Alliance Resource Partners, L.P. — Form 10-Q Summary
Business context and reporting period
Unaudited quarterly report for the period ended September 30, 2015. Alliance Resource Partners, L.P. is a diversified U.S. coal producer and marketer serving utilities and industrial users, with reportable segments in the Illinois Basin and Appalachia. The company sold 10.3 million tons in the quarter and 30.3 million tons for the nine months.
Key financial metrics
| Metric | Three months ended September 30, 2015 | Three months ended September 30, 2014 | Nine months ended September 30, 2015 | Nine months ended September 30, 2014 |
|---|---|---|---|---|
| Total revenue | $566.4 million | $569.3 million | $1.732 billion | $1.710 billion |
| Net income | $83.4 million | $120.0 million | $284.7 million | $373.5 million |
| Net income attributable to ARLP | $83.4 million | $120.0 million | $284.7 million | $373.5 million |
| Net income per limited partner unit | $0.61 | $1.13 | $2.29 | $3.59 |
| Operating income | $107.2 million | $127.5 million | $355.2 million | $410.1 million |
| Operating cash flow | Not separately provided | Not separately provided | $528.9 million | $586.4 million |
| Segment Adjusted EBITDA | $203.8 million | $214.8 million | $612.7 million | $655.4 million |
| Distributions per unit | $0.675 | $0.625 | $1.9875 | $1.835 |
Net margin was approximately 14.7% in the quarter and 16.4% for the nine months, compared with approximately 21.1% and 21.8%, respectively, in the prior-year periods. Segment Adjusted EBITDA margin was approximately 36.0% in the quarter and 35.4% for the nine months.
- Coal sales were $547.5 million in the quarter and $1.632 billion for the nine months. Average coal sales price declined to $53.18 per ton in the quarter and $53.92 per ton for the nine months.
- Operating expenses and outside coal purchases were $336.5 million in the quarter and $1.046 billion for the nine months.
- Capital expenditures were $159.2 million for the nine months, compared with $233.7 million in the prior-year period.
- Cash and cash equivalents were $35.9 million at September 30, 2015, compared with $24.6 million at December 31, 2014.
- Total debt was approximately $953.0 million, including $142.2 million of current maturities and $810.9 million of long-term debt. Estimated debt fair value was $963.8 million.
- The company had $291.6 million available under its $700.0 million revolving credit facility, after $403.0 million of borrowings and $5.4 million of letters of credit. The $100.0 million securitization facility was fully drawn.
- Trailing-twelve-month debt-to-cash-flow and cash-flow-to-interest ratios were 1.23 to 1.0 and 24.3 to 1.0, respectively; the company was in compliance with debt covenants.
Material changes versus the prior comparable period
- Quarterly net income declined 30.5%, while nine-month net income declined 23.8%. The decreases reflected lower coal prices, higher depreciation, depletion and amortization, a $10.7 million asset impairment charge, and substantially higher losses from affiliates.
- Sales volumes increased 4.8% in the quarter and 2.0% for the nine months, but average coal prices declined because of market conditions and lower-priced legacy contracts at Hamilton.
- Quarterly Segment Adjusted EBITDA declined 5.1% to $203.8 million; nine-month Segment Adjusted EBITDA declined 6.5% to $612.7 million. Appalachia EBITDA fell 22.1% in the quarter and 16.1% for the nine months.
- On July 31, 2015, the company acquired the remaining 60% of White Oak Resources, obtaining 100% ownership and operating control of the Hamilton Mine. Preliminary consideration was $287.3 million, including $50.0 million cash, $103.3 million for the previously held investment, $119.7 million for settlement of pre-existing relationships, and $14.3 million of contingent consideration. The acquisition added $157.6 million of preliminary goodwill.
- Hamilton contributed $29.3 million of revenue and a $6.1 million net loss from the acquisition date through September 30, 2015. Acquisition accounting remained preliminary.
- Debt increased primarily because of borrowings used to support acquisitions and operations. The $205.0 million Series A senior notes were repaid in June 2015.
- The company recognized increased depreciation associated with the expected closure of Elk Creek, Gibson South production, acquired coal supply agreements, and Hamilton.
Guidance, outlook, commentary, risks and unusual items
- Management estimated 2015 capital expenditures of $265.0 million to $285.0 million and 2015 investments of approximately $105.0 million to $115.0 million. Funding was expected from cash, operating cash flow, credit facilities and, if necessary, debt or equity markets.
- Management stated that it did not anticipate significant near-term liquidity constraints, while cautioning that weaker operating performance or reduced access to financing could adversely affect liquidity.
- On November 6, 2015, Gibson issued WARN notices and expected to idle Gibson North and eliminate one and a half production units. Sebree issued WARN notices and stopped production at the Onton mine. The company expected the reductions to affect approximately 120 Gibson employees and 140 Onton employees, subject to redeployment opportunities.
- Elk Creek was expected to cease production in early 2016. Future production at Gibson North was described as market dependent.
- On October 16, 2015, the company amended its revolving credit facility to increase permitted baskets for capital leases and sale-leasebacks. It also repaid $80.6 million of Hamilton equipment financing using revolving-facility borrowings. On October 29, 2015, it completed a $100.0 million mining-equipment sale-leaseback with a four-year term, $1.9 million initial monthly rent and a 20% balloon payment.
- The company declared a $0.675-per-unit distribution for the September 2015 quarter, totaling approximately $87.5 million including incentive distributions.
- Key risks include coal-price and demand weakness, customer and contract performance, mine productivity and geological interruptions, labor and benefit liabilities, environmental and mine-safety regulation, reclamation and surety obligations, variable-rate debt, insurance availability, litigation, related-party transactions and the tax treatment of publicly traded partnerships.
- The EPA’s Clean Power Plan and revised ozone standards could reduce coal demand or increase compliance costs. The company stated that the impact could not yet be meaningfully determined.
- Various lawsuits, claims and regulatory proceedings were pending, but management believed they would not have a material adverse effect based on currently known facts. The filing notes that outcomes exceeding recorded accruals could be material.
Important facts investors should verify
- Progress and final valuation of the Hamilton acquisition, including goodwill, contingent consideration and acquired mine performance.
- Effects of Gibson, Sebree and Onton production reductions and the expected closure of Elk Creek on 2016 volumes and margins.
- Coal price realizations, customer contract renewals and exposure to further market deterioration.
- Liquidity after distributions, acquisitions, investments, debt refinancing, the equipment sale-leaseback and required capital spending.
- Compliance with debt covenants and maturity requirements, particularly the May 2017 revolving credit facility maturity and 2018 Series B notes maturity.
- Potential impacts of environmental rules, mine-safety matters, litigation, reclamation obligations and related-party arrangements.
- Management’s integration of Hamilton’s financial reporting and internal controls, which was expected to continue through fiscal 2016.