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Edited Transcript of FELP earnings conference call or presentation 3-Aug-18 6:00pm GMT

Q2 2018 Foresight Energy LP Earnings Call

Saint Louis, Mo Aug 15, 2018 (Thomson StreetEvents) -- Edited Transcript of Foresight Energy LP earnings conference call or presentation Friday, August 3, 2018 at 6:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jeremy J. Harrison

Foresight Energy LP - Principal Financial Officer & CAO of Foresight Energy GP LLC

* Robert D. Moore

Foresight Energy LP - Chairman, CEO & President of Foresight Energy GP LLC

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Conference Call Participants

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* Mayur Kenia

* Michal Marczak

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Presentation

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Jeremy J. Harrison, Foresight Energy LP - Principal Financial Officer & CAO of Foresight Energy GP LLC [1]

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Actual results to differ materially from management's current expectations. For additional information regarding such risks, please see our annual and quarterly reports filed with the SEC and posted on our website.

During the call today, we will also discuss non-GAAP financial measures, including guidance with respect to expected adjusted EBITDA. Please refer to our earnings release for reconciliations to the most comparable generally accepted accounting principles for historical periods.

Also, this call includes only information that is available to us at this time. To the extent you are listening to this call at a later date via replay, please note that the information may be outdated or incomplete. We undertake no obligation to publicly update or revise any forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise, except as required by law.

And now I'd like to turn the call over to Rob Moore. Rob?

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Robert D. Moore, Foresight Energy LP - Chairman, CEO & President of Foresight Energy GP LLC [2]

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Thank you, Jeremy. Good afternoon, everyone, and thank you for being with us today.

This morning, Foresight Energy announced its financial results for the second quarter. During the quarter, Foresight sold nearly 5.9 million tons of thermal coal and generated total revenue of almost $270 million. This resulted in adjusted EBITDA of $104 million. Our second quarter results reflect our ability to take advantage of a very strong export market in which we've realized significant year-over-year improvements in our sales volumes and sales revenue. With total sales volumes up 21% and total sales revenues up 32%.

During the second quarter, we safely and efficiently produced 5.4 million tons compared to approximately 5.7 million tons in the second quarter of 2017. The decreased production resulted primarily from 2 longwall moves that occurred simultaneously at our Sugar Camp complex during this year's second quarter. Despite these longwall moves, our operating mines continued to maintain their position among the most productive underground mines in the country as measured on a clean-ton per man-hour work basis.

For the second quarter, all 3 operating mines ranked once again in the top 15 most productive underground mines in the country. Our 2 operating longwall complexes, our Williamson and Sugar Camp complexes, ranked as the second and third most productive underground mines in United States, generating 16 and 14.5 tons per man-hour worked, respectively.

On a combined basis, the Foresight operations produced over 13.8 tons per man-hour work during the second quarter. This compares to the national averages for underground mines of 4.6 tons per man-hour worked. These high levels of productivity allowed us to maintain a very low cost of $23.70 per ton.

As reflected on our operating results, our mines continue to perform very well. As noted previously, during the quarter, we completed 2 longwall moves at our Sugar Camp complex. We now have all of our scheduled calendar year 2018 longwall moves completed, and we expect to continue to improve our industry-leading cost structure over the remainder of the year.

Importantly, during the second quarter of 2018, we've exported 2.1 million tons or 36% of our sales volumes. The export demand for our product remains strong and has acted to pull considerable amount of volume out of the domestic thermal market. As a result, we have observed the domestic supply and demand levels move into balance. We believe that the export market will continue to provide an economical outlook for a significant portion of our production in 2019 as fundamentals across the globe remain favorable as it relates to demand for thermal coal with high Btu content. We continue to be a leader in developing new global market opportunities and have differentiated ourselves from other domestic suppliers by leveraging our logistics chains from our Illinois Basin operations through Convent Marine Terminal.

With this logistic system, including the ability to rapidly load all vessel sizes, we have proven ourselves as being a more reliable supplier to the export market as well as a supplier that is more capable of providing a consistent high heat product. For 2018, we currently have approximately 7.7 million tons contracted and priced for the export market, with a program to deliver up to 9 million total tons with pricing of the incremental volumes to be set at the time of delivery to the export terminal.

