Alliance Resource Partners
Annual Report 2009

Plain-text annual report

T E N A N D C O U N T I N G. 2009 Annual Report | Alliance Resource Partners, L.P. | Alliance Holdings GP, L.P. 1 10 Defining Points Alliance Resource Partners, L.P. Nine consecutive years of record financial results Seven consecutive years of increased distributions to unitholders Began mining operations in 1971 Currently the fifth-largest eastern U.S. coal producer Operates nine mining complexes; is building No. 10 Employs more than 3,000 Produces and markets diverse coal products and qualities Primarily serves U.S. utilities and industrial users Transports coal by rail, truck and barge Operates a coal-loading terminal on the Ohio River Alliance Resources Partners, L.P. (ARLP) and Alliance Holdings GP, L.P. (AHGP) are master limited partnerships. Both are publicly traded on the NASDAQ Global Select Market. AHGP’s only assets are its ownership interests in ARLP; therefore, this report is specific to ARLP unless otherwise noted. AHGP completed its initial public offering in 2006. 2 T H E R E L E V A N C E O F 1 0 Ten years ago the landscape changed for one of the energy industry’s best-kept secrets. Emerging from an initial public offering, Alliance Resource Partners (ARLP) established a plan to enhance its status as a premier coal producer and become a superior choice for investors. The 10 years just completed brought ARLP remarkable operational and financial success. Now the next decade begins, ripe with new and inspiring opportunities. 1 F E L L O W U N I T H O L D E R S : Our partnership has just completed the best financial performance in Alliance Resource Partners’ 10-year history, setting new full-year records with $1.23 billion in revenues, EBITDA* totaling $340.4 million and $192.2 million in net income. We began this journey in August 1999, at a time even as our country navigated the most difficult when certain business sectors were experiencing recession since the Great Depression. unprecedented, albeit ultimately illusory, growth fueled by the Internet boom. Many in the It has been a pleasure sharing a decade of investment community, skeptical of our prospects achievements with our investors who have and uncertain about our future, viewed Alliance demonstrated a commitment to our success. with a “show me” attitude. In the face of Since our IPO, ARLP has delivered more than a uncertainty, we held true to our core values 600 percent total return to unitholders – and in and focused on solid business fundamentals so doing earned a Standard & Poors ranking of with a goal of delivering steady growth and No. 39** out of 10,000 companies for total return increased unitholder distributions. to investors during the last 10 years. On a similar performance track, Alliance Holdings GP, L.P. Subsequent years presented further challenges, (AHGP) has increased unitholder distributions and coal floated in and out of favor with the 145 percent since its 2006 IPO. capital markets. Through it all, ARLP stayed the course and delivered nine consecutive years of 2010 already is offering glimpses of economic record financial results. Even during the most recovery. We move forward in this improving recent 18 months, while a seemingly perfect environment committed to achieving exceptional storm of factors led to a worldwide economic crisis, financial performance and partnership growth. ARLP remained steady and continued to set new financial records. We are especially proud of this 2 achievement – reporting record earnings in 2009 *Please see the inside back cover for a definition of EBITDA and GAAP to non-GAAP reconciliation information. **Research Magazine, January 2010, citing Standard & Poors Capital IQ, November 2009. 1 0 Y E A R S O F D I S T R I B U T I O N* G R O W T H $ 0.80 0.70 0.60 0.50 0.40 0.30 0.20 0.10 ‘99** ‘00 ‘01 ‘02 ‘03 ‘04 ‘05 ‘06 ‘07 ‘08 ‘09 ‘10 February May August November *Reflects distributions paid per quarter. **1999 distribution pro-rated from initial public offering on August 20, 1999 through September 30, 1999. 33 For a decade, Alliance has nurtured a disciplined and conservative approach to asset expansion. The result: we consistently create value for investors. . 4 1 5 0 , 1 6 . 0 3 0 , 1 7 . 1 0 7 0 . 5 3 6 7 . 2 3 5 8 . 2 1 4 Total Assets Dollars in Millions 5 . 6 3 3 9 . 6 1 3 3 . 0 1 3 2 . 9 0 3 8 . 