<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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 SEPTEMBER 30, 1999
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 [ ]
As of November 12, 1999, 8,982,780 common units were outstanding.
================================================================================
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TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
ITEM 1. FINANCIAL STATEMENTS Page
----
<S> <C> <C>
ALLIANCE RESOURCE PARTNERS, L.P. AND SUBSIDIARIES
Consolidated and Combined Balance Sheets as of September 30, 1999
and December 31, 1998 (Predecessor) ............................................ 1
Consolidated and Combined Statements of Income for the period from
Commencement of Operations (on August 20, 1999) to September 30,
1999, and the periods July 1, 1999 to August 19, 1999, July 1, 1998
to September 30, 1998, January 1, 1999 to August 19, 1999 and
January 1, 1998 to September 30, 1998 (Predecessor) ............................ 2
Consolidated and Combined Condensed Statements of Cash Flows for
The period from Commencement of Operations (on August 20, 1999) to
September 30, 1999 and the periods January 1, 1999 to August 19, 1999
and January 1, 1998 to September 30, 1998 (Predecessor) ........................ 3
Consolidated Statement of Partners' Capital from Commencement of
Operations (on August 20, 1999) to September 30, 1999 .......................... 4
Notes to Consolidated and Combined Financial Statements ........................ 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION .................................. 8
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK .............................................................. 13
FORWARD-LOOKING STATEMENTS ..................................................... 14
</TABLE>
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PART II
OTHER INFORMATION
<TABLE>
<S> <C> <C>
ITEM 1. LEGAL PROCEEDINGS .............................................................. 15
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS ...................................... 15
ITEM 3. DEFAULTS UPON SENIOR SECURITIES ................................................ 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS ............................................................... 15
ITEM 5. OTHER INFORMATION .............................................................. 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ............................................... 16
</TABLE>
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALLIANCE RESOURCE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED BALANCE SHEETS
(IN THOUSANDS, EXCEPT UNIT DATA)
ASSETS
<TABLE>
<CAPTION>
PARTNERSHIP PREDECESSOR
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents .......................................... $ 4,200 $ --
Trade receivables .................................................. 37,402 31,268
Marketable securities (at cost, which approximates market value) ... 41,814 --
Income tax receivable .............................................. -- 503
Inventories ........................................................ 20,079 20,055
Advance royalties .................................................. 2,500 2,501
Prepaid expenses and other assets .................................. 22 1,456
--------- ---------
Total current assets .......................................... 106,017 55,783
PROPERTY, PLANT AND EQUIPMENT AT COST ................................. 272,003 240,294
LESS ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION ............. (93,623) (69,158)
--------- ---------
178,380 171,136
OTHER ASSETS:
Advance royalties .................................................. 7,658 8,880
Coal supply agreements, net ........................................ 21,366 24,062
Other long-term assets ............................................. 5,143 1,235
--------- ---------
$ 318,564 $ 261,096
========= =========
</TABLE>
LIABILITIES AND PARTNERS' EQUITY
<TABLE>
<S> <C> <C>
CURRENT LIABILITIES:
Current maturities, long-term debt ................................. $ -- $ 350
Accounts payable ................................................... 22,697 24,527
Accounts payable to affiliate ...................................... 997 --
Accrued taxes other than income taxes .............................. 5,469 4,526
Accrued payroll and related expenses ............................... 8,888 9,269
Workers compensation and pneumoconiosis benefits ................... 4,926 4,707
Other current liabilities .......................................... 4,971 5,302
--------- ---------
Total current liabilities ..................................... 47,948 48,681
--------- ---------
LONG-TERM LIABILITIES:
Long-term debt, excluding current maturities ....................... 230,000 1,687
Deferred income taxes .............................................. -- 3,906
Accrued pneumoconiosis benefits .................................... 22,873 22,233
Workers' compensation .............................................. 13,648 13,934
Reclamation and mine closing ....................................... 13,955 12,824
Other liabilities .................................................. 5,046 5,062
--------- ---------
Total liabilities ............................................. 333,470 108,327
COMMITMENTS AND CONTINGENCIES
COMBINED EQUITY ....................................................... -- 152,769
PARTNERS' CAPITAL (DEFICIT):
Common Unitholders 8,982,780 units outstanding ..................... 159,447 --
Subordinated Unitholder 6,422,531 units outstanding ................ 123,464 --
General Partners ................................................... (297,358) --
Minimum pension liability .......................................... (459) --
--------- ---------
Total Partners' capital (deficit) ............................. (14,906) --
--------- ---------
$ 318,564 $ 261,096
========= =========
</TABLE>
See notes to unaudited consolidated and combined financial statements.
