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MarketScreener Homepage  >  Equities  >  Nasdaq  >  Alliance Resource Partners, L.P.    ARLP

ALLIANCE RESOURCE PARTNERS, L.P.

(ARLP)
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Alliance Resource Partners L P : LP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-K)

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02/20/2020 | 05:29pm EDT

General

The following discussion of our financial condition and results of operations should be read in conjunction with the historical financial statements and notes thereto included in Item 8. Financial Statements and Supplementary Data where you can find more detailed information in "Note 1 - Organization and Presentation" and "Note 2 - Summary of Significant Accounting Policies" regarding the basis of presentation supporting the following financial information.




Executive Overview



We are a diversified natural resource company that generates income from the production and marketing of coal to major domestic and international utilities and industrial users as well as income from oil & gas mineral interests located in strategic producing regions across the United States. We are currently the second-largest coal producer in the eastern United States with seven underground mining complexes in Illinois, Indiana, Kentucky, Maryland and West Virginia, as well as a coal-loading terminal in Indiana. In addition, the mineral interests we own are in premier oil & gas producing regions of the United States, primarily in the Permian, Anadarko and Williston Basins.

Our mining operations are located near many of the major eastern utility generating plants and on major coal hauling railroads in the eastern United States. Our River View and Tunnel Ridge mines and Mt. Vernon transloading facility are located on the Ohio River. As of December 31, 2019, we had approximately 1.69 billion tons of proven and probable coal reserves in Illinois, Indiana, Kentucky, Maryland, Pennsylvania and West Virginia. We believe we control adequate reserves to implement our currently contemplated mining plans. Please see "Item 1. Business-Coal Operations - Detail" for further discussion of our mines.

In 2019, we sold 39.3 million tons of coal and produced 40.0 million tons. The coal we sold in 2019 was approximately 26.2% low-sulfur coal, 65.2% medium-sulfur coal and 8.6% high-sulfur coal. Based on market expectations, we classify low-sulfur coal as coal with a sulfur content of less than 1.5%, medium-sulfur coal as coal with a sulfur content of 1.5% to 3%, and high-sulfur coal as coal with a sulfur content of greater than 3%. The Btu content of our coal ranges from 11,400 to 13,200.

During 2019, approximately 78.8% of our tons sold were purchased by United States electric utilities and 17.9% were sold into the international markets through brokered transactions. The balance of tons sold were to third-party resellers and industrial consumers. Although many utility customers continue to favor a shorter-term contracting strategy, in 2019, approximately 78.5% of our sales tonnage was sold under long-term contracts. Our long-term contracts contribute to our stability and profitability by providing greater predictability of sales volumes and sales prices. In 2019, approximately 90.9% of our medium- and high-sulfur coal was sold to utility plants with installed pollution control devices.

On January 3, 2019, our subsidiary, Alliance Royalty, LLC completed the AllDale Acquisition and acquired all of the limited partner interests not owned by Cavalier Minerals in AllDale I and AllDale II and the general partner interests in AllDale I & II for $176.2 million. On February 8, 2019, our equity investment of Series A-1 Preferred Interests in Kodiak was redeemed for $135.0 million cash. On August 2, 2019, our subsidiary, AR Midland acquired certain mineral interests in the Wing Acquisition for $144.9 million. As a result of the AllDale Acquisition, the Wing Acquisition, our previous AllDale investments held through Cavalier Minerals and our investment in AllDale III, we hold approximately 55,700 net royalty acres located primarily in the Permian (Delaware and Midland), Anadarko (SCOOP/STACK) and Williston (Bakken) Basins.

The AllDale and Wing Acquisitions provide us with diversified exposure to industry leading operators and are consistent with our general business strategy to grow our oil & gas mineral interest business. For more information on these transactions, please read "Item 8. Financial Statement and Supplemental Data-Note 3 - Acquisitions" and "-Note 12 - Investments".

As discussed in more detail in "Item 1A. Risk Factors," our results of operations could be impacted by variability in coal sales prices in addition to prices for items that are used in coal production such as steel, electricity and other supplies, unforeseen geologic conditions or mining and processing equipment failures and unexpected maintenance problems, and by the availability or reliability of transportation for coal shipments. Moreover, the mining regulatory environment in which we operate has grown increasingly stringent as a result of legislation and initiatives pursued during previous


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administrations. Additionally, our results of operations could be impacted by our ability to obtain and renew permits necessary for our operations, secure or acquire coal reserves, or find replacement buyers for coal under contracts with comparable terms to existing contracts. As outlined in "Item 1. Business-Environmental, Health, and Safety Regulations," a variety of measures taken by regulatory agencies in the United States and abroad in response to the perceived threat from climate change attributed to GHG emissions could substantially increase compliance costs for us and our customers and reduce demand for fossil fuels including coal which could materially and adversely impact our results of operations.

We are dependent on third-party Operators for the exploration, development and production of our oil & gas mineral interests; therefore, the success and timing of drilling and development of our oil & gas mineral interests depend on a number of factors outside our control. Some of those factors include the Operators' capital costs for drilling, development and production activities, the Operators' ability to access capital, the Operators' selection of counterparties for the marketing and sale of production and oil & gas prices in general, among others, as outlined in "Item 1. Business-Regulation of the Oil & Gas Industry". The operations on the properties in which we hold oil & gas mineral interests are also subject to various governmental laws and regulations. Compliance with these laws and regulations could be burdensome or expensive for these Operators and could result in the Operators incurring significant liabilities, either of which could delay production and may ultimately impact the Operators' ability and willingness to develop the properties in which we hold oil & gas mineral interests.

For additional information regarding some of the risks and uncertainties that affect our business and the industries in which we operate, see "Item 1A. Risk Factors."

Our principal expenses related to the production of coal are labor and benefits, equipment, materials and supplies, maintenance, royalties and excise taxes in addition to capital required to maintain our current levels of production. We employ a totally union-free workforce. Many of the benefits of our union-free workforce are related to higher productivity and are not necessarily reflected in our direct costs. In addition, transportation costs may be substantial and are often the determining factor in a coal consumer's contracting decision. The principal expenses related to our minerals interests business are production and ad valorem taxes.

Our primary business strategy is to create sustainable, capital-efficient growth in available cash to maximize the return of cash to our unitholders by:

? expanding our operations by adding and developing mines and coal reserves in

existing, adjacent or neighboring properties;

? extending the lives of our current mining operations through acquisition and

development of coal reserves using our existing infrastructure;

? continuing to make productivity improvements to remain a low-cost producer in

each region in which we operate;

strengthening our position with existing and future customers by offering a

? broad range of coal qualities, transportation alternatives and customized

services;

? developing strategic relationships to take advantage of opportunities within

the coal and oil & gas industries and MLP sector; and

? continuing to make investments in oil & gas mineral interests in various

geographic locations within producing basins in the continental United States.

As of December 31, 2019, we had three reportable segments: Illinois Basin, Appalachia and Minerals. We also have an "all other" category referred to as Other and Corporate. The two coal reportable segments correspond to major coal producing regions in the eastern United States with similar economic characteristics including coal quality, geology, coal marketing opportunities, mining and transportation methods and regulatory issues. The Minerals segment includes our oil & gas mineral interests which are located in premier oil & gas basins in the United States.

As a result of the AllDale Acquisition, we now control the underlying oil & gas mineral interests held by AllDale I & II. This control over the oil & gas mineral interests held by AllDale I & II reflects a strategic change in how we manage our business and how resources are allocated by our chief operating decision maker. Due to this strategic change, we realigned our reportable segments in the first quarter of 2019 to include our oil & gas mineral interests within a new Minerals reportable segment. The mineral interests acquired through the Wing Acquisition in August 2019 are also included within the Minerals reportable segment. As a part of our realignment, we have also included our Mt. Vernon Transfer Terminal, LLC ("Mt. Vernon") and Mid-America Carbonates, LLC ("MAC") in the Illinois Basin reportable


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segment rather than Other and Corporate to better reflect our Illinois Basin related activities. Prior periods have been recast to include our oil & gas mineral interests in the Minerals segment, and Mt. Vernon and MAC in the Illinois Basin segment.

Illinois Basin reportable segment includes our operating mining complexes (a)

Gibson County Coal's mining complex, which includes the Gibson North and Gibson

South mines, (b) Warrior's mining complex, (c) River View's mining complex and

? (d) the Hamilton mining complex. The Illinois Basin reportable segment also

includes our operating Mt. Vernon coal loading terminal in Indiana on the Ohio

River. The Gibson North mine was idled in the fourth quarter of 2019 in

response to market conditions.

The Illinois Basin reportable segment also includes MAC and other support services as well as non-operating mining complexes (a) Webster County Coal's Dotiki mining complex, which ceased production in August 2019, (b) White County Coal, LLC's Pattiki mining complex, (c) the Hopkins County Coal mining complex, and (d) Sebree's mining complex.

Appalachia reportable segment includes our operating mining complexes (a) the

Mettiki mining complex, (b) the Tunnel Ridge mining complex and (c) the MC

? Mining mining complex. The Mettiki mining complex includes Mettiki Coal (WV)'s

Mountain View mine and Mettiki Coal (MD)'s preparation plant. The Appalachia

reportable segment also includes Penn Ridge assets, which is primarily coal

   mineral interests.



