Categories Earnings Call Transcripts, Energy

Alliance Resource Partners LP  (NASDAQ: ARLP) Q1 2020 Earnings Call Transcript

ARLP Earnings Call - Final Transcript

Alliance Resource Partners LP  (ARLP) Q1 2020 earnings call dated May 08, 2020

Corporate Participants:

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

Joseph W. Craft III — President, Chief Executive Officer and Director

Analysts:

Mark A. Levin — Seaport Global — Analyst

Lucas N. Pipes — FBR Capital Markets & Co — Analyst

Nick Jarmoszuk — Stifel — Analyst

Shelly McNulty — Loomis Sayles — Analyst

Chuck Deiz — DSA — Analyst

Eric Fredback — Pacific Value — Analyst

Murray Hiten — MP Hiten LLC — Analyst

Presentation:

Operator

Good morning, and welcome to the Alliance Resource Partners, L.P. First Quarter 2020 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 Cantrell, Senior Vice President and Chief Financial Officer. Please go ahead.

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

Thank you, Eiley, 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 also be discussing certain non-GAAP financial measures. Definitions and reconciliations of these 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 this morning, I’ll 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 mineral 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. And 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, the 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 an exceptional 10% per ton reduction in the Appalachian segment’s cost per ton, resulting in a 4.3% sequential increase to total segment adjusted EBITDA expense per ton from our coal operations. Lower coal sales volumes were also the primary contributor to a 24.3% sequential reduction in segment adjusted EBITDA from coal.

Turning now 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, comparison of ARLP’s — sorry, 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 remain comfortably in compliance with our debt covenants, including total debt of approximately 1.6 times trailing 12 months EBITDA.

With that, I’ll now turn the call over to Joe. Joe?

Joseph W. Craft III — President, Chief Executive Officer and Director

Thank you, Brian. Good morning, everyone. As you are all aware, the global economic conditions for all commerce have been fundamentally altered this year as a result of 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, the 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 well-being of employees, the needs of our customers and protecting our balance sheet. As inventories were growing at our mining operations, we began closely — are working closely with our customers to assess anticipated shipping schedules. It became clear, we could meet our Illinois Basin 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. The MC Mining complex in Eastern Kentucky shortly thereafter.

To reliably service the needs of our customers, production operations continued on a four-day-a-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 1 focus and the health and well-being 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 on-site 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 learn more about this pandemic, we continued to adapt and improve these measures at all of our mines.

Among the many precautions taken at 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 to 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 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 base 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 initiatives are inspiring, and each of them have 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 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 made the decisions necessary to ensure ARLP maintain 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 of 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 strengths 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 a 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 in our lessees’ throttling back production.

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As we look beyond this year, we are hopeful that 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 than later. As I mentioned in our press release this morning, and 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 strategy for success has been to create sustainable growth and cash flow and deliver consistent growth in 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.

Questions and Answers:

Operator

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

Mark A. Levin — Seaport Global — Analyst

Thanks very much, and congratulations on the revolver amendment and extension. Just a few quick questions. Maybe I’ll start with you, Brian. When you’re thinking about excess cash flow in 2020, I think you referenced $100 million of cash savings this year. So when you think about excess cash flow, and I realize you guys aren’t giving guidance, but you’ve lowered your capex fairly meaningfully. Again, any scenarios this year in which you can envision not generating meaningful excess cash?

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

I mean, obviously, Mark, there’s tremendous uncertainty out there. And I’m sure, as you can imagine, we’ve run 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 pulled thus far, and 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 have likely the ability to not only sustain the liquidity we had at the end of the first quarter, but have an opportunity to see that liquidity expand throughout the year.

Mark A. Levin — Seaport Global — Analyst

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 cost for the balance of the year given those factors?

Joseph W. Craft III — President, Chief Executive Officer and Director

Yeah. I think it’s — as we look at trying to anticipate that, it’s really difficult to know exactly what our production levels are going to be. And I think we believe that the way we have planned it, we hope to bring down our inventory in the second quarter, so that in the back half of the year, we’re essentially producing to meet our contractual commitments. And that should allow us to operate at more normal run rates as opposed to what we’ve been running through the first quarter, and for those mines have been running in April, where we’ve been running at reduced ships. So running at reduced shifts is very inefficient. And that’s one of the reasons why you’ve seen the elevated cost in the first quarter at the Illinois Basins, because we’ve been — through the first quarter, in most cases, we were operating at four-day shifts and at most of the operations, we were taking time off for safety training, etc.

