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AHGP > SEC Filings for AHGP > Form 10-Q on 7-Nov-2013All Recent SEC Filings

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Form 10-Q for ALLIANCE HOLDINGS GP, L.P.


7-Nov-2013

Quarterly Report


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

References to "AHGP Partnership" mean the business and operations of Alliance Holdings GP, L.P., the parent company, as well as its consolidated subsidiaries, which include Alliance Resource Management GP, LLC and Alliance Resource Partners, L.P. and its consolidated subsidiaries.

References to "AGP" mean Alliance GP, LLC, the general partner of Alliance Holdings GP, L.P., also referred to as our general partner.

References to "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.

References to "SGP" mean Alliance Resource GP, LLC, the special general partner of Alliance Resource Partners, L.P.

References to "Intermediate Partnership" mean Alliance Resource Operating Partners, L.P., the intermediate partnership of Alliance Resource Partners, L.P.

References to "Alliance Coal" mean Alliance Coal, LLC, the holding company for the operations of Alliance Resource Operating Partners, L.P.

Summary

We have no operating activities apart from those conducted by the ARLP Partnership, and our cash flows currently consist primarily of distributions from ARLP for our ARLP partnership interests, including the incentive distribution rights that we own. We reflect our ownership interest in the ARLP Partnership on a consolidated basis, which means that our financial results are combined with the ARLP Partnership's financial results and the results of our other subsidiaries. The earnings of the ARLP Partnership allocated to its limited partners' interest not owned by us and allocated to SGP's general partner interest in ARLP are reflected as a noncontrolling interest in our condensed consolidated statement of income and balance sheet. In addition to the ARLP Partnership, our results of operations include the results of operations of MGP, our wholly-owned subsidiary.

The AHGP Partnership's results of operations principally reflect the results of operations of the ARLP Partnership adjusted for noncontrolling partners' interest in the ARLP Partnership's net income. Accordingly, the discussion of our financial position and results of operations in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" reflects the operating activities and results of operations of the ARLP Partnership.

The ARLP Partnership is a diversified producer and marketer of coal primarily to major United States ("U.S.") utilities and industrial users. The ARLP Partnership began mining operations in 1971 and, since then, has grown through acquisitions and internal development to become the third largest coal producer in the eastern U.S. The ARLP Partnership operates eleven underground mining complexes in Illinois, Indiana, Kentucky, Maryland and West Virginia, including the new Tunnel Ridge, LLC ("Tunnel Ridge") longwall mine in West Virginia and the Onton No. 9 mining complex ("Onton mine") in west


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Kentucky acquired on April 2, 2012. The ARLP Partnership is constructing a new mine in southern Indiana and operates a coal loading terminal on the Ohio River at Mt. Vernon, Indiana. Also, the ARLP Partnership owns a preferred equity interest in White Oak Resources LLC ("White Oak") and is purchasing and funding development of reserves and has constructed and is operating surface facilities at White Oak's new longwall mining complex in southern Illinois. As is customary in the coal industry, the ARLP Partnership has entered into long-term coal supply agreements with many of its customers.

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

Illinois Basin reportable segment is comprised of multiple operating segments, including Webster County Coal, LLC's Dotiki mining complex ("Dotiki"), Gibson County Coal, LLC's mining complex, which includes the Gibson North mine and Gibson South project, Hopkins County Coal, LLC's Elk Creek mining complex, White County Coal, LLC's Pattiki mining complex ("Pattiki"), Warrior Coal, LLC's mining complex ("Warrior"), Sebree Mining, LLC's mining complex ("Sebree"), which includes the Onton mine, Steamport, LLC and certain undeveloped coal reserves, River View Coal, LLC's mining complex ("River View"), CR Services, LLC, and certain properties of Alliance Resource Properties, LLC ("Alliance Resource Properties"), ARP Sebree, LLC and ARP Sebree South, LLC. The development of the Gibson South mine is currently underway and the ARLP Partnership is in the process of permitting the Sebree property for future mine development. For information regarding the acquisition of the Onton mine, which was added to the Illinois Basin segment in April 2012, please read "Item 1. Financial Statements (Unaudited) - Note 4. Acquisitions" of this Quarterly Report on Form 10-Q.

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

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

White Oak reportable segment is comprised of two operating segments, Alliance WOR Properties, LLC ("WOR Properties") and Alliance WOR Processing, LLC ("WOR Processing"). WOR Processing includes both the surface operations at White Oak and the equity investment in White Oak. WOR Properties owns reserves acquired from White Oak and is committed to acquiring additional reserves from White Oak under lease-back arrangements. WOR Properties has also provided certain funding to White Oak for development of these reserves. The White Oak reportable segment also includes two loans to White Oak from the Intermediate Partnership, one for the acquisition of mining equipment (which was paid off and terminated in June 2012) and another to construct certain surface facilities. For more information on White Oak, please


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read "Item 1. Financial Statements (Unaudited) - Note 8. White Oak Transactions" of this Quarterly Report on Form 10-Q.

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

Pontiki Mine

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

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

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


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

We reported net income of $86.8 million for the three months ended September 30, 2013 ("2013 Quarter") compared to $58.7 million for the 2012 Quarter. The increase of $28.1 million was principally due to increased coal sales and production volumes, which rose to 9.5 million tons sold and 9.7 million tons produced in the 2013 Quarter compared to 8.9 million tons sold and 9.0 million tons produced in the 2012 Quarter. The 2012 Quarter was also negatively impacted by the temporary idling of the Pontiki mining complex and the related non-cash impairment charge of $19.0 million. The increases in tons sold and tons produced resulted from increased volumes at the Tunnel Ridge, River View, Gibson North and Dotiki mines. Increased coal sales and production volumes led to increased operating expenses, which particularly impacted labor and related benefits expense, materials and supplies expense, maintenance cost and sales related expense. The increases in operating expenses were offset partially by lower outside coal purchases in the 2013 Quarter.

