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Alliance Resource Partners LP (NASDAQ:ARLP)
Q3 2019 Earnings Call
Oct 28, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the Alliance Resource Partners, L.P. Third Quarter 2019 Earnings Conference Call. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]

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

Brian L. Cantrell -- Senior Vice President and Chief Financial Officer

Thank you, Sarah, and welcome everyone. Earlier this morning, Alliance Resource Partners released its third quarter 2019 earnings, and we will now discuss these results as well as our outlook for the remainder of the year. Following our prepared remarks, we will open the call to your questions.

Before we begin, a reminder that some of our remarks today may include forward-looking statements that are subject to a variety of risks, uncertainties and assumptions that are contained in our filings from time to time with the Securities and Exchange Commission, and are also reflected in this morning's press release. While these forward-looking statements are based on information currently available to us, if one or more of these risks or uncertainties materialize, or if our underlying assumptions prove incorrect, actual results may vary materially from those we projected or expected.

In providing these remarks, the partnership has no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise unless required by law to do so.

Finally, we will also be discussing certain non-GAAP financial measures. Definitions and reconciliations of the differences between these non-GAAP financial measures and the most directly comparable GAAP financial measures are contained at the end of ARLP's press release, which has been posted on our website and furnished to the SEC 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 ARLP's outlook for the remainder of 2019. Joe?

Joseph W. Craft -- President, Chief Executive Officer and Director

Thank you, Brian, and good morning everyone. Following a year, where we enjoyed record coal sales volumes of 40.4 million tons, including a record 11.2 million tons sold in the export market, ARLP 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, weak power demand, aggressive marketing by Russian producers, and an oversupply of LNG, have all contributed to a 30% drop in API-2 thermal coal prices, since the beginning of the year, leading to what we believe will be a 20% year-over-year decline in eastern thermal exports by US producers in 2019. For ARLP, we now expect a disappointing 7.4 million tons of export sales in 2019.

As hedges fall off 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 US producers will again participate in the thermal export markets in a meaningful way. This international market downturn has not changed our belief in the long-term fundamentals for growth in coal demand globally, and we continue to believe ARLP will deliver 10% to 20% of our total coal sales volumes, and to the export market for years to come.

A lots of export volumes as well as falling domestic demand, due to low natural gas prices has caused the significant supply overhang in the United States, pressuring domestic coal prices to levels, which we believe are unsustainable for most of ARLP's competitors. We currently anticipate these conditions will require the industry to rationalize production to stabilize the markets, so fundamentals can improve. While 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, as other coal producers assess their options in this difficult environment.

ARLP has been proactive in responding to these uncertain markets, adjusting our production to meet customer demand, including the closure of our Dotiki mine, and altering normal operating schedules at several of our operations. In this fluid market, ARLP continues to evaluate numerous operating scenarios and strategic opportunities that will help us mitigate the potential loss of export sales in 2020, and a likely drop in our average sales price per ton next year.

While 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, ARLP expects 2019 coal sales volume to decline only 2% of last year's record level. At the midpoint of the range projected adjusted EBITDA for 2019 is 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 increased ARLP's domestic market share, securing additional commitments for the delivery of 11.2 million tons through 2023. We are fortunate that our low-cost operations have us better positioned than most to navigate today's challenging environment, and 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 ARLP's business. Enhancing this growth, during the 2019 quarter, we completed the acquisition of Permian Basin mineral interests from Wing, adding approximately 9,000 net royalty acres in the Midland Basin, and strengthening our position in this prolific liquids rich area. This transaction gives ARLP exposure to more than 400,000 gross acres under active development by well-capitalized operators, and as Brian will discuss, in more detail, in a moment, is adding to the growing contribution at this platform to ARLP's 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 ARLP's existing guidance for the minerals segment.

After careful consideration of current year results and our forward outlook, ARLP elected to maintain its quarterly cash distribution at current levels for the 2019 quarter. I believe the combination of cash flow growth potential in minerals, positive global supply/demand fundamentals for coal and the consolidation of US coal industry will strengthen long-term value creation for our unitholders.

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

Brian L. Cantrell -- Senior Vice President and Chief Financial Officer

Thank you, Joe. I'll cover the details behind our performance beginning with the review of our results for coal operations in the 2019 quarter.

A build in ARLP's coal inventory impacted the performance of our coal segment during the 2019 quarter. The late shipments of contracted tons pushed ARLP's coal inventory higher to 2.5 million tons, an increase of 1 million tons over the sequential quarter. This inventory build contributed to reduced coal sales volumes in the 2019 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 non-recurring, non-cash asset impairment charge of $15.2 million recognized by ARLP upon the closure of the Dotiki mine in August.

