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Alliance Resource Partners LP (NASDAQ:ARLP)

Q3 2010 Earnings Call

October 27, 2010 11:00 am ET

Executives

Brian Cantrell - SVP & CFO

Joe Craft - President & CEO

Analysts

Dave Martin - Deutsche Bank

Jim Rollyson - Raymond James

Joel Havard - Hilliard Lyons

Ronald Londe - Wells Fargo

John Tysseland - Citi

William Adams - FAMCO

Operator

Good day, ladies and gentlemen, and welcome to Alliance Resource Partners L.P., Alliance Holdings GP earnings conference call. My name is Carma and I’ll be your coordinator for today. At this time, all participants are in a listen-only mode. (Operator Instructions) Later, we will conduct a questions-and-answer session.

I would like to turn the call over to your host for today, Mr. Brian Cantrell, Senior Vice President and CFO. Please proceed, Mr. Cantrell.

Brian Cantrell

Thank you, Carma, and welcome, everyone. We appreciate your interest in Alliance Resource Partners, which this morning we refer to as ARLP and Alliance Holdings GP, which we will refer to as AHGP.

We released our 2010 third quarter earnings earlier this morning, and will now discuss these results, as well as our outlook for the remainder of 2010. Following our prepared remarks, we will open the call to your questions

As required, we’ll start with a few reminders. First, since AHGP’s only assets are its ownership interest in ARLP, our comments today will be directed to ARLP’s results and outlook, unless otherwise noted. In addition, please be aware that some of our remarks may include statements which are not historical in nature and may concern future expectations, plans and objectives of the partnerships regarding their future operations.

Such comments constitute forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, and are based on the beliefs of the partnerships and those of their respective general partners and management, as well as assumptions made by and information currently available to them.

Although the Alliance partnerships, their general partners and management believe these forward-looking statements to be reasonable at the time made, no assurances can be given that such statements will prove to be correct. Forward-looking statements are subject to a variety of risks, uncertainties and assumptions, which are contained in our filings from time to time with the Securities and Exchange Commission, and are also reflected in today’s press releases from the partnerships.

If one or more of these risks or uncertainties materialize or if our underlying assumptions prove incorrect, actual results of the partnerships may vary materially from those we anticipated, estimated, projected or expected. In providing our remarks this morning, neither ARLP nor AHGP has any obligations to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

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

Now that we’re through with the preliminaries, I’ll turn the call over to Joe Craft, our President and Chief Executive Officer. Joe?

Joe Craft

Thank you, Brian. Good morning, everyone, and thank you for joining us. We announced earlier today ARLP again delivered exceptional quarterly results.

We set new records for sales volumes, average coal sales price and revenues and saw EBITDA climb by 64% and net income more than double from a year ago. As we’ll discuss in a moment, this performance keeps ARLP firmly on track to deliver our 10th consecutive year of record results.

Our year-to-date performance, strong contractual position and positive long term market fundamentals also gave our Directors the confidence to again increase distributions this quarter to ARLP unitholders by 2.5% over the prior quarter to $0.83 per unit; and to AHGP unitholders by 3.6% to $0.50 per unit. These cash distribution increases represent a 9.2% year-over-year increase for ARLP unitholders and a 13.6% year-over-year increase for AHGP unitholders.

ARLP continued to add new sales commitments during the 2010 quarter. Specifically, negotiations are substantially complete with three separate customers to deliver approximately 4.4 million tons of coal beginning next year and continuing through 2015. With these agreements, ARLP has secured commitments for approximately 90% of our anticipated 2011 production.

Looking beyond 2011, we see a number of factors pointing toward favorable supply/demand dynamics in the domestic steam markets. Hopefully, we will see the U.S. economy beginning to improve over the next two years and beyond.

Domestic electricity consumption should trend higher as a result, leading to increased demand for thermal coal. We believe export metallurgical coal demand will remain high, and we are seeing positive signs for increasing export thermal coal opportunities as well.

