Q3 2019 Earnings Call

Good morning, and welcome to the Alliance Resource Partners LP third quarter 2019 earnings Conference call.

All participants will be in listen only mode.

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After todays presentation there'll be an opportunity to ask questions to ask a question you May Press Star then one on your Touchtone phone.

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Please note this event is being recorded.

I'd now like to turn the conference over to Brian L. control Senior VP and Chief Financial Officer. Please go ahead.

Thank you Sarah and welcome everyone.

Earlier. This morning Alliance resource partners released its third quarter 2019, Arnie and we will now discuss these results as well if our outlook for the remainder of the year.

Following our prepared remarks, we will open the call to your questions.

For we began a reminder that some of our remarks. Today may include forward looking statements that are subject to a variety of risks uncertainties assumptions that are contained in our filings from time to time with the Securities and Exchange Commission and are also reflected in this mornings press release.

These forward looking statements are based on information currently available available to us if one or more of these risks or uncertainties materialize or if our underlying assumptions prove incorrect actual results may vary materially from does we projected or expected.

And 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 could do so.

Finally, we will all [noise].

Seen 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 April piece press release, which has been posted on our website and furnished to the FCC on form 8-K.

With the required preliminaries out of the way I'll begin with I will turn the call over to Joe craft, Our chairman President and Chief Executive Officer for his perspective on the markets and they are all pays out like for the remainder of 29 team Joe.

Thank you Brian good morning, everyone.

Following a year, where we enjoyed record coal sales volumes at 40.4 million times.

Including a record 11.2 million tons sold in the export markets.

Air LP entered 2019 with expectations for another record setting sales year relying on export shipment levels.

Similar to if not slightly higher than last year.

For the first couple of months of 2019, the market was meeting our expectations.

As the year progressed, however, the international coal markets deteriorated.

In Europe , we power demand aggressive marketing about Russian producers and an oversupply. The LNG have all contributed to a 30% drop and HP I too thermal coal prices since the beginning of the year.

Leading to what we believe will be a 20% year over year decline and eastern thermal exports by U.S. producers and 29 chain.

Grayer LP, we now expect a disappointing 7.4 million tons of export sales in 2019.

It's had just follow up at the end of this year, we believe it may take a couple of quarters.

Or more for international prices to return to a level, where you asked producers will again participate ended thermal export markets and a meaningful way.

This international market downturn has not changed our leap in the long term fundamentals for growth in coal demand globally.

We continue to believe LP will deliver 10% to 20% of our total coal sales volumes.

And to the export market for years to calm.

The loss of export volumes as well as falling domestic demand due to low natural gas prices.

Has caused a significant supply overhang in the United States pressuring domestic coal prices the levels, which we believe are unsustainable for most of their Lps competitors.

We currently anticipate these conditions will require.

The industry to rationalize production to stabilize the market so fundamentals can improve.

Well some supply response has already occurred more reductions are necessary to balance the market.

We anticipate additional temporary and permanent mine closures are likely in the near future is other coal producers assess their options can this difficult environment.

They are LP has been proactive in responding to these uncertain markets.

Adjusting our production to meet customer demand.

Including the closure of our Dotiki mine in all during normal operating schedules at several of our operations.

And this fluid market Air LP continues to evaluate numerous operating scenarios and strategic opportunities that will help us mitigate the potential loss of export sales in 2020.

Likely drop in our average sales price per tonne next year.

Well it is too early to project, what our production levels and revenue will be next year.

We are more optimistic in our future cash flow potential than what our current unit price reflects.

Based upon the updated 2019 full year guidance outlined in our earnings release this morning.

LP expects 29 theme coal sales volumes declined only 2% of last year's record level.

At the midpoint of the range projected adjusted EBITDA.

For 2019 as close to $610 million.

Resulting in a 1.21 distribution coverage ratio for the year.

Since our last earnings release, we have also continued to build our contract book.

And increase their Lps domestic market share securing additional commitments for the delivery of 11.2 million times through 2023.

We are fortunate that are low low cost operations have us better positioned than most to navigate today's challenging environment.

We continue to see the potential for strategic opportunities created by these challenges.

Looking to our oil and gas minerals segment, we continue to be pleased with this growing part of Lps business.

Enhancing this growth during the 2019 quarter, we completed the acquisition of Permian Basin mineral interest from Wayne.

Adding approximately 9000 net royalty acres in the Midland Basin.

And strengthening our position in this prolific liquids rich area.

This transaction gives their LP exposure to more than 400000 gross acres under active development, but well capitalize operators.

And as Brian will discuss in more detail in a moment is adding to the growing contribution.

This platform to Errol piece total financial performance.

Regarding full year 2019 expectations for our oil and gas minerals segment.

Development and completion activity on our acreage remains as expected.

Therefore, we are maintaining air Lps existing guidance board be minerals segment.

After careful consideration of current year results in our forward outlook.

