Alliance Resource Partners
Annual Report 2010

Plain-text annual report

Alliance Resource Partners, L.P. Alliance Holdings GP, L.P. 2 0 1 0 A N N U A L R E P O R T Why Alliance? * Standard & Poor’s Capital IQ, November 12, 2010 ranking of 7,500 companies. 1 2 Alliance Mirrors Success. Record-breaking financials ten years straight makes Alliance Resource Partners, L.P. (ARLP) an investment story worth sharing. Steady and strong, ARLP has carefully advanced complex, is currently under construction and its mission since 1999 when our partnership expected to start longwall production in early formed. In ten short years, we’ve built upon 2012. ARLP also manages a coal loading terminal our original coal mining operations, adding on the Ohio River. mining units and facilities and transforming our partnership into an industry leader. Today, ARLP We believe our culture of credibility and is the fourth-largest coal producer in the eastern excellence allows every member of the ARLP United States and the tenth-largest in the nation. family to contribute to our partnership’s success. Employees epitomized that philosophy in 2010 Many things motivate us, but topping the list is our by realizing a lost-time accident rate that was role in supplying a low-cost energy source critical one-third below the industry average and the to the American way of life and economic growth. lowest rate in our partnership’s history. We ARLP is a diversified producer and marketer of also set new benchmarks for production, sales coal to major utilities and industrial users primarily volumes, revenues, EBITDA and net income. in the United States. We also export about five percent of our annual coal sales around the world. The first publicly traded master limited ARLP has 697 million tons of proven and provided unitholders a 31 percent compounded probable coal reserves and we operate a total annual return over the past decade. The power of of nine mining complexes in the Illinois Basin, our strength in numbers continues to unfold. partnership in our industry peer group, ARLP has Northern Appalachian and Central Appalachian coal-producing regions. Tunnel Ridge, our tenth 3 Strong Financials Provide Operating Strength. ARLP’s healthy balance sheet reflects conservative leverage and ample liquidity. As opportunities and challenges merged during In addition, our net income per basic and diluted 2010, ultimately the framework materialized to limited partner unit increased 87.6 percent to $6.68. achieve the best financial results our partnership has ever recorded. Achievements like these allow ARLP to share even more success with unitholders. The fourth quarter Our marketing team’s strategy strengthened ARLP’s of 2010 was the eleventh consecutive quarter that long-term domestic coal sales position and also ARLP’s Board of Directors increased unitholders’ moved more coal into export markets. The team’s cash distribution and it did so while maintaining efforts reduced our coal inventory, increased one of the highest distribution coverage ratios in the the average year-over-year coal sales price by master limited partnership sector. 9.9 percent to $51.21 per ton and bumped sales volume 21.3 percent to a record 30.3 million tons. ARLP is committed to ensuring that sophisticated safety technology is part of all existing facilities On the production side of our business, ARLP’s and expansion projects. This includes making operating groups delivered the highest output in investments in advanced communications and our partnership’s history. They successfully tracking technology and sophisticated ventilation expanded the River View complex, which began systems. During 2010, we dedicated $289.9 million production in 2009, to eight continuous mining in capital expenditure funds primarily for our River units. River View’s 600 employees are now able View Mine expansion and Tunnel Ridge development, to produce 7 million tons of high-sulfur coal per as well as for maintenance projects totaling year. Our Pattiki Mine was idled for eight weeks approximately $90.5 million. during 2010 due to a vertical hoist conveyor system failure. During that period as the mine was phased We completed a $300 million bank term loan at back to full capacity, other ARLP operations the end of 2010, taking advantage of attractive accelerated their coal production to help debt markets. The financing increased our liquidity, overcome this challenge. strengthened our balance sheet and enhanced our ability to pursue new growth opportunities. These actions and others pushed revenues, EBITDA* and net income to all-time ARLP highs. A comparison These are more than numbers. They demonstrate of our 2010 results with those in 2009 shows: the fundamental achievements that allow us to push forward with continued excellence in 2011 and beyond. Revenues +30.8 percent to $1.6 billion EBITDA +46.7 percent to $499.5 million Net income +67.1 percent to $321.0 million * Please see the inside back cover for a definition of EBITDA and GAAP to non-GAAP reconciliation information. 