Alliance Resource Partners, L.P. — Form 10-Q Summary
Business context and reporting period
Alliance Resource Partners, L.P. is a diversified producer and marketer of coal to U.S. utilities and industrial users. Operations are reported through the Illinois Basin and Appalachia segments, plus Other and Corporate activities. The filing covers the unaudited quarter ended March 31, 2017, compared with the quarter ended March 31, 2016.
Financial performance and key metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenues | $461.1 million | $412.8 million | 11.7% increase |
| Coal sales | $438.7 million | $401.3 million | 9.3% increase |
| Income from operations | $107.5 million | $54.8 million | 96.1% increase |
| Net income attributable to ARLP | $104.9 million | $47.3 million | 121.8% increase |
| Net income per limited partner unit | $1.10 | $0.36 | Increase |
| Cash flow from operating activities | $177.0 million | $80.6 million | Increase |
| Segment Adjusted EBITDA | $193.7 million | $142.8 million | 35.7% increase |
| Capital expenditures | $30.3 million | $31.7 million | 4.4% decrease |
Operating margin increased to approximately 23.3% from 13.3%, while net margin increased to approximately 22.8% from 11.5%. Segment Adjusted EBITDA margin was approximately 42.0% versus 34.6%.
- Coal tons sold increased to 9.6 million from 7.5 million, and tons produced increased to 10.2 million from 8.9 million.
- Average coal sales price declined to $45.65 per ton from $53.82, primarily because of expired or renegotiated higher-priced contracts and increased lower-priced export shipments.
- Operating expenses were essentially flat at $262.8 million versus $263.6 million, but declined to $27.35 per ton sold from $35.35 because of a lower-cost production mix and efficiency initiatives.
- Appalachia Segment Adjusted EBITDA nearly doubled to $73.2 million, while Illinois Basin Segment Adjusted EBITDA increased modestly to $106.3 million.
- Cash and cash equivalents were $87.4 million at March 31, 2017, compared with $39.8 million at December 31, 2016.
- Total debt principal was $525.0 million at March 31, 2017, comprising $230.0 million drawn on the revolving credit facility, $145.0 million of Series B senior notes, $50.0 million of term debt and $100.0 million under the accounts receivable securitization facility.
- Revolving facility availability was $537.9 million after $8.6 million of letters of credit. The trailing-twelve-month debt-to-cash-flow ratio was 0.80 to 1.0 and cash-flow-to-interest ratio was 25.5 to 1.0; the company reported compliance with its debt covenants.
- Distributions paid were $53.2 million, or $0.4375 per unit for the quarter, compared with $88.7 million and $0.6750 per unit in the prior-year quarter.
Material changes versus the prior comparable period
- Higher sales volumes and materially lower production costs per ton more than offset lower coal price realizations, driving substantial earnings and cash-flow growth.
- Appalachia benefited from increased Tunnel Ridge production and sales, improved recoveries and additional longwall production days.
- Illinois Basin results benefited from lower-cost longwall production and improved recoveries, although coal sales declined because of lower prices.
- Other and Corporate results improved because of higher Matrix Design and Mt. Vernon transloading revenue and $3.7 million of equity income from oil and gas mineral investments, versus a small loss in the prior-year period.
- The company entered into a new credit agreement on January 27, 2017. Subsequent to quarter-end, the revolving facility was amended and $400.0 million of 7.5% senior unsecured notes due 2025 were issued.
- Management stated that the new senior-note proceeds and cash on hand were used in part to repay revolving debt and would be used to repay the $50.0 million term loan and $145.0 million Series B notes in May 2017, including an approximately $8.9 million make-whole payment.
Guidance, outlook, commentary, risks and unusual items
- Management estimated 2017 capital expenditures of $145.0 million to $165.0 million and anticipated an additional $20.0 million to $30.0 million of investment in oil and gas mineral interests.
- Management expected to fund capital requirements through cash, operating cash flow, revolving and securitization facilities, and potential debt or equity financing, and stated that it did not currently anticipate liquidity constraints.
- The company’s quarterly distribution of $0.4375 per unit for the quarter ended March 31, 2017 was declared on April 28, 2017 and was payable May 15, 2017.
- Key risks include coal-price and demand volatility, customer concentration and contract renewals, utility and environmental regulation, mine operating interruptions, transportation constraints, labor and safety costs, reclamation and black-lung obligations, litigation, financing availability and performance of investments in oil and gas mineral interests.
- Various lawsuits, claims and regulatory proceedings were outstanding; management believed their ultimate outcome would not materially affect financial condition, results of operations or liquidity, although adverse outcomes exceeding recorded accruals could be material.
- The IRS began an administrative proceeding concerning the 2011 tax return of White Oak Resources LLC. The filing does not provide a clear estimate of any potential financial exposure.
- The company adopted certain accounting standards without material impact and expected the then-pending revenue-recognition standard to have no material financial-statement impact, although expanded disclosures would be required.
- Defined-benefit pension accruals ceased for participants effective January 31, 2017; previously accrued benefits were not affected.
Important facts for investors to verify
- Verify the post-quarter-end debt refinancing, including repayment of the term loan and Series B notes and the resulting maturity profile and interest burden.
- Assess whether the higher production volumes and lower unit costs are sustainable, particularly as coal prices and contract mix remain under pressure.
- Reconcile the $145.0 million to $165.0 million capital-expenditure outlook and the additional $20.0 million to $30.0 million mineral-investment commitment with projected operating cash flow and distributions.
- Review debt-covenant restrictions and their potential effect on distributions, investments and liquidity.
- Evaluate exposure to environmental, reclamation, workers’ compensation, pneumoconiosis, pension and mine-safety liabilities, as well as the White Oak IRS proceeding.
- Review related-party arrangements, including mineral leases, oil and gas investments, and financing relationships involving affiliates of the controlling ownership group.