Alliance Resource Partners LP (ARLP) 2013 Q3 法說會逐字稿

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

I would now like to turn the conference over to Mr. Brian Cantrell, Senior Vice President and Chief Financial Officer. Please proceed.

Thank you, Derek, and welcome, everyone. Earlier this morning we released 2013 third-quarter earnings from both Alliance Resource Partners, or ARLP, and Alliance Holdings GP, or AHGP, and we will now discuss these results as well as our outlook for 2013. Following our prepared remarks, we will open the call to 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 for 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 are through the required preliminaries, I will turn the call over to Joe Craft, our President and Chief Executive Officer, for his comments and perspective. After Joe's comments, I will review the Partnership's operating and financial results for the most recent quarter and the first nine months of 2013. We will then open the call to your questions. Joe?

Thank you, Brian. Good morning, everyone. ARLP again delivered solid results in the 2013 quarter, posting across-the-board improvements, as coal sales and production volumes, revenues, EBITDA and net income all increased compared to the 2012 quarter. All operations performed well during the 2000 (sic) quarter except Onton and Tunnel Ridge, which I will discuss in more detail after I address the current market outlook and activity.

Market conditions remained difficult in the 2013 quarter. Although natural gas pricing has not recently resulted in significant fuel-switching, mild weather and a stagnant economy in critical coal-burning regions has impacted demand. Utilities have reacted by modifying near-term buying strategies due to declining low projections and current inventory levels.

In addition, declining export volumes and recent aggressive contracting activity by the longwall producers in the Illinois Basin have disrupted the current coal markets in that region. We believe supply-demand in the Illinois Basin is closer to being in balance than the current price curve suggests. As a result, we see the potential for meaningful recovery in the coal market sometime in 2014.

We also expect improvement in the Northern Appalachia markets in 2014, as more supply comes off-line in Central Appalachia in the near-term.

Despite these challenging market conditions, our marketing team once again demonstrated its ability to identify and execute on opportunities. During the 2013 quarter, ARLP continued to add to its existing already-strong contract position, successfully reaching agreement for the sale of approximately 3.3 million tons for deliveries through 2016, bringing total new coal sales commitments to approximately 9.4 million tons since the beginning of the year.

We also continued to take advantage of opportunities in the export markets that met ARLP's price objectives, leading to the shipment of two vessels of Illinois Basin coal to the thermal export markets in the 2013 quarter.

Operationally, we experienced a disruption to production at the Onton mine in late July, when a geologic event created potentially hazardous methane levels. Following safety protocols, all personnel immediately evacuated the mine without injuries. Working closely with our regulators, Onton mine personnel developed and executed a plan to isolate the affected area and mining resumed in mid-August. If you normalize for the loss at Onton, which we estimate impacted expected EBITDA by $13.3 million this quarter, our financial results would have been close to last quarter's record results.

Performance at our Tunnel Ridge mine in the 2013 quarter was impacted by a planned longwall move in July and lower-than-expected recoveries in the current longwall panel. Fourth-quarter results are expected to be comparable, as we anticipate conditions experienced in the 2013 quarter to persist until Tunnel Ridge completes mining in the current longwall panel in early December, at which time a major longwall move will complete the transition into a new reserve area.

Consequently, we now expect 2013 full-year production of approximately 3.7 million tons at Tunnel Ridge. Geology and mining conditions experienced by development mining in this new mining reserve area have been encouraging, and following the longwall move to complete the mine plan transition, we expect productivity and yield improvement will drive production at Tunnel Ridge to increase to approximately 5.5 million tons in 2014.

In addition to increased production at Tunnel Ridge, we are also anticipating initial production in 2014 from our two other current growth projects. ARLP's new Gibson South mine remains on schedule to begin initial production in the third quarter of 2014, and we continue to expect longwall operations at the White Oak project will begin in the second half of next year.

The growth at Tunnel Ridge, Gibson South and White Oak is being driven by utility demand switching from higher-cost Central Appalachia production. Unfortunately, the decline in demand for Central Appalachian coal impacted our own Pontiki mine, as evidenced by our recent decision to cease production there at the end of this November after more than 36 years of operation. For the 142 dedicated employees impacted by this closing, we hope they will relocate to other Alliance mines to help us meet our growth objectives.

