Good day, and welcome to the Alliance Resource Partners Fourth Quarter 2018 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. I would now like to turn the conference over to Mr. Brian Cantrell, Senior VP and Chief Financial Officer.

Thank you, Sean, and welcome everyone. Earlier this morning, Alliance Resource Partners released its 2018 fourth quarter and full year earnings, and we’ll now discuss these results as well as our outlook for the balance of the -- for the upcoming 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 that are 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 providing these remarks, the partnership has no 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. I would also like to remind everyone that we will 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 now out of the way, I'll begin with the review of our 2018 results and then turn the call over to Joe Craft, our Chairman, President and Chief Executive Officer, for his perspective on the markets and ARLP's outlook for 2019. On the strength of higher coal sales volumes and prices, ARLP’s revenues increased in both the 2018…

Thank you, Brian. Good morning, everyone. Alliance entered 2018 with expectations for growth in operating and financial results. And as Brian just outlined, we delivered on those expectations, achieving record coal sales volumes at higher price realizations and posting year-over-year increases to coal production, revenues, net income and EBITDA. These results reflect the dedication of our employees and their daily focus on executing ARLP’s strategic objectives and priorities. Through the efforts of our operating team, we reopened the Gibson North mine and added a production unit at our River View mine, increasing ARLP's year-over-year production volumes by more than 7%. Increased production supported the efforts of our marketing team to capitalize on positive coal market fundamentals. We achieved record sales volumes in 2018, driven primarily by significant expansion of ARLP's presence in the international thermal and metallurgical coal markets with the year-over-year shipments to those markets increasing by 4.6 million tons to 11.2 million tons or approximately 27.8% of our total 2018 coal sales volumes. As we enter 2019, our teams remain focused on growth. For our coal business, market fundamentals remain favorable in the U.S. and abroad. A strong winter heating season across our market territory has increased coal burn and reduced stockpiles, allowing ARLP to expand and strengthen its domestic contract position. Internationally, we currently are planning export volumes in 2019 to be 10% higher than 2018. Our strategically located low-cost mines have allowed ARLP to already secured volume and price commitments for 2019 deliveries of approximately 36.8 million tons, including approximately 8 million tons of export shipments this year. Benefiting from positive market fundamentals, ARLP estimates coal production and sales volumes will grow in 2019 by approximately 10%, each at the midpoint of our guidance. To support this growth, ARLP plans to invest approximately $40 million to…

[Operator Instructions] Our first question comes from Mark Levin with Seaport Global. Please go ahead.

Hey. Thanks and congratulations on another really good quarter. Couple of quick questions; a few of them are for modeling purposes. So, maybe a production bridge; I think you mentioned 10% for shipments and production from 2018 to 2019. Can you bridge this in terms of the specific numbers that you would expect out of each mine getting us from ‘18 to your ‘19 number?

Most of that will come from Gibson. So, we just added another there, at our Gibson North operation. And Tunnel Ridge is expected to have some increased production of about 0.5 million tons in 2019 compared to 2018. And then, the balance will be out of River View. So, if you think in terms of 2 million at Gibson and 1.5 million at River View and 0.5 million at Tunnel Ridge, that should make up 10%.

And then, I think you mentioned the CapEx spread, so $40 million to $45 million at River View and Gibson, and then another $40 million to $45 million at Excel. Is that right? That’s the bulk of it, ‘18 to ‘19?

That’s the expansion, on top of maintenance capital.

Got it. That’s perfect. And then, the next question has to do with -- I think you mentioned oil and gas, and obviously growing that business and hiring a team of people or having people allocated to growing that. I think it's roughly 5% to 6% of you EBITDA now, Joe. How do you -- you mentioned growing it as a percentage of the total. Is there an optimal mix? How quickly do you think you can grow it and what does that mix ultimately look like?

We are focused on growing that. I mean, we want to maintain a conservative balance sheet. We do need to get our team in place, I think by having this ownership directly and the reserves, it provides more options for us in how we can grow that. So, we need to assemble this team as quickly as possible, and that was defined the fact that effectively how fast we can grow in 2019. But, we don’t have a specific target. But, we just look for attractive investment opportunities. And we believe that based on our investment to date from 2014 till today, we've been able to get attractive returns off our investments and we’ll just continue to look at that. But by having our own team and being able to be open to multiple ways, to grow it, we would anticipate a good opportunity to see increased opportunity to participate in that space.

And then last question and I'll leave it for someone else. But, pricing in 2020, I think, you've got roughly 40% plus or minus of the book priced. Any just sort of directional color in terms of where that is relative to your ‘19 guidance?

