Alliance Resource Partners LP (ARLP) 2012 Q2 法說會逐字稿

Welcome to the second-quarter 2012 Alliance Resource Partner LP and Alliance Holdings BP earnings conference call. My name is Erica and I'll be your coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions) I would now like to turn the presentation over to the host for today's call, Mr. Brian Cantrell, Senior Vice President and Chief Financial Officer. Please proceed.s

Thank you, Erica, and welcome, everyone. Earlier this morning we released 2012 second-quarter earnings for both Alliance Resource Partners, or ARLP, and Alliance Holdings GP, or AHGP, and we will now discuss those results, as well as our outlook for the remainder of this year. Following our prepared remarks we'll open your call to your questions.

Before beginning we'll start with a few customary reminders. First, since AHGP's only assets are its ownership interest in ARLP our comments today will be directed to ARLP's results and outlooks unless otherwise noted. In addition, please be aware that some of our remarks may include forward-looking statements that are subject to a variety of risks, uncertainties and assumptions, which are contained in our filings from time to time with the Securities and Exchange Commission and are also reflected in today's press releases from the partnership.

While these forward-looking statements are based on information currently available to the partnerships and those to their general partners and management, if one or more of these risks or uncertainties materialize, or if our underlying assumptions prove incorrect, actual results of the partnerships may vary materially from those we projected or expected. In providing these remarks, neither ARLP nor AHGP has any obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. Finally, we'll also be discussing certain non-GAAP financial measures. Definitions and reconciliations of the differences between these non-GAAP financial metrics and the most-directly comparable GAAP financial measure are contained at the end of the ARLP press release, which has been posted on ARLP's website and furnished to the SEC on Form 10-K.

Now that we're through the required preliminaries I'll start this morning with a review of the partnership's operating and financial results for the 2012 quarter and period then turn the call over to Joe Kraft, our President and Chief Executive Officer.

As noted in our release earlier this morning, ARLP once again post strong results for both the 2012 quarter and year to date. Looking first at the top line, ARLP posted record revenues in the 2012 quarter of $529.9 million, an increase of 15.7% compared to the 2011 quarter and $973.5 million for the first half of 2012, or 10.5% higher than the 2011 period.

Growth in coal sales revenues during the 2012 quarter was led by record coal sales pricing and volumes, improved contract price realizations in the Illinois Basin and increased sales from Northern Appalachia into the high-price metallurgical export markets, drove total average coal sales prices higher in the 2012 quarter to a record $59.17 per ton sold, an increase of 5.5% compared to the 2011 quarter. Higher Illinois Basin sales volumes from the Warrior and newly-acquired Onton mine and in Northern Appalachia from the start up of longwall production at Tunnel Ridge, as well as increased brokerage volumes, pushed coal sales volumes up 9.8% compared to the 2011 quarter, to a record 8.7 million-tons.

For the first half of 2012, higher sales volumes from the Riverview and Tunnel Ridge mines, as well as the acquisition of the Onton mine, more than offset lower sales into the export market, driving total sales volumes to a record 16.5 million tons, an increase of 16.8% compared to the 2011 period. Average coal sales prices also increased to a record $57.19 in the 2012 period, rising $2.08 per ton sold compared to the 2011 period.

On the strength of record revenues ARLP also reported record EBITDA of $155.5 million in the 2012 quarter, an increase of 6% compared to the 2011 quarter. Compared to the 2011 period, however, EBITDA year to date fell slightly to $287 million due to the pass-through of losses related to ARLP's investment in the White Oak development project and the impact on margins from lower export sales in the end of 2012 period I mentioned a moment ago.

As anticipated, higher DD&A related to the start of longwall production to Tunnel Ridge and the past-through of White Oak losses contributed to lower net income in the 2012 quarter, which declined 2.8% compared to the 2011 quarter. For the 2012 period, these factors along with reduced export sales volumes and revenue combined to drive net income lower by 7.8% compared to the 2011 period.

Turning now to costs, ARLP's total segment adjusted EBITDA expense increased to $40.23 per ton sold in the 2012 quarter. Costs in the Illinois Basin were impacted the most by lower coal recoveries in difficult mining conditions at Dotiki as this mine continued its transition into West Kentucky No. 13 coal scene and in addition, the acquisition of the Onton No. 9 mine.

