Yahoo Finance Alliance Resource Partners, L.P. (NASDAQ:ARLP) Q1 2024 Earnings Call Transcript
Alliance Resource Partners, L.P. (NASDAQ:ARLP) Q1 2024 Earnings Call Transcript April 29, 2024
Alliance Resource Partners, L.P. beats earnings expectations. Reported EPS is $1.21, expectations were $0.93. ARLP isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings and welcome to Alliance Resource Partners First Quarter 2024 Earnings Conference Call. At this time, all participants are in listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder this conference is being recorded. It is my pleasure to introduce your host Cary Marshall, Senior Vice President and Chief Financial Officer. Thank you, sir. You may now begin.
Cary Marshall: Thank you, operator, and welcome everyone. Earlier this morning, Alliance Resource Partners released its first quarter 2024 financial and operating results. And we will now discuss those results as well as our perspective on current market conditions and reiterated 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 statements, 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. With the required preliminaries out of the way, I will begin with a review of our results for the first quarter, give an update of our 2024 guidance, then turn the call over to Joe Craft, our Chairman, President, and Chief Executive Officer, for his comments.
Let me start by recognizing the dedicated efforts of our entire team that delivered solid first quarter results and a good start to the year. Our first quarter performance was led by higher coal sales volumes and record oil and gas royalty volumes. These factors were more than offset by lower average coal sales price per ton and higher segment adjusted EBITDA expense per ton, compared to the 2023 quarter. Specifically, coal sales volumes increased 2.4% to 8.7 million tons, while coal production declined 1.4% to 9.1 million tons, compared to the 2023 quarter. Our contracted coal position contributed to our sales volumes for the 2024 quarter, lessening the impact of mild winter weather and low natural gas prices. In the Illinois basin sales volumes were up 4% and in Appalachia they were down 1.8%.
Royalty volumes for oil and gas minerals increased to a record 898,000 barrel of oil equivalent, an 18.3% increase year-over-year. At the same time, coal sales price per ton sold was down 5.2% as a 5.8% increase in the Illinois basin was more than offset by a 19.4% decrease in Appalachia. The decline in Appalachia largely reflects the residual effects of strong export markets in 2022, which benefited the 2023 quarter. Compared to the sequential quarter, average coal sales prices increased 6.9% to $64.78 per ton sold, compared to $60.60 per ton sold. Coal sales price per ton sold rose in the Illinois basin by 4.6% and in Appalachia by 11.3%. In our oil and gas royalty segment, average realized sales prices were down 9.3% per barrel of oil equivalent versus the 2023 quarter, reflecting lower commodity prices.
Sequentially, average realized sales prices were 7.6% lower per barrel of oil equivalent. Our coal royalty segment reported higher coal royalty volumes and prices during the 2024 quarter, with coal royalty tons rising 9% and coal royalty revenue per ton increasing 10.4% year-over-year. Sequentially, coal royalty tons were up 9.8%. In total, consolidated revenue was $651.7 million, down 1.7% from $662.9 million in the year ago period and up 4.2% sequentially. Segment adjusted EBITDA expense per ton sold for our coal operations was $40.85, an increase of 3% versus the 2023 quarter, primarily due to continued inflationary pressures on labor and material costs, as well as higher maintenance costs. On a sequential basis, costs per ton were 4.8% lower as a result of a return to normal operations across our portfolio following adverse geological conditions experienced in late 2023.
For the 2024 quarter, we completed one longwall move at our Hamilton mine. For the second quarter, we expect to have three longwall moves, with one each at Hamilton, Mettiki, and Tunnel Ridge. During the 2024 quarter we booked a $15.3 million accrual relating to the settlement of certain litigation as described in our most recent form 10-K filed in February of this year with the SEC. Because we characterize this accrual as unrepresentative of our ongoing operations, we have not included it in our segment adjusted EBITDA expense per ton figures. The litigation expense accrual was partially offset by an increase in the fair value of the partnership's digital assets of $11.9 million. In the second-half of 2020, we started mining bitcoin as a pilot project to monetize already paid for yet underutilized electricity load at our River View mine.
Since then, we have mined and now own Bitcoin valued at approximately $30 million at the end of the 2024 quarter. Our crypto mining net property, plant, and equipment book balance at the end of the 2024 quarter was $7.3 million. The increase in fair value reflects the adoption of new accounting guidance to reflect the mark-to-market change in the value of our digital assets during the quarter. Our net income for the 2024 quarter attributable to ARLP was $158.1 million, or $1.21 per unit, which compares to $191.2 million, or $1.45 per unit in the year ago period. EBITDA in the 2024 quarter was $235 million, which compares to $270.9 million in the year ago period. These decreases reflect lower revenue and higher total operating costs. Sequentially, net income was up 36.9% and EBITDA was up 26.8%.