Segment adjusted EBITDA expense per ton in the 2019 quarter was comparable to the 2018 quarter. However, the lower revenue, I just mentioned, caused segment adjusted EBITDA from our coal operations to decline by $15.8 million, falling 9.9% to $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 fall $10.2 million or 6.6%. Reflecting strong performance at the start of the year, results for ARLP's coal operations during the first nine months of 2019 were 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 AllDale III limited partnership investment, segment adjusted EBITDA for minerals declined 9.9% sequentially to $12.2 million for the 2019 quarter. With the addition of the Wing assets in August and active development of our acreage during the 2019 quarter, production volumes increased to approximately 4,707 barrels of oil a day equivalent or 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 4,040 barrels of oil equivalent per day. Segment adjusted EBITDA, excluding the gain related to our AllDale acquisition earlier this year, increased to $32.4 million for the 2019 period, compared to $14 million during the 2018 period.

I'll close my comments with a look at ARLP's balance sheet. After funding the Wing minerals acquisition in August, we ended the 2019 quarter with liquidity of approximately $340 million, and with leverage ticking up to still conservative 1.15 times ARLP's 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 term finance ARLP's 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 in 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?

Questions and Answers:

Operator

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Mark Levin with Seaport Global. Please go ahead.

Mark Levin -- Seaport Global -- Analyst

Hey, gentlemen, thanks for taking my questions. A couple of them. The first on the export side, Joe, I think you referenced maybe doing 7 million tons this year. Any preliminary thoughts about what it could look like in 2020? I ask only because you mentioned in the release that you may ship some exports overseas even into a weaker market. So if 7 million tons is the baseline this year, what would you think is a reasonable expectation for 2020?

Joseph W. Craft -- President, Chief Executive Officer and Director

It's very difficult to answer that question with everything is going on in the consolidation of our 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 a consolidation of the industry. As I mentioned in the release and in my opening remarks, we believe there will continue to be some supply responses, 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 in the export market.

I mentioned in the release we can decide to -- 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 markets. So it's really hard to predict. And do believe we will be involved in the export market in 2020, but it probably won't be in the first quarter, because we probably wait and see how the action of other producers may create opportunities. I may want to wait a while before I commit some in the export market at first part of the year. But we do believe in 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? I just can't give you a guess right now.

Mark Levin -- Seaport Global -- Analyst

Got it. And as it relates to your 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 as you go into 2020? I think Brian referenced a second ago, the dislocation may be in the capital markets, particularly as it relates to looking for term financing. I know that sometimes is access to capital, sometimes there's 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?

Joseph W. Craft -- President, Chief Executive Officer and Director

Answer to this question is 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 of, we think 2020 will definitely be -- it's going to be a correction year for the industry. And I think with that correction year, we should be coming out of 2020 a lot stronger, and be 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 based on what we have targeted. If we can achieve our objectives, we believe that we can have a distribution at current levels, at one times coverage ratio.

Mark Levin -- Seaport Global -- Analyst

And do you really -- I'm sorry, go ahead.

Joseph W. Craft -- President, Chief Executive Officer and Director

Maybe a little bit more, maybe a little less, but we feel if we do our job and we can achieve the sales commitments that we have targeted, we should be able to sustain this distribution.

Mark Levin -- Seaport Global -- Analyst

Got it. And last question relates to that point, which is what is a reasonable volume target for 2020 if things happen 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 your shipments and margin expectations for 2020, as you look at the world today. Thank you.

Joseph W. Craft -- President, Chief Executive Officer and Director

So the margin will be dependent on the volume. If we maintain our volume at 2019 levels, I would expect that margin reduction to go from a $1.25, maybe another $0.50 or $0.75, it's hard. Again, we're not that far advanced in our planning to know.

Mark Levin -- Seaport Global -- Analyst

Sure.

Joseph W. Craft -- President, Chief Executive Officer and Director

But there would be pressure because, to maintain that volume, we would have to participate in the export markets at low prices. So if we elect not to participate in the export markets, then the productions would be 2 million tons to 3 million tons lower, and margins would stay within that $1.25, or maybe slip to $1.50 [Phonetic] or so. And we closed Dotiki, that was one of our higher cost operations. So we will be getting the benefit of having some of that market or some of that production coming from a lower cost operation. So we do expect to see some cost reduction in 2020 to offset the revenue reduction that is anticipated because of the weak markets.