So — and as we go forward, we’re not exactly able to move everything to low-cost operations because we have contracts that are designed to be sold from specific mines. And we are not — we don’t have the flexibility to just move all of our production to the lowest cost operations to satisfy some of those contracts. But as we think through what that cost level should be, it should trend back something closer to what we would be, but we are going to be operating at lower capacity. So it won’t go back to our pre-guidance levels or our January levels, but I don’t think it’s going — I mean, it should be better than what you will see in the second quarter. I mean the second quarter is going to be bad just because we had most of our mines down in the month of April. And once we get through that, I think the second half of the year, the cost should be probably slightly less than what we’ve seen in the first quarter for the Illinois Basin, but we should be able to bring our mines back with a staffing level that’s as efficient as possible, given the sizing of the mine with the overhead that we do have. So hopefully, that’s helpful.

Mark A. Levin — Seaport Global — Analyst

No, that’s very helpful, Jim [Phonetic]. That’s exceedingly helpful. And then my last question, just asking…

Joseph W. Craft III — President, Chief Executive Officer and Director

If I may just leave you with [Speech Overlap] our geology hasn’t changed, right? And our people haven’t changed. So what we’re dealing with, like everybody else in America, in most cases, is a demand issue and trying to time our supply through that demand, unfortunately, because the demand was so severe. It created inefficiencies. I think we’ve taken steps to eliminate those as much as possible. At the same time, we want to be ready if and when our customers may see a surge later on if natural gas prices rise, like some people are projecting. So it’s a balancing act.

As we said in the prepared comments, we’re very focused on cash flow, but we’re very focused on meeting the needs of our customers. So 2020 is going to be an unusual year. And I just caution everybody not to think in terms of what happens quarter-to-quarter is going to be sort of baked in the case as we move forward. We will get back to operating our mines at full capacity. And we will get back to being that low-cost producer that sets us apart in the industry.

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

Yeah, Mark, adding on to Joe’s comments, we did indicate that — the good news is we’re working very, 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 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, look at our contractual relationships and our customer relationships and see through this. That’s the way we’re trying to approach it.

Mark A. Levin — Seaport Global — Analyst

And that all makes sense. And I was going to just — on 2021, so I think at the end of last quarter, you guys had about 18 million tons [Phonetic] roughly, put to bit. I’m curious, were there any deferrals that you saw or are seeing in 2020 that would maybe change that contractual position in 2021 and have any impact on how to think about price in 2021 on those contracted tons?

Joseph W. Craft III — President, Chief Executive Officer and Director

I think currently, we’re still at that number.

Mark A. Levin — Seaport Global — Analyst

Okay.

Joseph W. Craft III — President, Chief Executive Officer and Director

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 the 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 by 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.

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

But, as you noted —

Mark A. Levin — Seaport Global — Analyst

And this 270 — yeah, go ahead.

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

Real quick, Mark, as you noted what our guidance back in January was for 2021 contractual commitments, our total commitments in 2020 were $29.4 million, and we’re totaling at $28 million today. The key point is those contracts generally have minimum and maximum parameters around that. So we haven’t lost contracts. We haven’t really experienced deferrals at this point. But not surprisingly, people are looking to take at the minimum levels, as Joe mentioned.

Joseph W. Craft III — President, Chief Executive Officer and Director

Deferrals into next year.

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

Yeah.

Joseph W. Craft III — President, Chief Executive Officer and Director

We have seen the…

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

Deferrals quarter-to-quarter. Yeah.

Mark A. Levin — Seaport Global — Analyst

Yeah, that makes sense. Last question. Is $2.75 gas kind of the magic number, if you had to pick a sort of magic number where do you think some of the coal capacity starts to ramp up and some of your customers really start getting back online. What’s the magic gas number? I realize it depends on a number of different factors, but if you had to just pick one number, what would it be?

Joseph W. Craft III — President, Chief Executive Officer and Director

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

Mark A. Levin — Seaport Global — Analyst

Yeah. Okay. Great. Thanks, guys. Appreciate it.

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

Thanks, Mark.

Operator

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

Lucas N. Pipes — FBR Capital Markets & Co — Analyst

Hey. Good morning, everyone. I hope you’re [Speech Overlap].

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

Good morning, Lucas.

