10-Q 1 a12-22453_110q.htm FORM 10-Q

Table of Contents

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 

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

 

For the quarterly period ended September 30, 2012

 

OR

 

o                   TRANSITION 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

 

73-1564280

(State or other jurisdiction of
incorporation or organization)

 

(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 o 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 o 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 o

 

 

 

Non-Accelerated Filer o

 

Smaller Reporting Company o

(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). o Yes x No

 

As of November 8, 2012, 36,874,949 common units are outstanding.

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

 

 

Page

 

 

PART I

 

FINANCIAL INFORMATION

 

 

 

ITEM 1.

Financial Statements (Unaudited)

 

 

 

 

 

ALLIANCE RESOURCE PARTNERS, L.P. AND SUBSIDIARIES

 

 

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2012 and December 31, 2011

1

 

 

 

 

Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2012 and 2011

2

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2012 and 2011

3

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 and 2011

4

 

 

 

 

Notes to Condensed Consolidated Financial Statements

5

 

 

 

ITEM 2.

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

20

 

 

 

ITEM 3.

Quantitative and Qualitative Disclosures about Market Risk

38

 

 

 

ITEM 4.

Controls and Procedures

39

 

 

 

 

Forward-Looking Statements

40

 

 

 

PART II

 

OTHER INFORMATION

 

 

 

ITEM 1.

Legal Proceedings

42

 

 

 

ITEM 1A.

Risk Factors

42

 

 

 

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

42

 

 

 

ITEM 3.

Defaults upon Senior Securities

42

 

 

 

ITEM 4.

Mine Safety Disclosures

42

 

 

 

ITEM 5.

Other Information

42

 

 

 

ITEM 6.

Exhibits

43

 

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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,

 

 

 

2012

 

2011

 

ASSETS

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

Cash and cash equivalents

 

$

2,061

 

$

273,528

 

Trade receivables

 

152,826

 

128,643

 

Other receivables

 

1,432

 

3,525

 

Due from affiliates

 

191

 

5,116

 

Inventories

 

63,923

 

33,837

 

Advance royalties

 

9,038

 

7,560

 

Prepaid expenses and other assets

 

10,185

 

11,945

 

Total current assets

 

239,656

 

464,154

 

 

 

 

 

 

 

PROPERTY, PLANT AND EQUIPMENT:

 

 

 

 

 

Property, plant and equipment, at cost

 

2,278,297

 

1,974,520

 

Less accumulated depreciation, depletion and amortization

 

(784,123

)

(793,200

)

Total property, plant and equipment, net

 

1,494,174

 

1,181,320

 

 

 

 

 

 

 

OTHER ASSETS:

 

 

 

 

 

Advance royalties

 

26,972

 

27,916

 

Equity investments in affiliates

 

74,329

 

40,118

 

Other long-term assets

 

31,138

 

18,010

 

Total other assets

 

132,439

 

86,044

 

TOTAL ASSETS

 

$

1,866,269

 

$

1,731,518

 

 

 

 

 

 

 

LIABILITIES AND PARTNERS’ CAPITAL

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

Accounts payable

 

$

113,316

 

$

96,869

 

Due to affiliates

 

395

 

494

 

Accrued taxes other than income taxes

 

19,126

 

15,873

 

Accrued payroll and related expenses

 

42,233

 

35,876

 

Accrued interest

 

6,320

 

2,195

 

Workers’ compensation and pneumoconiosis benefits

 

9,488

 

9,511

 

Current capital lease obligations

 

1,019

 

676

 

Other current liabilities

 

22,900

 

15,326

 

Current maturities, long-term debt

 

18,000

 

18,000

 

Total current liabilities

 

232,797

 

194,820

 

 

 

 

 

 

 

LONG-TERM LIABILITIES:

 

 

 

 

 

Long-term debt, excluding current maturities

 

693,000

 

686,000

 

Pneumoconiosis benefits

 

60,987

 

54,775

 

Accrued pension benefit

 

24,273

 

27,538

 

Workers’ compensation

 

74,862

 

64,520

 

Asset retirement obligations

 

76,695

 

70,836

 

Long-term capital lease obligations

 

18,865

 

2,497

 

Other liabilities

 

8,536

 

6,774

 

Total long-term liabilities

 

957,218

 

912,940

 

Total liabilities

 

1,190,015

 

1,107,760

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

 

 

 

 

 

PARTNERS CAPITAL:

 

 

 

 

 

Limited Partners - Common Unitholders 36,874,949 and 36,775,741 units outstanding, respectively

 

989,293

 

943,325

 

General Partners’ deficit

 

(274,534

)

(279,107

)

Accumulated other comprehensive loss

 

(38,505

)

(40,460

)

Total Partners’ Capital

 

676,254

 

623,758

 

TOTAL LIABILITIES AND PARTNERS’ CAPITAL

 

$

1,866,269

 

$

1,731,518

 

 

See notes to condensed consolidated financial statements.

 

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Table of Contents

 

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,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

SALES AND OPERATING REVENUES:

 

 

 

 

 

 

 

 

 

Coal sales

 

$

499,003

 

$

473,683

 

$

1,441,107

 

$

1,323,851

 

Transportation revenues

 

5,625

 

7,446

 

17,651

 

25,452

 

Other sales and operating revenues

 

6,813

 

6,618

 

26,133

 

19,648

 

Total revenues

 

511,441

 

487,747

 

1,484,891

 

1,368,951

 

 

 

 

 

 

 

 

 

 

 

EXPENSES:

 

 

 

 

 

 

 

 

 

Operating expenses (excluding depreciation, depletion and amortization)

 

338,644

 

294,771

 

946,806

 

835,006

 

Transportation expenses

 

5,625

 

7,446

 

17,651

 

25,452

 

Outside coal purchases

 

4,424

 

19,864

 

34,759

 

29,495

 

General and administrative

 

13,598

 

13,276

 

43,939

 

38,698

 

Depreciation, depletion and amortization

 

59,781

 

40,275

 

154,923

 

117,237

 

Asset impairment charge

 

19,031

 

 

19,031

 

 

Total operating expenses

 

441,103

 

375,632

 

1,217,109

 

1,045,888

 

 

 

 

