Alliance Resource Partners LP (ARLP) 2008 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2008 Alliance Resource Partners LP and Alliance Holdings GP earnings conference call. My name is Francine, and I will be your coordinator for today. (Operator Instructions)

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

Thank you, Francine, and welcome, everyone. We appreciate your interest in Alliance Resource Partners, which today we will refer to as ARLP, and Alliance Holdings GP, which we refer to as AHGP. We released our 2008 fourth quarter earnings earlier this morning and will now discuss these results and our outlook for 2009. Following our prepared remarks, we will open the call to your questions.

Before we begin, though, let me provide a few reminders. 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. 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 these forward-looking statements to be reasonable at the time made, no assurances can be given that such statements will prove to be correct. 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 release from the partnerships. If one or more of these risks or uncertainties materialize, or if our underlying assumptions prove incorrect, actual results of the partnerships 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 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 ARLP's website and furnished to the SEC on Form 8-K. Now that we're through with the preliminaries, I'll turn the call over to Joe Craft, our President and Chief Executive Officer. Joe.

Thank you, Brian. Good morning, everyone. Thank you for joining our year-end 2008 earnings review. For the eighth year in a row, ARLP delivered record financial and operating performance, setting new standards for coal sales, production volumes and revenues. ARLP continued to generate strong cash flow in 2008 as we set a new record for EBITDA after normalizing for non-recurring synfuel benefits that expired in 2007. During 2008 we were also successful in securing several long-term co-sales agreements at prices significantly higher than historical levels. With delivery terms ranging from one year to ten years, we expect these contracts will provide a solid foundation for future growth and production, earnings, and cash flow.

Over the past 12 months we were able to again deliver upon a long-stated goal that providing our unit holders with one of the highest distribution growth rates in the MLP sector. Our strong performance allowed ARLP to increase cash distributions to unit holders by 22% year-over-year, while AHGP was able to increase distributions to its unit holders by 40% during the same period. Overall, we were pleased with our performance in the last year. Today, the severe weaknesses currently existing in the global economy will provide challenges for us as well as anyone else engaged in commerce around the world.

As it applies to ARLP, the depth and breadth of the current economic slowdown has created some risk and uncertainties that make the supply and demand outlook for coal very difficult to predict. It is evident that short-term coal demand has been negatively impacted by the slowing global economy and customers are struggling to predict their ongoing demand requirements. Several of our coal producing competitors have responded to reduced demand by curtailing supply. We believe announcements of additional supply reductions are forthcoming; however, the timing and ultimate level of supply reduction remains unclear.

In this environment, it is understandable that both coal producers and purchasers have shown a reluctance to execute coal sales agreements lending to a lack of reliable price discovery. Unfortunately, we expect these conditions will persist until the economy begins to show signs of rebound and/or utility and steel industry customers make firm commitments for the future. In the interim, the coal markets will remain choppy. As to our response, ARLP will remain prudent, disciplined and flexible during these chaotic times with a clear focus on creating long-term value for our unit holders.

As we look forward with this objective in mind, we enter 2009 with a solid customer base, substantial coal supply committment levels, and prices well above historical levels, and significant cash flow growth clearly visible in 2009 beyond. ARLP will begin to realize significant benefits this year from our recent contracting efforts. With over 90% of ARLP's anticipated 2009 production committed and priced, we expect increased revenues will more than offset continuing pressures on our operating cost and productivity. As a result, we currently anticipate ARLP's EBITDA per ton will improve by 40% to 60% in 2009 over 2008 levels.

A significant portion of ARLP's production beyond 2009 is also committed and priced and we expect to achieve year-over-year growth in 2010 as well, although at a rate of growth that remains dependent on general economic and coal market conditions as well as coal pricing and cost dynamics that will be existing at that time. ARLP remains committed to the timely development of our River View and Tunnel Ridge organic growth projects. Our customers have clearly indicated that production from River View and Tunnel Ridge is needed to meet their long-term coal demand requirements despite the difficulties created by the current economic turmoil. Development activities at our Gibson South and [Penridge] projects are ongoing; however, construction of these mining complexes remains market dependent.

