ALLIANCE RESOURCE PARTNERS LP - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2002

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____________to_____________

Commission File No.: 0-26823
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ALLIANCE RESOURCE PARTNERS, L.P.
(Exact name of registrant as specified in its charter)

Delaware 73-1564280
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)

1717 South Boulder Avenue, Suite 600, Tulsa, Oklahoma 74119
(Address of principal executive offices and zip code)

(918) 295-7600
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

As of November 14, 2002, 8,982,780 Common Units and 6,422,531
Subordinated Units are outstanding.

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TABLE OF CONTENTS

PART I

FINANCIAL INFORMATION

i

PART II

OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS ................................... 14

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS ........... 14

ITEM 3. DEFAULTS UPON SENIOR SECURITIES ..................... 14

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS .................................... 14

ITEM 5. OTHER INFORMATION ................................... 14

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K .................... 14

ii

PART I

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ALLIANCE RESOURCE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except unit data)

ASSETS

See notes to consolidated financial statements.

1

ALLIANCE RESOURCE PARTNERS, L.P. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT UNIT AND PER UNIT DATA)
(UNAUDITED)

THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- ---------------------------
2002 2001 2002 2001
------------ ----------- ----------- -----------

SALES AND OPERATING REVENUES:
Coal sales ........................................... $ 121,620 $ 111,733 $ 354,736 $ 316,561
Transportation revenues .............................. 5,045 4,782 14,492 13,995
Other sales and operating revenues ................... 5,506 1,379 14,823 4,812
------------ ----------- ----------- -----------
Total revenues ............................. 132,171 117,894 384,051 335,368
------------ ----------- ----------- -----------

EXPENSES:
Operating expenses ................................... 90,756 77,049 244,759 228,315
Transportation expenses .............................. 5,045 4,782 14,492 13,995
Outside purchases .................................... 11,371 8,825 34,259 22,050
General and administrative ........................... 4,088 4,279 13,761 13,225
Depreciation, depletion and amortization ............ 11,643 11,016 34,755 33,371
Interest expense (net of interest income and interest
capitalized for the three months and nine months
ended September 30, 2002 and 2001 of $406, $324,
$992 and $1,492, respectively) ................. 4,055 4,261 12,201 12,744
------------ ----------- ----------- -----------
Total operating expenses .................. 126,958 110,212 354,227 323,700
----------- ----------- -----------
INCOME FROM OPERATIONS .................................... 5,213 7,682 29,824 11,668
OTHER INCOME (EXPENSE) .................................... (412) 134 417 538
------------ ----------- ----------- -----------

INCOME BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE .................................... 4,801 7,816 30,241 12,206

CUMULATIVE EFFECT OF ACCOUNTING CHANGE .................... -- -- -- 7,939
------------ ----------- ----------- -----------

NET INCOME ................................................ $ 4,801 $ 7,816 $ 30,241 $ 20,145
============ =========== =========== ===========
GENERAL PARTNERS' INTEREST IN
NET INCOME ........................................... $ 96 $ 156 $ 605 $ 403
============ =========== =========== ===========
LIMITED PARTNERS' INTEREST IN
NET INCOME ........................................... $ 4,705 $ 7,660 $ 29,636 $ 19,742
============ =========== =========== ===========
BASIC NET INCOME PER LIMITED
PARTNER UNIT ......................................... $ 0.31 $ 0.50 $ 1.92 $ 1.28
============ =========== =========== ===========

BASIC NET INCOME PER LIMITED PARTNER
UNIT BEFORE ACCOUNTING CHANGE ........................ $ 0.31 $ 0.50 $ 1.92 $ 0.78
============ =========== =========== ===========
DILUTED NET INCOME PER LIMITED
PARTNER UNIT ......................................... $ 0.30 $ 0.49 $ 1.87 $ 1.26
============ =========== =========== ===========

DILUTED NET INCOME PER LIMITED PARTNER
UNIT BEFORE ACCOUNTING CHANGE ........................ $ 0.30 $ 0.49 $ 1.87 $ 0.76
============ =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF UNITS
OUTSTANDING-BASIC .................................... 15,405,311 15,405,311 15,405,311 15,405,311
============ =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF UNITS
OUTSTANDING-DILUTED .................................. 15,844,316 15,678,013 15,842,689 15,676,639
============ =========== =========== ===========

See notes to consolidated financial statements.

