Good morning and welcome to the Alliance Resource Partners LP and Alliance Holdings GP, LP Third Quarter 2017 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. On the call today we have Brian Cantrell, Senior Vice President and Chief Financial Officer; and Joe Craft, President and Chief Executive Officer. I would now like to turn the conference over to Mr. Brian Cantrell. Please go ahead, sir.

Thank you, Rachel, and welcome, everyone. Earlier this morning, we released 2017 third quarter earnings for both Alliance Resource Partners, or ARLP, and Alliance Holdings GP, or AHGP; and in a moment we’ll discuss these results as well as our outlook for the balance of the year. Following our prepared remarks, we’ll open the call to your questions. Before we begin, a reminder that some of our remarks today may include forward-looking statements that are 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 always reflected in this morning’s press releases. 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 any of our underlying assumptions prove incorrect, actual results may vary materially from those we projected or expected. In providing these remarks, neither partnership has any 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’ll 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 the ARLP press release which has been posted on ARLP’s website and furnished to the SEC on Form 8-K. With the required preliminaries now out of the way, I’ll turn the call over to Joe Craft, our President and Chief Executive Officer. Joe?

Thank you, Brian. Good morning, everyone. Through the first nine months of 2017, ARLP’s performance has been solid as we posted year-over-year increases to coal volumes and net income, while maintaining healthy margins of $18.29 per ton sold. Considering our performance to date, our conservative balance sheet and current expectations for attractive cash flows in the future, ARLP is positioned to continue increasing distributions to our unitholders on a quarterly basis. For the 2017 third quarter, our board has announced a 1% cash distribution increase for ARLP unitholders and a 0.70% cash distribution increase for AHGP unitholders, both compared to the sequential quarter. The recently announced ARLP distribution represents a 15.4% increase over the 2016 quarter, and the AHGP distribution increase was 33.6% over the 2016 quarter. The year-to-date distribution coverage ratio at ARLP remains a healthy 1.8 times. In delivering these results, our operations have generally performed well all year. As Brian will discuss in a moment, results for the Alliance partnerships in the 2017 quarter were impacted by a major root ball encountered at our Hamilton Mine following a longwall move in August. This event reduced our production in the 2017 quarter by 760,000 tons and sales volumes by 240,000 tons and increased expenses above expectations as the mine worked to mitigate the effects of the root ball. For the quarter, we estimate EBITDA and net income were negatively impacted by approximately $12 million and $15 million respectively due to this isolated event. Normalizing for these impacts, ARLP’s 2017 quarter and year-to-date financial results were better than our expectations. ARLP’s solid performance demonstrates the soundness of our strategy and the strength of our execution. The benefit of our strategy to shift production to ARLP’s lowest-cost mines remains evident. Despite the root ball event experienced at Hamilton, the execution…

Thank you, Joe. As mentioned in our release this morning, results for the Alliance partnerships in the 2017 quarter were impacted by adverse geological conditions encountered at our Hamilton Mine following a longwall move in August. As Joe just discussed, Hamilton’s efforts to overcome these challenging conditions continued through the end of the quarter resulting in curtailed production, increased cost, and reduced net income and EBITDA. Comparing the 2017 quarter to the 2016 quarter, lower coal sales volumes and prices led total revenues down 17.9% to $453.2 million. Even though coal sales volumes for the 2017 quarter came in higher than expected, they were 1.1 million tons lower than the 2016 quarter primarily as a result of significantly higher sales from coal inventory during the 2016 quarter due to sizable contract deferrals by our customers in the first half of last year. Total revenues also declined as expected due to the expiration of higher-price legacy contracts which drove ARLP’s average price realization in the 2017 quarter down 9.1% to $45.12 per ton sold compared to the 2016 quarter. Comparing to the sequential quarter, strong sales performance at our Warrior, River View and Tunnel Ridge Mines more than offset reduced sales from Hamilton. Increased total sales volumes and relatively flat pricing led total revenues higher by 13.7% sequentially. Reflecting the ARLP’s shift to production to our lower-cost operation, operating expenses in the 2017 quarter fell 9.6% to $295.4 million. These ongoing efficiency efforts also helped overcome increased cost at Hamilton in the 2017 quarter, with segment-adjusted EBITDA expense per ton only slightly higher compared to the 2016 quarter, with geological issues at Hamilton per segment-adjusted EBITDA expense at the mines significantly higher in the 2017 quarter increasing by $12.79 per ton sold compared to the sequential quarter and driving ARLP’s sequential…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Lucas Pipes with FBR & Company. Please go ahead.

