Alliance Resource Partners, L.P. — FY2018 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2018, filed February 22, 2019. ARLP is a diversified natural-resource limited partnership focused on coal production and oil and gas mineral interests. It operated eight underground mining complexes in the eastern United States, a coal-loading terminal, and related mining-services businesses. The filing reports Illinois Basin and Appalachia as reportable coal segments, plus Other and Corporate.
ARLP sold a record 40.4 million tons of coal and produced 40.3 million tons in 2018. Approximately 68.2% of tons sold went to U.S. electric utilities and 27.8% to international markets. ARLP had approximately 1.70 billion tons of proven and probable coal reserves at year-end.
Key financial metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Total revenue | $2,002.9 million | $1,796.2 million | +11.5% |
| Coal sales | $1,844.8 million | $1,711.1 million | +7.8% |
| Income from operations | $372.3 million | $331.8 million | +12.2% |
| Net income attributable to ARLP | $366.6 million | $303.6 million | +20.7% |
| Basic and diluted earnings per unit | $2.74 | $2.80 | Down from reported 2017 level |
| Pro forma earnings per unit | $2.73 | $2.25 | +21.3% |
| Operating cash flow | $694.3 million | $556.1 million | +24.9% |
| Capital expenditures | $233.5 million | $145.1 million | +60.9% |
| Adjusted EBITDA | $647.4 million | $620.3 million | +4.4% |
| Cash and cash equivalents | $244.2 million | $6.8 million | Increase |
| Total debt principal | $667.0 million | $502.4 million | Increase |
Coal sales price increased modestly to $45.64 per ton from $45.24. Operating expenses and outside coal purchases increased to $29.91 per ton from $28.87, reflecting difficult mining conditions, additional Tunnel Ridge longwall move days, higher roof-support and contract-labor costs, and Gibson North restart costs. Income from operations was approximately an 18.6% margin; net income attributable to ARLP was approximately an 18.3% margin.
Distributions paid per limited partner unit totaled $2.07 in 2018. Quarterly distributions increased from $0.5100 in the first quarter to $0.5250 in the fourth quarter. The partnership declared a $0.53 per-unit distribution in January 2019.
Material changes versus the prior comparable period
- Coal volume was the primary driver of revenue growth: tons sold increased 6.9% and tons produced increased 7.1%. River View and the Gibson County complex performed strongly, and the Gibson North mine resumed production in May 2018.
- Illinois Basin tons sold increased 11.2% and segment Adjusted EBITDA increased 4.2%. Appalachia tons sold declined 3.9%, but segment Adjusted EBITDA increased 2.6% because of higher prices and increased metallurgical-coal exports.
- A March 2018 litigation settlement generated a $93.0 million cash payment and an $80.0 million net settlement gain. The settlement also included a new coal supply agreement, export transloading capacity, and coal reserves near Tunnel Ridge.
- ARLP recorded a $40.5 million non-cash impairment charge in the fourth quarter, including $34.3 million related to a reduced economic mine life at Dotiki and $6.2 million related to an Illinois coal-reserve lease option.
- The May 31, 2018 partnership simplification made AHGP a wholly owned subsidiary, eliminated economic general-partner interests and IDRs, and changed the comparability of reported per-unit results. Pro forma EPU is therefore more useful for year-over-year comparison.
- ARLP repurchased and retired approximately 3.684 million units for $70.6 million at an average price of $19.16, leaving $29.4 million authorized under the $100 million program at year-end.
- Debt principal increased primarily because borrowings under the revolving credit facility rose to $175.0 million and securitization-facility borrowings rose to $92.0 million. The $400.0 million senior notes remain outstanding at a 7.5% fixed rate and mature in 2025.
Liquidity, debt and outlook
- Management stated that cash balances, operating cash flow, investments, credit facilities and potential debt or equity issuance should be sufficient for working capital, capital expenditures, debt service, investments and distributions, while noting that liquidity depends on future operating performance and financing access.
- The $494.75 million revolving credit facility terminates in May 2021. At December 31, 2018, $310.5 million was available for borrowing after $9.3 million of letters of credit. ARLP was in compliance with its debt covenants; trailing debt-to-cash-flow was 0.98x versus a 2.5x maximum, and cash-flow-to-interest was 17.8x versus a 3.0x minimum.
- Management estimated 2019 total capital expenditures of $360 million to $400 million and average maintenance capital expenditures over the following five years of approximately $5.57 per ton produced.
- Development of the Excel Mine No. 5 was expected to require $45 million to $50 million over 12 to 18 months, including $40 million to $45 million in 2019. The project is intended to replace Excel Mine No. 4 as its reserves deplete in 2020 and is expected to access approximately 15 million tons of reserves.
- On January 3, 2019, ARLP acquired the AllDale I and II general-partner interests and substantially all remaining limited-partner interests for $176.0 million, funded with cash and revolving-credit borrowings. The assets include approximately 43,000 net royalty acres. Management expected to record a significant acquisition-related gain in the first quarter of 2019, but the amount was not finalized in the filing.
- On February 8, 2019, Kodiak redeemed ARLP’s preferred investment for $135.0 million, including an early-redemption premium. The filing states that this produced an $11.5 million gain.
Risks, contingencies and unusual items
- Coal demand and pricing remain exposed to competition from natural gas, renewables and nuclear generation; environmental rules, power-plant retirements, climate policies, tariffs and international market conditions may reduce demand.
- Approximately 69.1% of 2018 sales tonnage was under long-term contracts, but contracts include price-adjustment, volume-flexibility, reopening, suspension and termination provisions. Nominal commitments at February 14, 2019 were approximately 17.3 million tons for 2019 and 17.2 million tons for 2020.
- Louisville Gas and Electric Company accounted for approximately 10.9% of 2018 total revenue. Customer credit deterioration, contract disputes, cancellations or failures to take coal could affect cash flow.
- Mining operations face geological, equipment, weather, transportation, labor, safety, permitting and environmental risks. The company is self-insured for significant workers’ compensation and black-lung obligations.
- At year-end, ARLP reported $137.1 million of asset-retirement obligations, $121.6 million of workers’ compensation and pneumoconiosis obligations, and approximately $269.6 million of surety bonds. Management cautioned that surety-bond availability, collateral requirements and costs could adversely affect operations.
- Undiscounted reclamation obligations were estimated at $237.4 million, and contractual cash obligations totaled approximately $1.56 billion, including debt, interest, leases, capital-project commitments, reclamation and benefit obligations.
- Management stated that pending litigation was not expected to have a material adverse effect, but acknowledged that outcomes exceeding recorded accruals could be material. Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts for an investor to verify
- Reconcile reported EPU with pro forma EPU because the 2017 Exchange Transaction and 2018 Simplification Transactions materially changed ownership, distributions and income allocations.
- Assess whether higher volumes can offset rising operating costs per ton and the effect of difficult mining conditions.
- Review 2019 capital spending, Excel Mine No. 5 development progress and the funding impact of the AllDale acquisition.
- Verify debt maturities, variable-rate exposure, revolving-credit availability and compliance with financial covenants.
- Monitor coal contract renewals, customer concentration, export-market exposure and price-reopener provisions.
- Evaluate the effect of environmental regulation, coal-fired generation retirements, transportation constraints and surety-bond availability on future production and distributions.
- Confirm the final purchase-price allocation and acquisition gain for AllDale I and II, as well as the accounting and cash impact of the Kodiak redemption.