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Edited Transcript of ARLP earnings conference call or presentation 28-Jan-19 3:00pm GMT

Q4 2018 Alliance Resource Partners LP Earnings Call

Tulsa Jan 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Alliance Resource Partners LP earnings conference call or presentation Monday, January 28, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brian L. Cantrell

Alliance Resource Partners, L.P. - Senior VP & CFO of Alliance Resource Management GP, LLC

* Joseph W. Craft

Alliance Resource Partners, L.P. - President, CEO & Chairman of Alliance Holdings GP LP

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Conference Call Participants

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* Jeff Menapace

* Lin Shen

Hite Hedge Asset Management LLC - Analyst

* Lucas Nathaniel Pipes

B. Riley FBR, Inc., Research Division - Senior VP & Equity Analyst

* Mark Andrew Levin

Seaport Global Securities LLC, Research Division - MD & Senior Analyst

* Matthew Wyatt Fields

BofA Merrill Lynch, Research Division - Director

* Nicholas Jarmoszuk

Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the Alliance Resource Partners Fourth Quarter 2018 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

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

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Brian L. Cantrell, Alliance Resource Partners, L.P. - Senior VP & CFO of Alliance Resource Management GP, LLC [2]

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Thank you, Shawn, and welcome, everyone. Earlier this morning, Alliance Resource Partners released its 2018 fourth quarter and full year earnings, and we'll now discuss these results as well as our outlook for the balance of the -- for the upcoming year. 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 release. While these forward-looking statements are based on information currently available to us, if 1 or more of these risks or uncertainties materialize or if our underlying assumptions prove incorrect, actual results may vary materially from those we've projected or expected. In providing these remarks, the partnership has no 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.

I'd also like to remind everyone that we will 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 ARLP's press release, which has been posted on our website and furnished to the SEC on Form 8-K.

With the required preliminaries now out of the way, I'll begin with a review of our 2018 results and then turn the call over to Joe Craft, our Chairman, President and Chief Executive Officer, for his perspective on the markets and ARLP's outlook for 2019.

On the strength of higher coal sales volumes and prices, ARLP's revenues increased in both the 2018 quarter and year. For the 2018 year, total coal sales volumes increased by 6.9% to a record 40.4 million tons, which, coupled with improved year-over-year price realizations in both our domestic and international markets, led our coal sales revenues higher by 7.8% to $1.84 billion and total revenues up by 11.5% to $2 billion, both as compared to the 2017 year.

Coal sales volumes and revenues also increased in the 2018 quarter compared to the 2017 quarter. Primarily due to increased export sales from our Gibson mining complex, ARLP sold 10.5 million tons in the 2018 quarter, an increase of 3.6% over the 2017 quarter. Reflecting higher price realizations in Appalachia, coal sales prices also increased $1.31 per ton sold to $46.34. Strong coal sales volumes and prices in the 2018 quarter led coal sales and total revenues higher by 6.6% and 10.1%, respectively, both compared to the 2017 quarter.

As noted in our press release earlier this morning, comparisons of ARLP's net income and EBITDA for the 2018 and 2017 quarter and year are impacted by several items. Specifically, our 2018 results include an $80 million cash gain, resulting from a litigation settlement in March 2018 and $40.5 million of noncash impairment charges recorded in the 2018 fourth quarter. For 2017, ARLP's results include an $8.1 million loss related to the early retirement of our Series B senior notes in May 2017. Adjusting for these items, ARLP's results for the 2018 year-end quarter compare favorably to our results for the 2017 year-end quarter as well as to the 2018 sequential quarter. And my following comments will focus on a comparison of these clean results.

Comparing the 2018 year to the 2017 year, adjusted net income attributable to ARLP increased 4.9% to $327.1 million and adjusted EBITDA increased 4.4% to $647.4 million. Looking next to the 2018 quarter compared to the 2017 quarter, adjusted net income attributable to ARLP increased 22.9% to $91.3 million, while adjusted EBITDA rose 10.7% to $176.8 million. Sequentially, ARLP's results for the 2018 quarter also improved. Increased coal sales volumes, improved price realizations and lower segment-adjusted EBITDA expense per ton sold led adjusted net income attributable to ARLP and adjusted EBITDA higher by 23.8% and 15%, respectively, both compared to the sequential quarter.