 

 

 

 

 

 

 

INCOME FROM OPERATIONS

 

70,338

 

112,115

 

267,782

 

323,063

 

 

 

 

 

 

 

 

 

 

 

Interest expense (net of interest capitalized for the three and nine months ended September 30, 2012 and 2011 of $1,701, $170, $6,433 and $482, respectively)

 

(7,446

)

(8,782

)

(21,626

)

(27,248

)

Interest income

 

94

 

83

 

238

 

275

 

Equity in loss of affiliates, net

 

(2,832

)

 

(11,040

)

 

Other income

 

254

 

360

 

2,853

 

1,340

 

INCOME BEFORE INCOME TAXES

 

60,408

 

103,776

 

238,207

 

297,430

 

 

 

 

 

 

 

 

 

 

 

INCOME TAX BENEFIT

 

(102

)

(317

)

(726

)

(221

)

 

 

 

 

 

 

 

 

 

 

NET INCOME

 

$

60,510

 

$

104,093

 

$

238,933

 

$

297,651

 

 

 

 

 

 

 

 

 

 

 

GENERAL PARTNERS’ INTEREST IN NET INCOME

 

$

27,263

 

$

23,474

 

$

80,015

 

$

66,688

 

 

 

 

 

 

 

 

 

 

 

LIMITED PARTNERS’ INTEREST IN NET INCOME

 

$

33,247

 

$

80,619

 

$

158,918

 

$

230,963

 

 

 

 

 

 

 

 

 

 

 

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

 

$

0.89

 

$

2.16

 

$

4.25

 

$

6.19

 

 

 

 

 

 

 

 

 

 

 

DISTRIBUTIONS PAID PER LIMITED PARTNER UNIT

 

$

1.0625

 

$

0.9225

 

$

3.0775

 

$

2.6725

 

 

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE NUMBER OF UNITS OUTSTANDING — BASIC AND DILUTED

 

36,874,949

 

36,775,741

 

36,859,018

 

36,766,897

 

 

See notes to condensed consolidated financial statements.

 

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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,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

NET INCOME

 

$

60,510

 

$

104,093

 

$

238,933

 

$

297,651

 

 

 

 

 

 

 

 

 

 

 

OTHER COMPREHENSIVE INCOME:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Defined benefit pension plan

 

 

 

 

 

 

 

 

 

Amortization of actuarial loss

 

458

 

122

 

1,373

 

366

 

Total defined benefit pension plan adjustments

 

458

 

122

 

1,373

 

366

 

 

 

 

 

 

 

 

 

 

 

Pneumoconiosis benefits

 

 

 

 

 

 

 

 

 

Amortization of actuarial loss (gain)

 

194

 

(56

)

582

 

(167

)

Total pneumoconiosis benefits adjustments

 

194

 

(56

)

582

 

(167

)

 

 

 

 

 

 

 

 

 

 

OTHER COMPREHENSIVE INCOME

 

652

 

66

 

1,955

 

199

 

 

 

 

 

 

 

 

 

 

 

TOTAL COMPREHENSIVE INCOME

 

$

61,162

 

$

104,159

 

$

240,888

 

$

297,850

 

 

See notes to condensed consolidated financial statements.

 

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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,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

CASH FLOWS PROVIDED BY OPERATING ACTIVITIES

 

$

431,628

 

$

432,336

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Property, plant and equipment:

 

 

 

 

 

Capital expenditures

 

(332,353

)

(216,308

)

Changes in accounts payable and accrued liabilities

 

(4,024

)

511

 

Proceeds from sale of property, plant and equipment

 

114

 

465

 

Purchase of equity investments in affiliate

 

(43,100

)

(35,700

)

Payment for acquisition of business

 

(100,000

)

 

Payments to affiliate for acquisition and development of coal reserves

 

(34,601

)

(33,841

)

Advances/loans to affiliate

 

(2,229

)

 

Payments from affiliate

 

4,229

 

 

Other

 

546

 

810

 

Net cash used in investing activities

 

(511,418

)

(284,063

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Borrowings under term loan

 

250,000

 

 

Borrowings under revolving credit facility

 

150,000

 

 

Payments under revolving credit facility

 

(75,000

)

 

Payment on term loan

 

(300,000

)

 

Payment on long-term debt

 

(18,000

)

(18,000

)

Payments on capital lease obligations

 

(673

)

(595

)

Payment of debt issuance costs

 

(4,272

)

 

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

 

(3,734

)

(2,324

)

Cash contributions by General Partners

 

150

 

87

 

Distributions paid to Partners

 

(190,148

)

(159,826

)

Net cash used in financing activities

 

(191,677

)

(180,658

)

 

 

 

 

 

 

NET CHANGE IN CASH AND CASH EQUIVALENTS

 

(271,467

)

(32,385

)

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

 

273,528

 

339,562

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

 

$

2,061

 

$

307,177

 

 

 

 

 

 

 

SUPPLEMENTAL CASH FLOW INFORMATION:

 

 

 

 

 

Cash paid for interest

 

$

22,166

 

$

22,930

 

Cash paid for income taxes

 

$

 

$

300

 

 

 

 

 

 

 

NON-CASH INVESTING AND FINANCING ACTIVITY:

 

 

 

 

 

Accounts payable for purchase of property, plant and equipment

 

$

20,955

 

$

12,828

 

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

 

$

11,070

 

$

6,572

 

Assets acquired by capital lease

 

$

 

$

3,525

 

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 lease certain assets, including coal reserves and certain surface facilities, owned by SGP.

 

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.

 

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Table of Contents

 

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, 2012 and December 31, 2011, the results of our operations and comprehensive income for the three and nine months ended September 30, 2012 and 2011 and the cash flows for the nine months ended September 30, 2012 and 2011.  All of our intercompany transactions and accounts have been eliminated.

 

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, 2011.

 

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 May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”). ASU 2011-04 amends Accounting Standards Codification (“ASC”) 820, Fair Value Measurement, to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and International Financial Reporting Standards. ASU 2011-04 changes certain fair value measurement principles and enhances the disclosure requirements particularly for Level 3 fair value measurements. ASU 2011-04 was effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.  The adoption of ASU 2011-04 did not have a material impact on our condensed consolidated financial statements.

