ALLIANCE-RESOURCE-PARTNERS Earningcall Transcript Of Q2 of 2024
Cary Marshall -- Senior Vice President, Chief Financial Officer Thank you, and good morning and welcome, everyone. Earlier this morning, Alliance Resource Partners released its second quarter 2024 financial and operating results, which we refer to as our 2024 quarter, and we will now discuss those results, as well as our perspective on current market conditions and updated outlook for 2024. Following our prepared remarks, we will open the call to answer your questions. Before beginning, a reminder that some of our remarks today may include forward-looking statements, 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 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 this morning's press release, which has been posted on our website and furnished to the SEC on Form 8-K. Also, we have discovered that a version of the earnings release that was published by Business Wire this morning had an obvious typographical error in the line item for income from operations for the three months ended June 30, 2023. Earlier this morning, we filed our second quarter 2024 earnings release with the SEC under the cover of a Form 8-K, and we refer you to the earnings release attached to our Form 8-K, which is correct and does not contain this error. With the required preliminaries out of the way, I will begin with a review of our results for the second quarter, give an update to our 2024 guidance, then turn the call over to Joe Craft, our chairman, president, and chief executive officer, for his comments. In June, we successfully issued 400 million of 8.625% senior unsecured notes due in 2029 and we redeemed the outstanding balance of 284.6 million of ALRP's senior notes that were due in 2025. We also extended the maturity of our $425 million revolving credit facility to March of 2028 and amended certain terms to provide us additional flexibility, including the right to upsize the recently issued senior notes by $200 million. The successful completion of the senior notes offering increased our liquidity by $100 million, further strengthened our balance sheet, and represents a vote of confidence from the capital markets in ALRP's ability to execute its business plan. The vision we communicated to investors was obviously well received as the offering was significantly oversubscribed. We emphasized our track record over the past 25 years as a reliable low-cost coal producer, with access to both domestic and export markets that has proven to be a strong cash flow generator over the years. We also shared our view that we are poised to capitalize on the expected increase in U.S. electricity demand, driven by electric vehicles, onshore manufacturing, data centers, and the AI revolution. The value and prospects for our unlevered oil and gas royalty segment was also a major contributor to the offering's success. In particular, we outlined our expectation of continued growth in segment adjusted EBITDA and free cash flow from the high-margin oil and gas royalties business, which has grown from a segment adjusted EBITDA of 42 million in 2020 to 122 million in 2023. During the 2024 quarter, our oil and gas royalty segment continued to post solid results as volumes for oil and gas minerals reached 817,000 barrels of oil equivalent, or BOE, a 6.8% increase year over year. Average realized sales prices per BOE were up 3.1% versus the second quarter of 2023, which we refer to as our 2023 quarter. Reflecting higher commodity prices, sequentially, average realized sales prices per BOE were 8.2% higher. Turning results for our coal segment. Delayed shipments due to high water levels and lock outages on the Ohio River and lower-than-expected export shipments caused our coal inventories to grow by 800,000 tons by the end of the 2024 quarter. Coal sales volumes for the 2024 quarter decreased 11.8% to 7.9 million tons, while coal production declined 10.2% to 8.4 million tons compared to the 2023 quarter. In the Illinois Basin, sales volumes were down 4.6% as compared to the 2023 quarter, reflecting lower sales at our Hamilton mine. And in Appalachia, sales volumes were down 27.3% as compared to the 2023 quarter, reflecting lower shipments from our MC Mining and Tunnel Ridge mines. Compared to the sequential quarter, coal sales volumes decreased 9.5%, while coal production declined 7.4%. In the Illinois Basin, sales volumes were down 10.1%, mostly from our Hamilton mine. And in Appalachia, shipments were down 7.7%, primarily attributed to the floodwaters impacting shipments at our Tunnel Ridge mine. Reflecting the strength of our well-contracted order book, coal sales price per ton sold for the 2024 quarter was up 3.8% year over year, which included a higher revenue mix of Illinois Basin sales tons. By region, we realized a 4.9% increase in the Illinois Basin and an 8.7% increase in Appalachia. The increase in the Illinois Basin was due to improved domestic price realizations; in Appalachia, due to higher realized pricing