Alliance Resource Partners LP (ARLP) 2017 Q4 法說會逐字稿

Good morning and welcome to the Alliance Resource Partners, L.P. and Alliance Holdings GP, L.P. Fourth Quarter 2017 Earnings Conference Call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Brian Cantrell, Senior Vice President and Chief Financial Officer. Please go ahead.

Thank you, Anita, and welcome, everyone. Earlier this morning, we released 2017 fourth 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 year, of 2018. Following our prepared remarks, we'll 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 that 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, unless required by law to do so.

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.

With the required preliminaries out of the way, I'll begin this morning with the review of our performance in 2017 and then turn the call over to Joe Craft, our President and Chief Executive Officer, for his overview of the markets and our strategy.

As outlined in our release this morning, ARLP delivered solid results in line with our expectations for both the 2017 quarter and year. ARLP sold 10.1 million tons of coal in 2017 quarter with an additional 266,000 tons destined for the export market that remained in transit at the end of the year. The 2017 quarter was our highest shipping quarter for the year and reduced inventories to 760,000 tons, almost half of the inventory level from the third quarter.

Comparing our results to the 2017 quarter to the 2016 quarter, lower sales volumes and prices per ton sold led coal sales revenues down as expected by 9.8% to $454.9 million and total revenues lower by 8.4% to $483.2 million. Sequentially, sales volumes and total revenues both improved by 4.8%.

Operating costs were higher compared to the 2016 quarter. Operating expenses were higher in the Illinois Basin due to lower recoveries at our Gibson South and Dotiki mines and increased crude support and contract labor costs across the region. Sequentially, segment adjusted EBITDA expense per ton in the Illinois Basin improved by 11% on the strength of higher sales and production volumes and increased performance at Hamilton, following full recovery from adverse geological conditions encountered at the mine.

In Appalachia, higher operating expenses compared to the 2016 quarter reflect lower recoveries at our Tunnel Ridge mine and the higher cost of producing metallurgical coal at our Mettiki mine in the 2017 quarter. Sequentially, costs in Appalachia were also impacted by a longwall move at Tunnel Ridge during the 2017 quarter.

For the 2017 year, tons produced grew 6.7% and tons sold increased 3.1%. As expected, coal sales price realizations fell 10.9% to $45.24 per ton sold due to the expiration of higher-priced legacy contracts in the 2016 year. Lower coal sales prices more than offset increased sales volumes as coal sales revenue fell 8.1% and total revenues declined 7%, both compared to the 2016 year.

Reflecting the ongoing efficiency benefits of ARLP ship the production to our lower-cost mines, operating expenses fell 2.6% in the 2017 year, even though sales and production volumes increased 1.1 million tons and 2.4 million tons, respectively, compared to the 2016 year.

Segment adjusted EBITDA expense also declined to $28.88 per ton sold in the 2017 year, an improvement of 5.9% compared to the 2016 year. Improved cost performance partially offset top line pressure in 2017 to keep segment adjusted EBITDA margins at a healthy 38.6% or $17.39 per ton sold. The contribution to ARLP's financial results from our investments in oil and gas minerals and compression services increased meaningfully in 2017. Compared to the 2016 year, net income and EBITDA from these investments [climbed to] $16.7 million to $20.3 million.

In comparing ARLP's results for the 2017 quarter and year, I want to, again, remind everyone of the impact of our recent exchange transaction on the calculation of earnings per unit. As we have discussed previously, elimination of the IDRs significantly reduces the amount of ARLP's net income allocated to the general partners. This reduced allocation, along with the issuance of approximately 56.1 million common ARLP units, creates a lack of comparability between periods.

At the end of our release, we have included a comparison of ARLP's actual EPU and pro forma EPU as if the exchange transaction had occurred on January 1, 2016. As in the past, we will also, again, provide investors with a detailed pro forma presentation of ARLP's EPU in our upcoming Form 10-K filing with the SEC.

Before turning it over to Joe, I will wrap up my comments with a quick look at the balance sheet. Prior to year-end, ARLP accelerated payment of the certain expenses to reduce taxable income pass-through to unitholders under the higher income tax rate environment in 2017. Even though this reduced our cash balance at the end of 2017, total debt remained conservative at 0.95x trailing 12 months adjusted EBITDA and liquidity was a healthy $587 million. The bonds we issued last April have continued to perform well, recently trading at 108 or a yield towards the 5.71%.

