Alliance Resource Partners, L.P. (ARLP) Q3 2020 Earnings Report, Transcript and Summary

Good day, and welcome to the Alliance Resource, L.P. Third Quarter 2020 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions]. After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note this event is being recorded. I would like now to turn the conference over to Brian Cantrell, Senior Vice President and CFO. Please go ahead.

Thank you, Matt, and welcome, everyone. Earlier this morning, Alliance Resource Partners released its third quarter 2020 financial and operating results, and we’ll now discuss these results as well as our prospective on market conditions and outlook. Following our prepared remarks, we’ll open the call to your questions. Before beginning, a reminder that some of our remarks today may include forward-looking statements that are subject to a variety of risks, uncertainties and assumptions 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 statement whether as a result of new information, future events or otherwise, unless required by law to do so. Finally, we’ll 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 the review of our results, and then turn the call over to Joe Craft, our Chairman, President and Chief Executive Officer for his perspective. Encouraging trends in economic activity, coal demand and oil and gas production and prices were beginning to emerge as we entered the 2020 quarter. And we were cautiously optimistic that ARLP's financial and operating results were poised to improve. ARLP's strong performance this quarter certainly justified our optimism. During the 2020 quarter, Alliance delivered significant increases to all major operating and financial metrics compared to the sequential quarter, reflecting improved performance from both our coal operations and our mineral segment. Total revenues increased by 39.4% to $355.7 million; net income attributable to ARLP climbed 158.3% to $27.2 million; and EBITDA jumped 146.4% to $118.8 million. These increases and ARLP's continued focus on reducing costs, expenses, working capital and capital expenditures resulted in free cash flow of $103 million for the 2020 quarter, a 79% improvement over the sequential quarter. Increased free cash flow allowed ARLP to expand liquidity by 41.4% to $422.2 million, reduced total debt by $100.8 million and lower total leverage to 1.69x at the end of the 2020 quarter, keeping us comfortably in compliance with all debt covenants. Turning to our consolidated results. Let's take a closer look at the strong performance delivered by each of ARLP's business segments. Starting with our coal segment, improved coal demand and a resumption of production at all of ARLP's mining complexes, led coal sales and production volumes higher by 48.5% and 66.6%, respectively compared to the sequential quarter. Increased sales volumes more than offset lower price realizations, driving coal sales revenue higher by 42.1% to $335.8 million and contributing to 124.4% increase in segment adjusted EBITDA of $123.8 million. Segment adjusted EBITDA also benefited from lower cost per ton during the 2020 quarter. Segment adjusted EBITDA expense per ton decreased 22% in the 2020 quarter, the $28.03 per ton compared to $35.95 per ton in the sequential quarter. The decrease reflects the impact of ongoing expense control initiatives at all operations, higher coal volumes, a favorable sales mix from our lower cost mines and lower coal inventory costs. The performance of our mineral segment also rebounded in the 2020 quarter, as stronger commodity prices led oil and gas operators to bring previously shut in wells back online and slowly resumed drilling and completion of wells on our mineral acreage. Compared to the sequential quarter, oil and gas production on our acreage increased 13.9% to 468,000 barrels of oil equivalent and our realized price per BOE increased by 9.5%. Increased volumes in pricing led total revenues from oil and gas royalties and lease bonuses up by 23.9% to $9.7 million and segment adjusted EBITDA higher by 29.3% to $8.9 million. That completes our review of results for the 2020 quarter. And I'll now turn the call over to Joe. Joe?

