Alliance Resource Partners, L.P.

Good day and welcome to the Alliance Resource Partners fourth 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 and then zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star and then one on a touch tone phone. To withdraw your question, please press star and then two. Please note that 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, Tom, and welcome, everyone. Earlier this morning, Alliance Resource Partners released its fourth quarter 2020 financial and operating results, and we'll 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 2020 results and then turn the call over to Joe Kraft, our Chairman, President, and Chief Executive Officer, for his perspective and outlook. This morning, ARLP reported a continued rebound in our performance for the 2020 quarter, as we posted increases to all major operating and financial metrics compared to the sequential quarter. Reflecting increased sales from coal operations and higher oil and gas royalty revenues from our mineral segment, total consolidated revenues rose 3.1% to $366.5 million. Higher revenues contributed to increased net income in EBITDA, which climbed 28.8% to $35 million, and 2.1 percent to $121.4 million, respectively, each compared to the sequential quarter. The entire alliance organization remained focused on optimizing cash flows by controlling working capital, expenses, and capital expenditures, and these efforts continued to strengthen ARLP's balance sheet and financial position. During the 2020 quarter, ARLP generated free cash flow of $90.6 million, reduced debt and finance lease obligations by $67.8 million, and increased liquidity by $70.2 million. Our total leverage improved by 9.5% from the sequential quarter to 1.53 times, and we ended the year comfortably in compliance with all of our debt covenants. Turning from our consolidated results, let's take a closer look at the performance of ARLP's business segments. For our coal segment, Sales and production volumes were both higher compared to the sequential quarter, with total coal sales volumes rising 4.8% to 8.1 million tons and coal production increasing 3.4% to 7.4 million tons. Increased sales volumes more than offset lower price realizations, driving coal sales revenues higher by 2.9% to $345.6 million dollars. Ongoing expense control initiatives at all ARLP operations during the 2020 quarter led costs per ton lower compared to the sequential quarter, as total segment-adjusted EBITDA expense declined 2.3% to $27.38 per ton. Increased revenues and lower costs drove segment-adjusted EBITDA sequentially higher by 4.8% to $129.8 million. AROP's focus on reducing coal inventories and matching production to meet customer requirements reduced total coal inventory to approximately 600,000 tons at the end of the 2020 quarter, compared to 1.2 million tons at the end of the sequential quarter. The performance of our mineral segment also improved in the 2020 quarter. Compared to the sequential quarter, Stronger commodity pricing pushed ARLP's average realizations per BOE higher by 29.6% and drove segment-adjusted EBITDA for our mineral segment up 15.1% to $10.2 million. While stronger commodity prices have encouraged a gradual resumption of drilling and completion of wells on our acreage, the effects of dramatically reduced operator activity in the second and third quarters of 2020 resulted in a 10.7% decrease in production volumes per BOE from our mineral interest compared to the sequential quarter. It should not come as a surprise that the impacts of reduced global energy demand resulting from effects of the COVID-19 pandemic negatively impacted ARLP's results compared to the 2019 quarter and year. Reflecting lower coal and oil and gas volumes and prices in the 2020 quarter, total revenues fell 19.2% compared to the 2019 quarter, and EBITDA declined by 3.8%. In a testament to the efforts of our teams to respond to the pandemic, net income for the 2020 quarter actually increased 35.6% compared to the 2019 quarter, as the benefits of ARLP's expense reduction initiatives more than offset lower revenues. Total revenues for the 2020 year fell 32.3%, to $1.33 billion, leading adjusted net income and adjusted EBITDA lower to $27.8 million and $386.7 million respectively, compared to $244.6 million and $599 million respectively for the 2019 year. While we certainly experienced challenges during 2020, ARLP was able to achieve several impressive accomplishments. As noted in our release this morning, during 2020 we significantly reduced working capital requirements, capital expenditures, operating expenses, and G&A, paid down approximately $197 million of total debt and financing leases, increased liquidity by nearly $220 million, and generated approximately $280 million of free cash flow. With that, I'll now turn the call over to Joe. Joe?

