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MarketScreener Homepage  >  Equities  >  Nasdaq  >  Alliance Resource Partners, L.P.    ARLP

ALLIANCE RESOURCE PARTNERS, L.P.

(ARLP)
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Alliance Resource Partners L P : LP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

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05/06/2019 | 03:48pm EDT

Significant relationships referenced in this management's discussion and analysis of financial condition and results of operations include the following:

· References to "we," "us," "our" or "ARLP Partnership" mean the business and

operations of Alliance Resource Partners, L.P., the parent company, as well as

its consolidated subsidiaries.

· References to "ARLP" mean Alliance Resource Partners, L.P., individually as the

parent company, and not on a consolidated basis.

· References to "MGP" mean Alliance Resource Management GP, LLC, ARLP's general

partner.

· References to "Intermediate Partnership" mean Alliance Resource Operating

Partners, L.P., the intermediate partnership of Alliance Resource Partners,

L.P.

· References to "Alliance Resource Properties" mean Alliance Resource Properties,

LLC, the land-holding company for the mining operations of Alliance Resource

Operating Partners, L.P.

· References to "Alliance Coal" mean Alliance Coal, LLC, the holding company for

    the mining operations of Alliance Resource Operating Partners, L.P.




Summary



We operate in the United States as a diversified natural resource company that generates income from the production and marketing of coal to major domestic and international utilities and industrial users as well as income from oil & gas mineral interests. We began coal mining operations in 1971 and, since then, have grown through acquisitions and internal development in strategic producing regions to become the second largest coal producer in the eastern United States. As is customary in the coal industry, we have entered into long-term coal supply agreements with many of our customers. In 2014, we began acquiring oil & gas mineral interests in premier oil & gas producing regions across the United States.

We have three reportable segments, Illinois Basin, Appalachia and Minerals. We also have an "all other" category referred to as Other and Corporate. The two coal reportable segments correspond to major coal producing regions in the eastern United States with similar economic characteristics including coal quality, geology, coal marketing opportunities, mining and transportation methods and regulatory issues. The two coal mining segments include eight underground mining complexes in Illinois, Indiana, Kentucky, Maryland and West Virginia. We also have a coal loading terminal in Indiana on the Ohio River included in Other and Corporate. The Minerals segment includes our oil & gas mineral interests which are located primarily in the Anadarko (SCOOP/STACK), Permian (Delaware and Midland), Williston (Bakken) and Appalachian basins. We have no operations within our Minerals reportable segment other than receiving royalties for our oil & gas mineral interests.

On January 3, 2019 (the "Acquisition Date"), we acquired all of the limited partner interests not owned by Cavalier Minerals JV, LLC ("Cavalier Minerals") in AllDale Minerals LP ("AllDale I") and AllDale Minerals II, LP ("AllDale II", and collectively with AllDale I, "AllDale I & II") and the general partner interests in AllDale I & II for $176.0 million (the "Acquisition"). As a result of the Acquisition and our previous investments held through Cavalier Minerals, we now control approximately 43,000 net royalty acres in premier oil & gas resource plays. The Acquisition provides us with diversified exposure to industry leading operators and is consistent with our general business strategy to pursue accretive acquisitions. Please read "Item 1. Financial Statements (Unaudited) - Note 3 - Acquisition" of this Quarterly Report on Form 10-Q for more information on the Acquisition.

As a result of the Acquisition, we now control the underlying oil & gas mineral interests held by AllDale I & II. This control over the oil & gas mineral interests held by AllDale I & II reflects a strategic change in how we manage our business and how resources are allocated by our chief operating decision maker. Due to this strategic change we have restructured our reportable segments in the first quarter of 2019 to include our oil & gas mineral interests within a new Minerals reportable segment. Prior periods have been recast to include our oil & gas minerals interests in the Minerals segment.

· Illinois Basin reportable segment includes currently operating mining complexes

    (a) Webster County Coal, LLC's Dotiki mining complex ("Dotiki"), (b) Gibson
    County Coal, LLC's mining complex, which includes the Gibson North and Gibson
    South mines, (c) Warrior Coal, LLC's mining complex, (d) River View Coal, LLC's
    mining


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complex ("River View") and (e) Hamilton County Coal, LLC's mining complex ("Hamilton"). The Gibson North mine had been idled since the fourth quarter of 2015 in response to market conditions but resumed production in May 2018.

