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Section 1: 10-Q (10-Q)

ALLIANCE RESOURCE PARTNERS 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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 March 31, 2020

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 May 8, 2020, 127,195,219 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 March 31, 2020 and December 31, 2019

1

Condensed Consolidated Statements of Income for the three months ended March 31, 2020 and 2019

2

Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2020 and 2019

3

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and 2019

4

Notes to Condensed Consolidated Financial Statements

5

1.     Organization and Presentation

5

2.     New Accounting Standards

6

3.     Acquisition

6

4.     Long-Lived Asset Impairments

7

5. Goodwill Impairment

7

6.     Contingencies

7

7.     Inventories

8

8.     Fair Value Measurements

8

9.     Long-Term Debt

9

10.   Variable Interest Entities

10

11.   Investments

12

12.   Partners' Capital

13

13.   Revenue from Contracts with Customers

14

14.   Earnings per Limited Partner Unit

14

15.   Workers' Compensation and Pneumoconiosis

15

16.   Compensation Plans

16

17.   Components of Pension Plan Net Periodic Benefit Cost

17

18.   Segment Information

18

19.   Subsequent Events

20

ITEM 2.

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

22

ITEM 3.

Quantitative and Qualitative Disclosures about Market Risk

33

ITEM 4.

Controls and Procedures

34

Forward-Looking Statements

35

PART II

OTHER INFORMATION

ITEM 1.

Legal Proceedings

37

ITEM 1A.

Risk Factors

37

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

38

ITEM 3.

Defaults Upon Senior Securities

38

ITEM 4.

Mine Safety Disclosures

38

ITEM 5.

Other Information

38

ITEM 6.

Exhibits

39

i

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)

March 31, 

December 31, 

2020

    

2019

ASSETS

    

 

CURRENT ASSETS:

Cash and cash equivalents

$

29,623

$

36,482

Trade receivables

 

137,261

 

161,679

Other receivables

 

322

 

256

Inventories, net

 

124,516

 

101,305

Advance royalties

 

1,085

 

1,844

Prepaid expenses and other assets

    

 

14,685

    

 

18,019

Total current assets

 

307,492

 

319,585

PROPERTY, PLANT AND EQUIPMENT:

Property, plant and equipment, at cost

 

3,621,062

 

3,684,008

Less accumulated depreciation, depletion and amortization

 

(1,662,335)

 

(1,675,022)

Total property, plant and equipment, net

 

1,958,727

 

2,008,986

OTHER ASSETS:

Advance royalties

 

59,626

 

52,057

Equity method investments

 

28,114

 

28,529

Goodwill

4,373

136,399

Operating lease right-of-use assets

16,334

17,660

Other long-term assets

 

21,755

 

23,478

Total other assets

 

130,202

 

258,123

TOTAL ASSETS

$

2,396,421

$

2,586,694

LIABILITIES AND PARTNERS' CAPITAL

CURRENT LIABILITIES:

Accounts payable

$

63,107

$

80,566

Accrued taxes other than income taxes

 

21,598

 

15,768

Accrued payroll and related expenses

 

35,718

 

36,575

Accrued interest

 

13,037

 

5,664

Workers' compensation and pneumoconiosis benefits

 

11,175

 

11,175

Current finance lease obligations

 

7,043

 

8,368

Current operating lease obligations

 

2,264

 

3,251

Other current liabilities

 

21,687

 

21,062

Current maturities, long-term debt, net

 

71,727

 

13,157

Total current liabilities

 

247,356

 

195,586

LONG-TERM LIABILITIES:

Long-term debt, excluding current maturities, net

 

731,004

 

768,194

Pneumoconiosis benefits

 

95,089

 

94,389

Accrued pension benefit

 

43,361

 

44,858

Workers' compensation

 

44,999

 

45,503

Asset retirement obligations

 

135,232

 

133,018

Long-term finance lease obligations

 

2,039

 

2,224

Long-term operating lease obligations

 

13,991

 

14,316

Other liabilities

 

15,846

 

23,182

Total long-term liabilities

 

1,081,561

 

1,125,684

Total liabilities

 

1,328,917

 

1,321,270

PARTNERS' CAPITAL:

ARLP Partners' Capital:

Limited Partners - Common Unitholders 127,195,219 and 126,915,597 units outstanding, respectively

 

1,132,836

 

1,331,482

Accumulated other comprehensive loss

 

(77,055)

 

(77,993)

Total ARLP Partners' Capital

 

1,055,781

 

1,253,489

Noncontrolling interest

11,723

11,935

Total Partners' Capital

1,067,504

1,265,424

TOTAL LIABILITIES AND PARTNERS' CAPITAL

$

2,396,421

$

2,586,694

See notes to condensed consolidated financial statements.

