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OFFON

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)

05/07/2021 | 10:50am 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 "Mr. Craft" mean Joseph W. Craft III, the Chairman, President and

Chief Executive Officer of MGP.

References to "Intermediate Partnership" mean Alliance Resource Operating

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

L.P.

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

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

References to "Alliance Minerals" mean Alliance Minerals, LLC, the holding

? company for the oil and gas minerals interests of Alliance Resource Operating

Partners, L.P.

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

? LLC (the land holding company for certain coal mineral interests of Alliance

Resource Operating Partners, L.P.) including the subsidiaries of Alliance

   Resource Properties, LLC.




Summary


We are a diversified natural resource company operating in the United States that generates operating and royalty income from the production and marketing of coal to major domestic and international utilities and industrial users as well as royalty 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. Our mining operations are located near many of the major eastern utility generating plants and on major coal hauling railroads in the eastern United States. Two of our mines are located on the banks of the Ohio River. As is customary in the coal industry, we have entered into long-term coal supply agreements with many of our customers. In addition to our mining operations, in 2007, Alliance Resource Properties began acquiring control of coal mineral interests and leasing the coal reserves to our mining operations. In 2014, we began acquiring oil & gas mineral interests in premier oil & gas producing regions across the United States.

We have four reportable segments, Illinois Basin Coal Operations, Appalachia Coal Operations, Oil & Gas Royalties and Coal Royalties. We also have an "all other" category referred to as Other and Corporate. Our two coal operations 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 operations reportable segments include seven mining complexes operating in Illinois, Indiana, Kentucky, Maryland, Pennsylvania and West Virginia and a coal loading terminal in Indiana on the Ohio River. Our Oil & Gas Royalties reportable segment includes our oil & gas mineral interests which are located primarily in the Permian (Delaware and Midland), Anadarko (SCOOP/STACK), and Williston (Bakken) basins. Our ownership in these basins includes approximately 55,500 net royalty acres which provides us with diversified exposure to industry leading operators consistent with our general business strategy to grow our oil & gas mineral interest business. We market our oil & gas mineral interests for lease to operators in those regions and generate royalty income from the leasing and development of those mineral interests. Our Coal Royalties reportable segment includes coal reserves controlled by Alliance Resource Properties, which are either (a) leased to certain of our coal mining entities or (b) unleased but near our coal mining operations.

Beginning in the first quarter of 2021, we began to strategically view and manage our coal royalty activities separately from our coal operations since acquiring and managing a variety of royalty producing assets have similar management attributes. As a result, we restructured our reportable segments to better reflect this strategic view in how we manage our business and allocate resources. Prior periods have been recast to include Alliance Resource Properties within our new Coal Royalties reportable segment with offsetting recast adjustments primarily to our coal operations reportable


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segments and to a lesser extent, our Other and Corporate category. Our reported eliminations were recast also to reflect intercompany royalty revenues and offsetting intercompany royalty expense resulting from our new Coal Royalties reportable segment.

Illinois Basin Coal Operations reportable segment includes currently operating

mining complexes (a) the Gibson County Coal, LLC ("Gibson") mining complex,

which includes the Gibson South mine, (b) the Warrior Coal, LLC ("Warrior")

mining complex, (c) the River View Coal, LLC ("River View") mining complex and

? (d) the Hamilton County Coal, LLC ("Hamilton") mining complex. The Illinois

Basin Coal Operations reportable segment also includes our operating Mt. Vernon

Transfer Terminal, LLC ("Mt. Vernon") coal loading terminal in Indiana on the

Ohio River. Our Coal Royalties reportable segment controls other coal

reserves near our Illinois Basin operations, which have not yet been leased to

our Illinois Basin mining entities.

The Illinois Basin Coal Operations reportable segment also includes Mid-America Carbonates, LLC ("MAC") and other support services as well as non-operating mining complexes (a) the Gibson North mine, which ceased production in fourth quarter of 2019, (b) Webster County Coal, LLC's Dotiki mining complex, (c) White County Coal, LLC's Pattiki mining complex, (d) Hopkins County Coal, LLC's mining complex, and (e) Sebree Mining, LLC's mining complex.

