arlp_Current folio_10Q

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549


 

FORM 10-Q

 

☒   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2016

 

OR

 

☐   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ________________to________________

 

 

Commission File No.:  0-26823


 

ALLIANCE RESOURCE PARTNERS, L.P.

(Exact name of registrant as specified in its charter)

 

Delaware

   

73-1564280

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer Identification No.)

 

1717 South Boulder Avenue, Suite 400, Tulsa, Oklahoma 74119

(Address of principal executive offices and zip code)

 

(918) 295-7600

(Registrant's telephone number, including area code)


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes   [   ] No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  [X ] Yes   [   ] No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.  (check one)

 

Large Accelerated Filer [X]

Accelerated Filer [   ]

Non-Accelerated Filer [   ]

Smaller Reporting Company [   ]

 

 

(Do not check if smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  [   ] Yes   [X]  No

 

As of November 8, 2016,  74,375,025 common units are outstanding.

 

 

 

 

 


 

Table of Contents

TABLE OF CONTENTS

 

PART I 

 

FINANCIAL INFORMATION 

 

 

 

 

 

 

Page

 

 

 

ITEM 1. 

Financial Statements (Unaudited)

 

 

 

 

 

ALLIANCE RESOURCE PARTNERS, L.P. AND SUBSIDIARIES

 

 

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2016  and December 31, 2015

 

 

 

 

Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2016 and 2015

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2016 and 2015

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2016 and 2015

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

 

 

ITEM 2. 

Management's Discussion and Analysis of Financial Condition and Results of Operations

20 

 

 

 

ITEM 3. 

Quantitative and Qualitative Disclosures about Market Risk

33 

 

 

 

ITEM 4. 

Controls and Procedures

34 

 

 

 

 

Forward-Looking Statements

35 

 

 

 

PART II 

 

OTHER INFORMATION 

 

 

 

ITEM 1. 

Legal Proceedings

37 

 

 

 

ITEM 1A. 

Risk Factors

37 

 

 

 

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

37 

 

 

 

ITEM 3. 

Defaults Upon Senior Securities

37 

 

 

 

ITEM 4. 

Mine Safety Disclosures

37 

 

 

 

ITEM 5. 

Other Information

37 

 

 

 

ITEM 6. 

Exhibits

38 

 

 

 

 

 

 

 

i


 

Table of Contents

PART I

 

FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

 

ALLIANCE RESOURCE PARTNERS, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except unit data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

 

 

2016

    

2015

 

ASSETS

    

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

21,372

 

$

33,431

 

Trade receivables

 

 

146,209

 

 

122,875

 

Other receivables

 

 

492

 

 

696

 

Due from affiliates

 

 

198

 

 

190

 

Inventories, net

 

 

89,904

 

 

121,081

 

Advance royalties, net

 

 

2,016

 

 

6,820

 

Prepaid expenses and other assets

    

 

18,106

    

 

29,812

 

Total current assets

 

 

278,297

 

 

314,905

 

PROPERTY, PLANT AND EQUIPMENT:

 

 

 

 

 

 

 

Property, plant and equipment, at cost

 

 

2,994,420

 

 

3,044,260

 

Less accumulated depreciation, depletion and amortization

 

 

(1,352,117)

 

 

(1,243,985)

 

Total property, plant and equipment, net

 

 

1,642,303

 

 

1,800,275

 

OTHER ASSETS:

 

 

 

 

 

 

 

Advance royalties, net

 

 

30,872

 

 

21,295

 

Equity investments in affiliates

 

 

128,051

 

 

64,509

 

Goodwill

 

 

136,399

 

 

136,399

 

Other long-term assets

 

 

28,353

 

 

23,903

 

Total other assets

 

 

323,675

 

 

246,106

 

TOTAL ASSETS

 

$

2,244,275

 

$

2,361,286

 

 

 

 

 

 

 

 

 

LIABILITIES AND PARTNERS' CAPITAL

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

Accounts payable

 

$

63,465

 

$

83,597

 

Due to affiliates

 

 

44

 

 

129

 

Accrued taxes other than income taxes

 

 

22,007

 

 

15,621

 

Accrued payroll and related expenses

 

 

43,396

 

 

37,031

 

Accrued interest

 

 

2,607

 

 

306

 

Workers' compensation and pneumoconiosis benefits

 

 

8,701

 

 

8,688

 

Current capital lease obligations

 

 

27,035

 

 

19,764

 

Other current liabilities

 

 

15,420

 

 

18,929

 

Current maturities, long-term debt, net

 

 

509,155

 

 

238,086

 

Total current liabilities

 

 

691,830

 

 

422,151

 

LONG-TERM LIABILITIES:

 

 

 

 

 

 

 

Long-term debt, excluding current maturities, net

 

 

144,949

 

 

579,420

 

Pneumoconiosis benefits

 

 

62,529

 

 

60,077

 

Accrued pension benefit

 

 

38,239

 

 

39,031

 

Workers' compensation

 

 

50,051

 

 

47,486

 

Asset retirement obligations

 

 

124,925

 

 

122,434

 

Long-term capital lease obligations

 

 

92,376

 

 

80,150

 

Other liabilities

 

 

13,647

 

 

21,174

 

Total long-term liabilities

 

 

526,716

 

 

949,772

 

Total liabilities

 

 

1,218,546

 

 

1,371,923

 

 

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PARTNERS' CAPITAL:

 

 

 

 

 

 

 

Alliance Resource Partners, L.P. ("ARLP") Partners' Capital:

 

 

 

 

 

 

 

Limited Partners - Common Unitholders 74,375,025 and 74,188,784 units outstanding, respectively

 

 

1,329,934

 

 

1,280,218

 

General Partners’ deficit

 

 

(275,153)

 

 

(258,883)

 

Accumulated other comprehensive loss

 

 

(34,174)

 

 

(34,557)

 

Total ARLP Partners' Capital

 

 

1,020,607

 

 

986,778

 

Noncontrolling interest

 

 

5,122

 

 

2,585

 

Total Partners' Capital

 

 

1,025,729

 

 

989,363

 

TOTAL LIABILITIES AND PARTNERS' CAPITAL

 

$

2,244,275

 

$

2,361,286

 

 

See notes to condensed consolidated financial statements.

