Attached files

file filename
EX-95.1 - EX-95.1 - ALLIANCE RESOURCE PARTNERS LParlp-20170331ex951f5aba7.htm
EX-32.2 - EX-32.2 - ALLIANCE RESOURCE PARTNERS LParlp-20170331ex3225929e6.htm
EX-32.1 - EX-32.1 - ALLIANCE RESOURCE PARTNERS LParlp-20170331ex321f06a2a.htm
EX-31.2 - EX-31.2 - ALLIANCE RESOURCE PARTNERS LParlp-20170331ex312d3e739.htm
EX-31.1 - EX-31.1 - ALLIANCE RESOURCE PARTNERS LParlp-20170331ex311c1082c.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.:  0-26823


ALLIANCE RESOURCE PARTNERS, L.P.

(Exact name of registrant as specified in its charter)

 

Delaware

   

73-1564280

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer Identification No.)

 

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

(Address of principal executive offices and zip code)

(918) 295-7600

(Registrant's telephone number, including area code)


 

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

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 [X]

Accelerated Filer [   ]

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,  74,597,036 common units are outstanding.

 

 

 

 

 


 

TABLE OF CONTENTS

 

PART I 

 

FINANCIAL INFORMATION 

 

 

 

 

 

 

Page

 

 

 

ITEM 1. 

Financial Statements (Unaudited)

 

 

 

 

 

ALLIANCE RESOURCE PARTNERS, L.P. AND SUBSIDIARIES

 

 

 

 

 

Condensed Consolidated Balance Sheets as of 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

20

 

 

 

ITEM 3. 

Quantitative and Qualitative Disclosures about Market Risk

29

 

 

 

ITEM 4. 

Controls and Procedures

30

 

 

 

 

Forward-Looking Statements

31

 

 

 

PART II 

 

OTHER INFORMATION 

 

 

 

ITEM 1. 

Legal Proceedings

33

 

 

 

ITEM 1A. 

Risk Factors

33

 

 

 

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

33

 

 

 

ITEM 3. 

Defaults Upon Senior Securities

33

 

 

 

ITEM 4. 

Mine Safety Disclosures

33

 

 

 

ITEM 5. 

Other Information

33

 

 

 

ITEM 6. 

Exhibits

34

 

 

 

 

 

 

 

i


 

PART I

 

FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

 

ALLIANCE RESOURCE PARTNERS, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except unit data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

 

2017

    

2016

 

ASSETS

    

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

87,360

 

$

39,782

 

Trade receivables

 

 

120,290

 

 

152,032

 

Other receivables

 

 

295

 

 

279

 

Due from affiliates

 

 

277

 

 

271

 

Inventories, net

 

 

77,871

 

 

61,051

 

Advance royalties, net

 

 

1,207

 

 

1,207

 

Prepaid expenses and other assets

    

 

18,072

    

 

22,050

 

Total current assets

 

 

305,372

 

 

276,672

 

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

 

 

23,953

 

 

25,939

 

Total other assets

 

 

347,259

 

 

330,527

 

TOTAL ASSETS

 

$

2,204,316

 

$

2,193,042

 

 

 

 

 

 

 

 

 

LIABILITIES AND PARTNERS' CAPITAL

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

Accounts payable

 

$

65,583

 

$

64,055

 

Due to affiliates

 

 

550

 

 

906

 

Accrued taxes other than income taxes

 

 

18,459

 

 

18,273

 

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

 

 

323,034

 

 

326,871

 

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

 

 

1,057,951

 

 

1,099,618

 

 

 

 

 

 

 

 

 

PARTNERS' CAPITAL:

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

Limited Partners - Common Unitholders 74,597,036 and 74,375,025 units outstanding, respectively

 

 

1,451,453

 

 

1,400,202

 

General Partners’ deficit

 

 

(272,560)

 

 

(273,788)

 

Accumulated other comprehensive loss

 

 

(38,287)

 

 

(38,540)

 

Total ARLP Partners' Capital

 

 

1,140,606

 

 

1,087,874

 

Noncontrolling interest

 

 

5,759

 

 

5,550

 

Total Partners' Capital

 

 

1,146,365

 

 

1,093,424

 

TOTAL LIABILITIES AND PARTNERS' CAPITAL

 

$

2,204,316

 

$

2,193,042

 

 

See notes to condensed consolidated financial statements.

