10-Q 1 arlp-20220331x10q.htm 10-Q
ALLIANCE RESOURCE PARTNERS 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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2022

OR

   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________________to________________

Commission File No.: 0-26823

ALLIANCE RESOURCE PARTNERS, L.P.

(Exact name of registrant as specified in its charter)

Delaware

   

73-1564280

(State or other jurisdiction of

incorporation or organization)

(IRS Employer Identification No.)

1717 South Boulder Avenue, Suite 400, Tulsa, Oklahoma 74119

(Address of principal executive offices and zip code)

(918) 295-7600

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes   [   ] No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  [X ] Yes   [   ] No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer

Accelerated Filer

Non-Accelerated Filer  

Smaller Reporting Company  

Emerging Growth Company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [   ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes     No

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol

Name of each exchange on which registered

Common units representing limited partner interests

ARLP

NASDAQ Global Select Market

As of May 9, 2022, 127,195,219 common units are outstanding.

TABLE OF CONTENTS

PART I

FINANCIAL INFORMATION

Page

ITEM 1.

Financial Statements (Unaudited)

ALLIANCE RESOURCE PARTNERS, L.P. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021

1

Condensed Consolidated Statements of Income for the three months ended March 31, 2022 and 2021

2

Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2022 and 2021

3

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2022 and 2021

4

Notes to Condensed Consolidated Financial Statements

5

1.     Organization and Presentation

5

2.     New Accounting Standards

6

3.     Contingencies

6

4.     Inventories

7

5.     Fair Value Measurements

7

6.     Long-Term Debt

8

7.     Income Taxes

9

8.    Variable Interest Entities

11

9.    Investment

12

10.   Partners' Capital

12

11.   Revenue from Contracts with Customers

14

12.   Earnings per Limited Partner Unit

14

13.   Workers' Compensation and Pneumoconiosis

15

14.   Common Unit-Based Compensation Plans

16

15.   Components of Pension Plan Net Periodic Benefit Cost

18

16.   Segment Information

18

17. Subsequent Events

20

ITEM 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

22

ITEM 3.

Quantitative and Qualitative Disclosures about Market Risk

31

ITEM 4.

Controls and Procedures

31

Forward-Looking Statements

33

PART II

OTHER INFORMATION

ITEM 1.

Legal Proceedings

35

ITEM 1A.

Risk Factors

35

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

35

ITEM 3.

Defaults Upon Senior Securities

35

ITEM 4.

Mine Safety Disclosures

35

ITEM 5.

Other Information

36

ITEM 6.

Exhibits

36

i

PART I

FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

ALLIANCE RESOURCE PARTNERS, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except unit data)

(Unaudited)

March 31, 

December 31, 

2022

    

2021

ASSETS

    

 

CURRENT ASSETS:

Cash and cash equivalents

$

128,191

$

122,403

Trade receivables

 

156,698

 

129,531

Other receivables

 

440

 

680

Inventories, net

 

95,745

 

60,302

Advance royalties

 

4,385

 

4,958

Prepaid expenses and other assets

    

 

19,238

    

 

21,354

Total current assets

 

404,697

 

339,228

PROPERTY, PLANT AND EQUIPMENT:

Property, plant and equipment, at cost

 

3,666,987

 

3,608,347

Less accumulated depreciation, depletion and amortization

 

(1,975,381)

 

(1,909,669)

Total property, plant and equipment, net

 

1,691,606

 

1,698,678

OTHER ASSETS:

Advance royalties

 

71,403

 

63,524

Equity method investments

 

26,194

 

26,325

Goodwill

4,373

4,373

Operating lease right-of-use assets

15,165

14,158

Other long-term assets

 

12,109

 

13,120

Total other assets

 

129,244

 

121,500

TOTAL ASSETS

$

2,225,547

$

2,159,406

LIABILITIES AND PARTNERS' CAPITAL

CURRENT LIABILITIES:

Accounts payable

$

92,904

$

69,586

Accrued taxes other than income taxes

 

15,209

 

17,787

Accrued payroll and related expenses

 

31,178

 

36,805

Accrued interest

 

12,500

 

5,000

Workers' compensation and pneumoconiosis benefits

 

12,293

 

12,293

Current finance lease obligations

 

665

 

840

Current operating lease obligations

 

2,133

 

1,820

Other current liabilities

 

19,815

 

17,375

Current maturities, long-term debt, net

 

15,359

 

