Business Context and Reporting Period
Alliance Resource Partners, L.P. is a diversified U.S. natural-resource partnership generating revenue from coal production and marketing, coal royalties, and oil and gas royalties. Reportable segments are Illinois Basin Coal Operations, Appalachia Coal Operations, Oil & Gas Royalties, Coal Royalties, and Other and Corporate. This unaudited Form 10-Q covers the three and six months ended June 30, 2021, compared with the corresponding 2020 periods. Prior-period segment information was recast to separately present Coal Royalties beginning in 2021.
Key Financial Metrics
| Metric | Three months ended June 30, 2021 | Three months ended June 30, 2020 | Six months ended June 30, 2021 | Six months ended June 30, 2020 |
|---|---|---|---|---|
| Total revenue | $362.4 million | $255.2 million | $681.1 million | $606.0 million |
| Operating income (loss) | $55.0 million | $(35.1) million | $91.3 million | $(167.8) million |
| Net income (loss) attributable to ARLP | $44.0 million | $(46.7) million | $68.8 million | $(191.4) million |
| Earnings per unit | $0.34 | $(0.37) | $0.53 | $(1.51) |
| Operating margin | 15.2% | (13.8)% | 13.4% | (27.7)% |
| Net margin attributable to ARLP | 12.2% | (18.3)% | 10.1% | (31.6)% |
| Segment Adjusted EBITDA | $136.1 million | $62.1 million | $245.9 million | $173.8 million |
| Cash flow from operating activities | Not separately provided | Not separately provided | $158.2 million | $170.2 million |
Coal sales were $326.0 million for the quarter and $613.5 million for the six-month period. Coal tons sold increased 51.3% to 7.8 million in the quarter and 18.0% to 14.7 million for the six-month period. Average coal sales prices declined to $41.55 per ton in the quarter and $41.81 per ton for the six-month period, compared with $45.56 and $44.30, respectively, in the prior-year periods.
Oil and gas royalty revenue was $17.1 million for the quarter and $31.1 million for the six-month period, versus $7.8 million and $22.0 million, respectively. Oil and gas royalty volumes declined, but higher price realizations more than offset the volume decreases.
Operating expenses excluding depreciation, depletion and amortization were $213.0 million for the quarter and $409.6 million for the six-month period. Depreciation, depletion and amortization was $64.7 million and $123.9 million, respectively. The filing reports no asset or goodwill impairment charges in 2021, compared with $25.0 million of asset impairments and $132.0 million of goodwill impairment in the first six months of 2020.
Liquidity, Debt and Cash Flow
- Cash and cash equivalents were $37.7 million at June 30, 2021, compared with $55.6 million at December 31, 2020.
- Operating cash flow was $158.2 million; capital expenditures were $55.6 million; investing cash outflow was $50.2 million; and financing cash outflow was $125.8 million. Cash declined by $17.8 million during the six months.
- Total debt principal was $491.8 million at June 30, 2021, consisting primarily of $400.0 million of 7.5% senior notes due 2025, $38.1 million under the accounts receivable securitization facility, equipment financings, and a $1.8 million related-party line-of-credit draw. Revolving credit facility borrowings were zero.
- The $459.5 million revolving credit facility had $21.8 million of letters of credit outstanding and $437.7 million available for borrowing at June 30, 2021. The facility terminates March 9, 2024.
- The accounts receivable securitization facility was extended to January 2022 and its availability was reduced to $60.0 million; $38.1 million was outstanding at quarter-end.
- Trailing-twelve-month covenant ratios were debt to cash flow of 1.08x, cash flow to interest expense of 10.66x, and first-lien debt to cash flow of 0.20x. Management stated that the partnership was in compliance and expected to remain in compliance.
- Management estimates 2021 capital expenditures of $125 million to $130 million and expects to fund them through cash, operating cash flow, investments, and available financing.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue increased 42.0%, and six-month revenue increased 12.4%, primarily due to stronger coal demand, higher shipment volumes, increased exports, and higher oil and gas price realizations.