Minerals reportable segment includes oil & gas mineral interests held by AR

? Midland and AllDale I & II, and includes Alliance Minerals equity interest in

both AllDale III and Cavalier Minerals. AR Midland acquired its mineral

interests in the Wing Acquisition.

Other and Corporate marketing and administrative activities include the Matrix

Group, Alliance Coal's coal brokerage activity and Alliance Minerals' prior

equity investment in Kodiak. In February 2019, Kodiak redeemed our equity

investment. In addition, Other and Corporate includes certain Alliance Resource

? Properties' land and mineral interest activities, Pontiki Coal, LLC's workers'

compensation and pneumoconiosis liabilities, Wildcat Insurance, which assists

the ARLP Partnership with its insurance requirements, and AROP Funding, LLC

("AROP Funding") and Alliance Resource Finance Corporation ("Alliance

   Finance").



How We Evaluate Our Performance

Our management uses a variety of financial and operational measurements to analyze our performance. Primary measurements include the following: (1) raw and saleable tons produced per unit shift; (2) coal sales price per ton; (3) BOE produced; (4) Price per BOE; (5) Segment Adjusted EBITDA Expense per ton; (6) EBITDA; and (7) Segment Adjusted EBITDA.

Raw and Saleable Tons Produced per Unit Shift. We review raw and saleable tons produced per unit shift as part of our operational analysis to measure the productivity of our operating segments, which is significantly influenced by mining conditions and the efficiency of our preparation plants. Our discussion of mining conditions and preparation plant costs are found below under "-Analysis of Historical Results of Operations" and therefore provides implicit analysis of raw and saleable tons produced per unit shift.

Coal Sales Price per Ton. We define coal sales price per ton as total coal sales divided by tons sold. We review coal sales price per ton to evaluate marketing efforts and for market demand and trend analysis.

Oil & gas BOE sold. We monitor and analyze our BOE sales volumes from the various basins that comprise our portfolio of mineral interests. We also regularly compare projected volumes to actual volumes reported and investigate unexpected variances.

Price per BOE. We define price per BOE as total oil & gas royalties divided by BOE produced. We review price per BOE to evaluate performance against budget and for trend analysis.

Segment Adjusted EBITDA Expense per Ton. We define Segment Adjusted EBITDA Expense per ton (a non-GAAP financial measure) as the sum of operating expenses, coal purchases and other expense divided by total tons sold. We review Segment Adjusted EBITDA Expense per ton for cost trends.



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EBITDA. We define EBITDA (a non-GAAP financial measure) as net income attributable to ARLP before net interest expense, income taxes and depreciation, depletion and amortization. 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. We believe that the presentation of EBITDA provides useful information to investors regarding our performance and results of operations because EBITDA, when used in conjunction with related GAAP financial measures, (i) provides additional information about our core operating performance and ability to generate and distribute cash flow, (ii) provides investors with the financial analytical framework upon which we base financial, operational, compensation and planning decisions and (iii) presents a measurement that investors, rating agencies and debt holders have indicated is useful in assessing us and our results of operations.

Segment Adjusted EBITDA. We define Segment Adjusted EBITDA (a non-GAAP financial measure) as net income attributable to ARLP before net interest expense, income taxes, depreciation, depletion and amortization, general and administrative expense, settlement gain, asset impairment and acquisition gain.

Management therefore is able to focus solely on the evaluation of segment operating profitability as it relates to our revenues and operating expenses, which are primarily controlled by our segments.

Analysis of Historical Results of Operations



2019 Compared with 2018


We reported net income attributable to ARLP of $399.4 million for 2019 compared to $366.6 million for 2018. The increase of $32.8 million was due to a $170.0 million non-cash net gain related to the AllDale Acquisition, reduced non-cash asset impairments, the addition of oil & gas royalty revenues and lower operating expenses benefiting 2019, partially offset by decreased coal sales revenues and increased depreciation in 2019. In addition, 2018 benefited from an $80.0 million net gain on settlement of litigation. Total revenues were $1.96 billion in 2019 compared to $2.00 billion for 2018, primarily due to lower coal sales revenues resulting from reduced coal sales volumes and prices, partially offset by the addition of oil & gas royalty revenues in 2019.




                                     Year Ended December 31,          Year Ended December 31,
                                       2019            2018            2019              2018
                                          (in thousands)                   (per ton sold)
Tons sold                                 39,289         40,421             N/A               N/A
Tons produced                             39,981         40,266             N/A               N/A
Coal sales                         $   1,762,442$ 1,844,808$      44.86$      45.64
Oil & gas royalties                $      51,735    $         -             N/A               N/A
Coal - Segment Adjusted EBITDA
Expense (1) (2)                    $   1,197,085$ 1,211,800$      30.47$      29.98

For a definition of Segment Adjusted EBITDA Expense and related (1) reconciliation to its comparable GAAP financial measure, please see below

under "-Reconciliation of non-GAAP "Segment Adjusted EBITDA Expense" to GAAP

"Operating Expenses."

(2) Coal - Segment Adjusted EBITDA Expense is defined as consolidated Segment

    Adjusted EBITDA Expense excluding our Minerals segment.



Coal sales. Coal sales decreased $82.4 million or 4.5% to $1.76 billion for 2019 from $1.84 billion for 2018. The decrease in coal sales was attributable to a volume variance of $51.7 million resulting from reduced tons sold and a price variance of $30.7 million due to lower average coal sales prices. Coal sales volumes declined 2.8% to 39.3 million tons due primarily to lower export sales, partially offset by increased coal sales to domestic customers. Weak coal market conditions also impacted price realizations which declined 1.7% in 2019 to $44.86 per ton sold, compared to $45.64 per ton sold during 2018.

Oil & gas royalties. Our mineral interests contributed oil & gas royalties of $51.7 million in 2019. Please read "Item 8. Financial Statements and Supplementary Data-Note 3 - Acquisitions" for more information on the AllDale and Wing Acquisitions.



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Coal - Segment Adjusted EBITDA Expense. Segment Adjusted EBITDA Expense, excluding our Minerals segment, decreased 1.2% to $1.20 billion for 2019 from $1.21 billion for 2018 primarily due to reduced coal sales volumes offset in part by increased expenses per ton. Segment Adjusted EBITDA Expense per ton, excluding our Minerals segment, increased to $30.47 per ton sold compared to $29.98 per ton sold in 2018 due to curtailed production at our Gibson South mine, reduced longwall shifts at our Hamilton mine and lower recoveries at our River View and Mettiki mines, offset in part by increased recoveries from our Tunnel Ridge and Warrior mines and fewer longwall move days at Tunnel Ridge in 2019. In addition, other cost increases are discussed by category below:

Labor and benefit expenses per ton produced, excluding workers' compensation,

? increased 6.2% to $9.89 per ton in 2019 from $9.31 per ton in 2018. This

increase of $0.58 per ton was primarily attributable to reduced sales and

   production volumes;



Workers' compensation expenses per ton produced increased to $0.50 per ton in

? 2019 from $0.34 per ton in 2018. The increase of $0.16 per ton produced

resulted from the impact of lower discount rates and higher actuarial accrual

adjustments due primarily to unfavorable changes in claims development;

Maintenance expenses per ton produced increased 4.1% to $3.59 per ton in 2019

? from $3.45 per ton in 2018. The increase of $0.14 per ton produced was

primarily due to reduced sales and production volumes at certain mines

   discussed above; and



Outside coal purchases increased $21.9 million in 2019 as a result of sales

? from purchased coal, which generally cost higher on a per ton basis than our

   produced coal.



Segment Adjusted EBITDA Expense increases above were partially offset by the following decrease:

Production taxes, royalties and other selling expenses are primarily based on

? coal volumes and a percentage of coal sales prices. These expenses decreased

$0.67 per produced ton sold in 2019 compared to 2018 primarily due to a

favorable state sales mix and lower excise tax rates in 2019.

Depreciation, depletion and amortization. Depreciation, depletion and amortization expense increased to $309.1 million for 2019 compared to $280.2 million for 2018 primarily as a result of depletion from production of our oil & gas royalty interests in 2019.

Settlement gain. During 2018, we finalized an agreement with a customer and certain of its affiliates to settle litigation we initiated in 2015. The agreement provided for a $93.0 million cash payment to us in 2018, future conditional coal supply commitments, continued export transloading capacity for our Appalachian mines and the acquisition of certain coal reserves near our Tunnel Ridge operation. A settlement gain of $80.0 million was recorded in 2018 reflecting the cash payment received net of $13.0 million of combined legal fees paid and associated incentive compensation accruals.

Asset impairment. We recognized a non-cash asset impairment charge of $15.2 million at our Dotiki mine in 2019 as we ceased operations to shift production to our lower cost mines. In 2018, we recognized $40.5 million of non-cash impairment charges, comprised of a $34.3 million impairment related to the reduction of economic life at our Dotiki mine and a $6.2 million impairment due to a decrease in fair value of an option entitling us to lease certain coal reserves in Illinois.

