Alliance Resource Partners LP (ARLP) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2013 Alliance Resource Partners LP and Alliance Holdings GLP and LP earnings conference call. My name is Stephanie and I will be your operator for today.

(Operator Instructions)

As a reminder, this call is being recorded for replay purposes. And now I'd like to turn the call over to Mr. Brian Cantrell, Senior Vice President and Chief Financial Officer. Please proceed, Sir.

Thank you, Stephanie, and welcome, everyone. Earlier this morning, we released 2013 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 2013. Following our prepared remarks we will open the call for your questions. We will begin this morning 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 partnerships may vary materially should 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 statements, 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 are through the required preliminaries, I'll start this morning with a review of the Partnership's operating and financial results for the most recent quarter and the first six months of 2013 and then turn the call over to Joe Craft, our President and Chief Executive Officer. As noted in our release earlier this morning, ARLP once again posted strong results for both the 2013 quarter and year-to-date. Starting at the top, led by higher volumes, ARLP's revenues in the 2013 quarter increased 4.5%, compared to the 2012 quarter, to a record $553.6 million, while revenues climbed to a record $1.1 billion for the first half of 2013, a jump of 13.2% over the comparable period in 2012. Growth in coal sales revenues during the 2013 quarter was led by increased production at our Tunnel Ridge longwall mine in Northern Appalachia and strong performance from our Gibson North, River View, and Onton mines in the Illinois Basin. All of which contributed to drive coal sales volumes up 13.3% to a record 9.8 million tons, and production volumes higher by 23.6% to a record 10.1 million tons, both as compared to the 2012 quarter. These increases also contributed to record volumes for the first half of 2013 as tons sold climbed 18.5% to 19.5 million tons, and tons produced increased 19.4% to 19.9 million tons.

Volume growth more than offset a reduction in ARLP's total average coal sales price which was impacted by our previously announced decision to avoid participating in the weak metallurgical coal markets this year. On the strength of record revenues, ARLP also reported record EBITDA of $178.4 million for the 2013 quarter, an increase of 14.7% compared to the 2012 quarter, and $351.5 million for the first six months of 2013, a jump of 22.5% over the first half of last year. Net income was also higher compared to the 2012 quarter and first half, climbing 9% to $104.1 million for the 2013 quarter and 16% to $207 million year-to-date. The ongoing ramp-up of longwall production at Tunnel Ridge continued to drive ARLP's consolidated production cost per ton lower in the 2013 quarter, as total segment adjusted EBITDA expense per ton declined both quarter-over-quarter and sequentially. With year-to-date production at Tunnel Ridge increasing by approximately 1.6 million tons over the first half of last year, segment adjusted EBITDA expense for the first six months of 2013 was $2.90 per ton lower than the comparable 2012 period.

Turning to our outlook for the remainder of the year, as you may recall, last quarter we raised our expectations for the 2013 full-year to the higher end of our initial guidance estimates. In light of our strong year-to-date results and based on current expectations, we now anticipate ARLP's 2013 results will exceed these expectations. Consequently, we are increasing ARLP's guidance estimates for coal production to a range of 39.3 million to 39.6 million tons and coal sales volumes to a range of 38.6 million to 39.6 million tons. Our estimate for 2013 revenues, excluding transportation revenues, is increased to a range of $2.165 billion to $2.225 billion.

As it indicates all year our revenue estimates do not currently assume any sales into the metallurgical coal markets and as a result, we continue to expect average coal sales price per ton will be approximately 1% to 3.5% lower than last year. Looking at production expenses, we came into the year anticipating cost per ton in 2013 would be comparable to slightly below 2012 levels. Cost control over operations has been better than originally anticipated and we are now estimating 2013 segment adjusted EBITDA expense per ton will be 4% to 5% lower than 2012. Expectations for higher revenues and lower than anticipated cost per ton lead us to also increase 2013 estimates for EBITDA to a range of $675 million to $695 million, and net income to a range of $375 million to $395 million.