Appalachia Coal Operations reportable segment includes currently operating

mining complexes (a) the Mettiki mining complex ("Mettiki"), (b) the Tunnel

Ridge, LLC mining complex ("Tunnel Ridge"), and (c) the MC Mining, LLC ("MC

? Mining") mining complex. The Mettiki mining complex includes Mettiki Coal

(WV), LLC's Mountain View mine and Mettiki Coal, LLC's preparation plant. Our

Coal Royalties reportable segment discussed below, controls the Penn Ridge coal

reserves near our Tunnel Ridge operations which have not yet been leased to

   Tunnel Ridge.



Oil & Gas Royalties reportable segment includes oil & gas mineral interests

held by AR Midland, LP ("AR Midland") and AllDale I & II and includes Alliance

? Minerals' equity interests in both AllDale Minerals III, LP ("AllDale III")

(Note 9 - Investment) and Cavalier Minerals. Please read "Item 1. Financial

Statements (Unaudited)-Note 9 - Investment" of this Quarterly Report on Form

10-Q for more information on AllDale III.

Coal Royalties reportable segment includes coal reserves held or controlled by

Alliance Resource Properties, consisting of (a) reserves leased to certain of

our mining complexes in both the Illinois Basin Coal Operations and Appalachia

? Coal Operations reportable segments and (b) reserves near our coal mining

operations but not yet leased to our coal mining entities. About two thirds of

the coal sold by our Coal Operations' mines is leased from our Coal Royalties

   entities.



Other and Corporate includes marketing and administrative activities, Matrix

Design Group, LLC and its subsidiaries ("Matrix Design"), Alliance Design

Group, LLC ("Alliance Design") (collectively, Matrix Design and Alliance Design

referred to as the "Matrix Group"), Pontiki Coal, LLC's workers' compensation

? and pneumoconiosis liabilities, Wildcat Insurance, LLC ("Wildcat Insurance"),

which assists the ARLP Partnership with its insurance requirements, and AROP

Funding and Alliance Finance (both discussed in Note 7 - Long-Term Debt).

Please read "Item 1. Financial Statements (Unaudited)-Note 7 - Long-Term Debt"

of this Quarterly Report on Form 10-Q for more information on AROP Funding.

Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020

We reported net income attributable to ARLP of $24.7 million for the three months ended March 31, 2021 ("2021 Quarter") compared to a net loss attributable to ARLP of $144.8 million for the three months ended March 31, 2020 ("2020 Quarter"). The increase of $169.5 million was primarily due to non-cash asset and goodwill impairment charges of $157.0 million recorded in the 2020 Quarter and reduced operating expenses, partially offset by lower revenues. Total revenues decreased to $318.6 million in the 2021 Quarter compared to $350.8 million for the 2020 Quarter due to reduced coal sales volumes and price realizations as well as lower contract buy-out revenues, partially offset by higher transportation revenues due to increased coal sales into the export markets. Weather-related transportation disruptions and an unplanned customer plant outage impacted anticipated coal shipments during the 2021 Quarter, contributing to a 9.2% reduction in total revenues compared to the 2020 Quarter.

Lower coal volumes and ongoing efficiency initiatives at our mining operations contributed to lower operating expenses of $196.5 million for the 2021 Quarter, compared to $234.3 million for the 2020 Quarter, largely offsetting lower total revenues. In general, the results from the 2021 Quarter benefited as compared to


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the 2020 Quarter, from significantly reduced disruptions to global energy demand
created by the COVID-19 pandemic that negatively impacted our results for the
2020 Quarter.




                                                      Three Months Ended March 31,
                                              2021         2020          2021          2020

                                                (in thousands)          (per ton/BOE sold)
Coal - Tons sold                                6,828        7,251           N/A          N/A
Coal - Tons produced                            8,001        8,021           N/A          N/A
Coal - Coal sales                           $ 287,487    $ 314,637    $    42.10     $  43.39
Coal - Segment Adjusted EBITDA Expense
(1) (2)                                     $ 202,932    $ 240,719    $    29.72     $  33.20
Oil & Gas Royalties - BOE sold (3)                400          495           N/A          N/A
Oil & Gas Royalties - Royalties             $  13,999    $  14,239    $    35.02     $  28.79
Coal Royalties - Tons sold                      4,521        4,998           N/A          N/A

Coal Royalties - Intercompany royalties $ 11,301 $ 11,371 $ 2.50 $ 2.28

For a definition of Segment Adjusted EBITDA Expense and related (1) 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."

