Alliance Resource Partners, L.P.

Good morning and welcome to the Alliance Resource Partners, L.P., first quarter 2020 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press stars and one on your touchtone phone. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Brian Cantrell, Senior Vice President and Chief Financial Officer. Please go ahead.

Thank you, Eileen, and welcome, everyone. Earlier this morning, Alliance Resource Partners released its first quarter 2020 earnings and will now discuss these results as well as our perspective on market conditions. Following our prepared remarks, we'll open the call to your questions. Before we begin, a reminder that some of our remarks today may include forward-looking statements that are subject to a variety of risks, uncertainties, and assumptions contained in our filings from time to time with the Securities and Exchange Commission and are also reflected in this morning's press release. While these forward-looking statements are based on information currently available to us, if one or more of these risks or uncertainties materialize, or if our underlying assumptions prove incorrect, actual results may vary materially from those we projected or expected. In providing these remarks, the partnership has no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, unless required by law to do so. Finally, we will also be discussing certain non-GAAP financial measures. Definitions and reconciliations of these differences between these non-GAAP financial measures and the most directly comparable GAAP financial measures are contained at the end of ARLP's press release, which has been posted on our website and furnished to the SEC on Form 8K. With the required preliminaries out of the way this morning, I'll begin with a review of our results and then turn the call over to Joe Craft, our Chairman, President, and Chief Executive Officer, for his perspectives. As economic market conditions began to shift significantly during the 2020 quarter, ARLP's financial and operating results evolved as well. Early on, performance from both our coal operations and mineral segment was in line with our expectations. As the quarter progressed, however, coal markets began to come under pressure due to mild winter weather, persistently low natural gas prices, high utility stockpiles, and the continued absence of meaningful export opportunities. Midway through the quarter, our coal operations began to work at reduced levels as we responded to the weakening coal market conditions by cutting production. Late in the quarter, the global economy began to quickly and significantly contract as world leaders took actions to combat the deadly coronavirus pandemic. crushing demand for energy and leading to our decision on March 30th to temporarily idle our production in the Illinois Basin. The effect of these circumstances resulted in ARLP's coal sales volumes and prices in the 2020 quarter falling by 29.7% and 5.9% respectively compared to the 2019 quarter and leading coal sales revenues down 33.9% to $314.6 million. Lower sales volumes also resulted in lower coal operating expenses, which declined 22.6% versus the 2019 quarter. On a per ton basis, however, segment adjusted EBITDA expense at our coal operations increased 10.6% to $32.25 per ton compared to $29.17 in the 2019 quarter due to volume curtailments in response to reduced demand The Longwall move at our Hamilton mine and a $0.60 per ton increase to the federal black lung excise tax imposed by the federal government effective January 1, 2020. Reflecting these impacts, ARLP's segment adjusted EBITDA from coal operations dropped to $97.9 million or 46.9% lower than the 2019 quarter. Compared to the sequential quarter, Coal sales price realizations in the 2020 quarter improved slightly, increasing to $43.39 per ton sold. Higher per ton expenses in the Illinois Basin segment more than offset an exceptional 10% per ton reduction in the Appalachian segment's cost per ton, resulting in a 4.3 sequential increase to total segment adjusted EBITDA expense per ton from our coal operations. Lower coal sales volumes were also the primary contributor, to a 24.3% sequential reduction in segment-adjusted EBITDA from coal. Turning now to our mineral segment, oil and gas production volumes increased 51.4% over the 2019 quarter to approximately 5,440 barrels of oil equivalent per day, primarily as a result of additional mineral interest we acquired from WING last August, as well as continued development by operators across our total mineral position. As commodity prices weakened throughout the 2020 quarter, average sales price realizations per BOE declined, falling 9.2% compared to the 2019 quarter. Increased volumes more than offset these lower price realizations, driving segment adjusted EBITDA higher by 50.6% compared to the 2019 quarter. Sequentially, lower sales price realizations and slightly lower volumes pushed segment adjusted EBITDA down 5.6% to $13.8 million. Our mineral segment contributed 12.3% of ARLP's consolidated segment adjusted EBITDA this quarter. As noted in our press release earlier this morning, comparisons of ARLP's net income in EBITDA from the 2020 and 2019 quarters were impacted by several non-cash factors. For the 2020 quarter, our routine review of potential impairments was significantly influenced by the economic disruptions and uncertainties created by the COVID-19 pandemic. These uncertainties materially impacted our future cash flow estimates for all of our long-lived assets and resulted in two areas of impairment related to current market conditions. First, we recorded a $25 million asset impairment due to our decision this quarter to permanently close the Gibson North mine and a decrease in the estimated fair value of certain surplus mining equipment and Greenfield coal reserves. In addition, we wrote off $132 million of goodwill related to our 2015 acquisition of the Hamilton mine. Results for the 2019 quarter reflected a net non-cash gain of $170 million related to the January 2019 Alldale acquisition. Excluding these non-cash items, ARLP reported adjusted net income and adjusted EBITDA for the 2020 quarter of $12.2 million and $98.3 million, respectively, compared to $106.5 million and $188.8 million, respectively, for the 2019 quarter. During the 2019 quarter, ARLP successfully completed an amendment and a four-year extension of its revolving credit facility. The new facility provides for increased capacity of $537.75 million through May of next year, at which time it steps down to $459.5 million, and in addition gives us the flexibility to separately finance ARLP's mineral interest in the future. We ended the 2020 quarter with liquidity of $258.4 million and remain comfortably in compliance with our debt covenants, including total debt of approximately 1.6 times trailing 12 months EBITDA. With that, I'll now turn the call over to Joe. Joe?

