Alliance Resource Partners, L.P.

Good day and welcome to the Alliance Resource Partners LP first quarter 2021 earnings conference call. All participants will be in a listen only mode. Should you need assistance, please signal a conference specialist by pressing star then zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would like now to turn the conference over to Brian Cantrell, Senior VP and Chief Financial Officer. Please go ahead.

Thank you, Matt, and welcome, everyone. Earlier this morning, Alliance Resource Partners released its first quarter 2021 financial and operating results, and we will now discuss these results as well as our perspective on market conditions and outlook. Following our prepared remarks, we'll open the call to 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 that are 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 the 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'll 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 the required preliminaries out of the way, I'll turn the call over to Joe Kraft, our chairman, president, and chief executive officer for his opening comments. Joe?

Thank you, Brian, and good morning, everyone. We entered 2021 with the expectation that Alliance was poised to benefit from improved U.S. and global economic activity and increased energy demand as vaccines became more available. The solid financial performance we posted earlier this morning, and that Brian will review in more detail in a moment, suggest our expectations were well-founded. Coming into the year, we focused on advancing key initiatives across the Alliance organization. Among those initiatives were efforts we mentioned during our last earnings call to maximize the value of our existing assets and to explore new value-creating opportunities. We took the first step to unlock and highlight value embedded in our existing assets with the addition of a new coal royalty segment to separately report royalty income from coal reserves owned by ARLP's land company and leased to certain of our mining subsidiaries, primarily in the Illinois Basin. We believe combining coal royalties with oil and gas royalties to form a larger, enhanced total royalties group provides several benefits. Aggregating the results of all our royalty activities allows us to better inform AROP's unit holders and analysts of the cash flow potential of this part of our business to generate long-term royalty income free of CapEx requirements, with minimal working capital requirements and limited operating costs. With visibility to the mine plans of our coal operating subsidiaries, we expect results from our coal royalty segment will be rather predictable, adding greater certainty and stability to the results of our total royalty activity. We also expect to realize future cost efficiencies by combining the management of our various royalty activities. In addition, we believe aggregating the cash flow from these two royalty sources will improve our ability to secure lower-cost financing to support future growth in these segments. As we look at other royalty companies, recent total enterprise value multiples have been in a range of 7 to 11 times EBITDA, well above ARLP's current 3.3 times multiple. By emphasizing the full magnitude of ARLP's royalty activities, And as we continue to expand in this area, we are hopeful that the market will begin to fully recognize the true value of this part of our business. As we have managed through the uncertainties and disruptions created by the pandemic over the last year, ARLP has been clearly focused on protecting our balance sheet, and we continue to make progress on this initiative during the 2021 quarter. Utilizing free cash flow generated during the quarter and cash on hand, AEROP reduced its total debt and finance lease obligations by $52.9 million and lowered total leverage to 1.43 times, a 6.5% improvement from the sequential quarter. We have also been very clear that once the situation began to stabilize, returning cash to our unit holders was among our highest priorities. On the strength of our recent performance and with our outlook continuing to improve, management believes we have reached that point. And I'm very pleased that the board supported our view by declaring a 10 cent per unit cash distribution to unit holders for the 2021 quarter. And setting an annualized distribution level at approximately 30% of this year's anticipated free cash flow, the four investments and growth opportunities This distribution provides ARLP with the flexibility to pursue projects capable of providing long-term value for our unit holders while maintaining a conservative balance sheet. With our estimated distributable cash flow coverage ratio comfortably above four times for the year, we also believe this distribution is sustainable for the foreseeable future. I'll now turn the call back to Brian for a more detailed look at our results. Brian? Thank you, Joe.

