Good morning and welcome to the Alliance Resource Partners LP and Alliance Holdings GP, LP Fourth Quarter 2017 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note 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, Anita and welcome everyone. Earlier this morning, we released 2017 fourth quarter earnings for both Alliance Resource Partners, or ARLP and Alliance Holdings GP, or AHGP and we will now discuss these results as well as our outlook for the year of 2018. Following our prepared remarks, we will 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 also 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 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 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 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 out of the way, I will begin this morning with a review of our performance in 2017 and then turn the call over to Joe Craft, our President and Chief Executive Officer for his overview of the markets on our strategy. As outlined in our release this morning, ARLP delivered solid results in line with our expectations for both the 2017 quarter and…

Thank you, Brian. Good morning everyone. Brian just outlined Alliance delivered an impressive performance in 2017 even with the market reset by increasing sales and production volumes, reducing operating expenses and generating strong EBITDA, distributable cash flow and distribution coverage. We also accomplished a number of significant objectives last year. We entered 2017 with a goal of alleviating uncertainty in the debt capital markets. With the successful placement of a $400 million 8-year bond offer and a 4-year extension of our revolving credit facility ARLP met this goal and exited the year with a stable long-term capital structure with ample liquidity. The Alliance partnerships also took the first step towards simplifying our structure through the exchange transaction completed last July, further enhancing our capital markets capacity and access. And today AHGP announced its intention to move forward to complete the process to fully simplify the Alliance partnership structure, which will result in ARLP being the only publicly traded reporting entity. In addition, ARLP significantly expanded its presence in the international thermal and metallurgical coal markets, increasing year-over-year shipments to those markets by 4.7 million tons up to 6.3 million tons or approximately 16.7% of our total 2017 coal sales volumes. Entering 2018, we expect ARLP’s strong operating and financial performance to continue. After last year’s weak first half coal market environment, it appears that coal pricing bottomed in the back half of 2017 and continues to show signs of improvement. Domestically, recent cold weather across much of the U.S. has increased customer demand and reduced utility stockpiles. With favorable weather patterns expected to continue in the near-term, we anticipate coal burn and iron markets will remain strong and customers will seek to maximize tonnage under existing contracts and accelerate spot purchases. We also believe customers will soon be in the…

We will now begin the question-and-answer session. [Operator Instructions] First question today comes from Mark Levin with Seaport Global. Please go ahead.

Hey gentlemen, I appreciate all of the good color. Joe, I want to return back to the uses of cash that you were talking about before or potential uses of cash, capital return specifically, you noted this simplification strategy and that you would be pursuing that, where do unit buybacks and increased distribution increases fall into your thinking in 2018 if they do at all. And I think you noted $0.05 a quarter increase, but is there a potentiality that you could see some unit buybacks before the end of the year and also even – maybe even potentially greater distribution increases?

I think we will look at all options there, Mark. I think we do see some opportunities to invest capital that we believe it should be our first priority to try to grow and sustain our existing base and so we will be focusing on that first almost. I think relative to increases in distributions that’s also a possibility. Quite frankly, we have been a little disappointed that with the strong increase in distributions we gave in this past year, the market didn’t seem to – didn’t give us much credit for that, so will have to determine on a going forward basis what the right level of increases could be. I think again, we are going to try to make sure that all increases of sustainable and that we got strong balance sheet and insufficient distribution coverage for that, but in large part that decision will be made by the Board on a quarterly basis, be dependent on our future outlook.

And with regard to – just regard to the distribution increases and you mentioned maybe the market not giving you the credit that you probably deserve, does that mean when you think about buybacks versus distribution increases that that could be a powerful lever. And then related to that point, I think you mentioned you are 0.95x levered, is that the appropriate leverage metric that you are comfortable with, would you be willing to take leverage up to let’s say hypothetically 1.54x and use that excess cash to return it to shareholders, is that something you might consider?

Relative to the leverage, we would be willing to consider higher leverage. At the same time I think as I am trying to convey we do see opportunities to grow our business through the investments. And we will keep that balance sheet capacity available, so we can grow through investments that we see on the horizon, that’s going to be our first priority.

That makes sense. And then just two quick ones, ‘18 exports higher than ‘17 exports, is that the way to think about it. And then the final one is your maintenance CapEx per ton long-term planning purposes I think increased a little bit from last quarter maybe if you could just talk about those two and then I will hang up? Thanks.

