ALLIANCE RESOURCE PARTNERS LP - Quarter Report: 2013 June (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

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

THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2013

 

OR

 

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

THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _____________to_____________

 

Commission File No.:  0-26823

 

ALLIANCE RESOURCE PARTNERS, L.P.

(Exact name of registrant as specified in its charter)

 

Delaware (State or other jurisdiction of incorporation or organization)	73-1564280 (IRS Employer Identification No.)
1717 South Boulder Avenue, Suite 400, Tulsa, Oklahoma 74119 (Address of principal executive offices and zip code)
(918) 295-7600 (Registrant’s telephone number, including area code)

 

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

 

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

 

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

 

Large Accelerated Filer [X]	Accelerated Filer [   ]	Non-Accelerated Filer [   ]	Smaller Reporting Company [   ]
		(Do not check if smaller reporting company)

 

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

[   ] Yes   [X] No

 

As of August 8, 2013, 36,963,054 common units are outstanding.

 

Table of Contents

 

TABLE OF CONTENTS

 

PART I
FINANCIAL INFORMATION
			Page
ITEM 1.	Financial Statements (Unaudited)
	ALLIANCE RESOURCE PARTNERS, L.P. AND SUBSIDIARIES
	Condensed Consolidated Balance Sheets as of June 30, 2013 and December 31, 2012		1
	Condensed Consolidated Statements of Income for the three and six months ended June 30, 2013 and 2012		2
	Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2013 and 2012		3
	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2013 and 2012		4
	Notes to Condensed Consolidated Financial Statements		5
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		17
ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk		33
ITEM 4.	Controls and Procedures		34
	Forward-Looking Statements		35
PART II
OTHER INFORMATION
ITEM 1.	Legal Proceedings	37
ITEM 1A.	Risk Factors	37
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	37
ITEM 3.	Defaults Upon Senior Securities	37
ITEM 4.	Mine Safety Disclosures	37
ITEM 5.	Other Information	37
ITEM 6.	Exhibits	38

 

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PART I

 

FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

ALLIANCE RESOURCE PARTNERS, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except unit data)

(Unaudited)

 

		June 30,				December 31,
ASSETS		2013				2012
CURRENT ASSETS:
Cash and cash equivalents		$	8,794			$	28,283
Trade receivables		164,190				172,724
Other receivables		1,077				1,019
Due from affiliates		642				658
Inventories		63,886				46,660
Advance royalties		11,872				11,492
Prepaid expenses and other assets		9,837				20,476
Total current assets		260,298				281,312
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment, at cost		2,511,748				2,361,863
Less accumulated depreciation, depletion and amortization		(938,097		)		(832,293		)
Total property, plant and equipment, net		1,573,651				1,529,570
OTHER ASSETS:
Advance royalties		21,944				23,267
Equity investments in affiliates		128,884				88,513
Due from affiliate		5,927				3,084
Other long-term assets		29,359				30,226
Total other assets		186,114				145,090
TOTAL ASSETS		$	2,020,063			$	1,955,972
LIABILITIES AND PARTNERS’ CAPITAL
CURRENT LIABILITIES:
Accounts payable		$	95,509			$	100,174
Due to affiliates		386				327
Accrued taxes other than income taxes		23,848				19,998
Accrued payroll and related expenses		44,000				38,501
Accrued interest		1,455				1,435
Workers’ compensation and pneumoconiosis benefits		9,478				9,320
Current capital lease obligations		1,141				1,000
Other current liabilities		25,441				19,572
Current maturities, long-term debt		24,250				18,000
Total current liabilities		225,508				208,327
LONG-TERM LIABILITIES:
Long-term debt, excluding current maturities		753,750				773,000
Pneumoconiosis benefits		62,625				59,931
Accrued pension benefit		31,329				31,078
Workers’ compensation		72,213				68,786
Asset retirement obligations		75,029				81,644
Long-term capital lease obligations		17,888				18,613
Other liabilities		7,345				9,147
Total long-term liabilities		1,020,179				1,042,199
Total liabilities		1,245,687				1,250,526
COMMITMENTS AND CONTINGENCIES
PARTNERS’ CAPITAL:
Limited Partners - Common Unitholders 36,963,054 and 36,874,949 units outstanding, respectively		1,085,185				1,020,823
General Partners’ deficit		(269,998		)		(273,113		)
Accumulated other comprehensive loss		(40,811		)		(42,264		)
Total Partners’ Capital		774,376				705,446
TOTAL LIABILITIES AND PARTNERS’ CAPITAL		$	2,020,063			$	1,955,972