Mark Levin -- Seaport Global -- Analyst

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

Operator

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

Daniel Scott -- Clarksons -- Analyst

Hey, thanks, good morning, Joe and Brian.

Joseph W. Craft -- President, Chief Executive Officer and Director

Good morning, Dan.

Daniel Scott -- Clarksons -- Analyst

Thanks. So last quarter, Joe, you talked about the -- kind of the M&A environment out there being the most active, I think you said in your career, and 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 is clearly two of your larger peers, one public, one private that are -- the way their bonds are trading would indicate upcoming bankruptcies. Are those two in particular or maybe distressed operators in general, are they pulling the usual scenario of over-producing to try to hang on? Is that your one of the biggest overhangs here? And is that equal to some potential opportunity for you either directly or indirectly through M&A when that comes to fruition?

Joseph W. Craft -- President, Chief Executive Officer and Director

Dan, 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, is it to close or partner or to sale. So there's a lot of conversations going on relative to who we are talking to and what may happen, will be premature to talk about that. I think it's clear where we have our focus in the thermal business for low-cost operations. So anything that's low cost that we can transact with, that's what we're going to be trying to position ourselves to achieve.

Daniel Scott -- Clarksons -- Analyst

Okay, that's helpful. Now as far as back to the distribution policy in Mark's questions a bit there. Having your yield up near 16%, I understand the suspension of increases. I think you've illustrated your intention of maintaining and stress testing the ability to do that. But also given your current trading levels, when this unit repurchases can have become part of the conversation, as well?

Joseph W. Craft -- President, Chief Executive Officer and Director

It can be. I think that that capital is going to compete with what our opportunities are for investment, whether it'd be in the coal business and/or the minerals business. So whether we reduce -- if we're -- the implication of your question, I think is that will we be better off taken $15 million out of our distributions in buying back units? And I'm of the view that using that $15 million for distributions provides more value to the shareholders than buying back $15 million worth of units.

If we didn't have all these opportunities, whether to grow and to sustain for the long term, and by at a time where -- hopefully we're at the low end of the market. And then that would be different answer I believe. But I think, everything for me gets back to, how we allocate capital. And we've got some very interesting investment opportunities in front of us, that if we can complete, then I think that's in the best interest for the long-term value of the Company.

Daniel Scott -- Clarksons -- Analyst

Okay. Just one last follow-up here. I'm sure I can predict the non-answer, but so far the diversification into minerals has been pretty well received and is performing nice and steady. When you talk about opportunities on the coal side, due to the distressed nature of the markets and the competitors, is that kind of diversification plan stay intact? Or is it just up against the potential returns, if the coal sides distressed enough?

Joseph W. Craft -- President, Chief Executive Officer and Director

I think it does stay intact. I think as we look at the coal space, we're trying to think creatively as to how we would finance that, to where it would not -- 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 side also. And the only thing that would keep us from doing deals on the mineral side is if the seller's expectations around realistic, which right now, I'd say, they probably are. But if there is more realistic valuation expectation on the oil and gas side, I could see us participating that as well in 2020.

Daniel Scott -- Clarksons -- Analyst

Great. All right. Thanks for the color. I appreciate it, guys.

Operator

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

Lucas Pipes -- B Riley FBR -- Analyst

Hey, good morning everyone.

Joseph W. Craft -- President, Chief Executive Officer and Director

Good morning.

Lucas Pipes -- B Riley FBR -- Analyst

I wanted to follow up a little bit more on 2020, and appreciate the disclosure of the committed and 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, if one average would be great, if there's a way to maybe break it out between Illinois Basin in Northern Appa, that would be extra appreciated. Thank you.

Joseph W. Craft -- President, Chief Executive Officer and Director

Most of the commitments have been in Illinois Basin. We've had some in Northern Apps. So most of the committed tons are Illinois Basin. And the pricing, 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 for competitive reasons, feel like I can't really address that question. I can only give you the guidance that I gave earlier, as to what I think would happen to margins.

Lucas Pipes -- B Riley FBR -- Analyst

Got it.

Joseph W. Craft -- President, Chief Executive Officer and Director

Which is trying to be helpful to be responsive to where you're headed, but I can't help you build the model right now, because of negotiations are going on.

Lucas Pipes -- B Riley FBR -- Analyst

That's helpful. I appreciate that. And maybe to hone in on that just a little bit. I think you said earlier, you would be looking to maintain the distribution, if the sales distribution paraphrasing a little bit -- if the sales distribution delivers according to plan. Can you share with investors and us what that plan is? Is it $40 Illinois Basin prices, $45.35? What are you shooting for?

