Alliance Resource Partners, L.P. — Q3 2010 Form 10-Q Summary
Business context and reporting period
Alliance Resource Partners, L.P. is a diversified eastern U.S. coal producer and marketer serving utilities and industrial customers under long-term supply agreements. It operates nine mining complexes, a coal loading terminal, and is developing the Tunnel Ridge mine. This unaudited Form 10-Q covers the three and nine months ended September 30, 2010, compared with the corresponding 2009 periods.
Financial performance and key metrics
| Metric | Q3 2010 | Q3 2009 | 9M 2010 | 9M 2009 |
|---|---|---|---|---|
| Total revenue | $410.4 million | $299.6 million | $1,191.5 million | $932.8 million |
| Coal sales | $396.7 million | $281.6 million | $1,146.7 million | $881.5 million |
| Income from operations | $81.3 million | $44.5 million | $257.1 million | $173.3 million |
| Net income attributable to ARLP | $73.2 million | $36.4 million | $233.7 million | $150.4 million |
| Basic and diluted income per unit | $1.48 | $0.57 | $4.86 | $2.85 |
| Segment Adjusted EBITDA | $133.7 million | $82.8 million | $404.0 million | $286.7 million |
| Operating cash flow | Not separately provided | Not separately provided | $394.2 million | $238.3 million |
Revenue increased 36.9% in the quarter and 27.7% for the nine months. Net income attributable to ARLP increased 100.9% and 55.3%, respectively. Operating margins were approximately 19.8% in Q3 and 21.6% for the nine-month period; net margins were approximately 17.8% and 19.6%, respectively. Segment Adjusted EBITDA margins were approximately 32.6% and 33.9%, respectively.
- Q3 tons sold increased 24.2% to 7.676 million; nine-month tons sold increased 19.6% to 22.545 million.
- Average coal sales price increased to $51.68 per ton in Q3 from $45.58 and to $50.86 per ton for nine months from $46.76.
- Illinois Basin generated $114.2 million of Q3 Segment Adjusted EBITDA and $344.2 million for nine months, representing the principal source of growth.
- Central Appalachia nine-month Segment Adjusted EBITDA declined 18.1% to $24.1 million, while Northern Appalachia increased to $29.9 million from $11.6 million.
- Capital expenditures were $233.8 million for nine months, compared with $251.5 million in 2009.
Liquidity, debt and capital structure
- Cash and cash equivalents were $20.3 million at September 30, 2010, compared with $21.6 million at December 31, 2009.
- Total debt was $422.0 million, consisting of $72.0 million of senior notes, $205.0 million of Series A notes and $145.0 million of Series B notes. The company made an $18.0 million scheduled principal payment during the period.
- The $150.0 million revolving credit facility had no borrowings outstanding, $11.6 million of letters of credit outstanding and $130.9 million available for borrowing after the removal of Lehman Commercial Paper’s $7.5 million commitment.
- Trailing-twelve-month debt-to-cash-flow and cash-flow-to-interest ratios were 0.77-to-1.0 and 17.5-to-1.0, respectively, versus covenant limits of 3.0-to-1.0 and minimum 4.0-to-1.0. The partnership was in compliance with its debt covenants.
- Cash used in financing activities was $157.1 million, including $137.6 million of partner distributions. Distributions paid were $0.81 per unit in Q3 and $2.375 per unit for nine months.
Material changes, outlook and unusual items
- Management attributed improved results primarily to record sales volumes, higher contract pricing and increased River View production. Higher operating costs reflected greater volumes, materials and supplies costs, regulatory costs, Tunnel Ridge development activity and Northern Appalachia contract mining.
- Pattiki mine production was temporarily idled after a May 2010 hoist-conveyor failure. Limited production resumed July 19, 2010; management planned to restore full capacity by year-end. The company recorded $1.2 million for asset retirement and believed insurance recovery was unlikely because the property loss did not exceed the deductible.
- Tunnel Ridge began incidental production in May 2010; longwall production was not expected until late 2011. An August 2010 lease amendment added approximately 33 million tons of clean recoverable reserves.
- Management estimated 2010 capital expenditures of $285 million to $325 million and expected to fund remaining requirements through cash, operating cash flow, available revolver capacity and, if necessary, debt or equity markets.
- On October 27, 2010, the partnership declared a $0.83-per-unit quarterly distribution, totaling approximately $48.4 million, payable November 12, 2010.
- Effective January 1, 2010, Mid-America Carbonates was deconsolidated under revised variable-interest-entity guidance. Management stated that the change was not material to the consolidated financial statements.
Risks and contingencies
- A royalty dispute alleges damages of at least $33 million plus punitive damages; the company believes the claims lack merit and has accrued no loss.
- Health care reform may increase medical costs and could increase Black Lung liabilities. Management stated that the impact of certain provisions could not yet be reasonably estimated.
- The company faces coal-price, demand, customer-contract, regulatory, environmental, mine-safety, labor, geologic, weather, transportation, reclamation, workers’ compensation and insurance risks.
- Commercial property coverage effective October 1, 2010 has a $75.0 million per-occurrence maximum, a $1.5 million property-damage deductible, a 60-day business-interruption waiting period and a $10.0 million aggregate deductible.
- During Q3, mines received 1,598 MSHA inspection days and recorded 264 pending citation contests initiated during the quarter. No fatalities, pattern-of-violations notices or Section 110(b)(2) violations were reported for the period.
Investor verification points
- Verify whether the reported volume and pricing strength continued after Q3, particularly in the Illinois and Northern Appalachian segments.
- Review the timing and cost of Pattiki’s return to full capacity and any final insurance determination.
- Monitor Tunnel Ridge development spending, permitting, production ramp-up and the expected late-2011 longwall start.
- Assess the effect of health care legislation on Black Lung, medical and post-retirement liabilities.
- Confirm ongoing compliance with debt covenants, revolver availability and scheduled senior-note repayments.
- Track the outcome of the $33 million-plus royalty litigation and other regulatory, safety and environmental matters.