 

See notes to condensed consolidated financial statements.

 

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ALLIANCE RESOURCE PARTNERS, L.P. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except unit and per unit data)

(Unaudited)

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2013				2012				2013				2012
SALES AND OPERATING REVENUES:
Coal sales		$	541,574			$	512,505			$	1,076,083			$	942,104
Transportation revenues		4,971				5,441				11,905				12,026
Other sales and operating revenues		7,026				11,918				13,638				19,320
Total revenues		553,571				529,864				1,101,626				973,450
EXPENSES:
Operating expenses (excluding depreciation, depletion and amortization)		347,437				334,647				696,012				608,162
Transportation expenses		4,971				5,441				11,905				12,026
Outside coal purchases		790				16,154				1,392				30,335
General and administrative		16,597				16,052				31,843				30,341
Depreciation, depletion and amortization		68,207				52,109				132,589				95,142
Total operating expenses		438,002				424,403				873,741				776,006
INCOME FROM OPERATIONS		115,569				105,461				227,885				197,444
Interest expense (net of interest capitalized for the three and six months ended June 30, 2013 and 2012 of $2,873, $1,778, $5,404 and $4,732, respectively)		(6,218		)		(8,268		)		(12,836		)		(14,180		)
Interest income		178				51				312				144
Equity in loss of affiliates, net		(5,699		)		(4,430		)		(9,566		)		(8,208		)
Other income		353				2,384				627				2,599
INCOME BEFORE INCOME TAXES		104,183				95,198				206,422				177,799
INCOME TAX EXPENSE (BENEFIT)		109				(257		)		(589		)		(624		)
NET INCOME		$	104,074			$	95,455			$	207,011			$	178,423
GENERAL PARTNERS’ INTEREST IN NET INCOME		$	30,592			$	27,165			$	60,362			$	52,752
LIMITED PARTNERS’ INTEREST IN NET INCOME		$	73,482			$	68,290			$	146,649			$	125,671
BASIC AND DILUTED NET INCOME PER LIMITED PARTNER UNIT (Note 8)		$	1.96			$	1.83			$	3.92			$	3.36
DISTRIBUTIONS PAID PER LIMITED PARTNER UNIT		$	1.13			$	1.025			$	2.2375			$	2.015
WEIGHTED AVERAGE NUMBER OF UNITS OUTSTANDING – BASIC AND DILUTED		36,963,054				36,874,949				36,941,149				36,850,965

 

See notes to condensed consolidated financial statements.

 

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ALLIANCE RESOURCE PARTNERS, L.P. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2013				2012				2013				2012
NET INCOME		$	104,074			$	95,455			$	207,011			$	178,423
OTHER COMPREHENSIVE INCOME:
Defined benefit pension plan:
Amortization of actuarial loss (1)		559				485				1,118				915
Total defined benefit pension plan adjustments		559				485				1,118				915
Pneumoconiosis benefits:
Amortization of actuarial loss (1)		167				194				335				388
Total pneumoconiosis benefits adjustments		167				194				335				388
OTHER COMPREHENSIVE INCOME		726				679				1,453				1,303
TOTAL COMPREHENSIVE INCOME		$	104,800			$	96,134			$	208,464			$	179,726

 

(1)          Amortization of actuarial loss is included in the computation of net periodic benefit cost (see Notes 9 and 11 for additional details).

 

See notes to condensed consolidated financial statements.

