Alliance Resource Partners LP (ARLP) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2015 Alliance Resource Partners and Alliance Holdings GP earnings conference call. (Operator Instructions). As a reminder, this conference is being recorded.

I would like to introduce your host for today's conference, Mr. Brian Cantrell, Senior Vice President and Chief Financial Officer. Sir, please begin.

Thank you, Vince, and welcome everyone. Earlier this morning, we released 2015 third-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 balance of the year. Following our prepared remarks, we will open the call to your questions.

Before we begin, a reminder that some of our remarks today 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 this morning'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 ARLP's website and furnished to the SEC on Form 8-K.

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

Joe?

Thank you, Brian. Good morning, everyone. ARLP has a long track record of success, as increased coal volumes have led us to 14 consecutive years of record operating and financial results. Our performance has been solid again this year, as we expect to achieve another record year in 2015 for production and sales volumes. ARLP is also on track to have record cash flow this year, as ARLP's year-to-date distributable cash flow has grown 4.7% over the 2014 period, and our current distribution coverage ratio remains high at a robust 1.66 times.

ARLP's operations led the way to another solid performance during the 2015 quarter by producing a record 11.9 million tons, and reducing segment adjusted EBITDA expense per ton by approximately 8% and 8.7%, compared to the 2014 and sequential quarters, respectively. Quarterly results were impacted by two non-recurring items: specifically, a $10.7 million non-cash asset impairment for surrendering leases to certain non-core undeveloped coal reserves; and a $17 million non-cash equity in loss of affiliates passed through from the White Oak transaction prior to its acquisition.

Brian will discuss these items in more detail in a moment, as well as the impact to our results caused by inventory builds of approximately 1.2 million tons due, in part, to deferrals of contracted shipments during the 2015 quarter.

As we assess the short-term outlook for the industry, we expect 2016 domestic thermal demand to be comparable to 2015. However, we anticipate export shipments will be lower, and natural gas prices will remain low, which will continue to pressure coal prices until there is a supply response. Combining lower market prices with the short-term buying strategy being followed by many of our customers is requiring us to constantly determine the appropriate production levels for our installed capacity.

During the 2015 quarter, we reduced essentially all contractors who had been hired to assist our operations. We also have not replaced jobs that have come open due to normal attrition. As a result, we have run reduced unit shifts in most of our operations to help manage inventories. We expect this to continue for the rest of the year, leading us to lower our production and sales volumes for 2015 by approximately 4% to 5% below previous expectations.

Given this uncertain market environment, ARLP's annual coal volumes for 2016 could be as low as 40 million tons, and as high as 45 million tons, depending on the outcome of coal sale solicitations that are currently being considered or will be offered when our customers decide to come to market for additional purchases. Due to this wide range of possibilities and the need to manage our inventories, we will continue to evaluate what is best for the Partnerships, including shifting production to maximize volumes from our lowest-cost mines.

It is this short-term uncertainty that led our Board to elect to maintain quarterly cash distributions at current levels. We have always managed the Alliance Partnerships with the goal of creating long-term value for our unitholders through developing low-cost, strategically located operations in the Illinois Basin and Northern Appalachian regions, building strong customer relationships, and maintaining a conservative balance sheet. We believe this proactive decision to maintain distributions at current levels until we know our production volumes will have predictable, sustainable growth, is in keeping with this objective, and a prudent step in light of the uncertainty facing our industry.

As a low-cost producer, we continue to believe we are well positioned to see our volumes grow once our competitors withdraw their higher-cost production from the market and the more natural gas prices increase. Until then, ARLP will continue to focus on lowering costs and reducing capital expenditures.

I will now turn the call over to Brian for a review of our financial results. Brian?

Thank you, Joe. The Alliance Partnerships again posted solid profits and EBITDA and strong distributable cash flow in the 2015 quarter, especially considering the industry challenges just outlined by Joe. Taking a look at the details behind our performance, I'd like to address several items that impacted our results in the quarter.

First, the inventory build Joe discussed earlier negatively impacted sales volumes, coal sales revenues, EBITDA, and net income in the 2015 quarter. Customer deferrals of scheduled shipments of approximately 951,000 tons reduced coal sales volumes -- coal sales by approximately $50 million. And deferral of these shipments negatively impacted our results by approximately $16 million in the 2015 quarter.

