ALLIANCE RESOURCE PARTNERS LP quarterly report, Q3 FY2023

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, and selected energy-transition and infrastructure investments. The company operates seven underground coal mining complexes in the Illinois and Appalachia Basins and owns approximately 65,000 net oil and gas royalty acres. This unaudited Form 10-Q covers the three and nine months ended September 30, 2023, compared with the recast 2022 periods. The 2022 results were recast for the February 2023 acquisition of JC Resources, a related-party entity owned by Chairman and CEO Joseph W. Craft III.

Key Financial Metrics

Metric	Q3 2023	Q3 2022	9M 2023	9M 2022
Revenue	$636.5 million	$632.5 million	$1.941 billion	$1.716 billion
Operating income	$165.4 million	$181.2 million	$556.7 million	$447.8 million
Net income attributable to ARLP	$153.7 million	$167.7 million	$514.7 million	$369.3 million
Earnings per limited partner unit	$1.18	$1.25	$3.93	$2.76
Segment Adjusted EBITDA	$247.7 million	$275.2 million	$809.0 million	$717.7 million
Cash flow from operations	Not separately provided	Not separately provided	$735.4 million	$556.2 million

Q3 operating margin was approximately 26.0%, net margin attributable to ARLP was approximately 24.1%, and Segment Adjusted EBITDA margin was approximately 38.9%.
Nine-month operating margin was approximately 28.7%, net margin attributable to ARLP was approximately 26.5%, and Segment Adjusted EBITDA margin was approximately 41.7%.
Coal sales were $549.1 million in Q3 and $1.688 billion for nine months. Coal tons sold were 8.456 million in Q3 and 25.829 million for nine months.
Oil and gas royalty revenue was $34.1 million in Q3 and $101.7 million for nine months. Volumes increased to 772 thousand BOE in Q3 and 2.296 million BOE for nine months.
Cash and cash equivalents were $197.2 million at September 30, 2023, compared with $296.0 million at December 31, 2022.
Total debt, including current maturities and net of discounts and issuance costs, was approximately $359.8 million at September 30, 2023, compared with approximately $422.3 million at year-end 2022.
The company had no borrowings under its revolving credit facility or accounts receivable securitization facility. It had $41.0 million of letters of credit outstanding and $384.0 million of revolving capacity available, plus $48.3 million available under the securitization facility.

Material Changes Versus the Prior Comparable Period

Q3 revenue increased 0.6%, but net income attributable to ARLP declined 8.4% and Segment Adjusted EBITDA declined 10.0%. Higher operating costs, lower Appalachia volumes, oil and gas price declines, and equity-method investment losses outweighed modestly higher revenue.
Nine-month revenue increased 13.1%, net income attributable to ARLP increased 39.4%, and Segment Adjusted EBITDA increased 12.7%. The primary driver was higher coal pricing, with coal sales prices increasing to $65.36 per ton from $55.96 per ton.
Q3 coal tons sold declined 7.9%, primarily because of Appalachia lock outages, customer plant maintenance, reduced MC Mining operating units, and delayed development of a new Mettiki longwall district. The average coal sales price increased 8.3% to $64.94 per ton.
Q3 Appalachia Segment Adjusted EBITDA fell 26.6% to $74.8 million, while Illinois Basin Segment Adjusted EBITDA increased 9.7% to $132.4 million.
Oil and gas royalty revenue declined 11.8% in Q3 and 8.7% for nine months despite higher volumes, as average price per BOE declined 31.2% in Q3 and 32.8% for nine months.
Operating expenses increased 4.4% in Q3 and 9.2% for nine months. The filing cites higher labor, materials, maintenance, selling, production-tax and royalty costs, inflationary pressures, and increased purchases of higher-cost outside coal.
The company recorded a $14.2 million lower-of-cost-or-net-realizable-value adjustment to coal inventories during the first nine months, primarily related to lower coal prices and the idle Mettiki longwall.
Operating cash flow increased $179.2 million year over year, while investing cash use increased to $444.5 million from $247.5 million and financing cash use increased to $389.7 million from $152.6 million.
Capital expenditures were $295.4 million for the first nine months, compared with $221.3 million in 2022. The company also funded the $72.3 million JC Resources acquisition and purchased additional oil and gas interests and equity securities.

Guidance, Outlook, Commentary, Risks and Unusual Items

Management estimates 2023 total capital expenditures of $390 million to $440 million and average annual maintenance capital expenditures over the next five years of approximately $7.05 per ton produced.
Management expects cash balances, operating cash flow, and available credit facilities to fund 2023 capital requirements, debt service, contractual obligations, investments, and distributions. Management also anticipates continued compliance with credit agreement covenants.
The January 2023 credit agreement provides a $425 million revolving facility and a $75 million term loan, maturing in March 2027. It may mature earlier, in January 2025, if the senior notes remain outstanding and Alliance Coal does not have at least $200 million of liquidity at that time.
The company repurchased or redeemed $115.4 million of its 7.5% senior notes due 2025 during the first nine months. The remaining principal amount at September 30, 2023 was $284.6 million. Management expects additional purchases or redemptions using available cash flow and/or borrowings.
The quarterly distribution was $0.70 per common unit. Distributions paid during the first nine months totaled $273.8 million. The company repurchased and retired 929,842 units for $19.4 million during the period.
Strategic investments included $25.0 million of Ascend preferred stock in August 2023 and $24.6 million of Infinitum preferred stock in September 2023. The company also acquired approximately 2,682 oil and gas net royalty acres from JC Resources, a related party, for $72.3 million.
Material operating risks include coal and oil and gas price volatility, declining coal demand, regulatory and environmental requirements, mine safety and geological disruptions, labor and inflationary pressures, transportation interruptions, customer defaults, financing and covenant risks, and the ability of oil and gas operators to maintain drilling activity.
Pending wage-and-hour litigation alleges failures to compensate for equipment donning and doffing time and to calculate overtime correctly. Management believes the ultimate exposure is not material, but states that an adverse resolution could result in a material loss.
Francis Renewable Energy generated equity-method losses of $5.1 million for the first nine months. Management believes the investment is recoverable but notes that Francis depends on additional capital to meet operating and debt obligations.
Income tax expense for the first nine months of 2022 included a one-time $37.3 million deferred tax charge related to Alliance Minerals’ change to taxable status; this charge did not recur in 2023.

Important Facts for Investors to Verify

Confirm the sustainability of coal pricing and volumes, particularly the recovery timetable for Mettiki and the impact of Appalachia operational disruptions.
Review the $390 million to $440 million 2023 capital-expenditure outlook against actual spending and operating cash flow.
Assess refinancing and liquidity requirements for the $284.6 million of senior notes due in 2025, including the credit agreement’s potential January 2025 maturity trigger.
Monitor oil and gas royalty pricing, operator drilling activity, and the performance of recently acquired royalty interests.
Evaluate the related-party JC Resources transaction and the governance process applied to the acquisition.
Track the recoverability and future funding requirements of Francis and the valuation of other private equity investments without readily determinable fair values.
Review the pending wage-and-hour litigation, workers’ compensation and pneumoconiosis liabilities, asset-retirement obligations, and mine-safety disclosures.
Reconcile non-GAAP Segment Adjusted EBITDA with GAAP results and distinguish pricing benefits from volume and cost changes.