Alliance Resource Partners, L.P.

Greetings. Welcome to the Alliance Resource Partners LP First Quarter 2022 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 your host, Brian Cantrell, Senior Vice President and Chief Financial Officer. Thank you. You may begin.

Thank you, Alex, and welcome, everyone. Earlier this morning, Alliance Resource Partners released its first quarter 2022 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 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 8-K. With the required preliminaries out of the way, I'll begin with a review of our results for the quarter and then turn the call over to Joe Kraft, our Chairman, President, and Chief Executive Officer for his comments. As outlined in our release this morning, Alliance reported strong increases to key operating and financial metrics for the 2022 quarter compared to the 2021 quarter. For the 2022 quarter, ARLP posted increased volumes across the board as coal sales and production volumes rose 19.5% and 14.7% respectively, and royalty sales volumes for oil and gas and coal climbed 26.3% and 22.8% respectively, all as compared to the 2021 quarter. We also saw higher commodity prices during the 2022 quarter, with coal sales price per ton increasing 13%, oil and gas prices jumping 74.9% per BOE, and coal royalty revenue climbing 9.2% per ton. Reflecting higher sales volumes and price realizations, ARLP's total revenues, income before income taxes, and EBITDA also jumped significantly during the 2022 quarter, increasing 44.6%, 221%, and 61.5% respectively over the 2021 quarter. These increases would have been even greater but for 1.1 million tons of delayed coal shipments due to seasonal barge lock maintenance, high river levels, and ongoing rail transportation challenges experienced during the 2022 quarter. While these delayed coal shipments are expected to be delivered over the balance of the year, They reduced our coal revenues in the 2022 quarter by approximately $72 million, EBITDA by $31 million, and net income by $27 million, or $0.21 per limited partner unit. On the cost side, segment-adjusted EBITDA expense per ton increased by 10.7% in the 2022 quarter to $32.90 per ton, compared to 29%. dollars and 72 cents per ton in the 2021 quarter as a result of inflationary pressures on numerous expense items, including labor-related expenses and supply and maintenance costs. Operating costs were also impacted by long haul moves at our Hamilton, Tunnel Ridge, and Matiki mines. Reflecting higher revenues, partially offset by increased operating and income tax expense, Net income for the 2022 quarter increased 48.1% to $36.7 million or 28 cents per limited partner unit compared to $24.7 million or 19 cents per limited partner unit in the 2021 quarter. As we reported last week, ARLP recognized a one-time non-cash deferred income tax charge of $37.3 million and a current income tax expense of $4.8 million in the 2022 quarter, which collectively reduced net income by $42.1 million, or 33 cents per limited partner unit. These tax charges reflect the ARLP's recent election to convert Alliance Minerals LLC, the holding company for our oil and gas royalty activities, from a partnership pass-through entity taxable at the individual unit holder level to a corporate taxable entity for federal and state income tax purposes. This election effectively reduces the total income tax burden on our oil and gas royalties revenue, as ARLP will pay entity-level taxes at the corporate tax rate that is well below the individual tax rates that would otherwise be paid by our unit holders. Since we intend to grow our oil and gas royalty segment by reinvesting the free cash flow from Alliance Minerals into additional oil and gas minerals, we do not expect to be double taxed. Compared to the sequential quarter, total revenues decreased by 2.7%, primarily due to lower coal sales volumes as a result of the delayed coal shipments I previously mentioned. Lower coal sales volumes caused coal revenues to fall 5.6% sequentially, even though coal price realizations increased 5.3% to $47.58 per ton sold. Total operating expenses improved by 9.5% compared to the sequential quarter as a result of lower coal sales volumes and a 2.8% reduction in segment-adjusted EBITDA expense per ton. Lower total operating expenses more than offset reduced revenues, leading income before income taxes higher by 52.5% to $79.7 million in the 2022 quarter compared to $52.2 million for the sequential quarter. Although income taxes was higher in the 2022 quarter, net income decreased to $36.7 million compared to $51.8 million in the sequential quarter due to the impact of income tax expense attributable to the change in tax status of our oil and gas royalty segment I discussed earlier. EBITDA increased 16.9% in the 2022 quarter, to $152.3 million compared to $130.2 million in the sequential quarter. Taking a quick look at our balance sheet, ARLP ended the 2022 quarter with liquidity of $603.6 million and further reduced total leverage to approximately 0.8 times trailing adjusted EBITDA. Finally, as we outlined last week, ARLP has also updated its 2022 full-year guidance. We anticipate the current strong commodity price environment will continue through the balance of the year that levels well above our initial expectations. Our coal operations