Alliance Resource Partners reports lower net income in Q3 2015

Coal producer Alliance Resource Partners LP (NASDAQ: ARLP) said Oct. 27 that its net income in the 2015 third quarter fell to $83.4 million, compared to $120.0 million in the year-ago quarter.

Results for the 2015 third quarter were negatively impacted by two non-recurring items.

  • First, equity in loss of affiliates related to start-up Illinois coal producer White Oak Resources LLC increased $17.0 million prior to ARLP’s July 31 acquisition of the remaining equity interests in White Oak and assumption of operating control of the White Oak Mine No. 1 (now known as the Hamilton Mine No. 1).
  • Second, ARLP recently elected to surrender leases to certain undeveloped, unspecified coal reserves resulting in a $10.7 million non-cash asset impairment in the 2015 third quarter.

“ARLP once again distinguished itself as a leader in the coal industry by posting solid results in the 2015 Quarter,” said Joseph W. Craft III, President and Chief Executive Officer. “Our operations led the way by producing a record 11.5 million tons during the 2015 Quarter and reducing segment adjusted EBITDA expense per ton by approximately 8.0% and 8.7% compared to the 2014 and Sequential Quarters, respectively. Quarterly results were impacted by a non-cash asset impairment and inventory builds at various operations due in part to delays in scheduled shipments on coal sales agreements.

“As previously announced, we completed the White Oak Acquisition during the 2015 Quarter and assumed operating and marketing control of the Hamilton Mine No. 1. The integration of Hamilton Mine No. 1 into our operations is progressing rapidly; however, low-priced legacy contracts and transition costs, as well as the equity in loss of affiliates passed through from White Oak prior to the acquisition will be a drag on 2015 results. Nonetheless, we continue to believe that adding this low-cost longwall operation to our portfolio provides ARLP with significant strategic advantages in the Illinois Basin which will benefit us in the long term.”

Craft added: “ARLP’s cash flow and profits remain strong. Overall for the U.S. domestic thermal coal outlook, we expect future demand to be stable; however, the market continues to be oversupplied causing weak commodity prices. We see no near term catalyst to improve pricing except a supply response by the industry. As we evaluate our own supply response to an uncertain coal market, ARLP is electing to maintain quarterly cash distributions per unit at current levels. We are committed to managing ARLP as an enduring, profitable enterprise that will create long term value for our unitholders. We believe this proactive decision to maintain current distribution levels, along with our low-cost, strategically located operations, conservative balance sheet and strong 1.66x distribution coverage ratio keeps ARLP well positioned to deliver on this objective.”

For the 2015 third quarter, increased coal sales and production volumes from the Gibson South mine (in Indiana) and Hamilton Mine No. 1 drove coal sales volumes up 4.8% to 10.3 million tons and production volumes higher by 12.0% to a record 11.5 million tons, both as compared to the 2014 third quarter. Despite increased sales volumes, coal sales revenues of $547.5 million for the 2015 third quarter were slightly lower compared to the 2014 third quarter as a result of lower average coal sales prices, which declined 4.7% to $53.18 per ton sold. The lower coal sales prices per ton were due primarily to shipments on the Hamilton Mine No. 1’s lower-priced legacy contracts and the impact of market conditions on realized prices.

For the nine months ended Sept. 30, increased production at the Tunnel Ridge mine (in northern West Virginia), the start-up of coal production at the Gibson South mine in April 2014 and the addition of Hamilton Mine No. 1 to operations, led to record coal production and sales volumes. Tons produced climbed to 31.5 million tons and tons sold increased to 30.3 million tons, compared to 30.2 million tons and 29.7 million tons, respectively, in the nine months ended Sept. 30, 2014.

Reflecting higher coal sales volumes from the Gibson South mine and additional volumes from the assumption of operations at the Hamilton Mine No. 1, the Illinois Basin operations sold 8.1 million tons of coal in the 2015 third quarter, an increase of 10.5% over the year-ago quarter. The increase from Gibson South and Hamilton Mine No. 1 was offset in part by reduced unit shifts at the Pattiki, Warrior, Onton, River View and Gibson North mines in response to current market conditions.

Outlook

Craft said: “Coal supply reversed trend in the 2015 Quarter as production increased compared to the Sequential Quarter in both the Illinois Basin and the northern Appalachian basin as competitors fight for survival. Due to this oversupply, our increasing inventories and our customers’ focus on their short-term supply needs, ARLP has curtailed production by reducing unit shifts and will continue to produce below our installed capacity for the foreseeable future, which may include some near-term shifting of production to our lowest-cost mines. We will work to mitigate this reduction in production and sales volume by lowering our costs and capital expenditures. Historically, ARLP’s cash flow growth has been driven by increased coal volumes. Even though we are well positioned to continue this growth with low cost excess capacity, the market has to demand our coal at reasonable prices before ARLP will increase its production.”

Based upon current market conditions, ARLP is adjusting its previous 2015 full-year ranges for coal production to 41.1 million to 41.7 million tons, coal sales volumes to 40.9 million to 41.5 million tons and revenues, excluding transportation revenues, to $2.27 billion to $2.30 billion. Adjusted EBITDA is currently estimated in a range of $730.0 million to $750.0 million and net income in a range of $360.0 million to $380.0 million.

ARLP is essentially fully priced and committed for its anticipated 2015 coal sales volumes and has also secured coal sales and price commitments for about 31.9 million tons, 16.8 million tons and 12.5 million tons in 2016, 2017 and 2018, respectively.

ARLP continues to anticipate 2015 total capital expenditures in a range of $265.0 million to $285.0 million. In addition to these capital expenditures, ARLP currently anticipates funding investments in 2015 of $105.0 million to $115.0 million. These anticipated investments include the $50.0 million cash payment for White Oak equity upon closing of the recent acquisition and $10.8 million of preferred equity contributions funded to White Oak prior to the closing.

ARLP is a diversified producer and marketer of coal to major United States utilities and industrial users. 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 United States with mining operations in the Illinois Basin and Appalachian coal producing regions.

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.