16,071

Total current liabilities

 

202,056

 

177,577

LONG-TERM LIABILITIES:

Long-term debt, excluding current maturities, net

 

415,990

 

418,942

Pneumoconiosis benefits

 

108,491

 

107,560

Accrued pension benefit

 

24,857

 

25,590

Workers' compensation

 

44,669

 

44,911

Asset retirement obligations

 

123,989

 

123,517

Long-term finance lease obligations

 

590

 

618

Long-term operating lease obligations

 

13,009

 

12,366

Deferred income tax liabilities

 

37,621

 

391

Other liabilities

 

20,882

 

21,865

Total long-term liabilities

 

790,098

 

755,760

Total liabilities

 

992,154

 

933,337

COMMITMENTS AND CONTINGENCIES - (NOTE 3)

PARTNERS' CAPITAL:

ARLP Partners' Capital:

Limited Partners - Common Unitholders 127,195,219 units outstanding

 

1,285,725

 

1,279,183

Accumulated other comprehensive loss

 

(63,439)

 

(64,229)

Total ARLP Partners' Capital

 

1,222,286

 

1,214,954

Noncontrolling interest

11,107

11,115

Total Partners' Capital

1,233,393

1,226,069

TOTAL LIABILITIES AND PARTNERS' CAPITAL

$

2,225,547

$

2,159,406

See notes to condensed consolidated financial statements.

1

ALLIANCE RESOURCE PARTNERS, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except unit and per unit data)

(Unaudited)

Three Months Ended

March 31, 

    

2022

    

2021

    

SALES AND OPERATING REVENUES:

Coal sales

$

388,360

$

287,487

Oil & gas royalties

30,927

13,999

Transportation revenues

 

29,372

 

11,068

Other revenues

 

12,204

 

6,068

Total revenues

 

460,863

 

318,622

EXPENSES:

Operating expenses (excluding depreciation, depletion and amortization)

 

261,746

 

196,520

Transportation expenses

 

29,372

 

11,068

General and administrative

 

18,596

 

15,504

Depreciation, depletion and amortization

 

63,314

 

59,202

Total operating expenses

 

373,028

 

282,294

INCOME FROM OPERATIONS

 

87,835

 

36,328

Interest expense (net of interest capitalized for the three months ended March 31, 2022 and 2021 of $70 and $86, respectively)

 

(9,662)

 

(10,396)

Interest income

 

35

 

17

Equity method investment income

 

883

 

62

Other income (expense)

 

566

 

(1,197)

INCOME BEFORE INCOME TAXES

 

79,657

 

24,814

INCOME TAX EXPENSE (BENEFIT)

 

42,715

 

(12)

NET INCOME

36,942

24,826

LESS: NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST

 

(290)

 

(78)

NET INCOME ATTRIBUTABLE TO ARLP

$

36,652

$

24,748

EARNINGS PER LIMITED PARTNER UNIT - BASIC AND DILUTED

$

0.28

$

0.19

WEIGHTED-AVERAGE NUMBER OF UNITS OUTSTANDING – BASIC AND DILUTED

 

127,195,219

 

127,195,219

See notes to condensed consolidated financial statements.

2

ALLIANCE RESOURCE PARTNERS, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

Three Months Ended

March 31, 

    

2022

    

2021

    

NET INCOME

$

36,942

$

24,826

OTHER COMPREHENSIVE INCOME:

Defined benefit pension plan

Amortization of prior service cost (1)

47

47

Amortization of net actuarial loss (1)

 

483

 

1,141

Total defined benefit pension plan adjustments

 

530

 

1,188

Pneumoconiosis benefits

Amortization of net actuarial loss (1)

 

260

 

1,043

Total pneumoconiosis benefits adjustments

 

260

 

1,043

OTHER COMPREHENSIVE INCOME

 

790

 

2,231

COMPREHENSIVE INCOME

37,732

27,057

Less: Comprehensive income attributable to noncontrolling interest

(290)

(78)

COMPREHENSIVE INCOME ATTRIBUTABLE TO ARLP

$

37,442

$

26,979

(1)Amortization of prior service cost and net actuarial gain or loss is included in the computation of net periodic benefit cost (see Notes 13 and 15 for additional details).

See notes to condensed consolidated financial statements.