Joseph W. Craft -- President, Chief Executive Officer and Director

I can't go there. Like I said, we will begin probably without consolidation -- without us acquiring somebody. I don't see our volume increasing beyond where 2019 is. It could fall depending on what we decided 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 have targeted not the bids, but if we are not successful in the targeted markets that we should acquire at prices, that I think are competitive. Yes, then our volume could drop. But right now, based on my best judgment, we are looking at a range of anywhere from $37.5 million to $41 million in 2020, factoring in all of those considerations.

I can't see that they will be much higher than that if any, 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.

Lucas Pipes -- B Riley FBR -- Analyst

That's very helpful. Thank you, Joe. Maybe, one last one. You mentioned in the release, and I think on the call as well, that you see no catalyst for prices to rise. So is it kind of fair to conclude that you're baking in current quarter prices in all of your estimates for 2020, meaning, though I think it's a $1.25 to $1.50 margin increase?

Joseph W. Craft -- President, Chief Executive Officer and Director

That's decrease.

Brian L. Cantrell -- Senior Vice President and Chief Financial Officer

That's decrease, not margin increase.

Lucas Pipes -- B Riley FBR -- Analyst

I'm sorry, sorry, sorry, sorry decrease. Sorry about that.

Joseph W. Craft -- President, Chief Executive Officer and Director

So I would say that the first half of the year is going to -- we are going to feel more pressure in the first half of the year. There's a couple of reasons for that. One, as we are winding down in East Kentucky for our MC operation, where we are transitioning to a new reserve base, and the timing of that is I believe may before we get into that reserve. So the wrapping up of the old reserve is higher cost than what the new reserve will be. So we could feel a little pressure. Yes, it's only 1 million ton annual run rate. So there could be some pressure there.

If we participate in the export market, the near-term export pricing is lower. So that could have some impact in the first quarter. So those are two factors. The third factor is, we are continuing to operate at reduced operating shifts at several of our operations that probably will continue into the first quarter. We believe that the way we are, again, depending on what operating scenarios we pick, that should stabilize itself that end of the first quarter or maybe the end of the second quarter to where we are hoping we can get back to a full capacity position for operation. So we can be lower costs. So I don't think it's going to be uniform across all four quarters, to answer your question.

Unidentified Participant

Okay. That's very helpful, Joe and Brian. Thank you very much for the color and best of luck.

Brian L. Cantrell -- Senior Vice President and Chief Financial Officer

Thank you, Lucas.

Joseph W. Craft -- President, Chief Executive Officer and Director

Thank you.

Operator

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

Matthew Fields -- Bank of America Merrill Lynch -- Analyst

Hey, guys. Just a little bit on the commentary you made about picking up 11 million tons under contract since the last quarter. You said, I think, 3 million of that was from consolidations in the industry. Does that mean you won business from competitors that are in financial distress or have filed? Is that what that comment means?

Joseph W. Craft -- President, Chief Executive Officer and Director

It means that we either bought some contracts or paid for some contracts, and/or just a same contracts for people that we're closing operations. And for most of that volume, and then there was another contract that we got where competitor had shut its operations, and the customer was not getting tons from that particular competitor, and we won a bid by bidding lower than others to secure that business. So that market would not had happened, had that competitor not ceased production. There are three -- at least three maybe four, but there are at least three that I know off the top of my head contracts that we got for 2020 production that were direct results of mines closing.

Matthew Fields -- Bank of America Merrill Lynch -- Analyst

Okay. And then --

Joseph W. Craft -- President, Chief Executive Officer and Director

Market share we picked up with minimal capital.

Matthew Fields -- Bank of America Merrill Lynch -- Analyst

Okay, great. But one of them you had to kind of bid very low for it? So is it?

Joseph W. Craft -- President, Chief Executive Officer and Director

So, the customer came and said, listen I need the supply, or I need to cover this position, you want to bid on it? We did.

Matthew Fields -- Bank of America Merrill Lynch -- Analyst

Okay, great. And those are mainly tilted toward 2020, not all the way out to 2023?

Joseph W. Craft -- President, Chief Executive Officer and Director

No. Two of the three go to 2023.

Matthew Fields -- Bank of America Merrill Lynch -- Analyst

Okay. Great, thank you. And then a lot about the distribution on this call but, obviously, with EBITDA declining and your leverage ticking up to -- for the oil and gas acquisitions, where do you feel comfortable with your balance sheet and sort of what leverage level may you have to get to when you start to think about cutting the dividend?

