Alliance Resource Partners LP (ARLP) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2009 Alliance Resource Partners and Alliance Holdings earnings conference call. My name is Marcia, and I will be your coordinator for today's call. At this time all participants are in listen-only mode. We will conduct a question-and-answer session toward 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, Marcia, and welcome, everyone. We appreciate your interest in Alliance Resource Partners, which today we refer to as ARLP, and Alliance Holdings GP, which we will refer to as AHGP.

We released our 2009 third-quarter earnings earlier this morning, and I'll discuss these results as well as our outlook for the balance of 2009. Following our prepared remarks we'll open the call to your questions.

But before we begin, a few reminders. First, since AHGP's only assets are its ownership interests 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 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. 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 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 third-quarter 2009 earnings review. As we reported earlier today, ARLP again posted strong year-over-year increases to our financial results and remains on pace to deliver our ninth consecutive year of record performance.

Now, results like these would be impressive under any circumstance in the context of the current challenges facing our industry and our Partnerships. The results we have delivered thus far in 2009 are truly impressive.

I'd like to provide a little perspective to the challenges I just mentioned. On a macro level, although some segments of the US economy are beginning to show signs of stability, growth in general remains elusive, and electric power generation continues to be weak.

Consider these statistics reported by the EIA earlier this month for the 12 months ended July of 2009. Electricity generation in the US dropped 7.6%. Industrial production fell 13.1%. Low prices continued to benefit natural gas-fired generation, which showed the largest absolute fuel-specific increase. In contrast, the drop in coal-fired generation was the largest absolute fuel-specific decline, falling 15% during this period.

Reflecting these factors, utility coal stockpiles have continued to decline, with current levels well above historical averages and representing an estimated 70 days of consumption in our markets.

These pressures have certainly impacted ARLP, resulting in reduced customer demand and, in isolated instances, deferrals of contracted deliveries.

In addition, we continue to work through the ongoing effects of unplanned outages at several of our customers' power plants. In combination, these issues reduced ARLP's sales volumes by more than 1 million times in the 2009 quarter and by nearly 1.7 million times year to date.

ARLP has moved aggressively to mitigate the impact of this demand decline. As discussed earlier this year, we reduced production at existing operations, modified our approach in ramping our production volumes at River View. We adjusted our construction schedules at Tunnel Ridge and implemented rigorous cost controls throughout the organization. These efforts are ongoing, and as evidenced by ARLP's results, the benefits to our performance are clear.

Despite the near-term challenges, we continue to see encouraging long-term indicators and remain positive on the future of coal. Even in the face of still-high inventory levels, EIA predicts coal demand will likely climb 2% in 2010, as power demand recovers and natural gas prices edge up from their 2009 lows.

During the 2009 quarter, we strengthened ARLP's long-term contract position, most notably through the new long-term coal sales agreement with TVA, increasing our deliveries into their system by 2 million tons annually for seven years starting in January of 2010. We also expect to deliver approximately 450,000 tons into the higher-priced metallurgical coal market in 2010.

ARLP also recently achieved a significant milestone at our River View growth project. During the quarter, we held a ribbon-cutting ceremony to celebrate the opening of our new River View mine as the first continuous mining unit went into operation and initial production began. As of this week, River View is mining with three production units and employs approximately 270 workers.

River View remains on schedule, and on budget, to reach its full annual production capacity of 6.4 million tons by July of 2010, at which time this mine will operate eight continuous mining units and have an estimated 600 employees.

With the new sales commitments I mentioned a moment ago, as well as the base-load contracts we previously signed to open our River View mine, ARLP currently expects to grow production in 2010 by 13% to 18% over 2009 levels.

We also had several notable accomplishments on the safety front during the 2009 quarter. ARLP was well represented at the 2009 National Mine Rescue Competition, as teams from our Warrior mine captured national champion honors in the mine rescue, first aid, and confined competitions. Our Dotiki team finished sixth in the mine rescue competition. Both of these were out of 89 teams that we were competing against.

And Don Messel, from our Gibson County mine, was named national champion in the benchman competition. We offer our congratulations to each member of these teams. Their efforts reflect highly on ARLP's commitment to the health and safety of each and every coal mine.

ARLP also continues to be a leader in safety innovation. Our Matrix Design Group subsidiary, which designs the preferred underground miner tracking and communication system, already in use throughout the coal industry, recently received MSHA certification for a new safety product, the proximity detection device. This innovation is designed to keep miners out of harm's way by automatically halting the operation of machinery if an individual moves into a high-risk area near moving equipment.

In addition to gaining MSHA approval for underground use, Matrix recently entered into an agreement with Joy Manufacturing to make the proximity detection device available on Joy's continuous miner units.