1


 

Table of Contents

ALLIANCE RESOURCE PARTNERS, L.P. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except unit and per unit data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

 

    

2016

    

2015

    

2016

    

2015

    

SALES AND OPERATING REVENUES:

 

 

 

 

 

 

 

 

 

 

 

 

 

Coal sales

 

$

533,817

 

$

547,466

 

$

1,357,578

 

$

1,632,493

 

Transportation revenues

 

 

7,692

 

 

9,395

 

 

19,732

 

 

24,323

 

Other sales and operating revenues

 

 

10,565

 

 

9,584

 

 

26,743

 

 

74,765

 

Total revenues

 

 

552,074

 

 

566,445

 

 

1,404,053

 

 

1,731,581

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses (excluding depreciation, depletion and amortization)

 

 

347,711

 

 

336,527

 

 

847,513

 

 

1,045,954

 

Transportation expenses

 

 

7,692

 

 

9,395

 

 

19,732

 

 

24,323

 

Outside coal purchases

 

 

1,514

 

 

2

 

 

1,514

 

 

326

 

General and administrative

 

 

18,114

 

 

17,948

 

 

53,015

 

 

52,336

 

Depreciation, depletion and amortization

 

 

80,612

 

 

84,661

 

 

240,640

 

 

242,730

 

Asset impairment

 

 

 —

 

 

10,695

 

 

 —

 

 

10,695

 

Total operating expenses

 

 

455,643

 

 

459,228

 

 

1,162,414

 

 

1,376,364

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INCOME FROM OPERATIONS

 

 

96,431

 

 

107,217

 

 

241,639

 

 

355,217

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense (net of interest capitalized for the three and nine months ended September 30, 2016 and 2015 of $47, $152, $320 and $518, respectively)

 

 

(8,001)

 

 

(7,352)

 

 

(23,386)

 

 

(23,626)

 

Interest income

 

 

3

 

 

285

 

 

8

 

 

1,421

 

Equity in income (loss) of affiliates, net

 

 

1,105

 

 

(17,221)

 

 

1,041

 

 

(49,049)

 

Other income

 

 

293

 

 

455

 

 

545

 

 

750

 

INCOME BEFORE INCOME TAXES

 

 

89,831

 

 

83,384

 

 

219,847

 

 

284,713

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INCOME TAX EXPENSE

 

 

7

 

 

12

 

 

4

 

 

17

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INCOME

 

 

89,824

 

 

83,372

 

 

219,843

 

 

284,696

 

LESS:  NET LOSS (INCOME) ATTRIBUTABLE TO NONCONTROLLING INTEREST

 

 

(44)

 

 

7

 

 

(40)

 

 

27

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INCOME ATTRIBUTABLE TO ALLIANCE RESOURCE PARTNERS, L.P. ("NET INCOME OF ARLP")

 

$

89,780

 

$

83,379

 

$

219,803

 

$

284,723

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GENERAL PARTNERS' INTEREST IN NET INCOME OF ARLP

 

$

20,571

 

$

37,311

 

$

60,723

 

$

111,735

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIMITED PARTNERS' INTEREST IN NET INCOME OF ARLP

 

$

69,209

 

$

46,068

 

$

159,080

 

$

172,988

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BASIC AND DILUTED NET INCOME OF ARLP PER LIMITED PARTNER UNIT (Note 9)

 

$

0.91

 

$

0.61

 

$

2.08

 

$

2.29

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

DISTRIBUTIONS PAID PER LIMITED PARTNER UNIT

 

$

0.4375

 

$

0.6750

 

$

1.5500

 

$

1.9875

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

WEIGHTED-AVERAGE NUMBER OF UNITS OUTSTANDING – BASIC AND DILUTED

 

 

74,375,025

 

 

74,188,784

 

 

74,347,157

 

 

74,169,538

 

 

See notes to condensed consolidated financial statements.

2


 

Table of Contents

ALLIANCE RESOURCE PARTNERS, L.P. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

    

September 30, 

 

September 30, 

 

 

 

2016

    

2015

    

2016

    

2015

    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INCOME

 

$

89,824

 

$

83,372

 

$

219,843

 

$

284,696

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OTHER COMPREHENSIVE INCOME (LOSS):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Defined benefit pension plan

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of net actuarial loss (1)

 

 

787

 

 

839

 

 

2,365

 

 

2,516

 

Total defined benefit pension plan adjustments

 

 

787

 

 

839

 

 

2,365

 

 

2,516

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pneumoconiosis benefits

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of net actuarial gain (1)

 

 

(660)

 

 

(113)

 

 

(1,982)

 

 

(338)

 

Total pneumoconiosis benefits adjustments

 

 

(660)

 

 

(113)

 

 

(1,982)

 

 

(338)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OTHER COMPREHENSIVE INCOME

 

 

127

 

 

726

 

 

383

 

 

2,178

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

COMPREHENSIVE INCOME

 

 

89,951

 

 

84,098

 

 

220,226

 

 

286,874

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less: Comprehensive (income) loss attributable to noncontrolling interest

 

 

(44)

 

 

7

 

 

(40)

 

 

27

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

COMPREHENSIVE INCOME ATTRIBUTABLE TO ARLP

 

$

89,907

 

$

84,105

 

$

220,186

 

$

286,901

 


(1)

Amortization of net actuarial gain or loss is included in the computation of net periodic benefit cost (see Notes 10 and 12 for additional details).

