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AHGP > SEC Filings for AHGP > Form 10-Q on 9-May-2014All Recent SEC Filings

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

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


9-May-2014

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 ten underground mining complexes in Illinois, Indiana, Kentucky, Maryland and West Virginia. The ARLP Partnership is constructing an additional mine (the "Gibson South mine") at its southern Indiana Gibson County Coal, LLC ("Gibson


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County Coal") mining complex and operates a coal loading terminal on the Ohio River at Mt. Vernon, Indiana. Incidental production began at the Gibson South mine in April 2014. Also, the ARLP Partnership owns a preferred equity interest and is making additional equity investments 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 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 the 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 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, which includes the Gibson North mine and Gibson South mine, Hopkins County Coal, LLC mining complex, 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, 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 with incidental production beginning in April 2014. The ARLP Partnership is in the process of permitting the Sebree and Fies properties for future mine development.

Appalachian reportable segment is comprised of multiple operating segments, including the Mettiki mining complex, 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. 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 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, and is continuing to provide, certain funding to White Oak for development of these reserves. WOR Processing includes both the surface operations at White Oak and the equity investments the ARLP Partnership is making in White Oak. The White Oak reportable segment also includes a loan to White Oak from the 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, the ARLP Partnership's equity investment in Mid-America Carbonates, LLC ("MAC"), certain activities of Alliance Resource Properties and the Pontiki Coal, LLC mining complex ("Pontiki") which ceased operations in late November 2013.


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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 March 31, 2014 Compared to Three Months Ended March 31, 2013

We reported record net income of $115.3 million for the three months ended March 31, 2014 ("2014 Quarter") compared to $102.4 million for the three months ended March 31, 2013 ("2013 Quarter"). This increase of $12.9 million was principally due to lower operating expenses during the 2014 Quarter, primarily as a result of increased longwall production and improved recoveries at the Tunnel Ridge mine and the absence of higher cost production at the Pontiki mine. The ARLP Partnership also produced a record 10.3 million tons in the 2014 Quarter compared to 9.8 million tons in the 2013 Quarter. The increase in tons produced resulted from increased production at the Tunnel Ridge mine, increased production in the new Excel No. 4 mining area at the MC Mining mine and improved geological conditions at the Dotiki mine. Although the ARLP Partnership had record tons produced, coal sales volumes decreased to 9.5 million tons sold in the 2014 Quarter compared to 9.7 million tons sold in the 2013 Quarter primarily due to weather-related transportation disruptions at the Warrior, Gibson North and Pattiki mines.

                                                      Three Months Ended March 31,
                                                  2014       2013      2014       2013
                                                  (in thousands)       (per ton sold)
Tons sold                                          9,495      9,698       N/A      N/A
Tons produced                                     10,253      9,819       N/A      N/A
Coal sales                                      $525,545   $534,509    $55.35   $55.12
Operating expenses and outside coal purchases   $322,244   $349,177    $33.94   $36.01

Coal sales. Coal sales for the 2014 Quarter decreased 1.7% to $525.5 million from $534.5 million for the 2013 Quarter. The decrease of $9.0 million in coal sales reflected the impact of lower tons sold (reducing coal sales by $11.2 million), offset partially by higher average coal sales prices (contributing $2.2 million in additional coal sales). Average coal sales price increased slightly to $55.35 per ton in the 2014 Quarter as compared to $55.12 per ton sold in the 2013 Quarter, primarily as a result of higher priced coal sales at the Mettiki mine.

Operating expenses and outside coal purchases. Operating expenses and outside coal purchases combined decreased 7.7% to $322.2 million for the 2014 Quarter from $349.2 million for the 2013 Quarter, primarily due to the favorable impact of increased lower-cost production at the Tunnel Ridge mine, reduced cost per ton at the Dotiki and MC Mining mines, lower coal sales volumes and the absence of higher cost production at the Pontiki mine discussed above. On a per ton basis, operating expenses and outside coal purchases decreased 5.7% to $33.94 per ton sold. Operating expenses were impacted by various factors in addition to the impact of record production volumes. The most significantly impacted expenses are discussed below:

Labor and benefit expenses per ton produced, excluding workers' compensation, decreased 5.1% to $11.08 per ton in the 2014 Quarter from $11.67 per ton in the 2013 Quarter. This decrease of $0.59 per ton was primarily attributable to lower labor cost per ton resulting from increased coal production and improved recoveries discussed above;


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Workers' compensation expenses per ton produced decreased 37.5% to $0.45 per ton in the 2014 Quarter from $0.72 per ton in the 2013 Quarter. The decrease of $0.27 per ton produced resulted primarily from favorable claims trends;