Lucas N. Pipes — FBR Capital Markets & Co — Analyst

Also, good job on taking decisive action here during this pandemic and protecting the worker’s safety. I wanted to kind of touch on the market balance for the Illinois Basin. You’re obviously a low-cost producer. You’ve taken a lot of tons out. Have you 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? Would appreciate your color on that. Thank you.

Joseph W. Craft III — President, Chief Executive Officer and Director

I think relative to the response of others, I think others have, in fact, done similar in the situation of — they haven’t actually — they haven’t publicly announced that they idled their operations for a full month. But we do believe that everybody is working at reduced shifts. They’re taking time off. They’re having to manage their supply to meet their customer transaction because there’s just no spot market. So everybody is trying to operate for cash flow. So we do believe that supply is coming off. And it will come off for the year.

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So specifically, I think you asked Illinois Basin. I think, on the last call, we targeted thinking production was going to be around mid-80s. And at this time, I would say it’s going to be in the mid-70s. That again, I think the last time when I said the mid-80s, we were thinking 5 million to 6 million tons of export, and we’re still — that assumption is still baked into that mid-70s number as far as the production in the Illinois Basin. I’d say that map — I mean, for me, everything is sort of hovering around that 30% drop. Whether it be — I mean, everything we’re doing is about 30% to our contracts. It seems to translate probably across the basins where we’re operating…

Lucas N. Pipes — FBR Capital Markets & Co — Analyst

That’s very helpful. I appreciate your…

Joseph W. Craft III — President, Chief Executive Officer and Director

That’s year-over-year.

Lucas N. Pipes — FBR Capital Markets & Co — Analyst

Yes. And then maybe switching side to the minerals business. What do you think is kind of 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 it sits in? Well, we still have confidence in that segment. We feel like the assets that we have are in the core of the 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 we will do anything and everything that can to maintain that position in the world economy, like 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 is back to demand and supply. I think supply is running off faster than probably 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, you would expect a pretty significant increase in prices back to a level where it’s sustaining, which we think is at least mid-40s. So from a long-term strategic play, nothing’s changed and answered 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 for people getting back on the road, people getting back on airplanes and supply is coming out probably at a faster clip than people thought. And that should allow for us to get to that balance. I can’t give you the precise timing because it really depends on when the economies, in fact, 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 the $10 oil. But if they did, we’d definitely be there to help them exit some of that space. So we feel like it’s — all the attributes that attracted us to that space. Still are intact. I think in hindsight, we should have instituted some hedging, which we did not do. And 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 and probably implement, so that we can hedge against such a sudden drop in pricing, which again, was impossible to forecast in my view, so. Joe, I really appreciate this color. And you and everybody best of luck, and good job

Joseph W. Craft III — President, Chief Executive Officer and Director

Thanks, Lucas.

Operator

[Operator Instructions] our next question comes from Nick Jarmoszuk with Stifel.

Nick Jarmoszuk — Stifel — Analyst

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?

Joseph W. Craft III — President, Chief Executive Officer and Director

We would think — I mean it’s — again, it’s hard to predict. But because you’ve got to overlay that question with what is the economic impact. What is the demand — in general for energy? So if we could get back to, say, 2019 levels of thinking the economy is going to be running and something similar to 2019, that could be a very sizable number. If you want to think it’s something less than that, say, 10% or so less than 2019 levels than maybe we’re thinking it could be 20 million tons per — and what I’m looking at is the Eastern U.S. So I’m not looking at the total U.S. market, when I say that. So I would just be looking at our market area. It could be something in that level going safely back.

Nick Jarmoszuk — Stifel — Analyst

So would that’d be for the Illinois incremental, for Illinois Basin demand and NAP demand? Or would that be more skewed toward one basin?

Joseph W. Craft III — President, Chief Executive Officer and Director

No, for both. Yeah. For both.

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

And Nick, thinking through the flow-through of a higher gas price environment to a benefit to 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.

Joseph W. Craft III — President, Chief Executive Officer and Director

Right.

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

They’re at high stockpile levels today. So it could just physically take time to work those stockpiles down to, “normal levels”, or they could say, I’m going to keep a higher cold stockpile in light of a higher natural gas price environment, and it may cause them to come back into the market for RFP sooner. Those are some of the unknowns that we’re trying to manage our way through.

Joseph W. Craft III — President, Chief Executive Officer and Director

And that’s a very good point. And my numbers were assuming that they would work off inventory first.

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

First. Right.

