Alliance Resource Partners, L.P. — Q2 2023 Form 10-Q
Business context and reporting period
ARLP is a diversified natural-resource limited partnership with seven underground coal mining complexes, coal royalty interests, oil and gas mineral interests, mining technology operations and energy-transition investments. The filing covers the three and six months ended June 30, 2023; comparative 2022 amounts were recast for the JC Resources common-control acquisition.
Key financial metrics
| Metric | Q2 2023 | Q2 2022 | 6M 2023 | 6M 2022 |
|---|---|---|---|---|
| Total revenue | $641.8 million | $619.9 million | $1.305 billion | $1.083 billion |
| Net income attributable to ARLP | $169.8 million | $163.5 million | $361.0 million | $201.6 million |
| Earnings per limited partner unit | $1.30 | $1.23 | $2.75 | $1.51 |
| Income from operations | $183.9 million | $177.3 million | $391.3 million | $266.6 million |
| Consolidated Segment Adjusted EBITDA | $269.4 million | $269.3 million | $561.3 million | $442.5 million |
| Cash flow from operating activities | Not separately provided | Not separately provided | $504.0 million | $239.4 million |
Q2 operating margin was approximately 28.7%, net income attributable to ARLP margin was approximately 26.5%, and Segment Adjusted EBITDA margin was approximately 42.0%. Six-month margins were approximately 30.0%, 27.7% and 43.0%, respectively. Segment Adjusted EBITDA is a non-GAAP measure.
- Coal sales were $560.3 million in Q2 and $1.139 billion for the six months. Coal tons sold were 8.904 million in Q2 and 17.373 million for the six months.
- Oil and gas royalty revenue was $33.1 million in Q2 and $67.6 million for the six months. Oil and gas volume increased, but lower prices reduced royalty revenue.
- Capital expenditures were $185.0 million for the six months, compared with $122.0 million in the prior-year period.
- Cash and cash equivalents were $284.9 million at June 30, 2023, compared with $296.0 million at December 31, 2022.
- Debt principal was $429.0 million at June 30, 2023, consisting primarily of $339.2 million of senior notes, $70.3 million of term-loan borrowings and equipment financings. Reported debt net of discounts and issuance costs was $417.4 million.
- The $425 million revolving credit facility had $41.0 million of letters of credit outstanding and $384.0 million available. The $60 million receivables securitization facility had no borrowings and $48.3 million available after letters of credit.
- ARLP paid $182.9 million of partner distributions during the six months and repurchased 929,842 common units for $19.4 million.
Material changes versus the prior comparable period
- Q2 revenue increased 3.5%, while six-month revenue increased 20.4%, primarily from higher coal prices and modestly higher six-month coal volumes.
- Q2 net income attributable to ARLP increased 3.8% and Q2 earnings per unit increased from $1.23 to $1.30. Six-month net income increased 79.0% and earnings per unit increased from $1.51 to $2.75.
- Six-month results benefited from the absence of the $37.3 million one-time non-cash deferred tax charge recognized in the 2022 period following Alliance Minerals’ tax-status election.
- Q2 Segment Adjusted EBITDA was essentially flat because higher Illinois Basin coal profitability was offset by lower Appalachia coal and oil and gas royalty results. Six-month Segment Adjusted EBITDA increased 26.8%.
- Coal operating costs increased. Q2 coal Segment Adjusted EBITDA expense per ton rose 7.8% to $37.85, while six-month expense per ton rose 15.1% to $38.73, reflecting labor, maintenance, inflationary and other cost pressures.
- On February 22, 2023, ARLP acquired approximately 2,682 oil and gas net royalty acres in the Delaware Basin from a related party owned by Chairman and CEO Joseph W. Craft III for $72.3 million. The acquisition contributed $5.4 million of revenue in the six-month period.
Guidance, outlook, commentary and risks
- Management expects 2023 total capital expenditures of approximately $390 million to $440 million and estimates average annual maintenance capital expenditures over the next five years of approximately $7.05 per ton produced.
- Management expects cash on hand, operating cash flow and available credit facilities to fund operations, capital expenditures, debt service, distributions and other obligations, and anticipates continued compliance with credit agreement covenants.
- The credit agreement generally matures March 9, 2027, but may mature January 30, 2025 if the senior notes remain outstanding and Alliance Coal lacks at least $200 million of liquidity. The 7.5% senior notes mature May 1, 2025; ARLP repurchased $60.8 million during the six months and redeemed an additional $50.0 million in July 2023.
- Key risks include declining coal demand, coal and oil and gas price volatility, inflationary labor and maintenance costs, mine operating interruptions, regulatory and environmental requirements, customer and transportation risks, financing and covenant risks, and uncertainty surrounding oil and gas drilling activity.
- Pending wage-and-hour litigation alleges failure to compensate for equipment donning and doffing and certain overtime calculations. Mediation in June 2023 did not resolve the matter. Management believes exposure is not material, but acknowledges a potentially material loss is reasonably possible if its position is not upheld.
- Francis Renewable Energy, an early-stage investment, generated a $2.6 million equity-method loss in the six months. Management believes the investment is recoverable but identifies funding and operating-continuity risk.
- Disclosure controls and procedures were assessed as effective as of June 30, 2023, with no material changes to internal control over financial reporting.
Important facts for investors to verify
- Verify whether coal prices, export volumes and domestic utility demand can offset rising labor, maintenance, tax and regulatory costs.
- Review the timing and amount of 2023 capital expenditures against the $390 million to $440 million outlook and resulting free cash flow.
- Monitor the planned reduction of the 2025 senior notes, the July 2023 redemption and the January 2025 liquidity-based maturity provision.
- Assess distribution sustainability and future unit repurchases relative to operating cash flow, acquisition spending and debt obligations.
- Evaluate the performance and carrying values of the JC Resources assets, other oil and gas acquisitions and non-core energy-transition investments.
- Review developments in the wage-and-hour litigation, workers’ compensation and pneumoconiosis liabilities, asset-retirement obligations and related-party transactions.