Alliance Resource Partners LP (ARLP) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2011 Alliance Resource Partners L.P. and Alliance Holdings GP, L.P. earnings conference call. My name is Jasmine and I will be your coordinator for today. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's conference, Mr. Brian Cantrell, Senior Vice President and Chief Financial Officer. Please proceed.

Thank you, Jasmine, and welcome, everyone. We appreciate your interest in Alliance Resource Partners, or ARLP, and Alliance Holdings GP, or AHGP.

We released our 2011 fourth-quarter earnings for both partnerships earlier this morning and we'll now discuss these results, as well as our initial outlook for 2012. Following our prepared remarks, we will open the call to your questions.

Before we start, let me begin with a few reminders. First, since AHGP's only assets are its ownership interest in ARLP, our comments today will be directed toward 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 measures and the most directly-comparable GAAP financial measure are contained at the end of the ARLP press release, which has been posted on ARLP's website and furnished to the SEC on Form 8-K.

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

Thank you, Brian, and welcome, everyone.

This morning, we reported the best performance in the history of our partnerships, once again setting new milestones for all major operating and financial metrics. We also achieved our best safety results in our Company's history.

2011 marks the 11th consecutive year of record results. ARLP has set new standards each year since becoming a public company in 1999.

We believe that success begins with people, and this remarkable track record was achieved as a result of the daily commitment and dedication of the entire Alliance team. We have a saying at Alliance. It's who you're with. That reflects our spirit of teamwork and a recognition of the importance of each individual to the success of the organization.

Based on our performance, the Alliance team is clearly second to none, and I personally want to thank every employee for their contributions to our success.

In addition to delivering exceptional results over the years, our strategy of focusing on low-cost producing regions with growing market opportunities has ARLP well positioned for the future. We continue to see opportunities in the Illinois Basin and northern Appalachia, and ARLP remains committed to increasing our presence in these growing markets.

Toward that end, in the Illinois Basin we recently added a production unit in our River View and Warrior operations. We are also well underway with the development of our new Gibson South mine and are seeing progress related to our investments in the new White Oak mine number one longwall project.

In addition, our new Tunnel Ridge mine in northern Appalachia is scheduled to begin longwall production next quarter.

ARLP also enters the year with substantially all of our anticipated 2012 production priced and committed. Our strong contract portfolio, coupled with clear volume growth, has ARLP positioned to weather the near-term challenges facing the coal markets and poised to deliver another year of record performance in 2012.

As Brian will discuss in more detail in a moment, we are currently anticipating higher average coal sale price realizations in 2012, and at the midpoint of our guidance ranges for ARLP's operating activities, we are expecting net income to increase and double-digit growth for coal production, sales volumes, revenues, and EBITDA.

Reflecting our record performance, anticipated growth in 2012, and positive long-term outlook for our primary markets, our Board of Directors at both organizations were led to increase unitholder distributions for the 15th consecutive quarter by an impressive 3.7% at ARLP and 4.5% at AHGP. Based on our current operating plans and outlook, we anticipate quarterly unitholder distributions in 2012 will grow at a pace similar to 2011 at both ARLP and AHGP.

As you can see, Alliance remains committed to delivering exceptional value to our unitholders by continuing to focus on creating sustainable growth and cash flow to provide future growth and distributions to our unitholders.

At this time, I'll turn the call back to Brian for a more detailed look at our financial results and guidance, after which we will open the call to your questions. Brian?

Thanks, Joe.

Looking first at our full-year results, as Joe just mentioned, ARLP again posted record annual financial and operating metrics in 2011 as EBITDA increased 14.3% to $570.8 million and net income jumped 21.3% to $389.4 million, or $8.13 per basic and diluted limited partner unit.

Operationally, the continued strong performance of our River View mine and the return of our Pattiki mine to full production early last year drove 2011 coal production up by 6.6% to 30.8 million tons.

