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Edited Transcript of FELP earnings conference call or presentation 27-Feb-19 7:00pm GMT

Q4 2018 Foresight Energy LP Earnings Call

Saint Louis, Mo Mar 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Foresight Energy LP earnings conference call or presentation Wednesday, February 27, 2019 at 7:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jeremy J. Harrison

Foresight Energy LP - Principal Financial Officer & CAO of Foresight Energy GP LLC

* Robert D. Moore

Foresight Energy LP - Chairman, CEO & President of Foresight Energy GP LLC

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Conference Call Participants

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* Jeff Menapace

* Matthew Wyatt Fields

BofA Merrill Lynch, Research Division - Director

* Mayur Kenia

* Michal Marczak

* Nicholas Jarmoszuk

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

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Fourth Quarter and Full Year 2018 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now turn the call over to your host, Mr. Jeremy Harrison. Please go ahead, sir.

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Jeremy J. Harrison, Foresight Energy LP - Principal Financial Officer & CAO of Foresight Energy GP LLC [2]

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Thank you, Towanda, and welcome, everyone, to Foresight Energy's Earnings Call for the Fourth Quarter and Year Ended 2018. With me today is Rob Moore, our President and Chief Executive Officer.

Today, we will discuss Foresight Energy's operating and financial results for the fourth quarter and year ended 2018, and update you on the current operations at our coal mines. Following our prepared remarks, we will open up the call to your questions.

Please note that this call contains forward looking statements that are based upon our current expectations and beliefs concerning future developments and their potential effect on us. And there can be no assurance that the future developments affecting us will be those that we anticipate. Our business and our financial results involve risks and uncertainties that could cause actual results to differ materially from our current expectations. For additional information regarding such risks, please see our annual and quarterly reports filed with the SEC and posted on our website.

During the call today, we will also discuss non-GAAP financial measures, including guidance with respect to adjusted EBITDA. Please refer to our earnings release for reconciliations to the most comparable generally accepted accounting principles for historical periods.

Also this call includes only information that is available to us at this time. To the extent you are listening to this call at a later date, please note that the information may be outdated or incomplete. We undertake no obligation to publicly update or revise any forward looking statements after the date they are made, whether as a result of new information, future events or otherwise, except as required by law.

I would now turn the call over to Rob Moore. Rob?

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Robert D. Moore, Foresight Energy LP - Chairman, CEO & President of Foresight Energy GP LLC [3]

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Thank you, Jeremy. Good afternoon, everyone, and thank you for being with us today. This morning, Foresight Energy announced its very good fourth quarter and full year financial results for 2018.

During the quarter, Foresight sold over 6.1 million tons of thermal coal and generated total revenue of approximately $299 million, which resulted in adjusted EBITDA of nearly $87 million.

These results reflect continued improvement in our year-over-year and sequential quarter sales volumes, sales realization per ton sold and sales revenue.

Our fourth quarter results were the capstone of another successful year for Foresight in which we capitalized on strong export markets and improved domestic spot opportunities to achieve record sales volumes of 23.4 million tons, total revenue of $1.1 billion and adjusted EBITDA of over $313 million.

During the fourth quarter, we safely and efficiently produced over 6 million tons compared to approximately 5 million tons in the fourth quarter of 2017.

Our coal production for calendar year 2018 totaled 23.3 million tons versus 21.2 million tons for the prior year for an increase of nearly 10%.

These levels of production underscore the efficiency and productivity of our underground mines, which places our mines among the most efficient and productive underground mines in the country as measured on the clean ton per underground manhour work basis.

For 2018, our 2 longwall mining complexes Williamson and Sugar Camp ranked as the second and third most productive mines in the United States, generating 17.4 tons and 16.3 tons per underground manhour worked, respectively.

On a combined basis, the Foresight mines produced over 17 tons per underground manhour worked during the fourth quarter, and 15.3 tons per underground manhour worked for the full year.

This compares to the national average for underground mines of 4.7 tons for manhour worked during the fourth quarter, and 4.6 for underground manhour worked for the full year. These high levels of productivity, which drive our industry-leading cost structure, allow us to consistently maintain cash cost in the low 20s, as evidenced by our year-over-year results.

Our record sales volumes included exports of 2.7 million tons in the fourth quarter and approximately 9 million tons into the export market for the full year 2018, representing 43% and 38% of our sales volumes, respectively.

Although API2 levels have declined throughout the first quarter of 2019, we have successfully contracted 4.8 million tons into the export market for delivery in 2019, at prices that will yield us solid margins. Furthermore, the export markets remain a viable economic option for us as physical demand for our high Btu product remains strong, and we've had a recent success placing more of our volumes into India, the Middle East and elsewhere around the globe.

