Alliance Resource Partners, L.P.

Hello, and welcome to the Alliance Resource Partners third quarter 2023 earnings conference call. If anyone should require operator assistance, please press star zero on your telephone keypad. A question and answer session will follow the formal presentation. You may be placed into question queue at any time by pressing star one on your telephone keypad. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Senior Vice President and CFO, Carrie Marshall. Please go ahead, sir.

Thank you, Operator, and welcome, everyone. Earlier this morning, Alliance Resource Partners released its third quarter 2023 financial and operating results, and we will now discuss those results as well as our perspective on current market conditions and outlook for the balance of 2023. Following our prepared remarks, we will 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. 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 will 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 ARL Key'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 will begin with a review of our results for the third quarter, then turn the call over to Joe Kraft, our Chairman, President, and Chief Executive Officer, for his comments. Total revenues in the 2023 quarter increased slightly to $636.5 million compared to $632.5 million in the 2022 quarter. The modest year-over-year improvement was driven primarily by higher transportation and other revenues, partially offset by lower oil and gas royalties. Total coal sales price per ton rose to $64.94 per ton for the 2023 quarter, an increase of 8.3% versus the 2022 quarter, and continues to reflect the positive impacts of our contracted order book. On a sequential basis, coal sales price per ton was 3.2% higher. In our royalty segment, total revenues were $53.1 million, down 9% year over year, but up 6.2% sequentially. Our results versus the prior year period reflect lower realized oil and gas commodity pricing that more than offset record oil and gas volumes and increases in coal royalty revenue per ton. Specifically, coal royalty revenue per ton was up 13.5% compared to the 2022 quarter, while lower commodity prices led to oil and gas royalties average realized sales prices being down 31.2% per barrel of oil equivalent versus the 2022 quarter. Sequentially, coal royalty revenue per ton was up 3.7%, and oil and gas royalties average sales prices were up 2.1% per barrel of oil equivalent. As it relates to volume, coal production decreased 7% to 8.4 million tons, while coal sales volumes decreased 7.9% to 8.5 million tons compared to the 2022 quarter. Compared to the sequential quarter, coal sales volumes decreased 5% due to lower sales volumes in our Appalachia segment. Coal sales volumes in Appalachia were down 15.2% compared to the sequential quarters due to lockoutages, customer plant maintenance, a reduction in operating shifts at our MC mining operation, and challenging geologic conditions at our Metiki longwall operation that has delayed development of a new longwall district. Coal royalty tons sold declined 11.8% year-over-year, while oil and gas royalty volumes increased 28.2% on a barrel-of-oil equivalent basis year-over-year. The increased volumes from oil and gas resulted from the acquisition of additional oil and gas mineral interests and increased drilling and completion activities on our acreage. Turning to costs. Segment-adjusted EBITDA expense per ton sold for our coal operations was $41.19 per ton, an increase of 13.8% and 8.8% respectively versus the 2022 and sequential quarters. Higher labor, maintenance, purchase coal, and sales-related expenses per ton, particularly in Appalachia, all contributed to the higher cost. The Appalachia segment-adjusted EBITDA expense per ton increased by $11.06 per ton and $12.80 per ton, respectively, compared to the 2022 and sequential quarters. Of the total increases, approximately $3.97 per ton and $5.91 per ton, respectively, were attributable to Metiki, which had the long-law idle during the full 2023 quarter. The longwall at Metiki is expected to be back in production in the new longwall district in late November. Brokerage bought and sold at a profit in our Appalachia segment some high-cost coal during the 2023 quarter, which accounted for approximately $3.07 and $1.59 per ton of the increased expense compared to the 2022 and sequential quarters. The balance of the Appalachian cost increase during the 2023 quarter was due to a 20% drop in production at our MC mining operation and adverse mining conditions and equipment availability at our Tunnel Ridge mine, which resulted in several lost unit shifts during the 2023 quarter. Our net income in 2023 was $153.7 million, 8.4% lower as compared to the 2022 quarter. The decrease reflects lower coal sales volumes, higher production expenses, and lower realized prices in oil and gas royalties, partially offset by higher coal sales price per ton realization and higher volumes in oil and gas royalties. EBITDA for the quarter was $227.6 million, down 10.3% as compared to the prior year period. Now turning to our balance sheet and uses of cash, Alliance generated $123.4 $7 million of free cash flow in the 2023 quarter. Our total and net leverage ratios were 0.36 and 0.17 times respectively, total debt to trailing 12 months adjusted EBITDA. Total liquidity was $629.5 million at quarter end, which included approximately $197.2 million of cash on the balance sheet. During the 2023 quarter, we paid a quarterly distribution of $0.70 per unit, equating to an annualized rate of $2.80 per unit. This distribution level is unchanged sequentially and up 40% versus the prior year quarter. Additionally, we reduced our outstanding senior notes balance by $54.6 million and completed two strategic new venture investments in Ascend Elements and Infinitum during the 2023 quarter, totaling approximately $50 million. Now turning to our updated guidance detailed in this morning's release. We have elected to slightly adjust our full year 2023 coal sales volumes and pricing, which will be highly dependent upon logistics during the fourth quarter. We now anticipate ARLP's overall coal sales volumes in 2023 to be in the range of 34.5 to 35 million tons. Our committed tonnage for 2023 is 35 million tons. Of that total, 29.7 million is committed domestically and 5.3 million tons are committed to the export markets. We are encouraged by improving coal export market fundamentals based on recent international benchmark pricing. We believe there could be some incremental sales opportunities in late 2023 in the export markets. For 2024, we currently have 27.3 million tons committed comprised of 25.7 million tons in the domestic markets and 1.6 million tons for the export markets. As we look to 2024, we do believe there is opportunity in 2024 for us to ship more tons into the export markets in 2024 versus 2023 levels based on current export market fundamentals. Sales pricing for the year is expected to be slightly lower than at the time of our last update, We have chosen to modestly adjust our outlook for average coal price realizations for 2023 to a new range of $64.50 to $66 per ton from $65 to $66 per ton previously communicated. On the COF side, we have narrowed our full year 2023 segment adjusted EBITDA expense per ton to a new range of $39.50 to $40.50 per ton from the previous range of $38 to $41 per ton. We have fourth quarter 2023 long oil moves scheduled at our Hamilton mine in the Illinois basin and our tunnel ridge operation in Appalachia. We do expect Appalachia segment adjusted EBITDA expense per ton in the fourth quarter to be approximately eight to 10% higher than 2023 quarter cost per ton, while Illinois basin fourth quarter cost per ton are anticipated to be in line with the 2023 quarter. In our oil and gas segment, We are reiterating our guidance ranges for the full year, and all of our other guidance items are unchanged. And with that, I will turn the call over to Joe for comments on the market and his outlook for ARLP. Joe?

