Alliance Resource Partners LP (ARLP) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the first-quarter 2009 conference call for Alliance Resource Partners, L.P. and Alliance Holdings GP L.P. 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 call, Mr. Brian Cantrell, Senior Vice President and Chief Financial Officer.

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 2009 first-quarter earnings earlier this morning and will now discuss these results as well as our outlook for the balance of 2009. Following our prepared remarks we will open the call to your questions.

Before we begin 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 Partnership, the 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 releases 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. And providing these remarks neither ARLP nor AHGP has any obligation to publicly update or revise any forward-looking statements, 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 are through with the required preliminaries, I will turn the call over to Joe Craft, our President and Chief Executive Officer.

Good morning everyone. Thank you for joining our first-quarter 2009 earnings review. The best financial quarter in the history of our partnerships, I might add. With ARLP's EBITDA coming in at a quarterly record of $107.8 million, and net income reaching a quarterly record of $72.5 million.

ARLP entered 2009 with substantial coal supply commitments at prices well above historical levels. And as anticipated we opened the year with another strong start by posting new quarterly records for revenues as well as the aforementioned EBITDA net income.

These results were achieved despite the disruptions to our operations and transportation systems and customers due to the severe ice storm that hit Western Kentucky during the quarter. Disruptions that we estimate impacted our financial results by more than $8 million.

With a strong opening quarter and continued expectations for another year -- another record year in 2009, delivering substantial year-over-year growth in earnings and cash flows, we were also able to again increase quarterly distributions to ARLP unitholders to $0.73 per unit, an increase of 24.8% over the distribution for the first quarter of 2008.

AHGP unitholders will receive a quarterly distribution of $0.415 per unit, which represents an increase of 44.3% over the distribution for the first quarter of 2008.

While we are obviously pleased with these results, they could have been better, but for the challenges created by the continuing global recession. The ongoing economic slowdown has negatively impacted demand for steel and energy in general, including electricity, resulting in reduced electricity generation, falling prices for natural gas, and high utility stockpiles, which in turn have led to lower coal demand, weak coal pricing, and very little activity in the current coal spot markets.

The depth and duration of this recession, as well as potential timing of an economic rebound remain uncertain. So obviously projecting coal demand and prices for unsold coal positions is extremely challenging in this market environment.

ARLP is responding to these uncertainties in several ways. For 2009 and 2010 our aim is to avoid building coal inventory by matching production to existing contractual commitments, as well as anticipated demand based upon signals we receive directly from market participation.

In the second half of this year we will move a production unit from one of our Western Kentucky operations to our new River View mine. This move allows ARLP to keep development of the River View project on schedule to meet future coal supply obligations, while also reducing near-term production below previously planned levels, and defer anticipated training costs by staffing this production unit with experienced miners transferred from our other operations.

In addition, to better manage our production volumes in a difficult market, we are adjusting the construction timetable at our Tunnel Ridge project to coincide initial production from continuous miner development activity with the completion of the coal preparation plant for this new mining complex in mid-2010. With this revised schedule, long wall production at Tunnel Ridge is now anticipated to begin in late 2011, allowing us to defer significant capital expenditures in the near term.

ARLP has also reduced overtime at selected operations, as well as reduced production at our contract mining operations in the Northern Appalachia region. ARLP believes these adjustments, among others, are prudent, disciplined responses to the current market dynamics and provide us the flexibility to respond quickly in the event of a market rebound.

As a result of these actions we are lowering our 2009 guidance for coal production by 1.4 to 1.5 million tons.

We are fortunate to have a solid customer base that values ARLP for our reliability, diversity of supply and strong balance sheet. Other than a couple of unplanned customer outages, we have not experienced deferrals or rejections of contracted coal deliveries.

