Alliance Resource Partners, L.P. (ARLP) on Q2 2022 Results - Earnings Call Transcript
Operator: Greetings. Welcome to Alliance Resource Partners Second Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the program over to, Brian Cantrell, Senior Vice President and CFO. Thank you. You may begin.
Brian Cantrell: Thank you, Sherry, and welcome, everyone. Earlier this morning, Alliance Resource Partners released its second quarter 2022 financial and operating results, and weâll now discuss these results as well as our perspective on market conditions and outlook. Following our prepared remarks, weâll open the call to your questions. Before we begin, 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 morningâs 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, our 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, weâll 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 ARLPâs 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, Iâll begin with a review of our results for the quarter and then turn the call over to Joe Craft, our Chairman, President and Chief Executive Officer, for his comments. As we reported earlier this morning, Alliance delivered strong results during the 2022 quarter, posting increases to all of our key operating and financial metrics, compared to the 2021 quarter, reflecting improved performance for both, our coal operations and our royalty segment. ARLPâs coal sales and production volumes increased 13.9% and 18.7%, respectively, while our royalty sales volumes for oil & gas and coal rose 27.6% and 11.9%, respectively, all as compared to the 2021 quarter. Price realizations also increased across the board during the 2022 quarter with coal sales price per ton, increasing 43.3%, oil and gas prices jumping 64.7% per BOE and coal royalty revenue climbing 11.3% per ton. Driven by increased sales volumes and higher prices, ARLPâs total revenues for the 2022 quarter increased 70.1% to a record $616.5 million, as compared to the 2021 quarter. Net income and EBITDA also jumped significantly during the 2022 quarter, increasing 266.7% to $161.5 million and 105.6% to $243.8 million, respectively, over the 2021 quarter. Our financial results also improved over the sequential quarter, as total revenues increased 33.8%, income before income taxes jumped 111.1% and EBITDA rose 60.1%. ARLP generated $83.5 million of free cash flow in the 2022 quarter, an increase of 5.1% and 179.3% compared to the 2021 and sequential quarters, respectively. During the 2022 quarter, we returned $45.8 million to unitholders through our quarterly distribution, reduced our total leverage ratio by 19.5% to 0.66 times trailing adjusted EBITDA. Increased working capital by 30.5%, invested $52.7 million in previously announced energy transition and infrastructure growth opportunities, and we ended the quarter with liquidity of $572.3 million. Turning from our consolidated results, letâs now take a closer look at the performance of ARLPâs business segments during the 2022 quarter. At our coal operations, the previously mentioned increases to coal sales volumes and pricing led coal sales revenue higher to $531.8 million, an increase of 63.1% and 36.9% compared to the 2021 and sequential quarter, respectively. Segment adjusted EBITDA expense per ton increased compared to both, the 2021 and sequential quarters, reflecting higher labor-related expenses, inflationary pressures and supply chain issues on numerous expense items, increased sales-related expenses due to higher price realizations and reduced recoveries across both regions during the 2022 quarter. Costs in the 2022 quarter also increased by $1.11 per ton due to a noncash accrual related to our purchase of the Hamilton mine, which is based upon projections for higher coal sales price realizations in the future. Higher coal sales revenues more than offset increased segment adjusted EBITDA expenses to drive segment adjusted EBITDA from our coal operations higher to $222.6 million, an increase of 95.4% and 68.6% over the 2021 and sequential quarter, respectively. ARLPâs royalty business also performed well during the 2022 quarter. Benefiting from increased royalty sales volumes and sharply higher commodity prices, segment adjusted EBITDA from royalties rose to a record $43.7 million for the 2022 quarter, an increase of 97.4% and 12.4% compared to the 2021 and sequential quarter, respectively. Our financial and operating results for the first half of â22 were also much improved compared to the 2021 period. Coal sales and production volumes increased 16.5% and 16.6%, respectively, while our royalty sales volumes for oil and gas and coal rose 26.9% and 17.3%, respectively, all as compared to the 2021 period. Increased sales volumes and commodity prices drove total revenues higher by 58.2% to $1.08 billion. Increased revenues more than offset higher total operating expenses and income taxes, leading net income higher by 188.1% to $198.1 million for the 2021 period. EBITDA for the 2022 period also increased 86.1% to $396.2 million, compared to $212.9 million in the 2021 period. These exceptional results were achieved despite the continued negative impact ARLPâs financial and operating results of ongoing transportation disruptions, primarily due to poor performance by the railroads. At the end of the 2022 quarter, approximately 722,000 tons of ARLPâs planned coal shipments were delayed by these transportation issues. We currently expect the bulk of these delayed coal shipments will be delivered over the balance of this year, but we recognize the possibility that some shipments may shift into 2023. Iâll close my comments with a look at ARLPâs updated 2022 full year guidance. During the 2022 quarter, we secured price commitments for the delivery of an additional million tons this year and have modestly increased the midpoint of anticipated sales price realization per ton at our coal operations to reflect these new contracts. We have also slightly increased the midpoint of our expected segment adjusted EBITDA expense per ton due to ongoing impacts from inflationary pressures and supply chain challenges. Considering both of these adjustments, we currently anticipate full year 2022 operating margins from coal will be in line with our previous expectations. Turning to our outlook for ARLPâs royalty businesses, drilling and completion activity of E&P operators on our minerals acreage has resulted in greater than anticipated oil and gas royalty production volumes during the first half of 2022, leading us to increase full year BOE volume expectations by 11.7% at the midpoint. As a result of increased production volumes along with continued strong pricing for oil, natural gas and natural gas liquids, we expect the performance of our oil and gas royalty segment will exceed our previous expectations. Full year results for our coal royalty segment are expected to be generally in line with ARLPâs previous guidance. And accordingly, we increased guidance for our combined royalty businesses. We have also modified guidance ranges for several consolidated items. Anticipated income tax expense increased $10 million at the midpoint as a result of currently anticipated full year performance of our oil and gas royalties segment. The range for planned capital expenditures in 2022 was also increased $10 million to reflect the addition of a fifth continuous mining unit at our Gibson South mine and another development unit that our Hamilton mine by the end of this year or early next. Finally, estimated net interest expense was reduced to reflect anticipated cash flow expectations. With that, Iâll turn the call to Joe for comments on the markets and his outlook for ARLP. Joe?
