Alliance Resource Partners (ARLP) Q3 2026 earnings call transcript

Thank you, Operator. Good morning and welcome, everyone. Earlier today, Alliance Resource Partners released its third quarter 2026 financial and operating results. We will review the quarter, discuss our outlook for the remainder of 2026, and then open the call to answer your questions. Before beginning, a reminder that some of our remarks today may include forward-looking statements which 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 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 assumptions prove incorrect, actual results may vary materially from those we projected or expected. In 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.

Finally, we will also be discussing certain non-GAAP financial measures. Definitions and reconciliations of the differences between these non-GAAP financial measures and the most directly comparable GAAP financial measures are contained at the end of ARLP's press release, which has been posted on our website and furnished to the SEC on Form 8K.

With that, I will begin with a review of our third quarter 2026 results, including the first full quarter of contribution from our Aldell 3 and 4 acquisition and discuss our updated guidance for 2026 before turning the call over to Joe Kraft our chairman president and chief executive officer for his comments before I get into the numbers one note on presentation beginning this quarter we redefined how adjusted EBITDA is calculated to include non-controlling interest and as a result we'll be reporting adjusted EBITDA attributable to ARLP, which excludes amounts attributable to non-controlling interests in Aldel 3 and 4 and Cavalier minerals within our oil and gas royalties segment.

Prior periods have been adjusted to conform to this presentation. Overall, results for the third quarter of 2026, which we refer to as the 2026 quarter, were higher on a year-over-year and sequential basis. Compared to the prior year, which we refer to as the 2025 quarter, total revenues increased 5.5% to $603 million. Net income attributable to ARLP increased 46.8% to $139.6 million, or $1.08 per basic and diluted limited partner unit, and adjusted EBITDA attributable to ARLP increased 26.3% to $233.9 million.

Compared to the second quarter of 2026, which we refer to as the sequential quarter, total revenues increased 9.3%, net income attributable to ARLP increased 75.5%, and adjusted EBITDA attributable to ARLP increased 26.4%. Net income in the 2026 quarter benefited from a $16.5 million increase in the fair value of our digital assets and a $6.3 million non-cash gain from remeasuring our previously held equity interest in Aldale 3 in connection with the Aldale 3 and 4 acquisition.

Partially offsetting these items were higher income tax expenses and a $7.3 million loss on derivative instruments assumed in the acquisition, of which $6.7 million was unrealized.

Income from our equity method investments was $12.8 million in the 2026 quarter, compared to $4.5 million in the 2025 quarter and $9.5 million in the sequential quarter. The increase was driven primarily by higher income and valuations by our investments in the Gavin Power Plant and the NGP Fund, both of which continue to perform well. As a reminder, results from these investments can vary from quarter to quarter as valuations change.

Turning to coal operations, sales volumes were 9.3 million tons, up 7.4% year-over-year and 9.2% sequentially. Segment-adjusted EBITDA increased to $186.8 million, up 18.6% year-over-year and 23.1% sequentially, as higher volumes and lower per ton expenses more than offset lower average pricing. Our average coal sales price per ton was $53.93 in the 2026 quarter, down 8.3% year-over-year and 1.7% sequentially, primarily due to a higher sales mix of lower-priced tunnel ridge volumes.

Segment-adjusted EBITDA expense per ton was $35.64, improving 13.1% year-over-year and 7.9% sequentially. The reduction in per ton expense more than offset lower average pricing, increasing the spread between sales price and segment-adjusted EBITDA expense to $18.29 per ton, from $16.19 per ton in the sequential quarter. In the Illinois Basin, coal sales volumes were 7 million tons, up 6.4% year-over-year and 10.5% sequentially, driven by the resumption of longwall production at Hamilton. Illinois Basin coal sales price per ton was $51.16 in line with comparable periods, while segment-adjusted EBITDA expense per ton improved to $31.77, down 10.2% year-over-year and 11.1% sequentially due to higher production at Hamilton and improved per ton cost at our Riverview Complex.

