Alliance Resource Partners LP (ARLP) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 2014 Alliance Resource Partners, L.P. and Alliance Holdings GP, L.P. 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 2014 first-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 2014.

Following our prepared remarks we will open the call to your questions. Before beginning, we remind you 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 underlying assumptions prove incorrect, actual results of the partnerships may vary materially from those we projected or expected.

In providing these remarks neither ARLP or 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 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 and AHGP again posted record results for the first quarter of 2014. Performance at Tunnel Ridge exceeded our expectations and contributed to record coal production at ARLP in the 2014 quarter.

Continued focus by all of our mines to operate efficiently and control cost helped to drive total operating expenses and segment adjusted EBITDA expense per ton lower as well. These efforts led to record net income and EBITDA at ARLP and record net income at AHGP.

Operationally we are encouraged by what we have seen on the development sections for the next couple of longwall panels will at Tunnel Ridge and currently anticipate this mine will continue to deliver strong results going forward. As a result, we have raised our annual production goal for Tunnel Ridge and now expect it to produce approximately 6 million tons in 2014.

We've recently started production at the new Gibson South mine ahead of schedule and increased its targets as well, now expecting this mine to produce approximately 700,000 tons this year.

Our marketing team continue to strengthen ARLP's coal sales position during the 2014 quarter, securing new sales commitments for the delivery of approximately 7.8 million tons through 2016. Thermal coal markets in the US have improved this year as extreme winter weather and higher natural gas prices significantly impacted utility stockpiles in coal-fired power generation. We believe that market dynamics point to the potential for increased coal pricing in the second half of 2014 and are optimistic that ARLP's remaining open coal sales position will be contracted in an improved market environment.

With strong performance to start the year, improved market fundamentals for coal, and greater than anticipated production growth in 2014, our partnerships are well-positioned to deliver a 14th consecutive year of record results. Encouraged by this positive outlook, the Alliance Board announced today a two-for-one unit split for ARLP's unitholders. The Alliance Board also approved increased unit holder distributions for the 24th consecutive quarter, bringing our year-over-year distribution growth to 8.2% at ARLP and 11.1% at AHGP.

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

Thank you, Joe. AHGP and ARLP both started the year with another corporate record financial and operating results. AHGP's net income rose by 12.4% to a record $67.4 million, and net income for basic and diluted limited partner interest increased 13% to $1.13 per unit, both as compared to the 2013 quarter.

At ARLP increased production from the Tunnel Ridge longwall as well as strong performance from Dotiki and MC Mining drove coal production to a record 10.3 million tons during the 2014 quarter, an increase of 11.9% and 4.4% compared to the sequential and 2013 quarters, respectively.

Although production increased, total operating costs were held in check during the 2014 quarter, declining $26.3 million compared to the 2013 and by $34.5 million sequentially.

Per ton cost also improved during the 2014 quarter. Total segment adjusted EBITDA expense of $33.91 per ton was lower than expected, declining 5.8% compared to the 2013 quarter and 6.5% sequentially.

Looking at the top line, coal sales volumes were affected by transportation disruptions caused by severe winter weather during the 2014 quarter. The resulting delays in coal shipments along with the impact of closing the Pontiki Mine late last year pushed coal sales volumes and revenues slightly lower during the 2014 quarter.

As expected, on a per ton basis total average coal sales prices were comparable to the prior periods. The strong production and cost performance I mentioned earlier more than offset lower revenues, however, leading ARLP to post records during the 2014 quarter for EBITDA and net income.

EBITDA increased 10% over the 2013 quarter to $190.4 million, while net income climbed 12.6% to $115.9 million. Before turning to our guidance for the remainder of 2014, I do want to take a moment to discuss a recent change to ARLPs and AHGP's segment presentation. As you may recall, production operations at our Pontiki mine ended in November 2013. Following the mine closure, ARLP's senior management, operating team, and marketing group evaluated ongoing management of our mining operations and coal sales effort to ensure that resources were appropriately allocated to maximize our overall results.

