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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, 2004
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 IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
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)
-----------------------------------
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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
As of August 9, 2004, 14,692,527 Common Units and 3,211,266 Subordinated
Units are outstanding.
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TABLE OF CONTENTS
Page
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
ALLIANCE RESOURCE PARTNERS, L.P. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets as of June 30, 2004 and
December 31, 2003 .............................................................. 1
Condensed Consolidated Statements of Income for
the three months and six months ended June 30, 2004 and 2003 ................... 2
Condensed Consolidated Statements of Cash
Flows for the six months ended June 30, 2004 and 2003 .......................... 3
Notes to Condensed Consolidated Financial Statements ........................... 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS................................... 9
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK .............................................................. 16
ITEM 4 CONTROLS AND PROCEDURES ........................................................ 16
FORWARD-LOOKING STATEMENTS ..................................................... 18
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS .............................................................. 20
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS ...................................... 20
ITEM 3. DEFAULTS UPON SENIOR SECURITIES ................................................ 20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS ............................................................... 20
ITEM 5. OTHER INFORMATION .............................................................. 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ............................................... 20
i
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALLIANCE RESOURCE PARTNERS, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT UNIT DATA)
JUNE 30, DECEMBER 31,
2004 2003
----------- -------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 44,800 $ 10,156
Trade receivables, net 56,474 38,305
Marketable securities 20,056 23,615
Inventories 16,020 14,527
Advance royalties 1,108 1,108
Prepaid expenses and other assets 925 3,432
----------- -------------
Total current assets 139,383 91,143
PROPERTY, PLANT AND EQUIPMENT AT COST 493,551 474,357
LESS ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION (269,456) (251,567)
----------- -------------
224,095 222,790
OTHER ASSETS:
Advance royalties 15,288 12,439
Coal supply agreements, net 4,084 5,445
Other long-term assets 4,209 4,637
----------- -------------
$ 387,059 $ 336,454
=========== =============
LIABILITIES AND PARTNERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 29,063 $ 22,651
Due to affiliates 19,925 13,546
Accrued taxes other than income taxes 11,738 10,375
Accrued payroll and related expenses 13,541 11,095
Accrued interest 5,402 5,402
Workers' compensation and pneumoconiosis benefits 5,949 5,905
Other current liabilities 8,654 5,739
----------- -------------
Total current liabilities 94,272 74,713
----------- -------------
LONG-TERM LIABILITIES:
Long-term debt, excluding current maturities 180,000 180,000
Accrued pneumoconiosis benefits 18,569 17,633
Workers' compensation 25,883 22,819
Reclamation and mine closing 25,655 21,717
Due to affiliates 7,298 3,735
Other liabilities 3,577 3,280
----------- -------------
Total liabilities 355,254 323,897
----------- -------------
COMMITMENTS AND CONTINGENCIES
PARTNERS' CAPITAL (DEFICIT):
Common Unitholders 14,692,527 units outstanding 278,198 263,071
Subordinated Unitholder 3,211,266 units outstanding 61,717 58,411
General Partners (304,321) (305,034)
Unrealized loss on marketable securities - (102)
Minimum pension liability (3,789) (3,789)
----------- -------------
Total Partners' capital 31,805 12,557
----------- -------------
$ 387,059 $ 336,454
=========== =============
See notes to condensed consolidated financial statements.
1
ALLIANCE RESOURCE PARTNERS, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT UNIT AND PER UNIT DATA)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- ---------------------------
2004 2003 2004 2003
----------- ------------ ------------ ------------
SALES AND OPERATING REVENUES:
Coal sales $ 149,325 $ 122,589 $ 293,864 $ 237,039
Transportation revenues 7,019 5,071 13,857 9,386
Other sales and operating revenues 6,202 5,811 12,649 11,971
----------- ------------ ------------ ------------
Total revenues 162,546 133,471 320,370 258,396
----------- ------------ ------------ ------------
EXPENSES:
Operating expenses 102,857 94,933 207,185 177,685
Transportation expenses 7,019 5,071 13,857 9,386
Outside purchases 799 370 1,864 1,389
General and administrative 11,276 6,654 21,605 12,305
Depreciation, depletion and amortization 13,415 13,662 26,186 26,793
Interest expense (net of interest income and interest
capitalized for the three months and six months ended
June 30, 2004 and 2003 of $118, $88, $228, and $367,
respectively) 3,836 3,990 7,679 7,957
----------- ------------ ------------ ------------
Total operating expenses 139,202 124,680 278,376 235,515
----------- ------------ ------------ ------------
INCOME FROM OPERATIONS 23,344 8,791 41,994 22,881
OTHER INCOME 245 457 559 450
----------- ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 23,589 9,248 42,553 23,331
INCOME TAX EXPENSE 728 720 1,467 1,675
----------- ------------ ------------ ------------
NET INCOME $ 22,861 $ 8,528 $ 41,086 $ 21,656
=========== ============ ============ ============
ALLOCATION OF NET INCOME:
PORTION APPLICABLE TO WARRIOR COAL LOSS PRIOR TO ITS
ACQUISITION ON FEBRUARY 14, 2003 $ - $ - $ - $ (666)
PORTION APPLICATION TO PARTNERS' INTEREST 22,861 8,528 41,086 22,322
----------- ------------ ------------ ------------
NET INCOME $ 22,861 $ 8,528 $ 41,086 $ 21,656
=========== ============ ============ ============
GENERAL PARTNERS' INTEREST IN NET INCOME (LOSS) $ 1,028 $ 170 $ 1,392 $ (219)
=========== ============ ============ ============
LIMITED PARTNERS' INTEREST IN NET INCOME $ 21,833 $ 8,358 $ 39,694 $ 21,875
=========== ============ ============ ============
BASIC NET INCOME PER LIMITED PARTNER UNIT $ 1.22 $ 0.47 $ 2.22 $ 1.27
=========== ============ ============ ============
DILUTED NET INCOME PER LIMITED PARTNER UNIT $ 1.18 $ 0.45 $ 2.15 $ 1.23
=========== ============ ============ ============
DISTRIBUTION PAID PER COMMON AND SUBORDINATED UNIT $ 0.625 $ 0.525 $ 1.1875 $ 1.05
=========== ============ ============ ============
WEIGHTED AVERAGE NUMBER OF UNITS OUTSTANDING-BASIC 17,903,793 17,903,793 17,903,793 17,252,320
=========== ============ ============ ============
WEIGHTED AVERAGE NUMBER OF UNITS OUTSTANDING-DILUTED 18,438,551 18,485,741 18,437,704 17,833,368
=========== ============ ============ ============
See notes to condensed consolidated financial statements.
