Alliance Resource Partners LP (ARLP) 2014 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to the third quarter 2014 Alliance Resource Partners LP, and Alliance Holdings GP earnings conference call. My name is Lisa, and I will be your operator for today. At this time all participants are in listen-only mode. Later we will conduct a question-and-answer session. (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, sir.

Thank you Lisa, and welcome everyone. Yesterday we released 2014 third quarter earnings for 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 the balance of the year. Following our prepared remarks we will open the call to your questions. We will begin with a reminder that some of our remarks today may include forward-looking statements that are subject to a variety of risks and uncertainties assumptions, which are contained in our filings from time to time with the Securities and Exchange Commission, and are also reflected in our press releases.

While these forward-looking statements are based on information currently available to us, if one or more of these risks and uncertainties materialize, or if our underlying assumptions prove incorrect, actual results may vary materially from those we projected or expected, in providing these remarks neither partnership 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 will start this morning with a review of the partnership's operating and financial results for the most recent quarter and the first nine months of 2014, and then I will turn the call over to Joe Craft, our President and Chief Executive Officer.

Driver primarily by volume growth, ARLP's results for the 2014 quarter improved across the board compared to the 2013 quarter. Total sales and production volumes were up 3.4% and 5.5% respectively, led by increases at Tunnel Ridge, Onton, MC Mining, and our new Gibson South Mine, along with strong sales performance at Dotiki, increased volumes and higher coal sales prices, which rose by $1.25 per ton, combined to drive total revenues to $569.3 million, an increase of 6% compared to the 2013 quarter. Improved top line performance also contributed to higher EBITDA, which increased 24.8% to $197.8 million, and net income which climbed 37.6% to $120 million.

Year-to-date performance has also been strong with ARLP posting record operating and financial results for the first nine months of 2014, including new benchmarks for coal sales and production volumes, revenues, EBITDA, and net income. Comparing results to the sequential quarter, total coal production rose 4.7% led by increased volumes in the Illinois Basin, particularly at River View, Gibson South, Pontiki and Warrior, and at Tunnel Ridge and Appalachia. Total sales volumes, however, declined sequentially by 5.2%, due to increased shipments in the sequential quarter as ARLP worked to overcome the impact of weather-related delays experienced in the first quarter of the year.

As a result of timing differences in Illinois Basin customer shipments, total coal inventories increased by approximately 393,000 tons in the 2014 quarter. Total cost per ton improved in the 2014 quarter falling by 2.6% compared to the 2013 quarter, as increased production and sales volumes from Tunnel Ridge drove segment adjusted EBITDA expense per ton down by 25.1% in Appalachia. In the Illinois Basin, cost per ton increased 4.4% sequentially, due to lower recoveries and difficult mining conditions at our Dotiki, Gibson North, and Hopkins Mines. In evaluating increased sequential cost per ton, you should also recall that total segment EBITDA expense in the sequential quarter benefited by approximately $1.10 per ton from the receipt of insurance proceeds related to the temporary halt of production last year at our Onton Mine, and a gain on of the sale of assets following the late 2013 closure of our Pontiki mine.

Assuming coal shipments occur as anticipated we continue to expect that ARLP's EBITDA and net income in the second half of 2014 will be comparable to the results delivered during the first half of the year, after adjusting for the one-off items reported in the sequential quarter with regard to the Onton insurance claim and Pontiki asset sale I just discussed. ARLP's 2014 capital projects remain on schedule, and we continue to anticipate total capital expenditures this year in a range of $320 million to $350 million. In addition, we currently expect to fund in 2014 approximately $100 million to $115 million in preferred equity contributions to Wide Oak.

I will wrap-up my comments this morning with a quick look at the balance sheet. ARLP's liquidity at the end of the 2014 quarter remains strong at approximately $539.4 million, and our leverage is very comfortable at less than 1 time total debt to trailing 12-month EBITDA. Our distribution coverage ratio at the end of the 2014 quarter is also a very healthy 1.75 times total units holder distributions. With that, let me turn the call over to Joe for his take on our third quarter performance, and his perspectives on the coal markets. Joe.

Thank you ,Brian and good morning everyone. As Brian just reviewed both ARLP and AHGP added to their historic track record of delivering exceptional results that posting across-the-board improvements to operating and financial metrics for the 2014 quarter and the first nine months of 2014. Our operating teams remained focused on maintaining ARLP's low cost advantage, driving per cost per ton down $0.96 in the 2014 quarter, and $1.47 year-to-date.

Since the beginning of the year our marketing team has also secured new coal sales commitments for the delivery of approximately 18.3 million tons through 2017. With these agreements ARLP now has price commitments for approximately 33.5 million tons in 2015, and 26.6 million tons in 2016. During the 2014 quarter ARLP also continued to move forward on its current projects. Development is progressing at our Gibson South mine, and as recently announced by White Oak Resources LLC, their new mine #1 has begun longwall operation.

