Q2 2019 Earnings Call
[laughter].
Ladies and gentlemen, thank you for standing by your now rejoining the main conference.
And well go [noise].
Second quarter 2019 earnings call.
At this time all participants are in a listen only mode. Later, we will take questions instructions will be given at that time. If you should require assistance during the call. Please press star Zero as a reminder, this conference is being recorded I would now like to turn the conference over to our host Chief Accounting Officer, Jeremy Harrison. Please go ahead.
Thank you Katie.
Welcome to foresight Energy's earnings call for the second quarter 2019.
With me today is Rob Moore, our President and Chief Executive Officer.
Today, we will discuss foresight energy's operating and financial results for the second quarter of 2019 and update you on the current operations at our coal mines.
Following our prepared remarks, we will open the call to your questions.
Please note that this call contains forward looking statements that are based upon our current expectations and beliefs concerning future developments and their potential effect on us.
And there can be no assurance that the future developments affecting us will be those that we anticipate.
Our business and our financial results involve risks and uncertainties that could cause actual results to differ materially.
For managements current expectations.
For additional information regarding such risks please see our annual and quarterly reports filed with the FCC 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 a reconciliation 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 later date by a 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 Please note that the information may be outdated or incomplete.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.
I will now turn the call over to Rob Moore, Rob. Thank you German.
I'd like to begin by first expressing my condolences and the condolences of everyone at foresight energy to the families of.
Chris and Cameron Cline.
Those of you that new Chris It was fiercely loyal to all that knew him into the coal industry.
He was truly a tremendous individual that will be missed but always remembered and respected.
Turning our attention to four sites financial results this quarter continue to present several challenges.
Overall coal demand remains soft due to very low natural gas prices and mild temperatures here domestically.
Water levels remained high throughout the river systems and Swift current set the convent Marine terminal near the Gulf continued to cause vessel loading restrictions reduce draft levels limitation on vessel sizes and limitations on vessel movements.
Illustrating these difficulties darn attempted loading of a baby Cape vessel.
Eight tugs.
We are required to hold to ship against current while moring lines, we're still snapping.
In addition to these logistical challenges export prices remain depressed throughout the quarter with a pie to levels dropping into the high fortys for several days.
Challenged with these adversities foresight sold approximately 5 million tons of thermal coal and generated total revenue.
Of nearly $227 million, which resulted in adjusted EBITDA.
A $45.1 million.
Understandably at these volume and pricing levels. The results for each of these measures are declines over the prior year second quarter results.
Production remained strong during the quarter with the mine safely and efficiently producing 5.4 million tons.
This compares to 6.1 million tons in the most recent quarter ending March 31.
And 5.4 million tons in the second quarter of 2018.
During the quarter, we completed the two longwall moves at our sugar camp complex.
For both the M class and Viking mines.
The first of these moves was completed in early April with the second move completed in early May.
Following these longwall moves we have one additional moves scheduled in late 2019.
At Williamson's Mach mine.
We expect that to be a zero day walk across move.
Our mines continue to maintain that position among the most productive underground mines in the country as measured on a clean ton per man hour work basis.
Our two longwall complexes sugar camp and Williamson ranked as the first and second most productive larger underground mines in the United States generated 11.1.
An 11 tons per man hour worked respectively.
On a combined basis the foresight operations produced nearly 9.9 tons per man hour worked during the second quarter.
This compares to the national averages for underground mines of 4.8 tons per man hour worked.
These high levels of productivity allowed us to maintain a low cost of $24.64 per tons sold.
With approximately 75 cents per ton related to the development of the longwall panel.
At Hillsboro Deer run mine.
During the second quarter 2019, we exported nearly 1.7 million tons were over 33%.
Of our total sales volumes.
As mentioned previously Foresights export system was challenged by high and Swift water conditions on the Mississippi River.
And the continuation of loading restrictions at convent Marine terminal.
This resulted.
And the over 600000 tons of coal inventory that we have in storage at that facility today.
The most recent river conditions for cash should allow for some modest improvement and vessel loading for the second half of the year.
However, a pie to prices remain depressed due to strong renewable power generation.
Depressed LNG and natural gas prices in Europe and globally.
And significant exports of Russian coal into Europe .
We have seen some uptick in apiay two in recent weeks.
