Alliance Resource Partners LP Q1 FY2020 Earnings Call

Good morning and welcome to Alliance Resource Partners, L.P. First Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. Please note, this event is being recorded. I would now like to turn the conference over to Brian Cantrell, Senior Vice President and Chief Financial Officer. Please go ahead.

Thank you, Allie, and welcome everyone. Earlier this morning, Alliance Resource Partners released its first quarter 2020 earnings, and we’ll now discuss these results as well as our perspective on market conditions. Following our prepared remarks, we’ll 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, 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 will be discussing certain non-GAAP financial measures. Definitions and reconciliations of these differences between these non-GAAP measures and the most directly comparable GAAP 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, this morning, I will begin with a review of our results, and then turn the call over to Joe Craft, our Chairman, President, and Chief Executive Officer, for his perspective. As economic and market conditions began to shift significantly during the 2020 quarter, ARLP’s financial and operating results evolved as well. Early on, performance from both our coal operations and minerals segment was in line with our expectations. As the quarter progressed, however, coal markets began to come under pressure due to mild winter weather, persistently low natural gas prices, high utility stockpiles, and the continued absence of meaningful export opportunities. Midway through the quarter, our coal operations began to work at reduced levels as we responded to the weakening coal market conditions by cutting production. Late in the quarter, the global economy began to quickly and significantly contract as world leaders took actions to combat the deadly coronavirus pandemic, crushing demand for energy and leading to our decision on March 30th to temporarily idle our production in the Illinois Basin. The effect of these circumstances resulted in ARLP’s coal sales volumes and prices in the 2020 quarter falling by 29.7% and 5.9% respectively compared to the 2019 quarter, leading coal sales revenues down 33.9% to $314.6 million. Lower sales volumes also resulted in lower coal operating expenses, which declined 22.6% versus the 2019 quarter. On a per ton basis, however, segment-adjusted EBITDA expense at our coal operations increased 10.6% to $32.25 per ton compared to $29.17 in the 2019 quarter due to volume curtailments in response to reduced demand, a longwall move at our Hamilton mine, and a $0.60 per ton increase to the federal black lung excise tax imposed by the federal government, effective January 1, 2020. Reflecting these impacts, ARLP’s segment adjusted EBITDA from coal operations dropped to $97.9 million or 46.9% lower than the 2019 quarter. Compared to the sequential quarter, coal sales price realizations in the 2020 quarter improved slightly, increasing to $43.39 per ton sold. Higher per ton expenses in the Illinois Basin segment more than offset a significant 10% per ton reduction in the Appalachian segment’s cost per ton, resulting in a 4.3% sequential increase to total segment adjusted expense per ton from our coal operations. Lower coal sales volumes are also the primary contributor to a 24.3% sequential reduction in segment adjusted EBITDA from coal. Now turning to our minerals segment, oil and gas production volumes increased 51.4% over the 2019 quarter to approximately 5,440 barrels of oil equivalent per day, primarily as a result of additional mineral interest we acquired from Wing last August, as well as continued development by operators across our total mineral position. As commodity prices weakened throughout the 2020 quarter, average sales price realizations per BOE declined, falling 9.2% compared to the 2019 quarter. Increased volumes more than offset these lower price realizations, driving segment adjusted EBITDA higher by 50.6% compared to the 2019 quarter. Sequentially, lower sales price realizations and slightly lower volumes pushed segment adjusted EBITDA down 5.6% to $13.8 million. Our minerals segment contributed 12.3% of ARLP’s consolidated segment adjusted EBITDA this quarter. As noted in our press release earlier this morning, comparisons of ARLP's net income and EBITDA from the 2020 and 2019 quarters were impacted by several non-cash factors. For the 2020 quarter, our routine review of potential impairments was significantly influenced by the economic disruptions and uncertainties created by the COVID-19 pandemic. These uncertainties materially impacted our future cash flow estimates for all of our long-lived assets and resulted in two areas of impairment related to current market conditions. First, we recorded a $25 million asset impairment due to our decision this quarter to permanently close the Gibson North mine and a decrease in the estimated fair value of certain surplus mining equipment and greenfield coal reserves. In addition, we wrote off $132 million of goodwill related to our 2015 acquisition of the Hamilton mine. Results for the 2019 quarter reflected a net non-cash gain of $170 million related to the January 2019 AllDale acquisition. Excluding these non-cash items, ARLP reported adjusted net income and adjusted EBITDA for the 2020 quarter of $12.2 million and $98.3 million respectively, compared to $106.5 million and $188.8 million respectively for the 2019 quarter. During the 2019 quarter, ARLP successfully completed an amendment and a four-year extension of its revolving credit facility. The new facility provides for increased capacity of $537.75 million through May of next year, at which time it steps down to $459.5 million, and in addition, gives us the flexibility to separately finance ARLP's mineral interest in the future. We ended the 2020 quarter with liquidity of $258.4 million and remained comfortably in compliance with our debt covenants, including total debt of approximately 1.6 times trailing 12 months EBITDA.