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ALLIANCE RESOURCE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT UNIT AND PER UNIT DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
PARTNERSHIP | PREDECESSOR
-------------- | ----------------------------------------------------------------
FROM |
COMMENCEMENT | FOR THE FOR THE FOR THE FOR THE
OF OPERATIONS | PERIOD FROM PERIOD FROM PERIOD FROM PERIOD FROM
(ON AUGUST 20, | JULY 1, 1999 JULY 1, 1998 JANUARY 1, 1999 JANUARY 1, 1998
1999) TO | TO TO TO TO
SEPTEMBER 30, | AUGUST 19, SEPTEMBER 30, AUGUST 19, SEPTEMBER 30,
1999 | 1999 1998 1999 1998
------------- | ------------ ------------- --------------- ---------------
<S> <C> | <C> <C> <C> <C>
SALES AND OPERATING REVENUES: |
Coal Sales ............................... $ 43,927 | $ 47,669 $ 97,291 $ 217,033 $ 274,387
Other sales and operating revenues........ 125 | 134 1,137 577 3,332
----------- | ----------- ----------- ----------- -----------
Total revenues ...................... 44,052 | 47,803 98,428 217,610 277,719
|
EXPENSES: |
Operating expenses ....................... 30,456 | 35,024 64,937 152,066 185,327
Outside purchases ........................ 2,442 | 2,570 13,293 17,738 38,075
General and administrative ............... 1,685 | 1,959 4,135 8,912 11,849
Depreciation, depletion and amortization.. 4,450 | 5,246 9,767 24,622 30,493
Interest expense ......................... 1,627 | 21 44 100 129
Unusual item ............................. -- | -- 3,812 -- 3,812
----------- | ----------- ----------- ----------- -----------
Total operating expenses ............ 40,660 | 44,820 95,988 203,438 269,685
----------- | ----------- ----------- ----------- -----------
|
INCOME FROM OPERATIONS ...................... 3,392 | 2,983 2,440 14,172 8,034
OTHER INCOME ................................ 117 | 334 206 531 404
----------- | ----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES .................. 3,509 | 3,317 2,646 14,703 8,438
|
INCOME TAX EXPENSE .......................... -- | 1,015 1,035 4,498 2,831
----------- | ----------- ----------- ----------- -----------
NET INCOME .................................. $ 3,509 | $ 2,302 $ 1,611 $ 10,205 $ 5,607
=========== | =========== =========== =========== ===========
GENERAL PARTNERS' INTEREST IN |
NET INCOME ............................... $ 70 |
=========== |
LIMITED PARTNERS' INTEREST IN |
NET INCOME ............................... $ 3,439 |
=========== |
BASIC AND DILUTED NET INCOME |
PER LIMITED PARTNER UNIT ................. $ 0.22 |
=========== |
WEIGHTED AVERAGE NUMBER |
OF UNITS OUTSTANDING ..................... 15,405,311 |
=========== |
</TABLE>
See notes to unaudited consolidated and combined financial statements.
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ALLIANCE RESOURCE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED CONDENSED STATEMENTS OF CASH FLOW
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
PARTNERSHIP | PREDECESSOR
-------------------- | -------------------------------------
FROM |
COMMENCEMENT | FOR THE FOR THE
OF OPERATIONS | PERIOD FROM PERIOD FROM
(ON AUGUST 20, 1999) | JANUARY 1, 1999 JANUARY 1, 1998
TO | TO TO
SEPTEMBER 30, 1999 | AUGUST 19, 1999 SEPTEMBER 30, 1998
-------------------- | --------------- ------------------
<S> <C> | <C> <C>
CASH FLOWS PROVIDED BY (USED IN) |
OPERATING ACTIVITIES ..................................... $ (29,537) | $ 31,969 $ 35,935
CASH FLOWS FROM INVESTING ACTIVITIES: |
Payment for purchase of business ......................... -- | -- (7,310)
Direct acquisition costs ................................. -- | -- (821)
Purchase of property, plant and equipment ................ (10,895) | (21,984) (22,376)
Proceeds from sale of property, plant and equipment....... 66 | 447 70
Purchase of marketable securities ........................ (34,514) | -- --
Proceeds from sale of marketable securities .............. 8,452 | -- --
--------- | --------- ---------
Net cash used in investing activities ............... (36,891) | (21,537) (30,437)
--------- | --------- ---------
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
Net proceeds from initial public offering (see Note 1).... 137,872 | -- --
Cash contribution by General Partner ..................... 5,917 | -- --
Distributions upon formation (see Note 1) ................ (64,750) | -- --
Payment of formation costs ............................... (2,919) | -- --
Deferred financing cost .................................. (3,517) | -- --
Payments on long-term debt ............................... (1,975) | -- --
Return of capital ........................................ -- | (10,432) (5,498)
--------- | --------- ---------
Net cash provided by (used in) financing activities.. 70,628 | (10,432) (5,498)
--------- | --------- ---------
|
NET CHANGE IN CASH AND CASH EQUIVALENTS |
AND BALANCE AT END OF PERIOD ............................. $ 4,200 | $ -- $ --
========= | ========= =========
|
SUPPLEMENTAL CASH FLOW INFORMATION: |
Debt transferred from General Partner .................... $ 230,000 |
========= |
Marketable securities transferred from General Partner ... $ 15,486 |
========= |
</TABLE>
See notes to unaudited consolidated and combined financial statements.
