Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2021
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________to________________
Commission File No.: 0-26823
ALLIANCE RESOURCE PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
Delaware
73-1564280
(State or other jurisdiction of
incorporation or organization)
(IRS Employer Identification No.)
1717 South Boulder Avenue, Suite 400, Tulsa, Oklahoma 74119
(Address of principal executive offices and zip code)
(918) 295-7600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). [X ] Yes [ ] No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer ☐
Accelerated Filer ☒
Non-Accelerated Filer ☐
Smaller Reporting Company ☐
Emerging Growth Company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Common units representing limited partner interests
ARLP
NASDAQ Global Select Market
As of August 6, 2021, 127,195,219 common units are outstanding.
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
Page
ITEM 1.
Financial Statements (Unaudited)
ALLIANCE RESOURCE PARTNERS, L.P. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets as of June 30, 2021 and December 31, 2020
1
Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2021 and 2020
2
Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2021 and 2020
3
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2021 and 2020
4
Notes to Condensed Consolidated Financial Statements
5
1. Organization and Presentation
2. Long-Lived Asset Impairments
6
3. Goodwill Impairment
4. Contingencies
5. Inventories
7
6. Fair Value Measurements
7. Long-Term Debt
8
8. Variable Interest Entities
10
9. Investment
11
10. Partners' Capital
11. Revenue from Contracts with Customers
13
12. Earnings per Limited Partner Unit
14
13. Workers' Compensation and Pneumoconiosis
14. Common Unit-Based Compensation Plans
15
15. Components of Pension Plan Net Periodic Benefit Cost
17
16. Segment Information
17. Subsequent Events
20
ITEM 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
21
ITEM 3.
Quantitative and Qualitative Disclosures about Market Risk
35
ITEM 4.
Controls and Procedures
36
Forward-Looking Statements
37
PART II
OTHER INFORMATION
Legal Proceedings
39
ITEM 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
ITEM 5.
Other Information
ITEM 6.
Exhibits
40
i
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except unit data)
(Unaudited)
June 30,
December 31,
2021
2020
ASSETS
CURRENT ASSETS:
Cash and cash equivalents
$
37,749
55,574
Trade receivables
132,033
104,579
Other receivables
2,067
3,481
Inventories, net
74,505
56,407
Advance royalties
2,063
4,168
Prepaid expenses and other assets
12,536
21,565
Total current assets
260,953
245,774
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment, at cost
3,548,857
3,554,090
Less accumulated depreciation, depletion and amortization
(1,820,903)
(1,753,845)
Total property, plant and equipment, net
1,727,954
1,800,245
OTHER ASSETS:
65,087
56,791
Equity method investments
26,274
27,268
Goodwill
4,373
Operating lease right-of-use assets
14,713
15,004
Other long-term assets
16,159
16,561
Total other assets
126,606
119,997
TOTAL ASSETS
2,115,513
2,166,016
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Accounts payable
55,840
47,511
Accrued taxes other than income taxes
21,019
25,054
Accrued payroll and related expenses
38,951
28,524
Accrued interest
5,000
5,132
Workers' compensation and pneumoconiosis benefits
10,618
10,646
Current finance lease obligations
802
766
Current operating lease obligations
1,823
1,854
Other current liabilities
14,119
21,919
Current maturities, long-term debt, net
55,558
73,199
Total current liabilities
203,730
214,605
LONG-TERM LIABILITIES:
Long-term debt, excluding current maturities, net
426,643
519,421
Pneumoconiosis benefits
106,403
105,068
Accrued pension benefit
42,031
46,965
Workers' compensation
44,868
47,521
Asset retirement obligations
122,559
121,487
Long-term finance lease obligations
1,047
1,458
Long-term operating lease obligations
13,010
13,078
Other liabilities
20,702
24,146
Total long-term liabilities
777,263
879,144
Total liabilities
980,993
1,093,749
PARTNERS' CAPITAL:
ARLP Partners' Capital:
Limited Partners - Common Unitholders 127,195,219 units outstanding
1,206,511
1,148,565
Accumulated other comprehensive loss
(83,212)
(87,674)
Total ARLP Partners' Capital
1,123,299
1,060,891
Noncontrolling interest
11,221
11,376
Total Partners' Capital
1,134,520
1,072,267
TOTAL LIABILITIES AND PARTNERS' CAPITAL
See notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except unit and per unit data)
Three Months Ended
Six Months Ended
SALES AND OPERATING REVENUES:
Coal sales
325,974
236,286
613,461
550,923
Oil & gas royalties
17,114
7,786
31,113
22,025
Transportation revenues
12,058
5,757
23,126
10,496
Other revenues
7,297
5,373
13,365
22,521
Total revenues
362,443
255,202
681,065
605,965
EXPENSES:
Operating expenses (excluding depreciation, depletion and amortization)
213,039
187,164
409,559
421,506
Transportation expenses
Outside coal purchases
114
—
General and administrative
17,492
13,822
32,996
27,260
Depreciation, depletion and amortization
64,733
83,559
123,935
157,480
Asset impairments
24,977
Goodwill impairment
132,026
Total operating expenses
307,436
290,302
589,730
773,745
INCOME (LOSS) FROM OPERATIONS
55,007
(35,100)
91,335
(167,780)
Interest expense (net of interest capitalized for the three and six months ended June 30, 2021 and 2020 of $105, $509, $191 and $1,066, respectively)
(9,842)
(11,446)
(20,238)
(23,725)
Interest income
30
32
82
Equity method investment income
341
137
403
588
Other expense
(1,351)
(377)
(2,548)
(733)
INCOME (LOSS) BEFORE INCOME TAXES
44,170
(46,756)
68,984
(191,568)
INCOME TAX EXPENSE (BENEFIT)
(77)
(7)
(182)
NET INCOME (LOSS)
44,165
(46,679)
68,991
(191,386)
LESS: NET LOSS (INCOME) ATTRIBUTABLE TO NONCONTROLLING INTEREST
(130)
(208)
(61)
NET INCOME (LOSS) ATTRIBUTABLE TO ARLP
44,035
(46,664)
68,783
(191,447)
EARNINGS PER LIMITED PARTNER UNIT - BASIC AND DILUTED
0.34
(0.37)
0.53
(1.51)
WEIGHTED-AVERAGE NUMBER OF UNITS OUTSTANDING – BASIC AND DILUTED
127,195,219
127,133,764
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
OTHER COMPREHENSIVE INCOME (LOSS):
Defined benefit pension plan
Amortization of prior service cost (1)
46
47
93
Amortization of net actuarial loss (1)
1,142
1,063
2,283
2,127
Total defined benefit pension plan adjustments
1,188
1,110
2,376
2,220
Amortization of net actuarial loss (gain) (1)
1,043
(171)
2,086
(343)
Total pneumoconiosis benefits adjustments
OTHER COMPREHENSIVE INCOME
2,231
939
4,462
1,877
COMPREHENSIVE INCOME (LOSS)
46,396
(45,740)
73,453
(189,509)
Less: Comprehensive loss (income) attributable to noncontrolling interest
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO ARLP
46,266
(45,725)
73,245
(189,570)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES
158,216
170,168
CASH FLOWS FROM INVESTING ACTIVITIES:
Property, plant and equipment:
Capital expenditures
(55,626)
(84,245)
Change in accounts payable and accrued liabilities
1,547
(6,508)
Proceeds from sale of property, plant and equipment
2,838
2,739
Distributions received from investments in excess of cumulative earnings
994
551
Net cash used in investing activities
(50,247)
(87,463)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under securitization facility
35,000
12,800
Payments under securitization facility
(52,800)
(47,700)
Proceeds from equipment financings
14,705
Payments on equipment financings
(8,535)
(6,494)
Borrowings under revolving credit facilities
15,000
70,000
Payments under revolving credit facilities
(102,500)
(60,000)
Borrowings from line of credit
1,830
Payments on finance lease obligations
(375)
(8,043)
Payment of debt issuance costs
(6)
(5,776)
Payments for taxes related to net settlement of issuance of units in deferred compensation plans
(1,310)
Distributions paid to Partners
(13,045)
(51,753)
Other
(363)
(510)
Net cash used in financing activities
(125,794)
(84,081)
NET CHANGE IN CASH AND CASH EQUIVALENTS
(17,825)
(1,376)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
36,482
CASH AND CASH EQUIVALENTS AT END OF PERIOD
35,106
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest
18,817
23,337
Cash paid for income taxes
SUPPLEMENTAL NON-CASH ACTIVITY:
Accounts payable for purchase of property, plant and equipment
7,278
7,996
Right-of-use assets acquired by operating lease
278
Market value of common units issued under deferred compensation plans before tax withholding requirements
3,837
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1.ORGANIZATION AND PRESENTATION
Significant Relationships Referenced in Notes to Condensed Consolidated Financial Statements
Organization
ARLP is a Delaware limited partnership listed on the NASDAQ Global Select Market under the ticker symbol "ARLP." ARLP was formed in May 1999 and completed its initial public offering on August 19, 1999 when it acquired substantially all of the coal production and marketing assets of Alliance Resource Holdings, Inc., a Delaware corporation, and its subsidiaries. We are managed by our general partner, MGP, a Delaware limited liability company which holds a non-economic general partner interest in ARLP.