Due to.
Better temperatures in Europe .
Improved gas and power prices and anticipated cutbacks from producers in Russia.
However, we're not certain that this represents a significant upward trend in the near term.
Domestic coal markets remain subdued as a result of lack of generation demand due to.
Mild temperatures and low natural gas prices.
Updating you on the efforts at our Hillsboro complex, we continue to develop the longwall gate entries to allow for potential resumption of longwall mining at the deer run mine.
We are currently operating the continuous miner unit four days per week.
At one shift per day.
Additionally.
We've now obtained all necessary approvals from EMEA to recommence longwall mining operations.
Indeed, we have been testing the Hillsboro product at a number of domestic coal fired units with success.
With respect to our Hillsboro insurance recoveries, we continue to pursue all remedies available under our insurance policies related to the combustion event.
Due to the ongoing litigation with insurers that will be the extent of any public comments related to Hillsboro insurance matters at this time.
At this point I will turn the call over to Jeremy.
For further discussion of our second quarter financial results.
During the second quarter, we recognize coal sales revenue of 224.
Point $5 million on sales revenue of 5 million tons, what's generated adjusted EBITDA of $45.1 million.
This compares to nearly $270 million of coal sales revenue on 5 million 5.9 million tons sold.
Which generated adjusted EBITDA of $104.1 million than the prior year.
Second quarter.
The decrease in coal sales revenue was driven by the decrease in volumes sold combined with the 2.5% decrease on our realized price per ton.
The decreases in coal sales volumes and realizations were the result of reduced exports.
Due to the challenging logistical conditioning conditions and overall lower export pricing.
Consequently, adjusted EBITDA was impacted by these lower volumes and realizations.
You also recall in the prior year second quarter adjusted EBITDA included $44.1 million of insurance proceeds related to the combustion event at Hillsborough.
Our operating mines do continue to be among the most productive underground mines in the country with 5.4 million tons produced during the quarter and our cash costs remaining in the low $20.
Compared to the second quarter of 2018.
Transportation cost during the second quarter of 2019 decreased by approximately 9.9 point $2 million.
This decrease is driven by overall volumes tons sold during the quarter combined with a higher proportion of sales volumes shipped into the export market during the prior year period.
These decreases were slightly offset by increased costs, owing to higher river levels at the convent Marine terminal.
Finally from a cash flow perspective during the second quarter of 2019, we used 8.3 million.
Dollars of cash in operations, owing to the challenges we face.
We ended the quarter with a cash balance of nearly $3 million in total available borrowing capacity on our revolver of $44.7 million.
Capital expenditures totaled $26.9 million, and we paid down nearly $32 million on our long term debt and capital lease obligations, which included a $19.6 million payment related to our excess cash flow suite provisions and $9.3 million to pay off our sugar camp longwall financing arrangement.
With that I will turn the call back over to Rob for additional comments before we take your questions.
As a result of our operating and financial results for the second quarter of 2019, and current and expected market conditions.
We are updating our guidance for sales volumes adjusted EBITDA and capital expenditures.
Based on our current contracted position and outlook for the domestic and export coal markets. We expect 2019 sales volumes to total between 21 and 22 million tons.
With at least 6 million tons being sold to the export market.
At these volumes.
We expect to generate adjusted EBITDA, ranging between $240 million to $270 million.
And based on our current operating plans and recent capital spending.
We expect 2019 annual capital expenditures to total between 75 and $85 million, including projected spending.
At Hillsborough.
That concludes our prepared remarks, and with that I will turn the call back over to our operator, Katy and we'll take questions Katie ladies and gentlemen, if you wish to ask a question. Please press Star then one on your Touchtone phone.
You will hear a tone, indicating you've been placed in Q you may remove yourself from the queue at any time by pressing the pound key.
If you are using a speakerphone. Please pick up your handset before pressing the numbers once again, if we have a question. Please press star one at this time.
And our first question comes from the line of Matthew Fields with Bank of America. Please go ahead.
Hey, everyone.
It seems like year to date.
Your your deliveries to plants in the in the Illinois Basin and adjacent kind of states are doing okay, but your south eastern plants are taking significantly less.
Can you just talk about maybe a couple of your important plans like Chris or cross.
In South Carolina.