The Illinois Basin reportable segment also includes White County Coal, LLC's Pattiki mining complex ("Pattiki"), Hopkins County Coal, LLC's mining complex, which includes the Elk Creek mine, the Pleasant View surface mineable reserves and the Fies underground project, Sebree Mining, LLC's mining complex, which includes the Onton mine, Steamport, LLC and certain reserves, CR Services, LLC, CR Machine Shop, LLC, certain properties and equipment of Alliance Resource Properties, ARP Sebree, LLC, ARP Sebree South, LLC and UC Coal, LLC and its subsidiaries, UC Mining, LLC and UC Processing, LLC (collectively "UC Coal").

· Appalachia reportable segment includes currently operating mining complexes (a)

    Mettiki mining complex ("Mettiki"), (b) Tunnel Ridge, LLC mining complex
    ("Tunnel Ridge"), and (c) MC Mining, LLC mining complex ("MC Mining"). Mettiki
    includes Mettiki Coal (WV), LLC's Mountain View mine and Mettiki Coal, LLC's
    preparation plant. The Appalachia reportable segment also includes the Penn
    Ridge property.



· Minerals reportable segment includes AllDale I & II; Alliance Royalty, LLC;

    AllRoy GP, LLC; CavMM, LLC; and Alliance Minerals, LLC's ("Alliance Minerals")
    equity interests in AllDale Minerals III, LP ("AllDale III") and Cavalier
    Minerals. Please read "Item 1 - Financial Statements (Unaudited) - Note 10 -
    Investments" and "Note 9 - Variable Interest Entities" of this Quarterly Report
    on Form 10-Q for more information on Alliance Minerals and Cavalier Minerals.



· Other and Corporate includes marketing and administrative activities, Alliance

    Service, Inc. ("ASI") and its subsidiary, Matrix Design Group, LLC and its
    subsidiaries Matrix Design International, LLC and Matrix Design Africa (PTY)
    LTD ("Matrix Design"), Alliance Design Group, LLC (collectively along with
    Matrix Design, the "Matrix Group"), ASI's ownership of aircraft, the Mt. Vernon
    Transfer Terminal, LLC ("Mt. Vernon") dock activities, Alliance Coal's coal
    brokerage activity, Mid-America Carbonates, LLC's manufacturing and sales
    (primarily to our mines) of rock dust, Alliance Minerals' equity investment in
    Kodiak Gas Services, LLC ("Kodiak") which was redeemed in February 2019 by
    Kodiak (see Note 10 - Investments) certain of Alliance Resource Properties'
    land and mineral interest activities, Pontiki Coal, LLC's legacy workers'
    compensation and pneumoconiosis liabilities, Wildcat Insurance, LLC, which
    assists the ARLP Partnership with its insurance requirements, AROP Funding, LLC
    ("AROP Funding") and Alliance Resource Finance Corporation ("Alliance
    Finance"). Please read "Item 1. Financial Statements (Unaudited) - Note 8.
    Long-term Debt" "and Note 10. Investments" of this Quarterly Report on
    Form 10-Q for more information on AROP Funding and the Kodiak redemption,
    respectively.



Three Months Ended March 31, 2019 Compared to Three Months Ended March 31, 2018

We reported net income attributable to ARLP of $276.4 million for the three months ended March 31, 2019 ("2019 Quarter") compared to $155.9 million for the three months ended March 31, 2018 ("2018 Quarter"). The increase of $120.5 million was primarily due to higher revenues, and gains related to the Acquisition and the redemption of our preferred equity interest in Kodiak. Increased coal sales volumes, improved coal sales prices and the addition of royalty revenues in the 2019 Quarter drove total revenues higher to $526.6 million compared to $457.1 million in the 2018 Quarter.




                                                    Three Months Ended March 31,
                                              2019         2018         2019        2018
                                                (in thousands)           (per ton sold)
Tons sold                                      10,321        9,398         N/A         N/A
Tons produced                                  11,323       10,482         N/A         N/A
Coal sales                                  $ 476,016$ 423,610$  46.12$  45.07
Coal - Segment Adjusted EBITDA Expense
(1) (2)                                     $ 301,030$ 279,459$  29.17$  29.74

--------------------------------------------------------------------------------

 (1)  For a  definition of Segment Adjusted EBITDA Expense and related
      reconciliation to comparable generally accepted accounting principles
      ("GAAP") financial measures, please see below under "-Reconciliation of
      non-GAAP "Segment Adjusted EBITDA Expense" to GAAP "Operating Expenses."


 (2)  Coal - Segment Adjusted EBITDA Expense is defined as consolidated Segment
      Adjusted EBITDA Expense excluding our Minerals segment.


