Greetings, and welcome to the Alliance Resource Partners, L.P. Fourth Quarter 2022 Earnings Conference Call. [Operator Instructions] 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, 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 statements, 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 8-K. Now with the required preliminaries out of the way, I'll begin with a review of our record results for '22 fourth quarter and full year, and then turn the call over to Joe Craft, our Chairman, President and Chief Executive Officer, for his comments. While 2022 was 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…

Thank you, Brian, and good morning, everyone. Now 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've 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 in, Cary Marshall. Cary has been a critical contributor to ARLP's success from the beginning. Having been closely by my side since 1994, when he joined the coal group as a Manager of Financial Planning. Thank you, Brian, and congratulations, Cary.

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, ARLP delivered record financial results in 2022. 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. Now 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 and 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 need for a diverse mix of energy sources and in particular, the vital role coal plays. This was evidenced by the fact…

[Operator Instructions] Today's first question is coming from Mark Reichman of NOBLE Capital Markets.

I was just wondering if you could contrast the overall market and pricing dynamics for your coal produced in the Illinois Basin versus Appalachia and whether you think the outlook for Illinois Basin looks a little stronger moving forward? And then also, did you get the other unit at the Hamilton Mine added?

So the other unit was for the Gibson mine. And so we have added the unit and it is staffed for one shift. We've got the second shift yet to be deployed, and that's anticipated to come online sometime in the second quarter of this year. So back to the Illinois Basin versus the Appalachia, in most of our Appalachia production is targeted for the export market that we have that's unsold. And I'd say of the unsold position, about half is the Illinois Basin and half of it is for Appalachia. And so we do have the flexibility in Illinois Basin to either sell that tonnage either domestically or the export market depending on what the market pricing will be. Currently, there's really not much activity in the market, we are seeing more inbound opportunities from the export market than we are domestically given the warm weather and the inventory build that the utilities did for coal in the fourth quarter. So it's hard to answer specifically your question at the moment. I mean, we believe that in the back half of the year, most of our customers still have an open position, and there will be requests for additional tons, weather dependent, more likely for the rest of the winter as well as the summer. So again, most of our book is pretty much sold for the first half, and our open position is really opening up in the second half when we do see favorable markets compared to what we're seeing at the current moment in time.

Okay. I just had one more question and then I'll get back in the queue. With respect to the acquisition, Brian talked about the barrels of oil equivalent, but like the last acquisition, can you provide some additional information in terms of like the number of producing wells to be completed in a number of permitted locations?

Hey, Mark, I'll give you some aggregate statistics. At the end of 2022 we had 12,833 producing wells on our acreage, which was an increase from the year-end 2021 level, about 2,661 wells. We currently have 67 wells or at the end of the year we had 67 wells running on our acreage, an increase of 35 over year-end 2021 levels. And permitted locations, we currently have -- or at the end of the year, we had 779 total permitted locations on our acreage with 923 wells being drilled and 8,130 being completed.

The next question is coming from Nathan Martin of The Benchmark Company.

Great to see significant quarter-over-quarter increase in the distribution. I heard those comments about how you just -- it sounds like you knocked out in one big chunk, maybe you kind of see that flattish throughout the year. I had a question related to the target. I think in the past, you guys have mentioned around a 30% target payout. Is that still the case? Any conversations going on with the Board about adjusting that level and then any thoughts on the target distribution coverage ratio as we look ahead? Or should we still just think about this more as a targeted payout that would fluctuate depending on cash generation?

I'd say that we have moderated that view from that cash generation point to more of a coverage ratio perspective, given the strong growth in cash flows that we have seen over the year and what we've locked in with contracts going forward. So we believe at the levels we are today that we can pay out a distribution at this coverage ratio that will be anywhere from 2.2x to 2.5x coverage and still have sufficient cash flow to be able to participate in trying to grow the company.

Great. Appreciate that update, Joe. As you guys talked about some notable weakness in the gas and thermal coal markets to start the year, again, 94% committed and priced for '23 to midpoint of guidance. I mean what portion of those tons are susceptible to price fluctuations in either the domestic or export market, is that variability largely incorporated into your realized price per ton guidance?

So the committed tons are all fixed price. I mean they're all prices committed, so we know what the price is. They have been factored into our guidance. Our UI production, the tons we have opened to the market. Again, we projected what we believe the market is. We think that, again, based on our view of where the market is going to be in 2023, that we can definitely achieve those levels. And right now, they're sort of priced at the midpoint of the guidance we gave you when you factor in both the committed and our UI price situation. I think the volume is dependent on the economy. I believe and most people believe that China's reopening has not been factored into the market. I believe it's going to happen. And I think that gives us the confidence that the second half of the year is going to -- is going to be very supportive of the export market that will sort of set the standard of where the pricing is going to be when we start making decisions to sell our own so coal.