Although ARLP's performance has remained solid, the industry-wide market environment for domestic thermal coal continues to be challenging. Mild summer weather and weak exports both for met coal and steam coal, have largely eliminated any carryover benefits derived from strong coal demand last winter. Persistent transportation shortages affecting both rail and barge shipments, and a soft natural gas price outlook are also pressuring current coal markets. Adding to the downward pressure regulatory uncertainty is causing utilities to limit term transactions for coal, as they have reverted back to a quarter-by-quarter coal buying strategy. Assuming normal winter weather, we currently anticipate the coal markets to remain difficult through 2015. While we are always strive to operate at full capacity, in this environment it may be necessary to delay our production growth to match the market. Reflecting these concerns, we plan to moderate the pace at which ARLP currently plans to ramp production volumes at the Gibson South Mine.

Consequently we expect the Gibson South Mine will produce approximately 800,000 tons in 2014, and approximately 3.1 million tons in 2015, operating three production units through the end of next year or until market demand improves. Looking forward we remain confident in the ability of ARLP's teams to effectively execute our strategy, grow distributable cash flow, and deliver long-term value to ARLP and AHGP unitholders. Reflecting ARLP's strong year-to-date performance, continued expectations for the 14th consecutive year of record results in 2014, and confidence in our ability to successfully navigate market challenges in the future, the Alliance Board has elected to increase distributions to our unitholders for the 26th consecutive quarter. Cash distributions for the 2014 quarter were increased over the sequential quarter by 2% at ARLP, and by 2.6% at AHGP.

Compared to the 2013 quarter the announced distributions represent an 8.5% increase for ARLP, and a 10.5% increase for AHGP. Going forward we continue to anticipate quarterly distribution growth at ARLP of approximately $0.05 annualized, and approximately $0.09 annualized at AHGP. This concludes our prepared comments. We appreciate your continued support and interest in both ARLP and AHGP, and now with Lisa's assistance we will open the call to your questions.

(Operator Instructions). And your first question comes from the line of John Bridges with JPMorgan. Please proceed.

Hi, Joe, Brian. Congratulations on the results.

Morning, John.

Thank you.

Morning, I was just wondering with respect to the winter, we're hearing out in the plains that they're struggling to get coal, but you're pointing to difficulties, utilities you feel that may have a surplus of power generating options, with gas perhaps through the winter. Might Illinois Basin power generators run a bit hotter and push power into the plains? Is that something that could help you?

That's possible. I know that has been considered by some, but we are the modeling that in our projections. It is a possibility.

Okay. And then maybe on rail, I see you're having difficulty as well. Are those difficulties going to increase as the grain hits the system in Q4, or do you see some incremental improvements?

I think we're anticipating they will continue to have problems, primarily because of the grain, so we have factored that into our comments.

Okay.

We see tightness in the fourth quarter. We hope and believe in listening to our transportation partners that they're working on improvements, but it's hard to predict exactly when that's going to get back to normal.

Exactly. Okay. Thanks very much. Well done.

Thank you, John.

And your next question comes from the line of Jim Rollyson with Raymond James. Please proceed.

Good morning, gentlemen.

Morning, John.

Hello.

Joe, going back to John's question just on the rail, the third quarter sounds like timing of shipments pushed a little bit of volume out from the quarter. Is there enough rail and barge capacity to help you make up for that in the fourth quarter, or do you think the rail performance issues we have dealt with all year are going to be kind of limiting how much you can make up of that?

It's going to be tight. We're working with our customers who primarily arrange for that transportation, and they're trying to get their contractual commitments because they are committed. I think that it's just going to be a tight market, and we're hopeful that since we do have commitments, that the utilities also have commitments with their transporters and will be able to move our production in the fourth quarter, as we have currently have had it planned in our sales production forecasts.

Okay. That's helpful.

Hey Jim let me touch a little bit on the change in Illinois Basin sales tons in particular compared to the sequential quarter. You do need to recall that we drew down inventory significantly in the second quarter after having a build in the first quarter, due to transportation issues related to weather. By way of example, River View substantially depleted its inventory at the end of the second quarter, and so when you're making that comparison, it's not necessarily just timing differences that Joe discussed here, but it's also timing differences back to previous quarters, as we're trying to manage the inventory situation and coal flows.

Makes sense. Historically you guys kind of over a long period of time have been, just developing your growth by mainly organic projects, and maybe tack on an M&A project here and there. When you think out, Joe, over the next three or four or five years, obviously you have got the continued development of Gibson South at whatever pace the market allows for you to ramp that up, we've got White Oak starting and ramping up. When you think beyond those two projects, I mean how are you thinking about things? You clearly have other potential organic growth opportunities that you guys have in the portfolio, but when you think about the market conditions we have seen, just curious how you balance all of that to think about continued growth over the next five years, like you've had over the last several years?

