Significant relationships referenced in this management's discussion and
analysis of financial condition and results of operations include the following:
References to "we," "us," "our" or "ARLP Partnership" mean the business and
? operations of Alliance Resource Partners, L.P., the parent company, as well as
its consolidated subsidiaries.
? References to "ARLP" mean Alliance Resource Partners, L.P., individually as the
parent company, and not on a consolidated basis.
? References to "MGP" mean Alliance Resource Management GP, LLC, ARLP's general
partner.
References to "Intermediate Partnership" mean Alliance Resource Operating
? Partners, L.P., the intermediate partnership of Alliance Resource Partners,
L.P.
? References to "Alliance Coal" mean Alliance Coal, LLC, the holding company for
the coal mining operations of Alliance Resource Operating Partners, L.P.
References to "Alliance Minerals" mean Alliance Minerals, LLC, the holding
? company for the oil and gas minerals interests of Alliance Resource Partners,
L.P.
Summary
We are a diversified natural resource company operating in the United States
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. We began coal mining operations in 1971 and, since
then, have grown through acquisitions and internal development in strategic
producing regions to become the second largest coal producer in the eastern
United States. 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. Two of our mines are located on the banks of the Ohio River.
As is customary in the coal industry, we have entered into long-term coal supply
agreements with many of our customers. In 2014, we began acquiring oil & gas
mineral interests in premier oil & gas producing regions across the United
States.
We have three reportable segments, Illinois Basin, Appalachia, and Minerals. We
also have an "all other" category referred to as Other and Corporate. Our two
reportable coal 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 two coal segments include seven mining
complexes operating in Illinois, Indiana, Kentucky, Maryland and West Virginia
and a coal loading terminal in Indiana on the Ohio River. The Minerals
reportable segment includes our oil & gas mineral interests which are located
primarily in the Permian (Delaware and Midland), Anadarko (SCOOP/STACK), and
Williston (Bakken) basins. Our ownership in these basins includes approximately
55,700 net royalty acres which provides us with diversified exposure to industry
leading operators consistent with our general business strategy to grow our oil
& gas mineral interest business. We market our mineral interests for lease to
operators in those regions and generate royalty income from the leasing and
development of those mineral interests.
Illinois Basin reportable segment includes currently operating mining complexes
(a) Gibson County Coal, LLC's ("Gibson") mining complex, which includes the
Gibson South mine, (b) Warrior Coal, LLC's ("Warrior") mining complex, (c)
? River View Coal, LLC's ("River View") mining complex and (d) Hamilton County
Coal, LLC's ("Hamilton") mining complex. The Illinois Basin reportable segment
also includes our operating Mt. Vernon Transfer Terminal, LLC ("Mt. Vernon")
coal loading terminal in Indiana on the Ohio River.
The Illinois Basin reportable segment also includes Mid-America Carbonates, LLC
("MAC") and other support services as well as non-operating mining complexes (a)
Gibson North mine, which ceased production in fourth quarter of 2019, (b)
Webster County Coal, LLC's Dotiki mining complex, which ceased production in
August 2019, (c) White County Coal, LLC's Pattiki mining complex, (d) Hopkins
County Coal, LLC's mining complex, and (e) Sebree Mining, LLC's mining complex.
Appalachia reportable segment includes currently operating mining complexes (a)
? Mettiki mining complex ("Mettiki"), (b) Tunnel Ridge, LLC mining complex
("Tunnel Ridge"), and (c) MC Mining, LLC's ("MC Mining") mining complex.
Mettiki includes Mettiki Coal (WV), LLC's Mountain View mine and Mettiki Coal,
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LLC's preparation plant. The Appalachia reportable segment also includes the
Penn Ridge assets, which are 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 interests in
both AllDale Minerals III, LP ("AllDale III") (Note 11 - Investments) and
? Cavalier Minerals. AR Midland acquired its mineral interest in the Wing
Acquisition (Note 3 - Acquisition). Please read "Item 1. Financial Statements
(Unaudited)-Note 3 - Acquisition" and "-Note 11 - Investments" of this
Quarterly Report on Form 10-Q for more information on the Wing Acquisition and
AllDale III, respectively.
Other and Corporate includes marketing and administrative activities, Matrix
Design Group, LLC and its subsidiaries ("Matrix Design"), Alliance Design
Group, LLC ("Alliance Design") (collectively, Matrix Design and Alliance Design
referred to as 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 (see Note 11 - Investments). In addition, Other
? and Corporate includes certain Alliance Resource Properties' land and coal
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 and Alliance
Finance (both discussed in Note 9 - Long-Term Debt). Please read "Item 1.
Financial Statements (Unaudited)-Note 9 - Long-term Debt" and "-Note 11 -
Investments" of this Quarterly Report on Form 10-Q for more information on AROP
Funding and Kodiak redemption, respectively.
Market Developments and Our Response for the Six Months Ended June 30, 2020
We began the year anticipating our results for the six months ended June 30,
2020 (the "2020 Period") would be negatively impacted by challenging coal market
conditions primarily due to low natural gas prices and the overhang of coal
supply caused by the collapse of thermal coal export prices during the second
half of 2019. As the year progressed, mild weather conditions and deteriorating
natural gas prices placed increased pressure on the performance of our coal
operations. Also, our Minerals segment results were impacted by natural gas
prices remaining low and the collapse in oil prices following actions by the
Organization of Petroleum Exporting Countries and Russia. These trends
accelerated substantially with unprecedented demand destruction across all
energy markets due to the disruptions to global economies in response to the
COVID-19 pandemic. For the 2020 Period coal-fired generation in the eastern
U.S. declined 33% compared to the same time period in 2019. Demand for oil and
natural gas also fell precipitously, driving commodity prices lower and leading
operators to curtail production.