Thank you, Brian. Good morning, everyone. Before I get started this morning, I'd like to express my condolences to the family of Bob Murray, a giant in the coal industry. I'm sure you all have heard, he passed away yesterday. Bob has touched the lives of everyone associated with coal industry for more than 40 years. His importance to our country cannot be overstated. So please join me in a moment of silence to reflect on the many contributions Bob made during his lifetime for the good of America. Thank you all. As Brian mentioned this morning, we had some very encouraging signs that were beginning to take shape in June and continue to develop as the 2020 quarter progressed. After falling by 7% year-over-year during the first half of 2020, increased economic activity and favorable weather patterns during the 2020 quarter resulted in overall power demand in the Eastern United States increasing by 23% over the sequential quarter. With peak electricity loads increasing in July and August to support cooling demand, coal-fired generation rebounded even stronger in the third quarter, jumping 71% compared to the second quarter. After experiencing historically low oil prices in this sequential quarter, oil and gas commodity prices also rebounded during the 2020 quarter, resulting in oil and gas operators bringing shut in wells back into production and slowly resuming drilling and completion activity in the lower 48. While these improving macro trends certainly contributed to ARLP's strong performance in the 2020 quarter solid results were we delivered could not have been accomplished without the dedication and resilience of our people. Our coal mines worked through the disruptions created by the pandemic, reducing inventories and ramping up production to successfully meet the increased requirements of our customers during the 2020 quarter. The entire Alliance organization worked aggressively to maximize the cash flow of our businesses, reduce working capital and control capital expenditures and expenses, all of which has enhanced our financial position and liquidity. I am proud that through their efforts, ARLP was able to post significant improvements to all of our operating and financial metrics during the 2020 quarter. To close out 2020, our customers remain committed to taking delivery of all contracted tons this year. And we continue to anticipate full year 2020 coal production and sales volumes of approximately 27 million tons and 28 million tons, respectively. Looking ahead to next year, utility inventories continue to move lower and several utilities have recently issued solicitations seeking significant coal supply commitments for multi-year terms. ARLP currently has priced contract commitments for approximately 20 million tons in 2021 with expectations for higher natural gas prices and increased energy demand as the economy recovers post pandemic. We are currently targeting total coal sales volume in 2021 to be approximately 10% above 2020 levels. We also anticipate the results from our mineral segment will continue to modestly improve over the remainder of this year and throughout 2021. Our expectations reflected the recent rebound in commodity prices and production volumes, as well as the uptick in activity by the E&P companies. As global and domestic inventories continue to draw down and return to a more normal historical balance, supply demand fundamentals will again incentivize E&P companies to increase their pace of development. Due to this -- due to the strategic location of our minerals, coupled with the quality of operators with positions on our acreage, we feel ARLP's mineral segment should see increased drilling and completion activity next year. In conclusion, we keep -- we will keep our focus on maximizing cash flow from ARLP strategically located oil and gas minerals, in our low cost long lived fully capitalized coal operations, to provide us with the ability to return cash to unit holders, main access to the capital markets and generate attractive long-term total returns for our stakeholders. With that, I'll ask the operator to open the call for questions.

Our first question comes from Mark Levin from Benchmark Company. Please go ahead.

Okay. Thanks very much and congratulations, particularly on the cost side that was something we have not seen in a while, which leads me to this. So when you're thinking near-term now for a second on Q4, if you kind of assume 28 million tons of sales, it looks like you would be up modestly quarter-over-quarter. Does that mean that the cost performance that you saw in Q3 should be comparable in Q4 or would there be reasons why it wouldn't?

Some of the -- Mark, how are you?

I’m doing well.

Thanks for calling and thanks for the question.

Sure.

Some of the increase in the volume of sales will be coming out of inventory. We started the quarter -- we targeted 750,000 tons reduction last quarter. We ended up with 500,000 and we probably would have hit our 750, but we had some transportation delays. We do believe those, the railroads are operating more efficiently. I think they've been able to get their workers back more to the last month of the quarter and running into the fourth quarter. So we do believe those tons that we had slated to be sold in the third quarter will be picked up in the fourth quarter. So from a production standpoint, we'll -- we're still targeting to produce something similar in the quarter. There will be some holidays. So our cost might trend up a little bit, but I'm hopeful we can stay on pace with what we've been doing in the third quarter. Probably won't be as low because we had an outstanding quarter, but I think that we're back operating at near full capacity as much as you can be in a COVID impacted world that we should see, our costs be at a pretty predictable level of quarter in, quarter out for the next year or so.

That's great. That's very good news. And let me just kind of turn to '21 for a second. I think you mentioned you have 20 million tons priced and shooting for maybe 31 million tons roughly next year. At this point, Joe, what can you tell us kind of about those 20 million tons? Where they've been priced either up or down relative to what you've done so far this year, or if you look at it year-over-year '21 versus '20, anything that you can do to help us with where those tons have been priced for '21?

I think that the pricing for that 20 million tons is little over north of $41 a ton. And then when you look to the balance, the unsold tons I think it's about 60% Illinois basin and 40% Appalachia as to where the unsold tons are. We've got a lot of solicitations out right now and natural gas prices are right at $3 today. So we targeted that 20 -- that 30.8 or that 10% up, really off of what we've been able to do the third quarter and what we plan to do in the fourth quarter. We're running at 7.7 million ton run rate. And so that's just maintaining that pace. We are hopeful that if gas prices go what a lot of people believe they will and where the strip is, that we can see increased volumes, but we're not planning for that based on the uncertainty with the economy and trying to understand what's going to happen with COVID, what's going to happen with the election and does the economy gets shut down, does it continue to operate the planes fly, all those good things sure going to affect what our final analysis is. But bottom line is we're comfortable that we ought to be able to maintain at least a 7.7 million quarter demand for our production.