ARLP's 2013 capital projects, including continued development of the Gibson South mine, reserve acquisitions, and surface facility construction related to the White Oak mine development project, remain on schedule and we continue to anticipate total capital expenditures this year the range of $370 million to $400 million. Regarding our investments related to White Oak, our partners in the project have recently exercised their option to begin making equity capital contribution toward the development of the White Oak longwall mine. Consequently, we do not currently expect to make any additional preferred equity investments in White Oak during 2013 beyond the $47.5 million we have are ready contributed year-to-date.

I will wrap up my comments this morning with a quick look at the balance sheet. ARLP's liquidity at the end of the 2013 quarter remained strong at approximately $543.2 million, and our leverage is very comfortable at approximately 1.2 times total debt to trailing 12 month EBITDA. We continue to believe our solid balance sheet and strong cash flows leave ARLP well-positioned to execute our plans and take advantage of additional opportunities that may arise.

With that, let me turn the call over to Joe for his take on the second-quarter performance and our perspectives on the coal markets. Joe?

Thank you, Brian, and good morning, everyone. As Brian just reviewed, ARLP added to its history of delivering exceptional results by posting new operating and financial benchmarks for the 2013 quarter and first half of the year. I'd like to touch briefly on a few highlights.

Once again, ARLP's teams have demonstrated their ability to effectively execute our strategy and deliver long-term value in a challenging market for the coal industry. Operationally, performance at Tunnel Ridge continues to improve as previously discussed revisions for the mine plan are implemented. Sequential production increased approximately 54%, and Tunnel Ridge remains on track to reach an annual run rate of approximately 6 million tons by year end.

Our Illinois Basin mines continue to deliver strong performance, most notably at the River View, Gibson North, and Onton operations. Construction of our new Gibson South mine also continues to move forward with initial production targeted for the third quarter of 2014. Initial production from continuous miner development activity has now begun at White Oak. The longwall should begin operations toward the middle of next year, and we anticipate that our investments in White Oak will begin to generate positive cash flow to ARLP in 2014 and grow to approximately $90 million to $95 million in 2016. Despite difficult market conditions, our marketing team continued to build on ARLP's solid contract position.

During the 2013 quarter, they successfully reached agreements with a sale of approximately 2.6 million tons, bringing total new coal sales commitments to approximately 4.5 million tons since the beginning of this year. Assuming coal production and customer deliveries occur as planned, ARLP is now essentially sold out in 2013 and has commitments for approximately 80% of anticipated sales volumes in 2014. While our results speak for themselves, they could only be accomplished through the hard work and dedication of every employee at Alliance and I want to commend them for their efforts.

Turning for a moment to the current state of the US coal markets, conditions have generally improved, but remain challenging. Year-over-year coal demand has increased roughly 11%, utility stockpiles have declined approximately 24 million tons, and coal has regained market share from natural gas with coal currently accounting for approximately 40% of the US electricity generation. In the export markets, shipments in June reversed earlier positive trends and current seaborne prices are trading near multi-year lows making it difficult for US produced coal to compete in that market. Over the near-term, we continue to believe that the US supply/demand picture will continue to slowly improve, but tepid power demand in a weak outlet for exports will dampen the potential for meaningful price recovery through the end of 2013. Longer-term, we expect coal to remain a significant provider of baseload electricity.

We believe total demand for US coal, both domestic and export, will hold steady in the one billion ton per year range for the foreseeable future. As a low cost producer in the Illinois Basin and Northern Appalachia, ARLP is poised to prosper in this environment. We continue to see growth opportunities in these regions and ARLP remains focused on exploiting these opportunities to meet our growth objectives through 2020. Reflecting ARLP's current year-to-date performance, expectations for a 13th consecutive year of record results and our confidence in the future, the Alliance force is likely to increase distributions to our unit holders for the 21st consecutive quarter. Cash distributions for the 2013 quarter were increased over the first quarter of 2013 by 2% at ARLP and by 3% at AHGP. Compared to the 2012 quarter, the announced distributions represent an 8.5% increase for ARLP and a 12.5% increase for AHGP.