For 2020, I would say that it is an increase relative to 2019 on the domestic book, all that's domestic. So, for the volume that we've been able to contract over multi years, we have been able to see an improvement in the second year of the contract, compared to the first. So, for 2020, that domestic book should provide higher results than the 2019. As far as filling out that book, it's a little bit too early to tell exactly what they are -- where the market is going to be in 2020 compared to where it is in 2019.

Yes. And just to clarify to you Mark, I think at the midpoint of our 2019 guidance we’re about 83% pricing committed, you were talking in 2020 on the….

What I was hearing in here.

Yes.

Yes, that's right.

I just wanted to make sure everybody heard what I was talking to.

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

I wanted to follow up on the oil and gas side. Obviously, these oil and gas mineral interests tend to trade at a very different multiple from coal. And I wanted how quickly you expect to see that reflected in your stock price? And if you don't, what rates could you explore to crystallize that value?

We agree that if you look at how the oil and gas minerals public companies trade, there is a significant improvement [Technical Difficulty]. So, we're hopeful by showing a new segment, in 2019 we’ll be able to highlight exactly where we are growing and area, that should allow for better communication. [Technical Difficulty] the improvement in unit price to reflect the growth in that segment.

Okay. That’s helpful. Thank you. And I know Mark was asking about growth in that segment. Any rough number that you could give, kind of year-over-year ‘20 versus ‘19?

Right now, in our capital budget, if we’ve given guidance for capital, there is no money in there for minerals. So, we really need to get our team in place, which hopefully we can get done by the end of the first quarter. I think that will give us better guidance, so as to how fast we can deploy capital, we’re extremely focus on that. It’s hard to [Technical Difficulty] based on the capital that we have invested [Technical Difficulty] we should see the [Technical Difficulty] almost doubled the EBITDA in 2018. So, you can see that as you would look to 2020, even though we don't get guidance out; that shows continued improvement just with what we have purchased that we announced earlier in January. So, we do anticipate growth off of the reserve we own today. As we’ve mentioned, [Technical Difficulty] so that will be an attractive growth opportunity for our Company.

That's very helpful. Thank you for that color. And then, one last one on the coal side. Obviously, you commented on the strong heating season this winter. Outside of that, what’s your sense for the market over the course of 2019? And maybe also looking into 2020, where utilities head these days, are they looking to putting longer term contracts and where do you see pricing for longer term price commitments, both in the Illinois basin and northern Appalachia? Thank you.

On the international side, we anticipate that market to still be available to us. We’ve positioned ourselves to grow in that market. We continue to see pricing, even though it’s falling of the last quarter, we think that’s relative to certain transportation interruptions. And we anticipate that price curve will in fact get -- be more attractive as the year moves on in ‘19. And we see no real added supply in the international market coming on, yet we do see continued growth in that market. So, we feel very confident that the international market can provide growth to us, both margin as well as volume. On the domestic side, we anticipate that domestically in our market territories, over the next five years say, production -- demand will be relatively flat. We will probably lose some demand over the next two years, in the 10 million ton range. So, there will be some shortfall there. But for the plants that we have targeted, we see very-stable market opportunity for us. Some of these customers have talked about longer term, we executed some in 2018. The pricing was attractive compared to the year ago. The longer term for the term contracts, there was some -- they did not reflect the spot markets. So, there was some reduction as to what you would see on the price curve for the spot market. But, I feel like the market pricing is very attractive relative -- to allow us to have strong margins and yet still be competitive with whatever natural gas curve you could see down the road. It's hard to predict exactly where that's going because it's really so dependent on natural gas and weather. But, we see a step change, if you will, from 2018 to late 2016, early 2017 where those utilities that are committed to coal, realize the importance of having their producers be able to plan and make capital investments to sustain their production to where I think we've reached some type of a realization that will provide for predictability in our cash flow. Even though we're not getting contracts, we're getting definite signals on volume and the pricing will be dependent on whatever happens in the marketplace, whether it'd be how exports influence domestic pricing, how gas prices affect that pricing as well as what the weather is going to be. So, we feel good about it. We're projecting revenue on a consolidated basis to be relatively stable over the five-year planning horizon.

That's very helpful. I appreciate all the color and best of luck.

[Operator Instructions] Our next question comes from Nick Jarmoszuk with Stifel. Please go ahead.

Following the AllDale acquisition, can you talk about how you think about the use of additional debt to fund acquisitions?

I mean, we've obviously as a company have very conservative balance sheet, right at about 1 times, 1.1 times trailing today. We have significant cash flow coming out of the assets on the oil and gas side as well as our coal cash flows. We've always maintained a conservative balance sheet and primarily growing through using internally generated cash flow and modest levels of debt. So I don't think you would see us necessarily levering up to go pursue oil and gas activities. I would expect us to maintain our past practices of approaching it in the way that I just described.