 

In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income (“ASU 2011-05”).  ASU 2011-05 removes the presentation options in ASC 220, Comprehensive Income, and requires entities to report components of comprehensive income in either a continuous statement of comprehensive income or two separate but consecutive statements.  Under the two statement approach, the first statement would include components of net income, and the second statement would include components of other comprehensive income (“OCI”).  ASU 2011-05 does not change the items that must be reported in OCI.  ASU 2011-05 was effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, and its provisions had to be applied retrospectively for all periods presented in the financial statements.  In December 2011, the FASB issued ASU 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05 (“ASU 2011-12”), which indefinitely deferred a provision of ASU 2011-05 that required entities to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement in which net income is presented and the statement in which OCI is

 

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presented.  The adoption of ASU 2011-05 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.                                      ACQUISITION OF BUSINESS

 

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.  The transaction includes the Onton No. 9 mining complex (“Onton mine”), which includes 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 is consistent with our general business strategy and complements our current coal mining operations.

 

The following table summarizes the consideration paid to Green River and the preliminary and final fair value allocation of assets acquired and liabilities assumed at the acquisition date, as well as the fair value adjustments made in the third quarter of 2012 (in thousands):

 

 

 

Preliminary as of
June 30, 2012

 

Adjustments

 

Final as of
September 30, 2012

 

 

 

 

 

 

 

 

 

Consideration paid

 

$

100,000

 

 

 

$

100,000

 

 

 

 

 

 

 

 

 

Recognized amounts of net tangible and intangible assets acquired and liabilities assumed:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inventories

 

547

 

 

547

 

Advance royalties

 

888

 

 

888

 

Property, plant and equipment, including mineral rights and leased facilities

 

117,292

 

(182

)

117,110

 

Noncompete agreement

 

1,100

 

100

 

1,200

 

Customer contracts, net

 

4,873

 

82

 

4,955

 

Permits

 

843

 

 

843

 

Capital lease obligation

 

(17,384

)

 

(17,384

)

Asset retirement obligation

 

(6,032

)

 

(6,032

)

Pneumoconiosis benefits

 

(2,127

)

 

(2,127

)

 

 

 

 

 

 

 

 

Net tangible and intangible assets acquired

 

$

100,000

 

 

 

$

100,000

 

 

During the quarter ended September 30, 2012, we finalized the purchase price allocation related to the assets acquired and liabilities assumed from Green River.  The adjustments to the preliminary fair values resulted from additional information obtained about facts in existence on April 2, 2012.  Prior financial statements have not been retrospectively adjusted due to immateriality.

 

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Intangible assets and liabilities related to coal supply agreements will be amortized over the average term of the contracts.  Mine permits will be amortized over the estimated useful life of the Onton mine and the noncompete agreement will be amortized over the term of the agreement.

 

The following unaudited pro forma information for the ARLP Partnership has been prepared for illustrative purposes and assumes that the business combination occurred on January 1, 2011.  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.

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2011

 

2012

 

2011

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

Total revenues

 

 

 

 

 

 

 

As reported

 

$

487,747

 

$

1,484,891

 

$

1,368,951

 

Pro forma

 

$

513,840

 

$

1,512,234

 

$

1,455,052

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

As reported

 

$

104,093

 

$

238,933

 

$

297,651

 

Pro forma

 

$

106,071

 

$

240,214

 

$

307,976

 

 

The revenues and net income related to the acquired business are reflected in our condensed consolidated statements of income beginning April 2, 2012 and totaled $52.8 million and $5.6 million, respectively, which are included in the total revenues and net income above for the nine months ended September 30, 2012.

 

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.  Acquisition costs related to the business acquired of $0.6 million were reclassified to the beginning of 2011 in preparation of the pro forma results, as the acquisition was assumed to have been completed January 1, 2011 for the pro forma presentation.

 

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

 

5.                                      ASSET IMPAIRMENT CHARGE

 

On October 2, 2012, we announced that Pontiki Coal, LLC’s (“Pontiki”) mining complex in Martin County, Kentucky had been idled since August 29, 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 (“Firm”) before the surface facilities could be reopened.  The Firm recently issued its reports and we have commenced work to complete the first phase of repairs necessary to allow the complex to resume operation by the end of the fourth quarter of 2012.  Although the Pontiki mining complex will resume operations to fulfill contractual obligations for the delivery of coal in 2013 under existing coal sales agreements, significant uncertainty remains 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 places the long-term viability of Pontiki at significant risk.

 

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As a result of the above events 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 and determined it exceeded the carrying value and accordingly, we recorded an asset impairment charge of $19.0 million in our Central Appalachian segment for the three months 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.  These estimates incorporate certain assumptions, 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 establishes a new cost basis on which future depreciation, depletion and amortization will be based for the Pontiki Assets.

 

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 and accounts payable approximate fair value because of the short maturity of those instruments.  At September 30, 2012 and December 31, 2011, the estimated fair value of our long-term debt, including current maturities, was approximately $755.8 million and $746.5 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,
2012

 

December 31,
2011

 

 

 

 

 

 

 

Revolving credit facility

 

$

75,000

 

$

 

Senior notes

 

36,000

 

54,000

 

Series A senior notes

 

205,000

 

205,000

 

Series B senior notes

 

145,000

 

145,000

 

Term loan

 

250,000

 

300,000

 

 

 

711,000

 

704,000

 

Less current maturities

 

(18,000

)

(18,000

)

Total long-term debt

 

$

693,000

 

$

686,000

 

 