4 S N O T I N O L L M I ARLP Coal - Tons Produced 2006-2010 ARLP Coal - Tons Sold 2006-2010 35 30 25 20 15 10 S N O T I N O L L M I 35 30 25 20 15 10 2 0 0 6 2 0 0 7 2 0 0 8 2 0 0 9 2 0 1 0 2 0 0 6 2 0 0 7 2 0 0 8 2 0 0 9 2 0 1 0 ARLP Revenues 2006-2010 ARLP EBITDA 2006-2010 I S N O L L M N I I S R A L L O D I S N O L L M N I I S R A L L O D S R A L L O D 1800 1600 1400 1200 1000 800 I S N O L L M N I I S R A L L O D 600 500 400 300 200 100 2 0 0 6 2 0 0 7 2 0 0 8 2 0 0 9 2 0 1 0 2 0 0 6 2 0 0 7 2 0 0 8 2 0 0 9 2 0 1 0 ARLP Net Income 2006-2010 Total Assets 2006-2010 350 300 250 200 150 100 I S N O L L M N I I S R A L L O D 1600 1400 1200 1000 800 600 2 0 0 6 2 0 0 7 2 0 0 8 2 0 0 9 2 0 1 0 2 0 0 6 2 0 0 7 2 0 0 8 2 0 0 9 2 0 1 0 ARLP Distributions Paid 2001-2010 4.00 3.00 2.00 1.00 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 2 0 1 0 5 Why Coal? 7 ALMOST HALF OF AMERICA’S ELECTRICITY IS TRADITIONALLY GENERATED BY COAL. Recoverable coal reserves in the United States exceed that of any other country and represent more than one-quarter of the world’s total coal reserves. Half of the coal produced by ARLP alone each year generates the same amount of power created annually by all of the nation’s available wind energy. Powered Up. Lights On. Coal is by far the most abundant fossil fuel in the United States for electricity generation. Life takes on new possibilities every single day the U.S. total of coal-fired generating capacity to with the flip of a switch. Electric utilities (like those 330 gigawatts. with whom ARLP has significant long-term coal supply agreements) power homes, businesses, The coal and electric industries, in conjunction hospitals, schools and industries. Electricity is with government agencies, work diligently core to America’s prosperity, jobs, technology, to reduce emissions associated with coal education, comfort and entertainment. consumption. Power plant scrubber equipment, catalytic converters and electrostatic The coal supply in the U.S. exceeds that of any precipitators are examples of enhanced other fossil fuel. The nation’s recoverable coal technology employed by utilities to burn coal reserves pack the energy equivalent of one trillion more efficiently and cleanly than ever before. barrels of oil. That amount of energy is roughly The efforts have been successful: Emissions of equal to the entire world’s known oil reserves. major pollutants from coal-fueled power plants have been reduced by 84 percent per unit of The U.S. depends on approximately 600 electricity generated since 1970. Meanwhile, coal-fired plants for power. These facilities demand for coal to generate electricity has are projected to remain the backbone of the nearly doubled during this time. Without a doubt, nation’s electricity generation for years to come. coal is an increasingly clean and integral part of Between now and 2035, 21 gigawatts of new America’s energy future. generation are expected to be added, increasing 8 Why Now? 11 Production Growth + Sales Growth = Success. We entered 2011 with about 95 percent of ARLP’s estimated production committed and priced and with solid contracts booked for 2012 and beyond. A legacy of record-setting achievements provides Gibson South is an ARLP expansion project ARLP the necessary commitment to reach even that is in the permitting process. Located near higher. This is a challenge we accept with Princeton, Indiana, Gibson South has about enthusiasm, supported by calculated planning: 48 million tons of medium-sulfur coal and Coal sales on the books for 2011 have grown to production capacity of about 3.0 million tons between 32.0 million tons and 33.0 million tons, to 3.5 million tons per year. Our goal is to bring with all but about 5 percent under contract and Gibson South online sometime during 2014. priced. To meet this robust need, production has been ramped up to deliver between 31.6 million ARLP’s other development projects remain on tons and 32.6 million tons of coal. Our completed the horizon. Penn Ridge, located in Washington River View complex expansion is a critical key to County, Pennsylvania, has an estimated 57 million delivering this increased tonnage. tons of high-sulfur coal reserves. Sebree, located in Western Kentucky, has an estimated 24 million The momentum will continue when our new tons of high-sulfur coal reserves. Tunnel Ridge complex starts its longwall production in early 2012. Located in the Northern The flexibility and willingness to shift resources Appalachian coal region, Tunnel Ridge holds when and where needed allow ARLP to meet 97 million tons of high-sulfur Pittsburg No. 8 coal. customer expectations with exceptional service. When the mine is at full production capacity, a team of 340 employees will produce approximately 5.5 million tons to 6 million tons a year. 12 Disciplined Planning. Excellent Results. 2011 is on pace to extend ARLP’s bottom line performance streak for another year. Responsible management is ARLP’s foundation ARLP is actively participating in the export for success. We understand the importance market – moving about 1.0 million tons of electricity plays in advanced society and metallurgical coal overseas – to capture the remain impressed with our customers’ ability favorable international market dynamics. As to consistently deliver reliable, low-cost power we increase our production, ARLP will look for to consumers. We respect and value our additional opportunities to participate in the employees, as they are responsible for ARLP’s growing international demand for coal. achievements. We appreciate the support of our partners and unitholders and we are committed To fill customer demand, it is critical that ARLP’s to continue providing them the solid returns they mines remain in excellent shape and that we expect from us. continue to grow. During 2011, ARLP estimates capital expenditures will range from $320.0 million Emerging economies, led by China and India, to $360.0 million to cover ongoing development are reshaping the global energy landscape. activities at Tunnel Ridge, general maintenance and These countries are relying heavily on coal to infrastructure improvements. As a result of these fuel their economic growth and in turn, improve investments, ARLP expects 2011 depreciation, the quality of life for their people. As worldwide depletion and amortization expenses to increase demand continues to increase, the U.S. coal to a range of $160.0 million to $170.0 million, industry is benefitting from sales to higher- compared with $146.9 million in 2010. On a priced export markets. If export demand grows five-year planning horizon, ARLP estimates as it