My last post on Alliance Resources explored the differences between Alliance Resources (the best performing coal operation in North America) with Patriot Coal (famously and massively bankrupt).
Patriot produced only slightly less coal per worker (a key measure of cost-competitiveness) and it was higher quality coal.
Patriot had less debt.
They were about the same size - but alas - Patriot was bankrupt and so difficult to run they were closing mines in bankruptcy.
The differences lay in the balance sheet where Patriot had large post retirement benefit obligations and Alliance does not - and Patriot had large workers compensation obligations and Alliance does not.
The first one I understood. Patriot was heavily unionized. Alliance was not.
However the second one I did not understand. These were multi-mine operations in similar jurisdictions with similar numbers of employees. They both self-insure workers compensation. Unless one operation is massively safer than the other they should have similar workers compensation obligations.
I was puzzled.
So I went looking.
Here is the flows into and out of the workers compensation provision for the last full (non-bankrupt) year at the last 10-K for Patriot Coal...
(Dollars in thousands)
Change in benefit obligation:
Beginning of year obligation
Net change in actuarial gain
Benefit and administrative payments
Net obligation at end of year
Change in plan assets:
Fair value of plan assets at beginning of period
Fair value of plan assets at end of period
Obligation at end of period
Patriot Coal had $8.889 million in payments and an estimated total obligation of $185.6 million. The estimate of total obligation is 20.9 times current payments.
This compares with the last 10-K disclosure for Alliance Resources:
Payments were $10.48 million - a little higher than Patriot. However reserves were only 77.0 million. The estimate of total obligations is only 7.35 times.
Alliance Resources is - relatively to Patriot - extremely under-reserved for workers compensation.
If we were to reserve Alliance Resources on the same basis as Patriot we would have to add $141 million to reserves.
This difference has accumulated over time. If Alliance had used Patriots conservative reserving pre-tax earnings (and hence EBITDA) would be cumulatively $141 million lower than were actually recorded. This is clearly part of the reason why Alliance appears so profitable relative to the competition.
More importantly because Alliance is an MLP which distributes roughly its EBITDA, if a more conservative reserving had been used Alliance's distributions would cumulatively been about $140 million lower.
I wonder how the workers expecting to be paid compensation feel about having the money backing their compensation distributed to MLP unit holders?
In my crystal ball I see a class action.
Dear Class Action lawyers - there is this little disclosure in the 10-K which might make any future class action more - well - rewarding. I will leave it to the unit holders, their lawyers and the general partner to interpret this:
Your liability as a limited partner may not be limited, and our unitholders may have to repay distributions or make additional contributions to us under certain circumstances.
As a limited partner in a partnership organized under Delaware law, you could be held liable for our obligations to the same extent as a general partner if you participate in the "control" of our business. Our general partners generally have unlimited liability for the obligations of the partnership, except for those contractual obligations of the partnership that are expressly made without recourse to our general partners. Additionally, the limitations on the liability of holders of limited partner interests for the obligations of a limited partnership have not been clearly established in many jurisdictions.
Under certain circumstances, our unitholders may have to repay amounts wrongfully distributed to them. Under Delaware law, we may not make a distribution to our unitholders if the distribution would cause our liabilities to exceed the fair value of our assets. Delaware law provides that for a period of three years from the date of the impermissible distribution, partners who received the distribution and who knew at the time of the distribution that it violated Delaware law will be liable to the partnership for the distribution amount. Liabilities to partners on account of their partnership interest and liabilities that are non-recourse to the partnership are not counted for purposes of determining whether a distribution is permitted.