Alliance Resource Partners
Annual Report 2016

Plain-text annual report

F O R T H E LONG H AU L 2 0 1 6 A N N U A L R E P O R T A L L I A N C E R E S O U R C E P A R T N E R S, L . P. // A L L I A N C E H O L D I N G S G P, L . P. PERFORMANCE VALUE RELIABILITY for the long haul FELLOW UNITHOLDERS, AT ALLIANCE, WE HAVE ALWAYS TAKEN THE LONG VIEW. When responding to market challenges of the past year, we, not only made strategic decisions that delivered excellent results, but consistently acted with an eye toward the future—working to lay the groundwork for long-term performance, value and reliability for our unitholders. We finished the year strong. Robust performance, including reductions in operating expenses and near-record coal shipments in the second half of the year, led to sequential third- and fourth-quarter increases to net income and EBITDA. Solid performance throughout the latter half of 2016 also helped to drive year-over-year increases to net income and EBITDA for the full year. 1 Managing volumes to meet market demand and We made tough but necessary decisions during reduce expenses, ARLP responded quickly and a difficult year for the coal industry—curtailing strategically, trimming production to 35.2 million coal production and reducing distributions to tons and sales to 36.7 million tons, approximately our unitholders, among others. These decisions 15% and 9% below our 2015 record levels. As a enhanced ARLP’s competitive advantages and result, we finished the year with less than 1 million allowed us to strengthen our balance sheet by paying tons of coal inventory. Our final 2016 sales volume, average coal sales price, and total revenues were all within our initial guidance for the year, however, our strategic moves helped our cost-containment efforts to far down debt and amending our revolving credit facility to provide sufficient liquidity to execute our plans. Our strategy not only delivered impressive results, but positioned us to take advantage of improving market conditions in the years to come. exceed expectations. We shifted production to our I’m grateful to our team for their steady expertise, lowest-cost mines, which led to significant cost unwavering dedication, and strategic decision- improvements compared to 2015—as operating making. And I’m grateful to you for your faith in expenses decreased 17.3% and Segment-Adjusted our team. Here’s to the long haul. EBITDA expense-per-ton fell by 9.2% to $31.07. Lower costs and improved productivity from our Tunnel Ridge and Gibson South mines, drove actual results for 2016 well above our early expectations, as ARLP posted net income $73.9 million and EBITDA $112.7 million above the midpoints of our initial guidance, respectively. JOSEPH W. CRAFT III President, Chief Executive Officer, and Director of ARLP and AHGP, and Chairman of the Board of AHGP March 16, 2017 2 “While the results our team achieved are impressive under any circumstances, I trust you agree they are remarkable in light of the market conditions we faced at the beginning of 2016.” — Joe Craft 3 “ARLP has effectively managed its leverage under difficult market conditions.” — Market Realist PERFORMANCE for the long haul Conditions in the U.S. thermal markets deteriorated sharply coming into 2016 and continued to weaken during the first third of the year. A warm winter and low natural gas prices led to anemic coal demand, prompting utilities to defer deliveries, build inventories, and delay contracting decisions. Still, we performed. Here’s what we did: Alliance responded to market conditions by curtailing performance, or the outlook of our balance sheet, coal volumes to meet reduced demand levels and, but to preserve liquidity to help us maintain access to in the process, shifted production to our lowest- the debt capital markets during a period of uncertainty cost mines to improve efficiencies, reduce costs, in our industry and financial difficulties for many and minimize capital requirements. These initiatives competitors. As a result of our strong cash flow, enabled our operating team to effectively manage ARLP paid down $269.4 million of debt during 2016 our coal production volumes through a period of as our distribution coverage ratio increased to nearly extreme market weakness and positioned our two times for the full year. marketing team to capitalize on opportunities as conditions began to improve. As always, we approached our business with a thoughtful plan of action, leveraging our expertise We also took steps to strengthen our balance