Coal producer Alliance Resource Partners turns in another record year in 2014

Alliance Resource Partners LP (NASDAQ: ARLP) on Jan. 28 reported record operating and financial results for the fourteenth consecutive year, as it set new annual benchmarks for coal sales and production volumes, revenues, net income and EBITDA for 2014.

On the strength of record coal sales volumes and strong pricing, revenues grew to a record $2.3bn for the 2014 Year, an increase of 4.3% compared to the year ended Dec. 31, 2013. Higher revenues contributed to record EBITDA of $803.7m for the 2014 Year, an increase of 17.2% compared to the 2013 Year. ARLP’s net income for the 2014 Year was also higher, increasing 26.4% to a record $497.2m.

For the fourth quarter of 2014, revenues increased 4.3% to $590.8m, compared to the year-ago quarter. Net income and EBITDA were also higher in the 2014 Quarter, as net income increased 24.6% to $123.7m, and EBITDA increased 15.1% to $202.5m.

“ARLP added to its history of exceptional performance, once again setting new annual operating and financial benchmarks in 2014,” said Joseph W. Craft III, President and Chief Executive Officer. “Our operations performed impressively in 2014, leading ARLP to successfully deliver record coal production at a lower year-over-year cost per ton and sell record coal volumes at a higher average price compared to the prior year. In addition to delivering superior performance in 2014, ARLP also took steps to solidify its position as a low-cost operator for several decades into the future. As discussed in more detail below, we are announcing the acquisition of rights to approximately 452.2 million tons of Illinois Basin coal reserves. These strategic transactions provide ARLP with the ability to efficiently extend and expand existing operations and pursue new development projects to meet future market opportunities.”

Craft added, “Results like these don’t just happen. It takes the hard work and dedication of all our employees coming together as a team, and I want to thank each member of the Alliance organization for contributing to our success. Based on our record setting results and our positioning for the future, ARLP’s Board of Directors elected to increase quarterly unitholder distributions for the twenty-seventh consecutive quarter.”

Various developments drove 2014 results

Record revenues in the 2014 Year were driven primarily by record coal sales volumes and improved price realizations. Benefiting from increases at the Tunnel Ridge, MC Mining and Dotiki mines and the start-up of coal production at the Gibson South mine in Indiana in April 2014, ARLP set new records in the 2014 Year for both tons sold, which increased 2.3% to 39.7 million tons, and tons produced, which rose 5.1% to 40.7 million tons, both as compared to the 2013 Year. Reflecting its strong sales contract position and a favorable sales mix, ARLP’s average coal sales price realized during the 2014 Year increased to $55.59 per ton sold.

ARLP recorded approximately $21.2 million of revenues in the 2014 Year for surface facility services and coal royalties related to ARLP’s participation in development of the White Oak Resources LLC Mine No. 1 in Illinois, which contributed to the increase in other sales and operating revenues compared to the 2013 Year. Also, as anticipated, ARLP’s financial results for both the 2014 and 2013 Years were negatively impacted by losses related to White Oak’s mine development activities. ARLP’s financial results for the 2014 Year reflect the benefit of the commencement of longwall operations at the White Oak Mine No. 1. 

For the 2014 Quarter, higher coal sales volumes and increased throughput service and royalty revenues received from White Oak drove revenues up 4.3% to $590.8m, compared to the 2013 Quarter. Reflecting certain factors discussed above, Segment Adjusted EBITDA Expense per ton was $35.69 per ton in the 2014 Quarter compared to $36.25 and $35.48, respectively, for the 2013 and Sequential Quarters.

On the strength of higher Appalachia coal sales volumes, ARLP sold 10.0 million tons of coal in the 2014 Quarter, an increase of 2.4% over the 2013 Quarter. Improved coal shipments from the River View mine in western Kentucky drove total Illinois Basin coal sales volumes up by 4.5% compared to the Sequential Quarter (third quarter of 2014). However, Illinois Basin coal sales volumes decreased in the 2014 Quarter compared to the 2013 Quarter due to reduced sales at the Gibson North mine in Indiana, as well as reduced production from the Warrior mine in western Kentucky reflecting its continued transition to a new mining area. These decreases were offset in part by the strong sales performance from the River View mine and coal sales from the new Gibson South mine, which began production operations in April 2014.

Increased coal sales volumes from the Tunnel Ridge longwall operation in northern West Virginia drove coal sales tons for the 2014 Quarter higher in Appalachia compared to the 2013 Quarter. Sequentially, coal sales volumes decreased 4.3% in Appalachia as a result of timing differences in shipments across the region. Total coal inventory increased by approximately 468,000 tons during the 2014 Quarter to approximately 1.4 million tons at year end. The increase primarily reflects increased production and the timing of shipments from the Tunnel Ridge mine and Gibson complex.

Coal reserves increase to approximately 1.6 billion tons

ARLP also announced that, through a series of transactions agreed to during the 2014 Quarter, its total coal reserve position will increase approximately 50% to 1.6 billion tons. The mining rights acquired and under contract to be acquired, the majority of which will be leased by ARLP from related and other third parties, are in the Kentucky Nos. 6, 7, 9, 11 and 13 coal seams and total approximately 452.2 million tons. As a result of the transactions, ARLP will be able to reclassify approximately 85 million tons of currently controlled non-reserve coal deposits as reserves, resulting in a total increase to its Illinois Basin coal reserves of approximately 537.2 million tons.