4 1 3 4 19 9 9 * 20 0 0 20 01 20 0 2 20 0 3 20 0 4 20 0 5 20 0 6 20 07 20 0 8 20 0 9 NET INCOME 1999-2009 200 150 125 100 50 25 5 1 9 9 9 * 2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5 2 0 0 6 2 0 0 7 2 0 0 8 2 0 0 9 REVENUES 1999-2009 1400 1200 1000 800 600 400 200 1 9 9 9 * 2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5 2 0 0 6 2 0 0 7 2 0 0 8 2 0 0 9 EBITDA 1999-2009 350 300 250 200 150 100 50 I S N O L L M N I I S R A L L O D S N O I L L I M N I S R A L L O D S N O I L L I M N I S R A L L O D 1 9 9 9 * 2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5 2 0 0 6 2 0 0 7 2 0 0 8 2 0 0 9 5 *The unaudited selected pro forma financial and operating data for the year ended December 31, 1999, is based on the historical financial statements of the partnership from our commencement of operations on August 20, 1999, through December 31, 1999, and our Predecessor for the period from January 1, 1999, through August 19, 1999. The pro forma results of operations reflect certain pro forma adjustments to the historical results of operations as if we had been formed on January 1, 1999. The pro forma adjustments include (a) pro forma interest on debt assumed by us and (b) the elimination of income tax expense as income taxes will be borne by the partners and not by us. The pro forma adjustments do not include approximately $1.0 million of general and administrative expenses that we believe would have been incurred as a result of its being a public entity. When Alliance Resource Partners debuted in 1999, natural gas prices dropped so low that utilities began converting from coal-fired generation in a “dash to gas.” Flash forward 10 years. The scenario was similar One of ARLP’s strengths is the ability to manage in 2009, but this time coal-to-gas switching sustainable growth. Our new River View mine, was also coupled with an economic recession. the largest single mine development in ARLP’s At one point during the year, coal-fired electricity history, opened in 2009 on schedule and under generation was down 12 percent nationwide and budget. By May 2010, six of its units will be online the utilities’ coal stockpiles were at historic highs. and 2010 production from those units is fully Market conditions were so tough, many coal committed. The startup of two additional River producers – including ARLP – were forced to View units is being delayed until coal supply/ take production offline. demand fundamentals are in better balance. ARLP’s development projects, Gibson South In addition to adjusting production volumes, and Penn Ridge, also are on hold until market ARLP managed through 2009’s weak market timing is right. conditions by implementing rigorous cost and capital expenditure controls. And our team Construction of ARLP’s new Tunnel Ridge mine worked tirelessly throughout the year to maximize in the Northern Appalachian region is on target our strong sales contract portfolio. By year end, to begin longwall operations in late 2011 with these efforts helped Alliance to again post new significant coal sales commitments already in place. records for revenues, net income and EBITDA. Capital expenditures totaling $328.2 million Looking to the future, Alliance also took steps to covered our 2009 development activities, further strengthen long-term contract positions infrastructure improvements and maintenance with key customers. Among the achievements: requirements. We’ve budgeted between ARLP announced a new seven-year coal supply $275 million and $315 million for capital agreement with the Tennessee Valley Authority – expenditures during 2010, primarily to complete the largest coal sales contract in Alliance’s history. the construction of River View and continue the development of Tunnel Ridge. Everyone at Alliance is proud to work in an industry that is critical to our nation’s economic success. At Alliance, we are Powering America. 6 Kevin Vaughn Captained 2009 National Champion Mine Rescue Team 10 Years of Growth Completed ARLP IPO; Broke ground for the Gibson mining complex Initiated $30 million Pattiki mine extension Kicked off expansion at the Dotiki mining complex Topped $500 million in revenues Acquired Warrior Coal Added 100 million tons of scrubber-quality coal at Elk Creek and Tunnel Ridge Started three development projects – Elk Creek, Mountain View and Van Lear Completed AHGP IPO; Acquired River View reserves; Completed Elk Creek and Mountain View mine developments Acquired 78 million tons of Illinois Basin reserves; Began River View construction. Expanded Warrior complex; Committed to Tunnel Ridge development 7 Began production operations at River View 199920002001200220032004200520062007200820098 Strong ethics, broad experience and a sense of urgency are characteristics of ARLP employees. Our men and women work hard and smart, and devices and plan to outfit all of our continuous their persistence steadies ARLP through market miners with this safety equipment and make this challenges, stringent and evolving government technology available to the rest of our industry. regulations and economic difficulties. Efforts of Both of these technologies were designed our team members are rewarded with competitive specifically for underground mining environments wages and benefit programs that further enhance by the research and development teams at our sense of priorities and possibilities. our Matrix Design Group subsidiary and both are approved by the U.S. Mine Safety and Workplace health and safety are fundamental to Health Administration. ARLP’s culture and 2009 was one of our safest years on record. Employees are empowered to ARLP is also