Alliance Resource Partners, L.P. Reports Quarterly Financial and Operating Results; Maintains Quarterly Cash Distribution of $0.54 Per Unit; and Updates Guidance

TULSA, Okla.–(BUSINESS WIRE)–Alliance Resource Partners, L.P. (NASDAQ: ARLP) today reported financial and operating results for the quarter ended September 30, 2019 (the “2019 Quarter”). Total revenues were $464.7 million in the 2019 Quarter compared to $497.8 million for the quarter ended September 30, 2018 (the “2018 Quarter”), primarily due to lower coal sales revenues due to reduced coal sales volumes and prices, partially offset by the addition of oil & gas royalty revenues in the 2019 Quarter. Primarily as a result of lower revenues and a $15.2 million non-cash asset impairment discussed in more detail below, net income attributable to ARLP for the 2019 Quarter declined to $39.1 million, or $0.30 per basic and diluted limited partner unit, compared to $73.7 million, or $0.55 per basic and diluted limited partner unit, for the 2018 Quarter. EBITDA in the 2019 Quarter of $123.1 million was also lower compared to $153.7 million in the 2018 Quarter. Excluding the impact of the non-cash asset impairment, Adjusted EBITDA decreased 10.1% to $138.3 million in the 2019 Quarter. (Unless otherwise noted, all references in this release to “net income” refer to “net income attributable to ARLP.” For a definition of EBITDA, Adjusted EBITDA and related reconciliations to comparable GAAP financial measures, please see the end of this release.)

ARLP also announced today that the Board of Directors of its general partner approved a cash distribution to unitholders for the 2019 Quarter of $0.54 per unit (an annualized rate of $2.16 per unit), payable on November 14, 2019 to all unitholders of record as of the close of trading on November 7, 2019. The announced distribution represents a 2.9% increase over the cash distribution of $0.525 per unit for the 2018 Quarter and is equal to the distribution declared for the quarter ended June 30, 2019 (the “Sequential Quarter”).

“Challenging coal market conditions continued to impact ARLP’s financial and operating performance in the 2019 Quarter, as our coal inventories increased 1.0 million tons sequentially,” said Joseph W. Craft III, Chairman, President and Chief Executive Officer. “Weak power demand, persistently low prices for competing fuels and ongoing transportation issues have reduced coal-fired generation in the U.S. and internationally, leading to an oversupplied coal market and unsustainably low coal prices. ARLP proactively responded to weak coal demand by adjusting operations to shift production to our lowest cost mines and reducing total volumes. This response included the closure of our Dotiki mine, which led to a non-cash asset impairment in the 2019 Quarter.”

Mr. Craft added, “On a positive note, since our last earnings release we have secured new sales contracts for the delivery of 11.2 million tons through 2023. Our oil & gas minerals segment also continued to perform well, again delivering strong Segment Adjusted EBITDA growth compared to both the 2018 and Sequential Quarters. In addition, we completed the acquisition of Permian Basin mineral interests from Wing – adding approximately 9,000 net royalty acres in the Midland Basin, enhancing our already strong position in this prolific, liquids rich area. With exposure to more than 400,000 gross acres under active development by well-capitalized operators, we expect the newly acquired interests will generate long-term cash flow growth for ARLP.”

Mr. Craft continued, “As we continue to evaluate an uncertain coal market, ARLP elected to maintain its quarterly cash distributions for the 2019 Quarter at current levels. We believe this decision, along with our low-cost, strategically located operations, growing minerals business and conservative balance sheet keeps ARLP well positioned to deliver long-term value for our unitholders.”

Consolidated Financial Results

Three Months Ended September 30, 2019 Compared to Three Months Ended September 30, 2018

Coal Operations –

Reflecting lower coal sales volumes and prices, coal sales revenues for the 2019 Quarter decreased 8.8% to $420.0 million, compared to $460.3 million for the 2018 Quarter. Coal sales volumes declined 7.5% to 9.3 million tons due primarily to lower export sales from our Gibson South mine and reduced volumes from our Dotiki mine, which ceased production in the 2019 Quarter. Increased sales at our River View mine partially offset these decreases. Coal sales price realizations declined 1.4% in the 2019 Quarter to $45.06 per ton sold, compared to $45.71 per ton sold during the 2018 Quarter.

