Greetings, and welcome to the Alliance Resource Partners L.P. First Quarter 2023 Earnings Conference Call. [Operator Instructions]. Please note this conference is being recorded. I will now turn the conference over to your host, Senior Vice President and Chief Financial Officer, Cary Marshall, you may begin.

Thank you, operator, and welcome, everyone. Earlier this morning, Alliance Resource Partners released its first 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 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. 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. 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 ARLP's press release, which has been posted on our website and furnished to the SEC on Form 8-K. With the required preliminaries out of the way, I will begin with a review of our results for the first quarter then turn the call over to Joe Craft, our Chairman, President and Chief Executive Officer, for his comments. But first, let me briefly share how incredibly grateful I am for the opportunity to step into the role of Chief Financial Officer. I've called Alliance home for the past 34 years,…

Thank you, Cary, and good morning, everyone. Before I start, I would like to express my appreciation to Brian Cantrell for his dedication to me and our partnership over the past 2 decades. I can tell Brian is already enjoying his retirement as he sent carrying me an e-mail this morning after we posted our earnings release, which he said, "Outstanding first quarter, congratulations. I'm sure you'll do well on the call today." So many of you know Cary, who has been by my side for nearly 3 decades. And I'm so appreciative of him enthusiastically agreeing to step up and assume the role of CEO. Cary, I welcome you to the call, and think it's time to get ready. Yes. You're ready to go. So like Cary said earlier, I also want to begin my comments by thanking the entire Alliance organization for their continued hard work and dedication toward posting outstanding results to start 2023. Their efforts helped us deliver year-over-year improvements in coal production, coal sales volumes, record realized coal prices record royalty oil and gas volumes and ultimately, higher net income and EBITDA. We 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. Overall, this winter season was a mild one for our markets in both the United States and Europe, which makes it easy to forget the impact that severe weather events like December's winter storm Elliott, can have on our nation's energy security as well as the importance of having a reliable, diverse affordable energy mix. It is during these extreme weather events that renewable resources as well as natural gas are frequently unable to adequately respond at the times they are most needed. Deserve margins…

[Operator Instructions]. Our first question comes from the line of Nathan Martin Benchmark Company.

Joe, Cary, congrats on the quarter, and great to hear you on the call, Cary.

Thank you, Nate.

Thank you.

You guys built a little bit of inventory in the first quarter. I guess, first, was that expected? Or were there any logistical challenges to speak of? And then -- how should we think about that sales cadence over the next 3 quarters, both domestically and in export side and maybe when those inventories could draw back down? I know you guys had previously seen signaled the higher production and shipments in the back half. I think part of that was a bump from Gibson. So I'm assuming that's still the case. But just any additional color would be helpful.

Yes. On the inventory, it was within our plan. So as we move towards more export tonnage, we have secured the infrastructure, the capacity at the ports to be able to have our coal store to be ready for vessels when they come in. So based on the size of the vessels, which are larger, obviously, than the railcars that does require when we have shipments towards an end of a quarter to have to build our inventory to meet the shipping schedules of these export movements. And so there was a couple of vessels that we had planned to ship in the first quarter that we're going -- shipped in early the second quarter, and that's just a logistical timing issue. So I think as far as what our plan was, the inventory was pretty consistent with what we were thinking was going to be. But for those 1- or 2-day delays in shipping of those export vessels as far as our production, it continues to be as planned. I think we have delayed the hiring for the second shift of the fifth unit at Gibson County. We're going to wait and see exactly where the market develops in the second quarter, where we do anticipate based on internal inbound calls we're getting from customers, both in the export market and the domestic market that there will be opportunities in the back half, but rather than hire those people effective April 1, like we had originally planned, we delayed that to the second quarter to probably after miners vacation and then we'll wait and see if we do have the ability to produce tons on weekends to meet that demand. So a lot of our production demand just specific to that one unit will be determined based on our outlook at the midyear. And as we see where the weather is and what the gas prices are and what the export demand is. The sales are committed. I mean our sales are continuing to be targeted at the same range that we mentioned in the prior quarter. At this moment in time, we're very comfortable that we'll be able to hit those targets at the midpoint of our range that we have in our guidance for the year.

