Item 2. Management’s Discussion and Analysis
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Significant relationships referenced in this management's discussion and analysis of financial condition and results of operations include the following:
● References to "we," "us," "our" or "ARLP Partnership" mean the business and operations of Alliance Resource Partners, L.P., the parent company, as well as its consolidated subsidiaries.
● References to "ARLP" mean Alliance Resource Partners, L.P., individually as the parent company, and not on a consolidated basis.
● References to "MGP" mean Alliance Resource Management GP, LLC, ARLP's general partner.
● References to "Mr. Craft" mean Joseph W. Craft III, the Chairman, President and Chief Executive Officer of MGP.
● References to "Intermediate Partnership" mean Alliance Resource Operating Partners, L.P., the intermediate partnership of Alliance Resource Partners, L.P.
● References to "Alliance Coal" mean Alliance Coal, LLC, an indirect wholly owned subsidiary of ARLP.
● References to "Alliance Minerals" mean Alliance Minerals, LLC, an indirect wholly owned subsidiary of ARLP.
● References to "Alliance Resource Properties" mean Alliance Resource Properties, LLC, an indirect wholly owned subsidiary of ARLP.
Summary
We are a diversified natural resource company that generates operating and royalty income from the production and marketing of coal to major domestic utilities, industrial users and international customers, as well as royalty income from oil & gas mineral interests located in strategic producing regions across the United States. In addition, we continue to position ourselves as a reliable energy partner for the future as we pursue opportunities that support the advancement of energy and related infrastructure. We intend to pursue strategic investments that leverage our core competencies and relationships with electric utilities, industrial customers, and federal and state governments.
We are currently the largest coal producer in the eastern United States with seven operating underground mining complexes near many of the major eastern utility generating plants and on major coal hauling railroads in Illinois, Indiana, Kentucky, Maryland, Pennsylvania, and West Virginia, as well as a coal-loading terminal in Indiana. Two of our mines have loading facilities located on the banks of the Ohio River.
In addition to our mining operations, Alliance Resource Properties owns or leases substantially all of our measured, indicated and inferred coal mineral resources and the majority of our proved and probable coal mineral reserves in the Illinois and Appalachia Basins that are (a) leased to our internal mining complexes or (b) near other internal and external coal mining operations.
We currently own oil & gas mineral interests in approximately 65,000 net royalty acres in premier oil & gas producing regions of the United States, primarily in the Permian (Delaware and Midland), Anadarko (SCOOP/STACK), and Williston (Bakken) basins providing us with diversified exposure to industry-leading operators consistent with our general strategy to grow our oil & gas mineral interest business.
We have invested in energy and infrastructure opportunities including our investments in Francis Renewable Energy, LLC ("Francis"), Infinitum Electric, Inc. ("Infinitum"), and NGP ETP IV, L.P. ("NGP ETP IV"), which are in the businesses of, respectively, electric vehicle charging stations, electric motor manufacturing, and private equity investments in renewable energy, the electrification of our economy or the efficient use of energy.
On January 27, 2023, we entered into a one-year collaborative agreement with a third party effective January 1, 2023, committing up to $35.0 million for the acquisition of oil & gas mineral interests in the Midland and Delaware basins (the "Acquisition Agreement").
On February 22, 2023, we acquired mineral interests in approximately 2,682 oil & gas net royalty acres in the Delaware Basin from JC Resources, LP ("JC Resources"), a related-party entity owned by Mr. Craft (the "JC Resources Acquisition").
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For more information about the Acquisition Agreement and the JC Resources Acquisition, please read "Item 1. Financial Statements (Unaudited)—Note 2 – Acquisitions" of this Quarterly Report on Form 10-Q.
We have four reportable segments, Illinois Basin Coal Operations, Appalachia Coal Operations, Oil & Gas Royalties and Coal Royalties. We also have an "all other" category referred to as Other, Corporate and Elimination. Our two coal operations reportable segments correspond to major coal producing regions in the eastern United States with similar economic characteristics including coal quality, geology, coal marketing opportunities, mining and transportation methods and regulatory issues. Our Oil & Gas Royalties reportable segment includes our oil & gas mineral interests. Our Coal Royalties reportable segment includes coal mineral reserves and resources owned or leased by Alliance Resource Properties, which are either (a) leased to our mining complexes or (b) near our coal mining operations but not yet leased.
● Illinois Basin Coal Operations reportable segment includes (a) the Gibson County Coal mining complex, (b) the Warrior mining complex, (c) the River View mining complex and (d) the Hamilton mining complex. The segment also includes our Mt. Vernon coal-loading terminal on the Ohio River in Indiana, Mid-America Carbonates, LLC and other support services, and our non-operating mining complexes.
● Appalachia Coal Operations reportable segment includes (a) the Mettiki mining complex, (b) the Tunnel Ridge mining complex and (c) the MC Mining mining complex.
● Oil & Gas Royalties reportable segment includes oil & gas mineral interests held by AR Midland and AllDale I & II and includes Alliance Minerals' equity method investment in AllDale III. Please read "Item 1. Financial Statements (Unaudited) — Note 9 – Investments" of this Quarterly Report on Form 10-Q for more information on AllDale III.
● Coal Royalties reportable segment includes coal mineral reserves and resources owned or leased by Alliance Resource Properties. Approximately two-thirds of the coal sold by our Coal Operations' mines is leased from our Coal Royalties entities.
