Alliance Resource Partners LP (ARLP) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2011 Alliance Resource Partners LP and Alliance Holdings GP earnings conference call. My name is Tanya and I will be your coordinator for today.

At this time all participants are in listen-only mode. We will facilitate 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 hand the presentation over to Mr. Brian Cantrell, Senior Vice President and CFO.

Thank you, Tonya, 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 2011 first-quarter earnings earlier this morning and will now discuss those results as well as our outlook for the remainder of 2011. Following our prepared remarks we will open the call to your questions.

Before we begin a few reminders. First, since AHGP 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 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 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 risk, 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 ALRP's website and furnished to the SEC on Form 8-K.

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

Thank you, Brian. Good morning, everyone. Thank you for joining us today. I am pleased to report another strong performance by our partnerships as ARLP again posted record operating and financial results for the first quarter of 2011.

Solid performance by our operating and marketing teams allowed ARLP to deliver record results for production, average sales price per ton, revenue, EBITDA, and net income even though nearly 430,000 tons of coal shipments were delayed due to rail transportation issues and the impact of river flooding on the barge traffic.

ARLP continued to demonstrate leadership in safety during the quarter. Three of our operations -- MC Mining, Pontiki, and Gibson -- completed the quarter without a single lost-time accident contributing to an overall ARLP accident rate 30% below the industry average.

I might add that the MC operation reached 400 straight days without a lost-time accident this past Friday. Outstanding leadership by that team.

Looking ahead, we continue to be encouraged about ARLP's future. Strong customer demand resulted in new sales contracts executed in the first quarter for the delivery of 5.5 million tons between 2011 and 2014, including the delivery of 1 million tons of metallurgical coal into the export markets during the fiscal year beginning April 2011. ARLP is now essentially fully committed in price for all of its anticipated coal sales for 2011.

Improved Central Appalachian market opportunities will allow Pontiki's Van Lear mine to bring back into production over the next 45 days a mining unit that has been idled since the middle of 2009. In addition, Tunnel Ridge is on schedule to begin longwall production early next year. And assuming marketing and permitting efforts progress it's expected our Gibson South development project could see initial production beginning in the 2014 timeframe.

Our first-quarter results and expectations for ARLP's 11th consecutive year of record performance in 2011 also gave us the confidence to declare another 3.5% increase in quarterly cash distributions to our unit holders. The distribution to ARLP unitholders for the first quarter will be $0.89 per unit, an increase of 12.7% over the distribution for the first quarter of 2010. AHGP unit holders will receive a quarterly increase of 5.2% or $0.555 per unit, which represents an increase of 19.4% over the distribution for the first quarter of 2010.

At this time I will 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 Joe just mentioned, ARLP started the year with another quarter of record financial and operating results. During the 2011 quarter ARLP's average coal sales price rose 9.6% to a record $54.08 per ton while consolidated coal sales volumes increased to 7.5 million tons on the strength of more tons sold out of our River View operation.

Led by these increases, ARLP posted records in the 2011 quarter for revenues which climbed 11.2%, EBITDA which rose 19.5%, and net income which jumped 27.2% -- all as compared to the 2010 quarter. Total segment adjusted EBITDA expense per ton in the 2011 quarter increased 5.2% over the 2010 quarter, which was slightly below our previously stated range of 6% to 8%.

Increased coal production resulted in higher materials and supply expenses, maintenance costs, and labor-related expenses while record coal sales drove sales-related expenses up in the 2011 quarter. Stringent regulatory compliance requirements also continued to push per ton expenses higher in all of ARLP's operating regions.

In Northern Appalachia, segment-adjusted EBITDA expense per ton was impacted during the 2011 quarter by a longwall move at the Mountain View mine, increased expenses related to incidental coal production at the Tunnel Ridge mine development, and higher costs associated with producing metallurgical quality coal compared to the 2010 quarter.

