Alliance Resource Partners LP (ARLP) 2011 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to the Alliance Resource Partners LP and the Alliance Holdings GP conference call. My name is Fab and I will be your operator for today. At this time, all participants are in 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 call over to your host for today, Mr. Brian Cantrell, Chief Financial Officer and Senior Vice President. Please proceed.

Thank you Fab, and welcome everyone. Thank you for joining our conference call this morning for Alliance Resource Partners which we refer to as ARLP, and Alliance Holdings GP, which we refer to as AHGP. As you know, we released our 2011 third quarter earnings earlier this morning and we are now pleased to discuss these results as well as our outlook for the remainder of 2011. Following our prepared remarks we'll open the call to your questions. Before beginning, 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. Also, our remarks this morning will include some forward-looking statements. Such statements are 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 in management as well as assumptions made by and information currently available to them.

These forward-looking statements are subject to a variety of risks, uncertainties, and assumptions and should be considered in conjunction with the risk factors contained in our filings from time to time with the Securities and Exchange Commission, and they are also noted at the end of today's press releases from partnerships. If one or more of these risks or uncertainties materialize or if our underlying assumptions prove incorrect, actual results from 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 measure are contained at the ARLP press release which has been posted on ARLP's website and furnished to the SEC on Form 8-K. Now that we are through 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. As we announced this morning, ARLP again delivered impressive results during the third quarter of 2011. We posted healthy increases across the board. Setting new records for coal sales volumes and prices, revenues, EBITDA, and net income. And as we'll discuss in a moment our strong performance through the first three quarters of 2011, kept ARLP firmly on track to deliver its eleventh consecutive year of record setting financial results. In addition to delivering superior results during the 2011 quarter, we also continued to position ARLP for the future.

Our marketing team recently completed negotiations for the sale of 28.4 million tons of coal to be delivered over the next five years. With these agreements ARLP has now secured commitments for over 90% of our anticipated 2012 coal sales at prices above current realizations. During the 2011 quarter, we also continued to make progress on our longer term growth initiatives. Development of our new Tunnel Ridge mine in West Virginia remains on track to begin long wall production in the second quarter of next year. Assuming construction moves forward as scheduled, Tunnel Ridge is expected to add 4 million tons of coal sales and production in 2012. Construction is well underway at our new Gibson South mine in Indiana, and we continue it anticipate initial production from this operation, to begin in 2014, adding another 3 million to 3.5 million tons per year once the mine reaches full capacity.

Adding to these organic growth projects, our recent transactions related to White Oak Resources long wall mine development in southern Illinois are currently expected to significantly impact ARLP's cash flows beginning in 2015. Considering our solid growth profile and our strong contract position, it is easy to see why ARLP is optimistic about its future. Our solid year to date performance and positive long-term growth outlook also gave our directors the confidence to begin increased distributions for the 2000 quarter to ARLP unit holders by 3.5% over the prior quarter to $0.955 per unit. And to AHGP unit holders by 4.7% to $0.61 per unit. These declared distributions represent a 15% year over year increase for ARLP unit holders and a 22% year over year increase for AHGP unit holders.

We are also pleased to report that ARLP has once again been recognized by Standard and Poor's for consistently delivering superior long-term returns to our unit holders. Earlier this month, S&P released their most recent ranking of companies based on total return to shareholders over the last ten years. During this period, ARLP has delivered a 27.2% compounded annual return to its unit holders. Placing us for the third year in a row in the top 1% of more than 7000 companies. At this time I'll return 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 has been the case all year, our financial performance in the 2011 quarter was once again led by record coal sales, volumes, and price realizations. ARLP's coal sales volumes increased 8.5% over tons sold in the 2010 quarter to 8.3 million tons on higher sales volumes particularly from our Riverview and Pattiki mines. We also continue to benefit in the 2011 quarter from ARLP's strong contract position as average coal sale prices improved in each of our operating regions to a record $56.89 per ton, a year over year increase of $5.21 per ton. Driven by increased coal sales volumes and higher price realizations, ARLP's revenues in the 2011 quarter jumped 18.8% to a record $487.7 million. On the strength of these top line results in the 2011 quarter, ARLP also delivered significant growth in EBITDA, which climbed to a record $152.8 million and increased 28% compared to the 2010 quarter and that income which rose 42.2% to a record $104.1 million.

