Alliance Resource Partners, L.P. — 2013 Form 10-K Summary
Business context and reporting period
This Form 10-K covers the fiscal year ended December 31, 2013, with comparative results for 2012 and 2011. Alliance Resource Partners, L.P. is a diversified producer and marketer of coal primarily serving U.S. electric utilities and industrial users. The partnership operated ten underground mining complexes across the Illinois, Central Appalachian and Northern Appalachian basins, held approximately 1.1 billion tons of proven and probable reserves, and was developing the Gibson South and White Oak projects.
ARLP produced and sold record volumes of approximately 38.8 million tons in 2013. Approximately 93.7% of sales tonnage was sold to electric utilities, 93.5% was sold under long-term contracts, and 98.7% of utility tons were sold to plants with pollution-control devices.
Key financial metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Total revenue | $2,205.6 million | $2,034.3 million | +8.4% |
| Coal sales | $2,137.4 million | $1,979.4 million | +8.0% |
| Income from operations | $443.5 million | $374.5 million | +18.4% |
| Net income | $393.5 million | $335.6 million | +17.2% |
| Net income per limited partner unit | $7.26 | $6.12 | +18.6% |
| EBITDA | $685.9 million | $581.1 million | +18.1% |
| Cash flow from operations | $704.7 million | $555.9 million | +26.8% |
| Capital expenditures | $329.2 million | $424.6 million | -22.5% |
| Cash distributions paid per unit | $4.5650 | $4.1625 | +9.7% |
Calculated margins were approximately 20.1% operating margin, 17.8% net margin and 31.1% EBITDA margin in 2013. Coal sales averaged $55.04 per ton, down from $56.28 in 2012, while cost per ton sold declined to $36.07 from $38.15.
At December 31, 2013, cash and cash equivalents were $93.7 million and working capital was $109.4 million. Total long-term debt was $868.0 million, including $250.0 million drawn under the revolving facility and a $250.0 million term loan. The revolving facility had $425.8 million of remaining borrowing capacity after letters of credit. The debt-to-cash-flow ratio was 1.24 to 1.0 and cash-flow-to-interest-expense ratio was 19.8 to 1.0; ARLP reported compliance with its debt covenants.
Material changes versus the prior comparable period
- Record tons sold increased 10.4% to 38.8 million, driven by higher production at Tunnel Ridge, River View, Gibson North and Onton.
- Illinois Basin Segment Adjusted EBITDA increased 10.9% to $657.4 million; Northern Appalachia increased 51.4% to $72.6 million; Central Appalachia increased 71.0% to $44.0 million.
- Segment Adjusted EBITDA increased 13.8% to $749.6 million.
- Operating costs increased in total because of higher production, but operating expenses and outside coal purchases declined on a per-ton basis. Outside coal purchases fell to $2.0 million from $38.6 million.
- Average coal sales price declined primarily because of reduced sales into the metallurgical coal export market, particularly in Northern Appalachia.
- Depreciation, depletion and amortization increased to $264.9 million from $218.1 million, primarily due to Tunnel Ridge production startup, the Onton acquisition and other capital investment.
- Equity losses from affiliates increased to $24.4 million from $14.7 million, largely reflecting additional losses from the White Oak development project.
- Pontiki operations ceased in late November 2013 after existing contractual commitments were fulfilled. The $19.0 million impairment charge recorded in 2012 was not repeated in 2013.
- Operating cash flow improved substantially, while investing cash use declined because Tunnel Ridge development was completed and 2012 included the Onton acquisition.
Guidance, outlook, commentary, risks and unusual items
- Management estimated 2014 total capital expenditures, including maintenance capital, at $320 million to $350 million and projected average annual maintenance capital expenditures over the following five years of approximately $5.90 per ton produced.
- Management expected to fund 2014 capital requirements through cash on hand, operating cash flow, revolver borrowings and potential debt or equity issuance.
- Gibson South production was expected to begin in the third quarter of 2014, reach 2.5 million to 3.5 million tons in 2015 and potentially expand above 5.0 million tons annually. Estimated development costs were $200 million to $210 million, with $129.3 million incurred by December 31, 2013.
- White Oak’s longwall production was expected to begin in the second half of 2014. ARLP expected to fund approximately $99.2 million in 2014 and $28.2 million in 2015 for White Oak reserve acquisitions, development and equity investment. White Oak generated no distributions through December 31, 2013, and ARLP expected further allocated losses during development.
- Management stated that existing cash, expected operating cash flow and available financing were sufficient for foreseeable needs, while acknowledging that weaker operating performance or restricted financing access could impair liquidity.
- Major risks include coal-price volatility, declining utility coal demand, competition from natural gas and renewables, environmental and greenhouse-gas regulation, mine-safety requirements, permitting delays, transportation disruptions, customer concentration and contract renegotiation.
- The two largest customers represented approximately 26.5% of 2013 total revenue. Their coal supply agreements expire in 2016.
- ARLP had approximately $159.4 million of undiscounted reclamation obligations, $294.2 million of workers’ compensation and pneumoconiosis commitments, and $141.5 million of surety bonds outstanding for reclamation, workers’ compensation and other obligations.
- Insurance coverage included a $100 million per-occurrence commercial property limit, subject to deductibles and business-interruption waiting periods.
- The company reported no material litigation, no unresolved SEC staff comments and effective disclosure and internal controls. Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts an investor should verify
- Confirm the sustainability of record 2013 production and whether lower realized coal prices, particularly in Northern Appalachia, continue to pressure margins.
- Review the timing, remaining cost and financing requirements for Gibson South and White Oak, including White Oak’s lack of distributions and continuing allocated losses.
- Assess debt maturities of $36.8 million in 2014, $230.0 million in 2015, $156.3 million in 2016, $300.0 million in 2017 and $145.0 million in 2018.
- Evaluate exposure to the two largest customers, whose contracts expire in 2016, and the ability to renew long-term contracts on comparable pricing and volume terms.
- Monitor environmental, mine-safety and permitting developments, including potential effects on coal demand, production costs and mine access.
- Reconcile GAAP net income and cash flow with non-GAAP EBITDA and available cash for distribution; EBITDA is not a measure of cash available for distribution.
- Review the partnership’s distribution policy and incentive distribution rights. The quarterly distribution rose to $1.1975 per unit for the fourth quarter of 2013, but distributions are not guaranteed and depend on available cash, reserves, debt restrictions and operating performance.