ALLIANCE RESOURCE PARTNERS LP - Quarter Report: 2013 March (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 March 31, 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 May 9, 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 March 31, 2013 and December 31, 2012		1
	Condensed Consolidated Statements of Income for the three months ended March 31, 2013 and 2012		2
	Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2013 and 2012		3
	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 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		16
ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk		26
ITEM 4.	Controls and Procedures		27
	Forward-Looking Statements		28
PART II
OTHER INFORMATION
ITEM 1.	Legal Proceedings		30
ITEM 1A.	Risk Factors		30
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds		30
ITEM 3.	Defaults Upon Senior Securities		30
ITEM 4.	Mine Safety Disclosures		30
ITEM 5.	Other Information		30
ITEM 6.	Exhibits		31

 

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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)

 

		March 31,				December 31,
ASSETS		2013				2012
CURRENT ASSETS:
Cash and cash equivalents		$	28,677			$	28,283
Trade receivables		168,270				172,724
Other receivables		1,097				1,019
Due from affiliates		157				658
Inventories		50,628				46,660
Advance royalties		11,492				11,492
Prepaid expenses and other assets		14,874				20,476
Total current assets		275,195				281,312
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment, at cost		2,434,704				2,361,863
Less accumulated depreciation, depletion and amortization		(886,497		)		(832,293		)
Total property, plant and equipment, net		1,548,207				1,529,570
OTHER ASSETS:
Advance royalties		24,955				23,267
Equity investments in affiliates		115,525				88,513
Due from affiliate		4,862				3,084
Other long-term assets		30,794				30,226
Total other assets		176,136				145,090
TOTAL ASSETS		$	1,999,538			$	1,955,972
LIABILITIES AND PARTNERS’ CAPITAL
CURRENT LIABILITIES:
Accounts payable		$	97,282			$	100,174
Due to affiliates		407				327
Accrued taxes other than income taxes		25,048				19,998
Accrued payroll and related expenses		39,038				38,501
Accrued interest		6,398				1,435
Workers’ compensation and pneumoconiosis benefits		9,468				9,320
Current capital lease obligations		1,069				1,000
Other current liabilities		23,603				19,572
Current maturities, long-term debt		18,000				18,000
Total current liabilities		220,313				208,327
LONG-TERM LIABILITIES:
Long-term debt, excluding current maturities		768,000				773,000
Pneumoconiosis benefits		61,306				59,931
Accrued pension benefit		31,457				31,078
Workers’ compensation		70,347				68,786
Asset retirement obligations		82,017				81,644
Long-term capital lease obligations		18,260				18,613
Other liabilities		9,211				9,147
Total long-term liabilities		1,040,598				1,042,199
Total liabilities		1,260,911				1,250,526
COMMITMENTS AND CONTINGENCIES
PARTNERS’ CAPITAL:
Limited Partners - Common Unitholders 36,963,054 and 36,874,949 units outstanding, respectively		1,051,624				1,020,823
General Partners’ deficit		(271,460		)		(273,113		)
Accumulated other comprehensive loss		(41,537		)		(42,264		)
Total Partners’ Capital		738,627				705,446
TOTAL LIABILITIES AND PARTNERS’ CAPITAL		$	1,999,538			$	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 March 31,
		2013				2012
SALES AND OPERATING REVENUES:
Coal sales		$	534,509			$	429,599
Transportation revenues		6,934				6,585
Other sales and operating revenues		6,612				7,402
Total revenues		548,055				443,586
EXPENSES:
Operating expenses (excluding depreciation, depletion and amortization)		348,575				273,515
Transportation expenses		6,934				6,585
Outside coal purchases		602				14,181
General and administrative		15,246				14,289
Depreciation, depletion and amortization		64,382				43,033
Total operating expenses		435,739				351,603
INCOME FROM OPERATIONS		112,316				91,983
Interest expense (net of interest capitalized for the three months ended March 31, 2013 and 2012 of $2,531 and $2,954, respectively)		(6,618		)		(5,912		)
Interest income		134				93
Equity in loss of affiliates, net		(3,867		)		(3,778		)
Other income		274				215
INCOME BEFORE INCOME TAXES		102,239				82,601
INCOME TAX BENEFIT		(698		)		(367		)
NET INCOME		$	102,937			$	82,968
GENERAL PARTNERS’ INTEREST IN NET INCOME		$	29,770			$	25,587
LIMITED PARTNERS’ INTEREST IN NET INCOME		$	73,167			$	57,381
BASIC AND DILUTED NET INCOME PER LIMITED PARTNER UNIT (Note 8)		$	1.95			$	1.54
DISTRIBUTIONS PAID PER LIMITED PARTNER UNIT		$	1.1075			$	0.99
WEIGHTED AVERAGE NUMBER OF UNITS OUTSTANDING – BASIC AND DILUTED		36,919,002				36,826,980