Equity method investment income. Equity method investment income decreased to $2.2 million in 2019 from $22.2 million in 2018 due to the elimination of this income from AllDale I & II for all of 2019 offset in part by the increase of income from our AllDale III investment. The elimination of equity method investment income from AllDale I & II was due to the AllDale Acquisition and resulting consolidation of AllDale I & II on our consolidated statements of income beginning in January 2019. Prior to 2019, our investments in AllDale I & II generated income in addition to AllDale III.

Acquisition gain. We were required to re-measure Cavalier Minerals' equity method investments in AllDale I & II to fair value as a result of the AllDale Acquisition. The re-measurement resulted in a gain of $177.0 million in 2019.

Please read ""Item 8. Financial Statements and Supplementary Data-Note 3 - Acquisitions" for more information on the acquisition gain in connection with the AllDale Acquisition.



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Transportation revenues and expenses. Transportation revenues and expenses were $99.5 million and $112.4 million for 2019 and 2018, respectively. The decrease of $12.9 million was primarily attributable to decreased coal tonnage for which we arrange third-party transportation at certain mines resulting from reduced export shipments, offset in part by an increase in average third-party transportation rates in 2019 resulting from higher shipping costs for coal exported to international markets. Transportation revenues are recognized in an amount equal to transportation expenses when title to the coal passes to the customer.

Net income attributable to noncontrolling interest. Net income attributable to noncontrolling interest increased to $7.5 million in 2019 from $0.9 million in 2018 due to allocating $7.1 million of the AllDale Acquisition gain discussed above, to noncontrolling interest related to Bluegrass Minerals Management, LLC's ("Bluegrass Minerals") equity interest in Cavalier Minerals.



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Segment Information. Our 2019 Segment Adjusted EBITDA decreased $43.7 million, or 6.1%, to $672.0 million from 2018 Segment Adjusted EBITDA of $715.7 million.

 Segment Adjusted EBITDA, tons sold, coal sales, other revenues, oil & gas
royalties, BOE volumes and Segment Adjusted EBITDA Expense by segment are as
follows:




                                            Year Ended December 31,
                                               2019           2018         Increase (Decrease)
                                                        (in thousands)
Segment Adjusted EBITDA
Coal - Illinois Basin                     $      385,200$   417,773$  (32,573)      (7.8) %
Coal - Appalachia                                215,950       240,286      (24,336)     (10.1) %
Minerals                                          46,997        21,323        25,674      120.4 %
Other and Corporate                               32,911        44,864      (11,953)     (26.6) %
Elimination                                      (9,057)       (8,555)         (502)      (5.9) %

Total Segment Adjusted EBITDA (2) $ 672,001$ 715,691$ (43,690) (6.1) %

Tons sold
Coal - Illinois Basin                             28,480        30,055       (1,575)      (5.2) %
Coal - Appalachia                                 10,809        10,364           445        4.3 %
Other and Corporate                                  564           994         (430)     (43.3) %
Elimination                                        (564)         (992)           428       43.1 %
Total tons sold                                   39,289        40,421       (1,132)      (2.8) %

Coal sales
Coal - Illinois Basin                     $    1,128,588$ 1,197,143$  (68,555)      (5.7) %
Coal - Appalachia                                628,406       635,530       (7,124)      (1.1) %
Other and Corporate                               22,138        43,393      (21,255)     (49.0) %
Elimination                                     (16,690)      (31,258)        14,568       46.6 %
Total coal sales                          $    1,762,442$ 1,844,808$  (82,366)      (4.5) %

Other revenues
Coal - Illinois Basin                     $       13,034$    16,999$   (3,965)     (23.3) %
Coal - Appalachia                                 11,166         3,000         8,166        (1)
Minerals                                           1,301             -         1,301        (1)
Other and Corporate                               34,712        38,096       (3,384)      (8.9) %
Elimination                                     (12,173)      (12,431)           258        2.1 %
Total other revenues                      $       48,040$    45,664$     2,376        5.2 %

BOE volume and oil & gas royalties
Volume - BOE (3)                                   1,611             -         1,611        (1)
Oil & gas royalties                       $       51,735   $         -   $    51,735        (1)

Segment Adjusted EBITDA Expense
Coal - Illinois Basin                     $      756,423$   796,370$  (39,947)      (5.0) %
Coal - Appalachia                                423,623       398,243        25,380        6.4 %
Minerals                                           7,811             -         7,811        (1)
Other and Corporate                               36,845        52,321      (15,476)     (29.6) %
Elimination                                     (19,806)      (35,134)        15,328       43.6 %

Total Segment Adjusted EBITDA Expense $ 1,204,896$ 1,211,800$ (6,904) (0.6) %

(1) Percentage change not meaningful.

For a definition of Segment Adjusted EBITDA and related reconciliation to its (2) comparable GAAP financial measure, please see below under "-Reconciliation of

non-GAAP "Segment Adjusted EBITDA" to GAAP "net income."

(3) BOE for natural gas is calculated on a 6:1 basis (6,000 cubic feet of natural

    gas to one barrel).



Illinois Basin - Segment Adjusted EBITDA decreased 7.8% to $385.2 million in 2019 from $417.8 million in 2018. The decrease of $32.6 million was primarily attributable to lower coal sales volumes, partially offset by reduced operating expenses. Tons sold in 2019 decreased 5.2% compared to 2018 resulting from lower export sales from several mines and


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the cessation of production at our Dotiki mine in 2019 to focus on shifting production to our lower-cost mines, offset in part by additional production units at the River View mine. Segment Adjusted EBITDA Expense decreased 5.0% to $756.4 million in 2019 from $796.4 million in 2018 due to reduced coal sales volumes. Segment Adjusted EBITDA Expense per ton increased slightly to $26.56 per ton sold in 2019 due to certain cost increases described above under "-Coal - Segment Adjusted EBITDA Expense."

Appalachia - Segment Adjusted EBITDA decreased 10.1% to $216.0 million for 2019 from $240.3 million in 2018. The decrease of $24.3 million was primarily attributable to reduced coal sales prices and increased operating expenses, partially offset by higher coal sales volumes. Coal sales, which decreased 1.1% to $628.4 million in 2019 from $635.5 million in 2018, resulted from lower coal sales prices of $58.14 per ton in 2019 compared to $61.32 per ton in 2018, partially offset by higher coal sales volumes. A strong performance at our Tunnel Ridge longwall operation increased coal sales volumes by 4.3% to 10.8 million tons sold in 2019 compared to 10.4 million tons sold in 2018. Segment Adjusted EBITDA Expense increased 6.4% to $423.6 million in 2019 from $398.2 million in 2018 due to increased sales volumes and higher expenses per ton.

Segment Adjusted EBITDA Expense per ton increased 2.0% to $39.19 per ton compared to $38.43 per ton sold in 2018 reflecting lower recoveries at our Mettiki mine as well as certain cost increases described above under "-Coal - Segment Adjusted EBITDA Expense," offset in part by increased recoveries and fewer longwall move days from our Tunnel Ridge mine in 2019.

Minerals - Segment Adjusted EBITDA increased to $47.0 million for 2019 from $21.3 million in 2018. The increase of $25.7 million primarily resulted from the AllDale and Wing Acquisitions in 2019. Prior to the acquisitions, income from our equity method investments in AllDale I & II were reflected as equity method investment income. As a result of the AllDale Acquisition, we began consolidating AllDale I & II on our consolidated statements of income.

Other and Corporate - Segment Adjusted EBITDA decreased by $12.0 million to $32.9 million in 2019 compared to $44.9 million in 2018. The decrease was primarily attributable to reduced coal brokerage activity and mining technology product sales from the Matrix Group.



2018 Compared with 2017


We reported net income attributable to ARLP of $366.6 million for 2018 compared to $303.6 million for 2017. The increase of $63.0 million was due to record coal sales volumes, which rose to 40.4 million tons sold in 2018 compared to 37.8 million tons sold in 2017, an $80.0 million net gain on settlement of litigation and higher investment income in 2018 and a debt extinguishment loss of $8.1 million in 2017, offset in part by increased operating expenses, transportation expenses and depreciation, depletion and amortization and the impact of a $40.5 million non-cash asset impairment charge in 2018. Increased coal sales volumes drove total revenues higher by 11.5% to $2.00 billion in 2018 compared to $1.80 billion in 2017 and drove operating expenses higher to $1.21 billion in 2018 compared to $1.09 billion in 2017.

EPU for 2018 reflects the impact of the Simplification Transactions eliminating general partner net income allocations to MGP beginning with the second quarter of 2018. EPU for 2017 reflects the impact of the Exchange Transaction eliminating general partner net income allocations associated with the IDRs and a 0.99% general partner interest in ARLP, both of which were held by MGP prior to the Exchange Transaction. MGP exchanged both its general partner interest and IDRs for a non-economic general partner interest and significant limited partner units beginning with distributions for the second quarter of 2017. See "Item 1. Business-Partnership Simplification" for more information on the Exchange Transaction and Simplification Transactions. For the time between the Exchange Transaction and the Simplification Transactions, MGP maintained a 1.0001% general partner interest in the Intermediate Partnership and a 0.001% managing member interest in Alliance Coal and thus was allocated income and loss in our calculation of EPU. We reported EPU of $2.74 in 2018 compared to $2.80 in 2017. On a pro forma basis, as if the Exchange Transaction and Simplification Transactions had taken place on January 1, 2017, basic and diluted net income of ARLP per limited partner unit ("Pro Forma EPU") in 2018 would have been $2.73 compared to $2.25 in 2017. Please read "Item 8. Financial Statements and Supplementary Data-Note 14 - Net Income of ARLP Per Limited Partner Unit" for more information on the impact of


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the Exchange Transaction and Simplification Transactions on EPU, including a table providing a reconciliation of Pro Forma EPU amounts to net income of ARLP.




