Coal producer Alliance reports dip in Q1 2015 net income; but other metrics are strong

Coal producer Alliance Resource Partners LP (NASDAQ: ARLP) on April 28 reported net income for the 2015 first quarter decreased 8.1% to $106.5 million compared to the 2014 first quarter, primarily due to increased depreciation, depletion and amortization expense.

“ARLP continued its strong operating and financial performance in the first quarter of 2015, reporting increases to coal production volumes, revenues and EBITDA,” said Joseph W. Craft III, President and Chief Executive Officer. “Contributing to these results, our Tunnel Ridge mine continued to experience higher productivity, performing above expectations to drive production in our Appalachian region higher in the 2015 Quarter by almost 13% compared to the 2014 Quarter. All operations performed well during the 2015 Quarter and our teams posted the best safety performance in ARLP’s history. We are also beginning to see the benefits of our investment in White Oak as revenues and EBITDA from this project increased by $14.7 million and $9.3 million, respectively, compared to the 2014 Quarter.”

Craft continued: “Our financial performance for the 2015 Quarter was impacted by delayed shipments on contracted tons due to frigid February weather and high waters on the Ohio River that disrupted barge transportation. Inventory at our mines grew by more than 1.0 million tons during the 2015 Quarter to 2.4 million tons, causing us to reduce our production at several operations to offset the inventory build. We expect to ship approximately 800,000 tons above our production in the upcoming quarter and continue to work off the inventory over the balance of the year. Based on ARLP’s quarterly results and confidence in our future performance, the Board announced today an increase in unitholder distributions for the twenty-eighth consecutive quarter.”

For the 2015 first quarter, revenues increased to $560.4 million compared to $542.0 million for the 2014 first quarter, primarily due to higher surface facility services and coal royalties related to ARLP’s participation in the White Oak Mine No. 1 project in Illinois, which added approximately $14.7 million of additional other sales and operating revenues in the 2015 Quarter. This increase in revenues was partially offset by lower coal sales revenues as a result of lower average coal sales price which decreased slightly to $54.49 per ton sold. Although impacted by weather-related disruptions, total coal sales volumes in the 2015 Quarter remained consistent with the 2014 Quarter, while coal production volumes increased 2.4% to 10.5 million tons in the 2015 Quarter.

Compared to the 2014 Quarter, operating expenses increased in the 2015 Quarter by 3.8% to $334.4 million. This increase was primarily the result of increased coal sales and production volumes from the Gibson South and Tunnel Ridge mines as well as higher labor-related expenses at the Illinois Basin operations. These increases were partially offset by lower sales at the Warrior mine as it continues to transition to a new mining area, the Gibson North mine due to shift reductions in response to market conditions and an inventory build at the River View mine in western Kentucky. Segment Adjusted EBITDA Expense per ton increased 3.8% to $35.21 in the 2015 Quarter compared to the 2014 Quarter primarily due to tons sold from high-cost beginning inventory at various operations and lower recoveries at the Warrior and Gibson North mines.

Increased coal sales volumes from the Tunnel Ridge and Mettiki longwall operations drove sales tons for the 2015 Quarter higher by 17.9% in Appalachia, compared to the 2014 Quarter. In the Illinois Basin, coal sales volumes decreased in the 2015 Quarter compared to both the 2014 and Sequential Quarters primarily due to timing of shipments partially offset by increased sales volumes from the new Gibson South deep mine in Indiana.

Compared to the Sequential Quarter, weather-related transportation disruptions negatively impacted coal shipments in the 2015 Quarter, particularly at the Warrior, Gibson North, River View and Tunnel Ridge mines. Delayed shipments pushed total coal inventory to approximately 2.4 million tons during the 2015 Quarter. Coal shipments have recently improved, allowing ARLP to begin reducing coal stockpiles at its operations. It currently anticipates coal inventories will return to more normalized levels by year end.

As anticipated, for the 2015 Quarter, ARLP’s total coal sales price of $54.49 per ton sold decreased compared to both the 2014 and Sequential Quarters. Decreased coal sales prices in Appalachia primarily reflect lower average prices at the MC Mining and Tunnel Ridge mines due to current market conditions. Coal sales prices also declined in the Illinois Basin, primarily due to lower coal sales prices at the Gibson North and Onton mines.

Guidance Outlook

Commenting on ARLP’s current outlook for the rest of the year, Craft said: “The coal industry outlook remains challenged as demand for U.S. thermal coal has dropped further than expected this year and the supply response has been slow to occur. Relying on our sales contract position, strong balance sheet and low cost operations, we remain confident we are well positioned to achieve our financial goals for the year, including growing cash flow again in 2015.

“To adjust to current market conditions we have decided to reduce our production further in 2015, which will save the Partnerships some capital expenditures. We expect the reduced production will have minimal impact on our cost per ton sold. We anticipate tons sold would be reduced by a similar amount, or approximately 700,000 tons at the midpoint of the prior guidance range.”

Based on results to date and current estimates, in 2015 ARLP is now anticipating coal production in a range of 40.2 million to 41.2 million tons and sales volumes in a range of 40.75 million to 42.65 million tons. ARLP has committed and priced approximately 96% of its anticipated coal sales 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.

ARLP currently anticipates 2015 revenues, excluding transportation revenues, in a range of $2.35 to $2.41 billion. ARLP’s 2015 per ton estimates and guidance ranges for EBITDA of $765.0 to $825.0 million and net income of $395.0 to $455.0 million remain unchanged from its initial outlook for the year.

ARLP is lowering anticipated total capital expenditures during 2015 to a range of $270.0 million to $300.0 million due to mine plan changes at various operations in the Illinois Basin. In addition to these anticipated capital expenditures, ARLP now expects to fund approximately $20.0 to $25.0 million of its investment commitment to purchase oil and gas mineral interests, of which $8.0 million was funded in the 2015 Quarter. ARLP also funded $10.3 million of its preferred equity investment commitment to White Oak in the 2015 Quarter and does not anticipate funding any further preferred equity investments.

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 also has made equity investments in, and is purchasing reserves and operating surface facilities related to, 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.