 

See notes to condensed consolidated financial statements.

3


 

Table of Contents

ALLIANCE RESOURCE PARTNERS, L.P. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

September 30, 

 

 

    

2016

    

2015

    

 

 

 

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

$

494,528

 

$

528,895

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Property, plant and equipment:

 

 

 

 

 

 

 

Capital expenditures

 

 

(70,267)

 

 

(159,182)

 

Decrease in accounts payable and accrued liabilities

 

 

(7,965)

 

 

(3,093)

 

Proceeds from sale of property, plant and equipment

 

 

756

 

 

1,519

 

Purchases of equity investments in affiliates

 

 

(65,367)

 

 

(47,624)

 

Payments for acquisitions of businesses, net of cash acquired

 

 

(1,011)

 

 

(74,953)

 

Payment for acquisition of customer contracts

 

 

(23,000)

 

 

 —

 

Advances/loans to affiliate

 

 

 —

 

 

(7,300)

 

Other

 

 

2,167

 

 

1,807

 

Net cash used in investing activities

 

 

(164,687)

 

 

(288,826)

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Borrowings under securitization facility

 

 

44,600

 

 

6,500

 

Payments under securitization facility

 

 

(27,700)

 

 

(6,500)

 

Payments on term loan

 

 

(106,250)

 

 

(20,319)

 

Borrowings under revolving credit facilities

 

 

140,000

 

 

463,000

 

Payments under revolving credit facilities

 

 

(215,000)

 

 

(200,000)

 

Payment on long-term debt

 

 

 —

 

 

(205,000)

 

Proceeds on capital lease transactions

 

 

33,881

 

 

 —

 

Payments on capital lease obligations

 

 

(17,769)

 

 

(994)

 

Contributions to consolidated company from affiliate noncontrolling interest

 

 

2,557

 

 

1,483

 

Net settlement of employee withholding taxes on vesting of Long-Term Incentive Plan

 

 

(1,336)

 

 

(2,719)

 

Cash contributions by General Partners

 

 

47

 

 

95

 

Distributions paid to Partners

 

 

(194,870)

 

 

(258,697)

 

Other

 

 

(60)

 

 

(5,583)

 

Net cash used in financing activities

 

 

(341,900)

 

 

(228,734)

 

 

 

 

 

 

 

 

 

NET CHANGE IN CASH AND CASH EQUIVALENTS

 

 

(12,059)

 

 

11,335

 

 

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

 

 

33,431

 

 

24,601

 

 

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

 

$

21,372

 

$

35,936

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL CASH FLOW INFORMATION:

 

 

 

 

 

 

 

Cash paid for interest

 

$

20,194

 

$

20,164

 

Cash paid for income taxes

 

$

7

 

$

14

 

 

 

 

 

 

 

 

 

NON-CASH INVESTING AND FINANCING ACTIVITY:

 

 

 

 

 

 

Accounts payable for purchase of property, plant and equipment

 

$

4,669

 

$

12,561

 

Assets acquired by capital lease

 

$

37,089

 

$

 —

 

Market value of common units issued under Long-Term Incentive and Directors Deferred Compensation Plans before minimum statutory tax withholding requirements

 

$

3,642

 

$

7,389

 

Acquisition of businesses:

 

 

 

 

 

 

 

Fair value of assets assumed

 

$

1,011

 

$

497,790

 

Contingent consideration

 

 

 —

 

 

(20,407)

 

Settlement of pre-existing relationships

 

 

 —

 

 

(119,663)

 

Previously held equity-method investment

 

 

 —

 

 

(104,931)

 

Cash paid, net of cash acquired

 

 

(1,011)

 

 

(74,953)

 

Fair value of liabilities assumed

 

$

 —

 

$

177,836

 

 

See notes to condensed consolidated financial statements.

4


 

Table of Contents

 

ALLIANCE RESOURCE PARTNERS, L.P. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.ORGANIZATION AND PRESENTATION

 

Significant Relationships Referenced in Notes to Condensed Consolidated Financial Statements

 

·

References to "we," "us," "our" or "ARLP Partnership" mean the business and operations of Alliance Resource Partners, L.P., the parent company, as well as its consolidated subsidiaries.

·

References to "ARLP" mean Alliance Resource Partners, L.P., individually as the parent company, and not on a consolidated basis.

·

References to "MGP" mean Alliance Resource Management GP, LLC, the managing general partner of Alliance Resource Partners, L.P.

·

References to "SGP" mean Alliance Resource GP, LLC, the special general partner of Alliance Resource Partners, L.P., also referred to as our special general partner.

·

References to "Intermediate Partnership" mean Alliance Resource Operating Partners, L.P., the intermediate partnership of Alliance Resource Partners, L.P.

·

References to "Alliance Resource Properties" mean Alliance Resource Properties, LLC, the land-holding company for the mining operations of Alliance Resource Operating Partners, L.P.