And Joe on the tons that have not been priced, we look at obviously different coal rags and they put out numbers and you guys tend to price above that when I look at it historically. But are you starting to see prices for calendar '21, calendar '22 Illinois basin prices? Are they moving up now with gas? Are they into the upper 30s now? Or are they still kind of in the mid 30s? Where would you characterize pricing now and how it's moved with gas moving higher?

I think what you see in the publications are all dealing with the spot market, they're not dealing with the term market. And I think there's probably nine different major solicitations that have either happened or are going to happen within this quarter and the first part of next quarter. And all of those are longer term. So the minimum is 2 years. There's two of them that are taken, it's up to 10 years. We can't -- we as an industry can't sell coal on a multiyear basis at the prices that you see that are in those indexes or in the publications -- they're just not sustainable. Nobody is [indiscernible] for the large market that we have of 150 million a day in Illinois basin and Northern App, cost structure doesn't support those prices. So I would expect that the pricing will come in quite a bit higher than what you're seeing in those publications. I can't get into the details with that, but we're right in the middle of solicitations as to what a fair price is for our customers.

That’s very helpful. And then my final question, and I'll let someone else have it. It has to do with cash allocation. So you guys have done a superb job paying down debt. You've got your leverage ratio down to sub 1.7x. So I guess my question is from here, where do we go? Is it continue -- what are the priority -- is priority number one, still balance sheet, or deleveraging? Do you want to -- is there a kind of a target either absolute, or net number? How does the distribution kind of play into it in terms of your priorities? And then finally oil and gas investments, are those just on hold now. So maybe just some general thoughts on capital allocation balance sheet distributions versus additional investment. Thanks.

Okay. Again the -- what we'd like to see is some stability going forward. What is normal, what's the new normal -- is there a new normal, or is there the old normal. So when we have the vaccines, when we have more the headlines talking about things other than how many cases spike the day before and whether people are going back to work, whether the economy is going to stay open, those types of things we've got to get through this, to be able to know what is a stable run rate will be. So until that happens, our Board made the decision to suspend distributions. So we did make the decision not to pay distribution this quarter. We announced that we will not make a distribution for the fourth quarter, primarily believing that we're not going to have an answer by January as to what the predictability of cash flows are. So we've delayed that decision until our April Board meeting. We're hopeful by that time we'll have better clarity. With vaccines, with the election and with how the economy is either open or it's not open, whether airplanes are flying, all of those different issues are going to help provide us the answer to the future. The other major thing we will have known -- we will know by then is the outcome of the solicitations that I mentioned earlier. So we believe and feel comfortable and confident that our cash flow generation will stabilize and it will put us in a position to where -- we'll be in a position to consider distributions again. Right now we're focused on, as I mentioned in my opening comments, focused on maximizing cash flow, keeping our costs as low as possible, being as efficient as we can be, and trying to be as prudent as we can be to be a low cost producer in a very challenging industry. So today, yes, we'll continue to do is focus on pay down a debt as we determine what our earnings are that will give us more clarity on the other options. But everything is on the table like we've talked about before, whether it's buy down or debt reduction or back units or paying distributions and making acquisitions. We'd love to make acquisitions. We want to grow our company. We feel like we've been able to do that for 20 years for the entire history of our company. And then COVID comes and it gives us a setback that we're going to have to rebound from. And that's not only the coal industry, but the oil and gas industry. So do we want to make investments in minerals? Yes, we do. Exactly how we underwrite those is harder this year than it has been in the past, because there's been a lot of disruptions and there's a lot of questions on the mineral side. We're seeing a lot of acquisitions on the mineral side. That can be a really good thing, but it also gives us -- we need to understand how these companies that have merged are going to deploy capital and where they're going to deploy it. Given the position where minerals are, we think we're in good shape for what we're bought. Now we got figuring out what do we go by on the -- in the future. And so there's just -- what’s the commodity price, what's the timing of the drilling, what's government policy going to be relative to granting permits or not granting permits. Yes, we will be in that market. But it's hard to know how the values are going to -- what the value proposition will be between a buyer and seller and whether we'll be able to transact on that. So hopefully that answered most of your questions.

Absolutely. It did. And again congratulations on a super cost quarter. Thanks.

Thank you.

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

Hey, good morning, everyone. And I'd like to add my congratulations to a very strong quarter on the cost side. Well done.

Thank you.

