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Section 1: 10-Q (10-Q)

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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, 2019

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 5, 2019, 128,391,191 common units are outstanding.

Table of Contents

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, 2019 and December 31, 2018

1

Condensed Consolidated Statements of Income for the three and six months ended June 30, 2019 and 2018

2

Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2019 and 2018

3

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2019 and 2018

4

Notes to Condensed Consolidated Financial Statements

5

1.     Organization and Presentation

5

2.     New Accounting Standards

6

3.     Acquisition

7

4.     Contingencies

8

5.     Inventories

9

6.     Leases

9

7.     Fair Value Measurements

10

8.     Long-Term Debt

11

9.     Variable Interest Entities

12

10.   Investments

14

11.   Partners' Capital

15

12.   Revenue from Contracts with Customers

18

13.   Earnings per Limited Partner Unit

19

14.   Workers' Compensation and Pneumoconiosis

20

15.   Compensation Plans

20

16.   Components of Pension Plan Net Periodic Benefit Cost

22

17.   Segment Information

22

18.   Subsequent Events

25

ITEM 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

26

ITEM 3.

Quantitative and Qualitative Disclosures about Market Risk

40

ITEM 4.

Controls and Procedures

41

Forward-Looking Statements

42

PART II

OTHER INFORMATION

ITEM 1.

Legal Proceedings

44

ITEM 1A.

Risk Factors

44

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

44

ITEM 3.

Defaults Upon Senior Securities

45

ITEM 4.

Mine Safety Disclosures

45

ITEM 5.

Other Information

45

ITEM 6.

Exhibits

46

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Table of Contents

PART I

FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

ALLIANCE RESOURCE PARTNERS, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except unit data)

(Unaudited)

June 30, 

December 31, 

2019

    

2018

ASSETS

    

 

CURRENT ASSETS:

Cash and cash equivalents

$

55,215

$

244,150

Trade receivables

 

178,128

 

174,914

Other receivables

 

628

 

395

Inventories, net

 

84,661

 

59,206

Advance royalties, net

 

1,274

 

1,274

Prepaid expenses and other assets

    

 

11,592

    

 

20,747

Total current assets

 

331,498

 

500,686

PROPERTY, PLANT AND EQUIPMENT:

Property, plant and equipment, at cost

 

3,496,144

 

2,925,808

Less accumulated depreciation, depletion and amortization

 

(1,584,513)

 

(1,513,450)

Total property, plant and equipment, net

 

1,911,631

 

1,412,358

OTHER ASSETS:

Advance royalties, net

 

52,911

 

42,923

Equity method investments

 

28,672

 

161,309

Equity securities

 

122,094

Goodwill

136,399

136,399

Operating lease right-of-use assets

20,421

Other long-term assets

 

21,189

 

18,979

Total other assets

 

259,592

 

481,704

TOTAL ASSETS

$

2,502,721

$

2,394,748

LIABILITIES AND PARTNERS' CAPITAL

CURRENT LIABILITIES:

Accounts payable

$

108,116

$

96,397

Accrued taxes other than income taxes

 

17,507

 

16,762

Accrued payroll and related expenses

 

42,484

 

43,113

Accrued interest

 

5,154

 

5,022

Workers' compensation and pneumoconiosis benefits

 

11,270

 

11,137

Current finance lease obligations

 

38,214

 

46,722

Current operating lease obligations

 

5,554

 

Other current liabilities

 

18,734

 

19,718

Current maturities, long-term debt, net

 

78,144

 

92,000

Total current liabilities

 

325,177

 

330,871

LONG-TERM LIABILITIES:

Long-term debt, excluding current maturities, net

 

467,141

 

564,004

Pneumoconiosis benefits

 

73,607

 

68,828

Accrued pension benefit

 

40,841

 

43,135

Workers' compensation

 

45,422

 

41,669

Asset retirement obligations

 

132,414

 

127,655

Long-term finance lease obligations

 

2,549

 

10,595

Long-term operating lease obligations

 

14,806

 

Other liabilities

 

21,285

 

20,304

Total long-term liabilities

 

798,065

 

876,190

Total liabilities

 

1,123,242

 

