Alliance Resource Partners LP (ARLP) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the First Quarter 2012 Alliance Resource Partners and Alliance Holdings GP Conference Call. My name is Chanel, and I'll be your operator for today. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Brian Cantrell, Senior Vice President and CFO.

Thank you, Chanel. Good morning, everyone. Earlier this morning, we released 2012 first-quarter earnings for both Alliance Resource Partners, or ARLP, and Alliance Holdings GP, or AHGP, and we will now discuss those results, as well as our outlook for 2012. Following prepared remarks, we'll open the call to your questions.

Before we begin, let me start with a few reminders. First, since AHGP's only assets are its ownership interest in ARLP, our comments today will be directed to ARLP's result and outlook, unless otherwise noted. In addition, please be aware that some of our remarks may include forward-looking statements that are subject to a variety of risks, uncertainties, 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. While these forward-looking statements are based on information currently available to the partnership and those of their general partners and Management, 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 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 these differences between these non-GAAP financial measures and the most directly comparable GAAP financial measure are contained at the end of the ARLP press release, which has been posted on ARLP's website and furnished to the SEC on Form 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. Good morning, everyone. Thank you for joining our call today. I am pleased with our performance during the 2012 quarter, as the ARLP team again demonstrated the ability to meet challenges head on and achieve outstanding results. During the 2012 quarter, our operations successfully met their production and cost targets. They had one of the best safety performance quarters in our history.

In April, we also expanded our presence in the growing Illinois Basin coal market by completing the acquisition of substantially all of the coal-related assets of Green River Colliery, including the Onton number 9 mine, and an estimated 40 million tons of coal reserves in western Kentucky. This transaction provides ARLP with increased flexibility to service our existing customer base, and enhances our ability to meet increased demand for scrubber-quality coal. The integration of the Onton mine is going well, and we currently expect this operation to add approximately 1.6 million tons to ARLP's production and sales volumes in 2012. Essentially all these tons are priced and committed under contracts to existing ARLP customers, and as Brian will discuss in a moment, we have adjusted our full-year guidance to reflect the impact of this acquisition.

During the 2012 quarter, our marketing team also added to ARLP's already attractive long-term contract position by securing new commitments to supply all of Seminole Electric's coal needs from 2013 through 2018. Annual coal deliveries to Seminole are expected to range between 3 million to 4 million tons during this period on an annual basis. ARLP currently expects to ship approximately 3.65 million tons to Seminole this year, and approximately 3.4 million tons in 2013. ARLP continued to make progress on its growth initiatives. The Tunnel Ridge longwall is poised to start production in the second half of May. In addition, development is progressing well at our new Gibson South mine, and ahead of our original expectations at the new White Oak longwall mine.

Our results for the 2012 quarter were impacted by shipment delays, due to sharply lower coal demand. ARLP's inventory grew by approximately 575,000 tons, above our expectations during the 2012 quarter. Roughly 50% of this total is related to planned sales into the high-price metallurgical export markets from our Metiki complex. We currently expect this export shipments will be delivered at the anticipated contract price by the end of the summer. The remainder of our inventory bill was principally in the Illinois Basin. With our strong customer relationships and committed contract position, we expect to reduce our inventory over the balance of the year. As a result, we are hopeful that 2012 will be another record year for ARLP.

Looking beyond 2012, ongoing expansion of scrubber capacity by US utilities supports our view that demand for Illinois Basin and Northern Appalachian coal will continue to increase. ARLP's strategy of focusing on low-cost production opportunities in these regions remains intact. Our current operations and visible growth pipeline has us well-positioned to exploit these opportunities. We are confident of our ability to effectively execute our strategy and remain committed to ARLP's mission of creating exceptional value for our unit holders through sustainable cash flow growth and increases in unit holder distributions.

The Alliance Boards share in our confidence, and again increased quarterly cash distributions to unit holders by 3.5% at ARLP, and 4.7% at AHGP. We have been growing our distributions at this pace since the fourth quarter of 2010. We currently plan to maintain a similar rate of growth in distributions for both ARLP and AHGP throughout 2012. 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?