Basis of Presentation
The accompanying condensed consolidated financial statements include the accounts and operations of the ARLP Partnership and present our financial position as of June 30, 2021 and December 31, 2020, the results of our operations and comprehensive income (loss) for the three and six months ended June 30, 2021 and 2020, and cash flows for the six months ended June 30, 2021 and 2020. All intercompany transactions and accounts have been eliminated.
These condensed consolidated financial statements and notes are prepared pursuant to the rules and regulations of the Securities and Exchange Commission for interim reporting and do not include all the information normally included with financial statements prepared in accordance with generally accepted accounting principles ("GAAP") of the United States. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2020.
These condensed consolidated financial statements and notes are unaudited. However, in the opinion of management, these condensed consolidated financial statements reflect all normal recurring adjustments necessary for a fair presentation of the results for the periods presented. Results for interim periods are not necessarily indicative of results to be expected for the full year ending December 31, 2021.
Use of Estimates
The preparation of the ARLP Partnership's condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in our condensed consolidated financial statements. Actual results could differ from those estimates.
2.LONG-LIVED ASSET IMPAIRMENTS
During the first quarter of 2020, we recorded $23.5 million of non-cash asset impairment charges in our Illinois Basin Coal Operations segment due to sealing our idled Gibson North mine, resulting in its permanent closure, and a decrease in the fair value of certain mining equipment at our idled operations and greenfield coal reserves as a result of weakened coal market conditions. During the same period, we also recorded an asset impairment charge of $1.5 million in our Coal Royalties segment due to a decrease in the fair value of greenfield coal reserves held by Alliance Resource Properties near our coal mining operations in the Illinois Basin. See Note 16 – Segment Information for more information about our segments.
The fair values of the impaired assets were determined using a market approach, which represents Level 3 fair value measurements under the fair value hierarchy. The fair value analysis used assumptions regarding the marketability of certain mining and reserve assets near our Illinois Basin coal mining operations.
3.GOODWILL IMPAIRMENT
During the first quarter of 2020, we considered whether an interim test of our consolidated goodwill of $136.4 million was necessary. Our consolidated goodwill included $132.0 million recorded in our Illinois Basin Coal Operations segment in conjunction with our acquisition of the Hamilton County Coal, LLC ("Hamilton") mine on July 31, 2015. We assessed certain events and changes in circumstances, including a) adverse industry and market developments, including the impact of the COVID-19 pandemic, b) our response to these developments, including temporarily ceasing production at several mines, including our Hamilton mine and c) our actual performance during the quarter. After consideration of these events and changes in circumstances, we performed an interim test of the goodwill associated with Hamilton comparing Hamilton's carrying amount to its fair value.
We estimated the fair value of Hamilton using an income approach utilizing a discounted cash flow model. The assumptions used in the discounted cash flow model included estimated production, forward coal prices, operating expenses, capital expenditures and a weighted average cost of capital. Our forecasts of future cash flows considered market conditions at the time of the assessment and our estimate of the mine's performance in future years based on the information available to us. Key assumptions used in our valuation were not observable in active markets; therefore, the fair value measurements represent Level 3 fair value measurements. The fair value of Hamilton was determined to be below its carrying amount (including goodwill) by more than the recorded balance of goodwill associated with the mine. Accordingly, we recognized an impairment charge of $132.0 million consisting of the total carrying amount of goodwill associated with Hamilton. This impairment charge reduced our consolidated goodwill balance to $4.4 million. During the first quarter of 2020, we also performed an interim test on ARLP's remaining goodwill balances not associated with Hamilton and concluded no impairment was necessary for our other reporting units.
4.CONTINGENCIES
We are party to litigation that has been initiated against certain of our subsidiaries in which the plaintiffs allege violations of the Fair Labor Standards Act and Kentucky Wage and Hour Act due to an alleged failure to compensate for time "donning" and "doffing" equipment and to account for certain bonuses in the calculation of overtime rates and pay. The plaintiffs seek class or collective action certification. Because the litigation of these matters is in the early stages, we cannot reasonably estimate a range of potential exposure at this time. We believe the plaintiffs’ claims are without merit and our ultimate exposure, if any, will not be material to our results of operations or financial position and we intend to defend the litigation vigorously. However, if our current belief that the claims are without merit is not upheld, it is reasonably possible that the ultimate resolution of these matters could result in a potential loss that may be material to our results of operations.
We also have various other lawsuits, claims and regulatory proceedings incidental to our business that are pending against the ARLP Partnership. We record an accrual for a potential loss related to these matters when, in management's
opinion, such loss is probable and reasonably estimable. Based on known facts and circumstances, we believe the ultimate outcome of these outstanding lawsuits, claims and regulatory proceedings will not have a material adverse effect on our financial condition, results of operations or liquidity. However, if the results of these matters are different from management's current expectations and in amounts greater than our accruals, such matters could have a material adverse effect on our business and operations.
5.INVENTORIES
Inventories consist of the following:
(in thousands)
Coal
40,091
19,756
Supplies (net of reserve for obsolescence of $5,548 and $5,547, respectively)
34,414
36,651
Total inventories, net
6.FAIR VALUE MEASUREMENTS
The following table summarizes our fair value measurements within the hierarchy not included elsewhere in these notes:
June 30, 2021
December 31, 2020
Level 1
Level 2
Level 3
Long-term debt
479,993
518,317
Total
The carrying amounts for cash equivalents, accounts receivable, accounts payable, accrued and other liabilities approximate fair value due to the short maturity of those instruments.
The estimated fair value of our long-term debt, including current maturities, is based on interest rates that we believe are currently available to us in active markets for issuance of debt with similar terms and remaining maturities (See Note 7 – Long-Term Debt). The fair value of debt, which is based upon these interest rates, is classified as a Level 2 measurement under the fair value hierarchy.
7.LONG-TERM DEBT
Long-term debt consists of the following:
Unamortized Discount and
Principal
Debt Issuance Costs
Revolving credit facility
87,500
(6,067)
(7,196)
Senior notes
400,000
(3,506)
(3,964)
Securitization facility
38,100
55,900
May 2019 equipment financing
3,256
4,956
November 2019 equipment financing
37,231
42,367
June 2020 equipment financing
11,357
13,057
Line of credit
491,774
603,780
(9,573)
(11,160)
Less current maturities
(55,558)
(73,199)
Total long-term debt
436,216
530,581
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 $459.5 million revolving credit facility, including a sublimit of $125 million for the issuance of letters of credit and a sublimit of $15.0 million for swingline borrowings (the "Revolving Credit Facility"), with a termination date of March 9, 2024.
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 the assets of the Restricted Subsidiaries. The Credit Agreement is also guaranteed by Alliance Minerals but the oil and gas minerals assets of Alliance Minerals and its direct and indirect subsidiaries (collectively with Alliance Minerals, the "Unrestricted Subsidiaries") are not collateral under the Credit Agreement. 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 2.71% as of June 30, 2021. On June 30, 2021, we had $21.8 million of letters of credit outstanding with $437.7 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.
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 1.08 to 1.0, 10.66 to 1.0 and 0.20 to 1.0, respectively, for the trailing twelve months ended June 30, 2021. We remained in compliance with the covenants of the Credit Agreement as of June 30, 2021 and anticipate remaining in compliance with the covenants.
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 January 2021, we extended the term of the Securitization Facility to January 2022 and reduced the borrowing availability under the facility to $60.0 million. The Securitization Facility was previously scheduled to mature in January 2021. On June 30, 2021, we had a $38.1 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 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%, providing 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. Upon maturity, the equipment will revert 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 to the Intermediate Partnership.
Line of Credit. On February 19, 2021, we entered into a line of credit arrangement with a related party for $5.0 million. The line of credit has a maturity date of February 28, 2023, with an option to extend it for an additional six months and accrue interest at an annual rate of 3.50%. Interest is payable quarterly commencing March 31, 2021, and continuing each March 31, June 30, September 30 and December 31 thereafter through and including February 28, 2023. The agreement contains customary terms and events of default and is guaranteed by ARLP. We utilize the line of credit, as appropriate, for capital expenditures and investments. As of June 30, 2021, we had drawn $1.8 million under this agreement.
9
8.VARIABLE INTEREST ENTITIES
Cavalier Minerals
On November 10, 2014, our subsidiary, Alliance Minerals, and Bluegrass Minerals Management, LLC ("Bluegrass Minerals") entered into a limited liability company agreement (the "Cavalier Agreement") to create Cavalier Minerals JV, LLC ("Cavalier Minerals"), which was formed to indirectly acquire oil & gas mineral interests through its ownership in AllDale Minerals LP ("AllDale I") and AllDale Minerals II, LP ("AllDale II", and collectively with AllDale I, "AllDale I & II"). Alliance Minerals owns a 96% member interest in Cavalier Minerals, and Bluegrass Minerals owns a 4% member interest in Cavalier Minerals and a profits interest which entitles it to receive distributions equal to 25% of all distributions (including in liquidation) after all members have recovered their investment. Distributions with respect to Bluegrass Minerals' profits interest will be offset by all distributions received by Bluegrass Minerals from the former general partners of AllDale I & II. To date, there has been no profits interest distribution. We hold the managing member interest in Cavalier Minerals. Total contributions to and cumulative distributions from Cavalier Minerals are as follows:
Alliance
Bluegrass
Minerals
Contributions
143,112
5,963
Distributions
98,107
4,087
We have concluded that Cavalier Minerals is a variable interest entity ("VIE") which we consolidate as the primary beneficiary because we are the managing member and a substantial equity owner in Cavalier Minerals. Bluegrass Minerals' equity ownership of Cavalier Minerals is accounted for as noncontrolling ownership interest in our condensed consolidated balance sheets. In addition, earnings attributable to Bluegrass Minerals are recognized as noncontrolling interest in our condensed consolidated statements of income.
