Alliance Resource Partners, L.P. Reports Second Quarter 2020 Financial and Operating Results

Strong execution of plans to optimize cash flow and control costs led to total debt reduction of $49.6 million

TULSA, Okla.–(BUSINESS WIRE)–Alliance Resource Partners, L.P. (NASDAQ: ARLP) today reported a net loss attributable to ARLP of $46.7 million, or $(0.37) per basic and diluted limited partner unit for the quarter ended June 30, 2020 (the “2020 Quarter”) compared to net income attributable to ARLP of $58.1 million, or $0.44 per basic and diluted limited partner unit for the quarter ended June 30, 2019 (the “2019 Quarter”). The decrease in net income attributable to ARLP in the 2020 Quarter was primarily due to our decision to temporarily cease coal production at five of our seven mining complexes at the beginning of the 2020 Quarter in response to the impacts of the COVID-19 pandemic and coal market deterioration. Production days were cut in half compared to the quarter ended March 31, 2020 (the “Sequential Quarter”) as we gradually resumed production during the 2020 Quarter. (Unless otherwise noted, all references in this release to “net income (loss)” refer to “net income (loss) attributable to ARLP.”)

“As we cautioned in ARLP’s last earnings release, we expected the energy demand destruction caused by the COVID-19 pandemic to negatively impact our results for the 2020 Quarter,” said Joseph W. Craft III, Chairman, President and Chief Executive Officer. “For the first half of 2020 coal-fired generation in the eastern U.S. declined 33% compared to the same time period in 2019. Demand for oil and natural gas also fell precipitously, driving commodity prices lower and leading operators to curtail production. As a result, Consolidated Segment Adjusted EBITDA for the 2020 Quarter was $62.1 million compared to $165.3 million in the 2019 Quarter and $111.7 million in the Sequential Quarter. While the pandemic continues to create uncertainty in the global economy and suppress energy demand, our customers have indicated their intention to take all tons contracted for this year.”

Operations Update

In response to the impacts of the COVID-19 pandemic and coal market deterioration, ARLP announced earlier this year that it would temporarily halt production operations at all of its mining complexes in the Illinois Basin and its MC Mining complex in East Kentucky (see March 30, 2020 and April 9, 2020 Press Releases). With an objective of reducing coal production to match existing contracted sales commitments for 2020, currently targeted at 27.0 million tons and 28.0 million tons, respectively, we planned to curtail production at these operations as long as it was possible to meet customer requirements from existing coal inventories. Throughout the 2020 Quarter, ARLP monitored coal inventories at each location and worked closely with customers to determine when it would be necessary to resume coal production. Consistent with this plan, underground production operations resumed in May at the River View and Warrior mines in the Illinois Basin and subsequently at each of the remaining mining complexes – Gibson and Hamilton in the Illinois Basin and MC Mining in Appalachia. All seven of our mining complexes are now producing coal. However, several of these mines are running at less than capacity due to a limited spot market in the U.S. and a seaborne market that continues to be sub-economic for U.S. production.

Safety First has been the highest priority at ARLP throughout our history and this focus has never been more important than today. Our operating teams have successfully overcome the challenges created by pandemic-related disruptions delivering record safety results during the first half of this year. In response to the pandemic, ARLP quickly implemented and has continued to enhance health and safety protocols designed to contain and mitigate the risk of infection from COVID-19. The safety of our employees, their families and communities as well as vendors and suppliers visiting our locations remain a priority for ARLP.

In the 2020 Quarter, production volumes from our oil & gas mineral interests increased 16.4% compared to the 2019 Quarter, primarily as a result of additional mineral interests acquired in the Wing Acquisition. Due to the pandemic, oil & gas volumes declined as operators responded to lower demand and weak commodity prices by shutting in wells leading to a 17.0% reduction in production volumes compared to the Sequential Quarter. Weak commodity prices also drove ARLP’s average sales price realization per BOE in the 2020 Quarter lower by 44.0% and 34.3% compared to the 2019 and Sequential Quarters, respectively. For the 2020 Quarter, lower prices more than offset the benefit of increased volumes, resulting in a 38.0% decline in Segment Adjusted EBITDA for our Minerals segment compared to the 2019 Quarter. Sequentially, lower prices and volumes combined to reduce Segment Adjusted EBITDA from Minerals by 50.0%.