Relative to the domestic market, despite an extremely mild domestic winter, the realizations for our products have been resilient, with a number of coal-fired generating plants at critically low inventory levels.

Updating you on the efforts at our Hillsboro complex. As mentioned on our last quarterly call, the settlement of litigation within NRP provides us with operational flexibility, and we've been continuously evaluating the status, the future mining operations at Hillsboro's Deer Run Mine.

In January of 2019, we resumed production with 1 continuous miner unit. This continuous miner unit is developing longwall gate entry to allow for the potential resumption of longwall mining.

We're currently in the process of hiring personnel, procuring capital equipment and obtaining the necessary approvals from MSHA, to give us the ability to recommence longwall operations. And we believe that we can maintain our development with 1 continuous miner unit at that operation.

With respect to our Hillsboro insurance recoveries, we continue to pursue all available remedies under our insurance policies related to the combustion event.

Due to the ongoing litigations with the insurers, that would be the extent of any public comment related to Hillsboro insurance matters at this time.

At this point, I'll turn the call over to Jeremy Harrison for further discussion of our financial results.

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Jeremy J. Harrison, Foresight Energy LP - Principal Financial Officer & CAO of Foresight Energy GP LLC [4]

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Thank you. During 2018, we recognized coal sales revenue of nearly $1.1 billion on sales volumes of 23.4 million tons sold, which generated adjusted EBITDA of $313.6 million.

Our 2018 adjusted EBITDA includes $44.1 million of insurance proceeds related to the Hillsboro combustion event and a $25 million charge related to the settlement with NRP related to the Hillsboro Macoupin litigation matters. These results compared to $944 million of coal sales revenue on 21.4 million tons sold and adjusted EBITDA of $293.8 million during the prior year. The increase in coal sales revenue was driven by a nearly 10% or 2 million ton increase in sales volume combined with the $2.71 per ton or 6% increase in our coal sales realization. The increase in sales volumes and sales realizations per ton were the result of an increased export sales, which experienced more favorable API2 pricing during 2018 as well as more favorable domestic spot market pricing.

As Rob mentioned, our operating mines continued to be among the most productive underground mines in the country, producing 6.1 million tons during the fourth quarter and 23.3 million tons during the year. These productivity levels translates to cash costs of $22.30 per ton during the fourth quarter and $22.85 for the full year.

Our transportation cost increased $66.5 million in 2018 when compared to 2017. This increase was driven by increased sales volumes and a higher percentage of our sales going to the export market, which have higher associated transportation expense.

From a cash flow perspective, during 2018, we generated operating cash flows of $133 million and ended the quarter with a total liquidity of approximately $121 million.

Capital expenditures totaled $84.1 million. We paid down $69.1 million on our long-term debt and capital lease obligations, and we paid $18.1 million in distributions to our common unitholders.

I'll now turn the call back over to Rob for additional comments before we take your questions.

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Robert D. Moore, Foresight Energy LP - Chairman, CEO & President of Foresight Energy GP LLC [5]

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On the strength of our mining operations during 2018, Foresight generated $39.2 million of excess cash flow and was less than 4x levered as defined in our March 2017 credit and guaranty agreement.

Pursuant to the terms of the credit agreement, we will be sweeping to our first-lien lender, 50% of the excess cash flow or approximately $19.6 million. The retained portion of excess cash flow of $19.6 million will be available for distribution to our common unitholders in 2019. The partnership intends to utilize its excess cash flow for debt repayment and distribution to our common unitholders. To that end, based on the financial results for the fourth quarter, the results of our excess cash flow calculation for 2018 and our outlook on liquidity and operations for 2019 and beyond, the Board of Directors of our general partner has elected to declare a quarterly distribution from the retained portion of excess cash flow of $0.06 per unit payable exclusively to the holders of the FELP common units. This represents a 6% increase per unit over our prior quarterly distribution. The distribution will be paid on March 29 to common unitholders of record as of March 19.

As we have mentioned on previous calls, future distributions will be subject to board approval and will be based on a number of factors including our leverage levels, market conditions, excess cash flow remaining after required excess cash flow sweeps and our projected future financial and operating performance.

In concluding our prepared remarks, we are initiating guidance for sales volumes, adjusted EBITDA and capital expenditures for 2019. Based on our current contracted position and outlook for the domestic and export coal markets, we expect 2019 sales volumes to total between 22 million and 23 million tons with approximately 7 million tons being sold to the export market. At these volumes, we expect to generate adjusted EBITDA ranging between $300 million to $340 million. Based on our current operating plans and recent capital spending, we expect 2019 annual capital expenditures to total between $80 million and $95 million, which includes capital expenditures related to Hillsboro.

With that, we will open up the lines and take your questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question will come from the line of Matthew Fields with Bank of America.

