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Table of Contents

 


 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

          Washington, D.C. 20549          

 

FORM 10-Q

 

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

THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2014

 

OR

 

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

THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _____________to_____________

 

  Commission File No.:  0-26823  

 

 

ALLIANCE RESOURCE PARTNERS, L.P.

(Exact name of registrant as specified in its charter)

 

Delaware

(State or other jurisdiction of

incorporation or organization)

 

73-1564280

(IRS Employer Identification No.)

 

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

(Address of principal executive offices and zip code)

 

(918) 295-7600

(Registrant’s telephone number, including area code)

 


 

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

 

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

 

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

 

Large Accelerated Filer [X]

Accelerated Filer [   ]

Non-Accelerated Filer [   ]

Smaller Reporting Company [   ]

 

 

(Do not check if smaller reporting company)

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

[   ] Yes   [X] No

 

As of November 7, 2014, 74,060,634 common units are outstanding.

 


 


 


Table of Contents

 

TABLE OF CONTENTS

 

PART I

 

FINANCIAL INFORMATION

 

 

 

 

 

Page

 

 

 

ITEM 1.

Financial Statements (Unaudited)

 

 

 

 

 

ALLIANCE RESOURCE PARTNERS, L.P. AND SUBSIDIARIES

 

 

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013

1

 

 

 

 

Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2014 and 2013

2

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2014 and 2013

3

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013

4

 

 

 

 

Notes to Condensed Consolidated Financial Statements

5

 

 

 

ITEM 2.

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

17

 

 

 

ITEM 3.

Quantitative and Qualitative Disclosures about Market Risk

34

 

 

 

ITEM 4.

Controls and Procedures

35

 

 

 

 

Forward-Looking Statements

36

 

 

 

PART II

 

OTHER INFORMATION

 

 

 

ITEM 1.

Legal Proceedings

38

 

 

 

ITEM 1A.

Risk Factors

38

 

 

 

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

38

 

 

 

ITEM 3.

Defaults Upon Senior Securities

38

 

 

 

ITEM 4.

Mine Safety Disclosures

38

 

 

 

ITEM 5.

Other Information

38

 

 

 

ITEM 6.

Exhibits

39

 

i



Table of Contents

 

PART I

 

FINANCIAL INFORMATION

 

ITEM 1.                FINANCIAL STATEMENTS

 

ALLIANCE RESOURCE PARTNERS, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except unit data)

(Unaudited)

 

ASSETS

 

 

 

September 30,

 

 

December 31,

 

 

2014

 

 

2013

CURRENT ASSETS:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

$

14,829

 

 

 

$

93,654

 

Trade receivables

 

 

175,770

 

 

 

153,662

 

Other receivables

 

 

857

 

 

 

776

 

Due from affiliates

 

 

2,532

 

 

 

1,964

 

Inventories

 

 

67,896

 

 

 

44,214

 

Advance royalties

 

 

10,779

 

 

 

11,454

 

Prepaid expenses and other assets

 

 

2,779

 

 

 

16,186

 

Total current assets

 

 

275,442

 

 

 

321,910

 

 

 

 

 

 

 

 

 

 

PROPERTY, PLANT AND EQUIPMENT:

 

 

 

 

 

 

 

 

Property, plant and equipment, at cost

 

 

2,771,664

 

 

 

2,645,872

 

Less accumulated depreciation, depletion and amortization

 

 

(1,126,199

)

 

 

(1,031,493

)

Total property, plant and equipment, net

 

 

1,645,465

 

 

 

1,614,379

 

 

 

 

 

 

 

 

 

 

OTHER ASSETS:

 

 

 

 

 

 

 

 

Advance royalties

 

 

16,312

 

 

 

18,813

 

Due from affiliate

 

 

11,256

 

 

 

11,560

 

Equity investments in affiliates

 

 

201,624

 

 

 

130,410

 

Other long-term assets

 

 

23,503

 

 

 

24,826

 

Total other assets

 

 

252,695

 

 

 

185,609

 

TOTAL ASSETS

 

 

$

2,173,602

 

 

 

$

2,121,898

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND PARTNERS’ CAPITAL

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

Accounts payable

 

 

$

98,884

 

 

 

$

79,371

 

Due to affiliates

 

 

367

 

 

 

290

 

Accrued taxes other than income taxes

 

 

20,355

 

 

 

19,061

 

Accrued payroll and related expenses

 

 

50,231

 

 

 

47,105

 

Accrued interest

 

 

6,021

 

 

 

996

 

Workers’ compensation and pneumoconiosis benefits

 

 

9,287

 

 

 

9,065

 

Current capital lease obligations

 

 

1,305

 

 

 

1,288

 

Other current liabilities

 

 

15,436

 

 

 

18,625

 

Current maturities, long-term debt

 

 

230,000

 

 

 

36,750

 

Total current liabilities

 

 

431,886

 

 

 

212,551

 

 

 

 

 

 

 

 

 

 

LONG-TERM LIABILITIES:

 

 

 

 

 

 

 

 

Long-term debt, excluding current maturities

 

 

527,500

 

 

 

831,250

 

Pneumoconiosis benefits

 

 

52,131

 

 

 

48,455

 

Accrued pension benefit

 

 

16,290

 

 

 

18,182

 

Workers’ compensation

 

 

52,603

 

 

 

54,949

 

Asset retirement obligations

 

 

76,660

 

 

 

80,807

 

Long-term capital lease obligations

 

 

16,005

 

 

 

17,135

 

Other liabilities

 

 

6,031

 

 

 

7,332

 

Total long-term liabilities

 

 

747,220

 

 

 

1,058,110

 

Total liabilities

 

 

1,179,106

 

 

 

1,270,661

 

 

 

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PARTNERS CAPITAL:

 

 

 

 

 

 

 

 

Limited Partners - Common Unitholders 74,060,634 and 73,926,108 units outstanding, respectively

 

 

1,266,269

 

 

 

1,128,519

 

General Partners’ deficit

 

 

(261,845

)

 

 

(267,563

)

Accumulated other comprehensive loss

 

 

(9,928

)

 

 

(9,719

)

Total Partners’ Capital

 

 

994,496

 

 

 

851,237

 

TOTAL LIABILITIES AND PARTNERS’ CAPITAL

 

 

$

2,173,602

 

 

 

$

2,121,898

 

 

See notes to condensed consolidated financial statements.

