Alliance Resource Partners' Earnings Grow in Spite of the Abysmal Coal Market

The coal market has been absolutely abysmal over the past year. However, that's not the takeaway one would get after reviewing Alliance Resource Partners' (ARLP 1.51%) third-quarter results. The report, which was released before markets opened on Tuesday, was pretty solid. That's largely the function of two key differentiators between Alliance Resource Partners and the rest of the coal industry: its low levels of debt and strong long-term coal contracts with utilities.

Alliance Resource Partners results: The raw numbers

Data source: Alliance Resource Partners.

What happened with Alliance Resource Partners this quarter?
Alliance Resource Partners performed rather well:

• The company produced record coal volumes totaling 11.5 million tons during the quarter, up 12% year over year. This was due in part to completing the acquisition of White Oak and assuming operating and marketing control of the Hamilton Mine No. 1.
• Strong coal volumes helped offset some coal price weakness, which was down 4.7% from the year-ago period and pushed revenue down ever-so-slightly.
• Those weaker prices were partially offset by a 3.6% decrease in operating expenses.
• These three factors combined to drive strong distributable cash flow, which rose 7.6% year over year, including 6.9% on a per-unit basis.
• That strong cash flow resulted in a very robust distribution coverage ratio of 1.66 times.

What management had to say
CEO Joseph Craft, commenting on the company's results, said:

ARLP once again distinguished itself as a leader in the coal industry by posting solid results in the quarter...Our operations led the way by producing a record 11.5 million tons during the quarter and reducing segment adjusted EBITDA expense per ton by approximately 8% and 8.7% compared to the 2014 and Sequential Quarters, respectively. ARLP's cash flow and profits remain strong.

Alliance is one of the few coal producers that's not getting crushed by the current coal market. It has few peers that haven't yet fallen into bankruptcy, with those left standing on shaky ground. Peabody Energy (BTU) is one of those few, but it recently reported another very weak quarter. Peabody's coal volumes were flat, which when combined with weak coal prices led to a 7% decline in revenue to go along with another quarterly loss. Because of this weakness, Peabody Energy's main focus these days is on deleveraging its balance sheet. That's not a worry at Alliance because it has a very low debt-to-EBITDA ratio of around 1.0 times while Peabody's is in the high single digits.

Looking forward
Despite the fact that Alliance is delivering solid results right now, it is concerned about the impact that the weak coal market will have on its own future. In discussing the company's outlook, Craft said:

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.

While halting distribution growth is the prudent move given the current situation in the coal market, it's not exactly welcome news for income investors. Having said that, because of its low debt levels and extremely strong coverage ratio backed by long-term coal contracts, the company's distribution isn't in any risk of being reduced in the near term. The bottom line here is that those factors are what makes Alliance one of the strongest coal companies left standing.