LP elected to maintain its quarterly cash distribution at current levels for the 2019 quarter.

I believe the combination of cash flow growth potential and minerals positive global supply demand fundamentals for coal.

And the consolidation of U.S. co industry will strengthen long term value creation for our unit holders.

With that ill now turn the call over to Brian .

Hi.

Thank you Joe.

Ill cover the details behind our performance beginning with the overview of our results for coal operations in the 2019 quarter.

A build an arrow piece coal inventory impacted the performance of our coal segment during the 20 knocking quarter.

Delayed shipments of contracted tons push therapies coal inventories higher to 2.5 million tons.

An increase of a million tons over the sequential quarter.

This inventory build contributed to reduce coal sales volumes in the 29 quarter.

And in combination with lower coal price realizations.

Negatively impacted coal sales revenues by approximately $40.3 million compared to the 2018 quarter.

Results for the 2019 quarter and nine months were also impacted by a nonrecurring noncash asset impairment charge of $15.2 million recognized by Air LP. Upon the closure of the Dotiki mind in August .

Segment, adjusted EBITDA expense per ton under 2019 quarter was comparable to the 2018 quarter.

However, the lower revenue I, just mentioned call segment adjusted EBITDA from our coal operations for declined by $15.8 million.

Following 9.9% a $144 million.

Sequentially, although segment adjusted EBITDA expense per ton improved by 1.2%.

Lower coal sales volumes and revenues led segment adjusted EBITDA from coal to follow up $10.2 million or 6.6%.

Reflecting strong performance to start the year results for air all piece coal operations. During the first nine months of 29 team.

Generally comparable to the first nine months of last year.

Turning now to our minerals segment oil and gas royalties on lease bonuses contributed total revenues of $14.2 million during the 2019 quarter, an increase of 14.1% over the sequential quarter.

Including equity income from our all Dale Threed limited partnership investments.

Segment, adjusted EBITDA from minerals climbed 9.9% sequentially to $12.2 million for the 2019 quarter.

With the addition of the winning assets in August and active development of our acreage during the 29 chain quarter.

Production volumes increased to approximately 4707 barrels of oil a day equivalent.

For 22.7% higher than the sequential quarter.

For the first nine months of the year. Our minerals segment contributed total revenues of $37.3 million on average daily production of 4040 barrels of oil equivalent per day.

Segment adjusted EBITDA, excluding the gain related to our all Dale acquisition earlier this year increased at $32.4 million for the 20 by team period compared to $14 billion during the 2018 period.

I'll close my comments, where the look at arrow piece balance sheet.

After funding the wing minerals acquisition in August we ended the 2019 corridor with liquidity of approximately $340 million.

With leverage ticking up to us still conservative 1.15 times payroll piece total debt to trailing 12 months adjusted EBITDA.

Last quarter, we indicated that we were exploring options to extend our current revolving credit agreement.

As well as potentially accessing the debt capital markets to turn finance therapies oil and gas mineral acquisition investments this year.

We are now actively working with our lead banks to extend our existing revolving credit facility.

And currently anticipate completing that process before year end.

Regarding potential term financing.

Recent activity by several competitors has caused near term turmoil and the institutional term loan and bond markets, causing spreads to widen.

Accordingly, we will wait for conditions to improve before accessing the debt capital markets.

In the meantime, we expect to increase liquidity in the near term by completing a $50 million equipment lease within the next few weeks.

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

We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone, if you're using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then tail.

At this time, we will pause momentarily to assemble a roster.

Our first question comes from Mark Levin with Seaport Global Please go ahead.

Hi, gentlemen, thanks for taking my questions a couple of them. The first on the export side drew I think you referenced maybe doing 7 million tons this year or any.

Preliminary thoughts about what it could look like in 2020, I ask only because it you mentioned in the release that you may shipped some exports overseas even into a weaker markets. So if seven is the baseline. This year. What do you think is a reasonable expectation for 2020.

It's very difficult to.

Answer that question with everything is going on.

And the consolidation of their industry.

So if we look at the volume we picked up since the second quarter call.

We picked up over 3 million tons of domestic sales.

From what I would call the consolidation.

Of the industry.

As I mentioned in the release and in my opening remarks, we believe there will continue to be.

And then some supply response is that I believe will create opportunities for us.

So they may or may not happen.

So depending on.

Whether there will be opportunities for us to pick up more sales and more market share because of consolidation that will impact what we do and the export market.

I mentioned data release, we can decide to.

Uh huh.

Our volume is the issue do we want to participate in the export market or not with these price levels that we currently see.

I would not rule it out.

But.

There may be better opportunities domestically than the export market. So it's really hard to predict.

I do believe we will be involved in the export market in 2020.

And but it probably.

That being the first quarter.

Because it.

Probably wait and see how.

The.

