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EX-95.1 - EX-95.1 - Alliance Holdings GP, L.P.ahgp-20170331ex9512d9839.htm
EX-32.2 - EX-32.2 - Alliance Holdings GP, L.P.ahgp-20170331ex3227e3e42.htm
EX-32.1 - EX-32.1 - Alliance Holdings GP, L.P.ahgp-20170331ex321c3a2f4.htm
EX-31.2 - EX-31.2 - Alliance Holdings GP, L.P.ahgp-20170331ex3127d473e.htm
EX-31.1 - EX-31.1 - Alliance Holdings GP, L.P.ahgp-20170331ex3117aae2c.htm

 

 

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 March 31, 2017

 

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.:  0-51952


ALLIANCE HOLDINGS GP, L.P.

(Exact name of registrant as specified in its charter)

 

Delaware

03-0573898

(State or other jurisdiction of

(IRS Employer Identification No.)

incorporation or organization)

 

 

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

(Address of principal executive offices and zip code)

 

(918) 295-1415

(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, a smaller reporting company, or an emerging growth company.  See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer [   ]

Accelerated Filer [ X  ]

Non-Accelerated Filer [   ]

Smaller Reporting Company [   ]

 

 

(Do not check if smaller reporting company)

 

Emerging Growth Company [   ]

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [   ]

 

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 May 8, 2017,  59,863,000 common units are outstanding.

 

 

 

 


 

TABLE OF CONTENTS

 

 

 

 

 

PART I

 

 

 

 

FINANCIAL INFORMATION

 

 

 

 

 

 

 

Page

ITEM 1. 

Financial Statements (Unaudited)

 

 

 

 

 

 

 

ALLIANCE HOLDINGS GP, L.P. AND SUBSIDIARIES

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of March 31, 2017 and December 31, 2016

 

1

 

 

 

 

 

Condensed Consolidated Statements of Income for the three months ended March 31, 2017 and 2016

 

2

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2017 and 2016

 

3

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016

 

4

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

5

 

 

 

 

ITEM 2. 

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

 

24

 

 

 

 

ITEM 3. 

Quantitative and Qualitative Disclosures about Market Risk

 

34

 

 

 

 

ITEM 4. 

Controls and Procedures

 

35

 

 

 

 

 

Forward-Looking Statements

 

36

 

 

 

 

PART II 

 

OTHER INFORMATION 

 

 

 

 

ITEM 1. 

Legal Proceedings

 

38

 

 

 

 

ITEM 1A. 

Risk Factors

 

38

 

 

 

 

ITEM 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

 

38

 

 

 

 

ITEM 3. 

Defaults Upon Senior Securities

 

38

 

 

 

 

ITEM 4. 

Mine Safety Disclosures

 

38

 

 

 

 

ITEM 5. 

Other Information

 

38

 

 

 

 

ITEM 6. 

Exhibits

 

39

 

 

 

 

i


 

PART I

FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

 

ALLIANCE HOLDINGS GP, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except unit data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

    

2017

    

2016

    

ASSETS

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

92,028

 

$

44,525

 

Trade receivables

 

 

120,290

 

 

152,032

 

Other receivables

 

 

295

 

 

279

 

Due from affiliates

 

 

29

 

 

37

 

Inventories, net

 

 

77,871

 

 

61,051

 

Advance royalties, net

 

 

1,207

 

 

1,207

 

Prepaid expenses and other assets

 

 

18,091

 

 

22,128

 

 Total current assets

 

 

309,811

 

 

281,259

 

PROPERTY, PLANT AND EQUIPMENT:

 

 

 

 

 

 

 

Property, plant and equipment, at cost

 

 

2,940,438

 

 

2,920,988

 

Less accumulated depreciation, depletion and amortization

 

 

(1,388,753)

 

 

(1,335,145)

 

 Total property, plant and equipment, net

 

 

1,551,685

 

 

1,585,843

 

OTHER ASSETS:

 

 

 

 

 

 

 

Advance royalties, net

 

 

39,855

 

 

29,372

 

Equity investments in affiliates

 

 

147,052

 

 

138,817

 

Goodwill

 

 

136,399

 

 

136,399

 

Other long-term assets

 

 

24,011

 

 

25,997

 

 Total other assets

 

 

347,317

 

 

330,585

 

TOTAL ASSETS

 

$

2,208,813

 

$

2,197,687

 

 

 

 

 

 

 

 

 

LIABILITIES AND PARTNERS' CAPITAL

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

Accounts payable

 

$

66,054

 

$

64,460

 

Due to affiliates

 

 

550

 

 

906

 

Accrued taxes other than income taxes

 

 

18,481

 

 

18,288

 

Accrued payroll and related expenses

 

 

34,189

 

 

41,576

 

Accrued interest

 

 

2,460

 

 

316

 

Workers' compensation and pneumoconiosis benefits

 

 

9,826

 

 

9,897

 

Current capital lease obligations

 

 

27,505

 

 

27,196

 

Other current liabilities

 

 

14,509

 

 

14,778

 

Current maturities, long-term debt, net

 

 

149,953

 

 

149,874

 

 Total current liabilities

 

 

323,527

 

 

327,291

 

LONG-TERM LIABILITIES:

 

 

 

 

 

 

 

Long-term debt, excluding current maturities, net

 

 

368,498

 

 

399,446

 

Pneumoconiosis benefits

 

 

63,204

 

 

62,822

 

Accrued pension benefit

 

 

41,300

 

 

42,070

 

Workers' compensation

 

 

39,940

 

 

40,400

 

Asset retirement obligations

 

 

125,888

 

 

125,266

 

Long-term capital lease obligations

 

 

78,560

 

 

85,540

 

Other liabilities

 

 

17,527

 

 

17,203

 

 Total long-term liabilities

 

 

734,917

 

 

772,747

 

 Total liabilities

 

 

1,058,444

 

 

1,100,038

 

 

 

 

 

 

 

 

 

PARTNERS CAPITAL:

 

 

 

 

 

 

 

Alliance Holdings GP, L.P. ("AHGP") Partners' Capital:

 

 

 

 

 

 

 

Limited Partners – Common Unitholders 59,863,000 units outstanding

 

 

620,846

 

 

598,077

 

Accumulated other comprehensive loss

 

 

(16,395)

 

 

(16,550)

 

 Total AHGP Partners' Capital

 

 

604,451

 

 

581,527

 

Noncontrolling interests

 

 

545,918

 

 

516,122

 

 Total Partners’ Capital

 

 

1,150,369

 

 

1,097,649

 

TOTAL LIABILITIES AND PARTNERS CAPITAL

 

$

2,208,813

 

$

2,197,687

 

 

See notes to condensed consolidated financial statements.

 

1


 

ALLIANCE HOLDINGS GP, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except unit and per unit data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2017

    

2016

    

 

 

 

 

 

 

 

 

SALES AND OPERATING REVENUES:

 

 

 

 

 

 

 

Coal sales

 

$

438,744

    

$

401,292

 

Transportation revenues

 

 

9,596

 

 

6,558

 

Other sales and operating revenues

 

 

12,665

 

 

4,875

 

Total revenues

 

 

461,005

 

 

412,725

 

 

 

 

 

 

 

 

 

EXPENSES:

 

 

 

 

 

 

 

Operating expenses (excluding depreciation, depletion and amortization)

 

 

262,792

 

 

263,579

 

Transportation expenses

 

 

9,596

 

 

6,558

 

General and administrative

 

 

16,447

 

 

17,553

 

Depreciation, depletion and amortization

 

 

65,127

 

 

70,607

 

Total operating expenses

 

 

353,962

 

 

358,297

 

 

 

 

 

 

 

 

 

INCOME FROM OPERATIONS

 

 

107,043

 

 

54,428

 

Interest expense (net of interest capitalized for the three months ended March 31, 2017 and 2016 of $81 and $227, respectively)

 

 

(7,516)

 

 

(7,615)

 

Interest income

 

 

25

 

 

 4

 

Equity in income (loss) of affiliates

 

 

3,700

 

 

(27)

 

Other income

 

 

1,298

 

 

91

 

 

 

 

 

 

 

 

 

INCOME BEFORE INCOME TAXES

 

 

104,550

 

 

46,881

 

 

 

 

 

 

 

 

 

INCOME TAX BENEFIT

 

 

(12)

 

 

(8)

 

 

 

 

 

 

 

 

 

NET INCOME

 

 

104,562

 

 

46,889

 

 

 

 

 

 

 

 

 

LESS: NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS

 

 

(49,551)

 

 

(16,047)

 

 

 

 

 

 

 

 

 

NET INCOME ATTRIBUTABLE TO ALLIANCE HOLDINGS GP, L.P. ("NET INCOME OF AHGP")

 

$

55,011

 

$

30,842

 

 

 

 

 

 

 

 

 

BASIC AND DILUTED NET INCOME OF AHGP PER LIMITED PARTNER UNIT

 

$

0.92

 

$

0.52

 

 

 

 

 

 

 

 

 

DISTRIBUTIONS PAID PER LIMITED PARTNER UNIT

 

$

0.55

 

$

0.96

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE NUMBER OF UNITS OUTSTANDING – BASIC AND DILUTED

 

 

59,863,000

 

 

59,863,000

 

 

See notes to condensed consolidated financial statements.

 

2


 

ALLIANCE HOLDINGS GP, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2017

    

2016

    

 

 

 

 

 

 

 

 

NET INCOME

 

$

104,562

 

$

46,889

 

 

 

 

 

 

 

 

 

OTHER COMPREHENSIVE INCOME (LOSS):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Defined benefit pension plan:

 

 

 

 

 

 

 

Amortization of prior service cost (1)

 

 

47

 

 

 —

 

Amortization of net actuarial loss (1)

 

 

773

 

 

789

 

Total defined benefit pension plan adjustments

 

 

820

 

 

789

 

 

 

 

 

 

 

 

 

Pneumoconiosis benefits:

 

 

 

 

 

 

 

Amortization of net actuarial gain  (1)

 

 

(567)

 

 

(661)

 

Total pneumoconiosis benefits adjustments

 

 

(567)

 

 

(661)

 

 

 

 

 

 

 

 

 

OTHER COMPREHENSIVE INCOME

 

 

253

 

 

128

 

 

 

 

 

 

 

 

 

COMPREHENSIVE INCOME

 

 

104,815

 

 

47,017

 

 

 

 

 

 

 

 

 

Less: Comprehensive income attributable to noncontrolling interests

 

 

(49,649)

 

 

(16,085)

 

 

 

 

 

 

 

 

 

COMPREHENSIVE INCOME ATTRIBUTABLE TO AHGP

 

$

55,166

 

$

30,932

 


(1)

Amortization of prior service cost and 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


 

ALLIANCE HOLDINGS GP, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2017

    

2016

    

 

 

 

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

$

176,552

 

$

80,278

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Property, plant and equipment:

 

 

 

 

 

 

 

Capital expenditures

 

 

(30,346)

 

 

(31,733)

 

Increase (decrease) in accounts payable and accrued liabilities

 

 

2,144

 

 

(6,247)

 

Proceeds from sale of property, plant and equipment

 

 

453

 

 

458

 

Contributions to equity investments in affiliates

 

 

(9,287)

 

 

(20,168)

 

Other

 

 

1,191

 

 

416

 

Net cash used in investing activities

 

 

(35,845)

 

 

(57,274)

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Borrowings under securitization facility

 

 

 —

 

 

22,500

 

Payments under securitization facility

 

 

 —

 

 

(13,900)

 

Payments on term loan

 

 

 —

 

 

(6,250)

 

Borrowings under revolving credit facilities

 

 

 —

 

 

105,000

 

Payments under revolving credit facilities

 

 

(25,000)

 

 

(40,000)

 

Payments on capital lease obligations

 

 

(6,678)

 

 

(4,871)

 

Payment of debt issuance costs

 

 

(6,664)

 

 

 —

 

Contributions to consolidated company from affiliate noncontrolling interest

 

 

251

 

 

796

 

Contribution by limited partner - affiliate

 

 

800

 

 

 —

 

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

 

 

(2,988)

 

 

(1,336)

 

Distributions paid by consolidated partnership to noncontrolling interests

 

 

(19,810)

 

 

(30,388)

 

Distributions paid to Partners

 

 

(32,925)

 

 

(57,468)

 

Other

 

 

(190)

 

 

 —

 

Net cash used in financing activities

 

 

(93,204)

 

 

(25,917)

 

 

 

 

 

 

 

 

 

NET CHANGE IN CASH AND CASH EQUIVALENTS

 

 

47,503

 

 

(2,913)

 

 

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

 

 

44,525

 

 

38,678

 

 

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

 

$

92,028

 

$

35,765

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL CASH FLOW INFORMATION:

 

 

 

 

 

 

 

Cash paid for interest

 

$

4,591

 

$

4,996

 

 

 

 

 

 

 

 

 

NON-CASH INVESTING AND FINANCING ACTIVITY:

 

 

 

 

 

 

 

Accounts payable for purchase of property, plant and equipment

 

$

10,376

 

$

6,387

 

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

 

$

8,149

 

$

3,642

 

 

See notes to condensed consolidated financial statements.

 

4


 

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

·

References to "AHGP Partnership" mean the business and operations of Alliance Holdings GP, L.P., the parent company, as well as its consolidated subsidiaries, including Alliance Resource Management GP, LLC and Alliance Resource Partners, L.P. and its consolidated subsidiaries. 

·

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

·

References to "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.

·

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.

 

Organization and Formation

 

We are a Delaware limited partnership listed on the NASDAQ Global Select Market under the ticker symbol "AHGP."  We own directly and indirectly 100% of the members' interest in MGP, ARLP's managing general partner.  The ARLP Partnership is a diversified producer and marketer of coal to major United States ("U.S.") utilities and industrial users.  ARLP conducts substantially all of its business through its wholly-owned subsidiary, the Intermediate Partnership.  ARLP and the Intermediate Partnership were 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. ("ARH"), a Delaware corporation.  We and ARH, through its wholly-owned subsidiary, SGP, maintain general partner interests in ARLP and the Intermediate Partnership.  ARH is owned by Joseph W. Craft III, the Chairman, President and Chief Executive Officer of AGP as well as the President and Chief Executive Officer and a Director of MGP, 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 owned 100% by limited partners.  Our general partner, AGP, has a non-economic interest in us and is owned by Mr. Craft.

 

Basis of Presentation

 

The accompanying condensed consolidated financial statements include our accounts and operations and those of MGP, ARLP (a variable interest entity of which AHGP is the primary beneficiary), ARLP’s consolidated Intermediate Partnership and the Intermediate Partnership’s operating subsidiaries and present the financial position as of March 31, 2017 and December 31, 2016,  and the results of operations, comprehensive income and cash flows for the three months ended March 31, 2017 and 2016.  ARLP and its consolidated subsidiaries represent virtually all the net assets and

5


 

operations of AHGP.  All intercompany transactions and accounts have been eliminated.  See Note 8 – Variable Interest Entities for information regarding our consolidation of ARLP.