1,207,061

PARTNERS' CAPITAL:

ARLP Partners' Capital:

Limited Partners - Common Unitholders 128,391,191 and 128,095,511 units outstanding, respectively

 

1,417,962

 

1,229,268

Accumulated other comprehensive loss

 

(50,573)

 

(46,871)

Total ARLP Partners' Capital

 

1,367,389

 

1,182,397

Noncontrolling interest

12,090

5,290

Total Partners' Capital

1,379,479

1,187,687

TOTAL LIABILITIES AND PARTNERS' CAPITAL

$

2,502,721

$

2,394,748

See notes to condensed consolidated financial statements.

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ALLIANCE RESOURCE PARTNERS, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except unit and per unit data)

(Unaudited)

Three Months Ended

Six Months Ended

June 30, 

June 30, 

    

2019

    

2018

    

2019

    

2018

    

SALES AND OPERATING REVENUES:

Coal sales

$

461,310

$

475,925

$

937,326

$

899,535

Oil & gas royalties

11,892

22,285

Transportation revenues

 

32,630

 

27,532

 

62,868

 

47,317

Other revenues

 

11,222

 

12,680

 

21,177

 

26,407

Total revenues

 

517,054

 

516,137

 

1,043,656

 

973,259

EXPENSES:

Operating expenses (excluding depreciation, depletion and amortization)

 

314,273

 

311,201

 

617,001

 

588,439

Transportation expenses

 

32,630

 

27,532

 

62,868

 

47,317

Outside coal purchases

 

5,311

 

68

 

5,311

 

1,442

General and administrative

 

19,521

 

17,026

 

37,333

 

33,677

Depreciation, depletion and amortization

 

76,913

 

72,150

 

148,052

 

133,998

Settlement gain

 

 

(80,000)

Total operating expenses

 

448,648

 

427,977

 

870,565

 

724,873

INCOME FROM OPERATIONS

 

68,406

 

88,160

 

173,091

 

248,386

Interest expense (net of interest capitalized for the three and six months ended June 30, 2019 and 2018 of $238, $296, $492 and $561, respectively)

 

(10,711)

 

(9,955)

 

(22,133)

 

(20,813)

Interest income

 

138

 

24

 

229

 

89

Equity method investment income

 

550

 

4,839

 

874

 

8,575

Equity securities income

 

 

3,854

 

12,906

 

7,578

Acquisition gain

 

 

177,043

 

Other expense

 

(13)

 

(542)

 

(142)

 

(1,389)

INCOME BEFORE INCOME TAXES

 

58,370

 

86,380

 

341,868

 

242,426

INCOME TAX EXPENSE (BENEFIT)

 

186

 

3

 

80

 

(7)

NET INCOME

58,184

86,377

341,788

242,433

LESS: NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST

(114)

 

(187)

 

(7,290)

 

(335)

NET INCOME ATTRIBUTABLE TO ARLP

$

58,070

$

86,190

$

334,498

$

242,098

NET INCOME ATTRIBUTABLE TO ARLP

GENERAL PARTNER

$

$

$

$

1,560

LIMITED PARTNERS

$

58,070

$

86,190

$

334,498

$

240,538

EARNINGS PER LIMITED PARTNER UNIT - BASIC AND DILUTED

$

0.44

$

0.64

$

2.57

$

1.80

WEIGHTED-AVERAGE NUMBER OF UNITS OUTSTANDING – BASIC AND DILUTED

 

128,391,191

 

131,279,910

 

128,271,158

 

131,050,836

See notes to condensed consolidated financial statements.