As Joe mentioned earlier, our year to date performance has kept ARLP on pace to deliver another record year in 2011. Comparing results for the first nine months of 2011 to the same period in 2010, we have seen significant increases across the board and posted records for all major performance measurements. Our tons produced are up 8.4%. Tons sold up 5.4%. Average coal sales price up 10.1%. Revenues up 14.9%. EBITDA increased 20.2%, and net income was up 27.4%. And as Joe mentioned earlier, quarterly unit holder distributions have increased at ARLP and AHGP by 15% and 22% respectively since the 2010 quarter.

Turning to costs, as we expected increased coal production and sales, expenses related to producing metallurgical quality coal, and purchases of outside coal all contributed to higher segment adjusted EBITDA expense per ton sold in the 2011 quarter. Compared to the 2010 quarter, higher labor related expenses and maintenance costs also impacted segment adjusted EBITDA expense per ton in the 2011 quarter. Stringent interest oversight in all of our operating regions continues to hamper productivity and push certain costs higher such as root control and rock dust expenses. Increased segment adjusted EBITDA expense per ton also reflect difficult mining conditions at various operations notably Dotiki and Warrior in the Illinois basin and Pontiki in Central Appalachia. As well as the longwall move at Mettiki and expense related to the development of Tunnel Ridge in Northern Appalachia.

As we look to the balance of the year, we remind everyone that results in the fourth quarter of any year are typically impacted by reduced production due to fewer work days during the holiday season and the potential for delays or disruptions due to inclement weather. These normal impacts have been less apparent in ARLP's fourth quarter results recently over the last few years as we enjoyed sequentially higher performance from the expansion of our river view mine. The fourth quarter of this year is expected to be more typical, with our performance reflecting these normal seasonal fluctuations. Consequently, we expect ARLP's fourth quarter results in 2011 will trend lower sequentially.

For the full year, ARLP's remains on track for another year of record performance as reflected in our previously provided guidance ranges. We continue to anticipate 2011 total coal sales on a range of 32 million to 33 million tons and with substantially all of these tons priced and committed, ARLP also continues to expect 2011 revenues, excluding transportation revenues, within a range of $1.8 billion to $1.85 billion. In addition, we are affirming ARLP's prior 2011 guidance for EBITDA in a range of $550 million to $585 million. And net income in a range of $355 million to $385 million. Finally, reflecting anticipated capital investments related to the recent White Oak transactions and our current construction schedules at Tunnel Ridge and Gibson South as well as infrastructure projects at various operations, we continue to expect 2011 total capital expenditures including maintenance capital in a range of $420 million to $475 million. This wraps up our prepared comments. Now with Fab's assistance, we'll open the call to your questions.

(Operator Instructions)

Thank you. (Operator instructions). And we will pause a brief moment to compile a list. Please stand by. Jim Rollyson with Raymond James.

Good morning guys. Great quarterly results. Brian, you talked, at the end, good color, I guess about the assuming fourth quarter was going to be down sequentially. I'm curious, if you look at the guidance and you kind of work your way into the range for fourth quarter for EBITDA, and for earnings, it kind of implies you would be at the about the lowest point all year. Is that based on kind of what you are expecting from seasonal factors or do you think there is a little bit of conservatism maybe in there?

Well I think the fourth quarter, in addition to the seasonal factors that I mentioned earlier tends to be impacted by you know, annual accruals, by way of example, for certain expenses like worker's comp, et cetera. We do have another longwall move scheduled at Mettiki, prior to year end, so you'll see some impact from that.

We continue to face some regulatory challenges, as we put out last week. Our Pontiki Van Lear mine has been temporarily disrupted due to some regulatory actions that we are currently contesting. You know, so there is just a number of things that can impact you. Now on the flip side, some positive things can occur.

