Alliance Resource Partners, L.P. — Q2 2010 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 users. It operates in the Illinois Basin, Central Appalachia and Northern Appalachia, and is developing the Tunnel Ridge mining complex. This unaudited Form 10-Q covers the three and six months ended June 30, 2010, compared with the corresponding 2009 periods.
Key financial metrics
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Total revenues | $400.3 million | $303.9 million | $781.0 million | $633.2 million |
| Coal sales | $385.9 million | $287.6 million | $750.1 million | $599.9 million |
| Income from operations | $93.0 million | $48.6 million | $175.8 million | $128.8 million |
| Net income attributable to ARLP | $85.5 million | $41.5 million | $160.4 million | $114.0 million |
| Net income per limited partner unit | $1.82 | $0.72 | $3.38 | $2.28 |
| Operating cash flow | Not separately provided | Not separately provided | $258.9 million | $164.3 million |
| Capital expenditures | Not separately provided | Not separately provided | $174.8 million | $174.7 million |
Q2 operating margin was approximately 23.2%, compared with 16.0% in the prior-year quarter. Six-month operating margin was approximately 22.5%, compared with 20.3%. Net margin attributable to ARLP was approximately 21.3% in Q2 and 20.5% for the six-month period.
- Q2 tons sold increased 19.9% to 7.5 million, while tons produced increased to 6.9 million from 6.3 million.
- Average coal sales price rose to $51.53 per ton in Q2 from $46.04, and to $50.44 per ton for six months from $47.33.
- Segment Adjusted EBITDA, a non-GAAP measure, increased 62.7% to $140.6 million in Q2 and 32.6% to $270.3 million for six months.
- Cash and cash equivalents declined to $9.7 million at June 30, 2010, from $21.6 million at December 31, 2009.
- Total debt was $445.0 million, including $18.0 million of current maturities, compared with $440.0 million at year-end 2009. Net revolver borrowings were $5.0 million.
- The $150.0 million revolving credit facility had $125.9 million available after $11.6 million of letters of credit and $5.0 million of net borrowings.
- Debt-to-cash-flow and cash-flow-to-interest ratios were 1.08-to-1 and 13.1-to-1, respectively, versus covenant limits of 3.0-to-1 and a minimum of 4.0-to-1. Management reported compliance with debt covenants.
- Distributions paid to partners were $90.4 million during the first six months, versus $81.4 million in the prior-year period. A subsequent quarterly distribution of $0.81 per unit was declared on July 26, 2010.
Material changes versus the prior comparable period
- Results benefited from higher contract pricing, record sales volumes and increased production from the River View mine, which began operations in 2009.
- Illinois Basin Q2 Segment Adjusted EBITDA rose 50.5% to $115.9 million; Northern Appalachia increased to $14.1 million from $1.6 million, supported by stronger export demand. Central Appalachia Q2 EBITDA increased 44.9%, but its six-month EBITDA declined 31.1% because of lower volumes, regulatory oversight and an idled Pontiki unit.
- Operating expenses increased 20.7% in Q2 and 21.2% for six months. Materials, supplies, fuel, regulatory costs, labor and higher-cost beginning inventory contributed to the increase.
- Depreciation, depletion and amortization increased to $35.7 million in Q2 and $72.0 million for six months, primarily reflecting investment in River View and other infrastructure and capacity projects.
- MAC was deconsolidated effective January 1, 2010 under revised variable-interest-entity guidance. Management stated that the change did not materially affect the consolidated financial statements.
Guidance, outlook, risks and unusual items
- Management estimated 2010 capital expenditures of $285 million to $325 million, with remaining needs expected to be funded through operating cash flow, cash, revolver availability and, if necessary, debt or equity markets.
- Management stated that it did not anticipate significant liquidity constraints, but noted dependence on operating performance, financing access and financing costs.
- The Pattiki mine was temporarily idled on May 13, 2010 after a vertical hoist conveyor failure. Q2 operating expenses included a $1.2 million asset-retirement charge. Limited production resumed July 19, 2010; insurance recovery amounts and timing remained uncertain.
- The company faces coal-price, demand, customer-contract, transportation, labor, environmental, permitting, regulatory, mine-safety, reclamation, workers’ compensation and litigation risks.
- Health-care legislation could increase health-care and Black Lung costs; management could not yet estimate the legislation’s full effect. Black Lung liabilities were $36.2 million at June 30, 2010, and workers’ compensation liabilities totaled $70.1 million.
- A royalty dispute involving White County Coal alleges damages of $33 million or more plus punitive damages. The company accrued no loss and believes the claims lack merit. The ultimate outcome remains uncertain.
- Two miners were fatally injured in a roof-fall accident at the Dotiki mine on April 28, 2010. The company reported 249 safety citation contests pending before administrative law judges and proposed MSHA assessments disclosed in the filing.
- Lehman Commercial Paper, holding a $7.5 million revolver commitment, declined to fund its share of a February 2010 borrowing. Availability was reduced by that amount, and the company was negotiating to remove Lehman as a commitment holder.
Important facts for investors to verify
- Whether Pattiki returned to full reliable production and the amount and timing of any insurance recovery.
- Actual 2010 capital expenditures versus the $285 million to $325 million estimate and the resulting effect on cash and debt.
- Coal contract pricing, realized prices, volumes and export demand, particularly in Central and Northern Appalachia.
- Compliance with debt covenants, revolver availability and refinancing or repayment requirements for the $18.0 million annual senior-note maturities.
- Potential changes in Black Lung, workers’ compensation, health-care and environmental liabilities.
- Developments in the White County royalty dispute, greenhouse-gas litigation and mine-safety proceedings.
- The effect of the MAC deconsolidation and related-party balances, including the $1.7 million amount owed by MAC to ARLP.