As a result of this evaluation we have realigned the management of our operating and marketing team. ARLP will now aggregate its results into four reportable segments: Illinois Basin, Appalachia, White Oak, and other and corporate.

The Illinois Basin segment will continue to include the Dotiki, Gibson North, Gibson South, Hopkins, Pattiki, Warrior, River View, and Onton 9. The Appalachian segment will now include the MC Mining, Mettiki, and Tunnel Ridge mines. Our White Oak segment will continue to reflect the impact of ARLP's investments in reserves, surface facilities, and preferred equity relating to the White Oak longwall mine development project. And finally, the other and corporate segment is comprised of Mt. Vernon Transfer Terminal, our Matrix subsidiary, and smaller non-operating entities including Pontiki.

We believe this presentation of our reportable segments will allow the users of ARLP's and AHGP's financial statements to better understand our performance and make informed judgments about the partnership as a whole.

Now, let's take a look at our updated guidance [for the balance] of this year. With increased production from Tunnel Ridge and the early start up of Gibson South previously discussed, ARLP now expects total coal production and sales volumes in a range of 40.25 million to 41 million tons this year. With approximately 95% of anticipated 2014 coal sales now committed in price, ARLP continues to anticipate its average consolidated coal sales price per ton will be comparable to 2013 at the midpoint of our current guidance ranges.

As a result, ARLP is increasing estimated 2014 revenues, excluding transportation revenue to the range of $2.25 billion to $2.34 billion. Based on results to date and current expectations, ARLP is also increasing is 2014 estimates for EBITDA to a range of $720 million to $780 million, and net income to a range of $400 million to $460 million.

As we look forward, however, several factors are expected to influence quarter-to-quarter results as we progress through the year. The second and third quarters will be impacted by two additional longwall moves planned at Tunnel Ridge in May and late September as well as by annual miners' vacation in June and July. In addition, Mettiki has two longwall moves planned in April and December. We fully anticipate the coal shipment delays experienced in the 2014 quarter will be resolved by year end, but the timing of alleviating bottlenecks through the various transportation systems remains unclear at this time.

Finally, ARLP's balance sheet remains strong at the end of the 2014 quarter. With liquidity of approximately $475.2 million, leverage at a conservative 1.13 times, and a distribution coverage ratio of 1.67, ARLP is well-positioned to execute its current plans and to take advantage of additional opportunities that may arise.

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

Jim Rollyson, Raymond James.

Good morning, guys.

Good morning, Jim. How are you?

Great. Sorry you had such a terrible quarter. Congrats on a record quarter, actually. Joe, maybe you could spend a minute talking about the environment you are in right now when you talk to customers given that we had a nice cold winter and depleted inventory levels of both coal and natural gas. Just kind of curious what those conversations are like, if are starting to see a pickup an interest for coal as you head out into the out years. And maybe a little bit of discussion about pricing and just kind of how you see that shaping up.

I think the activity in the first quarter was quite significant as we indicated by the amount of tons we booked. Of that 7.8, most of it was then 2014, but we did have a couple of million tons each of 2015 and 2016. So, I think it's because of the weather and the interruption from the transportation which has mostly affected PRB. We did see increased demand, and we continue to see the evaluation of opportunities in the second half of the year which will roll into 2015 and 2016. Everybody is watching the natural gas curve, which continues to influence some utilities willingness to commit because the utilities did in fact enter the year a little bit shorter than normal, based on a desire to be able to be nimble, if you will, depending on where natural gas prices are.

But as we look at the gas storage business, we look at current demand against supply, we think that the markets are pretty much in balance for where we are positioned. I think that because of where natural gas prices will be over the next couple of years we are well positioned to compete with our low-cost production out of our Northern Appalachian coal mines as well as our Illinois Basin coal mines.

Well, you certainly did a great job of leaving some coal open for the optionality of that for this year, so good job there. On Gibson South, it came up a little bit early. I think you guys were expecting 700,000 tons this year. Maybe just remind us when that will get up to normal full run rates and normalize the cost back down and maybe how that -- will that influence your cost overall in the Illinois Basin positively, negatively, or about status quo?

