Alliance Resource Partners
Annual Report 2018

Plain-text annual report

THE 20 1 8 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 PA R T N E R S , L . P. THE RIGHT ATTITUDE WE’RE COMMITTED TO DELIVERING STRONG PERFORMANCE AND INVESTING IN OUR BUSINESS TO CREATE SUSTAINABLE GROWTH AND CASH FLOWS. RIGHT MOVES FELLOW UNITHOLDERS, achieving your goals doesn’t happen overnight. It takes forethought, focus and follow-through. Most of all, it takes a dedicated team making the right moves. That’s why Alliance entered 2018 expecting strong operating and financial results and continued execution on our strategic objective to generate future growth in cash flow. Through a challenging market in 2016, we made strategic decisions designed to lay a foundation for long- term performance, value and reliability for you: our unitholders. In 2017, we remained true to those decisions, building on our foundation and executing plans with an unwavering focus. In 2018, those efforts paid off. Alliance achieved record coal sales volumes at higher price realizations and posted year-over-year increases to coal production, revenues, net income and EBITDA. These results reflect the dedication of our employees and their daily focus on executing ARLP’s strategic objectives and priorities. Through the efforts of our operating team, we reopened the Gibson North mine and added a production unit at our River View mine, increasing ARLP’s year-over-year production volumes by more than 7%. The increased production supported the efforts of our marketing team to capitalize on positive coal market fundamentals. We achieved record sales volumes in 2018 driven primarily by a significant expansion of ARLP’s presence in the international thermal and metallurgical coal markets, with the year-over-year shipments to those markets increasing by 4.6 million tons to 11.2 million tons or approximately 27.8% of our total 2018 coal sales volumes. We’re proud of our team’s strong performance in 2018. Making the right moves, investing in long-term growth, and working hard for our unitholders has served us well this past year...and that dedication will continue to guide our growth and success in 2019 and beyond. Joseph W. Craft III PRESIDENT, CHIEF EXECUTIVE OFFICER, AND CHAIRMAN OF THE BOARD OF ALLIANCE RESOURCE PARTNERS, L.P. April 1, 2019 1 RIGHT STRATEGY Our capital allocation focus and the accompanying goals— grow the business, increase cash flow, and return cash to our unitholders—all benefited from faithful execution of our long-term strategy in 2018. TOTAL REVENUES INCREASED 11.5% TO $2.0 BILLION. NET INCOME ATTRIBUTABLE TO ARLP INCREASED 20.7% TO $366.6 MILLION. EBITDA INCREASED 12.2% TO $686.9 MILLION*. TOTAL COAL SALES VOLUMES INCREASED BY 6.9% TO A RECORD 40.4 MILLION TONS AND IMPROVED YEAR- OVER-YEAR PRICE REALIZATIONS LED TO A COAL-SALE REVENUE INCREASE OF 7.8% TO $1.84 BILLION. DURING 2018, THE BOARD ELECTED TO INCREASE DISTRIBUTIONS PER UNIT 3.9% AND ARLP REPURCHASED 3.7 MILLION UNITS FOR $70.6 MILLION IN OPEN MARKET TRANSACTIONS. *2018 and 2017 comparative results were impacted by: • 2018 results include an $80.0 million settlement gain recorded upon resolution of litigation related to a coal supply agreement and $40.5 million of non-cash impairment charges in the fourth quarter of 2018 comprised of (i) a $34.3 million impairment related to the reduction of the economic mine life at our Dotiki mine and (ii) a $6.2 million impairment of certain coal reserves in Illinois. • 2017 results include an $8.1 million debt extinguishment loss related to ARLP’s early repayment of its Series B Senior Notes. Please see inside back cover for a reconciliation of this non-GAAP measure to the most closely comparable GAAP measure. 