Alliance Resource Partners LP (ARLP) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Alliance Resource Partners LP and Alliance Holdings GP second-quarter 2015 earnings call. (Operator Instructions). As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Brian Cantrell, Senior Vice President and Chief Financial Officer. Sir, you may begin.

Thank you, Amanda, and welcome, everyone. Earlier this morning we released 2015 second-quarter earnings for both Alliance Resource Partners, or ARLP, and Alliance Holdings GP, or AHGP, and we'll now discuss these results as well as our outlook for the remainder of 2015. Following our prepared remarks we will open the call to your questions.

Before beginning a reminder that some of our remarks may include forward-looking statements that 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.

While these forward-looking statements are based on information currently available to us, if one or more of these risks or uncertainties materialize, or if our underlying assumptions prove incorrect, actual results may vary materially from those we projected or expected.

In providing these remarks neither partnership has any obligation to publicly update or revise any forward-looking statement whether as a result of new information, future events or otherwise.

Finally, we will also be discussing certain non-GAAP financial measures. Definitions and reconciliations of the differences between these non-GAAP financial measures and the most directly comparable GAAP financial measures are contained at the end of the ARLP press release which has been posted on our website and furnished to the SEC on Form 8-K.

Now that we are through with the required preliminaries I will start this morning with a review of the partnership's operating and financial results for the most recent quarter and then I will turn the call over to Joe Craft, our President and Chief Executive Officer.

As reported in our releases this morning the Alliance partnerships delivered solid results for both the 2015 quarter and year to date. We posted increases to coal sales volumes and total revenues and our distributable cash flow for the first half of 2015 also increased compared to the 2014 period. In addition, our EBITDA and net income remain strong despite what are obviously very challenging times in the US coal industry.

Taking a closer look at the details, coal sales volumes increased 10.3% sequentially as our operations continue to perform well, and we made significant progress in reducing inventories from the build experienced earlier in the year.

You may recall that ARLP's inventories grew by more than 1 million tons during the first quarter of 2015 due to shipment delays caused by frigid weather and high river levels that disrupted barge movements. Our operating and marketing teams successfully brought inventories down by approximately 962,000 tons during the 2015 quarter, well in excess of our 800,000 ton expectation.

Additionally, reflecting our decision to reduce unit shifts in response to market conditions, production volumes fell quarter over quarter and sequentially to approximately 9.5 million tons.

Total revenues for the 2015 quarter increased to a record $604.7 million led in part by the increased sales volumes I just mentioned and by significantly higher other sales and operating revenues which increased 68.9% compared to the 2014 quarter primarily as a result of higher coal royalties and surface facility services revenues from ARLP's investments related to the White Oak Mine No. 1.

EBITDA and net income for the 2015 quarter were negatively, however, by the non-cash equity loss of affiliates from White Oak which was considerably in excess of our expectations. Primarily due to low coal sales price realizations and higher expenses, equity losses from White Oak increased by $14.5 million compared to the 2014 quarter and $12.6 million sequentially.

As we previously announced, and as Joe will discuss in a moment, we are on track to close this week on the acquisition of the remaining equity interest in White Oak not already owned by ARLP and assume operating and marketing control of their Mine No. 1 effective August 1, 2015.

ARLP reported EBITDA of $182.4 million for the 2015 quarter. In addition to the equity losses from White Oak, EBITDA was lower compared to the 2014 quarter primarily as a result of higher sales-related expenses due to the increased coal sales volumes in the 2015 quarter. And the fact that the 2014 quarter contained a one-time $4.4 million gain on the sale of Pontiki assets and a $7 million insurance settlement at the Onton mine. These negatively impacted our year-over-year comparisons.

Net income of $94.9 million was further impacted by increased depreciation, depletion and amortization for the 2015 quarter.

Turning for a moment to our segment results, strong sales from the Tunnel Ridge mine during the 2015 quarter led call sales volumes and revenues in the Appalachian region higher compared to both the 2014 and sequential quarter.

Offsetting these increases lower clean coal recoveries pushed segment adjusted EBITDA expense per ton higher by 8.3% compared to the 2014 quarter while increased long wall move days at Mettiki and Tunnel Ridge also contributed to higher per ton costs which increased 5.1% compared to the sequential quarter.

