Alliance Resource Partners, L.P. — 2012 Q1 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 operated eleven underground mining complexes, a coal loading terminal, and development projects including Tunnel Ridge and White Oak. The filing covers the unaudited three months ended March 31, 2012, compared with the three months ended March 31, 2011.
Financial performance and liquidity
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Total revenue | $443.6 million | $423.3 million | Up 4.8% |
| Coal sales | $429.6 million | $407.7 million | Up 5.4% |
| Income from operations | $92.0 million | $103.8 million | Down 11.4% |
| Net income | $83.0 million | $95.4 million | Down 13.0% |
| Net income per limited partner unit | $1.54 | $1.99 | Down 22.6% |
| Operating margin | 20.7% | 24.5% | Down 3.8 percentage points |
| Net margin | 18.7% | 22.5% | Down 3.8 percentage points |
| Operating cash flow | $114.8 million | $120.8 million | Down 5.0% |
| Capital expenditures | $105.3 million | $63.8 million | Up 65.0% |
| Segment Adjusted EBITDA | $145.7 million | $154.6 million | Down 5.8% |
Coal volumes sold increased to 7.812 million tons from 7.538 million tons, while production increased to a record 8.512 million tons from 8.220 million tons. The average coal sales price increased to $54.99 per ton from $54.08 per ton. Operating expenses and outside coal purchases increased to $287.7 million from $259.9 million, or to $36.83 per ton sold from $34.48.
Cash and cash equivalents were $189.0 million at March 31, 2012, down from $273.5 million at December 31, 2011. Net cash used in investing activities was $134.9 million, including capital expenditures, $18.0 million of White Oak development funding, and a $4.4 million White Oak equity investment. Net cash used in financing activities was $64.5 million, including $60.7 million of partner distributions.
Total debt was $704.0 million before current maturities, consisting of senior notes, 2008 senior notes, and a $300.0 million term loan. The company had no borrowings under its $142.5 million revolving credit facility, $130.9 million available for borrowing, and $11.6 million of outstanding letters of credit. Debt fair value was approximately $748.4 million. The trailing-twelve-month debt-to-cash-flow ratio was 1.22-to-1 and cash-flow-to-interest ratio was 16.2-to-1; the company was in compliance with its debt covenants.
Material changes versus the prior comparable period
- Revenue increased because of higher coal volumes and pricing, but profitability declined as costs rose faster than revenue.
- Operating expenses increased because of higher labor and benefit costs, materials and supplies, maintenance, regulatory costs, Tunnel Ridge development, and higher outside coal purchases.
- Interest expense declined to $5.9 million from $9.3 million, principally because of lower debt and increased capitalized interest.
- White Oak generated a $4.0 million allocated equity loss and produced negative Segment Adjusted EBITDA of $4.1 million; it had no coal sales during the quarter.
- Northern Appalachia Segment Adjusted EBITDA fell to $0.3 million from $10.3 million, primarily because of delayed export shipments, lower volumes, and higher costs.
- Illinois Basin Segment Adjusted EBITDA increased to $136.9 million from $130.7 million, supported by higher volumes and pricing.
- The quarterly distribution paid increased to $0.99 per unit from $0.86 per unit.
Guidance, outlook, commentary, risks, and unusual items
Management estimated 2012 capital expenditures of $565 million to $610 million, including approximately $95 million to $110 million for White Oak-related reserves, development, and surface facilities, as well as the April 2012 Onton No. 9 acquisition. Management expected to fund requirements with cash, operating cash flow, and available financing, but noted that additional debt or equity capital may be required over the long term.
Management stated that it did not anticipate significant liquidity constraints in the foreseeable future, while noting that liquidity could be adversely affected by weaker operating cash flow or reduced access to financing. The revolving credit facility matured September 25, 2012.
White Oak commitments were significant: approximately $330.5 million to $455.5 million of additional funding over three to four years, of which $124.0 million had been funded through March 31, 2012. Additional commitments included $99.5 million for processing and rail facilities, a $10.5 million construction loan, and up to $100.0 million of equipment financing.
On April 2, 2012, the company acquired substantially all of Green River Collieries' coal-related assets, including the Onton No. 9 mining complex and an estimated 40.0 million tons of reserves. The acquisition-date fair values were not yet finalized. On April 30, 2012, the company declared a $1.025 per-unit distribution for the March 2012 quarter, totaling approximately $63.0 million.
Key risks included coal price and demand changes, customer concentration and defaults, export and transportation delays, mining and geological conditions, labor and benefit costs, mine safety and regulatory requirements, environmental and carbon regulation, reclamation and workers' compensation liabilities, pension and black-lung obligations, financing availability, and risks associated with the White Oak investment. Pending lawsuits and regulatory proceedings were not expected by management to have a material adverse effect, although larger-than-accrued outcomes could be material.
Facts investors should verify
- Progress, funding requirements, construction costs, and operating start-up for White Oak and Tunnel Ridge.
- Final accounting and purchase price allocation for the Onton No. 9 acquisition.
- Renewal, refinancing, or replacement of the revolving credit facility maturing in September 2012.
- Whether rising labor, materials, maintenance, regulatory, and purchased-coal costs normalize or continue to pressure margins.
- Export shipment timing and Northern Appalachia production and pricing trends.
- Actual 2012 capital spending relative to the $565 million–$610 million estimate and available liquidity after distributions.
- Exposure to mine safety, environmental, reclamation, workers’ compensation, pneumoconiosis, pension, and litigation liabilities.