Compared to the 2018 Quarter, our combined operating expenses and outside coal purchases for our coal operations decreased 7.2% to $286.3 million, primarily due to reduced coal sales volumes. Segment Adjusted EBITDA Expense per ton of $30.75 in the 2019 Quarter was comparable to the 2018 Quarter. Segment Adjusted EBITDA from our coal operations declined 9.9% to $144.0 million, compared to $159.8 million for the 2018 Quarter, primarily due to lower coal sales revenues offset in part by lower expenses in the 2019 Quarter discussed above. (For a definition of Segment Adjusted EBITDA, Segment Adjusted EBITDA Expense and related reconciliation to comparable GAAP financial measures, please see the end of this release.)

Minerals –

For the 2019 Quarter, our mineral interests contributed total revenues of $14.2 million from oil & gas royalties and lease bonuses. Including equity income from our AllDale III investment, ARLP’s Minerals segment contributed Segment Adjusted EBITDA of $12.2 million for the 2019 Quarter, compared to a contribution of $5.7 million in the 2018 Quarter. (Following the AllDale Acquisition, results related to the mineral interests controlled by ARLP are included in our consolidated results while activity related to our limited partner interest in AllDale III continues to be reflected as equity method investment income. Please see ARLP Press Release dated January 3, 2019 for a full description of the AllDale Acquisition.)

Compared to the 2018 Quarter, depreciation, depletion and amortization increased 3.1% to $72.3 million primarily due to depletion from production of our oil & gas royalty interests in the 2019 Quarter.

During the 2019 Quarter, we recorded a non-cash asset impairment charge of $15.2 million due to the closure of our Dotiki mine.

As a result of the redemption by Kodiak Gas Services, LLC of our preferred equity interest for $135.0 million cash in the first quarter of 2019, ARLP did not realize equity securities income in the 2019 Quarter, compared to $4.0 million in the 2018 Quarter.

Nine Months Ended September 30, 2019 Compared to Nine Months Ended September 30, 2018

Total revenues increased 2.5% to $1.51 billion for the nine months ended September 30, 2019 (the “2019 Period”), compared to $1.47 billion for the nine months ended September 30, 2018 (the “2018 Period”), primarily due to the addition of oil & gas royalty revenues in the 2019 Period. Higher revenues and a $170.0 million non-cash net gain related to the AllDale Acquisition led to increased net income, which rose 18.3% to $373.6 million for the 2019 Period, or $2.86 per basic and diluted limited partner unit, compared to $315.8 million, or $2.35 per basic and diluted limited partner unit, for the 2018 Period. EBITDA also increased 14.0% in the 2019 Period to $627.6 million compared to $550.6 million in the 2018 Period. Excluding the 2019 Period impact of the gain related to the AllDale Acquisition, the Dotiki $15.2 million non-cash asset impairment discussed previously and an $80.0 million net gain on settlement of litigation in the 2018 Period, Adjusted EBITDA increased slightly to $472.9 million in the 2019 Period, compared to $470.6 million for the 2018 Period. The acquisition and settlement gains are described in more detail below.