AllDale III
In February 2017, Alliance Minerals committed to directly invest $30.0 million in AllDale Minerals III, LP ("AllDale III") which was created for similar investment purposes as AllDale I & II. Alliance Minerals completed funding of this commitment in 2018. Alliance Minerals' limited partner interest in AllDale III is 13.9%.
The AllDale III Partnership Agreement includes a 25% profits interest for the general partner, subject to a return hurdle equal to the greater of 125% of cumulative capital contributions and a 10% internal rate of return, and following an 80/20 "catch-up" provision for the general partner.
Since AllDale III is structured as a limited partnership with the limited partners 1) not having the ability to remove the general partner and 2) not participating significantly in the operational decisions, we concluded that AllDale III is a VIE. We are not the primary beneficiary of AllDale III as we do not have the power to direct the activities that most significantly impact AllDale III's economic performance. We account for our ownership interest in the income or loss of AllDale III as an equity method investment. We record equity income or loss based on AllDale III's distribution structure. See Note 9 – Investment for more information.
9.INVESTMENT
As discussed in Note 8 – Variable Interest Entities, we account for our ownership interest in the income or loss of AllDale III as an equity method investment. We record equity income or loss based on AllDale III's distribution structure. The changes in our equity method investment in AllDale III for each of the periods presented were as follows:
Beginning balance
26,907
28,114
28,529
Distributions received
(974)
(546)
(1,397)
(1,139)
(273)
Ending balance
27,705
10.PARTNERS' CAPITAL
Distributions paid or declared during 2020 and 2021 were as follows:
Payment Date
Per Unit Cash Distribution
Total Cash Distribution
February 14, 2020
0.4000
51,753
May 14, 2021
0.1000
13,045
August 13, 2021 (1)
0.2000
Unit Repurchase Program
In May 2018, the MGP board of directors approved the establishment of a unit repurchase program authorizing us to repurchase and retire 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. No unit repurchases were made during the six months ended June 30, 2021. Since inception of the unit repurchase program, we have repurchased and retired 5,460,639 units at an average unit price of $17.12 for an aggregate purchase price of $93.5 million. The remaining authorized amount for unit repurchases under this program is $6.5 million.
Change in Partners' Capital
The following tables present the quarterly change in Partners' Capital for the six months ended June 30, 2021 and 2020:
Accumulated
Number of
Limited
Limited Partner
Partners'
Comprehensive
Noncontrolling
Total Partners'
Units
Capital
Income (Loss)
Interest
(in thousands, except unit data)
Balance at January 1, 2021
Comprehensive income:
Net income
24,748
78
24,826
Actuarially determined long-term liability adjustments
Total comprehensive income
27,057
Common unit-based compensation
723
Distributions from consolidated company to noncontrolling interest
(141)
Balance at March 31, 2021
1,174,036
(85,443)
11,313
1,099,906
130
1,485
Distributions on deferred common unit-based compensation
(324)
(222)
Distributions to Partners
(12,721)
Balance at June 30, 2021
Balance at January 1, 2020
126,915,597
1,331,482
(77,993)
11,935
1,265,424
Comprehensive income (loss):
Net income (loss)
(144,783)
76
(144,707)
938
Total comprehensive loss
(143,769)
Settlement of deferred compensation plans
279,622
(527)
(986)
(288)
(50,767)
Balance at March 31, 2020
1,132,836
(77,055)
11,723
1,067,504
Net loss
(15)
1,610
Balance at June 30, 2020
1,087,782
(76,116)
11,486
1,023,152
12
11.REVENUE FROM CONTRACTS WITH CUSTOMERS
The following table illustrates the disaggregation of our revenues by type, including a reconciliation to our segment presentation as presented in Note 16 – Segment Information.
Coal Operations
Royalties
Illinois
Other and
Basin
Appalachia
Oil & Gas
Corporate
Elimination
Consolidated
Three Months Ended June 30, 2021
210,157
115,817
Coal royalties
11,653
(11,653)
7,434
4,624
642
282
473
8,547
(2,647)
218,233
120,723
17,587
(14,300)
Three Months Ended June 30, 2020
134,160
102,126
6,778
(6,778)
0
3,153
2,604
474
2,380
61
4,955
(2,497)
137,787
107,110
7,847
(9,275)
Six Months Ended June 30, 2021
392,798
220,663
22,954
(22,954)
15,114
8,012
1,255
667
494
16,315
(5,366)
409,167
229,342
31,607
(28,320)
Six Months Ended June 30, 2020
333,258
217,665
18,149
(18,149)
7,009
3,487
1,392
14,061
85
12,334
(5,356)
341,659
235,213
22,110
18,154
(23,505)
The following table illustrates the amount of our transaction price for all current coal supply contracts allocated to performance obligations that are unsatisfied or partially unsatisfied as of June 30, 2021 and disaggregated by segment and contract duration.
2024 and
2022
2023
Thereafter
Illinois Basin Coal Operations coal revenues
446,385
305,362
238,070
201,875
1,191,692
Appalachia Coal Operations coal revenues
218,512
183,520
17,880
10,080
429,992
Total coal revenues (1)
664,897
488,882
255,950
211,955
1,621,684
(1) Coal revenues generally consists of consolidated revenues excluding our Oil & Gas Royalties segment as well as intercompany revenues from our Coal Royalties segment.
12.EARNINGS PER LIMITED PARTNER UNIT
We utilize the two-class method in calculating basic and diluted earnings per limited partner unit ("EPU"). Net income attributable to ARLP is allocated to limited partners and participating securities under deferred compensation plans, which include rights to nonforfeitable distributions or distribution equivalents. Net losses attributable to ARLP are allocated to limited partners but not to participating securities. Our participating securities are outstanding restricted unit awards under our Long-Term Incentive Plan ("LTIP") and phantom units in notional accounts under our Supplemental Executive Retirement Plan ("SERP") and the MGP Amended and Restated Deferred Compensation Plan for Directors ("Directors' Deferred Compensation Plan").
The following is a reconciliation of net income (loss) attributable to ARLP used for calculating basic and diluted earnings per unit and the weighted-average units used in computing EPU for the three and six months ended June 30, 2021 and 2020:
(in thousands, except per unit data)
Net income (loss) attributable to ARLP
Less:
Distributions to participating securities
(401)
(619)
Undistributed earnings attributable to participating securities
(825)
(934)
Net income (loss) attributable to ARLP available to limited partners
42,809
67,230
Weighted-average limited partner units outstanding – basic and diluted
127,195
127,134
Earnings per limited partner unit - basic and diluted (1)
13.WORKERS' COMPENSATION AND PNEUMOCONIOSIS
The changes in the workers' compensation liability, including current and long-term liability balances, for each of the periods presented were as follows:
54,233
52,880
54,739
53,384
Accruals increase
1,565
192
3,237
1,940
Payments
(2,565)
(1,992)
(4,975)
(4,563)
Interest accretion
231
320
463
639
Valuation loss (gain) (1)
(1,405)
3,078
52,059
54,478
We limit our exposure to traumatic injury claims by purchasing a high deductible insurance policy that starts paying benefits after deductibles for a claim have been met. The deductible level may vary by claim year. Our workers' compensation liability above is presented on a gross basis and does not include our expected receivables on our insurance policy. Our receivables for traumatic injury claims under this policy as of June 30, 2021 are $7.1 million and are included in Other long-term assets on our condensed consolidated balance sheet.