ARLP's comparative results also reflect increased contributions from our investments in oil and gas minerals and gas compression services. For the 2018 year, equity investment income from ARLP's oil and gas minerals investments increased $8.3 million to $22.2 million and equity securities income from our preferred investment and gas compression services rose $9.3 million to $15.7 million, both compared to the 2017 year. For the 2018 quarter, equity investment income from oil and gas minerals increased to $7.6 million and equity securities income from gas compression services increased to $4.1 million, both compared to the 2017 quarter.

As a reminder, the IDR Exchange and Simplification Transactions impacted total units outstanding and the allocation of net income to our general partners, creating a lack of comparability of earnings per unit between periods. We have, again, included at the end of this morning's earnings release a comparison of ARLP's actual EPU and pro forma EPU as if the Exchange and Simplification Transactions had occurred on January 1, 2017. We will also provide investors with a detailed pro forma presentation of ARLP's EPU in our upcoming form 10-K filing with the SEC.

Turning now to the balance sheet. We ended 2018 with ample liquidity of $634.1 million. And while leverage ticked up due to revolver borrowings in advance of closing the AllDale transaction, ARLP's total debt remained conservative at 1.1x trailing 12 months adjusted EBITDA. We continue to believe our strong conservative balance sheet provides ARLP with strategic advantages as we execute our plans and the financial flexibility and capacity to take advantage of future opportunities.

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

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Joseph W. Craft, Alliance Resource Partners, L.P. - President, CEO & Chairman of Alliance Holdings GP LP [3]

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Thank you, Brian. Good morning, everyone. Alliance entered 2018 with expectations for growth and operating and financial results. And as Brian just outlined, we delivered on those expectations, achieving record coal sales volumes at higher price realizations and posting year-over-year increases to coal production, revenues, net income and EBITDA.

These results reflect the dedication of our employees and their daily focus on executing ARLP's strategic objectives and priorities. Through the efforts of our operating team, we reopened the Gibson North mine and added a production unit at our River View mine, increasing ARLP's year-over-year production volumes by more than 7%. The increased production supported the efforts of our marketing team to capitalize on positive coal market fundamentals. We achieved record sales volumes in 2018 driven primarily by a significant expansion of ARLP's presence in the international thermal and metallurgical coal markets, with the year-over-year shipments to those markets increasing by 4.6 million tons to 11.2 million tons or approximately 27.8% of our total 2018 coal sales volumes.

As we enter 2019, our teams remain focused on growth. For our coal business, market fundamentals remain favorable in the U.S. and abroad. A strong winter heating season across our market territory has increased coal burn and reduced stockpiles, allowing ARLP to expand and strengthen its domestic contract position. Internationally, we currently are planning export volumes in 2019 to be 10% higher than 2018. Our strategically located low-cost mines have allowed ARLP to already secure volume and price commitments for 2019 deliveries of approximately 36.8 million tons, including approximately 8 million tons of export shipments this year.

Benefiting from positive market fundamentals, ARLP estimates coal production and sales volumes will grow in 2019 by approximately 10%, each at the midpoint of our guidance. To support this growth, ARLP plans to invest approximately $40 million to $45 million of capital to increase production at our River View and Gibson complex mines. Development of the Excel No. 5 mine is underway, and ARLP plans to also invest $40 million to $45 million of capital on this project in 2019.

In addition to investing for long-term growth in our coal business, we are excited about ARLP's new growth platform in the oil and gas royalty business. As you recall, we have been participating in this sector as an opportunistic passive investor for several years. Through 2018, our passive investments in oil and gas minerals have totaled approximately $171.4 million and generated cash flow to ARLP of approximately $52.4 million. We have been pleased with the performance of these investments, and late last year, ARLP made the strategic decision to expand our participation in the oil and gas minerals sector.

With the recent AllDale acquisition, ARLP now controls a significant ownership of oil and gas royalty interest strategically positioned in some of the premier-producing regions in the United States. On ARLP's controlled acreage, there are currently 3,823 gross-producing wells, 529 wells currently drilling and another 903 permitted well locations.

