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OXF > SEC Filings for OXF > Form 10-Q on 7-Nov-2012All Recent SEC Filings

Show all filings for OXFORD RESOURCE PARTNERS LP

Form 10-Q for OXFORD RESOURCE PARTNERS LP


7-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto and management's discussion and analysis of financial condition and results of operations for the year ended December 31, 2011 included in our Annual Report on Form 10-K (our "Annual Report") and filed with the U.S. Securities and Exchange Commission (the "SEC"). This discussion contains forward-looking statements that reflect management's current views with respect to future events and financial performance. Our actual results may differ materially from those anticipated in these forward-looking statements or as a result of certain factors such as those set forth below under "Cautionary Statement Regarding Forward-Looking Statements."

Cautionary Statement Regarding Forward-Looking Statements

Statements in this Quarterly Report on Form 10-Q that are not historical facts are forward-looking statements within the "safe harbor" provision of the Private Securities Litigation Reform Act of 1995 and may involve a number of risks and uncertainties. We have used the words "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "plan," "predict," "project," and similar terms and phrases, including references to assumptions, in this report to identify forward-looking statements. These forward-looking statements are made based on expectations and beliefs concerning future events affecting us and are subject to various risks, uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control, that could cause our actual results to differ materially from those matters expressed in or implied by these forward-looking statements. The following factors are among those that may cause actual results to differ materially from our forward-looking statements:

market demand for coal and energy;

availability of qualified workers;

future economic or capital market conditions;

weather conditions or catastrophic weather-related damage;

our production capabilities;

consummation of financing, acquisition or disposition transactions and the effect thereof on our business;

our plans and objectives for future operations and expansion or consolidation;

our relationships with, and other conditions affecting, our customers;

availability and costs of key supplies or commodities such as diesel fuel, steel, explosives and tires;

availability and costs of capital equipment;

prices of fuels which compete with or impact coal usage, such as oil and natural gas;

timing of reductions or increases in customer coal inventories;

long-term coal supply arrangements;

reductions and/or deferrals of purchases by major customers;

risks in or related to coal mining operations, including risks relating to third-party suppliers and carriers operating at our mines or complexes;



unexpected maintenance and equipment failure;

environmental, safety and other laws and regulations, including those directly affecting our coal mining and production, and those affecting our customers' coal usage;

ability to obtain and maintain all necessary governmental permits and authorizations;

competition among coal and other energy producers in the United States and internationally;

railroad, barge, trucking and other transportation availability, performance and costs;

employee benefits costs and labor relations issues;

replacement of our reserves;

our assumptions concerning economically recoverable coal reserve estimates;

availability and costs of credit, surety bonds and letters of credit;

title defects or loss of leasehold interests in our properties which could result in unanticipated costs or inability to mine these properties;

future legislation and changes in regulations or governmental policies or changes in interpretations or enforcement thereof, including with respect to safety enhancements and environmental initiatives relating to global warming and climate change;

our liquidity, including our ability to adhere to financial covenants related to our borrowing arrangements;

limitations in the cash distributions we receive from our majority-owned subsidiary, Harrison Resources, LLC ("Harrison Resources"), and the ability of Harrison Resources to acquire additional reserves on economical terms from CONSOL Energy in the future;

adequacy and sufficiency of our internal controls;

legal and administrative proceedings, settlements, investigations and claims, including those related to citations and orders issued by regulatory authorities, and the availability of related insurance coverage;

our ability to pay our quarterly distributions which substantially depends upon our future operating performance (which may be affected by prevailing economic conditions in the coal industry), debt covenants, and financial, business and other factors, some of which are beyond our control; and

the need to recognize impairment and/or restructuring charges associated with our operations, including impairment and restructuring charges associated with our Illinois Basin operations, as well as any changes to previously identified impairment or restructuring charge estimates.