Certain of our mine operating entities are liable under state statutes and the Federal Coal Mine Health and Safety Act of 1969, as amended, to pay pneumoconiosis, or black lung, benefits to eligible employees and former employees and their dependents. Components of the net periodic benefit cost for each of the periods presented are as follows:
Service cost
989
883
2,020
1,761
Interest cost (1)
637
749
1,273
1,499
Net amortization (1)
Net periodic benefit cost
2,669
1,461
5,379
2,917
14.COMMON UNIT-BASED COMPENSATION PLANS
Long-Term Incentive Plan
We maintain the LTIP for certain employees and officers of MGP and its affiliates who perform services for us. As part of our LTIP, unit awards of non-vested "phantom" or notional units, also referred to as "restricted units", may be granted which upon satisfaction of time and performance-based vesting requirements, entitle the LTIP participant to receive ARLP common units. Certain awards may also contain a minimum-value guarantee payable in ARLP common units or cash that would be paid regardless of whether or not the awards vest, as long as service requirements are met. Annual grant levels, vesting provisions and minimum-value guarantees of restricted units for designated participants are recommended by Mr. Craft, subject to review and approval of the compensation committee of the MGP board of directors (the "Compensation Committee"). Vesting of all restricted units outstanding is subject to the satisfaction of certain financial tests. If it is not probable the financial tests for a particular grant of restricted units will be met, any previously expensed amounts for that grant are reversed and no future expense will be recognized for that grant. Assuming the financial tests are met, grants of restricted units issued to LTIP participants are generally expected to cliff vest on January 1st of the third year following issuance of the grants. We expect to settle restricted unit grants by delivery of newly-issued ARLP common units, except for the portion of the grants that will satisfy employee tax withholding obligations of LTIP participants. We account for forfeitures of non-vested LTIP restricted unit grants as they occur. As provided under the distribution equivalent rights ("DERs") provisions of the LTIP and the terms of the LTIP restricted unit awards, all non-vested restricted units include contingent rights to receive quarterly distributions in cash or, at the discretion of the Compensation Committee, phantom units in lieu of cash credited to a bookkeeping account with value equal to the cash distributions we make to unitholders during the vesting period. If it is not probable the financial tests for a particular grant of restricted units will be met, any previously paid DER amounts for that grant are reversed from Partners’ Capital and recorded as compensation expense and any future DERs, for that grant, if any, will be recognized as compensation expense when paid.
A summary of non-vested LTIP grants as of and for the six months ended June 30, 2021 is as follows:
Number of units
Weighted average grant date fair value per unit
Intrinsic value
Non-vested grants at January 1, 2021
1,430,489
5.02
6,409
Granted (1)
1,818,190
6.03
Forfeited
(8,152)
Non-vested grants at June 30, 2021
3,240,527
5.59
23,364
LTIP expense for grants of restricted units was $1.4 million and $1.6 million for the three months ended June 30, 2021 and 2020, respectively, and $2.1 million and $0.9 million for the six months ended June 30, 2021 and 2020, respectively. LTIP expense for grants of restricted units for the six months ended June 30, 2020 includes the reversal of $4.8 million of cumulative previously recognized expense for the 2019 Grants, which were determined to be not probable of vesting, offset in part by related DERs for the 2019 Grants previously recorded to equity and then expensed.
The total obligation associated with LTIP grants of restricted units as of June 30, 2021 was $3.5 million and is included in the partners' capital Limited partners-common unitholders line item in our condensed consolidated balance sheets. As of June 30, 2021, there was $14.6 million in total unrecognized compensation expense related to the non-vested LTIP restricted unit grants that are expected to vest. That expense is expected to be recognized over a weighted-average period of 2.1 years.
Supplemental Executive Retirement Plan and Directors' Deferred Compensation Plan
We utilize the SERP to provide deferred compensation benefits for certain officers and key employees. All allocations made to participants under the SERP are made in the form of "phantom" ARLP units and SERP distributions will be settled in the form of ARLP common units. The SERP is administered by the Compensation Committee.
Our directors participate in the Directors' Deferred Compensation Plan. Pursuant to the Directors' Deferred Compensation Plan, for amounts deferred either automatically or at the election of the director, a notional account is established and credited with notional common units of ARLP, described in the Directors' Deferred Compensation Plan as "phantom" units. Distributions from the Directors' Deferred Compensation Plan will be settled in the form of ARLP common units.
For both the SERP and Directors' Deferred Compensation Plan, when quarterly cash distributions are made with respect to ARLP common units, an amount equal to such quarterly distribution is credited to each participant's notional account as additional phantom units. All grants of phantom units under the SERP and Directors' Deferred Compensation Plan vest immediately.
A summary of SERP and Directors' Deferred Compensation Plan activity as of and for the six months ended June 30, 2021 is as follows:
Phantom units outstanding as of January 1, 2021
760,630
22.04
3,408
Granted
12,942
5.99
Phantom units outstanding as of June 30, 2021
773,572
21.77
5,577
16
Total SERP and Directors' Deferred Compensation Plan expense was $0.1 million for the three months ended June 30, 2021 and 2020, and $0.2 million and $0.4 million for the six months ended June 30, 2021, and 2020, respectively. As of June 30, 2021, the total obligation associated with the SERP and Directors' Deferred Compensation Plan was $16.8 million and is included in the partners' capital Limited partners-common unitholders line item in our condensed consolidated balance sheets.
15.COMPONENTS OF PENSION PLAN NET PERIODIC BENEFIT COSTS
Eligible employees at certain of our mining operations participate in a defined benefit plan (the "Pension Plan") that we sponsor. The Pension Plan is currently closed to new applicants and participants in the Pension Plan are no longer receiving benefit accruals for service. The benefit formula for the Pension Plan is a fixed dollar unit based on years of service. Components of the net periodic benefit cost for each of the periods presented are as follows:
Interest cost
860
1,054
1,720
2,108
Expected return on plan assets
(1,671)
(1,491)
(3,342)
(2,983)
Amortization of prior service cost
Amortization of net loss
Net periodic benefit cost (1)
377
673
754
1,345
During the six months ended June 30, 2021, we made contribution payments totaling $3.3 million to the Pension Plan for the 2020 plan year. As a result of certain pension plan contribution relief provided by the American Rescue Plan Act enacted in March 2021, we do not expect to make additional contributions to the Pension Plan during 2021 or 2022.
16.SEGMENT INFORMATION
We operate in the United States as a diversified natural resource company that generates operating and royalty income from the production and marketing of coal to major domestic and international utilities and industrial users as well as royalty income from oil & gas mineral interests. We aggregate multiple operating segments into four reportable segments, Illinois Basin Coal Operations, Appalachia Coal Operations, Oil & Gas Royalties and Coal Royalties. We also have an "all other" category referred to as Other and Corporate.
Our two coal operations reportable segments correspond to major coal producing regions in the eastern United States with similar economic characteristics including coal quality, geology, coal marketing opportunities, mining and transportation methods and regulatory issues. The two coal operations reportable segments include seven mining complexes operating in Illinois, Indiana, Kentucky, Maryland, Pennsylvania and West Virginia and a coal loading terminal in Indiana on the Ohio River. Our Oil & Gas Royalties 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. The operations within our Oil & Gas Royalties reportable segment primarily include receiving royalties and lease bonuses for our oil & gas mineral interests. Our Coal Royalties reportable segment includes coal reserves controlled by Alliance Resource Properties, which are either (a) leased to certain of our coal mining entities or (b) unleased but near our coal mining operations.
Beginning in the first quarter of 2021, we began to strategically view and manage our coal royalty activities separately from our coal mining operations since acquiring and managing a variety of royalty producing assets have similar management attributes. As a result, we restructured our reportable segments to better reflect this strategic view in how we manage our business and allocate resources. Prior periods have been recast to include Alliance Resource Properties within our new Coal Royalties reportable segment with offsetting recast adjustments primarily to our coal operations reportable segments and to a lesser extent, our Other and Corporate category. Our reported eliminations were recast also to reflect intercompany royalty revenues and offsetting intercompany royalty expense resulting from our new Coal Royalties reportable segment.
The Illinois Basin Coal Operations reportable segment includes currently operating mining complexes (a) the Gibson County Coal, LLC ("Gibson") mining complex, which includes the Gibson South mine, (b) the Warrior Coal, LLC ("Warrior") mining complex, (c) the River View Coal, LLC ("River View") mining complex and (d) the Hamilton mining complex. The Illinois Basin Coal Operations reportable segment also includes our currently operating Mt. Vernon Transfer Terminal, LLC ("Mt. Vernon") coal loading terminal in Indiana on the Ohio River. Our Coal Royalties reportable segment discussed below, controls other coal reserves near our Illinois Basin operations which have not yet been leased to our Illinois Basin mining entities.
The Illinois Basin Coal Operations reportable segment also includes Mid-America Carbonates, LLC ("MAC") and other support services as well as non-operating mining complexes including (a) the Gibson North mine, which ceased production in the fourth quarter of 2019, (b) Webster County Coal, LLC's Dotiki mining complex, (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.
The Appalachia Coal Operations reportable segment includes currently operating mining complexes (a) the Mettiki mining complex, (b) the Tunnel Ridge, LLC mining complex and (c) the MC Mining, LLC ("MC Mining") mining complex. The Mettiki mining complex includes Mettiki Coal (WV), LLC's Mountain View mine and Mettiki Coal, LLC's preparation plant. Our Coal Royalties reportable segment discussed below, controls the Penn Ridge coal reserves near our Tunnel Ridge operations which have not yet been leased to Tunnel Ridge.
The Oil & Gas Royalties reportable segment includes oil & gas mineral interests held by AR Midland, LP and AllDale I & II and includes Alliance Minerals' equity interests in both AllDale III (Note 9 – Investment) and Cavalier Minerals.
The Coal Royalties reportable segment includes coal reserves controlled by Alliance Resource Properties, that are either (a) leased to certain of our mining complexes in both the Illinois Basin Coal Operations and Appalachia Coal Operations reportable segments or (b) near our coal mining operations but not yet leased to our coal mining entities. About two thirds of the coal sold by our Coal Operations' mines is leased from our Coal Royalties entities.