Coal - Segment Adjusted EBITDA Expense is defined as consolidated Segment (2) Adjusted EBITDA Expense excluding expenses of our Oil & Gas Royalties segment

and is adjusted for intercompany transactions with our Coal Royalties

segment.

(3) Average sales price per BOE is defined as oil & gas royalty revenues

    excluding lease bonus revenue divided by total BOE sold.



Coal sales. Coal sales decreased $27.1 million or 8.6% to $287.5 million for the 2021 Quarter from $314.6 million for the 2020 Quarter. The decrease was attributable to a volume variance of $18.3 million resulting from decreased tons sold and a price variance of $8.8 million due to lower average coal sales prices. Tons sold declined to 6.8 million tons in the 2021 Quarter compared to 7.3 million tons in the 2020 Quarter primarily reflecting weather-related transportation disruptions, and an unplanned customer plant outage offset in part by increased export volumes. Coal sales price realizations also fell by 3.0% in the 2021 Quarter to $42.10 per ton sold, compared to $43.39 per ton sold during the 2020 Quarter due to the expiration of higher priced contract shipments.

Coal - Segment Adjusted EBITDA Expense. Segment Adjusted EBITDA Expense for our coal operations decreased 15.7% to $202.9 million, as a result of reduced tons sold and lower expense per ton. On a per ton basis, Segment Adjusted EBITDA Expense for our coal operations decreased 10.5% in the 2021 Quarter to $29.72 per ton sold, compared to $33.20 per ton in the 2020 Quarter, primarily due to ongoing expense control and efficiency initiatives at all of our mining operations and improved recoveries at our Hamilton, Warrior, Tunnel Ridge and MC Mining operations. In addition, other cost decreases are discussed below by category:

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

decreased 13.2% to $9.43 per ton in the 2021 Quarter from $10.87 per ton in the

? 2020 Quarter. The decrease of $1.44 per ton was primarily due to decreased

labor expenses at various mines resulting from ongoing expense controls,

efficiency initiatives and improved recoveries at certain mines mentioned

   above.



Material and supplies expenses per ton produced decreased 9.0% to $9.95 per ton

in the 2021 Quarter from $10.94 per ton in the 2020 Quarter. The decrease of

$0.99 per ton produced resulted primarily from related decreases of $0.57 per

ton for outside expenses used in the mining processes, $0.19 per ton for

? environmental and reclamation expenses other than longwall subsidence, $0.18

per ton for certain ventilation expenses, $0.17 per ton for power and fuel used

in the mining process and $0.14 per ton for safety related materials and

supplies, partially offset by an increase of $0.60 per ton in longwall

subsidence expense primarily at our Tunnel Ridge operation.

Maintenance expenses per ton produced decreased 29.9% to $2.56 per ton in the

? 2021 Quarter from $3.65 per ton in the 2020 Quarter. The decrease of $1.09 per

ton produced was primarily due to reduced maintenance expenses at our longwall

mining operations and improved recoveries previously mentioned.




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Segment Adjusted EBITDA Expense decreases per ton above were partially offset by the following increase:

Production taxes and royalty expenses per ton incurred as a percentage of coal

? sales prices and volumes increased $0.23 per produced ton sold in the 2021

Quarter compared to the 2020 Quarter primarily as a result of increased

production in states with higher severance taxes per ton.

Other revenues. Other revenues were principally comprised of Mt. Vernon transloading revenues in our Illinois Basin Coal Operations segment, Matrix Design sales in Other & Corporate as well as revenues not specific to any particular segment such as contract buy-out revenues and other outside services.

Other revenues decreased to $6.1 million in the 2021 Quarter from $17.1 million in the 2020 Quarter. The decrease of $11.0 million was primarily due to a customer buy-out of certain coal contracts at our Tunnel Ridge mine during the 2020 Quarter.