With our conservative balance sheet, ability to generate attractive cash flows, strong bond market performance and simplified financial structure, we continue to believe ARLP has ample debt and equity capital market access and the capacity to execute our plans and pursue future opportunities.

With that, I will now turn the call over to Joe. Joe?

Thank you, Brian. Good morning, everyone. Brian just outlined Alliance delivered an impressive performance in 2017 even with the market reset by increasing sales and production volumes, reducing operating expenses and generating strong EBITDA, distributable cash flow and distribution coverage.

We also accomplished a number of significant objectives last year. We entered 2017 with a goal of alleviating uncertainty in the debt capital markets. With the successful placement of $400 million 8-year bond offer and a 4-year extension of our revolving credit facility, ARLP met this goal and exited the year with a stable long-term capital structure with ample liquidity.

The Alliance partnerships also took the first step towards simplifying our structure through the exchange transaction completed last July, further enhancing our capital markets capacity and access. And today, AHGP announced its intention to move forward to complete the process to fully simplify the Alliance partnership structure, which will result in ARLP being the only public-traded reporting entity.

In addition, ARLP significantly expanded its presence in the international thermal and metallurgical coal markets, increasing year-over-year shipments to those markets by 4.7 million tons up to 6.3 million tons or approximately 16.7% of our total 2017 coal sales volumes.

Entering 2018, we expect ARLP's strong operating and financial performance to continue. After last year's weak first half coal market environment, it appears the coal pricing bottomed in the back half of 2017 and continues to show signs of improvement.

Domestically, recent cold weather across much of the U.S. has increased customer demand and reduced utility stockpiles. With favorable weather patterns expected to continue in the near term, we anticipate coal-burn in our markets will remain strong, and customers will seek to maximize tonnage under existing contracts and accelerate spot purchases. We also believe customers will soon be in the market looking to secure 2018, 2019 volume commitments.

The international coal markets also remain positive. ARLP has benefited from those favorable conditions. And as of today, we have secured 2018 delivery commitments for 5.7 million tons to the thermal export market and 150,000 tons to the international metallurgical market. We expect more opportunities to sell into both of these markets for 2018 and beyond.

Our expectations for improving domestic and international coal markets led us to increase ARLP's 2018 estimated coal sales and production volumes by 1.9 million tons and 2.2 million tons, respectively, at the midpoint of our guidance and supported our initial full year guidance for revenue, net income and EBITDA as outlined in this morning's press release.

We also expect ARLP's financial results will continue to benefit from our existing investments in oil and gas minerals and compression services. We currently anticipate the contribution from these investments to ARLP's net income and EBITDA will increase this year by $5 million to $15 million to a range of $25 million to $35 million for 2018.

Alliance remains committed to delivering value to our unitholders, and I want to take a moment to discuss how we intend do so in the future. We build Alliance by focusing on a goal of creating sustainable long-term growth in cash flows to support increased distributions to unitholders. As we consider our future strategy and capital allocation decisions, we will remain focused on this goal, and we see numerous opportunities both within our core coal business and in areas outside of coal.

Our first priority will be to invest in our company to build future cash flow growth. For our coal business, we believe our low-cost strategically located assets, market positioning and financial strength provide ARLP with a platform to sustain and grow annual EBITDA levels. ARLP is positioned to expand its production to capture more market share as domestic and/or international opportunities present themselves. We will achieve this growth by leveraging off of our existing operations similar to what we are doing by reopening the Gibson North mine this year as well as considering making disciplined acquisitions.

Outside of coal, to date, we have participated by making opportunistic investments in projects, which, we believe, provided ARLP with long-term sustainable cash flow and/or attractive returns. We believe our investments to date have been successful in meeting this objective. We expect cash flow from these investments should grow meaningfully over the near term and into the future. While opportunistic, these investments have been focused on projects and resource plays that, in our view, have superior reservoir characteristics.

Mineral interest acquisitions concentrated in the STACK and Permian Basin and compression services in the Permian. In making these investments, we have applied the same prudent decision-making that has been a hallmark of our success at Alliance all these years. While we view these investments as a walk-before-you-run approach to expanding our business, we also hope to eventually leverage these investments into a strategic growth platform.

