Alliance Resource Partners, L.P. — 2Q 2014 Form 10-Q Summary
Business context and reporting period
Alliance Resource Partners, L.P. is a diversified eastern U.S. coal producer and marketer serving utilities and industrial customers. It operates reportable segments in the Illinois Basin, Appalachia, White Oak, and Other and Corporate. The unaudited filing covers the three and six months ended June 30, 2014, compared with the corresponding 2013 periods.
The company completed a two-for-one common-unit split on June 16, 2014; all unit counts and per-unit amounts in the filing are presented on a split-adjusted basis.
Financial performance and key metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total revenue | $598.6 million, up 8.1% | $1.141 billion, up 3.5% |
| Net income | $137.7 million, up 32.3% | $253.6 million, up 22.5% |
| Income from operations | $153.0 million | $282.5 million |
| Operating margin | Approximately 25.6% | Approximately 24.8% |
| Net margin | Approximately 23.0% | Approximately 22.2% |
| Net income per limited partner unit | $1.37, versus $0.98 | $2.47, versus $1.96 |
| Segment Adjusted EBITDA | $232.8 million, up 19.4% | $440.7 million, up 14.9% |
| Operating cash flow | Not separately provided | $379.4 million, versus $373.8 million |
Coal sales were $575.2 million in the second quarter and $1.101 billion for the six-month period. Tons sold increased 5.6% to 10.4 million in the quarter and 1.8% to 19.9 million for the six months. Average coal sales prices were $55.51 per ton in the quarter and $55.43 per ton for the six months.
As of June 30, 2014, cash and cash equivalents were $19.4 million, compared with $93.7 million at December 31, 2013. Total debt was $781.8 million, including $248.0 million classified as current, compared with $868.0 million at year-end. The revolving facility had $170.0 million drawn, $5.4 million of letters of credit outstanding, and $524.6 million available. The company was in compliance with its debt covenants; trailing-twelve-month debt to cash flow and cash flow to interest expense ratios were 1.05:1.0 and 21.5:1.0, respectively.
Partners received $154.9 million of distributions during the first six months. A quarterly distribution of $0.625 per unit, totaling approximately $79.9 million including incentive distributions, was declared on July 28, 2014 and payable August 14, 2014.
Material changes versus the prior comparable period
- Second-quarter and six-month net income reached filing-period records, driven primarily by higher sales volumes and improved operating performance.
- Appalachia was the principal operating improvement: second-quarter Segment Adjusted EBITDA increased 96.6% to $67.1 million, and six-month EBITDA increased to $116.0 million from $57.1 million. Tunnel Ridge and MC Mining benefited from improved productivity and geological conditions.
- Illinois Basin second-quarter EBITDA increased modestly to $165.9 million, but six-month EBITDA declined 0.7% to $329.5 million. Warrior’s transition to a new mining area, difficult conditions at Pattiki and Hopkins, and higher-cost Gibson South development production pressured costs.
- Operating expenses and outside coal purchases decreased 3.2% for the first six months to $675.1 million, while cost per ton sold declined to $34.00 from $35.74.
- Other sales and operating revenues increased to $17.6 million in the quarter and $28.0 million for the six months, primarily from higher White Oak throughput fees and customer payments in lieu of shipments.
- The company recognized a $4.4 million gain on the sale of most Pontiki assets and received $7.0 million of insurance proceeds related to the prior Onton mine geological event.
- White Oak remained loss-making, generating Segment Adjusted EBITDA of negative $4.9 million in the quarter and negative $8.9 million for the six months, although losses narrowed from 2013.
- Cash declined because operating cash flow was more than offset by capital expenditures, White Oak investments, distributions, and debt repayments. Net cash used in investing and financing activities was $208.8 million and $244.8 million, respectively.
Guidance, outlook, commentary, risks, and unusual items
- Management estimated 2014 capital expenditures of $320 million to $350 million, including Gibson South development, White Oak reserve acquisitions, infrastructure, and maintenance capital.
- Management also expected to fund approximately $80 million to $95 million of additional preferred equity investment in White Oak during 2014. White Oak funding commitments through December 31, 2015 were estimated at approximately $395.5 million to $425.5 million in total, including amounts already funded.
- Management stated that cash balances, operating cash flow, available revolver capacity, and potential debt or equity financing should be sufficient for anticipated requirements, but cautioned that weaker operating performance or reduced financing access could adversely affect liquidity.
- Near-term maturities included $18.0 million of senior notes due August 2014, $205.0 million of Series A notes due June 2015, and scheduled term-loan amortization. The Credit Facility matures in May 2017.
- Coal demand may be affected by environmental regulation, including the potential implementation of the Cross-State Air Pollution Rule and proposed carbon-emissions regulations for power plants. The filing states that the timing and ultimate impact remain uncertain.
- The final MSHA respirable coal-dust rule could increase compliance costs and operational requirements; litigation challenging the rule was pending.
- Other risks include coal prices and demand, customer contract performance and credit, mine accidents and geological disruptions, labor and reclamation liabilities, workers’ compensation and black-lung claims, pension assumptions, permitting, transportation, financing availability, and risks associated with the non-controlled White Oak investment.
- Various lawsuits, claims, and regulatory proceedings were pending. Management believed they would not have a material adverse effect, but an unfavorable outcome exceeding recorded accruals could be material.
- The IRS audit of Alliance Coal’s 2011 tax return remained ongoing; the filing describes it as a routine audit.
- The company adopted no material new accounting standard during the period. It was evaluating the future impact of revenue recognition standard ASU 2014-09, effective January 1, 2017.
Most important facts for investors to verify
- Whether Gibson South reaches targeted production and cost levels as development progresses.
- Whether Warrior, Pattiki, and Hopkins operating challenges improve and whether Appalachia’s productivity gains persist.
- White Oak’s construction progress, future funding requirements, operating losses, and ability to generate distributions or repay its construction loan.
- The company’s ability to fund substantial 2014 capital spending, White Oak investments, distributions, and upcoming debt maturities while maintaining adequate cash liquidity.
- Coal contract volumes, pricing adjustments, customer payment performance, and exposure to weaker coal demand.
- The ultimate effects and timing of CSAPR, carbon-emissions rules, MSHA dust regulations, and other environmental or mine-safety requirements.
- Potential changes in workers’ compensation, pneumoconiosis, pension, asset-retirement, and other long-term liabilities.
- The unusual contribution of the $4.4 million Pontiki asset-sale gain and $7.0 million of insurance proceeds to period results.