We will continue to exercise discipline by requiring sufficient coal supply agreements before committing capital to begin construction of these projects which in light of the current market conditions make it difficult to determine timing with any degree of accuracy. Not withstand the significant challenges facing the economy and our industry at this time, ARLP enters 2009 well positioned to build on its strong historical performance and its track record of growth. At this time, I'll turn the call back to Brian for a more detailed look at our financial results after which Brian and I will be happy to address any questions that you might have. Brian.

Thanks, Joe. ARLP again delivered strong financial results in 2008. The results for the 2008 quarter were generally in line with our expectations and has been the case all year, low results reported for the 2007 quarter due primarily to a loss of non-recurring synfuel benefits that Joe mentioned earlier. For the 2008 quarter, ARLP reported EBITDA of $62.8 million, an increase of 3.3% over the 2007 quarter after normalizing for synfuel. As anticipated, net income fell in the 2008 quarter to $25.2 million or $0.32 of net income per diluted LP unit. In addition to the $3.6 million synfuel benefit realized in the 2007 quarter, comparative results in the 2008 quarter also reflect the impact of increased DD&A which was up $8.7 million due to capital expenditures associated with our ongoing growth initiatives and higher net interest expense which rose $3.8 million due to the completion of our $350 million debt financing in June 2008.

Each of our operating regions experienced increased price realizations in the 2008 quarter which helped drive ARLP's average coal sales up 7.5% compared to the 2007 quarter to a record $42.15 per ton sold. Total sales volumes also increased in the 2008 quarter, up 15.1% compared to the same period last year as each of our regions reported higher coal sales. Higher sales volumes in the Illinois basin reflect the recent expansion of production capacity at our Elk Creek and Warrior mines as well as increased production from our Gibson and Dotiki operations.

Increased sales volumes in central Appalachia also reflect increased production while northern Appalachia benefited from higher sales of purchased coal as we were able to capture attractive opportunities in the spot and export markets. These increased coal sales volumes and record price realizations combined to push ARLP's revenue higher to a record $310.9 million in the 2008 quarter, an increase of 23.2% over the comparable 2007 quarter. Increased coal production at sales volumes along with continuing pressures on labor related expenses, materials and supply costs and maintenance costs helped drive ARLP's operating expenses in the 2008 quarter higher to $218.6 million.

In addition, all of ARLP's operating regions continue to experience increased compliance costs and produce productivity during the 2008 quarter as a result of a more stringent regulatory environment. As Joe previously mentioned, ARLP also delivered strong operating and financial results on a full year basis in 2008. For the 2008 period, ARLP reported records for coal production up 8.9% over 2007. Coal sales volumes up 9.9%. Coal sales prices up 3.6%, and revenues up 11.9%.

In addition, after normalizing for synfuel benefits realized in 2007, ARLP reported record EBITDA in 2008 which increased 8.3% over the 2007 period. Again, as expected, net income in the 2008 period was lower relative to the 2007 period $134.2 million or $2.41 per diluted LP unit compared to $170.4 million or $3.05 per diluted LP unit. Comparative results for the net income in the 2008 period also reflect the impact of the factors I mentioned earlier. Loss of non-recurring synfuel benefits of $28.5 million, increased DD&A of $20 million and higher net interest expense of $8.5 million.

Turning for a moment to our capital programs, ARLP reported total capital expenditures in 2008 of $206.3 million, including $77.7 million in maintenance capital. In addition to the continuing development of our River View and Tunnel Ridge growth projects, other major capital projects in 2008 included the expansion of production capacity at our Warrior and Elk Creek mining complexes, infrastructure improvements at our Warrior and Gibson mines, and acquisitions of coal reserves and lease hold interests.

For 2009, ARLP is currently estimating total capital expenditures of $430 million to $480 million, which will include continuing development of our River View and Tunnel Ridge mines, facilities upgrades and infrastructure improvements at the Warrior and Dotiki mining complexes, and various infrastructure and efficiency projects at our other operations. Maintenance capital is currently estimated at approximately 390 per production ton, but will likely vary period to period due to the inherently cyclical nature of maintenance schedules. Substantially, all of this year-over-year increase to maintenance capital reflects our response to the changing requirements imposed by [EMSHA].