In the Illinois basin coal sales volumes declined 3.4% compared to the 2014 quarter, primarily due to shift reductions at Gibson North and lower sales at Warrior as the mine continues its transition to a new mining area.

Compared to the sequential quarter strong performance at Gibson South and increased sales from inventories across the region drove coal sales volumes in the Illinois basin higher by 8 .7%. Segment adjusted EBITDA expense per ton in the Illinois basin during the 2015 quarter improved slightly compared to both 2014 and sequential quarters.

Comparing year today results, ARLP's total coal sales price per ton in 2015 decreased approximately 2% -- $54.30 per ton, in line with our previous guidance. Total segment adjusted EBITDA expense per ton increased approximately 4.5% during the 2015 period to $35.50 per ton, also in line with our prior guidance.

Looking ahead to the balance of 2015, we anticipate that the operating and financial performance of ARLP's existing operations will be consistent with previous guidance.

Assuming we gain operating and marketing control of White Oak at the end of this week we anticipate that the White Oak Mine No. 1 should be modestly accretive to our consolidated EBITDA and net income for the remainder of the year. We continue to expect 2015 full-year EBITDA and net income will be within the range of our prior guidance.

We will provide a complete update of guidance in a press release after the White Oak transaction is closed and will host a conference call soon thereafter to update our forward guidance and answer any questions you may have concerning the consolidation of the White Oak Mine No. 1 and termination of the current royalty and surface facilities services agreements and the preferred equity interest related to White Oak.

Finally, let's take a quick look at the balance sheet which we continue to view as a competitive advantage for ARLP. Our liquidity at the end of the 2015 quarter remained a very healthy $344.9 million, even after repayment of the $205 million Series A senior notes that matured during the 2015 quarter.

Our leverage also remains comfortable at a 1.1 times total debt to trailing 12 months EBITDA. We believe our strong balance sheet leaves ARLP in great shape to execute our plan and take advantage of future opportunities. With that let me turn the call over to Joe for his perspective and outlook. Joe?

Thank you, Brian, good morning, everyone. As you just heard from Brian, Alliance continued to distinguish itself this quarter, combining its consistently outstanding operating performance with a record shipping quarter.

Given the challenging commodity market the industry faces, ARLP has prudently adjusted production, controlled cost and minimized capital expenditures, all of which contributed to the strong performance and solid results achieved through the first half of this year.

ARLP continues to meet its objective of increasing distributable cash flow. Year to date distributable cash flow increased 3.3% over the 2014 period and ARLP's distribution coverage ratio remains a robust 1.71 times.

Brian also mentioned we are on track to close later this week on the acquisition of the remaining equity interest in White Oak not already owned by ARLP, and assume operating and marketing control of their Mine No. 1.

Now folding this operation into our portfolio rather than it being run as a standalone Company, we expect annual cost synergies of $12 million to $18 million. We also expect the marketing and operating expertise of our management team will add even more value to this mine and its contribution to our long-term success.

ARLP also continues to distinguish itself in the area of safety. Safety is embedded in our culture at Alliance and is our highest priority. Our safety performance has been particularly exceptional this year.

ARLP's key safety metric has improved by almost 50% over 2014 and is 66% better than the industry average through the first half of 2015. I want to offer congratulations to our operations for their daily focus and effort to make ARLP one of the safest coal companies in America.

Now Alliance has achieved 14 years of record operating and financial results. Year to date we have continued to perform at the highest level and have delivered the stability and growth that our long-term unit holders have come to expect.

We are on track to deliver year-over-year increases in distributable cash flow while maintaining a strong balance sheet with low leverage and a conservative distribution coverage ratio.

Production gains and consistent margins have driven our record results over the years. With the addition of White Oak, Gibson South, Tunnel Ridge and the significant reserve additions we acquired over the past year we are well-positioned for many years to come as a low cost producer, strategically located in the Illinois Basin and Northern Appalachian coal basins.

Notwithstanding our industry leading track record, our strong current results and our preferred positioning for the future, we do believe that ARLP and AHGP have been caught in the downdraft of some of the weaker coal stocks during the past six months.

We have been disappointed that the market has not differentiated between a very healthy Alliance and most of our distressed peers. Moreover, while we are in the same industry as these peers, our performance, our balance sheet, our access to capital, our strategy and our future outlook stand apart and are better than the rest of the industry.

