Alliance Resource Partners, L.P. — Fiscal 2011 Form 10-K Summary
Business context and reporting period
Alliance Resource Partners, L.P. is a diversified eastern U.S. coal producer and marketer serving primarily electric utilities and industrial users. This Form 10-K covers the fiscal year ended December 31, 2011, including fourth-quarter results. The partnership operated ten underground mining complexes and held approximately 911.4 million tons of proven and probable reserves, including 204.9 million tons leased to White Oak Resources.
- 2011 production: 30.8 million tons; sales: 31.9 million tons.
- Sales mix: 90.6% of tons to electric utilities; 92.2% of sales tonnage under long-term contracts.
- Regional production: Illinois Basin 25.5 million tons, Central Appalachia 2.5 million tons, and Northern Appalachia 2.8 million tons.
Financial performance and key metrics
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Total revenues | $1,843.6 million | $1,610.1 million | +14.5% |
| Coal sales | $1,786.1 million | $1,551.5 million | +15.1% |
| Income from operations | $412.9 million | $351.8 million | +17.4% |
| Net income attributable to ARLP | $389.4 million | $321.0 million | +21.3% |
| Net income per limited partner unit | $8.13 | $6.68 | +21.7% |
| EBITDA | $570.8 million | $499.5 million | +14.3% |
| Net cash from operating activities | $574.0 million | $520.6 million | +10.3% |
| Capital expenditures | $321.9 million | $289.9 million | +11.1% |
| Cash and cash equivalents | $273.5 million | $339.6 million | -19.5% |
| Total debt, including current maturities | $704.0 million | $722.0 million | -2.5% |
| Working capital | $269.3 million | $348.7 million | -22.8% |
Reported operating margin was approximately 22.4%, compared with 21.8% in 2010. Net margin was approximately 21.1%, compared with 19.9%. EBITDA margin was approximately 31.0% in both years. Revenue per ton sold increased to $56.75 from $52.04, while cost per ton sold increased to $38.79 from $35.58.
Cash flow was strong but was exceeded by investing and financing outflows. Investing cash use was $401.1 million, primarily for capital expenditures and White Oak investments. Financing cash use was $238.9 million, including $217.9 million of distributions and $18.0 million of debt repayment. Distributions paid per unit increased to $3.6275 from $3.2050.
Fourth-quarter 2011 results
- Revenue was $474.6 million, compared with $418.6 million in fourth-quarter 2010.
- Net income was $91.7 million, compared with $87.4 million.
- Net income per limited partner unit was $1.93, compared with $1.82.
- Income from operations declined to $89.9 million from $94.6 million, and operating margin declined to approximately 18.9% from 22.6%.
- Fourth-quarter comparability was affected by favorable workers’ compensation actuarial developments and an $11.2 million reduction in interest expense from correcting the capitalized-interest rate, of which $9.4 million related to prior years. Management concluded the correction was not material to prior periods or reported trends.
Material changes versus the prior comparable period
- Coal sales growth reflected a $4.74 increase in average coal sales price to $55.95 per ton and a 5.4% increase in tons sold.
- Production growth was driven primarily by River View expansion, the return of Pattiki to full production on January 3, 2011, and increased brokerage activity.
- Operating expenses and outside coal purchases increased 15.5%; cost per ton increased 9.6% to $37.15. Labor, materials, maintenance, regulatory costs, mine development and outside coal purchases were key pressures.
- Outside coal purchases rose to $54.3 million from $17.1 million, primarily because of increased brokerage activity and higher Mettiki purchases.
- Segment Adjusted EBITDA increased 13.2% to $623.2 million. Illinois Basin contributed $505.1 million, Central Appalachia $53.7 million, Northern Appalachia $62.4 million, and White Oak incurred a $4.4 million loss.
- Central Appalachia improved despite a 24-day fourth-quarter idling of the Pontiki mine following a dispute with federal regulators; one production unit remained idled thereafter.
- The partnership entered into White Oak transactions in September 2011, investing $69.5 million initially and funding an additional $24.0 million by year-end. White Oak generated no distributions and allocated $4.3 million of losses to ARLP.
Guidance, outlook, management commentary and risks
- Management projected 2012 capital expenditures of $400 million to $425 million, excluding White Oak commitments, funded through cash, operating cash flow, revolver borrowings, and potential debt or equity issuance.
- Expected average annual maintenance capital expenditures over the following five years were approximately $5.50 per ton produced; estimated 2012 operating capital requirements were approximately $7.50 per ton.
- Management expected to fund approximately $248.1 million to White Oak in 2012 and $147.4 million in 2013. Total additional White Oak funding commitments were estimated at $306.5 million to $431.5 million over three to four years.
- Tunnel Ridge longwall production was expected to begin in the second quarter of 2012, with estimated annual capacity of 6.5 to 6.8 million tons. Gibson South was expected to begin production in the third quarter of 2014 and reach approximately 3.0 to 3.5 million tons of annual capacity in 2015.
- The $142.5 million revolving credit facility matured September 25, 2012; $130.9 million was available at year-end after outstanding letters of credit, and no revolver borrowings were outstanding.
- Debt covenants were satisfied at year-end. Debt-to-cash-flow was 1.2x against a maximum of 3.0x, and cash-flow-to-interest was 16.1x against a minimum of 4.0x.
- Key risks include coal-price and demand volatility, substitution by natural gas and renewable energy, environmental and greenhouse-gas regulation, permitting delays, mine safety enforcement, transportation disruptions, labor and geologic conditions, customer concentration, surety-bond availability, reclamation and workers’ compensation liabilities, and access to financing.
- Two customers accounted for approximately 26.1% of 2011 revenue. The partnership had $143.6 million of undiscounted reclamation obligations and $319.3 million of undiscounted workers’ compensation and pneumoconiosis commitments.
- Management stated that existing liquidity and expected cash generation should satisfy foreseeable requirements, but acknowledged that lower operating cash flow or more difficult financing conditions could constrain liquidity.
Most important facts for an investor to verify
- Whether 2012 coal pricing, contracted volumes, production levels and utility demand support the 2011 earnings and distribution trajectory.
- The refinancing or replacement of the revolving credit facility before its September 2012 maturity.
- Actual capital spending and funding requirements for White Oak, Tunnel Ridge and Gibson South, including the effect on distributions and leverage.
- Progress on Tunnel Ridge longwall production and the timing, cost and permitting of Gibson South and other development projects.
- Changes in environmental, mine-safety, water-permitting and greenhouse-gas rules that could reduce coal demand or increase operating costs.
- Development of reclamation, workers’ compensation, black lung and pension liabilities, including sensitivity to discount-rate changes.
- Customer concentration, contract repricing or termination provisions, transportation availability, and the ability of customers to honor purchase commitments.
- The February 2012 agreement to acquire substantially all coal-related assets of Green River Collieries, including approximately 40.0 million tons of estimated reserves, and its final closing terms.