As noted in our 8-K filing from April 11, we have elected to cease all operations and permanently close Hillsboro's Deer Run Mine. As such, we recorded an aggregate noncash impairment charge during the second quarter of $111 million related to certain long-lived assets. With respect to our Hillsboro insurance coverage, we received approximately $44 million of additional proceeds representing the total of the 6 advance during the second quarter, and we continue to pursue all available remedies under our insurance policies related to the combustion event. Due to the ongoing litigations with natural resource partners and the insurers respectively, this will be the extent of any public comment related to Hillsboro at this time.

At this point, I'll turn the call over to Jeremy for further discussion on our second quarter financial results. Jeremy?

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Jeremy J. Harrison, Foresight Energy LP - Principal Financial Officer & CAO of Foresight Energy GP LLC [3]

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Thank you, Rob. During the second quarter, we recognized coal sales revenue of $270 million on sales volumes of 5.9 million tons, which generated adjusted EBITDA of $104.1 million, this compares to $204.5 million of coal sales revenue on 4.8 million tons sold and adjusted EBITDA of $84.5 million during the prior year second quarter. The increase in coal sales revenue was primarily driven by a $3.72 per ton or 8.8% increase in coal sales realizations and an overall increase in sales volumes. The improvement in coal sales volumes and realizations was primarily due to the year-over-year improvement in the export market.

As Rob mentioned earlier, our operating mines continue to be among the most productive underground mines in the country, safely and efficiently producing 5.4 million tons during the quarter. Our cash cost per ton sold was $23.70 for the quarter compared to $21.88 for the prior -- the second quarter of 2017. The increase in our cash cost was primarily due to the 2 longwall moves at our Sugar Camp complex in the current quarter as well as higher royalty expense.

Compared to the second quarter of 2017, transportation expense during the second quarter of 2018 increased by $30.7 million to $59 million. This increase is largely driven by a higher proportion of sales volumes shipped into the export market during the current period, as export sales incur higher transportation expense due to the longer distance to the port facility.

Finally, from a cash flow perspective, the second quarter of 2018 was a strong cash generating quarter where we recognized operating cash flows of $30.6 million and ended the quarter with a cash balance of nearly $38.6 million with total liquidity of almost $163 million.

For the second quarter of 2018, capital expenditures totaled $15.7 million. We reduced our long-term debt by $31 million and we paid a $4.5 million distribution to our common unitholders. Also, as mentioned earlier, we received approximately $44 million of additional insurance proceeds related to our Hillsboro insurance claim.

With that, I'll turn the call back over to Rob for additional comments before we take your questions.

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Robert D. Moore, Foresight Energy LP - Chairman, CEO & President of Foresight Energy GP LLC [4]

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On the strength of our second quarter financial performance and our outlook on liquidity and operations for the remainder of 2018 and beyond, the Board of Directors of our general partner has elected to declare a quarterly distribution from the retained portion of excess cash flow generated in 2017 of $0.0565 per unit, payable exclusively to the holders of the FELP common units. The distribution will be paid on August 31, to common unitholders of record as of August 21. As we have mentioned on previous calls, future distributions will be subject to board approval and will be based on a number of factors, including our leverage levels, market conditions, excess cash flow remaining after required excess cash flow sweeps and our projected future financial and operating performance.

We expect this level of performance to continue throughout 2018. And as a result, we are updating our guidance for sales volumes and adjusted EBITDA and reaffirming our guidance for CapEx. Based on our current contracted position and outlook for the domestic and export coal markets, we expect 2018 sales volumes to total between 22 million and 22.8 million tons, with at least 8.5 million tons being sold to the export market. At these volumes, we are increasing our guidance for adjusted EBITDA to a range of $300 million to $330 million. Based on our current operating plans and recent capital spending, we still expect our 2018 capital expenditures to total between $70 million and $80 million. Assuming our guided adjusted EBITDA levels for 2018 and our scheduled debt repayments, we expect the company to be less than 4x levered at the end of calendar year 2018.

This will provide for distribution of up to 50% of the partnership's 2018 excess cash flow during calendar year 2019.

With that, we have time to take questions, and we'll open up the lines. Colin?

Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we'll go to the line of Michael Marczak with DoubleLine.

