Alliance Resource Partners, L.P. — 2022 Form 10-K Summary
Business context and reporting period
Alliance Resource Partners, L.P. is a diversified natural-resource partnership focused on coal production and marketing, coal royalties, oil and gas royalties, mining technology, and energy-transition investments. The filing reports the fiscal year ended December 31, 2022; it is not a quarterly filing, although the request references 2022 Q4.
- Coal operations include seven underground mining complexes in the Illinois Basin and Appalachia and an Ohio River coal-loading terminal.
- Oil and gas interests comprise approximately 61,400 net royalty acres, primarily in the Permian, Anadarko and Williston basins.
- At year-end, ARLP reported approximately 580.7 million tons of proven and probable coal reserves, 1.17 billion tons of measured, indicated and inferred coal resources, and 20.6 million BOE of proved oil and gas reserves.
Key financial and operating metrics
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Total revenue | $2.407 billion | $1.570 billion | +53.3% |
| Coal sales | $2.102 billion | $1.387 billion | +51.6% |
| Oil and gas royalties | $138.4 million | $75.0 million | +84.6% |
| Income from operations | $658.4 million | $219.2 million | +200.4% |
| Net income attributable to ARLP | $577.2 million | $178.2 million | +224.0% |
| Basic and diluted earnings per unit | $4.39 | $1.36 | +223.0% |
| Operating cash flow | $791.8 million | $425.2 million | +86.2% |
| Capital expenditures | $286.4 million | $123.0 million | +132.9% |
| Segment Adjusted EBITDA | $1.021 billion | $549.3 million | +85.8% |
- Coal production increased to 35.5 million tons from 32.2 million tons, while sales increased to 35.6 million tons from 32.3 million tons. Coal realized pricing rose to $59.07 per ton from $42.98.
- Oil and gas royalty volumes increased 32.8% to 2.208 million BOE, and royalty revenue per BOE increased to $62.70 from $45.08.
- Reported operating margin was approximately 27.4%, compared with 14.0% in 2021. Net income attributable to ARLP represented approximately 24.0% of revenue, compared with 11.3% in 2021.
- Cash used in investing activities was $403.3 million, including $286.4 million of capital expenditures, $92.6 million for the Belvedere and Jase acquisitions, $42.0 million for Infinitum preferred stock and $24.1 million of equity-method investment contributions.
- Cash used in financing activities was $214.9 million, including $196.3 million of distributions to partners. Year-end cash and cash equivalents were $296.0 million.
- Long-term debt, including current maturities and before unamortized discounts and issuance costs, was $427.0 million, consisting primarily of $400.0 million of 7.5% senior notes due May 2025 and equipment financings. No borrowings were outstanding under the revolving credit or securitization facilities at year-end, although letters of credit reduced available capacity.
Material changes versus the prior comparable period
- Strong coal pricing, higher sales volumes and improved international demand drove the record revenue and earnings results. Appalachia Segment Adjusted EBITDA increased 147.0% and Illinois Basin Segment Adjusted EBITDA increased 58.6%.
- Inflation raised labor, materials, supplies, maintenance, fuel, power and other operating costs. Coal Segment Adjusted EBITDA expense per ton increased to $36.73 from $30.24.
- Alliance Minerals elected taxable-entity status effective January 1, 2022. The election resulted in a one-time non-cash deferred tax charge of $37.3 million and total income tax expense of $54.0 million versus $0.4 million in 2021.
- ARLP acquired approximately 4,322 Permian net royalty acres through the Belvedere and Jase transactions for an aggregate purchase price of $92.6 million.
- New-venture investments included $20.0 million in Francis Renewable Energy, $42.0 million in Infinitum and $4.1 million funded toward a $25.0 million NGP ETP IV commitment.
- A thermal event at the Hamilton mine caused approximately four weeks of lost production; operations returned to normal levels in December. No injuries or equipment damage were reported.
- A $6.7 million settlement gain was recorded in 2022. No goodwill or long-lived asset impairment was recorded in 2022 or 2021; 2020 included significant impairment charges.
Guidance, outlook, commentary and risks
- Initial 2023 guidance included 34.7 million priced and committed coal tons. Approximately 85.0% of 2022 coal tonnage was sold under contracts longer than one year, with committed contract expirations extending from 2022 through 2029.
- Management estimated 2023 cash requirements of $757 million to $807 million and expected to fund them with year-end cash, operating cash flow and, if necessary, revolving or securitization facilities.
- Management expected approximately $42.0 million of River View Mine No. 2 capital spending in 2023 and $24.0 million in 2024, with the project expected to provide access to approximately 109.5 million additional clean recoverable tons.
- On January 13, 2023, ARLP entered into a new $425 million revolving credit facility and a $75 million term loan, generally maturing in March 2027. The senior notes remain due in May 2025; the new credit agreement may mature earlier if specified liquidity conditions are not met.
- On January 27, 2023, ARLP committed up to $35.0 million under a collaborative oil and gas acquisition arrangement. On February 22, 2023, it acquired approximately 2,682 Delaware Basin net royalty acres for $72.3 million from a related-party entity owned by Joseph W. Craft III.
- Major risks include coal demand declines from utility retirements and fuel substitution, commodity-price volatility, inflation, transportation disruptions, permitting and environmental requirements, mine accidents, labor and supply-chain constraints, cybersecurity, customer concentration and contract renegotiations.
- Climate-related regulation, methane and greenhouse-gas initiatives, ESG-related financing constraints, litigation and potential restrictions on fossil-fuel infrastructure could reduce demand or increase costs.
- ARLP depends on third-party operators to develop its oil and gas interests and does not hedge its coal or oil and gas commodity exposure.
- Surety bonds totaled $244.4 million at year-end, while asset retirement obligations were $149.8 million recorded and approximately $260.2 million undiscounted. The filing states that obtaining or renewing surety bonds has become more difficult and costly.
- Labor litigation alleging unpaid donning and doffing time and overtime calculation issues remains pending. Plaintiffs have alleged damages ranging from approximately $22.2 million to $143.7 million, although management believes the claims lack merit and has not accrued a material loss.
Most important facts for an investor to verify
- Whether 2022 coal pricing and export-market strength are sustainable as contracts reprice and commodity markets normalize.
- Progress, spending and expected production benefits from River View Mine No. 2 and the impact of inflation on cost per ton.
- Available liquidity, covenant compliance and refinancing plans for the $400.0 million senior notes due in May 2025.
- Cash distributions relative to operating cash flow, capital expenditures, acquisitions and debt-service requirements; distributions remain discretionary and are not guaranteed.
- Integration, valuation and development results from the Belvedere, Jase and subsequent JC Resources oil and gas acquisitions.
- Financial effects of the Alliance Minerals tax election and any future tax or entity-level tax changes.
- Exposure to major customers, including Duke Energy, Louisville Gas and Electric Company and Tennessee Valley Authority, each of which represented more than 10% of 2022 revenue.
- Potential outcomes of labor litigation, reclamation and black-lung liabilities, surety-bond renewals, environmental permitting and climate-related regulatory developments.
- Reserve quality and the assumptions underlying the coal and oil and gas reserve estimates, including commodity prices, development timing and third-party operator activity.