Alliance Resource Partners LP (ARLP) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2010 earnings for Alliance Resource Partners LP and Alliance Holdings GP. My name is Jasmine and I'll be your operator for today. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Brian Cantrell, Senior Vice President and Chief Financial Officer. You may proceed, sir.

Thank you, Jasmine, and welcome, everyone. We appreciate your interest in Alliance Resource Partners, which we refer to as ARLP, and Alliance Holdings GP, which we refer to as AHGP. We released our 2010 first-quarter earnings earlier this morning and will now discuss these results as well as our outlook for 2010. Following our prepared remarks we will open the call to your questions.

Before we begin let me start with a few reminders. First since AHGP's only assets are its ownership interest in ARLP, our comments this morning 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 for 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 financial measures 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 required preliminaries I'll turn the call over to Joe Craft, our President and Chief Executive Officer. Joe?

Thank you, Brian, and good morning, everyone, and thank you for joining us today. Before we begin, I don't know how many of you-all on the phone got to see the memorial service yesterday, but we -- all of us here at Alliance wish to express our heartfelt condolences to the families and friends, coworkers, including Don and his management team, affected by the recent tragedy in West Virginia.

And we also appreciate that President Obama acknowledged at yesterday's memorial service the important contribution that coal miners make to America. We consider all coal miners to be heroes; men and women working tirelessly to provide the energy needed to fuel the economy of this great country. And it was refreshing to hear our leaders acknowledge their contribution yesterday.

So turning now to this morning's earnings release, for the first quarter of 2010, we are pleased to begin our discussion with another strong performance by ARLP and AHGP. We again posted record quarterly operating and financial results. These results were driven by solid performance across all operations including significant benefits realized during the quarter from our new River View mine and the strength of ARLP's long-term coal supply contracts.

Looking ahead to the rest of 2010, we expect these benefits will continue to positively impact ARLP's results. Coal revenues for the remainder of 2010 should further benefit from ARLP's recent commitments to deliver 1 million tons of metallurgical coal into the export markets during the fiscal year beginning April 2010.

In addition, development production has begun at Tunnel Ridge and production at River View, which has exceeded expectations so far this year, should continue to increase as we bring the six continuous mining units into production at this operation next month. These opportunities combined with our first-quarter performance give me confidence that ARLP will deliver its 10th consecutive year of record performance in 2010.

With more than 97% of our expected 2010 production sold we are increasing our guidance for this year. ARLP is now expecting 2010 coal production in a range of 29.9 million tons to 30.6 million tons and coal sales volumes of approximately 30.8 million tons to 31.5 million tons. Increased sales volumes and improved coal sales prices are now expected to increase ARLP's 2010 revenues to approximately $1.5 billion to $1.6 billion. We also currently expect 2010 EBITDA will increase to a range of $440 million to $480 million, with net income increasing to a range of $270 million to $300 million.

With a strong opening quarter and continued expectations for another record year in 2010, delivering substantial year-over-year growth in earnings and cash flows, we were able also to increase our quarterly cash distributions to ARLP unitholders to $0.79 per unit, an increase of 8.2% over the distribution for the first quarter of 2009. AHGP unit holders will receive a quarterly increase to $0.465 per unit, which represents an increase of 12% over the distribution for the first quarter of 2009.

At this time I'm going to turn the call back to Brian for a more detailed look at our financial results, after which we will be happy to address any questions that you might have. Brian?

Thanks, Joe. As reflected in our release earlier this morning, ARLP reported the strongest quarterly financial and operating performance in the history of our partnership, posting record results across the board for coal production and sales volumes which were up 9.8% and 14.8% respectively; revenues up 15.6%; EBITDA up 10.4%; and net income up 3.4%, all as compared to the 2009 quarter.

Several factors played a significant role in achieving these results -- increased coal production and sales volumes led by the performance of ARLP's Illinois Basin operations and particularly reflect the impact of our new River View mine.

ARLP also continued to benefit from its strong contractual position, particularly in the Illinois Basin and Northern Appalachian region, both of which delivered increased coal price realization quarter over quarter and sequentially and also helped push ARLP's average coal sales price up by $0.75 to a record $49.34 per ton sold. These higher prices combined with the previously mentioned increased sales volumes drove ARLP's record revenue in the 2010 quarter.