 

1



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,

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SALES AND OPERATING REVENUES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Coal sales

 

 

$

548,357

 

 

 

$

518,447

 

 

 

$

1,649,093

 

 

 

$

1,594,530

 

Transportation revenues

 

 

6,001

 

 

 

11,554

 

 

 

17,816

 

 

 

23,459

 

Other sales and operating revenues

 

 

14,970

 

 

 

7,228

 

 

 

43,019

 

 

 

20,866

 

Total revenues

 

 

569,328

 

 

 

537,229

 

 

 

1,709,928

 

 

 

1,638,855

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses (excluding depreciation, depletion and amortization)

 

 

349,170

 

 

 

346,045

 

 

 

1,024,305

 

 

 

1,042,057

 

Transportation expenses

 

 

6,001

 

 

 

11,554

 

 

 

17,816

 

 

 

23,459

 

Outside coal purchases

 

 

3

 

 

 

636

 

 

 

7

 

 

 

2,028

 

General and administrative

 

 

16,995

 

 

 

14,893

 

 

 

54,201

 

 

 

46,736

 

Depreciation, depletion and amortization

 

 

69,646

 

 

 

66,099

 

 

 

203,539

 

 

 

198,688

 

Total operating expenses

 

 

441,815

 

 

 

439,227

 

 

 

1,299,868

 

 

 

1,312,968

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INCOME FROM OPERATIONS

 

 

127,513

 

 

 

98,002

 

 

 

410,060

 

 

 

325,887

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense (net of interest capitalized for the three months ended September 30, 2013 of $2,816 and the nine months ended September 30, 2014 and 2013 of $833 and $8,220, respectively)

 

 

(8,584

)

 

 

(6,168

)

 

 

(25,395

)

 

 

(19,004

)

Interest income

 

 

432

 

 

 

252

 

 

 

1,238

 

 

 

564

 

Equity in income (loss) of affiliates, net

 

 

68

 

 

 

(5,990

)

 

 

(13,546

)

 

 

(15,556

)

Other income

 

 

549

 

 

 

372

 

 

 

1,178

 

 

 

999

 

INCOME BEFORE INCOME TAXES

 

 

119,978

 

 

 

86,468

 

 

 

373,535

 

 

 

292,890

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INCOME TAX BENEFIT

 

 

 

 

 

(718

)

 

 

 

 

 

(1,307

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INCOME

 

 

$

119,978

 

 

 

$

87,186

 

 

 

$

373,535

 

 

 

$

294,197

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GENERAL PARTNERS’ INTEREST IN NET INCOME

 

 

$

35,316

 

 

 

$

31,052

 

 

 

$

103,465

 

 

 

$

91,414

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIMITED PARTNERS’ INTEREST IN NET INCOME

 

 

$

84,662

 

 

 

$

56,134

 

 

 

$

270,070

 

 

 

$

202,783

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BASIC AND DILUTED NET INCOME PER LIMITED PARTNER UNIT (Note 7)

 

 

$

1.13

 

 

 

$

0.75

 

 

 

$

3.59

 

 

 

$

2.71

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

DISTRIBUTIONS PAID PER LIMITED PARTNER UNIT

 

 

$

0.625

 

 

 

$

0.57625

 

 

 

$

1.835

 

 

 

$

1.695

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE NUMBER OF UNITS OUTSTANDING – BASIC AND DILUTED

 

 

74,060,634

 

 

 

73,926,108

 

 

 

74,038,952

 

 

 

73,897,062

 

 

See notes to condensed consolidated financial statements.

 

2



Table of Contents

 

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,

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INCOME

 

 

$

119,978

 

 

 

$

87,186

 

 

 

$

373,535

 

 

 

$

294,197

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OTHER COMPREHENSIVE (LOSS)/INCOME:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Defined benefit pension plan:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of actuarial loss (1)

 

 

193

 

 

 

557

 

 

 

580

 

 

 

1,675

 

Total defined benefit pension plan adjustments

 

 

193

 

 

 

557

 

 

 

580

 

 

 

1,675

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pneumoconiosis benefits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of actuarial (gain)/loss (1)

 

 

(263

)

 

 

168

 

 

 

(789

)

 

 

503

 

Total pneumoconiosis benefits adjustments

 

 

(263

)

 

 

168

 

 

 

(789

)

 

 

503

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OTHER COMPREHENSIVE (LOSS)/INCOME

 

 

(70

)

 

 

725

 

 

 

(209

)

 

 

2,178

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TOTAL COMPREHENSIVE INCOME

 

 

$

119,908

 

 

 

$

87,911

 

 

 

$

373,326

 

 

 

$

296,375

 

 

(1)          Amortization of actuarial (gain)/loss is included in the computation of net periodic benefit cost (see Notes 8 and 10 for additional details).

 

See notes to condensed consolidated financial statements.

 

3



Table of Contents

 

ALLIANCE RESOURCE PARTNERS, L.P. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Nine Months Ended
September 30,

 

 

2014

 

2013

 

 

 

 

 

 

 

 

 

CASH FLOWS PROVIDED BY OPERATING ACTIVITIES

 

 

$

586,393

 

 

 

$

550,385

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Property, plant and equipment:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(233,659

)

 

 

(242,653

)

Changes in accounts payable and accrued liabilities

 

 

145

 

 

 

(354

)

Proceeds from sale of property, plant and equipment

 

 

272

 

 

 

124

 

Proceeds from insurance settlement for property, plant and equipment

 

 

4,512

 

 

 

-

 

Purchases of equity investments in affiliate

 

 

(85,250

)

 

 

(47,500

)

Payments to affiliate for acquisition and development of coal reserves

 

 

(1,401

)

 

 

(21,318

)

Advances/loans to affiliate

 

 

-

 

 

 

(7,500

)

Net cash used in investing activities

 

 

(315,381

)

 

 

(319,201

)

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Payments under term loan

 

 

(12,500

)

 

 

-

 

Borrowings under revolving credit facilities

 

 

221,800

 

 

 

211,000

 

Payments under revolving credit facilities

 

 

(301,800

)

 

 

(216,000

)

Payment on long-term debt

 

 

(18,000

)

 

 

(18,000

)

Payments on capital lease obligations

 

 

(1,113

)

 

 

(886

)

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

 

 

(2,991

)

 

 

(3,015

)

Cash contributions by General Partners

 

 

111

 

 

 

114

 

Distributions paid to Partners

 

 

(235,344

)

 

 

(213,809

)

Net cash used in financing activities

 

 

(349,837

)

 

 

(240,596

)

 

 

 

 

 

 

 

 

 

NET CHANGE IN CASH AND CASH EQUIVALENTS

 

 

(78,825

)

 

 

(9,412

)

 

 

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

 

 

93,654

 

 

 

28,283

 

 

 

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

 

 

$

14,829

 

 

 

$

18,871

 

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL CASH FLOW INFORMATION:

 

 

 

 

 

 

 

 

Cash paid for interest

 

 

$

20,381

 

 

 

$

21,638

 

 

 

 

 

 

 

 

 

 

NON-CASH INVESTING AND FINANCING ACTIVITY:

 

 

 

 

 

 

 

 

Accounts payable for purchase of property, plant and equipment

 

 

$

18,069

 

 

 

$

20,618

 

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

 

 

$

8,417

 

 

 

$

8,583

 

Disposition of property, plant and equipment:

 

 

 

 

 

 

 

 

Net change in assets

 

 

$

846

 

 

 

$

-

 

Book value of liabilities transferred

 

 

(5,246

)

 

 

-

 

Gain recognized

 

 

$

(4,400

)

 

 

$

-

 

 

See notes to condensed consolidated financial statements.