We've received more good news recently. In a recent ranking by Standard & Poor's of the total returns to shareholders over the last ten years, ARLP ranked 45th out of 10,000 companies, having delivered compounded annual returns of 27.6% to our unitholders during this period. And this year, our employees have worked hard to continue delivering impressive results during one of the worst recessions our country has experienced since the Great Depression.

Not only are unitholders that value ARLP's consistent long-term performance, ARLP's customers also appreciate our operational flexibility, product diversity, and financial stability, allowing us to secure commitments and pricing for 90% to 95% of our anticipated 2010 production, and 80% to 85% of estimated 2011 production.

ARLP's balance sheet strength, year-to-date performance, and encouraging long-term opportunities have again allowed us to increase quarterly cash distributions to ARLP and AHGP unitholders. Quarterly cash distributions to ARLP unitholders will increase to $0.76 per unit, an increase of 8.6% over the distribution for the third quarter of 2008, while distributions to AHGP unitholders will increase to $0.44 per unit, a jump of 12.8% 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 that you might have. Brian?

Thanks, Joe. As reflected in our release earlier this morning, for the 2009 quarter ARLP reported solid increases to revenues, which were up 4.8% to $299.6 million; EBITDA, up nearly 20% to $72.8 million; and net income up by slightly more than 25% to $36.4 million, all as compared to the 2008 quarter.

As Joe mentioned, our year-to-date results also kept ARLP on track for another record year in 2009 as we posted increases to revenues of 10.3%, EBITDA of 32.1%, and net income of 38%, all of which were records for the first nine months of this year.

Quarter over quarter, improved contract pricing pushed coal price realizations higher, particularly in the Illinois Basin, and continued to drive increased revenues during the 2009 quarter, more than offsetting lower total coal sales volumes.

Overall, ARLP's realized coal sales prices jumped 11.7% during the 2009 quarter to an average $45.58 per ton, an increase of $4.79 per ton over the 2008 quarter.

Sequentially, total average coal sales prices per ton fell slightly as reduced customer deliveries and limited spot-market opportunities drove realized prices lower in the Illinois Basin, more than offsetting increased price realizations in our Central and Northern Appalachian regions from sales mix and opportunistic export market sales, respectively.

General weakness in coal demand and reduced customer deliveries drove ARLP's total coal sales volumes in the 2009 quarter down by 6.4% to the 2008 quarter, and 1.1% compared to the second quarter of this year. These factors also contributed to increased coal inventories, both quarter over quarter and sequentially.

Our Illinois Basin and Central Appalachia operations were impacted most significantly as [forced major events] and contractual deferrals by several customers reduced planned sales volumes in the 2009 quarter by approximately 725,000 and 300,000 tons, respectively, more than offsetting increased deliveries to other customers in these regions.

On a positive note, however, Northern Appalachian sales volumes increased sequentially, primarily due to the previously mentioned sales into the export market during the 2009 quarter.

As Joe mentioned earlier, ARLP has responded aggressively to weak demand and operating difficulties at several customer plants. Since the beginning of the year, we have reduced planned coal production and sales volumes by approximately 2.8 million tons. Reduced production levels, coal inventory, as well as increased sales-related expenses, labor-related expenses, and costs related to the development activities at our River View and Tunnel Ridge mines all combined to negatively impact operating cost during the 2009 quarter and more than offset the benefits realized from our cost-control initiatives.

These contributed to a 6.4% increase to segment adjusted EBITDA expenses per ton when we compare to the 2008 quarter. The benefits of our cost management efforts are evident, however, as segment adjusted EBITDA expenses per ton increased only slightly more than 1% compared to the second quarter of this year.

Looking ahead, we're now anticipating ARLP's coal production for 2009 will end toward the lower portion of our previous guidance range of 25.9 million to 26.4 million tons, essentially all of which is contractually committed and priced.

Based on our results year to date and current estimates, we are anticipating our 2009 results will also be near the lower end of ARLP's previous guidance ranges for revenues, which exclude transportation revenues, of $1.2 billion to $1.3 billion, EBITDA of $335 million to $365 million, and net income of $185 million to $215 million.

ARLP also continues to expect total capital expenditures for 2009 in a range of $350 million to $400 million. And we continue to anticipate year-end liquidity will be comparable to our original estimates made at the beginning of the year.

With that, we've concluded our prepared comments. Again, thanks to everyone for joining us today to learn about what should prove to be the best year financially in our Partnership's history. We appreciate your continued support and interest in both ARLP and AHGP, and with Marcia's assistance we'll now open the call to your questions.

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

Good morning, Joe and Brian.

Good morning.

Good morning, Jim. How are you?

Good. You talked about the unplanned customer outages, which I think has kind of been a recurring problem in the last two quarters. Any thoughts to whether some of that volume can be made up this year or next, or is some of that just kind of lost business?