1

Table of Contents

ALLIANCE RESOURCE PARTNERS, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except unit and per unit data)

(Unaudited)

Three Months Ended

March 31, 

    

2020

    

2019

    

SALES AND OPERATING REVENUES:

Coal sales

$

314,637

$

476,016

Oil & gas royalties

14,239

10,393

Transportation revenues

 

4,739

 

30,238

Other revenues

 

17,148

 

9,955

Total revenues

 

350,763

 

526,602

EXPENSES:

Operating expenses (excluding depreciation, depletion and amortization)

 

234,342

 

302,728

Transportation expenses

 

4,739

 

30,238

General and administrative

 

13,438

 

17,812

Depreciation, depletion and amortization

 

73,921

 

71,139

Asset impairments

 

24,977

 

Goodwill impairment

132,026

 

Total operating expenses

 

483,443

 

421,917

(LOSS) INCOME FROM OPERATIONS

 

(132,680)

 

104,685

Interest expense (net of interest capitalized for the three months ended March 31, 2020 and 2019 of $557 and $254, respectively)

 

(12,279)

 

(11,422)

Interest income

 

52

 

91

Equity method investment income

 

451

 

324

Equity securities income

 

 

12,906

Acquisition gain

 

 

177,043

Other expense

 

(356)

 

(129)

(LOSS) INCOME BEFORE INCOME TAXES

 

(144,812)

 

283,498

INCOME TAX BENEFIT

 

(105)

 

(106)

NET (LOSS) INCOME

(144,707)

283,604

LESS: NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST

 

(76)

 

(7,176)

NET (LOSS) INCOME ATTRIBUTABLE TO ARLP

$

(144,783)

$

276,428

EARNINGS PER LIMITED PARTNER UNIT - BASIC AND DILUTED

$

(1.14)

$

2.12

WEIGHTED-AVERAGE NUMBER OF UNITS OUTSTANDING – BASIC AND DILUTED

 

127,072,308

 

128,149,791

See notes to condensed consolidated financial statements.

2

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ALLIANCE RESOURCE PARTNERS, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

(Unaudited)

Three Months Ended

March 31, 

    

2020

    

2019

    

NET (LOSS) INCOME

$

(144,707)

$

283,604

OTHER COMPREHENSIVE INCOME (LOSS):

Defined benefit pension plan

Amortization of prior service cost (1)

46

47

Amortization of net actuarial loss (1)

 

1,064

 

979

Total defined benefit pension plan adjustments

 

1,110

 

1,026

Pneumoconiosis benefits

Net actuarial loss

 

 

(3,465)

Amortization of net actuarial gain (1)

 

(172)

 

(1,145)

Total pneumoconiosis benefits adjustments

 

(172)

 

(4,610)

OTHER COMPREHENSIVE INCOME (LOSS)

 

938

 

(3,584)

COMPREHENSIVE (LOSS) INCOME

(143,769)

280,020

Less: Comprehensive income attributable to noncontrolling interest

(76)

(7,176)

COMPREHENSIVE (LOSS) INCOME ATTRIBUTABLE TO ARLP

$

(143,845)

$

272,844

(1)Amortization of prior service cost and net actuarial gain or loss is included in the computation of net periodic benefit cost (see Notes 15 and 17 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)

Three Months Ended

March 31, 

    

2020

    

2019

    

CASH FLOWS FROM OPERATING ACTIVITIES

$

78,719

$

143,706

CASH FLOWS FROM INVESTING ACTIVITIES:

Property, plant and equipment:

Capital expenditures

 

(50,364)

 

(84,043)

Change in accounts payable and accrued liabilities

 

(3,612)

 

6,470

Proceeds from sale of property, plant and equipment

 

