Alliance Resource Partners, L.P.

Welcome to Alliance Resource Partners LP First Quarter 2025 Earnings Conference Call. At this time, all participants are on a listen-only mode. A question and answer session will follow the formal presentation. If anyone requires 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 your host, Carrie Marshall, Senior Vice President and Chief Financial Officer. Thank you. You may begin.

Thank you, operator, and welcome everyone. Earlier this morning, Alliance Resource Partners released its first quarter 2025 financial and operating results, and we will now discuss those results as well as our perspective on current market conditions and updated outlook for 2025. 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 our 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 first quarter 2025 results, give an update of our 2025 guidance, and then turn the call over to Joe Kraft, our Chairman, President, and Chief Executive Officer, for his comments. Our overall operating performance and financial results for the first quarter of 2025, which we refer to as the 2025 quarter, was generally in line with our expectations we discussed with you on our last earnings call. Total revenues for the 2025 quarter were 540.5 million compared to 651.7 million in the first quarter of 2024, which we refer to as the 2024 quarter. The year-over-year decline was driven primarily by reduced coal sales volumes and prices, as well as lower transportation revenues. Our average coal sales price per ton for the 2025 quarter was $60.29, a decrease of 6.9% versus the 2024 quarter, but 0.5% higher on a sequential basis and in line with our expectations for the quarter. In the Illinois Basin, coal sales price per ton decreased by 4.2% compared to the 2024 quarter as a result of lower domestic price realizations at several of the mines within the region, while in Appalachia, coal sales prices decreased by 8.5% compared to the 2024 quarter due to reduced export price realizations from our MC Mining and Medtiki operations. As it relates to volumes, Total coal production in the 2025 quarter of 8.5 million tons was 7.2% lower compared to the 2024 quarter, while coal sales volumes decreased 10.4% to 7.8 million tons compared to the 2024 quarter. Compared to the sequential quarter, coal sales volumes were lower by 7.7%. Total coal inventory at quarter end was 1.4 million tons. In the Illinois Basin, coal sales volumes decreased by 6.1% and 8.4% compared to the 2024 and sequential quarters, respectively, due primarily to timing of committed sales from our Hamilton line. Reduced export sales volumes from Gibson South also contributed to the sequential reduction in coal sales volumes in the Illinois Basin. In Appalachia, coal sales volumes were down 22.7% and 4.9% compared to the 2024 and sequential quarters, respectively, due to continued challenging mining conditions, particularly at Tunnel Ridge, which led to lower recoveries, as well as long-wall moves at both Metiki and Tunnel Ridge. We anticipate that Tunnel Ridge will be in more favorable geology beginning in the second half of 2025. Turning to cost, segment-adjusted EBITDA expense per ton sold for our coal operations was $42.75, an increase of 4.7% versus the 2024 quarter, but down 11.1% as compared to the sequential quarter. The impact of lower volumes I just discussed in Appalachia were the primary driver of the increase year over year. In the Illinois Basin, segment-adjusted EBITDA expense per ton for the 2025 quarter decreased by 4 and 12.6% compared to the 2024 and sequential quarters, respectively, due primarily to increased production, and lower maintenance and materials and supplies costs at several mines in the region, as well as reduced long, long move days at our Hamilton mine. Additionally, an $11 million non-cash deferred purchase price adjustment recorded in the sequential quarter also contributed to the sequential decrease in the Illinois Basin. In Appalachia, segment adjusted EBITDA expense per ton for the 2025 quarter increased compared to the 2024 quarter, due to increased longwall move days and the challenging mining conditions discussed previously at Tunnel Ridge, which led to lower recoveries in the region. Compared to the sequential quarter, Appalachian costs decreased 9.2%, due in part to lower subsidence and reclamation expenses. In our royalty segments, total revenues were $52.7 million in the 2025 quarter, down 6% compared to the 2024 quarter. The year-over-year decrease in revenues reflect lower realized oil and gas commodity pricing for BOE, as well as lower oil and gas volumes and coal royalty tons sold. Compared to the sequential quarter, total revenues from our royalty segment increased by 8.8%, led primarily by an 11% increase in oil and gas royalty revenue for BOE. Specifically in the 2025 quarter, Oil and gas royalty volumes decreased 2% on a BOE basis, while coal royalty tons sold decreased 8% compared to the 2024 quarter. The decline in volumes from oil and gas resulted from decreased drilling and completion activities on our properties. Sequentially, oil and gas royalty volumes increased by 6.9%. Coal royalty revenue per ton for the 2025 quarter was down 8.3% compared to the 2024 quarter, while lower oil and gas prices reduced the average realized sales price per BOE by 0.5% versus the 2024 quarter. Sequentially, coal royalty revenue per ton