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"), 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 7 – Long-Term Debt).
18
Reportable segment results are presented below.
(1)
Revenues - Outside
5,900
Revenues - Intercompany
2,647
Total revenues (2)
Segment Adjusted EBITDA Expense (3)
140,176
74,456
2,419
4,871
4,825
(12,243)
214,504
Segment Adjusted EBITDA (4)
70,623
41,641
15,379
6,782
3,724
(2,057)
136,092
12,515
10,382
1,292
24,189
2,458
2,497
111,967
74,227
1,119
3,021
4,147
(6,940)
187,541
22,667
30,279
6,881
3,757
807
(2,335)
62,056
14,029
19,686
166
33,881
10,949
5,366
265,757
148,182
4,477
8,899
9,111
(24,205)
412,221
128,296
73,147
27,325
14,055
7,205
(4,115)
245,913
Total assets
726,555
425,574
604,355
292,134
489,271
(422,376)
28,916
22,048
4,662
55,626
6,978
5,356
268,650
154,145
2,002
7,488
8,789
(18,835)
422,239
66,000
77,581
20,636
10,666
3,544
(4,670)
173,757
814,972
492,073
628,308
294,435
473,119
(417,279)
2,285,628
40,258
43,257
730
84,245
19
The following is a reconciliation of consolidated Segment Adjusted EBITDA Expense to Operating expenses (excluding depreciation, depletion and amortization):
Segment Adjusted EBITDA Expense
(114)
Consolidated Segment Adjusted EBITDA
(17,492)
(13,822)
(32,996)
(27,260)
(64,733)
(83,559)
(123,935)
(157,480)
(24,977)
(132,026)
Interest expense, net
(9,827)
(11,416)
(20,206)
(23,643)
Income tax (expense) benefit
(5)
77
182
208
17.SUBSEQUENT EVENTS
Other than the event described in Note 10, there were no subsequent events.
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Significant relationships referenced in this management's discussion and analysis of financial condition and results of operations include the following:
Summary
We are a diversified natural resource company operating in the United States that generates operating and royalty income from the production and marketing of coal to major domestic and international utilities and industrial users as well as royalty 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 addition to our mining operations, in 2007, Alliance Resource Properties began acquiring control of coal mineral interests and leasing the coal reserves to our mining operations. In 2014, we began acquiring oil & gas mineral interests in premier oil & gas producing regions across the United States.
We have four reportable segments, Illinois Basin Coal Operations, Appalachia Coal Operations, Oil & Gas Royalties and Coal Royalties. We also have an "all other" category referred to as Other and Corporate. Our two coal operations reportable segments correspond to major coal producing regions in the eastern United States with similar economic characteristics including coal quality, geology, coal marketing opportunities, mining and transportation methods and regulatory issues. The two coal operations reportable segments include seven mining complexes operating in Illinois, Indiana, Kentucky, Maryland, Pennsylvania and West Virginia and a coal loading terminal in Indiana on the Ohio River. Our Oil & Gas Royalties 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 55,500 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 oil & gas mineral interests for lease to operators in those regions and generate royalty income from the leasing and development of those mineral interests. Our Coal Royalties reportable segment includes coal reserves controlled by Alliance Resource Properties, which are either (a) leased to certain of our coal mining entities or (b) unleased but near our coal mining operations.
Beginning in the first quarter of 2021, we began to strategically view and manage our coal royalty activities separately from our coal operations since acquiring and managing a variety of royalty producing assets have similar management attributes. As a result, we restructured our reportable segments to better reflect this strategic view in how we manage our business and allocate resources. Prior periods have been recast to include Alliance Resource Properties within our new Coal Royalties reportable segment with offsetting recast adjustments primarily to our coal operations reportable segments and to a lesser extent, our Other and Corporate category. Our reported eliminations were recast also to reflect
intercompany royalty revenues and offsetting intercompany royalty expense resulting from our new Coal Royalties reportable segment.
The Illinois Basin Coal Operations reportable segment also includes Mid-America Carbonates, LLC ("MAC") and other support services as well as non-operating mining complexes (a) the Gibson North mine, which ceased production in fourth quarter of 2019, (b) Webster County Coal, LLC's Dotiki mining complex, (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.
Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020
We reported net income attributable to ARLP of $44.0 million for the three months ended June 30, 2021 ("2021 Quarter") compared to a net loss attributable to ARLP of $46.7 million for the three months ended June 30, 2020 ("2020 Quarter"). The increase of $90.7 million was primarily due to higher revenues, partially offset by increased operating expenses. Increased coal sales volumes and oil & gas prices drove total revenues higher in the 2021 Quarter by 42.0% to $362.4 million, compared to $255.2 million for the 2020 Quarter. In general, the results from the 2021 Quarter benefited as compared to the 2020 Quarter, from significantly reduced disruptions to global energy demand created by the COVID-19 pandemic that negatively impacted our results for the 2020 Quarter.
22
Three Months Ended June 30,
(per ton / per BOE sold)
Coal - Tons sold
7,846
5,186
N/A
Coal - Tons produced
7,481
4,323
Coal - Coal sales
41.55
45.56
Coal - Segment Adjusted EBITDA Expense (1) (2)
218,867
190,179
27.90
36.67
Oil & Gas Royalties - BOE sold
391
411
Oil & Gas Royalties – Royalties (3)
43.73
18.92
Coal Royalties - Tons sold
4,707
3,441
Coal Royalties - Intercompany royalties
2.48
1.97
Coal sales. Coal sales increased $89.7 million or 38.0% to $326.0 million for the 2021 Quarter from $236.3 million for the 2020 Quarter. The increase was attributable to a volume variance of $121.2 million resulting from increased tons sold, partially offset by a price variance of $31.5 million due to lower average coal sales prices. Improved domestic and international coal demand during the 2021 Quarter drove coal sales volumes higher by 51.3% to 7.8 million tons sold compared to 5.2 million tons sold in the 2020 Quarter, which was adversely impacted by the pandemic. Contributing to the increase for the 2021 Quarter was the shipment of tons delayed in the three months ended March 31, 2021 due to weather-related transportation disruptions and an unplanned customer outage. Coal sales price realizations decreased by 8.8% in the 2021 Quarter to $41.55 per ton sold, compared to $45.56 per ton sold during the 2020 Quarter, due to the expiration of higher priced contract shipments. Production volumes increased by 73.1% in the 2021 Quarter, reflecting the temporary idling of production at certain mines during the 2020 Quarter in response to weak market conditions resulting from the pandemic.
Coal - Segment Adjusted EBITDA Expense. Segment Adjusted EBITDA Expense for our coal operations increased 15.1% to $218.9 million, as a result of higher coal sales volumes. On a per ton basis, Segment Adjusted EBITDA Expense for our coal operations decreased 23.9% in the 2021 Quarter to $27.90 per ton sold, compared to $36.67 per ton in the 2020 Quarter, primarily due to increased volumes, lower inventory charges, improved recoveries at several mines and the benefit of ongoing expense control and efficiency initiatives at all of our mining operations. In addition, other cost decreases are discussed below by category:
23
Oil & gas royalties. Oil & gas royalty revenues increased to $17.1 million in the 2021 Quarter compared to $7.8 million for the 2020 Quarter. The increase of $9.3 million was primarily due to significantly higher sales price realizations per BOE.
Depreciation, depletion and amortization. Depreciation, depletion and amortization expense decreased to $64.7 million for the 2021 Quarter compared to $83.6 million for the 2020 Quarter primarily as a result of increased mine life estimates for certain mines and reduced depreciation associated with coal inventory changes.
Transportation revenues and expenses. Transportation revenues and expenses were $12.1 million and $5.8 million for the 2021 and 2020 Quarters, respectively. The increase of $6.3 million was primarily attributable to increased average third-party transportation rates in the 2021 Quarter and increased coal tonnage for which we arrange third-party transportation at certain mines primarily due to increased coal shipments to international markets. Transportation revenues are recognized when title to the coal passes to the customer and recognized in an amount equal to the corresponding transportation expenses.