In addition, although total capital expenditures in 20009 reflect our current expectations for construction schedules, actual capital expenditures may vary due to accelerations or delays. ARLP's balance sheet is solid and we enjoy strong internal cash flow and sufficient liquidity that should allow us to meet our 2009 capital requirements without accessing the capital markets this year. That concludes our prepared comments. Again, thanks to all for joining us today and for your interest in both ARLP and AHGP, and with the Operators assistance, we will now open the call to your questions.

(Operator Instructions) Our first question comes from the line of Jim Rollyson of Raymond James. Please proceed.

Good morning gentlemen.

Hi, Jim.

Good morning, Jim, how are you?

Not too bad. Kind of fun when you're reporting record quarters and still generally optimistic in a crappy market. Joe, your original time frame, as I recall for River View, was Q4 '09 starting and Tunnel Ridge was Q4 '010 starting. Is that still the case or what's your general thoughts on timing at this point?

That is still the case for River View and Tunnel Ridge may be delayed 90 days from that. We're still evaluating that but it's going to be for the long wall, fourth quarter 10, first quarter 11 is where we sit today.

Okay. Good to know. Your increase in CapEx, Brian, I think you talked about it, the components of it. It sounds like a lot of the reason it's going up is tied to the new projects or two new mines I should say. As you think about this moving forward beyond '09, when you get into '010, you'll still have some CapEx, I assume, related to Tunnel Ridge but just kind of trying to get a sense as you think '010 comes back down once you're past the River View and making progress on Tunnel Ridge or thoughts there?

Well to be clear, too, we'll likely still have CapEx going on at River View as well as we continue to bring additional mining units into operation. I think the real issue around our capital for both '09 and '10 is one of time and the GAAP accounting that's related to that in terms of whether you're capitalizing development costs or you're actually expensing those. So it's a little bit fluid right now. I think for this year, we're currently anticipating for River View and Tunnel Ridge combined total capital in the range of $330 million plus or minus but, again, that can vary depending on what the actual timing of those projects ends up looking like.

Got it. And on the maintenance-- What's that?

You look beyond that, I think your question back will it return back to normal and I think the answer is yes, with the exception of if the market, with demand at Gibson South would come on and we could continue to be developing that mine, so there still is interest in Gibson South. I think we've hit a lull here because of the economy but there are customers who are still very interested us bringing that operation on once we get a little bit more clarity into the timing of the rebound in the economy.

Understood. Brian, on the maintenance side, if I remember right, your maintenance historically was maybe closer to a dollar a ton lower than what you're looking at for '09. Is that a function of spending money on some projects because obviously the cash flow situation and the balance sheet is better or continues to get better or regulatory or is it also a function of not having the tons yet at River View and eventually Tunnel Ridge.

Well, I'd say substantially all of that increase is really related to the changing EMSHA requirements, when you look at capital that has to be deployed and as we look at maintenance capital, while we in many of these cases will receive some payout on it, it's below a level that we would traditionally consider as being appropriate for a pay out project and is really related more to meeting the new compliance requirements that are out there. We will gain efficiencies but as you continue to respond to these obligations that continue to change, as we define maintenance capital which is to support the current level of our production capacity, it's increasing.

Okay, and last question for me, you've obviously pulled the 6% to 8% quarterly distribution growth that you had before, which I think in this environment makes sense. Any thoughts to where that might end upcoming out? Is it kind of this quarter you were up a little over 2%. Is it a 2% number a more realistic assumption?

We did, as you said, reduce that. We are at 2% for this quarter. I think the Board is going to continue to look at that on a quarter to quarter basis. I'm not going to give you guidance as to what that level is. We've restated our goal to be industry or sector leading or at the top tier of the [NLP] sector, we would like to just evaluate the markets in determining what cash flow requirements would be in the '09, '10, '11 time frame as we see the markets develop. We're still very optimistic that the future coal prices will support continued growth as well as our production growth.

We think that the current situation probably and more likely will create more volatility which will provide for an opportunity for another spike in prices similar to what we experienced a couple years ago given the potential need by some in the industry to pull supply. Once the economy gets rolling, the demand is going to be there so that we do look optimistically at future pricing and at the same time, we don't have visibility to that today, so that's just something we're going to have to continue to evaluate and assess but our expectation is that we will be very focused on continuing to grow our distributions. The amount and timing is going to be dependent on how we review the markets.