 

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 March 31,
		2013				2012
NET INCOME		$	102,937			$	82,968
OTHER COMPREHENSIVE INCOME:
Defined benefit pension plan
Amortization of actuarial loss (1)		559				430
Total defined benefit pension plan adjustments		559				430
Pneumoconiosis benefits
Amortization of actuarial loss (1)		168				194
Total pneumoconiosis benefits adjustments		168				194
OTHER COMPREHENSIVE INCOME		727				624
TOTAL COMPREHENSIVE INCOME		$	103,664			$	83,592

 

(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)

 

		Three Months Ended March 31,
		2013				2012
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES		$	199,478			$	114,804
CASH FLOWS FROM INVESTING ACTIVITIES:
Property, plant and equipment:
Capital expenditures		(70,306		)		(105,339		)
Changes in accounts payable and accrued liabilities		(7,608		)		(6,664		)
Proceeds from sale of property, plant and equipment		9				15
Purchases of equity investments in affiliate		(29,700		)		(4,400		)
Payments to affiliate for acquisition and development of coal reserves		(12,064		)		(18,000		)
Advances/loans to affiliate		(1,643		)		(776		)
Other		-				268
Net cash used in investing activities		(121,312		)		(134,896		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving credit facility		45,000				-
Payments under revolving credit facility		(50,000		)		-
Payments on capital lease obligations		(284		)		(171		)
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		(69,587		)		(60,722		)
Net cash used in financing activities		(77,772		)		(64,477		)
NET CHANGE IN CASH AND CASH EQUIVALENTS		394				(84,569		)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		28,283				273,528
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	28,677			$	188,959
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest		$	3,906			$	4,224
NON-CASH INVESTING AND FINANCING ACTIVITY:
Accounts payable for purchase of property, plant and equipment		$	13,364			$	18,314
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

 

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 March 31, 2013 and December 31, 2012, and the results of our operations, comprehensive income and cash flows for the three months ended March 31, 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.         ACQUISITION OF BUSINESS

 

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 complements our current coal mining operations.

 

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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 three months ended March 31, 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.

 

		Three Months Ended March 31, 2012
		(in thousands)
Total revenues
As reported		$  443,586
Pro forma		$  470,930
Net income
As reported		$    82,968
Pro forma		$    84,249

 

The revenues and net income related to the acquired business are reflected in our condensed consolidated statements of income beginning April 2, 2012 and totaled $34.0 million and $7.0 million, respectively, for the three months ended March 31, 2013.

 

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.

·              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 and accounts payable approximate fair value because of the short maturity of those instruments.  At March 31, 2013 and December 31, 2012, the estimated fair value of our long-term debt, including current maturities, was approximately $834.8 million and $834.3 million, respectively, based on interest rates that we believe are

 

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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):

 

		March 31, 2013				December 31, 2012
Revolving credit facility		$	150,000			$	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
		786,000				791,000
Less current maturities		(18,000		)		(18,000		)
Total long-term debt		$	768,000			$	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 million revolving credit facility (“Revolving Credit Facility”) and a $250 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 1.21 to 1.0 and 17.8 to 1.0, respectively, for the trailing twelve months ended March 31, 2013.  We were in compliance with the covenants of the ARLP Debt Arrangements as of March 31, 2013.

 

At March 31, 2013, we had borrowings of $150.0 million and $23.5 million of letters of credit outstanding with $526.5 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.

 

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 $164.8 million between the Transaction Date and March 31, 2013.  We expect to fund a total of

 

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approximately $300.5 million to $425.5 million from the Transaction Date through the next approximately two years, which includes the funding made to White Oak at closing and through March 31, 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.  During the year ended December 31, 2012, WOR Properties provided $34.6 million to White Oak for development of the acquired coal reserves, fulfilling its initial commitment for further development funding.  During the three months ended March 31, 2013, WOR Properties acquired from White Oak for $12.1 million cash paid at closing, an additional 42.2 million tons of reserves, of which 21.9 million tons are currently being developed for future mining by White Oak, and has a remaining commitment of $42.5 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 $29.7 million of additional Series A Units during the three months ended March 31, 2013.