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Michal Marczak, [2]

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I just wanted to make sure I understand the change in guidance. Does the adjusted EBITDA -- the newly adjusted EBITDA guidance include the $44.1 million of insurance proceeds that you've gotten to date?

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Robert D. Moore, Foresight Energy LP - Chairman, CEO & President of Foresight Energy GP LLC [3]

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That's correct.

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Michal Marczak, [4]

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Okay. And your original guidance, did that include any insurance proceeds that you're expecting for 2018?

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Robert D. Moore, Foresight Energy LP - Chairman, CEO & President of Foresight Energy GP LLC [5]

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Yes, we did have insurance proceeds reflected in that guidance as well.

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Michal Marczak, [6]

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Okay. So I guess maybe -- so I know what's the kind of increase in guidance this quarter. Is that solely from maybe higher expectations from insurance proceeds or is that from better pricing, better volume or better cost than your original guidance in your operations?

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Robert D. Moore, Foresight Energy LP - Chairman, CEO & President of Foresight Energy GP LLC [7]

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It's a result of the better performance that we expect over the second half of the year, specifically the realizations that we would expect to achieve on the back half of the year as well as improved cost, just given where our operations are at right now. Mines are running very well, generating good cost, and with what we've seen in the way of export market opportunities and realizations there, we believe that it was right to improve that guidance.

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Operator [8]

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And next, we'll go to the line of Mayur Kenia with IWD Capital Management.

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Mayur Kenia, [9]

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All right. I have a couple. One was regarding netbacks. Given the strength in API2, what led to netbacks being flat to down versus previous quarters? Was it domestic pricing sold for discounts, any color there would help?

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Robert D. Moore, Foresight Energy LP - Chairman, CEO & President of Foresight Energy GP LLC [10]

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Yes, so the majority of that is driven by contracts that we entered into last year for deliveries this year, that were priced at a time where markets were near the bottom. Unfortunately, we had some of those legacy contracts that we've obviously have to ship on. And that's really what's driving that differential, it's just the mix. We expect those realizations over the back half of this year to improve.

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Mayur Kenia, [11]

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Okay. And do you have an update on the impact of -- on cost per ton from Hillsboro in the quarter?

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Robert D. Moore, Foresight Energy LP - Chairman, CEO & President of Foresight Energy GP LLC [12]

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It's approximately $0.50.

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Mayur Kenia, [13]

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Okay. And then I noticed that the SG&A was a little bit higher in the quarter. Was that mostly related to litigation or it's something else?

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Robert D. Moore, Foresight Energy LP - Chairman, CEO & President of Foresight Energy GP LLC [14]

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A couple of things are driving that. We do have some litigation, but we also have -- with the significant amount of export volumes, we have expenses related to brokerage.

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Mayur Kenia, [15]

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Okay, okay. That's helpful. And I guess the last sort of area is regarding exports. Is there anything preventing Foresight from exporting more than 10 million tons in the future?

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Robert D. Moore, Foresight Energy LP - Chairman, CEO & President of Foresight Energy GP LLC [16]

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No, we have the capability of exporting more than 10 million tons. There is really nothing that puts a cap on that for us.

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Mayur Kenia, [17]

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Okay, and then lastly. Are there any updates in terms of structural changes with international demand, sort of like including Turkey?

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Robert D. Moore, Foresight Energy LP - Chairman, CEO & President of Foresight Energy GP LLC [18]

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Not really seeing any changes there. There's a lot of noise around tariffs and what affect the tariffs may have on trade with United States. While there's been a lot of talk, there hasn't been anything concrete as it relates to how that's going to be dealt with. We continue to see really solid fundamentals as it relates to demand for our thermal product. And we expect to see that on a go-forward basis. I feel really good about 2019 and beyond as it relates to demand for the export coal that we have to deliver.

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Operator [19]

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(Operator Instructions) Mr. Harrison, we have no lines in the queue. Sir, please continue.

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Robert D. Moore, Foresight Energy LP - Chairman, CEO & President of Foresight Energy GP LLC [20]

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Okay, everyone. This is Rob Moore. I appreciate you all being on with us today and look forward to talking to you next quarter. Thank you.

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Operator [21]

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And ladies and gentlemen, that does conclude our teleconference call for today. Again, thank you very much for your participation, and for using the AT&T Executive TeleConference service. You may now disconnect.