Secondly, our capital allocation priorities will also remain focused on returning cash to unitholders. Last week, the Board of Directors increased the ARLP cash distribution for the 2017 quarter by $0.005 per unit to an annualized rate of $2.04 per unit. The announced distribution represents a 16.6% increase over the cash distribution for the 2016 quarter. Based upon our current outlook, management expects to recommend to the board, similar distribution increases for each quarter in 2018.

As we execute our strategy, ARLP remains committed to maintaining the financial discipline, solid distribution coverage and conservative balance sheet that has served us so well.

This concludes our prepared comments. And now, and with Anita's assistance, we'll open the call to your questions.

(Operator Instructions) The first question today comes from Mark Levin with Seaport Global.

Joe, I want to return back to the uses of cash that you were talking about before, potential uses of cash. Capital return, specifically. You noted the simplification strategy and that you would be pursuing that. Where do you unit buybacks and increased distribution increases fall into your thinking in 2018, if they do at all? I mean, I think you noted $0.005 a quarter increase. But is there a potentiality that we could see some unit buybacks before the end of the year? And also even -- maybe even potentially greater distribution increases?

Yes. I think, we'll look at all options there, Mark. I think we do see some opportunities to invest capital and that we believe it should be our first priority to try to grow and sustain our existing base. And so we will be focusing on that first and foremost. I think relative to increases in distributions, that's also a possibility. Quite frankly, we've been a little disappointed that with the strong increase in distributions we gave in this past year, the market didn't seem to -- didn't give us much credit for that. So we'll have to determine on a going forward basis what the right level increases could be. I think, again, we are going to try to make sure that all increases are sustainable and that we got strong balance sheet and an in -- sufficient distribution coverage for that. But in large part that decision will be made by the board on a quarterly basis, be dependent on our future outlook.

And with regard to -- just regard to the distribution increases, and you mentioned maybe the market not giving you the credit that you probably deserve. Does that mean -- when you think about buybacks versus distribution increases, that, that could be a powerful lever? And then related to that point, I think, you mentioned you're 0.95x levered, is that the appropriate leverage metric that you're comfortable with? Would you be willing to take leverage up to, let's say, hypothetically 1.5x and use that excess cash to return it to shareholders? Is that something you might consider?

I think relative to the leverage, we would be willing to consider higher leverage. At the same time, as I'm trying to convey, we do see opportunities to grow our business through the investments. And we're going to keep that balance sheet capacity available so we can grow through investments that we see on the horizon. That's going to be our first priority.

Makes sense. And then just 2 quick ones. '18 exports higher than '17 exports, is that the way to think about it? And then the final one is, your maintenance CapEx per ton, long-term planning purposes, I think, increased a little bit from the last quarter. Maybe if you could just talk about those 2 and then I'll hang up.

Yes. We do continue to see strong opportunities in the export business. In large part, we sell -- so quite a bit of our Gibson product in the export market that is a lower sulfur product and it is being received very well in the export markets. That's one reason we're bringing our Gibson North property back into the marketplace. So we would expect to see more volumes in the export market in 2018, and we would, like to believe those are sustainable moving into 2019 as well. Relative to the capital on the maintenance, in the past couple of years, we benefited by having equipment that was excess as a result of moving our operations to low-cost operations. When we closed certain operations either through depletion or an effort to try to lower our cost, we did benefit by having equipment that was available without having the need to rebuild. We've started going through that cycle and we're in the process of finalizing that cycle. So we're moving towards a more normal rebuild phase of our ongoing operating equipment.

The next question comes from Lucas Pipes with B. Riley FBR.

So Joe and Brian, I think, in the -- in your prepared remarks, you commented a few times on M&A. Now I wanted to ask a few questions on that. First, what sort of M&A do you think is most appealing, size-wise, geography-wise, domestic or export market tilt? I would appreciate that. And then kind of broader, taking a step back on M&A, we've seen some activity in the domestic thermal coal space, but I think given where expectations were coming out of the downturn, maybe not as much as the market anticipated, kind of how do you think about the broader M&A picture over the next, call it, 12 to 24 months?