And sort of the developments that they're doing.
On may be shutting down the boiler.
Doing more natural gas switching.
In terms of first half deliveries, Matt I mean reality, our deliveries to customers in that region are down maybe 300 400000 tons total.
And.
Thats a result of some planned maintenance that certain of our customers had planned for over that period.
We expect them to make those volumes up over the back half of the year and in fact certain of those customers have already added the equipment into increase shipments over the back half of the year.
We have heard that certain of our customers are looking to move in that region. One in particular to gas.
At the end of 2020 timeframe.
But I don't see that as having a significant effect on the volumes and thats not a huge account for us.
So I'm not looking at that as a material development.
First half of the years, where I expected it to be in terms of our domestic customers and where.
Where were short I expect them to make it up and were seeing that happening right now.
Okay, great. Thank you and then can I ask you there or you got the permit to operate the longwall mine in the longwall unit in Hillsboro.
So.
Is that right.
You did hear that correctly is it is the longwall equipment, that's still down there presumably.
In okay shape and and.
How easily is it can you get that longwall back up and running.
You'll recall that that longwall was sealed in and that is the basis of our claim with our insurers. So that longwall equipment is not available and thats something that we have to resolve.
So is the idea to keep.
Using continuous mining for the foreseeable future.
No.
No. We are working towards a plan that would allow us to potentially resume longwall mining operations at Hillsborough, Although we're going to be.
As I've said before strategic about.
How we do that and when we do that.
Okay.
So the guidance that you you updated implies.
Based on your first half 130 to 160 million of EBITDA in the second half.
Compared to.
110 in the first.
Given where we know a PR to prices are.
How are you sort of reconciling.
The market improvement, you're calling for in the second half.
Well, we do have a pretty significant domestic book.
As I said I think during our last call and here again today, we expect to do.
About 6 million tons into the export we're already at 4 million tons of export. So we don't have a lot of exposure on the export. This time, however, I do believe.
That we could see some uptick on the API too in that fourth quarter timeframe I don't think its going to be.
A situation, where we see prices really take off I think it's going to be a gradual increase we're basing our guidance on the core current forwards, but I do believe there are some upside to those forwards.
As it relates to the real impact on EBITDA, it's really the cost side of our business, where we have been a little higher cost first half of the year with the two longwall moves we had some difficult conditions in class that we battled through that affected us for probably two to three week period. Those conditions have improved and we don't see anything that's going to impact us and those conditions were associated with is really the start up of that longwall panel that we moved into their in the may timeframe.
With that behind US. These mines are are poised to run at a really low cost the rest of this year.
And are you anticipating lower trends transportation costs in that guidance number two.
They'll be lower transportation costs, just based on the sales mix and what's going to the export and whats going over to the.
To the river once we surpass a certain level of exports than we do see a nice reduction in the throughput rates.
That's associated with our logistics chain going or the export market.
Okay, Great and then just a couple on the balance sheet.
Based on the credit agreement, it's our understanding you don't have a whole lot of RP capacity to buyback bonds can you can you. Please confirm what your ability is to buyback.
Your second lien.
We have around $25 million of RP capacity Thats available there are few builder baskets in there.
But give us a little more.
A little more juice, but it's around 25 million.
Okay, Great and then thank you very much and then lastly from me.
No the revolver Covenant is three and a half times net first lien.
Yes, given your guidance, you're going to get pretty close do you have a plan on how to maybe.
Address that get that relaxed or or.
How do you plan on dealing with that covenant.
Well I don't think we're going to be in a situation, where we trip that covenant through the end of the calendar year, and we're going to continue to monitor and manage our way.
Through that through that issue.
Okay. That's it for me thanks, and good luck.
Thanks, Matt.
And our next question comes from the line of Merit Mary Lee with Investor Network. Please go ahead.
Ed.
[noise].
Kinko's comes from the line of John Bridges with JP Morgan. Please go ahead.
Hi, everybody I was just curious.
Your host for a house how twice in the past and I understand I was just wondering if you were putting in any new policy started years whatever.
Two.
Reduce the risk going forward at all.
Manage any further combustion events.
Just curious.
The plan that we have put in place.
Is a bleed or less entry system.
There are engineering controls that will help us.
Identify any issues that we have.