Drilling activity and production is also beginning to occur on the acreage owned by ARLP through its limited partner interest in AllDale III. Based on 2019 estimated drilling activity and production and reflecting recent oil and gas prices, ARLP currently expects oil and gas royalties will contribute EBITDA this year in the range of $37 million to $47 million or approximately 5% to 6% of ARLP's total estimated 2019 EBITDA.

As we integrate ARLP's newly controlled acreage, initially, we will continue to work with in AllDale to assist with the management of these assets. During this transition, we plan to assemble our own team to grow this part of our business. Going forward, this dedicated team will focus on increasing the percentage contribution from oil and gas royalties to ARLP's total EBITDA. Beginning with our first quarter 2019 SEC filings, ARLP will include a new royalty reportable segment to clearly present the performance of this part of our business.

As you can see, ARLP remains focused on delivering strong performance and continuing to invest in our business to create sustainable growth and cash flows. By doing so, we have been able to deliver on ARLP's objective of returning cash to unitholders. During 2018, while maintaining a conservative balance sheet, we returned approximately $346.5 million to unitholders, paying out $275.9 million of distributions, an increase of 3.9% per unit year-over-year; and repurchasing approximately 3% of our units for $70.6 million. Looking ahead, we expect record performance from our coal operations and increasing contributions from oil and gas royalties will support our goal of increasing cash returns and delivering long-term value to our unitholders.

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

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Questions and Answers

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Operator [1]

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

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Mark Andrew Levin, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [2]

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A couple of quick questions. A few of them are modeling -- for modeling purposes. So maybe a production bridge, I think you mentioned 10% for shipments in production from 2018 to 2019. Can you bridge this in terms of the specific numbers that you would expect out of each mine getting us from '18 to your '19 number?

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Joseph W. Craft, Alliance Resource Partners, L.P. - President, CEO & Chairman of Alliance Holdings GP LP [3]

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Most of that will come from Gibson, so we had another unit there at our Gibson North operation. And then Tunnel Ridge is expected to have some increased production of about 0.5 million tons in 2019 compared to 2018, and then the balance will be out of River View. So if you think in terms of 2 million at Gibson and 1.5 million to River View and 0.5 million at Tunnel Ridge, that should make up the 10%.

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Mark Andrew Levin, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [4]

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No, that's perfect. And then the -- I think you mentioned the CapEx bridge, so $40 million to $45 million at River View and Gibson and then another $40 million to $45 million at Excel. Is that right? That's the bulk of it, '18 to '19?

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Joseph W. Craft, Alliance Resource Partners, L.P. - President, CEO & Chairman of Alliance Holdings GP LP [5]

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That's the expansion in -- on top of the maintenance capital.

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Mark Andrew Levin, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [6]

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All right, got it. That's perfect. And then the next question has to do with -- I think you mentioned oil and gas and obviously, growing that business and hiring a team of people or having people allocated to growing it. I think it's roughly 5%, 6% of your EBITDA now, Joe. How do you -- you mentioned growing it as a percentage of the total. Is there an optimal mix? How quickly do you think you can grow it? And what might that mix ultimately look like?

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Joseph W. Craft, Alliance Resource Partners, L.P. - President, CEO & Chairman of Alliance Holdings GP LP [7]

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I think we're -- we are focused on growing that. I mean, we want to maintain a conservative balance sheet. We do need to get our team in place. I think by having this ownership directly in the reserves, it provides more options for us in how we can grow that. So we need to assemble this team as quickly as possible, and that will [define] the fact that, effectively, how fast we can grow in 2019. But we don't have a specific target, but we just look for attractive investment opportunities. We believe that based on our investment to date, from 2014 until today, we've been able to get attractive returns off our investments, and we'll just continue to look at that. But by having our own team and being able to be open to multiple ways to grow it, and we would anticipate a good opportunity to see increased opportunity to participate in that space.

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Mark Andrew Levin, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [8]

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Got it. And then last question, and then I'll leave it for someone else. Pricing in 2020, I think you've got roughly 40%, plus or minus, of the book price. Any just sort of directional color in terms of where that is relative to your '19 guidance?