Thank you, Kerry, and good morning, everyone. I want to begin my comments by thanking the entire Alliance organization for their continued hard work and dedication. I am proud of all that has been accomplished through the first three quarters of the year as we are on track to achieve another record year, beating last year's full year's revenue and net income numbers. Our well-contracted coal order book enabled us to navigate an otherwise challenging operating environment during the 2023 quarter. Our coal segment achieved higher realized pricing per ton sold relative to both the 2022 and sequential quarters. a theme that continues to favorably impact year-to-date results, particularly with regards to EBITDA and net income. However, we did face some difficult mining conditions in Appalachia at all three mines during the 2023 quarter, which resulted in higher operating costs and fewer tons produced versus previous expectations. Mild weather experienced in the first half of the year combined with lower natural gas prices throughout the year have impacted coal consumption in 2023, preventing us from topping last year's record coal sales volumes. As we look to next year, we have seen a recent increase in the natural gas forward curve as well as a jump in API2 pricing due in large part to the conflict in the Middle East. At projected pricing levels, we believe that our export potential in 2024 will improve markedly as compared to the back half of 2023. Our oil and gas royalty segment reported continued growth in the 2023 quarter, resulting in record production volumes, underscoring the success of recent acquisitions in core parts of the prolific Permian Basin. Although average realized pricing for BOE during the 2023 quarter was lower compared to near record levels in the 2022 quarter, our royalty portfolio is well positioned to provide significant cash flow via hedge-free exposure to commodity price and cost-free organic growth. We expect additional growth in production will lead to record production volumes in 2024 as we continue to invest in minerals. The strong cash flow generation of our underlying businesses positions us to continue improving our balance sheet and pursue the highest and best uses for our capital. During the quarter, we paid our regular distribution, repurchased and redeemed a portion of our outstanding senior notes, and announced two exciting investments made by our new ventures group. The first was a $25 million investment in Ascend Elements, which is a US-based manufacturer and recycler of sustainable engineered battery materials for EVs. The investment was part of their $460 million Series D funding round, which when combined with a $480 million DOE grant, will help advance the construction of North America's first commercial-scale manufacturing facility producing cathode materials for EV batteries located essentially in our backyard in Hopkinsville, Kentucky. Beyond our initial contribution, we plan to evaluate additional partnership opportunities with Ascend to expand our investment in the battery recycling industry. and support the critical materials infrastructure needed to facilitate the onshoring of U.S. battery manufacturing. The second investment included an additional $25 million in Infinitum, a Texas-based developer and manufacturer of high-efficiency electric motors, as part of their ongoing Series E equity raise. If you recall, we originally invested in Infinitum in April of 2022, And with today's announcement, our total investment in Infinitum is now $67 million, making us a meaningful investor in the company. We believe Infinitum's patented AirCore motor technology has significant market potential. And our technology division, Matrix, is actively exploring opportunities to collaborate with Infinitum and incorporate the technology into our current mining operations. In closing, I am proud of AEROP's performance year-to-date and encouraged by the opportunities in front of us. We remain focused on finishing the year strong and gearing up for what should be another successful year in 2024. That concludes our prepared comments, and I'll now ask the operator to open the call for questions. Thank you.