2,500

 

103

Distributions received from investments in excess of cumulative earnings

142

 

2,260

Payments for acquisitions of businesses, net of cash acquired

 

 

(175,060)

Cash received from redemption of equity securities

 

134,288

Net cash used in investing activities

 

(51,334)

 

(115,982)

CASH FLOWS FROM FINANCING ACTIVITIES:

Borrowings under securitization facility

12,800

 

108,000

Payments under securitization facility

(28,200)

 

(110,000)

Payments on equipment financings

(3,225)

 

Borrowings under revolving credit facilities

 

70,000

 

Payments under revolving credit facilities

 

(25,000)

 

(150,000)

Payments on finance lease obligations

 

(1,510)

 

(7,341)

Payment of debt issuance costs

 

(5,758)

 

Payments for purchases of units under unit repurchase program

 

(5,251)

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

 

(1,310)

 

(7,817)

Distributions paid to Partners

(51,753)

 

(69,011)

Other

 

(288)

 

(262)

Net cash used in financing activities

 

(34,244)

 

(241,682)

NET CHANGE IN CASH AND CASH EQUIVALENTS

 

(6,859)

 

(213,958)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

 

36,482

 

244,150

CASH AND CASH EQUIVALENTS AT END OF PERIOD

$

29,623

$

30,192

SUPPLEMENTAL CASH FLOW INFORMATION:

Cash paid for interest

$

4,533

$

3,240

SUPPLEMENTAL NON-CASH ACTIVITY:

Accounts payable for purchase of property, plant and equipment

$

10,892

$

21,055

Right-of-use assets acquired by operating lease

$

195

$

25,179

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

$

3,837

$

17,415

Acquisition of businesses:

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 Coal" mean Alliance Coal, LLC, the holding company for the coal mining operations of Alliance Resource Operating Partners, L.P.
References to "Alliance Minerals" mean Alliance Minerals, LLC, the holding company for the oil and gas minerals interests of Alliance Resource Partners, L.P.

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 March 31, 2020 and December 31, 2019 and the results of our operations, comprehensive income and cash flows for the three months ended March 31, 2020 and 2019.  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, 2019.

 

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, 2020.

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.

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2.NEW ACCOUNTING STANDARDS

New Accounting Standards Issued and Adopted

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirement for Fair Value Measurement.  ASU 2018-13 amended the fair value measurement guidance by removing and modifying certain disclosure requirements, while also adding new disclosure requirements including the requirement to disclose the range and weighted average of significant unobservable inputs used to develop certain Level 3 measurements.  These changes are to be applied prospectively for only the most recent interim or annual period presented in the year of adoption.  We adopted ASU 2018-13 on January 1, 2020.

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 requires disclosure of significantly more information related to these items.  We adopted ASU 2016-13 on January 1, 2020 and because we do not have a history of credit losses on our financial instruments and have no material expected losses, the adoption of ASU 2016-13 did not have any material impact on our condensed consolidated financial statements.

3.ACQUISITION

Wing

On August 2, 2019 (the "Wing Acquisition Date"), our subsidiary, AR Midland, LP ("AR Midland") acquired from Wing Resources LLC and Wing Resources II LLC (collectively, "Wing") approximately 9,000 net royalty acres in the Midland Basin, with exposure to more than 400,000 gross acres, for a cash purchase price of $144.9 million (the "Wing Acquisition").  The purchase price was funded with cash on hand and borrowings under the Revolving Credit Facility discussed in Note 9 – Long-Term Debt.  The Wing Acquisition enhances our ownership position in the Permian Basin, expands our exposure to industry leading operators and furthers our business strategy to grow our Minerals segment.  Concurrent with the Wing Acquisition, JC Resources LP, an entity owned by Joseph W. Craft III, the Chairman, President and Chief Executive Officer of MGP ("Mr. Craft"), acquired from Wing, in a separate transaction, mineral interests that we elected not to acquire.

