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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
OR
[ ] TRANSITION 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 73-1564280
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1717 SOUTH BOULDER AVENUE, SUITE 600, TULSA, OKLAHOMA 74119
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
(918) 295-7600
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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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. Yes [X] No [ ]
As of August 9, 2002, 8,982,780 Common Units and 6,422,531 Subordinated
Units are outstanding.
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TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
<Table>
<Caption>
Page
----
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
ALLIANCE RESOURCE PARTNERS, L.P. AND SUBSIDIARIES
Consolidated Balance Sheets as of June 30, 2002 and
December 31, 2001 .............................................................. 1
Consolidated Statements of Income for the three-months and
six-months ended June 30, 2002 and 2001 ........................................ 2
Condensed Consolidated Statements of Cash Flows for the six-
months ended June 30, 2002 and 2001 ............................................ 3
Notes to Consolidated Financial Statements ..................................... 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS ................................. 5
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK .............................................................. 10
FORWARD-LOOKING STATEMENTS ..................................................... 11
</Table>
i
PART II
OTHER INFORMATION
<Table>
<Caption>
Page
----
ITEM 1. LEGAL PROCEEDINGS .............................................................. 12
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS ...................................... 12
ITEM 3. DEFAULTS UPON SENIOR SECURITIES ................................................ 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS ............................................................... 12
ITEM 5. OTHER INFORMATION .............................................................. 12
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ............................................... 12
</Table>
ii
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALLIANCE RESOURCE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT UNIT DATA)
<Table>
<Caption>
JUNE 30, DECEMBER 31,
2002 2001
------------ ------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ........................................... $ 4,104 $ 9,176
Trade receivables, net .............................................. 45,613 31,124
Marketable securities (at cost, which approximates fair value) ...... -- 10,085
Inventories ......................................................... 24,547 11,600
Advance royalties ................................................... 5,353 5,353
Prepaid expenses and other assets ................................... 824 2,020
------------ ------------
Total current assets ........................................... 80,441 69,358
PROPERTY, PLANT AND EQUIPMENT AT COST .................................. 387,192 367,050
LESS ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION .............. (186,146) (169,960)
------------ ------------
201,046 197,090
OTHER ASSETS:
Advance royalties ................................................... 8,434 9,756
Coal supply agreements, net ......................................... 10,099 12,031
Other long-term assets .............................................. 2,293 2,670
------------ ------------
$ 302,313 $ 290,905
============ ============
LIABILITIES AND PARTNERS' EQUITY
CURRENT LIABILITIES:
Accounts payable .................................................... $ 25,551 $ 25,237
Due to affiliates ................................................... 3,430 2,595
Accrued taxes other than income taxes ............................... 7,628 5,660
Accrued payroll and related expenses ................................ 8,985 8,284
Accrued interest .................................................... 5,829 5,402
Workers' compensation and pneumoconiosis benefits ................... 4,399 4,194
Other current liabilities ........................................... 6,928 5,324
Current maturities, long-term debt ............................... 15,000 15,000
------------ ------------
Total current liabilities ...................................... 77,750 71,696
LONG-TERM LIABILITIES:
Long-term debt, excluding current maturities ........................ 203,750 211,250
Accrued pneumoconiosis benefits ..................................... 15,333 14,615
Workers' compensation ............................................... 19,928 18,409
Reclamation and mine closing ........................................ 15,406 15,387
Due to affiliates ................................................... 4,680 3,624
Other liabilities ................................................... 2,687 2,865
------------ ------------
Total liabilities .............................................. 339,534 337,846
COMMITMENTS AND CONTINGENCIES
PARTNERS' CAPITAL (DEFICIT):
Common Unitholders 8,982,780 units outstanding ...................... 147,001 141,448
Subordinated Unitholder 6,422,531 units outstanding ................. 114,907 110,935
General Partners .................................................... (298,315) (298,510)
Minimum pension liability ........................................... (814) (814)
------------ ------------
Total Partners' capital (deficit) .............................. (37,221) (46,941)
------------ ------------
$ 302,313 $ 290,905
============ ============
</Table>
See notes to consolidated financial statements.
