Alliance Resource Partners, L.P.

Greetings. Welcome to Alliance Resource Partners LP fourth 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, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to Brian Cantrell, Senior Vice President and Chief Financial Officer. Thank you. You may begin.

Thank you, Sherry, and welcome, everyone. Earlier this morning, Alliance Resource Partners released its fourth quarter and year-end 2021 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 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, 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 year, and then turn the call over to Joe Kraft, our Chairman, President, and Chief Executive Officer, for his comments. As we outlined in our release this morning, Alliance reported strong increases to key operating and financial metrics for the 2021 quarter and year compared to the 2020 quarter and year. For the 2021 quarter, ARLP posted increased volumes across the board as coal sales and production volumes increased 12.7% and 17.4% respectively, and royalty sales volumes for oil and gas and coal increased 9.6% and 6.6% respectively, all as compared to the 2020 quarter. We also saw higher commodity prices during the 2021 quarter, the coal sales price per ton increasing 5.6%, Oil and gas prices jumping 93.1% per BOE, and coal royalty revenue climbing 11.9% per ton. Reflecting higher sales volumes and price realizations, ARLP's net income and EBITDA also rose during the 2021 quarter, increasing 48% and 7.3% respectively over the 2020 quarter. Similarly, full-year 2021 results were significantly higher compared to 2020. Coal sales and production volumes increased 4.1 million tons, up 14.4%, and 5.2 million tons, up 19.3%, respectively, during 2021, leading our year-over-year coal sales revenues higher by $154.7 million. Higher coal sales revenues, combined with a $32.1 million increase in oil and gas royalties revenue to drive ARLP's 2021 total revenues up by 18.2% to $1.57 billion. Excluding the impact of $157 million of non-cash impairment charges in 2020, for the 2021 year, net income increased $150.4 million to $178.2 million, and EBITDA rose 23.9% to $479.1 million. During 2021, Alliance generated $302.2 million of free cash flow, returned $52.2 million to unit holders through cash distributions, reduced total debt and financing leases by $161.5 million to lower our total leverage to 0.93 times, and increased our liquidity by $105.4 million. At this point, I'd like to take a closer look at several factors that impacted ARLP's results during the 2021 quarter. We experienced transportation delays during the quarter as rail and barge companies struggled to manage performance disruptions due to labor shortage and scheduling challenges related to COVID-19, resulting in 196,600 tons of coal in transit at the end of 2021. These delays reduced our coal revenues by $16.5 million, EBITDA by $8.9 million, and net income by $7.1 million during the 2021 quarter. We expect these tons will be delivered in the first quarter, benefiting our 2022 results. We also noted in our release earlier this morning that our coal mines experienced increased operating expenses during the last quarter. Cost per ton for the 2021 quarter were impacted by an $11.8 million buyout of a coal contract that enabled us to sell approximately 132,300 tons at a higher price. While the cost to buy out this contract was fully expensed in the 2021 quarter, over half those tons will be shipped during the first quarter of 2022 at higher margins as the increased pricing we obtained is realized. Increased operating costs also reflect an increased sales and production mix of higher cost metallurgical export tons. In addition, At the end of each year, we perform actuarial and other reviews to adjust accrual for various liabilities, such as workers' compensation. For the 2021 quarter, these reviews resulted in a $6.8 million unfavorable cash accrual adjustment. In comparison, we saw $3.6 million of favorable non-cash actuarial and accrual adjustments in the 2020 quarter. Not surprisingly, in this economic environment, portion of our increased operating expenses also reflected inflationary pressures that are being felt by most businesses especially with respect to wages higher materials and supply costs particularly for steel related items such as roof bolts and wire mesh and petroleum related supplies like lubricants and diesel fuel as well as higher freight costs passed through from vendors in response to continuing supply chain concerns Where possible, we made advanced purchases of critical materials to both mitigate potential future cost increases and to ensure that our mines have adequate supplies on hand. As reflected in our initial 2022 guidance, we currently anticipate inflationary pressures are likely to persist in the near term, resulting in segment-adjusted EBITDA expense per ton increasing by approximately 10 to 16% over 2021 full-year levels. With that, I'll turn the call over to Joe for his comments on the markets and his outlook for ARLP. Joe?

