Alliance Resource Partners, L.P. — Form 10-Q Summary
Business Context and Reporting Period
ARLP is a diversified producer and marketer of coal serving U.S. utilities and industrial users. As of June 30, 2015, it operated ten underground mining complexes in the eastern United States, together with the Mt. Vernon coal terminal. The unaudited filing covers the three and six months ended June 30, 2015, with comparisons to the corresponding 2014 periods.
Financial Performance and Position
| Metric | Three Months 2015 | Three Months 2014 | Six Months 2015 | Six Months 2014 |
|---|---|---|---|---|
| Total revenues | $604.7 million | $598.6 million | $1,165.1 million | $1,140.6 million |
| Net income | $94.9 million | $137.7 million | $201.3 million | $253.6 million |
| Net income attributable to ARLP | $94.9 million | $137.7 million | $201.3 million | $253.6 million |
| Net income per limited partner unit | $0.76 | $1.37 | $1.68 | $2.47 |
| Operating income | $124.5 million | $153.0 million | $248.0 million | $282.5 million |
| Segment Adjusted EBITDA | $199.9 million | $232.8 million | $408.9 million | $440.7 million |
| Operating cash flow | Not separately provided | Not separately provided | $338.9 million | $379.4 million |
- Revenue increased 1.0% in the quarter and 2.2% year to date, primarily from higher transportation revenue and White Oak-related services and royalties, despite lower coal sales.
- Operating margin was approximately 20.6% in the quarter and 21.3% year to date, versus approximately 25.6% and 24.8%, respectively, in the comparable periods. Net margin was approximately 15.7% and 17.3%, versus 23.0% and 22.2%.
- Coal sales declined 1.4% in both the quarter and year-to-date period. Tons sold increased 1.1% in the quarter and 0.6% year to date, but average coal prices declined to $54.13 and $54.30 per ton, respectively.
- Operating expenses excluding depreciation increased 6.3% in the quarter and 5.1% year to date. Depreciation, depletion and amortization rose 19.0% in the quarter and 18.1% year to date.
- Equity losses from affiliates increased to $22.1 million for the quarter and $31.8 million year to date, principally reflecting White Oak’s low price realizations and higher ramp-up costs.
- Cash and cash equivalents were $43.3 million at June 30, 2015, compared with $24.6 million at December 31, 2014. Total assets were $2.33 billion and partners’ capital was $1.05 billion.
- Total debt was $856.8 million, including $393.0 million drawn on the revolving facility, $218.8 million under the term loan, $145.0 million of Series B senior notes and $100.0 million under the receivables securitization facility.
- The revolving facility had $301.6 million available, excluding $5.4 million of outstanding letters of credit. ARLP also had $30.7 million of letters of credit outstanding under separate bank agreements.
- Debt-to-cash-flow and cash-flow-to-interest ratios were 1.09-to-1 and 23.9-to-1, respectively, versus covenant limits of no more than 3.0-to-1 and no less than 3.0-to-1. ARLP was in compliance with its debt covenants.
- Distributions paid per unit increased to $0.6625 in the quarter and $1.3125 year to date, compared with $0.61125 and $1.21, respectively, in 2014.
Material Changes Versus Prior Comparable Period
- Profitability weakened despite modest revenue growth. Quarterly and year-to-date net income declined 31.1% and 20.6%, respectively.
- Lower realized coal prices, higher production costs, increased depreciation, and larger White Oak affiliate losses were the principal earnings pressures.
- Illinois Basin Segment Adjusted EBITDA declined 5.2% in the quarter and 9.0% year to date; Appalachia declined 32.1% and 12.6%, respectively.
- White Oak-related other revenue increased substantially as longwall production ramped, but White Oak remained loss-making at the segment level.
- Operating cash flow declined $40.5 million year to date, while capital expenditures declined to $107.8 million from $154.6 million.
- ARLP repaid the $205.0 million Series A senior notes on June 26, 2015 and increased revolving-credit borrowings, resulting in higher long-term debt and lower current maturities at quarter-end.
- ARLP acquired Patriot Coal assets and coal supply agreements during the period for approximately $48.0 million of estimated consideration, with purchase accounting still preliminary. It also acquired the remaining interest in Mid-America Carbonates for $5.5 million and recorded $4.2 million of goodwill.
Guidance, Outlook, Risks, and Unusual Items
- Management estimated 2015 capital expenditures of $265 million to $285 million and anticipated additional 2015 investments of approximately $95 million to $100 million, including the $50 million purchase of the remaining White Oak equity.
- On July 31, 2015, after quarter-end, ARLP acquired the remaining 60% of White Oak for $50 million in cash plus potential contingent consideration. ARLP thereafter owned 100% of White Oak and assumed operating control of the mine. The purchase price allocation and contingent consideration valuation were not complete in the filing.
- Management declared a quarterly distribution of $0.675 per unit, totaling approximately $87.5 million, payable August 14, 2015.
- Management stated that existing cash, operating cash flow and available financing were expected to satisfy planned requirements, but noted that liquidity depends on coal-market conditions, operating performance and access to financing.
- Material risks include declining coal demand and prices, customer contract breaches or bankruptcies, regulatory and environmental requirements, mine interruptions, labor and reclamation liabilities, transportation issues, litigation, variable interest rates and the availability of surety bonds.
- A customer breach involving an above-market Tunnel Ridge coal supply agreement was subject to litigation and adversely affected Appalachia results.
- The Elk Creek mine was expected to cease production in early 2016, contributing to higher depreciation and depletion expense.
- Pending lawsuits and regulatory proceedings were not expected by management to have a material adverse effect, but the filing notes that outcomes exceeding recorded accruals could be material.
- The filing identifies potential changes to the federal tax treatment of publicly traded partnerships as a risk, including proposals that could affect ARLP’s partnership status or unit value.
- A one-percentage-point increase in applicable variable borrowing rates would have increased annualized interest expense by approximately $7.1 million based on June 30, 2015 borrowings.
Investor Verification Checklist
- Verify the final purchase accounting, contingent consideration and operating results for the White Oak acquisition.
- Assess whether White Oak’s mine ramp-up can improve price realization, production economics and affiliate losses.
- Monitor coal prices, customer contract performance and the Tunnel Ridge litigation.
- Reconcile projected 2015 capital expenditures and investments with operating cash flow, debt drawdowns and distributions.
- Review debt maturities, refinancing needs and compliance with financial covenants, particularly the May 2017 credit-facility maturity.
- Evaluate the sustainability of distributions relative to declining earnings, cash flow and leverage.
- Review mine-closure, reclamation, workers’ compensation and pneumoconiosis liabilities, including the expected Elk Creek closure.
- Track federal tax proposals and regulatory developments affecting coal demand and publicly traded partnerships.