Depreciation, depletion and amortization. Depreciation, depletion and amortization expense decreased to $59.2 million for the 2021 Quarter compared to $73.9 million for the 2020 Quarter primarily as a result of reduced sales volumes and increased mine life estimates for certain mines.

Asset impairment. During the 2020 Quarter, we recorded $25.0 million of non-cash asset impairment charges due to sealing our idled Gibson North mine, resulting in its permanent closure, and a decrease in the fair value of certain mining equipment and greenfield coal reserves as a result of weakened coal market conditions. Please read "Item 1. Financial Statements (Unaudited)-Note 2 - Long-Lived Asset Impairments" of this Quarterly Report on Form 10-Q.

Goodwill impairment. During the 2020 Quarter, we recorded a $132.0 million non-cash goodwill impairment charge associated with our Hamilton mine, primarily as the result of reduced expected production volumes due to weakened coal market conditions and low energy demand resulting in part from the COVID-19 pandemic.

Please read "Item 1. Financial Statements (Unaudited)-Note 3 - Goodwill Impairment " of this Quarterly Report on Form 10-Q.

Transportation revenues and expenses. Transportation revenues and expenses were $11.1 million and $4.7 million for the 2021 and 2020 Quarters, respectively.

The increase of $6.4 million was primarily attributable to increased average third-party transportation rates in the 2021 Quarter and increased coal tonnage for which we arrange third-party transportation at certain mines primarily due to increased coal shipments to international markets. Transportation revenues are recognized in an amount equal to transportation expenses when title to the coal passes to the customer.



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Segment Adjusted EBITDA. Our 2021 Quarter Segment Adjusted EBITDA decreased $1.9 million, or 1.7%, to $109.8 million from the 2020 Quarter Segment Adjusted EBITDA of $111.7 million. Segment Adjusted EBITDA, tons sold, coal sales, other revenues, oil & gas royalties, BOE volume, coal royalties, coal royalties tons sold and Segment Adjusted EBITDA Expense by segment are as follows:




                                              Three Months Ended
                                                  March 31,
                                              2021          2020        Increase (Decrease)

                                                        (in thousands)
Segment Adjusted EBITDA
Illinois Basin Coal Operations             $   57,673    $   43,333    $     14,340      33.1 %
Appalachia Coal Operations                     31,506        47,302        (15,796)    (33.4) %
Oil & Gas Royalties                            11,946        13,755         (1,809)    (13.2) %
Coal Royalties                                  7,273         6,909             364       5.3 %
Other and Corporate                             3,481         2,737             744      27.2 %
Elimination                                   (2,058)       (2,335)             277      11.9 %

Total Segment Adjusted EBITDA (2) $ 109,821 $ 111,701 $ (1,880) (1.7) %


Coal - Tons sold
Illinois Basin Coal Operations                  4,760         5,056           (296)     (5.9) %
Appalachia Coal Operations                      2,068         2,195           (127)     (5.8) %
Total tons sold                                 6,828         7,251           (423)     (5.8) %

Coal sales
Illinois Basin Coal Operations             $  182,641    $  199,098    $   (16,457)     (8.3) %
Appalachia Coal Operations                    104,846       115,539        (10,693)     (9.3) %
Total coal sales                           $  287,487    $  314,637    $   (27,150)     (8.6) %

Other revenues
Illinois Basin Coal Operations             $      613    $      918    $      (305)    (33.2) %
Appalachia Coal Operations                        385        11,681        (11,296)    (96.7) %
Oil & Gas Royalties                                21            24             (3)    (12.5) %
Coal Royalties                                      -             5             (5)       (1)
Other and Corporate                             7,768         7,379             389       5.3 %
Elimination                                   (2,719)       (2,859)             140       4.9 %
Total other revenues                       $    6,068    $   17,148    $   (11,080)    (64.6) %

Segment Adjusted EBITDA Expense
Illinois Basin Coal Operations             $  125,581    $  156,683    $   (31,102)    (19.9) %
Appalachia Coal Operations                     73,726        79,918         (6,192)     (7.7) %
Oil & Gas Royalties                             2,058           883           1,175       (1)
Coal Royalties                                  4,028         4,467           (439)     (9.8) %
Other and Corporate                             4,286         4,642           (356)     (7.7) %
Elimination (3)                              (11,962)      (11,895)            (67)     (0.6) %

