Alliance Resource Partners, L.P. — Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three and six months ended June 30, 2017, with comparisons to the corresponding 2016 periods. ARLP is a diversified producer and marketer of coal serving U.S. utilities and industrial users, with reportable segments in the Illinois Basin and Appalachia. It also has oil and gas mineral investments, transportation, mining technology and other activities.
Key financial metrics
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenues | $398.7 million | $439.2 million | $859.8 million | $852.0 million |
| Coal sales | $382.3 million | $422.5 million | $821.0 million | $823.8 million |
| Income from operations | $78.8 million | $90.4 million | $186.3 million | $145.2 million |
| Net income attributable to ARLP | $63.2 million | $82.7 million | $168.1 million | $130.0 million |
| Net income per limited partner unit | $0.82 | $0.82 | $1.93 | $1.18 |
| Segment Adjusted EBITDA | $156.0 million | $181.8 million | $349.7 million | $324.6 million |
| Operating cash flow | Not separately provided | Not separately provided | $294.5 million | $212.3 million |
| Capital expenditures | Not separately provided | Not separately provided | $67.5 million | $48.6 million |
Q2 operating margin was approximately 19.8% versus 20.6% in the prior-year quarter; net income attributable to ARLP represented approximately 15.9% of revenue versus 18.8%. For the six-month period, operating margin was approximately 21.7% versus 17.0%, and net income attributable to ARLP represented approximately 19.6% of revenue versus 15.3%.
- Coal volumes increased to 8.5 million tons sold and 9.5 million tons produced in Q2, from 8.0 million and 8.4 million, respectively. Six-month tons sold increased 17.2% to 18.1 million.
- Average coal sales price declined to $45.15 per ton in Q2 from $53.05 and to $45.42 for the six months from $53.42, primarily due to expiration or renegotiation of higher-priced legacy contracts and increased lower-priced export volumes.
- Operating expenses declined 5.3% in Q2 and 2.7% for the six months. Operating expense per ton sold declined to $28.19 from $31.64 in Q2 and to $27.74 from $33.43 for the six months.
- Cash and cash equivalents were $39.5 million at June 30, 2017, essentially unchanged from $39.8 million at December 31, 2016. Total assets were $2.18 billion and total partners’ capital was $1.16 billion.
- Gross debt principal was $475.7 million, consisting of $400.0 million of senior notes and $75.7 million under the accounts receivable securitization facility. Debt carrying value, net of discounts and issuance costs, was approximately $461.6 million. Capital lease obligations totaled approximately $99.4 million.
- The revolving credit facility had $486.7 million available, after $8.1 million of letters of credit. The company was in compliance with its debt covenants; trailing-twelve-month debt-to-cash-flow and cash-flow-to-interest ratios were 0.75x and 22.8x, respectively.
Material changes versus the prior comparable period
- Q2 net income attributable to ARLP declined $19.5 million, or approximately 23.5%, because lower coal price realizations more than offset higher volumes and lower operating costs. A $8.1 million debt extinguishment loss also reduced earnings.
- Six-month net income attributable to ARLP increased $38.1 million, or approximately 29.3%, as higher volumes, lower operating expenses and depreciation, and stronger affiliate earnings outweighed lower coal prices and the debt extinguishment loss.
- Q2 Segment Adjusted EBITDA declined 14.2% to $156.0 million. Illinois Basin EBITDA fell 28.7% to $93.3 million, while Appalachia increased 4.6% to $50.7 million and Other and Corporate increased to $14.2 million.
- Six-month Segment Adjusted EBITDA increased 7.7% to $349.7 million. Illinois Basin declined 15.3%, offset by a 45.5% increase in Appalachia and higher Other and Corporate results.
- On April 24, 2017, ARLP issued $400.0 million of 7.5% senior unsecured notes due May 1, 2025. Proceeds and cash on hand were used to repay the revolving facility, the $50.0 million term loan and the $145.0 million Series B Senior Notes. The Series B repayment generated the $8.1 million make-whole loss.
- Depreciation, depletion and amortization declined to $59.0 million in Q2 and $124.1 million for the six months, reflecting mine closures, reserve depletion and lower volumes at certain operations.
Guidance, outlook, commentary, risks and unusual items
- Management estimated 2017 capital expenditures of $145 million to $165 million and anticipated approximately $120 million to $130 million of investments in oil and gas mineral interests, including the subsequent Kodiak investment.
- Management stated that cash, operating cash flow and available borrowing capacity were expected to fund working capital, capital expenditures, investments, debt service and distributions, while cautioning that liquidity depends on future operating performance and financing access.
- On July 28, 2017, MGP exchanged its incentive distribution rights and economic general partner interest for 56.1 million ARLP common units and a non-economic general partner interest. SGP exchanged its interests for 7,181 units. Outstanding common units increased to 130,704,217, and IDR payments were eliminated.
- On July 28, ARLP declared a $0.50 per-unit quarterly distribution, totaling approximately $66.0 million, payable August 14, 2017.
- On July 19, Alliance Minerals purchased $100 million of Kodiak Gas Services Series A-1 preferred interests, which provide a quarterly cash or payment-in-kind return and rank senior to other Kodiak equity interests but junior to senior secured debt.
- The accounts receivable securitization facility had $75.7 million outstanding and matures in December 2017. Variable-rate borrowings create interest-rate exposure; a one-percentage-point increase in securitization-facility rates would increase annual interest expense by approximately $0.8 million.
- Risks include coal-price and demand volatility, customer concentration and contract renewals, environmental and mine-safety regulation, operational disruptions, reclamation and workers’ compensation obligations, pension and black-lung liabilities, customer defaults, financing availability, and performance of investments in oil and gas mineral interests.
- Various lawsuits, claims and regulatory proceedings are pending. Management believes their ultimate outcome will not materially affect financial condition, results or liquidity, but adverse outcomes exceeding recorded accruals could be material. The White Oak IRS audit for the year ended December 31, 2011 remained ongoing.
- The filing states that disclosure controls and procedures were effective as of June 30, 2017, with no material changes in internal control over financial reporting during the quarter.
Facts investors should verify
- Whether lower coal-price realizations and the expiration of legacy contracts continue to pressure Illinois Basin revenue and margins.
- Production, sales volumes and cost performance at Gibson South, River View, Hamilton, Tunnel Ridge, Mettiki and MC Mining, as well as the impact of idled or closed mines.
- Renewal or refinancing of the $100 million securitization facility before its December 2017 maturity.
- Compliance with the 2.5x debt-to-cash-flow and 3.0x cash-flow-to-interest covenants under changing coal-market conditions.
- Funding requirements for the stated 2017 capital expenditures, mineral-interest investments, distributions and Kodiak preferred investment.
- The economic effect of the July 2017 Exchange Transaction, including the elimination of IDRs, the expanded unit count and future per-unit distributions.
- Exposure to workers’ compensation, black-lung, pension, reclamation, litigation and mine-safety liabilities, including changes in actuarial assumptions.