1


 

ALLIANCE RESOURCE PARTNERS, 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

 

 

12,740

 

 

4,979

 

Total revenues

 

 

461,080

 

 

412,829

 

 

 

 

 

 

 

 

 

EXPENSES:

 

 

 

 

 

 

 

Operating expenses (excluding depreciation, depletion and amortization)

 

 

262,792

 

 

263,579

 

Transportation expenses

 

 

9,596

 

 

6,558

 

General and administrative

 

 

16,033

 

 

17,238

 

Depreciation, depletion and amortization

 

 

65,127

 

 

70,607

 

Total operating expenses

 

 

353,548

 

 

357,982

 

 

 

 

 

 

 

 

 

INCOME FROM OPERATIONS

 

 

107,532

 

 

54,847

 

 

 

 

 

 

 

 

 

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

 

 

24

 

 

 3

 

Equity in income (loss) of affiliates

 

 

3,700

 

 

(27)

 

Other income

 

 

1,298

 

 

91

 

INCOME BEFORE INCOME TAXES

 

 

105,038

 

 

47,299

 

 

 

 

 

 

 

 

 

INCOME TAX BENEFIT

 

 

(12)

 

 

(9)

 

 

 

 

 

 

 

 

 

NET INCOME

 

 

105,050

 

 

47,308

 

 

 

 

 

 

 

 

 

LESS:  NET LOSS (INCOME) ATTRIBUTABLE TO NONCONTROLLING INTEREST

 

 

(148)

 

 

 2

 

 

 

 

 

 

 

 

 

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

 

$

104,902

 

$

47,310

 

 

 

 

 

 

 

 

 

GENERAL PARTNERS' INTEREST IN NET INCOME OF ARLP

 

$

20,146

 

$

19,722

 

 

 

 

 

 

 

 

 

LIMITED PARTNERS' INTEREST IN NET INCOME OF ARLP

 

$

84,756

 

$

27,588

 

 

 

 

 

 

 

 

 

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

 

$

1.10

 

$

0.36

 

 

 

 

 

 

 

 

 

DISTRIBUTIONS PAID PER LIMITED PARTNER UNIT

 

$

0.4375

 

$

0.6750

 

 

 

 

 

 

 

 

 

WEIGHTED-AVERAGE NUMBER OF UNITS OUTSTANDING – BASIC AND DILUTED

 

 

74,503,298

 

 

74,291,114

 

 

See notes to condensed consolidated financial statements.

2


 

ALLIANCE RESOURCE PARTNERS, L.P. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2017

    

2016

    

 

 

 

 

 

 

 

 

NET INCOME

 

$

105,050

 

$

47,308

 

 

 

 

 

 

 

 

 

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

 

 

105,303

 

 

47,436

 

 

 

 

 

 

 

 

 

Less: Comprehensive (income) loss attributable to noncontrolling interest

 

 

(148)

 

 

 2

 

 

 

 

 

 

 

 

 

COMPREHENSIVE INCOME ATTRIBUTABLE TO ARLP

 

$

105,155

 

$

47,438

 


(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 RESOURCE PARTNERS, 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

 

$

177,011

 

$

80,594

 

 

 

 

 

 

 

 

 

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

 

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

 

 

(2,988)

 

 

(1,336)

 

Cash contributions by General Partners

 

 

905

 

 

47

 

Distributions paid to Partners

 

 

(53,224)

 

 

(88,749)

 

Other

 

 

(190)

 

 

 —

 

Net cash used in financing activities

 

 

(93,588)

 

 

(26,763)

 

 

 

 

 

 

 

 

 

NET CHANGE IN CASH AND CASH EQUIVALENTS

 

 

47,578

 

 

(3,443)

 

 

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

 

 

39,782

 

 

33,431

 

 

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

 

$

87,360

 

