Q4 2019 Earnings Call
Dead dead dead dead dead.
Monday
good day, and welcome to hold or energies fourth quarter and year-end 2019 conference call and webcast. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero after today's presentation. There will be an opportunity to ask questions to ask a question. You may press * then 1 touchdown phone to withdraw your question, please press star unto please note. This event is being recorded. I would now like to turn the conference over to Miss Becky Palumbo wage investor relations, please go ahead.
Thank you everyone for taking the time to join us today. Today. We are going to talk about our fourth-quarter and full-year 2019 earnings. If you haven't had time to review the form 10-K and the earnings release we issued yesterday. They are both posted on our website today as said before this call is being webcast and a replay will be available on our website along with the transcript later this week participating on today's call with me are Brent bilsland our president and CEO and Larry Martin our CFO. Larry will begin with a fine Kettle overview followed by Brent with comments and operations.
After management completes, their opening remarks. We will open the line up for Q&A. Our remarks will include forward-looking statements that are subject to certain risks and uncertainties that could cause actual results to differ materially. For example, our estimates of mine and costs future cost sales and regulations regarding the Clean Air Act and other environmental initiatives. Do not undertake to update our forward-looking statements whether as a result of new information future events, or otherwise except as may be required by law. Also, I would like to remind you that God will be turning to call back to I'm sorry with that said I will turn the call over to Larry. Thank you suck.
Good afternoon everybody. Thanks for listening.
I'm going to start with our review of operating results. And before I do that, I want to get some definitions out of the way. We Define adjusted free cash flow as net income plus the income taxes plus TV Plus accretion in stock compensation less maintenance capex and the effects of our Equity method Investments. We Define adjusted ebitda As Eva. Plus compensation and Recreation left the effects of our Equity method investments in our glass and
Howard or Internet loss
59.8 million for the quarter or a dollar and $95 a share and 59.9 million loss or dollars ninety-five per share for the years.
This lost included 77.9 million of impairment.
Without the effect of the impairments how the door would have lost 1.6 million for the quarter or a nickel a share and 1.7 million months a year or six cents this year. We incurred adjusted cash flow free cash flow of 8.1 million for the quarter 29.8 million for the year. We had adjusted ebitda of 16.7 million for the quarter and 68.8 million for the year. We increased our debt by 8.5 million for the quarter and reduce our debt 8.3 million for the entire year. We pay dividends of 1.2 million for the quarter or 4 cents a share.
and total of 5 million
in dividends for the year or 16 cents a share or bank that at the end of nineteen was 180.2 million or net debt at the end of 1970 one point four million.
And our debt-to-ebitda leverage ratio was 2.62 times.
Now turn the call over to our president CEO. Thank you. Larry Nelson our press release After experiencing negative free cash flow a month for the past eighteen months. We have decided to permanently close our Carlisle my line which will further reduce our overall cost structure maximize per ton margins off reduce current and future capex by utilizing Carlisle equipment.
In Parts, a total has reduced as we reduce coal and parts inventory. We will generate significant cash to be utilized for debt reduction.
During the quarter. We impaired three assets the Carlyle mine the Bulldog Reserve an hourglass Sands for a total of 77.9 million and non-cash impairment the Carlyle mine represented 65.7 million of impairment as a result of its closure.
Additionally, we thought it prudent to impair our Bulldog Reserve by nine point two million dollars as current market softness has reduced the opportunities the open the mind off lastly do to reduce practice and pricing. We determine that an impairment of our our glass and projects was necessary. We continue to sell through or sand inventory wage have recorded an impairment of 2.9 Million.
Some investors might have concern that 2019. We sold a record 8.1 million ton, and then 20/20. We were selling one point four million times less selling less of a product a good thing.
well
Answer is Carlisle produce 1.5 million tons last year at a loss. So in 2020 Oaktown will essentially be producing the same amount of time as in 2019 without having to support the loss of the Carlyle mind.
Operating cash flow is 15 million lower than expected in 2019. 7 million was largely attributed to Carlisle high cost structure pressuring home and we increase coal inventory by eight million dollars in anticipation of winter shipping fees.
As we look to twenty-twenty those headwinds either do not exist or unwinding cells.
It's we have six point seven million tonnes sold at $40 a tonne.
We are assuming no additional Coal Sales for the balance of this year.
With the closure of Carlisle, we believe our cost structure returned to twenty-eight to thirty dollars a time. We estimate our sg&a will run $12 our bank interest be $13 million-plus. We will spend three million in Carlisle closure costs.
We have reduced our capital expenditure budget to $29. We further look to generate another $24 billion in cash by reducing cold and parts inventory and other working capital adjustment.
Doesn't total we should create fifty million cash, which we will use utilize to pay $35 million in principle Bank payment on a pallet or only has Thirty point four million shares outstanding. So where else can invest or find a company that is paying down over a dollar a share and death and is trading in a Dodge. I think this represents extreme value.
On the financing front remind everyone that we refinanced our credit facility last September and extended our term through September of 2023. So we have plenty of time left at our agreement.