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Joseph W. Craft, Alliance Resource Partners, L.P. - President, CEO & Chairman of Alliance Holdings GP LP [9]

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So for 2020, I would say that it is an increase relative to 2019, on the domestic book -- all that's domestic. So for the volume that we've been able to contract over multi-years, we have been able to see an improvement in the second year of the contract compared to the first. So for 2020, that domestic book should provide higher results than the 2019. As far as billing out that book, it's a little bit too early to tell exactly what -- where the market is going to be in 2020 compared to where it is in 2019.

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Brian L. Cantrell, Alliance Resource Partners, L.P. - Senior VP & CFO of Alliance Resource Management GP, LLC [10]

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Yes. And just to clarify, too, Mark. I think at the midpoint of our 2019 guidance, we're about 83% pricing...

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Joseph W. Craft, Alliance Resource Partners, L.P. - President, CEO & Chairman of Alliance Holdings GP LP [11]

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(inaudible)

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Brian L. Cantrell, Alliance Resource Partners, L.P. - Senior VP & CFO of Alliance Resource Management GP, LLC [12]

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And you were talking 2020 on the fourth...

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Joseph W. Craft, Alliance Resource Partners, L.P. - President, CEO & Chairman of Alliance Holdings GP LP [13]

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That's what I was hearing.

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Joseph W. Craft, Alliance Resource Partners, L.P. - President, CEO & Chairman of Alliance Holdings GP LP [14]

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Yes.

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Mark Andrew Levin, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [15]

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Yes, that's right. Yes, that's right, exactly.

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Brian L. Cantrell, Alliance Resource Partners, L.P. - Senior VP & CFO of Alliance Resource Management GP, LLC [16]

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I just want to make sure everybody heard what he was talking to.

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Joseph W. Craft, Alliance Resource Partners, L.P. - President, CEO & Chairman of Alliance Holdings GP LP [17]

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Right. Absolutely.

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Operator [18]

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

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Lucas Nathaniel Pipes, B. Riley FBR, Inc., Research Division - Senior VP & Equity Analyst [19]

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I wanted to follow up on the oil and gas side. Obviously, these oil and gas mineral interests tend to trade at a very different multiple from coal. I wondered how quickly you expect to see that reflected in your stock price? And if you don't, what ways could you explore to, to crystallize that value?

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Joseph W. Craft, Alliance Resource Partners, L.P. - President, CEO & Chairman of Alliance Holdings GP LP [20]

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We agree that if you look at how the oil and gas minerals public companies trade, there is a significant improvement for recent multiples there. So we're hopeful, by showing a new segment in 2019, we'll be able to highlight exactly where we are growing in that area. That should allow for better communication. Years past, we [don't know.] Concerned about why it hasn't been reflected, but maybe if we put in a separate segment, we're hopeful that, that will put the spotlight on that [and indeed] improvement in our unit price to reflect the growth in that segment.

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Lucas Nathaniel Pipes, B. Riley FBR, Inc., Research Division - Senior VP & Equity Analyst [21]

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Okay, that's helpful. And I know Mark was asking about growth in that segment. Any rough number that you could give us kind of year-over-year '20 versus '19?

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Joseph W. Craft, Alliance Resource Partners, L.P. - President, CEO & Chairman of Alliance Holdings GP LP [22]

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Right now, in our capital budget that we've given guidance for the capital, there is no money in there for minerals, so we really need to get our team in place, which, hopefully, we can get done by the end of the first quarter. I think that will give us better guidance so as to how fast we can deploy capital. We are extremely focused on that. It's hard to get to a number for 2019. Based on the capital that we have invested with the $55 million, we should see an immediate growth, which should get us to almost doubled the EBITDA in 2018. So you can see that as you would look to 2020, even though we don't give guidance out. That shows continued improvement just with what we have purchased that we announced earlier in January. So we do anticipate growth off of the reserve we own today. As we've mentioned, we plan to execute on that, and so that will be an attractive growth opportunity for our company.

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Lucas Nathaniel Pipes, B. Riley FBR, Inc., Research Division - Senior VP & Equity Analyst [23]

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That's very helpful. And then one last one on the coal side. Obviously, you commented on the strong heating season this winter. Outside of that, what's your sense for the market over the course of '19 and maybe also looking into 2020? Where are utilities' heads these days? Are they looking to put in longer-term contracts? And where do you see pricing for longer-term price commitments, both in the Illinois Basin and Northern Appalachia?