I wanted to touch a little bit further on the cost side with my first question. I wondered, is it possible -- you mentioned it's predominantly driven by mix, but I wondered could you maybe provide a bridge either year-on-year or quarter-over-quarter that breaks down the cost improvement into various buckets? So besides mix, maybe lower input factors, would really appreciate any additional color you may be able to provide?

Wow, that's getting into quite a bit of detail, Lucas. I mean I think it's just been a very strong focus by our operations to critically evaluate all costs, line item by line item. I haven't really looked at it. That's not fair. I have looked at it at that level of detail, but to try to give a cohesive response in this form will be a bit challenging. Clearly bringing down inventories has helped inputs on materials and supplies has helped. I mean, it is multifaceted across the board focus, Lucas.

Just a couple of things, I mean, back to the mix side of it, if you're comparing to 2019 versus 2020, you can recall that we did have [indiscernible] operating part in the 2019, which was a higher cost. We ended up closing down our Gibson North operation. So there have been some closing costs that have sort of burdened some of the 2019 cost numbers. Of course, COVID impacted the second quarter of 2020. So when we came back from that, we basically were able to bring people back in an efficient manner, and everybody was very focused back to the challenges we've had in the urgency to pay attention to every detail that you can pay attention to. Another factor year-over-year is in East Kentucky. We had a high [indiscernible] mine, we're transitioning to the lower cost mine. Those haven't even really been benefited yet, not yet in these numbers because we just got that operation rolling in September. So it helped a little bit in the third quarter relative to the second quarter, as well as last year. But we're feeling that will be a lower cost driver some of our numbers on a relative basis year-over-year. So I think those are the major things and it really just gets down to productivity. It's bottom line.

Right. And volume, I mean, obviously our volumes were impacted significantly in the second quarter. And they've ramped back up nicely. When you're producing more tons, selling more tons across those fixed costs on a per ton basis, it's obviously very meaningful.

Yes. Very, very helpful. I may have some follow-up questions on that, but -- so my second question, I wanted to switch topics really quickly. With the election next week as it relates to the coal industry, in your opinion, what's on the ballot? Thank you.

Well, I think it's hard to know. I mean, Joe Biden says he's against fracking, and then he says, he's for it, or he's not against it. I'm not sure what his position is. He has stated that by 2035, he wants all utility generation to be all fossil fuels. So we know what his campaign promises are. We've had meetings with some of his -- I wouldn't call them surrogates or his policy advisors in the energy space, we being the industry, not we as a company they'd given us assurance that the Biden camp would understand the importance of low-cost energy and that they understand the importance of coal, but they do look for a transition over that '20 -- to 2035 to 2050 timeframe from fossil fuels. It's -- I think to me, what's on the ballot specific to coal was really not on the ballot. I mean, nobody is really making a decision based on what this election means to coal industry. But specifically to coal, I think all their focus is really on the oil and gas sector. It doesn't make sense to me in one respect, how you can say that you want to convert to electric vehicles, and then yet you don't want to build another power plant other than a wind and a solar that we don't have battery technology that can supply the increased demand of electricity that they anticipate. So how they square these circles, I don't know. I don't know how this works because what they say and what the physics and what the infrastructure is, is to being able to achieve those objectives maybe with $2 trillion you can get there, I don't know. From my perspective, we just look at it more micro than macro. We're very comfortable and confident that there are sufficient power plants that are -- that we sell to that are in our footprint that want to -- that are fully capitalized. They have all the bells and whistles for compliance, environmental compliance, as the laws are written today. And these utilities want to operate those facilities because they know they're the lowest cost plants in their footprint. So they want to operate them until 2035 to 20 -- in some cases 2048. And so we're focused to try to keep those plants open. And we've been working with those utilities with the state governments, with the federal government to protect your lowest cost assets and the jobs that they create through manufacturing, et cetera. And so we’re -- we feel that we'd like to believe that the Biden policy advisor that says that they understand the important contribution that coal makes to these communities. And hopefully if he were to get elected that, that they would have policies that would be more measured instead of what their campaign rhetoric is on a given day, depending on what state they're in. So I think that in my view there's no question that coal was damaged under the Obama [indiscernible] more so this may have been under the Trump, which you read the New York Times, you wouldn't believe that. But I believe that that's the case. So I think our future would be better from a coal industry perspective that Trump won. But if he doesn't then you know, Biden in his closing remarks at the debate was he's the President for all the people and he's a uniter, or he's not a divider. He's not -- he wants jobs. And so we'll see, we'll see if he were to win, whether that part of his closing comments, whether you governs that way or whether he wants it to be a divider, whether he wants to be a hater, whether he wants to destroy jobs or does he want to do what he said he would do and that's to be a uniter and be a job provider. And so, yes, it's hard to say more than that, I guess. I'm sure I could, but I don't know how many people are listening to the call. We [indiscernible].