There's always a chance for M&A transaction that could expand that. We're always looking, there's nothing on the horizon, but I agree with Brian relative to normal activity. We'll be in that 1 times area. But, we could expand that if the right opportunity comes along.

And aside from targets in the oil and gas space, is there anything in the coal arena that’s interesting or compelling to you, guys?

Again, there is nothing on the horizon. We will continue to be open to opportunities, but we’ve given you our capital that we plan to spend. Once we spend this capital, we don't anticipate any real capital needs for our own operations to be able to sustain and maintain the production level that we are targeting in 2019. But, we will continue to be open to opportunities to grow and expand in that area, but there is none on horizon.

And then, regarding the contracting environment, obviously it sounds a lot better than a couple of years ago. Could you talk about what sort of duration contract opportunities you have? Is it still in the one-year timeframe or are some of your customers open to longer-term contracts?

On the domestic side, most are one year, some have expanded two and three years, and we are in conversations with couple right now for two or three years. But most are in the one -- still more comfortable on the short end of the commitment scale than longer term. And the international markets, they are all one-year or less, internationally.

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

Brian, you mentioned revolver draw. Was there any balance on either the Cavalier facility or the AR securitization facility at year-end?

Yes, I think we had -- on Cavalier, no. We have had that facility available, but have never taken a drawing against it. On the AR securitization, I think we had a little over $90 million outstanding, maybe $92 million or so.

All right. So, the 92 number on your current capital -- excuse me, I'm looking at the wrong line, current maturities long-term debt on your balance sheet, that’s out of the securitization facility or the revolver?

No. T he securitization facility is 364-day facility by nature. So, it’s always short-term. On the long-term side, you have a combination of our $400 million bond offering, as well as some remain -- you see a long-term capital leases are broken out as a separate line item.

And then, what was the revolver use at year end?

$175 million, we drew down -- we had no drawings prior to preparing for the AllDale transaction, and we drew down an amount that was close to that level.

So, at yearend, you had, call it 175 on the revolver, 92 on the AR facility and then the 400 in notes.

Correct, as well as I...

Of course the cap leases. Right, the cap leases. Okay, excellent. Thanks, I appreciate it.

You bet.

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

For your export business, can you talk about which areas you sell your coal during 2018? And what do you think in 2019, the dynamic should be the same?

The orderings primarily were going into Europe, also into Africa and then into the India, those are the highest percentages. I think, in total, we sold to in the 31 different countries, but the three regions that I've just mentioned are predominantly where we've been transacting.

And in 2019 you think, they will actually be similar?

I expect it to be similar. Yes.

And also for the oil and gas business, so I just want to hear what's your outlook for the market? Because we know there are lot of companies including private equity money are chasing this market. How do you think the market -- the valuation there and what are the valuation metrics you in general use to evaluate deals?

It obviously is a highly competitive market and it's a large market. I think I've seen estimates of $500 billion type market in total, highly fragmented. Lin, as we've done in the past, we view those types of specific acquisition metrics as being proprietary. We're always going to be looking to deploy capital in a way that's attractive, accretive and gives us attractive returns. And the circumstances in terms of what metrics you use vary. If you're buying acreage that's not yet producing a little bit ahead of the drill bit, that's sort of different metric than if you're buying acreage that has more cash flow associated with it. So, it depends on what the opportunities are to present themselves and the mix of what we do as we look to grow the business.

Are you focused on producing area or you are focused on the like undeveloped area?

Historically, we have been focusing more on ahead of the bit. As Joe has mentioned, once we assemble our own team to determine how we best grow this business going forward, that will -- that mix may change.

Our next question comes from Dan Finney, [ph] private investor. Please go ahead.

So, I have been reading different articles about the importance of coal as a stable load, energy source, diversifier, and also about improvements in clean coal burning technology, i.e. scrubbers and whatever other technology contributes to that. And yet, I see very little coverage of that. And I'm wondering, if you've considered at all partnering with some utilities or promoting the technology, the clean burning technology, the people that make that equipment, I don’t know if it’s GE or who, but somehow sponsoring or partnering with utilities and making the argument that that coal is not only -- can be a clean energy source but that is an important energy diversifier as we’ve seen in Europe with -- and even here in the United States where we’ve had bottlenecks or potential shortages of natural gas due to pipeline issues or distribution and that kind of thing. So, I’m just trying to scratch my head as to why there's nobody making the case for coal being a much more clean and much more vital energy source in the United States and no projects to possibly compete with new gas plants.

