Executive Summary / Key Takeaways

• Alliance Resource Partners (ARLP) is strategically positioned to capitalize on surging electricity demand, driven by AI and data centers, and a supportive regulatory environment favoring baseload generation, reinforcing its core coal business.
• The company's significant investments in mining automation and infrastructure, particularly at Hamilton and Tunnel Ridge, are yielding tangible benefits in productivity and cost reduction, enhancing margins and free cash flow visibility for 2026 and beyond.
• ARLP's diversified portfolio, including growing oil and gas royalties and strategic investments in energy infrastructure like the Gavin power plant, provides multiple revenue streams and financial resilience against commodity price volatility.
• Despite a projected decline in average coal sales prices for 2026 due to the roll-off of legacy contracts, management anticipates maintaining margins through substantial cost savings and increased production volumes, particularly from Appalachia.
• A strategic reduction in the quarterly distribution, while seemingly counterintuitive, aims to strengthen the balance sheet and provide flexibility for accretive growth opportunities, aligning with a long-term capital allocation strategy focused on attractive after-tax returns.

A Cornerstone of Energy: ARLP's Strategic Evolution and Technological Edge

Alliance Resource Partners, L.P. (ARLP) stands as a diversified natural resource powerhouse, firmly established as the second-largest coal producer in the eastern United States. Since its inception in 1999, ARLP's core strategy has revolved around maximizing the value of its extensive mineral assets, encompassing both coal production and the leasing and development of its coal and oil and gas mineral ownership. This foundational approach has evolved, positioning ARLP as a reliable energy provider for the future, actively pursuing opportunities that bolster energy and related infrastructure.

The company's strategic journey reflects a proactive response to evolving energy landscapes. While rooted in coal, ARLP initiated a Bitcoin mining operation in 2020 to monetize underutilized electricity load capacity, demonstrating an early embrace of technological diversification. Further expanding its horizons, ARLP made strategic equity investments in companies like Infinitum Electric, Inc. (electric motor manufacturing) and Ascend Elements, Inc. (battery materials), alongside a commitment to NGP Energy Transition, L.P., a private equity fund focused on the lower carbon economy. In a move directly addressing grid reliability concerns, ARLP committed to invest in Gavin Generation Holdings A, LP in February 2025, indirectly acquiring a coal-fired power plant in the PJM service area. These investments underscore ARLP's commitment to a broader energy future while leveraging its core competencies.

A critical differentiator for ARLP lies in its continuous investment in advanced mining technology. The company has deployed automated longwall shields and shear automation at its Hamilton mine, a technological advancement expected to significantly enhance productivity, reduce the number of personnel required on the face, and minimize maintenance demands. This focus on operational efficiency is further exemplified by the successful transition of the Tunnel Ridge mine to a new longwall district in the third quarter of 2025. This move, driven by improved geology and mining conditions, resulted in a notable 8.8% reduction in the mine's cost per ton sold compared to the third quarter of 2024, and a 19.3% sequential improvement. ARLP's Matrix Design Group subsidiary further extends this technological edge, offering mining technology products and services including data network, communication and tracking systems, mining proximity detection systems, industrial collision avoidance systems, and data and analytics software. These technological advancements are not merely incremental improvements; they form a core competitive moat, enabling ARLP to operate more safely, efficiently, and cost-effectively, directly contributing to stronger financial performance and a more resilient market position.

A Shifting Energy Landscape and ARLP's Competitive Stance

The broader energy market is undergoing a profound transformation, creating both challenges and significant opportunities for ARLP. The rapid expansion of artificial intelligence (AI) and data centers is driving an unprecedented surge in electricity demand, with analysts projecting 4% to 6% annual growth in PJM and other markets ARLP serves over the next several years. The White House now forecasts U.S. electricity demand to rise 16% over the next five years, a threefold increase from forecasts just a year ago. This dramatic load growth, coupled with an increasing focus on grid reliability, has fundamentally reshaped utility planning.