I don't know that you can ever.
Prevent something like that but we are definitely taking the steps that we believe are needed to ensure safe operations at Hillsborough and reduces the possibility of a re occurrence.
Interesting.
Cool, Okay, well good luck guys. Thank you.
And our next question comes from the line of Kenyan Meyer with I.W.D. capital management.
Please go ahead.
Hi, Thanks for taking the questions I had a couple of one was do you have a rough estimate of what the unrestricted sub Hillsboro is effect was on EBITDA.
It's about 75 cents per ton.
On roughly 5 million tons.
Okay.
And then and then in terms of Hillsborough. If you guys did end up bringing Hillsboro back online would you shift production from other high cost mines due to the sub 20 dollar cost or.
I would just be incremental.
So that's a question that we got last time and I think if people study the cost structure.
Oh sure Pam complex is.
Capable of operating at that same level.
As Hillsboro, and we're seeing that.
Williamson is capable of operating at that level and we're seeing that so I look at Hillsborough as.
Those incremental to what we have.
Okay.
That makes sense.
And then I know you guys does that answer this question in the past they just to re ask it again, how much incremental capital would be required to kind of get the longwall started at Hillsborough County, I assume including shields and its financing currently available to you guys. If you wanted to restart.
Yes for a system.
That is identical to what we lost were looking at somewhere around $100 million plus for that system.
So there are ways to finance that.
That's what we're looking at.
Okay.
And then shifting gears to the sort of export market in terms of logistics is there any sort of sharing of cost with the take or pay contract due to the inability to ship export tons at port facility.
<unk> the contract does provide for some sharing for example, when draft levels are not at the.
Optimal levels, which are our 47 feet. There is some sharing there. There is also some sharing of the pilot costs et cetera.
Okay. That's helpful and then sort of a more broader question do you guys think Oh in terms of the Illinois basin with the Illinois basin benefit from any additional consolidation.
Yes, I believe that every basin would.
Okay.
And then I guess my last question is did you guys give us an updated balance on where like the irrs are on the common unit currently.
Oh, the Arrearages on the Commons through the second quarter, our right about 360 million.
Fantastic Okay, great. Thanks for the answers okay.
And our next question comes from the line of Matt Farwell with Imperial capital. Please go ahead.
Hi, good afternoon.
Could you just comment on your 2020 contract book and whether or not.
You believe you can so 22 million tons next year.
You know based on what how you see things today.
Yeah, right now, Matt I've got about half of the book.
Signed up and I don't see any reason why we can't why we can't get to those levels.
In terms of the the Netbacks that you're seeing.
I think you mentioned in the last call sort of low Thirtys high Twentys is that what you're seeing now and are you looking at sending coal into Asia or are you still focused on if you go to market.
Well, we are shipping co. everywhere that we can find a home for it man in the World, We're moving coal into South America or moving coal into Asia.
We're still moving coal into to Europe , or the net backs on the export side or not at those levels today, what they were when we last spoke.
Those netbacks or less and that's why you're seeing us only push out on another 2 million tons over the rest of this year with.
More than call it half of that already been hedged.
So that's that's what we're seeing right now the the netbacks are not at that level.
Oh, yes, if the international market is not strong next year and you think you can place the same amount of volumes I guess that implies that you plan to take share in the U.S. is or in domestic markets, where with domestic customers or with with other plants. You haven't sold two before can you elaborate on on what might happen and domestically.
Well we are being.
We're pretty successful right now in terms of taking a RFP that are out there and we continue to push our product into.
Markets that we haven't been in historically and we are seeing success there. So it's.
As I've told people with these assets that we have we can compete.
Yeah against every other basin out there and.
Where we're able to produce.
That gives us a benefit in terms of getting our coal into into plants. If these export markets aren't there.
Then you know, we're we're poised to take domestic share and that's what we're going to do.
Right now at your existing customers.
Generation was lower in the quarter, how is their inventory position looking.
Could you repeat that Matt.
How is there your your your existing customers you continue to ship coal and and but their generation consumption was obviously lower in the quarter.
Are there are you seeing your customer inventories, reaching a more normal levels or do you see them in a deficient state.
No. There there are normal levels and I think if you just look at how they have gone about their procurement.
This is kind of what they plan for.