I think you know that our policy historically has been once we make a decision for a distribution increase, we do that with a strong belief that it's sustainable for the long term, so we don't take this lightly. It undergoes a significant review, stress testing, so we're comfortable and confident today based on what we know that with the 2% increase that we made this quarter is it sustainable and we feel that as we go quarter to quarter we'll continue to do the same level of evaluation and diligence in testing and make the appropriate long-term decision at that time but it's very difficult to give you precise guidance on that because of the uncertainty of the economy and not knowing if and when it's going to respond to all of these stimulus packages that are going on around the world. So hopefully you can understand where we are on that. Our committment has not wavered and our focus to continue to grow our cash flow is as sharp as ever.

Well, thanks for the detailed response and thanks, guys.

Thanks, Jim.

Our next question comes from the line of Paul Forward of Stifel Nicolaus. Please proceed.

Thanks, good morning.

Good morning, Paul.

On that $430 million to $480 million of planned capital spending this year, have there been any changes to the project costs at River View or Tunnel Ridge or is that consistent with what you're expecting three, six months ago?

There's no real change. We have accelerated some capital into '09 at Tunnel Ridge, so we looked at our ability to build the prep plant at a faster pace than we had originally planned, so these numbers do reflect some higher capital in the earlier part of the project but that's more of a timing issue, not an amount issue. We haven't really changed our numbers from our original economics. We are hopeful, however, that maybe with the slowdown in the economy that some of our pricing will come in better than what we have and at the same time, we had made some commitments prior to this decline that we anticipate will be honored at the contracted level, so this is our best judgment at this time and I'd like to believe that there's -- because of the pricing that maybe we can improve on these numbers, but this is just our best judgment at this time and it is consistent with what we told you before.

Okay. Thanks, and just along that same line, have you seen any sort of easing in equipment markets or skilled labor availability that might support the idea that one or both of those projects might come in a little bit below your anticipated or earlier anticipated project cost?

I think it's too early to tell. We're definitely seeing signs of the equipment orders slowing down so the backlog and our suppliers is less today than it was in the last quarter's call. As we approached 2009, there was some concern on just getting some rebuilds and some slots for 2009 deliveries. Those concerns have become more clear that we will be able to get our equipment on a timely basis so they may be accelerated so that could be a positive as far as the pricing. Again, that's continuing to be a little sticky I would say on the downside. We would like to see it reflect steel prices today but that hasn't rolled through directly. I think with time, we will see some benefit but not to the level that you would anticipate just looking at the commodities markets and it just takes a little time to work through the system.

Okay. And on the fourth quarter Illinois Basin volumes there was a sequential decline. Could you go over what caused that and what your outlook is for when the volumes recover to their previous kind of mid year rate during 2009?

Are you referring to tons sold?

I was looking at the 5.2 million. I guess it was tons sold in the fourth quarter in the Illinois Basin. That was, I believe it was below the third quarter number.

Yes, I think year-over-year or quarter-over-quarter, production is not too significantly different. We did have one of our operations lower production than budget in anticipation that was mechanical oriented, so it's not a trend, so we do think that on a year-over-year basis, if you look at our existing operations, excluding River View and Tunnel Ridge, we do anticipate on an annual basis that our operations will be about a half million tons higher and most of that is in the Illinois Basin. So 2008 we have had our challenges with EMSHA impacting productivity and we worked through a lot of throes so we're hopeful that that plus some capital improvement projects we had in 2008 will allow us to have increased production out of the Illinois Basin absent River View and Tunnel Ridge coming from the northern App.

Paul let me use this as an opportunity as well. One of our operations in the Illinois Basin, there was an error in the original production volumes reported to EMSHA. One month was inadvertently left off of the initial report. That report has been corrected, so there may have been some confusion out there about what our actual Illinois Basin production actually looked like, but that's now been corrected and addressed.

Okay, and you're right. Sorry, it's my error. It was not a sequential decline quarter on quarter, so that sounds fine. And maybe lastly, you mentioned the higher maintenance CapEx related to primarily to EMSHA. Could you get a little bit more specific on that? What exactly is the spending that you've had to do in response to the regulatory changes?