1
ALLIANCE RESOURCE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT UNIT AND PER UNIT DATA)
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- -----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
SALES AND OPERATING REVENUES:
Coal sales ........................................ $ 117,573 $ 104,012 $ 233,116 $ 204,828
Transportation revenues ........................... 4,361 5,301 9,447 9,213
Other sales and operating revenues ................ 4,895 1,409 9,317 3,433
------------ ------------ ------------ ------------
Total revenues .......................... 126,829 110,722 251,880 217,474
------------ ------------ ------------ ------------
EXPENSES:
Operating expenses ................................ 76,589 77,931 154,003 151,266
Transportation expenses ........................... 4,361 5,301 9,447 9,213
Outside purchases ................................. 11,518 8,360 22,888 13,225
General and administrative ........................ 4,952 4,023 9,673 8,946
Depreciation, depletion and amortization ....... 11,390 11,095 23,112 22,355
Interest expense (net of interest income and
interest capitalized for the three months
and six months ended June 30, 2002 and 2001
of $283, $536, $586 and $1,168,
respectively) ................................ 4,180 4,221 8,146 8,483
------------ ------------ ------------ ------------
Total operating expenses ............. 112,990 110,931 227,269 213,488
------------ ------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS ........................ 13,839 (209) 24,611 3,986
OTHER INCOME ......................................... 381 163 829 404
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE ................................. 14,220 (46) 25,440 4,390
CUMULATIVE EFFECT OF ACCOUNTING CHANGE ............... -- -- -- 7,939
------------ ------------ ------------ ------------
NET INCOME (LOSS) .................................... $ 14,220 $ (46) $ 25,440 $ 12,329
============ ============ ============ ============
GENERAL PARTNERS' INTEREST IN
NET INCOME (LOSS) ............................... $ 284 $ (1) $ 509 $ 247
============ ============ ============ ============
LIMITED PARTNERS' INTEREST IN
NET INCOME (LOSS) ............................... $ 13,936 $ (45) $ 24,931 $ 12,082
============ ============ ============ ============
BASIC NET INCOME (LOSS) PER LIMITED
PARTNER UNIT .................................... $ 0.90 $ (0.01) $ 1.62 $ 0.78
============ ============ ============ ============
BASIC NET INCOME (LOSS) PER LIMITED PARTNER
UNIT BEFORE ACCOUNTING CHANGE ................... $ 0.90 $ (0.01) $ 1.62 $ 0.28
============ ============ ============ ============
DILUTED NET INCOME (LOSS) PER LIMITED
PARTNER UNIT .................................... $ 0.88 $ (0.01) $ 1.57 $ 0.77
============ ============ ============ ============
DILUTED NET INCOME (LOSS) PER LIMITED PARTNER
UNIT BEFORE ACCOUNTING CHANGE ................... $ 0.88 $ (0.01) $ 1.57 $ 0.27
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF UNITS
OUTSTANDING-BASIC ............................... 15,405,311 15,405,311 15,405,311 15,405,311
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF UNITS
OUTSTANDING-DILUTED ............................. 15,842,657 15,681,411 15,841,864 15,680,817
============ ============ ============ ============
</Table>
See notes to consolidated financial statements.
2
ALLIANCE RESOURCE PARTNERS, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<Table>
<Caption>
SIX MONTHS ENDED
JUNE 30,
------------------------------
2002 2001
------------ ------------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES ................ $ 33,139 $ 30,402
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment ............... (25,394) (27,236)
Proceeds from sale of property, plant and equipment ..... 318 21
Purchase of marketable securities ....................... -- (23,526)
Proceeds from the maturity of marketable securities ..... 10,085 37,230
------------ ------------
Net cash used in investing activities ...... (14,991) (13,511)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving credit facility .............. 39,500 --
Payments under revolving credit facility ................ (39,500) --
Payments on long-term debt .............................. (7,500) --
Distribution to Partners ................................ (15,720) (15,720)
------------ ------------
Net cash used in financing activities ...... (23,220) (15,720)
------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS .................... (5,072) 1,171
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ........... 9,176 6,933
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ................. $ 4,104 $ 8,104
============ ============
CASH PAID FOR:
Interest .............................................. $ 8,089 $ 9,325
============ ============
</Table>
See notes to consolidated financial statements.