Illinois Basin's segment-adjusted EBITDA was $139.8 million, up 32.6% year-over-year and 34.1% sequentially. In Appalachia, coal sales volumes were 2.3 million tons, up 10.7% compared to the 2025 quarter, and up 5.7% compared to the sequential quarter on strong sales at Tunnel Ridge. Appalachia coalsales price per ton was $62.35, down 25.1% year-over-year and 1.9% sequentially, primarily due to the higher sales mix of lower-priced tunnel ridge volumes that I mentioned a moment ago. Segment-adjusted EBITDA expense per ton was $46.25, improving 19.9% year-over-year and essentially flat sequentially due to increased production at Tunnel Ridge and a higher sales mix of lower cost Tunnel Ridge volumes.

Shifting to our royalty segments, total royalty revenues were $87.5 million, up 52.5% year-over-year and 26.4% sequentially. and segment-adjusted EBITDA attributable to ARLP was $61.8 million, up 40% year-over-year and 22.8% sequentially. The 2026 quarter was the first full quarter, including Aldale 3 and 4 in our oil and gas royalty segment. Oil and gas royalty revenues were a record $59.8 million, and BOE volumes were a record $1.45 million, up 61.3% year-over-year and 54.9% sequentially, primarily due to the acquisition. Average sales price per BOE was $41.21, up 15.5% year-over-year, as higher realized crude oil prices more than offset the greater natural gas weighting following the acquisition.

Sequentially, average price declined 16.6%, primarily due to lower realized crude oil prices and a higher natural gas mix. Oil and gas royalties segment-adjusted EBITDA attributable to ARLP was $43.6 million, up 61.4% year-over-year and 16.8% sequentially. Coal royalties segment-adjusted EBITDA was $18.2 million, up 6.2% year-over-year and 40% sequentially, driven by higher royalty tons sold, primarily from Tunnel Ridge and Hamilton.

As of September 30, 2026, total debt and finance leases outstanding were $679.9 million, and our total and net leverage ratios were 0.89 and 0.78 times debt to trailing 12 months adjusted EBITDA attributable to ARLP.

Net debt which we define as total debt and finance leases less cash was million at September 30th compared to million on June 30th 2026 That increase of $116 million is well below the $206.2 million Aldale 3 and 4 purchase price we paid on July 1st. We ended the 2026 quarter with total liquidity of $430.8 million. Additionally, we held 673 Bitcoins, valued at $56.3 million at quarter end.

Our cash flow trends continued to strengthen during the quarter. Free cash flow was $198.6 million in the 2026 quarter. Distributable cash flow increased to $136.8 million in the 2026 quarter, up approximately 29% year-over-year and up 27% sequentially. Our distribution coverage ratio increased to 1.76 times, representing a significant improvement relative to comparable periods.

Turning to our updated 2026 guidance, with one quarter remaining in the year, we are tightening our guidance ranges. In coal operations, we now expect total coal sales volumes of 34.5 to 35.5 million tons, which raises the midpoint of our prior range, with coal sales price per ton of $54.25 to $54.75, and segment-adjusted EBITDA expense per ton of $37.50 to $38.50. In the oil and gas royalty segment, our tightened volume ranges reflect a slightly higher natural gas weighting following the acquisition of the Aldale 3 and 4 acquisition, and we have also tightened our consolidated guidance ranges.

Reflecting the consolidation of our Aldale 3 and 4, our consolidated guidance now includes ranges for both net income and adjusted EBITDA attributable to non-controlling interests, which are detailed in our press release. As is our usual practice, we expect to provide 2027 guidance with our fourth quarter results in February. And with that, I'll turn the call over to Joe for his comments. Joe?

Thank you, Kerry. Good morning, everyone. Thank you for joining our call today. We had an outstanding third quarter, led by strong shipments from our coal operations. Hamilton's returned to longwall production and solid operating performance at Tunnel Ridge and our Riverview complex. Segment-adjusted EBITDA, our coal operations increased 18.6% year-over-year and 23.1% sequentially, while segment-adjusted EBITDA expense per ton sold declined 13.1% year-over-year and 7.9% sequentially.