have increased planned sales volumes by 500,000 tons in response to strong customer demand. And with approximately 94% of sales volumes now priced and committed for delivery in 2022, we expect our coal sales price realizations per ton will be 10% to 22% above the initial guidance AROP provided to the market in January of this year. Although supply chain challenges and continued inflationary pressures remain a concern, we currently expect full year operating costs will be in line with our initial expectations, leading to improved operating margins from coal. Our royalties business should also perform better than we expected coming into 2022. Pricing for oil, natural gas, and natural gas liquids has increased significantly since the beginning of the year, prompting E&P operators to increase production on ARLP's acreage. With expectations of increased volumes in pricing, our oil and gas royalty revenues should be meaningfully higher. Similarly, our coal royalty business should benefit from higher revenue per royalty ton sold. As a result, ARLP's full year operating and financial performance and cash flow generation this year should surpass our initial expectations for 2022. With that, I'll turn the call to Joe for comments on the markets and his outlook for ARLP. Joe?

Thank you, Brian, and good morning, everyone. As you just heard from Brian, much has changed since we last released earnings in January. The series of events that we experienced in the 2022 quarter led to outstanding results, but even more importantly, set the stage for historic growth for ARLP looking forward. Energy markets were already strong coming into the year as post-pandemic global economic expansion continued and power demand increased. As the 2022 quarter unfolded, market conditions improved even further. The impact of underinvestment in fossil fuel production since 2019 caused partly due to the pandemic, but also strongly influenced by climate policy decisions by governments and financial institutions around the globe began to manifest itself, creating worldwide shortages of coal, oil, and natural gas. Sanctions imposed on Russia following the invasion of Ukraine disrupted the global flow of commodities and energy supplies were further impacted by inflationary pressures, labor shortages, supply chain challenges, and transportation disruptions. All of these factors contributed to a dramatic increase in global commodity prices and a renewed focus by countries around the world on the importance of energy security, national security, and freedom. U.S. and international thermal coal markets have reacted strongly to the current environment. High natural gas prices have incentivized coal-fired power generation at the expense of natural gas, particularly in Europe. Coal generation across the European Union in March 2022 exceeded the five-year average and jumped twofold over 2021 levels. With the recent announced ban on Russian coal, which accounted for approximately 70% of the EU imports in 2021, European buyers are ramping up coal purchases from alternative supply sources and driving international thermal coal prices to unprecedented levels. China and India are generally the central focus on the global coal markets due to consuming two-thirds of the world's coal. However, due to the war in Ukraine, their influence in the current market environment has been somewhat muted. From a market perspective, this should provide more stability for U.S. exporters of coal than we have had in the past. While the international market, as reflected by the API2 index, remains extremely volatile, we are seeing the physical market being more stable and currently supporting our coal sales price per ton estimates in our updated 2022 full-year guidance. We recognize, and so should you, the difficulty of guessing commodity prices with the current turmoil around the globe right now. However, I believe energy prices will be at elevated levels as long as there is conflict with Russia and Ukraine. Unfortunately, it appears this conflict is going to last for quite a bit longer. So with that caveat, Our view is the US export prices for both thermal and metallurgical coal will remain higher than the domestic market over at least the next 18 months. As a result, we expect most of ARLP's uncommitted coal will be sold into those markets, lifting expectations for our export volumes to reach a little more than 6 million tons this year. If we are correct in projecting export prices to remain higher than the domestic market in 2023, we most likely will increase our export volumes by up to an additional 1.5 million tons next year. Turning to the domestic market, utilities have historically used the spring shoulder season to restock their coal inventories heading into the summer cooling season, but have been unable to do so this year. Facing extremely low stockpiles, high natural gas prices, and fierce competition with global fuel buyers, Domestic utilities are struggling to manage power dispatch economically in the current pricing environment this year. The forward natural gas curve supports strong demand for coal. In response to this environment, our domestic customers are actively issuing term RFPs for the next several years seeking security of supply. Initial discussions indicate the market seems to be setting up to replicate what we