Thank you, Joe. Let's walk through the numbers for the 2012 quarter in more detail, starting with the top line. Quarter over quarter, ARLP's revenues rose 4.8% to $443.6 million on higher coal sales, volumes, and prices. Volume increases at River View and Tunnel Ridge, and improved price realizations in the Illinois Basin and central Appalachia more than offset the impact of lower sales volumes in the high-priced export market, as our average price realizations in the 2012 quarter increased to $54.99 per ton. Sequentially, reduced brokerage sales and export delays contributed to lower total revenues, sales volumes, and pricing, which were down by 6.5%, 4.4%, and 2.8%, respectively.

Increases at River View and Tunnel Ridge drove production higher in the 2012 quarter, the total production increasing 3.6% to 8.5 million tons. As you would expect, increased volumes in the 2012 quarter compared to the 2011 quarter impacted our costs, as higher sales-related expenses, materials and supplies, maintenance costs, and labor-related expenses pushed total operating expenses up by 6.8%, to $273.5 million. Costs during the 2012 quarter were also affected by increased expenses related to greater incidental coal production at the Tunnel Ridge mine development project, the impact of our Pontiki mine operating down one production unit, and higher outside coal purchases. Total segment-adjusted EBITDA expense per ton in the 2012 quarter rose 7% over the 2011 quarter to $36.80 per ton, primarily due to higher labor-related costs. Sequentially, however, improved productivity resulted in lower costs, as total segment adjusted EBITDA expense fell by $2.59 per ton.

Coal inventories increased by 900,000 tons over year-end levels, to 1.1 million tons at the end of the 2012 quarter. Although these inventory levels are comparable to a year ago, as Joe mentioned earlier, the build during the 2012 quarter was higher than we expected. As previously discussed, however, ARLP expects coal inventories will decline over the balance of the year, returning to more normal levels by the end of 2012. As expected, compared to the 2011 quarter, EBITDA net income was also impacted by the flow-through of approximately $4 million of losses related to the development of the new White Oak longwall mine in southern Illinois.

Let's now turn to our outlook for the remainder of 2012. As you saw in our release earlier this morning, ARLP revised its 2012 full-year guidance for sales and production volumes, revenues, EBITDA, net income, and capital. With the exception of capital, we have tightened our current guidance within the ranges we provided at the beginning of the year, and have adjusted our expectations to reflect results to date and the impact of several other factors, including the Onton mine acquisition, the May startup of longwall mining at Tunnel Ridge, and the impact of our current market outlook on coal sales and production mix. Based on results to date and our analysis of these factors, ARLP now expects 2012 coal production in a range of 35.2 to 36.4 million tons, and coal sales of 35.6 to 36.9 million tons. These adjusted ranges reflect approximately 1.6 million tons of additional volume in 2012 from the Onton mine acquisition, and the startup of the Tunnel Ridge longwall. In addition, we have adjusted our estimates as we currently anticipate that fiscal 2013 deliveries into the metallurgical export market may be closer to 800,000 tons compared to the 1 million tons ARLP has sold into that market during each of the last two years.

We also adjusted our 2012 guidance for revenues, excluding transportation revenues, to a range of $2.06 billion to $2.12 billion, consolidated EBITDA to a range of $585 million to $615 million, and consolidated net income to a range of $345 million to $385 million. Reflecting our current view of sales and production mix this year, ARLP continues to anticipate average coal sales prices in 2012 will increase over 2011 levels, but we have lowered our expected increase to a range of 1% to 3% from our initial estimate of 2% to 4%. Likewise, while we originally expected 2012 margins would be comparable to 2011, we now anticipate margins this year will be approximately 4% to 6% below last year. We are also adjusting our capital estimates for 2012 to include the Onton mine acquisition, and for our major growth project at Tunnel Ridge, Gibson South and White Oak, as well as our planned mine extensions, infrastructure improvements and maintenance projects at various operations. Reflecting progress to date and current schedules, we are now anticipating total 2012 capital expenditures, including maintenance capital, in a range of $565 million to $610 million.

