Alliance Resource Partners(ARLP) - 2021 Q4 - Annual Report

PART I Business ARLP is a diversified natural resource company producing and marketing coal, and generating royalty income from its mineral interests General Overview ARLP is a diversified natural resource company generating income from coal production and mineral royalties, listed on NASDAQ as 'ARLP' - ARLP is a diversified natural resource company generating income from coal production and marketing, as well as royalty income from coal and oil & gas mineral interests across the United States[21] - The company is the second-largest coal producer in the eastern U.S., with seven underground mining complexes in Illinois, Indiana, Kentucky, Maryland, Pennsylvania, and West Virginia[22] - ARLP owns mineral and royalty interests in approximately 1.5 million gross acres in premier U.S. oil & gas producing regions, primarily the Permian, Anadarko, and Williston Basins[23] - Strategic growth in the Oil & Gas Royalties segment has been driven by key acquisitions: the Boulders Acquisition in 2021, the Wing Acquisition in 2019, and the AllDale I & II Acquisition in 2019[27][28][29] Coal Mining Operations ARLP's coal mining operations produced 32.2 million tons in 2021, primarily from the Illinois Basin and Appalachia, with sales to domestic and international markets 2021 Coal Sales & Production Summary | Metric | Value | | :--- | :--- | | Tons Sold | 32.3 million | | Tons Produced | 32.2 million | | Domestic Utility Sales | 81.6% of tons sold | | International Market Sales | 12.5% of tons sold | Coal Production by Region (Tons in millions) | Region | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Illinois Basin | 22.2 | 17.9 | 29.5 | | Appalachia | 10.0 | 9.1 | 10.5 | | Total | 32.2 | 27.0 | 40.0 | - In 2021, approximately 77.9% of sales tonnage was sold under long-term contracts with terms ranging from 2021 to 2026[53] - Louisville Gas and Electric Company was a major customer, accounting for over 10% of total revenue in 2021[58] Mineral Interest Activities ARLP's mineral interests include oil & gas royalties from 57,000 net acres and coal royalties from significant reserves leased to mining operations - The company holds approximately 57,000 net royalty acres for oil & gas, primarily in the Permian, Anadarko, and Williston Basins[63] Oil & Gas Production (2019-2021) | Metric | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Oil (MBbls) | 825 | 948 | 741 | | Natural gas (MMcf) | 3,490 | 3,635 | 3,664 | | NGLs (MBbls) | 357 | 337 | 364 | | Total BOE (MBbls) | 1,764 | 1,892 | 1,716 | - The Coal Royalties segment includes 422.9 million tons of proven and probable reserves and 1.17 billion tons of measured, indicated, and inferred coal mineral resources, which are leased to mining operations[77] Coal Royalty Tons Sold by Region (Tons in millions) | Region | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Illinois Basin | 18.9 | 16.6 | 20.9 | | Appalachia | 1.3 | 2.3 | 2.1 | | Total | 20.2 | 18.9 | 23.0 | Environmental, Health, and Safety Regulations ARLP's operations are subject to extensive environmental, health, and safety regulations, significantly impacting costs and future coal demand - Operations are heavily regulated in areas such as employee health and safety, permits, air and water quality, and reclamation, which increases the cost of doing business[96] - The Federal Mine Safety and Health Act (FMSHA) and the MINER Act impose stringent safety standards and penalties, significantly affecting operating costs[105][107] - Regulations under the Clean Air Act (CAA) affecting coal-fired power plants, such as MATS and CSAPR, have led to plant retirements and could reduce future coal demand[126][130][131] - Future regulation of Greenhouse Gas (GHG) emissions, both domestically and internationally (e.g., the Paris Agreement), poses a significant risk to the long-term demand for fossil fuels[140] Human Capital As of December 31, 2021, ARLP employed 2,990 union-free personnel, prioritizing competitive compensation, benefits, and workplace safety - As of December 31, 2021, the company employed 2,990 full-time employees, with a completely union-free workforce[167] - Workplace safety is a fundamental part of the company culture. The Non-Fatal Days Lost (NFDL) rating for 2021 was 3.26, below the preliminary industry average[169] - The company offers competitive compensation packages, including base salary, incentive compensation, and comprehensive health benefits with no out-of-pocket premiums for employees[168][170] Risk Factors The company