$

29,988

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL CASH FLOW INFORMATION:

 

 

 

 

 

 

 

Cash paid for interest

 

$

4,708

 

$

4,996

 

 

 

 

 

 

 

 

 

NON-CASH INVESTING AND FINANCING ACTIVITY:

 

 

 

 

 

 

Accounts payable for purchase of property, plant and equipment

 

$

10,376

 

$

6,387

 

Market value of common units issued under 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 RESOURCE PARTNERS, L.P. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.ORGANIZATION AND PRESENTATION

 

Significant Relationships Referenced in Notes to Condensed Consolidated Financial Statements

 

·

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

·

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

·

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

·

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

·

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

·

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

·

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

·

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

·

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

 

Organization

 

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

 

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

 

Basis of Presentation

 

The accompanying condensed consolidated financial statements include the accounts and operations of the ARLP Partnership and present the consolidated financial position as of 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 of ARLP, the Intermediate Partnership (a subsidiary of ARLP and a variable interest entity of which ARLP is the primary beneficiary), Alliance Coal (a subsidiary of the Intermediate Partnership and a variable interest entity of which the Intermediate Partnership is the primary beneficiary) and other directly and indirectly wholly- and majority-owned subsidiaries of the Intermediate Partnership and Alliance Coal.  The Intermediate Partnership, Alliance Coal and their wholly- and majority-owned subsidiaries represent virtually all the net assets of the ARLP Partnership.  MGP's interests in both Alliance Coal and the Intermediate Partnership and SGP's 0.01% interest in the Intermediate Partnership are reported as part of the overall

5


 

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

 

These condensed consolidated financial statements and notes are unaudited. However, in the opinion of management, these financial statements reflect all normal recurring adjustments necessary for a fair presentation of the results for the periods presented.  Results 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 incomeNet income of ARLP or Basic and diluted net income of ARLP 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 United States.  These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2016.

 

Use of Estimates

 

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

 

2.NEW ACCOUNTING STANDARDS

 

New Accounting Standards Issued and Adopted

 

In January 2017, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("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.

 

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.

 

6


 

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. 

 

We have developed an assessment team to determine the effect of adopting ASU 2014-09.  As part of our assessment process, we applied the five-step analysis outlined in the new standard to certain contracts representative of the majority of our coal sales contracts and determined that our pattern of recognition appears consistent between both the new and existing standards. We have also reviewed the expanded disclosure requirements under the new standard and determined the additional information to be disclosed.  In addition we are in the process of reviewing our business processes, systems and internal controls over financial reporting to support the new recognition and disclosure requirements under the new standard.  The assessment team continues to report our implementation progress for the new standard to our management and audit committee of our managing general partner ("Audit Committee"). 

 

We continue to monitor closely, a) activities of the FASB and various non-authoritative groups with respect to implementation issues that might impact our determinations, b) existing contracts for consistency with current implementation determinations derived from our assessment process and c) our revenue recognition policy, where applicable, for required modifications.  We expect 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

7


 

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 we do not anticipate a change in our pattern of revenue recognition, we anticipate that neither method will have a material impact on our consolidated financial statements.

 

3.CONTINGENCIES

 

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

 

4.INVENTORIES

 

Inventories consist of the following:

 

 

 

 

 

 

 

 

 

 

    

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

 

 

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

 

The estimated fair value of our contingent consideration arrangement is based on a probability-weighted discounted cash flow model.  The assumptions 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.

8


 

 

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)

 

Revolving Credit facility

 

$

230,000

 

$

255,000

 

$

(6,418)

 

$

(453)

 

Series B senior notes

 

 

145,000

 

 

145,000

 

 

(84)

 

 

(101)

 

Term loan

 

 

50,000

 

 

50,000

 

 

(47)

 

 

(126)

 

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

 

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

 

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

 

Borrowings under the 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 Credit Agreement).  The 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 Revolving Credit Facility.  We elected a Eurodollar Rate, which, with applicable margin, was 3.12% on borrowings outstanding as of March 31, 2017.  At March 31, 2017, we had borrowings of $230.0 million and $8.6 million of letters of credit outstanding with $537.9 million available for borrowing under the Revolving Credit Facility. We currently incur a weighted average annual commitment fee of 0.31% on the undrawn portion of the Revolving Credit Facility.  We utilize the 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 Note Purchase Agreement, including granting liens on substantially all of the Intermediate Partnership's assets to secure its obligations under the Note Purchase Agreement on an equal basis with the obligations under the Credit

9


 

Agreement.  The amendment also modified certain covenants to align them with the applicable covenants in the Credit Agreement.  As discussed below, we intend to repay the Series B Senior Notes in May 2017.

