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, LP ("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, LLC's land and
coal mineral interest activities, Pontiki Coal, LLC's workers' compensation and
pneumoconiosis liabilities, Wildcat Insurance, LLC ("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 Nine Months Ended September 30,
2020
We began the year anticipating our results for the nine months ended September
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. During the first half of the year, 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 during the first half of the year
with unprecedented demand destruction across all energy markets due to the
disruptions to global economies in response to the COVID-19 pandemic.
In response to these challenges, 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 quarter ended June
30, 2020 (the "Sequential Quarter") we monitored coal inventories at each
location and worked closely with customers to determine when it would be
necessary to resume coal production. Underground production operations resumed
in the Sequential Quarter at each of our mining complexes. All of our seven
mining complexes are now producing coal. However, several mines will continue
to run 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 continuously 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") suspended cash distributions to
unitholders beginning with the quarter ended March 31, 2020 ("First Quarter").
During the quarter ended September 30, 2020 (the "2020 Quarter"), improved
economic activity, increased coal demand and recovering oil & gas production
volumes and prices positively impacted our performance. Stronger commodity
prices led oil & gas operators to bring previously shut-in wells back online and
slowly resume drilling and completion activity positively impacting our Minerals
segment.
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 a reduction in the global demand for energy.
These measures included travel restrictions, gathering bans and stay-at-home
orders. All of our operations are classified as essential in the states in
which we operate. Therefore, to protect our employees during the COVID-19
pandemic, we implemented numerous health and safety protocols designed to
contain
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and mitigate the risk of infection from COVID-19. We will continually evaluate
the need for further safeguards as the pandemic continues.
As discussed above, we curtailed coal production during the 2020 Period in
response to global energy 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 beginning with the
First Quarter.
In March 2020, we withdrew 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 have further enhanced our liquidity by reducing our total debt by $100.4
million during the 2020 Quarter.
We are continuing to monitor and may take further actions to minimize any
adverse impact caused by the COVID-19 pandemic.
Beginning in the First Quarter, the trend of our earnings was 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. These impacts continued and were
more fully realized in the Sequential Quarter, as production was curtailed at a
majority of our mines and oil & gas commodity prices declined. Later in the
Sequential Quarter, we were able to bring our coal production back online at all
of our mines. Financial and operating results for the 2020 Quarter have
improved due to increased demand for coal and oil & gas compared to the
Sequential Quarter.
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The following comparisons between the 2020 Quarter, the Sequential Quarter, and
the First Quarter reflect the trend of earnings during the 2020 Period.
[[Image Removed: Graphic]]
For a definition of Segment Adjusted EBITDA and related reconciliation to
(1) comparable GAAP financial measures, please see below under "-Reconciliation
of non-GAAP "Segment Adjusted EBITDA" to GAAP "net income (loss)."
For a definition of Segment Adjusted EBITDA Expense and related
(2) 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."
(3) Barrels of oil equivalent ("BOE") is calculated on a 6:1 basis (6,000 cubic
feet of natural gas to one barrel).
Please see our discussion in "Part I - Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations" in our Forms 10-Q for
the quarterly periods ended June 30, 2020 and March 31, 2020 for more
information with respect to the results of the Sequential Quarter and the First
Quarter, respectively.
Three Months Ended September 30, 2020 Compared to Three Months Ended
September 30, 2019
We reported net income attributable to ARLP of $27.2 million for the 2020
Quarter compared to $39.1 million for the three months ended September 30, 2019
("2019 Quarter"). The decrease of $11.9 million was primarily due to lower
revenues, partially offset by reduced total operating expenses reflecting in
part a $15.2 million impairment charge in the 2019 Quarter discussed below.
Total revenues decreased to $355.7 million in the 2020 Quarter compared to
$464.7 million for the 2019 Quarter due to reduced coal sales volumes and prices
as a result of weak coal markets amid reduced global energy demand during the
COVID-19 pandemic. Operating expenses of $216.0 million for the 2020 Quarter
were also lower compared to $278.3 million in the 2019 Quarter.