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Joseph W. Craft, Alliance Resource Partners, L.P. - President, CEO & Chairman of Alliance Holdings GP LP [24]

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So on the international side, we anticipate that market to still be available to us. We've positioned ourselves to grow in that market. We continue to see pricing, even though it has fallen off the last quarter. We think that's relative to certain transportation interruptions, and we anticipate that price curve will, in fact, get -- be more attractive as the year moves on in '19. And we see no real added supply in the international market coming on, yet we do see continued growth in that market. So we feel very confident that the international market can provide growth to us, both as well as -- margin as well as volume. On the domestic side, we anticipate that, domestically, in our market territories, over the next 5 years, say, production -- or demand will be relatively flat. We will probably lose some demand over the next 2 years in the 10 million ton range, so there will be some shortfall there. But for the plants that we have targeted, we see very stable market opportunity for us. Some of these customers have talked about longer term. We executed some in 2018. The pricing was attractive compared to a year ago that longer term, for the term contracts, there was some -- they did not reflect the spot markets, so there was some reduction as to what you would see on the price curve for the spot market. But I feel like the market pricing is very attractive relative to -- to allow us to have strong margins and yet still be competitive with whatever natural gas curve you could see down the road. It's hard to predict exactly where that's going because it's really so dependent on natural gas and weather. But we see a step-change, if you will, from 2018 to late 2016, early 2017 where those utilities that are committed to coal realize the importance of having their producers be able to plan and make capital investments to sustain their production to where I think we've reached some type of a realization that will provide for predictability in our cash flow. Even though we're not getting contracts, we're getting definite signals on volume, and the pricing will be dependent on whatever happens in the marketplace, whether it be how exports influence domestic pricing, how gas prices affect that pricing as well as what the weather is going to be. So we feel good about it. We're projecting a revenue on a consolidated basis to be relatively stable over the 5-year planning horizon.

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Operator [25]

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(Operator Instructions) Our next question comes from Nick Jarmoszuk with Stifel.

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Nicholas Jarmoszuk, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [26]

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Following the AllDale acquisition, can you talk about how you think about the use of additional debt to fund acquisitions?

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Joseph W. Craft, Alliance Resource Partners, L.P. - President, CEO & Chairman of Alliance Holdings GP LP [27]

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Yes.

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Brian L. Cantrell, Alliance Resource Partners, L.P. - Senior VP & CFO of Alliance Resource Management GP, LLC [28]

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I mean, we've obviously, as a company, have a very conservative balance sheet, right at about 1x -- 1.1x trailing to date. We have significant cash flow coming out of the assets on the oil and gas side as well as our coal cash flows. We have always maintained a conservative balance sheet and primarily growing through using internally generated cash flow and modest levels of debt. So I don't think you would see us necessarily levering up to go pursue oil and gas activities. I wouldn't expect us to maintain our past practices of approaching it in the way that I just described.

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Joseph W. Craft, Alliance Resource Partners, L.P. - President, CEO & Chairman of Alliance Holdings GP LP [29]

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There's always a chance for an M&A transaction that could expand that. And we're always looking. There's nothing on the horizon, but I agree with Brian, relative to normal activity, we'll be in that 1x area. But we could expand that if the right opportunity comes along.

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Nicholas Jarmoszuk, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [30]

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And aside from targets in the oil and gas space, is there anything in the coal arena that's interesting or compelling to you guys?

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Joseph W. Craft, Alliance Resource Partners, L.P. - President, CEO & Chairman of Alliance Holdings GP LP [31]

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Again, there's nothing on the horizon. We'll continue to be open to opportunities, but we've given you our capital that we plan to spend. Once we spend this capital, we don't anticipate any real capital needs for our own operations to be able to sustain and maintain the production level that we're targeting in 2019. But we will -- we'll continue to be open to opportunities to grow and expand in that area, but there's none on the horizon.

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Nicholas Jarmoszuk, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [32]

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Okay. And then regarding the contracting environment, obviously, it sounds a lot better than a couple of years ago. Can you talk about what sort of duration contract opportunities you have? Is it still in the 1-year time frame? Or are some of your customers open to longer-term contracts?