As anticipated, operating expenses in the 2010 quarter increased over 2009 expenses within our previously stated range of 3% to 5%. Increased coal production contributed to higher labor-related expenses and material and supplies expenses while record coal sales pushed sales-related expenses up in the 2010 quarter. Higher costs associated with our beginning coal inventories also impacted operating expenses in the 2010 quarter.

In addition, we did experience some transportation disruptions during the quarter which led to increased coal inventories. We do expect to reduce our inventory during the remainder of 2010 however, and currently anticipate coal inventories will return to near normal levels by year end. ARLP is closely monitoring coal market conditions and managing production expansion and capital expenditures accordingly. We continue to anticipate 2010 total capital expenditures in a range of $275 million to $315 million.

In addition to necessary expenditures for maintenance, our capital will primarily be directed to continued expansion of the new River View mine and development of the Tunnel Ridge mine. As we had previously indicated, these estimates reflect our currently anticipated schedules and actual capital expenditures may vary due to construction accelerations or delays.

ARLP's strong performance and ongoing efforts to manage costs and expenses have kept our balance sheet strong. This strength, along with liquidity of approximately $130 million at the end of the 2010 quarter and ready access to the capital markets, leave ARLP well positioned to execute our current plans and to take advantage of additional opportunities that may arise.

This concludes our prepared comments. Again, thanks to all for joining us today to learn about our record quarter and what should prove to be the best year in our partnership's history. We appreciate your continued support and interest in both ARLP and AHGP. And now, with Jasmine's assistance, we'll open the call to your questions.

(Operator Instructions). Jim Rollyson, Raymond James.

Good morning, everyone, sorry about such sloppy results this quarter. Actually just kidding, fantastic job. Joe, last week Peabody spent some time on their call talking about the challenges going on with regard to Central Ap production, and obviously that's not going to get any easier after what happened a couple of weeks back. I'm kind of curious; they mentioned the outcome of that being to the benefit of PRB and the Illinois Basin. I'm kind of curious if you guys are having any pickup in discussions with customers in light of what's been going on and probably what's going to be going on and maybe how that filters into your development of Gibson South?

There hasn't been -- since the incident there hasn't been really a pickup for -- with Central Appalachian customers for Illinois Basin production. I mean, there has been over the past year continued interest relative to those utilities that have added scrubbers. But there hasn't been anything specific to the accident of April 5.

I think that relative to opportunities for Gibson South, we did have conversations ongoing towards the end of 2008 and beginning of 2009, those did subside with the recession. There has been some interest that has been shown recently but nothing specific to where we could give you an indication that there's any imminent startup of that operation.

So that's still a ways off? And on Tunnel Ridge, which you're kind of working up, can you remind us where you stand on contract commitments there?

We have about 60% of that production under contract with some of that having optionality in the Illinois Basin. So as we look to ramp up our production we have started production and we'll have about 250,000 tons to sell in 2010, which we plan to place as test orders. And at the moment we're sold out in 2011 with, again, 40% to be sold in 2012.

Got you. And then lastly for me maybe, given the kind of thoughts -- your commentary on the thermal markets right now, I'm kind of wondering what your contracting strategy is for your uncommitted steam coal going forward? Are you patiently waiting for the market to start developing into a little tighter market, a little better pricing opportunities, or are you just taking on commitments here and there or what are you thinking?

Well, we're essentially sold out for this year, so as we look to 2011 we basically -- if you exclude the seven and eight units at River View, which we've got in limbo and are waiting for the markets to respond, we've got about 90% of our production sold in 2011. So what we are doing is we are responding to solicitation, but we're responding at prices that we think are reasonable over a two to three year time period with the hope and expectation that the market will respond to those positively.

So, we are responding, again, with the effort to have longer-term solicitations with the ability to bring up some production. We had one unit at Excel where we suspended operations a year ago, so we got excess capacity there as well as we got the excess capacity with the units and some additional contracts that opened in the Illinois Basin. So we would definitely be responsive to what we're seeing in the marketplace. We are seeing some solicitations coming out for two to three year time horizons so we're just responding to those as they come to the market.