Additionally we're looking to sales. We do not feel nervous near-term pressure to sell cold as we are 100-percent sold for twenty twenty.
Now there are certainly challenges in the current energy environment, but we see markets that are making dramatic changes to return the balance.
As of February 7th Baker Hughes had reported that rig counts for natural gas Targets in the lower 48 had declined 76% year-over-year.
I'd like to point out that was a month ago.
Roughly half of us gas production comes from these targets.
The other half of gas of us gas production comes primarily from Associated gas from oil Target.
Yesterday yesterday JPMorgan reported that would WTI oil pricing in the thirties fifty percent of oil rigs and major basins such as a permanent or the eagleford will come off line and up to eighty percent of oil rigs and smaller oil basins are coming off line This is dramatic change.
The Illinois Basin we're also seeing significant Cold Supply response in January of 2019.
Fifteen million tonnes of coal production has announced that is Idle or closed 80% of which has permanently closed.
We estimate another 15 million tons of production has come off line with no Public Announcement.
In totality roughly 30% of Illinois Basin coal production from just a year ago is currently not operating.
So we see higher gas prices in the future due to dramatic reductions in drilling and less competition for competing Cold Supply due to mine closures off. So we certainly recognize again the challenges in the industry. We believe how it or is unique when an investor focuses on our strong sales position again a hundred percent sold this year 79% sold next year.
our low cost structure
in our strong cash flow per share
with that said I open up the phone for questions.
We will now begin the question-and-answer session to ask a question. You may press * then 1 on your touchtone phone. If you're using a speaker phone, please pick up your handset before pressing the keys off I said anytime. Your question has been addressed and you would like to withdraw your question, please press * then two at this time. We will pause momentarily to assemble our roster.
The first question comes from Lucas pipes would be Riley FBR, please go ahead.
Hey, good afternoon, everybody.
Hey Lucas.
I wanted to first ask a little bit about kind of the Contracting environment out there. What is your take on a kind of how the utilities are approaching this Market? Are they in a wait-and-see mode or they purchasing cons and and and if so, what's roughly wage price out there? I think it's it's it's something that the market would really appreciate some additional color on. Thank you very much. I think we've talked in the past about I you know, there are times and the cold market with the windows open and cool buyers are buying cold and there are times where the window is closed and
Quite frankly. There's just not a market price and to me right now, the the window is closed winner would have Burns were weak export tons came home gas prices a crash. So I would say most utilities at this point in time are long inventory slow to pick up inventory. I think they will be looking hard at the summer month Burns and looking for gas prices to increase. So that's why we base off assuming no additional sales this year cuz we just don't I mean we there's a few buyers out there, but I think they're at prices that we would not be interested in participating.
Okay. No. No, that's that that's very helpful. I appreciate that color. And then in terms of the the market in in the illinois-based mentioned the the compact is out there. What do you think is going to be the supply response? I mean if the market is essentially frozen out there you're in a pretty enviable contract position not wage. Everyone is in the same boat. How how do you think this will play out?
I think we're seeing it play out. I mean that's fifteen million times has announced that it's closed and the last you know, fourteen months 80% of that has announced that it is permanently closed such as the Carlyle mine.
There's a lot of production coming off line that there's no announcement for you know, if you're in the industry, you know, you you, you know have people telling you that, you know this my name here is you know used to run seven units. It's now running to and so there's a lot of Supply response that really has no Public Announcement with it. We estimate that to be at least $15. So you've got you know, almost a third of the Illinois Basin that was producing at the end of 2018 that's not producing today.
In large part, you know people look to export but I think in large part, it's just she Paso gas prices. You've got, you know gas down and unsustainable levels. This is a my opinion evidence by the fact that you know gas rigs have come off 76% year-over-year. That's a staggering statistic and now you know over the week. We see a dramatic shift in the oil prices, which sounds like it's going to last for a while. We're seeing significant response to see yesterday and oil rigs coming off line. Frac jobs being stopped mid Frac. The industry is having a significant respects in large part because
You know the oil and gas industry doesn't have the access to Capital that had just a couple of years ago. I mean it past downturns that industry would have borrowed or raised equity and those are lovers. They really can't pull right now. So to me the only lever they currently have is to rain in their drilling budgets and preserve cash and that's what we think is happening now decline curves for Shale plays which is the majority of of u.s. Gas and oil for that matter is is a pretty long too calling curves. So, you know, I think everyone is still trying to rejigger their model to figure out exactly when and to what magnitude we see Supply come off but supplies coming off line. Like I've not seen in my career so
It's a dramatic time but we see things coming back into balance and the good news is like you said we sit here. We feel no pressure to sell cold this year. We need to sell another 20% for next year and we believe that we will see gas prices significantly higher than they are today due to this response and drilling.
