Alliance Resource Partners LP (ARLP) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 2013 Alliance Resource Partners, LP, Alliance Holdings GP earnings conference call. My name is Clinton and I will be your operator for today. At this time all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions). As a reminder, the call is being recorded for replay purposes.

I'd now like to turn the call over to Mr. Brian Cantrell, Senior Vice President and Chief Financial Officer. Please proceed, sir.

Thank you, Clinton, and welcome, everyone. Earlier this morning we released 2013 first-quarter earnings for both Alliance Resource Partners, or ARLP; and Alliance Holdings GP, or AHGP. And we'll now discuss those results, as well as our outlook for 2013. Following our prepared remarks, we'll 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 are 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 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 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.

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

Thank you, Brian. Good morning, everyone. I'm pleased to report another strong showing for our partnerships, as ARLP again posted record operating and financial results for the first-quarter 2013. Solid performance by our operations resulted in record coal production and higher coal sales volumes compared to the 2012 quarter. We also continued to benefit from ARLP's strong contract book, as average coal sales price per ton increased slightly compared to the 2012 quarter.

Increased volumes in coal prices lead to higher revenues and net income in the 2013 quarter, as well as record EBITDA of $173.1 million, a 31.7% increase compared to the 2012 quarter. Segment adjusted EBITDA expenses per ton were 2.2% lower than the 2012 quarter, as well as the sequential quarter, even though our ramp-up of Tunnel Ridge production is progressing slower than we expected. Tunnel Ridge production was impacted by a split coal zone, which extended further into the reserve than was anticipated. This geologic condition has caused both lower run-of-mine production as well as lower plant yields for the quarter.

We have changed our mine plan to minimize the longwall mining in this zone for the remainder of the year. We expect higher salable tons from Tunnel Ridge over the next two quarters. However, the full extent of the mine plan change will not occur until October of this year. We have factored in 4.9 million tons of Tunnel Ridge production for 2013 in our guidance for coal sales, which we now believe will come in around 39 million tons in total for the year.

Assuming higher production at Tunnel Ridge, and consistent productivity at all of our other coal mines, we are optimistic that our operating costs for the rest of 2013 will continue to compare favorably to prior-year results. ARLP entered this year with substantially all of its anticipated 2013 coal sales volumes priced and committed. Based upon these commitments, we believe our coal sales price per ton will remain around $55 per ton for the year.

We continue to add to our long-term contract position during the 2013 quarter. Since our last report, our marketing team has secured new coal sales commitments for delivery of an additional 2 million tons through 2016. Our ability to enhance ARLP's long-term contract book at attractive prices during what remains challenging conditions for the industry gives us encouragement for the future.

As we assess the current coal market, supply/demand fundamentals are slowly improving. Power generation in the coal-consuming regions of our country has increased 3.4% in 2013, compared to the same time last year, driven by favorable weather patterns and improved industrial demand. Higher natural gas prices have contributed to increased coal demand as well. The supply picture has also tightened, with 2013 coal production down approximately 8.7% compared to 2012.

Even with a sluggish economy, we believe these favorable market fundamentals for domestic thermal coal will result in higher spot prices in the second half of the year, as utility stockpiles are drawn down toward historically normal levels. This should bode well for growth in revenue in 2014.

In addition to improved coal sales prices per ton, we continue to expect increased volume from our various growth projects in 2014 and beyond. Specifically, our development of the Gibson South mine is on schedule to begin production in the third quarter of next year, with production from this new mine expected to ramp to an annual run rate of approximately 5.2 million tons by 2016. Next year, we also expect to begin receiving cash flows from our investments in the White Oak, once longwall production begins at this new mine, sometime around the middle of 2014.

In addition, we expect Tunnel Ridge to be producing at an annual run rate of 6 million tons in 2014.

With strong first-quarter results, visible growth for ARLP, and improving market fundamentals for our primary markets, Alliance's Boards approved increased unitholder distributions for the 20th consecutive quarter, bringing our year-over-year distribution growth to 10.2% at ARLP; and 14.2% at AHGP.

At this time, I'll turn the call back to Brian for a more detailed look at our financial results and guidance, after which we'll be glad to answer your questions. Brian?