Because the mineral interests acquired in the Wing Acquisition include royalty interests in both producing properties and unproved properties, we have determined that the acquisition should be accounted for as a business combination and the underlying assets should be recorded at fair value as of the Wing Acquisition Date on our condensed consolidated balance sheet. During the three months ended March 31, 2020, we recorded adjustments to our mineral interests in proved and unproved properties due to additional information received about reserve and production quantities and projections that represented facts and circumstances that existed as of the Wing Acquisition Date.  In addition, we increased our receivables by $0.3 million as a result of information received from operators concerning royalty payments owed to us from production that occurred prior to the Wing Acquisition Date.

The following table summarizes the fair value allocation of assets acquired as of the Wing Acquisition Date incorporating measurement period adjustments made to the allocation:

As Previously

Reported

Adjustments

Adjusted

(in thousands)

Mineral interests in proved properties

$

58,084

16,987

$

75,071

Mineral interests in unproved properties

84,976

(17,275)

67,701

Receivables

1,867

288

2,155

Net assets acquired

$

144,927

$

144,927

The fair value of the mineral interests was determined using a weighting of both income and market approaches.  Our income approach primarily comprised a discounted cash flow model.  The assumptions used in the discounted cash flow model included estimated production, projected cash flows, forward oil & gas prices and a weighted average cost of

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capital.  Our market approach consisted of the observation of recent acquisitions in the Permian Basin to determine a market price for similar mineral interests.  Certain assumptions used in our valuation are not observable in active markets; therefore, the fair value measurements represent Level 3 fair value measurements.  The carrying value of the receivables represents the fair value given the short-term nature of the receivables.  

4.LONG-LIVED ASSET IMPAIRMENTS

During the three months ended March 31, 2020, we recorded $25.0 million of non-cash asset impairment charges in our Illinois Basin 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.  The fair value of the impaired assets was determined using a market approach, which represents Level 3 fair value measurement under the fair value hierarchy.  The fair value analysis used assumptions of marketability of certain assets in the Illinois Basin.

With the uncertainty related to energy demand as a result of a) weak electricity demand and b) an oversupply and lack of storage for oil and natural gas, both due in part to the COVID-19 pandemic and other market and production factors impacting both our coal mining operations and our mineral interests activities, we performed recoverability tests using undiscounted cash flows based on our estimate of both volume and prices from information available to us.  While we currently believe that we will recover the costs of our assets, excluding the impaired assets discussed above, the cash flow estimates used in our assessment, by their very nature, are dependent on conditions that could materially change in future periods based on new information.  If in future periods changes to these estimates were to materially reduce our expected cash flows, additional impairments could be necessary.

5.GOODWILL IMPAIRMENT

At December 31, 2019, our consolidated balance sheet included $136.4 million of goodwill, of which $132.0 million was associated with the reporting unit representing our Hamilton County Coal, LLC ("Hamilton") mine, which is included in our Illinois Basin segment. The goodwill associated with our Hamilton mine was recorded in conjunction with our acquisition of the Hamilton mine on July 31, 2015.  During the first quarter of 2020, 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 Hamilton and c) our actual performance during the first quarter of 2020.  After consideration of these events and changes in circumstances, we performed an interim test of the goodwill associated with the Hamilton reporting unit comparing Hamilton's carrying amount to its fair value as of March 31, 2020.

We estimated the fair value of the Hamilton reporting unit 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 current market conditions and our estimate on how the mine will perform in future years based on the information available to us. Key assumptions used in our valuation are not observable in active markets; therefore, the fair value measurements represent Level 3 fair value measurements.  The fair value of the Hamilton reporting unit was determined to be below its carrying amount (including goodwill) by more than the recorded balance of goodwill associated with the reporting unit.  Accordingly, we recognized an impairment charge of $132.0 million consisting of the total carrying amount of goodwill allocated to the Hamilton reporting unit.  This impairment change reduced our consolidated goodwill balance to $4.4 million as of March 31, 2020. We performed an interim test on ARLP’s remaining goodwill balances not associated with Hamilton and concluded no impairment was necessary for the goodwill associated with our other reporting units.

