Table of Contents

 

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

 

     Washington, D.C. 20549     

 

 

FORM 10-Q

 

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2013

 

OR

 

oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _____________to_____________

 

  Commission File No.:  0-26823  

 

 

ALLIANCE RESOURCE PARTNERS, L.P.

(Exact name of registrant as specified in its charter)

 

Delaware

(State or other jurisdiction of

incorporation or organization)

73-1564280

(IRS Employer Identification No.)

 

1717 South Boulder Avenue, Suite 400, Tulsa, Oklahoma 74119

(Address of principal executive offices and zip code)

 

(918) 295-7600

(Registrant’s telephone number, including area code)

 


 

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

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (check one)

 

Large Accelerated Filer [X]

Accelerated Filer [     ]

Non-Accelerated Filer [     ]

Smaller Reporting Company [     ]

 

 

(Do not check if smaller reporting company)

 

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

 

As of November 7, 2013, 36,963,054 common units are outstanding.

 

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

PART I

 

FINANCIAL INFORMATION

 

 

 

 

 

Page

 

 

 

ITEM 1.

Financial Statements (Unaudited)

 

 

 

 

 

ALLIANCE RESOURCE PARTNERS, L.P. AND SUBSIDIARIES

 

 

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2013 and December 31, 2012

1

 

 

 

 

Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2013 and 2012

2

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2013 and 2012

3

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2013 and 2012

4

 

 

 

 

Notes to Condensed Consolidated Financial Statements

5

 

 

 

ITEM 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

18

 

 

 

ITEM 3.

Quantitative and Qualitative Disclosures about Market Risk

35

 

 

 

ITEM 4.

Controls and Procedures

36

 

 

 

 

Forward-Looking Statements

37

 

 

 

PART II

 

OTHER INFORMATION

 

 

 

ITEM 1.

Legal Proceedings

39

 

 

 

ITEM 1A.

Risk Factors

39

 

 

 

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

39

 

 

 

ITEM 3.

Defaults Upon Senior Securities

39

 

 

 

ITEM 4.

Mine Safety Disclosures

39

 

 

 

ITEM 5.

Other Information

39

 

 

 

ITEM 6.

Exhibits

40

 

i



Table of Contents

 

PART I

 

FINANCIAL INFORMATION

 

ITEM 1.     FINANCIAL STATEMENTS

 

ALLIANCE RESOURCE PARTNERS, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except unit data)

(Unaudited)

 

 

 

September 30,

 

December 31,

ASSETS

 

2013

 

2012

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

Cash and cash equivalents

 

  $

18,871

 

 

  $

28,283

 

Trade receivables

 

169,916

 

 

172,724

 

Other receivables

 

1,121

 

 

1,019

 

Due from affiliates

 

740

 

 

658

 

Inventories

 

69,331

 

 

46,660

 

Advance royalties

 

11,280

 

 

11,492

 

Prepaid expenses and other assets

 

3,680

 

 

20,476

 

Total current assets

 

274,939

 

 

281,312

 

 

 

 

 

 

 

 

PROPERTY, PLANT AND EQUIPMENT:

 

 

 

 

 

 

Property, plant and equipment, at cost

 

2,576,521

 

 

2,361,863

 

Less accumulated depreciation, depletion and amortization

 

(990,133

)

 

(832,293

)

Total property, plant and equipment, net

 

1,586,388

 

 

1,529,570

 

 

 

 

 

 

 

 

OTHER ASSETS:

 

 

 

 

 

 

Advance royalties

 

20,881

 

 

23,267

 

Equity investments in affiliates

 

124,345

 

 

88,513

 

Due from affiliate

 

11,150

 

 

3,084

 

Other long-term assets

 

28,945

 

 

30,226

 

Total other assets

 

185,321

 

 

145,090

 

TOTAL ASSETS

 

  $

2,046,648

 

 

  $

1,955,972

 

 

 

 

 

 

 

 

LIABILITIES AND PARTNERS’ CAPITAL

 

 

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

Accounts payable

 

  $

107,132

 

 

  $

100,174

 

Due to affiliates

 

393

 

 

327

 

Accrued taxes other than income taxes

 

22,615

 

 

19,998

 

Accrued payroll and related expenses

 

51,603

 

 

38,501

 

Accrued interest

 

6,185

 

 

1,435

 

Workers’ compensation and pneumoconiosis benefits

 

9,478

 

 

9,320

 

Current capital lease obligations

 

1,214

 

 

1,000

 

Other current liabilities

 

21,763

 

 

19,572

 

Current maturities, long-term debt (Note 7)

 

80,500

 

 

18,000

 

Total current liabilities

 

300,883

 

 

208,327

 

 

 

 

 

 

 

 

LONG-TERM LIABILITIES:

 

 

 

 

 

 

Long-term debt, excluding current maturities

 

687,500

 

 

773,000

 

Pneumoconiosis benefits

 

63,921

 

 

59,931

 

Accrued pension benefit

 

31,202

 

 

31,078

 

Workers’ compensation

 

70,733

 

 

68,786

 

Asset retirement obligations

 

76,517

 

 

81,644

 

Long-term capital lease obligations

 

17,513

 

 

18,613

 

Other liabilities

 

6,831

 

 

9,147

 

Total long-term liabilities

 

954,217

 

 

1,042,199

 

Total liabilities

 

1,255,100

 

 

1,250,526

 

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

 

 

 

 

 

 

 

PARTNERS CAPITAL:

 

 

 

 

 

 

Limited Partners - Common Unitholders 36,963,054 and 36,874,949 units outstanding, respectively

 

1,100,541

 

 

1,020,823

 

General Partners’ deficit

 

(268,907

)

 

(273,113

)

Accumulated other comprehensive loss

 

(40,086

)

 

(42,264

)

Total Partners’ Capital

 

791,548

 

 

705,446

 

TOTAL LIABILITIES AND PARTNERS’ CAPITAL

 

  $

2,046,648

 

 

  $

1,955,972

 

 

See notes to condensed consolidated financial statements.

 

1



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ALLIANCE RESOURCE PARTNERS, L.P. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except unit and per unit data)

(Unaudited)

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

SALES AND OPERATING REVENUES:

 

 

 

 

 

 

 

 

 

Coal sales

 

$

518,447

 

 

$

499,003

 

 

$

1,594,530

 

 

$

1,441,107

 

Transportation revenues

 

11,554

 

 

5,625

 

 

23,459

 

 

17,651

 

Other sales and operating revenues

 

7,228

 

 

6,813

 

 

20,866

 

 

26,133

 

Total revenues

 

537,229

 

 

511,441

 

 

1,638,855

 

 

1,484,891

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses (excluding depreciation, depletion and amortization)

 

346,045

 

 

338,644

 

 

1,042,057

 

 

946,806

 

Transportation expenses

 

11,554

 

 

5,625

 

 

23,459

 

 

17,651

 

Outside coal purchases

 

636

 

 

4,424

 

 

2,028

 

 

34,759

 

General and administrative

 

14,893

 

 

13,598

 

 

46,736

 

 

43,939

 

Depreciation, depletion and amortization

 

66,099

 

 

59,781

 

 

198,688

 

 

154,923

 

Asset impairment charge

 

-

 

 

19,031

 

 

-

 

 

19,031

 

Total operating expenses

 

439,227

 

 

441,103

 

 

1,312,968

 

 

1,217,109

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INCOME FROM OPERATIONS

 

98,002

 

 

70,338

 

 

325,887

 

 

267,782

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense (net of interest capitalized for the three and nine months ended September 30, 2013 and 2012 of $2,816, $1,701, $8,220 and $6,433, respectively)

 

(6,168

)

 

(7,446

)

 

(19,004

)

 

(21,626

)

Interest income

 

252

 

 

94

 

 

564

 

 

238

 

Equity in loss of affiliates, net

 

(5,990

)

 

(2,832

)

 

(15,556

)

 

(11,040

)

Other income

 

372

 

 

254

 

 

999

 

 

2,853

 

INCOME BEFORE INCOME TAXES

 

86,468

 

 

60,408

 

 

292,890

 

 

238,207

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INCOME TAX BENEFIT

 

(718

)

 

(102

)

 

(1,307

)

 

(726

)

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INCOME

 

 $

87,186

 

 

 $

60,510

 

 

 $

294,197

 

 

 $

238,933

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GENERAL PARTNERS’ INTEREST IN NET INCOME

 

 $

31,052

 

 

 $

27,263

 

 

 $

91,414

 

 

 $

80,015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIMITED PARTNERS’ INTEREST IN NET INCOME

 

 $

56,134

 

 

 $

33,247

 

 

 $

202,783

 

 

 $

158,918

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BASIC AND DILUTED NET INCOME PER LIMITED PARTNER UNIT (Note 9)

 

 $

1.50

 

 

 $

0.89

 

 

 $

5.41

 

 

 $

4.25

 

 

 

 

 

 

 

 

 

 

 

 

 

 

DISTRIBUTIONS PAID PER LIMITED PARTNER UNIT

 

 $

1.1525

 

 

 $

1.0625

 

 

 $

3.39

 

 

 $

3.0775

 

 

 

 

 

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE NUMBER OF UNITS OUTSTANDING – BASIC AND DILUTED

 

36,963,054

 

 

36,874,949

 

 

36,948,531

 

 

36,859,018

 

 

See notes to condensed consolidated financial statements.

 

2



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ALLIANCE RESOURCE PARTNERS, L.P. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

NET INCOME

 

 $

87,186

 

 $

60,510

 

 $

294,197

 

 $

238,933

 

 

 

 

 

 

 

 

 

 

 

OTHER COMPREHENSIVE INCOME:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Defined benefit pension plan:

 

 

 

 

 

 

 

 

 

Amortization of actuarial loss (1)

 

557

 

458

 

1,675

 

1,373

 

Total defined benefit pension plan adjustments

 

557

 

458

 

1,675

 

1,373

 

 

 

 

 

 

 

 

 

 

 

Pneumoconiosis benefits:

 

 

 

 

 

 

 

 

 

Amortization of actuarial loss (1)

 

168

 

194

 

503

 

582

 

Total pneumoconiosis benefits adjustments

 

168

 

194

 

503

 

582

 

 

 

 

 

 

 

 

 

 

 

OTHER COMPREHENSIVE INCOME

 

725

 

652

 

2,178

 

1,955

 

 

 

 

 

 

 

 

 

 

 

TOTAL COMPREHENSIVE INCOME

 

 $

87,911

 

 $

61,162

 

 $

296,375

 

 $

240,888

 

 

(1)          Amortization of actuarial loss is included in the computation of net periodic benefit cost (see Notes 10 and 12 for additional details).

 

See notes to condensed consolidated financial statements.