Joseph W. Craft -- President, Chief Executive Officer and Director

No, that's really more of a question of making sure we have in terms of our distribution policy, making sure we have 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 leverage level that's a trigger, in terms of our decision we make around distribution. We've long said and this hasn't really changed. So that we'd be in a position to potentially see leverage increase up into the 1.5 times range, if we felt like there was a path toward bringing it back down over a reasonable period of time. And that really hasn't changed. We exited the quarter with liquidity at about $340 million or so. Having liquidity in that $300 million to $350 million range is a level that we would be comfortable at. So it's really not a linear decision in terms of how we view the balance sheet, and our distribution policy, and leverage levels. It's really kind of multi-faceted and what our outlook is in terms of where we're comfortable in going at any particular time.

Brian L. Cantrell -- Senior Vice President and Chief Financial Officer

Yes, we are celebrating our 20th year of being a public company. I think one of the strengths of our Company, and one of our successes is we have not over-levered. 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, we don't expect to borrow to pay distributions. And we believe we can generate sufficient cash flow to maintain our current rate now.

We need to have 2020 be a correction year, where we can get back in balance. So it may slide below a little bit in 2020, it might. But our expectation is that going forward, we will be able to maintain this distribution and hopefully get back to the type of distribution coverage ratios that we've experienced over the last 15 years, 20 years.

Joseph W. Craft -- President, Chief Executive Officer and Director

And to leverage levels that are more in keeping with how we've been running the business in the recent past.

Matthew Fields -- Bank of America Merrill Lynch -- Analyst

Okay. That's it for me. Thanks very much.

Operator

Our next question comes from Nick Jarmoszuk with Stifel. Please go ahead.

Nick Jarmoszuk -- Stifel -- Analyst

Hi, good morning. Thanks for taking my questions. A question on the distribution and 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 year, it's difficult to envision a scenario where the market is going to want to refinance you or provide you capital for the Wing acquisition. So longer term, what is the debt capital markets don't want to be there for you. How do you adjust the balance sheet for that?

Joseph W. Craft -- President, Chief Executive Officer and Director

Well, we believe that trading our bonds were a direct correlation to 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 year, if it's not a correction year, we'll have to adapt to that. Yes, we know there's capital available. It's just high cost. It's higher cost than what we can get in the equipment financing market as an example. So the reason in the second quarter, Brian, made the comment of looking in the bond markets. The bond market was very favorable, and was wanting to trade where our existing bonds were at 102% [Phonetic], I believe at the time.

Brian L. Cantrell -- Senior Vice President and Chief Financial Officer

Correct.

Joseph W. Craft -- President, Chief Executive Officer and Director

And so when we were exploring it, if we could maintain or increase our capacity at levels, they were comparable to where our existing bonds, where we were exploring that. But then, Brian said in his comments that the spreads jumped 200 basis points or so. So we've decided to pull back believing that it will get back to more normal level, once we get clarity on how the shake out the industry is going to occur in 2020. If it doesn't, we'll have to adjust and we may have to do some of the things that you just suggested. But if we feel like that this is temporary and we can manage through it, there is no reason in my view that we should overreact by taking a reduction that could send a signal. That's a wrong signal.

Nick Jarmoszuk -- Stifel -- Analyst

I think it's actually the right signal to send the bondholders to get the bonds -- bond prices up. Because then it shows that defending balance sheet and paying down debt is a higher priority than distributing cash to share or to unitholders, which you can do that in perpetuity after principal is returned. That's just one analyst opinion.

Joseph W. Craft -- President, Chief Executive Officer and Director

Let me just answer you by that. We have shown the willingness to do that a couple of years ago. So having this did for you, it's not a fixed charge, I mean we could definitely make the adjustment is what we said. And we've done it before, we will do it again, under the scenario that you outlined, if necessary. But I don't believe my future crystal ball is not like yours. I mean, I believe there will be increase in cash flow. I believe that we'll be able to show customer demand once our product that will allow us to grow, once we get the higher cost producers to face reality, and can get back to supply/demand position that will stabilize the market. And then when the export market pops back up, we got even more opportunity and we just need to get through this trough to be able to convert that story to reality. And the bondholder should feel like, with our coverage rate -- with our debt -- our leverage levels that it's still very, very safe investment for the bond market, which is trading at yields that are greater than a lot of other industries that have probably higher risk than what we do, in my opinion.

Brian L. Cantrell -- Senior Vice President and Chief Financial Officer

Historically, obviously commodity businesses 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. As Joe mentioned, if the markets turn out to be different and are not there for us long term, we'll take the steps we need to take to make sure that we maintain the balance sheet kind of in a manner that's consistent with how we've done it in the past.