3

ALLIANCE RESOURCE PARTNERS, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

Three Months Ended

March 31, 

    

2022

    

2021

    

CASH FLOWS FROM OPERATING ACTIVITIES

$

89,036

$

54,647

CASH FLOWS FROM INVESTING ACTIVITIES:

Property, plant and equipment:

Capital expenditures

 

(59,153)

 

(31,437)

Increase in accounts payable and accrued liabilities

 

13,551

 

7,200

Proceeds from sale of property, plant and equipment

 

928

 

1,139

Distributions received from investments in excess of cumulative earnings

131

 

361

Other

 

(982)

 

Net cash used in investing activities

 

(45,525)

 

(22,737)

CASH FLOWS FROM FINANCING ACTIVITIES:

Payments under securitization facility

 

(17,800)

Payments on equipment financings

(4,472)

 

(4,239)

Borrowings under revolving credit facilities

 

 

10,000

Payments under revolving credit facilities

 

 

(42,500)

Borrowings from line of credit

 

 

1,830

Payments on finance lease obligations

 

(203)

 

(185)

Payment of debt issuance costs

 

 

(6)

Distributions paid to Partners

(32,750)

 

Other

 

(298)

 

(141)

Net cash used in financing activities

 

(37,723)

 

(53,041)

NET CHANGE IN CASH AND CASH EQUIVALENTS

 

5,788

 

(21,131)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

 

122,403

 

55,574

CASH AND CASH EQUIVALENTS AT END OF PERIOD

$

128,191

$

34,443

SUPPLEMENTAL CASH FLOW INFORMATION:

Cash paid for interest

$

1,254

$

2,094

SUPPLEMENTAL NON-CASH ACTIVITY:

Accounts payable for purchase of property, plant and equipment

$

21,876

$

12,931

Right-of-use assets acquired by operating lease

$

99

$

See notes to condensed consolidated financial statements.

4

ALLIANCE RESOURCE PARTNERS, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.ORGANIZATION AND PRESENTATION

Significant Relationships Referenced in Notes to Condensed Consolidated Financial Statements

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, the holding company for our coal mining operations.
References to "Alliance Minerals" mean Alliance Minerals, LLC, the holding company for our oil and gas mineral interests.
References to "Alliance Resource Properties" mean Alliance Resource Properties, LLC, the land holding company for certain of our coal mineral interests, including the subsidiaries of Alliance Resource Properties, LLC.

Organization

ARLP is a Delaware limited partnership listed on the NASDAQ Global Select Market under the ticker symbol "ARLP."  ARLP was formed in May 1999 and completed its initial public offering on August 19, 1999 when it acquired substantially all of the coal production and marketing assets of Alliance Resource Holdings, Inc., a Delaware corporation, and its subsidiaries.  We are managed by our general partner, MGP, a Delaware limited liability company which holds a non-economic general partner interest in ARLP.  

Change in Tax Status

On March 15, 2022, Alliance Minerals changed its federal income tax status from a pass-through entity to a taxable entity via a "check the box" election (the "Tax Election"), which became effective January 1, 2022. This election for Alliance Minerals is anticipated to reduce the total income tax burden on our oil & gas royalties, as Alliance Minerals will pay entity-level taxes at corporate tax rates that are well below individual tax rates that would otherwise be paid by our unitholders. For more information on the Tax Election please see Note 7 – Income Taxes.

Basis of Presentation

The accompanying condensed consolidated financial statements include the accounts and operations of the ARLP Partnership and present our financial position as of March 31, 2022 and December 31, 2021 and the results of our operations, comprehensive income and cash flows for the three months ended March 31, 2022 and 2021.  All intercompany transactions and accounts have been eliminated.

These condensed consolidated financial statements and notes are prepared pursuant to the rules and regulations of the Securities and Exchange Commission for interim reporting and do not include all the information normally included with financial statements prepared in accordance with generally accepted accounting principles ("GAAP") of the United States.  These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2021.

5

These condensed consolidated financial statements and notes are unaudited. However, in the opinion of management, these condensed consolidated financial statements reflect all normal recurring adjustments necessary for a fair presentation of the results for the periods presented.  Results for interim periods are not necessarily indicative of results to be expected for the full year ending December 31, 2022.

Use of Estimates

The preparation of the ARLP Partnership's condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in our condensed consolidated financial statements.  Actual results could differ from those estimates.