3
ALLIANCE RESOURCE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND PRESENTATION
Alliance Resource Partners, L.P., a Delaware limited partnership (the
"Partnership"), was formed on May 17, 1999, to acquire, own and operate certain
coal production and marketing assets of Alliance Resource Holdings, Inc., a
Delaware corporation ("ARH") (formerly known as Alliance Coal Corporation),
consisting of substantially all of ARH's operating subsidiaries, but excluding
ARH.
The accompanying consolidated financial statements include the accounts
and operations of the Partnership and present the financial position as of June
30, 2002 and December 31, 2001, and the results of its operations and cash flows
for the three-month and six-month periods ended June 30, 2002 and 2001. All
material intercompany transactions and accounts have been eliminated.
These consolidated financial statements and notes thereto for interim
periods 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 of the periods
presented. Results for interim periods are not necessarily indicative of results
for a full year.
These 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 and
combined financial statements and notes included in the Partnership's Annual
Report on Form 10-K for the year ended December 31, 2001.
2. CONTINGENCIES
The Partnership is involved in various lawsuits, claims and regulatory
proceedings incidental to its business. The Partnership provides for costs
related to litigation and regulatory proceedings, including civil fines issued
as part of the outcome of these proceedings, when a loss is probable and the
amount is reasonably determinable. In the opinion of management, the outcome of
these matters to the extent not previously provided for or covered under
insurance will not have a material adverse effect on the Partnership's business,
financial position or results of operations, although management cannot give any
assurance to that effect.
The Partnership is involved in a dispute with PSI Energy Inc. ("PSI")
concerning the procedures for and testing of coal supplied by its Gibson County
mining complex. PSI alleged penalties are estimated to be $1,568,023 at June 30,
2002 associated with a contract specification addressing the hardness of coal
provided to PSI. Gibson County Coal and PSI have had on-going discussions since
March 2001 concerning the procedures for and testing of coal supplied by the
Gibson County mining complex and have been unable to resolve their differences.
During March and April 2002, PSI withheld approximately $234,000 in payments due
to Gibson County Coal; PSI verbally advised, however, that it does not intend to
withhold any future payments until this dispute is resolved. During April 2002,
Gibson County Coal and PSI agreed to proceed with mediation in an effort to
resolve the contractual dispute, which is currently scheduled for August 12
through 14, 2002. Gibson County Coal continues to strongly disagree with PSI's
position.
4
3. SUBSEQUENT EVENT
On July 24, 2002, the Partnership declared a minimum quarterly
distribution for the period from April 1, 2002 to June 30, 2002, of $0.50 per
unit, totaling approximately $7,703,000, on all of its Common and Subordinated
Units outstanding, payable on August 14, 2002, to all unitholders of record on
August 1, 2002.
4. CHANGE IN CONTROL
On May 8, 2002, AMH II, LLC, a newly formed Delaware limited liability
company owned by thirteen members of management ("AMH-II"), acquired the 74.1%
interest, including the managing member interest, of Alliance Resource
Management GP, LLC (the "MGP"), the managing general partner of the Partnership,
from Beacon-Alliance Managing Member, LLC and Beacon-Alliance Limited Member,
LLC. As a result of this transaction, and his current ownership of 31.6% of
Alliance Management Holdings, LLC ("AMH") (AMH holds a 25.9% member's interest
in the MGP), Joseph W. Craft, III, President and Chief Executive Officer of the
MGP, is the beneficial owner of 50.6% of the outstanding equity interests in the
MGP.