Yes. And Nate, as Joe mentioned during his opening comments, we're anticipating pricing to firm up in the back half of the year. And as you look at our commitments for 2023, most of our open times are in the back half of this year. So as Joe has just articulated, we feel pretty confident about the price levels that we're projecting for this year.

So Brian, by firm up in the back half of the year? Are you thinking pricing increases kind of as we move throughout the year from the first half and the second half, what you're saying or am I misunderstanding that.

Yes. Yes.

Okay. Perfect. And then, I mean, also just kind of thinking about the cadence throughout the year, any way to think about it from a shipment standpoint, any longwall moves to keep in mind? And I think, Brian, you also said just to confirm that first half expenses likely higher than second half expenses.

On shipping, we obviously have the normal seasonal impacts of miners' vacation, holidays, et cetera. We do have more longwall moves scheduled for 2023. Last year, we had a total of six. This year, we have a total of eight. I believe we have a longwall move scheduled in the first quarter at both Hamilton and Tunnel Ridge -- I'm sorry, two at Tunnel Ridge in the first half of the -- in the first quarter of this year. So after that, it will be spread out over the balance of the year. I would believe that our deliveries are going to be fairly consistent in the first and second quarters. And then as we look up the rest of our open position, the back half of the year should remain strong as well.

Yes. So as Gibson -- as the second unit comes on in the second quarter, you'll see that bump up for the third and fourth quarters. And you see that when you look at the sequential quarter fourth quarter, you can -- you know we had the impact at Hamilton of about 0.5 million tons. So as you think about the first couple of quarters, it should be similar to the sequential quarter in the first half -- the first half of the year and then the second half slightly higher for that second unit at Gibson.

Okay, Joe. So basically, you get that 0.5 million tons back, it sounds like in 1Q versus 4Q with Hamilton seemingly behind the event that occurred. And then first quarter, second quarter flattish and then Gibson second shift comes on, we should see a bump up?

Yes. There may -- you may not get the full amount back into the second quarter due to the number of longwall moves we got in the first quarter, but it's pretty close.

Got it. Really appreciate that color. And then just finally on CapEx guide, and I'll get back in the queue. A little bit higher than expected, it looks like '22 CapEx came in a little lower than your updated guidance. Many items that kind of carry forward, incorporated within '23 full year guidance? And then it looks like growth in maintenance grew about $100 million -- excuse me, maintenance grew roughly $100 million year-over-year. Assuming again, that's the main driver of the year-over-year guidance increase. But could you give a little bit more color maybe what's included in the growth piece as well.

On the growth piece, as we mentioned last quarter and in our opening remarks, we are moving into new reserve areas at River View and the main portion of the capital expenditures related to that will be incurred in this year and next. Other factors impacting maintenance capital, we're obviously projecting increased volumes, which by definition, you'll have higher maintenance capital costs associated with that, the inflationary impacts on our supplies, maintenance, equipment, et cetera, is also reflective. And then Nate as you know, maintenance capital year-over-year can be pretty heavily influenced by just the timing of rebuild schedules, et cetera. And 2023, we have an occurrence of more rebuilds during this particular point in time than we've seen recently.

The next question is coming from David Storms of Stonegate.

Just wondering if you could give a little more color as to what you're seeing on transportation expenses as inflation starts to turn a corner and specifically just outside of any seasonal moves?

On the transportation expenses, we are seeing better performance. Expenses are still elevated as we run into -- going into the year. Some of that does tie to pricing in the export market. So there could be some softening of that. Again, there's not been much activity because of our sold-out position. So we'll have to wait and see how that goes for the back half of the year. So I'm not sure I understood your second part of your question.

Maybe just reminder as well that for us, transportation expenses are pass-through.

Except for export.

Except for export, that's correct. So it really has an influence on decisions we make around where can we achieve the highest netback at our operations? Is that in the domestic market or the export market?

That's perfect. Thank you. And then on those export constative movement, how sticky do you view that just going into 2024 with the 40 million ton gap that Russia laps?

We believe that, that will continue to be there. There's a lot depends on several decisions that they make. We do think that as you move towards the end of '24, end to '25, there may be opportunity for them to get more LNG. But then into their country, they're trying to move to renewables, but they've opened up their own coal facilities. They've opened up coal plants. So if you look at in addition to the Russian supply, we think there's like 8 million to 10 million tons of added demand in 2023 for coal plants that they've opened to meet their energy needs. How long those stay online? It is hard to know. But based on our 4.4 million tons or so that we're going to sell in the export market, we believe that there is more than plenty of opportunities for that to sustain itself if not grow. If you go back before the pandemic, we were shipping at a 12 million-ton rate. So I think not sure we'll get back to that level, but there is opportunity for us to grow just with the demand that we've seen over the last six years or so. And so we don't need a lot of growth. We just need stability and we believe that with our low-cost operations, we can compete in that global economy in the 4.5 million, to say, 7.5 million to 8 million tons over the next three to four years if there's not alternatives in the domestic market.

