Alliance Resource Partners LP (ARLP) 2012 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to the third-quarter 2012 Alliance Resource Partners and Alliance Holdings GP earnings conference call. My name is Jasmine and I will 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 today's conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's conference, Mr. Brian Cantrell, Senior Vice President and Chief Financial Officer. Please proceed.

Thank you Jasmine and welcome everyone. Earlier this morning we released 2012 third-quarter earnings for both Alliance Resource Partners, or ARLP, and Alliance Holdings GP, or AHGP, and will now discuss these results update our full-year outlook for 2012. After our prepared remarks we'll open the call to your questions.

Before we start, let's begin 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 outlook 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 Partnerships.

While these forward-looking statements are based in information currently available to Partnerships, and those of 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 Partnerships may vary materially from those we projected or expected. In providing these remarks, neither ARLP or AHGP has any obligation to publicly update or revise any forward-looking statements 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 measures 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 8-K.

Now that we're through the required preliminaries, I'll turn the call over to Joe Craft, our President and Chief Executive Officer.

Thank you, Brian, and good morning everyone. ARLP experienced a number of positive results during the 2012 quarter. Production increases in Tunnel Ridge and Onton led to record volumes as production increased 17.7% and sales tons climbed 7% compared to the 2011 quarter.

Strong volume growth also drove coal revenues higher to $499 million, an increase of 5.3%. In addition to this topline growth, our segment adjusted EBITDA expense per ton for the 2012 quarter was 4.3% lower than the sequential quarter and only 1.9% more than the 2011 quarter.

Performance of our new Tunnel Ridge longwall mine continued to improve, with production increasing by almost 500,000 tons over the sequential quarter. Our Gibson North, Pattiki and River View mines also performed well this quarter.

Looking forward, we also added to ARLP's already solid contract position. During the 2012 quarter we booked new sales commitments for the delivery of 1.65 million tons through 2014. With these commitments, year-to-date ARLP has booked new arrangements to deliver nearly 29 million tons through 2018.

In an extremely challenging market environment, we're pleased that ARLP has successfully sold essentially all of our planned sales volumes for 2012, and has priced and committed over 95% of our anticipated 2013 sales volumes. ARLP remains committed and focused on building for the future as our Gibson South and White Oak development projects move forward this quarter in line with our expectations.

Our 2012 quarter was, however, negatively impacted by the unplanned idling of our Pontiki mining complex. On August 29, Pontiki was idled following a closure order issued by the Mine Safety and Health Administration with respect to the coal preparation plant and associated surface facilities at the complex.

After a review of all surface structures by an external ridge construction engineer, we were advised of significant repairs that needed to be made before the mine could return to production. We've made sufficient progress in our efforts to improve the near-term cost structure at Pontiki to justify the capital investment and expense required to complete the first phase of repairs necessary to allow the complex to resume operation. At Pontiki, we expect that the repairs will begin shortly and we should be completed by the end of the year to resume production.

By resuming production, we expect Pontiki will generate sufficient cash flow to recoup this investment over the next year. By taking this step, ARLP is hopeful we can preserve potential option value for Pontiki should market conditions improve, once the existing 2013 coal sales contracts are completed. Nevertheless, the market outlook for Pontiki beyond 2013 is uncertain and there are significant risks in the long-term viability of the mine.

In light of these risks and uncertainties, ARLP determined that an impairment of Pontiki's assets was required in the 2012 quarter. Brian will walk through the numbers on the impairment during his comments.

Now looking ahead, ARLP is well-positioned to successfully navigate the current challenges facing the coal industry. We currently expect coal production and sales volumes in 2013 will increase 11% to 13% over 2012 as the Tunnel Ridge longwall continues to ramp up production.

Increased low-cost production from Tunnel Ridge will also benefit ARLP's cost per ton in 2013. And with over 95% of that anticipated sales volumes already priced, we expect margins will be generally consistent with 2012 levels. Consequently, we expect ARLP should again enjoy year-over-year cash flow growth in 2013.

We believe coal burn will improve in 2013 assuming continued strength in natural gas prices and normal weather patterns. Much of the anticipated increase in coal demand can be met, however, by inventories already in the system. This overhang will continue to impact spot prices in the near term.

The timing and magnitude of sustained market improvement will be dependent on the strength of the economic activity, both domestically and abroad. Our best guess at this moment in time is an expectation the market will rebound sometime in the second half of 2013.

In light of the uncertainties in the timing of an improved market environment, and in keeping with our conservative nature, our Board of Directors decided to moderate our distribution growth rate from the robust level we have enjoyed over the last seven quarters to a level we believe will still place us in the top quartile of the MLP sector.

