Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
AHGP > SEC Filings for AHGP > Form 10-K on 28-Feb-2014All Recent SEC Filings

Show all filings for ALLIANCE HOLDINGS GP, L.P.

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


28-Feb-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

General

The following discussion of our financial condition and results of operations should be read in conjunction with the historical financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K. For more detailed information regarding the basis of presentation for the following financial information, please see "Item 8. Financial Statements and Supplementary Data-Note 1. Organization and Presentation and Note 2. Summary of Significant Accounting Policies."

Executive Overview

The AHGP Partnership

We have no operating activities apart from those conducted by the ARLP Partnership, and our cash flows currently consist of distributions from ARLP on our ARLP partnership interests, including the IDRs 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' interests not owned by us and allocated to SGP's general partner interest in ARLP are reflected as a noncontrolling interest in our consolidated income statement and balance sheet. Accordingly, the noncontrolling partners' interest in the ARLP Partnership's net income is reflected as reduction of consolidated net income in our results of operations to arrive at net income attributable to AHGP. In addition to the ARLP Partnership, our historical consolidated 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.

Our primary business objective is to increase our cash distributions to our unitholders by actively assisting ARLP in executing its business strategy. ARLP's business strategy is to create sustainable, capital-efficient growth in available cash to maximize its distribution to its unitholders by:

expanding its operations by adding and developing mines and coal reserves in existing, adjacent or neighboring properties;

extending the lives of its current mining operations through acquisition and development of coal reserves using its existing infrastructure;

continuing to make productivity improvements to remain a low-cost producer in each region in which it operates;

strengthening its position with existing and future customers by offering a broad range of coal qualities, transportation alternatives and customized services; and

developing strategic relationships to take advantage of opportunities within the coal industry and MLP sector.

The ARLP Partnership

The ARLP Partnership is a diversified producer and marketer of coal primarily to major U.S. utilities and industrial users. In 2013, it produced and sold a record 38.8 million tons of coal. The coal it produced in 2013 was approximately 3.4% low-sulfur coal, 18.2% medium-sulfur coal and 78.4% high-sulfur coal. The ARLP Partnership classifies low-sulfur coal as coal with a sulfur content of less than 1%, medium-sulfur coal as coal with a sulfur content of 1% to 2%, and high-sulfur coal as coal with a sulfur content of greater than 2%.

The ARLP Partnership operates ten underground mining complexes, including the Tunnel Ridge longwall mine in West Virginia, which began production in May 2012, and the Onton mine in west Kentucky acquired on April 2, 2012. The ARLP Partnership is constructing an additional mine at the southern Indiana Gibson County Coal mining complex and operates a coal loading terminal on the Ohio River at Mt. Vernon, Indiana. Also, the ARLP Partnership owns a preferred equity interest and is making additional equity investments in White Oak and is purchasing and funding development of coal reserves, and has constructed and is operating surface facilities at White Oak's new mining complex in southern Illinois. Please see "Item 1. Business-Mining Operations" for further discussion of the ARLP Partnership's


Table of Contents

mines. At December 31, 2013, the ARLP Partnership had approximately 1.1 billion tons of proven and probable coal reserves in Illinois, Indiana, Kentucky, Maryland, Pennsylvania and West Virginia. Approximately 288.6 million tons of those reserves are leased to White Oak. For more information on White Oak, please read "Item 8. Financial Statements and Supplementary Data-Note 12. White Oak Transactions." The ARLP Partnership believes it controls adequate reserves to implement its currently contemplated mining plans.

In 2013, approximately 93.7% of the ARLP Partnership's sales tonnage was purchased by electric utilities, with the balance sold to third-party resellers and industrial consumers. In 2013, approximately 93.5% of the ARLP Partnership's sales tonnage was sold under long-term contracts. The ARLP Partnership's long-term contracts contribute to its stability and profitability by providing greater predictability of sales volumes and sales prices. In 2013, approximately 95.2% of the ARLP Partnership's medium- and high-sulfur coal was sold to utility plants with installed pollution control devices. These devices, also known as scrubbers, eliminate substantially all emissions of sulfur dioxide.

