The coal market in the U.S. is absolutely miserable. Demand is weak due to coal power plant retirements, but producers are reluctant to cut supply too deeply as they desperately need the sales and cash flow. That's leading to weak coal pricing, which has pushed several producers to the brink of bankruptcy. However, it's quite a different story at Alliance Resource Partners, L.P. (NASDAQ:ARLP) as the MLP has contracted most of its coal volumes under long-term contracts, which is leading to very solid quarterly results.
Digging into the numbers
For the quarter, Alliance Resource Partners' revenue was $560 million, which was 3.4% higher than the $542 million in revenue the company generated in the first quarter of last year. Helping fuel that result was the addition of the White Oak Mine No. 1, which added $14.7 million in sales. Sales from that mine helped to overcome a lower average coal sales price, as well as an impact from weather-related disruptions.
Those solid sales fueled a slight increase in Alliance's EBITDA, as the proxy for cash flow was up $1.8 million over the prior year, to $192.2 million. Meanwhile, distributable cash flow came in at $135.9 million, which was up nicely from the $127.7 million in distributable cash flow the company generated in the first quarter of last year. That solid cash flow growth enabled Alliance to boost its distribution by 8.4% over the prior year, and 1.9% over last quarter's payout for the company's 28th straight quarterly increase.
One other item worth noting: Due to the weak winter weather, Alliance experienced a pretty large inventory build of 1 million tons at its mines. Because of that, it expects to ship about 800,000 tons above its production during the second quarter, and work off the rest of the inventory balance in future quarters.
A look ahead
Like its coal-producing peers, Alliance Resources Partners sees a challenging year for the U.S. coal market. However, thanks to its sales contract position, a strong balance sheet, and low-cost operations, the company believes it's well positioned to achieve all of its financial goals for the year, including growing its cash flow. That being said, the company is making some adjustments for 2015.
One of the adjustments it's making is cutting its production by about 700,000 tons for the year, which will save it some money on capital expenditures. This is expected to result in coal sales of 40.75 to 42.65 million tons, of which the company has committed and priced about 96% of its anticipated coal sales for the year. Despite the curtailment, the company expects its guidance for cash flow to remain unchanged from its initial outlook, as the cut in capex will help keep its bottom line steady.
By contracting most of its coal volumes out several years into the future, Alliance Resource Partners is able to remain strongly profitable despite a very weak coal market. In fact, while most of its peers are seeing their cash flows dry up, Alliance expects it to grow throughout 2015. That should yield steady distribution increases for investors for at least the next few quarters.