Most of our coal industry counterparts are under extreme duress due to the high leverage, significant exposure to metallurgical coal markets or both. Neither of these attributes applies to us.

Thermal coal demand in the domestic utility market has fallen this year primarily due to lower natural gas prices and a weaker export market. While we have been impacted by the reduced demand we have been somewhat protected from the lower price curve as a result of our strong contract book.

As we look ahead we are contracted at 96% for the rest of 2015 and roughly 65% for 2016. We believe this is as strong a contract book as there is among the public coal companies.

Speaking of pricing, we continue to believe that current price curve for coal, and for natural gas for that matter, is not sustainable. We are starting to see coal demand begin to stabilize and excess supply beginning to come off the market.

Total coal production has declined from the sequential quarter by 13.5% in the Illinois basin and 15% in northern Appalachia. We expect further supply reduction is coming which will continue to improve the oversupply situation in these regions.

We are encouraged to see spot solicitations for the rest of 2015 even though current gas prices are below $3 and utility stockpiles are above historic norms. It seems that coal to gas switching has a floor such that at least 30% of the electricity generation in this country for now and the foreseeable future will be coal-based.

The coal industry has probably another six or so months of uncertainty ahead of us as companies restructure their debt and determine their strategic options.

The perception for coal's future during this time will continue to be challenging as the bankruptcy headlines will be shared with EPA and their environmental industry allies promoting the final greenhouse gas regulations for new and existing power plants which are due to be released sometime next month.

This will keep the headlines full of negative news for coal as politicians and bureaucrats debate this politically charged issue. The doomsday reporting will mask the improving fundamentals which should take place over the next year as demands stabilize and supply is right sized.

As many of you know, my family is the largest holder of Alliance equity. From the outset I have taken a long-term view. As a long-term investor I believe coal will be around for the next quarter of a century for sure, delivering low-cost electricity to this country at demand levels no less than what we have today. And I believe Alliance will continue to be the best performing supplier of that coal.

ARLP is extremely well-positioned to not only survive the challenges currently buffeting the coal sector, but to thrive as the current turmoil in the industry will provide opportunities to add assets to strengthen our platform. We remain committed to our strategy and are focused on delivering long-term value to ARLP and AHGP unit holders.

And based on ARLP's current quarterly results, our strong 1.71 times distribution coverage, and their confidence in ARLP's outlook, the Alliance Board has elected to increase distributions to our unit holders for the 29th consecutive quarter. ARLP unit holder distributions were increased to an annualized rate of $2.70 per unit and to an annualized rate of $3.84 per unit at AHGP.

The announced cash distributions for the 2015 quarter reflect the sequential and quarter-over-quarter increase of 1.9% and 8% respectively at ARLP and an increase of 2.4% and 10.3% respectively at AHGP.

This concludes our prepared comments and we appreciate your continued support and interest in both ARLP and AHGP. So now with the operator's assistance we will open the call to your questions.

(Operator Instructions). Jorge Beristain, Deutsche Bank.

I guess maybe my question is for Brian. Given the pullback, as you said, that we have seen in generally the entire metals and mining complex and sort of like a throwing of the baby out with the bath water that we are seeing for the good companies, how would you I guess address investor fear that there may be a cut to the distribution?

Obviously you have just raised it, we get that. But could you just talk a little bit through the lines of defense that you have and how the Company would approach if distributions had to be cut? Is the GP first in order and then the LP and how you would tackle that kind of environment? Thanks.

Sure, Jorge. I don't see any likelihood of a distribution cut at either entity at this point in time, start with our coverage ratio over 1.7 times. It is very strong, very conservative. And our cash flows continue to be strong.

EBITDA net income in this environment, while we did show a decline quarter over quarter, several of those issues were due to one-offs in the 2014 quarter and just the anticipated reduction in revenues given the current market environment.

But our cash flows do remain strong. We did actually show an increase in distributable cash flow during the first six months of 2015 compared to 2014. So, while a lot of our peers, as Joe mentioned, are struggling, cash flows are deteriorating, ours remain very strong. And with our coverage ratio at the level that it is I think our distribution is secure.

Okay, and sorry, just maybe just a technical question. The depreciation being much higher than expected, is that sort of your new rate going forward or were there any one-offs there due to the White Oak consolidation?

Well, we haven't consolidated White Oak at this point in time. So it is not reflective of that. But as we mentioned, Gibson South period over period was ramping up. And so our DD&A increased as well.