Joe Craft: Thank you, Brian, and good morning, everyone. Global energy market conditions have continued to improve since our last earnings release in early May. Through the first half of this year, commodity prices have risen sharply as worldwide economies struggled to meet increasing power demand in the face of systemic commodity and renewable supply shortages and disruptions related to Russiaâs invasion of Ukraine. A confluence of factors has contributed to global shortages of coal, oil and natural gas. Climate policies by governments and regulatory bodies in the United States and Europe, have driven the premature closures of reliable base load power generation and are continuing to influence utilities decisions on displacing fossil fuel plants with unreliable renewables in an effort to meet arbitrarily imposed deadlines. Many large financial institutions continue to support these efforts by blocking access to capital for fossil fuel producers. Based with these headwinds, producers have for several years prudently limited investments in fossil fuel production, leading to the current worldwide shortages of coal, oil and natural gas and a continued reluctance to make meaningful investments to increase supply. This lack of supply response combined with inflationary forces, labor shortages, supply chain issues, transportation delays and sanctions imposed on Russian fuel sources have all contributed to the current energy crisis facing the world today. Governments and power generators around the world have begun to respond to these challenges by reevaluating their energy portfolios and power generation mix with a focus on energy security and reliability, which has favored natural gas and coal in the near-term. However, it is unclear what actions will be taken that will in fact lead to a supply response, significant enough to bring the energy markets more closely in balance and thus a reduction in future energy prices. In the United States, coal stockpiles remain critically low, approaching levels not seen since 2006. With competition from higher priced export markets and dismal performance by the railroads, domestic utilities are unable to secure the coal volumes necessary to meet their power demand obligations. These utilities, regional grid operators and public utility commissions have all begun to realize the reality of these market conditions, prompting their recent announcements to delay more than 12 gigawatts of planned coal plant closures, in an effort to ensure adequate grid capacity and reliability for the near future. We believe the decisions made by utilities this year in combination with a higher natural gas price curve for the next couple of years, support higher domestic demand for coal and elevated coal prices over the same time period. European utilities are facing similar challenges. In advance of the upcoming ban on Russian coal supply scheduled to occur in the next couple of weeks, API2 pricing remains elevated, recently closing at $370 per ton for fourth quarter deliveries. Attractive net back pricing for thermal and metallurgical exports should provide growth in revenues for several years for U.S. coal producers as well. The countries around the world recognizing the importance of energy security and our customers increasingly seeking to secure long-term reliable coal supply from well-capitalized operators, ARLP has been able to strengthen its contract book. During the 2022 quarter, we entered into new coal sales agreements for the delivery of 24.9 million tons, through 2025 at prices above last quarterâs expectations. We continue to believe coal markets will provide attractive opportunities for ARLP through at least 2024 and drive year-over-year margin growth for our coal operations in 2022, as well as 2023 and 2024. In this environment, we remain focused on expanding ARLPâs market share to meet the needs of our domestic and international customers. By phasing in two new units of production in the Illinois basin, we plan to increase our coal sales volume by approximately 1 million tons in 2023. Strong commodity markets should also benefit our oil and gas and coal royalty segments. Record oil and gas price realizations and production volumes resulted in record segment adjusted EBITDA from our oil and gas royalties segment through the first half of this year. With a favorable forward price curve for oil and gas and expectations for volume growth during the back half of 2022, we expect the performance of our oil and gas royalties segment to remain strong. The favorable market conditions supporting the performance of our coal operations are expected to benefit our coal royalties business as well. We continue to believe ARLP is well positioned to deliver solid growth and attractive cash returns to our unitholders. During our last earnings call, we indicated that management was targeting unitholder distribution increases of 10% to 15% per quarter over the balance of this year. And we are pleased that our Board elected to support managementâs view by increasing ARLPâs cash distribution to unit holders by 14.3% over the sequential quarter. Reflecting ARLPâs strong year-to-date performance and managementâs expectations for the future, our targeted quarterly distribution increase remains intact through the end of this year, and is expected to result in approximately 30% of our annual free cash flow being returned to unitholders as we previously communicated. In addition to returning cash to unitholders, ARLP continued to make progress during the 2022 quarter on its energy transition strategy we outlined last quarter. Adding to our earlier investments in EV charging infrastructure through Francis Energy, and energy efficiency through Infinitum Electricâs industrial electric motor technology, we announced this morning our $25 million commitment to NGP ETP IV, a private equity fund sponsored by NGP Energy Capital Management, LLC. While ARLPâs commitment to this fund will be deployed over several years, our participation provides us insight to a broad range of investments in companies focused on the growth of renewable energy, the electrification of the U.S. economy and energy efficiency. Through these efforts and others under evaluation, we remain focused on the capital allocation priorities we outlined during the last quarterly earnings call. We firmly believe the fossil fuels ARLP currently provides will remain essential for years to come to meet the immediate energy needs critical to our customers and the communities they serve. By implementing our energy transition strategy investments, we are also well-positioned to meet their energy needs of the future. In conjunction with all these efforts, we remain committed to maintaining a strong balance sheet and achieving record financial results, leading to long-term growth in total returns to our unitholders. That concludes our prepared comments. And Iâll now ask the operator to open the call for questions.
Operator: Our first question is from Nathan Martin with The Benchmark Company.
Nathan Martin: Maybe Iâll start with -- you guys mentioned committing an additional 24.9 million tons through â25 at prices above your recent expectations, pretty sizable chunk there. Maybe could we get a breakdown of those tons over the next several years â23, â24, â25? And any thoughts on pricing would be helpful.
Joe Craft: Yes. So, as Brian mentioned, we had 1 million in â22 and 9.1 million in 2023, â24 is 8.5 million and 6.3 million in 2025. As I mentioned, those prices did come in higher than what we anticipated last quarter. As we think about the 2023, if our forecasts are correct for our UI tons, and based on the tons we booked we would expect our average sales price to increase approximately $10 a ton from our guidance for 2022. As Brian mentioned or I mentioned, we believe those margins are also going to expand in 2024. So, that would suggest that those prices could be a little higher in 2024 as well. Itâs hard to project exactly what that number would be, because it does have a larger percent of UI. And thatâs subject to how the markets will develop over the next year for â24, â25. So, thatâs a guidance I can give you today.