While these customer relationships and ARLP's high-level of contracted commitments provide a buffer to the current market environment, placement of our remaining unsold coal positions at acceptable prices remains challenging. As a result, based on current estimates for coal sales volumes and anticipation of lower-than-expected price realizations for our remaining 2009 unsold coal position, ARLP is reducing guidance for revenues, excluding transportation revenues, to a range of $1.29 billion to $1.37 billion.

We are also reducing our expectations for EBITDA and net income to the lower end of our previous guidance ranges of $400 million to $440 million, and $240 million to $280 million, respectively.

Looking ahead, we continue to view the long-term fundamentals for coal as favorable, and based on ongoing discussions with customers, see signs of encouraging opportunities in the future. In the meantime we intend to keep ARLP well-positioned to successfully navigate the current economic storm, and remain committed to delivering long-term value to our unitholders.

At this time I am going to 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.

As reflected in our release earlier this morning ARLP came out of the gate strong in 2009, posting record results for quarterly revenues, which were up 16.1%, EBITDA up 56.6%, and net income up 68%, all as compared to 2008 quarter. These results were primarily driven by higher average coal prices, which jumped $10.11 per ton to a record $48.59 per ton, an increase of 26.3% over the 2008 quarter.

As anticipated, each of our operating regions experienced higher average coal sales prices, as ARLP continued to benefit from improved contract pricing. Our Central and Northern Appalachian regions also benefited from increased price realizations during the 2009 quarter on sales of purchased tons from transactions initiated in 2008.

Increased coal pricing more than offset lower sales volumes during the 2009 quarter, which were down 8.1% as compared to the 2008 quarter. ARLP's reduced coal sales volumes in the Illinois Basin during the 2009 quarter reflect the impact from disruptions to our operations, transportation schedules, and reduced electricity generation caused by the ice storm in Western Kentucky that Joe mentioned earlier.

Timing delays for coal shipments in Central Appalachia and lower than anticipated spot market sales in Northern Appalachia also impacted coal sales volumes during the 2009 quarter.

In addition, though ARLP had planned to begin increasing coal inventories to manage contractual delivery commitments with the timing of the initial production from River View later this year, the issues I just discussed contributed to a higher-than-expected inventory build during the 2009 quarter.

Higher sales-related expenses, maintenance expenses and materials and supplies contributed to higher operating expenses across all of ARLP's operating regions in the 2009 quarter.

As expected, labor-related expenses also increased during the 2009 quarter, as ARLP continued to hire and train new employees for our River View and Tunnel Ridge mine developments. I would like to point out, however, that mine closings and other operating challenges encountered by some of our competitors have allowed us to hire more experienced miners than originally anticipated, and did result in some savings to our expected training costs.

Costs related to the sales of purchased tons I mentioned earlier also helped drive segment adjusted expense higher during the quarter. These factors, coupled with reduced coal sales volumes, pushed segment adjusted EBITDA expense per ton up 12% in the 2009 quarter compared to the 2008 quarter.

On a sequential basis, however, ARLP experienced a 4.6% reduction in segment adjusted EBITDA expense per ton compared to the fourth quarter of 2008. Although this sequential improvement is in part attributable to typical seasonal production increases following year end holidays and vacations, the reduction in segment adjusted EBITDA expense in the 2009 quarter also reflects lower costs for certain consumable and the benefits of rigorous cost controls at all of our operations.

Comparative results on the 2009 quarter also reflect the impact of increased DD&A, which was up $4.1 million due to capital expenditures associated with our ongoing growth initiatives and higher net interest expense, which increased $4.5 million, due to the completion of our $350 million debt financing in June of last year.

Due to the revised operating plans and mine construction schedules that Joe outlined in his comments, ARLP is currently estimating total capital expenditures for 2009 in a range of $375 million to $425 million. As a result, we currently expect ARLP's liquidity will be $25 million to $50 million higher for the year, despite our lower production and revenue outlook.

That concludes our prepared comments. Again, thanks to all for joining us today to learn about the best financial quarter in our partnership's history, and for your interest in both ARLP and AHGP. Now with Francine's assistance, we will open the call to your questions.