 

4


 


Table of Contents

 

ALLIANCE RESOURCE PARTNERS, L.P. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.                                    ORGANIZATION AND PRESENTATION

 

Significant Relationships Referenced in Notes to Condensed Consolidated Financial Statements

 

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

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

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

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

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

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

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

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

 

Organization

 

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

 

We are managed by our managing general partner, MGP, a Delaware limited liability company, which holds a 0.99% and a 1.0001% managing general partner interest in ARLP and the Intermediate Partnership, respectively, and a 0.001% managing member interest in Alliance Coal.  AHGP is a Delaware limited partnership that was formed to become the owner and controlling member of MGP.  AHGP completed its initial public offering on May 15, 2006.  AHGP owns directly and indirectly 100% of the members’ interest of MGP, the incentive distribution rights (“IDR”) in ARLP and 31,088,338 common units of ARLP.

 

Basis of Presentation

 

The accompanying condensed consolidated financial statements include the accounts and operations of the ARLP Partnership and present our financial position as of September 30, 2014 and December 31, 2013, the results of our operations and comprehensive income for the three and nine months ended September 30, 2014 and 2013 and the cash flows for the nine months ended September 30, 2014 and 2013.  All of our intercompany transactions and accounts have been eliminated.

 

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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, 2013.

 

On June 16, 2014, we completed a two-for-one split of our common units, whereby holders of record as of May 30, 2014 received a one unit distribution on each unit outstanding on that date.  The unit split resulted in the issuance of 37,030,317 common units.  All references to the number of units and per unit net income and distribution amounts included in this report have been adjusted to give effect for this unit split for all periods presented.  Also, ARLP’s partnership agreement was amended effective June 16, 2014, to reduce by half the target thresholds for the incentive distribution rights per unit.

 

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 Not Yet Adopted

 

In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (“ASU 2014-08”).  ASU 2014-08 changes the requirements for reporting discontinued operations in Accounting Standards Codification 205, Presentation of Financial Statements, by updating the criteria for determining which disposals can be presented as discontinued operations and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of discontinued operations.  ASU 2014-08 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2014.  We do not anticipate the adoption of ASU 2014-08 on January 1, 2015 will have a material impact on our consolidated financial statements.

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”).  ASU 2014-09 is a new revenue recognition standard that provides a five-step analysis of transactions to determine when and how revenue is recognized.  The core principle of the new standard is an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  ASU 2014-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016 and shall be applied retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption.  Early adoption is not permitted.  We are currently evaluating the effect of adopting ASU 2014-09 on January 1, 2017.

 

In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”).  ASU 2014-15 provides guidance on management’s responsibility in evaluating whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures.  ASU 2014-15 is effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter with early adoption permitted.  We do not anticipate the adoption of ASU 2014-15 will have a material impact on our consolidated financial statements.

 

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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.                                    FAIR VALUE MEASUREMENTS

 

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

 

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

 

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

·     Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model derived valuations whose inputs are observable or whose significant value drivers are observable.

·     Level 3 – Instruments whose significant value drivers are unobservable.

 

The carrying amounts for cash equivalents, accounts receivable, accounts payable, due from affiliates and due to affiliates approximate fair value because of the short maturity of those instruments.  At September 30, 2014 and December 31, 2013, the estimated fair value of our long-term debt, including current maturities, was approximately $776.1 million and $884.8 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 5). 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.

 

5.                                    LONG-TERM DEBT

 

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

 

 

 

September 30,
2014

 

December 31,
2013

 

 

 

 

 

 

 

 

 

Revolving Credit facility

 

 

$

170,000

 

 

 

$

250,000

 

Senior notes

 

 

-

 

 

 

18,000

 

Series A senior notes

 

 

205,000

 

 

 

205,000

 

Series B senior notes

 

 

145,000

 

 

 

145,000

 

Term loan

 

 

237,500

 

 

 

250,000

 

 

 

 

757,500

 

 

 

868,000

 

Less current maturities

 

 

(230,000

)

 

 

(36,750

)

Total long-term debt

 

 

$

527,500

 

 

 

$

831,250

 

 

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Our Intermediate Partnership has $205.0 million in Series A and $145.0 million in Series B senior notes (collectively, the “2008 Senior Notes”), a $700.0 million revolving credit facility (“Revolving Credit Facility”) and a $237.5 million term loan (“Term Loan”) (collectively, with the 2008 Senior Notes and the Revolving Credit Facility, the “ARLP Debt Arrangements”), which are guaranteed by all of the material direct and indirect subsidiaries of our Intermediate Partnership.  At September 30, 2014, current maturities include Series A Senior notes, due in June 2015, and a portion of the Term Loan.  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, incurrence of additional indebtedness and liens, sale of assets, investments, mergers and consolidations and 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 0.97 to 1.0 and 22.9 to 1.0, respectively, for the trailing twelve months ended September 30, 2014.  We were in compliance with the covenants of the ARLP Debt Arrangements as of September 30, 2014.

 

At September 30, 2014, we had borrowings of $170.0 million and $5.4 million of letters of credit outstanding with $524.6 million available for borrowing under the Revolving Credit Facility.  We utilize the Revolving Credit Facility, as appropriate, for working capital requirements, 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.

 

6.                                    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.  The initial longwall system commenced operation in late October 2014.  The transactions with White Oak feature several components, including an equity investment in White Oak (represented by “Series A Units” containing certain distribution and liquidation preferences), the acquisition and lease-back of certain coal reserves and surface rights and a construction loan.  Our initial investment funding to White Oak at the Transaction Date, consummated utilizing existing cash on hand, was $69.5 million and we have funded White Oak $303.3 million between the Transaction Date and September 30, 2014.  We expect to fund a total of approximately $395.5 million to $435.5 million from the Transaction Date through December 31, 2015, which includes the funding made to White Oak through September 30, 2014 discussed above.  We will continue to assess and provide funding, as needed, to White Oak after December 31, 2015.  We expect to fund additional commitments utilizing existing cash balances, future cash flows from operations, borrowings under credit facilities and cash provided from the issuance of debt or equity.  On the Transaction Date, we also entered into a coal handling and preparation agreement, pursuant to which we constructed and are operating a preparation plant and other surface facilities.  The following information discusses each component of these transactions in further detail.

