Alliance Resource Partners LP (ARLP) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the quarter three 2007 Alliance Resource Partners LP earnings conference call. My name is Michelle and I will be your coordinator for today. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to your host for today, Mr. Brian Cantrell, Senior Vice President and Chief Financial Officer. Please proceed, sir.

(technical difficulty) only assets are its ownership interest in ARLP, our comments will be directed to ARLP's results and outlook unless otherwise noted.

Before we begin, I want to remind everyone that some of our remarks today may include statements which are not historical in nature and may concern future expectations, plans and objectives of the partnerships regarding their future operations. Such comments constitute forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 and are based on the beliefs of the partnerships and those of their respective general partners and management, as well as the assumptions made by and information currently available to them.

Although the partnerships, their general partnerships partners and management believe that forward-looking statements are reasonable at the time such statements are made, no assurances can be given that such statements will prove to be correct. These forward-looking statements 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 the partnerships' press releases dated October 29, 2007.

If one or more these risks or uncertainties materialize, or if underlying assumptions prove incorrect, actual results may vary materially from those the partnerships anticipated, estimated, projected or expected. In providing these remarks, the partnerships have no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

We will also be discussing non-GAAP financial measures. Definitions and reconciliations of these differences between the non-GAAP financial measures and the most directly comparable GAAP financial measure are contained at the end of the ARLP press release, a copy of which has been posted on the partnerships' website and which was furnished to the SEC on Form 8-K.

Also on the call this morning is Joe Craft, our President and Chief Executive Officer. We will begin with some formal remarks and will then be happy to take your questions.

At this time, I would like to turn the call over to Joe for his opening comments. Joe?

Thank you, Brian. Good morning, everyone, and thank you for joining our third-quarter 2007 earnings review. As reported earlier this morning, our strong performance in the quarter allowed ARLP to post record operating and financial results through the first nine months of 2007.

It is particularly gratifying that we delivered this record performance while managing an extremely challenging regulatory environment and cost pressures that are starting to impact industrywide coal supply. This reduced supply, combined with the increased demand for export coal, has contributed to an increasingly robust market.

In addition, demand for scrubber-quality coal continues to grow, and customers are increasingly willing to make favorable long-term commitments for Illinois Basin and Northern Appalachia high-sulfur coal.

During the quarter, ARLP essentially sold out its 2007 production, and we made commitments to sell 4.7 million tons in 2008 and 2 million tons in 2009. We completed negotiations with three new customers in this process, increasing our market share in the Illinois Basin. To meet these new obligations, ARLP will invest $10.5 million in new capital at our Western Kentucky operations over the next four to six months to add 1 million tons of annual incremental production.

In addition, the significant increase in spot market prices recently and the favorable long-term supply/demand fundamentals for high-sulfur coal gives us encouragement that we will be successful in securing mine opening contracts in a timely manner for our various growth projects we have previously discussed. We began construction of the slope and shaft at our River View project in Western Kentucky and responded to several customer solicitations for River View coal during this past quarter.

The new rail facility at our Gibson County complex also went into operation during the quarter and will provide expanded market opportunities for both our existing Gibson mine and the Gibson South development project. In Northern Appalachia, permitting and marketing efforts continue to move forward at our Tunnel Ridge and Penn Ridge projects.

At this time, I'm going to turn the call back to Brian for a review of our financial results, after which I will return to discuss our outlook for the rest of the year. Brian?

Thank you, Joe. As the results we reported this morning indicate, our strong financial and operating performance in 2007 continued during the third quarter. ARLP's net income for the 2007 quarter increased slightly to $38.7 million or $0.83 of adjusted net income per diluted limited partner unit compared to $38.6 million or $0.88 of adjusted net income per diluted limited partner unit in the 2006 quarter. At the same time, EBITDA increased 9.2% to $63.7 million compared to EBITDA of $58.4 million for the same quarter last year.

Our results for this quarter continue to be impacted by increased compliance capital and expenses, as well as reduced productivity attributable to recently enacted federal and state mine safety regulations, and in particular MSHA's emergency temporary standard relating to seal regulations. During the 2007 quarter, we estimate ARLP incurred incremental operating expenses of approximately $0.65 to $0.75 per ton sold as a result of our increased compliance efforts.

We currently expect incremental compliance initiatives will continue into the first quarter 2008, but believe the financial impact of these ongoing initiatives will be somewhat less than what we have experienced so far this year. The increased operating expenses I just described more than offset the $2.8 million net gain from sales of surplus equipment we realized during the 2007 third quarter. As a result, overall operating expenses during the quarter were generally in line with our expectations.