We experienced a number of challenges during the 2013 quarter, and I would like to thank every employee at Alliance for their hard work, dedication and commitment. Their efforts keep ARLP on track for another year of record performance in 2013 and positioned for more growth next year. Reflecting this performance, the Alliance Boards elected to increase distributions to our unitholders for the 22nd consecutive quarter. Cash distributions for the 2013 quarter were increased over the second quarter of 2013 by 2% to an annualized rate of $4.70 per unit at ARLP and by 2.9% to an annualized rate of $3.23 per unit at AHGP. Compared to the 2012 quarter, the announced distributions represent an 8.3% increase for ARLP and a 12.2% increase for AHGP.

With our strong year-to-date performance, our coverage ratio for all distributions has increased to an estimated 1.55 compared to 1.45 this time last year.

At this time, I will turn the call over to Brian for a more detailed look at our results for the 2013 quarter and outlook for the remainder of the year. Brian?

Thank you, Joe. As noted in our release this morning, ARLP's results for the 2013 quarter improved across the board compared to the 2012 quarter. Volume growth was the primary driver for this quarter-over-quarter improvement, as strong performance at our River View, Gibson North and Dotiki mines, as well as increased longwall production at Tunnel Ridge combined to drive coal sales and production volumes higher by 6.7% and 7.6%, respectively.

Increased volumes more than offset lower average coal sales prices, leading ARLP to post increases to revenue, EBITDA and net income compared to the 2012 quarter.

As a reminder, we anticipated ARLP's average coal sales prices would decline 1% to 3.5% in 2013, primarily due to our decision to not participate in the weak metallurgical export markets this year. With our last high-priced met coal shipment completed in July 2012, ARLP's year-to-date coal price realizations are approximately 3.2% below 2012, in line with our expectations.

The strong operating performance I mentioned earlier also provided benefits on the cost side in the 2013 quarter, as increased production contributed to drive segment-adjusted EBITDA expense per ton down by 5.3% compared to the 2012 quarter. In particular, cost per ton continued to trend lower in Northern Appalachia as production at Tunnel Ridge increased 13.9% over the 2012 quarter, helping to push segment-adjusted EBITDA expense per ton in the region lower by 11.3%.

As expected, cost per ton increased sequentially in northern Appalachia due to a planned longwall move at Tunnel Ridge during the 2013 quarter.

Before moving on, I would like to touch briefly on two factors you should consider when comparing results between the 2013 and 2012 quarters. First, the unanticipated halted mining operations at Onton resulted in reduced production and sales volumes, increased expenses and other charges in the 2013 quarter. As a result, ARLP's EBITDA from the Onton mine was impacted by approximately 13.3 million tons below our expectations.

Second, as you may recall, operations at our Pontiki mine were suspended in August 2012. Due to the temporary idling of the mine, results for the 2012 quarter were impacted by approximately $24.1 million of related losses and charges, including a $19 million non-cash asset impairment charge.

For 2000 (sic - 2013) full-year results, we expect higher-than-anticipated performance from our Illinois Basin operations, particularly at River View, Gibson North and Pattiki, will continue to offset the production shortfall at Tunnel Ridge. As a result, we currently expect ARLP's full-year results should be within our previously provided guidance ranges for 2013.

As we consider the impact of the unanticipated event at Onton, including the loss of one month's production and sales from that mine and the expenses and losses incurred to resume production, we now anticipate our full-year 2013 results will be closer to the lower end of these ranges for production volumes of 39.3 million to 39.6 million tons and sales volumes of 38.6 million to 39.6 million tons.

ARLP is also currently anticipating full-year 2013 results near the lower end of guidance for revenues, excluding transportation revenues, in a range of $2.165 billion to $2.225 billion; EBITDA of $675 million to $695 million; and net income of $375 million to $395 million. Our estimates for 2013 EBITDA and net income continue to reflect the expected pass-through of approximately $20 million to $30 million of losses related to ARLP's White Oak investments, but they do not include receipt of any insurance proceeds related to the Onton event.

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, remain on schedule and we continue to anticipate total capital expenditures this year in a range of $370 million to $400 million.

Regarding our investments related to White Oak, as we reported to you on our call in the previous quarter, our partners in the project have recently exercised their option to begin making equity capital contributions 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 beyond the $150 million ARLP has contributed since the beginning of the project, including the $47.5 million contributed in 2013.

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 $595 million, and our leverage is very comfortable at approximately 1.14 times total debt to trailing 12 months EBITDA.

ARLP's solid balance sheet and cash flows leave us well-positioned to continue to execute our current plans and take advantage of additional opportunities that may arise.

ARLP is in the middle of our budget-planning season and we are focused on continuing to deliver volume and cash flow growth in 2014. We look forward to providing a more detailed view of expectations for next year during our call in January.

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

(Operator Instructions). Jim Rollyson, Raymond James.

