Alliance Resource Partners
Annual Report 1999

Plain-text annual report

1971 1997 1977 1976 1988 1982 1981 Alliance Resource Partners, L.P. 1999 Annual Report 1979 1985 1980 1973 1990 1972 1993 1991 1996 1989 1995 1992 1974 1986 1983 1998 A new coal company with a long history of steady growth. 1975 1984 1994 1987 1978 1995 1999 M e s s a g e f r o m t h e P r e s i d e n t a n d C h i e f E x e c u t i v e O f f i c e r Dear Fellow Unitholders: It is my genuine pleasure to welcome you to Alliance Resource Partners, L.P., the coal industry’s only publicly-traded master limited partnership (MLP). Although this is the inaugural annual report for Alliance Resource Partners, our organization has a long history of success. We began our mining operations as MAPCO Coal Inc. in 1971 and have since grown through acquisitions and internal development to become one of the largest coal producers in the eastern United States. Thanks to your vote of confidence demonstrated by your ownership of common units, Alliance Resource Partners became a publicly-traded MLP in August 1999 trading on the Nasdaq National Market under the ticker symbol “ARLP”. The MLP structure was chosen because it focuses on cash flow – the same performance measurement that our management team has always emphasized. The quality of our assets and the predictability of our operating performance fit well within the MLP structure which passes the operating results of the business directly to the unitholders. The elimination of double taxation of a traditional corporate structure allows for increased cash distributions to unitholders making the MLP attractive to yield-oriented investors. Since our initial public offering, our operating and financial results have shown strong year over year improvement. Our predictable and stable cash flow has also met expectations, allowing us to comfortably distribute the targeted minimum quarterly distribution that, in each quarter since we became publicly- traded, equates to $2.00 per unit on an annualized basis. During the year 1999, we significantly grew our reserve base, began construction of a new mining complex and continued to set production records at our operations. The accomplishments of the past year were achieved despite a fiercely competitive marketplace. Dedication and teamwork among our employees was the primary reason. Our employees are one of our major assets with an average of 18 years experience with the company. Today, we are better than ever – more motivated, more focused, and more dedicated to giving our customers premium service and rewarding our unitholders for the faith you have shown in us. Our goal is to grow the assets and sustainable cash flow of the MLP. Our strategy is to grow through acquisitions, alliances and development of internal projects. To compete successfully we know we must continue to make productivity improvements in order to be a low cost, reliable supplier to our electric utility customers. We believe that we are well positioned to implement our strategy and achieve our goal. Alliance Resource Partners is a proven operator with a long history of steady growth. In our quest to be the most dependable provider of high-quality energy, we are supported by strategically located operations, an experienced and committed workforce, abundant long- lived reserves, and geographic diversity that provide opportunities for growth. These competitive strengths should bode well for our future success and cash distribution potential. Joseph W. Craft III President and Chief Executive Officer A l l i a n c e R e s o u r c e P a r t n e r s , L . P. O p e r a t i o n s O v e r v i e w Dotiki Established: 1971 Location: Webster County, KY Mine Type: Underground Production: 3.6 mm tons 73.2 mm tons Reserves: Pontiki/Excel Established: 1977 Location: Martin County, KY Mine Type: Underground Production: 1.8 mm tons 21.7 mm tons Reserves: MC Mining Established: 1996 Location: Mine Type: Underground Production: 1.0 mm tons 23.7 mm tons Reserves: Pike County, KY ILLINOIS INDIANA Gibson County Coal Established: Expected late 2000 Location: Gibson County, IN Mine Type: Underground Production: Under development Reserves: 37.8 mm tons MARYLAND KENTUCKY VIRGINA Pattiki Established: 1980 Location: White County, IL Mine Type: Underground Production: 2.3 mm tons 82.4 mm tons Reserves: Hopkins County Coal Established: 1998 Location: Hopkins County, KY Mine Type: Surface/Underground Production: 2.6 mm tons 37.2 mm tons Reserves: Mettiki Established: 1977 Location: Garrett County, MD Mine Type: Underground Production: 2.8 mm tons 38.6 mm tons Reserves: Note: All data based on 1999 actual results T o t h e U n i t h o l d e r s o f A l l i a n c e R e s o u r c e P a r t n e r s , L . P. The year 1999 was a notable one for all of us at Alliance Resource Partners, L.P. Not only did the Partnership enter the public domain effective with its initial public offering in August 1999, but we also achieved outstanding financial results given the poor market conditions that we faced. Financial Highlights Our financial results for 1999 show strong year over year improvements as a result of our growth and cost savings initiatives during the past two years. Our six mining complexes