Great. I appreciate that color there, Joe. But it sounds like really just as expected, timing-wise, it's had a vessel slip, but that's already shipped. So that's good to hear. If I look ahead of your updated committed and priced tonnage for '23 and '24. It appears totals are actually a little bit lower versus where they were last quarter. Looks like driven by lower domestic tonnage assumption there. Could we get some more color around that change? Maybe any additional thoughts on potential domestic deferrals?

Yes. So in our contracts, our utility customers do have some flexibility to either flex up or flex down their committed tonnage. When they do that, it basically carries forward. So it doesn't really release those tons from the contract. It's just a deferral into a subsequent period. So with the natural gas prices being where they were, and therefore, more of a demand issue that the utilities were projecting in the first quarter, they did -- several of the utilities did flex down under their contracts. That has opened the door for us to just ship more tons in the export market, which in total actually is a higher price than we would have gotten had they taken the tons under the domestic contracts. So in other words, the export price netback is higher than the times that these utilities elected to flex down in this quarter for some parts of the 2023. So that's why there was a change in the mix of the contracted tons for the calendar year 2023.

Got it. And that's great to hear that actually able to flex up to a better margin. I guess along those lines, where are your export netbacks today with API 2 around $135?

When you look at that and add in what we have still a few times that we can sell in the met market, I think the total netback will be somewhere in the same range as what we've guided as to our average sales price for the year in that $65 to $67 range.

Great. Very helpful. And then as we look ahead to 2024, how do we think about potential coal shipments? I mean, domestic demand seems like it could be under pressure. You guys have highlighted the desire to pivot to the export market a little bit. And I know I've asked this in the past, but how much could you ramp up export sales to offset any potential pressure on the domestic side? And then -- what's the potential to offset possible lower coal operations EBITDA with continued growth in your oil and gas royalty segment?

So as we look at the market, and we look at our contract book. Most of our contracts are still with customers that have been long-term customers for ours. So we would expect those contracts that do roll over into 2024 that expire that we will be able to place those tons with those customers. Since the end of the quarter, we have reached an agreement on one of our contracts that's $1.3 million to $1.6 million, depending on how the flexing goes on those contracts for a committed term of 18 months with the option to the utility to extend that beyond that for a term yet that would be at least 6 months, if not another year or 1.5 years under that contract at prices that continue to give us comfort that we will be able to maintain our profit levels and profit margins to a level that's a very attractive level compared to our historic run rates. I think that as far as the export and then -- in addition to that specific contract, there are 2 to 3 other customers that have announced RFPs. So they're going to be in the market this quarter to start placing tonnage. Most of those solicitations have been for at least a minimum of 2 years. One of them basically ask for bids for a period up to 5 years. So we are continuing to be very confident that the demand for our product is going to be stable in the domestic market for the next 3 years, for sure, based on our conversations with our domestic customers. On the export side, we're planning to ship 6.5 million or so in 2023. Our highest level historically was around 12.2 or something, I believe.

Correct.

So we could double that volume if necessary if the domestic market doesn't show up. We continue to believe that the export demand will be strong in 2024, comparable to what it is in 2023. The one issue that could change that is back to what happens with Russia, Ukraine situation and how well Russian product be moving throughout the international markets if there's a change with the sanctions, et cetera, that are impacting their shipments today and reducing their shipments because right now, based on the sanctions they have, we think there's a floor on the price of the export product because at these levels, Russia is not making any money and they need that cash flow for the strength of their economy.

Our next question comes from the line of Mark Reichman with NOBLE Capital Markets.

I was just wondering if you could provide a little more visibility on the comment on the several domestic customers that we're seeking the sizable commitments for coal deliveries in 2024 and 2025, because I know, as Nathan alluded to, the 2024 committed in price kind of actually went down a little bit. So just what are the dynamics in the market right now? And when do you when do you kind of expect those customers to really kind of step up? I think you said that some of those would be 2-year contracts.