 

WOR Processing’s ownership and member’s voting interest in White Oak at March 31, 2013 were 18.1% 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 March 31, 2013, WOR Processing had invested $132.2 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.

 

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 months ended March 31, 2013 and 2012, we were allocated losses of $4.2 million and $4.0 million, respectively.

 

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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 $4.6 million available under the Construction Loan as of March 31, 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.

 

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 months ended March 31, 2013 and 2012 (in thousands, except per unit data):

 

		Three Months Ended March 31,
		2013			2012
Net income		$	102,937		$	82,968
Adjustments:
Managing general partner’s priority distributions		(28,277)			(24,416)
General partners’ 2% equity ownership		(1,493)			(1,171)
Limited partners’ interest in net income		73,167			57,381
Less:
Distributions to participating securities		(569)			(498)
Undistributed earnings attributable to participating securities		(432)			(269)
Net income available to limited partners		$	72,166		$	56,614
Weighted average limited partner units outstanding – basic and diluted		36,919			36,827
Basic and diluted net income per limited partner unit (1)		$	1.95		$	1.54

 

(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 months ended March 31, 2013 and 2012, LTIP, SERP and Deferred Compensation Plan units of 324,315 and 377,229, respectively, were considered anti-dilutive under the treasury stock method.

 

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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 March 31,
		2013			2012
Beginning balance		$	77,046		$	73,201
Accruals increase		3,965			5,923
Payments		(2,876)			(2,906)
Interest accretion		620			684
Ending balance		$	78,755		$	76,902

 

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

 

		Three Months Ended March 31,
		2013			2012
Service cost		$	954		$	872
Interest cost		563			576
Amortization of net loss (1)		168			194
Net periodic benefit cost		$	1,685		$	1,642

 

(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 three months ended March 31, 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

 

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was $1.7 million and $1.5 million for the three months ended March 31, 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 March 31, 2013, there was $14.7 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 1.9 years.  As of March 31, 2013, the intrinsic value of the non-vested LTIP grants was $22.6 million.  As of March 31, 2013, the total obligation associated with the LTIP was $8.7 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.

 

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 three months ended March 31, 2013 and 2012, SERP and Deferred Compensation Plan participant notional account balances were credited with a total of 3,937 and 2,000 phantom units, respectively, and the fair value of these phantom units was $61.67 and $73.00, 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 March 31, 2013 and 2012, respectively.

 

As of March 31, 2013, there were 160,728 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 $10.2 million.  As of March 31, 2013, the total obligation associated with the SERP and Deferred Compensation Plan was $10.6 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.

 

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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 March 31,
		2013			2012
Service cost		$	760		$	754
Interest cost		852			818
Expected return on plan assets		(1,233)			(956)
Amortization of net loss (1)		559			430
Net periodic benefit cost		$	938		$	1,046

 

(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.  As of March 31, 2013, we had made no contributions to the Pension Plan.  However, on April 15, 2013, we made a contribution payment of $0.8 million for the 2013 plan year.  We expect to make quarterly contributions of $0.8 million for the remainder of 2013 for the 2013 plan year and, therefore, will contribute approximately $2.4 million to the Pension Plan in 2013.

 

12.         SEGMENT INFORMATION

 

We operate in the eastern U.S. as a producer and marketer of coal to major utilities and industrial users.  We aggregate multiple operating segments into 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.  Similar economic characteristics for 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 includes our activities associated with the White Oak longwall Mine No. 1 development project more fully described below.

 

The Illinois Basin reportable segment is comprised of multiple operating segments, including Webster County Coal, LLC’s Dotiki mining complex, Gibson County Coal, LLC’s mining complex, which includes the Gibson North mine and Gibson South project, Hopkins County Coal, LLC’s Elk Creek mining complex, White County Coal, LLC’s Pattiki mining complex, Warrior Coal, LLC’s mining complex, Sebree Mining, LLC’s mining complex, which includes the Onton mine, and River View Coal, LLC’s mining complex.  The development of the Gibson South mine is currently underway.  For information regarding the acquisition of the Onton mine, which was added to the Illinois Basin segment in April 2012, please see Note 4.

