Alliance Resource Partners, L.P. — Q1 2023 Form 10-Q Summary
Business context and reporting period
Alliance Resource Partners, L.P. is a diversified natural-resource limited partnership with seven underground coal mining complexes, a coal-loading terminal, coal royalty interests and approximately 65,000 net oil and gas royalty acres. Reported segments are Illinois Basin Coal Operations, Appalachia Coal Operations, Oil & Gas Royalties, Coal Royalties, and Other, Corporate and Elimination. This unaudited Form 10-Q covers the three months ended March 31, 2023, compared with the recast prior-year period.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total revenues | $662.9 million | $463.4 million | +43.0% |
| Coal sales | $578.8 million | $388.4 million | +49.0% |
| Income from operations | $207.3 million | $89.3 million | +132.3% |
| Net income attributable to ARLP | $191.2 million | $38.1 million | +402.2% |
| Basic and diluted earnings per unit | $1.45 | $0.28 | +417.9% |
| Operating cash flow | $223.3 million | $90.6 million | +146.4% |
| Segment Adjusted EBITDA | $291.9 million | $173.2 million | +68.6% |
- Coal volumes sold increased 3.8% to 8.469 million tons, while average coal sales price increased 43.6% to $68.34 per ton. Coal production was 9.244 million tons.
- Revenue margin was approximately 29.0%, operating margin approximately 31.3%, net income margin approximately 29.1%, and Segment Adjusted EBITDA margin approximately 44.0%.
- Cash and cash equivalents were $271.3 million at March 31, 2023, down from $296.0 million at year-end 2022. Net cash decreased $24.8 million during the quarter.
- Capital expenditures were $95.5 million. Investing cash outflows totaled $148.7 million, including $65.0 million for the JC Resources acquisition and $2.8 million for additional oil and gas interests.
- Gross debt principal was $471.6 million at quarter-end; reported long-term debt, net of discounts and issuance costs, totaled $430.6 million, including current maturities. Debt fair value was $469.9 million.
- The new credit agreement provides a $425 million revolving facility and a $75 million term loan. Revolver availability was $384.0 million after $41.0 million of letters of credit. The accounts receivable securitization facility had $48.3 million available and no borrowings outstanding.
- Trailing-twelve-month covenant ratios were well within requirements: Alliance Coal debt to cash flow of 0.09x, consolidated debt to cash flow of 0.54x and interest coverage of 294.35x.
Material changes versus the prior comparable period
- Higher coal pricing and modestly higher volumes drove the majority of the revenue and profit improvement. Illinois Basin Segment Adjusted EBITDA rose 68.8% to $132.0 million, and Appalachia Segment Adjusted EBITDA rose 128.1% to $116.6 million.
- Coal operating costs increased 28.3% to $335.9 million, and cost per ton increased 23.7% to $39.66, reflecting labor, materials, maintenance, taxes, royalties and broader inflationary pressures.
- Oil and gas royalty revenue increased 3.3% to $34.5 million, but Oil & Gas Royalties Segment Adjusted EBITDA declined 2.6% to $30.0 million because of lower average realized price per BOE.
- The prior-year period included a $37.3 million one-time deferred tax charge from Alliance Minerals’ tax election. Q1 2023 income tax expense was $4.2 million versus $42.7 million in Q1 2022.
- On February 22, 2023, ARLP acquired approximately 2,682 oil and gas net royalty acres in the Delaware Basin from JC Resources, an entity owned by Chairman and CEO Joseph W. Craft III, for $72.3 million. The transaction was accounted for as a common-control reorganization.
- ARLP repurchased and retired 860,060 common units for $18.2 million at an average price of $21.17. Remaining repurchase authorization was $81.8 million at March 31, 2023.
- ARLP paid a $0.70 per-unit distribution in February 2023 and declared another $0.70 per-unit distribution payable in May 2023.
Guidance, outlook, commentary and risks
- Management expects available cash, operating cash flow and credit facilities to fund 2023 operations, capital expenditures, debt service, investments, contractual obligations and distributions, while anticipating continued covenant compliance.
- Estimated 2023 total capital expenditures are $400 million to $460 million. Estimated average annual maintenance capital expenditures over the next five years are approximately $7.05 per ton produced.
- Management expects to continue opportunistic repurchases of the 7.5% senior notes due 2025; $26.6 million of principal was repurchased during the quarter, leaving $373.4 million outstanding at March 31, 2023.
- Key exposures include coal, oil and natural gas prices; declining coal demand and energy-transition policies; customer concentration and contract performance; inflation and labor availability; mine safety, operational and transportation disruptions; environmental and regulatory requirements; and commodity-price-driven changes in oil and gas drilling activity.
- Fair Labor Standards Act and state-law litigation alleges unpaid donning and doffing time and improper overtime calculations. Plaintiffs allege damages ranging from approximately $22.2 million to $143.7 million. Mediation was scheduled for June 12, 2023; the company believes the claims lack merit but states that a material loss is reasonably possible if its position is not upheld.
- Francis Renewable Energy depends on additional capital to meet obligations; ARLP states that failure to raise funds could adversely affect its investment. ARLP also has an unfunded portion of a $25.0 million NGP ETP IV commitment, with $4.6 million funded at quarter-end.
- The company identifies financial-institution liquidity and counterparty risk, including potential reduced access to deposits, undrawn credit commitments or letters of credit during broader banking-market disruption.
- Disclosure controls and procedures were assessed as effective as of March 31, 2023, with no material changes to internal control over financial reporting.
Most important facts for investors to verify
- Whether elevated coal prices and margins are sustainable as contracts reprice and market conditions change.
- Actual 2023 capital expenditures relative to the $400 million–$460 million estimate and their effect on distributions, buybacks and debt reduction.
- Progress toward refinancing or repaying the $373.4 million of senior notes due May 2025, including the credit agreement’s potential January 2025 maturity trigger.
- Resolution, certification status and potential financial exposure from the wage-and-hour litigation.
- Terms, governance and economic benefits of the related-party JC Resources acquisition and future purchases under the $35.0 million oil and gas acquisition agreement.
- Oil and gas production, realized prices and drilling activity, particularly following the Delaware Basin acquisitions.
- Coal demand, customer contract renewals, export-market conditions, regulatory developments and inflationary cost trends.