Good morning, gentlemen.

Good morning, Jim.

Joe, maybe just speak a minute on -- with respect to Tunnel Ridge and kind of the challenges relative to what you thought that would do this year, which fortunately, you said, ILB is providing the offset to that -- but how comfortable you feel with getting to the 5.5 million tons next year, just with what you see in mine plan development?

At Tunnel Ridge, we did start in a reserve area that essentially was just thinner than we expected, and therefore the recoveries just did not give us what we expected. So we recognized that early on in 2013 and designed a change in our mine plan. But based on the development of the panels, we had to go ahead and go through the panel sequencing that takes us to the new reserve, starting with our -- after our next longwall move.

So as we look at the development of the panel that we will next go to, we are encouraged by both the seam thickness as well as the mining conditions. So we do feel comfortable once we start the longwall and the next panel that we will be able to run at the 5.5 million to 6 million ton run rate.

Okay, that's helpful. You talked about kind of everything progressing, it sounds like, with both Gibson South and White Oak. Can you remind us where you stand from a sales contract standpoint for both? I know you're not necessarily marketing the coal for White Oak, but just curious if they have already got some of that spoken for and kind of how the interest levels have been for both those projects.

I think as far as what we have control over, the Gibson product -- the contracting position we have got is included in our release, and we really don't break those down on a mine-by-mine basis. But we feel very excited about the Gibson product, given its low-sulfur nature, as well as what we are seeing mine conditions there, that it is right on track to meet our expectations as far as return expectations.

As far as White Oak, their marketing of the coal has progressed since our last phone call, and I would say they are in good shape for 2014. And the main issue for White Oak is when will the longwall start. I think they are focused on making that happen midyear in 2014. But we will just have to see how development goes to be able to hit that target.

Okay, and last one, Joe, maybe just bigger-picture thought. You guys opted out of the met market this year given where pricing is. When you think about that, what price level -- maybe for a benchmark price -- but what price level do you consider getting back into -- bringing that 1 million tons back?

We are evaluating exactly how we should participate in that met market. We do have our contract with Dominion that ends this year. So that does open up more opportunity for us to participate in the met market. So we are evaluating and watching that closely.

So we do believe that we will participate in 2014 in some amount. The actual amount has yet to be determined. I think at current prices, it's a little challenging, but we do see some improvement in 2014 compared to 2013 current pricing. So we are optimistic that we will be participation in the met market in 2014.

All right. Thank you, guys.

Thanks, Jim.

Mark Levin, BB&T Capital Markets.

Hey, guys, a couple of quick questions. When you think about pricing for 2014 and 2015, I believe in a previous conference call or two, you guys had mentioned that you expected price per ton to be higher next year than this year.

When you think about your visibility now -- you obviously have locked in more tons -- when you look into 2014 and 2015 and then we see some of the rolloff of the cap pricing that I guess you guys have been getting still tremendous cap pricing -- and then you have got some mix issues obviously in there obviously as well. Directionally do you still feel confident about 2014 pricing over 2013? And then how should we think about the tons that are being layered on in 2015?

Yes, we still believe that our average sales price will be higher in 2014 compared to 2013. We still have a few tons unsold, but based on where those tons are and our market projections, we believe that we will see improved average sales price per ton on a consolidated basis in 2014.

As you look to 2015, I think the main increase in production will be at Gibson South. Again, that is a lower sulfur product, so it does garner a higher sales price than our typical Illinois Basin product would be. So I think that we would be looking for improved pricing in 2015 as well, but that is a little early to tell right now. And some of that is going to depend on what the steam coal/met coal mix would be in the 2015 timeframe. But that is what our read would be at this moment.

And Joe, when you think about pricing today in the various basins -- take the Illinois Basin -- pricing today for your sort of benchmark product pricing today in some of the other regions in which you operate, how do they compare -- I mean, obviously inventory levels have been worked down in pretty much every level -- in every area except Central App. How does pricing today look versus maybe three months ago or six months ago on incremental tons that you are putting to bed?

I think today's price is lower, again, because of some aggressive pricing by some of our competitors. As we look to the out year and where we are transacting, we don't see much difference than three months ago.

Okay, fair enough. And then the last question. One of your competitors today announced a fairly large transaction in which they were divesting some of their domestic assets. When you guys think about acquisitions, I mean, obviously, you have a very long runway of organic growth the next couple of years. But when you think of these types of acquisitions -- are there opportunities above and beyond this that you are looking at? And then I don't know -- I assume you don't want to speak specifically to this transaction. But are there other opportunities like this to grow through acquisition, or are you more or less content with what you have in front of you, which is admittedly a lot?