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ALLIANCE RESOURCE PARTNERS, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

Three Months Ended

Six Months Ended

    

June 30, 

June 30, 

2019

    

2018

    

2019

    

2018

    

NET INCOME

$

58,184

$

86,377

$

341,788

$

242,433

OTHER COMPREHENSIVE INCOME (LOSS):

Defined benefit pension plan

Amortization of prior service cost (1)

46

47

93

94

Amortization of net actuarial loss (1)

 

982

 

969

 

1,961

 

1,938

Total defined benefit pension plan adjustments

 

1,028

 

1,016

 

2,054

 

2,032

Pneumoconiosis benefits

Net actuarial loss

 

 

 

(3,465)

 

Amortization of net actuarial loss (gain) (1)

 

(1,146)

 

 

(2,291)

 

1

Total pneumoconiosis benefits adjustments

 

(1,146)

 

 

(5,756)

 

1

OTHER COMPREHENSIVE INCOME (LOSS)

 

(118)

 

1,016

 

(3,702)

 

2,033

COMPREHENSIVE INCOME

58,066

87,393

338,086

244,466

Less: Comprehensive income attributable to noncontrolling interest

(114)

(187)

(7,290)

(335)

COMPREHENSIVE INCOME ATTRIBUTABLE TO ARLP

$

57,952

$

87,206

$

330,796

$

244,131

(1)Amortization of prior service cost and net actuarial gain or loss is included in the computation of net periodic benefit cost (see Notes 14 and 16 for additional details).

See notes to condensed consolidated financial statements.

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ALLIANCE RESOURCE PARTNERS, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

Six Months Ended

June 30, 

    

2019

    

2018

    

CASH FLOWS FROM OPERATING ACTIVITIES

$

301,703

$

373,244

CASH FLOWS FROM INVESTING ACTIVITIES:

Property, plant and equipment:

Capital expenditures

 

(165,627)

 

(120,646)

Increase in accounts payable and accrued liabilities

 

4,442

 

2,376

Proceeds from sale of property, plant and equipment

 

701

 

477

Contributions to equity method investments

 

 

(11,400)

Distributions received from investments in excess of cumulative earnings

2,358

 

1,191

Payment for acquisition of business, net of cash acquired

 

(175,060)

 

Escrow payment for Wing acquisition

(10,875)

Cash received from redemption of equity securities

134,288

 

Net cash used in investing activities

 

(209,773)

 

(128,002)

CASH FLOWS FROM FINANCING ACTIVITIES:

Borrowings under securitization facility

118,000

 

112,600

Payments under securitization facility

(135,000)

 

(123,500)

Proceeds from equipment financing

10,000

 

Payments on equipment financing

(253)

 

Borrowings under revolving credit facilities

 

90,000

 

70,000

Payments under revolving credit facilities

 

(195,000)

 

(100,000)

Payments on finance lease obligations

 

(16,554)

 

(14,952)

Payments for purchases of units under unit repurchase program

(5,251)

 

(7,639)

Net settlement of withholding taxes on issuance of units in deferred compensation plans

 

(7,817)

 

(2,081)

Cash contribution by General Partner

 

 

41

Cash contribution by affiliated entity

 

2,142

Cash obtained in Simplification Transactions

 

1,139

Distributions paid to Partners

(138,500)

 

(137,443)

Other

 

(490)

 

(1,080)

Net cash used in financing activities

 

(280,865)

 

(200,773)

NET CHANGE IN CASH AND CASH EQUIVALENTS

 

(188,935)

 

44,469

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

 

244,150

 

6,756

CASH AND CASH EQUIVALENTS AT END OF PERIOD

$

55,215

$

51,225

SUPPLEMENTAL CASH FLOW INFORMATION:

Cash paid for interest

$

20,748

$

19,934

Cash paid for income taxes

$

$

34

SUPPLEMENTAL NON-CASH ACTIVITY:

Accounts payable for purchase of property, plant and equipment

$

19,027

$

18,012

Assets acquired by finance lease

$

$

835

Right-of-use assets acquired by operating lease

$

25,179

$

Market value of common units issued under deferred compensation plans before tax withholding requirements

$

17,415

$

6,142

Acquisition of business:

Fair value of assets assumed

$

484,303

$

Previously held equity-method investments

(307,322)

Cash paid, net of cash acquired

(175,060)

Fair value of liabilities assumed

$

1,921

$

See notes to condensed consolidated financial statements.