No, Joe, I really appreciate your perspective. It's a question that comes up frequently among investors, and it's very helpful to hear your take and I wish you and your team and company all the best especially during these times.

Yes, but again, I think just in summary, we shouldn't panic. I mean, there's definitely opportunity here for us, our company, we're a low cost producer. Again, I'm convinced that these States need a low cost power to support their industrial base. And you'd like to think that our elected officials would do the right thing. And if they feel like they've got a transition, they do it in a respectful and over a sufficient amount of time that there's no unintended consequences that are going to be bad for American, bad for the people that they represent.

Yes. Yes. Thank you very much, Joe.

Welcome.

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

Hi, everyone. First, I just wanted to follow-up on a comment, I think Brian might've made earlier where you’re talking about the 2021 kind of preliminary guidance about that 30.8 million ton level. It might've been just a comment in passing, but did you say at current kind of natural gas strip, which is a little above $3 for 2021? There could be upside to that 31 million ton number?

Yes. This Joe Craft. I'm the one that said that.

Sorry, Joe.

That's okay. I mean, we're seeing the demand now, how much of the demand is driven. I mean, we haven't seen $3 gas until in actuality until like today or the last week or so. So we've been trading in the third quarter at quite a bit lower gas, and yet we've still seen a run rate that's pushing us. Our company had a 7.5 to 7.7 million ton demand rate. So I don't know -- I mean, I personally don't believe that when we look at 2020, what the demand has been, has been driven by natural gas prices above $3, because we haven't experienced it. So we looked at if the natural gas prices go to $3.50 and $4, like some people are projecting, what would be the behavior of the market. So would we see more gas to coal switching and the numbers, if it's pure economics would suggest that there's sizable upside to gas, to coal switching. But in our numbers, when we're projecting like a 10% increase for '21, we've ignored that. So we just looked at our current run rate and say that in the current economy that we see even COVID related, even not assuming that we get back to normal January 1, 2021, which is looking less and less likely that we can still with no airplanes flying and the economy working at whatever 90%, whatever the number is that we can still maintain a demand for our product at that run rate of 3.8 million for 2021. Now that assumes that we don't have a major shut back -- shut down of the economy like we had in the second quarter. I mean, if we had [indiscernible], if Biden were to win and come in and try to shut down the economy, like it was in April to May, then that would obviously impact demand like it did in April, May of this year. But I'm assuming that no matter who wins that we're not going to go back to a shutdown of the economy. Biden again as repeated after the debate that he's shutting down the virus, he's not going to shut down the economy. But I don't know [multiple speakers].

Okay. So just to be [indiscernible] that 31 million ton assumes kind of no major economic disruptions again, and -- but it also assumes kind of switching back to coal because of strong natural gas prices.

Correct.

Okay. Thank you for that clarification. And then, I appreciate the clarity on the capital allocation. I think Mark asked about your capital allocation and you said kind of we want to wait to see what happens with the pandemic, with the economy and maybe kind of no changes to the distribution policy until your April Board meetings. So with the December and the March quarter, presumably reasonably cash flow positive, we're assuming that that goes to debt repayment like September was. My question really is, your bonds are trading at such distress levels, $0.60, $0.65 on the dollars. Appreciate that liquidity is paramount and you want to maintain revolver availability, but at some point you kind of can't ignore that the value in buying back bonds at $0.60 cents on the dollar versus paying back revolver at $0.100 on the dollar?

That's fair. What we will be doing in the interim is going back to the banks. We do have restrictions under the revolver ability to buy back bonds, but we'll be visiting with our banks to try to get as much flexibility as we can to potentially take advantage of that. So that if we do choose to go in that direction, we can. You also have to recognize that our bonds are fairly closely held. They are publicly traded, but the level of volume on at any given point in time is fairly limited. So the ability to go in and transact in the open market at any type of scale is a bit of an unknown at this point in time. But I believe in answering to your question, we'll be working to get as much flexibility as we can and assessing our ability to actually participate in the market to take advantage of what is clearly very strong math in terms of where the bonds are trading today and our cost of otherwise available capital.

So today your revolver limits RPs [ph] via this available cash concept, right? So can you just give us an estimate of how much kind of capacity you have to buy back bonds?

Well, we'll just maybe go back to the banks and work through that to see how much flexibility we can get.

Okay. All right. Thanks very much and good luck.

Thank you.