The next question is coming from David Marsh of Singular Research.

Congratulations on the quarter. Also, Brian, congrats on the retirement and Cary, congrats on the promotion. So just quickly one housekeeping question. Brian, are you going to be staying on through the 10-K filing. And do you have kind of a targeted date in mind when you'll get the K filed?

We should be filing the K toward the end of February. And yes, I will be here through that. My targeted date is March 31, and Cary steps in on April 1.

Got it. Got it. And then just -- I was intrigued by the acquisition activity and the comments regarding another one. I was wondering if you guys could perhaps kind of highlight some of your high-level criteria. I'm very encouraged by the fact that it sounds like you're going to be cash flow accretive immediately on this one that you just closed. And I just wanted to know if you could give us a little bit more color on your criteria when evaluating acquisitions?

We have certain underwriting standards not only for oil and gas, but then we are very focused on having results that will give us risk-adjusted returns that will be more longer term in nature for our unitholders. So, our return thresholds for this particular acquisition, probably - obviously, have been consistent with the past. We've committed to the oil and gas group, royalty segment that we will allow them to reinvest whatever cash flow they generate on an EBITDA basis the prior year. So they have capacity for another 50 million or so beyond the investment we made that we announced today. I'm hoping that some people will want to sell their gas at what current prices are. So that could give us some opportunities there. I don't know if people will. So, I think that we're very focused on those products or services and solutions that are needed for the long-term. And that's what we're looking for and then are -- right now, a challenging part of acquisition is just where it is the cost of capital. Interest rates are moving and all kinds of mixed signals as to whether the Fed is going to be right or the market is going to be right on where interest rates are going to be or where they are. So, I think that obviously, in order to have those attractive long-term investments, you have to have a significant level of return above your cost of capital and our cost of capital is probably moving right now that could make 2023 evaluations maybe a little bit more conservative than what they would have otherwise been had we not been in a higher cost environment. In other words, we're going to make sure that we get a nice return above our cost of capital, and we may hedge a little bit on a higher cost of capital in '23 than what possibly it will turn out to be. Those higher interest rates will obviously be impacting the seller's perspective. And so that just depends on what will be in the market from an acquisition standpoint as they look at their needs for cash and/or their strategic options that they're looking at.

That makes a lot of sense. I guess the acquisitions announced so far really are more oil and gas. So is there anything on the coal side where things could potentially become compelling?

There's -- as far as opportunities, there haven't been many in the coal space. I think from a strategic standpoint, the only thing that could potentially be an opportunity, is met coal potentially that we've had on our list, which we've been able to get from our Mettiki operation. And so that's an area that I could see is possible, but it's not highly probable. It's probably the best way I'd put it. So most of our focus is outside the coal sector on acquisitions front. In other words, there's nothing going on right now.

The next question is coming from Abe Landa of Bank of America.

Just a couple of questions on the balance sheet. So, I'm sure you're aware fixed income markets are beginning to fall a little. We have seen some other coal companies take up some notes early. And then in your capital allocation discussion, you did mention you could potentially redeem a portion of your bonds which I'm sure you know your bonds, the call price kind of steps down to par this May 1. Maybe kind of more holistically, what are you thinking about your capital structure and even more specifically about your bonds?

Yes. With respect to the bonds, we needed to wait until we completed our bank financing to make sure that we have the flexibility that we wanted to see should we choose to go out and begin taking the bonds down. We did achieve that flexibility. And with the strong cash flow that we're generating, we do have the opportunity to potentially opportunistically repurchase in the open market if conditions warrant. And then beyond that, you're correct, our bond call goes to par in May of this year. We'll evaluate market conditions and whether it's right -- when the right time is to completely potentially take those bonds down before they mature in May of '25. Clearly, we've got plenty of time to manage that, and we'll be watching markets very, very closely to try to pick up some of those positions at attractive levels.

Yes, it will depend obviously on our other alternatives.

Meaning like other capital allocation alternatives.

If there's opportunity -- acquisition-type opportunities that pop up.