 

3



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ALLIANCE RESOURCE PARTNERS, L.P. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Nine Months Ended
September 30,

 

 

2013

 

2012

 

 

 

 

 

 

 

CASH FLOWS PROVIDED BY OPERATING ACTIVITIES

 

  $

550,385

 

 

  $

431,628

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

Property, plant and equipment:

 

 

 

 

 

 

Capital expenditures

 

(242,653

)

 

(332,353

)

Changes in accounts payable and accrued liabilities

 

(354

)

 

(4,024

)

Proceeds from sale of property, plant and equipment

 

124

 

 

114

 

Purchases of equity investments in affiliate

 

(47,500

)

 

(43,100

)

Payment for acquisition of business

 

-

 

 

(100,000

)

Payments to affiliate for acquisition and development of coal reserves

 

(21,318

)

 

(34,601

)

Advances/loans to affiliate

 

(7,500

)

 

(2,229

)

Payments from affiliate

 

-

 

 

4,229

 

Other

 

-

 

 

546

 

Net cash used in investing activities

 

(319,201

)

 

(511,418

)

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

Borrowings under term loan

 

-

 

 

250,000

 

Borrowings under revolving credit facilities

 

211,000

 

 

150,000

 

Payments under revolving credit facilities

 

(216,000

)

 

(75,000

)

Payment on term loan

 

-

 

 

(300,000

)

Payment on long-term debt

 

(18,000

)

 

(18,000

)

Payments on capital lease obligations

 

(886

)

 

(673

)

Payment of debt issuance costs

 

-

 

 

(4,272

)

Net settlement of employee withholding taxes on vesting of Long-Term Incentive Plan

 

(3,015

)

 

(3,734

)

Cash contributions by General Partners

 

114

 

 

150

 

Distributions paid to Partners

 

(213,809

)

 

(190,148

)

Net cash used in financing activities

 

(240,596

)

 

(191,677

)

 

 

 

 

 

 

 

NET CHANGE IN CASH AND CASH EQUIVALENTS

 

(9,412

)

 

(271,467

)

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

 

28,283

 

 

273,528

 

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

 

  $

18,871

 

 

  $

2,061

 

 

 

 

 

 

 

 

SUPPLEMENTAL CASH FLOW INFORMATION:

 

 

 

 

 

 

Cash paid for interest

 

  $

21,638

 

 

  $

22,166

 

 

 

 

 

 

 

 

NON-CASH INVESTING AND FINANCING ACTIVITY:

 

 

 

 

 

 

Accounts payable for purchase of property, plant and equipment

 

  $

20,618

 

 

  $

20,955

 

Market value of common units issued under Long-Term Incentive and Directors Deferred Compensation Plans before minimum statutory tax withholding requirements

 

  $

8,583

 

 

  $

11,070

 

Acquisition of business:

 

 

 

 

 

 

Fair value of assets assumed

 

  $

-

 

 

  $

126,639

 

Cash paid

 

-

 

 

(100,000

)

Fair value of liabilities assumed

 

  $

-

 

 

  $

26,639

 

 

See notes to condensed consolidated financial statements.

 

4



Table of Contents

 

ALLIANCE RESOURCE PARTNERS, L.P. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.         ORGANIZATION AND PRESENTATION

 

Significant Relationships Referenced in Notes to Condensed Consolidated Financial Statements

 

·

References to “we,” “us,” “our” or “ARLP Partnership” mean the business and operations of Alliance Resource Partners, L.P., the parent company, as well as its consolidated subsidiaries.

·

References to “ARLP” mean Alliance Resource Partners, L.P., individually as the parent company, and not on a consolidated basis.

·

References to “MGP” mean Alliance Resource Management GP, LLC, the managing general partner of Alliance Resource Partners, L.P, also referred to as our managing general partner.

·

References to “SGP” mean Alliance Resource GP, LLC, the special general partner of Alliance Resource Partners, L.P., also referred to as our special general partner.

·

References to “Intermediate Partnership” mean Alliance Resource Operating Partners, L.P., the intermediate partnership of Alliance Resource Partners, L.P., also referred to as our intermediate partnership.

·

References to “Alliance Coal” mean Alliance Coal, LLC, the holding company for the operations of Alliance Resource Operating Partners, L.P., also referred to as our operating subsidiary.

·

References to “AHGP” mean Alliance Holdings GP, L.P., individually as the parent company, and not on a consolidated basis.

·

References to “AGP” mean Alliance GP, LLC, the general partner of Alliance Holdings GP, L.P.

 

Organization

 

ARLP is a Delaware limited partnership listed on the NASDAQ Global Select Market under the ticker symbol “ARLP.”  ARLP was formed in May 1999 to acquire, upon completion of ARLP’s initial public offering on August 19, 1999, certain coal production and marketing assets of Alliance Resource Holdings, Inc., a Delaware corporation (“ARH”), consisting of substantially all of ARH’s operating subsidiaries, but excluding ARH.  ARH is owned by Joseph W. Craft III, the President and Chief Executive Officer and a Director of our managing general partner, and Kathleen S. Craft.  SGP, a Delaware limited liability company, is owned by ARH and holds a 0.01% general partner interest in each of ARLP and the Intermediate Partnership.

 

We are managed by our managing general partner, MGP, a Delaware limited liability company, which holds a 0.99% and a 1.0001% managing general partner interest in ARLP and the Intermediate Partnership, respectively, and a 0.001% managing member interest in Alliance Coal.  AHGP is a Delaware limited partnership that was formed to become the owner and controlling member of MGP.  AHGP completed its initial public offering on May 15, 2006.  AHGP owns directly and indirectly 100% of the members’ interest of MGP, the incentive distribution rights (“IDR”) in ARLP and 15,544,169 common units of ARLP.

 

Basis of Presentation

 

The accompanying condensed consolidated financial statements include the accounts and operations of the ARLP Partnership and present our financial position as of September 30, 2013 and December 31, 2012, the results of our operations and comprehensive income for the three and nine months ended September 30, 2013 and 2012 and the cash flows for the nine months ended September 30, 2013 and 2012.  All of our intercompany transactions and accounts have been eliminated.

 

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Table of Contents

 

These condensed consolidated financial statements and notes are unaudited. However, in the opinion of management, these financial statements reflect all adjustments (which include only normal recurring adjustments) necessary for a fair presentation of the results for the periods presented.  Results for interim periods are not necessarily indicative of results for a full year.

 

These condensed consolidated financial statements and notes are prepared pursuant to the rules and regulations of the Securities and Exchange Commission for interim reporting and should be read in conjunction with the consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2012.

 

Use of Estimates

 

The preparation of the ARLP Partnership’s condensed consolidated financial statements in conformity with generally accepted accounting principles (“GAAP”) of the United States (“U.S.”) requires management to make estimates and assumptions that affect the reported amounts and disclosures in our condensed consolidated financial statements.  Actual results could differ from those estimates.

 

2.         NEW ACCOUNTING STANDARDS

 

New Accounting Standards Issued and Adopted

 

In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (“ASU 2013-02”)ASU 2013-02 requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income (“AOCI”) by component.  In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, certain significant amounts reclassified out of AOCI by the respective line items of net income.  ASU 2013-02 does not change the items that must be reported in AOCI.  ASU 2013-02 was effective for fiscal years, and interim periods within those years, beginning after December 15, 2012.  The adoption of ASU 2013-02 did not have a material impact on our condensed consolidated financial statements.

 

3.         CONTINGENCIES

 

Various lawsuits, claims and regulatory proceedings incidental to our business are pending against the ARLP Partnership.  We record an accrual for a potential loss related to these matters when, in management’s opinion, such loss is probable and reasonably estimable.  Based on known facts and circumstances, we believe the ultimate outcome of these outstanding lawsuits, claims and regulatory proceedings will not have a material adverse effect on our financial condition, results of operations or liquidity.  However, if the results of these matters were different from management’s current opinion and in amounts greater than our accruals, then they could have a material adverse effect.

 

4.         ACQUISITIONS

 

Asset Acquisition

 

In June 2013, our subsidiary, Alliance Resource Properties, LLC (“Alliance Resource Properties”), acquired the rights to approximately 11.6 million tons of proven and probable medium-sulfur coal reserves, and an additional 5.9 million resource tons, in Grant and Tucker County, West Virginia from Laurel Run Mining Company, a subsidiary of Consol Energy, Inc.  The purchase price of $25.2 million was allocated to owned and leased coal rights and was financed using existing cash on hand.  As a result of the coal reserve purchase, we reclassified certain tons of medium-sulfur, non-reserve coal deposits as reserves, which together with the reserves purchased above, extended the expected life of Mettiki Coal (WV), LLC’s Mountain View mine.

 

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Green River Collieries, LLC

 

On April 2, 2012, we acquired substantially all of Green River Collieries, LLC’s (“Green River”) assets related to its coal mining business and operations located in Webster and Hopkins Counties, Kentucky for consideration of $100.0 million.  The transaction included the Onton No. 9 mining complex (“Onton mine”), which included the mine, a dock, tugboat, and a lease for the preparation plant, and an estimated 40.0 million tons of coal reserves in the West Kentucky No. 9 coal seam.   The Green River acquisition was consistent with our general business strategy and complemented our current coal mining operations.

 

The following unaudited pro forma information for the nine months ended September 30, 2012 for the ARLP Partnership has been prepared for illustrative purposes as if the business combination occurred on January 1, 2011, the year prior to the acquisition date.  The unaudited pro forma results have been prepared based upon Green River’s historical results with respect to the business acquired and estimates of the effects of the transactions that we believe are reasonable and supportable. The results are not necessarily reflective of the consolidated results of operations had the acquisition actually occurred on January 1, 2011, nor are they indicative of future operating results.

 

 

 

Nine Months Ended

 

 

September 30, 2012

 

 

(in thousands)

 

 

 

Total revenues

 

 

As reported

 

$

1,484,891

Pro forma

 

$

1,512,234

 

 

 

Net income

 

 

As reported

 

$

238,933

Pro forma

 

$

240,214

 

The pro forma net income includes adjustments to depreciation, depletion and amortization to reflect the new basis in property, plant and equipment and intangible assets acquired, elimination of income tax expense, and the elimination of interest expense of Green River as its debt was paid off in conjunction with the acquisition.

 

Synergies from the acquisition are not reflected in the pro forma results.

 

5.         ASSET IMPAIRMENT CHARGE

 

Pontiki Coal, LLC’s (“Pontiki”) mining complex in Martin County, Kentucky was idled from August 29, 2012 to November 25, 2012.  The Mine Safety and Health Administration (“MSHA”) ordered the closure of the coal preparation plant and associated surface facilities at the Pontiki mining complex following the failure on August 23, 2012 of a belt line between two clean coal stacking tubes.  MSHA required a comprehensive structural inspection of all the surface facilities by an independent bridge engineering firm before the surface facilities could be reopened.  Although the Pontiki mining complex resumed operations to fulfill contractual obligations for the delivery of coal in 2013 under existing coal sales agreements, significant uncertainty remained regarding market demand and pricing for coal from Pontiki beyond 2013.  This uncertainty along with the likelihood of future cost increases arising from stringent regulatory oversight placed the long-term viability of Pontiki at significant risk.

