Alliance Resource Partners, L.P.

Good morning and welcome to the Alliance Resource Partners second 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 star then one on your telephone keypad. 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 L. Cantrell, Senior Vice President and Chief Financial Officer. Please go ahead.

Thank you, Gary, and welcome, everyone. Earlier this morning, Alliance Resource Partners released its second quarter 2020 financial and operating results. and we'll 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 that are 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'll also be discussing certain non-GAAP financial measures. Definitions and reconciliations of the 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, 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 perspective. Coming into the 2020 quarter, ARLP was taking action to mitigate the effects of the COVID-19 pandemic, which was crushing global energy demand. Specifically, we temporarily idled all of our Illinois Basin operations and our East Kentucky operation. with the objective to reduce production to match existing sales commitments of approximately 28 million tons for all of 2020. We immediately focused our partnership on optimizing cash flows through numerous initiatives to reduce costs, expenses, working capital, and capital expenditures. In addition, the board of directors of ARLP's general partner suspended the cash distribution to unit holders for the 2020 first and second quarters. At that time, due to these actions, we expected coal production and segment adjusted EBITDA from ARLP's coal operations would decline by more than half, and the contribution from our mineral segment would be even more severely impacted in the 2020 quarter. And while financial and operating results for the 2020 quarter were significantly lower compared to the sequential quarter, ARLP's performance actually came in slightly better than we expected. I am particularly pleased to report the strong execution of our plans to optimize cash flow and control costs led to total debt reduction of $49.6 million for the 2020 quarter. For our coal operations, ARLP's decision to temporarily idle five of our seven mining complexes in response to the effects of the COVID-19 pandemic led to lower coal production of 4.3 million tons in the 2020 quarter, 46.1% reduction compared to the sequential quarter. Coal sales volumes and revenues were also impacted falling 28.5% and 24.9% respectively compared to the sequential quarter. Lower coal sales revenues partially offset by lower expenses caused total segment adjusted EBITDA from our coal operations to decline 43.7% to $55.2 million in the 2020 quarter and that compares to $97.9 million in the sequential quarter. On a per ton sold basis, coal sales price realizations rose 5% sequentially to $45.56 per ton, primarily due to an increased sales mix of higher priced Appalachia sales tons in the 2020 quarter. Lower coal volumes as well as higher excise and severance taxes and inventory charges push segment adjusted EBITDA expense per ton higher by 11.5% to $35.95 compared to $32.25 in the sequential quarter. For our mineral segment, results for the 2020 quarter also declined compared to the sequential quarter due to reduced oil and gas demand amid the pandemic. Lower oil and gas volumes and sales price realizations caused total revenues from oil and gas royalties and lease bonuses to decline 45% to $7.8 million. Accordingly, segment-adjusted EBITDA fell 50% to $6.9 million in the 2020 quarter compared to $13.8 million in the sequential quarter. Our mineral segment contributed 11.1% of ARLP's consolidated segment-adjusted EBITDA this quarter. Weak market conditions and disruptions largely caused by the COVID-19 pandemic also impacted ARLP's results for the first six months of 2020. Total revenues decreased 41.9% to $606 million for the 2020 period, compared to $1.04 billion for the 2019 period due to lower coal sales, transportation revenues, and revenues from our mineral interests. Lower revenues, partially offset by lower operating expenses and excluding non-cash items, contributed to an adjusted net loss of $34.4 million for the 2020 period compared to adjusted net income of $164.5 million for the 2019 period. Adjusted EBITDA for the 2020 period was also lower, falling 56.2% to $146.5 million. As we manage through the current volatility, ARLP's efforts to optimize cash flows, reduce working capital requirements, and strictly control capital expenditure and expenses have yielded significant benefits to our financial position. Working capital requirements declined 29.6% from the sequential quarter as coal inventories were reduced by 862,000 tons during the 2020 quarter. These initiatives also lowered capital expenditures and general and administrative expenses, which declined during the 2020 period by 49.1% and 27% respectively, both compared to the 2019 period. Through the entire alliance organization's sharp focus on these efforts, KRLP increased free cash flow by $29.2 million during the 2020 quarter. increased liquidity 15.6% to $298.6 million, and as mentioned earlier, reduced total debt by $49.6 million, all as compared to the sequential quarter. Although our total leverage increased to 1.8 times at the end of the 2020 quarter, ARLP's balance sheet remains strong and comfortably in compliance with all of our debt covenants, including total leverage covenant of 2.5 times. With that, I'll now turn the call over to Joe.