                                      Year Ended December 31,          Year Ended December 31,
                                        2018            2017            2018              2017
                                           (in thousands)                   (per ton sold)
Tons sold                                  40,421         37,824             N/A               N/A
Tons produced                              40,266         37,609             N/A               N/A
Coal sales                          $   1,844,808$ 1,711,114$      45.64$      45.24
Coal - Segment Adjusted EBITDA
Expense (1) (2)                     $   1,211,800$ 1,092,187$      29.98$      28.88

For a definition of Segment Adjusted EBITDA Expense and related (1) reconciliation to its comparable GAAP financial measure, please see below

under "-Reconciliation of non-GAAP "Segment Adjusted EBITDA Expense" to GAAP

"Operating Expenses."

(2) Coal - Segment Adjusted EBITDA Expense is defined as consolidated Segment

    Adjusted EBITDA Expense excluding our Minerals segment.



Coal sales. Coal sales increased $133.7 million or 7.8% to $1.84 billion for 2018 from $1.71 billion for 2017. The increase in coal sales was attributable to a volume variance of $117.5 million resulting from increased tons sold and a price variance of $16.2 million due to higher average coal sales prices. For 2018, strong performances at River View and our Gibson Complex mines, which include the resumption of operations at Gibson North in 2018, drove total coal sales volumes up 6.9% to a record 40.4 million tons and production volumes higher by 7.1% to 40.3 million tons compared to 2017.

Coal - Segment Adjusted EBITDA Expense. Segment Adjusted EBITDA Expense, excluding our Minerals segment, increased 11.0% to $1.21 billion for 2018 from $1.09 billion for 2017 primarily as a result of increased coal sales volumes.

On a per ton basis, Segment Adjusted EBITDA Expense increased 3.8% to $29.98 per ton sold from $28.88 per ton sold in 2017, due primarily to difficult mining conditions encountered at several mines and additional longwall move days at our Tunnel Ridge mine in 2018. The most significant operating expense variances by category are discussed below:

Labor and benefit expenses per ton produced, excluding workers' compensation,

? increased 1.6% to $9.31 per ton in 2018 from $9.16 per ton in 2017. This

increase of $0.15 per ton was primarily attributable to increased labor

expenses at various mines; and

Material and supplies expenses per ton produced increased 13.1% to $11.04 per

ton in 2018 from $9.76 per ton in 2017. The increase of $1.28 per ton produced

? resulted primarily from increases of $0.47 per ton for roof support, $0.29 per

ton for contract labor used in the mining process and $0.11 per ton for power

and fuel used in the mining process.

Segment Adjusted EBITDA Expense per ton increases discussed above were partially offset by the following decrease:

Production taxes, royalties and other selling expenses incurred as a percentage

of coal sales prices and volumes decreased $0.12 per produced ton sold in 2018

? compared to 2017 primarily as a result of a favorable state sales mix,

increased sales into the export market and lower average coal sales prices in

the Illinois Basin region partially offset by higher average coal sales prices

   in Appalachia.



General and administrative. General and administrative expenses for 2018 increased to $68.3 million compared to $61.8 million in 2017. The increase of $6.5 million was primarily due to higher incentive compensation expenses and other professional services.

Depreciation, depletion and amortization. Depreciation, depletion and amortization expense increased to $280.2 million for 2018 compared to $269.0 million for 2017 primarily as a result of the previously discussed increase in coal sales volumes.



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Settlement gain. During 2018, we finalized an agreement with a customer and certain of its affiliates to settle litigation we initiated in 2015. The agreement provided for a $93.0 million cash payment to us in 2018, future conditional coal supply commitments, continued export transloading capacity for our Appalachian mines and the acquisition of certain coal reserves near our Tunnel Ridge operation. A settlement gain of $80.0 million was recorded in 2018 reflecting the cash payment received net of $13.0 million of combined legal fees paid and associated incentive compensation accruals.

Asset impairment. We recognized $40.5 million of non-cash impairment charges in 2018, comprised of a $34.3 million impairment related to the reduction of the economic mine life at our Dotiki mine and a $6.2 million impairment as a result of a decrease in the fair value of an option entitling us to lease certain coal reserves in Illinois.

Equity method investment income. Equity method investment income increased to $22.2 million in 2018 from $13.9 million in 2017 due to increased income from AllDale I, II and III, collectively referred to as the "AllDale Partnerships".

Equity securities income. Equity securities income increased $9.3 million to $15.7 million in 2018 compared to $6.4 million in 2017 due to increased distributions of preferred interests from our Kodiak investment.

Debt extinguishment loss. We recognized a debt extinguishment loss of $8.1 million in 2017 to reflect a make-whole payment incurred to repay our Series B Senior Notes in May 2017.

Transportation revenues and expenses. Transportation revenues and expenses were $112.4 million and $41.7 million for 2018 and 2017, respectively. The increase of $70.7 million was primarily attributable to increased tonnage for which we arrange third-party transportation at certain mines and an increase in average third-party transportation rates in 2018 both primarily due to increased export shipments. Transportation revenues are recognized in an amount equal to transportation expenses when title to the coal passes to the customer.



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Segment Information. Our 2018 Segment Adjusted EBITDA increased 4.9% to $715.7 million from 2017 Segment Adjusted EBITDA of $682.0 million. Segment Adjusted EBITDA, tons sold, coal sales, other revenues and Segment Adjusted EBITDA Expense by segment are as follows:




                                            Year Ended December 31,
                                               2018           2017         Increase (Decrease)
                                                        (in thousands)
Segment Adjusted EBITDA
Coal - Illinois Basin                     $      417,773$   398,080$    19,693        4.9 %
Coal - Appalachia                                240,286       234,124         6,162        2.6 %
Minerals                                          21,323        13,297         8,026       60.4 %
Other and Corporate                               44,864        45,296         (432)      (1.0) %
Elimination                                      (8,555)       (8,769)           214        2.4 %

Total Segment Adjusted EBITDA (1) $ 715,691$ 682,028$ 33,663 4.9 %

Tons sold
Coal - Illinois Basin                             30,055        27,026         3,029       11.2 %
Coal - Appalachia                                 10,364        10,783         (419)      (3.9) %
Other and Corporate                                  994         1,636         (642)     (39.2) %
Elimination                                        (992)       (1,621)           629       38.8 %
Total tons sold                                   40,421        37,824         2,597        6.9 %

Coal sales
Coal - Illinois Basin                     $    1,197,143$ 1,078,255$   118,888       11.0 %
Coal - Appalachia                                635,530       616,305        19,225        3.1 %
Other and Corporate                               43,393        74,973      (31,580)     (42.1) %
Elimination                                     (31,258)      (58,419)        27,161       46.5 %
Total coal sales                          $    1,844,808$ 1,711,114$   133,694        7.8 %

Other revenues
Coal - Illinois Basin                     $       16,999$    12,024$     4,975       41.4 %
Coal - Appalachia                                  3,000         3,621         (621)     (17.1) %
Other and Corporate                               38,096        39,776       (1,680)      (4.2) %
Elimination                                     (12,431)      (12,015)         (416)      (3.5) %
Total other revenues                      $       45,664$    43,406$     2,258        5.2 %

Segment Adjusted EBITDA Expense
Coal - Illinois Basin                     $      796,370$   692,199$   104,171       15.0 %
Coal - Appalachia                                398,243       385,802        12,441        3.2 %
Other and Corporate                               52,321        75,851      (23,530)     (31.0) %
Elimination                                     (35,134)      (61,665)        26,531       43.0 %

Total Segment Adjusted EBITDA Expense $ 1,211,800$ 1,092,187$ 119,613 11.0 %

For a definition of Segment Adjusted EBITDA and related reconciliation to its (1) comparable GAAP financial measure, please see below under "-Reconciliation of

    non-GAAP "Segment Adjusted EBITDA" to GAAP "net income."



Illinois Basin - Segment Adjusted EBITDA increased 4.9% to $417.8 million in 2018 from $398.1 million in 2017. The increase of $19.7 million was primarily attributable to higher coal sales, which increased 11.0% to $1.20 billion in 2018 from $1.08 billion in 2017, partially offset by increased operating expenses. The increase of $118.9 million in coal sales reflects higher coal sales volumes of 30.1 million tons sold in 2018 compared to 27.0 million tons sold in 2017, partially offset by lower average coal sales prices in 2018. The increase in coal sales volumes resulted from strong performances at our River View and Gibson Complex mines, which included the resumption of operations at Gibson North in 2018, due in part to increased export volumes. Segment Adjusted EBITDA Expense increased 15.0% to $796.4 million in 2018 from $692.2 million in 2017 due to increased sales volumes and higher expenses per ton. Segment Adjusted EBITDA Expense per ton increased $0.89 per ton sold to $26.50 from $25.61 per ton sold in 2017, primarily due to the


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previously mentioned difficult mining conditions in addition to increased roof support and contract labor costs per ton at various mines and start-up costs associated with reopening the Gibson North mine in 2018.

