Alliance Resource Partners, L.P. — Form 10-Q Summary
Business Context and Reporting Period
Unaudited quarterly report for the three and nine months ended September 30, 2021, filed November 4, 2021. ARLP is a diversified U.S. natural-resource partnership with four reportable segments: Illinois Basin Coal Operations, Appalachia Coal Operations, Oil & Gas Royalties, and Coal Royalties. It had 127.2 million common units outstanding as of November 4, 2021.
Financial Results and Key Metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Total revenue | $415.4 million | $355.7 million | $1,096.5 million | $961.6 million |
| Income from operations | $66.7 million | $39.3 million | $158.1 million | $(128.4) million |
| Net income attributable to ARLP | $57.5 million | $27.2 million | $126.3 million | $(164.2) million |
| Earnings per unit | $0.44 | $0.21 | $0.97 | $(1.29) |
| Segment Adjusted EBITDA | $154.6 million | $132.7 million | $400.5 million | $306.5 million |
| Operating cash flow | Not separately disclosed | Not separately disclosed | $311.0 million | $291.8 million |
- Revenue increased 16.8% in Q3 and 14.0% for the nine-month period. Operating margins were approximately 16.1% and 14.4%, respectively, compared with approximately 11.1% and negative 13.4% in the comparable periods.
- Net income attributable to ARLP rose 111% in Q3. The nine-month period returned to profitability primarily because of stronger operations, lower depreciation, and the absence of 2020 non-cash impairment charges.
- Coal tons sold increased 10.3% in Q3 to 8.5 million tons and 15.0% for the nine-month period to 23.2 million tons. Coal sales increased 7.9% in Q3 and 10.0% year to date, although realized coal prices declined 2.2% and 4.3%, respectively.
- Oil and gas royalty revenue increased 107.5% in Q3 and 61.5% year to date, driven primarily by higher commodity-price realizations despite lower BOE volumes.
- Segment Adjusted EBITDA increased 16.5% in Q3 and 30.7% year to date. Q3 performance benefited from Appalachia, Oil & Gas Royalties, and Coal Royalties, while Illinois Basin EBITDA declined 8.3% because of lower pricing and higher per-ton costs.
- Capital expenditures were $88.7 million for the nine-month period versus $102.8 million in 2020. Cash used in investing activities was $80.4 million, and cash used in financing activities was $181.5 million.
Liquidity, Debt, and Capital Allocation
- Cash and cash equivalents were $104.6 million at September 30, 2021, compared with $55.6 million at December 31, 2020. Total current assets were $326.2 million and total current liabilities were $191.1 million.
- Debt principal outstanding was $450.7 million, consisting primarily of $400.0 million of 7.5% senior notes due May 2025, equipment financings, and a $3.2 million related-party line-of-credit draw. Carrying value of long-term debt, including current maturities, was $433.9 million.
- The $459.5 million revolving credit facility had no borrowings, $23.3 million of letters of credit outstanding, and $436.2 million available at quarter-end. The $60.0 million accounts-receivable securitization facility had no outstanding balance.
- Trailing-twelve-month credit metrics were within covenant limits: debt-to-cash-flow ratio of 0.95x, cash-flow-to-interest ratio of 11.60x, and first-lien-debt-to-cash-flow ratio of 0.10x. Management stated that ARLP was compliant and expected to remain compliant.
- Cash distributions resumed in 2021 after suspension following the February 2020 distribution. ARLP paid $0.20 per unit for the first two quarters and declared a $0.20 per-unit distribution payable November 12, 2021. No unit repurchases occurred during the first nine months; $6.5 million remained under the repurchase authorization.
Material Changes, Outlook, and Unusual Items
- Results improved substantially from the COVID-19-affected 2020 period as coal demand, export shipments, production volumes, and oil and gas prices recovered.
- 2020 included $25.0 million of long-lived-asset impairments and a $132.0 million goodwill impairment related to the Hamilton mine; no comparable impairment charges were recorded in 2021.
- Management estimated 2021 total capital expenditures of $125 million to $130 million and expected to fund them with cash on hand, operating cash flow, investments, and available borrowings. Five-year average maintenance capital expenditures were projected at approximately $4.90 per ton produced.
- On October 13, 2021, ARLP acquired approximately 1,480 oil and gas net royalty acres in the Delaware Basin for $31.0 million, funded with cash on hand.
- Material risks include coal, oil, and gas price volatility; declining coal demand and energy-transition pressures; COVID-19 and economic disruptions; customer defaults or contract changes; mine accidents and operational interruptions; regulatory and environmental requirements; labor and benefit costs; reclamation, pension, workers’ compensation, and pneumoconiosis liabilities; insurance availability; litigation; and financing or covenant risk.
- Six wage-and-hour lawsuits allege unpaid donning and doffing time and improper overtime calculations. Plaintiffs collectively allege damages of approximately $22.2 million to $143.7 million. The litigation is in early stages, and management believes the claims lack merit, but a range of potential exposure cannot currently be estimated.
Investor Verification Items
- Verify the sustainability of higher coal volumes and oil and gas price realizations, particularly because coal prices per ton declined year over year.
- Reconcile reported non-GAAP Segment Adjusted EBITDA with GAAP net income and assess segment-level cost trends, especially in the Illinois Basin.
- Monitor the $400 million senior notes maturity in 2025, variable-rate exposure, facility availability, and compliance with credit covenants.
- Compare actual 2021 capital expenditures and distributions with management’s $125 million–$130 million capital-expenditure estimate and resumed distribution policy.
- Assess the Delaware Basin royalty acquisition, future acquisition spending, and the effect of commodity prices and operator drilling activity on royalty cash flows.
- Review developments in the wage-and-hour litigation and obligations for workers’ compensation, pneumoconiosis, pension benefits, and asset retirement.