Trains can move as scheduled, deliveries can occur as anticipated. So, it just tends to be a somewhat fluid quarter. But, we do believe it is going to be more typical than what we have seen over the last couple of years as we were ramping up River View in 2009 and enjoyed it at full capacity in the fourth quarter of 2010.

That is fair. Any impact from like a cash perspective from the White Oak transaction hit you a little bit in the fourth quarter?

I mean, obviously their development is underway. We have the various components to the transaction. Even that, however, can be a little bit difficult to nail down precisely. As you are aware, with any development project, you are impacted by how much capital you are spending versus how much is expense versus how much is capitalized for development purposes.

You know, we will see, for the first, this coming quarter, the first full quarter impact of our equity ownership in White Oak, as losses related to their development do flow through to our income statement on that equity investment line item. You know, we expect that to be somewhere in the $2 million to $3 million range for the full year. So, maybe you know, $2.5 million or so in the fourth quarter.

Okay. That is very helpful. And with regard to the, roughly, 90% of your coal that is sold next year, at I think in the press release you know just kind of quote higher prices, any -- I know you haven't given guidance for next year. But, any rough color on the magnitude of what you are priced at for next year, relative to what you average for this year?

It is probably close to 4%, above our average realizations this year on average sales price.

Okay. That's helpful. And last one for me, Joe, maybe a little bit bigger picture. With all the stuff going on, on the Casper regulations, kind of curious what you think the impact over time might be on the Illinois basin? Do you think you know, all the guys in your neck of the woods that have scrubbers installed, it has become not a big deal for Illinois basin? Especially when you throw in the recent strength in the export market? Or, do you think there is some potential for this to be a big deal? Or, just kind of what do you think there?

I don't anticipate it to be a big deal. I mean, I think that it's a negative for our country. But it probably is a positive for Illinois basin. So, again, for our country, I think it should be delayed, it should be repealed. But, if it goes forward, you know, it is going to hurt Central App the most, and we will benefit from that.

Unfor -- you know, that is, that is what I see. But a lot of that's already been built in to the whole scrubber strategy. I mean it is more of a timing issue than it is a real volume impact. Because over time, people are going to gravitate towards the lower cost higher sulfur product as they put their technology on.

Very helpful. Thanks, guys.

Mark Levin with BB&T Capital Markets.

Thank you very much. I wanted to focus a little bit on the cost equation. Just kind of looking at the Illinois basin, specifically. It looks like you guys were up about 4% sequentially, and 7% year-over-year.

And, just maybe if you can kind of breakdown, or maybe how to think about costs. Q4 2012, in terms, of you know, what the rate of inflation might look like. And what are the components that sort of lead you to the conclusion of what the cost increase might look like in Illinois basin going forward?

You may remember at the beginning of the year, we indicated we thought our costs would increase in the neighborhood of 6% to 8%. This is on a consolidated basis. We have been running generally within that range. So, I think what we were trying to focus on, at the start of the year, has, in effect, played out for us.

You know, the commodity-related costs that we are facing, how those prices adjust is, I think, more dependent on economic activity and supply demand there. We are trying to continue to assess that. The biggest issue that we have been dealing with for some time and we continue to deal with are costs related to the regulatory environment.

Please remember, it is not just simply direct increased costs around rock dusting, roof control, et cetera. But productivity continues to be impacted in all of our regions, and when you look at the impact of that as it rolls through on a cost per ton basis, it is significant. We are trying to factor that in to the guidance and the views that we provide you all.

And we are in the middle of our budgeting process as we speak. We will be able to give you an updated view at the end of January, as we provide our first guidance for 2012, but it looks like we are going to be falling out generally within the ranges that we expected at the beginning of the year.

Brian, I mean, do you think that moderates at all next year? Or, do you, is it just too early to say? Obviously, 6% to 8% this year and then next year, if it were another 6% to 8%, does that, does it feel like that will moderate? Or, is it just too early to say?