Yes. Like I mentioned 2 or 3 of those, I know 2 for sure, there may be a third one that has indicated that they will be out seeking coal for those time periods in this current quarter that we're talking. There will be others that will come out in the third quarter. Again, based on our customer conversations, there are sufficient coal plants that will continue to run and will continue to be needed in the states where they operate due to the capacity constraints in those states. They have to have the coal plants running no matter what the gas price is to meet their load. And with electrification in these states growing due to the growth anticipated in a lot of these battery factories and also EVs that are continuing to ramp as well as other factors in a growing economy. that will benefit from the infrastructure bill, the chipset, the Inflation Reduction Act. We anticipate the electric generation will grow over the next decade for that matter. And as a result, they're going to need to keep these coal plants either running and/or those that remain that are trying to fill the void for some that have closed at higher capacities. So even though there may be some plants that go offline, we believe there's sufficient capacity with the current plants that we anticipate that will be open through 2035, that demand will be at a level set for us as a low-cost producer and a reliable producer that we anticipate, as I said, at least the next 3 years that we can see that our production and sales should be at the levels where we are currently, if not maybe tick up a little higher depending on the export market. So there are attempts by…

And just the second question I had was revenues came in pretty much in line with our expectations. Operating expenses were actually lower. And just looking at your guidance, while you've kind of trimmed the coal sales price per ton sold, you also trimmed the segment adjusted EBITDA expense per tons sold. Kind of what are -- what do you think are the biggest pieces to watch on that operating expense line? And how do you see that evolving for the remainder of the year?

Everything ties back to inflation. So we have seen our supply cost sort of peak and start declining in several key areas. The one area that is holding firm is labor. We're continuing to have difficulty finding people. We also see competition from the infrastructure bill and some of the growth that is occurring because of some of these subsidies that I talked about earlier. So there -- so what we're seeing in our areas of operation that there continues to be solid opportunities for employees or workers to work whether we can get people in the workforce to meet those jobs or whether we're going to have to continue to have a shortage of workers. That's the one area that I would say that's hard to predict, and we're not looking at that going down. But on the supply side, the other issue that could be a variable factor is what our oil price is going to do. And are they going to go to $100 or $60? That's another -- you see analysts projecting different numbers. We're hedged on diesel for this year. So we should not be impacted by the diesel costs for the remainder of the year, but that would be an issue going into next year depending on where diesel prices go. So those would be the main thing. Supply chain. We're in a lot better positioned this year than last. When you look at supply chain, that tends to increase your cost somewhat because of the need to potentially buy some more items and then have storage costs for those items, et cetera, that increase your cost. So we're seeing supply chain be normalized for the materials and supplies we need to run our business. So that's another factor that impacts our cost. But the material ones are wages and I'd say, oil prices and steel prices, but they've come down. So -- and other consumables have come down.

Our next question comes from the line of Dave Storms with Stonegate.

With the average selling prices in tabulation and Appalachia going up a little bit and Illinois Basin going down a little bit. Can you talk just a little bit about what drove kind of that dislocation there?

Well, they serve different markets. One, I think that you've got -- our Mettiki mine serves both the metallurgical market as well as the steam market, and that benefits from the met market being at a higher sales point and stable for us. Our MC Mining product is also a very attractive market -- or product for the export market and demands the premium and is really not priced of natural gas prices. And our Tunnel Ridge operation in Appalachia is basically sold out. So they haven't really had any impact on having any open tonnage into the into the market relative to natural gas prices. Williston is the only basin we had some excess supply where we did, in fact, have to sell some product that reduce prices compared to prior periods or prior year, I guess it was.

I think the other important point that Joe is alluding to there is if you look at a mix issue in the most recent quarter, Tunnel Ridge did have 2 longwall moves during the quarter. And so when you look at from a volume perspective, our my mining and our Mettiki operations did have a little higher percentage going in there. And so when you look at that from both revenue per ton as well as cost per ton, it does get skewed a little bit in the existing quarter because of those 2 factors. If you look going forward, Tunnel Ridge, like I mentioned, had 2 longwall moves. Their next longwall move is not until December. And so I think what you'll see going forward is more of a normal mix and a bigger mix in relationship to Tunnel Ridge overall. And so you'll see it both on the sales price and the cost side going forward, and we've tried to kind of account for that in our total guidance ranges going forward on both the revenues and cost side as well.

Understood. That's very helpful. I also noticed on your guidance that you increased your acquisition gas royalty of about $30 million based on anticipated ground game acquisitions. Is there any sense of the pacing for that acquisition?