Another factor, as we have mentioned previously, is our Hopkins County mine is depleting this year when we will transfer some units to River View. So there has been an increase in depreciation to reflect the remaining life at Hopkins.

We did accelerate that beginning in the second -- or beginning earlier this year, Jorge.

Got it. Okay. Thanks very much.

Mark Levin, BB&T Capital.

Maybe too specific of a question, you might not be willing to answer, but I will throw it out there anyway. So just given -- I think given investors' concerns about safety of cash flow, particularly as you move into 2016 and 2017, can you maybe give us directionally where you see revenues per ton or price per ton?

Or something to give us maybe a little bit more clarity as to the security of the distribution as it pertains to 2016 and 2017?

I think as we look forward I think we would expect the pricing to follow up a little bit. However, when our Board looks at the distribution, I want to give everyone the comfort that we do look over pretty much about a five-year period. So we don't take increasing distributions lightly. And I think it -- I am confident to say every time we issue a distribution we do believe it is sustainable.

So as we look to the pricing environment, I've mentioned -- on the last three calls, I mentioned again today, that the current price curve is not sustainable. And we see again that the reduced supply that is coming off the market at a pretty fast clip right now will stabilize that market.

So when we think of 2017, which is really where our exposure is, you are going to see a much different price curve in 2017 than what you are looking at today. And we think that will allow us to sustain distribution for where we are today and looking forward.

If you think about the new MLPs, the CONSOL MLP and even Foresight, they are targeting a 1.3 coverage ratio. We are at 1.7. So we have got plenty of room here. So I think looking at 2016, looking at 2017 we are going to start to see improved pricing. But it is hard to predict exactly what that is.

We will give you some more guidance once we incorporate White Oak. And another factor when you look at year-over-year White Oaks prices are lower than ours right now so that is going to happen impact as well. But they have got very low cost also.

So, if we can defer some of that conversation until we close on White Oak, I think it might be clearer for people without confusing the issue with talking about it today and then having to recalibrate with White Oak Inc. in their forward look.

Absolutely fair. But, Joe, I guess maybe you can be more specific about it. Is there -- let's just assume that the coal markets for a second don't get a whole lot better, that gas kind of stays below $3 for an extended period of time. It sounds to me, obviously, like the distribution itself is safe, there's really no concern there.

But how about the growth rate? If things were to sort of stay the same way, if gas was to say sub $3 for let's say the next 12 months, would the Board be forced to evaluate the current distribution growth rate?

I think they would be forced to look at the growth rate, no question about that under that assumption. But as I mentioned in the -- in my prepared comments, it appears that there is a floor of 30%. So where we are really not -- as an industry we are really not competing with natural gas.

I mean if you look at the fact that this quarter right now we are starting to see solicitations for 2015, you would think that with the gas price being where it was if there was availability of gas that they would have been consuming gas instead of coal during the month of June and July. That doesn't appear to be the case.

So it appears to me that what we've got really driving our price curve more is coal-on-coal competition that it is coal-on-gas competition at these lower 30%, 32%, 34% market share for the total burn of coal against other fuels in the utility space.

So the reason you are starting to see the supply come off is that these coal prices just aren't sustainable. And so -- and that is compared to competing with other coal companies and not necessarily gas prices. So I do believe that the coal prices will go up because the higher cost producers aren't able to get the financing to continue to operate at a loss.

Fair enough. Last question, Joe, and then I will get off here. But has the competitive dynamic within the Illinois basin changed much post the Murray consolidation of Foresight mines? Has that had impact either positive, negative or neutral?

I mentioned earlier the supply reduction for the past quarter, a large portion of that relates to Murray and to Foresight. So, yes, I think it has made a difference.

Great, thanks very much.

Paul Forward, Stifel Nicolas.

There was good progress on inventory reductions during the quarter. I was just wondering if you could talk about, given your plans for the second half of the year, what is the potential for progress in that area, just during the second half of the year.

As Brian mentioned we had a big build in the first quarter related to weather and some transportation interruptions. And so what we saw in the second quarter was really a catch up for being behind in the first quarter.

As we look forward we would like to see our inventories go a little lower. But as we are trying to determine what the proper production levels are and as we look at 2016 and how we integrate White Oak it is hard to answer your question.