Second, ARLP recognized a non-recurring non-cash asset impairment charge of $10.7 million to write down assets associated with the surrender of a lease agreement for certain undeveloped coal reserves and related property in Western Kentucky. As you may recall, ARLP recently acquired more than 450 million tons of other Western Kentucky coal reserves, and, following that acquisition, we determined that the coal reserves associated with this write-off were no longer a core part of our foreseeable development plans. As a result, ARLP surrendered these leases in the 2015 quarter to avoid the future high holding cost of those reserves.

Finally, results for the 2015 quarter also reflected completion of ARLP's acquisition of the remaining outstanding equity interest in White Oak, and the consolidation of the Hamilton Mine No. 1 into our operating results. ARLP's results for the 2015 quarter include a final $17 million pass-through of non-cash losses related to the equity method of accounting for our preferred equity interest in White Oak. Prior to completing the acquisition, ARLP's coal royalties and surface facilities services agreement with White Oak contributed $3.2 million to other sales and operating revenues during the quarter. These agreements terminated upon closing, which contributed to a decrease in other sales and operating revenues in the 2015 quarter.

Effective August 1, ARLP began reporting operating activity at the Hamilton Mine No. 1 on a consolidated basis. And our operating and financial results reflect coal production and sales volumes from Hamilton, as well as related coal sales revenues, operating expenses, EBITDA, and net income. You will also note that beginning with the 2015 quarter, White Oak is no longer reported as a separate segment. Instead, operating results at the Hamilton Mine No. 1 are now included in our Illinois Basin segment. And all White Oak activity for prior periods through closing are presented in the Illinois Basin segment, as well.

Looking at year-to-date EBITDA and net income, the actual results generated by ARLP's prior investments in White Oak were well below the expectations we had at the beginning of the year. Prior to closing the acquisition, the year-to-date actual equity and loss of affiliates from White Oak was $48.5 million, much higher than the $20 million to $24 million losses estimated by White Oak for all of 2015. The integration of the Hamilton Mine No. 1 into our marketing and operating portfolio is going well. And despite the greater-than-anticipated drag from White Oak on ARLP's year-to-date results, we continue to expect the mine will be marginally accretive to our results over the remainder of 2015.

Turning now to the balance sheet, the preliminary accounting for the White Oak acquisition and resultant consolidation of the Hamilton Mine No. 1 impacted a number of line items, including property, plant, and equipment; due from affiliate; equity investments in affiliate; goodwill; accounts payable; and long-term debt. This preliminary accounting reflects initial fair value assessments and independent appraisals required by the business combination rules under GAAP. This preliminary accounting is also subject to change, pending completion and review of the required valuations and appraisals, which we expect to finalize sometime in the first half of 2016.

With that, I will now turn to an update of ARLP's 2015 full-year guidance. As Joe discussed earlier this morning, our current market assessment has led us to modify our operating plans and reduce ARLP's anticipated 2015 coal volumes.

Based on results to date and current expectations, Alliance is now estimating coal production in a range of 41.1 million to 41.7 million tons, and sales volumes in a range of 40.9 million to 41.5 million tons, which are essentially fully priced and committed. In light of these lower volume expectations, we are also reducing 2015 estimates for revenues, excluding transportation revenues, to a range of $2.27 billion to $2.3 billion; adjusted EBITDA to a range of $730 million to $750 million; and net income to a range of $360 million to $380 million.

Since our last update, ARLP has increased its coal sales and price commitments by an additional 8.6 million tons for deliveries through 2019 at an average sales price of $50.21 per ton over that period. As a result of these transactions, ARLP has now secured price commitments for 2016, 2017, and 2018, of 31.9 million tons, 16.8 million tons, and 12.5 million tons, respectively. Consistent with our most recent guidance, ARLP continues to anticipate that its average coal sales price per ton at the midpoint of its 2015 guidance ranges will be approximately 4% lower than 2014 realizations, with approximately one-half of this decrease attributable to averaging in the lower-priced legacy contracts inherited from White Oak at the Hamilton Mine No. 1.

Reflecting ongoing efforts to reduce expenses and maximize production of our lowest-cost tons, ARLP continues to anticipate its 2015 segment adjusted EBITDA expense per ton, at the midpoint, will be comparable to last year. Also consistent with prior guidance, total 2015 capital expenditures, including maintenance capital, continue to be estimated in a range of $265 million to $285 million, or roughly $40 million below our original expectations at the beginning of the year.