 

As a result of the above events, uncertainty regarding the future operations of the mine and the required additional repair costs, and our assessment of related risks, we concluded that indicators of impairment were present and the carrying value of the asset group representing the Pontiki mining complex (“Pontiki Assets”) was not fully recoverable.  We estimated the fair value of the Pontiki Assets

 

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and determined it was exceeded by the carrying value and accordingly, we recorded an asset impairment charge of $19.0 million in our Central Appalachian segment during the quarter ended September 30, 2012 to reduce the carrying value of the Pontiki Assets to their estimated fair value of $16.1 million.  The fair value of the Pontiki Assets was determined using the market and cost valuation techniques and represents a Level 3 fair value measurement.  The fair value analysis was based on the marketability of coal properties in the current market environment, discounted projected future cash flows, and estimated fair value of assets that could be sold or used at other operations.  As these estimates incorporate certain assumptions, including replacement cost of equipment and marketability of coal reserves in the Central Appalachian region, and it is possible that the estimates may change in the future resulting in the need to adjust our determination of fair value.  The asset impairment established a new cost basis on which depreciation, depletion and amortization is calculated for the Pontiki Assets.

 

As noted above, although the Pontiki mining complex resumed operations, significant uncertainty remained regarding market demand and pricing for coal from Pontiki beyond 2013.  On September 27, 2013, we issued Worker Adjustment and Retraining Notification (WARN) Act notices to all employees at Pontiki’s mining complex.  We plan to continue operations at the Pontiki mining complex until late November 2013 to fulfill commitments under existing sales contracts at which time the mine is expected to cease production.  No additional impairment was required related to the expected closure of the mine as the depreciable lives of the Pontiki Assets were adjusted in 2012 and throughout 2013 as management evaluated the future operations at Pontiki.

 

6.         FAIR VALUE MEASUREMENTS

 

We apply the provisions of FASB ASC 820, Fair Value Measurement, which, among other things, defines fair value, requires disclosures about assets and liabilities carried at fair value and establishes a hierarchal disclosure framework based upon the quality of inputs used to measure fair value.

 

Valuation techniques are based upon observable and unobservable inputs.  Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our own market assumptions.  These two types of inputs create the following fair value hierarchy:

 

·

Level 1 – Quoted prices for identical instruments in active markets.

·

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.

·

Level 3 – Instruments whose significant value drivers are unobservable.

 

The carrying amounts for cash equivalents, accounts receivable, accounts payable, due from affiliates and due to affiliates approximate fair value because of the short maturity of those instruments.  At September 30, 2013 and December 31, 2012, the estimated fair value of our long-term debt, including current maturities, was approximately $787.3 million and $834.3 million, respectively, based on interest rates that we believe are currently available to us for issuance of debt with similar terms and remaining maturities (Note 7). The fair value of debt, which is based upon interest rates for similar instruments in active markets, is classified as a Level 2 measurement under the fair value hierarchy.

 

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7.         LONG-TERM DEBT

 

Long-term debt consists of the following (in thousands):

 

 

 

September 30,
2013

 

December 31,
2012

 

 

 

 

 

 

 

Revolving credit facility

 

 $

100,000

 

 

 $

155,000

 

 

$50 million facility

 

50,000

 

 

-

 

 

Senior notes

 

18,000

 

 

36,000

 

 

Series A senior notes

 

205,000

 

 

205,000

 

 

Series B senior notes

 

145,000

 

 

145,000

 

 

Term loan

 

250,000

 

 

250,000

 

 

 

 

768,000

 

 

791,000

 

 

Less current maturities

 

(80,500

)

 

(18,000

)

 

Total long-term debt

 

 $

687,500

 

 

 $

773,000

 

 

 

On September 11, 2013, our Intermediate Partnership entered into a credit agreement for a $50.0 million revolving credit facility (“Facility”) to be used, as appropriate, for short-term working capital requirements.  The counterparty to the Facility is KC-LendCo, LLC, which is controlled by an officer of ARH via his role as independent trustee of irrevocable trusts established by our President and Chief Executive Officer.  Borrowings under the Facility bear interest at the London Interbank Offered Rate (“LIBOR”) plus 0.80%, with interest payable quarterly.  At September 30, 2013, the LIBOR with applicable margin was 0.98% on borrowings outstanding.  The Facility is included in the current maturities, long-term debt line item on our condensed consolidated balance sheet.  The lender and the Intermediate Partnership have the option to terminate the Facility at any time and the Facility was terminated on October 29, 2013, with all amounts outstanding, plus interest, paid in full.

 

Our Intermediate Partnership also has $18.0 million in senior notes (“Senior Notes”), $205.0 million in Series A and $145.0 million in Series B senior notes (collectively, the “2008 Senior Notes”), a $700.0 million revolving credit facility (“Revolving Credit Facility”) and a $250.0 million term loan (collectively, with the Senior Notes, the 2008 Senior Notes and the Revolving Credit Facility, the “ARLP Debt Arrangements”), which are guaranteed by all of the material direct and indirect subsidiaries of our Intermediate Partnership. The ARLP Debt Arrangements contain various covenants affecting our Intermediate Partnership and its subsidiaries restricting, among other things, the amount of distributions by our Intermediate Partnership, the incurrence of additional indebtedness and liens, the sale of assets, the making of investments, the entry into mergers and consolidations and the entry into transactions with affiliates, in each case subject to various exceptions.  The ARLP Debt Arrangements also require the Intermediate Partnership to remain in control of a certain amount of mineable coal reserves relative to its annual production.  In addition, the ARLP Debt Arrangements require our Intermediate Partnership to maintain (a) debt to cash flow ratio of not more than 3.0 to 1.0 and (b) cash flow to interest expense ratio of not less than 3.0 to 1.0, in each case, during the four most recently ended fiscal quarters.  The debt to cash flow ratio and cash flow to interest expense ratio were 1.12 to 1.0 and 19.4 to 1.0, respectively, for the trailing twelve months ended September 30, 2013.  We were in compliance with the covenants of the ARLP Debt Arrangements as of September 30, 2013.

 

At September 30, 2013, we had borrowings of $150.0 million and $23.5 million of letters of credit outstanding with $576.5 million available for borrowing under the Revolving Credit Facility and the Facility.  We utilize the Revolving Credit Facility, as appropriate, for working capital requirements, anticipated capital expenditures and investments in affiliates, scheduled debt payments and distribution payments.  We incur an annual commitment fee of 0.25% on the undrawn portion of the Revolving Credit Facility.

 

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8.                                    WHITE OAK TRANSACTIONS

 

On September 22, 2011 (the “Transaction Date”), we entered into a series of transactions with White Oak Resources LLC (“White Oak”) and related entities to support development of a longwall mining operation currently under construction.  The transactions feature several components, including an equity investment in White Oak (represented by “Series A Units” containing certain distribution and liquidation preferences), the acquisition and lease-back of certain coal reserves and surface rights and a backstop equipment financing facility.  Our initial investment funding to White Oak at the Transaction Date, consummated utilizing existing cash on hand, was $69.5 million and we funded an additional $197.7 million to White Oak between the Transaction Date and September 30, 2013.  We expect to fund a total of approximately $300.5 million from the Transaction Date through approximately the next 1.5 years, which includes the funding made to White Oak through September 30, 2013 discussed above.  We are also committed to invest up to an additional $125.0 million in Series A Units to the extent required for development or operation of the White Oak Mine No. 1 mine, which is subject to certain rights and obligations of other White Oak owners to participate in such investment.  On the Transaction Date, we also entered into a coal handling and services agreement, pursuant to which we constructed and are operating a preparation plant and other surface facilities.  We expect to fund these additional commitments utilizing existing cash balances, future cash flows from operations, borrowings under credit facilities and cash provided from the issuance of debt or equity.   The following information discusses each component of these transactions in further detail.

 

Hamilton County, Illinois Reserve Acquisition

 

On the Transaction Date, our subsidiary, Alliance WOR Properties, LLC (“WOR Properties”), acquired from White Oak the rights to approximately 204.9 million tons of proven and probable high-sulfur coal reserves, of which 105.2 million tons are currently being developed for future mining by White Oak, and certain surface properties and rights in Hamilton County, Illinois (the “Reserve Acquisition”).  Hamilton County is adjacent to White County, Illinois, where our White County Coal, LLC Pattiki mine is located.  The asset purchase price of $33.8 million cash paid at closing was allocated to owned and leased coal rights.  Between the Transaction Date and December 31, 2012, WOR Properties provided $51.6 million to White Oak for development of the acquired coal reserves.  During the nine months ended September 30, 2013, WOR Properties acquired from White Oak for $21.3 million cash paid at closing, an additional 75.4 million tons of reserves, of which 38.8 million tons are currently being developed for future mining by White Oak.  WOR Properties has a remaining commitment of $33.2 million for additional coal reserve purchases and development funding.

 

Equity Investment – Series A Units

 

Concurrent with the Reserve Acquisition, our subsidiary, Alliance WOR Processing, LLC (“WOR Processing”), made an equity investment of $35.7 million in White Oak to purchase Series A Units representing ownership in White Oak.  WOR Processing purchased $66.8 million of additional Series A Units between the Transaction Date and December 31, 2012 and $47.5 million of additional Series A Units during the nine months ended September 30, 2013, fulfilling WOR Processing’s minimum equity investment commitment.  Based on currently anticipated equity contributions by other White Oak owners, we do not expect to make further equity investments in White Oak in 2013.

 

WOR Processing’s ownership and member’s voting interest in White Oak at September 30, 2013 were 20.0% based upon currently outstanding voting units.  The remainder of the equity ownership in White Oak, represented by Series B Units, is held by other investors and members of White Oak management.

 

We continually review all rights provided to WOR Processing and us by various agreements with White Oak and continue to conclude all such rights are protective or participating in nature and do not provide WOR Processing or us the ability to unilaterally direct any of the primary activities of White Oak

 

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that most significantly impact its economic performance.  As such, we recognize WOR Processing’s interest in White Oak as an equity investment in affiliate in our consolidated balance sheets.  As of September 30, 2013, WOR Processing had invested $150.0 million in Series A Units of White Oak equity, which represents our current maximum exposure to loss as a result of our equity investment in White Oak exclusive of capitalized interest.  White Oak has made no distributions to us.

 

We record WOR Processing’s equity in earnings or losses of affiliates under the hypothetical liquidation at book value method of accounting due to the preferences to which WOR Processing is entitled on distributions.  For the three and nine months ended September 30, 2013 and 2012, we were allocated losses of $6.2 million, $3.0 million, $16.3 million and $11.6 million, respectively.

 

Services Agreement

 

Simultaneous with the closing of the Reserve Acquisition, WOR Processing entered into a Coal Handling and Preparation Agreement (“Services Agreement”) with White Oak pursuant to which WOR Processing committed to construct and operate a coal preparation plant and related facilities and a rail loop and loadout facility to service the White Oak longwall Mine No. 1.  During the quarter ended September 30, 2013, WOR Processing began processing and loading coal through the facilities and earned throughput fees of $0.6 million from White Oak.

 

In addition, the Intermediate Partnership agreed to loan $10.5 million to White Oak for the construction of various assets on the surface property, including but not limited to, a bathhouse, office and warehouse (“Construction Loan”).  The Construction Loan has a term of 20 years, with repayment scheduled to begin in 2015.  White Oak has borrowed the entire amount available under the Construction Loan as of September 30, 2013.