In this environment, baseload power generation, including coal, nuclear, and combined-cycle gas plants, is recognized as essential. The recent PJM capacity auction, clearing at maximum allowable prices with every megawatt of coal capacity selected, clearly demonstrated the grid's need for dispatchable generation. This trend is further supported by a more favorable regulatory environment under the current administration, which has issued executive orders aimed at preserving America's coal fleet and delaying premature coal power plant retirements. These policies are expected to lead to the extension of 10.6 gigawatts of coal plants previously scheduled for retirement by the end of 2027, representing an additional 23 million tons of coal demand per year.

ARLP operates within a competitive landscape dominated by other major U.S. coal producers such as Peabody Energy (BTU), Arch Resources (ARCH), CONSOL Energy (CEIX), and Alpha Metallurgical Resources (AMR). While Peabody's scale and Arch's metallurgical expertise present formidable competition, ARLP's geographic diversity across the Illinois Basin and Appalachia, combined with its integrated operations and technological services, provides a distinct advantage. ARLP's focus on operational efficiency through automation, as seen at Hamilton and Tunnel Ridge, allows it to maintain competitive costs and potentially achieve superior margins compared to rivals. Its diversified revenue streams, including significant oil and gas royalties, offer greater financial stability than more coal-pure plays.

However, ARLP is not immune to competitive pressures. Indirect competitors, including renewable energy providers and natural gas producers, continue to vie for market share, driven by environmental concerns and technological advancements. ARLP's reliance on coal demand, despite the current supportive environment, remains a long-term vulnerability. Nevertheless, high barriers to entry in the coal industry, such as access to extensive reserves and complex regulatory approvals, help ARLP defend its market position. The company's strategic investments in energy infrastructure and mining technology further enhance its competitive moat, allowing it to adapt to evolving market dynamics and maintain its relevance as a critical energy supplier.

Financial Performance and Operational Resilience

ARLP's financial performance in the third quarter and first nine months of 2025 reflects a dynamic market, characterized by both challenges and strategic adjustments. For the three months ended September 30, 2025, total revenues decreased by 6.9% to $571.4 million compared to the prior year, primarily due to a 7.5% decline in average coal sales prices, a consequence of the roll-off of higher-priced legacy contracts. This was partially offset by a 3.9% increase in coal sales volumes, driven by strong performance from the Hamilton and River View mines. For the nine months ended September 30, 2025, total revenues decreased 10.7% to $1.66 billion, with coal sales declining to $1.47 billion from $1.61 billion in the prior year period.

Despite revenue pressures, ARLP demonstrated strong operational cost control. Segment Adjusted EBITDA Expense for coal operations decreased 8.8% to $359.3 million in the third quarter of 2025, with the per-ton cost falling 11.1% to $40.99. This improvement was largely attributable to increased production, improved recoveries, and reduced longwall move days at key operations like Hamilton and Tunnel Ridge. Labor, materials, supplies, and maintenance expenses all saw significant per-ton reductions. For the nine-month period, Segment Adjusted EBITDA Expense decreased 5.1% to $1.06 billion, with per-ton costs down 5.5% to $41.63.

Profitability metrics, while impacted by revenue declines, showed resilience. Net income attributable to ARLP increased 10.2% to $95.1 million, or $0.73 per unit, in the third quarter of 2025, benefiting from reduced operating expenses and higher investment income. However, for the nine-month period, net income attributable to ARLP was $228.5 million, or $1.76 per unit, down from $344.5 million in the prior year, primarily due to lower coal sales, higher depreciation, and a $25 million impairment loss on the Ascend Elements investment. Segment Adjusted EBITDA for the third quarter rose 7.8% to $207.2 million, though the nine-month figure decreased by $84.8 million to $570 million.