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Coal sales. Coal sales increased $52.4 million or 12.4% to $476.0 million for the 2019 Quarter from $423.6 million for the 2018 Quarter. The increase was attributable to a volume variance of $41.6 million resulting from increased tons sold and a price variance of $10.8 million due to higher average coal sales prices. For the 2019 Quarter, a strong performance at our Tunnel Ridge mine, increased volumes from our River View mine due to the addition of two production units in the second half of 2018 and increased volumes resulting from the resumption of operations in the second quarter of 2018 at our Gibson North mine drove total coal sales volumes up 9.8% to 10.3 million tons and production volumes higher by 8.0% to 11.3 million tons, both as compared to the 2018 Quarter. Average coal sales prices increased $1.05 per ton sold in the 2019 Quarter to $46.12 compared to $45.07 per ton sold in the 2018 Quarter, primarily as a result of higher export sales prices compared to the 2018 Quarter.

Royalty revenues. As a result of the Acquisition on January 3, 2019, we obtained control of AllDale I & II and thus began consolidation of AllDale I & II in our financial statements. As a result of the consolidation, in the 2019 Quarter we began recording royalty revenues from AllDale I & II. Prior to 2019, our investments in AllDale I & II were accounted for as equity method investments. AllDale I & II contributed royalty revenues of $10.7 million in the 2019 Quarter. Please read "Item 1. Financial Statements (Unaudited) - Note 3 - Acquisition" of this Quarterly Report on Form 10-Q for more information on the Acquisition.

Coal - Segment Adjusted EBITDA Expense. Segment Adjusted EBITDA Expense, excluding our Minerals segment, increased 7.7% to $301.0 million for the 2019 Quarter from $279.5 million for the 2018 Quarter primarily as a result of increased coal sales volumes. On a per ton basis, Segment Adjusted EBITDA Expense, excluding our Minerals segment, decreased to $29.17 per ton sold compared to $29.74 per ton sold in the 2018 Quarter due to increased volumes from our lower cost mines. The most significant variances by category are discussed below:

· Workers' compensation expenses per ton produced decreased to $0.31 per ton in

    the 2019 Quarter from $0.45 per ton in the 2018 Quarter. The decrease of $0.14
    per ton produced resulted from decreased accruals at various operations; and



· Production taxes and royalty expenses incurred as a percentage of coal sales

    prices and volumes decreased $0.42 per produced ton sold in the 2019 Quarter
    compared to the 2018 Quarter primarily as a result of a favorable state
    production mix and a lower federal excise tax rate in 2019.



Segment Adjusted EBITDA Expense decreases above were partially offset by the following increases:

· Labor and benefit expenses per ton produced, excluding workers' compensation,

    increased 2.9% to $8.93 per ton in the 2019 Quarter from $8.68 per ton in the
    2018 Quarter. The increase of $0.25 per ton was primarily due to additional
    labor expenses at our Gibson North and River View mines in addition to
    difficult mining conditions at our Dotiki mine; and



· Material and supplies expenses per ton produced increased 6.1% to $11.02 per

    ton in the 2019 Quarter from $10.39 per ton in the 2018 Quarter. The increase
    of $0.63 per ton produced resulted primarily from increases of $0.58 per ton in
    longwall subsidence expense and $0.42 per ton for roof support, partially
    offset by decreases of $0.23 per ton for power and fuel used in the mining
    process and $0.15 per ton for other outside services.



Other sales and operating revenues. Other sales and operating revenues were principally comprised of Mt. Vernon transloading revenues, Matrix Design sales and other outside services. Other sales and operating revenues decreased to $9.6 million in the 2019 Quarter from $13.7 million in the 2018 Quarter. The decrease of $4.1 million was primarily due to reduced mining technology product sales from Matrix Design and transloading revenues from Mt. Vernon.

Depreciation, depletion and amortization. Depreciation, depletion and amortization expense increased to $71.1 million in the 2019 Quarter from $61.8 million in the 2018 Quarter. The increase of $9.3 million resulted primarily from increased coal sales volumes mentioned above and depletion beginning in the 2019 Quarter, attributable to production from our AllDale I & II oil & gas mineral assets.

Settlement gain. During the 2018 Quarter, we finalized an agreement with a customer and certain of its affiliates to settle litigation we initiated in 2015. The agreement provided for a $93.0 million cash payment to us in the 2018 Quarter, future conditional coal supply commitments, continued export transloading capacity for our Appalachian mines and the


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acquisition of certain coal reserves near our Tunnel Ridge operation. A settlement gain of $80.0 million was recorded in the 2018 Quarter reflecting the cash payment received net of $13.0 million of combined legal fees paid and associated incentive compensation accruals.