2

ALLIANCE RESOURCE PARTNERS, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)

NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
2002 2001
---------- ----------

CASH FLOWS PROVIDED BY OPERATING ACTIVITIES ......................... $ 46,520 $ 45,489

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment ...................... (37,838) (40,499)
Proceeds from sale of property, plant and equipment ............ 320 100
Purchase of marketable securities .............................. -- (33,539)
Proceeds from the maturity of marketable securities ........... 10,085 60,924
---------- ----------
Net cash used in investing activities ............... (27,433) (13,014)
---------- ----------

CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving credit and working capital facilities 61,700 --
Payments under revolving credit and working capital facilities . (51,700) --
Payments on long-term debt ..................................... (11,250) --
Distribution to Partners ....................................... (23,580) (23,580)
---------- ----------
Net cash used in financing activities ............... (24,830) (23,580)
---------- ----------

NET CHANGE IN CASH AND CASH EQUIVALENTS ............................. (5,743) 8,895

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD .................... 9,176 6,933
---------- ----------

CASH AND CASH EQUIVALENTS AT END OF PERIOD .......................... $ 3,433 $ 15,828
========== ==========

CASH PAID FOR:
Interest ....................................................... $ 16,600 $ 17,519
========== ==========

See notes to consolidated financial statements.

3

ALLIANCE RESOURCE PARTNERS, L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. ORGANIZATION AND PRESENTATION

Alliance Resource Partners, L.P., a Delaware limited partnership (the
"Partnership"), was formed on May 17, 1999, to acquire, own and operate certain
coal production and marketing assets of Alliance Resource Holdings, Inc., a
Delaware corporation ("ARH") (formerly known as Alliance Coal Corporation),
consisting of substantially all of ARH's operating subsidiaries, but excluding
ARH.

The accompanying consolidated financial statements include the accounts
and operations of the Partnership and present the financial position as of
September 30, 2002 and December 31, 2001, and the results of its operations for
the three-month and nine-month periods ended September 30, 2002 and 2001 and its
cash flows for the nine month periods ended September 30, 2002 and 2001. All
material intercompany transactions and accounts have been eliminated.

These consolidated financial statements and notes thereto for interim
periods are unaudited. However, in the opinion of management, these financial
statements reflect all adjustments (which include only normal recurring
adjustments) necessary for a fair presentation of the results of the periods
presented. Results for interim periods are not necessarily indicative of results
for a full year.

These consolidated financial statements and notes are prepared pursuant
to the rules and regulations of the Securities and Exchange Commission for
interim reporting and should be read in conjunction with the consolidated and
combined financial statements and notes included in the Partnership's Annual
Report on Form 10-K for the year ended December 31, 2001.

2. CONTINGENCIES

The Partnership is involved in various lawsuits, claims and regulatory
proceedings incidental to its business. The Partnership provides for costs
related to litigation and regulatory proceedings, including civil fines issued
as part of the outcome of these proceedings, when a loss is probable and the
amount is reasonably determinable. In the opinion of management, the outcome of
these matters to the extent not previously provided for or covered under
insurance will not have a material adverse effect on the Partnership's business,
financial position or results of operations, although management cannot give any
assurance to that effect.

The Partnership is involved in a dispute with PSI Energy Inc. ("PSI")
concerning the procedures for and testing of a certain coal quality
specification relating to the minimum Hardgrove Grindability Index (i.e.
physical hardness of coal) of coal supplied by its Gibson County mining complex.
Gibson County Coal and PSI have had on-going discussions since March 2001
concerning the procedures for and testing of coal supplied by the Gibson County
mining complex, and have been unable to resolve their differences to-date.
During March and April 2002, PSI withheld approximately $234,000 in payments due
to Gibson County Coal; PSI has not withheld any additional payments and has
verbally advised that it does not intend to withhold any future payments until
this dispute is resolved. PSI has previously claimed damages of $1,568,023 at
June 30, 2002. PSI has not provided specific information concerning the alleged
penalties for shipments after June 30, 2002. Based on Gibson County Coal's
understanding of PSI's position, the current penalties alleged by PSI are
estimated to be approximately $2,000,000 through September 30, 2002.

4

During April 2002, Gibson County Coal and PSI agreed to proceed with
mediation in an effort to resolve this contractual dispute. The mediation of the
dispute occurred in August 2002 during which the parties concluded an outline of
a tentative settlement, subject to the negotiation of a definitive settlement
agreement. The parties are in the process of negotiating such settlement
agreement, but no assurance can be provided that a final settlement can be
reached. In the event the final settlement agreement and certain other
agreements cannot be concluded, the parties will proceed with either additional
mediation efforts or resort to arbitration. Gibson County Coal continues to
strongly disagree with PSI's position.