We expect producers may have difficulty responding to this increased demand due to challenging regulatory burdens likely to persist under the Obama administration. This will continue to impact Central Appalachian production more than the other producing basins. In summary, we believe the long-term price outlook for coal in our markets remain positive.

ARLP also continued to make progress on its growth initiatives during the 2010 quarter. Performance at River View remains above original expectations, and development of our new Tunnel Ridge mine is moving ahead toward its schedule start-up of longwall production in late 2011.

With River View now expected to annually produce more than 7 million tons, and anticipated Tunnel Ridge longwall production of approximately 5.7 million tons per year, ARLP is on track to meet our goal of growing production by at least 10% annually for the next couple of years.

We are also pleased to report that ARLP has again been recognized for consistently delivering exceptional returns to our unitholders. In an updated recently-released ranking by Standard & Poor’s measuring total returns to shareholders over the last 10 years, ARLP now ranks 29th out of approximately 10,000 companies having delivered compounded annual returns of 31.1% to our unitholders during this period.

Last year, we thought being 39th was outstanding. Considering our current year results and outlook for significant volume growth, our strong contract portfolio and positive long term market fundamentals, we are hopeful we can keep moving up in S&P’s rankings.

At this time, I’ll turn the call back to Brian for a more detailed look at our financial results, after which we will be happy to address any questions you may have.

Brian Cantrell

Thanks, Joe. As has been the case in each of the previous quarters this year, financial performance in the third quarter was once again led by record coal sales volumes and price realizations.

Coal sales volumes climbed 24.2% over tons sold in the 2009 quarter to 7.7 million tons primarily on higher sales volumes at River View, as well as increased sales from Mettiki into the export market. ARLP continued to benefit in the 2010 quarters from its strong contractual provision, as average coal sales prices improved in each of our operating regions to a record $51.68 per ton, a year-over-year increase of $6.10 per ton.

Driven by higher sales volumes and prices, ARLP posted record revenues of 410.4 million during the 2010 quarter, a jump of 37% compared to the 2009 quarter, and 1.2 billion for the first nine months of 2010, an increase of 27.7% over the comparable 2009 period.

On the strength of these top line results in the 2010 quarter, ARLP also delivered significant growth in EBITDA, which increased 64% compared to the 2009 quarter, and net income, which more than doubled to 73.2 million. Strong coal sales year-to-date also contributed to reduced coal inventories, as our inventories have fallen by more than 50% since the beginning of the year.

As Joe mentioned earlier, our performance in the 2010 quarter kept ARLP on track to deliver another record year. Comparing results for the first nine months of 2010 to the same period in 2009, we have seen significant increases across the board, and posted records for all major performance measures. Our tons produced were up 10.7%; tons sold increased by 19.6%; revenues were up, as mentioned earlier, 27.7%; EBITDA increased 42.6%; and net income rose by 55.3%.

As previously discussed, quarterly unitholder distributions have increased at ARLP and at AHGP by 9.2% and 13.6% since the 2009 quarter.

While ARLP’s 2010 coal production has consistently exceeded prior year levels, mines in each of our operating regions did experience production challenges during the 2010 quarter. In the Illinois Basin production at Pattiki remains restricted. We are currently operating six unit shifts at Pattiki, and hope to add two more unit shifts in the fourth quarter of this year, bringing Pattiki back to full capacity by the end of 2010.

At our Gibson mine, a roof fall on the main belt line disrupted operation for approximately two weeks, resulting in lost production and increased expenses related to repairs. In Northern Appalachia, sandstone intrusions impacted productivity at our Mountain View mine during the 2010 quarter compared to the sequential quarter, and in Central Appalachia, production continued to be hampered by ever more costly and burdensome regulatory scrutiny.