Equity method investment income. Equity method investment income decreased to $0.3 million in the 2019 Quarter from $3.7 million in the 2018 Quarter as a result of the Acquisition and related consolidation of AllDale I & II in the 2019 Quarter. Prior to 2019, our investments in AllDale I & II were accounted for as equity method investments.

Equity securities income. Equity securities income increased $9.2 million to $12.9 million in the 2019 Quarter compared to $3.7 million in the 2018 Quarter as a result of the redemption of our preferred interest in Kodiak for $135.0 million in the 2019 Quarter, which included an $11.5 million gain due to an early redemption premium. We no longer hold any ownership interests in Kodiak.

Acquisition gain. We were required to re-measure Cavalier Minerals' equity method investments in AllDale I & II to fair value as a result of the Acquisition. The re-measurement resulted in a gain of $177.0 million in the 2019 Quarter.

Transportation revenues and expenses. Transportation revenues and expenses were $30.2 million and $19.8 million for the 2019 and 2018 Quarters, respectively. The increase of $10.4 million was primarily attributable to an increase in average third-party transportation rates in the 2019 Quarter, partially offset by decreased tonnage for which we arrange third-party transportation at certain mines. The cost of third-party transportation services are passed through to our customers and we recognize transportation revenue equal to transportation expense when title to the coal passes to the customer.

Net income attributable to noncontrolling interest. Net income attributable to noncontrolling interest increased to $7.2 million in the 2019 Quarter from $0.1 million in the 2018 Quarter as a result of allocating $7.1 million of the acquisition gain discussed above to noncontrolling interest related to Bluegrass Minerals' equity interest in Cavalier Minerals.




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Segment Adjusted EBITDA. Our 2019 Quarter Segment Adjusted EBITDA increased $41.4 million, or 25.1%, to $206.6 million from the 2018 Quarter Segment Adjusted EBITDA of $165.2 million. Segment Adjusted EBITDA, tons sold, coal sales, other sales and operating revenues, royalty revenues and BOE volume and Segment Adjusted EBITDA Expense by segment are as follows:




                                              Three Months Ended
                                                  March 31,
                                              2019         2018        Increase (Decrease)
                                                        (in thousands)
Segment Adjusted EBITDA
Coal - Illinois Basin                       $ 121,971$  94,830$     27,141      28.6 %
Coal - Appalachia                              58,655       53,621           5,034       9.4 %
Minerals                                        9,132        3,588           5,544       (1)
Other and Corporate                            19,127       15,256           3,871      25.4 %
Elimination                                   (2,241)      (2,105)           (136)     (6.5) %
Total Segment Adjusted EBITDA (2)           $ 206,644$ 165,190$     41,454      25.1 %

Tons sold
Coal - Illinois Basin                           7,673        7,008             665       9.5 %
Coal - Appalachia                               2,648        2,390             258      10.8 %
Other and Corporate                               136          181            (45)    (24.9) %
Elimination                                     (136)        (181)              45      24.9 %
Total tons sold                                10,321        9,398             923       9.8 %

Coal sales
Coal - Illinois Basin                       $ 317,270$ 276,065$     41,205      14.9 %
Coal - Appalachia                             157,453      145,289          12,164       8.4 %
Other and Corporate                             5,290        7,711         (2,421)    (31.4) %
Elimination                                   (3,997)      (5,455)           1,458      26.7 %
Total coal sales                            $ 476,016$ 423,610$     52,406      12.4 %

Other sales and operating revenues
Coal - Illinois Basin                       $     541$     569$       (28)     (4.9) %
Coal - Appalachia                                 951          829             122      14.7 %
Other and Corporate                            12,405       16,619         (4,214)    (25.4) %
Elimination                                   (4,277)      (4,290)              13       0.3 %

Total other sales and operating revenues $ 9,620$ 13,727$ (4,107) (29.9) %


Royalty revenues and BOE volume
Volume - BOE (3)                                  252            -             252       (1)

Royalty revenues excluding lease bonuses $ 10,393 $ - $ 10,393 (1) Lease bonuses

                                     335            -             335       (1)
Total royalty revenues                      $  10,728    $       -    $     10,728       (1)

Segment Adjusted EBITDA Expense
Coal - Illinois Basin                       $ 195,840$ 181,803$     14,037       7.7 %
Coal - Appalachia                              99,749       92,498           7,251       7.8 %
Minerals                                        1,827            -           1,827       (1)
Other and Corporate                            11,474       12,798         (1,324)    (10.3) %
Elimination                                   (6,033)      (7,640)           1,607      21.0 %

Total Segment Adjusted EBITDA Expense $ 302,857$ 279,459$ 23,398 8.4 %

--------------------------------------------------------------------------------

 (1)  Percentage change not meaningful.


