Coal producer Alliance Resource turns in lower net income in Q1 2016

Coal producer Alliance Resource Partners LP (NASDAQ: ARLP) on April 26 reported net income in the 2016 first quarter was $47.3 million, compared to $106.5 million for the year-ago quarter.

Total revenues were $412.8 million in the 2016 first quarter compared to $560.4 million in the 2015 first quarter, primarily resulting from planned reductions in coal sales and production volumes and lower other sales and operating revenues following the acquisition of the remaining equity interests in Illinois coal producer White Oak Resources LLC in July 2015. Lower revenues were offset in part by reduced operating expenses and equity in loss of affiliates related to White Oak and led to EBITDA of $135.8 million for the 2016 first quarter, compared to $192.2 million for the 2015 first quarter.

Notable is that Alliance still posted a net income at all at a time when even larger coal producers Peabody Energy, Arch Coal and Alpha Natural Resources are in Chapter 11 bankruptcy protection.

“ARLP’s operating and financial performance for the 2016 Quarter was in line with our expectations as our results remained solid in the face of an extremely challenging coal market,” said Joseph W. Craft III, President and Chief Executive Officer. “Although ARLP’s performance continues to lead the industry and our balance sheet remains strong, we are unfortunately being impacted by the contagion caused by the financial struggles facing many of our competitors. In the current capital market environment, it has become clear that we must be proactive in preserving liquidity in order to maintain access to capital. The decision by our Board to reduce ARLP’s unitholder distribution, while difficult, is a significant step toward maintaining that access.”

Coal sales revenues in the 2016 first quarter were $401.3 million as compared to $517.7 million for the 2015 first quarter primarily as a result of lower coal sales and production volumes due to idling the Onton (western Kentucky) and Gibson North (Indiana) mines late last year, the planned depletion of reserves at the Elk Creek mine in the 2016 first quarter and reduced production at the River View, Pattiki, Warrior, Tunnel Ridge and MC Mining operations. Compared to the 2015 first quarter, these reductions were partially offset by volumes from the Hamilton mine acquired as part of the White Oak Acquisition.

ARLP’s coal sales revenue was also impacted by lower total average coal sales price realizations in the 2016 first quarter, which fell approximately 1.2% to $53.82 per ton sold compared to $54.49 per ton sold for the 2015 first quarter.

Operating expenses in the 2016 first quarter decreased 24.2% to $253.3 million primarily as a result of the previously discussed reduction of coal production volumes, a favorable production cost mix due to ARLP’s initiative to reduce production from higher-cost operations and a build in coal inventory at various mines.

Total tons sold in the 2016 first quarter (7.5 million tons) decreased 21.5% and 25.2% compared to the 2015 first quarter (9.5 million) and fourth quarter of 2015 (10 milion), respectively, as a result of planned reductions of coal sales volumes in both the Illinois Basin and Appalachian regions.

  • Lower Illinois Basin coal sales volumes reflect the idling of the Onton and Gibson North mines, customer deferrals of scheduled shipments during the 2016 first quarter at the River View and Gibson South mines and reduced production at the Hamilton mine.
  • In Appalachia, lower coal sales volumes in the 2016 first quarter were primarily due to the planned scale back of production at the Tunnel Ridge and MC Mining operations in response to weak coal demand and customer deferrals.

Customer deferrals and soft coal demand due to a mild winter and excessive customer stockpiles also contributed to an inventory build at the Alliance mines of approximately 1.4 million tons during the 2016 first quarter.

Outlook

“Coming into 2016, we expected lower coal demand for our Illinois Basin and northern Appalachian markets due to tepid power demand, persistently low natural gas prices, excess utility stockpiles and regulatory impacts,” said Craft. “Mild weather conditions during the 2016 Quarter exacerbated these conditions, keeping the coal markets oversupplied and intensifying pressure on producers to curtail supply. Supply rationalization is occurring rapidly as evidenced by U.S. coal production falling by approximately 30% year-over-year in the 2016 Quarter, and we anticipate production cuts are likely to accelerate throughout the rest of the year. We continue to view current natural gas prices as unsustainable, eventually setting the stage for improved coal demand as gas supplies and pricing are impacted by significant reductions in drilling capital.”

Craft added: “We expect the coal markets will remain oversupplied for several quarters and near-term pricing will be challenging. Later this year the reducing supply picture for both coal and natural gas should support higher prices for both commodities, and we are beginning to see some signs of increased buying interest for 2017. As utilities make their purchasing decisions for 2017 and beyond, we believe ARLP will benefit from our strategically-located, low-cost operations and strong balance sheet. We are unwavering in our commitment to deliver long-term value to our unitholders and believe ARLP is well positioned to deliver on this commitment.”

Based on results to date and expectations for the balance of 2016, ARLP is maintaining its previous 2016 full-year ranges for coal production of 33.7 million to 35.7 million tons, coal sales volumes of 34.6 million to 38.1 million tons and revenues, excluding transportation revenues, of $1.82 billion to $1.95 billion. EBITDA continues to be estimated 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.

ARLP has secured volume and price commitments for approximately 34.5 million tons in 2016 and has also secured coal sales and price commitments for about 21.5 million tons, 14.5 million tons and 7.1 million tons in 2017, 2018 and 2019, respectively.

Capital expenditures of $33.3 million during the 2016 first quarter were below company expectations and ARLP continues to evaluate opportunities to minimize future capital expenditures. As a result, it is reducing anticipated 2016 total capital expenditures by approximately $27.0 million at the midpoint of prior guidance to a range of $105.0 million to $115.0 million. In addition to these capital expenditures, ARLP continues to anticipate funding investments in 2016 of $60.0 million to $70.0 million related to its commitment to acquire oil and gas mineral interests.

ARLP is a diversified producer and marketer of coal to major United States utilities and industrial users. ARLP is currently the second largest coal producer in the eastern United States with mining operations in the Illinois Basin and Appalachian coal producing regions. It currently operates nine 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.