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Signature Sponsor
By Alexis Tate
September 19, 2017 - This is part 2 of the article Alliance Resource Partners: A Company Overview. Part 1 can be found here.
Appalachian Mines
Alliance Resource Partners (ARLP) operates three underground mining complexes in the Appalachia region in eastern Kentucky, Maryland, and West Virginia. Peers Peabody Energy (BTU), Alpha Natural Resources (ANRZQ), and CNX Coal Resources (CNXC) are among the other coal (KOL) mining companies operating in the Appalachia region.
MC Mining Complex
The MC Mining Complex is located in Pike County, Kentucky. The mine employs the room-and-pillar mining techniques to produce low-sulfur coal. The preparation plant has a throughput capacity of 1,000 tons of raw coal per hour. ARLP transports coal from this complex through CSX railroad, by trucks via US and state highways, and through barge deliveries.
Tunnel Ridge Complex
Tunnel Ridge is a longwall mine located in Wheeling, West Virginia. The mine began operations in 2010, and its longwall mining operations began in May 2012. The preparation plant at the complex has a throughput capacity of 2,000 tons of raw coal per hour.
The Tunnel Ridge mine produces medium and high-sulfur coal, which is transported by conveyor belt to a barge-loading facility on the Ohio River. Tunnel Ridge has a third-party agreement that allows the transloading of coal from barges for shipment via the Wheeling and Lake Erie Railway and the Norfolk Southern Railway (NSC).
Mettiki Complex
The Mettiki Complex includes the Mountain View mine located in Tucker County, West Virginia, and a preparation plant located in Garrett County, Maryland, which has a throughput capacity of 1,350 tons of raw coal per hour.
The mine uses a longwall mining technique and produces medium-sulfur coal. The coal is then transported by truck either to the preparation plant for processing or to a coal-blending facility at the Virginia Electric and Power Mt. Storm Power Station. CSX railroad also transports this coal.
In the next part, we’ll look at ARLP’s subsidiaries.
Transloading Facility
Mt. Vernon Transfer Terminal is a subsidiary of Alliance Resource Partners (ARLP) that leases land and operates a coal trans-loading terminal in Mt. Vernon, Indiana, on the Ohio River. Coal is delivered to the terminal by both rail and truck.
The terminal’s capacity is 8.0 million tons per year, with ground storage of ~60,000–70,000 tons. In 2016, the terminal loaded ~3.6 million tons for customers of Gibson County Coal, Hamilton, and White County Coal.
Coal Brokerage
An operating subsidiary of ARLP, Alliance Coal, purchases coal from ARLP’s mining operations and from outside producers in the Eastern US, and then the coal is resold. In 2016, no outside coal purchases were made.
Matrix Group
ARLP acquired this business in September 2006. Matrix Group provides various products and services including miner and equipment tracking systems and proximity detection systems. It provides a variety of mining technology products and services for ARLP’s mining operations.
Alliance Minerals
On November 10, 2014, Alliance Minerals purchased a 96% ownership interest in Cavalier Minerals, which has limited partner interest in AllDale Minerals, an entity created to purchase oil and gas mineral interests in different geographic locations in producing basins in the continental US.
Coal Transportation
ARLP supplies coal to its customers by rail, barge, and truck. ARLP’s mines are located in favorable geographic locations that minimize transportation costs for customers. In 2016, ~38.2% of ARLP’s shipments were through rail, while 42.5% was shipped from the mines by barge, and 19.3% was shipped from the mines by truck.
In 2016, CSX railroad was Alliance Resource Partners’ largest volume transporter and shipped ~23.4% of ARLP’s coal. Notably, coal (KOL) peers Westmoreland Coal (WLB) and Arch Coal (ARCH) also depend on CSX for transportation of coal.
Alliance Resource Partners (ARLP) reported shipments of 36.7 million tons in 2016, which represents an 8.9% fall from 40.2 million tons in 2015 and a 7.6% fall from 39.7 million tons in 2014.