Hey, good morning everybody.

Good morning, Lucas.

Good morning. Good job managing through those adverse geologic conditions and putting in the solid results despite of that. So I wanted to follow up a little bit on the comments regarding 2018. Joe, I think you mentioned that you expect coal sales volumes to be higher in 2018. I wondered if you could give us a breakout of where you see that growth coming from? Is that more because of the export side and what you’ve already booked there, or is that because of recovering domestic markets? And then also obviously prices continue to come down, I would appreciate your insight into your pricing book for 2018? Thank you.

Thank you, Lucas. When we look at the potential for that increased volume, it is largely dependent on the export market. As I mentioned, in 2017, we had a strong sales end of that export market. If you go back to this time a year ago, I believe we had no export markets built into our plan for 2017. We knew there was opportunity for export volume in 2017, but we didn’t have the visibility as to the sustainability of that. With the increased sales this year, we have built some relationships that we believe will allow us to participate, therefore we did book the 2.5 million tons that’s over the fullyear that Brian – that we did talk about in the prepared comments. So if we can maintain volume at the 5.4 million ton range for steam coal and to the export market, that will give us the ability to increase the volume next year compared to this year. So that means we are anticipating higher sales in the domestic utility market in 2018 compared to 2017 as there are contracts that are rolling off for much higher cost mines, we expect to be competitive and be able to pick up some additional volume in the utility market as a result of our low cost position. So that’s the support for the increased volumes as to where that would come from. As far as where we stand financially in looking at sales prices for 2018, Brian mentioned there was a lot of activity in this past quarter. The last quarter’s call we expected 2018 sales prices to be comparable to 2017 through the activity this past quarter. The sales price has been a little lower than what we expected, so we still haven’t finalized, but I would say that you could expect that our average sales price for 2018 will be probably 2% to 5% lower than where we are in 2017. At the same time, I think our cost will be lower by a comparable amount as we look at some of the efficiency benefits that we are experiencing by some of the regulatory changes that are anticipated as a result of the new administration.

That’s very helpful, thank you for all of that detailing. Unfortunately I feel compelled to ask the same question that I asked last quarter, and I think I framed it up as in when we look at some of the indexes out there, they’re confusing some people, and I always like to point to your comments for elimination of where the Illinois Basin market is. So if you, maybe Brian or Joe could give us a little bit of color as to 2018 contract prices in the Illinois Basin, where do you – what do you think is a good range? Thank you.

It’s difficult to say based on the fact that we are all right in the middle of negotiations. We’d like to see those prices be in high $30s to low $40s. Right now they’re somewhat a little bit less than that, but they’re not in the low $30s that the indexes would lead you to believe. So I would say depending on the customer, depending on the transportation, depending on the quality of coal, they’re somewhere in the mid-$30s to the $40.

Perfect. Great. Well, thank you very much and good luck.

Thank you, Lucas.

The next question comes from John Bridges with JP Morgan. Please go ahead.

Thanks, Joe, Brian. Congratulations on the results again. Just wondered, you mentioned that you felt the prices had turned I think, was that on the exports or was that something that you detect in the market and I’d love to get some color on that if you could? Thank you.