was down 3.7%, and oil and gas royalties average sales prices were up 11% per BOE. Our net income in the 2025 quarter was $74 million, as compared to $158.1 million in the 2024 quarter. The decrease primarily reflects the previously discussed lower coal sales volumes and realized prices, and a decrease in the fair value of our digital assets of $5.6 million. Adjusted EBITDA for the 2025 quarter was $159.9 million. Now turning to our balance sheet and uses of cash. Total debt outstanding was $484.1 million at the end of the 2025 quarter. Our total and net leverage ratios finished the quarter at 0.76 and 0.63 times respectively total debt to trailing 12 months adjusted EBITDA. Total liquidity was 514.3 million at quarter end, which included 81.3 million of cash on the balance sheet. Additionally, we held approximately 513 Bitcoin on our balance sheet, valued at 42 million at the end of the 2025 quarter. At this morning's price of 94,500 per coin, 513 Bitcoin would be valued at $48.4 million or $6.1 million higher than the end of the 2025 quarter. For the 2025 quarter, Alliance generated free cash flow of $52.7 million after investing $83.4 million in our coal operations. Distributable cash flow for the 2025 quarter was $84.1 million. We declared a quarterly distribution of 70 cents per unit for the 2025 quarter, equating to an annualized rate of $2.80 per unit. This distribution level is unchanged sequentially and compared to the 2024 quarter. As a reminder, each quarter the Board considers multiple factors when determining the appropriate distribution levels, including but not limited to expected operating cash flows generated by our business, capital needed to maintain our operations, distribution coverage levels, implied yield on our units both on a pre-tax and after-tax basis, current and possible investment opportunities, and debt service costs. Turning to our updated 2025 guidance detailed in this morning's release, the cold winter weather resulted in more favorable natural gas prices and increased coal consumption in the eastern United States, helping reduce customer inventories, and increased domestic coal burn compared to 2024. As a result, we continue to see a higher level of domestic customer solicitations for both near-term and long-term supply contracts and have increased our Illinois Basin sales tons expectations by 500,000 tons for the 2025 full year. Alliances in active and domestic utility solicitations securing commitments for an additional 17.7 million tons over the 2025 to 2028 time period. Customers continue to value our product quality, reliability of service, and financial strength. We now have 32.5 million tons committed in price for 2025, including 29.4 million tons for the domestic market and 3.1 million tons for exports. Assuming estimated full-year sales of 33.75 million tons, which is at the midpoint of our updated 2025 full-year sales guidance range of 32.75 to 34.75 million tons, we are now 96% contracted for 2025 and 61% contracted in price for 2026. Much of our guidance for other key metrics is unchanged. On a net-net basis, we continue to expect a material improvement in full-year costs to roughly offset lower realized pricing in our coal business for 2025. Second quarter 2025 coal sales volumes are anticipated to be 8% to 12% higher than the first quarter. The added volumes and cadence of long-wall moves means we expect cost per ton to be lower in the second half of the year based upon the midpoint of our total cost per ton guidance range. On the cost side, we continue to expect full year 2025 segment adjusted EBITDA expense per ton to be in a range of $35 to $38 per ton in the Illinois Basin and $53 to $60 per ton in Appalachia. We completed two scheduled long haul moves in the 2025 quarter at Tunnel Ridge and Metiki and have another long haul move at Tunnel Ridge in the second quarter of 2025 and one at Hamilton in the third quarter of 2025. In our oil and gas royalties business, we continue to expect sales of 1.55 to 1.65 million barrels of oil, 6.1 to 6.5 million MCF of natural gas, and 775 to 825,000 barrels of natural gas liquids. Segment-adjusted EBITDA expense is now expected to be approximately 15% of oil and gas royalty revenues for the year. We continue to expect $285 to $320 million in total capital expenditures for the full year 2025. This is down significantly from 2024 capital expenditures of $429 million as we near the end of a roughly two-year period of elevated capital spend to make long-term strategic investments in our Riverview, Warrior, Hamilton, and Tunnel Ridge mines that ensure their reliable, low-cost operations for many years to come. We continue to expect the remaining work for these projects to be completed in the first half of 2025. Oil and gas minerals acquisition activity has been slow to date for 2025 as lower oil prices have impacted the number of opportunities in the market as well as the willingness of sellers to transact at these commodity prices. However, we remain committed to investing in our oil and gas minerals business and we plan to actively pursue growth in this segment in 2025 and beyond with the ultimate amount of investment dependent upon the number and quality of opportunities available and their ability to meet our underwriting standards. And with that, I will turn the call over to Joe for comments on the market and his outlook for ARLP. Joe?