I think the run rate will have to be bringing these units on sequentially, so it will be about the second quarter of 2015 before we would be pretty much at full capacity, and that's assuming we go to five units, which we designed the mine to do. Whether we go four units, five units will be dependent on the market. But we will see a ramp up to the middle of next year, basically, to get to an annual run rate of $5.5 million (inaudible).

On the cost, as a result of the start a little earlier, it will actually probably the increase our costs a little bit in 2014 as we ramp up and hire more people to bring on those tons. By not having the full tonnage allotment our costs would be a little higher in the earlier part of the ramp-up in within 2015. Because we will get to full capacity sooner, it should have a more balanced benefit to our cost. I think we have mentioned in the past that we think Gibson South's cost would be comparable to our other Illinois Basin operations on an average basis.

I think we're very encouraged by the coal scene and we're -- we feel like the opportunity opportunities at Gibson South may provide opportunities for lower cost than we anticipated when we made the investment. If the conditions can hold as to what we are seeing today, we expect Gibson South to be a very positive contributor to our Company through the life of this coal mine.

And, Jim, as you look at the remainder of this year because of the dynamics Joe was just outlining, in the Illinois Basin we're currently expecting our segmented adjusted EBITDA expense per ton to be -- call it 3% to 5% higher than what we experienced last year.

Yes. That makes sense. And then normalized back down next year. And the last question for me just maybe a status update on White Oak. When does that ramp-up? When do you actually think you will go from bleeding cash flow there to starting to generate some cash when you get into them paying you back first up front?

We are looking at -- they are producing development sections today, as we speak. I think the anticipation for the longwall start is we would say probably October, plus or minus a month, is the way it's trending currently. And so, we will start seeing cash flow. We are seeing some today, but we will have our contribution completed by first or second quarter of next year. And, therefore, we will start seeing the cash flow come back to us, but it won't become a material amount until the 2016 time period.

And just as a reminder, the revenue streams that we are currently receiving are reflected in our other revenue line item. So, you will see a bit of an uptick there this quarter. That's one of the drivers.

Makes sense. Thanks, guys.

Mark Levin, BB&T Capital Markets.

Hi, guys. First question has to do with the relative valuation of Alliance Resource Partners and the GP. If you look at the yields, they are almost on top of one another. And given how much faster or how much more leverage AHGP has, I'm just curious -- I guess you guys referenced it the last call, but what is your thinking about that? And maybe what are some of the steps you could do to make that equity trade a little bit more rationally?

I think what we've seen most recently is a differential of maybe 50 basis points, where historically it's been closer to 100, maybe 90 to 100. As we've looked at our different alternatives, we continue to believe we are going to have to do a better job of communicating our story because you understand that leverage is based on the way you answer the question, but maybe we've got to do a better job of communicating to all investors the math behind the growth between ARLP and AHGP.

So as we look at our presentations on a going-forward basis we want to try to make sure people understand that value proposition at AHGP as we continue to have these record results at ARLP, and that growth will flow through to the benefit of AHGP. So communication and better explaining with more emphasis on AHGP's result is one thing that we're committed to do.

Secondly, I think that one question we keep looking at is just liquidity and we're trying to think of ways that we could improve that liquidity, but that's a challenge in and of itself. So, right now our focus is trying to get our story pretty much focused on how the ARLP growth translates into the leverage and growth at AHGP, because it is a faster growing performance because of the way IDRs are structured.

Got it. Got it. Got it. And then the second question on pricing, obviously, you guys put a lot of tons to bed, specifically in 2014 this year, a little bit in 2015. I realize you guys don't give realized pricing, but are we looking at an Illinois Basin market today, Joe, that is up versus where it was three months ago, flat with where it was three months ago? How would you sort of characterize the pricing trends in the basin these days?

Well, it depends on really the size of the orders you are talking about. I would say based on what the just contracted, they were slightly ahead of 2013 pricing, but not significantly. So if we look at year over year -- if you look at our Illinois Basin price -- average price the positions that we put to bed were somewhere between 10%, 15% below that. But when you factor in the renegotiations of some below market contracts, it allows us to keep our average sales price pretty much consistent, year to year.