Contemporaneously with this acquisition, Alliance Resource Holdings II,
Inc., a newly formed Delaware corporation owned by the same thirteen management
members ("ARH-II"), acquired all of the outstanding capital stock of ARH
pursuant to a tax-free reorganization of ARH in which Beacon Investors Fund II,
L.P. and MPC Partners, L.P. exchanged all of their stock in ARH in consideration
for certain cash payments and notes. Mr. Craft is the beneficial owner of 57.27%
of the outstanding capital of each of AMH-II and ARH-II. As a result of the two
foregoing transactions, Mr. Craft's combined beneficial ownership of the
outstanding equity interests in the Partnership is 29.9%.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SELECTED OPERATING DATA
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ---------------------
2002 2001 2002 2001
-------- -------- -------- --------
Tons sold (000s) 4,443 4,278 8,901 8,580
Tons produced (000s) 4,320 3,828 8,639 8,068
Revenues per ton sold(1) $ 27.56 $ 24.64 $ 27.24 $ 24.27
Cost per ton sold(2) $ 20.95 $ 21.11 $ 20.96 $ 20.21
</Table>
(1) Revenues per ton sold is based on the total of coal sales and other sales
and operating revenues divided by tons sold.
(2) Cost per ton is based on the total of operating expenses, outside
purchases and general and administrative expenses divided by tons sold.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001
Coal sales. Coal sales for the three months ended June 30, 2002 (the
"2002 Quarter") increased 13.0% to $117.6 million from $104.0 million for the
three months ended June 30, 2001 (the "2001 Quarter"). The increase of $13.6
million was primarily attributable to higher price sales contracts secured
during the second half of last year, increased tons associated with coal
feedstock for coal synfuel production, and higher productivity from the Gibson
County Coal, LLC mining complex. These
5
increases were partially offset by a decrease in activity in the domestic coal
brokerage market. Tons sold increased 3.9% to 4.4 million for the 2002 Quarter
from 4.3 million for the 2001 Quarter. Tons produced increased 12.9% to 4.3
million tons for the 2002 Quarter from 3.8 million for the 2001 Quarter.
Transportation revenues. Transportation revenues decreased to $4.4
million for the 2002 Quarter from $5.3 million for the 2001 Quarter. The
decrease of $0.9 million was primarily attributable to a decrease in activity in
the domestic coal brokerage market. The Partnership reflects reimbursement of
the cost of transporting coal to customers through third-party carriers as
transportation revenues and the corresponding expense as transportation expense
in the consolidated statements of income. No profit margin is realized on
transportation revenues.
Other sales and operating revenues. Other sales and operating revenues
increased to $4.9 million for the 2002 Quarter from $1.4 million for the 2001
Quarter. The increase of $3.5 million is primarily attributable to additional
service fees associated with increased volumes at a third-party coal synfuel
facility at our Hopkins County Coal, LLC mining complex.
Operating expenses. Operating expenses decreased 1.7% to $76.6 million
for the 2002 Quarter from $77.9 million for the 2001 Quarter. The decrease of
$1.3 million is primarily due to record quarterly production at our Mettiki
Coal, LLC mine resulting in lower per ton costs compared to the prior year.
Transportation expenses. See "Transportation revenues" above concerning
the decrease in transportation expenses.
Outside purchases. Outside purchases increased to $11.5 million for the
2002 Quarter compared to $8.4 million for the 2001 Quarter. The increase of $3.1
million is primarily the result of outside purchases necessary to fulfill coal
feedstock contract commitments at our Hopkins County Coal mine, offset by a
decrease in the activity in the domestic coal brokerage market. The Partnership
has entered into coal supply agreements with Warrior Coal, LLC, an affiliate of
the Partnership, for the purchase of up to 1.8 million tons for the year ending
December 31, 2002.
General and administrative. General and administrative expenses increased
23.1% to $5.0 million for the 2002 Quarter compared to $4.0 million for the 2001
Quarter. The increase of $1.0 million was primarily attributable to increased
accruals related to incentive plans, which provide the Partnership's employees
an opportunity to receive additional compensation based on financial
performance.
Depreciation, depletion and amortization. Depreciation, depletion and
amortization expenses were comparable at $11.4 million and $11.1 million,
respectively.
Interest expense. Interest expense was comparable for the 2002 and 2001
Quarters at $4.2 million for each quarter.