Increased coal production at River View drove total production volumes up 9% in the 2011 quarter to a record 8.2 million tons compared to 7.5 million tons in the 2010 quarter. However, as a result of transportation delays and disruptions that Joe mentioned earlier, coal inventories also increased approximately 774,000 tons during the 2011 quarter. ARLP does expect to reduce inventory during the remainder of 2011 and currently anticipates coal inventories will return to more normal levels by year-end.

Based on results to date and current estimates, ARLP continues to anticipate 2011 coal production in a range of 31.6 million to 32.6 million tons and coal sales of 32 million to 33 million tons, substantially all of which has been priced and committed. ARLP is also maintaining its previously estimated ranges for 2011 revenues, excluding transportation revenues, of $1.75 billion to $1.85 billion, EBITDA of $545 million to $585 million, and net income of $345 million to $385 million.

We also continue to anticipate total capital expenditures during 2011 in a range of $320 million to $360 million, including maintenance capital.

With approximately $470 million of liquidity at the end of 2011, ARLP -- 2011 quarter, ARLP's balance sheet remains strong. This strength, along with the expected growth in cash flows from ARLP's operations, leave us well-positioned to execute on our current plans and to take advantage of additional opportunities that may arise.

Finally, I will briefly touch on AHGP's secondary offering of 2.75 million units at the end of the 2011 quarter. This sale of already outstanding common units allowed certain investors to diversify a modest portion of their holdings without diluting other unitholders or impacting quarterly distributions per unit.

In addition, the offering increased the number of AHGP units available for active trading in the public market by more than 22%. This increased public float should encourage a more liquid, efficient market and improve long-term trading performance for AHGP units.

This concludes our prepared comments. Again, thanks to all for joining us today to learn about our record quarter and what should again 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 Tanya's assistance, we will open the call to your questions. Tanya?

(Operator Instructions) Jim Rollyson, Raymond James.

Good morning, gentlemen. Congrats on a strong quarterly performance despite the shipment delays.

I guess, Joe, on the shipment delay topic I think you said 430,000 tons were kind of pushed off from this quarter into the future. How do you feel about making those up throughout the course of the year? Is that something you think you will get to, and is that probably in a linear fashion or how are you thinking about that?

Yes, we do expect to make it up by the end of the year. We are continuing to have high water issues, in the Illinois Basin in particular with the rains continuing in that area. So we had hoped probably to make up a little bit more in the second quarter but it may actually turn out to be more linear. But we would expect between the second and third quarter to try to pick up most of that shortfall.

Send some of that rain down to Texas, would you?

Wish we could.

Mountain View longwall move in the first quarter. Can you maybe just give us kind of outlook for the rest of the year in terms of longwall moves so we can think about that from a quarterly standpoint?

I think that is our only move for the year, so that should be what you see there. The other factor as we progress -- for Tunnel Ridge those tons are included in the northern half. Hopefully as we reach towards the end of the year we will start seeing that tonnage pick up a little bit in the fourth quarter.

Ahead of the longwall start-up in 2012?

Yes.

The million tons of met which you had sold last year for the export market at pretty good pricing. Again, any color on the pricing, maybe relative to last year?

It was an increase. We are not prepared to give that pricing currently. We are still in some negotiations surrounding that so maybe we can have some more color for you next quarter.

Okay. And then just last question, the --.

Pricing is included in our guidance.

Perfect. Last question for me, the Van Lear mine returning or the unit returning at Pontiki, kind of the impact on volumes and particularly on your costs in cap?

The volumes probably this year -- maybe 100,000 to 150,000 tons would be what our expectations are. And so that -- if you assume that is starting the second quarter then that annualizes out at 200,000 to 250,000, something like that. Maybe 275,000. We would expect that that should help us with our costs being incremental tons.

All of our operations are -- continue to have a little pressure with diesel prices, but right now we are very pleased with our cost performance in the first quarter. And mines are operating at cost that are meeting our expectations when we started the year.

Great, appreciate the insight.

