Alliance Resource Partners, L.P. — 2017 Q3 Form 10-Q Summary
Business context and reporting period
Alliance Resource Partners, L.P. is a diversified producer and marketer of coal serving U.S. utilities and industrial users. Operations are reported through the Illinois Basin and Appalachia segments, with additional marketing, transportation, mining technology, mineral-interest and midstream activities in Other and Corporate. The filing covers the three and nine months ended September 30, 2017; financial statements are unaudited.
On July 28, 2017, the partnership completed an exchange transaction in which its incentive distribution rights and economic general partner interest were exchanged for 56.1 million common units, while the special general partner interests were exchanged for 7,181 common units. Common units outstanding increased to 130.7 million.
Key financial metrics
| Metric | Three months ended Sept. 30, 2017 | Three months ended Sept. 30, 2016 | Nine months ended Sept. 30, 2017 | Nine months ended Sept. 30, 2016 |
|---|---|---|---|---|
| Total revenue | $453.2 million | $552.1 million | $1.313 billion | $1.404 billion |
| Coal sales | $435.2 million | $533.8 million | $1.256 billion | $1.358 billion |
| Income from operations | $64.8 million | $96.4 million | $251.1 million | $241.6 million |
| Net income attributable to ARLP | $61.3 million | $89.8 million | $229.4 million | $219.8 million |
| Net income per limited partner unit | $0.52 | $0.91 | $2.32 | $2.08 |
| Segment Adjusted EBITDA | $157.2 million | $217.4 million | $506.9 million | $542.0 million |
| Cash flow from operations | Not separately reported | Not separately reported | $456.1 million | $494.5 million |
Reported third-quarter operating margin was approximately 14.3%, net margin attributable to ARLP was approximately 13.5%, and Segment Adjusted EBITDA margin was approximately 34.7%. For the nine-month period, the corresponding margins were approximately 19.1%, 17.5% and 38.6%, respectively.
- Third-quarter tons sold declined 10.3% to 9.645 million tons, while tons produced were broadly stable at 8.521 million tons.
- Nine-month tons sold increased 5.9% to 27.721 million tons and tons produced increased to 28.211 million tons.
- Average coal sales price was $45.12 per ton in the quarter versus $49.63, and $45.31 per ton for the nine months versus $51.86.
- Operating expenses excluding depreciation, depletion and amortization declined to $295.4 million in the quarter and $796.8 million for the nine months.
- Cash and cash equivalents were $18.4 million at September 30, 2017, compared with $39.8 million at December 31, 2016.
- Capital expenditures were $105.5 million for the first nine months, compared with $70.3 million in the prior-year period.
Debt and liquidity
- Debt principal totaled $500.0 million at September 30, 2017, consisting of $400.0 million of senior notes and $100.0 million outstanding under the accounts receivable securitization facility. The carrying value of long-term debt, including current maturities, was $485.4 million.
- The $400.0 million senior notes mature in 2025 and bear interest at 7.5%. The $100.0 million securitization facility matures in December 2017.
- The $50.0 million term loan and $145.0 million Series B Senior Notes were repaid in May 2017; the Series B repayment generated an $8.1 million debt extinguishment loss.
- The revolving credit facility had $486.7 million available for borrowing, with $8.1 million of letters of credit outstanding. The applicable Eurodollar borrowing rate was 3.59% at September 30, 2017.
- Trailing-twelve-month debt-to-cash-flow and cash-flow-to-interest ratios were 0.84-to-1.0 and 19.2-to-1.0, respectively. Management reported compliance with debt covenants.
- Management stated that existing cash, operating cash flow and available financing were expected to satisfy working capital, capital expenditure, investment, debt service and distribution requirements, while noting that future liquidity depends on operating performance and financing access.
Material changes versus the prior comparable period
- Third-quarter revenue decreased 17.9%, coal sales decreased 18.5%, net income attributable to ARLP decreased 31.8%, and Segment Adjusted EBITDA decreased 27.7%.
- The quarterly decline was driven primarily by lower coal volumes and prices, the closure of the Pattiki mine, expiration of higher-priced legacy contracts and adverse geological conditions at Hamilton. Lower operating costs, lower depreciation and higher investment income partly offset the decline.
- For the nine months, revenue decreased 6.5% and coal sales decreased 7.5%, but net income attributable to ARLP increased 4.4%. The improvement reflected higher sales volumes, lower operating costs and depreciation, and greater equity income from mineral investments, partly offset by lower pricing and the debt extinguishment loss.
- Illinois Basin third-quarter Segment Adjusted EBITDA declined 40.6%, while Appalachia declined 5.2%. For the nine months, Illinois Basin declined 25.0%, while Appalachia increased 24.8%.
- Operating cash flow decreased 7.8% year over year, while investing cash use increased to $205.4 million, primarily because of higher capital expenditures and the $100.0 million Kodiak preferred-interest investment.
- The partnership invested $100.0 million in Kodiak Gas Services preferred interests in July 2017 and recorded $2.8 million of related cost investment income in the quarter and nine-month period.
- The quarterly distribution declared for the September 30, 2017 quarter was $0.505 per unit, totaling approximately $66.7 million, payable November 14, 2017.
Guidance, outlook, commentary and risks
- Management estimated 2017 capital expenditures of $145.0 million to $165.0 million and expected approximately $120.0 million to $130.0 million of 2017 investments in oil and gas mineral interests, including the Kodiak investment.
- Management cited production-shifting initiatives, lower-cost operations, higher Appalachia volumes and improved mining technology sales as favorable factors. It also identified coal-price pressure, contract repricing, geological conditions and mine closures as adverse factors.
- Material risks include changes in coal demand and prices, customer contract renewals or defaults, utility-sector conditions, environmental and mine-safety regulation, operational interruptions, labor and health-care costs, transportation disruptions, reclamation and workers’ compensation obligations, reserve replacement, financing access and performance of investments not controlled by the partnership.
- Various lawsuits, claims and regulatory proceedings were pending. Management believed their ultimate outcome would not materially adversely affect financial condition, results of operations or liquidity, although losses exceeding recorded accruals could be material.
- The IRS audit of White Oak Resources for the 2011 tax year remained ongoing.
- Disclosure controls and procedures were concluded to be effective as of September 30, 2017, with no material changes to internal control over financial reporting identified during the quarter.
Most important facts for investors to verify
- Whether the December 2017 maturity of the $100.0 million securitization facility was renewed, refinanced or repaid.
- Actual fourth-quarter coal volumes, realized prices and the effect of legacy contract expirations and mine-specific geological conditions.
- Progress toward the 2017 capital expenditure and mineral-investment ranges, including returns and distributions from Kodiak and the AllDale investments.
- Compliance with debt covenants and changes in borrowing availability, interest expense and liquidity.
- The sustainability of quarterly distributions relative to operating cash flow, capital expenditures, investments and debt obligations.
- Developments in the White Oak IRS audit, litigation, mine-safety matters, reclamation obligations and workers’ compensation or black-lung liabilities.