Income Taxes

We are not a taxable entity for federal or state income tax purposes; the tax effect of our activities accrues to our unitholders. Although publicly traded partnerships as a general rule are taxed as corporations, we qualify for an exemption because at least 90% of our income consists of qualifying income, as defined in Section 7704(c) of the Internal Revenue Code.  Net income for financial statement purposes may differ significantly from taxable income reportable to unitholders as a result of differences between the tax basis and financial reporting basis of assets and liabilities and the taxable income allocation requirements under our partnership agreement. Individual unitholders have different investment bases depending upon the timing and price of acquisition of their partnership units. Furthermore, each unitholder's tax accounting, which is partially dependent upon the unitholder's tax position, differs from the accounting followed in our consolidated financial statements.  Accordingly, the aggregate difference in the basis of our net assets for financial and tax reporting purposes cannot be readily determined because information regarding each unitholder's tax attributes in our partnership is not available to us.

Our subsidiary Alliance Minerals within our Oil & Gas Royalties segment and certain other subsidiaries within our Other, Corporate and Elimination category are subject to federal and state income taxes.  We use the liability method of accounting for income taxes, under which deferred tax assets and liabilities are recognized for the future tax consequences of (i) temporary differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities and (ii) operating losses and tax credit carryforwards.  Deferred income tax assets and liabilities are based on enacted rates applicable to the future period when those temporary differences are expected to be recovered or settled.  The effect of a change in tax status or a change in tax rates on deferred tax assets and liabilities is recognized in the period the change in status is elected or rate change is enacted.  A valuation allowance is provided for deferred tax assets when it is more likely than not the deferred tax assets will not be realized.

2.NEW ACCOUNTING STANDARDS

New Accounting Standards Issued and Adopted

In November 2021, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance ("ASU 2021-10").  ASU 2021-10 increases the transparency of government assistance including the disclosure of (1) the types of assistance, (2) an entity’s accounting for the assistance, and (3) the effect of the assistance on an entity’s financial statements.  We adopted ASU 2021-10 on January 1, 2022.  The adoption of ASU 2021-10 did not have a material impact on our condensed consolidated financial statements.

3.CONTINGENCIES

We are party to litigation that has been initiated against certain of our subsidiaries in which the plaintiffs allege violations of the Fair Labor Standards Act and Kentucky Wage and Hour Act due to an alleged failure to compensate for time "donning" and "doffing" equipment and to account for certain bonuses in the calculation of overtime rates and pay.  The plaintiffs seek class or collective action certification.  Because the litigation of these matters is in the early stages, we cannot reasonably estimate a range of potential exposure at this time.  We believe the plaintiffs’ claims are without merit and our ultimate exposure, if any, will not be material to our results of operations or financial position and we intend to defend the litigation vigorously.  However, if our current belief that the claims are without merit is not upheld, it is reasonably possible that the ultimate resolution of these matters could result in a potential loss that may be material to our results of operations.

6

We also have various other lawsuits, claims and regulatory proceedings incidental to our business that are pending against the ARLP Partnership.  We record an accrual for a potential loss related to these matters when, in management's opinion, such loss is probable and reasonably estimable.  Based on known facts and circumstances, we believe the ultimate outcome of these outstanding lawsuits, claims and regulatory proceedings will not have a material adverse effect on our financial condition, results of operations or liquidity.  However, if the results of these matters are different from management's current expectations and in amounts greater than our accruals, such matters could have a material adverse effect on our business and operations.

4.INVENTORIES

Inventories consist of the following:

    

March 31, 

December 31, 

2022

    

2021

 

(in thousands)

Coal

$

56,084

$

24,845

Supplies (net of reserve for obsolescence of $5,571 and $5,554, respectively)

 

39,661

 

35,457

Total inventories, net

$

95,745

$

60,302

5.FAIR VALUE MEASUREMENTS

The following table summarizes our fair value measurements within the hierarchy not included elsewhere in these notes:

March 31, 2022

December 31, 2021

    

Level 1

    

Level 2

    

Level 3

    

Level 1

    

Level 2

    

Level 3

 

(in thousands)

Long-term debt

$

$

438,553

$

$

$

457,758

$

Total

$

$

438,553

$

$

$

457,758

$

The carrying amounts for cash equivalents, accounts receivable, accounts payable, accrued and other liabilities approximate fair value due to the short maturity of those instruments.

The estimated fair value of our long-term debt, including current maturities, is based on interest rates that we believe are currently available to us in active markets for issuance of debt with similar terms and remaining maturities (See Note 6 – Long-Term Debt).  The fair value of debt, which is based upon these interest rates, is classified as a Level 2 measurement under the fair value hierarchy.