Thank you, Joe. As Joe just mentioned, ARLP started the year with another quarter of strong financial and operating results. Our performance during the 2013 quarter was led by record total production of 9.8 million tons, which increased 15.4% compared to the 2012 quarter, and 7.9% sequentially. Increased production at Tunnel Ridge, Onton, Gibson North, Pattiki, Warrior, and River View contributed to drive total coal sales volumes higher to 9.7 million tons, and increased revenues by 23.6%, to $548.1 million.

Benefiting from the ramp-up of longwall production at Tunnel Ridge; reduced outside coal purchase; and cost control efforts at all of ARLP's operations, per ton expenses declined in the 2013 quarter compared to both the 2012 and sequential quarters. Higher revenues and lower expenses per ton in the 2013 quarter contributed to a 31.7% increase of ARLP's EBITDA, which climbed to a record $173.1 million, while net income also rose 24.1% to $102.9 million, both as compared to the 2012 quarter.

Turning next to ARLP's segment results. Higher coal sales led to increased revenues in each of our operating regions during the 2013 quarter. Total segment adjusted EBITDA expense per ton in the 2013 quarter decreased by 2.2% compared to the 2012 quarter, as the previously mentioned production increases at our Illinois Basin mines reduced per ton cost in the region, and longwall production at Tunnel Ridge lowered cost per ton in Northern Appalachia.

ARLP is maintaining its previous 2013 guidance for coal production and sales volumes of 38.1 million tons to 39.1 million tons; revenues, excluding transportation revenues, of $2.1 billion to $2.2 billion; EBITDA of $600 million to $650 million; and net income of $300 million to $350 million. Reflecting our strong start to the year, and based on our expectations for the balance of 2013, we are now anticipating full-year results for 2013 to be near the higher end of these ranges.

We also continue to anticipate total capital expenditures during 2013 in a range of $370 million to $400 million, which includes expenditures for mine expansion and infrastructure projects; maintenance capital; continued development of the Gibson South mine; and reserve acquisitions and construction of surface facilities related to the White Oak mine development project. In addition, we continue to expect to fund approximately $70 million to $90 million of our preferred equity investment commitment to White Oak.

Looking at the balance sheet, liquidity at the end of 2013 -- of the 2013 quarter was approximately $555.1 million; and ARLP's leverage remained low, at less than 1.3 times total debt to trailing 12-month EBITDA. ARLP's strong balance sheet and cash flows leave us well-positioned to execute our current plans and take advantage of any additional opportunities that may arise.

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

(Operator Instructions). John Bridges, JPMorgan.

Thank you. Morning, Joe, Brian. Another very solid set of numbers. You certainly seem to be in the sweet spot in the coal space at the moment. And I wondered if you could talk about the value proposition for your customers, compared to PRB. You seem to have the advantage in terms of BTUs and short rail distances, but with all that spare capacity out in the PRB, could they come back and take some market share away from you?

We don't anticipate that. As we look at those utilities that have consumed PRB in the past, I think they will maintain that market. We're not seeing any new PRB competition to the plants that we're serving. I think prices are stable in the Illinois Basin and Northern App, and we don't anticipate that we're going to have any erosion in our market with competition from PRB.

Great. Could you give us a bit of a background or idea as to what mix profile to expect from White Oak, from that mine, in the next year or two?

I'm sorry, John. Can you repeat that question?

I'm just wondering -- the buildup at White Oak, what should we expect? And what should we put into our models there for that?

Well, obviously, we have three different cash flow streams coming out of that, with royalties coming off of the reserves that we have acquired and are leasing back to White Oak. We have a throughput stream coming as well. And then we'll receive the equity distributions off of our preferred investment. The mine should produce in the 6 million tons per year range. I don't believe we've yet broken out specifically what the cash flows will look like, John. But because we are capturing all of the economics until we recapture our preferred return, I think if you look at that as a 6 million tons a year mine, and typical Illinois Basin margins associated with that type of a longwall operation, that should get you pretty close.

Okay, that's great. Appreciate it. Well done, guys. Thank you.

Praveen Narra, Raymond James.

Hey, guys. Congratulations on another strong quarter again. You're making it really easy to like Alliance.

Glad to hear that.

So, one of your competitors recently commented on NAP pricing looking better -- or at least the outlook looking better, as stockpiles are dwindling. Are you guys seeing anything different?

I'm sorry; I didn't hear the first part of that question.

Natural gas pricing?

No, NAP pricing. Northern App pricing.