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ALLIANCE RESOURCE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL (DEFICIT)
FROM COMMENCEMENT OF OPERATIONS
(ON AUGUST 20, 1999) TO SEPTEMBER 30, 1999
(IN THOUSANDS, EXCEPT UNIT DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
TOTAL
NUMBER OF LIMITED MINIMUM PARTNERS'
PARTNER UNITS GENERAL PENSION CAPITAL
COMMON SUBORDINATED COMMON SUBORDINATED PARTNERS LIABILITY (DEFICIT)
--------- ------------ -------- ------------ -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at commencement of
operations (on August 20, 1999) .. -- -- $ -- $ 1 $ -- $-- $ 1
Issuance of units to public ...... 7,750,000 -- 134,020 -- -- -- 134,020
Contribution of net assets of
Predecessor .................... 1,232,780 6,422,531 23,423 122,028 (24,081) (459) 120,911
Managing General Partner
contribution ................... -- -- -- -- 5,917 -- 5,917
Amount retained by Special
General Partner from debt
borrowings assumed by the
Partnership .................... -- -- -- -- (214,514) -- (214,514)
Distribution at time of
formation ...................... -- -- -- -- (64,750) -- (64,750)
Net income from commencement
of operations (on August 20,
1999) to September 30, 1999 .... -- -- 2,004 1,435 70 -- 3,509
--------- --------- -------- -------- --------- ----- ---------
Balance at September 30, 1999 ....... 8,982,780 6,422,531 $159,447 $123,464 $(297,358) $(459) $ (14,906)
========= ========= ======== ======== ========= ===== =========
</TABLE>
See notes to unaudited consolidated and combined financial statements.
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ALLIANCE RESOURCE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND PRESENTATION
Alliance Resource Partners, L.P. is a Delaware limited partnership
formed 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) and substantially all of
its operating subsidiaries (collectively, the "Partnership").
Prior to August 20, 1999, (i) MAPCO Coal Inc., a Delaware corporation
and direct wholly-owned subsidiary of ARH merged with and into Alliance Coal,
LLC, a Delaware limited liability company ("Alliance Coal"), which prior to
August 20, 1999 was also a wholly-owned subsidiary of ARH, (ii) several other
indirect corporate subsidiaries of ARH were merged with and into corresponding
limited liability companies, each of which is a wholly-owned subsidiary of
Alliance Coal and (iii) two indirect limited liability company subsidiaries of
ARH became subsidiaries of Alliance Coal as a result of the merger described in
clause (i) above. Collectively, the coal production and marketing assets and
operating subsidiaries of ARH acquired by the Partnership are referred to as the
"Predecessor." The Delaware limited partnerships and limited liability companies
that comprise the Partnership are as follows: Alliance Resource Partners, L.P.,
Alliance Resource Operating Partners, L.P. (the "Intermediate Partnership"),
Alliance Coal, LLC (the "Holding Company for Operations"), Alliance Land, LLC,
Alliance Properties, LLC, Backbone Mountain, LLC, Excel Mining, LLC, Gibson
County Coal, LLC, Hopkins County Coal, LLC, MC Mining, LLC, Mettiki Coal, LLC,
Mettiki Coal (WV), LLC, Mt. Vernon Transfer Terminal, LLC, Pontiki Coal, LLC,
Toptiki Coal, LLC, Webster County Coal, LLC, and White County Coal, LLC.
The accompanying financial statements and related notes present the
consolidated financial position as of September 30, 1999, and the results of its
operations, cash flows and changes in partners' equity for the period from
commencement of operations on August 20, 1999 to September 30, 1999. All
material intercompany transactions and accounts have been eliminated. The
combined financial statements of the Predecessor are for the periods indicated.
These consolidated and combined 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 and combined 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
combined financial statements and notes included in the Partnership's
Registration Statement on Form S-1, as amended (Registration No. 333-78845) (the
"Registration Statement").
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Initial Public Offering and Concurrent Transactions
On August 20, 1999, the Partnership completed its initial public
offering (the "IPO") of 7,750,000 common units ("Common Units") representing
limited partner interests in the Partnership at a price of $19.00 per unit.
Concurrently with the closing of the IPO, the Partnership entered into
a contribution and assumption agreement (the "Contribution Agreement"), dated
August 20, 1999, among the Partnership and the other parties named therein,
whereby, among other things, ARH contributed its 100% member interest in
Alliance Coal, which is the sole member of fourteen subsidiary operating limited
liability companies, to the Intermediate Partnership. As a result of the
consummation of the transactions contemplated under the Contribution Agreement,
the Partnership holds a 98.9899% limited partner interest in the Intermediate
Partnership, and the Intermediate Partnership holds a 99.999% non-managing
member interest in Alliance Coal. The Partnership and the Intermediate
Partnership will be managed by the Managing GP, which, as a result of the
consummation of the transactions under the Contribution Agreement, holds (i) a
0.99% and 1.0001% managing general partner interest in the Partnership and the
Intermediate Partnership, respectively, and (ii) a 0.001% managing member
interest in Alliance Coal. Also as a result of the consummation of the
transactions completed under the Contribution Agreement, Alliance Resource GP,
LLC, a Delaware limited liability company and wholly-owned subsidiary of ARH
(the "Special GP"), holds, (i) 1,232,780 Common Units, (ii) 6,422,531
subordinated units ("Subordinated Units") convertible into Common Units in the
future upon the occurrence of certain events and (iii) a 0.01% special general
partner interest in each of the Partnership and the Intermediate Partnership.