ARLP's 2012 estimates for consolidated EBITDA and net income reflect the anticipated impact of our continuing investments in White Oak. We expect White Oak to negatively impact ARLP's 2012 consolidated EBITDA by $20 million to $25 million, and net income by $15 million to $20 million. Our initial 2012 guidance for estimated capital and equity contributions to White Oak was conservative, but as this project progresses, the timing of ARLP's funding obligations has become clearer. Based on revised estimates from White Oak, we have reduced our anticipated funding capital expenditures during 2012 to a range of $95 million to $110 million for reserve acquisitions and construction of surface facilities related to White Oak's mine number 1 development project. In addition, we have reduced our expectations for preferred equity contributions to White Oak in 2012 to a range of $60 million to $80 million. As Joe mentioned earlier, this project is progressing ahead of our initial expectations, and we now anticipate our investments in White Oak will become accretive to ARLP's cash flow in late 2014, once longwall production has begun at mine number 1.

ARLP's balance sheet remains strong, as we ended the 2012 quarter with approximately $320 million of liquidity. As we mentioned in January, our existing revolving credit facility expires in the third quarter of this year, so we are currently accessing the bank markets to refinance this facility, as well as our existing term loan. Syndication is going well, and we expect to close on new bank facilities within the next few weeks, to ensure that ARLP has sufficient liquidity and flexibility to execute its plans and quickly react to future opportunities that may arise. We all know that the current coal markets were challenging. Fortunately, we are well-positioned to not only manage these challenges, but to execute on our strategy and deliver value to our unit holders. As evidenced by our current outlook, we remain optimistic that ARLP will once again deliver record results and distribution growth in 2012.

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

(Operator Instructions)

David Reiser, Raymond James.

Looking at your production guidance, after adjusting for the additional production from Onton, it looks like production's actually down, essentially filled out for the year. Could you give us a little bit more color on the production mix and where you're making some adjustments?

Yes, I think when you look at -- talking off the mid-points, when you look at what we've moved, it reflects the 1.6 million tons coming in from you Onton. We've also indicated that we expect sales into the export markets may be down by 200,000 tons or so, relative to where we originally anticipated. In addition, just as we look at actual results for the quarter and current development and execution on our mine plans, you've got various ups and downs at the other operations.

Okay, so Onton's 1.6 million tons, I thought it was closer to 2.1 million tons.

No, Onton's 1.6 million tons

That's for this year.

Okay.

This year.

That's from April 1 to December 31.

I got you.

That's correct. 2.1 is annual run rate.

Okay. On the cost front, you had previously expected margins to be relatively flat. Now we're going to see some compression. I know pricing is partially to blame, as is cost per ton. Could you maybe give us a little bit more color regionally, more specifically central App and Northern App?

I think the issue on the revenue side is just slightly down, and that's primarily tied to the shipping less net tons this year than what we anticipated we would ship during our first quarter call. Those are higher-priced tons, so when you pull those out of the mix, it reduces the overall sales price. On our expense side we're still expecting our costs to go up 3% to 6%. Most of that's really tied to the White Oak contribution. When you look at each of our regions, our Illinois base and central App will go up with inflation in the 1% to 3% range, maybe. In Northern App, we expect to actually go down, as we get the benefit of the longwall at Tunnel Ridge.

Okay. Last question for me, you guys were able to book some tons in the out years. Could you just give us a sense of the current pulse of the market and appetite of your customers to book coal, given the weak environment here?

We did extend the contract with Seminole. That contract expired on its terms by the end of 2012. They had the option to extend for four years. We stretched that to 2018, so we were successful with that. We have a couple of other negotiations going on for multi-term sales. Beyond that, I think most of the market, the domestic customers are sort of waiting to see how the rest of the year develops and what their anticipated burns would be in 2013.

Okay.

The ones that we are talking to are traditional customers that are in similar situations as where Seminole was, where we've been long-term suppliers and we're trying to extend existing agreements by -- going to expire on their own terms and/or add to some tonnage that we have under existing contracts to meet their needs in the out years.

Okay, thanks, guys.

Thank you.

Paul Forward, Stifel Nicolaus.

Thanks, good morning.

Good morning, Paul.

On White Oak, you have -- it looks like you've got a little bit lower capital spending outlook for 2012, but I think, Brian, you talked about a little bit of an acceleration of the startup in, or at least becoming, additive to earnings a little earlier in late 2014 rather than 2015, and you said that it was going pretty well so far. I wondered if you could just expand on how you were able to pull the CapEx at least for 2012 a little lower, and just what are you seeing so far in the development that gives you the confidence to say that it will be a positive contributor late 2014?

