Alliance Resource Partners LP (ARLP) 2012 Q4 法說會逐字稿

Thank you for your patience, and welcome to the fourth-quarter 2012 Alliance Resource Partners LP and Alliance Holdings GP teleconference. My name is Candace and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session after management's remarks. (Operator Instructions).

I will now turn the presentation over to your host, Senior Vice President and Chief Financial Officer, Mr. Brian Cantrell. You may proceed, sir.

Thank you, Candace, and welcome, everyone. Earlier this morning, we released 2012 fourth-quarter earnings for both Alliance Resource Partners, or ARLP, and Alliance Holdings GP, or AHGP, and will now discuss these results as well as our outlook for 2013. Following our prepared remarks, we will open the call to your questions.

Before beginning, let's 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 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 on information currently available to the 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 the partnership 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 will 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 the ARLP press release, which has been posted on ARLP's website and furnished to the SEC on Form 8-K.

That completes the required preliminaries, and I will now turn the call over to Joe Craft, our President and Chief Executive Officer. Joe.

Thank you, Brian, and good morning, everyone. This morning, ARLP reported new operating and financial milestones, marking the 12th consecutive year of record results. Finishing the year strong, ARLP posted new quarterly records for coal sales, production volumes and revenues. When you add in lower costs, we recorded EBITDA 28.9% higher than the 2011 quarter, leading to a new quarterly EBITDA record of $166.5 million.

With our performance in 2012, ARLP continued its string of delivering record results each year since becoming a public Company in 1999. Posting record results is a major achievement in any year. To do so with the challenges that faced our industry in 2012 was truly remarkable and is a testament to the hard work and dedication of everyone at Alliance.

I would like to take a moment to review a few of the highlights from 2012. Our operating teams delivered the highest production output in ARLP's history, successfully integrated the Onton mine into our Illinois Basin asset portfolio, completed our new mine development in Northern Appalachia with commencement of the longwall production at Tunnel Ridge, and posted a lost time accident rate below the industry standard and one of the lowest rates in ARLP's history.

During arguably one of the most challenging coal markets in recent history memory, our marketing team sold more tons in 2012 at higher average prices than at any time in our history. Through their efforts, ARLP further strengthened its long-term coal sales position by securing new commitments for the delivery of approximately 31.7 million tons through 2018. This brings ARLP into this year with substantially all of our estimated 2013 production contractually committed and priced in a solid contract book for 2014 and beyond.

While we celebrate our past success, ARLP also remains focused on the future. We expect the coal markets for the first half of 2013 to be challenging. We are hopeful, however, we will see improvement during the back half of the year as the industry continues to reduce supply to balance demand. Other key indicators for this strengthening will continue to be natural gas prices, export demand for both thermal and metallurgical coal at profitable margins and a growing world economy.

Relying on a continued focus on productivity, cost control and our contracted book of business, ARLP enters 2013 poised to deliver our 13th consecutive year of record results.

Longer term, construction of our new Gibson South mine remains on track to begin production in the fourth quarter of 2014, and we continue to expect our investments in the White Oak development project will begin to yield meaningful benefits to ARLP's financial results in the 2015 timeframe, once longwall production begins at their mine Number 1 sometime in 2014.

Reflecting on our record performance, anticipated growth in 2013 and positive long-term outlook for our primary markets, Alliance's Boards approved increased unitholder distributions for the 19th consecutive quarter, bringing our year-over-year distribution growth to 11.9% at ARLP and 16.1% at AHGP.

As we continue to manage our business, pursue new opportunities and navigate the challenges facing our industry, Alliance remains committed to delivering exceptional value to our unitholders by staying focused on creating sustainable growth and cash flow to provide future increases in distributions to our unitholders.

At this time, I will turn the call back to Brian for a more detailed look at our financial results and guidance, after which we will open the call to your questions. Brian.

Thank you, Joe. Looking first at our full-year results, as Joe just mentioned, ARLP again posted new records for most annual operating and financial metrics, remarkable results considering the difficult environment facing the coal industry in 2012 and the specific challenges we overcame, including lower than anticipated metallurgical export sales and the temporary idling of our Pontiki mine.

Operationally, the continued strong performance of our River View mine, our acquisition of the Onton mine and the startup of longwall production at Tunnel Ridge drove 2012 coal production up by 13.2% to 34.8 million tons. Led by our stronger customer relationships and solid sales contract book, ARLP's coal sales volumes climbed 10.2% to a record 35.2 million tons, and average coal sales price increased to a record $56.28 per ton sold.