committed to the social, economic champion the safety process, and their actions and environmental well-being of the communities and achievements continually make ARLP an in which we operate. Minimal surface mining employer of choice in all the regions in which and no mountain top removal is used for our we operate. Continuous training helps ensure coal production. All ARLP mining facilities are that safety procedures and state-of the-art underground and employ either room and pillar technology are second nature to our employees. or longwall mining techniques. From the moment As evidence, we are proud that our mine rescue planning and permitting begins through full participants brought home multiple first place production and beyond, we take measures to titles in the 2009 National Mine Rescue Competition. preserve and restore the environment surrounding our operations. For example, beginning in Our goal is to have an accident-free work 1994 our Mettiki Complex and the Maryland environment, and the highly advanced systems Department of Natural Resources engaged in used by our miners increase safety and efficiency. a cooperative effort to construct a trout rearing ARLP installed METS 2.1 (Miner & Equipment facility within the complex’s 10 million gallons per Tracking System) in all mine locations, well in day drainage system. Today the facility provides advance of MINER Act compliance schedules. a coldwater resource where trout fisheries can We also developed innovative proximity detection revitalize their stock. 9 Coal plays a significant role in fueling our country’s economic engine. Consider the following: Coal provides approximately half of America’s electricity generation, powers the steel industry, accounts for 93 percent of fossil fuel reserves in the United States, consistently costs less than other fuels and creates high-paying jobs. More than 134,000 are employed directly by the U.S. coal industry, more than 600,000 are employed indirectly, and the average wage of a miner is more than $72,000 – 59 percent higher than the average American wage. Coal’s supply of affordable 10 Values of Coal Fuels approximately half of U.S. electric generation Advances domestic energy security Drives economic growth Provides critical, high-paying jobs Costs consistently less than other energy sources Results in lower-cost electricity energy provides the foundation for America’s economic growth. Is abundant in reserve supply Coal also is important to the U.S. transportation industry. Nearly Meets growing energy needs Represents 93 percent of all U.S. fossil fuel reserves Outpaces other energy sources for global demand two-thirds of domestic shipments are moved by rail, and coal is the largest freight commodity transported by barges on the nation’s inland waterways. Large coal deposits are found in 38 of the 50 states, and total U.S. coal resources are estimated at nearly 4 trillion tons. More than 296 billion of those tons are considered recoverable using current technology. At current burn rates, the U.S. has enough supply to last well over 200 years. During the past decade, the coal industry and electricity providers have taken significant strides to advance technology and reduce regulated emissions. Advanced technologies currently under development have a target of reducing emissions to near zero. For the last six years, coal has been the world’s fastest-growing fuel. The International Energy Agency projects that by 2030 global demand for coal will increase more than 53 percent, which means in real terms there will be more growth in demand for coal than other sources of energy. With the United States holding more 10 than a quarter of the world’s known reserves, the forward-looking international supply/demand dynamics make U.S. coal increasingly attractive as a resource for global markets. 1 0 S T R A T E G I C C O A L M I N E C O M P L E X E S Alliance Resource Partners currently operates nine underground coal mine complexes and has a tenth under construction. The mines are located in the Illinois Basin, Central Appalachia and Northern Appalachia regions of the eastern United States. Reserves include low-sulfur, medium-sulfur and scrubber- quality coal, allowing Alliance to meet diverse customer needs. Illinois Indiana Ohio Pennsylvania Maryland 8 10 West Virginia 5 1 9 2 3 4 Kentucky 6 7 Virginia Illinois Basin Central Appalachia Northern Appalachia Mining Complexes 1. Pattiki Pattiki Mine 2. Dotiki Dotiki Mine 3. Warrior Warrior Mine 4. Hopkins Elk Creek Mine 5. Gibson Gibson North Mine 6. Pontiki Excel No. 2 & Van Lear Mines Transfer Terminal 7. MC Mining Excel No. 3 Mine 8. Mettiki Mountain View Mine 9. River View River View Mine Under Construction 10. Tunnel Ridge Estimated reserves: 70 million tons Mount Vernon Transfer Terminal Operates a coal loading terminal on the Ohio River Mine Development Projects Gibson South Estimated reserves: 54 million tons Penn Ridge Estimated reserves: 57 million tons 11 10 Reasons to Invest Proven