Alliance Resource Partners, L.P. — FY2010 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2010, filed February 28, 2011. ARLP is a diversified eastern U.S. coal producer and marketer operating nine underground mining complexes, a coal loading terminal, brokerage and mine-safety service businesses. It reported approximately 697.4 million tons of proven and probable reserves, 28.9 million tons produced and 30.3 million tons sold in 2010.
- Illinois Basin represented the principal operating engine, with 24.8 million tons sold and 46.0% growth in Segment Adjusted EBITDA.
- Approximately 91.5% of sales tonnage went to electric utilities; 92.4% of sales tonnage was under long-term contracts.
- AHGP owned approximately 42.3% of ARLP’s common units and controlled the managing general partner and incentive distribution rights.
Key financial metrics
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Total revenue | $1,610.1 million | $1,231.0 million | +30.8% |
| Coal sales | $1,551.5 million | $1,163.9 million | +33.3% |
| Income from operations | $351.8 million | $221.6 million | +58.8% |
| Net income attributable to ARLP | $321.0 million | $192.2 million | +67.0% |
| Basic and diluted net income per unit | $6.68 | $3.56 | +87.6% |
| EBITDA | $499.5 million | $340.4 million | +46.8% |
| Net cash from operating activities | $520.6 million | $282.7 million | +84.1% |
| Capital expenditures | $289.9 million | $328.2 million | -11.7% |
| Cash and cash equivalents | $339.6 million | $21.6 million | Significant increase |
| Total long-term debt, including current maturities | $722.0 million | $440.0 million | +64.1% |
Reported operating margin was approximately 21.8%, net margin approximately 19.9%, and EBITDA margin approximately 31.0%. Revenue per ton sold increased to $52.04 from $47.41, while cost per ton sold increased to $35.58 from $33.85.
Quarterly fourth-quarter 2010 revenue was $418.6 million, operating income was $94.6 million, net income attributable to ARLP was $87.4 million and earnings per unit were $1.82. The fourth quarter included a favorable $13.9 million workers’ compensation liability adjustment related to the annual actuarial study.
Material changes versus the prior comparable period
- Sales volume increased 21.3% to 30.3 million tons and production increased 11.7% to 28.9 million tons, primarily reflecting the expansion of the River View mine.
- Average coal sales price rose to $51.21 per ton from $46.60, driven primarily by improved contract pricing across regions.
- Operating expenses increased 26.6%, with higher materials and supplies, labor-related costs, production taxes, development activity and depreciation. Materials and supplies expense per produced ton rose 9.7%.
- Illinois Basin Segment Adjusted EBITDA increased to $460.6 million from $315.5 million. Central Appalachia declined 10.8% to $36.7 million, while Northern Appalachia increased to $46.7 million from $15.6 million due to stronger export-market demand.
- Net cash from operations increased by $237.8 million, aided by higher earnings and a $31.4 million inventory-related cash benefit. Cash used for investing declined to $295.0 million.
- Debt increased primarily because of a new $300.0 million term loan entered into on December 29, 2010. The revolving facility had $130.9 million available and no borrowings outstanding at year-end.
- The Pattiki mine was partially idled after a vertical hoist conveyor failure on May 13, 2010, resumed limited production July 19 and returned to full capacity January 3, 2011. The filing recorded a $1.2 million asset-retirement charge and reported no material consolidated impact.
- ARLP deconsolidated Mid-America Carbonates effective January 1, 2010 under revised variable-interest-entity accounting; management stated the impact was not material.
Guidance, outlook, commentary, risks and unusual items
- Management stated that cash on hand, operating cash flow and available borrowing capacity should fund working capital, capital expenditures, debt service and distributions, and that it did not anticipate significant liquidity constraints in the foreseeable future.
- Estimated 2011 capital expenditures were $320 million to $360 million; expected average annual maintenance capital expenditures over the following five years were approximately $4.70 per ton produced.
- Tunnel Ridge longwall production was expected to begin in the first quarter of 2012, with estimated annual capacity of 5.5 million to 6.0 million tons. Gibson South production was currently expected to begin in 2014, subject to market conditions, permitting and board approval.
- Quarterly distributions increased during 2010 to $0.86 per unit for the fourth quarter, paid February 14, 2011. Distributions are not guaranteed and depend on available cash, reserves, debt restrictions, capital spending and operating performance.
- Key risks include coal-price and demand volatility, substitution by natural gas and renewable energy, environmental and carbon regulation, mine safety and permitting requirements, transportation disruptions, labor and equipment constraints, reclamation and black-lung liabilities, customer concentration and access to surety bonds.
- Two customers accounted for approximately 29.2% of 2010 revenue. Long-term contracts contain price-adjustment, reopening, volume-flexibility and potential termination provisions.
- Long-term debt agreements required a debt-to-cash-flow ratio no greater than 3.0 to 1.0 and cash-flow-to-interest ratio no lower than 4.0 to 1.0. Reported ratios were 1.4 to 1.0 and 16.5 to 1.0, respectively; ARLP reported compliance at year-end.
- Unfunded obligations included approximately $130.0 million of undiscounted reclamation obligations, $113.4 million of workers’ compensation and black-lung obligations, and a $13.3 million pension underfunding.
- The Rector royalty litigation resulted in a judgment of approximately $3.8 million plus future royalties; ARLP appealed and stated that the matter was not expected to be material. The filing reported no other litigation believed material to operations.
- ARLP reported three mine fatalities during 2010, 931 pending contests before administrative law judges at year-end and proposed MSHA assessments of approximately $2.2 million for the year. Management reported effective disclosure controls and internal control over financial reporting, with an unqualified Deloitte audit opinion.
Most important facts for an investor to verify
- Whether 2010 earnings and cash flow growth is sustainable after the River View ramp-up, favorable actuarial adjustments and higher coal prices.
- Actual 2011 capital spending, River View and Tunnel Ridge execution, and the timing and cost of Tunnel Ridge longwall production.
- Coal contract renewals, price reopeners, customer nominations and exposure to the two largest customers.
- Debt maturity schedule, variable-rate exposure, covenant headroom and revolving-facility availability following the Lehman lender default.
- Future environmental, mine-safety, permitting, reclamation, black-lung and workers’ compensation costs, including potential effects of regulatory changes.
- Availability and collateral requirements for surety bonds and letters of credit supporting reclamation and employee-benefit obligations.
- Distribution coverage after incentive distributions, capital expenditures, debt service and required reserves.
- Related-party arrangements, including leases and payments to affiliates controlled by Joseph W. Craft III.