Alliance Resource Partners, L.P. — 2018 First-Quarter 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, with reportable segments in the Illinois Basin and Appalachia. It also holds investments in oil and gas mineral interests and gas compression services. This unaudited Form 10-Q covers the three months ended March 31, 2018, compared with the three months ended March 31, 2017.
Key Financial Metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenues | $457.1 million | $461.1 million | Down 0.9% |
| Coal sales | $423.6 million | $438.7 million | Down 3.4% |
| Operating income | $160.2 million | $108.3 million | Up 47.9% |
| Net income attributable to ARLP | $155.9 million | $104.9 million | Up 48.6% |
| Net income per limited partner unit | $1.16 | $1.10 | Up $0.06 |
| Cash flow from operating activities | $224.2 million | $177.0 million | Up 26.6% |
| Capital expenditures | $51.5 million | $30.3 million | Up 69.8% |
| Segment Adjusted EBITDA | $165.3 million | $193.7 million | Down 14.6% |
| Distributions paid per unit | $0.5100 | $0.4375 | Up 16.6% |
Reported operating margin was approximately 35.1%, compared with 23.5% in the prior-year quarter, primarily because of an $80.0 million litigation settlement gain. Excluding that gain, operating performance was weaker: Segment Adjusted EBITDA margin declined to approximately 36.2% from 42.0%.
- Tons sold declined 2.2% to 9.398 million, while tons produced increased 2.6% to 10.482 million.
- Average coal sales price declined to $45.07 per ton from $45.65 per ton.
- Operating expenses and outside coal purchases increased to $278.6 million from $262.0 million, and cost per ton sold increased to $29.65 from $27.27.
- Illinois Basin Segment Adjusted EBITDA declined 10.8% to $94.8 million; Appalachia declined 26.7% to $53.6 million; Other and Corporate increased 15.4% to $19.0 million.
- Cash and cash equivalents were $28.8 million at March 31, 2018, compared with $6.8 million at December 31, 2017.
- Total debt principal was $440.0 million at March 31, 2018, down from $502.4 million at December 31, 2017. Debt consisted primarily of $400.0 million of 7.5% senior notes due 2025 and $40.0 million outstanding under the receivables securitization facility.
- The revolving credit facility had $486.7 million available, net of $8.1 million of letters of credit. The company reported a trailing-twelve-month debt-to-cash-flow ratio of 0.75 to 1.0 and cash-flow-to-interest ratio of 16.0 to 1.0, remaining in compliance with its covenants.
Material Changes Versus the Prior Comparable Period
- Coal sales decreased because of lower volumes caused by weather-related transportation disruptions, particularly at Tunnel Ridge and Hamilton, and lower average prices following the expiration of higher-priced legacy contracts.
- Production costs increased because of a higher-cost sales mix, lower recoveries, and higher material, supplies, contract labor, roof support, power and fuel costs.
- Transportation revenues and expenses both increased to $19.8 million from $9.6 million, primarily due to increased export shipments and higher third-party transportation rates. These costs are generally passed through to customers.
- Net income benefited from an $80.0 million net gain on settlement of litigation. The settlement provided a $93.0 million cash payment, a new coal supply agreement, continued export transloading capacity and rights to acquire certain coal reserves; $13.0 million of legal fees and related incentive compensation were accrued.
- Interest expense increased to $10.9 million from $7.5 million, primarily due to the senior notes issued in April 2017.
- The July 2017 Exchange Transaction eliminated ARLP incentive distribution rights and the prior economic general partner interest in exchange for approximately 56.1 million common units. This changed income allocations and increased the reported comparison of per-unit earnings. On a pro forma basis, Q1 2017 earnings per unit would have been $0.79 versus $1.16 in Q1 2018.
Guidance, Outlook, Commentary, Risks and Unusual Items
- Management estimated 2018 capital expenditures of $220 million to $240 million and anticipated approximately $30 million of additional investment related to oil and gas mineral interests.
- The company was evaluating a new east Kentucky mine to replace reserves expected to deplete at MC Mining in 2020. The project could provide access to approximately 15 million tons of reserves, require an estimated $50 million to $66 million of capital and begin in the second quarter of 2018 if approved.
- Management stated that cash balances, operating cash flow and available financing were expected to satisfy working capital, capital expenditure, investment, debt service and distribution requirements, while noting liquidity could be adversely affected by weaker operating performance or reduced access to financing.
- A $0.515 per-unit distribution for the quarter ended March 31, 2018 was declared on April 27, 2018, totaling approximately $68.1 million and payable May 15, 2018.
- The proposed Simplification Transactions with Alliance Holdings GP, L.P. were expected to close in the second quarter of 2018, subject to required approvals. Management expected no change in control, management or governance.
- Principal risks include coal price and demand volatility, customer concentration and defaults, transportation disruptions, adverse weather and mine operating interruptions, environmental and mine-safety regulation, labor and benefit costs, reclamation and workers’ compensation obligations, litigation, financing and covenant restrictions, and risks associated with investments not controlled by the company.
- The company reported various ordinary-course lawsuits and regulatory proceedings, but management did not believe their ultimate outcomes would materially affect financial condition, results of operations or liquidity based on currently known facts.
- Disclosure controls and procedures were concluded to be effective as of March 31, 2018, with no material changes in internal control over financial reporting identified during the quarter.
Most Important Facts for Investors to Verify
- Assess underlying operating performance excluding the $80.0 million litigation settlement gain, particularly the 14.6% decline in Segment Adjusted EBITDA.
- Verify the sustainability of coal volumes, prices and margins after weather-related transportation disruptions and the expiration of legacy contracts.
- Review the planned $220 million to $240 million of 2018 capital expenditures, the potential east Kentucky mine project and the additional mineral-interest investment commitments.
- Monitor debt maturities, the January 2019 securitization facility maturity, the 2025 senior notes, variable-rate exposure and continued covenant compliance.
- Confirm completion and accounting effects of the proposed Simplification Transactions and the impact of the prior Exchange Transaction on per-unit earnings and distributions.
- Evaluate distribution coverage using recurring operating cash flow rather than settlement proceeds, including the effect of increased capital expenditures and investment funding.