On May 23, 2012, our Intermediate Partnership entered into a credit agreement (the “Credit Agreement”) with various financial institutions for a revolving credit facility (the “Revolving Credit Facility”) of $700 million and a term loan (the “Term Loan”) in the aggregate principal amount of $250 million (collectively, the Revolving Credit Facility and Term Loan are referred to as the “Credit Facility”).  The Credit Facility replaces the $142.5 million revolving credit facility that would have matured September 25, 2012.  Borrowings under the Credit Agreement bear interest at a Base Rate or Eurodollar Rate, at our election, plus an applicable margin that fluctuates depending upon the ratio of Consolidated Debt to Consolidated Cash Flow (as defined in the Credit Agreement).  We have elected the Eurodollar Rate which, with applicable margin, was 1.89% on borrowings outstanding as of September 30, 2012.  The Credit Facility matures May 23, 2017, at which time all amounts outstanding under the Revolving Credit Facility and the Term Loan are required to be repaid.  Interest is payable quarterly, with principal of the Term Loan due as follows: commencing with the quarter ending June 30, 2014 and for each quarter thereafter ending on March 31, 2016, an amount per quarter equal to 2.50% of the aggregate amount of the Term Loan advances outstanding, 20% of the aggregate amount of the Term Loan advances outstanding per quarter beginning June 30, 2016 through December 31, 2016 with the remaining balance of the Term Loan advances being due May 23, 2017.  We have the option to prepay the Term Loan at any time in whole or in part subject to terms and conditions described in the Credit Agreement.  Upon a “change of control” (as defined in the Credit Agreement), the unpaid principal amount of the Credit Facility, all interest thereon and all other amounts payable under the Credit Agreement will become due and payable.

 

Also on May 23, 2012, our Intermediate Partnership terminated early its $300 million term loan agreement dated December 29, 2010.  As of May 23, 2012, the aggregate unpaid principal amount of $300 million, including all accrued but unpaid interest, was repaid using the proceeds of the Term Loan and borrowings under the Revolving Credit Facility.  Our Intermediate Partnership did not incur any early termination penalties in connection with the prepayment of the term loan.

 

We incurred debt issuance costs of approximately $4.3 million in 2012 associated with the Credit Agreement, which have been deferred and are being amortized as a component of interest expense over the duration of the Credit Agreement.  We expensed $1.1 million of previously deferred debt issuance costs associated with the terminated $300 million term loan.

 

Our Intermediate Partnership has $36.0 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”) and the Credit Facility described above (collectively, 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

 

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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 1.24 to 1.0 and 16.0 to 1.0, respectively, for the trailing twelve months ended September 30, 2012.  We were in compliance with the covenants of the ARLP Debt Arrangements as of September 30, 2012.

 

At September 30, 2012, we had borrowings of $75.0 million and $29.9 million of letters of credit outstanding with $595.1 million available for borrowing under the Revolving Credit 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.

 

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 leaseback of certain reserves and surface rights, a coal handling and services agreement and a backstop equipment financing facility.  Our initial investment at the Transaction Date, using existing cash on hand, was $69.5 million and we committed to additionally fund approximately $330.5 million to $455.5 million over the next three to four years, of which $211.7 million was funded from the Transaction Date through September 30, 2012.  We expect to fund these additional commitments using existing cash balances, future cash flows from operations, borrowings under existing debt and credit facilities and cash provided from the future issuance of debt or equity.  The following information discusses each component of these transactions in further detail.

 

Hamilton County, Illinois Reserve Acquisition

 

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.  WOR Properties also provided $17.0 million to White Oak for the development of the acquired reserves between the Transaction Date and December 31, 2011.  During the nine months ended September 30, 2012, WOR Properties provided $34.6 million to White Oak for development of the acquired coal reserves, fulfilling its initial commitment for further development funding.  WOR Properties has a remaining commitment of $54.6 million for additional coal reserve acquisitions 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 $7.0 million of additional Series A Units between the Transaction Date and December 31, 2011 and $43.1 million of additional Series A Units during the nine months ended September 30, 2012.

 

WOR Processing’s ownership and member’s voting interest in White Oak at September 30, 2012 was 12.5% based upon currently outstanding voting units.  The remainder of the equity ownership in

 

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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 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, 2012, WOR Processing had invested $85.8 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.  White Oak has made no distributions to WOR Processing or 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, 2012, we were allocated losses of $3.0 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.  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 had not used any amounts available under the Construction Loan as of September 30, 2012.

 

Equipment Financing Commitment

 

Also on the Transaction Date, the Intermediate Partnership committed to provide $100.0 million of fully collateralized equipment financing with a five-year term to White Oak for the purchase of coal mining equipment should other third-party funding sources not be available.  During the second quarter of 2012, White Oak obtained third-party financing for the purchase of coal mining equipment, and on June 18, 2012, repaid the Intermediate Partnership the outstanding amount of $2.2 million for previous advances and interest due.  White Oak also terminated early the equipment financing agreement with the Intermediate Partnership, and as part of the termination, paid the Intermediate Partnership a $2.0 million cancellation fee on June 18, 2012.

 

9.                                      NET INCOME PER LIMITED PARTNER UNIT

 

We apply the provisions of FASB ASC 260, Earnings Per Share (“FASB ASC 260”), which require 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

 

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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.

 

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, 2012 and 2011, respectively, (in thousands, except per unit data):

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

60,510

 

$

104,093

 

$

238,933

 

$

297,651

 

Adjustments:

 

 

 

 

 

 

 

 

 

General partner’s priority distributions

 

(26,584

)

(21,829

)

(76,771

)

(61,975

)

General partners’ 2% equity ownership

 

(679

)

(1,645

)

(3,244

)

(4,713

)

 

 

 

 

 

 

 

 

 

 

Limited partners’ interest in net income

 

33,247

 

80,619

 

158,918

 

230,963

 

 

 

 

 

 

 

 

 

 

 

Less:

 

 

 

 

 

 

 

 

 

Distributions to participating securities

 

(531

)

(501

)

(1,549

)

(1,462

)

Undistributed earnings attributable to participating securities

 

 

(642

)

(541

)

(1,833

)

 

 

 

 

 

 

 

 

 

 

Net income available to limited partners

 

$

32,716

 

$

79,476

 

$

156,828

 

$

227,668

 

 

 

 

 

 

 

 

 

 

 

Weighted average limited partner units outstanding — basic and diluted

 

36,875

 

36,776

 

36,859

 

36,767

 

 

 

 

 

 

 

 

 

 

 

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

 

$

0.89

 

$

2.16

 

$

4.25

 

$

6.19

 

 


(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, 2012 and 2011, LTIP, SERP and Deferred Compensation Plan units of 323,146, 411,043, 338,231 and 403,301, 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,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

81,195

 

$

74,515

 