·

References to "Alliance Coal" mean Alliance Coal, LLC, the holding company for the mining operations of Alliance Resource Operating Partners, L.P., also referred to as our primary operating subsidiary.

·

References to "AHGP" mean Alliance Holdings GP, L.P., individually as the parent company, and not on a consolidated basis.

·

References to "AGP" mean Alliance GP, LLC, the general partner of Alliance Holdings GP, L.P.

 

Organization

 

ARLP is a Delaware limited partnership listed on the NASDAQ Global Select Market under the ticker symbol "ARLP."  ARLP was formed in May 1999 to acquire, upon completion of ARLP's initial public offering on August 19, 1999, certain coal production and marketing assets of Alliance Resource Holdings, Inc., a Delaware corporation ("ARH"), consisting of substantially all of ARH's operating subsidiaries, but excluding ARH.  ARH is owned by Joseph W. Craft III, the President and Chief Executive Officer and a Director of our managing general partner, and Kathleen S. Craft.  SGP, a Delaware limited liability company, is owned by ARH and holds a 0.01% general partner interest in each of ARLP and the Intermediate Partnership. 

 

We are managed by MGP, a Delaware limited liability company, which holds a 0.99% and a 1.0001% managing general partner interest in ARLP and the Intermediate Partnership, respectively, and a 0.001% managing member interest in Alliance Coal.  AHGP is a Delaware limited partnership that was formed to become the owner and controlling member of MGP.  AHGP completed its initial public offering on May 15, 2006.  AHGP owns directly and indirectly 100% of the members' interest of MGP, the incentive distribution rights ("IDR") in ARLP and 31,088,338 common units of ARLP. ARLP and its consolidated subsidiaries represent virtually all the net assets and operations of AHGP.

 

Basis of Presentation

 

The accompanying condensed consolidated financial statements include the accounts and operations of the ARLP Partnership and present the consolidated financial position as of September 30, 2016 and December 31, 2015, the results of operations and comprehensive income for the three and nine months ended September 30, 2016 and 2015 and the cash flows for the nine months ended September 30, 2016 and 2015 of ARLP, the Intermediate Partnership (a subsidiary of ARLP and a variable interest entity of which ARLP is the primary beneficiary), Alliance Coal (a variable interest entity of which the Intermediate Partnership is the primary beneficiary) and other directly and indirectly wholly- and majority-owned subsidiaries of the Intermediate Partnership and Alliance Coal.  The Intermediate Partnership, Alliance Coal and their wholly- and majority-owned subsidiaries represent virtually all the net assets of the ARLP Partnership.  MGP's interests in both Alliance Coal and the Intermediate Partnership and SGP's 0.01% interest in the Intermediate Partnership are reported as part of the overall two percent general partner interest in the ARLP Partnership.  MGP's incentive

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distribution rights in ARLP are also reported with the general partner interest in ARLP.  All intercompany transactions and accounts have been eliminated.  See Note 7 – Variable Interest Entities for more information regarding ARLP's consolidation of the Intermediate Partnership and Alliance Coal.  See Note 9 – Net Income of ARLP Per Limited Partner Unit for more information regarding MGP's incentive distribution rights in ARLP.

 

These condensed consolidated financial statements and notes are unaudited. However, in the opinion of management, these financial statements reflect all normal recurring adjustments necessary for a fair presentation of the results for the periods presented.  Results for interim periods are not necessarily indicative of results to be expected for the full year ending December 31, 2016.  

 

These condensed consolidated financial statements and notes are prepared pursuant to the rules and regulations of the Securities and Exchange Commission for interim reporting and do not include all of the information normally included with financial statements prepared in accordance with generally accepted accounting principles ("GAAP") of the United States.  These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2015.

 

Use of Estimates

 

The preparation of the ARLP Partnership's condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in our condensed consolidated financial statements.  Actual results could differ from those estimates.

 

Goodwill

 

Goodwill represents the excess of cost over the fair value of net assets of acquired businesses. Goodwill is not amortized, but instead is evaluated for impairment periodically.  We evaluate goodwill for impairment annually on November 30th, or more often if events or circumstances indicate that goodwill might be impaired.  The reporting unit or units used to evaluate and measure goodwill for impairment are determined primarily from the manner in which the business is managed or operated.  A reporting unit is an operating segment or a component that is one level below an operating segment.  There were no impairments of goodwill during the nine months ended September 30, 2016.  In future periods it is reasonably possible that a variety of circumstances could result in an impairment of our goodwill.

 

2.NEW ACCOUNTING STANDARDS

 

New Accounting Standard Issued and Adopted

 

In April 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2015-03, Interest – Imputation of Interest ("ASU 2015-03").  ASU 2015-03 changes the classification and presentation of debt issuance costs by requiring debt issuance costs to be reported as a direct deduction from the face amount of the debt liability rather than an asset.  Amortization of the costs is reported as interest expense.  The amendment does not affect the current guidance on the recognition and measurement of debt issuance costs.  ASU 2015-03 was effective for fiscal years, and interim periods within those years, beginning after December 15, 2015 and is applied retrospectively to each period presented.  The adoption of ASU 2015-03 resulted in immaterial changes to our condensed consolidated financial statements.

 

In February 2015, the FASB issued ASU 2015-02, Consolidation ("ASU 2015-02").  ASU 2015-02 changes the requirements and analysis required when determining the reporting entity's need to consolidate an entity, including modifying the evaluation of limited partnership variable interest status, presumption that a general partner should consolidate a limited partnership and the consolidation criterion applied by a reporting entity involved with variable interest entities.  ASU 2015-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015 and may be applied retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption.  The adoption of ASU 2015-02 in January 2016 did not have a material impact on our condensed consolidated financial statements.