Now turning to our balance sheet and uses of cash. Alliance generated $209.7 million of cash flows from operating activities in the 2024 quarter. During the quarter, we invested $123.8 million in capital expenditures as our 2024 capital program is well underway and we paid our quarterly distribution of $0.70 per unit. Subsequent to quarter end, we announced a quarterly distribution for the current quarter of $0.70 per unit, payable to unit holders of record as of May 8, 2024. As we have discussed previously, the board considers the appropriate distribution levels on a quarter-by-quarter basis after considering a wide range of factors, including the implied current yield on our units, distribution coverage, capital needs, investment opportunities, and debt service costs.
We were pleased to report continued support by our senior lender group as we successfully increased our accounts receivable securitization facility by 50% to $90 million and entered into a new $54.6 million four year amortizing term loan maturing February 2028 to replace prior equipment financing that matured in November 2023. At quarter end, our total and net leverage ratios were 0.49 times and 0.34 times total debt to trailing 12 months adjusted EBITDA and our liquidity increased to $551 million, which included approximately $134 million of cash on the balance sheet. We expect to retire the $284.6 million outstanding on our senior notes throughout the balance of 2024, using a combination of operating cash flows and attractive financing options we believe are currently available to us and that are at various stages of execution today.
Now turning to our guidance detailed in this morning's release, we are reiterating our full-year guidance for coal sales volumes, coal sales price per ton sold, segment adjusted EBITDA expense per ton sold, royalties volumes, and royalties unit expenses. We did make slight updates to our committed and priced sales tons to reflect modest net contracting activity that occurred during the 2024 quarter. As a reminder Q1 is typically a seasonally light contracting quarter and this year was no different. At the end of the 2024 quarter, our committed tonnage for 2024 was 32.6 million tons or approximately 93% of our anticipated sales tons at the midpoint of our guidance range. Of that total 28.1 million tons are currently committed to the domestic market, while 4.5 million tons are committed to the export markets.
We continue to anticipate most of the sales activity for our unsold coal for 2024 to occur in the back half of the year and be sold in the export markets. Finally, as it relates to our oil and gas segment, our first quarter results signaled a strong start to the year. Given that it is still early in the year, we are reiterating our guidance for oil volumes of 1.4 million to 1.5 million barrels, natural gas of 5.6 million to 6 million MCF, and liquids of 675,000 to 725,000 barrels. There could be some upside to these volumes if market conditions remain as they are today. The remainder of our guidance ranges remain the same as previously discussed. And with that, I'll turn the call over to Joe for comments on the market and his outlook for ARLP.
Joe?
Joe Craft: Thank you and good morning, everyone. I want to begin my comments by thanking the entire Alliance organization for their resilience, continued hard work, and dedication in delivering a solid and safe start to 2024. Cary did an excellent job summarizing our first quarter 2024 results and updating our guidance for the full-year. Almost four full months into 2024, we continue to expect that our coal sales book will be equally as strong as last year and be the anchor to deliver another solid revenue year. We entered 2024 with over 90% of our coal sales volumes committed and priced at similar levels relative to 2023, and during the quarter we made modest updates to that contracted order book. While low natural gas prices are suppressing domestic coal demand, we continue to have confidence the export market demand will remain available to us this year supporting our sales guidance for the year.
We also expect our production to be more predictable this year due to our belief that we have moved beyond the several adverse geologic areas that we faced last year. As we think about the outlook for the domestic coal industry and the markets we serve, several key themes are emerging: data center growth driven by artificial intelligence and industrial load led by electric vehicles and battery manufacturing are driving significant growth in anticipated electricity demand over the next several years. This outlook underscores the critical need for reliable, affordable base load fuel for electric generation [Technical Difficulty] rapidly increasing load expectations. While I could talk for hours about those examples, let me highlight three in particular.
First, according to the Grid -- the Clean Grid Initiative's grid strategies report, the era of black power demand is over. According to 2023 FERC filings $630 billion of near-term investment in large load has driven the five-year outlook for nationwide peak demand to 852 gigawatts from just 835 gigawatts in the year ago report. That's a doubling of the five year growth projection from 2.6% to 4.7% in just a 12 month window. This is attributable to investments in new manufacturing, industrial loads, and data center facilities, all the types of customers that not just expect, but rather require highly reliable, affordable electricity supply 24/7. This unexpected new demand is set to ramp up even as the nation's power portfolio continues to be hamstrung by politically motivated regulatory-driven forced premature closures of coal fired and other fossil fuel generating sources.