This morning, ARLP reported net income for the 2021 quarter of $24.7 million for 19 cents per basic and diluted limited partner unit, an increase of $169.5 million compared to a net loss of $144.8 million for the 2020 quarter, and excluding the impact of $157 million of non-cash charges in the 2020 quarter, we more than doubled the adjusted net income of $12.2 million in that prior quarter. Lower coal shipments contributed to a 9.2% decline in total revenues compared to the 2020 quarter. Lower revenues, however, were largely offset by a $37.8 million reduction in operating expenses as efficiency initiatives at our coal operations continued to drive down costs. As a result, segment-adjusted EBITDA in the 2021 quarter decreased only slightly to $109.8 million compared to $111.7 million in the 2020 quarter. While these results were generally in line with our expectations, ARLP's performance for the 2021 quarter would have been even better, but for weather-related transportation disruptions and an unplanned customer plant outage causing approximately 950,000 tons of delayed coal shipments and negatively impacting our cash flow and EBITDA, by approximately $13 million. We currently expect these delayed coal shipments will be delivered to customers over the balance of the year. Taking a closer look at the performance of ARLP's coal operations, the previously mentioned shipment delays, as well as lower price realizations due to the expiration of higher price legacy contracts, led coal sales revenue in the 2021 quarter lower compared to both the 2020 and sequential quarters. Unplanned shipment delays also impacted total coal inventories, which increased by 1.2 million tons during the 2021 quarter. Ongoing expense control initiatives at all ARLP operations drove cost per ton lower compared to the 2020 quarter, with total segment adjusted EBITDA expense declining 10.5% to $29.72 per ton for the 2021 quarter. Compared to the sequential quarter, Total segment adjusted EBITDA expense per ton increased 5.2%, primarily due to increased subsidence expense and severance taxes at our Tunnel Ridge mine and higher costs associated with increased metallurgical coal sales at our Matiki mine. ARLP's royalties segments posted solid results for the 2021 quarter. Our oil and gas royalties segment benefited from significantly higher commodity prices compared to both the 2020 and sequential quarters, pushing ARLP's average price realizations per BOE higher by 21.6% and 30.5% respectively. Although sales volumes continue to reflect the impacts of dramatically reduced drilling and completion activity during much of last year, increased operator activity on our acreage led production for the 2021 quarter to exceed our expectations. Strong commodity pricing and greater than anticipated production drove segment-adjusted EBITDA for oil and gas royalties to $11.9 million, an increase of 16.7% compared to the sequential quarter. For our coal royalty segment, increased revenue per royalty ton sold more than offset lower volumes, leading segment-adjusted EBITDA higher to $7.3 million. an increase of 5.3% and 3.7% compared to the 2020 and sequential quarters respectively. On a combined basis, our oil and gas royalties and coal royalties contributed $19.2 million of segment-adjusted EBITDA in the 2021 quarter, or approximately 17.5% of ARLP's consolidated total. I'll close my comments with an update on guidance. On the strength of ARLP's performance to start the year, and an improved outlook for the balance of the year, we are increasing full-year guidance for 2021. With strong coal burn during the polar vortex in February, lower utility stockpiles, and a favorable natural gas price curve, we expect increased coal buying activity in our domestic markets over the rest of 2021. Improving international coal market fundamentals should also create additional export sales opportunities this year. As a result, ARLP is increasing the midpoint of its 2021 coal sales volumes to 31 million tons. I mentioned earlier that production volumes for oil and gas royalties exceeded our expectations during the 2021 quarter. The current pace of drilling, completion, and permitting activity on our acreage suggests this trend will continue for the remainder of 2021, and we are now anticipating full-year production near the top end of our initial ranges. With increased production and continued strength in commodity pricing, we now anticipate the 2021 EBITDA contribution from our oil and gas royalty segment will be 20% to 25% above 2020 levels. I will also note that we have increased the range for total segment adjusted EBITDA expense for our coal operations by approximately $1 per ton. This increase reflects the cost of intercompany coal royalties at our coal operating segments that are now reported separately in our coal loyalty segment. With that, I'll turn the call back to Joe for some final comments.

Joe? Thank you, Brian. As we look to the future, ARLP is committed to creating long-term value for our unit holders. And I want to clearly state that we intend to achieve that goal. First, ARLP remains committed to thermal coal. While headlines and rhetoric may suggest otherwise, recent challenges and disruptions experienced in Texas in California emphasize the importance of coal to maintaining an efficient, reliable, and resilient power grid. The common sense reality is that until science and innovation allow for a transition away from coal and other fossil fuels, coal will remain an essential to the well-being and economic success of our country. Until that transition occurs, AEROP intends to be there with our low-cost operations proudly supporting the economic vitality, standard of living, and quality of life that the communities we serve desire and deserve. Secondly, we recognize and embrace the ongoing transition toward new energy and power technologies. As I mentioned during our last earnings call, we intend to participate in that transition and are focused on evaluating and pursuing opportunities to do so. As these opportunities continue to develop We plan to utilize the talent and entrepreneurial spirit of our people, optimize the cash flow and value of our existing assets, and leverage ARLP's financial strength to pursue activities that we believe have the potential to generate attractive returns with sustainable long-term growth in cash flows. As we have always done, we intend to execute on our plans in a disciplined manner. Our capital allocation priorities will be balanced and focused. designed to return cash to unit holders while providing ARLP with the flexibility to simultaneously pursue strategic opportunities, protect our balance sheet, and maintain access to capital. While challenges exist, we are optimistic and excited about the future for Alliance. As we continue to define our future, ARLP remains focused on delivering strong performance and generating attractive long-term total returns for all our stakeholders. That concludes our prepared comments, and I'll now ask the operator to open the call for questions.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. Our first question will come from Nathan Martin with Seaport Global. Please go ahead.