saw in the back half of 2021. suggesting the current pricing environment will remain strong heading into next year. Production for the 2022 quarter was 14.7% higher year-over-year and 5% higher than the sequential quarter. These impressive numbers were achieved even though we continue to be impacted by rising inflation, supply chain issues, free long-wall moves, one of which took longer than we expected due to challenging circumstances. staffing shortages, as well as continued COVID-related absenteeism at our operations and those of our suppliers and transportation providers. Our increase in production was led by our Gibson South operation, which had their best quarter since Q2 2019. MC Mining's new mine number five achieved its best quarter since it opened in Q2 2020. And Tunnel Ridge, producing slightly more than two million tons, at its best quarter since Q2 2019. This quarter's total production annualized supports our sales guidance for this year. We, along with the rest of the coal industry, are finding it difficult to attract new workers simply by paying higher wages. Therefore, we do not anticipate our production will increase meaningfully this year or next. Likewise, we don't believe there will be a supply response by other coal producers either. Unless there is a global recession severely impacting demand for fossil fuels, it seems likely commodity pricing will stay strong for several years, especially if the U.S. stays committed to increase LNG exports over the next decade. As Brian mentioned earlier, we are anticipating 2022 sales volume from our coal operations to increase 10 to 15 percent at per ton price realizations 26% to 47% higher compared to 2021 levels. Buoyed by increased prices, we currently expect ARLP segment-adjusted EBITDA margin per ton sold in 2022 should increase by approximately 88% compared to 2021. While it is too early for 2023 guidance, Based upon my earlier comments, we are well positioned to grow margins again next year. Revenue from tons sold in the export market will determine by how much. Strong market fundamentals should also benefit our oil and gas and coal royalties segments. Pricing for oil and natural gas improved meaningfully during the 2022 quarter, with oil topping $100 per barrel and natural gas exceeding $7 per MMBTU. While operators continue to exhibit financial discipline, increased cash flows from higher commodity prices have led to some accelerated permitting drilling and completion activity, driving production on ARLP's acreage to exceed our initial expectations. The robust coal markets discussed earlier also expect to benefit our coal royalty segment as a result of higher revenue per royalty time sold. Our royalty segments delivered record financial results last year, and we expect favorable market conditions will support even better results in 2022. For our oil and gas royalty segment, we believe total BOE sales volumes will increase 4% to 13% this year, and a favorable forward price curve for oil, natural gas, and NGLs will most likely support much higher price realizations compared to last year. Anticipated increase And 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 expected to be 22% to 26% higher compared to 2021. As indicated by our updated guidance 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 are pleased that our board elected to support management's view by increasing ARLP's cash distribution to unit holders by 40% over the sequential quarter. Based upon our full year guidance, management is targeting unit holder distribution increases of 10% to 15% per quarter over the balance of this year. Distributions at these levels still allows for capital allocation ratios similar to what we have discussed in recent earnings calls. Therefore, the strong cash flow that supports the growth in distributions will also support higher cash flow available for growth investments and strengthening of our balance sheet. Over the last 18 months, we have discussed ARLP's goal of utilizing the strong cash flows from our existing assets to pursue opportunities in developing energy transition areas. To help you understand our thoughts on future uses of free cash flow, I want to outline our current strategy. The best way I have thought to explain our strategy at this stage is to consider our uses of cash in five verticals. The first vertical is to return cash to unit holders through quarterly distributions. Every year since our IPO in 1999, Our strategy for success has been centered on well-covered distributions providing an attractive yield to our investors. To do this, we have focused on creating sustainable growth in cash flows year over year. Since we restarted distributions after COVID-related disruptions, our allocation for distributions has been approximately 30% of estimated annual free cash flow before growth investments. Assuming we achieve results consistent with our guidance for 2022, we will be at that level again this year. The second vertical will be to support the maintenance capital requirements for our coal operations. We will also invest in high return efficiency projects to maintain our low cost competitive advantage. In addition, we will consider opportunities in mining beyond thermal coal. to include metallurgical coal and other industrial minerals to capitalize on one of our core competencies, our