and never wavering from our core values or our sheet. Capital expenditures came in approximately proven strategy for success. The results speak $50 million less than our budget. We took the difficult for themselves. step to adjust distributions, not because of our 4 VALUE for the long haul The market wasn’t kind to those who weren’t prepared or able to respond decisively. At ARLP, however, we continued our history of industry- leading performance. With our financial strength and low-cost, strategically located operations, we remain confident in our ability to create long-term value for unitholders. Here’s where we ended 2016: Bottom line: Year-over-year, 2016’s net income for approximately $480 million of senior secured increased 10.8% to $339.4 million and EBITDA rose financing maturing in May 2019. Despite challenging 3.5% to $692.7 million. Adjusted for the $77.6 million debt markets facing the coal industry, ARLP was able of net non-cash charges in 2015, adjusted net income to obtain this financing at a modest increase in pricing and adjusted EBITDA were lower by 11.6% and 7.3%, across the leverage grid with borrowings under the respectively. revolver bearing interest at an attractive rate of LIBOR plus 235 basis points at ARLP’s current leverage of As anticipated, weak market conditions drove ARLP’s average price realizations down 5.3% in less than one times. 2016 to an average of $50.76 per ton sold. Lower As part of our debt reduction efforts, we significantly coal sales prices, and planned reductions in reduced borrowings under our revolver and have paid production drove 2016 coal sales revenues lower down our existing term loan to a remaining balance of to $1.86 billion, compared to $2.16 billion for 2015. $50 million, which will be paid in full at the expiration Operating expenses, on the other hand, improved of its primary term in May 2017. With the completion 17.3% compared to 2015, contributing to a 9.2% of this amended credit facility and our strong balance improvement in Segment-Adjusted EBITDA expense sheet, ARLP maintains sufficient liquidity and financial of $31.07 per ton sold. flexibility to take advantage of opportunities that may develop as we execute our strategy. We ended 2016 with a healthy balance sheet. Total liquidity was $575.2 million with a very conservative leverage ratio of 0.9 times net debt-to-trailing EBITDA. We recently completed an amendment and extension of our revolving credit facility that provides 5 WITH EXPECTATIONS OF A STRONGER THERMAL MARKET, ARLP IS PLANNING FOR INCREASED PRODUCTION AND SALES VOLUMES, COMING PRIMARILY FROM OUR ILLINOIS BASIN OPERATIONS. GIBSON COMPLEX HAMILTON COMPLEX Ohio Illinois Indiana Pennsylvania Maryland 1 2 West Virginia Kentucky Virginia RIVER VIEW COMPLEX DOTIKI COMPLEX WARRIOR COMPLEX 6 WITH EXPECTATIONS OF A STRONGER THERMAL MARKET, ARLP IS PLANNING FOR INCREASED PRODUCTION AND SALES VOLUMES, COMING PRIMARILY FROM OUR ILLINOIS BASIN OPERATIONS. TUNNEL RIDGE COMPLEX Illinois Indiana Ohio Pennsylvania Maryland METTIKI COMPLEX West Virginia Kentucky Virginia MC MINING COMPLEX ILLINOIS BASIN current operations APPALACHIA current operations MOUNT VERNON transfer terminal HENDERSON/UNION reserves INACTIVE OPERATIONS 1. Gibson Complex North Mine 2. Sebree Complex Onton Mine 7 RELIABILITY for the long haul By 2040, global electricity demand is projected to rise 60%1 and coal-fired power plants are expected to continue to provide the largest share of the world’s electricity, powering nearly one-third of the energy used in homes, factories and offices.2 In the shorter-term, rising natural gas prices and planned reductions of current regulatory burdens—plus the proven track record of our team at Alliance—fuel an optimistic outlook. Here’s what we expect: Supply/demand fundamentals continue to point and less stringent environmental and energy to a cyclical recovery in the U.S. thermal coal market. policies should provide clarity and stability to Supply discipline by producers resulted in an 18% coal markets and set the stage for growing coal decline in domestic coal production and an estimated demand in the future. 