 

The earnings of the ARLP Partnership allocated to its limited partners' interests not owned by us and allocated to SGP's general partner interest in ARLP, are reflected as  a noncontrolling interest in our condensed consolidated statements of income and balance sheet.  Our consolidated financial statements do not differ materially from those of the ARLP Partnership.  The differences between our financial statements and those of the ARLP Partnership are primarily attributable to (a) amounts reported as noncontrolling interests and (b) additional general and administrative costs and taxes attributable to us.  The additional general and administrative costs principally consist of costs incurred by us as a result of being a publicly traded partnership, amounts billed by, and reimbursed to, Alliance Coal under an administrative services agreement and amounts billed by, and reimbursed to, AGP under our partnership agreement. Net income attributable to Alliance Holdings GP, L.P. from within our accompanying condensed consolidated financial statements will be described as "Net Income of AHGP."

 

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 presented for prior periods have been recast to reflect an immaterial reclassification of depreciation, depletion, and amortization capitalized into coal inventory as an adjustment to Depreciation, depletion, and amortization rather than Operating expenses (excluding depreciation, depletion and amortization).  This reclassification did not impact Total operating expenses, Income from operations, Net income, Net income of AHGP or Basic and diluted net income of AHGP per limited partner unit.  Results for interim periods are not necessarily indicative of results to be expected for the full year ending December 31, 2017.

 

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 U.S.  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, 2016.

 

Use of Estimates

 

The preparation of AHGP 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.

 

2.           NEW ACCOUNTING STANDARDS

 

New Accounting Standards Issued and Adopted

 

In January 2017, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Updated ("ASU") 2017-04, Intangibles–Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment ("ASU 2017-04").  The ASU simplifies the subsequent measurement of goodwill by eliminating the need for an entity to determine the implied fair value of goodwill to calculate an impairment charge.  Under the new guidance an entity compares the fair value of the reporting unit containing the goodwill to its carrying value and records any excess carrying value as an impairment charge.  We have early adopted this new standard and will apply the guidance to any future goodwill impairment assessments.

 

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, flexibility in the accounting for forfeitures and classification on the statement of cash flows.  ASU 2016-09 was effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods, with early adoption permitted.  The adoption of ASU 2016-09 did not have a material impact on our condensed consolidated financial statements.

6


 

 

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 was applied prospectively and was effective for annual reporting periods beginning after December 15, 2016 and interim periods within those annual periods, with early adoption permitted.  The adoption of ASU 2015-11 did not have a material impact on our condensed consolidated financial statements.

 

New Accounting Standards Issued and Not Yet Adopted

 

In March 2017, the FASB issued ASU 2017-07, Compensation–Retirement Benefits (Topic 715) ("ASU 2017-07").  ASU 2017-07 requires that an employer disaggregate the service cost component from the other components of net benefit cost.  It also provides explicit guidance on how to present the service cost component and the other components of net benefit cost in the income statement and allows only the service cost component of net benefit cost to be eligible for capitalization.  The new guidance will be applied retroactively to all periods presented.  ASU 2017-07 is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods.  We are currently evaluating the effect of adopting ASU 2017-07, but do not anticipate it will have a material impact on our consolidated financial statements.

 

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, but do not anticipate it will 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 classify leases as either finance or operating (similar to current standard's "capital" or "operating" classification), 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 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 as follows:

 

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.

 

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 deferred the effective date by one year while providing the option to early adopt the standard on the original effective date. 

 

The ARLP Partnership has developed an assessment team to determine the effect of adopting ASU 2014-09.  As part of the assessment process, the ARLP Partnership applied the five-step analysis outlined in the new standard to certain contracts representative of the majority of its coal sales contracts and determined that its pattern of recognition appears consistent between both the new and existing standards. The ARLP Partnership has also reviewed the expanded disclosure

7


 

requirements under the new standard and determined the additional information to be disclosed.  In addition the ARLP Partnership is in the process of reviewing its business processes, systems and internal controls over financial reporting to support the new recognition and disclosure requirements under the new standard.  The ARLP Partnership's assessment team continues to report its implementation progress for the new standard to its management and Audit Committee. 

 

The ARLP Partnership continues to monitor closely a) activities of the FASB and various non-authoritative groups with respect to implementation issues that might impact its determinations, b) existing contracts for consistency with current implementation determinations derived from it assessment process and c) its revenue recognition policy, where applicable, for required modifications.  The ARLP Partnership expects to complete this review in the first half of 2017.

 

We do not expect that the adoption of the new standard will have a material impact on our financial statements, but will require expanded disclosures including presenting, by type and by segment, revenues for all periods presented and expected revenues by year for performance obligations that are unsatisfied or partially unsatisfied as of the date of presentation.  The new standard allows for two methods of adoption: a full retrospective adoption method, which requires the recasting of prior periods presented as if the new standard were in effect with a cumulative effect adjustment to equity at the beginning of the earliest period presented and a modified retrospective method which allows a cumulative effect adjustment to equity as of the date of adoption.  Because the ARLP Partnership does not anticipate a change in its pattern of revenue recognition it anticipates that neither method will have a material impact on our consolidated financial statements.

 

3.           CONTINGENCIES

 

We are not engaged in any material litigation.  The ARLP Partnership is involved in various lawsuits, claims and regulatory proceedings incidental to its business.  The ARLP Partnership records 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, the ARLP Partnership believes the ultimate outcome of these outstanding lawsuits, claims and regulatory proceedings will not have a material adverse effect on its 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 the ARLP Partnership's accruals, then they could have a material adverse effect.

 

4.           INVENTORIES

 

Inventories consist of the following:

 

 

 

 

 

 

 

 

 

 

    

March 31, 

 

December 31, 

 

 

 

2017

    

2016

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

Coal

 

$

44,160

 

$

29,242

 

Supplies (net of reserve for obsolescence of $5,340 and $4,940, respectively)

 

 

33,711

 

 

31,809

 

Total inventories, net

 

$

77,871

 

$

61,051

 

 

 

 

8


 

5.           FAIR VALUE MEASUREMENTS

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2017

 

December 31, 2016

 

 

    

Level 1

    

Level 2

    

Level 3

    

Level 1

    

Level 2

    

Level 3

 

 

 

(in thousands)

 

Measured on a recurring basis:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration

 

$

 —

 

$

 —

 

$

9,700

 

$

 —

 

$

 —

 

$

9,700

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional disclosures:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

 

 —

 

 

538,876

 

 

 —

 

 

 —

 

 

559,509

 

 

 —

 

Total

 

$

 —

 

$

538,876

 

$

9,700

 

$

 —

 

$

559,509

 

$

9,700

 

 

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

 

The estimated fair value of the ARLP Partnership's long-term debt, including current maturities, is based on interest rates that the ARLP Partnership believes are currently available to it 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 the ARLP Partnership's contingent consideration arrangement is based on a probability-weighted discounted cash flow model.  The assumptions in the model include a risk-adjusted discount rate, forward coal sales price curves, cost of debt and probabilities of meeting certain contractual threshold coal sales prices.  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.

 

6.           LONG-TERM DEBT

 

Long-term debt consists of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unamortized

 

 

 

Principal

 

Debt Issuance Costs

 

 

 

March 31, 

 

December 31, 

 

March 31, 

 

December 31, 

 

 

    

2017

    

2016

    

2017

    

2016

    

 

 

(in thousands)

 

ARLP Revolving Credit facility

 

$

230,000

 

$

255,000

 

$

(6,418)

 

$

(453)

 

ARLP Series B senior notes

 

 

145,000

 

 

145,000

 

 

(84)

 

 

(101)

 

ARLP Term loan

 

 

50,000

 

 

50,000

 

 

(47)

 

 

(126)

 

ARLP Securitization facility

 

 

100,000

 

 

100,000

 

 

 —

 

 

 —

 

 

 

 

525,000

 

 

550,000

 

 

(6,549)

 

 

(680)

 

Less current maturities

 

 

(150,000)

 

 

(150,000)

 

 

47

 

 

126

 

Total long-term debt

 

$

375,000

 

$

400,000

 

$

(6,502)

 

$

(554)

 

 

On January 27, 2017, the Intermediate Partnership entered into a Fourth Amended and Restated Credit Agreement (the "ARLP Credit Agreement") with various financial institutions for a revolving credit facility and term loan (the "ARLP Credit Facility").  The ARLP Credit Facility replaced the $250 million term loan ("ARLP Replaced Term Loan") and $700 million revolving credit facility ("ARLP Replaced Revolving Credit Facility") extended to the Intermediate Partnership on May 23, 2012 (the "ARLP Replaced Credit Agreement") by various banks and other lenders that would have expired on May 23, 2017.

 

9


 

The ARLP Credit Agreement provided for a $776.5 million revolving credit facility, reducing to $490.75 million on May 23, 2017, including a sublimit of $125 million for the issuance of letters of credit and a sublimit of $15.0 million for swingline borrowings (the "ARLP Revolving Credit Facility"), and for a term loan with a remaining principal balance of $50.0 million (the "ARLP Term Loan").  The outstanding revolver balance and term loan balance under the ARLP Replaced Credit Agreement were deemed to have been advanced under the ARLP Credit Facility on January 27, 2017.   On April 3, 2017, the ARLP Partnership entered into an amendment to the ARLP Credit Agreement (the "Amendment") to extend the termination date of the ARLP Revolving Credit Facility as to $457.25 million of commitments to May 23, 2021, eliminate the Cavalier Condition and the ARLP Senior Notes Condition (both as defined in the ARLP Credit Agreement) and effectuate certain other changes.  In connection with the Amendment, the ARLP Partnership increased the commitments under the ARLP Revolving Credit Facility from $479.75 million to $490.75 million, effective May 23, 2017.

 

The ARLP Credit Agreement is guaranteed by all of the material direct and indirect subsidiaries of the Intermediate Partnership, and is secured by substantially all of the Intermediate Partnership’s assets.  The ARLP Term Loan aggregate remaining outstanding principal balance of $50.0 million will be paid in full in May 2017.

 

Borrowings under the ARLP Credit Facility bear interest, at the option of the Intermediate Partnership, at either (i) the Base Rate at the greater of three benchmarks or (ii) a Eurodollar Rate, plus margins for (i) or (ii), as applicable, that fluctuate depending upon the ratio of Consolidated Debt to Consolidated Cash Flow (each as defined in the ARLP Credit Agreement).  The ARLP Revolving Credit Facility bears a lower interest rate for Non-Extending Lenders during their brief participation period which ends May 23, 2017 compared to rates associated with the new lenders and Extending Lenders which are in effect through termination of the ARLP Revolving Credit Facility.  The ARLP Partnership elected a Eurodollar Rate, which, with applicable margin, was 3.12% on borrowings outstanding as of March 31, 2017.  At March 31, 2017, the ARLP Partnership had borrowings of $230.0 million and $8.6 million of letters of credit outstanding with $537.9 million available for borrowing under the ARLP Revolving Credit Facility. The ARLP Partnership currently incurs  a weighted average annual commitment fee of 0.31% on the undrawn portion of the ARLP Revolving Credit Facility.  The ARLP Partnership utilizes the ARLP Revolving Credit Facility, as appropriate, for working capital requirements, capital expenditures and investments in affiliates, scheduled debt payments and distribution payments. 

 

On January 27, 2017, the Intermediate Partnership also amended the 2008 Note Purchase Agreement dated June 26, 2008, for $145.0 million of Series B Senior Notes which bear interest at 6.72% and are due to mature on June 26, 2018 with interest payable semi-annually.  The amendment provided for certain modifications to the terms and provisions of the ARLP Note Purchase Agreement, including granting liens on substantially all of the Intermediate Partnership's assets to secure its obligations under the ARLP Note Purchase Agreement on an equal basis with the obligations under the ARLP Credit Agreement.  The amendment also modified certain covenants to align them with the applicable covenants in the ARLP Credit Agreement.  As discussed below, the ARLP Partnership intends to repay the ARLP Series B Senior Notes in May 2017.

 

The ARLP Credit Agreement and the ARLP Series B Senior Notes (collectively, "ARLP Debt Arrangements") contain various restrictions affecting the Intermediate Partnership and its subsidiaries including, among other things, incurrence of additional indebtedness and liens, sale of assets, investments, mergers and consolidations and transactions with affiliates, in each case subject to various exceptions, and the payment of cash distributions by the Intermediate Partnership if such payment would result in a certain fixed charge coverage ratio (as defined in the ARLP Debt Arrangements).  The Amendment lowered this fixed charge ratio from less than 1.25 to 1.0 to 1.15 to 1.0 for each rolling four-quarter period and further limited the Intermediate Partnership’s ability to incur certain unsecured debt. The Amendment also removed the requirement for the Intermediate Partnership to remain in control of a certain amount of mineable coal reserves relative to its annual production.  The ARLP Debt Arrangements require the Intermediate Partnership maintain (a) a debt to cash flow ratio of not more than 2.25 to 1.0 and (b) a 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 0.80 to 1.0 and 25.5 to 1.0, respectively, for the trailing twelve months ended March 31, 2017.  The ARLP Partnership  was in compliance with the covenants of the ARLP Debt Arrangements as of March 31, 2017.

 

10


 

On April 24, 2017, the Intermediate Partnership and Alliance Resource Finance Corporation (as co-issuer), a wholly owned subsidiary of the Intermediate Partnership ("Alliance Finance"), issued an aggregate principal amount of $400.0 million of senior unsecured notes due 2025 ("ARLP Senior Notes") in a private placement to qualified institutional buyers.  The ARLP Senior Notes have a term of eight years maturing on May 1, 2025 (the "Term") and accrue interest at an annual rate of 7.5%.  Interest is payable semi-annually in arrears on each May 1 and November 1, commencing on November 1, 2017.  The indenture to the ARLP Senior Notes contains customary terms, events of default and covenants relating to, among other things, the incurrence of debt, the payment of distributions or similar restricted payments, undertaking transactions with affiliates and limitations on asset sales.  At any time prior to May 1, 2020, the issuers of the ARLP Senior Notes may redeem up to 35% of the aggregate principal amount of the ARLP Senior Notes at a redemption price equal to 107.5% of the principal amount redeemed, plus accrued and unpaid interest, if any, to the redemption date, with an amount of cash not greater than the net proceeds from one or more equity offerings.  The issuers of the ARLP Senior Notes may also redeem all or a part of the notes at any time on or after May 1, 2020, at redemption prices set forth in the indenture to the ARLP Senior Notes.  At any time prior to May 1, 2020, the issuers of the ARLP Senior Notes may redeem the ARLP Senior Notes at a redemption price equal to the principal amount of the ARLP Senior Notes plus a "make-whole" premium, plus accrued and unpaid interest, if any, to the redemption date.  The net proceeds from issuance of the ARLP Senior Notes and cash on hand were partially used to repay the ARLP Revolving Credit Facility and will partially be used to repay the ARLP Term Loan and the outstanding ARLP Series B Senior Notes in May 2017 (including a make-whole payment of approximately $8.9 million).  The ARLP Partnership incurred discount and debt issuance costs of approximately $9.0 million in connection with issuance of the ARLP Senior Notes which will be deferred and amortized as a component of interest expense over the Term.

