Alliance Resource Partners LP (ARLP) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2010 earnings call for Alliance Resource Partners and Alliance Holdings GP. My name is Regina, and I will 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) Today's conference is being recorded for replay purposes.

I would now like to turn the conference over to Mr. Brian Cantrell, Senior Vice President and Chief Financial Officer. Mr. Cantrell, you may begin.

Thank you, Regina, and welcome, everyone. As always, 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 fourth quarter earnings earlier this morning, and will now discuss these results as well as our outlook for 2011. Following our prepared remarks, we'll open the call to your questions.

Before we begin, however, let me start with a few reminders. First, since AHGP's only assets are its ownership interest in ARLP, our comments today will be directed to ARLP's results and outlook unless otherwise noted. In addition, please be aware that some of our remarks may include statements which are not historical in nature, and may concern future expectations, plans and objectives of the partnerships regarding their future operations. Such comments constitute forward-looking statements made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995, and are based on the beliefs of the partnerships and those of their respective general partners and management, as well as assumptions made by and information currently available to them.

Although the Alliance partnerships, their general partners and management believe these forward-looking statements to be reasonable at the time made, no assurances can be given that such statements will prove to be correct. Forward-looking statements are subject to a variety of risks, uncertainties and assumptions, which are contained in our filings from time to time with the Securities and Exchange Commission, and are also reflected in today's press 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.

And 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 8K.

Now that we're through these required preliminaries, I will turn the call over to Joe Craft, our President and Chief Executive Officer. Joe?

Thank you, Brian. Good morning, everyone. Thank you for joining us today. Earlier this morning, we reported the best financial performance in the history of our partnership, continuing our streak of posted increased financial results every year since ARLP's IPO in 1999, thus marking our 10th consecutive year of record financial results. During this period, ARLP has delivered a compounded annual return to unit holders of approximately 31%, placing Alliance in elite company as S&P once again ranked us in the top 0.5% of the 10,000 companies they follow. The new operating and financial records we set in 2010 were only possible due to the contributions of every member of the Alliance organization. I would like to take a few moments to share a few examples of these contributions.

In 2010, our operating teams delivered the highest production output in ARLP's history. They successfully expanded the River View mine to eight continuous mining units, brought the Pattiki mine back to full production capacity, and made significant progress in the construction of our new Tunnel Ridge mine, which is now expected to start longwall production in early 2012; all while posting a loss time accident rate one-third below the industry average, and at the lowest rate in the partnership's history. By strengthening our long-term coal sales positioning, and moving tons into the attractive metallurgical coal export market, the efforts of our marketing team in 2010 helped reduce ARLP's co-inventory by approximately 1 million-tons from the beginning of the year, and drove ARLP's average coal sales price to a 10% year-over-year increase to $51.21 per ton; our highest realization ever.

We enter the new year with approximately 95% of estimated production contractually committed and priced, and a solid contract booked for 2012 and beyond. These examples illustrate the hard work and dedication of every employee at Alliance, and exemplify the effort that resulted in new records for tons produced and sold, revenues, EBITDA and net income in 2010. I am particularly pleased that these results allowed us to once more share our success by increasing year-over-year distributions to unit holders by 11% to ARLP, and 16.6% to AHGP, while again maintaining one of the highest distribution coverage ratios in the MLP sector.

In addition to delivering outstanding operating and financial results in 2010, ARLP also continued to position the partnership for continued growth in 2011. With River View producing at capacity for the full year, repairs to the vertical hoist at Pattiki now completed, and increased development tons expected from Tunnel Ridge, we expect 2011 coal production will increase 9.5% to 13%. With our strong contractual position, we currently anticipate coal sales volumes will increase roughly 5.5% to 9% this year, while average coal sales price should increase 6% to 8% per ton over 2010 realizations.

Reflecting this anticipated top line growth, we are currently estimated EBITDA and net income growth of approximately 9% to 17%, and 7.5% to 20%, respectively. With the Tunnel Ridge longwall coming online in early 2012, we see opportunities for future growth beyond this year as well. As we continue to manage our business, pursue new opportunities, and navigate the challenges facing our industry, Alliance remains committed to delivering exceptional value to our unit holders by staying focused on creating sustainable growth in cash flow to provide future growth in distributions.