3. SUBSEQUENT EVENT

On October 23, 2002, the Partnership declared a minimum quarterly
distribution for the period from July 1, 2002 to September 30, 2002, of $0.50
per unit, totaling approximately $7,703,000, on all of its Common and
Subordinated Units outstanding, payable on November 14, 2002, to all unitholders
of record on November 1, 2002.

4. ACQUISITION

On November 14, 2002, the Partnership announced that ARH Warrior
Holdings, Inc. ("ARH Warrior Holdings"), a company indirectly owned by
management of the Partnership, had delivered notice to the Partnership of its
intention to require the Partnership to purchase Warrior Coal, LLC ("Warrior
Coal"), from ARH Warrior Holdings, pursuant to the terms of the Amended and
Restated Put and Call Option Agreement (the "Put/Call Agreement") between the
Partnership and ARH Warrior Holdings. The Partnership expects to consummate the
purchase of Warrior Coal in the first quarter of 2003.

At closing, the Partnership will pay ARH Warrior Holdings, Inc.
approximately $12,500,000 in cash representing the put option price in
accordance with the Put/Call Agreement. In addition, the Partnership will repay
Warrior Coal's borrowings under the revolving credit agreement between an
affiliate of ARH Warrior Holdings, Inc. and Warrior Coal, which obligations
currently are estimated to be approximately $16,900,000. The primary borrowings
under the revolving credit agreement financed new infrastructure capital
projects that are expected to improve productivity and significantly increase
capacity. Warrior Coal currently plans to add one continuous miner unit early in
the second quarter 2003, to supplant other operations of the Partnership that
will be depleting.

Under the terms of the Put/Call Agreement, the Partnership, through
Warrior Coal, will assume certain other obligations, including a mineral lease
and sublease with SGP Land, LLC, an affiliate of ARH Warrior Holdings, Inc.,
covering coal reserves that have been and will continue to be mined by Warrior
Coal. The terms and conditions of the mineral lease and sub-lease will remain
unchanged following the closing of the acquisition.

The Partnership plans to fund the Warrior Coal transaction through the
issuance of additional debt and/or equity, depending on market conditions, or
through borrowings under its credit facility.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

SELECTED OPERATING DATA

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(1) Revenues per ton sold is based on the total of coal sales and other sales
and operating revenues divided by tons sold.

(2) Cost per ton is based on the total of operating expenses, outside purchases
and general and administrative expenses divided by tons sold.

RESULTS OF OPERATIONS

Three Months Ended September 30, 2002 Compared to Three Months Ended September
30, 2001

Coal sales. Coal sales for the three months ended September 30, 2002
(the "2002 Quarter") increased 8.8% to $121.6 million from $111.7 million for
the three months ended September 30, 2001 (the "2001 Quarter"). The increase of
$9.9 million was primarily attributable to higher price sales contracts secured
during the second half of last year and increased tons associated with coal
feedstock for coal synfuel production. These increases were partially offset by
a decrease in activity in the domestic coal brokerage market. Tons sold
increased 7.9% to 4.7 million for the 2002 Quarter from 4.3 million for the 2001
Quarter. Tons produced decreased 5.0% to 3.7 million tons for the 2002 Quarter
from 3.9 million for the 2001 Quarter.

Transportation revenues. Transportation revenues were comparable for
the 2002 and 2001 Quarters at $5.0 million and $4.8 million, respectively. The
Partnership reflects reimbursement of the cost of transporting coal to customers
through third-party carriers as transportation revenues and the corresponding
expense as transportation expense in the consolidated statements of income. No
profit margin is realized on transportation revenues.

Other sales and operating revenues. Other sales and operating revenues
increased to $5.5 million for the 2002 Quarter from $1.4 million for the 2001
Quarter. The increase of $4.1 million is primarily attributable to additional
service fees associated with increased volumes at a third-party coal synfuel
facility at our Hopkins County Coal, LLC mining complex.