Revenue in the 2007 third quarter increased 6.5% to $260.5 million compared to $244.7 million from the same period last year. Increased coal sales volumes and higher average coal sales prices per ton both contributed to higher revenues during the quarter. In addition, synfuel-related operating revenues increased $3.6 million to $6.8 million as the synfuel facilities remained in operation throughout the 2007 third quarter, despite high oil prices. Current indications are that the owners of these facilities intend to continue producing synfuel during the fourth quarter, but at a rate of about one-third of the 2007 third quarter.

ARLP's operating expenses increased to $176.9 million in the quarter compared to $162.2 million in the third quarter of 2006. As expected, expenses at our Mettiki complex increased approximately $11.6 million quarter over quarter, primarily due to the higher operating cost structure of mining in West Virginia during the third quarter of 2007 compared to mining in Maryland during the comparable quarter last year.

Operating expenses also increased at our Elk Creek mine by $3.7 million due to the mine operating at increased production capacity in the third quarter of 2007 compared to development activity in the 2006 quarter. Continuing pressures on labor-related expenses and materials and supply costs also contributed to increased operating expenses in the 2007 quarter.

Looking now at our regional performance, increased production at the Elk Creek and Pattiki mines drove coal sales volumes higher in the Illinois Basin, while Central Appalachian coal sales volumes increased due to improved mining conditions at MC Mining. Lower coal sales volumes in Northern Appalachia during the 2007 quarter reflect the impact of accelerated production levels at our Mettiki mine in the 2006 quarter as we prepared for the transition of longwall operations to the Mountain View mine during the fourth quarter of last year.

Average coal sales prices increased $1.79 per ton in the 2007 quarter to a record $38.91 compared to $37.12 in the 2006 quarter. Higher Northern Appalachian prices reflect the benefit of new coal sales contracts for sales from our Mountain View mine and effectively offset the previously discussed higher cost structure of mining in West Virginia compared to Maryland. Also, pricing increased 8.4% in the Central Appalachian region as a result of improved contract pricing in the 2007 quarter compared to the 2006 quarter.

As I mentioned previously, increased costs and reduced productivity associated with new mine safety standards resulted in higher operating expenses in all regions during the 2007 quarter and in particular in our Central Appalachian regions. Increased expenses in the Northern Appalachian region reflect the higher cost structure of the Mountain View mine.

Finally, ARLP successfully amended its revolving credit facility during the 2007 quarter. With this amendment, we increased our existing $100 million facility to $150 million and extended the term from April 2011 to September 2012. In addition, the amended credit facility can be increased up to $250 million, subject to lender approval. This amendment enhances our flexibility as we consider the future capital required to pursue our growth initiatives.

With that, I will turn the call back to Joe for his guidance, review and closing comments. Joe?

Thank you, Brian. ARLP is currently expecting 2007 coal sales in the range of 24.7 to 25.1 million tons. Looking ahead, we have concluded negotiation for sales of approximately 23.8 million tons for 2008, 17.4 million tons for 2009 and 15.5 million tons for 2010. Approximately 2 million tons, 8.2 million tons and 9.7 million tons of these future sales volumes remain open to market pricing in 2008, 2009 and 2010, respectively.

Based on our results to date and expectations for the remainder of 2007, we are tightening our guidance for coal production revenues, EBITDA and net income. ARLP now expects the following ranges for 2007 -- coal production to be between 24.3 and 24.5 million tons; revenues, excluding transportation revenues, of $985 million to $1 billion; EBITDA of $255 million to $265 million; and net income of $155 million to $165 million. Capital expenditures in 2007 are now estimated in the range of $170 million to $180 million.

We have not finalized our planning process for 2008. However, I would hope that production will increase by 1 to 1.5 million tons in 2008 compared to 2007. And our margins are expected to be comparable to 2007, excluding the synfuel benefit, which expires at the end of 2007.

As reflected in the press releases for both ARLP and AHGP, and in keeping with our practice of considering changes to distributions on a biannual basis, the Board of Directors of each partnership maintained unitholder distributions for the 2007 third quarter at an amount equal to the previous quarter. The ARLP Board declared a quarterly cash distribution of $0.56 per unit for the 2007 third quarter, which represents a 12% increase over the 2006 third quarter. AHGP Board also declared a quarterly cash distribution for the 2007 third quarter of $0.265 per unit, which represents a 23.3% increase over the cash distribution paid for the third quarter of 2006.

That concludes our prepared comments, and we will now open the call to your questions.

(Operator Instructions). Darren Horowitz, Raymond James.