As discussed in more detail in "Item 1A. Risk Factors," the ARLP Partnership's results of operations could be impacted by prices for items that are used in coal production such as steel, electricity and other supplies, unforeseen geologic conditions or mining and processing equipment failures and unexpected maintenance problems, and by the availability or reliability of transportation for coal shipments. Additionally, the ARLP Partnership's results of operations could be impacted by its ability to obtain and renew permits necessary for its operations, secure or acquire coal reserves, or find replacement buyers for coal under contracts with comparable terms to existing contracts. Moreover, the regulatory environment has grown increasingly stringent in recent years. As outlined in "Item 1. Business-Regulation and Laws," a variety of measures taken by regulatory agencies in the U.S. and abroad in response to the perceived threat from climate change attributed to GHG emissions could substantially increase compliance costs for the ARLP Partnership and its customers and reduce demand for coal, which could materially and adversely impact the ARLP Partnership's results of operations. For additional information regarding some of the risks and uncertainties that affect the ARLP Partnership's business and the industry in which it operates, see "Item 1A. Risk Factors."

The ARLP Partnership's principal expenses related to the production of coal are labor and benefits, equipment, materials and supplies, maintenance, royalties and excise taxes. Unlike many of the ARLP Partnership's competitors in the eastern U.S., it employs a totally union-free workforce. Many of the benefits of the ARLP Partnership's union-free workforce are related to higher productivity and are not necessarily reflected in direct costs. In addition, transportation costs may be substantial and are often the determining factor in a coal consumer's contracting decision. The ARLP Partnership's mining operations are located near many of the major eastern utility generating plants and on major coal hauling railroads in the eastern U.S. The River View and Tunnel Ridge mines and Mt. Vernon transloading facility are located on the Ohio River and the Onton mine is located on the Green River in western Kentucky.

We have five reportable segments: the Illinois Basin, Central Appalachia, Northern Appalachia, White Oak and Other and Corporate. The first three reportable segments correspond to the three major coal producing regions in the eastern U.S. Factors similarly affecting financial performance of our operating segments within each of these three reportable segments include coal quality, coal seam height, mining and transportation methods and regulatory issues. The White Oak reportable segment is comprised of the ARLP Partnership's 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's Dotiki mining complex, Gibson County Coal's mining complex, which includes the Gibson North mine and Gibson South project, Hopkins County Coal's Elk Creek mining complex, White County Coal's Pattiki mining complex, Warrior's mining complex, Sebree Mining's mining complex, which includes the Onton mine, Steamport and certain Sebree Reserves, River View's mining complex, CR Services, and certain properties of Alliance Resource Properties, ARP Sebree 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 Reserves and related property for future mine development. For information regarding the permitting process and matters that could hinder or delay the process, please read "Item 1. Business-Regulation and Laws-Mining Permits and Approvals" and for information regarding the acquisition of the Onton mine which was added to the Illinois Basin segment in April 2012, please read "Item 8. Financial Statements and Supplementary Data-Note 3. Acquisition of Business" of this Annual Report on Form 10-K.

Central Appalachian reportable segment is comprised of two operating segments, the MC Mining and Pontiki mining complexes. The Pontiki mining complex ceased operations in November 2013. Please read "Item 8. Financial Statements and Supplementary Data-Note 4. Asset Impairment Charge" of this Annual Report on


Table of Contents

Form 10-K and discussions below regarding an asset impairment charge of $19.0 million related to the idling of the Pontiki mining complex in 2012, as well as the cessation of mining operations at Pontiki in 2013.

Northern Appalachian reportable segment is comprised of multiple operating segments, including the Mettiki mining complex, the Tunnel Ridge mining complex and the Penn Ridge property. The Mettiki mining complex includes Mettiki (WV)'s Mountain View mine, Mettiki (MD)'s preparation plant and a small third-party mining operation which has been idled since July 2013. In June 2013, Alliance Resource Properties acquired reserves that extended the life of the Mettiki (WV) Mountain View mine. For information regarding the reserves acquired, please read "Item 8. Financial Statements and Supplementary Data-Note
3. Acquisition of Business" of this Annual Report on Form 10-K. 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. For information regarding the permitting process and matters that could hinder or delay the process, please read "Item 1. Business-Regulation and Laws-Mining Permits and Approvals."