 

The Central Appalachian reportable segment is comprised of two operating segments, the MC Mining, LLC and Pontiki Coal, LLC mining complexes.

 

The Northern Appalachian reportable segment is comprised of multiple operating segments, including the Mettiki mining complex, the Tunnel Ridge, LLC (“Tunnel Ridge”) mining complex and the Penn Ridge Coal, LLC (“Penn Ridge”) property.  The Mettiki mining complex includes Mettiki Coal (WV), LLC’s Mountain View mine and Mettiki Coal, LLC’s preparation plant.  In May 2012, longwall production began at the Tunnel Ridge mine.  We are in the process of permitting the Penn Ridge property for future mine development.

 

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The White Oak reportable segment is comprised of two operating segments, WOR Processing and WOR Properties.  WOR Processing includes both the surface operations at White Oak currently under construction and the equity investment in White Oak.  WOR Properties owns coal reserves acquired from White Oak with a lease-back arrangement (Note 7).

 

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

 

Reportable segment results as of and for the three months ended March 31, 2013 and 2012 are presented below.

 

		Illinois Basin			Central Appalachia			Northern Appalachia			White Oak			Other and Corporate			Elimination (1)			Consolidated
		(in thousands)
Reportable segment results as of and for the three months ended March 31, 2013 were as follows:
Total revenues (2)		$	404,823		$	45,025		$	93,792		$	-		$	7,972		$	(3,557)		$	548,055
Segment Adjusted EBITDA Expense (3)		234,145			35,302			73,821			101			9,091			(3,557)			348,903
Segment Adjusted EBITDA (4)(5)		167,221			9,709			16,509			(4,292)			(796)			-			188,351
Total assets (6)		1,046,513			89,543			529,403			272,316			63,202			(1,439)			1,999,538
Capital expenditures (7)		52,031			3,903			8,879			16,953			604			-			82,370
Reportable segment results as of and for the three months ended March 31, 2012 were as follows:
Total revenues (2)		$	342,230		$	41,166		$	47,105		$	-		$	17,104		$	(4,019)		$	443,586
Segment Adjusted EBITDA Expense (3)		201,548			30,754			44,230			135			14,917			(4,103)			287,481
Segment Adjusted EBITDA (4)(5)		136,892			10,210			282			(4,126)			2,399			85			145,742
Total assets (6)		829,320			91,496			492,629			116,886			223,800			(678)			1,753,453
Capital expenditures (7)		54,145			4,101			31,515			24,943			8,635			-			123,339

 

(1)  The elimination column represents the elimination of intercompany transactions and is primarily comprised of sales from the Matrix Group to our mining operations.

 

(2)  Revenues included in the Other and Corporate column are primarily attributable to the Matrix Group revenues, Mt. Vernon transloading revenues, administrative service revenues from affiliates and brokerage sales.

 

(3)  Segment Adjusted EBITDA Expense includes operating expenses, outside coal purchases and other income. Transportation expenses are excluded as these expenses are passed through to our customers and consequently we do not realize any gain or loss on transportation revenues.  We review Segment Adjusted EBITDA Expense per ton for cost trends.

 

The following is a reconciliation of consolidated Segment Adjusted EBITDA Expense to operating expenses (excluding depreciation, depletion and amortization) (in thousands):

 

		Three Months Ended
		March 31,
		2013		2012
Segment Adjusted EBITDA Expense		$348,903		$287,481
Outside coal purchases		(602)		(14,181)
Other income		274		215
Operating expenses (excluding depreciation, depletion and amortization)		$348,575		$273,515

 

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(4)  Segment Adjusted EBITDA is defined as net income before net interest expense, income taxes, depreciation, depletion and amortization and general and administrative expenses. 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. Consolidated Segment Adjusted EBITDA is reconciled to net income as follows (in thousands):

 

		Three Months Ended
		March 31,
		2013		2012
Consolidated Segment Adjusted EBITDA		$188,351		$145,742
General and administrative		(15,246)		(14,289)
Depreciation, depletion and amortization		(64,382)		(43,033)
Interest expense, net		(6,484)		(5,819)
Income tax benefit		698		367
Net income		$102,937		$ 82,968

 

(5)  Includes equity in income (loss) of affiliates for the three months ended March 31, 2013 and 2012 of $(4.2) million and $(4.0) million, respectively, included in the White Oak segment and $0.3 million and $0.2 million, respectively, included in the Other and Corporate segment.

