Alliance Resource Partners (ARLP) Q3 2025: Contracted 2026 Volumes Rise 9% as Data Center Demand Shifts Coal Outlook
ARLP’s third quarter revealed a structural shift in coal demand visibility, with 2026 contracted volumes up 9% sequentially and cost improvements unlocking margin stability despite legacy contract roll-offs. Strategic infrastructure investments are now translating to lower costs and operational flexibility, positioning the business to capture the accelerating electricity demand from data center growth. Investors should watch for sustained volume expansion and the durability of cost discipline as ARLP navigates a tightening power market and evolving regulatory tailwinds.
Summary
- Data Center Electrification Drives Volume Visibility: Power demand from AI and data centers is fundamentally changing coal’s demand curve in ARLP’s core markets.
- Cost Structure Inflection in Appalachia and Illinois Basin: Automation and infrastructure upgrades are materially lowering per-ton costs, supporting margin resilience into 2026.
- Contracting Tailwind Extends Into 2026: Sequential gains in committed volumes and improved pricing guidance signal a stronger forward order book than in recent years.
Performance Analysis
ARLP’s Q3 2025 results reflected a business in transition from cyclical to structurally advantaged demand. Total revenues decreased year-over-year, primarily due to lower realized coal sales prices as high-priced legacy contracts expired, but sequential revenue rose 4.4% on higher volumes and modest price improvement. Coal production and sales volumes both increased over the prior year, with Illinois Basin output up 10.8% and Appalachia rebounding sharply after operational improvements at Tunnel Ridge. Average coal sales price per ton fell 7.5% YoY, but ticked up 1.5% sequentially, reflecting stabilization as new contracts reset the price base.
Cost discipline was a standout, with segment adjusted EBITDA expense per ton sold improving in both Appalachia (down 11.7% YoY) and the Illinois Basin (down 6.4% YoY), driven by automation, better geology, and infrastructure upgrades. The royalty segments also delivered, with coal royalty EBITDA up 54.5% YoY and oil and gas royalty volumes modestly higher, though pricing headwinds persisted in the latter. Free cash flow was robust at $151.4 million, supporting a 1.37x distribution coverage ratio and further balance sheet strength.
- Volume-Driven Margin Expansion: Higher production and sales, especially from Tunnel Ridge and Hamilton, offset legacy price declines and improved cost leverage.
- Royalty Segment Outperformance: Coal royalty tons surged 38.1% YoY, with segment EBITDA growth far outpacing the core mining business.
- Liquidity and Balance Sheet Strength: Net leverage remains low at 0.6x, with over $540 million in liquidity and continued Bitcoin holdings as a non-core asset.
ARLP’s ability to grow contracted volumes for 2026 ahead of schedule, while maintaining cost improvements, is the key performance signal for investors this quarter.
Executive Commentary
"The significant infrastructure investments we have made in our co-operations over the past three years are beginning to pay off. Our Illinois Basin operations are performing well, led by Hamilton, which benefited from new automated longwall shields... Looking forward, the combination of shield and shear automation is expected to enhance productivity, reduce the number of personnel required on the face, and minimize maintenance demands."
Joe Kraft, Chairman, President, and Chief Executive Officer
"Our contracted position for 2025 is up slightly to 32.8 million tons committed and priced... We have now contracted and priced 29.1 million sales tons for 2026, up 9% from last quarter, putting us in a good position for this time of year for prompt year shipments."
Carrie Marshall, Senior Vice President and Chief Financial Officer
Strategic Positioning
1. Data Center and AI-Driven Demand Shift
ARLP’s forward outlook is increasingly shaped by surging electricity demand from data centers and artificial intelligence workloads. This demand is driving utility coal consumption up double digits in ARLP’s core markets (MISO and PJM), fundamentally altering the competitive dynamics between coal and natural gas for power dispatch.
2. Contracting and Pricing Power
Management secured a 9% sequential increase in 2026 contracted volumes, locking in 29.1 million tons early in the cycle. Most contracts are now 2–3 years with fixed pricing, often including escalation clauses, and some tariff pass-through protection. The ability to add tons at improved pricing versus indices signals ARLP’s strengthening negotiating position as utility customers seek reliability.
3. Operational Efficiency and Automation Payoff
Recent capital investments in automation and infrastructure are delivering structural cost reductions, particularly in Appalachia (Tunnel Ridge) and the Illinois Basin (Hamilton, Riverview). These improvements are expected to sustain lower cost per ton even as volumes rise, supporting margin stability despite legacy contract roll-offs.