There's four specific areas I believe. One is refuse chambers which is the final rules that were adopted and all of these were adopted recently within the fourth quarter, so you got refuse chambers concept, you got tracking of your employees, you got communication with your employees, and then you continue to have the issue with the construction of seals to new and higher standards which, as we've tried to evaluate that along with their interpretations with root control plans, we've looked at ways to mitigate that by changing our mine plans to have less of our old works exposed, if you will, to where we have to continue to monitor that so as we reconfigure the mine plans to minimize our expenses, some of that work is required to be capitalized by GAAP accounting, so those are the primary areas by GAAP accounting. So those are the primary areas where we're expending dollars that make up that sizeable amount of money.

We will have in our contracts the opportunity to try to recover some of that money from our customers through governmental imposition; however, just given the timing of making the claim and getting that process, we don't anticipate there will be any significant revenue dollars rolling through in 2009, but potentially we'll get some money back in the 2010 level. We did receive this year for 2006-2007 about $8 million, I believe.

That's right.

From recovery for changes that have occurred in '06 -'07 from our customers that have been reflected in our average sales prices for '08, so then we've got claims that we've got filed for '08 and we'll have some for '09 that eventually will make its way into our revenue numbers that the timing of which is hard to predict and the amount is hard to predict so we sort of ignored it in our guidance.

Good example is we still have, while we have collected some money in '08 for the '06 -'07 period that Joe mentioned, we do still have additional claims that are pending and are working their way through the process.

Okay, thanks very much.

Our next question comes from the line of Ron Londe of Wachovia. Please proceed.

Thanks. In your guidance for EBITDA for 2009, which is for 40% to 60% increase, that's a pretty broad range. Can you give us an idea of the factors that you're looking at that might cause that range to be that broad given your contractual situation and also, are you seeing pressure from your customers to go back and try to renegotiator reprice some of the contracts that you have in place now and going forward?

In answer to your first question, we thought about making it broader than it is. There's a lot of uncertainty out there and really our situation Brian sort of alluded to and earlier, as you look at the timing for Tunnel Ridge and River View, that potentially impacts our margins because if we don't bring it on as scheduled, if we delay by a month even, we're going to have expenses as opposed to capital so there's some of that that ties to our development projects and the capital around that. There's part of it that does relate specifically to our unsold position so, yes, we're at 90% but that still is 2 million tons, and of that 2 million tons, some of that is designated to the met market. We aren't a major met player but we have sold it anywhere from 200,000 to 300,000 tons and if you look at 200,000 to 300,000 tons at the swings and prices that are being discussed relative to the settlement, that can swing quite a bit of money, so we sort of anticipated, I'm not going to say the worst and the best but sort of the in the 80% if you think of a bell-shaped curve, we're sort of in the 80% category of where it could potentially be in a realistic matter, so I think the majority of that range is market driven for our unsold position; however, the cost side of it could be impacted as well driven by the timing of our development projects.

And the GAAP accounting that's required around whether you capitalize or expense those costs.

So we'll continue to look at that on a quarterly basis and bring it to this, we'll discuss it in our press release on a quarterly basis and our annual as we give our quarterly earnings, but that's the range. Specific to your second question, we have not had any customers that have come and asked for renegotiation of their contracts. At this moment in time, our shipping schedules have been consistent with the terms of the contract and our customers have continued to encourage us that they do not plan to change those for 2009. So they are expecting us to deliver on the contracts at the rates that we would typically, basically under the terms of the contract which is what we plan for. I think that it's fair to say that with our existing customer base they were anticipating being in the market for additional tons in 2009 and they're taking a wait-and-see attitude on that, but as far as their contractual tons, we have not at this moment in time have anybody come back and say that they aren't in need of it and they definitely haven't come back and tried to renegotiate their prices.

Okay, thank you.

Our next question comes from the line of Mark Reichman of Sanders, Morris and Harris.

Good morning. On the maintenance capital expenses you mentioned that some of those expenses had picked up in the fourth quarter. What was the maintenance CapEx on a per ton basis for the fourth quarter?