The impact of these issues contributed to higher segment adjusted EBITDA expense per ton both year-over-year and sequentially in all of our operating regions. As we expected, increased production volumes, higher coal sales, expenses related to producing metallurgical quality coal, as well as purchases of outside coal for sale into the export market also contributed to higher operating expenses in the 2010 quarter.

Our capital expenditures during the 2010 quarter totaled approximately 58.9 million, and we continue to expect total CapEx for 2010 in a range of 285 million to 325 million, including maintenance capital.

Our balance sheet has remained strong through the year, even as we continue to build for the future and deliver strong distribution growth. This strength was the evident in the 2010 quarter, as ARLP’s liquidity improved sequentially to approximately $151 million.

Based on our year-to-date performance and expectations for the balance of 2010, ARLP now anticipates coal production in a range of approximately 29 million to 29.6 million tons, and coal sales volumes in a range of approximately 30.2 million to 31 million tons, essentially all of which has been priced and committed.

ARLP continues to expect 2010 revenues, excluding transportation revenues, near the upper end of its previously provided range of approximately $1.5 billion to $1.6 billion. In addition, we are maintaining our 2010 estimated ranges for EBITDA and net income of approximately 475 million to 550 million, and 305 to $335 million, respectively.

This concludes our prepared comments. We appreciate your continued support and interest in both ARLP and AHGP, and now with Carma’s assistance, we will open the call to your questions.

Question-and-Answer Session

Operator

(Operator Instructions) And the first question comes from the line of Dave Martin from Deutsche Bank. Please proceed.

Dave Martin - Deutsche Bank

Wanted to start with sales commitments. I know at the beginning of the call you noted you’ve booked some business with three customers over the next four years. Previously in your press releases you included some details on committed sales out through 2013. Can you give us updated figures or should we just assume that those are largely unchanged?

Brian Cantrell

No. We can give you our current status. As we mentioned just a few minutes ago, Dave, we are essentially sold out for 2010.

Dave Martin - Deutsche Bank

Sure.

Brian Cantrell

Where we currently have commitments for both volumes and price of about 31.6 million tons next year. We have commitments in 2012 of about 24.6 million tons. Roughly 2 million of those tons remain open to pricing, and in 2013 we’re looking at roughly 23.6 million tons committed with about 6.2 of those open to pricing.

Joe Craft

And the 4.4 that were mentioned are not included in those numbers because they haven’t been actually inked.

Brian Cantrell

But they have not yet been executed, but we’ve concluded negotiations and...

Joe Craft

Those would be added to ones Brian just mentioned.

Dave Martin - Deutsche Bank

Okay. And then secondly, I just was hoping to get a few more details on your export business. What were your exports in the third quarter? What are you expecting in the fourth quarter? What’s the mix between met and thermal products? And then also on the export business, I’m curious. There was a comment in your press release, which I interpreted to mean that your export sales contributed to lower prices quarter-over-quarter. I wanted to understand that bit more? And then lastly, I’m just curious as to whether you are seeing any impacts from port issues and/or other logistics issues on your ability to export out of the U.S.?

Joe Craft

I think first off, our exports at this moment in time is all tied to our metallurgical contract that we mentioned previously, which is a million tons per year with April 1 to March 31. And that shipment is pro rata, and we’ve been shipping pretty much consistent with the contract.

Dave Martin - Deutsche Bank

Okay.

Joe Craft

So the next question relative to the cost or market. I’m not sure what you’re reading. Obviously our price was up in the third quarter, and that was driven in the Northern Appalachia. Our met coal is sold in Northern Appalachia. If you look at our press release, pricing is up. Relative to sequential quarters, there’s some timing issues there back to the mix between steam and met.

Brian Cantrell

As well as development production out of Tunnel Ridge during the quarter too.

Joe Craft

Right. But our sales price is consistent with what we’ve shared with you before on metallurgical and our costs are higher because of that product.

Dave Martin - Deutsche Bank

Okay.

Joe Craft

The sales price is still slightly more than $100. And you had one other question on the port capacity?