Appalachia - Segment Adjusted EBITDA increased 2.6% to $240.3 million for 2018 from $234.1 million in 2017. The increase of $6.2 million was primarily attributable to higher coal sales, which increased 3.1% to $635.5 million in 2018 from $616.3 million in 2017 partially offset by increased operating expenses. The increase of $19.2 million in coal sales reflects higher average coal sales prices of $61.32 per ton in 2018 compared to $57.16 per ton in 2017 due to increased export sales of higher priced metallurgical coal at our Mettiki mine and improved prices at our MC Mining and Tunnel Ridge mines. The price benefit was offset partially by lower coal sales volumes of 10.4 million tons sold in 2018 compared to 10.8 million tons in 2017 due to decreased volumes at our Tunnel Ridge and MC Mining mines. Segment Adjusted EBITDA Expense increased 3.2% to $398.2 million in 2018 from $385.8 million in 2017 and Segment Adjusted EBITDA Expense per ton increased $2.65 per ton sold to $38.43 compared to $35.78 per ton sold in 2017. The increase was primarily due to difficult mining conditions and additional longwall move days at our Tunnel Ridge mine and an increased sales mix of higher-cost Mettiki coal production in 2018 as well as certain cost increases described above under "-Operating expenses and outside coal purchases."

Minerals - Segment Adjusted EBITDA increased to $21.3 million for 2019 from $13.3 million in 2018. The increase of $8.0 million resulted from higher equity income from the AllDale Partnerships in 2018.

Other and Corporate - Coal sales and Segment Adjusted EBITDA Expense decreased by $31.6 million and $23.5 million, respectively due to reduced coal brokerage activity.

Reconciliation of non-GAAP "Segment Adjusted EBITDA" to GAAP "net income" and reconciliation of non-GAAP "Segment Adjusted EBITDA Expense" to GAAP "Operating Expenses"

Segment Adjusted EBITDA (a non-GAAP financial measure) is defined as net income attributable to ARLP before net interest expense, income taxes, depreciation, depletion and amortization, settlement gain, asset impairment, acquisition gain, debt extinguishment loss and general and administrative expenses. Segment Adjusted EBITDA is a key component of consolidated EBITDA, which is used as a supplemental financial measure by management and by external users of our financial statements such as investors, commercial banks, research analysts and others. We believe that the presentation of EBITDA provides useful information to investors regarding our performance and results of operations because EBITDA, when used in conjunction with related GAAP financial measures, (i) provides additional information about our core operating performance and ability to generate and distribute cash flow, (ii) provides investors with the financial analytical framework upon which we base financial, operational, compensation and planning decisions and (iii) presents a measurement that investors, rating agencies and debt holders have indicated is useful in assessing us and our results of operations.

Segment Adjusted EBITDA is also used as a supplemental financial measure by our management for reasons similar to those stated in the previous explanation of EBITDA. In addition, the exclusion of corporate general and administrative expenses, which are discussed above under "-Analysis of Historical Results of Operations," from consolidated Segment Adjusted EBITDA allows management to focus solely on the evaluation of segment operating profitability as it relates to our revenues and operating expenses, which are primarily controlled by our segments.



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The following is a reconciliation of consolidated Segment Adjusted EBITDA to net income, the most comparable GAAP financial measure:




                                                  Year Ended December 31,
                                             2019           2018           2017
                                                       (in thousands)

Consolidated Segment Adjusted EBITDA $ 672,001$ 715,691$ 682,028 General and administrative

                   (72,997)       (68,298)       (61,760)
Depreciation, depletion and
amortization                                (309,075)      (280,225)      (268,981)
Settlement gain                                     -         80,000              -
Asset impairment                             (15,190)       (40,483)              -
Interest expense, net                        (45,496)       (40,059)       (39,291)
Acquisition gain                              177,043              -              -
Debt extinguishment loss                            -              -        (8,148)
Income tax (expense) benefit                      211           (22)          (210)
Acquisition gain attributable to
noncontrolling interest                       (7,083)              -              -
Net income attributable to ARLP           $   399,414$   366,604$   303,638
Noncontrolling interest                         7,512            866            563
Net income                                $   406,926$   367,470$   304,201

Segment Adjusted EBITDA Expense (a non-GAAP financial measure) includes operating expenses, coal purchases and other income (expense). Transportation expenses are excluded as these expenses are passed through to our customers and, consequently, we do not realize any gain or loss on transportation revenues.

Segment Adjusted EBITDA Expense is used as a supplemental financial measure by our management to assess the operating performance of our segments. Segment Adjusted EBITDA Expense is a key component of Segment Adjusted EBITDA in addition to coal sales, royalty revenues and other revenues. The exclusion of corporate general and administrative expenses from Segment Adjusted EBITDA Expense allows management to focus solely on the evaluation of segment operating performance as it primarily relates to our operating expenses.

The following is a reconciliation of consolidated Segment Adjusted EBITDA Expense to operating expense, the most comparable GAAP financial measure:




                                                  Year Ended December 31,
                                             2019           2018           2017
                                                       (in thousands)
Segment Adjusted EBITDA Expense           $ 1,204,896$ 1,211,800$ 1,092,187
Outside coal purchases                       (23,357)        (1,466)              -
Other income (expense)                            561        (2,621)          (332)
Operating expenses (excluding
depreciation, depletion and
amortization)                             $ 1,182,100$ 1,207,713$ 1,091,855






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Ongoing Acquisition Activities

Consistent with our business strategy, from time to time we engage in discussions with potential sellers regarding our possible acquisitions of certain assets and/or companies of the sellers. For more information on acquisitions, please read "Item 8. Financial Statements and Supplementary Data-Note 3 - Acquisitions" of this Annual Report on Form 10-K.

Liquidity and Capital Resources



Liquidity


We have historically satisfied our working capital requirements and funded our capital expenditures, investments and debt service obligations with cash generated from operations, cash provided by the issuance of debt or equity, borrowings under credit and securitization facilities and other financing transactions. We believe that existing cash balances, future cash flows from operations and investments, borrowings under credit facilities and cash provided from the issuance of debt or equity will be sufficient to meet our working capital requirements, capital expenditures and additional investments, debt payments, commitments and distribution payments. Nevertheless, our ability to satisfy our working capital requirements, to fund planned capital expenditures, to service our debt obligations or to pay distributions will depend upon our future operating performance and access to and cost of financing sources, which will be affected by prevailing economic conditions generally, and in both the coal and oil & gas industries specifically, as well as other financial and business factors, some of which are beyond our control. Based on our recent operating results, current cash position, current unitholder distributions, anticipated future cash flows and sources of financing that we expect to have available, we do not anticipate any constraints to our liquidity at this time.

However, to the extent operating cash flow or access to and cost of financing sources are materially different than expected, future liquidity may be adversely affected. Please see "Item 1A. Risk Factors."

On August 2, 2019, we closed on the Wing Acquisition using cash on hand and borrowings under our revolving credit facility for $144.9 million. On January 3, 2019, we acquired all of the limited partner interests in AllDale I & II not owned by Cavalier Minerals and the general partner interests in AllDale I & II for $176.2 million, which was funded with cash on hand and borrowings under our revolving credit facility. On July 19, 2017, we purchased $100 million of Series A-1 Preferred Interests from Kodiak, a privately held company providing large scale, high utilization gas compression assets to customers operating primarily in the Permian Basin. This structured investment provided us with a quarterly cash or payment in kind return. On February 8, 2019, Kodiak redeemed our preferred interests for $135.0 million cash. For more information on these transactions, please read "Item 8. Financial Statements and Supplementary Data-Note 3 - Acquisitions" and "- Note 12 - Investments" of this Annual Report on Form 10-K.

In May 2018, the Board of Directors approved the establishment of a unit repurchase program authorizing us to repurchase up to $100 million of ARLP common units. The program has no time limit and we may repurchase units from time to time in the open market or in other privately negotiated transactions.

The unit repurchase program authorization does not obligate us to repurchase any dollar amount or number of units. Since inception through December 31, 2019, we have purchased units for a total of $93.5 million under the program.

Please read "Part II - Item 5. Market for Registrant's Common Equity, Related Unitholder Matters and Issuer Purchases of Equity Securities" for more information on the unit repurchase program.



Mine Development Project

In 2018, we began development of MC Mining's Excel Mine No. 5 and continued in 2019. We currently anticipate deploying capital of approximately $15.0 million to $18.0 million in 2020 to complete the project. We expect to fund the project in 2020 with cash from operations or borrowings under our credit facilities. We anticipate the new mine will enable us to access an additional 15 million tons of coal reserves with an expected mine life of approximately 12 years assuming the current level of production at MC Mining's Excel Mine No. 4 continues at the new mine. We expect the development plan for the new Excel Mine No. 5 will provide a seamless transition from the current MC Mining operation as its reserves deplete in 2020.