● Other, Corporate and Elimination includes marketing and administrative activities, Matrix Design Group, LLC, its subsidiaries and Alliance Design Group, LLC (collectively referred to as the "Matrix Group"), our investments in Francis, Infinitum, and NGP ETP IV, Wildcat Insurance, LLC, which assists the ARLP Partnership with its insurance requirements, AROP Funding, LLC ("AROP Funding") and Alliance Resource Finance Corporation ("Alliance Finance") and other miscellaneous activities. The eliminations included in Other, Corporate and Elimination primarily represent the intercompany coal royalty transactions described above between our Coal Royalties reportable segment and our coal operations' mines. Please read "Item 1. Financial Statements (Unaudited)—Note 9 – Investments" and —Note 6 – Long-Term Debt" of this Quarterly Report on Form 10-Q for more information on our investments in Francis, Infinitum and NGP ETP IV as well as AROP Funding and Alliance Finance.
Three Months Ended June 30, 2023 Compared to Three Months Ended June 30, 2022
Three Months Ended June 30,
2023
2022 (1)
2023
2022 (1)
(in thousands)
(per ton / per BOE sold)
Coal - Tons sold
8,904
8,933
N/A
N/A
Coal - Tons produced
9,397
8,878
N/A
N/A
Coal - Coal sales
$
560,331
$
531,807
$
62.93
$
59.53
Coal - Segment Adjusted EBITDA Expense (2) (3)
$
337,025
$
313,724
$
37.85
$
35.12
Oil & Gas Royalties - BOE sold
765
544
N/A
N/A
Oil & Gas Royalties - Royalties (4)
$
33,087
$
39,287
$
43.27
$
72.31
Coal Royalties - Tons sold
5,118
5,268
N/A
N/A
Coal Royalties - Intercompany royalties
$
16,567
$
14,525
$
3.24
$
2.76
(1) Recast for the JC Resources Acquisition. For more information, please read "Item 1. Financial Statements (Unaudited)—Note 1 – Organization and Presentation" of this Quarterly Report on Form 10-Q.
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(2) For a definition of Segment Adjusted EBITDA Expense and related reconciliation to comparable generally accepted accounting principles ("GAAP") financial measures, please see below under "—Reconciliation of GAAP 'Operating Expenses' to non-GAAP 'Segment Adjusted EBITDA Expense.'"
(3) Beginning in 2023, we redefined Coal - Segment Adjusted EBITDA Expense to reflect the activity of Alliance Coal, which is the holding company for our coal mining operations. We have retrospectively adjusted Coal - Segment Adjusted EBITDA Expense in prior periods to be on the same basis.
(4) Average sales price per BOE is defined as oil & gas royalty revenues excluding lease bonus revenue divided by total BOE sold.
Total Revenues . Total revenues for the three months ended June 30, 2023 ("2023 Quarter") increased 3.5% to $641.8 million compared to $619.9 million for the three months ended June 30, 2022 ("2022 Quarter") as a result of higher coal sales price per ton, partially offset primarily by lower average oil & gas sales price per BOE.
Total operating expenses . Total operating expenses increased to $457.9 million in the 2023 Quarter, compared to $442.6 million in the 2022 Quarter, due primarily to the sale of higher cost purchased coal and increased per ton costs on certain expense items discussed in more detail below.
Net income attributable to ARLP . Increased revenues, partially offset by higher total operating expenses, led to net income attributable to ARLP for the 2023 Quarter of $169.8 million, or $1.30 per basic and diluted limited partner unit, compared to $163.5 million, or $1.23 per basic and diluted limited partner unit, for the 2022 Quarter.
Coal sales . Coal sales increased $28.5 million or 5.4% to $560.3 million for the 2023 Quarter from $531.8 million for the 2022 Quarter. The increase was attributable to a price variance of $30.2 million due to higher average coal sales prices, partially offset by a volume variance of $1.7 million resulting from reduced tons sold. Improved price realizations in domestic markets during the 2023 Quarter drove coal sales prices higher by 5.7% in the 2023 Quarter to $62.93 per ton sold, compared to $59.53 per ton sold during the 2022 Quarter.
Coal - Segment Adjusted EBITDA Expense . Segment Adjusted EBITDA Expense for our coal operations increased 7.4% to $337.0 million, as a result of higher per ton costs. Segment Adjusted EBITDA Expense per ton sold for our coal operations increased 7.8% to $37.85 per ton sold in the 2023 Quarter compared to $35.12 per ton in the 2022 Quarter, primarily due to certain cost increases, which are discussed below by category:
● Labor and benefit expenses per ton produced, excluding workers' compensation, increased 7.5% to $11.23 per ton in the 2023 Quarter from $10.45 per ton in the 2022 Quarter. The increase of $0.78 per ton was primarily due to higher incentive benefits and direct labor costs at several mines.
● Workers' compensation expenses per ton produced increased to $0.52 per ton in the 2023 Quarter from $(0.15) per ton in the 2022 Quarter. The increase of $0.67 per ton produced primarily reflects a favorable mid-year workers' compensation accrual adjustment in the 2022 Quarter due to an increase in the discount rate.
● Maintenance expenses per ton produced increased 12.2% to $4.05 per ton in the 2023 Quarter from $3.61 per ton in the 2022 Quarter. The increase of $0.44 per ton produced was primarily as a result of inflationary cost pressures.
● Production taxes and royalty expenses per ton incurred as a percentage of coal sales prices increased $0.27 per produced ton sold in the 2023 Quarter compared to the 2022 Quarter primarily as a result of higher price realizations, increased excise taxes per ton resulting from a reduced mix of export shipments and higher federal black lung excise tax as a result of the tax rate increasing effective October 1, 2022, partially offset by a favorable mix of tons sold mined in states without severance taxes.
● Outside coal purchases increased $4.1 million in the 2023 Quarter as a result of increased sales from purchased coal, which generally costs more on a per ton basis than our produced coal.