EBITDA (income before net interest expense, depreciation, depletion and
amortization) increased 95.1% to $29.8 million for the 2002 Quarter compared
with $15.3 million for the 2001 Quarter. The $14.5 million increase is primarily
attributable to higher price realizations, increased volumes associated with
coal synfuel-related agreements and higher productivity from the Gibson County
Coal and Mettiki mining complexes.
EBITDA should not be considered as an alternative to net income, income
from operations, cash flows from operating activities or any other measure of
financial performance presented in accordance with generally accepted accounting
principles. EBITDA is not intended to represent cash flow and does not represent
the measure of cash available for distribution, but provides additional
information for
6
evaluating the Partnership's ability to make minimum quarterly distributions.
The Partnership's method of computing EBITDA may not be the same method used to
compute similar measures reported by other companies, or EBITDA may be computed
differently by the Partnership in different contexts (i.e., public reporting
versus computation under financing agreements).
Six Months Ended June 30, 2002 compared to Six Months Ended June 30, 2001
Coal sales. Coal sales for the six months ended June 30, 2002 (the "2002
Period") increased 13.8% to $233.1 million from $204.8 million for the six
months ended June 30, 2001 (the "2001 Period"). The increase of $28.3 million
was primarily attributable to higher price sales contracts secured during the
second half of last year, increased tons associated with coal feedstock for coal
synfuel production, and higher productivity from the Gibson County Coal mining
complex. These increases were partially offset by a decrease in activity in the
domestic coal brokerage market. Tons sold increased 3.7% to 8.9 million for the
2002 Period from 8.6 million for the 2001 Period. Tons produced increased 7.1%
to 8.6 million tons for the 2002 Period from 8.1 million for the 2001 Period.
Transportation revenues. Transportation revenues were comparable for the
2002 and 2001 Periods at $9.4 million and $9.2 million, respectively. The
Partnership reflects reimbursement of the cost of transporting coal to customers
through third-party carriers as transportation revenues and the corresponding
expense as transportation expense in the consolidated statements of income. No
profit margin is realized on transportation revenues.
Other sales and operating revenues. Other sales and operating revenues
increased to $9.3 million for the 2002 Period from $3.4 million for the 2001
Period. The increase of $5.9 million is primarily attributable to additional
service fees associated with increased volumes at a third-party coal synfuel
facility at our Hopkins County Coal mining complex.
Operating expenses. Operating expenses increased 1.8% to $154.0 million
for the 2002 Period from $151.3 million for the 2001 Period. The increase of
$2.7 million is primarily the result of increased production costs associated
with increased sales volumes offset by lower per ton costs at our Mettiki mine.
Transportation expenses. See "Transportation revenues" above concerning
the increase in transportation expenses.
Outside purchases. Outside purchases increased to $22.9 million for the
2002 Period compared to $13.2 million for the 2001 Period. The increase of $9.7
million is primarily the result of outside purchases necessary to fulfill coal
feedstock contract commitments at our Hopkins County Coal mine, offset by a
decrease in the activity in the domestic coal brokerage market. The Partnership
has entered into coal supply agreements with Warrior Coal, LLC, an affiliate of
the Partnership, for the purchase of up to 1.8 million tons for the year ending
December 31, 2002.
General and administrative. General and administrative expenses increased
8.1% to $9.7 million for the 2002 Period compared to $8.9 million for the 2001
Period. The increase of $0.8 million was primarily attributable to increased
accruals related to incentive plans, which provide the Partnership's employees
an opportunity to receive additional compensation based on financial
performance.
Depreciation, depletion and amortization. Depreciation, depletion and
amortization expenses increased 3.4% to $23.1 million for the 2002 Period
compared to $22.4 million for the 2001 Period. The increase of $0.7 million
primarily resulted from additional depreciation expense associated with the new
Gibson County Coal mining complex.
7
Interest expense. Interest expense was comparable for the 2002 and 2001
Periods at $8.1 million and $8.5 million, respectively.
