Alliance Resource Partners LP (ARLP) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2013 Alliance Resource Partners LP and Alliance Holdings GP LP earnings conference call. My name is Kim, and I will be your operator for today. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Brian Cantrell, Senior Vice President and Chief Financial Officer. Please proceed.

Thank you, Kim, and welcome, everyone. Earlier this morning, we released 2013 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 2014. Following our prepared remarks, we'll open the call to your questions.

Let's begin today 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 outlooks 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 respective 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 our 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, and good morning, everyone. Now this morning, ARLP reported new annual operating and financial milestones, marking our 13th consecutive year of record results. I'm especially pleased with this past year's results, given the fact that 2013 will be remembered as one of the most difficult performance years for the US coal industry. Our results were achieved through a team effort, with every employee at Alliance contributing to our success. Let me give a big shout out to them for a job well done. They deserve all the credit.

ARLP's increased coal sales and production volumes in 2013 were the primary factors for our 18% improvement in EBITDA and 17.3% growth in net income. Total production from our operations was the highest in ARLP's history, growing 11.4% in the 2013 year compared to 2012. The performance of our Illinois Basin mines was remarkable, with each mine delivering year-over-year production increases. Performance at Tunnel Ridge continued to improve, driving our production in Northern Appalachia higher by almost 36%.

Volumes also increased in Central Appalachia. The increased volumes and other cost control measures helped drop our segment adjustment EBITDA expense per ton by 5.4% in 2013.

Our marketing team also performed at the highest level in 2013, successfully navigating one of the most challenging coal markets in memory. Through their efforts, ARLP's revenue grew to an all-time high of $2.17 billion. In addition, we further strengthened ARLP's long-term coal sales position by securing new commitments for the delivery of approximately 13.2 million tons through 2017 at prices comparable to current realizations. We enter 2014 with approximately 87% of our estimated 2014 production contractually committed and priced.

As we look forward to 2014, the coal industry continues to face challenges as coal stockpiles are above normal, the domestic coal markets remain oversupplied, and coal prices in the export markets are down year-over-year. On the plus side, however, weather so far this winter has been significantly colder than normal, increasing power demand and driving natural gas prices north of $5.00 per million BTU. A continuation of this pattern, end of February, will reduce the inventory overhang sooner than expected.

We believe Central Appalachia coal production shut-ins will continue in 2014. As such, we believe market dynamics continue to favor the Illinois Basin in Northern Appalachia and our strategy of expanding ARLP's presence as a low-cost operator in these regions. ARLP expects 2014 coal sales and production volumes will again be at record levels, driving EBITDA higher as we anticipate how 2014 EBITDA margins can be comparable to 2013.

Reflecting on our record performance and anticipated growth in 2014 and beyond, Alliance's Boards approved increased unit holder distributions for the 23rd consecutive quarter, bringing our year-over-year distribution growth to 8.1% at ARLP and 11.8% at AHGP. ARLP enters 2014 with an expectation of posting our 14th consecutive year of record results and continuing to provide increased distributions to our unit holders.

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 will open the call to your questions. Brian?

Thank you, Joe. For 2013, ARLP once again posted new annual records for our major operating and financial metrics. Our mines delivered solid results, with year-over-year volume growth in each of ARLP's operating regions. Total coal production increased approximately 4 million tons to 38.8 million tons, and total coal sales rose approximately 3.7 million tons to 38.8 million tons. Led by strong performance from our River View and Dixon North mines, as well as increased production from our Onton mine, ARLP's Illinois Basin operation saw both production and sales volumes increase by approximately 2.3 million tons. Increased production from the Tunnel Ridge longwall operation also contributed to ARLP's volume growth in 2013, as production in our northern Appalachian region increased by approximately 1.6 million tons and coal sales volumes rose by approximately 1.4 million tons.

In line with our expectations, ARLP's average coal sales price declined in 2013 by approximately 2.2% year-over-year, primarily due to reduced participation in the metallurgical export markets during 2013. Partially offsetting lower price realizations, segment-adjusted EBITDA expense per ton improved in 2013, falling 5.4% to $36.02 per ton. While cost per ton declined in each of our operating regions, Northern Appalachia delivered the biggest improvement, as increased production from Tunnel Ridge pushed segment-adjusted EBITDA expense per ton lower by 19.5% in the region.

For the year, volume growth drove ARLP's revenues to a record $2.2 billion in 2013. Increased volumes and revenues, as well as ARLP's continued focus on cost control, all contributed to record EBITDA and net income in 2013 of $685.9 million and $393.5 million, respectively. As we look at results for the 2013 quarter compared to the 2012 and sequential quarters, ARLP also posted increases for total coal sales volumes and prices, revenues, and EBITDA, as well as lower segment -- total segment-adjusted EBITDA expense per ton. Coal production also increased in the 2013 quarter compared to the 2012 quarter. Sequentially, however, coal production declined due to seasonal holiday production schedules, the impact of the longwall move at Tunnel Ridge, and the shutdown of production operations at our Pontiki mine.

