New York, May 20, 2021 -- Moody's Investors Service, ("Moody's") affirmed
ratings for Alliance Resource Operating Partners L.P. ("Alliance"),
including the Ba3 Corporate Family Rating ("CFR"), the
Ba3-PD Probability of Default and revised the rating outlook to
stable from negative on a combination of improved coal industry fundamentals
and debt reduction. Moody's also upgraded the company's
Speculative Grade Liquidity Rating ("SGL") to SGL-2
from SGL-3.
"While the coal industry is under significant pressure in the United
States, management's aggressive operational response to Covid-19
and substantial debt reduction drive a stabilization of the rating outlook,"
said Ben Nelson, Moody's Vice President -- Senior Credit
Officer and lead analyst for Alliance Resource Operating Partners,
L.P.
Affirmations:
..Issuer: Alliance Resource Operating Partners,
L.P.
.... Probability of Default Rating,
Affirmed Ba3-PD
.... Corporate Family Rating, Affirmed
Ba3
....Senior Unsecured Regular Bond/Debenture,
Affirmed B1 (LGD5)
Upgrades:
..Issuer: Alliance Resource Operating Partners,
L.P.
.... Speculative Grade Liquidity Rating,
Upgraded to SGL-2 from SGL-3
Outlook Actions:
..Issuer: Alliance Resource Operating Partners,
L.P.
....Outlook, Changed To Stable From
Negative
RATINGS RATIONALE
Management responded aggressively to the global outbreak of Coronavirus.
While the company's management-adjusted EBITDA fell from
about $600 million in 2019 to about $380 million for the
twelve months ended 31 March 2021, management suspended cash distributions
starting in 2Q20, generated more than $250 million of free
cash flow, and reduced balance sheet debt by more than $240
million (about one-third of debt outstanding at 31 December 2019).
Alliance also extended its revolving credit facility at similar terms
during the early days of the pandemic and took a range of operational
actions to help preserve liquidity. These factors, combined
with an improved outlook for the thermal coal industry in 2021 and no
meaningful debt maturities for the next few years, drive the ratings
affirmation and return of the rating outlook to stable.
Moody's expects improved domestic and international demand for thermal
coal in 2021. Moody's expects management-adjusted
EBITDA in the range of $350-375 million, reflecting
a combination of improved volumes and weaker domestic pricing that reflects
current market conditions compared to contracts signed before the virus
outbreak, and continued strong free cash flow in 2021, supporting
very strong credit metrics including adjusted financial leverage below
2.0 times (Debt/EBITDA; including standard analytical adjustments).
Alliance's business model creates stronger and more stable discretionary
cash flow generation compared to rated peers in the United States.
The rating incorporates an expectation for a conservative approach to
managing the company's balance sheet and handling upcoming debt
maturities in 2024 (revolving credit facility) and 2025 (unsecured bonds).
Likewise, management reiterated during its first quarter earnings
call that it intends to manage toward a total leverage ratio of 1.0x
(compared to 1.43x at 1Q21) and re-established guidance
to direct 30% of the company's free cash flow to cash distributions.
The rating assumes that the company will generate at least $50
million (after considering distributions) per year for debt reduction
in 2021 and 2022 and, in a downside scenario where cash flow generation
is meaningfully weaker, suspend the distribution to avoid meaningfully
negative free cash flow and incurrence of debt.
However, Moody's also believes that investor concerns about the
coal industry's ESG profile are intensifying and coal producers will be
increasingly challenged by access to capital issues in the early 2020s.
An increasing portion of the global investment community is reducing or
eliminating exposure to the coal industry with greater emphasis on moving
away from thermal coal. The aggregate impact on the credit quality
of the coal industry is that debt capital will become more expensive over
this horizon, particularly in the public bond markets, and
other business requirements, such as surety bonds, which together
will lead to much more focus on individual coal producers' ability to
fund their operations and articulate clearly their approach to addressing
environmental, social, and governance considerations --
including reducing net debt in the near-to-medium term.
Alliance reported about $541 million of balance sheet debt at 31
March 2020 (down significantly from $781 million at 31 December
2019) and $273 million of surety bonds supporting environmental
reclamation, black lung, and worker's compensation liabilities.
Absent a significant change in access to capital or the competitive landscape
for the coal industry, Alliance will need to reduce debt steadily
to maintain the Ba3 CFR and stable rating outlook.
