Alliance Resource Partners, L.P.

Greetings. Welcome to Alliance Resource Partners LP second quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to Mr. Brian Cantrell, Senior Vice President and CFO. Thank you. You may begin.

Thank you, Sherry, and welcome, everyone. Earlier this morning, Alliance Resource Partners released its second quarter 2021 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 we begin, a reminder that some of our remarks today may include forward-looking statements, 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, our 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 for the quarter, and then I'll turn the call over to Joe Kraft, our Chairman, President, and Chief Executive Officer, for his comments. As we reported earlier this morning, Alliance delivered strong results during the 2021 quarter. posting significant increases to our major operating and financial metrics compared to the sequential quarter. Reflecting improved performance from both our coal operations and our royalty segments, total revenues increased 13.8% to $362.4 million. Net income jumped 77.9% to $44 million, or 34 cents per unit. and EBITDA climbed 25.7% to $118.6 million. Contributing to these exceptional results was the shipment of tons delayed during the sequential quarter. If you recall our release from last quarter, shipments for 950,000 tons were delayed by weather-related transportation disruptions and an unplanned customer outage, which impacted our cash flow and EBITDA by approximately $13 million. At that time, we anticipated customers would make up these tons over the balance of this year. With strong power demand and utilities calling on coal to meet this demand, the timing of delivering these delayed shipments was largely accelerated into the 2021 quarter. Absent these timing issues, results for the 2021 and sequential quarters would have been comparable. With these increases and our continued focus on controlling costs, expenses, and capital, ARLP generated $79.4 million of free cash flow in the 2021 quarter. We utilized this cash flow to return $12.7 million to unit holders through our quarterly distribution and to reduce total debt and finance lease obligations by $59.5 million. We ended the quarter with liquidity of $500.5 million and reduced our total leverage to 1.08 times, a 32.1% improvement since the beginning of this year. ARLP's financial and operating results for the 2021 quarter and the first half of 2021 were significantly improved compared to the 2020 quarter and period, which were negatively impacted by the pandemic. Compared to the 2020 quarter, total revenues increased 42% in the 2021 quarter, while net income jumped by $90.7 million and EBITDA climbed 145.9%. For the 2021 period, coal sales volumes increased 18% compared to the 2020 period, driving total revenues higher by 12.4% to $681.1 million. Reflecting ongoing cost control and efficiency initiatives at our mining operations, offset in part by increased selling expenses resulting from higher coal sales volumes, operating expenses declined to $409.6 million for the 2021 period, compared to $421.5 million for the 2020 period. Net income increased $260.2 million to $68.8 million for the 2021 period, reflecting higher revenues, reduced operating expenses, lower depreciation, and $157 million of non-cash impairment charges incurred in the 2020 period. Excluding the impact of these impairment charges, net income of $68.8 million for the 2021 period compares to an adjusted net loss of $34.4 million for the 2020 period. EBITDA for the 2021 period increased 45.3% to $212.9 million compared to adjusted EBITDA of $146.5 million in the 2020 period. Turning from our consolidated results, let's now take a closer look at the performance of AROP's business segments. At our coal operations, sales tons increased 14.9% during the 2021 quarter, as strong coal demand allowed us to deliver approximately 1 million tons of coal shipments delayed from the sequential quarter, as I discussed earlier. Increased coal sales volumes more than offset lower price realizations, leading coal sales revenues higher by 13.4% to $326 million compared to the sequential quarter. Increased volumes and the continued benefits of ongoing cost control and efficiency initiatives at all ARLP coal mines drove segment adjusted EBITDA expense per ton sold lower to $27.90, a 6.1% reduction compared to the sequential quarter. Increased revenues and lower per ton operating expenses drove segment adjusted EBITDA for our coal operations higher by 25.7% to $113.9 million. ARLP's royalty businesses also performed well during the 2021 quarter, delivering $22.2 million of segment adjusted EBITDA, an increase of 15.3% over the sequential quarter. Of this total, oil and gas royalties contributed $15.4 million to segment-adjusted EBITDA during the 2021 quarter, a sequential increase of 28.7% on the strength of significantly higher commodity prices. As expected, coal royalties delivered relatively stable results for the 2021 quarter, posting segment-adjusted EBITDA of $6.8 million. With that, I'll now turn the call over to Joe.

Joe? Thank you, Brian. As Brian mentioned, ARLP's operating and financial performance for the 2021 quarter improved significantly compared to both the sequential and 2020 quarters. Looking ahead, coal market fundamentals are extremely favorable, both at home and abroad, prompting us to increase our full-year 2021 guidance. We are increasing the midpoint of our targeted total coal sales volumes for 2021 by 1.8 million tons, or approximately 6%, to 32.9 million tons. Over the past two months, commodity prices for each of our business segments have skyrocketed. In our primary U.S. markets, year-over-year power demand has surged 7.5% through the first half of 2021. Rising natural gas prices have driven coal consumption higher for the 2021 period. According to Argus, June coal generation in the PJM hit a three-year high, while MISO and SPP grids reported increased coal demand of 37% and 42%, respectively. For the full year, coal consumption in the U.S. is expected to rebound 16%. Increased domestic demand is coming amidst declining utility stockpiles, constrained supply response, and a robust export market. International coal demand is rising as global economic expansion post-COVID-19 has lifted power demand and higher LNG prices have favored coal generation. IHS market currently projects U.S. thermal coal exports will climb to a range of 41 to 45 million short tons this year, compared to 26.7 million short tons in 2020. Alliance has responded to these favorable market conditions by significantly strengthening our contract position during the 2021 quarter. booking new commitments to deliver 8.7 million tons through 2024, including 2.5 million tons into the export markets. For 2021, we are targeting export sales volumes at 4.4 million tons compared to a little less than 1 million tons last year. We are actively evaluating opportunities to further increase production and sales in response to expectations for continued strong coal demand and pricing through 2022. However, the current tight labor market may limit what we can accomplish in this regard. Market fundamentals for ARLP's royalty businesses are also favorable. Increased coal sales volumes from ARLP's mining operations should benefit our coal royalty segment, and we are raising the midpoint of estimated 2021 royalty times sold by 3.3%. For our oil and gas royalty segment, drilling and completion activity continues on our acreage, with 103 new gross horizontal wells spud and 182 gross horizontal wells brought into production during the 2021 quarter. As a result, we are again increasing our 2021 full-year oil and gas production expectations. ARLP's oil and gas price realizations have increased throughout the year, and the current forward price curve remains strong. With expectations of increased oil, gas, and coal production and strong commodity pricing, we believe the contribution of our royalty segment to ARLP's consolidated results will continue to grow. With our strong year-to-date performance and positive outlook, ARLP is well-positioned to pursue our objectives of optimizing the cash flow and value of our existing assets and pursuing growth opportunities that we believe have the potential to generate attractive returns. That concludes our prepared comments, and I'll now ask the operator to open the call for questions.