This Company Is the Canary in the Coal Mine

To say the past year has been unkind to coal would be an understatement. A number of factors, such as low natural gas prices and the prospect of increasing regulatory scrutiny, have dealt coal a series of blows that nearly brought the entire industry to its knees.

Major coal producers in the United States including Peabody Energy (NYSE: BTU  ) and Alpha Natural Resources (NYSE: ANR  ) saw their businesses significantly affected this year by the harsh operating conditions.

Meanwhile, one coal company continues to not just survive in the current climate, but thrive. For investors able to put aside the natural fear of investing in coal, great rewards may be in store in the form of Alliance Resource Partners (NASDAQ: ARLP  ) .

A best-in-breed coal company
It may seem hard to believe, but Alliance Resource Partners is truly succeeding, even while its closest competitors flounder. Both Alpha Natural and Peabody Energy are fully ensnared in the very tough operating climate for coal and are proving they cannot escape the fundamental issues surrounding coal.

Alpha Natural Resource's adjusted net loss nearly doubled in the second quarter versus the same period one year ago. Metrics deteriorated across the board: The company sold 5 million fewer tons of coal, and Alpha's coal margin dropped a massive 59%, down to $2.72 per ton from $6.57 per ton in the second quarter of 2012.

Peabody's own second-quarter revenue fell 13%, and its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) collapsed by 44% versus the same quarter last year. Furthermore, the company's adjusted diluted earnings per share declined 80% through the first six months of the year. Unfortunately, things aren't expected to get much better: Peabody is projecting a loss at the midpoint of its expected 2013 adjusted diluted EPS range.

In a positive note for Alpha Natural Resources and Peabody Energy, both companies recently amended their credit facilities, a move that should relax their debt burdens over the next couple years. Alpha Natural Resources eliminated its interest coverage ratio through the end of next year and reduced the ratio until the second half of 2016. For its part, Peabody refinanced its existing credit facility, and extended its debt maturities. Management of both Alpha Natural Resources and Peabody each stated that these moves were designed to improve financial flexibility. This stands to reason, as lower interest expenses should indeed help the companies steer greater resources to their ongoing turnaround efforts.

That being said, an amended credit agreement isn't enough for me to be too optimistic about Alpha Natural Resources or Peabody Energy. Structural operating questions still linger, and it's unclear when each company will be able to reverse the rising tide of losses.

Meanwhile, Alliance Resource Partners continues to grow. The company's second-quarter results set a record for revenues, coal sales volumes, and EBITDA. In all, revenue and EBITDA rose 4.5% and 14.7%, respectively, year over year.

Even better, the company's outstanding second quarter, in addition to the fact that all 2013 coal volumes are fully priced and committed, compelled Alliance Resource Partners to increase its full-year 2013 guidance. Plus, Alliance Resource Partners continues to beef up its future contracts: In the second quarter, the company secured additional commitments in the amount of 2.6 million tons to be delivered through 2015.

But perhaps the best aspect of owning Alliance Resource Partners is its massive distribution. As a limited partnership, Alliance Resource Partners distributes the vast majority of cash flow through to unitholders in exchange for a favorable tax structure. This means investors are treated to a 6.2% yield. Moreover, as the company's profits grow, so does its distribution. Alliance Resource Partners has increased its distribution for 21 consecutive quarters, and its 2013 second quarter distribution was 8.5% higher than the second quarter of 2012.

Don't throw the baby out with the bath water
It's entirely reasonable to instinctively run from coal stocks. With utility customers increasingly switching to other power sources such as natural gas, and the ever-present threat of regulatory risk, it's not a surprise that so many coal companies are reporting losses. Naturally, most investors probably feel the entire industry itself is at risk and feel they should avoid all coal stocks.

However, Alliance Resource Partners continues to execute and reward unitholders handsomely through a rising price and increasing distributions. Even in such a harsh operating environment, Alliance Resource Partners' results speak for themselves. For better or worse, coal is likely to remain a meaningful part of our energy mix, and Alliance Resource Partners will be there to profit.

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