 

9.         NET INCOME PER LIMITED PARTNER UNIT

 

We apply the provisions of FASB ASC 260, Earnings Per Share, which requires the two-class method in calculating basic and diluted earnings per unit (“EPU”).  Net income is allocated to the general partners and limited partners in accordance with their respective partnership percentages, after giving effect to any special income or expense allocations, including incentive distributions to our managing general partner, the holder of the IDR pursuant to our partnership agreement, which are declared and paid following the end of each quarter. Under the quarterly IDR provisions of our partnership agreement, our managing general partner is entitled to receive 15% of the amount we distribute in excess of $0.275 per unit, 25% of the amount we distribute in excess of $0.3125 per unit, and 50% of the amount we distribute in excess of $0.375 per unit.  Our partnership agreement contractually limits our distributions to available cash; therefore, undistributed earnings of the ARLP Partnership are not allocated to the IDR holder.  In addition, our outstanding awards under our Long-Term Incentive Plan (“LTIP”) and phantom units in notional accounts under our Supplemental Executive Retirement Plan (“SERP”) and the MGP Amended and Restated Deferred Compensation Plan for Directors (“Deferred Compensation Plan”) include rights to nonforfeitable distributions or distribution equivalents and are therefore considered participating securities.  As such, we allocate undistributed and distributed earnings to these outstanding awards in our calculation of EPU.

 

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The following is a reconciliation of net income used for calculating basic earnings per unit and the weighted average units used in computing EPU for the three and nine months ended September 30, 2013 and 2012 (in thousands, except per unit data):

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 $

87,186

 

 

 $

60,510

 

 

 $

294,197

 

 

 $

238,933

 

Adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

Managing general partner’s priority distributions

 

(29,906

)

 

(26,584

)

 

(87,275

)

 

(76,771

)

General partners’ 2% equity ownership

 

(1,146

)

 

(679

)

 

(4,139

)

 

(3,244

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Limited partners’ interest in net income

 

56,134

 

 

33,247

 

 

202,783

 

 

158,918

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less:

 

 

 

 

 

 

 

 

 

 

 

 

Distributions to participating securities

 

(597

)

 

(531

)

 

(1,749

)

 

(1,549

)

Undistributed earnings attributable to participating securities

 

(167

)

 

-

 

 

(1,012

)

 

(541

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income available to limited partners

 

 $

55,370

 

 

 $

32,716

 

 

 $

200,022

 

 

 $

156,828

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average limited partner units outstanding – basic and diluted

 

36,963

 

 

36,875

 

 

36,949

 

 

36,859

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted net income per limited partner unit (1)

 

 $

1.50

 

 

 $

0.89

 

 

 $

5.41

 

 

 $

4.25

 

 

(1)          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 three and nine months ended September 30, 2013 and 2012, LTIP, SERP and Deferred Compensation Plan units of 355,259, 323,146, 328,314 and 338,231 respectively, were considered anti-dilutive under the treasury stock method.

 

10.       WORKERS’ COMPENSATION AND PNEUMOCONIOSIS

 

The changes in the workers’ compensation liability (including current and long-term liability balances) for each of the periods presented were as follows (in thousands):

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

 $

80,630

 

 

 $

81,195

 

 

 $

77,046

 

 

 $

73,201

 

 

Accruals increase

 

452

 

 

4,035

 

 

8,399

 

 

16,249

 

 

Payments

 

(2,553

)

 

(2,395

)

 

(8,156

)

 

(7,984

)

 

Interest accretion

 

621

 

 

685

 

 

1,861

 

 

2,054

 

 

Ending balance

 

 $

79,150

 

 

 $

83,520

 

 

 $

79,150

 

 

 $

83,520

 

 

 

Lower accrual increases in 2013 compared to 2012 was primarily attributable to favorable reserve adjustments for claims incurred in prior years.

 

Certain of our mine operating entities are liable under state statutes and the Federal Coal Mine Health and Safety Act of 1969, as amended, to pay pneumoconiosis, or black lung, benefits to eligible employees and former employees and their dependents.

 

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Components of the net periodic benefit cost for each of the periods presented are as follows (in thousands):

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

Service cost

 

 $

953

 

 

 $

960

 

 

 $

2,858

 

 

 $

2,795

 

 

Interest cost

 

563

 

 

598

 

 

1,690

 

 

1,773

 

 

Amortization of net loss (1)

 

168

 

 

194

 

 

503

 

 

582

 

 

Net periodic benefit cost

 

 $

1,684

 

 

 $

1,752

 

 

 $

5,051

 

 

 $

5,150

 

 

 

(1)          Amortization of net loss is included in the operating expenses line item within our condensed consolidated statements of income.

 

11.       COMPENSATION PLANS

 

Long-Term Incentive Plan

 

We have the LTIP for certain employees and officers of our managing general partner and its affiliates who perform services for us.  The LTIP awards are grants of non-vested “phantom” or notional units, which upon satisfaction of vesting requirements, entitle the LTIP participant to receive ARLP common units.  Annual grant levels and vesting provisions for designated participants are recommended by our President and Chief Executive Officer, subject to review and approval of the compensation committee of the MGP board of directors (the “Compensation Committee”).  On January 23, 2013, the Compensation Committee determined that the vesting requirements for the 2010 grants of 130,102 restricted units (which is net of 8,028 forfeitures) had been satisfied as of January 1, 2013.  As a result of this vesting, on February 15, 2013, we issued 82,400 unrestricted common units to the LTIP participants. The remaining units were settled in cash to satisfy the individual statutory minimum tax obligations of the LTIP participants.  On January 23, 2013, the Compensation Committee authorized additional grants of up to 156,575 restricted units, of which 146,725 were granted during the nine months ended September 30, 2013 and will vest on January 1, 2016, subject to satisfaction of certain financial tests.  The fair value of these 2013 grants is equal to the intrinsic value at the date of grant, which was $63.02 per unit.  LTIP expense was $1.8 million and $1.6 million for the three months ended September 30, 2013 and 2012, respectively, and $5.4 million and $4.7 million for the nine months ended September 30, 2013 and 2012, respectively.  After consideration of the January 1, 2013 vesting and subsequent issuance of 82,400 common units, 2.1 million units remain available under the LTIP for issuance in the future, assuming all grants issued in 2011, 2012 and 2013 currently outstanding are settled with common units, without reduction for tax withholding, and no future forfeitures occur.

 

As of September 30, 2013, there was $10.7 million in total unrecognized compensation expense related to the non-vested LTIP grants that are expected to vest.  That expense is expected to be recognized over a weighted-average period of 1.4 years.  As of September 30, 2013, the intrinsic value of the non-vested LTIP grants was $25.8 million.  As of September 30, 2013, the total obligation associated with the LTIP was $12.7 million and is included in the partners’ capital-limited partners line item in our condensed consolidated balance sheets.

 

As provided under the distribution equivalent rights provisions of the LTIP, all non-vested grants include contingent rights to receive quarterly cash distributions in an amount equal to the cash distributions we make to unitholders during the vesting period.

 

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SERP and Directors Deferred Compensation Plan

 

We utilize the SERP to provide deferred compensation benefits for certain officers and key employees. All allocations made to participants under the SERP are made in the form of “phantom” ARLP units.  The SERP is administered by the Compensation Committee.

 

Our directors participate in the Deferred Compensation Plan. Pursuant to the Deferred Compensation Plan, for amounts deferred either automatically or at the election of the director, a notional account is established and credited with notional common units of ARLP, described in the Deferred Compensation Plan as “phantom” units.

 

For both the SERP and Deferred Compensation Plan, when quarterly cash distributions are made with respect to ARLP common units, an amount equal to such quarterly distribution is credited to each participant’s notional account as additional phantom units.  All grants of phantom units under the SERP and Deferred Compensation Plan vest immediately.

 

For the nine months ended September 30, 2013 and 2012, SERP and Deferred Compensation Plan participant notional account balances were credited with a total of 10,835 and 7,168 phantom units, respectively, and the fair value of these phantom units was $68.32 per unit and $64.77 per unit, respectively, on a weighted-average basis.  Total SERP and Deferred Compensation Plan expense was approximately $0.3 million and $0.2 million for the three months ended September 30, 2013 and 2012, respectively, and $0.9 and $0.6 million for the nine months ended September 30, 2013 and 2012, respectively.

 

As of September 30, 2013, there were 167,626 total phantom units outstanding under the SERP and Deferred Compensation Plan and the total intrinsic value of the SERP and Deferred Compensation Plan phantom units was $12.4 million.  As of September 30, 2013, the total obligation associated with the SERP and Deferred Compensation Plan was $11.1 million and is included in the partners’ capital-limited partners line item in our condensed consolidated balance sheets.

 

12.       COMPONENTS OF PENSION PLAN NET PERIODIC BENEFIT COSTS

 

Eligible employees at certain of our mining operations participate in a defined benefit plan (the “Pension Plan”) that we sponsor.  The benefit formula for the Pension Plan is a fixed dollar unit based on years of service.

 

Components of the net periodic benefit cost for each of the periods presented are as follows (in thousands):

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

 $

674

 

 

 $

726

 

 

 $

2,108

 

 

 $

2,179

 

 

Interest cost

 

929

 

 

818

 

 

2,710

 

 

2,454

 

 

Expected return on plan assets

 

(930

)

 

(956

)

 

(3,094

)

 

(2,868

)

 

Amortization of net loss (1)

 

557

 

 

458

 

 

1,675

 

 

1,373

 

 

Net periodic benefit cost

 

 $

1,230

 

 

 $

1,046

 

 

 $

3,399

 

 

 $

3,138

 

 

 

(1)          Amortization of net loss is included in the operating expenses line item within our condensed consolidated statements of income.

 

We previously disclosed in our financial statements for the year ended December 31, 2012 that we expected to contribute $2.4 million to the Pension Plan in 2013.  During the nine months ended

 

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September 30, 2013, we made contribution payments of $1.6 million for the 2013 plan year.  On October 15, 2013, we made a contribution payment of $0.8 million for the 2013 plan year, bringing the total contributions to the Pension Plan in 2013 for the 2013 plan year to $2.4 million as expected.

 

13.         SEGMENT INFORMATION

 

We operate in the eastern U.S. as a producer and marketer of coal to major utilities and industrial users.  We aggregate multiple operating segments into five reportable segments: the Illinois Basin, Central Appalachia, Northern Appalachia, White Oak and Other and Corporate.  The first three reportable segments correspond to the three major coal producing regions in the eastern U.S.  Similar economic characteristics for our operating segments within each of these three reportable segments include coal quality, coal seam height, mining and transportation methods and regulatory issues.  The White Oak reportable segment includes our activities associated with the White Oak longwall Mine No. 1 development project more fully described below.

 

The Illinois Basin reportable segment is comprised of multiple operating segments, including Webster County Coal, LLC’s Dotiki mining complex, Gibson County Coal, LLC’s mining complex, which includes the Gibson North mine and Gibson South project, Hopkins County Coal, LLC’s Elk Creek mining complex, White County Coal, LLC’s Pattiki mining complex, Warrior Coal, LLC’s mining complex, Sebree Mining, LLC’s mining complex, which includes the Onton mine, and River View Coal, LLC’s mining complex.  The development of the Gibson South mine is currently underway.  For information regarding the acquisition of the Onton mine, which was added to the Illinois Basin segment in April 2012, please see Note 4.