So we are hopeful that the inventories will come down somewhat, but they won't be -- we are not -- we don't see another 900,000 ton excess shipping month in either the third quarter or the fourth quarter.

So, I would say our sales should be pretty much in line with production but hopefully it will be a little bit larger than production to reduce our inventory levels.

And, Paul, we will get into this more after the White Oak closing, but obviously bringing that new mine into our portfolio, as well inventory comes with it. So on an aggregate level, while our existing operations will continue to work to moderate inventories down, overall you may see an increase as we bring White Oak in --.

Or flat.

Or flat. It will be impacted.

And, thanks, I know that you are planning to talk more after the White Oak transaction closes. But you did mention I think $12 million to $18 million of synergies and you will have a chance to talk further about these later on.

I was wondering if you might -- since you mentioned the number can you talk about just within that $12 million to $18 million are we talking about, is that all operating synergies? Is there marketing synergies? Maybe just broadly talk about where you think the two companies together offer up synergy opportunities.

All of that is cost. So it really relates to the fact that they have been operating pretty much as a coal company versus a coal mine. So there will be labor and benefit savings. There are also (technical difficulty) -- where they have been insured for workers comp as an example and we are self-insured the same thing relative to the healthcare plans.

So there are certain things by having just one operation they don't have the economy of scale that we will bring to the table, our purchasing power versus theirs. There are just several factors that are truly low hanging fruit, as they say.

Some of those relationships will take some time to work on off. They've leased some equipment so those leases need to run off to get some of that benefit. So there are certain things that are just obvious. That run rate should kick in pretty much full percentage next year. But it will take a little while to integrate through the end of this year.

So we do believe that that range is really focused on just the cost component and it does not include any marketing synergies, it does not include any optimization by shipping some of their tons on our contracts, as an example. It doesn't include additional savings we can bring to the table by our scale and our operating expertise.

Great. And then -- well, that is a big addition to the Alliance portfolio with White Oak. I was just wondering if you could talk about in this time of obvious market turmoil where you see any opportunities that might be interesting for Alliance to take advantage of what might be mispriced assets in the market and thinking about the where the long-term trends are going.

If you were to line up what is available these days in terms of either diversifying into adding some oil and gas assets in an obvious weak part of the market, adding some coal assets in an obvious weak part of the market, or even stacking up those opportunities available to -- just say buying back your own units.

I think what we are seeing today in the coal industry is pretty much unprecedented. I think you will see quite a bit of structuring I think in the next six months or so that will provide a lot of opportunities for us to consider. And our focus will continue to be on the Illinois basin and northern App and the domestic utility market, not the metallurgical market.

So there will be plenty of opportunities for those that have brave hearts to tackle the metallurgical world. But our focus will be on the Illinois basin primarily and northern App coal assets.

And I do believe that there will be opportunities to consider making some additions and we will have to just see how that plays out. I can't really talk to any specifics as we normally talk about -- any opportunities we are looking at specifically. But generally I do think it is an opportunity for us to continue to add to our base.

As we think in terms of the midstream space or oil and gas space, there continues to be -- I think there will be opportunities there. I don't know that they are going to be as attractive as what we would look at in coal. There appears to be quite a few private equity firms that are targeting that area. So multiples continue to be a little higher than what we would like to pay.

Specifically on the minerals investment that we have announced previously, we are continuing to fulfill that obligation and are very pleased with the results to date. We have made some investments probably at a faster rate than what we had previously discussed.

So we may be concluded with that program within 12 to 16, 18 months as opposed to two years. That will give us the opportunity to exercise the next option for the $100 million worth of additional investment opportunity there that we will consider sometime later this year more than likely.

So as far as buying back stock, I think as we look at that alternative versus participating in the consolidation in the industry I would say at this moment if we can do some things that will allow consolidation that there could be more value added by bringing consolidation to the forefront faster and therefore allowing some rationalization to occur. But I like my stock too, so that is a tough choice.

All right, well, thanks a lot, Joe.

(Operator Instructions). Brian Yu, Citigroup.

Joe, you had mentioned that you guys do have a very high distribution cover ratio, 1.7 times. Once White Oak is consolidated, is that when we would see all the spending -- essentially your investing activities which have been running higher than some number presented in the table?

Is that going to start to narrow so we actually see kind of the full potential -- the free cash flow generation of the Company on a sustained basis? Because I think that post that most of your growth investment activities would start to wane pretty quickly.

