Falling Costs and Improving Volumes Push Alliance Resource Partners, L.P.'s Results and Guidance Upward

By Matthew DiLallo Markets Fool.com

The coal market continues to show signs of life, which is driving volume growth for coal MLP Alliance Resource Partners (NASDAQ: ARLP). Those higher volumes, when combined with its cost containment efforts fueled significantly higher earnings for the company and its general partner,Alliance Holdings GP (NASDAQ: AHGP). With those trends showing no signs of abating, the company is growing more confident in its ability to deliver improving future results. That's clear by its decision to boost full-year guidance and hint to investors that it's starting to think about restarting distribution growth.

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Alliance Resource Partners results: The raw numbers

Metric

Q1 2017

Q1 2016

Year-Over-Year Change

Revenue

$438.7 million

$401.3 million

9.3%

Distributable cash flow

$126.7 million

$75.5 million

67.8%

Distribution coverage ratio

2.38

0.85

180%

Data source: Alliance Resource Partners.

Image source: Getty Images.

What happened with Alliance Resource Partners this quarter?

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Alliance Resource Partners continues to benefit from an improving coal market and falling costs.

  • Revenue jumped thanks to a 28.9% improvement in total coal volumes sold in the quarter, which came in at 9.6 million tons. That more than offset a 15.2% decline in the average coal price per ton, which slumped to $45.65 per ton as a result of the continued roll-off of legacy sales contracts.
  • Meanwhile, operating expenses dipped 0.3% versus last year while general and administrative expenses fell 7%, which when combined with higher volumes, helped fuel a 35.6% rebound in segment adjusted EBITDA, propelling it to $193.7 million.
  • The combination of higher volumes and lower costs also drove up distributable cash flow, which rose sharply versus the year-ago period and when combined with a lower distribution than last year, drove a significant improvement in the company's coverage ratio.

What management had to say

CEO Joseph Craft commented on the quarter by saying:

ARLP started the year strong, posting increases to all of our major financial and operating metrics for the 2017 Quarter. Operationally, we continued to benefit from recent efforts to reduce costs and minimize capital by shifting production to our lowest-cost mines. On the marketing front, we further strengthened ARLP's sales contract portfolio by securing commitments for an additional 740,000 tons for deliveries through 2019 -- including another 342,000 tons of 2017 shipments into the thermal and metallurgical export markets. We also recently completed our initial high-yield bond offering, successfully placing $400 million of senior unsecured notes due 2025 and garnering an industry-best corporate credit rating of Ba3/BB+. This financing provides ARLP with a stable, long-term capital structure with ample liquidity and flexibility to execute our strategy. With expectations for generating strong cash flows while maintaining a conservative balance sheet and robust distribution coverage, we believe ARLP is well positioned to once again consider gradually increasing distributions to our unitholders.

As Craft points out, the first quarter was a busy one for the company. On the operational front, Alliance continues to benefit from a focus on producing from its lowest-cost mines, which is helping offset weaker pricing as legacy coal sales contracts expire. Meanwhile, the company has been able to secure new contracts to lock in future output, which provides a bit more clarity on revenue and cash flow. Because of that clarity, as well as the move to raise cash and shore up its balance sheet, Alliance Resource Partners believes it's in the position to start boosting the distribution again, which should lead to a higher payout at Alliance Holdings GP as well.

Looking forward

Alliance's optimism is fueled by the continued improvements in the coal market, with the company expecting that buying from utilities will pick up later this year. As a result, Alliance anticipates selling more coal than initially expected, which caused it to boost the full-year sales forecast to 38.5-39.5 million tons, up from last quarter's guidance of 37.9-39.2 million tons. Those higher sales volumes should push EBITDA up to a range of $605 million to $645 million, up from its prior guidance of $550 million to $615 million.

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Matt DiLallo has no position in any stocks mentioned. The Motley Fool recommends Alliance Resource Partners. The Motley Fool has a disclosure policy.