Yeah. The action at the other producers or May create opportunities I may want to wait a while before I commit some and the export market. The first part of the year, but.

We do believe ER and the fundamentals of the export market, we want to participate in it.

I'm sure, we will be selling into that market in 2020, exactly how much out.

I just can't give you a gas right now got it and as it relates to your disturbed <unk> distribution coverage I think it was one times today and it looks like it's going to slip below.

One time in Q4, how are you thinking about the dividend I'm actually going to go into 2020.

Thanks, Brian referenced a second ago, the dislocation maybe in the capital markets, particularly as it relates to looking for term financing I know that sometimes as you access to capital sometimes as maybe wait on that decision, but I'm just curious how you're thinking about the distribution headed into this.

Type of market in 2020.

Yeah.

The answer this question similar to my last one with a lot of the.

Opportunity that may present itself in the consolidation.

As we look at the distribution going into 2020.

First out we think 2020 will definitely be.

Yeah.

Yeah, it's going to be a correction here for the industry.

And I think with that correction year, we should be coming out of 2020 a lot stronger.

And the in a position to have coverage ratios greater than.

One times and closer to what we've experienced in the past.

As we look at 2020, and we stress test.

The opportunities in front of us it really comes down to what kind of volume can we secure and you and.

Based on what we have targeted if we can achieve our objectives. We believed that we can have a distribution at current levels.

<unk> one times coverage ratio.

And just in general I'm, sorry go ahead.

Maybe a little bit more maybe a little less but.

Yeah, we feel if we do better job.

And we can achieve the.

Cells.

Commitments that we have targeted.

We should be able to sustain this distribution.

Got it and last question relates to that point, which is what is a reasonable volume target for 2020, if things happened. The way you hope and then related to that point I think on the last call. You had mentioned $1.25 of margin, maybe plus or minus depending upon the market in terms of change in 2020, So just shipments in margin expectations for 22.

20, as you look at the World today. Thank you.

So the margin will be dependent on the volume.

If we maintain our.

Our volume at.

2019 levels.

I'd expect that margin.

Reduction to go from $1.25.

Maybe another 50 cents or 75 cents, it's hard Ghana.

We're not that far advanced and are planning to no sure. If it would be pressure because to maintain that volume we would have to participate in the export markets at low prices.

Ah so if we elect not to participate in the export markets.

Then the productions.

Would be two to 3 million tons lower.

And.

Margins could stay stay within that dollar 25, maybe slipped $1.50 here so yeah.

When we close Dotiki that was one of our higher cost operations, we will be getting the benefit.

Or having.

Some of that market.

Or some of that production coming from lower cost operations. So we do expect.

To see some cost reduction and 20.

20 to offset the revenue.

Reduction that is anticipated because of the weak markets.

Got it great. Thank you very much for your answers.

Our next question comes from Daniel Scott with Clarksons. Please go ahead.

Hey, Thanks, Good morning, Joe and Brian .

Banks, So last quarter, Joe you talked about the it's kinda M&A environment out there being the most active I think you'd said in your career certainly in a number of years and I assume that that is.

The same today, if you could give a little update on that and then more specifically, there's clearly two of your larger peers, one public one private debt our.

Way their bonds are trading would indicate a upcoming bankruptcies.

Are those two in particular or maybe distressed operators in general are they pulling this that the usual scenario of over producing to try to hang on is that one of the biggest overhangs here and is that equaled some potential opportunity for you either directly or indirectly through M&A when that comes to fruition.

I think to answer your first question the activity continues.

So yes, it's.

The industry with these pricing.

These prices are just not sustainable so every.

Participant is trying to evaluate what is their best.

Decision or is it.

Close or.

The partner or to sell.

So there's a lot of conversations going on.

Relative to.

Who we're talking to and what May happen.

Just a little premature to talk about that I think it's.

Clear, where we have.

Our focus.

And the thermal business for low cost operation. So anything this low cost that we can transact with.

And that's what we're going to be a trying to position ourselves to GE.

Okay. That's helpful now I'm as far as back to the distribution policy marks questions a bid there.

You know, having your yield up near 16% here I understand the suspension of increases I think you.

Illustrated your intention of maintaining and stress testing the ability to do that but also given your current trading levels is when does unit repurchase or cannot become.

Part of the conversation as well.

It can be I think that that capital was going to compete.

With.

What our opportunities are for investment.

Whether it be in coal business and or the minerals business.

The weather we reduce.

Yes, if we were near the implication of your question I think is that we'd be better off taken 15 million out of our distributions and buying back units.

And I'm of the view that using that 15 for distributions.

Provides more value to the shareholders than buying back $50 million, where the units.

If we didnt have all these opportunities.

Whether you know to grow and to sustain for the long term.

And by at a time, where.

Oh, probably where at the low end to the market.

And then that would be different answer I believe.

But I think.

Everything for me he gets back to how we allocate capital and.