(Operator Instructions). Jim Rollyson, Raymond James.

Excellent results. Joe, obviously the guidance adjusted a little bit, but your full year expectations for production now still implies the next three quarters ship more coal than the first quarter did. And your guidance on the EBITDA side would suggest that the next three quarters come in a bit below to get to this say closer to $400 million.

I am trying to figure out what is in between that drives that. Is it pricing -- average pricing realization, does it come down a little bit or average costs that go up a little bit or how do you suppose that plays out?

It is more the pricing. So as we went into the year and we did have some unidentified coal to sell, and that pricing has just deteriorated compared to where we were three months ago even. So every quarter it has gotten lower and lower. The pressure has gotten greater and greater on the price side of it.

So we have been able to secure some sales, but -- and we are in some discussions on others that we think that allow us to sell our production at the numbers we have talked about, but they are coming in at prices lower than we originally anticipated.

Understood. As you think about this from a distribution standpoint, with maybe your quarterly EBITDA and cash flow coming down just a little bit from first-quarter runrate, how do you think that plays into your distribution growth throughout the rest of the year? Are we still looking at 2% kind of numbers or is it more of a play it by ear?

We are going to have to really see 2010 forward as the bigger driver, not so much what is to happen in 2009. I think we are fairly confident in our 2009 position, given what we know today, based on what we know today. But as we unfold, the key question is how fast will this economy rebound. So will we see the rebound in the second half of this year like most people are predicting? Will it drag into 2010, first quarter, second quarter or later? There are significant stockpiles. How does that impact at the utility levels? How does that impact pricing going into '10 and '11?

So we will have to evaluate future pricing to make that determination. But we are very focused on growing our distribution and growing our Company. And I think with the year we are having, I would be hopeful that we could sustain at that level, but we are just going to have to make a decision every quarter as to what is the prudent thing to do for the long-term of the partnership.

Understood. And just one follow-up to that. Obviously on '10 you are pretty well positioned right now with a little over 25 million tons already committed. How do you think about the other tons? I think you guys are tracking maybe to get to north of 30 million tons. How do you think about those other tons right now in terms of selling them? Are you looking at waiting until things start to turn and then holding out to sell at a later point in time when prices look a little bit better, or willing to trim production back again to match the market, kind of like what you're doing this quarter? Just what is your philosophy there?

Probably all of the above. We are not talking about selling coal into and/or off of the current spot market. We do not believe that is reflective of term business. Again, I think most of the transactions that have driven that market has been based off resells, where people have bought and they are trying to resell that product, as opposed to producers selling at that level.

So I think from our perspective, again, the economy is going to drive a lot of the answer to the question. So as customers get a better feel for where the demand is, I think that they are going to be willing to commit at prices that are more reflective of what a term market would be versus a spot market.

And at this moment in time, based on the conversations we have had with our customers, we are pretty confident that demand projections that we have articulated previously that there is customers that would like to buy that level of production from us. The key question will be market price. And so as we sit and try to determine how to make commitments for volume, the key question is pricing. And there will be a price point where we will transact and there will be a price point where we won't. If we don't transact at that price then we do have the flexibility to slow down the River View project and not go to eight units, as an example, if we can't reach agreement on pricing that we find is reasonable for the long-term for our shareholders.

Great. Thanks for the detailed explanation.

Ron Londe, Wachovia.

Have you seen any of your utility customers trying to invoke force majeure because of inventories building at their various generating plants?

No. We have experienced two legitimate -- what we believe to be legitimate force majeures where there were some unplanned outages, as represented to us, that do appear to be legitimate. But we have not seen anybody try to declare a force majeure, or even try to negotiate out of a contract based on economic conditions and the fact that they anticipated one economy and they are finding a different one. Or people wanting to take advantage of natural gas, for instance. Knock on wood, we have not experienced that.

You said you were going to move the long wall from Kentucky, which would probably bring volumes down. Do you have an estimate of (multiple speakers)?