On the marketing front, ARLP continued to strengthen its long-term contract portfolio, captured increased pricing on export market sales, and capitalized on coal brokerage opportunities throughout the year. As a result, ARLP's average coal sales price increased 4.74 cents -- I'm sorry, $4.74 per ton sold and coal sales volumes climbed 5.4% to 31.9 million tons. These both combined to push 2011 revenues up by 14.5% to over $1.8 billion.

ARLP's record coal sales and production volumes, increased coal purchases, and cost pressures all contributed to higher total operating costs. During 2011, costs were particularly impacted by difficult mining conditions at our Dotiki and Warrior mines throughout the year, development production activity at Tunnel Ridge, and three longwall moves at our Mountain View mine.

In addition, increasingly stringent regulatory burdens resulted in increased costs and hurt productivity in all of ARLP's operating regions.

Overall during 2011, average price realizations per ton increased 9.3%, while operating costs per ton climbed 9.6%. Even though both of these increases were greater than we originally anticipated, ARLP's realized margin per ton in 2011 was in line with our expectations.

Turning now to results for the 2011 quarter compared to the 2010 quarter, higher coal sales volumes and prices combined to drive revenues up 13.4% to $474.6 million and contributed to a 5% increase in net income, which rose to $91.7 million. EBITDA for the 2011 quarter decreased slightly compared to the 2010 quarter to $129.2 million, as higher operating costs and the passthrough of losses related to our White Oak preferred equity investment weighed on ARLP's results.

Similar to my earlier comments on ARLP's full-year results, operating costs on the 2011 quarter were impacted by increased coal sales volumes and revenues, difficult mining conditions at Dotiki and Warrior, development production at Tunnel Ridge, and comparatively adverse geology at Mountain View immediately prior to its longwall move in December.

Partially offsetting these increases, workers' compensation expense declined sequentially by approximately $1.17 per ton. This reduction reflects the long-term benefits of ARLP's ongoing safety programs, which have improved our accident and expense trends.

As mentioned, increasing regulatory burdens have been impacting us for some time, and they continued to significantly impact operating costs during the 2011 quarter. These results -- or, I'm sorry, these impacts were felt most acutely at our Pontiki mine, which was idle for approximately 24 days as the mine worked with regulators to resolve a dispute affecting a single production unit. As a result of shutting down the entire mine, sequential production at Pontiki declined during the 2011 quarter by approximately 150,000 tons and operating cost per ton increased approximately 27%.

Unfortunately, this regulatory action will have a lasting impact at Pontiki as the mine will operate with three mining units in the future, one unit less than was in production prior to the dispute.

Several other factors also impacted ARLP's results for the 2011 quarter. Due to our preferred equity investment in White Oak Resources, accounting rules require ARLP to reflect substantially all of White Oak's income and/or losses until such time as we achieve our preferred return. For the 2011 quarter, these passthrough losses reduced ARLP's EBITDA and net income by approximately $4.3 million.

During our analysis of the accounting for ARLP's investments in White Oak, we also determined that an adjustment to the rate used to calculate capitalized interest on our recent development projects was also required. As a result, interest expense on the 2011 quarter was reduced by approximately $11.2 million to reflect this nonrecurring correction of ARLP's capitalized interest calculations.

As we provide our initial look at 2012, we felt breaking down guidance between ARLP's ongoing operating activities and the separate impact of our White Oak investments would provide a clearer comparative reference to prior periods. So as we look first at ongoing operations, ARLP currently anticipates total capital expenditures in 2012 in a range of $400 million to $425 million. These include maintenance capital expenditures.

As noted in our release, major capital projects this year include completion of longwall development at Tunnel Ridge and ongoing development activities at our new Gibson South mine. ARLP also has a number of significant maintenance projects scheduled for 2012, including transitions into new reserve areas at Dotiki, MC Mining, and Mountain View, and completion of a new coal preparation plant currently under construction at our Dotiki mining complex.

We have consistently provided a view of maintenance capital over a five-year horizon due to the inherently cyclical nature of these expenditures. For our long-term distribution planning purposes, ARLP is currently estimating total average maintenance capital expenditures of approximately $5.50 per ton produced over the next five years. In light of the significant infrastructure projects planned for this year, however, actual operating-necessity capital expenditures are expected to be approximately $7.50 per ton in 2012.