 

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ALLIANCE RESOURCE PARTNERS, L.P. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

		Six Months Ended June 30,
		2013				2012
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES		$	373,823			$	255,471
CASH FLOWS FROM INVESTING ACTIVITIES:
Property, plant and equipment:
Capital expenditures		(163,030		)		(238,330		)
Changes in accounts payable and accrued liabilities		(4,055		)		10,759
Proceeds from sale of property, plant and equipment		9				19
Purchases of equity investments in affiliate		(47,500		)		(30,600		)
Payment for acquisition of business		-				(100,000		)
Payments to affiliate for acquisition and development of coal reserves		(18,860		)		(34,601		)
Advances/loans to affiliate		(2,531		)		(2,229		)
Payments from affiliate		-				4,229
Other		-				429
Net cash used in investing activities		(235,967		)		(390,324		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under term loan		-				250,000
Borrowings under revolving credit facility		77,000				55,000
Payments under revolving credit facility		(90,000		)		-
Payments on capital lease obligations		(584		)		(405		)
Payment on term loan		-				(300,000		)
Payment of debt issuance costs		-				(4,272		)
Net settlement of employee withholding taxes on vesting of Long-Term Incentive Plan		(3,015		)		(3,734		)
Cash contributions by General Partners		114				150
Distributions paid to Partners		(140,860		)		(124,050		)
Net cash used in financing activities		(157,345		)		(127,311		)
NET CHANGE IN CASH AND CASH EQUIVALENTS		(19,489		)		(262,164		)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		28,283				273,528
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	8,794			$	11,364
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest		$	17,660			$	17,680
NON-CASH INVESTING AND FINANCING ACTIVITY:
Accounts payable for purchase of property, plant and equipment		$	16,917			$	35,738
Market value of common units issued under Long-Term Incentive and Directors Deferred Compensation Plans before minimum statutory tax withholding requirements		$	8,583			$	11,070
Acquisition of business:
Fair value of assets assumed		$	-			$	126,639
Cash paid		-				(100,000		)
Fair value of liabilities assumed		$	-			$	26,639

 

See notes to condensed consolidated financial statements.

 

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ALLIANCE RESOURCE PARTNERS, L.P. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.                                    ORGANIZATION AND PRESENTATION

 

Significant Relationships Referenced in Notes to Condensed Consolidated Financial Statements

 

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

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

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

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

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

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

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

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

 

Organization

 

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

 

We are managed by our managing general partner, MGP, a Delaware limited liability company, which holds a 0.99% and a 1.0001% managing general partner interest in ARLP and the Intermediate Partnership, respectively, and a 0.001% managing member interest in Alliance Coal.  AHGP is a Delaware limited partnership that was formed to become the owner and controlling member of MGP.  AHGP completed its initial public offering on May 15, 2006.  AHGP owns directly and indirectly 100% of the members’ interest of MGP, the incentive distribution rights (“IDR”) in ARLP and 15,544,169 common units of ARLP.

 

Basis of Presentation

 

The accompanying condensed consolidated financial statements include the accounts and operations of the ARLP Partnership and present our financial position as of June 30, 2013 and December 31, 2012, and the results of our operations and comprehensive income for the three and six months ended June 30, 2013 and 2012 and the cash flows for the six months ended June 30, 2013 and 2012.  All of our intercompany transactions and accounts have been eliminated.

 

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These condensed consolidated financial statements and notes are unaudited. However, in the opinion of management, these financial statements reflect all adjustments (which include only normal recurring adjustments) necessary for a fair presentation of the results for the periods presented.  Results for interim periods are not necessarily indicative of results for a full year.

 

These condensed consolidated financial statements and notes are prepared pursuant to the rules and regulations of the Securities and Exchange Commission for interim reporting and should be read in conjunction with the consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2012.

 

Use of Estimates

 

The preparation of the ARLP Partnership’s condensed consolidated financial statements in conformity with generally accepted accounting principles (“GAAP”) of the United States (“U.S.”) requires management to make estimates and assumptions that affect the reported amounts and disclosures in our condensed consolidated financial statements.  Actual results could differ from those estimates.