Well, a couple of things. Number one, when we look at total estimated expenditures, I think they are still within the range for the three categories, being the reserve acquisition and development at approximately $140 million, the processing facility that we're going to be building roughly in the $110 million, as well as equity investments ranging from $150 million to $275 million. So our totals haven't really been adjusted at all.

I would say that coming into the year, we were very early in the startup phase. We were probably a bit conservative on our estimates, but as the project develops and White Oak gets more comfortable with the actual timing of their capital requirements, especially in this year, we felt comfortable in adjusting it down. Whether the mine starts up in 2014, or we actually start seeing cash flows in late 2015, building an operation like this is a marathon, and we're probably at milepost 5 or 6 right now. It can continue to shift, but as we indicated when we first began talking about this project, we'll try to give you our best view as current status as we go along, and that's what we've done here.

Okay, thanks. You've got a number of development projects happening. I was just wondering if you might be able to comment a little bit about the equipment market. Is there -- obviously, the overall volumes are trending lower throughout the industry. I'm just wondering if this is, as you're developing other projects, are you seeing -- is this bringing up any equipment that might be kind of lightly used, or might there be other ways in which, as you're developing new projects, you're seeing the possibility that the capital budgets might come in lower than you might have anticipated six months or a year ago?

Yes, I think that -- this is Joe. I think the used markets will provide some opportunities. We haven't been able to capture a lot to date, but we do anticipate that there will be some used equipment that will become available in 2012, which we would take advantage of. A lot of that would be to replace our own maintenance-type capital, as opposed to thinking in terms of new projects. We do think that the equipment availability in the used market will increase in 2012 and we'll try to take advantage of that. As far as capabilities and availability, again, with the soft market, the availability of the equipment does not pose any problems at this moment in time for our development projects.

Great, and as you've -- to the extent that you've been able to make some longer-term commitments for Illinois Basin coal, I was just curious if you've had the -- this is a buyer's market for coal. Inventories are flush. Could you talk a little bit about whether over the long run, you think that there is -- the Company's got to sacrifice a little bit on pricing to hold on to volumes, or is that not something that really works into your equations as far as the longer-term thinking and that the short-term market doesn't have all that much impact on whether you can actually hang on to pricing power, looking out over the long-term contract?

Yes, I think so much of the pricing at the moment really is driven to short-term deals -- a barge here, or a train here -- and not conducive to be interpolated out on a long-term contract basis. At the same time, there haven't been a lot of long-term contract discussions. Now with Seminole, it was more of a long-term view than a spot view, so we expect the pact contract, we know that for 2013 pricing, it will be above 2012 realizations.

It has been -- it was priced as a market as if we were in a normal market instead of a quarter-by-quarter, where the utilities are selling more that are depressing the prices today, as opposed to the producer selling into that market that are setting the price. It's going to be more on the basis of a realistic supply/demand balance, which we expect will occur by 2013. The 2013 pricing will be dependent upon what the market demand's going to be at that time, and that will be both a factor of the economy and weather. I think the supply side is -- has become rationed, and will become more rationed in 2012, to where we will see a balance in place again by the end of 2012 or early 2013.

All right. Thanks for the comments.

Thanks, Paul.

Let me just follow that by saying, as we look at our unidentified sales, and as we focus on our distribution policy, we do anticipate that the revenues will be supportive of the rate of growth that we're showing, and planning on for 2012.

Kalpesh Patel, JPMorgan.

Good morning, everybody. It's John Bridges jumping for on for Cal.

Hi, John.

I was interested in your comment about the market supply coming off by year end. How do you see that developing? We've seen exports perhaps acting as a bit of a safety valve for excess coal in the market. Is that part of the solution, that those exports sort of decline, or are they economic and likely to continue? Could you comment on the export picture?

I think it's more driven by there are certain contracts that are being satisfied today by some of our competitors, that when those contracts roll off, and they're looking to place their tons into the forward market, they're going to -- they're not profitable, bottom line. I think that we'll see, like we have seen this quarter, with some announced mine closings, we'll see additional mine closings as the year develops. That will be more central Appalachia, but then that will benefit the entire market.