Three Months Ended September 30,
2020 2019 2020 2019
(in thousands) (per ton sold)
Tons sold 7,702 9,320 N/A N/A
Tons produced 7,202 10,071 N/A N/A
Coal sales $ 335,767 $ 420,005 $ 43.59 $ 45.06
Coal - Segment Adjusted EBITDA Expense
(1) (2) $ 215,901 $ 286,564 $ 28.03 $ 30.75 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 $84.2 million or 20.1% to $335.8 million for
the 2020 Quarter from $420.0 million for the 2019 Quarter. The decrease was
attributable to a volume variance of $72.9 million resulting from decreased tons
sold and a price variance of $11.3 million due to lower average coal sales
prices. Tons sold declined to 7.7 million tons in the 2020 Quarter compared to
9.3 million tons in the 2019 Quarter primarily reflecting reduced sales of
export
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volumes. Coal sales price realizations also fell by 3.3% in the 2020 Quarter to
$43.59 per ton sold, compared to $45.06 per ton sold during the 2019 Quarter due
to lower priced thermal and metallurgical markets compared to the 2019 Quarter.
Oil & gas royalties. Our mineral interests contributed royalty revenues of $9.7
million in the 2020 Quarter compared to $14.0 million for the 2019 Quarter. The
decrease in royalty revenues is primarily due to lower oil & gas sales price
realizations resulting from reduced global energy 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. 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 24.7% to $215.9 million, as a result
of reduced tons sold and lower expense per ton. On a per ton basis, Segment
Adjusted EBITDA Expense, excluding our Minerals segment, decreased 8.8% in the
2020 Quarter to $28.03 per ton sold, compared to $30.75 per ton in the 2019
Quarter, primarily due to ongoing expense control initiatives at all operations,
a favorable sales mix from our lower cost mines, improved recovery percentages
from certain mines and lower inventory costs, particularly at our Appalachian
mines. In addition, other cost decreases are discussed by category below:
Material and supplies expenses per ton produced decreased 10.3% to $9.58 per
ton in the 2020 Quarter from $10.68 per ton in the 2019 Quarter. The decrease
? of $1.10 per ton produced resulted primarily from related decreases of $0.33
per ton for contract labor used in the mining process, $0.29 per ton for roof
support and $0.28 per ton for outside expenses, partially offset by an increase
of $0.24 per ton in longwall subsidence expense.
Maintenance expenses per ton produced decreased 23.2% to $2.81 per ton in the
? 2020 Quarter from $3.66 per ton in the 2019 Quarter. The decrease of $0.85 per
ton produced was primarily due to reduced maintenance requirements as a result
of curtailed production.
Operating expenses benefited from a $4.0 million decrease associated with the
? commencement of a sales-type lease in the 2020 Quarter for certain properties
at our Pattiki mining complex, which ceased production in 2016 and where
reclamation activities are ongoing.
We had no sales of outside coal purchases in the 2020 Quarter compared to $10.6
? 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.
Segment Adjusted EBITDA Expense decreases per ton above were partially offset by
the following increases:
Labor and benefit expenses per ton produced, excluding workers' compensation,
? increased 4.7% to $10.39 per ton in the 2020 Quarter from $9.92 per ton in the
2019 Quarter. The increase of $0.47 per ton was primarily due to reduced
production and resulting higher fixed costs per ton.
Production taxes and royalty expenses per ton incurred as a percentage of coal
sales prices and volumes increased $0.86 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 increasing severance
taxes per ton, in addition to increased excise taxes per ton resulting from a
greater mix of domestic vs. export shipments.
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 Other & Corporate, in addition
to revenues not specific to any particular segment such as contract buy-out
revenues and other outside services. Other revenues decreased to $4.0 million
in the 2020 Quarter from $10.7 million in the 2019 Quarter. The decrease of
$6.7 million was primarily due to reduced sales of mining technology products by
our Matrix Design subsidiary and lower volumes at our Mt. Vernon transloading
facility.
General and administrative. General and administrative expenses for the 2020
Quarter decreased to $13.9 million compared to $17.9 million in the 2019
Quarter. The decrease of $4.0 million was primarily due to lower incentive
compensation expenses and reduced outside services.
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Depreciation, depletion and amortization. Depreciation, depletion and
amortization expense increased to $80.2 million for the 2020 Quarter compared to
$72.3 million for the 2019 Quarter primarily as a result of charges related to
increased sales from coal inventory.
