Alliance Resource Partners
Annual Report 2017

Plain-text annual report

F O C U S E D 2017 ANNUAL REPORT A L L I A N C E R E S O U R C E PA 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. FOCUSED ON FOCUSED ON EXCELLENCE FELLOW UNITHOLDERS, 2017 was a year of focused efforts and positive results. Through a challenging market in 2016, we made strategic decisions designed to lay a foundation for long-term performance, value and reliability for our unitholders. Last year, we remained true to those decisions, building on our foundation and executing plans with an unwavering focus. The results speak for themselves. In 2017, Alliance delivered an impressive performance by increasing sales and production volumes, reducing operating expenses and debt outstanding, and generating strong EBITDA, distributable cash flow and distribution coverage. We also set and accomplished a number of significant objectives last year. We entered 2017 with a goal of alleviating uncertainty in the debt capital markets. We accomplished this through the successful placement of a $400 million, eight-year bond offering and a four-year extension of our revolving credit facility. As a result, we exited the year with a stable, long-term capital structure with ample liquidity. The Alliance Partnerships also took the first step toward simplifying our structure through an Exchange Transaction. The Exchange Transaction eliminated AHGP’s incentive distribution rights and converted its general partner interest in exchange for the issuance of 56,100,000 ARLP common units. Completed in July, it further enhanced our capital markets capacity and access. We are also moving forward to complete the process of fully simplifying the Alliance Partnership structure, which will result in ARLP being the only publicly traded reporting entity. 2017’s strong operating and financial performance was the result of long-term thinking, smart planning, and hard work by many people. I’m grateful to our team for their steady focus on the road ahead. In a market full of distractions, their single-minded pursuit of excellence has served the Alliance family well. JOSEPH W. CRAFT III President, Chief Executive Officer, and Director of ARLP and AHGP, and Chairman of the Board of AHGP March 30, 2018 1 ALLIANCE HAS CONSISTENTLY ALLIANCE HAS A TRACK DELIVERED STRONG RESULTS THROUGHOUT MARKET CYCLES. RECORD OF OPERATIONAL AND FINANCIAL EXCELLENCE.1 1 Company filings and estimates. ARLP has met or exceeded production guidance for five consecutive years and revenue and adjusted EBITDA guidance four of the last five years. 2 FOCUSED ON PERFORMANCE We’re proud of our performance in 2017. Even with a market reset, focused planning and faithful execution of our plans led to increased sales and production volumes, lower operating expenses and improved Segment Adjusted EBITDA Expense. Revenues, net income and EBITDA met expectations. The contribution to net income and EBITDA from our investments in oil and gas minerals and compression services also increased. TONS PRODUCED GREW 6.7% WHILE TONS SOLD INCREASED 3.1% AS EXPECTED, COAL SALES PRICE REALIZATIONS FELL 10.9% TO $45.24 per ton sold due to the expiration of higher-priced legacy contracts in 2016 leading to a decrease in coal sales revenue (8.1%) and total revenues (7.0%). SEGMENT ADJUSTED EBITDA EXPENSE per IMPROVED ton sold.1 5.9% OPERATING EXPENSES FELL 2.6% even as sales and production volumes increased 1.1 million tons and 2.4 million tons, respectively. SEGMENT ADJUSTED EBITDA MARGINS1 WERE A HEALTHY 39.9% ($18.05 per ton sold). 1 Please see inside back cover for a reconciliation of these non-GAAP measures to the most closely comparable GAAP measures. 3 FOCUSED ON RELATIONSHIPS Our top 13 customers have been with us a combined 252 years. PRESENCE In 2017, we were the largest coal producer in the Illinois Basin and the second-largest coal producer in the eastern United States. STRENGTH Our balance sheet remains strong, with LTM total debt/adjusted EBITDA at a conservative 0.95x 1. 1 Please see inside back cover for a reconciliation of this non-GAAP measure to the most closely comparable GAAP measures. 4 Illinois Indiana Ohio 8 Pennsylvania Maryland 7 2 1B 1A 3 4 5 West Virginia Kentucky 6 Virginia ILLINOIS BASIN current operations APPALACHIA current operations 1. GIBSON COMPLEX 6. MC MINING COMPLEX 1A. GIBSON SOUTH 1B. GIBSON NORTH EXPECTED T O RESUME PRODUCTION IN 2018. 