Materials and supplies expenses per ton produced decreased 4.0% to $10.95 per ton in the 2014 Quarter from $11.41 per ton in the 2013 Quarter. The decrease of $0.46 per ton produced resulted primarily from increased coal production discussed above and a decrease in cost for certain products and services, primarily contract labor used in the mining process (decrease of $0.42 per ton) and roof support expenses per ton (decrease of $0.10 per ton), partially offset by an increase in power and fuel used in the mining process (increase of $0.15 per ton);

Maintenance expenses per ton produced decreased 4.8% to $3.74 per ton in the 2014 Quarter from $3.93 per ton in the 2013 Quarter. The decrease of $0.19 per ton produced was primarily from the benefits of newer equipment and increased production at the Tunnel Ridge mine and increased coal production and improved recoveries at certain locations as discussed above; and

Contract mining expenses decreased $2.0 million in the 2014 Quarter compared to the 2013 Quarter. The decrease reflects lower production from a third-party mining operation in the Appalachian region due to reduced metallurgical coal export market opportunities.

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 $10.4 million in the 2014 Quarter from $6.5 million in the 2013 Quarter. The increase of $3.9 million was primarily due to increased Matrix Design sales and White Oak throughput fees.

General and administrative. General and administrative expenses for the 2014 Quarter increased to $17.9 million compared to $15.7 million in the 2013 Quarter. The increase of $2.2 million was primarily due to higher incentive compensation expenses.

Depreciation, depletion and amortization. Depreciation, depletion and amortization expense increased to $66.8 million for the 2014 Quarter from $64.4 million for the 2013 Quarter. The increase of $2.4 million was attributable to increased production levels 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 $8.1 million for the 2014 Quarter from $6.6 million for the 2013 Quarter. The increase of $1.5 million in the 2014 Quarter was principally attributable to lower capitalized interest on the ARLP Partnership's equity investment in White Oak. Interest payable under the term loan and revolving credit facility is discussed below under "-Debt Obligations."

Transportation revenues and expenses. Transportation revenues and expenses were $6.0 million and $6.9 million for the 2014 and 2013 Quarters, respectively. The decrease of $0.9 million was primarily attributable to decreased tonnage for which the ARLP Partnership arranges transportation at certain mines, partially offset by an increase in average transportation rates in the 2014 Quarter. The cost of transportation services are passed through to customers. Consequently, the ARLP Partnership does not realize any gain or loss on transportation revenues.

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 2014 Quarter, equity in loss of affiliates was $6.2


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million compared to $3.9 million for the 2013 Quarter, which was primarily attributable to losses allocated to the ARLP Partnership due to its equity investment in White Oak.

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 $47.9 million and $42.4 million for the 2014 and 2013 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 2014 Quarter Segment Adjusted EBITDA increased $19.5 million, or 10.3%, to a record $207.8 million from the 2013 Quarter Segment Adjusted EBITDA of $188.3 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
                                           March 31,
                                       2014          2013          Increase/(Decrease)
Segment Adjusted EBITDA
Illinois Basin                       $ 163,649     $ 167,221     $  (3,572)      (2.1)%
Appalachia                              48,870        22,957         25,913         (1)
White Oak                              (3,997)       (4,292)            295        6.9%
Other and Corporate                      (772)         2,380        (3,152)         (1)
Elimination                                  -             -              -           -
Total Segment Adjusted EBITDA (2)    $ 207,750     $ 188,266     $   19,484       10.3%

Tons sold
Illinois Basin                           7,482         7,706          (224)      (2.9)%
Appalachia                               2,013         1,783            230       12.9%
White Oak                                    -             -              -           -
Other and Corporate                          -           242          (242)         (1)
Elimination                                  -          (33)             33         (1)
Total tons sold                          9,495         9,698          (203)      (2.1)%

Coal sales
Illinois Basin                       $ 392,254     $ 400,320     $  (8,066)      (2.0)%
Appalachia                             133,291       117,744         15,547       13.2%
White Oak                                    -             -              -           -
Other and Corporate                          -        18,522       (18,522)         (1)
Elimination                                  -       (2,077)          2,077         (1)
Total coal sales                     $ 525,545     $ 534,509     $  (8,964)      (1.7)%

Other sales and operating
revenues
Illinois Basin                       $     986     $   1,045     $     (59)      (5.6)%
Appalachia                               1,151         1,139             12        1.1%
White Oak                                3,698             -          3,698           -
Other and Corporate                      7,637         7,900          (263)      (3.3)%
Elimination                            (3,088)       (3,557)            469       13.2%
Total other sales and operating
revenues                             $  10,384     $   6,527     $    3,857       59.1%