This is very helpful a follow-up super helpful. In fact and and follow-up question on that is I know you don't have a crystal ball, But if if you had to take a guess I'm kind of what were gas prices are going to shake out on the back of the Dynamics you just mentioned. So that's that's one question. And then to what what gas price do you think is needed to balance the coal market? So you mention utilities I'm buying call us and stocking up like wage. What is what's the gas price you're looking at from what's going on in the energy world? And what's the gas price needed? Thank you.
What's the gas price needed that's a very loaded question. I mean, I think that
Illinois Basin cold does pretty darn well at a $2.60 gas price.
And that would you know at that price the United States would need 30 million tons of Illinois Basin coal to come back online that probably doesn't exist, you know, all that does not exist today.
so
it is it is a bit tougher to understand the supply response because we're just seeing things. We haven't seen before we haven't seen where you know, thirteen Dodge on permanently closed in Illinois Basin. Another too is is idled announce titled another 15 or more has kind of, you know Idol but hasn't really told anybody, you know, we see people being shifted around and we see units coming off line. We just haven't we really haven't seen that before? So it's it's a little tougher going forward to seeing where is where is the new balance?
But we know that looking at what coal plants can do in Indiana 70% usually of our product is consumed in Indiana in that 250 to $60 number for gas at the Henry Hub typically equates to you know, reasonable margins for coal prices back in Indiana and Kolb dispatching in front of gas in Indiana.
Obviously higher prices helps our customers that have greater Transportation rates, you know such as our Florida Market or you know anything in the southeast.
So we do better obviously with those higher prices, but Indiana does pretty well, you know in that mid $2 range for gas.
They're very very helpful. And and I I will close it out. If if one last question, what what are you seeing on the retirement front is off? That's something that's starting to slow down or in terms of tons and specific to the Illinois Basin. What's what's the outlook on on that wage? Appreciate your perspective and Things fall to color?
so as far as Retirement cuz I mean, I think that you know
We don't we don't currently today have you know, we've seen some retirements and we've seen some talked out there.
Mostly in the 2026 20:28 time frame. We will see some rfps later this year. We we don't know day exactly what those will bring saw who's your come out and announce in January if they plan to close Miriam + 23
But you know, I think that we're also seeing at the same point in time kind of come out and telling pjm. You've got to rewrite the capacity Market rules about you know, the motor rule or hey, we need these, you know, you look at the US grid
Our basic load we're replacing baseload assets cold new gas.
Mostly calling new with those are those are assets that have on switches that are being replaced by wind and solar generation that does not have an on-off switch and I think ferc is gentlemanly correct and they're concerned about this. The rules are being Rewritten first and pjm people. Some people are upset about this. Obviously it off Craig's challenges for those states that want to go more heavily renewable. But ultimately something has to back all this stuff up. Right and if you want plants to sit there idle and ready to go to back up this generation, you have to pay it and you have to pay for that through capacity payments. So we're seeing those rules change. We've seen the CEO of myself testify before Congress the day before Halloween that he can no longer guarantee that the lights can stay on 8760 hours of the year because he's having fog
Too many, you know reliability issues and not just on days of extreme weather just days where the sun doesn't shine in the wind doesn't blow suddenly a large portion of the grid doesn't show up and those days we have to rely upon generation that has on switches. Now, most of all the new bills are gas, especially in the mice of District.
but
We are seeing things where.
More and more people are getting concerned about the reliability of the grid. We saw California look heavily. It's probably has been more the front-runner staging pushing for more in global power. But now you have the issues with pjm or with
PG&E where you know their their response is in moments of high wind, we have to shut the lights off and that might be for three or four or five days at a time.
How do you run a business if you don't know if you have power?
So this is causing a lot of people to suddenly say well, hey, you know Renewables are good, but they also have their challenges are grid was not designed for that month and we're starting to see the problems that happen when you put an ever-increasing amount of Renewables on the system. These problems will get worked out. I think it will be through our capacity payment to pay to keep a slow generation online.
Whether that's cold gas or Nuclear Power Plant.
So by and large we are the opinion that news will run through, you know their license, but at the end of the license, they will not be renewed. I mean the labor cost for nuclear power plant. It's just to cost prohibited.
Coal Fired power plants have challenges as well.
But at the end of the day these plants are built there in the system. They work very well. You can store fuel on-site versus most gas plants don't have firm Transportation. So the event and we've seen this up in Michigan a couple of years ago. They had a gas line break during winter. So they had to shut all the gas transmission off to all the power plants.
You can call the load at that it's times and and so these are the scenarios that are I so operators are trying to understand trying to model and trying to figure out what they're all based off of saying the rules have to change because we have to Value assets that have on switches in store fuel on site.
Because that makes our bread more reliable and more resilient. So that conversation is happening. It does fly in the face of
summer what those in the Press would like to see so you don't typically see those headlines on front page news, so
So I think that answers your question.
It does this has been very helpful as always best of luck and appreciate the update and yeah, very helpful. Thank you.
Thank you, Lucas.
Yes.
If you have a question, please press * then 1.
Hey, this is Brent. If there are no further questions, we're going to thank everyone for joining our call and I look forward to talking to you all next quarter. Thank you.
This concludes our question-and-answer session. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.