Thank you, Brian. Good morning, everyone. As you are all aware, the global economic conditions for all commerce have been fundamentally altered this year due to the unforeseen and unprecedented consequences of the COVID-19 pandemic. That is especially true with respect to the energy industry, as Brian mentioned, as world leaders took actions to combat the deadly coronavirus, crushing demand for oil, natural gas, and coal. In today's press release, we went into more depth than normal to help you understand the decisive actions we have taken in response to the COVID-19 outbreak and the resulting demand destruction for energy in the United States. Specifically, we took steps to safeguard employee health and safety, ensure that we continue to meet customer requirements as an essential supplier to critical power generation infrastructure and support the communities in which we operate, all while protecting our balance sheet and enhancing our liquidity. I'd like to take a moment to outline in more detail our response in each of these areas. In these trying circumstances, our planning has centered on the wellbeing of employees, the needs of our customers, and protecting our balance sheet. As inventories grew at our mining operations, we began working closely with our customers to assess anticipated shipping schedules. It became clear that we could meet our Illinois Basin and customer requirements for a period of time from existing inventories, and the prudent thing to do was to temporarily idle underground production in our Illinois Basin operations beginning on March 30th, and the MC Mining complex in Eastern Kentucky shortly thereafter. To reliably service the needs of our customers, production operations continued on a four-day week schedule at our Tunnel Ridge and Mettiki mining complexes. This week, we partially resumed production at our River View complex as inventories at this coal mine have been depleted. We will continue to work closely with customers and monitor inventories at the mines that remain idled and will resume production at those operations when necessary. Safety first has long been our number one focus, and the health and wellbeing of employees is always the highest priority at Alliance. Our decision to temporarily halt underground mining at various operations allowed furloughed employees to shelter at home while continuing to receive full medical benefits for their families from Alliance, including continued access to onsite health clinics and medical staff at each of our locations. Prior to the furloughs, each of our operations had already started to develop and implement protocols designed to reduce risk and increase protection for miners. With production continuing at Tunnel Ridge and Mettiki, and as our nation learned more about this pandemic, we adapted and improved these measures at all of our mines. Among the many precautions taken in our operations, we implemented staggered work shifts to promote distancing, wellness screenings, enhanced cleaning and disinfection of surface facilities, touch points, mine elevators, underground transport, communication systems, and equipment. We distributed sanitizers throughout work areas, provided PPE for those working in combined spaces, and limited unnecessary access to the mine locations. Corporate offices have also done their part by implementing safeguards in light of CDC recommendations. While doing all we can to protect the employees and their families clearly benefits the communities where we operate, the Alliance team has also looked for opportunities to lend a hand in other ways. As an example, ARLP’s Matrix Design Group subsidiary has been using 3D printing technology to produce face shields and delivering these shields to healthcare providers during this time of need. I'm extremely grateful to the entire Alliance organization for their sacrifices and tireless efforts in these uncertain times. Their resilience, flexibility, dedication, and initiative are inspiring, and each of them has my heartfelt appreciation. We have always viewed ARLP’s strong balance sheet as a competitive advantage, and we have taken action to protect this advantage and enhance our liquidity. As Brian mentioned earlier, successfully amending and extending our revolving credit facility was a key step. In this environment, we are laser-focused on optimizing cash flow. Our operations have worked diligently to reduce capital budgets without jeopardizing safety or the long-term viability of ARLP’s assets. The entire organization has identified cost and the expense savings that will reduce G&A and working capital requirements. We currently anticipate these initiatives will result in cash savings this year of approximately $100 million. In addition, the Board's decision to suspend distributions for this quarter and the upcoming quarter will further help us preserve liquidity during these uncertain times. All these actions require hard choices, but we recognize that the next several months will likely be difficult. And we've made the decisions necessary to ensure ARLP maintains sufficient liquidity, stays in compliance with financial covenants, and emerges from the current environment with strength. While no one has dealt with the economic and market conditions that are facing us today, ARLP has a track record of successfully navigating through previous challenges, and we are confident in our ability to do so again. We have great assets and great people, and we are confident that better times are on the horizon. We plan to be there when conditions improve, ready to leverage our strength to take advantage of the opportunities that will follow with a goal of creating meaningful, long-term growth for our unitholders. In closing, until there is better visibility into both the degree and the speed of economic recovery post-lockdown, ARLP has withdrawn its initial 2020 operating and financial guidance, provided earlier this year. Notwithstanding, ARLP recently announced it would reduce its coal production to match existing contracted sales commitments for 2020. Accordingly, we are now targeting coal sales and production this year of approximately 28 million and 27 million tons respectively, or 25% to 30% lower than originally guided. We also expect the contribution from our minerals segment this year will be meaningfully below January guidance, due to the anticipated lower commodity prices, and our lessees throttling back production. As we look beyond this year, we are hopeful that the reopening of the U.S. economy will be swift, and supply and demand for coal, oil, and natural gas will reach a healthy balance sooner rather than later. As mentioned in our press release this morning, as we get past the next quarter, our results should be on the road to recovery. I believe this year will provide a new foundation for future growth for our partnership. For the past 20 years, the Alliance's strategy for success has been to create sustainable growth and cash flow, and deliver consistent growth and distributions. We are committed to continuing to pursue this strategy. More importantly, we are committed to achieving it. This concludes our prepared comments. And now with the operator’s assistance, we will open the call to your questions.