We've got some very interesting investment opportunities in front of is that.

If.

If we can complete.

Then I think that's in the best interest.

For the long term value the company.

Okay, and just have one last follow up here I'm, sorry, I'm sure I can predict the non answer but so far. This diversification you know into minerals has been pretty well received in is performing nice unsteady when you're talking about opportunities on the coal side due to the distress nature of the markets in the competitors.

Is that you know kind of diversification plan stay intact or do is it just up against the potential returns if the coal sides distressed enough.

And now I think it does stay intact I think is we look at the Colo space.

We're trying to think creatively as to how we would've been answer that do where it would not.

Uh huh.

Yeah, It would not slow down our interest in growing the oil and gas side.

So if the oil and gas the people. So we're seeing a lot of opportunities on the oil and gas I'd also.

And.

The only thing that would keep us from doing deals on the mineral side is if the sellers expectations around unrealistic.

Which right now I'd say, they probably are but.

If there's more realistic valuation expectations on the oil and gas side.

No I could see us participating that as well and 2020.

Great all.

Alright, thanks for that color I appreciate it guys.

Yeah.

Our next question comes from Lucas pipes lets B. Riley FBR. Please go ahead.

Hey, good morning, everyone.

I wanted to follow up a little bit more than 2020 and.

Appreciate the disclosure on the committed in priced sales tons, but I wondered if you can give us a flavor for.

The price level at which those tons are committed and priced.

On average would be great. If there's a way to maybe break it out between Illinois basin in northern App that would be extra appreciate it. Thank you.

[noise] same most of the commitments had been in Illinois Basin, we've had some and and.

Northern App so.

Most of the.

Committed tons are Illinois basin.

And the pricing.

Yeah, I'd prefer not to get into that because we're right in the middle of several solicitations.

And negotiating those as we speak so.

Yeah for competitive reasons I feel like I can't really address that question.

<unk>.

I can only give you the guidance that I gave earlier.

As to what I think what happened to margins.

Got it probably would be helpful to be responsive to where you're headed.

I can't help you've nailed the model right now because of.

Negotiations are going on.

That's that's that's helpful. I appreciate that and maybe to hone in on on that to just a little bit.

Thank you said earlier, you would be looking to maintain the distribution.

The sales distribution I'm paraphrasing, a little bit self distribution delivers according to plan or can you share with investors and us what.

What what that plan is at $40, Illinois basin prices $45 35.

What are you shooting for.

Again, I can't go there or I guess it.

We believe beat again.

Probably without consolidation with without us acquiring somebody.

I don't see our volume increasing.

Beyond where 2019 is.

Yeah.

It could fall.

Depending on.

What we decide to do in participating in the export market, whether we pick up any additional market share because.

Other competitors.

Close mines, and we assume contracts.

Or.

If we aren't successful on the bids that we had targeted not the bids but if we are not successful and the targeted markets that we should acquire at prices that they are.

Our competitive.

Yeah, then after our volume could could drop but right now based on my best judgment.

We're looking at a range of anywhere from 37, and a half million to 41 million.

2020.

Factoring in all those considerations.

I can't see that they'd be much higher than that it Danny.

Absent an acquisition, it's possible, but it's.

Probably not likely.

Could it be lower yes, do I expect it to be right now I do not.

<unk>.

That's very helpful thing, Thank you to maybe.

Maybe one last one.

Human in mentioned in the release and I think on the call as well, but do you see no catalyst for prices to rise. So is it kind of fair to conclude that youre baking in current from quarter prices in in all of your estimates for 2020, meaning.

I think it's a $1.25 to Oh.

150 margin increase.

Yeah.

That's decrease not not mark Okay decrease sorry about that.

So I would say that the first half of the year.

Is going to we're going to feel more pressure in the first half a year.

There's a couple of reasons for that one.

Yes, we're winding down.

Yeah, and east, Kentucky for AMC operation.

Where we're transitioning to.

The reserve base.

And the timing of that is I believe may before we get into that reserve.

So the ramping up of the old reserve is higher cost and what the new reserves will be.

So we could feel a little pressure yeah, it's only a million ton annual run rate so there could be.

Some pressure there.

If we participate in the export market yeah, we.

The near term export pricing is lower so that could have some impact in the first quarter.

So those are two factors.

You know third factor is we're continuing to operate at reduced operating ships at several of our operations that probably will continue into the first quarter.

We believe that.

The way where.

Yeah again, depending on what operating scenarios, we pick up that should stabilize itself.

But ended the first quarter or maybe the ended the second quarter, where.

We are hoping we can get back to.

At full capacity.

ER physician for operation, So we can be lower cost so.

I don't think it's gonna be uniform across all four quarters to answer your question <unk>.

That's a that's very helpful.

Joe and Brian . Thank you very much for the color and best of luck.

Okay.

Our next question comes from Matthew Fields with Bank of America, Matt Merrill Lynch. Please go ahead.

