Alliance Resource Partners, L.P. — Q3 2020 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three and nine months ended September 30, 2020, compared with the respective 2019 periods. ARLP is a U.S. diversified natural-resource partnership operating through Illinois Basin coal, Appalachia coal, and oil and gas Minerals segments. The period was materially affected by weak coal markets, low commodity prices, and COVID-19-related energy-demand disruption.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Total revenue | $355.7 million | $464.7 million | $961.6 million | $1.508 billion |
| Net income attributable to ARLP | $27.2 million | $39.1 million | $(164.2) million | $373.6 million |
| Earnings per unit | $0.21 | $0.30 | $(1.29) | $2.86 |
| Operating income (loss) | $39.3 million | $50.4 million | $(128.4) million | $223.5 million |
| Segment Adjusted EBITDA | $132.7 million | $156.2 million | $306.5 million | $528.1 million |
| Cash flow from operations | Not separately provided | Not separately provided | $291.8 million | $408.4 million |
| Capital expenditures | Not separately provided | Not separately provided | $102.8 million | $241.1 million |
Q3 operating margin was approximately 11.1%, compared with approximately 10.9% in Q3 2019. Net margin was approximately 7.7%, compared with approximately 8.4%. For the nine-month period, operating and net margins were negative, primarily because of lower operating results and significant impairment charges.
- Q3 coal sales declined 20.1% to $335.8 million. Tons sold fell 17.4% to 7.7 million, and realized coal price declined to $43.59 per ton from $45.06.
- Q3 oil and gas royalties declined 30.6% to $9.7 million, despite an 8.1% increase in BOE volumes, reflecting lower commodity-price realizations.
- Q3 Segment Adjusted EBITDA decreased 15.0% to $132.7 million. Illinois Basin EBITDA declined 7.0%, Appalachia declined 21.4%, and Minerals declined 27.1%.
- Cash and cash equivalents were $34.1 million at September 30, 2020, compared with $36.5 million at December 31, 2019.
- Total debt, including current maturities and net of discounts and issuance costs, was $660.3 million at September 30, 2020, compared with $781.4 million at December 31, 2019. Current maturities were $89.3 million.
- The revolving credit facility had $381.0 million available for borrowing after $21.8 million of letters of credit. The accounts-receivable securitization facility had $72.2 million outstanding against its $100.0 million capacity.
Material changes versus the prior comparable period
- Nine-month revenue fell 36.2%, driven primarily by a 34.7% decrease in coal sales and a 79.8% decrease in transportation revenues.
- Nine-month coal tons sold declined 32.5% to 20.1 million tons, while production declined 37.8% to 19.5 million tons due to temporary mine curtailments and weak markets.
- ARLP recorded a $132.0 million non-cash goodwill impairment related to the Hamilton mine and $25.0 million of long-lived asset impairments, compared with $15.2 million of long-lived asset impairments in the 2019 period.
- The 2019 comparison included a $177.0 million acquisition gain related to the AllDale acquisition and $12.9 million of equity-securities income from the former Kodiak investment; neither item recurred in 2020.
- Operating cash flow decreased 28.5% to $291.8 million, while capital expenditures decreased 57.4% to $102.8 million.
- The partnership suspended cash distributions beginning with the quarter ended March 31, 2020. The only 2020 distribution shown in the filing was $0.40 per unit, paid February 14, 2020.
- Management reduced costs, working capital, capital spending, and corporate support expenses. A new $537.75 million revolving credit facility was entered into in March 2020, replacing the prior $494.75 million facility.
Guidance, outlook, commentary, risks, and unusual items
- ARLP withdrew its initial 2020 operating and financial guidance in March 2020 because it did not reflect the COVID-19 impact. No replacement earnings guidance is provided.
- Management stated that all seven mining complexes had resumed production by the third quarter, although several were operating below capacity because of limited U.S. spot demand and uneconomic seaborne markets.
- Management expected 2020 capital expenditures of approximately $125 million to $130 million and estimated average annual maintenance capital expenditures of approximately $4.86 per ton produced for 2020–2024.
- Management believed liquidity and expected cash flows were sufficient for operations, capital requirements, debt service, and other commitments, but cautioned that substantially weaker economic conditions or financing access could affect liquidity and covenant compliance.
- Credit Agreement covenants were satisfied at September 30, 2020. Reported trailing-twelve-month ratios were debt to cash flow of 1.69x, cash flow to interest expense of 8.22x, and first-lien debt to cash flow of 0.69x, against maximum or minimum requirements of 2.5x, 3.0x, and 1.5x, respectively.
- Principal risks include coal and oil and gas price volatility, declining coal demand, COVID-19 effects, customer defaults or contract cancellations, mine interruptions, regulatory and environmental requirements, reclamation and benefit liabilities, insurance availability, and access to financing.
- Unusual items include mine closures and employee terminations, including 116 Gibson employees and 78 Hamilton employees notified of permanent termination in April 2020; the Hamilton goodwill impairment; and the permanent closure of Gibson North.
- ARLP reported no material adverse effect expected from pending lawsuits and regulatory proceedings based on current information, but stated that outcomes exceeding recorded accruals could materially affect results or liquidity.
Important facts for investors to verify
- Whether coal demand, export volumes, realized prices, and mine utilization recover sufficiently to support cash generation.
- The timing and terms of the $89.3 million of current debt maturities and the January 2021 maturity or refinancing of the securitization facility.
- Whether covenant compliance and revolving-credit availability remain intact if commodity prices or operating cash flow weaken.
- Whether suspended distributions will resume and what level of future distributions is sustainable.
- The assumptions underlying Hamilton and other asset valuations, including projected production, coal prices, and discount rates, because further impairments could occur.
- Actual 2020 capital expenditures versus the $125 million–$130 million estimate and the funding sources used.
- Potential effects of reclamation, workers’ compensation, pneumoconiosis, pension, insurance, litigation, and related-party obligations, including payments to WKY CoalPlay.