Alliance Resource Partners LP (ARLP) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2008 Alliance Resource Partners, L.P. and Alliance Holdings GP conference call. My name is Katie and I will be your coordinator for today. (OPERATOR INSTRUCTIONS).

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

Welcome everyone. We appreciate your interest in Alliance Resource Partners, which today we refer to as ARLP, and Alliance Holdings GP, which we refer to as AHGP.

We release our 2008 second quarter earnings earlier this morning, and will now discuss these results and our outlook for the remainder of 2008. Following our prepared remarks we will open the call to your questions.

Before we begin, I will run through a few reminders. As is our practice, 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, some of our remarks this morning 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 believes the forward-looking statements are reasonable at the time 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 today's press releases from the Partnerships.

If one or more of these risks or uncertainties materialize, or if the underlying assumptions prove incorrect, our actual results may vary materially from those we anticipated, estimated, projected or expected. In providing these remarks neither ARLP nor AHGP has any obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

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

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

Good morning everyone, and thanks for joining our second quarter 2008 earnings review. The US coal markets remained strong during the first half of 2008 and are expected to continue to benefit from favorable global and domestic coal supply demand fundamentals for the foreseeable future.

With coal continuing to be the fuel of choice to meet the growing electric power generation needs around the globe, demand for coal continues to outpace supply and has resulted in significant price increases in every coal market in the world.

Domestically coal consumption is rising, exports are growing year-over-year, and utility stockpiles are declining. Combining this rising demand with various constraints that continue to limit increases in coal supply supports our optimistic outlook for coal prices for the foreseeable future. These markets are helping ARLP stay on track to meet its production and distribution growth targets.

During the quarter we continued to experience increased demand for our coal in all of the markets ARLP serves, and successfully added to our coal sales commitments beyond 2008 at attractive prices.

We also made significant progress on the construction of our new River View mine and continue to have positive discussions with potential customers for our growth projects at Tunnel Ridge, Gibson South and Penn Ridge.

Overall we remain encouraged about ARLP's future growth opportunities and are committed to sharing the gains from these opportunities with unitholders. Toward that end management has set a goal of increasing ARLP unitholder distributions by 6% to 8% per quarter through 2010.

For the 2008 quarter the Board of Directors of each Partnership announced significant increases to their respective unitholder distributions for the second quarter just ended. The ARLP Board declared a quarterly cash distribution of $0.66 per unit for the 2008 quarter, a 12.8% increase over the distribution for the first quarter of this year, and a 17.9% increase over the distribution for the 2007 second quarter.

The AHGP Board declared a quarterly cash distribution for the 2008 second quarter of $0.3525 per unit. As a result of the accelerated cash flow growth available to the AHGP from its ownership interest in ARLP, the declared distribution represents a 22.6% increase over the cash distribution paid for the first quarter of this year and a 33% increase over the distribution for the second quarter 2007.

I know that many of you on the call today will be happy to hear that our Boards also reviewed their practice of considering changes to distributions on a biannual basis and decided they will now begin considering increases to unitholder cash distributions on a quarterly basis.

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

For the 2008 quarter ARLP reported EBITDA of $65.4 million, and net income of $36.7 million, or $0.68 of adjusted net income per diluted limited partner unit, which was in line with our expectations.

Although these results were below those recorded for the same period last year, to better compare ARLP's operating results between the 2008 and 2007 quarters, we believe it is appropriate to consider the impact of several significant non-recurring items which affected both quarters.

Specifically, our comparative results were impacted by a gain on the sale of noncore coal reserves, the loss of synfuel-related benefits, and the settlement gains for claims associated with the 2005 failure of the vertical belt system at our Pattiki mine, and the 2004 mine fire at our Excel No. 3 mine.

After normalizing for these items, ARLP's EBITDA and net income in the 2008 quarter increased by 14.4% and 6.8%, respectively, when compared to the 2007 quarter.

In addition, I would point out that ARLP's declared distribution to unitholders for the 2008 quarter was well above analysts' expectations, which impacted the comparison of ARLP's $0.68 of adjusted earnings per unit to the Street's consensus of $0.72 per unit for the 2008 quarter.

By way of example, had the Board utilized the analysts' consensus distribution of $0.62 per unit, ARLP's adjusted net income per diluted LP unit for the quarter would have been $0.72, right on top of the Street's expectations.

Driven by record average coal sales prices of $39.50 per ton and higher coal sales volumes, ARLP's revenues increased $12.9 million in the 2008 quarter to $276.2 million.

Price realizations per ton in the Central and Northern Appalachian regions continued to benefit from both improved contract pricing, as well as higher prices from sales under the spot and export markets during the 2008 quarter.

Higher coal sales volumes came primarily from ARLP's production capacity expansions in the Illinois Basin. These quarter-over-quarter increases more than offset the loss of $11.1 million of revenues from synfuel-related activities in the 2007 quarter.