What I was saying is that the law changes occurred in the fourth quarter.

So is 285 still a good number to use for the fourth quarter or per ton basis?

Mark, I haven't looked at it on a quarterly basis. The actual amount of maintenance capital can vary quite a bit quarter to quarter simply because of the cyclical nature of how you work through your maintenance schedules, so it's not really, we began to see the impact of the changes that were enacted in the fourth quarter. It's just as we look forward and recognize how we need to respond to those changes in the future, that's what's driven our cost up.

Well let me ask you this then. So a lot of those, you have some catch up expenses to bring yourself in to compliance. When will those costs start to go down?

I don't know that they are catch up. I mean, I think what we have is you had the law passed and then there were regulations to how they were going to interpret the law, and so we had to wait until they had final rules and now they've got final rules out that have specifics with what the requirements are and what the timeline to which you must comply.

Right.

And so now that we have certainty in the regulatory final rules, we are able to predict what we need to do beyond what we've already done to come in compliance. It's true that a lot of these requirements were anticipated because the law was the law and there were preliminary regs that were filed to receive comments, so we had some idea of the direction, so we were planning but--

But on these mines say like refuse chambers, for example, or communications. So you spend the money, it looks like maintenance CapEx is going up roughly a dollar a ton next year, so $29 million, but you're not going to have to, I guess on your new mines you'll have to do the same but a lot of that money will be spent and once that infrastructure is in place, you really won't have that expense, so wouldn't you expect the 390 per ton to come down at some point?

Well, and that's why I think in the earnings release we mentioned that you can see fluctuations period to period by as much as 20%. And following up on one of Joe's comments, it's right. As the rules exist today, there's certainty but those rules continue to evolve, the interpretations continue to evolve and we'll see how the new regimen under the current administration decides to act going forward, so I don't know that we can say with confidence that those costs are going to drop in the future.

I think the logic would suggest that the potential is there for them to drop.

Agreed.

At the same time, the way the law is written, it does pretty much mandate if there's new technology or new ideas, then you have to continue to reinvest and that's hard to predict, so I'd say it's probably fair that we are focused more near term than long term even though we do set the maintenance cap we do try to look at a five-year period, try to look at trend lines and it does include some reserve acquisitions so there are some other things that -- your logic is right on and I share your views, but we don't have clarity to give you anymore guidance than what we've given you.

That's fair enough. Now, just talking about the Illinois Basin, for example, a lot of coal producers, we have seen a lot of production cut announcements, Peabody, the Powder River Basin, the Central App. How do you see the Illinois Basin shaping up in terms of do you see any companies looking at the Illinois Basin to boost their production levels or do you see competition from lower cost Venezuelan imports? Just kind of how do you see the market for the Illinois Basin going forward?

At this moment in time, we believe there continues to be a shortage of supply and that's been driven primarily by some permitting delays where people were bringing on tons that were anticipated to be brought on in '08 and they just could not get the permits and, therefore, they have not brought the supply on the market. As there was an announcement I guess today by NRP where they've done a transaction with [Kline] for a new operation that was the old Exxon properties, so there's some supply there that's anticipated to come on and Kline still says, he's talking about bringing it on. There are a few other projects where people are looking to bring on some supply and I think that as you look at new power plant construction as well as scrubber completions, that in a normal market there's going to continue to be a supply/demand balance that's favorable to the producer.

In a very soft market, low-demand market, then it may have a tendency to balance that out. Again, it's back to timing and I can't, I just don't know as far as some of the other competitors what their access to capital is to know what they'vere thinking, but based on our conversations with the customers, there has been some again demand reduction this year that's relieved been some again demand reduction this year that's relieved some of the pressure for '08 -- excuse me, for '09, but as we look to '10 and '11, I think the vision that we had before and the way the market was reading the need for scrubber coal continues to be a focus for our customers. A lot of that is going to be dependent on central App, fact of what production level is there and what the ultimate price there is. I don't really see us losing market share to imports. I think it's really just demand for the product, industrial demand for electricity.

And just last question. On outside purchases, it may be in your guidance. Do you see that level remaining roughly the same in '09?