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Joseph W. Craft, Alliance Resource Partners, L.P. - President, CEO & Chairman of Alliance Holdings GP LP [33]

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On the domestic side, most are one year. Some have expanded 2 and 3 years, and we are in conversations with a couple right now for 2 or 3 years. But most are in the 1 -- still more comfortable on the short end of the commitment scale than longer term. And the international markets, they're all one year or less, internationally.

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Operator [34]

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Our next question comes from Jeff Menapace with FTN Financial.

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Jeff Menapace, [35]

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Brian, you mentioned revolver draw at -- was there a balance on either the Cavalier facility or the AR securitization facility at year-end?

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Brian L. Cantrell, Alliance Resource Partners, L.P. - Senior VP & CFO of Alliance Resource Management GP, LLC [36]

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Yes. I think we have -- on Cavalier, no. We have that facility available but have never taken a drawing against it. On the AR securitization, I think we had a little over $90 million outstanding, maybe $92 million or so.

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Jeff Menapace, [37]

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So -- oh, right. So the $92 million number on your -- in the current capital -- excuse me, I'm looking at the wrong line. The current maturities long-term debt on your balance sheet, that's out of the securitization facility or the revolver?

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Brian L. Cantrell, Alliance Resource Partners, L.P. - Senior VP & CFO of Alliance Resource Management GP, LLC [38]

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No, the securitization facility is a 364-day facility by its -- by nature, so it's always short term. On the long-term side, you have a combination of our $400 million bond offering as well some remaining -- well, you see the long-term capital leases I've broken out as a separate line item.

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Jeff Menapace, [39]

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Right. Well -- and then what was the revolver you said, at year-end?

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Brian L. Cantrell, Alliance Resource Partners, L.P. - Senior VP & CFO of Alliance Resource Management GP, LLC [40]

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About $175 million. We drew down -- we had no drawings prior to preparing for the AllDale transaction. And we drew down an amount that was close to that level.

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Jeff Menapace, [41]

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Okay. So at year-end, you had, call it, $175 million in the revolver, $92 million on the AR facility and then the $400 million in notes.

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Brian L. Cantrell, Alliance Resource Partners, L.P. - Senior VP & CFO of Alliance Resource Management GP, LLC [42]

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Correct. As well as some (inaudible) a little bit of...

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Jeff Menapace, [43]

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Plus the cap leases.

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Brian L. Cantrell, Alliance Resource Partners, L.P. - Senior VP & CFO of Alliance Resource Management GP, LLC [44]

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Right, the cap leases.

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Operator [45]

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Our next question comes from Lin Shen with HITE.

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Lin Shen, Hite Hedge Asset Management LLC - Analyst [46]

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For your export business, can you talk about which areas you sell your coal to in 2018 and whether you think in 2019 their dynamics should be the same?

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Brian L. Cantrell, Alliance Resource Partners, L.P. - Senior VP & CFO of Alliance Resource Management GP, LLC [47]

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Yes. The ordering is primarily, we're going into Europe, also into Africa and then into India. Those are the highest percentages. I think in total, we sold to -- in the 31 different countries, but the 3 regions that I've just mentioned are predominantly where we've been transacting.

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Lin Shen, Hite Hedge Asset Management LLC - Analyst [48]

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And in 2019, you think they're widely similar?

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Brian L. Cantrell, Alliance Resource Partners, L.P. - Senior VP & CFO of Alliance Resource Management GP, LLC [49]

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I expect it to be similar, yes.

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Lin Shen, Hite Hedge Asset Management LLC - Analyst [50]

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Great. And also, for the oil and gas business. So I just want to hear, what's your outlook for that market? Because we know there are a lot of companies, including private equity money, are chasing this market. How do you think the market -- the valuation there? And what are the valuation metric you in general, use to evaluate deals?

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Brian L. Cantrell, Alliance Resource Partners, L.P. - Senior VP & CFO of Alliance Resource Management GP, LLC [51]

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Well, it obviously is a highly competitive market. It's a large market. I think I've seen estimates of $500 billion type market in total, highly fragmented. In Atlanta, as we've done in the past, we view those types of specific acquisition metrics as being proprietary. We're always going to be looking to deploy capital in a way that's attractive, accretive and gives us attractive returns, and the circumstances in terms of what metrics you use vary. If you're buying acreage that's not yet producing a little bit ahead of the drill bit, that's at a different metric than if you're buying acreage that has more cash flow associated with it. So it depends on what the opportunities are that present themselves and the mix of what we do as we look to grow the business.