Thank you, Brian. Good morning, everyone. As Brian, Alec, and Lee explained, the first half of 2020 presented many challenges due to the COVID-19 pandemic, which negatively affected economic activity around the globe, resulting in lower demand for coal, oil, and natural gas. The entire energy industry, including ARLP, have had to react quickly to the rapid loss of demand. Year-over-year power demand in the eastern United States declined 7% during the first half of 2020, with coal-fired generation falling by a third compared to the first six months of 2019. The demand for oil and natural gas has also been crushed, and the resultant oversupply has pressured commodity prices. In response, operators have curtailed production, driving oil production down to approximately 11 million barrels per day in the United States, from a high earlier this year of 13 million barrels per day. The reduction of oil production also reduced associated natural gas volumes as well. As we reported this morning, this environment exacted a tremendous toll on ARLP's financial and operating performance during the 2020 quarter, and the period. The 2020 quarter was especially tough as we took aggressive action with ARLP having to furlough more than half of its workforce for most of the quarter in an effort to match its production levels to the delivery schedules of contracted coal sales for the year. Throughout the 2020 quarter, ARLP monitored coal inventories at each location and worked closely with customers to determine when it would be necessary to resume coal production. Consistent with this plan, underground coal operations resumed in May at the Riverview and Warrior Mines in the Illinois Basin and subsequently at each of the remaining mining complexes, Gibson and Hamilton in the Illinois Basin and MC Mining in Appalachia. All seven of our mining complexes are now producing coal. However, several of these mines are running at less than full capacity Thank you for joining us. and the Eastern United States improving economic activity and favorable weather patterns are contributing to increased electricity demand and coal burn, which jumped 55% month over month in June. This marks the second consecutive month of increased coal burn and pushed utility stockpiles lower for the first time since August 2019. Warmer than average temperatures across much of the country have kept coal demand strong in July as well as with similar projections for August. We are currently targeting full year 2020 production and sales volumes to be 27 million tons and 28 million tons respectively. For our oil and gas minerals business, prices are rebounding from recent lows and E&P companies are beginning to show signs of life, particularly in the Permian Basin where drilling activity has stabilized and we are seeing many shut-in wells returning to production and a meaningful increase in already drilled wells being completed. Although uncertainties remain, these favorable trends for ARLP's coal and minerals businesses support our cautious optimism that the second half of this year will be better than the first. With encouraging trends for coal demand expected to continue over the balance of the year and utility stockpiles currently projected to fall toward normal ranges by year-end, The outlook for coal is improving. The forward curves for oil and natural gas are also encouraging. As discussed during our last earnings call, we continue to believe that our results for the 2020 quarter are not representative of the underlying strength of alliance. Coal remains an essential part of the critical infrastructure necessary to meet the demands and needs of our country. Just as our federal and state governments decided when the pandemic first closed down the economy. During the recent heat wave, the essential nature of coal has again been made clear, with coal playing a vital role in keeping the power grid stable and meeting surging demand needs across the country. ARLP's low-cost, strategically located, well-capitalized, long-lived coal operations will allow us to service the needs of our domestic customers as well as expand our market share as weaker competitors exit the market and allow us to participate in export opportunities when international market conditions improve, hopefully in the near future. With the reduced pace of drilling new wells as well as lower commodity prices, we expect our mineral segment adjusted EBITDA over the next several quarters to be at levels comparable to those reported in the 2020 quarter. Someone who has been in the minerals business for as long as I have been in the coal business recently reminded me of the benefits of oil and gas minerals ownership. Specifically, he said, AROP's mineral interests are concentrated in the core development areas of the premier resource plays in the United States that are the primary area of focus for industry-leading, well-capitalized operators in these basins. providing you with a multi-decade inventory of cost-free organic growth opportunities. Your growth requires no capital expenditures on your part. You own perpetual rights and have very low holding costs. He concluded by saying he has conviction that the U.S. will continue to be an important producer in the global oil and gas market and that ARLP's asset base is positioned well to be the source of considerable production in the future. I share his conviction with respect to oil and gas, and we remain committed to our minerals business. I also believe we are equally well positioned with our coal assets to meet the stable needs of our customers for many more years to come. As we continue to manage through these uncertainties, AEROP remains focused on the well-being of our employees, servicing the needs of our customers, and protecting our balance sheets. We remain committed to making our choices necessary to emerge from the current environment with a strong foundation that will return ARLP to sustainable growth in cash flows and deliver attractive long-term value for our stakeholders. With that, I'll ask the operator to open the call for questions.