Additionally, as Kerry said, our oil and gas royalty segment results benefited from our first full quarter, including Aldel 3 and Aldel 4. Before turning to operations results, I wanted to take a moment to congratulate our mine rescue teams for their exceptional performance at the national mine rescue competition hosted in Tennessee during August. Members from our Alliance Coal Team took the stage 12 times during the awards ceremony this year, including individual recognition for national champion, a national runner-up, and three state team championships. On the production side, our coal operations teams delivered across the board.

At Hamilton, the long wall returned to production following an extended move, set monthly production records in July and August, and was our lowest cost operation in the 2026 quarter. That performance was the primary driver of a 10.2% year-over-year and 11.1% sequential improvement in Illinois Basin's segment-adjusted EBITDA expense per ton. Tunnel Ridge continued to deliver strong sales, helping hold Appalachia's segment-adjusted EBITDA expense per ton essentially flat sequentially and lower by 19.9% versus the 2025 quarter.

These improvements are the direct result of capital we invested in our operations over the past several years, leading to a lower cost, more reliable platform.

One additional development from the quarter involves our Metiki operation. You may recall we issued a WARN notice in the first quarter of 2026 in suspended mining operations. We are pleased to announce a new multi-year coal supply agreement with our largest historical customer that will allow the mine and nearly 150 miners to return to coal production operations. The mine has been transitioning from longwall mining to what we plan to be a two-room and pillar mining sections, two shifts a day by the end of the first quarter of 2027, to better align production with customer demand. As a result of winning this business, 2027 production from the Metiki mine is expected to be approximately 550,000 tons higher than 2026.

EBIT DOC spends per ton next year should be lower than 2026 as well. On the commercial side, domestic coal burn improved in the third quarter after a soft first half of the year. Sustained late summer heat drove record September power demand, and coal fire generation in September was up more than 40% year-over-year in PJM and roughly 25 to 33% across the Southeast, the Carolinas, and Tennessee. That burn drew Eastern U. S. domestic coal inventories down to slightly below last year's levels. Near-term solicitation activity remains measured as customers take a wait-and-see approach heading into winter, but we view that as a matter of timing, not a change in underlying demand.

We continue to convert this constructed market into contracted volumes. During the 2026 quarter, we added 4.2 million committed and priced tons through 2028, and we remain essentially fully committed at the midpoint of our 2026 sales volume guidance. with 31.7 million tons committed in price for 2027, which includes 700,000 tons to be shipped to meet Metiki's new sales commitment I just talked about.

We expect to enter next year with substantial visibility and the operating capacity to capture additional demand as commercial opportunities develop.

Export markets have become a more meaningful component of our sales portfolio with 3.7 million times committed and priced for 2026 and 3 million times for 2027. Export volumes have come in well above our expectations entering this year.

Seabourn thermal prices strengthened through the quarter with API2 rising from about $105 per ton at the start of the quarter to about $140 per ton by the end of September. And industry analysts have raised their outlook for U. S. thermal coal exports for both this year and next. Market conditions remain dynamic, and we remain cautiously optimistic that additional export opportunities could provide upside to our sales volumes next year.

Turning to the broader markets, we believe the fundamentals supporting coal demand continue to build. The electricity load in the markets we serve is growing, while permitting, interconnection, and supply chain constraints are slowing the pace at which new generation can come online. According to Inverness, GE Branova, the leading gas turbine manufacturer, is now sold out of new turbine deliveries until 2031. We believe this dynamic will extend the runway for the existing coal fleet. On data center demand specifically, the market is becoming more disciplined and we think that is a healthy development. Utilities and grid operators are increasingly counting only contracted, financially committed data center load in their forecast. Even on the stricter basis, the market still expects demand growth to be substantial and new generation is taking years longer to build than planned.

Both trends point to the same conclusion. The existing coal fleet will be needed longer, and running it harder is the fastest and most affordable way to serve that load. We expect the impact to become increasingly visible in our customers' coal burn as data center-driven demand materializes, with the more meaningful impact beginning in late 2027 and into 2028. Affordability is central to this discussion. We continue to see evidence that existing cogeneration remains cost competitive. One example is a recent Indiana study by Always On Energy Research, which concluded that existing coal plants become increasingly cost competitive the harder they run, and 75% of the state's coal plants could produce electricity more cheaply than the new combined cycle gas.

