Alliance Resource Partners LP (ARLP) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the quarter one 2008 earnings conference call for Alliance Resource Partners LP and Alliance Holdings GP LP. (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.

Thank you, Michelle, and welcome, everyone. We appreciate your interest in Alliance Resource Partners, which we will refer to as ARLP, and Alliance Holdings GP, which we refer to as AHGP. This morning we released our 2008 first-quarter earnings, and today we will discuss the results and our outlook for 2008. Following our prepared remarks, we will open the call to your questions. I'll take a moment now to run through a few reminders before we begin.

First, since AHGP's only assets are its ownership interest in ARLP, our comments today will be directed to ARLP's results and outlook, unless otherwise noted. In addition, please be aware that some of our remarks may include statements which are not historical in nature, and may concern future expectations, plans and objectives of the Partnerships regarding their future operations. Any 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 assumptions made by and information currently available to them. Although the Alliance Partnerships, their general 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 April 28, 2008. If one or more of 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 obligations to publicly update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise.

And finally, we will be discussing certain non-GAAP financial measures. Definitions and reconciliations of the differences between these non-GAAP financial measures and the most directly comparable GAAP financial measure are contained at the end of the ARLP press release, which has been posted on our Web sites and furnished to the SEC on Form 8-K.

Now that we're through with the preliminaries, I'd like to turn the call over to Joe Craft, our President and Chief Executive Officer.

Thank you, Brian. Good morning, everyone. Thanks for joining our first quarter 2008 earnings review.

ARLP once again opened a new year with a strong start, as we set records for coal produced and sold in the first quarter of 2008. By taking advantage of opportunities created by increasingly strong demand for our product, ARLP also posted record revenues and increased EBITDA for the quarter. As expected, our net income in the 2008 quarter was lower due to the loss of synfuels benefits and increased DD&A resulting from continuing investments in ARLP's growth projects.

During the quarter we also made significant progress on ARLP's future growth initiatives, and I'd like to take a moment to expand on that progress.

Positive supply demand dynamics in the global coal markets continue to support favorable supply demand fundamentals for US coal producers in general. For ARLP specifically, as it relates to our organic growth projects, demand for scrubber quality coal continues to increase and has exceeded our initial expectations. As a result, we are in the process of completing negotiations for several multi-year coal supply agreements, sufficient for ARLP to accelerate our growth initiatives in Western Kentucky.

Toward that end, last week we announced the opening of the River View mine and expansion of production capacity at our Warrior operation. With respect to River View, ARLP began constructing the slope and shaft of this project during the third quarter of last year in anticipation of demand growth for its Illinois Basin coal. We initially expected to start the River View mine as a four-unit operation, producing approximately 3 million tons per year, with the ability to expand annual production up to 6.4 million tons by gradually adding additional units and preparation plant capacity over time as the market would permit. Customer demand for our Illinois Basin coal, however, has proven to be stronger than we expected. As a result, we now plan to construct River View as an eight-unit underground mining operation, capable of annually producing up to the 6.4 million tons of coal at full capacity from the start. We currently expect coal production from River View to start sometime in the second quarter of 2009, with sales from River View to begin in the fourth quarter of 2009, once the preparation plant construction is completed and ramped up to full capacity into late 2010 or early 2011.

To meet customer demand, ARLP will also bring a fifth continuous mining unit into operation at our Warrior complex. Production from this unit is currently scheduled to begin in the first quarter of 2009 to coincide with completion of a new coal preparation plant at Warrior.

We also continue to make progress towards securing the coal supply commitments necessary to support the development of our Tunnel Ridge, Gibson South and Penn Ridge projects. Based on current customer indications, we remain optimistic about these growth opportunities, and would expect to be in a position to make final construction decisions on these projects later this year.

At this time I'll turn the call back to Brian for a more detailed look at our financial results, after which I will return to discuss the outlook for ARLP.

