Good day, and welcome to the Alliance Resource Partners Fourth Quarter 2020 Earnings Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. I would now like to turn the conference over to Brian Cantrell, Senior Vice President and Chief Financial Officer. Please go ahead.

Thank you, Tom, and welcome, everyone. Earlier this morning, Alliance Resource Partners released its fourth quarter 2020 financial and operating results. And we'll now discuss these results as well as our perspective on market conditions and outlook. Following our prepared remarks, we'll open the call to your questions.

Thank you, Brian, and good morning, everyone. I'd like to open my comments this morning by reflecting on the extraordinary performance of our people in 2020. We entered 2020 anticipating significant growth in our Minerals segment, while at the same time, prepared to manage challenging coal markets due to low natural gas prices, tepid coal demand, and an overhang of coal supply. None of us, however, could have anticipated the COVID-19 pandemic and its devastating impact on energy demand. As we have always done, the entire Alliance organization met these unprecedented challenges head-on, rapidly responding to safeguard the health and safety of our people, protect our balance sheet, support our communities, and operate prudently as an essential supplier to our customers to help ensure the reliability of the electric grid so critical to the markets we serve. Despite the disruptions encountered during the year, our teams performed at the highest levels across the entire organization, including our coal mines delivering the best safety record in the history of Alliance. The effectiveness of their response clearly demonstrated their flexibility, resilience, innovation, and determination to succeed. For their dedication, commitment, and all that they accomplished during such a tumultuous year, I extend my sincere appreciation. We entered 2021 hopeful that economic activity and energy demand will continue to improve as vaccines become more available. In the U.S., increased power generation and higher natural gas prices point to the possibility of gas to coal switching and projections of increased coal demand in our primary markets. Conditions are improving in the international markets as well. Cold weather across Europe and Asia, sharply higher LNG prices, a weakening U.S. dollar, and supply disruptions related to trade disputes are all supportive of potentially increased participation by U.S. producers in both the thermal and metallurgical export markets. Consequently, ARLP continues to target a 10% year-over-year increase in total coal sales volumes this year. During the 2020 quarter, ARLP contracted for 4.1 million tons of coal sales to be delivered in 2021, lifting our commitments to 78% of anticipated coal sales at the midpoint of our guidance for this year. While pricing for the newly contracted tons was greater than published spot prices, they were mostly lower than the expiring legacy contracts. As a result, we currently anticipate ARLP's 2021 average coal sales price per ton to decline approximately 4% to 8% from last year's average.

We will now begin the question-and-answer session. Our first question comes from Lin Shen with HITE. Please go ahead.

Hi, good morning. Thanks for taking the call.

Sure.

Two questions, Joe and Brian. First is, maybe you can talk a little bit about, with the new administration, we heard a lot of discussions that there's going to be more projects for wind and solar for the utility for the energy. So what are your expectations for your customers' closing profile of the alternate energy, so that your demand is going to stay small, not only from natural gas, but also a lot more from their alternative energy?

Well, it's our view that in the energy space, we're talking about really some long-term planning that needs to be made. Obviously, policy decisions made by government can influence those decisions and those plans. But when we assess the demand for coal and the length of the power plants that are going to be operating over the next two decades, we find it hard to believe that these policies are going to change much. I find there are very many contradictions in the policies that are being advanced right now because, on the one hand, they want to put a stop to building pipelines, and they want to put a stop to building natural gas plants, and I don't know how the administration can close other base-load generating units without replacing those with base-load units. We all know the technology for wind and solar is not available today to operate as a base-load operator. The transmission systems are not designed to operate with intermittent power supply. So the vision that they articulate, and unfortunately, it seems like it's more sound bites than it is a vision, is a very complex situation, and it's not going to happen overnight, as much as they are aspirational in their goals. So I can't find anyone that's been in the energy space that would suggest that the articulation of a 2035 target for fossil-neutral power generation is realistic. So as we think about our business, would we prefer to have more pro-energy policy? Yes. But the practicality of the situation is such that the demand for our product is still going to continue to be needed for the next two decades.

No, no, no. That's good. I mean, second question is you just mentioned that in April you might resume the distribution. I guess I'm trying to ask, in your opinion, is paying dividend still a better way to return capital or share buyback? Or what is your view?

We're going to look at all ways to utilize capital allocation, but we do believe that returning distributions is a major reason why a lot of our unitholders are in the units. And so we feel that that's an expectation. And that is a definable return of capital where shareholders can participate or anticipate exactly how they look at their total return when they try to evaluate investing in our company. So we believe that that's one critical element in shareholder return. Share buybacks is another. We still have some authorization, so that's a possibility, paying down debt, buying back bonds, as a possibility, investing in growth assets. Everything is on the table as far as trying to grow our shareholder value.