Yes. We do continue to see strong opportunities in the export business. And in large part, we sell quite a bit of our Gibson product in the export market that has a lower sulfur product and it is being received very well in the export markets. That’s one reason we are bringing our Gibson North property back into the marketplace. So, we would expect to see more volumes in the export market in 2018. And we would like to believe those are sustainable moving into 2019 as well. Relative to the capital on the maintenance, in the past couple of years, we benefited by having equipment that was excess and as a result of our moving our operations to low cost operations, when we closed certain operations either through depletion or in an effort to try to lower our cost. We did benefit by having equipment that was available without having the need to rebuild. We have sort of gone through that cycle or we are in the process of finalizing that cycle. So we are moving towards a more normal rebuild phase of our ongoing operating equipment.

That makes sense.

That answers your question on that.

Yes.

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

Hi, good morning everybody.

Good morning, Lucas.

So, Joe and Brian, I think in the – in your prepared remarks you commented a few times on M&A and I wanted to ask a few questions on that, first what sort of M&A do you think is most appealing size wise, geographic wise, domestic or export market tilt, would appreciate that. And then kind of broader taking a step back on M&A, we have seen some activity in the domestic thermal coal space, but I think given where our expectations were coming out of the downturn maybe not as much as the market anticipated, Kind of how do you think about the broader M&A picture over the next call it 12 months to 24 months? Thank you.

Income on the M&A, we would be looking at assets that would be primarily in the Illinois Basin, Northern App or potentially in Central App. I mean we have done some evaluation of the metallurgical market seeing the strength and the opportunities there. I don’t anticipate anything occurring by us in ‘18, but that is something that we have added emphasis on to evaluate in addition just to the steam markets. So most of our focus will remain on the domestic markets, so we are benefiting from the international markets, but our core strategy will remain to be on the domestic utility industry. We are also looking at investments outside of coal that would be consistent with the type of the investments we have made. And by that I mean in areas where we see substantial growth in demand and need for infrastructure investments and/or and in the services industry for the oil and gas drilling operations.

Got it, that’s very helpful. Thank you. And then maybe just to follow-up on the M&A opportunities in the domestic utility space, where would you say is the appetite in the market more broadly deep, do you see a lot of opportunities out there and would you say is it more on an asset level, my specific level or maybe enough larger, a larger maybe conglomerates potentially available as well and of interest?

Yes. I don’t want to put too much emphasis on it. The message is we are open to participating in a consolidation. And as you mentioned, we have seen much of that. I don’t see any real signal that would suggest that 2018 is going to be any different than 2017, but there have been transactions that occurred. We looked at most of those in 2017 and they didn’t meet our hurdle expectation. So, we weren’t successful in buying those, but that doesn’t mean that we don’t have an appetite for. So, we would definitely look for opportunities that if we felt like it would strengthen our position and/or we could bring a lot of synergy to the transaction then we would not be opposed or may put in a positive way. We would be happy to consider that as long as we felt like it would strengthen our ability to meet our goals and objectives of trying to grow our sustainable cash flow.

And Lucas on our comments in terms of how intend to allocate capital within the coal business, yes we did mention acquisition. But as Joe said real emphasis on expanding and/or extending our business as we always have more organically when the market presents opportunities to a similar what we are doing with going to get some more my volume back online this year.

Perfect this is a great segue into my second question. Gibson, restarting Gibson North, can you maybe provide a little bit more color as to why you decided to go that route versus for example increasing utilization rate at some of your other mines, for example, River View that I think of as a very low cost mine, is it that the other operations are already running at full capacity and therefore it was just simply not feasible or was there a unique attribute of Gibson North that just made it a little bit more palatable maybe from the export perspective I would appreciate more context around that position? Thank you.

Right. We do have excess capacity at River View, so that is the potential for expansion. If there is increased demand for the 5 pound SO2 product that is the primary driver for bringing Gibson North back what’s the demand for the lower sulfur that particular coal reserves possesses. We are operating Gibson South pretty much at full capacity. So we have more demand for that product than we had supplied. So bringing on two units at Gibson North not only do we feel like that we can add to our EBITDA, but it also reduces some of our closed mine maintenance cost hat we had in 2017. So it’s a profitable investment and that’s really small investment just to add some equipment to reopen that mine, but the driver was the marketability of the Gulf and as well as the footprint that we got there in Indiana.

Great. Thank you. And then maybe last question for me, if now become pretty active participant in the export market with sizable volumes as well, I wanted how do you think about that market factoring into the Alliance story, not just in ‘18 and ‘19, I think you mentioned that ‘19 should be similar, but longer term is this something where you tend to stay or would you say look this market is strong right, but we know this is a highly cyclical industry, so it may fluctuate and Alliance will adjust to that and kind of where do you fit into that export market, I would appreciate your color? Thank you.