Let's turn now to our initial guidance for 2014. Looking first at capital expenditures and investments, ARLP currently anticipates 2014 total capital expenditures in a range of $320 million to $350 million, which includes maintenance capital expenditures and compares the $354.4 million in 2013. As noted in our release, these expenditures include approximately $65 million to $75 million for production expansion projects related to the completion of our development at the Gibson South mine and reserve acquisitions related to our participation in the development of the White Oak mine No. 1. Maintenance capital expenditures in 2014 reflect equipment rebuilds and replacements, mine expansion 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 $5.96 per ton produced over the next five years.

In addition to these capital expenditures, ARLP also currently expects to fund in 2014 approximately $80 million to $95 million of its preferred equity investment commitment to White Oak. In 2014, we expect to substantially complete ARLP's required capital expenditures in equity funding related to the White Oak development project once longwall production has begun at mine No. 1, which we currently anticipate will occur late in the third quarter of 2014. With our investments in White Oak completed and longwall production underway, ARLP continues to anticipate its investments in White Oak will become accretive to cash flow in the 2015 time frame.

For 2014, we currently expect the [pasture] of losses related to ARLP's investments in White Oak will negatively impact both consolidated EBITDA and net income by approximately $27.5 million to $35.5 million. As a result of our capital investment projects and the anticipated production increases I'll discuss in a moment, depreciation, depletion, and amortization expense is currently anticipated to increase to approximately $287 million in 2014, compared to $264.9 million in 2013.

Reflecting increased production from Tunnel Ridge and initial production from the new Gibson South mine coming online in the third quarter, 2014 coal production and sales volumes are expected to increase to a range of 39.25 million tons to 40.75 million tons, of which 34.9 million tons are contractually priced and committed. Based on our existing coal sales commitments and expectations for filling its current open position, ARLP anticipates its average consolidated coal sales price per ton will be comparable to 2013 realizations at the midpoint of our 2014 guidance ranges. Driven primarily by anticipated increases in coal sale volumes, ARLP expects 2014 revenues to increase to a range of $2.2 billion to $2.3 billion, excluding transportation revenues, which is approximately 4% higher at the midpoint than 2013.

For 2014, ARLP is currently expecting to generate EBITDA in a range of $660 million to $760 million, and consolidated net income at a range of $340 million to $440 million. Both of these ranges include the pasture of losses related to ARLP's investments in White Oak that I previously mentioned.

I'd like to take a moment to break down guidance in a little more detail. As mentioned in our release this morning, at the midpoint of ARLP's 2014 guidance ranges, on a consolidated per-ton basis, total average coal sales prices, segment-adjusted EBITDA expense, and realized margins are expected to be comparable to last year. As we look at segment results, however, the results are expected to vary region to region. In Northern Appalachia, at the midpoint of our 2014 guidance, coal volumes are expected to be approximately 1.4 million tons higher than 2013. Due to increased contract pricing and a favorable sales mix, year-over-year pricing in Northern Appalachia is expected to increase by approximately 5% to 7%, compared to an average coal sales price of $59.16 per ton sold in 2013, while segment-adjusted EBITDA expense per ton sold is estimated to improve by 9% to 10%. Improved pricing and lower cost per ton are expected to drive segment-adjusted EBITDA per ton higher in 2014 by $7.50 to $8.25, compared to a margin of $11.87 per ton sold last year.

Volumes in the Illinois Basin are expected to increase by approximately 500,000 tons at the midpoint of our 2014 guidance. Average coal sales price per ton in the region for 2014 is expected to be comparable to slightly lower than the average coal sales price of $52.52 realized in 2013. Cost per ton sold in the Illinois Basin are currently expected to increase by 3% to 4% in 2014; and, as a result, margins per ton are expected to be approximately 5% to 7% lower, compared to segment-adjusted EBITDA of $21.46 per ton sold in the region during 2013.

In Central Appalachia, per-ton coal sales price, segment-adjusted EBITDA expense, and realized margins in 2014 are all expected to be comparable to 2013. Due to the closure of Pontiki, however, coal volumes are expected to decline by a third to approximately 1.4 million tons at the midpoint of our 2014 guidance. Consequently, 2014 segment-adjusted EBITDA in the region was also expected to fall by roughly a third from 2013 as well.

Finally, our balance sheet remains strong as we enter 2014. With debt to EBITDA at a conservative 1.27 times, liquidity of approximately $519.4 million, and a distribution coverage ratio of 1.59, ARLP has the financial flexibility to execute its future plans.

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

(Operator Instructions) Jim Rollyson, Raymond James.

Good morning, gentlemen.

