Despite the market headwinds that it and other coal producers are facing into due to factors like coal-to-gas switching by power generators, Alliance Resource Partners LP (NASDAQ: ARLP) said April 30 that it remains focused on delivering another year of record operating and financial results in 2012.
“Achieving this objective will not be easy, as year-over-year electricity generation and coal demand have fallen sharply,” said Joseph Craft III, President and CEO of ARLP. “With coal stockpiles at near record levels, traders and utilities continue to aggressively resell their previously purchased coal driving short-term coal prices to unsustainable levels. Although it will take time to work through the current supply overhang, we continue to be encouraged by longer term supply/demand fundamentals – particularly in the Illinois Basin and Northern Appalachia. As the coal markets settle, we will stay focused on managing customer relationships, controlling costs and positioning ARLP to take advantage of growth opportunities in the future.”
In the first quarter of this year, coal sales revenues for ARLP increased 5.4% to $429.6m due to higher sales volumes and pricing compared to the year-ago quarter. These increases were offset by higher operating costs and the pass through of losses related to the White Oak Resources LLC longwall mine development project in Illinois, which led to lower EBITDA and net income in the 2012 first quarter. Compared to the year-ago quarter, EBITDA fell 7.6% to $131.5m and net income declined 13% to $83m.
“During the 2012 Quarter, our operations performed well – meeting production and cost targets,” said Craft. “A mild winter and a slow economy delayed coal deliveries during the 2012 Quarter as inventories at our operations grew 575,000 tons more than planned causing our earnings to be below expectations. We view this inventory build as a timing delay as we expect these tons will be shipped over the balance of the year and benefit earnings in the upcoming quarters. We recently completed the acquisition of the Onton mine [in western Kentucky] and have updated our 2012 guidance to include this transaction and to reflect the start of the Tunnel Ridge longwall in late May. Our other projects at Gibson South and White Oak continue to move forward and we remain focused on delivering growth to our unitholders.”
Tunnel Ridge is a new Pittsburgh-seam deep mine in northern West Virginia, with mining to eventually extend into nearby Pennsylvania. Gibson South is a new deep mine project in Indiana near ARLP’s existing Gibson deep mine. White Oak is a new longwall mine being developed in Illinois by White Oak Resources, with ARLP recently having taken a financial position in this operation.
Reflecting higher coal sales prices and volumes, ARLP revenues rose to $443.6m in the 2012 Quarter, an increase of 4.8% compared to the 2011 Quarter. Improved pricing in the Illinois Basin and Central Appalachia offset lower export sales volumes in Northern Appalachia and drove total average coal sales price realizations higher in the 2012 Quarter to $54.99/ton sold, a 1.7% increase compared to the 2011 Quarter. Higher coal sales volumes at the River View (in western Kentucky) and Tunnel Ridge mines, as well as increased brokerage sales volumes, pushed sales volumes up 3.6% in the 2012 Quarter to 7.8 million tons.
River View, Tunnel Ridge help achieve record production
Increases at the River View and Tunnel Ridge mines also contributed to record coal production of 8.5 million tons in the 2012 Quarter, an increase of 3.6% compared to the 2011 Quarter. These higher coal sales and production volumes led to increased sales-related expenses, materials and supplies expenses, labor-related expenses and maintenance costs, which combined to drive operating expenses in the 2012 Quarter higher by 6.8% to $273.5m. Reflecting an increase in brokerage coal sales during the 2012 Quarter, outside coal purchases rose $10.4m compared to the 2011 Quarter.
As anticipated, ARLP’s financial results for the 2012 Quarter were negatively impacted by losses related to White Oak’s development of its Mine No.1. Since its equity investment in White Oak entitles ARLP to receive substantially all distributions from White Oak until ARLP achieves its contractual preferred return, accounting rules require ARLP to currently reflect substantially all of White Oak’s income and losses. As a result, for the 2012 Quarter, net equity in loss of affiliates increased $3.8m over the 2011 Quarter primarily due to the allocation of approximately $4m of losses related to White Oak’s mine development activities.