Alright. I think when you look at the market landscape right now, the big question is how fast will the high cost producers close shop, and how fast will that balance in, and we will get overshoot combined with when will the export market come back. So both of those have high probabilities of occurrence. We just don't know when. So what we will do is try to focus on how we can grow our production in the lowest cost possible, so that we're prepared when those, both the export market comes back and/or other competitors drop out of the market, and that market share becomes available.

Okay. That's very helpful. Good results, especially in light of the volumes. Appreciate it.

Thanks, John.

Next question comes from the line of Paul Forward with Stifel Nicolaus. Please proceed.

Thanks. Good morning.

Good morning.

Just I think you had talked about how it might be necessary given the market conditions to cut back some of your, some of the production growth at Gibson South, talking about I think the number was 3.1 million tons in 2015. I was just wondering if, when you look across it's kind of like there were some, in the third quarter you had mentioned some geological issues at some of the other mines. Can you look at the other mines in the Illinois Basin, and say that they should in your modeling should they basically be flat next year, or is Gibson South going to replace any of that if you experience some continuation of adverse geology? How do you look at that at Gibson South? Is that all growth, or any replacements of volumes elsewhere?

For us is that your question?

Yes.

We look at that as additive right now, so that would be added to the supply in the Illinois Basin, as opposed to replacing any of our internal tonnage. At this moment in time that's the way we would look at it now. If the market doesn't respond, we think there will be additional App tons fall out of the market, so we think that we will see some, not a lot but some increase in demand for Illinois Basin in 2015, and if we have the benefit of a little colder winter, or a little hotter summer, you could see that market tightening more than what is currently built into our plans, because I think we have said in the past we try to model off just normal weather patterns. We don't anticipate the export market to come back in 2015, but as you look at all of our competitors, and you look at the supply coming on, there is probably an oversupply at the moment, but the question is going to be what our competitors do relative to whether they want to continue to compete in a market where they're not making money, or whether they're ready to do something different. And if that were to happen, I think that more likely than not, it would be our competitors that do something than us, but if we have to, we will as far as pulling back production that is.

Sure. Great. And I was just wondering it was a good quarter for pricing in the Illinois Basin, another uptick to almost $53 a ton. I was just wondering if you could comment about this relatively soft market when you think about all of the other factors that you had mentioned, can we think about that near $53 per ton price as something that's going to be sustainable, or when you put to bed all of the remaining unpriced tons for next year, do you think that might be something that will drag on your average realized price outlook for 2015?

I think that as we look at overall pricing, and not specific to your question for Illinois Basin, but as we look at overall pricing, as you balance in the contract escalators with the spot market that we and/or the term market that we're going to sell into, we do think that our pricing on a per ton basis for coal sales in 2015 will be slightly lower than what we have in 2014, and by slightly, I'm saying $0.50 a ton plus or minus a quarter maybe. It's still being determined. I think a lot of the noise you hear on the markets, in the Illinois Basin in particular, are revolving around this new exchange that was launched a couple of weeks ago, which targets Long Wall Cove, basically for the higher coring product that has a little transportation disadvantage to what we do. So we don't see that reflective of our markets in our coal. Plus we think that it's just getting started. It's got very limited liquidity, and it's really not a good indicator of what the market prices are for the Illinois Basin.

Now having said that, I mentioned that we are projecting a slight oversupply in 2015, so there is pressure, but it's not as bad as what some of these public indices are suggesting. The determining factor is going to be, again weather and demand, so we are seeing some industrial demand increase supported in the utility growth is not, it's holding its own so it's growing like at 1%, but as far as the general economy itself, but as we think about the pricing and our position, and our historical customer base and what we anticipate for 2015 and going forward, we think we'll be able to be close to where our market price is, even though we will have some impact probably in the $0.50 a ton level overall in 2015.

Great. Appreciate the color, Joe. Thank you.

(Operator Instructions). Your next question comes from the line of Mark Levin with BB&T Capital Markets. Please proceed.

Hey, gentlemen. Two very quick questions. One regarding future growth opportunities. Brian, as you alluded to the balance sheet less than 1 times levered. When you think about growth beyond White Oak and some of the projects that you guys are executing on, where do you go from here, as you kind of think about maybe the intermediate term, not necessarily the next couple of years, but beyond that point, and will coal, I mean is there the possibility that you guys would consider diversifying outside of coal? Does that remain an interest of the Board, or is that and interest of the Board? That's my first question. And then the second question I think I ask every quarter, has to do with sort of the ARLP, AHGP the way those two trade, if you guys have any further thoughts or updates on trying to maybe make those two equities trade a little bit more rationally? Thanks.