Joseph W. Craft III — President, Chief Executive Officer and Director

So Brian and his — if they decide that they want to keep their inventory levels because of concerns about whatever second waves or whatever, then that number could go higher.

Nick Jarmoszuk — Stifel — Analyst

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

Joseph W. Craft III — President, Chief Executive Officer and Director

That’s both — it’s capex, working capital…

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

And G&A.

Joseph W. Craft III — President, Chief Executive Officer and Director

G&A.

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

Not much as those two items.

Joseph W. Craft III — President, Chief Executive Officer and Director

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

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

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’s coming down, I believe it’s 25% to 30% off of that number.

Joseph W. Craft III — President, Chief Executive Officer and Director

Some of that was non-cash.

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

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

Nick Jarmoszuk — Stifel — Analyst

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

Joseph W. Craft III — President, Chief Executive Officer and Director

We hope so.

Nick Jarmoszuk — Stifel — Analyst

Okay. And then the last item, understanding that distributions have been suspended for first quarter, second quarter, can 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 currently yielding close to 20%. Could there be a change in methodology where half of the excess cash flow goes to open market purchases of bonds and the other half goes to unitholder distributions?

Joseph W. Craft III — President, Chief Executive Officer and Director

We had a 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 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 happen, we’d do that. And we just need a little bit more clarity of how fast the economy is going to rebound before. We can really answer those or 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.

Nick Jarmoszuk — Stifel — Analyst

Okay. But am I supposed to — am I hearing you say that open market purchases of bonds may be on the table going forward?

Joseph W. Craft III — President, Chief Executive Officer and Director

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

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

Capital allocation, generally.

Joseph W. Craft III — President, Chief Executive Officer and Director

Yeah. So everything is on the table. This is — like I said in my prepared comments. We feel like this year, we’ve now got a new foundation from which to build and grow. And we need to look at everything in that light.

Nick Jarmoszuk — Stifel — Analyst

Understood. Thank you.

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

Okay, Nick.

Operator

Our next question comes from Shelly McNulty with Loomis Sayles.

Shelly McNulty — Loomis Sayles — Analyst

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 kind of 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? I’m reading in some coal company 10-Ks. It’s outlined as the 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 kind of risk as it relates to Alliance resources for me? That’s my first question. And then I have a follow-up. Thanks.

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

Our — we have a group of underwriters, insurance companies that we have very long relationships with that provide us our surety bonding. We are 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.

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At this stage, we have not been asked specifically to increase collateral postings, etc. Clearly, there’s risk around this area. But all of the discussions that we’ve been having with our existing stable of underwriters, working with our brokers who help us navigate this. Others that are considering potentially entering the space as opportunities open up where we feel pretty good about where we stand today. Subject to change clearly, but that’s the current state of affairs.

Shelly McNulty — Loomis Sayles — Analyst

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?

Joseph W. Craft III — President, Chief Executive Officer and Director

We can address — on the oil and gas side, we probably believe that the strip is undervalued. I mean we think that the prices will rebound faster than what the script suggests for both oil and natural gas. They gave you precise numbers because they change every day. Every — we have the Monday called educate me on what’s going on. Every week everything changes. So if I gave you a number today, it’s going to change on Monday.

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

But from an SEC disclosure standpoint, we’re following the SEC required guidelines and establishing our reserves.

Joseph W. Craft III — President, Chief Executive Officer and Director

Yeah. But as far as our — looking at the market, we think the oil and gas prices will rebound, probably higher than the script. And I think likewise, on the coal side. I mean there’s — on the coal side, it’s — there’s just no market activity. So it’s really hard to project…

Shelly McNulty — Loomis Sayles — Analyst

What are the SEC guidelines then for coal? Is it — what do you — what are you supposed to use kind of SEC guidelines for disclosure on estimating your reserves?

Joseph W. Craft III — President, Chief Executive Officer and Director

SEC for coal reserves, essentially, it’s a judgment as what is mineable and merchantable. Merchantable meaning what can you mine the coal for and sell at a profit. And that’s similar to what we do for impairment tests. So 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. I mean these things go for 10 years, 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.

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

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

Shelly McNulty — Loomis Sayles — Analyst

Okay. And then just in terms of like — I’m not as familiar with the like oil and gas segment and how you report the barrel of oil equivalent reserves. But there’s an aspect of, I guess, it’s called the PUDs. They have not been developed. I guess they can get eliminated from your reserve profile if they haven’t been developed within two years of permitting. I’m just wondering in terms of the life of reserves that you have now, with your mineral resides — mineral rights, how many years of reserve do you think you have. And then what — how you think about the risk of developing those reserves, the PUDs, in particular, I guess, given — if we keep — have oil prices remain low for longer than expected? How do you think about that?