Because when you look at the cost structure of Illinois Basin coal, it looks as if you could -- conceivably, you could put coal in a vessel on the Gulf for little more than $50 a ton.

Yes, I'm not speaking Illinois -- I'm not suggesting Illinois Basin will fall off any more. I think it will be more central App. I think as we look at the Illinois Basin, we think the production this year will be close to 120 million tons, so we are seeing growth in Illinois Basin, in fact, the opportunity to sell coal in the export market.

Interesting. We've seen reduction in sales to the utilities. How do we factor that into our modeling? We see your sales as being largely committed now for the rest of the year, but then as the utilities fill up their stockpiles, then perhaps we're seeing force majeure's called on that. Is that a risk for the rest of the year?

It's a risk. However, I think most of the utilities are -- that we're dealing with, aren't relying on force majeure. They are talking as to what their inventory levels are, and we're trying to be as flexible as we can be. At the same time, to factor in the investments we've made and the commitments we've made to folks. So far, we've been able to work in a win-win situation with our customers to try to take into consideration their situation, but then they, too, are taking into consideration our situation.

We're planning to be able to ship our tons this year. If the summer is not a normal summer, and the demand is lower than we anticipate, I think that's a bigger risk than force majeure events. Likewise, if the summer's a little warmer than normal, then maybe we'll see increased opportunities in the back half of the year. That would be my view on the market side. It's really weather-dependent for the summer. I think the customers are trying to honor their commitments, at least ours are, and we expect that that will be the case for 2012, and that's been totally factored into our guidance.

Okay, thanks. We'll do a weather dance to try and get the temperatures up. Thanks, guys.

Thanks, John.

Chris Haberlin, Davenport & Company.

Maybe first here on financing, you said that you were looking to replace the revolver here next month. I just kind of want to see what your appetite is to borrow on that, and kind of what's your comfort level on leverage metrics, say like a net-debt-to-EBITDA, or any other metric?

Yes. The current facilities that we're in the market for are looking to up-size our revolver. On the cover, we were at $500 million for that, and we also had a $250 million term loan component. We do have an accordion that we can exercise at closing to bring that up if we desire to. We're having those conversations this week to determine final sizing.

As we look at longer term, where we like our leverage levels to be, they've obviously been very low, recently in the 1.2 range on a gross basis and I think on 0.8 or so on a net basis. Long-term, probably somewhere in the 2.0 times range is where our comfort zone is. Then bottom line is, we just felt like it was -- A, we needed to address the revolver because of the expiry coming up in September, and as the Company has grown, we wanted to put a facility in place that was going to give us the flexibility we needed going forward.

Okay. Kind of switching to the export volumes, and I just want to make sure that I've got this down correctly. I think your guidance was the calendar year -- I'm sorry, fiscal year 2013 would be somewhere in the range of 800,000 tons, and then you all lost in Q1 around 250,000. I just want to make sure that kind of implies something on the order of 800,000 tons here in the back half, or I guess in Q2 through Q4. Is that fair?

I think the way you could think about it is, we had a million-ton-a-year contract, so that's roughly 83,000 tons a month, I believe. We lost -- we had delayed shipments on our 2012 fiscal year by about 100,000 tons in the fourth quarter last year, and 200,000 --

175,000.

175,000 or so in the first quarter. So that 275,000 is going to be shipped. Now we're continuing to ship at an 83,000-ton basis, on a monthly basis, so once we get to fiscal year 2013, that's anticipating the new contract would start April 1 of 2014. For our 2013, because we're shipping on the same rateable amount, we're effectively shipping on last year's contract--

First.

-- first, and then the second contract based on the run rate. It just shrinks that close to 800,000, as opposed to the million.

Right. So in your comment we lost those tons, we don't view that as we lost those tons. It's simply a timing issue and make that up through the summer, is our current expectation.

Yes, so we'll get -- the price we had for the 2012 fiscal year will stay intact and then for the balance of that contract. We'll have a new price for the roughly 800,000 tons rolling into next year.

Right, and those negotiations are ongoing. It could be in the 800,000-ton range, but there's an opportunity it could be back at the million-ton range. We just haven't settled those negotiations yet.

Okay.

We're just assuming it stays at the same run rate and giving you this guidance.

Right.

Brian's saying it could be higher than that. We'll wait and see.