Good quarter. Joe, you mentioned earlier on in your commentary about the favorable long-term commitments that you guys have received for production out of the Illinois Basin and for Appalachian coal. Can you give us a little bit more detail as maybe to the tonnage committed or the duration of those contracts?

Most of those contracts are Illinois Basin, and the duration is anywhere from one to three years. The volume, we basically don't break that out, but we are effectively sold out of the Illinois Basin for 2007 and 2008.

That's helpful. Thanks. And then my next question, maybe for you, Brian, when you are looking at forward commitments on tonnage, obviously, as you pointed out, you've got the majority of next year's tonnage already committed, with a larger percentage of '09's production open. What are you guys seeing right now in the marketplace when you are discussing price with customers as it relates to maybe booking up more of that 2009 production? Or at this point, is it a matter of you guys trying to maintain some spot market exposure with the expectation that prices are going to increase as you progress over the next six to 12 months before committing that tonnage?

Let me go back, and I want to clarify one thing I just said. On the Illinois Basin, I'm specifically speaking on high sulfur, not the low-sulfur coal we've got in the Illinois Basin as far as our commitments for 2008. And I think relative to our outlook for 2008 and 2009, if you look in Central App, our expectation has been that the market was going to move higher, which it has done. We are continuing to monitor that market, and we will make commitments pretty much on a blended basis. I don't think we're going to try to gauge exactly what the market is going to do, but we will start making commitments on a progressive basis into the 2008-2009 time-frame.

I think one of the main things that's happening in Central App is a lot of the utilities still have yet to decide whether they are going to go Central App or Illinois Basin. And that has -- we're waiting to get some signals from them before we can really determine what our final strategy is going to be, to be candid.

Relative to Illinois Basin, we are actively engaged in RFPs for 2009 and beyond, which as I mentioned last quarter and we're still on track to try to get some clarity on the future sales opportunities in that time period, sometime by the end of this year or the first quarter of next year. So we do believe that we're going to get some clarity on our ability to sell tonnage in the 2009 to, say, 2012-type time-frame that will allow us to make the final decision on our River View project. Things look very encouraging at the moment, but we have yet to finalize those negotiations.

That's helpful. That was actually going to be my next question. I was hoping to get a bit of an update on River View and Gibson South as to when you guys think production is going to start ramping up there. I think the last time we spoke, we were anticipating the first quarter of '08 and maybe the third quarter of '08, respectively. Is that still the timeline?

For River View and Gibson?

Yes.

I think you're a year off. I think it's 2009-2010 time-frame.

Excuse me, first quarter of 2009 and third quarter of 2009. I apologize.

Right, right.

But that progression is still on track?

We need to get commitments by the first quarter of '08 to be able to keep on that timetable. And we are hopeful that that will happen. Just have to wait and see.

And then my last question is as it relates to the outside purchases for the quarter, which was about $3.7 million, half of what it was last quarter. Can you just give us some clarity as to which area exceeded your production estimates to drive that lower realized outside purchase number?

We had a contract that expired at the end of June, where we were buying coal from an outside third party. So it wasn't really driven by our existing production. It was more by the termination -- the expiration of that specific contract that we did not renew when it expired at the end of June.

Okay, so then on a go-forward basis, it's probably likely sequential results exemplify what you guys just put up in this quarter because that contract is out, or do you think that you may enter into another contract similar?

More the former than the latter.

Thanks, guys. I appreciate the clarity.

(Operator Instructions). Mike Blum, Wachovia Securities.

Just a couple questions. Can you just elaborate a little bit in terms of adding that incremental production -- what exactly is involved? Are you just adding equipment? Do you need to hire additional people?

Yes, we are adding a fourth unit to the Elk Creek. So the dollars that we talked about, $10.5 million, essentially all of that is rolling stock, continuous miners, shuttle cars, roof bolters, etc. And we are hiring people to staff that unit, and we are also converting two of our units, one at Warrior and one at Dotiki, to super units, that will mean incremental people and some incremental equipment.

Okay. And I guess in that regard, can you talk about, within that context, how difficult it is to get people and equipment? And what I'm really getting at is, if you are able to get commitments for the projects that you're talking about, how big a challenge will it be to secure people and equipment for those projects?

The equipment is secured, so that is already taken care of. The people -- we're in a hiring process. We've got very good response for inexperienced miners, so we do have a training effort that will be ongoing. And then as far as experienced miners, we continue to have success, and you can always have more than you need sometimes, but we have been able to attract the talent we need to be able to get it done at this stage of our growth plans.

Great. Last question is, you said in the past in terms of the acquisition market, you've been more focused internally, but are you seeing anything different there? Is there any change in the stance there?