 (2)  For a definition of Segment Adjusted EBITDA and related reconciliation to
      comparable GAAP financial measures, please see below under "-Reconciliation
      of non-GAAP "Segment Adjusted EBITDA" to GAAP "net income."


 (3)  Barrels of oil equivalent ("BOE") is calculated on a 6:1 basis (6,000 cubic
      feet of natural gas to one barrel of oil).


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Illinois Basin - Segment Adjusted EBITDA increased 28.6% to $122.0 million in the 2019 Quarter from $94.8 million in the 2018 Quarter. The increase of $27.2 million was primarily attributable to higher coal sales, which increased 14.9% to $317.3 million in the 2019 Quarter from $276.1 million in the 2018 Quarter, partially offset by increased operating expenses. The increase of $41.2 million in coal sales reflects higher coal sales volumes and prices. The resumption of operations at our Gibson North mine in the second quarter of 2018 and the addition of two production units at the River View mine in the second half of 2018 drove Illinois Basin coal sales volumes in the 2019 Quarter higher by 9.5% to 7.7 million tons compared to 7.0 million tons sold in the 2018 Quarter. Coal sales price per ton sold in the 2019 Quarter increased 5.0% due to higher export sales prices compared to the 2018 Quarter. Segment Adjusted EBITDA Expense increased 7.7% to $195.8 million in the 2019 Quarter from $181.8 million in the 2018 Quarter due to increased sales volumes. Segment Adjusted EBITDA Expense per ton decreased $0.42 per ton sold to $25.52 from $25.94 per ton sold in the 2018 Quarter, primarily due to increased sales of lower-cost production from our River View and Gibson North mines and improved recoveries from our Hamilton mine in the 2019 Quarter.

Appalachia - Segment Adjusted EBITDA increased 9.4% to $58.7 million for the 2019 Quarter from $53.6 million in the 2018 Quarter. The increase of $5.1 million was primarily attributable to higher coal sales, which increased 8.4% to $157.5 million in the 2019 Quarter from $145.3 million in the 2018 Quarter, partially offset by increased operating expenses. The increase of $12.2 million in coal sales reflects higher coal sales volumes of 2.6 million tons sold in the 2019 Quarter compared to 2.4 million tons sold in the 2018 Quarter due primarily to strong sales performance at our Tunnel Ridge longwall operation in the 2019 Quarter. Segment Adjusted EBITDA Expense increased 7.8% to $99.7 million in the 2019 Quarter from $92.5 million in the 2018 Quarter due to increased sales volumes. Segment Adjusted EBITDA Expense per ton decreased $1.03 per ton sold to $37.67 compared to $38.70 per ton sold in the 2018 Quarter, primarily due to increased volumes and improved recoveries from the Tunnel Ridge mine in the 2019 Quarter.

Minerals - Segment Adjusted EBITDA increased to $9.1 million for the 2019 Quarter from $3.6 million in the 2018 Quarter. The increase of $5.5 million primarily resulted from the Acquisition in the 2019 Quarter.

Other and Corporate - Segment Adjusted EBITDA increased by $3.8 million to $19.1 million in the 2019 Quarter compared to $15.3 million in the 2018 Quarter. The increase was primarily attributable to higher equity securities income in the 2019 Quarter as a result of the redemption of our preferred interest in Kodiak, which included an $11.5 million gain due to an early redemption premium, partially offset by reduced mining technology product sales from Matrix Group and transloading revenues from Mt. Vernon.

Reconciliation of non-GAAP "Segment Adjusted EBITDA" to GAAP "net income" and reconciliation of non-GAAP "Segment Adjusted EBITDA Expense" to GAAP "Operating Expenses"

Segment Adjusted EBITDA (a non-GAAP financial measure) is defined as net income attributable to ARLP before net interest expense, income taxes, depreciation, depletion and amortization, general and administrative expenses, settlement gain and acquisition gain. Segment Adjusted EBITDA is a key component of consolidated EBITDA, which is used as a supplemental financial measure by management and by external users of our financial statements such as investors, commercial banks, research analysts and others. We believe that the presentation of EBITDA provides useful information to investors regarding our performance and results of operations because EBITDA, when used in conjunction with related GAAP financial measures, (i) provides additional information about our core operating performance and ability to generate and distribute cash flow, (ii) provides investors with the financial analytical framework upon which we base financial, operational, compensation and planning decisions and (iii) presents a measurement that investors, rating agencies and debt holders have indicated is useful in assessing us and our results of operations.