At this time, I will 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 may have. Brian?

Thanks, Joe. As Joe previously mentioned, ARLP again delivered record financial and operating results in 2010. To recap briefly, a nearly 10% jump in coal sales prices, combined with a 21.3% increase in sales volumes, pushed 2010 revenues up 30.8% to $1.61 billion, while EBITDA increased 46.7% to $499.5 million and net income climbed 67.1% to $321 million. And as we announced earlier this morning, ARLP also reported record results for the 2010 quarter. We continued to benefit from our strong contract position, and sales into the high-priced export markets, as average price realizations in each region increased both quarter-over-quarter and sequentially. This price improvement, coupled with record coal sales volumes of 7.8 million-tons in the 2010 quarter, drove revenues to a record $418.6 million, a jump of 40.4% compared to the 2009 quarter.

On the strength of these top line results, ARLP also delivered significant growth in EBITDA, which increased 59.8% compared to the 2009 quarter, and net income, which more than doubled to $87.4 million in the 2010 quarter. Record coal sales also contributed to a decrease in coal inventories of approximately 364,000-tons during the 2010 quarter.

Turning for a moment to the cost side, the large reduction in coal inventories I just mentioned, along with increases in consolidated coal sales and coal production, pushed total segment adjusted EBITDA expense per ton in the 2010 quarter up by 8.2% compared to the 2009 quarter. Stringent regulatory scrutiny continues to impact productivity and costs in all of our regions, and these impacts were felt most severely at our central Appalachian operations.

Our northern Appalachian operations continue to reflect higher costs per ton associated with producing metallurgical coal, increased purchases of outside coal for sale into the export markets, and expenses related to incidental development production at Tunnel Ridge. Compared to the sequential quarter, however, reduced workers' compensation accruals in the 2010 quarter resulted in lower segment adjusted EBITDA expense per ton in each region.

ARLP's capital expenditures in 2010 totaled $289.9 million, primarily related to the expansion of our River View mine, and continuing development of the Tunnel Ridge mine, as well as approximately $90.5 million in maintenance capital. For 2011, ARLP is currently estimating total capital expenditures, including maintenance capital, in a range of $320 million to $360 million, primarily due to continued development activities at Tunnel Ridge, anticipated capital expenditures to comply with new regulatory requirements, and infrastructure investments at various operations. For our current five-year planning horizon, ARLP is estimating maintenance capital expenditures of approximately $4.70 per ton produced. As we have consistently said in the past, our view of maintenance capital over a five-year horizon helps to reflect the inherently cyclical nature of these expenditures. As we experienced in 2010, however, actual expenditures will likely vary period-to-period due to timing of construction and maintenance schedules.

Finally, prior to year end, we elected to access the attractive debt capital markets by completing a $300 million bank term loan. This financing enhanced our liquidity while keeping ARLP's balance sheet strong, and increased our flexibility to pursue future opportunities. This flexibility, combined with our operating strength, solid customer relationships, and product diversity leaves Alliance well positioned to deliver superior value to our unit holders in the future.

This concludes our prepared comments. We appreciate your continued support and interest in both ARLP and AHGP, and now, with Regina's assistance, we'll open the call to your questions. Regina?

Thank you, sir. (Operator Instructions) Jim Rollyson with Raymond James.

Excellent results and outlook. Joe, you're basically there on River View. You're making progress on Tunnel Ridge to ramp up in 2012; any updates on the next level of projects at Gibson South or Penn Ridge, or are you taking this one project at a time?

We're still focused on Gibson South as well. We previously discussed a goal of bringing that on in 2014; so we're still targeting that as we speak. So, we're going through the permit process there. At Penn Ridge, we are focused on that as well, but we don't have any specific dates to give to you today as to when we might expect that would come into the marketplace.

Okay. That's helpful. And you talked about, in the prepared remarks or press release, the pricing expectations for this year relative to last year; and also noted your contract position for out years, 2012, 2013 and beyond. Any color maybe on pricing in terms of what's locked in, and how that compares to 2010 or 2011? I assume is still continues to go up and to the right a little bit?

