Alliance Resource Partners, L.P.

Greetings and welcome to Alliance Resource Partners LP third quarter 2024 earnings conference call. At this time, 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce Carrie Marshall, Senior Vice President and Chief Financial Officer. Thank you. You may begin.

Thank you. Good morning and welcome, everyone. Earlier this morning, Alliance Resource Partners released its third quarter 2024 financial and operating results, and we will now discuss those results as well as our perspective on current market conditions and outlook for 2024. 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 this morning'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, touch on our guidance for the year, and then turn the call over to Joe Kraft, our Chairman, President, and Chief Executive Officer, for his comments. Starting with our coal operations, our performance during the third quarter of 2024, which we refer to as our 2024 quarter, continued to be impacted by persistently low natural gas prices, low export market activity, and difficult mining conditions at our Appalachian operations. However, our total and domestic coal sales shipments did improve from the previous quarter, increasing 6.7% and 11.9% respectively. Additionally, and in response to the soft market conditions, we took proactive steps during the third quarter to more closely align production with shipments. The increased shipments and adjustments to production resulted in a reduction of our coal inventory by over 500,000 tons, which we expect will continue to decline over the coming months to an end-of-year target range of 500,000 to 1 million tons. Coal sales volumes of 8.4 million tons were essentially in line with the 2023 quarter and increased 6.7% sequentially, while coal production of 7.8 million tons declined 7.2% year over year and 8.1% sequentially. In the Illinois Basin, tons sold increased by 3.1% sequentially due to higher sales volumes from our Riverview and Hamilton mines. In Appalachia, Tons sold increased by 16.9% in the 2024 quarter compared to the sequential quarter, primarily due to improved conditions on the Ohio River allowing for higher shipments from our tunnel ridge operation. For the 2024 quarter, coal sales price per ton sold of $63.57 was down 2.1% year over year and 2.6% sequentially, primarily due to lower Appalachia volumes and pricing related to our export sales from our MC mining and Medtiki operations. Appalachia coal sales price per ton declined 5.8% and 7.7% compared to the prior year and sequential quarters, respectively. Segment-adjusted EBITDA expense per ton sold was $46.11 during the 2024 quarter. increasing 11.9% year-over-year and 1.6% sequentially. In Appalachia, segment-adjusted EBITDA expense per ton sold increased 19.3% versus the 2023 quarter, but declined 1.3% versus the sequential quarter. The increase in year-over-year costs was due to a long-wall move at our Tunnel Ridge operation, higher subsidence costs, and challenging mining conditions at all three Appalachia operations, that lowered recoveries and increased costs related to roof control and maintenance. In the Illinois Basin, segment-adjusted EBITDA expense per ton sold was $37.79, an increase of 7.2% year-over-year and 1.2% sequentially. The increase versus the 2023 quarter was due primarily to lower shipments and an extended longwall move at our Hamilton operation due to high inventories at the mine. Turning to our oil and gas royalty segment, our third quarter volumes reached 864,000 barrels of oil equivalent, or BOE, representing an 11.9% increase year over year and a 5.8% increase sequentially, driven by new well activity on our royalty acres in the Permian Basin. Higher volumes were largely offset by lower commodity pricing for crude, natural gas, and NGLs, Average realized sales prices per BOE were down 9.8% versus the 2023 quarter and down 10.6% sequentially. During the 2024 quarter, our coal royalty segment reported a 2.3% increase in coal royalty volumes and a 3% decrease in coal royalty revenue per ton compared to the prior year. Sequentially, coal royalty tons were up 2.7%. Overall, consolidated revenue was $613.6 million, down 3.6% from $636.5 million in the year-ago period. Sequentially, consolidated revenue was up 3.4% due to higher coal sales tons. Our net income for the 2024 quarter attributable to ARLP was $86.3 million, or $0.66 per unit. which compares to $153.7 million or $1.18 per unit in the year-ago period. Adjusted EBITDA in the 2024 quarter was $170.4 million, which compares to $227.6 million in the prior year period. These decreases reflect the lower revenues and higher total operating costs previously disclosed. Now turning to our balance sheet and uses of cash. Alliance generated $209.3 million of cash flow from operating activities in the 2024 quarter compared to $215.8 million in the sequential quarter, invested $110.3 million in