Concurrently with the closing of the IPO, the Special GP issued and the
Intermediate Partnership assumed the obligations under a $180 million principal
amount of 8.31% senior notes due August 20, 2014. The senior notes contain
various restrictive and affirmative covenants, including restrictions on the
incurrence of other debt. 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 drawn $50 million under the term loan
facility but has not drawn any money under either the working capital facility
or the revolving credit facility. The weighted average interest rate on the term
loan facility at September 30, 1999 was 6.38%. The credit facility agreement
expires August 2004. The credit facility contains various restrictive covenants,
including the amount of distributions by the Intermediate Partnership and the
incurrence of other debt. The credit facility also contains various financial
covenants. The Partnership was in compliance with the covenants of both the
senior notes and credit facility at September 30, 1999.
Consistent with guidance provided by the Emerging Issues Task Force in
Issue No. 87-21 "Change of Accounting Basis in Master Limited Partnership
Transactions", the Partnership maintained the historical cost of the $120.9
million of net assets received under the Contribution Agreement.
Analysis of Pro Forma Results of Operations
The pro forma results of operations for the nine months ended September
30, 1999 and 1998, are derived from the historical financial statements of the
Partnership from the commencement of operations on August 20, 1999 through
September 30, 1999 and the Predecessor for the period from January 1, 1999
through August 19, 1999 and January 1, 1998 through September 30, 1998. The pro
forma results of operations reflect certain pro forma adjustments to the
historical results of operations as if the Partnership had been formed on
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January 1, 1998. The pro forma adjustments include (i) pro forma interest on
debt assumed by the Partnership and (ii) the elimination of income tax expense
as income taxes will be borne by the partners and not the Partnership. For the
nine months ended September 30, 1999 and 1998, the pro forma total revenues
would have been approximately $216,662,000 and $277,719,000, respectively. For
the nine months ended September 30, 1999 and 1998, the pro forma net income
(loss) would have been approximately $5,362,000 and $(6,018,000) and net income
(loss) per limited partner unit would have been $0.34 and $(0.38), respectively.
2. CONTINGENCIES
Transloading Facility Dispute
Mt. Vernon Transfer Terminal, LLC ("Mt. Vernon"), a Delaware limited
liability company, is currently involved in litigation with Seminole Electric
Cooperative, Inc. ("Seminole") with respect to a long-term contract for the
transloading of coal from rail to barge through Mt. Vernon's terminal in
Indiana. Seminole has filed a lawsuit to terminate this contract and is seeking
a declaratory judgment as to the damages owed to Mt. Vernon. The provisions of
the contract stipulate the calculation of damages to be paid in the event of
breach. Rather than pay the amount of damages stipulated, Seminole is seeking
the court's agreement that the proper damage award should be calculated based on
Mt. Vernon's loss of net profits from the terminal for the term of the
agreement.
Seminole has ceased transloading any coal shipments through this terminal
and is transporting coal deliveries under the supply contract by rail. Mt.
Vernon is currently exploring alternative uses for this terminal, including
shipping different products to other customers or selling the terminal. Mt.
Vernon intends to vigorously defend its contract rights and believes that it
will prevail in the determination of the amount of damages Seminole owes under
the contract and believes those damages will be in excess of the carrying value
of this terminal.
General Litigation
The Partnership is involved in various lawsuits, claims and regulatory
proceedings incidental to its business. In the opinion of management, the
outcome of such matters will not have a material adverse effect on the
Partnership's business, combined financial position or results of operations.
3. SUBSEQUENT EVENT
On October 18, 1999, the Partnership declared a cash distribution of
$0.23 per unit on its outstanding common and subordinated units. The
distribution represents the minimum quarterly distribution for the 42-day period
from the commencement of operations (on August 20, 1999) through September 30,
1999. The $3.5 million distribution will be paid on November 12, 1999 to
unitholders of record on October 29, 1999.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
In comparing 1999 to 1998, the Partnership and Predecessor periods for
1999 have been combined. Since the Partnership maintained the historical basis
of the Predecessor's net assets, management believes that the combined
Partnership and Predecessor results for 1999 are comparable with 1998. The
interest expense associated with the debt incurred concurrent with the closing
of the IPO is applicable only to the Partnership period. (See "Part I, Item 1.
Alliance Resource Partners, L.P. and Subsidiaries Notes to Consolidated and
Combined Financial Statements - Note 1. Organization and Presentation.").