 

The Credit Agreement and the Series B Senior Notes (collectively, "ARLP Debt Arrangements") contain various restrictions affecting our 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 our 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. See Note 7 – Variable Interest Entities for further discussion of restrictions on the cash available for distribution.  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.  We were in compliance with the covenants of the ARLP Debt Arrangements as of March 31, 2017.

 

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 ("Senior Notes") in a private placement to qualified institutional buyers.    The 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 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 Senior Notes may redeem up to 35% of the aggregate principal amount of the 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 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 Senior Notes.  At any time prior to May 1, 2020, the issuers of the Senior Notes may redeem the Senior Notes at a redemption price equal to the principal amount of the 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 Senior Notes and cash on hand were partially used to repay the Revolving Credit Facility and will partially be used to repay the Term Loan and the outstanding Series B Senior Notes in May 2017 (including a make-whole payment of approximately $8.9 million).  We incurred discount and debt issuance costs of approximately $9.0 million in connection with issuance of the 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 our Intermediate Partnership entered into a $100.0 million accounts receivable securitization facility ("Securitization Facility") providing additional liquidity and funding.  Under the Securitization Facility, certain subsidiaries sell trade receivables on an ongoing basis to our Intermediate Partnership, which then sells the trade receivables to AROP Funding, LLC ("AROP Funding"), a wholly-owned bankruptcy-remote special purpose subsidiary of our Intermediate Partnership, which in turn borrows on a revolving basis up to $100.0 million secured by the trade receivables.  After the sale, Alliance Coal, as servicer of the assets, collects the receivables on behalf of AROP Funding.  The Securitization Facility bears interest based on a Eurodollar Rate.  It was renewed in December 2016 and matures in December 2017. At March 31, 2017, we had $100.0 million outstanding under the Securitization Facility. 

 

On October 6, 2015, Cavalier Minerals JV, LLC ("Cavalier Minerals") (see Note 7 – Variable Interest Entities) entered into a credit agreement (the "Cavalier Credit Agreement") with Mineral Lending, LLC ("Mineral Lending") for a $100.0 million line of credit (the "Cavalier Credit Facility").  Mineral Lending is an entity owned by a) Alliance Resource Holdings II, Inc. ("ARH II," the parent of ARH), b) an entity owned by an officer of ARH who is also a director of ARH II ("ARH Officer") and c) foundations established by the President and Chief Executive Officer of MGP and Kathleen S. Craft.  There is no commitment fee under the facility.  Borrowings under the Cavalier Credit Facility bear interest at a one month LIBOR rate plus 6% with interest payable quarterly.  Repayment of the principal balance will begin following the first fiscal quarter after the earlier of the date on which the aggregate amount borrowed exceeds $90.0 million or December 31, 2017, in quarterly payments of an amount equal to the greater of $1.3 million initially, escalated to $2.5 

10


 

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. 

 

7.VARIABLE INTEREST ENTITIES

 

Cavalier Minerals

 

On November 10, 2014, our 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.

 

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.

 

11


 

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

 

WKY CoalPlay

 

On November 17, 2014, SGP Land, LLC ("SGP Land"), a wholly-owned subsidiary of SGP, and two limited liability companies ("Craft Companies") owned by irrevocable trusts established by the President and Chief Executive Officer of MGP entered into a limited liability company agreement to form WKY CoalPlay, LLC ("WKY CoalPlay").  WKY CoalPlay was formed, in part, to purchase and lease coal reserves.  WKY CoalPlay is managed by the ARH Officer discussed in Note 6 – Long-Term Debt, who is also an employee of SGP Land and trustee of the irrevocable trusts owning the Craft Companies.  In December 2014 and February 2015, we entered into various coal reserve leases with WKY CoalPlay.  During the three months ended March 31, 2017, we paid $10.8 million of advanced royalties to WKY CoalPlay.  As of March 31, 2017, we 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. 