 

Hamilton County, Illinois Reserve Acquisition

 

On the Transaction Date, 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 have been developed for mining by White Oak, and certain surface properties and rights in Hamilton County, Illinois (the “Reserve Acquisition”), which is adjacent to White County, Illinois, where our White County Coal, LLC’s Pattiki mine is located.  The asset purchase price of $33.8 million cash paid at closing was allocated to owned and leased coal rights.  Between the Transaction Date and December 31, 2012, WOR Properties provided $51.6 million to White Oak for development of the acquired coal reserves, fulfilling its initial commitment for further development

 

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funding.  During the twelve months ended December 31, 2013, WOR Properties acquired from White Oak, for $25.3 million cash paid at various closings, an additional 90.1 million tons of reserves.  During the nine months ended September 30, 2014, WOR Properties acquired from White Oak, for $1.4 million cash paid at closing, an additional 5.1 million tons of reserves.  Of the additional tons acquired in 2013 and the nine months ended September 30, 2014, 48.5 million tons have been developed for mining by White Oak.  At September 30, 2014, WOR Properties had provided $112.1 million to acquire a total of 300.1 million tons of coal reserves and fund the development of the acquired reserves.  WOR Properties has a remaining commitment of $27.9 million for additional coal reserve acquisitions.

 

Equity Investment – Series A Units

 

Concurrent with the Reserve Acquisition, our subsidiary, Alliance WOR Processing, LLC (“WOR Processing”), made an initial equity investment of $35.7 million in White Oak to purchase Series A Units representing ownership in White Oak.  WOR Processing purchased $129.3 million of additional Series A Units between the Transaction Date and December 31, 2013, and fulfilled WOR Processing’s minimum equity investment commitment of $150.0 million.  During the nine months ended September 30, 2014, WOR Processing purchased $85.3 million of additional Series A Units, bringing our total investment in Series A Units to $250.3 million at September 30, 2014.

 

WOR Processing’s ownership and member’s voting interest in White Oak at September 30, 2014 were 37.5% based upon currently outstanding voting units.  The remainder of the equity ownership in White Oak, represented by Series A and 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 that 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, 2014, WOR Processing had invested $250.3 million in Series A Units of White Oak equity, which represents our current maximum exposure to loss as a result of our equity investment in White Oak exclusive of capitalized interest.  White Oak has made no distributions to us.

 

We record WOR Processing’s equity in income or losses of affiliates under the hypothetical liquidation at book value (“HLBV”) method of accounting due to the preferences to which WOR Processing is entitled to distributions.  We were allocated $39,000 of losses for the three months ended September 30, 2014 due primarily to losses incurred by White Oak offset in part by the impact of changes in allocations of equity income or losses resulting from the purchase of Series A Units during the period by another White Oak owner concurrent with the continued purchase of Series A Units by WOR Processing.  Series A Unit purchases impact the future preferred distributions allocable to each owner and the ongoing allocation of income and losses for GAAP purposes under the HLBV method.  For the three months ended September 30, 2013, we were allocated losses of $6.2 million.  For the nine months ended September 30, 2014 and 2013, we were allocated losses of $13.8 million and $16.3 million, respectively.

 

Services Agreement

 

Simultaneous with the closing of the Reserve Acquisition, WOR Processing entered into a Coal Handling and Preparation 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.  WOR Processing earned throughput fees of $2.7 million and $10.1 million, for the three and nine months ended September 30, 2014, respectively, and $0.6 million for each of the three and nine months ended September 30, 2013, from White Oak for processing and loading coal through the facilities.  Throughput fees earned from White Oak are included in the other sales and operating revenues line item within our condensed consolidated statements of income.

 

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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 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 borrowed the entire amount available under the Construction Loan as of September 30, 2014.

 

7.                                    NET INCOME PER LIMITED PARTNER UNIT

 

We apply the provisions of FASB ASC 260, Earnings Per Share, which requires the two-class method in calculating basic and diluted earnings per unit (“EPU”).  Net income is allocated to the general partners and limited partners in accordance with their respective partnership percentages, after giving effect to any special income or expense allocations, including incentive distributions to our managing general partner, the holder of the IDR pursuant to our partnership agreement, which are declared and paid following the end of each quarter. Under the quarterly IDR provisions of our partnership agreement, our managing general partner is entitled to receive 15% of the amount we distribute in excess of $0.1375 per unit, 25% of the amount we distribute in excess of $0.15625 per unit, and 50% of the amount we distribute in excess of $0.1875 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, outstanding awards under our Long-Term Incentive Plan (“LTIP”) and phantom units in notional accounts under our Supplemental Executive Retirement Plan (“SERP”) and the MGP Amended and Restated Deferred Compensation Plan for Directors (“Deferred Compensation Plan”) include rights to nonforfeitable distributions or distribution equivalents and are therefore considered participating securities.  As such, we allocate undistributed and distributed earnings to these outstanding awards in our calculation of EPU.  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, 2014 and 2013 (in thousands, except per unit data):

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

Net income

 

 $

119,978 

 

 $

87,186 

 

 $

373,535 

 

 $

294,197 

Adjustments:

 

 

 

 

 

 

 

 

Managing general partner’s priority distributions

 

(33,588)

 

(29,906)

 

(97,954)

 

(87,275)

General partners’ 2% equity ownership

 

(1,728)

 

(1,146)

 

(5,511)

 

(4,139)

 

 

 

 

 

 

 

 

 

Limited partners’ interest in net income

 

84,662 

 

56,134 

 

270,070 

 

202,783 

 

 

 

 

 

 

 

 

 

Less:

 

 

 

 

 

 

 

 

Distributions to participating securities

 

(751)

 

(597)

 

(2,188)

 

(1,749)

Undistributed earnings attributable to participating securities

 

(585)

 

(167)

 

(2,027)

 

(1,012)

 

 

 

 

 

 

 

 

 

Net income available to limited partners

 

 $

83,326 

 

 $

55,370 

 

 $

265,855 

 

 $

200,022 

 

 

 

 

 

 

 

 

 

Weighted average limited partner units outstanding – basic and diluted

 

74,061 

 

73,926 

 

74,039 

 

73,897 

 

 

 

 

 

 

 

 

 

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

 

 $

1.13 

 

 $

0.75 

 

 $

3.59 

 

 $

2.71 

 

(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, 2014 and 2013, the combined total of LTIP, SERP and Deferred Compensation Plan units of 843,976, 710,518, 776,094 and 656,628 respectively, were considered anti-dilutive under the treasury stock method.

 

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8.                                    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,

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

 

$

 61,515

 

 

 

$

 80,630

 

 

 

$

  62,909

 

 

 

$

 77,046

 

Accruals increase

 

 

1,291

 

 

 

452

 

 

 

8,755

 

 

 

8,399

 

Payments

 

 

(2,667

)

 

 

(2,553

)

 

 

(8,194

)

 

 

(8,156

)

Interest accretion

 

 

646

 

 

 

621

 

 

 

1,939

 

 

 

1,861

 

Valuation gain (1)

 

 

-

 

 

 

-

 

 

 

(4,624

)

 

 

-

 

Ending balance

 

 

$

 60,785

 

 

 

$

 79,150

 

 

 

$

  60,785

 

 

 

$

 79,150

 

 

(1)      Our liability for the estimated present value of current workers' compensation benefits is based on our actuarial estimates.  Our actuarial calculations are based on a blend of actuarial projection methods and numerous assumptions including claim development patterns, mortality, medical costs and interest rates.  We conducted a mid-year review of our actuarial assumptions which resulted in a valuation gain in June 2014 primarily attributable to favorable changes in claims development, offset partially by a decrease in the discount rate used to calculate the estimated present value of future obligations from 4.11% at December 31, 2013 to 3.67% at June 30, 2014.

