Alliance Resource Partners, L.P. — 2019 First-Quarter Form 10-Q
Reporting period: Three months ended March 31, 2019; filed May 6, 2019. ARLP is a diversified U.S. natural-resource company producing and marketing coal and holding oil and gas mineral interests. Its reportable segments are Illinois Basin, Appalachia and Minerals.
Financial performance and key metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenues | $526.6 million | $457.1 million | 15.2% increase |
| Coal sales | $476.0 million | $423.6 million | 12.4% increase |
| Royalty revenues | $10.7 million | — | New after AllDale consolidation |
| Income from operations | $104.7 million | $160.2 million | 34.7% decrease |
| Net income attributable to ARLP | $276.4 million | $155.9 million | 77.3% increase |
| Net income per limited partner unit | $2.12 | $1.16 | 82.8% increase |
| Operating cash flow | $143.7 million | $224.2 million | 35.9% decrease |
| Capital expenditures | $84.0 million | $51.5 million | 63.1% increase |
| Cash and equivalents | $30.2 million | $244.2 million at Dec. 31, 2018 | Decrease |
Coal tons sold increased 9.8% to 10.3 million, while tons produced increased 8.0% to 11.3 million. Average coal sales price increased to $46.12 per ton from $45.07. Consolidated Segment Adjusted EBITDA, a non-GAAP measure, increased 25.1% to $206.6 million from $165.2 million.
The reported operating margin was approximately 19.9%, compared with 35.1% in the prior-year quarter, primarily because Q1 2018 included an $80.0 million litigation settlement gain. Reported net margin increased to approximately 53.9% from 34.1%, but Q1 2019 included a $177.0 million acquisition-related gain and a $12.9 million equity-securities gain, including an $11.5 million Kodiak redemption gain.
Liquidity, debt and capital allocation
- Debt principal totaled $515.0 million at March 31, 2019, consisting of $25.0 million under the revolving credit facility, $400.0 million of 7.5% senior notes due 2025 and $90.0 million under the accounts-receivable securitization facility. Carrying value of debt, net of discounts and issuance costs, was $504.8 million.
- The revolving facility had $460.5 million available, after $9.3 million of letters of credit, and matures May 23, 2021. The securitization facility was renewed in January 2019 and matures in January 2020.
- Trailing-twelve-month debt-to-cash-flow and cash-flow-to-interest ratios were 0.81-to-1.0 and 16.6-to-1.0, respectively; ARLP reported compliance with its credit covenants.
- Cash used in investing activities was $116.0 million, including $175.1 million paid for the AllDale acquisition, partially offset by $134.3 million received from redemption of equity securities. Cash used in financing activities was $241.7 million, including net debt repayments, $69.0 million of partner distributions and $5.3 million of unit repurchases.
- The quarterly distribution was $0.530 per unit, and a $0.535 per-unit distribution was declared on April 26, 2019 for payment May 15, 2019. The unit repurchase program had $24.2 million remaining after Q1 repurchases.
Material changes versus the prior comparable period
- On January 3, 2019, ARLP acquired the remaining limited partner interests not already owned and the general partner interests in AllDale I and II for approximately $176.0 million. Including prior investments, ARLP controls approximately 43,000 net royalty acres and approximately 97% of the AllDale limited partner interests.
- The acquisition produced $10.7 million of royalty revenue and $4.1 million of net income during the quarter and generated a $177.0 million remeasurement/acquisition gain. The Minerals segment was established in Q1 2019, with prior periods recast for comparison.
- Kodiak redeemed ARLP’s preferred interest for $135.0 million on February 8, 2019. ARLP recorded an $11.5 million early-redemption gain and no longer owns an interest in Kodiak.
- Coal performance improved operationally: Illinois Basin Segment Adjusted EBITDA increased 28.6% to $122.0 million and Appalachia increased 9.4% to $58.7 million. Coal Segment Adjusted EBITDA Expense per ton declined to $29.17 from $29.74.
- Operating cash flow declined because Q1 2018 included a one-time $93.0 million litigation settlement receipt, in addition to unfavorable working-capital changes in 2019.
- ARLP adopted the new lease standard on January 1, 2019, recognizing approximately $25.0 million of additional net lease assets and corresponding liabilities.
Guidance, outlook, commentary and risks
- Management projects 2019 total capital expenditures, including investments, of $360 million to $400 million. Average estimated annual maintenance capital expenditures for 2019–2023 are approximately $5.57 per ton produced.
- ARLP expects to spend approximately $45 million to $50 million over the next 12 to 18 months on MC Mining’s Excel Mine No. 5, including $40 million to $45 million in 2019. The project is expected to access approximately 15 million tons of reserves and support a transition as the Excel Mine No. 4 reserves deplete in 2020.
- Management stated that current cash, operating cash flow, investments and available financing are expected to meet working-capital, capital-expenditure, debt-service and distribution needs, but cautioned that liquidity depends on operating performance and financing access.
- Key risks include coal, oil and gas price volatility; declining coal demand and regulatory or environmental changes; customer defaults or reduced contract nominations; mining, geological, labor, transportation and weather disruptions; reclamation, workers’ compensation and black-lung obligations; reserve-estimation uncertainty; interest-rate exposure on variable-rate debt; and litigation or regulatory outcomes.
- Various lawsuits and regulatory proceedings are pending. Management believes they will not materially affect financial condition, results or liquidity, although unfavorable outcomes exceeding recorded accruals could be material.
- Disclosure controls were deemed effective as of March 31, 2019. Integration of AllDale’s internal controls was ongoing, with completion expected in the first quarter of 2020.
Important facts for investors to verify
- Separate recurring operating earnings and cash generation from the $177.0 million AllDale acquisition gain, the $11.5 million Kodiak redemption gain and the prior-year $80.0 million settlement gain.
- Assess the sustainability of coal volumes, prices and per-ton costs, including performance at Gibson North, River View, Tunnel Ridge and the Excel Mine No. 5 development.
- Reconcile the substantial decline in cash to $30.2 million with the acquisition, capital spending, distributions and debt repayments, and monitor the January 2020 securitization-facility maturity.
- Evaluate coverage of the $360 million to $400 million 2019 capital program, quarterly distributions and remaining unit repurchase authorization.
- Review AllDale valuation assumptions, including projected production, oil and gas prices, discount rates and other Level 3 inputs.
- Monitor related-party arrangements, including WKY CoalPlay leases and the Cavalier Credit Facility, whose lender is affiliated with ARLP’s controlling management interests.