Coal production and sales volumes are expected to show strong increases in 2012 compared to 2011. These increases reflect two additional production units in the Illinois basin, the loss of the production unit at Pontiki, typical fluctuation at various operations, and, most significantly, the startup of longwall production at Tunnel Ridge. With this longwall now scheduled to start toward the end of the second quarter, we are updating estimated 2012 production from this new mine in a range of 3.1 million to 3.4 million tons.

Based upon our current operating plans, we now anticipate annual production capacity at Tunnel Ridge of 6.5 million to 6.8 million tons for 2013 and beyond, a run rate roughly 1 million tons per year higher than previous expectations.

Considering the pluses and minuses of these various factors, ARLP is currently estimating 2012 coal production in a range of 34 million to 35 million tons and coal sales in a range of 34.75 million to 35.85 million tons.

In addition to having approximately 97% of its anticipated 2012 coal volumes contractually committed in price, ARLP has also secured coal sales commitments for approximately 33.5 million tons, 27.2 million tons, and 19.8 million tons in 2013, 2014, and 2015, respectively.

Of these amounts, approximately 7.7 million tons in 2013 and 7.1 million tons in both 2014 and 2015 remain open to market pricing. Based on sales commitments and estimates for our remaining open position, ARLP is expecting average coal sales prices to increase by 2% to 4% in 2012 over 2011.

Expectations of increased price realization and coal sales volumes are driving ARLP's estimated 2012 revenues higher to a range of $2 billion to $2.1 billion, excluding transportation revenues.

ARLP's ongoing operating activities are also expected to generate 2012 EBITDA in a range of $590 million to $680 million and net income in a range of $360 million to $440 million.

It should also be noted that as a result of ARLP's ongoing capital investment projects and commencement of longwall production at Tunnel Ridge, DD&A is expected to increase by approximately $40 million to $50 million in 2012. This non-cash increase obviously has a meaningful effect on ARLP's estimated net income for 2012, compared to 2011.

Separate from the above guidance for our ongoing operations, ARLP's consolidated results in 2012 will also be impacted by our continuing investments in White Oak. We currently anticipate funding capital expenditures during 2012 of approximately $125 million to $150 million for reserve acquisitions and construction of surface facilities related to White Oak's mine number one development project and an additional estimated $100 million to $125 million of preferred equity contributions.

As discussed above, the accounting rules require we record the passthrough of losses related to our equity investments in White Oak, and as a result we partly expect White Oak to negatively impact ARLP's 2012 consolidated EBITDA by $20 million to $25 million and net income by an estimated $15 million to $20 million. As previously disclosed, ARLP continues to anticipate its investments in White Oak will be meaningfully accretive to our financial results in the 2015 timeframe, once longwall production has begun at mine number one.

Finally, ARLP entered 2012 with a strong balance sheet and significant available capacity. Our current revolving credit facility expires in the third quarter of this year, so we are planning to access the bank markets in the near term. As part of our planning, we will evaluate our options in the debt capital markets to ensure that ARLP has sufficient liquidity and flexibility to execute its plans.

This concludes our prepared comments. 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. Jasmine?

(Operator Instructions). Jim Rollyson, Raymond James.

Good morning, everyone. Congrats on an excellent year. Maybe starting off with costs, if you kind of look at your guidance, which I think you said, Joe, that in your average realized pricing you guys were kind of guiding up 2% to 4% and I think margins overall to be relatively flat, which obviously implies that your costs per ton are going to be up dollar-wise about the same amount.

Just maybe a little bit of color specifically on northern and central App, just given 4Q jumped up and you had a lot of moving parts. You've got Tunnel Ridge development going on, which I presume costs aren't getting better as the longwall kicks in late 2Q. You had longwall move at Mountain View, and just -- some of the things that -- how you see that proceeding, some of the drivers, and you see costs particularly in northern and central App as we move through the year.