at our Tunnel Ridge operation. Compared to the sequential quarter, the average coal sales price per ton increased 0.8% to $65.30 per ton, compared to $64.78 per ton sold sequentially. Coal sales price per ton sold declined in the Illinois Basin by 0.4% and rose in Appalachia by 2.4%. Our coal royalty segment experienced a decrease in volumes, primarily from our River View and Hamilton mines, and an increase in prices during the 2024 quarter, with coal royalty tons sold down 2.8% and coal royalty revenue per ton up 2.8% year over year. Sequentially, coal royalty tons sold were up 9.8%. As a result, consolidated total revenues for the 2024 quarter were 593.4 million, down 7.6% from 641.8 million in the year-ago period. Sequentially, consolidated total revenues were down 9%. Segment adjusted EBITDA expense per ton sold for the 2024 quarter increased by 5.5% and 3.1% in the Illinois Basin compared to the 2023 and sequential quarters, respectively, due primarily to reduced production at our Hamilton operation and lower recoveries at River View. In Appalachia, segment adjusted EBITDA expense per ton sold increased by 57.6% and 26.1% in the 2024 quarter compared to the 2023 and sequential quarters, respectively. The Appalachia per ton increases were due to reduced production across the region as a result of longwall moves, challenging mining conditions that lowered recoveries at all three operations, and increased costs related to roof control and maintenance during the 2024 quarter. For the 2024 quarter, we completed longwall moves at Mettiki and at Tunnel Ridge, while a planned move at Hamilton was moved into July. We now anticipate two longwall moves in the third quarter, with one each in the Illinois Basin and Appalachia; and three longwall moves in the fourth quarter, with one in the Illinois Basin and two in Appalachia. Coal inventory levels were 2.6 million tons at the end of the 2024 quarter. We expect sales tonnage being higher than production levels in the back half of the year and, as a result, anticipate more normal inventory levels of 0.5 million to 1 million tons at year-end. We anticipate these inventory levels to be reduced ratably throughout the balance of the year. During the 2024 quarter, we saw a decrease in the fair value of the partnership's digital assets of $3.7 million, based upon a month-end Bitcoin price of $62,678, while the amount of Bitcoin we own increased 6.3%. As we described last quarter, we started mining Bitcoin in 2020 as a pilot project to monetize already paid-for yet underutilized electricity load capacity at our River View mine. We now own approximately 452 Bitcoins, valued at 28.3 million, at the end of the 2024 quarter. I'd note that earlier this morning when I checked the Bitcoin price, it was at approximately $69,647, up approximately 11% from the price at the end of the 2024 quarter. Our net income for the 2024 quarter attributable to ARLP was $100.2 million, or $0.77 per unit, which compared to $169.8 million, or $1.30 per unit, in the year-ago period. Adjusted EBITDA in the 2024 quarter was 181.4 million, which compares to 249.2 million in the prior-year period. Net income and adjusted EBITDA in the sequential quarter were 158.1 million and 238.1 million, respectively. These decreases reflect the lower revenues and higher total operating expenses mentioned previously. Now, turning to our balance sheet and uses of cash. Free cash flow of 114.9 million for the 2024 quarter was up 27% from the sequential quarter. Alliance generated 215.8 million of cash flows from operating activities in the 2024 quarter, slightly more than the 209.7 million in the sequential quarter. Alliance also invested 101.4 million in capital expenditures in the 2024 quarter, down from 123.8 million in the sequential quarter, and paid a quarterly distribution of $0.70 per unit. At quarter-end, our total and net leverage ratios were 0.61 and 0.36 times total debt to trailing 12 months adjusted EBITDA and our liquidity increased to 666 million, which included approximately 203.7 million of cash and cash equivalents on the balance sheet, compared to 59.8 million at the beginning of the year. Now, turning to our updated guidance detailed in this morning's release. Based on our results year to date and outlook for markets through year-end, we are adjusting our full year guidance. As mentioned in this morning's press release, although demand for cooling has been strong since the start of this summer, accelerating coal-based power generation and U.S. thermal coal production has slowed down, we are seeing our domestic utility customers rely mainly on their elevated inventories to meet this demand. In the export markets, netback pricing for high sulfur Illinois Basin coal is at a level that we have decided it is prudent to slow down production for the back half of the year or until prices are more favorable. As a result, our revised guidance expects total coal sales volumes for 2024 to fall within a range between 33.5 million to 34.5 million