Hey, good morning, guys. Thanks for taking the questions. Good morning, Nate. I guess first, it looks like you priced an additional 2 million tons in the domestic market and about 400,000 in the export market since last quarter. Can you guys give us a sense of where those incremental tons may have priced?

We've All of the pricing has been embedded in our ranges that we gave in our guidance this quarter, which we did not change from the last quarter. So we're right on target with what our expectations are for the year.

Okay. Directionally, Joe, any comments there? I mean, like you said, I saw you maintained your full year $40 to $42 guidance.

No. I hesitate to discuss that. We're right in the middle of some price negotiations, so I prefer to defer that comment on a more specific basis, if you understand.

Fair enough. Totally understand. Then maybe then on the roughly 5 million tons you guys have left to commit in price, kind of to get to the midpoint of your guidance, can you give us an idea, maybe a breakdown between domestic and export expectations for those tons?

We've got about anywhere from 500 to 800,000. Well, we've got in our plan that we provided these numbers, there's right at 500,000 tons in the forecast. So that would show you the split between domestic and export that we're targeting. However, we believe that we could sell anywhere from another million to a million and a half tons in the export market, and that pricing could be more attractive than some of the domestic opportunities, so we're trying to evaluate that as the year goes on as to whether we're better to place those tons in the export market or place them in the domestic market. We are pretty confident as we look at our open position and the opportunities that will be presented in 2021 that we'll have plenty of opportunities to place that tonnage, but we're not currently anticipating increasing volumes beyond what we've given guidance to in this quarter's press release.

Got it. Thanks for that color. And then you guys made some comments on this in your prepared remarks, but you did build about a million tons of inventory, I think, for 1.8 in the quarter. Ryan, I believe you said maybe that's kind of rateable throughout the rest of the year. Can you give us maybe a more specific idea about kind of what you guys see for shipment cadence, you know, Q2 through Q4?

Yeah, well, part of the inventory build in the first quarter is obviously just due to some seasonality. I mean, it's not unusual to see. And just to clarify too, Nate, I don't believe I said it's ratably. We just do expect that those tons will be delivered over the balance of the year. I believe we had, by way of example, 220 million tons plus or minus in transit scheduled for export. If I recall correctly, those tons were actually delivered and monetized very early in April. I think in terms of overall cadence going forward, The normal seasonality that you see mid-year around miners' vacations and in the fourth quarter due to the year-end holiday schedules for Thanksgiving, Christmas, et cetera, it'll be fairly typical with what we've done historically, I believe. I think that's 200,000 on the quarter.

Instead of 200 million.

Oh, I'm sorry. Yeah, not 200 million tons.

Yeah, I got that too.

Thank you for correcting that.

Yeah, so we had interruptions by weather, and then we also had interruptions by transportation sources just not being able to fill out their crews. So we would hope and believe some of that will roll right into the second quarter.

That was actually going to be one of my other questions, Joe. You touched on a transportation infrastructure kind of side of things. How is that looking today versus obviously a couple months ago during the bipolar vortex and maybe from both the rail and the barge standpoint?

On the barge, I think we're seeing with the waters receding, that's becoming a little bit more in focus. But on the rail side, it's continuing to be an item that we're having to have discussions about. so that we do, in fact, as we believe that the volumes will be consistent going forward, we've got to be ready for delivering that coal when the customer needs it and when we want to deliver it. So we're having conversations. They've been constructive. We're hopeful people will decide to go back to work. I think we've got a challenge right now because throughout, Everywhere we see in the state of Kentucky as an example, there's 100,000 jobs that the Kentucky Chamber just posted that are open that we're finding people not wanting to come back to work. So this is a real challenge when we want to take care of people that are unfortunately not having a job, but when we give the benefits that are so generous that they don't want to come back to work, it really creates a problem. And Not sure how that's going to shake out, but, you know, labor is tight. And that's across the board, whether it's service industries or railroads or coal operators or aluminum operators, labor is tight. And it's great to talk about a jobs plan, but it seems like we've got job opportunities and we need workers to step up and go back to work.