EBITDA (income before net interest expense, depreciation, depletion and
amortization) increased 31.3% to $56.7 million for the 2002 Period compared with
$43.2 million for the 2001 Period. The 2001 Period results include the benefit
of a cumulative effect of accounting change totaling $7.9 million related to a
change in the method of estimating the black lung benefits liability. Excluding
the benefit of the accounting change on the 2001 Period, EBITDA for the 2002
Period increased $21.5 million or 60.9%. The $21.5 million increase in EBITDA,
after excluding the effect of the accounting change, is primarily attributable
to higher price realizations, increased volumes associated with coal synfuel
related agreements and higher productivity from the Gibson County Coal and
Mettiki mining complexes.
EBITDA should not be considered as an alternative to net income, income
from operations, cash flows from operating activities or any other measure of
financial performance presented in accordance with generally accepted accounting
principles. EBITDA has not been adjusted for the cumulative effect of accounting
change. EBITDA is not intended to represent cash flow and does not represent the
measure of cash available for distribution, but provides additional information
for evaluating the Partnership's ability to make minimum quarterly
distributions. The Partnership's method of computing EBITDA may not be the same
method used to compute similar measures reported by other companies, or EBITDA
may be computed differently by the Partnership in different contexts (i.e.,
public reporting versus computation under financing agreements).
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Cash provided by operating activities was $33.1 million for the 2002
Period compared to $30.4 million for the 2001 Period. The increase in cash
provided by operating activities was principally attributable to an increase in
net income offset by increased working capital during the 2002 Period compared
to the 2001 Period.
Net cash used in investing activities was $15.0 million for the 2002
Period compared to $13.5 million for the 2001 Period. The increase in the use of
cash is principally attributable to reduced liquidation of marketable
securities, net of purchases, during the 2002 Period compared to the 2001
Period.
Net cash used in financing activities was $23.2 million for the 2002
Period compared to $15.7 million for the 2001 Period. The increase is
attributable to $7.5 million of scheduled payments on long-term debt.
Capital Expenditures
Capital expenditures decreased to $25.4 million in the 2002 Period
compared to $27.2 million in the 2001 Period. The decrease is principally
attributable to capital expenditures related to the Gibson County Coal mining
complex during the 2001 Period. The Partnership estimates that its capital
expenditures will be approximately $54.6 million for 2002 including $15.9
million and $8.0 million related to the extension into the Pattiki II Coal
reserve area and a new service shaft at the Dotiki mine, respectively. The
Partnership currently expects to fund capital expenditures, other than
acquisitions, with cash generated from operations and borrowings under its
working capital and revolving credit facilities described below.
8
Reclamation Bonds and Insurance
Federal and state laws require surety bonds or other acceptable form of
surety support to secure the Partnership's obligations related to (a) the
statutory requirement that we return mined property to its approximate original
condition at the completion of the mining and reclamation process and (b)
workers compensation. The market for surety bonds has declined significantly and
the providers of bonds have indicated that bond renewals or new surety bonds
will require significant increases in collateral supporting the surety bonds.
Consequently, the Partnership could experience a significant increase in the
cost associated with the issuance of either replacement or new surety bonds. The
Partnership is actively negotiating for the renewal and/or replacement of
various surety bonds, but cannot estimate the potential increase in bonding
costs or other surety support at this time. The Partnership's failure to
maintain, or inability to acquire, surety bonds or other acceptable form of
surety support that are required by state and federal law would have a material
adverse effect on us.
The Partnership's commercial property insurance renewals are also due
in September 2002. The market for commercial property insurance has also
declined significantly with a number of insurance companies either exiting
certain lines of commercial property insurance, while also substantially
increasing the premiums and/or reducing the scope of coverage associated with
such insurance coverage. The Partnership is actively negotiating for commercial
property insurance renewals. The Partnership cannot estimate the potential
increase in cost for commercial property insurance or assure that its retention
of a participating interest in such commercial property insurance along with its
current insurance carriers will not increase from the existing 12.5% level.
