Alliance Resource Partners, L.P. — Form 10-Q Summary
Business context and reporting period
Unaudited quarterly report for the three and nine months ended September 30, 2019, filed November 5, 2019. ARLP operates coal mining and marketing businesses in the Illinois Basin and Appalachia and owns oil and gas mineral interests primarily in the Permian, Anadarko, Williston and Appalachian basins. The company reports Illinois Basin, Appalachia and Minerals segments, plus Other and Corporate.
2019 included the January 3 AllDale acquisition, which added control of approximately 43,000 net royalty acres, and the August 2 Wing acquisition, which added approximately 9,000 net royalty acres. ARLP controlled approximately 52,000 net royalty acres after the transactions.
Financial performance and key metrics
| Metric | Q3 2019 | Q3 2018 | First nine months 2019 | First nine months 2018 |
|---|---|---|---|---|
| Total revenue | $464.7 million | $497.8 million | $1.508 billion | $1.471 billion |
| Income from operations | $50.4 million | $74.6 million | $223.5 million | $323.0 million |
| Net income attributable to ARLP | $39.1 million | $73.7 million | $373.6 million | $315.8 million |
| Earnings per unit | $0.30 | $0.55 | $2.86 | $2.35 |
| Segment Adjusted EBITDA | $156.2 million | $169.6 million | $528.1 million | $520.1 million |
| Cash flow from operating activities | Not separately reported | Not separately reported | $408.4 million | $579.3 million |
| Capital expenditures | Not separately reported | Not separately reported | $241.1 million | $184.4 million |
Q3 operating margin was approximately 10.9%, compared with 15.0% in the prior-year quarter. Nine-month operating margin was approximately 14.8%, compared with 22.0% in the prior-year period. Q3 net margin attributable to ARLP was approximately 8.4%, compared with 14.8%; the nine-month margin was approximately 24.8%, compared with 21.5%, largely because of the 2019 AllDale acquisition gain and the absence of the 2018 litigation settlement gain from the comparison.
- Q3 coal sales declined 8.8% to $420.0 million. Tons sold declined 7.5% to 9.3 million, and realized price declined to $45.06 per ton from $45.71.
- Q3 oil and gas royalty revenue was $14.0 million, compared with none in the prior-year quarter, reflecting the acquired Minerals operations.
- Nine-month coal sales were essentially flat at $1.357 billion, while royalty revenue added $36.3 million.
- Nine-month Segment Adjusted EBITDA increased 1.5% to $528.1 million. Minerals EBITDA increased to $32.4 million from $14.0 million, while Appalachia EBITDA declined 5.5% to $167.6 million.
- Nine-month cash flow from operations declined $170.9 million, primarily because 2018 included a $93 million litigation settlement receipt and 2019 had less favorable working-capital changes.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $31.8 million at September 30, 2019, down from $244.2 million at December 31, 2018.
- Total assets were $2.627 billion, compared with $2.395 billion at year-end 2018. Net property, plant and equipment increased to $2.026 billion from $1.412 billion, largely reflecting acquisitions and capital investment.
- Debt principal totaled $715.5 million, consisting of $240.0 million under the revolving credit facility, $400.0 million of 7.5% senior notes due 2025, $66.5 million under the receivables securitization facility and $9.0 million of equipment financing. Reported long-term debt, net of discounts and issuance costs, was $645.8 million, including $69.7 million of current maturities.
- The $494.75 million revolving facility had $245.5 million available for borrowing after $9.3 million of letters of credit. The applicable Eurodollar rate plus margin was 4.43% at September 30, 2019.
- Trailing-twelve-month debt-to-cash-flow and cash-flow-to-interest ratios were 1.13x and 14.7x, respectively, versus covenant limits of 2.5x and at least 3.0x. ARLP reported compliance with its covenants.
- Distributions paid during the first nine months totaled $208.7 million. The quarterly distribution declared for payment November 14, 2019 was $0.54 per unit.
Material changes, outlook and unusual items
- AllDale was consolidated beginning January 2019. Remeasurement of previously held investments produced a $177.0 million acquisition gain, of which $7.1 million was attributable to noncontrolling interest.
- ARLP redeemed its Kodiak preferred investment for $135.0 million in February 2019 and recorded an $11.5 million early-redemption gain. It no longer held a Kodiak interest.
- Production at the Dotiki mine ceased on August 16, 2019 because of weak market conditions and a focus on lower-cost Illinois Basin mines. ARLP recorded a $15.2 million non-cash impairment charge.
- The 2018 comparison period included an $80.0 million net litigation settlement gain, making year-over-year nine-month net income comparisons unusually favorable to 2019 despite lower operating income.
- Management projected 2019 total capital expenditures, including investments, of $330 million to $350 million. It expected remaining capital requirements to be funded through cash, operating cash flow, investments and available borrowings.
- ARLP expected to spend approximately $29 million to $31 million during 2019 and an additional $15 million to $20 million in the first half of 2020 on MC Mining’s Excel Mine No. 5. The project is expected to access approximately 15 million tons of reserves and provide an approximately 12-year mine life at current production levels.
- Management stated that current liquidity was sufficient for anticipated requirements, but cautioned that liquidity depends on operating performance, financing availability and financing costs.
- Material risks include coal, oil and natural gas price volatility; weakening coal demand and export markets; customer performance and contract renewals; operating, geological, regulatory and safety events; reclamation, workers’ compensation and black lung obligations; insurance availability; acquisition integration; and variable-rate interest exposure.
- The filing states that disclosure controls were effective as of September 30, 2019. Internal-control integration for the acquired AllDale and Wing mineral businesses was still in process, with completion expected in 2020.
Investor verification points
- Verify the sustainability of coal volumes, realized prices and cost per ton, particularly after the Dotiki closure and amid weaker export markets.
- Assess whether royalty growth from AllDale and Wing offsets coal-sector pressure and confirm production, drilling and reserve assumptions underlying the acquired mineral interests.
- Reconcile reported net income with recurring operating performance, excluding the $177.0 million acquisition gain, the $15.2 million impairment and the prior-year $80.0 million settlement gain.
- Monitor cash generation after distributions, capital expenditures and acquisitions, given the decline in cash to $31.8 million.
- Review debt maturities, variable-rate exposure, covenant headroom and the January 2021 maturity of the receivables securitization facility.
- Evaluate the $330 million to $350 million 2019 capital-spending outlook and the funding requirements for Excel Mine No. 5.
- Review related-party arrangements involving mineral leases, the Craft family’s affiliates, WKY CoalPlay, Bluegrass Minerals and Cavalier Minerals.