Got it. Well, thank you guys for your answers, and I wish you best of luck. Take care.

Appreciate it, Nate. Thank you.

Again, if you have a question, please press star then 1. Our next question will come from Alan Arsht, a private investor. Please go ahead.

Good morning. Great quarter. I had a question about, uh, your relations, the, your royalty revenue per barrel has in relationship to west Texas, intermediate crude pricing. And I mean, it's up to around $57 today. I think you were averaging in the high thirties for Q1. And I wondered, is there a one-to-one relationship or something less? How do you look at that?

Yeah, thanks, Alan. It is definitely not a one-to-one relationship. When we are disclosing our volumes, we're doing that on a barrel of oil equivalent. So that takes into account natural gas. I believe that's typically converted on a six-to-one basis for moving from MMBTU to barrel of oil. And it also includes our oil liquids volume stream which, again, is not correlated to the price of oil. So when you look at our volumes embedded within the operating results and analysis table in our press release, we show that about, for this past quarter, a little over 48% of our BOE volumes were specifically oil. And our price per BOE, again, includes all three revenue streams and not just the oil stream.

So when you look at our oil stream, it was reflecting the WTI for the month of March. So it does correlate. And actually, when you look at our average sales for BOE this quarter, I believe that's a record for us since we've been in the oil and gas space.

So with the strength in natural gas prices and, I guess, NCLs, that should be a a nice upward trend for you?

Yeah, I mean, the forward curve on all three of those products is currently favorable. Expectations are today that they'll remain that way through the balance of this year. And just as importantly, you know, the volumes that we're seeing definitely exceeded our expectations by about 10% or so in the first quarter relative to what we thought would occur. So that improved pricing for those products is encouraging operator activity in the basins that we are participating in. So we're in the middle of an updated reserve report for our oil and gas activities. Hopefully we'll be able to incorporate that adjusted volume stream as well as the forward curve and give some more details during our next earnings discussions.

I had one other question, really two. One other question about the possible acquisition of unrelated coal royalties. Is that in your plans?

We are looking at different ways that we could utilize our talent in the land royalty business. That could be to other minerals that will participate at a greater level with battery technology, et cetera. It could be some other land-related investments that tie to turbines, to solar facilities. So, yes, we are looking at that segment to think in terms of deploying capital that would provide long-term stable royalty cash flow.

I noticed this is kind of slightly off the subject, but some of the big dry natural gas companies have sold overriding loyalty interests as a form of financing. And I wondered if those could happen in the coal industry as well.

Well, on the coal side, essentially, it's not... I mean, when they're selling that for financing, they're selling to people like us. So we could buy overriding royalties, and that's essentially some of what we're doing on the coal side. On the mineral side, we haven't participated as much in override royalties. We could, and we've looked at that. In the coal side, we have bought properties where we own fee, but where we've had to also buy leases. And that's one reason when you look at our guidance for our cost on royalties where it shows in our release that our royalty revenues, 245 to 255, or expenses 95 to $1.05, that roughly $1 are third-party leases that we have to pay to other people that own the fee property of some of the cold leases. We're going to be on some fees ourselves. So there's a blend of some override that we're charging back to our source. So there is opportunity for financing coal acquisitions and or providing capacity to other coal operators. And if it would be low-cost reserves, then we would be interested in looking at that. That's not really where our primary interest is. Our primary interest is looking at areas that would be either in the oil and gas sector or in non-fossil fuels that would participate in the transition, in this new transition to a new energy vision that's being discussed in political circles today.

Okay. And then finally, I was curious about the details of your recent bond offering. I I looked. I didn't see them in your release.

The bonds were issued a number of years ago. They mature in May of 25. Currently, they're trading about 93.5, I think, is the last trade I saw, which is roughly a 9.5% yield compared to the face of 7.5%.

Oh, I thought you had refinanced.

Oh, you may be thinking about our revolving credit facilities with our commercial banks. We redid that a year ago in March, and it matures in March of 2024. Gotcha.

Well, thanks again, and a great quarter. Appreciate it.

Thank you. Appreciate it, Alan. Thank you. Our next question will come from Lucas Pipes with B. Riley. Please go ahead.