Our optimization efforts, along with the benefits anticipated from the recent acquisition of mining equipment, as well as the integration of the Hamilton Mine No. 1, have also led ARLP to reduce its estimated average maintenance capital expenditures for the 2015 five-year planning horizon by approximately 10.6% to $4.96 per ton produced.

ARLP recently elected to increase its commitment to acquire oil and gas mineral interests by an additional $100 million over the next two years, bringing our total commitment to this activity to approximately $150 million. We currently expect to fund approximately $45 million to $55 million of this total commitment in 2015, which, when combined with the $50 million cash payment for White Oak equity upon closing of the acquisition and the $10.8 million in preferred equity contributions funded for White Oak prior to closing, will result in total investment funding this year of approximately $105 million to $115 million.

Our liquidity at the end of the 2015 quarter remained a very healthy $327.3 million. ARLP's leverage did increase slightly as a result of the assumption of approximately $94.1 million in debt upon closing of the White Oak acquisition. Using lower-cost borrowings under our revolving credit facilities, ARLP recently paid off the debt assumed from White Oak. We are working with several of our banks to replace this capacity, and currently expect to complete this effort very shortly.

Overall, our leverage at the end of the third quarter remained very comfortable, at approximately 1.27 times total debt to trailing-12-months EBITDA. Our strong balance sheet leaves ARLP in great shape to execute our plans and take advantage of future opportunities.

In closing, while we are not immune to the challenging conditions in the coal markets, ARLP continues to distinguish itself in the coal industry by remaining solidly profitable, generating strong EBITDA and distributable cash flow, all while maintaining a conservative balance sheet.

This concludes our prepared comments this morning. We appreciate your continued support and interest in both ARLP and AHGP.

And now, with the operator's assistance, we will open the call to your questions.

Vince?

(Operator Instructions). Daniel Scott, Cowen.

I was just wondering, with regards to your balance sheet being better than anyone else's in the sector, what your thoughts are on uses of cash going forward, now that you've suspended your distribution increases versus maybe some more debt paydown or M&A opportunities.

Dan, you're asking what we intend to do with the cash savings, basically, from the distributions?

Yes, now that you've suspended the increases that you've been doing for 29 straight quarters, what else might you think of doing with cash, going forward?

Yes, back a little bit on the rationale for doing that -- as you guys recall, most of our growth historically has been reflective of increases in volumes. And given the uncertainty out there and the questions we have around what our volumes will actually be for the foreseeable future, that's why we elected to maintain distributions at current levels. And as we look at the various scenarios going forward into 2016, we see coverage remaining at 1.2 times or higher during that period, regardless of the scenarios that we are evaluating.

Clearly, keeping distributions at current levels helps us preserve cash and liquidity, allows us to increase the amount of dry powder, if you will, for pursuing potential M&A opportunities. And we've always been very active in the deal flow in that area, and we're hopeful that there may be some opportunities that pop up.

Okay, great. And then, last night, we heard from CONSOL that there was some market share grab they were able to achieve with some longer-term contracts outside of their core markets. And they were basically implying taking some business into the Illinois Basin's key markets and into the Southeast. Have you seen an impact there from out of basin? Or is the impact you are showing on your cut guidance more specific to just low gas demand, et cetera? (multiple speakers)

Yes, we have -- we do believe that that's accurate, in the sense that they have been selling into the Southeast market. And whether they will take market share -- as we look at the total demand basins between Central App, Northern App, and Illinois Basin, we do believe Central App will continue to lose market share. So I think there was a question whether they took that production from Central App -- or that market share from Central App or Illinois Basin. We'll have to wait and see exactly how that shakes out. Our view would be that that was taken more from Central App production.

Okay. Thanks, Joe. Thanks, Brian.

Brian Yu, Citi.

My first question is -- it just, with all the movements, you guys having signed more contracts and deferrals, previously you had said 2016 pricing down 7.5% to 8.5%. Would you be able to provide us with an update on that outlook?

Yes, as we look at 2016, I think that number still is good. It really will depend on exactly what our ultimate production would be. The higher we go, that probably would slide a little bit. So at the 45 million ton, if we were at a 45 million ton run rate, that range may go up to 10%. But if we're at the lower, it's going to be closer to 7.5%. If it's somewhere in between, it will be between the 7.5% and 10%. And that's the coal sales price per ton, 2016 versus 2015.