2
ALLIANCE RESOURCE PARTNERS, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
--------------------------
2004 2003
----------- ------------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES $ 75,467 $ 43,727
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (25,114) (20,019)
Purchase of Warrior Coal - (12,661)
Proceeds from sale of property, plant and equipment 458 463
Proceeds from maturity of marketable securities 3,661 -
Proceeds from assumption of liability 2,112 -
----------- ------------
Net cash used in investing activities (18,883) (32,217)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from common unit offering to public - 53,965
Cash contribution by General Partners - 9
Payments on Warrior Coal revolving credit agreement balance - (17,000)
Borrowings under revolving credit facility and working
capital facilities - 10,600
Payments under revolving credit facility and working
capital facilities - (10,600)
Payments on long-term debt - (7,500)
Distributions to Partners (21,940) (17,844)
----------- ------------
Net cash provided by (used in) financing activities (21,940) 11,630
----------- ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 34,644 23,140
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 10,156 9,028
----------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 44,800 $ 32,168
=========== ============
CASH PAID FOR:
Interest $ 7,614 $ 8,138
=========== ============
Income taxes to taxing authorities $ 1,300 $ 1,625
=========== ============
See notes to condensed consolidated financial statements.
3
ALLIANCE RESOURCE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND PRESENTATION
Alliance Resource Partners, L.P., a Delaware limited partnership (the
"Partnership"), was formed in May 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 condensed consolidated financial statements include the
accounts and operations of the Partnership and present the financial position as
of June 30, 2004 and December 31, 2003, the results of its operations for the
three months and six months ended June 30, 2004 and 2003, and cash flows for the
six months ended June 30, 2004 and 2003. All material intercompany transactions
and accounts of the Partnership have been eliminated.
On February 14 and March 14, 2003, the Partnership issued 2,250,000 and
288,000 additional Common Units at a public offering price of $22.51 per unit
and received net proceeds of $48.5 million and $6.2 million, respectively,
before expenses of approximately $0.8 million, excluding underwriters fees. In
November 2003, 3,211,265 outstanding Subordinated Units were converted to Common
Units in accordance with the Partnership's Agreement.
On February 14, 2003, the Partnership acquired Warrior Coal, LLC ("Warrior
Coal") (Note 3). Because the Warrior Coal acquisition was between entities under
common control, the acquisition was recorded at historical cost in a manner
similar to that used in a pooling of interests. Accordingly, the condensed
consolidated financial statements and notes of the Partnership have been
restated to reflect the combined historical results of operations, financial
position and cash flows of the Partnership and Warrior Coal for the six months
ended June 30, 2003.
These condensed 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 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 the Partnership's Annual Report on
Form 10-K for the year ended December 31, 2003.
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. Although the ultimate outcome of these
matters cannot be predicted with certainty, in the opinion of management, the
outcome of these matters, to the extent not previously provided for or covered
under insurance, is not expected to have a material adverse effect on the
Partnership's business, financial position or results of operations.
Nonetheless, these matters or estimates that are based on current facts and
circumstances, if resolved in a manner different from the basis on
4
which management has formed its opinion, could have a material adverse effect on
the Partnership's financial position or results of operations.
Mettiki Coal (WV), LLC has proposed a long-wall underground mine extension
(the "E-Mine") to be located primarily in Tucker County, West Virginia, which
will eventually replace the Partnership's Mettiki Coal, LLC's existing long-wall
mine (the "D-Mine") located in Garrett County, Maryland. The proposed E-Mine is
approximately 10 miles from Mettiki Coal's D-Mine. In order to proceed with the
development of the E-Mine, Mettiki Coal (WV) filed two separate permit
applications with the West Virginia Department of Environmental Protection
("WVDEP") concerning on-site disposal of scalp rock and underground mining, each
requiring an associated water discharge permit. The Partnership was notified on
April 16, May 13, May 26, and June 7, 2004, that WVDEP had issued the permits
for on-site disposal of scalp rock, underground mining, water discharge related
to the operation of the scalp rock disposal facility, and water discharge
related to the operation of the underground mine, respectively.
The appeal periods for the scalp rock permit and the two water discharge
permits related to the operation of the scalp rock disposal facility and
underground mine have lapsed without any appeal being filed. Two appeals of the
underground mining permit were filed on June 11 and 16, 2004, respectively. The
West Virginia Surface Mine Board ("SMB") has consolidated the appeals and an
initial hearing is scheduled for September 8 and 9, 2004. Decisions are normally
rendered within several weeks after an administrative hearing has been
concluded. Management believes the WVDEP's approval of the permit applications
will be upheld by the SMB.
3. ACQUISITIONS
Warrior Coal
On February 14, 2003, the Partnership acquired Warrior Coal pursuant to
the terms of an Amended and Restated Put and Call Option Agreement ("Put/Call
Agreement") with ARH Warrior Holdings, Inc. ("ARH Warrior"), a subsidiary of
ARH. The Partnership acquired Warrior Coal for approximately $12.7 million and
paid Warrior Coal's borrowings of $17.0 million under a revolving credit
agreement between Alliance Resource GP, LLC (the "Special GP"), a subsidiary of
ARH, and Warrior Coal. Because the Warrior Coal acquisition was between entities
under common control, the acquisition is accounted for at historical cost in a
manner similar to that used in a pooling of interests. The Partnership financed
the transaction with a portion of the net proceeds of the public offering of
2,538,000 Common Units (Note 1) in February and March 2003.
Under the terms of the Put/Call Agreement, the Partnership assumed certain
other obligations, including a mineral lease and sublease with SGP Land, LLC, an
affiliate of ARH Warrior, covering coal reserves that have been and will
continue to be mined by Warrior Coal. The terms and conditions of the mineral
lease and sublease were not changed as a result of the acquisition.