faces diverse risks including partnership structure, business operations, volatile commodity prices, extensive environmental regulations, and tax implications for unitholders - Investment Risks: Cash distributions are not guaranteed and were suspended in 2020 before resuming in 2021. Unitholders have limited voting rights and do not elect the general partner[181][190] - Business & Operational Risks: The business is exposed to global economic conditions, the impacts of pandemics like COVID-19, reliance on key customers, and potential for cyber-attacks[208][210][226] - Industry & Regulatory Risks: The company faces volatile coal and oil & gas prices, intense competition, and extensive, costly environmental regulations. Legislative initiatives related to hydraulic fracturing and climate change could significantly impact demand and operations[230][276][294] - Tax Risks: The partnership's tax treatment is crucial; if treated as a corporation, cash available for distribution would be substantially reduced. Unitholders are required to pay taxes on their share of taxable income regardless of cash distributions received[339][350] Properties This section details ARLP's coal properties, with 547.1 million tons of proven and probable reserves, and oil & gas interests with 15.9 million BOE of proved reserves Coal Mineral Resources and Reserves As of December 31, 2021, ARLP held 547.1 million tons of proven and probable coal reserves and 1.17 billion tons of resources in key basins Coal Mineral Resources & Reserves (as of Dec 31, 2021) | Category | Tons (in millions) | | :--- | :--- | | Mineral Resources (exclusive of reserves) | 1,165.5 | | Proven & Probable Mineral Reserves | 547.1 | - Material properties with detailed disclosures include Henderson/Union, River View, Hamilton, Gibson South, and Tunnel Ridge[383] - Reserve and resource estimates were prepared by the independent engineering firm RESPEC Company, LLC[372] Oil & Gas Reserves As of December 31, 2021, ARLP's net proved oil & gas reserves totaled 15.9 million BOE, primarily in Permian, Anadarko, and Williston Basins Net Proved Oil & Gas Reserves (as of Dec 31, 2021) | Category | Crude Oil (MBbl) | Natural Gas (MMcf) | NGLs (MBbl) | Total (MBOE) | | :--- | :--- | :--- | :--- | :--- | | Proved Developed | 5,493 | 28,426 | 3,039 | 13,269 | | Proved Undeveloped | 1,353 | 4,126 | 578 | 2,618 | | Total Proved | 6,846 | 32,552 | 3,617 | 15,887 | - 95% of the 2021 year-end proved reserve estimates were audited by the independent petroleum engineering firm Netherland, Sewell & Associates, Inc. (NSAI)[452] - Proved undeveloped reserves (PUDs) decreased from 4,533 MBOE at the start of 2021 to 2,618 MBOE at year-end, primarily due to transfers to proved developed status and negative revisions[446] Legal Proceedings ARLP faces lawsuits alleging wage and hour violations with potential damages up to $143.7 million, which management intends to vigorously defend - ARLP subsidiaries are defendants in multiple lawsuits alleging violations of the Fair Labor Standards Act and state wage laws related to compensation for 'donning and doffing' equipment and overtime calculations[467] - The plaintiffs in two of the lawsuits allege collective damages ranging from approximately $22.2 million to $143.7 million[467] - Management believes the claims are without merit and does not expect the litigation to have a material adverse effect on the business, though the outcome is not certain[467] Mine Safety Disclosures This section provides mine safety violation disclosures as required by the Dodd-Frank Act, detailed in Exhibit 95.1 of the Form 10-K - Information regarding mine safety violations required by the Dodd-Frank Wall Street Reform and Consumer Protection Act is included in Exhibit 95.1 to this Form 10-K[468] PART II Market for Registrant's Common Equity, Related Unitholder Matters and Issuer Purchases of Equity Securities ARLP's common units trade on NASDAQ under 'ARLP', with a $100 million unit repurchase program having $6.5 million remaining authorization - The company's common units are listed on the NASDAQ Global Select Market under the symbol 'ARLP'[470] - A unit repurchase program authorized up to $100 million was established in May 2018. As of year-end 2021, $93.5 million had been used to repurchase 5,460,639 units, with $6.5 million remaining[473][474] Management's Discussion and Analysis of Financial Condition and Results of Operations ARLP's 2021 financial performance improved significantly with revenues of $1.57 billion and net income of $178.2 million, driven by