According to the latest ARLP filings, shipments fell 8.9% between 2016 and 2015 due to lower shipments from the Illinois Basin. Shipments from the ILB in 2016 came in 12.6% lower than in 2015, primarily due to the cessation of mining operations of its Hopkins Complex, Pattiki Complex, and Sebree Complex. This fall was partially offset by 3.1% rise in shipments from the Appalachia region.
Shipments rose 1.3% in 2015, compared with 39.7 million tons sold in 2014, primarily due to the addition of the Hamilton mine in 2015, the ramp-up of coal production at the Gibson South mine, and increased sales at the Tunnel Ridge and Mettiki mines.
ARLP’s Revenues
ARLP’s revenues are mainly driven by its mines operated in the Illinois Basin and Appalachia regions. In 2016, ~69.2% of total revenues came from the Illinois Basin while ~28.2% came from the Appalachia region.
ARLP reported ~$1.9 billion in revenues in 2016, which was 17.0% lower than the ~$2.3 billion it reported in 2015 and its $2.3 billion in 2014. In 2016, revenues declined primarily due to planned reductions in production volumes and shipments, and lower coal sales prices. Revenues were also affected by a fall in other sales and operating revenues due to the lack of coal royalties and surface facilities revenues from the Hamilton mine (formerly known as White Oak) in 2016. This fall was partially offset by reduced operating expenses in 2016.
Heating demand during the winter, higher natural gas prices, and environmental regulations changes by the Trump administration are all likely to be driving factors for coal (KOL) producers like Arch Coal (ARCH), Alpha Natural Resources (ANRZQ), Peabody Energy (BTU), and others in these regions.
Next, we’ll look at ARLP’s operating performance.
ARLP’s Adjusted Earnings
In 2016, Alliance Resource Partners (ARLP) reported adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) of $765.2 million, which was 6.1% lower than its $814.7 million in 2015. The fall is primarily due to lower adjusted EBITDA from the Illinois Basin region.
The segment’s adjusted EBITDA from Illinois Basin fell 12.8% in 2016, compared with $617.1 million in 2015, primarily due to a decline in revenues. The Appalachia region showcased a rise of 4.2% in adjusted EBITDA for 2016, up from $183.9 million in 2015.
The growth of $7.8 million was primarily attributable to increases in shipments and reduced operating expenses. But these were partially offset by lower average coal sales prices of $54.94 per ton sold in 2016, compared with $60.76 per ton sold in 2015.
The adjusted EBITDA in 2015 witnessed a 7.0% fall from the $876.2 million we saw in 2014, primarily due a 27.6% fall in the Appalachia region.
Net Adjusted Income
In 2016, Alliance Resource Partners reported net adjusted income of $339.5 million, which was higher than its $306 million in 2015. This reflects, in part, the negative net impact in 2015 of $77.6 million from large non-cash items and $48.5 million in equity from the loss of affiliates related to White Oak in 2015.
Notably, the fluctuations in the commodity market may have a significant impact on the margins of Alliance Resource Partners and other major coal (KOL) mining companies such as Arch Coal (ARCH), Alpha Natural Resources (ANRZQ), and Peabody Energy (BTU).
Next, we’ll take a look at ARLP’s leverage and liquidity position.
As of June 30, 2017, the book value of Alliance Resource Partners’ (ARLP) long-term debt was about $1.0 billion, of which ~$145 million is due for payment over the next year.
ARLP’s leverage, which is its net debt divided by EBITDA (earnings before interest, tax, depreciation, and amortization) for the fiscal year, has been consistently low. The lowest was 0.71x in 2011.
As of June 30, 2017, ARLP’s LTM total debt-to-adjusted EBITDA was 0.81x—much lower than the 2.8x average for coal (KOL) peers Westmoreland Coal (WLB), Cloud Peak Energy (CLD), Arch Coal (ARCH), Peabody Energy (BTU), and CNX Coal Resources (CNXC).