Go ahead, Joe.

We've got a continuous mining unit in West Kentucky.

Yes, right that is (multiple speakers).

From an existing operation that we will transfer to River View, as opposed to leaving that unit in production and just scaling up River View with new equipment and new people. We are just transferring a unit of people -- a unit of equipment, and then we will have people from various operations within our region that will staff that, and then backfill with some of the trainees we have had over time, depending on whether we bring in new equipment and/or move other units over there.

What would be the timetable for that?

Second half of the year. It may be as early as July. If we can get our planning done appropriately it could be as early as July. It could slip into August.

And the cost of doing that?

Our cost are factored into our numbers, so I think it is just a matter of moving one unit over from one mine to another. So you lose a little scale at that particular mine, but it shouldn't be a significant cost driver. In fact, it may save us some money, because of training dollars that we will not spend spend this year that we would have spent had we not done this.

Do you have a ballpark number for the number of tons of coal that you sell to power generating utilities that have dual fuel capabilities?

No, the answer is no. I think we do sell into the Southern Company, which has that capability. We don't sell a lot of tons to them. We sell into basically all the Southeast utilities, and they do have the opportunity to either buy power directly from others that generate with gas and/or they may have their own gas units. So it can be an issue. We have seen it be an issue to the overall market pricing. We haven't seen it be an issue to us directly with our coal shipments.

Paul Forward, Stifel Nicolaus.

Really outstanding quarter. On the -- just thinking on the cost side of things, you mentioned that pricing could sequentially be a little bit lower as the year goes along. But you did have a pretty impressive cost improvement, particularly in Illinois Basin quarter on quarter. I am just wondering if there is any possibility that that continues, or do you think maybe the first quarter with lower volumes going forward possibly than you had anticipated that you don't get further cost improvement on a per ton basis?

I would say we are probably conservative on our cost estimates right now. We are seeing finally some reduction in material and supply costs pass through with the economy. We are seeing some relief on an M&S side.

I think as far as our production, even though we have scaled back in most cases, it is not affecting our cost, because we are still operating at full capacity. Now there are a few areas where we have selectively cut back overtime, and that tends to -- at lower times your overtime cost it does, in fact, increase your cost in total. But on average, we are projecting costs in this quarter comparable to what we did last quarter when we were putting this guidance together.

And as you mentioned, our cost came in better than probably everyone expected the first quarter. So we are hoping that trend will continue, but we have not modified our guidance in anticipation of lower cost, but still relying on our normal annual budget process where we spend a lot more time and energy going through detail by detail, line item by line item, geology by geology as to what our anticipated cost is.

So we did not at this moment feel comfortable projecting the first quarter to analyze that, if you will. But instead is we are relying on our normal planning process to evolve with the cost numbers that we put in for these projections. That is a little bit more detail than you probably wanted, but in summary, hopefully we will see those trends continue. But it is hard for us to predict that we will have the benefit of -- the productivity we had in the first quarter that it will continue for the rest of the year.

Excellent. Can you talk about your willingness or inclination to essentially use this downturn to buy assets at a greatly reduced price, possibly either within the regions we currently operate in or could possibly add in another leg to the Company's coal production profile, whether it is the PRB or another region you're a currently not in? Can you talk about the opportunity that you might see here?

Obviously, values have gone down. Now whether they are willing sellers to sell at those values are yet to be seen. We are definitely evaluating all those possibilities and opportunities.

Capital -- how would you capitalize significant growth is a question that we are trying to evaluate. So I don't have anything definitive for you. I can just say we are very focused on growing our Company. We do believe there will be opportunities, maybe not this year, but more likely next year -- that our quality assets at attractive prices.

And I think that there is a better chance you will see something -- you'll see industry type activity. I'm not saying for us, but specifically industry activity towards the fourth quarter or sometime during 2010, because there will be assets that are available, and we will have to decide whether we are going to participate or not. But we are open to the idea and spend a lot of time and energy with the team to attract the numerous opportunities that may be out there.