4. Royalties and Non-Core Asset Leverage
The royalty segment is now a meaningful EBITDA contributor, with coal royalty growth outpacing mining, and oil and gas royalties providing optionality despite commodity headwinds. ARLP also continues to hold Bitcoin as a non-core asset, providing additional balance sheet flexibility.
5. Capital Allocation and Infrastructure Investments
ARLP’s disciplined capital allocation is evident in its recent investment in a PJM-area coal plant, positioning the company to benefit directly from tightening power markets and capacity shortages. Sustaining capex needs are expected to decline, enhancing free cash flow visibility for 2026 and beyond.
Key Considerations
This quarter marks a turning point for ARLP, with the confluence of demand visibility, cost discipline, and capital efficiency setting the stage for multi-year margin resilience. Investors should focus on:
- Volume Growth Leverage: Management expects to grow total sales by approximately 2 million tons in 2026, driven by Tunnel Ridge and Illinois Basin, without incremental headcount or major new capex.
- Cost Structure Durability: Automation and improved geology underpin lower costs per ton, particularly in Appalachia, with management confident these gains are sustainable post-2025.
- Contract Pricing Reset: While 2026 average coal price per ton is expected to decline about 5% YoY due to legacy contract roll-offs, margin impact will be muted by lower costs and higher volumes.
- Royalties as Growth Vector: Coal royalty tons and EBITDA are now outpacing core mining growth, providing a diversified earnings stream and partial hedge against mining cyclicality.
- Regulatory and Policy Tailwinds: Federal support for coal plant life extensions and a more favorable regulatory environment are increasing utility appetite for long-term supply commitments.
Risks
Key risks include potential declines in coal pricing as legacy contracts expire, especially in Appalachia, and the timing of new oil and gas royalty volumes, which are now delayed to 2026. Regulatory shifts or a reversal in federal support for coal-fired generation could impact demand, while commodity price volatility and unforeseen maintenance or geologic challenges remain operational risks. Management’s confidence in cost reductions is contingent on favorable mining conditions persisting into 2026.
Forward Outlook
For Q4 2025, ARLP expects:
- Operating and financial results to be in line with Q3 performance
- Continued cost discipline and volume momentum, especially at Tunnel Ridge and Hamilton
For full-year 2025, management tightened guidance:
- Sales volumes of 32.5–33.25 million tons (midpoint nearly unchanged)
- Segment adjusted EBITDA expense per ton: $60–$62 in Appalachia, $34–$36 in Illinois Basin
Management highlighted:
- Strong 2026 order book visibility, with 29.1 million tons already contracted and priced
- Potential for 2 million additional tons of volume growth in 2026, with no incremental headcount
Takeaways
ARLP’s Q3 signals a shift from cyclical recovery to structural growth, with data center demand and regulatory support underpinning multi-year coal demand visibility. The business is now positioned to expand volumes, sustain lower costs, and maintain strong capital returns even as legacy contract pricing resets.
- Operational Leverage Unlocked: Infrastructure and automation investments are now translating to real cost savings and margin stability, with further upside as volumes grow in 2026.
- Contracting Power Returns: Early 2026 order book strength and improved pricing terms reflect ARLP’s competitive edge as utilities seek reliability in a tightening grid.
- Watch for Sustained Cost Discipline: Investors should monitor whether cost improvements in Appalachia and Illinois Basin hold as volumes ramp and legacy contracts roll off.
Conclusion
Alliance Resource Partners’ Q3 2025 results highlight a business capitalizing on a secular shift in electricity demand, with operational execution and contracting momentum supporting a more resilient and visible earnings base. The next phase will test the durability of cost gains and order book depth as the power market tightens further.
Industry Read-Through
ARLP’s results offer a clear read-through for U.S. thermal coal producers, with data center-driven electricity demand and regulatory support for baseload generation creating a structural tailwind for coal-fired power. The surge in utility contracting activity and willingness to sign multi-year, fixed-price supply deals may signal a broader re-rating of coal demand visibility across the sector. Cost discipline via automation and infrastructure upgrades is now a competitive necessity, not a differentiator, as producers must offset legacy contract roll-offs and commodity price volatility. Mineral and royalty businesses are emerging as vital diversification levers for coal-centric operators facing an evolving energy mix.