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The Coal Market's Meltdown Cut Deeply Into Alliance Resource Partners, L.P.'s Earnings

By Matthew DiLallo - Apr 26, 2016 at 5:30PM

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The coal MLP is reducing its distribution in order to provide a better cushion to manage the downturn.

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Image source: Alliance Resource Partners. 

The coal market has been going from bad to worse, with another one of the sector's largest producers recently filing for bankruptcy. That's having a trickle-down effect on coal master limited partnership Alliance Resource Partners (ARLP -0.10%) and its general partner, Alliance Holdings GP (NASDAQ: AHGP), which was evident in their first-quarter earnings report. That report, which was released before the market opened on Tuesday, showed a steep drop in revenue and cash flow, forcing both to slash their distributions.

Alliance Resource Partners results: The raw numbers

 

Q1 2016 Actuals

Q1 2015 Actuals

Growth (YOY)

Revenue

$412.8 million

$560.4 million

-26.3%

Distributable cash flow

$85.8 million

$142.1 million

-39.6%

Distribution coverage ratio

0.97 times

1.68 times

-42.3%

Data source: Alliance Resource Partners.

What happened with Alliance Resource Partners this quarter?
Alliance Resource Partners was hurt by the brutal coal market.

  • Coal sales slumped 21.5% year over year to just under 7.5 million tons. That was primarily due to planned reductions in coal sales and production volumes given very weak demand for coal.
  • That weak demand put continued negative pressure on coal prices, which were down 1.2% year over year to $53.82 per ton.
  • That one-two punch of lower sales volumes and lower coal sales prices cut deeply into the company's distributable cash flow, which was down nearly 40%.
  • That steep drop in distributable cash flow, when combined with the company's weak outlook for the coal market, led Alliance Resource to reduce its distribution by 35.2% to $0.4375 per unit. That forced Alliance Holdings to decrease its distribution as well, cutting its payout by 42.7%. 

What management had to say
As CEO Joseph Craft said about the company's results:

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... Although ARLP's performance continues to lead the industry and our balance sheet remains strong, we are unfortunately being affected 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.

While Alliance Resource's results were abysmal compared to last year's first quarter, they're holding up relatively well compared to those of its peers. That's largely due to the fact that the bulk of Alliance's coal sales are backed by contracts with utility customers, which provide a strong base of support. That being said, the current environment requires caution, which is why it has reduced its distribution in order to pay down debt and further strengthen its balance sheet.

Looking forward
Conditions in the coal market are expected to remain weak with Craft noting that "we expect the coal markets will remain oversupplied for several quarters and near-term pricing will be challenging." That being said, he did offer up a slightly more optimistic picture for 2017:

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.

If that forecast plays out as Craft thinks it will, then Alliance Resource should deliver improved financial results starting in 2017, which would put it in a position where it could start increasing distributions to unitholders.

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