Okay. I think the biggest challenge is looking at northern App because of the timing of bringing on longwall.

So we will see in northern App for the first quarter Tunnel Ridge is going to be higher, relative to getting it to full production on the longwall, but then after -- starting -- once the longwall starts, you're going to start seeing northern App costs per ton drop.

And then, at central App, I think it's going to be roughly flat, except for the inflationary impacts, and that's going to be pretty comparable to 2011 because of the productivity impacts that we had in 2011 because of MSHA. We would like to believe that the settlement we made with them will allow us to have more predictability in our costs in 2012 and the negative impact we had, because it wasn't only the fourth quarter that we were dealing with that issue, the way it sort of rolls out as we look at our cost numbers for 2012. They may go up 2% to 3% just from inflationary pressures, but we don't really anticipate any real productivity impact in central App.

So, as you look at the total picture, our expenses are going to probably trend up in the 3% to 5% to 3% to 6% range, maybe. It depends on productivity, largely, but I think that is sort of what we're going to see.

So even though our costs will go up a little bit, a little bit higher than the revenue, because of the size of the base it ends up giving you a flat EBITDA per ton year to year (multiple speakers)

Right. And you talked about in the press release, while things are in a kind of temporary lull, focusing on cost-control things. What's out there that you can focus on, and as you move beyond 2012, and I know you're not prepared to give 2013 guidance yet, but do you think we get to a point beyond this year that margins -- obviously some of this depends on pricing, but from the cost side do you think we get to a point where beyond 2012 we could actually see margins expand again?

I think that with Tunnel Ridge coming on, that again will give our average cost per ton to have some improvement for northern App.

And then you've got -- the comment that we made in the press release, I'll focus on cost control with a lull in the market, when you get into markets that are continuing to grow your focus is trying to get tons onto the market to try to meet that volume.

And now that we're really not going to be chasing increased volumes as much, it just gives you an opportunity to really focus on trying to make sure you're as efficient as you can possibly be on the cost side. And so it just gives you got time to do that, is what that comment meant.

So as far as expanding margins in the out year, that's going to be pretty much market dependent. And as we look at it, the key -- one key, even though we're not a big met producer, one of the keys is the million-ton contract we have at Mettiki. A second aspect for us is we look forward is our Dominion contract expires at the end of 2013, so that will allow us to sell more met coal into the marketplace starting in 2014, which would give us the opportunity to have expanded margins.

The third aspect is bringing Gibson South on in 2014 timeframe. That's another aspect that's going to allow us to have lower costs because we anticipate that to be a low-cost operation that could also give us the ability to have expanded margins. That, too, is a lower sulfur product at Gibson South, similar to our Gibson North, so our realizations in the Illinois basin should be a little bit higher because we're selling a lower sulfur product that would have a higher realization.

So as we do look forward beyond 2012 and the growth, as we look at our five-year plan our goal is to grow our earnings year over year, grow our sustainable cash flow, and we feel we're well positioned to do that for our five-year plan.

(Multiple speakers). One other comment on the expansion, while our investments in White Oak are not going to be reflected as produced tons and operating EBITDA for our books, we do view this as a development capital project. And once the cash flows from the three tranches of that transaction begin turning toward us, we obviously expect to see total EBITDA expanding beginning in the 2015-type timeframe.

Yes, actually that brings up -- the other question I had was just you're talking short term while you're developing that and putting money into White Oak. It's a $20 million to $25 million hit this year. Is that probably going to be somewhat consistent for the next couple of years? I imagine when you get into 2014, you might get some development tons, and then sometime in 2015 the longwall starts, but is $20 million to $25 million kind of a reasonable annual assumption to think about for beyond 2012?

You hit it on the head. It really is dependent upon the timing of development and how that schedule progresses.

They're still very early in that stage. We are communicating with them closely and we'll continue to watch and advise as we can. So it's a bit early to say, but you're exactly right. It will be very dependent upon their development schedules and how the construction of that mine progresses.