And you know we're still.
Able to sell the 2020 2 million tons.
Albeit theres 6 million going export, but based on what we're seeing we're able to develop new markets.
You know for next year.
With inventories are at normal levels. So.
I'm, not seeing where any ones being deficient in terms of where they are at inventory wise I think everyone would agree that coal generators are all pressured right now just given where Nat gas has been and we've not had great weather. It was hot for a couple of weeks, but it's not been consistent over over the country and with gas where it's at it's gonna be just gonna be challenging the capacity rates on these plants are going to be something that people watch.
Right.
In terms of the third quarter were you affected I know the river levels were high in July where you are you're going to be affected by that in the third quarter as well.
Yes, Yeah. The river levels continued to be high our draft levels. Just this past weekend were moved from 44 to 45 feet, that's still to be below where we want to be that affects the amount of volume. We can put into vessels. There are still restrictions that southwest pass where vessels cannot move other than during daylight hours. So we hope that those are going to be lifted soon but yeah, we're gonna be impacted in Q3.
He's through with your or your fairly sizable revolver draw on the quarter. Your liquidity is tighter what are the other sources of liquidity that we're not thinking of that we should be aware of.
No I think that you know people know, where we can gain liquidity and that's that's what we have available to us I think we have some good partners that we work with and there may be ways to improve liquidity by working with our partners and we'll obviously, we're gonna be evaluating any opportunity we can.
Great. Thanks for taking my questions. That's all I have.
Okay.
And once again, if youd like to ask a question. Please press Star then one well go to the next line of Neil.
Winger with Foxhill capital Partners. Please go ahead.
Hi.
Good afternoon can you just.
Give us a little bit more granularity on your guidance in the second half.
How you get to the 131 60 in the second half. If you said you can't predict where a p. I too.
Is ah.
It's going to be or somebody ask a different way what level, what they'd like to does that implicitly pricing.
Yeah, I don't think I started couldn't predict I said based on our guidance I was using current forwards for a p. I too what I expected to see improvement over that and I also indicated that we expected to see significant cost improvement at the operations given that we've got the two longwall moves out of the way, we're not dealing with the conditions.
And then class that we had been in May during the start up of that longwall. So you should see a pretty significant drop in the in the cost over the second half of the year of the operations and the forwards on the I two are what we're using today for the guidance.
So using a what the forward curve is currently for guidance that is correct.
Okay. Thank you.
You're welcome.
Next question comes from the line of Arthur calibre tree knows with AMC capital. Please go ahead. Thank you for taking my question. Just a question earlier I consolidation and like you said to the question you're looking at everything that makes sense for I forgot what you said and I look at Peabody do their deal with arch it wasn't like it consolidation in the classic sense for one company buys another joint venture are you any thoughts you have any type of structure like that in the in the basin that you're in.
If you could talk to that that would be to just get your thoughts. Thank you.
Sure sure I think that.
But as I said earlier, I think all basins could benefit from strategic combinations, whether it be through merger and the traditional form or through JV opportunities and.
I think there are more.
Entities that are evaluating and considering those types of transactions.
Oh, I think people recognize that there is benefit to those types of combinations. So.
No we're not.
Actively engaged in any any discussions, but it's something that I think as an industry people.
We are looking at more frequently than they have in the past and we'll see what transpires over the next three to 12 months, but I would expect to see some additional consolidation in the space.
Okay, and then just a financial follow up on an earlier question. The restricted the amount of bonds you could buy was 25 million that's $25 million not par.
Right just so I understand that's that's $25 million total.
Whatever that was by the trading it's yes, that's right. Okay. Good. Thank you very much that's all I've got.
Well.
Is there any additional questions. Please press Star then one at this time.
[noise].
Yeah.
Our no further questions. Please continue.
Okay, we'd like to thank everyone for joining us this afternoon and look forward to speaking with you next quarter.
Thank you.
Ladies and gentlemen, this conference will be available for replay after three PM today through August 20, Onest at Midnight, you may access the ATM T. <unk> executive replay system at any time by dialing one 804, 756 701 and entering the access code 470 318.
Those numbers again are one 804 756 701.
Access code 470, 318 that does conclude our conference for today.
You for your participation and for using 18 T. teleconference service you may now disconnect.
[noise].