Alliance Resource Partners, L.P. — 2022 Q3 Form 10-Q Summary
Business context and reporting period
Alliance Resource Partners, L.P. is a diversified U.S. natural resource partnership with reportable segments covering Illinois Basin Coal Operations, Appalachia Coal Operations, Oil & Gas Royalties and Coal Royalties. The unaudited filing covers the three and nine months ended September 30, 2022, compared with the corresponding 2021 periods.
Key financial metrics
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Total revenue | $628.4 million | $415.4 million | $1.706 billion | $1.097 billion |
| Income from operations | $178.1 million | $66.7 million | $441.2 million | $158.1 million |
| Net income attributable to ARLP | $164.6 million | $57.5 million | $362.7 million | $126.3 million |
| Earnings per unit | $1.25 | $0.44 | $2.76 | $0.97 |
| Operating margin | 28.3% | 16.1% | 25.9% | 14.4% |
| Net margin attributable to ARLP | 26.2% | 13.9% | 21.3% | 11.5% |
| Segment Adjusted EBITDA | $271.5 million | $154.6 million | $708.7 million | $400.5 million |
| Cash flow from operating activities | Not separately provided | Not separately provided | $548.6 million | $311.0 million |
Coal sales were $550.6 million in Q3 and $1.471 billion for the first nine months. Q3 coal sales volumes increased 8.1% to 9.2 million tons, while the average sales price rose 40.5% to $59.94 per ton. Nine-month volumes increased 13.4% to 26.3 million tons, with average price increasing 32.9% to $55.96 per ton. Oil and gas royalty revenue increased to $35.3 million in Q3 and $102.2 million for the first nine months.
At September 30, 2022, cash and cash equivalents were $278.5 million, compared with $122.4 million at December 31, 2021. Total debt, net of discounts and issuance costs, was $415.6 million, including $15.1 million of current maturities. The $400 million of senior notes bear interest at 7.5% and mature May 1, 2025.
The $459.5 million revolving credit facility had no outstanding borrowings, $44.1 million of letters of credit and $415.4 million of borrowing availability. The accounts receivable securitization facility also had no outstanding balance, $9.2 million of letters of credit and $50.8 million of availability; it is scheduled to mature in January 2023.
Capital expenditures were $221.3 million for the first nine months, compared with $88.7 million in 2021. Management estimated 2022 total capital expenditures of $300 million to $325 million. Cash distributions paid to partners were $130.9 million for the first nine months.
Material changes versus the prior comparable period
- Q3 revenue increased 51.3%, and nine-month revenue increased 55.6%, driven primarily by higher coal prices, higher coal volumes and stronger oil and gas royalty revenue.
- Q3 net income attributable to ARLP increased 186.0% and nine-month net income increased 187.1%. Earnings per unit increased to $1.25 from $0.44 in Q3 and to $2.76 from $0.97 for the first nine months.
- Segment Adjusted EBITDA increased 75.6% in Q3 and 77.0% for the first nine months. Illinois Basin, Appalachia, Oil & Gas Royalties and Coal Royalties all reported higher segment EBITDA.
- Operating expenses increased 29.1% in Q3 and 34.7% for the first nine months, reflecting higher sales volumes and inflationary pressures. Coal operating expense per ton increased 27.0% in Q3 and 22.6% for the first nine months.
- Alliance Minerals elected taxable-entity status effective January 1, 2022. The election generated a $37.3 million non-cash deferred tax charge and contributed to total nine-month income tax expense of $55.6 million, versus $0.2 million in 2021.
- Investing cash outflows increased because of higher capital expenditures, a $20.0 million investment in Francis Renewable Energy, a $32.6 million preferred-stock investment in Infinitum Electric and the $11.4 million Belvedere oil and gas royalty acquisition.
- On September 9, 2022, ARLP acquired approximately 394 net oil and gas royalty acres in the Delaware Basin for $11.4 million. On October 26, 2022, it acquired approximately 3,928 additional net royalty acres in the Midland and Delaware Basins for $81.2 million.
- Quarterly cash distributions increased during 2022 from $0.25 per unit in February to $0.35 in May and $0.40 in August. A $0.50 per-unit distribution was declared on October 28, 2022, payable November 14, 2022.
Guidance, outlook, commentary and risks
Management stated that existing cash, operating cash flow and available credit facilities are expected to fund operations, capital expenditures, investments, debt service, contractual obligations and distributions. Management also expects continued compliance with credit agreement covenants. The filing does not provide formal revenue or earnings guidance.
Management highlighted strong domestic and export coal demand, higher price realizations and growth in oil and gas royalty volumes. It also identified inflation in labor, supplies, maintenance, power, fuel and other mining costs, adverse mining conditions, preparation plant maintenance and longwall moves as factors affecting expenses.
Key risks include coal, oil and natural gas price volatility; declining coal demand and the energy transition; inflation and labor availability; mine, transportation, supply-chain and operational interruptions; customer defaults or bankruptcies; environmental, mine-safety and greenhouse-gas regulation; interest-rate and refinancing risk; insurance availability; reclamation, workers’ compensation and pneumoconiosis obligations; and execution risk related to acquisitions and energy-transition investments.
The Inflation Reduction Act introduced a federal methane emissions charge beginning in 2024 that could increase costs for operators of properties in which ARLP holds mineral interests and could affect production and demand. The company is also defending wage-and-hour litigation alleging unpaid donning and doffing time and improper overtime calculations. Plaintiffs in two principal cases allege damages ranging from approximately $22.2 million to $143.7 million; management believes the claims are without merit, but the filing states that a material loss remains reasonably possible if its position is not upheld.
Most important facts for investors to verify
- Whether elevated coal prices and export demand persist and how quickly coal operating costs respond to inflation.
- 2022 full-year capital expenditures relative to the $300 million to $325 million estimate and the effect on distributable cash flow.
- Funding, valuation and performance of the Belvedere and Jase royalty acquisitions and other strategic investments.
- Refinancing or repayment plans for the $400 million senior notes due in May 2025 and the securitization facility maturing in January 2023.
- The recurring versus non-recurring effects of the $37.3 million deferred tax charge and Alliance Minerals’ ongoing taxable status.
- Developments, potential exposure and insurance coverage related to wage-and-hour litigation, reclamation, workers’ compensation and pneumoconiosis liabilities.
- The sustainability of increased quarterly distributions given commodity-price volatility, regulatory risks and future capital requirements.