Regarding the M&A, we would be looking at assets that would be primarily in the Illinois Basin, Northern App or potentially in the Central App. I mean, we have done some evaluation of the metallurgical market, seeing the strength and the opportunities there. I don't anticipate anything occurring by us in '18. But that is something that we've added emphasis on to evaluate, in addition, just to the steam markets. So most of our focus will remain on the domestic markets. So we're benefiting from international markets, but our core strategy will remain to be on the domestic utility industry. We're also looking at investments outside of coal that would be consistent with the type of investments we've made. And by that, I mean, in areas where we see substantial growth and demand and need for infrastructure investments and/or in the services industry for the oil and gas drilling operations.

Got you. That's very helpful. And then maybe just to follow-up on the M&A opportunities in the domestic utility space. What would you say is the appetite in the market more broadly? Do you see a lot of opportunities out there? And would you say is it more on an asset level, mine-specific level? Or maybe kind of larger maybe conglomerates potentially available as well end of interest?

Yes. I don't want to put too much emphasis on it. My message is, we're available -- we are open to participating in a consolidation. As you mentioned, we haven't seen much of that. I don't see any real signal that would suggest that 2018 is going being any different than 2017, but there have been transactions that occurred. We looked at most of those in 2017, and they didn't meet our hurdle expectations. So we weren't successful in buying those, but that doesn't mean that we don't have an appetite for it. So we would definitely look for opportunities that with -- if we felt like it would strengthen our position and/or we could bring a lot of synergy to the transaction, then we would not be opposed, or maybe put in a positive way, we would be happy to consider that as long as we felt like it would strengthen our ability to meet our goals and objectives of trying to grow our sustainable cash flow.

And Lucas, in our comments in terms of how we intend to allocate capital within the core coal business, yes, we did mention acquisitions, but as Joe said, the real emphasis on expanding and/or extending our business as we always have more organically when the market presents opportunities to us similar to what we are doing with bringing the Gibson North mine back online this year.

Perfect. This is a great segue into my second question. Gibson -- restarting Gibson North. Can you maybe provide a little bit more color as to why you decided to go that route versus, for example, increasing utilization rates at some of your other mines? For example, River View, I think of as a very low-cost mine. Is it that the other operations are already running at full capacity and therefore, it was just simply not feasible? Or was there a unique attribute of Gibson North that just made it a little bit more palatable, maybe from the export perspective? I would appreciate more context around the decision.

We do have excess capacity at River View. So that is a potential for expansion, if there is increased demand for the 5-pound SO2 product. But yes, the primary driver for bringing Gibson North back was the demand for the lower sulfur that particular coal reserve possesses. We've -- we're operating Gibson South pretty much at full capacity. So we have more demand for their product than we had supply. So by bringing on 2 units at Gibson North, not only do we feel like that we can add to our EBITDA, but it also reduces some of our closed mine maintenance costs that we had in 2017. So it's a profitable investment. It's really a small investment, just to add some equipment to reopen that mine, but the driver was the marketability of the coal and -- as well as the footprint that we got there in Indiana.

Great. And then maybe last question from me. You've now become a pretty active participant in the export market with sizable volumes as well. I wonder how do you think about that market factoring into the Alliance story. Not just here in '18 and '19, I think, you mentioned '19 should be similar, but longer term? Is this something where you tend to stay? Or would you say, look, this market is strong right now, but we know this is a highly cyclical industry so it may fluctuate and Alliance will adjust to that? Kind of where do you fit in, in that export market? I would appreciate your color.

Historically, we have participated at less than 10% of our production. What we're seeing that's different, this go around versus the past is that the customer base that we're targeting have characteristics that are similar to what we've seen here in domestic U.S., we are seeing actual coal-fired generation power plants being built in other countries. So we're expanding -- yes, we are selling into Europe, but our sight for the future is in countries other than Europe, where new coal-fired generation is being built, and we're trying to establish relationships with those countries that are signaling willingness to continue to build new generation and to grow their low-cost energy production within their buying coal to be able to participate. So we do see opportunities. Now what that size would be, again, as I said a little bit earlier, our core business will continue to be the domestic utility business, but we could see that 16% sustaining itself, if not growing to 20% or 25%, just to -- it depends on how successful we are in establishing long-term relationships and contracts that we can manage similar to the way we do our domestic business.

Interesting. So this would suggest possibly longer-term supply agreements on the export side?

I would say longer-term relationships. So yes, but it would always be priced annually, if not quarterly. But we would expect, for us to try to grow our percent, we would want that to be sustainable. We don't want to get too far out on a volatile market that's here today, gone tomorrow.