Got it. And what's that -- seeing as you produce more, prices would be down; but then cost side, I think, would improve. So how does that offset (technical difficulty)? As you produce more, I guess pricing would be down, but cost would decline, so would that essentially offset each other?

Yes. I think we were focused on maybe had our costs go down about 5% to 8%. And I think you are exactly right. If we produce more tons, then logically those costs would probably go down because we'd be selling from existing operations, excess capacity, so that would be incremental. (multiple speakers)

And then separately with the oil and gas investment in this -- it wasn't something we had in our model, but you're investing $100 million to develop those in the next couple of years. Can you discuss that in bit more detail? What's the outlook after the investments are made which you would be expecting?

We are buying minerals, to make it clear. We are not in an operating interest situation. We are buying minerals. And those minerals, we believe, will be developed, and we'll start seeing royalty income in the 2017 time frame that's rolling off of these investments. So the lower price, crude pricing, has accelerated really the opportunity to buy these minerals. When we first entered into the transaction a year ago and made our first commitment of the $50 million investment, we were expecting that to be funded over an 18-month time period, so we completed that within a year.

As you recall, we had an option to invest another $100 million with -- on the same economic terms. And so we did exercise that option, as Brian mentioned. And right now, that target is to invest that money over a two-year period. So, we should start seeing cash flows in the 2017 time frame that will give us attractive returns. We felt like the first $50 million was well invested. And we believe we're on track, with the new $100 million investment, to be able to maintain very attractive returns on that investment.

Got it. Thank you.

Mark Levin, BB&T.

Quick question on the pricing side: I think you'd mentioned contracting about 9 million tons, plus or minus, at an average price around $50. Can you maybe give us some color in terms of what you're seeing for pricing? Obviously you've given very good transparency with regard to 2016, and where you think things are going to be. But as we think even further out, in terms of 2017, maybe some commentary around where pricing is today in the Illinois Basin versus in Northern Appalachia, and where those tons are shaking out relative to maybe some of the price sheets that are circulated.

What we're seeing because of this change in buying strategy by several producers -- or, excuse me, several customers -- we see certain customers that are willing to look at their longer-term contracts in a more traditional way, and are willing to pay a price that's sustainable. On the short term, we're seeing some customers that are just price takers. They are really buying coal on spot tons basis [at both the term]. So trying to answer your question, if we think on a term basis, of those -- the tonnage that we're committing, about 80% of that number was at Illinois Basin.

As we think through the price curve for -- going out into 2017, 2018, as Brian mentioned, it does allow us to have prices comparable to where we've been in both regions, really, on a longer-term basis. In the shorter term, they're about 10% to 15% lower than what we've historically had. And there's a mix to where we've had to take some tonnage that's more short-term, spot type sales into that market, and some that's been longer-term that gives you more sustainable price numbers. So hopefully that gives you a flavor.

No, that's very helpful, Joe. But specifically, is it -- to the extent you are willing to comment -- on the Illinois Basin in 2017, is it possible to get upper 30s or even $40 a ton-plus numbers for 2017 in the Illinois Basin?

All of these numbers are greater than $40.

All these numbers are greater than 40? And in NAP, are the numbers greater than $50 when you go out to 2017 in beyond?

High 40s.

High 40s, got it. Perfect. And then --.

And Mark, just to be clear, those are all FOB mine.

FOB mine; got it, got it, got it. And then my final question has to do more with the railroads. Understanding obviously that you guys -- your customers primarily contract with the railroads -- but just in general, are you seeing more of a willingness on the part of the railroads to be more flexible on base rates? Not necessarily fuel adjusted surcharges, but just base rates, to try to move more coal in this gas environment? Or are they still sticking to tried-and-true ways and being a little bit more rigid? I know the Eastern railroads have been a little bit more flexible, maybe, than some of the Western ones. But I'm just curious what you are seeing from the rails.

The dialogue has increased significantly, I would say. So they are engaged to try to assist in all ways possible. However, it's usually in those situations that -- where there's intense competition between the rails, as opposed to those where there's not as much competition. So they have engaged. Now, how much they are making a difference, it's really a plant-by-plant analysis. They are trying to do their part.