Asset impairment. During the 2019 Quarter, we ceased coal production at our
Dotiki mine to focus on maximizing production at our lower-cost mines in the
Illinois Basin. Consequently, we recorded a non-cash asset impairment charge of
$15.2 million in the 2019 Quarter. Please read "Item 1. Financial Statements
(Unaudited) - Note 4 - Long-Lived Asset Impairments" of this Quarterly Report on
Form 10-Q.
Transportation revenues and expenses. Transportation revenues and expenses were
$6.2 million and $20.0 million for the 2020 and 2019 Quarters, respectively.
The decrease of $13.8 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
$23.5 million, or 15.0%, to $132.7 million from the 2019 Quarter Segment
Adjusted EBITDA of $156.2 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
September 30,
2020 2019 Increase (Decrease)
(in thousands)
Segment Adjusted EBITDA
Coal - Illinois Basin $ 81,617 $ 87,780 $ (6,163) (7.0) %
Coal - Appalachia 43,358 55,178 (11,820) (21.4) %
Minerals 8,898 12,202 (3,304) (27.1) %
Other and Corporate 1,163 3,243 (2,080) (64.1) %
Elimination (2,335) (2,240) (95) (4.2) %
Total Segment Adjusted EBITDA (2) $ 132,701 $ 156,163 $ (23,462) (15.0) %
Tons sold
Coal - Illinois Basin 5,219 6,553 (1,334) (20.4) %
Coal - Appalachia 2,483 2,767 (284) (10.3) %
Other and Corporate - 144 (144) (1)
Elimination - (144) 144 (1)
Total tons sold 7,702 9,320 (1,618) (17.4) %
Coal sales
Coal - Illinois Basin $ 206,356 $ 256,293 $ (49,937) (19.5) %
Coal - Appalachia 129,411 162,316 (32,905) (20.3) %
Other and Corporate - 5,689 (5,689) (1)
Elimination - (4,293) 4,293 (1)
Total coal sales $ 335,767 $ 420,005 $ (84,238) (20.1) %
Other revenues
Coal - Illinois Basin $ 282 $ 5,264 $ (4,982) (94.6) %
Coal - Appalachia 395 852 (457) (53.6) %
Minerals 28 208 (180) (86.5)
Other and Corporate 6,070 7,434 (1,364) (18.3) %
Elimination (2,810) (3,030) 220 7.3 %
Total other revenues $ 3,965 $ 10,728 $ (6,763) (63.0) %
BOE volume and oil & gas royalties
Volume - BOE (3) 468 433 35 8.1 %
Oil & gas royalties $ 9,693 $ 13,969 $ (4,276) (30.6) %
Segment Adjusted EBITDA Expense
Coal - Illinois Basin $ 125,021 $ 173,779 $ (48,758) (28.1) %
Coal - Appalachia 86,447 107,990 (21,543) (19.9) %
Minerals 849 2,517 (1,668) (66.3) %
Other and Corporate 4,908 9,878 (4,970) (50.3) %
Elimination (475) (5,083) 4,608 90.7 %
Total Segment Adjusted EBITDA Expense $ 216,750 $ 289,081 $ (72,331) (25.0) %
(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 7.0% to $81.6 million in the
2020 Quarter from $87.8 million in the 2019 Quarter. The decrease of $6.2
million was primarily attributable to lower coal sales, which decreased 19.5% to
$206.4 million in the 2020 Quarter from $256.3 million in the 2019 Quarter,
partially offset by reduced operating expenses. The decrease of $49.9 million
in coal sales primarily reflects reduced tons sold, which decreased 20.4%
compared to the 2019 Quarter due to the impacts of the COVID-19 pandemic and
reduced export shipments. Segment Adjusted EBITDA Expense decreased 28.1% to
$125.0 million in the 2020 Quarter from $173.8 million in the 2019 Quarter
primarily as a result of reduced tons sold and decreased per ton costs. Segment
Adjusted EBITDA Expense per ton decreased $2.57 per ton sold to $23.95 from
$26.52 per ton sold in the 2019 Quarter primarily as a result of reduced
maintenance expenses per ton as well as lower materials and supplies expenses
per ton across the region. Both decreases reflect a greater mix of sales from
lower cost River View production, the elimination of high cost Dotiki production
beginning late in the 2019 Quarter and improved recovery percentages at Gibson,
partially offset by reduced total coal production volumes from the region. See
also certain cost variances described above under "-Coal - Segment Adjusted
EBITDA Expense."