Segment Adjusted EBITDA Expense increases per ton were partially offset by the following decreases:
● Material and supplies expenses per ton produced decreased 6.1% to $12.84 per ton in the 2023 Quarter from $13.68 per ton in the 2022 Quarter. The decrease of $0.84 per ton produced primarily reflects decreases of $0.69
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per ton for roof support, $0.16 per ton for outside expenses used in the mining process and $0.13 per ton in longwall subsidence expense, partially offset by an increase of $0.17 per ton for various preparation plant expenses.
● A $6.5 million non-cash contingent accrual in the 2022 Quarter related to our purchase of the Hamilton mine based upon a projection for higher coal sale price realizations in the future.
Oil & gas royalties. Oil & gas royalty revenues decreased to $33.1 million in the 2023 Quarter compared to $39.3 million for the 2022 Quarter. The decrease of $6.2 million was primarily due to lower average sales price per BOE, which decreased by 40.2%, partially offset by higher BOE volumes.
Other revenues . Other revenues principally comprised Matrix Design sales, Mt. Vernon transloading revenues, oil & gas lease bonus revenues and other miscellaneous sales and revenue activities. Other revenues increased to $17.9 million in the 2023 Quarter from $13.4 million in the 2022 Quarter. The increase of $4.5 million was primarily due to increased sales of mining technology products by our Matrix Design subsidiary.
Transportation revenues and expenses . Transportation revenues and expenses were $30.5 million and $35.4 million for the 2023 and 2022 Quarters, respectively. The decrease of $4.9 million was primarily attributable to decreased average third-party transportation rates in the 2022 Quarter and reduced coal shipments for which we arrange third-party transportation. Transportation revenues are recognized when title to the coal passes to the customer and recognized in an amount equal to the corresponding transportation expenses.
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Segment Adjusted EBITDA. Our 2023 Quarter Segment Adjusted EBITDA of $269.4 million remained consistent with the 2022 Quarter Segment Adjusted EBITDA of $269.3 million.
Three Months Ended
June 30,
2023
2022 (1)
Increase (Decrease)
(in thousands)
Segment Adjusted EBITDA
Illinois Basin Coal Operations
$
119,551
$
97,352
$
22,199
22.8
%
Appalachia Coal Operations
109,573
124,377
(14,804)
(11.9)
%
Oil & Gas Royalties
29,050
37,638
(8,588)
(22.8)
%
Coal Royalties
10,970
9,127
1,843
20.2
%
Other, Corporate and Elimination (2)
222
839
(617)
(73.5)
%
Total Segment Adjusted EBITDA (3)
$
269,366
$
269,333
$
33
0.0
%
Coal - Tons sold
Illinois Basin Coal Operations
6,066
5,831
235
4.0
%
Appalachia Coal Operations
2,838
3,102
(264)
(8.5)
%
Total tons sold
8,904
8,933
(29)
(0.3)
%
Coal sales
Illinois Basin Coal Operations
$
331,813
$
290,389
$
41,424
14.3
%
Appalachia Coal Operations
228,518
241,418
(12,900)
(5.3)
%
Total coal sales
$
560,331
$
531,807
$
28,524
5.4
%
Other revenues
Illinois Basin Coal Operations
$
2,401
$
1,659
$
742
44.7
%
Appalachia Coal Operations
375
328
47
14.3
%
Oil & Gas Royalties
325
669
(344)
(51.4)
%
Other, Corporate and Elimination
14,790
10,743
4,047
37.7
%
Total other revenues
$
17,891
$
13,399
$
4,492
33.5
%
Segment Adjusted EBITDA Expense
Illinois Basin Coal Operations
$
214,666
$
194,697
$
19,969
10.3
%
Appalachia Coal Operations
119,319
117,369
1,950
1.7
%
Oil & Gas Royalties
3,562
3,582
(20)
(0.6)
%
Coal Royalties
5,597
5,398
199
3.7
%
Other, Corporate and Elimination (2)
(4,710)
(4,624)
(86)
(1.9)
%
Total Segment Adjusted EBITDA Expense (3)
$
338,434
$
316,422
$
22,012
7.0
%
Oil & Gas Royalties
Volume - BOE (4)
765
544
221
40.6
%
Oil & gas royalties
$
33,087
$
39,287
$
(6,200)
(15.8)
%
Coal Royalties
Volume - Tons sold (5)
5,118
5,268
(150)
(2.8)
%
Intercompany coal royalties
$
16,567
$
14,525
$
2,042
14.1
%
(1) Recast for the JC Resources Acquisition. For more information, please read "Item 1. Financial Statements (Unaudited)—Note 1 – Organization and Presentation" of this Quarterly Report on Form 10-Q.
(2) Other, Corporate and Elimination includes the elimination of intercompany coal royalty revenues and expenses between our Coal Royalties Segment and our Coal Operations Segments in addition to the expenses for the other miscellaneous activities included in this category.
(3) For definitions of Segment Adjusted EBITDA and Segment Adjusted EBITDA Expense and related reconciliations to their respective comparable GAAP financial measures, please see below under "—Reconciliation of GAAP 'net
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income' to non-GAAP 'Segment Adjusted EBITDA' and reconciliation of GAAP 'Operating Expenses' to non-GAAP 'Segment Adjusted EBITDA Expense.'"
(4) Barrels of oil equivalent ("BOE") is calculated on a 6:1 basis (6,000 cubic feet of natural gas to one barrel).
(5) Represents tons sold by our Coal Operations Segments that were produced from coal reserves leased from our Coal Royalties Segment.
