Alliance Resource Partners, L.P.

Greetings and welcome to the Alliance Resource Partners LP fourth quarter 2022 earnings conference call. At this time, all participants are on a listen-only mode. A brief question and answer session will follow the formal presentation. If you would like to register a question during today's conference, please press star 1 on your telephone keypad. If anyone should require operator assistance during the conference, please press star 0 on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Brian Cantrell, Senior Vice President and Chief Financial Officer. Thank you, sir. Please go ahead.

Thank you, Donna, and welcome, everyone. Earlier this morning, Alliance Resource Partners released its fourth quarter and full year 2022 financial and operating results, and we'll now discuss those results as well as our perspective on current market conditions and outlook for 2023. Following our prepared remarks, we'll open the call to answer 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. And 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. And finally, we'll also be discussing certain non-GAAP financial measures today, 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. Now with the required preliminaries out of the way, I'll begin with a review of our record results for the 22 fourth quarter and full year, and then turn the call over to Joe Kraft, our Chairman, President, and Chief Executive Officer for his comments. Well, 2022 is certainly an interesting year with supply chain difficulties, transportation challenges, and inflationary pressures driving operating costs significantly higher, while Russia's invasion of Ukraine impacting global commodity flows, post-pandemic demand increases, and global governmental policies led commodity prices to historically high levels. The alliance team responded to this turbulent market exceptionally well, achieving record full-year 2022 revenues net income and EBITDA. And ending the year, our results for the 2022 quarter were also strong as the ARLP delivered record coal sales and oil and gas royalty revenues and significantly higher net income and EBITDA compared to the 2021 quarter. Looking more closely at the 2022 quarter compared to the 2021 quarter, coal sales volumes increased 2.3%, while royalty volumes for oil and gas minerals increased 42.6%, As production on ARLP's legacy properties outperformed our expectations and combined with the new volumes from the previously announced minerals acquisitions in September and October of 2022. Coal production declined 3.5% from the 2021 quarter, primarily due to an unplanned allege at our Hamilton Longwall mine that I will discuss in more detail in a moment. As a result, our coal royalty funds, tons, excuse me, fell 8.5%. We saw higher commodity prices during the 2022 quarter, with coal sales price per ton increasing 50.1%, oil and gas prices climbing 7.2% per BOE, and coal royalty revenue up 1.5% per ton, all as compared to the 2021 quarter. For the 2022 quarter, segment adjusted EBITDA expense per ton sold was $40.71, up 20.2% versus the 2021 quarter, and on a full year basis was 36.73 cents per ton, up 21.5% versus 2021. Our increased operating expenses in the 2022 quarter reflected a number of factors, including higher sales-related expenses as a result of higher price realizations and coal sales volumes, inflationary pressures, particularly on wages, raw materials, petroleum-related supplies such as resins and lubricants, higher freight costs passed on to us from our suppliers, as well as $6.5 million of non-cash accruals for various long-term liabilities, such as workers' compensation and asset retirement obligations at our non-operating mines. Also specific to the 2022 quarter, a thermal event at our Hamilton mine resulted in an unexpected outage that lasted approximately four weeks. The responses by our mine rescue team members and our miners were exceptional. Our personnel were kept safe with no injuries occurring, no equipment was damaged, and we worked closely with federal and state regulators. Mining operations allowed to return to normal production levels in December 2022. However, we did incur approximately $5.8 million of third-party expenses directly related to the event, and we lost approximately 500,000 tons of production during the quarter. Absent certain non-cash accruals and third-party expenses associated with the Hamilton event, Illinois-based and segment-adjusted EBITDA expense per ton for the 2022 quarter would have been more in line with the percentage increase we experienced in the Appalachian region for the 2022 quarter. Our net income and EBITDA rose sharply in the 2022 quarter, increasing 313.8% and 125.7% respectively over the 2021 quarter. These increases reflect higher sales volumes and price realizations, which more than offset the inflationary pressures and other impacts on costs that are previously described. 