 

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,

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

 

$

857

 

 

 

$

953

 

 

 

$

2,571

 

 

 

$

2,858

 

Interest cost

 

 

566

 

 

 

563

 

 

 

1,697

 

 

 

1,690

 

Amortization of net (gain)/loss (1)

 

 

(263

)

 

 

168

 

 

 

(789

)

 

 

503

 

Net periodic benefit cost

 

 

$

  1,160

 

 

 

$

  1,684

 

 

 

$

  3,479

 

 

 

$

  5,051

 

 

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

 

9.                                    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 22, 2014, the Compensation Committee determined that the vesting requirements for the 2011 grants of 202,742 restricted units (which is net of 14,090 forfeitures) had been satisfied as of January 1, 2014.  As a result of this vesting, on February 14, 2014, we issued 128,610 unrestricted common units to the LTIP

 

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participants. The remaining units were settled in cash to satisfy the individual statutory minimum tax obligations of the LTIP participants.  On January 22, 2014, the Compensation Committee authorized additional grants of up to 370,410 restricted units, of which 356,154 were granted during the nine months ended September 30, 2014 and will vest on January 1, 2017, subject to satisfaction of certain financial tests.  The fair value of these 2014 grants is equal to the intrinsic value at the date of grant, which was $40.72 per unit.  LTIP expense was $2.5 million and $1.8 million for the three months ended September 30, 2014 and 2013, respectively, and $7.1 million and $5.4 million for the nine months ended September 30, 2014 and 2013, respectively.  After consideration of the January 1, 2014 vesting and subsequent issuance of 128,610 common units, approximately 3.9 million units remain available under the LTIP for issuance in the future, assuming all grants issued in 2012, 2013 and 2014 currently outstanding are settled with common units, without reduction for tax withholding, and no future forfeitures occur.

 

As of September 30, 2014, there was $15.1 million in total unrecognized compensation expense related to the non-vested LTIP grants that are expected to vest.  That expense is expected to be recognized over a weighted-average period of 1.4 years.  As of September 30, 2014, the intrinsic value of the non-vested LTIP grants was $36.3 million.  As of September 30, 2014, the total obligation associated with the LTIP was $15.4 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.

 

SERP and Directors Deferred Compensation Plan

 

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

 

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

 

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

 

For the nine months ended September 30, 2014 and 2013, SERP and Deferred Compensation Plan participant notional account balances were credited with a total of 15,860 and 21,670 phantom units, respectively, and the fair value of these phantom units was $44.47 per unit and $34.16 per unit, respectively, on a weighted-average basis.  Total SERP and Deferred Compensation Plan expense was approximately $0.3 million for each of the three months ended September 30, 2014 and 2013, and $0.9 million for each of the nine months ended September 30, 2014 and 2013.

 

As of September 30, 2014, there were 357,264 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 $15.3 million.  As of September 30, 2014, the total obligation associated with the SERP and Deferred Compensation Plan was $12.0 million and is included in the partners’ capital-limited partners line item in our condensed consolidated balance sheets.  On February 14, 2014, we issued 5,916 ARLP common units to directors under the Deferred Compensation Plan.

 

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10.                            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,

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

                  

 

Service cost

 

 

$

543

 

 

 

$

674

 

 

 

$

1,630

 

 

 

$

2,108

 

Interest cost

 

 

1,019

 

 

 

929

 

 

 

3,056

 

 

 

2,710

 

Expected return on plan assets

 

 

(1,368

)

 

 

(930

)

 

 

(4,106

)

 

 

(3,094

)

Amortization of net loss (1)

 

 

193

 

 

 

557

 

 

 

580

 

 

 

1,675

 

Net periodic benefit cost

 

 

$

387

 

 

 

$

1,230

 

 

 

$

1,160

 

 

 

$

3,399

 

 

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

 

We previously disclosed in our financial statements for the year ended December 31, 2013 that we expected to contribute $3.6 million to the Pension Plan in 2014.  During the nine months ended September 30, 2014, we made contribution payments of $0.8 million to the Pension Plan for the 2013 plan year and $1.7 million for the 2014 plan year.  On October 15, 2014, we made a contribution payment of $0.2 million for the 2014 plan year.

 

On August 8, 2014, new federal legislation extending the 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 anticipate that as a result of this new legislation, we will not make any further contributions during 2014 beyond the $2.7 million noted above.

 

11.                            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 four reportable segments: the Illinois Basin, Appalachia, White Oak and Other and Corporate.  The first two reportable segments correspond to major coal producing regions in the eastern U.S.  Similar economic characteristics for our operating segments within each of these two reportable segments generally include coal quality, geology, coal marketing opportunities, mining and transportation methods and regulatory issues.  The White Oak reportable segment includes our activities associated with the White Oak longwall Mine No. 1, which commenced initial longwall operation in late October 2014.

 

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 mine, Hopkins County Coal, LLC’s Elk Creek mining complex, White County Coal, LLC’s Pattiki mining complex, Warrior Coal, LLC’s mining complex, Sebree Mining, LLC’s mining complex, which includes the Onton mine, and River View Coal, LLC’s mining complex.  The development of the Gibson South mine continues and includes incidental production which began in April 2014.

 

The Appalachian reportable segment is comprised of multiple operating segments, including the Mettiki mining complex, the Tunnel Ridge, LLC mining complex, the MC Mining, LLC mining complex and the Penn Ridge Coal, LLC (“Penn Ridge”) property.  The Mettiki mining complex includes Mettiki

 

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Coal (WV), LLC’s Mountain View mine, Mettiki Coal, LLC’s preparation plant and a small third-party mining operation which has been idled since July 2013.  We are in the process of permitting the Penn Ridge property for future mine development.

 

The White Oak reportable segment is comprised of two operating segments, WOR Processing and WOR Properties.  WOR Processing includes both the surface operations at White Oak and the equity investment in White Oak.  WOR Properties owns coal reserves acquired from White Oak under lease-back arrangements (Note 6).

 

The Other and Corporate segment includes marketing and administrative expenses, Alliance Service, Inc. (“ASI”) and its subsidiary, Matrix Design Group, LLC (“Matrix Design”), Alliance Design Group, LLC (“Alliance Design”) (collectively, Matrix Design and Alliance Design are referred to as the “Matrix Group”), ASI’s ownership of aircraft, the Mt. Vernon Transfer Terminal, LLC (“Mt. Vernon”) dock activities, coal brokerage activity, our equity investment in Mid-America Carbonates, LLC, certain activities of Alliance Resource Properties, the Pontiki Coal, LLC mining complex (“Pontiki”), which ceased operations in November 2013 and sold most of its assets in May 2014, and Wildcat Insurance, LLC.