White Oak reportable segment is comprised of two operating segments, WOR Processing and WOR Properties. WOR Processing includes both the surface operations the ARLP Partnership constructed and is operating at the White Oak mining complex and the equity investments the ARLP Partnership is making in White Oak. WOR Properties has acquired and is acquiring additional reserves from White Oak, all of which are subject to a lease-back arrangement with White Oak. WOR Properties has also provided, and is continuing to provide, 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 repaid and terminated in June 2012) and another to construct certain surface facilities. For more information on White Oak, please read "Item 8. Financial Statements and Supplementary Data-Note 12. White Oak Transactions" of this Annual Report on Form 10-K.

Other and Corporate reportable segment includes ARLP Partnership and AHGP marketing and administrative expenses, Alliance Service, Inc. ("ASI") and Matrix Group and ASI's ownership of aircraft, the Mt. Vernon dock activities, coal brokerage activity, the ARLP Partnership's equity investment in MAC, and certain activities of Alliance Resource Properties. For more information on ASI, please read "Item 8. Financial Statements and Supplementary Data-Note 18. Related-Party Transactions" of this Annual Report on Form 10-K.

How the ARLP Partnership Evaluates its Performance

The ARLP Partnership's management uses a variety of financial and operational measurements to analyze its performance. Primary measurements include the following: (1) raw and saleable tons produced per unit shift; (2) coal sales price per ton; (3) Segment Adjusted EBITDA Expense per ton; (4) EBITDA; and
(5) Segment Adjusted EBITDA.

Raw and Saleable Tons Produced per Unit Shift. The ARLP Partnership reviews raw and saleable tons produced per unit shift as part of its operational analysis to measure the productivity of its operating segments which is significantly influenced by mining conditions and the efficiency of its preparation plants. A discussion of mining conditions and preparation plant costs are found below under "-Analysis of Historical Results of Operations" and therefore provides implicit analysis of raw and saleable tons produced per unit shift.

Coal Sales Price per Ton. The ARLP Partnership defines coal sales price per ton as total coal sales divided by tons sold. The ARLP Partnership reviews coal sales price per ton to evaluate marketing efforts and for market demand and trend analysis.

Segment Adjusted EBITDA Expense per Ton. The ARLP Partnership defines Segment Adjusted EBITDA Expense per ton (a non-GAAP financial measure) as the sum of operating expenses, outside coal purchases and other income divided by total tons sold. The ARLP Partnership reviews segment adjusted EBITDA expense per ton for cost trends.

EBITDA. The ARLP Partnership defines EBITDA (a non-GAAP financial measure) as net income before net interest expense, income taxes and depreciation, depletion and amortization. EBITDA is used as a supplemental financial measure by the ARLP Partnership's management and by external users of its financial statements such as investors, commercial banks, research analysts and others, to assess:

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


Table of Contents

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

its 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. The ARLP Partnership defines Segment Adjusted EBITDA (a non-GAAP financial measure) as net income before net interest expense, income taxes, depreciation, depletion and amortization, corporate general and administrative expenses and asset impairment charge. Management therefore is able to focus solely on the evaluation of segment operating profitability as it relates to our revenues and operating expenses, which are primarily controlled by our segments.

Analysis of Historical Results of Operations

2013 Compared with 2012

We reported record net income of $391.6 million for 2013 compared to $331.2 million for 2012. This increase of $60.4 million was principally due to record coal sales and production volumes. The ARLP Partnership had record tons sold and tons produced of 38.8 million in 2013 compared to 35.2 million tons sold and 34.8 million tons produced in 2012. Also negatively impacting 2012 was the temporary idling of the Pontiki mining complex and the related non-cash impairment charge of $19.0 million. The increase in tons sold and produced resulted from increased production at the Tunnel Ridge mine, which began longwall production in May 2012, increased tons produced and sold from the River View and Gibson North mines and increased production from the Onton mine, which was acquired in April 2012. Higher operating expenses during 2013 resulted primarily from the record coal sales and production volumes, which particularly impacted labor and related benefits expense, materials and supplies expense, maintenance costs and sales-related expenses. These increases in operating expenses were offset partially by lower workers compensation expense and reduced outside coal purchases in 2013.