In response to these market conditions, we halted production at all of our
mining complexes in the Illinois Basin at the end of March and our MC Mining
complex in East Kentucky in early April. With an objective of reducing coal
production to match existing contracted sales commitments for 2020, we planned
to curtail production at these operations as long as it was possible to meet
customer obligations from existing coal inventories. Throughout the second
quarter of 2020 we monitored coal inventories at each location and worked
closely with customers to determine when it would be necessary to resume coal
production. Consistent with this plan, underground production operations
resumed in May at the River View and Warrior mines in the Illinois Basin and
subsequently at each of the remaining mining complexes - Gibson and Hamilton in
the Illinois Basin and MC Mining in Appalachia. All of our seven mining
complexes are now producing coal. However, several mines are running at less
than capacity due to a limited spot market in the U.S. and a seaborne market
that continues to be sub-economic for U.S. production. Also in response to
these market conditions, we have undertaken numerous efforts to optimize cash
flows, reduce working capital requirements and strictly control capital
expenditures and expenses. In addition, the Board of Directors of ARLP's
general partner (the "Board") decided to suspend the cash distribution to
unitholders for the first, second and third quarters of 2020.
Impact of the COVID-19 Pandemic
In the 2020 Period, a variety of measures in the U.S. and abroad in response to
the COVID-19 pandemic resulted in an unprecedented reduction in demand for
energy. These measures have included travel restrictions, gathering bans and
stay-at-home orders. All of our operations have been classified as essential in
the states in which we operate. Therefore, to protect our employees during the
COVID-19 pandemic, we have implemented numerous health and safety protocols
designed to contain and mitigate the risk of infection from COVID-19. The
safety of our employees, their families and communities as well as customers,
vendors and suppliers visiting our locations will remain a priority for us. We
will continually evaluate the need for further safeguards as the pandemic
continues.
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As discussed above, we curtailed coal production during the 2020 Period in
response to demand destruction caused by the COVID-19 pandemic, including the
temporary cessation of production at various operations in both the Illinois
Basin and Appalachian regions. Due to the ongoing and unforeseen impacts of the
COVID-19 pandemic, on April 15, 2020, 116 employees of the Gibson County mining
complex and 78 employees of the Hamilton mining complex were notified that their
employment would be terminated permanently on April 26, 2020. In light of the
downturn in market conditions during the 2020 Period and the ongoing uncertainty
surrounding the COVID-19 pandemic, we have also taken the following additional
actions:
To mitigate the reduced revenues from lower coal sales volumes and depressed
commodity prices impacting our minerals segment, we have undertaken numerous
efforts to optimize cash flows, reduce working capital requirements and
? strictly control capital expenditures, operating expenses and general and
administrative expenses. Our cost control initiatives during the 2020 Period
have resulted in significant reductions in expenses in each of these categories
compared to the same period in 2019. The cost reductions are discussed in more
detail below.
? The Board has suspended the cash distribution to unitholders for the first,
second and third quarters of 2020.
We have also withdrawn our initial 2020 operating and financial guidance
? provided on January 27, 2020, which did not reflect the impact of the COVID-19
pandemic.
On March 9, 2020, we strengthened our liquidity by entering into a $537.75
million (reducing to $459.5 million on May 23, 2021) revolving credit facility
with a termination date of March 9, 2024, replacing the $494.75 million
? revolving credit facility that was set to expire on May 23, 2021. The loan
under the revolving credit facility is guaranteed by certain of our direct and
indirect subsidiaries and substantially all of their assets, with the exception
of our oil and gas subsidiaries and their assets.
We are continuing to monitor and may take further actions to minimize any
adverse impact caused by the COVID-19 pandemic.
The trend of our earnings has been impacted by the significant decrease in
global energy demand caused by the COVID-19 pandemic as well as already weak
coal market conditions and declining oil prices resulting from actions of major
oil producing countries. The following comparisons between the three months
ended June 30, 2020 (the "2020 Quarter") and the three months ended March 31,
2020 (the "Sequential Quarter") reflect the impacts of these trends.
The 2020 Quarter Compared to the Sequential Quarter
Consolidated Illinois Basin Appalachia Minerals
Increase (Decrease)
Revenues (27.2) % (32.4) % (16.4) % (45.0) %
Tons Sold (28.5) % (33.7) % (16.4) % N/A
Tons Produced (46.1) % (59.7) % (16.7) % N/A
BOE (17.0) % N/A N/A (17.0) %
Segment Adjusted EBITDA (44.4) % (47.7) % (35.7) % (50.0) %
Segment Adjusted EBITDA Expense (20.1) % (27.7) % (7.2) % 26.7 %
Please see our discussion in "Part I - Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations" in our Form 10-Q for
the quarterly period ended March 31, 2020 for more information with respect to
the results of the Sequential Quarter.
Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019
We reported a net loss attributable to ARLP of $46.7 million for the 2020
Quarter compared to net income attributable to ARLP of $58.2 million for the
three months ended June 30, 2019 ("2019 Quarter"). The decrease of $104.9
million was primarily due to our decision to temporarily cease coal production
at five of our seven mining complexes at
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the beginning of the 2020 Quarter in response to the impacts of the COVID-19
pandemic and coal market deterioration. Production days were cut in half
compared to the first quarter of 2020 as we gradually resumed production at
reduced levels during the 2020 Quarter. The ongoing effects of the COVID-19
pandemic significantly impacted our results for the 2020 Quarter with total
revenues decreasing to $255.2 million compared to $517.1 million for the 2019
Quarter. Operating expenses of $187.2 million for the 2020 Quarter were also
significantly lower compared to $314.3 million in the 2019 Quarter.
Three Months Ended June 30,
2020 2019 2020 2019
(in thousands) (per ton sold)
Tons sold 5,186 10,216 N/A N/A
Tons produced 4,323 10,036 N/A N/A
Coal sales $ 236,286 $ 461,310 $ 45.56 $ 45.16
Coal - Segment Adjusted EBITDA Expense
(1) (2) $ 186,422 $ 317,832 $ 35.95 $ 31.11 For a definition of Segment Adjusted EBITDA Expense and related
(1) reconciliation to comparable generally accepted accounting principles
("GAAP") financial measures, 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 $225.0 million or 48.8% to $236.3 million for
the 2020 Quarter from $461.3 million for the 2019 Quarter. The decrease was
attributable to a volume variance of $227.1 million resulting from decreased
tons sold, minimally offset by a positive price variance of $2.1 million due to
higher average coal sales prices. Coal sales volumes declined 49.2% to 5.2
million tons primarily due to weak coal demand caused in large part by the
COVID-19 pandemic. Coal sales price realizations increased 0.9% in the 2020
Quarter to $45.56 per ton sold, compared to $45.16 per ton sold during the 2019
Quarter primarily due to an increased sales mix of higher-priced Appalachia
sales tons in the 2020 Quarter.