We will now begin the question-and-answer session. Our first question today comes from Mark Levin with Seaport Global.

Thank you very much, and congratulations on the revolver amendment and extension. I have a few quick questions. Brian, when considering excess cash flow for 2020, I believe you mentioned $100 million in cash savings this year. Given that you're not providing guidance, but you have significantly reduced your CapEx, are there any scenarios this year where you foresee not generating substantial excess cash?

I mean, obviously, Mark, there's tremendous uncertainty out there. And I'm sure as you can imagine, we've gone through multiple scenarios, trying to stress test our operations and our financial performance. Our key focus is on managing for cash. As we look at the levers we pull, I can tell you that all of those efforts are ongoing. We're continuing to critically evaluate any other levers that we can continue to pull. We feel very comfortable that we'll stay in compliance with our covenants and that we likely have the ability to not only sustain this liquidity we had at the end of the first quarter but have an opportunity to see that liquidity expand throughout the year.

Okay, great, fantastic. And then, the second question just gets down to maybe calibrating what costs look like in a 28 million ton a year kind of world. Obviously, you're going to have less fixed cost leverage than what you had envisioned going into the year. So, I assume there would be upward pressure or meaningful upward pressure there. But then, I also would assume that you're kind of shifting things around and focusing on either your lower cost operations or some of the other things that you had mentioned. Without getting into specific guidance, can you maybe directionally give us some idea about how to think about costs for the balance of the year, given those factors?

Yes. Looking ahead, it's quite challenging to predict our production levels accurately. We anticipate reducing our inventory in the second quarter, allowing us to align production with our contractual commitments in the latter half of the year. This should enable us to operate at a more typical rate compared to the reduced shifts we've been managing in the first quarter and during April. The reduced shifts have led to inefficiencies, contributing to the increased costs we've observed in the first quarter at the Illinois Basin. Throughout the first quarter, we mostly operated on four-day shifts, with additional downtime for safety and training. Moving forward, we can't fully transition everything to lower-cost operations due to contractual obligations that require sourcing from specific mines. Therefore, while we aim to optimize costs, we will still be functioning at a reduced capacity, not quite returning to our January levels. However, it should improve compared to what we expect in the second quarter, especially since many of our mines were inactive in April. After that, we believe costs in the second half of the year will likely be slightly lower than what we experienced in the first quarter at the Illinois Basin, and we plan to staff our mines as efficiently as possible, considering the mine sizes and overhead. I hope this provides some clarity.