Segment Adjusted EBITDA is also used as a supplemental financial measure by our management for reasons similar to those stated in the previous explanation of EBITDA. In addition, the exclusion of corporate general and administrative expenses from consolidated Segment Adjusted EBITDA allows management to focus solely on the evaluation of segment operating profitability as it relates to our revenues and operating expenses, which are primarily controlled by our segments.




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The following is a reconciliation of consolidated Segment Adjusted EBITDA to net income, the most comparable GAAP financial measure:




                                                               Three Months Ended
                                                                   March 31,
                                                               2019          2018
                                                                 (in thousands)
Consolidated Segment Adjusted EBITDA                        $  206,644$  165,190
General and administrative                                    (17,812)      (16,651)
Depreciation, depletion and amortization                      (71,139)      (61,848)
Settlement gain                                                      -        80,000
Interest expense, net                                         (11,331)      (10,793)
Acquisition gain                                               177,043             -
Income tax benefit                                                 106            10
Acquisition gain attributable to noncontrolling interest       (7,083)             -
Net income attributable to ARLP                             $  276,428$  155,908
Noncontrolling interest                                          7,176           148
Net income                                                  $  283,604$  156,056

Segment Adjusted EBITDA Expense (a non-GAAP financial measure) includes operating expenses, coal purchases and other income. Transportation expenses are excluded as these expenses are passed through to our customers and, consequently, we do not realize any gain or loss on transportation revenues. Segment Adjusted EBITDA Expense is used as a supplemental financial measure by our management to assess the operating performance of our segments. Segment Adjusted EBITDA Expense is a key component of Segment Adjusted EBITDA in addition to coal sales, royalty revenues and other sales and operating revenues. The exclusion of corporate general and administrative expenses from Segment Adjusted EBITDA Expense allows management to focus solely on the evaluation of segment operating performance as it primarily relates to our operating expenses.

The following is a reconciliation of consolidated Segment Adjusted EBITDA Expense to operating expense, the most comparable GAAP financial measure:




                                                          Three Months Ended
                                                              March 31,
                                                        2019             2018
                                                            (in thousands)
  Segment Adjusted EBITDA Expense                   $     302,857$     279,459
  Outside coal purchases                                        -          (1,374)
  Other expense                                             (129)            (847)
  Operating expenses (excluding depreciation,
  depletion and amortization)                       $     302,728$     277,238










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Liquidity and Capital Resources



Liquidity


We have historically satisfied our working capital requirements and funded our capital expenditures, investments and debt service obligations with cash generated from operations, cash provided by the issuance of debt or equity, borrowings under credit and securitization facilities and sale-leaseback transactions. We believe that existing cash balances, future cash flows from operations and investments, borrowings under credit facilities and cash provided from the issuance of debt or equity will be sufficient to meet our working capital requirements, capital expenditures and additional investments, debt payments, commitments and distribution payments. Nevertheless, our ability to satisfy our working capital requirements, to fund planned capital expenditures, to service our debt obligations or to pay distributions will depend upon our future operating performance and access to and cost of financing sources, which will be affected by prevailing economic conditions generally and in the coal and oil & gas industries specifically, as well as other financial and business factors, some of which are beyond our control. Based on our recent operating results, current cash position, current unitholder distributions, anticipated future cash flows and sources of financing that we expect to have available, we do not anticipate any constraints to our liquidity at this time. However, to the extent operating cash flow or access to and cost of financing sources are materially different than expected, future liquidity may be adversely affected. Please read "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2018.

In May 2018, the MGP board of directors approved the establishment of a unit repurchase program authorizing us to repurchase 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. Please read "Part II - Item 2. Unregistered Sales of Equity Securities and Use of Proceeds" of this Quarterly Report on Form 10-Q for more information on unit repurchase program.

On January 3, 2019, we acquired all of the limited partner interests in AllDale I & II not owned by Cavalier Minerals and the general partner interests in AllDale I & II for $176.0 million, which was funded with cash on hand and borrowings under our revolving credit facility. On February 8, 2019, Kodiak redeemed our preferred equity interest for $135.0 million in cash. For more information on these transactions, please read "Item 1. Financial Statements (Unaudited) - Note 3. Acquisition" and "- Note 10. Investments" of this Quarterly Report on Form 10-Q.



