Alliance Resource Partners, L.P. — Q3 2016 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. utilities and industrial users. Operations are organized into the Illinois Basin and Appalachia reportable segments, plus Other and Corporate. The filing covers the three and nine months ended September 30, 2016, compared with the corresponding 2015 periods. The financial statements are unaudited.
Key financial metrics
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Total revenue | $552.1 million | $566.4 million | $1.404 billion | $1.732 billion |
| Coal sales | $533.8 million | $547.5 million | $1.358 billion | $1.632 billion |
| Income from operations | $96.4 million | $107.2 million | $241.6 million | $355.2 million |
| Net income | $89.8 million | $83.4 million | $219.8 million | $284.7 million |
| Net income attributable to ARLP | $89.8 million | $83.4 million | $219.8 million | $284.7 million |
| Net income per limited partner unit | $0.91 | $0.61 | $2.08 | $2.29 |
| Operating cash flow | Not separately provided | Not separately provided | $494.5 million | $528.9 million |
| Capital expenditures | Not separately provided | Not separately provided | $70.3 million | $159.2 million |
Calculated operating margin was approximately 17.5% in Q3 2016 versus 18.9% in Q3 2015, and approximately 17.2% for the first nine months of 2016 versus 20.5% in the comparable 2015 period. Segment Adjusted EBITDA, a non-GAAP measure, was $196.6 million in Q3 2016 and $536.9 million for the first nine months, down 3.5% and 12.4%, respectively.
- Coal sales volumes increased 4.5% year over year in Q3 to 10.757 million tons, while production declined 25.7% to 8.512 million tons. For the first nine months, tons sold declined 13.5% to 26.177 million and tons produced declined to 25.759 million.
- Average coal sales price declined to $49.63 per ton in Q3 from $53.18 and to $51.86 per ton for the first nine months from $53.92.
- Q3 income benefited from higher sales volumes, the absence of the prior-year $10.7 million asset impairment, and the elimination of White Oak equity losses following the Hamilton acquisition. These benefits were partly offset by lower coal prices and higher operating expenses.
- Distributions paid were $0.4375 per unit in Q3 2016 versus $0.6750 in Q3 2015; distributions paid for the first nine months were $1.5500 per unit versus $1.9875.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $21.4 million at September 30, 2016, down from $33.4 million at December 31, 2015.
- Total assets were $2.244 billion, compared with $2.361 billion at year-end 2015. Total partners’ capital was $1.026 billion.
- Debt principal outstanding totaled $655.0 million: $310.0 million under the revolving credit facility, $145.0 million of Series B senior notes, $100.0 million under the term loan and $100.0 million under the accounts receivable securitization facility. Capital lease obligations were $119.4 million in total.
- The revolving credit facility had $384.3 million available after $310.0 million of borrowings and $5.7 million of letters of credit. The separate bank facilities had $30.7 million of letters of credit outstanding.
- The revolving credit facility and term loan mature in May 2017, the securitization facility matures in December 2016, and the Series B senior notes mature in June 2018. Management was finalizing plans to extend the revolving facility; terms, cost and availability could be affected by weakness in the coal and broader energy sectors.
- Trailing-twelve-month debt-to-cash-flow and cash-flow-to-interest ratios were 1.12x and 22.0x, respectively, versus covenant limits of 3.0x maximum and 3.0x minimum. ARLP reported compliance with its debt covenants at September 30, 2016.
Material changes, outlook and unusual items
- Q3 net income increased $6.4 million despite lower revenue, primarily because of record sales volumes, the absence of the 2015 asset impairment, and improved equity earnings. First-nine-month net income decreased $64.9 million because of lower volumes, lower prices and reduced other revenue.
- Management idled Onton and Gibson North in response to market conditions; Elk Creek depleted its reserves and ceased production on April 1, 2016. Pattiki was expected to cease production by year-end 2016.
- The company recorded $16.1 million of inventory write-downs during the first nine months to reduce coal inventory to market value, primarily related to challenging conditions and lower production at Hamilton.
- On June 29, 2016, ARLP completed mining-equipment sale-leaseback transactions generating $33.9 million of proceeds and recognized a deferred loss of $7.6 million amortized over the lease terms.
- Management estimated 2016 capital expenditures of $97.5 million to $102.5 million and expected approximately $80 million to $85 million of additional investment in oil and gas mineral interests. Remaining funding was expected from cash, operating cash flow, credit and securitization facilities, and potential debt or equity issuance.
- A quarterly distribution of $0.4375 per unit, totaling approximately $52.4 million including incentive distributions, was declared on October 28, 2016 and was payable November 14, 2016.
- ARLP had no material changes to the risk factors previously disclosed in its 2015 Form 10-K. Management stated that pending lawsuits, claims and regulatory proceedings were not expected to have a material adverse effect, although outcomes exceeding recorded accruals could be material.
Important facts for investors to verify
- Renewal or refinancing of the revolving credit facility and the December 2016 securitization facility, including pricing, maturity and borrowing availability.
- Whether coal prices, customer demand, contract volumes and inventory reductions support management’s expected cash flow and distribution capacity.
- Execution of the planned mine idlings and Pattiki shutdown, Hamilton performance, and the effect of reduced production on unit costs and asset values.
- Funding requirements and returns associated with the remaining Cavalier Minerals commitments and oil and gas mineral investments.
- Exposure to variable interest rates, customer credit risk, environmental and mine-safety regulation, workers’ compensation and black-lung liabilities, reclamation obligations, pension obligations and litigation.
- The effect of related-party arrangements, including mineral leases, administrative services and the Cavalier Minerals financing relationship.