Oil & gas royalties. Our mineral interests contributed royalty revenues of $7.8
million in the 2020 Quarter compared to $11.9 million for the 2019 Quarter. The
decrease in royalty revenues is primarily due to lower oil & gas sales price
realizations resulting from reduced demand amid the COVID-19 pandemic.
Partially offsetting lower prices, royalty revenues benefited from higher
volumes as a result of the Wing Acquisition in August 2019 as well as continued
drilling and development activity on our mineral interests. Please read "Item
1. Financial Statements (Unaudited)-Note 3 - Acquisition" of this Quarterly
Report on Form 10-Q for more information on the Wing Acquisition.
Coal - Segment Adjusted EBITDA Expense. Segment Adjusted EBITDA Expense,
excluding our Minerals segment, decreased 41.3% to $186.4 million, primarily as
a result of reduced coal sales volumes reflecting our decision to temporarily
idle production at certain mines during the 2020 Quarter. On a per ton basis,
Segment Adjusted EBITDA Expense, excluding our Minerals segment, increased 15.6%
in the 2020 Quarter to $35.95 per ton, compared to $31.11 per ton in the 2019
Quarter, primarily due to the per ton cost impact of lower coal volumes and a
greater mix of coal volumes from our higher cost Appalachian production. Our
costs per ton were further impacted by increased inventory charges and other
cost variances discussed below by category:
Labor and benefit expenses per ton produced, excluding workers' compensation,
? increased 25.4% to $12.33 per ton in the 2020 Quarter from $9.83 per ton in the
2019 Quarter. The increase of $2.50 per ton was primarily due to curtailed
production and volume mix discussed above.
Workers' compensation expenses per ton produced increased to $1.33 per ton in
the 2020 Quarter from $0.82 per ton in the 2019 Quarter. The increase of $0.51
per ton produced resulted primarily from curtailed production, partially offset
? by reduced mid-year actuarial workers' compensation accrual adjustments in the
2020 Quarter compared to the 2019 Quarter. Please read "Part I - Item 1.
Financial Statements (Unaudited)-Note 15 - Workers' Compensation and
Pneumoconiosis" of this Quarterly Report on Form 10-Q for more information on
the workers' compensation accrual adjustments.
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Material and supplies expenses per ton produced increased 1.1% to $11.36 per
ton in the 2020 Quarter from $11.24 per ton in the 2019 Quarter. The increase
of $0.12 per ton produced resulted primarily from related increases of $0.87
? per ton for power and fuel used in the mining process, $0.63 per ton for
outside expenses and $0.39 per ton for environmental and reclamation expenses,
partially offset by decreases of $1.18 per ton for roof support and $0.55 per
ton for contract labor used in the mining process.
Production taxes and royalty expenses per ton incurred as a percentage of coal
sales prices and volumes increased $0.97 per produced ton sold in the 2020
? Quarter compared to the 2019 Quarter primarily as a result of a $0.60 per ton
government-imposed increase in the federal black lung excise tax, effective
January 1, 2020 and an unfavorable state production mix, partially offset by
reduced excise taxes resulting from decreased export shipments.
Segment Adjusted EBITDA Expense increases per ton above were partially offset by
the following decreases:
Maintenance expenses per ton produced decreased 12.4% to $3.18 per ton in the
? 2020 Quarter from $3.63 per ton in the 2019 Quarter. The decrease of $0.45 per
ton produced was primarily due to reduced maintenance requirements as a result
of curtailed production discussed above.
We had no sales of outside coal purchases in the 2020 Quarter compared to $5.3
? million in the 2019 Quarter. Thus, costs per ton in the 2020 Quarter benefited
as our cost of outside coal purchases are generally higher on a per ton basis
than our produced coal.
Other revenues. Other revenues were principally comprised of Mt. Vernon
transloading revenues in our Illinois Basin segment, oil & gas lease bonuses in
our Minerals segment and Matrix Design sales in our Other & Corporate segment,
in addition to revenues not specific to any particular segment such as contract
buy-out revenues and other outside services. Other revenues decreased to $5.4
million in the 2020 Quarter from $11.2 million in the 2019 Quarter. The
decrease of $5.8 million was primarily due to reduced sales of mining technology
products by Matrix Design and lower volumes at our Mt. Vernon transloading
facility.
General and administrative. General and administrative expenses for the 2020
Quarter decreased to $13.8 million compared to $19.5 million in the 2019
Quarter. The decrease of $5.7 million was primarily due to lower incentive
compensation expenses and reduced outside services.
Depreciation, depletion and amortization. Depreciation, depletion and
amortization expense increased to $83.6 million for the 2020 Quarter compared to
$76.9 million for 2019 Quarter primarily as a result of charges related to
increased sales from coal inventory and increased oil & gas production from our
Minerals segment.
Transportation revenues and expenses. Transportation revenues and expenses were
$5.8 million and $32.6 million for the 2020 and 2019 Quarters, respectively.