I think historically we have participated in less than 10% of our production. What we are seeing that’s different, this go around versus the past is that there the customer base that we are targeting have characteristics that are similar to what we have seen here in domestic U.S. We are seeing actual coal-fired generation power plants being built in other countries, so we are expanding. Yes, we are selling into Europe, but our site for the future is in countries other than Europe where their coal-fired generation is being built and we are trying to establish relationships with those countries that are signaling a willingness to continue to build new generation and to grow their low cost energy production within their country buying coal to be able to pay. So we do see opportunities, what that size will be. Again as I said a little bit earlier, our core business will continue to be the domestic utility business. We could see that 16% sustaining itself is not growing to 20 or 25 just it depends on how successful we are in establishing long-term relationships and contracts that we can manage similar to the way that we do our domestic business.

Interesting. So this would suggest possibly longer term supply agreements on the export side?

I would say longer term relationships, so yes, but it would always be priced annually, if not quarterly, but we would expect for us to try to grow our percent, we would want that to be sustainable. We don’t want to get too far out on a volatile market that’s here today going tomorrow.

Alright. Well, I have more questions, but I will jump back in queue for now. Thank you very much.

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

Thanks. Good morning.

Hi, Paul.

Just on Gibson North, I wanted to ask that’s great to be able to bring those 2 units back online at such a low CapEx Level. I was just curious considering the strength in either the export or the domestic markets. Do you have anymore levers like that you can pull where you’ve got to some underutilized equipment or capacity somewhere that you might decide to deploy at relatively low capital spending levels later on in 2018, if the market wants the coal?

We do have excess capacity both at our LTE operation as well as River View. We could also add another unit at Warrior. So, there is capacity at those three operations. At Hamilton, we expect to have our first full year of reaching full capacity at Hamilton it’s going to add some volume. That’s already factored into the guidance we gave you. So, when you look at the increase that was mentioned in our prepared remarks, that increase is primarily driven by Hamilton and Gibson. As far as whether these units will be deployed in 2018, they will be very market dependent. So, we are active and we will be active to try to grow our market share. So if are successful with long-term contracts and do so, then we would invest the capital to bring on additional units if the market demands it.

Great. And when thinking along those lines of considering expansions or as you are marketing your remaining tons out of Appalachia in 2018. I was just wondering if you could talk about – or are you concerned about cost pressures anywhere beyond, I mean certainly you have given us guidance, but our cost pressure is that, that could creep in either in Appalachia due to potentially labor shortages or might there be as you start seeing yourselves and your competitors bringing capacity back, would there be either labor or equipment issues in the Illinois Basin that could create some cost surprises?

When we prepared our budget, we did build in some inflationary increases in ‘18. In our last call we were hopeful that our ‘18 cost would be lower than ‘17 and so we are building into the plan something that’s comparable, but we have increased some of the inflationary aspects for M&A or – excuse me, M&S, material and supply components, whether it would be fuel or steel or other factors. So, there is some inflationary expectation that’s already been built into our guidance. On the labor front, we don’t see that and/or equipment availability that those would be bottlenecks. We don’t really anticipate across the Illinois Basin or Northern App that tonnage is going to expand that much beyond what we are doing that we think that the tonnage will be brought. There will be other tons that will be brought off the market or higher costs where contracts have been expired for those competitors. So, I don’t see the increase in volume that we are bringing on to be an industry issue and I guess more of a company specific issue.

Alright. Thanks very much.

[Operator Instructions] The next question comes from David [indiscernible] with Wells Fargo please go ahead.

Hey, good morning guys. I was just looking for a little more color you have given some proton estimates here on your sales price per ton being down 2% to 3% off of 2017. Could you just talk a little bit about, is that due to some mix shift between basins? And it seems like in your commentary here that you are saying softer market conditions in the first half and second half might be better, just any color that we can get on kind of realizations and when you might expect those to start moving the other way?

Yes, it’s softer in the first half, last year it was ‘17 not ‘18 just for clarity. And when we look at the market, it is definitely better today than it was just 3 months ago. When we put our plan together, this guidance probably is a month old. So, we haven’t really updated – we haven’t changed our market curve – price curve for that guidance since we presented the budget to the Board in December. We have reflected whatever contracts that have committed, but as far as our price curve, we have not adjusted that. So, when you look at our price year-over-year, we did enter into some contracts in early or in mid year of ‘17 so some of the contracts we have got for ‘18 even though they were entered into in ‘17 were impacted by the markets that we were facing at that time. So, that’s one reason even though we have seen strength in the second half of ‘17 and we are continuing to see strength that we are not getting the uplift in our average sales price. Another factor is at Mettiki, where we do have a basin issue there, where last year we sold 745,000 tons of metallurgical coal. We only had 150,000 sold this year of the met coal and that is a significant price increase of what our average sales price is. So, that is a mix issue specific to answer to your question. We do think that we will pickup some more metallurgical coal in ‘18 but more likely not as much as we had in ‘17. So overall, I think as we look at our mix between our contracts and our longer term contracts, our legacy contracts and the more recent contracts, we do believe that that sort of reflects where the market is today and maybe there is some opportunity for upside there.