Sure. Great. Thanks very much, guys. Appreciate it.

Paul Forward, Stifel.

I wanted to ask about the -- you've got for 2016, 31.9 million tons of customer commitments. And I think you have talked about overall volumes being in the 40 million to 45 million ton range. I was just wondering, as you look at the customer inventory situation, the low natural gas prices, et cetera -- in looking at the commitments you have now in the low end of your range of 40 million tons, how do you think you are going to proceed, as far as the timing of getting up to that minimum level, or low end of the range of 40 million tons, or when --. And I guess a related question would be, is there some risk that customer purchasing could surprise you in this gas price environment, where you might not even be able to put 40 million out there?

Let me take the last question first. As we look at the coal demand versus gas, and we don't see that gas price being too dissimilar in 2016 versus 2015. So if you try to assume that 2016 prices are comparable to 2015 prices on the gas side, that's what leads us to believe that the coal volumes would be comparable.

Now, the inventories are larger, so they could dip into their inventories. But we also believe that [NAPP] coal is going to be coming out of the market. So when you think in terms of Illinois Basin, Northern App, that's why we believe that the demand domestically is going to be similar. Because even if they take some coal out of inventory, we think that really is at the expense of the Central App producer, as opposed to the Illinois Basin or Northern App.

Now, the question really is -- that we're struggling with, is just the price point. At what level (technical difficulty) sell the coal price. Do we want to sell coal at a price? Or should we be part of the supply response that the industry needs? And when we think of what our production should be in 2016, our goal is to maintain our market share that we had in 2015, given the fact that we think the demand is comparable.

So when you factor in that we acquired the White Oak reserve -- excuse me, Mine No. 1, August 1 -- if you add the production or sales that they had prior to that time, we would be selling at around 42.5 million tons in 2015 from the mines that we control today. So, if we maintain market share with their existing customer base in 2016 as we had in 2015, that number would be 42.5 million.

And so, we're in constant dialogue with these customers, obviously; know their needs and their buying patterns; know what their open positions are. And it's really just a choice: do we produce the tons, anticipating they're going to buy on that pattern? Or do we wait until we actually book the tons before we produce it? We think that every week. And we don't really have a final answer for you. That's why we're giving you the range.

We could decide that we're not going to produce it and not sell it at that price, and/or they may say they don't have the demand, which we think is the least likely. I think it's more of a -- we think the demand is pretty solid. I think it's really a pricing issue. And then -- or do we decide to go ahead and take the business and produce at the same levels, and/or do we (technical difficulty) business and try to grow our market share? Right now, we don't have definitive -- a clear view on exactly where that's going to be. And that's why we're giving you the range and trying to be as transparent as possible, given the uncertain situation.

Sure. Thanks, Joe, for the comments. And following up on the questions on the oil and gas investment, obviously you are looking at the environment and deciding that the returns available there probably stack up pretty well, relative to what opportunities might be out there in coal. I was just wondering if you're -- as you look at your anticipated revenues coming out of that investment, are you doing any hedging? Or what kind of commodity price risk are you taking with those investments?

We are not doing any hedging. And we believe we are buying at a price that's comparable to today's market prices for oil. And most of these are oil -- mineral oil reserves, as opposed gas. So there is some exposure there, if you believe oil prices are going to go below a $45 to $50 a barrel range. But the value here is going to be more volume-driven than it is price-driven. If you think, like a general lessor, if you track what an NRP does or others, it's really more of a -- the return would really come back more volume-driven than they do price-driven, even though price is a factor.

Okay. And last question: I think you talked about being able to buy some equipment in the coal business, back to coal. You've been able to buy some equipment at lower cost. Just wondering if you could talk about the availability of low-cost equipment for you, as you look over the next couple of years. And might that have a favorable impact on the outlook for maintenance CapEx or overall CapEx, if there's a lot of low-cost equipment out there?

There is plenty of surplus equipment in the market. We look at our own operations (technical difficulty) that is depleting either at the end of the year or the first quarter of 2016, so that frees up some equipment. We still have equipment that we purchased from the Patriot transaction. It's assisting us in our capital as we look -- as we roll in (technical difficulty). So, I believe that our CapEx number will be coming down to what you've seen. (technical difficulty) maintained our maintenance capital at the same number we had last quarter. I think it's $4.96. I don't see that [changing yearly]. I think that's -- where our CM operations in the longwall is, I think that's a reasonable number, given the mix of production we have. So I don't see that number falling off very much.