Permitting
In January 2002, the West Virginia Department of Environmental
Protection (the "WV DEP") denied a permit application relating to 3.1 million
tons of coal reserves located in West Virginia that are contiguous to Mettiki
Coal, LLC's Maryland coal reserves. In May 2002, the West Virginia Surface Mine
Review Board (the "Surface Board") heard the Partnership's appeal of the WV
DEP's permit denial. The Surface Board unanimously reversed WV Dep's permit
denial. The Surface Board's action allows full seam extraction in the majority
of the permit area. Subject to the WV DEP's approval of a mitigation plan that
addresses any potential dewatering of a small tributary to the North Branch
Potomac River, the remaining area of the permit boundary will also be approved
for full seam extraction. However, a permit from the Maryland Department of
Environmental Protection has not been issued at this time, although the
Partnership believes that Mettiki Coal has satisfied all of the applicable
Maryland permitting requirements. Although Mettiki Coal continues to pursue all
required approvals for mining this block of coal reserves, the Partnership
cannot assure that all such approvals will be received.
Notes Offering and Credit Facility
Concurrently with the closing of the Partnership's initial public
offering, Alliance Resource GP, LLC (the "Special GP"), the Partnership's
special general partner, issued and Alliance Resource Operating Partners, L.P.
(the "Intermediate Partnership") assumed the obligations with respect to $180
million principal amount of 8.31% senior notes due August 20, 2014. The Special
GP also entered into, and the Intermediate Partnership assumed the obligations
under, a $100 million credit facility. The credit facility consists of three
tranches, including a $50 million term loan facility, a $25 million working
capital facility and a $25 million revolving credit facility. The Partnership
has borrowings outstanding of $38.8 million under the term loan facility and no
borrowings outstanding under either the working capital facility or revolving
credit facility at June 30, 2002. The weighted average interest rate on the term
loan facility at June 30, 2002 was 4.56%. The credit facility expires August
2004. The senior notes and credit
9
facility are guaranteed by all of the subsidiaries of the Intermediate
Partnership. The senior notes and credit facility contain various restrictive
and affirmative covenants, including the amount of distributions by the
Intermediate Partnership and the incurrence of other debt. The Partnership was
in compliance with the covenants of both the credit facility and senior notes at
June 30, 2002.
In 2001, the Partnership entered into agreements with three banks to
provide letters of credit in an aggregate amount of $25.0 million. At June 30,
2002, the Partnership had $15.5 million in letters of credit outstanding. The
Special GP guarantees the letters of credit.
Recent Accounting Pronouncements
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," which requires the fair value of a liability for an
asset retirement obligation to be recognized in the period in which it is
incurred. When the liability is initially recorded, a cost is capitalized by
increasing the carrying amount of the related long-lived asset. Over time, the
liability is accreted to its present value each period, and the capitalized cost
is depreciated over the useful life of the related asset. To settle the
liability, the obligation for its recorded amount is paid or a gain or loss upon
settlement is incurred. Since the Partnership has historically adhered to
accounting principles similar to SFAS No. 143 in accounting for its reclamation
and mine closing costs, the Partnership does not believe that adoption of SFAS
No. 143, effective January 1, 2003, will have a material impact on its financial
statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
All of the Partnership's transactions are denominated in U.S. dollars,
and as a result, the Partnership does not have material exposure to currency
exchange-rate risks.
The Partnership did not engage in any interest rate, foreign currency
exchange rate or commodity price-hedging transactions as of June 30, 2002.
The Intermediate Partnership assumed obligations under a $100 million
credit facility. Borrowings under the credit facility are at variable rates and,
as a result, the Partnership has interest rate exposure.
As of June 30, 2002, there were no significant changes in the
Partnership's quantitative and qualitative disclosures about market risk as set
forth in the Partnership's Annual Report on Form 10-K for the year ended
December 31, 2001.
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FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements.
These statements are based on our beliefs as well as assumptions made by, and
information currently available to, us. When used in this document, the words
"anticipate," "believe," "continue," "estimate," "expect," "forecast", "may,"
"project", "will," and similar expressions identify forward-looking statements.