 

On December 5, 2014, certain direct and indirect wholly-owned subsidiaries of the Intermediate Partnership entered into a $100.0 million accounts receivable securitization facility ("ARLP Securitization Facility") providing additional liquidity and funding.  Under the ARLP Securitization Facility, certain subsidiaries sell trade receivables on an ongoing basis to the Intermediate Partnership, which then sells the trade receivables to AROP Funding, LLC ("AROP Funding"), a wholly-owned bankruptcy-remote special purpose subsidiary of the 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 ARLP Securitization Facility bears interest based on a Eurodollar Rate.  It was renewed in December 2016 and matures in December 2017. At March 31, 2017, the ARLP Partnership had $100.0 million outstanding under the Securitization Facility. 

 

On October 6, 2015, Cavalier Minerals JV, LLC ("Cavalier Minerals") (see Note 8 – 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, LP ("AllDale I") and AllDale Minerals II, LP ("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 March 31, 2017, Cavalier Minerals had not drawn on the Cavalier Credit Facility.  Alliance Minerals, LLC ("Alliance Minerals") has the right to require Cavalier Minerals to draw the full amount available under the Cavalier Credit Facility and distribute the proceeds to the members of Cavalier Minerals, including Alliance Minerals.

 

11


 

7.           NONCONTROLLING INTERESTS

 

Our noncontrolling ownership interest in consolidated subsidiaries is presented in the condensed consolidated balance sheet within partners' capital as a separate component from the limited partners' equity. In addition, consolidated net income includes earnings attributable to both the limited partners' and the noncontrolling interests.

 

The noncontrolling interests balance is comprised of non-affiliate and affiliate ownership interests in the net assets of the ARLP Partnership that we consolidate (See Note 1 – Organization and Presentation) and an affiliate ownership interest in Cavalier Minerals (See Note 8 – Variable Interest Entities).

 

The following table summarizes the components of noncontrolling interests recorded in Partners' Capital for the periods indicated:

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

 

    

2017

    

2016

 

 

 

(in thousands)

 

Noncontrolling interests reflected in Partners' Capital:

 

 

 

 

 

 

 

Affiliate (SGP)

 

$

(303,810)

 

$

(303,818)

 

Non-Affiliates (ARLP's non-affiliate limited partners)

 

 

865,861

 

 

836,380

 

Affiliate (Cavalier Minerals) (See Note 8 - Variable Interest Entities)

 

 

5,759

 

 

5,550

 

Accumulated other comprehensive loss attributable to noncontrolling interests

 

 

(21,892)

 

 

(21,990)

 

Total noncontrolling interests

 

$

545,918

 

$

516,122

 

 

The noncontrolling interest designated as Affiliate (SGP) represents SGP's  0.01% general partner interest in ARLP and 0.01% general partner interest in the Intermediate Partnership.

 

The noncontrolling interest designated as Non-Affiliates represents the limited partners' interest in ARLP controlled through the common unit ownership, excluding the 31,088,338 common units of ARLP held by us.  The total obligation associated with ARLP's Long-Term Incentive Plan ("ARLP LTIP"), MGP Amended and Restated Deferred Compensation Plan for Directors ("MGP Deferred Compensation Plan") and the Supplemental Executive Retirement Plan ("SERP") are also included in the Non-Affiliates component of noncontrolling interest (See Note 11 – Compensation Plans).

 

The following table summarizes net income attributable to each component of the noncontrolling interests for the periods indicated:

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2017

    

2016

    

 

 

(in thousands)

 

Net income attributable to noncontrolling interest:

 

 

 

 

 

 

 

Affiliate (SGP)

 

$

17

 

$

 6

 

Non-Affiliates (ARLP's non-affiliate limited partners)

 

 

49,386

 

 

16,043

 

Affiliates (Cavalier Minerals)

 

 

148

 

 

(2)

 

 

 

 

49,551

 

 

16,047

 

 

12


 

The following table summarizes cash distributions paid by ARLP to each component of the noncontrolling interests for the periods indicated:

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2017

    

2016

    

 

 

(in thousands)

 

Distributions paid to noncontrolling interests:

 

 

 

 

 

 

 

Affiliate (SGP) (1)

 

$

 9

 

$

18

 

Non-Affiliates (ARLP's non-affiliate limited partners) (1)

 

 

19,801

 

 

30,370

 

 

 

$

19,810

 

$

30,388

 


(1)

Distributions paid to noncontrolling interests, in the table above, represent ARLP's quarterly distributions in accordance with the ARLP partnership agreement.

 

The Affiliate (SGP) component of noncontrolling interests represents SGP's cumulative investment basis in the net assets of the ARLP Partnership.  After the consummation of the various transactions associated with the ARLP Partnership's formation and initial public offering in 1999 (which included the contribution of net assets by SGP to the ARLP Partnership, the retention by SGP of debt borrowings assumed by ARLP and a distribution by ARLP to SGP), SGP's investment basis in ARLP totaled $(303.9) million.  SGP's investment basis as of March 31, 2017 and December 31, 2016 also reflects the cumulative amount of nominal ARLP income allocations and distributions to SGP and nominal contributions by SGP to ARLP and the Intermediate Partnership to maintain its general partner interests.

 

The following tables present the change in Partners' Capital for the three months ended March 31, 2017 and 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Alliance Holdings GP, L.P.

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated Other 

 

 

 

 

 

 

 

 

 

Limited Partners'

 

Comprehensive 

 

Noncontrolling

 

Total Partners'

 

 

    

Capital

     

Income (Loss) 

    

Interest

    

Capital

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2017

 

$

598,077

 

$

(16,550)

 

$

516,122

 

$

1,097,649

 

Net income

 

 

55,011

 

 

 —

 

 

49,551

 

 

104,562

 

Other comprehensive income

 

 

 —

 

 

155

 

 

98

 

 

253

 

Settlement of directors deferred compensation

 

 

(14)

 

 

 —

 

 

 —

 

 

(14)

 

Vesting of ARLP Long-Term Incentive Plan

 

 

 —

 

 

 —

 

 

(2,988)

 

 

(2,988)

 

Common unit-based compensation

 

 

(103)

 

 

 —

 

 

2,884

 

 

2,781

 

Distributions on ARLP common unit-based compensation

 

 

 —

 

 

 —

 

 

(862)

 

 

(862)

 

Contributions to consolidated company from affiliate noncontrolling interest

 

 

 —

 

 

 —

 

 

251

 

 

251

 

Distributions paid by consolidated company

 

 

 —

 

 

 —

 

 

(190)

 

 

(190)

 

Contributions by limited partner - affiliate

 

 

800

 

 

 —

 

 

 —

 

 

800

 

Distributions to AHGP Partners

 

 

(32,925)

 

 

 —

 

 

 —

 

 

(32,925)

 

Distributions paid by consolidated partnership to noncontrolling interest

 

 

 —

 

 

 —

 

 

(18,948)

 

 

(18,948)

 

Balance at March 31, 2017

 

$

620,846

 

$

(16,395)

 

$

545,918

 

$

1,150,369

 

 

13


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Alliance Holdings GP, L.P.

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated Other 

 

 

 

 

 

 

 

 

 

Limited Partners'

 

Comprehensive 

 

Noncontrolling

 

Total Partners'

 

 

    

Capital

     

Income (Loss) 

    

Interest

    

Capital

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2016

 

$

567,259

 

$

(14,875)

 

$

441,748

 

$

994,132

 

Net income

 

 

30,842

 

 

 —

 

 

16,047

 

 

46,889

 

Other comprehensive income

 

 

 —

 

 

90

 

 

38

 

 

128

 

Settlement of directors deferred compensation

 

 

(92)

 

 

 —

 

 

(335)

 

 

(427)

 

Vesting of ARLP Long-Term Incentive Plan

 

 

 —

 

 

 —

 

 

(1,001)

 

 

(1,001)

 

Common unit-based compensation

 

 

60

 

 

 —

 

 

3,135

 

 

3,195

 

Distributions on ARLP common unit-based compensation

 

 

 —

 

 

 —

 

 

(1,277)

 

 

(1,277)

 

Contributions to consolidated company from affiliate noncontrolling interest

 

 

 —

 

 

 —

 

 

796

 

 

796

 

Distributions to AHGP Partners

 

 

(57,468)

 

 

 —

 

 

 —

 

 

(57,468)

 

Distributions paid by consolidated partnership to noncontrolling interest

 

 

 —

 

 

 —

 

 

(29,111)

 

 

(29,111)

 

Balance at March 31, 2016

 

$

540,601

 

$

(14,785)

 

$

430,040

 

$

955,856

 

 

 

 

8.           VARIABLE INTEREST ENTITIES

 

Cavalier Minerals

 

On November 10, 2014, the ARLP Partnership's subsidiary, 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.  Contributions in the three months ended March 31, 2017 sufficiently completed funding to Cavalier Minerals for these commitments.  As of March 31, 2017, Cavalier Minerals is not expected to call on further funding of these commitments from Alliance Minerals and Bluegrass Minerals.

 

14


 

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

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2017

    

2016

 

 

 

(in thousands)

 

Alliance Minerals

 

 

 

 

 

 

 

Beginning cumulative commitment fulfilled

 

$

137,077

 

$

63,498

 

Capital contributions - Cash

 

 

6,035

 

 

19,080

 

Capital contributions - Net AllDale Minerals' distributions received by Cavalier Minerals (1)

 

 

 —

 

 

399

 

Ending cumulative commitment fulfilled

 

 

143,112

 

 

82,977

 

Remaining commitment

 

 

888

 

 

61,023

 

Total committed

 

$

144,000

 

$

144,000

 

 

 

 

 

 

 

 

 

Bluegrass Minerals

 

 

 

 

 

 

 

Beginning cumulative commitment fulfilled

 

$

5,712

 

$

2,646

 

Capital contributions - Cash

 

 

251

 

 

795

 

Capital contributions - Net AllDale Minerals' distributions received by Cavalier Minerals (1)

 

 

 —

 

 

17

 

Ending cumulative commitment fulfilled

 

 

5,963

 

 

3,458

 

Remaining commitment

 

 

37

 

 

2,542

 

Total committed

 

$

6,000

 

$

6,000

 


(1)

Represents distributions received from AllDale Minerals net of distributions reinvested and payments to Bluegrass Minerals for administration expense.

 

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 all members have recovered their investment.  The incentive distributions are 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

 

 

 

March 31, 

 

 

    

2017

    

2016

 

 

 

(in thousands)

 

Alliance Minerals

 

$

4,563

 

$

 —

 

Bluegrass Minerals

 

 

190

 

 

 —

 

   

Alliance Minerals' ownership interest in Cavalier Minerals at March 31, 2017 was 96%.  The remainder of the equity ownership is held by Bluegrass Minerals.  The ARLP Partnership has consolidated Cavalier Minerals' financial results as it concluded that Cavalier Minerals is a variable interest entity ("VIE") and the ARLP Partnership is the primary beneficiary because neither Bluegrass Minerals nor Alliance Minerals individually has both the power and the benefits related to Cavalier Minerals and the ARLP Partnership is most closely aligned with Cavalier Minerals through its 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.

 

15


 

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, the ARLP Partnership entered into various coal reserve leases with WKY CoalPlay.  During the three months ended March 31, 2017, the ARLP Partnership paid $10.8 million of advanced royalties to WKY CoalPlay.  As of March 31, 2017, the ARLP Partnership had $30.1 million of advanced royalties outstanding under the leases, which is reflected in the Advance royalties, net line items in our condensed consolidated balance sheets.

 

The ARLP Partnership has concluded that WKY CoalPlay is a VIE because of its 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.  The ARLP Partnership does not have any economic or governance rights related to WKY CoalPlay and the ARLP Partnership's options that provide it with a variable interest in WKY CoalPlay's reserve assets do not give it 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, the ARLP Partnership concluded that SGP Land is the primary beneficiary of WKY CoalPlay.

 

The ARLP Partnership

 

ARLP is a publicly-traded master limited partnership (NASDAQ ticker "ARLP") created in 1999 to acquire certain coal production and marketing assets of ARH.  AHGP holds 41.7% of the limited partnership interests in ARLP in addition to a 1.98% general partner interest in the ARLP Partnership through its 100% ownership of MGP.  The limited partners do not have substantive kick-out rights to remove the general partner nor do they have substantive participating rights in the activities of ARLP, therefore we determined that ARLP is a variable interest entity.  To determine the primary beneficiary of ARLP, we considered that AHGP through its 100% ownership of MGP has the sole ability to direct the activities of ARLP and with its ownership of 41.7% limited partner interest and all the incentive distribution rights through MGP, has economic benefit that is significant to ARLP.  As a result we determined that AHGP has both the power and benefits with respect to ARLP and is therefore the primary beneficiary and consolidates ARLP.

 

The Partnership Agreement (the "Agreement") of ARLP requires MGP to distribute on a quarterly basis 100% of ARLP’s available cash to ARLP's partners. Available cash is determined as defined in the Agreement and represents all cash with the exception of cash reserves (i) for the proper conduct of the business including reserves for future capital expenditures and for anticipated credit needs of the ARLP Partnership, (ii) to comply with debt obligations or (iii) to provide funds for certain subsequent distributions.  MGP is required under the terms of the Agreement to meet the distribution requirements as discussed above.  As discussed in Note 6 – Long-Term Debt, the Intermediate Partnership's debt covenants place additional restrictions on distributions from ARLP by limiting cash available for distribution based on various debt covenants pertaining to the most recent preceding quarter.  MGP cannot hold cash reserves to provide for subsequent distributions if that would prevent ARLP from making its minimum quarterly distributions or any cumulative distributions in arrears.  MGP does not have the ability to amend the Agreement without the consent of a majority of the limited partners.