Financial and Liquidity Update

As previously reported, ARLP has undertaken numerous efforts to optimize cash flows, reduce working capital requirements and strictly control capital expenditures and expenses and these efforts have yielded significant positive impacts to date. Working capital declined 29.6% from the Sequential Quarter, primarily due to inventory falling by $36.1 million as coal inventories were reduced by 862,000 tons during the 2020 Quarter. Cost control initiatives have also lowered capital expenditures and general and administrative expenses, which declined during the first six months of 2020 by 49.1% and 27.0%, respectively, compared to the same period in 2019.

During the 2020 Quarter, ARLP increased free cash flow by $29.2 million, improved liquidity by $40.2 million and reduced total debt by $49.6 million, all as compared to the Sequential Quarter, reflecting our sharp focus on managing for cash in the current environment. Although total leverage increased to 1.82 times at the end of the 2020 Quarter, ARLP’s balance sheet remains strong and comfortably in compliance with all debt covenants, including its total leverage covenant of 2.5 times. (For a definition of free cash flow and related reconciliations to comparable GAAP financial measures, please see the end of this release.)

As previously announced, the Board of Directors of ARLP’s general partner (the “Board”) suspended the cash distribution to unitholders for the 2020 Quarter. While we continue to believe that a sustainable distribution is an important contributor to long-term value for ARLP’s unitholders, strengthening and protecting our balance sheet is our immediate objective. Consequently, at its quarterly meeting last week, the Board extended the suspension of distributions through the quarter ending September 30, 2020. The Board will continue to evaluate economic conditions and intends to reassess its distribution decision following the third quarter of this year.

Consolidated Financial Results

Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019

The ongoing effects of the COVID-19 pandemic significantly impacted our financial and operating results for the 2020 Quarter. Total revenues for the 2020 Quarter decreased to $255.2 million compared to $517.1 million for the 2019 Quarter. Operating expenses of $187.2 million for the 2020 Quarter were also lower compared to $314.3 million in the 2019 Quarter.

Coal Operations –

Weak coal demand, caused in large part by the COVID-19 pandemic, led coal sales volumes lower to 5.2 million tons in the 2020 Quarter, compared to 10.2 million tons in the 2019 Quarter, resulting in a 48.8% decrease in coal sales revenues to $236.3 million, compared to $461.3 million for the 2019 Quarter. Primarily due to reduced coal shipments to international markets, transportation revenues and expenses decreased to $5.8 million from $32.6 million. Other revenues in the 2020 Quarter decreased by $5.4 million to $5.3 million primarily due to reduced sales of mining technology products by our Matrix Design subsidiary and lower volumes at our Mt. Vernon transloading facility.

Reflecting ARLP’s decision to temporarily idle production at certain mines during the 2020 Quarter, coal production volumes fell 56.9% to 4.3 million tons. Primarily as a result of lower coal volumes, combined operating expenses and outside coal purchases for our coal operations decreased 41.5% from the 2019 Quarter to $185.8 million. Segment Adjusted EBITDA Expense per ton increased 15.6% in the 2020 Quarter to $35.95 per ton, compared to $31.11 per ton in the 2019 Quarter. The increase is attributed primarily to the per ton cost impact of lower coal volumes, increased inventory charges, a $0.60 per ton government-imposed increase in the federal black lung excise tax, effective January 1, 2020, and higher severance taxes per ton due to the mix of coal sales from various states during the 2020 Quarter. Lower coal sales revenues, partially offset by lower expenses, caused total Segment Adjusted EBITDA from our coal operations to decline 64.2% to $55.2 million in the 2020 Quarter, compared to $154.2 million for the 2019 Quarter. (For a definition of Segment Adjusted EBITDA Expense, Segment Adjusted EBITDA and related reconciliations to comparable GAAP financial measures, please see the end of this release.)

Minerals –

For the 2020 Quarter, our mineral interests contributed total revenues of $7.8 million from oil & gas royalties and lease bonuses, compared to $12.4 million for the 2019 Quarter. The decrease in revenues is primarily due to lower oil & gas sales price realizations resulting from reduced demand amid the COVID-19 pandemic. Partially offsetting lower prices, revenues benefited from higher volumes as a result of the Wing Acquisition in August 2019 as well as continued drilling and development activity on our mineral interests. Our Minerals segment contributed Segment Adjusted EBITDA of $6.9 million for the 2020 Quarter, compared to a contribution of $11.1 million for the 2019 Quarter.