Operating expenses. Operating expenses increased 17.8% to $90.8 million
for the 2002 Quarter from $77.0 million for the 2001 Quarter. The increase of
$13.8 million is primarily the result of lower production at the Mettiki Coal,
LLC mining complex and East Kentucky operations. Production costs were
negatively impacted by adverse geology encountered as Mettiki moved its longwall
mining equipment to a new longwall panel in August 2002. Mettiki's production
decreased approximately 300,000 tons compared to the 2001 Quarter. Mining
conditions are expected to improve when the longwall moves to its next panel,
which is scheduled for early November 2002. Mettiki's reduced production levels
along with reduced production at the eastern Kentucky operations caused by the
need to relieve its coal inventory build up that occurred earlier this year
resulted in higher per ton costs compared to the 2001 Quarter. In addition the
Partnership's Dotiki mine experienced higher than normal expenses attributed
mostly to increased volume of fully washed coal sales at that mining complex.

Transportation expenses. See "Transportation revenues" above concerning
transportation expenses.

Outside purchases. Outside purchases increased to $11.4 million for the
2002 Quarter compared to $8.8 million for the 2001 Quarter. The increase of $2.6
million is primarily the result of outside purchases necessary to fulfill coal
feedstock contract commitments at our Hopkins County Coal mine, offset by a
decrease in the activity in the domestic coal brokerage market. The Partnership
entered into coal supply agreements with Warrior Coal, LLC, an affiliate of the
Partnership, for the purchase of up to 1.8 million tons during the year ending
December 31, 2002. By mutual agreement, the parties currently

6

expect purchases under this agreement to be approximately 1.6 million tons
during the year ending December 31, 2002.

General and administrative. General and administrative expenses were
comparable for the 2002 and 2001 Quarters at $4.1 million and $4.3 million,
respectively.

Depreciation, depletion and amortization. Depreciation, depletion and
amortization expenses were comparable for the 2002 and 2001 Quarters at $11.6
million and $11.0 million, respectively.

Interest expense. Interest expense was comparable for the 2002 and 2001
Quarters at $4.1 million and $4.3 million, respectively.

EBITDA (income before net interest expense, depreciation, depletion and
amortization) decreased to $20.5 million for the 2002 Quarter compared with
$23.1 million for the 2001 Quarter. The $2.6 million decrease is primarily
attributable to high production costs at Mettiki due to adverse geology
encountered as Mettiki moved its longwall mining equipment to a new longwall
panel in August 2002, reduced production at the eastern Kentucky operations and
increased operating expenses at the Dotiki mine due to the increased volume of
fully washed coal sales. These higher production costs are partially offset by
higher price realizations and increased volumes associated with coal synfuel
related agreements.

EBITDA should not be considered as an alternative to net income, income
from operations, cash flows from operating activities or any other measure of
financial performance presented in accordance with generally accepted accounting
principles. EBITDA is not intended to represent cash flow and does not represent
the measure of cash available for distribution, but provides additional
information for evaluating the Partnership's ability to make minimum quarterly
distributions. The Partnership's method of computing EBITDA may not be the same
method used to compute similar measures reported by other companies, or EBITDA
may be computed differently by the Partnership in different contexts (i.e.,
public reporting versus computation under financing agreements).

Nine Months Ended September 30, 2002 compared to Nine Months Ended September 30,
2001

Coal sales. Coal sales for the nine months ended September 30, 2002
(the "2002 Period") increased 12.1% to $354.7 million from $316.6 million for
the nine months ended September 30, 2001 (the "2001 Period"). The increase of
$38.1 million was primarily attributable to higher price sales contracts secured
during the second half of last year, increased tons associated with coal
feedstock for coal synfuel production, and higher production from the Gibson
County Coal mining complex. These increases were partially offset by a decrease
in activity in the domestic coal brokerage market. Tons sold increased 5.1% to
13.6 million for the 2002 Period from 12.9 million for the 2001 Period. Tons
produced increased 3.1% to 12.4 million tons for the 2002 Period from 12.0
million for the 2001 Period.

Transportation revenues. Transportation revenues were comparable for
the 2002 and 2001 Periods at $14.5 million and $14.0 million, respectively. The
Partnership reflects reimbursement of the cost of transporting coal to customers
through third-party carriers as transportation revenues and the corresponding
expense as transportation expense in the consolidated statements of income. No
profit margin is realized on transportation revenues.

Other sales and operating revenues. Other sales and operating revenues
increased to $14.8 million for the 2002 Period from $4.8 million for the 2001
Period. The increase of $10.0 million is primarily attributable to additional
service fees associated with increased volumes at a third-party coal synfuel
facility at our Hopkins County Coal mining complex.