All right. I think it’s really more driven off the domestic market when we’re looking at that comment. So early in the year and midyear, there was an oversupply situation. There has been discipline in the Illinois Basin, for example, third quarter production is down 7.5% compared to the second quarter. If you look at the eastern coal production, it’s down 9% year-over-year. So we’ve seen some discipline on the supply side and we’re also seeing the increased export volume that has resulted in what you see with utilities inventories declining. So we’re of the view that by the end of this year the utilities – the domestic utilities are buying eastern coal production, their inventories will be at five year averages. So what we will see is the demand being comparable in 2018 compared to 2017. We believe that with supply and demand imbalance that that should give a lift to prices compared to 2017 where some utilities had the luxury of buying out – taking out of inventory if they didn’t see the prices that they liked when they went out to bid.

Interesting. And you’re not getting word from utilities that they plan to use more gas next year when some of these pipelines come in?

We don’t see that they’ll use more gas. I think with the pipelines coming in, they may get – they may have some volume at higher prices, but to pay for the pipeline transportation, our expectation is with the southeast utilities where some of those pipes are going, they have access to gas today and if the gas price can remain at $3-plus, I think that – we believe that demand for coal will be comparable in 2018 compared to 2017.

Okay. And the Rover Pipeline is headed in your general direction or is that not affecting you?

We don’t anticipate that to affect us now.

Okay, great. I’ll get out of the way. Many thanks for you and your comments.

The next question comes from Mark Levin with Seaport Global. Please go ahead.

Okay. Thanks very much. Couple of quick questions just in terms of Hamilton; have the issues at Hamilton been resolved so that when you think about like Q4 production and cost that that will be back at sort of more of a normalized run-rate or will that bleed into Q4?

We will have some impact or we have had some impact in October as we got with the start up, so we had to work through those route conditions, but we believe that that’s all been factored and we know that that’s all been factored into our tonnage estimates or sales estimates in our guidance that we’re giving. So we believe that that issue is behind us going into the fourth quarter and finishing this panel. So we identified – I mean we knew it was going to occur, it was just hard to manage.

Got it. That make sense. And then with regard to the grid reliability rule, Secretary Perry’s proposal, Joe, how do you assess the potential impact on what that rule could mean if anything to your customers and to you?

I think to evaluate that rule, the action by Secretary Perry, what we do know is it has escalated to the top of the agenda for FERC, so it is getting a lot of attention. It’s on a fast track, they’ve had a lot of comments, it’s interesting that the comments are exactly what you would expect where the comments are coming in aligned with the various parties’ interest, no surprise there. What is I think encouraging for the coal plants is that there are a lot of very strong comments as to the real importance of having that capacity available for the resiliency issue, and if you think about – it’s as not an issue that affects the entire nation, it’s really focused on the merchant plants and if you look at where that primarily is at the PJN markets, so it’s not as significant nationwide, but – and so the volumes aren’t that big, but for the coal plants and the nuclear plants and for those customers that have low cost power, it’s a big issue. So personally I’m encouraged by the action taken by Secretary Perry. I think that it’s refreshing that we’ve got leadership in Washington that wants to be forward-thinking and talking about solving problems before they happen, and I think the evidence is clear that if you end up shutting down nuclear plants and coal plants and there’s no other plants to back them up that you’ve got a problem and it’s a problem that’s going to happen. So many times regulators want to say, well, I don’t have a problem because they’re looking back and they’ve had the ability to have the excess capacity there. We’ve already seen a warning in Texas where they’re concerned about the capacity from some of the announced coal shutdowns because of thinking about what their capacity would be big time and it’s already been reduced below their level that they think is a reasonable reliability level. So it’s a big issue, it’s one that keeps the attention. I applaud the administration for putting a spotlight on it. Now how the FERC commissioners will vote, what action will occur is anybody’s guess, but I welcome the analysis and the evaluation of it because it is something that is important for the folks that appreciate having electricity.

Do you think, Joe, related to that point and maybe given where inventories are, if in fact something like this were going to – were to happen that there would – that would create at least a temporary or one-time surge in demand as utilities needed to restock to meet – or merchant generators needed to restock to meet that rule?