ARLP’s expense reduction initiatives drove general and administrative expenses lower to $13.8 million in the 2020 Quarter, a reduction of $5.7 million compared to the 2019 Quarter. Compared to the 2019 Quarter, depreciation, depletion and amortization increased 8.6% to $83.6 million primarily due to charges related to increased sales from coal inventory and increased oil & gas production from our Minerals segment in the 2020 Quarter.

Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019

Total revenues decreased 41.9% to $606.0 million for the six months ended June 30, 2020 (the “2020 Period”) compared to $1.04 billion for the six months ended June 30, 2019 (the “2019 Period”) due to lower coal sales, transportation revenues and revenues from our mineral interests resulting from weak market conditions and disruptions caused by the COVID-19 pandemic. Lower revenues and non-cash impairment charges of $157.0 million, partially offset by lower operating expenses contributed to a net loss attributable to ARLP of $191.4 million, or $(1.51) per basic and diluted limited partner unit for the 2020 Period. This compares to net income attributable to ARLP of $334.5 million, or $2.57 per basic and diluted limited partner unit for the 2019 Period, which included a non-cash net gain of $170.0 million related to the AllDale Acquisition. Excluding the impact of non-cash items (each described in more detail below), Adjusted net income (loss) attributable to ARLP and Adjusted EBITDA for the 2020 Period decreased to $(34.4) million and $146.5 million, respectively, compared to $164.5 million and $334.6 million, respectively, for the 2019 Period. (For a definition of EBITDA, Adjusted net income (loss) attributable to ARLP, Adjusted EBITDA and related reconciliations to comparable GAAP financial measures, please see the end of this release.)

Coal Operations –

Due to reduced coal sales volumes and prices, coal sales revenues for the 2020 Period decreased 41.2% to $550.9 million, compared to $937.3 million for the 2019 Period. Tons sold declined 39.4% to 12.4 million tons in the 2020 Period due to reduced volumes across all of our mining operations amid demand destruction for coal-powered electricity caused by the COVID-19 pandemic and low natural gas prices. Primarily due to reduced shipments of thermal and metallurgical coal to international markets, coal sales price realizations declined 2.9% in the 2020 Period to $44.30 per ton sold, compared to $45.64 per ton sold during the 2019 Period. Reduced export shipments also impacted transportation revenues and expenses, which declined $52.4 million to $10.5 million in the 2020 Period.

As a result of temporarily idling production at certain mines during the 2020 Period, coal production volumes fell to 12.3 million tons, a reduction of 42.2% compared to the 2019 Period. Primarily as a result of lower coal volumes, combined operating expenses and outside coal purchases for our coal operations decreased 32.3% to $418.7 million. Segment Adjusted EBITDA Expense per ton increased 12.1% in the 2020 Period to $33.79 per ton, compared to $30.13 per ton in the 2019 Period. The increase is attributed primarily to the per ton cost impact of lower coal volumes, a $0.60 per ton government-imposed increase in the federal black lung excise tax, effective January 1, 2020, and higher severance taxes per ton due to the mix of coal sales from various states during the 2020 Period. Lower coal sales revenues, partially offset by lower expenses, caused total Segment Adjusted EBITDA from our coal operations to decline 54.8% to $153.1 million in the 2020 Period, compared to $338.8 million for the 2019 Period.

Minerals –

For the 2020 Period, our mineral interests contributed total revenues of $22.1 million from oil & gas royalties and lease bonuses, compared to $23.2 million for the 2019 Period. The decrease in revenues is primarily due to lower average prices partially offset by higher volumes resulting from the Wing Acquisition in August 2019 as well as continued drilling and development activity on our mineral interests. Comparative results between the 2020 and 2019 Periods were also impacted by a non-cash acquisition gain of $177.0 million, of which $7.1 million was attributable to non-controlling interest, recorded in the 2019 Period associated with the AllDale Acquisition to reflect the fair value of the interests in AllDale I and II we already owned at the time of the acquisition. Our Minerals segment contributed net income of $2.2 million to the 2020 Period, compared to $174.6 million for the 2019 Period, which included the acquisition gain. Excluding the gain, Segment Adjusted EBITDA related to our Minerals segment increased slightly to $20.6 million for the 2020 Period compared to $20.2 million for the 2019 Period.

General and administrative expenses decreased $10.1 million to $27.3 million in the 2020 Period as a result of ARLP’s expense reduction initiatives.