 

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New Accounting Standards Issued and Not Yet Adopted

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments–Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13").  ASU 2016-13 changes the impairment model for most financial assets and certain other instruments to require the use of a new forward-looking "expected loss" model that generally will result in earlier recognition of allowances for losses.  The new standard will require disclosure of significantly more information related to these items.  ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted for the fiscal year beginning after December 15, 2018, including interim periods.  We are currently evaluating the effect of adopting ASU 2016-13.

 

In March 2016, the FASB issued ASU 2016-09, Compensation–Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting ("ASU 2016-09").  ASU 2016-09 simplifies the accounting for several aspects of share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows.  ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods, with early adoption permitted.  We do not expect the adoption of ASU 2016-09 to have a material impact on our consolidated financial statements.

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) ("ASU 2016-02").  ASU 2016-02 increases transparency and comparability among organizations by requiring lessees to record right-to-use assets and corresponding lease liabilities on the balance sheet and disclosing key information about lease arrangements.  The new guidance will continue to classify leases as either finance or operating, with classification affecting the pattern of income recognition in the statement of income.  ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted.  We are currently evaluating the effect of adopting ASU 2016-02.

 

In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory ("ASU 2015-11").  ASU 2015-11 simplifies the subsequent measurement of inventory.  It replaces the current lower of cost or market test with the lower of cost or net realizable value test.  Net realizable value is defined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.  The new standard will be applied prospectively and is effective for annual reporting periods beginning after December 15, 2016 and interim periods within those annual periods, with early adoption permitted.  We are currently evaluating the effect of adopting ASU 2015-11, but do not expect it to have a material impact on our consolidated financial statements.

 

In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern ("ASU 2014-15").  ASU 2014-15 provides guidance on management's responsibility in evaluating whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures.  ASU 2014-15 is effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter with early adoption permitted.  We do not expect the adoption of ASU 2014-15 to have a material impact on our consolidated financial statements.

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers ("ASU 2014-09").  ASU 2014-09 is a new revenue recognition standard that provides a five-step analysis of transactions to determine when and how revenue is recognized.  The core principle of the new standard is an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  The standard will be applied retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption.  ASU 2014-09 was originally effective for fiscal years, and interim periods within those years, beginning after December 15, 2016.  In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date ("ASU 2015-14"), which defers the effective date by one year while providing the option to early adopt the standard on the original effective date.  We have developed an assessment team to determine the effect of adopting ASU 2014-09.  We are still determining whether there will be any material impact on our revenue recognition; however, we believe there will be changes with respect to disclosures on revenue from contracts and such changes will be reflected in our consolidated financial statements.  Our assessment team will continue working through the new guidance to finalize an evaluation later this year.

 

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3.CONTINGENCIES

 

Various lawsuits, claims and regulatory proceedings incidental to our business are pending against the ARLP Partnership.  We record accruals for potential losses related to these matters when, in management's opinion, such losses are probable and reasonably estimable.  Based on known facts and circumstances, we believe the ultimate outcome of these outstanding lawsuits, claims and regulatory proceedings will not have a material adverse effect on our financial condition, results of operations or liquidity.  However, if the results of these matters were different from management's current opinion and in amounts greater than our accruals, then they could have a material adverse effect.

 

4.INVENTORIES

 

Inventories consist of the following:

 

 

 

 

 

 

 

 

 

 

    

September 30, 

 

December 31, 

 

 

 

2016

    

2015

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

Coal

 

$

56,366

 

$

83,682

 

Supplies (net of reserve for obsolescence of $4,005 and $3,841, respectively)

 

 

33,538

 

 

37,399

 

Total inventory

 

$

89,904

 

$

121,081

 

 

During the nine months ended September 30, 2016, we recorded adjustments of $16.1 million to reduce the carrying value of our coal inventories to market price as a result of lower coal sale prices and higher cost per ton primarily due to lower production at the Hamilton County Coal, LLC ("Hamilton") mining complex as a result of challenging market conditions.

 

5.FAIR VALUE MEASUREMENTS

 

The following table summarizes our fair value measurements within the hierarchy:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2016

 

December 31, 2015

 

 

    

Level 1

    

Level 2

    

Level 3

    

Level 1

    

Level 2

    

Level 3

 

 

 

(in thousands)

 

Measured on a recurring basis:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration

 

 

 —

 

 

 —

 

 

7,000

 

 

 —

 

 

 —

 

 

10,400

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional disclosures:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

 

 —

 

 

667,425

 

 

 —

 

 

 —

 

 

819,099

 

 

 —

 

Total

 

$

 —

 

$

667,425

 

$

7,000

 

$

 —

 

$

819,099

 

$

10,400

 

 

The carrying amounts for cash equivalents, accounts receivable, accounts payable, due from affiliates and due to affiliates approximate fair value due to the short maturity of those instruments.

 

The estimated fair value of our long-term debt, including current maturities, is based on interest rates that we believe are currently available to us in active markets for issuance of debt with similar terms and remaining maturities (See Note 6 – Long-Term Debt).  The fair value of debt, which is based upon these interest rates, is classified as a Level 2 measurement under the fair value hierarchy.