Illinois Basin Coal Operations – Segment Adjusted EBITDA increased 22.8% to $119.6 million in the 2023 Quarter from $97.4 million in the 2022 Quarter. The increase of $22.2 million was primarily attributable to higher coal sales, which increased 14.3% to $331.8 million in the 2023 Quarter from $290.4 million in the 2022 Quarter, partially offset by increased operating expenses. The increase in coal sales reflects higher coal sales price realizations and increased sales volumes. Coal sales price per ton sold in the 2023 Quarter increased by 9.8% compared to the 2022 Quarter reflecting improved domestic price realizations. Tons sold increased by 4.0% compared to the 2022 Quarter due primarily to increased volumes from the Hamilton and Warrior mines. Segment Adjusted EBITDA Expense increased 10.3% to $214.7 million in the 2023 Quarter from $194.7 million in the 2022 Quarter primarily as a result of increased sales volumes and higher expenses per ton. Segment Adjusted EBITDA Expense per ton increased by 6.0% compared to the 2022 Quarter resulting from higher labor-related expenses and maintenance costs as well as increased sales-related expenses due to higher price realizations.
Appalachia Coal Operations – Segment Adjusted EBITDA decreased 11.9% to $109.6 million for the 2023 Quarter from $124.4 million in the 2022 Quarter. The decrease of $14.8 million was primarily attributable to lower coal sales, which decreased 5.3% to $228.5 million in the 2023 Quarter from $241.4 million in the 2022 Quarter, and higher operating expenses. Coal sales volumes decreased by 8.5% compared to the 2022 Quarter as a result of reduced export sales across the region and lower production from our MC Mining operation. Coal sales prices increased by 3.5% compared to the 2022 Quarter primarily due to improved price realizations in domestic markets. Segment Adjusted EBITDA Expense increased slightly to $119.3 million in the 2023 Quarter from $117.4 million in the 2022 Quarter due to higher per ton expenses, partially offset by reduced sales volumes. Segment Adjusted EBITDA Expense per ton increased $4.20 per ton sold to $42.04 compared to $37.84 per ton sold in the 2022 Quarter, as a result of increased labor-related expenses, purchased coal, and higher inventory charges, partially offset by increased recoveries and lower selling expenses due to a greater mix of coal sales from operations in states with lower severance taxes per ton during the 2023 Quarter.
Oil & Gas Royalties – Segment Adjusted EBITDA decreased 22.8% to $29.1 million in the 2023 Quarter compared to $37.6 million in the 2022 Quarter primarily due to lower average sales price per BOE, partially offset by higher BOE sold. Higher BOE volumes during the 2023 Quarter resulted from increased drilling and completion activities on our properties and additional volumes from oil & gas mineral interest acquisitions.
Coal Royalties – Segment Adjusted EBITDA increased 20.2% to $11.0 million for the 2023 Quarter compared to $9.1 million for the 2022 Quarter as a result of higher average royalty rates per ton received from our mining subsidiaries, partially offset by fewer royalty tons sold.
Six Months Ended June 30, 2023 Compared to Six Months Ended June 30, 2022
Six Months Ended June 30,
2023
2022 (1)
2023
2022 (1)
(in thousands)
(per ton / per BOE sold)
Coal - Tons sold
17,373
17,095
N/A
N/A
Coal - Tons produced
18,641
18,056
N/A
N/A
Coal - Coal sales
$
1,139,115
$
920,167
$
65.57
$
53.83
Coal - Segment Adjusted EBITDA Expense (2) (3)
$
672,901
$
575,466
$
38.73
$
33.66
Oil & Gas Royalties - BOE sold
1,524
1,088
N/A
N/A
Oil & Gas Royalties - Royalties (4)
$
67,584
$
72,683
$
44.34
$
66.83
Coal Royalties - Tons sold
10,175
10,821
N/A
N/A
Coal Royalties - Intercompany royalties
$
32,080
$
29,692
$
3.15
$
2.74
(1) Recast for the JC Resources Acquisition. For more information, please read "Item 1. Financial Statements (Unaudited)—Note 1 – Organization and Presentation" of this Quarterly Report on Form 10-Q.
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(2) For a definition of Segment Adjusted EBITDA Expense and related reconciliation to comparable generally accepted accounting principles ("GAAP") financial measures, please see below under "—Reconciliation of GAAP 'Operating Expenses' to non-GAAP 'Segment Adjusted EBITDA Expense.'"
(3) Beginning in 2023, we redefined Coal - Segment Adjusted EBITDA Expense to reflect the activity of Alliance Coal, which is the holding company for our coal mining operations. We have retrospectively adjusted Coal - Segment Adjusted EBITDA Expense in prior periods to be on the same basis.
(4) Average sales price per BOE is defined as oil & gas royalty revenues excluding lease bonus revenue divided by total BOE sold.
Total Revenues . Total revenues for the six months ended June 30, 2023 ("2023 Period") increased 20.4% to $1.30 billion compared to $1.08 billion for the six months ended June 30, 2022 ("2022 Period") as a result of significantly higher coal sales. Coal sales increased 23.8% to $1.14 billion in the 2023 Period from $920.2 million in the 2022 Period due to $204.0 million in higher price realizations in domestic markets, which reflects a 21.8% increase to $65.57 per ton sold compared to $53.83 per ton sold in the 2022 Period, and $15.0 million in increased coal sales volumes, reflecting a 1.6% increase compared to the 2022 Period.
Total operating expenses . Total operating expenses increased to $913.5 million in the 2023 Period, compared to $816.7 million in the 2022 Period, due primarily to higher per ton costs on certain expense items discussed in more detail below and increased coal sales volumes.