6.CONTINGENCIES

Various lawsuits, claims and regulatory proceedings incidental to our business 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 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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7.INVENTORIES

Inventories consist of the following:

March 31, 

December 31, 

2020

    

2019

 

(in thousands)

Coal

$

86,871

$

63,645

Supplies (net of reserve for obsolescence of $5,839 and $5,555, respectively)

 

37,645

 

37,660

Total inventories, net

$

124,516

$

101,305

During the three months ended March 31, 2020, we recorded a lower of cost or net realizable value adjustment of $5.4 million to our coal inventories as a result of lower coal sale prices resulting from challenging market conditions and higher cost per ton primarily attributed to various factors lowering production and thus impacting our fixed costs per ton in addition to the impact of challenging market conditions on our production levels.  The lower of cost or net realizable value adjustments were primarily attributable to the Hamilton mining complex.

8.FAIR VALUE MEASUREMENTS

The following table summarizes our fair value measurements within the hierarchy not included elsewhere in these notes:

March 31, 2020

December 31, 2019

    

Level 1

    

Level 2

    

Level 3

    

Level 1

    

Level 2

    

Level 3

 

(in thousands)

Long-term debt

$

$

471,918

$

$

$

736,206

$

Total

$

$

471,918

$

$

$

736,206

$

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 9 – 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.

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9.LONG-TERM DEBT

Long-term debt consists of the following:

Unamortized Discount and

Principal

Debt Issuance Costs

March 31, 

December 31, 

March 31, 

December 31, 

    

2020

    

2019

    

2020

    

2019

 

(in thousands)

Revolving credit facility

$

300,000

$

255,000

$

(8,273)

$

(3,050)

Senior notes

 

400,000

 

400,000

 

(4,649)

 

(4,879)

Securitization facility

58,400

73,800

May 2019 equipment financing

7,407

8,199

November 2019 equipment financing

49,846

52,281

 

815,653

 

789,280

 

(12,922)

 

(7,929)

Less current maturities

 

(71,727)

 

(13,157)

 

 

Total long-term debt

$

743,926

$

776,123

$

(12,922)

$

(7,929)

Credit Facility.  On March 9, 2020, our Intermediate Partnership entered into a Fifth Amended and Restated Credit Agreement (the "Credit Agreement") with various financial institutions.  The Credit Agreement provides for a $537.75 million revolving credit facility, reducing to $459.5 million on May 23, 2021, including a sublimit of $125 million for the issuance of letters of credit and a sublimit of $15.0 million for swingline borrowings (the "Revolving Credit Facility"), with a termination date of March 9, 2024.  The Credit Facility replaced the $494.75 million revolving credit facility extended to the Intermediate Partnership under its Fourth Amended and Restated Credit Agreement, dated as of January 27, 2017, by various banks and other lenders that would have expired on May 23, 2021.  Concurrently with the entry into the Credit Agreement, we reorganized the entities holding our oil & gas interests such that Alliance Royalty, LLC became a direct wholly-owned subsidiary of Alliance Minerals.  

The Credit Agreement is guaranteed by certain of our Intermediate Partnership's material direct and indirect subsidiaries (the "Restricted Subsidiaries") and is secured by substantially all of the assets of the Restricted Subsidiaries.  The Credit Agreement is not guaranteed or secured by the assets of the Intermediate Partnership's oil & gas minerals subsidiary, Alliance Minerals, or its direct and indirect subsidiaries (collectively the "Unrestricted Subsidiaries").  Borrowings under the Revolving Credit Facility bear interest, at our option, at either (i) the Base Rate at the greater of three benchmarks or (ii) a Eurodollar Rate, plus margins for (i) or (ii), as applicable, that fluctuate depending upon the ratio of Consolidated Debt to Consolidated Cash Flow (each as defined in the Credit Agreement).  The Eurodollar Rate, with applicable margin, under the Revolving Credit Facility was 3.50% as of March 31, 2020.  At March 31, 2020, we had $9.3 million of letters of credit outstanding with $228.5 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 1.58 to 1.0, 10.82 to 1.0 and 0.81 to 1.0, respectively, for the trailing twelve months ended March 31, 2020.  We remain in compliance with the covenants of the Credit Agreement as of March 31, 2020.  

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

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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 on or after May 1, 2020, 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 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.  In October 2019, we extended the term of the Securitization Facility to January 2021. At March 31, 2020, we had a $58.4 million outstanding balance under the Securitization Facility.  