Got it. And is your expectation, Joe, if the summer -- obviously, inventories have been drawn down probably a little bit more in PRB and NAP, but if we have a normal summer are we at a point now where we can start seeing prices move? Or, conversely because the export market is so weak and I guess you've got White Oak ramping and Foresight ramping, are those constraining factors? How do you kind of look at pricing in a normal summer scenario given some of the incremental tons that are coming online?

We look at the normal summer. As we factor in the balance of the year and factoring in a normal summer, we think that Illinois Basin demand will increase about 9.5 million tons in 2014 as a result of the winter weather we had and the drawdown of inventories. We think the northern half increased another 3.5 million. We believe if you look at production through the first quarter, it is still behind what 2013 was. So, we believe that currently production is falling short of demand.

Now with the adds at White Oak and Foresight as well as our own Gibson South, we think it's still within balance so we don't see an oversupply based off of current investments that are out there. I don't know that there's room for much more investment, but I think that we would expect prices to be higher in the back half of the year than the first half of the year due to the supply demand balance because you still have some Central App switching going on, as well as even some southern half switching going on.

So, we believe the demand picture for Illinois Basin and Northern App will require that the investments that are being made or have been made in the Illinois Basin and what we see an in Northern App. The caveats are weather and the export market. We are not projecting a bullish export market, but there are some export tons in that forecast. So I would say the one thing that could disrupt that view is if the market and the weather is not normal, if you will. And then the other could be gas prices, but I think that's a low risk given where gas prices are today and given the low level of inventory in gas storage.

All that makes sense. One last question, guys, more of an accounting question or a guidance question. I think, Brian, you guys had been guiding down to 9% or 10% in costs for Northern App. Now you have combined the operations. How should we think about just cost-per-ton guidance now that you have sort of blended the operations for 2014? And then 2015 would you kind of go back to sort of an inflationary growth type number or think about it otherwise?

Good question. By combining all of our Eastern operations under a single segment, performance at Tunnel Ridge is better than we expected coming into the year, and obviously, we've also with the closure of Pontiki, which was a higher cost operation, combining those two -- we are currently looking at cost being, call it, 10% to 15% lower this year than they were last year. So hopefully that's helpful, Mark.

That's perfect. I appreciate it. Thank you, guys.

Hold on.

And I think next year you would (multiple speakers) the inflationary.

Okay, great. Thanks very much.

(Operator Instructions) Paul Forward, Stifel.

Brian, I wanted to ask you about -- I think you mentioned in your prepared remarks some anticipation that these rail congestion issues potentially would continue to be an impact as the year goes along. I was just wondering if I could ask you to -- could you quantify, is there potentially a number that if you added up the whole year, is that going to be a 0.5 million, 1 million less tons or something in a ballpark? And then maybe secondarily, can you give a little sense of just provide some color on what kind of issues you are seeing right now? And has it improved it all over the past month or two?

Sure. I'll try to take those on as you ask them. Obviously, you saw inventory build this year -- or this quarter. We ended the year with inventory down in the 340,000 ton range, and we ended this quarter at a little over 1.1 million tons. We expect by year end that we'll get back to our more historical levels and better in the 400,000 to 500,000 ton range. So, again, the issue that we have is we have deferrals this quarter, but we do expect those to be made up over the balance of the year. The precise timing as to when that will occur is basically not particularly clear at the moment. I think much of the issue that we had on the rails side were bottlenecks in Chicago. Those are beginning to work themselves out, and I believe the rails are making significant efforts to try to clear up those bottlenecks. But it's just going to take some time to work its way through the system.

And as far as amount, based on what our expectations were we are about 500,000 tons that were impacted in the first quarter, of that 750,000 ton build. We anticipated some of that build, but about 0.5 million tons are related to transportation interruptions.

And so as we work our way through the year, those 0.5 million tons that were currently delayed will get pushed through the system and will bring our inventories back down to more historic levels.