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Matthew Wyatt Fields, BofA Merrill Lynch, Research Division - Director [2]

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Just wanted to talk first off about your export versus domestic tonnage. So if you delivered 9 million tons into the export market this year, that means you sold 14.5 million domestically, which is down about 8% from 2017. Can you just talk about the domestic market and your sort of contracted positions with utilities? And obviously, API2 was attractive in 2018, but does the dynamic go forward where you're going to continue to sort of offload tons because you're failing to find a home domestically? Or is it purely kind of opportunistic?

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Robert D. Moore, Foresight Energy LP - Chairman, CEO & President of Foresight Energy GP LLC [3]

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So we're looking at it, Matt, purely as opportunistic. We have right now for 2019 about 68% of our book on contract. And if you include options that we believe utilities will exercise and those would be domestic utilities here, we have about 73% of our volumes under contract. We're able to find homes for our product, domestically and in the export market, and we are going to toggle between the markets that provide us with the best overall realizations. Mindful of the benefit of having long-term relationships with our domestic customers. So there's definitely a balance, and we'll be opportunistic in that respect.

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Matthew Wyatt Fields, BofA Merrill Lynch, Research Division - Director [4]

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If I take the midpoint of the 22 million to 23 million guidance and subtract it with 7 million export tons that's 15.5 million domestically, which is actually up 1 million tons, is that a new client? Is that existing, sort of, clients reupping? Or is that just kind of going into the year kind of hopeful sense of whether you might play out? Can you give us a little color on that increase in domestic tons, which would be the first one in a while?

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Robert D. Moore, Foresight Energy LP - Chairman, CEO & President of Foresight Energy GP LLC [5]

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It is a combination of existing markets that we serve and some new markets. What we're seeing is as utility customers are unable to find coal that they have historically been able to source, they are looking outside of the box and coming up with, what I'll refer to as, blends of coal, that allow them to meet the specifications of their specific boilers, and we're trying to take advantage of that where we can. Given our low-cost platform, we're able to blend our products with other coals that allow that other product maybe to be stretched a little bit more, and it's allowing us to hit some new markets. So we're -- we like our position as it relates to the cost at Foresight and the flexibility we have transportation-wise to hit new markets, and we're going to continue to target those opportunities.

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Operator [6]

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Next, we'll go to the line of Nick Jarmoszuk with stifle.

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Nicholas Jarmoszuk, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [7]

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Question for you on the export book. Have you hedged any of the tons?

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Robert D. Moore, Foresight Energy LP - Chairman, CEO & President of Foresight Energy GP LLC [8]

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Yes. The total amount that I indicated, the 4.8 million, that's on the book right now, it's hedged.

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Nicholas Jarmoszuk, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [9]

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Okay, can you give us that price?

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Robert D. Moore, Foresight Energy LP - Chairman, CEO & President of Foresight Energy GP LLC [10]

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No, I can't.

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Nicholas Jarmoszuk, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [11]

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Is it higher than currents spot levels?

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Robert D. Moore, Foresight Energy LP - Chairman, CEO & President of Foresight Energy GP LLC [12]

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It is.

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Nicholas Jarmoszuk, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [13]

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Okay. So should we think about relative to where that hedge price is, we're going to have the sulfur discount is lower, freight is lower. Could you see some very attractive margins in the first quarter as a result of where the spot market has gone on API2?

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Robert D. Moore, Foresight Energy LP - Chairman, CEO & President of Foresight Energy GP LLC [14]

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We -- in terms of the Q1, Nick, we had the majority of our volumes hedged in Q1 and even going into Q2. So we didn't have a lot of opportunity to necessarily plan the spot market. The other thing that's limiting export spot market opportunities are the river conditions and the port conditions, which is slow traffic in and out of the port. So not a lot of, what I'll call, spot market -- spot export market opportunities. But I would tell you that I think that there could be some opportunities as things start to clear up at the port given the Mississippi River conditions right now, and the inability of certain suppliers to actually get to low point. And I think those opportunities could arise in the March time frame and April time frame.

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Nicholas Jarmoszuk, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [15]

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And a question for you on the outlook for Hillsboro. How do you guys weigh the risk of that additional tonnage repricing in the ILB market versus the opportunity for the additional tonnage?