Yes, I think that’s one of the heavily commented sections of the proposal as to what the 90-day rule or should it be – does it need to be 90, should it be something less than that. So that’s one area that may be modified if they do address this issue. So it’s hard to know the answer to that. I don’t know that 90 is the right number, but I think some minimum inventory level makes sense and whether it would be a one-time issue and some people – who knows, I mean, I can’t answer that question.

Yes, no that’s fair. Hey, Joe, then two last questions, just quick ones. So export margins you mentioned booking 2.5 million tons, so export margins that you can get let’s say at today’s forward prices for API 2 versus what you can get in the domestic market today, how do they compare to each other? And then last question is just on the met, what sort of the price we should be looking at as sell-side analysts to try to get an idea of what the prices are that you can get for the met and weather that market is economic for you at a given time or not? Thank you.

On your first question, the export price, I mean, you read a lot and you heard a lot about the sulfur discount, the belief that that sulfur discount really pretty much ties to what we can get into the domestic market. So our pricing tends to be right on top of where the domestic market is and that’s what it dictates in my view what the sulfur discount is, and that is different for our Gibson Mine which is a lower sulfur mine and so it’s hard to make an argument for sulfur discount if you don’t have high sulfur. So we haven’t been able to get pricing there that has been better than the domestic market and a lot of the volume that we’re looking at selling in the export market is coming from that coal mine. On the met side, I think the way you can look at it is if you look at the benchmark price is what we get back at the mine, it’s roughly about half of that and again that differs between customers and transportation as that moves month to month, but roughly it’s in that 50% to 60% of that number.

Great. Thanks very much. Really appreciate the time.

The next question comes from Paul Forward with Stifel. Please go ahead.

Thanks. Good morning Joe, good morning, Brian.

Paul.

Wanted to go back to your what your comment, Joe, earlier about how when you look into 2018 you thought that with the regulatory changes that you might be able to bring your cost down 2% to 5%, just wondered if you could go through the types of things that if you weren’t able to achieve that, what might stand in the way of achieving that 2% to 5% reduction in unit cost next year? Is it – would it be any sort of labor scarcity issues that could show up, any sort of whether it’s geology like you ran into this quarter at Hamilton, any equipment cost inflation, could you talk a little bit about what might be the challenges for reaching those cost reductions?

I mean, productivity is always the key issue, so we feel like we’ve got a pretty good handle on the geology as we go year to year. Every once in a while Mother Nature throws you a [Audio Dip] like it did this past quarter and those are hard to predict, but that is probably the main thing that could change that, the actual results is just what productivity gives you. I think on the labor side we feel comfortable and confident of our ability to attract talent. I mean, we would be looking, if we were able to increase that market we would have to probably add a unit or two, so that would require us to go out and find people, but since we’re a preferred supplier in the regions where we operate, we don’t think that would increase the cost. As far as materials and supplies there is a little bit of inflationary pressure there relative to what happens with the steel prices et cetera, but right now those are factored into our numbers. So I think the main thing that could affect that number is productivity that – what geology would give us.

Great. And just shifting over to the export markets, 2.5 million tons booked already for 2018, can you give us a sense of which countries have been the most important in taking those tons? And when you look at this kind of comparing 2018 to a really strong year for exports in 2017, are there areas were either coal types or areas of focus on marketing that you would say are going to be the most important in trying to match or beat the strong exports that you’ve already had for 2017?

Markets that we’re shipping into primarily Europe and India. And as I mentioned earlier, the lower sulfur tons that we have are really what we’re focused on shipping. We do ship some of the high sulfur, but that was – primarily the stability is coming from our lower sulfur operations.

Okay. That’s all I’ve got. Thanks a lot.

The next question comes from Jeff Menapace with FTN Financial. Please go ahead.

Good morning, guys. Joe, in your prepared remarks, did you quantify the revenue and EBITDA impact of the Hamilton issue in this past quarter?

We quantified the net income and EBITDA impact. I believe EBITDA was about $12 million and net income was $15 million.

