Alliance Resource Partners LP (ARLP) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Alliance Resource Partners LP and Alliance Holdings GP LP first quarter 2015 earnings conference call. (Operator Instructions) As a reminder, this conference call is being reminded. I would now like to turn the conference over to Brian Cantrell, Senior Vice President and Chief Financial Officer. You may begin.

Thank you, Nicole and welcome everyone. Earlier this morning we released 2015 first quarter earnings for both Alliance Resource Partners or ARLP and Alliance Holdings GP or AHGP, and we'll now discuss these results as well as our outlook for the remainder of 2015. Following our prepared remarks we'll open the call to your questions. Before beginning, a reminder 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.

While these forward-looking statements are based on information currently available to us, if one or more of these risks or 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 statement, whether as a result of new information, future events or otherwise. Finally we'll 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 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 start this morning with a review of the partnership's operating and financial results for the most recent quarter, and then turn the call over to Joe Craft, our President and Chief Executive Officer. As reported on our earnings release this morning, the Alliance partnerships delivered strong results in the 2015 quarter with ARLP posting increases to coal production, revenues, and EBITDA compared to the 2014 quarter. Results for the 2015 quarter were impacted by two major factors. First, other sales and operating revenues rose sharply to $35.5 million in the 2015 quarter.

This increase primarily reflects anticipated benefits from ARLP's investments in White Oak which added incremental revenues of approximately $14.7 million and $8.6 million compared to the 2014 and sequential quarters respectively. Led by higher other sales and operating revenues, total revenues climbed to $560.4 million an increase of 3.4% compared to the 2014 quarter. Our performance was negatively affected, however, by shipment delays experienced during the 2015 quarter, with weather-related interruptions impacting rail deliveries in February and early March, and frozen river conditions and high waters disrupting barge movements. The resulting shipment delays caused ARLP's coal sales volumes to fall well below planned levels and drove coal inventories at our mines higher by more than 1 million tons during the 2015 quarter to the total of 2.4 million tons, causing us to reduce production at several operations to partially offset the inventory build.

Lower than expected coal sales volumes and as anticipated slightly lower coal sales pricing pushed coal sales revenues below both the 2014 and sequential quarters. We do expect to ship approximately 800,000 tons above our production in the upcoming quarter and will continue to work off inventory over the balance of the year. Operationally, our mines performed well in the 2015 quarter, delivering coal production of 10.5 million tons, an increase of 2.4% compared to the 2014 quarter. This performance was led by our tunnel ridge mine, which continued to exceed expectations and drove production higher in our Appalachian region by almost 13% in the 2015 quarter compared to the 2014 quarter.

In addition, production from our new Gibson South mine, which began production operations in April 2014, as well as increases at Riverview and Mettiki contributed to ARLP's strong production in the 2015 quarter. Our operating teams also worked hard to manage the impacts of delayed shipments and inventory build to successfully control costs and push segment adjusted EBITDA expense per ton lower compared to the sequential quarter and in line with our expectations compared to the 2014 quarter. Turning for a moment to our segment results, comparing our results from the Appalachian region to the 2014 quarter, even with the inventory build at Tunnel Ridge, the mine was still able to increase sales volumes in the 2015 quarter, which combined with increased volumes from our Mettiki mine, to lead sales times and coal sales revenues higher in the region by 17.9% and 9.5% respectively.

Increased revenues and lower cost per ton due to better than expected productivity at Tunnel Ridge helped drive segment adjusted EBITDA in the Appalachian region higher by 14.1% compared to the 2014 quarter. Sequentially, lower coal sales prices and increased segment adjusted EBITDA expense per ton due to a longwall move and low recoveries at Tunnel Ridge in the 2015 quarter, contributed to reduced segment adjusted EBITDA in the Appalachian region by 19.8%. In the Illinois Basin, previously discussed transportation disruption negatively impacted our coal shipments in the 2015 quarter, particularly at Warrior, Gibson, and Riverview mines, leading to inventory build and lower coal sales volumes.

Lower sales tons and an anticipated reduction in coal sales price per ton drove segment adjusted EBITDA down compared to both the 2014 and sequential quarters. I'd also like to point out that with the ramp up of production from the White Oak mine No. 1 Longwall we have now added results for this segment to the regional results and analysis table reflected in the ARLP earnings release. Although we have reflected White Oak segment results in our SEC filings for some time now, this presentation and our quarterly earnings release will provide unit holders with additional insight into the benefits of our investments in this project.