You should keep in mind that any forward-looking statements made by us in this Quarterly Report on Form 10-Q or elsewhere speak only as of the date on which the statements were made. New risks and uncertainties arise from time to time, and it is impossible for us to predict these events or how they may affect us or anticipated results. We have no duty to, and do not intend to, update or revise the forward-looking statements in this Quarterly Report on Form 10-Q after the date of this Quarterly Report on Form 10-Q, except as may be required by law. In light of these risks and uncertainties, you should keep in mind that any forward-looking statement made in this Quarterly Report on Form 10-Q might not occur. When considering these forward-looking statements, you should keep in mind the cautionary statements in this Quarterly Report on Form 10-Q and in our other SEC filings, including the more detailed discussion of these factors, as well as other factors that could affect our results, contained in the "Risks Relating to Our Business" section of Item 1A of our Annual Report.


Overview

We are a low-cost producer of high value steam coal, and we are the largest producer of surface mined coal in Ohio. We focus on acquiring steam coal reserves that we can efficiently mine with our modern, large scale equipment. Our reserves and operations are strategically located to serve our primary market area of Illinois, Indiana, Kentucky, Ohio, Pennsylvania and West Virginia.

We operate in a single business segment and have three operating subsidiaries, Oxford Mining Company, LLC ("Oxford Mining"), Oxford Mining Company-Kentucky, LLC and Harrison Resources. All of our operating subsidiaries participate primarily in the business of utilizing surface mining techniques to mine domestic coal and prepare it for sale to our customers. All three subsidiaries share common customers, assets and employees.

We currently have 17 active surface mines and we manage these mines as eight mining complexes. Our operations also include two river terminals, strategically located in eastern Ohio and western Kentucky. During the three months and nine months ended September 30, 2012, we produced 1.8 and 5.3 million tons of coal, respectively, and sold 1.9 and 5.7 million tons of coal, respectively, including 0.1 and 0.4 million tons of purchased coal, respectively.

As previously disclosed in our public filings, we received a termination notice in March 2012 from a customer related to an 0.8 million ton per year coal supply contract fulfilled from our Illinois Basin operations. In response, we idled one Illinois Basin mine and the related wash plant, closed our Illinois Basin lab, reduced operations at two other mines, terminated a significant number of employees and substituted purchased coal for mined and washed coal on certain sales contracts.

In the second quarter of 2012, we further adjusted our Illinois Basin operations, varying the mines that were idled to best manage strip ratio impacts and other costs. We also resumed operations at the wash plant on a limited basis in June.

In the third quarter of 2012, we idled one additional mine and resumed production at a second mine for a limited period of time that allowed us to meet our coal supply commitments. As of September 30, 2012, both of these mines were being prepared for market deferment. The wash plant continued limited production through mid-September and has again been idled. We anticipate that the restructuring related to our Illinois Basin operations will be completed by the end of the first quarter of 2013.

In addition to these actions, we continue to redeploy certain Illinois Basin equipment to our Northern Appalachia operations. We are also seeking to sell certain excess mining equipment from these idled operations.

For the three and nine months ended September 30, 2012, we recognized impairment and restructuring charges of $0.2 million and $13.8 million, respectively, related to the restructuring of our Illinois Basin operations. We expect to incur $0.7 million of additional costs throughout the balance of 2012 and the first quarter of 2013 as we complete the restructuring.

Evaluating Our Results of Operations

We evaluate our results of operations based on several key measures:

our coal production, sales volume and sales prices, which drive our coal sales revenue;

our cost of coal sales including cost of purchased coal;

our Adjusted EBITDA, a non-GAAP financial measure; and

our Distributable Cash Flow, a non-GAAP financial measure.

Coal Production, Sales Volume and Sales Prices

We evaluate our operations based on the volume of coal we produce, the volume of coal we sell and the prices we receive for our coal. These coal volumes are measured in clean tons. Because we sell substantially all of our coal under long-term coal sales contracts, our coal production, sales volume and sales prices are largely


dependent upon the terms of those contracts. The volume of coal we sell is also a function of the productive capacity of our mining complexes, the amount of coal we purchase and changes in inventory levels. Please read "-Cost of Coal Sales" for more information regarding our purchased coal.