I would say it is probably too early to say, right now. You know, how regulatory activity continues to develop and evolve is just unknown. It's been a wild card.

It is likely to continue to be a wild card, and then again, around supply and demand, and how that impacts commodity-based type inputs into our expense equations. You know, we are still trying just like everybody else is, to determine what direction the economy is headed in general.

Got it. And then just in terms of you know, 2012 CapEx, I realize it is probably early. But, when might we expect to hear something in terms of what the capital budget looks like for 2012, and then, just in the interim, is there any -- you know, as we model it and try think about what next year looks like, can you maybe provide us some color as to how we should be thinking about it?

You will get an update our view for 2012, actually you will get our first view on 2012 at the end of January when we report our fourth quarter earnings. And Mark, as I said, we are currently right in the middle of our budgeting process. So, we are, if you will, still making sausage to some extent. You know, the final capital projects, costs et cetera are still being tied down. It is really a little early to give a view.

Got it. Appreciate it. Thanks you guys. Congratulations on a good water.

Joel Havard with Hilliard Lyons.

Thank you. Morning everybody. Congratulations, also, on the quarter. I wonder if you guys could give us a little dissertation on what's going on with the pricing in northern App. I know we were getting to the margins of the story here, but that's been surprisingly robust.

If you look at our northern App, if that is what you are speaking of, what you have in the numbers is the metallurgical pricing for the 1 million tons on a year over year basis. So, it was up substantially 2011 to 2010. That contract will roll through the first quarter of 2012.

We anticipate shipping the same tonnage for 2012. However, the pricing will be determined probably early February, mid February time frame. So, we don't know exactly what that pricing would be. But as you look at the Northern App, that is the primary driver of the increase that you are seeing.

Right. As you look at --

On a year-over-year basis.

Thanks Joe. As you look at that pricing environment today, though, are you comfortable that -- well I know you don't want to project. But, for what you know right now, does pricing seem fairly static? Or, are we starting to see a little?

Well today, I mean, a lot of it's obviously tied to the economy. So, Europe has been down. We are in a shoulder month. So, as you look at it today, that pricing level would be a little lower than where we are today.

Okay.

But, I would expect the 2012 pricing to be closer to 2011 than it was 2010.

Okay. That is good enough. That is all I've got right now guys. Thanks and good luck.

Dave Martin with Deutsche Bank.

Good morning and congratulations. A number of my questions have been answered. But, Brian, just one clarification on the CapEx, if you would. The range for this year's now $420 million to $475 million. So, that's up $100 million I believe. Is that all related to White Oak?

Yes. If you look at the announcement we put out with the White Oak transaction, taking a look at the various components of that transaction with regard to the reserves, the equity component, ownership of the preparation plant surface facilities, et cetera, it's fully baking in all of those activities.

Okay. Thank you.

(Operator instructions) Noah Learner with Hearts Capital.

Morning gentlemen. Joe, I was just curious, maybe, if you could provide some kind of an explanation. Volume seems to be going up you know for the last couple of years now from our growth projects for the next couple of years. But everywhere you turn you read articles about this coal-fired generation plant or that one going off line over the next handful of years.

Plus, you know, laid on environmental pressures that we are seeing. I'm just curious. The growth in volumes, is there some part of the story that we are not catching in the media about growth overall in the coal market? Or, are we really taking away volumes from competitors?

Well our growth is, is largely driven by a movement from Central App to Illinois basin and/or Northern App. So, you are going from a higher cost region to a lower cost region, it's the bottom line.

Now when you look at the overall demand for coal, we are right at, as a country, we are producing about 1 billion tons, a little over 1 billion tons. And I believe we'll continue to do that for the foreseeable future. Now you talk about some of the plants and all the announcements and there is a lot of hype with that.

But most of those plants are built in the 1950s and/or the 1960s. Most of them haven't been running on a full load basis. So, when you look at the amount of coal burn that those utilities would, in fact, experience, what they are going to do is take those plants down, but then they will run their existing base load plants a little -- at a higher capacity.

