Alliance Resource Partners, L.P. — 2021 Form 10-K Summary
Business Context and Reporting Period
The filing covers the fiscal year ended December 31, 2021; it is an annual report rather than a quarterly filing. ARLP is a diversified natural-resource limited partnership with underground coal operations in the Illinois Basin and Appalachia, coal and oil and gas royalty interests, and mining-technology activities. The partnership operated seven mining complexes, sold coal to domestic utilities, international customers and industrial users, and held approximately 57,000 net oil and gas royalty acres.
Key Financial Metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Total revenue | $1.570 billion | $1.328 billion | 18.2% increase |
| Operating income | $219.2 million | $(82.9) million | Returned to profit |
| Net income attributable to ARLP | $178.2 million | $(129.2) million | Returned to profit |
| Earnings per unit | $1.36 | $(1.02) | Improved |
| Operating margin | 14.0% | (6.2)% | Improved |
| Net margin attributable to ARLP | 11.3% | (9.7)% | Improved |
| Segment Adjusted EBITDA | $549.3 million | $446.5 million | 23.0% increase |
| Cash flow from operations | $425.2 million | $400.6 million | 6.1% increase |
| Capital expenditures | $123.0 million | $121.1 million | 1.6% increase |
| Cash and cash equivalents | $122.4 million | $55.6 million | Increased |
| Total debt principal | $443.1 million | $603.8 million | Reduced |
- Coal sales increased to $1.387 billion from $1.232 billion. Tons sold increased 14.4% to 32.3 million, while average realized coal pricing declined 1.6% to $42.98 per ton.
- Coal production increased 19.3% to 32.2 million tons, reflecting the restoration of production that had been curtailed during the pandemic-affected 2020 period.
- Oil and gas royalty revenue increased 74.7% to $75.0 million. BOE volume declined 7.2% to 1.663 million, but royalty revenue per BOE increased to $45.08 from $23.95 because of higher commodity prices.
- Coal operating expense per ton decreased to $30.24 from $31.23, benefiting from higher volumes, mix and cost-control initiatives. Material and supplies costs increased because of roof support, contract labor and subsidence expenses.
- Debt consisted primarily of $400.0 million of 7.5% senior notes due 2025 and $43.1 million of equipment financings. No borrowings were outstanding under the revolving credit or securitization facilities at year-end; the revolving facility had $415.4 million of borrowing availability after $44.1 million of letters of credit.
Material Changes Versus the Prior Comparable Period
- Results rebounded sharply from 2020, when COVID-19-related demand weakness, production curtailments and commodity-price declines caused a net loss.
- 2020 included $25.0 million of long-lived asset impairments and a $132.0 million goodwill impairment associated with Hamilton. No asset or goodwill impairment was recorded in 2021.
- Depreciation, depletion and amortization declined to $261.4 million from $313.4 million, primarily because of increased mine-life estimates and lower depletion associated with certain assets.
- Illinois Basin Segment Adjusted EBITDA increased 24.0% to $265.3 million; Appalachia increased 0.7% to $172.6 million; Oil and Gas Royalties increased 72.9% to $68.8 million; and Coal Royalties increased 38.5% to $33.2 million.
- ARLP acquired approximately 1,480 oil and gas net royalty acres in the Delaware Basin for $31.0 million in October 2021. The acquisition was accounted for as an asset acquisition.
- Cash distributions resumed after the quarter ended March 31, 2021. Quarterly distributions were $0.10 per unit for the second and third quarters and $0.20 per unit for the fourth quarter. A $0.25 per-unit distribution was declared in January 2022.
- The partnership did not repurchase units in 2021. The remaining authorization under the $100 million repurchase program was $6.5 million at year-end.
Guidance, Outlook, Commentary, Risks and Unusual Items
- Management estimated 2022 cash requirements, including capital expenditures, debt payments, leases, reclamation and benefit obligations, at $380 million to $400 million. Management expected to fund these requirements with cash on hand, operating cash flow and, if necessary, revolving or securitization borrowings.
- Management projected average annual maintenance capital expenditures over the next five years of approximately $5.41 per ton produced.
- As of February 11, 2022, approximately 33.1 million tons were committed for delivery in 2022. Approximately 77.9% of 2021 sales tonnage was sold under long-term contracts.
- Key risks include declining coal demand, coal-fired power-plant retirements, climate and emissions regulation, commodity-price volatility, transportation disruptions, inflation, labor and supply-chain constraints, permitting, mine-safety events, cybersecurity, customer credit and contract-renewal risk.
- Oil and gas royalty production depends on unaffiliated operators. ARLP does not control drilling timing, development spending or production volumes and does not currently hedge commodity production.
- Reclamation, workers’ compensation and black-lung obligations are material. Asset retirement obligations were $131.1 million, workers’ compensation and pneumoconiosis obligations totaled $164.8 million, and surety bonds outstanding totaled $254.5 million.
- Several wage-and-hour lawsuits allege failure to compensate employees for equipment donning and doffing and certain overtime calculations. Plaintiffs have alleged damages ranging from approximately $22.2 million to $143.7 million; the filing states that the matters are in early stages and that a potential loss cannot currently be reasonably estimated.
- During 2021, ARLP discovered a cyber incident affecting certain computer systems. The filing states that it did not materially affect the business or financial statements; two-factor authentication and other security enhancements were implemented.
- The filing reports effective disclosure controls and internal control over financial reporting, with an unqualified audit opinion from Grant Thornton LLP.
Most Important Facts for Investors to Verify
- Whether coal volumes, contract renewals and realized pricing support the 2022 cash-requirement plan.
- The timing and refinancing strategy for the $400 million of senior notes maturing in 2025.
- Actual 2022 distributions relative to the declared $0.25 per-unit quarterly distribution and the partnership’s discretionary distribution policy.
- Exposure to coal demand declines, environmental regulation, carbon policy and customer concentration, including Louisville Gas and Electric Company, which exceeded 10% of 2021 revenue.
- Whether oil and gas operators sustain drilling activity and whether royalty volumes recover after the 2021 production decline.
- Changes in reclamation, black-lung, workers’ compensation and surety-bond requirements.
- Developments in the wage-and-hour litigation and any resulting accruals or cash exposure.
- The distinction between GAAP earnings, Segment Adjusted EBITDA and cash available for distribution; Segment Adjusted EBITDA is a non-GAAP measure and does not by itself determine distributions.