2022 full-year results were also significantly higher compared to 2021. Coal sales and production volumes increased 3.3 million tons, up 10.3% and 10.2% respectively, driving year-over-year coal sales revenues higher by $715.3 million, or 51.6%. Higher coal sales revenues combined with a $63.4 million increase in oil and gas royalty revenue drove ARLP's 2022 total revenues up by 53.3% to a record $2.4 billion. Net income increased 224% to $577.2 million, and EBITDA rose 96.3% to $940.2 million, both record results. During 2022, Alliance generated $604.2 million of free cash flow before growth investments, returned $196.3 million to unit holders through quarterly cash distributions, while recording coverage of 3.45 times for the year. And we reduced debt and financing leases by $16.9 million. Exiting 2022, our balance sheet remains strong. ARLP's total leverage ratio improved to 4.5 times trailing adjusted EBITDA. And with $296 million of cash and cash equivalents, our net leverage decreased to an all-time low of 0.14 times. Our liquidity also increased to $762.8 million at year end. As we disclosed earlier this month, we successfully closed our new revolving credit facility and term loan aid financing. This transaction was very well received in the market with oversubscribed demand, reflecting the positive fundamentals of our business and the strength of our balance sheet. Our new $425 million revolving credit facility positions us well to manage AROP's day-to-day operations, while the $75 million term loan proceeds allow us to term out the capital associated with infrastructure projects as we expand into new reserve areas at our Riverview and Tunnel Ridge operations. The capacity we obtain with this new financing enables us to use cash generated from operations to support our capital allocation plans, including increased unit holder distributions, potential repurchase of our common units and senior notes, and positioning to capitalize on growth opportunities in the future. To that point, we announced today that the Board authorized an increase to our existing unit repurchase program. The program was previously established in May 2018 and had $6.5 million of remaining available capacity at year end. The expanded program authorizes ARLP to repurchase up to $100 million of its outstanding limited partner common units, further increasing our flexibility in returning cash to unit holders. Future unit repurchases will be subject to ongoing board review and will be based on a number of factors, including ARLP's financial and operating performance and other capital requirements, as well as future economic, business, and market conditions. The unit repurchase program has no time limit, and ARLP may repurchase units from time to time in the open market or in privately negotiated transactions. The unit repurchase program authorization does not obligate ARLP to repurchase any dollar amount or number of its units, and repurchases may be commenced or suspended from time to time without prior notice. Now turning to our initial guidance, detailed in this morning's release, 2023 is shaping up to be another strong year at ARLP. We anticipate our overall coal sales volumes in 2023 to be in a range of 36 to 38 million tons, an increase at the midpoint of 4% over 2022. Supported by our highly committed and priced coal contract book, we are currently anticipating 2023 coal price realizations in the range of 67 to $69 per ton, an increase of 13 to 17% compared to 2022. Currently, 34.7 million tons are already priced and committed for 23, and ARLP has secured commitments and pricing for another 23.7 million tons in 2024. With these commitments, we continue to believe that ARLP should benefit from increased coal sales volumes and pricing over the next several years. On the cost side, while we have recently begun to see some moderation in the inflationary factors we experienced in 2022, we currently anticipate labor pressures and higher sales-related expenses will continue to add to our costs in 2023. From a comparative standpoint, recall that inflation in 2022 built dramatically during the first half of the year before peaking in the third quarter. And as a result, we expect segment adjusted EBITDA expense per ton to be higher during the first half of 23 compared to 2022 levels before moderating in the back half of the year. For the 2023 full year, segment adjusted EBITDA expense is anticipated to increase by approximately 10% to 15% over 2022 full year levels, to a range of $40.25 to $42.25 per ton sold. One other item I would highlight is our anticipated capital expenditures in 2023. Not surprisingly, inflationary pressures are expected to impact maintenance capital this year, as we have previously discussed. And CapEx this year and next is expected to be higher as we move into a new reserve area at our Riverview mine. Reflecting these impacts, we currently anticipate capital expenditures to be in a range of $400 to $450 million from $286 million in 2022. This includes maintenance capital ranging between $350 to $390 million. Additionally, as we announced earlier this morning, 2023 guidance includes the benefits of our acquisition of an additional 2,682 net oil and gas royalty acres in the Permian-Delaware Basin. The cash purchase price of $72.3 million for this acquisition will be funded with available cash and is expected to close within the next 30 days with an effective date of January 1, 2023. Since this acquisition involves an entity owned by Mr. Kraft, Terms of the transaction were approved by the board and its conflicts committee, which is comprised entirely of independent directors. This acquisition not only further enhances our existing high-quality Permian royalty portfolio, but is expected to add approximately $250,000 total barrel of oil equivalent in 2023, weighted 67% towards oil and NGLs, and will be immediately accretive to cash flow. Before I turn the call over to Joe, let me take just a moment to comment on my upcoming retirement that we announced last March. I am extremely proud to have been a part of this incredible organization that Joe started 26 years ago and of what ARLP has grown to become. As you know, our Vice President of Corporate Finance and Treasurer, Kerry Marshall, will be assuming the CFL role effective April 1st, and I can't think of anyone more capable and prepared than Kerry. It has been an honor and a pleasure working with my colleagues at Alliance, our investors, bankers, and analysts. The future at ARLP is bright, and I look forward to following closely as a loyal, interested investor for many years in the future. 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. Brian, please let me express my heartfelt appreciation. to you for your service and commitment to ARLP for the nearly two decades you have been with us. I appreciate everything you have done for me and our partnership and wish you continued success and happiness in the next chapter of your life. I also want to echo your observations that we have the best possible replacement for him, for you, and Kerry Marshall. Kerry has been a critical contributor to ARLP success from the beginning, having been closely by my side since 1994 when he joined the co-group as a manager of financial planning. Thank you, Brian, and congratulations, Kerry. Thanks, Joe. I want to begin my comments this morning by thanking the entire Alliance organization for their hard work and dedication since the pandemic began in 2020. The challenges have been unprecedented and their resilience and determination to not only persevere, but to thrive need to be recognized. Through their efforts, AARP delivered record financial results in 2022. I'm extremely, 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. And let me share some thoughts on the state of the industry and our strategy for growth and value creation going forward. As Brian mentioned in his opening remarks, 2022 was a historic year for ARLP, but it was also a year that emphasized the importance of keeping coal-fired generation in the mix for years to come, providing a reminder for the need to value energy security and resilience for our nation and nations around the world. During the quarter, the U.S. experienced another major event with the arrival of Winter Storm Elliott that put an exclamation point on this fact, consistent with what we have talked about on all of our earnings calls this year. Winter Storm Elliott brought severe cold across much of the continental U.S., straining the grid in a way that has become all too common in recent years. During the storm, electricity demand soared. As natural gas wells froze, pipeline deliveries were constrained, and renewable sources were unable to respond with significance, resulting in severe price spikes for consumers in many states. As tragic as the storm's impact was, let me repeat, it was merely the latest highlight of the need for a diverse mix of energy sources and in particular, the vital role coal plays. This was evidenced by the fact that the U.S. coal-fired generation in December was at a three-year high, despite the retirement of almost 28 gigawatts of coal-fired generating capacity nationwide over that same three-year period. As you have heard repeated over the years, it is still true today, coal keeps the lights on, especially at times when we need it most. Policy decisions continue to challenge our industry, but events like Winter Storm Elliott and the not-too-distant Winter Storm Uri, which devastated many lives and homes in Texas, reinforced the urgency and need for an all-of-the-above strategy, embracing energy security, reliability, and affordable electricity. The past forced retirements of a significant portion of the country's coal-fired generation has exposed the grid, especially in the regions that comprise our primary market, where many utilities recently have reported delaying previously announced coal plant retirements for several years. As the nation continues to embark on its transition of energy and related infrastructure, we believe ARLP can play a vital role in the conversation and any changes to the U.S. power grid will create opportunities for ARLP to leverage long-standing relationships with the electric utilities, regulators, and other customers to create additional avenues for growth, while at the same time having the opportunity to rely on the coal plants we serve until we can responsibly get there. Again, we do not view our country's future energy needs as an either-or solution, but an and solution. which we will continue to advocate and support as we continue to highlight the reality of the situation. Now turning to the current market and commodity pricing environment, U.S. natural gas prices continue their decline heading into the new year with the Henry Hub spot price down sharply this month. A warmer than usual January builds in underground storage of natural gas and the Freeport LNG export terminal remaining offline are all factors contributing to the weakness in near-term pricing. Falling natural gas prices in the middle of winter tend to increase the risk of lower than expected coal