This concludes our prepared comments. We appreciate your continued support and interest in both ARLP and AHGP. Now with Stephanie's assistance, we will open the call to your questions.

(Operator Instructions)

David Feaster from Raymond James.

Hello, good morning, guys.

Good morning, David.

Could you talk about the Northern Appalachia market real quick? The market remains pretty tight right now with a couple mine outages. Have you seen a pickup in spot demand? And if there is been a pickup in the demand, do you have any spare capacity at your mine in Northern Appalachia?

Yes, we do see the supply disruptions have made the market tight. Stockpiles are declining. We do not have any spare capacity, so we are not able to participate. But, the prices have firmed since the last quarter.

Okay. On the met market, you talked a little bit continued weakness there. Do you see met production coming back online in 2014? I remember before, when we've talked, you're looking for prices closer to the $200 threshold? Is that still where you are looking?

It will depend on transportation. But, it's hard to know what's going to happen in 2014. But I think that price range is something that will definitely be attractive. It may not need to be at that level. Depending on what the transportation might be. So, we are disappointed where met prices are. We think that there will be some supply reductions for the balance of the year. So, hopefully in 2014, we will see improved pricing so we can participate.

Okay. Now in Central Appalachia, fortunately, your mines remain profitable, primarily due to much higher contract pricing. As spot prices in the mid-$50s right now, it implies your mines would be underwater. When you look at 2014 and 2015 contracting for these mines, what's your outlook for the region's production? Are you considering whittling down production as your higher-priced contracts roll off?

We are, specifically, at our MC Mining operation, that's a higher quality coal. So, we are trying to position that mine to sell some of the PCI market that would supplement the markets there. As far as the steam market, we are going to have to look for niche opportunities to be able to continue to produce into that market place, and we are working on those now to see we can't make that happen.

Okay. Thanks, guys.

Thank you.

Paul Forward from Stifel Nicolaus.

Thanks, good morning.

Good morning, Paul.

And congratulations on the results in the quarter. I wanted to ask on the, well I guess first of all, the $43 a ton number in Northern Appalachia in the quarter, really sounds like Tunnel Ridge is getting close to what you'd expect it from the mines. Can you talk about are the issues that you had with a little disappointment in the mining conditions you've had earlier, are you past that? Can you see a low- to mid-$40s type cost of going forward out of that region?

I think that, as we mentioned in the last quarter, we've implemented a change in our mine plan. However, that will still require, and we did have a longwall move in July. So, we are in the second panel. We expect the second panel to be similar to the first panel. Recoveries did improve this past quarter. Therefore, led to the higher production and the lower cost. So, we would be expecting cost to be in the same range in the third quarter. As we look to fourth quarter and beyond, with the change in the mine plan, we are hoping that we can see improved cost and improved production. Therefore, getting to that 6 million ton annual run rate that I mentioned in our opening comments.

Okay. Great. I wanted to ask a little, what your thoughts might be on the coal markets? You've got about 80% of your coal committed for 2014, and you touched a little bit on the Northern App markets being pretty favorable right now. Overall, this year, you are talking about average realized lower pricing being down 1% to 3.5%. With that 80% commitment level for 2014, can you characterize what your average price outlook directionally might be on '14 versus '13? And then, also, considering the -- we've had some overall good news relative to last year on coal demand levels. But, we did have a fairly mild first half of the summer and we've seen overall US shipping volumes have been creeping up. Can you talk about -- as you are putting to bed the remaining 20% of your expected production and committing that to customers for next year, is that -- how do you think that's going to look relative to the 80% that you've already got committed?