did in 2010, forward pricing dynamics will maintenance capital expenditures of approximately continue to flourish. $4.70 per ton produced. Actual expenses will 13 BY 2035, COAL IS EXPECTED TO REMAIN THE PRIME SOURCE FOR ELECTRICITY, IN THE UNITED STATES. COAL 43% OTHER 32% NATURAL GAS 25% vary due to timing of construction and maintenance schedules, as well as changes in Mine Safety and Health Administration laws and regulations. To keep pace as the world’s fastest-growing fuel, the coal industry must employ dedicated and highly motivated people. Today, the coal industry provides direct jobs for almost 90,000 Americans who live across 25 states. ARLP’s union-free workforce totaled 3,558 employees at the end of 2010 and we expect that number to increase to 3,700 by the end of 2011. ARLP is committed to attracting people who understand how their efforts help power America’s success. ARLP continuously implements and often establishes the coal industry’s best practices regarding safe working environments, equipment, ongoing training, compensation, benefits and recognition. As a result, ARLP has developed a team of professionals in our mining complexes and support offices whose operational practices drive superior earnings performance. By aligning the interests of customers, employees, management and unitholders, ARLP has been able to achieve a consistent and stable record of cash flow and distribution growth. Looking forward, we will continue to rely on our financial integrity as we further expand our strength in numbers. Mining Complexes Illinois Basin Central Appalachia Northern Appalachia 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 Mine 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: 97 million tons Mine Development Projects 11. Gibson South Estimated reserves: 48 million tons 12. Penn Ridge Estimated reserves: 57 million tons 13. Sebree Estimated reserves: 24 million tons Transfer Terminal ▲ Mount Vernon Transfer Terminal Operates a coal loading terminal on the Ohio River 15 ARLP remains committed to a business plan that inspires success and continues to reward supporters. The journey has been exceptional for ten years and it is our intention to continue forward on the same path. Our determination to be a leader within the coal industry is a commitment ARLP takes seriously. We will continue to manage our business with a disciplined approach and thoughtfully pursue new opportunities. We also will remain focused on delivering exceptional value to our unitholders by creating sustainable growth in cash flow and distributions. Much of the foundation for a successful 2011 already is in place and should result in greater coal sales volumes and sales prices. Those achievements are expected to produce the following increases for 2011, when compared with our 2010 results: Revenues* +10.8 to 17.1 percent, or $1.75 billion to $1.85 billion Net income +7.5 to 20.0 percent, or $345.0 million to $385.0 million EBITDA +9.0 to 17.0 percent, or $545.0 million to $585.0 million * Excludes transportation revenues ARLP’s anticipated 2011 results are expected to benefit from a full year of River View running all eight of its mining units and the Pattiki Mine’s return to full production capacity. The numbers also take into account challenges facing our industry: the domestic steam coal supply remains under pressure from growth in global coal demand and production is constrained due to heightened regulatory intervention. Our long-term view of the supply/demand dynamics in the domestic market remains positive. After two difficult years, the United States economy is showing signs of growth, raising expectations for higher electricity consumption in the future and pointing to increased coal demand. Your support provides ARLP confidence and strength. Thank you. Joseph W. Craft III ARLP President, Chief Executive Officer and Director AHGP President, Chief Executive Officer and Chairman of the Board March 8, 2011 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) 2010 2009 2008 2007 2006 $ Cash flows provided by operating activities Non-cash compensation expense Asset retirement obligations Coal inventory adjustment to market Net gain (loss) 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 vertical hoist conveyor system Other Net effect of working capital changes Interest expense, net Income tax expense (benefit) EBITDA Depreciation, depletion and amortization Interest expense, net Income tax (expense) benefit Cumulative effect of accounting change $ 520,588 (4,051 (2,579 (498 (274 (234 - - - (1,204 (1,448 (42,402 29,862 1,741 ) ) ) ) ) ) ) ) 499,501 (146,881 ) (29,862 ) (1,741 ) - ) ) ) 282,741 (3,582 (2,678 (3,030 653 ) (136 - - - - (537 36,440 29,798 708 ) 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 321,017 - 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 Net income attributable to ARLP $ 321,017 $ 192,157 $ 134,176 $ 170,390 $ $ 172,927 EBITDA is defined as net income attributable to ARLP before net interest expense, income taxes, depreciation, depletion and amortization, cumulative effect of accounting change 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). 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,” “continue,” “estimate,” “will” 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. (ARLP) and Alliance Holdings GP, L.P. (AHGP) 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 (12/31/2010) ARLP 36,716,855 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 2010 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. E-mail: investorrelations@arlp.com (918) 295-7674 Phone: Web site: www.arlp.com Alliance Holdings GP, L.P. investorrelations@ahgp.com E-mail: (918) 295-1415 Phone: Web site: www.ahgp.com P.O. Box 22027, Tulsa, Oklahoma 74121-2027 | www.arlp.com | www.ahgp.com 

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