Okay, great. Thanks again. Good quarter.

Thanks, Jim.

Thank you.

Mark Reichman, Madison Williams.

Good morning. Are you able to provide an update on secured sales commitments for 2011, 2012 and 2013? I think you gave some guidance earlier in the year.

We did and those have not moved materially from our earlier guidance.

Okay. And then last week the management of Peabody opined that coal inventory levels were higher at utilities that source their supplies from the Central Appalachia than from the PRB. And I was wondering if you could provide some color on coal inventories at some of the utilities that source their supplies from the Illinois Basin and Northern Appalachia?

I think that they're a little higher than normal, but they're not excessive. I mean, if you look at Illinois Basin, their stockpile typically is less than 30 days and it's running slightly more than 30 days. So I don't really think the stockpile issue is a significant issue for us at the moment. I think we are closer to balance even though there is probably some supply or some stockpile that is slightly greater than normal, but it's not as much as it was a year ago.

Okay. And then as just kind of a from 50,000 feet kind of level kind of question. But there was the article in the Wall Street Journal last Friday, I think it was addressing utilities' decisions to switch to gas versus coal and looking at plants that -- coal-fired plants that don't justify the expense of emissions reduction equipment. And I was just wondering how do you see the development of coal-fired generation advancing and what that means for industry growth?

Well, there are -- I can't give you the exact number, but there are several plants that are in final phase of construction. There are still some that are being constructed, for example at Duke Energy in particular and AEP I believe has a plant that's under construction. So there are some new plants under construction. You are seeing some of the very old plants on the coal side that are going off-line. And you're reading some about that, but when you really look at how much coal burn those plants actually account for, it's really not that significant.

I think on the coal to gas switching, if gas stays at the $4.50 or lower level then we're going to have some of that. We don't anticipate the switching to be as much this year as it was last year. And I think longer-term nobody really believes that you're going to see $4.50 gas. I mean, I was encouraged to actually see Chesapeake talking at a conference last week where they're even talking $6 to $6.50 gas.

That's the first time I've ever heard them come up with that expectation, which is a level that I believe is realistic. In other words, for these shale plays to have economic terms they've got to have $6 to $6.50 gas. And it's nice to hear Chesapeake confirm that as well. So longer term I really don't anticipate coal to gas being a significant deterrent to coal burn. Now whether utilities will step up and build new coal-fired power plants that's yet to be seen.

Okay, great, thank you, that's very helpful.

Thanks, Mark.

Joel Havard, Hilliard Lyons.

Thank you, good morning, everybody. Joe, can you elaborate, please, on your comments about the met opportunity?

Essentially we have our operation at Mountain View and we have the ability obviously -- it used be called [Metiki] for a reason, so it does produce some metallurgical product, so effectively we sold out our unsold position at our Mountain View operation in the export market. It will go to several customers around the globe. And it basically started April 1 and it will continue almost on a ratable basis through the first quarter of 2011.

We do expect that the metallurgical markets will continue to have some strength for at least another year or two. So we're hopeful that we could continue selling coal into that market for the next physical year as well, even though we have no contractual obligation to do so.

So this is a -- I guess like a brokered contract. They're farming it out internationally, it's about 1 million tons through the next 12 months. And is pricing indexed or fixed now?

It is a fixed price for the year.

I don't suppose you'd want to share that?

It's similar to what you're reading in the press. For us it nets back to the mine in the $100 range per ton.

Perfect. All right, and then Brian, I think I'm off here on my scheduling. Is Tunnel Ridge -- let me ask the question more directly. What is the timeline between now and say into or through 2011 with Tunnel Ridge? I've got it pushed back too far I believe.

Well, the production that Joe referred to that's occurring now is development production, as we set up the long wall. The long wall is still scheduled to begin operation late in 2011, probably in the November timeframe.

Okay. And as River View kind of wraps up and you shift into Tunnel for next year, where's the inflection in CapEx where we start to ramp back up? Or in fact does it go sideways now with this bigger development behind you?

