Alliance Resource Partners, L.P. — 2022 First-Quarter 10-Q Summary
Business context and reporting period
Alliance Resource Partners, L.P. is a diversified U.S. natural-resource company with Illinois Basin and Appalachia coal operations, oil and gas royalties, coal royalties and related businesses. The unaudited filing covers the three months ended March 31, 2022, compared with the three months ended March 31, 2021. The partnership had 127.2 million common units outstanding as of May 9, 2022.
Financial performance and liquidity
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Total revenue | $460.9 million | $318.6 million | 44.6% increase |
| Income from operations | $87.8 million | $36.3 million | 141.9% increase |
| Income before taxes | $79.7 million | $24.8 million | 221.0% increase |
| Net income attributable to ARLP | $36.7 million | $24.7 million | 48.1% increase |
| Earnings per unit | $0.28 | $0.19 | Increase |
| Segment Adjusted EBITDA | $170.9 million | $109.8 million | 55.6% increase |
| Operating cash flow | $89.0 million | $54.6 million | 63.1% increase |
| Capital expenditures | $59.2 million | $31.4 million | Increase |
- Coal sales increased 35.1% to $388.4 million. Tons sold rose 19.5% to 8.2 million, while realized coal prices increased 13.0% to $47.58 per ton.
- Oil and gas royalty revenue increased 120.9% to $30.9 million. BOE volumes increased 26.3% to 505 thousand, and realized royalty revenue increased 74.9% to $61.26 per BOE.
- Operating expenses increased 32.1% on a segment-adjusted basis, reflecting higher volumes and inflationary pressures. Coal operating expense increased to $32.90 per ton from $29.72 per ton.
- Income from operations represented approximately 19.1% of revenue, compared with 11.4% in the prior-year quarter. Net income attributable to ARLP represented approximately 8.0% of revenue, compared with 7.8%.
- Cash and cash equivalents were $128.2 million at March 31, 2022, compared with $122.4 million at December 31, 2021.
- Net cash used in financing was $37.7 million, including $32.8 million of partner distributions. A $0.25 per-unit distribution was paid on February 14, 2022, and a $0.35 per-unit distribution was declared for payment on May 13, 2022.
- Debt carrying value totaled approximately $431.3 million, including $15.4 million of current maturities and $416.0 million of long-term debt. Principal debt was $438.6 million, consisting primarily of $400.0 million of 7.5% senior notes due May 2025.
- The $459.5 million revolving credit facility had no borrowings and $415.4 million available at March 31, 2022, net of $44.1 million of letters of credit. The $60.0 million receivables securitization facility also had no outstanding balance.
Material changes versus the prior comparable period
- Higher domestic and export coal demand, sales volumes and pricing drove substantial revenue and EBITDA growth across both coal operating segments.
- Illinois Basin coal EBITDA increased 35.6% to $78.2 million; Appalachia coal EBITDA increased 62.2% to $51.1 million; and Oil and Gas Royalties EBITDA increased 139.0% to $28.6 million.
- Inflation increased labor, supplies, maintenance, power, fuel and other mining costs. Longwall moves at certain mines also increased costs.
- Capital expenditures increased 88.2% year over year to $59.2 million, and inventories increased to $95.7 million from $60.3 million at year-end 2021.
- Alliance Minerals elected to become a taxable entity effective January 1, 2022. The election generated a $37.3 million non-cash deferred tax charge and $4.8 million of current tax expense, materially reducing reported net income.
- The company adopted ASU 2021-10 regarding government assistance disclosures; adoption had no material financial statement impact.
Guidance, outlook, commentary, risks and unusual items
- Management estimated 2022 total capital expenditures of $230 million to $240 million and average annual maintenance capital expenditures over the next five years of approximately $5.66 per ton produced.
- Management expects cash balances, operating cash flow and available financing to fund operations, capital expenditures, debt service, contractual obligations and distributions, and expects continued compliance with credit-facility covenants.
- Trailing-twelve-month credit metrics at March 31, 2022 were 0.88-to-1.0 debt to cash flow, 12.91-to-1.0 cash flow to interest expense and 0.09-to-1.0 first-lien debt to cash flow; the applicable limits were 2.5-to-1.0, at least 3.0-to-1.0 and 1.5-to-1.0, respectively.
- On April 5, 2022, the company committed up to $50 million to Francis Renewable Energy, including an initial $20 million convertible-note investment, to pursue electric-vehicle charging infrastructure. On April 29, 2022, it invested $32.6 million in Infinitum Electric preferred stock.
- Pending wage-and-hour litigation alleges compensation violations and seeks class or collective action treatment. Plaintiffs in two cases allege damages ranging from approximately $22.2 million to $143.7 million. The company believes the claims lack merit, but states that an adverse outcome could be material.
- Key risks include coal, oil and gas price volatility; inflation and supply-chain constraints; customer contract performance and credit; mine accidents, geological and weather disruptions; labor and regulatory costs; environmental and climate-related regulation; reclamation, workers’ compensation and black-lung obligations; insurance availability; litigation; cybersecurity; and execution risk associated with new energy and technology investments.
- The filing states that results for an interim period are not necessarily indicative of full-year results. The company does not use commodity or interest-rate hedges for its principal exposures, although variable-rate borrowings create interest-rate risk when drawn.
Most important facts for investors to verify
- Whether coal demand, export pricing and 2022 contracted volumes support the elevated revenue and EBITDA levels.
- Whether inflation, labor availability, supply costs and longwall moves pressure coal expense per ton and margins.
- The cash impact and future tax effects of the Alliance Minerals tax election, distinguishing the one-time $37.3 million non-cash charge from recurring taxes.
- Actual 2022 capital spending versus the $230 million to $240 million estimate and the resulting effect on distributable cash flow.
- Debt maturities, refinancing plans for the $400 million senior notes due in 2025 and continued compliance with credit covenants.
- The outcome and potential exposure from the wage-and-hour litigation and other mine-related contingencies.
- The performance, funding requirements and valuation of the Francis and Infinitum investments.
- The sustainability of distributions in light of commodity prices, operating cash flow, capital expenditures and long-term reclamation and benefit obligations.