Business Context and Reporting Period
Alliance Resource Partners, L.P. is a diversified producer and marketer of coal serving U.S. utilities and industrial users. The partnership operates ten underground mining complexes, a coal loading terminal, and activities related to White Oak Resources. Reportable segments are Illinois Basin, Appalachia, White Oak, and Other and Corporate. This unaudited Form 10-Q covers the three months ended March 31, 2015, compared with the same period in 2014.
Key Financial Metrics
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Total revenue | $560.4 million | $542.0 million | 3.4% increase |
| Coal sales | $517.7 million | $525.5 million | 1.5% decrease |
| Income from operations | $123.5 million | $129.5 million | 4.7% decrease |
| Net income | $106.5 million | $115.9 million | 8.1% decrease |
| Net income attributable to ARLP | $106.5 million | $115.9 million | 8.1% decrease |
| Net income per limited partner unit | $0.92 | $1.10 | 16.4% decrease |
| Operating cash flow | $161.6 million | $140.1 million | 15.4% increase |
| Segment Adjusted EBITDA | $209.0 million | $207.9 million | 0.6% increase |
| Capital expenditures | $50.3 million | $69.5 million | 27.5% decrease |
Revenue increased despite lower coal sales because other sales and operating revenues rose to $35.5 million from $10.5 million, primarily from White Oak surface facility services and coal royalties and payments in lieu of shipments. Tons sold were essentially flat at 9.5 million, while the average coal sales price declined to $54.49 per ton from $55.35. Operating margin was approximately 22.0% versus 23.9% in the prior-year quarter; net margin was approximately 19.0% versus 21.4%.
Cash and cash equivalents were $26.4 million at March 31, 2015, compared with $24.6 million at December 31, 2014. Net cash used in investing activities was $94.4 million, and net cash used in financing activities was $65.4 million. Distributions paid to partners were $84.4 million, compared with $76.5 million in the prior-year quarter.
Total debt was $845.0 million at March 31, 2015, including $230.0 million classified as current. Debt consisted of $170.0 million drawn on the revolving credit facility, $225.0 million on the term loan, $100.0 million under the accounts receivable securitization facility, and $350.0 million of senior notes. The revolving facility had $524.6 million available after $5.4 million of letters of credit. Debt fair value was approximately $855.3 million. The partnership was in compliance with its debt covenants; trailing-twelve-month debt-to-cash-flow and cash-flow-to-interest ratios were 1.04-to-1 and 24.5-to-1, respectively.
Material Changes Versus the Prior Comparable Period
- Net income declined $9.4 million, primarily because of lower coal prices, higher operating expenses, and increased depreciation, depletion and amortization.
- Coal sales decreased $7.8 million as the average realized price fell $0.86 per ton, partially offset by slightly higher tons sold.
- Operating expenses and outside coal purchases increased 3.9% to $334.7 million, or $35.23 per ton sold versus $33.94.
- Depreciation, depletion and amortization increased $11.5 million to $78.3 million, driven by the reduced economic life of the Elk Creek mine, Gibson South production, amortization of acquired coal supply agreements, and infrastructure investments.
- Illinois Basin Segment Adjusted EBITDA declined 12.8% to $142.7 million, while Appalachia increased 14.2% to $55.8 million.
- White Oak Segment Adjusted EBITDA improved to $5.3 million from a $4.0 million loss as longwall production ramped up, although ARLP recorded a $9.4 million equity loss from White Oak.
- Operating cash flow increased $21.5 million, primarily because trade receivables decreased during the quarter.
- The partnership acquired Patriot Coal assets for estimated consideration of $47.5 million and acquired the remaining 50% interest in Mid-America Carbonates for $5.5 million. The Patriot purchase price allocation remained preliminary.
Guidance, Outlook, Commentary, Risks and Unusual Items
- Management estimated 2015 capital expenditures of $270 million to $300 million and anticipated approximately $20 million to $25 million of additional investments in oil and gas mineral interests.
- Management expected to fund requirements through cash balances, operating cash flow, revolving and securitization facilities, and, if necessary, debt or equity issuance. It did not anticipate significant near-term liquidity constraints, while noting that future liquidity depends on operating performance and financing access.
- The $205.0 million Series A senior notes mature June 26, 2015. The $145.0 million Series B senior notes mature June 26, 2018, and the credit facility matures May 23, 2017.
- Elk Creek was expected to cease production in early 2016, contributing to higher depreciation and depletion expense.
- White Oak had remaining funding commitments of $25.2 million for reserve acquisitions. Cavalier Minerals had a remaining commitment of $28.5 million, and its investment in AllDale Minerals had a remaining commitment of $28.8 million.
- On April 28, 2015, ARLP declared a quarterly distribution of $0.6625 per unit, totaling approximately $85.6 million, payable May 15, 2015.
- The partnership received notice that the IRS had begun an administrative proceeding relating to White Oak’s 2011 income tax return.
- Coal prices, customer contract performance, utility demand, environmental and mine-safety regulation, labor and healthcare costs, transportation, reclamation and workers’ compensation obligations, pension and black-lung liabilities, financing availability, litigation, and performance of equity investments are identified as significant risks.
- 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 an unfavorable outcome exceeding recorded accruals could be material.
- A one-percentage-point increase in applicable variable interest rates would increase annualized 2015 interest expense by approximately $5.0 million based on March 31 borrowing levels.
Important Facts for Investors to Verify
- Confirm the refinancing or repayment plan for the $205.0 million Series A notes due in June 2015.
- Assess whether coal prices, realized pricing, production costs, and Illinois Basin operating performance are improving or deteriorating.
- Review White Oak’s ramp-up, operating losses, remaining funding commitments, royalty economics, and exposure to its IRS proceeding.
- Verify the final purchase price allocation and expected benefits from the Patriot Coal asset acquisition.
- Monitor liquidity after distributions, capital expenditures, acquisitions, and commitments to White Oak, Cavalier Minerals, and AllDale Minerals.
- Evaluate the effect of the planned Elk Creek closure and related asset retirement, reclamation, and workforce obligations.
- Review related-party arrangements, including the WKY CoalPlay mineral lease and other transactions involving affiliates of management.