 

The estimated fair value of our contingent consideration arrangement is based on a probability-weighted discounted cash flow model.  The assumptions used in the model include a risk-adjusted discount rate, forward coal sales price curves, cost of debt and probabilities of meeting certain threshold prices.  The decrease in fair value was primarily a result of changes in the risk-adjusted discount rate and is recorded in Operating expenses (excluding depreciation, depletion and amortization) in our condensed consolidated income statement.  The fair value measurement is based on significant inputs not observable in active markets and thus represents a Level 3 fair value measurement under the fair value hierarchy.

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6.LONG-TERM DEBT

 

Long-term debt consists of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unamortized

 

 

 

Principal

 

Debt Issuance Costs

 

 

 

September 30, 

 

December 31, 

 

September 30, 

 

December 31, 

 

 

    

2016

    

2015

    

2016

    

2015

 

 

 

(in thousands)

 

Revolving Credit facility

 

$

310,000

 

$

385,000

 

$

(573)

 

$

(1,234)

 

Series B senior notes

 

 

145,000

 

 

145,000

 

 

(118)

 

 

(169)

 

Term loan

 

 

100,000

 

 

206,250

 

 

(205)

 

 

(441)

 

Securitization facility

 

 

100,000

 

 

83,100

 

 

 —

 

 

 —

 

 

 

 

655,000

 

 

819,350

 

 

(896)

 

 

(1,844)

 

Less current maturities

 

 

(510,000)

 

 

(239,350)

 

 

845

 

 

1,264

 

Total long-term debt

 

$

145,000

 

$

580,000

 

$

(51)

 

$

(580)

 

 

Our Intermediate Partnership has a $700.0 million revolving credit facility ("Revolving Credit Facility"), $145.0 million in Series B senior notes ("Series B Senior Notes") and a $100.0 million term loan ("Term Loan" and collectively, with the Revolving Credit Facility and the Series B Senior Notes, the "ARLP Debt Arrangements"), which are guaranteed by all of the material direct and indirect subsidiaries of our Intermediate Partnership.  On October 16, 2015, the Revolving Credit Facility was amended to increase the baskets for permitted other unsecured debt and capital lease obligations and for annual sale-leaseback arrangements.  Our Intermediate Partnership also has a $100.0 million accounts receivable securitization facility ("Securitization Facility"). At September 30, 2016, current maturities include the Securitization Facility, the Revolving Credit Facility and the Term Loan. Management is currently finalizing plans to extend the Revolving Credit Facility, the cost, availability and terms of which could be impacted by weakness in the energy sector in general and coal in particular.

 

The ARLP Debt Arrangements contain various covenants affecting our Intermediate Partnership and its subsidiaries restricting, among other things, the amount of distributions by our Intermediate Partnership, incurrence of additional indebtedness and liens, sale of assets, investments, mergers and consolidations and transactions with affiliates, in each case subject to various exceptions.  The ARLP Debt Arrangements also require the Intermediate Partnership to remain in control of a certain amount of mineable coal reserves relative to its annual production.  In addition, the ARLP Debt Arrangements require our Intermediate Partnership to maintain (a) debt to cash flow ratio of not more than 3.0 to 1.0 and (b) cash flow to interest expense ratio of not less than 3.0 to 1.0, in each case, during the four most recently ended fiscal quarters.  The debt to cash flow ratio and cash flow to interest expense ratio were 1.12 to 1.0 and 22.0 to 1.0, respectively, for the trailing twelve months ended September 30, 2016.  We were in compliance with the covenants of the ARLP Debt Arrangements as of September 30, 2016.  See Note 7 – Variable Interest Entities for further discussion of restrictions on the cash available for distribution and its impact on our consolidations.

 

At September 30, 2016, we had borrowings of $310.0 million and $5.7 million of letters of credit outstanding with $384.3 million available for borrowing under the Revolving Credit Facility.  We utilize the Revolving Credit Facility, as appropriate, for working capital requirements, capital expenditures and investments in affiliates.  We incur an annual commitment fee of 0.25% on the undrawn portion of the Revolving Credit Facility.

 

On December 5, 2014, certain direct and indirect wholly-owned subsidiaries of our Intermediate Partnership entered into the Securitization Facility providing additional liquidity and funding.  Under the Securitization Facility, certain subsidiaries sell trade receivables on an ongoing basis to our Intermediate Partnership, which then sells the trade receivables to AROP Funding, LLC ("AROP Funding"), a wholly-owned bankruptcy-remote special purpose subsidiary of our Intermediate Partnership, which in turn borrows on a revolving basis up to $100.0 million secured by the trade receivables.  After the sale, Alliance Coal, as servicer of the assets, collects the receivables on behalf of AROP Funding.  The Securitization Facility bears interest based on a Eurodollar Rate.  It was renewed in December 2015 and matures in December 2016. On February 24, 2016 the facility was amended to include additional subsidiaries as sellers of trade receivables, thereby increasing availability under the facility.  At September 30, 2016, we had $100.0 million outstanding under the Securitization Facility. 