Great. Thank you very much. I appreciate it.

The next question comes from Lucas Pipes with B. Riley Securities. Please go ahead.

Hey, good morning, Joe. Good morning, Brian.

Good morning.

I wanted to focus a little bit on the export opportunities here at this juncture. To what extent would you say this market is open or opening up? And to the extent it comes to your outlook for 2021, where would you say are the pockets of potential upside from a strengthening export market? Thank you very much.

We entered the year really not anticipating much volume in our export market. So, I think I mentioned in October that we had essentially all of our growth in sales was anticipated to come from the domestic market. Notwithstanding, I think the export markets have been influenced by a couple of things. The biggest thing being the China-Australia dispute and how that's disrupted flows of coal in particular, both in the metallurgical arena as well as the thermal market. So currently, that dispute has created opportunities for U.S. producers, and we took advantage of that booking some tons that are more in the metallurgical space, not necessarily met coal because we have a PCI coal at our MC operation in East Kentucky. So, we booked around 400,000, a little less than that or a little more than that from that region, and we were able to book a little less than 1 million tons out of the Illinois Basin region for thermal opportunities, where we saw the physical market be a little bit higher than the API-2 market, and we've been able to take advantage of that to book that volume. Even though we've seen some volatility in the API-2 market over the last two to three weeks, the physical market continues to be making inbound calls. So, we're continuing to feel positive about that market, but it's hard to answer your question of whether that it's sustainable or not or whether all of this demand is really a result of the Australia and China dispute and how the coal flows have been disrupted as a result of that. So, we're taking an opportunistic approach at this moment in time. And if we can be able to transact at prices that we feel are attractive, then we will do so. As far as projecting that this is going to encourage us to bring on more supply and believe that it's sustainable, we're not there yet. So we will continue to evaluate that market and see what happens because nobody knows, at least, I don't know whether the Australia and China dispute will get resolved tomorrow or five years from now; I just don't know. So, we're taking a cautious look, but we're being opportunistic in where there's an opportunity to capitalize on that. If it's attractive prices, we'll do so.

Very helpful. I have a quick follow-up regarding the export thermal export met coal tons you mentioned. When were those booked? Did that happen in the last month or over the past three months? That information could help us understand better.

I would say, somewhere as late as last week, and the earliest was probably middle of November forward.

That's about right.

Yes. So just when you compare to what we had last year, I mean, last year we were about 950,000 tons, a little over 500,000 in Appalachian and 400,000 in Illinois Basin. So we've already exceeded that. And we're also a little bit more on the metallurgical side, where we do feel that that has more sustainability. And so we are targeting to sell about 700,000 tons into that market more. So we've already booked a little over 100,000 tons into that market. So, we're looking to sell another 700,000 this year compared to last year. It was around 450,000 or something.

And that would be embedded in your 2021 outlook as well?

Yes. The sales targets are embedded in our guidance.

Very helpful. Thank you very much for that. And then when I look at 2021 capital expenditures, it looks like you're running at very efficient levels kind of when I think about the capital budget over the last few years. How would you describe the 2021 spending levels? Is that an adjustment to a lower price environment that's more temporary? Or would you say this is a level that you could sustain for the coming years? Thank you.

We benefited in both 2020 and 2021 from having excess equipment due to closed mines. As we reduced our production from 40 million tons to 27 million tons, we idled Gibson North and a few units at other operations, which means we have some extra equipment contributing to our current production numbers. If we maintain this production level, we believe we can sustain it for another year or so, and then we will reassess.

Got it. Just to follow up on Lin's question and your earlier response about considering investments in alternatives, could you specify which areas you think would be the most natural extension? I understand that you're an energy supplier, but it's a broad and evolving field. Where do you see yourself fitting in if you decide to explore any opportunities in that space?

It's a little premature to discuss that publicly. I can tell you that we are in the process of establishing internal teams, and we haven't decided whether we're going to be at five different areas of investigation or seven. We've already started investigating two or three, but we have identified different areas where we've got core competencies that we want to explore. And then we're looking at just the increased demand of you name it, whether it's transmission to batteries, battery storage, or all kinds of different technologies in the space that if truly the EV market moves as fast as it does, there are plenty of opportunities to do things on the EV side. So we're trying to determine where best we fit, whether it's on the power side, whether it's on the EV side, or whether it's in royalties and trying to expand royalties beyond just oil and gas and coal. I do think in terms of using those skill sets we have. So, there are plenty of people out there investing and trying to find ways to get returns for the shareholder. I mean, just look at all those facts that are being created. So, we're not setting up the spec, but I guess we can start thinking, and we've got our own spec that we've got this cash flow coming in what we can do with it. So, we're looking at a little bit of everything.