Dave Martin - Deutsche Bank

Yes, just logistics issues in the U.S.?

Joe Craft

We have not seen any constraint for our product going out of Baltimore.

Dave Martin - Deutsche Bank

Okay.

Joe Craft

And as we look to the future and see the export opportunities, most of those would be out of the Gulf for us as we look to the future of participating in the export steam or thermal markets.

Dave Martin - Deutsche Bank

Okay.

Joe Craft

And we don’t anticipate constraints there either. Next question?

Operator

And the next question comes from the line of Jim Rollyson from Raymond James. Please proceed.

Jim Rollyson - Raymond James

Good. Joe, I guess just circling back to the contract position going forward. Can you give a little color on kind of what’s in there from a pricing standpoint maybe relative to what you’re looking at averaging in 2010?

Joe Craft

Yes, I think our pricing; we are projecting that our pricing will be higher year-over-year. We’re not quite finished with our budgeting process, but I’d say that right at this moment we’d be looking at something better than this year, but probably no better than 10% above this year on an average sales price basis. So it will be somewhere between our average price for this year and 10% higher.

Brian Cantrell

Consolidated.

Joe Craft

Consolidated.

Jim Rollyson - Raymond James

Yes, that’s helpful just in making sure we’re all on the right page. On the cost side of things, obviously, a number of things hit you, and sounds like particularly in the Northern and Central App this quarter. If you think about this going forward, how many of the issues that drove costs higher this quarter were kind of these sometimes recurring, but one-off issues, like the roof fall and what have you versus ongoing things that will carry going forward? Or maybe an easier way is how do you think costs trend starting in the fourth quarter relative to the third quarter?

Brian Cantrell

I can take that, Jim. In the Illinois Basin, we’re looking at costs that are roughly comparable, maybe down a little bit quarter-over-quarter, Q3 to Q4. You don’t anticipate falls to shutdown one of your most profitable mines for two weeks, but they can happen, but we should be relatively stable in that region hopefully. In Central App, the challenges that we’re facing with MSHA are a daily occurrence.

The district that those operations happen to be in, the level of scrutiny and the strictness of interpretation on rules and regulations is very different and much more onerous compared to our other operations. We don’t expect that to change.

Jim Rollyson - Raymond James

At least you’re not based in Richmond.

Brian Cantrell

And in Northern App, the sandstone intrusions that we saw at Mountain View during the quarter we have worked our way through, so we would hope that costs will improve somewhat in the fourth quarter. But we are also facing a few longwall move days in the fourth quarter that we didn’t experience in the third quarter, and then, of course, just your normal annual cyclical issues around holidays, vacations, et cetera tend to impact costs in the quarter as well.

Jim Rollyson - Raymond James

Got you.

Brian Cantrell

Overall, I mean, sequentially we should be in the ballpark potentially of where we were in the third quarter, plus or minus a little bit either direction.

Jim Rollyson - Raymond James

Understood. And, Joe, as you think about these issues in the east in particular from a regulatory standpoint, and obviously you mentioned we’re probably stuck with this situation for another couple of years. How do you think about that impacting production out there? I mean there’s some guys thinking this is probably not going to because of the lack of permits it doesn’t really start meaningfully impacting the market till you get into the 2012/13 kind of timeframe. Do you think that’s accurate? Do you think its sooner or do you think it’s later? Just kind of what’s your gut feel?

Joe Craft

I think that’s accurate. I think that the dust regulations that came out in draft form probably won’t take effect till ‘12. The permitting issues, based on what we’re tracking is more of a 2012 issue, but the continued ventilation issues and other things that they’re hitting us with today, that could impact some production sooner than later where people just throw up their hands and say forget it. So that could impact some production, but I would say when you’re looking at material tonnage it’d be in the 2012, 2013 timeframe. I think that’s probably pretty accurate.

Operator

And the next question comes from the line of Joel Havard from Hilliard Lyons. Please proceed.