$

73,201

 

$

67,687

 

Accruals increase

 

6,294

 

5,570

 

18,508

 

16,684

 

Payments

 

(2,395

)

(2,491

)

(7,984

)

(8,519

)

Interest accretion

 

685

 

793

 

2,054

 

2,380

 

Valuation loss (gain)

 

(2,259

)

125

 

(2,259

)

280

 

Ending balance

 

$

83,520

 

$

78,512

 

$

83,520

 

$

78,512

 

 

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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.  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,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

960

 

$

833

 

$

2,795

 

$

2,513

 

Interest cost

 

598

 

596

 

1,773

 

1,788

 

Amortization of net loss (gain)

 

194

 

(56

)

582

 

(167

)

Net periodic benefit cost

 

$

1,752

 

$

1,373

 

$

5,150

 

$

4,134

 

 

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 25, 2012, the Compensation Committee determined that the vesting requirements for the 2009 grants of 9,125 restricted units (net of 500 forfeitures) and the grants issued during the three months ended December 31, 2008 of 135,305 restricted units (net of 5,840 forfeitures) had been satisfied as of January 1, 2012.  As a result of this vesting, on February 14, 2012, we issued 93,938 unrestricted common units to the LTIP participants. The remaining units were settled in cash to satisfy the individual tax withholding obligations for the LTIP participants.  On February 6, 2012 and April 26, 2012, the Compensation Committee authorized additional grants of up to 106,779 and 8,500 restricted units, respectively, of which 107,114 were granted during the nine months ended September 30, 2012 and will vest on January 1, 2015, subject to satisfaction of certain financial tests.  The fair value of these 2012 grants is equal to the intrinsic value at the date of grant, which was $77.71 per unit.  LTIP expense was $1.6 million and $1.3 million for the three months ended September 30, 2012 and 2011, respectively, and $4.7 million and $3.9 million for the nine months ended September 30, 2012 and 2011.  After consideration of the January 1, 2012 vesting and subsequent issuance of 93,938 common units, approximately 2.2 million units remain available for issuance under the LTIP in the future, assuming all grants issued in 2010, 2011 and 2012 currently outstanding are settled with common units and no future forfeitures occur.

 

As of September 30, 2012, there was $9.4 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 1.2 years.  As of September 30, 2012, the intrinsic value of the non-vested LTIP grants was $20.5 million.  As of September 30, 2012, the total obligation associated with the LTIP was $10.4 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.

 

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 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.

 

Amounts that were payable under either the SERP or Deferred Compensation Plan on or prior to January 1, 2011, were paid in either cash or common units of ARLP.  Effective for amounts that become payable after January 1, 2011, both the Deferred Compensation Plan and the SERP require that vested benefits be paid to participants only in common units of ARLP, and therefore the phantom units have qualified for equity award accounting treatment since that date.  As a result, we reclassified a total of $9.2 million of obligations for the SERP and the Deferred Compensation Plan from due to affiliates and other long-term liabilities to partners’ capital in our condensed consolidated balance sheets as required under FASB ASC 718, Compensation-Stock Compensation, on January 1, 2011.  For the nine months ended September 30, 2012 and 2011, SERP and Deferred Compensation Plan participant notional account balances were credited with a total of 7,168 and 8,284 phantom units, respectively, and the fair value of these phantom units was $64.77 and $72.01, respectively, on a weighted-average basis.  Total SERP and Deferred Compensation Plan expense was approximately $0.2 million for each of the three months ended September 30, 2012 and 2011, and $0.6 million for each of the nine months ended September 30, 2012 and 2011.

 

As of September 30, 2012, there were 155,873 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 $9.3 million.  As of September 30, 2012, the total obligation associated with the SERP and Deferred Compensation Plan was $10.3 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,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

726

 

$

618

 

$

2,179

 

$

1,854

 

Interest cost

 

818

 

788

 

2,454

 

2,364

 

Expected return on plan assets

 

(956

)

(972

)

(2,868

)

(2,917

)

Amortization of net loss

 

458

 

122

 

1,373

 

366

 

Net periodic benefit cost

 

$

1,046

 

$

556

 

$

3,138

 

$

1,667

 

 

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We previously disclosed in our financial statements for the year ended December 31, 2011 that we expected to contribute $5.4 million to the Pension Plan in 2012.  During the nine months ended September 30, 2012, we made contribution payments of $3.0 million for the 2011 plan year and $2.0 million for the 2012 plan year.

 

On July 6, 2012, new federal legislation entitled Moving Ahead for Progress in the 21st Century Act was passed, which includes a provision aimed at stabilizing the interest rates used to calculate pension plan liabilities for pension funding purposes.  We are currently evaluating the impact of this legislation; however, we anticipate that as a result of this new legislation, we will not make any further contributions during 2012 beyond the $5.0 million noted above.

 

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, River View Coal, LLC’s mining complex, Sebree Mining, LLC (“Sebree”), which includes the Onton mine and Sebree property, and certain properties of Alliance Resource Properties, LLC (“Alliance Resource Properties”), ARP 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 see Note 4.

 

The Central Appalachian reportable segment is comprised of two operating segments, the Pontiki and MC Mining, LLC mining complexes.  The Pontiki mining complex was idled on August 29, 2012.  For more information regarding the idling of the Pontiki mining complex, please see Note 5.

 

The Northern Appalachian reportable segment is comprised of multiple operating segments, including Mettiki Coal, LLC’s mining complex, Mettiki Coal (WV), LLC’s Mountain View mining complex, two small third-party mining operations (one of which ceased operations in July 2011), the Tunnel Ridge, LLC (“Tunnel Ridge”) mine and the Penn Ridge Coal, LLC (“Penn Ridge”) property.  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 Properties and WOR Processing.  WOR Processing includes both the surface operations at White Oak currently under construction and the equity investment in White Oak.  WOR Properties owns coal reserves acquired from White Oak and is committed to acquiring additional reserves from White Oak.  WOR Properties has also completed initial funding commitments to White Oak for development of these reserves.  The White Oak reportable segment also includes a loan to White Oak for current financial activities related to the acquisition of mining equipment (which was paid off and terminated in June 2012) and will include future financing activities for another loan to construct certain surface facilities (Note 8).