Overall, Jim, the 6% to 8% increase in cost per ton year over year we are still comfortable with, and that factors in the benefit from the fourth unit at Pontiki.

Okay. Appreciate the color, guys. Thanks.

Mark Levin, BB&T Capital Markets.

Congratulations, gentlemen, on a very, very good quarter. Let me switch topics a second to the pricing side.

If you could maybe talk about some of the pricing trends you are seeing in the thermal market, maybe where we were 3, 6 months ago on the contractual side in both Central App and Northern App and the Illinois Basin. Where we were then and then where you see things sort of shaking out today?

As we mentioned, we were able to contract for 5.5 million tons this quarter. The pricing is pretty much equal to or greater than what you see as our realizations in each of our regions, so pricing continues to be positive relative to our past performance. So we are seeing the market show a balance, if you will, in supply/demand.

I think, as we look forward, we continue to see markets be pretty much in the -- a little higher today than they were 3 or 4 months ago, back to your question. But I don't know that it's -- I guess I would just say they are stable.

The markets are stable. And let me ask you this too, just in terms of -- as you think about coverage ratios and raising the -- continuing to raise the distribution, is there an optimal coverage ratio that you think about as you look ahead and kind of plan what future distribution increases might look like?

Mark, I will take that one. What we have stated for a very long time is that our distribution objective really isn't geared toward trying to meet a certain percentage increase quarter over quarter or year over year, or driving toward a specific distribution coverage ratio.

What we are trying to accomplish is to maintain distribution growth that sits at the top end of the MLP space and we are very comfortable letting our coverage ratios fluctuate up and down. Currently, it's a bit higher than it has been historically, but looking at where we are today and the cash flow growth we see moving forward that is what made us comfortable with giving the distribution increase we gave this quarter.

Okay, fantastic.

Might want to go back on the marketing question. That is more domestic; the export market continues to be very strong and have a stronger pricing.

Yes, Joe, that is what I was going to ask. In terms of all of the coal that is moving to Europe out of the Illinois -- I mean can you maybe quantify how that is impacting the market, if at all? Is that -- what is the necessary lever to provide the balance that you talked about?

Yes, I think it definitely has made a difference in the domestic pricing.

And then how about barge capacity? Are you -- anything to make you feel better about barge capacity on the river?

It's very tight and it takes some creativity to be able to take advantage of the export markets. It's tight but I think that people are trying to do what they can do to take advantage of that market. There are opportunities, but they are -- it's tight.

Got it. Thanks very much, guys.

Dave Martin, Deutsche Bank.

Thank you and congratulations. I wanted to come back briefly to Van Lear. Could you give us any additional color on the cost of that operation versus current market pricing and/or what the near-term margin potential of those additional tons would be?

If you look at the first quarter for Central App I think that the revenue and the costs are going to be comparable for -- as we look forward for Central App. So that is not specific to that unit, but when you look at what contribution that unit makes to the total balance, it's not that many tons.

But the margin is a contributor, because again as you look at our numbers we do have a positive margin out of Central App. Again with the sales price and the costs that are projected in there or actually reported in our first-quarter results. So it would be comparable to what you will see in the first quarter of [2011].

Okay, that is helpful. Secondly, I just wanted to come back to costs also. Can you quantify the financial impact in the quarter from the incidental production at Tunnel Ridge? Then also, you mentioned some geological issues at Mountain View. Does the longwall move basically resolve that?

Latter question first; I think it all ties back in just to the timing. And so, yes, as we get into this new panel we are not expecting the same issues that we faced in the old panel at Mountain View.

On the Tunnel Ridge issue, the incidental production doesn't have a material impact on cost per ton. The data gets into the fairly complicated issues around how you deal with capitalized development costs, etc.

The bigger driver in Northern App, especially if you look at our segment chart where you are seeing fairly significant increases in costs over the prior-year quarter, that is really due more toward the production of metallurgical coal. That is the largest impact in that region.

Okay. Thank you very much.

Mark Reichman, Madison Williams.

