Alliance Resource Partners LP (NASDAQ: ARLP) posted record coal sales and production volumes for the third quarter, however EBITDA and net income were negatively impacted by the unplanned idling of the Pontiki mine in eastern Kentucky and a lack of export sales due to weak demand in the global coal markets.
Alliance on Oct. 26 said its net income in the third quarter fell to $60.5m, or $0.89 per basic and diluted limited partner unit, compared to $104.1m, or $2.16 per basic and diluted limited partner unit, for the year-ago quarter. The decrease primarily reflects about $24.1m of losses and charges related to the idling of the Pontiki mine, including a $19m non-cash asset impairment, and approximately $17.8m due to reduced coal sales into the metallurgical export markets.
Said Joseph Craft III, Alliance President and CEO: “As we navigate through the current environment, we are steadily making progress in building for the future. During the 2012 Quarter, our development projects at Gibson South and White Oak continued to move forward in line with our expectations. Performance of our new Tunnel Ridge longwall continued to improve as its production in the 2012 Quarter reached 764,000 tons, which was nearly 500,000 tons better than the Sequential Quarter. We also continued to add to our sales book during the 2012 Quarter, securing new coal sales commitments for approximately 1.65 million tons to be delivered through 2014, bringing our total year-to-date new commitments to approximately 28.7 million tons for deliveries through 2018. Our visible production growth and strong contract portfolio give us confidence that ARLP is well positioned to manage through current market challenges – allowing us to provide our unitholders with an attractive distribution increase for the eighteenth consecutive quarter.”
White Oak is a planned new longwall mine in Illinois, Gibson South is a planned room-and-pillar mine in Indiana and Tunnel Ridge is a new Pittsburgh-seam longwall operation in northern West Virginia.
The Pontiki complex was idled on Aug. 29, following a closure order by the U.S. Mine Safety and Health Administration with respect to the Pontiki coal prep plant and associated surface facilities. Enough progress has been made in efforts to improve the near-term cost structure at Pontiki to justify the capital investment and expense to complete the first phase of repairs necessary to allow the complex to resume operation, Alliance noted. Repairs at Pontiki are expected to begin shortly and should be completed by the year end. By resuming operations at Pontiki, the company expects to recoup the required investment for these initial repairs and preserve potential future option value for the complex. But, Pontiki faces major uncertainties about its long-term viability once its 2013 coal sales contracts expire.
On the strength of record sales volumes, coal sales revenues rose to $499m in the 2012 third quarter, an increase of 5.3% compared to the year-ago quarter. Higher sales volumes, particularly from the new Tunnel Ridge longwall and the recently-acquired Onton deep mine in western Kentucky, pushed coal sales volumes to 8.9 million tons in the third quarter, an increase of 7% compared to the year-ago quarter. Increased sales volumes more than offset reduced metallurgical coal sold into the export markets, which drove total average coal sales prices lower in the latest quarter to $56 per ton sold, an $0.89 per ton decrease compared to the third quarter of 2011.
Increases at Tunnel Ridge and Onton also contributed to record coal production of 9 million tons in the third quarter, an increase of 17.7% compared to the 2011 third quarter. Outside coal purchases decreased $15.4m to $4.4m in the 2012 third quarter compared to the year-ago quarter, primarily as a result of reduced purchases of brokerage coal.
Comparative financial results for the 2012 third quarter continued to be impacted by anticipated losses related to ARLP’s investments in White Oak Resources LLC and the development of its Mine No. 1. Its preferred equity investment in White Oak requires ARLP to record substantially all of White Oak’s income and losses until Alliance achieves its contractual preferred return.
For the nine months ended Sept. 30, production increases at the River View (western Kentucky), Warrior (western Kentucky) and Tunnel Ridge mines and the acquisition of the Onton mine in April led to record production and sales volumes as tons produced climbed 9.8% and tons sold increased 6.9%, compared to the nine months ended Sept. 30, 201.