 

The Central Appalachian reportable segment is comprised of two operating segments, the MC Mining, LLC and Pontiki mining complexes.

 

The Northern Appalachian reportable segment is comprised of multiple operating segments, including the Mettiki mining complex, the Tunnel Ridge, LLC (“Tunnel Ridge”) mining complex and the Penn Ridge Coal, LLC (“Penn Ridge”) property.  The Mettiki mining complex includes Mettiki Coal (WV), LLC’s Mountain View mine, Mettiki Coal, LLC’s preparation plant and a small third-party mining operation which has been idled since July 2013.  In May 2012, longwall production began at the Tunnel Ridge mine.  We are in the process of permitting the Penn Ridge property for future mine development.

 

The White Oak reportable segment is comprised of two operating segments, WOR Processing and WOR Properties.  WOR Processing includes both the surface operations at White Oak and the equity investment in White Oak.  WOR Properties owns coal reserves acquired from White Oak under lease-back arrangements (Note 8).

 

Other and Corporate includes marketing and administrative expenses, Alliance Service, Inc. (“ASI”) and its subsidiary, Matrix Design Group, LLC (“Matrix Design”), Alliance Design Group, LLC (“Alliance Design”) (collectively, Matrix Design and Alliance Design are referred to as the “Matrix Group”), ASI’s ownership of aircraft, the Mt. Vernon Transfer Terminal, LLC (“Mt. Vernon”) dock activities, coal brokerage activity, our equity investment in Mid-America Carbonates, LLC and certain activities of Alliance Resource Properties.

 

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Table of Contents

 

Reportable segment results as of and for the three and nine months ended September 30, 2013 and 2012 are presented below.

 

 

 

Illinois
Basin

 

Central
Appalachia

 

Northern
Appalachia

 

White Oak

 

Other and
Corporate

 

Elimination
(1)

 

Consolidated

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reportable segment results for the three months ended September 30, 2013 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues (2)

 

$

405,597

 

$

40,135

 

$

84,975

 

$

566

 

$

8,702

 

$

(2,746)

 

$

537,229

Segment Adjusted EBITDA Expense (3)

 

239,962

 

30,348

 

69,415

 

546

 

8,784

 

(2,746)

 

346,309

Segment Adjusted EBITDA (4)(5)

 

156,790

 

9,775

 

12,864

 

(6,190)

 

137

 

-

 

173,376

Capital expenditures (7)

 

58,569

 

2,459

 

12,284

 

6,632

 

2,137

 

-

 

82,081

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reportable segment results for the three months ended September 30, 2012 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues (2)

 

$

365,119

 

41,790

 

100,142

 

$

-

 

$

8,518

 

$

(4,128)

 

$

511,441

Segment Adjusted EBITDA Expense (3)

 

221,731

 

35,563

 

81,761

 

174

 

7,713

 

(4,128)

 

342,814

Segment Adjusted EBITDA (4)(5)

 

140,329

 

6,228

 

15,813

 

(3,188)

 

988

 

-

 

160,170

Capital expenditures (7)

 

51,541

 

9,395

 

21,422

 

10,468

 

1,197

 

-

 

94,023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reportable segment results as of and for the nine months ended September 30, 2013 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues (2)

 

$

1,210,806

 

$

126,701

 

$

284,303

 

$

566

 

$

26,696

 

$

(10,217)

 

$

1,638,855

Segment Adjusted EBITDA Expense (3)

 

707,810

 

96,786

 

219,356

 

1,074

 

28,277

 

(10,217)

 

1,043,086

Segment Adjusted EBITDA (4)(5)

 

488,634

 

29,691

 

56,074

 

(16,777)

 

(868)

 

-

 

556,754

Total assets (6)

 

1,064,268

 

84,162

 

539,194

 

306,002

 

53,887

 

(865)

 

2,046,648

Capital expenditures (7)

 

163,595

 

8,758

 

51,154

 

35,502

 

4,962

 

-

 

263,971

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reportable segment results as of and for the nine months ended September 30, 2012 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues (2)

 

$

1,082,057

 

$

122,989

 

247,104

 

$

-

 

$

46,674

 

$

(13,933)

 

$

1,484,891

Segment Adjusted EBITDA Expense (3)

 

652,231

 

96,920

 

202,449

 

(1,517)

 

42,562

 

(13,933)

 

978,712

Segment Adjusted EBITDA (4)(5)

 

419,955

 

25,618

 

37,326

 

(10,072)

 

4,661

 

-

 

477,488

Total assets (6)

 

1,030,860

 

81,867

 

521,156

 

198,631

 

34,580

 

(825)

 

1,866,269

Capital expenditures (7)

 

173,656

 

25,143

 

82,320

 

74,712

 

11,123

 

-

 

366,954

 

(1)  The elimination column represents the elimination of intercompany transactions and is primarily comprised of sales from the Matrix Group to our mining operations.

 

(2)  Revenues included in the Other and Corporate column are primarily attributable to the Matrix Group revenues, Mt. Vernon transloading revenues, administrative service revenues from affiliates and brokerage sales.

 

(3)  Segment Adjusted EBITDA Expense includes operating expenses, outside coal purchases and other income. Transportation expenses are excluded as these expenses are passed through to our customers and consequently we do not realize any gain or loss on transportation revenues.  We review Segment Adjusted EBITDA Expense per ton for cost trends.

 

The following is a reconciliation of consolidated Segment Adjusted EBITDA Expense to operating expenses (excluding depreciation, depletion and amortization) (in thousands):

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

Segment Adjusted EBITDA Expense

 

$

 346,309   

 

$

 342,814   

 

$

 1,043,086   

 

$

 978,712   

Outside coal purchases

 

(636)  

 

(4,424)  

 

(2,028)  

 

(34,759)  

Other income

 

372   

 

254   

 

999   

 

2,853   

Operating expenses (excluding depreciation, depletion and amortization)

 

$

 346,045   

 

$

 338,644   

 

$

 1,042,057   

 

$

 946,806   

 

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(4)  Segment Adjusted EBITDA is defined as net income before net interest expense, income taxes, depreciation, depletion and amortization, general and administrative expenses and asset impairment charge.  Management therefore is able to focus solely on the evaluation of segment operating profitability as it relates to our revenues and operating expenses, which are primarily controlled by our segments.  Consolidated Segment Adjusted EBITDA is reconciled to net income as follows (in thousands):

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

Consolidated Segment Adjusted EBITDA

 

$

173,376

 

$

160,170

 

$

556,754

 

$

477,488

General and administrative

 

(14,893)

 

(13,598)

 

(46,736)

 

(43,939)

Depreciation, depletion and amortization

 

(66,099)

 

(59,781)

 

(198,688)

 

(154,923)

Asset impairment charge

 

-

 

(19,031)

 

-

 

(19,031)

Interest expense, net

 

(5,916)

 

(7,352)

 

(18,440)

 

(21,388)

Income tax benefit

 

718

 

102

 

1,307

 

726

Net income

 

$

87,186

 

$

60,510

 

$

294,197

 

$

238,933

 

(5)  Includes equity in income (loss) of affiliates for the three and nine months ended September 30, 2013 of $(6.2) million and $(16.3) million, respectively, included in the White Oak segment and $0.2 million and $0.7 million, respectively, included in the Other and Corporate segment.  Includes equity in income (loss) of affiliates for the three and nine months ended September 30, 2012 of $(3.0) million and $(11.6) million, respectively, included in the White Oak segment and $0.1 million and $0.5 million, respectively, included in the Other and Corporate segment.

 

(6)  Total assets for the White Oak and Other and Corporate Segments include investments in affiliate of $122.7 million and $1.6 million, respectively, at September 30, 2013 and $72.7 million and $1.6 million, respectively, at September 30, 2012.

 

(7)  Capital expenditures shown above include funding to White Oak of $2.5 million and $21.3 million, respectively, for the three and nine months ended September 30, 2013, and $34.6 million for the three and nine months ended September 30, 2012, for the acquisition and development of coal reserves in our condensed consolidated statements of cash flow.

 

14.         SUBSEQUENT EVENTS

 

On October 28, 2013, we declared a quarterly distribution for the quarter ended September 30, 2013, of $1.175 per unit, on all common units outstanding, totaling approximately $74.2 million (which includes our managing general partner’s incentive distributions), payable on November 14, 2013 to all unitholders of record as of November 7, 2013.

 

Other than those events described above and in Note 7, there were no other subsequent events.

 

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Table of Contents

 

ITEM 2.             MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Significant relationships referenced in this management’s discussion and analysis of financial condition and results of operations include the following:

 

·

References to “we,” “us,” “our” or “ARLP Partnership” mean the business and operations of Alliance Resource Partners, L.P., the parent company, as well as its consolidated subsidiaries.

·

References to “ARLP” mean Alliance Resource Partners, L.P., individually as the parent company, and not on a consolidated basis.

·

References to “MGP” mean Alliance Resource Management GP, LLC, the managing general partner of Alliance Resource Partners, L.P., also referred to as our managing general partner.

·

References to “SGP” mean Alliance Resource GP, LLC, the special general partner of Alliance Resource Partners, L.P., also referred to as our special general partner.

·

References to “Intermediate Partnership” mean Alliance Resource Operating Partners, L.P., the intermediate partnership of Alliance Resource Partners, L.P., also referred to as our intermediate partnership.

·

References to “Alliance Coal” mean Alliance Coal, LLC, the holding company for the operations of Alliance Resource Operating Partners, L.P., also referred to as our operating subsidiary.

·

References to “AHGP” mean Alliance Holdings GP, L.P., individually as the parent company, and not on a consolidated basis.

·

References to “AGP” mean Alliance GP, LLC, the general partner of Alliance Holdings GP, L.P.

 

Summary

 

We are a diversified producer and marketer of coal primarily to major United States (“U.S.”) utilities and industrial users. We began mining operations in 1971 and, since then, have grown through acquisitions and internal development to become the third largest coal producer in the eastern U.S. We operate eleven underground mining complexes in Illinois, Indiana, Kentucky, Maryland and West Virginia, including the new Tunnel Ridge, LLC (“Tunnel Ridge”) longwall mine in West Virginia and the Onton No. 9 mining complex (“Onton mine”) in west Kentucky acquired on April 2, 2012.  We are constructing a new mine in southern Indiana and operate a coal loading terminal on the Ohio River at Mt. Vernon, Indiana.  Also, we own a preferred equity interest in White Oak Resources LLC (“White Oak”) and are purchasing and funding development of reserves and have constructed and are operating surface facilities at White Oak’s new longwall mining complex in southern Illinois.  As is customary in the coal industry, we have entered into long-term coal supply agreements with many of our customers.

 

We have five reportable segments: Illinois Basin, Central Appalachia, Northern Appalachia White Oak and Other and Corporate.  The first three reportable segments correspond to the three major coal producing regions in the eastern U.S.  Factors similarly affecting financial performance of our operating segments within each of these three reportable segments include coal quality, coal seam height, mining and transportation methods and regulatory issues.  The White Oak segment includes our activities associated with the White Oak longwall Mine No. 1 development project in southern Illinois more fully described below.