Lodestar
On July 15, 2003, Hopkins County Coal, LLC ("Hopkins County Coal")
executed an Asset Purchase Agreement with Lodestar Energy, Inc. ("Lodestar"), a
coal company operating in Chapter 7 bankruptcy proceedings. Concurrently,
Hopkins County Coal entered into various other agreements (collectively, the
Asset Purchase Agreement and the various other agreements are referred to as the
"Agreements") with several parties, including the Kentucky Environmental and
Public Protection Cabinet ("Cabinet") and Frontier Insurance Company
("Frontier"). Closing of the Agreements was subject to the resolution of
numerous contingencies and/or conditions. Under the terms of the relevant
Agreements, Hopkins County Coal principally acquired a mining pit, created by
Lodestar's mining activities. The
5
mining pit will be used for refuse disposal by the Partnership's Webster County
Coal, LLC's Dotiki mine. The purchase price included a nominal monetary amount
and the assumption of remedial reclamation activities under the various mining
permits acquired by Hopkins County Coal from Lodestar. The Cabinet accepted
these remedial activities in lieu of certain solid waste closure requirements
applicable to residual landfills. Hopkins County Coal also received $2.1 million
from Frontier in exchange for the assumption of the remedial activities
associated with the mining pit. As a result of closing the Agreements on June 2,
2004, Hopkins County Coal recorded the fair value of the asset retirement
obligation of approximately $3.6 million with a corresponding asset that was
reduced by the $2.1 million of cash received.
4. DOTIKI FIRE INCIDENT
On February 11, 2004, Webster County Coal, LLC's ("Webster County Coal")
Dotiki mine was temporarily idled for a period of twenty-seven calendar days
following the occurrence of a mine fire that originated with a diesel supply
tractor (the "Dotiki Fire Incident"). As a result of the firefighting efforts of
the Mine Safety and Health Administration, Kentucky Department of Mines and
Minerals, and Webster County Coal personnel, Dotiki successfully extinguished
the fire and totally isolated the affected area of the mine behind permanent
barriers. Initial production resumed on March 8, 2004. The Partnership has
commercial property insurance that provides coverage for damage to property
destroyed, interruption of business operations, including profit recovery, and
expenditures incurred to minimize the period and total cost of disruption to
operations. The Partnership currently believes such insurance policies will
cover a substantial portion of the total cost of the disruption to the
Partnership's operations, exclusive of certain amounts associated with
self-retention, deductible and coinsurance levels applicable to the Dotiki Fire
Incident. However, until the claim is resolved with the applicable insurance
underwriters, there can be no assurance of the aggregate amount or timing of
recovery of such insurance proceeds.
On April 16, 2004, following the submittal of a preliminary cost estimate
of the expenses and losses incurred by Webster County Coal and other affiliates
arising from or in connection with the Dotiki Fire Incident (the "Insurance
Claim") and detailed discussions with representatives of the insurers, the
Partnership tendered an initial proof of loss requesting a gross partial advance
payment of $8.5 million. Based on this initial proof of loss, the Partnership
has received an initial partial advance of an unallocated $4.5 million, which is
net of the $1.0 million self-retention, $2.5 million deductible (collectively,
the "Insurance Deductibles") and 10% coinsurance. On June 21, 2004, the
Partnership provided the insurers with an update, through May 31, 2004, of the
Insurance Claim. Following a review of this updated claim information, the
insurers' claims adjustor recommended a gross reserve for the insurers of $24.0
million and recommended further that the insurers make an additional $4.0
million partial advance payment. On July 30, 2004, the Partnership tendered a
supplemental proof of loss requesting a second gross advance partial payment of
$4.0 million. The accounting for the two partial advance payments and any future
partial payments will be subject to the accounting methodology described below.
Currently, the Partnership continues to evaluate its potential insurance
recoveries in the following areas:
1. Expenses incurred as a result of the fire - Extra expenses,
expediting expenses, and other costs associated with extinguishing
the fire are being expensed as incurred, with related actual and/or
estimated insurance recoveries recorded as they are considered to be
probable, up to the amount of the actual cost incurred.
2. Damage to Dotiki mine property -- The net book value of property
destroyed, which is currently estimated at $138,000, was written off
in the first quarter of 2004, with a corresponding amount recorded
as an estimated insurance recovery, since such recovery is
considered probable. Any insurance proceeds from the claims relating
to the Dotiki
6
mine property (other than amounts relating to the matters discussed
in 1. above) that exceed the net book value of such damaged property
are expected to result in a gain. The anticipated gain will be
recorded as the insurance claim is resolved and proceeds are
received.
3. Dotiki mine business interruption costs and extra expense - On June
21, 2004, the Partnership submitted to the insurers an initial
business interruption analysis for the period through May 31, 2004.
Expenses associated with business interruption and extra expense are
expensed as incurred, and estimated insurance recoveries of such
expenses will be recognized to the extent such recoveries are
considered to be probable. Recoveries in excess of actual costs
incurred will be recorded as gains when the Insurance Claim is
resolved and/or proceeds are received.
Pursuant to the accounting methodology described above, (a) the
Partnership has recorded as an offset to operating expenses, $0.2 million and
$2.9 million during the three months and six months ended June 30, 2004,
respectively, which amounts represent estimated insurance recovery of actual
costs incurred net of the Insurance Deductible and 10% coinsurance and (b) the
remaining $1.4 million of the initial partial advance payment has been deferred.
The anticipated $4.0 million second partial advance payment has not yet been
received. The Partnership continues to discuss the Insurance Claim and the
determination of the total claim amount with its insurers. The Insurance Claim
will continue to change as additional information becomes available with respect
to actual costs and as the insurers perform their review of claim information
submitted by the Partnership.
5. NET INCOME PER LIMITED PARTNER UNIT
A reconciliation of net income and weighted average units used in
computing basic and diluted earnings per unit is as follows (in thousands,
except per unit data):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ----------------------
2004 2003 2004 2003
----------- ---------- ---------- ---------
Net income $ 22,861 $ 8,528 $ 41,086 $ 21,656
Adjustments:
General partner's incentive distributions (582) - (582) -
General partners' 2% equity ownership (446) (170) (810) (447)
Portion applicable to Warrior Coal loss prior to its
acquisition on February 14, 2003 - - - 666
----------- ---------- ---------- ---------
Limited partners' interest in net income $ 21,833 $ 8,358 $ 39,694 $ 21,875
Weighted average limited partner units - basic 17,904 17,904 17,904 17,252
Basic net income per limited partner unit $ 1.22 $ 0.47 $ 2.22 $ 1.27
=========== ========== ========== =========
Weighted average limited partner units - basic 17,904 17,904 17,904 17,252
Units contingently issuable:
Restricted units for Long-Term Incentive Plan 474 527 474 527
Directors' compensation units deferred 16 16 15 16
Supplemental Executive Retirement Plan 45 39 45 38
----------- ---------- ---------- ---------
Weighted average limited partner units, assuming dilutive
effect of restricted units 18,439 18,486 18,438 17,833
----------- ---------- ---------- ---------
Diluted net income per limited partner unit $ 1.18 $ 0.45 $ 2.15 $ 1.23
=========== ========== ========== =========
7
The Partnership's net income is allocated to the general partners and
limited partners in accordance with their respective partnership percentages,
after giving effect to any priority income allocations for incentive
distributions, if any, to the managing general partner, the holder of the
incentive distribution rights pursuant to the Partnership Agreement, which are
declared and paid following the close of each quarter. Warrior Coal's loss prior
to its acquisition on February 14, 2003 was allocated to the general partners.