Okay. And then just last one kind of as you think about that as well, 85% contracted for this year, how much of that 15% is do you expect that to go into the international market, I mean, is most what you have left uncontracted to go into the international market or is that just on you are kind of holding up for potential domestic market?

There is, I would say, the majority of that is for domestic market that we have targeted that we know customers are going to be in the market to want to buy that. They have signaled to us a need, but they have not come to market to meet that need. So, most of that is targeted – the majority of that is targeted in domestic market, but some of that will also go to the international market.

Great. Thanks for taking my questions.

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

Alright. Could you just talk a little bit about the remaining process of simplifying the two entities in the press release you said 2018, but it sure seems like this is a simple process that could be over sooner and then you would pave the way for some of the other things you might want to do from a capital perspective?

Yes, I mean there is a process involved. The longest pole in the tent is probably potential timing around SEC review of the various filings, which is a little bit hard to predict. So, we will move through it as expeditiously as possible, but things like that are somewhat outside of our control from a timing standpoint.

Got it. And what timing do you have in mind to complete the required SEC filings at least from a submission standpoint?

First, obviously, we have to get final board approval, which hasn’t occurred yet. But, again, as I said we’ll move through it as quickly as we can and try to drive to the conclusion as expeditiously as possible.

Got it. And then on the potential M&A including outside coal, I appreciate the comment that selling coal utilities will remain your core business. Are there particular business lines that you are looking at or is it focused on building on some of the sort of small things you have in the business mix already?

Again, we are focused in those areas, in particular, the Permian on the stack, where we see good reservoir qualities and significant activity. And as that activity continues, there is going to be needs on the infrastructure and the services side to support the E&P drilling activity. So along that entire spectrum is where we will look and we do see opportunities that we might be able to take advantage out there.

Great. And then last question, so there is a story out, I think it was this morning over the weekend about how Chinese utilities are increasingly agitating for the Chinese government to do something about the rising prices in the seaborne and thermal market. Do you have an opinion on that or what direction that’s going and how it might impact your business?

We really don’t have an opinion on that, I read that as well. So they have enjoyed a very cold winter as well. So, demand is – prices are up, they need coal that’s positive. Again, I think that coal international market environment is very – it’s a very positive outlook right now. The global economy continues to show strength.

Great. Well, exciting to see you are taking advantage of that. Thank you.

The next question is a follow-up from Lucas Pipes with B. Riley FBR. Please go ahead.

Yes, thank you for taking my follow-up question. And I wanted to follow-up on the U.S. domestic market, in terms of 2018, 2019 and then maybe longer term looking out to 2020 and beyond, where do you see domestic coal burn, do you see it’s stable, rising, falling and if so due to what factors kind of what are the things you are having an eye on right now as it relates to the domestic market medium and longer term? Thank you.

I think the key issue is natural gas prices. So, as you look at the natural gas strip, I mean it’s showing $3 or somewhat, it’s going right around $3 whereas we are seeing more strength in the near term. I think there is a lot of belief that there is going to be a lot of capacity brought on and that does encourage I guess our customers to remain short in their buying habits as far as coal. We do again have conversations in our target, our 4 coal plants that we expect to operate for 5-year plan. And so we feel like we have got clear definition on the plants that you are going to run. Lot of those are going to running at similar capacity that they did in ‘17. There are some that may lose some demand if gas prices stay at the $3 level where we go down, but it’s something that you got to anticipate where gas prices are could be able to answer that question. What we are planning for is there sufficient at our size, there is sufficient demand. We believe that coal will remain in the 28% to 32% generation – coal-fired generation of the electric capacity of the country and it will be able to participate in that and be able to continue to grow our production in the 5% to 6% a year level if we continue to do what we need to do to solidify our relationships and long-term contract with those customers.

Yes, that’s helpful. Thank you. And then the new administration as you can still call it new has been I think very accommodative towards the industry over the past 12 months and kind of going forward from here what do you think is the most important initiative that the administration could be pursuing?

