Alliance Resource Partners, L.P. — 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 users. The filing covers the unaudited three months ended March 31, 2013, compared with the three months ended March 31, 2012. Operations include Illinois Basin, Central Appalachia, Northern Appalachia, White Oak and Other and Corporate segments.
Financial performance and key metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Total revenues | $548.1 million | $443.6 million | +23.6% |
| Coal sales | $534.5 million | $429.6 million | +24.4% |
| Income from operations | $112.3 million | $92.0 million | +22.1% |
| Operating margin | 20.5% | 20.7% | Down slightly |
| Net income | $102.9 million | $83.0 million | +24.1% |
| Net margin | 18.8% | 18.7% | Up slightly |
| Net income per limited partner unit | $1.95 | $1.54 | +26.6% |
| Segment Adjusted EBITDA | $188.4 million | $145.7 million | +29.2% |
| Cash flow from operating activities | $199.5 million | $114.8 million | +73.8% |
| Capital expenditures | $70.3 million | $105.3 million | Down $35.0 million |
Coal production increased to 9.8 million tons from 8.5 million tons, while tons sold increased to 9.7 million from 7.8 million. Average coal sales price rose modestly to $55.12 per ton from $54.99. Operating expenses and outside coal purchases increased to $349.2 million from $287.7 million, but declined on a per-ton basis to $36.01 from $36.83.
Cash and cash equivalents were $28.7 million at March 31, 2013, compared with $28.3 million at December 31, 2012. Net cash used in investing activities was $121.3 million, and net cash used in financing activities was $77.8 million. Distributions paid to partners totaled $69.6 million, compared with $60.7 million in the prior-year quarter.
Total debt, including current maturities, was $786.0 million at March 31, 2013, compared with $791.0 million at December 31, 2012. The company had $150.0 million drawn and $23.5 million of letters of credit outstanding under its $700.0 million revolving credit facility, leaving $526.5 million available. The estimated fair value of debt was approximately $834.8 million.
Material changes versus the prior comparable period
- Revenue and profitability benefited from record production and higher sales volumes, driven by the May 2012 start-up of longwall production at Tunnel Ridge, the April 2012 acquisition of the Onton mine, and increased output at several Illinois Basin mines.
- Illinois Basin Segment Adjusted EBITDA increased 22.2% to $167.2 million.
- Northern Appalachia Segment Adjusted EBITDA increased to $16.5 million from $0.3 million, principally due to Tunnel Ridge longwall production.
- Central Appalachia Segment Adjusted EBITDA declined 4.9% to $9.7 million because of difficult mining conditions at MC Mining.
- Depreciation, depletion and amortization increased to $64.4 million from $43.0 million due to Tunnel Ridge, Onton and other production and infrastructure investments.
- Outside coal purchases declined to $0.6 million from $14.2 million, primarily because of lower brokerage and metallurgical export volumes.
- Coal inventories declined to 492,000 tons at March 31, 2013, from 1.065 million tons at March 31, 2012.
Guidance, outlook, commentary, risks and unusual items
- Management estimated 2013 capital expenditures of $370 million to $400 million, including mine expansion, infrastructure, maintenance capital, Gibson South development, reserve acquisitions and White Oak surface facilities.
- The company expected to fund approximately $70 million to $90 million of its preferred equity investment commitment to White Oak during 2013. Total expected White Oak funding from inception through approximately the next two years was approximately $300.5 million to $425.5 million.
- White Oak represented an 18.1% voting interest at March 31, 2013. The company had invested $132.2 million in White Oak Series A units, had received no distributions and recorded a $4.2 million equity loss in the quarter.
- Management stated that existing cash, operating cash flow, credit availability and potential debt or equity financing should meet anticipated requirements, but noted that liquidity depends on operating performance and financing-market conditions.
- Debt covenants were satisfied at March 31, 2013. The trailing-twelve-month debt-to-cash-flow ratio was 1.21 to 1.0 versus a maximum of 3.0 to 1.0, and cash flow to interest expense was 17.8 to 1.0 versus a minimum of 3.0 to 1.0.
- A one-percentage-point increase in rates on the revolving facility and term loan would increase annualized interest expense by approximately $4.0 million based on March 31 borrowings.
- Various lawsuits, claims and regulatory proceedings were pending. Management believed they would not materially affect financial condition, results or liquidity, but acknowledged that outcomes exceeding recorded accruals could be material.
- An IRS audit proceeding began in April 2013 for Alliance Coal’s 2011 tax return. The filing characterizes it as a routine audit; the ultimate outcome was not provided.
- On April 26, 2013, the company declared a $1.13-per-unit quarterly distribution, totaling approximately $70.9 million, payable May 15, 2013.
- Key risks include coal demand and pricing, customer contract performance, regulatory and environmental requirements, mine safety and operating interruptions, labor and benefit costs, reclamation and workers’ compensation liabilities, financing access, and performance of investments the company does not control.
Most important facts for investors to verify
- Whether higher production from Tunnel Ridge, Onton and other mines can be sustained without deterioration in per-ton costs or safety performance.
- The remaining funding requirements, construction progress and expected returns for the White Oak project.
- Compliance with debt covenants and the availability and cost of revolving-credit borrowings as distributions and capital spending continue.
- The effect of variable interest rates, coal-market conditions, utility demand and customer contract renewals on cash flow.
- Potential changes in workers’ compensation, pneumoconiosis, pension, asset-retirement and environmental liabilities.
- The outcome of pending legal and regulatory matters and the IRS administrative proceeding.
- Whether the stated 2013 capital expenditure range and White Oak funding expectations remain consistent with actual cash generation.