The decrease of $26.8 million was primarily attributable to decreased coal
tonnage for which we arrange third-party transportation at certain mines
primarily due to reduced coal shipments to international markets and a decrease
in average third-party transportation rates in the 2020 Quarter. 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 Adjusted EBITDA. Our 2020 Quarter Segment Adjusted EBITDA decreased
$103.2 million, or 62.5%, to $62.1 million from the 2019 Quarter Segment
Adjusted EBITDA of $165.3 million. Segment Adjusted EBITDA, tons sold, coal
sales, other revenues, oil & gas royalties, BOE volume and Segment Adjusted
EBITDA Expense by segment are as follows:
Three Months Ended
June 30,
2020 2019 Increase (Decrease)
(in thousands)
Segment Adjusted EBITDA
Coal - Illinois Basin $ 26,157 $ 96,075 $ (69,918) (72.8) %
Coal - Appalachia 30,548 53,779 (23,231) (43.2) %
Minerals 6,881 11,098 (4,217) (38.0) %
Other and Corporate 805 6,551 (5,746) (87.7) %
Elimination (2,335) (2,240) (95) (4.2) %
Total Segment Adjusted EBITDA (2) $ 62,056 $ 165,263 $ (103,207) (62.5) %
Tons sold
Coal - Illinois Basin 3,350 7,567 (4,217) (55.7) %
Coal - Appalachia 1,836 2,649 (813) (30.7) %
Other and Corporate - 142 (142) (1)
Elimination - (142) 142 (1)
Total tons sold 5,186 10,216 (5,030) (49.2) %
Coal sales
Coal - Illinois Basin $ 134,160 $ 301,981 $ (167,821) (55.6) %
Coal - Appalachia 102,126 157,951 (55,825) (35.3) %
Other and Corporate - 5,551 (5,551) (1)
Elimination - (4,173) 4,173 (1)
Total coal sales $ 236,286 $ 461,310 $ (225,024) (48.8) %
Other revenues
Coal - Illinois Basin $ 474 $ 2,405 $ (1,931) (80.3) %
Coal - Appalachia 2,380 950 1,430 (1)
Minerals 61 536 (475) (88.6)
Other and Corporate 4,955 10,439 (5,484) (52.5) %
Elimination (2,497) (3,108) 611 19.7 %
Total other revenues $ 5,373 $ 11,222 $ (5,849) (52.1) %
BOE volume and oil & gas royalties
Volume - BOE (3) 411 353 58 16.4 %
Oil & gas royalties $ 7,786 $ 11,892 $ (4,106) (34.5) %
Segment Adjusted EBITDA Expense
Coal - Illinois Basin $ 108,478 $ 208,309 $ (99,831) (47.9) %
Coal - Appalachia 73,959 105,122 (31,163) (29.6) %
Minerals 1,119 1,765 (646) (36.6) %
Other and Corporate 4,147 9,442 (5,295) (56.1) %
Elimination (162) (5,041) 4,879 96.8 %
Total Segment Adjusted EBITDA Expense $ 187,541 $ 319,597 $ (132,056) (41.3) %
(1) Percentage change not meaningful.
For a definition of Segment Adjusted EBITDA and related reconciliation to
(2) comparable GAAP financial measures, please see below under "-Reconciliation
of non-GAAP "Segment Adjusted EBITDA" to GAAP "net income (loss)."
(3) Barrels of oil equivalent ("BOE") is calculated on a 6:1 basis (6,000 cubic
feet of natural gas to one barrel).
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Illinois Basin - Segment Adjusted EBITDA decreased 72.8% to $26.2 million in the
2020 Quarter from $96.1 million in the 2019 Quarter. The decrease of $69.9
million was primarily attributable to lower coal sales, which decreased 55.6% to
$134.2 million in the 2020 Quarter from $302.0 million in the 2019 Quarter,
partially offset by reduced operating expenses. The decrease of $167.8 million
in coal sales primarily reflects reduced coal sales volumes, which decreased
55.7% compared to the 2019 Quarter caused by weak coal demand resulting in large
part by the COVID-19 pandemic and coal market deterioration. The weak coal
demand also resulted in our curtailment of production in the region, including
temporary cessation of coal production at our River View, Gibson, Hamilton and
Warrior mining complexes. Segment Adjusted EBITDA Expense decreased 47.9% to
$108.5 million in the 2020 Quarter from $208.3 million in the 2019 Quarter
primarily as a result of reduced coal sales volumes. Segment Adjusted EBITDA
Expense per ton increased $4.85 per ton sold to $32.38 from $27.53 per ton sold
in the 2019 Quarter, primarily due to reduced coal sales and production volumes,
increased coal inventory charges and higher excise and severance taxes in
addition to certain cost increases described above under "-Coal - Segment
Adjusted EBITDA Expense."
Appalachia - Segment Adjusted EBITDA decreased 43.2% to $30.5 million for the
2020 Quarter from $53.8 million in the 2019 Quarter. The decrease of $23.3
million was primarily attributable to lower coal sales, which decreased 35.3% to
$102.1 million in the 2020 Quarter from $158.0 million in the 2019 Quarter. The
decrease of $55.9 million in coal sales reflects lower coal sales volumes and
price realizations. Sales volumes decreased 30.7% in the 2020 Quarter compared
to the 2019 Quarter due to curtailed production in the region as a result of
weak coal market conditions caused in large part by the COVID-19 pandemic. Coal
sales price per ton sold in the 2020 Quarter decreased 6.7% compared to the 2019
Quarter primarily due to lower metallurgical coal sales prices. Segment
Adjusted EBITDA Expense decreased 29.6% to $74.0 million in the 2020 Quarter
from $105.1 million in the 2019 Quarter due to reduced coal sales volumes.
Segment Adjusted EBITDA Expense per ton increased $0.60 per ton sold to $40.28
compared to $39.68 per ton sold in the 2019 Quarter, as a result of reduced
volumes in the region, an increased sales mix of higher-cost Mettiki tonnage,
higher excise and severance taxes and increased inventory charges, partially
offset by reduced sales of higher cost outside coal purchases. See also certain
cost variances described above under "-Coal - Segment Adjusted EBITDA Expense."
Minerals - Segment Adjusted EBITDA decreased to $6.9 million for the 2020
Quarter from $11.1 million in the 2019 Quarter. The decrease of $4.2 million
primarily resulted from lower sales price realizations per BOE due to reduced
demand amid the COVID-19 pandemic, partially offset by higher volumes, which
increased 16.4% compared to the 2019 Quarter primarily as a result of production
from the additional mineral interests acquired in the Wing Acquisition in August
2019 as well as continued drilling and development activity on our mineral
interests.
Other and Corporate - Segment Adjusted EBITDA decreased by $5.8 million to $0.8
million in the 2020 Quarter compared to $6.6 million in the 2019 Quarter. The
decrease was primarily attributable to reduced coal brokerage activity and
mining technology product sales from Matrix Group.
Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019
We reported a net loss attributable to ARLP of $191.4 million for the 2020
Period compared to net income attributable to ARLP of $334.5 million for the six
months ended June 30, 2019 ("2019 Period"). The net income decrease of $525.9
million was primarily due to a $437.7 million decline in total revenues,
non-cash asset and goodwill impairment charges of $157.0 million recorded in the
2020 Period, a net gain of $170.0 million related to the 2019 AllDale
Acquisition and the redemption of our preferred interest in Kodiak in the 2019
Period. These net income reductions were partially offset by lower operating
expenses and transportation expenses of $421.5 million and $10.5 million,
respectively, for the 2020 Period compared to $617.0 million and $62.9 million,
respectively, in the 2019 Period. Total revenues decreased 41.9% to $606.0
million for the 2020 Period compared to $1.04 billion for the 2019 Period
primarily due to lower coal sales and transportation revenues resulting from
weak market conditions and disruptions caused by the COVID-19 pandemic.