7

6.LONG-TERM DEBT

Long-term debt consists of the following:

Unamortized Discount and

Principal

Debt Issuance Costs

March 31, 

December 31, 

March 31, 

December 31, 

    

2022

    

2021

    

2022

    

2021

 

(in thousands)

Revolving credit facility

$

$

$

(4,441)

$

(5,019)

Senior notes

 

400,000

 

400,000

 

(2,820)

 

(3,048)

Securitization facility

May 2019 equipment financing

606

1,503

November 2019 equipment financing

29,295

31,972

June 2020 equipment financing

8,709

9,605

 

438,610

 

443,080

 

(7,261)

 

(8,067)

Less current maturities

 

(15,359)

 

(16,071)

 

 

Total long-term debt

$

423,251

$

427,009

$

(7,261)

$

(8,067)

Credit Facility.  On March 9, 2020, our Intermediate Partnership entered into a Fifth Amended and Restated Credit Agreement (the "Credit Agreement") with various financial institutions.  The Credit Agreement provides for a $459.5 million revolving credit facility, including a sublimit of $125 million for the issuance of letters of credit and a sublimit of $15.0 million for swingline borrowings (the "Revolving Credit Facility"), with a termination date of March 9, 2024.  

The Credit Agreement is guaranteed by certain of our Intermediate Partnership's material direct and indirect subsidiaries (the "Restricted Subsidiaries") and is secured by substantially all the assets of the Restricted Subsidiaries.  The Credit Agreement is also guaranteed by Alliance Minerals but the oil and gas mineral assets of Alliance Minerals and its direct and indirect subsidiaries (collectively with Alliance Minerals, the "Unrestricted Subsidiaries") are not collateral under the Credit Agreement.  Borrowings under the Revolving Credit Facility bear interest, at our option, at either (i) the Base Rate at the greater of three benchmarks or (ii) a Eurodollar Rate, plus margins for (i) or (ii), as applicable, that fluctuate depending upon the ratio of Consolidated Debt to Consolidated Cash Flow (each as defined in the Credit Agreement).  The Eurodollar Rate, with applicable margin, under the Revolving Credit Facility was 2.80% as of March 31, 2022.  On March 31, 2022, we had $44.1 million of letters of credit outstanding with $415.4 million available for borrowing under the Revolving Credit Facility. We incur an annual commitment fee of 0.35% on the undrawn portion of the Revolving Credit Facility.  We utilize the Revolving Credit Facility, as appropriate, for working capital requirements, capital expenditures and investments, scheduled debt payments and distribution payments.  

The Credit Agreement contains various restrictions affecting the Intermediate Partnership and its Restricted Subsidiaries including, among other things, restrictions on incurrence of additional indebtedness and liens, sale of assets, investments, mergers and consolidations and transactions with affiliates, including transactions with Unrestricted Subsidiaries.  In each case, these restrictions are subject to various exceptions.  In addition, the payment of cash distributions is restricted if such payment would result in a fixed charge coverage ratio of less than 1.0 to 1.0 (as defined in the Credit Agreement) for the four most recently ended fiscal quarters.  The Credit Agreement requires the Intermediate Partnership to maintain (a) a debt to cash flow ratio of not more than 2.5 to 1.0, (b) a cash flow to interest expense ratio of not less than 3.0 to 1.0 and (c) a first lien debt to cash flow ratio of not more than 1.5 to 1.0, in each case, during the four most recently ended fiscal quarters. The debt to cash flow ratio, cash flow to interest expense ratio and first lien debt to cash flow ratio were 0.88 to 1.0, 12.91 to 1.0 and 0.09 to 1.0, respectively, for the trailing twelve months ended March 31, 2022.  We remained in compliance with the covenants of the Credit Agreement as of March 31, 2022 and anticipate remaining in compliance with the covenants.  

Senior Notes.  On April 24, 2017, the Intermediate Partnership and Alliance Resource Finance Corporation (as co-issuer), a wholly owned subsidiary of the Intermediate Partnership ("Alliance Finance"), issued an aggregate principal amount of $400.0 million of senior unsecured notes due 2025 ("Senior Notes") in a private placement to qualified institutional buyers.  The Senior Notes have a term of eight years, maturing on May 1, 2025 (the "Term") and accrue interest at an annual rate of 7.5%.  Interest is payable semi-annually in arrears on each May 1 and November 1.  The indenture governing the Senior Notes contains customary terms, events of default and covenants relating to, among other

8

things, the incurrence of debt, the payment of distributions or similar restricted payments, undertaking transactions with affiliates and limitations on asset sales.  The issuers of the Senior Notes may redeem all or a part of the notes at any time at redemption prices set forth in the indenture governing the Senior Notes.    

