expense on a pro rata basis for ARLP LTIP and SERP awards, as appropriate, over the requisite service period. Compensation expense is fully recognized on the grant date for quarterly distributions credited to SERP accounts and the AGP Deferred Compensation Plan awards. The corresponding liability is classified as equity and included in limited partners ’ capital in the consolidated financial statements. (See Note 15 – Compensation Plans).
Income Taxes —We are not a taxable entity for federal or state income tax purposes; the tax effect of our activities accrues to the unitholders. Although publicly traded partnerships as a general rule will be taxed as corporations, we qualify for an exemption because at least 90% of our income consists of qualifying income, as defined in Section 7704(c) of the Internal Revenue Code. Net income for financial statement purposes may differ significantly from taxable income reportable to unitholders as a result of differences between the tax basis and financial reporting basis of assets and liabilities and the taxable income allocation requirements under our partnership agreement. Individual unitholders have different investment bases depending upon the timing and price of acquisition of their partnership units. Furthermore, each unitholder ’ s tax accounting, which is partially dependent upon the unitholder ’ s tax position, differs from the accounting followed in our consolidated financial statements. Accordingly, the aggregate difference in the basis of our net assets for financial and tax reporting purposes cannot be readily determined because information regarding each unitholder ’ s tax attributes in our partnership is not available to us. The ARLP Partnership’s subsidiaries, ASI and Wildcat Insurance, are subject to federal and state income taxes. A valuation allowance is established if it is more likely than not that a deferred tax asset will not be realized.
Our tax counsel has provided an opinion that AHGP, MGP, the ARLP Partnership and Alliance Coal will each be treated as a partnership. However, as is customary, no ruling has been or will be requested from the Internal Revenue Service ( “ IRS ”) regarding our classification as a partnership for federal income tax purposes.
Variable Interest Entity (“VIE”)— VIEs are primarily entities that lack sufficient equity to finance their activities without additional financial support from other parties or whose equity holders, as a group, lack one or more of the following characteristics: (a) direct or indirect ability to make decisions, (b) obligation to absorb expected losses or (c) right to receive expected residual returns. A VIE must be evaluated quantitatively and qualitatively to determine the primary beneficiary, which is the reporting entity that has (a) the power to direct activities of a VIE that most significantly impact the VIE’s economic performance and (b) the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. The primary beneficiary is required to consolidate the VIE for financial reporting purposes.
To determine a VIE’s primary beneficiary, we perform a qualitative assessment to determine which party, if any, has the power to direct activities of the VIE and the obligation to absorb losses and/or receive its benefits. This assessment involves identifying the activities that most significantly impact the VIE’s economic performance and determine whether it, or another party, has the power to direct those activities. When evaluating whether we are the primary beneficiary of a VIE, we perform a qualitative analysis that considers the design of the VIE, the nature of our involvement and the variable interests held by other parties. See Note 11 – Variable Interest Entities for further information.
New Accounting Standards Issued and Adopted —In September 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-16, Simplifying the Accounting for Measurement-Period Adjustments (“ASU 2015-16”). ASU 2015-16 requires that an acquirer within a business combination recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. ASU 2015-16 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015 with early adoption permitted and shall be applied prospectively after adoption. We elected to early adopt the standard in the third quarter of 2015. The adoption of ASU 2015-16 did not have a material impact on our consolidated financial statements as we did not have material measurement period adjustments in the third quarter of 2015. For more discussion of measurement period adjustments recorded in the fourth quarter of 2015 see Note 3 – Acquisitions.
In April 2014, the FASB issued ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (“ASU 2014-08”). ASU 2014-08 changes the requirements for reporting discontinued operations in Accounting Standards Codification (“ASC”) 205, Presentation of Financial Statements , by updating the criteria for determining which disposals can be presented as discontinued operations and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of discontinued operations. ASU 2014-08 was effective for fiscal years, and interim periods within those years, beginning after December 15, 2014. The adoption of ASU 2014-08 did not have a material impact on our consolidated financial statements.
New Accounting Standards Issued and Not Yet Adopted– In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory (“ASU 2015-11”). ASU 2015-11 simplifies the subsequent measurement of inventory. It replaces the current lower of cost or market test with the lower of cost or net realizable value test. Net realizable value is defined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The new standard should be applied prospectively and is effective for annual reporting periods beginning after December 15, 2016 and interim periods within those annual periods, with early adoption permitted. We are currently evaluating the effect of adopting ASU 2015-11, but do not expect it to have a material impact on our consolidated financial statements.
In April 2015, the FASB issued ASU 2015-03, Interest – Imputation of Interest (“ASU 2015-03”). ASU 2015-03 changes the classification and presentation of debt issuance costs by requiring debt issuance costs to be reported as a direct deduction from the face amount of the debt liability rather than an asset. Amortization of the costs is reported as interest expense. The amendment does not affect the current guidance on the recognition and measurement of debt issuance costs. ASU 2015-03 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015 and shall be applied retrospectively to each period presented. We do not anticipate the adoption of ASU 2015-03 will have a material impact on our consolidated financial statements.
In February 2015, the FASB issued ASU 2015-02, Consolidation (“ASU 2015-02”). ASU 2015-02 changes the requirements and analysis required when determining the reporting entity’s need to consolidate an entity, including modifying the evaluation of limited partnership variable interest status, the presumption that a general partner should consolidate a limited partnership and the consolidation criterion applied by a reporting entity involved with a VIE. ASU 2015-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015 and shall be applied retrospectively to each period presented. We have evaluated the impact of the guidance and do not believe it has a material impact on our consolidated financial statements.
In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”). ASU 2014-15 provides guidance on management’s responsibility in evaluating whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. ASU 2014-15 is effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter with early adoption permitted. We do not anticipate the adoption of ASU 2014-15 will have a material impact on our consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). ASU 2014-09 is a new revenue recognition standard that provides a five-step analysis of transactions to determine when and how revenue is recognized. The core principle of the new standard is an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard will be applied retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. ASU 2014-09 was originally effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date (“ASU 2015-14”), which defers the effective date by one year while providing the option to early adopt the standard on the original effective date. The ARLP Partnership has developed an assessment team to determine the effect of adopting ASU 2014-09. The ARLP Partnership is still determining whether there will be any material impact on revenue recognized; however we believe there will be changes with respect to our disclosures on revenue from contracts that will be reflected in our consolidated financial statements. The ARLP Partnership’s assessment team will continue to work through the new guidance to finalize its evaluation later this year. |