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Six Months Ended June 30,
2020 2019 2020 2019
(in thousands) (per ton sold)
Tons sold 12,437 20,537 N/A N/A
Tons produced 12,344 21,359 N/A N/A
Coal sales $ 550,923 $ 937,326 $ 44.30 $ 45.64
Coal - Segment Adjusted EBITDA Expense
(1) (2) $ 420,237 $ 618,862 $ 33.79 $ 30.13 For a definition of Segment Adjusted EBITDA Expense and related
(1) reconciliation to comparable GAAP financial measures, 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 $386.4 million or 41.2% to $550.9 million for
the 2020 Period from $937.3 million for the 2019 Period. The decrease was
attributable to a volume variance of $369.7 million resulting from decreased
tons sold and a price variance of $16.7 million due to lower average coal sales
prices. Tons sold declined 39.4% to 12.4 million tons in the 2020 Period due to
reduced volumes across all of our mining operations resulting from demand
destruction for coal-powered electricity caused primarily by the COVID-19
pandemic and low natural gas prices, in addition to lower volumes resulting from
a seaborne market that continues to be sub-economic for U.S. production.
Primarily due to reduced shipments of thermal and metallurgical coal to
international markets, coal sales price realizations declined 2.9% in the 2020
Period to $44.30 per ton sold, compared to $45.64 per ton sold during the 2019
Period. As a result of temporarily idling production at certain mines during
the 2020 Period, coal production volumes fell to 12.3 million tons, a reduction
of 42.2% compared to the 2019 Period.
Oil & gas royalties. Oil & gas royalty revenues decreased slightly to $22.0
million in the 2020 Period compared to $22.3 million for the 2019 Period. The
decrease was primarily due to lower average prices partially offset by higher
volumes resulting from the Wing Acquisition in August 2019 as well as continued
drilling and development activity on our mineral interests.
Coal - Segment Adjusted EBITDA Expense. Segment Adjusted EBITDA Expense,
excluding our Minerals segment, decreased 32.1% to $420.2 million, primarily as
a result of reduced coal sales volumes. Segment Adjusted EBITDA Expense per ton
increased 12.1% in the 2020 Period to $33.79 per ton, compared to $30.13 per ton
in the 2019 Period. The increase was attributed primarily to the per ton cost
impact of lower coal volumes and an increased sales mix of higher-cost
Appalachia region sales tons in addition to other cost increases which are
discussed below by category:
Labor and benefit expenses per ton produced, excluding workers' compensation,
? increased 21.7% to $11.38 per ton in the 2020 Period from $9.35 per ton in the
2019 Period. The increase of $2.03 per ton was primarily due to curtailed
production and the regional sales mix discussed above.
Workers' compensation expenses per ton produced increased to $0.74 per ton in
the 2020 Period from $0.55 per ton in the 2019 Period. The increase of $0.19
per ton produced resulted from curtailed production, partially offset by the
? impact of comparative mid-year actuarial workers' compensation accrual
adjustments in the 2020 Period compared to the 2019 Period. Please read "Part
I - Item 1. Financial Statements (Unaudited)-Note 15 - Workers' Compensation
and Pneumoconiosis" of this Quarterly Report on Form 10-Q for more information
on the workers' compensation accrual adjustments.
Production taxes and royalty expenses per ton incurred as a percentage of coal
sales prices and volumes increased $0.64 per produced ton sold in the 2020
? Period compared to the 2019 Period primarily as a result of a $0.60 per ton
government-imposed increase in the federal black lung excise tax, effective
January 1, 2020 and an unfavorable state production mix partially offset by
reduced excise taxes resulting from decreased export shipments.
General and administrative. General and administrative expenses for the 2020
Period decreased to $27.3 million compared to $37.3 million in the 2019 Period.
The decrease of $10.0 million was primarily due to lower incentive compensation
expenses, including the reversal of cumulative previously recognized expense for
restricted units in our
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LTIP granted in 2019 that are no longer considered probable for vesting at the
end of 2021. Please read "Item 1. Financial Statements (Unaudited)-Note 16 -
Compensation Plans" of this Quarterly Report on Form 10-Q for more information
on our LTIP and vesting matters.
Depreciation, depletion and amortization. Depreciation, depletion and
amortization expense increased to $157.5 million for the 2020 Period compared to
$148.1 million for 2019 Period primarily as a result of higher coal inventory
charges and increased oil & gas production from our Minerals segment.
Asset impairments. During the 2020 Period, we recorded $25.0 million of
non-cash asset impairment charges due to sealing our idled Gibson North mine,
resulting in its permanent closure, and a decrease in the fair value of certain
mining equipment and greenfield coal reserves as a result of weakened coal
market conditions. Please read "Item 1. Financial Statements (Unaudited)-Note 4
- Long-Lived Asset Impairments" of this Quarterly Report on Form 10-Q.
Goodwill impairment. During the 2020 Period, we recorded a $132.0 million
non-cash goodwill impairment charge associated with our Hamilton mine, primarily
as the result of reduced expected production volumes due to weakened coal market
conditions and low energy demand resulting in part from the COVID-19 pandemic.
Please read "Item 1. Financial Statements (Unaudited)-Note 5 - Goodwill
Impairment" of this Quarterly Report on Form 10-Q.
Equity securities income. Equity securities income decreased $12.9 million
compared to the 2019 Period as we did not recognize equity securities income in
the 2020 Period due to the redemption of our preferred interest in Kodiak in the
2019 Period.
Acquisition gain. We recorded a non-cash acquisition gain of $177.0 million in
the 2019 Period associated with the AllDale Acquisition to reflect the fair
value of the interests in AllDale I and II we already owned at the time of the
acquisition.
Transportation revenues and expenses. Transportation revenues and expenses were
$10.5 million and $62.9 million for the 2020 and 2019 Periods, respectively.
