ALLIANCE RESOURCE PARTNERS LP quarterly report, Q2 FY2022

Alliance Resource Partners, L.P. — 2022 Q2 Form 10-Q Summary

Business context and reporting period

Alliance Resource Partners, L.P. is a diversified U.S. natural-resource company generating revenue from coal production and marketing, coal royalties, oil and gas royalties, transportation, and mining-technology activities. Reported segments are Illinois Basin Coal Operations, Appalachia Coal Operations, Oil & Gas Royalties, Coal Royalties, and Other, Corporate and Elimination. The filing covers the three and six months ended June 30, 2022, compared with the same periods in 2021. The financial statements are unaudited.

Financial performance and key metrics

Metric	Q2 2022	Q2 2021	Six months 2022	Six months 2021
Total revenues	$616.5 million	$362.4 million	$1.077 billion	$681.1 million
Income from operations	$175.3 million	$55.0 million	$263.1 million	$91.3 million
Net income attributable to ARLP	$161.5 million	$44.0 million	$198.1 million	$68.8 million
Earnings per unit	$1.23	$0.34	$1.51	$0.53
Segment Adjusted EBITDA	$266.3 million	$136.1 million	$437.2 million	$245.9 million
Operating cash flow	Not separately provided	Not separately provided	$235.3 million	$158.2 million

Q2 revenue increased 70.1%, while six-month revenue increased 58.2%.
Q2 net income attributable to ARLP increased 266.7%; six-month net income increased 188.1%.
Q2 operating margin was approximately 28.4%, versus 15.2% in the prior-year quarter. Six-month operating margin was approximately 24.4%, versus 13.4%.
Q2 net margin attributable to ARLP was approximately 26.2%, versus 12.2%. Six-month net margin was approximately 18.4%, versus 10.1%.
Coal sales increased to $531.8 million in Q2 and $920.2 million for the first six months. Q2 tons sold rose 13.9% to 8.9 million, and average coal sales price increased 43.3% to $59.53 per ton.
Oil and gas royalty revenue increased 109.9% in Q2 to $35.9 million and 114.9% for the six months to $66.9 million, driven by higher prices and volumes.
Segment Adjusted EBITDA increased 95.7% in Q2 and 77.8% for the six months. Appalachia Coal Operations and Oil & Gas Royalties showed particularly strong growth.
Capital expenditures were $122.0 million for the first six months, compared with $55.6 million in 2021. Net cash used in investing activities was $163.3 million.

Balance sheet, debt and liquidity

Cash and cash equivalents were $106.1 million at June 30, 2022, compared with $122.4 million at December 31, 2021.
Total debt, including current maturities and net of discounts and issuance costs, was approximately $427.9 million at June 30, 2022, compared with $435.0 million at year-end 2021.
The $459.5 million revolving credit facility had no borrowings, $44.1 million of letters of credit outstanding, and $415.4 million available. The facility matures March 9, 2024.
The $60.0 million receivables securitization facility had no borrowings, $9.2 million of letters of credit outstanding, and $50.8 million available. It is scheduled to mature in January 2023.
The $400.0 million senior notes bear interest at 7.5% and mature May 1, 2025.
Management stated that existing cash, operating cash flow, and available financing are expected to fund operations, capital expenditures, debt service, investments, contractual obligations, and distributions. The filing does not provide a separate current ratio or net-debt-to-EBITDA measure.
Trailing-twelve-month covenant ratios were 0.74-to-1.0 debt to cash flow, 15.52-to-1.0 cash flow to interest expense, and 0.07-to-1.0 first-lien debt to cash flow; the company reported compliance with its covenants.

Material changes versus the prior comparable period

Higher domestic and export coal demand increased both realized prices and volumes. Coal sales price increased 43.3% in Q2 and 28.7% for the six-month period; tons sold increased 13.9% and 16.5%, respectively.
Coal operating costs rose materially due to higher labor, materials, supplies, maintenance, fuel, and other inflation-related expenses. Coal Segment Adjusted EBITDA Expense per ton increased 29.2% in Q2 and 20.2% for the six months.
The company recorded a $6.5 million non-cash contingent accrual related to the Hamilton mine purchase, based on projected higher future coal price realizations.
Alliance Minerals elected to become a taxable entity effective January 1, 2022. The election resulted in a $37.3 million initial non-cash deferred tax charge and reduced six-month earnings by approximately $0.29 per unit. Current income tax expense associated with the election was also recognized.
Investing activity expanded through a $20.0 million Francis Renewable Energy contribution, a $32.6 million Infinitum preferred-stock investment, and a $0.1 million NGP ETP IV contribution; additional commitments include up to $50.0 million to Francis and $25.0 million to NGP ETP IV.
Cash distributions paid to partners increased to $78.6 million for the first six months, including declared distributions totaling $1.00 per unit for the relevant 2022 payment dates. No units were repurchased during the period.

Guidance, outlook, commentary and risks

Management projected 2022 total capital expenditures of $230 million to $250 million and estimated average annual maintenance capital expenditures over the next five years of approximately $5.66 per ton produced.
Management expects sufficient liquidity and continued covenant compliance, but noted dependence on operating performance, commodity prices, financing availability and financing costs.
Key market risks include declining coal, oil or natural-gas prices; lower coal demand and the long-term shift in electricity generation; customer defaults or contract changes; inflation and labor availability; supply-chain, transportation and mine-operating disruptions; and regulatory, environmental and mine-safety requirements.
Oil and gas royalty results depend on commodity prices and drilling and completion activity by third-party operators. Coal results depend on contract pricing, export markets, production volumes, costs and customer performance.
The company does not currently use commodity or interest-rate hedges. Variable-rate exposure exists on drawn credit facilities, although neither the revolving credit facility nor securitization facility had an outstanding balance at June 30, 2022.
Pending wage-and-hour litigation alleges uncompensated donning and doffing time and improper overtime calculations. Plaintiffs in identified cases allege damages ranging from approximately $22.2 million to $143.7 million. The company believes the claims lack merit, but the filing states that potential exposure cannot presently be estimated reliably.
Insurance availability and coverage for fossil-fuel operations, asset-retirement obligations, workers’ compensation and pneumoconiosis liabilities remain relevant contingencies.

Most important facts for investors to verify

Whether elevated coal and oil and gas prices and volumes are sustainable, particularly after the period’s unusually favorable market conditions.
The effect of inflation, labor costs, materials, maintenance, fuel and production-related expenses on future coal margins.
The timing and funding of the $230 million to $250 million 2022 capital-expenditure plan and its effect on distributable cash flow.
Refinancing or repayment plans for the January 2023 securitization facility and the $400 million of senior notes maturing in May 2025.
The continuing cash-tax impact of the Alliance Minerals tax election and any additional deferred-tax changes.
The outcome and potential financial exposure of the wage-and-hour litigation and other legal, regulatory, reclamation, workers’ compensation and pneumoconiosis matters.
The valuation, funding obligations and performance of the Francis, Infinitum and NGP ETP IV investments, which are not controlled by ARLP.