Mine Development Project

We have begun development activity for MC Mining's Excel Mine No. 5 and currently anticipate deploying total capital of approximately $45.0 million to $50.0 million over the next 12 to 18 months, including $40.0 million to $45.0 million in 2019, which we expect to fund with cash from operations or borrowings under our credit facilities. We anticipate the new mine will enable us to access an additional 15 million tons of coal reserves with an expected mine life of approximately 12 years assuming the current level of production at MC Mining's Excel Mine No. 4 continues at the new mine. We expect the development plan for the new Excel Mine No. 5 will provide a seamless transition from the current MC Mining operation as its reserves deplete in 2020.



Cash Flows


Cash provided by operating activities was $143.7 million for the 2019 Quarter compared to $224.2 million for the 2018 Quarter. The decrease in cash provided by operating activities was primarily due to $93 million received in the 2018 Quarter for a one-time settlement related to litigation with a customer and certain of its affiliates initiated in 2015. The decrease also resulted from unfavorable working capital changes related to payroll and related benefit accruals, trade receivables and prepaid expenses and other assets. The decreases were partially offset by a favorable working capital change related to accounts payable.

Net cash used in investing activities was $116.0 million for the 2019 Quarter compared to $62.2 million for the 2018 Quarter. The increase in cash used in investing activities was primarily attributable to the Acquisition and increased capital expenditures for mine infrastructure and equipment at various mines. This increase was partially offset by cash received from the redemption of our equity securities and favorable changes in accounts payable related to property, plant and equipment purchases in the 2019 Quarter in addition to equity method investment contributions in the 2018 Quarter.


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Net cash used in financing activities was $241.7 million for the 2019 Period compared to $140.0 million for the 2018 Period. The increase in cash used in financing activities was primarily attributable to increased overall net payments on the securitization and revolving credit facilities and an increase in withholding taxes on issuance of units primarily under our long-term incentive plan in the 2019 Quarter compared to the 2018 Quarter as well as payments made to repurchase units in the 2019 Quarter.



Capital Expenditures


Capital expenditures increased to $84.0 million in the 2019 Quarter from $51.5 million in the 2018 Quarter. See our discussion of "Cash Flows" above concerning the increase in capital expenditures.

We currently project average estimated annual maintenance capital expenditures over the five-year period beginning in January 2019 of approximately $5.57 per ton produced. Our anticipated total capital expenditures (including investments) for the year ending December 31, 2019 are estimated in a range of $360.0 million to $400.0 million, which includes expenditures for maintenance capital at various mines. Management anticipates funding remaining 2019 capital requirements with cash and cash equivalents ($30.2 million as of March 31, 2019), cash flows from operations and investments, borrowings under revolving credit and securitization facilities and cash provided from the issuance of debt or equity. We will continue to have significant capital requirements over the long-term, which may require us to incur debt or seek additional equity capital. The availability and cost of additional capital will depend upon prevailing market conditions, the market price of our common units and several other factors over which we have limited control, as well as our financial condition and results of operations.



Debt Obligations


Credit Agreement. On January 27, 2017, our Intermediate Partnership entered into a Fourth Amended and Restated Credit Agreement (the "Credit Agreement") with various financial institutions. The Credit Agreement provides for a $494.75 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 May 23, 2021.

The Credit Agreement is guaranteed by all of the material direct and indirect subsidiaries of our Intermediate Partnership, and is secured by substantially all of the Intermediate Partnership's assets. Borrowings under the Revolving Credit Facility bear interest, at the option of the Intermediate Partnership, 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 4.85% as of March 31, 2019. At March 31, 2019, we had $9.3 million of letters of credit outstanding with $460.5 million available for borrowing under the Revolving Credit Facility. We currently 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 our Intermediate Partnership and its subsidiaries including, among other things, restrictions on incurrence of additional indebtedness and liens, sale of assets, investments, mergers and consolidations and transactions with affiliates, in each case subject to various exceptions, and the payment of cash distributions by our Intermediate Partnership if such payment would result in a certain fixed charge coverage ratio (as defined in the Credit Agreement). 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 and (b) a cash flow to interest expense ratio of not less than 3.0 to 1.0, in each case, during the four most recently ended fiscal quarters. The debt to cash flow ratio and cash flow to interest expense ratio were 0.81 to 1.0 and 16.6 to 1.0, respectively, for the trailing twelve months ended March 31, 2019. We remain in compliance with the covenants of the Credit Agreement as of March 31, 2019.