Higher coal sales volumes and pricing combined to push 2012 revenues up 10.3%, as ARLP's revenues topped $2 billion for the first time. Record coal sales also contributed to a 620,000-ton decrease in coal inventories during the 2012 quarter, which fell to approximately 350,000 tons at year-end.

Record volumes and pricing also contributed to a record $581.1 million of EBITDA in 2012. Net income declined to $335.6 million in 2012, primarily due to increased depreciation, depletion and amortization as a result of our growth projects.

ARLP's record coal sales and production volumes pushed total operating costs higher in 2012, with total segment adjusted EBITDA expense increasing 13% over 2011. However, it should be emphasized that ARLP's ongoing cost control efforts at all operations kept our per-ton costs in check during 2012, holding year-over-year segment adjusted EBITDA expense per ton to a modest 2.6% increase compared to 2011.

Improved operating costs in 2012 also reflect the benefit of increased longwall production at Tunnel Ridge.

As we look at results for the 2012 quarter, ARLP also posted new records for coal sales and production volumes, revenues and EBITDA. Compared to the 2011 quarter, strong performance from our River View, Warrior, Pattiki and Gibson mines, the addition of the Onton mine and the startup of longwall production at Tunnel Ridge all contributed to record coal sales, production and revenues.

Sales increased 19.8% to 9.8 million tons. Coal production rose 23.8% to 9.1 million tons. And revenues climbed 15.8% to $549.4 million.

ARLP's results in the 2012 quarter also benefited from improved segment-adjusted EBITDA expense per ton, which declined 6.6% compared to the 2011 quarter. For the 2012 quarter, lower costs, along with increased volumes and revenues, combined to push EBITDA higher by 28.9% to a record $166.5 million and drive net income up by 5.4% to $96.6 million, both as compared to the 2011 quarter.

On a similar note, results for the 2012 quarter compare favorably to the sequential quarter, with ARLP posting increases to coal sales and volumes, revenues, adjusted EBITDA and net income, as well as lower segment adjusted EBITDA expense per ton.

Let's now turn to our initial guidance for 2013. As in the past, we will break down our estimates between ARLP's ongoing operating activities and the separate impact of our White Oak investments to provide a clearer comparison to prior-period results.

Looking first at capital expenditures and investments, ARLP currently anticipates 2013 total capital expenditures in a range of $370 million to $400 million, which include maintenance capital and expenditures. And this compares to the $559.2 million of capital expenditures in 2012.

As noted in our release, these expenditures include approximately $900 million (sic -- see press release, $90 million) to $100 million related to continuing development of our Gibson South mine and maintenance capital for equipment rebuilds and replacements, mine extension projects at various mines and infrastructure projects at several operations.

Consistent with our approach of estimating maintenance capital over a long-term horizon due to the inherently cyclical nature of these expenditures, for distribution planning purposes, ARLP is currently estimating total average maintenance capital expenditures of approximately $5.70 per ton produced over the next five years.

I do want to point out that total capital expenditures during 2013 also include approximately $40 million to $50 million for reserve acquisitions and construction of surface facilities related to our participation in the White Oak Mine Number 1 development project.

In addition, ARLP also currently expects to fund in 2013 approximately $70 million to $90 million of its preferred equity investment commitment to White Oak compared to $59.8 million funded in 2012.

As a result of our capital investment projects and the anticipated production increase I'll discuss in a moment, depreciation, depletion and amortization expense is currently expected to increase to approximately $275 million in 2013 compared to $218.1 million in 2012. Reflecting a full year of production from the Onton mine and the continued ramp-up of production from Tunnel Ridge in 2013, coal production and sales volumes are expected to increase to a range of 38.1 million to 39.1 million tons.

ARLP's long-term sales contract position remains strong, with approximately 38.5 million tons priced and committed for 2013 deliveries. In addition, ARLP has secured coal sales commitments for approximately 30.7 million tons, 23.4 million tons and 18.7 million tons in 2014, 2015 and 2016, respectively. Of these amounts, approximately 2.9 million tons in both 2014 and 2015 and 3.3 million tons in 2016 remain open to market pricing.

