Alliance Resource Partners, L.P. — Q1 2021 Form 10-Q Summary
Business context and reporting period
Alliance Resource Partners, L.P. is a U.S. diversified natural-resource partnership operating coal mines and coal royalties, oil and gas mineral interests, transportation activities and related businesses. Reportable segments are Illinois Basin Coal Operations, Appalachia Coal Operations, Oil & Gas Royalties and Coal Royalties. The company separately presented Coal Royalties beginning in Q1 2021 and recast prior-period segment information.
The filing covers the unaudited three months ended March 31, 2021, compared with the three months ended March 31, 2020. Results for an interim period are not necessarily indicative of full-year results. The partnership had 127.2 million common units outstanding as of May 7, 2021.
Financial performance and key metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Total revenue | $318.6 million | $350.8 million | Down 9.2% |
| Coal sales | $287.5 million | $314.6 million | Down 8.6% |
| Operating income (loss) | $36.3 million | $(132.7) million | Improved $169.0 million |
| Net income (loss) | $24.8 million | $(144.7) million | Improved $169.5 million |
| Net income (loss) attributable to ARLP | $24.7 million | $(144.8) million | Improved $169.5 million |
| Earnings per unit | $0.19 | $(1.14) | Improved $1.33 |
| Segment Adjusted EBITDA | $109.8 million | $111.7 million | Down 1.7% |
| Cash flow from operations | $54.6 million | $78.7 million | Down $24.1 million |
| Capital expenditures | $31.4 million | $50.4 million | Down $18.9 million |
Based on reported GAAP figures, operating margin was approximately 11.4% and net margin was approximately 7.8% in Q1 2021. Segment Adjusted EBITDA margin was approximately 34.5%; this is a non-GAAP measure and excludes general and administrative expense, depreciation, interest, taxes and impairments.
- Coal tons sold decreased 5.8% to 6.8 million tons from 7.3 million tons. Coal production was 8.0 million tons in both periods.
- Average coal sales price decreased to $42.10 per ton from $43.39 per ton, primarily because higher-priced contract shipments expired.
- Coal operating expense per ton decreased to $29.72 from $33.20, reflecting cost controls, efficiency initiatives and improved recoveries.
- Oil and gas royalty revenue decreased 1.7% to $14.0 million, while royalty volumes decreased 19.2% to 400 thousand BOE.
- Transportation revenue increased to $11.1 million from $4.7 million, primarily from higher third-party rates and increased export-related shipments.
- Interest expense declined to $10.4 million from $12.3 million.
Liquidity, debt and capital resources
| Balance-sheet item | March 31, 2021 | December 31, 2020 |
|---|---|---|
| Cash and cash equivalents | $34.4 million | $55.6 million |
| Total assets | $2.15 billion | $2.17 billion |
| Total liabilities | $1.05 billion | $1.09 billion |
| Debt, current and long-term, net | $540.7 million | $592.6 million |
| Total partners’ capital | $1.10 billion | $1.07 billion |
- The revolving credit facility had $55.0 million outstanding, $21.8 million of letters of credit outstanding and $461.0 million available for borrowing. The facility is scheduled to reduce from $537.75 million to $459.5 million on May 23, 2021 and matures in March 2024.
- The $400.0 million senior notes bear interest at 7.5% and mature May 1, 2025.
- The accounts receivable securitization facility was extended to January 2022, with borrowing availability reduced to $60.0 million; $38.1 million was outstanding at March 31, 2021.
- ARLP had $1.8 million drawn under a new $5.0 million related-party line of credit bearing interest at 3.50% and maturing in February 2023, subject to an extension option.
- Management reported compliance with all Credit Agreement covenants. Trailing-twelve-month ratios were debt to cash flow of 1.43x, cash flow to interest expense of 8.67x and first-lien debt to cash flow of 0.39x.
- Net cash used in financing was $53.0 million, including debt repayments. No partner distributions were paid during the quarter, but a $0.10-per-unit distribution was declared on April 26, 2021 for payment May 14, 2021.
Material changes versus the prior comparable period
- Revenue declined because of lower coal volumes, lower coal price realizations and the absence of substantial contract buy-out revenue recorded in Q1 2020. Weather-related transportation disruptions and an unplanned customer plant outage reduced shipments.
- Operating results benefited significantly from the absence of Q1 2020 non-cash impairment charges: $25.0 million of long-lived asset impairments and $132.0 million of Hamilton mine goodwill impairment.
- Illinois Basin Segment Adjusted EBITDA increased 33.1% to $57.7 million, while Appalachia Segment Adjusted EBITDA decreased 33.4% to $31.5 million, primarily due to lower Tunnel Ridge contract buy-out revenue and shipments.
- Consolidated Segment Adjusted EBITDA declined modestly despite lower revenue because operating expenses fell 15.8% to $197.7 million.
- Operating cash flow decreased because of unfavorable working-capital changes, particularly trade receivables and accrued taxes, partially offset by accounts payable changes.
- Capital expenditures declined 37.6% to $31.4 million, primarily because of lower mine infrastructure and equipment spending.
Guidance, outlook, risks and unusual items
- Management estimates 2021 total capital expenditures of approximately $120 million to $125 million and expects to fund them with cash on hand, operating and investment cash flows, available credit facilities and potential debt or equity financing.
- Management projects average annual maintenance capital expenditures over the next five years of approximately $4.90 per ton produced.
- Management expects sufficient liquidity and continued covenant compliance, but cautions that results depend on operating performance, financing access and financing costs.
- Key risks include coal, oil and natural-gas prices; declining coal demand and energy-transition pressures; customer outages, bankruptcies or contract defaults; weather, transportation and mine disruptions; labor and safety matters; environmental and mine regulations; COVID-19 effects; insurance availability; reclamation, workers’ compensation and black-lung obligations; and interest-rate exposure.
- Six related wage-and-hour lawsuits allege failures to compensate for equipment donning and doffing time and to calculate overtime correctly. Plaintiffs in the initial two cases allege damages ranging from approximately $22.2 million to $143.7 million. The cases are in early stages; management believes the claims lack merit, but the filing states that potential exposure cannot currently be estimated clearly.
- A one-percentage-point increase in rates on revolving and securitization borrowings would increase annualized interest expense by approximately $0.9 million based on March 31, 2021 borrowings.
- No unit repurchases occurred in Q1 2021. Cumulative repurchases under the program totaled $93.5 million, leaving approximately $6.5 million authorized.
- Internal control and disclosure controls were concluded to be effective as of March 31, 2021, with no materially affecting changes identified during the quarter.
Important facts for investors to verify
- Whether coal shipment disruptions and lower price realizations persist, particularly in Appalachia and at Tunnel Ridge.
- Actual 2021 coal production, sales volumes, realized prices and cost per ton versus the $120 million–$125 million capital-spending estimate.
- Liquidity after the May 23, 2021 revolving-facility commitment reduction and the January 2022 securitization-facility maturity.
- Debt repayment requirements, the 2025 senior-note maturity and compliance with Credit Agreement covenants.
- The sustainability and timing of resumed $0.10-per-unit distributions and any future unit repurchases.
- Developments, certification status and potential financial exposure in the wage-and-hour litigation.
- Exposure to structural declines in coal demand, environmental regulation, ESG-related financing or insurance constraints, and commodity-price volatility.