Thank you, Brian, and good morning, everyone. I'd like to open my comments this morning by reflecting on the extraordinary performance of our people in 2020. We enter 2020 anticipating significant growth in our mineral segment, while at the same time prepared to manage challenging coal markets due to low natural gas prices, tepid coal demand, and an overhang of coal supply. None of us, however, could have anticipated the COVID-19 pandemic and its devastating impact to energy demand. As we have always done, the entire Alliance organization met these unprecedented challenges head on, rapidly responding to safeguard the health and safety of our people, protect our balance sheet, support our communities, and operate prudently as an essential supplier to our customers. to help ensure the reliability of the electric grid so critical to the markets we serve. Despite the disruptions encountered during the year, our teams performed at the highest levels across the entire organization, including our coal mines delivering the best safety record in the history of Alliance. The effectiveness of their response clearly demonstrated their flexibility, resilience, innovation, and determination to succeed. For their dedication, commitment, and all that they accomplished during such a tumultuous year, I extend my sincerest appreciation. We enter 2021 hopeful that economic activity and energy demand will continue to improve as vaccines become more available. In the U.S., increased power generation and higher natural gas prices point to the possibility of gas-to-cold switching and projections of increased coal demand in our primary markets. Conditions are improving in the international markets as well. Cold weather across Europe and Asia, sharply higher LNG prices, a weakening U.S. dollar, and supply disruptions related to trade disputes are all supportive of potentially increased participation by U.S. producers in both the thermal and metallurgical export markets. Consequently, ARLP continues to target a 10% year-over-year increase in total coal sales volumes this year. During the 2020 quarter, ARLP contracted for 4.1 million tons of coal sales to be delivered in 2021, lifting our commitments to 78% of anticipated coal sales at the midpoint of our guidance for this year. While pricing for the newly contracted tons were greater than published spot prices, they were mostly lower than the expiring legacy contracts. As a result, we currently anticipate ARLP's 2021 average cold sales price per ton to decline approximately 4% to 8% from last year's average. Our mines did a great job reducing operating expenses and capital during 2020, and their efforts are expected to continue to benefit 2021 as well. For the full year 2021, we currently anticipate segment adjusted EBITDA expense in a range of $27.50 to $30 per ton sold, a decrease of approximately 5% at the midpoint of our guidance compared to 2020. Estimated capital expenditures of $120 to $125 million for 2021 are comparable to last year. For our mineral segment, the significant reduction in drilling and completion activities by operators during 2020 that Brian mentioned earlier will continue to impact volumes produced from our minerals in 2021. Although drilling and completion has improved from the historic lows experienced last year, It takes time for increased activity to overcome the impact of such dramatic declines. As a result, as we saw during the 2020 quarter, AEROP currently anticipates total BOE volumes from our acreage will decline from year-end 2020 levels during the first two quarters of 2021 before gradually increasing over the second half of the year. Pricing for oil, natural gas, and natural gas liquids have shown strength recently And if the forward commodity price curves are sustained, we currently anticipate higher year-over-year price realizations in 2021 and a modest increase in the EBITDA contribution from our minerals segment this year. We believe ARLP's current outlook for 2021 supports a return to unit holder distributions this year. Assuming first quarter results are in line with our expectations and our current outlook for the future does not change, I expect management will recommend the Board consider declaring a distribution to unit holders at its next quarterly meeting in April. The Board will determine whether to do so, as well as the amount of any future distribution based on numerous factors, including business and market conditions, ARLP's future financial and operating performance outlook, and other capital allocation priorities. Looking ahead, we see a bright future for Alliance despite recent headlines and rhetoric that may suggest otherwise. Low-cost, reliable energy is critical to the well-being and success of our country. We are proud of the role Alliance plays in supporting the desires of the communities we serve to benefit from a thriving economy, a high standard of living, and a quality of life that allows them to flourish. We firmly believe that the products ARLP delivers, coal, oil, and natural gas, will remain essential to achieving these desired outcomes for years to come. We are also aware of the opportunities likely to be created by the ongoing transition toward new energy and power technologies. As we seek to create long-term unit holder value, ARLP is actively evaluating various strategies to utilize the cash flows from our existing assets to pursue opportunities in these developing areas, which we believe have the potential to generate attractive long-term returns and sustainable cash flow growth. As these evaluations crystallize, we will execute on future opportunities in a disciplined and balanced manner, focused on optimizing cash flows from existing assets, pursuing strategic external opportunities, protecting our balance sheet and returning cash to unit holders, maintaining access to capital markets, and generating attractive long-term total returns for all of our stakeholders. That concludes my prepared comments, and I'll now ask the operator to open the call for questions.