Appalachia - Segment Adjusted EBITDA decreased 21.4% to $43.4 million for the
2020 Quarter from $55.2 million in the 2019 Quarter. The decrease of $11.8
million was primarily attributable to lower coal sales, which decreased 20.3% to
$129.4 million in the 2020 Quarter from $162.3 million in the 2019 Quarter,
partially offset by reduced operating expenses. The decrease of $32.9 million
in coal sales reflects lower tons sold and price realizations. Tons sold
decreased 10.3% in the 2020 Quarter compared to the 2019 Quarter due to the
impacts of the COVID-19 pandemic and coal market deterioration, particularly
with regards to the international shipments. Coal sales price per ton sold in
the 2020 Quarter decreased 11.1% compared to the 2019 Quarter primarily due to
weak market conditions and the absence of higher priced metallurgical coal sales
in the 2020 Quarter. Segment Adjusted EBITDA Expense decreased 19.9% to $86.4
million in the 2020 Quarter from $108.0 million in the 2019 Quarter due to
reduced tons sold and decreased per ton costs. Segment Adjusted EBITDA Expense
per ton decreased $4.21 per ton sold to $34.82 compared to $39.03 per ton sold
in the 2019 Quarter, as a result of improved recoveries at our Mettiki and
Tunnel Ridge mines, lower maintenance expenses across the region, lower
inventory costs and the absence of higher cost purchased tons sold. See also
certain cost variances described above under "-Coal - Segment Adjusted EBITDA
Expense."
Minerals - Segment Adjusted EBITDA decreased to $8.9 million for the 2020
Quarter from $12.2 million in the 2019 Quarter. The decrease of $3.3 million
was primarily due to lower sales price realizations per BOE resulting from
reduced demand amid the COVID-19 pandemic, partially offset by higher volumes,
which increased 8.1% compared to the 2019 Quarter primarily as a result of
production from the additional mineral interests acquired in the Wing
Acquisition.
Nine Months Ended September 30, 2020 Compared to Nine Months Ended
September 30, 2019
We reported a net loss attributable to ARLP of $164.2 million for the 2020
Period compared to net income attributable to ARLP of $373.6 million for the
nine months ended September 30, 2019 ("2019 Period"). The decrease of $537.8
million was primarily due to a $546.8 million decline in total revenues, a
non-cash goodwill impairment charge of $132.0 million recorded in the 2020
Period, a net gain of $170.0 million related to the 2019 AllDale Acquisition and
the elimination of equity securities income due to 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
$637.5 million and $16.7 million, respectively, for the 2020 Period compared to
$895.3 million and $82.9 million, respectively, in the 2019 Period. Total
revenues decreased 36.2% to $961.6 million for the 2020 Period compared to $1.51
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.
Nine Months Ended September 30,
2020 2019 2020 2019
(in thousands) (per ton sold)
Tons sold 20,139 29,857 N/A N/A
Tons produced 19,546 31,430 N/A N/A
Coal sales $ 886,690 $ 1,357,331 $ 44.03 $ 45.46
Coal - Segment Adjusted EBITDA Expense
(1) (2) $ 636,138 $ 905,426 $ 31.59 $ 30.33 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."
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(2) Coal - Segment Adjusted EBITDA Expense is defined as consolidated Segment
Adjusted EBITDA Expense excluding our Minerals segment.
Coal sales. Coal sales decreased $470.6 million or 34.7% to $886.7 million for
the 2020 Period from $1.36 billion for the 2019 Period. The decrease was
attributable to a volume variance of $441.8 million resulting from decreased
tons sold and a price variance of $28.8 million due to lower average coal sales
prices. Tons sold declined 32.5% to 20.1 million tons in the 2020 Period
primarily due to reduced shipments to international markets, which also caused
coal sales price realizations to decline 3.1% in the 2020 Period to $44.03 per
ton sold, compared to $45.46 per ton sold during the 2019 Period. As a result
of temporarily idling production at certain mines in response to weak market
conditions during the 2020 Period, coal production volumes fell to 19.5 million
tons, a reduction of 37.8% compared to the 2019 Period.