The same analysis found that Indiana's existing combined cycle gas fleet already ran at 83% utilization in 2024, leaving limited room to serve new load, which makes the existing coal fleet well-suited to meet incremental demand.

Federal policy continues to recognize the value of the existing coal fleet and the administration continues to take the steps necessary to protect it In September the EPA finalized a rule repealing most of the 2024 greenhouse gas standards for power plants, including the carbon capture requirements for existing coal units and proposed repealing the remaining standards. More broadly, there is growing recognition among all stakeholders that leadership and Artificial intelligence and the security of the grid are national security priorities for our country, and both depend on abundant, reliable, and affordable electricity.

Taken together, we believe these actions support extending the operating lives of existing coal plants as critical grid resources. Turning to oil and gas royalties, I want to briefly highlight our record results, which included the first full quarter with the Aldell 3 and 4 acquisition. As we continue to scale the portfolio, oil and gas royalties is contributing a more meaningful share of AROP's consolidated free cash flow, highlighting the growing importance of the segment within our overall business. If today's higher crude oil prices remain elevated, we could be in a position to have another record quarter to finish the year.

We are also excited to increase our exposure to gas-weighted resource plays in the Hainesville, given the long-term tailwinds from LNG exports and power demand. Going forward, we will remain disciplined in reinvesting the after-tax cash flows generated by the oil and gas business in existing regions that meet our risk-adjusted return thresholds. That concludes our prepared comments, and I'll now ask the operator to open the call for questions.

I think that we had just continued conversations of the importance of our operation to their security of supply. As they look at their demand for electricity caused by the data center contracts that they've signed, They've spent quite a bit of time looking at capital improvements at the Mount Storm plant. And through just continued conversations, I think they recognize the value that we bring by giving them sustainable coal production at a level that, if we weren't there, would make it a lot more risky for them. So, we appreciate their trust in us, and we really are excited to be able to provide opportunities for the miners in that region. And we do believe that even though it's not at the scale we would like, by converting to a continuous miner operation, it will give us a little bit more opportunities to participate in the export met market.

because we can be a little more selective in mining the seams that gives us a better quality product to access the export market at a met market so like I say you know it's great that we've got the additional volume we can keep the mine open and we do believe that that will improve our results in in 2027, as we did have some loss in 26 while we were waiting for this contract to materialize.

I think that as you look to the fourth quarter, it should be comparable, and it is normal in that sense. But as you look at 27, given the fact that Hamilton was down half the year, we should see improvement in 27 relative to 26.

We have potential with the export market that gives us some more demand next year that we could expand the volume a little bit more. So we do have some excess capacity if the market would allow us to do that. And if we do have that ability to mine a few more tons, you know, that could help our costs as well. So we feel very good that we can maintain costs at the level we are, you know, with inflation pressures that are occurring throughout the supply chain.

So, again, it's a tribute to our operations for their focus on productivity and being a low-cost producer.

Thank you.

In answer to your latter question, no, we don't need to make any additional investments or operational changes to be in a position to produce more. The price, the reason I feel somewhat optimistic is the price curve is very constructive for export shipments. However, we are facing some logistical headwinds. Barge capacity has become very, very tight due to aggregate movements that are necessary for Elon Musk's project down in Louisiana. that sort of we're competing, I guess, for barges in the Onoay Basin that could impede our ability to grow beyond where we are.

And also the increased cost in both Ocean Parade as well as the barge business is eating up a lot of the margins that historically when we've talked about 125 is sort of a threshold. So we'll have to see that stabilize a little bit. But the real key is can we get the tons outside the country? So if we can clear up some of the logistical issues, we're pretty confident that we could exceed our volume this year maybe by a half million or a million tons.