Thank you, Joe. As the results we reported this morning indicate, ARLP opened 2008 with continued strong financial and operating performance. We reported increased EBITDA in the 2008 quarter of $68.8 million compared to $68.1 million in the 2007 quarter. As we anticipated, net income fell in the 2008 quarter to 43.2 million, or $0.93 of adjusted net income per diluted LP unit, compared to 45.5 million, or $1.03 of adjusted net income per diluted LP unit in the 2007 quarter.

As you heard Joe mention earlier, our results for the 2008 quarter reflect the loss of synfuel benefits due to the expiration of the synfuel tax credit at the end of last year. For the 2008 quarter, the loss of synfuel-related benefits impacted comparative EBITDA and net income by approximately $8.9 million and $8.1 million, respectively.

ARLP reported record revenues of 283.6 million in the 2008 quarter. This is an increase of 10.3% over the same quarter last year. Our improved revenues are primarily due to increased coal sales volumes, which were up 13.2% to a record 7 million tons. Higher coal sales volumes came primarily from our Illinois Basin operations, and reflect production capacity expansions and increased sales from coal inventory to meet customer demand in that region. Revenues also benefited from improved coal sales pricing in each of our operating regions, particularly in the Central and Northern Appalachian regions, where we were able to capture opportunities in the high-priced spot and export markets.

These quarter-over-quarter increases more than offset the loss of approximately $6.2 million of revenues from coal brokerage and $7.2 million of revenue from synfuel-related activities in the 2007 quarter. Primarily as a result of record coal production volumes, which were up 4.7% to 6.9 million tons, our operating expenses in the 2008 quarter increased to 192.6 million, compared to 167 million in the 2007 quarter.

Increased operating expenses in the 2008 quarter continue to reflect pressures on labor-related expenses, as well as higher costs for steel and other consumables on maintenance costs and materials and supplies. Our operations also continue to be impacted by higher costs and reduced productivity due to increased regulatory compliance requirements.

General and administrative costs rose in the 2008 quarter due to increased staffing levels as a result of ARLP's growth initiatives, as well as higher incentive compensation expenses. Recent capital expenditures related to our growth initiatives and infrastructure improvements also drove DD&A up by approximately 3.5 million to $23.3 million.

Turning now for a moment to our current capital program, with the River View mine opening and production capacity expansion at our Warrior complex, we are now estimating 2008 capital expenditures in a range of 200 to $220 million. ARLP enjoys strong internal cash flow and significant debt capacity available on our balance sheet to meet anticipated capital requirements, and as part of our financing strategy, we currently intend to access the debt markets during the second quarter of this year.

With that I'll turn the call back to Joe for his guidance review and closing comments.

Thank you, Brian. As I mentioned earlier, long-term supply demand fundamentals for the markets we serve remain extremely positive at this time. Even though my earlier comments were more directed toward our Illinois Basin markets, the same is true for our Eastern US production regions.

In the East, year-to-date, ARLP has benefited from these strong fundamentals by selling some coal into the high-priced spot and export markets during the 2008 quarter. We have also secured commitments for additional sales into these markets over the balance of 2008 and into 2009, and we'll continue to opportunistically pursue similar transactions as they arise. Although we do not typically sell significant volumes into these markets, with pricing in excess of $100 a ton in some cases, these transactions are currently very attractive.

Reflecting our year-to-date results and current projections, we are increasing guidance ranges for 2008. ARLP is currently estimating coal production in a range of 26.4 to 27.3 million tons. Revenues, excluding transportation revenues, are in a range of 1.03 to $1.1 billion. EBITDA is in a range of 250 to $280 million, and net income is a range of 130 to $160 million.

Keep in mind the guidance ranges for 2008 reflect the loss of approximately $31.3 million for EBITDA and $28.5 million for net income from benefits realized by ARLP in 2007 from synfuel-related activities. So, despite the loss of synfuel benefits, our expected increase in production should allow us to finish 2008 with financial results comparable to 2007.