2. HAMILTON COMPLEX 3. RIVER VIEW COMPLEX 4. DOTIKI COMPLEX 5. WARRIOR COMPLEX 7. METTIKI COMPLEX 8. TUNNEL RIDGE COMPLEX MOUNT VERNON TRANSFER TERMINAL HENDERSON/UNION RESERVES 5 6 FOCUSED ON BALANCE ARLP’s balance sheet is the result of a disciplined strategy focused on long-term performance and stability. At the end of 2017, total debt remained conservative at 0.95 times trailing twelve months Adjusted EBITDA.1 Liquidity was a healthy $587.0 million. The bonds we issued last April have performed well. With our conservative balance sheet, ability to generate attractive cash flows, strong bond market performance and simplified financial structure, we believe ARLP has ample debt and equity capital market access and the capacity to execute our plans and pursue future opportunities … ARLP’S PERFORMANCE HAS IT’S HARD TO FIND A EARNED BEST-IN-CLASS COMPANY THAT CAN RELIABLY RATINGS FROM MOODY’S AND S&P.2 PAY INVESTORS SUCH [AN ATTRACTIVE] YIELD.3 1 Please see inside back cover for a reconciliation of this non-GAAP measure to the most closely comparable GAAP measures, “net income attributable to ARLP.” 2 Moody’s/S&P corporate ratings of Ba3/BB+ 3 The Motley Fool, “3 Top Value Stocks to Buy in February,” February 2018. 7 FOCUSED ON THE FUTURE We built Alliance by creating sustainable, long-term growth in cash flows to support increased distributions to unitholders. We see numerous opportunities to continue, both within our core coal business and in areas outside of coal: 1 INVEST TO BUILD FUTURE CASH FLOW GROWTH. In coal, ARLP is positioned to expand production to capture more market share, as domestic and/or international opportunities present themselves. Outside of coal, we expect cash flow from investments already made to grow meaningfully and we will continue to seek opportunities we believe will provide long-term sustainable cash flow and/or attractive returns. 2 FOCUS ON RETURNING CASH TO UNITHOLDERS. The Board of Directors increased the ARLP cash distribution for the 2017 Fourth Quarter by one half of one cent per unit to an annualized rate of $2.04 per unit (a 16.6% increase over the cash distribution for the 2016 Fourth Quarter). Based upon on our current outlook, management expects to recommend to the Board similar distribution increases for each quarter in 2018. AS WE EXECUTE OUR STRATEGY, ARLP REMAINS COMMITTED TO MAINTAINING THE FINANCIAL DISCIPLINE, SOLID DISTRIBUTION COVERAGE AND CONSERVATIVE BALANCE SHEET THAT HAS SERVED US SO WELL. 8 ARLP IS PLANNING TO BOOST ARLP EXPECTS TO MAINTAIN SALES AND PRODUCTION VOLUMES IN 2018 AND HAS ALREADY PRICED AND COMMITTED 94% OF ITS PROJECTED OUTPUT.1 A STRONG COVERAGE RATIO WHILE INCREASING UNITHOLDER DISTRIBUTIONS IN 2018.1 1 Company analysis and estimates [as of March 16, 2018]. 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 Debt extinguishment loss Adjusted EBITDA Interest expense, net Income tax expense Year Ended December 31 2017 2016 2015 2014 2013 $ 303,638 $ 339,398 $ 306,198 $ 497,229 $ 393,490 563 304,201 268,981 39,842 (551) 210 140 339,538 336,509 31,017 (358) 13 612,683 706,719 - - 8,148 620,831 (39,842) (210) - - - 706,719 (31,017) (13) (27) 306,171 323,983 30,389 (695) 21 659,869 100,130 (22,548) - 737,451 (30,389) (21) (16) 497,213 274,566 32,746 (833) - - 393,490 264,911 35,074 (8,992) 1,396 803,692 685,879 - - - 803,692 (32,746) - - - - 685,879 (35,074) (1,396) Estimated maintenance capital expenditures 1 (159,838) (167,409) (204,243) (240,419) (221,058) Distributable Cash Flow Distributions paid to partners Distribution Coverage Ratio $ 420,941 $ 508,280 $ 502,798 $ 530,527 $ 428,351 $ 240,812 $ 247,915 $ 346,799 $ 317,626 $ 288,439 1.75 2.05 1.45 1.67 1.49 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 2017 2016 2015 2014 2013 $ 1,095,167 $ 1,124,848 $ 1,386,783 $ 1,383,360 $ 1,398,763 - (2,980) 1,514 (725) 327 (955) 14 (1,566) 2,030 (1,891) $ 1,092,187 $ 1,125,637 $ 1,386,155 $ 1,381,808 $ 1,398,902 37,824 36,680 40,247 39,731 38,835 Segment Adjusted EBITDA Expense per ton $ 28.88 $ 30.69 $ 34.44 $ 34.78 $ 36.02 Reconciliation of non-GAAP “Adjusted EBITDA” to “Segment Adjusted EBITDA” and “Segment Adjusted EBITDA per ton” (in thousands, except per ton data) Adjusted EBITDA (see above reconciliation) General and Administrative expense Segment Adjusted EBITDA Divided by tons sold Segment Adjusted EBITDA per ton Year Ended December 31 2017 2016 2015 2014 2013 $ 620,831 $ 706,719 $ 737,451 $ 803,692 $ 685,879 61,760 72,529 67,484 72,552 63,697 $ 682,591 $ 779,248 $ 804,935 $ 876,244 $ 749,576 37,824 36,680 40,247 39,731 38,835 $ 18.05 $ 21.24 $ 20.00 $ 22.05 $ 19.30 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 2017 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 Timothy J. Whelan Senior Vice President, Sales and Marketing 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 02/23/2018 ARLP 130,903,256 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. P.O. Box 22027, Tulsa, Oklahoma 74121-2027 | www.arlp.com | www.ahgp.com 

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