                                           December 31,                 December 31,
                                       2013           2012           2013           2012
                                          (in thousands)               (per ton sold)

Tons sold                                38,835         35,170            N/A           N/A
Tons produced                            38,782         34,800            N/A           N/A
Coal sales                          $ 2,137,449    $ 1,979,437     $    55.04    $    56.28
Operating expenses and outside
coal purchases                      $ 1,400,793    $ 1,341,898     $    36.07    $    38.15

Coal sales. Coal sales increased 8.0% to $2.1 billion in 2013 from $2.0 billion in 2012. The increase of $158.0 million reflected the benefit of record tons sold (contributing $206.3 million in additional coal sales), partially offset by lower average coal sales prices (reducing coal sales by $48.3 million). Average coal sales prices decreased $1.24 per ton sold in 2013 to $55.04 per ton compared to $56.28 per ton sold in 2012, primarily due to reduced coal sales into the metallurgical coal export market.

Operating expenses and outside coal purchases. Operating expenses and outside coal purchases increased 4.4% to $1.4 billion in 2013 from $1.3 billion in 2012 primarily due to record coal sales and production volumes. On a per ton basis, operating expenses and outside coal purchases decreased 5.5% to $36.07 per ton sold from $38.15 in 2012. In addition to the impact of record 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 3.5% to $12.04 per ton in 2013 from $12.48 per ton in 2012. The decrease of $0.44 per ton was primarily attributable to lower labor cost per ton resulting from increased production at the Tunnel Ridge mine, which began longwall production in May 2012, improved coal recoveries from the River View and Gibson North mines, improved geological conditions at the Dotiki and Pattiki mines and lower labor cost per ton at the Onton mine despite a temporary halt of production during the third quarter of 2013 due to adverse geological conditions. Costs per ton increased at the Mettiki mine, primarily due to higher medical-related employee benefits expense;


Table of Contents

Workers' compensation and black lung expenses per ton produced decreased to $0.17 per ton in 2013 from $0.70 per ton in 2012. The decrease of $0.53 per ton resulted primarily from an increase in the discount rate used to calculate the estimated present value of future obligations and favorable claim trends;

Material and supplies expenses per ton produced decreased to $11.63 per ton in 2013 from $12.46 per ton in 2012. The decrease of $0.83 per ton resulted from lower costs for certain products and services, primarily outside services (decrease of $0.24 per ton), contract labor used in the mining process (decrease of $0.16 per ton), certain ventilation-related materials and supplies (decrease of $0.12 per ton), power and fuel used in the mining process (decrease of $0.09 per ton) and roof support expenses per ton (decrease of $0.09 per ton) in addition to production increases at certain locations discussed above;

Maintenance expenses per ton produced decreased 3.1% to $4.00 per ton in 2013 from $4.13 per ton in 2012. The decrease of $0.13 per ton produced was primarily from the benefits of newer equipment and increased production at the Tunnel Ridge mine and improved coal recoveries at certain locations as discussed above;

Contract mining expenses decreased $6.7 million in 2013 compared to 2012. The decrease primarily reflects lower production from a third-party mining operation in the Northern Appalachian region due to reduced metallurgical coal export market opportunities;

Production taxes and royalties (which were incurred as a percentage of coal sales or based on coal volumes) decreased $0.17 per produced ton sold in 2013 compared to 2012, primarily resulting from a lower average coal sales prices for Northern Appalachian due to reduced coal sales into the metallurgical coal export market; and

Outside coal purchases decreased to $2.0 million in 2013 from $38.6 million in 2012. The decrease of $36.6 million was primarily attributable to decreased coal brokerage activity and less coal purchased to facilitate sales into the metallurgical coal export market. The cost per ton to purchase coal is typically higher than the cost per ton to produce coal, thus significantly lower volumes of coal purchases, like in 2013, generally reduce the overall total expense per ton.