 

16


 

9.           EQUITY INVESTMENT

 

AllDale Minerals

 

In November 2014, Cavalier Minerals (see Note 8 – Variable Interest Entities), was created to indirectly purchase, through its equity investments in AllDale Minerals, oil and gas mineral interests in various geographic locations within producing basins in the continental U.S.  In February 2017, Alliance Minerals committed to directly (rather than through Cavalier Minerals) invest $30.0 million in AllDale Minerals III, LP ("AllDale III") which was created for similar investment purposes.  The ARLP Partnership continually reviews all rights provided to Cavalier Minerals and the ARLP Partnership by various agreements and continues to conclude all such rights do not provide Cavalier Minerals or the ARLP Partnership the ability to unilaterally direct any of the activities of AllDale Minerals or AllDale III (collectively, the "AllDale Partnerships") that most significantly impact the economic performance of the AllDale Partnerships.  As such, the ARLP Partnership accounts for its ownership interest in the income or loss of the AllDale Partnerships as equity investments and it is so reflected in our condensed consolidated financial statements.  The ARLP Partnership records equity income or loss based on the AllDale Partnerships' individual distribution structures.  The changes in the ARLP Partnership's  aggregate equity investment in the AllDale Partnerships for each of the periods presented were as follows:

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2017

    

2016

 

 

 

(in thousands)

 

Beginning balance

 

$

138,817

 

$

64,509

 

Contributions

 

 

9,287

 

 

20,168

 

Equity in income (loss) of affiliates

 

 

3,700

 

 

(27)

 

Distributions received

 

 

(4,752)

 

 

(416)

 

Ending balance

 

$

147,052

 

$

84,234

 

 

 

10.         WORKERS' COMPENSATION AND PNEUMOCONIOSIS

 

The changes in the workers' compensation liability, including current and long-term liability balances, for each of the periods presented were as follows:

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended

 

 

 

March 31, 

 

 

 

2017

    

2016

 

 

    (in thousands)

 

Beginning balance

 

$

48,131

 

$

54,558

 

Accruals increase

 

 

1,974

 

 

3,237

 

Payments

 

 

(2,925)

 

 

(2,723)

 

Interest accretion

 

 

420

 

 

492

 

Ending balance

 

$

47,600

 

$

55,564

 

 

17


 

Certain of the ARLP Partnership's mine operating entities are liable under state statutes and the Federal Coal Mine Health and Safety Act of 1969, as amended, to pay pneumoconiosis, or black lung, benefits to eligible employees and former employees and their dependents.  Components of the net periodic benefit cost for each of the periods presented are as follows:

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2017

    

2016

 

 

    (in thousands)

Service cost

 

$

546

 

$

648

 

Interest cost

 

 

629

 

 

627

 

Amortization of net actuarial gain (1)

 

 

(567)

 

 

(661)

 

Net periodic benefit cost

 

$

608

 

$

614

 


(1)

Amortization of net actuarial gain is included in the Operating expenses (excluding depreciation, depletion and amortization) line item within our condensed consolidated statements of income.

 

 

11.         COMPENSATION PLANS

 

ARLP Long-Term Incentive Plan

 

The ARLP Partnership has the ARLP LTIP for certain employees and officers of MGP and its affiliates who perform services for the ARLP Partnership.  The ARLP LTIP awards are grants of non-vested "phantom" or notional units, also referred to as "restricted units", which upon satisfaction of time and performance based vesting requirements, entitle the ARLP LTIP participant to receive ARLP common units.  Annual grant levels and vesting provisions for designated participants are recommended by the President and Chief Executive Officer of MGP, subject to review and approval of the MGP Compensation Committee.  Vesting of all grants outstanding are subject to the satisfaction of certain financial tests, which management currently believes are probable.  Grants issued to ARLP LTIP participants are expected to cliff vest on January 1st of the third year following issuance of the grants.  The ARLP Partnership expects to settle the non-vested ARLP LTIP grants by delivery of ARLP common units, except for the portion of the grants that will satisfy tax withholding obligations of ARLP LTIP participants.  As provided under the distribution equivalent rights provisions of the ARLP LTIP and the terms of the ARLP LTIP awards, all non-vested grants include contingent rights to receive quarterly distributions in cash or, in the case of the 2016 and 2017 grants, at the discretion of the MGP Compensation Committee, cash or in lieu of cash, phantom units credited to a bookkeeping account with value, equal to the cash distributions we make to unitholders during the vesting period.

 

A summary of non-vested ARLP LTIP grants as of and for the three months ended March 31, 2017 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

    

Number of units

 

Weighted average grant date fair value per unit

 

Intrinsic value

 

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Non-vested grants at January 1, 2017

 

1,604,748

 

$

23.19

 

$

36,027

 

Granted

 

462,890

 

 

23.25

 

 

 

 

Vested (1)

 

(350,516)

 

 

40.73

 

 

 

 

Forfeited

 

(16,466)

 

 

21.22

 

 

 

 

Non-vested grants at March 31, 2017

 

1,700,656

 

 

19.61

 

 

36,819

 


(1)

During the three months ended March 31, 2017, the ARLP Partnership issued 222,011 unrestricted common units to the ARLP LTIP participants.  The remaining vested units were settled in cash to satisfy tax withholding obligations of the ARLP LTIP participants.

 

18


 

For the three months ended March 31, 2017 and 2016, ARLP LTIP expense was $2.6 million and $2.9 million, respectively.  The total obligation associated with the ARLP LTIP as of March 31, 2017 was $13.4 million and is included in Noncontrolling interests line item in our condensed consolidated balance sheets.  As of March 31, 2017, there was $19.9 million in total unrecognized compensation expense related to the non-vested ARLP LTIP grants that are expected to vest.  That expense is expected to be recognized over a weighted-average period of 1.8 years.

 

After consideration of the January 1, 2017 vesting and subsequent issuance of 222,011 common units, approximately 2.5 million units remain available under the ARLP LTIP for issuance in the future, assuming all grants issued in 2017, 2016 and 2015 and currently outstanding are settled with ARLP common units, without reduction for tax withholding, and no future forfeitures occur.

 

AHGP Long-Term Incentive Plan

 

We have also adopted a Long-Term Incentive Plan (the "AHGP LTIP") for employees, directors and consultants of our general partner and its affiliates, including the ARLP Partnership.  Grants under the AHGP LTIP are to be made in AHGP restricted units, which are "phantom" units that entitle the grantee to receive either a common unit or equivalent amount of cash upon the vesting of the phantom unit.  The aggregate number of common units reserved for issuance under the AHGP LTIP is 5,215,000.  There have been no grants under the AHGP LTIP as of March 31, 2017.

 

SERP and Directors Deferred Compensation Plans

 

The ARLP Partnership has a SERP to provide deferred compensation benefits for certain officers and key employees.  All allocations made to participants under the SERP are made in the form of "phantom" ARLP units and SERP distributions will be settled in the form of ARLP common units. The SERP is administered by the MGP Compensation Committee. 

 

Our directors participate in the AGP Amended and Restated Deferred Compensation Plan for Directors ("AGP Deferred Compensation Plan"), and the directors of MGP participate in the MGP Deferred Compensation Plan (collectively, the "Deferred Compensation Plans").  Pursuant to the Deferred Compensation Plans, for amounts deferred either automatically or at the election of the director, a notional account is established and credited with notional common units of ARLP or AHGP, as appropriate, which are described in the Deferred Compensation Plans as "phantom" units.  Distributions from the Deferred Compensation Plans will be settled in the form of ARLP or AHGP common units, as applicable.  

 

For both the SERP and Deferred Compensation Plans, when quarterly cash distributions are made with respect to ARLP or AHGP common units, an amount equal to such quarterly distribution is credited to each participant's notional account as additional phantom units.  All grants of phantom units under the SERP and Deferred Compensation Plans vest immediately.

 

A summary of SERP and MGP Deferred Compensation Plan activity as of and for the three months ended March 31, 2017  is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

    

Number of units

 

Weighted average grant date fair value per unit

 

Intrinsic value

 

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Phantom units outstanding as of January 1, 2017

 

494,018

 

$

29.77

 

$

11,091

 

Granted

 

12,307

 

 

23.22

 

 

 

 

Phantom units outstanding as of March 31, 2017

 

506,325

 

 

29.61

 

 

10,962

 

 

Total SERP and Deferred Compensation Plan expense was $0.3 million for each of the three months ended March 31, 2017  and 2016.  As of March 31, 2017, the total obligation associated with the SERP and MGP Deferred Compensation Plan was $15.0 million and is included in Noncontrolling interests line item in our condensed consolidated balance sheet.

19


 

 

A summary of the AGP Deferred Compensation Plan activity as of and for the three months ended March 31, 2017 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

    

Number of units

 

Weighted average grant date fair value per unit

 

Intrinsic value

 

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Phantom units outstanding as of January 1, 2017

 

26,112

 

$

36.67

 

$

734

 

Granted

 

478

 

 

30.11

 

 

 

 

Issued

 

(4,357)

 

 

39.18

 

 

 

 

Phantom units outstanding as of March 31, 2017

 

22,233

 

 

36.04

 

 

610

 

 

Total AGP Deferred Compensation Plan expense was approximately $14,392 and $60,372 for the three months ended March 31, 2017 and 2016, respectively.  The total obligation associated with the AGP Deferred Compensation Plan as of March 31, 2017 was $0.8 million and is included in Limited partners – Common Unitholders line item in our condensed consolidated balance sheets.

 

12.         COMPONENTS OF PENSION PLAN NET PERIODIC BENEFIT COSTS

 

Eligible employees at certain of the ARLP Partnership's mining operations participate in a defined benefit plan (the "Pension Plan") sponsored by the ARLP Partnership.  The Pension Plan is currently closed to new applicants and effective January 31, 2017, participants within the Pension Plan ("Participants") are no longer receiving benefit accruals for service.  The amendment did not affect pension benefits accrued prior to January 31, 2017.  All Participants can participate in enhanced benefit provisions under the defined contribution profit sharing and savings plan.  The benefit formula for the Pension Plan is a fixed dollar unit based on years of service.  Components of the net periodic benefit cost for each of the periods presented are as follows:

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended

 

 

 

March 31, 

 

 

 

2017

    

2016

    

 

    (in thousands)

 

Service cost

 

$

 —

 

$

598

 

Interest cost

 

 

1,135

 

 

1,132

 

Expected return on plan assets

 

 

(1,252)

 

 

(1,287)

 

Amortization of prior service cost (1)

 

 

47

 

 

 —

 

Amortization of net loss (1)

 

 

773

 

 

789

 

Net periodic benefit cost

 

$

703

 

$

1,232

 


(1)

Amortization of prior service cost and net actuarial loss is included in the Operating expenses (excluding depreciation, depletion and amortization) line item within our condensed consolidated statements of income.

 

During the three months ended March 31, 2017, the ARLP Partnership made a  contribution payment of $0.7 million to the Pension Plan for the 2016 plan year.  On April 17, 2017, the ARLP Partnership made a contribution payment of $0.6 million for the 2017 plan year.

 

13.         SEGMENT INFORMATION

 

The ARLP Partnership operates in the eastern U.S. as a producer and marketer of coal to major utilities and industrial users.  We aggregate multiple operating segments into two reportable segments: Illinois Basin and Appalachia, and we have an "all other" category referred to as Other and Corporate.  Our reportable segments correspond to major coal producing regions in the eastern U.S.  Similar economic characteristics for our operating segments within each of these

20


 

two reportable segments generally include coal quality, geology, coal marketing opportunities, mining and transportation methods and regulatory issues.   

 

The Illinois Basin reportable segment is comprised of multiple operating segments, including current operating mining complexes a) Webster County Coal, LLC's Dotiki mining complex, b) Gibson County Coal, LLC's mining complex, which includes the Gibson North (currently idled) and Gibson South mines, c) Warrior Coal, LLC's mining complex, d) River View Coal, LLC's mining complex and e)  Hamilton County Coal, LLC's mining complex.  The Gibson North mine has been idled since the fourth quarter of 2015 in response to market conditions.

 

The Illinois Basin reportable segment also includes White County Coal, LLC's Pattiki mining complex ("Pattiki"), Hopkins County Coal, LLC's mining complex, which includes the Elk Creek mine, the Pleasant View surface mineable reserves and the Fies underground project, Sebree Mining, LLC's mining complex ("Sebree"), which includes the Onton mine, Steamport, LLC and certain Sebree reserves, CR Services, LLC, CR Machine Shop, LLC, certain properties and equipment of Alliance Resource Properties, ARP Sebree, LLC, ARP Sebree South, LLC and UC Coal, LLC and its subsidiaries, UC Mining, LLC and UC Processing, LLC (collectively "UC Coal").  The Pattiki mine ceased production in December 2016. The Elk Creek mine depleted its reserves in March 2016 and ceased production on April 1, 2016.  The Onton mine has been idled since the fourth quarter of 2015 in response to market conditions.  UC Coal equipment assets acquired in 2015 continue to be deployed as needed at various Illinois Basin operating mines.

 

The Appalachia reportable segment is comprised of multiple operating segments, including the Mettiki mining complex, the Tunnel Ridge, LLC mining complex and the MC Mining, LLC mining complex.  The Mettiki mining complex includes Mettiki Coal (WV), LLC's Mountain View mine and Mettiki Coal, LLC's preparation plant.    

 

Other and Corporate includes the ARLP Partnership and AHGP's marketing and administrative expenses, Alliance Service, Inc. ("ASI") and its subsidiary, Matrix Design Group, LLC and its subsidiaries Matrix Design International, LLC and Matrix Design Africa (PTY) LTD ("Matrix Design"), Alliance Design Group, LLC ("Alliance Design") (collectively, the Matrix Design entities and Alliance Design are referred to as the "Matrix Group"), ASI's ownership of aircraft, the Mt. Vernon Transfer Terminal, LLC ("Mt. Vernon") dock activities, coal brokerage activity, Mid-America Carbonates, LLC ("MAC"), certain activities of Alliance Resource Properties, Pontiki Coal, LLC's throughput receivables and prior workers' compensation and pneumoconiosis liabilities, Wildcat Insurance, LLC ("Wildcat Insurance"), Alliance Minerals, and its affiliate, Cavalier Minerals (See Note 8 – Variable Interest Entities), both of which hold equity investments in various AllDale Partnerships (Note 9 – Equity Investment), AROP Funding and the ARLP Partnership's new subsidiary formed March 30, 2017, Alliance Finance (both discussed in Note 6 – Long-Term Debt).

