In midst of weak coal market, Alliance turns in relatively strong Q2

Based on current expectations, Alliance Resource Partners LP (NASDAQ: ARLP) is essentially fully priced and committed for its anticipated 2012 coal sales volumes, the company said July 27.

ARLP has also secured coal sales commitments for about 36.1 million tons, 29.3 million tons and 22.8 million tons in 2013, 2014 and 2015, respectively, of which approximately 1 million tons in 2013 and 2.9 million tons in both 2014 and 2015 remain open to market pricing.

Compared to the 2011 second quarter, net income for ARLP in the second quarter of this year declined 2.8% to $95.5m, or $1.83 per basic and diluted limited partner unit due to anticipated increases in depreciation, depletion and amortization expense and the pass through of losses related to investments in start-up Illinois coal producer White Oak Resources LLC.

“ARLP’s operating strength, quality customer relationships and solid contract position allowed us to overcome challenging market conditions and deliver another quarter of excellent results to our unitholders,” said Joseph Craft III, President and CEO. “In addition to posting record EBITDA, sales volumes and revenue, our team’s accomplishments during the 2012 Quarter continued to strengthen ARLP’s long-term growth prospects. Operationally, we commenced longwall operations in mid-May at our Tunnel Ridge mine, completed the acquisition of the Onton No. 9 mine and continued to make progress at the Gibson South and White Oak mine development projects. On the sales side, we continued to execute ARLP’s strategy of securing long-term commitments for our production. To that end, we recently reached agreement for the sale of approximately 5.6 million tons over a six-year period. Since the beginning of the year, we have now made new coal sales commitments of 27 million tons, plus or minus 10% depending on customer nominations, for deliveries through 2018.”

Reflecting record sales volumes and pricing, coal sales revenues rose to $512.5m in the 2012 Quarter, an increase of 15.8% compared to the 2011 Quarter. Improved price realizations, particularly in the Illinois Basin and Northern Appalachia, drove total average coal sales prices higher in the 2012 Quarter to a record $59.17/ton sold, a 5.5% increase compared to the 2011 Quarter. Higher sales volumes in the Illinois Basin and Northern Appalachia, particularly at the Warrior (western Kentucky) and Tunnel Ridge (northern West Virginia) mines and the newly acquired Onton mine (western Kentucky), as well as increased brokerage sales volumes, pushed coal sales volumes up 9.8% in the 2012 Quarter to a record 8.7 million tons.

The increases at Warrior, Tunnel Ridge and Onton also contributed to higher coal production of 8.2 million tons in the 2012 Quarter, an increase of 8.6% compared to the 2011 Quarter. These higher coal sales and production volumes drove operating expenses in the 2012 Quarter higher to $334.6m, an increase of 17.8% 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 in Illinois. The preferred equity investment in White Oak requires ARLP to record substantially all of White Oak’s income and losses until ARLP achieves it contractual preferred return. As a result, net equity in loss of affiliates in the 2012 Quarter primarily reflects the pass through of approximately $4.6m of losses related to White Oak’s mine development activities.

For the six months ended June 30, increases at the River View and Tunnel Ridge mines and the acquisition of the Onton mine in the 2012 Quarter led to record production and sales volumes as tons produced climbed 6.0% and tons sold increased 6.8%, compared to the six months ended June 30, 2011. Higher coal sales volumes and increased average coal sales prices, which rose $2.08 per ton sold, combined to drive 2012 Period revenues to a record $973.5m, an increase of 10.5% compared to the 2011 Period.

With new mines in hand, Alliance scores record production in the second quarter

Reflecting higher Illinois Basin, Northern Appalachia and brokerage sales volumes, ARLP sold a record 8.7 million tons of coal in the 2012 Quarter, an increase of 9.8% over the 2011 Quarter. Coal sales volumes in the Illinois Basin increased from the 2011 and Sequential Quarters, primarily as a result of strong sales and production performance from the Warrior mine and the addition of the Onton mine.

In Central Appalachia, lower coal sales volumes compared to the 2011 Quarter reflect the loss of a production unit at the Pontiki mine in eastern Kentucky in the third quarter of 2011 and, compared to the Sequential Quarter, the loss of a production unit during the 2012 Quarter at the MC Mining mine, each due to regulatory action.

Coal sales volumes in Northern Appalachia increased from the 2011 and Sequential Quarters reflecting the start-up of longwall production in the Pittsburgh seam at the Tunnel Ridge mine in May. Sequentially, Northern Appalachia also benefited from higher export sales as tons that had been deferred from the first quarter of 2012 were shipped from the Mettiki mining complex during the 2012 Quarter.

Total coal inventory declined by approximately 243,000 tons during the 2012 Quarter to approximately 822,000 tons. ARLP continues to anticipate coal inventories will trend lower throughout the balance of this year.

Compared to the 2011 Quarter, ARLP continued to benefit from improved contract pricing, particularly in the Illinois Basin and Northern Appalachia, as total average coal sales price increased 5.5% to $59.17 per ton sold in the 2012 Quarter. Sequentially, total coal sales prices increased 7.6% due primarily to the previously mentioned higher priced export shipments in the 2012 Quarter.

Commenting on ARLP’s outlook, Craft said: “The first half of 2012 has been an extremely challenging market environment for the coal industry as the U.S. experienced significant year-over-year declines in coal-fired electricity generation causing a steep reduction in domestic coal demand. Recently, hotter weather patterns, rising natural gas prices, strong export thermal sales and supply reductions by other coal producers gives us hope that better days are ahead for the coal markets. We still are concerned, however, about a weak U.S. economy and the direction of the global economy. This weakness and uncertainty has impacted demand and pricing for our metallurgical coal sales for the remainder of this year. We expect to ship the last 70,000 tons on our high-priced export contract in July. We are in negotiations to continue shipping into the export metallurgical market but cannot predict if, or when, shipments will resume. On a positive note, at Tunnel Ridge our production was 300,000 tons in the 2012 Quarter and is expected to grow to 900,000 tons in the third quarter of 2012 and reach 1.2 million tons in the fourth quarter of this year. With our strong balance sheet and contract portfolio, as well as the increased production from Tunnel Ridge, ARLP is well positioned to manage through these near-term challenges and we expect to deliver record EBITDA results consistent with previous guidance.”

Reflecting results to date and adjusting for current coal sales and production mix expectations, ARLP currently anticipates full-year 2012 results near the lower end of its previous guidance ranges for production volumes of 35.2 million to 36.4 million tons, sales volumes of 35.6 million to 36.9 million tons and revenues, excluding transportation revenues, of $2.06bn to $2.12bn.

ARLP continues to anticipate total 2012 capital expenditures in a range of $565m to $610m, including approximately $95m to $110m for reserve acquisitions and construction of surface facilities related to the White Oak mine development project. In addition, ARLP now expects to fund $75m to $95m of its preferred equity investment commitment to White Oak during 2012.

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.