Segment adjusted EBITDA expense per ton sold was essentially flat quarter-over-quarter at $29.55, even though ARLP's operating expenses in the 2008 quarter increased $13.4 million to $191.4 million. This increase was primarily attributable to increased coal production volumes, which were up 14.7% to 6.5million tons.

Operating expenses in all of ARLP's operating regions during the 2008 quarter continue to be impacted by increased labor-related expenses, as well as higher costs for steel and other consumables on maintenance costs, materials and supplies.

All of our operations also continued to experience higher costs and reduced productivity due to increased regulatory compliance requirements.

General and administrative costs rose in the 2008 quarter, primarily due to increased staffing levels as a result of ARLP's growth initiatives and higher incentive compensation expenses.

Recent capital expenditures related to our growth initiatives and infrastructure improvements also drove DD&A up by approximately $4.2 million to $25.6 million.

Capital expenditures during the 2008 quarter were approximately $37 million. And we continue to anticipate total capital expenditures for the year in a range of $200 million to $220 million.

To help finance its growth, ARLP recently completed a $350 million private placement of senior notes. $205 million of these notes were placed in a seven-year tranche with a coupon of 6.28%, while the balance of $145 million was placed in a ten-year tranche at a 6.71% coupon.

By completing this debt financing and with our strong internal cash flow, ARLP remains very well-positioned to meet the anticipated capital requirements for the River View mine, as well as our other growth initiatives.

I will now turn the call back to Joe for his guidance review and closing comments.

And reflecting our results through the first up of 2008 and our current projections, ARLP is confirming its previous guidance for 2008 coal production in a range of 26.4 million to 27.3 million tons, essentially all of which is committed to contract pricing.

We are also reiterating our previous guidance ranges for revenues, excluding transportation revenues, of $1.03 billion to $1.1 billion. EBITDA of $250 million to $280 million, and net income of $130 million to $160 million.

As a result, we continued to expect 2008 financial results will be comparable to 2007, despite the loss of approximately $31.3 million for EBITDA and $28.5 million for net income in synfuel-related benefits realized last year.

Counting our planned production increases in the Illinois Basin from the new River View mine, and the expanded operating capacity at our Warrior operation that we mentioned during our last earnings call, ARLP now estimates coal production will increase over 2008 levels by approximately 1.2 million tons in 2009 and an estimated additional 4 million tons in 2010.

As I discussed earlier today, we have successfully increased our coal sales commitments beyond 2008 at attractive prices, and continue to maintain exposure to the market with approximately 9% and 25% of our anticipated coal sales and volumes remaining unpriced in 2009 and 2010, respectively.

Our revenue expectations for the out years have improved since our last earnings call. Based on new commitment during the quarter and our current price estimates for our unsold coal, ARLP now anticipates its total average price realizations per sales ton will increase over estimated 2008 levels by 25% to 35% in 2009 and 40% to 50% in 2010.

Like all other publicly traded coal producers, we expect our profits will grow significantly over the next two years, assuming we can realize these revenue projections.

These projections also give us confidence we can meet the goal I mentioned earlier that management has set of increasing ARLP unitholder distributions by 6% to 8% per quarter through 2010, starting with the third quarter in 2008.

Even with these higher distribution payouts, we expect ARLP's distribution coverage ratio will continue to be greater than the average publicly traded Partnership over the next two years.

Assuming AHGP maintains its existing distribution coverage ratio, and ARLP's distribution growth goal is met, AHGP unitholders would see its quarterly distribution more than double through 2010, highlighting again the accelerated cash flow growth achievable at AHGP due to its ownership interest in ARLP.

That concludes OUR prepared comments. We again appreciate your interest in ARLP and AHGP. And we will now open the call to your questions.

(OPERATOR INSTRUCTIONS). Jim Rollyson, Raymond James.

Just kind of following back up on the distribution growth. You he mentioned 6% to 8% growth per quarter throughout '10. Is that sequential growth or year-over-year growth?

It's per quarter.

Sequential.

That's what I thought you met. That is pretty stout growth. How do you feel once you get out to 2010, if you extrapolate this obviously you feel pretty comfortable that those type of distributions are sustainable, given whatever price you might look like when you get out to that stage. Is that obviously a fair assumption?

That is a fair assumption. As we get closer in time, we will evaluate the markets. We will see how successful we are in placing committed tons with prices. And we will make that judgment as we get closer to that time. But based on our current committed sales prices, increased tonnage, we feel comfortable that we can meet that target based on what we see today.

You look at the numbers you threw for pricing expectations in '09 and '10 in terms of 25% to 35% and 40% to 50% growth over '08 levels, can you give us some sense of what kind of regional price assumptions you're using for the 9% that is still open and the 25%? Basically what are you guys thinking for prices as you look out in '09 and '10?

