Business Context and Reporting Period
Alliance Resource Partners, L.P. filed its Form 10-K for the fiscal year ended December 31, 2020. ARLP is a diversified natural-resource partnership with three reportable segments: Illinois Basin coal, Appalachia coal, and oil and gas mineral interests. It operates seven underground mining complexes, a coal-loading terminal, approximately 1.5 million gross mineral-interest acres, and mining-technology and brokerage businesses.
COVID-19-related energy demand disruption materially affected 2020. ARLP temporarily curtailed production at multiple mines, later resumed operations at reduced capacity, suspended quarterly cash distributions beginning with the quarter ended March 31, 2020, and withdrew its initial 2020 guidance.
Key Financial Metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Total revenue | $1.328 billion | $1.962 billion | Down 32.3% |
| Coal sales | $1.232 billion | $1.762 billion | Down 30.1% |
| Oil and gas royalties | $42.9 million | $51.7 million | Down 17.1% |
| Income from operations | $(82.9) million | $259.5 million | Turned negative |
| Net income attributable to ARLP | $(129.2) million | $399.4 million | Turned negative |
| Earnings per unit | $(1.02) | $3.07 | Turned negative |
| Operating cash flow | $400.6 million | $514.9 million | Down 22.2% |
| Capital expenditures | $121.1 million | $305.9 million | Down 60.4% |
| Segment Adjusted EBITDA | $446.5 million | $672.0 million | Down 33.6% |
| Cash and cash equivalents | $55.6 million | $36.5 million | Up $19.1 million |
| Long-term debt, including current maturities | $603.8 million | $789.3 million | Down $185.5 million |
Reported operating margin was approximately negative 6.2%, compared with approximately 13.2% in 2019. Net margin attributable to ARLP was approximately negative 9.7%, compared with approximately 20.4% in 2019.
- Coal production declined to 27.0 million tons from 40.0 million; tons sold declined to 28.2 million from 39.3 million.
- Coal sales price decreased to $43.68 per ton from $44.86. Coal segment expense decreased slightly to $30.38 per ton from $30.47.
- Oil and gas production increased to 1.892 million BOE from 1.716 million BOE, but realized price fell to $24.10 per BOE from $32.02.
- Net cash used in investing activities was $125.1 million, compared with $488.1 million in 2019, primarily because 2019 included the AllDale and Wing acquisitions.
- Net cash used in financing activities was $256.4 million. Distributions paid to partners declined to $51.8 million from $278.4 million.
Material Changes Versus the Prior Comparable Period
- Revenue and profitability deteriorated primarily because of lower coal volumes, weak coal markets, COVID-19-related demand destruction, and lower oil and gas prices.
- ARLP recorded a $132.0 million non-cash goodwill impairment related to the Hamilton mine and $25.0 million of non-cash long-lived asset impairment charges, compared with $15.2 million of asset impairments and no goodwill impairment in 2019.
- 2019 results benefited from a $177.0 million non-cash AllDale acquisition gain; no comparable acquisition gain was recorded in 2020.
- Production was halted temporarily at Illinois Basin operations and the MC Mining complex. Gibson North was permanently idled, reclaimed, and sealed in 2020.
- Capital spending was substantially reduced, while total debt decreased by $185.5 million.
- The Excel Mine No. 5 development at MC Mining began production in July 2020 and is expected to provide access to approximately 15 million tons of reserves with an expected mine life of approximately 12 years at comparable production levels.
- Goodwill declined to $4.4 million from $136.4 million, primarily because of the Hamilton impairment.
Guidance, Outlook, Commentary, Risks, and Unusual Items
- Management estimates 2021 capital expenditures of $120.0 million to $125.0 million and average annual maintenance capital expenditures over the next five years of approximately $4.90 per ton produced.
- Management expects to fund 2021 capital needs with cash on hand, operating cash flow, investments, revolving and securitization facilities, and potentially debt or equity issuance.
- The Board intended to reassess its distribution policy after the quarter ending March 31, 2021. Future distributions remain discretionary and depend on operating results, capital needs, debt covenants, liquidity, and market conditions.
- The March 2020 revolving credit facility provides initial capacity of $537.75 million, reducing to $459.5 million on May 23, 2021, and terminates March 9, 2024. At year-end, $87.5 million was drawn, $21.8 million of letters of credit were outstanding, and $428.5 million was available.
- The accounts receivable securitization facility had $55.9 million outstanding at year-end. In January 2021, its maturity was extended to January 2022 and borrowing availability was reduced from $100 million to $60 million.
- ARLP was in compliance with debt covenants at December 31, 2020. Reported trailing-twelve-month ratios included debt-to-cash flow of 1.53x, cash flow-to-interest of 8.45x, and first-lien debt-to-cash flow of 0.52x.
- Major continuing risks include coal demand decline from natural gas, renewables, environmental and climate regulation; commodity-price volatility; customer concentration; mine operating and safety events; permitting and reclamation requirements; surety-bond availability; third-party control over oil and gas drilling; and COVID-19 or other pandemic effects.
- Outstanding surety bonds totaled $273.0 million, including $171.1 million related to reclamation, workers’ compensation, and other obligations. Undiscounted reclamation obligations were approximately $230.0 million, and workers’ compensation and pneumoconiosis obligations totaled $163.2 million.
- Two wage-and-hour lawsuits allege damages ranging from approximately $22.2 million to $143.7 million. Management considers the claims without merit and does not expect a material adverse effect, but the cases were in early stages and discovery had not begun.
- Approximately 93.0% of 2020 coal sales tonnage was under long-term contracts, but contracts include price adjustments, volume flexibility, force majeure provisions, and potential renegotiation or termination rights.
Most Important Facts an Investor Should Verify
- Whether coal demand, production volumes, realized prices, and mine utilization recover sufficiently to support positive cash flow and covenant compliance.
- The Board’s decision regarding reinstatement, timing, and amount of common-unit distributions.
- Actual 2021 capital expenditures versus the $120.0 million to $125.0 million estimate and the effect on debt reduction and liquidity.
- Availability and pricing of revolving-credit, securitization, surety-bond, insurance, and other financing capacity.
- Renewal, pricing, and volume commitments for major customer contracts, including contracts expiring in 2020 and 2022.
- Potential additional impairments of coal assets or goodwill if commodity prices, production forecasts, or market conditions weaken.
- Progress and economics of Excel Mine No. 5 and the reclamation status of idled or closed mines.
- Changes in federal and state climate, environmental, mine-safety, hydraulic-fracturing, and induced-seismicity regulation.
- Resolution and potential exposure from the wage-and-hour litigation and other legal, reclamation, workers’ compensation, and pneumoconiosis claims.
- The filing’s consolidated financial statements, debt maturities, related-party transactions, reserve estimates, and non-GAAP Segment Adjusted EBITDA reconciliations.