Beyond the obvious limitations of renewable resources for round-the-clock availability, the actual investment in needed high-voltage transmission to utilize those renewable sources has not come close to expectations, making the ability to shift supply across regions far less practical, or in many cases even possible. Another example is a recent op-ed in the Wall Street Journal [Technical Difficulty] are pushing the power grid to what could become a breaking point”. In it, they cited Georgia Power's recent 17-fold increase in winter power demand forecast by 2031 from growth in EV and battery facilities. PJMs doubled 15-year annual forecasts for demand growth and a new micron chip plant in New York that is expected to draw more power than the States of New Hampshire and Vermont combined, among other examples.
Finally, the Washington Post published an article on March 7 entitled “amid explosive demand, America is running out of power”. In it, they describe how vast swaths of the U.S. are at risk of running short of power due to the growth of data centers and clean tech facilities. Georgia's industrial demand is at record levels. Arizona public service expects to be out of transmission capability before the end of the decade without major investment. Northern Virginia needs the equivalent of several large nuclear reactors to serve all of the data centers being planned in Texas, as we know is already facing frequent shortages and interruptions, they said. Notwithstanding these warnings and the practical realities of how the grid works, The Biden Administration through the United States Environmental Protection Agency last Thursday, finalized several regulations designed to prematurely close existing coal plants that are essential to providing grid saving baseload power in heavily energy consuming states.
In response to these rules, the National Mining Association called out EPA for: One, refusing to account for irrefutable evidence that electricity demand is soaring. Two, disregarding validated warnings from grid experts related to coal plant closures. And three, ignoring the basic fact that there is no adequate replacement ready to replace the sorely needed dispatchable generating capacity coal was providing. America's Power also issued a statement last week in response to the EPA's new Clean Power Plan 2.0 they described the rule as “an extreme and unlawful overreach that endangers America's supply of dependable and affordable electricity”. They followed by saying “the new Clean Power Plan is the same kind of overreach that caused the U.S. Supreme Court to reject EPA's first Clean Power plan in 2022”.
At the end of the day, it is our view that physics will always trump bad policy that we believe is impossible to meet. For example, the Edison Electric Institute, a trade association representing the interest of all U.S. investor-owned electric companies, responded to the EPA package of final rules for power plants by stating “we are disappointed that the agency did not address the concerns we raised about carbon capture and storage. CCS is not yet ready for full-scale economy-wide deployment, nor is there sufficient time to permit, finance, and build the CCS infrastructure needed for compliance by 2032”. The Wall Street Journal editorial board also weighed in by writing, “Section 111 of the Clean Air Act says, the EPA can regulate pollutants from stationary sources [Technical Difficulty] through the “best system of the emission reduction” that [Technical Difficulty] neither the best nor adequately demonstrated.
As of last year, only one commercial scale coal plant in the world used carbon capture, and no gas-fired plants did”. They went on to say “by the way, EPA plans to unveil soon another rule to reduce CO2 emissions from existing gas-fired plants, so some of them may also have to shut down. Meantime, China has added about 200 gigawatts of coal power over the last five years, about as much as the entire U.S. coal fleet. The Biden fossil fuel onslaught will have no effect on global temperatures”. Government directives designed to support greater dependence on renewables cannot change the fundamental realities of how electricity is generated and transmitted as we look at expected supply and demand. Our customers, whose job it is to keep the lights on reliably and affordably, know this.
That is why we believe the U.S. will continue to see delays and extensions in the premature closure of critical coal plants and why we are committed to serving these markets for many years to come. Over the past few quarters, utilities have extended the planned operating life of approximately 10 gigawatts of coal generating capacity as a result of increasing electricity demand and delays in the construction of replacement generation, and we see room for that number to increase. Now turning to strategic updates related to our business, this year in our coal segment we expect to complete major infrastructure projects at Tunnel Ridge, Hamilton, Warrior, and our River View complex. These already well-capitalized mines will benefit from these payout projects, making them more productive, improving their cost structure, and extending their overall mine lives.
As a result, we expect to maintain our position as the most reliable, low-cost producer in our operating regions for many years to come. Turning to our Royalties Segment, we remain committed to growing our oil and gas royalties business, which delivered record volumes in 2023 and again in the first quarter of this year. We like the cash flow potential the segment offers via hedge-free exposure to commodity prices and organic growth. We are looking for investment opportunities that meet our current underwriting standards as we seek to grow this segment in a tight market. As such, we will remain highly disciplined as additional mineral acquisition opportunities [Technical Difficulty] our relationships and experience established over soon to be 25-years as a public company position us to add significant strategic value across many segments of the energy spectrum.
You have seen a number of these initial investments, which should be thought of as potential platforms for future lines of business with long-term growth and cash flow generation potential. In closing, our first quarter results were in line with our expectations and set the tone for what we believe will be another strong year. Our partnership remains a generator of strong cash flows that positions 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'll now ask the operator to open the call for questions. Operator?
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