Coal producer Alliance records lower net income in 2015

Coal producer Alliance Resource Partners LP (NASDAQ: ARLP) reported Jan. 26 that revenues for all of 2015 decreased to $2.27 billion, a decline of 1.2% compared to 2014, as a 3.5% decrease in coal sales prices offset record coal sales volumes.

Lower revenues and the net $77.6 million impact in 2015 of non-cash items led to reduced EBITDA of $670.0 million for the full year, a decrease of 16.7% compared to 2014. These factors also drove ARLP’s net income lower by 38.4% in 2015 to $306.2 million.

ARLP’s results for the fourth quarter of 2015 were also lower compared to the 2014 fourth quarter. Total revenues declined 8.2% to $542.2 million, compared to the 2014 quarter, as coal sales fell due to lower coal sales prices and reduced sales tons reflecting customer deferrals of scheduled coal shipments and, as anticipated, the decrease of other sales and operating revenues following ARLP’s acquisition of the remaining equity interests in White Oak Resources LLC and the assumption of operating control of the White Oak Mine No. 1 in Illinois (now known as the “Hamilton Mine No. 1 “) on July 31, 2015.

Lower revenues and the $66.9 million net impact of non-cash items drove net income and EBITDA lower in the 2015 fourth quarter compared to the 2014 fourth quarter, as net income decreased 82.6% to $21.5 million, and EBITDA decreased 40.8% to $120.0 million. Excluding certain non-cash items from the 2015 fourth quarter, ARLP’s Adjusted EBITDA was $186.8 million and Adjusted net income was $88.4 million, a decrease of 7.7% and 28.6%, respectively, compared to the 2014 fourth quarter.

“During 2015, ARLP maintained its position as a leader in the coal industry. Our operations and marketing teams produced and sold record volumes leading ARLP to deliver profits and solid cash flows in what was arguably one of the most challenging years in the history of our industry,” said Joseph W. Craft III, President and Chief Executive Officer. “Faced with weak power demand, persistently low natural gas prices, ongoing regulatory pressures and an oversupplied coal market, we were able to achieve these results relying on ARLP’s long-term sales agreements and our ability to reduce operating expenses and capital expenditures. In response to lower demand and unsustainably low spot coal pricing, we adjusted ARLP’s operating portfolio and shuttered certain higher-cost operations, which led to non-cash impairments that reduced our financial results for the 2015 Quarter and Year.”

Coal sales revenues in the full 2015 year declined as a result of lower coal prices partially offset by increased coal sales volumes at the Tunnel Ridge (West Virginia) and Gibson Sout (Indiana) mines in addition to coal sales volumes from the acquisition of the Hamilton Mine No. 1. ARLP set new records in the 2015 year for both tons sold, which increased 1.3% to 40.2 million tons, and tons produced, which rose 1.1% to 41.2 million tons, both as compared to 2014.

ARLP’s other sales and operating revenue increased $16.0 million in the 2015 year primarily due to White Oak’s start-up of longwall production in late October 2014 and the resulting increase in surface facility services and coal royalties prior to the White Oak acquisition.

The 2015 year was impacted by $100.1 million of non-cash impairment charges comprised of a $66.9 million impairment related to the previously announced idling of the Onton mine, a $19.5 million impairment at the MC Mining complex, primarily due to lower coal sales prices, and $13.7 million of impairments to leases the company elected to surrender rather than incur high holding costs.

Reflecting higher coal sales volumes from the Gibson South mine and the assumption of operations at the Hamilton Mine No. 1, offset by reduced sales volumes due to weak market conditions, ARLP’s Illinois Basin operations sold 7.8 million tons of coal in the 2015 fourth quarter, an increase of 1.5% over the 2014 fourth quarter. Lower sales volumes in the 2015 quarter at the Elk Creek, River View and Onton mines in response to current market conditions, partially offset by increased volumes at Hamilton Mine No. 1, pushed Illinois Basin sales volumes lower by 4.0% compared to the third quarter of 2015.

