Alliance Resource Partners: A Company Overview - Part 1
September 19, 2017 - In this series, we’ll explore how Alliance Resource Partners (ARLP) has expanded its business and evaluate its key operational metrics and financial position. After reading this series, you’ll understand what sets Alliance Resource Partners apart from competitors like Westmoreland Coal (WLB), CNX Coal Resources (CNXC), and Cloud Peak Energy (CLD) in the coal (KOL) mining industry.
We’ll wrap up the series with a company outlook, analyzing ARLP’s current valuation and the various factors that could drive its valuation multiples going forward.
Alliance Resource Partners
Alliance Resource Partners (ARLP) is a diversified coal producer operating in the Eastern United States. It started mining operations in 1971 and is currently headquartered in Tulsa, Oklahoma.
ARLP has mining operations in Indiana, Illinois, West Virginia, and Maryland. The company has control of ~1.7 billion tons of coal reserves and produced 35.2 million tons of coal. ARLP is the second-largest producer in the Eastern US and largest producer in the Illinois Basin.
ARLP has a portfolio of well-located, low-cost, and long-lived operations and supplies thermal coal to large US utilities and industrial customers.
ARLP’s IPO
Alliance Resource completed its IPO (initial public offering) as an MLP (master limited partnership) on August 20, 1999, with 7.75 million common units at $19.00 per unit. ARLP was the first publicly traded master limited partnership.
In the next part, we’ll assess the benefits of MLPs.
A Typical MLP Structure
An MLP (master limited partnership) has one or more GPs (general partners) and thousands of limited partners or unit holders. Limited Partners hold publicly traded units, while the GP manages the partnership and, in general, has a ~2% ownership stake in the partnership.
The limited partners provide capital but don’t play any role in managing the partnership. They receive quarterly cash distributions, while the GPs may hold IDRs (incentive distribution rights).
As of December 31, 2016, Alliance Resource Partners (ARLP) was being managed by its MGP (managing general partner), which is 100% owned, directly and indirectly, by AGHP (Alliance Holdings GP), a Delaware limited partnership.
AGHP is the owner of 1.98% general partner interest in ARLP, IDR (incentive distribution rights) in ARLP, and 31 million (41.8%) common units of ARLP. The public owns 43.2 million (58.2%) outstanding units.
AGHP does not directly own any cash-generating assets. Instead, it derives its income from its ownership interests in Alliance Resource Partners, and the management owns 0.01% general partner interest in ARLP.
The MLP Advantage
MLPs are pass-through entities that don’t pay any corporate taxes, thereby lowering their cost of capital. Instead, the unit holders (shares in MLP are referred to as “units,” and the shareholders are referred to as “unit holders”) of an MLP pay taxes at the individual level.
MLPs help corporations to unlock the value of their assets by exchanging them for MLP common units or IDRs. But not all corporations can form an MLP. According to the IRS (Internal Revenue Service), at least 90% of MLP income must come from activities in specific sources. These include income from activities in natural resources such as mining, oil, and gas, and income from commodity investments and real estate.
Some of the coal-based (KOL) MLPs include Westmoreland Resource Partners (WMLP), Foresight Energy (FELP), Natural Resource Partners (NRP), and CNX Coal Resources (CNXC).
Next, we’ll look at Alliance Resource Partners’ mining operations.
ARLP’s Mining Operations
Alliance Resource Partners (ARLP) operates eight underground mining complexes in two regions: Illinois and Appalachia. These two regions are spread across five states: Illinois, Indiana, Kentucky, Maryland, and West Virginia. ARLP also operates a coal-loading terminal on the Ohio River at Mt. Vernon, Indiana.
The mines use the room-and-pillar mining techniques and a longwall technique to produce coal with varied sulfur and heat contents. ARLP’s River View mine complex is currently the largest room-and-pillar underground coal mine in the US.
Other coal (KOL) companies that use longwall mining include Westmoreland Coal (WLB), CNX Coal Resources (CNXC), and Arch Coal (ARCH).
Mines Idled and Diversified Doal
ARLP’s Onton mine was idled in November 2015. The Pattiki mine and Elk Creek mine ceased operations in 2016. All of these mines operated in the Illinois Basin.
ARLP produces a diverse range of steam coals with varying sulfur and heat contents. In 2016, the company produced ~15.2% low-sulfur coal, 63.8% medium-sulfur coal, and 21.0% high-sulfur coal. Coal that has sulfur content below 1.5% is classified as low-sulfur coal, while coal with sulfur content of 1.5%–3% is classified as medium-sulfur coal, and coal with sulfur content greater than 3% as high-sulfur coal. The BTU content of ARLP coal ranges from 11,400–13,200.
Customers
In 2016, 90.3% of coal produced at ARLP mines was sold to electric utilities. These utility plants have pollution-control devices or scrubbers, which eliminate nearly all emissions of sulfur dioxide.
Duke Energy, Louisville Gas, and Electric Company and Tennessee Valley Authority were ARLP’s largest customers in 2016. In 2016, ~39.4% of ARLP’s total revenues were derived from these three customers.
Now, let’s take a closer look at the specific mines that ARLP operates.
ARLP’s Illinois Basin Mines
Alliance Resource Partners’ (ARLP) Illinois Basin segment consists of five operating mining complexes. The Dotiki mine is located in Webster County, Kentucky, and produces high-sulfur coal.
Coal is transported to customers via the CSX Transportation (CSX) and Paducah & Louisville Railway, or PAL railroads, by trucks on US and state highways and by barge deliveries. The mine’s preparation plant has a throughput capacity of 1,800 tons of raw coal per hour.
Gibson Complex
This complex includes the Gibson North mine and the Gibson South mine located in Gibson County, Indiana. The North mine was idled on December 18, 2015. The south mine started production in April 2014 and mines low- and medium-sulfur coal.
The mine’s preparation plant has a throughput capacity of 1,800 tons of raw coal per hour. Coal produced at the Gibson South mine is transported to customers through CSX and Norfolk Southern Railway (NSC) railroads, by trucks on US and state routes, and by barge deliveries.
Warrior Complex
Located in Hopkins County, Kentucky, the Warrior complex was acquired by ARLP in February 2003. It produces medium and high-sulfur coal. The preparation plant has a throughput capacity of 1,200 tons of raw coal per hour. Coal is transported to customers directly via CSX and PAL railroads, and by trucks on US and state highways. Coal is also shipped to various trans-loading facilities.
River View Complex
River View mine is located in Union County, Kentucky, and produces medium and high-sulfur coal. The mine started production in 2009. Its preparation plant has a throughput capacity of 2,700 tons of raw coal per hour. Coal produced from the River View mine is transported by the overland belt to a barge loading facility on the Ohio River.
Hamilton Mining Complex
Acquired in July 2015, the mine is located in McLeansboro, Illinois. It uses a longwall mining operation to produce medium- and high-sulfur coal. The mine’s preparation plant has a throughput capacity of 2,000 tons of raw coal per hour. Coal is transported via CSX, Evansville Western and NS rail and barge deliveries.
Other major coal (KOL) producers that mine in the Illinois Basin include Arch Coal (ARCH) and Peabody Energy (BTU).
Part 2 will follow later.