ARLP's diversified segments contributed variably. The Illinois Basin Coal Operations saw a slight decrease in Segment Adjusted EBITDA, while Appalachia Coal Operations experienced a significant 44.2% increase in Segment Adjusted EBITDA in Q3 2025, driven by reduced operating expenses following the Tunnel Ridge longwall move. The Oil & Gas Royalties segment's EBITDA decreased slightly due to lower average sales prices per BOE, despite higher volumes. Coal Royalties, however, delivered a robust 54.5% increase in Segment Adjusted EBITDA, benefiting from higher royalty tons and rates.

Liquidity, Capital Allocation, and Forward Outlook

ARLP maintains a robust financial position, with total liquidity of $541.8 million and $94.5 million in cash as of September 30, 2025.

The company's Bitcoin holdings, valued at $64.8 million, represent an additional liquid asset, with management adopting a strategy of holding rather than selling to cover expenses in early 2025, influenced by the current administration's supportive stance on cryptocurrency. ARLP's balance sheet remains strong, with total debt of $470.289 million and conservative leverage ratios of 0.75x total debt and 0.6x net debt to trailing 12-month adjusted EBITDA.

Capital allocation reflects a strategic pivot following significant infrastructure investments. Total capital expenditures for 2025 are projected in a range of $285 million to $320 million, a substantial decrease from $429 million in 2024, as major projects at River View, Warrior, Hamilton, and Tunnel Ridge near completion. This reduction in sustaining capital is expected to meaningfully enhance free cash flow visibility for 2026 and beyond. Average estimated annual maintenance capital expenditures over the next five years are projected at approximately $7.28 per ton produced.

Management's outlook for the remainder of 2025 and into 2026 is cautiously optimistic. They expect fourth-quarter 2025 operating and financial results to equal the strong third-quarter performance. Full-year 2025 sales guidance has been tightened to 32.5 million to 33.25 million tons, with a significant portion already committed and priced. For 2026, ARLP has already contracted and priced 29.1 million sales tons, up 9% from the previous quarter, indicating strong demand. While average coal sales prices for 2026 are anticipated to be approximately 5% below the 2025 midpoint due to the roll-off of higher-priced legacy contracts, management expects to maintain margins through projected cost improvements, particularly from Tunnel Ridge's favorable geology. Overall, ARLP anticipates a volume increase of approximately 2 million tons in 2026 compared to 2025, driven by improved production in Appalachia and the Illinois Basin.

The decision to declare a quarterly distribution of $0.60 per unit in Q3 2025, equating to an annualized rate of $2.40 per unit, reflects a strategic adjustment. While lower than previous levels, this move aims to strengthen the balance sheet and provide financial flexibility for future growth opportunities, such as further investments in energy infrastructure and oil and gas minerals. This decision was also contextualized by new tax legislation that could result in higher after-tax distributions for unitholders, even at a lower per-unit rate.

Risks and Conclusion

Despite a compelling investment thesis, ARLP faces several pertinent risks. Commodity price volatility for coal, oil, and natural gas remains a primary concern, as short-term contracts and global market dynamics can significantly impact revenues. Political and regulatory changes, while currently favorable, could shift, affecting production and pricing. Credit risk with domestic utilities and international brokers, along with exchange rate fluctuations impacting foreign competitiveness, also warrant close monitoring. Furthermore, investments in development-stage companies like Infinitum carry impairment risk, as evidenced by the Ascend Elements write-down.

In conclusion, Alliance Resource Partners is strategically positioned to thrive in an evolving energy landscape. Its core investment thesis is underpinned by a robust and technologically advanced coal mining operation, a growing and high-margin oil and gas royalties business, and a forward-looking approach to energy infrastructure investments. The company's proactive capital allocation, including significant infrastructure upgrades and a strategic adjustment to its distribution, aims to fortify its balance sheet and provide flexibility for accretive growth. With strong operational execution, a favorable regulatory backdrop, and increasing demand for baseload power driven by AI and data centers, ARLP is poised to deliver sustainable value to its unitholders, leveraging its competitive advantages in efficiency and diversification to navigate market dynamics and capitalize on emerging opportunities.