Nick Jarmoszuk -- Stifel -- Analyst

Okay. And then 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 is looking to close partner sell. In terms of partner opportunities that Alliance is looking at, do any of the opportunities that exist or that you're contemplating required Department of Justice Antitrust Review?

Joseph W. Craft -- President, Chief Executive Officer and Director

They probably would. I mean they would expect that we meet the threshold of Hart-Scott-Rodino. So they would have to be reviewed.

Nick Jarmoszuk -- Stifel -- Analyst

Okay. That's all I had. Thank you.

Operator

Our next question comes from Lin Shen with HITE. Please go ahead.

Lin Shen -- HITE -- Analyst

Hey, good morning, and thanks for taking my question. When you negotiate with utility for 2020 price, I would think 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 pricing next year? And also how big difference your assumption versus utilities buyers?

Joseph W. Craft -- President, Chief Executive Officer and Director

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. They see the range being comparable in 2020 as it was in 2019. But the point, they would make to me is with the commitment that they've made to the coal fleet, they want those plants to run. They believe in diversification. And they believe gas has done the damage, that gas is going to do to coal. And weather -- if weather spikes, then gas may be the winners than a coal. But as far as a base low type commitment to coal, we are expecting from the customer conversations we've had that if we've taken our hit in 2019 compared to 2018 and in 2020, the expectation is gas basically trade the way it did in '19, and the volumes for our customer region domestically should be comparable in 2020 as it was in 2019.

Lin Shen -- HITE -- Analyst

Got it. And also when you talk about you expecting -- you're expecting more pressure reduction for thermal coal market in US. It sounds like you think you already did what Alliance can do, but expecting the peers cutting more? Is any more production cut you can do on your mine for 2020?

Brian L. Cantrell -- Senior Vice President and Chief Financial Officer

I mean, we've talked about that. Joe said, here's our view of what we expect in 2020. If our view doesn't play out based on those current expectations, our volumes may need to drop further. 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 time frame. 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.

Lin Shen -- HITE -- Analyst

Great. Last question. These days we are hearing more and more positive news for US/China trade talk. I remember last year there was some discussion that if China/US kind of reached the deal, Chinese buyer can buy more US coal. I think that's kind of just last year. Have you guys hear any update on that for this round of trade discussion between US/China?

Joseph W. Craft -- President, Chief Executive Officer and Director

I'm not exactly sure I understood your question. But if you're asking what is the impact of the US/China trade talks?

Lin Shen -- HITE -- Analyst

Yes. I mean, is it possible like a Chinese buyer come by US coals, if there is success discussion?

Joseph W. Craft -- President, Chief Executive Officer and Director

Yes, we don't really participate in that market. I think the bigger issue for the trade issue relates to the med market as to how that -- the global economy as to how the trade impact issues affect the global economy, number one. And number two, how much steel does China produce, that then impacts other nations by US metallurgical coal. So we've seen US met coal also dropped 15% to 25% in price which we participate small. I mean, we shipped about 600,000 tons --

Brian L. Cantrell -- Senior Vice President and Chief Financial Officer

650,000 this year, something like that.

Joseph W. Craft -- President, Chief Executive Officer and Director

Yes, in 2019, in the metallurgical market. So it has some impact on us. But again we believe that's -- the overhang there is not as great as in the US domestic thermal market. So I don't really think the trade talks are going to impact the US thermal market in more than they already have. And I think it's really more of a met issue, which we're not that exposed to.

Lin Shen -- HITE -- Analyst

Great. Thank you very much.

Operator

Our next question is a follow-up from Mark Levin with Seaport Global. Please go ahead.

Mark Levin -- Seaport Global -- Analyst

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

Brian L. Cantrell -- Senior Vice President and Chief Financial Officer

I think you asked this question last quarter?

Mark Levin -- Seaport Global -- Analyst

I did. I did, I know they're kind of co-mingled, Brian, but I was just thought I'd give it another run, just to see if there is a way to just take those 7 million tons and apply some sort of margin to them. I mean the way I was thinking about is that you wouldn't -- you probably wouldn't have shipped it into the export market, if you weren't getting better realizations than you were domestically or at least as good. So is there anything faulty with that math of just taking 7 million tons and using the floor domestic margin? Or is that not right?

Brian L. Cantrell -- Senior Vice President and Chief Financial Officer

Well, I would start with 7.4 million tons instead of 7 million tons.

Mark Levin -- Seaport Global -- Analyst

Sure. I'm sorry, yes.

