ALLIANCE RESOURCE PARTNERS LP quarterly report, Q2 FY2020

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Alliance Resource Partners, L.P. — Q2 2020 Form 10-Q

Business context and reporting period

Unaudited quarterly report for the three and six months ended June 30, 2020, filed August 6, 2020. ARLP is a U.S. diversified natural-resources partnership with three reportable segments: Illinois Basin coal, Appalachia coal, and oil and gas minerals. The period was materially affected by COVID-19-related energy demand destruction, weak coal markets, low natural-gas prices, and sharply lower oil prices.

Financial performance and liquidity

  • Q2 revenue: $255.2 million, down 50.6% from $517.1 million; six-month revenue was $606.0 million, down 41.9% from $1.04 billion.
  • Q2 net loss attributable to ARLP: $46.7 million, or $0.37 per unit, versus net income of $58.1 million, or $0.44 per unit. Six-month net loss was $191.4 million, or $1.51 per unit, versus net income of $334.5 million, or $2.57 per unit.
  • Operating results: Q2 operating loss was $35.1 million versus operating income of $68.4 million. Six-month operating loss was $167.8 million versus operating income of $173.1 million.
  • Segment Adjusted EBITDA: $62.1 million in Q2, down 62.5%; $173.8 million for six months, down 53.3%. Segment Adjusted EBITDA margins were approximately 24.3% in Q2 and 28.7% for six months, compared with 32.0% and 35.6%, respectively, in the prior-year periods.
  • Coal volumes: Q2 tons sold declined 49.2% to 5.2 million; six-month tons sold declined 39.4% to 12.4 million. Q2 coal sales fell 48.8% to $236.3 million, while six-month coal sales fell 41.2% to $550.9 million.
  • Minerals: Q2 oil and gas royalty revenue decreased 34.5% to $7.8 million. Six-month royalty revenue was $22.0 million, down 1.2%, as higher volumes from the Wing acquisition partly offset lower commodity prices.
  • Cash flow and capital spending: Six-month operating cash flow was $170.2 million versus $301.7 million. Capital expenditures were $84.2 million versus $165.6 million, and management projected 2020 capital expenditures of $130 million to $135 million.
  • Cash and debt: June 30 cash was $35.1 million. Debt principal totaled $772.6 million, including $265.0 million under the revolving facility, $38.9 million under the securitization facility, and $400.0 million of senior notes. Revolving-facility availability was $263.5 million after $9.3 million of letters of credit.
  • Balance sheet: Total assets were $2.29 billion versus $2.59 billion at year-end 2019. Total liabilities were $1.26 billion, and partners’ capital was $1.02 billion.

Material changes versus the prior comparable period

  • Coal production was temporarily halted at multiple Illinois Basin and Appalachia mines during March and April; production resumed gradually in May, but several mines operated below capacity.
  • Q2 Illinois Basin Segment Adjusted EBITDA fell 72.8% to $26.2 million, Appalachia declined 43.2% to $30.5 million, and Minerals declined 38.0% to $6.9 million.
  • Six-month operating expenses declined to $421.5 million from $617.0 million, but cost per coal ton increased because fixed costs were spread over lower volumes and the sales mix shifted toward higher-cost production.
  • The partnership recorded $25.0 million of non-cash long-lived asset impairments and a $132.0 million non-cash goodwill impairment related to the Hamilton mine. Goodwill declined from $136.4 million at December 31, 2019 to $4.4 million.
  • Unlike the first half of 2019, the first half of 2020 included no acquisition gain or equity-securities income. The prior-year period included a $177.0 million AllDale acquisition gain and $12.9 million of equity-securities income related to the Kodiak investment redemption.
  • The Board suspended cash distributions for the quarters ended March 31, June 30, and September 30, 2020. The only 2020 distribution shown was $0.40 per unit paid February 14, 2020.
  • No units were repurchased during the first six months of 2020. Cumulative repurchases since program inception totaled $93.5 million, leaving limited authorization under the $100 million program.

Guidance, outlook, commentary, risks, and unusual items

  • ARLP withdrew its initial 2020 operating and financial guidance because it did not reflect the pandemic’s effects. The filing states that the timing and pace of recovery remained unclear and that future COVID-19 impacts could not be accurately predicted.
  • Management expected all seven mining complexes to continue producing, but noted limited U.S. spot-market demand and a seaborne market that remained uneconomic for U.S. production.
  • Management reported compliance with debt covenants at June 30, 2020. Trailing-twelve-month ratios were debt to cash flow of 1.82x, cash flow to interest expense of 8.63x, and first-lien debt to cash flow of 0.88x, versus maximum or minimum covenant thresholds of 2.5x, 3.0x, and 1.5x, respectively.
  • The new revolving credit facility provides $537.75 million of capacity, reducing to $459.5 million on May 23, 2021, and matures March 9, 2024. Management expected covenant compliance for the remainder of 2020 provided economic conditions did not deteriorate substantially.
  • Key risks include further COVID-19 disruption, declining coal generation, coal and oil and gas price volatility, operator production curtailments, customer defaults or bankruptcies, transportation and mine-operating disruptions, environmental and safety regulation, reclamation and benefit liabilities, and access to financing.
  • Management identified potential impairment risk if future changes in commodity prices, production, operating costs, or other assumptions materially reduce projected cash flows. Pending litigation and regulatory matters were not expected to have a material adverse effect, although outcomes exceeding recorded accruals could be material.
  • The filing reports a 2020 actuarial workers’ compensation valuation loss of $3.1 million and a $16.9 million lower-of-cost-or-net-realizable-value adjustment to coal inventories.

Important facts for investors to verify

  • Whether coal demand, production volumes, pricing, and mine utilization recover sufficiently to support positive operating cash flow.
  • The sustainability of the distribution suspension and the conditions required for distributions to resume.
  • Revolving-credit availability, securitization-facility renewal in January 2021, debt maturities, and compliance with financial covenants under weaker operating conditions.
  • Whether additional impairments arise at Hamilton, Gibson North, other mining assets, coal inventories, or oil and gas investments.
  • The pace of drilling and production by operators on ARLP’s mineral interests and the resulting royalty volumes and prices.
  • Completion of internal-control integration for the Wing acquisition, which management expected in the third quarter of 2020.
  • Execution and funding of the projected $130 million to $135 million of 2020 capital expenditures, including completion of the MC Mining Excel Mine No. 5 project.