As far as capital for growth I think generally the answer to your question is, yes. I think once we bring White Oak into consolidation there will be some transition back to trying to get that operation stabilized, if you will. And we will talk about that more once we close. I don't think it is appropriate to talk about it at this moment in time.

But as we look out for other growth capital we are completing the expansion of our prep plant at River View, that should be completed this year. So when we think of capital going forward, except for opportunities that may present themselves in the M&A space, we would expect our growth capital expenditures in the out years to be less than what you have historically seen.

We did recalibrate our maintenance CapEx number this quarter. We have evaluated the benefits of the equipment that we bought from Patriot early in the year, end of last year, which has allowed us to effectively use that equipment without having to go to the market. We'll have the benefit of doing the same with the Hopkins assets when it closes.

There is quite a bit of used equipment in the world these days. So as we look at our five-year look for our maintenance CapEx, we believe that number has gone down. We have gotten some of the benefit that the oil and gas guys got with their drop in prices from suppliers sort of sharing in the pain of some of the market reductions.

So, we feel like that our maintenance CapEx number needed to be adjusted to be realistic to what we are seeing in the marketplace. I think our CapEx number both from a growth perspective as well as maintenance perspective will be lower in 2016 than what you've been used to seeing.

Okay, helpful. And then the 65% coverage for next year, is that meaningfully front between Illinois basin and Appalachia?

I don't think so. It is about the same.

Okay, thanks.

Lin Shen, HITE.

It is actually James Jampel from HITE. Could you be a little more clear on the schedule for the next couple months in terms of what you will be announcing when? Did you say you were going to have some sort of Investor Day type presentation before the next quarter?

No, we didn't say that. We do plan on -- we are on track to close the acquisition of the White Oak equity interest later this week. And shortly after that closing in all likelihood early next week I am assuming closing occurs we will host a call to discuss that transaction and to provide an update on guidance in a more detailed fashion.

Okay, so we are waiting only a week or so.

Yes.

Great. You mentioned that -- I was wondering how you see that coal can't go below a 30% market share. How do you reach that conclusion?

Well, if you look at -- if you go back to 2012 we had extremely low gas prices and there was a floor at 30% pretty much. Then as gas prices rebounded we went back close to 40%. What we have experienced year to date is right at 34%. April came in at a low right at 30%, gas got a lot of headlines, we were exceeding coal for the first time, in my career, I guess.

But then you look at May, coal is back up to 32%. I believe in June you are going to see that role literally even greater in July probably back closer to the 34%. Yet gas prices are still in the $2.70, $2.80. And everybody projects, well, that gas prices have to be $3.50 really to be competitive. If gas price had to be lower than $3.50 to be competitive.

Well, that is generally true and that is why we have seen from 40% going down to the low 30%. But there appears to be a deliverability for must run coal plants or other factors. I can't pinpoint it precisely because when you look at the spreadsheets it would suggest that there should be more competition.

But in reality what we are seeing is when the coal share gets closer to 30% there seems to be a floor to where no matter what the gas price is coal plants are running.

So I can't give it to you precisely. But I can look in the rearview mirror and see exactly what has happened, where the gas prices have been and what the production has been. And it seems to come in at 30% plus as far as a total market share for coal in the electric utility generation space.

But you have been unable to point out exactly what causes it -- prevents it from going below 30% (multiple speakers)?

Again, I think it is either going to be deliverability to where there is no additional deliverability. It is either going to be bull capacity at the gas plants or it's going to be must run coal plants, it is going to be one of those three things. But I can't tell you precisely plant by plant and utility by utility what that answer is.

Okay, fair enough. You mentioned that quite a bit of capacity has come off in the Illinois basin the last quarter. Is that reduction a type that is -- that reduction, is that difficult to reverse or could that easily be reversed?

Some of it is permanent; I would say most of it could be reversed if the market presents itself. But there has been a signal saying at this price point we are not going to produce it. So, yes, it can be reversed but it will be reduced -- it will be reversed at a higher price, in my view.

I see. And the Murray bonds that are trading out there are obviously indicating a company in distress. How has that been impacting you guys directly?

It has not impacted us directly as far as the lending markets. We are in constant contact with our financial advisors, our balance sheet is very strong. We believe we have got plenty of access to capital.