Great. And just related to that, we've definitely heard some stories about some PRBs and power plants operating at very low inventories. Any kind of anecdotal information to provide on the Illinois Basin, or are there any plants among your customer base that are feeling the squeeze of these rail issues and that's showing up in the inventory?

No. We don't really see that Illinois Basin. I think the inventories in the Illinois Basin are close to normal, so they are not at the low end of the five-year average. That Northern App we think is lower than what the average has been. A couple of customers need tons in the first quarter, but I think the issue that has gotten a lot of dialogue has been more the PRB issue than it's been an Illinois Basin or Central App, Northern App issue.

Okay. Thanks. And you've got -- well, congratulations on the Gibson South early ramp up there. Looking out, say, looking a year from now, you will have your major projects mostly done. I was just curious if you could talk about following the completion of Gibson South and White Oak. What do you see as your most attractive growth projects internally? And could you talk a little bit as you think about growing beyond 2015, your inclination to grow internally or to look for acquisitions for future growth?

I think we do have some opportunities we are trying to evaluate the benefits of Penn Ridge, what the Northern App markets will be. We're going to have to continue to just evaluate that to see what supply demand logistics look for Northern App and Illinois Basin. We've got a couple of projects that we are evaluating. I think most of those are really going to have to be dependent on the export market and/or what our competitors do relative to whether they continue to stay in the market or whether they decide to close shop. Because with the power plants being closed because of the Mercury Rule, we anticipate the demand is going to be relatively flat over that time period.

So we will have growth through 2016, so the real focus point is 2017 because of the benefits of White Oak starting to provide growth through 2016. So I think we've got visibility through 2016, but in 2017 we are evaluating what our next move is to continue our record production growth.

With the winter -- and there's a lot of discussion now because of some of the plants that are scheduled to be closed are being utilized or were being utilized in the first quarter. There has been a lot more conversation in Washington DC about whether or not we were going to have the reliability that this country demands for power.

A second piece to the puzzle is even if those utilities do shut those plants down, there is an expectation that the plants that remain will have higher utilization. And when we've looked at our supply demand forecast we have not factor that increased utilization in our supply demand. So when I give you -- what we've -- where the markets are supply demand driven they pretty much anticipate utilization of existing plants at historical levels and normal weather.

The other piece of the puzzle is the export market. We know there are a lot of coal plants being built in the world in anticipation for another 700 million tons of demand in the world economy. What happens in Europe, what happens in the Ukraine, what happens in China -- all that will have to be evaluated to determine where growth opportunities -- where we want to put some capital for future growth opportunities. But we will continue to be focused on delivering our production growth which has then delivered our ability to grow our cash flows and grow our distributions. But that's what we're focused on at the moment, to try to respond to your question.

Great. Thanks.

Sam Dubinsky, Wells Fargo.

Hi, guys. Thanks for taking my question. Congrats on the good quarter. It seems like there is light here in the tunnel after a few challenging years for coal. At what point do you think it makes sense to increase the rate of you distribution at ARLP?

I didn't understand the first part of your question.

It seems like things are getting incrementally better for you. At what point do you think it makes sense to increase the rate of distribution?

I don't anticipate we would do that. Obviously, that's a Board decision, but as we've talked about our rate of growth, we're comfortable with the rate of growth that we've experienced the last 24 quarters. I think it would be, more or less -- I'm expecting it will maintain at that rate for the foreseeable future. Once we get better clarity on whether utilities will continue to go short or go long, that could help us revisit that question. But in the current environment, the utilities are going to stay short. And there's not more commitment to our tons. I don't anticipate we'll see that change.

Okay. And then your Appalachia pricing I believe was up about 4% quarter over quarter, I think driven by higher contract pricing in Dotiki. Was that just a function of that being a low-priced contract?

Yes.

And what percentage of your contracts are below where you are pricing today and what percent are above, if you can give some color on that?

No. I don't have that handy. I'm sorry.

Okay. Maybe we will chat off-line. Thank you very much. Congrats, again.

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

Thanks, Kim. Good question and dialogue this morning, and we appreciate everybody's time 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 midyear results with you at that time. Thanks very much.

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