Alliance Resource Partners, L.P.

Greetings, and welcome to Alliance Resource Partners' third quarter 2022 earnings conference call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during a conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Brian Cantrell, Senior Vice President and Chief Financial Officer. Thank you. You may begin.

Thank you, Doug, and welcome, everyone. Earlier this morning, Alliance Resource Partners released its third 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 will 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, 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 then turn the call over to Joe Kraft, our Chairman, President, and Chief Executive Officer for his comments. As announced earlier this morning, ARLP's exceptional performance during the first half of this year continued into the 2022 quarter as we reported record revenues and coal sales prices. In addition to these records, ARLP also posted increases to coal sales and production volumes, oil and gas and coal royalty volumes, and consolidated net income and EBITDA, all as compared to the 2021 quarter. At our coal operations, coal sales and production volumes increased 8.1% and 12.5% compared to the 2021 quarter. As previously mentioned, coal sales price per ton increased during the 2022 quarter, jumping 40.5% to a record $59.94 per ton. Increased sales volumes and record price realizations led coal sales revenues higher to $550.6 million, an increase of 52% compared to the 2021 quarter. As noted in our release, segment-adjusted EBITDA expense per ton also increased during the 2022 quarter, reflecting continued inflationary pressures on numerous expense items, most notably labor-related expenses, materials and supply expenses, and maintenance costs. A few items in particular bear further mention with respect to cost increases we experienced during the 2022 quarter. In the Illinois Basin, our Hamilton mine began a longwall move in early September that included bringing 194 longwall shields to the surface for repair and refurbishment. This extensive repair work resulted in completion of the Hamilton Longwall move extending into mid-October. In Appalachia, our Tunnel Ridge mine also performed a Longwall move in early September. In addition, MC Mining encountered adverse mining conditions and performed extensive maintenance on and made improvements to its coal preparation plant. Despite these higher expenses, margins at our coal operation rose on the strength of record coal sales prices to drive segment-adjusted EBITDA higher to $224.6 million, an increase of 77.8% over the 2021 quarter. Turning now to ARLP's royalty segments, compared to the 2021 quarter, royalty sales volumes for oil and gas rose 33.1%, and price realizations jumped 31.6%. leading oil and gas royalties revenue to increase 75.6% to $35.3 million. Our coal royalty segment also performed well during the 2022 quarter, with royalty tons sold increasing 5.8% and royalty revenue per ton climbing 17.5%, both as compared to the 2021 quarter. Total royalty segment adjusted EBITDA increased 66% and 7.3% compared to the 2021 and sequential quarters respectively, jumping to a record $46.9 million. On the strength of strong performance by our coal operations and royalty segments, ARLP's consolidated total revenues for the 2022 quarter increased 51.3% to a record $628.4 million. as compared to the 2021 quarter. Net income and EBITDA also jumped significantly during the 2022 quarter, increasing 186% to $164.6 million and 84% to $250.2 million, respectively, over the 2021 quarter. Financial results also improved over the sequential quarter, with total revenues and net income both increasing 1.9%, and EBITDA rising 2.6%. ARLP generated $244.5 million of free cash flow in the 2022 quarter, more than double the free cash flow from the 2021 quarter, and 210.1% higher than the sequential quarter. In keeping with our objective of returning cash to unit holders, during the 2022 quarter, we paid $52.3 million to unit holders through our quarterly distribution. Our balance sheet metrics continued to improve during the 2022 quarter as we reduced ARLP's net leverage to 0.2 times trailing adjusted EBITDA, and we ended the quarter with $278.5 million of cash and liquidity of $744.7 million. ARLP's financial and operating results for the first nine months of 2022 were also much improved compared to the 2021 period. Coal sales and production volumes increased 13.4% and 15.2% respectively, while our royalty sales volumes for oil and gas and coal rose 29% and 13.1% respectively, all as compared to the 2021 period. Increased sales volumes and commodity prices drove total revenues higher by 55.6% to $1.71 billion. Increased revenues more than offset higher total operating expenses and income taxes, leading net income higher by 187.1% to $362.7 million for the 2022 period. EBITDA