Good morning, just four questions. The first is what were maintenance CapEx expenses this quarter?

I think we were at $4.70.

Yes, that is what we were.

$4.70 per ton, okay? Okay, per ton produced.

And again, Mark, when we look at that we quote that number based on a long-term horizon. You will you have -- you can have fairly significant fluctuations quarter to quarter or year over year, depending on maintenance and rebuild schedules and whether you are needing to put in a new portal, etc.

In other words, we look at operating necessities different than maintenance capital.

Correct.

Right.

Our maintenance capital is measured over a period of time. Operating necessities could be higher or lower.

Right. So you look at last year as an example. I think we had said for a 5-year horizon $4 a ton would be a good estimate. We came in in the $3.60, $3.65 range I believe.

It all gets back into the way we look at our distributions which is over a very long-term horizon. And we think looking at our maintenance capital over that same horizon is the best approach.

Okay, thank you. And then in terms of your capital expenditures, the $320 million to $360 million. Now at the end of the quarter you had a pretty -- you had a very strong cash position and so your liquidity -- are you planning to fund most of that I guess from just out of cash flow? And could you talk a little bit about some of those expenditures? Like, for example, how much would be related to Gibson South?

Well, in answer to your first question, yes, we are planning on funding our current plans out of existing cash and internal cash flow generation. The bulk of our capital this year is going to be directed toward completing Tunnel Ridge, or getting Tunnel Ridge ready for completion and start-up of the longwall early next year.

We have some allocated toward Gibson South, but it's really more around permitting that type of activity. So it's not particularly material at this point.

Okay. And then I just wanted to ask you, Tennessee Valley Authority is a pretty significant customer of yours. They had that settlement earlier this month where they had agreed to I think make some modifications to their coal-fired fleet. I was just curious kind of what your take on that is, what you see as maybe the longer-term impact, either positive or negative.

Specific to the TVA units they are taking off-line, none of those are units that we are currently selling coal to.

Right.

All those were Central App tons. What you are seeing in both TVA and really throughout the industry you have got a lot of coal units that were built 50 to 60 years ago and none of them really operate at full load to speak of. So most of them are only used in periods of high demand.

So, yes, it does have some impact on coal burn but it's not as significant as the headlines would lead one to believe.

Well, that is what I was curious because they said they would phase out like 2,700 MW of the 17,000 MW of coal-fired capacity by 2017, but they also were going to spend like $300 million, $350 million on environmental projects. And I was just wondering whether -- if that included -- if that could actually help if they start taking more mid-sulfur coal from the Illinois Basin or just kind of how you were thinking about that?

We do believe that -- again for TVA and some of the other utilities that the Illinois Basin demand continues to be very positive as we look over the next 10 to 15 years as well as the Northern App. So the high sulfur, lower cost production continues to be positive and we are very focused on that as part of our strategy.

Okay, thank you very much.

It would be beneficial.

Ron Londe, Wells Fargo.

Thanks. Curious how you view terminaling capacity on the East Coast for exports and how [proprietizing] met coal versus thermal coal exports might affect you or the industry?

On the East Coast there continues to be, I guess, estimates on whether we are going to hit 100 million tons this year. So both railroads have talked about their strong increase in met coal in the export market. There is some shipments of steam coal as well specific to us.

Our primary focus is the million tons out of Mountain View that we are selling, which we do have the capacity, both rail and port, to move that tonnage. So it should not have any impact to us.

We are looking at the steam export markets a little bit closer today than we have in the past, and we will attempt to try to take advantage of that. But again, it's not going to be a material amount for us. So if the railroads decide to take the higher priced met tons versus the steam tons, it should have no impact to us.

Okay, thanks.

Paul Forward, Stifel Nicolaus.

Good morning and congrats on the quarter, that was an excellent result. You have been hiring for Tunnel Ridge and Van Lear and also in the Illinois Basin. I was just wondering if you could go over how you see the markets for skilled labor and coal mines in the different regions today.

