Alliance Resource Partners, L.P. — FY2017 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2017, filed February 23, 2018. ARLP is a diversified eastern U.S. coal producer and marketer with eight underground mining complexes, an Ohio River loading terminal, and investments in oil and gas mineral interests and gas compression services. It produced 37.6 million tons and sold 37.8 million tons in 2017, compared with 35.2 million and 36.7 million tons, respectively, in 2016.
- Coal reserves totaled approximately 1.67 billion proven and probable tons at year-end.
- Approximately 80.0% of sales tonnage went to electric utilities; 71.7% of sales tonnage and 74.7% of coal sales were under long-term contracts.
- Reportable segments were Illinois Basin, Appalachia, and Other and Corporate.
Financial and operating metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Total revenues | $1.796 billion | $1.931 billion | Down 7.0% |
| Coal sales | $1.711 billion | $1.862 billion | Down 8.1% |
| Income from operations | $328.6 million | $365.9 million | Down 10.2% |
| Net income attributable to ARLP | $303.6 million | $339.4 million | Down 10.5% |
| Basic and diluted earnings per unit | $2.80 | $3.39 | Down 17.4% |
| Adjusted EBITDA | $620.8 million | $706.7 million | Down 12.2% |
| Cash flow from operations | $556.1 million | $703.5 million | Down 21.0% |
| Capital expenditures | $145.1 million | $91.1 million | Up 59.3% |
| Distributions paid per unit | $1.88 | $1.9875 | Down 5.4% |
Reported operating margin was approximately 18.3%, net margin attributable to ARLP was approximately 16.9%, and Adjusted EBITDA margin was approximately 34.6%. Coal sales per ton declined to $45.24 from $50.76, while operating expenses and outside coal purchases per ton declined to $28.95 from $30.71.
- Illinois Basin Segment Adjusted EBITDA declined 29.1% to $391.4 million, primarily because lower realized prices outweighed slightly higher volume.
- Appalachia Segment Adjusted EBITDA increased 22.3% to $234.1 million, supported by higher volume and improved pricing, including Mettiki metallurgical coal sales.
- Other and Corporate Segment Adjusted EBITDA increased 42.0% to $65.8 million, reflecting higher AllDale investment income, Kodiak distributions and Matrix Design sales.
Liquidity, debt and distributions
- Cash and cash equivalents were $6.8 million at December 31, 2017, versus $39.8 million at year-end 2016; reported working capital was negative $8.0 million.
- Total debt principal was $502.4 million, consisting primarily of $400.0 million of 7.5% senior notes due 2025, $30.0 million under the revolving credit facility and $72.4 million under the accounts receivable securitization facility.
- The revolving credit facility had $456.7 million of borrowing availability, excluding $8.1 million of outstanding letters of credit. The stated interest rate was 4.49% at year-end.
- Debt-to-cash-flow and cash-flow-to-interest ratios were 0.91x and 16.1x, respectively; ARLP was compliant with its debt covenants.
- Management stated that existing cash, operating cash flow, investments, credit facilities and potential debt or equity issuance were expected to fund liquidity needs, capital expenditures, investments, debt service and distributions.
- 2018 capital expenditures were projected at $220 million to $240 million. Estimated average annual maintenance capital expenditures were approximately $4.72 per ton produced over the following five years.
Material changes versus the prior comparable period
- Sales volumes increased 3.1%, but the average coal sales price fell 10.9%, largely because higher-priced legacy contracts expired.
- Production shifted toward lower-cost operations, reducing operating expense per ton and partially offsetting pricing pressure.
- Depreciation, depletion and amortization declined to $269.0 million from $336.5 million, principally due to mine reserve depletion, the Pattiki closure, lower production at certain mines and capital reduction initiatives.
- Interest expense increased to $39.4 million from $30.7 million following the issuance of the 7.5% senior notes.
- ARLP issued $400.0 million of senior notes in April 2017, repaid the $145.0 million Series B senior notes and paid off the $50.0 million term loan.
- The July 2017 Exchange Transaction canceled incentive distribution rights and the economic general partner interest in ARLP in exchange for 56.1 million ARLP units issued to MGP and 7,181 units issued to SGP. Year-end units outstanding increased to 130.7 million from 74.4 million.
- ARLP invested $100.0 million in Kodiak preferred interests and contributed $20.7 million to equity investments during 2017.
- Cash flow from operations decreased substantially, while capital spending and investment cash requirements increased, resulting in a $33.0 million decline in cash during the year.
Guidance, outlook, commentary, risks and unusual items
- Management expected 2018 capital expenditures of $220 million to $240 million and approximately $30 million of 2018 investment funding for existing AllDale and Kodiak commitments.
- Gibson North was idled but expected to resume production in 2018; Warrior was transitioning seams, with completion expected in the second quarter of 2018.
- On February 22, 2018, ARLP and AHGP approved proposed simplification transactions under which AHGP would become a wholly owned ARLP subsidiary and AHGP units would convert into ARLP units. Closing required SEC effectiveness of a Form S-4 and AHGP unitholder approval.
- On February 18, 2018, ARLP agreed to settle customer breach-of-contract litigation for a $93 million payment, future coal supply commitments and acquisition of certain reserves for $2 million. Management expected approximately $80 million of recovery after costs; the settlement was a nonrecognized subsequent event for 2017.
- Key risks include declining coal demand from natural gas and renewable generation, environmental and greenhouse-gas regulation, coal price volatility, contract repricing or termination, transportation disruptions, mine operating incidents, permitting delays, reclamation and black-lung liabilities, surety-bond availability, customer credit risk, investment exposure to oil and gas markets, and refinancing or liquidity constraints.
- ARLP had $268.7 million of surety bonds outstanding, $244.6 million of undiscounted reclamation obligations, and $249.6 million of undiscounted workers’ compensation and pneumoconiosis benefit obligations.
Most important facts for investors to verify
- Whether coal pricing and contract renewals offset the expiration of higher-priced legacy contracts.
- Progress and economics of Gibson North’s restart and Warrior’s seam transition.
- Actual 2018 capital spending, operating cash flow and distribution coverage relative to the $220 million–$240 million capital plan.
- Availability and cost of revolving credit, securitization funding and required surety bonds.
- Final completion, unit issuance and historical recast effects of the AHGP simplification transactions.
- Accounting and cash-flow treatment of the approximately $80 million expected customer litigation recovery.
- Potential changes in reclamation, black-lung, workers’ compensation and environmental liabilities.