 

2.                                    NEW ACCOUNTING STANDARDS

 

New Accounting Standards Issued and Adopted

 

In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (“ASU 2013-02”).  ASU 2013-02 requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income (“AOCI”) by component.  In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, certain significant amounts reclassified out of AOCI by the respective line items of net income.  ASU 2013-02 does not change the items that must be reported in AOCI.  ASU 2013-02 was effective for fiscal years, and interim periods within those years, beginning after December 15, 2012.  The adoption of ASU 2013-02 did not have a material impact on our condensed consolidated financial statements.

 

3.                                    CONTINGENCIES

 

Various lawsuits, claims and regulatory proceedings incidental to our business are pending against the ARLP Partnership.  We record an accrual for a potential loss related to these matters when, in management’s opinion, such loss is probable and reasonably estimable.  Based on known facts and circumstances, we believe the ultimate outcome of these outstanding lawsuits, claims and regulatory proceedings will not have a material adverse effect on our financial condition, results of operations or liquidity.  However, if the results of these matters were different from management’s current opinion and in amounts greater than our accruals, then they could have a material adverse effect.

 

4.                                    ACQUISITIONS

 

Asset Acquisition

 

In June 2013, our subsidiary, Alliance Resource Properties, LLC (“Alliance Resource Properties”), acquired the rights to approximately 11.6 million tons of proven and probable medium-sulfur coal reserves, and an additional 5.9 million resource tons, in Grant and Tucker County, West Virginia from Laurel Run Mining Company, a subsidiary of Consol Energy, Inc.  The purchase price of $25.2 million was allocated to owned and leased coal rights and was financed using existing cash on hand.  As a result of the coal reserve purchase, we reclassified certain tons of medium-sulfur, non-reserve coal deposits as reserves, which together with the reserves purchased above, extended the expected life of Mettiki Coal (WV), LLC’s Mountain View mine.

 

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Green River Collieries, LLC

 

On April 2, 2012, we acquired substantially all of Green River Collieries, LLC’s (“Green River”) assets related to its coal mining business and operations located in Webster and Hopkins Counties, Kentucky for consideration of $100.0 million.  The transaction included the Onton No. 9 mining complex (“Onton mine”), which included the mine, a dock, tugboat, and a lease for the preparation plant, and an estimated 40.0 million tons of coal reserves in the West Kentucky No. 9 coal seam.   The Green River acquisition was consistent with our general business strategy and complemented our current coal mining operations.

 

During the quarter ended September 30, 2012, we finalized the purchase price allocation related to the assets acquired and liabilities assumed from Green River.  The adjustments to the preliminary fair values resulted from additional information obtained about facts in existence on April 2, 2012.

 

The following unaudited pro forma information for the six months ended June 30, 2012 for the ARLP Partnership has been prepared for illustrative purposes as if the business combination occurred on January 1, 2011, the year prior to the acquisition date.  The unaudited pro forma results have been prepared based upon Green River’s historical results with respect to the business acquired and estimates of the effects of the transactions that we believe are reasonable and supportable. The results are not necessarily reflective of the consolidated results of operations had the acquisition actually occurred on January 1, 2011, nor are they indicative of future operating results.

 

		Six Months Ended
		June 30, 2012
		(in thousands)
Total revenues
As reported		$	973,450
Pro forma		$	1,000,794
Net income
As reported		$	178,423
Pro forma		$	179,935

 

The pro forma net income includes adjustments to depreciation, depletion and amortization to reflect the new basis in property, plant and equipment and intangible assets acquired, elimination of income tax expense, and the elimination of interest expense of Green River as its debt was paid off in conjunction with the acquisition.

 

Synergies from the acquisition are not reflected in the pro forma results.