Regulatory actions continue to burden results in Central Appalachia, as the loss of a production unit at both our Pontiki and MC Mining operations contributed to higher segment-adjusted EBITDA expense per ton in the 2012 quarter. In Northern Appalachia higher segment-adjusted EBITDA expense per ton reflects the increased cost for coal purchased by the Mettiki complex, higher cost per ton of initial longwall production at the Tunnel Ridge mine, as well as the impact of difficult mining conditions at Mountain View as this mine experienced significant sandstone intrusions during the 2012 quarter.

Looking at cost through the end of 2012, for our Illinois Basin Central Appalachian regions we expect production in the second half of the year to be consistent with the first half and segment-adjusted EBITDA expense per ton to be comparable to second-quarter levels. In Northern Appalachia we expect costs over the balance of the year to improve significantly by approximately 30% per ton, as production for the Tunnel Ridge longwall builds over initial start-up levels and mining conditions at Mettiki improve as the sandstone role that impacted production and costs in the 2012 quarter is now behind us. Based on our currently anticipated production and sales mix total segment-adjusted EBITDA expense per ton in the full-year 2012 is expected to be approximately 3% to 5% higher than 2011.

I'll wrap up my comments this morning with an update on our liquidity. During the 2012 quarter ARLP approached the bank markets to replace its expiring revolving credit facility and restructure its then existing $300 million term loan. Market reception was strong, with roughly $1.1 billion in demand, allowing us to expand our bank group, price the new $7 million revolver at an attractive 165-basis point initial draw and spread, and replace the old term loan with a new $250 million term loan.

These new facilities improved ARLP's liquidity to approximately $626 million at the end of the 2012 quarter. Our balance sheet remains strong and we believe these new facilities provide ARLP with sufficient liquidity and flexibility to execute our current plans and position us to quickly take advantage of additional opportunities that may arise in the future.

With that let me turn the call over to Joe for his take on the second quarter performance, our prospectus on the coal markets and a review of our outlook for the balance of the year. Joe?

Thank you, Brian, and good morning, everyone.

It's no secret that times have been and are still tough in the coal sector. The markets are weak and the challenges are many. We can't forget, however, that our industry is still expected to mine a billion tons in 2012, and even more in 2013. The world continues to rely on coal today, and coal will continue to be the fuel of choice for most of the electricity produced around the globe.

We believe demand for US coal has hit bottom and supply and demand are closer to being in balance and better times are ahead. The question remains just when. With a ton of misery for many of our industry I feel fortunate that our partnerships have been able to manage through this recent downturn and still be able to deliver record results. As Brian just reviewed, during the 2012 quarter ARLP posted record EBITDA, sales volumes and revenue. We also significantly improved our liquidity with our new bank facilities.

Operationally, we continue to effectively execute ARLP's growth plans. We completed the acquisition of assets from Green River Collieres in April, adding the Onton No. 9 mine and approximately 40 million-tons of reserves to our Illinois Basin portfolio. Onton performed as expected in the 2012 quarter and we believe their addition will further enhance our already-strong Illinois Basin market position.

We also began longwall operations at Tunnel Ridge in mid May, increasing production from this mine to nearly 300,000 tons in this 2012 quarter. As we work through the typical startup issues of a new coal mine, we currently expect production from Tunnel Ridge to reach 900,000 tons in the third quarter and 1.2 million tons in the fourth quarter of this year. In 2013, as we continue to ramp up production, we are now expecting Tunnel Ridge to produce approximately 6.2 million-tons on the way to an annual run rate of 6.5 million to 6.8 million-tons in 2014.

In addition, ARLP continued to move full speed ahead with our development projects at Gibson South and White Oak. Recently our marketing team successfully reached agreement for the sale of approximately 5.6 million-tons over a six-year period starting in 2013.

With these new agreements, since the beginning of the year ARLP has secured new coal commitments for deliveries through 2018 of 27 million-tons, plus or minus 10% depending on customer-generating requirements. ARLP has essentially sold out for 2012 and has commitments for approximately 90% of anticipated sales volumes in 2013, based upon current production levels plus the previously-discussed increased production expected at Tunnel Ridge.

Recently, hotter weather prices, rising natural gas prices, strong export thermal sales and supply reductions by other coal producers gives us hope that better days are ahead with coal markets. We are still concerned, however, about a weak US and global economy. We expect to ship the last 70,000 tons on our high-priced export contract in July. We are in negotiations to continue shipping into the export metallurgical market, but cannot predict if or when shipments will presume. Due to this uncertainty, we have assumed in our guidance that we will not ship additional met tons this year.

