An In-Depth Look At Alliance Holdings' IPO (AHGP)

Includes: AHGP, ARLP
by: Bill Simpson

Before Alliance Holdings GP's (NASDAQ:AHGP) IPO this month, Bill Simpson wrote a detailed analysis of the company and offering. AHGP shares priced at $25 on May 9th. The text of Mr. Simpson's original writeup follows.

Alliance Holdings GP plans on offering 12.5 million units (500k from insider) at a range of $23-$25. Lehman and Citigroup are lead managing the deal. Post-offering AHGP will have 60 million units outstanding for a market cap of $1.44 million at mid-range. All IPO monies will be going to interests controlled by President, CEO and Director Joseph W. Craft III. Post-offering entities controlled by Mr. Craft will own 76% of AHGP. By all IPO monies going to Mr. Craft and his controlled entities, it equates to all offering shares being sold by Mr. Craft and controlled entities.

AHGP is another in a long line of MLP (master limited partnership) IPOs. This one is structured similar to EPE/ ETE in that AHGP will own the general partnership in ARLP as well as common units in ARLP.

From the prospectus:

Our cash generating assets consist of our partnership interests in Alliance Resource Partners, L.P. (NASDAQ: ARLP), a publicly traded limited partnership engaged in the production and marketing of coal to major United States utilities and industrial users....ARLP is a diversified producer and marketer of coal to major United States utilities and industrial users. ARLP began mining operations in 1971 and, since then, has grown through acquisitions and internal development to become what management believes to be the fifth largest coal producer in the eastern United States.

Post offering AHGP's assets will consist of:
1) The general partner interest in ARLP, which equates to a 1.98% stake in ARLP, plus 100% of incentive distribution rights.
2) 15,550,628 common units of ARLP, representing approximately 42.7% of the common units of ARLP.
3) 0.001% managing interest in Alliance Coal, LLC.

ARLP is structured as a partnership also and is required to distribute all cash quarterly to unitholders. ARLP currently yields 46 cents per quarter. AHGP's incentive distribution rights entitle them to increasing amount of ARLP's yield as ARLP increases distribution. Currently that distribution is maxed out at 48% of all cash distributed quarterly above $0.375 cents a unit. At ARLP's current yield, AHGP's general partnership, common shares and incentive rights mean AHGP receives roughly 54% of all cash distributed by ARLP. Annualized this comes to 76 cents a unit for AHGP. AHGP plans on distributing nearly all this cash to shareholders.

Currently AHGP plans on distributing $0.185 cents a unit or $0.74 annually.

At a mid-range pricing AHGP will be yielding 3.1% annually.

I've analyzed dozens of MLP IPOs this decade and a handful also of these 'general partnership' MLPs. The prospectus goes into plenty of detail on ARLP's business as AHGP's sole revenue source is ownership interests in ARLP. For our purposes we need to know the following about ARLP: 1) they've been successful expanding their coal operations; 2) ARLP has increased quarterly distribution 84% overall since the 1999 IPO and 3) ARLP has increased quarterly distributions in 6 of the last 9 quarters.

I think we can anticipate ARLP will increase their quarterly yield by a few pennies over the next year and that AHGP's payout will be a little higher than the anticipated 74 cents. I would estimate unitholder of AHGP will receive closer to 80 cents per unit the next year.
MLP IPOs have been a great spot to be in the 2000s. Nearly all have performed wonderfully. A few reasons for this: 1) demand has built for energy assets throughout the decade, 2) low treasury yields have led yield seekers elsewhere, Most MLP's have come public 5%-9% annual yield making them a very attractive alternative to 10 and 30 year treasuries yielding 4%-5%, 3) Most MLP IPOs have floated very few units, with very few total units outstanding also quite small. This has helped lead to substantial yield increases as assets have been added for many of the energy MLP's.

It has definitely been a case of not enough supply coupled with strong demand for the reasons noted above. 2 issues here with this AHGP offering. Much like recent general partnership MLP IPOs ETE/ MGG, AHGP is offering a substantial number of shares. There are also a substantial number of shares outstanding (60 million) which will mean potential float dilution as those shares get sold later as well as making it difficult to swiftly grow the yield. Also these general partnership MLP offerings tend to trade in the 3% range or so. At mid-range AHGP will be right there at that 3% range.

With so many units offered/outstanding as well as coming right in line yield-wise with similar IPOs, I'd expect AHGP's aftermarket to be muted initially. Factor in that long bond yields are rising and AHGP at 3% is not anything to get too excited about. I would be a little surprised if AHGP did not perform a bit like MGG/ ETE initially. Each of those offerings struggled initially before finding a level in which investors stepped in. I'd expect similar from AHGP. Coal has been a very good spot to be, and I would not be surprised to see AHGP at least hold offering price unlike MGG/ ETE. I don't however see much short to mid-term upside here, the expected yield just isn't strong enough. I'd rate this one as neutral.