 

(6)  Total assets for the White Oak and Other and Corporate Segments include investments in affiliate of $113.7 million and $1.9 million, respectively, at March 31, 2013 and $40.0 million and $1.7 million, respectively, at March 31, 2012.

 

(7)  Capital expenditures shown above for the three months ended March 31, 2013 and 2012 include $12.1 million and $18.0 million, respectively, for acquisition and development of coal reserves in our condensed consolidated statements of cash flow.

 

13.         SUBSEQUENT EVENTS

 

On April 26, 2013, we declared a quarterly distribution for the quarter ended March 31, 2013, of $1.13 per unit, on all common units outstanding, totaling approximately $70.9 million (which includes our managing general partner’s incentive distributions), payable on May 15, 2013 to all unitholders of record as of May 8, 2013.

 

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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 “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.

 

Summary

 

We are a diversified producer and marketer of coal primarily to major United States (“U.S.”) utilities and industrial users. We began mining operations in 1971 and, since then, have grown through acquisitions and internal development to become the third largest coal producer in the eastern U.S. We operate eleven underground mining complexes in Illinois, Indiana, Kentucky, Maryland and West Virginia, including the new Tunnel Ridge, LLC (“Tunnel Ridge”) longwall mine in West Virginia and the Onton No. 9 mining complex (“Onton mine”) in west Kentucky acquired on April 2, 2012.  We are constructing a new mine in southern Indiana and operate a coal loading terminal on the Ohio River at Mt. Vernon, Indiana.  Also, we own a preferred equity interest in White Oak Resources LLC (“White Oak”), and are purchasing and funding development of reserves and constructing surface facilities at White Oak’s new longwall mining complex in southern Illinois.  As is customary in the coal industry, we have entered into long-term coal supply agreements with many of our customers.

 

We have five reportable segments: Illinois Basin, Central Appalachia, Northern Appalachia White Oak and Other and Corporate.  The first three reportable segments correspond to the three major coal producing regions in the eastern U.S.  Factors similarly affecting financial performance of 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 segment includes our activities associated with the White Oak longwall Mine No. 1 development project in southern Illinois more fully described below.

 

·

Illinois Basin reportable segment is comprised of multiple operating segments, including Webster County Coal, LLC’s Dotiki mining complex (“Dotiki”), Gibson County Coal, LLC’s mining complex, which includes the Gibson North mine and Gibson South project, Hopkins County Coal, LLC’s Elk Creek mining complex, White County Coal, LLC’s Pattiki mining complex (“Pattiki”), Warrior Coal, LLC’s mining complex (“Warrior”), Sebree Mining, LLC mining complex (“Sebree”), which includes the Onton mine, Steamport, LLC and certain Sebree reserves, River View Coal, LLC’s mining complex (“River View”), CR Services, LLC, and certain properties of Alliance Resource Properties, LLC (“Alliance Resource Properties”), ARP

 

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	Sebree, LLC and ARP Sebree South, LLC. The development of the Gibson South mine is currently underway and we are in the process of permitting the Sebree property for future mine development. For information regarding the acquisition of the Onton mine, which was added to the Illinois Basin segment in April 2012, please read “Item 1. Financial Statements (Unaudited) – Note 4. Acquisition of Business” of this Quarterly Report on Form 10-Q.
·	Central Appalachian reportable segment is comprised of two operating segments, the Pontiki Coal, LLC and MC Mining, LLC (“MC Mining”) mining complexes.
·	Northern Appalachian reportable segment is comprised of multiple operating segments, including the Mettiki mining complex, the Tunnel Ridge mining complex and the Penn Ridge Coal, LLC (“Penn Ridge”) property. The Mettiki mining complex includes Mettiki Coal (WV), LLC’s Mountain View mine and Mettiki Coal, LLC’s preparation plant. In May 2012, longwall production began at the Tunnel Ridge mine. We are in the process of permitting the Penn Ridge property for future mine development.
·	White Oak reportable segment is comprised of two operating segments, Alliance WOR Properties, LLC (“WOR Properties”) and Alliance WOR Processing, LLC (“WOR Processing”). WOR Processing includes both the surface operations at White Oak currently under construction and the equity investment in White Oak. WOR Properties owns reserves acquired from White Oak and is committed to acquiring additional reserves from White Oak with a lease-back arrangement. WOR Properties has also completed initial funding commitments to White Oak for development of these reserves. The White Oak reportable segment also includes two loans to White Oak from our Intermediate Partnership, one for the acquisition of mining equipment (which was paid off and terminated in June 2012) and another to construct certain surface facilities. For more information on White Oak, please read “Item 1. Financial Statements (Unaudited) – Note 7. White Oak Transactions” of this Quarterly Report on Form 10-Q.
·	Other and Corporate reportable segment includes marketing and administrative expenses, Alliance Service, Inc. (“ASI”) and its subsidiary, Matrix Design Group, LLC (“Matrix Design”), Alliance Design Group, LLC (collectively, Matrix Design and Alliance Design Group, LLC are referred to as the “Matrix Group”), ASI’s ownership of aircraft, the Mt. Vernon Transfer Terminal, LLC (“Mt. Vernon”) dock activities, coal brokerage activity, our equity investment in Mid-America Carbonates, LLC (“MAC”) and certain activities of Alliance Resource Properties.