tons, with a new midpoint of 34 million tons that is 2.6% below our original guidance midpoint for the year. We expect Illinois Basin sales volumes to be in a range of 24.25 million to 25 million tons and for Appalachia sales volumes to be in a range of 9.25 million to 9.5 million tons this year. We made some minor adjustments to our committed sales and priced sales tons to reflect modest net contracting activity and movement in the timing of customer shipments that occurred during the 2024 quarter. At the end of the 2024 quarter, our committed tonnage for 2024 was 32.7 million tons or approximately 96% of our expected sales tons at the midpoint of our updated guidance range. Of that total, 27.5 million tons are currently committed to the domestic market, while 5.2 million tons are committed to the export markets. We anticipate, due to the summer burn continuing to be above average, there will be opportunities for spot sales to domestic utilities in the fourth quarter of this year. As a result, we are now planning for over half of our 2024 unsold coal position to be sold in the domestic market. We also anticipate, over the next three months, we will secure additional commitments for deliveries in 2025 and beyond as most of our customers are actively in the market wanting to firm up their book for the near future. Based on the lower coal sales volumes, we increased our expectation for sales price per ton sold to be in a range of $63.75 to $64.50 per ton, as compared to $61.75 to $63.75 previously. In the Illinois Basin, we expect pricing of $56.25 to $57 a ton, versus the previous range of $54.50 to $56. And in Appalachia, we now expect pricing of $83 to $84 per ton, versus the previous range of $80.50 to $83.50 per ton. For segment adjusted EBITDA expense per ton, we now expect a range of $43 to $45 per ton, versus the previous range of $41 to $43. In the Illinois Basin, we expect costs to be in a range of $36 to $38 per ton. While in Appalachia, we expect our per-ton cost to be in the $57 to $60 range. As it relates to volumes for our oil and gas royalties segment, we are raising our guidance as we continue to see strong activity from our Permian Basin acreage. For oil, we expect 1.5 million to 1.6 million barrels, versus 1.4 million to 1.5 million barrels previously. For natural gas, we expect 5.8 million to 6.2 million MCF, versus 5.6 million to 6 million MCF previously. And for liquids, we expect 750,000 to 800,000 barrels, versus 675,000 to 725,000 barrels previously. We are excited by the momentum we continue to build in our minerals business. And finally, we are lowering our guidance for maintenance capital expenditures to be in a -- in the $395 million to $430 million range, versus $420 million to $470 million previously. Interest expense, which reflects the impact of our refinancing activities, is now expected to be in the range of $34 million to $36 million. The remainder of our guidance ranges remain the same. And with that, I will turn the call over to Joe for comments on the market and his outlook for ARLP. Joe. Joseph W. Craft -- Chairman, President, and Chief Executive Officer Thank you, Cary, and good morning, everyone. I would like to reiterate the significance of completing our senior notes offering in June. As Cary said, the successful offering further strengthens our balance sheet and represents a vote of confidence from the capital markets, which will allow ARLP to pursue its growth initiatives in coal, oil and gas royalties, and other new business ventures. We continue to advance major infrastructure projects at Tunnel Ridge, Hamilton, Warrior, and the River View complex. Starting next year, we expect our investments in these mines will make them more productive and improve their cost structure. When coupled with our enhanced liquidity position, we plan to remain the most reliable low-cost producer in our operating regions for many years to come. As we think about the outlook for the coal industry and the markets we serve, a number of key themes continue to resonate, making us particularly bullish on our intermediate and longer-term prospects for the U.S. coal industry at large. First, looking at current trends in supply and demand, year-to-date domestic utility coal burn in 2024 is essentially flat with 2023. At the same time, U.S. thermal coal production has slowed significantly, with eastern U.S. production down 11% year over year. Further, we are encouraged that as summer progresses, demand for cooling has been strong across many parts of the country, driven by recent record-breaking temperatures that is pushing coal-based power generation ahead of last year's pace. Weather forecasts suggest this heat wave will continue through August, and one industry publication is projecting coal demand will exceed supply by close to 20 million tons in the second half of 2024. Therefore, it is reasonable to expect coal stockpiles will decline for producers and utilities as we close out the year, supporting improved pricing