 

21


 

Reportable segment results as of and for the three months ended March 31, 2017 and 2016 are presented below.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Illinois

    

 

    

Other and

    

Elimination

    

    

 

 

 

    

Basin

    

Appalachia

    

Corporate

    

(1)  

    

Consolidated

 

 

 

(in thousands)

 

Three Months Ended March 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues - Outside

 

$

264,350

 

$

170,244

 

$

26,411

 

$

 —

 

$

461,005

 

Revenues - Intercompany

 

 

11,205

 

 

 —

 

 

4,113

 

 

(15,318)

 

 

 —

 

  Total revenues (2)

 

 

275,555

 

 

170,244

 

 

30,524

 

 

(15,318)

 

 

461,005

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment Adjusted EBITDA Expense (3)

 

 

161,437

 

 

95,317

 

 

17,838

 

 

(13,098)

 

 

261,494

 

Segment Adjusted EBITDA (4)(5)

 

 

106,263

 

 

73,187

 

 

16,386

 

 

(2,221)

 

 

193,615

 

Total assets (6)

 

 

1,426,551

 

 

479,375

 

 

420,876

 

 

(117,989)

 

 

2,208,813

 

Capital expenditures

 

 

17,189

 

 

12,780

 

 

377

 

 

 —

 

 

30,346

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues - Outside

 

$

276,018

 

$

116,145

 

$

20,562

 

$

 —

 

$

412,725

 

Revenues - Intercompany

 

 

11,858

 

 

2,181

 

 

4,504

 

 

(18,543)

 

 

 —

 

  Total revenues (2)

 

 

287,876

 

 

118,326

 

 

25,066

 

 

(18,543)

 

 

412,725

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment Adjusted EBITDA Expense (3)

 

 

178,643

 

 

79,729

 

 

20,746

 

 

(15,630)

 

 

263,488

 

Segment Adjusted EBITDA (4)

 

 

104,772

 

 

36,669

 

 

4,125

 

 

(2,914)

 

 

142,652

 

Total assets (6)

 

 

1,685,134

 

 

519,223

 

 

302,575

 

 

(132,864)

 

 

2,374,068

 

Capital expenditures

 

 

18,014

 

 

12,663

 

 

1,056

 

 

 —

 

 

31,733

 

 


(1)

The elimination column represents the elimination of intercompany transactions and is primarily comprised of sales from the Matrix Group and MAC to the ARLP Partnership's mining operations, coal sales and purchases between operations within different segments, sales of receivables to AROP Funding and insurance premiums paid to Wildcat Insurance.

 

(2)

Revenues included in the Other and Corporate column are primarily attributable to the Matrix Group revenues, Mt. Vernon transloading revenues, MAC revenues, Wildcat Insurance revenues and brokerage coal sales.

 

(3)

Segment Adjusted EBITDA Expense includes operating expenses, coal purchases and other income. Transportation expenses are excluded as these expenses are passed through to the ARLP Partnership's customers and consequently it does not realize any gain or loss on transportation revenues. We review Segment Adjusted EBITDA Expense per ton for cost trends.  Results presented for Segment Adjusted EBITDA Expense for the three months ended March 31, 2016 have been recast to reflect a reclassification of depreciation and depletion capitalized into coal inventory as adjustments to Depreciation, depletion and amortization rather than Operating expenses (excluding depreciation, depletion and amortization).

 

22


 

The following is a reconciliation of consolidated Segment Adjusted EBITDA Expense to Operating expenses (excluding depreciation, depletion and amortization): 

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended

 

 

 

March 31, 

 

 

 

2017

    

2016

 

 

 

(in thousands)

 

Segment Adjusted EBITDA Expense

 

$

261,494

 

$

263,488

 

Other income

 

 

1,298

 

 

91

 

Operating expenses (excluding depreciation, depletion and amortization)

 

$

262,792

 

$

263,579

 


(4)

Segment Adjusted EBITDA is defined as net income (prior to the allocation of noncontrolling interest) before net interest expense, income taxes, depreciation, depletion and amortization and general and administrative expenses.  Management therefore is able to focus solely on the evaluation of segment operating profitability as it relates to the ARLP Partnership's revenues and operating expenses, which are primarily controlled by our segments.  Results presented for Segment Adjusted EBITDA for the three months ended March 31, 2016 have been recast to reflect a reclassification of depreciation and depletion capitalized into coal inventory as adjustments to Depreciation, depletion and amortization rather than Operating expenses (excluding depreciation, depletion and amortization).  Consolidated Segment Adjusted EBITDA is reconciled to net income as follows:

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2017

    

2016

 

 

 

(in thousands)

 

Consolidated Segment Adjusted EBITDA

 

$

193,615

 

$

142,652

 

General and administrative

 

 

(16,447)

 

 

(17,553)

 

Depreciation, depletion and amortization

 

 

(65,127)

 

 

(70,607)

 

Interest expense, net

 

 

(7,491)

 

 

(7,611)

 

Income tax benefit

 

 

12

 

 

 8

 

Net income

 

$

104,562

 

$

46,889

 


(5)

Includes equity in income of affiliates for the three months ended March 31, 2017 of $3.7 million in Other and Corporate.

 

(6)

Total assets for Other and Corporate include investments in affiliates of $147.1 million and $84.2 million at March 31, 2017 and 2016, respectively. 

 

 

14.         SUBSEQUENT EVENTS

 

On April 28, 2017, we declared a quarterly distribution for the quarter ended March 31, 2017, of $0.55 per unit on all common units outstanding, totaling approximately $32.9 million, payable on May 19, 2017 to all unitholders of record as of May 12, 2017.

 

On April 28, 2017, the ARLP Partnership declared a quarterly distribution for the quarter ended March 31, 2017, of $0.4375 per unit, on all common units outstanding, totaling approximately $52.5 million, including MGP's incentive distributions, payable on May 15, 2017 to all unitholders of record as of May 8, 2017.

 

Other than the events described above and in Notes 6 and 12, there were no other subsequent events.

23


 

ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Significant relationships referenced in this management's discussion and analysis of financial condition and results of operations include the following:

 

·

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

·

References to "AHGP Partnership" mean the business and operations of Alliance Holdings GP, L.P., the parent company, as well as its consolidated subsidiaries, including Alliance Resource Management GP, LLC and Alliance Resource Partners, L.P. and its consolidated subsidiaries.

·

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

·

References to "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.

·

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.

 

Summary

 

Our cash flows currently consist primarily of distributions from ARLP for our ARLP partnership interests, including the incentive distribution rights that we own.  We reflect our ownership interest in the ARLP Partnership on a consolidated basis, which means that our financial results are combined with the ARLP Partnership's financial results and the results of our other subsidiaries.  The earnings of the ARLP Partnership allocated to its limited partners' interest not owned by us and allocated to SGP's general partner interest in ARLP are reflected as a noncontrolling interest in our condensed consolidated statement of income and balance sheet.  In addition to the ARLP Partnership, our results of operations include the results of operations of MGP, our wholly-owned subsidiary.

 

The AHGP Partnership's results of operations principally reflect the results of operations of the ARLP Partnership adjusted for noncontrolling partners' interest in the ARLP Partnership's net income.  Accordingly, the discussion of our financial position and results of operations in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" reflects the operating activities and results of operations of the ARLP Partnership.

 

The ARLP Partnership is a diversified producer and marketer of coal primarily to major United States ("U.S.") utilities and industrial users. The ARLP Partnership began mining operations in 1971 and, since then, has grown through acquisitions and internal development to become the second largest coal producer in the eastern U.S.  As is customary in the coal industry, the ARLP Partnership has entered into long-term coal supply agreements with many of its customers.  The ARLP Partnership operates eight underground mining complexes in Illinois, Indiana, Kentucky, Maryland and West Virginia, and operates a coal loading terminal on the Ohio River at Mt. Vernon, Indiana.

 

We have two reportable segments: Illinois Basin and Appalachia, and an "all other" category referred to as Other and Corporate.  Our reportable segments correspond to major coal producing regions in the eastern U.S.  Factors similarly affecting financial performance of our operating segments within each of these two reportable segments generally include coal quality, geology, coal marketing opportunities, mining and transportation methods and regulatory issues.

24


 

 

·

Illinois Basin reportable segment is comprised of multiple operating segments, including the following current operating mining complexes a) Webster County Coal, LLC's Dotiki mining complex; b) Gibson County Coal, LLC's mining complex, which includes the Gibson North (currently idled) and Gibson South mines; c) Warrior Coal, LLC's mining complex; d) River View Coal, LLC's mining complex ("River View") and e) Hamilton County Coal, LLC's  mining complex ("Hamilton").  The Gibson North mine has been idled since the fourth quarter of 2015 in response to market conditions.

 

The Illinois Basin reportable segment also includes White County Coal, LLC's Pattiki mining complex ("Pattiki"); Hopkins County Coal, LLC's mining complex, which includes the Elk Creek mine ("Elk Creek"), the Pleasant View surface mineable reserves and the Fies underground project; Sebree Mining, LLC's mining complex ("Sebree"), which includes the Onton mine, Steamport, LLC and certain Sebree reserves; CR Services, LLC; CR Machine Shop, LLC; certain properties and equipment of Alliance Resource Properties; ARP Sebree, LLC; ARP Sebree South, LLC and UC Coal, LLC and its subsidiaries, UC Mining, LLC and UC Processing, LLC (collectively "UC Coal").  The Pattiki mine ceased production in December 2016.  The Elk Creek mine depleted its reserves in March 2016 and ceased production on April 1, 2016.  The Onton mine has been idled since the fourth quarter of 2015 in response to market conditions.  UC Coal equipment assets acquired in 2015 continue to be deployed as needed at various Illinois Basin operating mines.

 

·

Appalachia reportable segment is comprised of multiple operating segments, including the Mettiki mining complex ("Mettiki"); the Tunnel Ridge, LLC mining complex ("Tunnel Ridge"); and the MC Mining, LLC mining complex ("MC Mining").  The Mettiki mining complex includes Mettiki Coal (WV), LLC's Mountain View mine and Mettiki Coal, LLC's preparation plant.

 

·

Other and Corporate includes marketing and administrative expenses; Alliance Service, Inc. ("ASI") and its subsidiary, Matrix Design Group, LLC ("Matrix Design") and its subsidiaries Matrix Design International, LLC and Matrix Design Africa (PTY) LTD; Alliance Design Group, LLC; ASI's ownership of aircraft; the Mt. Vernon Transfer Terminal, LLC ("Mt. Vernon") dock activities; coal brokerage activity; the manufacturing and sales (primarily to the ARLP Partnership's mines) of rock dust by Mid-America Carbonates, LLC; certain activities of Alliance Resource Properties; Pontiki Coal, LLC's throughput receivables and prior workers' compensation and pneumoconiosis liabilities; Wildcat Insurance, LLC; Alliance Minerals, LLC ("Alliance Minerals"), which holds direct equity investments in AllDale Minerals III, LP ("AllDale III"), and its affiliate, Cavalier Minerals JV, LLC ("Cavalier Minerals"), which holds equity investments in AllDale Minerals, LP and AllDale Minerals II, LP (collectively with AllDale III, the "AllDale Partnerships"), AROP Funding, LLC ("AROP Funding") and the ARLP Partnership's new subsidiary formed March 30, 2017, Alliance Resource Finance Corporation ("Alliance Finance"). Please read "Item 1. Financial Statements (Unaudited) – Note 6. Long-term Debt", "– Note 7. Variable Interest Entities" and "– Note 8. Equity Investment" of this Quarterly Report on Form 10-Q for more information on AROP Funding, Alliance Finance, Alliance Minerals, Cavalier Minerals and the AllDale Partnerships.

 

Three Months Ended March 31, 2017 Compared to Three Months Ended March 31, 2016

 

We reported net income attributable to  AHGP of $55.0 million for the three months ended March 31, 2017 ("2017 Quarter") compared to $30.8 million for the three months ended March 31, 2016 ("2016 Quarter"). The increase of $24.2 million was due to increased coal sales volumes, which rose to 9.6 million tons sold in the 2017 Quarter compared to 7.5 million tons sold in the 2016 Quarter, higher other sales and operating revenues, lower depreciation, depletion and amortization, lower operating expenses and higher equity in earnings of affiliates from the ARLP Partnership's investments in oil and gas mineral interests, offset in part by lower coal sales price realizations.  Total revenues increased to $461.0 million in the 2017 Quarter compared to $412.7 million in the 2016 Quarter as increased sales volumes and other sales and operating revenues more than offset lower coal sales prices.  Even though coal sales and production volumes increased by 28.9% and 15.0%, respectively, for the 2017 Quarter, operating expenses were slightly lower compared to the 2016 Quarter reflecting the benefits of the ARLP Partnership's recent efficiency initiatives to shift production to lower-cost operations.  The favorable production cost mix in the 2017 Quarter significantly lowered operating expenses per ton sold compared to the 2016 Quarter.  Results presented for the 2016 Quarter have been recast to reflect a reclassification of depreciation and

25


 

depletion capitalized into coal inventory as an adjustment to depreciation, depletion and amortization rather than operating expenses.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

    

2017

    

2016

    

2017

    

2016

 

 

 

(in thousands)

 

(per ton sold)

 

Tons sold

 

 

9,610

 

 

7,456

 

 

N/A

 

 

N/A

 

Tons produced

 

 

10,218

 

 

8,884

 

 

N/A

 

 

N/A

 

Coal sales

 

$

438,744

 

$

401,292

 

$

45.65

 

$

53.82

 

Operating expenses

 

$

262,792

 

$

263,579

 

$

27.35

 

$

35.35

 

 

Coal sales.  Coal sales increased $37.4 million or 9.3% to $438.7 million for the 2017 Quarter from $401.3 million for the 2016 Quarter.  The increase in coal sales reflected the benefit of increased tons sold, which contributed $115.9 million in additional coal sales, partially offset by lower average coal sales prices, which reduced coal sales by $78.5 million.  Sales and production volumes rose to 9.6 million tons sold and 10.2 million tons produced in the 2017 Quarter compared to 7.5 million tons sold and 8.9 million tons produced in the 2016 Quarter, primarily due to strong performances at the Gibson South, River View, Hamilton and Tunnel Ridge mines.  Average coal sales prices decreased $8.17 per ton sold in the 2017 Quarter to $45.65 compared to $53.82 per ton sold in the 2016 Quarter, primarily as a result of the expiration and/or renegotiation of certain higher-priced long-term contracts in addition to a significant increase in lower price export tons shipped from the Illinois Basin mines partially offset by increased higher priced export shipments from the Mettiki mine.  There were no export shipments in the 2016 Quarter.

 

Operating expenses.  Operating expenses decreased 0.3% to $262.8 million for the 2017 Quarter from $263.6 million for the 2016 Quarter primarily as a result of the previously discussed favorable production cost mix.  On a per ton basis, operating expenses decreased 22.6% to $27.35 per ton sold from $35.35 per ton sold in the 2016 Quarter, due primarily to the lower-cost production mix and increased sales and production volumes.  The most significant impacts on operating expenses are discussed below:

 

·

Labor and benefit expenses per ton produced, excluding workers' compensation, decreased 25.3% to $8.70 per ton in the 2017 Quarter from $11.65 per ton in the 2016 Quarter.  This decrease of $2.95 per ton was primarily attributable to the increased mix of lower-cost production discussed above;

 

·

Material and supplies expenses per ton produced decreased 12.3% to $8.81 per ton in the 2017 Quarter from $10.05 per ton in the 2016 Quarter.  The decrease of $1.24 per ton produced resulted primarily from the increased mix of lower-cost production discussed above and decreases of $0.33 per ton for power and fuel used in the mining process, $0.23 per ton in longwall subsidence expense, $0.20 per ton in outside services used in the mining process, $0.19 per ton for roof support and $0.17 per ton for certain ventilation expenses;

 

·

Maintenance expenses per ton produced decreased 9.9% to $3.17 per ton in the 2017 Quarter from $3.52 per ton in the 2016 Quarter.  The decrease of $0.35 per ton produced was primarily due to the increased mix of lower-cost production discussed above; and

 

·

Production taxes and royalties expenses incurred as a percentage of coal sales prices and volumes decreased $0.95 per produced ton sold in the 2017 Quarter compared to the 2016 Quarter primarily as a result of lower excise taxes per ton resulting from a favorable state production mix and lower average coal sales prices as discussed above.