In Appalachia, coal sales volumes decreased in the 2015 fourth quarter compared to the 2014 fourth quarter due to reduced sales from the Tunnel Ridge mine reflecting scaled back production in response to weak coal demand.

Due to weak coal demand and customer delays of scheduled shipments, ARLP’s coal inventory remains elevated at 2.4 million tons at the end of the 2015 fourth quarter, compared to 1.4 million tons at the end of the 2014 fourth quarter.

Outlook

“Conditions in the U.S. thermal coal markets continued to deteriorate during the 2015 Quarter as mild weather reduced overall power demand,” said Craft. “Utilities responded by deferring contracted tons and adding to their already above normal coal stockpiles. Looking forward, we believe 2016 coal demand for our Illinois Basin and northern Appalachia markets will be 6% to 7% below 2015, depending on the weather. We are uncertain as to whether utilities will satisfy this demand by reducing inventories or taking advantage of current low spot prices and purchase coal to match their coal burn.”

Craft continued: “ARLP has elected to address this uncertainty by shifting production to our lowest-cost mines and reducing unit shifts and production days to curtail production. We will continue to operate below our installed capacity until ARLP’s customers provide clarity on the need for additional tons. The impact of our response to current market conditions is reflected in ARLP’s 2016 guidance provided below. Fortunately, despite expectations for lower production and sales volumes in the near term, ARLP’s low-cost, strategically located operations and our ongoing cost reduction and efficiency efforts should help us to navigate these challenging times. Even with this reduced production level and costs incurred to keep production capacity available in the event additional demand materializes, based upon our guidance outlined below, we expect ARLP’s 2016 distributable cash flow to cover its current unitholder distribution by 1.1 to 1.2 times.”

For 2016, ARLP is providing the following full year guidance for its operating and investment activities:

  • Capital Expenditures and Investments – Total 2016 capital expenditures for ARLP’s operating activities are currently estimated in a range of $134.0 million to $142.0 million. Capital expenditures for 2016 are primarily related to maintenance capital expenditures including equipment rebuilds and replacements and mine extension and other infrastructure projects at various operations. In addition to these capital expenditures, ARLP currently anticipates funding in 2016 investments of approximately $60.0 milion to $70.0 million related to its commitment to acquire oil and gas minerals.
  • Coal Production and Sales Volumes – During 2016, coal production is currently estimated in a range of 33.7 million to 35.7 million tons and sales volumes are expected in a range of 34.6 million to 38.1 million tons. ARLP has secured price commitments for about 34.3 million tons in 2016 and has also secured coal sales and price commitments for approximately 19.1 million tons, 14.5 million tons and 7.1 million tons in 2017, 2018 and 2019, respectively.
  • Revenue, EBITDA and Net Income Estimates – Driven primarily by reduced coal sales volumes and prices and lower other revenues, ARLP is currently expecting 2016 revenues in a range of $1.82 billion to $1.95 billion, excluding transportation revenues, EBITDA in a range of $545.0 million to $615.0 million and net income in a range of $230.0 million to $300.0 million.
  • Per Ton Estimates – ARLP currently anticipates its average coal sales price per ton at the midpoint of its 2016 guidance ranges will be 3.5% to 6.0% lower than 2015 realizations, primarily due to the deterioration in near-term coal markets. In addition, based on current cost and production estimates, ARLP anticipates total Segment Adjusted EBITDA Expense per ton at the 2016 midpoint will be comparable to 2015. Based on these price and cost estimates, and reflecting lower other revenues following the White Oak Acquisition, total Segment Adjusted EBITDA per ton sold at the 2016 midpoint is currently expected to be approximately 11.0% to 12.0% below the prior year.

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 second largest coal producer in the eastern United States with mining operations in the Illinois Basin and Appalachian coal producing regions. ARLP currently operates ten mining complexes in Illinois, Indiana, Kentucky, Maryland and West Virginia. ARLP also 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.