Alliance Resource Partners LP (ARLP) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Second Quarter Earnings Call for Alliance Resource Partners, L.P. and Alliance Holdings GP. My name is [Jenada] and I will be your operator for today. At this time all participants are in listen-only mode. We will conduct a question and answer session towards the end of this conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

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

Thank you, Jenada, and welcome, everyone. We appreciate your interest in Alliance Resource Partners, which we will refer to as ARLP and Alliance Holdings GP, which we refer to as AHGP.

We released our 2009 second 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, however, 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 contain 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 that 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, the 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 measures and the most directly comparable GAAP measure are contained at the end of the ARLP press release which has been posted on the ARLP's Website and furnished to the SEC on Form 8K.

Now that we're through with the required 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 Second Quarter 2009 Earnings Review. Buoyed by strong price realizations well above our historical levels, ARLP posted solid increases to earnings and cash flows for the second quarter and reported records for revenues, EBITDA, and net income through the first six months of 2009. We're pleased that ARLP has continued to deliver strong financial results in the face of significant challenges created by the severe global economic downturn.

Domestic coal demand and pricing continue to erode during the quarter as economic activity remained weak, particularly in the industrial sector, causing coal fired electric power generation to decline by more than 14% in the Eastern markets compared to last year. Temporary pressure from low natural gas prices and growing utility stockpiles are also contributing to a sloppy near-term coal market. ARLP has been further impacted by unplanned outages at several of our customers' power plants which could potentially reduce deliveries this year by slightly more than one million tons.

For the first half of the year, ARLP's coal sales volume has fallen by approximately 942,000 tons compared to the first half of 2008. We were forced to lower production volumes and build inventory to respond to lower demand. Lower production and sales volume were a major factor in our higher costs posted and lower than anticipated earnings for the quarter.

Despite the demand destruction caused by one of the worst recessions on record, ARLP was able to grow net income and net income for basic and diluted limited partner unit by 43% for the first half of 2009 compared to the same period in 2008. EBITDA for the 2009 period increased 37.7% over the comparable 2008 period.

Looking ahead, ARLP is continuing to adjust our operating plans to match production volumes to lower customer demand. As a result, we are now anticipating reduced coal production for 2009 to fall within a range of 25.9 million to 26.4 million tons essentially all of which is contractually committed and priced.

Based on current estimates for coal sales volumes and pricing, we are also lowering guidance for revenues, excluding transportation revenues, to a range of $1.2 billion to $1.3 billion and reducing our expectations for EBITDA and net income to guidance ranges of $335 million to $365 million and $185 million to $215 million respectively.

Notwithstanding the current difficulties in the coal markets, we continue to see encouraging indicators on the horizon. In particular, ongoing discussions with customers seeking to secure long-term supplies of low chlorine, high sulfur coal support our view that demand for this product over the next couple of years exceeds available supply.

Fortunately, ARLP's reserve position and operating flexibility give us what we believe is a competitive advantage to meet this growing demand for scrubber quality coal. Enhancing this advantage, our River View and Tunnel Ridge projects are proceeding on schedule and the mining conditions we have encountered so far at both operations are encouraging. Export demand for met coal also seems to be showing signs of increased activity.

These encouraging long-term opportunities combined with our strong year to date results and continued expectations for another record year in 2009 allowed us to again increase quarterly cash distributions to ARLP and AHGP unit holders. Quarterly cash distributions to ARLP unit holders will increase to $0.745 per unit, an increase of 12.9% over distribution for the second quarter of 2008. This would take us to an annual distribution rate of $2.98. Our distributions to AHGP unit holders will increase to $0.4275 per unit, a jump of 21.3% over the distribution for the comparable 2008 quarter.

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 you might have. Brian?