Nathan Martin: Thatâs very helpful, Joe. I appreciate that. Maybe another question on â23 specifically. Youâre now expecting production sales to be up about 1 million tons, as you said, with the fifth unit Gibson South and the extra development unit at Hamilton you said late this year, early next year. Are you guys planning any further expansion at this point, if demand is there, or itâs pretty much how you see sales shaping up this point for next year?
Joe Craft: I think itâs dependent on labor. We have seen an improvement in our labor supply this quarter. Thatâs attributed to thereâs been some demand response and some industrial companies in our region that have cut back. And so, thatâs created some opportunities for us to hire. Weâre hopeful that with our forward look that shows this commitment from our customers over the next several years that that tool will help us and continuing to recruit workers to the coal industry. The state of Kentucky in particular and Southern Indiana both have a lot of efforts on workforce development to try to go to the young people in high schools and in technical schools to put an explanation or trying to educate these young people that tremendous opportunities they got in the manufacturing sector of our economy and the growth thatâs projected over the next several years. I think thatâs having -- bearing fruit. But, whether we can increase volume and beyond this will in large part be dependent on workforce and maybe more importantly on government policy. So, right now, Iâm not expecting anything beyond what weâve announced to try to get to the bottom line. There are a few things we are looking at that could create some opportunities this year, if we did increase those opportunities this year, it would probably take away from next year. Itâs just different ways. We could look at our mine plan that could allow us to bring on a little bit more tonnage. Itâs not significant, but there is opportunities with the price. When you look at the market for fourth quarter of this year, both domestically and export, itâs quite a bit higher than what we would expect next year. So, we are trying to evaluate whether there is opportunities to adjust our mine plans a little bit, to take advantage of that different price curve, but itâs not significant. I mean, itâs meaningful to us, but itâs -- as far as the guidance weâve given, itâs all within the ranges of the guidance weâve given you for 2022.
Nathan Martin: Got it. Thank you, Joe. I appreciate those thoughts on the labor front as well because I was going to go there next. So, maybe just curious on the export side. I think, you guys have done as many as maybe 10 million or 11 million tons max at some point historically in a year. Is that still a reasonable maximum number or where do you see that number popping out today?
Joe Craft: When we did that, I think we were producing a little over 40 million tons, right, at 41 or so. We could do that. Our preference is to sign long-term contracts domestically. So, if domestic customers would agree to three years or greater, we would more than likely end up selling tons in that market as opposed to the export market. But, we are also talking to some export customers for long-term contracts. So, we are looking for stability. I think the pricing, weâve been pleased -- we thought we would have more export tons sold this year. But most of -- I think the ones that we just sold were all -- were domestic. We may have a little bit in the export market, but the domestic market has met the export pricing. And as we get into next year with the tons that are unidentified, which is around 8 million tons, itâll depend on how our efforts go. I mean, if the domestic market wants it and theyâll commit to 3 million tons and pay us something comparable to the export price, thatâs what we would do. If they elect to go to short and then there is plenty of export demand for us to participate in that market to where we could go higher than the 5 million tons or so that we are targeting for this year.
Nathan Martin: Okay. So, that sounds pretty positive, Joe. If I understood you correctly, your domestic customers have been willing to kind of meet you where the export net backs have been or at least close to that area and give duration.
Joe Craft: They have in the short-term. As far as the longer term, weâre talking to them about meeting those. The contracts that we got longer term were not at the export levels, but they were still very attractive, given the guidance I gave you that we are going to increase our average sales about $10 a ton.
Nathan Martin: Perfect. I appreciate those thoughts. And then maybe just finally, just kind of a higher level question. Joe, how do you think about balancing your growth investments and growing your distribution over the next couple of years, especially with the forecasts that hopefully margins will expand in â23 and then â24 of higher margins here in â22 as well?
Joe Craft: So, weâve been consistent in saying for 2022, weâve targeted 30% payout. And we will evaluate what we will do in â23, â24 as far as a percent of cash flow, probably at our December meeting, so we will have an October meeting. But what we will decide is relative to what our future cash or our future percent of cash flow for distributions will be made, that would more likely be with our preliminary budget presentation to the Board in December. I think that itâs fair to say thereâs not going to go below 30%, whether it goes higher than that, itâs going to be dependent on what the outlook is, not only for â23 but â24 and forward, I think weâve also been very consistent that when we set an increase in distribution, we expect that distribution level to be sustainable. So, there is a possibility with these elevated prices that in the future we would look at some type of variable distribution on top of our fix but thatâll be a decision that weâll be made in December, once we have a better sense of how the utilities are thinking about the transition and the timing and their willingness to continue to commit folks like us that are in it for the long term that are reliable, have the capacity to be there for them. So, that will factor into that decision.
Operator: Our next question is from Mark Reichman with Noble Capital Markets.
Mark Reichman: Just wanted to ask, Joe, if he could comment a little bit about the electric power sector of coal stocks, kind of where they sit, what you view as kind of a normalized level? And then, talk a little bit about how thatâs impacting the contracting environment. And when I talk about kind of where the power -- the coal stocks sit, not just in aggregate, but maybe kind of how theyâre kind of distributed regionally?