Joel Havard - Hilliard Lyons

Thanks. My question kind of echoes the previous, one of the previous, but is more backward looking actually. The production margin differential from Q2 to Q3. Brian, can you give us a sense of either a dollar or a percent of sales impacted some of these operational challenges exerted? I caught your answer that you’re looking for an operating expense environment for Q4 that look similar. I’m just wondering if you can give us a sense of what part of that may be moderating beyond Q4 as we get some of these, I guess, on the ground issues resolved? And then second question would be, have you drawn forward enough CapEx into that forecast for this year that 2011 starts to go down or is there another bogie to deal with?

Brian Cantrell

Let’s take the second one first. On CapEx, we’ve been consistent through the year in terms of what our expected ranges are going to be and don’t obviously see any changes there. Looking into ‘11, as Joe mentioned, we are still in our planning process, still making sausage, to some degree, but we’ll have continuing construction going on at Tunnel Ridge.

A wild card that we’re trying to get our arms around in the accounting world as you’re building an operation like that you do have capitalized development costs, capitalized interest costs that can be meaningful if the plant’s start date shifts by a month or two months. So we’re working through all of those. Can’t really give you a precise answer on what CapEx is going to look like as a result, but I don’t think that you should anticipate seeing significant downturn in CapEx. It could be up slightly depending on the timing issues that we just talked about.

Joe Craft

And some other projects we’re looking at and we’re always looking for ways to improve our operations. So I think if you strictly look at the cash expenditures, they’re going to be comparable in ‘11 as they were in ‘10.

Brian Cantrell

That’s fair.

Joe Craft

On CapEx.

Brian Cantrell

But the other major issue that we’re trying to get our arms around is on maintenance capital, continuing evolution, if you will, of regulations under MSHA, how the dust standards, by way of example, are going to impact us and just how that plays out could have an impact on maintenance capital going forward. So we’re...

Joel Havard - Hilliard Lyons

Joe, does some of that ‘11, 2011 thought process have to do with maybe exploring these export opportunities as well? Is that something you all have to absorb?

Joe Craft

No.

Joel Havard - Hilliard Lyons

Okay.

Joe Craft

No, it doesn’t. That would not impact our cost in that regard. That’s not factored into....

Joel Havard - Hilliard Lyons

Downstream. All right. Thanks for that. And then, Brian, any thoughts on the first part of that long-winded question?

Brian Cantrell

It was a good two parter. I think probably the best way to look at the margins that you’re referring to. We expect to see our prices are pretty well locked in and determined. We think those will be reasonably consistent quarter-to-quarter, and I already talked to what we expect to see on the expense side. Reasonably consistent with where we were in the third quarter when you look at the fourth quarter sequentially, so margins should reflect that. I’m not sure if I can get a whole lot more granular than that at this point, Joel.

Joel Havard - Hilliard Lyons

Okay. Well, just one follow-up then. So the 2 or 3 percentage points swing in production margin from Q2 to Q3, what I was really trying to get a sense of is working through the engineering-related issues that you all have discussed. Getting into 2011, are you comfortable that you can carve some of that back for the company?

Brian Cantrell

From a margin standpoint and moving into next year?

Joel Havard - Hilliard Lyons

Yes, sir.

Brian Cantrell

Yes. I mean, I think you have to recognize we’ll have a full year worth of production at River View. It’s a very efficient mine, and we were still in a ramp-up phase this year. As Joe alluded to, we are seeing, expecting to see improvements in our pricing. We do have the cost pressures that we talked about, but I don’t think we’re...

Joe Craft

Pattiki back to full production capacity next year, so that’s going to help us.

Brian Cantrell

So the accounting around the construction at Tunnel Ridge, as I mentioned, is a little bit complex. I think it’s safe to say we don’t anticipate margin erosion.

Joel Havard - Hilliard Lyons

Okay.