Cash Flows


Cash provided by operating activities was $514.9 million for 2019 compared to $694.3 million for 2018. In the comparison, 2018 benefited from $93 million received for a one-time settlement related to litigation with a customer and


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certain of its affiliates initiated in 2015. In addition, decreases in cash provided by operating activities for 2019 resulted from lower net income in 2019 after excluding the 2019 non-cash acquisition gain and the non-cash impairments in both years. Additional decreases in 2019 were due to unfavorable working capital changes related to inventories, accounts payable and payroll and related benefit accruals. These decreases were partially offset by a favorable working capital change related to trade receivables.

Net cash used in investing activities was $488.1 million for 2019 compared to $245.2 million for 2018. The increase in cash used in investing activities was primarily attributable to the AllDale Acquisition, the Wing Acquisition and increased capital expenditures for mine infrastructure and equipment at various mines. This increase was partially offset by cash received from Kodiak for the redemption of our equity securities in 2019, and in comparison, greater cash was used for equity method investment contributions in AllDale III in 2018.

Net cash used in financing activities was $234.4 million for 2019 compared to $211.7 million for 2018. The increase in cash used in financing activities was primarily attributable to increases in overall net payments on the securitization and revolving credit facilities and increased payments on financing lease obligations. These 2019 increases in cash used were partially offset by proceeds received for equipment financings and reduced payments for unit repurchases in 2019.

We have various commitments primarily related to long-term debt, including capital and operating leases, obligations for estimated future asset retirement obligations costs, workers' compensation and pneumoconiosis, capital projects and pension funding. We expect to fund these commitments with existing cash balances, future cash flows from operations and investments as well as cash provided from borrowings of debt or issuance of equity.




The following table provides details regarding our contractual cash obligations
as of December 31, 2019:




                                                Less
       Contractual                             than 1         1-3           3-5         More than
       Obligations               Total          year         years         years         5 years
                                                         (in thousands)
Long-term debt                $   789,280$   13,157$  355,051$   21,072$   400,000
Future interest
obligations(1)                    184,479        46,179        67,714        60,641          9,945
Operating leases                   25,728         3,832         4,497         3,860         13,539
Finance leases(2)                  11,268         8,747         1,824           278            419
Purchase obligations for
capital projects                   28,633        28,633             -             -              -
Reclamation obligations(3)        240,463         4,496         5,370         5,013        225,584
Workers' compensation and
pneumoconiosis benefit(3)         303,648        11,923        18,794        15,079        257,852
Pension benefit(3)                 64,614         5,288        11,722        12,849         34,755
                              $ 1,648,113$  122,255$  464,972$  118,792$   942,094

Interest on variable-rate, long-term debt was calculated using rates (1) effective at December 31, 2019 for the remaining term of outstanding

    borrowings.



(2) Includes amounts classified as interest.

Future commitments for reclamation obligations, workers' compensation and (3) pneumoconiosis and pension are shown at undiscounted amounts. These

    obligations are primarily statutory, not contractual.



Off-Balance Sheet Arrangements

In the normal course of business, we are a party to certain off-balance sheet arrangements. These arrangements include coal reserve leases, indemnifications, transportation obligations and financial instruments with off-balance sheet risk, such as bank letters of credit and surety bonds. Liabilities related to these arrangements are not reflected in our consolidated balance sheets, and we do not expect these off-balance sheet arrangements to have any material adverse effects on our financial condition, results of operations or cash flows.



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We use a combination of surety bonds and letters of credit to secure our financial obligations for reclamation, workers' compensation and other obligations as follows as of December 31, 2019:




                                         Workers'
                      Reclamation      Compensation
                      Obligation        Obligation      Other      Total
                                        (in millions)
Surety bonds         $       181.6    $         82.2    $ 15.8$ 279.6
Letters of credit                -               8.0       6.3       14.3




Capital Expenditures



Capital expenditures increased to $305.9 million in 2019 compared to $233.5 million in 2018. See our discussion of "Cash Flows" above concerning the increase in capital expenditures.

We currently project average estimated annual maintenance capital expenditures over the next five years of approximately $5.04 per ton produced. Our anticipated total capital expenditures, including maintenance capital expenditures, for 2020 are estimated in a range of $165.0 million to $190.0 million. Management anticipates funding 2020 capital requirements with our December 31, 2019 cash and cash equivalents of $36.5 million, cash flows from operations and investments, borrowings under revolving credit and securitization facilities and cash provided from the issuance of debt or equity. We will continue to have significant capital requirements over the long term, which may require us to incur debt or seek additional equity capital. The availability and cost of additional capital will depend upon prevailing market conditions, the market price of our common units and several other factors over which we have limited control, as well as our financial condition and results of operations.



Insurance


Effective October 1, 2019, we renewed our annual property and casualty insurance program. Our property insurance was procured from our wholly owned captive insurance company, Wildcat Insurance. Wildcat Insurance charged certain of our subsidiaries for the premiums on this program and in return purchased reinsurance for the program in the standard market. The maximum limit in the commercial property program is $100.0 million per occurrence, excluding a $1.5 million deductible for property damage, a 60, 75, 90 or 120 day waiting period for underground business interruption depending on the mining complex and an additional $10.0 million overall aggregate deductible. We have elected to retain a 10% participating interest in our commercial property insurance program. We can make no assurances that we will not experience significant insurance claims in the future that could have a material adverse effect on our business, financial condition, results of operations and ability to purchase property insurance in the future. Also, exposures exist for which no insurance may be available and for which we have not reserved. In addition, environmental activists may try to hamper fossil fuel companies by other means including pressuring insurance and surety companies into restricting access to certain needed coverages.




Debt Obligations



Credit Facility. On January 27, 2017, our Intermediate Partnership entered into a Fourth Amended and Restated Credit Agreement (the "Credit Agreement") with various financial institutions. The Credit Agreement provides for a $494.75 million revolving credit facility, including a sublimit of $125 million for the issuance of letters of credit and a sublimit of $15.0 million for swingline borrowings (the "Revolving Credit Facility"), with a termination date of May 23, 2021. We incurred debt issuance costs in 2017 of $9.2 million in connection with the Credit Agreement. These debt issuance costs are deferred and amortized as a component of interest expense over the term of the Revolving Credit Facility.

The Credit Agreement is guaranteed by all of the material direct and indirect subsidiaries of our Intermediate Partnership, and is secured by substantially all of the Intermediate Partnership's assets. Borrowings under the Revolving Credit Facility bear interest, at the option of the Intermediate Partnership, at either (i) the Base Rate at the greater of three benchmarks or (ii) a Eurodollar Rate, plus margins for (i) or (ii), as applicable, that fluctuate depending upon the ratio of Consolidated Debt to Consolidated Cash Flow (each as defined in the Credit Agreement). The Eurodollar Rate, with applicable margin, under the Revolving Credit Facility was 4.32% as of December 31, 2019. At December 31, 2019, we had $9.3 million of letters of credit outstanding with $230.5 million available for borrowing under the Revolving Credit Facility. We currently incur an annual commitment fee of 0.35% on the undrawn portion of the Revolving Credit Facility.


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We utilize the Revolving Credit Facility, as appropriate, for working capital requirements, capital expenditures and investments, scheduled debt payments and distribution payments.

The Credit Agreement contains various restrictions affecting our Intermediate Partnership and its subsidiaries including, among other things, restrictions on incurrence of additional indebtedness and liens, sale of assets, investments, mergers and consolidations and transactions with affiliates, in each case subject to various exceptions, and the payment of cash distributions by our Intermediate Partnership if such payment would result in a certain fixed charge coverage ratio (as defined in the Credit Agreement). The Credit Agreement requires the Intermediate Partnership to maintain (a) a debt to cash flow ratio of not more than 2.5 to 1.0 and (b) a cash flow to interest expense ratio of not less than 3.0 to 1.0, in each case, during the four most recently ended fiscal quarters. The debt to cash flow ratio and cash flow to interest expense ratio were 1.34 to 1.0 and 12.6 to 1.0, respectively, for the trailing twelve months ended December 31, 2019. We remain in compliance with the covenants of the Credit Agreement as of December 31, 2019.

Senior Notes. On April 24, 2017, the Intermediate Partnership and Alliance Finance (as co-issuer), a wholly owned subsidiary of the Intermediate Partnership, issued an aggregate principal amount of $400.0 million of senior unsecured notes due 2025 ("Senior Notes") in a private placement to qualified institutional buyers. The Senior Notes have a term of eight years, maturing on May 1, 2025 (the "Term") and accrue interest at an annual rate of 7.5%.

Interest is payable semi-annually in arrears on each May 1 and November 1. The indenture governing the Senior Notes contains customary terms, events of default and covenants relating to, among other things, the incurrence of debt, the payment of distributions or similar restricted payments, undertaking transactions with affiliates and limitations on asset sales. At any time prior to May 1, 2020, the issuers of the Senior Notes may redeem up to 35% of the aggregate principal amount of the Senior Notes with the net cash proceeds of one or more equity offerings at a redemption price equal to 107.5% of the principal amount redeemed, plus accrued and unpaid interest, if any, to the redemption date. The issuers of the Senior Notes may also redeem all or a part of the notes at any time on or after May 1, 2020, at redemption prices set forth in the indenture governing the Senior Notes. At any time prior to May 1, 2020, the issuers of the Senior Notes may redeem the Senior Notes at a redemption price equal to the principal amount of the Senior Notes plus a "make-whole" premium, plus accrued and unpaid interest, if any, to the redemption date. The net proceeds from issuance of the Senior Notes and cash on hand were used to repay previous debt obligations (including a make-whole payment of $8.1 million). We incurred discount and debt issuance costs of $7.3 million in connection with issuance of the Senior Notes. These costs are deferred and are currently being amortized as a component of interest expense over the Term.