I'll wrap up my comments this morning with a quick look at the balance sheet. ARLP's liquidity at the end of the 2015 quarter remains strong, at approximately $551 million, and our leverage is a very comfortable 1.05 times total debt to trailing 12 months EBITDA. Our distribution coverage ratio at the end of the 2015 quarter is also a very healthy 1.61 times total unit holder distribution. With that, let me turn the call over to Joe for his take on the first quarter performance, and our perspectives on the coal markets. Joe?

Thank you, Brian. Good morning, everyone. As Brian just reviewed both ARLP and AHGP added to their history of strong performance by delivering solid results for the 2015 quarter. Our operating and marketing teams worked together closely to overcome adverse market conditions in frigid winter weather by effectively managing production, coal inventory, and customer relationships. As a result, ARLP's performance continues to set the standard for the U.S. coal industry and I want to commented our teams for their efforts.

In particular, I want to recognize our operations for their exceptional safety performance during the 2015 quarter. Safety for our people is our partnership's highest priority. And our employees embrace this core value every day. Through their focus and effort, ARLP's key safety metric improved by almost 50% during the 2015 quarter, and remains greater than 50% better than the industry average. Although ARLP's performance has remained consistently strong, the domestic normal coal markets in general continue to phase stiff headwinds.

Weak export markets, lower than expected natural gas prices, create a significant coal to gas switching. As many producers struggle to survive in this environment, the supply response has been slower than anticipated. The result has been extreme coal on coal competition for what little spot activity exists. Adding to the downward pressure, elevated coal stockpiles and regulatory uncertainty is causing utilities to limit some transactions for COLAs they critically review their fuel-buying strategies.

In the face of these pressures, we currently anticipate coal markets will remain challenged through 2015. In response to lower demand we are adjusting our operating plans by reducing our planned coal production and sales volume for the remainder of the year by approximately 700,000 tons at the midpoint of our prior guidance ranges. This decision will result in 2015 capital expenditure savings from our initial estimates of approximately $30 million, and will allow ARLP to bring its coal inventory more in line with historical levels by the end of the year. Reflecting these adjustments, ARLP is reducing its 2015 coal production guidance to a range of 40.2 million to 41.2 million times, and coal sales volumes to a range of 40.75 million to 42.65 million tons.

As a result of lower anticipated coal sale to volumes, we are also reducing our estimates for 2015 revenues. Excluding transportation revenues, to a range of $2.35 billion to $2.41 billion. Despite reduced coal volumes, we continue to anticipate ARLP's per ton revenue and cost estimates will be in line with our prior guidance. And our expectations for 2015 EBITDA and net income remain unchanged at $765 million to $825 million, and $395 million to $455 million respectively. Since the quarter end, we have begun to see transportation returning to normal, and our stockpiles to begin to recede.

As we look at our operating and financial performance throughout the rest of the year, the timing of coal shipments could impact comparative quarterly results. We also expect results will be impacted by scheduled Longwall moves at Tunnel Ridge in the second quarter and at Mettiki in the second and fourth quarters. In addition, performance in the second and fourth quarters will be impacted by seasonal, miners vacation, and holiday schedules. Despite the current challenges confronting the coal industry, we remain confident that ARLP is well positioned to achieve our goal of increasing distributable cash flow in 2015.

Reflecting this expectation and confidence in the ability of ARLP's teams to effectively execute our strategy and deliver long-term value to ARLP and AHGP unit holders, the alliance boards elected to increase distributions to our unit holders for the 28th consecutive quarter. ARLP unit holder distributions were increased to an annualized rate of $2.65 per unit and to an annualized rate of $3.75 per unit at AHGP. The announced cash distributions for the 2015 quarter reflect a sequential and quarter over quarter increase of 1.9% and 8.4% respectively at ARLP and an increase of 2.5% to 10.6% respectively at AHGP. This concludes or prepared comments. We appreciate your continued support and interest in both ARLP and AHGP, and now with the operator's assistance, we'll open up the call to your questions.

Thank you. (Operator Instructions) Our first question comes from the line of John Bridges of JPMorgan. Your line is now open.

Thanks, everybody. Thanks, Joe. Thanks Brian. Just wondered, you were thinking about maybe changing the structure of the ARLP AHGP. Any further thoughts on that?

There's no new update on that. We continue to evaluate whether there's opportunities to benefit both unit holders and at this moment there's no new news on that subject.