Brian L. Cantrell -- Senior Vice President and Chief Financial Officer

That's OK. And it also gets into the mix between thermal and met. As we just mentioned, this year, I think we'll sell about 650,000 tons into the met market in '19, that compares to about 1 million tons last year. And so, it really would get back to your expectations, Mark, on what the met market is going to look like, and whether that would be something that could be attractive to us in 2020 as well.

Mark Levin -- Seaport Global -- Analyst

Yes, that makes --

Brian L. Cantrell -- Senior Vice President and Chief Financial Officer

So the volume -- overall volume issue and then a mix between met, if any on thermal.

Mark Levin -- Seaport Global -- Analyst

Got it. Got it. No, that's perfect. And Brian, correct me if I'm wrong, I may have forgotten. In terms of the pricing that you guys get on met, I vaguely recall you saying something like maybe 55% of the benchmark or 50% something to that. Is that still, or what is the right way to think about how you price that met?

Brian L. Cantrell -- Senior Vice President and Chief Financial Officer

Yes. When they are -- that rule of thumb did apply for a while. It doesn't apply today. And what our sales are doing, it really depends on what market we go to and so it's hard to project 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.

Mark Levin -- Seaport Global -- Analyst

Okay. Is there a rule of thumb as to how to model -- how to think about modeling it out? Or there are just too many pieces?

Brian L. Cantrell -- Senior Vice President and Chief Financial Officer

There's just too many variables. It really depends on South Asian power market.

Mark Levin -- Seaport Global -- Analyst

Okay, great. Okay, makes sense. Transportation stuff. Okay, great, thanks guys.

Operator

Our next question is also a follow-up from Lucas Pipes with B Riley FBR. Please go ahead.

Lucas Pipes -- B Riley FBR -- Analyst

Hey, thank you for taking my follow-up question. Mark got most of it, but I have one left, and that's the comment regarding electricity demand decline in the US of 2% year-on-year. Do you have a rough sense for what proportion of that decline is driven by weather versus efficiency in the power sector, the LED light bulbs etc. Would appreciate your thoughts on that.

Joseph W. Craft -- President, Chief Executive Officer and Director

I don't have that. But I would think it's probably more weather-related than specifically related to efficiencies.

Brian L. Cantrell -- Senior Vice President and Chief Financial Officer

And then you've got the increase in manufacturing. There are some downward pressure recently. I don't really have it that precise. I'm sorry.

Joseph W. Craft -- President, Chief Executive Officer and Director

I'm not sure anybody does, quite frankly.

Brian L. Cantrell -- Senior Vice President and Chief Financial Officer

But we don't -- I don't have that. I'm sorry I can't help you on that.

Lucas Pipes -- B Riley FBR -- Analyst

No that's helpful. I'll see if maybe there is something out there in the --

Brian L. Cantrell -- Senior Vice President and Chief Financial Officer

The only way I can respond to that is, again, talking to utilities based on the way they are looking at 2020. There is an expectation that right now that their volume in 2020 will be comparable to 2019.

Lucas Pipes -- B Riley FBR -- Analyst

Okay. Yes, it would be -- could be interesting, hopefully it's really just weather, and then we should see an increase in 2020, I would assume. But, yes, a good data point for sure. So maybe just a second follow-up since, while 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 2020, and you mentioned a lot of attractive investment opportunities. So, how do you square all of that? I assume it would be below one times coverage in the next few quarters, and then debt markets are tighter as you mentioned throughout the call. How does all of this factor into your thinking? Thank you very much.

Joseph W. Craft -- President, Chief Executive Officer and Director

So for the distribution, we assume that there will be no transactions, and there'll be no further benefit from the consolidation of us picking up any market share. But 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 based on 95% probability we pick up the business that we're bidding at the prices that we're bidding. So that's looking strictly at what we control and based on what we've done so far and we're still in our planning.

But based on what we've done so far and trying to determine what's the right decision for our distribution, and we believe that if we can achieve 95% probability of our volume that we can achieve close to a one times coverage ratio. Our goal is to be in excess of one times, but it may fall slightly short of that in 2020. But believing that the consolidation in 2020 that will occur, I think it has to occur, that we will roll out of 2020 and move 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 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. It will happen when we feel comfortable making a decision to maintain our distribution at current levels.

Lucas Pipes -- B Riley FBR -- Analyst

Very interesting.

Joseph W. Craft -- President, Chief Executive Officer and Director

What we believe they are sustainable.

Lucas Pipes -- B Riley FBR -- Analyst

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 exports, is that something where the 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, etc. I would appreciate your thoughts, if there is anything that the administration could do to make the -- to make US coal exports more competitive.