Good morning, Jim.

I guess first question — Joe, with the nice cold weather you referenced and gas at $5 and kind of the way things are shaping up maybe on inventories, just a little color from what you're hearing from your customers in terms of interest levels and booking additional coal, since you've got certainly some room for this year, but just even beyond 2014?

We are seeing — due to this increased power demand, we are seeing increased activity in January. Normally we don't expect, starting the year, for people to rush into the stock market. I would say we've probably had a dozen inquiries this month wanting to buy some tonnage in 2014, which I think is a positive sign. You would think that they would be drawing from their inventories. I think that just sort of reflects that they would like to keep an inventory level that might be a little bit higher than historic by coming into the market this early in the year.

At the same time, it is weather related. So this is not something that is going to sustain itself more than likely. So we believe that we have to run our business on normal weather patterns as opposed to continuing to have beneficial weather, as we're having right now. So as we look forward, we don't see — the cost of the natural gas price curve has not really increased that much in the out years. We still believe that the Central App production is going to fall off and the demand will be driven to replace — demand is going to be driven out of Illinois Basin and Northern App.

Okay, that's definitely helpful. I'm sure we'll take what we can get at this point for help. On Gibson South, it ramps up in the back half of this year — I think you guys have said about 400,000 tons this year. Remind me what the mine plan looks like when we get out into 2015. What does that grow to in 2015? I know you probably won't necessarily get to a 100% run rate for the full year in 2015. But kind of thoughts on volumes there, and how does the cost structure of Gibson South compare maybe just to the overall region? Is it just going to be relatively in line or — we had Tunnel Ridge come in. It was meaningfully lower cost than helping drive Northern App costs down. Just trying to see how Gibson South will compare.

Yes, Jim, this is Brian. In the past, we've indicated that we'll begin with initial production and the first production unit in the third quarter of 2014. We'll add units through 2014 and potentially into 2015. If the market is there for us, we'll grow to a 5-unit mine, which will produce in the neighborhood of 5.5 million tons or so at full capacity. We'll wait to see how the market develops and whether we win, and when we actually end up adding that fourth and fifth unit. So we should expect to see some ramp-up through 2014 and into 2015, and hitting that run rate in the 5.5 million-ton range if we get to 5 units by 2016. On the cost side, I believe it's going to be comparable to what we're experiencing. So hopefully that answers your question.

Yes, that was very much appreciated. Great results. Thanks, guys.

Thanks, Jim.

I think that for 2014, part of our increase in Illinois Basin is driven by Gibson South. So when Brian went through the regional cost expectations for 2014, we do have cost in 2014 for training and a slower ramp. It will affect our cost overall in the basin.

Right. And the overall increase in volume of 500,000 tons — much of that is related to Gibson South. And then we have pluses and minuses at our other operations that make up the balance.

And going forward, it should be — their costs should be comparable to the other Illinois Basin operations.

Once we get the capacity, right?

Right.

Spiro Dounis, JP Morgan.

Good morning, everyone. Thanks for taking my questions.

Can't hear you.

Can you hear me now?

A little better.

A little better? How about now?

That's better.

Sorry about that. Just a quick question on pricing and contracting. Thanks for the detail on the basin-by-basin breakdown. So I realize are not providing 2015 pricing guidance at this point. But as you look out to 2015 and 2016, if you were to just fill your contract book today with whatever you've been pricing at recently, what does the trajectory look like relative to 2013? Should we look up, down, flat? Is it similar to 2014?

We think that — right now, we're projecting that those prices will be comparable. We're going to start looking at changes and contract prices falling off and replacing them with new contracts. So we may see a slight increase in 2015. I think with this current increase in demand, that it's definitely — it's pushing prices up currently. Now, whether that will sustain itself, it's hard to know, so that bodes well. But we'd like to believe the worst is behind us as far as pressure in the marketplace. And looking forward, we can at least sustain where we are, if not grow those prices.

Got you, thanks. And then just a quick question on natural gas competition. So we've seen some European nat gas power plants being mothballed just due to cheaper coal pricing coming in. Do you see any meaningful upside in the export market because of that, or is that too early of a trend to really tell at this point?

It's hard for [me]. We do see increased demand. Unfortunately, we're also seeing increased supply in an international marketplace. So the demand is there; it's just back to the supply in the international marketplace that's going to influence the pricing. And right now, as we look at steam market exports, the opportunities in the US are better than they are in the export market.

Even as you look at the out-year price curve, we believe that's the case. However, we also believe that the prices over the next, say, two to three years will, in fact, be higher in the export market than they are today. A lot of that depends on what the world economy is and how China does, but we are spending time trying to study the export markets. And I would say in a 2016 time frame, we will be participating in those markets more than we are today.

Got it, great. That's it for me, thanks.

Paul Forward, Stifel.