Oil & gas royalties. Oil & gas royalty revenues decreased to $31.7 million in
the 2020 Period compared to $36.3 million for the 2019 Period. The decrease was
primarily due to lower average product prices, partially offset by higher
volumes resulting from the Wing Acquisition in August 2019, and continued
drilling and development of our mineral interests.
Coal - Segment Adjusted EBITDA Expense. Segment Adjusted EBITDA Expense,
excluding our Minerals segment, decreased 29.7% to $636.1 million, primarily as
a result of reduced tons sold. Segment Adjusted EBITDA Expense per ton
increased 4.2% in the 2020 Period to $31.59 per ton, compared to $30.33 per ton
in the 2019 Period. The increase is attributed primarily to the per ton cost
impact of lower coal volumes in addition to other cost increases which are
discussed below by category:
Labor and benefit expenses per ton produced, excluding workers' compensation,
? increased 15.6% to $11.02 per ton in the 2020 Period from $9.53 per ton in the
2019 Period. The increase of $1.49 per ton was primarily due to curtailed
production.
Production taxes and royalty expenses per ton incurred as a percentage of coal
sales prices and volumes increased $0.71 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 increasing severance
taxes per ton, in addition to increased excise taxes per ton resulting from a
greater mix of domestic vs. export shipments.
Segment Adjusted EBITDA Expense increases per ton above were partially offset by
the following decreases:
Material and supplies expenses per ton produced decreased 4.1% to $10.53 per
ton in the 2020 Period from $10.98 per ton in the 2019 Period. The decrease of
$0.45 per ton produced resulted primarily from related decreases of $0.52 per
? ton for roof support and $0.36 per ton for contract labor used in the mining
process, partially offset by increases of $0.27 per ton for power and fuel used
in the mining process and $0.16 per ton for outside expenses. In addition,
material and supplies expenses per ton produced benefited from a greater mix of
production from our lower cost per ton mines, River View and Tunnel Ridge.
Maintenance expenses per ton produced decreased 8.8% to $3.23 per ton in the
? 2020 Period from $3.54 per ton in the 2019 Period. The decrease of $0.31 per
ton produced was primarily due to reduced maintenance requirements as a result
of curtailed production.
We had no sales of outside coal purchases in the 2020 Period compared to $15.9
? million in the 2019 Period. Thus, costs per ton in the 2020 Period benefited
as our cost of outside coal purchases are generally higher on a per ton basis
than our produced coal.
General and administrative. General and administrative expenses for the 2020
Period decreased to $41.1 million compared to $55.2 million in the 2019 Period.
The decrease of $14.1 million was primarily due to lower incentive compensation
expenses, including the reversal of cumulative previously recognized expense for
restricted units in our 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.
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Depreciation, depletion and amortization. Depreciation, depletion and
amortization expense increased to $237.7 million for the 2020 Period compared to
$220.4 million for 2019 Period primarily due to charges related to increased
sales from coal inventory and increased oil & gas production from our Minerals
segment in the 2020 Period.
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. During the 2019 Period, we recorded an asset impairment
charge of $15.2 million due to the cessation of production at our Dotiki mine.
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
$16.7 million and $82.9 million for the 2020 and 2019 Periods, respectively.
