Alliance Resource Partners, L.P. — 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 users. The filing covers the unaudited three and nine months ended September 30, 2012, compared with the corresponding 2011 periods. Operations include the Illinois Basin, Central Appalachia, Northern Appalachia, White Oak development activities, and other corporate operations. The partnership had 36.9 million common units outstanding as of November 8, 2012.
Financial Performance and Key Metrics
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Total revenues | $511.4 million | $487.7 million | $1.485 billion | $1.369 billion |
| Net income | $60.5 million | $104.1 million | $238.9 million | $297.7 million |
| Net income per limited partner unit | $0.89 | $2.16 | $4.25 | $6.19 |
| Operating income | $70.3 million | $112.1 million | $267.8 million | $323.1 million |
| Operating cash flow | Not separately provided | Not separately provided | $431.6 million | $432.3 million |
| Segment Adjusted EBITDA | $160.2 million | $166.0 million | $477.5 million | $480.3 million |
| Distributions per unit paid | $1.0625 | $0.9225 | $3.0775 | $2.6725 |
Coal sales increased 5.3% to $499.0 million in the quarter and 8.9% to $1.441 billion for the nine-month period. Tons sold rose 7.0% in the quarter to 8.9 million and 6.9% for the nine months to 25.4 million. Average coal sales price was $56.00 per ton in the quarter, down from $56.89, while the nine-month average increased to $56.77 from $55.73.
Approximate operating margin declined to 13.8% from 23.0% in Q3 and to 18.0% from 23.6% for the nine months. Approximate net margin declined to 11.8% from 21.3% in Q3 and to 16.1% from 21.7% for the nine months. Segment Adjusted EBITDA margin was approximately 31.3% versus 34.0% in Q3 and 32.2% versus 35.1% for the nine months.
Operating expenses excluding depreciation, depletion and amortization were $338.6 million in Q3 and $946.8 million for the nine months, compared with $294.8 million and $835.0 million, respectively. Depreciation, depletion and amortization increased to $59.8 million in Q3 and $154.9 million for the nine months, primarily due to Tunnel Ridge production, the Onton mine, and infrastructure investments.
Cash Flow, Capital Spending, Debt and Liquidity
- Operating cash flow was $431.6 million for the nine months, essentially unchanged from $432.3 million in 2011.
- Investing cash use increased to $511.4 million from $284.1 million, including $332.4 million of capital expenditures, the $100.0 million Green River acquisition, $43.1 million invested in White Oak, and $34.6 million of White Oak reserve-development funding.
- Financing cash use was $191.7 million, including $190.1 million of partner distributions and debt repayment activity.
- Cash declined to $2.1 million at September 30, 2012 from $273.5 million at December 31, 2011.
- Total debt was $711.0 million, including $75.0 million drawn on the revolving facility, $250.0 million under the term loan, $36.0 million of senior notes, and $350.0 million of Series A and Series B senior notes. Net long-term debt, excluding current maturities, was $693.0 million.
- The new credit facility provides a $700.0 million revolving facility and a $250.0 million term loan, maturing May 23, 2017. Borrowings outstanding under the facility carried an applicable rate of 1.89% at September 30, 2012.
- Available revolver capacity was $595.1 million after $75.0 million of borrowings and $29.9 million of letters of credit. Additional bank letters of credit totaled $30.7 million.
- Trailing-twelve-month debt-to-cash-flow and cash-flow-to-interest ratios were 1.24-to-1.0 and 16.0-to-1.0, respectively, versus covenant limits of 3.0-to-1.0 and a minimum of 3.0-to-1.0. The partnership was in compliance with its debt covenants.
- Management estimated 2012 capital expenditures of $565 million to $610 million, including approximately $85 million to $95 million for White Oak. Remaining funding was expected from operating cash flow, revolver borrowings, cash, and potentially debt or equity markets.
Material Changes Versus the Prior Comparable Period
- Revenue and volumes increased, driven by Tunnel Ridge’s longwall ramp-up, the April 2012 Onton acquisition, and expansion at River View and Warrior.
- Profitability declined despite higher revenue. Q3 net income fell 41.9% and nine-month net income fell 19.7%; limited partner earnings per unit fell to $0.89 from $2.16 in Q3 and to $4.25 from $6.19 year to date.
- Operating costs increased faster than revenue. Nine-month operating expenses and outside coal purchases rose 13.5% to $981.6 million, while cost per ton increased to $38.67 from $36.39.
- Segment Adjusted EBITDA decreased 3.5% in Q3 and 0.6% for the nine months. Illinois Basin improved, but Central Appalachia and Northern Appalachia declined; White Oak generated a $10.1 million year-to-date loss.
- The partnership acquired substantially all of Green River’s coal mining assets for $100.0 million, including the Onton complex and estimated reserves of 40.0 million tons. The acquired business contributed $52.8 million of revenue and $5.6 million of net income from April 2 through September 30, 2012.
- The partnership replaced a $300.0 million term loan with a $250.0 million term loan and revolver borrowings under the new credit facility.
Guidance, Outlook, Risks and Unusual Items
- Pontiki was idled on August 29, 2012 after an MSHA-ordered closure following a belt-line failure. Repairs were underway with an expected restart by the end of Q4 2012, but long-term viability was uncertain because of market demand, pricing, and regulatory cost risks.
- A $19.0 million impairment charge was recorded for Pontiki, reducing the assets to an estimated fair value of $16.1 million. The valuation was a Level 3 measurement and may change if assumptions change.
- White Oak is under construction and is expected to require approximately $330.5 million to $455.5 million of additional funding over three to four years from the transaction date; $211.7 million had been funded through September 30, 2012. The partnership owned 12.5% of White Oak and recorded $11.6 million of equity losses during the nine months.
- Management stated that existing cash, operating cash flow, credit availability, and potential debt or equity financing were expected to satisfy foreseeable requirements, while acknowledging sensitivity to coal markets, financing access and costs, and operating performance.
- Regulatory and market risks include mine-safety actions, environmental rules affecting coal-fired generation, coal-price and demand volatility, customer and contract risk, labor and transportation disruptions, reclamation and benefit liabilities, insurance availability, permitting, and geological conditions.
- Various lawsuits, claims, and regulatory proceedings were pending. Management believed their ultimate outcome would not materially affect financial condition, results of operations, or liquidity, although adverse outcomes exceeding recorded accruals could be material.
- On October 26, 2012, the partnership declared a $1.085 per-unit distribution for the quarter ended September 30, 2012, totaling approximately $67.4 million including incentive distributions.
Important Facts for Investors to Verify
- Whether Pontiki repairs were completed and whether the mine resumed operations as expected, including the effect on production, costs, and future impairment risk.
- Actual 2012 capital expenditures versus the $565 million to $610 million estimate and the sources used to fund the remaining requirements.
- White Oak’s construction progress, future funding needs, operating losses, and the partnership’s maximum exposure to the investment.
- Coal pricing, metallurgical export demand, customer contract performance, and production-cost trends, particularly in Central and Northern Appalachia.
- Cash availability, revolver utilization, debt maturities, variable-rate exposure, and continued compliance with debt covenants.
- Mine-safety, environmental, permitting, pension, workers’ compensation, pneumoconiosis, asset-retirement, litigation, and insurance exposures.