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

Good morning. I was hoping to get a little additional color on the '21 book. I appreciate the commentary earlier. How can we think about of the tons that are contracted. Are any of those multiyear terms? How many of those tons carried over from the current 2020 contracts as well?

There's not too many that have carried over from 2020. I mean, the only reason they would carry over are shipment delays that I remember.

That's right.

So as we think of '21 and going into '22, I don't -- do you have that, Brian? I don't -- I can't recall off the top of my head how many times we've got committed in '22.

Yes, I think we've got about 8.5 million committed in '22. At this point in time we've got some volumes committed out into the '24 timeframe as well.

What’s the longest term that you -- that would -- that the company would entertain?

We would entertain 10-year contracts …

At an appropriate price.

… or -- well, at a structure that would have reopened.

Okay. Understood.

We believe there needs to be. We've always believed that a good contract one is close to market. If it gets too far out of marketing, it's not good for either party [indiscernible]. So we would want some mechanism and they would want some mechanism that keeps it close to market, but they want security of supply and so do we. So I think that I think it's encouraging that we've got several customers that are telling the markets, whether it be our lenders or our bondholders or investors that, listen, we need you here for the next 10 to 15 to 20 years. So we need security supply. So I think that's positive if we would definitely enter into those types of agreements, if get -- and they're going to want protection, and we want protection that whatever the pricing is, it allows us to be a responsible operator, [indiscernible].

[Multiple Speakers] sorry, the type of construct that Joe just described, where you have periodic reopeners and the ability for pricing to move, plus or minus within a band over time to keep both sides as close to market as possible is what we've seen historically.

Okay. And then in terms of the power plant mix, can you describe just how it's been -- if there are any changes in terms of where the shipments have been going historically, or are you adding any new power plant customers or is it pretty stable?

It's pretty stable. I mean, I think that you're seeing because there's fewer suppliers and you're seeing our market share go up. But it's basically, I mean, sure that there's some people we've got targeted that we haven't shipped to before, but I'm trying to build through each of our customers. I think the answer to your question is that, no, it's the same customers, it's the same plant. It's just -- it's the higher cost gas go out in the market and it's that we pick up some market share.

And then what's the like, or what’s the reception you get for power plants that you have not historically sold to? Is it difficult to get the coal spec store? What are the hurdles that you see?

Yes. So we're targeting -- there are some plants that have historically only taken river basin coal. And we've got a lower sulfur product in Illinois basin and at our Gibson operation that we are marketing too. And we've been -- we picked up some volume into that area. But all the customers that have coal-fired generation -- getting generation, definitely want to talk to us because they look at us as being someone committed to the industry for the long-term and they see the strength of our balance sheet and the capabilities of our operators, how reliable we are and how we do what we say. So that reception is good. I think one thing we haven't talked about is the export market and we really don't have any volume built into the plant in 2021 for any thermal tons sold. Next year we are looking at 600,000 tons going into the metallurgical market out of [indiscernible] and our MC product does bid PCI [indiscernible] and we're looking at around 300,000 there. So there could be 1 million tons, 900,000 to 1 million tons going into the export market, but it's all related that we got built into our 2021 plan.

Okay. And then on the subject of balance sheet and your competitors who are either potentially in bankruptcy post reorg, does your balance sheet give you advantage when you're going in for RFPs?

Every solicitation says that it does. Whether it does or not [indiscernible] our customers are.

Okay. All right. I appreciate your time. Thank you.

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

Hey, good morning. Thanks for taking my question. Just want to clarify the cost for 2021. I think you mentioned that you expect that cost to be predictable for next year and assuming you are producing 31 million or so next year, should we think about the cost for 2021 going to be lower than 2019, given what the [indiscernible]?

Yes, I mean, we believe that right now, I think that we would be slightly lower than 2019.

Got it. And also I think back to a couple of years ago, I think you guys also -- the industry talk about the coal to cash parity or coal demand [indiscernible] to gas price. So now, like even we see $3 above gas price, I don't see you’re very bullish for the coal demand next year. I understand there [indiscernible] about COVID-19 and also demand, but should we think about what is the new, like parity for coal to gas, given the policy change or given the ESG pressure for the utility part?

Well, I don't think I would characterize that we're not bullish. I would just say we're cautious. All I'm saying is that what we've assumed in the guidance, or it's not -- we're not actually giving guidance other than we're just telling you that we believe that we can maintain sales at 7.7. And I said earlier, I have not factored in natural gas. And so I didn't offer an opinion one way or the other on that. In fact, I'm suggesting to you that there will be upside if gas stays at $3 and goes higher like most people think, we just haven't built it into that number.