Brian Cantrell

In 2011, but getting precise in terms of growth around that is a little bit difficult until we finish our planning process.

Operator

(Operator Instructions) The next question comes from the line of Ronald Londe from Wells Fargo. Please proceed.

Ronald Londe - Wells Fargo

Thanks. Your million tons of met coal per year that you export. Can you give us a feel for how much of that is priced through 2011? And how much is priced on a quarterly basis? And what your indications are for pricing for maybe the first quarter of 2011 and the second quarter of 2011 at this point?

Joe Craft

Our contract is an annual priced contract, and so it runs from April to March. So we will have the slightly more than $100 at the mine pricing for the first quarter of 2011, and we’ve had certain discussions about the outlook that we believe that we can maintain our million ton level for the following year. And we would expect if markets stay where they are, that that price will be equal to or greater than our price this year.

Ronald Londe - Wells Fargo

Okay. From the standpoint of your overall inventories, where do you think you’ll be at the end of the year?

Brian Cantrell

I mean, we do expect them to trend back down to more normalized levels, which have been in the 250,000 to 350,000 ton range, and we would hope that we’ll see them at that level this year as well.

Joe Craft

Yes. If everything works as planned, it’d be right at 250.

Ronald Londe - Wells Fargo

250. Okay. And can you give us any feel about how the unusual hot weather conditions in the third quarter benefited the overall operation, the standpoint of reducing inventories or price of coal?

Joe Craft

We did see in our markets that the demand was higher basically around 7% in the Midwest, and 3% in the east. We haven’t really seen a lot of spot activity around that, but I think that given the amount of contracts that we put to bed last quarter and this quarter, there has been activity for customers looking to fill their books, so to speak, for the 2011-2015 timeframe. Now whether that’s weather dependent or just normal buying practices on their part, it’s probably more than latter than it is the former.

Operator

The next question comes from the line John Tysseland from Citi.

John Tysseland - Citi

Given the rash of MLP simplifications and GP buyouts over the last six months, I suppose, just wanted to get your opinion on these transactions and whether you feel this is something that might make sense for ARLP? And I guess ARLP is in a little bit of a different situation even after CapEx and distributions, the partnership will be close to free cash flow positive or neutral in 2011, so the cost of capital argument does not necessarily make sense. But I was still interested in your view?

Joe Craft

We have looked at that. As you can imagine, given the fact that everybody else has looked at it as well in our space. I think the issue for us is we’ve got such strong growth, and you just mentioned cost of capital really hasn’t been a restrain on our ability to grow. That it’s very difficult at market prices that we’re trading at, it’s hard to get a transaction done because we see so much growth that the premium that would need to be paid is so high for AHGP that it’s a challenge to get a deal done at that level.

So we’re not pursuing a total buyout today, and we’ve looked at it, and we decided we’re not going to pursue a total buyout by ARLP of AHGP. It just doesn’t seem prudent for AHGP to sell at those prices.

Brian Cantrell

Yes, because of those valuations, a complete buyout at premiums that have been set in precedented transactions would be highly dilutive at the LP level, and you mentioned the cost of capital, and as you well are well aware, John, the wedge capital that is assumed in a lot of those cases to show the dilution turn relatively quickly. That just really doesn’t apply to us.

John Tysseland - Citi

No, that’s fair. Does that view change, do you think, if you have a large project that’s kind of in front of you? Or maybe if an acquisition or something like that materializes in the future? Do you think about it differently in that way?

Brian Cantrell

We do look at our cost of capital going forward. As you know, our balance sheet is pretty strong. We’ve got significant leverage capacity available to us, so when you look at the overall mix of capital for a larger transaction, again, I don’t see it as been constraining on our ability to execute.

So as Joe said, we have no intentions of doing a total simplification transaction because of our access to all of the markets that are available. We just don’t see it as been an issue that would hamper our ability to grow in the future.