The managing general partner is entitled to receive incentive
distributions if the amount the Partnership distributes with respect to any
quarter exceeds levels specified in the Partnership Agreement. Under the
quarterly incentive distribution provisions of the Partnership Agreement,
generally the managing general partner is entitled to receive 15% of the amount
the Partnership distributes in excess of $0.55 per unit, 25% of the amount the
Partnership distributes in excess of $0.625 per unit and 50% of the amount the
Partnership distributes in excess of $0.75 per unit.
6. RESTRICTED UNIT-BASED COMPENSATION
The Partnership has elected to account for the compensation expense of the
non-vested restricted units granted under the Long-Term Incentive Plan using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and the related Financial Accounting
Standards Board Interpretation No. 28, "Accounting for Stock Appreciation Rights
and Other Variable Stock Option or Award Plans." Compensation cost for the
non-vested restricted units is recorded on a pro-rata basis, as appropriate
given the "cliff vesting" nature of the grants, based upon the current market
value of the Partnership's Common Units at the end of each period.
Consistent with the disclosure requirements of Statement of Financial
Accounting Standards ("SFAS") No. 148, "Accounting for Stock-Based Compensation
Transition and Disclosure," and amendment of SFAS No. 123, "Accounting for
Stock-Based Compensation," the following table provides pro forma results as if
the fair value-based method had been applied to all outstanding and non-vested
awards, including Long-Term Incentive Plan units, in each period presented (in
thousands, except per unit data):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ----------------------
2004 2003 2004 2003
---------- ---------- ---------- --------
Net income, as reported $ 22,861 $ 8,528 $ 41,086 $ 21,656
Add: compensation expenses related to Long-Term
Incentive Plan units included in reported net income 4,807 2,207 8,724 2,742
Deduct: compensation expense related to Long-Term
Incentive Plan units determined under fair value method for all awards (1,079) (852) (2,221) (1,736)
---------- ---------- ---------- --------
Net income, pro forma $ 26,589 $ 9,883 $ 47,589 $ 22,662
========== ========== ========== ========
General partners' interest in net income (loss), pro forma $ 1,102 $ 198 $ 1,522 $ (199)
========== ========== ========== ========
Limited partners' interest in net income, pro forma $ 25,487 $ 9,685 $ 46,067 $ 22,861
========== ========== ========== ========
Earnings per limited partner unit:
Basic, as reported $ 1.22 $ 0.47 $ 2.22 $ 1.27
========== ========== ========== ========
Basic, pro forma $ 1.42 $ 0.54 $ 2.57 $ 1.33
========== ========== ========== ========
Diluted, as reported $ 1.18 $ 0.45 $ 2.15 $ 1.23
========== ========== ========== ========
Diluted, pro forma $ 1.38 $ 0.52 $ 2.50 $ 1.28
========== ========== ========== ========
8
The total accrued liability associated with the Long-Term Incentive Plan
as of June 30, 2004 and December 31, 2003 was $21,217,000 and $12,493,000,
respectively, and is included in the current and long-term due to affiliates
liability in the condensed consolidated balance sheet.
7. RECENT ACCOUNTING PRONOUNCEMENTS
Consistent with other extractive industry entities, the Partnership has
historically classified leased coal interests and advance royalties as tangible
assets, which is consistent with the classification of owned coal due to the
similar rights of the leaseholder. SFAS No. 141, "Business Combinations,"
identifies mineral rights as an example of a contract-based intangible asset
that should be considered for separate classification as the result of a
business combination. Due to the potential for inconsistencies in applying the
provisions of SFAS No. 141 and SFAS No. 142, "Goodwill and Other Tangible
Assets," in the extractive industries as they relate to mineral interests
controlled by other than fee ownership, the Emerging Issues Task Force ("EITF")
established a Mining Industry Working Group to address this issue. During March
2004, the EITF reached a consensus regarding classification of leased coal
interests and advance royalties as tangible assets. On April 30, 2004, the
Financial Accounting Standards Board ("FASB") issued FASB Staff Positions
("FSP") Nos. 141-1 and 142-1, "Interaction of FASB Statements No. 141, Business
Combination, and No. 142 Goodwill and Other Intangible Assets," and EITF Issue
No. 04-02, "Whether Mineral Rights Are Tangible or Intangible Assets," which
amends SFAS Nos. 141 and 142 to state that certain use rights may have
characteristics of assets other than intangible assets. Accordingly, use rights
should be accounted for based on their substance. The guidance in these FSP's is
to be applied to the first reporting period beginning after April 29, 2004. The
Partnership does not believe these FSP's result in a re-characterization of its
related assets, which have historically been classified as tangible.
8. SUBSEQUENT EVENT
On July 22, 2004, the Partnership declared a quarterly distribution, for
the quarterly period ended June 30, 2004, of $0.65 per unit, totaling
approximately $12.2 million (which includes the general partner's portion of
incentive distributions), on all of its Common and Subordinated Units
outstanding, payable on August 13, 2004, to all unitholders of record as of
August 2, 2004.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SUMMARY
We reported record quarterly net income for the three months ended June
30, 2004 (the 2004 Quarter) of $22.9 million, an increase of 168.1% over the
three months ended June 30, 2003 (the 2003 Quarter). The 2004 Quarter benefited
from favorable market conditions as we realized higher prices on long-term coal
sales agreements, and we were able to sell additional production at
significantly higher prices into the export and Central Appalachia coal markets.
We have contractual commitments for substantially all of our estimated
2004 production of 20.6 million tons. For our estimated 2005 production of 21.3
million tons, approximately 89% is committed under existing coal sales
agreements, and approximately 43% is subject to market price negotiations for
existing contracts as well as anticipated new coal supply agreements.
