Business Context and Reporting Period
Alliance Resource Partners, L.P. is a publicly traded Delaware limited partnership and diversified producer and marketer of U.S. coal. This Form 10-K covers the fiscal year ended December 31, 2016, with audited financial statements for 2016, 2015 and 2014. Operations comprised eight underground mining complexes in the Illinois Basin and Appalachia, plus the Mt. Vernon coal terminal, mining technology services and oil-and-gas mineral investments.
- 2016 production was 35.2 million tons and sales were 36.7 million tons, down from 41.2 million and 40.2 million tons, respectively, in 2015.
- Approximately 90.3% of sales tonnage went to electric utilities; 87.7% of sales tonnage and 91.5% of total coal sales were under long-term contracts, as separately reported in the filing.
- Coal reserves were approximately 1.76 billion tons at December 31, 2016.
Financial and Operating Metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Total revenues | $1,931.5 million | $2,273.7 million | Down 15.0% |
| Coal sales | $1,861.8 million | $2,158.0 million | Down 13.7% |
| Income from operations | $365.9 million | $361.4 million | Up 1.2% |
| Operating margin | 18.9% | 15.9% | Improved |
| Net income attributable to ARLP | $339.4 million | $306.2 million | Up 10.8% |
| Net margin | 17.6% | 13.5% | Improved |
| Net income per limited partner unit | $3.39 | $2.11 | Up 60.7% |
| Adjusted EBITDA | $692.7 million | $747.2 million | Down 7.3% |
| Cash flow from operations | $703.5 million | $716.3 million | Down 1.8% |
| Capital expenditures | $91.1 million | $212.8 million | Down 57.2% |
| Maintenance capital expenditures | $93.3 million | $236.3 million | Down 60.5% |
| Coal sales price per ton | $50.76 | $53.62 | Down 5.3% |
| Operating expenses and outside coal purchases per ton | $31.09 | $34.22 | Down 9.1% |
At December 31, 2016, cash and cash equivalents were $39.8 million, working capital was negative $50.2 million, total debt principal was $550.0 million and total liabilities were $1.10 billion. Debt consisted of $255.0 million drawn on the revolving facility, $145.0 million of Series B senior notes, a $50.0 million term loan and $100.0 million under the receivables securitization facility. Surety bonds totaled $269.4 million, including $171.8 million for reclamation and $84.1 million for workers’ compensation.
Cash used in investing activities was $191.8 million and cash used in financing activities was $505.4 million. Distributions paid to partners were $247.9 million, and the 2016 quarterly distribution was $0.4375 per unit for each of the second through fourth quarters, after $0.6750 per unit in the first quarter.
Material Changes Versus Prior Comparable Period
- Revenue declined primarily because sales volume fell 8.9% and the average coal sales price decreased $2.86 per ton. The volume reduction reflected the idling of Onton and Gibson North, depletion and closure of Elk Creek, and the cessation of Pattiki production in December 2016.
- Profitability improved despite lower revenue because operating expenses and outside coal purchases fell 17.2%, or $3.13 per ton, reflecting lower-cost production, productivity improvements and a shift toward lower-cost mines.
- 2015 included $100.1 million of asset impairments and a $22.5 million non-cash acquisition gain related to the Hamilton acquisition; neither item recurred in 2016.
- Equity in income of affiliates improved to $3.5 million from a $49.0 million loss, principally because White Oak was consolidated after the 2015 Hamilton acquisition and AllDale Minerals generated higher equity earnings.
- Illinois Basin Segment Adjusted EBITDA fell 12.8% to $538.1 million, while Appalachia increased 4.2% to $191.7 million. Consolidated Segment Adjusted EBITDA declined 6.1% to $765.2 million.
- Capital expenditures declined substantially as the company reduced spending and redeployed equipment from idled or closed mines.
Guidance, Outlook, Risks, Contingencies and Unusual Items
- Management projected 2017 total capital expenditures of $145.0 million to $165.0 million and estimated average annual maintenance capital expenditures over the following five years of approximately $4.25 per ton produced.
- Management stated that cash balances, operating cash flow, credit facilities, sale-leaseback transactions and potential debt or equity issuance were expected to fund working capital, capital expenditures, investments, debt service and distributions. It reported no anticipated liquidity constraints at the filing date, but noted that liquidity depends on future coal prices, operating performance and financing access.
- On January 27, 2017, the company entered into a revised credit agreement. The facility provided a revolving commitment of up to $776.5 million through May 23, 2017, reducing to $479.75 million thereafter, and retained a $50.0 million term loan. The revolver maturity was generally May 23, 2019 but could accelerate if specified Cavalier and senior-note conditions were not met.
- The Series B senior notes totaled $145.0 million, bore interest at 6.72% and matured June 26, 2018. The receivables securitization facility totaled $100.0 million and matured in December 2017.
- The company reported compliance with debt covenants at December 31, 2016. Actual trailing-twelve-month debt-to-cash-flow and cash-flow-to-interest ratios were 0.93 to 1.0 and 23.0 to 1.0, respectively.
- Material risks include declining coal demand from natural gas and renewables, environmental and greenhouse-gas regulation, additional coal-fired power plant retirements, coal-price volatility, customer concentration, transportation disruptions, permitting delays, mine operating events, reclamation and self-insured workers’ compensation and black-lung obligations, and difficulty maintaining surety bonds.
- Three customers generated approximately 39.4% of 2016 total revenue. The company was pursuing litigation over an alleged anticipatory breach of a coal supply contract requiring more than 5.0 million tons of purchases through 2021; management believed pending litigation would not materially affect liquidity or financial condition.
- Alliance Minerals had funded $142.7 million into AllDale Minerals and had a remaining $6.3 million commitment, funded in January 2017. In February 2017, it committed an additional $30.0 million over two years to AllDale Minerals III.
- The company’s independent auditor, Ernst & Young LLP, issued unqualified opinions on the financial statements and internal control over financial reporting. Management reported effective disclosure controls and internal controls.
Most Important Facts for Investors to Verify
- Reconcile the reported long-term contract percentages of 87.7% of sales tonnage and 91.5% of total coal sales, and review the timing, pricing and renewal terms of the 2017–2020 commitments.
- Assess the sustainability of distributions after the reduction from $0.6750 to $0.4375 per unit and in light of negative working capital, debt maturities and fixed-charge coverage requirements.
- Review the January 2017 refinancing, including the May 2017 term-loan maturity, the possible revolver acceleration provisions and the requirement to address the Series B notes before 2018.
- Evaluate whether lower-cost production and reduced capital spending can offset lower coal prices and declining volumes, particularly in the Illinois Basin.
- Analyze customer concentration, contract-renegotiation rights and the pending coal supply contract litigation.
- Quantify potential exposure from reclamation, workers’ compensation, black-lung benefits and surety-bond renewals; undiscounted reclamation obligations were $236.4 million and workers’ compensation and pneumoconiosis commitments were $251.3 million.
- Review the valuation and funding risks of the AllDale oil-and-gas mineral investments, including the additional $30.0 million commitment announced after year-end.