Okay. I'm not exactly sure I understand your last part. But let me go ahead and start answering two or three questions and then you can follow-up with what I've missed. Specifically, to the average sales price per ton, this year was impacted primarily because of not selling the net tons. So, when we look at the average sales price per ton in 2013 compared to 2014, the mix between Northern App and the balance of our reserves is going to allow for an improved average sales price year-over-year. Because the Northern App prices are higher than the Illinois Basin prices based on what we are looking at. So, we do expect that we will see improved pricing.

Now, as you look at the balance of the 20%, we anticipate there is numerous solicitations that have already been announced and there's going to be more coming down the pike in the third quarter of this year. And that will help us determine exactly what that will be, to where we can possibly give you more guidance, probably, in the fourth quarter. Probably won't be concluded by the end of the third quarter. But we do anticipate that the prices will be up. I can't give you a precise percentage, yet, because of not knowing what the balance of that 20% would be. But, based on our expectations, it's going to be a higher revenue on an average sales price per ton basis next year versus this year.

That's what I needed. That's good. And I think you had talked a little bit about the White Oak contributing $90 million to $95 million in 2016. Is that, putting the 2016 number on that, is that being a little conservative? Considering if you are going to start up third quarter 2014, 2015 ought to be a pretty good year, too, right? I was just wondering why you would put a '16 number on when you would hit that full run rate?

Yes. I mean, we will have positive -- we are expecting positive cash flow in 2014 and 2015. We just think that, based on timing, 2016 gives us more of a normal run rate. That's where we will start getting returns on our Series A. But, so 2015, we will get cash flow out of the royalties and the prep plant and loadout facilities.

Okay.

It's a meaningful dollars there. It's all going to be dependent on timing, not knowing exactly when the longwall is going to start will affect that number. So, we didn't feel comfortable giving guidance at this time on that.

Thanks. That's all I've got.

Okay, thank you.

Sam Dubinsky from Wells Fargo.

Great, thanks for taking my question. I just have a couple quick housekeeping ones. I know you don't want to give an exact number, but perhaps can you give an idea of how year contract pricing for 2014 and '15 compare to current spot market pricing? And how does this compare to historical trends?

I would say that it is higher than what you would see in the spot market pricing. It's what the trend has been and that's consistent with what we've seen in the past. So, from a trend line basis, you could expect, looking back in time, a similar premium for long-term contracts compared to spot pricing.

And what is that? Can you give me an idea of the percent premium on average?

I'm not at liberty to tell you about that right now because of all the negotiations we've got. I'm sorry, I can't disclose that.

And the just do think you are shipping close to your customer's consumption? Or do think there's still inventory in the channel?

We are pretty much right on track for customer shipments per our contracts. So, we haven't seen any, basically, we haven't seen any deferral, so we are right on track for shipments based off our contracts.

Okay. And then, lastly, could you just talk about capacity for next year and your ability to flex capacity as the market continues to remain strong? What is it today and what could it be if you had to increase it?

Well, I'd say that what we've indicated, is Gibson South will come on in third, fourth quarter of 2014, so we are projecting that will be about 300,000 tons. And then we are looking at Tunnel Ridge to be in a run rate of 6 million and we really don't have any access flex capacity, using your terminology, with the existing capital that we have invested.

In our Illinois Basin operations have produced more than we anticipated this year with the embedded capacity we have. So, we are running full out at the moment. And so, the only opportunity for increased tons that we are anticipating right now is at Gibson South and Tunnel Ridge.

Now, we also mentioned White Oak is coming online. We expect the longwall to be in 2014. That tonnage won't be reflected in our numbers, but again, we will get some benefit out of their production based on the structure of that joint venture.

Okay, great. Thank you very much.

Thank you, Sam.

Alex Turnbull from Goldman Sachs.