Okay, and the last one for me, Joe, just in conversations with customers, maybe what's the kind of current pulse of your customers and appetite for -- you guys tend to sell coal out a ways. What's the appetite for looking out? You're pretty well sold this year and next, but as you look out to beyond 2013, what's the appetite for locking up coal right now, just giving the sloppy gas market?

I would say we've got negotiations with one customer -- well, we probably have negotiations with two customers right now for longer-term contracts, but they're not dependent necessarily on where the gas prices are in the coal markets. It's more of the normal cycle for the contracts that we have.

So these are existing customers that are looking to renew expiring contracts, and both of those are talking multi-term agreements.

So as far as new markets, we're not seeing a desire to commit at this moment in time. I think there is still a little uncertainty as to how long this gas market is going to do what it does and what the environmental regulations are.

Economic recovery and (multiple speakers) manufacturing demand, all of those factors.

But even though we've got tonnage that's open in the out years, that tonnage is primarily with long-term customers that we've had that we feel highly confident we'll be able to renew those contracts, and those contracts as they become rolling -- and as they roll off, we will be able to enter into longer-term agreements.

Great. Thank you.

Thanks, Jim.

John Bridges, JPMorgan.

Good morning, guys.

Morning, John.

Congratulations on the results.

Thank you.

Just wondered, looking at the EIA data last night, you guys seem to be -- or your region in the Midwest is increasing supply coal, but it is coming off elsewhere. Just wondered if you could sort of talk a little bit about how the competitive environment for [field] coal versus App, and where that's going.

I'm sorry, you cut out. I'm sorry, on our phone. Could you repeat that last part of that question?

I'm just trying to understand the competitive environment between your coal and cap coal, given that cap coal is under -- seems to be falling off and where you can make inroads into cap's business.

I think, as you mentioned, the projections are to see continuing decline in production in the cap markets, and then that moving towards the Illinois basin.

The primary utilities will be in the Southeast, so you've got Progress, Progress Duke now, as well as the Southern Company actually is looking to the Illinois basin in the future. There is a couple of South Carolina utilities that have already made announcements. A couple of the Florida utilities that have been looking, so most of all of that is going to be Southeast utilities, and most of it has been reflected with the scrubber capacity that has been added to meet the environmental regulations.

So, our strategy has been targeting that market, and this is not something that is recent. This is something that has been developing for the last five years or so, and it's just now coming into fruition. So we do believe that the supply that is coming on in the Illinois basin, that the demand will be there pretty much at the expense of central App that will support our growth plans, and the balance between supply and demand, based on our view, is still such that we should be able to attract the revenue that allows us to meet our objective to grow our Company.

Okay, thank you. And you know, there is some pretty chunky estimates as to how much coal could get replaced by gas. But we've been here once before, and I'm just wondering how much low-hanging fruit there is in terms of power plants that are conveniently located to do switching. What is your sense on that?

We believe that there is some continued opportunity, but not a lot.

So I've seen some of the other coal companies talk in terms of 50 million tons. I don't think it's going to be quite that high. We're closer to 30 million, but it really gets into the infrastructure and the capacity to switch, and then the evaluation of base load units and how you run them.

If -- I believe from -- our focus, there's not a real expectation gas prices are going to stay this low by customers, so that's another factor that customers need to consider when they're making these decisions. They need to have their stable suppliers continue to be in their fold so that they don't have significant volatility and swings in their own supply.

So, yes, gas prices are very low, lower than I expected, and it has had an impact and it will have an impact in 2012. But I think we're starting to reach the limit as to the capacity to deliver that low-cost gas into the markets that would impact coal.

And this is probably a dumb question, but I seem to remember the last time gas got down, the sort of favorite figure was for about switching of 30-odd million tons. So I'm just wondering, of your 30 million that you're talking now, how much of that is material or tonnage that switched before that is coming back and how much of that, do you think, is actually incremental switching?

It's incremental. All that is incremental to 2010 and 2011, so it's incremental to 2011.

Incremental, but to the 2008 period when, you know, the gas price got low before and you had that switching?

