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. It operates nine underground mining complexes and a coal loading terminal, with reportable segments in the Illinois Basin and Appalachia. This unaudited Form 10-Q covers the three and six months ended June 30, 2016, compared with the corresponding 2015 periods.
Financial Performance and Liquidity
| Metric | Q2 2016 | Q2 2015 | Six Months 2016 | Six Months 2015 |
|---|---|---|---|---|
| Total revenue | $439.2 million | $604.7 million | $852.0 million | $1.165 billion |
| Coal sales | $422.5 million | $567.3 million | $823.8 million | $1.085 billion |
| Operating income | $90.4 million | $124.5 million | $145.2 million | $248.0 million |
| Net income | $82.7 million | $94.9 million | $130.0 million | $201.3 million |
| Net income attributable to ARLP | $82.7 million | $94.9 million | $130.0 million | $201.3 million |
| Net income per limited partner unit | $0.82 | $0.76 | $1.18 | $1.68 |
| Segment Adjusted EBITDA | $187.3 million | $199.9 million | $340.3 million | $408.9 million |
| Cash flow from operating activities | Not separately provided | Not separately provided | $212.3 million | $338.9 million |
| Capital expenditures | Not separately provided | Not separately provided | $48.6 million | $107.8 million |
Calculated margins were approximately 20.6% operating and 18.8% net in Q2 2016, compared with 20.6% and 15.7%, respectively, in Q2 2015. For the six-month period, operating and net margins were approximately 17.0% and 15.3%, compared with 21.3% and 17.3% in 2015. Segment Adjusted EBITDA margin was approximately 42.7% for Q2 and 40.0% for the six-month period.
- Coal volume declined to 7.964 million tons in Q2 and 15.420 million tons for the six-month period, down 24.0% and 22.8%, respectively, from the comparable 2015 periods.
- Average coal sales prices were $53.05 per ton in Q2 and $53.42 per ton for the six-month period, compared with $54.13 and $54.30, respectively, in 2015.
- Cash and cash equivalents were $50.4 million at June 30, 2016, compared with $33.4 million at December 31, 2015.
- Total debt principal was $832.5 million, including $450.0 million drawn on the revolving facility, $150.0 million under the term loan, $145.0 million of Series B senior notes and $87.5 million under the accounts receivable securitization facility. Reported debt carrying value was approximately $831.3 million.
- The company had $244.1 million available under the revolving credit facility, after $5.9 million of letters of credit. It also had $30.7 million of letters of credit outstanding under separate bank agreements.
- Debt-to-cash-flow and cash-flow-to-interest ratios were 1.37 to 1.0 and 22.7 to 1.0, respectively, versus covenant limits of 3.0 to 1.0 and not less than 3.0 to 1.0. The company was in compliance with its debt covenants.
- Distributions paid were $141.8 million during the first six months, or $1.1125 per limited partner unit. A $0.4375 per-unit distribution for the quarter ended June 30, 2016 was declared after quarter-end.
Material Changes Versus the Prior Comparable Period
- Revenue fell 27.4% in Q2 and 26.9% for the six-month period, principally because of lower tons sold, lower coal prices and reduced other operating revenue.
- Net income declined 12.8% in Q2 and 35.4% for the six-month period. Six-month Segment Adjusted EBITDA decreased 16.8%.
- Production and sales were reduced in response to weak market conditions. Onton and Gibson North remained idled, Elk Creek depleted its reserves and ceased production on April 1, 2016, and River View and certain Appalachia operations reduced activity.
- Operating expenses and outside coal purchases declined 34.3% in Q2 and 29.6% for the six-month period. Per-ton costs also improved because of a lower-cost production mix, improved productivity and reduced production at higher-cost operations.
- The Hamilton mine, acquired through the 2015 White Oak transaction, contributed additional consolidated volume but had lower-priced legacy contracts. White Oak-related equity losses no longer occurred after Hamilton was consolidated, reducing equity losses from $22.1 million to $37,000 in Q2 and from $31.8 million to $64,000 for the six-month period.
- Other sales and operating revenues declined 62.2% in Q2 and 75.2% for the six-month period, primarily because coal royalty and surface-facility revenues from White Oak were no longer recognized and Matrix Design sales were lower.
- Coal inventory was written down by $18.9 million during the first six months, including $6.6 million in Q2, due to lower selling prices and higher cost per ton, particularly at Hamilton.
- Capital expenditures decreased substantially, while investing activity included $33.2 million of purchases of equity investments in affiliates during the first six months.
- On June 29, 2016, the company completed additional mining-equipment sale-leaseback transactions, receiving $33.9 million and recording a $7.6 million deferred loss to be amortized over the lease terms.
Guidance, Outlook, Risks and Unusual Items
- Management estimated 2016 capital expenditures of $100 million to $110 million and expected approximately $80 million to $85 million of additional investment related to oil and gas mineral interests.
- Management stated that existing cash, operating cash flow, credit facilities, sale-leaseback transactions and potential debt or equity issuance were expected to fund working capital, capital expenditures, investments, debt service, commitments and distributions. It stated that no current liquidity constraint was anticipated, but acknowledged that weaker operating results or financing access could adversely affect liquidity.
- Management was finalizing plans to extend the revolving credit facility, which matures May 23, 2017. The cost and availability of the extension could be affected by weakness in the energy and coal sectors.
- The accounts receivable securitization facility, with $87.5 million outstanding at June 30, 2016, matures in December 2016.
- ARLP had a remaining commitment of $49.8 million to fund Cavalier Minerals, which invests in oil and gas mineral interests. Management expected to use cash flow, existing cash, credit facilities, debt or equity issuance, or Cavalier’s undrawn $100 million credit facility to fund the commitment.
- Principal risks include weak coal demand and prices, customer inventory levels, customer contract performance, mine idling and production interruptions, regulatory and environmental requirements, mine safety, reclamation and workers’ compensation obligations, pension and black-lung liabilities, financing availability, and potential adverse performance of oil and gas mineral investments.
- Various lawsuits, claims and regulatory proceedings were pending. Management believed their ultimate outcome would not materially affect financial condition, results or liquidity, but adverse outcomes exceeding recorded accruals could be material.
- The company disclosed an IRS notice initiating an administrative proceeding concerning White Oak’s 2011 income tax return; the filing does not provide a clear quantified exposure.
- Management identified no material changes to previously disclosed risk factors and concluded that disclosure controls were effective as of June 30, 2016.
Important Facts for Investors to Verify
- Whether the revolving credit facility was successfully extended before its May 2017 maturity and on what pricing and covenant terms.
- Whether the accounts receivable securitization facility was renewed or replaced before its December 2016 maturity.
- Actual 2016 coal volumes, realized prices, inventory levels and the sustainability of reported per-ton cost reductions.
- The remaining funding requirements and operating performance of Cavalier Minerals and its AllDale oil and gas mineral investments.
- The effect of the $18.9 million coal inventory write-down, deferred sale-leaseback loss and future capital-lease obligations on cash flow and earnings.
- Potential outcomes and financial exposure from the White Oak IRS proceeding, litigation, mine-safety matters, reclamation obligations and workers’ compensation or black-lung claims.
- Coverage of distributions by operating cash flow after capital expenditures, affiliate investments and required debt repayments.