Excuse me. Thank you, Brian, and good morning, everyone. During our last earnings call, we outlined several reasons why fossil fuel prices, and by that I mean oil, natural gas, and coal, have risen dramatically around the world, primarily because supply fell woefully short of growing demand as economies around the world continue to adjust from the COVID-19 disruptions that began in early 2020. The energy crisis persists today as the pandemic remains disruptive to supply chains, and just as importantly, due to continued pressures from governments, regulators, financial institutions, ESG activists and even customers unwilling to make commitments, all of which are contributing factors restricting growth in fossil fuel production and investment. These conditions remained intact both in the domestic and international coal markets through the end of 2021, resulting in natural gas prices rising to levels beneficial for coal demand. In our primary U.S. markets, year-over-year coal generation increased climbed nearly 21% during 2021 and would have been even higher if utilities had not been concerned about preserving critically low coal stockpiles. With many utilities reporting 20 days or less coal inventory and experiencing the supply shortages I mentioned previously, power companies chose to turn to higher cost natural gas generation. Similarly, our international coal markets continued to benefit from increased power demand, high natural gas and LNG prices, limited coal supply response, and transportation disruptions. Reflecting positive international supply demand fundamentals and attractive pricing, ARLP shipped approximately 4 million tons to the export markets in 2021, more than tripling our international coal sales volumes over 2020 levels. Absent any significant global economic downturn and destruction of power demand, we expect these favorable market conditions to continue for the near term. The combination of labor shortages and the surge of the Omicron variant affecting industry-wide coal transportation and production on the supply side, along with the favorable natural gas prices, frigid January weather, and the need for domestic utilities to restock low inventories, On the demand side, a point to the shortfall in coal supply continuing into 2022, keeping coal prices at elevated levels. Export demand is just as robust as the world LNG market prices remain steep, and Russia's intentions toward Ukraine has caused uncertainty of natural gas supply into Europe. AEROP's initial guidance for 2022 reflects this favorable outlook. With 32.1 million tons of coal already priced and committed for this year, we are anticipating 2022 sales volumes from our coal operations to increase 9 to 14% at per ton price realizations, 14 to 19% higher compared to 2021 levels. Although, as Brian mentioned, we also anticipate higher per ton operating expenses this year, We're still buoyed by increased cold prices, which we now believe will expect that AROP's segment-adjusted EBITDA margin per ton sold in 2022 should increase by approximately 25% compared to 2021. Our royalty segments delivered record financial results in 2021, and we expect favorable market fundamentals will support further growth in our royalty segments in 2022. For our oil and gas royalty segment, we believe total BOE sales volumes will increase modestly and a favorable forward price curve for oil, natural gas, and NGLs will most likely support higher price realizations in 2022. Anticipated increases in coal sales volumes and prices from ARLP's mining operations should also benefit our coal royalty segment, with royalty tons sold expected to increase approximately 7.5% and revenue per royalty ton 6% to 10% higher compared to 2021. As indicated by our guidance this morning and with market fundamentals remaining extremely favorable for 2022 and beyond, ARLP is well positioned to deliver solid growth and attractive cash returns to our unit holders. We remain committed to targeting annualized unit holder distributions this year of approximately 30% of free cash flow before growth investments, and are pleased that our board's elected to support that commitment by increasing ARLP's cash distribution to unit holders by 25% over the sequential quarter. I'm proud of the efforts of the entire Alliance organization to deliver the exceptional results we enjoyed in 2021. Facing ongoing challenges from COVID, supply chain shortages and disruptions, our employees worked tirelessly to meet the needs of our customers during this critical time and allowed ARLP to benefit from favorable market conditions. Through their dedication, ARLP is stronger than ever and well positioned for the future. That concludes our prepared comments and I will now ask the operator to open the call for questions.