mining expertise. Third, we plan to continue growing our royalty segments, focused primarily on reinvesting the cash flow generated from this part of our business to acquire additional oil and gas mineral interests. We are also exploring opportunities to expand this segment by investing in other royalty-type investments. The fourth use of cash flow will be to invest in growth assets we can manage that may lead to establishing another business segment. An example includes the repurposing of our Matrix Design Group subsidiary. It's described more fully in our press release issued this morning. Matrix has recently launched OmniPro, the NIOSH 2020 award-winning visual artificial intelligence technology. OmniPro is a camera safety system that uses VAI to detect people and objects such as stop signs within a mobile equipment unit's projected travel path and alerts the operator of their presence. This is one of the products we think has the potential to help grow matrix of sales by five to 10 times over the next five years or so. We will achieve this growth by adding new talent to our workforce and deploy a modest amount of capital expenditures. Other areas of potential investment by Matrix and ARLP's broader management team focused on technology development include smart cameras, energy storage, energy efficiency, renewable power generation, EV charging, smart metering, and energy demand management. The fifth vertical is focused on investments capable of providing attractive returns on a standalone basis or one that could also result in assets we can manage for sustainable long-term growth. This strategy is similar to how we built our oil and gas royalty segment. As you may recall, we started by investing in minerals as a limited partner in Aldell 1 in 2014, and then again in Aldell 2 in 2015. After seeing the earnings potential for this business, we decided to buy out the other limited partners and the GP of these two funds to own directly and manage the underlying minerals. We have made several other investments in this space since then and plan to continue to do more. This quarter's record performance for our total royalty segments affirms why we like this model. On the other hand, we invested in a natural gas compression company in 2017, thinking that could be a line of business for AARP to pursue. Once we decided the gas compression business did not fit with our long-term objectives, we sold that investment, achieving an attractive return. This, too, is a business model we could pursue. We have made the strategic decision to invest in non-coal assets, believing we can realize sustainable cash flows and attractive returns on invested capital. As we pursue these opportunities, we will remain steadfast in our commitment to maintain a strong balance sheet and strive to make the best decisions for our long-term unit holders. While we are continuing to explore several areas of growth along the lines I just outlined, we are excited to announce today our recently completed investments in two entrepreneurial companies, Francis Energy and Infini Electric, that fit the above-referenced fifth vertical. We believe both of these investments will provide significant returns for our unit holders within four to seven years. A key component of our evaluation of these operations was the ability to leverage the technology and manufacturing skills of our Matrix Design Group subsidiary. Since 2006, Matrix has been an innovative technology company embedded within the Alliance organization. Initially focused on developing, manufacturing, and deploying technology to enhance the safety and productivity of underground coal mining operations. Matrix has recently begun focusing on expanding the expertise and skills of its more than 100 professionals into other areas. With its powerful platform combining hardware, software, data analytics, and AI all in one place, Matrix is uniquely positioned to not only support the ongoing development efforts of Francis and Infinitum Electric, but to accelerate their progress and execution. When you look at the investments we are making in Francis Energy and Infinitum Electric in the context of Matrix, all three companies are focused in strong growth sectors aligned with the broader energy transition. Critically, however, they each provide tangible offerings which are enhanced by this transition rather than being dependent upon it. Combined, we plan to invest up to $90 million over the next 12 months in these investments. The investment details will be provided in our upcoming quarterly filing with the SEC. As the energy and infrastructure transition continues, we also believe the necessary changes to the U.S. power grid will create opportunities for ARLP to leverage its relationships with electric utilities, industrial customers, and federal and state governments to create additional revenues or avenues for growth. As the future of energy continues to evolve, AEROP is well-positioned to benefit. We remain committed to providing the fuels essential to meeting the energy needs of today and to profitably invest in opportunities that will allow us to meet the energy needs of tomorrow. In doing so, we are focused on creating long-term value for our stakeholders. That concludes our prepared comments, and I'll now ask the operator to open the call for questions.