The next question comes Paul Forward with Stifel.

Just on Gibson North, I wanted to ask, that's great to be able to bring -- there was 2 units back online at such a low CapEx level. I was just curious, considering the strength in either the export or the domestic markets, do you have any more levers like that, that you can pull where you've got some underutilized equipment or capacity somewhere that you might decide to deploy at relatively low capital spending levels later on in 2018 if the market wants the coal?

We do have excess capacity both at our Dotiki operation as well as River View. You could also add another unit at Warrior. So there is capacity at those 3 operations. At Hamilton, we expect to have our first full year of reaching full capacity at Hamilton. It's going to add some volume. That's already factored into the guidance we gave you. So when you look at the increase that was mentioned in our prepared remarks, that increase is primarily driven by Hamilton and Gibson. As far as whether, these units will be deployed in 2018, they will be very market dependent. So we are active, and we will be active to try to grow our market share. So if we're successful with long-term contracts to do so, then we would invest the capital to bring on additional units if the market demands it.

Great. And when thinking along those lines of considering expansions or as you're marketing your remaining tons out of Appalachia in 2018, I was just wondering if you could talk about are you concerned about cost pressures anywhere beyond? I mean certainly, you've given us guidance, but are cost pressures that could creep in either in Appalachia due to potentially labor shortages? Or might there be, as you start seeing yourselves and your competitors bringing capacity back, would there be either labor or equipment issues in the Illinois Basin that could create some cost surprises?

Initially when we prepared our budget, we did build in some inflationary increases in '18. In our last call, we were hopeful that our '18 costs would be lower than '17. And so we're building into the plan something that's comparable, but we have increased some of the inflationary aspects for M&A -- excuse me, M&S, material and supply components, whether it be fuel or steel or other factors. So there is some inflationary expectations that's already been built into our guidance. On the labor front, we don't see that and/or equipment availability that those would be bottlenecks. We don't really anticipate across the Illinois Basin or Northern App that tonnage is going to expand that much beyond what we're doing. In fact, we think that the tonnage will be brought, that there will be other tons that will be brought off the market. There are higher costs where contracts have been expired for those competitors. So I don't see the increase in volume that we are bringing on to be an industry issue. I think, it's more of a company-specific issue.

(Operator Instructions) The next question comes from David Deterding with Wells Fargo.

I was just looking for a little more color. You've given some per ton estimates here on your sales price per ton being down 2% to 3% off of 2017. Can you just talk a little bit about is that due to some mix shift between basins? And it seems like in your commentary here that you are saying softer market conditions in the first half and second half might be better. Just any color that we can get on kind of realizations? And when we might expect to start moving the other way?

That's softer in the first half -- second -- last year was '17, not '18, just for clarity. And when we look at the market, it is definitely better today than it was just 3 months ago. When we put our plan together, this guidance probably is a month old. So we haven't really updated -- we haven't changed our market curve, the price curve for that guidance since we presented the budget to the board in December. We have reflected new -- whatever contracts that have committed. But as far as our price curve, we have not adjusted that. So when you look at our price year-over-year, we did enter into some contracts in early -- well, midyear of '17. So some of the contracts we got for '18, even though they were entered into in '17, were impacted by the markets that we were facing at that time. So that's one reason, even though we've seen strength in second half of '17, if we're continuing to see strength that we're not getting the uplift in our average sales price. Another factor is at Mettiki, where we do have a basin issue there where last year, we sold 745,000 tons of metallurgical coal. We only had about 150,000 sold this year of the met coal and that is a significant price increase of what our average sales price is. So that is...

That is a mix issue.

That is a mix issue specific to your -- to answer your question. We do think that we'll pick up some more metallurgical coal in '18, but more likely not as much as we had in '17. So overall, I think we're -- as we look at our mix between our contracts and -- our longer-term contracts, our legacy contracts and the more recent contracts, we do believe that, that sort of reflects where the market is today and maybe there is some opportunity for upside there.

Okay. And then just last one kind of as you think about that as well, 85% contracted for this year. How much of that 15% is -- do you expect that to go -- to enter the international market? I mean, is most of what you have left uncontracted to go into the international market? Or is that just tons you're kind of holding up for potential domestic market?