The reserves are located in Webster, Union, and Henderson counties, Kentucky and provide ARLP with strategic advantages and opportunities in the region. The Webster County reserves significantly extend the life of ARLP’s Dotiki No. 13 seam mine. The remaining coal reserves are near the River View mine, providing ARLP the option to almost double River View’s current production and adding three new potential development projects to ARLP’s organic growth portfolio. Notably, River View, with direct access to the Ohio River via its own barge-loading facility, is already one of the largest underground coal mines in the U.S.

ARLP paid $11.5m in cash and assumed approximately $6m of related reclamation liabilities for the reserves and related surface properties acquired in the 2014 Quarter.

Included in the 452.2 million tons are approximately 101.1 million tons of coal reserves in Union and Henderson counties, Kentucky, to be acquired as part of the transactions with Patriot Coal announced on Jan. 2. ARLP has acquired certain coal supply agreements from Patriot and expects to complete the acquisition of the coal reserves, mining equipment and other assets in the first quarter of 2015, subject to obtaining third-party consents and other conditions.

The coal supply agreements acquired from Patriot give ARLP the right to deliver approximately 5.1 to 5.6 million tons of coal from 2015 through 2017. The mining equipment and underground infrastructure to be acquired from Patriot is expected to be used by ARLP’s other operations in the region.

Assuming consummation of the transactions, total consideration payable to Patriot by ARLP will be $40m-$50m, which includes $21m paid in 2014.

Outlook

Commenting on ARLP’s outlook, Craft said: “As we enter 2015, U.S. thermal coal markets continue to be faced with significant challenges. Tepid power demand, weak export demand, regulatory pressures and low natural gas prices are expected to pressure coal prices this year. While we are also impacted by these market pressures, ARLP remains well positioned to grow its distributable cash flow again in 2015. Due to current market conditions our guidance assumes we will produce approximately 4.0 million tons less than our installed capacity. Any market improvement provides upside potential for 2015 and beyond. We remain focused on strengthening our contract portfolio, and ARLP enters 2015 with approximately 92.6% of its estimated coal sales volumes priced and committed at the midpoint of our guidance.

“Our acquisition of an additional 452.2 million tons of Illinois Basin coal reserves provides important growth opportunities for ARLP in the future. We will immediately benefit from acquiring these reserves by expanding our preparation plant at River View in 2015 and adding three more continuous mining units in 2016, increasing River View’s total capacity to 11.2 million tons per year. Our Hopkins County Elk Creek mine will deplete in early 2016, and the investment at River View is a lower-capital and lower-cost option than our other alternative to maintain this market share.

“In addition to the coal reserve growth, we also took a step toward expanding ARLP’s future growth opportunities. In late 2014, ARLP made a commitment to invest up to $50.0 million in natural resource minerals over the next two to four years and, to date, has invested approximately $11.5 million to purchase oil and gas mineral interests in the U.S. We are hopeful this small investment will prove to be successful and develop into another growth platform complementing our strategy to create sustainable growth in cash flow.”

For 2015, ARLP is providing the following full year guidance for its operating and investment activities:

  • Capital Expenditures and Investments – Total 2015 capital expenditures for ARLP’s operating activities are currently estimated in a range of $300m-$330m, including maintenance capital expenditures. Capital expenditures reflected in the 2015 estimates include the purchase of coal reserves, mining equipment and underground infrastructure from Patriot; additional reserve acquisitions related to ARLP’s participation in White Oak Mine No. 1; expansion of prep plant capacity at the River View mine; purchase of additional equipment at the Gibson South mine; equipment rebuilds and replacements; and mine extension and infrastructure projects at various operations.
  • Coal Production and Sales Volumes – During 2015, coal production is currently estimated in a range of 40.4 to 42.5 million tons and sales volumes are expected to increase to a range of 41.4 to 43.5 million tons. ARLP has secured price commitments for approximately 39.3 million tons in 2015 and has also secured coal sales and price commitments for approximately 28.9 million tons, 12.8 million tons and 9.6 million tons in 2016, 2017 and 2018, respectively.
  • Revenue, EBITDA and Net Income Estimates – Driven primarily by anticipated increases in coal sales volumes, ARLP is currently expecting 2015 revenues to increase to a range of $2.39 bnto $2.48bn, excluding transportation revenues. Net income for 2015 is expected in a range of $395m to $455m. Compared to 2014, net income in 2015 is expected to be impacted by an increase in depreciation, depletion and amortization of approximately $71.6m, primarily due to the acceleration of depletion at the Hopkins mine, increased production at the Gibson South mine and amortization of the acquisition cost of coal sales contracts purchased from Patriot.
  • Per Ton Estimates – ARLP currently anticipates its average coal sales price per ton at the midpoint of its 2015 guidance ranges will be approximately 2.0% to 3.0% lower than 2014 realizations, primarily due to deterioration in the low-sulfur coal market and the impact of a customer breach of an above-market coal supply agreement, which is now the subject of litigation. In addition, based on current cost and production estimates, ARLP anticipates total Segment Adjusted EBITDA Expense per ton at the midpoint will increase in 2015 by approximately 4.0% to 5.0% over 2014. Consequently, total realized margins per ton at the 2015 midpoint are currently expected to be approximately 7.0% to 8.0% below the prior year.

ARLP is a diversified producer and marketer of coal to major United States utilities and industrial users. ARLP is currently the third largest coal producer in the eastern United States with mining operations in the Illinois Basin and Appalachian coal producing regions. ARLP operates ten mining complexes in Illinois, Indiana, Kentucky, Maryland and West Virginia. ARLP is also purchasing reserves, operating surface facilities and making equity investments in a new mining complex in southern Illinois. In addition, ARLP operates a coal loading terminal on the Ohio River at Mount Vernon, Indiana.

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.