I think that we do not break that down by region. But I think that our prices aren't too far off of what you would expect as you have heard other coal producers. And we're not projecting anything that is greater than what you have read about in the general press.

So I would say that based on what we are seeing in the market, we're very comfortable with our price projections that they are achievable at this moment in time.

Last one for me. Just maybe spend a minute on costs. Inflation, obviously, we were seeing fuel costs, etc., all moving up. Maybe a little bit about what you guys are seeing, what you're trying to do to prevent that and just how you think that proceeds going forward?

We are continuing to be pressured by cost on the labor front. We are giving increases to maintain our position as far as attracting labor. So that is a factor that we anticipate will continue to show increases.

We are still seeing steel price increases reflected through our operations. We are still seeing productivity impacts from regulatory changes. At the same time, I think, as you can tell by our quarterly results year-over-year being basically flat, we're doing a very good job of managing those and trying to keep those as close to current levels as possible, even though in our projections we do anticipate inflationary pressures as we go forward over the next couple of years. Joe Craft.

We do take a look at our supply chain, and where we can we try to manage those, either from the reliability of supply standpoint, as well as managing costs. By way of example, you have probably seen we have a joint venture on a rock testing company, which helps us manage that area.

We have the ability to manufacture our own roof bolts, so we are being proactive in those areas where we feel like we can go in and manage those costs a little bit more tightly.

If you put numbers on it, I guess some of your peers in the public market have talked about high single digit to maybe low double-digit core inflation in '08. Any thoughts on what you guys are seeing or what you are expecting and how that goes into '09?

We're not projecting increases to that level in our cost. But I think it is definitely fair to say that we will see inflationary pressures.

Thanks guys. Good job.

Paul Forward, Stifel Nicolaus.

I just wanted to maybe follow-up on the new contracts that you have signed with Allegheny. Does your 2010 pricing increase of 40% to 50%, does that include a contribution from this new agreement with Allegheny?

Yes, it does.

Do you have any --?

Along with several others. There are more than a half-dozen contracts we have signed in the past quarter or so.

Was that the biggest one?

No.

That's good. What about -- do you have any updated thoughts on when you can bring Tunnel Ridge online?

We are in negotiations with several parties on that tonnage so we're hopeful that we could have an announcement on that soon. Right now I think we have given expectations of bringing production on as early as 2009, 2010. So we are still on track to do that, based on assuming that we can conclude the negotiations we've got ongoing for sales commitments for that production.

In talking about 2009, I assume that would be development tonnage just rather than (inaudible)?

Right. Those times are not included in the numbers I gave you earlier, because we're not committed to that at this moment in time.

If let's say the timetable slips on Tunnel Ridge, what is your ability to ship Illinois Basin coal up the river to meet your obligations up in that region?

It is real. That is primarily the flexibility that was granted under the Allegheny contract. So if we don't build Tunnel Ridge we will supply that contact out of Illinois Basin.

I trust there's no possibility you would give us any sort of pricing information on these contracts?

No, sir.

That's a fair comment.

Ron Londe, Wachovia.

Could you just give us a feel for how many of your tons might reach the export market?

In 2008 we don't have substantial tonnage going to export. For 2009 it is possible that we could see maybe 0.5 million tons go to the export market, maybe more. Again, we don't have -- well, that is probably what I would guess, somewhere in the 0.5 million to 1 million ton range.

You wouldn't have the flexibility to kind of step that up?

We do have the flexibility to do that; however, we are seeing strong enough demand. Domestically our strategy right now is to try to commit as much of the tonnage we have under long-term contracts. And the domestic players seem to be willing to go longer in term than what we have been able to talk to people in the export market to do.

So our strategy is to try to have that sustainable long-term cash flow. And if we've got what we call Tier 1 category one customers, our focus will be to look for those long-term relationships and sell into those markets.

When you talk long term, how long term are you talking?

5 to 10 years to 20 years, something in that zip code.

[Luther Lu], FBR Capital Markets.

I want to follow-up with Paul's question about Tunnel Ridge. Do you guys have the permit already or it is still in progress?

We had the mining permit. We still have the refuse permit to go. But (multiple speakers).

The refuse permit is a 404 permit, isn't it?

I'm not exactly sure on that.

With the mining permit in hand have you committed the purchase of the longwall?

Not at this moment, no.

You have not ordered a longwall yet. Okay.

We have talked to suppliers about slots. So we have reserved slots, but we haven't issued a PO.

If you were to issue the PO today, when do you think you can get a longwall? What is the leadtime on that?

I think fourth quarter 2010.

That's right.

What about the Gibson South project, any update on that one?

We are continuing to negotiate for that as well. We are also in conversations for that operation as well. I think the timing on that probably has slipped a year since -- I mean, we're looking at probably 2011, assuming we can get the contracts negotiated. I am not exactly sure what our last --.