 

Three Months Ended March 31, 2013 Compared to Three Months Ended March 31, 2012

 

We reported net income of $102.9 million for the three months ended March 31, 2013 (“2013 Quarter”) compared to $83.0 million for the three months ended March 31, 2012 (“2012 Quarter”). This increase of $19.9 million was principally due to record coal production and increased coal sales volumes, which rose to 9.8 million tons produced and 9.7 million tons sold in the 2013 Quarter compared to 8.5 million tons produced and 7.8 million tons sold in the 2012 Quarter.  The increases in tons produced and tons sold resulted from the start-up of longwall production at the Tunnel Ridge mine in May 2012, the addition of the Onton mine acquired in April 2012 and increased tons produced and sold from our Gibson North, River View, Warrior and Pattiki mines.  Higher operating expenses during the 2013 Quarter resulted primarily from the increased sales and record 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 outside coal purchases in the 2013 Quarter.

 

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		Three Months Ended March 31,
		2013		2012		2013		2012
		(in thousands)				(per ton sold)
Tons sold		9,698		7,812		N/A		N/A
Tons produced		9,819		8,512		N/A		N/A
Coal sales		$534,509		$429,599		$55.12		$54.99
Operating expenses and outside coal purchases		$349,177		$287,696		$36.01		$36.83

 

Coal sales.  Coal sales for the 2013 Quarter increased 24.4% to $534.5 million from $429.6 million for the 2012 Quarter.  The increase of $104.9 million in coal sales reflected the benefit of increased tons sold (contributing $103.7 million in additional coal sales) and higher average coal sales prices (contributing $1.2 million in additional coal sales).  Average coal sales prices increased slightly to $55.12 per ton in the 2013 Quarter as compared to $54.99 per ton sold in the 2012 Quarter, primarily as a result of higher priced Central Appalachian coal sales.

 

Operating expenses and outside coal purchases.  Operating expenses and outside coal purchases combined increased 21.4% to $349.2 million for the 2013 Quarter from $287.7 million for the 2012 Quarter, primarily due to increased coal sales and record production volumes.  On a per ton basis, operating expenses and outside coal purchases decreased 2.2% to $36.01 per ton sold.  In addition to the impact of record production volumes and increased sales volumes, operating expenses were impacted by various other factors, the most significant of which are also discussed below:

 