potential heading into next year. Turning to the export market. Our guidance has not changed for our lower sulfur steam coal and met coal offerings. As Cary said earlier, at the time we completed our updated guidance forecast, recent bids for our high sulfur Illinois Basin coal did not meet our minimum pricing thresholds, explaining our reduced sales volume guidance this quarter. However, since then, API2 index pricing jumped higher last Friday, up around $8 per ton from the beginning of the week. If this upward trend continues, we can respond quickly by adding back volumes to meet market demand. Beyond this year, we remain confident in the core fundamentals that are expected to drive rapid growth in electricity demand for many years to come, led by massive power requirements from AI, data centers, and the onshoring of U.S. manufacturing. In many cases, this pace of low growth is multiples greater than what was anticipated in our customers' resource plans, and grid reliability is now at the forefront of discussions as parties recognize the forced early retirement of coal plants, if implemented, will increase risk to the grid, particularly during times of peak demand. Earlier this month, the Wall Street Journal published an article about how the owners of roughly one-third of the nation's nuclear generating capacity are in direct talks with tech companies, looking for baseload reliable energy supply for their existing and planned data centers. If true, removing these baseloads from the grid will be another reason the existing baseload coal fleet must stay on longer than the Biden-Harris administration may prefer. Fortunately, resource planners in the eastern U.S. and state regulators are waking up to the risk that the Biden-Harris policies have created. More importantly, our customers are also acknowledging the acceleration of demand is reason to reconsider their previous plans to prematurely close coal generation. In May, the interim CEO of American Electric Power testified before the Senate Committee on Energy and Natural Resources. In his filed testimony, he acknowledged that after two decades of flat demand for electricity, we are now beginning to see this trend reverse, driven by customers who require significant amounts of power. He said -- he cited how, just a few years ago, a large-scale industrial manufacturing facility might require 100 megawatts of electricity. A facility that size would typically be a one-of-a-kind in a region and would be a major source of economic activity for the area. Now, he says, it is common for a single data center to require anywhere from three to over 10 times this amount of power for a single site. Another important example of the shift in reliability comes from MISO. Last month, they released a report which emphasized the immediate need to add generating capacity. Specifically, they said that resource adequacy risk could grow over time across all seasons, absent new capacity additions and actions to delay capacity retirements. They added, significant economic development activities are spurring new large spot load additions and increasing pressures on resource adequacy. All of this underscores what we have been saying for several years, that the forced early retirement of critical baseload capacity will jeopardize grid reliability across the eastern United States. We believe the market will continue to see deferral of previously planned early retirements, allowing the plants to do what they have done for decades: keep the lights on safely, reliably, and affordably. Before I wrap up, I would like to highlight the momentum we are seeing in our oil and gas royalties business. We realized another solid quarter of year-over-year growth. And when combined with the exceptionally strong first quarter results, we are on track to deliver another record year. Our growth in oil and gas royalties is predominantly self-funded from cash flows generated by the segment, providing hedge-free exposure to commodity prices; and perhaps more importantly, organic growth without operating risk. Our net royalty acres in remaining locations are heavily weighted toward the Permian, which is the fastest-growing basin in the Lower 48. Going forward, we are committed to continue to grow this segment, and we are encouraged investors have started to recognize the value proposition of this growth. In closing, the fundamentals for electricity demand over the next five years are poised for rapid growth, and we are well-positioned to benefit from that increased demand. We anticipate this growth in demand will give us the opportunity to continue to be a generator of strong cash flows, enabling us to grow unitholder value. I am encouraged by the opportunities in front of us and look forward to delivering what should be another successful year in 2024. That concludes our prepared comments, and I will now ask the operator to open the call for questions. Operator. Operator Questions & Answers: |
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