The decrease of $52.4 million was largely attributable to decreased coal
tonnage for which we arrange third-party transportation at certain mines
primarily reflecting reduced coal shipments to international markets and a
decrease in average third-party transportation rates in the 2020 Period.
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 decreased to $0.1 million in the 2020 Period from $7.3
million in the 2019 Period as a result of allocating $7.1 million of the
acquisition gain discussed above to noncontrolling interest in the 2019 Period.
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Segment Adjusted EBITDA. Our 2020 Period Segment Adjusted EBITDA decreased
$198.1 million, or 53.3%, to $173.8 million from the 2019 Period Segment
Adjusted EBITDA of $371.9 million. Segment Adjusted EBITDA, tons sold, coal
sales, other revenues, oil & gas royalties, BOE volume and Segment Adjusted
EBITDA Expense by segment are as follows:
Six Months Ended
June 30,
2020 2019 Increase (Decrease)
(in thousands)
Segment Adjusted EBITDA
Coal - Illinois Basin $ 76,186 $ 218,812 $ (142,626) (65.2) %
Coal - Appalachia 78,058 112,434 (34,376) (30.6) %
Minerals 20,636 20,230 406 2.0 %
Other and Corporate 3,547 24,912 (21,365) (85.8) %
Elimination (4,670) (4,481) (189) (4.2) %
Total Segment Adjusted EBITDA (2) $ 173,757 $ 371,907 $ (198,150) (53.3) %
Tons sold
Coal - Illinois Basin 8,406 15,240 (6,834) (44.8) %
Coal - Appalachia 4,031 5,297 (1,266) (23.9) %
Other and Corporate - 278 (278) (1)
Elimination - (278) 278 (1)
Total tons sold 12,437 20,537 (8,100) (39.4) %
Coal sales
Coal - Illinois Basin $ 333,258 $ 619,251 $ (285,993) (46.2) %
Coal - Appalachia 217,665 315,404 (97,739) (31.0) %
Other and Corporate - 10,841 (10,841) (1)
Elimination - (8,170) 8,170 (1)
Total coal sales $ 550,923 $ 937,326 $ (386,403) (41.2) %
Other revenues
Coal - Illinois Basin $ 1,392 $ 5,293 $ (3,901) (73.7) %
Coal - Appalachia 14,061 1,901 12,160 (1)
Minerals 85 871 (786) (90.2) %
Other and Corporate 12,339 19,311 (6,972) (36.1) %
Elimination (5,356) (6,199) 843 13.6 %
Total other revenues $ 22,521 $ 21,177 $ 1,344 6.3 %
BOE volume and oil & gas royalties
Volume - BOE (3) 906 680 226 33.2 %
Oil & gas royalties $ 22,025 $ 22,285 $ (260) (1.2) %
Segment Adjusted EBITDA Expense
Coal - Illinois Basin $ 258,465 $ 405,731 $ (147,266) (36.3) %
Coal - Appalachia 153,669 204,871 (51,202) (25.0) %
Minerals 2,002 3,592 (1,590) (44.3) %
Other and Corporate 8,789 18,148 (9,359) (51.6) %
Elimination (686) (9,888) 9,202 93.1 %
Total Segment Adjusted EBITDA Expense $ 422,239 $ 622,454 $ (200,215) (32.2) %
(1) Percentage change not meaningful.
For a definition of Segment Adjusted EBITDA and related reconciliation to
(2) comparable GAAP financial measures, please see below under "-Reconciliation
of non-GAAP "Segment Adjusted EBITDA" to GAAP "net income (loss)."
(3) Barrels of oil equivalent ("BOE") is calculated on a 6:1 basis (6,000 cubic
feet of natural gas to one barrel).
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Illinois Basin - Segment Adjusted EBITDA decreased 65.2% to $76.2 million in the
2020 Period from $218.8 million in the 2019 Period. The decrease of $142.6
million was primarily attributable to lower coal sales, which decreased 46.2% to
$333.3 million in the 2020 Period from $619.3 million in the 2019 Period,
partially offset by reduced operating expenses. The decrease of $286.0 million
in coal sales primarily reflects reduced coal sales volumes, which decreased
46.2% compared to the 2019 Period due to curtailed production across all of our
mining operations in the region as a result of weak coal market conditions amid
the COVID-19 pandemic. Segment Adjusted EBITDA Expense decreased 36.3% to $258.5
million in the 2020 Period from $405.7 million in the 2019 Period primarily as a
result of reduced coal sales volumes. Segment Adjusted EBITDA Expense per ton
increased $4.13 per ton sold to $30.75 from $26.62 per ton sold in the 2019
Period, primarily due to reduced coal volumes and certain cost increases
described above under "-Coal - Segment Adjusted EBITDA Expense."
Appalachia - Segment Adjusted EBITDA decreased 30.6% to $78.1 million for the
2020 Period from $112.4 million in the 2019 Period. The decrease of $34.3
million was primarily attributable to lower coal sales, which decreased 31.0% to
$217.7 million in the 2020 Period from $315.4 million in the 2019 Period. The
decrease of $97.7 million in coal sales reflects lower coal sales volumes and
price realizations. Sales volumes decreased 23.9% in the 2020 Period compared
to the 2019 Period due to curtailed production in the region as a result of weak
coal market conditions amid the COVID-19 pandemic. Coal sales price per ton
sold in the 2020 Period decreased 9.3% compared to the 2019 Period primarily due
to reduced metallurgical coal sales volumes and price realizations at our
Mettiki mine. Segment Adjusted EBITDA Expense decreased 25.0% to $153.7 million
in the 2020 Period from $204.9 million in the 2019 Period due to reduced coal
sales volumes. Segment Adjusted EBITDA Expense per ton decreased $0.56 per ton
sold to $38.12 compared to $38.68 per ton sold in the 2019 Period, as a result
of fewer longwall move days at both our Tunnel Ridge and Mettiki mines and
reduced roof support and contract labor expenses per ton, partially offset by
curtailed production in the region, particularly from the temporary cessation of
operations at our MC Mining mine during the 2020 Period, and an increased sales
mix of higher-cost Mettiki tonnage. See also certain cost variances described
above under "-Coal - Segment Adjusted EBITDA Expense."