2 3 SIMPLIFY THE TIMING WAS RIGHT TO MAKE ALLIANCE HOLDINGS GP, L.P. (AHGP) A WHOLLY OWNED SUBSIDIARY OF ARLP. WITH THIS MOVE, WE INCREASED INVESTOR TRANSPARENCY, CREATED A SINGLE ENTITY WITH GREATER LIQUIDITY AND ELIMINATED DUPLICATIVE COSTS REQUIRED TO MAINTAIN TWO PUBLIC COMPANIES. RIGHT TIMING 2018 proved to be the right time to simplify, diversify, and modify in pursuit of unitholder value. 4 THE TIMING WAS RIGHT TO MAKE ALLIANCE HOLDINGS GP, L.P. (AHGP) A WHOLLY OWNED SUBSIDIARY OF ARLP. WITH THIS MOVE, WE INCREASED INVESTOR TRANSPARENCY, CREATED A SINGLE ENTITY WITH GREATER LIQUIDITY AND ELIMINATED DUPLICATIVE COSTS REQUIRED TO MAINTAIN TWO PUBLIC COMPANIES. MODIFY JOHN P. NEAFSEY DECIDED IT WAS THE RIGHT TIME TO RETIRE AFTER SERVING 20 DISTINGUISHED YEARS AS BOARD CHAIRMAN. JOSEPH W. CRAFT III REPLACED HIM AS CHAIRMAN OF THE BOARD, AND ROBERT J. DRUTEN WAS ELECTED TO THE BOARD OF DIRECTORS. DIVERSIFY IT WAS THE RIGHT TIME TO EXPAND OUR PARTICIPATION IN OIL AND GAS MINERALS AS A LONG-TERM GROWTH PLATFORM FOR OUR BUSINESS. ARLP ACQUIRED SIGNIFICANT OWNERSHIP OF ATTRACTIVE OIL AND GAS MINERAL INTERESTS—GAINING CONTROL OF APPROXIMATELY 42,000 NET ROYALTY ACRES IN PREMIER OIL AND GAS RESOURCE PLAYS.* *The bulk of the work for the acquisition of certain partnership interests in AllDale Minerals, LP and AllDale Minerals II, LP occurred in 2018. The acquisition closed on January 3, 2019. 5 RIGHT PLACES COAL OPERATIONS 1. Gibson Complex 3. River View Complex 7. MC Mining Complex 9. Tunnel Ridge Complex 1A. Gibson South 4. Dotiki Complex 7A. Excel Mine No. 4 10. Penn Ridge Reserves 1B. Gibson North 5. Warrior Complex 7B. Excel Mine No. 5 2. Hamilton Complex 6. Henderson/Union Reserves 8. Mettiki Complex 11. Mount Vernon Transfer Terminal Illinois Indiana Ohio 10 9 Pennsylvania Maryland 2 ILLINOIS BASIN 1B 1A 11 3 4 6 5 APPALACHIA BASIN 8 West Virginia Kentucky 7B 7A Virginia Operating Mine Mine in Development Transfer Terminal Reserve THE REOPENING OF THE GIBSON NORTH MINE AND ADDING A CONTINUOUS MINING UNIT AT OUR RIVER VIEW MINE HELPED DRIVE TOTAL COAL SALES VOLUMES TO RECORD LEVELS. 6 Low-cost coal operations strategically located in the Illinois Basin and Appalachia. And now, oil & gas mineral interests positioned in the core of the Anadarko, Permian, Williston and Appalachian Basins. Montana North Dakota South Dakota OIL & GAS MINERAL HOLDINGS New York APPALACHIA BASIN (MARCELLUS/UTICA) ANADARKO BASIN (SCOOP/STACK) Indiana Ohio Pennsylvania Maryland New Mexico Oklahoma West Virginia Kentucky Virginia PERMIAN BASIN (DELAWARE/MIDLAND) Texas WILLISTON BASIN (BAKKEN) Montana North Dakota South Dakota THROUGH 2018, OUR PASSIVE INVESTMENTS IN OIL AND GAS MINERALS HAVE TOTALED APPROXIMATELY $171.4 MILLION AND GENERATED CASH FLOW TO ARLP OF APPROXIMATELY $52.4 MILLION. IN JANUARY 2019, WE INVESTED AN ADDITIONAL $176.0 MILLION IN OIL AND GAS MINERALS TO FURTHER EXPAND Oklahoma New Mexico OUR ROYALTY ACREAGE HOLDINGS. Texas 7 $346.5 MILLION RETURNED TO UNITHOLDERS IN 2018 PAYING OUT $275.9 MILLION OF DISTRIBUTIONS AND REPURCHASING APPROXIMATELY 3% OF OUR UNITS FOR $70.6 MILLION. ARLP INCREASED DISTRIBUTIONS 3.9% PER UNIT YEAR-OVER-YEAR WHILE MAINTAINING A CONSERVATIVE BALANCE SHEET. 