Thanks, Joe. As reflected on our release earlier this morning for the 2009 quarter, ARLP reported solid increases to revenues which were up 10% to $303.9 million, EBITDA up nearly 18% to $77.1 million, and net income up 13% to $41.5 million, all as compared to the 2008 quarter. As Joe mentioned, we also reported records for revenues, EBITDA, and net income for the first half of this year.

Increased price realizations, particularly in the Illinois Basin, continued to drive revenues higher during the 2009 quarter, more than offsetting lower total coal sales volumes. ARLP continued to benefit from improved contract pricing during the quarter as realized coal sales prices climbed $6.54 per ton to an average of $46.04 per ton, an increase of 16.6% over the 2008 quarter.

Sequentially, however, average coal sales prices per ton fell 5.2% during the 2009 quarter as sales opportunities in the high priced spot and export markets from transactions we initiated in 2008 were completed during the first quarter of 2009. Also contributing to lower average sales prices in the 2009 quarter, lower cost indexes resulted in reduced pricing under several contracts compared to the first quarter of 2009.

Looking at sales volumes, general weakness in coal demand and reduced deliveries due to unplanned customer outages drove ARLP's total coal sales volumes in the 2009 quarter down by 5.7% compared to the 2008 quarter and 2.8% compared to the first quarter of this year. More specifically, lower coal sales volumes during the quarter reflect reduced spot market sales in our Central and Northern Appalachian regions. Partially offsetting these reductions, however, Illinois Basin coal sales volumes increased slightly during the 2009 quarter compared to both the 2008 quarter and the first quarter of 2009.

As Joe mentioned, ARLP has responded to weak demand and operating difficulties at several customer plants by adjusting production schedules. Our reduced coal production and sales volumes negatively impacted operating costs during the 2009 quarter, contributing to increased segment adjusted EBITDA expenses per ton compared to both the 2008 quarter and the first quarter of this year.

Increased inventory levels as well as higher sales related expenses, maintenance costs, and labor related expenses at all of ARLP's operating regions also helped to drive total operating expenses higher during the quarter. Expanding briefly on labor related expenses during the quarter, a non-cash charge reflecting discount rate fluctuations resulted in a significant increase to ARLP's labor related expenses in the 2009 quarter. Primarily as a result of this non-cash charge, total workers' compensation expense increased by $0.95 per ton and effected the Illinois Basin, Northern Appalachian, and Central Appalachian regions by $0.61 per ton, $0.93 per ton, and $4.17 per ton respectively.

Increased segment adjusted EBITDA expenses during the 2009 quarter in our Central Appalachia region also reflect anticipated higher operating costs at our Pontiki mine as mining operations were completed in the Pond Creek coal seam and transitioned in the thinner Van Lear coal seam. In our Northern Appalachian region, a longwall move during the 2009 quarter also contributed to higher operating costs per ton.

Comparative results between the 2009 and 2008 quarters were also impacted by $9.9 million of non-recurring benefits realized in the 2008 quarter related to favorable claim settlements and the sale of non-core coal reserves, including a $1.9 million benefit to operating expenses. In addition, expenses related to our River View and Tunnel Ridge mine developments drove segment adjusted EBITDA expenses in the 2009 quarter compared to the 2008 quarter up by $0.31 per ton in the Illinois Basin and $2.27 per ton in Northern Appalachia.

Looking ahead, ARLP's ongoing initiatives to reduce coal volumes to match demand will continue to weigh on our operating expenses per ton. In addition, the duration of unplanned outages currently affecting several customers could negatively impact ARLP's cost per ton and inventory levels over the balance of this year. Nevertheless, ARLP is confident that ongoing efforts at each of our operations to reduce costs, enhance productivity, improve efficiency, and manage inventory levels will allow us to control operating costs and protect margins as we work through the challenges currently in front of us.

Complimenting these operational efforts, ARLP will continue to aggressively manage its liquidity in this difficult market environment. Since the beginning of the year, we have revised operating plans and mine construction schedules to reduce planned capital expenditures in 2009 by $70 million to $80 million. As a result of this disciplined approach, we currently anticipate yearend liquidity will be comparable to original estimates made at the beginning of the year.