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Lin Shen, Hite Hedge Asset Management LLC - Analyst [52]

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Great. And so then are you focused on production -- producing area? Or you're focused on the like undeveloped area?

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Brian L. Cantrell, Alliance Resource Partners, L.P. - Senior VP & CFO of Alliance Resource Management GP, LLC [53]

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Historically, we have been focusing more on ahead of the bit. As Joe has mentioned, once we assemble our own team to determine how we best grow this business going forward, that will -- that mix may change.

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Operator [54]

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Our next question comes from [Dan Finney], a private investor.

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Unidentified Participant, [55]

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Okay. So I have been reading different articles about the importance of coal as a stable load energy source diversifier and also about improvements in clean coal burning technology, i.e. scrubbers and whatever other technology contributes to that. And yet, I see very little coverage of that. And I'm wondering if you've considered at all partnering with some utilities or promoting the technology -- the clean burning technology, the people that make that equipment, I don't know if it's GE or who, but somehow sponsoring or partnering with utilities and making the argument that coal is not only a -- can be a clean energy source, but that it's an important energy diversifier as we've seen in Europe with -- and even here in the United States where we've had bottlenecks or potential shortages of natural gas due to pipeline issues or distribution and that kind of thing. So I'm just kind of scratching my head as to why there's nobody making the case for coal being a much more clean and much more vital energy source for the -- in the United States and no projects to possibly compete with new gas plants.

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Joseph W. Craft, Alliance Resource Partners, L.P. - President, CEO & Chairman of Alliance Holdings GP LP [56]

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Thank you for that question, and it's an astute observation. We do have efforts ongoing to make that case. Most of those have been targeted to the actual consuming regions where coal makes up greater than 50% of a particular state's energy source. I think you will see more and more conversation about that as each of these states start to implement their compliance with the new regulation out of the Obama -- excuse me, out of the Trump administration. After Trump did repeal Obama's Clean Power Plan. So that decision as far as what the energy mix for each state will be now made by the states, and there will be a lot of discussion about that over the next 2 to 3 years. We and our National Mining Association just this week issued a press release with a study that goes into great detail on the technology that's available to allow for coal-fired generation to not only continue but for opportunities for future investments to allow for reduced emissions. We are at a disadvantage because the mainstream media just does not want to [pick us] anything positive at all on coal. And so we are a disadvantage. So we have been trying with a strong effort that both NMA and our ACE, which is Americans for clean coal technology. We've tried to make that case, and we're going to continue to make that case. And we've done everything, except a national advertising campaign. We tried that earlier at some point in time, about 10 years ago, and it really did not register much gain. And so with the resources we have, we're trying to target our communication efforts to those regions of the country that still depend heavily on coal and also for their industrial base, their manufacturing base, the need for that low-cost energy. We do believe strongly that coal can be and is the most economical energy providing -- fuel for energy consumption, and we also believe that it can, in fact, be consumed with the efficient methods today. It -- and it allows for lower emissions, and we're out there trying to do what we can do. But it's sometimes difficult to get the mainstream media to print anything positive. And we'll continue efforts in that regard.

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Unidentified Participant, [57]

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Yes, that has been very clear as far as the bias in the media from -- because I'm reading as much as I can on this. And not only has there been a lack of reporting, but there's some contradictory reporting, and I really appreciate you taking the time to articulate that. But one other question is related to Europe and Germany. My understanding was, last year, they ran dangerously low on natural gas reserves, and they had a cold winter, and luckily, it was short. But now I'm reading that Germany had made a statement about trying to be coal-free by 2038 or something like that. And yet, they have, to my understanding, a pretty precarious energy mix as far as being able to support any kind of cold, long winter. I just wonder if you have any comments on that.