Yes. I mean, obviously, managing our balance sheet is one of our core capital allocation priorities, returning cash to unitholders is as well. The distribution we announced today -- or on Friday, I'm sorry, as Joe mentioned, we intend to currently intend to maintain that level through the year. So that's fairly well defined. And with the flexibility we've been given with our bank refinancing. Should conditions warrant, we could return additional cash to unitholders through a repurchase program that the Board elected to top off last week.

And then just two quick housekeeping. It was good to see your credit agreement was extended. I think it also -- within that note, it included a $75 million term loan, just maybe uses. And also, is that currently undrawn?

No. The term loan is drawn at closing. So that cash is now on our balance sheet. In our prepared comments, we noted that we do have these activities going on at the River View and we acquired some additional coal reserves at Tunnel Ridge. So we're using that $75 million to effectively turn those activities out for a more extended period of time primarily.

The next question is coming from Mark Reichman of NOBLE Capital Markets.

Just on the guidance, when you talk about the stronger second half -- and I'd agree with those observations. But -- so coal prices in Illinois Basin in the fourth quarter was $57.47 a ton and an Appalachia at about $89 a ton. I was just wondering how much of a leap you have to make in terms of on those open or unpriced tonnage to meet your guidance?

Not much. I mean I think if you look at fourth quarter and then you look at our guidance, I mean, like you said, our fourth quarter averaged $67.84. And so our guidance is what?

$67 to $69.

$69. So you can see we're right on with what we have committed. And so anything that we have open, it's going to be helpful to those numbers. So I think that that's where you get to the midpoint or the higher end of the range. But if -- so I think we've got flexibility there within that range that we're in. I would say -- yes, the pricing is conservative that's in our guidance for the year...

And then I was just curious on -- has the new ventures team -- what kind of progress have you seen there in terms of have they come up with some pretty good ideas? Or what are your expectations there?

Primarily, we -- they have established a process and we established internal resources as well as external resources to help us as we go through the many, many, many opportunities that are out there. We're trying to take those multitude of opportunities and trying to narrow those into preferred areas so that we can be efficient with our time and our resources, our people resources. So that we're focused on the right targets. So they made significant progress in a short period of time. I think we've got a clear vision on how we want to approach inbound opportunities that come to us. We also have an approach that's very much proactive that we are, again, using some outside sources to help us go target certain areas that will fit with what we believe to be our core competencies and give us those long-term risk-adjusted returns. Most of the things that we're looking at are more in the mid- to late stage of the growth process of a lot of these what have been in the transition world, we're trying to not limit ourselves on just a transition-type investments. So we're looking at other type things that are a little bit more mature that have cash flow that can be financed. But I would say our progress has been good. At the same time, there's just a lot of things we can look at that we're having to prioritize and it's going to take a little time.

One thing I've always appreciated is the strength and the longevity of Alliance's management team. So congratulations to both Brian and Cary and to the whole team for an excellent -- for the excellent results.

The next question is coming from Tom Coleman of Kensico Capital.

Just wanted to go back to your comment about the royalty team having like 50 million or whatever, they can use their free cash to keep expanding their business. So when they come to you with a deal, does it feel [technical difficulty]

You are cutting out…

Okay. When the royalty guys come here with the deal and you compare the packaging in the common stock repurchase. Is there a critical mass in royalty that's important to achieve and you're willing to reach a little bit relative to the comment to get to a certain level? How do you think about the size of that business standalone?

Again, you were cutting out a little bit. But the way we think about our Minerals segment is we do believe it has -- we have a proven track record now that we have been successful in our underwriting approach. We believe that oil and gas is going to be here for decades and decades. And so I think that it can compete with sustainable cash flow and it meets our strategic objectives again, to try to give them some guidance so they have certainty in developing deal flow. We've given them the latitude to know how much capital that they know they have available to them. It's not a cap. I think if they bring other opportunities that come to us that we can evaluate those and look at those, but we do not look at thinking in terms of re-examining on a quarterly basis, whether or not we want to allocate that capital to that segment. We believe that it needs to grow and so if we can put $100 million to $120 million to whatever their growth is on an annual basis, we will get to a meaningful number. That has proven to be the case so far, since we've been in the business since 2014, late 2014. We're committed to that business. We believe that it's an attractive business. We believe we have a proven track record of understanding how to value those opportunities and as a long-term investment we continue to have confidence and faith that it's a good place for us to allocate capital.

At this time, I would like to turn the floor back over to Mr. Cantrell for closing comments.

Thank you, Donna, and to everyone on the call. We sincerely appreciate your time this morning as well as your continued support and interest in Alliance. Our next call to discuss our first quarter 2023 financial and operating results is currently expected to occur in late April, and we hope everyone will enjoy will join us again at that time. This concludes our call for the day. Thank you very much.

Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines or log off the webcast at this time, and enjoy the rest of your day.