Total Segment Adjusted EBITDA Expense $ 197,717 $ 234,698 $ (36,981) (15.8) %

Oil & Gas Royalties
Volume - BOE (4)                                  400           495            (95)    (19.2) %
Oil & gas royalties                        $   13,999    $   14,239    $      (240)     (1.7) %

Coal Royalties
Volume - Tons sold (5)                          4,521         4,998           (477)     (9.5) %
Intercompany coal royalties                $   11,301    $   11,371    $       (70)     (0.6) %

(1) Percentage change not meaningful.


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

of non-GAAP "Segment Adjusted EBITDA" to GAAP "net income (loss)."

(3) Primarily includes the elimination of intercompany coal royalty revenues and

expenses between our Coal Royalties Segment and our Coal Operations Segments.

(4) Barrels of oil equivalent ("BOE") is calculated on a 6:1 basis (6,000 cubic

feet of natural gas to one barrel).

(5) Represents tons sold by our Coal Operations Segments associated with coal

    reserves leased from our Coal Royalties Segment.



Illinois Basin Coal Operations - Segment Adjusted EBITDA increased 33.1% to $57.7 million in the 2021 Quarter from $43.3 million in the 2020 Quarter. The increase of $14.4 million was primarily attributable to reduced operating expenses, partially offset by lower coal sales, which decreased 8.3% to $182.6 million in the 2021 Quarter from $199.1 million in the 2020 Quarter. The decrease of $16.5 million in coal sales primarily reflects reduced tons sold, which decreased 5.9% compared to the 2020 Quarter due to reduced domestic sales partially offset by increased export volumes. Segment Adjusted EBITDA Expense decreased 19.9% to $125.6 million in the 2021 Quarter from $156.7 million in the 2020 Quarter primarily as a result of reduced tons sold and decreased per ton costs. Segment Adjusted EBITDA Expense per ton decreased $4.61 per ton sold to $26.38 from $30.99 per ton sold in the 2020 Quarter primarily as a result of ongoing expense control and efficiency initiatives in the region and improved recoveries at our Hamilton and Warrior operations. See also certain cost variances described above under "-Coal - Segment Adjusted EBITDA Expense."

Appalachia Coal Operations - Segment Adjusted EBITDA decreased 33.4% to $31.5 million for the 2021 Quarter from $47.3 million in the 2020 Quarter. The decrease of $15.8 million was primarily attributable to lower contract buy-out revenues at Tunnel Ridge as discussed above and lower coal sales, which decreased 9.3% to $104.8 million in the 2021 Quarter from $115.5 million in the 2020 Quarter, partially offset by reduced operating expenses. The decrease of $10.7 million in coal sales reflects lower tons sold and price realizations.

Tons sold decreased 5.8% in the 2021 Quarter compared to the 2020 Quarter due to reduced sales volumes at our Tunnel Ridge mine as a result of an unplanned customer plant outage and weather-related delays. Coal sales price per ton sold in the 2021 Quarter decreased 3.7% compared to the 2020 Quarter primarily due to the expiration of higher priced contract shipments. Segment Adjusted EBITDA Expense decreased 7.7% to $73.7 million in the 2021 Quarter from $79.9 million in the 2020 Quarter due to reduced tons sold and decreased per ton costs.

Segment Adjusted EBITDA Expense per ton decreased $0.76 per ton sold to $35.65 compared to $36.41 per ton sold in the 2020 Quarter, as a result of ongoing expense control and efficiency initiatives as well as improved recoveries at our Tunnel Ridge and MC Mining operations. See also certain cost variances described above under "-Coal - Segment Adjusted EBITDA Expense."

Oil & Gas Royalties - Segment Adjusted EBITDA decreased to $11.9 million for the 2021 Quarter from $13.8 million in the 2020 Quarter. The decrease of $1.9 million was primarily due to reduced volumes, which decreased 19.2% compared to the 2020 Quarter, partially offset by higher sales price realizations per BOE.