During the 2020 Period, we recorded $157.0 million of non-cash impairment charges, which included a $132.0 million goodwill impairment charge associated with our Hamilton mine and a $25.0 million asset impairment charge due to the permanent closure of our Gibson North mine and a decrease in the fair value of certain mining equipment and greenfield coal reserves. These non-cash charges reflect the impact of weak coal market conditions and low energy demand caused primarily by the COVID-19 pandemic.

As a result of the redemption by Kodiak Gas Services, LLC of our preferred equity interest for $135.0 million cash in the 2019 Period, ARLP did not realize equity securities income in the 2020 Period, compared to $12.9 million in the 2019 Period.

Segment Results and Analysis
								% Change
		2020 Second			2019 Second			Quarter /			2020 First			% Change
(in millions, except per ton and per BOE data)		Quarter			Quarter			Quarter			Quarter			Sequential
Coal Operations
Illinois Basin
Tons sold			3.350			7.567		(55.7	)%			5.056		(33.7	)%
Coal sales price per ton (1)		$	40.05		$	39.91		0.4	%		$	39.38		1.7	%
Segment Adjusted EBITDA Expense per ton (2)		$	32.38		$	27.53		17.6	%		$	29.67		9.1	%
Segment Adjusted EBITDA (2)		$	26.2		$	96.1		(72.8	)%		$	50.0		(47.7	)%
Appalachia
Tons sold			1.836			2.649		(30.7	)%			2.195		(16.4	)%
Coal sales price per ton (1)		$	55.62		$	59.63		(6.7)	%		$	52.64		5.7	%
Segment Adjusted EBITDA Expense per ton (2)		$	40.28		$	39.68		1.5	%		$	36.31		10.9	%
Segment Adjusted EBITDA (2)		$	30.5		$	53.8		(43.2	)%		$	47.5		(35.7	)%
Total Coal
Tons sold			5.186			10.216		(49.2	)%			7.251		(28.5	)%
Coal sales price per ton (1)		$	45.56		$	45.16		0.9	%		$	43.39		5.0	%
Segment Adjusted EBITDA Expense per ton (2)		$	35.95		$	31.11		15.6	%		$	32.25		11.5	%
Segment Adjusted EBITDA (2)		$	55.2		$	154.2		(64.2	)%		$	97.9		(43.7	)%
Minerals (3)
Volume – BOE			0.411			0.353		16.4	%			0.495		(17.0	)%
Volume – oil percentage of BOE			53.3	%		41.7	%	27.8	%			50.8	%	4.9	%
Average sales price per BOE (3)		$	18.92		$	33.80		(44.0	)%		$	28.79		(34.3	)%
Segment Adjusted EBITDA Expense (2)		$	1.12		$	1.77		(36.6	)%		$	0.88		26.7	%
Segment Adjusted EBITDA (2)		$	6.9		$	11.1		(38.0	)%		$	13.8		(50.0	)%
Consolidated Total (4)
Total revenues		$	255.2		$	517.1		(50.6	)%		$	350.8		(27.2	)%
Segment Adjusted EBITDA Expense (2)		$	187.5		$	319.6		(41.3	)%		$	234.7		(20.1	)%
Segment Adjusted EBITDA (2)		$	62.1		$	165.3		(62.5	)%		$	111.7		(44.4	)%
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(1)	Coal sales price per ton is defined as total coal sales divided by total tons sold.
(2)	For definitions of Segment Adjusted EBITDA Expense and Segment Adjusted EBITDA and related reconciliations to comparable GAAP financial measures, please see the end of this release. Segment Adjusted EBITDA Expense per ton is defined as Segment Adjusted EBITDA Expense – Coal (as reflected in the reconciliation table at the end of this release) divided by total tons sold.
(3)	Average sales price per BOE is defined as royalty revenues excluding lease bonus revenue divided by total barrels of oil equivalent (“BOE”). BOE for natural gas volumes is calculated on a 6:1 basis (6,000 cubic feet of natural gas to one barrel).
(4)	Total reflects consolidated results, which include our other and corporate category and eliminations in addition to the Illinois Basin, Appalachia and Minerals segments highlighted above.