Our long-term coal sales contracts typically provide for a fixed price, or a schedule of prices that are either fixed or contain market-based adjustments, over the contract term. In addition, many of our long-term coal sales contracts have full or partial cost pass through or cost adjustment provisions. Cost pass through provisions increase or decrease our coal sales price for all or a specified percentage of changes in the costs for items such as fuel and inflation. Cost adjustment provisions adjust the initial contract price over the term of the contract either by a specific percentage or a percentage determined by reference to various cost-related indices, including cost-related indices for fuel and cost-of-living generally.

Our transportation revenue reflects the portion of our total coal revenues attributable to the actual transportation costs incurred to transport our coal from our mines to our river terminals, our rail loading facilities and our customers. Our transportation revenue fluctuates based on a number of factors, including the volume of coal we transport, the method by which we transport our coal and the rates charged by the third-party transportation companies. Our transportation expenses are equal to and offset our transportation revenues.

We evaluate the price we receive for our coal on a coal sales revenue per ton basis, net of transportation costs. Our coal sales revenue per ton represents our coal sales revenue divided by total tons of coal sold. The following table provides operational data including data with respect to our coal production and purchases, coal sold and coal sales revenue per ton for the periods indicated:

                                                                                                       % Change
                                                                                                  Three         Nine
                                                                                                 Months        Months
                                          Three Months Ended           Nine Months Ended          2012          2012
                                             September 30,               September 30,             vs.           vs.
                                          2012           2011          2012          2011         2011          2011
                                                        (tons in thousands)
Produced tons                               1,776         2,187          5,285        6,071        (18.8 %)      (12.9 %)
Purchased tons                                146            88            366          365         65.9 %         0.3 %

Tons of coal sold                           1,922         2,275          5,651        6,436        (15.5 %)      (12.2 %)

Tons sold under long-term
contracts(1)                                 94.0 %        93.2 %         93.0 %       93.5 %        n/a           n/a

Coal sales revenue per ton              $   43.67       $ 41.72      $   43.70      $ 40.73          4.7 %         7.3 %
Below-market sales contract
amortization per ton                         0.06          0.11           0.10         0.12        (45.5 %)      (16.7 %)

Cash coal sales revenue per ton             43.61         41.61          43.60        40.61          4.8 %         7.4 %
Cash cost of coal sales per ton             35.54         33.54          36.28        33.36          6.0 %         8.8 %

Cash margin per ton                     $    8.07       $  8.07      $    7.32      $  7.25          0.0 %         1.0 %

Transportation revenue and cost per
ton                                     $    5.77       $  5.66      $    5.81      $  5.43          1.9 %         7.0 %

Number of operating days                       67            68            203          204         (1.5 %)       (0.5 %)

(1) Represents the percentage of the tons sold under long-term coal sales contracts.

Cost of Coal Sales

We evaluate, on a cost per ton sold basis, our cost of coal sales, which excludes the cost of transportation, non-cash costs such as depreciation, depletion and amortization ("DD&A"), gain/loss on asset disposals, impairment and restructuring charges, and indirect costs such as selling, general and administrative expenses. Our cost of coal sales per ton represents our cost of coal sales divided by the tons of coal sold. Our cost of coal sales includes costs for labor, fuel, oil, explosives, royalties, equipment lease expense, repairs and maintenance, and other costs directly related to our mining operations. Our cost of coal sales does not take into account the effects of the cost pass through or cost adjustment provisions in our long-term coal sales contracts, as those provisions result in an adjustment to our coal sales price.


We purchase coal from third parties to fulfill a portion of our obligations under our long-term coal sales contracts and, in certain cases, to meet customer coal quality specifications. These costs are included in the cost of purchased coal amount within cost of coal sales.

In connection with our Illinois Basin operations, we had a long-term coal purchase contract with a third-party supplier that had favorable pricing terms relative to our production costs. Under this contract the third-party supplier was obligated to deliver and we were obligated to purchase 0.4 million tons of coal each year until the coal reserves covered by this contract were depleted. We have experienced supplier performance issues under this contract which have continued into 2012. The supplier has asserted that this contract is terminated by its terms, while we have taken a contrary position. We are actively pursuing resolution of this matter. We have not received any tons from this supplier during 2012.