Reflecting higher Illinois Basin and brokerage sales volumes, ARLP sold 7.8 million tons of coal in the 2012 Quarter, an increase of 3.6% over the 2011 Quarter. Compared to the fourth quarter of 2011, however, weak market conditions drove brokerage coal sales and export volumes lower in the 2012 Quarter as total coal sales volumes fell by 4.4%. Coal sales volumes increased from the 2011 first and fourth quarters in the Illinois Basin primarily as a result of strong sales and production performance from the River View mine. Lower coal sales volumes in Central Appalachia reflect delayed contract shipments during the 2012 Quarter and the loss of a production unit at the Pontiki mine due to regulatory action during the 2011 third quarter.
Met coal shipments expected to fall in 2013
Delayed shipments of tons contracted for delivery into high-priced export market impacted coal sales from the Mountain View longwall mine in northern West Virginia and resulted in lower Northern Appalachian coal sales volumes in the 2012 Quarter, compared to both the 2011 first and fourth quarters. ARLP currently expects these delayed export shipments will be fulfilled at the contract price during the second and third quarters of 2012; however, total metallurgical sales for the 2013 fiscal year may be closer to 800,000 tons compared to the approximate 1 million tons per year level shipped during the 2011 and 2012 fiscal years.
Compared to the year-ago quarter, ARLP continued to benefit from improved contract pricing, particularly in the Illinois Basin, as total average coal sales price increased 1.7% to $54.99/ton sold. Sequentially, total coal sales prices decreased 2.8% due primarily to export shipment delays in Northern Appalachia.
Adjusting for results to date and updating current estimates to include the Onton mine acquisition and revised estimates from White Oak, ARLP currently anticipates the following full year guidance for 2012:
Coal Production and Sales Volumes – ARLP currently anticipates 2012 coal output of 35.2 million to 36.4 million tons. Coal sales volumes are now estimated at 35.6 million to 36.9 million tons, of which about 98% is contractually committed and priced. ARLP has also secured coal sales commitments for around 34.6 million tons, 28.8 million tons and 21.5 million tons in 2013, 2014 and 2015, respectively, of which about 4.9 million tons in 2013 and 3.8 million tons in both 2014 and 2015 remain open to market pricing.
Per Ton Revenue and Cost Estimates – ARLP expects 2012 revenues in a range of $2.06bn to $2.12bn, excluding transportation revenues. Despite expectations of reduced export sales volumes and pricing, total average coal sales prices in 2012 are still estimated to be higher than 2011 realizations by 1% to 3%, but below original expectations of 2% to 4%. Reflecting currently anticipated coal sales and production mix for 2012, ARLP now expects realized margins per ton to be 4% to 6% below last year.
EBITDA and Net Income – For 2012, ARLP is adjusting its anticipated ranges for consolidated EBITDA to $585m to $615m and net income to $345m to $385m. Consolidated estimates for 2012 continue to reflect the negative effects of ARLP’s White Oak investments on EBITDA, $20m to $25m, and net income, $15m to $20m.
Capital Expenditures and Equity Investments – During the 2012 Quarter, ARLP made progress at Tunnel Ridge, Gibson South and White Oak, as well as with planned mine extensions, infrastructure improvements and maintenance projects at various operations. The Onton No. 9 mine acquisition was completed in April. Reflecting progress to date on existing capital projects and updating for the Onton acquisition, ARLP currently anticipates total 2012 capital expenditures, including maintenance capital, of $565m to $610m. Reflecting revised estimates from White Oak, ARLP’s total capital spend for 2012 currently includes $95m to $110m for reserve acquisitions and construction of surface facilities related to the White Oak project. Also, ARLP now expects to fund $60m to $80m of its preferred equity investment commitment to White Oak during 2012.
ARLP, the nation’s first publicly traded master limited partnership involved in the production and marketing of coal, is currently the third largest coal producer in the eastern U.S. with mining operations in the Illinois Basin, Northern Appalachia and Central Appalachia. ARLP operates eleven mining complexes in Illinois, Indiana, Kentucky, Maryland and West Virginia.