Alliance Resource Partners, L.P. — 2018 Q2 Form 10-Q Summary
Business context and reporting period
Alliance Resource Partners, L.P. is a diversified U.S. coal producer and marketer operating eight underground mining complexes in the Illinois Basin and Appalachia, a coal-loading terminal, and investments in oil and gas mineral interests and gas-compression services. This unaudited Form 10-Q covers the three and six months ended June 30, 2018, compared with the corresponding 2017 periods.
On May 31, 2018, the partnership completed simplification transactions that made AHGP a wholly owned subsidiary, eliminated economic general-partner interests, and resulted in ARLP becoming the indirect owner of certain interests in the Intermediate Partnership and Alliance Coal. Comparative per-unit results are affected by these transactions.
Key financial metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total revenue | $516.1 million, versus $398.7 million | $973.3 million, versus $859.8 million |
| Coal sales | $475.9 million, versus $382.3 million | $899.5 million, versus $821.0 million |
| Net income attributable to ARLP | $86.2 million, versus $63.2 million | $242.1 million, versus $168.1 million |
| Net income per limited partner unit | $0.64, versus $0.82 | $1.80, versus $1.93 |
| Pro forma net income per unit | $0.63, versus $0.47 | $1.79, versus $1.25 |
| Operating income | $88.2 million, versus $79.5 million | $248.4 million, versus $187.8 million |
| Operating margin | 17.1%, versus 19.9% | 25.5%, versus 21.8% |
| Segment Adjusted EBITDA | $185.5 million, versus $156.0 million | $350.8 million, versus $349.7 million |
| Cash flow from operating activities | Not separately presented | $373.2 million, versus $294.5 million |
| Capital expenditures | Not separately presented | $120.6 million, versus $67.5 million |
Quarterly revenue increased 29.5% and six-month revenue increased 13.2%. Quarterly net income attributable to ARLP increased 36.3%; six-month net income increased 44.0%, primarily reflecting stronger coal volumes, an $80.0 million net litigation settlement gain, higher investment income, and the absence of the prior-year debt extinguishment loss.
Coal tons sold increased 23.9% to 10.5 million in the quarter and 10.0% to 19.9 million for the six-month period. Coal production increased 2.6% in both comparable periods. Average coal sales prices were $45.38 per ton in the quarter versus $45.15 and $45.23 per ton for the six-month period versus $45.42.
Cash flow, debt and liquidity
- Cash and cash equivalents were $51.2 million at June 30, 2018, compared with $6.8 million at December 31, 2017.
- Operating cash flow of $373.2 million funded $120.6 million of capital expenditures, $200.8 million of net financing cash uses, and other investing requirements. Ending cash increased by $44.5 million during the six months.
- Total debt principal was $461.5 million, consisting of $400.0 million of 7.5% senior notes due 2025 and $61.5 million outstanding under the accounts-receivable securitization facility. The balance-sheet carrying amount of total debt, net of discounts and issuance costs, was $448.9 million.
- The revolving credit facility had $486.7 million available, subject to $8.1 million of outstanding letters of credit. The applicable Eurodollar rate with margin was 4.44% at June 30, 2018.
- Trailing-twelve-month debt-to-cash-flow and cash-flow-to-interest ratios were 0.75-to-1.0 and 16.6-to-1.0, respectively, versus covenant limits of 2.5-to-1.0 and not less than 3.0-to-1.0. Management reported compliance with the credit agreement.
- Distributions paid were $137.4 million during the first six months. The quarterly distribution declared for August 14, 2018 was $0.5200 per unit.
Material changes versus the prior comparable period
- Illinois Basin quarterly Segment Adjusted EBITDA increased 17.5% to $109.6 million, while Appalachia increased 18.4% to $60.1 million. For the six-month period, Illinois Basin increased 2.5%, but Appalachia declined 8.3% to $113.7 million because of higher costs and lower Tunnel Ridge volumes.
- Higher quarterly volumes reflected shipments delayed by first-quarter weather-related transportation disruptions, increased export shipments, stronger Illinois Basin performance, and the May 2018 restart of Gibson North.
- Operating expenses and outside coal purchases increased 30.8% in the quarter and 18.0% for the six-month period. Cost per ton sold increased to $29.68 from $28.10 in the quarter and to $29.66 from $27.66 for the six-month period.
- Transportation revenue and expense increased substantially because of higher export-related tonnage and third-party transportation rates; transportation costs are generally passed through to customers.
- The partnership recorded $7.6 million of equity-securities income from additional preferred interests received from its Kodiak investment during the six months, compared with none in the prior-year period.
- ARLP authorized a $100 million unit-repurchase program in May 2018 and repurchased approximately 383,600 units for $7.6 million through June 30, leaving approximately $92.4 million authorized.
Guidance, outlook, risks and unusual items
- Management estimated 2018 capital expenditures of $225 million to $255 million and approximately $30 million of additional investment funding for oil and gas minerals and gas-compression services.
- Management was evaluating a new east Kentucky mine to replace reserves expected to deplete at MC Mining in 2020. The potential project would access approximately 15 million tons of reserves, require estimated capital of $50 million to $66 million, and potentially begin in the third quarter of 2018 with completion in the first quarter of 2020.
- The March 2018 litigation settlement provided $93.0 million of cash, a new coal supply agreement, export-transloading capacity, and rights to acquire certain reserves. After $13.0 million of legal fees and related incentive compensation, ARLP recognized an $80.0 million net settlement gain.
- Mine performance remains exposed to difficult mining conditions, lower recoveries, roof-support and labor costs, maintenance requirements, production interruptions, weather, transportation constraints, and reserve depletion.
- Other principal risks include coal-price and demand changes, customer concentration and contract performance, environmental and mine-safety regulation, reclamation, workers’ compensation and black-lung liabilities, labor availability, litigation, financing access, and the performance of unconsolidated investments.
- The accounts-receivable securitization facility matures in January 2019, creating a refinancing or repayment consideration. Variable-rate borrowings expose the partnership to interest-rate increases; management estimated that a one-percentage-point increase on the securitization balance would increase annual interest expense by approximately $0.6 million.
- Management stated that no material changes had occurred in previously disclosed risk factors and that existing liquidity sources were expected to meet anticipated requirements, while cautioning that adverse operating or financing conditions could reduce liquidity.
Important facts for investors to verify
- Whether coal volumes, export demand, pricing, and mining-cost trends remain sustainable after the favorable second-quarter shipment timing effects.
- The January 2019 maturity and renewal terms of the securitization facility, as well as continued availability under the revolving credit facility.
- The cash-flow impact and accounting comparability of the $80.0 million litigation settlement and other nonrecurring items.
- Progress, final approval, timing, and funding requirements for the proposed east Kentucky mine.
- Execution of the $100 million unit-repurchase authorization alongside quarterly distributions and planned capital expenditures.
- Exposure to workers’ compensation, pneumoconiosis, asset-retirement obligations, environmental regulation, mine-safety matters, and other contingencies.
- The effect of the simplification transactions on unit count, distributions, governance, related-party transactions, and comparability of reported per-unit earnings.