7

Operating expenses. Operating expenses increased 7.2% to $244.8 million
for the 2002 Period from $228.3 million for the 2001 Period. The increase of
$16.5 million is primarily the result of increased operating costs associated
with increased sales volumes of coal synfuel production. In addition, the Dotiki
mine experienced higher than normal expenses attributed mostly to increased
volume of fully washed coal sales at that mining complex and production costs
were negatively impacted by adverse geology encountered as Mettiki moved its
longwall mining equipment to a new longwall panel in August 2002 resulting in
higher per ton costs compared to the 2001 Period.

Transportation expenses. See "Transportation revenues" above concerning
transportation expenses.

Outside purchases. Outside purchases increased to $34.3 million for the
2002 Period compared to $22.1 million for the 2001 Period. The increase of $12.2
million is primarily the result of outside purchases necessary to fulfill coal
feedstock contract commitments at our Hopkins County Coal mine, offset by a
decrease in the activity in the domestic coal brokerage market. The Partnership
has entered into coal supply agreements with Warrior Coal, LLC, an affiliate of
the Partnership, for the purchase of up to 1.8 million tons during the year
ending December 31, 2002. By mutual agreement, the parties currently expect
purchases under this agreement to be approximately 1.6 million tons during the
year ending December 31, 2002.

General and administrative. General and administrative expenses were
comparable for the 2002 and 2001 Periods at $13.8 million and $13.2 million,
respectively.

Depreciation, depletion and amortization. Depreciation, depletion and
amortization expenses increased 4.1% to $34.8 million for the 2002 Period
compared to $33.4 million for the 2001 Period. The increase of $1.4 million
primarily resulted from additional depreciation expense associated with the new
Gibson County Coal mining complex.

Interest expense. Interest expense was comparable for the 2002 and 2001
Periods at $12.2 million and $12.7 million, respectively.

EBITDA (income before net interest expense, depreciation, depletion and
amortization) increased 16.5% to $77.2 million for the 2002 Period compared with
$66.3 million for the 2001 Period. The 2001 Period results include the benefit
of a cumulative effect of accounting change totaling $7.9 million related to a
change in the method of estimating the black lung benefits liability. Excluding
the benefit of the accounting change on the 2001 Period, EBITDA for the 2002
Period increased $18.8 million or 32.4%. The $18.8 million increase in EBITDA,
after excluding the effect of the accounting change, is primarily attributable
to higher price realizations, increased volumes associated with coal synfuel
related agreements and higher sales volume from the Gibson County Coal mining
complex.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

Cash provided by operating activities was $46.5 million for the 2002
Period compared to $45.5 million for the 2001 Period. The increase in cash
provided by operating activities was principally attributable to operating
income and working capital changes during the 2002 Period compared to the 2001
Period.

Net cash used in investing activities was $27.4 million for the 2002
Period compared to $13.0 million for the 2001 Period. The increase in the use of
cash is principally attributable to reduced

8

liquidation of marketable securities, net of purchases, during the 2002 Period
compared to the 2001 Period.

Net cash used in financing activities was $24.8 million for the 2002
Period compared to $23.6 million for the 2001 Period. The increase is
attributable to $11.3 million of scheduled payments on long-term debt partially
offset by $10.0 million in net borrowings under the revolving credit facility.

Capital Expenditures

Capital expenditures decreased to $37.8 million in the 2002 Period
compared to $40.5 million in the 2001 Period. The decrease is principally
attributable to capital expenditures related to the Gibson County Coal mining
complex during the 2001 Period. The Partnership estimates that its capital
expenditures will be approximately $52.4 million for 2002, including $15.9
million and $8.0 million related to the extension into the Pattiki II Coal
reserve area and a new service shaft at the Dotiki mine, respectively. The
Partnership currently expects to fund capital expenditures, other than
acquisitions, with cash generated from operations and borrowings under its
working capital and revolving credit facilities described below.

ARH Warrior Holdings, Inc. ("ARH Warrior Holdings"), a company
indirectly owned by management of the Partnership, had delivered notice to the
Partnership of its intention to require the Partnership to purchase Warrior
Coal, LLC ("Warrior Coal"), from ARH Warrior Holdings pursuant to the terms of
the Amended and Restated Put and Call Option Agreement (the "Put/Call
Agreement") between the Partnership and ARH Warrior Holdings. The Partnership
expects to consummate the purchase of Warrior Coal in the first quarter of 2003.