It could be -- yes, basically anything that we feel like we've got the core capabilities to run profitably for a long-term sustainable cash type distribution type business or asset.

Then maybe just lastly, you got a pretty strong hedge position in 2010 as well as 2009. Are there any significant contacts rolling off or getting repriced or anything that we can go through region by region and anticipate a step one way or the other on pricing in Illinois Basin, Central App or Northern App that really stand out as significant to you?

As we have given you the out-year tonnage commitments, as well as those tons that are committed without price, you can get an idea of how the contracts fall off. Most of those contracts that we have today are the ones that open up.

As far as where they are, I don't think we have actually made those public on a region by region basis. But we will consider that and see if we can. Complications are that a couple of our regions, it is pretty obvious that we only have one coal mine, like in Northern App today. I think if we -- once Tunnel Ridge is up and running, we may be able to give a little bit more transparent information. But if we go down that road with just one coal mine it is pretty obvious (multiple speakers) competition and our customers exactly where our position is. We don't find that that puts us in an appropriate position to manage our business.

Well, thanks very much.

Klaus von Stutterheim, Deutsche Bank.

Can you make some comments for those of us who don't follow the industry very closely about what the increased environmental attention, specifically to coal, might do for the coal industry in general and for you specifically?

We are obviously in the middle of that. I don't know if anybody watched 60 Minutes last night, but Jim Rodgers from Duke Energy was on. And so they had a 12 minute segment, which I sort of took as a little biased. But there is definitely a movement afoot to try to move forward with an energy tax by the current administration that would impact the coal industry in the very long term. The question is over what long-term are we talking, '20'30 to 2050 or are we talking 2015 to 2030?

I think I am sort of in the same camp that Jim Rogers indicated last night on 60 Minutes that coal will be the answer for this country in the near term. And that means over the next 15 years. And coal should be the answer for the long term. So with technology, the coal industry has proven time and time again, if there is a need to adjust its emissions, it's mining practices, and if the public is willing to pay for it, they will do it. We have done it since 1975, since I have been in the business. And I strongly believe we can do it again.

The question is going to back to whether the current leadership in Washington wants coal to be part of the answer, and gives reasonable timetables for the technology to work. If they don't, it could be very disruptive to the American people. Coal will still be the answer, because if you look at the scale, coal being 50% of the energy -- electricity generation in this country, with no reasonable backup to replace it, it will just be a lot of disruption, a lot of volatility. And at the end of the day coal will continue to be mined. Coal will continue to be delivered because the American people are going to demand electricity. That is my view.

So what it does to the industry, it does create a lot of questions, a lot of uncertainty. With uncertainty people tend to react a little slower. But I think long term goal is still the answer, because it is the most abundant fuel that America has. If this administration wants to believe in energy independence, they have got to have coal at the center point of their energy policy.

It is low cost. It creates jobs. It can be mined and consumed in an environmentally acceptable way. So we just need to get policy to accept the attributes of coal. And I believe they will at the final outcome.

What it means to our Company specifically, we have run our business to try to match our strategies around existing demand, existing power plants that we feel have minimal impact to builds of this type, to government interaction. We are always mindful of growth. We are mindful of changes. We try to position ourselves to take advantage of those at the appropriate time, but we don't depend on it. We are not going to be investing strictly because there is tax credits out there, and assuming that those tax credits will be there forever. We are not going to lead in that way.

At the same time, our Company has benefited from the Clean Air Act of 1990, where utilities have been required to add scrubbers to their utilities. And we were able to position ourselves to buy into the Illinois Basin, secure enough coal reserves, as well as Northern App, at a very attractive time, to where in long term if those markets came to bear, we would take advantage of that.

We will continue to evaluate the coal industry in the same light. As a coal investor myself, I think that we have to watch what Washington does, because one of my big concerns is they are not paying attention to the end game. So they are looking at the political positioning in the short run, but they are not really sorting out and figuring out what the consequences of their action are.