That's very helpful, Joe. That's exceedingly helpful. And then, my last question just asked…

Our geology and our team remain unchanged. However, like many others in America, we are experiencing a demand issue as we attempt to align our supply with that demand. Sadly, the high level of demand led to some inefficiencies, but we have taken steps to reduce those. We also want to be prepared for a potential surge from our customers if natural gas prices increase, as some have anticipated. This creates a balancing act. As mentioned in our prepared remarks, we are concentrating on cash flow while also prioritizing our customers' needs. This year is likely to be atypical, and I advise everyone to avoid thinking in quarter-to-quarter terms. Moving forward, we aim to restore our mines to full capacity and return to being the low-cost producer that distinguishes us in the industry.

Yes. Mark, adding on to Joe’s comments, we did indicate that the good news is we're working very closely with our customers. And indications we have from all of them are that they currently intend to take the contractual commitments that we have in front of us. But, as you noted, we also said that volumes are likely to be less than half of what they were in the first quarter, as we look at the second quarter. So, trying to anticipate the timing of when demand begins to ramp back up, the pace of how that demand ramps back up, all of those will influence the cost. So, you do need to look through the current volatility and uncertainty, look at our asset base, look at our overall cost structure longer term, and look at our contractual relationships and our customer relationships and see through this. That's the way we're trying to approach it.

That all makes sense. Regarding 2021, I believe that at the end of last quarter, you had about 18 million tons settled. I'm curious if there were any deferrals in 2020 that might affect that contractual position in 2021 and have any influence on how to consider pricing for those contracted tons in 2021.

I think, currently, we're still at that number at the end of the first quarter. So, I think, as Brian said, we've talked to all our customers, they've all indicated a willingness and a desire to take at a minimum levels of our contracts. And as we go forward, we’ll just have to see how the demand plays out. But, I think the intention of all of our customers is to honor their contracts and take this year, and believe they need to do so as they're thinking about what their needs are for a recovering economy.

As you mentioned, what we provided as guidance back in January was related to our contractual commitments for 2021. Our total commitments in 2020 were 29.4 million, and we're now indicating 28 million. The key takeaway is that these contracts typically have minimum and maximum parameters. Therefore, we haven't lost any contracts, nor have we seen significant deferrals at this time. However, it's not surprising that customers are aiming to fulfill at least the minimum levels, as Joe pointed out.

Deferrals in the next year.

Yes, that makes sense. For the last question, is $2.75 for gas considered the key point? If you had to choose a specific figure where you believe coal capacity begins to increase and some of your customers start to return, what would that key gas figure be? I understand that it varies based on multiple factors, but if you had to select just one number, what would it be?

I think, in the MISO-PJM, that's probably a good number. If you go to the Southeast, probably need a little higher number.

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

Hey. Good morning, everyone. I hope you’re all doing well. Also, good job on taking decisive action here during this pandemic and ensuring worker safety. I wanted to kind of touch on the market balance for the Illinois Basin. You're obviously a low-cost producer, and you've taken a lot of tops out. Haven’t seen similar actions from some of your peers. Maybe you could comment on that. Have you seen more supply cuts across the basin? And then, second half of the year, into 2021, what are your expectations for the supply side? I would appreciate the color on that. Thank you.

Relative to the response of others, I think others have, in fact, done similar in this situation, but they haven't publicly announced that they idled their operations for a full month. But, we do believe that everybody's working at reduced shifts. They've taken time off. They're having to manage their supply to meet their customer transactions because there's just no spot market. So, everybody's trying to operate for cash flow. So, we do believe that supply is coming off, and it will come off for the year. Specifically, I think you asked about the Illinois Basin. I think on the last call, we targeted thinking production was going to be around mid-80s. At this time, I would say it's going to be in the mid-70s. Again, I think the last time when I said the mid-80s, we were thinking 5 to 6 million tons exports, and that assumption is still baked into that mid-70s number for production in Illinois Basin. I’d say everything's sort of hovering around that 30% drop. Whether it’d be everything we're doing, it’s at that 30% to our contracts, it seems to translate comparably across the basins where we're operating.

And then, maybe switching to the minerals business. What do you think is the longer-term outlook for that? Is that an area where you plan on deploying capital on the other side of this, or are you taking another look at this, given the unprecedented drop in oil prices? How are you thinking about this segment, and how sensitive?