Warrior Coal is an underground mining complex that utilizes continuous
mining units employing room-and-pillar mining techniques and is located adjacent
to the Partnership's Western Kentucky operations. Warrior Coal is expected to
produce approximately 1.6 million tons during 2002, essentially all of which is
or will be sold to the Partnership as feedstock for synfuel production. Assuming
the Partnership consummates the acquisition, the Partnership plans to add a
third continuous mining unit at Warrior Coal, early in the second quarter 2003,
to supplant other operations of the Partnership that will be depleting.

At closing, the Partnership will pay ARH Warrior Holdings, Inc.
approximately $12.5 million in cash representing the put option price in
accordance with the Put/Call Agreement. In addition, the Partnership will repay
Warrior Coal's borrowings under the revolving credit agreement between an
affiliate of ARH Warrior Holdings, Inc. and Warrior Coal, which obligations
currently are estimated to be approximately $16.9 million. The primary
borrowings under the revolving credit agreement financed new infrastructure
capital projects that are expected to improve productivity and significantly
increase capacity. Warrior Coal currently plans to add one continuous miner unit
early in the second quarter 2003, to supplant other operations of the
Partnership that will be depleting.

Under the terms of the Put/Call Agreement, the Partnership, through
Warrior Coal, will assume certain other obligations, including a mineral lease
and sublease with SGP Land, LLC, an affiliate of ARH Warrior Holdings, Inc.,
covering coal reserves that have been and will continue to be mined by Warrior
Coal. The terms and conditions of the mineral lease and sub-lease will remain
unchanged following the closing of the acquisition.

The Partnership plans to fund the Warrior Coal transaction through the
issuance of additional debt and/or equity, depending on market conditions, or
through borrowings under its credit facility. The Partnership anticipates that
the acquisition will be immediately accretive on a basic earnings per unit
basis.

9

Reclamation Bonds and Insurance

Federal and state laws require surety bonds or other acceptable form of
surety support to secure the Partnership's obligations related to (a) the
statutory requirement that we return mined property to its approximate original
condition at the completion of the mining and reclamation process and (b)
self-insured workers compensation. During the 2002 Quarter, the Partnership
secured renewal and/or replacement of various surety bonds. As of September 30,
2002, the Partnership has put in place a surety bond program with several
third-party bonding entities, which program is subject to certain financial and
other conditions. The Partnership believes the program is sufficient to support
our projected surety bond requirements for self-insured workers compensation
programs and reclamation activities through 2004.

During September 2002, the Partnership completed its annual property
and casualty insurance renewal. In general, recent insurance carrier losses
worldwide have created a tightening market reducing available capacity for
underwriting property insurance. As a result, the Partnership and its affiliates
increased the deductible for property insurance from $1.0 million to $3.5
million and, in addition, retained a participating interest along with its
insurance carriers in the commercial property program at various levels up to
15.48%. The aggregate maximum limit in the commercial property program is $50
million per occurrence of which the Partnership would be responsible for a
maximum limit of $7.7 million for each occurrence. While the Partnership does
not have a significant history of material insurance claims, the ultimate amount
of occurrences incurred and claims made, if any, are dependent on future
developments. The Partnership cannot assure you that it will not experience
significant insurance claims in the future, which as a result of the
Partnership's participation in the commercial property program, could have a
material adverse effect on its business, financial condition and results of
operations.

Combining the increase in insurance premiums with the increased cost
for surety capacity, the Partnership is expecting an increase in insurance and
surety related costs for the quarterly period ending December 31, 2002 and year
ending December 31, 2003 of approximately $0.5 million and $2.5 million,
respectively.

Permitting

In January 2002, the West Virginia Department of Environmental
Protection (the "WV DEP") denied a permit application relating to 3.1 million
tons of coal reserves located in West Virginia that are contiguous to Mettiki
Coal, LLC's Maryland coal reserves. In May 2002, the West Virginia Surface Mine
Review Board (the "Surface Board") heard the Partnership's appeal of the WV
DEP's permit denial. The Surface Board unanimously reversed WV DEP's permit
denial. The Surface Board's action allows full seam extraction in a significant
part of the permit area, while the remaining portion can be partially extracted
through the room-and-pillar method of mining by continuous miners. Subject to
the WV DEP's approval of a mitigation plan that addresses any potential
dewatering of a small tributary to the North Branch of the Potomac River, the
remaining area of the permit boundary should also be approved for full seam
extraction. In October 2002, the Maryland Department of the Environment approved
a permit application allowing Mettiki access to such West Virginia reserves by
tunneling under the North Branch of the Potomac River from Mettiki's existing
Maryland operations.