ARLP's guidance does not currently assume any sales into the metallurgical export markets during 2013. Based on current assumptions, we are anticipating 2013 average coal sales price per ton will decline by 1% to 3.5% from 2012 levels. Increased coal sales volumes should however more than offset our lower sales price expectations, driving ARLP's estimated 2013 revenues higher by 6% to 9%, to a range of $2.1 billion to $2.2 billion, excluding transportation revenues.

For 2013, ARLP is also currently anticipating increased consolidated EBITDA in a range of $600 million to $650 million and consolidated net income in a range of $300 million to $350 million. As expected, ARLP's consolidated results in 2013 will continue to be impacted by losses related to our preferred equity contributions and investments in White Oak, including increased development costs related to construction of their Mine Number 1. Consequently, our investments in White Oak are currently expected to negatively impact ARLP's 2013 estimates for both EBITDA and net income by approximately $20 million to $30 million. ARLP continues to anticipate that its investments in White Oak will become meaningfully accretive to our financial results in the 2015 timeframe, once longwall production has begun at Mine Number 1.

Finally, we enter 2013 with a strong balance sheet and (inaudible) liquidity of approximately $549.7 million, providing ARLP with the financial flexibility to execute its future growth plans.

This concludes our prepared comments, and now with Candace's assistance, we will open the call to your questions. Candace.

(Operator Instructions) David Feaster, Raymond James.

Good morning, guys. Congratulations on a solid quarter.

Let's talk about the met market for a second. Could you talk a little bit about your outlook on US met and what kind of price would it take to get you interested in bringing production back online?

I think right now, we are assuming in our guidance that we are not selling met tons. We are seeing some encouraging signs as we start the year 2013.

We've looked at our situation at Mettiki. We still have our long-term commitment to Dominion that requires us to ship around 2.3 million tons to them in 2013, so it doesn't leave much room for met sales. If we were to participate in the met market, we would have to rely on purchased coal. I think that to try to look at what that price needs to be, continue to believe that we would need to see prices maybe $20 a ton higher than where they are today to interest us in participating in that market.

Okay. Fortunately, right now, you guys are completely sold out for 2013 and were able to book some longer-term coal in the quarter. When you look out to 2014 and beyond, how are negotiations going? Are buyers interested, or are they kind of looking for more clarity? What are you guys seeing?

Each utility has its own specific circumstances, but I think -- I am very pleased with the results we had in 2012, with the amount of tonnage we were able to book in multiyear contracts. We have booked some additional tons just within the last 30 days, so there are utility participants that are willing to look at buying in a one-, two- or three-year time horizon.

So -- at the same time, you see a lot of utilities are sitting on the sidelines, waiting to see what the economy is going to do, what natural gas is going to do and potentially where the economy is going to be. So -- or excuse me -- on environmental regulations.

So right today, I am very pleased, given the environment we are in, with the activity we've seen. And hopefully, by second half of 2013, we will see more intense activity among the utility buyers as they look to 2014/15.

I think their book is shorter today than it has been in the past, so we are optimistic that in the second half of the year, prices will firm and the utilities will be back in to fill their needs to have sufficient supply for the demand to run their plants.

Okay, last question for me. Given the strong cash flow that you guys have seen and solid distribution coverage, it looks like you guys paid down a substantial amount of debt in the quarter. With your excess cash going forward, are you looking to continue to pay down debt, maybe some other M&A opportunities? I know you guys have kind of got your hands full. Or would you potentially return capital to shareholders more quickly?

I think that Brian shared with you what our CapEx expectations are. I think the other issue is we are constantly looking for other ways to grow our business. But we are comfortable with the distribution rate or the rate of growth that we've shown last quarter and this quarter, so I would expect that growth, assuming we can achieve the results that we've laid out for you, to be in -- the distribution growth will be consistent with what we've seen this quarter and last quarter.

Okay. Great. Thanks a lot, guys.

Mark Levin, BB&T.

Congratulations on another very good quarter. A couple of pretty quick questions. One is just more theoretical. When you look at your production trajectory and kind of going from, just round numbers, 35 million to 38 million tons, and obviously 3 million more tons of production, where does that share come from? How do you think of it? Obviously, the market is oversupplied at the moment, and with 3 million tons more of production coming into a market that right now, at least, there isn't a whole lot of demand, and when you go from 35 to 38 and then presumably higher over the next several years, how do we think about that in terms of the share gain that you are getting? Who is on the other end of that coal?