Looking beyond 2008, we anticipate total average realizations to increase over current levels by 15 to 20% in 2009 and 25 to 35% in 2010. Production is expected to grow approximately 7%, or 1.8 million tons, in 2009, and approximately 15%, or an additional 4.4 million tons, in 2010 as a result of the capacity additions discussed earlier at our Warrior and River View operations. Hopefully, we will add to these projections by staying on track with our other organic growth projects.

Finally, 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 2008 quarter at an amount equal to the previous quarter. The ARLP Board declared a quarterly cash distribution of $0.585 per unit for the 2008 quarter, which represents an 8.3% increase over the 2007 quarter. The AHGP Board also declared a quarterly cash distribution for the 2008 quarter of $0.2875 per unit, which represents a 15% increase over the cash distribution paid for the 2007 quarter.

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

(OPERATOR INSTRUCTIONS). Jim Rollyson, Raymond James.

If you could go back, Joe, on production this quarter, obviously, kind of tracking ahead of your annual range. Is that just basically affecting things like miners' vacations and some seasonality there, or just being conservative? And maybe second to that, the spread between sold tons versus production tons, what your thoughts are for the rest of the year.

On the production, production was up the first quarter. And as we look forward, we'll get -- as you recall, in the fourth quarter we announced the addition of the fifth unit at Elk Creek, and that was ramping up in the first quarter. So we will see stronger production out of Elk Creek for the balance of the year compared to the first quarter, which does drive that year-over-year production up around 10%, I believe. Specifically, there are -- we do have the miners' vacation, and in the fourth quarter you have the Christmas holiday, plus Thanksgiving. So there are seasonality influences there on production.

Relative to sales out of inventory, we did have a reduction in inventory in the first quarter. I would think that drove us down to, I think, roughly around 400,000 tons. So I would not expect to see a significant sales over production number for the balance of the year. We may pick up a little bit, but it won't be as significant as what we saw in the first quarter.

Understood. On the pricing side, I guess, can you give us an update, maybe, of what you have contracted for '09 and '10? Just looking at your growth numbers of 15 to 20% for '09, and 25 to 35, obviously, the spot market has gone up quite a bit more, which you had some already contracted. I'm just trying to get a sense of where you guys sit today.

We're right in the middle of negotiating several contracts, so I think it would be misleading to try to give you the precise unsold position because of where we are in negotiating those contracts. That's why we elected to give it to you in ranges. We do have -- in our open position of what we've given to you before, there are several contracts that do have ceilings on those contracts when they reopen. So we've taken that into consideration, as well as the negotiations of where we stand on some current production. I think we'll be in a better position by the next quarterly call to give you a better indication of exactly what our unsold position would be as we look forward to '09 and '10. But as we try to think that through, given the fact that we have not signed these contracts that we are in the process of negotiating for River View in particular, we felt it might be misleading to give you specific numbers at this moment in time.

Where might you see pricing for stuff you're signing up today for next year and beyond? You may not have closed anything recently; I'm just curious if you have recently, just trying to get a sense of where you guys are coming out relative to spot.

Given the fact that we're right in the middle of these negotiations, I don't think I can share that information with you today. I'm sorry.

Fair enough. Thanks. Good quarter.

Paul Forward, Stifel Nicolaus.

Great quarter; great outlook for this year. A couple of things on the new projects. I suppose, considering Warrior and River View projects, I was wondering if you could just talk about the risk that the Illinois Basin is going to overshoot on production in the aggregate. I know the demand is outstanding today, but it's just not as constrained a market as Central Appalachia. Just wondering if it's -- in your view, is there risk that you bring too much production on here?

We don't think so. I think that at least in our case, and I believe probably from the other projects that have been discussed, people were going to bring those -- that production on only when they get sufficient contracts to bring it on. So I think, in our case anyway, all the production we're bringing on is back with contracts for multiyear benefit. We're seeing the scrubbers, obviously, are coming on. You're seeing Northern App go to the export market more than we anticipated, and that's providing for the growth, the Central App pricing. There's also renewed significant interest in the Southeast for Illinois Basin goal. So I believe that the demand is stronger than what we thought Illinois Basin coal would bring, say, a year ago. And as a result of that, I think, the production will meet the demand. But I don't think it's likely it will overshoot it. It's possible, but I don't think it's likely it will.