It's typically not included in our guidance. Although we historically have activity in that area, it's very opportunistic and so we generally don't provide a guidance figure on that. The opportunities continued in the fourth quarter, as Joe mentioned earlier, things have slowed down significantly [at these 10 seconds], and we anticipate that we will have some additional opportunities there but to give you clarity on a [cottage] number, it's a little tough.

I'd say it's going to go down a little bit for the first half of the year and if the economy rebounds, then we would supplement our existing operations with purchased coal.

Yes.

If the market stays soft, we would just sell our own production into that marketplace.

Got it. Well very helpful. I appreciate it. Thank you very much.

Thanks Mark.

Our next question comes from the line of Luther Lu of FBR Capital Markets. Please proceed.

Good morning.

Good morning Luther.

Quick question, since you mentioned the NRP and the [Chris Kline's] project. Do you know if they'vere going to wait for a year or that basically I'm talking about the union status?

I don't know. All I know is what I read in the press so I really don't know.

So the production could be ramping up fairly quickly?

I would just refer you to their press release.

Okay, got you.

I don't know anymore than that.

Can you quickly remind us how much of production you were expecting at the River View in the fourth quarter '09 and how much you can produce in 2010?

I'm thinking in '09 we were anticipating roughly 800,000 tons of production and '10, that's probably more dependent on timing of when we add additional units.

I can't recall that right off the top of my head.

I believe that it's in the 5 million to 5.2 million ton range assuming we stay on the anticipated schedules to add units to get to full capacity.

Right. And since [it is] a CM mine, you can -- would you say that you'd be willing to add or take away the capacity due to the market conditions?

Yes, that's fair.

Okay.

If the market is not there, we're not going to produce it so we will, we do have that flexibility, you're right.

Okay. Next question I have is can you guys give us colors on the shipping cost, trucking cost to the River docks today versus maybe six months ago?

Obviously, diesel has gone down, so that has benefited. To try to give you a precise number, it's totally dependent on mine to which dock. As you look at our operations, I think we did install the rail at Gibson, so we're not really trucking from Gibson to the Mount Vernon dock, Patiki to Mount Vernon's rail, so in West Kentucky we still have some so we've had some reduction; however, when we bring River View on, that tonnage will be coming out of River View instead of our operations so it's really not a material issue for us.

Okay. Just well then just for maybe for general knowledge, what is the general trucking cost to River docks in the Illinois Basin? Like on average.

I don't have an answer for you, I'm sorry.

Oh, okay. All right, that's all my questions. Thank you.

Thank you.

Our next question comes from the line of [Franklin Ross] of the [Lynch] Foundation.

How you guys doing? Great quarter.

Thanks, Franklin.

So when you guys look out at your CapEx, I was just wondering, what was the size of the CapEx on River View and on Tunnel Ridge in total do you think?

For?

For each project.

For each project?

It's again the ranges that we previously provided haven't changed at this point.

Okay, they have not changed?

No.

And when you look at labor costs, are you seeing some change in sort of the pressure there? Are there more miners?

We actually gave increases in November, even though we anticipated the situation that we're into some degree. I think the cost of labor, it's still an issue. It has softened somewhat but in addition to the pressures we were having before to find skilled labor to grow and competitors growing to meet the higher markets which were mostly driven in Central App with the met market, you still have some hiring of people that just through attrition where we've got people retiring and needing to bring the next generation in as you look at the cycle and the age of the workforce. So there continues to be opportunity for skilled labor at rates that demand a market that's consistent with what we experienced last year and maybe even a little bit more this year, I don't know.

As far as the unskilled labor, there's definitely an improved marketplace there because the alternatives have reduced, specifically if you look in the Illinois Basin and the auto industry support facilities, both manufacturing and support, there have been a lot of layoffs and that has increased the applicant flow to where for unskilled miners, the labor pool is larger and attractive. At the same time, we're not anticipating -- year-over-year our labor costs will go up and exactly how we need to respond to the market in 2009 is yet to be determined.

I'd also add that as we continue to develop River View and Tunnel Ridge, we are hiring people and they are in training programs, so as we go through that hiring and training effort, during those development periods, our labor cost per ton are going to be higher as a result.

All right, great. Thank you.