Thank you, Brian. Good morning, everyone. As you are all aware, the global economic conditions for all commerce have been fundamentally altered this year as a result of the unforeseen and unprecedented consequences of the COVID-19 pandemic. That is especially true with respect to the energy industry. As Brian mentioned, his world leaders took actions to combat the deadly coronavirus crushing demand for oil, natural gas, and coal. In today's press release, we went into more depth than normal to help you understand the decisive actions we have taken in response to the COVID-19 outbreak and the resulting demand destruction for energy in the United States. Specifically, we took steps to safeguard employee health and safety, ensure that we continue to meet customer requirements as an essential supplier to critical power generation infrastructure and support the communities in which we operate, all while protecting our balance sheet and enhancing our liquidity. I'd like to take a moment to outline in more detail our response in each of these areas. In these trying circumstances, our planning has centered on the well-being of employees, the needs of our customers, and protecting our balance sheet. As inventories were growing and our mining operations, we began working closely with our customers to assess anticipated shipping schedules. It became clear we could meet our Illinois Basin customer requirements for a period of time from existing inventories and the prudent thing to do was to temporarily idle underground production at our Illinois Basin operations beginning on March 30th in the NC Mining Complex in eastern Kentucky shortly thereafter. To reliably service the needs of our customers, production operations continued on a four-day-a-week schedule at our Tunnel Ridge and Metiki mining complexes. This week, We partially resumed production at our Riverview complex as inventories at Disco Mine have been depleted. We will continue to work closely with customers and monitor inventories at the mines that remain idled and will resume production at those operations when necessary. Safety first has long been our number one focus and the health and well-being of employees is always the highest priority at Alliance. Our decision to temporarily halt underground mining at various operations allowed furloughed employees to shelter at home while continuing to receive full medical benefits for their families from Alliance, including continued access to on-site health clinics and medical staff at each of our locations. Prior to the furloughs, each of our operations had already started to develop and implement protocols designed to reduce risk and increase protection were minors. With production continuing at Tunnel Ridge and Metiki, and as our nation learned more about this pandemic, we continue to adapt and improve these measures at all of our mines. Among the many precautions taken in our operations, we implemented staggered work shifts to promote distancing, wellness screenings, enhanced cleaning and disinfection of surface facilities, touch points, Mine Elevators, Underground Transport, Communication Systems, and Equipment. We distributed sanitizers throughout work areas, provided PPE to those working in combined spaces, and limited unnecessary access to the mine locations. Corporate offices have also done their part by implementing safeguards in light of CDC recommendations. By doing all we can to protect employees and their families clearly benefits the communities where we operate. The Alliance team has also looked for opportunities to lend a hand in other ways. As an example, AEROP's Matrix Design Group subsidiary has been using 3D printing technology to produce face shields and delivering these shields to healthcare providers during this time of need. I'm extremely grateful to the entire Alliance organization for their sacrifices and tireless efforts in these uncertain times. Their resilience, flexibility, dedication, and initiative are inspiring, and each of them have my heartfelt appreciation. We have always viewed AROP's strong balance sheet as a competitive advantage, and we have taken action to protect this advantage and enhance our liquidity. As Brian mentioned earlier, successfully amending and extending our revolving credit facility was a key step. In this environment, we are laser focused on optimizing cash flow. Our operations have worked diligently to reduce capital budgets without jeopardizing safety or the long-term viability of AROP's assets. The entire organization has identified cost and expense savings that will reduce G&A and working capital requirements. We currently anticipate these initiatives will result in cash savings this year of approximately $100 million. In addition, the Board's decision to suspend distributions for this quarter and the upcoming quarter will further help us preserve liquidity during these uncertain times. All these actions require hard choices, but we recognize that the next several months will likely be difficult. and we've made the decisions necessary to ensure ARLP maintains sufficient liquidity, stays in compliance with financial covenants and emerges from the current environment with strength. While no one has dealt with the economic and market conditions that are facing us today, ARLP has a track record of successfully navigating through previous challenges and we are confident of our ability to do so again. We have great assets and great people, and we are confident that better times are on the horizon. We plan to be there when conditions improve, ready to leverage our strengths to take advantage of the opportunities that will follow, with a goal of creating meaningful, long-term growth for our unit holders. In closing, until there is better visibility into both the degree and the speed of economic recovery post-lockdown, ARLP has withdrawn its initial 2020 operating and financial guidance provided earlier this year. Notwithstanding, ARLP recently announced it would reduce its co-production to match existing contracted sales commitments for 2020. Accordingly, we are now targeting co-sales and production this year of approximately 28 million and 27 million tons respectively. or 25% to 30% lower than originally guided. We also expect the contribution from our mineral segment this year will be meaningfully below January guidance due to the anticipated lower commodity prices in our lessees throttling back production. As we look beyond this year, we are hopeful the reopening of the U.S. economy will be swift and supply and demand for coal, oil, and natural gas will reach a healthy balance sooner than later. As I mentioned in our press release this morning, as we get past the next quarter, our results should be on the road to recovery. I believe this year will provide a new foundation for future growth for our partnership. For the past 20 years, the Alliance Strategy for Success has been to create sustainable growth in cash flow and deliver consistent growth in distributions. We are committed to continuing to pursue this strategy. More importantly, we are committed to achieving it. This concludes our prepared comments, and now with the operator's assistance, we will open the call to your questions.