24
Segment Adjusted EBITDA. Our 2021 Quarter Segment Adjusted EBITDA increased $74.0 million to $136.1 million from the 2020 Quarter Segment Adjusted EBITDA of $62.1 million. Segment Adjusted EBITDA, tons sold, coal sales, other revenues, oil & gas royalties, BOE volume, coal royalties, coal royalties tons sold and Segment Adjusted EBITDA Expense by segment are as follows:
Increase (Decrease)
Segment Adjusted EBITDA
Illinois Basin Coal Operations
47,956
211.6
%
Appalachia Coal Operations
11,362
37.5
Oil & Gas Royalties
8,498
123.5
Coal Royalties
3,025
80.5
Other and Corporate
11.9
Total Segment Adjusted EBITDA (2)
74,036
119.3
5,425
3,350
2,075
61.9
2,421
1,836
585
31.9
Total tons sold
2,660
51.3
75,997
56.6
13,691
13.4
Total coal sales
89,688
38.0
168
35.4
(2,098)
(88.2)
412
3,592
72.5
(150)
(6.0)
Total other revenues
1,924
35.8
28,209
25.2
229
0.3
1,300
116.2
1,850
61.2
678
16.3
Elimination (3)
(5,303)
(76.4)
Total Segment Adjusted EBITDA Expense
26,963
14.4
Volume - BOE (4)
(20)
(4.9)
9,328
119.8
Volume - Tons sold (5)
1,266
36.8
Intercompany coal royalties
4,875
71.9
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Illinois Basin Coal Operations – Segment Adjusted EBITDA increased to $70.6 million in the 2021 Quarter from $22.7 million in the 2020 Quarter. The increase of $47.9 million was primarily attributable to higher coal sales, which increased 56.6% to $210.2 million in the 2021 Quarter from $134.2 million in the 2020 Quarter, partially offset by increased operating expenses. The increase of $76.0 million in coal sales primarily reflects increased sales volumes, which rose 61.9% compared to the 2020 Quarter due to improved coal demand and increased export volumes reflecting the continued economic recovery from the COVID-19 pandemic. Segment Adjusted EBITDA Expense increased 25.2% to $140.2 million in the 2021 Quarter from $112.0 million in the 2020 Quarter primarily as a result of increased sales volumes. Segment Adjusted EBITDA Expense per ton decreased $7.58 per ton sold to $25.84 from $33.42 per ton sold in the 2020 Quarter primarily as a result of increased volumes at all of our Illinois Basin mines reflecting the temporary idling and scaling back of Illinois Basin operations in the 2020 Quarter in response to weak market conditions resulting from the pandemic offset in part by increased longwall move days at our Hamilton mine. Lower inventory charges, the impact of ongoing expense control and efficiency initiatives at all of our mining operations in the region and improved recoveries at our Hamilton mine also contributed to the expense decrease. In addition, see certain cost variances described above under "–Coal - Segment Adjusted EBITDA Expense" and particularly related to expense decreases associated with workers compensation expense.
Appalachia Coal Operations – Segment Adjusted EBITDA increased 37.5% to $41.6 million for the 2021 Quarter from $30.3 million in the 2020 Quarter. The increase of $11.3 million was primarily attributable to higher coal sales, which increased 13.4% to $115.8 million in the 2021 Quarter from $102.1 million in the 2020 Quarter. The increase in coal sales reflects higher tons sold, partially offset by lower price realizations. Tons sold increased 31.9% in the 2021 Quarter compared to the 2020 Quarter due to increased sales volumes at our Tunnel Ridge and MC Mining operations resulting from improved market conditions. Coal sales price per ton sold in the 2021 Quarter decreased 14.0% compared to the 2020 Quarter primarily due to the expiration of higher priced contract shipments at our Tunnel Ridge and MC Mining mines and reduced export shipments of higher priced metallurgical coal from our Mettiki mine. Segment Adjusted EBITDA Expense remained comparable to the 2020 Quarter as reduced per ton costs in the 2021 Quarter offset increased expenses resulting from higher sales volumes in the 2021 Quarter. Segment Adjusted EBITDA Expense per ton decreased $9.68 per ton sold to $30.75 compared to $40.43 per ton sold in the 2020 Quarter, as a result of increased sales volumes, favorable inventory charges, ongoing expense control and efficiency initiatives and improved recoveries across the region, partially offset by reduced longwall shifts at our Mettiki mine, and increased longwall move days and certain operational transition issues with new longwall equipment both at our Tunnel Ridge mine in the 2021 Quarter. See also certain cost variances described above under "–Coal - Segment Adjusted EBITDA Expense" and particularly related to expense per ton decreases associated with selling expenses.
Oil & Gas Royalties – Segment Adjusted EBITDA increased to $15.4 million for the 2021 Quarter from $6.9 million in the 2020 Quarter. The increase of $8.5 million was primarily due to significantly higher sales price realizations per BOE, which more than offset lower BOE volumes.
Coal Royalties – Segment Adjusted EBITDA increased 80.5% to $6.8 million for the 2021 Quarter from $3.8 million in the 2020 Quarter. The increase of $3.0 million was a result of increased royalty tons sold and higher average royalty rates per ton received from our mining subsidiaries, partially offset by increased selling expenses.
Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020
We reported net income attributable to ARLP of $68.8 million for the six months ended June 30, 2021 ("2021 Period") compared to a net loss attributable to ARLP of $191.4 million for the six months ended June 30, 2020 ("2020 Period"). The increase of $260.2 million resulted from higher revenues, reduced operating expenses, lower depreciation and $157.0 million of non-cash impairment charges in the 2020 Period. Coal sales volumes increased 18.0% compared to the 2020 Period driving total revenues higher by 12.4%. Ongoing cost control and efficiency initiatives at our mining operations, offset in part by expense increases resulting from higher coal sales volumes, contributed to lower operating expenses of $409.6 million for the 2021 Period, compared to $421.5 million for the 2020 Period. In general, results for
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the 2021 Period were significantly improved compared to the 2020 Period, which was impacted by reduced global energy demand and weak commodity prices as a result of lockdown measures imposed in response to the COVID-19 pandemic.
Six Months Ended June 30,
14,674
12,437
15,482
12,344
41.81
44.30
421,799
430,898
28.74
34.65
791
906
39.33
24.31
9,228
8,439
2.49
2.15
Coal sales. Coal sales increased $62.6 million or 11.4% to $613.5 million for the 2021 Period from $550.9 million for the 2020 Period. The increase was attributable to a volume variance of $99.1 million resulting from increased tons sold partially offset by a price variance of $36.5 million due to lower average coal sales prices. Tons sold increased 18.0% to 14.7 million tons in the 2021 Period due to improved coal demand and increased export shipments. Primarily due to the expiration of higher priced contract shipments, coal sales price realizations declined 5.6% in the 2021 Period to $41.81 per ton sold, compared to $44.30 per ton sold during the 2020 Period. Production volumes increased by 25.4% in the 2021 Period, reflecting the temporary idling and scaling back of production at certain mines during the 2020 Period in response to weak market conditions resulting from the pandemic.
Coal - Segment Adjusted EBITDA Expense. Segment Adjusted EBITDA Expense for our coal operations decreased 2.1% to $421.8 million, primarily as a result of reduced costs per ton, partially offset by increased expenses associated with higher coal sales volumes. Segment Adjusted EBITDA Expense per ton decreased 17.1% in the 2021 Period to $28.74 per ton, compared to $34.65 per ton in the 2020 Period. The decrease was attributed primarily to increased volumes, lower inventory charges, improved recoveries at several mines and the impact of ongoing expense control and efficiency initiatives at all of our mining operations in addition to other cost decreases which are discussed below by category:
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Oil & gas royalties. Oil & gas royalty revenues increased to $31.1 million in the 2021 Period compared to $22.0 million for the 2020 Period. The increase of $9.1 million was primarily due to significantly higher sales price realizations per BOE.
Other revenues. Other revenues were principally comprised of Mt. Vernon transloading revenues in our Illinois Basin Coal Operations segment, Matrix Design sales in Other & Corporate as well as revenues not specific to any particular segment such as contract buy-out revenues and other outside services. Other revenues decreased to $13.4 million in the 2021 Period from $22.5 million in the 2020 Period. The decrease of $9.1 million was primarily due to a customer buy-out of certain coal contracts at our Tunnel Ridge mine during the 2020 Period.
Depreciation, depletion and amortization. Depreciation, depletion and amortization expense decreased to $123.9 million for the 2021 Period compared to $157.5 million for the 2020 Period primarily as a result of increased mine life estimates for certain mines and reduced depreciation associated with a) coal inventory changes, b) certain mines closed prior to 2021 and c) lower BOE volumes.
Asset impairment. 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 2 – 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 3 – Goodwill Impairment " of this Quarterly Report on Form 10-Q.
Transportation revenues and expenses. Transportation revenues and expenses were $23.1 million and $10.5 million for the 2021 and 2020 Periods, respectively. The increase of $12.6 million was primarily attributable to increased average third-party transportation rates in the 2021 Period and increased coal tonnage for which we arrange third-party transportation at certain mines primarily due to increased coal shipments to international markets. Transportation revenues are recognized when title to the coal passes to the customer and recognized in an amount equal to the corresponding transportation expenses.