Joe Craft: So, as we mentioned, theyâre lows that weâve havenât seen in five years or so or more than that, 2006. So, I would say itâs pretty much across the board from a regional standpoint. Now, there are select utilities that may have a little bit better coverage than others, but not really, because of the transportation shortfalls that we both, Brian and I both talked about. So, because of the transportation shortfalls, especially those that are dependent on rail, most utilities are trying to build those inventories. Theyâre concerned about natural gas deliverability as well, given the demand that theyâve seen for power generation, and they basically decided to burn more gas even though itâs not economic, relative to coal, because the coal supply is so short. And they want to make sure they have enough inventory and storage as a base to winter as possible. Itâs hard to know whatâs normal anymore. So, I canât really respond to that. I think thatâ¦
Mark Reichman: Well, thatâs what I was going to say, because, if at the end of 2020, the stocks are about 133 million tons and then they drifted down to about 95 million tons at the end of 2021, and I think at the end of April they were around 91. And of course, you donât have to go too far back where over 100 million tons was kind of the norm. But I was thinking how are the utilities handling, should the normalized level, is it -- would you say itâs around 100 million or how much do you think they need those stocks toâ¦
Joe Craft: Here is the complication in market. Itâs hard for me to understand. So, the public service commissions are asking them very difficult questions right now. Why are you dispatching uneconomic gas, coal? And so, they may say, well, because we canât get it transported. Well, have you contracted to get it transported? So, I think the public service commissions, that Iâve -- Iâve been in conferences with three of them. So, itâs not like Iâm having personal conversations with them, but as I listen to them. And what theyâre saying is theyâre trying to encourage the utilities to not think short term, think longer term. If they want to build inventory that thereâs flexibility from a public service commission perspective that they would prefer to see and to get return on that working capital than them to go short and then come back and say, I canât get it, have excess capacity in their units, their coal plants that the ratepayers have already paid for, or are paying for and then not use them and they go by our grid, and then want to go come back and pass that through to the ratepayers. So, thereâs pressure. Stop thinking about -- I mean, we -- over the last several years, even with interest rates at near zero, they were trying to push to get their inventories down instead of building inventory on ratable shipments. So, they would sign a contract. That says in our contract, you ship ratably and then they come to us and say, well, we got to keep our working capital down, so weâre not going to ship this month or this month in the shoulder months. And historically, they usually would not do that. They would usually ship ratably, and that would add to their stockpile. And so, when you try to think of averages, most recently, theyâve tried to keep those very low anyway. And I would think that if they are being responsive to the utilities and to the utility commissions that they should want to be increasing their stockpiles. Now, having said that, we all know that the export market is very strong. So, they got decisions to make, do they buy and meet the price of the export market, or do they go and continue to not buy those tons at that price in anticipation that canât predict natural gas. Natural gas right now is projected to be 5.50, I think next year, right, currently. So, at 5.50, I mean, they can pay prices that are at elevated levels that they could put in stockpile. So, theyâve got to have that conversation with the utility commission as to, okay, let me make sure Iâm hearing you correctly. If I do this, are you saying thatâs prudent? So, it gets a little complicated. And every public service commission is different. And Iâm really focused on regulated utilities when I speak to that, which is the majority of our customers. So, itâs hard to answer your question. In normal times, if markets were...
Mark Reichman: Thatâs actually very helpful. And the other question I had was the Supreme Court recently kind of gave the coal producing states a win on that EPA case. But, now you see kind of the Biden Administration saying, well, the EPA may come back and tackle other pollutants, like coal ash. I mean, how do you see that -- how do you see that playing out and impacting the utilities decisions? Because it does seem there is a lot of uncertainty, even though it seems like first, initially I thought the Supreme Court decision might lead to maybe a longer tail, but maybe a more thoughtful policy. It seems like in some policymakersâ mind, fossil fuel is just kind of a dirty word that -- not recognizing that there is still plenty of opportunities to improve the carbon profile of fossil fuel sources, itâs not fossil fuels that the focus should just be on decarbonization or lowering carbon emissions.
Joe Craft: Yes. I agree with you. Again, thatâs very complicated as well, because there is these mixed signals. The White House wants to talk in terms that they care about inflation and they are trying their best to reduce energy cost, and yet the EPA is accelerating these regulations that you mentioned. Totally inconsistent policy. I do believe that the utilities at the very highest level are trying to communicate to the White House that our energy security is such that until we can increase supply, they need to be aware that they need every plant that they have, every coal plant, every fossil plant, if they are going to meet the needs of the customers, they need to operate those and not close any. So, they are encouraging the White House to give extensions on these regulations, push the pause button. But you see the Manchin-Schumer bill that if you listen to all the hype around it, they are trying to increase the speed of the transition, instead of slow the speed of the transition. They need to slow the speed of the transition because these utilities are saying we canât replace these plant -- we canât replace the power with these plants, we just canât do it fast enough. You guys are moving this faster than is practical, because we donât have the pipelines for the gas. We canât get permits to construct new facilities. We have got supply chain issues on the renewable side. We canât -- all the -- a lot of the states just canât move fast enough to give the go ahead to connect to the grid, et cetera and so on. So, weâve got public policy that is trying to will their political agenda for the â22 election and try to spin a story that is unbelievable. I listened to the White House person this morning. I canât believe that person really believes this stuff. And man! Sheâs good speaker but what sheâs saying just is not practical, is not reality. Youâre not going to get lower prices with this policy. You canât go single thread into the natural gas industry and expect okay, weâre going to have lower prices, without competition. Itâs really hard to answer your question. I think the question that in my career economics always trump policy, government policy. Unfortunately, that has not been through the last three, four years. But Iâve got to think that thereâs going to have to be a wakeup call because both, MISO and PJM and then speaking out very loudly, they are very concerned about the capacity to be there, if the windâs not blowing or the sunâs not shining, we just donât have the backup.
Mark Reichman: Well, youâre absolutely right, cost and reliability.
Joe Craft: Yes.
Mark Reichman: Cost and reliability.
Brian Cantrell: Youâre seeing similar issues play out in Europe as well.
Joe Craft: Yes. I mean, they are giving usâ¦
Brian Cantrell: Watch the movie that Europe is going through today.
Joe Craft: The political rhetoric is interfering with that. Now, practically, whatâs going to happen? I am hopeful that the utilities will be able to educate the government, and theyâll do the right thing and keep these plants on line. And if we have to wait until we get replacements, thatâs going to -- I think thatâs going to bode well for us. If they decided to go ahead and create another energy crisis more severe than the one we got this year, then weâll probably have a new President in 2024.
Mark Reichman: Now, just one last question for Brian. Brian, could you just address your annual capital expenditure profile over the next couple of years and kind of where that money gets spent?
Brian Cantrell: Youâre talking about our maintenance capital, Mark?
Mark Reichman: Yes, the maintenance capital.