We're continuing to evaluate. There are opportunities, I guess, is the best way to say. I think that there will be things for us to evaluate and examine. I think as far as our focus and our priorities, it hasn't changed, but we will definitely look at M&A opportunities if it makes sense for a long-term investment for our unitholders.

Paul Forward, Alliance Resource Corporation.

Actually, I'm not with Alliance, as you know, but I'm with Stifel Nicolaus. Thanks. Just a couple questions here. We know that the export markets are extremely strong right now. How limited are you in your ability to ship coal to the export markets from Penn Ridge, Tunnel Ridge, Mountain View, and is it a contract constraint, is it a transport constraint that might keep you from moving that coal overseas if the market still stays strong?

Specific to Mountain View, we can move coal to that market, and we have made some provisions that allow us to participate in that market with our customer, because we do have an agreement with Dominion. But we have reached an understanding to allow us to participate in that market somewhat, which can be done out at Mountain View, for sure. We can sell coal out of our Illinois Basin operations unrestricted relative to going out of the Gulf. Going out of East, we can likewise sell coal in the international market. Transportation logistics are something we've got to deal with, just back to capacity, given the increased demand there.

Relative to Penn Ridge and Tunnel Ridge, of course those mines aren't operating today. But I would say that those particular properties will be more focused on the barge markets and going up and down the Ohio River as opposed to the international markets. All of these coals, with the exception of Mountain View -- Mountain View does have some metallurgical characteristics to it -- all of the other coals are steam coals that we would be selling into the export market. It's not going to be a large percentage of our sales, however. So I don't want to mislead people in that regard. But we definitely are benefiting from the increase in the export demand, and we have been able to take advantage in a small way with small amounts of tonnage, but at the prices that they are going for, it's very -- it's additive to what we're doing.

Even if you're not shipping directly, I guess there's got to be some nervousness among your customers that there is this, I guess, unexpected new flow of coal out of the country. Do you find that when you talk to your customers now, there's a little bit more urgency on their part to get commitments of coal for the next few years, or do they still feel like with the stockpile levels pretty high still, do they have the upper hand, in their view?

As I mentioned in earlier, I think we are seeing utilities more willing to start to focus on making commitments for their scrubbers. And they are seeing the tightness in the marketplace, and they are ready to start beginning to lock up demand -- lock up the supply for their particular investment that they've made. I wouldn't say that they are in a panic mode, but they are definitely more willing to sit down and start talking about making a term commitments to encourage the supply to come on the market to try to balance what is today, especially in [Pit 8], an undersupplied marketplace for the demand for that product.

In Central App this quarter, there was that big move up quarter on quarter in expense per ton, and I was just wondering if you might be able to break down just how much of that is just this sort of typical third-quarter increase that we see across the whole industry? How much of that was the spending on worker safety initiatives? And if it is spending on worker safety initiatives, to what extent is that expense a onetime issue and to what extent can we expect that to be a recurring item in Central App going forward?

I think if you're looking compared to a year-ago quarter or even the second quarter, if you look at our second quarter, we had the settlement with the mine fire situation that helped our costs in the second quarter. So if you normalize that out, our costs actually were better this quarter than they were the second quarter. However, the second quarter and the third quarter, we have been significantly impacted by the regulatory actions of MSHA, and I mean significantly, to where we have had to comply with the ETS, the emergency standards on the seals.

So a lot of that we hope is behind us. We do expect it will continue to have expenses that are more of a onetime nature through the end of this year and maybe into a part of the first quarter. But by the end of the first quarter, we believe that will be behind us and that we will be in full compliance without having to monitor behind the seals. We will have replaced all our seals and that cost will be behind us. But it is more of a onetime issue, even though it has expanded over three quarters in order for us to have the time to get these seals built to the standards that continue to evolve as we negotiate with the regulatory agencies.

So as we look forward into 2008, we would expect to not have this significant increase. We are definitely still going to have increases because the standards are just that much higher, but not to the level of materiality that we've seen over the last two quarters, speaking to the third quarter and the second quarter of 2007. I don't know, Brian if you've got any more to add?

No, that's right. You've got to go back -- we've had to go back through and replace existing seals. So those are really all truly onetime cost-type issues. Going forward, though, as Joe said, as we build new seals into the future, the costs associated with those newly constructed seals will clearly be higher than they have been in the past.

As there are no further questions at this time, I will turn it back to management for closing remarks.

Everyone, we appreciate your continued interest in both Alliance Resource Partners and Alliance Holdings, and we look forward to visiting with you again soon. Thank you very much.

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