Net income attributable to ARLP . Increased revenues and lower income tax expense, partially offset by higher total operating expenses, led net income attributable to ARLP for the 2023 Period to $361.0 million, or $2.75 per basic and diluted limited partner unit, compared to $201.6 million, or $1.51 per basic and diluted limited partner unit, for the 2022 Period.
Coal - Segment Adjusted EBITDA Expense . Segment Adjusted EBITDA Expense for our coal operations increased 16.9% to $672.9 million, as a result of higher coal sales volumes and inflationary cost pressures. On a per ton basis, Segment Adjusted EBITDA Expense for our coal operations increased 15.1% to $38.73 per ton sold in the 2023 Period compared to $33.66 per ton in the 2022 Period, primarily due to certain cost increases, which are discussed below by category:
● Labor and benefit expenses per ton produced, excluding workers' compensation, increased 16.5% to $11.55 per ton in the 2023 Period from $9.91 per ton in the 2022 Period. The increase of $1.64 per ton was primarily due to higher incentive benefits and direct labor costs at several mines.
● Workers' compensation expenses per ton produced increased to $0.56 per ton in the 2023 Period from $0.14 per ton in the 2022 Period. The increase of $0.42 per ton produced primarily reflects a favorable mid-year workers' compensation accrual adjustment in the 2022 Period due to an increase in the discount rate.
● Material and supplies expenses per ton produced increased 2.8% to $13.41 per ton in the 2023 Period from $13.04 per ton in the 2022 Period. The increase of $0.37 per ton produced primarily reflects increases of $0.27 per ton for ventilation related expenses, $0.21 per ton for various preparation plant expenses, $0.15 per ton for safety related materials and supplies and $0.12 per ton for power and fuel, partially offset by a decrease of $0.49 per ton for roof support.
● Maintenance expenses per ton produced increased 24.3% to $4.24 per ton in the 2023 Period from $3.41 per ton in the 2022 Period. The increase of $0.83 per ton produced was primarily as a result of inflationary cost pressures.
● Production taxes and royalty expenses per ton incurred as a percentage of coal sales prices and volumes increased $1.00 per produced ton sold in the 2023 Period compared to the 2022 Period primarily as a result of higher price realizations, increased excise taxes per ton resulting from a reduced mix of export shipments and higher federal black lung excise tax as a result of the tax rate increasing effective October 1, 2022, partially offset by a favorable mix of tons sold mined in states without severance taxes.
Other revenues . Other revenues principally comprised Matrix Design sales, Mt. Vernon transloading revenues, oil & gas lease bonus revenues and other miscellaneous sales and revenue activities. Other revenues increased to $37.3
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million in the 2023 Period from $25.7 million in the 2022 Period. The increase of $11.6 million was primarily due to increased sales of mining technology products by our Matrix Design subsidiary.
Income tax expense. Income tax expense decreased to $8.2 million for the 2023 Period compared to $49.0 million for the 2022 Period as a result of our recognition of a one-time non-cash income tax charge of $37.3 million during the 2022 Period when Alliance Minerals elected to be treated as a taxable entity for federal and state income tax purposes.
Segment Adjusted EBITDA. Our 2023 Period Segment Adjusted EBITDA increased $118.8 million to $561.3 million from the 2022 Period Segment Adjusted EBITDA of $442.5 million.
Six Months Ended
June 30,
2023
2022 (1)
Increase (Decrease)
(in thousands)
Segment Adjusted EBITDA
Illinois Basin Coal Operations
$
251,559
$
175,567
$
75,992
43.3
%
Appalachia Coal Operations
226,123
175,480
50,643
28.9
%
Oil & Gas Royalties
59,095
68,473
(9,378)
(13.7)
%
Coal Royalties
21,095
19,475
1,620
8.3
%
Other, Corporate and Elimination (2)
3,441
3,525
(84)
(2.4)
%
Total Segment Adjusted EBITDA (3)
$
561,313
$
442,520
$
118,793
26.8
%
Coal - Tons sold
Illinois Basin Coal Operations
12,256
11,713
543
4.6
%
Appalachia Coal Operations
5,117
5,382
(265)
(4.9)
%
Total tons sold
17,373
17,095
278
1.6
%
Coal sales
Illinois Basin Coal Operations
$
668,723
$
544,294
$
124,429
22.9
%
Appalachia Coal Operations
470,392
375,873
94,519
25.1
%
Total coal sales
$
1,139,115
$
920,167
$
218,948
23.8
%
Other revenues
Illinois Basin Coal Operations
$
4,569
$
3,559
$
1,010
28.4
%
Appalachia Coal Operations
850
691
159
23.0
%
Oil & Gas Royalties
1,365
793
572
72.1
%
Other, Corporate and Elimination
30,510
20,650
9,860
47.7
%
Total other revenues
$
37,294
$
25,693
$
11,601
45.2
%
Segment Adjusted EBITDA Expense
Illinois Basin Coal Operations
$
421,735
$
372,286
$
49,449
13.3
%
Appalachia Coal Operations
245,118
201,084
44,034
21.9
%
Oil & Gas Royalties
7,986
6,859
1,127
16.4
%
Coal Royalties
10,985
10,217
768
7.5
%
Other, Corporate and Elimination (2)
(8,094)
(12,568)
4,474
35.6
%
Total Segment Adjusted EBITDA Expense (3)
$
677,730
$
577,878
$
99,852
17.3
%
Oil & Gas Royalties
Volume - BOE (4)
1,524
1,088
436
40.1
%
Oil & gas royalties
$
67,584
$
72,683
$
(5,099)
(7.0)
%
Coal Royalties
Volume - Tons sold (5)
10,175
10,821
(646)
(6.0)
%
Intercompany coal royalties
$
32,080
$
29,692
$
2,388
8.0
%
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(1) Recast for the JC Resources Acquisition. For more information, please read "Item 1. Financial Statements (Unaudited)—Note 1 – Organization and Presentation" of this Quarterly Report on Form 10-Q.