capital expenditures, and paid our quarterly distribution of $0.70 per unit. At quarter end, our total and net leverage ratios were 0.64 and 0.39 times total debt to trailing 12 months adjusted EBITDA and liquidity was $657.7 million, which included approximately $195.4 million of cash on the balance sheet. During the 2024 quarter, we continue to make good progress on all of the capital and infrastructure projects at our operations that we have discussed throughout previous earnings calls. The new portal at our Warrior operations should be occupied by the beginning of 2025. which will consolidate three portals into one and generate meaningful expense savings. The West Alexander portal at Tunnel Ridge is anticipated to be fully completed by the beginning of 2025 and will allow us to access better mining conditions than the current panel and reduce overtime and other expenses next year. We are beginning to receive shipments of the new longwall shields at our Hamilton operation and anticipate all of the shields to be delivered and in place in mid-2025, which we expect will enhance productivity and generate considerable maintenance-related savings for Hamilton at that time. And finally, at the Riverview Complex, the Henderson County Mine Interseam Slope is approaching completion one month ahead of schedule. The first unit is now scheduled to start December 1st. By September of 2025, we expect the production mix at the Riverview Complex will be three units at the Riverview Mine and six units at the Henderson County Mine. This project, when completed, should also contribute to lower operating costs per ton beginning next year from our Riverview Complex, with the full benefit of the investment occurring in 2026. Now turning to our guidance. Based on our results year to date, current visibility into our order book, and outlook for markets through year-end, we are maintaining our full-year guidance for coal sales volumes, coal sales price per ton sold, segment-adjusted EBITDA expense per ton sold, royalties volumes, and royalties unit expenses. We now expect total coal volumes and realized coal sales prices to be closer to the bottom of their respective ranges and for segment-adjusted EBITDA expense per ton to be at the high end of the range. For modeling purposes, the two longwall moves previously scheduled for the fourth quarter of this year at Tunnel Ridge and Metiki are now planned to occur in the first quarter of 2025, leaving one in the fourth quarter at our Hamilton mine. We made some minor adjustments to our 2024 committed and priced sales tons to reflect modest net contracting activity and movement in the timing of customer shipments that occurred during the 2024 quarter. At the end of the 2024 quarter, our committed tonnage for 2024 was 33.4 million tons. Of that total, 28.2 million tons are currently committed to the domestic market, while 5.2 million tons are committed to the export markets. More notably, we increased our committed tonnage for 2025 by 5.9 million tons with significant contracting activity from our domestic customers. In total, we are in the process of finalizing new contract commitments for approximately 21.7 million tons over the 2025 to 2030 timeframe. We are also in active discussions with our customers to add to future commitments that, if secured, will lift our 2025 domestic sales order book to a level near our historical contracted positions heading into the new year. The remainder of our guidance ranges remain the same. 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 resilience, continued hard work, and dedication. At our co-operations, we had our lowest injury rate for a quarter since the fourth quarter of 2017, excluding the 2020 COVID impact quarters. Every operation safety statistics have improved from 2023 to 2024. Our results here today are currently 32% below the ARLP 2023 year-end comparable incident rate. In addition to the excellent safety results, Alliance had two national champions from the National Mine Rescue Contest in August. Jake Sayre from Tunnel Ridge in the bench competition and James Forrest from Warrior in the pre-ship competition. Congratulations to Jake and James. Terry did an excellent job summarizing challenging near-term market conditions and adverse mining conditions that impacted our third quarter 2024 results. Unfortunately, the hotter than normal weather we saw at the start of the summer in several regions of the country failed to carry through in the back half of the 2024 quarter, limiting spot domestic sales opportunities and caused shipments on some of our higher contracted co-sales to be deferred. This, coupled with export pricing keeping us out of the market, led to our sales volumes being below expectations for the 2024 quarter. During the 2024 quarter, our coal segment operating team focused on improving the safe operation of our facilities, providing reliable service to our