Minerals - Segment Adjusted EBITDA increased slightly to $20.6 million for the
2020 Period from $20.2 million in the 2019 Period reflecting increased
production volumes from the additional mineral interests acquired in the Wing
Acquisition in August 2019 and from continued drilling and development
activities, partially offset by reduced average sales price per BOE due to
reduced demand amid the COVID-19 pandemic.
Other and Corporate - Segment Adjusted EBITDA decreased by $21.4 million to $3.5
million in the 2020 Period compared to $24.9 million in the 2019 Period. The
decrease was primarily attributable to lower equity securities income as a
result of the redemption of our preferred interest in Kodiak in the 2019 Period,
decreased coal brokerage activity and lower mining technology product sales from
the Matrix Group.
Reconciliation of non-GAAP "Segment Adjusted EBITDA" to GAAP "net income (loss)"
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
(loss) attributable to ARLP before net interest expense, income taxes,
depreciation, depletion and amortization, general and administrative expenses,
asset and goodwill impairments and acquisition gain. 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 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 (loss), the most comparable GAAP financial measure:
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 2020 2019
(in thousands)
Consolidated Segment Adjusted
EBITDA $ 62,056 $ 165,263 $ 173,757 $ 371,907
General and administrative (13,822) (19,521) (27,260) (37,333)
Depreciation, depletion and
amortization (83,559) (76,913) (157,480) (148,052)
Asset impairments - - (24,977) -
Goodwill impairment - - (132,026) -
Interest expense, net (11,416) (10,573) (23,643) (21,904)
Acquisition gain - - - 177,043
Income tax (expense) benefit 77 (186) 182 (80)
Acquisition gain attributable to
noncontrolling interest - - - (7,083)
Net income (loss) attributable to
ARLP $ (46,664) $ 58,070 $ (191,447) $ 334,498
Noncontrolling interest (15) 114 61 7,290
Net income (loss) $ (46,679) $ 58,184 $ (191,386) $ 341,788Segment Adjusted EBITDA Expense (a non-GAAP financial measure) includes
operating expenses, coal purchases and other 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:
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 2020 2019
(in thousands)
Segment Adjusted EBITDA Expense $ 187,541 $ 319,597 $ 422,239 $ 622,454
Outside coal purchases - (5,311) - (5,311)
Other expense (377) (13) (733) (142)
Operating expenses (excluding
depreciation, depletion and
amortization) $ 187,164 $ 314,273 $ 421,506 $ 617,001
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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 any 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 including
the COVID-19 pandemic. Based on our recent operating cash flow results, current
cash position, anticipated future cash flows and sources of financing that we
expect to have available, we anticipate remaining in compliance with the
covenants of the Credit Agreement and do not expect any constraints to our
liquidity. However, to the extent operating cash flow or access to and cost of
financing sources are materially different than expected, future covenant
compliance or liquidity may be adversely affected. Please read "Item 1A. Risk
Factors" in our Annual Report on Form 10-K for the year ended December 31, 2019
and "Part II - Item 1A. Risk Factors" in our Form 10-Q for the quarterly period
ended March 31, 2020.
In responding to weak market conditions, lower commodity prices, and the
lockdown initiated in the first quarter of 2020 to certain areas of the global
economy due to the COVID-19 pandemic, the Partnership took numerous actions to
optimize cash flows and preserve liquidity by reducing capital expenditures,
working capital, costs and expenses, including adjusting its corporate support
structure to better align with current operating levels. We have also utilized
certain provisions of the Coronavirus Aid Relief and Economic Security Act of
2020 which modestly increased our short-term liquidity.
Additional actions to enhance our liquidity include our Board's decisions to
suspend the cash distributions to unitholders for the Quarters ending March 31,
2020, June 30, 2020 and September 30, 2020. We have also strengthened our
liquidity by entering into a $537.75 million (reducing to $459.5 million on May
23, 2021) revolving credit facility with a termination date of March 9, 2024,
replacing the $494.75 million revolving credit facility that was set to expire
on May 23, 2021. In addition, on June 5, 2020 we entered into a $14.7 million
equipment financing arrangement which provides for forty-eight monthly payments
with an implicit interest rate of 6.1%, maturing on June 5, 2024.
In May 2018, the Board 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 June 30, 2020, we have purchased units
for a total of $93.5 million under the program. During the six months ended
June 30, 2020, we did not repurchase and retire any units. The timing of any
future unit repurchases and the ultimate number of units to be purchased will
depend on a number of factors, including business and market conditions, our
future financial performance, and other capital priorities. Please read "Part II
- Item 2. Unregistered Sales of Equity Securities and Use of Proceeds" of this
Quarterly Report on Form 10-Q for more information on unit repurchase program.
Mine Development Project
In 2018, we began development of MC Mining's Excel Mine No. 5 which continued
through 2019 and into 2020. We currently anticipate deploying capital of
approximately $3.0 million to $5.0 million in 2020 to complete the project which
we expect to fund 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 recent levels of production at MC Mining's Excel Mine No. 4
continue 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
we anticipate its reserves depleting later in 2020.
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Cash Flows
Cash provided by operating activities was $170.2 million for the 2020 Period
compared to $301.7 million for the 2019 Period. The decrease in cash provided
by operating activities was primarily due to a decrease in net income adjusted
for non-cash items and unfavorable working capital changes primarily related to
accounts payable. These decreases were partially offset primarily by a
favorable working capital change related to trade receivables and inventories.
Net cash used in investing activities was $87.5 million for the 2020 Period
compared to $209.8 million for the 2019 Period. The decrease in cash used in
investing activities was primarily attributable to the AllDale Acquisition
during 2019 Period and decreased capital expenditures for mine infrastructure
and equipment at various mines during the 2020 Period. This comparative decrease
was partially offset by cash received from the redemption of our Kodiak equity
securities in the 2019 Period.
Net cash used in financing activities was $84.1 million for the 2020 Period
compared to $280.9 million for the 2019 Period. The decrease in cash used in
financing activities was primarily attributable to decreases in overall net
payments on the securitization and revolving credit facilities and a decrease in
distributions paid to partners in the 2020 Period.
Capital Expenditures
Capital expenditures decreased to $84.2 million in the 2020 Period from $165.6
million in the 2019 Period. See our discussion of "Cash Flows" above concerning
the decrease in capital expenditures.