On all the new continuous mining units that you're bringing on line, have you ordered all those? Is it -- because I know that the timeframe for getting that equipment is probably being extended here. You talked about eight units at River View and one at Warrior. Are those all ordered now?

They're ordered. We don't see the equipment delivery as a big risk. It's possible there could be some slippage, but we don't really see that as a big risk.

So what's the biggest risk you're worried about? Is it the labor markets, or anything else?

Yes. I think that's the biggest issue. We're talking about hiring 600 people. So, trying to find 600 coal miners, and get them adequately trained to get them ready to bring this production into the market, is our biggest challenge.

Shifting over to Northern App, I think you gave a range on Tunnel Ridge and a potential new online day between 2009 and 2011. I know it's a strong market, but how realistic is it to think you can go through all the hurdles and get it up by 2009, just considering how difficult it is to bring on new projects in that region?

We're optimistic. I think when you look at specifically for Tunnel Ridge, based on the specific mine plan we have, even though we get into coal and actually begin production in 2009, it will still take us some time to get the long wall panels developed, so the significant tonnage would not come until later, towards the 2010 timeframe, 2011. But we think it's a very high probability that property can be developed on the timeline that we've identified. There is strong customer demand, and we would expect that essentially all the other projects will have some announcement probably in the third quarter of this year.

I trust that there's -- when you say there's strong customer demand, the demand is there, and certainly your willingness to bring this project online is there. What do you see as the one or two most significant hurdles to actually getting production going?

We're focused on finishing our River View contracts first. And then once we get those inked, signed, then we'll immediately turn our attention to the contract negotiations for the other projects. That's the leading issue for those particular projects (multiple speakers) getting contracts signed and committed to a level we're satisfied it's worth taking the risk to make the investment.

Very good. Thanks a lot.

(OPERATOR INSTRUCTIONS). Ron Londe, Wachovia Securities.

I'd just like to get your perception of where inventories are for your customers right now. It looked like you benefited from demand for rebuilding inventories. Where do you perceive them at this point in time?

I'm not -- I think if you look at it on a relative basis this quarter versus last quarter, essentially, for all our producing regions, they're lower. I think for the Midwest, they probably are comfortable. And Central App's probably comfortable. Northern App, of course, that situation -- our particular market there is our Mt. Storm power plant, so really inventories aren't a significant issue there, since it's pretty balanced. But, if you look to Central App and the Illinois Basin, they're lower quarter-over-quarter. But, as we look to the balance of 2008, we do believe that inventories are going to continue to decline, and they're going to continue to get tighter. So, as we go into 2009, it's our expectation that the inventory levels will be more favorable to the producers than to our customers, if you will, in the marketplace. So, we do see the inventories declining as the year progresses.

From the standpoint of your adjusted EBITDA expense per ton, it looked like you had some pretty big increases for Central App and Northern App. Was that mainly from overhead -- pardon me -- overtime, or how did that break out? What were the specifics to those expense increases?

We still have some lag-over effect in Central app in particular, related to MSHA activity, where we've had some [seal] constructions. We've had some productivity issues as far as there as well. In the earlier part of the quarter, latter part of the quarter, they picked up significantly. So that's a positive sign. I think at Mountain View, we do have just normal cost issues from an inflationary standpoint. [I believe there was a] long wall move. Is that right, Brian? Do you remember?

I believe so.

I thought there was, in this quarter compared to last quarter; it may have affected the numbers as well.

From the standpoint of your two big projects, the River View and the Warrior mine, could you break out the capital expense of those two?

For the (multiple speakers) project, or for this year, or what?

For this year and, I guess, next year.