I don't know that you'll necessarily see an inflection point. Obviously there's a significant amount that has already occurred at Tunnel Ridge and we'll complete that buildout as we previously discussed. At River View, the capital that's really remaining is when we bring the seventh and eighth -- the significant capital that's remaining is when we bring the seventh and eighth units into production. And as we've talked about previously, those are on hold as we continue to evaluate supply and demand in the market.

Okay. And lastly on River View, I think originally it was anticipated that the sixth unit would be up in June. Is that already up?

It's scheduled to come up anytime now.

Oh, okay, all right. Guys, that's great, thank you very much, good luck.

Thank you.

Thank you.

Ronald Londe, Wells Fargo.

Thanks, my question surrounded the met coal situation, a lot of them were answered. But, I have one question surrounding that. From the standpoint of that 1 million tons, do you expect any variation in the next four quarters or from a modeling standpoint should we use 250,000 tons a quarter or how should we look at that?

Yes, I mean it's ratable over the 12 months beginning in April.

Yes, we have -- that's assuming the railroads perform and the vessels show up. But yes, that's the expectation for both us and the customer.

In general, what is your -- also what's your outlook for expenses going forward? For the quarter they were up about 7% versus last year and 9% sequentially especially in the Illinois Basin. Do you see anything unusual in the future from an expense standpoint that we should look for?

Well, on a consolidated basis they were up 4.6% compared to the 2009 quarter and 3.7% sequentially, which I think our range when we discussed expectations on costs, that the fourth-quarter 2009 conference call we said 3% to 5%. So it's staying within our anticipated ranges on a consolidated basis. And I think looking forward that range will still hold for the year.

I think one of the things -- there's some ramp up at River View, so there are some costs there that hopefully once -- that number will stabilize a little bit more than what we saw in the first quarter. But we still had some inventory -- our inventory position at River View is such that a lot of our costs that are flowing through in the first quarter were really part of our ramp up in the third quarter of 2009. So now as that inventory starts rolling forward we should see a little bit lower cost at River View.

Right.

The other thing that has impacted us, we have had some lower yields at a couple of our operations and one of those in particular we believe we've gotten through that geology. So we're hoping to see a little bit better production. Now with the incident that just occurred and the step up in MSHA regulation we may give some of that back.

But we believe we've taken into consideration all factors with the exception of the April 5 incident and what the regulators are going to do in our estimate. And I think relative to that it still would be within the range. We don't expect there will be significant impact this year, but you just never know with the way the regulators may react to that incident, and/or any laws that might change.

And adding on to that, we are continuing to assess any potential impact out of the healthcare legislation, in particular around the Black Lung provisions. Our actuaries are in the middle of that study as we speak. But to Joe's point, taking all of those things into consideration I still believe that a 3% to 5% increase on a consolidated basis over last year will hopefully still hold.

Okay, thank you.

Dave Martin, Deutsche Bank.

Good morning, thanks. I wanted to start with just a couple additional questions on the met coal business. What were the met coal sales in the first quarter? And how would they compare to the fourth quarter?

The fourth quarter of 2010 or the fourth quarter of 2009?

Of 2009, sorry.

I think all of last year -- last year around 250,000 tons I believe for the year. So that's 75,000 -- 60,000 to 75,000 per quarter, which would run into the first quarter of 2010.

So the first-quarter volumes would have been pretty consistent with the fourth quarter of last year?

Yes.

Okay. And then on the --.

That's going to step up now with this increased commitment we just made --

To about 250,000 tons a quarter.

Yes, okay. And then on the 1 million tons in the forward fiscal year, I know you mentioned they're all export sales to various regional markets. But could you give us maybe a bit more color on where the concentration of these customers may be? How much is NAFTA, LATAM versus Europe and Asia?

I think maybe about one-third South America and two-thirds Asia.

Okay.

And we were correct, the met tons the first quarter were right at 170,000 tons.

170,000 in the first quarter.

So that would have -- yes.

Okay. And then on the capital budget, could you just give us an update on the total budget for both River View and Tunnel Ridge and the amount that has been spent?

At River View our approved level is right at $270 million and we've paid $[209] million through the first quarter. And Tunnel Ridge, we're right at $300 million and we've expended $120 million through the first quarter.

Okay, thank you very much. Good luck.

Thank you.

Paul Forward, Stifel Nicolaus.