 

As a result of the cessation of operations at Pontiki in November 2013, we evaluated the ongoing management of our mining operations and coal sales efforts to ensure that resources were appropriately allocated to maximize our overall results.  Based on this evaluation, we have realigned the management of our operating and marketing teams and changed our reportable segment presentation to reflect this realignment.  Due to the change in our reportable segment presentation in 2014, certain reclassifications of 2013 segment information have been made to conform to the 2014 presentation.  These reclassifications include changes to the Appalachian segment and Other and Corporate segment.

 

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Reportable segment results as of and for the three and nine months ended September 30, 2014 and 2013 are presented below.

 

 

 

 

Illinois
Basin

 

Appalachia

 

White Oak

 

Other and
Corporate

 

Elimination
(1)

 

Consolidated

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reportable segment results for the three months ended September 30, 2014 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues (2)

 

 

$

392,401

 

 

 

$

167,391

 

 

 

$

3,583

 

 

 

$

7,730

 

 

 

$

(1,777

)

 

 

$

569,328

 

Segment Adjusted EBITDA Expense (3)

 

 

245,481

 

 

 

95,956

 

 

 

2,144

 

 

 

6,820

 

 

 

(1,777

)

 

 

348,624

 

Segment Adjusted EBITDA (4)(5)

 

 

143,854

 

 

 

68,501

 

 

 

1,401

 

 

 

1,015

 

 

 

-

 

 

 

214,771

 

Capital expenditures (7)

 

 

62,583

 

 

 

13,371

 

 

 

247

 

 

 

2,880

 

 

 

-

 

 

 

79,081

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues (2)

 

 

$

405,597

 

 

 

$

111,789

 

 

 

$

566

 

 

 

$

23,530

 

 

 

$

(4,253

)

 

 

$

537,229

 

Segment Adjusted EBITDA Expense (3)

 

 

239,962

 

 

 

89,578

 

 

 

546

 

 

 

20,476

 

 

 

(4,253

)

 

 

346,309

 

Segment Adjusted EBITDA (4)(5)

 

 

156,790

 

 

 

19,504

 

 

 

(6,190

)

 

 

3,272

 

 

 

-

 

 

 

173,376

 

Capital expenditures (7)

 

 

58,569

 

 

 

14,528

 

 

 

6,632

 

 

 

2,352

 

 

 

-

 

 

 

82,081

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reportable segment results as of and for the nine months ended September 30, 2014 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues (2)

 

 

$

1,213,426

 

 

 

$

468,671

 

 

 

$

11,451

 

 

 

$

23,660

 

 

 

$

(7,280

)

 

 

$

1,709,928

 

Segment Adjusted EBITDA Expense (3)

 

 

731,014

 

 

 

275,446

 

 

 

5,160

 

 

 

18,794

 

 

 

(7,280

)

 

 

1,023,134

 

Segment Adjusted EBITDA (4)(5)

 

 

473,362

 

 

 

184,460

 

 

 

(7,511

)

 

 

5,121

 

 

 

-

 

 

 

655,432

 

Total assets (6)

 

 

1,136,731

 

 

 

591,516

 

 

 

390,013

 

 

 

56,742

 

 

 

(1,400

)

 

 

2,173,602

 

Capital expenditures (7)

 

 

180,458

 

 

 

42,040

 

 

 

2,426

 

 

 

10,136

 

 

 

-

 

 

 

235,060

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues (2)

 

 

$

1,210,806

 

 

 

$

367,733

 

 

 

$

566

 

 

 

$

74,559

 

 

 

$

(14,809

)

 

 

$

1,638,855

 

Segment Adjusted EBITDA Expense (3)

 

 

707,810

 

 

 

282,056

 

 

 

1,074

 

 

 

66,955

 

 

 

(14,809

)

 

 

1,043,086

 

Segment Adjusted EBITDA (4)(5)

 

 

488,634

 

 

 

76,581

 

 

 

(16,777

)

 

 

8,316

 

 

 

-

 

 

 

556,754

 

Total assets (6)

 

 

1,064,268

 

 

 

605,759

 

 

 

306,002

 

 

 

71,484

 

 

 

(865

)

 

 

2,046,648

 

Capital expenditures (7)

 

 

163,595

 

 

 

58,947

 

 

 

35,502

 

 

 

5,927

 

 

 

-

 

 

 

263,971

 

 

(1)

The elimination column represents the elimination of intercompany transactions and is primarily comprised of sales from the Matrix Group to our mining operations and coal sales and purchases between mining operations (2013 only).

 

 

(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, brokerage sales and Pontiki’s coal sales revenue (primarily 2013).

 

 

(3)

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

 

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

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment Adjusted EBITDA Expense

 

 

$

 348,624

 

 

 

 

$

 346,309

 

 

 

 

$

1,023,134

 

 

 

 

$

1,043,086

 

Outside coal purchases

 

 

(3

)

 

 

 

(636

)

 

 

 

(7

)

 

 

 

(2,028

)

Other income

 

 

549

 

 

 

 

372

 

 

 

 

1,178

 

 

 

 

999

 

Operating expenses (excluding depreciation, depletion and amortization)

 

 

$

 349,170

 

 

 

 

$

 346,045

 

 

 

 

$

1,024,305

 

 

 

 

$

1,042,057

 

 

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(4)

Segment Adjusted EBITDA is defined as net income before net interest expense, income taxes, depreciation, depletion and amortization and general and administrative expenses.  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,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated Segment Adjusted EBITDA

 

 

$

  214,771

 

 

 

 

$

 173,376

 

 

 

 

$

  655,432

 

 

 

 

$

 556,754

 

General and administrative

 

 

(16,995

)

 

 

 

(14,893

)

 

 

 

(54,201

)

 

 

 

(46,736

)

Depreciation, depletion and amortization

 

 

(69,646

)

 

 

 

(66,099

)

 

 

 

(203,539

)

 

 

 

(198,688

)

Interest expense, net

 

 

(8,152

)

 

 

 

(5,916

)

 

 

 

(24,157

)

 

 

 

(18,440

)

Income tax benefit

 

 

-

 

 

 

 

718

 

 

 

 

-

 

 

 

 

1,307

 

Net income

 

 

$

119,978

 

 

 

 

$

87,186

 

 

 

 

$

373,535

 

 

 

 

$

 294,197

 

 

(5)

Segment Adjusted EBITDA attributable to the White Oak segment includes equity in income (loss) of affiliates for the three and nine months ended September 30, 2014 of $39,000 and $(13.8) million, respectively, and $0.2 million and $0.3 million, respectively, included in the Other and Corporate segment.  Segment Adjusted EBITDA includes equity in income (loss) of affiliates for the three and nine months ended September 30, 2013 of $(6.2) million and $(16.3) million, respectively, included in the White Oak segment and $0.1 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 $200.1 million and $1.5 million, respectively, at September 30, 2014 and $122.7 million and $1.6 million, respectively, at September 30, 2013.