(technical difficulties) Does that cash flow get recorded as revenue towards average tons? And my second question is about the market. I understand that your largest competitor, Foresight, sold about 35% to 40% of their product into the export market last year. But this year, they're not going to be able to compete. So, I'm just wondering how pricing is looking in 2014 and '15, given that the effective supply in Illinois is going to increase 20%, there's no particular increase in demand and there's no particular good reason why people would pay a premium for long-term uptakes? Thank you.

We missed your first question. I will go ahead and try to answer your second question. Go ahead.

Yes, the first question was, if you guys, say, you aren't going to take up A contract and your customer said, I can't take this call, I'm going to pay the break, do you then record that on the revenues and divide it by the reduced number of tons sold? Or do you record that as something else?

I think the question, Brian, is if we had a negotiation with the customer and they wanted to buy out of the contract, how do you record that?

I believe that that gets recorded through other revenue.

Other revenue, okay.

It's not a sale to coal ton, it's a revenue associated with the contract termination.

Okay. That's sort of a question the market, I believe it is interesting because I mostly see these contract actions, mostly a couple of Asian coals. And the market is shut down and you allow this competitor to sell on a lot of Asian coal, which is going to go somewhat now.

Back to your -- what I heard your second question was for Illinois Basin coal, since there was an increased demand, why do we expect to get a premium for long-term contract? (multiple speakers)

Your nearest competitor is selling has now got a lot of their supply, 40% of their supply, which can't go into closure anymore, and has to go somewhere.

Yes, I think that the response to that is, one, we do have a domestic market that's growing for Illinois Basin coal. Primarily at the expense of Central Appalachian coal for switching in the 2014, 2015 timeframe. And I think that our coals, you've also got to look at the various qualities of coal. And so, certain of our coals compete in the markets that the longwall coals do not compete in. I think that plus the relationships we have, allow us to sell coal at a market price -- we have a higher BTU, got a lower transportation, and there's numerous factors that give a different price point relative to what you might see in the spot market pricing.

Okay. So, there's one more follow-up question. So, I noticed that under the EIA 923 filings, that you guys have some very profitable contracts selling, like $4 on BP Oil [plus two up]. Into, say, Pepco, Georgia Power, and so forth. Those contracts have since rolled off. Have those been renewed at similar prices? Or can we assume they've been renewed at quite different prices?

They are all different. And a couple of those we're actually in the middle of negotiating right now, so I can't comment on the specific contract by contract price differentials.

Okay. Thank you.

(Operator Instructions)

Joseph Steckler, no company name provided.

This is Joseph Steckler, Steckler and Company. Congratulations on your outstanding performance under trying conditions. Do you anticipate any need to go to the equity markets? I know you have not done so in secondaries in the past, or to the debt markets, to achieve your ongoing goals? And, what additional steps are you taking to reduce those costs, cost structure, particularly in those areas where prices continue to soften?

Joseph, I will take the first part of that question. With regard to need or desire to access the equity markets, we talked about what our liquidity levels are and what our leverage ratios look like, our balance sheet is very conservative. We have significant capacity available to us in the debt markets, if need be. And our cash flow remains very strong. So, I don't see any need, at this point in time, to execute our existing plans to go into the equity capital markets.

And on the cost side, we are hitting on all cylinders right now and we are doing very well. So, we believe we can compete with our cost structure. We are continuously looking for ways to be efficient and cost effective. Our team has done a great job with that. They need to get congratulated for the tremendous effort. So, we feel like we are a low-cost producer in the markets we serve. And we respect that and we stay on top of it and I think our record speaks for itself. Our guys have done a fantastic job of controlling their cost.

Again, congratulations on your performance in a very difficult market.

Appreciated, Joseph, thank you.

Thank you very much.

There are no more questions at this time. I would now like to turn the call back over to Mr. Brian Cantrell.

Thank you, Stephanie. We appreciate everyone's time this morning. As well as your continued support and interest in both ARLP and AHGP. Our next call is currently scheduled for late October and we look forward to discussing our third-quarter results with you at that time. Thanks again.

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