8 RIGHT DIRECTION Moving forward, we plan to continue this direction and expect performance from our coal operations and increasing contributions from oil and gas royalties will support ARLP’s goal of increasing cash returns and delivering long-term value to our unitholders. 9 RIGHT LEADERSHIP EXECUTIVE OFFICERS AND DIRECTORS JOSEPH W. CRAFT III President, Chief Executive Officer and Chairman of the Board CHARLES R. WESLEY Executive Vice President and Director BRIAN L. CANTRELL Senior Vice President and Chief Financial Officer R. EBERLEY DAVIS Senior Vice President, General Counsel and Secretary ROBERT J. FOUCH Vice President, Controller and Chief Accounting Officer ROBERT G. SACHSE Executive Vice President 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 ROBERT J. DRUTEN Director, Chairman of Conflicts Committee, member of 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 and member of the Compensation Committee 10 GENERAL INFORMATION The following information applies to Alliance Resource Partners, L.P. (ARLP) 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) COMMON UNITS OUTSTANDING AT 02/22/2019 ARLP 128,391,191 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. 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 website at www.arlp.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 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 2018 Form 10-K, please contact the e-mail address or phone number listed below. Form 10-K also may be downloaded from the Partnership’s website. Alliance Resource Partners, L.P. E-mail: Phone: Website: investorrelations@arlp.com (918) 295-7674 www.arlp.com 11 ARLP 2018 THE RIGHT MOVES THE RIGHT STRATEGY THE RIGHT TIMING THE RIGHT PLACES THE RIGHT DIRECTION THE RIGHT LEADERSHIP 12 RECONCILIATION OF GAAP “NET INCOME ATTRIBUTABLE TO ARLP” TO NON-GAAP “EBITDA,” “ADJUSTED EBITDA” AND “DISTRIBUTABLE CASH FLOW” (in thousands) 2018 2017 2016 2015 2014 Net income attributable to ARLP $ 366,604 $ 303,638 $ 339,398 $ 306,198 $ 497,229 Depreciation, depletion and amortization 280,225 268,981 336,509 323,983 274,566 Year Ended December 31 Interest expense, net Capitalized interest Income tax expense EBITDA Asset impairment Acquisition gain, net Settlement gain Debt extinguishment loss Adjusted EBITDA Interest expense, net Income tax expense 41,365 (1,306) 22 39,842 31,017 30,389 (551) 210 (358) 13 (695) 21 32,746 (833) - 686,910 612,120 706,579 659,896 803,708 40,483 - (80,000) - - - - 8,148 - - - - 100,130 (22,548) - - - - - - 647,393 620,268 706,579 737,478 803,708 (41,365) (39,842) (31,017) (30,389) (32,746) (22) (210) (13) (21) - Estimated maintenance capital expenditures 1 (190,056) (159,838) (167,409) (204,243) (240,419) Distributable Cash Flow Distributions paid to partners Distribution Coverage Ratio $ 415,950 $ 420,378 $ 508,140 $ 502,825 $ 530,543 $ 275,902 $ 240,812 $ 247,915 $ 346,799 $ 317,626 1.51 1.75 2.05 1.45 1.67 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. P.O. Box 22027, Tulsa, Oklahoma 74121-2027 | www.arlp.com 

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