Good morning and welcome to Alliance Resource Partners, L.P. First Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] 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 prospective 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. And providing these remarks, the partnership has no obligation to publicly update or revise any forward-looking statement whether as a result of new information, future events or otherwise, unless required by law 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 the 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…

Thank you, Brian. Good morning, everyone. As you are all aware, the global economic conditions for all commerce [ph] 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 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 were growing at our mining operations, we began closely -- working closely with our customers to assess anticipated shipping schedules. It became clear, 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 a week schedule at our Tunnel Ridge and met Mettiki mining complexes. This week, we partially resumed production at our…

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

Thanks very much, and congratulations on the 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?

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 press far, 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 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. I think, as we look at trying to anticipate that it's really difficult to know exactly what our production levels are going to be. 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 rate as opposed to what we've been running through the first quarter and for those mines had been running in April, where we've been running at reduced shifts. 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 Basin. Because we've been -- through the first quarter in most cases we were operating in a four day shifts; at most of the operations, we were taking time off for safety, training, et cetera. 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 costs operations to satisfy some of those contracts. But, as we think through what that cost level should be, it should trim 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, so our January levels. But, I don't think it's going -- I mean it should be better than what your -- 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 that we should be able to bring our mines back with a staffing level that is efficient as possible, given the sizing of the mine with the overhead that we do have. So, hopefully that's helpful.

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

Our geology hasn't changed. And our people haven't changed. But, what we're dealing with, like everybody else in America, in most cases is a demand issue, and trying to tie our supply to 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. It’s going to be sort of baked into -- 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.

Yes. 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.

And that all make 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 roughly put to bed. 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?

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 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, 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 recovering economy.

As you noted -- real quick, Mark, as you noted, what our guidance back in January was for 2021 contractual commitments. Our total commitments in ‘20 were 29.4 million, and we're telling 28 today. The 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…

Deferrals in the next year.

Yes, deferrals quarter-to-quarter. Yes.

Yes. 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 you think some of the coal -- capacity starts to ramp up and some of your customers really start getting back on line? 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?

I think, in the MISO-PJM, that's probably a good number. If you go to 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 the workers’ 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 tops out. Haven’t seen similar actions from some of your peers. Maybe you could comment on that. Have you seen more of 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, they haven't actually -- 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. 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. Again, I think the last time when I said the mid-80s, we were thinking 5 to 6 million tons export, we're still -- that assumption is still baked into that mid70s number, as far as the production in Illinois Basin. I’d say that -- for me, everything's sort of hovering around that 30% drop. Whether it’d be everything we're doing it's that 30% to our contracts, it seems to translate comparably across the basins where we're operating.

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 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 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, we would expect a pretty significant increase in prices back to the level where sustaining, which we think is at least 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 for people back on the road, people getting back on airplanes and supplies 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 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 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 -- yes, 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. 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, probably implement, so that we can hedge against such a sudden drop in pricing, which, again was impossible to forecast.

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

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

We would think -- again, it’s hard to predict, but because you 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's going to be running 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, then maybe we're thinking, it could be 20 million tons. 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.

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 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. They're at high stockpile levels today. So, it could just physically take time to work those stockpiles down the quote unquote normal levels, or they could say, I'm going 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 for sooner. Those are some of the unknowns that we're trying to manage our way through.

And that's a very good point. And my numbers were assuming that they would work off inventory first. So, Brian, in 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.

And on $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, 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 first quarter, 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 of 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. But, am I supposed to -- or 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's on the table. This is a -- like I said in my prepared comments, we feel like this year, we now got new foundation from which to build and grow. And we need to look at everything in that line.

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 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? 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 kind of 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, working with our brokers, who will help us navigate this, 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. We can address -- on the oil and gas side, we probably believe that the strip is undervalued, and we think that the prices will rebound faster than what the strip suggests for both oil and natural gas. I can't give you precise numbers because they change every day. If we had -- 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.

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

Yes. But as far as looking at the market, we think that oil on gas prices will rebound probably higher than the strip, 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…

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 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 test. 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. 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. And then, just in terms of like -- I'm not as familiar with like oil and gas segment, and how you report the barrel of oil equivalent reserves. But, there's an aspect of just as called the PUDs. They have not been developed. I guess, they can get eliminated from your reserve profiles; 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 rights, how many years of reserves do you think you have? And then, 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 a longer than expected? How do you think about that?

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. And that's certainly we have right now as to what their volume is and how fast that may decline as they decide our pullback, 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 [indiscernible].

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 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, 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 or 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 a 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.

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's been hit the same. It is a huge macro event. Would there opportunistically be anything to dig deeper on the coal side? Is that a very high possibility or are you seeing anything yet?

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.

Yes. Thanks. That’s all I got.

Thank you.

Our next question comes from [Indiscernible].

I'm here. Can you hear me?

Good morning.

Good morning. I’ll tell you, listening to this call so far, it seems pretty darn 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. And it's -- 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 and 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. 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 want to ask, is that -- is 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, goodwill impairment, those are reflective of current market conditions and the processes is dictated by Generally Accepted Accounting Principles.

Absolutely…

Yes.

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, that you've just done a great job. And I just wanted to chime in and say that.

Very much appreciated.

Thank you, Maurie [ph]. 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's 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.