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

Yeah, Shelly, remember, when you own the mineral interest, you own the underlying hydrocarbon in the reserve and 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, etc., 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.

Joseph W. Craft III — President, Chief Executive Officer and Director

So when we look at those that’s how we do — I mean, 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. They’ve been in their horizon, and that’s the uncertainty we have right now as to what the volume is and how fast that may decline as they decide now to pull back their completion crews, etc., and how they adjust their capital.

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

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 might remains intact, the pace of when it ends up being developed could definitely shift.

Joseph W. Craft III — President, Chief Executive Officer and Director

But I think most E&Ps are still trying to get through the other side also. So we’re all trying to see when that supply can come back. So — I hope that helps you.

Operator

Our next question comes from Chuck Deiz [Phonetic] with DSA.

Chuck Deiz — DSA — Analyst

Good morning. Thank you. A part of this question was asked, but I’d like to follow-up on that. One, the $100 million expected cost reductions 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 potentially could 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? I know you’ve done that from time to time, taking back units. Is that part of the equation as well? Is it everything on the table?

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

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 $100 million. I think we have $6.5 million or so 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 covenant 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.

Chuck Deiz — DSA — Analyst

And then, I guess, the second part of that, so the unit purchases aren’t on the table, at least anything significant. You’ve talked about the mineral, if the mineral assets or opportunities came available, anything else? Is there anything from a strategic — looking at the rest of the producers in your space, everybody has been hit the same. It is a huge macro event. Would there opportunistically be anything to dig deeper on the coal side. Have you — is that a very high possibility? Or are you seeing anything yet?

Joseph W. Craft III — President, Chief Executive Officer and Director

The consolidation is needed in the coal space, and we’re a consolidator, nothing currently being done, but it needs to happen. And whether it does or not, I can’t predict. But that needs to happen. And we are a willing participant in that.

Chuck Deiz — DSA — Analyst

Alright. That’s good to hear. That’s it. Thank you.

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

Thank you, Chuck. Appreciate it.

Operator

Our next question comes from Eric Fredback with Pacific Value.

Eric Fredback — Pacific Value — Analyst

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.

Joseph W. Craft III — President, Chief Executive Officer and Director

No, there’s no update on that, from our view. That has changed.

Eric Fredback — Pacific Value — Analyst

Okay. Thanks. That’s all I got.

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

Appreciate that. Thank you.

Joseph W. Craft III — President, Chief Executive Officer and Director

Our next question comes from Murray Hiten [Phonetic] with MP Hiten LLC.

Murray Hiten — MP Hiten LLC — Analyst

I’m here. Can you here me.

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

Good morning.

Murray Hiten — MP Hiten LLC — Analyst

Good morning. I’ll tell you, I was listening to this call so far, it seems pretty darn positive to me, and I’m an investor, not a big investor. I have about 13,000 units. I just doubled them recently. And it’s primary thing I read, it just seems to me that you guys have to be unbelievably great managers. But the question I have, just in 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 to me if you didn’t have those two things, you would have had an operating profit of somewhere around $12 million. And 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 wanted to ask if that is somewhere near, right?

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

Yeah. 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, goodwill impairment, those are reflective of current market conditions and the process is dictated by generally accepted accounting principles…

Murray Hiten — MP Hiten LLC — Analyst

Absolutely [Speech Overlap]

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

Non-cash. Yes.

Murray Hiten — MP Hiten LLC — Analyst

It makes a lot of sense to me. And I just — wanted to chime in. I’ve done a lot of reading on the Company in the last — I’ve had it for a long time. But I’ve done a lot of reading on it. It just seems to me that everything you do in these markets, in an industry that’s a tough industry to start with in coal, you have such a strong position in it and you’ve just done a great job. And I just wanted to chime in and say that.

Joseph W. Craft III — President, Chief Executive Officer and Director

Very much appreciate.

Murray Hiten — MP Hiten LLC — Analyst

And that’s all I have.

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

Thank you, Murray. Appreciate the support and the comments.

Operator

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

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

Thank you, Eiley. 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 is very much appreciated. We look forward to our next call and a 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.

Operator

[Operator Closing Remarks]

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