 

Other sales and operating revenues.  Other sales and operating revenues were principally comprised of Mt. Vernon transloading revenues, Matrix Design sales and other outside services.  Other sales and operating revenues increased to $12.7 million in the 2017 Quarter from $4.9 million in the 2016 Quarter.  The increase of $7.8 million was primarily due to increased mining technology product sales by Matrix Design and increased transloading revenues from Mt. Vernon.

 

26


 

Depreciation, depletion and amortization.  Depreciation, depletion and amortization expense decreased to $65.1 million in the 2017 Quarter from $70.6 million in the 2016 Quarter.  The decrease of $5.5 million resulted primarily from the depletion of reserves at the Elk Creek mine in the 2016 Quarter and closure of the Pattiki mine in the fourth quarter of 2016, offset in part by an increase in coal sales volumes at the Hamilton and Tunnel Ridge mines in the 2017 Quarter.

 

Equity in income (loss) of affiliates.  Equity in earnings of affiliates increased $3.7 million in the 2017 Quarter compared to the 2016 Quarter due to increased earnings from the ARLP Partnership's investments in the AllDale Partnerships.

 

Transportation revenues and expenses.  Transportation revenues and expenses were $9.6 million and $6.6 million for the 2017 and 2016 Quarters, respectively.  The increase of $3.0 million was primarily attributable to increased tonnage for which the ARLP Partnership arranged transportation at certain mines, partially offset by a decrease in average transportation rates in the 2017 Quarter.  The cost of transportation services are passed through to the ARLP Partnership's customers.  Consequently, the ARLP Partnership does not realize any gain or loss on transportation revenues.

 

Net income attributable to noncontrolling interests.  The noncontrolling interests balance is comprised of non-affiliate and affiliate ownership interests in the net assets of the ARLP Partnership that we consolidate as well as the noncontrolling interest of Cavalier Minerals.  The noncontrolling interest designated as affiliate represents SGP's 0.01% general partner interest in ARLP and 0.01% general partner interest in the Intermediate Partnership as well as Bluegrass Minerals Management, LLC’s ownership interest in Cavalier Minerals.  The noncontrolling interest designated as non-affiliates represents the limited partners' interest in ARLP controlled through the common unit ownership, excluding the 31,088,338 common units of ARLP held by us.  The net income attributable to noncontrolling interest was $49.6 million and $16.0 million for the 2017 and 2016 Quarters, respectively.  The increase in net income attributable to noncontrolling interest is due to the increase in the consolidated net income of the ARLP Partnership resulting from the changes in revenues and expenses described above.

 

27


 

Segment Adjusted EBITDA.  Our 2017 Quarter Segment Adjusted EBITDA increased $50.9 million, or 35.7%, to $193.6 million from the 2016 Quarter Segment Adjusted EBITDA of $142.7 million.  Segment Adjusted EBITDA, tons sold, coal sales, other sales and operating revenues and Segment Adjusted EBITDA Expense by segment are:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

March 31,

 

 

 

 

 

 

 

 

    

2017

    

2016

    

Increase (Decrease)

 

    

 

 

(in thousands)

    

 

 

 

Segment Adjusted EBITDA

 

 

 

 

 

 

 

 

 

 

 

 

 

Illinois Basin

 

$

106,263

 

$

104,772

 

$

1,491

 

1.4

%

 

Appalachia

 

 

73,187

 

 

36,669

 

 

36,518

 

99.6

%

 

Other and Corporate

 

 

16,386

 

 

4,125

 

 

12,261

 

(1)

 

 

Elimination

 

 

(2,221)

 

 

(2,914)

 

 

693

 

23.8

%

 

Total Segment Adjusted EBITDA (2)

 

$

193,615

 

$

142,652

 

$

50,963

 

35.7

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tons sold

 

 

 

 

 

 

 

 

 

 

 

 

 

Illinois Basin

 

 

6,665

 

 

5,530

 

 

1,135

 

20.5

%

 

Appalachia

 

 

2,930

 

 

1,926

 

 

1,004

 

52.1

%

 

Other and Corporate

 

 

342

 

 

367

 

 

(25)

 

(6.8)

%

 

Elimination

 

 

(327)

 

 

(367)

 

 

40

 

10.9

%

 

Total tons sold

 

 

9,610

 

 

7,456

 

 

2,154

 

28.9

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Coal sales

 

 

 

 

 

 

 

 

 

 

 

 

 

Illinois Basin

 

$

266,928

 

$

282,689

 

$

(15,761)

 

(5.6)

%

 

Appalachia

 

 

167,773

 

 

115,344

 

 

52,429

 

45.5

%

 

Other and Corporate

 

 

15,248

 

 

17,298

 

 

(2,050)

 

(11.9)

%

 

Elimination

 

 

(11,205)

 

 

(14,039)

 

 

2,834

 

20.2

%

 

Total coal sales

 

$

438,744

 

$

401,292

 

$

37,452

 

9.3

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other sales and operating revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

Illinois Basin

 

$

772

 

$

726

 

$

46

 

6.3

%

 

Appalachia

 

 

730

 

 

1,054

 

 

(324)

 

(30.7)

%

 

Other and Corporate

 

 

15,276

 

 

7,600

 

 

7,676

 

(1)

 

 

Elimination

 

 

(4,113)

 

 

(4,505)

 

 

392

 

8.7

%

 

Total other sales and operating revenues

 

$

12,665

 

$

4,875

 

$

7,790

 

(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment Adjusted EBITDA Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

Illinois Basin

 

$

161,437

 

$

178,643

 

$

(17,206)

 

(9.6)

%

 

Appalachia

 

 

95,317

 

 

79,729

 

 

15,588

 

19.6

%

 

Other and Corporate

 

 

17,838

 

 

20,746

 

 

(2,908)

 

(14.0)

%

 

Elimination

 

 

(13,098)

 

 

(15,630)

 

 

2,532

 

16.2

%

 

Total Segment Adjusted EBITDA Expense (2)

 

$

261,494

 

$

263,488

 

$

(1,994)

 

(0.8)

%

 


(1)

Percentage change is greater than or equal to 100%.

 

(2)

For a definition of Segment Adjusted EBITDA and Segment Adjusted EBITDA Expense and related reconciliations to comparable generally accepted accounting principles ("GAAP") financial measures, please see below under "—Reconciliation of non-GAAP "Segment Adjusted EBITDA" to GAAP "net income" and reconciliation of non-GAAP "Segment Adjusted EBITDA Expense" to GAAP "Operating Expenses."  Results presented for Segment Adjusted EBITDA and Segment Adjusted EBITDA Expense for the three months ended March 31, 2016 have been recast to reflect a reclassification of depreciation and depletion capitalized into coal inventory as adjustments to depreciation, depletion and amortization rather than operating expenses.

 

28


 

Illinois Basin – Segment Adjusted EBITDA increased 1.4% to $106.3 million in the 2017 Quarter from $104.8 million in the 2016 Quarter.  The increase of $1.5 million was primarily attributable to decreased expenses per ton resulting from a favorable production mix, partially offset by lower coal sales, which decreased 5.6% to $266.9 million in the 2017 Quarter from $282.7 million in the 2016 Quarter.  The decrease of $15.8 million in coal sales primarily reflects lower average coal sales prices of $40.05 in the 2017 Quarter compared to $51.12 in the 2016 Quarter resulting from the expiration and/or renegotiation of certain higher-priced long-term contracts and 1.9 million tons of lower price export sales volumes, both in the 2017 Quarter.  No export tons were sold in the 2016 Quarter.  The lower sales prices were partially offset by increased tons sold, which increased 20.5% to 6.7 million tons in the 2017 Quarter compared to 5.5 million tons in the 2016 Quarter.  Higher coal sales volumes resulted from increased sales from the River View, Gibson South and Hamilton operations, in addition to the increased export volumes mentioned above, offset in part by the previously mentioned depletion of reserves at the Elk Creek mine in the 2016 Quarter and the closure of the Pattiki mine in the fourth quarter of 2016.  Segment Adjusted EBITDA Expense decreased 9.6% to $161.4 million in the 2017 Quarter from $178.6 million in the 2016 Quarter due to reduced per ton expenses.  Segment Adjusted EBITDA Expense per ton decreased $8.08 per ton sold to $24.22 from $32.30 per ton sold in the 2016 Quarter, primarily due to reduced selling expenses, a  significant increase in low-cost longwall production and improved recoveries at the Hamilton mine, and increased production and improved recoveries at the River View and Gibson South operations, as well as certain cost decreases described above under "–Operating expenses."

 

Appalachia – Segment Adjusted EBITDA increased 99.6% to $73.2 million for the 2017 Quarter from $36.7 million in the 2016 Quarter.  The increase of $36.5 million was primarily attributable to increased tons sold, which rose 52.1% to 2.9 million tons sold in the 2017 Quarter compared to 1.9 million tons sold in the 2016 Quarter and lower Segment Adjusted EBITDA Expense per ton, offset in part by lower average coal sales prices.  Coal sales increased 45.5% to $167.8 million compared to $115.3 million in the 2016 Quarter.  The increase of $52.5 million primarily resulted from increased sales volumes from the Tunnel Ridge longwall operation in addition to increased export sales from the Mettiki and MC Mining mines offset in part by lower average coal sales prices, which decreased 4.4% to $57.26 per ton sold compared to $59.89 per ton sold in the 2016 Quarter primarily reflecting lower Tunnel Ridge price realizations.  Segment Adjusted EBITDA Expense increased 19.6% to $95.3 million in the 2017 Quarter from $79.7 million in the 2016 Quarter due to increased sales volumes.   However, Segment Adjusted EBITDA Expense per ton decreased $8.87 per ton sold to $32.53 compared to $41.40 per ton sold in the 2016 Quarter, as a result of increased production and sales volumes at the Tunnel Ridge mine resulting from improved recoveries and additional longwall production days due in part to no longwall move days during the 2017 Quarter, as well as certain other cost decreases described above under "–Operating expenses."

 

Other and Corporate – In the 2017 Quarter, Segment Adjusted EBITDA increased $12.3 million compared to the 2016 Quarter primarily as a result of increased mining technology product sales by Matrix Design, increased transloading revenues from Mt. Vernon, as well as an increase in equity earnings from the AllDale Partnerships.  Segment Adjusted EBITDA Expense decreased to $17.8 million for the 2017 Quarter compared to $20.7 million for the 2016 Quarter primarily as a result of reduced intercompany coal brokerage activity.

 

Elimination – Segment Adjusted EBITDA Expense eliminations decreased in the 2017 Quarter to $13.1 million from $15.6 million in the 2016 Quarter and coal sales eliminations decreased to $11.2 million from $14.0 million, reflecting reduced intercompany coal brokerage activity.

 

Reconciliation of non-GAAP "Segment Adjusted EBITDA" to GAAP "net income" and reconciliation of non-GAAP "Segment Adjusted EBITDA Expense" to GAAP "Operating Expenses"

 

Segment Adjusted EBITDA (a non-GAAP financial measure) is defined as net income (prior to the allocation of noncontrolling interest) before net interest expense, income taxes, depreciation, depletion and amortization and general and administrative expenses.  Segment Adjusted EBITDA is a key component of consolidated EBITDA, which is used as a supplemental financial measure by management and by external users of our financial statements such as investors, commercial banks, research analysts and others.  We believe that the presentation of EBITDA provides useful information to investors regarding our performance and results of operations because EBITDA, when used in conjunction with related GAAP financial measures, (i) provides additional information about our core operating performance and ability to generate and distribute cash flow, (ii) provides investors with the financial analytical framework upon which we base financial,

29


 

operational, compensation and planning decisions and (iii) presents a measurement that investors, rating agencies and debt holders have indicated is useful in assessing us and our results of operations.

 

Segment Adjusted EBITDA is also used as a supplemental financial measure by our management for reasons similar to those stated in the previous explanation of EBITDA.  In addition, the exclusion of corporate general and administrative expenses from consolidated Segment Adjusted EBITDA allows management to focus solely on the evaluation of segment operating profitability as it relates to our revenues and operating expenses, which are primarily controlled by our segments.  Results presented for Segment Adjusted EBITDA for the three months ended March 31, 2016 have been recast to reflect a reclassification of depreciation and depletion capitalized into coal inventory as adjustments to depreciation, depletion and amortization rather than operating expenses.

 

The following is a reconciliation of consolidated Segment Adjusted EBITDA to net income, the most comparable GAAP financial measure:

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2017

    

2016

 

 

 

(in thousands)

 

Consolidated Segment Adjusted EBITDA

 

$

193,615

 

$

142,652

 

General and administrative

 

 

(16,447)

 

 

(17,553)

 

Depreciation, depletion and amortization

 

 

(65,127)

 

 

(70,607)

 

Interest expense, net

 

 

(7,491)

 

 

(7,611)

 

Income tax benefit

 

 

12

 

 

 8

 

Net income

 

$

104,562

 

$

46,889

 

 

Segment Adjusted EBITDA Expense (a non-GAAP financial measure) includes operating expenses, coal purchases and other income.  Transportation expenses are excluded as these expenses are passed through to the ARLP Partnership's customers and, consequently, it does not realize any gain or loss on transportation revenues.  Segment Adjusted EBITDA Expense is used as a supplemental financial measure by our management to assess the operating performance of our segments.  Segment Adjusted EBITDA Expense is a key component of Segment Adjusted EBITDA in addition to coal sales and other sales and operating revenues.  The exclusion of corporate general and administrative expenses from Segment Adjusted EBITDA Expense allows management to focus solely on the evaluation of segment operating performance as it primarily relates to operating expenses.  Results presented for Segment Adjusted EBITDA Expense for the three months ended March 31, 2016 have been recast to reflect a reclassification of depreciation and depletion capitalized into coal inventory as adjustments to depreciation, depletion and amortization rather than operating expenses.

 

The following is a reconciliation of consolidated Segment Adjusted EBITDA Expense to operating expense, the most comparable GAAP financial measure:

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended

 

 

 

March 31, 

 

 

 

2017

    

2016

 

 

 

(in thousands)

 

Segment Adjusted EBITDA Expense

 

$

261,494

 

$

263,488

 

Other income

 

 

1,298

 

 

91

 

Operating expenses (excluding depreciation, depletion and amortization)

 

$

262,792

 

$

263,579

 

 

30


 

Liquidity and Capital Resources

 

Liquidity

 

Our only cash generating assets are limited partnership and general partnership interests in the ARLP Partnership, including incentive distribution rights, from which we receive quarterly distributions.  We rely on distributions from the ARLP Partnership to fund our cash requirements.