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


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indenture governing the Senior Notes contains customary terms, events of default and covenants relating to, among other things, the incurrence of debt, the payment of distributions or similar restricted payments, undertaking transactions with affiliates and limitations on asset sales. At any time prior to May 1, 2020, the issuers of the Senior Notes may redeem up to 35% of the aggregate principal amount of the Senior Notes with the net cash proceeds of one or more equity offerings at a redemption price equal to 107.5% of the principal amount redeemed, plus accrued and unpaid interest, if any, to the redemption date. The issuers of the Senior Notes may also redeem all or a part of the notes at any time on or after May 1, 2020, at redemption prices set forth in the indenture governing the Senior Notes. At any time prior to May 1, 2020, the issuers of the Senior Notes may redeem the Senior Notes at a redemption price equal to the principal amount of the Senior Notes plus a "make-whole" premium, plus accrued and unpaid interest, if any, to the redemption date.

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"). Under the Securitization Facility, certain subsidiaries sell 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 $100.0 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. It was renewed in January 2019 and matures in January 2020. At March 31, 2019, we had $90.0 million outstanding balance under the Securitization Facility.

Cavalier Credit Agreement. On October 6, 2015, Cavalier Minerals (see Note 9 - Variable Interest Entities) entered into a credit agreement (the "Cavalier Credit Agreement") with Mineral Lending, LLC ("Mineral Lending") for a $100.0 million line of credit (the "Cavalier Credit Facility"). The commitment under the Cavalier Credit Facility is reduced by any distributions received from Cavalier Minerals' investment in AllDale II. As of March 31, 2019, the commitment under the Cavalier Credit Facility was $68.2 million. Mineral Lending is an entity owned by (a) Alliance Resource Holdings II, Inc. ("ARH II"), an entity owned by Joseph W. Craft III, the Chairman, President and Executive Officer of MGP ("Mr. Craft") and Kathleen S. Craft, (b) an entity owned by an individual who is an officer and director of ARH II and (c) charitable foundations established by Mr. Craft and Kathleen S. Craft. There is no commitment fee under the facility. Mineral Lending's obligation to make the line of credit available terminates no later than October 6, 2019. Borrowings under the Cavalier Credit Facility bear interest at a one month LIBOR rate plus 6% with interest payable quarterly, and mature on September 30, 2024, at which time all amounts then outstanding are required to be repaid. The Cavalier Credit Agreement requires repayment of the principal balance beginning in 2018, in quarterly payments of an amount equal to the greater of $1.3 million initially, escalated to $2.5 million after two years, or fifty percent of Cavalier Minerals' excess cash flow. To secure payment of the facility, Cavalier Minerals pledged all of its partnership interests, owned or later acquired, in AllDale I & II. Cavalier Minerals may prepay the Cavalier Credit Facility at any time in whole or in part subject to terms and conditions described in the Cavalier Credit Agreement. As of March 31, 2019, Cavalier Minerals had not drawn on the Cavalier Credit Facility.

Other. We also have an agreement with a bank to provide additional letters of credit in an amount of $5.0 million to maintain surety bonds to secure certain asset retirement obligations and our obligations for workers' compensation benefits. At March 31, 2019, we had $5.0 million in letters of credit outstanding under this agreement.



Related-Party Transactions


We have related-party transactions with MGP, ARH II and their respective affiliates. These related-party transactions relate principally to mineral leases with charitable foundations established by Mr. Craft and Kathleen S. Craft and agreements relating to the use of aircraft. We also have transactions with (a) WKY CoalPlay, LLC ("WKY CoalPlay") regarding three mineral leases, (b) Bluegrass Minerals Management, LLC ("Bluegrass Minerals") through its noncontrolling ownership interest in Cavalier Minerals and (c) AllDale III to support its acquisition of oil & gas mineral interests. For more information regarding WKY CoalPlay, Bluegrass Minerals and AllDale III, please read "Item 1. Financial Statements (Unaudited) - Note 9. Variable Interest Entities," "- Note 10. Investments" and "- Note 18. Subsequent Events" of this Quarterly Report on Form 10-Q. Please read our Annual Report on Form 10-K for the year ended December 31, 2018, "Item 8. Financial Statements and Supplementary Data - Note 18. Related-Party Transactions" for additional information concerning related-party transactions.

Prior to the Acquisition and Kodiak redemption, we also had transactions with AllDale I & II to support their acquisition of oil & gas mineral interests, and Kodiak to support its gas compression services. For more information


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regarding the Acquisition and Kodiak redemption, please read "Item 1. Financial Statements (Unaudited) - Note 3. Acquisition" and "- Note 10. Investments" of this Quarterly Report on Form 10-Q.



New Accounting Standards


See "Item 1. Financial Statements (Unaudited) - Note 2. New Accounting Standards" of this Quarterly Report on Form 10-Q for a discussion of new accounting standards.

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