(2) Other, Corporate and Elimination includes the elimination of intercompany coal royalty revenues and expenses between our Coal Royalties Segment and our Coal Operations Segments in addition to the expenses for the other miscellaneous activities included in this category.
(3) For definitions of Segment Adjusted EBITDA and Segment Adjusted EBITDA Expense and related reconciliations to their respective comparable GAAP financial measures, please see below under "—Reconciliation of GAAP 'net income' to non-GAAP 'Segment Adjusted EBITDA' and reconciliation of GAAP 'Operating Expenses' to non-GAAP 'Segment Adjusted EBITDA Expense.'"
(4) Barrels of oil equivalent ("BOE") is calculated on a 6:1 basis (6,000 cubic feet of natural gas to one barrel).
(5) Represents tons sold by our Coal Operations Segments that were produced from coal reserves leased from our Coal Royalties Segment.
Illinois Basin Coal Operations – Segment Adjusted EBITDA increased to $251.6 million in the 2023 Period from $175.6 million in the 2022 Period. The increase of $76.0 million was primarily attributable to higher coal sales, which increased 22.9% to $668.7 million in the 2023 Period from $544.3 million in the 2022 Period, partially offset by increased operating expenses. The increase in coal sales reflects higher coal sales price per ton, which increased by 17.4% compared to the 2022 Period reflecting increased domestic prices, and increased tons sold, which rose 4.6% in the 2023 Period as a result of increased sales volumes at the Warrior, Gibson South and Hamilton mines. Segment Adjusted EBITDA Expense increased 13.3% to $421.7 million in the 2023 Period from $372.3 million in the 2022 Period primarily as a result of increased sales volumes and higher expenses per ton. Segment Adjusted EBITDA Expense per ton increased $2.63 per ton sold to $34.41 from $31.78 per ton sold in the 2022 Period primarily as a result of inflationary pressures on numerous expense items, including labor-related expenses, maintenance costs and increased sales-related expenses due to higher price realizations.
Appalachia Coal Operations – Segment Adjusted EBITDA increased 28.9% to $226.1 million for the 2023 Period from $175.5 million in the 2022 Period. The increase of $50.6 million was primarily attributable to higher coal sales, which increased 25.1% to $470.4 million in the 2023 Period from $375.9 million in the 2022 Period, due to increased prices. Coal sales prices increased by 31.6% compared to the 2022 Period primarily due to increased export and domestic price realizations in the region. Partially offsetting higher prices, coal sales volumes decreased 4.9% compared to the 2022 Period as a result of reduced export sales from our Tunnel Ridge operation and lower production across the region. Segment Adjusted EBITDA Expense increased 21.9% to $245.1 million in the 2023 Period from $201.1 million in the 2022 Period due to higher per ton expenses. Segment Adjusted EBITDA Expense per ton increased 28.2% to $47.90 compared to $37.36 per ton sold in the 2022 Period, as a result of increased longwall move days at the Tunnel Ridge and Mettiki mines, reduced recoveries at the MC Mining operation and inflationary pressures on certain expense items, most notably labor-related expenses and materials and maintenance costs, and increased sales-related expenses due to higher price realizations.
Oil & Gas Royalties – Segment Adjusted EBITDA decreased to $59.1 million for the 2023 Period from $68.5 million in the 2022 Period. The decrease of $9.4 million was primarily due to lower average sales price per BOE, which decreased 33.6% to $44.34 per BOE, partially offset by increased volumes in the 2023 Period, which increased by 40.1%. Higher BOE volumes during the 2023 Period resulted from increased drilling and completion activities on our properties and additional volumes from oil & gas mineral interest acquisitions.
Coal Royalties – Segment Adjusted EBITDA increased 8.3% to $21.1 million for the 2023 Period from $19.5 million in the 2022 Period. The increase of $1.6 million was a result of higher average royalty rates per ton, partially offset by reduced royalty tons sold.
Reconciliation of GAAP "net income" to non-GAAP "Segment Adjusted EBITDA" and reconciliation of GAAP "Operating Expenses" to non-GAAP "Segment Adjusted EBITDA Expense"
Segment Adjusted EBITDA (a non-GAAP financial measure) is defined as net income attributable to ARLP before net interest expense, income taxes, depreciation, depletion and amortization and general and administrative expenses. Segment Adjusted EBITDA is a key component of consolidated EBITDA, which is used as a supplemental financial measure by management and by external users of our financial statements such as investors, commercial banks, research analysts and others. We believe that the presentation of EBITDA provides useful information to investors regarding our performance and results of operations because EBITDA, when used in conjunction with related GAAP
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financial measures, (i) provides additional information about our core operating performance and ability to generate and distribute cash flow, (ii) provides investors with the financial analytical framework upon which we base financial, operational, compensation and planning decisions and (iii) presents a measurement that investors, rating agencies and debt holders have indicated is useful in assessing us and our results of operations.
Segment Adjusted EBITDA is also used as a supplemental financial measure by our management for reasons similar to those stated in the previous explanation of EBITDA. In addition, the exclusion of corporate general and administrative expenses from consolidated Segment Adjusted EBITDA allows management to focus solely on the evaluation of segment operating profitability as it relates to our revenues and operating expenses, which are primarily controlled by our segments.