For one customer, it will not be made up this year. And it's possible that we will see some makeup next year, but it's unlikely. For another customer, we do anticipate increased deliveries in the fourth quarter that will be making up some of the reduced shipments in the second/third quarter for that particular customer.

Okay, that's helpful. And I don't recall you guys historically being a big met producer but was kind of intrigued by the contract for 450,000 tons you mentioned. Any insight into what your met potential might be, given kind of the optimism going on in that market today?

I think the ultimate -- I mean the potential we would have would be probably 600,000 to 700,000. That'd be about the maximum potential we could have, but right now we're targeting 450,000. I think this year we shipped around 100,000, or we're anticipating shipping around 100,000 tons. So it's not a large number, but it does help because of the differential in the market price for met compared to steam.

Sure. And on the contract side --

And Jim, we also have some opportunities for PCI that we're looking to do as well, and that could be in the 200,000- to 500,000-ton range.

That's obviously helpful to the margin. Last question for me. I guess on the contract side, you're pretty well contracted, obviously, fully for this year, pretty well for next year, and largely for 2011. Can you maybe just spend a minute, Joe, talking about how your pricing level in those contracts for '10 and '11 maybe compare to what you've done in '09?

We've been able to secure prices that are higher than what you would see in the spot market. And we can't break down those specific prices, but I think it's fair to say, we look at our increase and tonnage that you could expect to see similar increases in revenue year over year.

I guess in the past you've given us, [probably] at the beginning of this year, kind of a percentage growth over the prior year, [tight] numbers. Can you -- any guidance on that just in ballpark, total terms?

We mentioned in the press release production growth of 13% to 18%.

Right.

And, again, the revenue should be similar to that, maybe a couple points higher, depending on how we end up pricing the unidentified tons for 2010.

And it's really the unidentified tons that are the issue, Jim. Middle of last year, there appeared to be a little bit more clarity there, but the spot markets obviously still remain unsettled. And given that situation, it's difficult to try to provide an overall layout on what the price-per-ton realizations may ultimately be.

Right, I guess the implication there, then, is the prices on average of what you've got already in the books is something similar to what you've seen this year?

I think we would expect, with the roll-off of tons from last year, our legacy contracts, replaced with contracts we secured for the new River View mine, you will see higher per-ton numbers next year on revenue. And, again, the best guidance I can give you right now, because we haven't completed our budget cycle, is if you look at total revenues both for committed and spot that we're anticipating, it's going to be in the 13% to 18% improvement based on what I know today now. Again, we've got a couple more months to finalize our planning process, and we'll give you better guidance on that in January.

Very helpful. Thanks, guys.

Thanks, Jim.

And your next question comes from the line of Norman Kramer from Kramer Investments. Please proceed, sir.

Good morning. I also saw in the press release a very short piece about export coal and coal that you've exported to -- well, wherever. Could you give us a little more color on that and what you think the potential for Alliance might be going forward in the export markets?

It's the -- that comment is similar to the comment Jim just asked relative to the metallurgical coal. So that coal is the 450,000 that's mentioned in the press release, and then there could be some potential for more than that, but right now we only have contracts to deliver 450,000 tons into that export market. We are looking for another couple hundred thousand in the PCI market that potentially could go export. And I think there will be opportunities in the out-years, if not 2010, for some export steam. But our primary emphasis will continue to be on the domestic markets instead of the export market for our company.

Oh, okay. I'm just wondering. I'm just a little confused about one thing. Maybe you could clarify this. Was the coal that was exported, was that the met coal --

Yes, it was.

-- or the steam coal?

Oh, okay.

It was the metallurgical coal. It will be a metallurgical coal.

Okay, thank you for that.

Yes.

Thank you.

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

Good morning.

Good morning, Paul.

Good morning.

On the -- you've got a lot of -- the majority of your tons already committed for 2010 and 2011. I guess on this 5% to 10% of the uncommitted business in 2010, the 15% to 20% in 2011, I'm just curious about whether you have seen any sort of recent pickup in customer interest on trying to secure business. And is it typically a one-year, or has it -- have you had any recent interest in multiyear commitments?

We do have interest in multiyear commitments. I think that that's evidenced by the TVA contract we did secure in the third quarter. We do have several other conversations that are ongoing for long-term commitments that would be multiyear contracts.

I think that for 2010, most of these would start in the 2011 timeframe as opposed to 2010 timeframe, or even 2012 timeframe. We are looking at making several test shipments in 2010, as well as the fourth quarter of 2009, to customers that have historically not taken an Illinois Basin coal and/or our new Tunnel Ridge product that we'll be producing in 2010. So there is interest, again, as a result of the scrubber markets, scrubbers that are recently completed, new power plants recently completed, that will be testing our coal and provide opportunities for new long-term contracts in our Illinois Basin -- for our Illinois Basin production.