 

The ARLP Partnership has historically satisfied its working capital requirements and funded its capital expenditures, equity investments and debt service obligations with cash generated from operations, cash provided by the issuance of debt or equity, borrowings under credit and securitization facilities and sale-leaseback transactions.  The ARLP Partnership believes that existing cash balances, future cash flows from operations, borrowings under credit facilities, sale-leaseback transactions and cash provided from the issuance of debt or equity will be sufficient to meet its working capital requirements, capital expenditures and additional equity investments, debt payments, commitments and distribution payments.  Nevertheless, the ARLP Partnership's ability to satisfy its working capital requirements, to fund planned capital expenditures and equity investments, to service its debt obligations or to pay distributions will depend upon its future operating performance and access to and cost of financing sources, which will be affected by prevailing economic conditions generally and in the coal industry specifically, as well as other financial and business factors, some of which are beyond the ARLP Partnership's control.  Based on the ARLP Partnership's recent operating results, current cash position, current unitholder distributions, anticipated future cash flows and sources of financing that the ARLP Partnership expects to have available, it does not anticipate any constraints to its liquidity at this time.  However, to the extent operating cash flow or access to and cost of financing sources are materially different than expected, future liquidity may be adversely affected.  Please read "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2016.

 

Cash Flows

 

Cash provided by operating activities was $176.6 million for the 2017 Quarter compared to $80.3 million for the 2016 Quarter.  The increase in cash provided by operating activities was primarily due to an increase in net income as adjusted for non-cash items and favorable working capital changes related to trade receivables, coal inventories and accounts payable in the 2017 Quarter compared to the 2016 Quarter.  

 

Net cash used in investing activities was $35.8 million for the 2017 Quarter compared to $57.3 million for the 2016 Quarter.  The decrease in cash used in investing activities was primarily attributable to decreased purchases of equity investments in affiliates and favorable changes in accounts payable related to property, plant and equipment purchases in the 2017 Quarter compared to the 2016 Quarter.

 

Net cash used in financing activities was $93.2 million for the 2017 Quarter compared to $25.9 million for the 2016 Quarter.  The increase in cash used in financing activities was primarily attributable to decreased net borrowings on securitization and revolving facilities, offset in part by reduced distributions paid to partners in the 2017 Quarter compared to the 2016 Quarter.

 

Capital Expenditures

 

Capital expenditures decreased marginally to $30.3 million in the 2017 Quarter from $31.7 million in the 2016 Quarter.

 

The ARLP Partnership's anticipated total capital expenditures for the year ending December 31, 2017 are estimated in a range of $145.0 million to $165.0 million, which includes expenditures for maintenance capital at various mines.  In addition to these capital expenditures, the ARLP Partnership anticipates funding in 2017 investments of approximately $20.0 million to $30.0 million related to its commitment to acquire oil and gas mineral interests.  Management anticipates funding remaining 2017 capital requirements with cash and cash equivalents ($87.4 million as of March 31, 2017), cash flows from operations, borrowings under revolving credit and securitization facilities and cash provided from the issuance of debt or equity.  The ARLP Partnership will continue to have significant capital requirements over the long-term, which may require it to incur debt or seek additional equity capital.  The availability and cost of

31


 

additional capital will depend upon prevailing market conditions, the market price of the ARLP Partnership's common units and several other factors over which it has limited control, as well as its financial condition and results of operations.

 

Debt Obligations

 

ARLP Credit Facility. On January 27, 2017, the Intermediate Partnership entered into a Fourth Amended and Restated Credit Agreement (the "ARLP Credit Agreement") with various financial institutions for a revolving credit facility and term loan (the "ARLP Credit Facility").  The ARLP Credit Facility replaced the $250 million term loan ("ARLP Replaced Term Loan") and $700 million revolving credit facility ("ARLP Replaced Revolving Credit Facility") extended to the Intermediate Partnership on May 23, 2012 (the "ARLP Replaced Credit Agreement") by various banks and other lenders that would have expired on May 23, 2017.

 

The ARLP Credit Agreement provided for a $776.5 million revolving credit facility, reducing to $490.75 million on May 23, 2017, including a sublimit of $125 million for the issuance of letters of credit and a sublimit of $15.0 million for swingline borrowings (the "ARLP Revolving Credit Facility"), and for a term loan with a remaining principal balance of $50.0 million (the "ARLP Term Loan").  The outstanding revolver balance and term loan balance under the ARLP Replaced Credit Agreement were deemed to have been advanced under the ARLP Credit Facility on January 27, 2017.    On April 3, 2017, the ARLP Partnership entered into an amendment to the ARLP Credit Agreement (the "Agreement") to extend the termination date of the ARLP Revolving Credit Facility as to $457.25 million of commitments to May 23, 2021, eliminate the Cavalier Condition and the ARLP Senior Notes Condition (both as defined in the ARLP Credit Agreement) and effectuate certain other changes.  In connection with the Amendment, the ARLP Partnership increased the commitments under the ARLP Revolving Credit Facility from $479.75 million to $490.75 million, effective May 23, 2017.

 

The ARLP Credit Agreement is guaranteed by all of the material direct and indirect subsidiaries of the Intermediate Partnership, and is secured by substantially all of the Intermediate Partnership’s assets.  The ARLP Term Loan aggregate remaining outstanding principal balance of $50.0 million will be paid in full in May 2017.

 

Borrowings under the ARLP Credit Facility bear interest, at the option of the Intermediate Partnership, at either (i) the Base Rate at the greater of three benchmarks or (ii) a Eurodollar Rate, plus margins for (i) or (ii), as applicable, that fluctuate depending upon the ratio of Consolidated Debt to Consolidated Cash Flow (each as defined in the ARLP Credit Agreement).  The ARLP Revolving Credit Facility bears a lower interest rate for Non-Extending Lenders during their brief participation period which ends May 23, 2017 compared to rates associated with the new lenders and Extending Lenders which are in effect through termination of the ARLP Revolving Credit Facility.  The ARLP Partnership elected a Eurodollar Rate, which, with applicable margin, was 3.12% on borrowings outstanding as of March 31, 2017.  At March 31, 2017, the ARLP Partnership had borrowings of $230.0 million and $8.6 million of letters of credit outstanding with $537.9 million available for borrowing under the ARLP Revolving Credit Facility. The ARLP Partnership currently incurs  a weighted average annual commitment fee of 0.31% on the undrawn portion of the ARLP Revolving Credit Facility.  The ARLP Partnership utilizes the ARLP Revolving Credit Facility, as appropriate, for working capital requirements, capital expenditures and investments in affiliates, scheduled debt payments and distribution payments.

 

ARLP Series B Senior Notes.    On January 27, 2017, the Intermediate Partnership amended the 2008 Note Purchase Agreement dated June 26, 2008, for $145.0 million of Series B Senior Notes which bear interest at 6.72% and are due to mature on June 26, 2018 with interest payable semi-annually.  The amendment provided for certain modifications to the terms and provisions of the ARLP Note Purchase Agreement, including granting liens on substantially all of the Intermediate Partnership's assets to secure its obligations under the ARLP Note Purchase Agreement on an equal basis with the obligations under the ARLP Credit Agreement.  The amendment also modified certain covenants to align them with the applicable covenants in the ARLP Credit Agreement.  As discussed below, the ARLP Partnership intends to repay the ARLP Series B Senior Notes in May 2017.

 

The ARLP Credit Agreement and the ARLP Series B Senior Notes (collectively, "ARLP Debt Arrangements") contain various restrictions affecting the Intermediate Partnership and its subsidiaries including, among other things, incurrence of additional indebtedness and liens, sale of assets, investments, mergers and consolidations and transactions with affiliates, in each case subject to various exceptions, and the payment of cash distributions by the Intermediate Partnership if such payment would result in a certain fixed charge coverage ratio (as defined in the ARLP Debt

32


 

Arrangements).  The Amendment lowered this fixed charge ratio from less than 1.25 to 1.0 to 1.15 to 1.0 for each rolling four-quarter period and further limited the Intermediate Partnership’s ability to incur certain unsecured debt. The Amendment also removed the requirement for the Intermediate Partnership to remain in control of a certain amount of mineable coal reserves relative to its annual production.  The ARLP Debt Arrangements require the Intermediate Partnership maintain (a) a debt to cash flow ratio of not more than 2.25 to 1.0 and (b) a 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 0.80 to 1.0 and 25.5 to 1.0, respectively, for the trailing twelve months ended March 31, 2017.  The ARLP Partnership was in compliance with the covenants of the ARLP Debt Arrangements as of March 31, 2017.

 

ARLP Senior Notes. On April 24, 2017, the Intermediate Partnership and Alliance Finance (as co-issuer), a wholly owned subsidiary of the Intermediate Partnership, issued an aggregate principal amount of $400.0 million of senior unsecured notes due 2025 ("ARLP Senior Notes") in a private placement to qualified institutional buyers.  The ARLP Senior Notes have a term of eight years maturing on May 1, 2025 (the "Term") and accrue interest at an annual rate of 7.5%.  Interest is payable semi-annually in arrears on each May 1 and November 1, commencing on November 1, 2017.  The indenture to the ARLP Senior Notes contain customary terms, events of default and covenants relating to, among other things, the incurrence of debt, the payment of distributions or similar restricted payments, undertaking transactions with affiliates and limitations on asset sales.  At any time prior to May 1, 2020, the issuers of the ARLP Senior Notes may redeem up to 35% of the aggregate principal amount of the ARLP Senior Notes at a redemption price equal to 107.5% of the principal amount redeemed, plus accrued and unpaid interest, if any, to the redemption date, with an amount of cash not greater than the net proceeds from one or more equity offerings.  The issuers of the ARLP Senior Notes may also redeem all or a part of the notes at any time on or after May 1, 2020, at redemption prices set forth in the indenture to the ARLP Senior Notes.  At any time prior to May 1, 2020, the issuers of the ARLP Senior Notes may redeem the ARLP Senior Notes at a redemption price equal to the principal amount of the ARLP Senior Notes plus a "make-whole" premium, plus accrued and unpaid interest, if any, to the redemption date.  The net proceeds from issuance of the ARLP Senior Notes and cash on hand were partially used to repay the ARLP Revolving Credit Facility and will partially be used to repay the ARLP Term Loan and the outstanding ARLP Series B Senior Notes in May 2017 (including a make-whole payment of approximately $8.9 million).  The ARLP Partnership incurred discount and debt issuance costs of approximately $9.0 million in connection with issuance of the ARLP Senior Notes which will be deferred and amortized as a component of interest expense over the Term.

 

ARLP Accounts Receivable Securitization. On December 5, 2014, certain direct and indirect wholly-owned subsidiaries of the Intermediate Partnership entered into a $100.0 million accounts receivable securitization facility ("ARLP Securitization Facility") providing additional liquidity and funding.  Under the ARLP Securitization Facility, certain subsidiaries sell trade receivables on an ongoing basis to the Intermediate Partnership, which then sells the trade receivables to AROP Funding, LLC ("AROP Funding"), a wholly-owned bankruptcy-remote special purpose subsidiary of the 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 ARLP Securitization Facility bears interest based on a Eurodollar Rate.  It was renewed in December 2016 and matures in December 2017. At March 31, 2017, the ARLP Partnership had $100.0 million outstanding under the Securitization Facility .

 

Cavalier Credit Agreement.  On October 6, 2015, Cavalier Minerals 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").  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, LP and AllDale Minerals II, LP.  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 March 31, 2017, Cavalier Minerals had not drawn on the Cavalier Credit Facility.  Alliance Minerals has the right to require Cavalier Minerals to draw the full amount

33


 

available under the Cavalier Credit Facility and distribute the proceeds to the members of Cavalier Minerals, including Alliance Minerals.

 

Other.  In addition to the letters of credit available under the ARLP Credit Facility discussed above, the ARLP Partnership also has agreements with one bank to provide additional letters of credit of $5.0 million to maintain surety bonds to secure its obligations for workers' compensation benefits.  At March 31, 2017, the ARLP Partnership had $5.0 million in letters of credit outstanding under the agreement.

 

Related-Party Transactions

 

The ARLP Partnership has continuing related-party transactions with us, SGP and our respective affiliates. These related-party transactions relate principally to the provision of administrative services to us and Alliance Resource Holdings II, Inc. and our respective affiliates, mineral leases with SGP and its affiliates, and agreements relating to the use of aircraft.  The ARLP Partnership has also had transactions with WKY CoalPlay, LLC ("WKY CoalPlay") regarding three mineral leases and Bluegrass Minerals Management, LLC ("Bluegrass Minerals") and, through Alliance Minerals and Cavalier Minerals, the AllDale Partnerships to support the acquisition of oil and gas mineral interests.  For more information regarding WKY CoalPlay, the AllDale Partnerships and Bluegrass Minerals, please read “Item 1. Financial Statements (Unaudited) – Note 8. Variable Interest Entities" and "– Note 9. Equity Investment" of this Quarterly Report on Form 10-Q.  Please read our Annual Report on Form 10-K for the year ended December 31, 2016, "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations – Related-Party Transactions" for additional information concerning related-party transactions.

 

New Accounting Standards

 

See "Item 1. Financial Statements (Unaudited) – Note 2. New Accounting Standards" of this Quarterly Report on Form 10-Q for a discussion of new accounting standards.

 

Other Information

 

White Oak IRS Notice

 

The ARLP Partnership received notice that the Internal Revenue Service issued White Oak Resources LLC a "Notice of Beginning of Administrative Proceeding" in conjunction with an audit of the income tax return of White Oak for the tax year ended December 31, 2011.

 

ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Our ownership interests, results of operations and cash flows principally reflect those of the ARLP Partnership.   As such, our discussions of market risk reflect those risks as they apply to the ARLP Partnership.

 

Commodity Price Risk

 

The ARLP Partnership has significant long-term coal supply agreements.  Most of the long-term coal supply agreements are subject to price adjustment provisions, which periodically permit an increase or decrease in the contract price typically to reflect changes in specified indices or changes in production costs resulting from regulatory changes, or both.

 

The ARLP Partnership has exposure to price risk for supplies that are used directly or indirectly in the normal course of coal production such as steel, electricity and other supplies. The ARLP Partnership manages its risk for these items through strategic sourcing contracts for normal quantities required by its operations.  The ARLP Partnership does not utilize any commodity price-hedges or other derivatives related to these risks.