Joseph W. Craft -- President, Chief Executive Officer and Director

Yes, I think we've got plenty of capacity, so that's not an issue for the coal side. I think the LNG side of the equation, the administration has been advocating for that and you could argue that that's had an impact on us in a negative way, because the LNG did impact [Indecipherable] year -- this year. But I think, in longer term, those prices will price at levels that coal will be competitive. I think we're just in a short-term low on the LNG prices, I think those will go 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.

Brian L. Cantrell -- Senior Vice President and Chief Financial Officer

Over time.

Joseph W. Craft -- President, Chief Executive Officer and Director

So we believe that the administration is doing what they can to help the coal industry. The President is very much a strong supporter of our industry. He is doing everything he can to help us.

Lucas Pipes -- B Riley FBR -- Analyst

Good, good. Well, best of luck. Really appreciate all the color. Thank you very much.

Operator

Our next question is a follow-up from Matthew Fields with Bank of America Merrill Lynch. Please go ahead.

Matthew Fields -- Bank of America Merrill Lynch -- Analyst

I hate to beat a dead horse on this distribution, but you're talking about all this consolidation and strategic opportunities and whatnot. And where your bonds are trading right now? It will be really, really hard to finance anything, or really expensive to finance anything. You're kind of already in the middle of your comfort zone liquidity-wise that you've previously stated. So anything major would sort of put you out of your comfort zone. All I'm saying is, I think, why not take like a one-year holiday on your distribution of 2020 is going to be this correction year, to take advantage of these great opportunities that you see in front of you, and not sort of jeopardize the balance sheet as a way of doing it.

Joseph W. Craft -- President, Chief Executive Officer and Director

We don't plan to jeopardize the balance sheet. We plan to finance any participation in a way that will not jeopardize our balance sheet. If the draconian view that you have plays out then we may have to look at it differently. But just more optimistic than you are, as to what will happen in the industry before the cash flows, it will result once the industry goes through its consolidation.

And whether the lenders will be there or not, I'd like to believe once you present a clear picture of what the future cash flows are, that those bondholders would want to invest similar to what they did a couple of years ago when we went out and show them, what our cash flow projections were or what our future -- what our operating plans were. And we are still -- we are operating to achieve the goals that I've set out, and we feel comfortable that we can generate cash flow necessary to discharge the operating plan that I've laid out for you this morning. I can't do it any more clearly, I don't think. Is there a risk? Yes, there is risk, but we had just --

Lucas Pipes -- B Riley FBR -- Analyst

So, like you mentioned earlier, you've shown 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 might caused your thinking -- what caused your thinking then to change, and what might cause your thinking to change now?

Joseph W. Craft -- President, Chief Executive Officer and Director

What caused it then was our lenders basically said you needed to. They have had capital at that time, so we did.

Brian L. Cantrell -- Senior Vice President and Chief Financial Officer

Specifically, the commercial banks at that time with the issues that a number of our competitors were having, and the risk that they saw on their balance sheets and their credit. As a result, folks were looking for covenant structures etc., 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 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, we will do what we need to in order to preserve the integrity of our balance sheet, and gain access for the capacity that we need. We've laid out what we believe we'll be able to accomplish. You can paint draconian pictures of the assumed [Phonetic] debt capital markets aren't here today, and they'll never be here. If that happens, we'll need to adjust our thinking. We just don't expect that to be the case long term.

Matthew Fields -- Bank of America Merrill Lynch -- Analyst

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

Brian L. Cantrell -- Senior Vice President and Chief Financial Officer

You bet.

Operator

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

Brian L. Cantrell -- Senior Vice President and Chief Financial Officer

Thank you, Sarah. Good call this morning, and thank you everybody for your participation. We look forward to our next call in late January of 2020, at which time, we'll review our fourth quarter and 2019 full-year results. And we will have completed our planning process that we've talked about several times today, and we'll be offering our initial guidance for 2020. That concludes our call today. Thanks to everyone and for your participation, and your continued support in ARLP.

Operator

[Operator Closing Remarks]

Duration: 64 minutes

Call participants:

Brian L. Cantrell -- Senior Vice President and Chief Financial Officer

Joseph W. Craft -- President, Chief Executive Officer and Director

Mark Levin -- Seaport Global -- Analyst

Daniel Scott -- Clarksons -- Analyst

Lucas Pipes -- B Riley FBR -- Analyst

Unidentified Participant

Matthew Fields -- Bank of America Merrill Lynch -- Analyst

Nick Jarmoszuk -- Stifel -- Analyst

Lin Shen -- HITE -- Analyst

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