Alliance Resource Partners, L.P. — 2014 Q3 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 include ten underground mining complexes, a coal loading terminal, the developing Gibson South mine, and the White Oak longwall mining project. This unaudited Form 10-Q covers the three and nine months ended September 30, 2014, compared with the corresponding 2013 periods.
The partnership completed a two-for-one common-unit split on June 16, 2014; all unit counts and per-unit amounts in the filing reflect the split.
Financial Performance and Key Metrics
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Total revenues | $569.3 million | $537.2 million | $1.710 billion | $1.639 billion |
| Coal sales | $548.4 million | $518.4 million | $1.649 billion | $1.595 billion |
| Income from operations | $127.5 million | $98.0 million | $410.1 million | $325.9 million |
| Net income | $120.0 million | $87.2 million | $373.5 million | $294.2 million |
| Net income per limited partner unit | $1.13 | $0.75 | $3.59 | $2.71 |
| Segment Adjusted EBITDA | $214.8 million | $173.4 million | $655.4 million | $556.8 million |
| Cash flow from operations | Not separately provided | Not separately provided | $586.4 million | $550.4 million |
Operating margin was approximately 22.4% in Q3 2014 versus 18.2% in Q3 2013, and approximately 24.0% for the first nine months versus 19.9% in the prior-year period. Net margin was approximately 21.1% in Q3 2014 versus 16.2%, and 21.8% for the nine months versus 18.0%.
- Q3 tons sold increased 3.4% to 9.825 million, while tons produced increased to 10.219 million from 9.682 million.
- Q3 average coal sales price increased to $55.81 per ton from $54.55; operating expenses and outside coal purchases declined to $35.54 per ton from $36.48.
- Nine-month tons sold increased 2.3% to 29.682 million, and average coal sales price increased to $55.56 per ton from $54.95. Operating expenses and outside coal purchases declined to $34.51 per ton from $35.98.
- Q3 Appalachia Segment Adjusted EBITDA increased to $68.5 million from $19.5 million, while Illinois Basin EBITDA declined to $143.9 million from $156.8 million.
Liquidity, Capitalization and Distributions
| Balance sheet item | September 30, 2014 | December 31, 2013 |
|---|---|---|
| Cash and cash equivalents | $14.8 million | $93.7 million |
| Total debt | $757.5 million | $868.0 million |
| Current maturities of debt | $230.0 million | $36.8 million |
| Partners’ capital | $994.5 million | $851.2 million |
- The $700 million revolving credit facility had $170.0 million drawn, $5.4 million of letters of credit outstanding and $524.6 million available at September 30, 2014.
- The term loan balance was $237.5 million. Series A senior notes of $205.0 million mature in June 2015; Series B senior notes of $145.0 million mature in June 2018.
- The partnership reported compliance with debt covenants. Trailing-twelve-month debt to cash flow was 0.97x, versus a maximum of 3.0x, and cash flow to interest expense was 22.9x, versus a minimum of 3.0x.
- Operating cash flow of $586.4 million was more than offset by $315.4 million of investing outflows and $349.8 million of financing outflows, resulting in a $78.8 million decrease in cash.
- Distributions paid during the first nine months were $235.3 million. A quarterly distribution of $0.6375 per unit, totaling approximately $81.8 million including incentive distributions, was declared for the September 30, 2014 quarter.
Material Changes Versus the Prior Comparable Period
- Revenue and earnings growth reflected higher volumes, higher coal prices, improved production at Tunnel Ridge, MC Mining and Onton, and initial Gibson South production.
- Appalachia performance improved substantially due to higher volumes, improved productivity and better geological conditions. Illinois Basin performance weakened because of lower recoveries and difficult mining conditions at several mines, including Warrior, Pattiki and Hopkins.
- Operating costs benefited from the closure of the higher-cost Pontiki mine, favorable Onton insurance proceeds, the absence of prior-year Onton asset retirements and lower costs at certain Appalachian operations.
- Interest expense increased to $8.6 million in Q3 and $25.4 million for the nine months, primarily because of lower capitalized interest and increased revolving-credit borrowings, partly offset by debt repayments.
- White Oak equity losses declined to $13.8 million for the nine months from $16.3 million, but the project remained loss-making. White Oak’s initial longwall system commenced operation in late October 2014.
Guidance, Outlook, Commentary and Risks
- Management estimated full-year 2014 capital expenditures of $320 million to $350 million and expected to fund approximately $100 million to $115 million of additional preferred equity investment in White Oak during 2014.
- White Oak funding from inception through September 30, 2014 totaled $303.3 million. Total funding from inception through December 31, 2015 was expected to reach approximately $395.5 million to $435.5 million, subject to additional funding needs.
- Management stated that existing cash, operating cash flow, available credit and potential debt or equity financing were expected to satisfy foreseeable requirements, while noting that liquidity depends on operating performance and financing-market access.
- Key risks include coal demand and pricing, customer contract performance, environmental and mine-safety regulation, permitting, geological and operational interruptions, labor and benefit costs, reclamation and workers’ compensation obligations, insurance availability, and financing access.
- Potential implementation of CSAPR and proposed carbon-emissions regulations could reduce coal-fired generation and demand. MSHA’s respirable coal-dust rule was being challenged, and its effect remained under evaluation.
- Various lawsuits, claims and regulatory proceedings were pending. Management did not expect a material adverse outcome based on currently known facts, but losses exceeding recorded accruals could materially affect results.
- The IRS audit of Alliance Coal’s 2011 tax return remained ongoing; the filing characterizes it as a routine audit and does not provide a clear quantified exposure.
Important Facts for Investors to Verify
- Verify the timing and financing plan for the $230 million of current debt maturities, including the $205 million Series A notes due in June 2015.
- Assess whether operating cash flow and available revolver capacity can fund distributions, capital expenditures and the remaining White Oak commitments while cash was only $14.8 million at quarter-end.
- Review White Oak’s operating ramp-up after the late-October 2014 longwall start, future funding requirements and the effect of its preferred-equity accounting losses.
- Monitor Illinois Basin mine recoveries and geological conditions, particularly at Warrior, Pattiki, Hopkins and Gibson South.
- Evaluate the effects of environmental, mine-safety and carbon regulations on utility customers and long-term coal demand.
- Confirm the impact of the Pontiki asset sale, Onton insurance proceeds and other unusual items when assessing sustainable earnings and cash flow.