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ALLIANCE RESOURCE PARTNERS, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.ORGANIZATION AND PRESENTATION

Significant Relationships Referenced in Notes to Condensed Consolidated Financial Statements

References to "we," "us," "our" or "ARLP Partnership" mean the business and operations of Alliance Resource Partners, L.P., the parent company, as well as its consolidated subsidiaries.
References to "ARLP" mean Alliance Resource Partners, L.P., individually as the parent company, and not on a consolidated basis.
References to "MGP" mean Alliance Resource Management GP, LLC, ARLP's general partner.
References to "Intermediate Partnership" mean Alliance Resource Operating Partners, L.P., the intermediate partnership of Alliance Resource Partners, L.P.
References to "Alliance Resource Properties" mean Alliance Resource Properties, LLC, the land-holding company for the mining operations of Alliance Resource Operating Partners, L.P.
References to "Alliance Coal" mean Alliance Coal, LLC, the holding company for the coal mining operations of Alliance Resource Operating Partners, L.P.

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.  

AllDale I & II Acquisition

On January 3, 2019 (the " AllDale Acquisition Date"), we acquired all of the limited partner interests not owned by Cavalier Minerals JV, LLC ("Cavalier Minerals") in AllDale Minerals LP ("AllDale I") and AllDale Minerals II, LP ("AllDale II", and collectively with AllDale I, "AllDale I & II") and the general partner interests in AllDale I & II (the "AllDale Acquisition").  As a result of the AllDale Acquisition and our previous investments held through Cavalier Minerals, we now control approximately 43,000 net royalty acres in premier oil & gas resource plays.   The AllDale Acquisition provides us with diversified exposure to industry leading operators and is consistent with our general business strategy to pursue accretive acquisitions. See Note 3 – Acquisition for more information.

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, 2019 and December 31, 2018, the results of our operations and comprehensive income for the three and six months ended June 30, 2019 and 2018, and the cash flows for the six months ended June 30, 2019 and 2018.  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 of 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, 2018 and particularly as it relates to the simplification transactions completed by the Partnership on May 31, 2018 ("Simplification Transactions").

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For the periods presented prior to the Simplification Transactions, MGP's previous interests in both Alliance Coal and the Intermediate Partnership are reported as part of the general partner's interest in the ARLP Partnership's condensed consolidated financial statements.  

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, 2019.

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.

Leases

We lease buildings and equipment under operating lease agreements that provide for the payment of minimum rentals.  We also have noncancelable lease agreements with third parties for land and equipment under finance lease obligations.  Some of our arrangements within these agreements have both lease and non-lease components, which are generally accounted for separately.  We have elected a practical expedient to account for lease and non-lease components as a single lease component for leases of buildings and office equipment.  Our leases have lease terms of one year to 20 years, some of which include automatic renewals up to ten years which are likely to be exercised, and some of which include options to terminate the lease within one year.  We also hold numerous mineral reserve leases with both related parties as well as third parties, none of which are accounted for as an operating lease or as a finance lease.  

We review each agreement to determine if an arrangement within the agreement contains a lease at the inception of an arrangement.  Once an arrangement is determined to contain either an operating or finance lease with a term greater than 12 months, we recognize a lease liability for the obligation to make lease payments and a right-of-use asset for the right to use the underlying asset for the lease term based on the present value of lease payments over the lease term. The lease term includes all noncancelable periods defined in the lease as well as periods covered by options to extend the lease that we are reasonably certain to exercise.  As an implicit borrowing rate cannot be determined under most of our leases, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments.

Expenses related to leases determined to be operating leases will be recognized on a straight-line basis over the lease term including any reasonably assured renewal periods, while those determined to be finance leases will be recognized following a front-loaded expense profile in which interest and amortization are presented separately in the income statement.  The determination of whether a lease is accounted for as a finance lease or an operating lease requires management to make estimates primarily about the fair value of the asset and its estimated economic useful life.

2.NEW ACCOUNTING STANDARDS

New Accounting Standards Issued and Adopted

In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-02, Leases (Topic 842) ("ASU 2016-02").  ASU 2016-02 requires lessees to record right-of-use assets and corresponding lease liabilities on the balance sheet and disclose key information about lease arrangements. Leases are now classified as either finance or operating, with the resulting classification affecting the pattern of expense recognition in the income statement.  We elected to use the modified retrospective transition method which allows a cumulative effect adjustment on the balance sheet upon adoption. The adoption of the standard resulted in the recognition of approximately $25.0 million in additional net lease assets and respective lease liabilities as of January 1, 2019.  