Three Months Ended September 30, 1999 Compared to Three Months Ended September
30, 1998
Coal sales. Coal sales for the three months ended September 30, 1999
(the "1999 Quarter") declined 5.9% to $91.6 million from $97.3 million for the
three months ended September 30, 1998 (the "1998 Quarter"). The decrease of $5.7
million primarily reflects lower brokerage volumes, partially offset by higher
sales volumes from operating mines. The lower brokerage volumes are largely
attributable to reduced participation in coal export brokerage markets. The
brokerage business is not expected to be material in the future. Because the
coal brokerage operations generate lower margins than direct coal sales, changes
in the levels of brokerage activity have a greater impact on revenues and
outside purchases than on margins. Tons sold decreased 4.8% to 4.0 million for
the 1999 Quarter from 4.2 million for the 1998 Quarter. Tons produced increased
2.9% to 3.6 million tons for the 1999 Quarter from 3.5 million for the 1998
Quarter.
Other sales and operating revenues. Other sales and operating revenues
declined 77.2% to $0.3 million for the 1999 Quarter from $1.1 million for the
1998 Quarter. The decrease of $0.8 million was primarily due to lower volumes at
Mt. Vernon due to the dispute with Seminole. (See "Part I, Item 1. Alliance
Resource Partners, L.P. and Subsidiaries Notes to Consolidated and Combined
Financial Statements - Note 2. Contingencies - General Litigation").
Operating Expenses. Operating expenses were comparable for the 1999 and
1998 Quarters at $65.5 million and $64.9 million, respectively.
Outside purchases. Outside purchases declined 62.3% to $5.0 million for
the 1999 Quarter compared to $13.3 million for the 1998 Quarter. The decrease of
$8.3 million was the result of lower coal export brokerage volumes. See coal
sales above concerning the decrease in coal export brokerage volumes.
Interest expense. Interest expense was $1.6 million for the 1999
Quarter compared to less than $0.1 million for the 1998 Quarter. The increase
reflects the interest on the $180 million principal amount of 8.31% senior notes
and $50 million of borrowings on the credit facility in connection with the
initial public offering and concurrent transaction occurring on August 20, 1999.
(See "Part I, Item 1. Alliance Resource Partners, L.P. and Subsidiaries Notes to
Consolidated and Combined Financial Statements - Note 1. Organization and
Presentation").
Unusual item. In response to market conditions, the Pontiki mine ceased
operations and terminated substantially all of its workforce in September 1998.
During the idle status period, which ended in November 1999, Pontiki incurred a
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<PAGE> 12
net loss of approximately $5.2 million consisting of estimated amounts for
increased workers' compensation claims of $1.2 million and severance payments
consistent with the Federal Worker Adjustment and Retraining Act of $1.2 million
as well as the costs associated with maintaining an idled mine of $2.8 million.
Of the total $5.2 million net loss, $3.8 million was recorded in the third
quarter and $1.4 million of costs associated with maintaining an idled mine are
properly reported in the fourth quarter of 1998.
Income before income taxes. Income before income taxes increased 158.0%
to $6.8 million for the 1999 Quarter compared with $2.6 million for the 1998
Quarter. The increase of $4.2 million is primarily related to increased
productivity and cost control, which include the benefits of the restructured
operation at Excel/Pontiki following the idle status period of the mine which
resulted in the $3.8 million unusual item recorded in the 1998 Quarter as
discussed above.
Income tax expense. The Partnership is a limited partnership. As a
result, the Partnership's earnings or loss for federal income taxes purposes
will be included in the tax returns of the individual partners. Accordingly, no
recognition has been given to income taxes in the accompanying financial
statements of the Partnership. The Predecessor is included in the consolidated
federal income tax return of ARH. Federal and state income taxes are calculated
as if the Predecessor had filed its return on a separate company basis utilizing
an effective income tax rate of 31%.
EBITDA (income from operations before net interest expense, income
taxes, depreciation, and depletion and amortization) increased 45.9% to $18.2
million for the 1999 Quarter compared with $12.5 million for the 1998 Quarter.
The $5.7 million increase is attributable to the same factors that contributed
to the increase in income before income taxes.
EBITDA should not be considered as an alternative to net income, income
before income taxes, 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 evaluating the Partnership's ability to make the
minimum quarterly distribution. The Partnership's method of computing EBITDA
also 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).
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September 30,
1998
Coal sales. Coal sales for the nine months ended September 30, 1999
(the "1999 Period") declined 4.9% to $261.0 million from $274.4 million for the
nine months ended September 30, 1998 (the "1998 Period"). The decrease of $13.4
million is primarily attributable to lower coal export brokerage volumes
partially offset by higher volumes from operating mines. The lower brokerage
volumes are largely attributable to reduced participation in coal export
brokerage markets. The brokerage business is not expected to be material in the
future. Because the coal brokerage operations generate lower margins than direct
coal sales, changes in the levels of brokerage activity have a greater impact on
revenues and outside purchases than on margins. Tons sold decreased 2.6% to 11.3
million tons for the 1999 Period from 11.6 million tons for the 1998 Period.