But I do believe that our CapEx could be quite a bit lower in [2016]. (technical difficulty) on a going-forward basis, in the near term, if the market stays the way it is.

Great. Thanks a lot.

Lucas Pipes, FBR.

So, if I understood it correctly on the call earlier, the current level of distribution would imply, in 2016, about a 1.2 times coverage ratio. And I wonder, did I understand that correctly? And then do you have a target distribution coverage ratio in mind? And then also, how do you think about your leverage in this environment? Do you have a target rate for that, and how do you think about those two metrics?

Let me follow up on the coverage ratio, Lucas. Today we're at 1.66 times. As we have assessed our distributions historically, we always look over the long-term, and we consider a variety of scenarios. So my commentary earlier around the coverage in excess of 1.2 times is really reflective of the low end of the scenario and production levels that Joe talked about earlier. So if we are able to maintain our current market share, et cetera, we would expect it to be higher than that.

Look, we are laser-focused on generating distributable cash flow sufficient to maintain our current distribution levels. And I think the steps that we took today, or that we announced today, give us confidence in our ability to maintain and support the current distribution levels, going forward.

With regard to leverage, we think that our conservative balance sheet gives us a competitive advantage, going forward. I'm sure you all have seen processes that various companies are running for disposition of assets out of their portfolios. Look around the industry and compare our balance sheet to most of our peers. We think that gives us the opportunity to transact and access the capital markets, if appropriate, for the right transaction. We intend to maintain a conservative balance sheet.

In answer to your target questions, we don't necessarily target a specific coverage ratio or a specific leverage ratio. We are just trying to evaluate what is the right thing to do for the Partnerships over the long-term.

That's very helpful commentary. Thank you. A quick follow-up question on more of the macro side. In the release, you stated that you expect future demand to be stable. And wondered if you could elaborate on that, and what gives you confidence in that future demand outlook.

Yes, that's specific to -- so we're looking at utility demand we think will be stable in the 785, plus or minus, depending on weather; 785 million tons a year of domestic utility consumption. Again, depending on weather, plus or minus. And that factors in the mass. It factors in the retirements from the previous regulations. It does not have any impact over the next five years of any additional reductions related to the clean power plant, in this final ruling for the regulation that was just posted in the Federal Register. They have deferred and delayed the implementation of that into the early 2020s.

So I think as we look over the next five years, we see the coal plants -- we have identified the coal plants that are going to run, the utilities have publicly stated they are going to run; and they are buying coal for that. And they are all operating at lower capacity, so there's some opportunity to see some increase. Because there is a capacity -- an unused capacity that's available, if for some reason the economy would get better and/or gas prices would rise. So there's opportunity for that to grow.

But we're assuming that gas prices will be such that the demand will stay pretty flat on the coal side for the foreseeable future; next five years or so.

Got it, got it. Yes, that's very helpful. I appreciate the commentary, and good luck with everything.

The other piece of the equation is the export market, which we do believe is going to be lower in 2016. And that's going to add a little bit more supply, depending on how producers deal with that. And so that is part of the pressure on pricing. Hard to determine how much will go export in 2016 versus 2015, or how much will try to flow back in and compete for that stable utility demand.

And just because you mentioned the export market, do you think specifically in the Illinois Basin, before the Illinois Basin exports could be pressured or not, essentially stay domestically?

Yes. Our [guesstimate] is there's about 8 million tons that were -- the Illinois Basin production was exported in 2015. And the 2016 price is more challenging than the 2015. So it really depends on exactly what those producers plan to do. Are they going to reduce their production and not sell it in that market? Or are they going to try to reposition that? And from those that we believe are participating, some are actually reducing production; some are increasing production, so it's hard to know exactly (technical difficulty).

Got it. All right, thank you.

(Operator Instructions). Lin Shen, HITE.

I have a question for HGP, Joe. If you keep the distributions [light for] ARLP and AHGP this quarter, and there potentially be before their market improved, so do you think they're likely to maybe more GP, LP, because a GP -- we saw the distribution grow since it hardly to be appreciate that market.

Sorry, it's hard to understand your question.

No, I was just like, what's the strategy you think for the GP, HGP, given there's no distribution growth of both LP and GP?

