ALLIANCE RESOURCE PARTNERS LP quarterly report, Q2 FY2019

Alliance Resource Partners, L.P. — 2019 Second-Quarter Form 10-Q Summary

Business Context and Reporting Period

Alliance Resource Partners, L.P. is a diversified U.S. natural-resource partnership operating coal mining and marketing businesses in the Illinois Basin and Appalachia, together with oil and gas mineral interests. The filing covers the three and six months ended June 30, 2019, compared with the corresponding 2018 periods. The partnership had 128.4 million common units outstanding as of August 5, 2019.

Following the January 3, 2019 AllDale acquisition, ARLP consolidated approximately 43,000 net royalty acres and established a Minerals reporting segment. Prior-period segment information was recast accordingly.

Financial Performance and Key Metrics

Metric	Q2 2019	Q2 2018	Six Months 2019	Six Months 2018
Total revenues	$517.1 million	$516.1 million	$1.044 billion	$973.3 million
Coal sales	$461.3 million	$475.9 million	$937.3 million	$899.5 million
Oil and gas royalties	$11.9 million	—	$22.3 million	—
Net income attributable to ARLP	$58.1 million	$86.2 million	$334.5 million	$242.1 million
Earnings per unit	$0.44	$0.64	$2.57	$1.80
Segment Adjusted EBITDA	$165.3 million	$185.3 million	$371.9 million	$350.5 million
Cash flow from operations	Not separately reported	Not separately reported	$301.7 million	$373.2 million

Q2 net income attributable to ARLP declined 32.6% year over year, while the implied net-income margin fell to approximately 11.2% from 16.7%. Six-month net income increased 38.2%, but the comparison benefited from a $177.0 million acquisition gain in 2019 and an $80.0 million litigation settlement gain in 2018. Segment Adjusted EBITDA decreased 10.8% in Q2 but increased 6.1% for the six-month period.

• Coal tons sold were 10.2 million in Q2, down 2.6%, and 20.5 million for six months, up 3.3%.
• Coal production was 10.0 million tons in Q2 and 21.4 million tons for six months, up 3.3% and 5.8%, respectively.
• Average coal price realization was $45.16 per ton in Q2 versus $45.38, and $45.64 per ton for six months versus $45.23.
• Q2 segment EBITDA was $96.1 million in Illinois Basin, $53.8 million in Appalachia, $11.1 million in Minerals and $6.6 million in Other and Corporate.
• Capital expenditures were $165.6 million for six months, compared with $120.6 million in 2018.

Liquidity, Debt and Capital Allocation

• Cash and cash equivalents were $55.2 million at June 30, 2019, compared with $244.2 million at December 31, 2018.
• Total debt principal was $554.7 million, consisting primarily of $400.0 million of 7.5% senior notes due 2025, $70.0 million drawn on the revolving facility, $75.0 million under the securitization facility and $9.7 million of equipment financing.
• The revolving credit facility had $415.5 million available for borrowing after $9.3 million of letters of credit; its applicable Eurodollar rate was 4.77%.
• The accounts-receivable securitization facility matures in January 2020 and had $75.0 million outstanding.
• Debt-to-cash-flow and cash-flow-to-interest ratios were 0.87 to 1.0 and 15.7 to 1.0, respectively; management reported compliance with applicable covenants.
• Cash distributions paid during the first six months totaled $138.5 million. A $0.54 per-unit distribution was declared on July 26, 2019, payable August 14, 2019.
• Management estimated 2019 capital expenditures, including investments, of $345 million to $375 million and expected to fund them through operating cash flow, cash balances and borrowings.

Material Changes, Outlook and Unusual Items

• The AllDale acquisition required $176.0 million of cash consideration and resulted in a $177.0 million remeasurement gain on previously held investments. AllDale contributed $12.4 million of Q2 revenue and $4.9 million of Q2 net income.
• Kodiak redeemed ARLP’s preferred investment for $135.0 million in February 2019, producing an $11.5 million early-redemption gain. ARLP no longer owns an interest in Kodiak.
• Flooding and high water delayed approximately 500,000 tons of planned export shipments, which management expected to ship in the second half of 2019.
• Q2 coal margins were pressured by a Hamilton mine longwall move, lower River View recoveries, higher labor and benefit costs, increased workers’ compensation expense and higher-cost outside coal purchases.
• Workers’ compensation liabilities increased following a mid-year actuarial review, including a $4.8 million valuation loss driven by adverse claims development and a lower discount rate.
• ARLP agreed to acquire approximately 9,000 net royalty acres in the Midland Basin from Wing for approximately $145 million. The acquisition closed August 2, 2019 using cash and revolving-facility borrowings.
• ARLP planned approximately $35 million to $40 million of 2019 development spending for MC Mining’s Excel Mine No. 5, plus $5 million to $10 million in the first half of 2020. The project is expected to access approximately 15 million tons of reserves.
• Management stated that it did not anticipate liquidity constraints, but noted that liquidity depends on operating performance, commodity markets and access to financing.

Principal Risks and Contingencies

• Coal prices, export demand, customer performance, transportation disruptions, weather and mine operating conditions may materially affect results.
• Oil and natural-gas prices and drilling activity by third-party operators affect royalty revenues and mineral-interest values.
• ARLP has variable-rate exposure through its revolving and securitization facilities; a one-percentage-point rate increase would increase annualized interest expense by approximately $1.5 million based on June 30 borrowings.
• Environmental, mine-safety, reclamation, workers’ compensation and pneumoconiosis obligations remain material. Management considered pending legal and regulatory matters not materially adverse based on current information, but unfavorable outcomes could exceed recorded accruals.
• ARLP identified related-party transactions involving affiliates of its general partner, mineral leases and related mineral-investment entities.
• The company had not completed integration of AllDale’s internal controls and expected to complete the process in the first quarter of 2020.
• Potential changes in U.S. tax law or interpretations could affect the partnership’s tax treatment and the value of its common units.

Facts an Investor Should Verify

• Whether the delayed export tons were shipped in the second half of 2019 and whether export pricing and volumes recovered.
• The final purchase accounting, production profile and royalty economics for AllDale and the post-period Wing acquisition.
• Available revolver capacity, securitization-facility renewal or repayment requirements and debt levels after the Wing closing.
• Actual 2019 capital expenditures versus the $345 million to $375 million estimate and funding sources.
• Progress, cost and reserve conversion for Excel Mine No. 5.
• Changes in workers’ compensation, pneumoconiosis, reclamation and pension liabilities, including actuarial assumptions.
• Whether distribution growth and unit repurchases remain supported by recurring operating cash flow rather than acquisition or investment proceeds.