Brian Cantrell: Yes. Our most recent plant that weâre operating under today, we have that at about $5.66 per ton produced. Obviously, we will reevaluate that as we go through our 2023 five-year plan. But for now, I would use that number as a placeholder on what maintenance CapEx will look like.
Operator: Our next question is from Marco Rodriguez with Stonegate Capital Markets.
Marco Rodriguez: Just a couple of quick follow-ups. I was wondering if maybe you could first start with the additional million tons that youâre expecting in 2023. Can you kind of give us a sense as far as the timing of that is concerned and when that comes on line and how that spreads through the year?
Joe Craft: So, the bulk of that will -- should start in the first quarter, probably in February, January. It depends on hiring folks. And then, the other, letâs say, 300,000 or so, 400,000 would start probably at the end of the first quarter. And at pro rata, itâs a development unit. So, itâs not going to be as productive as our single unit, our CM unit.
Brian Cantrell: It gets back to the timing of when we can get this completed. As Joe mentioned in his opening comments, weâre working to add the development unit at Hamilton and the production unit at Gibson South. Hope to have that in place by the end of the year. But depending on labor, it could end up being completed in the first quarter.
Marco Rodriguez: And then, kind of following up on some of the pricing questions and answers you had here, just wondering, if you can maybe give a little bit more color on how those discussion and tone of the talks were related to pricing, on a domestic side as well as international side. I know that you said, you have a preference to doing long term contracts domestically. And it sounded like if I picked this up correctly, that the international tonnage is not you would have expected to have done more by now, if you can maybe just kind of compare and contrast how thatâs going and what might be some of the gating factors surrounding not picking up more international tonnage?
Joe Craft: So, on the domestic side, we typically just respond to RFPs that the utilities will go out. And that unfortunately takes a month or so. I mean, they send them out and then you have conversation. So, then you get signals and so then you have to decide whatâs the likelihood that youâre going to close that deal as youâre thinking about where the export markets going to go. On the export side, the rails have been a challenge. So, itâs hard to get commitments from some export buyers, because not getting the commitment from the railroads to know that they can deliver this specifically on the East Coast as we try to ship times through the peers on the East Coast, thereâs backup. And a lot of these vessels are incurring demurrage, because rails arenât delivering the coal at the times that they thought they were going to. So, thatâs been one factor. The second factor that impacted sales for this year is trying to get an opportunity to ship a vessel to Europe in particular where theyâve been trying to accelerate their shipments from Russia until what was an August 10th deadline as to when those sanctions were going to apply. So, the opportunities at the time to try to book something with vessel availabilities just proved to be uncertain. So, we had to make decisions -- or have to make decisions whether we want to do wait for that vote or go ahead and take the burden hand. And since the domestic utilities were willing to book at what we would have gotten, had we sold going the export market, that made it an easier decision for us.
Brian Cantrell: The European steel buyers are in a tight spot. Joe mentioned theyâre trying to accelerate deliveries from Russia prior to the full scale sanctioning going in on August 10th. And at the same time in addition to the poor rail service, youâre -- the ARA ports or at near or capacity, water levels on the Rhine River for barge movement out of those ports are -- is very, very low. There is bottlenecks occurring at their ports as well that have caused them to pause a little bit on how they deal with that in the short term.
Joe Craft: We do think that now that itâs August that thatâs going to start showing opportunities. And thatâs why that API2 price is where it is today. Physicals are actually higher than what the API2 benchmark is. So, itâs constant communication and trying to make good long-term decisions is what weâre trying to do.
Marco Rodriguez: Understood. And last quick question for me. Just wondering if maybe you could provide a little more color surrounding the additional investment you made this quarter for the energy transition in that private equity fund, how did that kind of come about and what your expectations are?
Joe Craft: Okay. So, as we were looking at different ways to determine how to educate ourselves and investing in the transition, I asked my team, why donât you go out and start looking at different private equity funds, because they got people that are doing this. There is a lot of them out there that we could learn from, because API has larger staffs than we do to try to look at each of the different ways to invest. I mean, when the government starts throwing money out, like they are doing, before this new bill, now, even with this bill, there is more money out there. And there is a lot of people out there trying to evaluate opportunities to participate in that transition. So, we went to -- or my team looked at numerous private equity funds to determine, who we thought could be best-in-class so that we could invest some into their funds. And then, as an LP, like any other LP, get whatever information they share as to what their views of the future are, what theyâre looking at, what theyâre not looking at, why theyâre looking at what theyâre looking at, why theyâre not looking at what theyâre not looking at, just to learn. So, their history and their returns are good. And so, we think that itâs a good place marker to put some cash and we will get good returns on the cash -- on cash over the next several years. But we will also hopefully be able to get some information on opportunities to -- so that we could be more focused in things that we might be willing to look at that would, if we went back to the last call, our vertical four, which are trying to find those businesses that could turn into two-decade, three-decade businesses that could generate sustainable cash flow. This particular fund is not early venture. Itâs a late stage. So, they are looking for investments that they call growth equity investments. So, itâs not truly an infrastructure fund. It is focused on the transition space. But they are looking at companies that will cash flow in the very near term compared to a lot of these transition -- funds or a little bit earlier stage capital, and they are not expecting cash flow for 3 to 4 to 5 years. So, thatâs what attracted us to this particular fund. We think that they are looking at things that we would look -- at the type of stuff we would look at that would be shorter -- that would have cash flow in the near-term as opposed to further out with a lot of these transition companies. So, thatâs why we did what we did.
Brian Cantrell: Marco, philosophically, itâs very similar to the approach we took when we got into the oil and gas minerals business, where we initially participated as an LP and a fund, giving ourselves an opportunity to learn the business in more detail. And in that case, we determined that this could be a segment for us with long-term cash flow potential. Itâs a similar approach here where weâre trying to learn as much as we can about the various opportunities that are out there. And hopefully, we will identify, as Joe mentioned, businesses that will be a more sustainable part of our company going forward.
Operator: Our next question is from Chris Sakai with Singular Research.
Chris Sakai: I had a question. Can you just share what youâre seeing regarding sulfur discounts, especially on shipments to Europe?
Joe Craft: I havenât heard that word mentioned lately. The general -- recently, weâve been seeing sulfur discounts depending on the mine, depending on the quality thatâs being produced, ranging from nothing, by way of example, for our MC mining operation, but elsewhere, we are seeing discounts in the 10% to 15% range or so.
