Alliance Resource Partners, L.P. — 2013 Q2 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 eleven underground mining complexes across the eastern United States, a coal loading terminal, and the White Oak longwall mine development project. The filing covers the three and six months ended June 30, 2013; financial statements are unaudited.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2013 | Three Months Ended June 30, 2012 | Six Months Ended June 30, 2013 | Six Months Ended June 30, 2012 |
|---|---|---|---|---|
| Total revenues | $553.6 million | $529.9 million | $1,101.6 million | $973.5 million |
| Coal sales | $541.6 million | $512.5 million | $1,076.1 million | $942.1 million |
| Income from operations | $115.6 million | $105.5 million | $227.9 million | $197.4 million |
| Net income | $104.1 million | $95.5 million | $207.0 million | $178.4 million |
| Net income per limited partner unit | $1.96 | $1.83 | $3.92 | $3.36 |
| Segment Adjusted EBITDA | $195.0 million | $171.6 million | $383.4 million | $317.3 million |
| Operating margin | 20.9% | 19.9% | 20.7% | 20.3% |
| Net margin | 18.8% | 18.0% | 18.8% | 18.3% |
Coal production was 10.1 million tons and coal sales were 9.8 million tons in the second quarter. For the six-month period, production was 19.9 million tons and sales were 19.5 million tons. Average coal sales price declined to $55.17 per ton in the quarter and $55.14 per ton for the six-month period, primarily because of the absence of metallurgical coal export sales.
- Cash provided by operating activities was $373.8 million for the six months ended June 30, 2013, compared with $255.5 million in the prior-year period.
- Capital expenditures were $163.0 million, compared with $238.3 million in the prior-year period.
- Net cash used in investing activities was $236.0 million; net cash used in financing activities was $157.3 million.
- Cash and cash equivalents declined to $8.8 million at June 30, 2013 from $28.3 million at December 31, 2012.
- Total debt was $778.0 million, including $24.3 million of current maturities. Estimated debt fair value was approximately $800.6 million.
- The $700.0 million revolving credit facility had $142.0 million drawn, $23.5 million of letters of credit outstanding, and $534.5 million available for borrowing.
- Debt-to-cash-flow and cash-flow-to-interest ratios were 1.15 to 1.0 and 19.0 to 1.0, respectively, versus covenant limits of 3.0 to 1.0 and 3.0 to 1.0. The partnership was in compliance with its debt covenants.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue increased 4.5%, while six-month revenue increased 13.2%, primarily from higher coal volumes.
- Second-quarter net income increased 9.0%; six-month net income increased 16.0%.
- Segment Adjusted EBITDA increased 13.7% in the quarter and 20.8% for the six-month period.
- Sales volumes increased 13.3% in the quarter and 18.5% for the six-month period. Growth was driven by Tunnel Ridge longwall production, higher production at River View and Gibson North, and the Onton mine acquired in April 2012.
- Operating expenses and outside coal purchases decreased to $35.47 per ton sold in the quarter and $35.74 per ton for the six-month period, compared with $40.50 and $38.76, respectively.
- Depreciation, depletion and amortization increased to $68.2 million in the quarter and $132.6 million for the six-month period, primarily because of Tunnel Ridge production startup, the Onton mine, and other expansion and infrastructure investments.
- White Oak generated Segment Adjusted EBITDA losses of $6.3 million in the quarter and $10.6 million for the six-month period, compared with losses of $2.8 million and $6.9 million, respectively, in the prior-year periods.
Guidance, Outlook, Commentary, Risks and Unusual Items
- Management estimated 2013 capital expenditures of $370.0 million to $400.0 million, including mine expansion, infrastructure, maintenance capital, Gibson South development, reserve acquisitions, and White Oak surface facilities.
- Management stated that existing cash, operating cash flow, credit-facility borrowings, and potential debt or equity financing were expected to fund working capital, capital expenditures, investments, debt payments, commitments, and distributions. Management did not anticipate significant near-term liquidity constraints, but noted dependence on operating performance and financing access.
- White Oak commitments are significant. The partnership had funded $190.3 million through June 30, 2013 and expected total funding of approximately $300.5 million to $425.5 million through approximately the next 1.5 years, including amounts already funded. Remaining reserve-purchase and development commitments were $35.7 million, and the White Oak construction loan had $5.5 million drawn against a $10.5 million commitment.
- In June 2013, the partnership acquired rights to approximately 11.6 million tons of proven and probable coal reserves and 5.9 million resource tons in West Virginia for $25.2 million.
- On July 26, 2013, the partnership declared a quarterly distribution of $1.1525 per common unit, totaling approximately $72.6 million including incentive distributions, payable August 14, 2013.
- Material risks include coal-price and demand volatility, dependence on utility customers and long-term contracts, regulatory and environmental requirements, mine safety and operating interruptions, labor and reclamation liabilities, customer credit risk, variable-rate debt, financing availability, reserve replacement, and losses or funding requirements associated with equity investments such as White Oak.
- The IRS audit of Alliance Coal’s 2011 income tax return remained ongoing. Management described it as a routine audit; the filing does not provide a quantified potential exposure.
- Various lawsuits, claims, and regulatory proceedings were pending. Management believed they would not have a material adverse effect, although an unfavorable outcome exceeding recorded accruals could be material.
Important Facts for Investors to Verify
- Whether coal prices and the lack of metallurgical export sales continue to pressure realized pricing despite volume growth.
- Progress, costs, funding requirements, and operating commencement expectations for the White Oak development project and related commitments.
- Actual 2013 capital expenditures versus the $370.0 million to $400.0 million estimate and the resulting effect on cash balances and borrowings.
- Compliance with debt covenants and the timing of mandatory term-loan amortization beginning in the quarter ended June 30, 2014.
- Whether Tunnel Ridge, River View, Gibson North, Onton, and other operations sustain the production and cost-per-ton improvements reported in the filing.
- Developments in the IRS audit, litigation, mine-safety matters, workers’ compensation, pneumoconiosis, pension, and asset-retirement obligations.