One, we believe that this current situation is temporary. So we don't believe -- we believe that the supply and demand will, in fact, come in balance. Prices will improve. And we also believe that as we look at the mine plans of our competitors, we know that there are mines that are completing over the next 2 to 3 years. And the question will be, will those competitors decide to bring capital in to maintain that production, or not?

We are of the view that with the excess capacity in the Basin, they will not. And because we are a low-cost producer, we have a very good opportunity to grow our production once we get back to that supply/demand balance. So, just because we're maintaining distributions today doesn't mean that we are giving up on increasing our distributions in the future. We are very focused (technical difficulty). And as a significant owner of AHGP, finding ways to grow our distributions and grow our business. So in the long-term, we do believe there's going to be opportunity to do that. It's just in the short term, until we get the supply/demand in balance, we just thought it was the right thing to do, was to pull -- to maintain it at the level we've already discussed.

Now, in addition, Brian talked about looking at other opportunities. And given the state of the financing markets, we believe having HGP is an alternative to structure deals and finance deals. It's still valuable; so still a valuable component that will help us as we think about how we strengthen our position in the industry. So, we're still very focused on increasing value at both ARLP and AHGP. Just because we've got this [call us] doesn't mean that there's not still inherent value in having the GP trade and be a part of our future strategy.

Thank you very much.

Sagar Surya, Candlewood Investments.

I'm going to follow up on this chain of questions about market color; just whatever light you can shed. As I look at Tennessee Valley or Louisville Gas and Electric, I see them making the changes, like TVA installing scrubbers on 17 of their units and switching to some renewable energy. Same thing with Louisville Gas and Electric. Can we talk about market share gains, like is the whole market shrinking, and that's when we claim that we are gaining market share? Or how are we thinking about the 40 million to 45 million tons? Because it seems like some of the competitors are also adding capacity. Where is this excess tonnage going to go?

Well, back to the demand side, again, the mercury rule did require these utilities to determine how they were going to -- what plants they were going to keep, and which plants they were going to shutter. And as they decided to shutter certain plants, they had to replace that to maintain, again, the electricity demand in the country. So we have seen that the electricity demand is stable. We anticipate that's going to continue to grow. In a 2% to 2.5% GDP, we still believe we're going to see electricity grow. Even with efficiency efforts to try to reduce people's use of electricity, we continue to believe that that number will grow.

So from a demand side, the plants are in place. And that's been factored in as to what each of our customers, including TVA and LG&E, expect to run, and the coal that they expect to buy. So we feel pretty confident of what the demand side is. And it's really back to the supply side that is creating some of the difficulty in determining what the right level for us is. Because there are some that are definitely selling incremental times to try to survive to the next day. And we think of -- if you look at the different basins, I'd say it's true that there is some percentage -- at least 20%-plus in each basin, that's being produced today that's below people's cost. We just don't think that's sustainable.

And being sold below people's cost.

Yes, being sold at below people's cost. And the only way they can sell at those prices is to be subsidized by some legacy contracts, and we know those are rolling off -- some at the end of 2015, some in the middle of 2016, some at the end of 2016. And it's just a matter of time, especially given the tight financing markets, that that production is going to come off the market. And so we are trying to read that as close as we can. We could decide to do what others are doing. Or we could decide to, again, be part of the supply response. We really have not made a final decision on that, so that's why we're giving you the range of 40 million to 45 million.

But the demand is there. We are at the low cost of the curve in both Northern App and Illinois Basin and Central App. Although the production we've got in Central App, we've got one of the lowest cost mines there is, so we are well positioned to be able to maintain whatever production level we want, and add cash flow. So that's the positive news. It's just back to strategy, as to -- what is the right strategy for us to take? We're trying to work through that. As each opportunity presents itself, we make a decision.

Okay. You mentioned that some of your competitors are losing legacy contracts. Let me just try to read that into how to bridge the realized for some of your contracts. I'm sure you are also facing some of the same problems. And what I'm seeing, just sitting here, is some of these [IB] contracts -- even setting them at the $29.50 range; and how do I bridge the gap, going from that $30 coal to your realized pricing on an [App Basin] coal?