Coal Royalties - Segment Adjusted EBITDA increased 5.3% to $7.3 million for the 2021 Quarter from $6.9 million in the 2020 Quarter. The increase of $0.4 million was a result of higher average intercompany royalty rates per ton received from our mining operations and reduced selling expenses, partially offset by reduced coal sales volumes by our mining operations from reserves owned or controlled by our Coal Royalties Segment entities.

Reconciliation of non-GAAP "Segment Adjusted EBITDA" to GAAP "net income (loss)" 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 (loss) attributable to ARLP before net interest expense, income taxes, depreciation, depletion and amortization, general and administrative expenses and asset and goodwill impairments. 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.



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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.

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




                                               Three Months Ended
                                                   March 31,
                                               2021          2020

                                                 (in thousands)

Consolidated Segment Adjusted EBITDA $ 109,821 $ 111,701 General and administrative

                    (15,504)       (13,438)

Depreciation, depletion and amortization (59,202) (73,921) Asset impairments

                                    -       (24,977)
Goodwill impairment                                  -      (132,026)
Interest expense, net                         (10,379)       (12,227)
Income tax benefit                                  12            105
Net income (loss) attributable to ARLP      $   24,748    $ (144,783)
Noncontrolling interest                             78             76
Net income (loss)                           $   24,826    $ (144,707)



Segment Adjusted EBITDA Expense (a non-GAAP financial measure) includes operating expenses and other expense. 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 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,
                                                      2021             2020

                                                          (in thousands)
Segment Adjusted EBITDA Expense                   $     197,717    $     234,698
Other expense                                           (1,197)            (356)
Operating expenses (excluding depreciation,
depletion and amortization)                       $     196,520    $     234,342






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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 other financing 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 any 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 both the coal and oil & gas industries specifically, as well as other financial and business factors, some of which are beyond our control, including the COVID-19 pandemic. Based on our recent operating cash flow results, current cash position, anticipated future cash flows and sources of financing that we expect to have available, we anticipate remaining in compliance with the covenants of the Credit Agreement and expect to have sufficient liquidity to fund our operations and growth strategies. However, to the extent operating cash flow or access to and cost of financing sources are materially different than expected, future covenant compliance or 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, 2020.

In May 2018, the Board 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. Since inception through March 31, 2021, we have purchased units for a total of $93.5 million under the program. During the three months ended March 31, 2021, we did not repurchase and retire any units. The timing of any future unit repurchases and the ultimate number of units to be purchased will depend on a number of factors, including business and market conditions, our future financial performance, and other capital priorities. 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.




Cash Flows



Cash provided by operating activities was $54.6 million for the 2021 Quarter compared to $78.7 million for the 2020 Quarter. The decrease in cash provided by operating activities was primarily due to unfavorable working capital changes related to trade receivables and accrued taxes other than income taxes which was partially offset by a favorable working capital change related to accounts payable.

Net cash used in investing activities was $22.7 million for the 2021 Quarter compared to $51.3 million for the 2020 Quarter. The decrease in cash used in investing activities was primarily attributable to the decrease in capital expenditures for mine infrastructure and equipment at various mines during the 2021 Quarter.

Net cash used in financing activities was $53.0 million for the 2021 Quarter compared to $34.2 million for the 2020 Quarter. The increase in cash used in financing activities was primarily attributable to lower net proceeds from borrowings under the revolving credit facility, partially offset by the cash benefit of suspending quarterly distributions to unitholders, which were first suspended in May 2020 related to the 2020 Quarter. Quarterly distributions to unitholders will resume for the 2021 Quarter in May 2021.



Capital Expenditures


Capital expenditures decreased to $31.4 million in the 2021 Quarter from $50.4 million in the 2020 Quarter. See our discussion of "Cash Flows" above concerning the decrease in capital expenditures.

We currently project average estimated annual maintenance capital expenditures over the next five-year of approximately $4.90 per ton produced. Our anticipated total capital expenditures, including maintenance capital expenditures, for 2021 are estimated in a range of $120.0 million to $125.0 million. Management anticipates funding remaining 2021 capital requirements with our March 31, 2021 cash and cash equivalents of $34.4 million, cash flows from


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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 Facility. On March 9, 2020, our Intermediate Partnership entered into a Fifth Amended and Restated Credit Agreement (the "Credit Agreement") with various financial institutions. The Credit Agreement provides for a $537.75 million revolving credit facility, reducing to $459.5 million on May 23, 2021, including a sublimit of $125 million for the issuance of letters of credit and a sublimit of $15.0 million for swingline borrowings (the "Revolving Credit Facility"), with a termination date of March 9, 2024.

