Alliance Resource Partners, L.P. — Q1 2011 Form 10-Q Summary
Business context and reporting period
Alliance Resource Partners, L.P. is a diversified eastern U.S. coal producer and marketer serving utilities and industrial users. It operated nine underground mining complexes, was constructing the Tunnel Ridge complex in West Virginia, and operated the Mt. Vernon coal loading terminal. Reported results cover the three months ended March 31, 2011, compared with the three months ended March 31, 2010. The interim financial statements are unaudited.
Financial performance and key metrics
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Total revenue | $423.3 million | $380.7 million | 11.2% |
| Coal sales | $407.7 million | $364.2 million | 12.0% |
| Income from operations | $103.8 million | $82.9 million | 25.2% |
| Net income | $95.4 million | $75.0 million | 27.2% |
| Limited partners’ interest in net income | $74.4 million | $57.9 million | 28.4% |
| Basic and diluted net income per unit | $1.99 | $1.56 | 27.6% |
| Segment Adjusted EBITDA | $154.6 million | $129.7 million | 19.2% |
| Cash flow from operating activities | $120.8 million | $106.6 million | 13.3% |
| Capital expenditures | $63.8 million | $77.5 million | (17.7%) |
| Distributions paid per unit | $0.86 | $0.775 | 11.0% |
Coal tons sold increased to 7.538 million from 7.381 million, while tons produced increased to 8.220 million from 7.543 million. The average coal sales price rose to $54.08 per ton from $49.34 per ton, primarily due to improved contract pricing across all regions.
Calculated margins were approximately 24.5% for operating income, 22.5% for net income, and 36.5% for Segment Adjusted EBITDA in Q1 2011, compared with approximately 21.8%, 19.7%, and 34.1%, respectively, in Q1 2010.
At March 31, 2011, cash and cash equivalents were $339.0 million, compared with $339.6 million at December 31, 2010. Total assets were $1.562 billion and total partners’ capital was $508.6 million.
Total debt was $722.0 million, consisting of senior notes, Series A and Series B senior notes, and a $300.0 million term loan. No borrowings were outstanding under the $142.5 million revolving credit facility; $130.9 million was available after $11.6 million of letters of credit. The trailing-twelve-month debt-to-cash-flow ratio was 1.37 to 1.0 in the financial statement disclosures and 1.34 to 1.0 in MD&A; both were below the 3.0-to-1.0 covenant limit. Cash flow to interest expense was 16.4 to 1.0 versus a minimum covenant of 4.0 to 1.0.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by a $4.74 per ton increase in average coal pricing and modestly higher sales volumes.
- Segment Adjusted EBITDA increased across Illinois Basin, Central Appalachia, and Northern Appalachia, with the largest percentage increase in Central Appalachia.
- Operating expenses increased 7.0% to $256.1 million. Cost pressures included labor, benefits, materials, supplies, maintenance, regulatory compliance, workers’ compensation, the Mettiki longwall move, and Tunnel Ridge development.
- Interest expense increased to $9.3 million from $7.6 million, principally because of the $300 million term loan completed in the fourth quarter of 2010.
- Operating cash flow increased, while investing cash use decreased because of lower capital spending. Financing cash use increased, primarily because the prior-year period included net revolving-credit borrowings and Q1 2011 distributions were higher.
- Inventory increased by approximately 0.8 million tons, reflecting record productivity and transportation delays and disruptions.
- The quarterly distribution declared on April 26, 2011 was $0.89 per unit, totaling approximately $52.9 million, payable May 13, 2011.
Guidance, outlook, commentary, risks, and unusual items
- Management estimated 2011 capital expenditures of $320 million to $360 million, funded through cash on hand, operating cash flow, and available revolver capacity.
- Management did not anticipate significant liquidity constraints in the foreseeable future, while noting dependence on operating performance and access to financing.
- Longwall production at Tunnel Ridge was not expected until early 2012; development activity increased costs during the quarter.
- The Affordable Care Act increased the estimated black lung obligation by $8.3 million at December 31, 2010. Potential effects from re-filed claims and future filing rates remained uncertain pending regulations. Health-care costs and black lung liabilities could increase further.
- The company recorded workers’ compensation and pneumoconiosis liabilities of approximately $71.0 million and $54.7 million, respectively, at March 31, 2011.
- Variable-rate debt creates interest-rate exposure. A one-percentage-point increase in Term Loan rates would increase annualized interest expense by approximately $3.0 million.
- Key operating risks include coal price and demand volatility, customer concentration and contract performance, transportation disruptions, labor and equipment availability, mine safety, geologic and weather conditions, regulatory and environmental requirements, reclamation and benefit liabilities, litigation, and access to surety bonds and financing.
- The company reported 1,720 MSHA inspection days, no fatalities, no pattern-of-violations notices, and 214 contests pending before administrative law judges. Proposed MSHA assessments listed in the filing totaled approximately $231.2 thousand based on the disclosed mine-level amounts.
- Management concluded that disclosure controls and procedures were effective and that no material change in internal control over financial reporting had been identified.
Important facts for investors to verify
- Reconcile the disclosed debt-to-cash-flow ratios of 1.37 and 1.34 to the applicable covenant calculation and definitions.
- Assess whether higher coal prices and contract pricing can offset rising labor, materials, maintenance, regulatory, and development costs.
- Verify the timing, budget, and production ramp-up for Tunnel Ridge and the effect of related development spending.
- Monitor coal inventories and transportation disruptions, particularly rail and barge delays affecting deliveries.
- Review the $320 million to $360 million 2011 capital-expenditure outlook against operating cash flow and distribution requirements.
- Evaluate potential changes to black lung, workers’ compensation, health-care, reclamation, pension, and environmental liabilities.
- Review long-term coal contracts, customer credit exposure, contract renewals, and sensitivity to coal-market demand.
- Confirm the April 2011 $0.89 per-unit distribution and the partnership agreement’s incentive distribution rights.