Oxford Resource Partners' CEO Discusses Q2 2013 Results - Earnings Call Transcript

| About: Westmoreland Coal (WLB)
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Oxford Resource Partners, LP (OXF) Q2 2013 Earnings Conference Call August 6, 2013 10:00 AM ET


Karen Van Horn - IR Representative

Chuck Ungurean - President & CEO

Greg Honish - SVP, Operations

Brad Harris - SVP & CFO


Jim Rollyson - Raymond James

Sam Dubinsky - Wells Fargo


Great day, ladies and gentlemen, and welcome to the Oxford Resource Partners, LP Second Quarter Earnings Conference Call. My name is Kristel and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will facilitate a question-and-answer session towards the end of the presentation. (Operator Instructions).

I would now like to turn the presentation over to the host for today Ms. Karen Van Horn. Please proceed.

Karen Van Horn

Thanks, Kristel. Good morning, and welcome everyone to our second quarter 2013 earnings conference call. We appreciate your continued interest in Oxford Resource Partners. I’m Karen Van Horn, Investor Relations Representative with Oxford. Participating on the call today are Oxford’s President and Chief Executive Officer, Chuck Ungurean; Oxford’s Senior Vice President of Operations, Greg Honish; and Oxford’s Senior Vice President and Chief Financial Officer, Brad Harris.

Oxford released its 2013 second quarter results earlier this morning. On today’s call, we will be discussing our operations and financial results. Following our prepared remarks, we will open the call up to questions. Dan Maher, Oxford’s Senior Vice President and Chief Legal Officer will be available to assist us in responding to your questions.

Please be aware that some of our remarks may include statements that are not historical in nature and that may involve expectations, plans and objectives regarding future operations. These remarks are forward-looking statements and are subject to the cautionary language regarding forward-looking statements contained in our press release.

Additionally, we will be discussing adjusted EBITDA and adjusted net loss, which are non-GAAP financial measures. The definitions of adjusted EBITDA and adjusted net loss and reconciliations thereof to net loss, a comparable GAAP financial measure, are included in tables presented near the end of our press release. Our press release has been posted on our website, oxfordresources.com and furnished to the SEC in our Form 8-K filing.

With that, I would like to turn the call over to Chuck for some opening remarks. Chuck?

Chuck Ungurean

Thanks, Karen, and thanks everyone for joining us today. As you saw on our June 25th announcement and our earnings release this morning, we completed our refinancing in June. This refinancing was accomplished in spite of the tight debt markets in the coal industry. With the thermal coal market and our region moving in the right direction and our enhanced liquidity, we are in a stronger position to participate as the thermal coal market improves.

On the operating side, we drove another quarter of sequential improvement in our key metrics. Our adjusted EBITDA was $13.9 million, an increase $4.9 million over the first quarter of '13. In addition, we generated per ton improvement in our coal sales revenue, cost of coal sales and margin. We were able to achieve these results in a challenging coal market. Importantly, our customer relationships remain very strong. We are almost fully committed and priced for 2013, and for '14 our projected sales are 81% committed with 49% being priced, while the other 32% is not yet priced.

Let me talk briefly about the coal market. Due to the higher natural gas prices in our region we have started to see some switching back to coal. While this has not yet translated into increased demand utility coal stockpiles have been declining in our region. As the coal market improves we will be able to increase our production by 5% to 10% with little additional CapEx.

Now I’ll turn the call over to Greg to provide an update on our mining operations. Greg?

Greg Honish

Okay. I’m going to report on safety and operations. Starting with safety. We completed the second quarter with an MSHA reportable incident rate that was 68% better than the national average for surface mines and facilities. Our employees worked the entire quarter with just one reportable accident, once again displaying Oxford’s commitment to working safely. As we’ve said before, employee safety remains our highest priority.

Moving on to our operations. Second quarter production was 50,000 tons better than budget. During the quarter we moved one of our highwall miners, got our first production at a newly opened mine and began development at another mine. We were issued two mine permits during the second quarter and expect issuance of at least three more mine permits in the third quarter. We continue to transfer equipment from the Illinois Basin operations to our Northern App operations as appropriate. To that end we are moving two more haul trucks at the present time.

Finally, we completed the acquisition of the Conesville Coal Preparation Plant from AEP early in the second quarter. This facility is adjacent to AEP’s Conesville generating station. This strategic location of the preparation plant will further enhance our already strong competitive position and help reduce operating and transportation costs.

With that, I’ll turn the call over to Brad. Brad?

Brad Harris

Thanks, Greg. Good morning everyone. Second quarter 2013 cash margin of $8.28 per ton was slightly better than the second quarter 2012 cash margin of $8.26 per ton. Coal sales revenue increased 2.6% to $51.21 per ton offset by an increase in cash cost coal sales of 3.1% to $42.93 per ton the result of lower Illinois Basin production.