 

Other and Corporate includes marketing and administrative expenses, Alliance Service, Inc. and its subsidiary, Matrix Design Group, LLC (“Matrix Design”), Alliance Design Group, LLC (“Alliance

 

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Design”) (collectively, Matrix Design and Alliance Design are referred to as the “Matrix Group”), 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.

 

Reportable segment results as of and for the three and nine months ended September 30, 2012 and 2011 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, 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

 

51,541

 

9,395

 

21,422

 

10,468

 

1,197

 

 

94,023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reportable segment results for the three months ended September 30, 2011 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues (2)

 

$

342,237

 

$

49,478

 

$

76,808

 

$

 

$

22,696

 

$

(3,472

)

$

487,747

 

Segment Adjusted EBITDA Expense (3)

 

210,024

 

36,796

 

50,911

 

204

 

19,812

 

(3,472

)

314,275

 

Segment Adjusted EBITDA (4)(5)

 

127,230

 

12,456

 

23,665

 

(204

)

2,879

 

 

166,026

 

Capital expenditures (7)

 

36,050

 

8,298

 

29,044

 

33,841

 

483

 

 

107,716

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reportable segment results as of and for the nine months ended September 30, 2011 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues (2)

 

$

983,038

 

$

154,704

 

$

200,004

 

$

 

$

43,340

 

$

(12,135

)

$

1,368,951

 

Segment Adjusted EBITDA Expense (3)

 

583,291

 

109,848

 

143,804

 

204

 

38,149

 

(12,135

)

863,161

 

Segment Adjusted EBITDA (4)(5)

 

382,164

 

43,590

 

49,602

 

(204

)

5,186

 

 

480,338

 

Total assets (6)

 

787,790

 

89,516

 

400,372

 

69,337

 

333,027

 

(877

)

1,679,165

 

Capital expenditures (7)

 

109,404

 

20,153

 

84,817

 

33,841

 

1,934

 

 

250,149

 

 


(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.

 

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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,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Segment Adjusted EBITDA Expense

 

$

342,814

 

$

314,275

 

$

978,712

 

$

863,161

 

 

 

 

 

 

 

 

 

 

 

Outside coal purchases

 

(4,424

)

(19,864

)

(34,759

)

(29,495

)

Other income

 

254

 

360

 

2,853

 

1,340

 

Operating expenses (excluding depreciation, depletion and amortization)

 

$

338,644

 

$

294,771

 

$

946,806

 

$

835,006

 

 

(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,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Consolidated Segment Adjusted EBITDA

 

$

160,170

 

$

166,026

 

$

477,488

 

$

480,338

 

General and administrative

 

(13,598

)

(13,276

)

(43,939

)

(38,698

)

Depreciation, depletion and amortization

 

(59,781

)

(40,275

)

(154,923

)

(117,237

)

Asset impairment charge

 

(19,031

)

 

(19,031

)

 

Interest expense, net

 

(7,352

)

(8,699

)

(21,388

)

(26,973

)

Income tax benefit

 

102

 

317

 

726

 

221

 

Net income

 

$

60,510

 

$

104,093

 

$

238,933

 

$

297,651

 

 

(5)          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.  Includes equity in income (loss) of affiliates for the three and nine months ended September 30, 2011 of $(0.2) million included in the White Oak Segment and three and nine months ended September 30, 2011 of $0.2 million and $0.7 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 $72.7 million and $1.6 million, respectively, at September 30, 2012 and $35.5 million and $1.6 million, respectively, at September 30, 2011.

 

(7)          Capital expenditures shown above for the nine months ended September 30, 2012 include development funding to White Oak of $34.6 million and for the three and nine months ended September 30, 2011 includes the reserves acquired from White Oak of $33.8 million (Note 8), which is described as “Payments to affiliate for acquisition and development of coal reserves” in our condensed consolidated statements of cash flow.  Capital expenditures shown above exclude the Green River acquisition on April 2, 2012 (Note 4).

 

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14.                               SUBSEQUENT EVENTS

 

On October 26, 2012, we declared a quarterly distribution for the quarter ended September 30, 2012, of $1.085 per unit, on all common units outstanding, totaling approximately $67.4 million (which includes our managing general partner’s incentive distributions), payable on November 14, 2012 to all unitholders of record as of November 7, 2012.

 

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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 have an equity investment in White Oak Resources LLC (“White Oak”), and we purchase and fund the development of White Oak’s reserves and are constructing surface facilities at White Oak’s new 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”), River View Coal, LLC’s mining complex (“River View”), Sebree Mining, LLC (“Sebree”), which includes the Onton mine and Sebree property, and certain properties of Alliance Resource Properties, LLC (“Alliance Resource Properties”), ARP 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

 

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was added to the Illinois Basin segment in April 2012, please read “Item 1. Financial Statements (Unaudited) — Note 4. Acquisition of Business” 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 and discussions below regarding an asset impairment charge of $19.0 million related to our Pontiki mining complex.

 

·                  Northern Appalachian reportable segment is comprised of multiple operating segments, including Mettiki Coal, LLC’s mining complex (“Mettiki”), Mettiki Coal (WV), LLC’s Mountain View mining complex, two small third-party mining operations (one of which ceased operations in July 2011), the Tunnel Ridge mine and the Penn Ridge Coal, LLC (“Penn Ridge”) property.  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 currently under construction 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.  WOR Properties has also completed initial funding commitments to White Oak for development of these reserves.  The White Oak reportable segment also includes a loan to White Oak for current financial activities related to the acquisition of mining equipment (which was paid off and terminated in June 2012) and will include future financing activities for another loan 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”), 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

 

On October 2, 2012, we announced that our Pontiki mining complex in Martin County, Kentucky had been idled since August 29, 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 (“Firm”) before the surface facilities could be reopened.  The Firm recently issued their reports and we have commenced work to complete the first phase of repairs necessary to allow the complex to resume operation by the end of the fourth quarter of 2012.  Although Pontiki will resume operations, there is still significant uncertainty regarding the long-term viability of the mine primarily due to risk associated with coal markets and the continued impact of regulatory matters on our costs.  As a result of the above events 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.  Please also read “Item 1. Financial Statements (Unaudited) — Note 5. Asset Impairment

 

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Charge” of this Quarterly Report on Form 10-Q for additional information regarding this asset impairment.