As you have heard, continuing economic weakness and demand destruction in the coal markets present significant near-term challenges. Fortunately ARLP has demonstrated the ability to manage these challenges and although results this year may be below our original expectations, we remain positioned to deliver another record year of financial results to our unit holders in 2009.

That concludes our prepared comments. Thanks to all for joining us today and for your interest in both ARLP and AHGP and with Jenada's assistance, we will now open the call to your questions.

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

Good morning, guys.

Good morning, Jim.

Could you maybe given your CapEx reductions and kind of the way the market's trending give us a status update on the timing and development of River View and Tunnel Ridge?

Alright. I think Tunnel Ridge is consistent with what we said last quarter to where we're moving ahead at the one shift per day which delayed from what we said in the first quarter. So, we're on track and I believe that means the longwall is fourth quarter 2011?

That's correct.

As to when the longwall production will begin. So, we will have some production in 2010 as the prep plant is -- we're timing the production to the prep plant construction which should be sometime in the second quarter of 2010 to where we would actually see tons going into the market. But then development for the longwall panels would not -- the longwall will actually start in the fourth quarter 2011.

As far as River View, we expect coal to be on the belt in the second week of August and we are ramping that production up as we -- on schedule as to what we've previously communicated. So, we're still on track to bring on eight units. We are looking at the marketplace, determining exactly what the needs will be in the latter half of 2010, 2011. It is possible that we would transfer a unit from other operations as opposed to hiring new hires if the market does not respond as we anticipate.

So, we do have some flexibility there. But in this moment in time, we do plan to effectively transfer two units from our other operations of the eight and then we would be hiring people to fill the other six and that would be completed by the third quarter of 2010. There will be some ramp up so we would expect that by the fourth quarter of 2010 hopefully we will be at the annualized production rate of around 6.2 million to 6.3 million tons a year.

Very helpful. Brian, you talked about some of the different factors impacting costs to different regions. Based on kind of where your production levels are today or your guidance and some of those factors you mentioned that kind of helped push costs up in the second quarter, what are you guys thinking in the different regions for costs in the second half? Similar to second quarter or will there be some moving parts?

There could be moving parts. As I mentioned, a lot of it's going to be dependent upon volume. So, the duration of some of the customer outages that are currently in effect could have an impact on that. Looking at it in the aggregate for the balance of this year over next year, we expect them to see -- I'm sorry. Balance of this year over our results so far this year, we would expect our costs to be barely comparable. We're looking, as we mentioned, to continue taking initiatives to cut costs and improve efficiencies and productivity. So, it could vary a little bit, but I think we're going to be seeing overall costs coming in in the range of about where we have been so far this year.

That's helpful. Maybe last question from me, distributions, obviously at one point in time last year you were looking at some exceptional growth and you're still putting up some pretty strong growth here at over 2% per quarter. So, you're I guess tracking to a 13% annualized rate. Given the way the market looks today and the way some of the MLP tiers, where they tend to be coming out on distribution growth for this year, any thoughts as to what you want your full-year numbers to be? Or is just kind of a quarter by quarter assessment?

Yes. This is Joe. It would be a quarter by quarter assessment. I think the key for us is whether River View will in fact proceed with the other units in the Illinois Basin, staying intact. As I mentioned earlier, if we can get that volume in at the margins that we anticipate there, then I think that would be very helpful to us. I think as we've looked at the other pricing in the market, it has been affected in the short-term, but in the long-term we expect that our growth is going to allow us to continue to focus with our goal to increase distributions.

We're just going to have to measure that on a quarter by quarter basis and determine how long this economy is going to languish. If we can get some industrial demand to where electricity demand would grow, that would obviously help things. But at the same time, if we see continued reduction in electricity generation or just flat growth in electricity generation, then that may impact our analysis in the short-term.