Yes, I think we've seen some favorable occurrences this quarter with higher gas prices, and we anticipated stockpiles are moving down, and demand has been good. And then there's been some supply shortfalls, including our own Tunnel Ridge. So the supply/demand fundamentals for Northern App are better today than they -- for the last, say, the last quarter or the past six months. We are seeing, and expect, higher pricing for that basin.

Okay. And then, with gas prices where they are today -- let's call it 20% of 14 tons uncontracted -- are you seeing increased interest by utilities to lock in out-year tons? And, the same token, are you guys willing to roll the dice a little bit more, and wait for pricing to catch up before you lock in the rest of 2014 and more of 2015?

We do believe that utilities will begin buying in the 1- to 3-year term area. Some are going 1 year; some are going out as much as 3 years, is what we're seeing. And we will be responsive to RFPs when they come up. So we feel pretty comfortable with our current customer base. So when you look at our production in 2014, with the exception of Gibson South, we're not expecting increased production in the Illinois Basin. We expect to really be able to maintain our market share at prices that should become stronger as the year goes on.

Okay. Very good. Thank you very much.

Mark Levin, BB&T Capital Markets.

Congratulations on another very good quarter. A quick modeling question. Trying to think about Central App going forward, I realized it's a relatively de minimis part of what goes on there; just the volatility on cost, maybe quarter over to quarter, how to think about that going forward. And then, are you selling any met? And if so, how much, and what does that market look like to you?

On the volatility of costs, the reason we had an $80 quarter was tied back to the problems we had at our Van Lear mine at Pontiki, where we had the mine shut down for regulatory reasons in the third and fourth quarter. It straddled the third and fourth quarters. That impacted cost. Last year, I think, the cost that you see in the first quarter of this year should be a predictable number for the balance of the year, as we look at our mine plans there, and productivity, and what our expectations are.

As far as the markets, we do not anticipate any met coal sales in 2013. Our met coal sales would be out of our Mettiki operation, which is included in our Northern App. So we don't have any met coal in Central App. So all the coal sales in Central App is to the steam market or the industrial market. (Multiple speakers)

And, Joe, remind me, the realization, obviously, is in the low 80s relative to a market that's not quite there. Is this a function of stuff that was contracted when life was a lot better, from a pricing perspective there?

Yes.

Okay, great. I appreciate the time. Congratulations, again.

(Operator Instructions). Paul Forward, Stifel.

Thanks, and congratulations on a great quarter.

Thanks, Paul.

I wanted to ask about Tunnel Ridge. On the changes to the mine plan, it sounds like it's not going to affect things for the next couple of quarters, but maybe fourth quarter is light. And then as you get into 2014, and going forward, you're comfortable still with that 6 million ton rate. I was just wondering if you could describe, is that right that you have a couple of good quarters impacted the mine plan change, and then from that point forward you're in an area where you're very comfortable with that 6 million ton number? Is that right?

Yes, I think as we modified our mine plan because of the development of the longwall panels, there was limited options for us in the short-term, because we had the panels already developed. So we got a longwall move in June. We'll have another one in the October time frame. And we think by going to the next panel after the second longwall move, that's when we should start seeing more benefit.

We do believe that -- and we are already seeing improved recoveries and run-of-mine production this month. So we do believe we're going to have better results out of Tunnel Ridge in the second and third quarters. But our higher productivity should begin to show at the higher run rate, starting in the fourth quarter.

That's exactly right.

And we are now projecting 6 million -- I'd like to believe that's conservative. I think the capacity of the mine we've given you in the 6.2 million to 6.6 million ton range, we'd like to be able to get there. But until we prove it, I think we're going to be conservative and plan around a 6 million ton base until we start seeing better results.

And just following up on that, is there something that changes in the geology or some of the drilling work that you've done to figure out that, as you move away from where you are right now, what gives you the confidence that you won't see the same kind of issues with the seam as you move the longwall in October?

Yes, I think it's back to -- it's difficult; when you're looking at these split zones, it's difficult to really be able to determine that by drilling, so the best way is through the development of your panels; so through the continuous mining process, so we can tell as we advance forward the longwall panels what the seam conditions are. And as we trend more in one direction, we're just seeing better results. It was just unfortunate where we started, the particular panel, to start the coal mine.

We don't know for sure until we get there. But we do feel pretty confident that, through the continuous mining development, that the coal conditions will improve and will run away from the split coal zone.