The primary growth year over year comes from Tunnel Ridge. Secondly, we expect the full year of production from Onton. So if you recall, when we made that acquisition, it closed around April 1, so we only had nine months of production. So we will have the ability to annualize that for 2013. And then we had our idling of Pontiki that affected about three months of production in East Kentucky. So those three operations provide the incremental growth in 2013 versus 2012.

But Joe, when you think about it more conceptually, is that CAP ton -- I mean, is that replacing CAP tons? Is it replacing higher-cost Northern App tons? Obviously, you guys are cost-advantaged, but when you think about it just from a market share perspective, you are bringing on 3 million more tons, which means there is 3 million less tons for someone else to serve. How do you think about it in that context?

In that context, we are looking for probably 15 million to 20 million tons of switching, if you will, from CAP to either Northern App or Illinois Basin. We are looking for maybe another 9 million to 10 million tons from weather and gas. So we do see growth in demand of about 25 million tons year-over-year.

Now, there are higher inventories, so that may or may not be reflected in increased purchases. But given the fact our marketing team was successful in placing our tons, we do see a growing demand in 2013 and we believe that will continue into 2014.

Got it. And that is where those tons would go. And then just on the cost issue, obviously, you guys are going to benefit from some fixed cost leverage as production goes up over the next couple years. But just more specifically, are you seeing any deflationary cost signs, meaning because the market has been so saturated and prices have been under pressure -- I guess we are now in the second year of an sort of unprecedented steam market, bear market, as it were -- are you starting to see anything from a cost perspective, deflationary weather on labor or any other area that we should be thinking about?

I would say that our cost improvement was not driven by deflationary aspects. It was driven by productivity, and it was also driven by mix. So when you look at our fourth quarter, we had very strong sales from inventory, as well as our production in the fourth quarter.

And when you look at the mines where we had higher inventory, they just happened to be from some of our lowest-cost mines. So when you look at fourth-quarter cost in particular, they benefited from the sales of coal from our lower-cost mines that are probably a higher mix than what you would normally see on a quarter-to-quarter basis. But as you look at it over the entire year, that cost control has been a focus on productivity, and we are very focused on cost control. So I think we have been able to keep our cost in check, but I can't say that we are seeing major reductions from suppliers that are adding to that cost reduction.

Got you. One last question. Again, just kind of given the unprecedented nature of what is sort of going on in the US steam market right now, are you continuing to see production get shut in in the Illinois basin, some of the higher cost producers? If not, do you expect that to accelerate as the months go on? And then also in Northern App, the same question.

Not significant tonnage, but yes, we do anticipate that there will be some mines that will reduce or basically shut in production. So you will see year-over-year, certain coal mines that will be less in 2013 versus 2012, both in Northern App and Illinois Basin. But it is not significant as compared to, say, Central App, where you were really seeing the drawdown.

Got it. Thank you very much.

(Operator Instructions) Paul Forward, Stifel Nicolas.

Thanks, and congratulations on the quarter. I wanted to ask about -- so the inventory, you had big sales out of the inventory, and you mentioned they were from low-cost mines. At a 350,000 ton or so level of inventories, just wondering if you could talk about -- is that a level that is low enough that we could anticipate some restocking over time? Just -- is it kind of a bare-bones inventory level that you are going to typically keep something around that level, or just directionally where does it go from here, do you think?

I think that is probably at the low end of what we normally would maintain. We did have several of our operations actually zero out their piles by the end of the year. So on a normal month-to-month basis, you can probably expect the inventories to be a little bit higher.

But if you look at our trends year-over-year, we usually finish strong by reducing our inventory in the December timeframe. We typically have shown strong results in December. So believe last year's inventory was actually less than the (multiple speakers) --

It was. It was a little bit lower. But this is in line with where we typically end each year, Paul.

Right.

But you could expect that to grow as a more normal working capital level during the year.

Okay. And then looking at White Oak, just wanted to ask about the customer commitment levels. Where do we stand as far as your anticipated production from White Oak? And how much -- in the first full year, in 2015, how much of that is committed to customers? And if you could talk a little bit about the development timetable. Is there any sort of flexibility in that development timetable based on your ability to secure customer commitments? And then maybe as a follow-up to that, is the export market at all a consideration when looking at White Oak and your marketing of that?