produced 14.1 million tons in 1999 representing a 5% increase from the previous year. Four mining complexes (Dotiki, Pattiki, Hopkins County Coal, MC Mining) enjoyed production records. Dotiki set its eighth consecutive and Pattiki set its third consecutive record year for production. Excel and MC Mining, our compliance coal operations, enjoyed a 12% increase in annual production from the previous year. Our sales tonnage and revenues declined slightly from 1998 levels due to our planned reduced participation in coal export brokerage markets. Because coal export brokerage operations generate lower margins than our direct coal sales, changes in our levels of brokerage activity have a greater impact on revenues than on margins. The brokerage business is not expected to be a material part of our business in the future. The reduced sales revenue was more than offset by cost reductions resulting from increased productivity. Company- wide productivity, as measured in tons per man hour, increased by 4.4% during 1999. Productivity improvements were generated not only by improved processes, but also by two major cost reduction programs. In January 1998, we acquired the assets that comprise our Hopkins County Coal operations. As part of our acquisition plan, we rebuilt older equipment and purchased new or refurbished equipment. With the higher efficiencies resulting from these capital investments, we began to realize improved productivity beginning in the third quarter of 1998 and have continued to realize the full impact of the new mining equipment during 1999. Secondly, in September 1998, we suspended operations at our Pontiki mine due to adverse market conditions. In late 1998, we were able to obtain a new long-term coal supply agreement through 2006 that justified reopening of the mine. As a result, the Pontiki mine was restructured with a new mine plan, operating structure, and workforce hired by Excel Mining, LLC, an affiliate of Pontiki Coal, LLC. During late 1998 and early 1999, Excel’s expenses were adversely impacted by the restructuring costs as well as reduced production as the mine slowly returned to full operational status. Excel has achieved substantial productivity improvements generating an excellent return on the restructuring investment. EBITDA $ Millions $70 $60 $50 $40 $30 $20 $10 0 66.7 51.7 52.5 46.7 96 97 98 99 The increase in productivity resulting from the benefits of the restructured Pontiki/Excel mine and the capital investments at the Hopkins County Coal mining complex, allowed the Partnership to significantly improve its profitability. EBITDA (income before net interest expense, income taxes, depreciation, depletion and amortization) increased 27% to $66.7 million for 1999 compared with $52.5 million for 1998. Continued growth and productivity improvements are key to our meeting our goal of increasing the Partnership’s distributable cash flow. We will continue to make prudent capital investments in projects to achieve this objective. With the liquidity available from cash generated from operations, our revolving credit facility, and the 1999 year-end U.S. Treasury Notes balance of approximately $42 million, the Partnership is well positioned to fund capital expenditures that generate incremental growth. Long-Term Contracts Our stability and profitability continue to be supported by long-term contracts. In 1999, approximately 75% of our sales tonnage, including approximately 84% of our medium- and high-sulfur coal sales tonnage, was sold under long-term contracts with maturities extending up to 2010. Major electric utilities are the primary source of our long-term contracts, consuming approximately 77% of our sales tonnage. Our long-term position as a major supplier to our largest customers has resulted in sales relationships with each for at least 15 years. Our total nominal commitment under significant long-term contracts is approximately 88 million tons at December 31, 1999. One of the major additions to our coal sales contract portfolio occurred in June 1999, when we entered into a long- term contract to provide 23 million tons of low-sulfur coal to PSI Energy, Inc., a subsidiary of Cinergy Corporation, through December 2012. The signing of this new long-term contract provided the financial support for the development of our new Gibson County Coal mining complex. Cost Per Ton $ per Ton $25 23.62 $20 $15 $10 $5 0 21.18 20.14 18.75 96 97 98 99 Reserve Growth To ensure the long-term continuity of the Partnership, we are constantly acquiring coal reserve properties that are adjacent or otherwise complementary to our existing operations. In September 1999, we acquired approximately 21 million saleable tons of reserves in western Kentucky that are contiguous with our Dotiki mine. This acquisition allows for the immediate advancement of the Dotiki mine’s existing operations into the newly acquired reserve area without the cost of additional development capital. In March 2000, the Partnership’s Special General Partner exercised two separate options to acquire more than 60 million tons of reserves in western Kentucky. Upon closing of this reserve acquisition, the Partnership will have access to the additional reserves through either a lease or purchase