There's, I would say, the majority of that is for domestic market that we have targeted, that we know customers are going to be in the market, who want to buy that. They haven't -- they've signaled to us a need, but they have not come to market to meet that need. So most of that is targeted -- the majority of that's targeted in the domestic market, but some of that will also go to the international market.

The next question comes from Lin Shen with Hite.

Could you just talk a little bit about the remaining process of simplifying the 2 entities? The press release said 2018, but it sure seems like this is a simple process that could be over sooner and then you would pave the way for some of the other things you might want to do from a capital perspective?

Yes, I mean, there is a process involved. The longest pole in the tent is probably potential timing around SEC review of the various filings, which is a little bit hard to predict. So we will move through it as expeditiously as possible, but things like that are somewhat outside of our control from a timing standpoint.

Got it. And what timing do you have in mind to complete the required SEC filings, at least, from a submission standpoint?

First, obviously, we have to get final board approval, which hasn't occurred yet. But, again, as I said, we'll move through it as quickly as we can and try to drive to the conclusion as expeditiously as possible.

Got it. And then on the potential M&A, including outside of coal. I appreciate the comment that selling closed utilities will remain your core business. Are there particular business lines that you're looking at? Or is it focused on building on some of the sort of small things you have in the business mix already?

Again, we're focused in those areas in particular, the Permian and the STACK, where we see good reservoir qualities and significant activity. And as that activity continues, there is going to be needs on the infrastructure and the services side to support the E&P drilling activity. So along that entire spectrum is where we will look, and we are -- we do see opportunities that we might be able to take advantage up there.

Great. And then last question. So there was a story out, I think, it was this morning or over the weekend about how Chinese utilities are increasingly agitating for the Chinese government to do something about the rising prices in the seaborne and thermal market. Do you have an opinion on that? Or what direction that's going? And how it might impact your business?

Really don't have an opinion on that. I read that as well. So they've enjoyed a very cold winter as well. So demand is up, prices are up. They need coal. That's positive. Again, I think the whole international market environment is very -- it's a very positive outlook right now. The global economy continues to show strength.

The next question is a follow-up from Lucas Pipes with B. Riley FBR.

And I wanted to follow-up on the U.S. domestic market. In terms of 2018, 2019 and then maybe longer term looking out to 2020 and beyond, where do you see domestic coal burn? Do you see it stable, rising, falling? And if so, due to what factors? Kind of, what are the other things you're having an eye on right now as it relates to the domestic market, medium and longer term?

I think the key issue is natural gas prices. So as you look at the natural gas spread, I mean, it's showing $3 or somewhat -- it's going right around $3, whereas we are seeing more strength in the near term. There is a lot of belief that there is going to be a lot of capacity brought on and that does encourage, I guess, our customers to remain short in their buying habits as far as coal. We do, again, have conversations and our target are for coal plants that we expect to operate for the 5-year [plan]. So we feel like we've got clear definition on the plants that we're going to run. [Mostly], a lot of those are going to be running at similar capacity that they did in '17, there are some that may lose some demand if gas prices stay at the $3 level or go down. But it's something that you got to anticipate where gas prices are to be able to answer that question. What we are planning for is there is sufficient -- at our size, there is sufficient demand. We believe that coal will remain in the 28% to 32% generation, the coal-fired generation of the electric capacity of the country and that we'll be able to participate in that and be able to continue to grow our production in the 5% to 6% a year level, if we continue to do what we need to do to solidify our relationships and long-term contracts with those customers.

Yes. That's helpful. Thank you. Then the new administration, if you can still call it new, has been, I think, very accommodative towards the industry over the past 12 months. And going forward from here, what do you think is the most important initiative that the administration could be pursuing?

I think the resiliency issue continues to be an issue. I think, they will continue to be evaluation of that for even though they ruled against the DOE NOPR they did also ask the markets to evaluate and report back on the resiliency issue within a 60-day time frame, I believe. So we're going to still have discussion on that, and I think that's something we need to address. The second thing is the new source review provisions, which would tie into the need to really focus on the long term and our ability to build new coal-fired power plants. So number one, let's protect the fleet. Number two, let's look to see if we can't replace our old -- older inefficient plants with newer efficient plants so that we can have the lower-cost energy that would still be environmentally acceptable. Countries around the world are building coal-fired power plants with new technology and most of those have signed the Paris Accord, they're still building. So there is no reason why we as a country shouldn't consider to do that as well. So those would be the things that need to be addressed. The third area is the waters of the U.S. that needs to be addressed and it will be. So those are the major things that the administration needs to focus on in my view.