I think that's fair. A lot is going to depend on obviously the strength of the export market, which continues to be very favorable as we see it for the next several years. So, if we continue to see the export demand that we have been able to experience in 2010, we do expect that that's going to bode well for supply and demand prospects for the US coal, and therefore for pricing as we look out to the 2012, 2013 time horizon.

Great. Brian, you're sitting on a pretty good amount of cash after the debt raise. Looks to me like your CapEx will be covered mostly by cash flow this year. Just curious if you're just keeping things conservative by having cash on hand, or if you guys have plans for that specifically?

I think that's a good characterization, that we're being conservative by increasing our liquidity like this. But obviously, we hope to be able to deploy that capital as opportunities present themselves.

Okay, and last one, Joe, just regulatory environment, obviously over the last period of time has been challenging. I guess you could make that a long period of time, but any thoughts or color or how you're feeling about things post-November?

We continue to see challenges. The Obama administration has made no -- they have not shied away from saying they can't get things done now legislatively, so they are going to be pushing more regulatory-wise to get those things done that they couldn't get done legislatively. So, we are gearing up in anticipation that the regulatory burdens are going to continue at the pace that we have seen since 2008, and they may actually accelerate.

Thanks.

Appreciate it, Jim.

Lasan Johong with RBC Capital Markets.

Thank you. Following up on that last question, specifically if regulatory issues get tight, would you expect Illinois Basin coal to be a net beneficiary? And how would you take advantage of those changes?

The answer is yes, we would, because the primary focus right now is EPA. They made headlines this week touting the fact they're going to take 7,000 jobs out of the industry on EPA permitting for surface mining, as an example. Most of that is going to be central Ap related, so there is more pressure probably in central Ap than other regions. And the demand is still there, so it will be met between Northern Ap and Illinois Basin, so we positioned ourselves to try to take advantage of that with our increased production. So that we would look to primarily the tons we're bringing on at Tunnel Ridge to be the -- our ability to participate in that market so we can participate either in Northern Ap and/or Illinois Basin with our production capacity that we have invested in.

Agreed. In terms of met coal flexibility, million tons rolling basis, do you have the ability to ramp that up if necessary? And would it be similar quality, or would it be just higher cost, similar quality, or lower quality, similar cost?

We really don't have much ability to ramp that up too much, just given the contractual position we're in. 1 million tons, we might be able to bring in another 100,000 or so, but it is not going to be material. So, I think that for guidance purposes, I think you should think in terms and plan on 1 million tons for us in participation in the metallurgical markets.

What about beyond the immediate first year or two years?

I think that's, for the next couple of years, where we're positioned. And absent any other type of acquisition or anything, which nothing is imminent, so I think for planning purposes you ought to think in terms of 1 million tons for us in the export metallurgical markets.

Even if prices zoom back up to $300 a ton?

Unfortunately, we can't make more than what we have. I wish we could.

I understand, so do I.

(laughter) Yes.

Thank you very much. Appreciate it.

Ron Londe with Wells Fargo.

Thank you. From the standpoint of exporting Illinois Basin coal to foreign markets, it looks like a lot of it is going to ports on the Gulf Coast. Do you see any limitations there that would hamper exports of your coal, or in general, the Illinois Basin coal?

There are obviously physical limitations now relative to what has been out. There is capacity. I think for some growth, there is going to be capacity. We haven't historically participated in that market. We have seen increased interest with API-2 prices moving the way they have, and there has been a lot of discussions about China taking more coal out of either the PRB and Illinois Basin. So, we do anticipate there is going to be continued growth opportunities; probably more optimistic today than we have been in the past relative to the demand for Illinois Basin in the export markets. And I am a believer that the capacity will be there for that export market as it develops to be available for Illinois Basin coal.

Historically, we have looked more domestically, just because it doesn't have the volatility, and we can plan with long-term contracts at pricing that gives us the ability to focus on our sustainable cash flow. But given our size, I think we will be playing in that market some. But I think our focus will continue to be the domestic markets, and the reliance on long-term contracts to give us stable cash flow so we can truly focus on our cash distribution protection and growth, and do what we do best. But if opportunities present themselves, we'll take advantage on the edges, but it is not going to be our central focus.