25 million ton stockpile reduction during 2016. Higher natural gas prices prompted us to expect increased coal demand for the first half of 2017 compared to last year. Full-year forecasts by the U.S. Energy Information Administration show coal consumption in the electric power sector increasing 6% in 2017.3 In addition to this more balanced supply/demand dynamic, resurgence in the export coal markets has added further support to improved U.S. market conditions. Longer-term, the Trump administration has already made moves to reduce the overreaching regulatory burden that has plagued the coal industry for the last eight years and to bolster the existing fleet of coal-fired generating power plants. A return to more reasonable With our low-cost, strategically-located operations, strong market presence, robust distribution coverage and conservative balance sheet, ARLP is well-positioned to deliver industry-leading performance and value for our unitholders for the foreseeable future. “Alliance Resource is a well-run company with a strong asset base.” — Yahoo! Finance 1 ExxonMobil, “2017 Outlook For Energy: A View To 2040,” December 2016 2 The Daily Caller, “Report: Coal Is Still King In 2040,” January 3, 2017 3 U.S. Energy Information Administration, “Short-Term Energy Outlook,” January 10, 2017 8 ARLP COAL – TONS PRODUCED ARLP COAL – TONS SOLD 41.2 40.7 38.8 35.2 34.8 2016 2015 2014 2013 2012 36.7 40.2 39.7 38.8 35.2 40 35 30 25 20 15 10 10 15 20 25 30 35 40 Million Tons Million Tons ARLP REVENUES ARLP EBITDA $1.93 $2.27 $2.30 $2.21 $2.03 2016 2015 2014 2013 2012 $692.7 $669.6 $685.9 $803.7 $581.1 2.40 2.20 2.00 1.80 1.60 1.40 1.20 1.00 100 200 300 400 500 600 700 800 Dollars in Billions Dollars in Millions ARLP NET INCOME ARLP TOTAL ASSETS $497.2 $339.4 $306.2 $393.5 $335.6 2016 2015 2014 2013 2012 $2.19 $2.36 $2.29 $2.12 $1.96 500 450 400 350 300 250 200 150 100 1.00 1.20 1.40 1.60 1.80 2.00 2.20 2.40 Dollars in Millions Dollars in Billions ARLP DISTRIBUTIONS PAID Distributions paid per LP unit AHGP DISTRIBUTIONS PAID Distributions paid per LP unit $1.99 $2.66 $2.47* $2.28* $2.08* 2016 2015 2014 2013 2012 $2.61 $3.77 $3.44 $3.10 $2.72 3.00 2.00 1.00 0 0 1.00 2.00 3.00 4.00 Dollars Dollars Amounts rounded to the nearest penny. *Adjusted for 2:1 Unit Split. Reconciliation of GAAP “net income attributable to ARLP” to non-GAAP “Adjusted net income” (in thousands) Net income attributable to ARLP Asset impairment charge Acquisition gain, net Adjusted net income Year Ended December 31 2016 2015 2014 2013 2012 $ 339,398 $ 306,198 $ 497,229 $ 393,490 $ 335,571 - - 100,130 (22,548) - - - - 19,031 - 339,398 $ 383,780 $ 497,229 $ 393,490 $ 354,602 Reconciliation of GAAP “net income attributable to ARLP” to non-GAAP “EBITDA,” “Adjusted EBITDA” and “Distributable Cash Flow” (in thousands) Net income attributable to ARLP Net income (loss) attributable to noncontrolling interests Net Income Depreciation, depletion and amortization Interest expense, net Capitalized interest Income tax expense (benefit) EBITDA Asset impairment Acquisition gain, net Adjusted EBITDA Equity in (income) loss of affiliates Interest expense, net Income tax (expense) benefit Estimated maintenance capital expenditures 1 Distributable Cash Flow Distributions paid to partners Distribution Coverage Ratio Year Ended December 31 2016 2015 2014 2013 2012 $ 339,398 $ 306,198 $ 497,229 $ 393,490 $ 335,571 140 339,538 322,509 31,017 (358) 13 692,719 - - 692,719 (3,543) (31,017) (13) (167,409) $ 490,737 $ 247,915 1.98 (27) 306,171 333,713 30,389 (695) 21 669,599 100,130 (22,548) 747,181 49,046 (30,389) (21) (204,243) $ 561,574 $ 346,799 1.62 (16) 497,213 274,566 32,746 (833) - - 393,490 264,911 35,074 (8,992) 1,396 803,692 685,879 - - 803,692 16,648 (32,746) - (240,419) $ 547,175 $ 317,626 1.72 - - 685,879 24,441 (35,074) (1,396) (221,058) $ 452,792 $ 288,439 1.57 - 335,571 218,122 36,891 (8,436) (1,082) 581,066 19,031 - 600,097 14,650 (36,891) 1,082 (191,400) $ 387,538 $ 257,923 1.50 1, Our maintenance capital expenditures, as defined under the terms of our partnership agreement, are those capital expenditures required to maintain, over the long-term, the operating capacity of our capital assets. We estimate maintenance capital expenditures on an annual basis based upon a five-year planning horizon. Reconciliation of GAAP “Operating Expenses” to non-GAAP “Segment Adjusted EBITDA Expense per ton” (in thousands, except per ton data) Operating expense Outside coal purchases Other income Segment Adjusted EBITDA Expense Divided by tons sold Year Ended December 31 2016 2015 2014 2013 2012 $ 1,138,848 $ 1,377,053 $ 1,383,360 $ 1,398,763 $ 1,303,291 1,514 (725) 327 (955) 14 (1,566) 2,030 (1,891) 38,607 (3,115) $ 1,139,637 $ 1,376,425 $ 1,381,808 $ 1,398,902 $ 1,338,783 36,680 40,247 39,731 38,835 35,170 Segment Adjusted EBITDA Expense per ton $ 31.07 $ 34.20 $ 34.78 $ 36.02 $ 38.07 Partnership Tax Details Unitholders are partners in the