 

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On October 6, 2015, Cavalier Minerals JV, LLC ("Cavalier Minerals") (See Note 7 – Variable Interest Entities) entered into a credit agreement (the "Cavalier Credit Agreement") with Mineral Lending, LLC ("Mineral Lending") for a $100.0 million line of credit (the "Cavalier Credit Facility").  Mineral Lending is an entity owned by a) Alliance Resource Holdings II, Inc. ("ARH II," the parent of ARH), b) an entity owned by an officer of ARH who is also a director of ARH II ("ARH Officer") and c) foundations established by the President and Chief Executive Officer of MGP and Kathleen S. Craft.  There is no commitment fee under the facility.  Borrowings under the Cavalier Credit Facility bear interest at a one month LIBOR rate plus 6% with interest payable quarterly.  Repayment of the principal balance will begin following the first fiscal quarter after the earlier of the date on which the aggregate amount borrowed exceeds $90.0 million or December 31, 2017, in quarterly payments of an amount equal to the greater of $1.3 million initially, escalated to $2.5 million after two years, or fifty percent of Cavalier Minerals' excess cash flow. The Cavalier Credit Facility matures September 30, 2024, at which time all amounts then outstanding are required to be repaid.  To secure payment of the facility, Cavalier Minerals pledged all of its partnership interests, owned or later acquired, in AllDale Minerals, L.P. ("AllDale I") and AllDale Minerals II, L.P. ("AllDale II") (collectively "AllDale Minerals").  Cavalier Minerals may prepay the Cavalier Credit Facility at any time in whole or in part subject to terms and conditions described in the Cavalier Credit Agreement.  As of September 30, 2016, Cavalier Minerals had not drawn on the Cavalier Credit Facility.

 

On June 29, 2016, we entered into various sale-leaseback transactions for certain mining equipment and received $33.9 million in proceeds.  The lease agreements have terms ranging from three to four years with initial monthly rentals totaling $0.7 million. Balloon payments equal to 20% of the equipment cost under lease are due at the end of each lease term.  As a result of this transaction, we recognized a deferred loss of $7.6 million which is being amortized over the life of the equipment.  We have recognized the lease agreements as capital leases.

 

7.VARIABLE INTEREST ENTITIES

 

Cavalier Minerals

 

On November 10, 2014, our subsidiary, Alliance Minerals, LLC ("Alliance Minerals"), and Bluegrass Minerals Management, LLC ("Bluegrass Minerals") entered into a limited liability company agreement (the "Cavalier Agreement") to create Cavalier Minerals, which was formed to indirectly acquire oil and gas mineral interests, initially through its 71.7% noncontrolling ownership interest in AllDale I and subsequently through its 72.8% noncontrolling ownership interest in AllDale II.  Bluegrass Minerals is owned and controlled by the ARH Officer discussed in Note 6 – Long-Term Debt and is Cavalier Minerals' managing member.  Alliance Minerals and Bluegrass Minerals initially committed funding of $48.0 million and $2.0 million, respectively, to Cavalier Minerals, and Cavalier Minerals committed funding of $49.0 million to AllDale I.  On October 6, 2015, Alliance Minerals and Bluegrass Minerals committed to fund an additional $96.0 million and $4.0 million, respectively, to Cavalier Minerals, and Cavalier Minerals committed to fund $100.0 million to AllDale II. 

 

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Contributions made from Alliance Minerals and Bluegrass Minerals to Cavalier Minerals and remaining commitments for each period presented are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

 

    

2016

    

2015

    

2016

    

2015

 

 

(in thousands)

 

Alliance Minerals

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning cumulative commitment fulfilled

 

$

95,597

 

$

30,675

 

$

63,498

 

$

11,520

 

Capital contributions - Cash

 

 

30,184

 

 

16,447

 

 

61,360

 

 

35,602

 

Capital contributions - AllDale Minerals' distributions received by Cavalier Minerals

 

 

385

 

 

 —

 

 

1,308

 

 

 —

 

Ending cumulative commitment fulfilled

 

 

126,166

 

 

47,122

 

 

126,166

 

 

47,122

 

Remaining commitment

 

 

17,834

 

 

878

 

 

17,834

 

 

878

 

Total committed

 

$

144,000

 

$

48,000

 

$

144,000

 

$

48,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bluegrass Minerals

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning cumulative commitment fulfilled

 

$

3,983

 

$

1,627

 

$

2,646

 

$

480

 

Capital contributions - Cash

 

 

1,258

 

 

336

 

 

2,557

 

 

1,483

 

Capital contributions - AllDale Minerals' distributions received by Cavalier Minerals

 

 

16

 

 

 —

 

 

54

 

 

 —

 

Ending cumulative commitment fulfilled

 

 

5,257

 

 

1,963

 

 

5,257

 

 

1,963

 

Remaining commitment

 

 

743

 

 

37

 

 

743

 

 

37

 

Total committed

 

$

6,000

 

$

2,000

 

$

6,000

 

$

2,000

 

 

At Alliance Minerals' election, Cavalier Minerals will meet its remaining funding commitment to AllDale Minerals through contributions from Alliance Minerals and Bluegrass Minerals or from borrowings under the Cavalier Credit Facility (see Note 6 – Long-Term Debt).  We expect to fund our remaining commitments utilizing existing cash balances, future cash flows from operations, borrowings under credit and securitization facilities and cash provided from the issuance of debt or equity, or by requiring Cavalier Minerals to draw on the Cavalier Credit Facility.