Well, if we've got $29 contracts, it's really tied back to what we now call Hamilton. Those were legacy contracts that they may have entered into, so they're not contracts we've entered into. We have -- to my knowledge, we haven't entered into any contract where we're losing money. That's probably why we have 14 years of record results. People that know me, know that our expectation is to produce at a profit, and I think that's what we're trying to do. And I think we will do that. I think that because of the strength of our balance sheet, our reliability, our optionality, our transportation advantages, we will be part of the portfolios at the level of the 40 million to 45 million. I'm very confident of that.

Just back to at what price will we have to book some of that tonnage, I believe we will be able to make money at those prices, but not as much as probably our historical margins. And that's what's created the delay in our firmly committing going full-steam ahead. We'd like to get margins that really reflect the longer-term, stable situation instead of an unsustainable short-term view that needs to be corrected.

And Sagar, we've given guidance, our view toward what we expect our overall pricing to look like in 2016. And obviously we're not immune to current market conditions. But when you look at, just from the quarter, our ability to book almost 8.6 million, 8.7 million tons for term at a price in excess of $50 in the aggregate, I think it supports all of the comments Joe just made.

Okay. Thank you, guys.

[Rashav Perry], GoldenTree.

When you guys are deciding between whether to participate in the supply reduction, is it hard that if your weaker players continue to produce, you are going to continue to produce as well? So that's the first one, and you might have addressed it. I just want to make sure I'm getting it right.

And the other thing I wanted to touch on is that I've heard from other producers that the longer-term business model is changing slightly, where your customers are more inclined to keep larger open positions. So can you comment on -- do you see the business model changing, or the way utilities buy coal changing longer-term? Thanks.

I'm going to answer your last question, because I didn't understand your first one. It's not because -- we've had, for some reason.

The connection is not great.

The connection is not very good today. But on your last question, yes, there are certain customers that are changing and going shorter, if you will, on their purchases. Historically, you would see -- going back five years, you would see utilities buy about 90% of their anticipated needs before the end of the year. So they would have 90% of their expected burn put to bed by the end of the calendar year, for the next year. In the last five years, that number has gone to 80%. We're seeing some people go to 50% and 60% right now, so they will -- they anticipate what their needs are, they will communicate what those are, but they won't commit.

And they are going to quarter to quarter, and they're pricing in commitments as opposed to annual. And they just are failing to commit, and they don't want to be held with those ties, depending on the ability to try and make day-to-day or week-to-week decisions to optimize. And that's difficult in the coal space, because we got limited stockpile capacity at our coal mines. And so our need to be able to plan and be able to produce at full capacity to have low-cost -- it just creates a decision -- that we've got to decide if we want to produce; anticipate they are going to take it on a ratable basis; and they will deplete our stockpiles and the transportation will be there, even though we had no commitments.

Or do we say, well, we hear you; we're ready? We've got everything in place, and when you're ready to buy, we'll be there to sell it to you. And will be there to produce it, but we're not committing to produce it, just like they're not committing to buy it. And we have to play in our operations around knowns instead of what we may think the market will be. Because it's just inefficient for us to have to scale back or coddle back production, which is what we're doing right now. And even though our costs have been lower, they could have been a lot lower, had we had been able to operate at full capacity. We're just trying to find that right blend and balance to where we can meet the needs of our customers and still optimize our position and be prudent in the timing of how we produce to meet those markets.

We really -- again, we believe strongly that there should be an opportunity for us at the same level in 2015, but it's a timing issue. And we've got some extra inventory. So we've got the ability to utilize that. But that's a plus, but it's also a minus because we can't continue to produce and put it on the ground, because we just don't have the capacity. So we've got to get them to commit in a more rational basis, on a ratable basis. It does no good to commit times, and then defer them because it doesn't help in that quarter or that month. Because it just backs up our system and creates inefficiencies.

So I'm of the view that it's in everybody's best interest to have as much efficiency as possible, so that that can yield the lowest-cost energy, which is what we're both striving to do for America.

Got it. Thank you.

Thank you. At this time, I see no other questions in queue.

I'd like to turn it back to Mr. Cantrell for any closing remarks.

Thank you, Vince. We very much appreciate everyone's time this morning, as well is your continued support and interest in both ARLP and AHGP. Our next quarterly earnings release and call are currently scheduled for late January 2016. And we look forward to discussing our fourth-quarter and year-end 2015 results, as well as our outlook for 2016, with you at that time. This concludes our call. Thanks to everyone for your participation.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Everyone have a great day.