agreement. Over the last year, we have increased our reserves from approximately 411 million tons of proven and probable reserves at December 31, 1998, to approximately 440 million tons of reserves at December 31, 1999. The reserves covered by the Special General Partner options are not included in the 440 million tons of reserves noted above. Gibson County Coal Gibson County Coal is our new low- sulfur mining complex under development in southern Indiana. With the signing of the new long-term sales contract in June 1999, Gibson County Coal has started construction of the new mining complex to supply PSI Energy Inc.’s Gibson Station with low- sulfur coal to its generating units. The slope construction commenced in the fall of 1999 and construction of the preparation plant began in January 2000. We expect the mine to commence production by the end of 2000. Once the initial start-up curve has been completed, Gibson County Coal should provide additional distributable cash flow to the Partnership. Tons Produced Million Tons 15 12 9 6 3 0 14.1 13.4 10.9 9.0 96 97 98 99 Distributions to Unitholders In November 1999, the Partnership made its first distribution to unitholders. For the 42-day period from the Partnership’s commencement of operations (on August 20, 1999) through September 30, 1999, the Partnership paid a pro-rata quarterly distribution of $0.23 per unit ($2.00 on an annualized basis) on all of its outstanding Common and Subordinated Units. In February 2000, the Partnership paid its first full quarterly distribution, for the period from October 1, 1999 to December 31, 1999, of $0.50 per unit on all of its outstanding Common and Subordinated Units. Future Prospects Coal continues to be the largest fuel source for generating electricity in the United States, capturing over 55% of market share. Though utility deregulation and new regulatory and legislative initiatives create a changing economic environment within our industry, we remain convinced that increased coal demand will be realized over the next decade. Coal’s abundance and low cost have contributed to its lead role as the primary fuel source for utility baseload electricity generation. Because of coal’s dominance in the utility industry, increased demand for electricity generally results in increased demand for coal. The federal Energy Information Administration is currently projecting coal demand for electric utility generation to increase by over one percent in 2000 and by over three percent in 2001. In a billion ton industry, every one percent of growth equates to incremental coal demand of 10 million tons. Although coal demand has grown steadily, the coal industry continues to experience consolidation. To increase competitiveness, coal production has been shifting from smaller, high-cost operations to larger, low-cost operations. This emerging pattern has resulted in significant industry consolidation during the past ten years. The Partnership should be a beneficiary of this industry trend as it creates opportunities for incremental growth through acquisitions of operating companies and undeveloped reserves that can benefit from our economies of scale. In the long run, only those coal companies that can adapt to changing industry trends will be successful. The Partnership management is well aware of the issues facing the industry and has positioned itself to stand the test of time. We believe our attitude to stay competitive, regardless of the economic environment, protects our future and allows us to be successful for the long- term, which best serves our employees, customers, and unitholders. C o a l a n d E l e c t r i c i t y – A D i r e c t C o n n e c t i o n Availability of reliable sources of electricity is something we may take for granted because 24 hours each day, the availability of electricity makes our lives more comfortable. Electricity is generated through use of many natural resources. Electric utility power plants in the United States are fueled by coal, oil, gas, nuclear power, and hydro. However, when it comes to utility electricity generation, coal is by far the predominant energy source. Market Share Simply stated, coal is the United States’ major source of electricity. Electric utility companies in the United States have steadily increased their reliance upon coal as their primary source of fuel. Coal’s share of the fuel market for electricity generation has risen from 48% in 1979 to 56% in 1999. Electric utilities have increased their reliance on coal as their principal energy source primarily for one reason - coal has consistently remained the most reliable and lowest cost fuel to generate inexpensive electricity. Because of its low-cost attributes, electric utilities rely on coal-fired electricity generation in most cases to supply their baseload electricity needs, the amount of power that is consistently required 24 hours per day. U.S. Electric Utility Generation By Fuel Source Coal 56% Nuclear 23% Natural Gas 9% Hydro 9% Petroleum 3% Data Source: Energy Information Administration U.S. Coal Demand Million Tons 1000 800 600 400 200 0 1,000 951 890 791 680 79 84 89 94 99 Data Source: Energy Information Administration Coal Demand With 86% of domestic coal production consumed by