So, your expectation is that export capacity in the Gulf will rise to meet demand for it?

Yes.

Okay. Thank you.

(Operator Instructions)Paul Forward with Stifel Nicolaus.

Good morning, and really great results.

Thanks, Paul.

Thank you.

Just a couple of things. We'd heard from a couple of your competitors, CONSOL yesterday said some of their customers are -- utility customers, that is, being at inventories of 20 to 35 days. I think Arch Coal said this morning they'd expect utility inventories to go down 25 million-tons this year. Just curious about what you're hearing from your utility customers? Are they pretty full at this point or at least comfortable, and not really coming back to you to look to top up any additional tons this year? And how would you characterize their level of concern or lack of concern over inventories?

Paul, I think if you look overall, there is some concern. They're watching it closely. But in terms of transacting, you're not seeing a whole lot. There have been some recent scattered RFPs, but I think most at this stage feel reasonably comfortable for this year, and are focused maybe later this year or into 2012 and beyond. So I think your characterization and your question was fairly accurate.

But us coal guys are always optimistic. (laughter) It is going to continue to be cold, and they're going to have those big floods over in Australia, and so it is going to continue to be a problem. It is going to be very weather-dependent, I think, all kidding aside, as to how those utilities are going to react tomorrow versus today.

All right. Well, if it is any help to you, I just looked out my window and it is snowing.

Glad to hear it, Paul.

There you go. Just going back to the Penn Ridge question; you're not really willing to put a date on the start-up. Just wondering, is that more the result of customer unwillingness to commit to contracts to support the development of that mine, or is it more uncertainty on the regulatory front as far as being able to get all the necessary approvals?

It is more the latter. So we are encouraged with the change of administration in Pennsylvania. So, we're spending time trying to determine exactly what this new administration in Pennsylvania is going to do relative to encouraging coal production in their state and new investments. And so we're anticipating we're going to have a more favorable environment today than we've had over the last three or four years.

All right, that's good. All right, I think that's about it for me. Thanks very much.

Appreciate it, Paul.

Dave Martin with Deutsche Bank.

Good morning, and congratulations as well. I had two follow-up questions. You mentioned or gave us an update on your strategy, your liquidity position, and you also mentioned that your met sales in the coming years won't likely grow unless you did an acquisition in that market. Is an acquisition in that market in the cards? Is it something you would consider, and how aggressive would you be?

And then my second question is just on CapEx. You're now quoting a maintenance CapEx of $4.70 a ton, if I recall. Previously it was less than $4, so I am curious whether that's just a function of your larger footprint today or some other factors?

I think relative to the strategy on met coal, I think it is fair to say we would not be pursuing expanding in the metallurgical business aggressively. I think our focus will continue to be Illinois Basin, Northern Ap. We're watching what CONSUL has done with their Northern Ap properties to participate in their coal's crossover, whatever they call the crossover tons. So, we had reserves that aren't too far from Bailey in low, so once we get into our longwall panels, we'll be evaluating that to see if we can't take advantage in that market similar to what they've been able to do. But other than that, as far as thinking in terms of us going to Central Ap and getting into the metallurgical business, that is not on our radar screen.

Relative to the maintenance CapEx, one of the drivers in that has been MSHA capital, which was a result of the law and regulatory changes where they're continuing to require us to make capital investments in refuse chambers and SCRs and tracking and communications and Co2 and et cetera, et cetera, et cetera. So, there is continued capital requirements that MSHA brings to the table that is primarily driving that number.

Brian, is there anything I am missing on that.

No, that's a big impact on it. Your comment around scale, there is some impact there, but as much as anything, it gets back to the timing of when we need to make infrastructure investments as our mines continue to extend, and you're seeing the reflection of that. If you look at last year, we had guided over a five-year horizon that we would expect to see $4 a ton in maintenance capital, and I think we actually came in at $3.13, $3.14, something like that. Again, just getting back to the timing of construction and maintenance schedules.Those numbers can fluctuate fairly significantly quarter-to-quarter and year-over-year because of all of those things, which is why we've consistently provided a five-year view. We look at our distributions long-term, and we think you ought to be looking at what our long-term maintenance capital requirements are as well, as you consider that.