The decrease of $66.2 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 $7.4
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
$221.6 million, or 42.0%, to $306.5 million from the 2019 Period Segment
Adjusted EBITDA of $528.1 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:
Nine Months Ended
September 30,
2020 2019 Increase (Decrease)
(in thousands)
Segment Adjusted EBITDA
Coal - Illinois Basin $ 157,803 $ 306,592 $ (148,789) (48.5) %
Coal - Appalachia 121,416 167,612 (46,196) (27.6) %
Minerals 29,534 32,432 (2,898) (8.9) %
Other and Corporate 4,710 28,155 (23,445) (83.3) %
Elimination (7,005) (6,721) (284) (4.2) %
Total Segment Adjusted EBITDA (2) $ 306,458 $ 528,070 $ (221,612) (42.0) %
Tons sold
Coal - Illinois Basin 13,625 21,793 (8,168) (37.5) %
Coal - Appalachia 6,514 8,064 (1,550) (19.2) %
Other and Corporate - (422) 422 (1)
Elimination - 422 (422) (1)
Total tons sold 20,139 29,857 (9,718) (32.5) %
Coal sales
Coal - Illinois Basin $ 539,614 $ 875,544 $ (335,930) (38.4) %
Coal - Appalachia 347,076 477,720 (130,644) (27.3) %
Other and Corporate - 16,530 (16,530) (1)
Elimination - (12,463) 12,463 (1)
Total coal sales $ 886,690 $ 1,357,331 $ (470,641) (34.7) %
Other revenues
Coal - Illinois Basin $ 1,674 $ 10,557 $ (8,883) (84.1) %
Coal - Appalachia 14,456 2,753 11,703 (1)
Minerals 113 1,079 (966) (89.5) %
Other and Corporate 18,409 26,745 (8,336) (31.2) %
Elimination (8,166) (9,229) 1,063 11.5 %
Total other revenues $ 26,486 $ 31,905 $ (5,419) (17.0) %
BOE volume and oil & gas royalties
Volume - BOE (3) 1,374 1,113 261 23.5 %
Oil & gas royalties $ 31,718 $ 36,254 $ (4,536) (12.5) %
Segment Adjusted EBITDA Expense
Coal - Illinois Basin $ 383,486 $ 579,510 $ (196,024) (33.8) %
Coal - Appalachia 240,116 312,861 (72,745) (23.3) %
Minerals 2,851 6,109 (3,258) (53.3) %
Other and Corporate 13,697 28,026 (14,329) (51.1) %
Elimination (1,161) (14,971) 13,810 92.2 %
Total Segment Adjusted EBITDA Expense $ 638,989 $ 911,535 $ (272,546) (29.9) %
(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 48.5% to $157.8 million in
the 2020 Period from $306.6 million in the 2019 Period. The decrease of $148.8
million was primarily attributable to lower coal sales, which decreased 38.4% to
$539.6 million in the 2020 Period from $875.5 million in the 2019 Period,
partially offset by reduced operating expenses. The decrease of $335.9 million
in coal sales primarily reflects reduced tons sold, which decreased 37.5%
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,
particularly international markets, amid the COVID-19 pandemic. Segment
Adjusted EBITDA Expense decreased 33.8% to $383.5 million in the 2020 Period
from $579.5 million in the 2019 Period primarily as a result of reduced tons
sold. Segment Adjusted EBITDA Expense per ton increased $1.56 per ton sold to
$28.15 from $26.59 per ton sold in the 2019 Period, primarily due to reduced
coal volumes and related increased fixed costs per ton, in addition to certain
cost increases described above under "-Coal - Segment Adjusted EBITDA Expense."
Appalachia - Segment Adjusted EBITDA decreased 27.6% to $121.4 million for the
2020 Period from $167.6 million in the 2019 Period. The decrease of $46.2
million was primarily attributable to lower coal sales, which decreased 27.3% to
$347.1 million in the 2020 Period from $477.7 million in the 2019 Period,
partially offset by reduced operating expenses. The decrease of $130.6 million
in coal sales reflects lower tons sold and price realizations. Sales volumes
decreased 19.2% in the 2020 Period compared to the 2019 Period due to curtailed
production in the region as a result of weak coal market conditions,
particularly international markets, amid the COVID-19 pandemic. Coal sales
price per ton sold in the 2020 Period decreased 10.1% compared to the 2019
Period primarily due to reduced metallurgical tons sold and price realizations
at our Mettiki mine. Segment Adjusted EBITDA Expense decreased 23.3% to $240.1
million in the 2020 Period from $312.9 million in the 2019 Period due to reduced
tons sold and decreased per ton costs. Segment Adjusted EBITDA Expense per ton
decreased $1.94 per ton sold to $36.86 compared to $38.80 per ton sold in the
2019 Period, as a result of fewer longwall move days at both our Tunnel Ridge
and Mettiki mines, reduced roof support and contract labor expenses per ton and
the absence of higher cost purchased tons sold in the 2020 Period, partially
offset by curtailed production in the region during the 2020 Period increasing
fixed costs per ton, 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 decreased to $29.5 million for the 2020
Period from $32.4 million in the 2019 Period reflecting reduced average sales
price per BOE due to reduced demand amid the COVID-19 pandemic, partially offset
by production volumes from the additional mineral interests acquired in the Wing
Acquisition in August 2019 and from continued drilling and development
activities.