 

Three Months Ended September 30, 2012 Compared to Three Months Ended September 30, 2011

 

We reported net income of $60.5 million for the three months ended September 30, 2012 (“2012 Quarter”) compared to $104.1 million for the three months ended September 30, 2011 (“2011 Quarter”). This decrease of $43.6 million was principally due to the idling of our Pontiki mining complex and the related non-cash impairment charge of $19.0 million discussed above, reduced coal sales into the metallurgical export markets, higher operating expenses, increased depreciation, depletion and amortization and the pass through of losses as anticipated related to the White Oak development project.  These decreases to net income were offset partially by increased revenues driven by record tons sold and produced resulting primarily from the ramp-up of longwall production at our Tunnel Ridge mine and production from the recently acquired Onton mine.  Tons sold and produced increased to 8.9 and 9.0 million tons, respectively, for the 2012 Quarter compared to 8.3 and 7.6 million tons, respectively, for the 2011 Quarter.  Higher revenue resulting from increased tons sold were offset partially by a lower average coal sales price of $56.00 per ton sold for the 2012 Quarter compared to $56.89 in the 2011 Quarter.  The decreases in average coal sales price was due primarily to reduced coal sales into the metallurgical export markets.

 

Higher operating expenses resulted primarily from increased sales and production volumes discussed above, which particularly impacted materials and supplies expenses, labor-related expenses, maintenance costs and sales-related expenses. Higher operating expenses per ton resulted primarily from the impact of regulatory actions on production from our Central Appalachian mines and higher beginning coal inventory costs per ton partially offset by the benefit of increased production from our Tunnel Ridge mine discussed above.

 

 

 

Three Months Ended September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(in thousands)

 

(per ton sold)

 

Tons sold

 

8,910

 

8,326

 

N/A

 

N/A

 

Tons produced

 

9,000

 

7,644

 

N/A

 

N/A

 

Coal sales

 

$

499,003

 

$

473,683

 

$

56.00

 

$

56.89

 

Operating expenses and outside coal purchases

 

$

343,068

 

$

314,635

 

$

38.50

 

$

37.79

 

 

Coal sales.  Coal sales for the 2012 Quarter increased 5.3% to $499.0 million from $473.7 million for the 2011 Quarter.  The increase of $25.3 million in coal sales reflected the benefit of record tons sold (contributing $33.2 million in additional coal sales) offset partially by lower average coal sales prices (reducing coal sales by $7.9 million).  Average coal sales prices in the 2012 Quarter decreased $0.89 per ton sold to $56.00 per ton in the 2012 Quarter compared to $56.89 per ton in the 2011 Quarter primarily as a result of reduced coal sales into the metallurgical export markets.

 

Operating expenses and outside coal purchases.  Operating expenses and outside coal purchases increased 9.0% to $343.1 million for the 2012 Quarter from $314.6 million for the 2011 Quarter primarily due to record coal sales and increased production volumes partially offset by lower outside coal purchases.  On a per ton basis, operating expenses and outside coal purchases increased 1.9% to $38.50 per ton sold.  Operating expenses were impacted by various other factors, the most significant of which are discussed below:

 

·                  The 2011 Quarter expenses benefited from $11.2 million capitalized development costs related to the Tunnel Ridge mine.  Capitalized development ceased in May 2012 with the start-up of longwall production;

 

·                  Production taxes and royalties expenses (which were incurred as a percentage of coal sales prices and volumes) increased $0.24 per produced ton sold in the 2012 Quarter compared to

 

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the 2011 Quarter primarily resulting from a higher mix of sales from states with severance taxes offset partially by a lower total average sales price in the 2012 Quarter compared to the 2011 Quarter also discussed above; and

 

·                  Operating expenses per ton also increased in the 2012 Quarter due to a significantly higher average cost per ton associated with the 0.8 million tons of beginning coal inventory for the 2012 Quarter as compared to similar levels of beginning coal inventory for the 2011 Quarter with a lower average cost per ton.

 

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

 

·                  Labor and benefit expenses per ton produced, excluding workers’ compensation, decreased 3.1% to $12.15 per ton in the 2012 Quarter from $12.54 per ton in the 2011 Quarter.  This decrease of $0.39 per ton was primarily attributable to lower labor cost per ton resulting from the ramp-up of production at our Tunnel Ridge mine and improved coal recoveries from our River View, Gibson and Warrior mines, partially offset by reduced production at our Central Appalachian mines due to regulatory actions and lower coal recoveries from our Dotiki and Hopkins mines.  See segment discussions below regarding further comments on production variances;

 

·                  Workers’ compensation expenses per ton produced decreased to $0.80 per ton in the 2012 Quarter from $1.09 per ton in the 2011 Quarter.  The decrease of $0.29 per ton produced resulted primarily from favorable reserve adjustments for claims incurred in prior years;

 

·                  Material and supplies expenses per ton produced decreased 4.5% to $11.78 per ton in the 2012 Quarter from $12.33 per ton in the 2011 Quarter.  The decrease of $0.55 per ton produced resulted primarily from production benefits and offsets discussed above under labor variance comments and a decrease in cost for certain products and services, primarily roof support (decrease of $0.45 per ton), certain safety-related materials and supplies (decrease of $0.25 per ton), and ventilation materials (decrease of $0.12 per ton) partially offset by an increase in contract labor used in the mining process (increase of $0.30 per ton);

 

·                  Maintenance expenses per ton produced decreased 5.5% to $3.95 per ton in the 2012 Quarter from $4.18 per ton in the 2011 Quarter.  The decrease of $0.23 per ton produced resulted primarily from the benefit of newer equipment and increased production at our new Tunnel Ridge mine and other production benefits and offsets discussed above under labor variance comments;

 

·                  Mine administration expenses decreased $1.0 million for the 2012 Quarter compared to the 2011 Quarter, primarily due to decreased costs associated with Matrix Design products and research; and

 

·                  Outside coal purchases decreased to $4.4 million for the 2012 Quarter from $19.9 million in the 2011 Quarter.  The decrease of $15.5 million was primarily attributable to decreased coal brokerage volumes, as well as 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, like the 2012 Quarter compared to the 2011 Quarter, reduce our overall total expenses per ton.