So the leverage that others have taken on is a factor in their performance, but it has not impacted our ability to have confidence in our ability to execute our plans.

I mean do you think it influences Murray's strategy and could that -- would their strategy --?

I can't really speak to that. I mean there is -- it is hard to know sometimes whether the market's running on facts or fear. And I can't answer why the Murray bonds are trading the way they are trading. I really can't answer that.

Okay. And last one for me and Lin may have one. You mentioned the six months of uncertainty for the industry full of negative news and doomsday reporting. Could you again point out what key dates or things -- I couldn't quite follow what you were saying -- might be coming in the next few months?

Well, there has just been several suggestions of potential bankruptcy filings. Several of our competitors have hired advisers to restructure their debt. You can see the stock market where several of them are trading in single-digits.

And you just mentioned the bonds. In the entire bond market we have seen really in the last month most all coal bonds, except ours, have traded down 8% to 10%.

So there has been sort of a negative perception, if you will, or sentiment over the coal space that, again, sometimes I don't know if it is just herd mentality or whether there are certain facts people are looking that drive it that way. But we have seen that with our competitors primarily due to the high leverage in the metallurgical coal markets, not the steam markets.

I think the metallurgical markets continue to show stress, the export markets continue to be nonexistent because of the dollar primarily. So when we look at our current situation, and if you want to just freeze it in time and then try to project it forward, then it gives you an analysis that prompts some other questions we had earlier today.

I think on the steam side, the domestic thermal side, again, I am very confident in the utility market being an 800 million ton market for the domestic coal business. It might be 785 million, it might be 825 million, it may be 850 million, but it is going to be a stable market for years to come.

The Mercury rule, even though it got overturned by the Supreme Court, I think there is opportunity that we will pick up some demand there. But most people are saying it is already baked in the cake and -- but not being baked in the cake we know how many plants are going to run.

The next issue is back to greenhouse gas rules. I think they're going to be delayed as far as implementation. So I think for the next 5 to 10 years we are going to have a very stable domestic utility market.

Now beyond that I think that there are players that are trying to evaluate what they are doing. I think there will be a lot of discussions about greenhouse gas rules because Obama has got his legacy attached to them. But they are destructive to the United States.

We are starting to see Republican governors sign up pretty much -- I think there is up to eight right now. And there may be a couple of Democrat governors, the Democratic candidate Kentucky has a pretty said he is not going to file a state plan.

So there is going to be resistance to the greenhouse gas plans. But all of that discussion is going to be in the headlines. I think we have got -- a solid investor would look through some of these headlines to try to understand what the underlying fundamentals are.

I think the underlying fundamentals are we've pretty much reached bottom on the domestic coal side and the opportunities going forward are going to be more positive.

I believe with every passing month you are going to start seeing better supply/demand outlook and therefore I think that will give the market or give the coal producers a price where they can again be long-term successful in being reliable suppliers to the utility industry to supply that 800 million tons that America needs to have low cost, reliable electricity.

All right, thank you. Lin, did you have a question?

Yes, just a very quick follow-up for this coal demand and also market share. Other than the low natural gas price can you talk a little bit about their generation increase by wind and solar?

We hear that the cost at lower end, also their technology and efficiency improvements make them a better generation source so that they can pick up some more market share. So do you think that could be any threat for coal demand?

Not in the near term. I think if government wants to continue to subsidize that sector, then longer-term it could have some impact but it is not significant. I strongly believe that the natural gas and coal are going to be the backbone of electricity generation, they are going to be 70%, 63% to 68%, 65%, 68% for some time to come.

So, yes, you may see some capacity additions, but it is not -- it doesn't move the needle. It is very small to the total grid. The power is intermittent. I think the gains they have made have been made in areas of the country where they've got the most demand and the rest of the country I just don't see it competing with fossil fuels.

Great.

Michael Goldenberg, Luminus Management.

Can you hear me?

Yes. All right, just one more point on that last question. There was a Moody's article that was just released --

A Moody's report yesterday, yes.

That basically came to the same conclusion, that for the next significant period of time coal and gas are going to be the backbone of the electric utility industry. I'm sorry to interrupt you.

No problem, no problem at all. So I wanted to understand again, the theme of the call has been that the current state of forecasting is wrong and that the floor prices are wrong and that things will get better. And I totally appreciate that you guys have a differentiated view.