In summary our strategy remains intact, our growth pipeline remains clear, our coal sales agreements should serve us well in 2013 and the markets are poised for a rebound. ARLP and HGP are both focused on meeting our goals to grow distribution and build long-term value for our unit holders.

I'll now turn the call back over to Brian for a more detailed look at our results. Brian?

Thank you, Joe. As noted in our release this morning, ARLP's results for the 2012 quarter were significantly impacted by three items -- the idling of Pontiki, reduced sales of metallurgical coal into the export markets for Mettiki and increased depreciation expense.

Looking first at Pontiki, results reflect approximately $5.1 million in losses due to the suspension of operations and a $19 million non-cash impairment of the long-lived assets of the mine. The impairment charge we recorded essentially adjusts the mine's assets to the fair value of equipment currently in use at Pontiki that could be used at other operations.

Second, during our last earnings call we indicated that our existing met coal contracts to be completed in July, and given weakness under metallurgical export markets at that time, expressed concern about the likelihood of securing attractively priced new agreements. Our concerns were well-founded, as demand and pricing for metallurgical coal continued to decline, and as a result, ARLP elected not to participate in the currently depressed market environment.

Consequently, metallurgical coal sales in the 2012 quarter declined by roughly 175,000 tons, leading to lower price realizations in Northern Appalachia and reducing ARLP's comparative financial results by approximately $17.8 million.

Third, depreciation, depletion and amortization increased $19.5 million to $59.8 million in the 2012 quarter compared to the 2011 quarter, primarily as a result of the startup of longwall production at the Tunnel Ridge mine, the addition of the Onton mine and capital expenditures related to infrastructure improvements at various other operations.

As we evaluate our results for the 2012 quarter, the proper read is to look beyond Pontiki, which was an unprecedented one-off occurrence. Reporting Joe's comments that our strategy and growth plans remain intact, ARLP posted record volumes in the 2012 quarter as sales tons increased 7% to 8.9 million tons and production climbed 17.7% to 9 million tons.

Despite the impact of reduced met coal sales, we also delivered topline growth with revenues increasing 4.9% to $511.4 million in the 2012 quarter and jumping 8.5% to a record $1.5 billion for the first nine months of 2012.

Excluding the impacts of Pontiki, ARLP's cash flows were in line with expectations and only slightly below the 2011 and sequential quarters.

Taking a closer look at cost, ARLP continued to benefit from increased production at Tunnel Ridge which pushed segment adjusted EBITDA expense per ton lower in Northern Appalachia by 22.5% and helped drive total cost down by 4.3%, both as compared to the sequential quarter. As longwall production continues to ramp up at Tunnel Ridge, we expect costs will continue to improve in Northern Appalachia over the next 12 to 18 months.

Sequential cost per ton also improved in the Illinois Basin, falling 2.3% on the strength of improved performance in our Riverview, Gibson, Pattiki and Onton mines. These improvements more than offset the impact of idling Pontiki, which drove sequential cost up by 9.6% in Central Appalachia.

In assessing our expectations for the balance of 2012, we have adjusted our guidance ranges to reflect the impact of the Pontiki incident, including the loss of previously anticipated reduction in sales from our mine and the cost of repairs required to bring the operation back into production. Consequently we are adjusting our expected full year 2012 production volumes to a range of 34.4 million to 34.9 million tons, and sales volumes to a range of 34.8 million to 35.2 million tons.

ARLP is now anticipating full year 2012 revenues, excluding transportation revenues, in a range of $1.95 billion to $2.05 billion, adjusted EBITDA of $565 million to $580 million, and net income of $300 million to $315 million. Our consolidated estimates for 2012 continue to reflect the pass-through development expenses related to ARLP's White Oak investments which are now estimated in the range of $12 million to $16 million for both EBITDA and net income.

ARLP continues to anticipate total capital expenditures for 2012 in a range of $565 million to $610 million, including approximately $85 million to $95 million reserve acquisitions and construction of surface facilities related to the White Oak mine development project. In addition, ARLP now expects to fund approximately $75 million to $85 million of its preferred equity investment commitment to White Oak during 2012.

As Joe mentioned earlier, ARLP is on track to deliver volume and cash flow growth in 2013, and we look forward to providing a more detailed view of expectations during our call in January.

This concludes our prepared comments. And now with Jasmine's assistance we'll open the call to your questions. Jasmine?

(Operator Instructions) Jim Rollyson, Raymond James.

Joe, obviously third quarter had a couple of things going on. But from the met perspective, it sounds like you won't be participating in a big way in the met market in the near term. So when I think about kind of Northern App, we look at met being softer and you look at Tunnel Ridge ramping up. Should we think about kind of average realized prices and cost, that mix to kind of look similar in the next couple of quarters versus what it did in the third quarter?