So, yes there are plants coming off line, yes we have lost market share to natural gas. But when you look at the scale, and if you look at a growing economy, the country's going to need, essentially, all the embedded invested capital they have got to generate the electricity they need to move the economy.

And coal, of course, at 45% to 50%, is going to maintain its same volume. Now as the economy grows, we may lose some market share, but we are confident that over the next ten years, you are going to see a billion tons of coal produced in this country.

Okay great. So, it seems to me, the short of it all is basically, due to the pricing we have an advantage. So, volumes we are picking up, some other coal company might be losing.

Yes, you are seeing coal production fall in Central App, due to cost. And that tonnage, or that demand for BTUs is being picked up by either PRB, Illinois Basin or Northern App. And when you look at, the other factor you got is a lot of the Central App coal was 12,500 to 13,000 BTU, and Illinois Basin is probably 11,500 BTU, so you are going to end up with more tons just to get the same BTUs. So, you have got to factor in the equation also.

Okay, great. Thanks for your information. Really appreciate it.

Paul Forward with Stifel Nicolaus.

Good morning. And congratulations on the very good quarter. Can you talk a little bit more about, well, just on the met coal side of things. Joe, I think you said you anticipate the same tonnage being shipped in 2012 as your contract rolls over. I'm just curious, as you watch the met markets, where maybe you'll see greater supply coming in in 2012 than what we had this year.

Can you talk about your position, a shipper into that -- into the met markets? And whether you think you know -- I guess, what gives you the confidence to say that you know there might not be some greater availability of supply that might potentially threaten that position that you had in 2011? Or is it just simply a question of, the price might come down, but the customer relationship --

No, I mean I think you have got to look at the quality. We have got a low vol product that is an attractive blend partner for another coal that is highly desirable in the marketplace. And so, there is actually more demand than the million tons, if we could ship it. But, so, a lot of it has to do with the specific quality of the coal we've got, and how it blends in with another competitor's coal.

And that goes into a market that wants to, to buy that particular product. And some of the supply that you are talking to is more of a high vol product. And so, you really just have to look at the specific qualities that the market's, you know, demanding. The particular coal we've got is, we've got a market niche if you want to call it that, that certain customers would like just to continue to buy this particular product that they are buying.

Okay. That is, that is excellent. Can you talk a little bit more about, I guess, there is that at Pontiki, there is both geology and regulatory issues.

I guess, can you talk about 2012, 2013? Do you think there is going to be things that get you back to your historical at a level of production, or is it something that potentially impacts you going forward on a continuing basis?

We'd like to believe we'll be back to normal production, but it is just unpredictable. I mean, we can't really say too much about it, because we are right in the middle of a contest with the regulatory authorities. But, I think it is fair to say we have disagreement. As to the interpretation of the rules, and we'd like to believe that at the end of the day, justice will prevail, as they say.

Okay. And maybe lastly, we've got some pretty heavy CapEx expectations. I was just curious if you could talk about the equipment markets and the lead times. Are those challenging, or is it pretty much not all that tough to get equipment on a timely basis these days?

No, it is challenging. I mean you have to do very precise, long-term planning. And we are fortunate to have some of the best long-term planners that anticipate what our needs are. To make sure we get the slots we need. And, but yes, it is challenging. To make sure that you get the equipment on time and as scheduled and when you need it. To, you know, maximize your efficiency and your productivity. But, it can be managed through managed and communication. You know, the suppliers want to sell the product, so it just really gets back to making commitments and anticipating and planning for the long-term, so you don't get caught short.

Okay. Well, thanks very much.

There are no further questions in the queue. I would turn the call back over to Mr. Brian Cantrell for closing comments.

Thanks again to everyone for joining us today to learn about our record quarter and what we believe could be the best year, again, in our partnership's history. We appreciate your continued support and interest in both ARLP and AHGP and we look forward to updating you next quarter. Thanks to everyone.

Thank you very much. This concludes today's conference. Thank you for your participation. You may now disconnect.