As part of our transition there are a number of practical expedients available in the new standard.  We elected a package of practical expedients that, among other things, allows us to not reassess the lease classification of expired or existing leases. In addition to the package of practical expedients, we also elected to use a practical expedient allowing us to use hindsight in determining the lease term for existing leases.

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New Accounting Standards Issued and Not Yet Adopted

In June 2016, the FASB issued ASU 2016-13, Financial Instruments–Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13").  ASU 2016-13 changes the impairment model for most financial assets and certain other instruments to require the use of a new forward-looking "expected loss" model that generally will result in earlier recognition of allowances for losses.  The new standard will require disclosure of significantly more information related to these items.  ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted for the fiscal year beginning after December 15, 2018, including interim periods.  We do not have a history of credit losses on our financial instruments, accordingly we do not anticipate ASU 2016-13 will have a material impact on our condensed consolidated financial statements.  

3.ACQUISITION

On the AllDale Acquisition Date, we acquired all of the limited partner interests not owned by Cavalier Minerals in AllDale I & II and the general partner interests in AllDale I & II for $176.0 million, which was funded with cash on hand and borrowings under the Revolving Credit Facility discussed in Note 8 – Long-Term Debt.  As a result of the AllDale Acquisition and our previous investments held through Cavalier Minerals, we now control approximately 43,000 net royalty acres strategically positioned in the core of the Anadarko (SCOOP/STACK), Permian (Delaware and Midland), Williston (Bakken) and Appalachian basins. The AllDale Acquisition provides us with diversified exposure to industry leading operators and is consistent with our general business strategy to pursue accretive acquisitions.  

Because the underlying mineral interests held by AllDale I & II include royalty interests in producing properties, we have determined that the AllDale Acquisition should be accounted for as a business combination and the underlying assets and liabilities of AllDale I & II should be recorded at their AllDale Acquisition Date fair value on our condensed consolidated balance sheet. We consider our fair value measurements to be preliminary as we continue to obtain additional information from operators of the mineral interests about reserve and production quantities and projections.

The total fair value of the cash paid in the AllDale Acquisition and our previous investments were as follows:

As of January 3, 2019

(in thousands)

Cash

$

175,960

Previously held investments

307,322

Total

$

483,282

Prior to the AllDale Acquisition Date, we accounted for our investments in AllDale I & II, held through Cavalier Minerals, as equity method investments. The combined fair value of our equity method investments on the AllDale Acquisition Date was $307.3 million.  We re-measured our equity method investments, which had an aggregate carrying value of $130.3 million immediately prior to the AllDale Acquisition.  The re-measurement resulted in a gain of $177.0 million which is recorded in the Acquisition gain line item in our condensed consolidated statements of income.

The following table summarizes the fair value allocation of assets acquired and liabilities assumed as of the AllDale Acquisition Date:

As of January 3, 2019

(in thousands)

Cash and cash equivalents

$

900

Mineral interests in proved properties

159,617

Mineral interests in unproved properties

314,084

Receivables

10,602

Accounts payable

(1,921)

Net assets acquired

$

483,282

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Our previous equity method investments in AllDale I & II were held through Cavalier Minerals.  Bluegrass Minerals continues to hold a 4% membership interest (the "Bluegrass Interest") as well as a profits interest in Cavalier Minerals as it did before the AllDale Acquisition.  This Bluegrass Interest represents an indirect noncontrolling interest in AllDale I & II.  The AllDale Acquisition Date fair value of the Bluegrass Interest was $12.3 million.  

The fair value of our previous equity method investments, the mineral interests and the Bluegrass Interest were determined using an income approach primarily comprised of discounted cash flow models.  The assumptions used in the discounted cash flow models include estimated production, projected cash flows, forward oil & gas prices and a risk adjusted discount rate.  Certain assumptions used are not observable in active markets, therefore the fair value measurements represent Level 3 fair value measurements.  AllDale I & II's carrying value of the receivables and accounts payable represent their fair value given their short-term nature.