Okay. And the Foresight Murray deal, how might that impact the Illinois Basin? Have you had any thoughts along those lines yet?

Well, I think in the long term, when you have some supply side consolidation, that typically is good for prices. You know, we're going to have to wait and see exactly how Mr. Murray ends up managing both of these operations. I think it's too early to know for sure. So we're just going to have to wait and then see exactly how he determines to handle both operating public entity as well as his increased debt load. I think that might bring some discipline to the market but we'll just have to wait and see.

Okay. Thanks. Congratulations on the results. Well done. Thank you.

Thank you.

Thank you.

Thank you. And our next question comes from the line of Mark Levin of BB&T Capital Markets your line is now open.

Hey guys, again, congratulations on another good quarter. A couple of quick questions. The first has to do with coal prices. What you're seeing from a pricing perspective on the typical product which you sell, trying to figure out, you know, what is an appropriate price to be thinking about as we model some of your unpriced and uncommitted tons for 2016 and beyond.

I think as we see what's happened in the market today and really, the past quarter, we did see both in Illinois basin and northern App, which is our particular regions, prices continue to decline. They decline anywhere from 10% to 15% in the spot market. As we look at the market today and over the past quarter. You've seen a commodity cycle of oil, natural gas, and coal, this having to adjust different demand levels. In coal it's driven in part by the Mercury rule and the coal fire power plants that are going to be retired over 2015, 2016, so there's some of a demand reduction there. We're also seeing natural gas prices continue to be lower than expected when we went into the first of the year.

But there are signs, with the reduced rigs in play, and there are expectations that you should see natural gas start to improve towards 2016, 2017 time period, to a level where they can make money. If you think about the oil and gas sector, they are adjusting, they're trying to sort out exactly where their production level needs to be. We know a lot of production has fallen off; at the same time, I'd say in the oil and gas space, like the coal space, sometimes supply doesn't fall off as fast as you would think it would, given the financial realities of the cash flow position. Some of that's really driven by hedging, where on the oil and gas side and coal side we've got some hedges that were put in place that might allow for certain producers to hang on a little longer than what market conditions would expect.

So I think what we're seeing in today's short-term market is not sustainable. It's really just a matter of a shakeout. So as we think through what is the new normal, if you will, for utility consumption, you know, we in the coal space are going to have to make a decision in the industry of how do we plan our production, what level of utility demand are we going to anticipate, is it going to be at the low end of the curve because we expect it's going to be constant natural gas pressure or will it trend up because natural gas prices start trending back up to the $4 level. So natural gas price is going to be a catalyst, to answer that question. The export market is a catalyst, to answer that question. We don't see the export market bringing us any relief over the next two to three years. So it's really going to come down to natural gas prices and what the supply response is in the U.S. coal industry.

So, Joe, related to that point, and being a little bit more specific, I mean, do you feel like -- are Illinois basin prices for, let's say, the low chlorine product that you sell today, around $40 or even lower than $40 or is that -- is that too draconian?

It's still in the $40 range today, but it should be higher than that. I mean, I think when you look at Illinois Basin and northern App, we're not that far out of supply/demand balance. There is an inventory build that we're going to have to adjust, but when you think about the total production in Illinois Basin and northern App, we don't need that much supply reduction to get to balance. And the real driver, of course, largely is central App. And central App, most people project will drop to the 80 million ton level, and it's not there yet. It needs to get there. And I think that's going to have the bigger impact for Illinois Basin and northern App, really, is looking at the supply in the central App area that needs to fall off, but I also think there's 5 million to 10 million tons out of the Illinois Basin and northern App that has to come off, also.

So when you think about looking forward, Joe, like if in fact, let's say the market for gas doesn't provide you a heck of a lot of relief. If pricing -- if you're sort of in a $40 pricing market going forward, obviously you're in a great position having a 1.6 times cover distribution but I imagine it wouldn't be quite as high next year if that pricing persisted, is there any push or any feeling that the current distribution growth rate might have to be moderated if these current prices persist for an extended period of time?

Yes, if the prices stay at a $40 level in the Illinois Basin for a sustained period of time, yes, they would have to -- we would have to reevaluate what our distribution growth would be or what our -- what the distribution growth position would be.

Okay.