I think that is still long range.

So we are probably in a 2011 time period there. The issue gets into timing of contractors to construct slopes and shafts. As much as it is market, it is more construction timeline than it is market demand opportunities.

With recent drop in the sulfur credits, are you guys seeing in the marketplace a narrowing -- there is a narrowing in gap between the high-sulfur NRLM product and the medium-sulfur NRLM product?

We are not seeing much immediate change there. I think the utilities are trying to determine what that means to them. But we continue to see what we call our low-sulfur Illinois Basin product still compete very well relative to a Central App substitute.

Unfortunately, we just don't have lots of tons to sell to take advantage of that. So we're not really seeing any change within the last week or two. But I think the utilities are trying to evaluate what is change means.

I think in general for high-sulfur coal and for the scrubber markets it is still going to be -- I mean, we don't see any negative effects out of this, especially where the SO2 credits are trading today.

One more question if I may. In your prepared remarks you mentioned that you guys are experiencing reduced productivity due to some regulatory issues. What are those issues?

It is just the mine [self] m/shift basically with their enforcement and the attention that they are spending. And they have just stepped up their oversight to the point when they come in they like to disrupt production.

Rob Mullin, Duquesne Capital.

Actually as a follow-up question from the last question, I wanted to get not just the price of sulfur, but with CAIR -- the legal status of CAIR being thrown up in the air, what you guys' take is on that.

Do you see that as structurally positive, structurally negative? Not so much what your customers reaction are what you guys' reaction is to the vacation -- the fact that the courts vacated the CAIR process?

I think long-term it is not going to have any impact. I think that our expectations there will be an attempt to legislatively bring the controls back in place.

Absent that, I think that Illinois Basin coal, Pet-8 coal is still very low-cost relative to Central App. So I personally think that obviously from a Clean Air Act perspective they can burn the call probably easier today than they could with CAIR.

So it is going to create uncertainty in the short term, but long term I think it will all balance out to where, as far as our objectives of bringing on production in those two regions, it hasn't changed our customers' view and it hasn't changed our view as to the demand for that product.

As we have mentioned on numerous times, the investment we make there will be driven off commitments from customers. So I think, as evidenced by the Allegheny announcement and the current conversations we're having for Tunnel Ridge, the utilities continue to have an appetite for the higher sulfur Pet-8 and Illinois Basin coals.

In terms of the overall scrubber build that you were anticipating, how much of that is already committed that regardless of this CAIR ruling, you would expect the amount of scrub plants to be 80% of what you expected, if CAIR just went away or --?

You got a macro question and a micro question. I think what we have -- on a macro basis there is probably -- there will be a delay. On a micro, as far as the markets that we're focused on for the construction of the mines that we're constructing and we sell into, we're not really seeing any change in demand, as we speak today.

[Mike Tang], Morningstar.

Great quarter. I just have one quick follow-up question about the committed tonnage. What differences do you have across basins? For example, is there more uncommitted tons in Central Appalachia or Northern Appalachia as a percentage versus Illinois Basin?

We don't really break that out, so I'm sorry. But for competitive reasons we don't disclose that.

I have got just one quick other question. Do you have any potential to still shift blending or shift production in order to get more lower quality metallurgical coal versus higher quality steam coal from this point forward?

We do at our Maryland operation. Again, we're substantially committed for 2008, so it is not going to benefit us this year.

Right. But what about next year and the year after that?

Second quarter of 2009 those contracts come open to where that is a possibility.

[Franklin Ross], [Ling Foundation].

Great quarter you guys. I guess my question is really centered around River View and in terms of how much coal you have priced there and how much you have committed and kept unpriced going forward?

We have committed substantially all of it for a period time, 3 to 5 years. Some of those contracts would come open in price in the three-year timeframe. But as far as commitments, we're committed for most of that tonnage through -- for about five years I believe it is.

When you look at your 5 to 20 year contracts that you have signed over the last quarter, how do you protect yourself to capture rising prices if the market goes that way?

We've got indices-based and/or stated inflationary numbers -- specific inflation numbers, a fixed number say, to try to protect that margin with [mark to market] escalators.

Are those cost escalators, are those dynamic or static? Are they fixed or (multiple speakers).

Some of them are dynamic and some of them are static. Some of them are fixed and some of them try to track our cost.

It is just on an individual case basis on negotiations with the particular counterparty.

Some people want certainty and some want to just -- be willing to take indices.

On the unpriced positions, are those totally uncommitted, those unpriced positions or --?

Some of them are committed tons with subject to reopener.

At this time I'm showing you have no further questions. I would like to now turn the call back over to management for closing remarks.

Once again we appreciate everybody's time this morning and your interest in both of our Companies. We look forward to talking again soon. Thank you very much.

Thank you all.