Well, we still have confidence in that segment. We feel like the assets that we have are in the core to core. We feel like they're outstanding. They're outperforming. They will outperform the average in the various basins because of their location and their quality. Nobody could foresee a pandemic in their planning horizon. I do believe that the United States values being energy independent, and will do anything and everything they can to maintain that position in the world economy. I think our country needs the U.S. to continue to be the largest producer in the world, if possible. So, we do believe it will bounce back; everything's back to demand and supply. I think supply is running out faster than people might have thought. As a mineral owner, that's good for us. We don't really want to see them producing oil and giving it away or selling it in the teens. Especially, if we can get the economy rolling, we would expect a pretty significant increase in prices back to the level where sustaining, which we think is at least in the mid-40s. So, from a long-term strategic play, nothing's changed, and to your specific question, the timing of when it bounces back, again, demand is going to increase. We're already starting to see signs of that gradually, but we're seeing signs of people back on the road, people getting back on airplanes, and supplies coming out probably at a faster clip than people thought. That should allow us to get to that balance. I can't give you the precise timing because it really depends on when the economies can roll back. But we will be looking for opportunities in that space. It may take time for sellers of minerals to adjust to the new reality. We haven't seen that many people rushing out the door in a panic mode wanting to sell their minerals off at $10 oil. But, if they did, we’d definitely be there to help them exit some of that space. So, we feel like all the attributes that attracted us to that space still are intact. In hindsight, we should have instituted some hedging, which we did not do. I think once we get back to a price point that is sustainable for the industry to maintain its production level, that's something we definitely will have to evaluate, probably implement, so that we can hedge against such a sudden drop in pricing, which, again, was impossible to forecast.

Our next question comes from Nick Jarmoszuk with Stifel.

Hi. Good morning. So, I wanted to ask you about the $2.75 natural gas price. If we hit that area, what sort of demand pickup do you think you could see?

We believe it's difficult to predict the demand for energy due to the overall economic impact. If we can return to levels similar to 2019, we might see a substantial increase in demand. If we consider a scenario where demand is about 10% lower than 2019, we're estimating it could reach around 20 million tons. I am focusing specifically on the Eastern U.S. market, not the total U.S. market area. So, I anticipate that the demand could align with those estimates as we move forward.

So, is that before the Illinois incremental or Illinois Basin demand and NAPP demand or would that be more skewed toward one basin?

No. For both. Yes, for both.

And Nick, thinking through the flow-through of a higher gas price environment to benefit a coal producer, as Joe said, it's obviously clearly driven by overall electricity demand and decisions that utilities will need to make around how they manage their inventories. They're at high stockpile levels today. So, it could just physically take time to work those stockpiles down to quote unquote normal levels, or they could say they want to keep a higher coal stockpile in light of a higher natural gas price environment and it might cause them to come back into the market sooner. Those are some of the unknowns that we're trying to manage our way through.

That's an important observation. My figures were based on the assumption that they would prioritize reducing their inventory first. So, if they choose to maintain their inventory levels due to concerns about potential second waves or other factors, that figure could increase.

And on the $100 million cash savings between G&A and working capital, can you give us a split between those two items?

It's both, it’s CapEx and working capital.

And G&A, not just those two items.

So, the CapEx, we had talked about close to 30%.

So, the range that we gave initially was $165 million to $190 million I believe. So, the 25% to 30% down is at the midpoint of that. Working capital was $35 million plus or minus. And if you look at last year’s G&A, we indicated it coming down, I believe it was 25% to 30% off of that number.

Some of that was non-cash.

Some of that was non-cash at around a portion of the incentive compensation.

Okay. With the working capital, should we see most of that benefit in the second quarter?

We hope so.

And then, the last item, understanding that distributions have been suspended for the first quarter and second quarter, could you talk about any Board discussions around once distributions recommence, whether there's going to be a change in policy to take advantage of the discount where the bonds are trading, where they're trading currently yielding close to 20%? Could there be a change in methodology where half of the excess cash flow goes to open market purchases or bonds and the other half goes to unitholder distributions?

We had our Board meeting yesterday. And all the questions that you just asked, I think the decision is that we're going to have that discussion at the next meeting, which will be in July. We did not have it at this meeting. There's just so much uncertainty right now as to what the timing of everything is. We felt that we would have better information in the next quarter to address these questions and try to tackle them, at this meeting. Because when we tried to look at that as a management team, the variables, the assumptions were so many that you found yourself saying, if this happened, then we would do this, if this happened, we do that. And we just need a little bit more clarity on how fast the economy's going to rebound before we can really answer those. Our feel like we can make decisions that are in the long-term best interest of everybody. So, we deferred that decision until the next quarter.

Okay. Am I hearing you say that open market purchase of bonds may be on the table going forward?