 

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

 

Alliance Coal and the Intermediate Partnership

 

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

 

12


 

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

 

We determined that neither the MGP nor the Intermediate Partnership have both the power and the benefits related to Alliance Coal.  We then considered which of the two was most closely aligned with Alliance Coal and thus would be designated the primary beneficiary of Alliance Coal for consolidation purposes.  We determined that the Intermediate Partnership was most closely aligned with Alliance Coal and is the primary beneficiary.  We based our determination of alignment on 1) the purpose and design of Alliance Coal which is to a) be the operating subsidiary of the Intermediate Partnership and b) distribute all of its available cash to the Intermediate Partnership such that the Intermediate Partnership can pay its partners and debt obligations, 2) AHGP's common control over both the Intermediate Partnership and MGP, as discussed in Note 1 – Organization and Presentation, to achieve the aforementioned purpose and design and 3) the Intermediate Partnership's debt funding for Alliance Coal for capital expenditures, operations and other purposes as needed and related risks and collateral requirements in the debt arrangements.

 

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

 

We determined that neither the MGP nor ARLP have both the power and the benefits related to Intermediate Partnership.  We then considered which of the two was most closely aligned with the Intermediate Partnership and thus would be designated the primary beneficiary of the Intermediate Partnership for consolidation purposes.  We determined that ARLP was most closely aligned with the Intermediate Partnership and is the primary beneficiary.  We based our determination of alignment on 1) the purpose and design of the Intermediate Partnership which is to a) be the operating subsidiary to ARLP and b) distribute all of its available cash to ARLP to pay its partners and 2) AHGP's common control over ARLP, MGP and the Intermediate Partnership, as discussed in Note 1 – Organization and Presentation, to achieve the aforementioned purpose and design.

 

The effect of the partnership agreements of ARLP and the Intermediate Partnership and the operating agreement of Alliance Coal (collectively the "Agreements") is that on a quarterly basis 100% of available cash from our operations must be distributed by ARLP to its partners (apart from nominal distributions from the Intermediate Partnership and Alliance Coal to MGP and SGP).  Available cash is determined as defined in the Agreements 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 Partnership Group, (ii) to comply with debt obligations or (iii) to provide funds for certain subsequent distributions.  Cash reserves may not be established for the purpose of funding subsequent distributions if the effect would be to prevent ARLP from making the minimum quarterly distributions plus any cumulative distribution arrearage.  MGP, as the managing member of Alliance Coal and the managing general partner of the Intermediate Partnership, is responsible for distributing this cash to ARLP so it can meet its distribution requirements.  As discussed in Note 6 – Long-Term Debt, the Intermediate Partnership's debt covenants place additional restrictions on distributions to ARLP by limiting cash available for distribution from the Intermediate Partnership based on various debt covenants pertaining to the most recent preceding quarter.  MGP does not have the ability, without the consent of the limited partners, to amend the Agreements.

 

8.EQUITY INVESTMENT

 

AllDale Minerals

 

In November 2014, Cavalier Minerals (see Note 7 – 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.  We continually review all rights provided to Cavalier Minerals and us by various agreements and continue to conclude all such rights do not provide Cavalier Minerals or us the ability to unilaterally direct any of the activities of AllDale Minerals or AllDale III (collectively, the "AllDale Partnerships") that most significantly impact the 

13


 

economic performance of the AllDale Partnerships.  As such, we account for our 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.  We record equity income or loss based on the AllDale Partnerships'  individual distribution structures.  The changes in our 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

 

 

 

9.NET INCOME OF ARLP PER LIMITED PARTNER UNIT

 