Accounts Receivable Securitization. On December 5, 2014, certain direct and indirect wholly owned subsidiaries of our Intermediate Partnership entered into a $100.0 million accounts receivable securitization facility ("Securitization Facility"). Under the Securitization Facility, certain subsidiaries sell trade receivables on an ongoing basis to our Intermediate Partnership, which then sells the trade receivables to AROP Funding, a wholly owned bankruptcy-remote special purpose subsidiary of our Intermediate Partnership, which in turn borrows on a revolving basis up to $100.0 million secured by the trade receivables. After the sale, Alliance Coal, as servicer of the assets, collects the receivables on behalf of AROP Funding. The Securitization Facility bears interest based on a Eurodollar Rate. In January 2019, we extended the term of the Securitization Facility to January 2020. In October 2019, we extended the term from January 2020 to January 2021. At December 31, 2019, we had $73.8 million outstanding under the Securitization Facility.

May 2019 Equipment Financing. On May 17, 2019, the Intermediate Partnership entered into an equipment financing arrangement accounted for as debt, wherein the Intermediate Partnership received $10.0 million in exchange for conveying its interest in certain equipment owned indirectly by the Intermediate Partnership and entering into a master lease agreement for that equipment (the "May 2019 Equipment Financing"). The May 2019 Equipment Financing contains customary terms and events of default and provides for thirty-six monthly payments with an implicit interest rate of 6.25%, maturing on May 1, 2022. Upon maturity, the equipment will revert back to the Intermediate Partnership.

November 2019 Equipment Financing. On November 6, 2019, the Intermediate Partnership entered into an equipment financing arrangement accounted for as debt, wherein the Intermediate Partnership received $53.1 million in exchange for conveying its interest in certain equipment owned indirectly by the Intermediate Partnership and entering into a master lease agreement for that equipment (the "November 2019 Equipment Financing"). The November 2019 Equipment Financing contains an implicit interest rate of 4.75% and provides for a four year term with forty-seven monthly payments of $1.0 million and a balloon payment of $11.6 million upon maturity on November 6, 2023. At maturity, the equipment will revert back to the Intermediate Partnership. The November 2019 Equipment Financing contains customary terms and events of default.



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Other. We also have an agreement with a bank to provide additional letters of credit in an amount of $5.0 million to maintain surety bonds to secure certain asset retirement obligations and our obligations for workers' compensation benefits. At December 31, 2019, we had $5.0 million in letters of credit outstanding under this agreement.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition, results of operations, liquidity and capital resources is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of our consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts and disclosures in the consolidated financial statements. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. We discuss these estimates and judgments with the audit committee of the Board of Directors ("Audit Committee") periodically. Actual results may differ from these estimates. We have provided a description of all significant accounting policies in the notes to our consolidated financial statements. The following critical accounting policies are materially impacted by judgments, assumptions and estimates used in the preparation of our consolidated financial statements:

Business Combinations and Goodwill

We account for business acquisitions using the purchase method of accounting.

See "Item 8. Financial Statements and Supplementary Data-Note 3 - Acquisitions" for more information on the Wing and AllDale Acquisitions. Assets acquired and liabilities assumed are recorded at their estimated fair values at the acquisition date. The excess of purchase price over fair value of net assets acquired is recorded as goodwill. Given the time it takes to obtain pertinent information to finalize the acquired business' balance sheet, it may be several quarters before we are able to finalize those initial fair value estimates.

Accordingly, it is not uncommon for the initial estimates to be subsequently revised. The results of operations of acquired businesses are included in the consolidated financial statements from the acquisition date.

For the Wing Acquisition, we determined a preliminary fair value for the acquired mineral interests using a weighting of both income and market approaches. Our income approach primarily comprised of a discounted cash flow model. The assumptions used in the discounted cash flow model included estimated production, projected cash flows, forward oil & gas prices and a risk-adjusted discount rate. Our market approach consisted of the observation of recent acquisitions in the Permian Basin to determine a market price for similar mineral interests. We consider our fair value measurements for the Wing Acquisition to be preliminary as we continue to obtain additional information from operators regarding reserve and production quantities and projections for the mineral interests we acquired.

For the AllDale Acquisition, in addition to valuing the acquired assets and liabilities, we were required to value our previously held equity method investments in AllDale I & II just prior to the acquisition and record a gain as the fair value was determined to be higher than the carrying value of our equity method investments. We used a discounted cash flow model to re-measure our equity method investments immediately prior to the AllDale Acquisition as well as to value the mineral interests acquired. Assumptions used in our discounted cash flow model are similar to those discussed in the Wing Acquisition above.

The only indefinite-lived intangible that the Partnership currently has is goodwill. At December 31, 2019, the Partnership had $136.4 million in goodwill. Goodwill is not amortized, but subject to annual reviews on November 30th for impairment at a reporting unit level. The reporting unit or units used to evaluate and measure goodwill for impairment are determined primarily from the manner in which the business is managed or operated. A reporting unit is an operating segment or a component that is one level below an operating segment.

We have assessed the reporting unit definitions and determined that at December 31, 2019, the Hamilton reporting unit and the MAC reporting unit are the appropriate reporting units for testing goodwill impairment related to the acquisition of these entities.

The Partnership computes the fair value of these reporting units primarily using the income approach (discounted cash flow analysis). The computations require management to make significant estimates. Critical estimates are used as part of these evaluations include, among other things, the discount rate applied to future earnings reflecting a weighted average cost of capital rate, and projected coal price assumptions. Our estimate of the forward coal sales price curve and future sales volumes are critical assumptions used in our discounted cash flow analysis. There were no impairments of goodwill during 2019 or 2018.

In future periods, it is reasonably possible that a variety of circumstances could result in an impairment of our goodwill.

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A discounted cash flow analysis requires us to make various judgmental assumptions about sales, operating margins, capital expenditures, working capital and coal sales prices. Assumptions about sales, operating margins, capital expenditures and coal sales prices are based on our budgets, business plans, economic projections, and anticipated future cash flows. In determining the fair value of our reporting units, we were required to make significant judgments and estimates regarding the impact of anticipated economic factors on our business. The forecast assumptions used in the period ended December 31, 2019 make certain assumptions about future pricing, volumes and expected maintenance capital expenditures. Assumptions are also made for a "normalized" perpetual growth rate for periods beyond the long range financial forecast period.

Our estimates of fair value are sensitive to changes in all of these variables, certain of which relate to broader macroeconomic conditions outside our control.

As a result, actual performance in the near and longer-term could be different from these expectations and assumptions. This could be caused by events such as strategic decisions made in response to economic and competitive conditions and the impact of economic factors, such as over production in coal and low prices of natural gas. In addition, some of the inherent estimates and assumptions used in determining fair value of the reporting units are outside the control of management, including interest rates, cost of capital and our credit ratings. While we believe we have made reasonable estimates and assumptions to calculate the fair value of the reporting units and other intangible assets, it is possible a material change could occur.



Oil & Gas Reserve Values


Estimated oil & gas reserves and estimated market prices for oil & gas are a significant part of our depletion calculations, impairment analyses, and other estimates. Following are examples of how these estimates affect financial results:

an increase (decrease) in estimated proved oil & gas reserves can reduce

? (increase) our units of production depreciation, depletion and amortization

rates; and

changes in oil & gas reserves and estimated market prices both impact projected

? future cash flows from our mineral interests. This in turn can impact our

periodic impairment analysis.

The process of estimating oil & gas reserves is very complex, requiring significant judgment in the evaluation of all available geological, geophysical, engineering and economic data. After being estimated internally, our proved reserves estimates are compared to proved reserves that are prepared by independent experts in connection with our required year end reporting. The data may change substantially over time as a result of numerous factors, including the historical 12 month average price, additional development cost and activity, evolving production history and a continual reassessment of the viability of production under changing economic conditions. As a result, material revisions to existing reserves estimates could occur from time to time. Such changes could trigger an impairment of our oil & gas mineral interests and have an impact on our depreciation, depletion and amortization expense prospectively.

Estimates of future commodity prices utilized in our impairment analyses consider market information including published forward oil & gas prices. The forecasted price information used in our impairment analyses is consistent with that generally used in evaluating third party operator drilling decisions and our expected acquisition plans, if any. Prices for future periods will impact the production economics underlying oil & gas reserve estimates. In addition, changes in the price of oil & gas also impact certain costs associated with our expected underlying production and future capital costs. The prices of oil & gas are volatile and change from period to period, thus are expected to impact our estimates. Significant unfavorable changes in the estimated future commodity prices could result in an impairment of our oil & gas mineral interests. There were no impairments of our oil & gas mineral interests during 2019.