May 2019 Equipment Financing.  On May 17, 2019, the Intermediate Partnership entered into an equipment financing arrangement accounted for as debt, wherein the Intermediate Partnership received $10.0 million in exchange for conveying its interest in certain equipment owned indirectly by the Intermediate Partnership and entering into a master lease agreement for that equipment (the "May 2019 Equipment Financing"). The May 2019 Equipment Financing contains customary terms and events of default and provides for thirty-six monthly payments with an implicit interest rate of 6.25%, maturing on May 1, 2022. Upon maturity, the equipment will revert back to the Intermediate Partnership.

November 2019 Equipment Financing.  On November 6, 2019, the Intermediate Partnership entered into an equipment financing arrangement accounted for as debt, wherein the Intermediate Partnership received $53.1 million in exchange for conveying its interest in certain equipment owned indirectly by the Intermediate Partnership and entering into a master lease agreement for that equipment (the "November 2019 Equipment Financing"). The November 2019 Equipment Financing contains an implicit interest rate of 4.75% and provides for a four year term with forty-seven monthly payments of $1.0 million and a balloon payment of $11.6 million upon maturity on November 6, 2023. At maturity, the equipment will revert back to the Intermediate Partnership. The November 2019 Equipment Financing contains customary terms and events of default.  

10.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

Minerals

(in thousands)

Contributions

$

143,112

$

5,963

Distributions

78,831

3,284

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

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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 at March 31, 2020 was 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 11 – Investments for more information.

WKY CoalPlay

On November 17, 2014, SGP Land, LLC ("SGP Land"), an entity owned indirectly by the Chairman, President and CEO of MGP ("Mr. Craft") and Kathleen S. Craft, jointly, and two limited liability companies ("Craft Companies") owned by irrevocable trusts established by Mr. Craft and his children, entered into a limited liability company agreement to form WKY CoalPlay, LLC ("WKY CoalPlay").  WKY CoalPlay was formed, in part, to purchase and lease coal reserves.  WKY CoalPlay is managed by an individual who is an officer and director of Alliance Resource Holdings II, Inc. and trustee of the irrevocable trusts owning one of the Craft Companies.  In December 2014 and February 2015, we entered into various coal reserve leases with WKY CoalPlay.  During the three months ended March 31, 2020, we paid $10.8 million of advanced royalties to WKY CoalPlay.    

We have concluded that WKY CoalPlay is a VIE because of our ability to exercise options to acquire reserves under lease with WKY CoalPlay, which is not within the control of the equity holders and, if it occurs, could potentially limit the expected residual return to the owners of WKY CoalPlay.  We do not have any economic or governance rights related to WKY CoalPlay and our options that provide us with a variable interest in WKY CoalPlay's reserve assets do not give us any rights that constitute power to direct the primary activities that most significantly impact WKY CoalPlay's economic performance.  SGP Land has the sole ability to replace the manager of WKY CoalPlay at its discretion and therefore has power to direct the activities of WKY CoalPlay.  Consequently, we concluded that SGP Land is the primary beneficiary of WKY CoalPlay.

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11.INVESTMENTS

AllDale III

As discussed in Note 10 – 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:

Three Months Ended

March 31, 

    

2020

    

2019

(in thousands)

Beginning balance

$

28,529

$

28,974

Equity method investment income

451

324

Distributions received

(593)

(528)

Other

(273)

Ending balance

$

28,114

$

28,770

As discussed in Note 4 – Long-Lived Asset Impairments, there is uncertainty related to energy demand as a result of a) weak electricity demand and b) an oversupply and lack of storage for oil and natural gas, both due in part to the COVID-19 pandemic, which could impact our investment in AllDale III.  As a result we compared the fair value of our investment to its carrying value and concluded that the fair value exceeded the carrying value and no impairment in our investment was necessary.  To calculate the fair value of the investment we used an income approach utilizing a discounted cash flow model based on our estimate of both volume, prices and expenses from information available to us.  Key assumptions used in our valuation are not observable in active markets; therefore, the fair value measurements represent Level 3 fair value measurements.  The cash flow estimates used in our assessment, by their very nature, are dependent on conditions that could materially change in future periods based on new information.  If in future periods changes to these estimates were to materially reduce our expected cash flows, an impairment of our investment could be necessary.

