Alliance Resource Partners, L.P. — FY2014 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2014; filed February 27, 2015. The filing is an annual Form 10-K, not a standalone quarterly filing. Selected fourth-quarter 2014 data are included where relevant. ARLP is a diversified U.S. coal producer and marketer operating ten underground mining complexes in the Illinois Basin and Appalachia, with approximately 1.5 billion tons of proven and probable reserves at year-end.
Business Context and Operating Results
- Record 2014 production was 40.7 million tons, up from 38.8 million tons in 2013; tons sold were 39.7 million, up 2.3%.
- Illinois Basin production was 30.9 million tons, while Appalachia production increased to 9.8 million tons from 7.4 million tons, primarily reflecting improved Tunnel Ridge and MC Mining results and the Gibson South startup.
- Gibson South began production in April 2014. White Oak’s initial longwall operation began in October 2014.
- Approximately 95.6% of sales tonnage was sold to electric utilities, and approximately 84.0% of sales tonnage was under long-term contracts.
- Louisville Gas and Electric Company and Tennessee Valley Authority represented approximately 25.1% of total 2014 revenue combined.
Financial Metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Total revenue | $2,300.7 million | $2,205.6 million | +4.3% |
| Coal sales | $2,208.6 million | $2,137.4 million | +3.3% |
| Income from operations | $544.2 million | $443.5 million | +22.7% |
| Net income | $497.2 million | $393.5 million | +26.4% |
| Net income per limited partner unit | $4.77 | $3.63 | +31.4% |
| EBITDA | $803.7 million | $685.9 million | +17.2% |
| Operating cash flow | $739.2 million | $704.7 million | +4.9% |
| Capital expenditures | $307.4 million | $329.2 million | -6.6% |
| Maintenance capital expenditures | $236.3 million | $222.4 million | +6.2% |
| Coal sales price per ton sold | $55.59 | $55.04 | +1.0% |
| Cost per ton sold | $34.82 | $36.07 | -3.5% |
Margins: Operating margin was approximately 23.7% in 2014 versus 20.1% in 2013. Net margin was approximately 21.6% versus 17.8%. These are calculated from reported GAAP revenue and income figures.
Fourth quarter: Fourth-quarter revenue was $590.8 million, income from operations was $134.1 million, net income attributable to ARLP was $123.7 million, and earnings per limited partner unit were $1.18. The quarterly distribution paid in February 2015 was $0.65 per unit.
Liquidity, Debt and Obligations
- Cash and cash equivalents were $24.6 million at December 31, 2014, down from $93.7 million at year-end 2013. Working capital was negative $80.0 million, largely due to current debt maturities.
- Total debt was $821.3 million, including $140.0 million drawn on the revolving facility, $231.3 million under the term loan, $350.0 million of senior notes and $100.0 million under a new receivables securitization facility.
- The revolving credit facility had $554.6 million of borrowing availability after outstanding borrowings and letters of credit.
- Debt maturities were $230.0 million in 2015, $256.3 million in 2016, $190.0 million in 2017 and $145.0 million in 2018.
- Debt-to-cash-flow and cash-flow-to-interest ratios were 1.01 to 1.0 and 24.0 to 1.0, respectively; ARLP reported compliance with its debt covenants at year-end.
- Contractual obligations totaled approximately $1.316 billion, including debt, interest, leases, capital-project commitments, reclamation obligations and workers’ compensation and pneumoconiosis benefits.
Material Changes Versus the Prior Comparable Period
- Profitability improved substantially due to higher volumes, lower cost per ton, improved productivity at Tunnel Ridge, MC Mining and Dotiki, and the absence of Pontiki’s higher-cost production.
- Appalachia Segment Adjusted EBITDA rose to $254.0 million from $105.1 million, while Illinois Basin Segment Adjusted EBITDA declined to $620.1 million from $657.4 million because of difficult mining conditions at Warrior, Pattiki and Hopkins.
