On June 2, the Environmental Protection Agency proposed a new set of rules designed to cut carbon dioxide emissions at U.S. power plants 30% by 2030. The target is part of the Obama administration's plan to combat climate change. While the proposal gives states and utilities some flexibility in fulfilling the new regulations, it's likely that coal-fired power plants will suffer the most from the new rules.
Not surprisingly, shares of several coal producers sunk that day. For example, Walter Energy (WLT +0.00%) dropped 6% on the day and another 4% the day after despite issuing a statement saying its performance would not be adversely affected. Clearly the market was unconvinced, and it stands to reason that coal producers like Walter Energy have plenty of reason to worry.
That's because Walter Energy is currently reporting losses and has resorted to idling mines. Put simply, Walter Energy already had its back against the wall.
However, not all coal companies are suffering. Alliance Resource Partners (ARLP 2.23%) actually traded higher on the day of the EPA announcement. Even though coal usage has declined in the United States over the past couple of years, Alliance Resource Partners continues to sail through the difficult climate for coal due to the surge in natural gas production.
While it might seem like any other coal company, Alliance Resource Partners has a magic formula for success. The fortunes of many coal companies like Walter Energy will worsen now that the EPA is out with its carbon dioxide emissions rules.
But Alliance Resource Partners is growing, and here's why future growth is still likely.
Sebree Reserves, Webster County, Kentucky
Source: arlp.com
Low-cost structure key to success
What separates Alliance Resource from its peers is its geographic location. Alliance Resource Partners is strategically positioned so that its mines and production facilities are close to end users like utility customers. This allows for high production and keeps transportation expenses and related costs low.
Most of the company's mines are situated in the Illinois Basin and Appalachia and are positioned close to its core customers. In addition, the company reported strengthening trends in the underlying economics of its industry to start the year. Year to date, Alliance Resource has stated that coal-fired electricity generation has actually increased 15% year over year and that coal consumption has increased 12%. This should provide further tailwinds even with the new set of regulations set forth by the EPA.
Alliance Resource Partners has superb execution abilities, and the results speak for themselves. Alliance Resource Partners has racked up 13 consecutive years of record financial performance. According to a company presentation, Alliance Resource Partners has generated a 323% total return to unitholders since 2008.
By contrast, Walter Energy lost $92 million in the first quarter, which is more than double the loss incurred in the same quarter of the previous year. In response, the company will idle its mines in Canada. But that's going to have an adverse impact on its production.
Another difference between Alliance Resource Partners and Walter Energy is the income you can receive from your investment. Alliance Resource Partners offers a whopping 5.5% yield. That's possible because of the company's sizable profits as well as its corporate structure.
Alliance Resource Partners is a master limited partnership. In fact, it's the oldest and largest coal MLP. As such, it's required to distribute the vast majority of its profits to investors, which results in a massive yield. In fact, it's increased its distribution for 24 consecutive quarters.
Future growth likely
Importantly, Alliance Resource Partners continues to see positive developments in its industry. It has a stable outlook for coal, driven by a return from utility customers as natural gas prices rise. And, exports of coal to the emerging markets should drive demand as well.
While it's easy to get swept away with panic over the new set of rules put forth by the EPA, the reality is that coal will remain a part of the U.S. energy mix. The task for investors is to separate the winners from the losers, given that coal now has more competition than ever from natural gas and is under regulatory scrutiny. For a clear winner in the coal space, look no further than Alliance Resource Partners.