Well, we sort of planned it to be sort of proratable over the year, but it will be totally dependent on the opportunities that present themselves. So it's hard to predict exactly what it's going to be. But the way we planned it in our planning was to do it on a ratable basis for the year.

And I think as you look at the first quarter, you can see the ground game was at $2.8 million for the first quarter. And so like Joe mentioned, I think the opportunities will play themselves out over time. I know there is quite a bit of activity in terms of what they're looking at. And so as we look at the full year guidance, we still feel very comfortable in terms of being able to transact on that ground game. But like Joe said, it's going to be a little lumpier than the way we had originally planned it, and we'll likely come in different spurts throughout the quarters.

There was an earlier question on what we anticipated our growth would be in that segment. So I don't think I answered that question. So -- but we are committed to continuing to invest in that segment, effectively redeploying what their prior year EBITDA is. So as we look into the balance of this year and then going into next year, we would expect to continue to be investing sizable dollars into that segment.

That's very helpful. And one more, if I could. Just with the potential for the U.S. dollar to keep weakening, how does that impact any outlook you have on export sales?

It obviously improves our opportunities and effects on what our competition is. So if most of the contracts are priced in dollars, that does give us a benefit.

Our next question comes from the line of David Marsh with Singular Research.

Congrats on the quarter, guys. Just wanted to start with just a quick question on the -- on the oil and gas royalty side, it looked like the dollar price per BOE was down a good bit sequentially. Could you just discuss that a little bit I was just a little surprised by that given that oil has kind of hung out in the $70 range for the most part. And just curious what drove that reduced number and what that number might look like going forward for the second quarter?

Yes, I think as you just look at it, we don't hedge our oil and gas royalty side of it. And so it's just dependent upon where the pricing measures are for the product during that period of time. And if you look just sequentially quarter-over-quarter in terms of our realizations, it was 9.7% lower on the oil side of it and 65% lower on the gas side of it. As you look into the fourth quarter of last year on the gas side. But for example, you had pricing in excess of $5. And as you kind of move back into where our netbacks were in the first quarter and look at where those realizations were, the actual netback ends up being under $2 for us over on the gas side of it. And so it's just a matter of what the commodity price index is -- are doing at that particular point in time. And that's the result of the different flows related to those commodity price indexes.

It's more of just that component of natural gas, even though it's a smaller percentage than oil, it's still a percent and does impact the total price.

Right. Okay. Understood. Yes, I just -- I was reading through it said 75% oil, and I was just a little surprised the realization was so low, but I appreciate it.

No, that's right. I mean when you look sequentially, our oil price realization is down about 10%, though.

Got it Got it. And then with regard to the debt side of the balance sheet, congrats on the repurchases in the open market below par, that's a great win for the company and for unitholders, I believe. But I just was looking at -- just looking at the balance sheet, though sequentially, your debt was higher. Is that as a result of the acquisition?

No, it's not really a result of the acquisition. We just redid our credit facility that we closed in January. And as a part of that new credit facility it had 2 components to it. It was a $500 million credit facility in total. $425 million of that was a revolver and $75 million of that was a term loan. And when we entered into that credit facility, the term loan component was an important part. We feel like it made sense to have a term loan component. And basically, we've got some capital expenditure needs within our coal operations that we announced related to River View just in terms of some extensions into some new reserve areas. And by entering into that term loan component, it matched up what the capital needs were going to be associated with that. So we elected to enter into a term loan facility associated with that. So that's why it's higher quarter-over-quarter. It's just related to that term loan component. The repurchases that we did, as you mentioned, were on our senior notes that are due in 2025.

Right. Okay. That makes sense. I'm sure the banks appreciated you locking into some amount of borrowing right out of the gate. And then just the last question, if I could circle back and kind of piggyback on the last caller. With regard to the acquisition side, I mean, can you just talk about the environment and what you're seeing in terms of opportunities being presented to you? Are you continuing to see kind of mostly opportunities in places like the Permian or -- have you expanded the search beyond that? And is it, again, still primarily around oil and gas assets as opposed to anything else?

Yes, there are opportunities presented to us in all the basins that we evaluate. But our primary focus has been on the Permian, both the Delaware and the Midland basins. So that's where our focus will be. Now again, we're willing to look at other basins, and we evaluate those. But most of the things we prioritize currently as being attractive to us are in the Permian.