The Credit Agreement is guaranteed by certain of our Intermediate Partnership's material direct and indirect subsidiaries (the "Restricted Subsidiaries") and is secured by substantially all of the assets of the Restricted Subsidiaries. The Credit Agreement is also guaranteed by Alliance Minerals but the oil and gas minerals assets of Alliance Minerals and its direct and indirect subsidiaries (collectively with Alliance Minerals, the "Unrestricted Subsidiaries") are not collateral under the Credit Agreement. Borrowings under the Revolving Credit Facility bear interest, at our option, at either (i) the Base Rate at the greater of three benchmarks or (ii) a Eurodollar Rate, plus margins for (i) or (ii), as applicable, that fluctuate depending upon the ratio of Consolidated Debt to Consolidated Cash Flow (each as defined in the Credit Agreement). The Eurodollar Rate, with applicable margin, under the Revolving Credit Facility was 2.97% as of March 31, 2021. At March 31, 2021, we had $21.8 million of letters of credit outstanding with $461.0 million available for borrowing under the Revolving Credit Facility. We incur an annual commitment fee of 0.35% on the undrawn portion of the Revolving Credit Facility. We utilize the Revolving Credit Facility, as appropriate, for working capital requirements, capital expenditures and investments, scheduled debt payments and distribution payments.

The Credit Agreement contains various restrictions affecting the Intermediate Partnership and its Restricted Subsidiaries including, among other things, restrictions on incurrence of additional indebtedness and liens, sale of assets, investments, mergers and consolidations and transactions with affiliates, including transactions with Unrestricted Subsidiaries. In each case, these restrictions are subject to various exceptions. In addition, the payment of cash distributions is restricted if such payment would result in a fixed charge coverage ratio of less than 1.0 to 1.0 (as defined in the Credit Agreement) for the four most recently ended fiscal quarters. The Credit Agreement requires the Intermediate Partnership to maintain (a) a debt to cash flow ratio of not more than 2.5 to 1.0, (b) a cash flow to interest expense ratio of not less than 3.0 to 1.0 and (c) a first lien debt to cash flow ratio of not more than 1.5 to 1.0, in each case, during the four most recently ended fiscal quarters. The debt to cash flow ratio, cash flow to interest expense ratio and first lien debt to cash flow ratio were 1.43 to 1.0, 8.67 to 1.0 and 0.39 to 1.0, respectively, for the trailing twelve months ended March 31, 2021. We remained in compliance with the covenants of the Credit Agreement as of March 31, 2021 and anticipate remaining in compliance with the covenants.

Senior Notes. On April 24, 2017, the Intermediate Partnership and Alliance Resource Finance Corporation (as co-issuer), a wholly owned subsidiary of the Intermediate Partnership ("Alliance Finance"), issued an aggregate principal amount of $400.0 million of senior unsecured notes due 2025 ("Senior Notes") in a private placement to qualified institutional buyers. The Senior Notes have a term of eight years, maturing on May 1, 2025 (the "Term") and accrue interest at an annual rate of 7.5%. Interest is payable semi-annually in arrears on each May 1 and November 1. The indenture governing the Senior Notes contains customary terms, events of default and covenants relating to, among other things, the incurrence of debt, the payment of distributions or similar restricted payments, undertaking transactions with affiliates and limitations on asset sales. The issuers of the Senior Notes may redeem all or a part of the notes at any time at redemption prices set forth in the indenture governing the Senior Notes.