Environmental, social, and governance factors have a material
impact on Alliance's credit quality. The company is exposed
to ESG issues typical for a company in the coal mining industry,
including increasing global demand for renewable energy that is detrimental
to demand for coal, especially in the United States and Western
Europe. From an environmental perspective the coal mining sector
is also viewed as: (i) very high risk for air pollution and carbon
regulations; (ii) high risk for soil and water pollution, land
use restrictions, and natural and man-made hazards;
and (iii) high risk for water shortages. Social issues include
factors such as community relations, operational track record,
and health and safety issues associated with coal mining, such as
black lung disease. Alliance is highly exposed to thermal coal.
Moody's believes that thermal coal carries greater ESG-related
risks than metallurgical coal. Alliance is a publicly traded company,
which is a positive factor in the analysis of governance risk, and
a master limited partnership, which is a negative factor because
MLPs typically distribute most or all of their free cash flow.
Alliance's suspension of the distribution during 2020 is a substantial
mitigant to this risk. The high proportion of insider ownership,
which is 33% of total outstanding shares, is also considered
in our assessment of governance risks.
The Ba3 CFR is principally constrained by the challenges of operating
with meaningful balance sheet debt in an industry that faces substantial
cyclical and structural issues, including: (i) ongoing secular
decline in the demand for thermal coal in the United States; (ii)
volatility in export prices that makes it difficult for companies to maintain
export volumes through price cycles; and (iii) rapidly emerging ESG-related
issues with an adverse impact on access to capital and, therefore,
debt capacity. Alliance's rating is supported by the company's
(i) low cost position; (ii) size, scale, and geographic
and operational diversity; (iii) willingness to reduce or eliminate
the distribution to unitholders of its master limited partnership during
difficult market conditions; and (iv) expectation for further debt
reduction in a scenario where access to capital constraints worsen.
Moody's expects that the company will generate meaningful free cash
flow and maintain very strong credit metrics in the medium term.
The SGL-2 reflects good liquidity to support operations in the
next 12-18 months. Alliance reported roughly $495
million of availability liquidity at 31 March 2021, comprised of
$34 million of cash and $461 of availability under its revolving
credit facility. Moody's expects that the company will generate
positive free cash flow over the next 12-18 months. Moody's
expects a healthy cushion of compliance under financial maintenance covenants
that govern the $537.75 million revolving credit facility
due 2024. Moody's will place emphasis on the company's
continued ability to maintain its surety bonding program with a reasonable
level of required collateral.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Moody's could downgrade the ratings with expectations for adjusted financial
leverage sustained above 2.50x (Debt/EBITDA), negative free
cash flow, or further intensification of ESG concerns that call
into question the company's ability to handle upcoming debt maturities.
Moody's could upgrade the ratings with a substantial and sustained reduction
in debt. However, given the issues facing the thermal coal
industry, an upgrade is unlikely in the near-term.
Alliance Resource Operating Partners, L.P. is a subsidiary
of Alliance Resource Partners, L.P., which is
a publicly traded master limited partnership ("MLP").
Alliance operates seven underground mining complexes in Illinois,
Indiana, Kentucky, Maryland, Pennsylvania, and
West Virginia. Alliance also operates a coal terminal in Indiana
(Ohio River) and owns royalty interests on 1.5 million gross acres
in oil and gas producing properties in the United States.
The principal methodology used in these ratings was Mining published in
September 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1089739.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security or pursuant
to a program for which the ratings are derived exclusively from existing
ratings in accordance with Moody's rating practices. For ratings
issued on a support provider, this announcement provides certain
regulatory disclosures in relation to the credit rating action on the
support provider and in relation to each particular credit rating action
for securities that derive their credit ratings from the support provider's
credit rating. For provisional ratings, this announcement
provides certain regulatory disclosures in relation to the provisional
rating assigned, and in relation to a definitive rating that may
be assigned subsequent to the final issuance of the debt, in each
case where the transaction structure and terms have not changed prior
to the assignment of the definitive rating in a manner that would have
affected the rating. For further information please see the ratings
tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated
agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy
for Designating and Assigning Unsolicited Credit Ratings available on
its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1263068.
At least one ESG consideration was material to the credit rating action(s)
announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
by Moody's Deutschland GmbH, An der Welle 5, Frankfurt
am Main 60322, Germany, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
office that issued the credit rating is available on www.moodys.com.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the UK and is endorsed
by Moody's Investors Service Limited, One Canada Square,
Canary Wharf, London E14 5FA under the law applicable to credit
rating agencies in the UK. Further information on the UK endorsement
status and on the Moody's office that issued the credit rating is
available on www.moodys.com.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Benjamin Nelson
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Glenn B. Eckert
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