Accounts Receivable Securitization.  On December 5, 2014, certain direct and indirect wholly owned subsidiaries of our Intermediate Partnership entered into a $100.0 million accounts receivable securitization facility ("Securitization Facility").  In January 2021, we reduced the borrowing availability under the facility to $60.0 million.  Under the Securitization Facility, certain subsidiaries sell certain trade receivables on an ongoing basis to our Intermediate Partnership, which then sells the trade receivables to AROP Funding, LLC ("AROP Funding"), a wholly owned bankruptcy-remote special purpose subsidiary of our Intermediate Partnership, which in turn borrows on a revolving basis up to $60.0 million secured by the trade receivables.  After the sale, Alliance Coal, as servicer of the assets, collects the receivables on behalf of AROP Funding.  The Securitization Facility bears interest based on a Eurodollar Rate.  The agreement governing the Securitization Facility contains customary terms and conditions, including limitations with regards to certain customer credit ratings.  In January 2022, we extended the term of the Securitization Facility to January 2023.  The Securitization Facility was previously scheduled to mature in January 2022.  On March 31, 2022, we had no outstanding balance under the Securitization Facility.  

May 2019 Equipment Financing.  On May 17, 2019, the Intermediate Partnership entered into an equipment financing arrangement accounted for as debt, wherein the Intermediate Partnership received $10.0 million in exchange for conveying its interest in certain equipment owned indirectly by the Intermediate Partnership and entering into a master lease agreement for that equipment (the "May 2019 Equipment Financing"). The May 2019 Equipment Financing contains customary terms and events of default and provides for thirty-six monthly payments with an implicit interest rate of 6.25%.  The May 2019 Equipment Financing matured on May 1, 2022 and the equipment reverted to the Intermediate Partnership.

November 2019 Equipment Financing.  On November 6, 2019, the Intermediate Partnership entered into an equipment financing arrangement accounted for as debt, wherein the Intermediate Partnership received $53.1 million in exchange for conveying its interest in certain equipment owned indirectly by the Intermediate Partnership and entering into a master lease agreement for that equipment (the "November 2019 Equipment Financing").  The November 2019 Equipment Financing contains customary terms and events of default and an implicit interest rate of 4.75%, providing for a four-year term with forty-seven monthly payments of $1.0 million and a balloon payment of $11.6 million upon maturity on November 6, 2023.  Upon maturity, the equipment will revert to the Intermediate Partnership.  

June 2020 Equipment Financing.  On June 5, 2020, the Intermediate Partnership entered into an equipment financing arrangement accounted for as debt, wherein the Intermediate Partnership received $14.7 million in exchange for conveying its interest in certain equipment owned indirectly by the Intermediate Partnership and entering into a master lease agreement for that equipment (the "June 2020 Equipment Financing"). The June 2020 Equipment Financing contains customary terms and events of default and provides for forty-eight monthly payments with an implicit interest rate of 6.1%, maturing on June 5, 2024. Upon maturity, the equipment will revert to the Intermediate Partnership.

7.INCOME TAXES

Components of income tax expense (benefit) are as follows:

Three Months Ended March 31, 

 

2022

    

2021

 

(in thousands)

Current:

Federal

$

5,034

$

(1)

State

 

386

 

 

5,420

 

(1)

Deferred:

Federal

 

34,920

 

(11)

State

 

2,375

 

 

37,295

 

(11)

Income tax expense (benefit)

$

42,715

$

(12)

9

Alliance Minerals' Tax Election resulted in the recognition of an initial deferred tax liability of $37.3 million and a corresponding increase to income tax expense for the three months ended March 31, 2022.  This increase in income tax expense reduced net income by $37.3 million, or approximately $0.29 per basic and diluted limited partner unit, for the three months ended March 31, 2022. Recognition of the initial deferred tax liability and expense is primarily the result of the $177.0 million non-cash acquisition gain recognized in 2019 related to the acquisition of the remaining interests in AllDale Minerals LP ("AllDale I") and AllDale Minerals II, LP ("AllDale II", and collectively with AllDale I, "AllDale I & II") (the “Acquisition Gain”).  The Acquisition Gain was recognized to step up to fair value the financial reporting basis of the interests we already owned at the time of acquisition. The tax basis of the underlying properties of AllDale I & II did not include the Acquisition Gain.