for the 2022 period also increased 85.3% to $646.3 million compared to $348.9 million in the 2021 period. I think it's also important to point out that these exceptional results were achieved despite ongoing shipping delays, primarily due to transportation disruptions. While rail performance has improved recently, we continue to be negatively impacted by coal shipments falling below our expectations during the 2022 quarter. Year to date, approximately 1 million tons of ARLP's planned coal shipments have been delayed. As we close out 2022, ARLP is currently planning for its strongest coal shipping quarter this year, but with low water levels and lock outages impacting barge movements, and with the potential for a rail strike back on the table, we recognize the possibility that some shipments may shift into 2023, and we've adjusted our current expectations for 2022 coal sales volumes, prices, and costs accordingly. Turning to the outlook for ARLP's royalty businesses, Oil and gas royalty volumes continue to be higher than anticipated, as drilling and completion activity in our minerals acreage exceeds our expectations. Increased production on ARLP's base acreage, along with additional production from the two transactions we recently closed, led us to increase full-year BOE volume expectations by 9.2% at the midpoint. We expect the performance of our oil and gas royalty segment will exceed our previous expectations in 2022, and anticipate oil and gas royalty production volumes will increase next year as well. For our coal royalty segment, the coal shipment delays I discussed previously have led us to slightly lower our full year 2022 guidance. We've also modified guidance ranges for several consolidated items for the 2022 full year. The range for anticipated income tax expense was increased to reflect the current full year performance expectations for our oil and gas royalty segment. And the range for planned capital expenditures in 2022 was also increased to reflect ARLP's acquisition of the reserves adjacent to our Tunnel Ridge mine and initial work this year to begin accessing a lower cost reserve area adjacent to the Riverview mine. With that, I'll turn the call over to Joe for comments on the market and his outlook for ARLP. Joe?

Thank you, Brian, and good morning, everyone. I want to begin my comments this morning by thanking the entire Alliance organization for their hard work and dedication. Through their efforts, ARLP has delivered outstanding performance so far this year, and we are on track to achieve record financial results in 2022, a significant accomplishment for a company with our 23-year growth history. I'm extremely proud of all that has been accomplished and thankful for the unwavering focus of our teams on creating long-term value for all of our stakeholders. Attracting, retaining, and properly incentivizing the talent necessary to drive execution of ARLP's strategy is critical to our success. Since our inception, ARLP's long-term incentive plan has been an important tool to motivate key employees by aligning their interests with the long-term performance of Alliance. To keep this plan in place for our future, ARLP recently filed a proxy solicitation requesting that unit holders approve an increase to the number of units available for award under this plan. All additional units to be included in the amended plan can only be used for future LTIP grants and cannot be issued for any other purposes. The proxy advisory firms ISS and Glass-Lewis have both recommended consent for our proposed plan amendment, and management encourages all unit holders to vote in favor of the proposal. In case you're wondering, yes, the now viral photo of the coal miner who wanted so badly to be with his three-year-old son when the boy wanted to see the University of Kentucky play basketball for the first time in his life, that he showed up at last weekend's blue-white scrimmage still in his miner's clothes. He is an employee at Alliances subsidiary XL Mining. Michael's picture has captured the hearts of tens of thousands of people around the country who are ready to celebrate a hardworking, caring family man chasing his American dream. His picture, his story, and his work ethic are representative of more than 3,000 employees working across Xcel, ARLP, and all of Alliance's operating subsidiaries. It is refreshing to see the heartfelt response of those Americans that recognize the contribution of coal miners to our country's energy security. During our last earnings call, we outlined many of the factors that have contributed to global shortages in the fuels critical to providing the world with reliable, low-cost energy. Misguided climate policies resulted in the premature abandonment of base-low power generation in favor of unreliable renewables and a drive to meet unrealistic, arbitrarily set governmental and regulatory