That's very helpful. And last question, and don't want to sound like a broken record, but we are seeing a lot of different prices out there for Illinois Basin coal. In your opinion, domestic market 2018 contracts, if you were to go out today, what's the reasonable pricing range to think about?

I'd say we're better than we were a month ago or a quarter ago. So it's ranging anywhere from the high mid-30s to low-40s, again, depending on quality or maybe even to the mid-40s depending on quality.

Average, above or below 40?

Maybe at 40. Maybe a little better than 40. Maybe a little -- that is right in that ZIP code.

The next question is a follow-up from Mark Levin with Seaport Global.

Lucas asked the question that I wanted to ask. But I'll ask another one related to price that has to do with netback prices for your exports and where those prices are when you're moving coal overseas? What's the sulfur discount? I know you guys have done a good job in terms of maximizing or minimizing, I should say, the impact of sulfur. But how do the export prices today compare to the prices that you can get domestically?

The -- for the higher sulfur coal, they're comparable. Maybe, most recently, our price has been a little better both for our Gibson product as well as our higher sulfur coal. So what we booked for 2018, those numbers are coming in slightly higher than what we're getting in the domestic markets. The domestic markets are catching up. So I continue to believe that the domestic markets really drive the export market's market price in large part in most cases. Now there are exceptions to that. But in most cases, our pricing is driven off of our alternatives.

It makes perfect sense. Let me come back to a domestic question then for NAPP. Lucas asked the question for what you're getting from the Illinois Basin. How about for NAPP? How -- where are you seeing prices today? What's a good way to think about if you went out for a term business, when you term business what you would get? And how has that maybe changed over the last 3 to 4 months?

Over the -- it's continuing to move and the challenge is when you have a fire at Mansfield, that tonnages -- that demand is off the market, it impacts the market somewhat in the short-term until that demand scenario gets clarified. So I would say somewhere in the mid-40s would be a price for [hit aid] on a sustainable basis. We've seen prices higher than that. But recently, they are in the mid-40s to high-40s. But on a sustainable contract basis, they probably be right in the mid-40s, plus or minus a little bit.

Okay. That's perfect. And then my last question has to do with the railroads. Obviously, the utilities have to worry about that as well. But just to kind of what you're seeing given all the weather? Has there been much impact? Are things looking somewhere -- something close to normal? Has there been any deterioration in railroad service?

2017, it improved significantly. So at the end of the year, things were running very well. January, with the weather impact, it's been very disruptive both for the rails and the barge. So we have seen, in January, some slowdown in deliveries just because of transportation constraints or weather-related problems, where coal gets frozen in a railcar or the rivers are freezing and it's hard to barges to maneuver. So they are fighting through that and doing as a good job as they can do. We don't think it has any permanent impact, but it does disrupt shipments on a week-to-week basis.

It's really just a timing issue.

Yes. Brian, I was going to ask that. I mean, should we -- when we think about Q1 relative to other quarters, is there going to be some -- I mean, obviously we look at seasonality, but just because of the weather, should we be thinking about that how -- as to how we model Q1?

Joe?

Right now, we believe it will not impact Q1, that's subject to what the weather is going to be next week or the rest of the winter. [If anything], normal thawing, no major impact like we had a couple of weeks ago. And we should make up those tons in the first quarter. If there is another big -- big Arctic blast that changes that dynamic, obviously, it could impact it.

Yes, I mean, if we do have sustained cold weather for another period of time that could -- you could see it push a little bit into the second quarter, but what we've seen so far this year -- this month, we expect to make up in the quarter.

This concludes our question-and-answer session. I would like to turn the conference back over to Brian Cantrell for any closing remarks.

Thank you, Anita. Good session this morning, and thanks to everyone for your time and your continued support, both ARLP and AHGP. Our next quarterly earnings release and call will be in late April, and we look forward to discussing our first quarter 2018 results and to updating you for our outlook for the balance of 2018 at that time. This concludes our call and thanks to everyone for your participation.

This conference has now concluded. Thank you for attending today's presentation. You may now disconnect.