Yeah. So, again, it varies by operation. If we go to Hamilton, it has a sulfur discount to it. If we go to Gibson, it's pretty consistent with what the domestic markets are, and the discount varies by customer by customer. So I prefer not to talk about that, given the fact that we're continuing to negotiate with our training partners on that.

We think we could expand it another couple hundred thousand tons beyond the Dominion contract. The Dominion contracts for 700,000 tons next year. So, we feel like it's possible we could have 150,000 to 200,000 tons in the MET market.

Thanks, Dave.

Yeah, Mark, on that one, as I mentioned in my remarks, those two investments continue to perform well. If you look at that total number there, about 85% of that was associated with GAVIN. Our investment there, the remaining piece of it would be the NGP investment. Both those investments continue to perform well. really hard to predict predict you know what that that number is going to be on a quarter to quarter basis for you know we're invested in funds there so we're subject to fund fund investment accounting there so that that kind of gets revalued you know really at the the end of each quarter you know kind of the way that that we look at it and you know some of our past guidance where we've talked about three million of distributions we kind of we kind of focus on the distribution number that comes out of it.

Now, the distributions have been strong the last couple of quarters, 8.5 million this quarter. I think it was 10.7 the quarter before.

We still think, as we look at that, kind of that 3 to 4 million per quarter is just a good number to count on. That's kind of how we look at it in terms of distributions coming in. What that earnings is going to bounce around there, and that's really hard to project. But that's kind of how we look at it. And so, you know, we kind of count $3 to $4 million per quarter just in terms of cash distributions coming in.

Yeah, I think we'll definitely continue to focus on making acquisitions. I mean, our focus is to continue to reinvest that cash flow that we have within that business there. I do think when you look at volume growth, I think even if we didn't make acquisitions, you would continue to see volume growth associated with our existing assets that we have there. So we're very optimistic in terms of what the volumes will be for us next year in terms of looking at the year-over-year growth. We're right in the middle of doing our reserve studies for the fourth quarter right now. So when we get to February and we talk about what our guidance is there, we'll have a pretty good handle of it at that point in time.

But, you know, we should see some pretty good volume growth next year just because, you know, from the fact that we'll get a full-year benefit from our Aldale 3 and 4 acquisition as well. And we are seeing privates invest back to your theory. With these high prices, there are people that are going and trying to increase their volumes to take advantage of that higher price environment.

Thank you, Mark.

I think, you know, as we reopen, you know, we don't plan to, I mean, we'll do some investments in equipment, but it's not really going to change what that carrying value is on the balance sheet. So that number will continue to remain where that is. We are, you know, making investment. We did write it down to the point where most of the assets on the balance sheet are mobile type assets there. So don't really anticipate any additional adjustments in terms of balance sheet adjustments at this point in time associated with restarting the operation.

No, I mean, the debt facility, so we did two things to fund that acquisition. We did draw at the end of the last quarter on our existing revolving credit facilities for about three quarters of that total transaction. We did enter into a new $150 million short-term debt facility at Minerals. So that's an 18-month facility. We do anticipate amortizing that down on a quarterly basis. And so we made our first quarterly payment right at the end of September associated with that. So we will use the minerals cash flow to pay that facility down. We will still have a good amount of additional cash flow over and above that to continue to invest in additional minerals assets.

And financing markets are very supportive of this asset class. And so there is additional debt capacity. So in the event we see a more sizable type acquisition other than, you know, just funding out of cash flow, there could be opportunities to enter into, you know, other facilities or continue on with this facility as well to support that growth.

I'd say we would more than likely be keeping our power dry on that. We've got several things that we're considering. If the deal flow is there for minerals, I think we would continue to invest in them like Carrie just said we could potentially go higher than what their net cash is and yeah so we're we're looking at other opportunities to how we could you know what the capital allocation would be but I think right now we want to stay at the 1.5 coverage ratio or greater and I think that's a target that we must sustain beyond one quarter before we would consider increasing distribution.

Thank you, Michael.

Thank you, operator. To everyone on the call, we appreciate your time this morning and also your continued support and interest in Alliance. We expect to report fourth quarter and full year 2026 financial and operating results in early February and look forward to speaking with you then. This concludes our call for the day.