Coal Operations –

Coal sales revenues of $1.36 billion for the 2019 Period were comparable to the 2018 Period. Compared to the 2018 Period, coal sales volumes fell slightly to 29.9 million tons in the 2019 Period as reduced export volumes offset increased domestic shipments. Coal sales price realizations in the 2019 Period increased modestly to $45.46 per ton sold, compared to $45.39 per ton sold in the 2018 Period. Coal production increased 4.5% compared to the 2018 Period to 31.4 million tons, primarily due to increased production from additional mining units at our River View mine, the resumption of operations in the second quarter of 2018 at our Gibson North mine and strong performance at our Tunnel Ridge mine during the 2019 Period. These increases were partially offset by curtailed production at our Gibson South mine due to weak export markets, production ceasing at our Dotiki mine and lower recoveries at our Mettiki and MC Mining operations in the 2019 Period. Transportation revenues and expenses increased to $82.9 million in the 2019 Period from $76.0 million in the 2018 Period, primarily due to increased transportation rates per ton for coal shipped to international markets.

Compared to the 2018 Period, operating expenses and outside coal purchases for our coal operations increased to $904.9 million and contributed to higher Segment Adjusted EBITDA Expense per ton of $30.33 in the 2019 Period compared to $30.06 per ton in the 2018 Period. The increase in Segment Adjusted EBITDA Expense per ton was primarily impacted by curtailed production at our Gibson South mine and lower recoveries at our Mettiki and MC Mining operations, offset in part by improved productivity at our Tunnel Ridge and Hamilton mines in the 2019 Period.

Lower coal sales revenues and higher expenses in the 2019 Period, as discussed above, caused total Segment Adjusted EBITDA from our coal operations to decline 2.4% to $482.7 million, compared to $494.5 million for the 2018 Period.

Minerals –

For the 2019 Period, our mineral interests contributed total revenues of $37.3 million from oil & gas royalties and lease bonuses. During the 2019 Period, we also recorded a non-cash acquisition gain of $177.0 million, of which $7.1 million was attributable to noncontrolling interest, to reflect the fair value of the interests in AllDale I and II we already owned at the time of the AllDale Acquisition. Inclusive of this gain, our Minerals segment contributed $174.9 million to ARLP’s net income, compared to $14.0 million for the 2018 Period. Excluding the impact of the acquisition gain, Segment Adjusted EBITDA related to our Minerals segment increased to $32.4 million for the 2019 Period, compared to $14.0 million for the 2018 Period.

Compared to the 2018 Period, depreciation, depletion and amortization increased 7.9% to $220.4 million primarily due to depletion from production of our oil & gas royalty interests in the 2019 Period.

As previously discussed, we recorded a non-cash asset impairment charge of $15.2 million in the 2019 Period due to ceasing production at our Dotiki mine.

In the 2018 Period, ARLP finalized an agreement with a customer and certain of its affiliates to settle litigation we initiated in 2015. The settlement agreement provided for a $93.0 million cash payment to ARLP, future conditional coal supply commitments, continued export trans-loading capacity for our Appalachian mines and the acquisition of 57 million tons of additional coal reserves near our Tunnel Ridge operation. A settlement gain of $80.0 million was recorded in the 2018 Period reflecting the cash payment received net of certain costs associated with the gain.

Segment Results and Analysis

Lower export sales from our Gibson South mine and reduced volumes resulting from the cessation of production at our Dotiki mine in the 2019 Quarter, led to a decrease in Illinois Basin sales volumes of 9.6% and 13.4% compared to the 2018 and Sequential Quarters, respectively. In Appalachia, sales volumes decreased 2.1% in the 2019 Quarter compared to the 2018 Quarter as a result of lower export sales volumes from our Mettiki and MC Mining operations. Compared to the Sequential Quarter, strong performance by our Tunnel Ridge longwall operation in the 2019 Quarter led Appalachia coal sales volumes higher by 4.5%.

Weak market conditions pushed total coal inventory higher to 2.5 million tons at the end of the 2019 Quarter, an increase of 1.6 million tons and 1.0 million tons compared to the end of the 2018 and Sequential Quarters, respectively.

Illinois Basin coal sales price per ton sold in the 2019 Quarter decreased 2.0% compared to both the 2018 and Sequential Quarters reflecting lower domestic and export sales prices due to weakened market conditions. In Appalachia, coal sales price per ton decreased 1.6% compared to both the 2018 and Sequential Quarters due to reduced volumes and lower price realizations for exports of metallurgical coal from our Mettiki mine, partially offset by increased domestic prices from our MC Mining operation.