customers, managing through difficult operating conditions, and adjusting production lower to meet demand. During the quarter, we advanced major capital and infrastructure projects at our Tunnel Ridge, Hamilton, Warrior, and Riverview complexes as part of our stated long-term commitment to our customers and our operations. These investments will make our operations more productive, improve their future cost structure beginning in early 2025, and extend their mine lives, allowing us to remain the most reliable, low-cost producer in our operating regions for many years to come. The overall mild summer that followed a mild winter last year continues to impact prompt coal demand. However, looking at the intermediate and longer term, the underlying coal demand fundamentals of nontraditional demand growth from data centers, AI, and onshoring of manufacturing capacity are accelerating, particularly in the markets we serve in the Midwest, Mid-Atlantic, and Southeast United States. On October 16, the Federal Energy Regulatory Commission hosted a major conference on focused on electric reliability. Participants discussed the urgent need to preserve baseload generation to meet the growing demand for electricity. Recent integrated resource plans filed by utilities also support the view that power demand will exceed generating supply, increasing dangers to grid reliability. The harsh reality is that the push to electrify many aspects of our economy, coupled with accelerating computation and storage speed demand, requires more generation capacity than our current renewables-based energy policy can provide. The sources of this new demand require 24-7 reliability, which we believe only fossil fuel and nuclear generation sources can provide. A recent report by McCloskey echoes this, calling for a doubling of data center electric demand from 17 gigawatts in 2022 to 35 gigawatts by the end of the decade, which they estimate represents 74 million tons of incremental utility coal burn during that time period, and an additional 179 million tons across the next decade. They, plus other third-party sources, also importantly point out that over 40% of previously announced nationwide coal plant retirements have pushed back their planned closure dates, some indefinitely, while new announcements of coal unit retirements have virtually stopped. The chronic investment in fossil fuel and nuclear generation became readily visible in the results of the recent PJM capacity auctions. Capacity payments, which are the market signal mechanism used to incentivize the construction of new generation sources, increased almost tenfold. This is a clear market signal that our power grid continues to become more unreliable in a time of rising demand forecasts. This situation is not limited to PJM, but extends to all regions we market to, and we believe it will continue. Many of our largest customers have been in the market recently with solicitations for significant tonnage to serve their plants in 2025 and beyond, with some looking for volume commitments through 2030. As our customers look to fulfill their long-term and short-term coal needs, we will leverage our well-capitalized operations and history of reliability to maintain and opportunistically grow our market share in the coming months. Before I wrap up, I would like to highlight a few points related to our oil and gas royalties business. As Kerry mentioned, we realized another solid quarter of year-over-year volumetric growth. We continue to reap the benefits of a minerals portfolio that is heavily weighted towards the Permian Basin, where top-tier upstream operators are actively drilling and completing new wells on our minerals. Additionally, we continue to enhance our position in the Permian, successfully closing $10.5 million of ground game acquisitions during the 2024 quarter. As we previously mentioned, the value and prospects for our oil and gas royalty segment was a major contributor to the successful completion of our June 2024 senior notes offering. We remain committed to growing this segment as a complement to our core coal operations. And as we scale the business, we believe investors will continue to recognize the intrinsic value the segment possesses as a growth vehicle. In closing, while our 2024 quarter results reflect a difficult market and operating conditions, I will repeat what I said on our last quarterly call. We believe the fundamentals for electricity demand over the next five years and beyond are poised for rapid growth. We also believe reliable, affordable baseload generation is a cornerstone of our nation's economy. With our well-capitalized and strategically located coal mines and growing minerals acreage portfolio, we are well-positioned to benefit from the anticipated increased demand for many years to come. That concludes our prepared comments, and I will now ask the operator to open the call for questions. Operator?