 

·      Illinois Basin reportable segment is comprised of multiple operating segments, including Webster County Coal, LLC’s Dotiki mining complex (“Dotiki”), Gibson County Coal, LLC’s mining complex, which includes the Gibson North mine and Gibson South project, Hopkins County Coal, LLC’s Elk Creek mining complex, White County Coal, LLC’s Pattiki mining complex (“Pattiki”), Warrior Coal, LLC’s mining complex (“Warrior”), Sebree Mining, LLC’s mining complex (“Sebree”), which includes the Onton mine, Steamport, LLC and certain undeveloped coal reserves, River View Coal, LLC’s mining complex (“River View”), CR Services, LLC, and certain properties of Alliance Resource Properties, LLC (“Alliance Resource Properties”), ARP

 

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Table of Contents

 

Sebree, LLC and ARP Sebree South, LLC.  The development of the Gibson South mine is currently underway and we are in the process of permitting the Sebree property for future mine development.  For information regarding the acquisition of the Onton mine, which was added to the Illinois Basin segment in April 2012, please read “Item 1. Financial Statements (Unaudited) – Note 4. Acquisitions” of this Quarterly Report on Form 10-Q.

 

·      Central Appalachian reportable segment is comprised of two operating segments, the Pontiki Coal, LLC (“Pontiki”) and MC Mining, LLC (“MC Mining”) mining complexes.  Please read “Item 1. Financial Statements (Unaudited) – Note 5. Asset Impairment Charge” of this Quarterly Report on Form 10-Q for additional information regarding this asset impairment.

 

·      Northern Appalachian reportable segment is comprised of multiple operating segments, including the Mettiki mining complex, the Tunnel Ridge mining complex and the Penn Ridge Coal, LLC (“Penn Ridge”) property.  The Mettiki mining complex includes Mettiki Coal (WV), LLC’s Mountain View mine, Mettiki Coal, LLC’s preparation plant and a small third-party mining operation which has been idled since July 2013.  In May 2012, longwall production began at the Tunnel Ridge mine.  We are in the process of permitting the Penn Ridge property for future mine development.

 

·      White Oak reportable segment is comprised of two operating segments, Alliance WOR Properties, LLC (“WOR Properties”) and Alliance WOR Processing, LLC (“WOR Processing”).  WOR Processing includes both the surface operations at White Oak and the equity investment in White Oak.  WOR Properties owns reserves acquired from White Oak and is committed to acquiring additional reserves from White Oak under lease-back arrangements.  WOR Properties has also provided certain funding to White Oak for development of these reserves.  The White Oak reportable segment also includes two loans to White Oak from our Intermediate Partnership, one for the acquisition of mining equipment (which was paid off and terminated in June 2012) and another to construct certain surface facilities. For more information on White Oak, please read “Item 1. Financial Statements (Unaudited) – Note 8. White Oak Transactions” of this Quarterly Report on Form 10-Q.

 

·      Other and Corporate reportable segment includes marketing and administrative expenses, Alliance Service, Inc. (“ASI”) and its subsidiary, Matrix Design Group, LLC (“Matrix Design”), Alliance Design Group, LLC (collectively, Matrix Design and Alliance Design Group, LLC are referred to as the “Matrix Group”), ASI’s ownership of aircraft, the Mt. Vernon Transfer Terminal, LLC (“Mt. Vernon”) dock activities, coal brokerage activity, our equity investment in Mid-America Carbonates, LLC (“MAC”) and certain activities of Alliance Resource Properties.

 

Pontiki Mine

 

Pontiki’s mining complex in Martin County, Kentucky was idled from August 29, 2012 to November 25, 2012.  The Mine Safety and Health Administration (“MSHA”) ordered the closure of the coal preparation plant and associated surface facilities at the Pontiki mining complex following the failure on August 23, 2012 of a belt line between two clean coal stacking tubes.  MSHA required a comprehensive structural inspection of all the surface facilities by an independent bridge engineering firm before the surface facilities could be reopened.

 

As a result of the above events, uncertainty regarding the future operations of the mine and the required additional repair costs, and our assessment of related risks, we concluded that indicators of impairment were present and the carrying value of the asset group representing the Pontiki mining complex (“Pontiki Assets”) was not fully recoverable as of September 30, 2012.  We estimated the fair value of the Pontiki Assets and determined it exceeded the carrying amount and accordingly, we recorded an asset impairment charge of $19.0 million for the three months ended September 30, 2012 (“2012 Quarter”).

 

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Table of Contents

 

Although the Pontiki mining complex resumed operations, significant uncertainty remained regarding market demand and pricing for coal from Pontiki beyond 2013.  On September 27, 2013, we issued Worker Adjustment and Retraining Notification (WARN) Act notices to all employees at Pontiki’s mining complex.  We plan to continue operations at the Pontiki mining complex until late November 2013 to fulfill commitments under existing sales contracts at which time the mine is expected to cease production.  Please also read “Item 1. Financial Statements (Unaudited) – Note 5. Asset Impairment Charge” of this Quarterly Report on Form 10-Q for additional information regarding this asset impairment.

 

Three Months Ended September 30, 2013 Compared to Three Months Ended September 30, 2012

 

We reported net income of $87.2 million for the three months ended September 30, 2013 (“2013 Quarter”) compared to $60.5 million for the 2012 Quarter. The increase of $26.7 million was principally due to increased coal sales and production volumes, which rose to 9.5 million tons sold and 9.7 million tons produced in the 2013 Quarter compared to 8.9 million tons sold and 9.0 million tons produced in the 2012 Quarter. The 2012 Quarter was also negatively impacted by the temporary idling of our Pontiki mining complex and the related non-cash impairment charge of $19.0 million. The increases in tons sold and tons produced resulted from increased volumes at the Tunnel Ridge, River View, Gibson North and Dotiki mines. Increased coal sales and production volumes led to increased operating expenses, which particularly impacted labor and related benefits expense, materials and supplies expense, maintenance cost and sales related expense. The increases in operating expenses were offset partially by lower outside coal purchases in the 2013 Quarter.

 

 

 

Three Months Ended September 30,

 

 

2013

 

2012

 

2013

 

2012

 

 

(in thousands)

 

(per ton sold)

Tons sold

 

9,504

 

8,910

 

N/A

 

N/A

Tons produced

 

9,682

 

9,000

 

N/A

 

N/A

Coal sales

 

$518,447

 

$499,003

 

$54.55

 

$56.00

Operating expenses and outside coal purchases

 

$346,681

 

$343,068

 

$36.48

 

$38.50

 

Coal sales.  Coal sales for the 2013 Quarter increased 3.9% to $518.4 million from $499.0 million for the 2012 Quarter.  The increase of $19.4 million in coal sales reflected the benefit of increased tons sold (contributing $33.2 million in additional coal sales) offset partially by lower average coal sales prices (reducing coal sales by $13.8 million).  Average coal sales prices in the 2013 Quarter decreased to $54.55 compared to $56.00 per ton in the 2012 Quarter, primarily as a result of the lack of coal sales into the metallurgical export markets.

 

Operating expenses and outside coal purchases.  Operating expenses and outside coal purchases combined increased slightly to $346.7 million for the 2013 Quarter from $343.1 million for the 2012 Quarter, primarily due to increased coal sales and production volumes partially offset by lower outside coal purchases.  On a per ton basis, operating expenses and outside coal purchases decreased 5.2% to $36.48 per ton sold.  In addition to the impact of increased production and sales volumes, operating expenses were impacted by various other factors, the most significant of which are discussed below:

 

·      Labor and benefit expenses per ton produced, excluding workers’ compensation, decreased 1.9% to $11.92 per ton in the 2013 Quarter from $12.15 per ton in the 2012 Quarter.  This decrease of $0.23 per ton was primarily attributable to lower labor costs per ton resulting from increased production at our Tunnel Ridge and Dotiki mines and improved coal recoveries from our River View and Gibson North mines, partially offset by reduced production at our Onton mine and higher employee benefits expense at our Mettiki mine.  The Onton mine temporarily ceased production in July 2013 due to unfavorable geological conditions and resumed full production in mid-August 2013;

 

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·      Workers’ compensation expenses per ton produced decreased to $0.41 per ton in the 2013 Quarter from $0.80 per ton in the 2012 Quarter.  The decrease of $0.39 per ton produced resulted primarily from increased production discussed above and favorable claim trends;

 

·      Contract mining expense decreased $2.4 million for the 2013 Quarter compared to the 2012 Quarter.  The decrease primarily reflects lower production from a third-party mining operation in our Northern Appalachian region due to reduced metallurgical coal export market opportunities;

 

·      Production taxes and royalties expenses (which were incurred as a percentage of coal sales prices and volumes) decreased $0.20 per produced ton sold in the 2013 Quarter compared to the 2012 Quarter primarily as a result of lower average coal sales prices for Northern Appalachian due to reduced sales of metallurgical coal;

 

·      Outside coal purchases decreased to $0.6 million for the 2013 Quarter from $4.4 million in the 2012 Quarter.  The decrease of $3.8 million was primarily attributable to reduced volumes of coal purchased for sale into the metallurgical export markets.  Coal purchase costs per ton are typically higher than our production costs per ton, thus significantly lower volumes of coal purchases in the 2013 Quarter reduced our overall total expenses per ton compared to the 2012 Quarter; and

 

·      Operating expenses per ton also decreased in the 2013 Quarter due to lower cost per ton beginning coal inventories in the 2013 Quarter.

 

Operating expenses and outside coal purchases per ton decreases discussed above were offset by the following per ton increases:

 

·      Material and supplies expenses per ton produced increased slightly to $11.96 per ton in the 2013 Quarter from $11.92 per ton in the 2012 Quarter.  The increase of $0.04 per ton produced resulted primarily from increases in cost for certain products and services, primarily roof support (increase of $0.31 per ton) and certain safety-related materials and supplies (increase of $0.30 per ton) partially offset by a decrease in outside expenses (decrease of $0.18 per ton), power and fuel used in the mining process (decrease of $0.10 per ton) and contract labor used in the mining process (decrease of $0.07 per ton).  Higher safety-related materials and supplies primarily resulted from activity at our Onton mine during the temporary halt of production operations discussed above; and

 

·      Operating expenses for the 2013 Quarter included $3.8 million related to the retirement of certain assets also resulting from the Onton mine’s previously mentioned adverse geological conditions.

 

Depreciation, depletion and amortization.  Depreciation, depletion and amortization expense increased to $66.1 million for the 2013 Quarter from $59.8 million for the 2012 Quarter.  The increase of $6.3 million was primarily attributable to increased production volumes mentioned above, as well as capital expenditures related to production expansion and infrastructure investments at various operations.

 

General and administrative.  General and administrative expenses for the 2013 Quarter increased to $14.9 million compared to $13.6 million in the 2012 Quarter.  The increase of $1.3 million was primarily due to increases in incentive compensation expense.

 

Asset impairment charge.  In the 2012 Quarter, we recorded an asset impairment charge of $19.0 million associated with the long-lived assets at our Pontiki mining complex as discussed in more detail above and in “Item 1. Financial Statements (Unaudited) – Note 5. Asset Impairment Charge.”

