Thanks to long-term contracts inked at high prices, Alliance moved into the year propelled by a strong tail wind.
First-quarter sales climbed 16% to $329.3 million.
Alliance operates as a master limited partnership. It's required to distribute 90% of its net income to investors, called unit holders.
But it can pay out more if it chooses, says Argus Research analyst William Eddleman.
The tax burden flows to the individual unit holder.
First-quarter profit climbed 68% to $1.56 per unit, sailing past analysts' views.
"One of the reasons we've seen earnings go up is you had a tightening of coal markets last year that allowed the firm to price contracts at higher levels," said Stifel Nicolaus analyst Paul Forward.
Coal prices hit record levels in mid-2008 amid rising exports and high oil and gas prices, which caused utilities to favor coal, he says.
Alliance typically sells its coal under multi-year contracts.
Of total coal sales, 99% in 2008 were done under long-term contracts, with a term of at least one year; maturities ranged from 2009 to 2023. Utilities consumed about 90% of the tonnage it sold.
Alliance entered 2009 with large coal-supply commitments at prices well above historical levels, the company says. Improved contract pricing across all regions during the first quarter buoyed its total average coal sales price per ton 26.3% vs. a year earlier.
But the coal market has softened. Forward says that in the eastern U.S., prices of some types of coal used by utilities are going for about $50 a ton vs. $140 a ton in mid-2008. He figures coal demand could sink by 7% or more this year.
Still, since it takes time for pricing on old contracts to reflect current market conditions, Alliance should continue to fare well this year, Forward says.
Executives would not comment. But they, too, expect a good year.
"Looking ahead, even though reduced electricity generation and falling natural gas prices have resulted in lower coal demand and weakened coal prices, we are optimistic that Alliance will achieve substantial growth in earnings and cash flow in 2009," said Chief Executive Joseph Craft in a statement.
Analysts polled by Thomson Reuters see 2009 earnings rising 111% to $5.08 per unit, then 4% in 2010.
But the short-term pricing outlook is cloudy.
"We've gone from a tight coal market in 2008 to a soft market this year, (which) places downward pressure on the type of pricing Alliance can realize when it signs multi-year contracts today," said Forward.
Management is proceeding with caution in light of the tough economy and uncertain prospects for overall energy demand.
Alliance said it is idling one of the four units in its Pontiki mining complex in Martin County, Ky., because of slack demand expected to last through 2010.
In this year's second half, it will move a production unit from one of its western Kentucky operations to its new River View mine in the same state. The company says River View is slated to start production later this year.
The move will let Alliance keep the project development on track to meet future supply obligations while reducing production below previously planned levels, said Craft on an April 27 conference call. It will also defer training costs by staffing the production unit with experienced miners from another operation.
Its strategy also includes cutting back on overtime at some mines and reducing production at its contract mining operations in the Northern Appalachian region.
As a result of these and other actions, Alliance lowered its guidance for coal production by 1.4 million to 1.5 million tons, without giving further details.
It also cut its 2009 capital spending guidance to $375 million to $425 million from $430 million to $480 million, wrote Forward in a report.
In the first quarter, the company increased its distribution 24.8% from last year to 73 cents per unit.
Eddleman is optimistic about Alliance's prospects amid the higher prices of oil and natural gas in recent weeks.
"The outlook for coal is better now than it was in February or March," he said. "All energy is in line. If oil is running up to (about) $70 a barrel, natural gas will follow and coal will follow. They're all inner related."
Forward says the coal market could recover later this year. But it's likelier to do so in 2010.