Business Context and Reporting Period
Alliance Resource Partners, L.P. filed its Form 10-K for the fiscal year ended December 31, 2012. The partnership produces and markets coal primarily to U.S. electric utilities and industrial users through eleven underground mining complexes in the Illinois Basin, Central Appalachia and Northern Appalachia. It sold a record 35.2 million tons and produced a record 34.8 million tons during 2012.
- Approximately 93.1% of sales tonnage was sold to electric utilities and 94.2% was sold under long-term contracts.
- At December 31, 2012, proven and probable reserves totaled approximately 919.5 million tons, including 204.9 million tons leased to White Oak.
- The April 2012 acquisition of Onton added a Kentucky mining complex and approximately 40.0 million tons of reserves.
Financial and Operating Metrics
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Total revenue | $2,034.3 million | $1,843.6 million | +10.3% |
| Coal sales | $1,979.4 million | $1,786.1 million | +10.8% |
| Income from operations | $374.5 million | $412.9 million | -9.3% |
| Net income | $335.6 million | $389.4 million | -13.8% |
| Net income per limited partner unit | $6.12 | $8.13 | -24.8% |
| EBITDA | $581.1 million | $570.8 million | +1.8% |
| Net cash from operating activities | $555.9 million | $574.0 million | -3.2% |
| Capital expenditures | $424.6 million | $321.9 million | +31.9% |
| Cash and equivalents | $28.3 million | $273.5 million | -89.7% |
| Total long-term debt | $791.0 million | $704.0 million | +12.4% |
Reported operating margin was approximately 18.4%, compared with 22.4% in 2011; net margin was approximately 16.5%, compared with 21.1%. EBITDA margin was approximately 28.6%.
- Average coal sales price increased to $56.28 per ton from $55.95, while operating expenses and outside coal purchases increased to $38.15 per ton from $37.15.
- Segment Adjusted EBITDA, a non-GAAP measure, increased 5.7% to $658.8 million. Illinois Basin Segment Adjusted EBITDA rose 17.4% to $593.1 million, while Central Appalachia declined 52.1% to $25.7 million and Northern Appalachia declined 23.2% to $47.9 million.
- Cash used in investing activities increased to $623.4 million, primarily because of the Onton acquisition, higher mine infrastructure spending and White Oak funding. Cash used in financing activities was $177.7 million, including $257.9 million of partner distributions.
- Working capital declined to $73.0 million from $269.3 million, and total assets increased to $2.0 billion from $1.7 billion.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven by record volumes, Tunnel Ridge longwall production beginning in May 2012, higher River View and Warrior production, the Onton acquisition and improved Illinois Basin contract pricing.
- Profitability declined because of higher operating expenses, substantially higher depreciation, depletion and amortization, lower Mettiki metallurgical export volumes, increased White Oak losses and a $19.0 million Pontiki impairment charge.
- Pontiki was idled from August 29 through November 25, 2012 following an MSHA-ordered closure of surface facilities. Operations resumed to meet 2013 contractual obligations, but management identified material uncertainty regarding demand, pricing and the mine’s longer-term viability.
- Depreciation, depletion and amortization increased 36.1% to $218.1 million, largely because of Tunnel Ridge, Onton and infrastructure investments.
- On May 23, 2012, the partnership replaced prior facilities with a $700 million revolving credit facility and a $250 million term loan. At year-end, $155.0 million was drawn on the revolver, $250.0 million was outstanding under the term loan and $521.5 million of revolver capacity remained available.
- Quarterly distributions increased from $0.9900 per unit in the first quarter to $1.0850 in the fourth quarter. A $1.1075 per-unit distribution was declared in January 2013 and paid February 14, 2013.
Guidance, Outlook, Risks and Unusual Items
- Management projected 2013 capital expenditures of approximately $370 million to $400 million and estimated average annual maintenance capital expenditures over the next five years at approximately $5.70 per ton produced.
- Management stated that cash balances, operating cash flow, credit facilities and potential debt or equity issuance were expected to satisfy liquidity needs, while noting that materially lower cash flow or reduced financing access could adversely affect liquidity.
- White Oak funding commitments were expected to total approximately $300.5 million to $425.5 million from September 2011 through the following two to three years. The filing identified anticipated funding of approximately $125.7 million in 2013 and $61.7 million in 2014. ARLP had funded $191.0 million through December 31, 2012 and recognized $15.3 million of allocated White Oak losses in 2012.
- Major risks include coal-price and demand volatility, competition from natural gas and renewable energy, environmental and greenhouse-gas regulation, mine-safety enforcement, permitting delays, transportation interruptions, adverse geology, labor and input-cost inflation, customer concentration and customer contract renegotiation or default.
- Two customers accounted for approximately 28.5% of 2012 revenue. Their coal supply agreements expire in 2016.
- Debt agreements required a debt-to-cash-flow ratio no greater than 3.0-to-1.0 and cash-flow-to-interest-expense ratio no lower than 3.0-to-1.0. Reported year-end ratios were 1.3-to-1.0 and 16.8-to-1.0, respectively, and the partnership was in compliance.
- Contractual obligations totaled approximately $1.506 billion, including $791.0 million of long-term debt, $304.2 million of workers’ compensation and pneumoconiosis obligations, and $155.6 million of undiscounted reclamation obligations.
- Surety bonds and letters of credit supported reclamation, workers’ compensation and other obligations. Management warned that the availability and cost of required surety bonds could materially affect operations.
- The filing reported no material pending litigation and an unqualified audit opinion. Management and the independent auditor concluded that internal control over financial reporting was effective.
Most Important Facts an Investor Should Verify
- Whether 2013 and later coal volumes, pricing and contract commitments support the planned distribution level after capital expenditures and debt service.
- The remaining amount, timing and economic return of White Oak funding commitments, including the effect of continuing allocated losses.
- Pontiki’s operating status, regulatory requirements, future demand and potential for additional impairment.
- Actual 2013 capital expenditures and the funding mix relative to the $370 million to $400 million estimate.
- Liquidity after distributions, debt maturities and the scheduled 2014-2017 term-loan and senior-debt payments.
- Renewal terms and pricing provisions for major customer contracts expiring in 2016, together with customer credit quality and concentration.
- Changes in environmental, greenhouse-gas, water-discharge and mine-safety rules that could reduce coal demand or increase operating and reclamation costs.