The coal industry has been hit hard in recent years with once-dominant names like Peabody Energy (OTC:BTU) resorting to bankruptcy protection to ensure their survival. Throughout the downturn, however, one name has stood out -- Alliance Resource Partners, L.P. (NASDAQ:ARLP). Here's why investors have nothing to worry about when looking at this coal industry leader with an over-10% distribution yield.

On the outs

So let's get the bad news out of the way up front... Coal is slowly losing its place in the U.S. power grid. There are several reasons, the most notable of which is low natural gas prices. Coal is unlikely to regain material share from this cleaner burning fuel.

A miner standing at the mouth of a mine

Image source: Getty Images

Coal's dirty image, meanwhile, will likely mean it continues to lose ground, slowly, in the future, to alternatives like solar and wind. But coal isn't on a path to quick extinction. The U.S. Energy Information Administration (EIA) projects that coal will remain an important part of the grid until at least 2040. Even better for Alliance, the EIA expects the Interior Region, which is where Alliance operates, to increase its market share from 20% to 26% over that span.

In other words, Alliance is actually in a coal market that's expected to do reasonably well. That helps explain why Alliance was able to increase production by around 20% between 2010 and 2016, during a deep industry downturn. Powder River Basin-focused Cloud Peak Energy (NYSE:CLD), by comparison, cut production by 35% over that span. Despite what you've heard about coal, Alliance is actually pretty well positioned.

Rock solid

Alliance is also on solid financial footing. For starters, despite a deep industry downturn, Alliance's bottom line never dipped into the red. Most of its peers can't say the same. And the competitors that had to seek out bankruptcy protection -- well, they clearly had bigger issues.

ARLP EPS Diluted (Quarterly) Chart

ARLP EPS Diluted (Quarterly) data by YCharts

Long-term debt, meanwhile, makes up just 25% (or so) of Alliance's capital structure. Note that even after a trip through bankruptcy court Peabody's debt makes up around 35% of its capital structure, with management continuing to talk about the importance of debt reduction. Meanwhile, Alliance's current ratio, a measure of the company's ability to pay its near-term bills, is a solid 1.1. There's no reason to worry about Alliance's balance sheet.

Even better, Alliance is taking steps to simplify its business. It issued new units to its general partner Alliance Holdings GP, L.P. (NASDAQ: AHGP) for the incentive rights owned by the GP. That's a first step toward buying Alliance Holdings, which is often referred to as an internalization transaction in the partnership space. Doing this will reduce the costs of future acquisitions and make Alliance Resources' structure easier to understand.

Along with this announcement, Alliance also reported that it would increase the distribution by 14%. That makes good on the company's first quarter statement that distribution growth might be back on the table after a cut in mid-2016. The best part? Alliance expects to cover its 2017 distribution by more than 1.7 times. That means there's a healthy margin of safety for the distribution, and perhaps even some room for more hikes.

Less concerning than it looks

Alliance definitely has a big long-term issue to deal with, but coal's demise appears to be at least 20 years away at this point... if not longer. That's plenty of time for what is likely the best run coal company around to adjust. (Note, interestingly enough, that it's made some small investments in the natural gas space.) In the meantime the partnership is using its solid financial position and strong industry position to reward investors and streamline its business. In the end, it doesn't look like investors interested in Alliance's over-10% distribution yield have anything to worry about right now, except perhaps collecting some big quarterly checks.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.