Again, I don't think it's going to sustain at $40. I think that, with the investments that have been made, the capacity's there, I think producers will in fact adjust to that capacity to where they can make money. We're all driven to do that. Essentially all our competitors are levered, so they've got, say, a higher leverage cost now that Mr. Murray's in the public market with an NOP and wants to pay distributions, I'm sure, that's going to bring a discipline to where I believe the industry will right size itself, to get an adequate supply/demand balance to where you'll see a price curve more comparable to where it was a year ago than where it is today. And that will push prices up $5-plus.

Well, all right. The last point, Joe, and then I'll leave it there, you guys are -- you're in a terrific position from a balance sheet perspective, as Brian alluded you're only one times levered, the rest of the industry or most of the rest of the industry is highly levered. You guys obviously have some fire power. When you think about his growth, you know, beyond White Oak, obviously you've brought on Tunnel Ridge, Gibson South, and White Oak, you have this great balance sheet, we've already seen some consolidation, is there the willingness to look at big or large size deals that can really, really impact the trajectory going forward? I mean, put another way, I mean, do you see a lot of opportunity on the M&A side and would it necessarily be in -- are you seeing valuations in coal now that Intrigue you given all the pain?

Yes, we will consider anything and everything that will add to shareholder value, from small to large. Now, where are those opportunities and, you know, am I enthusiastic? There's all kinds of opportunities out there? No, I'm not. Part of the challenge you have is it's hard for people to adjust their expectations to a level that really reflects what today's value should be. And so that -- that makes it a challenge, especially given the fact that the Obama administration has pretty much put a lid on our demand for our product by not allowing new coal fired power plants to be built. And I think the industry has adjusted pretty much to the EPA rules that are in place today so that as we think of what the actual demand growth is going to be region to region there's really not going to be any. That demand growth is really going to be dependent pretty much year to year based on weather, export sales and, natural gas prices.

So it's going to be a smaller band of potential growth, and so I think the thought of being able to continue to add production because there's increased market share, that's -- you know, the market and the Obama administration have sort of taken one of those tools away from us. So the growth is going to come by people that have depleting resources and they decide they don't want to reinvest that capital because they don't have a good alternative to make that investment, and so that's going to lead -- for those that do have that footprint and several of us do, where we've got the capacity already embedded and we've got low cost reserves we can stand to, that we will be able to grow, really, on the cost side, maintaining volume, maybe growing slightly as other competitors decide not to reinvest, and we can take that market share. So I think that's -- as we think of how we can sustainably continue our growth in the coal space, that's sort of the way we look at it.

Okay. Great. Thank you very much.

Thank you. (Operator Instructions) Our next question comes from [Linchin of HITE.] Your line is now open.

It's actually James Jampel from HITE. I think you mentioned in your remarks that you were a little bit surprised about -- that the supply response isn't what you expected. I was wondering if you could comment a little bit more about that. What do you think should have happened and why didn't it happen and why do you think it will happen in terms of supply response in the future?

I think, really, as I just mentioned a few minutes ac, I think central App, we think, should be an 80 million ton production level as opposed to 100 tons or so. And why that hasn't happened, I can't answer that. I don't know if people believe that this is a cycle similar to what's been in the past as opposed to a cycle where their markets have gone away. I can't answer exactly why more central App producers haven't pulled off production sooner than what we expected they would. I think on the Illinois Basin side and the northern App side, and I think that there's been a focus to try to be as low cost producer as we can be, so that tends to drive for trying to increase your capacity or operate at full capacity, and we went into the year expecting to have more demand than what we've really been able to achieve, and largely because of low natural gas prices.

So the demand response wasn't there that I think most producers anticipated and we geared up for, and now we're having to adjust by looking at some production and not continuing to produce at those previously-determined levels to try to get us back into a supply/demand balance. And unfortunately it just takes a little time to evaluate that and implement it and that what I've said pretty consistently here, I think the demand side for Illinois Basin and northern App has been pretty much established and it's going to be flat for a while. So I believe that the industry will realize that and they'll manage their operations to meet that market and not try to overshoot it.

Okay. Turning to the Murray Foresight deal, we here at HITE have been following ARLP for over ten years now, and we've always respected you and Chris Cline as being the premiere operators in the business and a couple of the smartest guys that are out there, and what should we make of Chris deciding to sell at this point? Is he seeing something out there in the market that you're not?