the electric utility industry, the continued growth in electricity demand has resulted in a simultaneous increase in the demand for more coal. Over the past 20 years, total coal consumption has increased from 680 million tons per year in 1979 to a record 1 billion tons in 1999. This demand level has made coal the largest source of overall domestic energy production since 1984. Coal, with 33% of the total United States energy production, outpaces both oil and natural gas as the primary domestic source of energy. Coal Resources Coal is the most abundant natural resource in the United States. The locations and quantities of the United States coal resources are generally well known and have been found in 38 states. Total United States coal resources are estimated at nearly 4 trillion tons making coal much more plentiful than domestic oil and natural gas reserves. The amount of coal reserves considered recoverable with current technology is approximately 275 billion tons – enough to last nearly 300 years at current demand levels. Affordable electricity is essential to the economic development, growth and technological progress of the United States. Producing coal is a sophisticated, high tech, 21st century enterprise in which an essential energy resource is extracted from its natural surroundings in an efficient and environmentally compatible manner. Given the importance of coal in the generation of low-priced electricity, as the United States economy continues to grow, coal will be there as the primary fuel source for electric utilities to provide the nation with the vital electricity it needs. U.S. Natural Resources Reserve Lifes in Years Natural Gas 71 Petroleum 77 E S A B E C R U O S E R Coal 273 50 100 150 200 250 300 Data Source: Energy Information Administration W h e n y o u u s e e l e c t r i c i t y , t h i n k a b o u t c o a l . T h e r e i s a d i r e c t c o n n e c t i o n . U n i t h o l d e r I n f o r m a t i o n Publicly-Traded Units Alliance Resource Partners, L.P. is a publicly-traded master limited partnership. Alliance Resource Partners, L.P. common units began trading on the Nasdaq National Market under the symbol ARLP in August of 1999. As of December 31, 1999, there were 15,405,311 common and subordinated units outstanding. Cash Distributions Alliance Resource Partners, L.P. expects to make Minimum Quarterly Distributions of $0.50 per common unit within 45 days after the end of each March, June, September and December to unitholders of record on the applicable record dates. Partnership Tax Details n Unitholders are partners in the Partnership and receive cash distributions. The cash distributions are generally not taxable as long as the partner’s tax basis remains above zero. n A partnership is generally not subject to federal or state income tax. The annual income, gains, losses, deductions, or credits of the Partnership flow through to the unitholders, who are required to report their allocated share of these amounts on their individual tax returns, as though the unitholder had incurred these items directly. n Unitholders of record will receive Schedule K-1 packages that summarize their allocated share of the Partnership’s reportable tax items for the fiscal year. It is important to note that cash distributions received should not be reported as taxable income. Only the amounts provided on the Schedule K-1 should be entered on each unitholder’s 1999 tax return. n Should you have questions regarding the Schedule K-1 contact: Alliance Resource Partners, L.P. K-1 Support P.O. Box 480927 Denver, CO 80248 1-800-485-6875 Transfer Agent and Registrar Unitholder requests regarding transfer of units, lost certificates, lost distribution checks or changes of address should be directed to: American Stock Transfer and Trust Company Attn: Shareholder Services 40 Wall Street New York, NY 10005 (800) 937-5449 Additional Investor Information Additional information about Alliance Resource Partners, L.P. can be obtained by contacting Investor Relations by e-mail at fredric@arlp.com, telephone at (918) 295-7642, or writing to the Partnership’s Mailing Address provided below. Partnership Offices Alliance Resource Partners, L.P. 1717 South Boulder Avenue Tulsa, OK 74119 (918) 295-7600 Partnership Mailing Address P.O. Box 22027 Tulsa, OK 74121-2027 Independent Auditors Deloitte & Touche LLP Two Warren Place 6120 South Yale, Suite 1700 Tulsa, OK 74136 Officers and Directors Joseph W. Craft III President, Chief Executive Officer and Director Thomas L. Pearson Senior Vice President – Law and Administration, General Counsel and Secretary Michael L. Greenwood Senior Vice President – Chief Financial Officer and Treasurer Charles R. Wesley Senior Vice President – Operations Gary J. Rathburn Senior Vice President – Marketing John J. MacWilliams Director Preston R. Miller, Jr. Director John P. Neafsey Director John H. Robinson Director Paul R. Tregurtha Director 1717 South Boulder Avenue P.O. Box 22027 Tulsa, Oklahoma 74121-2027 Contact: Carolyn Fredrich Director – Investor Relations 918-295-7642 fredric@arlp.com Alliance Resource Partners, L.P. common units are traded on the Nasdaq National Market Ticker Symbol: ARLP 

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