We have adjusted our anticipated production and sales mix with the balance of 2012 accordingly. Based on results to date and adjusted expectations we now expect full-year 2012 coal production, sales volume, and revenues near the lower end of our previous guidance ranges. Reflecting the strength of our contract position and customer relationships, as well as increased production from Tunnel Ridge and the addition of Onton, we continue to target 2012 EBITDA and net income near the midpoint of previous guidance.

For the 17th consecutive quarter the Alliance boards elected to increase distributions to our unitholders. For this quarter the cash distribution was increased over the first quarter of 2012 by 3.7% at ARLP, and by 4.5% at AHGP. Compared to the 2011 second quarter the announced distributions represented a 15.2% for ARLP, and a 19.7% increase for AHGP. The board's decision to again provide unitholders with a strongest strong distribution increase was based upon ARLP's year-to-date performance, expectations for another year of record EBITDA in 2012 and confidence in our ability to execute our growth strategy.

Results like these don't just happen, and I want to recognize all of the men and women that work at Alliance coal. They are responsible for these results, and they position us not only to manage these challenges, but to execute on our strategy, meet and exceed customer demand and deliver long-term value to our unitholders, and they are the best. This concludes our prepared comments. We appreciate your continued support and interest in both ARLP and AHGP.

And now with the operator's assistance we'll open the call to your questions.

(Operator Instructions) Our first question comes from the line of Praveen Narra with Raymond James. Please proceed.

Hi, guys, great quarter once again. You guys have actually been able to book some coal for the out years this far, speaking to your strong relationships and operational reliability. Can you give us an idea of what prices we're coming in at? Is it comparable to old contracts, are these higher or lower? Basically how should we think about coal pricing going forward?

It's mixed, obviously, but I think as we look -- at this moment in time, as we look into 2013 we would be expecting revenues on a per ton basis comparable to what we see in 2012.

Okay, that's great. Then just -- in thinking about the drought. With your proximity to the rivers, could you give us a bit of color on how it is getting the coal out to market? What percentage of your coal is delivered on the river? We're thinking about 15% to 20%, is that about right?

We have essentially River View and Onton are on the river, as well as Tunnel Ridge, but I think the river issues you're talking about are more for our West Kentucky operations. We are watching that, we haven't had any disruptions yet, but we are keeping an eye on that.

Okay. Then I guess you guys have had a couple of regulatory issues at two mines. Are these back up and running and are there any perceivable issues on the horizon?

Well, in our Central Appalachia operations we had idle two units, so we are -- we basically modified our work schedule to work seven days a week on a six/three work schedule to try to maximize efficiency and cost. But we're having to focus on essentially three units at each mine as opposed to what we would prefer is four units at each mine and that's been our biggest challenge. You continue to have as much help as we want from the government, so I can't say that we're always through those things.

Right, and then last question for me. Regarding the guidance on income and EBITDA where the range was unchanged, you are a little bit lower, but the incoming -- the volumes and revenues were little bit lower there but income and EBITDA were in line. Should we see this as a reflection of better than previously expected costs?

As Brian mentioned, with Tunnel Ridge ramping up we should see our Northern App cost -- I think we're projecting about 30% decrease than what we had in the first half, I believe.

That's right.

So you're going to see -- we would -- depending on if Tunnel Ridge hits their tonnage projections then we should see improved cost, primarily driven by Tunnel Ridge's production.

Perfect. Thank you guys very much for the color.

(Operator Instructions) Our next question comes from the line of Garrett Nelson with BB&T Capital Markets. Please proceed.

I've got to say it's really pretty remarkable how you guys continue to execute quarter after quarter under these market conditions, so congratulations on that. I was just wondering if you could talk about changes in market demand that you've seen for your Illinois Basin coal in recent quarters. I know you mentioned exports, but are you seeing more of your Illinois Basin coal travel into the Southeast or being used as a blend? Are you seeing an increase in demand from any specific regional markets over the last few quarters?

Not really. I think that we feel like for 2013, 2014 we will. We think that with the Central Appalachia production falling and gas prices expected to rise, we do expect that we will see increased demand for the reasons you just mentioned. But looking back we haven't actually seen any movement in that regard.

Okay. Then I was hoping you might be able to provide some insight into productivity metrics at your Illinois Basin mines. Not just the sales and cash-plus numbers that we can see, but maybe tons per man hour trends or some of the steps you've taken to maximize efficiency from these mines?