Everything's on the table. Everything's open for us to preserve our liquidity and try to provide long-term value for our shareholders and unitholders. So, everything’s on the table. We need to look at everything from incentive compensation to distribution policy to…

Capital allocation, generally.

Yes. Everything is open for consideration. As I mentioned in my prepared comments, we believe this year provides us with a solid foundation to build and grow. We need to evaluate all options in that regard.

Understood. Thank you.

Our next question comes from Shelly McNulty with Loomis Sayles.

Hi. Thanks for taking my question. I have a question on surety bonds. I believe you have about $280 million of surety bonds outstanding. Kind of want you to educate me on how that works? Are they renewed annually? Who provides the surety bonds to you? Is it a very diverse group of small insurance companies? What's kind of the tone you're hearing? And reading in some coal company 10-Ks, it's outlined as a risk that's getting harder to renew these types of instruments. And are you being asked to post more collateral, which you intend to use more letters of credit against your revolver in order to meet that? If you do, can you just kind of lay out that risk as it relates to Alliance Resources for me? That's my first question. And then, I have a follow-up.

We have a group of underwriters, insurance companies that we have very long relationships with that provide us our surety bonding. We're fortunate that the support for us remains strong. Frankly, it's a credit risk assessment from their perspective. That being said, there are certain insurance companies, underwriters that have indicated they are looking to no longer provide surety bonds to the coal industry generally. Those will phase out over time. But, the relationships that we have with other underwriters, we feel like there is currently sufficient capacity for those to be ultimately replaced. At this stage, we have not been asked specifically to increase collateral postings, et cetera. Clearly, there's risk around this area. But, all of the discussions that we've been having with our existing stable of underwriters and brokers, who help us navigate this, and others that are considering potentially entering the space as opportunities open up, we feel pretty good about where we stand today, subject to change clearly. But, that's the current state of affairs.

Okay, great. And then, as you measure your reserves, can you just remind me like what kind of underlying assumptions you're using for natural gas prices and coal prices in each of the regions?

Yes. On the oil and gas side, we believe that the market is undervalued, and we anticipate that prices for both oil and natural gas will recover more quickly than current projections indicate. I can’t provide exact figures because they fluctuate daily. If you were to ask me about it on Monday, for example, everything could be different by then. So, any number I give you today would likely change by Monday.

So, from an SEC disclosure standpoint, we're following the SEC-required guidelines in establishing our reserves.

Yes. But as far as looking at the market, we think that oil and gas prices will rebound probably higher than the strip, and I think likewise on the coal side. I mean, there's just no market activity. So, it's really hard to project…

What are SEC guidelines then for coal? What are you supposed to use per the SEC guidelines for disclosure on estimating your reserves?

Well, SEC for coal reserves, essentially, it's a judgment as to what is mineable and merchantable. Merchantable meaning what can you use mine to go for and sell at a profit? And that's similar to what we do for impairment tests. We do have a price curve that we have in our guidance that’s supported by internal numbers as well as outside sources. But, that's taking a longer-term view. These things go for decades. I thought your question was more specific; what's going to happen in the next two quarters or maybe next year. So, maybe I misunderstood your question.

And, Shelly, to get to a precise answer, you really can't establish a rule of thumb when you look at each operation, the qualities associated with that operation, the merchantable opportunities related to those qualities, transportation, logistics, et cetera, it's a detailed analysis that's probably beyond the scope of this conversation.

Okay. I'm not as familiar with the oil and gas segment and how you report the barrel of oil equivalent reserves. There's an aspect called PUDs, which have not been developed and can be removed from your reserve profiles if they haven't been developed within two years of permitting. I'm curious about the life of reserves you currently have with your mineral rights. How many years of reserves do you believe you have? Additionally, how do you assess the risk of developing those reserves, particularly the PUDs, especially if oil prices remain low for longer than anticipated?

Yes. Shelly, remember when you own the mineral interest, you own the underlying hydrocarbon and the reserve in perpetuity, which is what our position is. The reserve category going away, as you described it, really relates more to what can happen on the E&P side. If permits expire, wells end up getting dropped off of the planned drilling list, et cetera. That can cause a change very significantly for an oil and gas operator. The intrinsic ownership that we have in the underlying hydrocarbon really doesn't go away. The classification between P1, P2, P3 could shift, but the reserve itself remains intact.