 

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Table of Contents

 

Interest expense.  Interest expense, net of capitalized interest, decreased to $6.2 million for the 2013 Quarter from $7.4 million for the 2012 Quarter.  The decrease of $1.2 million was principally attributable to increased capitalized interest on our equity investment in White Oak, as well as reduced interest expense resulting from our August 2013 principal repayment of $18.0 million on our original senior notes issued in 1999.  This decrease was partially offset by increased borrowings under our revolving credit facilities during the 2013 Quarter.  The revolving credit facilities are discussed in more detail below under “–Debt Obligations.”

 

Equity in loss of affiliates, net.  Equity in loss of affiliates, net includes our equity investments in MAC and White Oak.  For the 2013 Quarter, equity in loss of affiliates was $6.0 million compared to $2.8 million for the 2012 Quarter, which was primarily attributable to losses allocated to us from our equity investment in White Oak.

 

Transportation revenues and expenses.  Transportation revenues and expenses were $11.6 million and $5.6 million for the 2013 and 2012 Quarters, respectively.  The increase of $6.0 million was primarily attributable to an increase in average transportation rates in the 2013 Quarter related to new export sales from our Warrior mine.  The cost of transportation services are passed through to our customers.  Consequently, we do not realize any gain or loss on transportation revenues.

 

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Table of Contents

 

Segment Adjusted EBITDA.  Our 2013 Quarter Segment Adjusted EBITDA increased $13.2 million, or 8.2%, to $173.4 million from the 2012 Quarter Segment Adjusted EBITDA of $160.2 million.  Segment Adjusted EBITDA, tons sold, coal sales, other sales and operating revenues and Segment Adjusted EBITDA Expense by segment are (in thousands):

 

 

 

Three Months Ended
September 30,

 

 

 

 

2013

 

2012

 

Increase/(Decrease)

Segment Adjusted EBITDA

 

 

 

 

 

 

 

 

Illinois Basin

 

$

156,790

 

$

140,329

 

$

16,461

 

11.7

%

Central Appalachia

 

9,775

 

6,228

 

3,547

 

57.0

%

Northern Appalachia

 

12,864

 

15,813

 

(2,949)

 

(18.6

)%

White Oak

 

(6,190)

 

(3,188)

 

(3,002)

 

(94.2

)%

Other and Corporate

 

137

 

988

 

(851)

 

(86.1

)%

Elimination

 

-

 

-

 

-

 

-

 

Total Segment Adjusted EBITDA (2)

 

$

173,376

 

$

160,170

 

$

13,206

 

8.2

%

 

 

 

 

 

 

 

 

 

 

Tons sold

 

 

 

 

 

 

 

 

 

Illinois Basin

 

7,598

 

6,919

 

679

 

9.8

%

Central Appalachia

 

490

 

523

 

(33)

 

(6.3

)%

Northern Appalachia

 

1,405

 

1,468

 

(63)

 

(4.3

)%

White Oak

 

-

 

-

 

-

 

-

 

Other and Corporate

 

11

 

-

 

11

 

(1

)

Elimination

 

-

 

-

 

-

 

-

 

Total tons sold

 

9,504

 

8,910

 

594

 

6.7

%

 

 

 

 

 

 

 

 

 

 

Coal sales

 

 

 

 

 

 

 

 

 

Illinois Basin

 

$

396,056

 

$

361,206

 

$

34,850

 

9.6

%

Central Appalachia

 

39,959

 

41,790

 

(1,831)

 

(4.4

)%

Northern Appalachia

 

81,440

 

95,988

 

(14,548)

 

(15.2

)%

White Oak

 

-

 

-

 

-

 

-

 

Other and Corporate

 

992

 

19

 

973

 

(1

)

Elimination

 

-

 

-

 

-

 

-

 

Total coal sales

 

$

518,447

 

$

499,003

 

$

19,444

 

3.9

%

 

 

 

 

 

 

 

 

 

 

Other sales and operating revenues

 

 

 

 

 

 

 

 

 

Illinois Basin

 

$

696

 

$

853

 

$

(157)

 

(18.4

)%

Central Appalachia

 

165

 

-

 

165

 

(1

)

Northern Appalachia

 

839

 

1,587

 

(748)

 

(47.1

)%

White Oak

 

566

 

-

 

566

 

(1

)

Other and Corporate

 

7,708

 

8,501

 

(793)

 

(9.3

)%

Elimination

 

(2,746)

 

(4,128)

 

1,382

 

33.5

%

Total other sales and operating revenues

 

$

7,228

 

$

6,813

 

$

415

 

6.1

%

 

 

 

 

 

 

 

 

 

 

Segment Adjusted EBITDA Expense

 

 

 

 

 

 

 

 

 

Illinois Basin

 

$

239,962

 

$

221,731

 

$

18,231

 

8.2

%

Central Appalachia

 

30,348

 

35,563

 

(5,215)

 

(14.7

)%

Northern Appalachia

 

69,415

 

81,761

 

(12,346)

 

(15.1

)%

White Oak

 

546

 

174

 

372

 

(1

)

Other and Corporate

 

8,784

 

7,713

 

1,071

 

13.9

%

Elimination

 

(2,746)

 

(4,128)

 

1,382

 

33.5

%

Total Segment Adjusted EBITDA Expense (3)

 

$

346,309

 

$

342,814

 

$

3,495

 

1.0

%

 

(1)  Percentage change was greater than or equal to 100%.

 

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(2)  Segment Adjusted EBITDA (a non-GAAP financial measure) is defined as net income before net interest expense, income taxes, depreciation, depletion and amortization, general and administrative expenses and asset impairment charge.  Segment Adjusted EBITDA is a key component of consolidated EBITDA, which is used as a supplemental financial measure by management and by external users of our financial statements such as investors, commercial banks, research analysts and others, to assess:

 

·      the financial performance of our assets without regard to financing methods, capital structure or historical cost basis;

·      the ability of our assets to generate cash sufficient to pay interest costs and support our indebtedness;

·      our operating performance and return on investment compared to those of other companies in the coal energy sector, without regard to financing or capital structures; and

·      the viability of acquisitions and capital expenditure projects and the overall rates of return on alternative investment opportunities.

 

Segment Adjusted EBITDA is also used as a supplemental financial measure by our management for reasons similar to those stated in the previous explanation of EBITDA.  In addition, the exclusion of corporate general and administrative expenses from Segment Adjusted EBITDA allows management to focus solely on the evaluation of segment operating profitability as it relates to our revenues and operating expenses, which are primarily controlled by our segments.

 

The following is a reconciliation of consolidated Segment Adjusted EBITDA to net income, the most comparable GAAP financial measure (in thousands):

 

 

 

Three Months Ended

 

 

September 30,

 

 

2013

 

2012

 

 

 

 

 

Segment Adjusted EBITDA

 

 $

173,376

 

 $

160,170

 

 

 

 

 

General and administrative

 

(14,893)

 

(13,598)

Depreciation, depletion and amortization

 

(66,099)

 

(59,781)

Asset impairment charge

 

-

 

(19,031)

Interest expense, net

 

(5,916)

 

(7,352)

Income tax benefit

 

718

 

102

Net income

 

 $

87,186

 

 $

60,510

 

(3)  Segment Adjusted EBITDA Expense (a non-GAAP financial measure) includes operating expenses, outside coal purchases and other income.  Transportation expenses are excluded as these expenses are passed through to our customers and, consequently, we do not realize any gain or loss on transportation revenues.  Segment Adjusted EBITDA Expense is used as a supplemental financial measure by our management to assess the operating performance of our segments.  Segment Adjusted EBITDA Expense is a key component of EBITDA in addition to coal sales and other sales and operating revenues.  The exclusion of corporate general and administrative expenses from Segment Adjusted EBITDA Expense allows management to focus solely on the evaluation of segment operating performance as it primarily relates to our operating expenses.  Outside coal purchases are included in Segment Adjusted EBITDA Expense because tons sold and coal sales include sales from outside coal purchases.

 

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The following is a reconciliation of consolidated Segment Adjusted EBITDA Expense to operating expense, the most comparable GAAP financial measure (in thousands):

 

 

 

Three Months Ended

 

 

September 30,

 

 

2013

 

2012

 

 

 

 

 

Segment Adjusted EBITDA Expense

 

 $

346,309

 

 $

342,814

 

 

 

 

 

Outside coal purchases

 

(636)

 

(4,424)

Other income

 

372

 

254

Operating expense (excluding depreciation, depletion and amortization)

 

 $

346,045

 

 $

338,644

 

Illinois Basin – Segment Adjusted EBITDA increased 11.7% to $156.8 million in the 2013 Quarter from $140.3 million in the 2012 Quarter.  This increase of $16.5 million was primarily attributable to higher tons sold which increased 9.8% to 7.6 million tons in the 2013 Quarter.  Coal sales increased 9.6% to $396.1 million in the 2013 Quarter compared to $361.2 million in the 2012 Quarter. The sales increase of $34.9 million primarily reflects increased tons sold and produced from our River View, Gibson North and Dotiki mines, offset partially by the temporary halt of production operations at the Onton mine due to adverse geological conditions during the 2013 Quarter.  Total Segment Adjusted EBITDA Expense for the 2013 Quarter increased 8.2% to $240.0 million from $221.7 million in the 2012 Quarter primarily due to increased sales and production volumes noted above and the impact of the temporary halt of production at the Onton mine discussed above.  Although Segment Adjusted EBITDA Expense increased, Segment Adjusted EBITDA Expense per ton decreased $0.46 per ton sold to $31.58 from $32.04 per ton sold, primarily as a result of increased coal production discussed above as well as certain cost per ton decreases described above under “–Operating expenses and outside coal purchases.”

 

Central Appalachia – Segment Adjusted EBITDA increased 57.0% to $9.8 million for the 2013 Quarter compared to $6.2 million in the 2012 Quarter.  The increase of $3.6 million was primarily attributable to higher coal sales prices, increased production and lower inventory cost in the 2013 Quarter compared to the 2012 Quarter.  This increase was offset partially by a decrease in coal sales volumes, primarily as a result of timing differences in customer shipments during the 2013 Quarter compared to the 2012 Quarter.  Segment Adjusted EBITDA Expense for the 2013 Quarter decreased 14.7% to $30.3 million from $35.6 million in the 2012 Quarter and decreased $6.15 per ton sold to $61.89 compared to $68.04 per ton in the 2012 Quarter, primarily as a result of increased production, lower inventory costs and repair costs in the 2013 Quarter.  Repair costs and production in the 2012 Quarter were negatively impacted by previously mentioned regulatory actions at our Pontiki mine.  For additional detail related to the Pontiki mining complex read “Item 1. Financial Statements (Unaudited) – Note 5. Asset Impairment Charge.”