Accounts Receivable Securitization. On December 5, 2014, certain direct and indirect wholly owned subsidiaries of our Intermediate Partnership entered into a $100.0 million accounts receivable securitization facility ("Securitization Facility"). Under the Securitization Facility, certain subsidiaries sell certain trade receivables on an ongoing basis to our Intermediate Partnership, which then sells the trade receivables to AROP Funding, LLC ("AROP Funding"), a wholly owned bankruptcy-remote special purpose subsidiary of our Intermediate Partnership, which in turn borrows on a revolving basis up to $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


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Rate. The agreement governing the Securitization Facility contains customary terms and conditions, including limitations with regards to certain customer credit ratings. In January 2021, we extended the term of the Securitization Facility to January 2022 and reduced the borrowing availability under the facility to $60.0 million. The Securitization Facility was previously scheduled to mature in January 2021. On March 31, 2021, we had a $38.1 million outstanding balance under the Securitization Facility.

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

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

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

Line of Credit. On February 19, 2021, we entered into a line of credit arrangement with a related party for $5.0 million. The line of credit has a maturity date of February 28, 2023, with an option to extend it for an additional six months and accrue interest at an annual rate of 3.50%. Interest is payable quarterly commencing March 31, 2021, and continuing each March 31, June 30, September 30 and December 31 thereafter through and including February 28, 2023. The agreement contains customary terms and events of default and is guaranteed by ARLP. We utilize the line of credit, as appropriate, for capital expenditure and investments. As of March 31, 2021, we had drawn $1.8 million under this agreement.

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. On March 31, 2021, we had $5.0 million in letters of credit outstanding under this agreement.



Related-Party Transactions


We have related-party transactions and activities with Mr. Craft, MGP, ARH II and their respective affiliates. These related-party transactions and activities relate principally to 1) coal mineral leases with The Joseph W. Craft III Foundation and The Kathleen S. Craft Foundation, 2) the use of aircraft, and 3) providing administrative services with respect to certain oil & gas mineral interests Mr. Craft acquired in 2019. We also have related-party transactions with (a) WKY CoalPlay, LLC ("WKY CoalPlay") regarding four mineral leases, (b) Bluegrass Minerals Management, LLC ("Bluegrass Minerals") through its noncontrolling ownership interest in our consolidated subsidiary, Cavalier Minerals and (c) with our equity interest in AllDale III. For more information regarding the Bluegrass Minerals and AllDale III, please read "Item 1. Financial Statements (Unaudited)-Note 8 - Variable Interest Entities" and "-Note 9 - Investment" of this Quarterly Report on Form 10-Q. We also have a line of credit with a related party as discussed in "Item 1. Financial Statements (Unaudited)-Note 7 - Long-Term Debt" of this Quarterly Report on Form 10-Q.

Please read our Annual Report on Form 10-K for the year ended December 31, 2020, "Item 8. Financial Statements and Supplementary Data-Note 21 - Related-Party Transactions" for additional information concerning related-party transactions.



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Other Information



Insurance


Effective October 1, 2020, we renewed our annual property and casualty insurance program. Our property insurance was procured from our wholly owned captive insurance company, Wildcat Insurance. Wildcat Insurance charged certain of our subsidiaries for the premiums on this program and in return purchased reinsurance for the program in the standard market. The maximum limit in the commercial property program is $100.0 million per occurrence, excluding a $1.5 million deductible for property damage, a 75- or 90-day waiting period for underground business interruption depending on the mining complex and an additional $10.0 million overall aggregate deductible. We have elected to retain a 10% participating interest in our commercial property insurance program. We can make no assurances that we will not experience significant insurance claims in the future that could have a material adverse effect on our business, financial condition, results of operations and ability to purchase property insurance in the future. Also, exposures exist for which no insurance may be available and for which we have not reserved. In addition, the insurance industry has been subject to efforts by environmental activists to restrict coverages available for fossil fuel companies.

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Financials (USD)
Sales 2021 1 522 M - -
Net income 2021 - - -
Net Debt 2021 - - -
P/E ratio 2021 -
Yield 2021 3,23%
Capitalization 1 180 M 1 180 M -
Capi. / Sales 2021 0,78x
Capi. / Sales 2022 0,83x
Nbr of Employees 2 902
Free-Float 68,4%
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Managers and Directors
Joseph W. Craft Chairman, President & Chief Executive Officer
Brian L. Cantrell Chief Financial Officer & Senior Vice President
Thomas M. Wynne Chief Operating Officer & Senior Vice President
John Harris Robinson Independent Director
Wilson Mack Torrence Independent Director