In the Illinois Basin, Segment Adjusted EBITDA Expense per ton decreased 3.8% and 3.7% compared to the 2018 and Sequential Quarters, respectively, primarily due to longwall moves at our Hamilton mine in both prior comparative periods and reduced sales of higher cost tons following the cessation of production at our Dotiki mine. These decreases were partially offset by reduced production at our Gibson South mine in response to weak export markets and lower recoveries at our River View mine in the 2019 Quarter. In Appalachia, Segment Adjusted EBITDA Expense per ton was higher compared to the 2018 Quarter, increasing 4.6% as a result of lower recoveries at our Mettiki mine, reduced production from our MC Mining operation and sales of higher-cost purchased coal in the 2019 Quarter. These increases were partially offset by the comparative impact of longwall moves at our Mettiki and Tunnel Ridge mines in the 2018 Quarter and reduced selling expenses across the region in the 2019 Quarter. As anticipated, Segment Adjusted EBITDA Expense per ton in Appalachia was lower sequentially, decreasing 1.6% as our Tunnel Ridge mine in the 2019 Quarter benefited from improved geologic conditions following a longwall move in the Sequential Quarter. Both regions also benefited from decreased workers’ compensation expense in the 2019 Quarter primarily due to the impact of mid-year actuarial adjustments recorded in the Sequential Quarter.

Segment Adjusted EBITDA from our Minerals segment increased by $6.5 million and $1.1 million compared to the 2018 and Sequential Quarters, respectively, primarily due to the previously discussed AllDale Acquisition in the first quarter of 2019 and the Wing Acquisition in the 2019 Quarter.

Market Update and Outlook

“In Europe, weak power demand, increased Russian supply and an oversupply of LNG have all contributed to a 30% drop in API-2 thermal coal prices since the beginning of the year, leading us to believe industrywide U.S. eastern thermal exports will decline approximately 20% this year compared to 2018,” said Mr. Craft. “Overall, electricity demand in the U.S. has declined approximately 2% year-over-year, and coal has continued to lose market share to natural gas. As a result, we expect eastern U.S. utility burn to be 18% lower for 2019 compared to last year. The combination of both weak export and domestic markets has created a sizable oversupply of coal, pressuring prices to unsustainable levels for most of ARLP’s competitors.”

“We see no near-term catalyst to improve pricing except a rationalization of coal supply. The industry has begun to respond as recent actions by ARLP and others have reduced supply by closing mines and altering normal operating schedules. While this is a start, we believe additional temporary and/or permanent mine closures will likely occur in the near future. ARLP anticipates we may have to sell into a depressed export market or operate at reduced levels until market conditions improve. In this uncertain market environment, ARLP continues to evaluate numerous operating scenarios and strategic opportunities. In consideration of the current market environment, ARLP has updated its 2019 guidance for coal operations and consolidated results in the table provided below.”

Looking forward, Mr. Craft added, “We are very pleased with the performance to date of our oil & gas minerals segment. I anticipate we will be actively looking to add to our existing base of mineral interests and expect meaningful growth in future cash flow from these investments. While current challenges in the coal markets will affect our revenues in the short term, ARLP is well positioned to benefit over the long term. Our expectations for increased worldwide coal demand has not changed and we continue to believe the current weakness in the Atlantic Basin coal markets will rebound sometime in the second half of 2020. In the U.S., our low-cost, strategically located coal operations have presented ARLP with near-term opportunities to grow its domestic market share. The combination of cash flow growth in minerals, positive global supply/demand fundamentals for coal and consolidation of the domestic coal industry, I believe, will strengthen long-term value creation for our unitholders.”

ARLP is updating its 2019 full-year guidance for its operating and investment activities as follows:

A conference call regarding ARLP’s 2019 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.

Contacts

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

(918) 295-7673

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