Well, I guess related to that point, have you seen -- what's the level of concern among your customers about the permitting issues in Central App? And are you seeing that opening up -- let's call it recently, in the last kind of one to three months, new interest as eyebrows have been raised over the potential for surface mine declines in Central App. Are you looking at that as a pretty significant opportunity long term for Illinois Basin?

Not really. I mean, I don't -- our customers haven't expressed a concern about that. That doesn't mean they don't have one, but they really haven't been concerning themselves with that. I think what's driving their interest is more looking at the anticipated cost for Central App production, which would drive the ultimate price.

When you look at the out-year price curve for Central App, it's north of $70. And when you look at Central App coal at $70, our coal competes very well against the $70 Central App price, and I think it's more driven by that than they are focused on the surface mine issue. That's not to say they shouldn't be focused on it, but from my conversations I've heard, that's not been what's driving their interest in looking at the Illinois Basin product.

All right, and just one line item in the press release. You had a bit of an uptick this quarter in the other sales and operating revenues line to $6.4 million. I was curious about -- was there anything in there that included any sort of compensation for deferred shipments, and what would you look at a reasonable quarterly rate for that line item going forward?

Now, Paul, the primary driver there on the increase was increased activity from our Matrix Design Group.

Oh, okay.

And as they're -- Joe mentioned during his comments that the miner tracking and communication system is already extensively used throughout the industry. And with the new safety device, the proximity detection device being available now on Joy's continuous miners, we hope to see increases there moving forward. It's fairly nascent still, so trying to predict that is a little bit difficult at this time, but it's something we're obviously very excited about and hope to see some improvements moving ahead.

Okay, that's helpful. Thanks very much.

Thank you.

(Operator Instructions). And your next question comes from the line of Joel Havard from Hilliard Lyons. Please proceed.

Thank you. Good morning.

Hey, Joel.

Good morning.

Guys, can you give maybe a quarterly flow to what the CapEx environment looks like through 2010, specifically with regard to which project is sort of most important right now?

I think as we look at CapEx, our CapEx anticipation for next year is slightly lower than what we're spending this year. So we're going to have --

The $350 million to $400 million was for '09?

That's correct.

That's correct.

Okay.

We haven't given a specific view toward '10 --

Toward '10, but it will be a little bit lower than the number you got there for 2009 based on our current review of where we are in our planning cycle. So we still have River View that we've got to complete, and I'm not sure exactly. We're about half there or 60%, and I don't know -- [Terry], do you know the answer to that?

Yes, I think we're closer to 60% complete on that right now. We've just got some of the mining units that we have yet to complete.

That's right, and that'll continue through the first half of 2010.

Right.

As you recall at Tunnel Ridge, we shifted that construction schedule to begin the longwall startup in the latter -- really the fourth quarter of 2011. As originally scheduled, it was going to come on quicker and you would've seen a more consistent CapEx spend in 2010 relative to 2009. But with that schedule adjustment, that is part of the reason why you'll see somewhat lower CapEx next year relative to this year.

And does that imply that the other two -- and I'm sorry for not remembering this, the --

Oh, you're talking about Gibson South and Penn Ridge?

Yes. Are they just indefinite right now then?

They're just on hold pending market demand for the product.

(Inaudible) --

Work is continuing there, but as is our practice, we're not going to commit the capital until we have contracts for the production.

Of course. All right, so that's suggesting that the River -- its volume -- you are starting to place, as it were.

Yes. Well, it began production in August. Our prep plant is still under construction, so we're continuing to build inventory there and waiting on the prep plant. But it is still scheduled to ramp up to eight production units. As of this week, there are three units in operation there, and we'll be at eight by July of next year and would anticipate being at our 6.4 million-ton annual run rate at that point.

Okay. All right, good. And maybe more for Brian, is that -- does that schedule require much by way of utilization of the revolving facility, or is this kind of prepackaged?

Well, of course, when we had the approval of River View and in anticipation of the approval of Tunnel Ridge, we issued the $350 million private placement last June. That, in combination with our revolving credit facility, which I think we've got about $135 million in availability under there -- we have no current drawings against it, but there are letters of credit that are counting against that. So it was always the plan to utilize the cash from the debt offering as well as the availability under the revolver to allow us to build out these two projects.

And that's the notes?

Yes, we had a seven-year and a ten-year tranche on that offering last June.

Right. Right. All right. Well, that's all I've got, guys. Sorry. Best of luck.

Thanks, Joel.

(Operator Instructions). We have no further questions at this time. I would now like to turn the call back over to Mr. Brian Cantrell. Please proceed, sir.

Thanks, Marcia, and thank you, everyone, for your continued interest and support. We look forward to talking with you again when we are able to provide you with our year-end results in January as well as our outlook for 2010. Thanks very much.

Thank you for your participation in today's conference. This concludes the presentation, and you may now disconnect. Good day.