Joe Craft

It’s hard to see, to speculate on a transaction that would change our mind in this time period. Three years from now, four years from now, five years from now...

Brian Cantrell

Yes.

Joe Craft

Who knows what’s going to happen, but...

Brian Cantrell

Yes, you can never say never, but it doesn’t appear to be a hindrance to us today.

Operator

And the next question comes from the line of William Adams from FAMCO. Please proceed.

William Adams - FAMCO

Good. Can you give us maybe a little more details, I was just trying to figure out your maintenance spending for your say the third quarter maybe for the year. Should we use what was the second quarter level on a per ton level? And then I think, Brian, in the past you talked like getting to like $4 a ton. Is that be a good starting point for next year?

Brian Cantrell

I mean, as you know, Bill, we’ll update that in the first quarter once we finish our planning process. I think until then, I think using the per ton maintenance CapEx that we suggested is appropriate, is still appropriate. There have been increased regulatory burdens, et cetera that will likely impact our cost, but until we get through the planning process, it’s difficult for me to update that number. So until then, I would stick with the, I believe, it’s roughly $4 a ton that we’ve suggested is appropriate at this time.

William Adams - FAMCO

The second quarter was like around 360. Is that...

Brian Cantrell

No, no. The way we look at this is what would we expect to see maintenance CapEx being over a five year period of time. We really don’t try to get into the quarterly fluctuations that will occur because of maintenance schedules. You may have a higher number of rebuild in quarter A versus quarter B, so to try to have it swing quarter-to-quarter given our long-term outlook on how we view distribution and distribution growth doesn’t seem to be a clean way to look at it. So when we give you that number at the beginning of each year, it’s our view of what we would hope to see maintenance CapEx be over a longer period of time that takes out those quarterly fluctuations.

Joe Craft

So maintenance capital is potentially it’s going to be higher than your operating necessities that you might see in our quarterly results. Because operating as we run our plan day-to-day, our operating necessities, part of the they actual cash that goes out on these recurring basis for the quarter. As Brian said, our maintenance capital number is looking at a longer time period. What does it take for us to maintain our EBITDA levels? And we update that once a year, and it has been trending up, and your question is, is $4 a good number for first quarter? Probably is, until we get the final sign on. As soon as we get the final, we’ll tell you, but...

William Adams - FAMCO

Okay. I guess I was more interested in getting CapEx number for the third quarter. Anyway, do you have a coverage ratio for the third quarter of your distribution?

Brian Cantrell

Yes, I think our...

Joe Craft

Yes. It’s 1.75 total.

William Adams - FAMCO

Okay.

Joe Craft

Using a $4 number. It’s 2.20 for the LP.

Brian Cantrell

For the LP.

William Adams - FAMCO

Okay. And then, Joe, could you just maybe talk what you’re seeing in the marketplace for acquisition opportunities and the multiples? How the multiples changed over time and you’ve been pretty disciplined in approaching that, but just wanted to get your thoughts?

Joe Craft

A lot of the activity has been driven by met coal, so that obviously changes the multiples, and if you look on the steam coal side, there really hasn’t been a whole lot of acquisitions. Whether I mean there’s just we’re focused on our organic growth projects is the best way I can say.

William Adams - FAMCO

Okay.

Joe Craft

As I can say to answer your question. I don’t know that I can use a rule of thumb today on what a good M&A target would be because it’s so specific to the asset, and there’s just not a lot of activity to give you a rule of thumb in the coal business today.

Operator

And we have no further questions at this time. I would now like to turn it back over to Brian.

Brian Cantrell

Carma, you cut out a little bit there, but that, I think, completes the Q&A and our prepared comments. I want to thank everybody for their participation this morning and their continued interest in ARLP and AHGP.

We look forward to visiting with you again when we can report our 2010 full year results early in the first quarter next year. Thank you all very much.

Operator

This concludes the presentation for today. Ladies and gentlemen, you may now disconnect. Have a wonderful day.

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