 

5.                                    FAIR VALUE MEASUREMENTS

 

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

 

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

 

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

 

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

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

 

The carrying amounts for cash equivalents, accounts receivable, accounts payable and due to/from affiliates approximate fair value because of the short maturity of those instruments.  At June 30, 2013 and December 31, 2012, the estimated fair value of our long-term debt, including current maturities, was approximately $800.6 million and $834.3 million, respectively, based on interest rates that we believe are currently available to us for issuance of debt with similar terms and remaining maturities (Note 6). The fair value of debt, which is based upon interest rates for similar instruments in active markets, is classified as a Level 2 measurement under the fair value hierarchy.

 

6.                                    LONG-TERM DEBT

 

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

 

		June 30, 2013				December 31, 2012
Revolving credit facility		$	142,000			$	155,000
Senior notes		36,000				36,000
Series A senior notes		205,000				205,000
Series B senior notes		145,000				145,000
Term loan		250,000				250,000
		778,000				791,000
Less current maturities		(24,250		)		(18,000		)
Total long-term debt		$	753,750			$	773,000

 

Our Intermediate Partnership has $36.0 million in senior notes (“Senior Notes”), $205.0 million in Series A and $145.0 million in Series B senior notes (collectively, the “2008 Senior Notes”), a $700.0 million revolving credit facility (“Revolving Credit Facility”) and a $250.0 million term loan (collectively, with the Senior Notes, the 2008 Senior Notes and the Revolving Credit Facility, the “ARLP Debt Arrangements”), which are guaranteed by all of the material direct and indirect subsidiaries of our Intermediate Partnership. The ARLP Debt Arrangements contain various covenants affecting our Intermediate Partnership and its subsidiaries restricting, among other things, the amount of distributions by our Intermediate Partnership, the incurrence of additional indebtedness and liens, the sale of assets, the making of investments, the entry into mergers and consolidations and the entry into transactions with affiliates, in each case subject to various exceptions.  The ARLP Debt Arrangements also require the Intermediate Partnership to remain in control of a certain amount of mineable coal reserves relative to its annual production.  In addition, the ARLP Debt Arrangements require our Intermediate Partnership to maintain (a) debt to cash flow ratio of not more than 3.0 to 1.0 and (b) cash flow to interest expense ratio of not less than 3.0 to 1.0, in each case, during the four most recently ended fiscal quarters.  The debt to cash flow ratio and cash flow to interest expense ratio were 1.15 to 1.0 and 19.0 to 1.0, respectively, for the trailing twelve months ended June 30, 2013.  We were in compliance with the covenants of the ARLP Debt Arrangements as of June 30, 2013.

 

At June 30, 2013, we had borrowings of $142.0 million and $23.5 million of letters of credit outstanding with $534.5 million available for borrowing under the Revolving Credit Facility.  We utilize the Revolving Credit Facility, as appropriate, for working capital requirements, anticipated capital expenditures and investments in affiliates, scheduled debt payments and distribution payments.  We incur an annual commitment fee of 0.25% on the undrawn portion of the Revolving Credit Facility.

 

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7.                                    WHITE OAK TRANSACTIONS

 

On September 22, 2011 (the “Transaction Date”), we entered into a series of transactions with White Oak Resources LLC (“White Oak”) and related entities to support development of a longwall mining operation currently under construction.  The transactions feature several components, including an equity investment in White Oak (represented by “Series A Units” containing certain distribution and liquidation preferences), the acquisition and lease-back of certain coal reserves and surface rights and a backstop equipment financing facility.  Our initial investment funding to White Oak at the Transaction Date, consummated utilizing existing cash on hand, was $69.5 million and we have funded to White Oak $190.3 million between the Transaction Date and June 30, 2013.  We expect to fund a total of approximately $300.5 million to $425.5 million from the Transaction Date through approximately the next 1.5 years, which includes the funding made to White Oak through June 30, 2013 discussed above.  On the Transaction Date, we also entered into a coal handling and services agreement, pursuant to which we are constructing a preparation plant and other surface facilities.  We expect to fund these additional commitments utilizing existing cash balances, future cash flows from operations, borrowings under credit facilities and cash provided from the issuance of debt or equity.   The following information discusses each component of these transactions in further detail.