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

Capitalized development related to the construction of the new Tunnel Ridge mine ceased in May 2012 with the start-up of longwall production. Accordingly, the above discussed operating expense decreases in 2013 were offset partially by the capitalization of $19.0 million of mine development costs at Tunnel Ridge in 2012. Please read "Item 8. Financial Statements and Supplementary Data-Note 2. Summary of Significant Accounting Policies" of this Annual Report on Form 10-K for discussion of capitalized mine development costs.

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. Other sales and operating revenues increased to $35.1 million in 2013 from $32.5 million in 2012. The increase of $2.6 million was primarily attributable to increased Matrix Design sales, Mt. Vernon transloading revenues and White Oak throughput fees, partially offset by the amounts received from a customer for the partial buy-out of a certain Northern Appalachian coal contract in 2012.

General and administrative. General and administrative expenses for 2013 increased to $65.2 million compared to $62.7 million in 2012. The increase of $2.5 million was primarily due to higher incentive compensation expenses.

Depreciation, depletion and amortization. Depreciation, depletion and amortization increased to $264.9 million in 2013 compared to $218.1 million in 2012. The increase of $46.8 million was primarily attributable to the start-up of longwall production at the Tunnel Ridge mine, which began in May 2012, the addition of the Onton mine in April 2012 and capital expenditures related to production and infrastructure improvements at various other operations.

Asset impairment charge. In 2012, the ARLP Partnership recorded an asset impairment charge of $19.0 million associated with the long-lived assets at the Pontiki mining complex. Please read "Item 8. Financial Statements and Supplementary Data-Note 4. Asset Impairment Charge" of this Annual Report on Form 10-K for discussion of the Pontiki mining complex.


Table of Contents

Interest expense. Interest expense, net of capitalized interest, decreased to $27.0 million in 2013 from $28.7 million in 2012. The decrease of $1.7 million was principally attributable to reduced interest expense resulting from the August 2013 principal repayment of $18.0 million on the original senior notes issued in 1999, reduced interest expense resulting from lower rates and fees under the term loan and revolving credit facility entered into in May 2012, higher capitalized interest on the ARLP Partnership's equity investment in White Oak in 2013 and $1.1 million of deferred debt issuance costs related to the early termination of the $300 million term loan in 2012. These decreases were partially offset by increased borrowings under the revolving credit facilities in 2013. The term loan and revolving credit facility are discussed in more detail below under "-Debt Obligations."

Equity in loss of affiliates, net. Equity in loss of affiliates, net includes the ARLP Partnership's share of the results of operations of its equity investments in White Oak and MAC. Equity in loss of affiliates, net was $24.4 million in 2013 compared to $14.7 million in 2012, which was primarily attributable to losses allocated to the ARLP Partnership due to its equity investment in White Oak. For more information regarding White Oak, please read "Item 8. Financial Statements and Supplementary Data-Note 12. White Oak Transactions" of this Annual Report on Form 10-K.

Transportation revenues and expenses. Transportation revenues and expenses each increased to $32.6 million in 2013 from $22.0 million in 2012. The increase of $10.6 million was attributable to an increase in average transportation rates in 2013 primarily related to new export sales from the Warrior mine, as well as increased tonnage in 2013 for which the ARLP Partnership arranged the transportation at certain other mines. The cost of transportation services are passed through to the ARLP Partnership's customers. Consequently, it does not realize any gain or loss on transportation revenues.

Income tax (expense) benefit. Income tax expense was $1.4 million in 2013 compared to income tax benefit of $1.1 million in 2012. Income taxes are primarily due to the operations of Matrix Design. The income tax expense in 2013 was due to a valuation allowance of ASI's deferred tax assets, offset by an income tax benefit due to a net operating loss carry-forward related to Matrix Design from prior years, as well as research and development tax credits earned by Matrix Design.

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 $157.7 million and $135.2 . . .

  Add AHGP to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for AHGP - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.