So, when we look at those two, and that's how we do it, based on when the E&P company files their permits, that's where we can gauge what is most likely to occur. And that's what our guidance was set on back in January. Now, with the drop in pricing, these E&P companies are now having to reassess when they would actually complete those wells that they've been revising. That's certainly we have right now as to what their volume is and how fast that may decline as they decide to pull back, their completion crews, et cetera, and how they adjust their capital.

So, when a permit by an operator expires, it may cause that location to fall out of their reserve base, because they no longer have a lease in place. As an example, for us, the reserve remains intact. The pace of when it ends up being developed could definitely shift.

But, I think most E&Ps are still trying to get through the other side also. We're all trying to see when the supply can come back. So, hopefully that helps you.

Our next question comes from an unidentified analyst.

Good morning. Thank you. A part of this question was asked, but I'd like to follow on. One, the $100 million expected cost reduction to G&A and development capital improvements and combined with the liquidity from the resigning of the revolving credit. Mapping that out against this trailing ratio, you've probably done some scenarios to calculate what kind of liquidity you could potentially see in the next three to six months. And that's some of the discussion about bonds and/or opportunistic mineral purchases. Is there also equity reduction, and we've done that from time to time, taking back units? Is that part of the equation as well as everything on the table?

At this stage, I would not expect to see us engage in unit buybacks. We have a small amount remaining on the original authorization from last year, which was a $100 million. I think we have $6.5 million remaining under that authorization. But, again, everything is on the table. But, our focus in the near term is to make sure that we maintain sufficient liquidity and having compliance to manage through the current situation. The other thing that you're not taking into consideration, we did temporarily halt our distributions for two quarters. And our cash payout on those distributions is roughly $52 million a quarter, I believe. So, that's on top of the $100 million of capital reduction, working capital reduction, and G&A reduction that we outlined.

The second part of that is that significant unit purchases are not currently being considered. You've mentioned the mineral assets; if opportunities arise there, is there anything else? From a strategic standpoint, are you looking at the other producers in your sector? Everyone has been affected by the same macro events. Are there any opportunities to explore on the coal front? Is that a strong possibility, or are you encountering any developments?

Consolidation is needed in the coal space, and we're a consolidator. Nothing currently being done, but it needs to happen. Whether it does or not, I can't predict. But, that needs to happen, and we are a willing participant in that.

Our next question comes from Eric Fredback with Pacific Value.

Hey, guys. Thanks for taking my call. Most of my questions have been answered. I was just curious if there's any update on potential coal plant closures here in the next year or two, considering what's happened in the last few months?

No, there's no update on that from our view at this stage.

Thank you.

Our next question comes from an unidentified analyst.

I'm here. Can you hear me?

Good morning.

Good morning. I’ll tell you, listening to this call so far, it seems pretty positive to me. And I'm an investor. I'm not a big investor. I have about 13,000 units. I just doubled them recently. From everything I read, it just seems to me that you guys have to be unbelievably great managers. But, the question I have is just, looking over the figures, you had a loss of $144.8 million. The way I look at it, you had $157 million of that was non-cash and $132 million of it was a write-off of goodwill. It seems if you didn't have those two things, you would have had an operating profit of somewhere around $12 million. I understand that writing off those intangibles is a big deal. But it seems like a pretty good thing to do in this market. So, I just want to ask, is that somewhere near right?

Yes. The way you work through the math is correct. As we indicated in our comments, when you exclude the non-cash items, our adjusted net income for the quarter was $12.2 million and our adjusted EBITDA was $98.3 million. The asset impairment and goodwill impairment, those are reflective of current market conditions and are dictated by Generally Accepted Accounting Principles.

Absolutely…

Yes.

It makes a lot of sense to me, and I just wanted to add my thoughts. I've been researching the company for quite some time, and I believe that in such a challenging industry like coal, you have established a strong position and have done an excellent job. I wanted to express that.

Very much appreciated.

Thank you, Maurie. I appreciate the support and the comments.

This concludes our question-and-answer session. I would like to hand the call back over to Brian Cantrell for any closing remarks.

Thank you, Allie. Listen, we appreciate everyone's time this morning. It's obviously a challenging environment that we are all trying to manage through; your continued support and interest in Alliance are very much appreciated. We look forward to our next call and the discussion of our second quarter results, as well as an update on our operational plans that are in place at that time. This concludes our call for today. Thanks to everyone for your participation and your continued support of Alliance.

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