Higher coal sales volumes and increased average coal sales prices, which rose $1.04 per ton sold, combined to drive 2012 nine-month revenues to a record $1.5bn, an increase of 8.5% compared to the 2011 nine-month period. These increases were offset by reduced metallurgical coal sales, higher operating costs and depreciation, depletion and amortization, the Pontiki asset impairment charge, and losses related to investments in White Oak. As a result, compared to the 2011 period, net income for the 2012 nine-month period fell 19.7% to $238.9m, or $4.25 per basic and diluted limited partner unit, while Adjusted EBITDA declined 1.8% to $433.5m.
Coal sales volumes hit record level
Reflecting higher Illinois Basin and Northern Appalachia sales volumes, ARLP sold a record 8.9 million tons of coal in the 2012 third quarter, an increase of 7% over the 2011 third quarter.
- Coal sales volumes in the Illinois Basin, at 6.9 million tons, increased from the 2011 quarter (6.6 million tons) primarily as a result of strong sales and production performance from the Warrior and Gibson North mines and the addition of the Onton mine.
- In Central Appalachia, lower coal sales volumes of 0.5 million tons, compared to the 2011 quarter total of 0.6 million tons, reflect the idling of the Pontiki complex in August. Compared to the second quarter of 2012, improved coal recoveries at both Central Appalachia mines and increased unit shifts at MC Mining contributed to higher coal sales volumes.
- Coal sales volumes in Northern Appalachia of 1.5 million tons increased from the 2011 third quarter (0.8 million tons) and 2012 second quarter, reflecting the start-up of longwall production at the Tunnel Ridge mine in May.
Total coal inventory increased by about 155,000 tons during the 2012 third quarter to approximately one million tons. The increase primarily reflects higher production and the timing of shipments from the River View mine, which has direct access to the Ohio River, as barge traffic was impacted by adverse weather-related conditions during the 2012 third quarter. Shipment schedules are returning to normal and ARLP anticipates coal inventories will trend lower to about 350,000 tons by the end of the year.
In the Illinois Basin, Segment Adjusted EBITDA Expense per ton increased in the 2012 third quarter compared to the year-ago quarter, primarily due to increased costs per ton due to adverse geological conditions at the Hopkins County mine and at the Dotiki mine related to its transition into the West Kentucky No. 13 coal seam and the addition of the Onton No. 9 mine. Compared to the second quarter of 2012, Segment Adjusted EBITDA Expense per ton improved in the Illinois Basin primarily due to increased recoveries at various operations, particularly the River View, Gibson and Pattiki mines, and improved operating performance at Onton.
Alliance shooting for steam coal rebound in 2013
Craft said about the company’s outlook: “Assuming normal weather patterns and continued strength in natural gas prices, we expect U.S. steam coal demand will grow in 2013 – removing the current inventory overhang and setting the stage for higher spot coal prices in the second half of 2013. The exact timing and magnitude of these market improvements will be affected by the strength of the economy, both global and domestic. We expect ARLP’s coal production and sales volumes in 2013 to increase 11.0% to 13.0% over 2012 levels. With over 95.0% of these estimated volumes priced and committed, ARLP is on track to again deliver solid cash flow growth in 2013 and build on our record of distribution increases to our unitholders.”
Reflecting the impact of idling Pontiki and the estimated cost of returning the mine to production by year end, ARLP is revising its full-year 2012 guidance. It is currently anticipating 2012 production volumes of 34.4 million to 34.9 million tons and sales volumes of 34.8 million to 35.2 million tons. ARLP has secured sales commitments for essentially all of its 2012 coal sales volumes and for about 37.1 million tons, 29.8 million tons and 22.8 million tons in 2013, 2014 and 2015, respectively, of which approximately 2.9 million tons in both 2014 and 2015 remain open to market pricing.
For 2012, ARLP is now anticipating full-year revenues, excluding transportation revenues, in a range of $1.95bn to $2.05bn, Adjusted EBITDA of $565m to $580m and net income of $300m to $315m. Consolidated estimates for 2012 continue to reflect the pass through of development expenses related to ARLP’s White Oak investments, which are now estimated in a range of $12m to $16m for both EBITDA and net income.
ARLP anticipates total 2012 capital expenditures of $565m to $610m, including about $85m to $95m 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 $85m of its preferred equity investment commitment to White Oak during 2012.