Segment Adjusted EBITDA Expense
Illinois Basin                       $ 229,591     $ 234,145     $  (4,554)      (1.9)%
Appalachia                              85,573        95,925       (10,352)     (10.8)%
White Oak                                1,391           101          1,290         (1)
Other and Corporate                      8,471        24,366       (15,895)     (65.2)%
Elimination                            (3,088)       (5,634)          2,546       45.2%
Total Segment Adjusted EBITDA
Expense (3)                          $ 321,938     $ 348,903     $ (26,965)      (7.7)%

(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


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noncontrolling interest) before net interest expense, income taxes and depreciation, depletion and amortization. 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 consolidated 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
                                                   March 31,
                                              2014          2013

Segment Adjusted EBITDA                     $ 207,750    $ 188,266

General and administrative                   (17,899)      (15,713 )
Depreciation, depletion and amortization     (66,841)      (64,382 )
Interest expense, net                         (7,674)       (6,484 )
Income tax benefit                                  -          697
Net income                                  $ 115,336    $ 102,384

(3) Segment Adjusted EBITDA Expense (a non-GAAP financial measure) includes operating expenses, outside coal purchases and other income. Transportation expenses are excluded as these expenses are passed through to the ARLP Partnership's customers and, consequently, it does not realize any gain or loss on transportation revenues. Segment Adjusted EBITDA Expense is used as a supplemental financial measure by the ARLP Partnership's management to assess the operating performance of the segments. Segment Adjusted EBITDA Expense is a key component of Segment Adjusted EBITDA in addition to coal sales and other sales and operating revenues. The exclusion of corporate general and administrative expenses from Segment Adjusted EBITDA Expense allows management to focus solely on the evaluation of segment operating performance as it primarily relates to the ARLP Partnership's operating expenses. Outside coal purchases are included in Segment Adjusted EBITDA Expense because tons sold and coal sales include sales from outside coal purchases.


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

                                                           Three Months Ended
                                                               March 31,
                                                          2014            2013

Segment Adjusted EBITDA Expense                       $     321,938    $    348,903

Outside coal purchases                                          (2)           (602)
Other income                                                    306             274
Operating expense (excluding depreciation,
depletion and amortization)                           $     322,242    $    348,575

Illinois Basin - Segment Adjusted EBITDA decreased 2.1% to $163.6 million in the 2014 Quarter from $167.2 million in the 2013 Quarter. The decrease of $3.6 million was primarily attributable to decreased tons sold, which decreased 2.9% to 7.5 million tons in the 2014 Quarter. Coal sales decreased 2.0% to $392.3 million in the 2014 Quarter compared to $400.3 million in the 2013 Quarter. The decrease of $8.1 million reflects decreased tons sold from the Warrior, Gibson North and Pattiki mines due to weather-related transportation disruptions, partially offset by increased coal production at the Dotiki mine related to improved geological conditions. Total Segment Adjusted EBITDA Expense for the 2014 Quarter decreased 1.9% to $229.6 million from $234.1 million in the 2013 Quarter, primarily due to lower tons sold for the segment, reduced cost per ton at the Dotiki mine due to improved coal production and lower operating expenses described above under "-Operating expenses and outside coal purchases." Although Segment Adjusted EBITDA Expense decreased in the 2014 Quarter, Segment Adjusted EBITDA Expense per ton sold increased $0.30 to $30.68 from $30.38 per ton sold in the 2013 Quarter, primarily as a result of reduced recoveries from the Warrior operation.

Appalachia - Segment Adjusted EBITDA increased to $48.9 million for the 2014 Quarter as compared to $23.0 million in the 2013 Quarter. This increase of $25.9 million was primarily attributable to increased tons sold, which increased 12.9% to 2.0 million tons in the 2014 Quarter. Coal sales increased 13.2% to $133.3 million in the 2014 Quarter compared to $117.7 million in the 2013 Quarter. The increase of $15.5 million was primarily due to increased production at the Tunnel Ridge longwall operation. Segment Adjusted EBITDA Expense decreased 10.8% to $85.6 million in the 2014 Quarter from $95.9 million in the 2013 Quarter and decreased $11.28 per ton sold to $42.52 from $53.80 per ton sold in the 2013 Quarter, primarily due to improved productivity and geological conditions at the Tunnel Ridge mine and new Excel No. 4 mining area at the MC Mining operation and reduced contract mining expenses at the Mettiki mining complex, partially offset by higher costs per ton at Mettiki due to reduced longwall shifts related to reduced contract shipments.

White Oak - Segment Adjusted EBITDA was $(4.0) million and $(4.3) million, respectively, in the 2014 and 2013 Quarters primarily attributable to losses allocated to the ARLP Partnership from its equity interest in White Oak, . . .

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