track record of growth Positive long-term coal fundamentals Strong balance sheet and liquidity Consistent distribution growth and attractive tax-deferred yield Managed for sustainable cash flow growth Valued customer relationships Experienced, empowered employees Well-positioned in growing markets Inventory of growth projects Substantial ownership position clearly aligns management with unitholders 12 ARLP entered 2010 with a strong balance sheet, solid internal cash flow, sound contractual positions and visible growth opportunities. Our strength provides flexibility and allows us to operate efficiently in difficult markets and provide growth for our unitholders. As the coal-producing industry’s only publicly traded master limited partnership, we are keenly aware that distributions are key to those who invest in our future. With that in mind, our primary business objective is to keep Alliance positioned for sustainable, capital-efficient growth in distributable cash flows. This approach provides us the opportunity to deliver on our goal of providing distribution increases to ARLP and AHGP unitholders that are in the top tier of the MLP sector. Alliance again achieved that goal in 2009 as we increased distributions to ARLP unitholders by 8.4 percent and by 12.4 percent for AHGP unitholders, both compared to 2008 year-end distributions. Looking forward, positive trends already taking place in 2010 have us optimistic about the potential for additional growth in the current year. With our strong customer relationships and more than 29.6 million tons of coal already committed and priced for the next 12 months, ARLP currently anticipates the following increases in 2010: • Revenues* – 24-31 percent • Coal production – 15-17 percent • Net income – 25-40 percent • Sales volumes – 21-24 percent • EBITDA – 20-32 percent ARLP has set new financial records for nine straight years. We are counting on 2010 to extend that streak to 10 in a row. * Excludes transportation revenues 13 Joseph W. Craft III ARLP President, Chief Executive Officer and Director AHGP President, Chief Executive Officer and Chairman of the Board March 3, 2010 Reconciliation Of GAAP "Cash Flows Provided By Operating Activities" To Non-GAAP "EBiTdA" Reconciliation Of Non-GAAP "EBiTdA" To GAAP "Net income" Year Ended December 31 (in thousands) 2009 2008 2007 2006 2005 $ Cash flows provided by operating activities Non-cash compensation expense Asset retirement obligations Coal inventory adjustment to market Net gain on foreign currency exchange Net gain (loss) on sale of property, plant and equipment Gain on sale of coal reserves Gain from insurance recoveries for property damage Gain from insurance settlement proceeds received in a prior period Loss on retirement of damaged vertical belt equipment Other Net effect of working capital changes Interest expense, net Income tax expense (benefit) ) ) ) 282,741 (3,582 (2,678 (3,030 653 ) (136 - - - - (537 36,440 29,798 708 ) EBITDA Depreciation, depletion and amortization Interest expense, net Income tax (expense) benefit Cumulative effect of accounting change 340,377 (117,524 (29,798 (708 - ) ) ) $ 261,041 (3,931 (2,827 (452 - 911 5,159 - - - (366 (19,661 18,418 (480 257,812 (105,278 (18,418 480 - ) ) ) ) ) ) ) ) $ ) ) ) ) 244,012 (3,925 (2,419 (21 - 3,189 - 2,357 5,088 - ( 811 7,898 9,952 1,669 266,989 (85,310 (9,952 (1,669 - ) ) ) Net income Net (income) loss attributable to noncontrolling interest 192,347 (190 ) 134,596 (420 ) 170,058 332 $ 250,923 (4,112 (2,101 (319 - 1,188 - - - - (1,119 (5,317 9,175 2,443 ) ) ) ) ) 250,761 (66,489 (9,175 (2,443 112 ) ) ) 172,766 161 $ ) ) ) ) ) ) 193,618 (8,193 (1,918 (573 - (179 - - - (1,298 (580 34,770 11,816 2,682 230,145 (55,637 (11,816 (2,682 - ) ) ) 160,010 - Net income of ARLP $ 192,157 $ 134,176 $ 170,390 $ 172,927 $ 160,010 EBITDA is defined as net income of ARLP before net interest expense, income taxes, depreciation, depletion and amortization and net income attributable to noncontrolling interest. EBITDA is used as a supplemental financial measure by our management and by external users of our financial statements such as investors, commercial banks, research analysts and others to assess: the financial performance of our assets without regard to financing methods, capital structure or historical cost basis; the ability of our assets to generate cash sufficient to pay interest costs and support our indebtedness; our operating performance and return on investment as compared to those of other companies in the coal energy sector, without regard to financing or capital structures; and the viability of acquisitions and capital expenditure projects and the overall rates of return on alternative investment opportunities. EBITDA should not be considered as an alternative to net income, income from operations, cash flows from operating activities or any other measure of financial performance presented in accordance with generally accepted accounting principles. EBITDA is not intended