Good morning. On that last — just following up on the last question on just the outlook for pricing in 2015. Obviously, there is a lot of moving parts. But I think you talked about the Illinois Basin this year kind of comparable pricing, but unit costs were up low to mid single digits, which does have an impact on realized margins. Just wondering about if you could talk about what you can control in the areas of keeping unit cost inflation in line with pricing. Or are there areas that you could talk about with whether it's equipment costs or keeping a lid on labor cost inflation? What do you think you could do to hold margins up in a flat pricing environment?

Yes, I think the key for us or any operator is really productivity. So you have to have the higher — tons per man hour you can produce is going to be your primary factor. So that drives process changes to see how you can improve your tons produced. And then you also have to be very [vigilant] on how many people you hire. So you need to — and for us, we look at it because of the number of coal mines we have and trying to look at where the markets are. How do we bring on those incremental tons in the lowest-cost regions — the lowest-cost coal mines?

And I think with White Oak coming online and Gibson South coming online, we do have opportunity to bring on lower-cost operations, specifically at White Oak. And then really, Gibson is going to be — we think Gibson South is going to be a low-cost operation that will allow us to keep our margins comparable to where they are in Illinois Basin. But it does take a lot of effort to try to manage that.

And remember, Paul, as Joe mentioned earlier, in 2014, we have training costs, start-up costs, et cetera, around Gibson South that — once the mine hits full capacity, we should expect to see those come down over time.

Great. Thanks. And the — that was a big move down on inventories you were able to accomplish in the quarter. I was just wondering about at — if you've got a dozen inquiries for coal and you've only got 344,000 tons on the ground, just how able are you in the short run to respond to all these inquiries with what looks like is a pretty impressive draw-down down of your inventories during the quarter?

I think you have to — we still do have some coal for sale, as we've mentioned, so we can still have about 13% of our production capacity. So what we have to do is work with customers. Some customers need coal more than others; so if we can defer some tons from customers that have larger stockpiles, we'll do that. We'll try to move some tons around and try to use the scale that we have, specifically in the Illinois Basin, to try to meet the needs of those that are coming to us in the current time frame.

But back to your point, you can't ramp up production above and beyond where it is already planned at this time of the year. You can't just turn it on on a dime. It needs a little bit advanced planning. So we'll just have to do the best we can to try to meet the needs of those who are calling.

And maybe lastly on the customer inventory situation, you mentioned you're still — we are still above target levels. Can you give us a little bit of more detail on what you're seeing specifically in the Illinois Basin? Or is it — is there any anecdotal kind of information that you might be able to provide on your customer positions? Or is — I mean, there's always a big distribution where some regions got a lot, some places not much. Any little anecdotes recently that give us a little color on the situation?

Yes, Southeast is — has the highest inventory relative to the markets that we are serving. I'd say that as we look at — let's see here, on the Illinois Basin, they are probably close to normal. Maybe at the high end going into the year. But Northern App is normal, Powder River Basin is probably below normal. So as we would look at it, I think Southeast is high, the Illinois Basin markets are sort of mid to high, and then the rest, normal or below normal.

Okay, that's all I've got. Thanks.

(Operator Instructions) Robert Wiegand, New Salem Investment Capital.

Just — can you give us a little bit of a view about the acquisition market? You're obviously in a pretty good position compared to the rest of the industry, and you have got a fantastic currency there with ARLP. Are you looking at opportunities?

We're primarily focused on our organic growth as our number one priority as far as growing our business, but we do we evaluate acquisition opportunities as they may present themselves. So we will participate if there are good fits for us and — but we don't have anything to talk about today in that area. So I would say as we look at our investment profile, we are very focused on trying to engage in those things we can control as opposed to feeling like we have to grow through acquisitions. And that's what's allowed us to have our 13-year performance, and it's really been focused on trying to grow organically as opposed to through acquisitions. But we will participate if the opportunity presents itself and it's a good fit for us.

All right. And along those lines, obviously the AHGP is quite attractive versus the ARLP. They basically have the same yields. One is growing faster than the other one is. Would you ever consider lowering that cost of capital and volume in the AHGP?

We have looked at that in the past and — but I think that that will be an area we're going to look at for AHGP. I don't really like the way it's been trading. I think that there is opportunity there to try to do some things. We're going to have to evaluate what options we have at AHGP for the market, appreciate the value of AHGP relative to ARLP. So I don't have anything specific to say as to what we would do, but it is something that I'm going to ask our team to look at in 2014.

Okay. Well, good luck and great job.

Okay. This concludes our question-and-answer session. I will now turn the call back to Mr. Brian Cantrell.

Thank you, Kim, and thanks to all of you for joining us today. We sincerely appreciate your continued support and interest in both ARLP and AHGP, and we look forward to discussing our results for the first quarter during our next call in April. Thank you all very much.

This concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.