                                                 Three Months Ended September 30,
                                             2013         2012        2013        2012
                                              (in thousands)           (per ton sold)
Tons sold                                      9,504       8,910         N/A         N/A
Tons produced                                  9,682       9,000         N/A         N/A
Coal sales                                  $518,447    $499,003      $54.55      $56.00
Operating expenses and outside coal
purchases                                   $346,681    $343,068      $36.48      $38.50

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

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

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

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

Contract mining expense decreased $2.4 million for the 2013 Quarter compared to the 2012 Quarter. The decrease primarily reflects lower production from a third-party mining


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operation in the Northern Appalachian region due to reduced metallurgical coal export market opportunities;

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

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

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

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

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

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

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

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

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


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

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

Net income attributable to noncontrolling interests. The noncontrolling interests balance is comprised of non-affiliate and affiliate ownership interests in the net assets of the ARLP Partnership that we consolidate. The noncontrolling interest designated as Affiliate represents SGP's 0.01% general partner interest in ARLP and 0.01% general partner interest in the Intermediate Partnership. The noncontrolling interest designated as Non-Affiliates represents the limited partners' interest in ARLP controlled through the common unit ownership, excluding the 15,544,169 common units of ARLP held by us. The net income attributable to noncontrolling interest was $32.5 million and $19.2 million for the 2013 and 2012 Quarters, respectively. The increase in net income attributable to noncontrolling interest is due to the increase in the consolidated net income of the ARLP Partnership resulting from the changes in revenues and expenses described above, partially offset by an increase in ARLP's priority distribution to the MGP, which is deducted from ARLP's net income in the allocation of net income attributable to noncontrolling interest.


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Segment Adjusted EBITDA. Our 2013 Quarter Segment Adjusted EBITDA increased $13.2 million, or 8.2%, to $173.3 million from the 2012 Quarter Segment Adjusted EBITDA of $160.1 million. Segment Adjusted EBITDA, tons sold, coal sales, other sales and operating revenues and Segment Adjusted EBITDA Expense by segment are (in thousands):

                                                Three Months Ended
                                                  September 30,
                                                2013          2012          Increase/(Decrease)
Segment Adjusted EBITDA
Illinois Basin                                $ 156,790     $ 140,329     $   16,461       11.7%
Central Appalachia                                9,775         6,228          3,547       57.0%
Northern Appalachia                              12,864        15,813        (2,949)     (18.6)%
White Oak                                       (6,190)       (3,188)        (3,002)     (94.2)%
Other and Corporate                                  44           895          (851)     (95.1)%
Elimination                                           -             -              -           -
Total Segment Adjusted EBITDA (2)             $ 173,283     $ 160,077     $   13,206        8.2%

Tons sold
Illinois Basin                                    7,598         6,919            679        9.8%
Central Appalachia                                  490           523           (33)      (6.3)%
Northern Appalachia                               1,405         1,468           (63)      (4.3)%
White Oak                                             -             -              -           -
Other and Corporate                                  11             -             11         (1)
Elimination                                           -             -              -           -
Total tons sold                                   9,504         8,910            594        6.7%

Coal sales
Illinois Basin                                $ 396,056     $ 361,206     $   34,850        9.6%
Central Appalachia                               39,959        41,790        (1,831)      (4.4)%
Northern Appalachia                              81,440        95,988       (14,548)     (15.2)%
White Oak                                             -             -              -           -
Other and Corporate                                 992            19            973         (1)
Elimination                                           -             -              -           -
Total coal sales                              $ 518,447     $ 499,003     $   19,444        3.9%

Other sales and operating revenues
Illinois Basin                                $     696     $     853     $    (157)     (18.4)%
Central Appalachia                                  165             -            165         (1)
Northern Appalachia                                 839         1,587          (748)     (47.1)%
White Oak                                           566             -            566         (1)
Other and Corporate                               7,615         8,408          (793)      (9.4)%
Elimination                                     (2,746)       (4,128)          1,382       33.5%
Total other sales and operating revenues      $   7,135     $   6,720     $      415        6.2%

Segment Adjusted EBITDA Expense
Illinois Basin                                $ 239,962     $ 221,731     $   18,231        8.2%
Central Appalachia                               30,348        35,563        (5,215)     (14.7)%
Northern Appalachia                              69,415        81,761       (12,346)     (15.1)%
White Oak                                           546           174            372         (1)
Other and Corporate                               8,784         7,713          1,071       13.9%
Elimination                                     (2,746)       (4,128)          1,382       33.5%
Total Segment Adjusted EBITDA Expense (3)     $ 346,309     $ 342,814     $    3,495        1.0%


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

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

the financial performance of the ARLP Partnership's assets without regard to financing methods, capital structure or historical cost basis;

the ability of the ARLP Partnership's assets to generate cash sufficient to pay interest costs and support its indebtedness;

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

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

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

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

                                             Three Months Ended
                                               September 30,
                                              2013        2012

Segment Adjusted EBITDA                     $ 173,283   $ 160,077

General and administrative                   (15,237)    (15,282)
Depreciation, depletion and amortization     (66,099)    (59,781)
Asset impairment charge                             -    (19,031)
Interest expense, net                         (5,915)     (7,352)
Income tax benefit                                718         102
Net income                                  $  86,750   $  58,733

(3) Segment Adjusted EBITDA Expense (a non-GAAP financial measure) includes operating expenses, outside coal purchases and other income. Transportation . . .

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