If you recall, we had started the construction of the slope and the shaft in I believe it was August of last year. And we had carryover of roughly 16, $17 million or so, to complete that in 2008. And with the announcement of the project last week, we are looking for an incremental $40 million or so this year. With respect to the Warrior fifth unit, I think incremental cost, over and above what we were anticipating this year, is roughly $10 million, or thereabouts.

So, the rest of the 200 to 220 that you said, what are the specific projects that are going to fall out of that?

We've got -- if you recall what our prior ranges were, we have our normal maintenance, we have infrastructure improvements going on at several of our operations, and then the River View and Warrior activity that we just talked about. So it's the same projects we talked about during the year-end release, with these additions added on top of that.

Thank you.

Luther Lu, FBR.

I was wondering if you guys can give us a breakdown of how much you exported last year versus how much you will export this year?

Export volumes are really quite small for both 2007 and 2008. I would say we're in the 100 to 200,000 ton range. It's not a significant number, but (multiple speakers)

Is that Illinois Basin, or Northern app?

It's a little bit of everything. We've done a little bit Central app, a little bit of Northern App, and a little bit of Illinois Basin. So there's not a whole lot, but we have been able to take advantage occasionally on some export movements.

The labor issue you mentioned earlier, what is the labor turnover ratio at your mines right now?

If you look corporate-wide, it's less than 5%. If you take all of our operations, it's -- I don't know -- it's probably 2.5%, something like that.

But for Illinois Basin, have you seen a pickup in labor turnover, or (multiple speakers)

No, we haven't. It's not a significant number in Illinois Basin. Our challenge is just hiring 600 new coal miners over the next year, which we do have a plan to do so. I think when we bring those on, right now, we will be adding some people probably starting in the third quarter of this year. So we will start adding people and training them at our existing operations. So you will see a little bit -- some cost impact in the third and fourth quarter for training dollars, is what we would call them. The way we've looked at that, even though they'll flow through our expense line item, we've essentially put the burden of all those expenses to the River View mine, even though the accounting doesn't allow us to capitalize those numbers. We're looking at that pretty much as a capital investment that we're going to have to get a return on. So it has factored into our return analysis, which we're very comfortable with. But going into the last half of 2008 and into 2009, we will have more headcount than what we would normally need at our existing operations to produce the tons at those operations. In preparation, training our people to be in a position to hit the ground running at River View, and do it safely and successfully.

One last question. On the contracting front, what kind of difference are you seeing between the (inaudible) ultra-high-sulfur product, and fairly medium-sulfur Illinois Basin coal?

I would say the index pricing that you probably read is pretty current as far as the sulfur -- the price of sulfur in the marketplace, and that's really -- it's not tied to sulfur as much as it is just tied to supply demand for low sulfur versus the higher sulfur product. But I'd say what you see in the indexes that are publicly available is pretty close to what we're seeing in the physical market as well.

Thank you.

(OPERATOR INSTRUCTIONS). [Franklin Ross], [The Lynch Foundation].

Great quarter. A quick question on River View. Have you guys talked to any possible European utilities about taking coal from River View? I know you like to focus on the domestic side, but --

No, we haven't. We've been focused strictly domestically for that product. It is a lower BTU product relative to our other operations, so transportation is -- definitely it's a river product, obviously, and it will be traveling up and down the Ohio.

Out of the contracts that you guys have discussed with -- in terms of possible River View customers, have you priced any of those contracts, or are you just going to have those contracts committed but unpriced?

They will all be priced.

Prior to the production starting?

Yes.

Last question. When you look at the coal markets, what is the thing that makes you most nervous, sort of keeps you up at night?

Recently nothing has kept us up at night looking at the coal prices, and I don't see anything that's going to change that in the near-term.

Great job, you guys. (multiple speakers)

You have no further questions at this time.

I'd like to thank everybody for joining us today. Obviously, if there's any follow-up questions, feel free to reach out. We look forward to talking again at the end of next quarter. Thank you, all.

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