Chris Sakai: I noticed, you increase your expense per ton sold guidance. Wanted to see what youâre thinking about as far as, as we head into 2023, can you share some color there?
Joe Craft: Right now, it appears that weâre sort of seeing things level off and weâre actually seeing some commodities that are going down. What weâre projecting is that theyâll continue to rise, as weâre thinking about 2023. So, when we are giving you guidance on margin growth, we are planning at a 4% increase or so on top of the increases weâve seen this year. So, thatâs what weâre seeing. Now, weâll see what happens. But thatâs what our -- thatâs our look right now is weâre looking at 4% on top of what we got this year, but weâre starting to see some reduction. The areas that continue to be a little elevated that are starting to pass through is just back on the power and energy side, reflecting these higher prices.
Brian Cantrell: Through the first half of this year, Chris, we have been focused on making sure that we have enough materials and supplies on hand so that we donât have any operational disruptions, which has caused some of the increase in the first and second quarter. As Joe said, weâre beginning to see that level off a little bit. And so, if you look at our updated guidance for the full year and compare that to where we are for the first half of the year, itâs pretty well right in line despite the relatively high increase in this particular quarter.
Chris Sakai: Lastly, can you elaborate more on the recent private equity investment? And also, do you plan on investing in more private equity funds in the future?
Joe Craft: I think that right now, we donât have any additional plans to do that. So nothing -- I donât have anything more to add on. The investment in this particular one that I just talked about it, if thereâs something more specific that youâd like to ask, I donât what my answer was, Iâm happy to try to answer it without repeating what I said.
Chris Sakai: Okay. Thanks for the answer.
Operator: Our next question is from Joseph .
Unidentified Analyst: Hi, just a couple of quick follow-ups. So, Manchin as a coal guy, what do you guys think heâs really up to, or do you have a view? Because Iâm sure you are well briefed on all this?
Joe Craft: Good question. And Iâm very disappointed, to be honest, but I really donât know whatâs in his head as to why he did what he did, because itâs totally inconsistent than everything heâs done all year. And I just donât understand it. I mean, you can title anything you want to title it. But it just doesnât seem like itâs going to reduce inflation, to me. I donât know what you all think.
Brian Cantrell: And at a time when weâre focused on energy security and reliability of supply to significantly subsidize one form of energy while taxing other forms of energy, as Joe said, it just seems very inconsistent, and it is very disappointing.
Unidentified Analyst: Well, hopefully, weâll get a new administration soon, or at least new leadership in the Congress. What is the relationship between U.S. gas prices and coal dispatch? And I sort of asked that from the perspective that Europeâs problems have pulled up coal prices quite a bit. So, they can offer high prices. At what point will domestic utilities just stick with gas, because itâs cheaper than dispatching coal, whatever, $100 a ton or whatever that is? And this is very general question, because I know it varies from point to point.
Joe Craft: So today, all utilities are acknowledging that as they dispatch gas over coal, that itâs an economic. When you got $8 and $9 gas, they should be buying coal, if they can get it, if itâs on a rail, or B, if theyâre willing to pay for it, compared to what we can get in international market. And thatâs why in the short-term, the sales we made this year, they were willing to pay what we could get in the international market, because it was economic for them to do so. And we can definitely compete with natural gas at the future price curve to where they should be running their coal plants full out. Our recent estimate, I donât know, if this holds true, Iâm having a meeting Wednesday, but we think that there is probably 30 million tons that could have been bought in our region, just in our buying area that could have been bought this year to run at full capacity in those coal plants that were not bought, because of the utilities deciding to buy uneconomic gas, instead of buying coal at a price that would be better for the rate payers.
Unidentified Analyst: So, last question real quick. Your balance sheet has two equity items on it. One is equity method, which went up by $20 million. The other one is equity securities, which went up by $32.6 million from the fourth quarter. Are those both private equity investments or is there something else in the equity securities?
Joe Craft: I think that $20 million relates to Francis.
Brian Cantrell: Yes.
Joe Craft: And the other relates to the Infinitum.
Brian Cantrell: Thatâs exactly correct. From the two investments that we announced last quarter, Joe.
Unidentified Analyst: Okay, great. Guys great job. And look forward to rest of the year.
Joe Craft: Thank you.
Operator: Our next question is from .
Unidentified Analyst : Can you tell me, Q2, how much of that improvement over Q1 was sort of makeup of volume and maybe the fact that there were fewer long wall moves? How much volume got shifted so that you were just sort of seeing the improvement from what was delayed in Q1?
Joe Craft: Yes. What was delayed at the end of Q1 was about 1.1 million tons. At that time it was due obviously to poor performance by the rails, but also, barge shipments were impacted in the first quarter due to high water levels as well as locked maintenance. On the barge front, those delays have essentially been resolved, they are mainly seasonal. So, you saw our delayed shipments dropped from the 1.1 million to the 722,000 tons or so. I would say, the vast majority of that was attributable to the barges being back on track after those seasonal issues in the first quarter. Rail performance has continued to be very, very disappointing and accounts for the majority of our delayed shipments at the end of the second quarter.
Unidentified Analyst: Okay. And any long wall moves coming up or youâre pretty much done for some period?
Joe Craft: I donât have the long wall move schedule in front of me. I donât believe we had any long wall moves in the second quarter.
Unidentified Analyst: Okay.
Joe Craft: Iâll get back to you on that.
Unidentified Analyst : Yes. Thatâs fine. Joe, in 2015, your dividend or distribution was $0.675 and the Company was probably 75% or 80% of where you are now. Is there any reason why you couldnât get back to that level?
Joe Craft: When were at that level, we were closer to 70% payout of our cash flow. So now, weâre targeting 30. So, what we do relative to that, going forward, as I mentioned earlier today, thatâll be something thatâll be discussed at our December meeting. So, thereâs just a lot of issues that weâve got to understand how utilities act, how this government acts, and what the opportunities are for us to deploy that extra cash flow that weâre going to be generating that is significant. As I earlier discussed, there is a potential that we could pay out some variables also to where it would be at higher levels, but I do not see us going back to 70% payout, if thatâs your question.