Other and Corporate - Segment Adjusted EBITDA decreased by $23.5 million to $4.7
million in the 2020 Period compared to $28.2 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 Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
(in thousands)
Consolidated Segment Adjusted
EBITDA $ 132,701 $ 156,163 $ 306,458 $ 528,070
General and administrative (13,871) (17,885) (41,131) (55,218)
Depreciation, depletion and
amortization (80,182) (72,348) (237,662) (220,400)
Asset impairments - (15,190) (24,977) (15,190)
Goodwill impairment - - (132,026) -
Interest expense, net (11,156) (11,606) (34,799) (33,510)
Acquisition gain - - - 177,043
Income tax expense (293) (50) (111) (130)
Acquisition gain attributable to
noncontrolling interest - - - (7,083)
Net income (loss) attributable to
ARLP $ 27,199 $ 39,084 $ (164,248) $ 373,582
Noncontrolling interest 36 117 97 7,407
Net income (loss) $ 27,235 $ 39,201 $ (164,151) $ 380,989Segment 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 Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
(in thousands)
Segment Adjusted EBITDA Expense $ 216,750 $ 289,081 $ 638,989 $ 911,535
Outside coal purchases - (10,599) - (15,910)
Other expense (723) (228) (1,456) (370)
Operating expenses (excluding
depreciation, depletion and
amortization) $ 216,027 $ 278,254 $ 637,533 $ 895,255
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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 expect to have sufficient liquidity to
fund our operations and growth strategies. 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 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 beginning with the First Quarter. 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. We have further enhanced our liquidity by reducing our total debt
by $117.5 million in the 2020 Period.
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 September 30, 2020, we have purchased
units for a total of $93.5 million under the program. During the nine months
ended September 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 ("No. 5 Mine")
which continued through 2019 and into 2020. In July 2020, the No. 5 Mine began
production. We expect the No. 5 Mine will enable us to access an additional 15
million tons of coal reserves with an expected mine life of approximately 12
years assuming production levels similar to MC Mining's former Excel Mine No.
4.
Cash Flows
Cash provided by operating activities was $291.8 million for the 2020 Period
compared to $408.4 million for the 2019 Period. The decrease in cash provided
by operating activities was primarily due to a net loss in the 2020 Period as
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compared to net income in the 2019 Period adjusted for changes from certain
non-cash items discussed above such as an acquisition gain and impairments. The
decrease in net income was partially offset by a favorable working capital
change primarily related to trade receivables and inventories and other
favorable comparisons.
Net cash used in investing activities was $108.9 million for the 2020 Period
compared to $423.6 million for the 2019 Period. The decrease in cash used in
investing activities was primarily attributable to the AllDale and Wing
Acquisitions during 2019 Period and decreased capital expenditures for mine
infrastructure and equipment at various mines during the 2020 Period. The
decreased net cash used compared to the 2019 Period 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 $185.2 million for the 2020 Period
compared to $197.2 million for the 2019 Period. The decrease in cash used in
financing activities was primarily attributable to reduction in distributions
paid to partners in the 2020 Period, partially offset by lower net proceeds from
borrowings under the revolving credit facility.
Capital Expenditures
Capital expenditures decreased to $102.8 million in the 2020 Period from $241.1
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 $125.0 million to
$130.0 million. Management anticipates funding remaining 2020 capital
requirements with cash and cash equivalents ($34.1 million as of September 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 3.01% as of September 30, 2020. At
September 30, 2020, we had $21.8 million of letters of credit outstanding with
$381.0 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 1.69 to 1.0, 8.22 to 1.0 and 0.69 to 1.0, respectively, for the
trailing twelve months ended September 30, 2020. We remain in compliance with
the covenants of the Credit Agreement as of September 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 September 30, 2020, we had a $72.2 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 September 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.
Other Information
Insurance
Effective October 1, 2020, 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 75 or 90 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, the insurance
industry has been subject to efforts by environmental activists to restrict
coverages available for fossil fuel companies.
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