Alliance Resource Partners, L.P. — Q1 2014 Form 10-Q Summary
Business Context and Reporting Period
Alliance Resource Partners, L.P. is a diversified producer and marketer of coal serving U.S. utilities and industrial users. It operates ten underground mining complexes in the eastern United States, a coal terminal, and the developing Gibson South and White Oak projects. This unaudited Form 10-Q covers the three months ended March 31, 2014, with comparisons to the three months ended March 31, 2013.
Key Financial Metrics
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Total revenue | $542.0 million | $548.1 million | (1.1%) |
| Coal sales | $525.5 million | $534.5 million | (1.7%) |
| Operating income | $129.5 million | $112.3 million | +15.3% |
| Net income | $115.9 million | $102.9 million | +12.6% |
| Net income per limited partner unit | $2.20 | $1.95 | +12.8% |
| Segment Adjusted EBITDA | $207.9 million | $188.4 million | +10.4% |
| Cash flow from operating activities | $140.1 million | $199.5 million | (29.8%) |
| Capital expenditures | $69.5 million | $70.3 million | (1.2%) |
Operating margin was approximately 23.9% versus 20.5% in the prior-year quarter. Net margin was approximately 21.4% versus 18.8%. Coal production increased to 10.3 million tons from 9.8 million tons, while tons sold declined to 9.5 million from 9.7 million. Average coal sales price increased modestly to $55.35 per ton from $55.12.
Cash and cash equivalents were $14.4 million at March 31, 2014, compared with $93.7 million at December 31, 2013. Net cash used in investing activities was $104.6 million, including $69.5 million of capital expenditures and $30.0 million invested in White Oak. Net cash used in financing activities was $114.7 million, including $76.5 million of partner distributions and net repayments under revolving credit facilities.
Total debt was $833.0 million, including $43.0 million of current maturities, compared with $868.0 million at December 31, 2013. The estimated fair value of debt was $845.5 million. The company had $215.0 million drawn and $24.2 million of letters of credit outstanding under its $700.0 million revolving credit facility, leaving $460.8 million available for borrowing. Debt-to-cash-flow and cash-flow-to-interest ratios were 1.17 to 1.0 and 20.4 to 1.0, respectively, and the company was in compliance with its debt covenants.
Material Changes Versus the Prior Comparable Period
- Net income increased primarily because of lower operating expenses, increased longwall production, improved recoveries at Tunnel Ridge, and the absence of higher-cost Pontiki production.
- Operating expenses and outside coal purchases decreased 7.7% to $322.2 million, and expense per ton sold declined to $33.94 from $36.01.
- Appalachia Segment Adjusted EBITDA increased to $48.9 million from $23.0 million, driven by higher Tunnel Ridge production and improved productivity and geological conditions.
- Illinois Basin Segment Adjusted EBITDA declined 2.1% to $163.6 million, primarily because weather-related transportation disruptions reduced sales at Warrior, Gibson North, and Pattiki.
- General and administrative expense increased to $17.4 million from $15.2 million, primarily due to higher incentive compensation. Depreciation, depletion and amortization increased to $66.8 million from $64.4 million.
- Equity in losses of affiliates increased to $6.2 million from $3.9 million, primarily due to the White Oak investment.
- Operating cash flow declined substantially because of increased trade receivables and coal inventories despite higher net income.
Guidance, Outlook, Commentary, Risks and Unusual Items
- Management estimated 2014 capital expenditures of $320 million to $350 million, including Gibson South development, White Oak reserve acquisitions, infrastructure, and maintenance capital.
- The company expected to fund approximately $80 million to $95 million of additional preferred equity investment in White Oak during 2014. Total White Oak funding from inception through December 31, 2015 was expected to be approximately $395.5 million to $425.5 million; $248.1 million had been funded through March 31, 2014.
- Management stated that cash balances, operating cash flow, available credit, and potential debt or equity financing were expected to satisfy anticipated requirements, but noted that liquidity could be adversely affected by weaker operating performance or reduced access to financing.
- White Oak represented a significant ongoing commitment. The company held a 29.0% voting interest, had invested $195.0 million in Series A units, and had recorded no distributions from White Oak. The company’s maximum exposure to loss from the equity investment was stated as $195.0 million, excluding capitalized interest.
- On April 28, 2014, the company announced a two-for-one common-unit split, with distribution of the additional units scheduled for June 16, 2014. The quarterly distribution of $1.2225 per pre-split unit would become $0.61125 per post-split unit.
- On April 28, 2014, the company declared a $1.2225-per-unit distribution for the March 31, 2014 quarter, totaling approximately $77.9 million, payable May 15, 2014.
- Key risks include coal demand and pricing, utility-sector changes, environmental and mine-safety regulation, transportation disruptions, weather and geological conditions, customer credit and contract performance, labor and benefit liabilities, reclamation obligations, litigation, and financing availability.
- The Supreme Court’s decision concerning the Cross-State Air Pollution Rule and MSHA’s new respirable coal-dust rule could affect coal demand, operating requirements, and costs. The ultimate effects were not yet determinable.
- Various lawsuits, claims, and regulatory proceedings were pending. Management did not expect them to have a material adverse effect based on current information, but acknowledged that unfavorable outcomes exceeding accruals could be material.
- The IRS audit of Alliance Coal’s 2011 tax return remained ongoing; the company characterized it as a routine audit.
Most Important Facts for Investors to Verify
- Whether the strong earnings improvement is sustainable after accounting for weather-related sales disruptions, production mix, and the absence of Pontiki’s higher-cost production.
- The conversion of higher production into cash, given the $59.4 million year-over-year decline in operating cash flow and the quarter-end cash balance of only $14.4 million.
- Progress, remaining funding requirements, operating performance, and potential losses associated with the White Oak development project.
- Funding sources for the projected $320 million to $350 million of 2014 capital expenditures and $80 million to $95 million of additional White Oak investment.
- Debt maturities, including $18.0 million of senior notes due August 2014 and $205.0 million of Series A senior notes due June 2015, together with required term-loan amortization beginning June 2014.
- Potential effects of CSAPR, MSHA’s respirable coal-dust rule, other environmental requirements, and mine-safety compliance costs.
- The impact of the two-for-one unit split on historical per-unit figures, distributions, incentive distribution rights, and valuation comparisons.