·	Labor and benefit expenses per ton produced, excluding workers’ compensation, decreased 5.4% to $11.67 per ton in the 2013 Quarter from $12.33 per ton in the 2012 Quarter. This decrease of $0.66 per ton was primarily attributable to lower labor cost per ton resulting from higher longwall production at our Tunnel Ridge mine, which began production in May 2012, improved coal recoveries from our River View and Gibson mines and improved mining conditions at our Pattiki mine, partially offset by lower coal recoveries at our Dotiki mine reflecting its recent transition to a new coal seam;
·	Workers compensation expenses per ton produced decreased to $0.72 per ton in the 2013 Quarter from $1.04 per ton in the 2012 Quarter. The decrease of $0.32 per ton produced resulted primarily from increased production discussed above and favorable reserve adjustments;
·	Materials and supplies expenses per ton produced decreased 9.1% to $11.41 per ton in the 2013 Quarter from $12.55 per ton in the 2012 Quarter. The decrease of $1.14 per ton produced resulted primarily from production benefits discussed above and a decrease in cost for certain products and services, primarily roof support (decrease of $0.50 per ton), certain safety-related materials and supplies (decrease of $0.21 per ton), ventilation related materials and supplies (decrease of $0.19 per ton) and power and fuel used in the mining process (decrease of $0.15 per ton);
·	Maintenance expenses per ton produced decreased 8.6% to $3.93 per ton in the 2013 Quarter from $4.30 per ton in the 2012 Quarter. The decrease of $0.37 per ton produced was primarily from the benefits of newer equipment and increased production at our new Tunnel Ridge mine and improved coal recoveries at certain locations as discussed above; and
·	Outside coal purchases decreased to $0.6 million for the 2013 Quarter compared to $14.1 million in the 2012 Quarter. The decrease of $13.5 million was primarily attributable to decreased coal brokerage volumes and coal for sale into the metallurgical export markets. Coal purchase costs per ton are typically higher than our production costs per ton thus significantly lower volumes of coal purchases, like the 2013 Quarter, generally reduce our overall total expenses per ton.

 

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

 

·	Operating expenses increased in the 2013 Quarter due to greater sales from coal inventories compared to the 2012 Quarter. The 2013 Quarter ended with 492,000 tons of coal inventories compared to 1,065,000 at the end of the 2012 Quarter. Coal inventories increased only 136,000 tons during the 2013 Quarter compared to an increase of 897,000 tons during the 2012 Quarter;
·	Production taxes and royalties expenses (which are incurred as a percentage of coal sales prices and volumes) increased $0.26 per produced ton sold in the 2013 Quarter compared to the 2012 Quarter, primarily resulting from an increased mix of sales and production from certain mines in states with higher severance tax rates and a reduced mix of purchased tons sold (discussed above), which typically have minimal, if any, production taxes or royalty obligations; and
·	Capitalization of mine development expenses related to the construction of the Tunnel Ridge mine declined $13.1 million in the 2013 Quarter compared to the 2012 Quarter. Capitalized development ceased in May 2012 with the startup of longwall production.

 

Other sales and operating revenues.  Other sales and operating revenues are principally comprised of Mt. Vernon transloading revenues, Matrix Design sales and other outside services and administrative services revenue from affiliates.  Other sales and operating revenues decreased to $6.6 million in the 2013 Quarter from $7.4 million in the 2012 Quarter.  The decrease of $0.8 million was primarily due to decreased Matrix Design sales.

 

General and administrative.  General and administrative expenses for the 2013 Quarter increased to $15.2 million compared to $14.3 million in the 2012 Quarter.  The increase of $0.9 million was primarily due to the higher incentive-based compensation.

 

Depreciation, depletion and amortization.  Depreciation, depletion and amortization expense increased to $64.4 million for the 2013 Quarter from $43.0 million for the 2012 Quarter.  The increase of $21.4 million was attributable to additional depreciation expense related to the expansion of longwall production capacity at the new Tunnel Ridge mine, the addition of the Onton mine and capital expenditures related to production expansion and infrastructure investments at various mines.

 

Interest expense.  Interest expense, net of capitalized interest, increased to $6.6 million for the 2013 Quarter from $5.9 million for the 2012 Quarter.  The increase of $0.7 million was principally attributable to increased borrowings under our revolving credit facility and lower capitalized interest.  This increase was partially offset by the August 2012 repayment of $18.0 million on our original senior notes issued in 1999 and reduced interest expense resulting from lower rates and fees under our term loan and revolving credit facility entered into during May 2012.  The term loan and revolving credit facility are discussed in more detail below under “–Debt Obligations.”

 

Transportation revenues and expenses.  Transportation revenues and expenses were $6.9 million and $6.6 million for the 2013 and 2012 Quarters, respectively.  The increase of $0.3 million was primarily attributable to increased tonnage for which we arrange transportation at certain mines, partially offset by a decrease in average transportation rates in the 2013 Quarter.  The cost of transportation services are passed through to our customers.  Consequently, we do not realize any gain or loss on transportation revenues.

 

Equity in loss of affiliates, net.  Equity in loss of affiliates, net includes our equity investments in MAC and White Oak.  For the 2013 Quarter, equity in loss of affiliates was $3.9 million compared to $3.8 million for the 2012 Quarter, which was primarily attributable to losses allocated to us from our equity investment in White Oak.

 

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