But long-term, we do believe our projects with Tunnel Ridge and River View are going to give us significant growth that will allow us to still maintain our goal and objective and that's to increase cash distributions at the highest tier of the MLP universe.

Very good. Thank you, guys.

Thanks, Jim.

Your next question comes from the line of Ron Londe with Wells Fargo. Please proceed.

Thank you, this is obvious from your press release, that inventories had ballooned up to over 900,000 tons. Can you give us an idea of where you are now and where you think you'll be trending? What's a good level that you can feel comfortable with going forward?

With miners' vacation occurred first week of July in most of our operations. We had some operations where we actually accelerated our miners' vacation into June. But with that and our shipping schedule in July, those numbers have come down. We are projecting that by the end of the year -- I would say through the third quarter you're probably not going to see much difference. But by the end of the year, we do anticipate that our inventories will be down similar to what we've seen in prior years. So, that's probably in the 350,000, 400,000 ton range. But that's going to be market dependent. Back to what Brian said relative to the length of some of these outages that are still uncertain at this moment and just general economic conditions as well as our production, obviously.

You also talked about reduced pricing due to index price adjustments on several long-term contracts. Can you give us a feel for the magnitude of those adjustments? How it might've affected you in this quarter, whether there's a potential for more index adjustments going forward? And maybe what percent of that 25.9 million to 26.4 million is subject to index pricing?

In the quarter index adjustments on a consolidated basis affected us by about $0.58 per ton. The bulk of that was in our Northern Appalachia region which had an impact of around $5.04 per ton. The balance of that was in the Illinois Basin at about $0.15 per ton.

So, it lowered you - ?

At least on a going forward basis. I think it's a quarterly adjustment. It's typically lagging. One of the big ones is on crude or oil or diesel. So, we -- that sort of reflects back when oil prices dropped down to the $40 range, $50 range. Hopefully we'll make some of that up in the out quarters. So, we think that the worst effect has been reflected through this quarter. We hopefully will get some of that back over the next successive quarters as we've seen steel prices stabilize and other commodity prices start to go back up and diesel prices and crude going back up. We know electricity's going up. There are some cost factors that hopefully we've seen the worst of that impact through the second quarter.

Can you give us a feel for how many tons that might be effecting?

It would be a guess, but I would say probably a quarter of our production.

Yes.

Five million or six million tons, maybe?

That's all I have. Thank you.

That's a reasonable estimate.

(Operator Instructions) Your next question comes from the line of Paul Forward with Stifel Nicolaus. Please proceed.

Hi. Good morning.

Good morning, Paul.

Could you talk a little bit about just where customer inventories are right now in the regions that you're delivering coal to?

Yes. I think it's fair to say that they're at or above historic levels. As we look at -- we've only had I think only one customer where we've actually deferred tons into 2010. Maybe two. And it's really not substantial tonnage.

So, as we think of utilities and customers that have -- where inventory levels are so high that they're coming back asking for relief, we've only experienced that with a couple of our customers. So, I don't think that the current inventory situation is such that it's going to impact our current contractual arrangements but for these outages that we've mentioned which happened at a couple of our operations -- or a couple of our customers, rather.

Is there a difference by region that you run into?

Not really. I think that -- not really. We're basically in Illinois Basin, Southeast, and we've got the Mt. Storm plant and I'd say they're all about the same really for our customers.

Okay. And on this seam transition that you mentioned at Pontiki, would you expect to be going forward there at some permanently higher unit cost or permanently lower production rate?

We will be at a lower production rate. That had been anticipated in our previous guidance; however, as you probably known from our recent press release, we did reduce that operation from four units to three units with a layoff of 72 people 1st of July. As a result of that we will see lower production. At the same time, we've been able to position those remaining three units in the most -- in the coal seam that will give us the highest productivity.

So, we're hopeful that on a unit cost basis that, yes, it will be higher because we've got fewer tons to spread over some fixed costs. At the same time, we don't think it's going to be a significant change. And that's been reflected in our reforecast or our revised guidance to you.