I think that on the revenue side you are correct. We will not be participating in the met market definitely in the fourth quarter and most likely not in the first quarter, and probably not even in the second quarter of 2013. So from a revenue perspective, I think you can look at this quarter as indicative.

Rather -- as to the cost, we would expect the cost to trend down as our production continues to ramp up in Tunnel Ridge, which should drive the segment expense number lower. And I would expect an incremental improvement both in the fourth quarter, and then it should be even better first quarter as we move towards a full production rate at Tunnel Ridge.

And, Jim, you saw the sequential expenses in Northern Appalachia dropped almost 23% and that, as we said, is clearly indicative of the ramp up and lower cost production out of Tunnel Ridge. And we do expect to see a continuing trend on declining costs on that as the mine ramps up to full production.

Yes, and if you get to say second half of next year and that's running full out, like with pretty attractive costs, and you get back on the Met side, where do you think costs ultimately, on a full run rate basis across the spectrum for Northern Appalachia, any kind of target where that cost number might come down to?

Not at this moment. It is impacted by the met sales. So if you assume no met sales it's going to give you one number. If you assume met sales it gives you another. We're right in the middle of our planning process for 2013.

Okay, that's good.

I would like to defer until the January meeting to give you better guidance on that.

One other point too, Jim, I mean everybody needs to remember that our participation in the met market over the past couple of years has been roughly 3% to 3.5% of our total volume. So while it's meaningful on the margins, it's not a significant portion of our activity. Our approach there has always been to tap into that market when it's attractive and opportunistically, and that's what we're going to continue to do in the future at this stage.

And when we don't participate, we usually cut back purchased coal, which is also a factor.

On the cost side.

On the cost side. But on the margin side, it's back to what Brian just said.

Any particular price level on, say, benchmark met prices that -- kind of where is the threshold where you get back interested again?

I would say it probably needs to be $15 to $20 higher than what we've seen in the third quarter, not speaking to the fourth quarter.

Yes, okay. On the sales contract side, you kind of continued to layer on some contracts. And I know you made a comment with regard to the margins next year being fairly stable. I'm just curious, when you think about the all-in blended average pricing that you're still getting today, or the past quarter on contracts, is it relatively consistent with what you've been experiencing in actual sales?

Yes, I would expect that the sales revenue per ton number in 2013 will be close to what we are experiencing in 2012.

Okay, and then last one just on Pontiki, sounds like it's going to be out for the most part of the rest of this year. You mentioned covering the contracts you have next year. Is there kind of a Central App price level above which you probably go ahead and try and keep this volume going longer-term and below which you're obviously more impaired?

Based on what I would look at right now, we would expect the price would have to be north of $75 per ton.

Makes sense, all right; sorry you only grew distributions over 13% year over year this quarter.

Thanks, Jim. (laughter)

Paul Forward, Stifel Nicolaus.

Thanks, good morning. Yes, so a couple of questions. I mean obviously you've had to see the Northern App met exports drying up a little bit. I was just wondering, are you doing any exporting of Illinois Basin coal? And can you talk a little bit about any -- whether it's domestic or export coal, any issues related to the river levels and whether that might be impacting the near-term outlook for deliveries?

I think we have mentioned in the past that we have been moving some thermal tons, particularly out of our River View and Gibson operations, into the export markets. I think this quarter we did 330,000 tons, 335,000 tons. You know, again, longer-term we think we have a place to play in that market. At current realizations I don't view it as particularly attractive on netbacks to the mine. But we'll continue to evaluate it and lay it up against our other opportunities to determine how we participate.

From a river standpoint, there has been some disruptions in the system. I don't believe we have experienced any at our particular operations. I mean it's been -- it hasn't been material. Joe, anything else to add?

No, I think that says it well. I think as we look at the export markets, we do believe we will export more once the Gibson South property comes into production. But as we look at the 2013 sales book, we would not expect the export volumes to be that much different than what they are in 2012 in the domestic -- excuse me, in the steam market.

Okay, thanks. And looking a little longer term at Illinois Basin, I was just wondering if you could give us a little sense of what your current thoughts are on when you would expect the production ramps to occur at Gibson South and White Oak, as you're evaluating customer demand levels and inventories, and the long-term outlook for Illinois Basin to displace coal from other regions. I was just wondering if you could give us a sense on your current thoughts of timing of those projects.

Gibson South is going to be fourth quarter 2014 to early 2015. And we will start seeing to production ramp up, so you'll see the full benefit of that really in 2015, 2016. As to White Oak, we would expect some production in 2013. But the bulk of the production will come in the 2014, 2015 timeframe at White Oak.