Hey, good morning, everybody.

Morning, Lucas.

Joe and Brian, you mentioned the royalty business in your prepared remarks, specifically the value ARB between where Alliance is trading today and where you see your comps for the royalty business trade. And now you're also shifting royalty, cold royalty profits into that segment, further increasing its relative size And so I wondered, what's the end game to close this ARB? Is it separating these businesses completely? A public listing, for example? Would really appreciate your thoughts on that. Thank you.

Right now, Lucas, we're trying to make sure people understand our cash flows. And when you think of that ARB, we don't see any difference between a coal royalty and an oil and gas royalty in the sense that they're both stable cash flows from production with limited capital, limited operating expense, limited working capital. And we've got management teams that basically are managing land, whether it's oil and gas or coal, it's similar. So as we think about trying to manage those together to bring some efficiencies together, We felt it was reasonable to say, let's bring these cash flows that are very predictable on the coal side, that we know from our mine plans that we're going to be mining for the next 10 years plus, that that should be provided to this segment to provide the ability that when we go try to finance oil and gas acquisitions in particular, we may be able to get a lower cost of financing than we would be if we try to do it as a coal company. So it's really driven more by our financing needs and thinking on ways we can finance our growth of our company. ESG has discriminated against a well-run coal company like ours. If you took the name of coal off of our company, we would be able to borrow in the low single digits. But because we're a coal company, people want to charge us double digits just because of an ESG stigma or whatever that they want to call it. But, I mean, we're being discriminated against, and we need to find a way to address that issue. But in the interim, I think one way to provide ability to get low-cost financing is to show stable cash flow to potential lenders and that would allow for us growing that segment without having to borrow at rates that are not justifiable. So I think that's part strategy as far as trying to grow it. We do want to grow it, but we're trying to grow it primarily to grow the strength of alliance. We are in transition. We think that transition should be 15 to 20 years, not nine to 15. in the thought of what in the world can the utility industry really do, practically speaking. I mean, most utility executives talk in terms of 2050, not 2030 or 2035. And 2030 to 2035 is just not practical. The administration is not telling the truth. They're misleading the American people and investors to believe that we can transition that fast. Now, having said that, we've got to deal with reality. They may do it anyway. And so we've got to think in terms of how do we take the cash flow we have today, redeploy it so that by 2030, 2035, we've got as much cash flow generated in the future as we have today and hopefully even more. So we've got to grow where the market's going to be. So I think minerals can be a large part of that. Yes, there's some effort as well on the transportation sector to reduce the demand. But everything I read believes that EV's best case, most optimistic case may penetrate 50% of the market. And I think that's a very aggressive target. So we believe that investing in oil and gas still will provide for good long-term returns for three decades. And so we're not, you know, we're still feeling that that's an area where we can make investments that can be very attractive, where we've got a solid base that we can invest around to where we can generate long-term investments or returns for our shareholders.

So really appreciate all this color. Super helpful. You touched on this just now, but the balance sheet, and when I think about an EV to EBITDA in the threes, one could make the case that any dollar that you allocate towards that reduction creates value for shareholders. In my opinion, no. Let's not get into it. But anyway, so, Brian, is there an argument to be made to be running this business with no leverage at all? Thank you.

I mean, certainly you could, in theory, suggest that. I don't think it makes rational sense. You know, running a business as we have traditionally in the one-time level seems to be conservative and achievable. I think current enterprise value multiples, to your point, I believe, Lucas, do reflect concerns about ability to refinance. We do have strong relationships with our banks. We recently participated in a high-yield conference a few months ago. Very good discussions with a variety of different investors. And while there certainly are some who have, for virtual investing purposes, put a red line around thermal coal, there remains a very wide, deep pool of capital that continues to be available to thermal coal. To Joe's point, current cost is above where we think that should be. But we are continuing to evaluate those markets, strengthen the relationships that we have, and look at opportunities to pursue pools of capital that we haven't necessarily done so in the past. I think driving our leverage near one-to-one, as we have done historically, remains an objective. But to completely de-lever, makes it pretty difficult to grow the company, and I think we are absolutely focused on growth. If we're able to achieve that, then cash flows will take care of themselves, and the ability to return value to the unit holders and our creditors will be clear.