In response to robust market conditions and a supply shortage in the
markets served by our Mettiki Coal mine, we have signed two separate mining
agreements with third-party mining companies to
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produce coal on reserves we own or control near our Mettiki Coal mining complex.
Production at these operations began in July 2004 and will add annual production
of approximately 625,000 tons. To further increase production during the second
half of 2004, we have added equipment at our Gibson County mine and will add
equipment at our Pattiki mine later this year. We estimate that total capital
expenditures for 2004 will be approximately $5.1 million for these third-party
mining and equipment projects.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2004 Compared to Three Months Ended June 30, 2003
JUNE 30, JUNE 30,
---------------------------- ---------------------------
2004 2003 2004 2003
-------- -------- ------- ------
(in thousands) (per ton sold)
-------------- --------------
Tons sold 5,196 4,749 N/A N/A
Tons produced 5,185 4,643 N/A N/A
Coal sales $149,325 $122,589 $28.74 $25.81
Operating expenses and outside $103,656 $ 95,303 $19.95 $20.07
purchases
Coal sales. Coal sales for the 2004 Quarter increased 21.8% to $149.3
million from $122.6 million for the 2003 Quarter. The increase of $26.7 million
reflects higher prices on long-term coal sales agreements and the sale of
additional production at significantly higher prices into the export and Central
Appalachia coal markets. Coal sales further benefited by record tons sold.
Higher prices on long-term contracts reflect a stronger market in the second
half of 2003 when contracts were entered into for shipments in 2004 compared to
the market in the second half of 2002 when contracts were entered into for
shipments in 2003. The export market opportunities for the U.S. coal industry
were generally attributable to strong economic expansion in China. The increase
in Central Appalachia spot market pricing was primarily attributable to a
combination of the diversion of coal production from domestic markets to export
markets and a decline in region-wide production. Tons sold increased 9.4% to 5.2
million tons for the 2004 Quarter from 4.7 million tons in the 2003 Quarter,
reflecting additional production and increased demand for the coals we market.
Operating Expenses. Operating expenses increased 8.3% to $102.9 million
for the 2004 Quarter from $94.9 million for the 2003 Quarter. The increase of
$8.0 million primarily resulted from an increase in aggregate operating expenses
associated with additional coal sales of 447,000 tons and sales related
expenses.
General and administrative. General and administrative expenses increased
to $11.3 million for the 2004 Quarter compared to $6.7 million for the 2003
Quarter. The increase of $4.6 million was primarily attributable to increased
accruals associated with our incentive compensation plans, including the
Long-Term Incentive Plan, which is a restricted unit program and is impacted by
the increased market value of our common units, and the Short-Term Incentive
Plan, which provides our employees an opportunity to receive additional
compensation based upon our financial performance.
Other sales and operating revenues. Other sales and operating revenues
were comparable for the 2004 and 2003 Quarters at $6.2 million and $5.8 million,
respectively.
Outside purchases. Outside purchases increased to $0.8 million for the
2004 Quarter compared to $0.4 million for the 2003 Quarter. The increase of $0.4
million was primarily the result of outside purchases necessary to fulfill coal
commitments at our East Kentucky operations.
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Depreciation, depletion and amortization. Depreciation, depletion and
amortization expense was comparable for the 2004 and 2003 Quarters at $13.4
million and $13.7 million, respectively. A $1.4 million decrease in depreciation
was attributable to the idling of Hopkins County Coal in June 2003 and was
partially offset by increased depreciation associated with the capital
expenditures which increased our production capacity.
Interest expense. Interest expense was comparable for each of the 2004 and
2003 Quarters at $3.8 million and $4.0 million, respectively.
Transportation revenues and expenses. Transportation revenues and expenses
increased to $7.0 million for the 2004 Quarter from $5.1 million for the 2003
Quarter. The increase of $1.9 million was primarily attributable to higher sales
volumes and increased shipments to customers with above average transportation
costs.
Income before income taxes. Income before income taxes increased to $23.6
million for the 2004 Quarter from $9.2 million for the 2003 Quarter. The
increase of $14.4 million is primarily attributable to higher sales volumes and
higher prices on both long-term coal sales agreements and short-term sales
agreements in the export and Central Appalachia coal markets. The benefits of
increased sales volumes and prices were partially offset by the net costs
associated with higher production costs, increased sales related expenses and
increased accruals associated with our incentive compensation plans.
Income tax expense. Income tax expense was comparable for each of the 2004
and 2003 Quarters at $0.7 million, respectively.
Six Months Ended June 30, 2004 compared to Six Months Ended June 30, 2003
Net income for the six months ended June 30, 2004 (the 2004 Period) was
$41.1 million, an increase of 89.7% over the six months ended June 30, 2003 (the
2003 Period). The continuing strength in both the U.S. and international coal
markets favorably impacted our financial results for the 2004 Period. We
achieved record results for revenues, net income, production tons, and tons sold
despite lost production and expenses incurred as a result of the mine fire that
occurred at the Dotiki mine. See "Dotiki Fire Incident" below.
JUNE 30, JUNE 30,
---------------------------- ----------------------------
2004 2003 2004 2003
--------- ------- ------- -------
(in thousands) (per ton sold)
-------------- --------------
Tons sold 10,306 9,205 N/A N/A
Tons produced 10,297 9,633 N/A N/A
Coal sales $293,864 $237,039 $28.51 $25.75
Operating expenses and outside $209,049 $179,074 $20.28 $19.45
purchases
Coal sales. Coal sales for the 2004 Period increased 24.0% to $293.9
million from $237.0 million for the 2003 Period. The increase of $56.9 million
reflects higher prices on long-term coal sales agreements and the sale of
additional production at significantly higher prices into the export and Central
Appalachia coal markets. Higher prices on long-term contracts reflect a stronger
market in the second half of 2003 when contracts were entered into for shipments
in 2004 compared to the market in the second half of 2002 when contracts were
entered into for shipments in 2003. The export market opportunities for the U.S.
coal industry were attributable generally to the strong economic expansion in
China. The increase in Central Appalachia spot market pricing was attributable
primarily to a combination of the diversion of coal production from domestic
markets to export markets and a decline in
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region-wide production. Coal sales were further benefited by record tons sold.
Tons sold increased 12.0% to 10.3 million tons for the 2004 Period from 9.2
million tons in the 2003 Period reflecting additional production and reduction
of coal inventories in response to increased demand for the coals we market.