Hey, guys.

Just a little bit on the commentary you made about picking up 11 million tons and under contract since the last quarter.

You said I think threemillion.

That was from consolidations in the industry does that mean you won business from competitors that are.

In financial distress or what have filed is that what that comment means.

And things that we.

Either bought.

Some contracts are paid for some contracts and or just the same contracts for people that were closing operations.

And for or most of that volume and then there was.

Another.

Contract that we got where a competitor.

I had shut its operations and the customer was.

Not getting times.

From that particular competitor.

And we won.

A bid by bidding lower than others to secure that business. So.

That market would not add happened had that competitor not cease production.

So there were.

Three at least three maybe four but there are at least three that I'm no off my head.

The contracts that we got 420 20 production.

That were a direct result of mines closing.

Okay and in that.

Market share, we picked up with minimal capital.

Okay, great but.

One of them you had to kind of bid.

Very low for it.

Right so is it.

Same and said listen I need to supply or the I need to cover this position.

You want to bid on it and we did.

Okay, great and those.

Those are mainly tilted towards 2020, not all the way out to 20 to 23.

No two of the three.

Go to 2023.

Okay, great. Thank you and then.

A lot about.

The distribution I'm on this call but.

Obviously with EBITDA declining and and leverage ticking up to a <unk> you know for the oil and gas acquisitions.

Where do you feel comfortable with your balance sheet.

And and sort of what what leverage level may you have to get too when you start to think about cutting the dividend.

That's really more of a question that making sure we have in terms of our distribution policy, making sure we.

Control over that and can access the capacity in those markets that we believe we need we're not trying to say at a certain level.

Leverage level, that's a trigger and turns about a decision we make around distribution.

We've long said 10 bucks hasn't really changed.

You know.

That we'd be in a position to potentially see a leverage increase up.

You know into the one and a half times range. If we felt like there was a path toward bringing it back down over a reasonable period of time.

Not really hasn't changed a we exited the quarter with liquidity at about 340 million or so.

Having liquidity in that $300 million to $350 million ranges as a level that we would be comfortable out.

So it.

It's really not a linear a decision in terms of how we view.

You the balance sheet on our distribution policy and leverage levels.

It's really kind of multifaceted and what our outlook is in terms of where we're comfortable and going at any particular time.

Yeah, we're celebrating our twentyth year.

That being a public company.

I think one of the.

Strengths of our company and one of our successes is we have not overlevered.

We believed in a strong balance sheet.

And that hasn't changed.

We're still very committed.

To maintaining a very strong balance sheet and relative to distributions.

Yeah, we don't expect to borrow to pay distributions right.

Huh.

And we believe we can.

Generates sufficient cash flow to maintain.

Our current right now.

We need to have.

2020 be a correction here, where we can get back in balance. So it may at slide below a little bit and 2020.

It might but.

Yeah, our expectation is it going forward, we will be able to maintain this distribution.

And hopefully get back to the type of Pittsburgh, you shouldn't coverage ratios that we've experienced over the last 15 20 years and to leverage levels that are more in keeping with how we've been running the business and the recent past right.

Okay.

That's it for me thanks very much.

Our next question comes from Nick Jarmoszuk with Stifel. Please go ahead, hi, good morning, Thanks for taking my questions I'm a question on the distribution at the debt trading levels. The bonds are currently trading below par how do you weigh the equation of.

Cutting the distribution delevering and reducing the balance sheets reliance on the debt capital markets, because with the 2020 being the correction here, it's difficult to envision a scenario, where the markets going to want to refinance your or provide you.

Capital for the wing acquisition, so [laughter] longer term, what if the debt capital markets don't want to be there for you. How do you how do you adjust the balance sheet for that.

Well you know we believe that.

The trading in our bonds, where a direct.

Correlation to.

Ah activity by others in the bond market place had nothing to do with our.

Current and or future prospects.

We believe that it will be a correction here if it's not a correction here, we'll have to adapt to that.

We know there's capital available, it's just high cost.

Its higher costs and what we can get in the equipment financing market as an example, as though.

The reason in the second quarter, Brian made the comment that looking into bond markets. The bond Mark was very favorable and was wanting to.

A trade where our existing bonds were at one or two I believe at the time right and so when we were exploring it if we could.

Maintain or you know increase our capacity.

Yeah.

At levels could you ended were comparable to where our existing bonds, where we were exploring that but then.

Brian said in his comments that the.

Spreads John 200 basis points or so.

So we decided to pull back believing they will get back to more.

A normal level once we get clarity.

On how this shake out the industrys going to occur in 2020.

Yeah, if it doesn't we'll have to adjust we may have to do some of the things that you suggested.

If we feel like.

That this is temporary and we can manage through it.

You know there's no reason in my view and at least it.

Yeah.

Overreact.

Taking a reduction that could send a signal that did wrong signal.