Total revenues were $88.1 million including revenues of $85.7 million from our 1.7 million tons of coal sales. Comparatively second quarter 2012 revenues totaled $91.9 million including revenues of $90 million from our 1.8 million tons of coal sales.

Adjusted EBITDA was $13.9 million for the quarter compared to $14.7 million for the prior year quarter. All these financial results were in line with our expectation that anticipated lower production sales from our Illinois Basin operations due to the coal supply contract termination in early 2012 that we’ve previously discussed.

Depreciation, depletion and amortization expense was $12.8 million for the second quarter compared to $12.2 million for the prior year period. Corporate SG&A for the second quarter was $5.8 million compared to $3.5 million for the prior year period. Second quarter SG&A included a $2.8 million of cost associated with our debt refinancing.

CapEx totaled $4.7 million during the second quarter as compared to $6.2 million during the same period in 2012. Maintenance CapEx was down in part because of the benefits from Illinois Basin equipment previously transferred to our Northern App operations. The impairment and restructuring expenses of $0.7 million for the second quarter related to a terminated coal sale, coal lease agreement in the Illinois Basin. We recorded $5.3 million in impairment and restructuring expenses for the same quarter last year.

The net gain on disposal of assets of $5.9 million primarily resulted from the sale of additional oil and gas rights similar to the second quarter of last year.

Interest expense was higher for the second quarter primarily due to a $0.8 million write-off of deferred financing cost associated with our previous credit facility and higher interest rates in amortization of cost associated with our new credit facilities.

Excluding the impact of the aforementioned items and the warrants I’m going to discuss in a moment, our adjusted net loss would have been $3.5 million for the second quarter of 2013 compared to an adjusted net loss of $1.9 million for the second quarter of 2012.

As Chuck mentioned, we closed on $170 million of new credit facilities in late June that replaced our prior term loan and revolving credit facility. This refinancing extended the maturity of our debt and provided increased availability under our revolver. The new facilities consist of a first lien $75 million term loan and $25 million revolving credit facility and the second lien $75 million term loan.

The second lien facility includes an option to increase the facility by $10 million with the consent of the second lien lenders. The first lien facility matures in September, 2015 with an option to extend to June, 2016, and the second lien facility matures in December, 2015 with an option to extend to September, 2016 if certain conditions were met.

In connection with the second lien facility, we issued warrants to purchase up to 1.9 million common units and 1.8 million subordinated units of the partnership. The warrants were valued at $7.9 million which is recorded as a discount to the second lien debt. This discount gets amortized as interest expense over the term of the second lien facility. Additionally, we recorded a non-cash charge of $2.1 million at the end of the quarter for the change in fair value of the warrants from the time of issuance. We incurred deferred financing cost of $9.4 million associated with the new facilities including a $5.8 million reduction in proceeds.

Both new financing agreements contain customary financial and other covenants and also preclude making unitholder distributions during the terms of the facilities. Additional detail on the terms of the facilities can be found in earnings release distributed this morning also the financing agreements will be included as exhibits with our Form 10-Q which we expect to file later today.

As of June 30, 2013, we had $6 million of cash and $8 million in available borrowing capacity on our revolving line of credit. The revolver currently held by our first lien lenders will ultimately be placed with a financial institution. The borrowings currently outstanding on the revolver include $11.5 million used to collateralize our reclamation borrowings. This collateral will be replaced by letters of credit once the revolver placement is finalized.

Subsequent to June 30, we paid down $2 million on the revolver. We also permanently reduced the first lien term debt with the payment of $4.4 million using proceeds from the sale of oil and gas rights. We continue to pursue the sale of our excess Illinois Basin equipment which had a net book value of $3.9 million at the end of the second quarter.

And now for our updated 2013 outlook. We expect to produce between 6.1 million and 6.4 million tons and we expect to sell between 6.6 million and 6.9 million tons. Our production guidance has increased slightly as we are producing more tons in the Illinois Basin than we had anticipated earlier in the year. Our sales tons have not changed much as the increase in production is being offset with fewer purchased tons. Our average selling price is expected to be between $50.50 and $52 per ton.

We’ve tightened our expectations for average cost to a range of $43 to $44.50 per ton. We’ve also tightened our adjusted EBITDA guidance to a range of $45 million to $48 million. And finally, we continue to anticipate capital expenditures of between $22 million and $25 million.

With that, I’ll open up the call up for questions. Kristel?

Question-and-Answer Session


Thank you, sir. (Operator Instructions). Your first question comes from the line of Jim Rollyson with Raymond James. Please proceed.

Jim Rollyson - Raymond James

It seems just following through some of your competitors in Northern App here of late at least this year, there have been a lot of outages between CONSOL, Alpha, CONSOL again I guess here of late, is there any opportunity for you to boost production or take advantage of this or you’re seeing this at least show up in pricing for maybe trying to lock in some business down the road?