The next question comes from Shelly McNulty with Loomis Sayles. Please go ahead.

First, going back to you were talking about base load power. I just see the better understanding, like bigger picture, kind of what percent of the total power is considered base load, and how does that translate to how many tons of coal would be needed to stay in the base load, given that you kind of talked about the solar and wind aren't capable of supporting steady state base load power supply? That's my first question. Second question is on the expansion outside of coal, natural gas into other forms of energy. Just wondering how you plan on financing that? Is utilizing new forms of financing, such as transition bonds, something you're considering? Or would it be done under the current financing you have in place, like your revolver or whatnot? Thanks.

I will address the financing question first. It will be a critical factor in our decision-making. Currently, we are focusing on how to allocate our free cash flow moving forward. Financing will be a key element in this process, as we need to understand the availability of funds from banks or other lenders to support our growth. We may also consider using some of our cash flow as equity, particularly if it falls outside our existing banking arrangements. We have not progressed far enough to engage in conversations about this yet. Regarding your first question, it is essential to analyze the situation on a regional basis. Essentially, the grid is designed for base load generation, which means it continuously supplies power without interruptions, allowing for efficient delivery through the transmission lines. I have been informed that once the share of interruptible power exceeds 30% on these lines, it complicates their efficiency, necessitating reconsideration of the capital needed to ensure reliable electricity for the public. People expect that when they enter a room and flip a switch, the lights come on without fail. If we depend on unreliable energy sources like solar and wind for grid power, it would not function as expected. This topic could be discussed in great detail region by region. However, in summary, achieving a certain level of reliability with non-traditional energy sources like solar and wind requires significant upgrades to the transmission system, potentially costing trillions of dollars depending on the desired scope and speed of implementation, which must be factored in when deciding to shut down base load generation.

Okay, got it. And then though I appreciate the fact that you could talk about it ad nauseam, and I actually think it's probably would be good for you to put these kinds of comments out there and educate people on things that aren't being talked about, like you said, there are only snippets of information and somehow get, I think, more education, the more nitty-gritty you guys can provide in supporting these statements, actual facts might give a little bit more support to the core industry overall.

So, we do belong to an organization called Americas Power that is trying their best to educate the American public on that subject. So, we just need someone like you that is interested to understand it. So, we're out there trying, but I take to heart your comments. They're very well-founded, and I agree 100% with what you're saying.

So I don't know, maybe you guys should start a Reddit group or something to talk about.

Maybe, that's a good idea. I don't really understand it. I think it's a good idea. It seems to move markets, I don't know.

Our next question comes from Joe Pisano, who is a private investor. Please go ahead.

Yes, I know that in my area, there's a large institution with a significant demand for power, especially in the winter when it gets really cold. They rely on gas and oil, particularly natural gas, and they've been advised to switch to alternatives because there isn't enough natural gas available. This isn't a small issue. There's a concern about the decision to start closing down pipelines and similar infrastructure.

I'm not exactly sure. Yes, obviously, we know natural gas has been a transition fuel. It needs to continue to be. If the vision is that we can get to a non-fossil fuel environment, then you still have to rely on fossil fuels and nuclear to bridge to that technology. And it just is not going to happen overnight. Unfortunately, I believe the Biden administration knows that. I don't know why they just can't say the truth on that.

That's my point. If this is done like it is in my city and goes nationwide, how is closing pipelines and everything going to work?

They say they engaged in political maneuvering for a while, and I often hear that campaigning is quite different from governing. At some point, you have to stop campaigning and begin the process of governing. I don’t believe the Biden administration has transitioned from campaigning to governing yet. The challenge you mentioned is that it’s much harder to deliver on those aspirational statements made during a campaign when you start implementing policies and assessing their feasibility. I read an article by Eric Rosenbaum in CNBC that discusses Biden's climate change plan and the challenges faced by America's most threatened workers. It highlights the complexities involved in making an overnight transition and the unintended consequences that can arise without careful consideration of the necessary steps. What you're expressing is a practical concern: how can a transition from one fuel source to another be successfully managed when there are real-world examples where it's simply not feasible? I hope that when the Biden administration begins to genuinely focus on executing their strategy, they will consider these practicalities and ensure that essential services aren’t compromised, but only time will reveal their approach.

This concludes our question-and-answer session. I would like to turn the conference back over to Brian Cantrell for any closing remarks.

Thanks, Tom. We appreciate everybody's time this morning as well as your continued support of and interest in Alliance. Our next call to discuss our first quarter 2021 financial and operating results is currently expected to occur in late April, and we hope you'll join us again at that time. This concludes our call for today. Thanks to everyone for your participation.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.