Alliance Resource Partners, L.P. — FY2015 Form 10-K Summary
Business context and reporting period
Annual report for the year ended December 31, 2015, filed February 26, 2016. ARLP is a diversified U.S. coal producer and marketer operating ten underground mining complexes in the Illinois Basin and Appalachia, primarily serving electric utilities. It reported approximately 1.8 billion tons of proven and probable coal reserves, record production of 41.2 million tons and record sales of 40.2 million tons.
- Approximately 96.1% of sales tonnage was sold to electric utilities, and approximately 92.2% was sold under long-term contracts.
- ARLP acquired the remaining interest in White Oak Resources on July 31, 2015, obtaining full control of the Hamilton Mine No. 1 and consolidating the operation.
Financial performance and key metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Total revenues | $2.274 billion | $2.301 billion | (1.2%) |
| Coal sales | $2.158 billion | $2.209 billion | (2.3%) |
| Income from operations | $361.4 million | $544.2 million | (33.6%) |
| Net income | $306.2 million | $497.2 million | (38.4%) |
| Net income per limited partner unit | $2.11 | $4.77 | (55.8%) |
| Operating margin | 15.9% | 23.7% | Down 7.8 points |
| Net margin | 13.5% | 21.6% | Down 8.1 points |
| Adjusted EBITDA | $747.2 million | $803.7 million | (7.0%) |
| Operating cash flow | $716.3 million | $739.2 million | (3.1%) |
| Capital expenditures | $212.8 million | $307.4 million | (30.8%) |
| Distributions paid per unit | $2.6625 | $2.4725 | Up 7.7% |
- Coal sales averaged $53.62 per ton, down from $55.59; cost per ton sold declined to $34.22 from $34.82.
- Segment Adjusted EBITDA was $814.7 million, including $617.1 million from Illinois Basin and $183.9 million from Appalachia.
- Cash and cash equivalents were $33.4 million at year-end. Working capital was negative $108.5 million.
- Total long-term debt outstanding was $819.4 million, consisting primarily of the revolving credit facility, term loan, Series B senior notes and receivables securitization facility.
- Revolving facility availability was $309.1 million, and the company was in compliance with its debt covenants. Debt-to-cash-flow and cash-flow-to-interest ratios were 1.19-to-1 and 24.2-to-1, respectively.
Material changes versus the prior comparable period
- Sales and production volumes increased 1.3% and 1.1%, respectively, but lower coal prices reduced revenue and profitability.
- Appalachia Segment Adjusted EBITDA fell 27.6% to $183.9 million, driven by lower prices, weaker recoveries and reduced production at Tunnel Ridge.
- Illinois Basin Segment Adjusted EBITDA was essentially unchanged at $617.1 million, as volume and cost improvements offset lower pricing.
- ARLP recorded a $100.1 million long-lived asset impairment charge, principally related to the Onton and MC Mining operations and surrendered coal leases.
- ARLP recorded a $22.5 million net non-cash acquisition gain associated with final accounting for the Hamilton Acquisition.
- Depreciation, depletion and amortization increased by $59.1 million to $333.7 million, reflecting Hamilton, Gibson South production, acquired coal supply contracts and the shortened life of the Elk Creek mine.
- Onton and Gibson North were idled in the fourth quarter in response to weak demand and rising coal inventories. Elk Creek was expected to cease production in early 2016.
- Quarterly distributions increased to $0.675 per unit in the third and fourth quarters. A $0.675 per-unit fourth-quarter distribution was paid February 12, 2016.
Guidance, outlook, commentary, risks and unusual items
- Management estimated 2016 capital expenditures of $134.0 million to $142.0 million and projected average annual maintenance capital expenditures of approximately $4.75 per ton produced over the next five years.
- Management stated that existing cash, operating cash flow, credit facilities and potential debt or equity issuance were expected to fund working capital, capital expenditures, investments, debt service and distributions, while acknowledging exposure to adverse coal-market and financing conditions.
- Long-term contract commitments were approximately 34.3 million tons for 2016, 19.1 million tons for 2017, 14.5 million tons for 2018 and 7.1 million tons for 2019. Contracts include price reopeners, volume flexibility and termination provisions.
- The company had an $83.1 million remaining funding commitment to AllDale Minerals, expected to be funded over the following two years. AllDale investments expose ARLP to depressed oil and natural-gas prices.
- Contractual obligations totaled approximately $1.540 billion, including debt, interest, leases, capital projects, reclamation and workers’ compensation and pneumoconiosis obligations.
- Surety bonds totaled $234.0 million and letters of credit supporting obligations totaled $36.6 million. Management highlighted increasing difficulty and cost in obtaining or renewing surety bonds.
- Key industry risks include low coal and natural-gas prices, coal-fired power-plant retirements, competition from natural gas and renewables, environmental and greenhouse-gas regulation, permitting delays, transportation disruptions, mine-safety and reclamation liabilities, customer defaults and contract disputes.
- ARLP initiated litigation over a customer’s alleged anticipatory breach of a coal supply contract covering more than 5.0 million tons through 2021. Management believed pending litigation would not have a material adverse effect, but outcomes remain uncertain.
- The fourth-quarter results were significantly affected by $89.4 million of impairment charges, partially offset by the $22.5 million Hamilton acquisition gain. Fourth-quarter net income attributable to ARLP was $21.5 million; reported per-unit earnings were negative $0.19 because of partnership allocations and other adjustments.
- Management and Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Hamilton operations were excluded from management’s internal-control evaluation and represented approximately 16.8% of total assets at year-end.
Most important facts for an investor to verify
- Whether coal prices, utility demand and natural-gas competition continue to pressure realized pricing and Appalachian profitability.
- The sustainability of the $0.675 quarterly distribution given negative working capital, debt maturities and distribution restrictions under the credit agreements.
- Refinancing and repayment capacity for approximately $239.4 million of debt due in 2016 and $435.0 million due in 2017.
- Actual production, costs and cash generation from Hamilton, and the effectiveness of integrating its financial controls during 2016.
- Potential additional impairments or closure costs for Onton, Gibson North, Elk Creek, MC Mining and other higher-cost operations.
- The company’s ability to maintain $234.0 million of surety bonds and satisfy reclamation, workers’ compensation and black-lung obligations.
- Exposure to environmental rules, coal-plant retirements, permitting challenges and litigation that could reduce long-term coal demand.
- Funding requirements and investment performance of AllDale Minerals, including the remaining $83.1 million commitment.