 

 

(7)

Capital expenditures shown above include funding to White Oak of $1.4 million for the nine months ended September 30, 2014, no funding for the three months ended September 30, 2014 and $2.5 million and $21.3 million of funding, respectively, for the three and nine months ended September 30, 2013, for the acquisition and development of coal reserves from White Oak (Note 6), which is described as “Payments to affiliate for acquisition and development of coal reserves” in our condensed consolidated statements of cash flow.

 

12.                            SUBSEQUENT EVENTS

 

On October 27, 2014, we declared a quarterly distribution for the quarter ended September 30, 2014, of $0.6375 per unit, on all common units outstanding, totaling approximately $81.8 million (which includes our managing general partner’s incentive distributions), payable on November 14, 2014 to all unitholders of record as of November 7, 2014.

 

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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.  As is customary in the coal industry, we have entered into long-term coal supply agreements with many of our customers.  We operate ten underground mining complexes in Illinois, Indiana, Kentucky, Maryland and West Virginia and we operate a coal loading terminal on the Ohio River at Mt. Vernon, Indiana.  The development of an additional mine (the “Gibson South mine”) at our southern Indiana Gibson County Coal, LLC mining complex (“Gibson County Coal”) continues and includes incidental production which began in April 2014.  Also, we own a preferred equity interest and are making additional equity investments in White Oak Resources LLC (“White Oak”), we own and are purchasing additional coal reserves under lease-back arrangements with White Oak, and have constructed and are operating surface facilities at White Oak’s new longwall mining complex in southern Illinois.  White Oak’s initial longwall system commenced operation in late October 2014.

 

We have four reportable segments: Illinois Basin, Appalachia, White Oak and Other and Corporate.  The first two reportable segments correspond to major coal producing regions in the eastern U.S.  Factors similarly affecting financial performance of our operating segments within each of these two reportable segments generally include coal quality, geology, coal marketing opportunities, mining and transportation methods and regulatory issues.  The White Oak segment includes our activities associated with the White Oak longwall Mine No. 1 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, which includes the Gibson North mine and Gibson South mine, Hopkins County Coal, LLC mining complex (“Hopkins”), which includes the Elk Creek mine and the Fies property, White County Coal, LLC’s Pattiki mining complex (“Pattiki”), Warrior Coal, LLC’s mining complex (“Warrior”), Sebree Mining, LLC’s mining complex (“Sebree”), which includes the Onton mine, Steamport, LLC and certain undeveloped coal reserves, River View Coal, LLC’s mining complex (“River View”), CR Services, LLC, and certain properties of Alliance Resource Properties, LLC

 

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(“Alliance Resource Properties”), ARP Sebree, LLC and ARP Sebree South, LLC.  The development of the Gibson South mine continues and includes incidental production which began in April 2014.  The Sebree and Fies properties are held by us for future mine development.

 

·      Appalachian reportable segment is comprised of multiple operating segments, including the Mettiki mining complex (“Mettiki”), the Tunnel Ridge, LLC mining complex (“Tunnel Ridge”), the MC Mining, LLC mining complex (“MC Mining”) and the Penn Ridge Coal, LLC (“Penn Ridge”) property.  The Mettiki mining complex includes Mettiki Coal (WV), LLC’s Mountain View mine, Mettiki Coal, LLC’s preparation plant and a small third-party mining operation which has been idled since July 2013.  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 Properties owns coal reserves acquired from White Oak, and is committed to acquiring additional reserves from White Oak, under lease-back arrangements.  WOR Properties has also provided certain funding to White Oak for development of these reserves.  WOR Processing includes both the surface operations at White Oak and the equity investments we are making in White Oak.  The White Oak reportable segment also includes a loan to White Oak from our Intermediate Partnership to construct certain surface facilities. For more information on White Oak, please read “Item 1. Financial Statements (Unaudited) – Note 6. White Oak Transactions” of this Quarterly Report on Form 10-Q.

 

·      Other and Corporate segment includes marketing and administrative expenses, Alliance Service, Inc. (“ASI”) and its subsidiary, Matrix Design Group, LLC (“Matrix Design”), Alliance Design Group, LLC, ASI’s ownership of aircraft, the Mt. Vernon Transfer Terminal, LLC (“Mt. Vernon”) dock activities, coal brokerage activity, our equity investment in Mid-America Carbonates, LLC (“MAC”), certain activities of Alliance Resource Properties, the Pontiki Coal, LLC mining complex (“Pontiki”), which ceased operations in November 2013 and sold most of its assets in May 2014, and Wildcat Insurance, LLC (“Wildcat Insurance”), which was established in September 2014 to assist the ARLP Partnership with its insurance requirements.

 

As a result of a change in our reportable segments in 2014, certain reclassifications of 2013 segment information have been made to conform to the 2014 presentation.  These reclassifications include changes to the Appalachian reportable segment and Other and Corporate segment.

 

Three Months Ended September 30, 2014 Compared to Three Months Ended September 30, 2013

 

We reported net income of $120.0 million for the three months ended September 30, 2014 (“2014 Quarter”) compared to $87.2 million for the three months ended September 30, 2013 (“2013 Quarter”). The increase of $32.8 million was principally due to increased sales and production volumes, which rose to 9.8 million tons sold and 10.2 million tons produced in the 2014 Quarter compared to 9.5 million tons sold and 9.7 million tons produced in the 2013 Quarter.  The increase in tons sold and produced resulted from increased volumes at our Tunnel Ridge, Onton and MC Mining mines, new development coal production at our Gibson South mine and strong sales performance at our Dotiki mine.  Net income was also favorably impacted by a $1.26 increase in average coal sales price per ton sold to $55.81 per ton sold in the 2014 Quarter compared to $54.55 per ton sold in the 2013 Quarter.  Higher operating expenses during the 2014 Quarter primarily resulted from increased sales and production volumes, which particularly impacted sales-related expenses, materials and supplies expenses, labor-related expenses and maintenance costs compared to the 2013 Quarter.  Increases in operating expenses were partially offset by higher costs in the 2013 Quarter related to costs associated with an adverse geological event at the Onton mine.

 

 

 

Three Months Ended September 30,

 

 

2014

 

2013

 

2014

 

2013

 

 

(in thousands)

 

(per ton sold)

Tons sold

 

9,825

 

9,504

 

N/A

 

N/A

Tons produced

 

10,219

 

9,682

 

N/A

 

N/A

Coal sales

 

$548,357

 

$518,447

 

$55.81

 

$54.55

Operating expenses and outside coal purchases

 

$349,173

 

$346,681

 

$35.54

 

$36.48

 

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Coal sales.  Coal sales for the 2014 Quarter increased 5.8% to $548.4 million from $518.4 million for the 2013 Quarter.  The increase of $30.0 million in coal sales reflected the benefit of increased tons sold (contributing $17.6 million in additional coal sales) and higher average coal sales prices (contributing $12.4 million in coal sales).  Average coal sales prices in the 2014 Quarter increased to $55.81 compared to $54.55 per ton in the 2013 Quarter, primarily as a result of higher-priced coal sales at our Mettiki and Tunnel Ridge mines and higher-priced coal sales from development production at our Gibson South mine.