These statements reflect our current views with respect to future events and are
subject to various risks, uncertainties and assumptions. Specific factors which
could cause actual results to differ from those in the forward-looking
statements include:
o competition in coal markets and our ability to respond to the
competition;
o fluctuation in coal prices, which could adversely affect our
operating results and cash flows;
o deregulation of the electric utility industry and/or the effects
of any adverse changes in the domestic coal industry, electric
utility industry, or general economic conditions;
o dependence on significant customer contracts, including renewing
customer contracts upon expiration;
o customer cancellations of, or breaches to, existing contracts;
o customer delays or defaults in making payments;
o fluctuations in coal demand, price and availability due to labor
and transportation costs and disruptions, equipment availability,
governmental regulations and other factors;
o our productivity levels and margins that we earn on our coal
sales;
o any unanticipated increases in labor costs, adverse changes in
work rules, or unexpected cash payments associated with post-mine
reclamation and workers' compensation claims;
o greater than expected environmental regulations, costs and
liabilities;
o a variety of operational, geologic, permitting, labor and
weather-related factors;
o risks of major mine-related accidents or interruptions;
o results of litigation;
o difficulty maintaining our surety bonds for mine reclamation as
well as workers' compensation and black lung benefits; and
o difficulty obtaining commercial property insurance.
If one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, our actual results may differ materially
from those described in any forward-looking statement. When considering
forward-looking statements, you should also keep in mind the risk factors
described in our Annual Report on Form 10-K for the year ended December 31,
2001. Those risk factors could also cause our actual results to differ
materially from those contained in any forward-looking statement. We disclaim
any obligation to update the above list or to announce publicly the result of
any revisions to any of the forward-looking statements to reflect future events
or developments.
You should consider the above information when reading any
forward-looking statements contained in:
o this Quarterly Report on Form 10-Q;
o other reports filed by us with the SEC;
o our press releases; and
o oral statements made by us or any of our officers or other persons
acting on our behalf.
11
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information under "Contingencies" in Note 2 of the Notes to
Unaudited Consolidated Financial Statements herein is hereby incorporated by
reference. See also "Item 3. Legal Proceedings" in the Annual Report on Form
10-K for the year ended December 31, 2001.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit No. Description
----------- -----------
10.32 -- Amendment No. 2 to the Restated and Amended Coal
Supply Agreement effective February 28, 2002 between
Webster County Coal, LLC, White County Coal, LLC and
Seminole Electric Cooperative, Inc.
(b) Reports on Form 8-K:
A Form 8-K was filed on May 9, 2002 announcing that members of its
current management have purchased the remaining interests of its managing
general partner that were not already owned. In addition, members of management
also acquired the Beacon Investors' interests in Alliance Resource Holdings,
Inc., the parent company of the Partnership's special general partner, Alliance
Resource GP, LLC, which owns 1,232,780 and 6,422,531 of the Partnership's common
and subordinated units, respectively.
Additionally, The Board of Directors of Alliance Resource Management,
GP, LLC (the "MGP"), the managing general partner of the Partnership, elected
Cary P. Marshall as Vice President - Corporate Finance and Treasurer of the MGP
at a telephonic meeting of the Board of Directors held on May 2, 2002. Michael
L. Greenwood was separated from service as Senior Vice President and Chief
Financial Officer of the managing general partner effective May 17, 2002.
12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, in Tulsa, Oklahoma, on August 9, 2002.
ALLIANCE RESOURCE PARTNERS, L. P.
By: Alliance Resource Management GP, LLC
its managing general partner
/s/ Joseph W. Craft III
------------------------------------------
Joseph W. Craft III
President, Chief Executive
Officer and Director
/s/ Dale G. Wilkerson
----------------------------------
Dale G. Wilkerson
Vice President and Controller
(Principal Accounting
Officer)
13
EXHIBIT INDEX
<Table>
<Caption>
Exhibit No. Description
----------- -----------
10.32 -- Amendment No. 2 to the Restated and Amended Coal
Supply Agreement effective February 28, 2002 between
Webster County Coal, LLC, White County Coal, LLC and
Seminole Electric Cooperative, Inc.
</Table>
14