Lin, it starts with power demand, which is reflective of economic activity. So if we -- the economy does recover, gets back to pre-COVID levels or close to it, and with natural gas pricing where it is, you will likely see gas to coal switching in that environment. It is just very difficult to predict at this point in time. So I agree with Joe. I don't think we've characterized that we're not hopeful, that we'll see stronger coal demand next year, but it gets back to where the economy is and what overall power demand looks like.

Yes. I just want to clarify. I guess, when you talk to your utility clients, do you feel that they are talking about the same [indiscernible] before, okay. If gas $3, we need to increase our coal consumption because of the energy parity or press party, but now versus like a couple of years ago [indiscernible], on top of that, we also need to consider about ESG pressure. So probably we need little bit higher gas -- gas price to do the same kind of conversion. Do you feel that way, or you feel the same thing like couple of years ago?

[Indiscernible] that what we're seeing from our customers, they're not willing to make a commitment on a gas curve. They do not want to be put in a position where they've overbought to where the gas curve does not prove to be -- proves to be volatile, and therefore they don't want to be caught long on the coal side. So what they've asked for is more flexibility in optionality. So we have seen that to where customers are saying, well, I'm not going to commit to a higher gas price, but I want to prepare for it. And will you be there for us, and can you give us optionality that if it happens, that we can be covered. So that conversation is occurring. But, no, we're not seeing customers say that I'm willing to commit to that. And that's one of the reasons that we're cautious, because I can't predict exactly what's going to happen with gas prices. But I can give you some assurance based on conversations with customers that we're comfortable and confident that they're going to want to take 7.7 million tons a quarter from us, pretty much no matter what happens in 2021, absent the economy just collapsing, not going backwards. I mean, if the economy goes backwards, back to Brian's comment, energy generation is going to be dependent on the economy. And if Biden comes and shuts the economy down, and it's a different story. But absent that, I believe our customers based on the solicitations they've made are giving us comfort and confidence that we should be in a position to sell with a high degree of confidence that 31 million tons that we’re -- that I’ve indicated that we're trying to target our production around as a base case.

Great. Last question, if I can squeeze one more. If you see higher demand next year, let's see if you can increase -- you need to have 10% higher demand next year. Do you see, you can still produce 10% or more production at a similar cost, or you probably have to start some high cost production?

I think it's the former. I think we could generate another 10% at equal to or lower costs because it's incremental. I mean, we've got excess capacity. I think that challenge to go beyond that is we would need some term to try to make sure that it's not just a quarter-over-quarter to try to go much above another 10%.

Great. Thank you very much. I appreciate it.

Our next question comes from Tim Novak [ph] with Advent. Please go ahead.

Hi. Good morning. Tom Novak, Advent. Do you guys have a gross debt target that you would like to get to?

I'd say we typically target 1x EBITDA in total leverage. But again, we can't [technical difficulty] than that, if we see a [technical difficulty] 1x.

So you -- I think you've done $180 million of free cash flow year-to-date in a pretty disastrous year. Just out of curiosity, what do you think if you didn't assuming, March, April, May shutdowns again and assuming you don't pay any distributions, how many years do you think you would take you to just entirely repay your gross debt balance?

I mean, I think in that type of a scenario, we'd have sufficient cash flow to completely pay down all of our debt within their maturity schedules.

Yes. I mean, I guess what I'm getting at is you generate a lot of free cash flow and it's not unreasonable to think that coal companies are permanently shut out of the high yield market, right? So in that scenario, why run really with any material debt levels at all? Why not just use the free cash flow, take debt down to a de minimis level, maybe a little bit of secured bank debt and then just pay out the rest to equity holders in the life of these assets?

Well, we'd like to grow, so we're not a trust. So we would like to [multiple speakers] …

But is that -- but you grow using debt financing?

Well, I don't know that we're using debt financing, or we're using the cash flow that we're generating, I'd like to think it's generating the cash flow we're generating and that the growth that taking that cash flow and putting it in growing our cash flow from those investments on top of that growth already embedded in the investments we've made in the mineral segment. I believe that our cash flow would support debt levels at 1x EBITDA that we can -- we do have a future beyond 2035. And that to try to zero back to zero debt in the next two years, when you got a 15-year runway, it seems to be very, very conservative. I appreciate that we may not be in the high yield bond market, but there's other ways to finance the growth of investments that we would make. And that we don't have to use a 100% of the cash flow. I mean, I think we have committed forever that we're going to have a strong balance sheet. I think your question was leading towards what is a reasonable net flow to have a strong balance sheet in the -- as we look to the future of our company. And I believe today that we can carry 1x debt load, and that's a very conservative balance sheet. That's strong. That will allow us to use any cash above that to grow our business and or reward shareholders in some way. That's my focus today, or will be for today going forward.