Reconciliations of income taxes at the U.S. federal statutory tax rate to income taxes at our effective tax rate are as follows:

Three Months Ended March 31, 

 

    

2022

    

2021

 

(in thousands)

Income taxes at statutory rate

$

16,728

$

5,211

Less: Income taxes at statutory rate on Partnership income not subject to income taxes

 

(12,087)

 

(5,033)

Increase (decrease) resulting from:

State taxes, net of federal income tax

 

361

 

38

Change in valuation allowance of deferred tax assets

 

(10)

 

(163)

Deferred taxes related to tax election

37,253

Other

 

470

 

(65)

Income tax expense (benefit)

$

42,715

$

(12)

The effective income tax rate for our income tax expense for the three months ended March 31, 2022 is greater than the federal statutory rate, primarily due to the effect of the Tax Election previously discussed, partially offset by the portion of income not subject to income taxes. The effective income tax rate for our income tax benefit for the three months ended March 31, 2021 is less than the federal statutory rate, primarily due to the portion of income not subject to income taxes.

Significant components of deferred tax liabilities and deferred tax assets are as follows:

March 31, 

December 31, 

 

    

2022

    

2021

 

(in thousands)

Deferred tax liabilities:

Property, plant and equipment

$

(40,119)

$

(2,169)

Total deferred tax liabilities

(40,119)

(2,169)

Deferred tax assets:

Federal loss carryovers and credits

2,071

1,328

Other

 

735

 

808

Total deferred tax assets

2,806

2,136

Less valuation allowance

(307)

(317)

Net deferred tax assets

2,499

1,819

Overall net deferred tax liabilities

$

(37,620)

$

(350)

The change in deferred tax liabilities for property, plant and equipment is primarily as a result of the Acquisition Gain discussed above.  

Federal loss carryovers and credits are primarily due to net operating losses and research and development credits associated with the operations of other subsidiaries that are taxable for federal income tax purposes.  

10

The valuation allowance as of March 31, 2022 and 2021 serves to reduce the available deferred tax assets to amounts that will, more likely than not, be realized.  We considered all available positive and negative evidence, which incorporates available tax planning strategies and our estimate of future reversals of existing temporary differences, and have determined that a portion of our deferred tax assets relating to state losses and credits may not be realized.

Our 2018 through 2021 tax years remain open to examination by tax authorities.

8.VARIABLE INTEREST ENTITIES

Cavalier Minerals

On November 10, 2014, our subsidiary, Alliance Minerals, and Bluegrass Minerals Management, LLC ("Bluegrass Minerals") entered into a limited liability company agreement (the "Cavalier Agreement") to create Cavalier Minerals JV, LLC ("Cavalier Minerals"), which was formed to indirectly acquire oil & gas mineral interests through its ownership in AllDale I & II.  Alliance Minerals owns a 96% member interest in Cavalier Minerals, and Bluegrass Minerals owns a 4% member interest in Cavalier Minerals and a profits interest which entitles it to receive distributions equal to 25% of all distributions (including in liquidation) after all members have recovered their investment.  Distributions with respect to Bluegrass Minerals' profits interest will be offset by all distributions received by Bluegrass Minerals from the former general partners of AllDale I & II.  To date, there has been no profits interest distribution.  We hold the managing member interest in Cavalier Minerals.  Total contributions to and cumulative distributions from Cavalier Minerals are as follows:  

Alliance

Bluegrass

Minerals

Minerals

(in thousands)

Contributions

$

143,112

$

5,963

Distributions

117,162

4,881

We have concluded that Cavalier Minerals is a variable interest entity ("VIE") which we consolidate as the primary beneficiary because we are the managing member and a substantial equity owner in Cavalier Minerals.  Bluegrass Minerals' equity ownership of Cavalier Minerals is accounted for as noncontrolling ownership interest in our condensed consolidated balance sheets.  In addition, earnings attributable to Bluegrass Minerals are recognized as noncontrolling interest in our condensed consolidated statements of income.