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Robert D. Moore, Foresight Energy LP - Chairman, CEO & President of Foresight Energy GP LLC [16]

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So when I think about Hillsboro and the effect that it could have on ILB, I think people may not understand just where that product can report. I think that there is an ability to have that product being blended in with our existing production such that we're not really repricing any new volumes into ILB. We have the ability to take that product to the East Coast in significant volumes, and we also have the ability to move that coal into the export market. So as I think about where I'm going to place Hillsboro, I think we can move quite a bit of that volume away from the ILB market such that it doesn't have a direct effect, and obviously, it's going to -- some of that is going to come in. But when you also then take into consideration operations that are closing or have closed and the lack of supply that, I think, you're going to see, even though you've got a couple of our competitors coming on with some additional production, I think when you look at the overall supply and balance -- demand balance, there's a place for that product. And I do not believe it's going to result in deterioration of ILB prices.

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Operator [17]

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Next we'll go to the line of Jeff Menapace with FTN Financial.

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Jeff Menapace, [18]

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With respect to Hillsboro, so obviously -- or it seems like the settlement was the impetus for -- within our peers, impetus for getting that restarted again. What's the status of the combustion event? Is that no longer -- is that resolved, no longer an issue?

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Robert D. Moore, Foresight Energy LP - Chairman, CEO & President of Foresight Energy GP LLC [19]

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It is no longer an issue. We sealed up the entire longwall district in which the event occurred. We are now in a new longwall district. We have resumed the development of a panel that existed in that new district. And as I indicated, we're working with the regulators to gain a ventilation plan that allows us to ventilate the longwall.

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Jeff Menapace, [20]

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Okay, terrific. And then with respect to EBITDA guidance, if I want to normalize the reported EBITDA, the $313.6 million for the NRP settlement and insurance recoveries, I should subtract the 20 -- I want to make sure my numbers are right, $25 million for NRP? And I think there $43 million was the addition to operating income from insurance recovery? So my normalized number is $295.6 million. Is that a good number, normalized number?

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Robert D. Moore, Foresight Energy LP - Chairman, CEO & President of Foresight Energy GP LLC [21]

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Yes. You are definitely in the ballpark there. That's right.

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Operator [22]

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(Operator Instructions) Next we'll go to the line of Mayur Kenia with IWD Capital Management.

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Mayur Kenia, [23]

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One question I had was, does the adjusted EBITDA guidance include any insurance recoveries?

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Robert D. Moore, Foresight Energy LP - Chairman, CEO & President of Foresight Energy GP LLC [24]

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The adjusted 2019 does not.

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Mayur Kenia, [25]

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Yes. Okay. And in terms of the CapEx guidance, does that include any longwall equipment at Hillsboro?

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Robert D. Moore, Foresight Energy LP - Chairman, CEO & President of Foresight Energy GP LLC [26]

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Yes, it does include some of the longwall equipment. It does not include the longwall shields.

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Mayur Kenia, [27]

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Okay, all right. And in terms of -- could you provide a range for excess cash flow for 2019?

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Robert D. Moore, Foresight Energy LP - Chairman, CEO & President of Foresight Energy GP LLC [28]

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In terms of 2019, if you just work off of our midpoints, what we've outlined as the CapEx and what our cash interest is, you're going to see excess cash flow of around $75 million to $80 million for the year.

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Mayur Kenia, [29]

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Okay, great. And then thank you for the color around Hillsboro. Could I get the impact on cost per ton from the Hillsboro in the quarter?

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Robert D. Moore, Foresight Energy LP - Chairman, CEO & President of Foresight Energy GP LLC [30]

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For the fourth quarter?

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Mayur Kenia, [31]

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Yes.

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Robert D. Moore, Foresight Energy LP - Chairman, CEO & President of Foresight Energy GP LLC [32]

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It's been about $0.50 a ton all year.

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Mayur Kenia, [33]

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Okay, all right. And then I guess the last question, do you know what the actual specific secured leverage ratio was at the end of Q4?

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Jeremy J. Harrison, Foresight Energy LP - Principal Financial Officer & CAO of Foresight Energy GP LLC [34]

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It's 3.90x.

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Operator [35]

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And next we'll go to the line of Michal Marczak with DoubleLine Capital.

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Michal Marczak, [36]

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The previous gentlemen's questions are most of the ones I had. Just a quick follow-up. The excess cash flow that you mentioned, Rob, $75 million to $85 million, is that the total number or is that kind of the 50% of the kind of potential cash flow sweep that would go down to paying down the term loan?

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Robert D. Moore, Foresight Energy LP - Chairman, CEO & President of Foresight Energy GP LLC [37]

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Yes. So that's the total number based on the guidance that we've delivered.

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Operator [38]

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And at this time, gentlemen, there are no further questions in the queue.

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Robert D. Moore, Foresight Energy LP - Chairman, CEO & President of Foresight Energy GP LLC [39]

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Very good. We appreciate everyone's time today and look forward to talking to you next quarter.

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Operator [40]

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Ladies and gentlemen, that does conclude our conference for today. Thanks for your participation. And for using AT&T Executive TeleConference. You may now disconnect.