I will remind you that White Oak is managed by its own independent management team, so some of the marketing questions I am not privy to, so I can't answer your questions specifically. But as we look at the development, we do anticipate that we will see tons being mined in 2013 and into 2014. The longwall will start in 2014, sometime midyear, plus or minus, depending on development and sometimes how that works. So we would expect that by 2015, the longwall should be running at a more normal run rate.

I do know that the marketing plans do include sales into the export markets. So when you look at the forward curve for 2014, 2015, I think you could expect that a significant amount of their tonnage will go to the export market, and that they will be probably looking to sell coal into the domestic market, that we also believe will be growing during that time period, as more CAP tons go off-market or go out of the market and the natural gas prices trend over the $4.00 mark.

Okay, great. And the last question I've got is on Tunnel Ridge. I think just looking at some of the MSHA stats last quarter, Tunnel Ridge did a little over 800,000 tons of coal production. And I just wanted to ask about, as you see the coal -- the commitments to customers that you've got in 2013 and your plans to operate the longwall, is that -- I guess I look at Tunnel Ridge as being about a 6 million ton per year capacity mine, if you are operating at something close to 100% of capacity. Can we anticipate that -- as you continue to ramp production at the longwall over the next couple of quarters, can we anticipate that Tunnel Ridge during 2013 is going to hit somewhere in the range of a 1.5 million ton per quarter rate or 6 million ton per year? When can we see -- when would you anticipate that Tunnel Ridge would be at what you would consider to be full capacity?

In the fourth quarter, we were impacted by our first longwall move at Tunnel Ridge, which sort of bridged December and the first week of January. So that did impact the numbers in December.

We are targeting 5.8 million tons at Tunnel Ridge in our plan for 2013. We have got two longwall moves in 2013 that factor into that number. We candidly have started off slow in our new panel, so we are moving a little bit off that pace just starting the year. However, we are still focused on trying to achieve a 5.8 million ton level.

If we achieve that, we would be -- that tonnage number is at the high end of the range that we gave you. So we have sort of modified our guidance in anticipation maybe of a little slippage. But that doesn't mean that we've given up on trying to hit that 5.8 million number.

Okay. Well, maybe just to follow up on that, can you describe a little bit -- is it a geology issue or are there roof conditions or (multiple speakers)?

The first part of this panel, the recovery is lower than what we anticipated and what we've experienced. So we just had the coal seam just not as good as we anticipated early on. We do anticipate it is going to get better, and we are already seeing signs of that. But it is just a slow start, is the best way I could say it. And I think as far as your run rate, that is what we are targeting on an annual basis.

Okay. Thanks a lot.

(Operator Instructions) Chris Haberlin, Davenport.

Good morning, guys. Can you give us an update on Gibson South, just where you are contracting -- or how you are contracting is going there and just how everything is going?

Gibson South production, the development is going on schedule, so we are looking at a fourth-quarter 2014, ramping up in the 2015 timeframe. Our market demand for our Gibson product is very strong. We anticipate that the first tons that come out of Gibson South more than likely will be going to the export market, given the future price curve for export tons. So we have not committed tons initially in anticipation of strengthening export prices in the 2015 timeframe.

And then from a cost perspective, should Gibson South be relatively in-line with where your Illinois Basin costs are today?

Yes.

And then switching gears to kind of more the market environment, just given what has been a relatively mild winter thus far, are you seeing any concern on the part of utility buyers maybe kind of relative to what you saw this time last year, where we could start to see -- and this is more industrywide question -- just start to see deferrals or discussions on contracts between buyers and coal producers?

I can't speak to the industry, but I can speak on experience. And we had a very strong shipping quarter in 2000 -- the last quarter of 2012. And our shipping book for the first quarter of 2013 is continuing as we expected. So relative to a year ago, we are not seeing anything close to the customer requests for deferrals that we received a year ago. And we are also not seeing the reselling by customers this year as much as they did a year ago.

So I believe that the customers, as they are approaching 2013, their books are more in balance with their needs than they were a year ago, where they probably overbought quite a bit more than the position they are in today.

Okay, that's all I have. Thank you very much.

Thank you, sir. I will now turn the call back to management for any closing remarks.

Appreciate it, Candace. And again, thanks to all for joining us today. We appreciate your continued support and interest in both ARLP and AHGP, and we look forward to visiting with you on our next call in April. Thank you.

We thank you for your participation. You may now disconnect. Have a great day.