Operating Expenses. Operating expenses increased 16.6% to $207.2 million
for the 2004 Period from $177.7 million for the 2003 Period. The increase of
$29.5 million primarily resulted from an increase in aggregate operating
expenses associated with additional coal sales of 1.1 million tons and sales
related expenses, along with expenses associated with the Dotiki Fire Incident
described below.
General and administrative. General and administrative expenses increased
to $21.6 million for the 2004 Period compared to $12.3 million for the 2003
Period. The increase of $9.3 million was primarily attributable to increased
accruals associated with our incentive compensation plans, including the
Long-Term Incentive Plan, which is a restricted unit program and is impacted by
the increased market value of our common units, and the Short-Term Incentive
Plan, which provides our employees an opportunity to receive additional
compensation based upon our financial performance.
Other sales and operating revenues. Other sales and operating revenues
were comparable for the 2004 and 2003 Periods at $12.6 million and $12.0
million, respectively.
Outside purchases. Outside purchases increased to $1.9 million for the
2004 Period compared to $1.4 million for the 2003 Period. The increase of $.5
million was primarily the result of outside purchases necessary to fulfill coal
commitments at our East Kentucky operations.
Depreciation, depletion and amortization. Depreciation, depletion and
amortization expense was comparable for the 2004 and 2003 Periods at $26.2
million and $26.8 million, respectively. A $2.9 million decrease in depreciation
was attributable to the idling of Hopkins County Coal in June 2003 and was
partially offset by increased depreciation associated with the capital
expenditures which increased our production capacity.
Interest expense. Interest expense was comparable for each of the 2004 and
2003 Periods at $7.7 million and $8.0 million, respectively.
Transportation revenues and expenses. Transportation revenues and expenses
increased to $13.9 million for the 2004 Period from $9.4 million for the 2003
Period. The increase of $4.5 million was attributable primarily to higher sales
volumes and increased shipments to customers with above average transportation
costs.
Income before income taxes. Income before income taxes increased to $42.6
million for the 2004 Period from $23.3 million for the 2003 Period. The increase
of $19.3 million was attributable primarily to higher sales volumes and higher
prices on both long-term coal sales agreements and short-term sales agreements
in the export and Central Appalachia coal markets. The benefits of increased
sales volumes and prices were offset partially by the net costs associated with
the Dotiki Fire Incident, higher production costs, increased sales related
expenses, and increased accruals associated with our incentive compensation
plans.
Income tax expense. Income tax expense was comparable for each of the
2004 and 2003 Periods at $1.5 million and $1.7 million, respectively.
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DOTIKI FIRE INCIDENT
On February 11, 2004, our Webster County Coal, LLC's ("Webster County
Coal") Dotiki mine was temporarily idled for a period of twenty-seven calendar
days following the occurrence of a mine fire that originated with a diesel
supply tractor (the "Dotiki Fire Incident"). As a result of the firefighting
efforts of the Mine Safety and Health Administration, Kentucky Department of
Mines and Minerals, and Webster County Coal personnel, Dotiki successfully
extinguished the fire and totally isolated the affected area of the mine behind
permanent barriers. Initial production resumed on March 8, 2004. We have
commercial property insurance that provides coverage for damage to property
destroyed, interruption of business operations, including profit recovery, and
expenditures incurred to minimize the period and total cost of disruption to
operations. We currently believe such insurance policies will cover a
substantial portion of the total cost of the disruption to our operations,
exclusive of certain amounts associated with self-retention, deductible and
coinsurance levels applicable to the Dotiki Fire Incident. However, until the
claim is resolved with the applicable insurance underwriters, there can be no
assurance of the aggregate amount or timing of recovery of such insurance
proceeds.
On April 16, 2004, following the submittal of a preliminary cost estimate
of the expenses and losses incurred by Webster County Coal and other affiliates
arising from or in connection with the Dotiki Fire Incident (the "Insurance
Claim") and detailed discussions with representatives of the insurers, we
tendered an initial proof of loss requesting a gross partial advance payment of
$8.5 million. Based on this initial proof of loss, we have received an initial
partial advance of an unallocated $4.5 million, which is net of the $1.0 million
self-retention, $2.5 million deductible (collectively, the "Insurance
Deductibles") and 10% coinsurance. On June 21, 2004, we provided the insurers
with an update, through May 31, 2004, of the Insurance Claim. Following a review
of this updated claim information, the insurers' claims adjustor recommended a
gross reserve for the insurers of $24.0 million and recommended further that the
insurers make an additional $4.0 million partial advance payment. On July 30,
2004, we tendered a supplemental proof of loss requesting a second gross advance
partial payment of $4.0 million. The accounting for the two partial advance
payments and any future partial payments will be subject to the accounting
methodology described below. Currently, we continue to evaluate potential
insurance recoveries in the following areas:
1. Expenses incurred as a result of the fire - Extra expenses,
expediting expenses, and other costs associated with extinguishing
the fire are being expensed as incurred, with related actual and/or
estimated insurance recoveries recorded as they are considered to be
probable, up to the amount of the actual cost incurred.
2. Damage to Dotiki mine property -- The net book value of property
destroyed, which is currently estimated at $138,000, was written off
in the first quarter of 2004, with a corresponding amount recorded
as an estimated insurance recovery, since such recovery is
considered probable. Any insurance proceeds from the claims relating
to the Dotiki mine property (other than amounts relating to the
matters discussed in 1. above) that exceed the net book value of
such damaged property are expected to result in a gain. The
anticipated gain will be recorded as the insurance claim is resolved
and proceeds are received.
3. Dotiki mine business interruption costs and extra expense - On June
21, 2004, we submitted to the insurers an initial business
interruption analysis for the period through May 31, 2004. Expenses
associated with business interruption and extra expense are expensed
as incurred, and estimated insurance recoveries of such expenses
will be recognized to the extent such recoveries are considered to
be probable. Recoveries in
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excess of actual costs incurred will be recorded as gains when the
Insurance Claim is resolved and/or proceeds are received.