Okay. Got it. Thank you very much. That's helpful.

Our next question comes from Mark Levin with Benchmark Company. Please go ahead.

Yes, thanks again for allowing me a follow-up. Question around liquidity and surety bonds or third-party surety bonds, Brian, is there -- well, two questions. One is, is there a minimum amount of liquidity that you want to maintain? And I asked that against the backdrop of what we've heard from several other coal companies like Arch more recently, and then Peabody before them regarding collateral -- cash collateral calls related to surety bonds. I guess my question is, a; around -- is there a comfort minimum liquidity level? And then, b; have you been asked or are you corresponding with third-party surety bond providers about having to potentially provide more cash collateral? Thanks.

Yes. Let me take the second part of that question first, Mark. I think at year-end between our asset retirement obligation bonds, workers' comp, the amount of [indiscernible] and other performance bonds, total surety bonds in place were roughly $280 million or so.

Okay.

It's obviously a very fluid market, not just with our space, but across the board in many industries as sureties are really reassessing. What is an appropriate level of collateral, we've seen some increase. It's been relatively modest. I think our total collateral outstanding at this point in time is still less than 10% of our total bonds in place. But it does remain very fluid and we're talking not only with our surety providers, but with our insurance companies, et cetera, on how to best manage that. In terms of overall liquidity, I think probably at a minimum we've generally been focused in somewhere on the $250 million range or so and clearly increasing collateral requirements each in to what your overall capacity availability looks like. And we'll be trying to manage through that as that market continues to evolve.

That's a great answer. I appreciate all the clarity there. Thank you.

Sure.

Our next question comes from Private Investor, Sam Johnson. Please go ahead.

Yes. Thank you for taking my call and congratulations on a good quarter. Two questions. First, have you folks considered a reverse stock split? And if not, why not? And also you touched on acquisition strategy earlier. What role or what's your thinking with respect to renewables? Obviously, a lot of oil companies, BP, Total, Shell and others are moving into the renewables area. What -- how do you -- what do you see for your company in that regard?

For the first question, I had thought of the stock split and we're continuing to find ways to try to understand how we can unlock the value of our company, particularly our mineral segment, where we feel like we're not getting proper valuation in understanding the cash flows that those assets bring and what they’re -- what the prospects are for the future. So that is one of the areas and we just -- as we continue to evaluate, it's so hard right now because of the way the markets have treated the energy sector in total. I haven't felt that just going out and doing a stock split today is going to matter. I mean, I can't get any assurance that any of the tools that we're talking about that might be traditional tools that could enhance value for the long-term would be appreciated and recognized in the short-term. So that is tool and but that's why it hasn't happened today. But could it happen in the future? It's on the list of things that we should consider as being a shareholder [indiscernible]. Relative to your question on M&A, I think that there is, again, a need for consolidation. I've made that statement many times, and I continue to believe that in our industry it is -- it would be beneficial to all. We -- again, I think that given the climate of what happened with the Arch Peabody merger, trying to understand what that means, trying to understand the timing relative to the election. It makes a decision really more from a seller's perspective, not from a buyer's perspective difficult. So we're starting to see on the E&P side, producers coming together driven largely by their leverage and/or the leverage that's occurring in that industry. So you got to assume that the management and the Boards of those industries have been influenced by what the lenders are saying [indiscernible] investors, you've seen a lot of investment money, both private and public runaway from that space, when you look at the investment, et cetera. And like I think -- if we think about what is going to take in the coal industry, it's probably going to have to be driven by the lenders and/or the investing community as to whether that money is going to come to the industry or not. And eventually will the owners of other players that have to participate, I mean, if we're going to have a consolidation, you have to have more than one party willing to do it. Then it's going to take someone -- some catalyst to encourage those type communications. And we'll see -- I think that the election is so close that everybody is going to wait and see what happens and then is [indiscernible] Lucas's question, I believe earlier on what happens to the coal industry under a Biden administration. That'll have to be evaluated by all stakeholders and we will have to come together somehow some way to determine what's best, what's in the best interest of the owners of these companies.

Okay. Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Brian Cantrell, Senior Vice President and Chief Financial Officer, for any closing remarks.

Thank you, Matt. And thanks to everyone for the robust discussion this morning as well as your time and continued support of Alliance. Our next call to discuss our fourth quarter financial and operating results is currently expected to occur in late January. We hope you'll rejoin us again at that time. This concludes our call for today. Thanks to all for your participation.

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