For the past several years, the coal industry has been proving that, yes, things can definitely get worse than this. Competing energy sources such as natural gas and renewables have been steadily taking market share, and coal miners haven't responded by scaling back production fast enough.
Some have been hit harder than others, but the one company that has weathered the decline well is Alliance Resource Partners (NASDAQ:ARLP), and its most recent earnings release is a reflection of a company that has survived this downturn in decent shape. So let's take a quick look at the numbers as well as a little peek at what we can expect to see in the coming year at Alliance.
By the numbers
After what seemed like years and years of annual revenue increases, results from the fourth quarter led to the first year of declining revenue. Most of the drop came from lower prices, as Alliance actually increased its total coal produced and sold in 2015 compared to the prior year.
For the quarter, Alliance saw a modest dip in production as it shifts production to its more profitable mines and shutters the less profitable ones. The best way to see this is by comparing operational results between the two coal basins in which it Alliance operates. As it slowly winds down production at its Northern Appalachian mines, adjusted EBITDA has dropped considerably compared to last year while its Illinois Basin production remains solidly profitable.
All of this translated to a bottom-line result of $21 million in net income for the quarter, but since Alliance Resource Partners is an operating subsidiary of Alliance GP Holdings LP (NASDAQ:AHGP), the parent company claimed $34 million in net income attributable to the general partner, leaving limited partner units with a per-unit loss of $0.19.
This may sound odd, but a net loss to limited partner investors is actually helpful. As a master limited partnership, individual investors are responsible for paying the income taxes on their portion of net income. With the general partner claiming all the profits for the quarter and leaving limited partner units with a loss, investors in Alliance Resource Partners can count that loss against their taxes while still receiving distributions.
Of all the numbers that Alliance gives on its earnings reports, the most important one is by far distributable cash flow. Like its profit levels, this quarter we saw distributable cash flow slip a few million to $131 million. However, that was more than enough to cover the distribution paid to shareholders as its coverage ratio still came in at a rather healthy 1.49 times.
The high (and low) lights
There wasn't exactly anything that screamed "awesome" in Alliance's most recent earnings, but the simple fact that operational results haven't fallen off a cliff with the rest of the coal industry might be enough to smile about. In the past year, we have seen two of the nation's largest coal miners file for Chapter 11 bankruptcy while Peabody Energy, the giant of the coal industry, teeters on the edge of solvency.
The other thing that should give investors confidence is that Alliance's management is still making preliminary moves to cut costs and remain conservative about future prospects despite its current profitability levels. It has taken proactive steps like buying used equipment to lower costs, and has decided to keep its distribution payout at its current levels with no plan to raise it until it sees better times coming.
By keeping its distribution as is, Alliance anticipates that its distribution coverage ratio will be in the 1.1-1.2 range for all of 2016. It's much lower than it has been, but that is just a reflection of how bad it has been for coal producers lately.
What a Fool believes
It's still a bit of a marvel that Alliance has been able to remain so profitable while the rest of the coal industry has been withering on the vine. CEO Joseph Craft III made a point to say that the company doesn't expect the operating environment to get much better in 2016, and that is why it is taking more proactive steps with its distribution policy and production mix to ensure it makes it through the year in decent shape.
It may take a while before the market for coal picks back up again, and it's becoming more and more apparent that coal is in a structural decline from which it may never recover. In the meantime, though, Alliance Resource Partners remains the best company in the industry that could very well be the last one standing when all is said and done.
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