So we will be cautious. And the investments we will make, we will get adequate rates of return in a reasonable time period that we can anticipate getting that return without governmental action impacting the ability to have any surprises. So don't know if you want me to expand on any of that but --.

No, no. I think that's fine. Let me just ask another sort of basic question. Does the technology exist to bring the emissions down to what is considered desirable, and is this just a question of price, or is the technology still evolving? And if it is evolving, is it a gradual process or does progress come in quantum leaps?

You get into a debate on what is an acceptable level. So that is part of the problem. I personally believe that the technology is available. I think there is efficiency today -- if you look at the new source review that is currently hamstringing utilities, there is enough efficiency in existing power plants. You don't need new technology. You just need to take the handcuffs off of existing utilities. If these people really wanted results, they could take the handcuffs off existing power plants, repeal new source review, they would get enough energy that would cover all of the solar and wind that they are talking about over the next three years that they can generate with no emissions. Because what they would be doing is bringing more efficient power onto the grid that allows them to eliminate some of the less efficient coal-fired generation that is creating some of these CO2 emissions.

So if there are policies that are focused, there are steps that can be taken -- steps with IGCC. Now if you want to go to capture of carbon, there are definitely steps that can be taken there. If the government or the country would accept CO2 emissions comparable to natural gas, that is one step. That is something that is definitely achievable and can be done. If they want to go to 100% emissions, then it makes it a lot more challenging -- capture of 100% of emissions -- and the cost goes significantly higher.

This is a very complex area. I think technology is definitely there for capture. You can store it. Now then you get to the scale of how much and for how long and the legal framework that is required, and whether the government would cap liabilities in case there were mishaps, etc., and so on, and the complexities go on and on and on.

I think that is probably more than we can handle on an earnings call. I appreciate the overview.

(Operator Instructions). [Eric Sowl], Merrill Lynch.

You have actually, I think, done a good job of answering all the questions I had. So thank you.

Chris D'Agnes, Hamlin Capital.

Relative to your CapEx plans, and your new EBITDA forecast, does the Company need to raise money?

We do not believe we need to raise any capital, no, for this plan. If we were to participate in the M&A activities, based on the question that was asked earlier, we may want to access capital. But to discharge our organic growth projects we do not believe that we are in need of raising capital based on where we are right at this 10 seconds.

Thank you. That is very helpful. Has the Company discussed a longer-term CapEx budget looking out 2010, '11, '12?

Not specifically, no.

Should it be lower than the current year's activity?

I think what we have given you are the total capital expenditures for both the River View and Tunnel Ridge.

For those two projects.

Projects. We have also shared with you what we call maintenance capital, which is a little different than operating necessities. The maintenance capital that we are using is really to factor in on distribution coverage ratios where we look at it over a period of time versus an operating necessities budget, which would just take your operating necessities divided by tons. On maintenance CapEx we have equated -- I think we have told you $3.90.

On average over a five-year horizon, yes.

On an annual basis. So if you took our number of production tons times 390, that would give you an idea of what we think our runrate annual capital would be without M&A and growth projects. So the differential between that would be growth capital. And right now the two projects that we have committed to, we have shared with you what those capital numbers are, and to date they are on budget. So we don't have any new guidance there as to suggest that we need any capital for those projects.

We've got two other projects that are in the wings. And those will be very market dependent. I think it is safe to say that the market has not improved. The timing of those projects are still uncertain, based on market dependency since the last quarter, given the sluggishness in the economy. So that would be something that you would look for in addition on CapEx, if and when we would announce those projects.

Ladies and gentlemen, that concludes our Q&A portion for today's presentation. I would like to turn the call over to Mr. Brian Cantrell.

Again, we appreciate everybody's participation this morning, and hope you will join us next quarter when we release earnings in July. Thanks very much.

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