Unidentified Analyst: No, it wasnât but thatâs a good way to. Whatâs your feeling, Joe, about buybacks?
Joe Craft: Thatâs on the table. I donât know that would be significant but I think thereâs a possibility that the market doesnât appreciate what weâre doing that we would look at that as an option, whether itâs cash flow.
Unidentified Analyst: Going back to questions about NGP, your comment, Joe, was that you want to know what theyâre looking at and what theyâre not looking at. And youâve got basically things that are going to be cash flowing soon. So, can you just give us a general idea of what theyâre looking at and what theyâre not looking at?
Joe Craft: I think we talked about that. So, theyâre looking at renewables, areas in the renewable space. Theyâre looking at electrification, which gets into a lot of the auto sector, and then
Brian Cantrell: Energy efficiency.
Joe Craft: Energy efficiency. So, the electrification also gets into battery storage and things of those natures is pretty consistent with the things that I outlined on our last call, the things weâre looking at. So, you got energy, storage, youâve got EVs, and infrastructure for EVs. Weâve energy efficiency, likely what weâve done with Infinitum. So, thereâs -- those are the type of things that theyâre looking at and that weâve been looking at. So, it seemed to be a pretty good fit for us.
Unidentified Analyst: Separate from them, Joe, are you looking at anything in batteries? I know youâve mentioned it a couple of times in the past.
Joe Craft: There are continuing evaluations of numerous companies, and thereâs a couple of battery deals that -- not deals but investments that weâre looking at. I think our guys have a tour scheduled at one of these companies soon. So yes, we are keenly interested in investments in that arena.
Unidentified Analyst: Okay. Maybe thereâs a company that we can direct you to, you might be interested taking a look at.
Joe Craft: Sure. Give us a call, Mark.
Unidentified Analyst: I will give you a call. Joe, on Infinitum, can you give me any sense on the sort of the take-up of these PCB Stator motors? What the actual usage is?
Joe Craft: Yes. I think most of them are in the HVAC, but also in the auto sector, but a lot of the interest is in both of those sectors.
Unidentified Analyst: Any sense -- I mean, I guess, we can -- I donât need to know them. But Iâm just curious, I mean, how -- are these things, are they revolutionary?
Joe Craft: Theyâre lighter and theyâre more efficient. Theyâre easier to maintain, quieter. And so, there are a couple of competitors around the world. But yes, so we take solace in that most of the co-investors are customers, thereâs couple private equity firms. But theyâve got strong interest. Theyâve got a very large look at business in the pipeline.
Brian Cantrell: From OEMs, that are also invested in the company as well.
Joe Craft: Weâre excited about it.
Unidentified Analyst: Joe, one point I think I heard -- I think in the last call, you said that there were 100 people at Matrix. Is that right?
Joe Craft: Thatâs correct.
Unidentified Analyst: And are they doing anything specifically with Infinitum?
Joe Craft: They are -- they did have a visit this quarter, where they are looking at the technology and sharing different things weâre looking at with our R&D, what theyâre what theyâre doing, beyond just this one investment, this particular motor that is -- what is everybodyâs investing in that particular motor. But theyâve got strong R&D people that are talking to our R&D people to see if thereâs other applications of this particular motor and other things theyâre working on. That could be interesting for both companies. So, there is some discussions that we think that could bear fruit, but thereâs nothing really to talk about other than the fact that yes, there is potential for us to have ancillary business opportunities with them that are not related to this particular motor. That is what we basically invested in.
Unidentified Analyst: And then, just staying -- going back to the 100 people at Matrix. Are they making products that are being sold to third parties, is Matrix going to be at some point big enough to be reported separately, so we kind of know more about what theyâre doing? Can you just give us more of a feeling for what you see Matrix doing, what theyâre doing?
Joe Craft: So, as we talked about in the last earnings release, we think they can -- they have a technology called OmniPro, which is a camera focused facility on forklifts that weâre rolling out to the industrial sector. And thatâs our growth -- our biggest growth potential. Thereâs a few other products that weâve got that are in the mining space that will be complementary to other things weâre doing in the mining space on our proximity devices. But the primary growth engine for Matrix right now with a specific product thatâs being manufactured are these camera typeâ¦
Brian Cantrell: AI cameras.
Joe Craft: Forklifts to have avoidance -- to avoid running into people. And we talked about growing that 5 to 6 times I think.
Brian Cantrell: 10 times.
Joe Craft: Yes, and go to like 35 million. So, itâs not -- it is growth. So, we are encouraging them to look beyond what theyâve been doing, which is just spend money within their own cash flow. So, we do think that there will be opportunities for them to do some things that will allow that to grow. And then, our dream would be to, yes, we would hope it would be a separate reportable segment, in not too distant future, maybe two or three years from now.
Brian Cantrell: Today it is still relatively small. I think last year, we did about $4.5 million in EBITDA, tracking to do about $8 million in EBITDA this year with the base being the proximity detection, miner communication type technologies that are used for mining. And then as we use those technologies to get into other products like OmniPro, thatâs really whatâs driving the growth this year and next year.
Unidentified Analyst: All right. Anyway, Iâd just like one final one, which is PJM and MISO, you had mentioned earlier that they are concerned about, and they have said, they are concerned about shortages about capacity. Does it look like theyâve managed to sort of skate through the summer and is the winter more of a concern or not?
Joe Craft: Yes. No, I mean, I think they are concerned from this point forward. They are really concerned with the number of plants that are on the drawing board to be closed. Thatâs what they are really concerned about, back to the CCR rule that there is 41 plants right now asking for extensions, so that they can stay open beyond 2023 that are subject to closing if EPA continues to expect them to meet certain standards. So, thatâs what they are really concerned about in the near-term, as opposed to month-to-month. They are really looking to keep these plants open, keep the capacity open. Again, as Brian said, if you look at Europe, theyâre having to go back and pull plants out of mothball. Weâve got plants that are running today that the governmentâs trying to put in mothball. And why do that? Why not allow these plants to stay on line, until we get better definition of what weâve got to back them up, if they are shutdown. And thatâs the megaphone they are using to try to educate people that we need to be careful and not close anything that weâve got on line today. If we got shortages, you donât solve the problem by making the capacity more shortâ¦
Unidentified Analyst : Has there been any -- whatâs the experience been of restarting mothballed plants. Are they no problem, or are they any problems people experienced doing?