burn, which could cause coal stockpiles to grow faster than anticipated. However, eastern U.S. coal pricing has not been meaningfully impacted so far since we, along with most of our competitors, are either fully committed or have very little inventory available. This is evidenced by our year-end coal inventory of 500,000 tons, of which 200,000 tons were staged for export in early 2023. Our planned January shipments are on schedule, keeping our inventories at relatively low levels. Internationally, a number of factors are impacting global energy trade routes, and in our view, will continue to drive higher demand and pricing in the back half of 2023 and for several years to come, if not permanently. Our primary trading partners for thermal coal in Europe are faced with the consequences of losing roughly 40 million tons per year of Russian coal imports for power generation, which resulted in skyrocketing prices in 2022. And while mild weather so far this winter in Europe has resulted in API2 prices easing from recent peaks, during the last year, we expect them to rebound sometime in mid-year 2023. Meanwhile, China's ban on imports of Australian coal is slowly being relaxed, putting additional pressure on European supply. Three Chinese power generators and a steelmaker were recently cleared by their regulators to buy Australian coal. It is believed easing of the ban will continue to broaden allowing other Chinese entities to pursue Australian thermal and metallurgical coal. As Europe continues to replace Russian supply and Australian supply becomes more competitive as China's economy reopens, we believe coal demand will grow as European stockpiles will need to be replenished ahead of next winter and extend further into 2024. Again, we expect this increase in demand will lift oil, gas, and coal prices here this year. Turning to our own book and guidance, 94% of our coal sales are priced and committed in 2023, which includes 3.3 million tons for export markets, giving us strong visibility and certainty into our 2023 guidance. Of our roughly 2.3 million tons of unsold coal this year, Assuming production of 37 million tons, which is at the midpoint of our guidance, we expect at least one-half will be sold into the export market with the balance to either go to the export or domestic market as pricing dictates. Even though we are guiding for higher costs, as Brian mentioned, we expect favorable market forces in our current coal sales commitments will drive top-line growth. that should more than offset these inflationary pressures, as margins are expected to expand to record levels in 2023. Now, turning to our capital allocation priorities, our primary focus is to provide well-covered distributions and attractive returns to our unit holders over the long term. Last week, we announced that our board approved a 40% increase in our quarterly distribution, equating to an annualized rate of $2.80 per unit. We elected to declare a quarterly distribution increase to a level that we expect to maintain throughout the year, as opposed to smaller increments each quarter. This was based on our competence and high visibility in 2023 and 2024, expected cash flows, committed tons, and strong financial position. After distributions, we will continue to support our co-operations funding appropriate maintenance capital requirements, and investing in high-return efficiency projects with near-term paybacks that maintain our low-cost competitive advantage. Thereafter, Alliance's robust cash flow generation uniquely positions us to pursue attractive investments that meet the evolving energy needs of tomorrow and are consistent with our proven track record to date, including investments in oil and gas royalties as evidenced by the Permian Basin acquisition announced today. We took the next step in our diversification strategy in early 2022 with three energy transition investments totaling $87 million in outstanding commitments. In September, we hired a dedicated team of leaders to join our new ventures group to continue these efforts of identifying, evaluating, and executing commercial opportunities beyond coal and oil and gas royalties. The team is focused on highly strategic investments that allow ARLP to leverage its core competencies and relationships with electric utilities, industrial customers, and federal and state governments. As we embark on this new journey, we will maintain a disciplined and process-oriented approach to allocating capital. Absent available opportunities to invest in these businesses, we will continue to maintain flexibility, evaluating other high-return uses of cash, which, as Brian noted, may include redeeming a portion of our senior notes outstanding, unit buybacks, as well as providing well-covered cash distributions. In closing, I am very proud of AROP's 2022 record levels of revenues, net income, and EBITDA, while at the same time equally excited about the opportunities in front of us. Our operations are running well, our coal contract book is heavily committed at very attractive levels, and our financial position has never been stronger. Looking forward, we believe ARLP is well positioned to deliver solid growth and attractive cash returns to our unit holders in 2023 and beyond. That concludes our prepared comments, and I will now ask the operator to open the call for questions.