to represent cash flow and does not represent the measure of cash available for distribution. Our method of computing EBITDA may not be the same method used to compute similar measures reported by other companies, or EBITDA may be computed differently by us in different contexts (i.e., public reporting versus computation under financing agreements). See our website, www.arlp.com for reconciliation information prior to 2005. Forward-Looking Statements This Annual Report contains forward-looking statements and information that are based on the beliefs of Alliance Resource Partners, L.P. and Alliance Holdings GP, L.P. (the “Partnerships”) and those of their respective general partners (the “General Partners”), as well as assumptions made by and information currently available to them. When used in this Annual Report, words such as “anticipate,” “project,” “expect,” “plan,” “goal,” “forecast,” “intend,” “could,” “believe,” “may,” and similar expressions and statements regarding the plans and objectives of the Partnerships for future operations, are intended to identify forward-looking statements. Although the Partnerships and their General Partners believe that such expectations reflected in such forward-looking statements are reasonable at the time such statements are made, neither the Partnerships nor the General Partners can give assurances that such expectations will prove to be correct. Such statements are subject to a variety of risks, uncertainties and assumptions. For a description of such risks and uncertainties, please see the forward-looking statements included in the Annual Reports on Form 10-K for Alliance Resource Partners, L.P. and Alliance Holdings GP, L.P. which are available by request or can be viewed on the partnerships’ respective Web sites. If one or more of these risks or uncertainties materialize, or if underlying assumptions prove incorrect, actual results may vary materially from those the Partnerships anticipated, estimated, projected or expected. The Partnerships have no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. General Information Partnership Tax details The following information applies to Alliance Resource Partners, L.P. and Alliance Holdings GP, L.P. unless specified otherwise. Partnership Offices 1717 South Boulder Avenue, Suite 400 Tulsa, OK 74119 (918) 295-7600 Partnership Mailing Address P.O. Box 22027 Tulsa, OK 74121-2027 Contact Brian L. Cantrell Senior Vice President and Chief Financial Officer (918) 295-7674 brian.cantrell@arlp.com Business Structure Publicly traded master limited partnership. Common Unit Trading Common units are traded on the NASdAQ Global Select Market. NASdAQ Ticker Symbols Alliance Resource Partners, L.P. Alliance Holdings GP, L.P. ARLP AHGP Common Units Outstanding (12/31/2009) ARLP 36,661,029 common units AHGP 59,863,000 common units independent Auditors deloitte & Touche LLP One Technology Center 100 South Cincinnati Avenue, Suite 700 Tulsa, OK 74103 Unitholder Information Cash distributions The partnerships expect to make quarterly distributions to unitholders of record on the applicable record dates according to the following schedules: Alliance Resource Partners, L.P. Within 45 days after the end of each March, June, September and december. Alliance Holdings GP, L.P. Within 50 days after the end of each March, June, September and december. Unitholders are partners in the partnership and receive quarterly cash distributions. Cash distributions generally are not taxable as long as the individual unitholder’s tax basis remains above zero. A partnership generally is 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. Schedule K-1 Unitholders of record 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 tax return. Schedule K-1 information also is available on our Web sites. Please visit www.arlp.com and www.ahgp.com. Unitholders should refer questions regarding their Schedule K-1 as follows: By Mail K-1 Support P.O. Box 799060 dallas, TX 75379-9060 By Phone/Fax Alliance Resource Partners, L.P. Phone (800) 485-6875 Fax (866) 554-3842 Alliance Holdings GP, L.P. Phone (866) 867-4060 Fax (866) 554-3842 Transfer Agent and Registrar direct requests regarding transfer of units, lost certificates, lost distribution checks or address changes to: American Stock Transfer and Trust Company Attn: Shareholder Services 59 Maiden Lane – Plaza Level New York, NY 10038 (800) 937-5449 investor information and Form 10-K For more information or free copies of the 2009 Form 10-K, please contact the appropriate e-mail address or phone number listed below. Form 10-K also may be downloaded from the partnerships’ Web sites. Alliance Resource Partners, L.P. investorrelations@arlp.com E-mail: Phone: (918) 295-7674 Web site: www.arlp.com Alliance Holdings GP, L.P. investorrelations@ahgp.com E-mail: Phone: (918) 295-1415 Web site: www.ahgp.com 15 P.O. Box 22027, Tulsa, Oklahoma 74121-2027 | www.arlp.com | www.ahgp.com 16 

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