Okay. Last question on Gibson South. Could you just kind of remind us what the timing of that project is, and how your customer commitments are coming along?

The timing is in late 2014, should be up and running. Right now, we're pretty much focused on the export market for that output. We are shipping some export Gibson product to the market today to build those relationships, and as we get closer to the actual startup date, we'll begin the conversations more in earnest to try to increase the volume to the production of the Gibson County operation.

Okay. Thank you very much.

Thank you.

Mark Levin, BB&T Capital Markets.

Hi, guys. Couple of just sort of macro questions. Joe, just curious, to kind of get your thoughts on how you see the thermal export market evolving in the back half of the year, and into 2013. I think on the last call, or maybe two calls before, we were talking about API 2 prices that were last year somewhere around 120, Today, you know, around 100 or even below 100. Just kind of curious to hear how you see that market evolving into this year, and into 2013?

Again, we are seeing, in addition to the European market, we're seeing increased interest in the Asian market, as well as India. You can't look at it just off the API 2 pricing. There is increased activity, I think back to those other markets that are filling in what would otherwise be a void to the European market because of the pricing pressure. As we look to 2013, we don't see any reason why the demand appetite would not continue. In other words, we believe it will continue, and we, like some others that are engaged in that, in the export markets, do see opportunity for continued strong demand for US production in the 2013 time frame, as well as going forward. The world demand for coal continues to be at a strong pace, contrary to what we're seeing right now in the United States.

Okay. Then the second question, maybe more specifically to the Illinois Basin. I think last year as a region it did about 110 million tons or so of production. When you look at your crystal ball, we've seen maybe some higher-cost stuff come off, but obviously a lot of lower-cost production is coming on line. As you sort of see the ramp in the Illinois Basin, from maybe that 110-million level in 2011, how do you kind of see that over the next couple of years? Maybe talk about central App's steam market, how you kind of envision the decline there occurring?

I think for Illinois Basin, we see the production anywhere from 115 million to 120 million this year. We think it has the opportunity to grow over 2013 and 2014, probably another 20 million tons, and that most of that increase in production will go to the US domestic market, but there will be some of that going into the international markets as well. On central App, we are seeing roughly 160 million today, and that could fall off maybe 40 million tons over the next two years, somewhere in that ZIP code. With the Illinois Basin growing about 20, you're going to see central app decline about 20, is my projection at this moment in time.

Got it, great. The last question, just in terms of the rails. I know there's been a lot of discussion in terms of how different rails are approaching their customers, and I realize on the utility side, they're dealing directly with them and you guys are not. Just from what you're hearing and your perspective, I mean, is your sense that the rails will be a little bit more accommodative, or are you seeing any signs, real tangible signs that they are being more accommodative to help move more coal in this type of environment?

I think that as you look at the eastern export markets, again, we're not participating in that as much, so I don't have first-hand experience with that. But I have heard, back to your question, that they have been more accommodative for the eastern export movements, to allow for certain producers to participate in that declining market, as you mentioned earlier about the pricing, or someone did. I think the rails are obviously an important part of the distribution chain. I'm sure they will continue to try to move their product to increase volume, or to increase and/or sustain volumes, but at the same time, they going to want to try to maintain their margins as well.

Great, thank you.

(Operator Instructions)

Dave Martin, Deutsche Bank.

Had a couple of follow-ups. First, it's clearly an interesting time to be signing new, large, long-term agreements. I think, Joe, you mentioned earlier as it related to the Seminole deal, that you expected 2013 prices to be up versus 2012. I'm wondering if you can also just comment on margins. Do you expect the price improvement to be above and beyond the cost inflation you would expect?

Yes, we would. If you look at our relationship with Seminole, it goes back to late 1970s. We've had a very solid, long-term relationship with them, and, again, the contract pricing, because we had a long-term contract, I think it's fair to say that our 2011, or excuse me, 2012 price on our base tonnage there is below market. When we look at our pricing year-over-year, in large part it's just really bringing that contract up with the market prices, for the base tonnage in 2013, which does give us the increase and it is -- it should be higher, it should be additive to our margins in 2013.