 

In accordance with the Cavalier Agreement, Bluegrass Minerals is entitled to receive an incentive distribution from Cavalier Minerals equal to 25% of all distributions (including in liquidation) after return of members' capital reduced by certain distributions received by Bluegrass Minerals or its owner from AllDale Minerals Management, LLC ("AllDale Minerals Management"), the managing member of AllDale Minerals.  Distributions paid to Alliance Minerals and Bluegrass Minerals from Cavalier Minerals for each period presented are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

 

    

2016

    

2015

    

2016

    

2015

 

 

(in thousands)

 

Alliance Minerals

 

$

1,444

 

$

 —

 

$

1,444

 

$

 —

 

Bluegrass Minerals

 

 

60

 

 

 —

 

 

60

 

 

 —

 

 

Alliance Minerals' ownership interest in Cavalier Minerals at September 30, 2016 was 96%.  The remainder of the equity ownership is held by Bluegrass Minerals.  We have consolidated Cavalier Minerals' financial results as we concluded that Cavalier Minerals is a variable interest entity ("VIE") and we are the primary beneficiary because neither Bluegrass Minerals nor Alliance Minerals individually has both the power and the benefits related to Cavalier Minerals and we are most closely aligned with Cavalier Minerals through our substantial equity ownership.  Bluegrass Minerals equity ownership of Cavalier Minerals is accounted for as noncontrolling ownership interest in our condensed consolidated balance sheets.  In addition, earnings attributable to Bluegrass Minerals are recognized as noncontrolling interest in our condensed consolidated statements of income.

 

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WKY CoalPlay

 

On November 17, 2014, SGP Land, LLC ("SGP Land"), a wholly-owned subsidiary of SGP, and two limited liability companies ("Craft Companies") owned by irrevocable trusts established by the President and Chief Executive Officer of MGP entered into a limited liability company agreement to form WKY CoalPlay, LLC ("WKY CoalPlay").  WKY CoalPlay was formed, in part, to purchase and lease coal reserves.  WKY CoalPlay is managed by the ARH Officer discussed in Note 6 – Long-Term Debt, who is also an employee of SGP Land and trustee of the irrevocable trusts owning the Craft Companies.  In December 2014 and February 2015, we entered into various coal reserve leases with WKY CoalPlay.  During the nine months ended September 30, 2016, we paid $10.8 million of advanced royalties to WKY CoalPlay.  As of September 30, 2016, we had $20.4 million of advanced royalties outstanding under the leases, which is reflected in the Advance royalties, net line items in our condensed consolidated balance sheets. 

 

We have concluded that WKY CoalPlay is a VIE because of our ability to exercise options to acquire reserves under lease with WKY CoalPlay, which is not within the control of the equity holders and, if it occurs, could potentially limit the expected residual return to the owners of WKY CoalPlay.  We do not have any economic or governance rights related to WKY CoalPlay and our options that provide us with a variable interest in WKY CoalPlay's reserve assets do not give us any rights that constitute power to direct the primary activities that most significantly impact WKY CoalPlay's economic performance.  SGP Land has the sole ability to replace the manager of WKY CoalPlay at its discretion and therefore has power to direct the activities of WKY CoalPlay.  Consequently, we concluded that SGP Land is the primary beneficiary of WKY CoalPlay.

 

Alliance Coal and the Intermediate Partnership

 

Alliance Coal is a limited liability company designed to operate as the operating subsidiary of the Intermediate Partnership and holds the interests in the mining operations and Alliance Service, Inc. ("ASI").  The Intermediate Partnership is a limited liability partnership that holds the non-managing member interest in Alliance Coal and the sole member interests in Alliance Resource Properties, Alliance Minerals and other entities.  Together Alliance Coal and the Intermediate Partnership and their subsidiaries represent virtually all the net assets of ARLP.  Both the Intermediate Partnership and Alliance Coal were designed to operate as the operating subsidiaries of ARLP and to distribute available cash to ARLP so that ARLP can distribute available cash to its partners. We considered MGP's and ARLP's ownership in the Intermediate Partnership and MGP's and the Intermediate Partnership's ownership in Alliance Coal separately for the purposes of determining whether the Intermediate Partnership and Alliance Coal are VIEs.

 

The Intermediate Partnership holds a 99.999% non-managing interest and MGP holds the 0.001% managing member interest in Alliance Coal.  To determine whether Alliance Coal is a VIE, we considered that since Alliance Coal is structured as the equivalent of a limited partnership with the non-managing member 1) not having the ability to remove its managing member and 2) not participating significantly in the operational decisions, Alliance Coal represents a VIE.

 

We determined that the Intermediate Partnership should consolidate Alliance Coal because it has a controlling financial interest in Alliance Coal.  We made this determination based on 1) the purpose and design of Alliance Coal which is to a) be the operating subsidiary of the Intermediate Partnership and b) distribute all of its available cash to the Intermediate Partnership such that the Intermediate Partnership can pay its partners and debt obligations, 2) AHGP's common control over both the Intermediate Partnership and MGP, as discussed in Note 1 – Organization and Presentation, to achieve the aforementioned purpose and design, 3) the Intermediate Partnership's debt funding for Alliance Coal for capital expenditures, operations and other purposes as needed and related risks and collateral requirements in the debt arrangements and 4) making available the most meaningful information to investors.

 

ARLP holds a 98.9899% limited partnership interest in the Intermediate Partnership and MGP holds the 1.0001% managing partner interest in the Intermediate Partnership.  To determine whether the Intermediate Partnership is a VIE, we considered that since the Intermediate Partnership is structured as a limited partnership with the limited partner 1) not having the ability to remove its general partner and 2) not participating significantly in the operational decisions, the Intermediate Partnership represents a VIE.

 

We determined that ARLP should consolidate the Intermediate Partnership because it has a controlling financial interest in the Intermediate Partnership.  We made this determination based on 1) the purpose and design of the Intermediate Partnership which is to a) be the operating subsidiary to ARLP and b) distribute all of its available cash to ARLP to pay its partners, 2) AHGP's common control over ARLP, MGP and the Intermediate Partnership, as discussed in

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Note 1 – Organization and Presentation, to achieve the aforementioned purpose and design, and 3) making available the most meaningful information to investors.