The following is a reconciliation of net income, the most comparable GAAP financial measure, to consolidated Segment Adjusted EBITDA:
Three Months Ended
Six Months Ended
June 30,
June 30,
2023
2022
2023
2022
(in thousands)
Net income
$
171,305
$
163,851
$
363,983
$
202,224
Noncontrolling interest
(1,515)
(323)
(3,008)
(613)
Net income attributable to ARLP
$
169,790
$
163,528
$
360,975
$
201,611
General and administrative
20,130
22,480
41,215
41,102
Depreciation, depletion and amortization
68,639
67,690
134,189
131,830
Interest expense, net
6,808
9,304
16,694
18,931
Income tax expense
3,999
6,331
8,240
49,046
Consolidated Segment Adjusted EBITDA
$
269,366
$
269,333
$
561,313
$
442,520
Segment Adjusted EBITDA Expense (a non-GAAP financial measure) includes operating expenses, coal purchases, if applicable, and other expense (income). Transportation expenses are excluded as these expenses are passed through to our customers and, consequently, we do not realize any gain or loss on transportation revenues. Segment Adjusted EBITDA Expense is used as a supplemental financial measure by our management to assess the operating performance of our segments. Segment Adjusted EBITDA Expense is a key component of Segment Adjusted EBITDA in addition to coal sales, royalty revenues and other revenues. The exclusion of corporate general and administrative expenses from Segment Adjusted EBITDA Expense allows management to focus solely on the evaluation of segment operating performance as it primarily relates to our operating expenses.
The following is a reconciliation of operating expenses, the most comparable GAAP financial measure, to consolidated Segment Adjusted EBITDA Expense:
Three Months Ended
Six Months Ended
June 30,
June 30,
2023
2022
2023
2022
(in thousands)
Operating expenses (excluding depreciation, depletion and amortization)
$
334,402
$
316,850
$
673,125
$
578,873
Outside coal purchases
4,209
151
4,209
151
Other expense (income)
(177)
(579)
396
(1,146)
Segment Adjusted EBITDA Expense
$
338,434
$
316,422
$
677,730
$
577,878
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Liquidity and Capital Resources
Liquidity
We have historically satisfied our working capital requirements and funded our capital expenditures, investments, contractual obligations and debt service obligations with cash generated from operations, cash provided by the issuance of debt or equity, borrowings under credit and securitization facilities and other financing transactions. We believe that existing cash balances, future cash flows from operations and investments, borrowings under credit facilities and cash provided from the issuance of debt or equity will be sufficient to meet our working capital requirements, capital expenditures and additional investments, debt payments, contractual obligations, commitments and distribution payments. Nevertheless, our ability to satisfy our working capital requirements and additional investments, to satisfy our contractual obligations, to fund planned capital expenditures, to service our debt obligations or to pay distributions will depend upon our future operating performance and access to and cost of financing sources, which will be affected by prevailing economic conditions generally, and in both the coal and oil & gas industries specifically, as well as other financial and business factors, some of which are beyond our control. Based on our recent operating cash flow results, current cash position, anticipated future cash flows and sources of financing that we expect to have available, we anticipate being in compliance with the covenants of the Credit Agreement and expect to have sufficient liquidity to fund our operations and growth strategies. However, to the extent operating cash flow or access to and cost of financing sources are materially different than expected, future covenant compliance or liquidity may be adversely affected. Please read "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2022.
Oil & Gas Acquisitions — As of June 30, 2023, we have purchased mineral interests for $1.1 million and $3.9 million for the three and six months ended June 30, 2023, respectively, with cash on hand under our $35.0 million Acquisition Agreement. Future acquisitions under the Acquisition Agreement are expected to be funded with cash on hand or cash generated from operations.
On February 22, 2023, we closed on the JC Resources Acquisition for $72.3 million, which was funded with cash on hand.
Please read "Item 1. Financial Statements (Unaudited) – Note 2 – Acquisitions" of this Quarterly Report on Form 10-Q for additional information about the Acquisition Agreement and the JC Resources Acquisition.
Credit Facility — On January 13, 2023, Alliance Coal, as borrower, entered into a Credit Agreement (the "Credit Agreement") with various financial institutions. The Credit Agreement provides for a $425 million revolving credit facility, which includes a sublimit of $15.0 million for swingline borrowings and permits the issuance of letters of credit of up to the full amount of $425 million (the "Revolving Credit Facility"), and for a term loan in an aggregate principal amount of $75 million (the "Term Loan"). The Credit Agreement matures on March 9, 2027, at which time the aggregate outstanding principal amount of all Revolving Credit Facility advances and all Term Loan advances are required to be repaid in full. The Credit Agreement will instead mature on January 30, 2025, if on that date our Senior Notes are still outstanding and Alliance Coal does not have liquidity of at least $200 million. Interest is payable quarterly, with principal of the Term Loan due in quarterly installments equal to 6.25% of the original principal amount of the Term Loan beginning with the quarter ending June 30, 2023, and the balance payable at maturity. The Revolving Credit Facility replaces the $459.5 million revolving credit facility, which included a sublimit of $125.0 million for the issuance of letters of credit and a sublimit of $15.0 million for swingline borrowings, extended to the Intermediate Partnership under its Fifth Amended and Restated Credit Agreement, dated as of March 9, 2020 that would have expired on March 9, 2024. The Credit Agreement is guaranteed by ARLP and certain of its subsidiaries, including the Intermediate Partnership and most of the direct and indirect subsidiaries of Alliance Coal (the "Subsidiary Guarantors"). The Credit Agreement also is secured by substantially all of the assets of the Subsidiary Guarantors and Alliance Coal. For additional information on the Credit Agreement, please see " Item 1. Financial Statements (Unaudited) – Note 6 – Long-Term Debt."