Kodiak

On July 19, 2017, Alliance Minerals purchased $100 million of Series A-1 Preferred Interests from Kodiak Gas Services, LLC ("Kodiak"), a privately-held company providing large-scale, high-utilization gas compression assets to customers operating primarily in the Permian Basin.  This structured investment provided us with a quarterly cash or payment-in-kind return.  On February 8, 2019, Kodiak redeemed our preferred interest for $135.0 million in cash resulting in an $11.5 million gain due to an early redemption premium. The gain is included in the Equity securities income line item.  We no longer hold any ownership interests in Kodiak.  Prior to redemption, we accounted for our ownership interests in Kodiak as equity securities without readily determinable fair values.  

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12.PARTNERS' CAPITAL

Distributions

Distributions paid or declared during 2019 and 2020 were as follows:

Payment Date

    

Per Unit Cash Distribution

 

Total Cash Distribution

 

(in thousands)

February 14, 2019

$

0.5300

$

69,011

May 15, 2019

0.5350

69,489

August 14, 2019

0.5400

70,153

November 14, 2019

0.5400

69,772

Total

$

2.1450

$

278,425

February 14, 2020

$

0.4000

$

51,753

Total

$

0.4000

$

51,753

In response to the disruptions to the economy and the uncertainty surrounding the COVID-19 pandemic, the Board of Directors of ARLP's general partner suspended the cash distribution to unitholders for the quarter ended March 31, 2020.

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 three months ended March 31, 2020.  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.  Total units repurchased include the repurchase and retirement of 35 units representing fractional units as part of the simplification transactions completed by the Partnership on May 31, 2018 which are not part of the unit repurchase program.

Change in Partners' Capital

The following tables present the quarterly change in Partners' Capital for the three months ended March 31, 2020 and 2019:

Accumulated

Number of

Limited 

Other

Limited Partner

Partners'

Comprehensive

Noncontrolling

Total Partners’

    

Units

    

Capital

    

Income (Loss)

    

Interest

    

 Capital

 

(in thousands, except unit data)

Balance at January 1, 2020

 

126,915,597

$

1,331,482

$

(77,993)

$

11,935

$

1,265,424

Comprehensive (loss) income:

Net (loss) income

 

 

(144,783)

 

76

 

 

(144,707)

Actuarially determined long-term liability adjustments

 

 

 

938

 

 

 

938

Total comprehensive loss

 

 

(143,769)

Settlement of deferred compensation plans

279,622

(1,310)

(1,310)

Common unit-based compensation

 

 

(527)

(527)

Distributions on deferred common unit-based compensation

 

 

(986)

(986)

Distributions from consolidated company to noncontrolling interest

(288)

(288)

Distributions to Partners

 

(50,767)

(50,767)

Other

(273)

(273)

Balance at March 31, 2020

 

127,195,219

$

1,132,836

$

(77,055)

$

11,723

$

1,067,504

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Accumulated

Number of

Limited 

Other

Limited Partner

Partners'

Comprehensive

Noncontrolling

Total Partners’

    

Units

    

Capital

    

Income (Loss)

    

Interest

    

 Capital

 

(in thousands, except unit data)

Balance at January 1, 2019

 

128,095,511

$

1,229,268

$

(46,871)

$

5,290

$

1,187,687

Comprehensive income:

Net income

 

 

276,428

 

7,176

 

 

283,604

Actuarially determined long-term liability adjustments

 

 

 

(3,584)

 

 

 

(3,584)

Total comprehensive income

 

 

280,020

Settlement of deferred compensation plans

 

596,650

 

(7,817)

(7,817)

Purchase of units under unit repurchase program

 

(300,970)

 

(5,251)

(5,251)

Common unit-based compensation

 

 

2,743

2,743

Distributions on deferred common unit-based compensation

 

 

(1,280)

(1,280)

Distributions from consolidated company to noncontrolling interest

(262)

(262)

Distributions to Partners

 

(67,731)

(67,731)

Balance at March 31, 2019

 

128,391,191

$

1,426,360

$

(50,455)

$

12,204

$

1,388,109

13.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 18 – Segment Information.

    

Illinois

    

    

    

Other and

    

    

    

Basin

    

Appalachia

    

Minerals

    

Corporate

    

Elimination

    

Consolidated

(in thousands)

Three Months Ended March 31, 2020