Okay. Net income $15 million. And Joe – excuse me, Brian, what was the – can you tell us the revolver AR securitization balances at the quarter-end?

We are undrawn on our revolver at quarter-end, and I think on the securitization we were fully drawn at $100 million.

Fully at $100 million, okay. And then with respect to Hamilton, I understand it was a short-term issue, but can you give us a little color on what the specific – what specifically the issue was at Hamilton in the quarter?

So specifically when we started the panel we encountered what is known as a vertical slip, and so that was combined with a zone of incompetent rock basically, so we didn’t have the limestone over the coal sink, and so we just had that incompetent strata that resulted in the rock – in the roof rolling down onto the tailgate piece of our longwall, and then that ran into the face of the longwall in front six fields I believe. And so it took us some time to get the shields and the debris, if you will, out of the way so that we could advance the longwall to its normal mining cycle.

I got you. Thank you very much. Go ahead.

You have to lose rock to advance the shield.

I got you. Thank you very much. I appreciate it.

The next question comes from Lin Shen with Hite. Please go ahead.

Good morning, Joe and Brian. In opening remark, you also mentioned that after 2016 transaction last quarter, you are still reviewing in further simplified their GP L.P. structure. Can you talk about the update? And also what do you think of the timing to close that review?

We’re still evaluating that step and it would – say by the January call we’ll have better insights as to what that timing would be. So we’re going to evaluate that after the first of the year as we determine – we had some strategic issues we were looking at as to whether we should keep them separate or not, and then we’re also trying to understand if there will be tax reform and whether that would have any impact or not and any second step transaction that might occur there.

This is James. Is there anything that we know or don’t know about the proposed tax reform that could potentially impact the transaction? What’s the scenario where it would – it wouldn’t make sense given tax reform?

The main issues back to depreciation rules and expensing and how that could impact if there’s a technical termination you will…

And the timing of the expenses Joe just mentioned.

Yes. So it’s – there’s nothing specific, it’s just we’d like to have perfect knowledge instead of guessing, and that’s just again – that’s just one component that’s not the decisive factor, but as we evaluate the strategic reasons for keeping them separate, that’s another factor that does affect the timing.

And what are the strategic reasons potentially for keeping them separate?

I think as we think in terms of capital, I mean we do have access to two different capital forms right now, and so as we look at where we’re better off with a lower form of capital which we already have by taking the IDRs out, does it make sense if you’re pursuing thoughts on investments and assets other than the gold business to have two separate entities.

Okay. And when you look at the two entities and you think about a potential consolidation, how do you think about that 2% GP interest in ARLP?

Yes. 2% interest would still – isn’t exact, actually it’s 1%.

1% economic interest.

Yes.

1%, yes.

And that would be transferred privately if we were to – if we were to do the consolidation so there would not be a public entity for that 1% interest.

Okay. Thank you.

Thank you.

[Operator Instructions] The next question comes from Frank Duplak with Prudential. Please go ahead.

Good morning, guys. Just curious this morning with the Dyna G distribution news, if you guys can talk about your potential exposure to Dyna G as a customer, particularly maybe some of the South Illinois operations there?

Yes. Yes, we do fill into it, I just heard that news on the drive in this morning, so I haven’t really had chance to talk to anybody to understand what strategically their objectives are, so I can’t be responsive to your question this morning, but we’ll evaluate that and try to get back to you if it’s any impact, but we don’t anticipate it’s much there.

And is Dyna G in the top 10 customers at this point?

Probably in the top 10, but they’re not – I can’t give you the exact number, but it’s – they’re not in the top five I don’t believe. I’d have to – I’d have – I’m just not focused on that, I can’t help you.

Okay. Thank you.

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

Thank you, Rachel. We appreciate everyone’s time this morning as well as your continued support and interest in both ARLP and AHGP. Our next quarterly earnings release and call will be in late January and we look forward to discussing our full year 2017 results and outlook for 2018 with you at that time. This concludes our call and thanks to everyone for your participation.

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