partnership and receive quarterly cash distributions. Cash distributions generally are not taxable as long as the individual unitholder’s tax basis remains above zero. A partnership generally is not subject to federal or state income tax. The annual income, gains, losses, deductions or credits of the partnership flow through to the unitholders, who are required to report their allocated share of these amounts on their individual tax returns, as though the unitholder had incurred these items directly. Schedule K-1 Unitholders of record receive Schedule K-1 packages that summarize their allocated share of the partnership’s reportable tax items for the fiscal year. It is important to note that cash distributions received should not be reported as taxable income. Only the amounts provided on the Schedule K-1 should be entered on each unitholder’s tax return. Schedule K-1 information also is available on our web sites. Please visit www.arlp.com and www.ahgp.com. Unitholders should refer questions regarding their Schedule K-1 as follows: By Mail K-1 Support P.O. Box 799060 Dallas, TX 75379-9060 By Phone/Fax Alliance Resource Partners, L.P. Phone (800) 485-6875 Fax (866) 554-3842 Alliance Holdings GP, L.P. Phone (866) 867-4060 Fax (866) 554-3842 Transfer Agent and Registrar Direct requests regarding transfer of units, lost certificates, lost distribution checks or address changes to: American Stock Transfer and Trust Company Attn: Shareholder Services 59 Maiden Lane – Plaza Level New York, NY 10038 (800) 937-5449 Investor Information and Form 10-K For more information or free copies of the 2016 Form 10-K, please contact the appropriate e-mail address or phone number listed below. Form 10-K also may be downloaded from the Partnerships’ Web sites. Alliance Resource Partners, L.P. investorrelations@arlp.com E-mail: Phone: (918) 295-7674 Web site: www.arlp.com Alliance Holdings GP, L.P. investorrelations@ahgp.com E-mail: Phone: (918) 295-1415 Web site: www.ahgp.com Executive Officers & Directors ARLP ›› AHGP ›› Joseph W. Craft III ›››› President, Chief Executive Officer, and Director of ARLP and AHGP, and Chairman of the Board of AHGP Brian L. Cantrell ›››› Senior Vice President and Chief Financial Officer R. Eberley Davis ›››› Senior Vice President, General Counsel and Secretary Robert G. Sachse ›› Executive Vice President Charles R. Wesley ›› Executive Vice President and Director Thomas M. Wynne ›› Senior Vice President and Chief Operating Officer Nick Carter ›› Director, member of the Audit, Compensation and Conflicts Committees for ARLP John P. Neafsey ›› Director, Chairman of the Board of Directors, Chairman of the Conflicts Committee, and member of the Audit and Compensation Committees John H. Robinson ›› Director, Chairman of the Compensation Committee, and member of the Audit and Conflicts Committees Wilson M. Torrence ›››› Director, Chairman of the Audit Committee for ARLP and AHGP and member of the ARLP Compensation Committee Thomas M. Davidson, Sr. ›› Director, Chairman of the Conflicts Committee and member of the Audit Committee Robert J. Druten ›› Director and member of the Audit and Conflicts Committees General Information The following information applies to Alliance Resource Partners, L.P. (ARLP) and Alliance Holdings GP, L.P. (AHGP) unless specified otherwise. Partnership Offices 1717 South Boulder Avenue, Suite 400 Tulsa, OK 74119 (918) 295-7600 Partnership Mailing Address P.O. Box 22027 Tulsa, OK 74121-2027 Contact Brian L. Cantrell Senior Vice President and Chief Financial Officer (918) 295-7674 brian.cantrell@arlp.com Business Structure Publicly traded master limited partnership. Common Unit Trading Common units are traded on the NASDAQ Global Select Market. NASDAQ Ticker Symbols Alliance Resource Partners, L.P. (ARLP) Alliance Holdings GP, L.P. (AHGP) Common Units Outstanding at 02/24/2017 ARLP 74,597,036 common units AHGP 59,863,000 common units Independent Auditors Ernst & Young LLP 1700 One Williams Center Tulsa, OK 74172 Unitholder Information Cash Distributions The partnerships expect to make quarterly distributions to unitholders of record on the applicable record dates according to the following schedules: Alliance Resource Partners, L.P. Within 45 days after the end of each March, June, September and December. Alliance Holdings GP, L.P. Within 50 days after the end of each March, June, September and December. F O R T H E LONG H AU L P.O. Box 22027, Tulsa, Oklahoma 74121-2027 // www.arlp.com // www.ahgp.com 

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