higher coal sales and oil & gas prices Results of Operations In 2021, total revenues increased 18.2% to $1.57 billion, resulting in a net income of $178.2 million, a significant turnaround from 2020 - Total revenues increased 18.2% to $1.57 billion in 2021 from $1.33 billion in 2020, primarily due to increased coal sales volumes and higher oil & gas prices[506] Financial Performance (2021 vs. 2020) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Net Income (Loss) Attributable to ARLP | $178.2 million | ($129.2 million) | | Coal Tons Sold | 32.3 million | 28.2 million | | Average Coal Sales Price per Ton | $42.98 | $43.68 | | Segment Adjusted EBITDA | $549.3 million | $446.5 million | - The Illinois Basin segment's Adjusted EBITDA increased 24.0% to $265.3 million, driven by a 16.5% increase in sales volumes[521] - The Oil & Gas Royalties segment's Adjusted EBITDA increased 72.9% to $68.8 million, primarily due to significantly higher sales price realizations per BOE[521] Liquidity and Capital Resources ARLP maintained strong 2021 liquidity with $425.2 million in operating cash flow, $122.4 million cash, and $415.4 million available credit - Cash provided by operating activities was $425.2 million for 2021, an increase from $400.6 million in 2020[551] - As of December 31, 2021, the company had $122.4 million in cash and cash equivalents and $415.4 million available for borrowing under its Revolving Credit Facility[555][741] - Total long-term debt was $443.1 million as of December 31, 2021[215] - Estimated 2022 cash requirements, including capital expenditures and debt payments, are projected to be between $380.0 million and $400.0 million[555] Critical Accounting Policies and Estimates Key accounting policies involve significant estimates for goodwill, oil & gas reserves, workers' compensation, and asset retirement obligations - Key estimates include goodwill impairment, oil & gas reserve values, asset retirement obligations, and liabilities for workers' compensation and pneumoconiosis benefits[563] - In 2020, the company recorded a $132.0 million non-cash goodwill impairment charge related to the Hamilton mine due to weakened coal market conditions[573] - The aggregate undiscounted cost of final mine closure (asset retirement obligations) is estimated at $229.4 million as of December 31, 2021[591] - Accrued liabilities for workers' compensation and pneumoconiosis benefits totaled $53.4 million and $111.3 million, respectively, at year-end 2021, based on actuarial estimates[581][582] Quantitative and Qualitative Disclosures About Market Risk ARLP is exposed to commodity price, credit, and interest rate risks, with some mitigation from long-term coal contracts - Commodity Price Risk: The company is exposed to price volatility for coal, oil, and natural gas. In 2021, 77.9% of coal tonnage was sold under long-term contracts, which helps mitigate risk. The company does not currently use commodity price hedges[599][601] - Credit Risk: Risk is concentrated with U.S. electric utilities and international brokerage firms. This is managed through credit evaluations, and when necessary, letters of credit or prepayments[602] - Interest Rate Risk: The company has exposure on its variable-rate Revolving Credit Facility and Securitization Facility, but no balances were outstanding at December 31, 2021. Fixed-rate debt totaled $443.1 million[606] Financial Statements and Supplementary Data This section presents ARLP's audited consolidated financial statements for 2021, including balance sheets, income statements, cash flows, and detailed notes Key Financial Statement Balances (as of Dec 31, 2021) | Account | Amount (in thousands) | | :--- | :--- | | Total Assets | $2,159,406 | | Total Liabilities | $933,337 | | Total Partners' Capital | $1,226,069 | | Total Liabilities and Partners' Capital | $2,159,406 | Key Income Statement Items (for year ended Dec 31, 2021) | Account | Amount (in thousands) | | :--- | :--- | | Total Revenues | $1,569,976 | | Income from Operations | $219,203 | | Net Income Attributable to ARLP | $178,157 | | Earnings Per Unit (Basic & Diluted) | $1.36 | - The financial statements are accompanied by 25 detailed notes that explain the company's accounting policies and provide breakdowns of significant financial statement line items, such as debt, acquisitions, and segment information[610] Controls and Procedures Management and independent auditors concluded that ARLP's disclosure controls and internal control over financial reporting were effective as of December 31, 2021 - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of December 31, 2021[916] - Based on the COSO framework, management concluded that the company's internal control over financial reporting was effective as of December 31, 2021[920] - The independent registered public accounting firm, Grant Thornton LLP, provided an unqualified opinion on the effectiveness of the company's internal control over financial reporting[922][925] PART III Directors, Executive Officers and Corporate Governance of the General Partner This section details the executive officers and directors of ARLP's general partner, including governance structure and code of ethics - Joseph W. Craft III is the Chairman, President, and Chief Executive Officer of the general partner and indirectly owns it[934] - The Board of Directors' Audit Committee is composed of four members, all of whom have been determined to be independent under NASDAQ and SEC rules[955] - The company has adopted a code of ethics for its principal executive officer and senior financial officers, which is available on its website[962] Executive Compensation Executive compensation, overseen by the Compensation Committee, includes base salary, annual cash incentives, and long-term equity awards tied to performance - The primary components of executive compensation are base salary, an annual cash Short-Term Incentive Plan (STIP), and equity awards under the Long-Term Incentive Plan (LTIP)[980] - CEO Joseph W. Craft III's compensation is distinct due to his significant equity ownership. His annual base salary has been $1 since February 2016, and he has not received a STIP bonus since 2005[979] - The 2021 STIP was based on an EBITDA performance target of $371.1 million, which the company exceeded[987] - LTIP awards granted in 2021 consist of restricted units that cliff vest on January 1, 2024, contingent on achieving an aggregate EBITDA target for the 2021-2023 period[996] Security Ownership of Certain Beneficial Owners and Management and Related Unitholder Matters This section details beneficial ownership of ARLP's common units, with Joseph W. Craft III holding 15.3% and all directors/executive officers holding 16.8% Beneficial Ownership of Common Units (as of Feb 2, 2022) | Beneficial Owner | Percentage Owned | | :--- | :--- | | Joseph W. Craft III | 15.3% | | Kathleen S. Craft | 12.8% | | All directors and executive officers as a group | 16.8% | Certain Relationships and Related Transactions, and Director Independence ARLP engages in related-party transactions, including administrative services, aircraft sharing, and coal leases, reviewed by the Conflicts Committee - The general partner is reimbursed for all direct and indirect expenses incurred on ARLP's behalf; total costs billed were approximately $0.7 million in 2021[1072] - The company has aircraft time-sharing and pilot expense reimbursement agreements with JC Land, LLC, an affiliate of CEO Joseph W. Craft III[1073][1074][1076] - ARLP has coal lease agreements with the Craft Foundations for properties operated by the Tunnel Ridge and MC Mining complexes, involving royalty payments[847][1077] - The Board of Directors has four independent directors: Messrs. Torrence, Carter, Druten, and Robinson, who comprise the Audit, Compensation, and Conflicts Committees[1081] Principal Accountant Fees and Services This section details fees paid to independent accounting firms, Grant Thornton LLP in 2021 and Ernst & Young LLP in 2020, for audit and tax services Accountant Fees (in thousands) | Fee Type | 2021 (Grant Thornton) | 2020 (Ernst & Young) | | :--- | :--- | :--- | | Audit Fees | $670 | $1,349 | | Tax Fees | $0 | $339 | | Total | $670 | $1,688 | - The Audit Committee is responsible for pre-approving all auditing and permitted non-audit services performed by the independent registered public accounting firm[1085] PART IV Exhibits and Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed with the Form 10-K, including corporate documents and required certifications - Lists all financial statements and schedules included in the report, such as the Condensed Financial Information of Registrant (Schedule I)[1087][1089] - Includes an index of all exhibits filed with the report, such as governance documents, material contracts, debt agreements, and compensation plans[1090] - Certifications by the CEO and CFO pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act are filed as exhibits[1115][1116][1117] - Technical Report Summaries for material mining properties and the audit report for oil & gas reserves are included as exhibits[1120]