I think you're -- if you look at it as total utility burn, somewhere in 2008 we were at like 1 billion tons, 1.040 billion, I think, something in that ZIP code.

And then, it dropped to, like, 920 million, 940 million, so we lost about 100 million tons. And over that -- since 2008-2009, we saw a little spike up, and then the gas prices over the last two years has taken that tonnage down again.

So, it's possible between gas prices and environmental regulations to see the utility market to be in the 840 million to 880 million range as far as total coal consumption, so that's a combination of both regulation as well as gas. But that's sort of where we see the things shake out over the next five years.

Okay, that's great color. I really appreciate it. Thanks a lot and congratulations again.

Thank you, John.

Brian Yu, Citigroup.

Great. Thank you and good morning. Could you talk a little bit more about the targeted production increase at Tunnel Ridge? What's driving that? Was there something you found in the gate development that allowed -- gave you more confidence in that 1 million ton increase?

A lot of that was driven by, as the team was being put together and they were finalizing operating plans, our initial full capacity estimates were reflecting a five-day week.

We now believe that with the team in place and the way the mine is developing that we can operate at a seven day -- on a seven-day week schedule. And that's the largest driver around the 1 million ton, roughly 1 million ton per-year annual run rate increase. Any other thoughts, Joe?

Yes, I think it's just a cultural issue. For our history and our culture, we have operated more five-, 5.5-day work weeks. We at one time tried a seven-day work week at our longwall operation at Mettiki because it seemed to make sense, but culturally we had a hard time making that work.

So then when we started hiring at Tunnel Ridge, the teams that we hired were more used to seven-day work weeks and they like that schedule, so management -- local management said we really feel like this is in the best interest of our success. So we said go, let's go. We're going to make it happen. So we're focused on operating a seven-day a week work schedules at Tunnel Ridge.

All right. And then, the second question on a slightly different topic is just with your price-realization guidance and for that number to be up around -- a few percentage points, can you talk about that for the specific regions, whether those will be up, or is that increase mostly because of the higher-priced product coming out of Tunnel Ridge?

Well, what we have in northern App actually on a sales price because we have -- as you recall, we have a 1 million ton contract in the export market. That is typically priced on a fiscal-year basis, so April 1 to April 1.

So in the first quarter, we're going to have the benefit of a higher export price in northern App than we will in the second half because export prices -- met prices have dropped.

So when you think in terms of sales price at northern App, the first quarter is going to be comparable, but it will in fact drop starting in the second quarter to reflect two things. One is back to the reduction in the export market price, and then, second is bringing on the additional tons at a lower price, as you just mentioned.

But it's not too significant, but it is -- that is a factor. So we are seeing an average sales price drop in northern App just for the issues that you talked about.

And so, the other regions are pretty comparable, so we're getting a slight bump in the Illinois basin, a slight bump in central App, offset by the declining price in northern App to get to the 2% growth overall.

And then, the last one I've got is just on rail costs. With all of this talk about coal to gas switching, less coal being moved, Illinois basin obviously growing, are the rails -- any change in the perception of transportation costs and their willingness to work with you guys to be even more competitive than where you are already?

I think from what we understand, they are becoming very flexible on the export movements. We -- again, we don't participate that significantly in the export movements.

As we look at domestically, we see the same focus as we have seen, so we're not seeing a real change. Their customer focus is to deliver our product, but we're not seeing a real change of any significant magnitude. And I think most of the change that you're alluding to is for export movements, and so I think if the European market starts to bounce back, that potentially could benefit us in selling some coal into the export market.

But right now, based on what our strategy is and our focus on the domestic markets, it's really not a material event for us.

Okay. Thank you.

Mark Levin, BB&T Capital Markets.

Hey, Joe and Brian, great, great quarter. Just some very broad market-based questions, following on to some of the earlier ones. And realizing you guys are not a big player in the export market, but just, Joe, your perceptions of what exports out of the Illinois basin in 2012 will look like relative to where things shook out in 2011?

Everything goes back to the European economy. We've seen API to drop significantly from 2011 values and 125-plus range down to 110. Now it's back up to -- whatever. 117 yesterday, I think, something like that.