I think we would participate in acquisition opportunities if the situation fit our strategy. Our first priority is to grow organically; that is how we built our Company. But we have also made selective acquisitions along the way. We did Onton last year. We acquired Warrior several years ago. So there is definitely a role to play for M&A transactions to allow us to meet our growth objectives.

So we continue to be active to evaluate whether or not there is a fit. So yes, we would definitely participate if the right situation occurred.

Great. Thanks very much. I appreciate it.

Brian Yu, Citi.

Thanks, good morning. My question is somewhat a follow-up on the previous one about average price, but the other side, which is you have got Tunnel Ridge that will improve the price. How should we look at the costs and get a better sense of margins for next year?

I think, again, we are going through our budget process, so it is a little difficult to answer that question. But with the mix and the way everything is rolling through, I would say the margins are going to be comparable, maybe a little bit better. But I would just assume for right now you would be looking at similar margins in 2014 compared to 2013.

Yes, and Brian, recall when we came into 2013, we were expecting margins, because of the anticipated drop in pricing, to be lower by roughly 2% to 4%. To date, they are actually slightly higher, 1%, 1.5% or so. So with the performance that we have been seeing out of some of our larger Illinois Basin mines in particular and as Tunnel Ridge ramps up their cost-per-ton improvement that we expect to see there, to Joe's point, 2014 should be comparable to what we have actually experienced this year.

All right. Okay, helpful. And then my second question is with the tons that are freeing up with the Dominion contract you mentioned earlier, is there -- can you provide us a sense at what benchmark net price -- or however would be best to characterize it -- where the prices will be comparable to what you are getting now selling into the thermal coal markets?

The difficulty in answering that question is just back to the transportation. And it is hard for me to give you a number, because we don't have the transportation component locked up yet.

Okay, got it. Thank you.

Thanks, Brian.

Sam Dubinsky, Wells Fargo.

Great, thanks for taking my question. Just a couple of quick ones. How should we think about White Oak losses in 2014 and 2015 as the project ramps?

Yes, coming into 2014, to try to compare results between this year and next year will be a bit of a challenge, just given the way the accounting causes losses to flow through to the income statement.

As you know, we began breaking out White Oak separately because of that. And when we come into next year, we will be providing a view really on cash flow which, Sam, as you know, is what we are focused on. So we will probably be coming up with some type of a perspective that adjusts the White Oak accounting out and gives you a better view on how it is actually impacting our cash flows.

It is a little bit early to tell what that will look like right now. As Joe mentioned earlier, the biggest issue there is the timing of when the longwall starts. And if that moves plus or minus a couple of months, the impact can be meaningful.

We should have a better idea about where the longwall timing will be when we get to our call in January, and we will be providing as much clarity as we can at that time.

To just remind everybody, I mean, those are accounting numbers. And back to Brian's emphasis on cash flow, they really won't affect our free cash flow and distributable cash flow. So even if the EBITDA number swings, we should be still seeing increases in distributable cash flow in 2014, based on our current outlook.

Okay, great. And then coverage ratio has been very healthy. At what point do you think it makes sense to increase the rate of your distribution? And I have one last follow-up.

I think that given the outlook in the marketplace and the uncertainty that surrounds that, we are comfortable with growing at the 2% a quarter rate. And as we see a little bit more -- or let's say less volatility in the market, it might give us some encouragement to look at a different rate. But given the volatility we see in the market, we think growing at the current rate is the prudent thing to do.

Okay. And then I think you mentioned there were some insurance recoveries from Onton. What is the -- is it full recovery or partial, and how do we think about the amount and when it flows through the P&L?

Well, it is a little bit early to try to quantify that, Sam. We are working with our brokers and underwriters to develop the claim right now. There are multiple components to that, and it will take a little bit of time to bring that to a conclusion.

In addition, when you look at our program, we tend to take a healthy share of that for first risk. So we have a deductible that is a little over $11 million in this case. So how it finally shakes out is yet to be determined, but we are working through it as quickly as we can.

Great. Thank you very much.

(Operator Instructions). Noah Lerner, Hartz Capital.

Good morning, guys. A quick question again. When I look at the committed volumes as of the end of the third quarter for 2014, 2015 and 2016, and I compare them to the committed volumes at the end of last year's third quarter for 2013, 2014 and 2015 -- again, the one-, two- and three-year period -- it looks like committed volumes for each of the three years out are down about 12% right now.