 

Hamilton County, Illinois Reserve Acquisition

 

On the Transaction Date, our subsidiary, Alliance WOR Properties, LLC (“WOR Properties”), acquired from White Oak the rights to approximately 204.9 million tons of proven and probable high-sulfur coal reserves, of which 105.2 million tons are currently being developed for future mining by White Oak, and certain surface properties and rights in Hamilton County, Illinois (the “Reserve Acquisition”).  Hamilton County is adjacent to White County, Illinois, where our White County Coal, LLC Pattiki mine is located.  The asset purchase price of $33.8 million cash paid at closing was allocated to owned and leased coal rights.  Between the Transaction Date and December 31, 2012, WOR Properties provided $51.6 million to White Oak for development of the acquired coal reserves, fulfilling its initial commitment for further development funding.  During the six months ended June 30, 2013, WOR Properties acquired from White Oak for $18.9 million cash paid at closing, an additional 66.5 million tons of reserves, of which 34.3 million tons are currently being developed for future mining by White Oak.  WOR Properties has a remaining commitment of $35.7 million for additional coal reserve purchases and development funding.

 

Equity Investment – Series A Units

 

Concurrent with the Reserve Acquisition, our subsidiary, Alliance WOR Processing, LLC (“WOR Processing”), made an equity investment of $35.7 million in White Oak to purchase Series A Units representing ownership in White Oak.  WOR Processing purchased $66.8 million of additional Series A Units between the Transaction Date and December 31, 2012 and $47.5 million of additional Series A Units during the six months ended June 30, 2013, fulfilling WOR Processing’s minimum equity investment commitment.

 

WOR Processing’s ownership and member’s voting interest in White Oak at June 30, 2013 were 20.0% based upon currently outstanding voting units.  The remainder of the equity ownership in White Oak, represented by Series B Units, is held by other investors and members of White Oak management.

 

We continually review all rights provided to WOR Processing and us by various agreements with White Oak and continue to conclude all such rights are protective or participating in nature and do not provide WOR Processing or us the ability to unilaterally direct any of the primary activities of White Oak that most significantly impact its economic performance.  As such, we recognize WOR Processing’s interest in White Oak as an equity investment in affiliate in our consolidated balance sheets.  As of June 30, 2013, WOR Processing had invested $150.0 million in Series A Units of White Oak equity, which represents our current maximum exposure to loss as a result of our equity investment in White Oak exclusive of capitalized interest.  White Oak has made no distributions to us.

 

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We record WOR Processing’s equity in earnings or losses of affiliates under the hypothetical liquidation at book value method of accounting due to the preferences to which WOR Processing is entitled on distributions.  For the three and six months ended June 30, 2013 and 2012, we were allocated losses of $5.9 million, $4.6 million, $10.1 million and $8.6 million, respectively.

 

Services Agreement

 

Simultaneous with the closing of the Reserve Acquisition, WOR Processing entered into a Coal Handling and Preparation Agreement (“Services Agreement”) with White Oak pursuant to which WOR Processing committed to construct and operate a coal preparation plant and related facilities and a rail loop and loadout facility to service the White Oak longwall Mine No. 1.  In addition, the Intermediate Partnership agreed to loan $10.5 million to White Oak for the construction of various assets on the surface property, including but not limited to, a bathhouse, office and warehouse (“Construction Loan”).  The Construction Loan has a term of 20 years, with repayment scheduled to begin in 2015.  White Oak has utilized $5.5 million available under the Construction Loan as of June 30, 2013.