transition deadlines. Constraints on access to capital, limiting the ability of fossil fuel producers to increase supply of critical commodities essential to meeting rising power demand. Disruptions related to the conflict in Ukraine, labor shortages, supply chain, transportation challenges, have all contributed to the energy crisis currently gripping the world. As the Executive Director of the IEA recently stated, the energy world is shifting dramatically before our eyes. and responses around the world promise to make this a historic and definitive turning point. The need for reliable, affordable, secure energy has become a clear focus for governments around the world as they react to the severe impact on their citizens facing potential power capacity shortages and rapidly escalating energy costs. Cold consumption has increased in Europe as restricted Russian coal and natural gas supply has pushed many countries to delay planned retirements of coal power generation and bring idle coal plants back online. We expect this new reality will persist, at least over the next couple of years, if not longer. In the U.S., utility coal inventories continue to be at extremely low levels, and are expected to remain so through the winter. Against this backdrop, ARLP is well positioned for growth over the foreseeable future. We anticipate buying activity from our domestic customers will increase as utilities seek to replenish depleted stockpiles next year. We also anticipate favorable market conditions in Europe will provide attractive export opportunities next year as well, as they try to replace 40 million tons of Russian imports that they received this year. As a result, we currently anticipate ARLP's overall coal production in 2023 will increase by as much as 2 million tons over this year's level in order to help meet these needs. Our confidence is supported by our contract book, currently 32.9 million tons already priced and committed for 2023, and another 22.8 million tons priced and committed in 2024. With these commitments, we continue to believe that ARLP should benefit from increased coal volumes and margins over the next several years. We remain committed to our strategy of investing in our existing mining assets to maintain ARLP's low-cost position and to maximize the cash flow generation potential of our existing coal operations. The announcements we made earlier this morning of our decisions to acquire additional reserves adjacent to our low-cost Tunnel Ridge longwall mine and to access a lower-cost, higher-yielding coal sink adjacent to our Riverview mine are evidence of this commitment. With these commitments providing cost savings and increased production capacity beginning in 2025, and the two new production units in the Illinois Basin we announced last quarter that will benefit us next year, we believe ARLP has the opportunity to expand its market share and sustain planned coal volumes through 2035. We also remain focused on growing our oil and gas and coal royalty segments. The recent acquisition of an additional 4,322 acres in the Permian increases ARLP's total mineral position to approximately 62,008 net royalty acres and provides line-of-sight growth in future oil and gas royalty volumes. Our coal royalty segment is also expected to show future growth as a result of the Tunnel Ridge and Riverview activity I previously discussed. AEROP continues to make progress on its new venture's energy transition strategy. We are increasingly confident in the management team, commercial plans, and technology of Infinitum Electric, startup developer and manufacturer of high-efficiency electric motors AEROP invested in last April. We remain excited about our investment in NGP, ETP4 is their evaluation of numerous opportunities in the energy transition space has resulted in several initial investments for the fund. AEROP is recently elected to hold its commitment to Francis Energy to support development of its EV infrastructure charging network at our initial $20 million convertible node investment. We remain interested in the EV infrastructure market and our new ventures team continues to evaluate opportunities to work with Francis Energy and others in this growing sector. AEROP's management is excited about the opportunities in front of us in our future. Our visibility into the cash flow generation sustainability of our core coal and oil and gas businesses gave our board confidence to accelerate our previously targeted 10 to 15% per quarter unit holder distribution increase by bumping the distribution for the 22 quarter to 50 cents per unit, a 25% increase over the sequential quarter. Looking forward, we believe ARLP is well positioned to deliver solid growth and attractive cash returns to our unit holders again next year. That concludes our prepared comments, and I will now ask the operator to open the call for questions.