Essentially we've had issues at Dotiki where we're transitioning from the 9 seam to the 13, so we have had some production loss there and productivity issues. We do anticipate -- we feel that the 13 seam is going to be very favorable once we can get there, so we do expect improved productivity out of Dotiki as we look forward. Beyond that, I think our operations are running pretty consistently and the only issue that will effect productivity, either plus or minus, is conditions. So sometimes conditions are good and we get higher productivity, and sometimes we find some not totally challenging, but just some root conditions or whatever that might impact production in a negative way. But overall Illinois Basin seams are pretty consistent and our mines do have a pretty consistent, reliable tons per man hour across the board conditions, and regulatory impacts being the exception.

Got it. Thanks very much.

(Operator Instructions) Our next question comes from the line Chris Haberlin with Davenport & Company. Please proceed.

Good morning. I was hoping that maybe you could give us a little color around your customers' inventory positions. Just given the recent heat, are you starting to see inventories come down? And then as a follow on, how do you see different -- inventories by different basins' positions? What basins are best positioned and what basins have the most inventory?

I think to answer your first question, the burn obviously has improved. I prayed for a rain dance the last quarter -- not a rain dance but a heat dance and I think it worked. So the burn has been up for our customers and thus that have been able to reduce inventories. I think overall inventories are still high -- at a higher level so we don't see a lot of new activity in the marketplace. So I think we would expect that because of the supply side, the demand/supply balance will be more in balance hopefully by the end of the year, because there needs to be a little more supply to come off the market in Central App, which I think will happen. Central App has been the highest and then you've got Powder River Basin are the two highest. Northern App and Illinois Basin are better positioned, but even their inventories are higher than normal. I think that's the current situation.

I think the real issue that I think creates uncertainty is what's going to happen in Europe with the debt issue there and the euro and then what's going to happen in our own country as we have this election season and we're playing around with whether we're going to have this fiscal cliff occur or not with the tax increases and the sequesture, which will definitely impact GDP. So some people believe that everything will get delayed a year, and whoever wins the presidency will deal with it next year without any major impact, and others believe that politicians will go off the cliff here and create all kinds of consternation. That's the one area of concern as to what the economy's going to be that would impact what the inventories would be and until we get clarity, you're not see utilities go out and start committing tonnage. And then obviously the other is the natural gas prices as to whether you're going to see $4 gas the fourth quarter of this year, or $4 dollar gas sometime next year or the following year.

On pricing, just given the significant supply cuts across the industry, would you anticipate seeing pricing start to return due to the supply cuts, or would you need to see demand really come back and the inventories get back down to more normal levels before pricing would start to return?

I think the biggest catalyst of price increase would be natural gas prices and the return back to coal. I think absent that, if demand is stable then I think pricing will remain to be stable. So I think that's going to be the key as how fast utilities that moved away from coal over the last 18 months would move back into coal if you started to see gas prices moving up.

On that, given the recent rebound in natural gas prices, are you starting to see any switching back to coal specifically in the Illinois Basin?

We haven't lost that much in the Illinois Basin, so I think the first switch back will be at the Powder River Basin and then I think the second will be as those plants that moved away from Central App and they're going to come back for Illinois Basin. So I think that's where we're going to get the improved market condition is when -- there's certain utilities today at $3.50 gas that are definitely looking to burn Illinois Basin coal, so whether they switched or they didn't switch or whether that demand -- it's a hard question to answer as to whether it's replacement for Central App or if it's gas prices, but we are projecting that Illinois Basin will grow anywhere from 10 million to 20 million tons over the next 12 to 18 months.

Okay, thank you. Thank you very much and congrats on the great quarter.

Thanks, Chris.

Our next question comes from the line of Wayne Atwell with Global Hunter. Please proceed.

Thank you. This is an industry question. Do you have any idea on how much capacity is going to be closed permanently over the next six-to-12 months?

I think our projections go to 2015 so I don't know over the six-to-12 month period and I think we were at 37, I can't remember. I can't give you a precise number, I can't remember right off the top of my head, but it's in our last presentation and hopefully it's still on our website as to what our particular guidance is. If it's not you call Brian and he can give you the exact number.

Okay, thank you.

We just don't have it at our fingertips right now.

I read so many different projections on that I'm afraid to say which one is ours and other people's.

Okay.

We have no further questions at this time. I will now turn the call back over to Brian Cantrell for any closing remarks.

Thanks, Erica. Well, it looks like our results to a large part are speaking for themselves. We want to thank all of you for joining us today to learn more about our record results this quarter and what should prove to be another year impressive results for our partnerships. As always we appreciate your continued support and interest in both ARLP and AHGP and we look forward to updating you on our progress in October. Thank you all.

Thank you for your participation in today's conference. This concludes the presentation. Everyone may now disconnect and have a great day.