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Segment Adjusted EBITDA. Our 2021 Period Segment Adjusted EBITDA increased $72.1 million, or 41.5%, to $245.9 million from the 2020 Period Segment Adjusted EBITDA of $173.8 million. Segment Adjusted EBITDA, tons sold, coal sales, other revenues, oil & gas royalties, BOE volume, coal royalties, coal royalties tons sold and Segment Adjusted EBITDA Expense by segment are as follows:
62,296
94.4
(4,434)
(5.7)
6,689
32.4
3,389
31.8
3,661
103.3
555
72,156
41.5
10,185
8,406
1,779
21.2
4,489
4,031
458
11.4
2,237
18.0
59,540
17.9
2,998
1.4
62,538
(137)
(9.8)
(13,394)
(95.3)
409
(100.0)
3,981
32.3
(10)
(0.2)
(9,156)
(40.7)
(2,893)
(1.1)
(5,963)
(3.9)
2,475
123.6
1,411
18.8
322
3.7
(5,370)
(28.5)
(10,018)
(2.4)
(115)
(12.7)
9,088
41.3
789
9.3
4,805
26.5
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Illinois Basin Coal Operations – Segment Adjusted EBITDA increased 94.4% to $128.3 million in the 2021 Period from $66.0 million in the 2020 Period. The increase of $62.3 million was primarily attributable to higher coal sales, which increased 17.9% to $392.8 million in the 2021 Period from $333.3 million in the 2020 Period. The increase of $59.5 million in coal sales primarily reflects increased sales volumes, which rose 21.2% compared to the 2020 Period due to improved coal demand and increased export volumes reflecting the continued economic recovery from the COVID-19 pandemic. Ongoing cost control and efficiency initiatives, offset in part by expense increases resulting from higher coal sales volumes, contributed to slightly lower Segment Adjusted EBITDA Expense in the 2021 Period compared to the 2020 Period. Segment Adjusted EBITDA Expense per ton decreased 18.4% to $26.09 from $31.96 per ton sold in the 2020 Period primarily as a result of increased volumes where production was temporarily idled and scaled back in the 2020 Period in response to weak market conditions resulting from the pandemic. Lower inventory charges and the impact of ongoing expense control and efficiency initiatives at all of our mining operations in the region also contributed to the decrease. See also certain cost variances described above under "–Coal - Segment Adjusted EBITDA Expense."
Appalachia Coal Operations – Segment Adjusted EBITDA decreased 5.7% to $73.1 million for the 2021 Period from $77.6 million in the 2020 Period. The decrease of $4.5 million was primarily attributable to lower contract buy-out revenues at Tunnel Ridge as discussed above, partially offset by reduced operating expenses and higher coal sales. Coal sales increased slightly to $220.7 million in the 2021 Period compared to $217.7 million in the 2020 Period as a result of increased sales volumes, partially offset by lower price realizations. Tons sold increased 11.4% in the 2021 Period compared to the 2020 Period due to increased sales volumes at our Tunnel Ridge and MC Mining operations resulting from improved market conditions. Coal sales price per ton sold in the 2021 Period decreased 9.0% compared to the 2020 Period primarily due to the expiration of higher priced contract shipments and reduced export shipments of higher priced metallurgical coal from our Mettiki mine. Segment Adjusted EBITDA Expense decreased to $148.2 million in the 2021 Period from $154.1 million in the 2020 Period due to decreased per ton costs, partially offset by increased volumes. Segment Adjusted EBITDA Expense per ton decreased $5.23 per ton sold to $33.01 compared to $38.24 per ton sold in the 2020 Period, as a result of increased sales volumes, ongoing expense control and efficiency initiatives and improved recoveries across the region. See also certain cost variances described above under "–Coal - Segment Adjusted EBITDA Expense."
Oil & Gas Royalties – Segment Adjusted EBITDA increased 32.4% to $27.3 million for the 2021 Period from $20.6 million in the 2020 Period. The increase of $6.7 million was primarily due to significantly higher sales price realizations per BOE, which more than offset lower volumes.
Coal Royalties – Segment Adjusted EBITDA increased 31.8% to $14.1 million for the 2021 Period from $10.7 million in the 2020 Period. The increase of $3.4 million was a result of increased royalty tons sold and higher average royalty rates per ton received from our mining subsidiaries, partially offset by increased selling expenses.
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 and asset and goodwill impairments. 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.
The following is a reconciliation of consolidated Segment Adjusted EBITDA to net income (loss), the most comparable GAAP financial measure:
Segment 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:
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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, 2020.
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, 2021, we have purchased units for a total of $93.5 million under the program. During the six months ended June 30, 2021, 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.
Cash Flows
Cash provided by operating activities was $158.2 million for the 2021 Period compared to $170.2 million for the 2020 Period. The decrease in cash provided by operating activities was primarily due to an unfavorable working capital change related to trade receivables partially offset by a favorable working capital change related to accounts payable.
Net cash used in investing activities was $50.2 million for the 2021 Period compared to $87.5 million for the 2020 Period. The decrease in cash used in investing activities was primarily attributable to the decrease in capital expenditures for mine infrastructure and equipment at various mines during the 2021 Period.
Net cash used in financing activities was $125.8 million for the 2021 Period compared to $84.1 million for the 2020 Period. The increase in cash used in financing activities was primarily attributable to increased payments and reduced borrowings on the revolving credit facility, partially offset by lower cash distributions paid to unitholders compared to the 2020 Period. A quarterly cash distribution of $0.40 per unit was paid in February 2020, after which payment of distributions to unitholders was temporarily suspended. Payment of distributions resumed in the 2021 Period with a cash distribution of $0.10 per unit paid in May for the quarter ended March 31, 2021. The quarterly distribution for the 2021 Quarter will be paid in August, 2021.
Capital Expenditures
Capital expenditures decreased to $55.6 million in the 2021 Period from $84.2 million in the 2020 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 next five-year period of approximately $4.90 per ton produced. Our anticipated total capital expenditures, including maintenance capital expenditures, for 2021 are estimated in a range of $125.0 million to $130.0 million. Management anticipates funding
remaining 2021 capital requirements with our cash and cash equivalents ($37.7 million as of June 30, 2021), 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
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
33
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 January 2021, we extended the term of the Securitization Facility to January 2022 and reduced the borrowing availability under the facility to $60.0 million. The Securitization Facility was previously scheduled to mature in January 2021. On June 30, 2021, we had a $38.1 million outstanding balance under the Securitization Facility.
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. On June 30, 2021, 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) coal mineral leases with The Joseph W. Craft III Foundation and The Kathleen S. Craft Foundation, 2) the use of aircraft, and 3) providing administrative services with respect to certain oil & gas mineral interests Mr. Craft acquired in 2019. We also have related-party transactions with (a) WKY CoalPlay, LLC ("WKY CoalPlay") regarding four mineral leases, (b) Bluegrass Minerals Management, LLC ("Bluegrass Minerals") through its noncontrolling ownership interest in our consolidated subsidiary, Cavalier Minerals and (c) with our equity interest in AllDale III. For more information regarding the Bluegrass Minerals and AllDale III, please read "Item 1. Financial Statements (Unaudited)—Note 8 – Variable Interest Entities" and "—Note 9 – Investment" of this Quarterly Report on Form 10-Q. We also have a line of credit with a related party as discussed in "Item 1. Financial Statements (Unaudited)—Note 7 – Long-Term Debt" of this Quarterly Report on Form 10-Q. Please read our Annual Report on Form 10-K for the year ended December 31, 2020, "Item 8. Financial Statements and Supplementary Data—Note 21 – Related-Party Transactions" for additional information concerning related-party transactions.
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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.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Commodity Price Risk
We have significant long-term coal sales contracts. Most of the long-term sales contracts are subject to price adjustment provisions, which periodically permit an increase or decrease in the contract price, typically to reflect changes in specified indices or changes in production costs resulting from regulatory changes, or both.
Our results of operations are highly dependent upon the prices we receive for our coal, oil and natural gas. Regarding coal, the short-term sales contracts favored by some of our coal customers leave us more exposed to risks of declining coal price periods. Regarding oil & natural gas, significant decline in prices would have a significant impact on our oil & gas royalty revenues.
We have exposure to coal and oil & gas sales prices and price risk for supplies that are used directly or indirectly in the normal course of coal and oil & gas production such as steel, electricity and other supplies. We manage our risk for these items through strategic sourcing contracts for normal quantities required by our operations. Historically, we have not utilized any commodity price-hedges or other derivatives related to either our sales price or supply cost risks but may do so in the future.
Credit Risk
Most of our coal is sold to United States electric utilities or into the international markets through brokered transactions. Therefore, our credit risk is primarily with domestic electric power generators and reputable global brokerage firms. Our policy is to independently evaluate each customer's creditworthiness prior to entering into transactions and to constantly monitor outstanding accounts receivable. When deemed appropriate by our credit management department, we will take steps to reduce our credit exposure to customers that do not meet our credit standards or whose credit has deteriorated. These steps may include obtaining letters of credit or cash collateral, requiring prepayment for shipments or establishing customer trust accounts held for our benefit in the event of a failure to pay. Such credit risks from customers may impact the borrowing capacity of our Securitization Facility. See "Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations—Debt Obligations – Accounts Receivable Securitization".
Exchange Rate Risk
Almost all our transactions are denominated in United States dollars, and as a result, we do not have material exposure to currency exchange-rate risks. However, because coal is sold internationally in United States dollars, general economic conditions in foreign markets and changes in foreign currency exchange rates may provide our foreign competitors with a competitive advantage. If our competitors' currencies decline against the United States dollar or against foreign purchasers' local currencies, those competitors may be able to offer lower prices for coal to these purchasers. Furthermore, if the currencies of overseas purchasers were to significantly decline in value in comparison to the United States dollar, those purchasers may seek decreased prices for the coal we sell to them. Consequently, currency fluctuations could adversely affect the competitiveness of our coal in international markets.