In March 2012, we entered into another long-term coal purchase contract with a separate supplier for our Illinois Basin operations for delivery of 350,000 tons of coal in 2012 and 360,000 tons of coal in 2013. A majority of the tons purchased in both the third quarter and the nine months ended September 30, 2012 were under this new contract as compared to the previously described lower priced contract in the third quarter and the nine months ended September 30, 2011.

The following table provides summary information for the periods indicated relating to our cost of coal sales per ton and tons of coal sold:

                                                                                                      % Change
                                                                                                 Three         Nine
                                                                                                Months        Months
                                           Three Months Ended          Nine Months Ended         2012          2012
                                              September 30,              September 30,            vs.           vs.
                                            2012          2011          2012         2011        2011          2011
                                                        (tons in thousands)
Cost of coal sales per ton               $    35.54      $ 33.54     $    36.28     $ 33.36         6.0 %         8.8 %

Produced tons                                 1,776        2,187          5,285       6,071       (18.8 %)      (12.9 %)
Purchased tons                                  146           88            366         365        65.9 %         0.3 %

Tons of coal sold                             1,922        2,275          5,651       6,436       (15.5 %)      (12.2 %)

Adjusted EBITDA

Adjusted EBITDA represents net income (loss) attributable to our unitholders before interest, income taxes, DD&A, non-cash equity-based compensation expense, gain or loss on the disposal of assets, amortization of below-market coal sales contracts, impairment and restructuring charges, certain non-recurring costs, non-cash change in future reclamation obligations, and noncontrolling interest. Although Adjusted EBITDA is not a measure of performance calculated in accordance with GAAP, we believe it is useful in evaluating our financial performance and compliance with certain credit facility financial covenants. Because not all companies calculate Adjusted EBITDA in the same way, our calculation may not be comparable to similarly titled measure of other companies.

Adjusted EBITDA is used as a supplemental financial measure by management and by external users of our financial statements, such as investors and lenders, to assess:

our financial performance without regard to financing methods, capital structure or income taxes;

our ability to generate cash sufficient to pay interest on our indebtedness and to make cash distributions to our limited partners and general partners;

our compliance with certain credit facility financial covenants; and

our ability to fund capital expenditure projects from operating cash flow.


Distributable Cash Flow

Distributable Cash Flow represents Adjusted EBITDA less cash interest expense (net of interest income), estimated reserve replacement expenditures, maintenance capital expenditures, cash reclamation expenditures, and noncontrolling interest. Cash interest expense represents the portion of our interest expense accrued and paid in cash during the reporting periods presented or that we will pay in cash in future periods as the obligations become due. Estimated reserve replacement expenditures represent an estimate of the average periodic (quarterly or annual, as applicable) reserve replacement expenditures that we will incur over the long term and then applied to the applicable period. We use estimated reserve replacement expenditures to calculate Distributable Cash Flow instead of actual reserve replacement expenditures, consistent with our partnership agreement which requires that we deduct estimated reserve replacement expenditures when calculating operating surplus. Maintenance capital expenditures include, among other things, actual expenditures for plant, equipment, and mine development. Cash reclamation expenditures represent the reduction to our reclamation and mine closure costs resulting from cash payments. Earnings attributable to the noncontrolling interest are not available for distribution to our unitholders and accordingly are deducted.

Distributable Cash Flow should not be considered as an alternative to net income
(loss) attributable to our unitholders, income from operations, cash flows from operating activities or any other measure of performance presented in accordance with GAAP. Although Distributable Cash Flow is not a measure of performance calculated in accordance with GAAP, we believe Distributable Cash Flow is useful to investors because this measurement is used by many analysts and others in the industry as a performance measurement tool to evaluate our operating and financial performance, facilitating comparison with the performance of other publicly traded limited partnerships.

