Alliance Resource Partners, L.P. — Q3 2011 Form 10-Q Summary
Business context and reporting period
Alliance Resource Partners, L.P. is a diversified producer and marketer of coal serving U.S. utilities and industrial users. It operates nine underground mining complexes, a coal loading terminal, and mines under development across the Illinois, Central Appalachian and Northern Appalachian regions. This unaudited Form 10-Q covers the three and nine months ended September 30, 2011, compared with the corresponding 2010 periods.
Financial performance and key metrics
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Total revenues | $487.7 million | $410.4 million | $1,369.0 million | $1,191.5 million |
| Coal sales | $473.7 million | $396.7 million | $1,323.9 million | $1,146.7 million |
| Income from operations | $112.1 million | $81.3 million | $323.1 million | $257.1 million |
| Operating margin | 23.0% | 19.8% | 23.6% | 21.6% |
| Net income | $104.1 million | $73.2 million | $297.7 million | $233.7 million |
| Net margin | 21.3% | 17.8% | 21.7% | 19.6% |
| Limited partner earnings per unit | $2.16 | $1.48 | $6.19 | $4.86 |
| Segment Adjusted EBITDA | $166.0 million | $133.7 million | $480.3 million | $404.0 million |
| Cash flow from operations | Not separately provided | Not separately provided | $432.3 million | $394.2 million |
- Q3 coal sales volumes increased 8.5% to 8.326 million tons; production increased to 7.644 million tons from 7.124 million tons.
- Average coal sales price increased to $56.89 per ton from $51.68 per ton. For the nine-month period, the average price was $55.73 per ton versus $50.86 per ton.
- Operating expenses and outside coal purchases rose 16.5% in Q3 and 13.4% for the nine-month period, with costs per ton sold increasing to $37.79 and $36.39, respectively.
- Cash and cash equivalents were $307.2 million at September 30, 2011, compared with $339.6 million at December 31, 2010.
- Total debt was $704.0 million, including $18.0 million of current maturities, compared with $722.0 million at year-end 2010. Estimated fair value was approximately $741.5 million.
- No borrowings were outstanding under the $142.5 million revolving credit facility; $130.9 million was available after $11.6 million of letters of credit.
- Distributions paid to partners were $159.8 million during the first nine months, compared with $137.6 million in the prior-year period. A quarterly distribution of $0.955 per unit was declared after quarter-end.
Material changes versus the prior comparable period
- Q3 net income increased 42.2%, and nine-month net income increased 27.4%, driven primarily by higher coal prices and increased sales volumes.
- Q3 Segment Adjusted EBITDA increased 24.2% to $166.0 million; nine-month Segment Adjusted EBITDA increased 18.9% to $480.3 million.
- Illinois Basin remained the largest contributor, with Q3 Segment Adjusted EBITDA of $127.2 million. Central Appalachia and Northern Appalachia also improved, helped by higher pricing and volumes, including stronger export-market pricing.
- Higher labor, materials, maintenance, regulatory compliance and mine-development costs partially offset the benefit of higher prices and volumes. Outside coal purchases increased materially to $19.9 million in Q3 from $5.7 million.
- Investing cash outflows increased to $284.1 million from $238.1 million, primarily because of the White Oak transactions. Financing cash outflows increased to $180.7 million from $157.1 million, principally because of higher partner distributions.
- Capital expenditures declined to $216.3 million for the nine months from $233.8 million, while net property, plant and equipment increased to $1.088 billion from $949.2 million at year-end.
Guidance, outlook, commentary, risks and unusual items
- Management estimated full-year 2011 capital expenditures of $420 million to $475 million, including the White Oak reserve acquisition.
- Management expected remaining capital needs to be funded with cash on hand, operating cash flow and revolving-credit availability and stated that it did not anticipate significant near-term liquidity constraints.
- On September 22, 2011, ARLP entered into White Oak transactions involving a $35.7 million equity investment, a $33.8 million reserve acquisition and other commitments. Total expected funding, including initial funding, was approximately $400 million to $525 million over three to four years.
- White Oak commitments include up to $106.2 million for additional reserves, up to $125.0 million in additional preferred equity, approximately $99.5 million for processing and rail facilities, a $10.5 million construction loan and a $100.0 million backstop equipment-financing commitment.
- Debt covenants required a debt-to-cash-flow ratio no higher than 3.0x and cash-flow-to-interest ratio no lower than 4.0x. Reported ratios were 1.23x and 16.5x, respectively, and ARLP was in compliance at September 30, 2011.
- Key risks include coal-price and demand changes, customer concentration and contract performance, mine accidents and interruptions, labor and geologic conditions, regulatory and environmental requirements, health-care and black-lung liabilities, reclamation and workers’ compensation obligations, insurance availability, financing access and White Oak execution risk.
- Workers’ compensation liabilities totaled $78.5 million, while pneumoconiosis liabilities totaled $57.6 million including current and long-term balances. The 2010 health-care legislation had increased the estimated black-lung obligation by $8.3 million at December 31, 2010.
- Various lawsuits, claims and regulatory proceedings were pending, but management believed their ultimate outcome would not materially affect financial condition, results of operations or liquidity; adverse outcomes exceeding recorded accruals could be material.
- The Pattiki mine returned to full production on January 3, 2011. The 2010 period included $1.2 million of expense related to the prior conveyor-system failure.
Important facts for investors to verify
- Whether higher coal prices and export exposure remain sustainable as contracts reset and market conditions change.
- Progress, total funding requirements, construction timing and expected returns for White Oak, Gibson South and Tunnel Ridge.
- Actual 2011 capital expenditures and the effect of planned spending on distributions, cash balances and leverage.
- Compliance with debt covenants and the maturity schedule for the $704.0 million debt balance, especially the term-loan amortization beginning in 2013.
- Trends in per-ton operating costs, regulatory-compliance spending, mine recoveries and outside coal purchases.
- Changes in black-lung, workers’ compensation, pension, reclamation and other long-term liabilities.
- MSHA enforcement and litigation developments; for Q3, the filing reported no fatalities, no Section 110(b)(2) violations and no Section 104(e) pattern-of-violations notices.
- The filing’s non-GAAP Segment Adjusted EBITDA measure and its reconciliation to GAAP net income when comparing ARLP with other issuers.