We currently project average estimated annual maintenance capital expenditures
over the five-year period beginning in January 2020 of approximately $4.86 per
ton produced. Our anticipated total capital expenditures, including maintenance
capital expenditures, for 2020 are estimated in a range of $130.0 million to
$135.0 million. Management anticipates funding remaining 2020 capital
requirements with cash and cash equivalents ($35.1 million as of June 30, 2020),
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.
Debt Obligations
Credit Facility. On March 9, 2020, our Intermediate Partnership entered into a
Fifth Amended and Restated Credit Agreement (the "Credit Agreement") with
various financial institutions. The Credit Agreement provides for a $537.75
million revolving credit facility, reducing to $459.5 million on May 23, 2021,
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 March 9, 2024. The Credit Facility
replaced the $494.75 million revolving credit facility extended to the
Intermediate Partnership under its Fourth Amended and Restated Credit Agreement,
dated as of January 27, 2017, by various banks and other lenders that would have
expired on May 23, 2021. Concurrently with the entry into the Credit Agreement,
we reorganized the entities holding our oil & gas interests such that Alliance
Royalty, LLC became a direct wholly-owned subsidiary of Alliance Minerals.
The Credit Agreement is guaranteed by certain of our Intermediate Partnership's
material direct and indirect subsidiaries (the "Restricted Subsidiaries") and is
secured by substantially all of the assets of the Restricted Subsidiaries. The
Credit Agreement is not guaranteed or secured by the assets of the Intermediate
Partnership's oil & gas minerals subsidiary, Alliance Minerals, or its direct
and indirect subsidiaries (collectively the "Unrestricted Subsidiaries").
Borrowings under the Revolving Credit Facility bear interest, at our option, 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 3.03% as of June 30, 2020. At June 30, 2020, we
had $9.3 million of letters of credit outstanding with $263.5 million available
for borrowing under the Revolving Credit Facility. We incur an annual commitment
fee of 0.35% on the undrawn portion of the Revolving Credit Facility. We
utilize the Revolving Credit Facility, as appropriate, for working capital
requirements, capital expenditures and investments, scheduled debt payments and
distribution payments.
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The Credit Agreement contains various restrictions affecting the Intermediate
Partnership and its Restricted Subsidiaries including, among other things,
restrictions on incurrence of additional indebtedness and liens, sale of assets,
investments, mergers and consolidations and transactions with affiliates,
including transactions with Unrestricted Subsidiaries. In each case, these
restrictions are subject to various exceptions. In addition, the payment of cash
distributions is restricted if such payment would result in a fixed charge
coverage ratio of less than 1.0 to 1.0 (as defined in the Credit Agreement) for
the four most recently ended fiscal quarters. 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, (b) a cash flow to interest expense ratio of not less than 3.0
to 1.0 and (c) a first lien debt to cash flow ratio of not more than 1.5 to 1.0,
in each case, during the four most recently ended fiscal quarters. The debt to
cash flow ratio, cash flow to interest expense ratio and first lien debt to cash
flow ratio were 1.82 to 1.0, 8.63 to 1.0 and 0.88 to 1.0, respectively, for the
trailing twelve months ended June 30, 2020. We remain in compliance with the
covenants of the Credit Agreement as of June 30, 2020 and expect to remain in
compliance with such covenants for the balance of the year, provided economic
conditions do not deteriorate substantially.
Senior Notes. On April 24, 2017, the Intermediate Partnership and Alliance
Resource Finance Corporation (as co-issuer), a wholly owned subsidiary of the
Intermediate Partnership ("Alliance Finance"), 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. The issuers of the Senior Notes may redeem all or a part of the
notes at any time at redemption prices set forth in the indenture governing the
Senior Notes.
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
certain trade receivables on an ongoing basis to our Intermediate Partnership,
which then sells the trade receivables to AROP Funding, LLC ("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. The
agreement governing the Securitization Facility contains customary terms and
conditions, including limitations with regards to certain customer credit
ratings. In October 2019, we extended the term of the Securitization Facility
to January 2021. At June 30, 2020, we had a $38.9 million outstanding balance
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 customary terms and events of default and an implicit
interest rate of 4.75% that 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.
June 2020 Equipment Financing. On June 5, 2020, the Intermediate Partnership
entered into an equipment financing arrangement accounted for as debt, wherein
the Intermediate Partnership received $14.7 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
"June 2020 Equipment Financing"). The June 2020 Equipment Financing contains
customary terms and events of default and provides for forty-eight monthly
payments with an implicit interest rate of 6.1%, maturing on June 5, 2024. Upon
maturity, the equipment will revert back to the Intermediate Partnership.
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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 June 30, 2020, we had $5.0 million in letters of credit
outstanding under this agreement.
Related-Party Transactions
We have related-party transactions and activities with Mr. Craft, MGP, ARH II
and their respective affiliates. These related-party transactions and activities
relate principally to 1) mineral leases with charitable foundations established
by Mr. Craft and Kathleen S. Craft, 2) the use of aircraft, and 3) providing
administrative services with respect to the mineral interests Mr. Craft acquired
concurrently with the Wing Acquisition. We also have transactions with (a) WKY
CoalPlay, LLC ("WKY CoalPlay") regarding three mineral leases, (b) Bluegrass
Minerals Management, LLC ("Bluegrass Minerals") through its noncontrolling
ownership interest in Cavalier Minerals and (c) AllDale III to support its
acquisition of oil & gas mineral interests. For more information regarding the
Wing Acquisition, WKY CoalPlay, Bluegrass Minerals and AllDale III, please read
"Item 1. Financial Statements (Unaudited)-Note 3 - Acquisition", "-Note 10 -
Variable Interest Entities" and "-Note 11 - Investments" of this Quarterly
Report on Form 10-Q. Please read our Annual Report on Form 10-K for the year
ended December 31, 2019, "Item 8. Financial Statements and Supplementary
Data-Note 20 - Related-Party Transactions" for additional information concerning
related-party transactions.
New Accounting Standards
See "Item 1. Financial Statements (Unaudited)-Note 2 - New Accounting Standards"
of this Quarterly Report on Form 10-Q for a discussion of new accounting
standards.
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