For your skilled minors it continues to be a challenge so we are -- because of our growth in anticipation we have had a significant training program that we have embarked upon a couple of years ago to train mechanics in particular, as well as just inexperienced miners so that we have adequate staffing. Most of that has been in our Illinois Basin operations.

But I think for Central App it appears that we will have the opportunity to pick up a sufficient number there. It's not a large number of people compared to Tunnel Ridge and what we had to do at River View.

As we look at Northern App, we are getting ready to build our next tranche. We have got a lot of applicants; the challenge is back to sorting through and making sure that the quality people that you get are consistent with our culture. So we are very focused on that. My guys are giving me assurance that we are going to be able to staff it appropriately, but that doesn't mean it's easy.

Everybody is looking for good people because it's a people business and it's what, in large part, makes a difference in how successful you are. Fortunately, we have got a good reputation and winners like to be with winners. We are optimistic and hopeful that we will be able to fill the remaining slots that we need with the quality people we need to be able to continue to have record performance.

Thanks. Just want to follow up on Mark's question about TVA and just other utilities who are Illinois Basin coal. Just wondering if they are expressing concern to you as you negotiate with them over the export flows of Illinois Basin coal and whether there might be concerns over their own ability to get decent prices on the Illinois Basin coal once inventories get back down to normal or below normal levels.

We are not hearing customers express that. At the same time, I think that, given the quality of coal that we produce and the reliability of our operations, we are seeing customers that are concerned that we may sell out before they have a chance to include us in their mix of suppliers.

So we are seeing interest on the part of our customers to make sure that we are including them in our future plans as they look to make sure they have got the type of coal quality and the type of suppliers that they want in their mix. So that is not really related to export as much as it is just looking at their steam allocation and trying to make sure that we are part of that mix for them.

All right. And just maybe lastly, can you give us an update on just how active you are looking or whether you are looking at acquisitions, or really are you just busy enough with internal growth projects that acquisitions really aren't on the table right now?

Yes, I think we are looking to continue to grow our business. But with Tunnel Ridge, with Gibson South we will continue to evaluate but there is nothing imminent on the acquisition side.

All right, thanks a lot.

Chris Haberlin, Davenport & Co.

Good morning. With Tunnel Ridge slated to come on next year it looks like production could be up maybe 5 million tons from where it is this year. And I guess that leaves -- with what you have committed at 27 million tons for next year that kind of leaves a 10 million ton gap. I just wanted to see when you expected to start booking some of that tonnage.

I think that estimate is a little strong. I think we have talked about -- there is a longwall coming up in the first quarter. It's probably more towards the end in the front, so I think that volume is probably closer to 4 million than 5 million next year as far as additional tons, assuming everything works out as we currently plan it to.

So you are next -- you had another question to that?

Yes. Could you maybe just comment on how your customers' inventories look right now? And is there any chance that you any of your customers could kind of get caught short of inventory, maybe in the second half of this year, and would have to come back to the market?

We are not really seeing that totally. There may be a few that would like to take some tons this year but it's not a material amount. And back to next year, I think we do feel like there is more than adequate demand for us to fill those orders.

Okay, great. Thank you.

(Operator Instructions) James Jampel, HITE.

Just one more touch on Van Lear. When you talk about improving market conditions in Central App is there anything beyond pricing or is that a dominant factor that would bring Van Lear back?

I guess demand, specifically demand on the Norfolk Southern. That mine is on the Norfolk Southern railroad. So as we look at demand in the utility space on the Norfolk Southern railroad it gave us confidence to bring that tonnage back onto the market and to go ahead and hire those people and make commitments to the people.

All right, thanks.

We have no additional questions at this time. I would now like to hand back over to management for closing remarks.

Thank you, Tanya. Again, thanks to everyone for joining us today. We appreciate your continued support and look forward to talking with you again next quarter. Thanks a lot.

Thank you for attending today's conference. This concludes the presentation. You may now disconnect and have a great day.