Let me add to that, Lucas. I mean, again, I think your question was centered around us being a coal company, and I think the message we're started with last quarter and we're trying to continue to talk through, but this is an evolving evaluation. Every fossil fuel company that's a publicly traded company that I pay attention to have transition teams trying to think through what is the definition of this transition and how can we participate in the transition from this energy business model to the next one. So we're in the energy business. Our name is Alliance Resource Partners, not Alliance Coal particularly. And it was set up that way in the middle 90s because we wanted to be an investor in energy because we believe people love to have their lights on. And we saw that in Texas in spades. Two weeks of disruption of electric generation created a shortage worldwide of plastics. it's still a contributing factor to the shortage in chips that everybody's talking about. So people need to understand the scale of the U.S. energy generation in this country and what it means to the world economy. And we've got relationships. We've been in this business from day one, going way back to the 60s, predated me. We've been in this business and We're in the energy business, and we've got relationships with our customers, our utility customers, that if they want to transition to something else, there's no reason why we can't help be a supplier to them in whatever choice they make. There's going to be a lot of capital. You're reading about it with the Biden infrastructure plan, $2 trillion. They're talking hundreds of billions of dollars that they want to channel back into the the electric grid and the transportation sector. In specifics, there's $18 billion plus $4 billion that Senator Manchin has earmarked. So there's $22 billion of federal money that's going to come to areas affected by their policies, i.e. coal communities specifically. And if Who's going to invest $18 billion of federal money or take advantage of tax credits if it's not people that are already there? So I'm hopeful in conversations with the banks that they will start looking at how am I going to participate in this transition? Am I going to lend money to the solar industry, the wind industry, the transmission industry, the EV industry? Are they going to lend money to new technologies? And if they are, can we participate in that and can they look at that in a different vein than just looking at us to just the solid cash flow that we're going to have from coal for the next 15 years. It's just unfortunate that we get labeled because we're in the coal company that people can't look beyond just that definition and can't look at the strength of our cash flow as a low-cost producer to an essential fuel that's going to be needed over the next three decades. Now, So we're targeting areas in areas where we live, where we have skilled people, where we have relationships with the state governments, with the federal governments, with utilities, to say we can be your partner. And these skills are very transferable to what we do, and that's our target. We can't do it overnight, but we recognize that we've been discriminated against. in lending practices. And unfortunately, that's one reason why we're only using 30% of our cash flow to pay our unit holders. We should be able to do more than that, but we are having to use our free cash flow that we're generating without borrowing to see how we're going to define what areas that we start investing in to show that we have the capability to build businesses like we've done in the past, and we've got a track record of doing, that we can build businesses that are ready to be financed for that future growth, whatever that transition and that time period is. Fortunately, I believe we've got two decades to do that. It may be 15 years, I don't know. But we're very focused on it. Fortunately, we've got enough cash flow that we can engage in businesses And we're one of the few in these areas of coal communities that have the financial resources that can benefit from all these tax credits and all this federal money that they want to throw out to encourage this transition from fossil fuels. That's our strategy and hopefully that helps you understand the context of how we're looking at the balance sheet and it's something that's got some uncertainty to it and that's why we're being conservative. Uh, but, uh, uh, you know, I'm very confident that, uh, we're in a great, great place, uh, to be able to take advantage of these opportunities, probably more so than a lot of people.

So I, I really appreciate all this color, uh, very helpful. And I wish you in, in all of this, uh, All the luck. Thank you. Thank you, Lucas.

Our next question will come from Arthur Calvertinos with ANC Capital. Please go ahead.

Thank you. Hey, guys. A couple of questions, one short-term and a couple longer-term, and a great discussion on the last question. I've been getting a lot of reports in Europe being very cold and being sort of running short on stuff. I'm just wondering, particularly in April, what's going on with any color on the export market? Are you getting any extra lift there? Anything you can speak to that?

For the month of April, we've basically been dealing with some high transportation costs, some driven by oil prices. diesel, some driven by just the capacity, some driven by the Suez Canal disruption. So there's several things that are happening in the transportation piece of the business that we believe has started to show some reduction that could provide opportunities. So we're still bullish. I mean, we do sell some to Europe. but we're more targeted to India right now, and India's got the virus resurging that's created some pause, but we're still in conversations with our customers, and we believe that there's definite demand, because not only does that virus affect the demand for products, but it really affects their ability to mine coal, because We know what it did to us a year ago when people were testing positive as to how disruptive it can be to the operation. So we continue to feel that the export market is constructive. Again, I would remind that in large part, this recent resurgent was tied to the political issues between Australia and China. Those still exist, and they are also unpredictable. But in that backdrop, April was slowed a little bit because of the cost of the transportation. We think that will correct itself, and we do believe the second half of the year, as I said earlier, that we'll have the potential potentially to do more than a million to two million tons than what we had planned for and what's in our current forecast And if we do that, that would probably take away from domestic market sales and just strengthen lower inventories for our customers going into next year.