Interest Expenses
In 2016, ARLP’s interest expenses reached $30.7 million, compared with $31.2 million in 2015 and $32.8 million in 2014.
As of June 30, 2017, ARLP had an interest coverage ratio (the number of times interest expenses can be paid with earnings) of 7.42x for 2Q17, compared with CNX Coal Resources’ (CNXC) 5.79x, CONSOL Energy’s (CNX) 6.55x, and Cloud Peak Energy’s (CLD) 0.14x.
A high interest coverage ratio is a good indicator of a company’s ability to pay off debt on a regular basis.
Next, we’ll assess the key risks in ARLP’s business.
Commodity Price Risk
Alliance Resource Partners (ARLP) has significant long-term supply agreements. As of June 30, 2017, ARLP’s long-term contracts totaled ~38.0 million tons for 2017, 20.1 million tons for 2018, 11.0 million tons for 2019, and 6.9 million tons for 2020. In 2016, 91.5% of ARLP’s revenues came through long-term contracts.
Most long-term supply agreements are subject to price adjustment provisions. These allow changes in contract prices to reflect commodity prices as they rise or fall and production cost fluctuations due to regulatory changes. ARLP uses significant amounts of electricity, steel, petroleum products, and other raw materials in its mining operations, and so ARLP’s revenues are dependent on commodity prices.
In 2016, ~90.3% of ARLP’s coal sales in tons were purchased by electric utilities. ARLP’s credit risk is thus primarily with domestic electric power generators.
Notably, credit risk is a common risk among many coal (KOL) producers, including Peabody Energy (BTU), Cloud Peak Energy (CLD), and Arch Coal (ARCH).
Interest Rate Risk
The interest rate of ARLP’s borrowings under its credit facility, its securitization facility, and its cavalier credit agreements are variable. As of December 31, 2016, ARLP had $255.0 million in borrowings under its Replaced Revolving Credit Facility, $50.0 million outstanding under its Replaced Term Loan, and $100.0 million in borrowings under its Securitization Facility.
Assuming the principal amount of variable debt outstanding to be constant, a 1% increase in interest rate could increase the company’s interest expenses by $4.1 million for that particular year. However, according to company filings, ARLP’s earnings have not been materially affected by the recent changes in interest rates.
In the next and final part of this series, we’ll discuss the factors that could drive ARLP’s stock price in 2H17.
Stock Performance So Far
The ETF (exchange-traded fund) market has outperformed coal stocks, as represented by the VanEck Vectors Coal ETF (KOL), so far in 1H17. Most coal stock prices have fallen so far in 2017.
As of September 5, 2017, Alliance Resource Partners (ARLP) had fallen ~17% so far in 2017. YTD (year-to-date), peers CNX Coal Resources (CNXC), CONSOL Energy (CNX), and Cloud Peak Energy (CLD) have fallen 17%, 22%, and 46%, respectively.
Westmoreland Coal (WLB) has fallen the most, witnessing a ~88% YTD decline, while the VanEck Vectors Coal ETF has gained nearly 23%, outperforming all these stocks YTD.
Outlook
ARLP’s earnings are expected to improve, driven by reduced coal supplies, higher natural gas prices, and export demand growth. Meanwhile, the Trump administration has also been vocally supportive of the coal industry.
On March 28, 2017, Trump signed an executive order to repeal the safety regulations and guidelines to combat global climate change put in place by the Obama administration. Trump withdrew the US from the Paris Agreement on climate change in June 2017, and these reforms are expected to affect the coal industry positively.
Coal’s and natural gas’s shares in electricity generation are expected to be similar this winter. The EIA (US Energy Information Administration) estimates that the natural gas share in electricity generation will be ~31% in 2017, down from 34% in 2016.
This fall in market share is being attributed to higher natural gas prices, increased generation from renewables and coal, and lower electricity demand.
Coal’s share is expected to be ~32% in 2017—higher than its 30% market share in 2016 |
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