We utilize the two-class method in calculating basic and diluted earnings per unit ("EPU").  Net income of ARLP is allocated to the general partners and limited partners in accordance with their respective partnership percentages, after giving effect to any special income or expense allocations, including incentive distributions to our managing general partner, the holder of the IDR pursuant to our partnership agreement, which are declared and paid following the end of each quarter. Under the quarterly IDR provisions of our partnership agreement, our managing general partner is entitled to receive 15% of the amount we distribute in excess of $0.1375 per unit, 25% of the amount we distribute in excess of $0.15625 per unit, and 50% of the amount we distribute in excess of $0.1875 per unit.  Our partnership agreement contractually limits our distributions to available cash; therefore, undistributed earnings of the ARLP Partnership are not allocated to the IDR holder.  In addition, outstanding awards under our Long-Term Incentive Plan ("LTIP") and phantom units in notional accounts under our Supplemental Executive Retirement Plan ("SERP") and the MGP Amended and Restated Deferred Compensation Plan for Directors ("Deferred Compensation Plan") include rights to nonforfeitable distributions or distribution equivalents and are therefore considered participating securities.  As such, we allocate undistributed and distributed earnings to these outstanding awards in our calculation of EPU.  The following is a reconciliation of net income of ARLP used for calculating basic earnings per unit and the weighted-average units used in computing EPU for the three months ended March 31, 2017 and 2016:

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2017

    

2016

    

 

    (in thousands, except per unit data)

 

Net income of ARLP

 

$

104,902

 

$

47,310

 

Adjustments:

 

 

 

 

 

 

 

Managing general partner's priority distributions

 

 

(19,216)

 

 

(19,159)

 

General partners' 2% equity ownership

 

 

(1,730)

 

 

(563)

 

General partners' special allocation of certain general and administrative expenses

 

 

800

 

 

 —

 

 

 

 

 

 

 

 

 

Limited partners' interest in net income of ARLP

 

 

84,756

 

 

27,588

 

 

 

 

 

 

 

 

 

Less:

 

 

 

 

 

 

 

Distributions to participating securities

 

 

(966)

 

 

(875)

 

Undistributed earnings attributable to participating securities

 

 

(1,465)

 

 

 —

 

 

 

 

 

 

 

 

 

Net income of ARLP available to limited partners

 

$

82,325

 

$

26,713

 

 

 

 

 

 

 

 

 

Weighted-average limited partner units outstanding – basic and diluted (1)

 

 

74,503

 

 

74,291

 

 

 

 

 

 

 

 

 

Basic and diluted net income of ARLP per limited partner unit (1)

 

$

1.10

 

$

0.36

 


(1)

Diluted EPU gives effect to all dilutive potential common units outstanding during the period using the treasury stock method. Diluted EPU excludes all dilutive potential units calculated under the treasury stock method if their effect is

14


 

anti-dilutive.  The combined total of LTIP, SERP and Deferred Compensation Plan units of 1,427 and 439 for the three months ended March 31, 2017 and 2016, respectively, were considered anti-dilutive under the treasury stock method.

 

During the three months ended March 31, 2017, an affiliated entity controlled by Mr. Craft made a capital contribution of $0.8 million to AHGP for the purpose of funding certain general and administrative expenses.  Upon AHGP's receipt of the contribution, it contributed the same to its subsidiary MGP, our managing general partner, which in turn contributed the same to our subsidiary, Alliance Coal.  As provided under our partnership agreement, we made a special allocation to our managing general partner of certain general and administrative expenses equal to its contribution.  Net income of ARLP allocated to the limited partners was not burdened by this expense.

 

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

 

 

Certain of our 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

 

Long-Term Incentive Plan

 

We have the LTIP for certain employees and officers of MGP and its affiliates who perform services for us.  The 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 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 compensation committee of the MGP board of directors (the "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 LTIP participants are expected to cliff vest on January 1st of the third year following issuance of the grants.  We expect to settle the non-vested LTIP grants by delivery of ARLP common units, except for the portion of the grants that will satisfy tax withholding obligations of LTIP participants.  As provided under the distribution equivalent rights provisions of the LTIP and the terms of the LTIP awards, all non-vested

15


 

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 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 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