So if you can -- at 110, or 115, 117, the pricing is definitely a lot better domestically. If you can get back in the 125, 126, pricing is better in the export market. And that, too, factors into what the discounts are for the higher sulfur product in the Illinois basin, which seems to be a little volatile. So trying to think through the actual tonnage really gets into, one, a pricing issue, as well as just the economic environment in Europe.

Based on my judgment right now, you would expect it would be probably slightly lower in 2012 than 2011. But based in our -- when I say slightly lower, maybe 5 million tons less is probably what we're forecasting in our supply demand outlook for Illinois basin coal.

Got it. Very helpful. And then, the next question, just speaking of markets that you guys aren't real big players in, but just sort of valuing perspective, when you look at some of the lower-quality met coals and the potential pricing degradation and the impact of maybe some of those coals moving back into the thermal market in 2012, a couple of questions.

On some of the lower-quality met coals, and again, this is probably more of a central App-generated question, but I will ask it anyway, when you think of the lower-quality met coals, the Bs, the Cs, is there some concern or some worry that those coals, given where pricing is or where pricing could go, might return back into the domestic market? How many tons do you think could be back and trying to find a home in the U.S. thermal market? Is that a realistic concern? Is that something you're seeing? What's your sort of take on the crossover met market at this point?

It is my expectation we're going to see a lot of coal that is pulled off the market. I don't think that coal would cross over based on the lack of demand for central App coal [but back] to the gas prices and the cost of -- if you look at the OTC market price, all that coal that you're talking about wouldn't be selling into a loss market if they were to try to, instead of selling in the met market, try to sell in the steam market.

So they've got two hurdles. One is there's really not a lot of demand for the volume, and number two, the price that they would demand to be able to make money is not being reflected in the current market end of season -- in the OTC market price. So I don't anticipate we're going to see a lot of crossover. I think you're going to see a lot of production that is pulled off the market place.

Any -- care to hazard a guess as to how many tons do you think at a central App might come off this year?

I can't predict that.

It would be a guess.

It is a guess, but it could be as much as 30 million tons, but I don't know precisely.

Sure, sure. I appreciate the color, as always. Great, great quarter. Thanks, guys.

Thanks, Mark.

Paul Forward, Stifel Nicolaus.

Thanks and good morning. Congratulations on the quarter.

Just to ask about Tunnel Ridge again, with the expanded outlook on volumes now 6.5 million to 6.8 million tons, I think, Joe, you had talked about how that would -- that as Tunnel Ridge comes online and that will pull costs lower. I was just wondering if you might give us a sense of just kind of how much relative to the -- I think the number was $69 in the fourth quarter -- that the northern App had. Can you give us an order of magnitude about once we fold in the Tunnel Ridge tons, just what you might target as far as the cost in that region? Can we get back down to the 2010 level of $50 or is there some reason we can't get down that far?

That's a great goal. I'm going to take that to my management team. No, I think it is possible we could get down that low, but it would be in the low $50s to mid-$50s.

Once you his (multiple speakers)

Yes, once you hit full production. Now, first quarter is going to be higher (multiple speakers) back to what we said before, and second quarter is not going to get there. But hopefully by the second half of the year, we could be moving in that direction.

And so, you'd be talking about that's not just Tunnel Ridge itself, but the whole (multiple speakers)

That's correct. That is the total (multiple speakers), so we don't break them out.

By mine.

Great. And on -- I think you had mentioned your five-year plan earlier. We've definitely seen in central App in particular some utility customers obviously backing off on their reliance on central App thermal over the long run.

You've had your costs rise with MSHA and a lot of other factors. Prices have come in a lot. Can you talk about central App thermal and how it fits in with the long-term strategy for Alliance? Is this still a strategic region for you over the long run or are there just too many opportunities elsewhere? How are you thinking about how is this going to affect the Company's operations in the region?

Historically, we've enjoyed the benefit of the diversification. But as we have implemented what we call the scrubber strategy over the last five years, we've become more and more dominant in focusing on the Illinois basin and northern App.