Pursuant to the accounting methodology described above, (a) we have
recorded as an offset to operating expenses, $0.2 million and $2.9 million
during the three months and six months ended June 30, 2004, respectively, which
amounts represent estimated insurance recovery of actual costs incurred net of
the Insurance Deductible and 10% coinsurance and (b) the remaining $1.4 million
of the initial partial advance payment has been deferred. The anticipated $4.0
million second partial advance payment has not yet been received. We continue to
discuss the Insurance Claim and the determination of the total claim amount with
our insurers. The Insurance Claim will continue to change as additional
information becomes available with respect to actual costs and as the insurers
perform their review of claim information submitted by us.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Cash provided by operating activities was $75.5 million for the 2004
Period compared to $43.7 million in the 2003 Period. The increase in cash
provided by operating activities was principally attributable to an increase in
net income and a greater reduction in total working capital principally due to
reduced coal inventories associated with increased sales combined with the
timing of increased accounts payable partially offset by a sales driven increase
in trade receivables in the 2004 Period compared to the 2003 Period.
Net cash used in investing activities was $18.9 million for the 2004
Period compared to $32.2 million in the 2003 Period. The decrease is
attributable principally to the Warrior Coal acquisition, which occurred during
the 2003 Period, and proceeds from maturing marketable securities partially
offset by an increase in 2004 capital expenditures associated with Dotiki
expanding its preparation plant and adding two continuous miners. See discussion
of "Related Party Transactions" below concerning the Warrior Coal acquisition.
Net cash used in financing activities was $21.9 million for the 2004
Period compared to net cash provided by financing activities of $11.6 million in
the 2003 Period. The change to net cash used in financing activities from net
cash provided by financing activities is primarily attributable to the proceeds
received from our common unit offering, which occurred during the 2003 Period
offset by the repayment of Warrior Coal's revolving credit agreement balance
during the 2003 Period and increased distributions to partners in the 2004
Period.
Capital Expenditures
Capital expenditures decreased to $25.1 million in the 2004 Period from
$32.7 million in the 2003 Period, which includes the acquisition of Warrior
Coal. See discussion of "Cash Flows" above concerning the decrease in capital
expenditures. Capital expenditures for the remainder of 2004 are estimated to be
$26.5 million.
Notes Offering and Credit Facility
Alliance Resource Operating Partners, L.P., our intermediate partnership,
has $180 million principal amount of 8.31% senior notes due August 20, 2014,
payable in ten equal annual installments of $18 million beginning in August 2005
with interest payable semiannually (the Senior Notes). On August 22, 2003, our
intermediate partnership completed a new $85 million revolving credit facility
(the Credit
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Facility), which expires September 30, 2006. The Credit Facility replaced a $100
million credit facility that would have expired August 2004. We paid in full all
amounts outstanding under the $100 million credit facility with borrowings of
$20 million under the new Credit Facility. The interest rate on the Credit
Facility is based on either the (i) London Interbank Offered Rate or (ii) the
"Base Rate", which is equal to the greater of the JPMorgan Chase Prime Rate or
the Federal Funds Rate plus 1/2 of 1%, plus, in either case, an applicable
margin. We incurred certain costs totaling $1.2 million associated with the
Credit Facility. These costs have been deferred and are being amortized as a
component of interest expense over the term of the Credit Facility. We had no
borrowings outstanding under the Credit Facility at June 30, 2004. Letters of
credit can be issued under the Credit Facility not to exceed $30 million.
Outstanding letters of credit reduce amounts available under the Credit
Facility. At June 30, 2004, we had letters of credit of $9.0 million outstanding
under the Credit Facility.
The Senior Notes and Credit Facility are guaranteed by all of the
subsidiaries of our intermediate partnership. The Senior Notes and Credit
Facility contain various restrictive and affirmative covenants, including
restrictions on the amount of distributions by our intermediate partnership and
the incurrence of other debt. We were in compliance with the covenants of both
the Credit Facility and Senior Notes at June 30, 2004.
We have previously entered into and have maintained agreements with two
banks to provide additional letters of credit in an aggregate amount of $25.0
million to maintain surety bonds to secure our obligations for reclamation
liabilities and workers' compensation benefits. At June 30, 2004, we had $18.8
million in letters of credit outstanding under these agreements. Our special
general partner guarantees these outstanding letters of credit.
Conversion of Subordinated Units
As a result of satisfying certain financial tests in our partnership
agreement as of September 30, 2003, one-half of the outstanding subordinated
units (i.e., 3,211,265 subordinated units) held by our special general partner
converted into common units on November 15, 2003. The remaining 3,211,266
subordinated units are expected to convert on a one-for-one basis into common
units in the fourth quarter of 2004, assuming we continue to meet the financial
test requirements of our partnership agreement.
Related Party Transactions
In February 2003, we acquired Warrior Coal from an affiliate, ARH Warrior
Holdings, Inc. (ARH Warrior Holdings), in accordance with the terms of an
Amended and Restated Put and Call Option Agreement. We paid $12.7 million to ARH
Warrior Holdings and repaid Warrior Coal's borrowings of $17.0 million under a
revolving credit agreement between our special general partner and Warrior Coal.
Please see "Item 1. Financial Statements - Note 3, Warrior Coal Acquisition."
We have continuing related party transactions with our managing general
partner and our special general partner, including our special general partner's
affiliates. These related party transactions relate principally to the provision
of administrative services by our managing general partner, mineral and
equipment leases with our special general partner and its affiliates, and
guarantees from our special general partner for letters of credit.
Please read our Annual Report on Form 10-K for the year ended December 31,
2003, "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Related Party Transactions - " for additional
information concerning the related party transactions described above.
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Recent Accounting Pronouncements
Consistent with other extractive industry entities, we have historically
classified leased coal interests and advance royalties as tangible assets, which
is consistent with the classification of owned coal due to the similar rights of
the leaseholder. Statement of Financial Accounting Standards (SFAS) No. 141,
"Business Combinations," identifies mineral rights as an example of a
contract-based intangible asset that should be considered for separate
classification as the result of a business combination. Due to the potential for
inconsistencies in applying the provisions of SFAS No. 141 and SFAS No. 142,
"Goodwill and Other Tangible Assets," in the extractive industries as they
relate to mineral interests controlled by other than fee ownership, the Emerging
Issues Task Force (EITF) established a Mining Industry Working Group to address
this issue. During March 2004, the EITF reached a consensus regarding
classification of leased coal interests and advance royalties as tangible
assets. On April 30, 2004, the Financial Accounting Standards Board (FASB)
issued FASB Staff Positions (FSP) Nos. 141-1 and 142-1, "Interaction of FASB
Statements No. 141, Business Combination, and No. 142 Goodwill and Other
Intangible Assets," and EITF Issue No. 04-02, "Whether Mineral Rights Are
Tangible or Intangible Assets," which amends SFAS Nos. 141 and 142 to state that
certain use rights may have characteristics of assets other than intangible
assets. Accordingly, use rights should be accounted for based on their
substance. The guidance in these FSP's is to be applied to the first reporting
period beginning after April 29, 2004. We do not believe these FSP's result in a
re-characterization of our related assets, which have historically been
classified as tangible.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
All of our transactions are denominated in U.S. dollars and, as a result,
we do not have material exposure to currency exchange-rate risks.