- Quarterly net income attributable to ARLP improved by $90.7 million from a loss to income. Six-month net income improved by $260.2 million, primarily reflecting stronger operations, lower expenses, lower depreciation, and the absence of the $157.0 million of 2020 impairment charges.
- Quarterly Segment Adjusted EBITDA increased 119.3% to $136.1 million; six-month Segment Adjusted EBITDA increased 41.5% to $245.9 million.
- Coal operating expense per ton declined to $27.90 in the quarter and $28.74 for the six-month period, compared with $36.67 and $34.65, respectively, driven by higher volumes, improved recoveries, lower inventory charges, and cost-control initiatives.
- Cash flow from operations declined $11.9 million despite improved earnings, primarily because of an unfavorable trade-receivables working-capital change.
- Partner distributions resumed in 2021 after being suspended following the February 2020 distribution. A $0.10 per-unit distribution was paid in May 2021, and a further $0.10 per-unit distribution was declared in July for payment in August 2021.
- No unit repurchases occurred during the first six months of 2021. The remaining authorization under the $100 million repurchase program was approximately $6.5 million.
Guidance, Outlook, Commentary and Risks
Management expects available liquidity and anticipated operating cash flow to fund operations, capital requirements, debt service, investments, and distributions, while acknowledging that liquidity and covenant compliance depend on future operating performance and access to financing. The filing does not provide full-year revenue or earnings guidance.
- Results remain sensitive to coal, oil, and natural gas prices, demand, export markets, transportation costs, production levels, and customer performance. Most coal contracts contain price-adjustment provisions, while shorter-term contracts increase exposure to declining prices.
- Management has not historically used commodity or interest-rate hedges. A one-percentage-point increase in the securitization facility’s interest rate would increase annual interest expense by approximately $0.4 million based on June 30 borrowings.
- Long-term obligations include workers’ compensation, pneumoconiosis, pension, asset-retirement, reclamation, and insurance-related liabilities. The partnership made $3.3 million of pension contributions during the six months and does not expect additional pension contributions during 2021 or 2022 because of relief under the American Rescue Plan Act.
- Six lawsuits allege wage-and-hour violations relating to time spent donning and doffing equipment and overtime calculations. Plaintiffs allege aggregate damages ranging from approximately $22.2 million to $143.7 million. Management believes the claims are without merit, but the litigation is in early stages and exposure cannot yet be reasonably estimated.
- A cyber incident during the quarter did not materially affect operations, financial position, or results. The partnership implemented two-factor authentication and other security and backup enhancements.
- Other principal risks include declining coal use and environmental regulation, greenhouse-gas and ESG-related pressures, mine accidents and operational disruptions, permitting and reclamation requirements, customer bankruptcies or contract defaults, insurance availability, labor costs, foreign competition, oil and gas operator activity, and COVID-19-related effects.
Investor Verification Items
- Verify the sustainability of the 2021 recovery in coal volumes and margins, particularly as higher volumes coincided with lower realized coal prices.
- Reconcile operating cash flow with reported earnings and monitor receivables, inventories, and working-capital requirements.
- Confirm the timing and refinancing or repayment plan for the January 2022 securitization facility and 2022 equipment-financing maturities.
- Monitor the $400 million of senior notes due May 2025, variable-rate borrowings, and compliance with credit-facility covenants.
- Assess whether the $125 million to $130 million 2021 capital-expenditure estimate remains appropriate and whether projected cash generation is sufficient to fund it and distributions.
- Evaluate the potential financial impact of wage-and-hour litigation, black-lung and workers’ compensation liabilities, asset-retirement obligations, insurance limitations, and mine-safety matters.
- Review future distribution decisions and the remaining unit-repurchase authorization, noting that distributions are subject to financial conditions and debt-agreement restrictions.