At the same time, we've got a great central App team. They've been able to generate cash flow that is strong and good and additive. We still see some opportunity for those operations. We continue to explore opportunities in the central App. But it's not our highest priority.

So we feel like with the team we've got and the opportunities we've got with those two operations that we can still make money and have opportunity, and we will continue to evaluate where the markets go and where the world goes, and particularly in the export market, to see if there may be some opportunity for some expansion. But our strategy is definitely not focused on central App.

But participating in that market as well, Paul, in addition to what Joe was talking about, the evaluations of how we analyze the various markets and supply and demand flows, our participation there is very additives to us to understand that market and what the dynamics are relative to the areas where we're more heavily focused.

With White Oak and Tunnel Ridge, you've got a lot of -- and other projects, you've got a lot of organic growth in front of you. I'm just curious about how you think about M&A opportunities. With valuations coming in dramatically over the past few months, are you thinking along the lines of 2012 being a year that could present some very attractive chances to pick up properties or new areas at a time when the market is giving up on or opening up low-cost M&A opportunities for you? Or are you satisfied with your pipeline?

We're open to that, and we constantly are focused on trying to grow our Company, including M&A opportunities in addition to our organic.

So, yes, if there is an owner of a property that would like to sell in 2012 that we think fits our strategy of being a low-cost operator that has the opportunity to grow our cash flow, we would be more than happy to participate in that.

Okay. Thanks very much.

Thanks, Paul.

(Operator Instructions). Chris Haberlin, Davenport.

Good morning. Most of my questions have been answered, but I'd love to get your opinion on the regulations, the EPA regulations, that we've been hearing a lot about, the CSAPR and the -- I guess it was previously called [Macked], but just how you think that would impact -- I guess when might these come on, as it relates to CSAPR, and what the impact might be for the Illinois basin and more broadly the coal markets?

As you are aware, CSAPR's stayed, currently, so we don't anticipate that there'll be any enforcement of that action for 2012. So we think that will work its way through the courts for the entire year.

The gas markets and just the general economy has sort of muted any impact of that as to what it means for the coal markets, so sometimes it's hard to distinguish between what the demand is relative to regulations versus other factors.

But as we saw in 2011, as CSAPR was anticipated to be effective January 1, 2012, it did in fact have an impact on demand expectations going forward with the utilities that were affected. So, it's not a positive, but it has been factored into our supply/demand expectations as if that particular regulation will, in fact, be final and implemented in the 2013 forward basis.

Mack, that too has been factored into our plans with the implementation starting in the 2014-2015 -- I think it's 2015 timeframe as to what that demand impact is.

So as I mentioned earlier about the expectation of utility demand for -- domestic utility demand for coal in the United States, the numbers I threw out earlier is the effect of both gas prices, CSAPR, Mack, et cetera, by -- over the five-year plan that we're looking at. So it's in the 830 to 850, somewhere in that zip code, as far as coal consumption for the industry.

Okay. And then, considering these EPA regulations and gas prices and so forth, maybe could you give us an idea of how your customer inventories look? I guess a lot of the trade rags are saying that utilities are actually long coal, and then a lot of them are out there selling it at really low prices. What is your take on that?

We would agree with that, so we do believe that the current market impact is driven largely by reselling of coal that was purchased in 2011, as opposed to producers driving to that level. We do believe there is a long position by the buyers in -- at this current time.

Okay, that's all I've got. Thank you.

There are no further questions. I would like to turn the call over to Mr. Brian Cantrell for closing remarks.

Thank you, Jasmine. As you all have just heard, we had another great year in 2011, our 11th consecutive year of record performance.

And as we've just outlined, we continue to see growth opportunities in our primary markets, Illinois basin and northern App. We have strong growth projects on tap, a very strong contract portfolio. That, coupled with our anticipated distribution growth, we're poised for another strong year in 2012. We look forward to updating you all on our progress toward that in upcoming calls and we thank you for your participation this morning.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a wonderful day.