 

Northern Appalachia – Segment Adjusted EBITDA decreased to $12.9 million for the 2013 Quarter as compared to $15.8 million in the 2012 Quarter. This decrease of $2.9 million was primarily attributable to the lack of coal sales into the metallurgical export markets, resulting in a lower average sales price of $57.97 per ton sold for the 2013 Quarter compared to $65.43 per ton sold for the 2012 Quarter, as well as lower tons sold, which decreased 4.3% compared to the 2012 Quarter.  The decrease in tons sold was due to the timing of shipments from Mettiki in the 2013 Quarter compared to the 2012 Quarter, offset in part by increased coal sales from the continued ramp-up of longwall production at the Tunnel Ridge mine.  Segment Adjusted EBITDA Expense for the 2013 Quarter decreased 15.1% to $69.4 million from $81.8 million in the 2012 Quarter and decreased $6.32 per ton sold to $49.41 from $55.73 per ton sold, primarily as a result of improved productivity from our Tunnel Ridge mine long-wall operations which began in May 2012, reduced outside coal purchases, contract mining expenses and coal processing expenses at our Mettiki mine all resulting from the lack of coal sales into the metallurgical export markets, partially offset by higher employee benefit costs at Mettiki.

 

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Table of Contents

 

White Oak – Segment Adjusted EBITDA was $(6.2) million and $(3.2) million, respectively, in the 2013 and 2012 Quarters primarily attributable to losses allocated to us due to our equity interest in White Oak.  For more information on White Oak, please read “Item 1. Financial Statements (Unaudited) – Note 8. White Oak Transactions” of this Quarterly Report on Form 10-Q.

 

Other and Corporate – Segment Adjusted EBITDA decreased $0.9 million in the 2013 Quarter from the 2012 Quarter.  This decrease was primarily attributable to lower sales of Matrix safety equipment.  Segment Adjusted EBITDA Expense increased 13.9% to $8.8 million for the 2013 Quarter compared to $7.7 million for the 2012 Quarter, primarily due to higher outside coal purchases and increases in component expenses by the Matrix group.

 

Nine Months Ended September 30, 2013 Compared to Nine Months Ended September 30, 2012

 

We reported net income of $294.2 million for the nine months ended September 30, 2013 (“2013 Period”) compared to $238.9 million for the nine months ended September 30, 2012 (“2012 Period”). This increase of $55.3 million was principally due to record coal sales and production volumes. We had tons sold of 29.0 million tons and tons produced of 29.6 million tons in the 2013 Period compared to 25.4 million tons sold and 25.7 million tons produced in the 2012 Period. The 2012 Period was also negatively impacted by the temporary idling of our Pontiki mining complex and the related non-cash impairment charge of $19.0 million. The increase in tons sold and produced resulted from increased production at the Tunnel Ridge mine, which began longwall production in May 2012, increased tons produced and sold from our River View and Gibson North mines and the addition of the Onton mine in April 2012. Higher operating expenses during the 2013 Period resulted primarily from the record coal sales and production volumes, which particularly impacted labor and related benefits expense, materials and supplies expense, maintenance costs and sales-related expenses. These increases in operating expenses were offset partially by lower outside coal purchases in the 2013 Period.

 

 

 

Nine Months Ended September 30,

 

 

2013

 

2012

 

2013

 

2012

 

 

(in thousands)

 

(per ton sold)

Tons sold

 

29,019

 

25,383

 

N/A

 

N/A

Tons produced

 

29,621

 

25,697

 

N/A

 

N/A

Coal sales

 

$1,594,530

 

 $

1,441,107

 

$54.95

 

$56.77

Operating expenses and outside coal purchases

 

$1,044,085

 

 $

981,565

 

$35.98

 

$38.67

 

Coal sales.  Coal sales for the 2013 Period increased 10.6% to $1.6 billion from $1.4 billion for the 2012 Period.  The increase of $153.4 million in coal sales reflected the benefit of increased tons sold (contributing $206.2 million in additional coal sales), partially offset by lower average coal sales prices (reducing coal sales by $52.8 million).  Average coal sales prices decreased $1.82 per ton sold to $54.95 per ton in the 2013 Period as compared to $56.77 per ton sold in the 2012 Period, primarily due to reduced coal sales into the metallurgical export market.

 

Operating expenses and outside coal purchases.  Operating expenses and outside coal purchases combined increased 6.4% to $1.0 billion for the 2013 Period from $981.6 million for the 2012 Period primarily due to record coal sales and production volumes.  On a per ton basis, operating expenses and outside coal purchases decreased 7.0% to $35.98 per ton sold.  Operating expenses were impacted by various other factors, the most significant of which are discussed below:

 

·      Labor and benefit expenses per ton produced, excluding workers’ compensation, decreased 6.9% to $11.69 per ton in the 2013 Period from $12.56 per ton in the 2012 Period.  This decrease of $0.87 per ton was primarily attributable to lower labor cost per ton resulting from increased production at our Tunnel Ridge mine, which began longwall production in May 2012, improved coal recoveries from our River View and Gibson North mines and improved geological conditions at our Pattiki and Dotiki mines, lower labor cost per ton at our Onton

 

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Table of Contents

 

mine despite a temporary halt of production in the 2013 Period and Pontiki’s lower cost per ton due to its temporary shutdown in the 2012 Period, both of which are discussed above, partially offset by higher employee benefits expense at our Mettiki mine, primarily medical related;

 

·      Workers’ compensation expenses per ton produced decreased to $0.61 per ton in the 2013 Period from $1.00 per ton in the 2012 Period.  The decrease of $0.39 per ton produced resulted primarily from increased production discussed above and favorable claim trends;

 

·      Material and supplies expenses per ton produced decreased 6.7% to $11.63 per ton in the 2013 Period from $12.46 per ton in the 2012 Period.  The decrease of $0.83 per ton produced resulted primarily from the benefits of increased production discussed above and a decrease in cost for certain products and services, primarily outside services (decrease of $0.27 per ton), certain ventilation-related materials and supplies (decrease of $0.18 per ton), roof support (decrease of $0.16 per ton) and power and fuel used in the mining process (decrease of $0.16 per ton);

 

·      Maintenance expenses per ton produced decreased 6.9% to $3.94 per ton in the 2013 Period from $4.23 per ton in the 2012 Period.  The decrease of $0.29 per ton produced was primarily from the benefits of newer equipment and increased production at our new Tunnel Ridge mine and improved coal recoveries at certain locations as discussed above;

 

·      Contract mining expenses decreased $4.5 million for the 2013 Period compared to the 2012 Period.  The decrease reflects lower production from a third-party mining operation in our Northern Appalachian region due to reduced metallurgical coal export market opportunities; and

 

·      Outside coal purchases decreased to $2.0 million for the 2013 Period compared to $34.8 million in the 2012 Period.  The decrease of $32.8 million was primarily attributable to decreased coal brokerage activity and reduced sales into the metallurgical coal export markets.  The cost per ton to purchase coal is typically higher than our cost per ton to produce coal, thus significantly lower volumes of coal purchases, like in the 2013 Period, generally reduce our overall total expenses per ton.

 

Operating expenses and outside coal purchases per ton decreases discussed above were partially offset by the following increases:

 

·      Operating expenses for the 2013 Period included $3.8 million related to the retirement of certain assets resulting from the Onton mine’s previously mentioned temporary halt in production; and

 

·      Capitalized development related to the construction of our new Tunnel Ridge mine ceased in May 2012 with the start-up of longwall production.  Accordingly, the above discussed operating expense decreases in the 2013 Period were offset partially by the capitalization of $19.0 million of mine development costs at Tunnel Ridge in the 2012 Period.

 

General and administrative.  General and administrative expenses for the 2013 Period increased to $46.7 million compared to $43.9 million in the 2012 Period.  The increase of $2.8 million was primarily due to increases in incentive compensation expense.

 

Other sales and operating revenues.  Other sales and operating revenues are principally comprised of Mt. Vernon transloading revenues, Matrix Design sales and other outside services and administrative services revenue from affiliates.  Other sales and operating revenues decreased to $20.9 million for the 2013 Period from $26.1 million for the 2012 Period.  The decrease of $5.2 million was

 

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Table of Contents

 

primarily attributable to amounts received from a customer in the 2012 Period for the partial buy-out of a certain Northern Appalachian coal contract.

 

Depreciation, depletion and amortization.  Depreciation, depletion and amortization expense increased to $198.7 million for the 2013 Period from $154.9 million for the 2012 Period.  The increase of $43.8 million was primarily attributable to additional depreciation related to the start-up of longwall production at the Tunnel Ridge mine, which began in May 2012, the addition of the Onton mine in April 2012 and capital expenditures related to production expansion and infrastructure improvements at various other operations.

 

Asset impairment charge.  In the 2012 Period, we recorded an asset impairment charge of $19.0 million associated with the long-lived assets at our Pontiki mining complex as discussed in more detail above and in “Item 1. Financial Statements (Unaudited) – Note 5. Asset Impairment Charge.”

 

Interest expense.  Interest expense, net of capitalized interest, decreased to $19.0 million for the 2013 Period from $21.6 million for the 2012 Period.  The decrease of $2.6 million was principally attributable to reduced interest expense resulting from our August 2013 and 2012 principal repayments of $18.0 million on our original senior notes issued in 1999, reduced interest expense resulting from lower rates and fees under our term loan and revolving credit facility entered into in May 2012, higher capitalized interest on our equity investment in White Oak in the 2013 Period and $1.1 million of deferred debt issuance costs related to the early termination of the $300 million term loan in the 2012 Period.  These decreases were partially offset by increased borrowings under our revolving credit facilities in the 2013 Period.  The term loan and revolving credit facilities are discussed in more detail below under “–Debt Obligations.”

 

Equity in loss of affiliates, net.  Equity in loss of affiliates, net includes our equity investments in MAC and White Oak.  For the 2013 Period, equity in loss of affiliates was $15.6 million compared to $11.0 million for the 2012 Period, which was primarily attributable to losses allocated to us due to our equity investment in White Oak.

 

Transportation revenues and expenses.  Transportation revenues and expenses were $23.5 million and $17.7 million for the 2013 and 2012 Periods, respectively.  The increase of $5.8 million was attributable to an increase in average transportation rates in the 2013 Period primarily related to new export sales from our Warrior mine, as well as increased tonnage for which we arranged transportation at certain other mines.  The cost of transportation services are passed through to our customers.  Consequently, we do not realize any gain or loss on transportation revenues.

 

Other income.  Other income decreased to $1.0 million in the 2013 Period from $2.9 million in the 2012 Period.  The decrease of $1.9 million was primarily due to the cancellation fee paid in the 2012 Period to the Intermediate Partnership by White Oak related to the termination of the equipment financing agreement.  For more information on White Oak, please read “Item 1. Financial Statements (Unaudited) – Note 8. White Oak Transactions” of this Quarterly Report on Form 10-Q.

 

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Table of Contents

 

Segment Adjusted EBITDA.  Our 2013 Period Segment Adjusted EBITDA increased $79.3 million, or 16.6%, to $556.8 million from the 2012 Period Segment Adjusted EBITDA of $477.5 million.  Segment Adjusted EBITDA, tons sold, coal sales, other sales and operating revenues and Segment Adjusted EBITDA Expense by segment are (in thousands):

 

 

 

Nine Months Ended
September 30,

 

 

 

 

2013

 

2012

 

Increase/(Decrease)

Segment Adjusted EBITDA

 

 

 

 

 

 

 

 

Illinois Basin

 

$

488,634

 

$

419,955

 

$

68,679

 

16.4

%

Central Appalachia

 

29,691

 

25,618

 

4,073

 

15.9

%

Northern Appalachia

 

56,074

 

37,326