Accounts Receivable Securitization — In January 2023, we extended the term of our $60.0 million accounts receivable securitization facility (the "Securitization Facility") from January 2023 to January 2024. For additional information on the Securitization Facility, please see "Item 1. Financial Statements (Unaudited) – Note 6 – Long-Term Debt."
Unit Repurchase Program — In May 2018, the Board of Directors approved the establishment of a unit repurchase program authorizing us to repurchase up to $100 million of ARLP common units. In January 2023, the Board
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of Directors authorized a $93.5 million increase to the unit repurchase program, which had $6.5 million of available capacity as of December 31, 2022. The program has no time limit and we may repurchase units from time to time in the open market or in other privately negotiated transactions. The unit repurchase program authorization does not obligate us to repurchase any dollar amount or number of units. During the six months ended June 30, 2023, we repurchased and retired 929,842 units at an average price of $20.90 for an aggregate purchase price of $19.4 million. The timing of any future unit repurchases and the ultimate number of units to be purchased will depend on several factors, including business and market conditions, our future financial performance, and other capital priorities. Please read "Part II - Item 2. Unregistered Sales of Equity Securities and Use of Proceeds" of this Quarterly Report on Form 10-Q for more information on the unit repurchase program.
Repurchase of Senior Notes — During the six months ended June 30, 2023, we repurchased $60.8 million of our 7.5% senior notes due 2025. In July 2023, we redeemed an additional $50.0 million of our Senior Notes. At June 30, 2023, the aggregate principal amount of our outstanding 7.5% senior notes due 2025 was $339.2 million. We expect to continue additional purchases with available cash flows.
Shelf Registration Statement — We currently have an effective universal shelf Registration Statement on Form S-3 that provides for the registration and sale of an unspecified amount of our equity or debt securities. We may over time, and subject to market conditions, in one or more offerings, offer and sell any of the securities described in the prospectus.
Cash Flows
Cash provided by operating activities was $504.0 million for the 2023 Period compared to $239.4 million for the 2022 Period. The increase in cash provided by operating activities was primarily due to an increase in net income adjusted for non-cash items and favorable working capital changes related primarily to trade receivables and workers' compensation accruals. These increases were partially offset by unfavorable working capital changes related primarily to accrued payroll and related benefits accruals, as well as miscellaneous other changes compared to the 2022 Period.
Net cash used in investing activities was $277.6 million for the 2023 Period compared to $163.3 million for the 2022 Period. The increase in cash used in investing activities was primarily attributable to an increase in capital expenditures, change in accounts payable and accrued liabilities and the acquisition of oil & gas reserves under the JC Resources Acquisition and the Acquisition Agreement. These increases were partially offset by decreases in contributions to equity method investments and purchases of equity securities compared to the 2022 period. Please read "Item 1. Financial Statements (Unaudited) - Note 2 – Acquisitions" of this Quarterly Report on Form 10-Q for additional information about the JC Resources Acquisition and the Acquisition Agreement.
Net cash used in financing activities was $237.5 million for the 2023 Period compared to $92.4 million for the 2022 Period. The increase in cash used in financing activities was primarily attributable to increased cash distributions paid to unitholders, the repurchase of senior notes during the 2023 Period, debt issuance costs, settlements under deferred compensation plans and the purchase of units under the unit repurchase program. These increases were partially offset by increased long-term borrowings.
Cash Requirements
Management anticipates having sufficient cash flow to meet 2023 cash requirements, including capital expenditures, scheduled payments on long-term debt, lease obligations, asset retirement obligation costs and workers' compensation and pneumoconiosis costs, with our June 30, 2023 cash and cash equivalents of $284.9 million, cash flows from operations, or borrowings under our Revolving Credit Facility and Securitization Facility, if necessary. We currently project average estimated annual maintenance capital expenditures over the next five years of approximately $7.05 per ton produced. Our anticipated total capital expenditures, including maintenance capital expenditures, for 2023 are estimated in a range of $390.0 million to $440.0 million. We will continue to have significant cash requirements over the long term, which may require us to incur debt or seek additional equity capital. The availability and cost of additional capital will depend upon prevailing market conditions, the market price of our common units and several other factors over which we have limited control, as well as our financial condition and results of operations.
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Debt Obligations
See "Item 1. Financial Statements (Unaudited)—Note 6 – Long-Term Debt" of this Quarterly Report on Form 10-Q for a discussion of our long-term debt obligations.
We also have an agreement with a bank to provide additional letters of credit in the amount of $5.0 million to maintain surety bonds to secure certain asset retirement obligations and our obligations for workers' compensation benefits. On June 30, 2023, we had $5.0 million in letters of credit outstanding under this agreement.
Related-Party Transactions
We have related-party transactions and activities with Mr. Craft, MGP and their respective affiliates as well as other related parties. These related-party transactions and activities relate principally to (1) coal mineral leases with The Joseph W. Craft III Foundation and The Kathleen S. Craft Foundation, (2) the use of aircraft, and (3) the purchase of oil & gas mineral interests from JC Resources LP, an entity owned by Mr. Craft. Please read "Item 1. Financial Statements (Unaudited) – Note 2 – Acquisitions" of this Quarterly Report on Form 10-Q for more information on the purchase of oil & gas mineral interests. We also have related-party transactions with (a) WKY CoalPlay, LLC regarding three mineral leases, and (b) with entities in which we hold equity investments. For more information regarding our investments, please read "Item 1. Financial Statements (Unaudited) — Note 9 – Investments" of this Quarterly Report on Form 10-Q. Please read our Annual Report on Form 10-K for the year ended December 31, 2022, "Item 8. Financial Statements and Supplementary Data — Note 22 – Related-Party Transactions" for additional information concerning related-party transactions.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.