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Joseph W. Craft, Alliance Resource Partners, L.P. - President, CEO & Chairman of Alliance Holdings GP LP [58]

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Right, yes. So they -- several countries in Europe have made claims that they're going to cut back, and then they realized that the cost to be competitive is not -- does not allow them to sustain the commitments they make. So I think part of Germany's push here is one, a, to push it further out to when there's not anything immediate that impacts their ability to compete in the global economy as they are a producer of products and goods. Another element of that announcement is the big huge payout to people, and I don't really know the details, but they're talking about billions of euros that will go into the pockets of some people. So that may have influenced some of that policy, don't know for sure. But I think, there's no silver bullet to replace coal with an energy source that's going to be as reliable, as low cost, as dependable that gives you the resiliency to the grid than coal. And so for those countries that elect to make these political decisions, it's precarious for them to do so because they're just increasing the cost or increasing their dependence on other sources. And obviously, that's their choice to make. But we continue to believe strongly that we've got very stable coal demand within our market areas through 2035, 2040. But it's hard to predict. And then the main issue for the American markets are the age of our existing plants, so I think the bigger issue is that 2035, 2040 time frame, will there be that awareness that you're talking about that will permit new coal-fired generation to be constructed. And so there's efforts [in] countries that are actually building plants today. We're seeing tremendous growth worldwide in coal plants, and that technology is available to where we should be thinking about that and making investments in coal as well as in any other generating technologies that are out there.

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Operator [59]

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Our next question comes from Matthew Fields with Bank of America Merrill Lynch.

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Matthew Wyatt Fields, BofA Merrill Lynch, Research Division - Director [60]

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Two questions for me. One, just thanks for the breakout of your exports. Within Europe as one of your largest export destinations, is Germany a large portion of that European export total?

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Joseph W. Craft, Alliance Resource Partners, L.P. - President, CEO & Chairman of Alliance Holdings GP LP [61]

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Yes.

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Matthew Wyatt Fields, BofA Merrill Lynch, Research Division - Director [62]

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Okay. And then more broadly speaking, I understand that you're frustrated that the stock may not be trading as well as you want it to, and you may be getting slightly more aggressive on maybe purchasing more oil and gas interests and whatnot. Is there a kind of upper bound to which you will sort of not let leverage go above? Is there still a sort of target leverage range in which you don't want to sort of let the balance sheet get out of hand at some point?

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Brian L. Cantrell, Alliance Resource Partners, L.P. - Senior VP & CFO of Alliance Resource Management GP, LLC [63]

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Yes. As we've said in the past, depending on the opportunity, we could expand our leverage. We'd be more comfortable in doing that if we had a clear path to bringing it down to something more on the 1.25x, maybe 1.5x range long term. But as I said in my comments, we do view our conservative balance sheet as a strategic advantage, and we don't intend to step out to put our overall franchise at risk with leverage.

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Joseph W. Craft, Alliance Resource Partners, L.P. - President, CEO & Chairman of Alliance Holdings GP LP [64]

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And I would just add that absent some M&A transaction that we find attractive in normal course, I mean, we're -- I would not anticipate us to go greater than 1x. So if you look at our plan for 2019, assuming we come in at what our expectations are, we'll be back down to 0.8 by the end of the year. So we'll stay in that ZIP Code 1x for unless there's something that we find attractive that needs to be a strategic step that might be some opportunity that we can execute on that would allow us, as Brian just said, to still run back towards the 1x coverage ratio.

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Matthew Wyatt Fields, BofA Merrill Lynch, Research Division - Director [65]

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And just to clarify, that 1x is gross, not net of cash?

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Brian L. Cantrell, Alliance Resource Partners, L.P. - Senior VP & CFO of Alliance Resource Management GP, LLC [66]

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It's total debt.

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Joseph W. Craft, Alliance Resource Partners, L.P. - President, CEO & Chairman of Alliance Holdings GP LP [67]

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Total debt, yes.

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Operator [68]

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

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Brian L. Cantrell, Alliance Resource Partners, L.P. - Senior VP & CFO of Alliance Resource Management GP, LLC [69]

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Thank you, Shawn. We appreciate everyone's time this morning as well as your continued support and interest in Alliance. Our next quarterly earnings release and call will be scheduled for late April, and we look forward to discussing our first quarter 2019 results with you at that time. This concludes our call. Thanks to everyone for your participation.

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Operator [70]

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Thank you for attending, and you may now disconnect.