Alliance Resource Partners, L.P. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. Financial statements are unaudited. ARLP is a diversified eastern U.S. coal producer and marketer serving utilities and industrial users, with operations in the Illinois, Central Appalachian and Northern Appalachian regions.
Financial performance and position
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Total revenues | $457.9 million | $400.3 million | $881.2 million | $781.0 million |
| Coal sales | $442.5 million | $385.9 million | $850.2 million | $750.1 million |
| Income from operations | $107.2 million | $93.0 million | $210.9 million | $175.8 million |
| Net income | $98.2 million | $85.5 million | $193.6 million | $160.4 million |
| Limited partners’ net income | $76.0 million | $67.5 million | $150.3 million | $125.5 million |
| Net income per limited partner unit | $2.04 | $1.82 | $4.03 | $3.38 |
| Segment Adjusted EBITDA | $159.7 million | $140.6 million | $314.3 million | $270.3 million |
| Cash flow from operations | Not separately provided | Not separately provided | $261.4 million | $258.9 million |
Margins: Q2 operating margin was approximately 23.4% versus 23.2% in the prior-year quarter; net margin was approximately 21.4% versus 21.3%. Six-month operating margin was approximately 23.9% versus 22.5%, and net margin was approximately 22.0% versus 20.5%. Segment Adjusted EBITDA increased 13.6% in Q2 and 16.3% year to date; it is a non-GAAP measure.
- Q2 tons sold increased 5.4% to 7.89 million; tons produced increased to 7.54 million from 6.92 million.
- Six-month tons sold increased 3.8% to 15.43 million; tons produced increased to 15.76 million from 14.46 million.
- Average coal sales price increased to $56.08 per ton in Q2 from $51.53 and to $55.11 per ton year to date from $50.44.
- Cash and cash equivalents were $347.1 million at June 30, 2011, compared with $339.6 million at December 31, 2010.
- Capital expenditures were $142.4 million year to date, compared with $174.8 million in the prior-year period.
- Net cash used in financing activities was $106.8 million, including $104.2 million of partner distributions.
Debt, liquidity and distributions
- Total debt was $722.0 million, consisting of senior notes, 2008 senior notes and a $300.0 million term loan; $18.0 million was classified as current.
- No borrowings were outstanding under the $142.5 million revolving credit facility. Availability was $130.9 million after $11.6 million of letters of credit.
- Trailing-twelve-month debt-to-cash-flow and cash-flow-to-interest ratios were 1.33x and 16.2x, respectively, versus maximum or minimum covenant levels of 3.0x and 4.0x. ARLP was in compliance with its debt covenants.
- Management stated that cash on hand, operating cash flow and available credit were expected to fund working capital, capital expenditures, debt service and distributions without significant near-term liquidity constraints.
- Full-year 2011 capital expenditures were estimated at $320 million to $360 million.
- A quarterly distribution of $0.9225 per common unit, totaling approximately $55.3 million including incentive distributions, was declared on July 27, 2011 and payable August 12, 2011.
Material changes and management commentary
- Improved contract pricing and higher sales volumes drove record quarterly and six-month net income. The Illinois Basin remained the largest contributor, while Central Appalachia showed the strongest percentage improvement.
- Operating expenses rose 15.2% in Q2 and 11.2% year to date, exceeding volume growth in the quarter. Management cited higher labor, materials, maintenance, regulatory compliance, insurance and mine-development costs.
- Tunnel Ridge development increased expenses; longwall production was not expected until early 2012. Development of the Gibson South mine was approved on July 25, 2011 after required permits were received.
- The Pattiki mine, temporarily idled after a 2010 conveyor failure, returned to full production on January 3, 2011. The 2010 comparison period included a $1.2 million asset retirement charge related to the failure.
- Black lung liabilities increased by an estimated $8.3 million at December 31, 2010 under health-care legislation. Potential effects from future regulations and possible claim filings were not yet reasonably estimable.
- Management identified exposure to coal prices, customer demand and credit, fuel and materials costs, interest rates, mining and geologic conditions, weather, labor, permitting, mine safety, environmental regulation, reclamation, workers’ compensation and litigation.
Risks, contingencies and unusual items
- Various lawsuits, claims and regulatory proceedings were pending; management believed their ultimate outcome would not materially affect financial condition, results or liquidity, although adverse outcomes exceeding accruals could be material.
- Mining operations received 1,541 MSHA inspection days during Q2, with an average of 0.21 significant-and-substantial citations per inspection day. No fatalities or specified pattern-of-violations notices were reported.
- There were 296 contested citations or orders pending before administrative law judges, and proposed MSHA assessments for listed subsidiaries totaled approximately $306 million based on the table in the filing. The company contests many citations, and the filing states that assessments may be reduced or dismissed.
- A one-percentage-point increase in the term-loan interest rate would increase annualized interest expense by approximately $3.0 million based on June 30, 2011 borrowings.
- The filing states that long-term coal supply agreements generally include price-adjustment provisions, but ARLP does not use commodity or interest-rate derivatives.
Investor verification points
- Verify the sustainability of higher coal prices, contract renewals and sales volumes, particularly in export markets.
- Reconcile operating-cost growth with production growth and monitor regulatory, labor, materials and maintenance cost inflation.
- Review Tunnel Ridge and Gibson South capital requirements, timing and expected production contributions.
- Assess distribution coverage using operating cash flow after capital expenditures, debt service and required liabilities.
- Monitor term-loan variable-rate exposure, 2013–2015 amortization requirements and the 2012 maturity of the revolving credit facility.
- Review MSHA proceedings, black lung and workers’ compensation liabilities, reclamation obligations and other contingencies.