Good morning. On the met tons, about 1 million tons a year, can you talk about -- is there any domestic appetite for that coal at all as a met coal or does it really exclusively need to go to the export market?

We have talked to people on the domestic front, and when I say domestic some of that may include Canada even though it's not domestic. But trying to move in this part of the world versus say North America versus Asia and South America. However, the offer that -- the benefit or the opportunity that came to us sooner was in fact the export market. So it could move in North America. However, we do have -- we just had the opportunity, so we went ahead and took advantage of it.

And can you talk a little bit about the -- just the logistics of how you're moving that coal out and what your options are available to you on the transportation side for Mountain View?

Yes. We've got a direct trainload out there in Maryland that goes straight to the port in Baltimore.

Okay.

On the vessel.

And then maybe also if you look at the quarter out of Northern Ap, you actually had costs go down sequentially and that sounds like you even -- it went down sequentially even though you had a little bit more met coal moving out the quarter and also overall volumes were down. Can we expect that cost per ton out of Northern Ap to hold at that level that you did in the first quarter or is that going to go up as you do more -- a greater share of your output goes to the met market?

I would say it will go up as we do a greater share both for quality reasons as well as sales-related expenses.

Fourth-quarter costs were also -- we had longwall moves in the fourth quarter that impacted costs as well. So those will occur periodically and you may see impact from that period to period.

Now on the sales-related expenses side, can you give us a rough number as like if revenues go up $1 per ton because you're moving into the met markets, then is there a number that we should think about in terms of the number of cents that --?

Yes, 10% in West Virginia.

Okay.

Roughly, and variable back to severance taxes and royalties.

All right, I appreciate it. Thanks.

Thanks, Paul.

Noah Lerner, Hartz Capital.

Thank you. First off, I just want to say wow, great quarter. Just real quick question, in prior quarters and mostly last year you were talking about deferred volumes from 2009 into 2010. And I'm just curious if that has all corrected itself yet and how much of that is the increase in volume that we did see in the first quarter or is that still an issue that has to work its way through during the year?

Most of it has resolved itself. We did have some transportation delays in the first quarter. So as good as the first quarter was it could have been better. So there still is some volume; we believe that we've worked that out to where that volume will be made up in 2010. But it will basically take the rest of the year to work out that and that's probably in the 250,000 ton range, something like that, plus or minus a little bit.

Yes.

Okay. And a second question I had is -- and you just alluded to it -- that there have been some transportation issues. When you've mentioned transportation issues, is that logistics or just that the purchasers are saying hold off for a while?

It's more logistics.

Okay, and can you give any (multiple speakers)?

Rail cars.

Can you give any further description of what those problems are? Is it that there's not enough coal cars on the trains (multiple speakers)?

Yes.

Okay, great. Thank you.

There were also weather issues in the first quarter that impacted Central Ap. But it really comes down to logistics and placing the train sets.

Okay, great. Thanks a lot.

Thanks, Noah.

(Operator Instructions). Norman Kramer, Kramer Investments.

Good morning, Joe. I had a couple more questions on met coal also. Could you expand a little on this and I'm wondering if your reserves at Mountain View have sufficient tonnage of the right type of coal that if the pricing were good that this might continue on into the future years. And the second question is whether you think that any of your other properties might have potential for met coal?

Our volume at Mountain View is restricted more by our contractual position with Dominion versus the quality of coal that the mine itself can produce. That contract goes through 2012 -- into 2013. So there is a commitment there that does, I guess, cap our volume as to what our volume expectations can be.

And relative to our other operations we have shipped some coal out of East Kentucky into the PCI market and we will continue to look at opportunities in that market and compare those against sales either into the industrial market or into the steam market.

The price differential is not as great in the PCI market as it has been directly into the met market relative to the steam market, but we'll look at opportunities there as well. But as far as a pure met coal, Mountain View is our only operation that can produce a met coal and/or met coal blend that we have.

Okay, thank you for that, it was helpful.

At this time there are no further questions. I will turn the call back to Brian Cantrell for closing remarks.

Thanks, everyone, again for joining us today. We appreciate your continued support and interest in both ARLP and AHGP and we look forward to visiting again soon. Thank you.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a wonderful day.