Industrial and commercial electricity consumption is expected to increase again this year, supporting coal prices for Alliance Resource Partners, L.P. (NASDAQ:ARLP), a high dividend yielding stock with an expanding coal mine portfolio.
In early April, the Energy Information Administration issued its short-term energy and summer fuels outlook, which called for a 0.2% rise in electricity consumption this year and an additional 2.3% again in 2012. The 2011 electricity forecast is dampened by expectations of fewer cooling degree-days, which may offer upside if summer weather is hotter than expected. Overall, electricity demand is on the rise thanks to rebounding commercial and industrial production. Companies selling coal, which generates 45% of our U.S electricity, are set to benefit.
Alliance Resource Partners is the fourth largest eastern coal producer. In 2010, U.S. electricity coal consumption rose 5% from 2009. While consumption is expected to be flat this year, it’s estimated to rise 3% in 2012. If the EIA’s estimate proves correct, total coal consumption will return to 1 billion short tons for the first time since 2008. At the same time consumption is growing, supplies at utilities are falling. Utility companies held significant coal inventory heading into 2010, which they worked down through the year as consumption growth outstripped the 1% growth in overall coal production.
Export activity is also tightening supply and helping coal miner profits. Supply interruptions in Australia pushed buyers to unconventional markets, including the United States, where rail and port investments are expanding export capacity. Export growth is expected to continue this year, with the EIA forecasting exports will grow 7.3% to 88 million short tons.
Thanks to the rising demand, Alliance boosted average realized coal prices 9.6% to a record $54.08 per ton last quarter. Q1 earnings of $1.99 per share were $0.16 ahead of street consensus. And, record revenue rose 11.2% from the prior year.
Alliance operates nine mines in the Illinois Basin and Central and Northern Appalachia, and has 697 million tons of reserves. Its Illinois Basin mines, however, generate the bulk of its coal, producing 82% of the 6.1 million tons sold in the quarter. Realized prices in the Illinois Basin were 6.5% higher year over year and 5.2% higher quarter over quarter. The company also got a solid boost from a 10.2% increase in Northern Appalachian production, driven by exports, where prices increased 20.8% from last year. However, volumes from the region remain small, at only 0.769 million tons, and its export business represents only 5% of total sales.
In 2011, Alliance expects coal production to increase 11% to 31.6-32.6 million tons with all of it committed and priced, providing investors with solid earnings clarity. The company remains shareholder friendly, boosting its dividend 3.5% from last quarter to $0.89 per unit and currently yielding 4.3%. Over the past year, Alliance has upped its dividend payout by 12.7%.
Severe weather last quarter offers upside in Q2 as inventory backed up on transportation delays. The company expects to bring additional idled production back online in Central Appalachia at its Pontiki mine this quarter. Looking forward, the company expects to start full-scale production at its Tunnel Ridge long wall mine in the Northern panhandle next year. Tunnel Ridge has 70.5 million tons of high sulfur coal reserves and will produce an estimated 6 million tons annually. ARLP also hopes to bring its Gibson South property, with estimated annual production of 3.1 million tons, into production around 2014.
Of 2012 and 2013 coal production, ARLP has commitments for 27.3 million and 25.9 million tons, leaving 3 million and 6.2 million tons uncommitted in 2012 and 2013, respectively. The company also has an upside production opportunity at Penn Ridge, where it's initiating permitting, and Sebree Reserves, where permitting is in process.
As we move into the slower summer months, investors will increasingly turn toward businesses offering revenue and earnings clarity with strong and stable dividend yields. As a result, Alliance offers shareholders an attractive alternative to low growth stocks and low yielding bonds.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in ARLP, CLD, ANR over the next 72 hours.