Well, I'd say probably he felt good about the price he got. That might have been a factor. But, you know, I can't really respond to that as to why he decided to do -- to reduce his position. He'll still involved somewhat. But I think the consolidation that Mr. Murray and Mr. Cline implemented, I mean, it does have an opportunity to provide some (inaudible - background noise) if it's managed properly. But at the 85 million tons, plus or minus (inaudible - background noise) the scale to where he can do some things, where he can manage it properly, that he can get an adequate return on his investment. So -- and, you know, Chris, with the way he structured the deal and he still has ownership stake in that, he can benefit from that, too. So I don't know exactly what his motives are, but I think that, given the fact that the market's not a 200 million ton market like we all hoped for at one point in time, and it's turning into a more flat market, if you will, I think he may have looked at it to say, hey, consolidation makes sense here, and that -- trying to benefit through, you know, combining two strong Longwall players, he'd be better off than trying to compete, I guess. I'm just speculating. I can't really know for sure. But you know, that's my view.

Fair enough. Matt, did you have a follow-up?

Yes. So in terms of the AHGP ARLP structure, it seems at this point, given the maturity of the structure and the inability of AHGP to sustain any real GP premium, that there'd be real value in just simplifying the story and allowing investors to solely focus on the fact that you are the lowest cost provider of coal and, you know, really stand out that way without having this extra brain damage around the structure. Is there going to be any consideration internally to just consolidating that structure, making it easier for investors to get into the story and understand the story?

Yes, we look at that, and we've looked at it pretty continuously quarter by quarter over the last two years probably, and as we think it through and there's always, you know -- we sometimes see other opportunities to where we feel like there's value to stay where we are. And we're going to continue to evaluate that. I think if we feel like there continues to be opportunity for one unit holder versus the other that is better for them to stay where we are, we're going to continue in this mode. If we think we get to a point that we have a vision that it's in both parties best interest to go ahead and consolidate, then that is a very strong possibility. But we're not there yet. And we still think that there's some opportunity for both unit holders to benefit by us keeping the structure we've got, but there's merit in what you suggest but we just have to determine as we go forward whether we're better off consolidating or having two separate entities.

Right. So what opportunities are you seeing right now that makes this structure more attractive than it would seem to those of us on the outside?

Well, one of the things that the Murray transaction has sort of opened some eyes to, for me, is all of a sudden the ability to finance at the GP level may be greater than it has been in the past to where we would have two forms of ability to raise capital, whereas previously in our -- since 2002 when the GPs -- been a public entity -- or 2006. In 2006. You know, we really have not been able to utilize the fact that we have zero debt at the GP level. It appears that, with the Murray structure, he can lever up both sides and bring some operations into the GP side that could give us, if we wanted to go to a larger transaction, could give us more flexibility in financing transactions that, if we collapsed them, we may not have that capacity.

So that's one example of where having them separate, as we look forward and the opportunities that may present themselves, that -- that we could consider evaluation. Another could be if we wanted to look at some other midstream assets, whether they should be done at the MLP level or in a different entity but that the GP could participate in that again with the added capacity that they may have for financing. So there's several things that we are considering, but we'll have to evaluate those and determine whether they're operative or if they're going to, you know -- back to your point, is it better to go ahead and consolidate and not have the noise or is there real value to have them separated because of growth potential that could exist if certain things were to materialize.

Understood. Thank you.

Thank you and our next question comes from the line of John Bridges of JPMorgan. Your line is now open.

Just following up on this consolidation idea, we've felt that the big level consolidation would hit sort of FDC snags and whatever, I suppose we're a bit surprised by the Foresight Murray deal. Do you think there's going to be other big picture deals or is it going to be more tack-on deals like the ones you've been doing?

Well, it seems like there a lot of industry observers that are continuing to write a lot about bigger deals. I really don't know. I think there's a -- the challenge is that the debt levels of so many of the players are so high that it complicates what you would typically expect would occur in an industry that should be consolidating. It just makes it harder to get deals done when you look at the debt levels of a lot of the bigger players. So it's going to take some creativity and I'm not going to brew it out, but it's -- it's just hard to predict exactly where we will see significant transactions or whether they'll be one-off transactions similar to what we did with Patriot.

Okay. Great. Many thanks for your wisdom. Well done, the results. Thank you.

Thank you, and I'm show no further questions at this time. I'd like to turn the call back to Brian Cantrell for closing remarks.

Thank you, Nicole. We appreciate everybody's participation this morning as well as your continued support and interest in both ARLP and AHGP. A reminder that replay information can be found at the end of our press releases. And our next call is currently scheduled for late July. We look forward to discussing our second quarter 2015 results with you at that time. This concludes our call. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. That does conclude today (inaudible) and you may all disconnect. Have a great day, everyone.