So, again, when you kind of step back and look at it from where we are today, as Joe talked about, next year we'll see production growth principally coming out of the ramp-up at Tunnel Ridge, and then as he just mentioned, moving into the 2014 beginning to see benefits from White Oak and then in 2015 benefits from both White Oak and Gibson South.

Okay. And thanks. And then the last question I have is, while we had -- earlier in 2012 we had some impact of utility deferrals of shipments. And the great news for you guys, you've got over 95% of your planned 2013 deliveries committed and priced. And I was just wondering if you could talk a little bit about you know -- you're anticipating inventories coming down as the year goes along, but still a pretty soft first-half 2013 utility market. I was just wondering if you could talk about the risk of any of that already priced business getting deferred into later quarters.

As we look at the softness, and that's more on the market side and not necessarily the consumption side, because we do believe demand is on the upswing, thanks to natural gas prices, though as natural gas prices continue at the $4.00 range we believe that the demand should be improving, and therefore hopeful we would not have the pressures of deferral that we did feel in the first half of 2012. So, the answer to your question is really dependent on natural gas prices. So if natural gas prices can stay in the $4.00 range, we feel like we should be okay with our sales contract position.

All right, thanks a lot.

Appreciate it.

Chris Haberlin, Davenport.

Can you just give us an idea of where your customer inventories stand as they relate to customers for Northern App coal and Illinois Basin coal?

I would say that our customers are typical of what you're seeing overall with inventory positions for those basins, so they are above what historical levels have been. And as a result, we do think that the improvement in the market, as I mentioned in my last answer, will only be to draw down inventories as opposed to seeing new buys in the first half of 2013. But we do believe that by the end of the first half of 2013, assuming we have growth in the economy and a normal weather pattern in the first quarter of 2013, that we will be in balance in both Illinois Basin and Northern App by the middle of 2013.

And then with gas now in the mid-$3.00's and the strip out kind of north of $4.00, can you just give us an idea of where you see coal in those two regions regaining share?

I think -- well, excuse me, looking at those two regions relative to both cap and natural gas, we look at Illinois Basin and Northern App picking up some demand of about 24 million tons year-over-year. We believe about 15 million of that is going to come from Central App and maybe roughly 9 million or 10 million can come from gas switching or weather, and I can't distinguish between the two.

And then last question -- what type of prices, API 2 prices would you want to see to encourage increased exports?

We would love $120 again. But if we could see $105-plus, then based on current domestic markets, that would be a competitive pricing point that we could shift in the export market at realizations that are comparable to what we're getting domestically.

And then kind of looking at your crystal ball, given the recession in Europe, do you all have any view on when -- I mean obviously spot prices on the API are in the [$80's]. Do you have any view on when we might recover to those levels? Would Europe have to recover from its recession or is that something that would be achievable next year, in your opinion?

It is achievable. I think you have got to look at the global economy. So you have to understand what's going to go on in China and you've got to understand what's going on in the United States. I think those are two critical parts of the global economy, and both of those are going to be impacted by leadership, and hopefully new leadership in the United States.

All right, well, great. Thanks very much.

Thanks Chris.

John Bridges, JPMorgan.

Hi, just wanted to ask a big picture question -- you know, the PRB ate your lunch for the last couple of decades and the tide seems to have changed. I just wondered if you could talk about a little bit about the competitive situation between the Illinois Basin and PRB coal that you're seeing at the moment.

We believe that, as far as the PRB competition, we don't see that it's changing much. And if it does change, it will probably go to Illinois Basin advantage (technical difficulty) into, again, scrubber technology and transportation is the key. So it's going to be totally dependent on what the rail rates are out of PRB into our areas.

But then we also have the aspect of what the plants want to burn. And that chapter has already been written, and really comes down to rail rates, and we don't see that changing. So we're not -- as we look at the competition, we think that more than likely it's going to drive more towards an Illinois benefit versus PRB. But more than likely, it's just going to be not that much different than what we've experience to date.

Yes, thank you. There has been some comments that the rails have been a little bit more friendly to ensure the business. What sort of business have you been having with the rails?

We haven't seen -- specifically the PRB, we haven't seen any inroads into our markets relative to the rail rate improvements. As far as our own experience with the rails to secure business, to think the railroads have been receptive to listen. But I can't say that we've seen much movement relative to our markets that have impacted our outlook one way or the other.

Excellent, thanks a lot. Well done guys.

Thank you, John.

At this time we have no further questions. I would like to turn the call back to Brian Cantrell for closing remarks.

Thank you, and again, thanks to everyone for joining us today. We appreciate your interest and continued support for both ARLP and AHGP. As you heard this morning, we continue to see opportunities and growth ahead of us, and we look forward to updating you on our full-year 2012 results, and refreshing our outlook for 2013 on our January call. Thank you very much.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a wonderful day.