ALLIANCE RESOURCE PARTNERS LP annual report, FY2023

Alliance Resource Partners, L.P. — FY2023 Form 10-K Summary

Business context and reporting period

Alliance Resource Partners, L.P. is a diversified natural-resource limited partnership reporting for the year ended December 31, 2023. Its principal businesses are Illinois Basin and Appalachia coal operations, oil and gas royalties, coal royalties, and mining and industrial technology activities. The filing is an annual report, not a standalone fourth-quarter filing.

Seven underground coal mining complexes and an Ohio River coal terminal.
Approximately 67,700 net royalty acres in the Permian, Anadarko and Williston Basins.
Approximately 663.2 million tons of coal reserves and 1.065 billion tons of coal resources at year-end.
Approximately 3,595 full-time employees; the workforce is union-free.

Financial performance and key metrics

Metric	2023	2022	Change
Total revenues	$2.567 billion	$2.420 billion	6.1% increase
Operating income	$672.4 million	$667.4 million	0.7% increase
Net income attributable to ARLP	$630.1 million	$586.2 million	7.5% increase
Basic and diluted earnings per unit	$4.81	$4.39	9.6% increase
Net cash from operating activities	$830.6 million	$802.3 million	3.5% increase
Capital expenditures	$379.3 million	$286.4 million	32.5% increase
Segment Adjusted EBITDA	$1.012 billion	$1.033 billion	2.0% decrease

Coal sales were $2.210 billion, up 5.1%; tons sold declined 3.2% to 34.442 million, while average coal pricing increased 8.6% to $64.17 per ton.
Operating margin was approximately 26.2%, compared with approximately 27.6% in 2022; net margin was approximately 24.6%, compared with approximately 24.2%.
Oil and gas royalty revenue declined 8.8% to $137.8 million as the average realized price per BOE fell 29.4% to approximately $44.37, partly offset by a 29.1% increase in BOE volumes.
Illinois Basin Segment Adjusted EBITDA increased 22.2% to $514.1 million. Appalachia Segment Adjusted EBITDA decreased 22.4% to $330.7 million.
Other revenues increased 44.7% to $76.5 million, primarily because of higher mining-technology sales.
Income tax expense declined to $8.3 million from $54.0 million, principally because 2022 included a $37.3 million one-time non-cash charge related to Alliance Minerals’ tax election.

Cash flow, debt and liquidity

Cash and cash equivalents declined to $59.8 million from $296.0 million at year-end 2022.
Investing cash outflows were $559.7 million, including $379.3 million of capital expenditures, oil and gas acquisitions, and equity investments.
Financing cash outflows were $507.1 million, including $364.6 million of distributions, $129.5 million of debt repayments and $19.4 million of unit repurchases.
Long-term debt principal was $347.6 million at year-end, consisting primarily of $284.6 million of 7.5% senior notes due May 2025 and a $60.9 million variable-rate term loan.
The credit agreement provides a $425 million revolving facility and a $75 million term loan. At year-end, $384.0 million of revolver capacity was available after $41.0 million of letters of credit; the term loan carried an 8.50% rate.
No borrowings were outstanding under the accounts-receivable securitization facility; $48.3 million was available at year-end. In January 2024, its availability was increased to $90.0 million and its maturity extended to January 2025.
Management expects sufficient liquidity and covenant compliance, but the credit agreement could mature January 30, 2025 if the senior notes remain outstanding and Alliance Coal lacks at least $200 million of liquidity.

Material changes versus the prior comparable period

Higher coal pricing and Illinois Basin volumes increased revenue, but Appalachia volumes fell 15.3% because of outages, customer maintenance, geological delays, longwall moves and reduced operating units.
Coal operating expense increased 9.4% to $1.405 billion; expense per ton increased to $40.38 from $35.91. Labor, maintenance, inflation and purchased coal were significant contributors.
Mettiki’s longwall operation experienced delayed development of a new district, contributing to $36.1 million of outside coal purchases and a $33.3 million inventory lower-of-cost-or-net-realizable-value adjustment.
Oil and gas production increased to 3.215 million BOE from 2.516 million BOE, but lower commodity prices reduced royalty profitability.
ARLP acquired approximately 6,443 net royalty acres for $110.9 million, including the $72.3 million related-party JC Resources acquisition and the $14.5 million Skyland acquisition.
ARLP invested $49.6 million in Infinitum and Ascend during 2023. Total investments in Francis, Infinitum, NGP ET IV and Ascend reached $119.1 million, with $18.4 million remaining committed to NGP ET IV.
The quarterly distribution was $0.70 per unit in each quarter of 2023, compared with $0.25, $0.35, $0.40 and $0.50 in the four quarters of 2022. A $0.70 per-unit distribution was declared in January 2024.

Guidance, outlook, commentary and risks

Initial 2024 guidance includes 32.5 million priced and committed coal tons for delivery during 2024. Approximately 93.4% of 2023 coal tons were sold under long-term contracts, generally expiring from 2024 through 2029.
Management estimates 2024 cash requirements of $728 million to $778 million, including capital expenditures, debt payments, leases, reclamation and benefit obligations.
Management expects approximately $36.5 million of additional 2024 spending to complete the Henderson County mine, after $69.3 million was invested through 2023. The project is expected to provide access to approximately 109.5 million clean recoverable tons.
Average annual maintenance capital expenditures over the next five years are projected at approximately $7.76 per ton produced.
Key risks include declining coal demand from plant retirements and fuel substitution, coal and oil and gas price volatility, inflation, labor shortages, transportation disruptions, mine operating incidents, permitting and environmental regulation, climate-related litigation, surety-bond availability, customer concentration, operator control over oil and gas development, and refinancing of 2025 senior notes.
Reclamation obligations were $150.4 million, with approximately $266.6 million of undiscounted future costs. Workers’ compensation and pneumoconiosis obligations totaled $180.4 million, including a substantial 2023 increase in pneumoconiosis liabilities.
Six wage-and-hour lawsuits seek class or collective-action certification. Management expects no material loss, but states that an unfavorable resolution could be material.
Management and Grant Thornton concluded that internal control over financial reporting was effective. Grant Thornton issued unqualified opinions; valuation of workers’ compensation and pneumoconiosis obligations was the critical audit matter.

Most important facts for investors to verify

Whether coal pricing, Appalachia production reliability and cost per ton support 2024 cash flow expectations.
The refinancing or repayment plan for the $284.6 million senior notes due May 2025 and the credit-agreement liquidity test.
Actual 2024 capital spending and completion costs for the Henderson County mine.
Whether oil and gas volumes continue to grow sufficiently to offset lower realized commodity prices.
The adequacy of reclamation, black-lung, workers’ compensation and surety-bond provisions.
The outcome and potential exposure of the wage-and-hour litigation and other contingencies.
The valuation, funding requirements and potential returns of the Infinitum, Ascend, Francis and NGP ET IV investments.
The sustainability of $0.70-per-unit quarterly distributions given cash balances, debt maturities and capital requirements.