- Other sales and operating revenue increased to $66.1 million from $35.5 million, mainly from White Oak throughput fees and payments in lieu of shipments.
- General and administrative expense increased to $72.6 million from $63.7 million, primarily due to higher compensation-related costs.
- Equity investment losses declined to $16.6 million from $24.4 million, although White Oak continued to generate losses and had made no distributions to ARLP.
- ARLP funded $99.8 million of additional White Oak Series A units during 2014 and had funded $390.0 million of White Oak-related commitments by year-end.
- ARLP formed Cavalier Minerals and began investing in AllDale Minerals, an oil and gas mineral-interest platform; the investment had limited 2014 earnings impact but carried additional future funding commitments.
- ARLP completed or initiated major reserve and customer-contract acquisitions, including transactions involving CONSOL, Peabody and Patriot assets. Some Patriot transactions closed in February 2015.
- Cash distributions increased to $2.4725 per unit for 2014 from $2.2825 for 2013.
Guidance, Outlook, Risks and Unusual Items
- Management projected 2015 total capital expenditures of approximately $300 million to $330 million and average annual maintenance capital expenditures over the following five years of approximately $5.55 per ton produced.
- Management expected existing cash, operating cash flow, credit facilities, securitization financing and potential debt or equity issuance to fund capital needs, debt service, investments and distributions, while cautioning that weaker operating results or financing access could constrain liquidity.
- White Oak was expected to require additional funding through 2015, with total commitments from the 2011 transaction date through December 31, 2015 estimated at approximately $395.5 million to $415.5 million. ARLP also had approximately $37.4 million of remaining AllDale Minerals funding commitments over two to four years.
- A customer notified ARLP that it would stop accepting shipments under a contract after April 15, 2015. ARLP filed litigation seeking damages for an alleged anticipatory breach; the contract covered more than 5.0 million tons through December 2021.
- Major risks include coal-price and demand volatility, natural-gas and renewable-energy competition, customer concentration, transportation disruptions, mine operating conditions, permitting delays, mine-safety liabilities, environmental regulation, reclamation costs and the availability and cost of surety bonds.
- CSAPR, MATS, greenhouse-gas initiatives, proposed carbon standards and other environmental requirements could accelerate coal-fired power-plant retirements and reduce long-term coal demand.
- ARLP’s obligations included approximately $181.9 million of undiscounted reclamation costs and $182.4 million of undiscounted workers’ compensation and pneumoconiosis benefits.
- No 2014 asset impairment charge was recorded. A $19.0 million impairment charge related to Pontiki had been recorded in 2012; Pontiki ceased operations in November 2013 and most remaining assets were sold in May 2014.
- The filing reports unqualified audit opinions and effective disclosure controls and internal control over financial reporting.
Investor Verification Checklist
- Verify refinancing or repayment of the $230.0 million of debt maturing in 2015, including the $205.0 million Series A notes due June 2015.
- Track whether White Oak reaches sustained production and begins making distributions, and compare actual funding requirements with the $395.5 million to $415.5 million commitment estimate.
- Assess the financial effect of the customer contract dispute and the loss of shipments after April 15, 2015.
- Monitor coal prices, utility demand, natural-gas prices, coal-plant retirements and implementation of environmental and mine-safety regulations.
- Evaluate the sustainability of distributions relative to operating cash flow, capital expenditures, debt repayments and general partner incentive distributions.
- Review reserve estimates, permitting status and expected production lives, particularly for Elk Creek, Gibson South, River View, Dotiki and the acquired western Kentucky reserves.
- Assess exposure to reclamation, workers’ compensation, black lung, pension and surety-bond requirements, including the sensitivity of actuarial assumptions.
- Review related-party transactions involving White Oak, WKY CoalPlay, SGP, Cavalier Minerals and AllDale Minerals for funding obligations, royalty terms and governance conflicts.