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Alliance Resource Partners, L.P. Earnings Feel a Slight Chill From the Frozen Coal Market

By Matthew DiLallo - Jan 30, 2016 at 9:01AM

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The coal master limited partnership sees tough times ahead, but remains in a much stronger position than its peers.

The coal market has been brutal, with one quarter of the industry's production currently being reorganized through bankruptcy. More coal producers are likely to follow, due to high legacy costs and large debt loads.

But despite the industry's tough operating conditions, coal MLP Alliance Resource Partners (ARLP 1.51%) and general partner Alliance Holdings GP (NASDAQ: AHGP) are still doing fairly well, as shown in the company's fourth-quarter report. The report released on Tuesday showed that while Alliance isn't immune to the troubles surrounding it, the coal company is in a much better position to weather the storm thanks to its low level of debt and strong long-term coal contracts with utilities.

Alliance Resource Partners results: The raw numbers

 

Q4 2015 Actuals

Q4 2014 Actuals

Growth (YOY)

Revenue

$542.2 million

$590.8 million

-8.2%

Distributable Cash Flow

$131.0 million

$135.8 million

-3.5%

DCF per unit

$1.77

$1.83

-3.3%

Data source: Alliance Resource Partners.

What happened with Alliance Resource Partners this quarter?
Alliance Resource Partners' operations were solid but certainly not spectacular.

  • Coal volumes slipped to just under 10 million tons during the quarter. That was down 0.8% year over year and down 3.1% sequentially and was due to customer deferrals of scheduled coal shipments.
  • In addition to lower volumes, Alliance was affected by a weaker coal price, which was down 5.4% from the year-ago period and 0.9% sequentially.
  • The company offset some of this weakness by lowering its operating expenses.
  • This helped reduce the negative impact of weaker volumes and pricing on its distributable cash flow, which only declined 3.5% year over year and was actually flat sequentially.
  • That enabled the company to keep a very strong distribution coverage ratio of 1.49 times.

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

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.

The foundation of Alliance Resources is its long-term coal sales agreements, which provide relatively stable revenue and income during good times and bad. That said, the company has felt some of the impact of the weaker industry conditions, but has muted that impact by reducing its costs, including shutting high-cost production. Also, its overall cost structure is lower than its peers because of its relatively low debt level, keeping its interest expense at bay.

Looking forward
Alliance Resources expects the weak coal market to have further impact on its business in 2016. Craft said, "Conditions in the U.S. thermal coal markets continued to deteriorate during the [fourth quarter] as mild weather reduced overall power demand." Because of this, it is taking a number of actions to address these weakening conditions including shifting production to its lowest-cost mines, reducing shifts, and curtailing production. This will lead to lower production in 2016, but the company anticipates that it will be able to maintain its current distribution and still deliver a solid coverage ratio of 1.1 to 1.2 times.

Matt DiLallo has no position in any stocks mentioned. The Motley Fool recommends Alliance Resource Partners. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Alliance Resource Partners, L.P. Stock Quote
Alliance Resource Partners, L.P.
ARLP
$23.45 (1.51%) $0.35

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