Well I think it's actually the rights signal to send to bondholders to get the bonds price bond prices up because then it shows that defending balance sheet and paying down debt is a higher priority then distributing it.

Cash to share to unit holders, which you can do that in perpetuity. After principal was returned that's just one analyst opinion.

Well, let me just to answer you buy that we have shown the willingness to do that.

Yeah, a couple of years ago.

So.

Having just didnt for you, it's not a fixed charge I mean, we could definitely make the adjustment just what you say and we've done it before we will do it again under this scenario that you outlined if necessary, but I don't believe.

My future Crystal ball.

It's not like yours, I mean, I believe there will be.

Increasing cash flow I believe that we'll be able to show.

A customer demand at once our product that will allow us to grow.

Once we get the higher cost producers to face reality.

And get back their supply demand.

Position.

That will stabilize the market and then when the export market Pops back up we've got even more opportunity and.

And yeah, we just need to get through this trough to be able to.

To convert that story to reality.

And that they did bondholder should feel like.

With our coverage rate and with our debt did yeah, a lever get filled our leverage levels that it's still a bigger better safe or investment for the bond market.

Which is trading.

It yields that are greater than a lot of another.

Industries that have.

Probably higher risk than what we do not in my opinion, historically, obviously commodity.

That's a cycle capital market cycle.

Windows open and close and unless or until the market tells us that that typical pattern.

Is no longer the case.

We will wait until conditions improve and access the markets at the appropriate time that's dimension.

If the markets turn out to be different that are not there for as long term, we'll take the stats, we need to take to make sure that we maintain the balance sheet. It in a manner, that's consistent with how we've done it in the past.

[laughter] and then a follow up on a comment that was made earlier regarding how you see the.

Basins, playing out and how you're looking to or how the industry's looking to close partner so in terms of partner opportunities that.

Alliances looking at.

Do any of the opportunities that exist or that you're contemplating required department of Justice Antitrust review.

They probably would.

I wouldn't affect wouldn't meet a threshold of Hart Scott Rodino. So.

It would have to be review.

Okay. That's all ahead. Thank you.

Our next question comes from the Lin Chen with Hite. Please go ahead.

Hey, good morning. Thanks for taking my question you know what do you negotiate with utility fall 2020 price I was seeing natural gas price assumption going to be a key factor for both parties. So can you talk about the what are you expecting for natural gas price next year and also how big difference.

Our assumption horses utilities buyers.

So I think that when we look at 2019, we've seen the volatility of natural gas.

And the conversations that I've had with some utility executives.

Is that and it's more important what their forecast is instead of mine that they see the range being comparable in 2020 as it wasn't 29 day.

The point they would make to me is with the commitment that they've made to the coal fleet.

They want that was plants to run they believe in diversification.

And they believe gas is done the damage that gas is going to do the goal.

That weather, yeah, if weather spikes thin gas may be the winners that at coal, but as far as a base.

Load type commitment to coal or.

We're expecting from the customer conversations we've had.

That we've taken our hit 29 paint compared to 2018 and 2020.

The expectation is gas.

Basically trade the way it did in 19 and that volume's, where our customer region.

Domestically should be comparable in 2020 is it wasn't 29 thing.

Got it and also when you talk about are you expecting.

In low pressure and a reduction fall some coal marketing U.S. sounds like have you seen that you already deed, what aligns can do but a expecting there a appears can know as any no production can you can do Oh youre.

Mindful 2020.

I mean, we've talked about that Joe said, you know here is our view of what we expect and 2020.

If our view doesn't play out based on those current expectations, our volumes might need to drop or.

And yes, we have the ability to adjust our volumes should that be necessary. You saw this play out in a similar way in the 2015 2016 timeframe.

So yes, we're not dependent upon.

Actions of others alone, we have the ability to modify our operating schedules and our total production levels as needed.

Great last question you know as these days, we are hearing more and more positive news for you as China treat talk I remember last year. There was some discussion that you know even China U.S. Kinda Richard do Chinese buyer can buy moat U.S. coal I think that's kind of them use and loss.

Here have you guys here any update on that fuzzy Serrano.

Sure discussion between you guys China.

Not exactly sure I understood your question, but.

If you're asking what is the impact of the U.S., China trade talks.

Yeah, Matt is that possible like a Chinese buyers come by U.S. coast a their success discussion.

Yeah, we don't really participate in that market I think the bigger issue for.

The traded she relates to the met market as to.

Hal.

That <unk> yeah.

The global economy as to how the trade impact yeah issues affect the global economy number one and number two how much steels as China produce.

That then impacts other nations that by U.S. metallurgical coal. So we've seen U.S. medco also dropped 15% to 25% in price.

Which we participate small Lee I mean, weve shifted that 600000 tons 650, this year or something like that yeah, yeah, and 2019 into metallurgical markets. So it has some impact on us but.

Again.