 

8.                                    NET INCOME PER LIMITED PARTNER UNIT

 

We apply the provisions of FASB ASC 260, Earnings Per Share, which requires the two-class method in calculating basic and diluted earnings per unit (“EPU”).  Net income is allocated to the general partners and limited partners in accordance with their respective partnership percentages, after giving effect to any special income or expense allocations, including incentive distributions to our managing general partner, the holder of the IDR pursuant to our partnership agreement, which are declared and paid following the end of each quarter. Under the quarterly IDR provisions of our partnership agreement, our managing general partner is entitled to receive 15% of the amount we distribute in excess of $0.275 per unit, 25% of the amount we distribute in excess of $0.3125 per unit, and 50% of the amount we distribute in excess of $0.375 per unit. Our partnership agreement contractually limits our distributions to available cash; therefore, undistributed earnings of the ARLP Partnership are not allocated to the IDR holder.  In addition, our outstanding awards under our Long-Term Incentive Plan (“LTIP”) and phantom units in notional accounts under our Supplemental Executive Retirement Plan (“SERP”) and the MGP Amended and Restated Deferred Compensation Plan for Directors (“Deferred Compensation Plan”) include rights to nonforfeitable distributions or distribution equivalents and are therefore considered participating securities.  As such, we allocate undistributed and distributed earnings to these outstanding awards in our calculation of EPU.

 

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The following is a reconciliation of net income used for calculating basic earnings per unit and the weighted average units used in computing EPU for the three and six months ended June 30, 2013 and 2012 (in thousands, except per unit data):

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2013				2012				2013				2012
Net income		$	104,074			$	95,455			$	207,011			$	178,423
Adjustments:
Managing general partner’s priority distributions		(29,092		)		(25,771		)		(57,369		)		(50,187		)
General partners’ 2% equity ownership		(1,500		)		(1,394		)		(2,993		)		(2,565		)
Limited partners’ interest in net income		73,482				68,290				146,649				125,671
Less:
Distributions to participating securities		(583		)		(520		)		(1,152		)		(1,018		)
Undistributed earnings attributable to participating securities		(415		)		(380		)		(847		)		(653		)
Net income available to limited partners		$	72,484			$	67,390			$	144,650			$	124,000
Weighted average limited partner units outstanding – basic and diluted		36,963				36,875				36,941				36,851
Basic and diluted net income per limited partner unit (1)		$	1.96			$	1.83			$	3.92			$	3.36

 

(1)          Diluted EPU gives effect to all dilutive potential common units outstanding during the period using the treasury stock method. Diluted EPU excludes all dilutive potential units calculated under the treasury stock method if their effect is anti-dilutive.  For the three and six months ended June 30, 2013 and 2012, LTIP, SERP and Deferred Compensation Plan units of 345,152, 315,568, 317,167 and 339,165, respectively, were considered anti-dilutive under the treasury stock method.

 

9.                                    WORKERS’ COMPENSATION AND PNEUMOCONIOSIS

 

The changes in the workers’ compensation liability (including current and long-term liability balances) for each of the periods presented were as follows (in thousands):

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2013				2012				2013				2012
Beginning balance		$	78,755			$	76,902			$	77,046			$	73,201
Accruals increase		3,982				6,291				7,947				12,214
Payments		(2,727		)		(2,683		)		(5,603		)		(5,589		)
Interest accretion		620				685				1,240				1,369
Ending balance		$	80,630			$	81,195			$	80,630			$	81,195

 

Certain of our mine operating entities are liable under state statutes and the Federal Coal Mine Health and Safety Act of 1969, as amended, to pay pneumoconiosis, or black lung, benefits to eligible employees and former employees and their dependents.

 

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Components of the net periodic benefit cost for each of the periods presented are as follows (in thousands):

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2013				2012				2013				2012
Service cost		$	951			$	963			$	1,905			$	1,835
Interest cost		564				599				1,127				1,175
Amortization of net loss (1)		167				194				335				388
Net periodic benefit cost		$	1,682			$	1,756			$	3,367			$	3,398

 

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

 

10.                            COMPENSATION PLANS

 

Long-Term Incentive Plan

 