Notes Offering, Credit Facility and Letters of Credit Facilities

Concurrently with the closing of the Partnership's initial public
offering, the Partnership's Special GP issued and Alliance Resource Operating
Partners, L.P. (the "Intermediate Partnership") assumed the obligations with
respect to $180 million principal amount of 8.31% senior notes due August 20,
2014. The Special GP also entered into, and the Intermediate Partnership assumed
the obligations under, a $100 million credit facility. The credit facility
consists of three tranches, including a $50 million term loan facility, a $25
million working capital facility and a $25 million revolving credit facility.
The Partnership

10

has borrowings outstanding of $35 million under the term loan facility and $5
million outstanding under each of the revolving credit facility and working
capital facility at September 30, 2002, respectively. The interest rate on the
term loan facility at September 30, 2002 was 4.56%. The interest rate on the
revolving credit facility and working capital facility was 4.75% and 3.31% at
September 30, 2002, respectively. The credit facility expires August 2004. The
senior notes and credit facility are guaranteed by all of the subsidiaries of
the Intermediate Partnership. The senior notes and credit facility contain
various restrictive and affirmative covenants, including the amount of
distributions by the Intermediate Partnership and the incurrence of other debt.
The Partnership was in compliance with the covenants of both the credit facility
and senior notes at September 30, 2002.

In 2001, the Partnership entered into agreements with three banks to
provide letters of credit in an aggregate amount of $25.0 million. On September
30, 2002, one of these letter of credit facility agreements was extended for an
additional one-year term. At September 30, 2002, the Partnership had $15.5
million in letters of credit outstanding supporting reclamation and workers'
compensation surety bond requirements. The Special GP guarantees the letters of
credit.

Recent Accounting Pronouncements

In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," which requires the fair value of a liability for an
asset retirement obligation to be recognized in the period in which it is
incurred. When the liability is initially recorded, a cost is capitalized by
increasing the carrying amount of the related long-lived asset. Over time, the
liability is accreted to its present value each period, and the capitalized cost
is depreciated over the useful life of the related asset. To settle the
liability, the obligation for its recorded amount is paid or a gain or loss upon
settlement is incurred. Since the Partnership has historically adhered to
accounting principles similar to SFAS No. 143 in accounting for its reclamation
and mine closing costs, the Partnership does not believe that adoption of SFAS
No. 143, effective January 1, 2003, will have a material impact on its financial
statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

All of the Partnership's transactions are denominated in U.S. dollars,
and as a result, the Partnership does not have material exposure to currency
exchange-rate risks.

The Partnership did not engage in any interest rate, foreign currency
exchange rate or commodity price-hedging transactions as of September 30, 2002.

The Intermediate Partnership assumed obligations under a $100 million
credit facility. Borrowings under the credit facility are at variable rates and,
as a result, the Partnership has interest rate exposure. The Partnership's
earnings are not materially affected by changes in interest rates, if interest
rates increased by 100 basis points, interest expense for the nine months ended
September 30, 2002 would have increased by approximately $300,000.

As of September 30, 2002, there were no significant changes in the
Partnership's quantitative and qualitative disclosures about market risk as set
forth in the Partnership's Annual Report on Form 10-K for the year ended
December 31, 2001.

ITEM 4. CONTROLS AND PROCEDURES

Within the 90-day period prior to filing of this report, an evaluation
was carried out by management, including our chief executive officer and
principal accounting officer, of the effectiveness

11

of the design and operation of our disclosure controls and procedures (as
defined in Rule 13a-14(c) under the Securities Exchange Act of 1934). Based upon
this evaluation, the chief executive officer and the principal accounting
officer concluded that the design and operation of these disclosure controls and
procedures were effective.

Subsequent to this evaluation on October 25, 2002 through the date of
this filing on Form 10-Q for the quarterly period ended September 30, 2002,
there have been no significant changes in the Partnership's internal controls or
in other factors that could significantly affect these controls, including any
significant deficiencies or material weaknesses of internal controls that would
require corrective action.