 

34


 

Credit Risk

 

Most of the ARLP Partnership's sales tonnage is consumed by electric utilities.  Therefore, the ARLP Partnership's credit risk is primarily with domestic electric power generators.  The ARLP Partnership's policy is to independently evaluate each customer’s creditworthiness prior to entering into transactions and to constantly monitor outstanding accounts receivable against established credit limits. When deemed appropriate by the ARLP Partnership's credit management department, it will take steps to reduce its credit exposure to customers that do not meet its credit standards or whose credit has deteriorated. These steps may include obtaining letters of credit or cash collateral, requiring prepayment for shipments or establishing customer trust accounts held for the ARLP Partnership's benefit in the event of a failure to pay.

 

Exchange Rate Risk

 

Almost all of the ARLP Partnership's transactions are denominated in U.S. Dollars, and as a result, it does not have material exposure to currency exchange-rate risks.

 

Interest Rate Risk

 

Borrowings under the ARLP Credit Facility, ARLP Securitization Facility and Cavalier Credit Agreement are at variable rates and, as a result, the ARLP Partnership has interest rate exposure.  Historically, the ARLP Partnership's earnings have not been materially affected by changes in interest rates.  The ARLP Partnership does not utilize any interest rate derivative instruments related to its outstanding debt.  The ARLP Partnership had $230.0 million in borrowings under the ARLP Replaced Revolving Credit Facility, $50.0 million outstanding under the ARLP Replaced Term Loan and $100.0 million in borrowings under the ARLP Securitization Facility at March 31, 2017.  A one percentage point increase in the interest rates related to the ARLP Replaced Credit Facility and ARLP Securitization Facility would result in an annualized increase in interest expense of $3.8 million, based on borrowing levels at March 31, 2017.  On April 3, 2017, the ARLP Partnership amended the ARLP Credit Facility.  For more information regarding the amended terms, see above under "–Debt Obligations."  With respect to the ARLP Partnership's  fixed-rate borrowings, a one percentage point increase in interest rates would result in a decrease of approximately $1.8 million in the estimated fair value of these borrowings.

 

As of March 31, 2017, the estimated fair value of the ARLP Debt Arrangements was approximately $538.9 million.  The fair values of long-term debt are estimated using discounted cash flow analyses, based upon the ARLP Partnership's current incremental borrowing rates for similar types of borrowing arrangements as of March 31, 2017.  There were no other changes in our quantitative and qualitative disclosures about market risk as set forth in our Annual Report on Form 10-K for the year ended December 31, 2016. 

 

ITEM 4.CONTROLS AND PROCEDURES

 

We maintain controls and procedures designed to provide reasonable assurance that information required to be disclosed in the reports we file with the Securities and Exchange Commission ("SEC") is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure.  As required by Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), we have evaluated, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) of the Exchange Act) as of March 31, 2017.  Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that these controls and procedures are effective as of March 31, 2017.

 

During the quarterly period ended March 31, 2017, there have not been any changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) identified in connection with this evaluation that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

35


 

FORWARD-LOOKING STATEMENTS

 

Certain statements and information in this Quarterly Report on Form 10-Q may constitute "forward-looking statements."  These statements are based on our beliefs as well as assumptions made by, and information currently available to, us.  When used in this document, the words "anticipate," "believe," "continue," "estimate," "expect," "forecast," "may," "project," "will," and similar expressions identify forward-looking statements.  Without limiting the foregoing, all statements relating to our future outlook, anticipated capital expenditures, future cash flows and borrowings and sources of funding are forward-looking statements. These statements reflect our current views with respect to future events and are subject to numerous assumptions that we believe are reasonable, but are open to a wide range of uncertainties and business risks, and actual results may differ materially from those discussed in these statements.  Among the factors that could cause actual results to differ from those in the forward-looking statements are:

 

·

changes in coal prices, which could affect the ARLP Partnership's operating results and cash flows;

·

changes in competition in coal markets and the ARLP Partnership's ability to respond to such changes;

·

legislation, regulations, and court decisions and interpretations thereof, including those relating to the environment and the release of greenhouse gases, mining, miner health and safety and health care;

·

deregulation of the electric utility industry or the effects of any adverse change in the coal industry, electric utility industry, or general economic conditions;

·

risks associated with the expansion of the ARLP Partnership's operations and properties;

·

dependence on significant customer contracts, including renewing existing contracts upon expiration;

·

adjustments made in price, volume or terms to existing coal supply agreements;

·

changing global economic conditions or in industries in which the ARLP Partnership's customers operate;

·

liquidity constraints, including those resulting from any future unavailability of financing;

·

customer bankruptcies, cancellations or breaches to existing contracts, or other failures to perform;

·

customer delays, failure to take coal under contracts or defaults in making payments;

·

fluctuations in coal demand, prices and availability;

·

continuation or worsening of depressed oil and gas prices adversely affecting the ARLP Partnership's investments in oil and gas mineral interests;

·

the ARLP Partnership's productivity levels and margins earned on its coal sales;

·

the coal industry's share of electricity generation, including as a result of environmental concerns related to coal mining and combustion and the cost and perceived benefits of other sources of electricity, such as natural gas, nuclear energy and renewable fuels;

·

changes in raw material costs;

·

changes in the availability of skilled labor;

·

the ARLP Partnership's ability to maintain satisfactory relations with its employees;

·

increases in labor costs including costs of health insurance and taxes resulting from the Affordable Care Act, adverse changes in work rules, or cash payments or projections associated with post mine reclamation and workers' compensation claims;

·

increases in transportation costs and risk of transportation delays or interruptions;

·

operational interruptions due to geologic, permitting, labor, weather-related or other factors;

·

risks associated with major mine-related accidents, such as mine fires, or interruptions;

·

results of litigation, including claims not yet asserted;

·

difficulty maintaining the ARLP Partnership's surety bonds for mine reclamation as well as workers' compensation and black lung benefits;

·

difficulty in making accurate assumptions and projections regarding post-mine reclamation as well as pension, black lung benefits and other post-retirement benefit liabilities;

·

uncertainties in estimating and replacing the ARLP Partnership's coal reserves;

·

a loss or reduction of benefits from certain tax deductions and credits;

·

difficulty obtaining commercial property insurance, and risks associated with the ARLP Partnership's participation (excluding any applicable deductible) in the commercial insurance property program;

·

difficulty in making accurate assumptions and projections regarding future revenues and costs associated with equity investments in companies the ARLP Partnership does not control; and

36


 

·

other factors, including those discussed in "Item 1A. Risk Factors" and "Item 3. Legal Proceedings" in our Annual Report on Form 10-K for the year ended December 31, 2016.

 

If one or more of these or other risks or uncertainties materialize, or should underlying assumptions prove incorrect, our actual results may differ materially from those described in any forward-looking statement.  When considering forward-looking statements, you should also keep in mind the risk factors described in "Risk Factors" below.  These risk factors could also cause our actual results to differ materially from those contained in any forward-looking statement.  We disclaim any obligation to update the above list or to announce publicly the result of any revisions to any of the forward-looking statements to reflect future events or developments.

 

You should consider the information above when reading or considering any forward-looking statements contained in:

 

·

this Quarterly Report on Form 10-Q;

·

other reports filed by us with the SEC;

·

our press releases;

·

our website http://www.ahgp.com; and

·

written or oral statements made by us or any of our officers or other authorized persons acting on our behalf.

37


 

PART II

 

OTHER INFORMATION

 

ITEM 1.LEGAL PROCEEDINGS

 

The information in Note 3. Contingencies to the Unaudited Condensed Consolidated Financial Statements included in "Part I. Item 1. Financial Statements (Unaudited)" of this Quarterly Report on Form 10-Q herein is hereby incorporated by reference.  See also "Item 3. Legal Proceedings" of our Annual Report on Form 10-K for the year ended December 31, 2016.

 

ITEM 1A.RISK FACTORS

 

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Part I, Item 1A  "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2016 which could materially affect our business, financial condition or future results.  The risks described in our Annual Report on Form 10-K and this Quarterly Report on Form 10-Q are not our only risks.  Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial based on current knowledge and factual circumstances, if such knowledge or facts change, also may materially adversely affect our business, financial condition and/or operating results in the future.  We do not believe there have been any material changes to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016.

 

ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

ITEM 3.DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4.MINE SAFETY DISCLOSURES

 

Information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K (17 CFR 229.104) is included in Exhibit 95.1 to this Quarterly Report on Form 10-Q.

 

ITEM 5.OTHER INFORMATION

 

None.

38


 

ITEM 6.EXHIBITS

 

 

 

 

 

Incorporated by Reference

Exhibit
Number

    

Exhibit Description

    

Form

    

SEC
File No. and
Film No.

    

Exhibit

    

Filing Date

    

Filed
Herewith*

 

 

 

 

 

 

 

 

 

 

 

 

 

3.1

 

Amended and Restated Agreement of Limited Partnership of Alliance Holdings GP, L.P., dated as of May 15, 2006

 

8-K

 

000-51952

06849300

 

3.1

 

05/17/2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3.2

 

Amended and Restated Limited Liability Company Agreement of Alliance GP, LLC

 

8-K

 

000-51952

06849300

 

3.2

 

05/17/2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3.3

 

Certificate of Limited Partnership of Alliance Holdings GP, L.P. 

 

S-1

 

333-129883

051220816

 

3.1

 

11/22/2005

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3.4

 

Certificate of Formation of Alliance GP, LLC

 

S-1

 

333-129883

051220816

 

3.3

 

11/22/2005

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3.5(1)

 

Third Amended and Restated Agreement of Limited Partnership of Alliance Resource Partners, L.P.

 

8-K

 

000-26823

14922391

 

3.1

 

06/16/2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3.6(1)

 

Amended and Restated Agreement of Limited Partnership of Alliance Resource Operating Partners, L.P.

 

10-K

 

000-26823

583595

 

3.2

 

03/29/2000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3.7(1)

 

Certificate of Limited Partnership of Alliance Resource Partners, L.P.

 

S-1

 

333-78845

99630855

 

3.6

 

05/20/1999

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3.8(1)

 

Certificate of Limited Partnership of Alliance Resource Operating Partners, L.P.

 

S-1/A

 

333-78845

99669102

 

3.8

 

07/23/1999

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3.9(1)

 

Certificate of Formation of Alliance Resource Management GP, LLC

 

S-1/A

 

333-78845

99669102

 

3.7

 

07/23/1999

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3.10(1)

 

Amended and Restated Operating Agreement of Alliance Resource Management GP, LLC

 

S-3

 

333-85282

02596627

 

3.4

 

04/01/2002

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3.11(1)

 

Amendment No. 1 to Amended and Restated Operating Agreement of Alliance Resource Management GP, LLC

 

S-3

 

333-85282

02596627

 

3.5

 

04/01/2002

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3.12(1)

 

Amendment No. 2 to Amended and Restated Operating Agreement of Alliance Resource Management GP, LLC

 

S-3

 

333-85282

02596627

 

3.6

 

04/01/2002

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3.13

 

Amendment No. 1 to Amended and Restated Agreement of Limited Partnership of Alliance Holdings GP, L.P., dates as of October 25, 2007.

 

10-K

 

000-51952

08673302

 

3.14

 

03/07/2008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4.1

 

Indenture, dated as of April 24, 2017, by and among Alliance Resource Operating Partners, L.P. and Alliance Resource Finance Corporation, as issuers, Alliance Resource Partners, L.P., as parent, the subsidiary guarantors party thereto and Wells Fargo Bank, National Association, as trustee.

 

8-K

 

000-51952 17778675

 

4.1

 

04/24/2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

39


 

 

 

 

 

Incorporated by Reference

Exhibit
Number

    

Exhibit Description

    

Form

    

SEC
File No. and
Film No.

    

Exhibit

    

Filing Date

    

Filed
Herewith*

10.1

 

First Amendment to Note Purchase Agreement, dates as of January 27, 2017, among Alliance Resource Operating Partners, L.P., the subsidiary guarantors named therein and the institutional investor party thereto.

 

8-K

 

000-51952 17567552

 

10.2

 

02/02/2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10.2

 

Fourth Amended and Restated Credit Agreement, dated as of January 27, 2017, by and among Alliance Resource Operating Partners, L.P., as borrower, JPMorgan Chase Bank, N.A., as administrative agent, and the lenders party thereto.

 

8-K

 

000-51952

17567552

 

10.1

 

02/02/2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10.3

 

Amendment No. 1 dated April 3, 2017 to the Fourth Amended and Restated Credit Agreement, dated as of January, 27, 2017, by and among Alliance Resource Operating Partners, L.P., as borrower, JPMorgan Chase Bank, N.A., as administrative agent, and the lenders party thereto.

 

8-K

 

000-51952

17750729

 

10.1

 

04/07/2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

31.1

 

Certification of Joseph W. Craft, III, President and Chief Executive Officer of Alliance GP, LLC, the general partner of Alliance Holdings GP, L.P., dated May 8, 2017, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

 

 

 

 

 

Picture 6

 

 

 

 

 

 

 

 

 

 

 

 

 

31.2

 

Certification of Brian L. Cantrell, Senior Vice President and Chief Financial Officer of Alliance GP, LLC, the general partner of Alliance Holdings GP, L.P., dated May 8, 2017, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

 

 

 

 

 

Checked box symbol

 

 

 

 

 

 

 

 

 

 

 

 

 

32.1

 

Certification of Joseph W. Craft III, President and Chief Executive Officer of Alliance GP, LLC, the general partner of Alliance Holdings GP, L.P., dated May 8, 2017, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

 

 

 

 

 

Checked box symbol

 

 

 

 

 

 

 

 

 

 

 

 

 

32.2

 

Certification of Brian L. Cantrell, Senior Vice President and Chief Financial Officer of Alliance GP, LLC, the general partner of Alliance Holdings GP, L.P., dated May 8, 2017, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

 

 

 

 

 

Checked box symbol

 

 

 

 

 

 

 

 

 

 

 

 

 

95.1

 

Federal Mine Safety and Health Act Information

 

 

 

 

 

 

 

 

 

Checked box symbol

 

 

 

 

 

 

 

 

 

 

 

 

 

101

 

Interactive Data File (Form 10-Q for the quarter ended March 31, 2017 filed in XBRL).

 

 

 

 

 

 

 

 

 

Checked box symbol


*     Or furnished, in the case of Exhibits 32.1 and 32.2.

(1)

Denotes Alliance Resource Partners, L.P. filings.

40


 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, in Tulsa, Oklahoma, on May 8, 2017.

 

 

 

 

 

 

ALLIANCE HOLDINGS GP, L.P.

 

 

 

 

By:

Alliance GP, LLC

 

 

its general partner

 

 

 

 

 

/s/ Joseph W. Craft, III

 

 

 

Joseph W. Craft, III

 

 

 

President, Chief Executive Officer

 

 

 

and Director, duly authorized to sign

 

 

 

on behalf of the registrant

 

 

 

 

 

 

 

 

 

 

 

/s/ Brian L. Cantrell

 

 

 

Brian L. Cantrell

 

 

 

Senior Vice President and

 

 

 

Chief Financial Officer

 

 

41