 

Operating expenses and outside coal purchases.  Operating expenses and outside coal purchases combined increased slightly to $349.2 million for the 2014 Quarter from $346.7 million for the 2013 Quarter, primarily due to increased coal sales and production volumes.  On a per ton basis, operating expenses and outside coal purchases decreased 2.6% to $35.54 per ton sold primarily due to the favorable impact of increased lower-cost production at our Tunnel Ridge mine, strong production performance at the MC Mining mine, improved production and operating conditions at our Onton mine and the absence of higher cost production at our Pontiki mine, which was closed in late 2013.  Operating expenses were impacted by various other factors, the most significant of which are discussed below:

 

·                 Labor and benefit expenses per ton produced, excluding workers’ compensation, decreased 1.8% to $11.70 per ton in the 2014 Quarter from $11.92 per ton in the 2013 Quarter.  This decrease of $0.22 per ton was primarily attributable to lower labor and benefit costs per ton resulting from increased production discussed above and lower medical expenses at our Mettiki mine, partially offset by higher labor cost per ton resulting from decreased coal recoveries at our Warrior and Gibson North mines, higher labor and benefit costs per ton during the development phase of our Gibson South mine and higher medical expense at certain Illinois Basin mines;

 

·                 Material and supplies expenses per ton produced were $11.96 for the 2014 and 2013 Quarters.  Material and supplies expenses remained unchanged on a per ton basis due to the increase in cost of certain products and services, primarily roof support (increase of $0.13 per ton), various preparation plant expenses (increase of $0.11 per ton) and other outside services used in the mining process (increase of $0.09 per ton), offset by the decrease in cost of certain products and services, primarily attributable to safety-related expenses (decrease of $0.36 per ton) and contract labor used in the mining process (decrease of $0.08 per ton).  Lower safety-related materials and supplies in the 2014 Quarter resulted from the absence of higher costs associated with the adverse geological event at our Onton mine which occurred in the 2013 Quarter;

 

·                 Maintenance expenses per ton produced increased 1.8% to $4.00 per ton in the 2014 Quarter from $3.93 per ton in the 2013 Quarter.  The increase of $0.07 per ton produced was primarily due to higher cost production during the development phase of our Gibson South mine, partially offset by increased production at certain locations as discussed above and the absence of higher cost production at our Pontiki mine;

 

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·                 Production taxes and royalties expenses (which were incurred as a percentage of coal sales prices and volumes) increased $0.22 per produced ton sold in the 2014 Quarter compared to the 2013 Quarter primarily as a result of increased sales and production from certain mines in states with higher severance tax rates; and

 

·                 Operating expenses for the 2014 Quarter were also favorably impacted by the absence of $3.8 million of asset retirements which occurred in the 2013 Quarter resulting from the adverse geological event at our Onton mine.

 

Other sales and operating revenues.  Other sales and operating revenues are principally comprised of Mt. Vernon transloading revenues, Matrix Design sales, throughput fees received from White Oak and other outside services and administrative services revenue from affiliates.  Other sales and operating revenues increased to $15.0 million in the 2014 Quarter from $7.2 million in the 2013 Quarter.  The increase of $7.8 million was primarily due to increased White Oak throughput fees, payments in lieu of shipments received from a customer in the 2014 Quarter related to an Appalachian coal sales contract and increased Matrix Design sales.

 

General and administrative.  General and administrative expenses for the 2014 Quarter increased to $17.0 million compared to $14.9 million in the 2013 Quarter.  The increase of $2.1 million was primarily due to increased incentive compensation expense and other professional services.

 

Depreciation, depletion and amortization.  Depreciation, depletion and amortization expense increased to $69.6 million for the 2014 Quarter from $66.1 million for the 2013 Quarter.  The increase of $3.5 million was primarily attributable to increased production volumes mentioned above, as well as capital expenditures related to production expansion and infrastructure investments at various operations.

 

Interest expense.  Interest expense, net of capitalized interest, increased to $8.6 million for the 2014 Quarter from $6.2 million for the 2013 Quarter.  The increase of $2.4 million was principally attributable to decreased capitalized interest on our equity investment in White Oak and increased borrowings under our revolving credit facilities during the 2014 Quarter.  This increase was partially offset by principal repayments, made during 2014, of $12.5 million and $18.0 million on our term loan and original senior notes issued in 1999, respectively.  Interest payable under our senior notes, term loan and revolving credit facilities is discussed below under “–Debt Obligations.”

 

Equity in income (loss) of affiliates, net.  Equity in income (loss) of affiliates, net includes our equity investments in MAC and White Oak.  For the 2014 Quarter, we recognized net equity in income of affiliates of $0.1 million compared to net equity in loss of affiliates of $6.0 million for the 2013 Quarter.  The change in net equity in earnings of affiliates is primarily related to our equity investment in White Oak and the impact of changes in allocations of equity income or losses resulting from equity contributions during the 2014 Quarter by another White Oak owner, partially offset by increased losses incurred by White Oak during the 2014 Quarter.  Equity contributions impact the future preferred distributions allocable to each owner and the ongoing allocation of income and losses for generally accepted accounting principles (“GAAP”) purposes.

 

Transportation revenues and expenses.  Transportation revenues and expenses were $6.0 million and $11.6 million for the 2014 and 2013 Quarters, respectively.  The decrease of $5.6 million was primarily attributable to a decrease in average transportation rates reflecting the absence of export sales from our Warrior mine in the 2014 Quarter compared to the 2013 Quarter.  The cost of transportation services are passed through to our customers.  Consequently, we do not realize any gain or loss on transportation revenues.

 

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Table of Contents

 

Segment Adjusted EBITDA.  Our 2014 Quarter Segment Adjusted EBITDA increased $41.4 million, or 23.9%, to $214.8 million from the 2013 Quarter Segment Adjusted EBITDA of $173.4 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,

 

 

 

 

 

 

2014

 

2013

 

Increase/(Decrease)

Segment Adjusted EBITDA

 

 

 

 

 

 

 

 

Illinois Basin

 

 $

143,854

 

 $

156,790

 

 $

(12,936)

 

(8.3

)%

Appalachia (4)

 

68,501

 

19,504

 

48,997

 

(1

)

White Oak

 

1,401

 

(6,190)

 

7,591

 

(1

)

Other and Corporate (4)

 

1,015

 

3,272

 

(2,257)

 

(69.0

)%

Elimination

 

-

 

-

 

-

 

-

 

Total Segment Adjusted EBITDA (2)

 

 $

214,771

 

 $

173,376

 

 $

41,395

 

23.9

%