Joe Craft: Again, these are the European plants that weâre talking about. And there are problems, because in most cases they werenât capitalized towards the end of their life. But they are spending the money to bring them back up because they need -- when you have as much gas as theyâve got taken off the market, theyâve got an energy crisis and theyâll spend the money to bring them back up them to operate.
Operator: And our final question is from Arthur Calavritinos with ANC Capital. Please proceed.
Arthur Calavritinos: Iâm not a lawyer, but on the EPA decision, right, West Virginia EPA, is there any compensation the industry could get? Because I mean, they carpet-bombed the entire coal industry. And Iâm just wondering, I just thought about it after the -- and by the way, congratulations. But is there any precedent or anything like that you guys could get as an industry?
Joe Craft: Well, thatâs a good question. I donât have the answer for you. You say youâre not a lawyer.
Arthur Calavritinos: Iâm not. I just play one on TV. Now, Iâm not a lawyer.
Joe Craft: Now, I think that -- so we are looking at what impacts to the specific regulations, one of the biggest ones thatâs facing everyone is this carbon disclosure rule that is being talked about with the final regulations due sometime in January maybe?
Brian Cantrell: At the SEC.
Joe Craft: Right, the SEC, which is another -- I mean would just be a tremendous burden on everybody to report data that donât know that anybody would really read it or use it. So thatâs one. I think, the regulations that exist today, itâs going to be hard to overturn those, on the ones that are considering, we canât take action until thereâs a final rule. And then, those will be focused on to determine whether or not EPAs operating within their boundaries. I do believe that the energy crisis itself and the desire to lower Americans high prices for energy is the best route for us to get regulatory relief as opposed to going through the courts and of course, just take forever. And theyâre customers, and theyâre advocates for those that are in energy poverty need to step up and say, come on government, you got to do something here and donât make it worse, which is what theyâre getting ready to do if they turn a blind eye. If EPA turns a blind eye to the energy crisis, and right now I havenât seen no sign that theyâre not willing to do that. In fact, EPA administrator was quoted last week in a speech that said that the West Virginia decision just leads them to want to accelerate what theyâre doing, instead of slowing it down.
Arthur Calavritinos: And to the 24 plants, you mentioned that I think last quarter or the quarter before, the decisionâ¦
Joe Craft: 41.
Arthur Calavritinos: 41, would those, -- just mentioned 24, are those -- so those would, because of decision came in the way it did, they were supposed to be closed, but theyâre not, right?
Joe Craft: Thereâs a compliance date of 2023 for them to dispose of their coal combustion waste in a manner, different than the way theyâve been disposing of it. And if they donât make the investment to dispose of future ash going forward in the way that theyâve ascribed, then they would be cited for a violation of continuing to dispose of that waste in their existing piles. And so, therefore the utility has a decision to make, am I going to make that capital decision to do that and theyâre going back and saying with COVID, we lost two years of trying to think in terms of coming up with a different alternative. For coal ash, weâd like to have an extension for two years, so that we can do the engineering, get the permits, make that final decision whether we want to keep the plants open or go ahead and make the investment to open a new storage facility. Thatâs what theyâre asking. So, EPA is supposedly reviewing these plans. But to my knowledge, theyâve only actually responded to 1 of the 41. And given them conditional approval, but I havenât heard of anybody else getting any approval or rejectionâ¦
Arthur Calavritinos: Iâm sorry. Go ahead.
Joe Craft: So, weâre encouraging everyone to act on those things. Maybe utilities arenât buying, they need to make this -- EPA needs to make decisions and start talking to these utilities. And they need to have candid conversations on whatâs practical, not what sounds good for a campaign slogan, between now and November. I just think they put the utilities on heck of buying, personally.
Arthur Calavritinos: And then, the other question I was going to have is, when you look at the business, right, and weâre going to be -- just the industry in general, are they going to do more international -- is it just going to be a business that does more international stuff, because gas is so volatile, and we havenât seen a winner yet. And the reason I ask it like that is we have our guys here in this country not wanting to do long-term contracts, however -- Iâm phrasing it. But at what point to the international guys just watch this and you know whatâs going on, and theyâre like, they want to step ahead of it and maybe have much higher inventories of coal -- not much higher, but much -- higher than they -- not that they should just to have absolute higher inventory. Because it seems to me youâre going to have like a supply squeeze coming all over the world. Because to me, the more I look at nat gas, to me, it seems like itâs very unreliable in terms of shipping and other logistics, and even a political event where somebody may say, letâs boycott sending that gas to China, for example, doing crazy stuff like that. And just the demand for coal, just worldwide, and outpacing our guys basically like just higher prices, longer term contracts and all that, because it just seems like itâs changing a lot. Itâs ready to -- I feel like itâs like right now, at the moment, weâre ready to jump that way.
Joe Craft: Yes. And I think that the U.S., you can argue that U.S. is no longer a swing supplier, which I think is what youâre suggesting. And thatâs a valid position to take. And now, the real question is back to, are we going to move more and more towards that? I think the answer is, yes. Our challenge is going to be whatâs it going to be five years from now? And is there going to be any increase and take away capacity? Are there going to be any -- is there going to be any ability for anybody who wants to invest in capital to expand the capacity to export shipments? And I think under this administration, I donât think anybodyâs going to want to invest capital to do that. If there is a change of administration and there can be some certainty, you could see some expansion of export facilities that would allow for the U.S. to increase shipments in the export market beyond what we have historically done. There was an earlier question about us shipping 12 million tons a few years ago, and there is capacity for us to do that. But to really try to replace 30 million tons or 40 million tons in the export market, and others in our domestic industry do the same, there is not the port capacity to be able to hit those numbers. So, what I really think needs to happen is, we need to protect every coal fleet we have got, thatâs been invested in that has every environmental -- hasnât been meeting environmental standards to date, those plants need to stay operating. China is going to increase their coal production, a billion tons this year and a billion tons next year. Our coun
