Alliance Resource Partners (ARLP) Q4 2025: Coal Royalty Volumes Jump 25% on Tunnel Ridge Expansion

2026-02-02 | By EarningsIQ Research

ARLP’s Q4 2025 showcased a sharp shift in coal royalty dynamics, with Tunnel Ridge driving a 25% surge in projected 2026 royalty volumes and solidifying the asset’s cash flow relevance. Management’s disciplined capital stance, near-full contract coverage for 2026, and productivity investments point to a business model resilient to near-term pricing softness. Investors should watch for the Tunnel Ridge transition, Metiki wind-down, and evolving utility contracting behavior as key levers shaping future cash flows.

Summary

• Tunnel Ridge Royalty Shift: Tunnel Ridge’s new district unlocks a step-change in royalty volumes and segment cash flow.
• Metiki Wind-Down Impact: Metiki mine’s customer loss and closure will reshape Appalachian cost structure and volumes.
• Contract Positioning: Over 93% of 2026 coal sales are locked in, limiting near-term price risk and boosting visibility.

Performance Analysis

ARLP’s Q4 2025 results were marked by a complex mix of lower total revenues and sharply higher earnings, driven by cost improvements, investment gains, and a changing segment mix. Revenue fell year-over-year on lower coal sales and pricing, as legacy high-priced contracts rolled off and were replaced at lower 2026 guidance levels. However, adjusted EBITDA surged 54% YoY, fueled by lower operating expenses, a $17.5M gain from an equity interest in a coal-fired power plant, and disciplined cost execution, especially in the Illinois Basin.

Coal production and sales volumes were mixed: Illinois Basin volumes fell slightly, while Hamilton Mine delivered record output and yield. Appalachia volumes declined on operational disruptions and the Metiki customer outage, which will have a lasting impact. Coal royalty and oil and gas royalty segments both posted double-digit EBITDA growth, with Tunnel Ridge’s new district and Permian oil completions as key drivers. ARLP’s balance sheet remains strong, with leverage ratios below 0.7x and robust liquidity.

• Expense Discipline: Segment adjusted EBITDA expense per ton fell 16% YoY, with Illinois Basin and Tunnel Ridge leading cost reductions.
• Royalty Segment Outperformance: Oil and gas royalty EBITDA hit $30M, up on volume gains, while coal royalties rose to $14.6M, primarily from Tunnel Ridge.
• Free Cash Flow Generation: $93.8M in Q4 free cash flow and a 1.29x distribution coverage ratio signal strong cash conversion.

The quarter’s results reinforce ARLP’s strategic pivot toward royalty-driven cash flow, while highlighting the operational risk of customer concentration at mines like Metiki. Investors should track the evolving mix between owned production and royalty income as a key valuation driver.

Executive Commentary

Strategic Positioning

1. Royalty Platform Expansion

ARLP is leaning into its royalty business model, where it collects fees or a share of revenue from third-party operators using its mineral assets. Tunnel Ridge’s district transition will boost coal royalty tons by 25% in 2026, with nearly all future Tunnel Ridge output flowing through the royalty segment. Oil and gas royalty volumes also reached new highs, with the Permian Delaware Basin pad completion and $14.4M in new mineral acquisitions adding to future run-rate.

2. Contracted Sales and Pricing Stability

Over 93% of 2026 coal sales are already committed and priced, sharply reducing exposure to spot price volatility. This near-full contract coverage provides cash flow visibility and reflects a shift in utility procurement behavior toward longer-term reliability. Management signaled upside potential in Illinois Basin pricing if customer optionality is exercised, but expects Appalachia pricing to land near the midpoint of guidance due to limited uncontracted tons.

3. Metiki Mine Wind-Down and Cost Reset

Metiki’s loss of its anchor customer and planned closure by March 2026 will materially reduce Appalachian segment volumes and costs. The mine’s EBITDA contribution was minimal in 2025, and its exit will lower segment expense per ton, especially as Tunnel Ridge’s lower-cost output becomes the dominant driver. ARLP expects to evaluate potential impairment charges in Q1 2026 related to Metiki’s closure.

4. Productivity and Capital Allocation Discipline

Management is prioritizing productivity gains over volume expansion, especially in the Illinois Basin. Investments in shuttle car technology (via Infinitum partnership) are delivering measurable efficiency improvements. There are no plans to add mining units or materially increase production capacity unless customers commit to longer-term contracts, underscoring a capital-light, return-focused approach.