Workers' Compensation and Pneumoconiosis (Black Lung) Benefits

We provide income replacement and medical treatment for work-related traumatic injury claims as required by applicable state laws. We generally provide for these claims through self-insurance programs. Workers' compensation laws also compensate survivors of workers who suffer employment related deaths. Our liability for traumatic injury claims is the estimated present value of current workers' compensation benefits, based on our actuary estimates. Our actuarial calculations are based on a blend of actuarial projection methods and numerous assumptions including claim development patterns, mortality, medical costs and interest rates. See "Item 8. Financial Statements and Supplementary Data-Note 19 - Accrued Workers' Compensation and Pneumoconiosis Benefits" for additional discussion. We had accrued liabilities


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for workers' compensation of $53.3 million and $49.5 million for these costs at December 31, 2019 and 2018, respectively. A one-percentage-point reduction in the discount rate would have increased operating expense by approximately $3.6 million at December 31, 2019. We limit our exposure to traumatic injury claims by purchasing a high deductible insurance policy that starts paying benefits after deductibles for a particular claim year have been met. Our receivables for traumatic injury claims under this policy as of December 31, 2019 and 2018 are $7.7 million and $8.1 million, respectively.

Coal mining companies are subject to Federal Coal Mine Health and Safety Act of 1969, as amended, and various state statutes for the payment of medical and disability benefits to eligible recipients related to coal worker's pneumoconiosis, or black lung. We provide for these claims through self-insurance programs. Our pneumoconiosis benefits liability is calculated using the service cost method based on the actuarial present value of the estimated pneumoconiosis benefits obligation. Our actuarial calculations are based on numerous assumptions including disability incidence, medical costs, mortality, death benefits, dependents and discount rates. We had accrued liabilities of $97.7 million and $72.1 million for the pneumoconiosis benefits at December 31, 2019 and 2018, respectively. A one-percentage-point reduction in the discount rate would have increased the expense recognized for the year ended December 31, 2019 by approximately $3.9 million. Under the service cost method used to estimate our pneumoconiosis benefits liability, actuarial gains or losses attributable to changes in actuarial assumptions, such as the discount rate, are amortized over the remaining service period of active miners.

The discount rate for workers' compensation and pneumoconiosis is derived by applying the FSTE Pension Discount Curve to the projected liability payout.

Other assumptions, such as claim development patterns, mortality, disability incidence and medical costs, are based upon standard actuarial tables adjusted for our actual historical experiences whenever possible. We review all actuarial assumptions periodically for reasonableness and consistency and update such factors when underlying assumptions, such as discount rates, change or when sustained changes in our historical experiences indicate a shift in our trend assumptions are warranted.

Impairment of Long-Lived Assets

In addition to oil & gas reserves discussed above in the Oil & Gas Reserve Values section, we review the carrying value of long-lived assets and certain identifiable intangibles whenever events or changes in circumstances indicate that the carrying amount may not be recoverable based upon estimated undiscounted future cash flows. Long-lived assets and certain intangibles are not reviewed for impairment unless an impairment indicator is noted. Several examples of impairment indicators include:

? A significant decrease in the market price of a long-lived asset;

? A significant adverse change in the extent or manner in which a long-lived

asset is being used or in its physical condition;

A significant adverse change in legal factors or in the business climate that

? could affect the value of a long-lived asset, including an adverse action of

assessment by a regulator;

? An accumulation of costs significantly in excess of the amount originally

expected for the acquisition or construction of a long-lived asset;

A current-period operating or cash flow loss combined with a history of

? operating or cash flow losses or a projection or forecast that demonstrates

continuing losses associated with the use of a long-lived asset; or

A current expectation that, more likely than not, a long-lived asset will be

? sold or otherwise disposed of significantly before the end of its previously

estimated useful life. The term more likely that not refers to a level of

likelihood that is more than 50 percent.

The above factors are not all inclusive, and management must continually evaluate whether other factors are present that would indicate a long-lived asset may be impaired. If there is an indication that the carrying amount of an asset may not be recovered, the asset is monitored by management where changes to significant assumptions are reviewed. Individual assets are grouped for impairment review purposes based on the lowest level for which there is identifiable cash flows that are largely independent of the cash flows of other groups of assets, generally on a by-mine basis. The amount of impairment is measured by the difference between the carrying value and the fair value of the asset. The fair value of impaired assets is typically determined based on various factors, including the present values of expected future cash flows using a risk adjusted discount rate, the marketability of coal properties and the estimated fair value of assets that could be sold or used at other operations. We recorded asset impairments of $15.2 million in 2019 and $40.5 million in 2018 (see "Item 8. Financial Statements and Supplementary Data-Note 4 - Long-Lived Asset Impairments").



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Asset Retirement Obligations


SMCRA and similar state statutes require that mined property be restored in accordance with specified standards and an approved reclamation plan. A liability is recorded for the estimated cost of future mine asset retirement and closing procedures on a present value basis when incurred or acquired and a corresponding amount is capitalized by increasing the carrying amount of the related long-lived asset. Those costs relate to permanently sealing portals at underground mines and to reclaiming the final pits and support surface acreage for both our underground mines and past surface mines. Examples of these types of costs, common to both types of mining, include, but are not limited to, removing or covering refuse piles and settling ponds, water treatment obligations, and dismantling preparation plants, other facilities and roadway infrastructure. Accrued liabilities of $137.5 million and $137.1 million for these costs are recorded at December 31, 2019 and 2018, respectively. See "Item 8. Financial Statements and Supplementary Data-Note 18 - Asset Retirement Obligations" for additional information. The liability for asset retirement and closing procedures is sensitive to changes in cost estimates and estimated mine lives. As changes in estimates occur (such as mine plan revisions, changes in estimated costs or changes in timing of the performance of reclamation activities), the revisions to the obligation and asset are recognized at the appropriate credit-adjusted, risk-free interest rate.

Accounting for asset retirement obligations also requires depreciation of the capitalized asset retirement cost and accretion of the asset retirement obligation over time. Depreciation is generally determined on a units-of-production basis and accretion is generally recognized over the life of the producing assets.

On at least an annual basis, we review our entire asset retirement obligation liability and make necessary adjustments for permit changes approved by state authorities, changes in the timing of reclamation activities, and revisions to cost estimates and productivity assumptions, to reflect current experience.

Adjustments to the liability associated with these assumptions resulted in a decrease of $0.7 million and an increase of $5.0 million for the year ended December 31, 2019 and 2018, respectively.

While the precise amount of these future costs cannot be determined with certainty, we have estimated the costs and timing of future asset retirement obligations escalated for inflation, then discounted and recorded at the present value of those estimates. Discounting resulted in reducing the accrual for asset retirement obligations by $102.9 million and $100.3 million at December 31, 2019 and 2018. We estimate that the aggregate undiscounted cost of final mine closure is approximately $240.5 million and $237.4 million at December 31, 2019 and 2018, respectively. If our assumptions differ from actual experiences, or if changes in the regulatory environment occur, our actual cash expenditures and costs that we incur could be materially different than currently estimated.



Universal Shelf


In February 2018, we filed with the SEC a universal shelf registration statement allowing us to issue from time to time an indeterminate amount of debt or equity securities ("2018 Registration Statement"). At February 20, 2020, we had not utilized any amounts available under the 2018 Registration Statement.



Related-Party Transactions


See "Item 8. Financial Statements and Supplementary Data-Note 20 - Related-Party Transactions" for a discussion of our related-party transactions.

Accruals of Other Liabilities

We had accruals for other liabilities, including current obligations, totaling $315.9 million and $272.6 million at December 31, 2019 and 2018, respectively. These accruals were chiefly comprised of workers' compensation benefits, pneumoconiosis benefits, and costs associated with asset retirement obligations. These obligations are self-insured except for certain excess insurance coverage for workers' compensation. The accruals of these items were based on estimates of future expenditures based on current legislation, related regulations and other developments. Thus, from time to time, our results of operations may be significantly affected by changes to these liabilities. Please see "Item 8. Financial Statements and Supplementary Data-Note 18 - Asset Retirement Obligations" and "-Note 19 - Accrued Workers' Compensation and Pneumoconiosis Benefits."

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Inflation


Any future inflationary or deflationary pressures could adversely affect the results of our operations. For example, at times our results have been significantly impacted by price increases affecting many of the components of our operating expenses such as fuel, steel, maintenance expense and labor. Please see "Item 1A. Risk Factors."



New Accounting Standards


See "Item 8. Financial Statements and Supplementary Data-Note 2 - Summary of Significant Accounting Policies" for a discussion of new accounting standards.

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Financials (USD)
Sales 2020 1 293 M - -
Net income 2020 -214 M - -
Net Debt 2020 - - -
P/E ratio 2020 -1,88x
Yield 2020 12,6%
Capitalization 403 M 403 M -
EV / Sales 2019
Capi. / Sales 2020 0,31x
Nbr of Employees 3 602
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Joseph W. Craft Chairman, President & Chief Executive Officer
Thomas M. Wynne Chief Operating Officer & Senior Vice President
Brian L. Cantrell Chief Financial Officer & Senior Vice President
Charles R. Wesley Director & Executive Vice President
John Harris Robinson Independent Director
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