 

Depreciation, depletion and amortization.  Depreciation, depletion and amortization expense increased to $59.8 million for the 2012 Quarter from $40.3 million for the 2011 Quarter.  The increase of $19.5 million was attributable to the start-up of longwall production at the Tunnel Ridge mine, the addition of the Onton mine and capital expenditures related to infrastructure improvements at various other operations.

 

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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.  Due to regulatory actions requiring certain surface facility repairs, the Pontiki mining complex was idled on August 29, 2012.  The asset impairment charge is primarily the result of the mine being idled, increased regulatory costs and uncertainty regarding the mine’s future operations and market opportunities 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 $7.4 million for the 2012 Quarter from $8.8 million for the 2011 Quarter.  The decrease of $1.4 million was principally attributable to increased capitalized interest, as well as reduced interest expense resulting from our August 2012 principal repayment of $18.0 million on our original senior notes issued in 1999.  Interest expense was also impacted by the early termination of our $300 million term loan, which was replaced with a $250.0 million term loan in May 2012.  These decreases were partially offset by increased interest expense on borrowings under our $700.0 million revolving credit facility during the 2012 Quarter.  The new term loan and revolving credit facility 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 2012 Quarter, equity in loss of affiliates was $2.8 million, which was primarily attributable to losses of $3.0 million allocated to us due to our equity investment in White Oak.

 

Transportation revenues and expenses.  Transportation revenues and expenses were $5.6 million and $7.4 million for the 2012 and 2011 Quarters, respectively.  The decrease of $1.8 million was primarily attributable to a decrease in average transportation rates in the 2012 Quarter, as well as reduced tonnage for which we arrange transportation at certain mines.  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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Segment Adjusted EBITDA.  Our 2012 Quarter Segment Adjusted EBITDA decreased $5.8 million, or 3.5%, to $160.2 million from the 2011 Quarter Segment Adjusted EBITDA of $166.0 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,

 

 

 

 

 

 

 

2012

 

2011

 

Increase/(Decrease)

 

Segment Adjusted EBITDA

 

 

 

 

 

 

 

 

 

Illinois Basin

 

$

140,329

 

$

127,230

 

$

13,099

 

10.3

%

Central Appalachia

 

6,228

 

12,456

 

(6,228

)

(50.0

)%

Northern Appalachia

 

15,813

 

23,665

 

(7,852

)

(33.2

)%

White Oak

 

(3,188

)

(204

)

(2,984

)

(1

)

Other and Corporate

 

988

 

2,879

 

(1,891

)

(65.7

)%

Elimination

 

 

 

 

 

Total Segment Adjusted EBITDA (2)

 

$

160,170

 

$

166,026

 

$

(5,856

)

(3.5

)%

 

 

 

 

 

 

 

 

 

 

Tons sold

 

 

 

 

 

 

 

 

 

Illinois Basin

 

6,919

 

6,631

 

288

 

4.3

%

Central Appalachia

 

523

 

616

 

(93

)

(15.1

)%

Northern Appalachia

 

1,468

 

820

 

648

 

79.0

%

White Oak

 

 

 

 

 

Other and Corporate

 

 

259

 

(259

)

(1

)

Elimination

 

 

 

 

 

Total tons sold

 

8,910

 

8,326

 

584

 

7.0

%

 

 

 

 

 

 

 

 

 

 

Coal sales

 

 

 

 

 

 

 

 

 

Illinois Basin

 

$

361,206

 

$

337,029

 

$

24,177

 

7.2

%

Central Appalachia

 

41,790

 

49,252

 

(7,462

)

(15.2

)%

Northern Appalachia

 

95,988

 

73,731

 

22,257

 

30.2

%

White Oak

 

 

 

 

 

Other and Corporate

 

19

 

13,671

 

(13,652

)

(99.9

)%

Elimination

 

 

 

 

 

Total coal sales

 

$

499,003

 

$

473,683

 

$

25,320

 

5.3

%

 

 

 

 

 

 

 

 

 

 

Other sales and operating revenues

 

 

 

 

 

 

 

 

 

Illinois Basin

 

$

853

 

$

226

 

$

627

 

(1

)

Central Appalachia

 

 

 

 

 

Northern Appalachia

 

1,587

 

845

 

742

 

87.8

%

White Oak

 

 

 

 

 

Other and Corporate

 

8,501

 

9,019

 

(518

)

(5.7

)%

Elimination

 

(4,128

)

(3,472

)

(656

)

18.9

%

Total other sales and operating revenues

 

$

6,813

 

$

6,618

 

$

195

 

2.9

%

 

 

 

 

 

 

 

 

 

 

Segment Adjusted EBITDA Expense

 

 

 

 

 

 

 

 

 

Illinois Basin

 

$

221,731

 

$

210,024

 

$

11,707

 

5.6

%

Central Appalachia

 

35,563

 

36,796

 

(1,233

)

(3.4

)%

Northern Appalachia

 

81,761

 

50,911

 

30,850

 

60.6

%

White Oak

 

174

 

204

 

(30

)

(14.7

)%

Other and Corporate

 

7,713

 

19,812

 

(12,099

)

(61.1

)%

Elimination

 

(4,128

)

(3,472

)

(656

)

18.9

%

Total Segment Adjusted EBITDA Expense (3)

 

$

342,814

 

$

314,275

 

$

28,539

 

9.1

%

 


(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,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Segment Adjusted EBITDA

 

$

160,170

 

$

166,026

 

 

 

 

 

 

 

General and administrative

 

(13,598

)

(13,276

)

Depreciation, depletion and amortization

 

(59,781

)

(40,275

)

Asset impairment charge

 

(19,031

)

 

Interest expense, net

 

(7,352

)

(8,699

)

Income tax benefit

 

102

 

317

 

Net income

 

$

60,510

 

$

104,093

 

 

(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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Table of Contents

 

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,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Segment Adjusted EBITDA Expense

 

$

342,814

 

$

314,275

 

 

 

 

 

 

 

Outside coal purchases