Alliance Resource Partners, L.P. — Form 10-Q Summary
Business Context and Reporting Period
Alliance Resource Partners, L.P. is a diversified producer and marketer of coal to U.S. and international utilities and industrial users, with reportable segments in the Illinois Basin and Appalachia. The partnership also holds investments in oil and gas mineral interests and gas compression services. This unaudited filing covers the three and nine months ended September 30, 2018, compared with the corresponding 2017 periods.
The May 31, 2018 partnership simplification made AHGP a wholly owned subsidiary of ARLP and eliminated economic general partner interests in the Intermediate Partnership and Alliance Coal. Comparability of earnings per unit and ownership allocations is therefore affected.
Key Financial Metrics
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Total revenue | $497.8 million | $453.2 million | $1.471 billion | $1.313 billion |
| Coal sales | $460.3 million | $435.2 million | $1.360 billion | $1.256 billion |
| Net income attributable to ARLP | $73.7 million | $61.3 million | $315.8 million | $229.4 million |
| Operating income | $74.6 million | $65.7 million | $323.0 million | $253.5 million |
| Net income per limited partner unit | $0.55 | $0.52 | $2.35 | $2.32 |
| Segment Adjusted EBITDA | $169.8 million | $157.2 million | $520.6 million | $506.9 million |
| Operating cash flow | Not separately provided | Not separately provided | $579.3 million | $456.1 million |
| Capital expenditures | $63.8 million | $37.9 million | $184.4 million | $105.5 million |
| Cash balance | September 30, 2018: $38.4 million | December 31, 2017: $6.8 million |
Q3 operating margin was approximately 15.0% and net margin approximately 14.8%. For the nine-month period, operating margin was approximately 22.0% and net margin approximately 21.5%; the nine-month results include an $80.0 million net litigation settlement gain.
Coal volumes sold increased 4.4% in Q3 to 10.1 million tons and 8.1% for the nine months to 30.0 million tons. Coal production increased 15.9% in Q3 to 9.9 million tons and 6.6% for the nine months to 30.1 million tons.
Debt and Liquidity
- Gross principal debt at September 30, 2018 was $400.0 million, consisting of 7.5% senior unsecured notes due May 2025. Carrying value of long-term debt, net of discounts and issuance costs, was $388.2 million.
- The revolving credit facility was increased to $479.75 million of extended commitments. No borrowings were outstanding; $9.3 million of letters of credit were outstanding and $485.5 million was available.
- The $100.0 million accounts receivable securitization facility had no outstanding balance and matures in January 2019.
- Cash increased to $38.4 million from $6.8 million at year-end 2017. Net cash used in financing activities was $352.4 million, primarily reflecting distributions, debt-facility repayments and unit repurchases.
- Trailing-twelve-month debt-to-cash-flow and cash-flow-to-interest ratios were 0.64:1 and 17.2:1, respectively, versus covenant limits of 2.5:1 and 3.0:1. Management reported compliance with debt covenants.
Material Changes Versus the Prior Comparable Period
- Q3 revenue increased 9.8%, net income attributable to ARLP increased 20.3%, and Segment Adjusted EBITDA increased 8.0% year over year.
- Nine-month revenue increased 12.0% and net income attributable to ARLP increased 37.7%. The increase includes the $80.0 million net gain from a customer litigation settlement and the absence of the $8.1 million debt extinguishment loss recorded in 2017.
- Coal sales increased 5.8% in Q3 and 8.3% for the nine months. Q3 average coal sales price increased to $45.71 per ton from $45.12; nine-month average price increased modestly to $45.39 from $45.31.
- Q3 operating expenses increased 4.7%, while operating expense per ton rose slightly to $30.62 from $30.53. Nine-month operating expenses and outside coal purchases increased 13.1%, with cost per ton rising to $29.99 from $28.66.
- Illinois Basin performance benefited from higher volumes and the May 2018 restart of Gibson North. Appalachia benefited from higher realized prices but experienced difficult mining conditions and a Tunnel Ridge longwall move.
- Capital expenditures increased 74.9% for the nine months, reflecting mine infrastructure and equipment spending.
- The partnership repurchased 1.067 million units for $21.1 million through September 30, 2018, under a $100 million authorization, leaving $78.9 million authorized.
- Quarterly cash distributions increased from $0.505 per unit for the November 2017 payment to $0.525 per unit declared for November 2018.
Guidance, Outlook, Risks and Unusual Items
- Management estimated 2018 capital expenditures of $245 million to $260 million and expected to fund remaining requirements with cash, operating cash flow, investments and available borrowing capacity.
- Management was evaluating a new east Kentucky mine to replace reserves expected to deplete at MC Mining in 2020. Estimated capital requirements were $50 million to $66 million, with potential project commencement before year-end 2018 and completion in the first quarter of 2020.
- Management stated that current liquidity was sufficient and that it did not anticipate liquidity constraints, while noting dependence on operating performance, financing access and coal-industry conditions.
- The $93.0 million litigation settlement cash receipt was offset by $13.0 million of legal fees and related incentive compensation, producing an $80.0 million net gain. The agreement also included a new coal supply contract, export transloading capacity and acquisition of certain coal reserves.
- Operating lease accounting adoption is expected to result in recognition of approximately $25 million to $30 million of right-of-use assets and lease liabilities on January 1, 2019.
- Principal risks include coal prices and demand, customer contract performance and renewals, environmental and mine-safety regulation, mining conditions and interruptions, transportation costs and delays, labor availability, reclamation and workers’ compensation obligations, pension and pneumoconiosis liabilities, insurance availability, litigation, and performance of non-controlled investments.
- Outstanding legal and regulatory matters were not expected by management to have a material adverse effect, although an unfavorable outcome exceeding recorded accruals could be material.
Most Important Facts for Investors to Verify
- Whether the $80.0 million settlement gain and higher coal volumes are nonrecurring or repeatable contributors to earnings and cash flow.
- Cost trends in the Illinois Basin and Appalachia, particularly difficult mining conditions, longwall moves and the effect of reopening Gibson North.
- Progress, final approval, funding and expected returns for the proposed east Kentucky mine.
- Renewal or refinancing of the accounts receivable securitization facility, which matures in January 2019.
- Future unit repurchases and distributions relative to operating cash flow, capital expenditures and debt-service requirements.
- Exposure to environmental, mine-safety, reclamation, workers’ compensation and pneumoconiosis liabilities, including insurance recoveries and reserve assumptions.
- Effect of the May 2018 simplification transactions when comparing reported earnings per unit, ownership allocations and historical periods.