Tons produced increased 2.9% to 10.6 million tons for the 1999 Period from 10.3
million tons for the 1998 Period.
-9-
<PAGE> 13
Other sales and operating revenues. Other sales and operating revenues
declined 78.9% to $0.7 million for the 1999 Period from $3.3 million from the
1998 Period. The decrease of $2.6 million was primarily due to lower volumes at
Mt. Vernon due to the dispute with Seminole. (See "Part 1. Item 1. Alliance
Resource Partners, L.P. and Subsidiaries Notes to Consolidated and Combined
Financial Statements - Note 2. Contingencies - General Litigation").
Operating expenses. Operating expenses declined 1.5% to $182.5 million
for the 1999 Period from $185.3 million for the 1998 Period. The decrease of
$2.8 million is primarily attributable to improved productivity, which includes
the benefits of the restructured operation at Excel/Pontiki and the capital
investments at Hopkins County.
Outside purchases. Outside purchases declined 47.0% to $20.2 million
for the 1999 Period from $38.1 million for the 1998 Period. The decrease of
$17.9 million was the result of lower coal export brokerage volumes. See coal
sales above concerning the decrease in coal export brokerage volumes.
Unusual item. See discussion of unusual item above.
Income before income taxes. Income before income taxes increased
115.8% to $18.2 million for the 1999 Period compared to $8.4 million for the
1998 Period. The increase of $9.8 million was primarily attributable to improved
productivity, which includes the benefits of the restructured operation at
Excel/Pontiki following the idle status period of the mine which resulted in the
$3.8 million unusual item recorded in the 1998 Period as discussed above, and
the capital investments at Hopkins County, partially offset by the losses
incurred at Mt. Vernon due to the dispute with Seminole.
Income tax expense. The Partnership is a limited partnership. As a
result, the Partnership's earnings or loss for federal income taxes purposes
will be included in the tax returns of the individual partners. Accordingly, no
recognition has been given to income taxes in the accompanying financial
statements of the Partnership. The Predecessor is included in the consolidated
federal income tax return of ARH. Federal and state income taxes are calculated
as if the Predecessor had filed its return on a separate company basis utilizing
an effective income tax rate of 31%.
EBITDA (income from operations before net interest expense, income
taxes, depreciation and depletion and amortization) increased 25.5% to $49.0
million for the 1999 Period compared with $39.1 million for the 1998 Period. The
$9.9 increase is attributable to the same factors that contributed to the
increase in income before income taxes.
EBITDA should not be considered as an alternative to net income, income
(loss) before income taxes, 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 evaluating the Partnership's ability to make the
minimum quarterly distribution. The Partnership's method of computing EBITDA
also 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).
-10-
<PAGE> 14
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Cash flows provided by operating activities was $2.4 million in the
1999 Period compared to $35.9 million in the 1998 Period. The decrease in cash
flows provided by operating activities is principally attributable to the
increase in trade receivables subsequent to the initial public offering and
concurrent transactions that occurred on August 20, 1999. In conjunction with
these transactions, the Special General Partner retained approximately $37.9
million of trade receivables.
Net cash used in investing activities increased to $58.4 million in the
1999 Period compared to $30.4 million in the 1998 Period. The increase in net
cash used in investing activities is principally attributable to the purchase of
U.S. Treasuries and the capital expenditures described below.
Capital Expenditures
Capital expenditures increased to $32.9 million in the 1999 Period
compared to $22.4 million in the 1998 Period. The increase is primarily
attributable to a major enhancement of a preparation plant and a coal reserve
acquisition.
Notes Offering and Credit Facility
Concurrently with the closing of the IPO, the Special GP issued and the
Intermediate Partnership assumed the obligations under $180 million principal
amount of 8.31% senior notes due August 20, 2014. Alliance Resource GP, LLC (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 drawn $50 million under the term loan facility but has not drawn
any money under either the working capital facility or the revolving credit
facility. The senior notes contain various restrictive and affirmative
covenants, including restrictions on the incurrence of other debt. The credit
facility contains various restrictive covenants, including the amount of
distributions by the Intermediate Partnership and the incurrence of other debt.
The credit facility also contains various financial covenants.
Impact of Year 2000 Issue
Year 2000 Issue. The year 2000 issue is the result of computer programs
being written using two digits rather than four to define the applicable year.
Any software, hardware and equipment and embedded chip systems that are
date-sensitive may recognize a date using "--00" as the year 1900 rather than
the year 2000. The Partnership's failure or the failure of any other entity with
which the Partnership interacts to correct this problem could result in system
failures or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices or
engage in similar business activities. Because substantially all hardware and
software was replaced following the Predecessor's separation from MAPCO Inc. in
1996, the Partnership believes that most of its critical hardware and software
are Year 2000 compliant. However, the Partnership may have embedded chip systems
in certain of its mining equipment and in older hardware or software in its
mining complexes. The Partnership believes that with its modification and
replacement of some of its existing software, hardware, equipment and embedded
chip systems, the year 2000 issue has been mitigated substantially. If these
modifications and replacements are not successful, the Year 2000 issue could
have a material impact on the Partnership's operations.