Our next question comes from the line of David Smith of Barclays Capital. Please proceed.

Good morning, gentlemen.

Good morning, David.

When I look at Alliance Resource as a stock and less as an MLP, but just focusing on your financial statements, the biggest issue I see is an increase in the percentage of revenues represented by operating expenses. It seems pretty much to have consistently gone up since 2005 or so. Looking forward, and obviously it's cutting into your net and then distributer income as well, looking forward over the next year, you guys have projected a fairly robust net income so how are you planning to -- what are the factors in that large operating expense numbers that are manageable and how are you guys planning to work that going forward to widen margins out again?

Several factors. One has been the increase in commodity prices, so we just talked about diesel. A year ago I think we had an average crude price around 120 that broke down to diesel prices and now you're 40 or something, on the other side you got power costs that have increased which is the higher priced coal contracts and gas contracts roll into the utilities we'll see some price pressures there that will continue. Steel prices have been a major driver in those costs. We anticipate roof control related expenses. That's been both pricing on the commodity side and volume driven by EMSHA safety policy. We do anticipate that with the decline in steel that we will start seeing benefits in lower (inaudible) type expenses on a going forward basis. The regulatory compliance area has been a large part of the expense on a run up basis. Once we get to a standard you would think that would stabilize, but where we won't see the increases, I'm not suggesting we won't see a decrease in our cost but we're sort of running at a state that we don't anticipate year-over-year expense increases other than the capital that we talked about earlier for EMSHA compliance but the actual operating expense we're hopeful will be comparable, so as we think in terms of year-over-year increases, it will be primarily on the upside in the labor and electricity and benefits. On the downside we can see some lower commodity prices, diesel, steel, copper, rubber, we might see some benefit on the downside.

The other factor in our cost is with the higher sales prices we will have higher taxes, higher royalties and they are all tied to a percent of sales price, so all of those things go in the mix to where year-over-year there will be some cost increase but say after 2009, when you won't see such a high jump in revenues on a percent basis, I would think you'd see a leveling out of those costs as well. If not, some reduction.

And on the cost side too, David, I don't know if you're looking at just aggregate numbers or per ton numbers, but aggregate numbers will also reflect increased coal production and sales volumes, so it just depends on how you're viewing this in terms of what the factors are.

Definitely need to look at the per ton numbers. That's what I was responding to.

Actually, I was thinking more in aggregate, but I'll dig a little deeper in that. Do you guys see margins widening back out? I guess is the bottom line.

We do anticipate, we told you that--

Per ton is going to go up 40% to 60%.

In '09 and we expect that they will widen even more than that in '010.

Thanks.

You're welcome. Thank you.

(Operator Instructions) Our next question comes from the line of [Clark Vonstutterhein] of Deutsche Bank. Please proceed.

I was just curious, what's the difference between your contract prices and the spot price?

In most cases, I'd say the spot price continues to be higher than our average contract price.

Oh, really?

Across-the-board. So we have some legacy contracts that we're continuing to honor prior to the run up and we've got some new contracts that bring that average up but when you look at the total contracted position, what we would consider the spot market, it's still higher than what our contracted position is.

Okay, thanks.

Thank you.

I'm showing we have another question from the line of Franklin Ross of the Lynch Foundation. Please proceed.

Do you guys have any sort of, I know there hasn't been a lot of coal traded recently, but what are the kind of coal prices in the Illinois Basin? Do you have a rate on that?

There really haven't been, all of the trading that's happened in the last month in our view has been really consumers that have bought coal and they are reselling it, so it's very difficult to put a number on that. And so to give you an accurate number I'm not in a position to do that. We're continuing to bid coal at prices that were more comparable to what you would have seen in the over-the-counter market that was back in the third quarter of '08 and not what you would see recently. At the same time, we have not signed any contracts at that level, so I don't know that there's any utilities that are buying at this moment in time other than some of these bargain opportunities that they'vere buying from other producers that bought or are trying to lay off their position.

Okay, thank you.

We have no further questions in the queue. I'd like to turn the call over to Mr. Brian Cantrell.

Thanks to everyone for your participation this morning. We appreciate your questions and interests and look forward to visiting again at the next quarter call. Thank you.

Thanks.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.