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Alliance simplification should allow more sustainable growth, analysts say

A structural streamlining announced recently by Alliance Resource Partners LP and Alliance Holdings GP LP should allow more sustainable growth for the energy producer, according to analysts.

"At the end of the day it's going to lead to a healthier overall company that can maybe sustain itself," CBRE Clarion Securities analyst Hinds Howard told S&P Global Market Intelligence.

Alliance Resource Partners and Alliance Holdings announced July 28 they were streamlining their economic structure. Alliance Holdings eliminated its incentive distribution rights and converted its approximate 1% general partner interest in Alliance Resource Partners into a noneconomic general partner interest. In exchange for these transactions, Alliance Holdings received 56.1 million Alliance Resource Partners common units.

"It's a very circular and very incestuous transaction. A lot of financial engineering," Howard said.

Though not necessarily as common in coal producers as in midstream gas producers, Howard said that a number of other master limited partnerships are executing these simplification moves in a bid to allow for better growth.

"It's definitely a trend, and a trend we expect to see continue," he said.

Tortoise Capital Advisors LLC Managing Director Rob Thummel agreed.

"It's something that has been a trend in the effort to reduce cost of capital for all companies," he told S&P Global Market Intelligence.

The problem, Howard and Thummel said, is that as an MLP grows, it has to give an increasingly large percentage of its earnings to the general partner in this case Alliance Holdings. While this may be a good incentive for growth in the beginning, it can become cumbersome later.

"It becomes harder for ARLP to grow with this anvil around their neck," Howard said. "The incentive distribution rights were maybe too much of a burden for ARLP to handle."

Thummel said there is no good reason why a coal producer should have incentive distribution rights.

"It's obviously a business and industry on the decline," he said.

However, Alliance announced the acquisition of $100 million in midstream gas assets during its earnings call and release for the second quarter.

Howard said the simplification move also could have something to do with these assets. "You want to reduce your cost of capital so you can survive and grow," he said.

The July 28 announcement said that while both entities would remain publicly traded after the exchange transaction, they would be positioned for a potential simplification operation in which Alliance Resource Partners would become the only reporting and trading entity, with a much larger public float.

"There still are two currencies. I think the next step would be for ARLP and AHGP to merge together, that's typically what we see," Howard said.

He is unsure why the partnership is waiting to merge, but said it could have to do with Alliance President and CEO Joseph Craft III's personal taxes.

In the earnings call, Craft said Alliance is waiting to see whether the Trump administration might change the tax code before it proceeds with simplification.

Alliance Resource Partners reported a net income attributable to Alliance of $63.2 million in the second quarter of 2017.