12

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements.
These statements are based on our beliefs as well as assumptions made by, and
information currently available to, us. When used in this document, the words
"anticipate," "believe," "continue," "estimate," "expect," "forecast", "may,"
"project", "will," and similar expressions identify forward-looking statements.
These statements reflect our current views with respect to future events and are
subject to various risks, uncertainties and assumptions. Specific factors which
could cause actual results to differ from those in the forward-looking
statements include:

o competition in coal markets and our ability to respond to the
competition;

o fluctuation in coal prices, which could adversely affect our
operating results and cash flows;

o deregulation of the electric utility industry and/or the effects
of any adverse changes in the domestic coal industry, electric
utility industry, or general economic conditions;

o dependence on significant customer contracts, including renewing
customer contracts upon expiration;

o customer cancellations of, or breaches to, existing contracts;

o customer delays or defaults in making payments;

o fluctuations in coal demand, price and availability due to labor
and transportation costs and disruptions, equipment availability,
governmental regulations and other factors;

o our productivity levels and margins that we earn on our coal
sales;

o any unanticipated increases in labor costs, adverse changes in
work rules, or unexpected cash payments associated with post-mine
reclamation and workers' compensation claims;

o greater than expected environmental regulations, costs and
liabilities;

o a variety of operational, geologic, permitting, labor and
weather-related factors;

o risks of major mine-related accidents or interruptions;

o results of litigation;

o difficulty maintaining our surety bonds for mine reclamation as
well as workers' compensation and black lung benefits;

o difficulty obtaining commercial property insurance; and

o and risks associated with our 15.48% participation (excluding any
applicable deductible) in the commercial property program.

If one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, our actual results may differ materially
from those described in any forward-looking statement. When considering
forward-looking statements, you should also keep in mind the risk factors
described in our Annual Report on Form 10-K for the year ended December 31,
2001. Those risk factors could also cause our actual results to differ
materially from those contained in any forward-looking statement. We disclaim
any obligation to update the above list or to announce publicly the result of
any revisions to any of the forward-looking statements to reflect future events
or developments.

You should consider the above information when reading any
forward-looking statements contained in:

o this Quarterly Report on Form 10-Q;

o other reports filed by us with the SEC;

o our press releases; and

o oral statements made by us or any of our officers or other
persons acting on our behalf.

13

PART II

OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The information under "Contingencies" in Note 2 of the Notes to Unaudited
Consolidated Financial Statements herein is hereby incorporated by reference.
See also "Item 3. Legal Proceedings" in the Annual Report on Form 10-K for the
year ended December 31, 2001.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits:

Exhibit No. Description

10.32 -- First Amendment to the Letter of Credit Facility
Agreement between Alliance Resource Partners, L.P. and
Bank of the Lakes, National Association.

10.33 -- Amendment One to Letter of Credit Facility Agreement
between Alliance Resource Partners, L.P. and Bank of
Oklahoma, National Association.

(b) Reports on Form 8-K:

A Form 8-K was filed on August 9, 2002 to submit to the Securities and
Exchange Commission the certifications of the Partnership's chief executive
officer and principal accounting officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

14

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, in Tulsa, Oklahoma, on November 14, 2002.

ALLIANCE RESOURCE PARTNERS, L. P.

By: Alliance Resource Management GP, LLC
its managing general partner

/s/ Joseph W. Craft III
-----------------------------
Joseph W. Craft III
President, Chief Executive
Officer and Director

/s/ Dale G. Wilkerson
-----------------------------
Dale G. Wilkerson
Vice President and Controller
(Principal Accounting
Officer)

15

CERTIFICATION

I, Joseph W. Craft III certify that:

1. I have reviewed this quarterly report on Form 10-Q of Alliance
Resource Partners, L.P.;

2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;

3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;

4. The registrant's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and we have:

a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the
period in which this quarterly report is being prepared;

b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report (the
"Evaluation Date"); and

c. presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;

5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent functions):

a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and

b. any fraud, whether or not material, that involves
management or other employees who have a significant role
in the registrant's internal controls; and

6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Date: November 14, 2002

/s/ Joseph W. Craft III
- --------------------------
Joseph W. Craft III
President, Chief Executive
Officer and Director

16

CERTIFICATION

I, Dale G. Wilkerson certify that:

1. I have reviewed this quarterly report on Form 10-Q of Alliance
Resource Partners, L.P.;

2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report; 3.
Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report; 4. The registrant's
other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:

a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the
period in which this quarterly report is being prepared;

b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report (the
"Evaluation Date"); and

c. presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;

5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent functions):

d. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and

e. any fraud, whether or not material, that involves
management or other employees who have a significant role
in the registrant's internal controls; and

6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.

Date: November 14, 2002

/s/ Dale G. Wilkerson
- -----------------------------
Dale G. Wilkerson
Vice President and Controller
(Principal Accounting
Officer)

17

EXHIBIT INDEX