Thank you, Terry, and good morning, everyone. Our operations ran well in the first quarter, in line with our expectations, thanks to the hard work and dedication of our entire team. Our Illinois Basin operations, continue to deliver strong results, and we are seeing cost improvements in Appalachia. While costs have not yet reached our target levels, they remain on track with our 2025 full-year guidance expectations. Importantly, as we near the completion of mining in the more challenging areas at Tunnel Ridge and Metiki, we expect our costs in those operations will continue to decline in the quarters ahead. Now turning to an update of current market conditions, the domestic markets strengthened considerably in early 2025 due to the cold winter season, higher natural gas prices, declining coal inventories, leading to increased coal consumption and upward revisions to electricity demand forecasts from our customers. In contrast, Export opportunities for our high sulfur coal out of the Illinois Basin have not been as attractive. With the strength of domestic demand for Illinois Basin coal, our guidance assumes we will not enter into new export contracts for Illinois Basin deliveries this year. With the outlook for near-term data center-driven demand growth and the extended life of the coal plants we ship to we will continue to give preference to the domestic market. I want to emphasize that we remain a cornerstone of our customers' supply plans, consistently supporting them throughout market cycles. We will prioritize customers who recognize our quality, reliability, and financial strength based on years and even decades of service to their critical assets. With inventories on the decline, utilities have come back to the market for both flex tonnage requests for 2025 as well as term business in 2026 and beyond. I'm pleased to report that we have been successful in a number of those solicitations year to date, including entering into an arrangement with a long-term customer to supply essentially all of their needs through 2025, excuse me, 2028. As Kerry stated, we have nearly sold out and priced our expected production for 2025. Current market indications suggest sales for the year could even approach the upper end of our guidance range. Next, I would like to spend a few minutes highlighting the ongoing shift in energy policy out of Washington. The administration's recent actions regarding the coal industry and grid reliability have directly address the realities we have warned about for years, that over-dependence on intermittent renewable energy sources while simultaneously disadvantaging coal puts the reliability of our country's energy backbone at risk. We welcome these policy actions as a recognition of coal's essential role in energy security. Notably, on April 8, 2025, President Trump signed four executive orders to expand domestic coal-fired generation, seeking affordable electricity for the American people and grid stability in anticipation of growing energy demand, which is critical for our country's national security interests. The executive order addressing grid reliability cited that rapid technology advancement and expansion of AI data centers and increased domestic manufacturing are driving an unprecedented surge in electricity demand and placing a significant strain on our nation's electric grid. The White House now forecasts U.S. electricity demand is expected to rise 16% over the next five years, or three times the growth forecasted just a year ago. These orders are designed to help level the playing field, inject common sense approaches to the calculation of reserve margins and prevent premature retirement of critical generation. Additionally, the administration is calling for greater federal involvement in decisions regarding capacity reserves that have typically been made at the utility or regional transmission organization level, which could further promote the extension of baseload capacity lives. the results are likely to be material for our customers and our industry. Recent analysis by Energy Ventures Analysis estimates that 10.6 gigawatts of coal plants scheduled to retire or convert to natural gas by the end of 2027 could be extended, representing coal demand of 23 million tons per year as a result of these executive orders. This includes a number of coal plants we currently serve. We have long maintained that premature closing of coal generating capacity would threaten grid reliability. The market has already signaled the scarcity value of coal fire generation. As evidenced by last year's PJM capacity auction, clearing price increasing tenfold. The next PJM auction, scheduled for June of this year, will cover the period from June 26 through May of 2027, and is indicating more of the same, with a $350 per megawatt day price cap already announced. While this policy momentum supports constructive long-term fundamentals for future coal production, the initial call-out from the April 2, 2025 Liberation Day tariff announcements has created significant uncertainty as to the future of inflation, supply chain interruptions, global economic activity, and energy prices, among other things, making it difficult to predict with any certainty how these policies will impact us. As Kerry mentioned, we have secured solid volume commitments for 2025 and 2026. However, similar to this year, as our higher price multi-year contracts signed during the 2022 energy prices roll off, our average coal sales price per ton is trending lower. Based on current market developments, including a favorable natural gas futures price curve, we anticipate the 2026 average coal sales price per ton could be 4% to 5% below the midpoint of our 2025 guidance. Like this year, we are hopeful we can maintain margins with cost savings. The trade policy uncertainty makes actual cost, sales opportunities, and pricing very hard to predict. For 2025, we have tried to factor in what we believe the known impacts of the tariffs are into our cost and our guidance that Kerry mentioned. Our royalty segment faces the same uncertainties from potential trade implications. As we navigate rapidly evolving market dynamics, we are committed to maintaining a strong balance sheet and disciplined approach to capital allocation, while carefully monitoring the potential impacts of trade policy uncertainty on cold demand, pricing, and costs. As Gary mentioned, we declared a quarterly distribution of $0.70 per per unit for the 2025 quarter, equating to an annualized rate of $2.80 per unit. This distribution level is unchanged sequentially and compared to the 2024 quarter. The Board, in making this decision, recognized the uncertainty regarding the trade policies, but decided it was premature to make any adjustment this quarter. Kerry also outlined the multiple factors the Board considers in determining the appropriate distribution level. The Board will closely be evaluating the potential impacts of tariffs on future results, which will, among other factors, inform the Board's decision regarding future distributions. In closing, we are off to a solid start for the year. With an improving regulatory framework and the realities of natural gas and coal-fired electric generation being critical for grid security, we believe alliances, investments in oil and gas minerals, as well as the recapitalization of our coal mines have positioned us well for continued success. That concludes our prepared comments, and I will now ask the operator to open the call for questions.