5. Macro Tailwinds and Policy Support

Coal’s role in grid reliability remains central to ARLP’s market thesis, with recent winter storms exposing the limits of gas and renewables. Management credits policy shifts under the Trump administration for reversing coal plant retirements and expects ongoing regulatory support for dispatchable generation. Data center and industrial load growth are expected to sustain demand for ARLP’s coal supply.

Key Considerations

ARLP’s Q4 2025 results reflect a business model in transition, with royalty cash flow and contract coverage mitigating risk from coal price softness and segment volatility. The following factors merit close investor attention:

Key Considerations:

• Tunnel Ridge Royalty Ramp: New district volumes will transform the coal royalty segment’s scale and margin profile.
• Metiki Exit and Appalachian Reset: The wind-down will streamline cost structure, but exposes ARLP to impairment and regional volume risk.
• Productivity Over Expansion: Equipment upgrades and process improvements are prioritized over capital-intensive unit additions.
• Contracted Visibility: High contract coverage for 2026 shields ARLP from near-term market swings but limits upside in a rapidly rising price environment.
• Oil & Gas Royalty Optionality: Recent Permian completions and targeted acquisitions provide incremental growth, though commodity price risk remains.

Risks

Customer concentration risk remains material, as shown by Metiki’s closure following a single customer’s plant outage. Coal pricing headwinds could persist as legacy contracts roll off, and lower realized prices will test margin resilience. Regulatory and policy uncertainty, particularly around coal plant retirements and emissions, could alter demand fundamentals. Finally, royalty segment growth is tied to third-party operator activity, which is sensitive to broader commodity cycles and capital allocation trends.

Forward Outlook

For Q1 2026, ARLP guided to:

• Lowest quarterly sales volumes of the year, with gradual improvement into H2 as longwall moves subside.
• Segment adjusted EBITDA expense per ton expected to be 6–10% above Q4 2025 due to the Hamilton longwall move.

For full-year 2026, management maintained guidance:

• Coal sales volumes of 33.75–35.25 million tons, up 0.75–2.25 million tons from 2025 (excluding Metiki impact).
• Coal royalty tons sold to rise 25% YoY, driven by Tunnel Ridge and Hamilton.
• Average realized coal pricing expected to be 3–6% below Q4 2025 levels.
• CapEx of $280–300M, with maintenance capital per ton slightly reduced versus 2025.

Management highlighted:

• Strong customer demand and robust contracting activity, with upside potential if market conditions strengthen.
• Ongoing focus on disciplined capital allocation, productivity gains, and royalty segment expansion.

Takeaways

ARLP enters 2026 with a defensive contract book, strong liquidity, and a clear pivot toward royalty-driven cash flow. The Tunnel Ridge transition and Metiki wind-down will reshape segment economics, while operational discipline and productivity investments underpin margin stability.

• Royalty Platform Scaling: Tunnel Ridge’s district shift and oil and gas completions are set to drive royalty segment growth and cash flow mix change.
• Operational Reset in Appalachia: Metiki’s closure will lower costs but highlights the need for diversified customer and asset exposure.
• Contracted Visibility vs. Upside Potential: High contract coverage limits downside, but investors should watch for optionality in Illinois Basin pricing and incremental production gains from productivity investments.

Conclusion

ARLP’s Q4 2025 results mark a clear inflection in its business model, with royalty growth and contract coverage providing stability amid coal market volatility. The company’s disciplined approach to capital and productivity, paired with strategic asset transitions, positions it to weather near-term pricing pressure and capitalize on emerging demand tailwinds in the power sector.

Industry Read-Through

ARLP’s results offer a window into the broader U.S. coal and royalty landscape. The sharp rise in royalty volumes, driven by asset transitions like Tunnel Ridge, signals that coal producers are increasingly monetizing mineral interests to diversify cash flow and reduce operational risk. Utilities’ shift toward longer-term contracts and reliability-focused procurement is likely to benefit well-capitalized, low-cost operators while limiting spot market upside for marginal producers. The Metiki closure underscores the risk of single-customer dependency, a theme relevant for all regional miners. Finally, the oil and gas royalty segment’s growth highlights the ongoing convergence between traditional energy resource monetization models, with implications for valuation and capital allocation across the sector.

ARLP Energy Coal Royalties Contracting Productivity Appalachia Illinois Basin