Alliance Resource Partners, L.P. — 2016 Q1 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. It operates nine underground mining complexes in the eastern United States and a coal loading terminal in Indiana. Reportable segments are Illinois Basin, Appalachia, and Other and Corporate.
This unaudited Form 10-Q covers the three months ended March 31, 2016, with comparisons to the three months ended March 31, 2015. The partnership had 74,375,025 common units outstanding as of May 10, 2016.
Financial Performance and Key Metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Total revenues | $412.8 million | $560.4 million | Down 26.3% |
| Coal sales | $401.3 million | $517.7 million | Down 22.5% |
| Income from operations | $54.8 million | $123.5 million | Down 55.6% |
| Net income | $47.3 million | $106.5 million | Down 55.6% |
| Net income attributable to ARLP | $47.3 million | $106.5 million | Down 55.6% |
| Basic and diluted earnings per unit | $0.36 | $0.92 | Down $0.56 |
| Segment Adjusted EBITDA | $153.0 million | $209.0 million | Down 26.8% |
| Cash flow from operating activities | $80.6 million | $161.6 million | Down 50.1% |
| Capital expenditures | $31.7 million | $50.3 million | Down 37.0% |
| Distributions paid per unit | $0.675 | $0.65 | Up $0.025 |
Coal tons sold declined 21.5% to 7.456 million tons from 9.501 million tons, while tons produced declined to 8.884 million from 10.502 million. Average coal sales price decreased to $53.82 per ton from $54.49. Operating expenses and outside coal purchases declined 24.3% to $253.3 million, or $33.97 per ton sold versus $35.23 in the prior-year quarter.
Approximate margins were as follows: operating margin was 13.3% versus 22.0% in Q1 2015; net margin was 11.5% versus 19.0%; and Segment Adjusted EBITDA margin was 37.1% versus 37.3%. The filing presents these margin calculations based on reported revenue and non-GAAP Segment Adjusted EBITDA.
At March 31, 2016, cash and cash equivalents were $30.0 million, total assets were $2.37 billion, and total partners’ capital was $950.7 million. Total debt principal was $886.7 million, consisting primarily of $450.0 million drawn on the revolving facility, $200.0 million under the term loan, $145.0 million of Series B senior notes, and $91.7 million under the securitization facility. Revolving-facility availability was $244.1 million after $5.9 million of letters of credit.
Material Changes Versus the Prior Comparable Period
- Revenue and profitability declined primarily because of reduced coal volumes, lower coal prices, customer shipment deferrals, mine idlings, and weak coal-market conditions.
- Onton and Gibson North had been idled since Q4 2015. Elk Creek depleted its reserves in March 2016 and ceased production on April 1, 2016.
- Hamilton, acquired through the 2015 White Oak transaction, contributed production but also carried lower-priced legacy contracts and increased depreciation and equipment-related costs.
- Other sales and operating revenues fell 86.0% to $5.0 million, largely because White Oak royalty and surface-facility revenues were no longer reported separately after consolidation and because prior-year customer payments and Matrix Design sales were not repeated.
- Equity in losses of affiliates improved to $27,000 from $9.7 million, primarily because Hamilton was consolidated after the White Oak acquisition rather than accounted for as an equity investment.
- A $12.3 million lower-of-cost-or-market adjustment was recorded against coal inventories due to lower sale prices and higher unit costs at Hamilton amid customer deferrals and difficult market conditions.
- Segment Adjusted EBITDA declined in Illinois Basin by 24.1%, in Appalachia by 29.5%, and in Other and Corporate by 48.6%.
- Cash flow from operations decreased by $81.0 million, reflecting lower net income, inventory growth, and a less favorable change in accounts payable.
- The partnership adopted accounting updates on debt issuance costs and consolidation in 2016; management reported no material effect.
Guidance, Outlook, Management Commentary, Risks, and Unusual Items
Management estimated 2016 capital expenditures of $105.0 million to $115.0 million and anticipated approximately $60.0 million to $70.0 million of investments related to acquiring oil and gas mineral interests. Management expected to fund requirements through cash, operating cash flow, revolving and securitization facilities, and potential sale-leaseback, debt, or equity transactions.
Management stated that existing liquidity sources were expected to be sufficient for working capital, capital expenditures, equity investments, debt service, commitments, and distributions, while cautioning that future liquidity depends on operating performance and access to financing. The filing does not provide formal revenue or earnings guidance.
The partnership declared a quarterly distribution of $0.4375 per common unit for the quarter ended March 31, 2016, totaling approximately $52.4 million including managing general partner incentive distributions, payable May 13, 2016.
Debt covenant compliance remained strong at March 31, 2016. The trailing-twelve-month debt-to-cash-flow ratio was 1.38 to 1.0 versus a maximum of 3.0 to 1.0, and cash flow to interest expense was 22.7 to 1.0 versus a minimum of 3.0 to 1.0. The revolving facility matures in May 2017 and the securitization facility matures in December 2016.
- Key operating risks include coal-price volatility, weak demand, customer deferrals or defaults, contract renewals, mine interruptions, regulatory and environmental requirements, labor availability, safety incidents, transportation disruptions, and reserve replacement.
- Variable-rate debt creates interest-rate exposure; a one-percentage-point increase in applicable rates was estimated to increase annualized 2016 interest expense by $7.4 million.
- The partnership had committed $82.2 million to Cavalier Minerals by March 31, 2016, with $61.8 million of remaining commitments. Cavalier Minerals had not drawn on its $100.0 million credit facility.
- The partnership paid $10.8 million of advance royalties to related-party WKY CoalPlay during the quarter and had $21.5 million outstanding under related leases.
- Various lawsuits, claims, and regulatory proceedings were pending. Management did not expect a material adverse outcome based on currently known facts, but an unfavorable result exceeding recorded accruals could be material.
- White Oak received an IRS notice commencing an administrative proceeding concerning its 2011 tax return.
- Management reported effective disclosure controls as of March 31, 2016 and continued integrating Hamilton’s internal controls, expected to be completed in Q2 2016.
Important Facts for Investors to Verify
- Verify the sustainability of distributions, particularly the $0.4375 per-unit quarterly distribution, against operating cash flow, debt maturities, and covenant restrictions.
- Assess the impact of continued coal-market weakness, customer deferrals, mine idlings, and the Elk Creek closure on 2016 production and cash flow.
- Evaluate Hamilton’s realized prices, operating costs, inventory valuation, and contribution following the White Oak acquisition.
- Review the May 2017 revolving credit and term-loan maturity profile and the December 2016 securitization-facility maturity.
- Monitor the $61.8 million remaining Cavalier Minerals funding commitment and the performance of the underlying oil and gas mineral investments.
- Assess exposure to inventory write-downs, workers’ compensation, pneumoconiosis, pension, asset-retirement, legal, environmental, and mine-safety obligations.
- Review related-party transactions involving WKY CoalPlay, Cavalier Minerals, Bluegrass Minerals, and entities associated with the partnership’s controlling owners.
- Confirm the effect of newly adopted and pending accounting standards, particularly revenue recognition, leases, inventory, and share-based compensation guidance.