Okay. That's good. And you talked about your own inventories being -- having come down quite a bit during the quarter. I was wondering if you could talk a little bit about specifically Illinois Basin customer inventory levels today, and the prospects of working back toward a normal level, and what that might mean as you are contracting for the next couple of years on your open tons?

Yes, it looks like, at this point in time, the Illinois Basin is still running about its historical ranges. But we're anticipating that we'll see increasing demand that we see coming out of that region, that you'll begin to see those inventories coming back down to more normal levels. And, frankly, given that increase in demand, it's not unusual that you would expect to see inventories increasing, as the utilities are building up in anticipation of the increasing demand coming out IB.

We see Southeast still has a larger overhang than the others.

Okay.

But in the Mid-Continent and then the North-Central, we see the stockpile levels pretty close to normal.

Yes, Northern App continues to tighten on its inventory. PRB is coming back into this five-year range. Central App is, on a total level, pretty close to its historical range, but the forecasted burn is down, so the days of inventory are still relatively high.

So with that in mind -- just getting back to Mark's question earlier about Central App -- you had a really nice quarter realizations, at $81 a ton. I was just wondering, as you look forward in your contracts over the next couple of years -- that's well above current market realization. I was just wondering if you could give us a little bit of sense of, out of Central Appalachia, how would you anticipate that $81 changes over the next few quarters? And if it's going to drop, then what might that -- what might be the impact on your outlook for volumes out of Central Appalachia? Your own volumes, that is.

Well, as you know, they're generally contracted out about a year in Central App. And so, as Joe mentioned earlier, I think the per ton realizations that we saw the first quarter will be generally consistent through the balance of the year. Once we move toward the second half of the year, the contracting will start for 2014 and we'll see how that plays out.

We've got some contracts that roll into 2014.

Correct.

We are also, at our MC operation, accessing some very high-quality coal. It's very low-sulfur, high BTU. So we are able to sell some of that coal into the PCI markets and industrial markets. So we are able to get a higher price than what you would actually see off of NYMEX pricing. But at the same time, the market does need to rebound somewhat to be able to maintain this price level in 2014. But when you look at overall for a Company, we do expect our 2014 realizations to be higher.

And that's a combination of contract re-openers, where we've got some below-market contracts, still that will roll into higher pricing. And then we also anticipate that we will be selling some met coal next year out of our Mettiki operation. So the combination of those things, plus our increased production that Tunnel Ridge, is at a higher price point. And when you look at the total revenue, we're going to get -- on average sales price, we should be at a higher point next year than we are this year.

Okay. And maybe one last question. As you look at the White Oak and Gibson South developments, any sense you can give us on the current status of customer contracting activity from those operations? And is there any exports that you could anticipate from those? Or is that -- you're really just going to focus on your utility customers domestically as you go through the contracting process.

As we mentioned in the last quarter, White Oak is marketing their own production, so we do not market that production. We do know that they are actively in the market. They have secured sales for the 2013 and 2014 production that's anticipated. I can't tell you exactly what that percentage is. Specifically to Gibson, we're continuing to talk to customers, and are very active in trying to sell both our Gibson North product, as well as Gibson South. So some of the tonnage that are in the 2 million tons that we booked, as well as some of last year, does include some increased sales at Gibson, but not a significant amount.

So, most of the new production which we're targeting, or for 2015, is open in the market. And we would expect that, for Gibson South, that some of that production may be as much as one-third could go to the export markets. It's a low-sulfur product, and we think it competes well in the export market. It will have a good cost structure that we should be able to participate in the export market. The actual amount will be depending on how strong the domestic market is. So we're looking to try to maintain consistent cash flows. So we'll go to the market that gives us the best opportunity for the Gibson South product.

I do believe that White Oak will also be participating in the export market to some extent. How much, I can't tell you.

Okay. That's all I've got. Thanks a lot.

Thank you. We currently have no more questions in the queue. So I'd now like to turn the call over to Brian Cantrell for closing remarks.

Thank you, Clinton. To everyone on the call, we appreciate your time this morning, as well as your continued support and interest in both ARLP and AHGP. Our next call is currently scheduled for late July. And we look forward to discussing our mid-year results with you at that time. Thank you all very much.

Thank you, ladies and gentlemen. That concludes your call for today. You may now disconnect. Thank you for joining. Have a very good day.