Interest Rate Risk
Borrowings under the Revolving Credit Facility and Securitization Facility are at variable rates and, as a result, we have interest rate exposure. Historically, our earnings have not been materially affected by changes in interest rates and we have not utilized interest rate derivative instruments related to our outstanding debt. We had no outstanding borrowings under the Revolving Credit Facility and $38.1 million in borrowings under the Securitization Facility on June 30, 2021. A one percentage point increase in the interest rates related to the Securitization Facility would result in an annualized increase in interest expense of $0.4 million, based on borrowing levels on June 30, 2021.
There were no other changes in our quantitative and qualitative disclosures about market risk as set forth in our Annual Report on Form 10-K for the year ended December 31, 2020.
ITEM 4.CONTROLS AND PROCEDURES
We maintain controls and procedures designed to provide reasonable assurance that information required to be disclosed in the reports we file with the Securities and Exchange Commission ("SEC") is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. As required by Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), we have evaluated, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) of the Exchange Act) as of June 30, 2021. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that these controls and procedures are effective as of June 30, 2021.
During the quarter ended June 30, 2021, we discovered that certain of our computer systems were subject to a cyber incident that did not materially impact our business, financial position or results of operations. We are taking appropriate steps in response to the incident, including providing individual notifications. Because of this incident and the recent focus nationally on increases in ransomware attacks and other cybersecurity incidents on critical infrastructure, we implemented two-factor authentication and other security enhancements for access to our internal network as well as improvements to our network backup and recovery processes. We do not consider these changes to our information technology environment, under which many of our internal controls operate, to be material changes in our internal control over financial reporting, but expect that these changes will strengthen our overall system of internal control over financial reporting.
During the quarterly period ended June 30, 2021, there have not been any changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) identified in connection with our evaluation, including the changes discussed above, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
FORWARD-LOOKING STATEMENTS
Certain statements and information in this Quarterly Report on Form 10-Q, and certain oral statements made from time to time by our representatives, constitute "forward-looking statements." These statements are based on our beliefs as well as assumptions made by, and information currently available to, us. When used in this document, the words "anticipate," "believe," "continue," "could," "estimate," "expect," "forecast," "foresee," "may," "outlook," "plan," "project," "potential," "should," "will," "would," and similar expressions identify forward-looking statements. Without limiting the foregoing, all statements relating to our future outlook, anticipated capital expenditures, future cash flows and borrowings and sources of funding are forward-looking statements. These forward-looking statements are based on our current expectations and beliefs concerning future developments and reflect our current views with respect to future events and are subject to numerous assumptions that we believe are reasonable, but are open to a wide range of uncertainties and business risks, and actual results could differ materially from those discussed in these statements. Among the factors that could cause actual results to differ from those in the forward-looking statements are:
If one or more of these or other risks or uncertainties materialize, or should our underlying assumptions prove incorrect, our actual results could differ materially from those described in any forward-looking statement. When considering forward-looking statements, you should also keep in mind our risk factors and legal proceedings. Known material factors that could cause our actual results to differ from those in the forward-looking statements are described in "Item 1. Legal Proceedings" and "Item 1A. Risk Factors" below. We disclaim any obligation to update or revise any forward-looking statements or to announce publicly the result of any revisions to any of the forward-looking statements to reflect future events or developments, unless required by law.
You should consider the information above when reading or considering any forward-looking statements contained in:
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ITEM 1.LEGAL PROCEEDINGS
Litigation was initiated in November 2019 in the U.S. District Court for the Western District of Kentucky (Branson v. Webster County Coal, LLC et al.) against certain of our subsidiaries in which the plaintiff alleges violations of the Fair Labor Standards Act and Kentucky Wage and Hour Act due to alleged failure to compensate for time "donning" and "doffing" equipment and to account for certain bonuses in the calculation of overtime rates and pay. The plaintiff seeks class or collective action certification. A similar lawsuit was initiated in March 2020 in the U.S. District Court for the Eastern District of Kentucky (Brewer v. Alliance Coal, LLC, et al.). Collectively, the plaintiffs of these two lawsuits allege damages ranging from approximately $22.2 million to $143.7 million. Subsequently, four additional lawsuits making similar allegations were initiated against certain of our subsidiaries: filed March 4, 2021 in the Circuit Court for Hopkins County, Kentucky (Johnson v. Hopkins County Coal, LLC, et al.); filed April 6, 2021 in the U.S. District Court for the Northern District of West Virginia (Rettig v. Mettiki Coal WV, LLC, et al.); filed April 9, 2021 in the U.S. District Court for the Southern District of Illinois (Cates v. Hamilton County Coal, LLC, et al.); and filed April 13, 2021 in the U.S. District Court for the Southern District of Indiana (Prater v. Gibson County Coal, LLC, et al.). We believe the claims made in these lawsuits are without merit and intend to defend the litigation vigorously. The litigation is in early stages. We do not believe this litigation will have a material adverse effect on our business, financial position or results of operations.
ITEM 1A.RISK FACTORS
In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risk factors discussed in Part I - Item 1A. "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2020, which could materially affect our business, financial condition or future results. The risks described in these reports are not our only risks. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial based on current knowledge and factual circumstances, if such knowledge or facts change, also may materially adversely affect our business, financial condition and/or operating results in the future.
ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On May 31, 2018, ARLP announced that the MGP board of directors approved the establishment of a unit repurchase program authorizing ARLP to repurchase up to $100 million of its outstanding limited partner common units. The unit repurchase program is intended to enhance ARLP's ability to achieve its goal of creating long-term value for its unitholders and provides another means, along with quarterly cash distributions, of returning cash to unitholders. The program has no time limit and ARLP 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 ARLP to repurchase any dollar amount or number of units and repurchases may be commenced or suspended from time to time without prior notice.
During the three months ended June 30, 2021, we did not repurchase and retire any units. Since inception of the unit repurchase program, we have repurchased and retired 5,460,639 units at an average unit price of $17.12 for an aggregate purchase price of $93.5 million.
ITEM 3.DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4.MINE SAFETY DISCLOSURES
Information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K (17 CFR 229.104) is included in Exhibit 95.1 to this Quarterly Report on Form 10-Q.
ITEM 5.OTHER INFORMATION
ITEM 6.EXHIBITS
Incorporated by Reference
ExhibitNumber
Exhibit Description
Form
SECFile No. andFilm No.
Exhibit
Filing Date
FiledHerewith*
3.1
Fourth Amended and Restated Agreement of Limited Partnership of Alliance Resource Partners, L.P.
8-K
000-26823
17990766
3.2
07/28/2017
Amendment No. 1 to Fourth Amended and Restated Agreement of Limited Partnership of Alliance Resource Partners, L.P.
10-K
18634634
3.9
02/23/2018
3.3
Amendment No. 2 to Fourth Amended and Restated Agreement of Limited Partnership of Alliance Resource Partners, L.P.
18883834
06/06/2018
3.4
Amendment No. 3 to Fourth Amended and Restated Agreement of Limited Partnership of Alliance Resource Partners, L.P.
3.5
Amended and Restated Agreement of Limited Partnership of Alliance Resource Operating Partners, L.P.
583595
03/29/2000
3.6
Amendment No. 1 to Amended and Restated Agreement of Limited Partnership of Alliance Resource Operating Partners, L.P.
Amended and Restated Certificate of Limited Partnership of Alliance Resource Partners, L.P.
3.8
Certificate of Limited Partnership of Alliance Resource Operating Partners, L.P.
S-1/A
333-78845
99669102
07/23/1999
Certificate of Formation of Alliance Resource Management GP, LLC
3.10
Third Amended and Restated Operating Agreement of Alliance Resource Management GP, LLC
3.11
Certificate of Formation of MGP II, LLC
3.12
Amended and Restated Operating Agreement of MGP II, LLC
31.1
Certification of Joseph W. Craft III, President and Chief Executive Officer of Alliance Resource Management GP, LLC, the general partner of Alliance Resource Partners, L.P., dated August 6, 2021, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of Brian L. Cantrell, Senior Vice President and Chief Financial Officer of Alliance Resource Management GP, LLC, the general partner of Alliance Resource Partners, L.P., dated August 6, 2021, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification of Joseph W. Craft III, President and Chief Executive Officer of Alliance Resource Management GP, LLC, the general partner of Alliance Resource Partners, L.P., dated August 6, 2021, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
Certification of Brian L. Cantrell, Senior Vice President and Chief Financial Officer of Alliance Resource Management GP, LLC, the general partner of Alliance Resource Partners, L.P., dated August 6, 2021, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
95.1
Federal Mine Safety and Health Act Information
101
Interactive Data File (Form 10-Q for the quarter ended June 30, 2021 filed in Inline XBRL).
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
* Or furnished, in the case of Exhibits 32.1 and 32.2.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, in Tulsa, Oklahoma, on August 6, 2021.
By:
Alliance Resource Management GP, LLC
its general partner
/s/ Joseph W. Craft, III
Joseph W. Craft, III
President, Chief Executive Officer
and Chairman, duly authorized to sign on behalfof the registrant.
/s/ Robert J. Fouch
Robert J. Fouch
Vice President, Controller and
Chief Accounting Officer
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