We have the LTIP for certain employees and officers of our managing general partner and its affiliates who perform services for us.  The LTIP awards are grants of non-vested “phantom” or notional units, which upon satisfaction of vesting requirements, entitle the LTIP participant to receive ARLP common units.  Annual grant levels and vesting provisions for designated participants are recommended by our President and Chief Executive Officer, subject to review and approval of the compensation committee of the MGP board of directors (the “Compensation Committee”).  On January 23, 2013, the Compensation Committee determined that the vesting requirements for the 2010 grants of 130,102 restricted units (which is net of 8,028 forfeitures) had been satisfied as of January 1, 2013.  As a result of this vesting, on February 15, 2013, we issued 82,400 unrestricted common units to the LTIP participants. The remaining units were settled in cash to satisfy the individual statutory minimum tax obligations of the LTIP participants.  On January 23, 2013, the Compensation Committee authorized additional grants of up to 156,575 restricted units, of which 146,725 were granted during the six months ended June 30, 2013 and will vest on January 1, 2016, subject to satisfaction of certain financial tests.  The fair value of these 2013 grants is equal to the intrinsic value at the date of grant, which was $63.02 per unit.  LTIP expense was $1.9 million and $1.6 million for the three months ended June 30, 2013 and 2012, respectively, and $3.6 million and $3.1 million for the six months ended June 30, 2013 and 2012, respectively.  After consideration of the January 1, 2013 vesting and subsequent issuance of 82,400 common units, 2.1 million units remain available under the LTIP for issuance in the future, assuming all grants issued in 2011, 2012 and 2013 currently outstanding are settled with common units, without reduction for tax withholding, and no future forfeitures occur.

 

As of June 30, 2013, there was $12.7 million in total unrecognized compensation expense related to the non-vested LTIP grants that are expected to vest.  That expense is expected to be recognized over a weighted-average period of 1.6 years.  As of June 30, 2013, the intrinsic value of the non-vested LTIP grants was $24.7 million.  As of June 30, 2013, the total obligation associated with the LTIP was $10.7 million and is included in the partners’ capital-limited partners line item in our condensed consolidated balance sheets.

 

As provided under the distribution equivalent rights provisions of the LTIP, all non-vested grants include contingent rights to receive quarterly cash distributions in an amount equal to the cash distributions we make to unitholders during the vesting period.

 

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SERP and Directors Deferred Compensation Plan

 

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

 

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

 

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

 

For the six months ended June 30, 2013 and 2012, SERP and Deferred Compensation Plan participant notional account balances were credited with a total of 7,424 and 4,548 phantom units, respectively, and the fair value of these phantom units was $65.94 per unit and $64.66 per unit, respectively, on a weighted-average basis.  Total SERP and Deferred Compensation Plan expense was approximately $0.3 million and $0.2 million for the three months ended June 30, 2013 and 2012, respectively, and $0.6 and $0.4 million for the six months ended June 30, 2013 and 2012, respectively.

 

As of June 30, 2013, there were 164,215 total phantom units outstanding under the SERP and Deferred Compensation Plan and the total intrinsic value of the SERP and Deferred Compensation Plan phantom units was $11.6 million.  As of June 30, 2013, the total obligation associated with the SERP and Deferred Compensation Plan was $10.8 million and is included in the partners’ capital-limited partners line item in our condensed consolidated balance sheets.

 

11.                            COMPONENTS OF PENSION PLAN NET PERIODIC BENEFIT COSTS

 

Eligible employees at certain of our mining operations participate in a defined benefit plan (the “Pension Plan”) that we sponsor.  The benefit formula for the Pension Plan is a fixed dollar unit based on years of service.

 

Components of the net periodic benefit cost for each of the periods presented are as follows (in thousands):

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2013				2012				2013				2012
Service cost		$	674			$	699			$	1,434			$	1,453
Interest cost		929				818				1,781				1,636
Expected return on plan assets		(931		)		(956		)		(2,164		)		(1,912		)
Amortization of net loss (1)		559				485				1,118				915
Net periodic benefit cost		$	1,231			$	1,046			$	2,169			$	2,092

 

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

 

We previously disclosed in our financial statements for the year ended December 31, 2012 that we expected to contribute $2.4 million to the Pension Plan in 2013.  During the six months ended June 30, 2013, we made contribution payments of $0.8 million for the 2013 plan year.  On July 15, 2013, we

 

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