And I am just curious if this has anything to do with some kind of structural long-term change in the coal market, maybe based on the war on coal from the current administration. Or if you just think this is a timing mechanism and it will all be pretty much on par by the end of the fourth quarter, and your customers are just waiting to see what happens with the coal industry as a whole from the government regulations, and also to see if pricing might soften up to get in a little bit better opportunity to wait on their commitments?

I think that it does not reflect customer concerns with regulation or the war on coal concept that you mentioned. I think it does reflect that the customers are in fact shorter in the marketplace; in other words, they are not booking as much of their expected burn and trying to keep open some of their book in -- not knowing exactly what gas prices are going to do. So as they look at it, I think they are committed to the plants that we see operating over the next dozen -- five to 10 years. So it is really more of an issue of how fast does Central App roll off and what are the various utilities' position relative to natural gas.

In that regard, I think there is a little bit more conservatism on booking business than there has been in the past.

Okay, great. Thanks a lot.

Thanks, Noah.

Alex Turnbull, Goldman Sachs.

Congratulations on a great quarter. I guess my question is just trying to understand how you guys think about the market. Because you are currently saying for you guys, the spot transactions compared to contract transactions from the EIA-923 data, coal has been sold anywhere between $5 to closer to $10 cheaper than contracted levels for spot transactions.

And those spot transactions would appear to line up with ICAP's information on spot data, which indicates that pricing ranges from $38 to, say, $43. And when I look at the output of your largest customers and their coal burn, it appears to be almost universally dropping over time -- choppy series, depends on weather and so forth.

So I am just trying to understand -- what do you guys think could happen or would happen which would cause the market to firm up? Because I for one am finding it very hard to see what could make that happen. And in particular, given the customers can now contract a lot of spot product, which has now essentially been put onto the market from the likes of Forsyth, Armstrong and, increasingly, you guys, why anyone would contract at levels that are anywhere near where you guys historically had managed to sell coal.

Well, what we try to do is have our own proprietary database to where we evaluate supply and demand. And based on where we see the balance, and for our specific products, we believe that we can achieve. And we are doing it today, and we believe on a going-forward basis that we will in fact receive a premium to what you are seeing in the spot market curve.

That is driven by several factors. It is driven by the BTU of our product. It is driven by the transportation. It is driven by the quality. It is driven by the optionality we give customers. It is driven by long-term relationships and reliability of supply.

And all I can say is based on our experience and our look at the markets, we have been able to achieve a revenue number that is a little bit higher than what you see in the marketplace, and we have no reason to believe we can't continue that.

And Alex, Joe alluded to it in an earlier comment, but on the tons that we have contracted so far this year, over 9 million tons, on average, consolidated, those are coming in at levels above our current realizations on a consolidated basis. So all of those factors that Joe mentioned play into how we approach the market and the value we are able to capture.

What about a mine-to-mine basis? Because let's face it, your prices should be blending up as your NAP production comes online.

Right, on a mine-by-mine basis, you will see some mines down in revenue and some mines up in revenue; so there is no question about that. So we are not immune to the market. So don't get me wrong here.

But when you look at our portfolio and you look at our mix and you look at the layering of our various contracts, the net result is we believe our average sales price will be higher over the next couple of years compared to what we experienced in 2013.

So on your guys' comment on relationships and so forth, I understand that can be important and you guys can be seen as a reliable producer. But I would say there are other producers in the area who are very solvent.

My primary concern is that many of these utilities who are your customers are regulated, and their rates are set based upon their fuel costs. So essentially, there is no free lunch here, to the extent that your fuel cost, if it reflects a relationship and is higher than it could be from someone else on a quality-adjusted basis, that essentially comes out of consumers' pockets. So I don't frankly see that as a source of a long-term edge.

I think the real issue is (multiple speakers).

Or maybe I don't understand US coal.

I think the issue is back to where the supply-demand balance is. And right now, I just don't believe that we are as in a large -- that the oversupply is not to the level that the current market is pricing. So we just think that the market is more in balance, and that will be reflected as utilities do in fact fill their book.

Okay. So the market is wrong. Got it. Okay, thank you.

At this time, I am showing no further questions in queue. I would like to turn the call back over to Mr. Brian Cantrell for any closing remarks.

Thank you, Derek. As always, we appreciate everyone's time this morning, as well as your continued support and interest in both ARLP and AHGP. We look forward to our call in January, when we will review our performance for the full-year 2013 and our outlook for 2014. Thank you all very much.

Ladies and gentlemen, that concludes today's conference. We thank you for your participation. You may now disconnect. Have a great day.