Alliance Resource Partners, L.P. — 2020 Q1 Form 10-Q Summary
Business context and reporting period
Alliance Resource Partners, L.P. is a U.S. diversified natural-resource limited partnership producing and marketing coal and owning oil and gas mineral interests. Reportable segments are Illinois Basin, Appalachia and Minerals. This unaudited filing covers the three months ended March 31, 2020, with comparison to the three months ended March 31, 2019. The quarter was materially affected by weak coal and hydrocarbon markets and the emerging COVID-19 pandemic.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total revenue | $350.8 million | $526.6 million | Down 33.4% |
| Coal sales | $314.6 million | $476.0 million | Down 33.9% |
| Oil and gas royalties | $14.2 million | $10.4 million | Up 37.0% |
| Operating income (loss) | $(132.7) million | $104.7 million | Declined $237.4 million |
| Net income (loss) attributable to ARLP | $(144.8) million | $276.4 million | Declined $421.2 million |
| Basic and diluted earnings per unit | $(1.14) | $2.12 | Turned negative |
| Operating margin | (37.8%) | 19.9% | Down 57.7 percentage points |
| Segment Adjusted EBITDA | $111.7 million | $206.6 million | Down 45.9% |
| Operating cash flow | $78.7 million | $143.7 million | Down 45.2% |
| Capital expenditures | $50.4 million | $84.0 million | Down 40.1% |
Coal tons sold fell 29.7% to 7.3 million tons, while production declined 29.2% to 8.0 million tons. Average coal realization decreased to $43.39 per ton from $46.12. Coal Segment Adjusted EBITDA Expense increased to $32.25 per ton from $29.17 because curtailed production increased fixed costs per ton.
Cash and cash equivalents were $29.6 million at March 31, 2020, compared with $36.5 million at December 31, 2019. Total debt principal was $815.7 million, consisting primarily of $300.0 million drawn on the revolving facility, $400.0 million of senior notes, $58.4 million under the securitization facility and $57.3 million of equipment financing. Net debt, based on reported cash and principal debt, was approximately $786.0 million.
The March 31, 2020 balance sheet included total assets of $2.40 billion and total partners’ capital of $1.07 billion. Current maturities of debt increased to $71.7 million from $13.2 million at year-end 2019.
Material changes versus the prior comparable period
- Revenue declined primarily because of lower coal volumes and prices, reduced transportation activity and weaker market conditions. Minerals royalty revenue increased due to the Wing mineral-interest acquisition and increased production volumes, partially offset by lower commodity prices.
- Segment Adjusted EBITDA declined in Illinois Basin to $50.0 million from $122.7 million and in Appalachia to $47.5 million from $58.7 million. Minerals Segment Adjusted EBITDA increased to $13.8 million from $9.1 million.
- The company recorded $25.0 million of non-cash long-lived-asset impairments, including charges associated with permanently closing the Gibson North mine and weakened Illinois Basin asset values.
- The company recorded a $132.0 million non-cash goodwill impairment related to the Hamilton mine, reducing consolidated goodwill from $136.4 million to $4.4 million.
- Q1 2019 included a $177.0 million acquisition gain related to the AllDale acquisition and $12.9 million of equity-securities income associated with the prior Kodiak investment; neither item was recognized in Q1 2020.
- Operating cash flow decreased by $65.0 million, while investing cash use improved because Q1 2020 had no comparable acquisition payment. Financing cash use decreased to $34.2 million from $241.7 million, primarily because of lower debt repayments and partner distributions.
Guidance, outlook, commentary and risks
- Management withdrew its initial 2020 operating and financial guidance because it did not reflect COVID-19 effects.
- Management estimated 2020 total capital expenditures of $130 million to $135 million, including maintenance capital expenditures, and projected average annual maintenance capital spending of approximately $4.86 per ton over 2020–2024.
- The board suspended cash distributions for the first and second quarters of 2020. The Q1 2020 distribution of $0.40 per unit was paid on February 14, 2020; no Q1-period distribution was declared for unitholders.
- Coal production was temporarily halted at River View, Gibson, Hamilton and Warrior in late March and at MC Mining in April. Production resumed at River View, but management stated that not all mines would return to prior production levels. Gibson and Hamilton employees received permanent termination notices affecting 116 and 78 employees, respectively.
- Management reduced capital expenditures, working capital, costs and expenses and adjusted its corporate support structure to preserve liquidity. It stated that it did not anticipate near-term liquidity constraints, while acknowledging that materially weaker operating cash flow or financing access could adversely affect liquidity.
- On March 9, 2020, the company replaced its prior revolving facility with a $537.75 million facility, reducing to $459.5 million on May 23, 2021 and maturing March 9, 2024. At March 31, $228.5 million was available for borrowing and $9.3 million of letters of credit was outstanding.
- The company remained in compliance with debt covenants. Reported trailing-twelve-month ratios were debt to cash flow of 1.58x, cash flow to interest expense of 10.82x and first-lien debt to cash flow of 0.81x, compared with maximum or minimum covenant thresholds of 2.5x, 3.0x and 1.5x, respectively.
- Principal risks include COVID-19 duration and economic effects, coal and oil and gas price volatility, reduced energy demand, customer defaults or contract cancellations, mine closures and operating disruptions, liquidity and refinancing risk, environmental and regulatory obligations, workers’ compensation and black-lung liabilities, and potential additional asset impairments.
- The filing states that the full operational and financial impact of COVID-19 could not be accurately predicted and that additional impairments could be required if future cash-flow estimates deteriorate.
Important facts for investors to verify
- Whether coal demand, production volumes and mine utilization recover, particularly at Gibson, Hamilton, Warrior and MC Mining.
- Whether COVID-19, commodity prices and operator activity cause further impairments to coal assets, goodwill or oil and gas investments.
- Actual 2020 capital expenditures versus the $130 million–$135 million estimate and the pace of cash-flow generation.
- Continuation or restoration of quarterly cash distributions and compliance with the revolving-credit covenant package.
- Debt maturities, refinancing requirements and available borrowing capacity under the revolving and securitization facilities.
- Customer credit quality, coal contract performance and exposure to lower oil and natural gas prices.
- Costs and timing associated with mine closures, employee terminations, reclamation, asset retirement obligations and other contingencies.
- Integration and internal-control implementation for the Wing mineral interests, which management expected to complete in the third quarter of 2020.