Okay. All right. Thank you. And then just a couple of longer-term questions. I've been getting a lot of research reports, just, you know, big-picture thing, but just on the use of electrons, like the amount of electricity people are using and countries are using for the next 30 to 50 years. I had a report like it's going to increase by 60%. Again, this may be 2050. And what I'm seeing is now I'm seeing companies like Amazon, Google, they have the cloud, they have data storage, and all that stuff uses electricity. But unlike a steel plant, it never shuts off, right? I mean, in the old days, you'd have a steel plant making sheet metal for an F-150, and it shuts off, right? A lot of electricity, but then it shuts off. And then you can speak to, like, you know, when I look at technology companies, they think of tech as being green, but these tech guys use a lot of electricity to that never is supposed to shut off. And just any color you may have or thoughts on that, I'd appreciate it. Thank you.

Well, there is. And then you add to that the EVs. And when you start doing electric vehicles, that is an increase in demand. The policymakers would suggest that a lot of their focus is going to be on buildings and efficiency, and that that could offset some of that increased usage. You know, we'll see. I mean, I had the opportunity to live in New York for a year last year, and there was discussions about they're going to tear down buildings because they're not efficient enough, build these skyscrapers again more efficiently. But I don't know how that works mathematically. So there's a lot of analysis that would suggest that the efficiency could offset some of that growth. That's in the developed countries. Then you get into the emerging countries. We include China and India in that. There's going to continue to be tremendous uses of electricity, including coal-fired generation. So no matter what we do on fossil fuels in America, China and India are going to trump that plus. So that's a challenge that we've got to think through as to are we really making a difference? I know it makes a lot of people feel good, but I'm not sure that the cost benefit is there for our country. But I can speak about that, but I don't know that the Biden administration listens to that.

Yeah, well, yeah, it's funny. On the skyscrapers, I've read and heard that, you know, you can build them, but there's basically very small windows. And so nobody wants that product. So yeah. I hear you. And then on the other thing – well, two things. One, on electric cars, what is like 5% or 10% of the fleet? Any math on that or what 5% or 10% of the fleet if they were electric? I think we've got 220 million cars electric. What does that do or mean or anything like that? Does that move the needle permanently for gas and coal, for electricity, or are we still in the early stages? It's a tough guess.

Again, I think they are somewhat offset by the renewables as well as the efficiency at that level. If you start going greater than that, then yes, there's going to be greater demand for electricity and coal and natural gas. I don't know. Natural gas has to supply it. That's part of the challenge that these states are dealing with is if I shut down a coal plant, am I really going to replace it with a natural gas plant that you want to be shut down in five years or seven years? You've got to allow me to run that plant for 40 years. That's a real challenge when we start throwing out all these numbers and and deciding that we want to just shut down coal plants by 2030, well, what are you going to replace it with? And again, we got reports, the MISO report that was issued in February, again, just reinforced that renewable energy penetration increased more risk on their electric systems back to the transmission, basically saying 30% renewables raise significant challenges and significant dollars in our transmission grid. We all know that that cannot be done in nine to ten years. You can't get permitting done that quickly. We really need to be truthful with how long this transition is. I think our country would be better served if we started talking about year 2050 with commitments to get there than starting to talk about 2030 to 2035 that It makes it so confusing for investors to determine exactly how to make sure they're investing in the right technologies and doing it in a low-cost way where we can compete in an international marketplace.

Okay, agreed. And then the last one, just hydrogen. I've been reading about hydrogen in Japan. They're doing an experiment at the utility with hydrogen from coal. So it just got me thinking about you guys, and you mentioned it on the last call with new technologies. You threw that phrase in the last call and this call. Are you guys having a lot of incoming calls or guys that want to do hydrogen? And I assume you must have some great engineers that know the properties of coal and what it could do in a new energy era or what these guys are doing. And then you throw the money in on the administration's plan. It just seems like you guys may be a natural fit as a JV partner or some kind of alliance with one of these newer hydrogen technologies.