Alright. And I think you mentioned in the press release that EBITDA expense per ton in Central Appalachia was around $56.69 in the quarter. Is there some -- what point or what level does pricing have to rise to before you can really start thinking about putting new capital to work? Do you need $70 plus Central Appalachia pricing to even consider I don't know about restarting units or thinking of expansions? Is that a level that you think is probably needed to turn around and start boosting production again?

I think that is a number that I've used and that's more for industry specific. I mean, our layoff was really not price driven as much as it was market driven. There's just no demand for that quantity of coal on the Norfolk Southern Railroad that we foresee because of the inventory build on that rail line through the middle of 2010 if not longer than that. It's not a matter of price as much as it was just having the volume and a place to put it. So, for us to bring back that other unit, we could do that profitability at a price lower than $70. But it's unlikely that will occur until 2011 timeframe.

Okay. And maybe lastly, you're continuing with your two expansion projects. I was just wondering what your current status might be on looking around at acquisitions and if there are any areas that look interesting in this really weak market, be able to pick up properties that are currently pressured by the market but could eventually be a really nice addition to your mix of operations?

We have continued to look for acquisitions as well as continued to market our development projects at Gibson South and Penn Ridge. I think that I don't really have anything to tell you of any substance. I think the more likely scenario would probably be bringing on more production organically than acquisitions. It's possible that there's some opportunity that will present itself. At the same time, because of values other than in Central Appalachia, there are not too many opportunities where people are willing to sell at prices that the market would dictate today that we're aware of.

So, it's still cheaper to build than to buy? Expectations among sellers are still in your view not - ?

Yes, sir.

Okay. Thank you very much.

Thanks, Paul.

Your next question comes from the line of Mark Reichman with Sanders, Morris, Harris. Please proceed.

Thank you and good morning. Just a follow-up on the inventory level question. I was wondering if you could frame it maybe in terms of how many days of inventory do your customers normally carry and how many days of inventory would you say they have on hand currently?

That's a hard -- that's a moving target because of the coal burn.

Would you say they're above - when you say they're above historic norms, pretty much inline with industry? Because we've heard that most of the inventory levels are probably affecting Powder River Basin coal more so than Eastern coals. I was curious how you stack up relative to either the industry norm or maybe you could maybe get a little more specific to the utilities that you serve?

I think for the Southeast utilities we serve, they're probably higher than normal. The Illinois Basin and Northern Appalachia markets are probably also higher than normal but to the same extent as Southeast and probably not to the same extent as the PRB mines, if that helps you.

Okay. And then just a second question. To what degree do you think fuel switching is impacting the inventory levels? We've seen that gas fired generation rose and coal fired generation declined. Gas prices are low. I mean, how are your utilities kind of viewing that? Are you seeing, I mean, to the extent that depending on their mix of fuel or the mix of power plants, I mean, to what extent do your customers have the ability to fuel switch and how is their view of gas prices impacting the longer-term negotiations or their longer-term plans?

We've had a couple of customers that it's affected their coal burn but the majority, the great majority of our customers it has not affected their coal burn. Their coal burn's been more affected by the general economic conditions.

Right. Okay.

For those couple that it has affected, they're going to take advantage of it. But I don't think they look at natural gas prices being sustainable in the $4.00, sub $4.00 level.

Right. Okay.

They're not really anticipating that. They're just being opportunistic at the moment. But those same customers have honored their agreements with us. So, they haven't been pushing back. It's just taking away spot market opportunities for us.

I see. Great. Listen, thank you very much.

Thanks, Mark.

At this time, there are no further questions. I would now like to turn the call over back to Mr. Brian Cantrell for any closing remarks.

We'd like to thank everyone again for their interest and confidence in ARLP and AHGP. And we look forward to speaking with you again next quarter. Thank you very much.

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