Thank you for that question and it’s an astute observation. We do have efforts ongoing to make that case; most of those have been targeted to the actual consuming regions where coal makes up greater than 50% of a particular state’s energy resource. I think you will see more and more conversation about that as each of these states start to implement their compliance with the new regulation out of the Obama -- excuse me, out of the Trump administration, after Trump did repeal Obama’s clean power plant. So, that decision as far as what the energy mix for each stake will be now made by the states and there will be a lot of discussion about that over the next 2 to 3 years. Our National Mining Association just this week issued a press release with the study that goes into great detail on the technology that's available to allow for coal-fired generation to not only continue but for opportunities for future investments to allow for reduced emissions. We are at a disadvantage because the mainstream media just does not want to pick up anything positive at all, on coal. And so, we are at a disadvantage. So, we have been trying with a strong effort at both NMA and at our ACE which is for clean coal technology. We pride to make that case and we’re going to continue to make that case, and we’ve done everything except national advertising campaign. We tried that earlier at some point in time 10 years ago and it really did not register much gain. And so with resources we have, we’re trying to target our communication efforts to those regions of the country that still depend heavily on coal and also for their industrial base, their manufacturing base that need for that low-cost energy. We do believe strongly that coal can be and is the most economical energy providing fuel for energy consumption and we also believe it can affect the concerned with the efficient methods today. It allows for lower emissions. And we’re out there trying to do what we can do. But, it's sometimes difficult to get the mainstream media to print anything positive, and we will continue efforts in that regard.

Yes. That has been very clear as far as the bias in the media because I’m reading as much as I can on this. And not only has there been a lack of reporting, but there's some contradictory reporting. And I really appreciate taking the time to articulate that. But, one other question is related to Europe and Germany. My understanding was last year, they ran dangerously low on natural gas reserves and they had a cold winter and luckily that was short. But, now, I'm reading that Germany has made a statement about trying to be coal-free by 2038 or something like that. And yet, they have to my understanding a pretty precarious energy mix as far as being able to support any kind of cold, long winter. I just wondered if you have any comments on that.

Right. So, they -- several countries in Europe have made claims that they are going to cut back and then they realize that the cost to be competitive does not allow them to sustain the commitments they make. So, I think part of Germany's push here is one, to push it further out to where there's not anything immediate that impacts their ability to compete in the global economy as they're a producer of products and good. Another element of that announcement is that they've huge payoff to people. And I don't really know the details but they're talking about billions of euros that will go into pockets of some people. So, that may have influenced some of that policy. Don't know for sure. But, I think, there's no silver bullet to replace coal with an energy source that's going to be as reliable, as low cost, as dependable that gives you the resiliency to the grid than coal. And so, for those countries that elect to make these political decisions, it's precarious for them to do so because they're just increasing the costs or increasing their dependence on other sources. And obviously that's their choice to make. But, we continue to believe strongly that we've got very stable coal demand within our market areas through 2035, 2040. But, it's hard to predict. The main issues for the American markets are the age of our existing plants. So, I think the bigger issues by 2035, 2040 timeframe will there be that awareness that you're talking about that will permit new coal fired generation to be constructed. So, there is efforts [Technical Difficulty] countries that are actually building plants today, we’re seeing tremendous growth worldwide in coal plants. And that technology is available to where we should be thinking about that and making investments in coal as well as any of the other generating technologies that are out there.

Our next question comes from Matthew Fields with Bank of America Merrill Lynch. Please go ahead.

Two questions for me. One, thanks for the breakdown of your exports. Within Europe as one of your largest export destinations, is Germany a large portion of that European export total?

Yes.

And then, more broadly speaking, I understand that you are frustrated that the stock may not be trading as well as you wanted to and you may be getting slightly more aggressive on maybe purchasing more oil and gas interests and whatnot. Is there a upper bound to which you will sort of not let leverage go above? Is there still a sort of target leverage range in which you don't want to sort of let the balance sheet get out of hand at some point?

Yes. As we have said in the past, depending on the opportunity, we could expand our leverage. We would be more comfortable in doing that if we had a clear path to bringing it down to something more in the 1.25, maybe 1.5 times range long-term. But, as I said in my comments, we do view our conservative balance sheet as a strategic advantage and we don't intend to step out to put our overall franchise at risk with leverage.

And I would just add that absent some M&A transaction that we find attractive in normal course, I mean, we are -- I would not anticipate us to go greater than 1 times. So, if you look at our plan for 2019, assuming we come in at what our expectations are, we’ll be back down to 0.8 by the end of the year. So, we will stay in that ZIP Code of 1 times unless there's something that we find attractive that needs to be a strategic step that might be some opportunity that we can execute on that would allow us, as Brian just said that still run back towards the 1 times coverage ratio.

And just to clarify that 1 times is gross, not net of cash?

It’s total debt. Yes.

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

Thank you, Sean. We appreciate everyone's time this morning as well as your continued support and interest in Alliance. Our next quarterly earnings release and call will be scheduled for late April, and we look forward to discussing our first quarter 2019 results with you at that time. This concludes our call. Thanks to everyone for your participation.

Thank you for attending. And you may now disconnect.