We believe that's just.

The overhang, there's not as great as in the U.S. domestic thermal market.

So.

I don't really think that trade talks are going to impact the U.S. thermal marketing more than they already have I think it's really more of that met issue, which were not that exposed to.

Great. Thank you very much.

[noise].

Our next question as a follow up some mark Levin with Seaport Global. Please go ahead.

Yeah. Thanks, very much I'm, just two quick modeling questions I'm not sure if you want to disclose it but I'm going ask anyway any idea on the 7 million tons of exports that you guys will do this year, what the EBITDA contribution might be.

Oh.

Thank you asked this question last quite did I did I know I know there kind of commingled, Brian but I was just thought I'd give it another Ron just to see if if if there was a way to just take those 7 million tons and apply some sort of margin to that I mean, the way I was thinking about is that you wouldn't know you probably wouldn't have shifted into the export market. If you weren't getting better realizations than you were domestic.

Well you're at least is good so is there anything anything faulty with that math of just taking seven and using the floor domestic margin or is that not right.

Let's start with 7.4, instead of seven sure I'm sorry, yeah.

Okay and it also gets into the mix between thermal and bad as we just mentioned this year I think we'll sell about.

650000 tons and that the map market and 19 that compares to about a million tons last year. Okay.

So it really would get back to your expectations more gone well I've met Mark is going to look like and whether that would be something that could be attractive to us in 2020 as well so that makes them volume overall volume issue and then a mix between Matt if any abnormal they've got it got.

That's perfect abroad, I can correct me, if I'm wrong as I I may have forgotten. This in terms of the pricing that you guys get on Matt Yeah, I've vaguely recall, you, saying something like maybe 55% of the benchmark or 50% something to that effect is is that still or what is the right way to think about how you price that Matt.

Yeah.

When there yeah that rule of thumb did apply for a while it doesn't imply.

Today today, and what ourselves are doing it really depends on what market. We go to.

And so it's hard to for Jack exactly what it is but.

I think it's fair to say that our pricing is.

$15 below.

At least.

Going into 20 from 19.

Okay.

Is there a rule of thumb mr. how to model how to think about modeling an hour or it's just there's just too many pieces, there's too many variables that really stands out.

Okay.

Oh my market right. Okay, that's what makes sense transportation stuff, okay, great. Thanks, guys.

Our next question is also a follow up some Lucas pipes with B. Riley FBR. Please go ahead.

Hi, Thank you for taking my follow up question.

Mark to market most of it but a F. One left and that's a.

The comment regarding electricity demand decline in the U.S. of 2% year on year do you have a rough sense for what a portion of that decline is driven by weather versus a efficiency in the power sector be led lightbulbs et cetera.

I appreciate your thoughts on that.

[noise] I don't have that.

I would think it's probably more weather related and then specifically related to efficiencies.

And then you got the increase in India and manufacturing.

Some downward pressure recently.

I don't really habit that precise I'm, sorry, I'm not sure anybody does quite frankly, but [laughter] site.

Well I don't have that I'm, sorry, I can't help you on it.

No. That's a that's helpful. I will see this maybe a there's something out the only thing I can think spot only way I can respond to that is again talking to utilities based on the way. They are looking at 22 way.

Yeah, there's an expectation that.

Right now.

That their volume in 2020 will be comparable to 29.

Okay.

Yeah, I would be at could could be interesting hopefully, it's really just weather and then we should see an increase in 2020 I would assume.

But yeah good.

The good data point for sure so.

Maybe maybe just a second follow up since.

Well I have you.

In terms of.

Sorry to go back to the distribution question, but.

So it.

Seems like we're looking at a slightly weaker Q4, and then a weaker first half of of 2020, and and you mentioned a lot of attractive.

Investment opportunities.

So it.

How do you how do you square all of that I assume you be below one times coverage and the next few quarters and then.

And that markets are tighter as you mentioned throughout the call how does how how does all of this factor into your thinking thank you very much.

Right so.

For the distribution, we assume that there will be no transactions.

And there will be no further benefit from the consolidation of us picking up any market share.

So when we stress test our current operations.

We look at domestic targets, we look at.

The international benchmarks.

And.

We make judgments on what we believe volume wise, we will produce space down.

95% probability we pick up the business.

That were bidding at the price as it were bidding.

So that's looking strictly at what we control.

And based on.

The.

What we've done so far we're still in our planning.

Uh huh.

So but based on what we've done so far in trying to.

Determine what's the right decision for our distribution.

We believe that.

If we can achieve.

95% probability of their volume.

That a weekend.

She close to the one times coverage ratio.

Our goal is to be in excess of one times, but it may fall slightly short of that <unk> and 2020.

Believing that.

The consolidation in 2020 that will occur I think it has to occur.

That we will roll out of 2020 and moved to a better.

Pricing environment.

It will allow us to get back to greater than one times coverage ratio.