In the 2020 Quarter, total coal sales volumes decreased 49.2% and 28.5% compared to the 2019 and Sequential Quarters, respectively, due to the impacts of the COVID-19 pandemic and coal market deterioration. Compared to the 2019 Quarter, export shipments were down 1.7 million tons. With coal production curtailed as a result of the temporary cessation of production at various operations in both the Illinois Basin and Appalachian regions, total coal inventory fell to 1.7 million tons at the end of the 2020 Quarter, a decrease of 34.6% compared to the Sequential Quarter.

Compared to the 2019 Quarter, total coal sales prices were higher due to an increased sales mix of higher-priced Appalachia sales tons in the 2020 Quarter. Appalachia price realizations decreased by 6.7% compared to the 2019 Quarter primarily due to lower metallurgical coal sales prices. Sequentially, coal sales price per ton sold in the 2020 Quarter increased in both regions primarily due to higher price realizations from our River View and Tunnel Ridge mines and increased sales volumes from our Mettiki mine.

In the Illinois Basin, Segment Adjusted EBITDA Expense per ton in the 2020 Quarter increased 17.6% and 9.1% compared to the 2019 and Sequential Quarters, respectively, primarily as a result of reduced coal volumes. In Appalachia, Segment Adjusted EBITDA Expense per ton increased 1.5% and 10.9% compared to the 2019 and Sequential Quarters, respectively, as a result of reduced volumes in the region and an increased sales mix of higher-cost Mettiki production in the 2020 Quarter. Compared to the 2019 Quarter, expenses per ton for both segments were impacted by higher excise and severance taxes and inventory charges discussed above.

Segment Adjusted EBITDA for our Minerals segment decreased 38.0% to $6.9 million in the 2020 Quarter compared to $11.1 million in the 2019 Quarter primarily due to lower sales price realizations per BOE resulting from reduced demand amid the COVID-19 pandemic, partially offset by higher volumes, which increased 16.4% compared to the 2019 Quarter primarily as a result of production from the additional mineral interests acquired in the Wing Acquisition. Compared to the Sequential Quarter, Segment Adjusted EBITDA decreased 50.0% due to reduced price realizations and volumes resulting from disruptions caused by the pandemic.

Outlook

“As difficult as the last six months have been, we are beginning to see signs of encouragement,” said Mr. Craft. “Businesses are beginning to re-open and economies are slowly coming back to life. Improved economic activity and favorable weather patterns have increased power demand, lifting month-over-month coal burn in June by 55% in the eastern U.S. and resulting in the first decline in utility stockpiles in nearly a year. Internationally, the forward price curve has improved and long-term fundamentals remain constructive for coal. Oil & gas prices are recovering from recent historic lows, encouraging operators to bring wells back into production and complete wells that have already been drilled. These favorable trends support our cautious optimism that the second half of this year will be better than the first.”

Mr. Craft continued, “While early signs of increasing economic activity are encouraging, we are all aware that challenges persist. With coronavirus cases increasing nationwide, some governors have responded by pausing or reversing re-opening plans ─ potentially jeopardizing nascent recovery efforts. The timing and pace of recovery remains unclear and a return to normalcy will likely occur gradually as we anxiously await a vaccine. Shrinking revenues and cash flows continue to pressure the coal and oil & gas industries. Reduced supply and increased demand are needed before a sustained recovery can occur in both industries. As we continue to manage through these uncertainties, ARLP will remain focused on the wellbeing of our employees, servicing the needs of our customers and protecting our balance sheet. We remain committed to making the hard choices necessary to emerge from the current environment with a strong foundation that will return ARLP to sustainable growth in cash flows and deliver attractive long-term value for our stakeholders.”

A conference call regarding ARLP’s 2020 Quarter financial results is scheduled for today at 10:00 a.m. Eastern. To participate in the conference call, dial (877) 506-1589 and request to be connected to the Alliance Resource Partners, L.P. earnings conference call. Canadian callers should dial (855) 669-9657 and all other international callers should dial (412) 317-5240 and request to be connected to the same call. Investors may also listen to the call via the “investor information” section of ARLP’s website at http://www.arlp.com.

An audio replay of the conference call will be available for approximately one week. To access the audio replay, dial US Toll Free (877) 344-7529; International Toll (412) 317-0088; Canada Toll Free (855) 669-9658 and request to be connected to replay access code 10146346.

About Alliance Resource Partners, L.P.

ARLP is a diversified natural resource company that generates income from coal production and oil & gas mineral interests located in strategic producing regions across the United States.

Contacts

Brian L. Cantrell
Alliance Resource Partners, L.P.

(918) 295-7673

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