AllDale III

In February 2017, Alliance Minerals committed to directly invest $30.0 million in AllDale Minerals III, LP ("AllDale III") which was created for similar investment purposes as AllDale I & II.  Alliance Minerals completed funding of this commitment in 2018. Alliance Minerals' limited partner interest in AllDale III is 13.9%.

The AllDale III Partnership Agreement includes a 25% profits interest for the general partner, subject to a return hurdle equal to the greater of 125% of cumulative capital contributions and a 10% internal rate of return, and following an 80/20 "catch-up" provision for the general partner.  

Since AllDale III is structured as a limited partnership with the limited partners 1) not having the ability to remove the general partner and 2) not participating significantly in the operational decisions, we concluded that AllDale III is a VIE.  We are not the primary beneficiary of AllDale III as we do not have the power to direct the activities that most significantly impact AllDale III's economic performance.  We account for our ownership interest in the income or loss of AllDale III as an equity method investment.  We record equity income or loss based on AllDale III's distribution structure. See Note 9 – Investment for more information.

11

9.INVESTMENT

AllDale III

As discussed in Note 8 – Variable Interest Entities, we account for our ownership interest in the income or loss of AllDale III as an equity method investment.  We record equity income or loss based on AllDale III's distribution structure.  The changes in our equity method investment in AllDale III for each of the periods presented were as follows:

Three Months Ended

March 31, 

    

2022

    

2021

(in thousands)

Beginning balance

$

26,325

$

27,268

Equity method investment income

883

62

Distributions received

(1,014)

(423)

Ending balance

$

26,194

$

26,907

10.PARTNERS' CAPITAL

Distributions

Distributions paid or declared during 2021 and 2022 were as follows:

Payment Date

    

Per Unit Cash Distribution

 

Total Cash Distribution

 

(in thousands)

May 14, 2021

$

0.1000

$

13,045

August 13, 2021

0.1000

13,041

November 12, 2021

0.2000

26,072

Total

$

0.4000

$

52,158

February 14, 2022

$

0.2500

$

32,750

May 13, 2022 (1)

0.3500

Total

$

0.6000

$

32,750

(1)On April 26, 2022, we declared this quarterly distribution payable on May 13, 2022 to all unitholders of record as of May 6, 2022.  

Unit Repurchase Program

In May 2018, the MGP board of directors approved the establishment of a unit repurchase program authorizing us to repurchase and retire up to $100 million of ARLP common units.  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.  No unit repurchases were made during the three months ended March 31, 2022.  Since inception of the unit repurchase program, we have repurchased and retired 5,460,639 units at an average unit price of $17.12 for an aggregate purchase price of $93.5 million. The remaining authorized amount for unit repurchases under this program is $6.5 million.

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Change in Partners' Capital

The following tables present the quarterly change in Partners' Capital for the three months ended March 31, 2022 and 2021:

Accumulated

Number of

Limited 

Other

Limited Partner

Partners'

Comprehensive

Noncontrolling

Total Partners'

    

Units

    

Capital

    

Income (Loss)

    

Interest

    

 Capital

 

(in thousands, except unit data)

Balance at January 1, 2022

 

127,195,219

$

1,279,183

$

(64,229)

$

11,115

$

1,226,069

Comprehensive income:

Net income

 

 

36,652

 

290

 

 

36,942

Actuarially determined long-term liability adjustments

 

 

 

790

 

 

 

790

Total comprehensive income

 

 

37,732

Common unit-based compensation

 

 

2,640

2,640

Distributions on deferred common unit-based compensation

 

 

(950)

(950)

Distributions from consolidated company to noncontrolling interest

(298)

(298)

Distributions to Partners

 

(31,800)

(31,800)

Balance at March 31, 2022

127,195,219

$

1,285,725

$

(63,439)

$

11,107

$

1,233,393

Accumulated

Number of

Limited 

Other

Limited Partner

Partners'

Comprehensive

Noncontrolling

Total Partners'

    

Units

    

Capital

    

Income (Loss)

    

Interest

    

 Capital

 

(in thousands, except unit data)

Balance at January 1, 2021

 

127,195,219

$

1,148,565

$

(87,674)

$

11,376

$

1,072,267

Comprehensive income:

Net income

 

 

24,748

 

78

 

 

24,826

Actuarially determined long-term liability adjustments

 

 

 

2,231

 

 

 

2,231

Total comprehensive income

 

 

27,057

Common unit-based compensation

 

 

723

723

Distributions from consolidated company to noncontrolling interest

(