Chuck Ungurean

Chuck here, Jim. It’s definitely impacted the – our river business in our area, haven’t really seen anybody come out for any new coal. I think if you look at some of the forwarding pricing it seems it has impacted it a little bit on the upper Ohio river coal. So, I think there is -- its definitely going to have an impact, I just don’t think we’ve seen much of it yet.

Jim Rollyson - Raymond James

Okay. When we think about just your comments earlier in the press release regarding working through Illinois Basin this year and eventually closing that down, how should we think about further potential maybe asset sales there in terms of equipment or reserves or what have you and the opportunity to maybe deploy some of that capital or equipment or whatever into kind of down the road possibly increasing production out of your Northern App operation?

Chuck Ungurean

That is kind of our plan, Jim. As you know, we have brought a lot of equipment up here, we still have the equipment we can transfer, we have some equipment down there that is for sale. As far as the coal reserves, we will look at any opportunities that may arise for divesting of them, and at the same time we are idling the mines and if the market would turn and we still have the assets we could get those back up to speed if the market would allow it. So, it’s kind of a combination and sell it we will, we basically have, will have those in the idle mode at the end of the year.

Jim Rollyson - Raymond James

So, you are not necessarily thinking that just you are out of that business more just while current conditions are what they are and then if things get better that bounces back or is that maybe what you are thinking, kind of say of a path maybe at some point to where you could get back to cash flows to start paying distributions kind of beyond your period with creditors?

Brad Harris

Yeah, as I mentioned in my comments earlier, Jim, the credit facilities we have in place right now do preclude us from making any distribution. So, through at least '15 and if we go through the extension periods through '16 we will not be able to make any distributions. I think past that, at this point, is probably a little premature to say just to give it a couple of years out don’t know exactly what’s going to be happening in the coal markets. Certainly, if we see improvement in those markets and cash flows improve subsequent to the again the term of the facilities we would certainly revisit the ability to make distributions, but in the short term again we are precluded in any further distributions will depend on market developments.


Our next question comes from the line of Sam Dubinsky with Wells Fargo. Please proceed.

Sam Dubinsky - Wells Fargo

I believe you mentioned that 32% of your sales volume is unpriced for 2014. When do you think these volumes will be priced or will be more of floating with spot?

Brad Harris

The 32% is, if you will, largely priced based on a mechanism that is in those contracts. For example, our AEP contract provides for pricing that is dependent upon three indices on weekly average for the preceding 12 month period. So, while we are not through all of '13 yet and can’t go through the mechanics of the calculations we do not definitely know what the prices, but the mechanism for pricing those tons is set. So, they are subject to a little bit to movement and what happens in the spot prices from this point through year end, but again just to repeat myself the mechanism for pricing those tons is contractually set and it’s a matter of waiting for time to pass.

Sam Dubinsky - Wells Fargo

I got you. Okay. And then just as we stand today is pricing up next year verse this year or how should we think about that?

Chuck Ungurean

Yes, Sam, it’s Chuck here. The – for what we know through the first six months that pricing would be up.

Sam Dubinsky - Wells Fargo

Any idea in order of magnitude or will be disclosed later?

Unidentified Company Speaker

We’ll have to disclose that later.

Sam Dubinsky - Wells Fargo

Okay. And just my last question, how should we think about CapEx for next year, is $20 million to $25 million sort of the normalized run rate going forward?

Brad Harris

I think that’s fairly reasonable to assume. In that $25 million, 22 to 25 number this year we had about $1.5 million of expansion CapEx. So I think just to confirming that 22 to 24 type of range is the ongoing maintenance CapEx at this level of production and if there are expansion opportunities that maybe on top of that, but I think that’s very representative of what maintenance should be.

Sam Dubinsky - Wells Fargo

Okay. And then should we assume its on the excess cash flow will be used to pay down debt or just to sit on the balance sheet or do you plan deploying that for growth initiatives as the market stands today?

Brad Harris

I think most of it will be obviously we were certainly pleased to be able to improve our current liquidity position which is definitely one of the pluses and the benefits out of refinancing we went through. We’d certainly be looking at reducing our debt going forward from a leverage position that would certainly be advantageous, but also to the extent that there are opportunistic, opportunities whether it would be reserves, operations, those types of things we will certainly look at those. But I think for 2013, for the balance of 2013 and 2014 I largely think its going to be business as usual and the current cash flows will sustain operations and support our business and basically improve current liquidity balances.


With no further questions, I would now like to turn the call back over to Chuck for closing remarks.

Chuck Ungurean

Thanks again everyone for your ongoing support of Oxford. We look forward to sharing our progress with you on our next earnings call.


Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a good day.

Karen Van Horn

Thank you.

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