We did not engage in any interest rate, foreign currency exchange-rate or
commodity price-hedging transactions as of June 30, 2004.
Borrowings under the current Credit Facility and the previous credit
facility are and were at variable rates and, as a result, we have interest rate
exposure. Our earnings are not materially affected by changes in interest rates.
We had no borrowings outstanding under the Credit Facility during the 2004
Period or at June 30, 2004.
As of June 30, 2004, the estimated fair value of the Senior Notes
decreased approximately $8.0 million due to higher market interest rates in
2004. There were no other significant changes in our quantitative and
qualitative disclosures about market risk as set forth in our Annual Report on
Form 10-K for the year ended December 31, 2003.
ITEM 4. CONTROLS AND PROCEDURES
An evaluation was carried out by management, including our chief executive
officer and chief financial officer, of the effectiveness of the design and
operation of our disclosure controls and procedures (as defined in Rule
13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934). Based
upon this evaluation, the chief executive officer and the chief financial
officer concluded that the design and operation of these disclosure controls and
procedures were effective as of the end of the period covered by this report.
During the quarterly period ended June 30, 2004, there have not been any changes
in our internal control over financial reporting (as defined in Rule 13a-15(f)
under the Securities Exchange Act of 1934) identified in connection with this
evaluation that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
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Each of the chief executive officer and the chief financial officer of our
managing general partner has furnished as Exhibit 32.1 and Exhibit 32.2,
respectively, a certificate to the Securities and Exchange Commission as
required by Section 906 of the Sarbanes-Oxley Act of 2002.
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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:
- competition in coal markets and our ability to respond to the
competition;
- fluctuation in coal prices, which could adversely affect our
operating results and cash flows;
- deregulation of the electric utility industry or the effects of any
adverse change in the domestic coal industry, electric utility
industry, or general economic conditions;
- dependence on significant customer contracts, including renewing
customer contracts upon expiration of existing contracts;
- customer bankruptcies and/or cancellations of, or breaches to
existing contracts;
- customer delays or defaults in making payments;
- fluctuations in coal demand, prices and availability due to labor
and transportation costs and disruptions, equipment availability,
governmental regulations and other factors;
- our productivity levels and margins that we earn on our coal sales;
- any unanticipated increases in labor costs, adverse changes in work
rules, or unexpected cash payments associated with post-mine
reclamation and workers' compensation claims;
- any unanticipated increases in transportation costs and risk of
transportation delays or interruptions;
- greater than expected environmental regulation, costs and
liabilities;
- a variety of operational, geologic, permitting, labor and
weather-related factors;
- risk of major mine-related accidents or interruptions;
- results of litigation;
- difficulty maintaining our surety bonds for mine reclamation as well
as workers' compensation and black lung benefits; and
- difficulty obtaining commercial property insurance, and risks
associated with our 10.0% participation (excluding any applicable
deductible) in the commercial insurance property program.
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,
2003. The 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 this Quarterly Report on Form 10-Q;
- other reports filed by us with the SEC;
- our press releases; and
18
- written or oral statements made by us or any of our officers or
other persons acting on our behalf.
19
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information under "Contingencies" in Note 2 of the Notes to Unaudited
Condensed 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, 2003.
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:
31.1 Certification of Joseph W. Craft III, President and Chief Executive
Officer of Alliance Resource Management GP, LLC, the managing
general partner of Alliance Resource Partners, L.P., dated August 9,
2004, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
furnished herewith.
31.2 Certification of Brian L. Cantrell, Senior Vice President and Chief
Financial Officer of Alliance Resource Management GP, LLC, the
managing general partner of Alliance Resource Partners, L.P., dated
August 9, 2004, pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 furnished herewith.
32.1 Certification of Joseph W. Craft III, President and Chief Executive
Officer of Alliance Resource Management GP, LLC, the managing
general partner of Alliance Resource Partners, L.P., dated August 9,
2004, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
furnished herewith.
32.2 Certification of Brian L. Cantrell, Senior Vice President and Chief
Financial Officer of Alliance Resource Management GP, LLC, the
managing general partner of Alliance Resource Partners, L.P., dated
August 9, 2004, pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 furnished herewith.
(b) Reports on Form 8-K:
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A Form 8-K was filed on April 23, 2004 to submit to the Securities
and Exchange Commission a press release announcing earnings and operating
results for the first quarter of 2004. The press release contains the
following financial statements: (i) condensed consolidated statements of
income and operating data for the three months ended March 31, 2004 and
2003; (ii) condensed consolidated balance sheets at March 31, 2004 and
December 31, 2003; and (iii) condensed consolidated statements of cash
flow for the three months ended March 31, 2004 and 2003.
A Form 8-K was filed on June 8, 2004 to the Securities and Exchange
Commission to disclose the status of the permit application process with
the West Virginia Department of Environmental Protection for the
development of the proposed E-Mine.
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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, 2004.
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/ Brian L. Cantrell
------------------------------------
Brian L. Cantrell
Senior Vice President
and Chief Financial Officer
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EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
31.1 Certification of Joseph W. Craft III, President and Chief Executive
Officer of Alliance Resource Management GP, LLC, the managing
general partner of Alliance Resource Partners, L.P., dated August
9, 2004, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
furnished herewith.
31.2 Certification of Brian L. Cantrell, Senior Vice President and Chief
Financial Officer of Alliance Resource Management GP, LLC, the
managing general partner of Alliance Resource Partners, L.P., dated
August 9, 2004, pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 furnished herewith.
32.1 Certification of Joseph W. Craft III, President and Chief Executive
Officer of Alliance Resource Management GP, LLC, the managing
general partner of Alliance Resource Partners, L.P., dated August
9, 2004, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
furnished herewith.
32.2 Certification of Brian L. Cantrell, Senior Vice President and Chief
Financial Officer of Alliance Resource Management GP, LLC, the
managing general partner of Alliance Resource Partners, L.P., dated
August 9, 2004, pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 furnished herewith.
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