But let's go back to, for argument's sake, that the forwards are right and the inventories are building -- I just saw Hallador yesterday completely revamp their whole output and hedging because customers' inventories are beyond full.

So if that were to hold true how -- as far as your revenue goes I'm trying to understand where would revenue be roughly per ton in 2017 if the forwards are correct. What are we looking at if things that are being forecasted right now do not improve?

Well, let's see. Again, part of the challenge is we can tell you what it is today with our operations, but then when we add White Oak it is going to be a different answer. But it could be revenues -- just looking at our -- well, don't really have it precisely.

I would say it would probably be about 5% difference in revenues if you looked at our consolidated sales price per ton. That if prices persist it would be somewhere in that percentage of decline year over year.

So right now you generate about $52 of revenue per ton, which is extremely healthy, excellent -- by far better than anybody else in the group. If in 2017, I don't -- I'm not sure how much you have hedged at this point, but I am seeing the forwards are a lot closer to the [$30]. So how is that (multiple speakers) I'm sorry?

Those forwards are spot tons, they are not big volume, it is very illiquid. Physicals are not trading in those price ranges even today. Even without an uplift in price.

Michael, if you are looking at the spot curve today for a specific quality at a specific delivery point and you are wanting to assume that that stays in place for the next two or three or four years or whatever, it is just a simple math exercise if you believe that is what our realizations are going to.

But when you adjust for quality, transportation differentials, etc., and longer-term contracts the spot price and the ultimate price realized at Alliance are very different.

The other thing that you have to take into consideration is that if this environment persists for the next few years there will be a supply response. And if supply and demand adjusts you will see pricing adjust as well.

And we are already seeing that and it is not -- it is happening today, you just mentioned Hallador and that's 3 million tons of supply that is not going to be here next year that before yesterday everybody was anticipating, so --.

Okay, but so for example, using them or Foresight as an example, why are they cutting production and you guys are able to maintain production? Why would you be able to keep at the same level, enjoy higher revenue because the other guys cut while being able to avoid supply cuts yourself?

Well, we've withheld production ourselves, we've got 4 million tons of capacity that we are not producing today because of the current demand. So, we have participated in this. We would have obviously had a better year this year had we been able to operate our Gibson complex at full capacity.

So we have been impacted just like they have been. Hallador is a little later, Foresight brought some tons off, Murray has brought some tons off, we have kept tons off. We have reduced a unit at Pattiki earlier.

So we have participated in that and we continue to look at how you right size the organization back to both supply/demand as well as substituting low cost production for high cost production. And we will continue in that vein.

So, we have been able to increase some of our tons at Gibson South, they are very low cost relative to some of our other production. So that is one reason why we have been able to keep our margins as stable as they have been.

I got you. Thank you very much.

Brett Jones, Luzich Partners.

I wanted to just get your opinion on where you think the average cash cost is for the Illinois basin. And given forward spot pricing, what percentage of the basin is uneconomical at the forward curve?

Well, I don't have a precise percentage. The challenge is obviously it is moving as we speak. But I do believe that the average is really not what you need to look at. You need to look at the marginal.

And there are several mines that are open today that have costs in the high 30s if not low 40s. And then went to add interest and CapEx on top of that it gives you a signal that the pricing at a $40 level is just not sustainable.

But that tonnage will fall off once high price contracts that may be subsidizing that production do in fact expire. And (technical difficulty) we see some of that.

We believe that that is going to happen because we know certain contracts are expiring, that some of our contractors -- that our customers have or competitors have that are going to drive that supply response.

And I guess what percentage do you think are the marginal producers? And the other question would be --.

If you look at supply/demand balance, it doesn't take much because we are pretty close in my view. So, I'd say if you only had a 5% supply response, then you are going to be pretty much in balance in the Illinois basin as well as northern App.

Okay, that answers my question then. Thank you.

Thank you. I am showing no further questions. I would now like to turn the call back to Brian Cantrell for closing remarks.

Thank you, Amanda. We have obviously had a robust discussion this morning and we appreciate everybody's time and your continued support and interest in both ARLP and AHGP. As we discussed, following the close of the White Oak acquisition we plan to issue a press release and host a call to discuss the transaction and update our guidance.

Our next quarterly earnings release and call are currently scheduled for late October and we look forward to addressing our third-quarter results with you at that time. Thank you, everybody.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a great day.