Sales Contracts

For the past three years, over 90% of our annual coal sales were made under long-term coal sales contracts and we intend to continue to enter into long-term coal sales contracts for substantially all of our annual coal production. We define coal sales contracts as long-term if their initial term is one year or more. We believe our long-term coal sales contracts reduce our exposure to fluctuations in the spot price for coal and provide us with a reliable and stable revenue base. Our long-term coal sales contracts also allow us to partially mitigate our exposure to rising costs to the extent those contracts have full or partial cost pass through and/or cost adjustment provisions.

As of September 30, 2012, all of our projected sales for the balance of 2012 are committed and priced. For 2013, 2014 and 2015, we have committed and priced long-term contracts for sales of 6.3 million tons, 4.8 million tons and 1.9 million tons, respectively. In addition, we have contracts which are committed and unpriced for 0.4 million tons for 2014, 2.5 million tons for 2015 and 4.2 million tons for 2016.

The terms of our coal sales contracts result from competitive bidding and negotiation with customers. As a result, the terms of these contracts vary by customer. However, many of our long-term coal sales contracts have full or partial cost pass through and/or cost adjustment provisions. For fiscal 2012, 2013, 2014 and 2015, 63%, 70%, 68% and 61%, respectively, of the tons of coal that we have committed to deliver under our current long-term coal sales contracts are subject to full or partial cost pass through and/or cost adjustment provisions. Cost pass through provisions increase or decrease the coal sales price for all or a specified percentage of changes in the costs for items such as fuel, explosives and/or labor. Cost adjustment provisions adjust the initial contract price over the term of the contract either by a specific percentage or a percentage determined by reference to various cost-related indices.

Some long-term coal sales contracts contain option provisions that give the customer the right to purchase certain tons of coal during the contract term at the same price as the fixed tons provided for in the contract. As of September 30, 2012, customers hold options to purchase 0.4 million tons per year for the period from 2013 through 2015.

Factors That Impact Our Business

Factors that influence our business include, but are not limited to: (i) demand for electricity, (ii) economic conditions, (iii) the quantity and quality of coal available from competitors, (iv) competition for production of electricity from non-coal sources such as natural gas, (v) domestic air emission standards and the ability of coal-fired power plants to meet these standards,
(vi) legislative, regulatory and judicial developments, including delays,


challenges to, and difficulties in acquiring, maintaining or renewing necessary permits or mineral or surface rights, (vii) market price fluctuations for sulfur dioxide emission allowances and (viii) our ability to meet governmental financial security requirements associated with mining and reclamation activities.

Results of Operations

Factors Affecting the Comparability of Our Results of Operations

The comparability of our results of operations was impacted by impairment and restructuring charges resulting from the actions taken with respect to our Illinois Basin operations as described above under "Overview." For additional information regarding these impairment and restructuring charges, refer to "Part
I. - Financial Information - Item 1. - Condensed Consolidated Financial Statements (Unaudited) - Notes to Condensed Consolidated Financial Statements - Note 3 - Impairment and Restructuring Charges."

Summary

The following table presents certain of our historical consolidated financial
data for the periods indicated and contains both GAAP and non-GAAP measures:



                                                 Three Months Ended              Nine Months Ended
                                                   September 30,                   September 30,
                                                2012           2011            2012            2011
                                                             (in thousands, unaudited)
Statement of Operations Data:
Revenue:
Coal sales                                    $ 83,931       $  94,919       $ 246,964       $ 262,093
Transportation revenue                          11,096          12,867          32,842          34,976
Other revenue                                    2,187           2,202           7,223           7,015

Total revenue                                   97,214         109,988         287,029         304,084

Costs and expenses:
Cost of coal sales:
Produced coal                                   62,025          73,193         188,895         201,593
Purchased coal                                   6,274           3,143          16,121          13,058

Total cost of coal sales (excluding
depreciation, depletion and amortization)       68,299          76,336         205,016         214,651
Cost of transporation                           11,096          12,867          32,842          34,976
Cost of other revenue                              274             248             649           1,309
Depreciation, depletion and amortization        13,110          13,323          39,019          38,669
. . .
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