-11-
<PAGE> 15
Compliance Program. As part of the Partnership's compliance program, it
has performed an evaluation of its state of readiness. The Partnership's
evaluation included examination of its information technology systems and its
operating equipment. The Partnership's key information technology systems
consist of:
o financial systems applications;
o human resources and payroll systems applications;
o hardware and equipment; and
o third-party developed software.
The Partnership's key operating equipment consists of coal mining,
processing and loadout equipment. The Partnership has also evaluated major
equipment used in its mining operations. The Partnership's evaluation also
included the evaluation of the exposure of third parties material to its
operations. The Partnership has not hired independent contractors to verify its
assessment and estimates related to the year 2000 issue.
State of Readiness. The Partnership has completed an assessment of all
material information technology systems that would be affected by the year 2000
issue if not modified and has initiated a program to modify or replace portions
of its software and hardware so that its computer systems will function properly
in the year 2000 and thereafter. The Partnership has assessed its operating
equipment which contains embedded chip systems to determine the extent that it
is at risk for year 2000 problems. The remediation of operating equipment
depends primarily on the manufacturers of that equipment for modifications. The
Partnership substantially completed this remediation, testing and implementation
during the third quarter of 1999. The Partnership also substantially completed
assessing the extent to which its customers and suppliers of products and
services will be affected by year 2000 issues. The Partnership has substantially
completed formal communications with all of its significant customers and
equipment vendors and other suppliers. The responses from these third parties to
the Partnership's inquiries indicate that these third parties expect, at this
time, to be compliant by the year 2000 based on their progress to date. The
Partnership has received written assurances from substantially all of its
significant customers and third party service providers. These assurances
include specific letters to the Partnership responding to its Y2K inquiries. In
addition, the Partnership has verified the Y2K readiness of much of its specific
mining equipment, software, and hardware through vendor published product
bulletins. These assurances provide comfort that its third party vendors are
aware of and are addressing their Y2K issues, but they cannot guarantee the
Partnership that they will not encounter Y2K problems that could negatively
impact its business. The Partnership is not aware of any contract provisions or
agreements that would limit its legal remedies due to Y2K non-compliance of any
of its products or services. The Partnership has not obtained timetables of
expected completion dates or modification, testing and implementation from all
these third parties. The Partnership does not control its customers, suppliers
and vendors. Furthermore, the Partnership cannot be assured that its customers,
suppliers or vendors will not experience material business disruptions that
could affect it as a result of the year 2000 problem.
Costs to Address Year 2000 Compliance. Although many of the
Partnership's critical financial and production application systems, hardware
and software are year 2000 compliant, some systems and equipment remain to be
converted. The Partnership does not expect the cost in connection with these
modifications and replacements to be material. The Partnership currently
estimates that the cost of these modifications will not exceed $500,000. The
Partnership expects to fund the costs through cash from operations or
borrowings.
-12-
<PAGE> 16
Risk of Non-Compliance and Contingency Plans. The Partnership believes
that it is difficult to fully assess the risks of the year 2000 issue due to
numerous uncertainties surrounding the issue. The Partnership believes that the
primary risks are external to it and relate to the year 2000 readiness of
customers, suppliers, transportation suppliers such as railroads, barge lines,
terminal operators, ocean vessel brokers, and others. In a worst case scenario,
the Partnership's utility customers may not purchase coal if their generators
fail to operate, the Partnership may not be able to access its bank accounts or
make or receive payments and its transportation providers may not be able to
make timely coal shipments to customers. The Partnership's mines and processing
plants are highly mechanized and employ equipment that incorporates embedded
chip systems. The failure of these embedded chip systems in critical equipment
due to the year 2000 problem could cause significant coal mining and processing
disruptions.
The Partnership has not established formal contingency plans in case of
failure of its information technology systems or operating equipment since the
Partnership believes its material systems are year 2000 compliant. Some of these
systems may be interrelated with systems outside of the Partnership's control
and the Partnership cannot be assured that all implementations will be
successful. Accordingly, contingency plans will be developed to respond to any
failures as they occur. In the event the Partnership's intermediaries or vendors
or the manufactures of its operating equipment do not expect to be year 2000
compliant, the Partnership's contingency plan will include replacing the
non-compliant intermediaries or vendors or operating equipment. Based on
information available at this time, the Partnership cannot conclude that its
failure or the failure of third parties to achieve year 2000 compliance will not
adversely affect the Partnership. The Partnership's inability or the inability
of third parties to adequately address the year 2000 issues on a timely basis
could result in a material financial risk including loss of revenue, substantial
unanticipated costs and service interruptions.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). The Statement establishes accounting and reporting standards for
derivative instruments and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. The Partnership
has not determined the impact on its September 30, 1999 financial statements
that may result from adoption of SFAS 133, which was revised during June 1999 to
be implemented no later than January 1, 2001.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Almost all of the Predecessor's transactions were, and almost all of
the Partnership's transactions are, denominated in U.S. dollars, and as a
result, it does not have material exposure to currency exchange-rate risks.