I think the resiliency issue continues to be an issue. I think there will continue be evaluation of that for even though they ruled against the BOE NOPR, they did also ask the markets to evaluate and report back on the resiliency issue with that 60-day timeframe I believe, so we are not still have discussion on that and I think that’s something we need to address. The second thing is the new source review provisions which would tie into the need to really focus on the long-term and our ability to build new coal-fired power plants. So number one, let’s protect the fleet. Number two let’s look to see if we can’t replace our older inefficient plants with newer efficient plants so that we can have lower cost energy that would still be environmentally acceptable. Countries around the world are building coal-fired power plants with new technology and most of those have signed the [indiscernible] and they are still building. So, there is no reason why we as a country, shouldn’t consider to do that as well. So, those would be the things that need to be addressed the 30 areas, the waters of U.S. that needs to be addressed and it will be, so those are the major things that the administration needs to focus on in my view.

That’s very helpful. Thank you. And last question and don’t want to sound like a broken record, but we are seeing a lot of different prices out there for Illinois Basin coal, in your opinion, domestic market 2018 contracts if you were to go out today what’s the reasonable pricing range to think about?

It’s a – we are better than we were a month ago or the quarter ago. So it’s great being anywhere from high, mid-30s to low-40s again depending on the quality or maybe even to the mid-40s depending on quality.

Average above or below 40?

Maybe at 40, maybe little better than 40, that’s right in that zip code.

Perfect. Really appreciate the detail. Thank you and good luck.

The next question is a follow-up from Mark Levin with Seaport Global. Please go ahead.

Thanks. Lucas asked the question that I wanted to ask, but I will ask another one related to price that has to do with netback prices for your exports and where those prices are when you are moving coal overseas, what’s the sulfur discount, I know you guys have done a good job in terms of maximizing or minimizing I should say the impact of sulfur, but how do the export prices today compared to the prices that you can get domestically?

The – for the higher sulfur coal they are comparable, maybe most recently our pricing has been a little bit better, both for our Gibson product as well as our higher sulfur coal. So what we booked for 2018, those numbers should come in and are slightly higher than what we are getting in the domestic markets. The domestic markets are catching up, so I will continue to believe that the domestic markets really drive the export markets market price in large part, in most cases now our exceptions to that, but in most cases, our pricing is driven off of our alternatives.

It makes perfect sense. And let me come back to a domestic question then from NAP Lucas asked the question for what you are getting from the Illinois Basin, how about for NAP, how – where are you seeing prices today, what’s the good way to think about, if you went out for term business, when your term business what you would get and how was that maybe changed over the last 3 to 4 months?

It’s continuing to move. And the challenge is when you have a fire advanced field and then that tonnage is – that demand is off the market, it impacts the market somewhat in the short-term until that demand scenario gets clarified. So I would say somewhere in the mid-40s would be a price for Pit 8 on a sustainable basis. We have seen prices higher than that, but recently they are in the mid-40s to high 40s, but on a sustainable contract basis, it probably be right in the mid 40 plus or minus a little bit.

Okay, that’s perfect. And my last question has to do with the railroads, obviously, the utilities have to worry about that as well, but just to kind of what you are seeing given all the weather, has there been much impact or things looking somewhere something close to normal, has there been any deterioration in railroad service?

2017, it improved significantly. So at the end of year things would run very well, January with the weather impact, it’s been very disruptive both for the rails and the barge. So, we have seen for in January some slowdown in deliveries just because of transportation constraints or weather-related problems, where cold gets frozen at railcar or the rivers are freezing and it’s hard to get barges to maneuver. So, they are fighting through that and doing as good a job as they can do. We don’t think it has any permanent impact, but it does disrupt shipments on a week-to-week basis.

Really just a timing issue there.

Yes, Brian, I was going to ask that, I mean should we – when we think about Q1 relative to other quarters is there going to be some, I mean obviously, we look at seasonality, but just because of the weather should we be thinking about that how we model Q1?

Right now, we believe it will not impact Q1. I think that’s subject to what the weather is going to be next week or the rest of the winter.

Right, right, sure.

Normal following and no major impact like we had couple of weeks ago and we should makeup those tons in the third quarter if there is another big blast that changes that dynamic obviously could impact.

Yes, I mean we do have sustained cold weather for another period of time, you could see it push a little bit into the second quarter, but what we have seen so far this year this month, we expect to makeup in the quarter.

Got it. Perfect. Great, thanks so much for all the time today.

You’re welcome. Thank you, all.

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, Anita. Good session this morning and thanks to everyone for your time and your continued support both ARLP and AHGP. Our next quarterly earnings release and call will be in late April. And we look forward to discussing our first quarter 2018 results and to updating you for our outlook for the balance of 2018 at that time. This concludes our call and thanks to everyone for your participating.

This conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.