ALLIANCE RESOURCE PARTNERS LP quarterly report, Q3 FY2013

Alliance Resource Partners, L.P. — Q3 2013 Form 10-Q

Business context and reporting period

ARLP is a diversified eastern U.S. coal producer and marketer serving utilities and industrial customers. The filing covers the unaudited three and nine months ended September 30, 2013, compared with the corresponding 2012 periods. Operations include the Illinois Basin, Central Appalachia, Northern Appalachia, White Oak development activities, and related corporate businesses.

Financial performance and key metrics

Metric	Q3 2013	Q3 2012	9M 2013	9M 2012
Total revenue	$537.2 million	$511.4 million	$1.639 billion	$1.485 billion
Coal sales	$518.4 million	$499.0 million	$1.595 billion	$1.441 billion
Income from operations	$98.0 million	$70.3 million	$325.9 million	$267.8 million
Net income	$87.2 million	$60.5 million	$294.2 million	$238.9 million
Net income per limited partner unit	$1.50	$0.89	$5.41	$4.25
Operating cash flow	Not separately reported	Not separately reported	$550.4 million	$431.6 million
Segment Adjusted EBITDA	$173.4 million	$160.2 million	$556.8 million	$477.5 million

Q3 net income margin was approximately 16.2%, compared with 11.8% in the prior-year quarter. Nine-month net income margin was approximately 18.0%, compared with 16.1% in the prior-year period. Q3 operating margin was approximately 18.2%; nine-month operating margin was approximately 19.9%.

Coal tons sold increased 6.7% in Q3 to 9.5 million and 14.3% for nine months to 29.0 million. Production increased to 9.7 million tons in Q3 and 29.6 million tons for nine months.
Average coal sales price declined to $54.55 per ton in Q3 from $56.00 and to $54.95 per ton for nine months from $56.77, principally because of reduced metallurgical export sales.
Operating expenses and outside coal purchases per ton sold declined to $36.48 in Q3 from $38.50 and to $35.98 for nine months from $38.67.
Cash and cash equivalents were $18.9 million at September 30, 2013, compared with $28.3 million at December 31, 2012.
Net cash used in investing activities was $319.2 million, including $242.7 million of capital expenditures and $47.5 million of additional White Oak equity investments. Net cash used in financing activities was $240.6 million, including $213.8 million of distributions.
Debt totaled $768.0 million at September 30, 2013, consisting of $80.5 million of current maturities and $687.5 million of long-term debt. Estimated debt fair value was $787.3 million.
Borrowings and letters of credit under the revolving facilities totaled $150.0 million and $23.5 million, respectively; $576.5 million was available for borrowing. The partnership 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 1.12-to-1 and 19.4-to-1, respectively, versus covenant limits of no more than 3.0-to-1 and no less than 3.0-to-1. The partnership was in compliance with its debt covenants.

Material changes versus the prior comparable period

Q3 net income increased $26.7 million, or approximately 44%, while nine-month net income increased $55.3 million, or approximately 23%.
Revenue growth was driven by higher sales volumes, particularly in the Illinois Basin and from the ramp-up of the Tunnel Ridge mine, partly offset by lower realized coal prices.
Segment Adjusted EBITDA increased 8.2% in Q3 and 16.6% for nine months. Illinois Basin performance improved materially, while Northern Appalachia benefited from Tunnel Ridge production but faced lower metallurgical export sales and prices.
The prior-year periods included a $19.0 million non-cash impairment charge related to the Pontiki mining complex. No comparable charge was recorded in 2013.
Depreciation, depletion and amortization increased to $66.1 million in Q3 and $198.7 million for nine months, primarily due to Tunnel Ridge, the Onton mine, and other capital investments.
White Oak generated Segment Adjusted EBITDA losses of $6.2 million in Q3 and $16.8 million for nine months, compared with losses of $3.2 million and $10.1 million, respectively, in the prior-year periods.
In June 2013, ARLP acquired approximately 11.6 million tons of proven and probable coal reserves and 5.9 million resource tons in West Virginia for $25.2 million.

Guidance, outlook, commentary, risks and unusual items

Management estimated 2013 total capital expenditures of $370 million to $400 million, including mine expansion, infrastructure, maintenance capital, Gibson South development, reserve acquisitions, and White Oak surface facilities.
Management stated that cash balances, operating cash flow, available borrowings, and potential debt or equity financing were expected to be sufficient for working capital, capital expenditures, debt service, commitments, and distributions, while noting that future liquidity depends on operating performance and financing conditions.
On September 27, 2013, ARLP issued WARN notices to Pontiki employees. Pontiki was expected to continue operating through late November 2013 to fulfill existing contracts and then cease production. The filing stated that no additional impairment was required.
A $50.0 million related-party revolving facility entered into in September 2013 was terminated on October 29, 2013, with all outstanding amounts and interest paid in full.
ARLP declared a quarterly distribution of $1.175 per unit, totaling approximately $74.2 million, payable November 14, 2013.
White Oak remained a significant funding commitment. ARLP had invested $150.0 million in preferred equity, expected total funding of approximately $300.5 million over the development period, and an additional potential commitment of up to $125.0 million for Series A Units. White Oak had made no distributions to ARLP.
Key risks include coal price and demand volatility, lower metallurgical export opportunities, customer concentration and defaults, mine safety and regulatory requirements, environmental obligations, geologic and operating interruptions, labor costs, reclamation and workers’ compensation liabilities, insurance availability, and the performance and funding needs of White Oak.
A one-percentage-point increase in rates on variable-rate borrowings would have increased annualized interest expense by approximately $4.0 million based on September 30, 2013 borrowing levels.
Pending lawsuits, claims, and regulatory proceedings were considered by management unlikely to have a material adverse effect, although outcomes exceeding recorded accruals could be material. An IRS audit of Alliance Coal’s 2011 tax return was ongoing.

Important facts for investors to verify

Confirm the post-November 2013 status, closure costs, reclamation obligations, and production impact of the Pontiki mine.
Assess whether lower coal prices and reduced metallurgical export sales persist and affect contract renewals, margins, and cash flow.
Reconcile planned 2013 capital expenditures with actual spending and evaluate funding for Gibson South, White Oak, and other development projects.
Review debt maturities, including the $18.0 million senior notes due in August 2014, the $205.0 million Series A notes due in 2015, and scheduled term-loan amortization beginning in 2014.
Monitor White Oak construction progress, operating losses, additional funding requirements, and the recoverability of ARLP’s $150.0 million investment and related commitments.
Verify distributions against available cash, covenant restrictions, and free cash flow after capital expenditures and required investments.
Review mine safety, environmental, workers’ compensation, pneumoconiosis, pension, insurance, litigation, and IRS audit developments.