I think more of the hydrogen is focused on natural gas than it is coal. But that doesn't mean that we can't have a role, but they want to eliminate all coal mining, so they don't want any new technology that would utilize that. But there are some carbon capture things that are being worked on that we're evaluating. So there are things that can be done, and that does feed into what you're saying. So there are some carbon capture that then would allow that to be tied into the hydrogen formula. Okay. We do have some folks looking at that. I don't know that that's something we're going to pursue, be candid. It's possible. I'm more focused on where our customers are, where the footprints are, that we know there's going to be a lot of capital flow, and there are things that fit some of our needs. not only geographic footprint, but where we have people that have skills and talent that can provide running businesses other than just coal mining.

Thank you very much. Thank you.

Thank you. Our next question will come from Matthew Fields with Bank of America. Please go ahead.

Hey, everyone. I wanted to talk about capital allocation a little bit. I think you mentioned in your answer to Lucas' question about no leverage that you kind of are trying to continue managing towards a one-time level. You know, I appreciate that you've thought through the distribution to be, you know, 30% of your sort of cash flow before growth projects. Do you think that you're going to end the year at about one time, or is that kind of a longer-term target?

It's more of a longer-term target. I mean, it's possible. I mean, you get there both two ways, right? Paying down debt or growing your EBITDA. And I think if we made investments, the ability to make them that accretive this year would be very difficult because we'll just be getting into them. And therefore, if we use that capital to grow, we're not paying down debt. Now, where we are right now, we're effectively paying down our debt except for our equipment leases and our bonds. So we can still buy back the bonds, but I think that right now our focus is on trying to find growth. And if we find that growth, it'll be hard to get to one time at the end of the year unless we find some. great deal that we get one-times EBITDA from our investment right off the bat.

You've still got about $90 million, $95 million outstanding between your AR facility and your revolver. Do you see that being paid down close to zero by the end of the year?

Our revolver?

Well, between the AR facility and revolver, you've got about $95 million.

Yeah, so the AR facility probably will stay intact. Obviously, it depends on whether we can deploy the capital or not, but we're hopeful we can use that free cash flow to grow and therefore maintain our revolver on the AR facility.

Okay. And then I think your revolver shrinks by about $80 million, maybe $78 million in May next month.

Correct.

Do you plan on kind of upsizing the AR facility or growing, you know, establishing some other credit facility? Or are you okay with kind of that reduction in sort of overall facility availability? Are we just going to kind of leave it there?

Yeah, I don't think you would see us go out and necessarily upsize the AR facility securitization facility. until it renews in December of this year. We'll take a look at it at that point in time. And obviously we are stepping down on capacity under the revolver, but we have paid it down to a level where we still have meaningful capacity that continues to be available to us. So absent other transactions that could cause us to touch one or both of those facilities, I think you can expect to see us leaving those intact for now.

Okay, great. That's it for me. Thanks very much.

Thanks, Matt. Our next question will come from Scott Ferguson with Pacific Value. Please go ahead.

Hi there. So just so I'm clear on the distribution, so that 40-cent distribution is 30% of – anticipated free cash flow for this year?

Roughly, yes.

Forty cents annualized.

Yeah, 40 cents annualized.

And that distribution level, is that being constrained by your creditors?

No, it's not. Not at all. It's wanting to make sure that we execute on our objectives of returning appropriate levels of cash to our unit holders, but maintaining the flexibility to pursue the growth projects that we've been talking about. But there is no constraint on our facilities that we're bumping up against right now. We have plenty of room with the 40 cents per unit on an annualized basis.

And when you guys are prioritizing cash flow and doing your planning, are buybacks ever in that discussion? And if they are, where do they fall?

Obviously, we have repurchased units in the past. And so it's a tool that remains on the table. I think, in fact, we still have six or seven or eight million dollars of authorization to buy back units. But again, our focus is on deploying our cash flow to grow as well as return that cash to our unit holders through distribution. So it's possible, but I wouldn't say it's a high priority at this stage.

Okay, thanks.

This concludes our question and answer session. I would like to turn the conference back over to Brian Cantrell for any closing remarks.

Thank you, everyone, for your time this morning. Good conversations. We appreciate your continued support of and interest in Alliance. Our next call to discuss our second quarter 2021 results is currently expected to occur in late July, and we hope that you'll join us again at that time. This concludes our call for today. Thanks for your participation and support. Thank you.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.