Okay. Thank you very much. And good luck.

Thanks, Dave.

William Adams with FAMCO.

Good morning. Great quarter.

Thanks, Bill.

I had some questions on the maintenance capital, which you addressed, but I guess I wanted to ask you on the growth capital, that was a little bit more than I was expecting. And can you break that down between the Tunnel Ridge and I think regulatory -- I don't know if all the regulatory costs are in the maintenance, or there are other -- if you could just break down other allocations of that growth capital, and if that will all be earning a return?

Yes, we expect our growth capital to earn a return, but for 2011 the bulk of the growth capital is back around expenditures to complete the build-out at Tunnel Ridge. And you also, around the accounting rules, have capitalized development and interest costs that are attached to that. As you probably noticed, we had been expecting start up of the longwall sometime in the fourth quarter of this year. We had pushed that a little bit into early next year, and so as you are extending that development time, that can have an impact on your capitalized costs around that project. But primarily, Bill, it is tied back to our Tunnel Ridge operation.

Okay. And then, you mentioned that you increased the five-year maintenance spending from $4 to $4.70. Do you think you will be at that $4.70 level for this year, or do you think it will ramp up over time?

I think it is going to ebb and flow year-to-year, period-to-period, just as we execute on those infrastructure projects that I mentioned. As Joe alluded to, a significant portion of the driver on our maintenance capital is around the regulatory requirements. Those have been there for a while and are continuing into the future, and there is some expectation that they could increase. So, we're trying to factor all of those issues in, as we provide that guidance number.

It was so low in the fourth quarter. I just didn't know if it would quickly ramp up in the first quarter of this year.

I really wouldn't place a whole lot of emphasis on the quarter-to-quarter swings. It gets back to schedules. Again, that's why we're trying to look at it on a longer-term basis than try to be precise period-to-period.

Okay, that's all I had. Thanks so much.

Thanks, Bill.

[James Jampel].

Hi, I am wondering, what might have to change in the environment for you guys to consider a consolidation of the GP interest like other MLPs have done recently? What would have to change for you to seriously consider that?

Well, I don't know how to answer that question other than -- I think that when we look at the valuation and we look at our growth at ARLP and AHGP, it is just very difficult to -- for an AHGP shareholder to want to sell at today's values, to be quite candid about it. So, everything gets back to timing.

So, for ARLP to buy AHGP out at the valuation it would take, it becomes dilutive at ARLP, so we've just elected to continue to grow our Company and grow our cash flows. We have not been constrained for cost to capital purposes in growing our Company, which is a driver for most companies to do that. They're looking at trying to reduce their cost of capital because they feel like they need to, to grow their business. We have not had that issue historically, and we don't see in the near future that we're going to have that issue.So there is really not a compelling reason for ARLP to step up and make that acquisition, and there is no compelling reason for AHGP really to think in terms of trying to sell at today's values.

All right. Thank you.

Thank you.

Michael Marone with Pennant Capital.

Yes, good morning. Most of my questions have been answered. I was just wondering, can you repeat what the contribution you expect from Tunnel Ridge in 2011 and 2012?

In 2011, we're going to be having development production primarily, which is not particularly material. When the longwall starts up, and we're at full production capacity, I think our prior guidance in the 5.5 million-ton to 6 million-ton a year range is probably still applicable, depending on start-up schedules, et cetera. Hopefully, that answers your question.

It does. Thank you.

Ladies and gentlemen, this concludes the question and answer portion of today's call. I would like to turn the call back over to Mr. Cantrell for closing remarks.

Thanks again, Regina. To everyone on the call and listening, we appreciate your continued support and interest in both ARLP and AHGP. We thank you for your time this morning, and look forward to visiting again next quarter. Thank you, all.

Ladies and gentlemen, thank you so much for your participation in today's conference. This concludes the presentation, and you may now disconnect. Have a wonderful day.