Alliance Resource Partners, L.P. — Q2 2012 Form 10-Q Summary
Business context and reporting period
Alliance Resource Partners, L.P. is a diversified eastern U.S. coal producer and marketer serving utilities and industrial customers. The unaudited filing covers the three and six months ended June 30, 2012, compared with the same periods in 2011. Operations span the Illinois Basin, Central Appalachia, Northern Appalachia, White Oak and Other and Corporate segments.
- As of June 30, 2012, 36.9 million common units were outstanding.
- The Onton No. 9 mining complex was acquired on April 2, 2012, adding an estimated 40.0 million tons of reserves.
- Longwall production began at the Tunnel Ridge mine in May 2012.
Key financial metrics
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Total revenues | $529.9 million | $457.9 million | $973.5 million | $881.2 million |
| Net income | $95.5 million | $98.2 million | $178.4 million | $193.6 million |
| Income from operations | $105.5 million | $107.2 million | $197.4 million | $210.9 million |
| Segment Adjusted EBITDA | $171.6 million | $159.7 million | $317.3 million | $314.3 million |
| Operating cash flow | Not separately provided | Not separately provided | $255.5 million | $261.4 million |
| Capital expenditures | Not separately provided | Not separately provided | $238.3 million | $142.4 million |
| Net income per limited partner unit | $1.83 | $2.04 | $3.36 | $4.03 |
| Distributions per limited partner unit | $1.025 | $0.890 | $2.015 | $1.750 |
- Q2 revenue increased 15.7%; six-month revenue increased 10.5%.
- Q2 net margin was approximately 18.0%, compared with 21.4% in the prior-year quarter. Six-month net margin was approximately 18.3%, compared with 22.0%.
- Q2 operating margin was approximately 19.9%, compared with 23.4%; six-month operating margin was approximately 20.3%, compared with 23.9%.
- Coal sales were $512.5 million in Q2 and $942.1 million for six months. Tons sold increased 9.8% in Q2 to 8.7 million and 6.8% for six months to 16.5 million.
- Average coal sales price increased to $59.17 per ton in Q2 from $56.08 and to $57.19 per ton for six months from $55.11.
- Cash and cash equivalents declined to $11.4 million at June 30, 2012 from $273.5 million at December 31, 2011.
- Total debt was $709.0 million, including $18.0 million of current maturities, compared with $704.0 million at year-end 2011. The estimated fair value of debt was $759.4 million.
- Total assets were $1.86 billion and total partners’ capital was $679.4 million at June 30, 2012.
Material changes versus the prior comparable period
- Net income declined 2.8% in Q2 and 7.8% for the first six months despite higher revenue and volumes, primarily because operating expenses, depreciation, outside coal purchases and White Oak losses increased.
- Operating expenses excluding depreciation increased 17.8% in Q2 and 12.6% for six months. Outside coal purchases increased to $16.2 million in Q2 from $5.8 million and to $30.3 million for six months from $9.6 million.
- Depreciation, depletion and amortization increased to $52.1 million in Q2 from $39.1 million and to $95.1 million for six months from $77.0 million, reflecting Tunnel Ridge, Onton and infrastructure investment.
- Segment Adjusted EBITDA increased 7.5% in Q2 and 1.0% for six months. Illinois Basin improved, while Central Appalachia declined because of regulatory-related production losses. Northern Appalachia benefited from higher volumes and pricing in Q2 but declined for the six-month period because of startup and operating costs at Tunnel Ridge.
- Equity in losses of affiliates was $4.4 million in Q2 and $8.2 million for six months, primarily from White Oak.
- Other income included a $2.0 million cancellation fee from White Oak related to termination of an equipment-financing agreement.
Cash flow, liquidity and debt
- Six-month operating cash flow of $255.5 million was substantially offset by $390.3 million of investing cash use and $127.3 million of financing cash use, producing a $262.2 million decline in cash.
- Investing cash use included $238.3 million of capital expenditures, $100.0 million for the Onton acquisition, $34.6 million of White Oak reserve-development funding and $30.6 million for additional White Oak equity units.
- On May 23, 2012, the company replaced its prior facility with a $700 million revolving credit facility and a $250 million term loan maturing May 23, 2017. Proceeds funded repayment of the former $300 million term loan.
- At June 30, 2012, borrowings under the revolver were $55.0 million, letters of credit under the revolver were $29.9 million and available revolver capacity was $615.1 million. Additional bank letters of credit of $30.7 million were outstanding.
- The company reported debt-to-cash-flow and cash-flow-to-interest ratios of 1.24-to-1 and 16.2-to-1, respectively, versus maximum or minimum covenant requirements of 3.0-to-1. It was in compliance with debt covenants.
Guidance, outlook, commentary and risks
- Management estimated 2012 total capital expenditures of $565 million to $610 million, including the Onton acquisition and approximately $95 million to $110 million for White Oak.
- Management stated that cash, operating cash flow, revolver capacity and potential debt or equity financing should be sufficient for anticipated requirements, but noted that liquidity depends on operating performance and financing conditions.
- A quarterly distribution of $1.0625 per unit, totaling approximately $65.8 million including incentive distributions, was declared on July 27, 2012 and payable August 14, 2012.
- White Oak commitments were estimated at approximately $330.5 million to $455.5 million over three to four years; $188.7 million had been funded through June 30, 2012. Additional commitments include $54.6 million for coal-reserve acquisitions and approximately $99.5 million for processing and rail facilities.
- Key risks include coal-price and demand volatility, customer concentration and contract performance, regulatory and mine-safety actions, environmental and greenhouse-gas regulation, labor and equipment availability, geologic and weather conditions, reclamation and workers’ compensation liabilities, pension and black-lung obligations, and access to financing.
- The EPA’s proposed greenhouse-gas standards for new and modified power plants could challenge future coal-fired generation construction; the company expected potential legal challenges if finalized.
- Various lawsuits, claims and regulatory proceedings were pending. Management did not expect a material adverse outcome based on currently known facts, but adverse results exceeding recorded accruals could be material.
Investor verification checklist
- Reconcile the sharp decline in cash with capital spending, the Onton acquisition, White Oak funding, distributions and debt refinancing.
- Assess whether Tunnel Ridge and Onton production growth can offset higher startup, maintenance, labor and depreciation costs.
- Monitor Central Appalachian regulatory constraints and Northern Appalachian operating performance.
- Review the scale, timing and funding sources of the remaining White Oak commitments and related-party transactions.
- Evaluate distribution sustainability against operating cash flow, planned capital expenditures and debt covenant capacity.
- Confirm subsequent quarterly distributions, final purchase-price allocation for Onton and any developments in litigation, mine safety, environmental regulation and pension funding.