Alliance Resource Partners, L.P. — 2019 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2019, filed February 20, 2020. ARLP is a diversified natural-resource partnership with coal mining and marketing operations, oil and gas mineral interests, coal transportation, brokerage and mining-technology activities. Reportable segments were Illinois Basin, Appalachia and Minerals.
- Coal operations included seven underground mining complexes and a coal-loading terminal; 2019 production was 40.0 million tons and sales were 39.3 million tons.
- The Minerals segment expanded materially through the AllDale acquisition on January 3, 2019 and the Wing acquisition on August 2, 2019.
- At year-end, ARLP reported approximately 1.693 billion tons of proven and probable coal reserves and approximately 55,700 net royalty acres in oil and gas basins.
Financial and operating metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total revenue | $1.962 billion | $2.003 billion | Down 2.1% |
| Coal sales | $1.762 billion | $1.845 billion | Down 4.5% |
| Oil and gas royalties | $51.7 million | — | New consolidated revenue stream |
| Income from operations | $259.5 million | $372.3 million | Down 30.3% |
| Net income attributable to ARLP | $399.4 million | $366.6 million | Up 8.9% |
| EPS per limited partner unit | $3.07 | $2.74 | Up 12.0% |
| Operating cash flow | $514.9 million | $694.3 million | Down 25.8% |
| Adjusted EBITDA | $599.0 million | $647.4 million | Down 7.5% |
| EBITDA | $753.8 million | $686.9 million | Up 9.7% |
| Capital expenditures | $305.9 million | $233.5 million | Up 31.0% |
| Distributions paid per unit | $2.15 | $2.07 | Up 3.9% |
Reported operating margin was approximately 13.2%, compared with 18.6% in 2018. Net margin attributable to ARLP was approximately 20.4%, but was significantly elevated by the $177.0 million non-cash acquisition gain associated with the AllDale transaction.
- Coal sales volumes declined 2.8% to 39.3 million tons, while average coal sales price declined to $44.86 per ton from $45.64.
- Coal segment adjusted EBITDA declined 6.1% to $672.0 million. Illinois Basin adjusted EBITDA fell 7.8% and Appalachia fell 10.1%; Minerals increased 120.4% to $47.0 million.
- Cash and cash equivalents were $36.5 million at year-end, down from $244.2 million in 2018. Working capital was $124.0 million.
- Total debt principal was $789.3 million, including $255.0 million under the revolving credit facility, $73.8 million under the receivables securitization facility, $400.0 million of 7.5% senior notes due 2025 and $60.5 million of equipment financings.
- The revolving facility had $230.5 million of borrowing availability after $9.3 million of letters of credit. ARLP reported a debt-to-cash-flow ratio of 1.34x and cash-flow-to-interest ratio of 12.6x, remaining in compliance with covenants.
Material changes versus the prior comparable period
- AllDale I and II were acquired for approximately $176.2 million. The transaction resulted in consolidation of the mineral interests and a $177.0 million remeasurement gain.
- Wing mineral interests were acquired for approximately $144.9 million, adding approximately 9,000 net royalty acres in the Midland Basin.
- Kodiak redeemed ARLP’s preferred interests for $135.0 million, including an early redemption premium.
- Oil and gas royalties contributed $51.7 million in 2019, while the Minerals segment generated $47.0 million of adjusted EBITDA versus $21.3 million in 2018.
- Dotiki ceased coal production in August 2019 and Gibson North was idled in November 2019 due to market conditions. ARLP recorded a $15.2 million non-cash impairment charge related primarily to Dotiki.
- The prior year included an $80.0 million net litigation settlement gain, which did not recur in 2019.
- Operating cash flow declined because of the absence of the 2018 settlement proceeds, lower underlying earnings excluding non-cash items and unfavorable working-capital movements.
- Unit repurchases since inception totaled approximately $93.5 million through year-end, leaving $6.5 million under the $100 million authorization.
Guidance, outlook, commentary and risks
- Management estimated 2020 total capital expenditures of $165 million to $190 million and expected average annual maintenance capital expenditures over the next five years of approximately $5.04 per ton produced.
- ARLP expected to spend approximately $15 million to $18 million in 2020 to complete the Excel Mine No. 5 project, intended to replace depleting Excel Mine No. 4 reserves and provide access to approximately 15 million tons of reserves.
- Management stated that cash on hand, operating cash flow, investments and available financing were expected to fund working capital, capital expenditures, debt service, acquisitions and distributions, while noting that liquidity depends on commodity prices, operating performance and financing access.
- Coal demand remains exposed to natural-gas and renewable generation, coal-plant retirements, environmental and greenhouse-gas regulation, international competition, tariffs, transportation constraints and customer contract renewals.
- Oil and gas cash flow depends on commodity prices and drilling decisions by unaffiliated operators. ARLP generally does not control development timing and does not currently hedge oil and gas production.
- Major customers represented more than 10% of revenue individually. Their coal supply agreements expire in 2020 and 2022, respectively.
- Reclamation, workers’ compensation and black-lung obligations are material and partly self-insured. Undiscounted reclamation obligations were approximately $240.5 million; workers’ compensation and pneumoconiosis liabilities totaled $151.1 million.
- Surety bonds totaled $279.6 million, and management identified the availability and renewal of surety bonds as a material operational risk.
- Internal controls were assessed as effective, but ARLP and its auditor excluded the acquired AllDale and Wing mineral-interest operations from the 2019 internal-control evaluation. These operations represented approximately 23.7% of total assets and 2.7% of revenue.
Important facts for investors to verify
- Separate recurring operating earnings and cash flow from the $177.0 million non-cash AllDale acquisition gain and other unusual items.
- Review 2020 coal contract volumes, pricing provisions, customer renewal risk and the effect of Dotiki and Gibson North idling.
- Reconcile debt maturities, revolver availability, securitization borrowings and the May 2021 revolving-credit-facility termination date.
- Assess whether planned capital expenditures and distributions are supportable given only $36.5 million of year-end cash and declining operating cash flow.
- Evaluate the reserve quality, commodity-price sensitivity and operator-development plans underlying the acquired oil and gas mineral interests.
- Review the $15.2 million Dotiki impairment, future reclamation costs and minimum royalty obligations that may become unrecoverable.
- Monitor workers’ compensation and black-lung actuarial assumptions, discount rates and required surety bonds.
- Consider customer concentration, fossil-fuel regulation, climate-related litigation, permitting, transportation and cybersecurity risks.