The amounts of revenue and earnings, exclusive of the acquisition gain, of AllDale I & II included in our condensed consolidated statements of income since the AllDale Acquisition Date are as follows:

Three Months Ended

Six Months Ended

 

June 30, 

June 30, 

2019

    

2019

(in thousands)

Revenue

$

12,428

$

23,156

Net income

 

4,901

 

8,982

The following represents the pro forma revenues and net income for the three and six months ended June 30, 2018 as if AllDale I & II had been included in our consolidated results since January 1, 2018.  These amounts have been calculated after applying our accounting policies.  Pro forma information is not necessary for the three and six months ended June 30, 2019 as the AllDale Acquisition occurred at the beginning of the year.  Additionally, our results have been adjusted to remove the effect of our past equity method investments in AllDale I & II.

Three Months Ended

Six Months Ended

June 30, 

June 30, 

    

2018

    

2018

  

(in thousands)

Total revenues

As reported

$

516,137

$

973,259

Pro forma

 

525,013

 

989,894

Net income

As reported

$

86,377

$

242,433

Pro forma

 

85,062

 

240,645

4.CONTINGENCIES

Various lawsuits, claims and regulatory proceedings incidental to our business are pending against the ARLP Partnership.  We record accruals for potential losses related to these matters when, in management's opinion, such losses are 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 were different from management's current opinion and in amounts greater than our accruals, then they could have a material adverse effect.

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5.INVENTORIES

Inventories consist of the following:

    

June 30, 

December 31, 

2019

    

2018

 

(in thousands)

Coal

$

46,387

$

20,929

Supplies (net of reserve for obsolescence of $5,306 and $5,453, respectively)

 

38,274

 

38,277

Total inventories, net

$

84,661

$

59,206

6.LEASES

The components of lease expense were as follows:

    

Three Months Ended

Six Months Ended

 

June 30, 

June 30, 

2019

    

2019

(in thousands)

Finance lease cost:

Amortization of right-of-use assets

$

4,496

$

9,017

Interest on lease liabilities

 

619

 

1,333

Operating lease cost

 

2,400

 

5,409

Short-term lease cost

106

296

Variable lease cost

 

343

 

675

Total lease cost

$

7,964

$

16,730

Supplemental cash flow information related to leases was as follows:

    

Three Months Ended

Six Months Ended

 

June 30, 

June 30, 

2019

    

2019

(in thousands)

Cash paid for amounts included in the measurement of lease liabilities:

Operating cash flows for operating leases

$

2,325

$

5,291

Operating cash flows for finance leases

$

619

$

1,333

Financing cash flows for finance leases

$

9,213

$

16,554

Right-of-use assets obtained in exchange for lease obligations:

Operating leases

$

$

25,179

Supplemental balance sheet information related to leases was as follows:

    

June 30, 

December 31, 

2019

    

2018

 

(in thousands)

Finance leases:

Property and equipment finance lease assets, gross

$

140,717

$

141,019

Accumulated depreciation

 

(83,291)

 

(74,576)

Property and equipment finance lease assets, net

$

57,426

$

66,443

9

Table of Contents

    

June 30, 

2019

    

Weighted average remaining lease term

Operating leases

11.8 years

Finance leases

0.9 years

Weighted average discount rate

Operating leases

6.0

%

Finance leases

 

5.2

%

Maturities of lease liabilities as of June 30, 2019 were as follows:

Operating leases

    

Finance leases

(in thousands)

2019

$

3,796

$

30,921

2020

3,788

8,748

2021

2,236

913

2022

2,172

913

2023

1,995

140

Thereafter

14,864

560

Total lease payments

28,851

42,195

Less imputed interest

(8,491)

(1,432)

Total

$

20,360

$

40,763

7.FAIR VALUE MEASUREMENTS

The following table summarizes our fair value measurements within the hierarchy:

June 30, 2019

December 31, 2018

    

Level 1

    

Level 2

    

Level 3

    

Level 1

    

Level 2

    

Level 3

 

(in thousands)

Long-term debt

$

$

587,757

$

$

$

669,864

$

Total

$

$

587,757

$