Relative to your first question as to whether we would look outside coal, the answer is yes. I mean for several years we do have internal analysis tracking all of the MLP qualifying income opportunities, and trying to determine if there's a niche for us with our skills, management skills to participate in that, and we have on and off again looked at things. We continue to look at them. So there is that possibility if we were to do that, it would be walking before we run. You wouldn't expect us to go out there and make a big splash. So we would be thinking in terms of something that's modest, that would give us an opportunity to see if we can find something that would also be a platform for us to grow off of. So we would want to do it strategically, as opposed to just financially, but that is a possibility. As you know MLP space is pretty competitive right now, so we are not going to get into something unless we feel like we can get results comparable to what we have been able to deliver in the coal space, and what our alternatives are. Anything we would do there would be additive to what we do in coal.

We still believe we're very strongly positioned to migrate in the coal space, so we think with our balance sheet there's going to be opportunities beyond just organic projects as the future unfolds in the coal environment, so we plan to participate in that just as aggressively as we have in the past, which some people might not say is aggressive, but it's methodical, and it has allowed us to have 14 years of record growth that we've been able to enjoy and celebrate over the past, ever since we have been a public company. On the simplification we do continue to look at that, and we haven't come to a conclusion as to what the right thing to do is on that, but it does get back to how the market is trading. We have seen this last quarter where we did have some separation back between the GP and LP, and is that just volatility, or is that something that's systemic back to the realization of the growth at AHGP versus ARLP.

I think we would want to see the market stabilize a little bit more back to some normal times, instead of whether our unit price was affected by a coal price drop of 20-something percent, which it should not have any impact. I mean that should be a benefit instead of a detriment, because we don't compete with oil, gas doesn't link with oil, and the lower the oil price the lower our cost, because of the consumables that we have in the oil space, but historically when we have seen drops in oil price, we've seen drops in our unit price, and it's hard to understand why that is. So I think if we can get back to more of a stable environment that truly reflects the values between one or the other, it would be easier to make a judgment on exactly what we ought to do, as far as some type of simplification.

Super. Thank you guys very much, I appreciate it.

Thanks, Mark.

Next question comes from the line of Chris [Stroud]. Please proceed.

Good morning gentlemen. First as a long time shareholder I want to just thank you. You have done a wonderful job, and you're making me a lot of money, so thank you very much. I enjoy these year-over-year distribution increases a lot. You have a kind of touched on a few of my questions already, so I am not going to repeat them. Thank you for that. But I guess maybe as a summarizing kind of question, what or how does ARLP's business, how is it significantly different than the other coal miners, and what's your winning strategy right now, because you guys definitely have differences, or you're definitely a differentiator among the other coal minors that appear to be going away, or definitely in dark days and ARLP continues to prosper, and that's exciting, and I'm not a significant, I'm not an analyst or anything, so in layman's terms invest for me, please.

Alright. Thank you for your long time support, and we're happy to benefit your net worth, and hopefully we continue do that. We're working hard to make that happen. I think the distinguishing factors for us, is one, we are very focused on the domestic utility market, and a lot of our competitors have a more global view, and a lot of them are in the metallurgical markets, so those markets have been hit significantly harder than the domestic utility market. Second factor is the cause of what their focus is, they have much more levered balance sheets than we have, so having a very strong balance sheet has benefited us well. Another distinguishing factor is we positioned ourselves in anticipation of the markets moving to the Illinois Basin and the northern Appalachia Basin, and fortunately we were able to secure very low cost operations that have advantages from a transportation standpoint, and of course, finally, a distinguishing factor that I believe strongly about is our people.

I mean we have tremendous people, they're dedicated day-in and day-out to do what it takes to excel at the highest level, so they make decisions every day that are long-term in nature, and they're very focused on job security and trying to be service oriented to our customers, which means that we do enjoy very good customer relations as well. I'm sure our customers, or our competitors feel equally as strongly about the latter two points, but I would rather have my team than anybody, I would rather be in this position than in any other company in America. So thank you for your support. We're committed to the business. We believe that coal is the low cost producer for this nation. It's the right thing for our nation. We need low cost energy. It has built the economy. We're committed to continuing that for many years to come, and we don't see any reason why we can't for the next 14, like we have done the last 14.

Great. Well, I'm looking forward to that. No reason to change my portfolio substantially.

Thank you very much. Appreciate it.

Thank you.

Alright, no additional questions at this time. I would now like to turn the presentation back over to Mr. Brian Cantrell for closing remarks.

Thank you Lisa. We appreciate everybody'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 January of next year, and we look forward to discussing our fourth quarter results with you at that time, as well as our outlook for 2015. Thank you all very much.

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