Okay, great. Coming back to your met export business, it's clear that you'll benefit in the short-term from delays and higher-priced tons over the next quarter or so, and I guess maybe the next quarter. I'm wondering if you can comment on what your realizations will be for your met shipments this year?

Well, as Brian said, we're right in the middle of negotiations for fiscal year 2013, so it's probably not appropriate to discuss what our pricing would be under that contract at this time.

Okay, thank you. Good luck.

Kalpesh Patel, JPMorgan.

Hello?

Yes.

I wanted to ask about your exposure to coal to gas switching. Are any of your customers that you know about looking to possibly shut in coal-fired power generation, fire up some natural gas that might be in their portfolio currently?

I think essentially all utilities are looking at what their mix is going to be on a going-forward basis. I'd say most of our customers have engaged in some form of coal-to-gas switching. They've done so this year. I think most of what we expect, most of that has been to a level that we don't really anticipate seeing an increase in coal-to-gas switching in 2013. I think gas prices have sort of hit their bottom and will be going up in the future. I think most utilities anticipate the same. We don't anticipate in the 2012, in the 2013 timeframe or even 2012, a further increase in coal-to-gas switching.

As you get beyond that, a lot will hinge on the election in 2012. We've seen a lot of announcements by utilities that are planning to shut down coal units and rely more on natural gas. We're seeing more utilities and basically anybody that is building plants today that were not in the construction phase, or the permitting phase before this year pretty much, solely looking to build natural gas units. Over time, you would expect that the market share for natural gas would be higher than coal. Having said that, I think there's a concern -- some of the anticipation of the coal burn has been too conservative. I do believe that the base load units that are running today will continue to run for the next 10 to 15 years.

I think demand for coal for the next 15 years, and as we look at the projects that are in our pipeline and the capital we're spending, we believe we can have more than sufficient adequate markets to make great investments and to be able to continue to show the type of growth that we've been able to show for the last 11 years. Some of the concern of some of these headlines and announcements of greenhouse gas regs or whatever, they're not going to impact our markets year to year. It's more of an impact 10 years from now. There will be, in my view, increasing demand for coal in the world. In the US, we think it has pretty much flattened out, and will have a sustainable 800-million-ton to 900-million-ton utility burn for the next 10, 15 years.

Just a follow-up to that, do you see your basin, or particularly the Illinois Basin benefiting more versus other basins as these regulations in coal-to-gas switching dynamics like play out in that time frame you're talking about, the 5- to 10-year time frame?

We do anticipate growth in Illinois Basin. That has largely been due to the capital that the utilities have spent that allow them to burn the higher sulphur, lower-cost coal. We do anticipate the Illinois Basin will benefit from the regulations as the customers anticipate, or as they look to meet the needs of their customer base, but also the obligations of the regulations. Yes, Illinois Basin should benefit, as well as Northern App, should benefit from these regulations as we look to the next 10 years.

Is Illinois Basin going to out-perform Northern App in the Powder River Basin?

I think it's -- I think there's more growth opportunity in Illinois Basin than you can see in Northern App. As a percentage of each of the basins, Illinois Basin will grow at a faster clip than either Powder River Basin or Northern App. In absolute terms, I think that Illinois Basin will have increased tonnage that's greater than Northern App. Powder River Basin, I can't really answer your question specifically, because I think they are looking to export more tons in the out year, so they may have -- of course they had some reduction this year that's probably larger in volumes. On a volume basis, they may be able to get back to normal and grow at a little faster pace in volume, but not in percentage. Most of that will be driven by the export markets.

Got you. Okay, thank you and good luck.

Thank you.

There are no further questions. I would now like to turn the call back over to Mr. Brian Cantrell.

Thank you, Chanel. As you've just heard, we view our results in the first quarter as being principally related to timing issues, and we continue to anticipate improved performance over the balance of the year, as we get back on schedule for our deliveries and realize the benefits from our Onton acquisition and the startup of the Tunnel Ridge longwall. As a result, we remain optimistic that 2012 will be another record year for ARLP. With this expectation and along with our visible growth pipeline, those factors give us confidence that we can continue to deliver distribution growth to our unit holders in the future. We appreciate your time and interest this morning, and look forward to catching up next quarter. Thank you.

Ladies and gentlemen, that concludes the presentation. Thank you for your participation. You may now disconnect. Have a great day.