The Predecessor did not, and the Partnership does not, engage in any
interest rate, foreign currency exchange rate or commodity price-hedging
transactions.
As explained in "- Liquidity and Capital Resources - Notes Offering and
Credit Facility" above, 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.
-13-
<PAGE> 17
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements.
These statements are based on the Partnership's beliefs as well as assumptions
made by and information currently available to the Partnership. When used in
this document, the words "anticipate," "believe," "expect," "estimate,"
"forecast," "project," and similar expressions identify forward-looking
statements. These statements reflect the Partnership's current views with
respect to future events and are subject to various risks, uncertainties and
assumptions including:
o the Partnership's dependence on the terms of significant customer
contracts and the terms of those contracts;
o the Partnership's productivity levels and margins that it earns
from the sale of coal;
o the effects of any unanticipated increases in labor costs or
adverse changes in work rules or unexpected cash payments
associated with post-mine reclamation, workers' compensation
claims or environmental litigation or cleanup;
o the risk of major mine-related accidents or interruptions; and
o the effects of any adverse change in the domestic coal industry,
in the electric utility industry, or in general economic
conditions.
If one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those described in this Form 10-Q. Except as required by applicable securities
laws, the Partnership does not intend to update these forward-looking
statements. For additional discussion of these risks, uncertainties and
assumptions, see the Partnership's Registration Statement on Form S-1, as
amended (Registration No. 333-78845).
-14-
<PAGE> 18
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
No material litigation has been filed against the Partnership during
the period July 1, 1999 to August 19, 1999 (Predecessor), and the period from
commencement of operations (on August 20, 1999) to September 30, 1999
(Partnership), and there have been no material changes in legal proceedings
previously disclosed. See "Part I, Item 1. Alliance Resource Partners, L.P. and
Subsidiaries Notes to Consolidated and Combined Financial Statements - Note 2.
Contingencies - General Litigation."
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On May 20, 1999, the Partnership filed the Registration Statement
relating to the IPO. On August 12, 1999, the Partnership's Registration
Statement was declared effective, and the IPO closed on August 20, 1999. The
Partnership sold 7,750,000 Common Units in the IPO. The public offering price
was $19.00 per Common Unit, and the underwriting discount was $1.21 per Common
Unit. The proceeds from the offering to the Partnership, after deducting the
underwriting discount but before deducting expenses associated with the
offering, were approximately $137.9 million. Concurrently with the closing of
the IPO, the Partnership issued 1,232,780 Common Units and 6,422,531
Subordinated Units to the Special General Partner.
The Partnership used the $137.9 million from the IPO, the $5.9 million
from the sale of the Managing Partner interest, together with the gross proceeds
of the private placement of the senior notes, of $180.0 million, and the $50.0
million of term loan borrowings under the senior credit facility to (i) pay
approximately $7.4 million in fees and expenses incurred in connection with the
IPO and the related transactions, (ii) purchase $50.0 million of U.S. Treasury
Notes which were assigned as collateral to secure the term loan borrowings under
the senior credit facility, and (iii) make a distribution of $64.8 million to
the Special General Partner. The Partnership retained approximately $37.1
million available to fund future capital expenditures and for working capital
and other general corporate purposes. The balance of the proceeds, approximately
$214.5 million, were retained by the Special General Partner and distributed to
ARH, of which ARH used $123.5 million to repay substantially all of its debt.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
-15-
<PAGE> 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit No. Description
----------- -----------
27.1 - Financial Data Schedule.
(b) Reports on Form 8-K:
None
-16-
<PAGE> 20
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 November 12, 1999.
ALLIANCE RESOURCE PARTNERS, L.P.
By: Alliance Resource Management GP, LLC
its managing general partner
/s/ MICHAEL L. GREENWOOD
----------------------------------------------
Michael L. Greenwood
Senior Vice President, Chief Financial Officer
and Treasurer
-17-
<PAGE> 21
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
27.1 -- Financial Data Schedule.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> AUG-21-1999
<PERIOD-END> SEP-30-1999
<CASH> 4,200
<SECURITIES> 41,814
<RECEIVABLES> 37,402
<ALLOWANCES> 0
<INVENTORY> 20,079
<CURRENT-ASSETS> 106,017
<PP&E> 272,003
<DEPRECIATION> (93,623)
<TOTAL-ASSETS> 318,564
<CURRENT-LIABILITIES> 47,948
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> (14,906)
<TOTAL-LIABILITY-AND-EQUITY> 318,564
<SALES> 43,927
<TOTAL-REVENUES> 44,052
<CGS> 32,898
<TOTAL-COSTS> 40,660
<OTHER-EXPENSES> (117)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,627
<INCOME-PRETAX> 3,509
<INCOME-TAX> 0
<INCOME-CONTINUING> 3,509
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,509
<EPS-BASIC> 0.22
<EPS-DILUTED> 0.22
</TABLE>