I was just curious, as the weather or not the folks might be kind of interested in exiting positions in the Haynesville, given the weakness in that gas, which might create on a really interesting opportunity.

As I mentioned, we're evaluating opportunities in all basins. So we're not exclusive to one. And so we look at the capital we've got available to us, and then we try to assess the return opportunities and try to prioritize where we feel like we can have the best long-term investment in right, the opportunities being presented and the ones that we're looking at right now, they're more Permian-based -- that doesn't mean that there won't be some new ones that come in that we look at that the price expectations could be met to where we can take advantage of the lower price today. We're not finding too many people that want to lock in at these low gas prices when they're trying to sell their .

Right. Okay. Last 1 for me, Cary. Just quickly, I noticed your interest income increased nicely in the quarter. Could you talk about what you're doing with the cash in order to generate some incremental interest income and just how liquid those investments are?

Sure. Yes. Interest income was up on the quarter. It's just a matter of where interest rates have been going. Most of the cash that we have on the balance sheet today is invested in money market accounts. So it's all very liquid. And as you know, short-term money market accounts have been increasing with the increase in interest rates over the period of time. We do have a modest amount of our overall cash that's on more bank balance sheets that may earn a little bit lower rate than what you get on existing money markets today. But out of our total, roughly 75% to 80% of our cash balances in money market accounts with others in very short-term, very liquid availability at our other banking relationships.

Our next question comes from Nathan Martin with Benchmark Company.

If I just look out maybe over the next few years, do you guys see any big changes related to your domestic customer base, maybe with regulations on the horizon, anything like that? And what percentage of your domestic business is recurring at this point if you have that number? And then as we look at the export side, you mentioned you've secured some additional capacity at the ports there. I think Joe, you said you expect to export around 6.5 million tons this year, but had maxed out over 12 million historically. Do you have the capacity to get close to that 12 million-ton number now if the demand is there? Or are there other items you guys would have to address first?

We have the capacity. Obviously, we don't have the production because we don't have that our unsold position is only a couple of million tons, so -- for this year. So we would have the capacity from a logistics standpoint to be able to ship at that rate if we elected to do so. And I think as far as looking at our customer base, we don't really see any substantial changes that are on the horizon. There are some customers that in their IRPs , they are looking at retirements in the 2028 time period that could tweak what our mix is among the various customers. But as I said earlier, even with some of those closures the other plants that they remain to keep open, they sure to us that they are still going to need coal volumes pretty much consistent with what they've been taking because they would be utilizing the remaining coal plants at higher capacity factors. So for the next 5 years, we don't really see any shifts in our customer mix.

Great. Appreciate that. And then Cary, I know you mentioned the expectation to maintain the current $0.70 per unit quarterly distribution throughout this year. But any thoughts on where that distribution could go looking forward? Joe, I think you previously mentioned a target coverage ratio of 2.2 to 2.5x. Does that still hold true? And then where do potential unit repurchases kind of fit into the capital return equation?

Yes. I think just in terms of distribution coverage, which you talked about beyond 2023, that's still where our view is in that 2 to 2.5x range in terms of distribution coverage going forward. And that's where we would tend to focus. Obviously, we haven't provided detailed guidance on any of that into 2024. Typically, we'll do that as we get closer to the end of the year. But that gives you a pretty good sense as to what we would look for distribution levels going forward.

Yes. And I think really to the stock buyback, I think our primary focus right now would be on buying back our bonds. We -- as we look at our credit agreement and what the underlying covenants are under that agreement. There is an expectation that we will retire those bonds within a certain time period, which it makes sense for us to do anyway, given the reborrowing cost trying to go back and replace those bonds. And I believe we've mentioned that as of May 1, we have the ability and flexibility to either continue to do what we've been doing buying them in the market or we can redeem those at par under our current credit agreement under our senior notes, credit agreement.

And we have reached the end of the question-and-answer session. And I'll now turn the call back over to Cary Marshall for closing remarks.

Thank you, operator. And to everyone on the call, we appreciate your time this morning as well and also your continued support and interest in Alliance. Our next call to discuss our second quarter 2023 financial and operating results is currently expected to occur in late July, and we hope everyone will join us again at that time. This concludes our call for the day. Thank you.

And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.