Alliance Resource Partners, L.P.

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

Thank you, Matt, and welcome everyone. Earlier this morning, Alliance Resource Partners released its third quarter 2020 financial and operating results, and we will now discuss these results as well as our perspective on market conditions and outlook. Following our prepared remarks, we'll open the call to your questions. Before beginning, 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'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. Encouraging trends in economic activity, coal demand, and oil and gas production and prices were beginning to emerge as we entered the 2020 quarter, and we were cautiously optimistic that ARLP's financial and operating results were poised to improve. ARLP's strong performance this quarter certainly justified our optimism. During the 2020 quarter, Alliance delivered significant increases to all major operating and financial metrics compared to the sequential quarter. Reflecting improved performance from both our coal operations and our minerals segment, total revenues increased by 39.4% to $355.7 million. Net income attributable to ARLP climbed 158.3% to $27.2 million. And EBIT jobs jumped 146.4% to $118.8 million. These increases and ARLP's continued focus on reducing costs, expenses, working capital, and capital expenditures resulted in free cash flow of $103 million for the 2020 quarter, a 79% improvement over the sequential quarter. Increased free cash flow allowed ARLP to expand liquidity by 41.4% to $422.2 million, reduced total debt by $100.8 million and lowered total leverage to 1.69 times at the end of the 2020 quarter, keeping us comfortably in compliance with all debt covenants. Turning to our consolidated results, let's take a closer look at the strong performance delivered by each of ARLP's business segments. Starting with our coal segment, improved coal demand and a resumption of production at all of ARLP's mining complexes, led coal sales and production volumes higher by 48.5% and 66.6% respectively compared to the sequential quarter. Increased sales volumes more than offset lower price realizations, driving coal sales revenue higher by 42.1% to $335.8 million and contributing to a 124.4% increase in segment adjusted EBITDA of $123.8 million. Segment adjusted EBITDA also benefited from lower cost per ton during the 2020 quarter. Segment adjusted EBITDA expense per ton decreased 22% in the 2020 quarter to $28.03 per ton compared to $35.95 per ton in the sequential quarter. The decrease reflects the impact of ongoing expense control initiatives at all operations, higher coal volumes, a favorable sales mix from our lower cost mines and lower coal inventory costs. The performance of our mineral segment also rebounded in the 2020 quarter as stronger commodity prices led oil and gas operators to bring previously shut-in wells back online and slowly resume drilling and completion of wells on our mineral acreage. Compared to the sequential quarter, Oil and gas production on our acreage increased 13.9% to 468,000 barrels of oil equivalent and our realized price per BOE increased by 9.5%. Increased volumes in pricing led total revenues from oil and gas royalties and lease bonuses up by 23.9% to $9.7 million and segment adjusted EBITDA higher by 29.3% to $8.9 million. That completes our review of results for the 2020 quarter, and I'll now turn the call over to Joe. Joe?

Thank you, Brian. Good morning, everyone. Before I get started this morning, I'd like to express my condolences to the family of Bob Murray, a giant in the coal industry. I'm sure you all have heard he passed away yesterday. Bob has touched the lives of everyone associated with the coal industry. for more than 40 years. His importance to our country cannot be overstated. So please join me in a moment of silence to reflect on the many contributions Bob made during his lifetime for the good of America. Thank you all. As Brian mentioned this morning, we had some very encouraging signs that were beginning to take shape in June and continue to develop as the 2020 quarter progressed. After falling by 7% year-over-year during the first half of 2020, increased economic activity and favorable weather patterns during the 2020 quarter resulted in overall power demand in the eastern United States increasing by 23% over the sequential quarter. With peak electricity loads increasing in July and August to support cooling demand, coal fire generation rebounded even stronger in the third quarter, jumping 71% compared to the second quarter. After experiencing historically low oil prices in the sequential quarter, oil and gas commodity prices also rebounded, during the 2020 quarter, resulting in oil and gas operators bringing shut-in wells back into production and slowly resuming drilling and completion activity in the lower 48. While these improving macro trends certainly contributed to ARLP's strong performance in the 2020 quarter, solid results we delivered could not have been accomplished without the dedication and resiliency of our people. Our coal mines worked through the disruptions created by the pandemic, reducing inventories and ramping up production to successfully meet the increased requirements of our customers during the 2020 quarter. The entire Alliance organization worked aggressively to maximize the cash flow of our businesses, reduce working capital, and control capital expenditures and expenses, all of which has enhanced our financial position and liquidity. I am proud that through their efforts, AROP was able to post significant improvements to all of our operating and financial metrics during the 2020 quarter. To close out 2020, our customers remain committed to taking delivery of all contracted tons this year. And we continue to anticipate full year 2020 coal production and sales volumes of approximately 27 million tons and 28 million tons respectively. Looking ahead to next year, utility inventories continue to move lower and several utilities have recently issued solicitations seeking significant coal supply commitments for multi-year terms. AROP currently has priced contract commitments for approximately 20 million tons in 2021. With expectations for higher natural gas prices and increased energy demand, as the economy recovers post-pandemic. We are currently targeting total coal sales volume in 2021 to be approximately 10% above 2020 levels. We also anticipate the results from our mineral segment will continue to modestly improve over the remainder of this year and throughout 2021. Our expectations reflect the recent rebound in commodity prices and production volumes as well as the uptick in activity by the EMP companies. As global and domestic inventories continue to draw down in return to a more normal historical balance, supply-demand fundamentals will again incentivize EMP companies to increase their pace of development. Due to the strategic location of our minerals, coupled with the quality of operators with positions on our acreage, We feel ARLP's mineral segment should see increased drilling and completion activity next year. In conclusion, we will keep our focus on maximizing cash flow from ARLP's strategically located oil and gas minerals and our low-cost, long-lived, fully capitalized coal operations to provide us with the ability to return cash to unit holders main access to the capital markets, and generate attractive long-term total returns for our stakeholders. With that, I'll ask the operator to open the call for questions.