More likely to 1.2 times, but.

It's really going to be dependent on how fast.

The export market returns.

And how fast the consolidation occurs.

So that's the way we look at it so we're not counting on any of things outside our control.

He was happen.

When we feel comfortable.

Or making a decision to maintain our distribution at current levels.

Very interesting.

We believe that your sustain.

Very.

Thank you.

Just another question occurred to me.

Given the importance on the export side is there something that.

The administration could do so for example, when it comes to.

Ports, a is that something where the.

<unk> increased investments for example could help and make a difference or do you think that's really all driven by LNG prices.

Power policy in Europe et cetera, I would appreciate your thoughts if there's anything that the administration could do to make there to make us coal exports more competitive.

Yeah, I think we've got plenty of capacity. So that's not an issue for the cold side.

Yeah.

Yeah, I think the LNG.

Side of the equation you know the administration has been.

Advocating for that you could argue that that's had an impact on us in a negative way.

Because of the LNG that did in fact flow to Europe . This year.

But they.

Longer term those prices.

Will price at levels that coal will be competitive I think we're just going to short term.

Uh huh.

Well only LNG prices I think those will know higher for the investments that are being made there they have to.

To meet the growing demand.

So.

The good news about low prices is low prices tend to solve the problem.

Over time.

[laughter].

We believe that.

The administration is doing what they can.

To help the go industry and.

The president.

Is it very much a strong support or buyer or of our industry.

He is doing everything he can do to help us.

Good good well best of luck I really appreciate all the color. Thank you very much.

Like that.

Our next question is a follow up from Matthew fields with Bank of America Merrill Lynch. Please God.

Ah Hey, I hate to beat a dead horse on this distribution, but you know you're talking about all this consolidation and strategic opportunities and whatnot and.

And you know where your your bonds are trading at right now.

Yeah, It would be really really hard to finance anything really expensive to finance anything.

You're kind of already.

In the middle of your comfort zones liquidity wise that used previously stated so anything major would would sort of put you out of your comfort zone, all I'm, saying as I think you know why not take like a one year holiday on your distribution of 2020 is gonna be this correction here to take advantage of these great opportunities that you see in front of you and.

Not sort of jeopardize the balance sheet as as a way of and the way of doing it.

We don't plan to jeopardize the balance sheet.

We plan to finance any.

Participation in a way did will not jeopardize our balance sheet.

If the draconian you that you had plays out then we may have to look at it differently.

I'm just more optimistic than.

The new are.

As to what will happen in the industry and where the.

The cash flows it will result.

Uh huh once the industry goes through its consolidation.

And whether the lenders will be there not I'd like to believe once you present.

The clear picture.

What the future cash flows are.

That those bond holders would want to invest similar to what they did a couple of years ago. When we went out and show them what are.

Cash flow projections were more what our feature where operating plans were.

And yet we're still.

We are up and we're operating to the cheap it goes it upset out.

And.

We feel comfortable that.

You know the weaken.

Generate cash flow necessary to.

Discharge that operating plan that I've laid out for you. This morning, I can't do it anymore, clearly I don't think yeah.

Is there risk yeah, there is risk but.

Yeah.

So just so you call it.

Like you mentioned earlier, you showed a willingness to cut the dividend, which you did in the spring of 2016 can you just sort of walk us through maybe the parallels between then and now and what what might cause your thing what caused your thinking then to change and what might cause your thinking to change now.

What caused it then was our lenders basically said you need it do you.

They have access to capital at that time, So we did.

Yeah.

Specifically the commercial banks at that time with the.

Issues at a number of our competitors were having.

And the risk that they saw on their balance sheets and their credit.

As a result.

You know folks were looking for.

Covenant structures etcetera that would have essentially.

Taken away our ability to control our distribution policy and we were unwilling to do that.

So we took the steps necessary to make certain that that capacity in that market was there for us.

In a way that allowed us to maintain control over how we want to manage the company and plan for our distributions long term.

That's what drove it at that point in time.

As we've said several times. This morning, a you know we will do what we need to in order to preserve the integrity of our balance sheet and gain access to the capacity that we need.

We've laid out what we believe I will be able to accomplish you can paint draconian pictures of this debt capital markets.

Art here today, and they'll never be here that happens, we'll need to adjust our thinking.

We just don't expect that to be the case.

Long term.

Okay fair enough. Thanks, Thanks for all the color.

You bet.

This concludes the question and answer session I would like tend to conference back over to Brian L. control for any closing remarks.

Oh, Thank you Sarah good call. This morning I'm. Thank you everybody for your participation.

I look forward toward next call in late January of 2020 at which time will review, our fourth quarter and 2019, a full year results.

And we will have been completed our planning process that we've talked about several times today and we'll be offering our initial guidance for 2020.

Concludes our call today, thanks to everyone in your eye for your participation and your continued support and they are LP.

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